UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018March 31, 2019
or
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-33409
T-MOBILE US, INC.
(Exact name of registrant as specified in its charter)
|
| | |
DELAWARE | | 20-0836269 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
12920 SE 38th Street, Bellevue, Washington | | 98006-1350 |
(Address of principal executive offices) | | (Zip Code) |
| | |
(425) 378-4000 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
| | | |
Class | | Shares Outstanding as of October 25, 2018April 18, 2019 |
|
Common Stock, $0.00001 par value per share | | 848,393,022854,303,011 |
|
T-Mobile US, Inc.
Form 10-Q
For the Quarter Ended September 30, 2018March 31, 2019
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
T-Mobile US, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| | (in millions, except share and per share amounts) | September 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | $ | 329 |
| | $ | 1,219 |
| $ | 1,439 |
| | $ | 1,203 |
|
Accounts receivable, net of allowances of $70 and $86 | 1,652 |
| | 1,915 |
| |
Accounts receivable, net of allowances of $63 and $67 | | 1,749 |
| | 1,769 |
|
Equipment installment plan receivables, net | 2,366 |
| | 2,290 |
| 2,466 |
| | 2,538 |
|
Accounts receivable from affiliates | 12 |
| | 22 |
| 16 |
| | 11 |
|
Inventories | 958 |
| | 1,566 |
| |
Inventory | | 1,261 |
| | 1,084 |
|
Other current assets | 1,969 |
| | 1,903 |
| 1,814 |
| | 1,676 |
|
Total current assets | 7,286 |
| | 8,915 |
| 8,745 |
| | 8,281 |
|
Property and equipment, net | 22,502 |
| | 22,196 |
| 21,464 |
| | 23,359 |
|
Operating lease right-of-use assets | | 9,509 |
| | — |
|
Financing lease right-of-use assets | | 2,339 |
| | — |
|
Goodwill | 1,901 |
| | 1,683 |
| 1,901 |
| | 1,901 |
|
Spectrum licenses | 35,553 |
| | 35,366 |
| 35,618 |
| | 35,559 |
|
Other intangible assets, net | 229 |
| | 217 |
| 174 |
| | 198 |
|
Equipment installment plan receivables due after one year, net | 1,223 |
| | 1,274 |
| 1,662 |
| | 1,547 |
|
Other assets | 1,488 |
| | 912 |
| 1,661 |
| | 1,623 |
|
Total assets | $ | 70,182 |
| | $ | 70,563 |
| $ | 83,073 |
| | $ | 72,468 |
|
Liabilities and Stockholders' Equity | | | | | | |
Current liabilities | | | | | | |
Accounts payable and accrued liabilities | $ | 6,500 |
| | $ | 8,528 |
| $ | 7,330 |
| | $ | 7,741 |
|
Payables to affiliates | 226 |
| | 182 |
| 242 |
| | 200 |
|
Short-term debt | 783 |
| | 1,612 |
| 250 |
| | 841 |
|
Short-term debt to affiliates | | 598 |
| | — |
|
Deferred revenue | 696 |
| | 779 |
| 665 |
| | 698 |
|
Short-term operating lease liabilities | | 2,202 |
| | — |
|
Short-term financing lease liabilities | | 911 |
| | — |
|
Other current liabilities | 367 |
| | 414 |
| 1,129 |
| | 787 |
|
Total current liabilities | 8,572 |
| | 11,515 |
| 13,327 |
| | 10,267 |
|
Long-term debt | 11,993 |
| | 12,121 |
| 10,952 |
| | 12,124 |
|
Long-term debt to affiliates | 14,581 |
| | 14,586 |
| 13,985 |
| | 14,582 |
|
Tower obligations | 2,565 |
| | 2,590 |
| 2,244 |
| | 2,557 |
|
Deferred tax liabilities | 4,370 |
| | 3,537 |
| 4,925 |
| | 4,472 |
|
Operating lease liabilities | | 9,339 |
| | — |
|
Financing lease liabilities | | 1,224 |
| | — |
|
Deferred rent expense | 2,761 |
| | 2,720 |
| — |
| | 2,781 |
|
Other long-term liabilities | 985 |
| | 935 |
| 896 |
| | 967 |
|
Total long-term liabilities | 37,255 |
| | 36,489 |
| 43,565 |
| | 37,483 |
|
Commitments and contingencies (Note 15) |
|
| |
|
| |
Commitments and contingencies (Note 11) | |
|
| |
|
|
Stockholders' equity | | | | | | |
Common Stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 849,890,566 and 860,861,998 shares issued, 848,380,679 and 859,406,651 shares outstanding | — |
| | — |
| |
Common Stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 855,858,890 and 851,675,119 shares issued, 854,380,118 and 850,180,317 shares outstanding | | — |
| | — |
|
Additional paid-in capital | 37,956 |
| | 38,629 |
| 38,100 |
| | 38,010 |
|
Treasury stock, at cost, 1,509,887 and 1,455,347 shares issued | (7 | ) | | (4 | ) | |
Treasury stock, at cost, 1,478,772 and 1,494,802 shares issued | | (5 | ) | | (6 | ) |
Accumulated other comprehensive income | — |
| | 8 |
| (521 | ) | | (332 | ) |
Accumulated deficit | (13,594 | ) | | (16,074 | ) | (11,393 | ) | | (12,954 | ) |
Total stockholders' equity | 24,355 |
| | 22,559 |
| 26,181 |
| | 24,718 |
|
Total liabilities and stockholders' equity | $ | 70,182 |
| | $ | 70,563 |
| $ | 83,073 |
| | $ | 72,468 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
T-Mobile US, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
(in millions, except share and per share amounts) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
Revenues | | | | | | | | | | |
Branded postpaid revenues | $ | 5,244 |
| | $ | 4,920 |
| | $ | 15,478 |
| | $ | 14,465 |
| $ | 5,493 |
| | $ | 5,070 |
|
Branded prepaid revenues | 2,395 |
| | 2,376 |
| | 7,199 |
| | 7,009 |
| 2,386 |
| | 2,402 |
|
Wholesale revenues | 338 |
| | 274 |
| | 879 |
| | 778 |
| 304 |
| | 266 |
|
Roaming and other service revenues | 89 |
| | 59 |
| | 247 |
| | 151 |
| 94 |
| | 68 |
|
Total service revenues | 8,066 |
| | 7,629 |
| | 23,803 |
| | 22,403 |
| 8,277 |
| | 7,806 |
|
Equipment revenues | 2,391 |
| | 2,118 |
| | 7,069 |
| | 6,667 |
| 2,516 |
| | 2,353 |
|
Other revenues | 382 |
| | 272 |
| | 993 |
| | 775 |
| 287 |
| | 296 |
|
Total revenues | 10,839 |
| | 10,019 |
| | 31,865 |
| | 29,845 |
| 11,080 |
| | 10,455 |
|
Operating expenses | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | 1,586 |
| | 1,594 |
| | 4,705 |
| | 4,520 |
| 1,546 |
| | 1,589 |
|
Cost of equipment sales | 2,862 |
| | 2,617 |
| | 8,479 |
| | 8,149 |
| |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | | 3,016 |
| | 2,845 |
|
Selling, general and administrative | 3,314 |
| | 3,098 |
| | 9,663 |
| | 8,968 |
| 3,442 |
| | 3,164 |
|
Depreciation and amortization | 1,637 |
| | 1,416 |
| | 4,846 |
| | 4,499 |
| 1,600 |
| | 1,575 |
|
Gains on disposal of spectrum licenses | — |
| | (29 | ) | | — |
| | (67 | ) | |
Total operating expense | 9,399 |
| | 8,696 |
| | 27,693 |
| | 26,069 |
| 9,604 |
| | 9,173 |
|
Operating income | 1,440 |
| | 1,323 |
| | 4,172 |
| | 3,776 |
| 1,476 |
| | 1,282 |
|
Other income (expense) | | | | | | | | | | |
Interest expense | (194 | ) | | (253 | ) | | (641 | ) | | (857 | ) | (179 | ) | | (251 | ) |
Interest expense to affiliates | (124 | ) | | (167 | ) | | (418 | ) | | (398 | ) | (109 | ) | | (166 | ) |
Interest income | 5 |
| | 2 |
| | 17 |
| | 15 |
| 8 |
| | 6 |
|
Other income (expense), net | 3 |
| | 1 |
| | (51 | ) | | (89 | ) | 7 |
| | 10 |
|
Total other expense, net | (310 | ) | | (417 | ) | | (1,093 | ) | | (1,329 | ) | (273 | ) | | (401 | ) |
Income before income taxes | 1,130 |
| | 906 |
| | 3,079 |
| | 2,447 |
| 1,203 |
| | 881 |
|
Income tax expense | (335 | ) | | (356 | ) | | (831 | ) | | (618 | ) | (295 | ) | | (210 | ) |
Net income | 795 |
| | 550 |
| | 2,248 |
| | 1,829 |
| $ | 908 |
| | $ | 671 |
|
Dividends on preferred stock | — |
| | (13 | ) | | — |
| | (41 | ) | |
Net income attributable to common stockholders | $ | 795 |
| | $ | 537 |
| | $ | 2,248 |
| | $ | 1,788 |
| |
| | | | | | | | | | |
Net income | $ | 795 |
| | $ | 550 |
| | $ | 2,248 |
| | $ | 1,829 |
| $ | 908 |
| | $ | 671 |
|
Other comprehensive income, net of tax | | | | | | | | |
Unrealized gain on available-for-sale securities, net of tax effect of $0, $0, $0 and $2 | — |
| | 1 |
| | — |
| | 3 |
| |
Other comprehensive income | — |
| | 1 |
| | — |
| | 3 |
| |
Other comprehensive loss, net of tax | | | | |
Unrealized loss on available-for-sale securities, net of tax effect of $0 and $(1) | | — |
| | (3 | ) |
Unrealized loss on cash flow hedges, net of tax effect of $(66) and $0 | | (189 | ) | | — |
|
Other comprehensive loss | | (189 | ) | | (3 | ) |
Total comprehensive income | $ | 795 |
| | $ | 551 |
| | $ | 2,248 |
| | $ | 1,832 |
| $ | 719 |
| | $ | 668 |
|
Earnings per share | | | | | | | | | | |
Basic | $ | 0.94 |
| | $ | 0.65 |
| | $ | 2.65 |
| | $ | 2.15 |
| $ | 1.07 |
| | $ | 0.78 |
|
Diluted | $ | 0.93 |
| | $ | 0.63 |
| | $ | 2.62 |
| | $ | 2.10 |
| $ | 1.06 |
| | $ | 0.78 |
|
Weighted average shares outstanding | | | | | | | | | | |
Basic | 847,087,120 |
| | 831,189,779 |
| | 849,960,290 |
| | 829,974,146 |
| 851,223,498 |
| | 855,222,664 |
|
Diluted | 853,852,764 |
| | 871,420,065 |
| | 858,248,568 |
| | 871,735,511 |
| 858,643,481 |
| | 862,244,084 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
T-Mobile US, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
Operating activities | | | | | | | | | | |
Net income | $ | 795 |
| | $ | 550 |
| | $ | 2,248 |
| | $ | 1,829 |
| $ | 908 |
| | $ | 671 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | |
Depreciation and amortization | 1,637 |
| | 1,416 |
| | 4,846 |
| | 4,499 |
| 1,600 |
| | 1,575 |
|
Stock-based compensation expense | 115 |
| | 82 |
| | 324 |
| | 221 |
| 110 |
| | 97 |
|
Deferred income tax expense | 284 |
| | 347 |
| | 762 |
| | 595 |
| 288 |
| | 206 |
|
Bad debt expense | 80 |
| | 123 |
| | 209 |
| | 298 |
| 73 |
| | 54 |
|
Losses from sales of receivables | 48 |
| | 67 |
| | 127 |
| | 242 |
| 35 |
| | 52 |
|
Deferred rent expense | 10 |
| | 21 |
| | 21 |
| | 61 |
| — |
| | 4 |
|
Losses on redemption of debt | — |
| | — |
| | 122 |
| | 86 |
| — |
| | 32 |
|
Gains on disposal of spectrum licenses | — |
| | (29 | ) | | — |
| | (67 | ) | |
Changes in operating assets and liabilities | | | | | | | | | | |
Accounts receivable | (1,238 | ) | | (1,022 | ) | | (3,247 | ) | | (2,676 | ) | (1,143 | ) | | (873 | ) |
Equipment installment plan receivables | (335 | ) | | (355 | ) | | (843 | ) | | (1,148 | ) | (250 | ) | | (222 | ) |
Inventories | (115 | ) | | 113 |
| | 43 |
| | (28 | ) | (265 | ) | | 33 |
|
Operating lease right-of-use assets | | 435 |
| | — |
|
Other current and long-term assets | (193 | ) | | (184 | ) | | (309 | ) | | (330 | ) | (87 | ) | | 132 |
|
Accounts payable and accrued liabilities | (265 | ) | | (12 | ) | | (1,372 | ) | | (607 | ) | 13 |
| | (1,028 | ) |
Short and long-term operating lease liabilities | | (522 | ) | | — |
|
Other current and long-term liabilities | 39 |
| | 60 |
| | (21 | ) | | (84 | ) | 121 |
| | 45 |
|
Other, net | 52 |
| | 75 |
| | 35 |
| | 75 |
| 76 |
| | (8 | ) |
Net cash provided by operating activities | 914 |
| | 1,252 |
| | 2,945 |
| | 2,966 |
| 1,392 |
| | 770 |
|
Investing activities | | | | | | | | | | |
Purchases of property and equipment, including capitalized interest of $101, $29, $246 and $111 | (1,362 | ) | | (1,441 | ) | | (4,357 | ) | | (4,316 | ) | |
Purchases of spectrum licenses and other intangible assets | (22 | ) | | (15 | ) | | (101 | ) | | (5,820 | ) | |
Purchases of property and equipment, including capitalized interest of $118 and $43 | | (1,931 | ) | | (1,366 | ) |
Purchases of spectrum licenses and other intangible assets, including deposits | | (185 | ) | | (51 | ) |
Proceeds related to beneficial interests in securitization transactions | 1,338 |
| | 1,110 |
| | 3,956 |
| | 3,126 |
| 1,157 |
| | 1,295 |
|
Acquisition of companies, net of cash acquired | — |
| | — |
| | (338 | ) | | — |
| — |
| | (333 | ) |
Other, net | 4 |
| | 1 |
| | 30 |
| | (2 | ) | (7 | ) | | (7 | ) |
Net cash used in investing activities | (42 | ) | | (345 | ) | | (810 | ) | | (7,012 | ) | (966 | ) | | (462 | ) |
Financing activities | | | | | | | | | | |
Proceeds from issuance of long-term debt | — |
| | 500 |
| | 2,494 |
| | 10,480 |
| — |
| | 2,494 |
|
Payments of consent fees related to long-term debt | — |
| | — |
| | (38 | ) | | — |
| |
Proceeds from borrowing on revolving credit facility | 1,810 |
| | 1,055 |
| | 6,050 |
| | 2,910 |
| 885 |
| | 2,170 |
|
Repayments of revolving credit facility | (2,130 | ) | | (1,735 | ) | | (6,050 | ) | | (2,910 | ) | (885 | ) | | (1,725 | ) |
Repayments of capital lease obligations | (181 | ) | | (141 | ) | | (508 | ) | | (350 | ) | |
Repayments of short-term debt for purchases of inventory, property and equipment, net | (246 | ) | | (4 | ) | | (246 | ) | | (296 | ) | |
Repayments of financing lease obligations | | (86 | ) | | (172 | ) |
Repayments of long-term debt | — |
| | — |
| | (3,349 | ) | | (10,230 | ) | — |
| | (999 | ) |
Repurchases of common stock | — |
| | — |
| | (1,071 | ) | | — |
| — |
| | (666 | ) |
Tax withholdings on share-based awards | (5 | ) | | (6 | ) | | (89 | ) | | (101 | ) | (100 | ) | | (74 | ) |
Dividends on preferred stock | — |
| | (13 | ) | | — |
| | (41 | ) | |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (212 | ) | | (188 | ) | — |
| | (31 | ) |
Other, net | (6 | ) | | (5 | ) | | (6 | ) | | 11 |
| (4 | ) | | 3 |
|
Net cash used in financing activities | (758 | ) | | (349 | ) | | (3,025 | ) | | (715 | ) | |
Net cash (used in) provided by financing activities | | (190 | ) | | 1,000 |
|
Change in cash and cash equivalents | 114 |
| | 558 |
| | (890 | ) | | (4,761 | ) | 236 |
| | 1,308 |
|
Cash and cash equivalents | | | | | | | | | | |
Beginning of period | 215 |
| | 181 |
| | 1,219 |
| | 5,500 |
| 1,203 |
| | 1,219 |
|
End of period | $ | 329 |
| | $ | 739 |
| | $ | 329 |
| | $ | 739 |
| $ | 1,439 |
| | $ | 2,527 |
|
Supplemental disclosure of cash flow information | | | | | | | | | | |
Interest payments, net of amounts capitalized | $ | 366 |
| | $ | 343 |
| | $ | 1,303 |
| | $ | 1,565 |
| $ | 340 |
| | $ | 378 |
|
Operating lease payments (1) | | 688 |
| | — |
|
Income tax payments | 29 |
| | 2 |
| | 40 |
| | 23 |
| 32 |
| | 1 |
|
Noncash investing and financing activities | | | | |
Noncash beneficial interest obtained in exchange for securitized receivables | 1,263 |
| | 972 |
| | 3,596 |
| | 2,980 |
| $ | 1,512 |
| | $ | 1,128 |
|
Noncash investing and financing activities | | | | | | | | |
Changes in accounts payable for purchases of property and equipment | $ | 78 |
| | $ | (141 | ) | | $ | (672 | ) | | $ | (458 | ) | (333 | ) | | (364 | ) |
Leased devices transferred from inventory to property and equipment | 229 |
| | 262 |
| | 813 |
| | 775 |
| 147 |
| | 304 |
|
Returned leased devices transferred from property and equipment to inventory | (74 | ) | | (165 | ) | | (246 | ) | | (635 | ) | (57 | ) | | (82 | ) |
Issuance of short-term debt for financing of property and equipment | — |
| | 1 |
| | 291 |
| | 291 |
| |
Assets acquired under capital lease obligations | 133 |
| | 138 |
| | 451 |
| | 735 |
| |
Short-term debt assumed for financing of property and equipment | | 250 |
| | 237 |
|
Operating lease right-of-use assets obtained in exchange for lease obligations
| | 694 |
| | — |
|
Financing lease right-of-use assets obtained in exchange for lease obligations
| | 180 |
| | 142 |
|
(1) On January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842),” which requires certain supplemental cash flow disclosures. Where these disclosures or a comparable figure were not required under the former lease standard, we have not retrospectively presented historical amounts. See Note 1 – Summary of Significant Accounting Policies for additional details.
The accompanying notes are an integral part of these condensed consolidated financial statements.
T-Mobile US, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shares) | Common Stock Outstanding | | Treasury Shares at Cost | | Par Value and Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders' Equity |
Balance as of December 31, 2017 | 859,406,651 |
| | $ | (4 | ) | | $ | 38,629 |
| | $ | 8 |
| | $ | (16,074 | ) | | $ | 22,559 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 671 |
| | 671 |
|
Other comprehensive income | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Stock-based compensation | — |
| | — |
| | 108 |
| | — |
| | — |
| | 108 |
|
Exercise of stock options | 78,435 |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Stock issued for employee stock purchase plan | 1,069,512 |
| | — |
| | 55 |
| | — |
| | — |
| | 55 |
|
Issuance of vested restricted stock units | 3,947,005 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuance of restricted stock awards | 354,459 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares withheld related to net share settlement of stock awards and stock options | (1,235,899 | ) | | — |
| | (74 | ) | | — |
| | — |
| | (74 | ) |
Repurchases of common stock | (10,498,539 | ) | | — |
| | (666 | ) | | — |
| | — |
| | (666 | ) |
Transfer RSU to NQDC plan | (55,395 | ) | | (3 | ) | | 3 |
| | — |
| | — |
| | — |
|
Prior year retained earnings | — |
| | — |
| | — |
| | — |
| | 224 |
| | 224 |
|
Balance as of March 31, 2018 | 853,066,229 |
| | $ | (7 | ) | | $ | 38,057 |
| | $ | 5 |
| | $ | (15,179 | ) | | $ | 22,876 |
|
| | | | | | | | | | | |
Balance as of December 31, 2018 | 850,180,317 |
| | $ | (6 | ) | | $ | 38,010 |
| | $ | (332 | ) | | $ | (12,954 | ) | | $ | 24,718 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 908 |
| | 908 |
|
Other comprehensive income | — |
| | — |
| | — |
| | (189 | ) | | — |
| | (189 | ) |
Stock-based compensation | — |
| | — |
| | 121 |
| | — |
| | — |
| | 121 |
|
Exercise of stock options | 31,874 |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Stock issued for employee stock purchase plan | 1,172,511 |
| | — |
| | 69 |
| | — |
| | — |
| | 69 |
|
Issuance of vested restricted stock units | 4,343,972 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares withheld related to net share settlement of stock awards and stock options | (1,364,621 | ) | | — |
| | (100 | ) | | — |
| | — |
| | (100 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfer RSU from NQDC plan | 16,065 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
|
Prior year retained earnings | — |
| | — |
| | — |
| | — |
| | 653 |
| | 653 |
|
Balance as of March 31, 2019 | 854,380,118 |
| | $ | (5 | ) | | $ | 38,100 |
| | $ | (521 | ) | | $ | (11,393 | ) | | $ | 26,181 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
T-Mobile US, Inc.
Index for Notes to the Condensed Consolidated Financial Statements
T-Mobile US, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements of T-Mobile US, Inc. (“T-Mobile,” “we,” “our,” “us” or the “Company”“the Company”) include all adjustments of a normal recurring nature necessary for the fair presentation of the results for the interim periods presented. The results for the interim periods are not necessarily indicative of those for the full year. The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
The condensed consolidated financial statements include the balances and results of operations of T-Mobile and our consolidated subsidiaries. We consolidate majority-owned subsidiaries over which we exercise control, as well as variable interest entities (“VIE”) where we are deemed to be the primary beneficiary and VIEs which cannot be deconsolidated, such as those related to Tower obligations (Tower obligations are included in VIEs related to the 2012 Tower Transaction. See Note 87 - Tower Obligations included in our Annual Report on Form 10-K for the year ended December 31, 2017)further information). Intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires our management to make estimates and assumptions which affect the financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which our management believes are reasonable under the circumstances. These estimates are inherently subject to judgment and actual results could differ from those estimates.
Accounting Pronouncements Adopted During the Current Year
RevenueLeases
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and has since modified the standard with several ASUs (collectively, the “new revenue standard”). The new revenue standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations. We adopted the new revenue standard on January 1, 2018, using the modified retrospective method with the cumulative effect of initially applying the guidance recognized at the date of initial application. Comparative information has not been restated and continues to be reported under the standards in effect for those periods. We have applied the new revenue standard only to contracts not completed as of the date of initial application, referred to as open contracts. We have elected the practical expedient that permits an entity to reflect the aggregate effect of all of the modifications (on a contract-by-contract basis) that occurred before the date of initial application in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations. Electing this practical expedient does not have a significant impact on our financial statements due to the short-term duration of most of our contracts and the nature of our contract modifications.
We have implemented significant new revenue accounting systems, processes and internal controls over revenue recognition to assist us in the application of the new revenue standard.
Revenue Recognition
We primarily generate our revenue from providing wireless services to customers and selling or leasing devices and accessories. Our contracts with customers may involve multiple performance obligations, which include wireless services, wireless devices or a combination thereof, and we allocate the transaction price between each performance obligation based on its relative standalone selling price.
Significant Judgments
The most significant judgments affecting the amount and timing of revenue from contracts with our customers include the following items:
For transactions where we recognize a significant financing component, judgment is required to determine the discount rate. For equipment installment plan (“EIP”) sales, the discount rate used to adjust the transaction price primarily reflects current market interest rates and the estimated credit risk of the customer.
Our products are generally sold with a right of return, which is accounted for as variable consideration when estimating the amount of revenue to recognize. Expected device returns are estimated based on historical experience.
Sales of equipment to indirect dealers who have been identified as our customer (referred to as the sell-in model) often include credits subsequently paid to the dealer as a reimbursement for any discount promotions offered to the end consumer. These credits (payments to a customer) are accounted for as variable consideration when estimating the amount of revenue to recognize from the sales of equipment to indirect dealers and are estimated based on historical experience and other factors, such as expected promotional activity.
Promotional bill credits offered to a customer on an equipment sale that are paid over time and are contingent on the customer maintaining a service contract may result in an extended service contract based on whether a substantive penalty is deemed to exist. Determining whether contingent bill credits result in a substantive termination penalty, and determining the term over which a substantive termination penalty exists, may require significant judgment.
For capitalized contract costs, determining the amortization period as well as assessing the indicators of impairment may require significant judgment.
The determination of the standalone selling price for contracts that involve more than one product or service (or performance obligation) may require significant judgment.
The identification of distinct performance obligations within our service plans may require significant judgment.
Wireless Services Revenue
We generate our wireless services revenues from providing access to, and usage of, our wireless communications network. Service revenues also include revenues earned for providing value added services to customers, such as handset insurance services. Service contracts are billed monthly either in advance or arrears, or are prepaid. Generally, service revenue is recognized as we satisfy our performance obligation to transfer service to our customers. We typically satisfy our stand-ready performance obligations, including unlimited wireless services, evenly over the contract term. For usage-based and prepaid wireless services, we satisfy our performance obligations when services are rendered.
Revenue for service contracts that we assess are not probable of collection is not recognized until the contract is completed and cash is received. Collectibility is re-assessed when there is a significant change in facts or circumstances. Our assessment of collectibility considers whether we may limit our exposure to credit risk through our right to stop transferring additional service in the event the customer is delinquent.
Consideration payable to a customer is treated as a reduction of the total transaction price, unless the payment is in exchange for a distinct good or service, such as certain commissions paid to dealers.
Revenue is recorded net of costs paid to another party for performance obligations where we arrange for the other party to transfer goods or services to the customer (i.e., when we are acting as an agent). For example, performance obligations relating to services provided by third-party content providers where T-Mobile neither controls a right to the content provider’s service nor controls the underlying service itself are presented net because T-Mobile is acting as an agent.
Federal Universal Service Fund and other regulatory fees are assessed by various governmental authorities in connection with the services we provide to our customers and are included in Cost of services. When we separately bill and collect these regulatory fees from customers, they are recorded in Total service revenues in our Condensed Consolidated Statements of Comprehensive Income.
We have made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by T-Mobile from a customer (for example, sales, use, value added, and some excise taxes).
Equipment Revenues
We generate equipment revenues from the sale or lease of mobile communication devices and accessories. For performance obligations related to equipment contracts, we typically transfer control at a point in time when the device or accessory is delivered to, and accepted by, the customer or dealer. We have elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. We estimate variable consideration (e.g. device returns or certain payments to indirect dealers) based on historical experience as well as other factors, such as expected trends. Equipment sales not probable of collection are generally recorded as payments are received. Our assessment of collectibility considers contract terms such as down payments that reduce our exposure to credit risk.
We offer certain customers the option to pay for devices and accessories in installments using an EIP. Generally, we recognize as a reduction of the total transaction price the effects of a financing component in contracts where customers purchase their devices and accessories on an EIP with a term of more than one year, including those financing components that are not considered to be significant to the contract. However, we have elected the practical expedient to not recognize the effects of a significant financing component for contracts where we expect, at contract inception, that the period between the transfer of a performance obligation to a customer and the customer’s payment for that performance obligation will be one year or less.
In addition, for customers who enroll in our Just Upgrade My Phone (“JUMP!”®) program, we recognize a liability based on the estimated fair value of the specified-price trade-in right guarantee. The fair value of the guarantee is deducted from the transaction price under the new revenue standard, and the remaining transaction price is allocated to other elements of the contract, including service and equipment performance obligations. See “Guarantee Liabilities” in Note 1 - Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2017.
In 2015, we introduced JUMP! On Demand, which allows customers to lease a device and upgrade their leased wireless device for a new device up to one time per month. To date, all of our leased wireless devices are accounted for as operating leases and estimated contract consideration is allocated between lease elements and non-lease elements (such as service and equipment performance obligations) based on the relative standalone selling price of each performance obligation in the contract. Lease revenues are recorded as equipment revenues and recognized as earned on a straight-line basis over the lease term. Lease revenues on contracts not probable of collection are limited to the amount of payments received. See “Property and Equipment” in Note 1 - Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Contract Balances
Generally, T-Mobile devices and service plans are available at standard prices, which are maintained on price lists and published on our website and/or within our retail stores.
For contracts that involve more than one product or service that are identified as separate performance obligations, the transaction price is allocated to the performance obligations based on their relative standalone selling prices. Standalone selling price is the price at which T-Mobile would sell the good or service separately to a customer and is most commonly evidenced by the price at which T-Mobile sells that good or service separately in similar circumstances and to similar customers.
A contract asset is recorded when revenue is recognized in advance of our right to receive consideration (i.e., we must perform additional services in order to receive consideration). Amounts are recorded as receivables when our right to consideration is unconditional. When consideration is received, or we have an unconditional right to consideration in advance of delivery of goods or services, a contract liability is recorded. The transaction price can include non-refundable upfront fees, which are allocated to the identifiable performance obligations.
Contract assets are included in Other current assets and Other assets and contract liabilities are included in Deferred revenue in our Condensed Consolidated Balance Sheets.
Contract Modifications
Our service contracts allow customers to frequently modify their contracts without incurring penalties in many cases. Each time a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a separate contract, as if there is a termination of the existing contract and creation of a new contract, or if the modification should be considered a change associated with the existing contract. We typically do not have significant impacts from contract modifications.
Contract Costs
We incur certain incremental costs to obtain a contract that we expect to recover, such as sales commissions. We record an asset when these incremental costs to obtain a contract are incurred and amortize them on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.
We amortize deferred costs incurred to obtain service contracts on a straight-line basis over the term of the initial contract and anticipated renewal contracts to which the costs relate. However, we have elected the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less.
Incremental costs to obtain equipment contracts (e.g., commissions paid on device and accessory sales) are recognized when the equipment is transferred to the customer.
Financial Statement Impacts of Applying the New Revenue Standard
The cumulative effect of initially applying the new revenue standard to all open contracts as of January 1, 2018 is as follows: |
| | | | | | | | | | | |
| January 1, 2018 |
(in millions) | Beginning Balance | | Cumulative Effect Adjustment | | Beginning Balance, As Adjusted |
Assets | | | | | |
Other current assets | $ | 1,903 |
| | $ | 140 |
| | $ | 2,043 |
|
Other assets | 912 |
| | 150 |
| | 1,062 |
|
Liabilities and Stockholders’ Equity | | | | | |
Deferred revenue | $ | 779 |
| | $ | 4 |
| | $ | 783 |
|
Deferred tax liabilities | 3,537 |
| | 73 |
| | 3,610 |
|
Accumulated deficit | (16,074 | ) | | 213 |
| | (15,861 | ) |
The most significant impacts upon adoption of the new revenue standard on January 1, 2018 include the following items:
A deferred contract cost asset of $150 million was recorded at transition in Other assets in our Condensed Consolidated Balance Sheets for incremental contract acquisition costs paid on open contracts, which consists primarily of commissions paid to acquire branded postpaid service contracts; and
A contract asset of $140 million was recorded at transition in Other current assets in our Condensed Consolidated Balance Sheets primarily for contracts with promotional bill credits offered to customers on equipment sales that are paid over time and are contingent on the customer maintaining a service contract.
Financial statement results as reported under the new revenue standard as compared to the previous revenue standard for the three and nine months ended and as of September 30, 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
(in millions, except per share amounts) | Previous Revenue Standard | | New Revenue Standard | | Change | | Previous Revenue Standard | | New Revenue Standard | | Change |
Revenues | | | | | | | | | | | |
Branded postpaid revenues | $ | 5,242 |
| | $ | 5,244 |
| | $ | 2 |
| | $ | 15,503 |
| | $ | 15,478 |
| | $ | (25 | ) |
Branded prepaid revenues | 2,396 |
| | 2,395 |
| | (1 | ) | | 7,203 |
| | 7,199 |
| | (4 | ) |
Wholesale revenues | 295 |
| | 338 |
| | 43 |
| | 836 |
| | 879 |
| | 43 |
|
Roaming and other service revenues | 89 |
| | 89 |
| | — |
| | 247 |
| | 247 |
| | — |
|
Total service revenues | 8,022 |
| | 8,066 |
| | 44 |
| | 23,789 |
| | 23,803 |
| | 14 |
|
Equipment revenues | 2,286 |
| | 2,391 |
| | 105 |
| | 6,791 |
| | 7,069 |
| | 278 |
|
Other revenues | 382 |
| | 382 |
| | — |
| | 993 |
| | 993 |
| | — |
|
Total revenues | 10,690 |
| | 10,839 |
| | 149 |
| | 31,573 |
| | 31,865 |
| | 292 |
|
Operating expenses | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | 1,562 |
| | 1,586 |
| | 24 |
| | 4,655 |
| | 4,705 |
| | 50 |
|
Cost of equipment sales | 2,867 |
| | 2,862 |
| | (5 | ) | | 8,491 |
| | 8,479 |
| | (12 | ) |
Selling, general and administrative | 3,320 |
| | 3,314 |
| | (6 | ) | | 9,724 |
| | 9,663 |
| | (61 | ) |
Depreciation and amortization | 1,637 |
| | 1,637 |
| | — |
| | 4,846 |
| | 4,846 |
| | — |
|
Total operating expenses | 9,386 |
| | 9,399 |
| | 13 |
| | 27,716 |
| | 27,693 |
| | (23 | ) |
Operating income | 1,304 |
| | 1,440 |
| | 136 |
| | 3,857 |
| | 4,172 |
| | 315 |
|
Total other expense, net | (310 | ) | | (310 | ) | | — |
| | (1,093 | ) | | (1,093 | ) | | — |
|
Income before income taxes | 994 |
| | 1,130 |
| | 136 |
| | 2,764 |
| | 3,079 |
| | 315 |
|
Income tax expense | (300 | ) | | (335 | ) | | (35 | ) | | (750 | ) | | (831 | ) | | (81 | ) |
Net income | $ | 694 |
| | $ | 795 |
| | $ | 101 |
| | $ | 2,014 |
| | $ | 2,248 |
| | $ | 234 |
|
Earnings per share | | | | | | | | | | | |
Basic earnings per share | 0.82 |
| | 0.94 |
| | 0.12 |
| | 2.37 |
| | 2.65 |
| | 0.28 |
|
Diluted earnings per share | 0.81 |
| | 0.93 |
| | 0.12 |
| | 2.35 |
| | 2.62 |
| | 0.27 |
|
|
| | | | | | | | | | | |
| September 30, 2018 |
(in millions) | Previous Revenue Standard | | New Revenue Standard | | Change |
Assets | | | | | |
Other current assets | $ | 1,874 |
| | $ | 1,969 |
| | $ | 95 |
|
Other assets | 969 |
| | 1,488 |
| | 519 |
|
Liabilities and Stockholders’ Equity | | | | | |
Deferred revenue | $ | 682 |
| | $ | 696 |
| | $ | 14 |
|
Deferred tax liabilities | 4,216 |
| | 4,370 |
| | 154 |
|
Accumulated deficit | (14,040 | ) | | (13,594 | ) | | 446 |
|
The most significant impacts to financial statement results as reported under the new revenue standard as compared to the previous revenue standard for the current reporting period are as follows:
Under the new revenue standard, certain commissions paid to dealers previously recognized as a reduction to Equipment revenues in our Condensed Consolidated Statements of Comprehensive Income are now recorded as commission costs in Selling, general and administrative expense.
Contract costs capitalized for new contracts will accumulate in Other assets in our Condensed Consolidated Balance Sheets during 2018. As a result, there will be a net benefit to Operating income in our Condensed Consolidated Statements of Comprehensive Income during 2018 as capitalization of costs exceed amortization. As capitalized costs amortize into expense over time, the accretive benefit to Operating income anticipated in 2018 is expected to moderate in 2019 and normalize in 2020.
For contracts with promotional bill credits that are contingent on the customer maintaining a service contract that result in an extended service contract, a contract asset is recorded when control of the equipment transfers to the customer and is subsequently amortized as a reduction to Total service revenues in our Condensed Consolidated Statements of Comprehensive Income over the extended contract term.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (the “new cash flow standard”Standards Update (“ASU”). The new cash flow standard is intended to reduce current diversity in practice and provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows. We adopted the new cash flow standard on January 1, 2018, which was the date it became effective for us. We have applied the new cash flow standard retrospectively to all periods presented. The new cash flow standard impacted the presentation of cash flows related to our beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities of $1.3 billion and $1.1 billion for the three months ended September 30, 2018 and 2017, respectively, and $4.0 billion and $3.1 billion for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. The new cash flow standard also impacted the presentation of our cash payments for debt prepayment and debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities of $212 million and $188 million for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. There were no cash payments for debt prepayment and debt extinguishment costs during the three months ended September 30, 2018 and 2017.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities,” and has since modified the standard in February 2018 with ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall” (Subtopic 825-10). The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The standard became effective for us, and we adopted the standard, on January 1, 2018. The standard requires the impact of adoption to be recorded to retained earnings under a modified retrospective approach. The implementation of this standard did not have a material impact on our condensed consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. The standard became effective for us, and we adopted the standard, on January 1, 2018. The standard requires any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. The implementation of this standard did not have a material impact on our condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and has since modified the standard with several ASUs (collectively, the “new lease standard”). The new lease standard requires most lessees to report a right-of-use assetis effective for us, and a lease liability. The income statement recognition is similar to existing lease accounting and is basedwe adopted the standard, on lease classification. The new lease standard requires lessees and lessors to classify most leases using principles similar to existing lease accounting. For lessors, the new lease standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The new lease standard provides entities two options for applying the modified retrospective approach (1) retrospectively to each prior reporting period presented in the financial statements with the cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented or (2) retrospectively at the beginning of the period of adoption (JanuaryJanuary 1, 2019) through a cumulative-effect adjustment. TMUS plans to adopt2019.
We adopted the standard by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application.application and as a result did not restate the prior periods presented in the Condensed Consolidated Financial Statements.
The new lease standard provides for a number of optional practical expedients in transition. We did not elect the “package of practical expedients” and as a result reassessed under the new lease standard our prior accounting conclusions about lease identification, lease classification and initial direct costs. We elected to use hindsight for determining the reasonably certain lease term. We did not elect the practical expedient pertaining to land easements as it is not applicable to us.
The new lease standard provides practical expedients and policy elections for an entity’s ongoing accounting. Generally, we elected the practical expedient to not separate lease and non-lease components in arrangements whereby we are the lessee. For arrangements in which we are lessor we did not elect this practical expedient. We did not elect the short-term lease recognition exemption, which includes the recognition of right-of-use assets and lease liabilities for existing short-term leases at transition. We have also applied this election to all active leases at transition.
The most significant judgments and impacts upon adoption of the standard include the following:
In evaluating contracts to determine if they qualify as a lease, we consider factors such as if we have obtained or transferred substantially all of the rights to the underlying asset through exclusivity, if we can or if we have transferred the ability to direct the use of the asset by making decisions about how and for what purpose the asset will be used and if the lessor has substantive substitution rights.
We recognized right-of-use assets and operating lease liabilities for operating leases that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments.
The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent and deferred rent, which we remeasured at adoption due to the application of hindsight to our lease term estimates. Deferred and prepaid rent will no longer be presented separately.
Capital lease assets previously included within Property and equipment, net were reclassified to financing lease right-of-use assets, and capital lease liabilities previously included in Short-term debt and Long-term debt were reclassified to financing lease liabilities in our Condensed Consolidated Balance Sheet.
| |
• | Certain line items in the Condensed Consolidated Statements of Cash Flows and the “Supplementary disclosure of cash flow information” have been renamed to align with the new terminology presented in the new standard; “Repayment of capital lease obligations” is now presenting as “Repayments of financing lease obligations” and “Assets acquired under capital lease obligations” is now presenting as “Financing lease right-of-use assets obtained in exchange for lease obligations.” In the “Operating Activities” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease right-of-use assets” and “Short and long-term operating lease liabilities” which represent the change in the operating lease asset and liability, respectively. Additionally, in the “Supplemental disclosure of cash flow information” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease payments,” and in the “Noncash investing and financing activities” section we have added “Operating lease right-of-use assets obtained in exchange for lease obligations.” |
In determining the discount rate used to measure the right-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our evaluationincremental borrowing rate is based on an estimated secured rate comprised of a risk-free LIBOR rate plus a credit spread as secured by our assets.
Certain of our lease agreements include rental payments based on changes in the consumer price index (“CPI”). Lease liabilities are not remeasured as a result of changes in the CPI; instead, changes in the CPI are treated as variable lease payments and are excluded from the measurement of the right-of-use asset and lease liability. These payments are recognized in the period in which the related obligation was incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We elected the use of hindsight whereby we applied current lease term assumptions that are applied to new leases in determining the expected lease term period for all cell sites. Upon adoption of the new standard and application of hindsight, our expected lease term has shortened to reflect payments due for the initial non-cancelable lease term only. This assessment corresponds to our lease term assessment for new leases and aligns with the payments that have been disclosed as lease commitments in prior years. As a result, the average remaining lease term for cell sites has decreased from approximately nine to five years based on lease contracts in effect at transition on January 1, 2019. The aggregate impact of using the hindsight is an estimated decrease in Total operating expense of $240 million in fiscal year 2019.
We were also required to reassess the previously failed sale-leasebacks of certain T-Mobile-owned wireless communication tower sites and determine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a sale should be recognized.
We concluded that a sale has not occurred for the 6,200 tower sites transferred to Crown Castle International Corp. (“CCI”) pursuant to a master prepaid lease arrangement; therefore, these sites will continue to be accounted for as failed sale-leasebacks.
We concluded that a sale should be recognized for the 900 tower sites transferred to CCI pursuant to the sale of a subsidiary and the 500 tower sites transferred to Phoenix Tower International (“PTI”). Upon adoption on January 1, 2019, we derecognized our existing long-term financial obligation and the tower-related property and equipment associated with these 1,400 previously failed sale-leaseback tower sites and recognized a lease liability and right-of-use asset for the leaseback of the tower sites. The estimated impacts from the change in accounting conclusion are primarily a decrease in Other revenues of $44 million and a decrease in Interest expense of $34 million.
Rental revenues and expenses associated with co-location tower sites are presented on a net basis under the new lease standard. These revenues and expenses were presented on a gross basis under the former lease standard.
Including the impacts from a change in the accounting conclusion on the 1,400 previously failed sale-leaseback tower sites, the cumulative effect of initially applying the new lease standard on January 1, 2019 is as follows: |
| | | | | | | | | | | |
| January 1, 2019 |
(in millions) | Beginning Balance |
| Cumulative Effect Adjustment |
| Beginning Balance, As Adjusted |
Assets | | | | | |
Other current assets | $ | 1,676 |
| | $ | (78 | ) | | $ | 1,598 |
|
Property and equipment, net | 23,359 |
| | (2,339 | ) | | 21,020 |
|
Operating lease right-of-use assets | — |
| | 9,251 |
| | 9,251 |
|
Financing lease right-of-use assets | — |
| | 2,271 |
| | 2,271 |
|
Other intangible assets, net | 198 |
| | (12 | ) | | 186 |
|
Other assets | 1,623 |
| | (71 | ) | | 1,552 |
|
Liabilities and Stockholders’ Equity | | | | | |
Accounts payable and accrued liabilities | 7,741 |
| | (65 | ) | | 7,676 |
|
Other current liabilities | 787 |
| | 28 |
| | 815 |
|
Short-term and long-term debt | 12,965 |
| | (2,015 | ) | | 10,950 |
|
Tower obligations | 2,557 |
| | (345 | ) | | 2,212 |
|
Deferred tax liabilities | 4,472 |
| | 231 |
| | 4,703 |
|
Deferred rent expense | 2,781 |
| | (2,781 | ) | | — |
|
Short-term and long-term operating lease liabilities | — |
| | 11,364 |
| | 11,364 |
|
Short-term and long-term financing lease liabilities | — |
| | 2,016 |
| | 2,016 |
|
Other long-term liabilities | 967 |
| | (64 | ) | | 903 |
|
Accumulated deficit | $ | (12,954 | ) | | $ | 653 |
| | $ | (12,301 | ) |
Including the impacts from the change in the accounting conclusion on the 1,400 previously failed sale-leaseback tower sites and the change in presentation on the income statement of the 6,200 tower sites for which a sale did not occur, the cumulative effects of initially applying the new lease standard for fiscal year 2019 are estimated as follows:
The aggregate impact is a decrease in Other revenues of $185 million, a decrease in Total operating expenses of $380 million, a decrease in Interest expense of $34 million and an increase to Net income of $175 million.
| |
• | The expected impact on our Condensed Consolidated Statements of Cash Flows is a decrease in Net cash provided by operating activities of $10 millionand a decrease in Net cash used in financing activities of $10 million. |
For arrangements where we are the lessor, including arrangements to lease devices to our service customers, the adoption of the new lease standard is ongoingdid not have a material impact on our financial statements as these leases are classified as operating leases.
Device lease payments are presented as Equipment revenues and includes assessing whichrecognized as earned on a straight-line basis over the lease term. Recognition of our arrangements qualify as aequipment revenue on lease through detailed contract reviews and targeted inquiries and aggregating and validating lease data and related information as well as determining whether previous conclusions for certain transactions, such as failed sale leaseback arrangements undercontracts that are determined to not be probable of collection are limited to the previous lease standard, Leases (Topic 840), would change underamount of payments received. We have made an accounting policy election to exclude from the new lease standard. We areconsideration in the processcontract all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer (for example, sales, use, value added, and some excise taxes).
At operating lease inception, leased wireless devices are transferred from Inventory to Property and equipment, net. Leased wireless devices are depreciated to their estimated residual value over the period expected to provide utility to us, which is generally shorter than the lease term and considers expected losses. Returned devices transferred from Property and equipment, net are recorded as Inventory and are valued at the lower of implementingcost or market with any write-down to market recognized as Cost of equipment sales in our Consolidated Statements of Comprehensive Income.
We do not have any leasing transactions with related parties. See Note 10 - Leases for further information.
We have implemented significant new lease accounting systems, and cross-functional teams are working to update processes and identify new internal controls over lease recognition, which will ultimatelyaccounting to assist us in the application of the new lease standard. Additionally, we are assessing
We plan to adopt the new lease standard when it becomes effective for us beginning January 1, 2019 and the adoption of the new lease standard will result in the recognition of right-of-use assets and lease liabilities that have not previously been recorded, which we expect will have a material impact on our condensed consolidated financial statements.Accounting Pronouncements Not Yet Adopted
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which amends the scope and transition requirements of ASU 2016-13. The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectabilitycollectibility of the reported amount. The standard will become effective for us beginning January 1, 2020 and will require a cumulative-effect adjustment to Accumulated deficit as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). Early adoption is permitted for us as of January 1, 2019. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements and the timing of adoption.Consolidated Financial Statements.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvement to Accounting for Hedging Activities.” The standard modified the guidance for the designation and measurement of qualifying hedging relationships and the presentation of hedge results. We adopted this standard on October 1, 2018 and will apply the standard to hedging transactions prospectively.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement Thatthat is a Service Contract.” The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will become effective for us beginning January 1, 2020 and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted for us at any time. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statementsConsolidated Financial Statements and the timing of adoption.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”(the “SEC”) did not have, or are not believed by managementexpected to have, a significant impact on our present or future consolidated financial statements.Consolidated Financial Statements.
Note 2 - Significant Transactions
Business Combinations
During the nine months ended September 30, 2018, we completed the following acquisitions which were accounted for as business combinations:
On January 1, 2018, we closed on our previously announced Unit Purchase Agreement to acquire the remaining equity in Iowa Wireless Services, LLC (“IWS”), a 54% owned unconsolidated subsidiary, for a purchase price of $25 million.
On January 22, 2018, we completed our acquisition of television innovator Layer3 TV, Inc. (“Layer3 TV”) for cash consideration of $318 million.
Proposed Sprint Transaction
On April 29, 2018, we entered into a Business Combination Agreement (the “Business Combination Agreement”) to merge with Sprint Corporation (“Sprint”).
Hurricane Impacts
During the first quarter of 2018, we recognized $36 million in incremental costs to maintain services in Puerto Rico related to hurricanes that occurred in 2017. Additional costs incurred during the second and the third quarters related to hurricanes that occurred in 2017 were immaterial and are expected to be immaterial in the fourth quarter of 2018. During the first quarter of 2018, we received reimbursement payments from our insurance carriers of $94 million, previously accrued for as a receivable as of December 31, 2017. During the second quarter of 2018, we received reimbursement payments of $70 million. During the third quarter of 2018, we received reimbursement payments of $81 million and accrued an additional receivable of $63 million for reimbursement payments agreed to with our insurance carriers as of September 30, 2018 and received in October 2018.
During the third quarter of 2018, our operations in North Carolina and South Carolina experienced losses related to a hurricane, and we recognized $6 million in costs associated with these losses. Additional costs related to the hurricane are expected to be immaterial in the fourth quarter of 2018.
In October 2018, our operations in Florida experienced immaterial losses related to a hurricane. Additional costs related to the hurricane are expected to be incurred during the remainder of the fourth quarter of 2018.
The following table shows the hurricane impacts in our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
(in millions, except per share amounts) | Gross | | Reim- bursement | | Net | | Gross | | Reim- bursement | | Net |
Increase (decrease) | | | | | | | | | | | |
Revenues | | | | | | | | | | | |
Other revenues | $ | — |
| | $ | 71 |
| | $ | 71 |
| | $ | — |
| | $ | 71 |
| | $ | 71 |
|
Total revenues | $ | — |
| | $ | 71 |
| | $ | 71 |
| | $ | — |
| | $ | 71 |
| | $ | 71 |
|
| | | | | | | | | | | |
Operating expenses | | | | | | | | | | | |
Cost of services | $ | 6 |
| | $ | (60 | ) | | $ | (54 | ) | | $ | 42 |
| | $ | (130 | ) | | $ | (88 | ) |
Selling, general and administrative | — |
| | (13 | ) | | (13 | ) | | — |
| | (13 | ) | | (13 | ) |
Total operating expenses | $ | 6 |
| | $ | (73 | ) | | $ | (67 | ) | | $ | 42 |
| | $ | (143 | ) | | $ | (101 | ) |
| | | | | | | | | | | |
Operating income (loss) | $ | (6 | ) | | $ | 144 |
| | $ | 138 |
| | $ | (42 | ) | | $ | 214 |
| | $ | 172 |
|
Net income (loss) | (4 | ) | | 92 |
| | 88 |
| | (27 | ) | | 137 |
| | 110 |
|
| | | | | | | | | | | |
Earnings per share - basic | $ | (0.01 | ) | | $ | 0.11 |
| | $ | 0.10 |
| | $ | (0.03 | ) | | $ | 0.16 |
| | $ | 0.13 |
|
Earnings per share - diluted | (0.01 | ) | | 0.11 |
| | 0.10 |
| | (0.03 | ) | | 0.16 |
| | 0.13 |
|
The following table shows the hurricane impacts in our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
(in millions, except per share amounts) | Gross | | Reim- bursement | | Net | | Gross | | Reim- bursement | | Net |
Increase (decrease) | | | | | | | | | | | |
Revenues | | | | | | | | | | | |
Branded postpaid revenues | $ | (20 | ) | | $ | — |
| | $ | (20 | ) | | $ | (20 | ) | | $ | — |
| | $ | (20 | ) |
Of which, postpaid phone revenues | (19 | ) | | — |
| | (19 | ) | | (19 | ) | | — |
| | (19 | ) |
Branded prepaid revenues | (11 | ) | | — |
| | (11 | ) | | (11 | ) | | — |
| | (11 | ) |
Wholesale revenues | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total service revenues | (31 | ) | | — |
| | (31 | ) | | (31 | ) | | — |
| | (31 | ) |
Roaming and other service revenues | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Equipment revenues | (8 | ) | | — |
| | (8 | ) | | (8 | ) | | — |
| | (8 | ) |
Total revenues | $ | (39 | ) | | $ | — |
| | $ | (39 | ) | | $ | (39 | ) | | $ | — |
| | $ | (39 | ) |
| | | | | | | | | | | |
Operating expenses | | | | | | | | | | | |
Cost of services | $ | 69 |
| | $ | — |
| | $ | 69 |
| | $ | 69 |
| | $ | — |
| | $ | 69 |
|
Cost of equipment sales | 4 |
| | — |
| | 4 |
| | 4 |
| | — |
| | 4 |
|
Selling, general and administrative | 36 |
| | — |
| | 36 |
| | 36 |
| | — |
| | 36 |
|
Of which, bad debt | 20 |
| | — |
| | 20 |
| | 20 |
| | — |
| | 20 |
|
Total operating expenses | $ | 109 |
| | $ | — |
| | $ | 109 |
| | $ | 109 |
| | $ | — |
| | $ | 109 |
|
| | | | | | | | | | | |
Operating income (loss) | $ | (148 | ) | | $ | — |
| | $ | (148 | ) | | $ | (148 | ) | | $ | — |
| | $ | (148 | ) |
Net income (loss) | (90 | ) | | — |
| | (90 | ) | | (90 | ) | | — |
| | (90 | ) |
| | | | | | | | | | | |
Earnings per share - basic | $ | (0.11 | ) | | $ | — |
| | $ | (0.11 | ) | | $ | (0.11 | ) | | $ | — |
| | $ | (0.11 | ) |
Earnings per share - diluted | (0.10 | ) | | — |
| | (0.10 | ) | | (0.10 | ) | | — |
| | (0.10 | ) |
Sales of Certain Receivables
In February 2018,2019, the service receivable sale arrangement was amended to extend the scheduled expiration date, as well as extend certain third-party credit support under the arrangement, to March 2019. In October 2018, we amended and restated the EIP sale arrangement to, among other things, extend the scheduled expiration date to November 2020 and expand the types of EIP receivables that may be sold.2021. See Note 5 – Sales of Certain Receivables for further information.
DebtNote Redemption
During the nine months ended September 30, 2018,In March 2019, we completed significant transactions with both third parties and affiliates related to the issuance, borrowing anddelivered a notice of redemption of debt. See Note 9 - Debt for further information.
Repurchases of Common Stock
During the first half of 2018, we made additional repurchaseson $600 million aggregate principal amount of our common stock. Additionally, during the first quarter of 2018,9.332% Senior Reset Notes due 2023 (the “DT Senior Reset Notes”) held by Deutsche Telekom AG (“DT”), our majority stockholderstockholder. The notes will be redeemed on April 28, 2019, at a redemption price equal to 104.666% of the principal amount of the notes (plus accrued and an affiliated purchaser, made additional purchasesunpaid interest thereon), payable on April 29, 2019. The redemption premium is $28 million. The outstanding principal amount was reclassified from Long-term debt to affiliates to Short-term debt to affiliates in our Condensed Consolidated Balance Sheets as of March 31, 2019.
Certain components of the reset features were required to be bifurcated from the DT Senior Reset Notes and are separately accounted for as embedded derivatives. The balance of embedded derivatives was reclassified from Other long-term liabilities to Other current liabilities in our common stock.Condensed Consolidated Balance Sheets as of March 31, 2019. The write-off of embedded derivatives upon redemption will be $11 million. See Note 12 – Repurchases of Common Stock6 - Fair Value Measurements for further information.
Note 3 -– Business Combinations
Proposed Sprint Transactions
On April 29, 2018, we entered into a Business Combination Agreement to merge with Sprint in an all-stock transaction at a fixed exchange ratio of 0.10256 shares of T-Mobile common stock for each share of Sprint common stock, or 9.75 shares of Sprint common stock for each share of T-Mobile common stock (the “Merger”). The combined company will be named “T-Mobile” and, as a result of the Merger, is expected to be able to rapidly launch a broad and deep nationwide 5G network, accelerate innovation
and increase competition in the U.S. wireless, video and broadband industries. Neither T-Mobile nor Sprint on its own could generate comparable benefits to consumers.
The Merger and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”)
have been approved by the boards of directors of T-Mobile and Sprint.Sprint and the required approvals of the stockholders of each of T-Mobile and Sprint have been obtained. Immediately following the Merger, it is anticipated that DT and SoftBank Group Corp. (“SoftBank”) will hold, directly or indirectly, on a fully diluted basis, approximately 41.7% and 27.3%27.4%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 31.0%30.9% of the outstanding T-Mobile common stock held by other stockholders, based on closing share prices and certain other assumptions as of October 1,December 31, 2018.
In connection with the entry into the Business Combination Agreement, T-Mobile USA, Inc. (“T-Mobile USA”) entered into a commitment letter, dated as of April 29, 2018 (as amended and restated on May 15, 2018, the “Commitment Letter”), with certain financial institutions named therein that have committed to provide up to $38.0 billion in secured and unsecured debt financing. As permitted by the terms of the Commitment Letter, on June 6, 2018, T-Mobile USA reduced the initial aggregate commitment under the Commitment Letter by $8.0 billion such that the remaining size of the commitment is currently $30.0 billion.. The funding of the debt facilities provided for in the Commitment Letter is subject to the satisfaction of the conditions set forth therein, including consummation of the Merger. The proceeds of the debt financing provided for in the Commitment Letter will be used to refinance certain existing debt of us, Sprint and our and Sprint’s respective subsidiaries and for post-closing working capital needs of the combined company. In connection with the financing provided for in the Commitment Letter, we expect to incur certain fees if the Merger closes, includingcloses. There were no fees for the financial institutions structuring and providing the commitments for the secured term loan facility, secured revolving loan facility and the secured bridge loan, and certain take-out fees associated with the issuance of permanent secured bond debt in lieu of the secured bridge loan. We expect to incur up to approximately $275 million in fees if the Merger were to close on or after January 29, 2019. The fees increase to up to approximately $340 million if the closing date occurs on or after April 29, 2019. We have not accrued these fees as of September 30, 2018.March 31, 2019. We also may be required to draw down on the $7.0$7 billion secured term loan facility on May 1, 2019,prior to closing and, wouldif so, will be required to place the proceeds in escrow and pay interest thereon until the Merger closes.
In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a Financing Matters Agreement,financing matters agreement, dated as of April 29, 2018, pursuant to which DT agreed, among other things, to consent to the incurrence by T-Mobile USA of secured debt in connection with and after the consummation of the Merger. In connection with receivingIf the Merger is consummated, we will make payments for requisite consents we made upfrontto DT. There were no consent payments to DTaccrued as of $7 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt to affiliates in our Condensed Consolidated Balance Sheets. See Note 9 - Debt for further information.March 31, 2019.
On May 18, 2018, under the terms and conditions described in the Consent Solicitation Statement dated as of May 14, 2018, (the “Consent Solicitation Statement”) we obtained consents necessary to effect certain amendments to certain existing debt of us and our subsidiaries. In connection with receivingIf the Merger is consummated, we will make payments for requisite consents we made upfront payments to third-party note holdersholders. There were no consent payments accrued as of approximately $31 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt. We paid third-party bank fees associated with obtaining the requisite consents of $6 million during the second quarter of 2018, which we recognized as Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income.March 31, 2019.
Under the terms of the Business Combination Agreement, Sprint may be required to reimburse us for 33% of the upfront consent and related bank fees we paid, or $14 million, if the Business Combination Agreement is terminated. We have notThere were no reimbursements accrued the reimbursement of these fees as of September 30, 2018.March 31, 2019. On May 18, 2018, Sprint also obtained consents necessary to effect certain amendments to certain existing debt of itSprint and its subsidiaries. In connection with receiving the requisite consents, Sprint’s made upfront payments to third-party note holders and related bank fees of $241 million during the second quarter of 2018. Under the terms of the Business Combination Agreement, we may also be required to reimburse Sprint for 67% of the upfront consent and related bank fees it paid, or $161 million, if the Business Combination Agreement is terminated. We have notThere were no fees accrued these fees as of September 30, 2018.March 31, 2019.
For the three and nine months ended September 30, 2018,March 31, 2019, we recognized merger-related costs associated with the Transactions of $53 million and $94 million, respectively.$113 million. These costs generally included bank fees associated with obtaining the requisite consents on debt to third parties, consulting and legal fees and were recognized as Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income.
The consummation of the Transactions is subject to regulatory approvals and certain other customary closing conditions. The transaction is expectedWe expect to close duringreceive federal regulatory approval in the first half of 2019. The Business Combination Agreement contains certain termination rights for both Sprint and us. If we terminate the Business Combination Agreement in connection with a failure to satisfy the closing condition related to specified minimum credit ratings for the combined company on the closing date of the Merger
(after (after giving effect to the Merger) from at least two of the three credit rating agencies, then in certain circumstances, we may be required to pay Sprint an amount equal to $600 million.
On June 18, 2018, we filed the Public Interest Statement and applications for approval of our Merger with Sprint with the Federal Communications Commission (the “FCC”(“FCC”). On July 18, 2018, the FCC issued a Public Notice formally accepting our applications and establishing a period for public comment. On September 11, 2018, theThe transaction remains subject to FCC issued a letter informing us itreview. The FCC’s informal transaction review clock, which has stopped and started several times as T-Mobile and Sprint have filed additional information, is pausing its informal 180-day transaction shot clockcurrently set to allow for a thorough review by FCC staff and third parties of newly-submitted and anticipated modeling provided by us and Sprint.
On July 30, 2018, we filed a registration statementexpire on Form S-4 with the SEC related to the Merger. The registration statement became effective on October 29, 2018.
Acquisition of Layer3 TV
On January 22, 2018, we completed our acquisition of television innovator Layer3 TV for cash consideration of $318 million. The consideration included a $5 million payment that was made after the closing date in the second quarter of 2018. Upon closing of the transaction, Layer3 TV became a wholly-owned consolidated subsidiary. Layer3 TV acquires and distributes digital entertainment programming primarily through the internet to residential customers, offering direct to home digital television and multi-channel video programming distribution services. This transaction represented an opportunity to acquire a complementary service to our existing wireless service to advance our video strategy.
We accounted for the purchase of Layer3 TV as a business combination. Costs related to this acquisition were immaterial to our Condensed Consolidated Statements of Comprehensive Income. The grant-date fair value of cash-based and share-based incentive compensation awards attributable to post-combination services was approximately $37 million.
The following table shows the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation:
|
| | | |
(in millions) | January 22, 2018 |
Assets acquired | |
Cash and cash equivalents | $ | 2 |
|
Other current assets | 14 |
|
Property and equipment, net | 11 |
|
Intangible assets | 100 |
|
Goodwill | 218 |
|
Deferred tax assets | 2 |
|
Total assets acquired | $ | 347 |
|
Liabilities assumed | |
Accounts payable and accrued liabilities | $ | 27 |
|
Short-term debt | 2 |
|
Total liabilities assumed | 29 |
|
Total consideration transferred | $ | 318 |
|
We recognized a liability of $21 million within Accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheets and an associated indemnification asset of $12 million in our Condensed Consolidated Balance Sheets related to minimum commitments under acquired content agreements. As of September 30, 2018, the $12 million has been received.
Goodwill of $218 million is calculated as the excess of the purchase price paid over the net assets acquired. The goodwill recorded as part of the Layer3 TV acquisition primarily reflects industry knowledge of the retained management team, as well as intangible assets that do not qualify for separate recognition. None of the goodwill is deductible for tax purposes. See Note 6 - Goodwill for further information.
As part of the transaction, we acquired an identifiable intangible asset of developed technology with an estimated fair value of $100 million, which is being amortized on a straight-line basis over a useful life of 5 years.
The financial results from the acquisition of Layer3 TV since the closing date through September 30, 2018 were not material to our Condensed Consolidated Statements of Comprehensive Income.
Acquisition of Iowa Wireless
On January 1, 2018 (the “IWS Acquisition Date”), we closed on our previously announced Unit Purchase Agreement to acquire the remaining equity in IWS, a 54% owned unconsolidated subsidiary, for a purchase price of $25 million. We accounted for our acquisition of IWS as a business combination.
Prior to the IWS Acquisition Date, we accounted for our previously-held investment in IWS under the equity method as we had significant influence, but not control. Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. As such, we valued our previously held equity interest in IWS at $56 million as of the IWS Acquisition Date and recognized a gain of $15 million.
The following table highlights the consideration transferred, the fair value of our previously held equity interest and bargain purchase:
|
| | | |
(in millions) | January 1, 2018 |
Consideration transferred: | |
Cash paid | $ | 25 |
|
Previously held equity interest: | |
Acquisition date fair value of previously held equity interest | 56 |
|
Bargain purchase gain | 25 |
|
Net assets acquired | $ | 106 |
|
As part of the acquisition of IWS, we recognized a bargain purchase gain of approximately $25 million, which represents the fair value of the identifiable net assets acquired, primarily IWS spectrum licenses, in excess of the purchase price and fair value of our previously held equity interest. We were in a favorable position to acquire the remaining shares of IWS as a result of our previously held 54% equity interest in IWS, an unprofitable business with valuable spectrum holdings.
The following table shows the amounts recognized as of the IWS Acquisition Date for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation:
|
| | | |
(in millions) | January 1, 2018 |
Assets acquired | |
Current assets | |
Cash and cash equivalents | $ | 3 |
|
Accounts receivable, net | 6 |
|
Equipment installment plan receivables, net | 3 |
|
Inventories | 1 |
|
Other current assets | 2 |
|
Total current assets | 15 |
|
Property and equipment, net | 36 |
|
Spectrum licenses | 87 |
|
Total assets acquired | $ | 138 |
|
Liabilities assumed | |
Accounts payable and accrued liabilities | $ | 6 |
|
Deferred revenue | 2 |
|
Total current liabilities | 8 |
|
Deferred tax liabilities | 17 |
|
Other long-term liabilities | 7 |
|
Total long-term liabilities | 24 |
|
Net assets acquired | $ | 106 |
|
We included both the gain on our previously held equity interest in IWS and the bargain purchase gain within Other income (expense), net for the nine months ended September 30, 2018.
Pro forma information
The acquisitions of Layer3 TV and IWS were not material to our prior period consolidated results on a pro forma basis.
June 3, 2019.
Note 4 – Receivables and Allowance for Credit Losses
Our portfolio of receivables is comprised of two portfolio segments, accounts receivable and EIP receivables. Our accounts receivable segment primarily consists of amounts currently due from customers, including service and leased device receivables, other carriers and third-party retail channels.
Based upon customer credit profiles, we classify the EIP receivables segment into two customer classes of “Prime” and “Subprime.” Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. Customers may be required to make a down payment on their equipment purchases. In addition, certain customers within the Subprime category are required to pay an advance deposit.
To determine a customer’s credit profile, we use a proprietary credit scoring model that measures the credit quality of a customer at the time of application for wireless communications service using several factors, such as credit bureau information, consumer credit risk scores and service and device plan characteristics.
The following table summarizes the EIP receivables, including imputed discounts and related allowance for credit losses:
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
EIP receivables, gross | $ | 4,573 |
| | $ | 4,534 |
|
Unamortized imputed discount | (341 | ) | | (330 | ) |
EIP receivables, net of unamortized imputed discount | 4,232 |
| | 4,204 |
|
Allowance for credit losses | (104 | ) | | (119 | ) |
EIP receivables, net | $ | 4,128 |
| | $ | 4,085 |
|
Classified on the balance sheet as: | | | |
Equipment installment plan receivables, net | $ | 2,466 |
| | $ | 2,538 |
|
Equipment installment plan receivables due after one year, net | 1,662 |
| | 1,547 |
|
EIP receivables, net | $ | 4,128 |
| | $ | 4,085 |
|
|
| | | | | | | |
(in millions) | September 30, 2018 | | December 31, 2017 |
EIP receivables, gross | $ | 3,978 |
| | $ | 3,960 |
|
Unamortized imputed discount | (273 | ) | | (264 | ) |
EIP receivables, net of unamortized imputed discount | 3,705 |
| | 3,696 |
|
Allowance for credit losses | (116 | ) | | (132 | ) |
EIP receivables, net | $ | 3,589 |
| | $ | 3,564 |
|
Classified on the balance sheet as: | | | |
Equipment installment plan receivables, net | $ | 2,366 |
| | $ | 2,290 |
|
Equipment installment plan receivables due after one year, net | 1,223 |
| | 1,274 |
|
EIP receivables, net | $ | 3,589 |
| | $ | 3,564 |
|
To determine the appropriate level of the allowance for credit losses, we consider a number of credit quality indicators, including historical credit losses and timely payment experience as well as current collection trends such as write-off frequency and severity, aging of the receivable portfolio, credit quality of the customer base and other qualitative factors such as macro-economic conditions.
We write off account balances if collection efforts are unsuccessful and the receivable balance is deemed uncollectible, based on customer credit quality and the aging of the receivable.
For EIP receivables, subsequent to the initial determination of the imputed discount, we assess the need for and, if necessary, recognize an allowance for credit losses to the extent the amount of estimated probable losses on the gross EIP receivable balances exceed the remaining unamortized imputed discount balances.
The EIP receivables had weighted average effective imputed interest rates of 10.2%9.8% and 9.6%10.0% as of September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.
Activity for the ninethree months ended September 30,March 31, 2019 and 2018 and 2017, in the allowance for credit losses and unamortized imputed discount balances for the accounts receivable and EIP receivablereceivables segments were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | March 31, 2018 |
(in millions) | Accounts Receivable Allowance | | EIP Receivables Allowance | | Total | | Accounts Receivable Allowance | | EIP Receivables Allowance | | Total |
Allowance for credit losses and imputed discount, beginning of period | $ | 67 |
| | $ | 449 |
| | $ | 516 |
| | $ | 86 |
| | $ | 396 |
| | $ | 482 |
|
Bad debt expense | 15 |
| | 59 |
| | 74 |
| | 4 |
| | 50 |
| | 54 |
|
Write-offs, net of recoveries | (19 | ) | | (74 | ) | | (93 | ) | | (14 | ) | | (67 | ) | | (81 | ) |
Change in imputed discount on short-term and long-term EIP receivables | N/A |
| | 53 |
| | 53 |
| | N/A |
| | 53 |
| | 53 |
|
Impact on the imputed discount from sales of EIP receivables | N/A |
| | (42 | ) | | (42 | ) | | N/A |
| | (51 | ) | | (51 | ) |
Allowance for credit losses and imputed discount, end of period | $ | 63 |
| | $ | 445 |
| | $ | 508 |
| | $ | 76 |
| | $ | 381 |
| | $ | 457 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | September 30, 2017 |
(in millions) | Accounts Receivable Allowance | | EIP Receivables Allowance | | Total | | Accounts Receivable Allowance | | EIP Receivables Allowance | | Total |
Allowance for credit losses and imputed discount, beginning of period | $ | 86 |
| | $ | 396 |
| | $ | 482 |
| | $ | 102 |
| | $ | 316 |
| | $ | 418 |
|
Bad debt expense | 46 |
| | 163 |
| | 209 |
| | 83 |
| | 215 |
| | 298 |
|
Write-offs, net of recoveries | (62 | ) | | (179 | ) | | (241 | ) | | (99 | ) | | (205 | ) | | (304 | ) |
Change in imputed discount on short-term and long-term EIP receivables | N/A |
| | 155 |
| | 155 |
| | N/A |
| | 163 |
| | 163 |
|
Impact on the imputed discount from sales of EIP receivables | N/A |
| | (146 | ) | | (146 | ) | | N/A |
| | (126 | ) | | (126 | ) |
Allowance for credit losses and imputed discount, end of period | $ | 70 |
| | $ | 389 |
| | $ | 459 |
| | $ | 86 |
| | $ | 363 |
| | $ | 449 |
|
Management considers the aging of receivables to be an important credit indicator. The following table provides delinquency status for the unpaid principal balance for receivables within the EIP portfolio segment, which we actively monitor as part of our current credit risk management practices and policies:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
(in millions) | Prime | | Subprime | | Total EIP Receivables, gross | | Prime | | Subprime | | Total EIP Receivables, gross |
Current - 30 days past due | $ | 2,091 |
| | $ | 2,395 |
| | $ | 4,486 |
| | $ | 1,987 |
| | $ | 2,446 |
| | $ | 4,433 |
|
31 - 60 days past due | 14 |
| | 25 |
| | 39 |
| | 15 |
| | 32 |
| | 47 |
|
61 - 90 days past due | 6 |
| | 15 |
| | 21 |
| | 6 |
| | 19 |
| | 25 |
|
More than 90 days past due | 7 |
| | 20 |
| | 27 |
| | 7 |
| | 22 |
| | 29 |
|
Total receivables, gross | $ | 2,118 |
| | $ | 2,455 |
| | $ | 4,573 |
| | $ | 2,015 |
| | $ | 2,519 |
| | $ | 4,534 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
(in millions) | Prime | | Subprime | | Total EIP Receivables, gross | | Prime | | Subprime | | Total EIP Receivables, gross |
Current - 30 days past due | $ | 1,661 |
| | $ | 2,226 |
| | $ | 3,887 |
| | $ | 1,727 |
| | $ | 2,133 |
| | $ | 3,860 |
|
31 - 60 days past due | 13 |
| | 31 |
| | 44 |
| | 17 |
| | 29 |
| | 46 |
|
61 - 90 days past due | 6 |
| | 15 |
| | 21 |
| | 6 |
| | 16 |
| | 22 |
|
More than 90 days past due | 6 |
| | 20 |
| | 26 |
| | 8 |
| | 24 |
| | 32 |
|
Total receivables, gross | $ | 1,686 |
| | $ | 2,292 |
| | $ | 3,978 |
| | $ | 1,758 |
| | $ | 2,202 |
| | $ | 3,960 |
|
Note 5 – Sales of Certain Receivables
We have entered into transactions to sell certain service and EIP accounts receivable.receivables. The transactions, including our continuing involvement with the sold receivables and the respective impacts to our condensed consolidated financial statements, are described below.
Sales of Service ReceivablesAccounts Receivable
Overview of the Transaction
In 2014, we entered into an arrangement to sell certain service accounts receivable on a revolving basis and in November 2016, the arrangement was amended to increase the maximum funding commitment to $950 million (the “service receivable sale arrangement”) and extend. The maximum funding commitment of the scheduled expiration date to March 2018.service receivable sale arrangement is $950 million. In February 2018,2019, the service receivable sale arrangement was again amended to extend the scheduled expiration date, as well as certain third-party credit support under the arrangement, to March 2019. In April 2018, the service receivable sale arrangement was again amended to update certain terms and covenants contained therein to make them consistent with analogous terms and covenants in the documentation of our other financing arrangements.2021. As of September 30, 2018March 31, 2019 and December 31, 2017,2018, the service receivable sale arrangement provided funding of $830$891 million and $880$774 million, respectively. Sales of receivables occur daily and are settled on a monthly basis. The receivables consist of service charges currently due from customers and are short-term in nature.
In connection with the service receivable sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity, to sell service accounts receivable (the “Service BRE”). The Service BRE does not qualify as a VIE, and due to the significant level of control we exercise over the entity, it is consolidated. Pursuant to the service receivable sale arrangement, certain of our wholly-owned subsidiaries transfer selected receivables to the Service BRE. The Service BRE then sells the receivables to an unaffiliated entity (the “Service VIE”), which was established to facilitate the sale of beneficial ownership interests in the receivables to certain third parties.
Variable Interest Entity
We determined that the Service VIE qualifies as a VIE as it lacks sufficient equity to finance its activities. We have a variable interest in the Service VIE but are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the Service VIE’s economic performance. Those activities include committing the Service VIE to legal agreements to purchase or sell assets, selecting which receivables are purchased in the service receivable sale arrangement, determining whether the Service VIE will sell interests in the purchased service receivables to other parties, funding of the entity and servicing of receivables. We do not hold the power to direct the key decisions underlying these activities. For example, while we act as the servicer of the sold receivables, which is considered a significant activity of the Service VIE, we are acting as an agent in our capacity as the servicer and the counterparty to the service receivable sale arrangement has the ability to remove us as the servicing agent of the receivables at will with no recourse available to us. As we have determined we are not the primary beneficiary, the balances and results of the Service VIE are not included in our condensed consolidated financial statements.
The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to our variable interest in the Service VIE:
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
Other current assets | $ | 342 |
| | $ | 339 |
|
Accounts payable and accrued liabilities | — |
| | 59 |
|
Other current liabilities | 230 |
| | 149 |
|
|
| | | | | | | |
(in millions) | September 30, 2018 | | December 31, 2017 |
Other current assets | $ | 299 |
| | $ | 236 |
|
Accounts payable and accrued liabilities | 11 |
| | 25 |
|
Other current liabilities | 174 |
| | 180 |
|
Sales of EIP Receivables
Overview of the Transaction
In 2015, we entered into an arrangement to sell certain EIP accounts receivable on a revolving basis and in August 2017,(the “EIP sale arrangement”). The maximum funding commitment of the EIP sale arrangement was amended to reduce the maximum funding commitment to $1.2is $1.3 billion, (the “EIP sale arrangement”) and extend the scheduled expiration date tois November 2018. In December 2017, the EIP sale arrangement was again amended to increase the maximum funding commitment to $1.3 billion. In April 2018, the EIP sale arrangement was again amended to update certain terms and covenants contained therein to make them consistent with analogous terms and covenants in the documentation of our other financing arrangements. 2020.
As of both September 30, 2018March 31, 2019 and December 31, 2017,2018, the EIP sale arrangement provided funding of $1.3 billion. Sales of EIP receivables occur daily and are settled on a monthly basis. The receivables consist of customer EIP balances, which require monthly customer payments for up to 24 months.
In October 2018, we amended and restated the EIP sale arrangement to, among other things, extend the scheduled expiration date to November 2020 and expand the types of EIP receivables that may be sold.
In connection with this EIP sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity (the “EIP BRE”). Pursuant to the EIP sale arrangement, our wholly-owned subsidiary transfers selected receivables to the EIP BRE. The EIP BRE then sells the receivables to a non-consolidated and unaffiliated third-party entity for which we do not exercise any level of control, nor does the third-party entity qualify as a VIE.
Variable Interest Entity
We determined that the EIP BRE is a VIE as its equity investment at risk lacks the obligation to absorb a certain portion of its expected losses. We have a variable interest in the EIP BRE and determined that we are the primary beneficiary based on our ability to direct the activities which most significantly impact the EIP BRE’s economic performance. Those activities include selecting which receivables are transferred into the EIP BRE and sold in the EIP sale arrangement and funding of the EIP BRE. Additionally, our equity interest in the EIP BRE obligates us to absorb losses and gives us the right to receive benefits from the EIP BRE that could potentially be significant to the EIP BRE. Accordingly, we determined that we are the primary beneficiary, and include the balances and results of operations of the EIP BRE in our condensed consolidated financial statements.
The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to the EIP BRE:
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
Other current assets | $ | 327 |
| | $ | 321 |
|
Other assets | 71 |
| | 88 |
|
Other long-term liabilities | 20 |
| | 22 |
|
|
| | | | | | | |
(in millions) | September 30, 2018 | | December 31, 2017 |
Other current assets | $ | 405 |
| | $ | 403 |
|
Other assets | 98 |
| | 109 |
|
Other long-term liabilities | 22 |
| | 3 |
|
In addition, the EIP BRE is a separate legal entity with its own separate creditors who will be entitled, prior to any liquidation of the EIP BRE, to be satisfied prior to any value in the EIP BRE becoming available to us. Accordingly, the assets of the EIP BRE may not be used to settle our general obligations and creditors of the EIP BRE have limited recourse to our general credit.
Sales of Receivables
The transfers of service receivables and EIP receivables to the non-consolidated entities are accounted for as sales of financial assets. Once identified for sale, the receivable is recorded at the lower of cost or fair value. Upon sale, we derecognize the net carrying amount of the receivables.
We recognize the cash proceeds received upon sale in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. We recognize proceeds net of the deferred purchase price, consisting of a receivable from the purchasers that entitles us to certain collections on the receivables. We recognize the collection of the deferred purchase price in Net cash provided byused in investing activities in our Condensed Consolidated Statements of Cash Flows as Proceeds related to beneficial interests in securitization transactions.
The deferred purchase price represents a financial asset that is primarily tied to the creditworthiness of the customers and which can be settled in such a way that we may not recover substantially all of our recorded investment, due to default by the customers on the underlying receivables. We elected, at inception, to measure the deferred purchase price at fair value with changes in fair value included in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income. The fair value of the deferred purchase price is determined based on a discounted cash flow model which uses primarily unobservable inputs (Level 3 inputs), including customer default rates. As of September 30, 2018March 31, 2019 and December 31, 2017,2018, our deferred purchase price related to the sales of service receivables and EIP receivables was $800$738 million and $745$746 million, respectively.
The following table summarizes the impacts of the sale of certain service receivables and EIP receivables in our Condensed Consolidated Balance Sheets:
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
Derecognized net service receivables and EIP receivables | $ | 2,546 |
| | $ | 2,577 |
|
Other current assets | 669 |
| | 660 |
|
of which, deferred purchase price | 667 |
| | 658 |
|
Other long-term assets | 71 |
| | 88 |
|
of which, deferred purchase price | 71 |
| | 88 |
|
Accounts payable and accrued liabilities | — |
| | 59 |
|
Other current liabilities | 230 |
| | 149 |
|
Other long-term liabilities | 20 |
| | 22 |
|
Net cash proceeds since inception | 1,861 |
| | 1,879 |
|
Of which: | | | |
Change in net cash proceeds during the year-to-date period | (18 | ) | | (179 | ) |
Net cash proceeds funded by reinvested collections | 1,879 |
| | 2,058 |
|
|
| | | | | | | |
(in millions) | September 30, 2018 | | December 31, 2017 |
Derecognized net service receivables and EIP receivables | $ | 2,682 |
| | $ | 2,725 |
|
Other current assets | 704 |
| | 639 |
|
of which, deferred purchase price | 702 |
| | 636 |
|
Other long-term assets | 98 |
| | 109 |
|
of which, deferred purchase price | 98 |
| | 109 |
|
Accounts payable and accrued liabilities | 11 |
| | 25 |
|
Other current liabilities | 174 |
| | 180 |
|
Other long-term liabilities | 22 |
| | 3 |
|
Net cash proceeds since inception | 1,915 |
| | 2,058 |
|
Of which: | | | |
Change in net cash proceeds during the year-to-date period | (143 | ) | | 28 |
|
Net cash proceeds funded by reinvested collections | 2,058 |
| | 2,030 |
|
We recognized losses from sales of receivables, of $48 million and $67 million for the three months ended September 30, 2018 and 2017, respectively, and $127 million and $242 million for the nine months ended September 30, 2018 and 2017, respectively. These losses from sales of receivables were recognized in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income. Losses from sales of receivables includeincluding adjustments to the receivables’ fair values and changes in fair value of the deferred purchase price.
Continuing Involvement
Pursuant to the sale arrangements described above, we have continuing involvement with the service receivables and EIP receivables we sell as we service the receivables and are required to repurchase certain receivables, including ineligible receivables, aged receivables and receivables where write-off is imminent. We continue to service the customers and their related receivables, including facilitating customer payment collection, in exchange for a monthly servicing fee. As the receivables are sold on a revolving basis, the customer payment collections on sold receivables may be reinvested in new receivable sales. While servicing the receivables, we apply the same policies and procedures to the sold receivables as we apply to our owned receivables, and we continue to maintain normal relationships with our customers. Pursuant to the EIP sale
arrangement, under certain circumstances, we are required to deposit cash or replacement EIP receivables primarily for contracts terminated by customers under our JUMP! Program.
In addition, we have continuing involvement with the sold receivables as we may be responsible for absorbing additional credit losses pursuant to the sale arrangements. Our maximum exposure to loss related to the involvement with the service receivables and EIP receivables sold under the sale arrangements was $1.3$1.1 billion as of September 30, 2018.March 31, 2019. The maximum exposure to loss, which is a required disclosure under GAAP, represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby we would not receive the deferred purchase price portion of the contractual proceeds withheld by the purchasers and would also be required to repurchase the maximum amount of receivables pursuant to the sale arrangements without consideration for any recovery. As we believe the probability of these circumstances occurring is remote, the maximum exposure to loss is not an indication of our expected loss.
Note 6 - Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2018, are as follows:
|
| | | |
(in millions) | Goodwill |
Historical goodwill | $ | 12,449 |
|
Accumulated impairment losses at December 31, 2017 | (10,766 | ) |
Balance as of December 31, 2017 | 1,683 |
|
Goodwill from acquisition of Layer3 TV | 218 |
|
Balance as of September 30, 2018 | $ | 1,901 |
|
Accumulated impairment losses at September 30, 2018 | $ | (10,766 | ) |
On January 22, 2018, we completed our acquisition of television innovator Layer3 TV. This purchase was accounted for as a business combination resulting in $218 million in goodwill. Layer3 TV is a separate reporting unit and the acquired goodwill will be tested for impairment at this level. See Note 3 - Business Combinations for additional information.
Note 7 – Spectrum License Transactions
The following table summarizes our spectrum license activity for the nine months ended September 30, 2018:
|
| | | |
(in millions) | Spectrum Licenses |
Balance at December 31, 2017 | $ | 35,366 |
|
Spectrum license acquisitions | 137 |
|
Costs to clear spectrum | 50 |
|
Balance at September 30, 2018 | $ | 35,553 |
|
We had the following spectrum license transactions in the nine months ended September 30, 2018:
| |
• | We recorded spectrum licenses received as part of our acquisition of the remaining equity interest in IWS at their estimated fair value of approximately $87 million. See Note 3 - Business Combinations for further information. |
We closed on multiple spectrum purchase agreements in which we acquired total spectrum licenses of approximately $50 million for cash consideration.
In September 2018, we signed a reciprocal long-term lease agreement with Sprint in which both parties have the right to use a portion of spectrum owned by the other party. This executory agreement does not qualify as an acquisition of
spectrum licenses, and we have not capitalized amounts related to the lease. The reciprocal long-term lease is a distinct transaction from the Merger. See Note 15 – Commitments and Contingencies for further information.
Note 86 – Fair Value Measurements
The carrying values of cashCash and cash equivalents, accountsAccounts receivable, accountsAccounts receivable from affiliates, accountsAccounts payable and accrued liabilities, and borrowings under our senior secured revolving credit facility with DT, our majority stockholder, approximate fair value due to the short-term maturities of these instruments.
Derivative Financial Instruments
Interest rate lock derivatives
Periodically, we use derivatives to manage exposure to market risk, such as interest rate risk. We designate certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow hedge) to help minimize significant, unplanned fluctuations in cash flows caused by interest rate volatility. We do not use derivatives for trading or speculative purposes.
We enter into and designate interest rate lock derivatives (forward-starting swap instruments) as cash flow hedges to reduce variability in cash flows due to changes in interest payments attributable to increases or decreases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt.
We record interest rate lock derivatives on our Condensed Consolidated Balance Sheets at fair value that is derived primarily from observable market data, including yield curves. Interest rate lock derivatives were classified as Level 2 in the fair value hierarchy. Cash flows associated with qualifying hedge derivative instruments are presented in the same category on the Condensed Consolidated Statements of Cash Flows as the item being hedged.
In October 2018, we entered into interest rate lock derivatives with notional amounts of $9.6 billion. The fair value of interest rate lock derivatives was a liability of $703 million and $447 million as of March 31, 2019 and December 31, 2018, respectively, and were included in Other current liabilities in our Condensed Consolidated Balance Sheets. As of and for the three months ended March 31, 2019, no amounts were accrued or amortized into Interest expense in the Condensed Consolidated Statements of Comprehensive Income while changes in fair value, net of tax, of $521 million and $332 million are presented in Accumulated other comprehensive income as of March 31, 2019 and December 31, 2018, respectively. There were no cash payments or receipts associated with these derivatives for the three months ended March 31, 2019.
Embedded derivatives
In March 2019, we delivered a notice of redemption on $600 million aggregate principal amount of our 9.332% Senior Reset Notes due 2023 held by DT. The notes will be redeemed effective April 28, 2019, at a redemption price equal to 104.666% of the principal amount of the notes (plus accrued and unpaid interest thereon), payable on April 29, 2019. The balance of embedded derivatives associated with the DT Senior Reset Notes was reclassified from Other long-term liabilities to Other current liabilities in our Condensed Consolidated Balance Sheets as of March 31, 2019. The write-off of embedded derivatives upon redemption will be $11 million.
Deferred Purchase Price Assets
In connection with the sales of certain service and EIP receivablesaccounts receivable pursuant to the sale arrangements, we have deferred purchase price assets measured at fair value that are based on a discounted cash flow model using unobservable Level 3 inputs, including customer default rates. See Note 5 – Sales of Certain Receivables for further information.information.
The carrying amounts and fair values of our assets measured at fair value on a recurring basis included in our Condensed Consolidated Balance Sheets were as follows:
|
| | | | | | | | | | | | | | | | | |
| Level within the Fair Value Hierarchy | | March 31, 2019 | | December 31, 2018 |
(in millions) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | | | | | | | | |
Deferred purchase price assets | 3 | | $ | 738 |
| | $ | 738 |
| | $ | 746 |
| | $ | 746 |
|
|
| | | | | | | | | | | | | | | | | |
| Level within the Fair Value Hierarchy | | September 30, 2018 | | December 31, 2017 |
(in millions) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | | | | | | | | |
Deferred purchase price assets | 3 | | $ | 800 |
| | $ | 800 |
| | $ | 745 |
| | $ | 745 |
|
Long-term Debt
The fair value of our Senior Notes to third parties was determined based on quoted market prices in active markets, and therefore was classified as Level 1 within the fair value hierarchy. The fair values of our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were determined based on a discounted cash flow approach using market interest rates of instruments with similar terms and maturities and an estimate for our standalone credit risk. Accordingly, our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were classified as Level 2 within the fair value hierarchy.
Although we have determined the estimated fair values using available market information and commonly accepted valuation methodologies, considerable judgment was required in interpreting market data to develop fair value estimates for the Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates. The fair value estimates were based on information available as of September 30, 2018March 31, 2019 and December 31, 2017.2018. As such, our estimates are not necessarily indicative of the amount we could realize in a current market exchange.
The carrying amounts and fair values of our short-term and long-term debt included in our Condensed Consolidated Balance Sheets were as follows:
|
| | | | | | | | | | | | | | | | | |
| Level within the Fair Value Hierarchy | | March 31, 2019 | | December 31, 2018 |
(in millions) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Liabilities: | | | | | | | | | |
Senior Notes to third parties | 1 | | $ | 10,952 |
| | $ | 11,354 |
| | $ | 10,950 |
| | $ | 10,945 |
|
Senior Notes to affiliates | 2 | | 9,985 |
| | 10,201 |
| | 9,984 |
| | 9,802 |
|
Incremental Term Loan Facility to affiliates | 2 | | 4,000 |
| | 4,000 |
| | 4,000 |
| | 3,976 |
|
Senior Reset Notes to affiliates | 2 | | 598 |
| | 632 |
| | 598 |
| | 640 |
|
|
| | | | | | | | | | | | | | | | | |
| Level within the Fair Value Hierarchy | | September 30, 2018 | | December 31, 2017 |
(in millions) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Liabilities: | | | | | | | | | |
Senior Notes to third parties | 1 | | $ | 10,949 |
| | $ | 11,168 |
| | $ | 11,910 |
| | $ | 12,540 |
|
Senior Notes to affiliates | 2 | | 9,983 |
| | 9,990 |
| | 7,486 |
| | 7,852 |
|
Incremental Term Loan Facility to affiliates | 2 | | 4,000 |
| | 3,997 |
| | 4,000 |
| | 4,020 |
|
Senior Reset Notes to affiliates | 2 | | 598 |
| | 648 |
| | 3,100 |
| | 3,260 |
|
Guarantee Liabilities
We offer a device trade-in program, JUMP!, which provides eligible customers a specified-price trade-in right to upgrade their device. For customers who enroll in JUMP!, we recognize a liability and reduce revenue for the portion of revenue which represents the estimated fair value of the specified-price trade-in right guarantee, incorporating the expected probability and timing of handset upgrade and the estimated fair value of the handset which is returned. Accordingly, our guarantee liabilities were classified as Level 3 within the fair value hierarchy. When customers upgrade their device, the difference between the EIP balance credit to the customer and the fair value of the returned device is recorded against the guarantee liabilities. Guarantee liabilities are included in Other current liabilities in our Consolidated Balance Sheets.
The carrying amounts of our guarantee liabilities measured at fair value on a non-recurring basis included in our Condensed Consolidated Balance Sheets were $76 million and $73 million as of March 31, 2019 and December 31, 2018, respectively.
The total estimated remaining gross EIP receivable balances of all enrolled handset upgrade program customers, which are the remaining EIP amounts underlying the JUMP! guarantee, including EIP receivables that have been sold, was $3.1 billion as of March 31, 2019. This is not an indication of our expected loss exposure as it does not consider the expected fair value of the used handset or the probability and timing of the trade-in.
Note 7 – Tower Obligations
In 2012, we conveyed to CCI the exclusive right to manage and operate approximately 7,100 T-Mobile-owned wireless communication tower sites (“CCI Tower Sites”) in exchange for net proceeds of $2.5 billion (the “2012 Tower Transaction”). Rights to approximately 6,200 of the tower sites were transferred to CCI via a master prepaid lease with site lease terms
ranging from 23 to 37 years (“CCI Lease Sites”), while the remaining tower sites were sold to CCI (“CCI Sales Sites”). CCI has fixed-price purchase options for the CCI Lease Sites totaling approximately $2.0 billion, exercisable at the end of the lease term. We lease back space at certain tower sites for an initial term of ten years, followed by optional renewals at customary terms.
In 2015, we conveyed to PTI the exclusive right to manage and operate certain T-Mobile-owned wireless communication tower sites (“PTI Sales Sites”) in exchange for net proceeds of approximately $140 million (the “2015 Tower Transaction”). As of March 31, 2019, rights to approximately 150 of the tower sites remain operated by PTI under a management agreement (“PTI Managed Sites”). We lease back space at certain tower sites for an initial term of ten years, followed by optional renewals at customary terms.
Assets and liabilities associated with the operation of the tower sites were transferred to SPEs. Assets included ground lease agreements or deeds for the land on which the towers are situated, the towers themselves and existing subleasing agreements with other mobile network operator tenants, who lease space at the tower sites. Liabilities included the obligation to pay ground lease rentals, property taxes and other executory costs. Upon closing of the 2012 Tower Transaction, CCI acquired all of the equity interests in the SPE containing CCI Sales Sites and an option to acquire the CCI Lease Sites at the end of their respective lease terms and entered into a master lease agreement under which we agreed to lease back space at certain of the tower sites. Upon closing of the 2015 Tower Transaction, PTI acquired all of the equity interests in the SPEs containing PTI Sales Sites and entered into a master lease agreement under which we agreed to lease back space at certain of the tower sites.
We determined the SPEs containing the CCI Lease Sites (“Lease Site SPEs”) are VIEs as our equity investment lacks the power to direct the activities that most significantly impact the economic performance of the VIEs. These activities include managing tenants and underlying ground leases, performing repair and maintenance on the towers, the obligation to absorb expected losses and the right to receive the expected future residual returns from the purchase option to acquire the CCI Lease Sites. As we determined that we are not the primary beneficiary and do not have a controlling financial interest in the Lease Site SPEs, the balances and operating results of the Lease Site SPEs are not included in our Consolidated Financial Statements.
Due to our continuing involvement with the tower sites, we previously determined that we were precluded from applying sale-leaseback accounting. We recorded long-term financial obligations in the amount of the net proceeds received and recognized interest on the tower obligations at a rate of approximately 8% for the 2012 Tower Transaction and 5% for the 2015 Tower Transaction using the effective interest method. The tower obligations are increased by interest expense and amortized through contractual leaseback payments made by us to CCI or PTI and through net cash flows generated and retained by CCI or PTI from operation of the tower sites. Our historical tower site asset costs continue to be reported in Property and equipment, net in our Condensed Consolidated Balance Sheets and are depreciated.
Upon adoption of the new leasing standard we were required to reassess the previously failed sale-leasebacks and determine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a sale should be recognized. We concluded that a sale has not occurred for the CCI Lease Sites and these sites continue to be accounted for as a failed sale-leaseback. We concluded that a sale had occurred for the CCI Sales Sites and the PTI Sales Sites and therefore we derecognized our existing long-term financial obligation and the tower-related property and equipment associated with these sites as part of the cumulative effect adjustment on January 1, 2019.
The following table summarizes the balances of the failed sale-leasebacks in the Condensed Consolidated Balance Sheets:
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
Property and equipment, net | $ | 237 |
| | $ | 329 |
|
Tower obligations | 2,244 |
| | 2,557 |
|
Future minimum payments related to the tower obligations are approximately $157 million for the year ended March 31, 2020, $314 million in total for the years ended March 31, 2021 and 2022, $314 million in total for years ended March 31, 2023 and 2024 and $574 million in total for years thereafter.
We are contingently liable for future ground lease payments through the remaining term of the CCI Lease Sites. These contingent obligations are not included in Operating lease liabilities as any amount due is contractually owed by CCI based on the subleasing arrangement. See Note 10 - Leases for further information.
Note 9 – Debt
Activity for the nine months ended September 30, 2018, related to our debt was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | December 31, 2017 | | Proceeds from Issuances and Borrowings (1)(3) | | Note Redemptions(1)(3) | | Repayments | | Reclassifications (1) | | Consent Fees | | Other (2) | | September 30, 2018 |
Short-term debt | $ | 1,612 |
| | $ | — |
| | $ | (3,424 | ) | | $ | — |
| | $ | 2,425 |
| | $ | — |
| | $ | 170 |
| | $ | 783 |
|
Long-term debt | 12,121 |
| | 2,494 |
| | — |
| | — |
| | (2,425 | ) | | (31 | ) | | (166 | ) | | 11,993 |
|
Total debt to third parties | 13,733 |
| | 2,494 |
| | (3,424 | ) | | — |
| | — |
| | (31 | ) | | 4 |
| | 12,776 |
|
Short-term debt to affiliates | — |
| | 6,050 |
| | — |
| | (6,050 | ) | | — |
| | — |
| | — |
| | — |
|
Long-term debt to affiliates | 14,586 |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | 2 |
| | 14,581 |
|
Total debt to affiliates | 14,586 |
| | 6,050 |
| |
| | (6,050 | ) | | — |
| | (7 | ) | | 2 |
| | 14,581 |
|
Total debt | $ | 28,319 |
| | $ | 8,544 |
| | $ | (3,424 | ) | | $ | (6,050 | ) | | $ | — |
| | $ | (38 | ) | | $ | 6 |
| | $ | 27,357 |
|
| |
(1) | Issuances and borrowings, note redemptions, and reclassifications are recorded net of related issuance costs, discounts, and premiums. Issuances and borrowings and repayments for Short-term debt to affiliates represent net outstanding borrowings and net repayments on our revolving credit facility. |
| |
(2) | Other includes: $300 million of issuances of short-term debt related to vendor financing arrangements, of which $291 million related to financing of property and equipment. During the nine months ended September 30, 2018, repayments under the vendor financing arrangements totaled $246 million. Vendor financing arrangements are included in Short-term debt within Total current liabilities in our Condensed Consolidated Balance Sheets. Other also includes capital leases and the amortization of issuance costs, discounts, premiums, and consent fees. Capital lease liabilities totaled $1.8 billion at both September 30, 2018 and December 31, 2017. |
| |
(3) | Through net settlement on April 30, 2018, we issued to DT a total of $2.5 billion in aggregate principal amount of New DT Notes (as defined below) and redeemed $1.25 billion in aggregate principal amount of 8.097% Senior Reset Notes due 2021 and $1.25 billion in aggregate principal amount of 8.195% Senior Reset Notes due 2022 (collectively, the “DT Senior Reset Notes”) held by DT. |
Debt to Third Parties
During the nine months ended September 30, 2018, we issued the following Senior Notes:
|
| | | | | | | | | | | | | |
(in millions) | Principal Issuances | | Issuance Costs | | Net Proceeds from Issuance of Long-Term Debt | | Issue Date |
4.500% Senior Notes due 2026 | $ | 1,000 |
| | $ | 2 |
| | $ | 998 |
| | January 25, 2018 |
4.750% Senior Notes due 2028 | 1,500 |
| | 4 |
| | 1,496 |
| | January 25, 2018 |
Total of Senior Notes issued | $ | 2,500 |
| | $ | 6 |
| | $ | 2,494 |
| | |
We used the net proceeds of $2.494 billion from the public debt issuance in January 2018 to redeem our $1.750 billion of 6.625% Senior Notes due 2023 on April 1, 2018, and to redeem our $600 million of 6.836% Senior Notes due 2023 on April 28, 2018, as further discussed below, and for general corporate purposes, including the partial repayment of borrowings under our revolving credit facility with DT.
During the nine months ended September 30, 2018, we made the following note redemptions:
|
| | | | | | | | | | | | | | | | |
(in millions) | Principal Amount | | Write-off of Premiums, Discounts and Issuance Costs (1) | | Call Penalties (1) (2) | | Redemption Date | | Redemption Price |
6.125% Senior Notes due 2022 | $ | 1,000 |
| | $ | 1 |
| | $ | 31 |
| | January 15, 2018 | | 103.063 | % |
6.625% Senior Notes due 2023 | 1,750 |
| | (75 | ) | | 58 |
| | April 1, 2018 | | 103.313 | % |
6.836% Senior Notes due 2023 | 600 |
| | — |
| | 21 |
| | April 28, 2018 | | 103.418 | % |
| |
(1) | Write-off of premiums, discounts, issuance costs and call penalties are included in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income. Write-off of premiums, discounts and issuance costs are included in Losses on redemption of debt within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. |
| |
(2) | The call penalty is the excess paid over the principal amount. Call penalties are included within Net cash used in financing activities in our Condensed Consolidated Statements of Cash Flows. |
Debt to Affiliates
On April 30, 2018, DT purchased (i) $1.0 billion in aggregate principal amount of 4.500% Senior Notes due 2026 and (ii) $1.5 billion in aggregate principal amount of 4.750% Senior Notes due 2028 directly from T-Mobile USA and certain of its affiliates, as guarantors, with no underwriting discount (the “New DT Notes”).
We used the net proceeds of $2.5 billion from the transaction to refinance existing indebtedness to DT as follows:
|
| | | | | | | | | | | | | | | | |
(in millions) | Principal Amount | | Write -off of Embedded Derivatives (1) | | Other (2) | | Redemption Date | | Redemption Price |
8.097% Senior Notes due 2021 | $ | 1,250 |
| | $ | (8 | ) | | $ | 51 |
| | April 28, 2018 | | 104.0485 | % |
8.195% Senior Notes due 2022 | 1,250 |
| | (8 | ) | | 51 |
| | April 28, 2018 | | 104.0975 | % |
| |
(1) | Certain components of the reset features were required to be bifurcated from the DT Senior Reset Notes and separately accounted for as embedded derivative instruments. Write-off of embedded derivatives are included in Losses on redemption of debt within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. |
| |
(2) | Cash for the premium portion of the redemption price set forth in the indenture governing the DT Senior Reset Notes, plus accrued but unpaid interest on the DT Senior Reset Notes to, but not including, the exchange date. |
Incremental Term Loan Facility
In March 2018, we amended the terms of the Incremental Term Loan Facility. Following this amendment, the applicable margin payable on LIBOR indexed loans is 1.50% under the $2.0 billion Incremental Term Loan Facility maturing on November 9, 2022 and 1.75% under the $2.0 billion Incremental Term Loan Facility maturing on January 31, 2024. The amendment also modified the Incremental Term Loan Facility to (i) include a soft-call prepayment premium of 1.00% of the outstanding principal amount of the loans under the Incremental Term Loan Facility payable to DT upon certain refinancings of such loans by us with lower priced debt prior to a date that is six months after March 29, 2018 and (ii) update certain covenants and other provisions to make them substantially consistent, subject to certain additional carve outs, with our most recently publicly issued notes. No issuance fees were incurred related to this debt agreement for the three and nine months ended September 30, 2018.
Revolving Credit Facility
In January 2018, we utilized proceeds under our revolving credit facility with DT to redeem $1.0 billion in aggregate principal amount of our 6.125% Senior Notes due 2022 and for general corporate purposes. On January 29, 2018, the proceeds utilized under our revolving credit facility with DT were repaid. The proceeds and borrowings from the revolving credit facility are presented in Proceeds from borrowing on revolving credit facility and Repayments of revolving credit facility within Net cash used in financing activities in our Condensed Consolidated Statements of Cash Flows. As of September 30, 2018 and December 31, 2017, there were no outstanding borrowings under the revolving credit facility.
In March 2018, we amended the terms of (a) our Secured Revolving Credit Facility and (b) our Unsecured Revolving Credit Facility. Following these amendments, (i) the range of applicable margin payable under the Secured Revolving Credit Facility is 1.05% to 1.80%, (ii) the range of the applicable margin payable under the Unsecured Revolving Credit Facility is 2.05% to 3.05%, (iii) the range of the undrawn commitment fee applicable to the Secured Revolving Credit Facility is 0.25% to 0.45%, (iv) the range of the undrawn commitment fee applicable to the Unsecured Revolving Credit Facility is 0.20% to 0.575% and (v) the maturity date of the revolving credit facility with DT is December 29, 2020. The amendments also modify the facility to update certain covenants and other provisions to make them substantially consistent, subject to certain additional carve outs, with our most recently publicly issued notes.
Commitment Letter
In connection with the entry into the Business Combination Agreement, T-Mobile USA entered into a commitment letter, dated as of April 29, 2018 (as amended and restated on May 15, 2018, the “Commitment Letter”), with certain financial institutions named therein that have committed to provide up to $38.0 billion in secured and unsecured debt financing, including a $4.0 billion secured revolving credit facility, a $7.0 billion secured term loan facility, a $19.0 billion secured bridge loan facility and an $8.0 billion unsecured bridge loan facility. Following the receipt of the debt consents described below, as permitted by the terms of the commitment letter, on May 22, 2018, T-Mobile USA reallocated the entire $8.0 billion unsecured bridge loan facility to be part of the secured bridge loan facility, increasing the size of the secured bridge loan facility to $27.0 billion, and subsequently on June 6, 2018, reduced the initial aggregate commitment under the secured bridge facility by $8.0 billion, such that the remaining size of the secured bridge facility is currently $19.0 billion and total committed financing is currently $30.0 billion. The funding of the debt facilities provided for in the Commitment Letter is subject to the satisfaction of the conditions
set forth therein, including consummation of the Merger. The proceeds of the debt financing provided for in the Commitment Letter will be used to refinance certain existing debt of us, Sprint and our and Sprint’s respective subsidiaries and for post-closing working capital needs of the combined company. In connection with the financing provided for in the Commitment Letter, we expect to incur certain fees if the Merger closes, including fees for the financial institutions structuring and providing the commitments for the secured term loan facility, secured revolving loan facility and the secured bridge loan, and certain take-out fees associated with the issuance of permanent secured bond debt in lieu of the secured bridge loan. We expect to incur up to approximately $275 million in fees if the Merger were to close on or after January 29, 2019. The fees increase to up to approximately $340 million if the closing date occurs on or after April 29, 2019. We have not accrued these fees as of September 30, 2018. We also may be required to draw down on the $7.0 billion secured term loan facility on May 1, 2019, and would be required to place the proceeds in escrow and pay interest thereon until the Merger closes.
Financing Matters Agreement
In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a Financing Matters Agreement, dated as of April 29, 2018 (the “Financing Matters Agreement”). Pursuant to the Financing Matters Agreement, DT agreed, among other things, to consent to the incurrence by T-Mobile USA of secured debt in connection with and after the consummation of the Merger, and to provide a lock up on sales thereby as to certain senior notes of T-Mobile USA held thereby. In addition, T-Mobile USA agreed, among other things, to repay and terminate, upon closing of the Merger, the Incremental Term Loan Facility and the revolving credit facility of T-Mobile USA which are provided by DT, as well as $2.0 billion of T-Mobile USA’s 5.300% Senior Notes due 2021 and $2.0 billion of T-Mobile USA’s 6.000% Senior Notes due 2024. In addition, T-Mobile USA and DT agreed, upon closing of the Merger, to amend the $1.25 billion of T-Mobile USA’s 5.125% Senior Notes due 2025 and $1.25 billion of T-Mobile USA’s 5.375% Senior Notes due 2027 to change the maturity dates thereof to April 15, 2021 and April 15, 2022, respectively. In connection with receiving the requisite consents, we made upfront payments to DT of $7 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt to affiliates in our Condensed Consolidated Balance Sheets. If the Merger is consummated, we will make additional payments for requisite consents to DT of $20 million. We have not accrued these additional payments as of September 30, 2018.
Consents on Debt to Third Parties
On May 18, 2018, under the terms and conditions described in the Consent Solicitation Statement, we obtained consents necessary to effect certain amendments to our Senior Notes to third parties in connection with the Business Combination Agreement. Pursuant to the Consent Solicitation Statement, third-party notes holders agreed, among other things, to consent to increasing the amount of Secured Indebtedness under Credit Facilities that can be incurred from the greater of $9 billion and 150% of Consolidated Cash Flow to the greater of $9 billion and an amount that would not cause the Secured Debt to Cash Flow Ratio (calculated net of cash and cash equivalents) to exceed 2.00x (the “Ratio Secured Debt Proposed Amendments”) and in each case as such capitalized term is defined in the Indenture. In connection with receiving the requisite consents for the Ratio Secured Debt Proposed Amendments, we made upfront payments to third-party note holders of $17 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt in our Condensed Consolidated Balance Sheets. These upfront payments increased the effective interest rate of the related debt.
In addition, note holders agreed, among other things, to allow certain entities related to Sprint’s existing spectrum securitization notes program (“Existing Sprint Spectrum Program”) to be non-guarantor Restricted Subsidiaries, provided that the principal amount of the spectrum notes issued and outstanding under the Existing Sprint Spectrum Program does not exceed $7.0 billion and that the principal amount of such spectrum notes reduces the amount available under the Credit Facilities ratio basket, and to revise the definition of GAAP to mean generally accepted accounting principles in effect from time to time, unless the Company elects to “freeze” GAAP as of any date, and to exclude the effect of the changes in the accounting treatment of lease obligations (the “Existing Sprint Spectrum and GAAP Proposed Amendments,” and together with the Ratio Secured Debt Proposed Amendments, the “Proposed Amendments”). In connection with receiving the requisite consents for the Existing Sprint Spectrum and GAAP Proposed Amendments, we made upfront payments to third-party note holders of $14 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt in our Condensed Consolidated Balance Sheets. These upfront payments increased the effective interest rate of the related debt.
In connection with obtaining the requisite consents, on May 20, 2018, T-Mobile USA, the guarantors and Deutsche Bank Trust Company Americas, as trustee, executed and delivered the 37th supplemental indenture to the Indenture, pursuant to which, with respect to each of the Notes, the Proposed Amendments will become effective immediately prior to the consummation of the Merger.
We paid third-party bank fees associated with obtaining the requisite consents related to the Proposed Amendments of $6
million during the second quarter of 2018, which we recognized as Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income. If the Merger is consummated, we will make additional payments to third-party note holders for requisite consents related to the Ratio Secured Debt Proposed Amendments of up to $54 million and additional payments to third-party note holders for requisite consents related to the Existing Sprint Spectrum and GAAP Proposed Amendments of up to $41 million. We have not accrued these payments as of September 30, 2018.
Note 10 - Employee Compensation and Benefit Plans
On February 14, 2018, our Board of Directors adopted, and on June 13, 2018, our stockholders approved an amendment (the “Amendment”) to the 2013 Omnibus Incentive Plan (as amended, the “Plan”) which increased the number of shares authorized for issuance under the Plan by 18,500,000 shares. On June 18, 2018, we filed a Form S-8 to register a total of 19,345,005 shares of common stock pursuant to the Plan, representing those covered by the Amendment, certain other predecessor plans, and certain equity arrangements assumed in connection with the acquisition of Layer3 TV in January 2018.
During the nine months ended September 30, 2018, we granted or assumed an aggregate of 5,897,295 restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) to eligible employees, certain non-employee directors, and eligible key executives, which primarily included annual awards.
During the nine months ended September 30, 2018, we granted an aggregate of 3,185,853 performance-based restricted stock units (“PRSUs”) to eligible key executives, which primarily included annual awards. In addition, in connection with the entry into a Business Combination Agreement to merge with Sprint, in April 2018 we granted an aggregate of 1,210,710 PRSUs to certain executive officers.
As discussed in Note 3 - Business Combinations, in January 2018, we completed our acquisition of Layer3 TV. The grant-date fair value of share-based incentive compensation awards attributable to post-combination services was approximately $30 million.
Stock-based compensation expense and related income tax benefits were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except shares, per share and contractual life amounts) | 2018 | | 2017 | | 2018 | | 2017 |
Stock-based compensation expense | $ | 115 |
| | $ | 82 |
| | $ | 324 |
| | $ | 221 |
|
Income tax benefit related to stock-based compensation | $ | 20 |
| | $ | 21 |
| | $ | 62 |
| | $ | 53 |
|
Weighted average fair value per stock award granted | $ | 65.41 |
| | $ | 63.88 |
| | $ | 61.91 |
| | $ | 63.26 |
|
Unrecognized compensation expense | $ | 613 |
| | $ | 402 |
| | $ | 613 |
| | $ | 402 |
|
Weighted average period to be recognized (years) | 1.9 |
| | 1.8 |
| | 1.9 |
| | 1.8 |
|
Fair value of stock awards vested | $ | 17 |
| | $ | 17 |
| | $ | 284 |
| | $ | 312 |
|
Restricted Stock Units and Restricted Stock Awards
|
| | | | | | | | | | | | |
(in millions, except shares, per share and contractual life amounts) | Number of Units or Awards | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Nonvested, December 31, 2017 | 12,061,608 |
| | $ | 50.69 |
| | 1.1 | | $ | 766 |
|
Granted | 5,897,295 |
| | 60.03 |
| | | | |
Vested | 3,700,642 |
| | 45.26 |
| | | | |
Forfeited | 721,687 |
| | 56.63 |
| | | | |
Nonvested, September 30, 2018 | 13,536,574 |
| | 56.14 |
| | 1.0 | | 950 |
|
Performance-Based Restricted Stock Units
|
| | | | | | | | | | | | |
(in millions, except shares, per share and contractual life amounts) | Number of Units | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Nonvested, December 31, 2017 | 1,633,935 |
| | $ | 48.06 |
| | 1.1 | | $ | 104 |
|
Granted | 3,185,853 |
| | 65.95 |
| | | | |
Vested | 1,021,064 |
| | 36.85 |
| | | | |
Forfeited | 11,580 |
| | 66.32 |
| | | | |
Nonvested, September 30, 2018 | 3,787,144 |
| | 62.62 |
| | 1.7 | | 266 |
|
PRSUs included in the table above are shown at target. Share payout can range from 0 to 200% based on different performance outcomes.
Note 11 -8 – Revenue from Contracts with Customers
Disaggregation of Revenue
We provide wireless communication services to three primary categories of customers:
| |
• | Branded postpaid customers generally include customers that are qualified to pay after receiving wireless communication services utilizing phones, mobile broadband devices (including tablets), DIGITS, SyncUP DRIVETM or other devices including wearables;Branded postpaid customers generally include customers who are qualified to pay after receiving wireless communication services utilizing phones, DIGITS, or connected devices which includes tablets, wearables and SyncUP DRIVE™ ; Branded prepaid customers generally include customers who pay for wireless communication services in advance. Our branded prepaid customers include customers of T-Mobile and Metro by T-Mobile; and |
| |
• | Branded prepaid customers generally include customers who pay for wireless communication services in advance. Our branded prepaid customers include customers of T-Mobile and MetroTM by T-Mobile (“Metro”); and
|
Wholesale customers include Machine-to-Machine (“M2M”) and Mobile Virtual Network Operator (“MVNO”) customers that operate on our network but are managed by wholesale partners.
Branded postpaid service revenues, including branded postpaid phone revenues and branded postpaid other revenues, were as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2019 | | 2018 |
Branded postpaid service revenues | | | |
Branded postpaid phone revenues | $ | 5,183 |
| | $ | 4,811 |
|
Branded postpaid other revenues | 310 |
| | 259 |
|
Total branded postpaid service revenues | $ | 5,493 |
| | $ | 5,070 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Branded postpaid service revenues | | | | | | | |
Branded postpaid phone revenues | $ | 4,955 |
| | $ | 4,626 |
| | $ | 14,658 |
| | $ | 13,691 |
|
Branded postpaid other revenues | 289 |
| | 294 |
| | 820 |
| | 774 |
|
Total branded postpaid service revenues | $ | 5,244 |
| | $ | 4,920 |
| | $ | 15,478 |
| | $ | 14,465 |
|
We operate as a single operating segment. The balances presented within each revenue line item in our Condensed Consolidated Statements of Comprehensive Income represent categories of revenue from contracts with customers disaggregated by type of product and service. Service revenues also include revenues earned for providing value added services to customers, such as handset insurance services. Revenue generated from the lease of mobile communication devices and accessories is included within Equipment revenues in our Condensed Consolidated Statements of Comprehensive Income.
Equipment revenues from the lease of mobile communication devices and accessories were as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2019 | | 2018 |
Equipment revenues from the lease of mobile communication devices | $ | 161 |
| | $ | 171 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Equipment revenues from the lease of mobile communication devices and accessories | $ | 176 |
| | $ | 159 |
| | $ | 524 |
| | $ | 717 |
|
Contract Balances
The opening and closing balances of our contract asset and contract liability balances from contracts with customers as of January 1,December 31, 2018 and September 30, 2018,March 31, 2019, were as follows:
|
| | | | | | | |
(in millions) | Contract Assets Included in Other Current Assets | | Contract Liabilities Included in Deferred Revenue |
Balance as of December 31, 2018 | $ | 51 |
| | $ | 645 |
|
Balance as of March 31, 2019 | 44 |
| | 615 |
|
Change | $ | (7 | ) | | $ | (30 | ) |
|
| | | | | | | |
(in millions) | Contract Assets Included in Other Current Assets | | Contract Liabilities Included in Deferred Revenue |
Balance as of January 1, 2018 | $ | 140 |
| | $ | 718 |
|
Balance as of September 30, 2018 | 52 |
| | 649 |
|
Change | $ | (88 | ) | | $ | (69 | ) |
Contract assets primarily represent revenue recognized for equipment sales with promotional bill credits offered to customers that are paid over time and are contingent on the customer maintaining a service contract. The change in the contract asset balance includes customer activity related to new promotions, offset by billings on existing contracts and impairment which is recognized as bad debt expense.
Contract liabilities are recorded when fees are collected, or we have an unconditional right to consideration (a receivable) in advance of delivery of goods or services. The change in contract liabilities is primarily related to customer activity associated with our prepaid plans including the receipt of cash payments and the satisfaction of our performance obligations.
Revenues for the three and nine months ended September 30, 2018,March 31, 2019, include the following:
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2019 | | 2018 |
Amounts included in the beginning of period contract liability balance | $ | 560 |
| | $ | 528 |
|
|
| | | | | | | |
(in millions) | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
Amounts included in the January 1, 2018 contract liability balance | $ | 23 |
| | $ | 582 |
|
Amounts associated with performance obligations satisfied in previous periods | 28 |
| | 2 |
|
Remaining Performance Obligations
As of September 30, 2018,March 31, 2019, the aggregate amount of transaction price allocated to remaining service performance obligations for branded postpaid contracts with promotional bill credits that result in an extended service contract is $379$269 million. We expect to recognize this revenue as service is provided over the extended contract term in the next 24 months.
Certain of our wholesale, roaming and other service contracts include variable consideration based on usage. This variable consideration has been excluded from the disclosure of remaining performance obligations. As of September 30, 2018,March 31, 2019, the aggregate amount of the contractual minimum consideration allocated to remaining service performance obligations for wholesale, roaming and other service contracts is $272$901 million, $1.1 billion and $911 million$1.5 billion for 2018, 2019, 2020 and 20202021 and beyond, respectively. These contracts have a remaining duration of less than one year to sevensix years.
Information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less have been excluded from the above, which primarily consists of monthly service contracts. The aggregate amount of the transaction price allocated to remaining service performance obligations includes the estimated amount to be invoiced to the customer.
Contract Costs
The total balance of deferred incremental costs to obtain contracts balance as of September 30, 2018March 31, 2019 was $519 million.$719 million compared to $644 million as of December 31, 2018. Deferred contract costs incurred to obtain postpaid service contracts are amortized over a period of 24 months. The amortization period is monitored to reflect any significant change in assumptions. Amortization of deferred contract costs was $79$116 million and $171$35 million for the three and nine months ended September 30,March 31, 2019 and 2018, respectively.
The deferred contract cost asset is assessed for impairment on a periodic basis. There were no impairment losses recognized on deferred contract cost assets for the three and nine months ended September 30, 2018.
Note 12 – Repurchases of Common Stock
2017 Stock Repurchase Program
On December 6, 2017, our Board of Directors authorized a stock repurchase program for up to $1.5 billion of our common stock through December 31, 2018 (the “2017 Stock Repurchase Program”). During the nine months ended September 30, 2018, we repurchased an additional 16.7 million shares of our common stock for $1.1 billion. There were no repurchases during the three months ended September 30, 2018. From the inception of the 2017 Stock Repurchase Program through April 27, 2018, we repurchased 23.7 million shares of our common stock at an average price per share of $63.07 for a total purchase price of $1.5 billion. Repurchased shares are retired. The 2017 Stock Repurchase Program completed on April 29, 2018.
2018 Stock Repurchase Program
On April 27, 2018, our Board of Directors authorized an increase in the total stock repurchase program to $9.0 billion, consisting of the $1.5 billion in repurchases previously completed and for up to an additional $7.5 billion of repurchases of our common stock, allocated as up to $500 million of shares of common stock through December 31, 2018, up to $3.0 billion of shares of common stock for the year ending DecemberMarch 31, 2019 and up to $4.0 billion of shares of common stock for the year ending December 31, 2020, with any authorized but unutilized repurchase capacity for any of the foregoing periods increasing the authorized repurchase capacity for the succeeding period by the amount of such unutilized repurchase capacity. The additional $7.5 billion repurchase authorization is contingent upon the termination of the Business Combination Agreement and the abandonment of the transactions contemplated under the Business Combination Agreement.
Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements. The specific timing, price and size of purchases will depend on prevailing stock prices, general economic and market conditions, and other considerations. The repurchase program does not obligate us to acquire any particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at our discretion. Repurchased shares are retired.
Stock Purchases by Affiliate
In the first quarter of 2018, DT, our majority stockholder and an affiliated purchaser, purchased 3.3 million additional shares of our common stock at an aggregate market value of $200 million in the public market or from other parties, in accordance with the rules of the SEC and other applicable legal requirements. There were no purchases in the second and third quarters of 2018. We did not receive proceeds from these purchases.
Note 13 – Income Taxes
Within our Condensed Consolidated Statements of Comprehensive Income, we recorded Income tax expense of $335 million and $356 million for the three months ended September 30, 2018 and 2017, respectively, and $831 million and $618 million for the nine months ended September 30, 2018 and 2017, respectively.
The change for the three and nine months ended September 30, 2018, was primarily impacted by a reduction in the federal corporate income tax rate from 35% to 21% provided by the Tax Cuts and Jobs Act, which took effect January 1, 2018. This reduction was partially offset by higher income before taxes. The change in Income tax expense for the nine months ended September 30, 2018 additionally reflected $289 million in tax benefits recognized in the nine months ended September 30, 2017 related to a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions that did not impact 2018.
Income tax expense for the three and nine months ended September 30, 2018 was additionally impacted by an increase of $115 million from a change in tax regime in certain state tax jurisdictions as well as an increase from non-deductible costs associated with the Transactions. These increases were partially offset by income tax benefits of $63 million from a change in tax status of certain subsidiaries, including a related $28 million reduction in valuation allowance against deferred tax assets in certain state jurisdictions. We will continue to monitor positive and negative evidence related to the utilization of the remaining deferred tax assets for which a valuation allowance continues to be provided. It is possible that our valuation allowance may change within the next twelve months.
Note 149 – Earnings Per Share
The computation of basic and diluted earnings per share was as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions, except shares and per share amounts) | 2019 | | 2018 |
Net income | $ | 908 |
| | $ | 671 |
|
| | | |
Weighted average shares outstanding - basic | 851,223,498 |
| | 855,222,664 |
|
Effect of dilutive securities: | | | |
Outstanding stock options and unvested stock awards | 7,419,983 |
| | 7,021,420 |
|
Weighted average shares outstanding - diluted | 858,643,481 |
| | 862,244,084 |
|
| | | |
Earnings per share - basic | $ | 1.07 |
| | $ | 0.78 |
|
Earnings per share - diluted | $ | 1.06 |
| | $ | 0.78 |
|
| | | |
Potentially dilutive securities: | | | |
Outstanding stock options and unvested stock awards | 266,452 |
| | 67,580 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except shares and per share amounts) | 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 795 |
| | $ | 550 |
| | $ | 2,248 |
| | $ | 1,829 |
|
Less: Dividends on mandatory convertible preferred stock | — |
| | (13 | ) | | — |
| | (41 | ) |
Net income attributable to common stockholders - basic | 795 |
| | 537 |
| | 2,248 |
| | 1,788 |
|
Add: Dividends related to mandatory convertible preferred stock | — |
| | 13 |
| | — |
| | 41 |
|
Net income attributable to common stockholders - diluted | $ | 795 |
| | $ | 550 |
| | $ | 2,248 |
| | $ | 1,829 |
|
| | | | | | | |
Weighted average shares outstanding - basic | 847,087,120 |
| | 831,189,779 |
| | 849,960,290 |
| | 829,974,146 |
|
Effect of dilutive securities: | | | | | | | |
Outstanding stock options and unvested stock awards | 6,765,644 |
| | 7,992,286 |
| | 8,288,278 |
| | 9,523,365 |
|
Mandatory convertible preferred stock | — |
| | 32,238,000 |
| | — |
| | 32,238,000 |
|
Weighted average shares outstanding - diluted | 853,852,764 |
| | 871,420,065 |
| | 858,248,568 |
| | 871,735,511 |
|
| | | | | | | |
Earnings per share - basic | $ | 0.94 |
| | $ | 0.65 |
| | $ | 2.65 |
| | $ | 2.15 |
|
Earnings per share - diluted | $ | 0.93 |
| | $ | 0.63 |
| | $ | 2.62 |
| | $ | 2.10 |
|
| | | | | | | |
Potentially dilutive securities: | | | | | | | |
Outstanding stock options and unvested stock awards | 537,810 |
| | — |
| | 779,644 |
| | 4,760 |
|
As of September 30, 2018,March 31, 2019, we had authorized 100 million shares of 5.50% mandatory convertible preferred stock, series A, with a par value of $0.00001 per share. There were zero and 20 millionwas no preferred sharesstock outstanding as of September 30, 2018March 31, 2019 and September 30, 2017, respectively.2018.
On December 15, 2017, 20 million shares of our preferred stock converted to approximately 32 million shares of our common stock at a conversion rate of 1.6119 shares of common stock for each share of previously outstanding preferred stock and certain cash-in-lieu of fractional shares.
Potentially dilutive securities were not included in the computation of diluted earnings per share if to do so would have been anti-dilutive.
Note 10 - Leases
Leases (Topic 842) Disclosures
Lessee
We are lessee for non-cancellable operating and finance leases for cell sites, switch sites, retail stores and office facilities with contractual terms through 2029. The majority of cell site leases have an initial non-cancelable term of five to ten years with several renewal options that can extend the lease term from five to thirty-five years. In addition, we have finance leases for network equipment that generally have a non-cancelable lease term of two to four years; the finance leases do not have renewal options and contain a bargain purchase option at the end of the lease.
The components of lease expense were as follows:
|
| | | |
(in millions) | Three Months Ended March 31, 2019 |
Operating lease expense | $ | 602 |
|
Financing lease expense: | |
Amortization of right-of-use assets | 113 |
|
Interest on lease liabilities | 20 |
|
Total financing lease expense | 133 |
|
Variable lease expense | 65 |
|
Total lease expense | $ | 800 |
|
Information relating to the lease term and discount rate is as follows:
|
| | |
| Three Months Ended March 31, 2019 |
Weighted Average Remaining Lease Term (Years) | |
Operating leases | 6 |
|
Financing leases | 3 |
|
Weighted Average Discount Rate | |
Operating leases | 5.4 | % |
Financing leases | 4.5 | % |
Maturities of lease liabilities as of March 31, 2019, were as follows:
|
| | | | | | | |
(in millions) | Operating Leases | | Finance Leases |
Twelve Months Ending March 31, | | | |
2020 | $ | 2,623 |
| | $ | 961 |
|
2021 | 2,446 |
| | 644 |
|
2022 | 2,196 |
| | 380 |
|
2023 | 1,814 |
| | 115 |
|
2024 | 1,350 |
| | 73 |
|
Thereafter | 3,300 |
| | 108 |
|
Total lease payments | 13,729 |
| | 2,281 |
|
Less imputed interest | (2,188 | ) | | (146 | ) |
Total | $ | 11,541 |
| | $ | 2,135 |
|
Interest payments for financing leases for the three months ended March 31, 2019 were $20 million.
As of March 31, 2019, we have additional operating leases, for cell sites and commercial properties, that have not yet commenced with lease payments of approximately $350 million.
As of March 31, 2019, we were contingently liable for future ground lease payments related to the tower obligations. These contingent obligations are not included in the above table as the amounts owed are contractually owed by CCI based on the subleasing arrangement. See Note 7 - Tower Obligations for further information.
Lessor
JUMP! On Demand allows customers to lease a device (handset or tablet) over a period of up to 18 months and upgrade it for a new device up to one time per month. Upon device upgrade or at lease end, customers must return or purchase their device. The purchase price at the expiration of the lease is established at lease commencement and reflects the estimated residual value of the device, which reflects the estimated fair value of the underlying asset at the end of the lease term. The JUMP! On Demand leases do not contain any residual value guarantees or variable lease payments, and there are no restrictions or covenants imposed by these leases. Leased wireless devices are included in Property and equipment, net in our Condensed Consolidated Balance Sheets.
The components of leased wireless devices under our JUMP! On Demand program were as follows:
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
Leased wireless devices, gross | $ | 1,080 |
| | $ | 1,159 |
|
Accumulated depreciation | (638 | ) | | (622 | ) |
Leased wireless devices, net | $ | 442 |
| | $ | 537 |
|
Future minimum payments expected to be received over the lease term related to the leased wireless devices, which exclude optional residual buy-out amounts at the end of the lease term, are summarized below:
|
| | | |
(in millions) | Total |
Twelve Months Ending March 31, | |
2020 | $ | 352 |
|
2021 | 46 |
|
Total | $ | 398 |
|
Leases (Topic 840) Disclosures
On January 1, 2019, we adopted the new lease standard using a modified-retrospective approach by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application and did not restate the prior periods presented in our Consolidated Financial Statements. As such, prior periods presented in our Consolidated Financial Statements continue to be in accordance with the former lease standard, Topic 840 Leases. See Note 1 - Summary of Significant Accounting Policies for further information.
Operating Leases
Under the previous lease standard, we had non-cancellable operating leases for cell sites, switch sites, retail stores and office facilities. As of December 31, 2018, these leases had contractual terms expiring through 2028, with the majority of cell site leases having an initial non-cancelable term of five to ten years with several renewal options. In addition, we had operating leases for dedicated transportation lines with varying expiration terms through 2027.
Our commitments under leases existing as of December 31, 2018 were approximately $2.7 billion for the year ending December 31, 2019, $4.7 billion in total for the years ending December 31, 2020 and 2021, $3.3 billion in total for the years ending December 31, 2022 and 2023 and $3.8 billion in total for years thereafter.
Total rent expense under operating leases, including dedicated transportation lines, was $734 million for the three months ended March 31, 2018, and was classified as Cost of services and Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income.
Lessor
As of December 31, 2018, the future minimum payments expected to be received over the lease term related to the leased wireless devices, which exclude optional residual buy-out amounts at the end of the lease term, are summarized below:
|
| | | |
(in millions) | Total |
Year Ended December 31, | |
2019 | $ | 419 |
|
2020 | 59 |
|
Total | $ | 478 |
|
Capital Leases
Within property and equipment, wireless communication systems include capital lease agreements for network equipment with varying expiration terms through 2033. Capital lease assets and accumulated amortization were $3.1 billion and $867 million as of December 31, 2018.
As of December 31, 2018, the future minimum payments required under capital leases, including interest and maintenance, over their remaining terms are summarized below:
|
| | | |
(in millions) | Future Minimum Payments |
Year Ended December 31, | |
2019 | $ | 909 |
|
2020 | 631 |
|
2021 | 389 |
|
2022 | 102 |
|
2023 | 66 |
|
Thereafter | 106 |
|
Total | $ | 2,203 |
|
Included in Total | |
Interest | $ | 143 |
|
Maintenance | 45 |
|
Note 1511 – Commitments and Contingencies
Commitments
Operating Leases
We have non-cancellable operating leases for cell sites, switch sites, retail stores and office facilities with contractual terms expiring through 2028. The majority of cell site leases have an initial non-cancelable term of five to ten years with several renewal options. In addition, we have operating leases for dedicated transportation lines with varying expiration terms through 2027. Our commitments under these leases are approximately $2.6 billion for the year ending September 30, 2019, $4.5 billion in total for the years ending September 30, 2020 and 2021, $3.0 billion in total for the years ending September 30, 2022 and 2023 and $3.2 billion in total for years thereafter.
Purchase Commitments
We have commitments for non-dedicated transportation lines with varying expiration terms through 2029. In addition, we have commitments to purchase and lease spectrum licenses, wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business, with various terms through 2029. These amounts are not reflective of our entire anticipated purchases under the related agreements but are determined based on the non-cancelable quantities or termination amounts to which we are contractually obligated.
We have contractual obligations to purchase and lease certain goods and services from various other parties. Our purchase obligations are approximately $2.5 billion for the year ending September 30, 2019, $2.7 billion in total for the years ending September 30, 2020 and 2021, $1.9 billion in total for the years ending September 30, 2022 and 2023 and $1.3 billion in total for the years thereafter.
In June 2018, we entered into an agreement for the purchase of network equipment totaling approximately $3.5 billion. Based on unavoidable spend, the minimum commitment under this agreement is $201 million as of September 30, 2018.
In September 2018, we amended an agreement with a third party to increase the total amount of network equipment to purchase by approximately $3.5 billion. Based on unavoidable spend, the minimum commitment under this agreement is $201 million as of September 30, 2018.
In September 2018, we signed a reciprocal long-term spectrum lease with Sprint that included a total commitment of $533 million andSprint. The lease includes an offsetting amount to be received from Sprint for the lease of our spectrum. Lease payments are expected to beginbegan in the fourth quarter of 2018. The minimum commitment under this lease as of March 31, 2019 is $523 million. The reciprocal long-term lease is a distinct transaction from the Merger.
Under the previous lease standard certain of our network backhaul arrangements were accounted for as operating leases. Obligations under these agreements were included within our operating lease commitments as of December 31, 2018.
These agreements no longer qualify as leases under the new lease standard. Our commitments under these agreements as of March 31, 2019, were approximately $131 million for the year ending March 31, 2020, $224 million in total for the years ended March 31, 2021 and 2022, $158 million in total for the years ended March 31, 2023 and 2024, and $190 million in total for years thereafter.
Interest rate lock derivatives
In October 2018, we entered into agreementsinterest rate lock derivatives with a third-party associated with a device upgrade program, trade-in services, and device protection products and services offerednotional amounts of $9.6 billion. These interest rate lock derivatives were designated as cash flow hedges to our mobile communications customers, with initial terms of onereduce variability in cash flows due to three years. Device protection products and services include reinsurance for device insurance policies and extended warranty contracts, mobile security applications, and technical support services.
Renewable Energy Purchase Agreements
In June 2018, T-Mobile USA entered into a renewable energy purchase agreement (the “REPA”) with a third party. The REPA is based on the expected operation of a wind energy-generating facility locatedchanges in Illinois and will remain in effect until the 15th anniversary of the facility’s entry into commercial operation. Commercial operation of the facility is expectedinterest payments attributable to occur by the end of 2020. The REPA consists of two components: (1) an energy forward agreement that is net settled based on energy prices and the energy output generated by the facility and (2) a commitment to purchase environmental attributes (“EACs”)increases or decreases in the same amount as the energy output generated by the facility. T-Mobile USA will net settle the forward agreement and acquire the EACs monthly by paying, or receiving, an aggregate net payment based on two variables (1) the facility’s energy output, which has an estimated maximum capacity of approximately 150 megawatts and (2) the difference between (a) an initial fixed price, subject to annual escalation, and (b) current local marginal energy pricesbenchmark interest rate during the monthly settlement period. We have determined thatperiod leading up to the REPA does not meet the definitionprobable issuance of a derivative because the expected energy output of the facility may not be reliably estimated (the arrangement lacks a notional amount). The REPA does not contain any unconditional purchase obligations because amounts under the agreement are not fixed and determinable. Our participation in the REPA did not require an upfront investment or capital commitment. We do not control the activities that most significantly impact the energy-generating facility, nor do we receive specific energy output from it. No amounts were settled under the REPA during the nine months ended September 30, 2018.
fixed-rate debt. The fair value of interest rate lock derivatives as of March 31, 2019 was a liability of $703 million and is included in Other current liabilities in our Condensed Consolidated Balance Sheets. See Note 6 – Fair Value Measurements for further information.
Renewable Energy Purchase Agreements
In August 2018,April 2019, T-Mobile USA entered into a REPARenewable Energy Purchase Agreement (“REPA”) with a third party. The REPAparty that is based on the expected operation of a solar photovoltaic electrical generation facility located in VirginiaTexas and will remain in effect until the twentiethfifteenth anniversary of the respective facility’s entry into commercial operation. Commercial operation of the facility is expected to occur by the end of 2020. The REPA consists of an energy forward agreement that is net settled based on energy prices and the energy output generated by the facility.in July 2021. The REPA does not contain a defined commitment, volume, or penalty amount. T-Mobile USA will acquire the EACs and net settle on the fixed-for-variable energy cost swap on the basis of the energy output at an initial fixed price, subject to annual escalation. We have determined that the REPA does not meet the definition of a derivative because the expected energy output of the facility may not be reliably estimated (the arrangement lacks a notional amount). The REPA does not contain any unconditional purchase obligations because amounts under the agreement are not fixed and determinable. Our participation in the REPA did not require an upfront investment or capital commitment. We do not control the activities that most significantly impact the energy-generating facility, nor do we receive specific energy output from it. No amounts were settled under the REPA during the nine months ended September 30, 2018.
In October 2018, T-Mobile USA entered into two REPAs with third parties that are based on the expected operation of solar photovoltaic electrical generation facilities located in Virginia and will remain in effect until the fifteenth anniversary of the respective facilities’ entry into commercial operation. Commercial operation of the facilities is expected to occur by the end of 2019 and 2020, respectively. The REPAs do not contain a defined commitment, volume, or penalty amount.
Contingencies and Litigation
Litigation Matters
We are involved in various lawsuits and disputes, claims, government agency investigations and enforcement actions, and other proceedings (“Litigation Matters”) that arise in the ordinary course of business, which include claims of patent infringement (most of which are asserted by non-practicing entities primarily seeking monetary damages), class actions, and proceedings to enforce FCC rules and regulations. The Litigation Matters described above have progressed to various stages and some of them may proceed to trial, arbitration, hearing or other adjudication that could result in fines, penalties, or awards of monetary or injunctive relief in the coming 12 months if they are not otherwise resolved. We have established an accrual with respect to certain of these matters, where appropriate, which is reflected in the condensed consolidated financial statementsConsolidated Financial Statements but that we dois not consider,considered to be, individually or in the aggregate, material. An accrual is established when we believe it is both probable that a loss has been incurred and an amount can be reasonably estimated. For other matters, where we have not determined that a loss is probable or because the amount of loss cannot be reasonably estimated, we have not recorded an accrual due to various factors typical in contested proceedings, including but not limited to:to uncertainty concerning legal theories and their resolution by courts or regulators;regulators, uncertain damage theories and demands;demands, and a less than fully developed factual record. While we do not expect that the ultimate resolution of these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, an unfavorable outcome of some or all of these proceedings could have a material adverse impact on results of operations or cash flows for a particular period. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future.
Note 1612 – Subsequent EventsEvent
In October 2018, we received reimbursement payments of $63 million from our insurance carriers related to hurricane impacts. The balance was accrued as a receivable as of September 30, 2018. See Note 2 - Significant Transactions for further information.
In October 2018, we amended and restated the EIP sale arrangement to, among other things, extend the scheduled expiration date to November 2020 and expand the types of EIP receivables that may be sold. See Note 5 - Sales of Certain Receivables for further information.
In October 2018, weApril 2019, T-Mobile USA entered into several interest rate lock transactions with multiple banks with an aggregate notional amount of $9.6 billion. These agreements will be used to mitigate variability in future cash flows resulting from changes in interest rates prior to the issuance of long-term debt.
In October 2018, we entered into agreementsa REPA with a third-party associated with a device upgrade program, trade-in services, and device protection products and services offered to our mobile communications customers, with initial terms of one to three years. Device protection products and services include reinsurance for device insurance policies and extended warranty contracts, mobile security applications, and technical support services.third party. See Note 1511 - Commitments and Contingencies for further information.
In October 2018, T-Mobile USA entered into two REPAs with third parties. See
In October 2018, our operations in Florida experienced immaterial losses related to a hurricane. Additional costs relatedNotes to the hurricane are expected to be incurred during the remainder of the fourth quarter of 2018.Condensed Consolidated Financial Statements
Note 1713 – Guarantor Financial Information
Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties issued by T-Mobile USA (“Issuer”) is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of the Issuer’s 100% owned subsidiaries (“Guarantor Subsidiaries”).
In January 2018, T-Mobile USA and certain of its affiliates, as guarantors, issued (i) $1.0 billion of public 4.500% Senior Notes due 2026 and (ii) $1.5 billion of public 4.750% Senior Notes due 2028.
In April 2018, T-Mobile USA and certain of its affiliates, as guarantors, issued (i) $1.0 billion in aggregate principal amount of 4.500% Senior Notes due 2026 and (ii) $1.5 billion in aggregate principal amount of 4.750% Senior Notes due 2028. Additionally, T-Mobile USA and certain of its affiliates, as guarantors, redeemed through net settlement, (i) the $1.25 billion in aggregate principal amount of 8.097% Senior Reset Notes due 2021 and (ii) $1.25 billion in aggregate principal amount of 8.195% Senior Reset Notes due 2022.
The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures and credit facilities governing the long-term debt contain covenants that, among other things, limit the ability of the Issuer and the Guarantor Subsidiaries to:to incur more debt;debt, pay dividends and make distributions;distributions, make certain investments;investments, repurchase stock;stock, create liens or other encumbrances;encumbrances, enter into transactions with affiliates;affiliates, enter into transactions that restrict dividends or distributions from subsidiaries;subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuer to loan funds or make payments to Parent. However, the Issuer and Guarantor Subsidiaries are allowed to make certain permitted payments to the Parent under the terms of the indentures and the supplemental indentures.
DuringOn October 23, 2018, SLMA LLC was formed as a limited liability company in Delaware to serve as an escrow subsidiary to facilitate the preparationcontemplated issuance of notes by Parent in connection with the condensed consolidating financial informationTransactions. SLMA LLC is an indirect, 100% owned finance subsidiary of T-Mobile US, Inc.Parent, as such term is used in Rule 3-10(b) of Regulation S-X, and Subsidiaries for the year ended December 31, 2017, it was determinedhas been designated as an unrestricted subsidiary under Issuer’s existing debt securities. Any debt securities that certain intercompany advances were misclassified in Net cash providedmay be issued from time to time by (used in) operating activitiesSLMA LLC will be fully and Net cash providedunconditionally guaranteed by (used in) financing activities in the Condensed Consolidating Statement of Cash Flows Information for the three and nine months ended September 30, 2017, as filed in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017. We have revised the Issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries columns of the Condensed Consolidating Statement of Cash Flows Information to reclassifyParent.
Intercompany advances, net from Net cash provided by (used in) operating activities to Net cash provided by (used in) financing activities. The impacts to the Issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries columns for the three months ended September 30, 2017 were $1.3 billion, $1.3 billion and $12 million, respectively and for the nine months ended September 30, 2017 were $15.2 billion, $15.2 billion and $28 million, respectively. The revisions, which we have determined are not material, are eliminated upon consolidation and have no impact on our Condensed Consolidating Statement of Cash Flows Information.
Presented below is the condensed consolidating financial information as of September 30, 2018March 31, 2019 and December 31, 2017,2018, and for the three and nine months ended September 30, 2018March 31, 2019 and 2017.2018.
Condensed Consolidating Balance Sheet Information
September 30, 2018March 31, 2019
| | (in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Assets | | | | | | | | | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 2 |
| | $ | 1 |
| | $ | 272 |
| | $ | 54 |
| | $ | — |
| | $ | 329 |
| $ | 3 |
| | $ | 2 |
| | $ | 1,314 |
| | $ | 120 |
| | $ | — |
| | $ | 1,439 |
|
Accounts receivable, net | — |
| | — |
| | 1,428 |
| | 224 |
| | — |
| | 1,652 |
| — |
| | — |
| | 1,465 |
| | 284 |
| | — |
| | 1,749 |
|
Equipment installment plan receivables, net | — |
| | — |
| | 2,366 |
| | — |
| | — |
| | 2,366 |
| — |
| | — |
| | 2,466 |
| | — |
| | — |
| | 2,466 |
|
Accounts receivable from affiliates | — |
| | 6 |
| | 11 |
| | — |
| | (5 | ) | | 12 |
| — |
| | 5 |
| | 16 |
| | — |
| | (5 | ) | | 16 |
|
Inventories | — |
| | — |
| | 957 |
| | 1 |
| | — |
| | 958 |
| |
Inventory | | — |
| | — |
| | 1,260 |
| | 1 |
| | — |
| | 1,261 |
|
Other current assets | — |
| | — |
| | 1,273 |
| | 696 |
| | — |
| | 1,969 |
| — |
| | — |
| | 1,155 |
| | 659 |
| | — |
| | 1,814 |
|
Total current assets | 2 |
| | 7 |
| | 6,307 |
| | 975 |
| | (5 | ) | | 7,286 |
| 3 |
| | 7 |
| | 7,676 |
| | 1,064 |
| | (5 | ) | | 8,745 |
|
Property and equipment, net (1) | — |
| | — |
| | 22,197 |
| | 305 |
| | — |
| | 22,502 |
| — |
| | — |
| | 21,155 |
| | 309 |
| | — |
| | 21,464 |
|
Operating lease right-of-use assets | | — |
| | — |
| | 9,505 |
| | 4 |
| | — |
| | 9,509 |
|
Financing lease right-of-use assets | | — |
| | — |
| | 2,338 |
| | 1 |
| | — |
| | 2,339 |
|
Goodwill | — |
| | — |
| | 1,683 |
| | 218 |
| | — |
| | 1,901 |
| — |
| | — |
| | 1,683 |
| | 218 |
| | — |
| | 1,901 |
|
Spectrum licenses | — |
| | — |
| | 35,553 |
| | — |
| | — |
| | 35,553 |
| — |
| | — |
| | 35,618 |
| | — |
| | — |
| | 35,618 |
|
Other intangible assets, net | — |
| | — |
| | 142 |
| | 87 |
| | — |
| | 229 |
| — |
| | — |
| | 97 |
| | 77 |
| | — |
| | 174 |
|
Investments in subsidiaries, net | 25,007 |
| | 44,605 |
| | — |
| | — |
| | (69,612 | ) | | — |
| 26,686 |
| | 48,221 |
| | — |
| | — |
| | (74,907 | ) | | — |
|
Intercompany receivables and note receivables | — |
| | 6,324 |
| | — |
| | — |
| | (6,324 | ) | | — |
| — |
| | 5,275 |
| | — |
| | — |
| | (5,275 | ) | | — |
|
Equipment installment plan receivables due after one year, net | — |
| | — |
| | 1,223 |
| | — |
| | — |
| | 1,223 |
| — |
| | — |
| | 1,662 |
| | — |
| | — |
| | 1,662 |
|
Other assets | — |
| | 5 |
| | 1,394 |
| | 250 |
| | (161 | ) | | 1,488 |
| — |
| | 7 |
| | 1,596 |
| | 211 |
| | (153 | ) | | 1,661 |
|
Total assets | $ | 25,009 |
| | $ | 50,941 |
| | $ | 68,499 |
| | $ | 1,835 |
| | $ | (76,102 | ) | | $ | 70,182 |
| $ | 26,689 |
| | $ | 53,510 |
| | $ | 81,330 |
| | $ | 1,884 |
| | $ | (80,340 | ) | | $ | 83,073 |
|
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | — |
| | $ | 137 |
| | $ | 6,090 |
| | $ | 273 |
| | $ | — |
| | $ | 6,500 |
| $ | — |
| | $ | 136 |
| | $ | 6,883 |
| | $ | 311 |
| | $ | — |
| | $ | 7,330 |
|
Payables to affiliates | — |
| | 187 |
| | 44 |
| | — |
| | (5 | ) | | 226 |
| — |
| | 189 |
| | 58 |
| | — |
| | (5 | ) | | 242 |
|
Short-term debt | — |
| | 54 |
| | 729 |
| | — |
| | — |
| | 783 |
| — |
| | 250 |
| | — |
| | — |
| | — |
| | 250 |
|
Short-term debt to affiliates | | — |
| | 598 |
| | — |
| | — |
| | — |
| | 598 |
|
Deferred revenue | — |
| | — |
| | 696 |
| | — |
| | — |
| | 696 |
| — |
| | — |
| | 665 |
| | — |
| | — |
| | 665 |
|
Short-term operating lease liabilities | | — |
| | — |
| | 2,199 |
| | 3 |
| | — |
| | 2,202 |
|
Short-term financing lease liabilities | | — |
| | — |
| | 911 |
| | — |
| | — |
| | 911 |
|
Other current liabilities | — |
| | — |
| | 166 |
| | 201 |
| | — |
| | 367 |
| — |
| | 714 |
| | 157 |
| | 258 |
| | — |
| | 1,129 |
|
Total current liabilities | — |
| | 378 |
| | 7,725 |
| | 474 |
| | (5 | ) | | 8,572 |
| — |
| | 1,887 |
| | 10,873 |
| | 572 |
| | (5 | ) | | 13,327 |
|
Long-term debt | — |
| | 10,949 |
| | 1,044 |
| | — |
| | — |
| | 11,993 |
| — |
| | 10,952 |
| | — |
| | — |
| | — |
| | 10,952 |
|
Long-term debt to affiliates | — |
| | 14,581 |
| | — |
| | — |
| | — |
| | 14,581 |
| — |
| | 13,985 |
| | — |
| | — |
| | — |
| | 13,985 |
|
Tower obligations (1) | — |
| | — |
| | 386 |
| | 2,179 |
| | — |
| | 2,565 |
| — |
| | — |
| | 76 |
| | 2,168 |
| | — |
| | 2,244 |
|
Deferred tax liabilities | — |
| | — |
| | 4,531 |
| | — |
| | (161 | ) | | 4,370 |
| — |
| | — |
| | 5,078 |
| | — |
| | (153 | ) | | 4,925 |
|
Deferred rent expense | — |
| | — |
| | 2,761 |
| | — |
| | — |
| | 2,761 |
| |
Operating lease liabilities | | — |
| | — |
| | 9,337 |
| | 2 |
| | — |
| | 9,339 |
|
Financing lease liabilities | | — |
| | — |
| | 1,224 |
| | — |
| | — |
| | 1,224 |
|
Negative carrying value of subsidiaries, net | — |
| | — |
| | 625 |
| | — |
| | (625 | ) | | — |
| — |
| | — |
| | 761 |
| | — |
| | (761 | ) | | — |
|
Intercompany payables and debt | 654 |
| | — |
| | 5,365 |
| | 305 |
| | (6,324 | ) | | — |
| 508 |
| | — |
| | 4,412 |
| | 355 |
| | (5,275 | ) | | — |
|
Other long-term liabilities | — |
| | 26 |
| | 937 |
| | 22 |
| | — |
| | 985 |
| — |
| | — |
| | 876 |
| | 20 |
| | — |
| | 896 |
|
Total long-term liabilities | 654 |
| | 25,556 |
| | 15,649 |
| | 2,506 |
| | (7,110 | ) | | 37,255 |
| 508 |
| | 24,937 |
| | 21,764 |
| | 2,545 |
| | (6,189 | ) | | 43,565 |
|
Total stockholders' equity (deficit) | 24,355 |
| | 25,007 |
| | 45,125 |
| | (1,145 | ) | | (68,987 | ) | | 24,355 |
| 26,181 |
| | 26,686 |
| | 48,693 |
| | (1,233 | ) | | (74,146 | ) | | 26,181 |
|
Total liabilities and stockholders' equity | $ | 25,009 |
| | $ | 50,941 |
| | $ | 68,499 |
| | $ | 1,835 |
| | $ | (76,102 | ) | | $ | 70,182 |
| $ | 26,689 |
| | $ | 53,510 |
| | $ | 81,330 |
| | $ | 1,884 |
| | $ | (80,340 | ) | | $ | 83,073 |
|
| |
(1) | Assets and liabilities for Non-Guarantor Subsidiaries are primarily included in VIEs related to the 2012 Tower Transaction. See Note 87 – Tower Obligations included in our Annual Report on Form 10-K for the year ended December 31, 2017 for further information. |
Condensed Consolidating Balance Sheet Information
December 31, 20172018
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Assets | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 2 |
| | $ | 1 |
| | $ | 1,079 |
| | $ | 121 |
| | $ | — |
| | $ | 1,203 |
|
Accounts receivable, net | — |
| | — |
| | 1,510 |
| | 259 |
| | — |
| | 1,769 |
|
Equipment installment plan receivables, net | — |
| | — |
| | 2,538 |
| | — |
| | — |
| | 2,538 |
|
Accounts receivable from affiliates | — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
Inventory | — |
| | — |
| | 1,084 |
| | — |
| | — |
| | 1,084 |
|
Other current assets | — |
| | — |
| | 1,031 |
| | 645 |
| | — |
| | 1,676 |
|
Total current assets | 2 |
| | 1 |
| | 7,253 |
| | 1,025 |
| | — |
| | 8,281 |
|
Property and equipment, net (1) | — |
| | — |
| | 23,062 |
| | 297 |
| | — |
| | 23,359 |
|
Goodwill | — |
| | — |
| | 1,683 |
| | 218 |
| | — |
| | 1,901 |
|
Spectrum licenses | — |
| | — |
| | 35,559 |
| | — |
| | — |
| | 35,559 |
|
Other intangible assets, net | — |
| | — |
| | 116 |
| | 82 |
| | — |
| | 198 |
|
Investments in subsidiaries, net | 25,314 |
| | 46,516 |
| | — |
| | — |
| | (71,830 | ) | | — |
|
Intercompany receivables and note receivables | — |
| | 5,174 |
| | — |
| | — |
| | (5,174 | ) | | — |
|
Equipment installment plan receivables due after one year, net | — |
| | — |
| | 1,547 |
| | — |
| | — |
| | 1,547 |
|
Other assets | — |
| | 7 |
| | 1,540 |
| | 221 |
| | (145 | ) | | 1,623 |
|
Total assets | $ | 25,316 |
| | $ | 51,698 |
| | $ | 70,760 |
| | $ | 1,843 |
| | $ | (77,149 | ) | | $ | 72,468 |
|
Liabilities and Stockholders' Equity | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | — |
| | $ | 228 |
| | $ | 7,240 |
| | $ | 273 |
| | $ | — |
| | $ | 7,741 |
|
Payables to affiliates | — |
| | 157 |
| | 43 |
| | — |
| | — |
| | 200 |
|
Short-term debt | — |
| | — |
| | 841 |
| | — |
| | — |
| | 841 |
|
Deferred revenue | — |
| | — |
| | 698 |
| | — |
| | — |
| | 698 |
|
Other current liabilities | — |
| | 447 |
| | 164 |
| | 176 |
| | — |
| | 787 |
|
Total current liabilities | — |
| | 832 |
| | 8,986 |
| | 449 |
| | — |
| | 10,267 |
|
Long-term debt | — |
| | 10,950 |
| | 1,174 |
| | — |
| | — |
| | 12,124 |
|
Long-term debt to affiliates | — |
| | 14,582 |
| | — |
| | — |
| | — |
| | 14,582 |
|
Tower obligations (1) | — |
| | — |
| | 384 |
| | 2,173 |
| | — |
| | 2,557 |
|
Deferred tax liabilities | — |
| | — |
| | 4,617 |
| | — |
| | (145 | ) | | 4,472 |
|
Deferred rent expense | — |
| | — |
| | 2,781 |
| | — |
| | — |
| | 2,781 |
|
Negative carrying value of subsidiaries, net | — |
| | — |
| | 676 |
| | — |
| | (676 | ) | | — |
|
Intercompany payables and debt | 598 |
| | — |
| | 4,234 |
| | 342 |
| | (5,174 | ) | | — |
|
Other long-term liabilities | — |
| | 20 |
| | 926 |
| | 21 |
| | — |
| | 967 |
|
Total long-term liabilities | 598 |
| | 25,552 |
| | 14,792 |
| | 2,536 |
| | (5,995 | ) | | 37,483 |
|
Total stockholders' equity (deficit) | 24,718 |
| | 25,314 |
| | 46,982 |
| | (1,142 | ) | | (71,154 | ) | | 24,718 |
|
Total liabilities and stockholders' equity | $ | 25,316 |
| | $ | 51,698 |
| | $ | 70,760 |
| | $ | 1,843 |
| | $ | (77,149 | ) | | $ | 72,468 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Assets | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 74 |
| | $ | 1 |
| | $ | 1,086 |
| | $ | 58 |
| | $ | — |
| | $ | 1,219 |
|
Accounts receivable, net | — |
| | — |
| | 1,659 |
| | 256 |
| | — |
| | 1,915 |
|
Equipment installment plan receivables, net | — |
| | — |
| | 2,290 |
| | — |
| | — |
| | 2,290 |
|
Accounts receivable from affiliates | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Inventories | — |
| | — |
| | 1,566 |
| | — |
| | — |
| | 1,566 |
|
Other current assets | — |
| | — |
| | 1,275 |
| | 628 |
| | — |
| | 1,903 |
|
Total current assets | 74 |
| | 1 |
| | 7,898 |
| | 942 |
| | — |
| | 8,915 |
|
Property and equipment, net (1) | — |
| | — |
| | 21,890 |
| | 306 |
| | — |
| | 22,196 |
|
Goodwill | — |
| | — |
| | 1,683 |
| | — |
| | — |
| | 1,683 |
|
Spectrum licenses | — |
| | — |
| | 35,366 |
| | — |
| | — |
| | 35,366 |
|
Other intangible assets, net | — |
| | — |
| | 217 |
| | — |
| | — |
| | 217 |
|
Investments in subsidiaries, net | 22,534 |
| | 40,988 |
| | — |
| | — |
| | (63,522 | ) | | — |
|
Intercompany receivables and note receivables | — |
| | 8,503 |
| | — |
| | — |
| | (8,503 | ) | | — |
|
Equipment installment plan receivables due after one year, net | — |
| | — |
| | 1,274 |
| | — |
| | — |
| | 1,274 |
|
Other assets | — |
| | 2 |
| | 814 |
| | 236 |
| | (140 | ) | | 912 |
|
Total assets | $ | 22,608 |
| | $ | 49,494 |
| | $ | 69,142 |
| | $ | 1,484 |
| | $ | (72,165 | ) | | $ | 70,563 |
|
Liabilities and Stockholders' Equity | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | — |
| | $ | 253 |
| | $ | 8,014 |
| | $ | 261 |
| | $ | — |
| | $ | 8,528 |
|
Payables to affiliates | — |
| | 146 |
| | 36 |
| | — |
| | — |
| | 182 |
|
Short-term debt | — |
| | 999 |
| | 613 |
| | — |
| | — |
| | 1,612 |
|
Deferred revenue | — |
| | — |
| | 779 |
| | — |
| | — |
| | 779 |
|
Other current liabilities | 17 |
| | — |
| | 192 |
| | 205 |
| | — |
| | 414 |
|
Total current liabilities | 17 |
| | 1,398 |
| | 9,634 |
| | 466 |
| | — |
| | 11,515 |
|
Long-term debt | — |
| | 10,911 |
| | 1,210 |
| | — |
| | — |
| | 12,121 |
|
Long-term debt to affiliates | — |
| | 14,586 |
| | — |
| | — |
| | — |
| | 14,586 |
|
Tower obligations (1) | — |
| | — |
| | 392 |
| | 2,198 |
| | — |
| | 2,590 |
|
Deferred tax liabilities | — |
| | — |
| | 3,677 |
| | — |
| | (140 | ) | | 3,537 |
|
Deferred rent expense | — |
| | — |
| | 2,720 |
| | — |
| | — |
| | 2,720 |
|
Negative carrying value of subsidiaries, net | — |
| | — |
| | 629 |
| | — |
| | (629 | ) | | — |
|
Intercompany payables and debt | 32 |
| | — |
| | 8,201 |
| | 270 |
| | (8,503 | ) | | — |
|
Other long-term liabilities | — |
| | 65 |
| | 866 |
| | 4 |
| | — |
| | 935 |
|
Total long-term liabilities | 32 |
| | 25,562 |
| | 17,695 |
| | 2,472 |
| | (9,272 | ) | | 36,489 |
|
Total stockholders' equity (deficit) | 22,559 |
| | 22,534 |
| | 41,813 |
| | (1,454 | ) | | (62,893 | ) | | 22,559 |
|
Total liabilities and stockholders' equity | $ | 22,608 |
| | $ | 49,494 |
| | $ | 69,142 |
| | $ | 1,484 |
| | $ | (72,165 | ) | | $ | 70,563 |
|
| |
(1) | Assets and liabilities for Non-Guarantor Subsidiaries are primarily included in VIEs related to the 2012 Tower Transaction. See Note 87 – Tower Obligations included in our Annual Report on Form 10-K for the year ended December 31, 2017, for further information. |
Condensed Consolidating Statement of Comprehensive Income Information
Three Months Ended September 30, 2018March 31, 2019
| | (in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Revenues | | | | | | | | | | | | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | — |
| | $ | 7,737 |
| | $ | 563 |
| | $ | (234 | ) | | $ | 8,066 |
| $ | — |
| | $ | — |
| | $ | 7,859 |
| | $ | 732 |
| | $ | (314 | ) | | $ | 8,277 |
|
Equipment revenues | — |
| | — |
| | 2,444 |
| | — |
| | (53 | ) | | 2,391 |
| — |
| | — |
| | 2,570 |
| | — |
| | (54 | ) | | 2,516 |
|
Other revenues | — |
| | 6 |
| | 333 |
| | 59 |
| | (16 | ) | | 382 |
| — |
| | 6 |
| | 273 |
| | 50 |
| | (42 | ) | | 287 |
|
Total revenues | — |
| | 6 |
| | 10,514 |
| | 622 |
| | (303 | ) | | 10,839 |
| — |
| | 6 |
| | 10,702 |
| | 782 |
| | (410 | ) | | 11,080 |
|
Operating expenses | | | | | | | | | | | | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 1,571 |
| | 15 |
| | — |
| | 1,586 |
| — |
| | — |
| | 1,568 |
| | 6 |
| | (28 | ) | | 1,546 |
|
Cost of equipment sales | — |
| | — |
| | 2,657 |
| | 258 |
| | (53 | ) | | 2,862 |
| |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | | — |
| | — |
| | 2,798 |
| | 272 |
| | (54 | ) | | 3,016 |
|
Selling, general and administrative | — |
| | 2 |
| | 3,305 |
| | 257 |
| | (250 | ) | | 3,314 |
| — |
| | 1 |
| | 3,494 |
| | 275 |
| | (328 | ) | | 3,442 |
|
Depreciation and amortization | — |
| | — |
| | 1,614 |
| | 23 |
| | — |
| | 1,637 |
| — |
| | — |
| | 1,578 |
| | 22 |
| | — |
| | 1,600 |
|
Cost of Metro business combination | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Gains on disposal of spectrum licenses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Total operating expense | — |
| | 2 |
| | 9,147 |
| | 553 |
| | (303 | ) | | 9,399 |
| — |
| | 1 |
| | 9,438 |
| | 575 |
| | (410 | ) | | 9,604 |
|
Operating (loss) income | — |
| | 4 |
| | 1,367 |
| | 69 |
| | — |
| | 1,440 |
| |
Operating income | | — |
| | 5 |
| | 1,264 |
| | 207 |
| | — |
| | 1,476 |
|
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | — |
| | (117 | ) | | (29 | ) | | (48 | ) | | — |
| | (194 | ) | — |
| | (112 | ) | | (20 | ) | | (47 | ) | | — |
| | (179 | ) |
Interest expense to affiliates | — |
| | (124 | ) | | (5 | ) | | — |
| | 5 |
| | (124 | ) | — |
| | (109 | ) | | (5 | ) | | — |
| | 5 |
| | (109 | ) |
Interest income | — |
| | 5 |
| | 5 |
| | — |
| | (5 | ) | | 5 |
| — |
| | 5 |
| | 7 |
| | 1 |
| | (5 | ) | | 8 |
|
Other expense, net | — |
| | — |
| | 4 |
| | (1 | ) | | — |
| | 3 |
| |
Other income (expense), net | | — |
| | 8 |
| | (1 | ) | | — |
| | — |
| | 7 |
|
Total other expense, net | — |
| | (236 | ) | | (25 | ) | | (49 | ) | | — |
| | (310 | ) | — |
| | (208 | ) | | (19 | ) | | (46 | ) | | — |
| | (273 | ) |
Income (loss) before income taxes | — |
| | (232 | ) | | 1,342 |
| | 20 |
| | — |
| | 1,130 |
| — |
| | (203 | ) | | 1,245 |
| | 161 |
| | — |
| | 1,203 |
|
Income tax expense | — |
| | — |
| | (330 | ) | | (5 | ) | | — |
| | (335 | ) | — |
| | — |
| | (261 | ) | | (34 | ) | | — |
| | (295 | ) |
Earnings of subsidiaries | 795 |
| | 1,027 |
| | 8 |
| | — |
| | (1,830 | ) | | — |
| 908 |
| | 1,111 |
| | 7 |
| | — |
| | (2,026 | ) | | — |
|
Net income | $ | 795 |
| | $ | 795 |
| | $ | 1,020 |
| | $ | 15 |
| | $ | (1,830 | ) | | $ | 795 |
| $ | 908 |
| | $ | 908 |
| | $ | 991 |
| | $ | 127 |
| | $ | (2,026 | ) | | $ | 908 |
|
Dividends on preferred stock | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Net income attributable to common stockholders | $ | 795 |
| | $ | 795 |
| | $ | 1,020 |
| | $ | 15 |
| | $ | (1,830 | ) | | $ | 795 |
| |
| | | | | | | | | | | | | | | | | | | | | | |
Net income | $ | 795 |
| | $ | 795 |
| | $ | 1,020 |
| | $ | 15 |
| | $ | (1,830 | ) | | $ | 795 |
| $ | 908 |
| | $ | 908 |
| | $ | 991 |
| | $ | 127 |
| | $ | (2,026 | ) | | $ | 908 |
|
Other comprehensive income, net of tax | | | | | | | | | | | | |
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Other comprehensive (loss) income, net of tax | | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | | (189 | ) | | (189 | ) | | 65 |
| | — |
| | 124 |
| | (189 | ) |
Total comprehensive income | $ | 795 |
| | $ | 795 |
| | $ | 1,020 |
| | $ | 15 |
| | $ | (1,830 | ) | | $ | 795 |
| $ | 719 |
| | $ | 719 |
| | $ | 1,056 |
| | $ | 127 |
| | $ | (1,902 | ) | | $ | 719 |
|
Condensed Consolidating Statement of Comprehensive Income Information
Three Months Ended September 30, 2017March 31, 2018
| | (in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Revenues | | | | | | | | | | | | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | — |
| | $ | 7,312 |
| | $ | 527 |
| | $ | (210 | ) | | $ | 7,629 |
| $ | — |
| | $ | — |
| | $ | 7,487 |
| | $ | 540 |
| | $ | (221 | ) | | $ | 7,806 |
|
Equipment revenues | — |
| | — |
| | 2,160 |
| | — |
| | (42 | ) | | 2,118 |
| — |
| | — |
| | 2,407 |
| | — |
| | (54 | ) | | 2,353 |
|
Other revenues | — |
| | — |
| | 224 |
| | 55 |
| | (7 | ) | | 272 |
| — |
| | 1 |
| | 249 |
| | 55 |
| | (9 | ) | | 296 |
|
Total revenues | — |
| | — |
| | 9,696 |
| | 582 |
| | (259 | ) | | 10,019 |
| — |
| | 1 |
| | 10,143 |
| | 595 |
| | (284 | ) | | 10,455 |
|
Operating expenses | | | | | | | | | | | | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 1,588 |
| | 6 |
| | — |
| | 1,594 |
| — |
| | — |
| | 1,580 |
| | 9 |
| | — |
| | 1,589 |
|
Cost of equipment sales | — |
| | — |
| | 2,418 |
| | 241 |
| | (42 | ) | | 2,617 |
| |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | | — |
| | — |
| | 2,664 |
| | 236 |
| | (55 | ) | | 2,845 |
|
Selling, general and administrative | — |
| | — |
| | 3,106 |
| | 209 |
| | (217 | ) | | 3,098 |
| — |
| | — |
| | 3,157 |
| | 236 |
| | (229 | ) | | 3,164 |
|
Depreciation and amortization | — |
| | — |
| | 1,399 |
| | 17 |
| | — |
| | 1,416 |
| — |
| | — |
| | 1,554 |
| | 21 |
| | — |
| | 1,575 |
|
Gains on disposal of spectrum licenses | — |
| | — |
| | (29 | ) | | — |
| | — |
| | (29 | ) | |
Total operating expense | — |
| | — |
| | 8,482 |
| | 473 |
| | (259 | ) | | 8,696 |
| |
Total operating expenses | | — |
| | — |
| | 8,955 |
| | 502 |
| | (284 | ) | | 9,173 |
|
Operating income | — |
| | — |
| | 1,214 |
| | 109 |
| | — |
| | 1,323 |
| — |
| | 1 |
| | 1,188 |
| | 93 |
| | — |
| | 1,282 |
|
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | — |
| | (176 | ) | | (30 | ) | | (47 | ) | | — |
| | (253 | ) | — |
| | (174 | ) | | (29 | ) | | (48 | ) | | — |
| | (251 | ) |
Interest expense to affiliates | — |
| | (167 | ) | | (6 | ) | | — |
| | 6 |
| | (167 | ) | — |
| | (166 | ) | | (5 | ) | | — |
| | 5 |
| | (166 | ) |
Interest income | — |
| | 7 |
| | 1 |
| | — |
| | (6 | ) | | 2 |
| — |
| | 6 |
| | 5 |
| | — |
| | (5 | ) | | 6 |
|
Other expense, net | — |
| | 1 |
| | 1 |
| | (1 | ) | | — |
| | 1 |
| |
Total other expense, net | — |
| | (335 | ) | | (34 | ) | | (48 | ) | | — |
| | (417 | ) | |
Other (expense) income, net | | — |
| | (32 | ) | | 42 |
| | — |
| | — |
| | 10 |
|
Total other (expense) income, net | | — |
| | (366 | ) | | 13 |
| | (48 | ) | | — |
| | (401 | ) |
Income (loss) before income taxes | — |
| | (335 | ) | | 1,180 |
| | 61 |
| | — |
| | 906 |
| — |
| | (365 | ) | | 1,201 |
| | 45 |
| | — |
| | 881 |
|
Income tax expense | — |
| | — |
| | (335 | ) | | (21 | ) | | — |
| | (356 | ) | — |
| | — |
| | (199 | ) | | (11 | ) | | — |
| | (210 | ) |
Earnings of subsidiaries | 550 |
| | 885 |
| | — |
| | — |
| | (1,435 | ) | | — |
| |
Earnings (loss) of subsidiaries | | 671 |
| | 1,036 |
| | (6 | ) | | — |
| | (1,701 | ) | | — |
|
Net income | 550 |
| | 550 |
| | 845 |
| | 40 |
| | (1,435 | ) | | 550 |
| $ | 671 |
| | $ | 671 |
| | $ | 996 |
| | $ | 34 |
| | $ | (1,701 | ) | | $ | 671 |
|
Dividends on preferred stock | (13 | ) | | — |
| | — |
| | — |
| | — |
| | (13 | ) | |
Net income attributable to common stockholders | $ | 537 |
| | $ | 550 |
| | $ | 845 |
| | $ | 40 |
| | $ | (1,435 | ) | | $ | 537 |
| |
| | | | | | | | | | | | | | | | | | | | | | |
Net income | $ | 550 |
| | $ | 550 |
| | $ | 845 |
| | $ | 40 |
| | $ | (1,435 | ) | | $ | 550 |
| $ | 671 |
| | $ | 671 |
| | $ | 996 |
| | $ | 34 |
| | $ | (1,701 | ) | | $ | 671 |
|
Other comprehensive income (loss), net of tax | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | 1 |
| | 1 |
| | 1 |
| | — |
| | (2 | ) | | 1 |
| |
Other comprehensive loss, net of tax | | | | | | | | | | | | |
Other comprehensive loss, net of tax | | (3 | ) | | (3 | ) | | (3 | ) | | — |
| | 6 |
| | (3 | ) |
Total comprehensive income | $ | 551 |
| | $ | 551 |
| | $ | 846 |
| | $ | 40 |
| | $ | (1,437 | ) | | $ | 551 |
| $ | 668 |
| | $ | 668 |
| | $ | 993 |
| | $ | 34 |
| | $ | (1,695 | ) | | $ | 668 |
|
Condensed Consolidating Statement of Comprehensive IncomeCash Flows Information
NineThree Months Ended September 30, 2018
March 31, 2019
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Revenues | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | — |
| | $ | 22,833 |
| | $ | 1,654 |
| | $ | (684 | ) | | $ | 23,803 |
|
Equipment revenues | — |
| | — |
| | 7,221 |
| | 1 |
| | (153 | ) | | 7,069 |
|
Other revenues | — |
| | 9 |
| | 849 |
| | 169 |
| | (34 | ) | | 993 |
|
Total revenues | — |
| | 9 |
| | 30,903 |
| | 1,824 |
| | (871 | ) | | 31,865 |
|
Operating expenses | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 4,673 |
| | 32 |
| | — |
| | 4,705 |
|
Cost of equipment sales | — |
| | — |
| | 7,877 |
| | 756 |
| | (154 | ) | | 8,479 |
|
Selling, general and administrative | — |
| | 8 |
| | 9,663 |
| | 709 |
| | (717 | ) | | 9,663 |
|
Depreciation and amortization | — |
| | — |
| | 4,779 |
| | 67 |
| | — |
| | 4,846 |
|
Gains on disposal of spectrum licenses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total operating expense | — |
| | 8 |
| | 26,992 |
| | 1,564 |
| | (871 | ) | | 27,693 |
|
Operating (loss) income | — |
| | 1 |
| | 3,911 |
| | 260 |
| | — |
| | 4,172 |
|
Other income (expense) | | | | | | | | | | | |
Interest expense | — |
| | (411 | ) | | (86 | ) | | (144 | ) | | — |
| | (641 | ) |
Interest expense to affiliates | — |
| | (419 | ) | | (14 | ) | | — |
| | 15 |
| | (418 | ) |
Interest income | — |
| | 17 |
| | 14 |
| | 1 |
| | (15 | ) | | 17 |
|
Other (expense) income, net | — |
| | (91 | ) | | 41 |
| | (1 | ) | | — |
| | (51 | ) |
Total other (expense) income, net | — |
| | (904 | ) | | (45 | ) | | (144 | ) | | — |
| | (1,093 | ) |
Income (loss) before income taxes | — |
| | (903 | ) | | 3,866 |
| | 116 |
| | — |
| | 3,079 |
|
Income tax expense | — |
| | — |
| | (806 | ) | | (25 | ) | | — |
| | (831 | ) |
Earnings of subsidiaries | 2,248 |
| | 3,151 |
| | 25 |
| | — |
| | (5,424 | ) | | — |
|
Net income | $ | 2,248 |
| | $ | 2,248 |
| | $ | 3,085 |
| | $ | 91 |
| | $ | (5,424 | ) | | $ | 2,248 |
|
Dividends on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income attributable to common stockholders | $ | 2,248 |
| | $ | 2,248 |
| | $ | 3,085 |
| | $ | 91 |
| | $ | (5,424 | ) | | $ | 2,248 |
|
| | | | | | | | | | | |
Net income | $ | 2,248 |
| | $ | 2,248 |
| | $ | 3,085 |
| | $ | 91 |
| | $ | (5,424 | ) | | $ | 2,248 |
|
Other comprehensive income, net of tax | | | | | | | | | | | |
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total comprehensive income | $ | 2,248 |
| | $ | 2,248 |
| | $ | 3,085 |
| | $ | 91 |
| | $ | (5,424 | ) | | $ | 2,248 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (248 | ) | | $ | 2,797 |
| | $ | (1,017 | ) | | $ | (140 | ) | | $ | 1,392 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (1,926 | ) | | (5 | ) | | — |
| | (1,931 | ) |
Purchases of spectrum licenses and other intangible assets, including deposits | — |
| | — |
| | (185 | ) | | — |
| | — |
| | (185 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 9 |
| | 1,148 |
| | — |
| | 1,157 |
|
Other, net | — |
| | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) |
Net cash (used in) provided by investing activities | — |
| | — |
| | (2,109 | ) | | 1,143 |
| | — |
| | (966 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from borrowing on revolving credit facility, net | — |
| | 885 |
| | — |
| | — |
| | — |
| | 885 |
|
Repayments of revolving credit facility | — |
| | — |
| | (885 | ) | | — |
| | — |
| | (885 | ) |
Repayments of financing lease obligations | — |
| | — |
| | (85 | ) | | (1 | ) | | — |
| | (86 | ) |
Intercompany advances, net | — |
| | (636 | ) | | 622 |
| | 14 |
| | — |
| | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (100 | ) | | — |
| | — |
| | (100 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | (140 | ) | | 140 |
| | — |
|
Other, net | 1 |
| | — |
| | (5 | ) | | — |
| | — |
| | (4 | ) |
Net cash provided (used in) by financing activities | 1 |
| | 249 |
| | (453 | ) | | (127 | ) | | 140 |
| | (190 | ) |
Change in cash and cash equivalents | 1 |
| | 1 |
| | 235 |
| | (1 | ) | | — |
| | 236 |
|
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 2 |
| | 1 |
| | 1,079 |
| | 121 |
| | — |
| | 1,203 |
|
End of period | $ | 3 |
| | $ | 2 |
| | $ | 1,314 |
| | $ | 120 |
| | $ | — |
| | $ | 1,439 |
|
Condensed Consolidating Statement of Comprehensive Income Information
Nine Months Ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Revenues | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | — |
| | $ | 21,457 |
| | $ | 1,580 |
| | $ | (634 | ) | | $ | 22,403 |
|
Equipment revenues | — |
| | — |
| | 6,878 |
| | — |
| | (211 | ) | | 6,667 |
|
Other revenues | — |
| | — |
| | 634 |
| | 158 |
| | (17 | ) | | 775 |
|
Total revenues | — |
| | — |
| | 28,969 |
| | 1,738 |
| | (862 | ) | | 29,845 |
|
Operating expenses | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 4,502 |
| | 18 |
| | — |
| | 4,520 |
|
Cost of equipment sales | — |
| | — |
| | 7,622 |
| | 738 |
| | (211 | ) | | 8,149 |
|
Selling, general and administrative | — |
| | — |
| | 8,967 |
| | 652 |
| | (651 | ) | | 8,968 |
|
Depreciation and amortization | — |
| | — |
| | 4,446 |
| | 53 |
| | — |
| | 4,499 |
|
Gains on disposal of spectrum licenses | — |
| | — |
| | (67 | ) | | — |
| | — |
| | (67 | ) |
Total operating expenses | — |
| | — |
| | 25,470 |
| | 1,461 |
| | (862 | ) | | 26,069 |
|
Operating income | — |
| | — |
| | 3,499 |
| | 277 |
| | — |
| | 3,776 |
|
Other income (expense) | | | | | | | | | | | |
Interest expense | — |
| | (634 | ) | | (80 | ) | | (143 | ) | | — |
| | (857 | ) |
Interest expense to affiliates | — |
| | (398 | ) | | (18 | ) | | — |
| | 18 |
| | (398 | ) |
Interest income | — |
| | 24 |
| | 9 |
| | — |
| | (18 | ) | | 15 |
|
Other income (expense), net | — |
| | (87 | ) | | (1 | ) | | (1 | ) | | — |
| | (89 | ) |
Total other expense, net | — |
| | (1,095 | ) | | (90 | ) | | (144 | ) | | — |
| | (1,329 | ) |
Income (loss) before income taxes | — |
| | (1,095 | ) | | 3,409 |
| | 133 |
| | — |
| | 2,447 |
|
Income tax expense | — |
| | — |
| | (572 | ) | | (46 | ) | | — |
| | (618 | ) |
Earnings (loss) of subsidiaries | 1,829 |
| | 2,924 |
| | (17 | ) | | — |
| | (4,736 | ) | | — |
|
Net income | 1,829 |
| | 1,829 |
| | 2,820 |
| | 87 |
| | (4,736 | ) | | 1,829 |
|
Dividends on preferred stock | (41 | ) | | — |
| | — |
| | — |
| | — |
| | (41 | ) |
Net income attributable to common stockholders | $ | 1,788 |
| | $ | 1,829 |
| | $ | 2,820 |
| | $ | 87 |
| | $ | (4,736 | ) | | $ | 1,788 |
|
| | | | | | | | | | | |
Net income | $ | 1,829 |
| | $ | 1,829 |
| | $ | 2,820 |
| | $ | 87 |
| | $ | (4,736 | ) | | $ | 1,829 |
|
Other comprehensive income, net of tax | | | | | | | | | | | |
Other comprehensive income, net of tax | 3 |
| | 3 |
| | 3 |
| | — |
| | (6 | ) | | 3 |
|
Total comprehensive income | $ | 1,832 |
| | $ | 1,832 |
| | $ | 2,823 |
| | $ | 87 |
| | $ | (4,742 | ) | | $ | 1,832 |
|
Condensed Consolidating Statement of Cash Flows Information
Three Months Ended September 30,March 31, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | 1 |
| | $ | (404 | ) | | $ | 2,374 |
| | $ | (1,201 | ) | | $ | — |
| | $ | 770 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (1,366 | ) | | — |
| | — |
| | (1,366 | ) |
Purchases of spectrum licenses and other intangible assets, including deposits | — |
| | — |
| | (51 | ) | | — |
| | — |
| | (51 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 13 |
| | 1,282 |
| | — |
| | 1,295 |
|
Acquisition of companies, net of cash | — |
| | — |
| | (333 | ) | | — |
| | — |
| | (333 | ) |
Other, net | �� |
| | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) |
Net cash (used in) provided by investing activities | — |
| | — |
| | (1,744 | ) | | 1,282 |
| | — |
| | (462 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from issuance of long-term debt | — |
| | 2,494 |
| | — |
| | — |
| | — |
| | 2,494 |
|
Proceeds from borrowing on revolving credit facility, net | — |
| | 2,170 |
| | — |
| | — |
| | — |
| | 2,170 |
|
Repayments of revolving credit facility | — |
| | — |
| | (1,725 | ) | | — |
| | — |
| | (1,725 | ) |
Repayments of financing lease obligations | — |
| | — |
| | (172 | ) | | — |
| | — |
| | (172 | ) |
Repayments of long-term debt | — |
| | — |
| | (999 | ) | | — |
| | — |
| | (999 | ) |
Repurchases of common stock | (666 | ) | | — |
| | — |
| | — |
| | — |
| | (666 | ) |
Intercompany advances, net | 590 |
| | (4,260 | ) | | 3,679 |
| | (9 | ) | | — |
| | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (74 | ) | | — |
| | — |
| | (74 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (31 | ) | | — |
| | — |
| | (31 | ) |
Other, net | 2 |
| | — |
| | 1 |
| | — |
| | — |
| | 3 |
|
Net cash provided by (used in) financing activities | (74 | ) | | 404 |
| | 679 |
| | (9 | ) | | — |
| | 1,000 |
|
Change in cash and cash equivalents | (73 | ) | | — |
| | 1,309 |
| | 72 |
| | — |
| | 1,308 |
|
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 74 |
| | 1 |
| | 1,086 |
| | 58 |
| | — |
| | 1,219 |
|
End of period | $ | 1 |
| | $ | 1 |
| | $ | 2,395 |
| | $ | 130 |
| | $ | — |
| | $ | 2,527 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (429 | ) | | $ | 2,713 |
| | $ | (1,320 | ) | | $ | (50 | ) | | $ | 914 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (1,355 | ) | | (7 | ) | | — |
| | (1,362 | ) |
Purchases of spectrum licenses and other intangible assets | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 12 |
| | 1,326 |
| | — |
| | 1,338 |
|
Acquisition of companies, net of cash acquired | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Equity investment in subsidiary | — |
| | — |
| | (17 | ) | | — |
| | 17 |
| | — |
|
Other, net | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Net cash (used in) provided by investing activities | — |
| | — |
| | (1,378 | ) | | 1,319 |
| | 17 |
| | (42 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from issuance of long-term debt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Payments of consent fees related to long-term debt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Proceeds from borrowing on revolving credit facility, net | — |
| | 1,810 |
| | — |
| | — |
| | — |
| | 1,810 |
|
Repayments of revolving credit facility | — |
| | — |
| | (2,130 | ) | | — |
| | — |
| | (2,130 | ) |
Repayments of capital lease obligations | — |
| | — |
| | (180 | ) | | (1 | ) | | — |
| | (181 | ) |
Repayments of short-term debt for purchases of inventory, property and equipment, net | — |
| | — |
| | (246 | ) | | — |
| | — |
| | (246 | ) |
Repayments of long-term debt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Intercompany advances, net | — |
| | (1,383 | ) | | 1,342 |
| | 41 |
| | — |
| | — |
|
Equity investment from parent | — |
| | — |
| | — |
| | 17 |
| | (17 | ) | | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Intercompany dividend paid | — |
| | — |
| | — |
| | (50 | ) | | 50 |
| | — |
|
Other, net | 1 |
| | — |
| | (7 | ) | | — |
| | — |
| | (6 | ) |
Net cash provided by (used in) financing activities | 1 |
| | 427 |
| | (1,226 | ) | | 7 |
| | 33 |
| | (758 | ) |
Change in cash and cash equivalents | 1 |
| | (2 | ) | | 109 |
| | 6 |
| | — |
| | 114 |
|
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 1 |
| | 3 |
| | 163 |
| | 48 |
| | — |
| | 215 |
|
End of period | $ | 2 |
| | $ | 1 |
| | $ | 272 |
| | $ | 54 |
| | $ | — |
| | $ | 329 |
|
Condensed Consolidating Statement of Cash Flows Information
Three Months Ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | (2 | ) | | $ | (282 | ) | | $ | 2,609 |
| | $ | (1,073 | ) | | $ | — |
| | $ | 1,252 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (1,441 | ) | | — |
| | — |
| | (1,441 | ) |
Purchases of spectrum licenses and other intangible assets | — |
| | — |
| | (15 | ) | | — |
| | — |
| | (15 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 11 |
| | 1,099 |
| | — |
| | 1,110 |
|
Equity investment in subsidiary | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other, net | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Net cash (used in) provided by investing activities | — |
| | — |
| | (1,444 | ) | | 1,099 |
| | — |
| | (345 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from issuance of long-term debt | — |
| | 500 |
| | — |
| | — |
| | — |
| | 500 |
|
Proceeds from borrowing on revolving credit facility, net | — |
| | 1,055 |
| | — |
| | — |
| | — |
| | 1,055 |
|
Repayments of revolving credit facility | — |
| | — |
| | (1,735 | ) | | — |
| | — |
| | (1,735 | ) |
Repayments of capital lease obligations | — |
| | — |
| | (141 | ) | | — |
| | — |
| | (141 | ) |
Repayments of short-term debt for purchases of inventory, property and equipment, net | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Repayments of long-term debt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Intercompany advances, net | — |
| | (1,272 | ) | | 1,284 |
| | (12 | ) | | — |
| | — |
|
Equity investment from parent | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Dividends on preferred stock | (13 | ) | | — |
| | — |
| | — |
| | — |
| | (13 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other, net | 1 |
| | — |
| | (6 | ) | | — |
| | — |
| | (5 | ) |
Net cash (used in) provided by financing activities | (12 | ) | | 283 |
| | (608 | ) | | (12 | ) | | — |
| | (349 | ) |
Change in cash and cash equivalents | (14 | ) | | 1 |
| | 557 |
| | 14 |
| | — |
| | 558 |
|
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 43 |
| | 1 |
| | 121 |
| | 16 |
| | — |
| | 181 |
|
End of period | $ | 29 |
| | $ | 2 |
| | $ | 678 |
| | $ | 30 |
| | $ | — |
| | $ | 739 |
|
Balances have been revised based on the guidance in ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” See Note 1 - Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements, for further information.
Condensed Consolidating Statement of Cash Flows Information
Nine Months Ended September 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (1,091 | ) | | $ | 8,019 |
| | $ | (3,803 | ) | | $ | (180 | ) | | $ | 2,945 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (4,345 | ) | | (12 | ) | | — |
| | (4,357 | ) |
Purchases of spectrum licenses and other intangible assets | — |
| | — |
| | (101 | ) | | — |
| | — |
| | (101 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 37 |
| | 3,919 |
| | — |
| | 3,956 |
|
Acquisition of companies, net of cash acquired | — |
| | — |
| | (338 | ) | | — |
| | — |
| | (338 | ) |
Equity investment in subsidiary | — |
| | — |
| | (43 | ) | | — |
| | 43 |
| | — |
|
Other, net | — |
| | — |
| | 30 |
| | — |
| | — |
| | 30 |
|
Net cash (used in) provided by investing activities | — |
| | — |
| | (4,760 | ) | | 3,907 |
| | 43 |
| | (810 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from issuance of long-term debt | — |
| | 2,494 |
| | — |
| | — |
| | — |
| | 2,494 |
|
Payments of consent fees related to long-term debt | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
Proceeds from borrowing on revolving credit facility, net | — |
| | 6,050 |
| | — |
| | — |
| | — |
| | 6,050 |
|
Repayments of revolving credit facility | — |
| | — |
| | (6,050 | ) | | — |
| | — |
| | (6,050 | ) |
Repayments of capital lease obligations | — |
| | — |
| | (506 | ) | | (2 | ) | | — |
| | (508 | ) |
Repayments of short-term debt for purchases of inventory, property and equipment, net | — |
| | — |
| | (246 | ) | | — |
| | — |
| | (246 | ) |
Repayments of long-term debt | — |
| | — |
| | (3,349 | ) | | — |
| | — |
| | (3,349 | ) |
Repurchases of common stock | (1,071 | ) | | — |
| | — |
| | — |
| | — |
| | (1,071 | ) |
Intercompany advances, net | 995 |
| | (7,453 | ) | | 6,427 |
| | 31 |
| | — |
| | — |
|
Equity investment from parent | — |
| | — |
| | — |
| | 43 |
| | (43 | ) | | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (89 | ) | | — |
| | — |
| | (89 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (212 | ) | | — |
| | — |
| | (212 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | (180 | ) | | 180 |
| | — |
|
Other, net | 4 |
| | — |
| | (10 | ) | | — |
| | — |
| | (6 | ) |
Net cash (used in) provided by financing activities | (72 | ) | | 1,091 |
| | (4,073 | ) | | (108 | ) | | 137 |
| | (3,025 | ) |
Change in cash and cash equivalents | (72 | ) | | — |
| | (814 | ) | | (4 | ) | | — |
| | (890 | ) |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 74 |
| | 1 |
| | 1,086 |
| | 58 |
| | — |
| | 1,219 |
|
End of period | $ | 2 |
| | $ | 1 |
| | $ | 272 |
| | $ | 54 |
| | $ | — |
| | $ | 329 |
|
Condensed Consolidating Statement of Cash Flows Information
Nine Months Ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | — |
| | $ | (1,211 | ) | | $ | 7,280 |
| | $ | (3,023 | ) | | $ | (80 | ) | | $ | 2,966 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (4,316 | ) | | — |
| | — |
| | (4,316 | ) |
Purchases of spectrum licenses and other intangible assets | — |
| | — |
| | (5,820 | ) | | — |
| | — |
| | (5,820 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 32 |
| | 3,094 |
| | — |
| | 3,126 |
|
Equity investment in subsidiary | (308 | ) | | — |
| | — |
| | — |
| | 308 |
| | — |
|
Other, net | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) |
Net cash (used in) provided by investing activities | (308 | ) | | — |
| | (10,106 | ) | | 3,094 |
| | 308 |
| | (7,012 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from issuance of long-term debt | — |
| | 10,480 |
| | — |
| | — |
| | — |
| | 10,480 |
|
Proceeds from borrowing on revolving credit facility, net | — |
| | 2,910 |
| | — |
| | — |
| | — |
| | 2,910 |
|
Repayments of revolving credit facility | — |
| | — |
| | (2,910 | ) | | — |
| | — |
| | (2,910 | ) |
Repayments of capital lease obligations | — |
| | — |
| | (350 | ) | | — |
| | — |
| | (350 | ) |
Repayments of short-term debt for purchases of inventory, property and equipment, net | — |
| | — |
| | (296 | ) | | — |
| | — |
| | (296 | ) |
Repayments of long-term debt | — |
| | — |
| | (10,230 | ) | | — |
| | — |
| | (10,230 | ) |
Intercompany advances, net | — |
| | (15,218 | ) | | 15,246 |
| | (28 | ) | | — |
| | — |
|
Equity investment from parent | — |
| | 308 |
| | — |
| | — |
| | (308 | ) | | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (101 | ) | | — |
| | — |
| | (101 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (188 | ) | | — |
| | — |
| | (188 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | (80 | ) | | 80 |
| | — |
|
Dividends on preferred stock | (41 | ) | | — |
| | — |
| | — |
| | — |
| | (41 | ) |
Other, net | 20 |
| | — |
| | (9 | ) | | — |
| | — |
| | 11 |
|
Net cash (used in) provided by financing activities | (21 | ) | | (1,520 | ) | | 1,162 |
| | (108 | ) | | (228 | ) | | (715 | ) |
Change in cash and cash equivalents | (329 | ) | | (2,731 | ) | | (1,664 | ) | | (37 | ) | | — |
| | (4,761 | ) |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 358 |
| | 2,733 |
| | 2,342 |
| | 67 |
| | — |
| | 5,500 |
|
End of period | $ | 29 |
| | $ | 2 |
| | $ | 678 |
| | $ | 30 |
| | $ | — |
| | $ | 739 |
|
Balances have been revised based on the guidance in ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” See Note 1 - Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements, for further information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including information concerning our future results of operations, are forward-looking statements. These forward-looking statements are generally identified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could” or similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties and may cause actual results to differ materially from the forward-looking statements. The following important factors, along with the Risk Factors included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, as supplemented by the Risk Factors included in Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, the Risk Factors included in Part II, Item 1A “Risk Factors” below and the risk factors contained in the section entitled “Risk Factors” in the final joint consent solicitation/proxy statement of T-Mobile and Sprint dated October 29, 2018 forming part of our registration statement on Form S-4 (Registration No. 333-226435) filed with the SEC, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:
the failure to obtain, or delays in obtaining, required regulatory approvals for the Transactions (as defined below)merger (the “Merger”) with Sprint Corporation (“Sprint”), pursuant to the Business Combination Agreement with Sprint and other parties therein (the “Business Combination Agreement”) and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”), and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the Transactions, or the failure to satisfy any of the other conditions to the Transactions on a timely basis or at all;
the occurrence of events that may give rise to a right of one or both of the parties to terminate the Business Combination Agreement (as defined below);Agreement;
adverse effects on the market price of our common stock or on our or Sprint’s operating results because of a failure to complete the Merger (as defined below) in the anticipated timeframe or at all;
inability to obtain the financing contemplated to be obtained in connection with the Transactions on the expected terms or timing or at all;
the ability of us, Sprint and the combined company to make payments on debt or to repay existing or future indebtedness when due or to comply with the covenants contained therein;
adverse changes in the ratings of our or Sprint’s debt securities or adverse conditions in the credit markets;
negative effects of the announcement, pendency or consummation of the Transactions on the market price of our common stock and on our or Sprint’s operating results, including as a result of changes in key customer, supplier, employee or other business relationships;
significant costs related to the Transactions, including financing costs and unknown liabilities of Sprint or that may arise;
failure to realize the expected benefits and synergies of the Transactions in the expected timeframes or at all;
costs or difficulties related to the integration of Sprint’s network and operations into our network and operations;
the risk of litigation or regulatory actions related to the Transactions;
the inability of us, Sprint or the combined company to retain and hire key personnel;
the risk that certain contractual restrictions contained in the Business Combination Agreement during the pendency of the Transactions could adversely affect our or Sprint’s ability to pursue business opportunities or strategic transactions;
adverse economic, political or politicalmarket conditions in the U.S. and international markets;
competition, industry consolidation, and changes in the market for wireless services, which could negatively affect our ability to attract and retain customers;
the effects of any future merger, investment, or acquisition involving us, as well as the effects of mergers, investments, or acquisitions in the technology, media and telecommunications industry;
challenges in implementing our business strategies or funding our operations, including payment for additional spectrum or network upgrades;
the possibility that we may be unable to renew our spectrum licenses on attractive terms or acquire new spectrum licenses at reasonable costs and terms;
difficulties in managing growth in wireless data services, including network quality;
material changes in available technology and the effects of such changes, including product substitutions and deployment costs and performance;
the timing, scope and financial impact of our deployment of advanced network and business technologies;
the impact on our networks and business from major technology equipment failures;
breaches of our and/or our third-party vendors’ networks, information technology (“IT”) and data security, resulting in unauthorized access to customer confidential information;
natural disasters, terrorist attacks or similar incidents;
unfavorable outcomes of existing or future litigation;
any changes in the regulatory environments in which we operate, including any increase in restrictions on the ability to operate our networks and changes in data privacy laws;
any disruption or failure of our third parties’ or key suppliers’ provisioning of products or services;
material adverse changes in labor matters, including labor campaigns, negotiations or additional organizing activity, and any resulting financial, operational and/or reputational impact;
changes in accounting assumptions that regulatory agencies, including the Securities and Exchange Commission (“SEC”), may require, which could result in an impact on earnings;
changes in tax laws, regulations and existing standards and the resolution of disputes with any taxing jurisdictions; and
the possibility that the reset process under our trademark license with Deutsche Telekom AG (“DT”) results in changes to the royalty rates for our trademarks.trademarks;
the possibility that we may be unable to adequately protect our intellectual property rights or be accused of infringing the intellectual property rights of others;
our business, investor confidence in our financial results and stock price may be adversely affected if our internal controls are not effective;
the occurrence of high fraud rates related to device financing, credit card, dealers, or subscriptions; and
interests of a majority stockholder may differ from the interests of other stockholders.
Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. In this Form 10-Q, unless the context indicates otherwise, references to “T-Mobile,” “T-Mobile US,” “our Company,” “the Company,” “we,” “our,” and “us” refer to T-Mobile US, Inc., a Delaware corporation, and its wholly-owned subsidiaries.
Investors and others should note that we announce material financial and operational information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use the @TMobileIR Twitter account (https://twitter.com/TMobileIR) and the @JohnLegere Twitter (https://twitter.com/JohnLegere), Facebook and Periscope accounts, which Mr. Legere also uses as means for personal communications and observations, as means of disclosing information about the Companyus and itsour services and for complying with itsour disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these social media channels in addition to following the Company’sour press releases, SEC filings and public conference calls and webcasts. The social media channels that we intend to use as a means of disclosing the information described above may be updated from time to time as listed on the Company’sour investor relations website.
Overview
The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our condensed consolidated financial statements with the following:
A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results;
Context to the financial statements; and
Information that allows assessment of the likelihood that past performance is indicative of future performance.
Our MD&A is provided as a supplement to, and should be read together with, our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2018,March 31, 2019, included in Part I, Item 1 of this Form 10-Q and audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017 (together with our Current Report on Form 8-K filed June 18, 2018, which is incorporated by reference herein).2018. Except as expressly stated, the financial condition and results of operations discussed throughout our MD&A are those of T-Mobile US, Inc. and its consolidated subsidiaries.
Business Overview
In April 2019, T-Mobile introduced TVisionTM Home, a rebranded and upgraded version of Layer3 TV. TVisionTM Home delivers what customers want most from high-end home TV, including a premium TV experience and HD and 4K channels. TVisionTM Home launched in eight markets, with other markets coming later in 2019.
In August 2018, we introduced Un-carrier Next,April 2019, T-Mobile launched T-Mobile MONEY nationwide, offering customers a new initiative that radically changes the structure of our customer service departmentno-fee, interest-earning, mobile-first checking account which can be opened and solves several significant pain points for customers. Postpaid customers will get directly through to a human when they call customer support, and that human will be one member of a “Team of Experts” devoted to that customer and other customers in their geographic region. No bots, no bouncing, no BS.managed from customers’ smartphones.
Un-carrier Next also provided T-Mobile customers exclusive access to a free one-year Pandora Plus subscription via the T-Mobile Tuesdays App on August 28, 2018. In addition, we announced an exclusive multi-year partnership with Live Nation, the world’s largest live entertainment company, giving Un-carrier customers rock star status at Live Nation amphitheater and arena concerts, including access to last-minute reserve seats in sold-out sections and discounted tickets.
In September 2018, we announced the rebranding of our prepaid brand, MetroPCS, as MetroTM by T-Mobile (“Metro”) and introduced new unlimited rate plans with tiers that feature added benefits of Google One and Amazon Prime as well as an expanded selection of the latest and greatest smartphones. Gone are the outdated perceptions that prepaid service is synonymous with limited coverage, cheap flip phones or bad credit.
Proposed Sprint Transaction
On April 29, 2018, we entered into a business combination agreement (“the Business Combination Agreement”)Agreement to merge with Sprint Corporation (“Sprint”) to merge in an all-stock transaction at a fixed exchange ratio of 0.10256 shares of T-Mobile common stock for each share of Sprint common stock, or 9.75 shares of Sprint common stock for each share of T-Mobile common stock (the “Merger,” and together with the other transactions contemplated by the Business Combination Agreement, the “Transactions”).stock. The combined company will be named “T-Mobile,”“T-Mobile” and, as a result of the Merger, is expected to be able to rapidly launch a broad and deep nationwide 5G network, accelerate innovation and increase competition in the U.S. wireless, video and broadband industries. Immediately following the Merger, it is anticipated that DT and SoftBank Group Corp. will hold, directly or indirectly, on a fully diluted basis, approximately 41.7% and 27.3%27.4%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 31.0%30.9% of the outstanding T-Mobile common stock held by other stockholders, based on closing share prices and certain other assumptions as of the date of the Business Combination Agreement.December 31, 2018. The Merger is subject to regulatory approvals and certain other customary closing conditions and is expectedconditions. We expect to closereceive federal regulatory approval in the first half of 2019.
to the Condensed Consolidated Financial Statements.
Acquisitions
On January 1, 2018, we closed on our previously announced Unit Purchase Agreement to acquire the remaining equity in Iowa Wireless Services, LLC (“IWS”), a 54% owned unconsolidated subsidiary, for a purchase price of $25 million. We accounted for our acquisition of IWS as a business combination and recognized a bargain purchase gain of approximately $25 million as part of our purchase price allocation and a gain on our previously held equity interest of approximately $15 million in Other income, net in the nine months ended September 30, 2018.
On January 22, 2018, we completed our acquisition of television innovator Layer3 TV, Inc. (“Layer3 TV”) for cash consideration of $318 million. Upon closing of the transaction, Layer3 TV became a wholly-owned consolidated subsidiary. Layer3 TV acquires and distributes digital entertainment programming primarily through the internet to residential customers, offering direct to home digital television and multi-channel video programming distribution services. This transaction represented an opportunity to acquire a complementary service to our existing wireless service to advance our video strategy. We accounted for the purchase of Layer3 TV as a business combination and recognized $218 million of goodwill as part of our purchase price allocation.
For more information regarding our acquisitions, see Note 3 - Business Combinations in the Notes to the Condensed Consolidated Financial Statements.Statements.
Accounting Pronouncements Adopted During the Current Year
Revenue RecognitionLeases
The impact of our adoption of the new revenue standard is presented in Note 1 – Summary of Significant Accounting Policies and in the following table which presents a comparison of selected financial information under both the new revenue standard and the previous revenue standard for the three and nine months ended September 30, 2018: |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| Previous Revenue Standard | | New Revenue Standard | | Change | | Previous Revenue Standard | | New Revenue Standard | | Change |
Performance Measures | | | | | | | | | | | |
Branded postpaid phone ARPU | $ | 46.15 |
| | $ | 46.17 |
| | $ | 0.02 |
| | $ | 46.51 |
| | $ | 46.44 |
| | $ | (0.07 | ) |
Branded postpaid ABPU | $ | 57.68 |
| | $ | 57.69 |
| | $ | 0.01 |
| | $ | 58.78 |
| | $ | 58.71 |
| | $ | (0.07 | ) |
Branded prepaid ARPU | $ | 38.36 |
| | $ | 38.34 |
| | $ | (0.02 | ) | | $ | 38.59 |
| | $ | 38.57 |
| | $ | (0.02 | ) |
Non-GAAP financial measures | | | | | | | | | | | |
Adjusted EBITDA (in millions) | $ | 3,103 |
| | $ | 3,239 |
| | $ | 136 |
| | $ | 9,113 |
| | $ | 9,428 |
| | $ | 315 |
|
Statement of Cash Flows
On January 1, 2018, we adopted ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (the “new cash flow standard”) which impacted the presentation of our cash flows related to our beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities of approximately $1.3 billion and $1.1 billion for the three months ended September 30, 2018 and 2017, respectively, and $4.0 billion and $3.1 billion for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. The new cash flow standard also impacted the presentation of our cash payments for debt prepayment and debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities of $212 million and $188 million for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. There were no cash payments for debt prepayment and debt extinguishment costs during the three months ended September 30, 2018 and 2017. We have applied the new cash flow standard retrospectively to all periods presented.
Financial Instruments
In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, “Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities.” The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The standard became effective for us, and we adopted the standard, on January 1, 2018. The standard requires the impact of adoption to be recorded to retained earnings under a modified retrospective approach. The implementation of this standard did not have a material impact on our condensed consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. The standard became effective for us, and we adopted the standard, on January 1, 2018. The standard requires any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. The implementation of this standard did not have a material impact on our condensed consolidated financial statements.
Hurricane Impacts
During the first quarter of 2018, we recognized $36 million in incremental costs to maintain services in Puerto Rico related to hurricanes that occurred in 2017. Additional costs incurred during the second and the third quarters related to hurricanes that occurred in 2017 were immaterial and are expected to be immaterial in the fourth quarter of 2018. During the first quarter of 2018, we received reimbursement payments from our insurance carriers of $94 million, previously accrued for as a receivable as of December 31, 2017. During the second quarter of 2018, we received reimbursement payments of $70 million. During the third quarter of 2018, we received reimbursement payments of $81 million and accrued an additional receivable of $63 million for reimbursement payments agreed to with our insurance carriers as of September 30, 2018 and received in October 2018.
During the third quarter of 2018, our operations in North Carolina and South Carolina experienced losses related to a hurricane, and we recognized $6 million in costs associated with these losses. Additional costs related to the hurricane are expected to be immaterial in the fourth quarter of 2018.
In October 2018, our operations in Florida experienced immaterial losses related to a hurricane. Additional costs related to the hurricane are expected to be incurred during the remainder of the fourth quarter of 2018.
The following table shows the hurricane impacts to our results, operating metrics and non-GAAP financial measures for the three and nine months ended September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
(in millions, except per share amounts) | Gross | | Reim- bursement | | Net | | Gross | | Reim- bursement | | Net |
Increase (decrease) | | | | | | | | | | | |
Revenues | | | | | | | | | | | |
Other revenues | $ | — |
| | $ | 71 |
| | $ | 71 |
| | $ | — |
| | $ | 71 |
| | $ | 71 |
|
Total revenues | $ | — |
| | $ | 71 |
| | $ | 71 |
| | $ | — |
| | $ | 71 |
| | $ | 71 |
|
Operating expenses | | | | | | | | | | | |
Cost of services | $ | 6 |
| | $ | (60 | ) | | $ | (54 | ) | | $ | 42 |
| | $ | (130 | ) | | $ | (88 | ) |
Selling, general and administrative | — |
| | (13 | ) | | (13 | ) | | — |
| | (13 | ) | | (13 | ) |
Total operating expenses | $ | 6 |
| | $ | (73 | ) | | $ | (67 | ) | | $ | 42 |
| | $ | (143 | ) | | $ | (101 | ) |
Operating income (loss) | $ | (6 | ) | | $ | 144 |
| | $ | 138 |
| | $ | (42 | ) | | $ | 214 |
| | $ | 172 |
|
Net income (loss) | $ | (4 | ) | | $ | 92 |
| | $ | 88 |
| | $ | (27 | ) | | $ | 137 |
| | $ | 110 |
|
Earnings per share - basic | $ | (0.01 | ) | | $ | 0.11 |
| | $ | 0.10 |
| | $ | (0.03 | ) | | $ | 0.16 |
| | $ | 0.13 |
|
Earnings per share - diluted | $ | (0.01 | ) | | $ | 0.11 |
| | $ | 0.10 |
| | $ | (0.03 | ) | | $ | 0.16 |
| | $ | 0.13 |
|
Non-GAAP financial measures | | | | | | | | | | | |
Adjusted EBITDA | $ | (6 | ) | | $ | 144 |
| | $ | 138 |
| | $ | (42 | ) | | $ | 214 |
| | $ | 172 |
|
The following table shows the hurricane impacts to our results, operating metrics and non-GAAP financial measures for the three and nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
(in millions, except per share amounts) | Gross | | Reim- bursement | | Net | | Gross | | Reim- bursement | | Net |
Increase (decrease) | | | | | | | | | | | |
Revenues | | | | | | | | | | | |
Branded postpaid revenues | $ | (20 | ) | | $ | — |
| | $ | (20 | ) | | $ | (20 | ) | | $ | — |
| | $ | (20 | ) |
Of which, postpaid phone revenues | (19 | ) | | — |
| | (19 | ) | | (19 | ) | | — |
| | (19 | ) |
Branded prepaid revenues | (11 | ) | | — |
| | (11 | ) | | (11 | ) | | — |
| | (11 | ) |
Total service revenues | (31 | ) | | — |
| | (31 | ) | | (31 | ) | | — |
| | (31 | ) |
Equipment revenues | (8 | ) | | — |
| | (8 | ) | | (8 | ) | | — |
| | (8 | ) |
Total revenues | $ | (39 | ) | | $ | — |
| | $ | (39 | ) | | $ | (39 | ) | | $ | — |
| | $ | (39 | ) |
Operating expenses | | | | | | | | | | | |
Cost of services | $ | 69 |
| | $ | — |
| | $ | 69 |
| | $ | 69 |
| | $ | — |
| | $ | 69 |
|
Cost of equipment sales | 4 |
| | — |
| | 4 |
| | 4 |
| | — |
| | 4 |
|
Selling, general and administrative | 36 |
| | — |
| | 36 |
| | 36 |
| | — |
| | 36 |
|
Of which, bad debt | 20 |
| | — |
| | 20 |
| | 20 |
| | — |
| | 20 |
|
Total operating expenses | $ | 109 |
| | $ | — |
| | $ | 109 |
| | $ | 109 |
| | $ | — |
| | $ | 109 |
|
Operating income (loss) | $ | (148 | ) | | $ | — |
| | $ | (148 | ) | | $ | (148 | ) | | $ | — |
| | $ | (148 | ) |
Net income (loss) | $ | (90 | ) | | $ | — |
| | $ | (90 | ) | | $ | (90 | ) | | $ | — |
| | $ | (90 | ) |
Earnings per share - basic | $ | (0.11 | ) | | $ | — |
| | $ | (0.11 | ) | | $ | (0.11 | ) | | $ | — |
| | $ | (0.11 | ) |
Earnings per share - diluted | $ | (0.10 | ) | | $ | — |
| | $ | (0.10 | ) | | $ | (0.10 | ) | | $ | — |
| | $ | (0.10 | ) |
Operating metrics | | | | | | | | | | | |
Bad debt expense and losses from sales of receivables as a percentage of total revenues | | | | | 0.20 | % | | | | | | 0.07 | % |
Non-GAAP financial measures | | | | | | | | | | | |
Adjusted EBITDA | (148 | ) | | — |
| | (148 | ) | | (148 | ) | | — |
| | (148 | ) |
lease standard.
Results of Operations
Highlights for the three months ended September 30, 2018,March 31, 2019, compared to the same period in 20172018
Total revenues of $10.8$11.1 billion for the three months ended September 30, 2018March 31, 2019 increased $820$625 million, or 8%6%, primarily driven by growth in service and equipment revenues as further discussed below.
Service revenues of $8.1$8.3 billion for the three months ended September 30, 2018March 31, 2019 increased $437$471 million, or 6%, primarily due to growth in our average branded customer base driven by the continued growth in existing and Greenfield markets, including the growing success of new customer segments and rate plans such as T-Mobile for Business, T-Mobile ONE Unlimited 55+, and T-Mobile ONE Military, T-Mobile for Business and T-Mobile Essentials, along with lowerrecord low churn and growth in wearables and other connected devices and the success of our Metro brand.devices.
Equipment revenues of $2.4$2.5 billion for the three months ended September 30, 2018March 31, 2019 increased $273$163 million, or 13%7%, primarily due to a higher average revenue per device sold, and the positive impact from the new revenue standard of $105 million, partially offset by a decrease in the number of devices sold, excluding purchased lease devices, lower volumes of purchased leased devices at the end of the lease term, and a decrease in the proceeds from liquidation of returned customer handsets.devices.
Operating income of $1.4$1.5 billion for the three months ended September 30, 2018March 31, 2019 increased $117$194 million, or 9%15%, primarily due to higher TotalService revenues, partially offset by higher Cost of equipment sales, Depreciation and amortization and Selling, general and administrative expenses. Operating income for the three months ended September 30, 2018 included the positive impacts from the adoption of the new revenue standard of $136 million and insurance reimbursements related to the hurricanes, net ofexpenses, including merger-related costs of $138 million as well as the negative impact of costs associated with the Transactions of $53$113 million. Operating income also included the negative impact from hurricanes of $148$36 million and gains on disposalfor three months ended March 31, 2018.
Net income of spectrum licenses of $29$908 million for the three months ended September 30, 2017.
Net income of $795 million for the three months ended September 30, 2018March 31, 2019 increased $245$237 million, or 45%35%, primarily due to higher Operating income and lower Interestinterest expense and Interestinterest expense to affiliates, and lowerpartially offset by higher Income tax expense, as further discussed below. Net incomeexpense. The negative impact of merger-related costs was $93 million, net of tax, for the three months ended September 30, 2018 included the positive impacts from the adoption of the new revenue standard of $101 million and insurance reimbursements related to the hurricanes, net of costs of $88 million as well as the negative impact of costs associated with the Transactions of $53 million.March 31, 2019. Net income also included the negative impact from hurricanes of $90$23 million, and net after-tax gains on disposal of spectrum licenses of $18 milliontax, for the three months ended September 30, 2017.March 31, 2018.
| |
• | Adjusted EBITDA, a non-GAAP financial measure, of $3.2$3.3 billion for the three months ended September 30, 2018March 31, 2019 increased $417 million, or 15%, primarily due to higher Operating income driven by the factors described above. See “Performance Measures” for additional information. |
| |
• | Net cash provided by operating activities of $914 million for the three months ended September 30, 2018 decreased $338 million, or 27%. See “Liquidity and Capital Resources” for additional information. |
| |
• | Free Cash Flow, a non-GAAP financial measure, of $890 million for the three months ended September 30, 2018 decreased $31 million, or 3%. See “Liquidity and Capital Resources” for additional information. |
Highlights for the nine months ended September 30, 2018, compared to the same period in 2017
Total revenues of $31.9 billion for the nine months ended September 30, 2018 increased $2.0 billion, or 7%, primarily driven by growth in service and equipment revenues as further discussed below.
Service revenues of $23.8 billion for the nine months ended September 30, 2018 increased $1.4 billion, or 6%, primarily due to growth in our average branded customer base driven by the continued growth in existing and Greenfield markets, the growing success of new customer segments such as T-Mobile for Business, T-Mobile ONE Unlimited 55+, and T-Mobile ONE Military, along with lower churn, growth in connected devices and the success of our Metro brand.
Equipment revenues of $7.1 billion for the nine months ended September 30, 2018 increased $402 million, or 6%, primarily due to a higher average revenue per device sold, a positive impact from the new revenue standard of $278 million and proceeds from liquidation of returned customer handsets, partially offset by a decrease in the number of devices sold, excluding purchased lease devices, lower volumes of purchased leased devices at the end of the lease term, and lower lease revenues.
Operating income of $4.2 billion for the nine months ended September 30, 2018 increased $396 million, or 10%, primarily due to higher Total revenues, partially offset by higher Selling, general and administrative expenses, Depreciation and amortization, and Cost of services. Operating income for the nine months ended September 30, 2018 included the positive impacts from the adoption of the new revenue standard of $315 million and from hurricane reimbursement payments of $172 million as well as the negative impact of costs associated with the Transactions of $94 million. Operating income also included the negative impact from hurricanes of $148 million and gains on disposal of spectrum licenses of $67 million for the nine months ended September 30, 2017.
Net income of $2.2 billion for the nine months ended September 30, 2018 increased $419 million, or 23%, primarily due to higher Operating income, lower Interest expense and lower Other expense, partially offset by higher Income tax expense, further discussed below. Net income for the nine months ended September 30, 2018 included the positive impacts from the adoption of the new revenue standard of $234 million and from hurricane reimbursement payments of $110 million as well as the negative impact of costs associated with the Transactions of $92 million. Net income also included the negative impact from hurricanes of $90 million and net, after-tax gains on disposal of spectrum licenses of $41 million for the nine months ended September 30, 2017.
| |
• | Adjusted EBITDA of $9.4 billion for the nine months ended September 30, 2018 increased $926$328 million, or 11%, primarily due to higher Operating income driven by the factors described above. See “Performance Measures” for additional information. |
| |
• | Net cash provided by operating activities of $2.9$1.4 billion for the ninethree months ended September 30, 2018 decreased $21March 31, 2019 increased $622 million, or 1%81%. See “Liquidity and Capital Resources” for additional information. |
| |
• | Free Cash Flow, a non-GAAP financial measure, of $2.3 billion$618 million for the ninethree months ended September 30, 2018 increased $744March 31, 2019 decreased $50 million, or 47%7%. Free Cash Flow includes $34 million in payments for merger-related costs for the three months ended March 31, 2019. See “Liquidity and Capital Resources” for additional information. |
Set forth below is a summary of our unaudited condensed consolidated financial results:
| | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(in millions) | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Revenues | | | | | | | | | | | | | | | | | | | | | | |
Branded postpaid revenues | $ | 5,244 |
| | $ | 4,920 |
| | $ | 324 |
| | 7 | % | | $ | 15,478 |
| | $ | 14,465 |
| | $ | 1,013 |
| | 7 | % | $ | 5,493 |
| | $ | 5,070 |
| | $ | 423 |
| | 8 | % |
Branded prepaid revenues | 2,395 |
| | 2,376 |
| | 19 |
| | 1 | % | | 7,199 |
| | 7,009 |
| | 190 |
| | 3 | % | 2,386 |
| | 2,402 |
| | (16 | ) | | (1 | )% |
Wholesale revenues | 338 |
| | 274 |
| | 64 |
| | 23 | % | | 879 |
| | 778 |
| | 101 |
| | 13 | % | 304 |
| | 266 |
| | 38 |
| | 14 | % |
Roaming and other service revenues | 89 |
| | 59 |
| | 30 |
| | 51 | % | | 247 |
| | 151 |
| | 96 |
| | 64 | % | 94 |
| | 68 |
| | 26 |
| | 38 | % |
Total service revenues | 8,066 |
| | 7,629 |
| | 437 |
| | 6 | % | | 23,803 |
| | 22,403 |
| | 1,400 |
| | 6 | % | 8,277 |
| | 7,806 |
| | 471 |
| | 6 | % |
Equipment revenues | 2,391 |
| | 2,118 |
| | 273 |
| | 13 | % | | 7,069 |
| | 6,667 |
| | 402 |
| | 6 | % | 2,516 |
| | 2,353 |
| | 163 |
| | 7 | % |
Other revenues | 382 |
| | 272 |
| | 110 |
| | 40 | % | | 993 |
| | 775 |
| | 218 |
| | 28 | % | 287 |
| | 296 |
| | (9 | ) | | (3 | )% |
Total revenues | 10,839 |
| | 10,019 |
| | 820 |
| | 8 | % | | 31,865 |
| | 29,845 |
| | 2,020 |
| | 7 | % | 11,080 |
| | 10,455 |
| | 625 |
| | 6 | % |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | 1,586 |
| | 1,594 |
| | (8 | ) | | (1 | )% | | 4,705 |
| | 4,520 |
| | 185 |
| | 4 | % | 1,546 |
| | 1,589 |
| | (43 | ) | | (3 | )% |
Cost of equipment sales | 2,862 |
| | 2,617 |
| | 245 |
| | 9 | % | | 8,479 |
| | 8,149 |
| | 330 |
| | 4 | % | |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | | 3,016 |
| | 2,845 |
| | 171 |
| | 6 | % |
Selling, general and administrative | 3,314 |
| | 3,098 |
| | 216 |
| | 7 | % | | 9,663 |
| | 8,968 |
| | 695 |
| | 8 | % | 3,442 |
| | 3,164 |
| | 278 |
| | 9 | % |
Depreciation and amortization | 1,637 |
| | 1,416 |
| | 221 |
| | 16 | % | | 4,846 |
| | 4,499 |
| | 347 |
| | 8 | % | 1,600 |
| | 1,575 |
| | 25 |
| | 2 | % |
Gains on disposal of spectrum licenses | — |
| | (29 | ) | | 29 |
| | NM |
| | — |
| | (67 | ) | | 67 |
| | NM |
| |
Total operating expense | 9,399 |
| | 8,696 |
| | 703 |
| | 8 | % | | 27,693 |
| | 26,069 |
| | 1,624 |
| | 6 | % | 9,604 |
| | 9,173 |
| | 431 |
| | 5 | % |
Operating income | 1,440 |
| | 1,323 |
| | 117 |
| | 9 | % | | 4,172 |
| | 3,776 |
| | 396 |
| | 10 | % | 1,476 |
| | 1,282 |
| | 194 |
| | 15 | % |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | (194 | ) | | (253 | ) | | 59 |
| | (23 | )% | | (641 | ) | | (857 | ) | | 216 |
| | (25 | )% | (179 | ) | | (251 | ) | | 72 |
| | (29 | )% |
Interest expense to affiliates | (124 | ) | | (167 | ) | | 43 |
| | (26 | )% | | (418 | ) | | (398 | ) | | (20 | ) | | 5 | % | (109 | ) | | (166 | ) | | 57 |
| | (34 | )% |
Interest income | 5 |
| | 2 |
| | 3 |
| | 150 | % | | 17 |
| | 15 |
| | 2 |
| | 13 | % | 8 |
| | 6 |
| | 2 |
| | 33 | % |
Other income (expense), net | 3 |
| | 1 |
| | 2 |
| | 200 | % | | (51 | ) | | (89 | ) | | 38 |
| | (43 | )% | 7 |
| | 10 |
| | (3 | ) | | (30 | )% |
Total other expense, net | (310 | ) | | (417 | ) | | 107 |
| | (26 | )% | | (1,093 | ) | | (1,329 | ) | | 236 |
| | (18 | )% | (273 | ) | | (401 | ) | | 128 |
| | (32 | )% |
Income before income taxes | 1,130 |
| | 906 |
| | 224 |
| | 25 | % | | 3,079 |
| | 2,447 |
| | 632 |
| | 26 | % | 1,203 |
| | 881 |
| | 322 |
| | 37 | % |
Income tax expense | (335 | ) | | (356 | ) | | 21 |
| | (6 | )% | | (831 | ) | | (618 | ) | | (213 | ) | | 34 | % | (295 | ) | | (210 | ) | | (85 | ) | | 40 | % |
Net income | $ | 795 |
| | $ | 550 |
| | $ | 245 |
| | 45 | % | | $ | 2,248 |
| | $ | 1,829 |
| | $ | 419 |
| | 23 | % | $ | 908 |
| | $ | 671 |
| | $ | 237 |
| | 35 | % |
| | | | | | | | | | | | | | | | |
Statement of Cash Flows Data | | | | | | | | |
Net cash provided by operating activities | $ | 914 |
| | $ | 1,252 |
| | $ | (338 | ) | | (27 | )% | | $ | 2,945 |
| | $ | 2,966 |
| | $ | (21 | ) | | (1 | )% | $ | 1,392 |
| | $ | 770 |
| | $ | 622 |
| | 81 | % |
Net cash used in investing activities | (42 | ) | | (345 | ) | | 303 |
| | (88 | )% | | (810 | ) | | (7,012 | ) | | 6,202 |
| | (88 | )% | (966 | ) | | (462 | ) | | (504 | ) | | 109 | % |
Net cash used in financing activities | (758 | ) | | (349 | ) | | (409 | ) | | 117 | % | | (3,025 | ) | | (715 | ) | | (2,310 | ) | | 323 | % | |
| | | | | | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | (190 | ) | | 1,000 |
| | (1,190 | ) | | (119 | )% |
Non-GAAP Financial Measures | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 3,239 |
| | $ | 2,822 |
| | $ | 417 |
| | 15 | % | | $ | 9,428 |
| | $ | 8,502 |
| | $ | 926 |
| | 11 | % | $ | 3,284 |
| | $ | 2,956 |
| | $ | 328 |
| | 11 | % |
Free Cash Flow | 890 |
| | 921 |
| | (31 | ) | | (3 | )% | | 2,332 |
| | 1,588 |
| | 744 |
| | 47 | % | 618 |
| | 668 |
| | (50 | ) | | (7 | )% |
NM - Not Meaningful
The following discussion and analysis is for the three and nine months ended September 30, 2018, compared to the same periods in 2017 unless otherwise stated.
Total revenues increased $820 million, or 8%,are for the three months ended and $2.0 billion,March 31, 2019, compared to the same period in 2018 unless otherwise stated.
Total revenues increased $625 million, or 7%6%, for the nine months ended September 30, 2018 as discussed below.
Branded postpaid revenues increased $324$423 million, or 7%8%, for the three months ended and $1.0 billion, or 7%, for the nine months ended September 30, 2018, primarily from:
Higher average branded postpaid phone customers, primarily from growth in our customer base driven by the continued growth in existing and Greenfield markets including the growing success of new customer segments and rate plans such as T-Mobile for Business, T-Mobile ONE Unlimited 55+, and T-Mobile ONE Military, T-Mobile for Business and T-Mobile Essentials, along with lowerrecord low churn; and
Higher average branded postpaid other customers, driven by higher wearables and other connected devices;devices, specifically the Apple watch; partially offset by
| |
• | Lower branded postpaid phone Average Revenue Per User (“ARPU”). See “Branded Postpaid Phone ARPU”). See Branded Postpaid Phone ARPU in the “Performance Measures” section of this MD&A. |
Branded prepaid revenues increased $19 million, or 1%, for the three months ended and $190 million, or 3%, for the nine months ended September 30, 2018 primarily from:
Higherwere essentially flat with higher average branded prepaid customers driven by the continued success of our Metro brand.
The increase for the three months ended September 30, 2018 was also partiallyby T-Mobile brand, offset by lower branded prepaid ARPU. See
Branded“Branded Prepaid
APRUARPU” in the
“Performance Measures” section of this MD&A.
Wholesale revenuesincreased $64$38 million, or 23%14%, for the three months ended and $101 million, or 13%, for the nine months ended September 30, 2018 primarily from the continued success of our MVNO partnerships and higher minimum commitment revenues. Wholesale revenues for minimum commitments are accelerated under the new revenue standard, with $43 million in shortfalls recognized during the three and nine months ended September 30, 2018.partnerships.
Roaming and other service revenues increased $30$26 million, or 51%38%, for the three months endedprimarily from increases in domestic and $96international roaming revenues.
Equipment revenues increased $163 million, or 64%7%, for the nine months ended September 30, 2018 primarily from an increase in international and domestic roaming revenues.
Equipment revenues increased $273 million, or 13%, for the three months ended and increased $402 million, or 6%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 was primarily from:
An increase of $394$136 million in device sales revenues, excluding purchased leaseleased devices, primarily due to:from:
Higher average revenue per device sold due to an increase in the high-end device mix;mix and lower promotions; partially offset by
An 8% decrease in the number of devices sold, excluding purchased leased devices.
Other revenues decreased $9 million, or 3%, primarily from:
A decrease of $46 million in co-location rental revenue from the adoption of the new lease standard; partially offset by
Higher amortized imputed discount on EIP receivables primarily due to an increase in volumes financed; and
A positive impactHigher advertising revenues.
Operating expenses increased $431 million, or 5%, primarily from the new revenue standard of $105 million primarily related to certain commission costs now recorded ashigher Selling, general and administrative expenses;expenses and Cost of equipment sales as discussed below.
Cost of services decreased $43 million, or 3%, primarily from:
The positive impact of the new lease standard of approximately $95 million resulting from the decrease in the average lease term and the change in accounting conclusion for certain sale-leaseback sites;
Lower regulatory program costs; and
The negative impact from hurricanes of $36 million for three months ended March 31, 2018; partially offset by
A 4%Higher costs for customer appreciation programs and network expansion.
Cost of equipment sales increased $171 million, or 6%, primarily from:
An increase in device cost of equipment sales, excluding purchased leased devices, primarily due to a higher average cost per device sold, primarily due to an increase in the high-end device mix, partially offset by an 8% decrease in the number of devices sold, excluding purchased lease devices; partially offset by
A decrease of $117 million from lower volumes of purchased leased devices at the end of the lease term; andLower warranty costs.
A decrease of $32 million primarily related to lower proceeds from liquidation of returned customer handsets.
The change for the nine months ended September 30, 2018 was primarily from:
An increase of $812 million in device sales revenues, excluding purchased lease devices, primarily due to:
Higher average revenue per device sold due to an increase in the high-end device mix; and
A positive impact from the new revenue standard of $278 million related to certain commission costs now recorded as Selling, general and administrative expenses; partially offset by
A 5% decrease in the number of devices sold, excluding purchased lease devices; and
An increase of $86 million related to higher proceeds from liquidation of returned customer handsets; partially offset by
A decrease of $302 million from lower volumes of purchased leased devices at the end of the lease term; and
| |
• | A decrease of $193 million in lease revenues from “JUMP!”® On Demand customers preferring affordable device options on leasing programs with lower monthly lease payments and shifting focus to our EIP financing option for high-end devices.
|
Under our JUMP! On Demand program, upon device upgrade or at lease end, customers must return or purchase their device. Revenue for purchased leased devices is recorded as equipment revenues when revenue recognition criteria have been met.
Other revenues increased $110 million, or 40%, for the three months ended and $218 million, or 28%, for the nine months ended September 30, 2018 primarily due to the positive impact from $71 million in insurance reimbursements related to the hurricanes, revenue share agreements with third parties, and higher amortized imputed discount on EIP receivables.
Operating expenses increased $703 million, or 8%, for the three months ended September 30, 2018 primarily from higher Selling, general and administrative expenses and Depreciation and amortization expense as discussed below. Operating expenses increased $1.6 billion, or 6%, for the nine months ended September 30, 2018 primarily from higher Selling, general and administrative expenses, Cost of services, Depreciation and amortization expense, Cost of equipment sales, and lower Gains on disposal of spectrum licenses as discussed below.
Cost of services decreased $8 million, or 1%, for the three months ended and increased $185 million, or 4%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 was primarily from:
The positive impact from insurance reimbursements related to hurricanes, net of costs, of $54 million in the three months ended September 30, 2018, compared to costs incurred related to hurricanes of $69 million in the three months ended September 30, 2017; partially offset by
The impact of the accelerated rollout of low band spectrum; and
The impact from the new revenue standard of $24 million, which primarily related to certain costs for customer appreciation programs reclassified to Cost of services from Selling, general and administrative expenses.
The change for the nine months ended September 30, 2018 was primarily from:
Higher lease and employee-related expenses associated with network expansion; and
The impact from the new revenue standard of $50 million for the nine months ended September 30, 2018, which primarily related to certain costs for customer appreciation programs reclassified to Cost of services from Selling, general and administrative expenses; partially offset by
The positive impact from insurance reimbursements related to hurricanes, net of costs, of $88 million in the nine months ended September 30, 2018, compared to costs incurred related to hurricanes of $69 million for the nine months ended September 30, 2017; and
Lower regulatory program costs.
Cost of equipment sales increased $245$278 million, or 9%, for the three months ended and increased $330 million, or 4%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 was primarily from:
An increase of $386Higher commissions including an $81 million in device cost of equipment sales, excluding purchased leased devices, primarily due to:
A higher average cost per device sold, primarily due to an increase in the high-end device mix; partially offset by
A 4% decrease in the number of devices sold. This increase was partially offset by
A decrease of $66 million primarilyamortization expense related to lower inventory adjustments;commission costs that were capitalized beginning upon the adoption of ASC 606 on January 1, 2018;
Merger-related costs of $113 million versus zero in Q1 2018; and
A decrease of $85 million from lower volumes of purchased leased devices at the end of the lease term.
The change for the nine months ended September 30, 2018 was primarily from:
An increase of $776 million in device cost of equipment sales, excluding purchased leased devices, primarily due to:
A higher average cost per device sold, primarily due to an increase in the high-end device mix; partially offset by
A 5% decrease in the number of devices sold, excluding purchased lease devices. This increase was partially offset by
A decrease of $329 million from lower volumes of purchased leased devices at the end of the lease term; and
A decrease of $122 million primarily due to lower inventory adjustments and a decrease in average claim costs and warranty fulfillment.
Under our JUMP! On Demand program, upon device upgrade or at the end of the lease term, customers must return or purchase their device. The cost of purchased leased devices is recorded as Cost of equipment sales. Returned devices transferred from Property and equipment, net are recorded as inventory and are valued at the lower of cost or market with any write-down to market recognized as Cost of equipment sales.
Selling, general and administrative expenses increased $216 million, or 7%, for the three months ended and $695 million, or 8%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 was primarily from:
Higher employee-related costs and costs related to outsourced functions, managed services;
Higher commissions driven by compensation structureservices and channel mix changes; and
Costs associated with the Transactions of $53 million;employee-related costs; partially offset by
Lower bad debt expense and losses from sales of receivables reflecting our ongoing focus on managing customer quality;
Lower promotional and advertising costs; andcosts.
The positive impact from insurance reimbursements related to the hurricanes of $13 million compared to costs incurred related to hurricanes of $36 million for the three months ended September 30, 2017.
The change for the nine months ended September 30, 2018 was primarily from:
Higher employee-related costs and costs related to managed services;
Higher commissions driven by compensation structure and channel mix changes;
Costs associated with the Transactions of $94 million; and
An approximately $40 million FCC settlement related to local ring back tones in rural areas; partially offset by
Lower bad debt expense and losses from sales of receivables reflecting our ongoing focus on managing customer quality;
Lower handset repair services costs;
Lower promotional and advertising costs;
The positive impact from the new revenue standard of $61 million primarily related to a net benefit from capitalized commission costs in excess of the related amortization, partially offset by higher commissions which were previously recorded as contra-equipment revenue; and
The positive impact from insurance reimbursements related to the hurricanes of $13 million compared to costs incurred related to hurricanes of $36 million for the nine months ended September 30, 2017.
Depreciation and amortization increased $221$25 million, or 16%2%, for the three months ended and $347 million, or 8%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 was primarily from:
The continued build-outdeployment of our 4G LTE network;
Higher depreciation expense related to our JUMP! On Demand program resulting from a higher number of devices under lease. Under our JUMP! On Demand program,low band spectrum, including 600 MHz, and laying the cost of a leased wireless device is depreciated to its estimated residual value over the period expected to provide utility to us; and
The implementation of the first component of our new billing system.
The changegroundwork for the nine months ended September 30, 2018 was primarily from:
The continued build-out of our 4G LTE network; and
The implementation of the first component of our new billing system;5G; partially offset by
Lower depreciation expense related to our JUMP! On Demand program resulting from an increase in the affordable device mix. Under our JUMP! On Demand program, the costa lower total number of a leased wireless device is depreciated to its estimated residual value over the period expected to provide utility to us.devices under lease.
Gains on disposal of spectrum licenses were $29 million for the three months ended and $67 million for the nine months ended September 30, 2017. We had no gains on disposal of spectrum license transactions during the three and nine months ended September 30, 2018.
Operating income, the components of which are discussed above, increased $117$194 million, or 9%15%, for the three months ended March 31, 2019 primarily due to higher Service revenues, partially offset by higher Selling, general and $396 million, or 10%, foradministrative expenses. Operating income included the nine months ended September 30, 2018.following:
Merger-related costs of $113 million;
The changenegative impact from hurricanes of $36 million for the three months ended September 30, 2018 included:
March 31, 2018. The positive impacts from the new revenue standard of $136 million;
The positive impact from insurance reimbursements related to hurricanes net of costs, of $138 million, compared to a negative impact of $148 millionis not material in 2017; partially offset by
Gains on disposal of spectrum licenses of $29 million in 2017. There were no gains on disposal of spectrum licenses in 2018; and
Costs associated with the Transactions of $53 million.
The change for the nine months ended September 30, 2018 included:
The positive impacts from the new revenue standard of $315 million;
The positive impact from insurance reimbursements related to hurricanes, net of costs, of $172 million, compared to a negative impact of $148 million in the same period in 2017; partially offset by
Gains on disposal of spectrum licenses of $67 million in 2017. There were no gains on disposal of spectrum licenses in 2018; and
Costs associated with the Transactions of $94 million.
Interest expense decreased $59 million, or 23%, for the three months ended March 31, 2019; and $216
The net positive impact of the new lease standard of approximately $49 million.
Interest expense decreased $72 million, or 25%29%, for the nine months ended September 30, 2018.primarily from:
The change for the three months ended September 30, 2018 was primarily from:
Redemption in January 2018 of $1.0 billion of 6.125% Senior Notes due 2022;
Redemptionredemption in April 2018 of aggregate principal amount of $2.4 billion of Senior Notes, with various interest rates and maturity dates; and
Higher capitalized interest costs of $37$32 million, primarily due to the build out of our network to utilize our 600 MHz spectrum licenses in the three months ended September 30, 2018, compared to the three months ended September 30, 2017; partially offset by
Issuance in January 2018 of $1.0 billion of public 4.500% Senior Notes due 2026; and
Issuance in January 2018 of $1.5 billion of public 4.750% Senior Notes due 2028.licenses.
The change for the nine months ended September 30, 2018 wasInterest expense to affiliates decreased $57 million, or 34%, primarily from:
Redemption in April 2017 of aggregate principal amount of $6.8 billion of Senior Notes, with various interest rates and maturity dates;
Redemption in January 2018 of $1.0 billion of 6.125% Senior Notes due 2022;
Redemption in April 2018 of aggregate principal amount of $2.4 billion of Senior Notes due 2022, with various interest rates and maturity dates; and
Higher capitalized interest costs of $59$43 million, primarily due to the build out of our network to utilize our 600 MHz spectrum licenses in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017; partially offset by
Issuance in March 2017 of aggregate principal amount of $1.5 billion of Senior Notes, with various interest rates and maturity dates;
Issuance in January 2018 of $1.0 billion of public 4.500% Senior Notes due 2026;licenses; and
Issuance in January 2018 of $1.5 billion of public 4.750% Senior Notes due 2028.
See Note 9 – Debt of the Notes to the Condensed Consolidated Financial Statements for further information.
Interest expense to affiliates decreased $43 million, or 26%, for the three months ended and increased $20 million, or 5%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 was primarily from:
Higher capitalized interest costs of $36 million primarily due to build out of our network to utilize our 600 MHz spectrum licenses in the three months ended September 30, 2018, compared to the three months ended September 30, 2017; and
A decrease from lowerLower interest rates achieved through refinancing of a total of $2.5 billion of Senior Reset Notes in April 2018.
The change for the nine months ended September 30, 2018 was primarily from:
Issuance in January 2017 of $4.0 billion of Incremental Secured Term Loan facility, which refinanced $1.98 billion of outstanding senior secured term loans;
Issuance in May 2017 of aggregate principal amount of $4.0 billion of Senior Notes, with various interest rates and maturity dates;
Issuance in April 2017 of aggregate principal amount of $3.0 billion of Senior Notes, with various interest rates and maturity dates; and
Issuance in September 2017 of aggregate principal amount of $500 million of 5.375% Senior Notes due 2027; partially offset by
A decrease from lower interest rates achieved through refinancing in April 2017 of a total of $2.5 billion of Senior Reset Notes;
A decrease from lower interest rates achieved through refinancing in April 2018 of a total of $2.5 billion of Senior Reset Notes; and
Higher capitalized interest costs of $76 million primarily due to build out of our network to utilize our 600 MHz spectrum licenses in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017.
See Note 9 – Debt of the Notes to the Condensed Consolidated Financial Statements for further information.
Other income (expense), net increased $2 decreased $3 million, or 200%30%. Other income (expense), net for the three months ended September 30,March 31, 2018 and decreased $38 million, or 43%, forincluded the nine months ended September 30, 2018.following:
The change in the nine months ended September 30, 2018 was primarily from:
A $30 million gain on sale of certain investments;
A $25 million bargain purchase gain as part of our purchase price allocation ofrelated to the IWS acquisition;acquisition and
A a $15 million gain on our previously held equity interest in IWS; partially offset by
A $36$32 million increase in lossesloss on early redemption of debt, including
| |
◦ | An $86 million loss on early redemption of $2.5 billion in DT Senior Reset Notes in April 2018, and |
| |
◦ | A $32 million loss on early redemption of $1.0 billion of 6.125% Senior Notes due 2022 in January 2018; partially offset by |
| |
◦ | A $73 million net loss on early redemption of aggregate principal amount of $8.25 billion in Senior Notes, with various interest rates and maturity dates, during the nine months ended September 30, 2017; and |
| |
◦ | A $13 million loss on refinancing of $1.98 billion of outstanding senior secured term loans in January 2017. |
$1.0 billion of 6.125% Senior Notes due 2022 in January 2018.
Income tax expense decreased $21 increased $85 million, or 6%40%, for the three months ended and increased $213 million, or 34%, for the nine months ended September 30, 2018.
The decrease for the three months ended September 30, 2018 was primarily from:
Benefits from a reduction in the federal corporate income tax rate provided by the Tax Cuts and Jobs Act, which took effect on January 1, 2018, from 35% to 21%; and
A $63 million benefit from a change in tax status of certain subsidiaries, including a related $28 million reduction in valuation allowance against deferred tax assets in certain state jurisdictions; partially offset by
A $115 million increase in income tax expense from a tax regime change in certain state tax jurisdictions;
Higherhigher income before taxes; andtaxes.
Non-deductible costs associated with the Transactions.
The increase for the nine months ended September 30, 2018 was primarily from:
A $289 million tax benefit recognized in the nine months ended September 30, 2017 related to a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions that did not impact 2018;
A $115 million increase in income tax expense from a tax regime change in certain state tax jurisdictions;
Higher income before taxes; and
Non-deductible costs associated with the Transactions; partially offset by
Benefits from a reduction in the federal corporate income tax rate provided by the Tax Cuts and Jobs Act, which took effect on January 1, 2018, from 35% to 21%.
Net income, the components of which are discussed above, increased $245$237 million, or 45%35%, primarily due to higher Operating income and lower interest expense and interest expense to affiliates, partially offset by higher Income tax expense. Net income included the following:
Merger-related costs of $93 million, net of tax; partially offset by
No significant impact from hurricanes for the three months ended September 30, 2018 and $419 million, or 23%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 included:
The positive impact from the new revenue standard of $101 million;
The positive impact from insurance reimbursements related to the hurricanes, net of costs, of $88 million,March 31, 2019, compared to a negative impact from hurricanes of $90$23 million in 2017; partially offset by
Gains on disposalnet of spectrum licenses of $18 million in 2017. There were no gains on disposal of spectrum licenses in 2018; and
The negative impact from costs associated with the Transactions of $53 million.
The changetax for the ninethree months ended September 30, 2018 included:March 31, 2018.
The positive impact from the new revenue standard of $234 million;
The positive impact from insurance reimbursements related to the hurricanes, net of costs, of $110 million, compared to a negative impact of $90 million in the same period in 2017; partially offset by
Gains on disposal of spectrum licenses of $41 million in 2017. There were no gains on disposal of spectrum licenses in 2018; and
The negative impact from costs associated with the Transactions of $92 million.
Guarantor Subsidiaries
The financial condition and results of operations of the Parent, Issuer and Guarantor Subsidiaries is substantially similar to our consolidated financial condition. The most significant components of the financial condition of our Non-Guarantor Subsidiaries were as follows:
| | | September 30, 2018 | | December 31, 2017 | | Change | March 31, 2019 | | December 31, 2018 | | Change |
(in millions) | $ | | % | $ | | % |
Other current assets | $ | 696 |
| | $ | 628 |
| | $ | 68 |
| | 11 | % | $ | 659 |
| | $ | 645 |
| | $ | 14 |
| | 2 | % |
Property and equipment, net | 305 |
| | 306 |
| | (1 | ) | | — | % | 309 |
| | 297 |
| | 12 |
| | 4 | % |
Goodwill | 218 |
| | — |
| | 218 |
| | NM |
| 218 |
| | 218 |
| | — |
| | NM |
|
Tower obligations | 2,179 |
| | 2,198 |
| | (19 | ) | | (1 | )% | 2,168 |
| | 2,173 |
| | (5 | ) | | — | % |
Total stockholders' deficit | (1,145 | ) | | (1,454 | ) | | 309 |
| | (21 | )% | (1,233 | ) | | (1,142 | ) | | (91 | ) | | 8 | % |
NM - Not Meaningful
The most significant components of the results of operations of our Non-Guarantor Subsidiaries were as follows:
| | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(in millions) | 2018 | | 2017 | $ | | % | 2018 | | 2017 | $ | | % | 2019 | | 2018 | $ | | % |
Service revenues | $ | 563 |
| | $ | 527 |
| | $ | 36 |
| | 7 | % | | $ | 1,654 |
| | $ | 1,580 |
| | $ | 74 |
| | 5 | % | $ | 732 |
| | $ | 540 |
| | $ | 192 |
| | 36 | % |
Cost of equipment sales | 258 |
| | 241 |
| | 17 |
| | 7 | % | | 756 |
| | 738 |
| | 18 |
| | 2 | % | |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | | 272 |
| | 236 |
| | 36 |
| | 15 | % |
Selling, general and administrative | 257 |
| | 209 |
| | 48 |
| | 23 | % | | 709 |
| | 652 |
| | 57 |
| | 9 | % | 275 |
| | 236 |
| | 39 |
| | 17 | % |
Total comprehensive income | 15 |
| | 40 |
| | (25 | ) | | (63 | )% | | 91 |
| | 87 |
| | 4 |
| | 5 | % | 127 |
| | 34 |
| | 93 |
| | 274 | % |
The change to the results of operations of our Non-Guarantor Subsidiaries for the three months ended September 30, 2018March 31, 2019 was primarily from:
Higher Selling, general and administrative expensesService revenues, primarily due to new operating costs from the non-guarantor Layer3 TV subsidiary acquired in the first quarter of 2018, partially offset by an increase in deferred interest released on the sale of EIP receivables as a resultactivity of the upsizenon-guarantor subsidiary that provides device insurance, primarily driven by a net increase in December 2017;average revenue as well as growth in our customer base related to a device protection product that launched at the end of August 2018 and
sales of the new product; partially offset by
Higher Cost of equipment sales, exclusive of depreciation and amortization shown separately below, primarily due to an increase in higher cost devices used for device insurance claims fulfillment, partially offset by an increase in device liquidations and a decrease in device non-return fees charged to customers; partially offset by
Higher Service revenues primarily due to an increase in activity of the non-guarantor subsidiary that provides device insurance, primarily driven by growth in our customer base.
The change to the results of operations of our Non-Guarantor Subsidiaries for the nine months ended September 30, 2018 was primarily from:
Higher Service revenues primarily due to an increase in activity of the non-guarantor subsidiary that provides device insurance, primarily driven by growth in our customer base; partially offset byand
Higher Selling, general and administrative expenses, primarily due to new operating costs from the non-guarantor Layer3 TV subsidiary acquiredan increase in the first quarter of 2018, partially offset by lower valuation losses in the non-guarantor subsidiary involved in the EIP sale arrangement; and
Higher Cost of equipment sales primarilybilling services fees due to an increase in higher cost devices used for device insurance claims fulfillment, partially offset byrate during the fourth quarter of 2018 and an increase in device liquidations and a decrease in device non-return fees charged to customers.program expenses.
All other results of operations of the Parent, Issuer and Guarantor Subsidiaries are substantially similar to the Company’s condensed consolidated results of operations. See Note 1713 – Guarantor Financial Information of the Notes to the Condensed Consolidated Financial Statements.
Performance Measures
In managing our business and assessing financial performance, we supplement the information provided by our financial statements with other operating or statistical data and non-GAAP financial measures. These operating and financial measures are utilized by our management to evaluate our operating performance and, in certain cases, our ability to meet liquidity requirements. Although companies in the wireless industry may not define each of these measures in precisely the same way, we believe that these measures facilitate comparisons with other companies in the wireless industry on key operating and financial measures.
Total Customers
A customer is generally defined as a SIM number with a unique T-Mobile identifier which is associated with an account that generates revenue. Branded customers generally include customers that are qualified either for postpaid service utilizing phones, DIGITS or connected devices which includes tablets, wearables and SyncUp DRIVE,TM, where they generally pay after receiving service, or prepaid service, where they generally pay in advance. Our branded prepaid customers include customers of T-Mobile and Metro by T-Mobile. Wholesale customers include Machine-to-Machine (“M2M”) and Mobile Virtual Network Operator (“MVNO”) customers that operate on our network but are managed by wholesale partners.
The following table sets forth the number of ending customers:
| | | September 30, 2018 | | September 30, 2017 | | Change | March 31, 2019 | | March 31, 2018 | | Change |
(in thousands) | # | | % | # | | % |
Customers, end of period | | | | | | | | | | | | | | |
Branded postpaid phone customers (1) | 36,204 |
| | 33,223 |
| | 2,981 |
| | 9 | % | 37,880 |
| | 34,744 |
| | 3,136 |
| | 9 | % |
Branded postpaid other customers | 4,957 |
| | 3,752 |
| | 1,205 |
| | 32 | % | 5,658 |
| | 4,321 |
| | 1,337 |
| | 31 | % |
Total branded postpaid customers | 41,161 |
| | 36,975 |
| | 4,186 |
| | 11 | % | 43,538 |
| | 39,065 |
| | 4,473 |
| | 11 | % |
Branded prepaid customers (1) | 21,002 |
| | 20,519 |
| | 483 |
| | 2 | % | 21,206 |
| | 20,876 |
| | 330 |
| | 2 | % |
Total branded customers | 62,163 |
| | 57,494 |
| | 4,669 |
| | 8 | % | 64,744 |
| | 59,941 |
| | 4,803 |
| | 8 | % |
Wholesale customers | 15,086 |
| | 13,237 |
| | 1,849 |
| | 14 | % | 16,557 |
| | 14,099 |
| | 2,458 |
| | 17 | % |
Total customers, end of period | 77,249 |
| | 70,731 |
| | 6,518 |
| | 9 | % | 81,301 |
| | 74,040 |
| | 7,261 |
| | 10 | % |
| |
(1) | As a result of the acquisition of IWS, we included an adjustment of 13,000 branded postpaid phone and 4,000 branded prepaid IWS customers in our reported subscriber base as of January 1, 2018. Additionally, as a result of the acquisition of Layer3 TV, we included an adjustment of 5,000 branded prepaid customers in our reported subscriber base as of January 22, 2018.
|
Branded Customers
Total branded customers increased 4,669,000,4,803,000, or 8%, primarily from:
Higher branded postpaid phone customers driven by the growing success of new customer segments and rate plans such as T-Mobile for Business, T-Mobile ONE Unlimited 55+, T-Mobile ONE Military, T-Mobile for Business and T-Mobile ONE MilitaryEssentials and continued growth in existing and Greenfield markets, along with lowerrecord-low churn, partially offset by increased competitive activityactivity;
Higher branded postpaid other customers, primarily due to strength in the marketplace;gross customer additions from wearables; and
| |
• | Higher branded postpaid other customers primarily due to higher connected devices, specifically the Apple watch and SyncUP DRIVETM; and
|
Higher branded prepaid customers driven by the continued success of our Metro by T-Mobile brand due to promotional activities, and rate plan offers.offers, and growth in connected devices, along with lower churn.
Wholesale
Wholesale customers increased 1,849,000,2,458,000, or 14%17%, primarily due to the continued success of our M2M and MVNO partnerships.
Net Customer Additions
The following table sets forth the number of net customer additions:
| | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(in thousands) | 2018 | | 2017 | # | | % | 2018 | | 2017 | # | | % | 2019 | | 2018 | # | | % |
Net customer additions | | | | | | | | | | | | | | | | | | | | | | |
Branded postpaid phone customers (1) (2) | 774 |
| | 595 |
| | 179 |
| | 30 | % | | 2,077 |
| | 1,926 |
| | 151 |
| | 8 | % | |
Branded postpaid phone customers | | 656 |
| | 617 |
| | 39 |
| | 6 | % |
Branded postpaid other customers (2) | 305 |
| | 222 |
| | 83 |
| | 37 | % | | 1,024 |
| | 622 |
| | 402 |
| | 65 | % | 363 |
| | 388 |
| | (25 | ) | | (6 | )% |
Total branded postpaid customers | 1,079 |
| | 817 |
| | 262 |
| | 32 | % | | 3,101 |
| | 2,548 |
| | 553 |
| | 22 | % | 1,019 |
| | 1,005 |
| | 14 |
| | 1 | % |
Branded prepaid customers (1) | 35 |
| | 226 |
| | (191 | ) | | (85 | )% | | 325 |
| | 706 |
| | (381 | ) | | (54 | )% | 69 |
| | 199 |
| | (130 | ) | | (65 | )% |
Total branded customers | 1,114 |
| | 1,043 |
| | 71 |
| | 7 | % | | 3,426 |
| | 3,254 |
| | 172 |
| | 5 | % | 1,088 |
| | 1,204 |
| | (116 | ) | | (10 | )% |
Wholesale customers | 516 |
| | 286 |
| | 230 |
| | 80 | % | | 1,216 |
| | 550 |
| | 666 |
| | 121 | % | 562 |
| | 229 |
| | 333 |
| | 145 | % |
Total net customer additions | 1,630 |
| | 1,329 |
| | 301 |
| | 23 | % | | 4,642 |
| | 3,804 |
| | 838 |
| | 22 | % | 1,650 |
| | 1,433 |
| | 217 |
| | 15 | % |
Adjustments to branded postpaid phone customers (2) | — |
| | — |
| | — |
| | | | — |
| | (253 | ) | | 253 |
| | | |
Adjustments to branded postpaid other customers (2) | — |
| | — |
| | — |
| | | | — |
| | 253 |
| | (253 | ) | | | |
| |
(1) | As a result of the acquisition of IWS and Layer3 TV, customer activity post acquisition was included in our net customer additions beginning in the first quarter of 2018.
|
| |
(2) | During the third quarter of 2017, we retitled our “Branded postpaid mobile broadband customers” category to “Branded postpaid other customers” and included DIGITS customers and reclassified 253,000 DIGITS customer net additions from our “Branded postpaid phone customers” category for the second quarter of 2017, when the DIGITS product was released. |
Branded Customers
Total branded net customer additions increased 71,000,decreased 116,000, or 7%10%, for the three months ended and 172,000, or 5%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 wasMarch 31, 2019 primarily from:
Higher branded postpaid phone net customer additions primarily driven by lower churn, continued growth in existing and Greenfield markets and the growing success of new customer segments such as T-Mobile for Business, T-Mobile ONE Unlimited 55+ and T-Mobile ONE Military; and
| |
• | Higher branded postpaid other net customer additions primarily due to higher gross customer additions from wearables, specifically the Apple watch, and lower churn, partially offset by lower DIGITS and SyncUP DRIVETM gross customer additions. These increases were partially offset by
|
Lower branded prepaid net customer additions primarily due to increased competitive activitycontinued promotional activities in the marketplace, partially offset by lower migrations tochurn; and
Lower branded postpaid plans.
The change for the nine months ended September 30, 2018 wasother net customer additions primarily from:due to higher deactivations from a growing customer base, partially offset by lower churn; partially offset by
| |
• | Higher branded postpaid other net customer additions primarily due to higher gross customer additions from wearables, specifically the Apple watch, and lower churn, partially offset by lower DIGITS and SyncUP DRIVETM gross customer additions; and
|
Higher branded postpaid phone net customer additions primarily due to lower churn and continued growth in existing and Greenfield markets and the growing success of new customer segments such as T-Mobile for Business, T-Mobile ONE Unlimited 55+ and T-Mobile ONE Military, partially offset by the impact from more aggressive service promotions and the launch of Un-carrier Next - All Unlimited with taxes and fees in the first quarter of 2017. These increases were partially offset byrecord-low churn.
Lower branded prepaid net customer additions primarily due to increased competitive activity in the marketplace, partially offset by lower migrations to branded postpaid plans.
Wholesale
Wholesale net customer additions increased 230,000,333,000, or 80%145%, for the three months ended and 666,000, or 121%, for the nine months ended September 30, 2018.
The change for the three months ended September 30, 2018 wasMarch 31, 2019 primarily due to higher gross additions from the continued success of our M2M and MVNO net customer additions.
partnerships.The change for the nine months ended September 30, 2018 was primarily from lower deactivations driven by the removal of Lifeline program customers.
Customers Per Account
Customers per account is calculated by dividing the number of branded postpaid customers as of the end of the period by the number of branded postpaid accounts as of the end of the period. An account may include branded postpaid phone customers and branded postpaid other customers which includes DIGITS and connected devices such as tablets, wearables and SyncUp DRIVETM.DRIVE. We believe branded postpaid customers per account provides management, investors and analysts with useful information to evaluate our branded postpaid customer base on a per account basis.base.
The following table sets forth the branded postpaid customers per account:
| | | September 30, 2018 | | September 30, 2017 | | Change | March 31, 2019 | | March 31, 2018 | | Change |
# | | % | # | | % |
Branded postpaid customers per account | 2.99 |
| | 2.92 |
| | 0.07 |
| | 2 | % | 3.06 |
| | 2.95 |
| | 0.11 |
| | 4 | % |
Branded postpaid customers per account increased 2%4% primarily from continued growth of new customer segments and rate plans such as T-Mobile ONE Unlimited 55+, T-Mobile ONE Military, T-Mobile for Business and T-Mobile Essentials, promotional activities targeting families and the continued success of connected devices.
Churn
Churn represents the number of customers whose service was disconnected as a percentage of the average number of customers during the specified period. The number of customers whose service was disconnected is presented net of customers that subsequently have their service restored within a certain period of time. We believe that churn provides management, investors and analysts with useful information to evaluate customer retention and loyalty.
The following table sets forth the churn: | | | Three Months Ended September 30, | | Bps Change | | Nine Months Ended September 30, | | Bps Change | Three Months Ended March 31, | | Bps Change |
2018 | | 2017 | 2018 | | 2017 | | 2019 | | 2018 |
Branded postpaid phone churn | 1.02 | % | | 1.23 | % | | -21 bps | | 1.02 | % | | 1.18 | % | | -16 bps | 0.88 | % | | 1.07 | % | | -19 bps |
Branded prepaid churn | 4.12 | % | | 4.25 | % | | -13 bps | | 3.95 | % | | 4.06 | % | | -11 bps | 3.85 | % | | 3.94 | % | | -9 bps |
Branded postpaid phone churn decreased 2119 basis points for the three months ended and 16 basis points for the nine months ended September 30, 2018,March 31, 2019, primarily from increased customer satisfaction and loyalty from ongoing improvements to network quality, industry-leading customer service and the overall value of our offerings in the marketplace.offerings.
Branded prepaid churn decreased 139 basis points for the three months ended and 11 basis points for the nine months ended September 30, 2018,March 31, 2019, primarily due to the continued impact from the optimizationsuccess of our third-party distribution channels which was substantially completed during the first quarter of 2017, partially offsetMetro by higher deactivations from a growing customer baseT-Mobile brand due to promotional activities and increased competitive activity in the marketplace.rate plan offers.
Average Revenue Per User Average Billings Per User
Average Revenue Per User (“ARPU”)ARPU represents the average monthly service revenue earned from customers. We believe ARPU provides management, investors and analysts with useful information to assess and evaluate our service revenue realization per customer and assist in forecasting our future service revenues generated from our customer base. Branded postpaid phone ARPU excludes Branded postpaid other customers and related revenues which includes DIGITS and connected devices such as tablets, wearables and SyncUp DRIVETM.DRIVE.
Average Billings Per User (“ABPU”) represents the average monthly customer billings, including monthly lease revenues and EIP billings before securitization, per customer. We believe branded postpaid ABPU provides management, investors and analysts with useful information to evaluate average branded postpaid customer billings as it is indicative of estimated cash collections, including device financing payments, from our customers each month.
The following tables illustrate the calculation of our operating measuresmeasure ARPU and ABPU and reconcile these measuresreconciles this measure to the related service revenues:
| | (in millions, except average number of customers, ARPU and ABPU) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change | |
2018 | | 2017 | | $ | | % | | 2018 | | 2017 | $ | | % | |
(in millions, except average number of customers and ARPU) | | Three Months Ended March 31, | | Change |
| 2019 | | 2018 | | $ | | % |
Calculation of Branded Postpaid Phone ARPU | | | | | | | | | | | | | | | | | | | | | | |
Branded postpaid service revenues | $ | 5,244 |
| | $ | 4,920 |
| | $ | 324 |
| | 7 | % | | $ | 15,478 |
| | $ | 14,465 |
| | $ | 1,013 |
| | 7 | % | $ | 5,493 |
| | $ | 5,070 |
| | $ | 423 |
| | 8 | % |
Less: Branded postpaid other revenues | (289 | ) | | (294 | ) | | 5 |
| | (2 | )% | | (820 | ) | | (774 | ) | | (46 | ) | | 6 | % | (310 | ) | | (259 | ) | | (51 | ) | | 20 | % |
Branded postpaid phone service revenues | $ | 4,955 |
| | $ | 4,626 |
| | $ | 329 |
| | 7 | % | | $ | 14,658 |
| | $ | 13,691 |
| | $ | 967 |
| | 7 | % | $ | 5,183 |
| | $ | 4,811 |
| | $ | 372 |
| | 8 | % |
Divided by: Average number of branded postpaid phone customers (in thousands) and number of months in period | 35,779 |
| | 32,852 |
| | 2,927 |
| | 9 | % | | 35,067 |
| | 32,248 |
| | 2,819 |
| | 9 | % | 37,504 |
| | 34,371 |
| | 3,133 |
| | 9 | % |
Branded postpaid phone ARPU | $ | 46.17 |
| | $ | 46.93 |
| | $ | (0.76 | ) | | (2 | )% | | $ | 46.44 |
| | $ | 47.17 |
| | $ | (0.73 | ) | | (2 | )% | $ | 46.07 |
| | $ | 46.66 |
| | $ | (0.59 | ) | | (1 | )% |
| | | | |
|
| |
|
| | | | | |
|
| |
|
| |
Calculation of Branded Postpaid ABPU | | | | |
|
| |
|
| | | | | |
|
| |
|
| |
Branded postpaid service revenues | $ | 5,244 |
| | $ | 4,920 |
| | $ | 324 |
| | 7 | % | | $ | 15,478 |
| | $ | 14,465 |
| | $ | 1,013 |
| | 7 | % | |
EIP billings | 1,601 |
| | 1,481 |
| | 120 |
| | 8 | % | | 4,884 |
| | 4,285 |
| | 599 |
| | 14 | % | |
Lease revenues | 176 |
| | 159 |
| | 17 |
| | 11 | % | | 524 |
| | 717 |
| | (193 | ) | | (27 | )% | |
Total billings for branded postpaid customers | $ | 7,021 |
| | $ | 6,560 |
| | $ | 461 |
| | 7 | % | | $ | 20,886 |
| | $ | 19,467 |
| | $ | 1,419 |
| | 7 | % | |
Divided by: Average number of branded postpaid customers (in thousands) and number of months in period | 40,561 |
| | 36,505 |
| | 4,056 |
| | 11 | % | | 39,526 |
| | 35,627 |
| | 3,899 |
| | 11 | % | |
Branded postpaid ABPU | $ | 57.69 |
| | $ | 59.89 |
| | $ | (2.20 | ) | | (4 | )% | | $ | 58.71 |
| | $ | 60.71 |
| | $ | (2.00 | ) | | (3 | )% | |
| | | | |
|
| |
|
| | | | | |
|
| |
|
| |
Calculation of Branded Prepaid ARPU | | | | |
|
| |
|
| | | | | |
|
| |
|
| | | | |
|
| |
|
|
Branded prepaid service revenues | $ | 2,395 |
| | $ | 2,376 |
| | $ | 19 |
| | 1 | % | | $ | 7,199 |
| | $ | 7,009 |
| | $ | 190 |
| | 3 | % | $ | 2,386 |
| | $ | 2,402 |
| | $ | (16 | ) | | (1 | )% |
Divided by: Average number of branded prepaid customers (in thousands) and number of months in period | 20,820 |
| | 20,336 |
| | 484 |
| | 2 | % | | 20,737 |
| | 20,119 |
| | 618 |
| | 3 | % | 21,122 |
| | 20,583 |
| | 539 |
| | 3 | % |
Branded prepaid ARPU | $ | 38.34 |
| | $ | 38.93 |
| | $ | (0.59 | ) | | (2 | )% | | $ | 38.57 |
| | $ | 38.71 |
| | $ | (0.14 | ) | | — | % | $ | 37.65 |
| | $ | 38.90 |
| | $ | (1.25 | ) | | (3 | )% |
Branded Postpaid Phone ARPU
Branded postpaid phone ARPU decreased $0.76,$0.59, or 2%1%, for the three months ended and $0.73, or 2%, for the nine months ended September 30, 2018.
The decrease for the three months ended September 30, 2018 wasMarch 31, 2019 primarily due toto:
A reduction in regulatory program revenues from the continued adoption of tax inclusive plans, including theplans;
A reduction in certain non-recurring charges;
The growing success of new customer segments and rate plans such as T-Mobile for Business, T-Mobile ONE Unlimited 55+ and, T-Mobile ONE Military, as well as a reductionT-Mobile for Business and T-Mobile Essentials; and
The ongoing growth in certain non-recurring charges includingour Netflix offering, which totaled $0.51 for the noncash net benefit from Data Stash. These decreases werethree months ended March 31, 2019, and decreased branded postpaid phone ARPU by $0.27 compared to the three months ended March 31, 2018; partially offset by a
Higher premium services revenue; and
A net reduction in service promotional activities.
The decrease for the nine months ended September 30, 2018 was primarily due to the continued adoption of tax inclusive plans, including from the growing success of new customer segments such as T-Mobile for Business, T-Mobile ONE Unlimited 55+ and T-Mobile ONE Military and a reduction in certain non-recurring charges including the noncash net benefit from Data Stash. The negative impact of the new revenue standard was $0.07. These decreases were partially offset by a net reduction in service promotional activities.
We continue to expect that Branded postpaid phone ARPU in full-year 20182019 will be generally stable compared to full-year 2017, excluding the impact from the new revenue standard.2018.
Branded Postpaid ABPUPrepaid ARPU
Branded postpaid ABPUprepaid ARPU decreased $2.20,$1.25 or 4%,3% for the three months ended and $2.00, or 3%, for the nine months ended September 30, 2018.March 31, 2019 primarily due to:
The decreaseDilution from promotional rate plans; and
Growth in our Amazon Prime offering, which impacted prepaid ARPU by $0.32, is included as a benefit to certain Metro by T-Mobile unlimited rate plans for the three months ended September 30, 2018 was primarily from:March 31, 2019; partially offset by
| |
• | Certain non-recurring charges. |
Lower branded postpaid phone ARPU; and
Growth in the branded postpaid other customer base with a lower ARPU than branded postpaid phone.
The decrease for the nine months ended September 30, 2018 was primarily from:
Lower branded postpaid phone ARPU;
Lower lease revenues; and
Growth in the branded postpaid other customer base with a lower ARPU than branded postpaid phone.
Branded Prepaid ARPU
Branded prepaid ARPU decreased $0.59, or 2%, for the three months ended and $0.14, for the nine months ended September 30, 2018, primarily from dilution from promotional rate plans.
Adjusted EBITDA
Adjusted EBITDA represents earnings before Interest expense, net of Interest income, Income tax expense, Depreciation and amortization, non-cash Stock-based compensation and certain income and expenses not reflective of T-Mobile’sour operating performance. Net income margin represents Net income divided by Service revenues. Adjusted EBITDA margin represents Adjusted EBITDA divided by Service revenues.
Adjusted EBITDA is a non-GAAP financial measure utilized by our management to monitor the financial performance of our operations. We use Adjusted EBITDA internally as a metricmeasure to evaluate and compensate our personnel and management for their performance, and as a benchmark to evaluate our operating performance in comparison to our competitors. Management believes analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate overall operating performance and facilitate comparisons with other wireless communications companies because it is indicative of our ongoing operating performance and trends by excluding the impact of interest expense from financing, non-cash depreciation and amortization from capital investments, non-cash stock-based compensation, network decommissioning costs and costs related to the Transactions, as they are not indicative of our ongoing operating performance, as well as certain other nonrecurring income and expenses. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for income from operations, net income or any other measure of financial performance reported in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
The following table illustrates the calculation of Adjusted EBITDA and reconciles Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure:
| | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(in millions) | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | $ | | % | 2019 | | 2018 | | $ | | % |
Net income | $ | 795 |
| | $ | 550 |
| | $ | 245 |
| | 45 | % | | $ | 2,248 |
| | $ | 1,829 |
| | $ | 419 |
| | 23 | % | $ | 908 |
| | $ | 671 |
| | $ | 237 |
| | 35 | % |
Adjustments: | | | | |
|
| |
|
| | | | | |
|
| |
|
| | | | |
|
| |
|
|
Interest expense | 194 |
| | 253 |
| | (59 | ) | | (23 | )% | | 641 |
| | 857 |
| | (216 | ) | | (25 | )% | 179 |
| | 251 |
| | (72 | ) | | (29 | )% |
Interest expense to affiliates | 124 |
| | 167 |
| | (43 | ) | | (26 | )% | | 418 |
| | 398 |
| | 20 |
| | 5 | % | 109 |
| | 166 |
| | (57 | ) | | (34 | )% |
Interest income | (5 | ) | | (2 | ) | | (3 | ) | | 150 | % | | (17 | ) | | (15 | ) | | (2 | ) | | 13 | % | (8 | ) | | (6 | ) | | (2 | ) | | 33 | % |
Other (income) expense, net | (3 | ) | | (1 | ) | | (2 | ) | | 200 | % | | 51 |
| | 89 |
| | (38 | ) | | (43 | )% | (7 | ) | | (10 | ) | | 3 |
| | (30 | )% |
Income tax expense (benefit) | 335 |
| | 356 |
| | (21 | ) | | (6 | )% | | 831 |
| | 618 |
| | 213 |
| | 34 | % | 295 |
| | 210 |
| | 85 |
| | 40 | % |
Operating income | 1,440 |
| | 1,323 |
| | 117 |
| | 9 | % | | 4,172 |
| | 3,776 |
| | 396 |
| | 10 | % | 1,476 |
| | 1,282 |
| | 194 |
| | 15 | % |
Depreciation and amortization | 1,637 |
| | 1,416 |
| | 221 |
| | 16 | % | | 4,846 |
| | 4,499 |
| | 347 |
| | 8 | % | 1,600 |
| | 1,575 |
| | 25 |
| | 2 | % |
Stock-based compensation (1) | 102 |
| | 83 |
| | 19 |
| | 23 | % | | 304 |
| | 222 |
| | 82 |
| | 37 | % | 93 |
| | 96 |
| | (3 | ) | | (3 | )% |
Cost associated with the Transactions | 53 |
| | — |
| | 53 |
| | NM |
| | 94 |
| | — |
| | 94 |
| | NM |
| |
Merger-related costs | | 113 |
| | — |
| | 113 |
| | NM |
|
Other, net (2) | 7 |
| | — |
| | 7 |
| | NM |
| | 12 |
| | 5 |
| | 7 |
| | 140 | % | 2 |
| | 3 |
| | (1 | ) | | (33 | )% |
Adjusted EBITDA | $ | 3,239 |
| | $ | 2,822 |
| | $ | 417 |
| | 15 | % | | $ | 9,428 |
| | $ | 8,502 |
| | $ | 926 |
| | 11 | % | $ | 3,284 |
| | $ | 2,956 |
| | $ | 328 |
| | 11 | % |
Net income margin (Net income divided by service revenues) | 10 | % | | 7 | % | |
|
| | 300 bps |
| | 9 | % | | 8 | % | |
|
| | 100 bps |
| 11 | % | | 9 | % | |
|
| | 200 bps |
|
Adjusted EBITDA margin (Adjusted EBITDA divided by service revenues) | 40 | % | | 37 | % | |
|
| | 300 bps |
| | 40 | % | | 38 | % | |
|
| | 200 bps |
| 40 | % | | 38 | % | |
|
| | 200 bps |
|
| |
(1) | Stock-based compensation includes payroll tax impacts and may not agree to stock-based compensation expense in the condensed consolidated financial statements. Additionally, certain stock-based compensation expenses associated with the Transactions have been included in Merger-related costs. |
| |
(2) | Other, net may not agree to the Condensed Consolidated Statements of Comprehensive Income primarily due to certain non-routine operating activities, such as other special items that would not be expected to reoccur or are not reflective of T-Mobile’s ongoing operating performance, and are therefore excluded in Adjusted EBITDA. |
Adjusted EBITDA increased $417$328 million, or 15%11%, for the three months ended September 30, 2018March 31, 2019 primarily from:
Higher totalservice revenues, as further discussed above;
The positive impact of the new lease standard of approximately $49 million; and
The negative impact from insurance reimbursements related to the hurricanes net of costs,$36 million for three months ended March 31, 2018. There was no significant impact from hurricanes for the three months ended September 30, 2018 of $138 million, compared to costs incurred related to hurricanes in the three months ended September 30, 2017 of $148 million;
The positive impact from the new revenue standard of $136 million; and
Lower losses on equipment;March 31, 2019; partially offset by
Higher selling,Selling, general and administrative expenses; andexpenses.
Lower gains on disposal of spectrum licenses of $29 million.
Adjusted EBITDA increased $926 million, or 11%, for the nine months ended September 30, 2018 primarily from:
Higher total revenues, as further discussed above;
The positive impact from insurance reimbursements related to hurricanes, net of costs, for the nine months ended September 30, 2018 of $172 million, compared to costs incurred related to hurricanes of $148 million in the nine months ended September 30, 2017;
The positive impact from the new revenue standard of $315 million; and
Lower losses on equipment; partially offset by
Higher selling, general and administrative expenses;
Higher cost of services; and
Lower gains on disposal of spectrum licenses of $67 million.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations, proceeds from issuance of long-term debt and common stock, capitalfinancing leases, the sale of certain receivables, financing arrangements of vendor payables which effectively extend payment terms and secured and unsecured revolving credit facilities with DT. Upon consummation of the Transactions, we will incur substantial third-party indebtedness which will increase our future financial commitments, including aggregate interest payments on higher total indebtedness, and may adversely impact our liquidity. Further, the incurrence of additional indebtedness may inhibit our ability to incur new debt under the terms governing our existing and future indebtedness, which may make it more difficult for us to incur new debt in the future to finance our business strategy.
Cash Flows
On January 1, 2018, we adopted ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (the “new cash flow standard”) which impacted the presentation of our cash flows related to our beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities of approximately $1.3 billion and $1.1 billion for the three months ended September 30, 2018 and 2017, respectively, and $4.0 billion and $3.1 billion for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. The new cash flow standard also impacted the presentation of our cash payments for debt prepayment and debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities of $212 million and $188 million for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. There were no cash payments for debt prepayment and debt extinguishment costs during the three months ended September 30, 2018 and 2017. We have applied the new cash flow standard retrospectively to all periods presented.
The following is an analysisa condensed schedule of our cash flows for the three and nine months ended September 30, 2018March 31, 2019 and 2017:2018:
| | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(in millions) | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Net cash provided by operating activities | $ | 914 |
| | $ | 1,252 |
| | $ | (338 | ) | | (27 | )% | | $ | 2,945 |
| | $ | 2,966 |
| | $ | (21 | ) | | (1 | )% | $ | 1,392 |
| | $ | 770 |
| | $ | 622 |
| | 81 | % |
Net cash used in investing activities | (42 | ) | | (345 | ) | | 303 |
| | (88 | )% | | (810 | ) | | (7,012 | ) | | 6,202 |
| | (88 | )% | (966 | ) | | (462 | ) | | (504 | ) | | 109 | % |
Net cash used in financing activities | (758 | ) | | (349 | ) | | (409 | ) | | 117 | % | | (3,025 | ) | | (715 | ) | | (2,310 | ) | | 323 | % | |
Net cash (used in) provided by financing activities | | (190 | ) | | 1,000 |
| | (1,190 | ) | | (119 | )% |
Operating Activities
Net cash provided by operating activities decreased $338increased $622 million, or 27%81%, for the three months ended and $21 million, or 1%, for the nine months ended September 30, 2018.
The decrease for the three months ended September 30, 2018 was primarily from:
A $707$237 million increase in Net income; and
A $215 million decrease in net cash outflows from changes in working capital, including a paydown ofprimarily due to lower use from Accounts payable and accrued liabilities, of $253 million, a $228 million build up ofpartially offset by an increase in Inventories, withAccounts receivable and Other current and long-term assets.
Changes in Operating lease right-of-use assets and Short and long-term operating lease liabilities are now presented in Changes in operating assets and liabilities due to the launchadoption of the new iPhone generation and a $216 million increase in Accounts receivable; partially offset by
A $245 million increase to Net income; and
A $124 million increase inlease standard. The net non-cash adjustments to Net income, primarily due to higher Depreciation and amortization, partially offset by lower Deferred income tax expense and Bad debt expense.
The decrease for the nine months ended September 30, 2018 was primarily from:
A $876 million increase in net cash outflows fromimpact of changes in working capital including a paydown of Accounts payable and accrued liabilities of $765 million and a $571 million increase in Accounts receivable, partially offsetthese accounts decreased Net cash provided by changes in EIP receivables; This increase in net cash outflows was partially offsetoperating activities by $87 million.
A $436 million increase in net non-cash adjustments to Net income, primarily due to higher Depreciation and amortization, Deferred income tax expense and Stock-based compensation expense, partially offset by lower Losses from sales of receivables; and
A $419 million increase to Net income.
Investing Activities
Net cash used in investing activities decreased $303increased $504 million, or 88%109%, to a use of $42$966 million for the three months ended and $6.2 billion, or 88%, to a use of $810 million for the nine months ended September 30, 2018.
March 31, 2019. The use of cash for the three months ended September 30, 2018March 31, 2019, was primarily from:
$1.41.9 billion in Purchases of property and equipment, including capitalized interest, primarily driven by growth in network build as we continued deployment of low band spectrum, including 600 MHz;MHz, and started laying the groundwork for 5G; and
$185 million in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by
$1.31.2 billion in proceedsProceeds related to beneficial interestinterests in securitization transactions.
The use of cash for the nine months ended September 30, 2018 was primarily from:
$4.4 billion in Purchases of property and equipment, including capitalized interest, primarily driven by growth in network build as we continued deployment of low band spectrum, including beginning deployment of 600 MHz; and
$338 million of cash consideration paid, net of cash acquired, for the acquisitions of Layer3 and IWS; partially offset by
$4.0 billion in proceeds related to beneficial interest in securitization transactions.
Financing Activities
Net cash used in(used in) provided by financing activities increased $409 million,changed by $1.2 billion, or 117%119%, to a use of $758$190 million for the three months ended and $2.3 billion, or 323%, to a use of $3.0 billion for the nine months ended September 30, 2018.
March 31, 2019. The use of cash for the three months ended September 30, 2018March 31, 2019, was primarily from:
$2.1 billion for Repayments of our revolving credit facility;
$246100 million for Repayments of short-term debt for purchases of inventory, property and equipment, net;Tax withholdings on share-based awards; and
$18186 million for Repayments of capital lease obligations; partially offset byobligations.
$1.8 billion in Proceeds from borrowing on ourActivity under the revolving credit facility.
The usefacility included borrowing and full repayment of cash for the nine months ended September 30, 2018 was primarily from:
$6.1 billion for Repayments of our revolving credit facility;
$3.3 billion for Repayments of long-term debt;
$1.1 billion for Repurchases of common stock; and
$508$885 million, for Repaymentsa net of capital lease obligations; partially offset by$0 impact.
$6.1 billion in Proceeds from borrowing on our revolving credit facility; and
$2.5 billion in Proceeds from issuance of long-term debt.
Cash and Cash Equivalents
As of September 30, 2018,March 31, 2019, our Cash and cash equivalents were $329 million.$1.4 billion.
Free Cash Flow
Free Cash Flow represents netNet cash provided by operating activities less payments for purchasesPurchases of property and equipment, including proceedsProceeds related to beneficial interests in securitization transactions and less cashCash payments for debt prepayment or debt extinguishment costs. Free Cash Flow is a non-GAAP financial measure utilized by our management, investors and
analysts of T-Mobile’sour financial information to evaluate cash available to pay debt and provide further investment in the business.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
(in millions) | 2019 | | 2018 | | $ | | % |
Net cash provided by operating activities | $ | 1,392 |
| | $ | 770 |
| | $ | 622 |
| | 81 | % |
Cash purchases of property and equipment | (1,931 | ) | | (1,366 | ) | | (565 | ) | | 41 | % |
Proceeds related to beneficial interests in securitization transactions | 1,157 |
| | 1,295 |
| | (138 | ) | | (11 | )% |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | (31 | ) | | 31 |
| | NM |
|
Free Cash Flow | $ | 618 |
| | $ | 668 |
| | $ | (50 | ) | | (7 | )% |
In the first quarter of 2018, we redefined our non-GAAP financial measure Free Cash Flow to reflect the adoption of ASU 2016-15 to present cash flows on a consistent basis for investor transparency. We have applied the change in definition retrospectively in the table below, which illustrates the calculation of Free Cash Flow and reconciles Free Cash Flow to Net cash provided by operating activities, which we consider to be the most directly comparable GAAP financial measure:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
(in millions) | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % |
Net cash provided by operating activities | $ | 914 |
| | $ | 1,252 |
| | $ | (338 | ) | | (27 | )% | | $ | 2,945 |
| | $ | 2,966 |
| | $ | (21 | ) | | (1 | )% |
Cash purchases of property and equipment | (1,362 | ) | | (1,441 | ) | | 79 |
| | (5 | )% | | (4,357 | ) | | (4,316 | ) | | (41 | ) | | 1 | % |
Proceeds related to beneficial interests in securitization transactions | 1,338 |
| | 1,110 |
| | 228 |
| | 21 | % | | 3,956 |
| | 3,126 |
| | 830 |
|
| 27 | % |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | — |
| | NM |
| | (212 | ) | | (188 | ) | | (24 | ) |
| 13 | % |
Free Cash Flow | $ | 890 |
| | $ | 921 |
| | $ | (31 | ) | | (3 | )% | | $ | 2,332 |
| | $ | 1,588 |
| | $ | 744 |
| | 47 | % |
Free Cash Flow decreased $31 $50 million, or 3%7%, for the three months ended September 30, 2018, primarily from:
Lower net cash provided by operating activities, as described above; partially offset by
Higher proceeds related to our deferred purchase price from securitization transactions; and
Lower purchases of property and equipment. Cash purchasesPurchases of property and equipment, includenet of capitalized interest of $101$118 million and $29$43 million for the three months ended September 30,March 31, 2019 and 2018, respectively. The increase in cash purchases of property and 2017, respectively.equipment was primarily due to growth in network build as we continued deployment of low band spectrum, including 600 MHz, and started laying the groundwork for 5G; and
Free Cash Flow increased $744 million, or 47%, for the nine months ended September 30, 2018, primarily from:
HigherLower proceeds related to our deferred purchase price from securitization transactions; partially offset by
Higher Purchases of property and equipment, net of capitalized interest of $246Net cash provided by operating activities.
Free Cash Flow includes $34 million and $111 millionin payments for merger-related costs for the ninethree months ended September 30, 2018March 31, 2019.
Borrowing Capacity and 2017, respectively.Debt Financing
Debt
As of September 30, 2018,March 31, 2019, our total debt was $27.4$25.8 billion, excluding our tower obligations, of which $26.6$24.9 billion was classified as long-term debt. Significant debt-related activity for the nine months ended September 30, 2018 included:
Debt to Third Parties
During the nine months ended September 30, 2018,In March 2019, we issued the following Senior Notes:
|
| | | | | | | | | | | | | |
(in millions) | Principal Issuances | | Issuance Costs | | Net Proceeds from Issuance of Long-Term Debt | | Issue Date |
4.500% Senior Notes due 2026 | $ | 1,000 |
| | $ | 2 |
| | $ | 998 |
| | January 25, 2018 |
4.750% Senior Notes due 2028 | 1,500 |
| | 4 |
| | 1,496 |
| | January 25, 2018 |
Total of Senior Notes issued | $ | 2,500 |
| | $ | 6 |
| | $ | 2,494 |
| | |
We used the net proceedsdelivered a notice of $2.494 billion from the public debt issuance in January 2018 to redeem our $1.750 billion of 6.625% Senior Notes due 2023redemption on April 1, 2018, and to redeem our $600 million of 6.836% Senior Notes due 2023 on April 28, 2018, as further discussed below, and for general corporate purposes, including the partial repayment of borrowings under our revolving credit facility with DT.
During the nine months ended September 30, 2018, we made the following note redemptions:
|
| | | | | | | | | | | | | | | | |
(in millions) | Principal Amount | | Write-off of Premiums, Discounts and Issuance Costs (1) | | Call Penalties (1) (2) | | Redemption Date | | Redemption Price |
6.125% Senior Notes due 2022 | $ | 1,000 |
| | $ | 1 |
| | $ | 31 |
| | January 15, 2018 | | 103.063 | % |
6.625% Senior Notes due 2023 | 1,750 |
| | (75 | ) | | 58 |
| | April 1, 2018 | | 103.313 | % |
6.836% Senior Notes due 2023 | 600 |
| | — |
| | 21 |
| | April 28, 2018 | | 103.418 | % |
| |
(1) | Write-off of premiums, discounts, issuance costs and call penalties are included in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income. Write-off of premiums, discounts and issuance costs are included in Losses on redemption of debt within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. |
| |
(2) | The call penalty is the excess paid over the principal amount. Call penalties are included within Net cash used in financing activities in our Condensed Consolidated Statements of Cash Flows. |
Debt to Affiliates
On April 30, 2018, DT purchased (i) $1.0 billion in aggregate principal amount of 4.500%our 9.332% Senior Reset Notes due 2026 and (ii) $1.5 billion in aggregate principal amount2023 held by DT, our majority stockholder. The notes will be redeemed effective April 28, 2019, at a redemption price equal to 104.666% of 4.750% Senior Notes due 2028 directly from T-Mobile USA and certain of its affiliates, as guarantors, with no underwriting discount (the “New DT Notes”).
We used the net proceeds of $2.5 billion from the transaction to refinance existing indebtedness to DT as follows:
|
| | | | | | | | | | | | | | | | |
(in millions) | Principal Amount | | Write -off of Embedded Derivatives (1) | | Other (2) | | Redemption Date | | Redemption Price |
8.097% Senior Notes due 2021 | $ | 1,250 |
| | $ | (8 | ) | | $ | 51 |
| | April 28, 2018 | | 104.0485 | % |
8.195% Senior Notes due 2022 | 1,250 |
| | (8 | ) | | 51 |
| | April 28, 2018 | | 104.0975 | % |
| |
(1) | Certain components of the reset features were required to be bifurcated from the DT Senior Reset Notes and separately accounted for as embedded derivative instruments. Write-off of embedded derivatives are included in Losses on redemption of debt within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. |
| |
(2) | Cash for the premium portion of the redemption price set forth in the indenture governing the DT Senior Reset Notes, plus accrued but unpaid interest on the DT Senior Reset Notes to, but not including, the exchange date. |
Incremental Term Loan Facility
In March 2018, we amended the terms of the Incremental Term Loan Facility. Following this amendment, the applicable margin payable on LIBOR indexed loans is 1.50% under the $2.0 billion Incremental Term Loan Facility maturing on November 9, 2022 and 1.75% under the $2.0 billion Incremental Term Loan Facility maturing on January 31, 2024. The amendment also modified the Incremental Term Loan Facility to (i) include a soft-call prepayment premium of 1.00% of the outstanding principal amount of the loans under the Incremental Term Loan Facilitynotes (plus accrued and unpaid interest thereon), payable on April 29, 2019. The redemption premium is $28 million. The outstanding principal amount was reclassified from Long-term debt to DT upon certain refinancingsaffiliates to Short-term debt to affiliates in our Condensed Consolidated Balance Sheets as of such loans by us with lower priced debt prior toMarch 31, 2019.
We maintain a date that is six months after March 29, 2018 and (ii) update certain covenants and other provisions to make them substantially consistent, subject to certain additional carve outs, with our most recently publicly issued notes. No issuance fees were incurred related to this debt agreement for the three and nine months ended September 30, 2018.
Revolving Credit Facility
In January 2018, we utilized proceeds under our$2.5 billion revolving credit facility with DT to redeemwhich is comprised of a $1.0 billion in aggregate principal amount of our 6.125% Senior Notes due 2022 and for general corporate purposes. On January 29, 2018, the proceeds utilized under ourunsecured revolving credit facility with DT were repaid. The proceedsagreement and borrowings from thea $1.5 billion secured revolving credit facility are presented in Proceeds from borrowing on revolving credit facility and Repaymentsagreement, with a maturity date of revolving credit facility within Net cash used in financing activities in our Condensed Consolidated Statements of Cash Flows.December 29, 2021. As of September 30, 2018March 31, 2019 and December 31, 2017,2018, there were no outstanding borrowings under the revolving credit facility.
InWe maintain a handset financing arrangement with Deutsche Bank AG (“Deutsche Bank”), which allows for up to $108 million in borrowings. Under the handset financing arrangement, we can effectively extend payment terms for invoices payable to certain handset vendors. As of March 31, 2019 and December 31, 2018, there was no outstanding balance.
We maintain vendor financing arrangements with our primary network equipment suppliers. Under the respective agreements, we amended the termscan obtain extended financing terms. As of (a) our Secured Revolving Credit Facility and (b) our Unsecured Revolving Credit Facility. Following these amendments, (i) the range of applicable margin payableMarch 31, 2019, there was $250 million in outstanding borrowings under the Secured Revolving Credit Facility is 1.05% to 1.80%, (ii) the rangevendor financing agreements. As of the applicable margin payable under the Unsecured Revolving Credit Facility is 2.05% to 3.05%, (iii) the range of the undrawn commitment fee applicable to the Secured Revolving Credit Facility is 0.25% to 0.45%, (iv) the range of the undrawn commitment fee applicable to the Unsecured Revolving Credit Facility is 0.20% to 0.575% and (v) the maturity date of the revolving credit facility with DT is December 29, 2020. The amendments also modify the facility to31, 2018, there was no outstanding balance.
update certain covenants and other provisions to make them substantially consistent, subject to certain additional carve outs, with our most recently publicly issued notes.Consents on Debt
Commitment Letter
In connection with the entry into the Business Combination Agreement, T-Mobile USA entered into a commitment letter, dated as of April 29, 2018 (as amended and restated on May 15, 2018, the “Commitment Letter”), with certain financial institutions named therein that have committed to provide up to $38.0 billion in secured and unsecured debt financing, including a $4.0 billion secured revolving credit facility, a $7.0 billion secured term loan facility, a $19.0 billion secured bridge loan facility and an $8.0 billion unsecured bridge loan facility. Following the receipt of the debt consents described below, as permitted by the terms of the commitment letter, on May 22, 2018, T-Mobile USA reallocated the entire $8.0 billion unsecured bridge loan facility to be part of the secured bridge loan facility, increasing the size of the secured bridge loan facility to $27.0 billion, and subsequently on June 6, 2018, reduced the initial aggregate commitment under the secured bridge facility by $8.0 billion, such that the remaining size of the secured bridge facility is currently $19.0 billion and total committed financing is currently $30.0 billion. The funding of the debt facilities provided for in the Commitment Letter is subject to the satisfaction of the conditions set forth therein, including consummation of the Merger. The proceeds of the debt financing provided for in the Commitment Letter will be used to refinance certain existing debt of us, Sprint and our and Sprint’s respective subsidiaries and for post-closing working capital needs of the combined company. In connection with the financing provided for in the Commitment Letter, we expect to incur certain fees if the Merger closes, including fees for the financial institutions structuring and providing the commitments for the secured term loan facility, secured revolving loan facility and the secured bridge loan, and certain take-out fees associated with the issuance of permanent secured bond debt in lieu of the secured bridge loan. We expect to incur up to approximately $275 million in fees if the Merger were to close on or after January 29, 2019. The fees increase to up to approximately $340 million if the closing date occurs on or after April 29, 2019. We have not accrued these fees as of September 30, 2018. We also may be required to draw down on the $7.0 billion secured term loan facility on May 1, 2019, and would be required to place the proceeds in escrow and pay interest thereon until the Merger closes.
Financing Matters Agreement
In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a Financing Matters Agreement,financing matters agreement, dated as of April 29, 2018, (the “Financing Matters Agreement”). Pursuantpursuant to the Financing Matters Agreement,which DT agreed, among other things, to consent to the incurrence by
T-Mobile USA of secured debt in connection with and after the consummation of the Merger, and to provide a lock up on sales thereby as to certain senior notes of T-Mobile USA held thereby. In addition, T-Mobile USA agreed, among other things, to repay and terminate, upon closing of the Merger, the Incremental Term Loan Facility and the revolving credit facility of T-Mobile USA which are provided by DT, as well as $2.0 billion of T-Mobile USA’s 5.300% Senior Notes due 2021 and $2.0 billion of T-Mobile USA’s 6.000% Senior Notes due 2024. In addition, T-Mobile USA and DT agreed, upon closing of the Merger, to amend the $1.25 billion of T-Mobile USA’s 5.125% Senior Notes due 2025 and $1.25 billion of T-Mobile USA’s 5.375% Senior Notes due 2027 to change the maturity dates thereof to April 15, 2021 and April 15, 2022, respectively. In connection with receiving the requisite consents, we made upfront payments to DT of $7 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt to affiliates in our Condensed Consolidated Balance Sheets.Merger. If the Merger is consummated, we will make additional payments for requisite consents to DT of $20 million. We have notDT. There was no payment accrued these additional payments as of September 30, 2018.March 31, 2019.
Consents on Debt to Third Parties
On May 18, 2018, under the terms and conditions described in the Consent Solicitation Statement dated as of May 14, 2018, we obtained consents necessary to effect certain amendments to certain existing debt of us and our Senior Notes to third parties in connection with the Business Combination Agreement. Pursuant to the Consent Solicitation Statement, third-party notes holders agreed, among other things, to consent to increasing the amount of Secured Indebtedness under Credit Facilities that can be incurred from the greater of $9 billion and 150% of Consolidated Cash Flow to the greater of $9 billion and an amount that would not cause the Secured Debt to Cash Flow Ratio (calculated net of cash and cash equivalents) to exceed 2.00x (the “Ratio Secured Debt Proposed Amendments”) and in each case as such capitalized term is defined in the Indenture. In connection with receiving the requisite consents for the Ratio Secured Debt Proposed Amendments, we made upfront payments to third-party note holders of $17 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt in our Condensed Consolidated Balance Sheets. These upfront payments increased the effective interest rate of the related debt.
In addition, note holders agreed, among other things, to allow certain entities related to Sprint’s existing spectrum securitization notes program (“Existing Sprint Spectrum Program”) to be non-guarantor Restricted Subsidiaries, provided that the principal amount of the spectrum notes issued and outstanding under the Existing Sprint Spectrum Program does not exceed $7.0 billion
and that the principal amount of such spectrum notes reduces the amount available under the Credit Facilities ratio basket, and to revise the definition of GAAP to mean generally accepted accounting principles in effect from time to time, unless the Company elects to “freeze” GAAP as of any date, and to exclude the effect of the changes in the accounting treatment of lease obligations (the “Existing Sprint Spectrum and GAAP Proposed Amendments,” and together with the Ratio Secured Debt Proposed Amendments, the “Proposed Amendments”). In connection with receiving the requisite consents for the Existing Sprint Spectrum and GAAP Proposed Amendments, we made upfront payments to third-party note holders of $14 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt in our Condensed Consolidated Balance Sheets. These upfront payments increased the effective interest rate of the related debt.
In connection with obtaining the requisite consents, on May 20, 2018, T-Mobile USA, the guarantors and Deutsche Bank Trust Company Americas, as trustee, executed and delivered the 37th supplemental indenture to the Indenture, pursuant to which, with respect to each of the Notes, the Proposed Amendments will become effective immediately prior to the consummation of the Merger.
We paid third-party bank fees associated with obtaining the requisite consents related to the Proposed Amendments of $6 million during the second quarter of 2018, which we recognized as Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income.subsidiaries. If the Merger is consummated, we will make additional payments for requisite consents to third-party note holders for requisite consents related to the Ratio Secured Debt Proposed Amendments of up to $54 million and additional payments to third-party note holders for requisite consents related to the Existing Sprint Spectrum and GAAP Proposed Amendments of up to $41 million. We have notholders. There was no payment accrued these payments as of September 30, 2018.March 31, 2019.
Future Sources and Uses of Liquidity
We couldmay seek additional sources of liquidity, including through the issuance of additional long-term debt in 2018,2019, to continue to opportunistically acquire spectrum licenses or other assets in private party transactions or for the refinancing of existing long-term debt on an opportunistic basis. Excluding liquidity that could be needed for spectrum acquisitions, or for other assets, we expect our principal sources of funding to be sufficient to meet our anticipated liquidity needs for business operations for the next 12 months.months as well as our longer-term liquidity needs. Our intended use of any such funds is for general corporate purposes, including for capital expenditures, spectrum purchases, opportunistic investments and acquisitions, redemption of high yield callable debt and stock purchases.
We determine future liquidity requirements, for both operations and capital expenditures, based in large part upon projected financial and operating performance, and opportunities to acquire additional spectrum. We regularly review and update these
projections for changes in current and projected financial and operating results, general economic conditions, the competitive landscape and other factors. There are a number of risks and uncertainties that could cause our financial and operating results and capital requirements to differ materially from our projections, which could cause future liquidity to differ materially from our assessment.
The indentures and credit facilities governing our long-term debt to affiliates and third parties, excluding capital leases, contain covenants that, among other things, limit the ability of the Issuer and the Guarantor Subsidiaries to: incur more debt; pay dividends and make distributions on our common stock; make certain investments; repurchase stock; create liens or other encumbrances; enter into transactions with affiliates; enter into transactions that restrict dividends or distributions from subsidiaries; and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt to affiliates and third parties restrict the ability of the Issuer to loan funds or make payments to the Parent. However, the Issuer is allowed to make certain permitted payments to the Parent under the terms of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt to affiliates and third parties. We were in compliance with all restrictive debt covenants as of September 30, 2018.March 31, 2019.
CapitalFinancing Lease Facilities
We have entered into uncommitted capitalfinancing lease facilities with certain partners, which provide us with the ability to enter into capitalfinancing leases for network equipment and services. As of September 30, 2018,March 31, 2019, we have committed to $2.6$3.1 billion of capitalfinancing leases under these capitalfinancing lease facilities, of which $133 million and $451$91 million was executed during the three and nine months ended September 30, 2018, respectively.March 31, 2019. We expect to enter into up to an additional $449$809 million in capitalfinancing lease commitments during 2018.2019.
Capital Expenditures
Our liquidity requirements have been driven primarily by capital expenditures for spectrum licenses and the construction, expansion and upgrading of our network infrastructure. Property and equipment capital expenditures primarily relate to our network transformation, including the build-out of our network to utilize our 600 MHz low-band spectrum licenses. We expect cash purchases of property and equipment, excluding capitalized interest of approximately $400 million, to be at the high end$5.4 to $5.7 billion and cash purchases of the range of $4.9 billionproperty and equipment, including capitalized interest, to $5.3be $5.8 to $6.1 billion in 2018.2019. This includes expenditures for the continued deployment of 600 MHz and laying the groundwork for 5G deployment. This does not include property and equipment obtained through capitalfinancing lease agreements, leased wireless devices transferred from inventory or any additional purchases of spectrum licenses.
Share Repurchases
On December 6, 2017, our Board of Directors authorized a stock repurchase program for up to $1.5 billion of our common stock through December 31, 2018 (the “2017 Stock Repurchase Program”). During the nine months ended September 30, 2018, we repurchased an additional 16.7 million shares of our common stock for $1.1 billion. There were no repurchases during the three months ended September 30, 2018. From the inception of the 2017 Stock Repurchase Program through April 27, 2018, we repurchased 23.7 million shares of our common stock at an average price per share of $63.07 for a total purchase price of $1.5 billion. Repurchased shares are retired. The 2017 Stock Repurchase Program completed on April 29, 2018.
On April 27, 2018, our Board of Directors authorized an increase in the total stock repurchase program to $9.0 billion, consisting of the $1.5 billion in repurchases previously completed and for up to an additional $7.5 billion of repurchases of our common stock. The additional $7.5 billion repurchase authorization is contingent upon the termination of the Business Combination Agreement and the abandonment of the transactionsTransactions contemplated under the Business Combination Agreement. See Note 12 – Repurchases of Common Stock of
Dividends
We have never paid or declared any cash dividends on our common stock, and we do not intend to declare or pay any cash dividends on our common stock in the Notesforeseeable future. Our credit facilities and the indentures and supplemental indentures governing our long-term debt to the Condensed Consolidated Financial Statements for further information.affiliates and third parties, excluding financing leases, contain covenants that, among other things, restrict our ability to declare or pay dividends on our common stock.
Related-PartyRelated Party Transactions
During the nine months ended September 30, 2018, we entered into certain debt related transactions with affiliates. See Note 9 – Debt of the Notes to the Condensed Consolidated Financial Statements for further information.
In the first quarter of 2018, DT, our majority stockholder and an affiliated purchaser, purchased 3.3 million additional shares of our common stock at an aggregate market value of $200 million in the public market or from other parties, in accordance with the rules of the SEC and other applicable legal requirements. There were no purchases in the second and third quarters of 2018. We do not receive proceeds from these purchases. See Note 12 – Repurchases of Common Stock of the Notes to the Condensed Consolidated Financial Statements for further information.
We also have related party transactions associated with DT or its affiliates in the ordinary course of business, including intercompany servicing and licensing.
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 Exchange Act of 1934, as amended (“Exchange Act”). 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, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. 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.
As of the date of this report, we are not aware of any activity, transaction or dealing by us or any of our affiliates for the three months ended September 30, 2018,March 31, 2019, that requires disclosure in this report under Section 13(r) of the Exchange Act, except as set forth below with respect to affiliates that we do not control and that are our affiliates solely due to their common control with DT. We have relied upon DT for information regarding their activities, transactions and dealings.
DT, through certain of its non-U.S. subsidiaries, is party to roaming and interconnect agreements with the following mobile and fixed line telecommunication providers in Iran, some of which are or may be government-controlled entities: Gostaresh Ertebatat Taliya, Irancell Telecommunications Services Company, (“MTN Irancell”), Telecommunication Kish Company, Mobile Telecommunication Company of Iran, and Telecommunication Infrastructure Company of Iran. In addition, during the three months ended March 31, 2019, DT, through certain of its non-U.S. subsidiaries, provided basic telecommunications services to Telecommunication Company of Iran and to three customers in Germany identified on the Specially Designated Nationals and Blocked Persons List maintained by the U.S. Department of Treasury’s Office of Foreign Assets Control: Bank Melli, Bank Sepah, and Europäisch-Iranische Handelsbank. These services have been terminated or are in the process of being terminated. For the three months ended September 30, 2018,March 31, 2019, gross revenues of all DT affiliates generated by roaming and interconnection traffic and telecommunications services with Iranthe Iranian parties identified herein were less than $1$0.1 million, and the estimated net profits were less than $1$0.1 million.
In addition, DT, through certain of its non-U.S. subsidiaries, operating a fixed linefixed-line network in their respective European home countries (in particular Germany), provides telecommunications services in the ordinary course of business to the Embassy of Iran in those European countries. Gross revenues and net profits recorded from these activities for the three months ended September 30, 2018March 31, 2019 were less than $0.1 million. We understand that DT intends to continue these activities.
Off-Balance Sheet Arrangements
We have arrangements, as amended from time to time, to sell certain EIP accounts receivable and service accounts receivable on a revolving basis as a source of liquidity. As of September 30, 2018, T-MobileMarch 31, 2019, we derecognized net receivables of $2.7$2.5 billion upon sale through these arrangements. See Note 5 – Sales of Certain Receivablesof the Notes to the Condensed Consolidated Financial Statements for further information.
Critical Accounting Policies and Estimates
Preparation of our condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Except as described below, there have been no material changes to the critical accounting policies and estimates as previously disclosed in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
The policy below is critical because it requires management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Actual results could differ from those estimates.
Management and the Audit Committee of the Board of Directors have reviewed and approved these critical accounting policies.
Revenue RecognitionLeases
We primarily generate our revenue from providing wireless services to customersadopted the new lease standard on January 1, 2019 and selling or leasing devicesrecognized right-of-use assets and accessories. Our contracts with customers may involve multiple performance obligations, which include wireless services, wireless devices or a combination thereof, and we allocate the transaction price between each performance obligation based on its relative standalone selling price.lease liabilities for operating leases that have not previously been recorded.
Significant JudgmentsJudgments:
The most significant judgments affectingand impacts upon adoption of the amount and timing of revenue from contracts with our customersstandard include the following items:following:
For transactions where we recognize a significant financing component, judgment is requiredIn evaluating contracts to determine if they qualify as a lease, we consider factors such as if we have obtained or transferred substantially all of the discount rate. For EIP sales,rights to the underlying asset through exclusivity, if we can or if we have transferred the ability to direct the use of the asset by making decisions about how and for what purpose the asset will be used and if the lessor has substantive substitution rights.
We recognized right-of-use assets and operating lease liabilities for operating leases that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent and deferred rent which we remeasured at adoption due to the application of hindsight to our lease term estimates. Deferred and prepaid rent will no longer be presented separately.
Capital lease assets previously included within Property and equipment, net were reclassified to financing lease right-of-use assets and capital lease liabilities previously included in Short-term debt and Long-term debt were reclassified to financing lease liabilities in our Condensed Consolidated Balance Sheet.
| |
• | Certain line items in the Condensed Consolidated Statements of Cash Flows and the “Supplementary disclosure of cash flow information” have been renamed to align with the new terminology presented in the new standard; “Repayment of capital lease obligations” is now presenting as “Repayments of financing lease obligations” and “Assets acquired under capital lease obligations” is now presenting as “Financing lease right-of-use assets obtained in exchange for lease obligations.” In the “Operating Activities” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease right-of-use assets” and “Short and long-term operating lease liabilities” which represent the change in the operating lease asset and liability, respectively. Additionally, in the “Supplemental disclosure of cash flow information” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease payments,” and in the “Noncash investing and financing activities” section we have added “Operating lease right-of-use assets obtained in exchange for lease obligations.” |
In determining the discount rate used to adjustmeasure the transactionright-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our incremental borrowing rate is based on an estimated secured rate comprised of a risk-free LIBOR rate plus a credit spread as secured by our assets.
Certain of our lease agreements include rental payments based on changes in the consumer price primarily reflects current market interest rates andindex (CPI). Lease liabilities are not remeasured as a result of changes in the estimated credit risk ofCPI; instead, changes in the customer.
Our productsCPI are generally sold with a right of return, which is accounted fortreated as variable consideration when estimating the amount of revenue to recognize. Expected device returns are estimated based on historical experience.
Sales of equipment to indirect dealers who have been identified as our customer (referred to as the sell-in model) often include credits subsequently paid to the dealer as a reimbursement for any discount promotions offered to the end consumer. These credits (payments to a customer) are accounted for as variable consideration when estimating the amount of revenue to recognize from the sales of equipment to indirect dealerslease payments and are estimated based on historical experience and other factors, such as expected promotional activity.
Promotional bill credits offered to a customer on an equipment sale that are paid over time and are contingent on the customer maintaining a service contract may result in an extended service contract based on whether a substantive penalty is deemed to exist. Determining whether contingent bill credits result in a substantive termination penalty, and determining the term over which a substantive termination penalty exists, may require significant judgment.
For capitalized contract costs, determining the amortization period as well as assessing the indicators of impairment may require significant judgment.
The determination of the standalone selling price for contracts that involve more than one product or service (or performance obligation) may require significant judgment.
The identification of distinct performance obligations within our service plans may require significant judgment.
Wireless Services Revenue
We generate our wireless services revenues from providing access to, and usage of, our wireless communications network. Service revenues also include revenues earned for providing value added services to customers, such as handset insurance
services. Service contracts are billed monthly either in advance or arrears, or are prepaid. Generally, service revenue is recognized as we satisfy our performance obligation to transfer service to our customers. We typically satisfy our stand-ready performance obligations, including unlimited wireless services, evenly over the contract term. For usage-based and prepaid wireless services, we satisfy our performance obligations when services are rendered.
Revenue for service contracts that we assess are not probable of collection is not recognized until the contract is completed and cash is received. Collectibility is re-assessed when there is a significant change in facts or circumstances. Our assessment of collectibility considers whether we may limit our exposure to credit risk through our right to stop transferring additional service in the event the customer is delinquent.
Consideration payable to a customer is treated as a reduction of the total transaction price, unless the payment is in exchange for a distinct good or service, such as certain commissions paid to dealers.
Revenue is recorded net of costs paid to another party for performance obligations where we arrange for the other party to transfer goods or services to the customer (i.e., when we are acting as an agent). For example, performance obligations relating to services provided by third-party content providers where T-Mobile neither controls a right to the content provider’s service nor controls the underlying service itself are presented net because T-Mobile is acting as an agent.
Federal Universal Service Fund and other regulatory fees are assessed by various governmental authorities in connection with the services we provide to our customers and included in Cost of services. When we separately bill and collect these regulatory fees from customers, they are recorded in Total service revenues in our Condensed Consolidated Statements of Comprehensive Income.
We have made an accounting policy election to excludeexcluded from the measurement of the transaction price all taxes assessed by a governmental authorityright-of-use asset and lease liability. These payments are recognized in the period in which the related obligation was incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We elected the use of hindsight whereby we applied current lease term assumptions that are both imposedapplied to new leases in determining the expected lease term period for all cell sites. Upon adoption of the new standard and application of hindsight our expected lease term has shortened to reflect payments due for the initial non-cancelable lease term only. This assessment corresponds to our lease term assessment for new leases and aligns with the payments that have been disclosed as lease commitments in prior years. As a result, the average remaining lease term for cell sites has decreased from approximately nine to five years based on and concurrent with a specific revenue-producing transaction and collected by T-Mobile from a customer (for example, sales, use, value added, and some excise taxes).lease contracts in effect at transition on January 1, 2019. The aggregate impact of using the hindsight is an estimated decrease in Total operating expense of $240 million in fiscal year 2019.
Equipment Revenues
We generate equipment revenues fromwere also required to reassess the sale or leasepreviously failed sale-leasebacks of mobilecertain T-Mobile-owned wireless communication devicestower sites and accessories. For performance obligations related to equipment contracts, we typically transfer control at a point in time when the device or accessory is delivered to, and accepted by, the customer or dealer. We have elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. We establish provisions for estimated device returns based on historical experience. Equipment sales not probable of collection are generally recorded as payments are received. Our assessment of collectibility considers contract terms such as down payments that reduce our exposure to credit risk.
We offer certain customers the option to pay for devices and accessories in installments using an EIP. Generally, we recognize as a reduction of the total transaction price the effects of a financing component in contracts where customers purchase their devices and accessories on an EIP with a term of more than one year, including those financing components that are not considered to be significant to the contract. However, we have elected the practical expedient to not recognize the effects of a significant financing component for contracts where we expect, at contract inception, that the period betweendetermine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a performance obligationsale should be recognized.
We concluded that a sale has not occurred for the 6,200 tower sites transferred to CCI pursuant to a customermaster prepaid lease arrangement; therefore, these sites will continue to be accounted for as failed sale-leasebacks.
We concluded that a sale should be recognized for the 900 tower sites transferred to CCI pursuant to the sale of a subsidiary and the customer’s payment500 tower sites transferred to PTI. Upon adoption on January 1, 2019 we derecognized our existing long-term financial obligation and the tower-related property and equipment associated with these 1,400 previously failed sale-leaseback tower sites and recognized a lease liability and right-of-use asset for that performance obligation will be one year or less.
In addition, for customers who enroll in our JUMP!® program, we recognize a liability based on the estimated fair valueleaseback of the specified-price trade-in right guarantee.tower sites. The fair value of the guarantee is deductedestimated impacts from the transaction pricechange in accounting conclusion are primarily a decrease in Other revenues of $44 million and a decrease in Interest expense of $34 million.
Rental revenues and expenses associated with co-location tower sites are presented on a net basis under the new revenue standard,lease standard. These revenues and expenses were presented on a gross basis under the remaining transaction price is allocated to other elements of the contract, including service and equipment performance obligations. former lease standard.
In 2015, we introduced JUMP! On Demand, which allows customers to lease a device and upgrade their leased wireless device for a new device up to one time per month. To date, all of our leased wireless devices are accounted for as operating leases and estimated contract consideration is allocated between lease elements and non-lease elements (such as service and equipment performance obligations) based on the relative standalone selling price of each performance obligation in the contract. Lease revenues are recorded as equipment revenues and recognized as earned on a straight-line basis over the lease term. Lease revenues on contracts not probable of collection are limited to the amount of payments received. See “Property and Equipment” in Note 110 - Summary of Significant Accounting PoliciesLeases included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Contract Balances
Generally, T-Mobile devices and service plans are available at standard prices, which are maintained on price lists and published on our website and/or within our retail stores.
For contracts that involve more than one product or service that are identified as separate performance obligations, the transaction price is allocated to the performance obligations based on their relative standalone selling prices. Standalone selling price is the price at which T-Mobile would sell the good or service separately to a customer and is most commonly evidenced by the price at which T-Mobile sells that good or service separately in similar circumstances and to similar customers.
A contract asset is recorded when revenue is recognized in advance of our right to receive consideration (i.e., we must perform additional services in order to receive consideration). Amounts are recorded as receivables when our right to consideration is unconditional. When consideration is received, or we have an unconditional right to consideration in advance of delivery of goods or services, a contract liability is recorded. The transaction price can include non-refundable upfront fees, which are allocated to the identifiable performance obligations.
Contract assets are included in Other current assets and Other assets and contract liabilities are included in Deferred revenue in our Condensed Consolidated Balance Sheets.
Contract Modifications
Our service contracts allow customers to frequently modify their contracts without incurring penalties in many cases. Each time a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a separate contract, as if there is a termination of the existing contract and creation of a new contract, or if the modification should be considered a change associated with the existing contract. We typically do not have significant impacts from contract modifications.
Contract Costs
We incur certain incremental costs to obtain a contract that we expect to recover, such as sales commissions. We record an asset when these incremental costs to obtain a contract are incurred and amortize them on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.
We amortize deferred costs incurred to obtain service contracts on a straight-line basis over the term of the initial contract and anticipated renewal contracts to which the costs relate. However, we have elected the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less.
Incremental costs to obtain equipment contracts (e.g., commissions paid on device and accessory sales) are recognized when the equipment is transferred to the customer.
Accounting Pronouncements Not Yet Adopted
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the interest rate risk as previously disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure information required to be disclosed in our periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Form 10-Q.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2, respectively, to this Form 10-Q.
Changes in Internal Control over Financial Reporting
Beginning January 1, 2019, we adopted the new lease standard. As a result of our adoption of the new lease standard, we have implemented significant new lease accounting systems, processes and internal controls over lease accounting to assist us in the application of the new lease standard. There were no other changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during our most recently completed fiscal quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 15 -11 – Commitments and Contingenciesof the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for information regarding certain legal proceedings in which we are involved.
Item 1A. Risk Factors
In addition to the other information containedThere have been no material changes in this Form 10-Q, the Risk Factorsour risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, as supplemented by the Risk Factors included in Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, the following risk factors and the risk factors contained in the section entitled “Risk Factors” in the final joint consent solicitation/proxy statement of T-Mobile and Sprint dated October 29, 2018 forming part of our registration statement on Form S-4 (Registration No. 333-226435) filed with the SEC, should be considered carefully in evaluating T-Mobile. Our business, financial condition, liquidity, or operating results, as well as the price of our common stock and other securities, could be materially adversely affected by any of these risks.2018.
We could be harmed by data loss or other security breaches, whether directly or by way of third parties.
Our business, like that of most retailers and wireless companies, involves the receipt, storage, and transmission of our customers’ confidential information, including sensitive personal information and payment card information, confidential information about our employees and suppliers, and other sensitive information about our Company, such as our business plans, transactions and intellectual property (“Confidential Information”). Unauthorized access to Confidential Information may be difficult to anticipate, detect, or prevent, particularly given that the methods of unauthorized access constantly change and evolve. We are subject to the threat of unauthorized access or disclosure of Confidential Information by state-sponsored parties, malicious actors, third parties or employees, errors or breaches by third-party suppliers, or other security incidents that could compromise the confidentiality and integrity of Confidential Information. In August 2018, we notified affected customers of an incident involving unauthorized access to certain customer contact information (not involving credit card information, financial data, social security numbers or passwords). While we do not believe the August 2018 security incident was material, we expect to continue to be the target of cyber-attacks, data breaches, or security incidents, which may in the future have a materially adverse effect on our business, reputation, financial condition, and operating results.
Cyber-attacks, such as denial of service and other malicious attacks, could disrupt our internal systems and applications, impair our ability to provide services to our customers, and have other adverse effects on our business and that of others who depend on our services. As a telecommunications carrier, we are considered a critical infrastructure provider and therefore may be more likely to be the target of such attacks. Such attacks against companies may be perpetrated by a variety of groups or persons,
including those in jurisdictions where law enforcement measures to address such attacks are ineffective or unavailable, and such attacks may even be perpetrated by or at the behest of foreign governments.
In addition, we provide confidential, proprietary and personal information to third-party service providers when it is necessary. These third-party service providers have experienced data breaches and other attacks that included unauthorized access to Confidential Information in the past, including a breach of the networks of one of our credit decisioning providers in September 2015, during which a subset of records containing current and potential customer information was acquired by an external party.
Our procedures and safeguards to prevent unauthorized access to sensitive data and to defend against attacks seeking to disrupt our services must be continually evaluated and revised to address the ever-evolving threat landscape. We cannot make assurances that all preventive actions taken will adequately repel a significant attack or prevent information security breaches or the misuses of data, unauthorized access by third parties or employees, or exploits against third-party supplier environments. If we or our third-party suppliers are subject to such attacks or security breaches, we may incur significant costs or other material financial impact, be subject to regulatory investigations, sanctions and private litigation, experience disruptions to our operations or suffer damage to our reputation. Any future cyber-attacks, data breaches, or security incidents may have a materially adverse effect on our business, financial condition, and operating results.
Changes in regulations or in the regulatory framework under which we operate could adversely affect our business, financial condition and operating results.
The FCC regulates the licensing, construction, modification, operation, ownership, sale, and interconnection of wireless communications systems, as do some state and local regulatory agencies. In particular, the FCC imposes significant regulation on licensees of wireless spectrum with respect to how radio spectrum is used by licensees, the nature of the services that licensees may offer and how the services may be offered, and the resolution of issues of interference between spectrum bands. Additionally, the Federal Trade Commission and other federal and state agencies have asserted that they have jurisdiction over some consumer protection, and elimination and prevention of anticompetitive business practices with respect to the provision of wireless products and services. We are subject to regulatory oversight by various federal, state and local agencies, as well as judicial review and actions, on issues related to the wireless industry that include, but are not limited to: roaming, interconnection, spectrum allocation and licensing, facilities siting, pole attachments, intercarrier compensation, Universal Service Fund (“USF”), net neutrality, 911 services, consumer protection, consumer privacy, and cybersecurity. We are also subject to regulations in connection with other aspects of our business, including handset financing and insurance activities.
We cannot assure you that the FCC or any other federal, state or local agencies will not adopt regulations or take enforcement or other actions that would adversely affect our business, impose new costs, or require changes in current or planned operations. For example, under the Obama administration, the FCC established new net neutrality and privacy regimes that applied to our operations. Both sets of rules potentially subjected some of our initiatives and practices to more burdensome requirements and heightened scrutiny by federal and state regulators, the public, edge providers, and private litigants regarding whether such initiatives or practices are compliant. While the FCC rules are now largely rolled back under the Trump administration, some state legislators and regulators are seeking to replace them with state laws, perpetuating uncertainty regarding the regulatory environment around these issues.
In addition, states are increasingly focused on the quality of service and support that wireless communication providers provide to their customers and several states have proposed or enacted new and potentially burdensome regulations in this area. We also face potential investigations by, and inquiries from or actions by state Public Utility Commissions. We also cannot assure you that Congress will not amend the Communications Act, from which the FCC obtains its authority and which serves to limit state authority, or enact other legislation in a manner that could be adverse to our business. Additionally, California passed the California Consumer Privacy Act (the “CCPA”) in June 2018, putting into place new data privacy rights for consumers, effective in January 2020. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. We will likely have to incur significant implementation costs to ensure compliance with the CCPA, and we could see increased litigation costs once the law goes into effect. If we are unable to put proper controls and procedures in place to ensure compliance, it could have an adverse effect on our business. Other states are considering similar legislation, which, if passed, could create more risks and potential costs for us.
Failure to comply with applicable regulations could have a material adverse effect on our business, financial condition and operating results. We could be subject to fines, forfeitures, and other penalties (including, in extreme cases, revocation of our spectrum licenses) for failure to comply with FCC or other governmental regulations, even if any such non-compliance was
unintentional. The loss of any licenses, or any related fines or forfeitures, could adversely affect our business, financial condition, and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
| | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit No. | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herein |
10.1 | | Third Amended and Restated Receivables Purchase and Administration Agreement, dated as of October 23, 2018, by and among T-Mobile Handset Funding LLC, as transferor, T-Mobile Financial LLC, as servicer, T-Mobile US, Inc., as performance guarantor, Royal Bank of Canada, as administrative agent, and certain financial institutions party | | | | | | | | X |
10.2 | | | | | | | | | | X |
31.1 | | | | | | | | | | X |
31.2 | | | | | | | | | | X |
32.1* | | | | | | | | | | |
32.2* | | | | | | | | | | |
101.INS | | XBRL Instance Document. | | | | | | | | X |
101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | X |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | X |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | X |
|
| | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit No. | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herein |
10.1 | | Fourth Amended and Restated Master Receivables Purchase Agreement, dated as of February 26, 2019, among T-Mobile Funding LLC, as funding seller, Billing Gate One LLC, as purchaser, Landesbank Hessen-Thüringen Girozentrale, as bank purchasing agent, MUFG Bank (Europe) N.V., Germany Branch, as bank collection agent, T-Mobile PCS Holdings LLC, as servicer, and T-Mobile US, Inc. and T-Mobile USA, Inc., as performance guarantors.
| | 8-K | | 03/04/2019 | | 10.1 | | |
10.2* | | Second Amendment, dated as of March 25, 2019, to Amended and Restated Employment Agreement, dated as of December 20, 2017, between T-Mobile US, Inc. and J. Braxton Carter.
| | | | | | | | X |
31.1 | | | | | | | | | | X |
31.2 | | | | | | | | | | X |
32.1** | | | | | | | | | | |
32.2** | | | | | | | | | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | X |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | X |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | X |
|
| | |
* | | Indicates a management contract or compensatory plan or arrangement. |
** | | Furnished herein. |
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.
|
| | | |
| | T-MOBILE US, INC. | |
| | | |
October 30, 2018April 25, 2019 | | /s/ J. Braxton Carter | |
| | J. Braxton Carter | |
| | Executive Vice President and Chief Financial Officer | |
| | (Principal Financial Officer and Authorized Signatory) | |