Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 andthat 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,II, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018,below, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:
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., as a Delaware corporation,standalone company prior to April 1, 2020, the date we completed the Merger with Sprint, and its wholly-owned subsidiaries.on and after April 1, 2020, refer to the combined company as a result of the Merger.
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 Periscopecertain social media accounts which Mr. Legere also uses as means for personal communications and observations, as means of disclosing information about us and our services and for complying with our disclosure obligations under Regulation FD.FD (the @TMobileIR Twitter account (https://twitter.com/TMobileIR) and the @MikeSievert Twitter (https://twitter.com/MikeSievert) account, which Mr. Sievert also uses as a means for personal communications and observations). 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 our 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 our investor relations website.
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:
financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. 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.
Set forth below is a summary of our unaudited condensed consolidated financial results:
The following discussion and analysis areis for the three months ended March 31, 2019,2020, compared to the same period in 20182019 unless otherwise stated.
Total revenues increased $625 million, or 6%, asslightly, the components of which are discussed below.
Branded postpaid revenues increased $423$394 million, or 8%7%, primarily from:
Higher•An 8% increase in 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 ONE Unlimited 55+, T-Mobile ONE Military, T-Mobile for Business and T-Mobile Essentials, along with record low churn; andEssentials; partially offset by
Higher average•A 1% decrease in branded postpaid other customers, driven by higher wearables and other connected devices, specificallyphone ARPU. See “Branded Postpaid Phone ARPU” in the Apple watch; partially offset by“Performance Measures” section of this MD&A. | |
• | Lower branded postpaid phone Average Revenue Per User (“ARPU”). See “Branded Postpaid Phone ARPU” in the “ |
Branded prepaid revenues were essentially flat with higher average branded prepaid customers driven by the continued success of our Metro by T-Mobile brand, offset by lower branded prepaid ARPU. See “Branded Prepaid ARPU” in the “Performance Measures” section of this MD&A.flat.
Wholesale revenues increased $38$21 million, or 14%7%, primarily from the continued success of our MVNO partnerships.
Roaming and other service revenues increased $26$34 million, or 38%36%, primarily from increases in domestic and international roaming revenues.revenues, including growth from Sprint.
Equipment revenues increased $163decreased $399 million, or 7%16%, primarily from:
$136•A decrease of $400 million in device sales revenues, excluding purchased leased devices, primarily from:
Higher average revenue per device sold due to an increase in the high-end device mix and lower promotions; partially offset by
An 8%•A 15% decrease in the number of devices sold, excluding purchased leased devices.devices, primarily due to reduced demand from social distancing rules and retail store closures arising from COVID-19; and
•Lower average revenue per device sold primarily due to a decrease in the high-end device mix and higher promotions.
Other revenues decreased $9 million, or 3%, primarily from:were essentially flat.
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
Higher advertising revenues.
Operating expenses increased $431 million, or 5%, primarily fromwere essentially flat with lower Cost of equipment sales offset by higher Selling, general and administrative, expensesDepreciation and Costamortization and Costs of equipment salesservices expenses as discussed below.
Cost of services decreased $43 million, or 3%, primarily from:
The positive impactexclusive of the new lease standard of approximately $95 million resulting from the decrease in the average lease termdepreciation 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
Higher costs for customer appreciation programs and network expansion.
Cost of equipment salesamortization, increased $171$93 million, or 6%, primarily from:
An increase•Expenses associated with new and modified leases due to network expansion and the launch of our 5G network; and
•Higher employee-related costs to support our network expansion.
Cost of equipment sales, exclusive of depreciation and amortization, decreased $487 million, or 16%, primarily from:
•A decrease of $488 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 an 8%from:
•A 15% decrease in the number of devices sold, excluding purchased lease devices; partially offset byleased devices, due to reduced demand from social distancing rules and retail store closures arising from COVID-19; and
•Lower warranty costs.average cost per device sold primarily due to a decrease in the high-end device mix.
Selling, general and administrative expenses increased $278$246 million, or 9%7%, primarily from:
•Higher commissions includingemployee-related costs;
•Higher commission expense resulting from an $81increase of $89 million increase in amortization expense related to commission costs that were capitalized beginning upon the adoption of ASC 606 on January 1, 2018;
Merger-related costs•Higher legal-related expenses including from recording an estimated accrual associated with the FCC Notice of $113Apparent Liability;
•Higher bad debt expense primarily due to the recording of estimated losses associated with the adoption of the new credit loss standard including an incremental $30 million versus zerofor the estimated macro-economic impacts of COVID-19; and
•An increase of $30 million in Q1 2018; and
Higher costs related to outsourced functions, managed services and employee-relatedMerger-related costs; partially offset by
•Lower promotional and advertising costs.
•Selling, general and administrative expenses for the three months ended March 31, 2020, included $117 million of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs.
Depreciation and amortization increased $25$118 million, or 2%7%, primarily from:
The•Network expansion, including the continued deployment of low band spectrum, including 600 MHz, and laying the groundwork for 5G; partially offset bynationwide launch of our 5G network.
Lower depreciation expense related to our JUMP! On Demand program resulting from a lower total number of devices under lease.
Operating income, the components of which are discussed above, increased $194$63 million, or 15%, for the three months ended March 31, 2019 primarily due to higher Service revenues, partially offset by higher Selling, general and administrative expenses. Operating income included the following:4%.
Merger-related costs of $113 million;
The negative impact from hurricanes of $36 million for the three months ended March 31, 2018. The impact from hurricanes is not material in the three months ended March 31, 2019; and
The net positive impact of the new lease standard of approximately $49 million.
Interest expensedecreased $72 million, or 29%, primarily from:
The redemption in April 2018 of aggregate principal amount of $2.4 billion Senior Notes, with various interest rates and maturity dates; and
Higher capitalized interest costs of $32 million, primarily due to the build out of our network to utilize our 600 MHz spectrum licenses.
Interest expense to affiliates decreased $57 million, or 34%, primarily from:
Higher capitalized interest costs of $43 million, primarily due to the build out of our network to utilize our 600 MHz spectrum licenses; and
Lower interest rates achieved through refinancing a total of $2.5 billion of Senior Reset Notes in April 2018.
Other income (expense), net decreased $3 million, or 30%. Other (expense) income, (expense), net for the three months ended March 31, 2018 included the following:were essentially flat.
A $25 million bargain purchase gain as part of our purchase price allocation related to the IWS acquisition and a $15 million gain on our previously held equity interest in IWS; partially offset by
A $32 million loss on early redemption of $1.0 billion of 6.125% Senior Notes due 2022 in January 2018.
Income tax expense increased $85$11 million, or 40%4%, primarily from higher income before taxes.
Net income, the components of which are discussed above, increased $237$43 million, or 35%5%, 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 hurricanestax, of $117 million for the three months ended March 31, 2019,2020, compared to a negative impact from hurricanes of $23$93 million net of tax for three months ended March 31, 2018.
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:
|
| | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | Change |
(in millions) | $ | | % |
Other current assets | $ | 659 |
| | $ | 645 |
| | $ | 14 |
| | 2 | % |
Property and equipment, net | 309 |
| | 297 |
| | 12 |
| | 4 | % |
Goodwill | 218 |
| | 218 |
| | — |
| | NM |
|
Tower obligations | 2,168 |
| | 2,173 |
| | (5 | ) | | — | % |
Total stockholders' deficit | (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:
|
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| Three Months Ended March 31, | | Change |
(in millions) | 2019 | | 2018 | $ | | % |
Service revenues | $ | 732 |
| | $ | 540 |
| | $ | 192 |
| | 36 | % |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | 272 |
| | 236 |
| | 36 |
| | 15 | % |
Selling, general and administrative | 275 |
| | 236 |
| | 39 |
| | 17 | % |
Total comprehensive income | 127 |
| | 34 |
| | 93 |
| | 274 | % |
The change to the results of operations of our Non-Guarantor Subsidiaries for the three months ended March 31, 2019 was primarily from:2019.
•The negative impact of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, net of tax, of $86 million for the three months ended March 31, 2020;
Higher Service revenues, primarily due•The negative impact from commission costs capitalized and amortized beginning upon the adoption of ASC 606 on January 1, 2018, net of tax, of $66 million for the three months ended March 31, 2020, compared to an increase in activitythree months ended March 31, 2019.
Guarantor Financial Information
On March 2, 2020, the SEC adopted amendments to the financial disclosure requirements for guarantors and issuers of guaranteed securities, as well for affiliates whose securities collateralize a registrant’s securities. We early adopted the requirements of the non-guarantor subsidiary that provides device insurance, primarily driven by a net increase in average revenueamendments on January 1, 2020, which included replacing guarantor condensed consolidating financial information with summarized financial information for the consolidated obligor group (Parent, Issuer, and Guarantor Subsidiaries) as well as growth in our customer base relatedno longer requiring guarantor cash flow information, financial information for non-guarantor subsidiaries, nor a reconciliation to the consolidated results.
Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties issued by T-Mobile USA, Inc. (“T-Mobile USA” or “Issuer”) is fully and unconditionally guaranteed, jointly and severally, on a device protection product that launched at the end of August 2018senior unsecured basis by T-Mobile (“Parent”) and salescertain of the new product; partially offset by
Higher Cost of equipment sales, exclusive of depreciation and amortization shown separately below, primarily due to 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; and
Higher Selling, general and administrative expenses, primarily due to an increase in billing services fees due to an increase in rate during the fourth quarter of 2018 and an increase in program expenses.
Issuer’s 100% owned subsidiaries (“Guarantor Subsidiaries”).
All other results of operations
The guarantees of the Parent,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 incur more debt, pay dividends and make distributions,
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 restrict the ability of the Issuer to loan funds or make payments to Parent. However, the Issuer and Guarantor Subsidiaries are substantially similarallowed to make certain permitted payments to the Company’sParent under the terms of the indentures and the
supplemental indentures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. We early adopted the standard on January 1, 2020 and have applied the standard retrospectively to all periods presented. Upon the adoption of the standard, deferred tax assets of non-guarantor entities in aggregate of $163 million were reclassified and netted with the deferred tax liabilities of the guarantor obligor group. The adoption of this standard did not have an impact on our condensed consolidated financial statements.
In March 2020, certain Guarantor Subsidiaries became Non-Guarantor Subsidiaries. Certain prior period amounts have been
reclassified to conform to the current period’s presentation.
The summarized balance sheet information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below:
| | | | | | | | | | | | | | | |
(in millions) | March 31, 2020 | | December 31, 2019 | | | | |
Current assets | $ | 8,431 | | | $ | 8,177 | | | | | |
Noncurrent assets | 77,827 | | | 77,684 | | | | | |
Current liabilities | 14,125 | | | 11,885 | | | | | |
Noncurrent liabilities | 43,156 | | | 45,187 | | | | | |
| | | | | | | |
Due from non-guarantors | 358 | | | 346 | | | | | |
Due to related parties | 14,215 | | | 14,173 | | | | | |
Due from related parties | 26 | | | 20 | | | | | |
The summarized results of
operations. See Note 13 – Guarantor Financial Informationoperations information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | Year Ended December 31, 2019 | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | |
Total revenues | $ | 10,694 | | | $ | 43,431 | | | | | | | | | | | | | | | |
Operating income | 1,309 | | | 4,761 | | | | | | | | | | | | | | | |
Net income | 951 | | | 3,468 | | | | | | | | | | | | | | | |
Revenue from non-guarantors | 259 | | | 974 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
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.
TotalThe performance measures presented here relate to historical periods prior to the Merger and do not include Sprint customer results. On May 1, 2020, we provided preliminary standalone Sprint customer results for the quarter ended March 31, 2020. Those results were calculated based on the customer reporting policies of Sprint prior to the Merger and thus are not indicative of future results of the combined company. The historical Sprint policies differ from those applied by T-Mobile as a combined company, and the customer results will be materially lower once T-Mobile reporting policies are applied and the Sprint prepaid brands divesture is reflected.
Branded 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, wearables, DIGITS or other connected devices which includes tablets wearables and SyncUp DRIVE,products, 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:
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| As of March 31, | | | | | | Change | | | | | | |
(in thousands) | 2020 | | 2019 | | | | # | | % | | | | |
Customers, end of period | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Branded postpaid phone customers | 40,797 | | | 37,880 | | | | | 2,917 | | | 8 | % | | | | |
Branded postpaid other customers | 7,014 | | | 5,658 | | | | | 1,356 | | | 24 | % | | | | |
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Total branded postpaid customers | 47,811 | | | 43,538 | | | | | 4,273 | | | 10 | % | | | | |
Branded prepaid customers (1) | 20,732 | | | 21,206 | | | | | (474) | | | (2) | % | | | | |
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Total branded customers | 68,543 | | | 64,744 | | | | | 3,799 | | | 6 | % | | | | |
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| March 31, 2019 | | March 31, 2018 | | Change |
(in thousands) | # | | % |
Customers, end of period | | | | | | | |
Branded postpaid phone customers | 37,880 |
| | 34,744 |
| | 3,136 |
| | 9 | % |
Branded postpaid other customers | 5,658 |
| | 4,321 |
| | 1,337 |
| | 31 | % |
Total branded postpaid customers | 43,538 |
| | 39,065 |
| | 4,473 |
| | 11 | % |
Branded prepaid customers | 21,206 |
| | 20,876 |
| | 330 |
| | 2 | % |
Total branded customers | 64,744 |
| | 59,941 |
| | 4,803 |
| | 8 | % |
Wholesale customers | 16,557 |
| | 14,099 |
| | 2,458 |
| | 17 | % |
Total customers, end of period | 81,301 |
| | 74,040 |
| | 7,261 |
| | 10 | % |
(1) On July 18, 2019, we entered into an agreement whereby certain T-Mobile branded prepaid products will now be offered and distributed by a current MVNO partner. As a result, we included a base adjustment in the third quarter of 2019 to reduce branded prepaid customers by 616,000.
Branded Customers
Total branded customers increased 4,803,000,3,799,000, or 8%6%, primarily from:
•Higher branded postpaid phone customers driven by the growing success 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 and continued growth in existing and Greenfield markets, along with record-low churn, partially offset by competitive activity;promotional activities and lower churn; and
•Higher branded postpaid other customers, primarily due to strength in gross customer additions from wearables;wearables, specifically the Apple Watch, and other connected devices; partially offset by
Higher•Lower branded prepaid customers driven primarily by a reduction of 616,000 customers resulting from a base adjustment for certain T-Mobile branded prepaid products now being offered and distributed by a current MVNO partner, partially offset by the continued success of our Metro by T-Mobile brandprepaid brands due to promotional activities and rate plan offers, and growth in connected devices, along with lower churn.offers.
Wholesale
Wholesale customers increased 2,458,000, or 17%, primarily due to the continued success of our M2M and MVNO partnerships.
Net Customer Additions (Losses)
The following table sets forth the number of net customer additions:additions (losses):
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| | | | | | | | | Three Months Ended March 31, | | | | | | Change | | | | | | |
(in thousands) | | | | | | | | | 2020 | | 2019 | | | | # | | % | | | | |
Net customer additions (losses) | | | | | | | | | | | | | | | | | | | | | |
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Branded postpaid phone customers | | | | | | | | | 452 | | | 656 | | | | | (204) | | | (31) | % | | | | |
Branded postpaid other customers | | | | | | | | | 325 | | | 363 | | | | | (38) | | | (10) | % | | | | |
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Total branded postpaid customers | | | | | | | | | 777 | | | 1,019 | | | | | (242) | | | (24) | % | | | | |
Branded prepaid customers (1) | | | | | | | | | (128) | | | 69 | | | | | (197) | | | (286) | % | | | | |
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Total branded customers | | | | | | | | | 649 | | | 1,088 | | | | | (439) | | | (40) | % | | | | |
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| Three Months Ended March 31, | | Change |
(in thousands) | 2019 | | 2018 | # | | % |
Net customer additions | | | | | | | |
Branded postpaid phone customers | 656 |
| | 617 |
| | 39 |
| | 6 | % |
Branded postpaid other customers | 363 |
| | 388 |
| | (25 | ) | | (6 | )% |
Total branded postpaid customers | 1,019 |
| | 1,005 |
| | 14 |
| | 1 | % |
Branded prepaid customers | 69 |
| | 199 |
| | (130 | ) | | (65 | )% |
Total branded customers | 1,088 |
| | 1,204 |
| | (116 | ) | | (10 | )% |
Wholesale customers | 562 |
| | 229 |
| | 333 |
| | 145 | % |
Total net customer additions | 1,650 |
| | 1,433 |
| | 217 |
| | 15 | % |
(1) On July 18, 2019, we entered into an agreement whereby certain T-Mobile branded prepaid products will now be offered and distributed by a current MVNO partner. As a result, we included a base adjustment in the third quarter of 2019 to reduce branded prepaid customers by 616,000.
Branded Customers
Total branded net customer additions decreased 116,000,439,000, or 10%40%, for the three months ended March 31, 2019 primarily from:
•Lower branded postpaid phone net customer additions primarily due to lower gross additions impacted by reduced demand from social distancing rules and retail store closures arising from COVID-19, partially offset by lower churn;
•Lower branded prepaid net customer additions primarily due to continued promotional activities in the marketplace,lower gross additions impacted by reduced demand from social distancing rules and retail store closures arising from COVID-19, partially offset by lower churn; and
•Lower branded postpaid other net customer additions primarily due to higher deactivationslower gross additions impacted by reduced demand from a growing customer base,social distancing rules and retail store closures arising from COVID-19, partially offset by lower churn; partially offset bychurn.
Higher branded postpaid phone net customer additions primarily due to record-low churn.
Wholesale
Wholesale net customer additions increased 333,000, or 145%, for the three months ended March 31, 2019 primarily due to higher gross additions from the continued success of our M2M and MVNO partnerships.
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 DRIVE. We believe branded postpaid customers per account provides management, investors and analysts with useful information to evaluate our branded postpaid customer base.
The following table sets forth the branded postpaid customers per account:
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| March 31, 2019 | | March 31, 2018 | | Change |
# | | % |
Branded postpaid customers per account | 3.06 |
| | 2.95 |
| | 0.11 |
| | 4 | % |
Branded postpaid customers per account increased 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 March 31, | | Bps Change | | | Three Months Ended March 31, | | | Bps Change | |
2019 | | 2018 | | 2020 | | 2019 | | | |
Branded postpaid phone churn | 0.88 | % | | 1.07 | % | | -19 bps | Branded postpaid phone churn | | 0.86 | % | | 0.88 | % | | | -2 bps | |
Branded prepaid churn | 3.85 | % | | 3.94 | % | | -9 bps | Branded prepaid churn | | 3.52 | % | | 3.85 | % | | | -33 bps | |
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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 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 wearables, DIGITS and other connected devices such as tablets wearables and SyncUp DRIVE.products.
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(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 | $ | 5,493 |
| | $ | 5,070 |
| | $ | 423 |
| | 8 | % |
Less: Branded postpaid other revenues | (310 | ) | | (259 | ) | | (51 | ) | | 20 | % |
Branded postpaid phone service revenues | $ | 5,183 |
| | $ | 4,811 |
| | $ | 372 |
| | 8 | % |
Divided by: Average number of branded postpaid phone customers (in thousands) and number of months in period | 37,504 |
| | 34,371 |
| | 3,133 |
| | 9 | % |
Branded postpaid phone ARPU | $ | 46.07 |
| | $ | 46.66 |
| | $ | (0.59 | ) | | (1 | )% |
Calculation of Branded Prepaid ARPU | | | | |
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Branded prepaid service revenues | $ | 2,386 |
| | $ | 2,402 |
| | $ | (16 | ) | | (1 | )% |
Divided by: Average number of branded prepaid customers (in thousands) and number of months in period | 21,122 |
| | 20,583 |
| | 539 |
| | 3 | % |
Branded prepaid ARPU | $ | 37.65 |
| | $ | 38.90 |
| | $ | (1.25 | ) | | (3 | )% |
Branded Postpaid Phone ARPU
Branded postpaid phone ARPU decreased $0.59,$0.27, or 1%, primarily due to:
•An increase in our promotional activities, including the ongoing growth in our Netflix offering, which totaled $0.59 for the three months ended March 31, 2019 primarily due to:2020, and decreased branded postpaid phone ARPU by $0.08 compared to the three months ended March 31, 2019;
•A reduction in regulatory program revenues from the continued adoption of tax inclusive plans; and
•A reduction in certain non-recurring charges;charges including the impact of credits for restore fees, international calls and data usage in connection with our response to COVID-19; partially offset by
•A decrease in the discount allocation to branded postpaid phone revenue within contracts that involve a mobile internet line; and
•The growing success of new customer segments and rate plans suchplans.
Branded Prepaid ARPU
Branded prepaid ARPU increased $0.46, or 1%, primarily due to:
•The removal of certain branded prepaid customers associated with products now offered and distributed by a current MVNO partner as T-Mobile ONE Unlimited 55+, T-Mobile ONE Military, T-Mobilethose customers had lower ARPU; partially offset by
•Dilution from our promotional activities;
•A reduction in certain non-recurring charges; and
•Growth in our Amazon Prime offering which impacted branded prepaid ARPU by $0.40 for Businessthe three months ended March 31, 2020, and T-Mobile Essentials;decreased branded prepaid ARPU by $0.08 compared to the three months ended March 31, 2019.
Average Revenue Per Account
Average Revenue per Account (“ARPA”) represents the average monthly branded postpaid service revenue earned per account. We believe branded postpaid ARPA provides management, investors and analysts with useful information to assess and evaluate our branded postpaid service revenue realization and assist in forecasting our future branded postpaid service revenues on a per account basis. We consider branded postpaid ARPA to be indicative of our revenue growth potential given the increase in the average number of branded postpaid phone customers per account and increases in postpaid other customers, including wearables, DIGITS or other connected devices which includes tablets and SyncUp products.
The following table illustrates the calculation of our operating measure ARPA and reconciles this measure to the related service revenues:
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(in millions, except average number of accounts, ARPA) | Three Months Ended March 31, | | | | Change | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | $ | | % | | | | | | | | | | | | | | |
Calculation of Branded Postpaid ARPA | | | | | | | | | | | | | | | | | | | | | |
Branded postpaid service revenues | $ | 5,887 | | | $ | 5,493 | | | $ | 394 | | | 7 | % | | | | | | | | | | | | | | |
Divided by: Average number of branded postpaid accounts (in thousands) and number of months in period | 15,155 | | | 14,108 | | | 1,047 | | | 7 | % | | | | | | | | | | | | | | |
Branded postpaid ARPA | $ | 129.47 | | | $ | 129.77 | | | $ | (0.30) | | | — | % | | | | | | | | | | | | | | |
Branded Postpaid ARPA
Branded postpaid ARPA was essentially flat, primarily impacted by:
•An increase in average customers per account due to the growing success of wearables, specifically the Apple Watch, and other connected devices; offset by
•An increase in our promotional activities, including the ongoing growth in our Netflix offering, which totaled $0.51$1.58 for the three months ended March 31, 2019,2020, and decreased branded postpaid phone ARPU by $0.27$0.23 compared to the three months ended March 31, 2018; partially offset by2019;
Higher premium services revenue; and
•A net reduction in promotional activities.
We continue to expect that Branded postpaid phone ARPU in full-year 2019 will be generally stable compared to full-year 2018.
Branded Prepaid ARPU
Branded prepaid ARPU decreased $1.25 or 3% forregulatory program revenues from the three months ended March 31, 2019 primarily due to:
Dilution from promotional ratecontinued adoption of tax inclusive plans; and
Growth•A reduction in certain non-recurring charges including the impact of credits for restore fees, international calls and data usage in connection with our Amazon Prime offering, which impacted prepaid ARPU by $0.32, is included as a benefitresponse to certain Metro by T-Mobile unlimited rate plans for the three months ended March 31, 2019; partially offset byCOVID-19.
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• | Certain non-recurring charges.
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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 our 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 measure 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 services 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 and incremental costs directly attributable to COVID-19, 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:
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| | | | | | | | | Three Months Ended March 31, | | | | | | Change | | | | | | |
(in millions) | | | | | | | | | 2020 | | 2019 | | | | $ | | % | | | | |
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Net income | | | | | | | | | $ | 951 | | | $ | 908 | | | | | $ | 43 | | | 5 | % | | | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | | | | | | | 185 | | | 179 | | | | | 6 | | | 3 | % | | | | |
Interest expense to affiliates | | | | | | | | | 99 | | | 109 | | | | | (10) | | | (9) | % | | | | |
Interest income | | | | | | | | | (12) | | | (8) | | | | | (4) | | | 50 | % | | | | |
Other (income) expense, net | | | | | | | | | 10 | | | (7) | | | | | 17 | | | (243) | % | | | | |
Income tax expense | | | | | | | | | 306 | | | 295 | | | | | 11 | | | 4 | % | | | | |
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Operating income | | | | | | | | | 1,539 | | | 1,476 | | | | | 63 | | | 4 | % | | | | |
Depreciation and amortization | | | | | | | | | 1,718 | | | 1,600 | | | | | 118 | | | 7 | % | | | | |
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Stock-based compensation (1) | | | | | | | | | 123 | | | 93 | | | | | 30 | | | 32 | % | | | | |
Merger-related costs | | | | | | | | | 143 | | | 113 | | | | | 30 | | | 27 | % | | | | |
COVID-19-related costs | | | | | | | | | 117 | | | — | | | | | 117 | | | NM | | | | | |
Other, net (2) | | | | | | | | | 25 | | | 2 | | | | | 23 | | | 1,150 | % | | | | |
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Adjusted EBITDA | | | | | | | | | $ | 3,665 | | | $ | 3,284 | | | | | $ | 381 | | | 12 | % | | | | |
Net income margin (Net income divided by Service revenues) | | | | | | | | | 11 | % | | 11 | % | | | | | | — bps | | | | |
Adjusted EBITDA margin (Adjusted EBITDA divided by Service revenues) | | | | | | | | | 42 | % | | 40 | % | | | | | | 200 bps | | | | |
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| Three Months Ended March 31, | | Change |
(in millions) | 2019 | | 2018 | | $ | | % |
Net income | $ | 908 |
| | $ | 671 |
| | $ | 237 |
| | 35 | % |
Adjustments: | | | | |
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Interest expense | 179 |
| | 251 |
| | (72 | ) | | (29 | )% |
Interest expense to affiliates | 109 |
| | 166 |
| | (57 | ) | | (34 | )% |
Interest income | (8 | ) | | (6 | ) | | (2 | ) | | 33 | % |
Other (income) expense, net | (7 | ) | | (10 | ) | | 3 |
| | (30 | )% |
Income tax expense (benefit) | 295 |
| | 210 |
| | 85 |
| | 40 | % |
Operating income | 1,476 |
| | 1,282 |
| | 194 |
| | 15 | % |
Depreciation and amortization | 1,600 |
| | 1,575 |
| | 25 |
| | 2 | % |
Stock-based compensation (1) | 93 |
| | 96 |
| | (3 | ) | | (3 | )% |
Merger-related costs | 113 |
| | — |
| | 113 |
| | NM |
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Other, net (2) | 2 |
| | 3 |
| | (1 | ) | | (33 | )% |
Adjusted EBITDA | $ | 3,284 |
| | $ | 2,956 |
| | $ | 328 |
| | 11 | % |
Net income margin (Net income divided by service revenues) | 11 | % | | 9 | % | |
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| | 200 bps |
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Adjusted EBITDA margin (Adjusted EBITDA divided by service revenues) | 40 | % | | 38 | % | |
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| | 200 bps |
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(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. | |
(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. |
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(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. |
(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 $328$381 million, or 11%12%, primarily due to:
•Higher service revenues, as further discussed above; and
•Lower net losses on equipment sales; partially offset by
•Higher Cost of services expenses; and
•Higher Selling, general and administrative expenses, excluding Merger-related costs and supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs.
•The impact from commission costs capitalized and amortized beginning upon the adoption of ASC 606 on January 1, 2018, reduced Adjusted EBITDA by $89 million for the three months ended March 31, 2019 primarily from:
Higher service revenues, as further discussed above;
The positive impact of the new lease standard of approximately $49 million; and
The negative impact from hurricanes of $36 million for2020, compared to three months ended March 31, 2018. There was no significant impact from hurricanes for the three months ended March 31, 2019; partially offset by2019.
Higher Selling, general and administrative expenses.
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, financing 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 consummationIn connection with the closing of the Transactions,Merger on April 1, 2020, we will incurincurred a substantial amount of additional third-party indebtedness which will increaseincreased our future financial commitments, including aggregate interest payments on higher total indebtedness, and may adversely impact our liquidity.payments. 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
The following is a condensed schedule of our cash flows for the three months ended March 31, 20192020 and 2018:2019:
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| | | | | | | | | Three Months Ended March 31, | | | | | | Change | | | | | | |
(in millions) | | | | | | | | | 2020 | | 2019 | | | | $ | | % | | | | |
Net cash provided by operating activities | | | | | | | | | $ | 1,617 | | | $ | 1,392 | | | | | $ | 225 | | | 16 | % | | | | |
Net cash used in investing activities | | | | | | | | | (1,580) | | | (966) | | | | | (614) | | | 64 | % | | | | |
Net cash used in financing activities | | | | | | | | | (453) | | | (190) | | | | | (263) | | | 138 | % | | | | |
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| Three Months Ended March 31, | | Change |
(in millions) | 2019 | | 2018 | | $ | | % |
Net cash provided by operating activities | $ | 1,392 |
| | $ | 770 |
| | $ | 622 |
| | 81 | % |
Net cash used in investing activities | (966 | ) | | (462 | ) | | (504 | ) | | 109 | % |
Net cash (used in) provided by financing activities | (190 | ) | | 1,000 |
| | (1,190 | ) | | (119 | )% |
Operating Activities
Net cash provided by operating activities increased $622$225 million, or 81%16%, primarily from:
•A $237$235 million increase in Net income;income, adjusted for non-cash income and expense.
A $215 million decrease in•The net cash outflows from changeschange in working capital was relatively neutral, primarily due to lower use fromchanges in Accounts payable and accrued liabilities, partially offset by an increase in Inventories Accounts 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 assetsoffset by lower use from Accounts receivable and liabilities due to the adoption of the new lease standard. The net impact of changes in these accounts decreased Net cash provided by operating activities by $87 million.Equipment installment plan receivables.
Investing Activities
Net cash used in investing activities increased $504$614 million, or 109%, to a use of $966 million for the three months ended March 31, 2019.64%. The use of cash for the three months ended March 31, 2019,2020, was primarily from:
•$1.91.8 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,our nationwide 5G network;
•$580 million in Net cash related to derivative contracts under collateral exchange arrangements, see Note 6 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements for further information; and started laying the groundwork for 5G; and •$18599 million in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by
•$1.2 billion868 million in Proceeds related to beneficial interests in securitization transactions.
Financing Activities
Net cash (used in) provided byused in financing activities changed by $1.2 billion,increased $263 million, or 119%, to a use of $190 million for the three months ended March 31, 2019.138%. The use of cash for the three months ended March 31, 2019,2020, was primarily from:
•$100282 million for Repayments of financing lease obligations;
•$141 million for Tax withholdings on share-based awards; and
•$8625 million for Repayments of capital lease obligations.short-term debt for purchases of inventory, property and equipment.
Activity under the revolving credit facility included borrowing and full repayment of $885 million, for a net of $0 impact.
Cash and Cash Equivalents
As of March 31, 2019,2020, our Cash and cash equivalents were $1.4 billion.$1.1 billion compared to $1.5 billion at December 31, 2019.
Free Cash Flow
Free Cash Flow represents Net cash provided by operating activities less cash payments for Purchases of property and equipment, including Proceeds from sales of tower sites and Proceeds related to beneficial interests in securitization transactions, and less Cash 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 our financial information to evaluate cash available to pay debt and provide further investment in the business.
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| 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 |
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Free Cash Flow | $ | 618 |
| | $ | 668 |
| | $ | (50 | ) | | (7 | )% |
We have presented the impact of the sales 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.
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| | | | | | | | | Three Months Ended March 31, | | | | | | Change | | | | | | |
(in millions) | | | | | | | | | 2020 | | 2019 | | | | $ | | % | | | | |
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Net cash provided by operating activities | | | | | | | | | $ | 1,617 | | | $ | 1,392 | | | | | $ | 225 | | | 16 | % | | | | |
Cash purchases of property and equipment | | | | | | | | | (1,753) | | | (1,931) | | | | | 178 | | | (9) | % | | | | |
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Proceeds related to beneficial interests in securitization transactions | | | | | | | | | 868 | | | 1,157 | | | | | (289) | | | (25) | % | | | | |
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Free Cash Flow | | | | | | | | | $ | 732 | | | $ | 618 | | | | | $ | 114 | | | 18 | % | | | | |
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decreased $50
Free Cash Flow increased $114 million, or 7%18%, primarily from:
•Higher Net cash provided by operating activities, as described above; and
Higher•Lower Cash Purchasespurchases of property and equipment, net ofincluding capitalized interest of $118$112 million and $43$118 million for the three months ended March 31, 2020 and 2019, and 2018, respectively. The increase in cash purchases of property and 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; andrespectively; partially offset by
•Lower proceedsProceeds related to our deferred purchase price from securitization transactions; partially offset bytransactions.
Higher Net cash provided by operating activities.
•Free Cash Flow includes $161 million and $34 million in payments for merger-relatedMerger-related costs for the three months ended March 31, 2019.2020 and 2019, respectively.
•Free Cash Flow includes $46 million and $0 in cash received in settlement of interest rate swaps for the three months ended March 31, 2020 and 2019, respectively. See Note 6 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements for further information. •Free Cash Flow includes $12 million and $0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the three months ended March 31, 2020 and 2019, respectively.
Borrowing Capacity and Debt Financing
As of March 31, 2019,2020, our total debt was $25.8and financing lease liabilities were $27.1 billion, excluding our tower obligations, of which $24.9$22.9 billion was classified as long-term debt.
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, our majority stockholder. The notes will be redeemed effective April 28, 2019, at a redemption price equalPrior to 104.666%the close of the principal amount of the notes (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 affiliates to Short-term debt to affiliates in our Condensed Consolidated Balance Sheets as of March 31, 2019.
We maintainMerger, we maintained a $2.5 billion revolving credit facility with DT which is comprised of a $1.0 billion unsecured revolving credit agreement and a $1.5 billion secured revolving credit agreement,agreement. In December 2019, we amended the terms of the revolving credit facility with aDT to extend the maturity date ofto December 29, 2021.2022. As of March 31, 20192020 and December 31, 2018,2019, there were no outstanding borrowings under the revolving credit facility. Subsequent to March 31, 2020 and on April 1, 2020, in connection with the closing of the Merger, the revolving credit facility was terminated with DT.
We 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, 20192020 and December 31, 2018,2019, there waswere no outstanding balance.balances.
We maintain vendor financing arrangements with our primary network equipment suppliers. Under the respective agreements, we can obtain extended financing terms. During the three months ended March 31, 2020, we repaid $25 million under the vendor financing arrangements. Payments on vendor financing agreements are included in Repayments of short-term debt for purchases of inventory, property and equipment, net, in our Condensed Consolidated Statements of Cash Flows. As of March 31, 2019,2020, there was $250 million inwere no outstanding borrowings under the vendor financing agreements. As of December 31, 2018,2019, there was noa $25 million outstanding balance.
Subsequent to March 31, 2020, on DebtApril 1, 2020, in connection with the closing of the Merger, T-Mobile USA and certain of its affiliates, as guarantors, entered into a Bridge Loan Credit Agreement (the “Bridge Loan Credit Agreement”) with certain financial institutions named therein, providing for a $19.0 billion secured bridge loan facility (“New Secured Bridge Loan Facility”).
Subsequent to March 31, 2020, on April 1, 2020, in connection with the closing of the Merger, T-Mobile USA and certain of its affiliates, as guarantors, entered into a Credit Agreement (the “New Credit Agreement”) with certain financial institutions named therein, providing for a $4.0 billion secured term loan facility (“New Secured Term Loan Facility”) and a $4.0 billion revolving credit facility (“New Revolving Credit Facility”).
Subsequent to March 31, 2020, on April 1, 2020, in connection with the closing of the Merger, we drew down on our $19.0 billion New Secured Bridge Loan Facility and our $4.0 billion New Secured Term Loan Facility. We used the net proceeds of $22.6 billion from the draw down of the secured facilities to repay our $4.0 billion Incremental Term Loan Facility with DT and to repurchase from DT $4.0 billion of indebtedness to affiliates, consisting of $2.0 billion of 5.300% Senior Notes due 2021 and $2.0 billion of 6.000% Senior Notes due 2024, as well as to redeem certain debt of Sprint and Sprint’s subsidiaries, including the secured term loans due 2024 with a total principal amount outstanding of $5.9 billion, accounts receivable facility with a total amount outstanding of $2.3 billion, and Sprint Corporation 7.250% Guaranteed Notes due 2028 with a total principal amount outstanding of $1.0 billion, and for post-closing general corporate purposes of the combined company.
In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a financing matters agreement,commitment letter, dated as of April 29, 2018 pursuant to which DT agreed, among other things, to consent(as amended and restated on May 15, 2018 and on September 6, 2019, the “Commitment Letter”). In connection with the financing provided for in the Commitment Letter, we incurred certain fees payable to the incurrence by
T-Mobile USA offinancial institutions, including certain financing fees on the secured
debtterm loan commitment and fees for structuring, funding, and providing the commitments. Subsequent to March 31, 2020, on April 1, 2020, in connection with
and after the
consummationclosing of the
Merger. If the Merger,
is consummated, we
will make paymentspaid $355 million in Commitment Letter fees to certain financial institutions, of which $30 million were accrued for
requisite consents to DT. There was no payment accrued as of March 31,
2019.2020, and were recognized in Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income. See Note 7 - Debt of the Notes to the Condensed Consolidated Financial Statements for further information.
Subsequent to March 31, 2020, on April 9, 2020, T-Mobile USA and certain of its affiliates, as guarantors, issued $3.0 billion of 3.500% Senior Secured Notes due 2025, $4.0 billion of 3.750% Senior Secured Notes due 2027, $7.0 billion of 3.875% Senior Secured Notes due 2030, $2.0 billion of 4.375% Senior Secured Notes due 2040, and $3.0 billion of 4.500% Senior Secured Notes due 2050 and used the net proceeds of $18.8 billion together with cash on hand to repay at par all of the outstanding amounts under, and terminate,our $19.0 billion New Secured Bridge Loan Facility. Additionally, in connection with the repayment of our New Secured Bridge Loan Facility, we received a reimbursement of $71 million, which represents a portion of the Commitment Letter fees that were paid to certain financial institutions when we drew down on the New Secured Bridge Loan Facility on April 1, 2020.
Consents on Debt
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 of our existing debt and certain existing debt of us and our subsidiaries. IfSubsequent to March 31, 2020, on April 1, 2020, in connection with the closing of the Merger, is consummated, we will makemade payments for requisite consents to third-party note holders.holders of $95 million. There were no consent payments accrued as of March 31, 2020.
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, 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. Subsequent to March 31, 2020, on April 1, 2020, in connection with the closing of the Merger, we made an additional payment for requisite consents to DT of $13 million. There was no consent payment accrued as of March 31, 2019.
Future Sources and Uses of Liquidity
We may seek additional sources of liquidity, including through the issuance of additional long-term debt in 2019,2020, 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 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 and redemption of high yield callable debt.
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 $2.3 billion and $1.2 billion as of March 31, 2020 and December 31, 2019, respectively, and was included in Other current liabilities in our Condensed Consolidated Balance Sheets.
In November 2019, we extended the mandatory termination date on our interest rate lock derivatives to June 3, 2020. For the three months ended March 31, 2020, we made net collateral transfers to certain of our derivative counterparties totaling $580 million, which included variation margin transfers to (or from) such derivative counterparties based on daily market movements. These collateral transfers are included in Other current assets in our Condensed Consolidated Balance Sheetsand inNet cash related to derivative contracts under collateral exchange arrangements within Net cash used in investing activities in our Condensed Consolidated Statements of Cash Flows.
In March 2020, we received floating rate payments from our derivative counterparties totaling $46 million. These floating rate payments were recognized as an increase to the interest rate lock derivatives liability included in Other current liabilities in our Condensed Consolidated Balance Sheets and in Changes in other current and long-term liabilities within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.
Subsequent to March 31, 2020, during April 2 to April 6, 2020, in connection with the issuance of senior secured notes, we terminated our interest rate lock derivatives. At the time of termination, the interest rate lock derivatives were a liability of $2.3 billion, $1.2 billion of which was cash-collateralized. Consequently, the net cash out flow required to settle the interest rate lock derivatives was an additional $1.1 billion and was paid at termination.
In connection with the closing of the Merger, on April 1, 2020, the major classes of Sprint’s liabilities assumed include accounts payable and accrued liabilities, short-term debt, operating and stock purchases.financing lease liabilities, net pension plan liabilities, deferred tax liabilities and long-term debt with an aggregate principal balance of $26.5 billion.
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. We have incurred, and will incur, substantial expenses as a result of completing the Transactions, the Divestiture Transaction and compliance with the Government Commitments, and we are also expected to incur substantial expenses in connection with integrating and coordinating T-Mobile’s and Sprint’s businesses, operations, policies and procedures. While we have assumed that a certain level of transaction-related expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses could exceed the costs historically borne by us and adversely affect our financial condition and results of operations. There are a number of additional risks and uncertainties, including those due to the impact of the COVID-19 pandemic, 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 capitalfinancing leases, 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 on our common stock;stock, 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 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 March 31, 2019.2020.
Financing Lease Facilities
We have entered into uncommitted financing lease facilities with certain partners, which provide us with the ability to enter into financing leases for network equipment and services. As of March 31, 2019,2020, we have committed to $3.1$4.1 billion of financing leases under these financing lease facilities, of which $91$173 million was executed during the three months ended March 31, 2019.2020. We expect to enter into up to an additional $809 million$1.0 billion in financing lease commitments during 2019.2020.
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 spectrum licenses. Welicenses and the deployment of 5G. Subsequent to the closing of the Merger on April 1, 2020, we expect cash purchasesto incur significant capital expenditures in the near term related to the integration of propertythe T-Mobile and equipment, excluding capitalized interestSprint businesses in order to fully realize the anticipated synergies associated with the Merger.
Spectrum Auction
In March 2020, the FCC announced that we were the winning bidder of approximately $4002,384 licenses in Auction 103 (37/39 GHz and 47 GHz spectrum bands) for an aggregate price of $873 million, to be $5.4 to $5.7 billion and cash purchasesnet of property and equipment, including capitalized interest, to be $5.8 to $6.1 billionan incentive payment of $59 million. At the inception of Auction 103 in 2019. This includes expendituresOctober 2019, we deposited $82 million with the FCC. Upon conclusion of Auction 103 in March 2020, we made a down payment of $93 million for the continued deploymentpurchase price of 600 MHz and laying the groundwork for 5G deployment. This does not include property and equipment obtained through financing 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 uplicenses won in the auction. Subsequent to $1.5 billion of our common stock through DecemberMarch 31, 2018 (the “2017 Stock Repurchase Program”). Repurchased shares are retired. The 2017 Stock Repurchase Program completed2020, on April 29, 2018.
On April 27, 2018, our Board8, 2020, we paid the FCC the remaining $698 million of
Directors authorized an increasethe purchase price for the licenses won in the
total stock repurchase program to $9.0 billion, consisting auction. See Note 5 - Spectrum License Transactionsof the $1.5 billion in repurchases previously completed and upNotes 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 Transactions contemplated under the Business Combination Agreement.Condensed Consolidated Financial Statements for further information.
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 foreseeable future. Our credit facilities and the indentures and supplemental indentures governing our long-term debt to 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.
Contractual Obligations
In connection with the regulatory approvals of the Transactions, we made commitments to various state and federal agencies, including the DOJ and FCC. See Note 11 – Commitments and Contingenciesof the Notes to the Condensed Consolidated Financial Statements for further information.
Subsequent to March 31, 2020, on April 1, 2020, in connection with the closing of the Merger, we became obligated to redeem certain of our indebtedness to DT, pay certain consent fees to DT and third parties and pay certain fees to financing institutions for the provision of financing associated with the closing of the Merger. See Note 7 - Debt of the Notes to the Condensed Consolidated Financial Statements for further information.
Subsequent to March 31, 2020, during April 2 to April 6, 2020, in connection with the issuance of senior secured notes, we terminated our interest rate lock derivatives. See Note 6 – Fair Value Measurements for further information.
The contractual commitments and purchase obligations of Sprint were assumed upon the completion of the Merger. These contractual commitments and purchase obligations are primarily commitments to purchase wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business.
Due to the limited time since the acquisition date and restrictions on access to Sprint information arising from antitrust considerations prior to the closing of the Merger, quantification and assessment of commitments and obligations under the assumed contracts is not yet complete.
Related Party Transactions
We have related party transactions associated with DT or its affiliates in the ordinary course of business, including intercompany servicing and licensing. Upon closing the Merger, we also have related party transactions associated with SoftBank or its affiliates, including a Master Services Agreement with Brightstar US, LLC. In addition, as a result of the Merger, we became party to a number of related party transactions with SoftBank and its affiliates that are being evaluated during the integration process to determine those that will remain in place for the Company.
Subsequent to March 31, 2020, on April 1, 2020, in connection with the closing of the Merger, we repaid our $4.0 billion Incremental Term Loan Facility with DT and repurchased from DT $4.0 billion of indebtedness to affiliates, consisting of $2.0 billion of 5.300% Senior Notes due 2021 and $2.0 billion of 6.000% Senior Notes due 2024 as well as made an additional
payment for requisite consents to DT of $13 million. See Note 7 - Debt of the Notes to the Condensed Consolidated Financial Statements for further information. 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 March 31, 2019,2020, 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, Telecommunication Kish Company, Mobile Telecommunication Company of Iran, and Telecommunication Infrastructure Company of Iran. In addition, during the three months ended March 31, 2019,2020, 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 March 31, 2019,2020, gross revenues of all DT affiliates generated by roaming and interconnection traffic and telecommunications services with the Iranian parties identified herein were less than $0.1 million, and the estimated net profits were less than $0.1 million.
In addition, DT, through certain of its non-U.S. subsidiaries operatingthat operate a fixed-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 March 31, 20192020 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 March 31, 2019,2020, we derecognized net receivables of $2.5 billion upon sale through these arrangements. See Note 54 – Sales of Certain Receivables of 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, 2018.2019.
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.
LeasesReceivables and Expected Credit Losses
We adopted the new leasecredit loss standard on January 1, 20192020 and recognized right-of-use assetslifetime expected credit losses at the inception of our credit risk exposures whereas we recognized credit losses only when it was probable that they had been incurred under the previous standard.
Allowance for Credit Losses
We maintain an allowance for expected credit losses and lease liabilitiesdetermine its appropriateness through an established process that assesses the lifetime credit losses that we expect to incur related to our receivable portfolio. We develop and document our allowance methodology at the portfolio segment level for operating leases that have not previously been recorded.
Significant Judgments:
The most significant judgmentsthe accounts receivable portfolio and impacts upon adoptionEIP receivables portfolio segments. While we attribute portions of the standard includeallowance to our respective accounts receivable and EIP portfolio segments, the following:entire allowance is available to absorb expected credit losses related to the total receivable portfolio.
In evaluating contractsOur process involves procedures to determine if they qualify as a lease, weappropriately consider factorsthe unique risk characteristics of our accounts receivable and EIP receivable portfolio segments. For each portfolio segment, losses are estimated collectively for groups of receivables with similar characteristics. Our allowance levels are influenced by receivable volumes, receivable delinquency status, historical loss experience and other conditions influencing loss expectations, such as changes in credit and collections policies and forecasts of macro-economic conditions.
We consider a receivable past due when a customer has not paid us by the contractually specified payment due date. We write-off account balances if we have obtained or transferred substantially allcollection efforts are unsuccessful and the receivable balance is deemed uncollectible, based on customer credit quality and the aging of the rights to the underlying asset through exclusivity, if we can or if we have transferred the ability to direct the usereceivable.
Accounts Receivable Portfolio Segment
Accounts receivable consists primarily of the asset by making decisions about howamounts currently due from customers (e.g., for wireless services), handset insurance administrators, wholesale partners, other carriers 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 bethird-party retail channels. Accounts receivable are 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.
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• | 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.”
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In determiningSheets at the discount rate usedamortized cost basis (i.e., the receivables’ outstanding principal balance adjusted for any write-offs), net of the allowance for expected credit losses. We have an arrangement to measuresell 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 incremental borrowing rate is basedmajority of customer service accounts receivable on an estimated secured rate compriseda revolving basis, which are treated as sales of a risk-free LIBOR rate plus a credit spread as secured by ourfinancial assets.
Certain ofWe estimate expected credit losses associated with our lease agreements include rental payments based on changes in the consumer price index (CPI). Lease liabilitiesaccounts receivable portfolio using an aging schedule methodology that utilizes historical information and current conditions to develop expected credit losses by aging bucket, including for receivables that are not remeasuredpast due.
To determine the appropriate credit loss percentages by aging bucket, we consider a number of factors, including our overall historical credit losses net of recoveries and timely payment experience as well as current collection trends such as write-off frequency and severity, credit quality of the customer base, and other qualitative factors such as macro-economic conditions, including an expected economic slowdown or recession as a result of the COVID-19 pandemic.
We consider the need to adjust our estimate of expected credit losses for reasonable and supportable forecasts of future economic conditions. To do so, we monitor professional forecasts of changes in real U.S. gross domestic product and forecasts of consumer credit behavior for comparable credit exposures. We also periodically evaluate other economic indicators such as unemployment rates to assess their level of correlation with our historical credit loss statistics.
EIP Receivables Portfolio Segment
We offer certain retail customers the CPI; instead, changesoption to pay for their devices and other purchases in installments over a period of, generally, 24 months and up to 36 months using an EIP. EIP receivables are presented in our Condensed Consolidated Balance Sheets at the CPIamortized cost basis (i.e., the receivables’ outstanding principal balance adjusted for any write-offs and unamortized discounts), net of the allowance for expected credit losses. At the time of an installment sale, we impute a discount for interest if the EIP term exceeds 12 months as there is no stated rate of interest on the EIP receivables. The EIP receivables are treated as variable leaserecorded at their present value, which is determined by discounting expected future cash payments at the imputed interest rate. The difference between the recorded amount of the EIP receivables and are excludedtheir unpaid principal balance (i.e., the contractual amount due from the measurementcustomer) results in a discount which is allocated to the performance obligations of the right-of-use assetarrangement and lease liability. These payments arerecorded as a reduction in transaction price in Total service revenues and Equipment revenues in our Condensed Consolidated Statements of Comprehensive Income. We determine the imputed discount rate based primarily on current market interest rates and the estimated credit risk on the EIP receivables. The imputed discount on EIP receivables is amortized over the financed installment term using the effective interest method and recognized as Other revenues in our Condensed Consolidated Statements of Comprehensive Income.
At the period in whichtime that we originate EIP loans to customers, we recognize an allowance for credit losses that we expect to incur over the related obligation was incurred. Our lease agreementslifetime of such assets. This allowance represents the portion of the amortized cost basis of EIP receivables that we do not contain any material residual value guarantees or material restrictive covenants.expect to collect.
We electedestimate expected credit losses on our EIP receivables by using historical data adjusted for current conditions to calculate default probabilities for our outstanding EIP loans. We consider various risk characteristics when calculating default probabilities, such as how long such loans have been outstanding, customer credit ratings, customer tenure, delinquency status and other correlated variables identified through statistical analyses. We multiply these estimated default probabilities by our estimated loss given default, which considers recoveries.
As we do for our accounts receivable portfolio segment, we consider the useneed to adjust our estimate of hindsight whereby we applied current lease term assumptions that are applied to new leases in determiningexpected losses on EIP receivables for reasonable and supportable forecasts of economic conditions through monitoring of external professional forecasts and periodic internal statistical analyses, including the impact from an expected lease term period for all cell sites. Upon adoptioneconomic slowdown or recession as a result 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.COVID-19 pandemic.
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 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 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.
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, 2018.2019.
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 (the “Sarbanes-Oxley Act”) 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
Item 1A. Risk Factors
There have been no material changes in ourThe risk factors aspresented below amend and restate the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. In addition to the other information contained in this Form 10-Q, the following risk factors 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. In addition, many of these risks have been or may be heightened by impacts of the COVID-19 pandemic.
Risks Related to Our Business and the Wireless Industry
The COVID-19 pandemic has adversely affected, and will continue to adversely affect, our business, liquidity, financial condition, and operating results.
The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide. It has impacted, and will continue to impact, the demand for our products and services, the ways in which our customers use them, and our suppliers’ ability to provide products to us. As a result, our business, liquidity, financial condition, and operating results have been, and will continue to be, adversely impacted by the COVID-19 pandemic. For example, the COVID-19 pandemic has caused a widespread increase in unemployment and is expected to result in reduced consumer spending and economic slowdown or recession. In addition, public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing, the adoption of work-from-home initiatives, government forbearance programs and online learning by companies and institutions, could affect our operations, consumer and business spending, and the amount and ways our customers use our networks and our other products and services. In addition, COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us and our customers’ ability to timely pay for services. Further, the continued spread of COVID-19 has led to extreme disruption and volatility in the global capital markets and may lead to a significant economic recession, which could have a further adverse impact on our business, financial condition and operating results, including potentially decreased access to capital markets or a reduced ability to issue debt on terms acceptable to us. Additionally, there may be a potential impairment of goodwill, spectrum licenses or long-lived assets if the adverse impact on operating results and cash flows continues for a prolonged period of time.
Before the Merger, in mid-March, approximately 80% of T-Mobile and 70% of Sprint company-owned store locations, as well as many third-party retailer locations that sell our T-Mobile, Metro by T-Mobile and Sprint brands, were closed. In compliance with the regulations of various states, we have since reopened a number of our previously closed stores. Our plans to potentially reopen additional stores depend on safe and healthy operating environments and local and state mandates and orders.
In addition, in an effort to assist customers impacted by the COVID-19 pandemic, on March 13, 2020, we pledged our support for the FCC’s Keep Americans Connected Pledge ensuring residential and small business customers with financial impacts resulting from the pandemic do not lose service. Since then, we have taken steps to ensure our customers have temporarily expanded international long distance calling, data services and access to our network. These initiatives could divert our resources from network buildout and put additional strain on our network, potentially leading to slower speeds impacting our customer experience.
The extent to which the COVID-19 pandemic impacts our liquidity, financial condition and operating results will depend on future developments, which are highly uncertain and cannot be predicted, including the duration and scope of the COVID-19 pandemic, government, social, business and other actions that have been and will be taken in response to the COVID-19 pandemic, and its effect on short-term and long-term economic conditions.
Economic, political and market conditions, including those caused by the COVID-19 pandemic, may adversely affect our business, financial condition, and operating results, as well as our access to financing on favorable terms or at all.
Our business, financial condition, and operating results are sensitive to changes in general economic conditions, including interest rates, consumer credit conditions, consumer debt levels, consumer confidence, rates of inflation (or concerns about
deflation), unemployment rates, economic growth, energy costs, and other macro-economic factors. Difficult, or worsening, general economic conditions, including those caused by the COVID-19 pandemic or other events such as terrorist activity, armed conflict, political instability or natural disasters, could have a material adverse effect on our business, financial condition, and operating results.
Market volatility, political and economic uncertainty, and weak economic conditions, such as a recession or economic slowdown, may materially and adversely affect our business, financial condition, and operating results in a number of ways. Our services and device financing plans are available to a broad customer base, a significant segment of which may be vulnerable to weak economic conditions, particularly our subprime customers. We may have greater difficulty in gaining new customers within this segment, and existing customers may be more likely to terminate service and default on device financing plans due to an inability to pay.
Further, because we offer a device leasing plan, we expect to realize economic benefit from the estimated residual value of a leased device, which reflects the estimated fair value of the underlying asset at the end of the expected lease term. Changes in residual value assumptions made at lease inception affect the amount of depreciation expense and the net amount of equipment under operating leases. If estimated residual values, in the aggregate, significantly decline due to economic factors, including COVID-19 impacts, obsolescence, or other circumstances, we may not realize such residual value. Sprint historically suffered, and we may suffer, negative consequences including increased costs and increased losses on devices as a result of a lease subscriber default, the related termination of a lease, and the attempted repossession of the device, including failure of a lease subscriber to return a leased device.
Weak economic conditions and credit conditions may also adversely impact our suppliers, dealers, and MVNOs, some of which may file for or may be considering bankruptcy, or may experience cash flow or liquidity problems, or may be unable to obtain or refinance credit such that they may no longer be able to operate. Any of these could adversely impact our ability to distribute, market, or sell our products and services.
In addition, instability in the global financial markets could lead to periodic volatility in the credit, equity, and fixed income markets. This volatility could limit our access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain financing on terms that are acceptable to us or at all.
Competition, industry consolidation, and changes in the market for wireless services could negatively affect our ability to attract and retain customers and adversely affect our business, financial condition, and operating results.
We have multiple wireless competitors, some of which have greater resources than we have and compete for customers based principally on service/device offerings, price, network coverage, speed and quality and customer service. We expect market saturation to continue to cause the wireless industry’s customer growth rate to be moderate in comparison with historical growth rates, or possibly negative, leading to ongoing competition for customers. We also expect that our customers’ appetite for data services will place increasing demands on our network capacity. This competition and our capacity will continue to put pressure on pricing and margins as companies compete for potential customers. Our ability to compete will depend on, among other things, continued absolute and relative improvement in network quality and customer service, effective marketing and selling of products and services, innovation, and attractive pricing, all of which will involve significant expenses.
Joint ventures, mergers, acquisitions and strategic alliances in the wireless sector have resulted in and are expected to result in larger competitors competing for a limited number of customers. The two largest national wireless communications services providers may be able to enter into exclusive handset, device, or content arrangements, execute pervasive advertising and marketing campaigns, or otherwise improve their cost position relative to ours. In addition, refusal of our large competitors to provide critical access to resources and inputs, such as roaming services on reasonable terms could improve their position within the wireless broadband mobile services industry.
We face intense and increasing competition from other service providers as industry sectors converge, such as cable, telecom services and content, satellite, and other service providers. Companies like Comcast and AT&T (with acquisitions of DirecTV and Time Warner, Inc.) will have the scale and assets to aggressively compete in a converging industry. Verizon, through its acquisitions of AOL, Inc. and Yahoo! Inc. is also a significant competitor focusing on premium content offerings to diversify outside of core wireless. Further, some of our competitors now provide content services in addition to voice and broadband services, and consumers are increasingly accessing video content from Internet-based providers and applications, all of which create increased competition in this area. These factors, together with the effects of the increasing aggregate penetration of wireless services in all metropolitan areas and the ability of our larger competitors to use resources to build out their networks and to quickly deploy advanced technologies, such as 5G, could make it more difficult for us to continue to attract and retain
customers, and may adversely affect our competitive position and ability to grow, which would have a material adverse effect on our business, financial condition and operating results.
Any acquisition, investment, or merger may subject us to significant risks, any of which may harm our business.
We may pursue acquisitions of, investments in or mergers with businesses, technologies, services and/or products that complement or expand our business. Some of these potential transactions could be significant relative to the size of our business and operations. Any such transaction would involve a number of risks and could present financial, managerial and operational challenges, including:
•diversion of management attention from running our existing business;
•increased costs to integrate the networks, spectrum, technology, personnel, customer base and business practices of the business involved in any such transaction with our business;
•difficulties in effectively integrating the financial and operational systems of the business involved in any such transaction into (or supplanting such systems with) our financial and operational reporting infrastructure and internal control framework in an effective and timely manner;
•potential exposure to material liabilities not discovered in the due diligence process or as a result of any litigation arising in connection with any such transaction;
•significant transaction-related expenses in connection with any such transaction, whether consummated or not;
•risks related to our ability to obtain any required regulatory approvals necessary to consummate any such transaction;
•acquisition financing may not be available on reasonable terms or at all and any such financing could significantly increase our outstanding indebtedness or otherwise affect our capital structure or credit ratings; and
•any business, technology, service, or product involved in any such transaction may significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from the transaction, which could, among other things, also result in a write-down of goodwill and other intangible assets associated with such transaction.
For any or all of these reasons, acquisitions, investments, or mergers may have a material adverse effect on our business, financial condition, and operating results.
Prior to the closing of the Merger, Sprint identified a material weakness in its internal control over financial reporting that could result in material misstatements as well as negatively impact the reliability of our financial statements. This and any other material weaknesses we identify while we work to integrate and align guidelines, principles and practices of the two companies following the Merger, or any other failure by us to maintain effective internal controls, could result in a loss of investor confidence regarding our financial statements. Additionally, the trading price of our stock and our access to capital could be negatively impacted, and we could be subjected to significant costs and reputational damage that could have an adverse impact on our business, financial condition or operating results.
Under Section 404 of the Sarbanes-Oxley Act, we, along with our independent registered public accounting firm, will be required to report on the effectiveness of our internal control over financial reporting. This requirement is subject to an exemption for business combinations during the most recent fiscal year, which we may choose to utilize due to the Merger.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the preparation of Sprint’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, a material weakness in Sprint’s internal control over financial reporting was discovered. The material weakness is the result of deficiencies in the operating effectiveness of the controls over testing changes to the functionality that determines qualifying subscriber usage and the validation of the ongoing qualifying subscriber usage under Sprint’s Lifeline program. Sprint provides service to eligible Lifeline subscribers under the Assurance Wireless brand for whom it seeks reimbursement from the Universal Service Fund. In 2016, the FCC enacted changes to the Lifeline program, which required Sprint to update how it determined qualifying subscriber usage. An inadvertent coding issue in the system used to identify qualifying subscriber usage occurred in July 2017 while the system was being updated to address the required changes. As a result, Sprint claimed monthly subsidies for serving Lifeline subscribers that may not have met Sprint’s usage requirements under the Lifeline program. The estimated reimbursements to federal and state governments for subsidies claimed contrary to Sprint’s usage policy reduced Sprint’s ‘‘Service revenue,’’ increased Sprint’s ‘‘Selling, general and administrative expense’’ and increased Sprint’s ‘‘Net loss attributable to Sprint Corporation’’ in the consolidated statements of comprehensive (loss) income for the nine-month period ended December 31, 2019. These control deficiencies could have resulted in disclosures that would result in a material misstatement to Sprint’s annual or interim consolidated financial statements that would not be prevented or detected.
Accordingly, Sprint’s management determined that these control deficiencies constituted a material weakness. This material weakness remained unremediated as of December 31, 2019.
While we work to integrate and align guidelines, principles and practices of the two companies following the Merger, as a result of the differences in control environments and cultures, we could potentially identify other material weaknesses that could result in materially inaccurate financial statements, materially inaccurate disclosures, or failure to prevent error or fraud for the combined company. There can be no assurance that remediation of the existing Sprint material weakness, or any other material weaknesses identified during integration of the two companies, will be completed in a timely manner or that the remedial measures will prevent other control deficiencies or material weaknesses. Subsequent testing of the operational effectiveness of the modified systems and validation controls will be necessary to conclude that any material weaknesses identified have been fully remediated. We may also identify other material weaknesses in internal control over financial reporting in the future. If we are unable to remediate material weaknesses in internal control over financial reporting, then our ability to analyze, record and report financial information free of material misstatements, to prepare financial statements within the time periods specified by the rules and forms of the SEC and otherwise to comply with the requirements of Section 404 of the Sarbanes-Oxley Act will be adversely affected. The occurrence of, or failure to remediate, this material weakness and any future material weaknesses in internal control over financial reporting may result in material misstatements of our financial statements.
The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including judgments used in decision-making, the nature and complexity of the transactions we undertake, assumptions about the likelihood of future events, the soundness of our systems, cost limitations, and other factors. If we or our independent registered public accounting firm is unable to conclude that we have effective internal control over financial reporting, or if other material weaknesses in our internal controls are discovered, such as through the identification of any additional material weaknesses as we complete our assessment of Sprint’s legacy control environment, or occur in the future or we otherwise must restate our financial statements, it could materially and adversely affect our business, financial condition or operating results, restrict our ability to access the capital markets, require the expenditure of significant resources to correct the weaknesses or deficiencies, subject us to fines, penalties, investigations or judgments, harm our reputation, or otherwise cause a decline in investor confidence.
The difficulties in satisfying the large number of Government Commitments in the required time frames and the significant cost incurred in tracking, monitoring and complying with them, could adversely impact our business, financial condition and results of operations.
In connection with the regulatory proceedings and approvals required to close the Transactions, we agreed to various Government Commitments. These Government Commitments include, among other things, extensive 5G network build-out commitments, obligations to deliver high-speed wireless services to the vast majority of Americans, including Americans residing in rural areas, and the marketing of an in-home broadband product where spectrum capacity is available. Other Government Commitments relate to national security, pricing, service and device availability to specified percentages of certain state populations, employment and support of diversity initiatives. Many of the Government Commitments specify time frames for compliance. Failure to fulfill our obligations under these Government Commitments in a timely manner could result in substantial fines, penalties, or other legal and administrative actions.
We expect to incur significant costs, expenses and fees for professional services to track, monitor, comply with and fulfil our obligations under these Government Commitments. In addition, abiding by the Government Commitments may divert our management’s time and energy away from other business operations and could force us to make business decisions we would not otherwise make and forego taking actions that might be beneficial to us. The difficulties in satisfying the large number of Government Commitments in the required time frames and the cost incurred in tracking, monitoring and complying with them could also adversely impact our business, financial condition and results of operations and hinder our ability to effectively compete.
We could be harmed by data loss or other security breaches, whether directly or indirectly.
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, November 2019, and March 2020, we notified affected customers of incidents involving unauthorized access to certain customer information. Other than a small
number of customers in connection with the March 2020 incident, these incidents did not involve credit card information, financial data, social security numbers or passwords. While we do not believe these security incidents were material, we expect to continue to be the target of cyber-attacks, data breaches, or security incidents, which may in the future have a material 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 as part of our business operations. These third-party service providers have experienced data breaches and other attacks that included unauthorized access to Confidential Information in the past, and face security challenges common to all parties that collect and process information. Past data breaches include 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 impacts, which may not be covered by, or may exceed the coverage limits of, our cyber insurance, 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 material adverse effect on our business, financial condition, and operating results.
System failures and business disruptions may allow unauthorized use of or interference with our network and other systems which could materially adversely affect our reputation and financial condition.
To be successful, we must provide our customers with reliable, trustworthy service and protect the communications, location, and personal information shared or generated by our customers. We rely upon both our systems and networks and the systems and networks of other providers and suppliers to provide and support our services and, in some cases, protect our customers’ information and our information. Failure of our or others’ systems, networks, or infrastructure may prevent us from providing reliable service or may allow for the unauthorized use of or interference with our networks and other systems or for the compromise of customer information. Examples of these risks include:
•human error such as responding to deceptive communications or unintentionally executing malicious code;
•physical damage, power surges or outages, or equipment failure with respect to both our wireless and wireline networks, including those as a result of severe weather, natural disasters, public health crises, terrorist attacks, political instability and volatility, and acts of war;
•theft of customer and/or proprietary information offered for sale for competitive advantage or corporate extortion;
•unauthorized access to our IT and business systems or to our network and critical infrastructure and those of our suppliers and other providers;
•supplier failures or delays; and
•system failures or outages of our business systems or communications network.
Such events could cause us to lose customers, lose revenue, incur expenses, suffer reputational damage, and subject us to litigation or governmental investigation. Remediation costs could include liability for information loss, repairing infrastructure and systems, and/or costs of incentives offered to customers. Our insurance may not cover, or be adequate to fully reimburse us for, costs and losses associated with such events.
If we are unable to take advantage of technological developments on a timely basis, we may experience a decline in demand for our services or face challenges in implementing or evolving our business strategy.
Significant technological changes continue to impact the communications industry. In general, these technological changes enhance communications and enable a broader array of companies to offer services competitive with ours. In order to grow and
remain competitive with new and evolving technologies in our industry, we will need to adapt to future changes in technology, continually invest in our network, increase network capacity, enhance our existing offerings, and introduce new offerings to address our current and potential customers’ changing demands. Enhancing our network, including our 5G network, is subject to risk from equipment changes and migration of customers from older technologies. Adopting new and sophisticated technologies may result in implementation issues such as scheduling and supplier delays, unexpected or increased costs, technological constraints, regulatory permitting issues, customer dissatisfaction, and other issues that could cause delays in launching new technological capabilities, which in turn could result in significant costs or reduce the anticipated benefits of the upgrades. In general, the development of new services in the wireless telecommunications industry will require us to anticipate and respond to the continuously changing demands of our customers, which we may not be able to do accurately or timely. If our new services fail to retain or gain acceptance in the marketplace or if costs associated with these services are higher than anticipated, this could have a material adverse effect on our business, financial condition and operating results.
We continue to implement a new billing system, which will support a portion of our subscribers, while maintaining our legacy billing systems and integrating Sprint’s billing system as a result of the Merger. The combined company will have multiple billing systems and our go-forward billing system strategy will need to be evaluated. Any unanticipated difficulties, disruption, or significant delays could have adverse operational, financial, and reputational effects on our business.
We continue to implement a new customer billing system that involves a new third-party supported platform and utilization of a phased deployment approach. Elements of the billing system have been placed into service and are operational and we plan to operate both the existing and new billing systems in parallel to aid in the transition to the new system until all phases of the conversion are complete.
The ongoing implementation as well as integration efforts with respect to billing as a result of the Merger may cause major system or business disruptions, or we may fail to implement the new billing system in its entirety or in a timely or effective manner. In addition, we or the supporting vendor may experience errors, cyber-attacks, or other operational disruptions that could negatively impact us and over which we may have limited control. Interruptions and/or failure of this billing services system could disrupt our operations and impact our ability to provide or bill for our services, retain customers, attract new customers, or negatively impact overall customer experience. Any occurrence of the foregoing could cause material adverse effects on our operations and financial condition, material weaknesses in our internal control over financial reporting, and reputational damage.
We rely on third parties to provide products and services for the operation of our business, and the failure or inability of such parties to provide these products or services could adversely affect our business, financial condition, and operating results.
We depend heavily on suppliers, service providers, their subcontractors and other third parties for us to efficiently operate our business. Due to the complexity of our business, it is not unusual to engage a diverse set of suppliers to help us develop, maintain, and troubleshoot products and services such as wireless and wireline network components, software development services, and billing and customer service support. Some of our suppliers may provide services from outside of the United States, which carries additional regulatory and legal obligations. We commonly rely on suppliers to provide us with contractual assurances and to disclose accurate information regarding risks associated with their provision of products or services in accordance with our policies and standards, including our Supplier Code of Conduct and our third party-risk management practices. The failure of our suppliers to comply with our expectations and policies could have a material adverse effect on our business, financial condition, and operating results.
Many of the products and services we use are available through multiple sources and suppliers. However, there are a limited number of suppliers who can support or provide billing services, voice and data communications transport services, wireless or wireline network infrastructure, equipment, handsets, other devices, and payment processing services, among other products and services. Disruptions or failure of such suppliers to adequately perform could have a material adverse effect on our business, financial condition, and operating results.
In the past, our suppliers, service providers and their subcontractors may not have always performed at the levels we expected or at the levels required by their contracts. Our business could be severely disrupted if critical suppliers or service providers fail to comply with their contracts or if we experience delays or service degradation during any transition to a new outsourcing provider or other supplier or if we are required to replace the supplied products or services with those from another source, especially if the replacement becomes necessary on short notice. Any such disruptions could have a material adverse effect on our business, financial condition, and operating results.
Our indebtedness is substantially greater than the indebtedness of each of T-Mobile and Sprint on a standalone basis prior to the Transactions. This increased level of indebtedness could adversely affect our business flexibility and increase our borrowing costs.
In connection with the Transactions, T-Mobile and Sprint conducted financing transactions that were used in part to prepay a portion of T-Mobile’s and Sprint’s existing indebtedness and to fund liquidity needs. Immediately following the Transactions, we have consolidated indebtedness, including financing lease liabilities, of approximately $69.0 billion, excluding our obligations to pay for the management and operation of certain of our wireless communications tower sites (“Tower Obligations”) and operating lease liabilities.
Our substantially increased indebtedness following the Transactions could have the effect, among other things, of reducing our flexibility to respond to changing business, economic, market and industry conditions and increasing the amount of cash required to meet interest payments. In addition, this increased level of indebtedness following the Transactions may reduce funds available to support efforts to integrate T-Mobile’s and Sprint’s businesses and realize the expected benefits of the Transactions, and may also reduce funds available for capital expenditures, share repurchases and other activities. Those impacts may put us at a competitive disadvantage relative to other companies with lower debt levels. Further, we may need to incur substantial additional indebtedness in the future, subject to the restrictions contained in our debt instruments, which could increase the risks associated with our capital structure.
Because of our substantial indebtedness, there is a risk that we may not be able to service our debt obligations in accordance with their terms.
We have, and we expect that we will continue to have, a significant amount of debt. Immediately following the Transactions, we have consolidated indebtedness, including financing lease liabilities, of approximately $69.0 billion, excluding Tower Obligations and operating lease liabilities.
Our ability to service our substantial debt obligations will depend on future performance, which will be affected by business, economic, market and industry conditions and other factors, including our ability to achieve the expected benefits of the Transactions. There is no guarantee that we will be able to generate sufficient cash flow to service our debt obligations when due. If we are unable to meet such obligations or fail to comply with the financial and other restrictive covenants contained in the agreements governing such debt obligations, we may be required to refinance all or part of our debt, sell important strategic assets at unfavorable prices or make additional borrowings. We may not be able to, at any given time, refinance our debt, sell assets or make additional borrowings on commercially reasonable terms or at all, which could have a material adverse effect on our business, financial condition and results of operations after the Transactions.
Some or all of our variable-rate indebtedness may use the London Inter-Bank Offered Rate (“LIBOR”) as a benchmark for establishing the rate. LIBOR will be discontinued after 2021 and will be replaced with an alternative reference rate. The consequence of this development cannot be entirely predicted but could include an increase in the cost of our variable rate indebtedness. In addition, any hedging agreements we have and may continue to enter into to limit our exposure to interest rate increases or foreign currency fluctuations may not offer complete protection from these risks or may be unsuccessful, and consequently may effectively increase the interest rate we pay on our debt or the exchange rate with respect to such debt, and any portion not subject to such hedging agreements would have full exposure to interest rate increases or foreign currency fluctuations, as applicable. If any financial institutions that are parties to our hedging agreements were to default on their payment obligations to us, declare bankruptcy or become insolvent, we would be unhedged against the underlying exposures. Any posting of collateral by us under our hedging agreements and the modification or termination of any of our hedging agreements could negatively impact our liquidity or other financial metrics. Any of these risks could have a material adverse effect on our business, financial condition and operating results.
The agreements governing our indebtedness and other financings include restrictive covenants that limit our operating flexibility.
The agreements governing our indebtedness and other financings impose material operating and financial restrictions. These restrictions, subject in certain cases to customary baskets, exceptions and maintenance and incurrence-based financial tests, together with our debt service obligations, may limit our ability to engage in transactions and pursue strategic business opportunities, including the following:
•incurring additional indebtedness and issuing preferred stock;
•paying dividends, redeeming capital stock or making other restricted payments or investments;
•selling, buying or leasing assets, properties or licenses, including spectrum;
•developing assets, properties or licenses that we have or in the future may procure;
•creating liens on assets securing indebtedness or other obligations;
•participating in future Federal Communications Commission (“FCC”) auctions of spectrum or private sales of spectrum;
•engaging in mergers, acquisitions, business combinations or other transactions;
•entering into transactions with affiliates; and
•placing restrictions on the ability of subsidiaries to pay dividends or make other payments.
These restrictions could limit our ability to obtain debt financing, make share repurchases, refinance or pay principal on our outstanding indebtedness, complete acquisitions for cash or indebtedness or react to business, economic, market and industry conditions and other changes in our operating environment or the economy. Any future indebtedness that we incur may contain similar or more restrictive covenants. Any failure to comply with the restrictions of our debt agreements may result in an event of default under these agreements, which in turn may result in defaults or acceleration of obligations under these and other agreements, giving our lenders the right to terminate the commitments they had made or the right to require us to repay all amounts then outstanding plus any interest, fees, penalties or premiums. An event of default may also compel us to sell certain assets securing indebtedness under these agreements.
Credit rating downgrades could adversely affect our businesses, cash flows, financial condition and operating results, which relies on investment-grade markets.
Credit ratings impact the cost and availability of future borrowings, and, as a result, cost of capital. Our current ratings reflect each rating agency’s opinion of our financial strength, operating performance and ability to meet our debt obligations. Our capital structure and business model are reliant on continued access to the investment-grade debt markets. Each rating agency reviews our ratings periodically and there can be no assurance that such ratings will be maintained in the future. A downgrade in our corporate rating and/or our issued investment-grade debt ratings could impact our ability to access the investment-grade debt market and adversely affect our businesses, cash flows, financial condition and operating results.
The scarcity and cost of additional wireless spectrum, and regulations relating to spectrum use, may adversely affect our business, financial condition and operating results.
As a result of completing the Transactions, we acquired additional spectrum from Sprint, including 2.5 GHz spectrum, that we need in order to continue our customer growth, expand and deepen our coverage, maintain our quality of service, meet increasing customer demands, and deploy new technologies. Although the Merger has reduced our immediate need to acquire additional spectrum, as we continue to enhance the quality of our services in certain geographic areas and deploy new technologies, we may need to acquire additional spectrum in the future. As a result, we will continue to actively seek to make additional investment in spectrum, which could be significant.
The continued interest in, and acquisition of, spectrum by existing carriers and others may reduce our ability to acquire and/or increase the cost of acquiring spectrum in the secondary market or negatively impact our ability to gain access to spectrum through other means, including government auctions. We may need to enter into spectrum sharing or leasing arrangements, which are subject to certain risks and uncertainties and may involve significant expenditures. In addition, our return on investment in spectrum depends on our ability to attract additional customers and to provide additional services and usage to existing customers. As a result, the return on any investment in spectrum that we make may not be as much as we anticipate or take longer than expected. Additionally, the FCC may not be able to provide sufficient additional spectrum to auction or we may be unable to secure the spectrum we need in any auction we may elect to participate in or in the secondary market, on favorable terms or at all.
The FCC may impose conditions on the use of new wireless broadband mobile spectrum that may negatively impact our ability to obtain spectrum economically or in appropriate configurations or coverage areas. Additional conditions that may be imposed by the FCC include heightened build-out requirements, limited license terms or renewal rights, and clearing obligations that may make it less attractive or less economical to acquire spectrum. In addition, rules may be established for future government spectrum auctions that may negatively impact our ability to obtain spectrum economically or in appropriate configurations or coverage areas.
If we cannot acquire needed spectrum from the government or otherwise, if competitors acquire spectrum that will allow them to provide services competitive with our services, or if we cannot deploy services over acquired spectrum on a timely basis without burdensome conditions, at reasonable cost, and while maintaining network quality levels, then our ability to attract and retain customers and our business, financial condition and operating results could be materially adversely affected.
We have incurred, and will incur, direct and indirect costs as a result of the Transactions.
We have incurred, and will incur, substantial expenses as a result of completing the Transactions, the Divestiture Transaction and compliance with the Government Commitments, and we are also expected to incur substantial expenses in connection with integrating and coordinating T-Mobile’s and Sprint’s businesses, operations, policies and procedures. While we have assumed that a certain level of transaction-related expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses could exceed the costs historically borne by us and adversely affect our financial condition and results of operations.
Our financial condition and operating results will be impaired if we experience high fraud rates related to device financing, customer credit cards, dealers, subscriptions, or account take over fraud.
Our operating costs could increase substantially as a result of fraud, including any fraud related to device financing, customer credit cards, dealers, subscriptions, or account take over fraud. If our fraud detection strategies and processes are not successful in detecting and controlling fraud, whether directly or by way of the systems, processes, and operations of third parties such as national retailers, dealers, and others, the resulting loss of revenue or increased expenses could have a material adverse effect on our financial condition and operating results.
We rely on highly skilled personnel throughout all levels of our business. Our business could be harmed if we are unable to retain or motivate key personnel, hire qualified personnel or maintain our corporate culture.
The market for highly skilled workers and leaders in our industry is extremely competitive. We believe that our future success depends in substantial part on our ability to recruit, hire, motivate, develop, and retain talented and highly-skilled personnel for all areas of our organization, including our CEO, the other members of our senior leadership team and highly skilled employees in technical, marketing and staff positions. Doing so may be difficult due to many factors, including fluctuations in economic and industry conditions, changes to U.S. immigration policy, competitors’ hiring practices, employee tolerance for the significant amount of change within and demands on our Company and our industry, and the effectiveness of our compensation programs.
Uncertainty about the process of integrating T-Mobile’s and Sprint’s businesses could have an adverse impact on our employees. These uncertainties may impair the ability to attract, retain and motivate key personnel, as existing and prospective employees may experience uncertainty about their future roles with us. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with us, our business could be negatively impacted. We may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent. As a result, we may not be able to meet our business plan and our revenue growth and profitability may be materially adversely affected.
In addition, certain members of our senior leadership team, including our CEO, have term employment agreements with us. Our inability to extend the terms of these employment agreements or to replace these members or our senior leadership team at the end of their terms with qualified and capable successors could hinder our strategic planning and execution. There can be no assurance that we will be able to retain the executives of T-Mobile and Sprint or that we will otherwise succeed in attracting, hiring and retaining candidates with the qualifications and skills necessary to our success. Our failure to attract, hire and retain such candidates, from within T-Mobile or Sprint or otherwise, could negatively affect our operations and profitability.
Risks Related to Legal and Regulatory Matters
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 FTC 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, implement new programs in response to the COVID-19 pandemic, 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 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 states and other jurisdictions have enacted, or are considering enacting, laws in these areas (including for example the CCPA as discussed below), perpetuating the risk and uncertainty regarding the regulatory environment and compliance around these issues.
In addition, states are increasingly focused on the quality of service and support that wireless communications services 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, in June 2018, California passed the California Consumer Privacy Act (the “CCPA”), which became effective in January 2020, creating new data privacy rights for California residents and new compliance obligations for us. We have incurred and will continue to incur significant implementation costs to ensure compliance with the CCPA, and we could see increased litigation costs with the law now in effect. The California Attorney General has proposed related CCPA regulations, which could be adopted in a form that increases our costs and/or litigation exposure. If we are unable to put proper controls and procedures in place to ensure compliance, it could have an adverse effect on our business. A California ballot initiative has recently been introduced by the original proponent of the CCPA that would provide additional data privacy rights and require additional implementation processes if passed. Other states, such as Nevada and Washington, have passed or are considering similar legislation, which, if passed, could create more risks and potential costs for us, especially to the extent the specific requirements of these laws vary significantly from those in California, Nevada and other existing laws.
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.
Unfavorable outcomes of legal proceedings may adversely affect our business, financial condition and operating results.
We and our affiliates are involved in various disputes, governmental and/or regulatory inspections, investigations and proceedings and litigation matters. Such legal proceedings can be complex, costly, and highly disruptive to our business operations by diverting the attention and energy of management and other key personnel.
In connection with the Transactions, it is possible that stockholders of T-Mobile and/or Sprint may file putative class action lawsuits against the legacy T-Mobile board of directors and/or the Sprint board of directors. Among other remedies, these
stockholders could seek damages. The outcome of any litigation is uncertain and any such potential lawsuits could result in substantial costs and may be costly and distracting to management.
Additionally, prior to the closing of the Merger, Sprint notified the FCC and state regulators that Sprint had claimed monthly subsidies for serving subscribers even though these subscribers may not have met usage requirements under Sprint’s usage policy for its Lifeline program. It is possible that an unfavorable resolution of one or more of these matters or other future matters could adversely affect us and our results of operations, financial condition and cash flows.
On February 28, 2020, we received a Notice of Apparent Liability for Forfeiture and Admonishment from the FCC, which proposed a penalty against us for allegedly violating section 222 of the Communications Act and the FCC’s regulations governing the privacy of customer information. We recorded an accrual for an estimated payment amount as of March 31, 2020, which was included in Accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheets.
The assessment of the outcome of legal proceedings, including our potential liability, if any, is a highly subjective process that requires judgments about future events that are not within our control. The amounts ultimately received or paid upon settlement or pursuant to final judgment, order or decree may differ materially from amounts accrued in our financial statements. In addition, litigation or similar proceedings could impose restraints on our current or future manner of doing business. Such potential outcomes including judgments, awards, settlements or orders could have a material adverse effect on our business, financial condition and operating results.
We offer highly regulated financial services products. These products expose us to a wide variety of state and federal regulations.
The financing of devices, such as through our EIP, JUMP! On Demand or other leasing programs such as those acquired in the Merger, has expanded our regulatory compliance obligations. Failure to remain compliant with applicable regulations, may increase our risk exposure in the following areas:
•consumer complaints and potential examinations or enforcement actions by federal and state regulatory agencies, including but not limited to the Consumer Financial Protection Bureau, state attorneys general, the FCC and the FTC; and
•regulatory fines, penalties, enforcement actions, civil litigation, and/or class action lawsuits.
Failure to comply with applicable regulations and the realization of any of these risks could have a material adverse effect on our business, financial condition, and operating results.
We may not be able to adequately protect the intellectual property rights on which our business depends or may be accused of infringing intellectual property rights of third parties.
We rely on a combination of patent, service mark, trademark, and trade secret laws and contractual restrictions to establish and protect our proprietary rights, all of which offer only limited protection. The steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary rights. We may not have the ability in certain jurisdictions to adequately protect intellectual property rights. Moreover, others may independently develop processes and technologies that are competitive to ours. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our revenues. We cannot be sure that any legal actions against such infringers will be successful, even when our rights have been infringed. We cannot assure you that our pending or future patent applications will be granted or enforceable, or that the rights granted under any patent that may be issued will provide us with any competitive advantages. In addition, we cannot assure you that any trademark or service mark registrations will be issued with respect to pending or future applications or will provide adequate protection of our brands. We do not have insurance coverage for intellectual property losses, and as such, a charge for an anticipated settlement or an adverse ruling awarding damages represents an unplanned loss event. Any of these factors could have a material adverse effect on our business, financial condition, and operating results.
Third parties may claim we infringe upon their intellectual property rights. We are a defendant in numerous intellectual property lawsuits, including patent infringement lawsuits, which expose us to the risk of adverse financial impact either by way of significant settlement amounts or damage awards. As we adopt new technologies and new business systems and provide customers with new products and/or services, we may face additional infringement claims. These claims could require us to cease certain activities or to cease selling relevant products and services. These claims can be time-consuming and costly to defend, and divert management resources, and expose us to significant damages awards or settlements, any or all of which could have a material adverse effect on our operations and financial condition. In addition to litigation directly involving our Company, our vendors and suppliers can be threatened with patent litigation and/or subjected to the threat of disruption or
blockage of sale, use, or importation of products, posing the risk of supply chain interruption to particular products and associated services which could have a material adverse effect on our business, financial condition and operating results.
Our business may be impacted by new or amended tax laws or regulations, judicial interpretations of same or administrative actions by federal, state, and/or local taxing authorities.
In connection with the products and services we sell, we calculate, collect, and remit various federal, state, and local taxes, fees and regulatory charges (“tax” or “taxes”) to numerous federal, state and local governmental authorities, including federal USF contributions and common carrier regulatory fees. In addition, we incur and pay state and local taxes and fees on purchases of goods and services used in our business.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In many cases, the application of existing, newly enacted or amended tax laws (such as the U.S. Tax Cuts and Jobs Act of 2017) may be uncertain and subject to differing interpretations, especially when evaluated against new technologies and telecommunications services, such as broadband internet access and cloud related services. Changes in tax laws could also impact revenue reported on tax inclusive plans.
In the event that we have incorrectly described, disclosed, determined, calculated, assessed, or remitted amounts that were due to governmental authorities, we could be subject to additional taxes, fines, penalties, or other adverse actions, which could materially impact our business, financial condition and operating results. In the event that federal, state, and/or local municipalities were to significantly increase taxes on our network, operations, or services, or seek to impose new taxes, it could have a material adverse effect on our business, financial condition and operating results.
Our wireless licenses are subject to renewal and may be revoked in the event that we violate applicable laws.
Our existing wireless licenses are subject to renewal upon the expiration of the 10-year or 15-year period for which they are granted. Historically, the FCC has approved our license renewal applications. However, the Communications Act provides that licenses may be revoked for cause and license renewal applications denied if the FCC determines that a renewal would not serve the public interest. If we fail to timely file to renew any wireless license or fail to meet any regulatory requirements for renewal, including construction and substantial service requirements, we could be denied a license renewal. Many of our wireless licenses are subject to interim or final construction requirements and there is no guarantee that the FCC will find our construction, or the construction of prior licensees, sufficient to meet the build-out or renewal requirements. Accordingly, we cannot assure you that the FCC will renew our wireless licenses upon their expiration. If any of our wireless licenses were to be revoked or not renewed upon expiration, we would not be permitted to provide services under that license, which could have a material adverse effect on our business, financial condition, and operating results.
For our Educational Broadband Service (“EBS”) licenses in the 2.5 GHz band, FCC rules generally limit eligibility to hold EBS licenses to accredited educational institutions and certain governmental, religious and nonprofit entities, but permit those license holders to lease up to 95% of their capacity for non-educational purposes. Therefore, we primarily access EBS spectrum through long-term leasing arrangements with EBS license holders. Our EBS spectrum leases typically have an initial term equal to the remaining term of the EBS license, with an option to renew the lease for additional terms, for a total lease term of up to 30 years. We rely on the EBS license holders from whom we lease the EBS spectrum to take necessary and appropriate steps to meet the FCC requirements to continue to hold these licenses. If the EBS license holders fail to meet those requirements, we could be denied our rights under the leasing arrangements, which could have an adverse impact on our business, financial condition or operating results. On April 27, 2020, the FCC lifted the restriction on who can hold EBS licenses, which would allow current license holders to sell their licenses to other parties, including to T-Mobile. We will continue to monitor the impact of this change on our ability to access the EBS spectrum.
Our business could be adversely affected by findings of product liability for health or safety risks from wireless devices and transmission equipment, as well as by changes to regulations or radio frequency emission standards.
We do not manufacture the devices or other equipment that we sell, and we depend on our suppliers to provide defect-free and safe equipment. Suppliers are required by applicable law to manufacture their devices to meet certain governmentally imposed safety criteria. However, even if the devices we sell meet the regulatory safety criteria, we could be held liable with the equipment manufacturers and suppliers for any harm caused by products we sell if such products are later found to have design or manufacturing defects. We generally seek to enter into indemnification agreements with the manufacturers who supply us with devices to protect us from losses associated with product liability, but we cannot guarantee that we will be protected in whole or in part against losses associated with a product that is found to be defective.
Allegations have been made that the use of wireless handsets and wireless transmission equipment, such as cell towers, may be linked to various health concerns, including cancer and brain tumors. Lawsuits have been filed against manufacturers and carriers in the industry claiming damages for alleged health problems arising from the use of wireless handsets. In addition, the FCC has from time to time gathered data regarding wireless handset emissions and its assessment of this issue may evolve based on its findings. The media has also reported incidents of handset battery malfunction, including reports of batteries that have overheated. These allegations may lead to changes in regulatory standards. There have also been other allegations regarding wireless technology, including allegations that wireless handset emissions may interfere with various electronic medical devices (including hearing aids and pacemakers), airbags and anti-lock brakes. Defects in the products of our suppliers, such as the 2016 recall by a handset original equipment manufacturer of one of its smartphone devices, could have a material adverse effect on our business, financial condition and operating results. Any of these allegations or risks could result in customers purchasing fewer devices and wireless services, and could also result in significant legal and regulatory liability.
Additionally, there are safety risks associated with the use of wireless devices while operating vehicles or equipment. Concerns over any of these risks and the effect of any legislation, rules or regulations that have been and may be adopted in response to these risks could limit our ability to sell our wireless services.
Risks Related to Ownership of our Common Stock
Each of DT, which controls a majority of the voting power of our common stock, and SoftBank, a significant stockholder of T-Mobile, may have interests that differ from the interests of our other stockholders.
Upon the completion of the Transactions, DT and SoftBank entered into a proxy, lock-up and right of first refusal agreement (the “Proxy Agreement”). Pursuant to the Proxy Agreement, at any meeting of our stockholders, the shares of our common stock beneficially owned by SoftBank will be voted in the manner as directed by DT.
Accordingly, DT controls a majority of the voting power of our common stock and therefore we are a “controlled company,” as defined in The NASDAQ Stock Market LLC (“NASDAQ”) listing rules, and are not subject to NASDAQ requirements that would otherwise require us to have a majority of independent directors, a nominating committee composed solely of independent directors or a compensation committee composed solely of independent directors. Accordingly, our stockholders will not be afforded the same protections generally as stockholders of other NASDAQ-listed companies with respect to corporate governance for so long as we rely on these exemptions from the corporate governance requirements.
In addition, pursuant to our certificate of incorporation and the Amended and Restated Stockholders’ Agreement (i) as long as DT beneficially owns 30% or more of our outstanding common stock, we are restricted from taking certain actions without DT’s prior written consent, including (a) incurring indebtedness above certain levels based on a specified debt to cash flow ratio, (b) taking any action that would cause a default under any instrument evidencing indebtedness involving DT or its affiliates, (c) acquiring or disposing of assets or entering into mergers or similar acquisitions in excess of $1.0 billion, (d) changing the size of our board of directors, (e) subject to certain exceptions, issuing equity of 10% or more of the then-outstanding shares of our common stock, or issuing equity to redeem debt held by DT, (f) repurchasing or redeeming equity securities or making any extraordinary or in-kind dividend other than on a pro rata basis, or (g) making certain changes involving our CEO; and (ii) as long as SoftBank beneficially owns 22.5% or more of our outstanding common stock, we are restricted from taking certain actions without SoftBank’s prior written consent, including (a) acquiring or disposing of assets or entering into mergers or similar acquisitions in excess of $1.0 billion (other than a Sale of the Company (as defined in the Amended and Restated Stockholders’ Agreement), for which the prior written consent of SoftBank will not be required, but for which SoftBank has a match right as set forth in the Amended and Restated Stockholders’ Agreement), or (b) subject to certain exceptions, issuing equity of 10% or more of the then-outstanding shares of our common stock. We are also restricted from amending our certificate of incorporation and bylaws in any manner that could adversely affect DT’s or SoftBank’s rights under the Amended and Restated Stockholders’ Agreement for as long as the applicable stockholder beneficially owns 5% or more of our outstanding common stock. These restrictions could prevent us from taking actions that our board of directors may otherwise determine are in the best interests of the Company and our stockholders or that may be in the best interests of our other stockholders.
Subject to SoftBank’s rights described above and SoftBank’s right to designate a certain number of individuals to be nominees for election to our board of directors pursuant to the Amended and Restated Stockholders’ Agreement, DT effectively has control over all matters submitted to our stockholders for approval, including the election or removal of directors, changes to our certificate of incorporation, a sale or merger of our Company and other transactions requiring stockholder approval under Delaware law. DT’s controlling interest may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from seeking to acquire, the Company. DT and SoftBank as significant shareholders may have strategic, financial, or other interests different from our other stockholders, including as the holder of a substantial amount of
our indebtedness and as the counterparty in a number of commercial arrangements, and may make decisions adverse to the interests of our other stockholders.
In addition, we license certain trademarks from DT, including the right to use the trademark “T-Mobile” as a name for the Company and our flagship brand, under a trademark license agreement, as amended, with DT. As described in more detail in our Proxy Statement on Schedule 14A filed with the SEC on April 21, 2020 under the heading “Transactions with Related Persons and Approval,” we are obligated to pay DT a royalty in an amount equal to 0.25% (the “royalty rate”) of the net revenue (as defined in the trademark license) generated by products and services sold by the Company under the licensed trademarks subject to a cap of $80.0 million per calendar year through December 31, 2028. We and DT are obligated to negotiate a new trademark license when (i) DT has 50% or less of the voting power of the outstanding shares of capital stock of the Company or (ii) any third party owns or controls, directly or indirectly, 50% or more of the voting power of the outstanding shares of capital stock of the Company, or otherwise has the power to direct or cause the direction of the management and policies of the Company. If we and DT fail to agree on a new trademark license, either we or DT may terminate the trademark license and such termination shall be effective, in the case of clause (i) above, on the third anniversary after notice of termination and, in the case of clause (ii) above, on the second anniversary after notice of termination. A further increase in the royalty rate or termination of the trademark license could have a material adverse effect on our business, financial condition and operating results.
Future sales or issuances of our common stock, including sales by DT and SoftBank, could have a negative impact on our stock price.
We cannot predict the effect, if any, that market sales of shares or the availability of shares of our common stock will have on the prevailing trading price of our common stock from time to time. Sales or issuances of a substantial number of shares of our common stock could cause our stock price to decline and could result in dilution of your shares.
We, DT and SoftBank are parties to the Amended and Restated Stockholders’ Agreement pursuant to which DT and SoftBank are free to transfer their shares in public sales without notice, as long as such transactions would not result in a third party owning more than 30% of the outstanding shares of our common stock. If a transfer would exceed the 30% threshold, it is prohibited unless the transfer is approved by our board of directors or the transferee makes a binding offer to purchase all of the other outstanding shares on the same price and terms. The Amended and Restated Stockholders’ Agreement does not otherwise impose any other restrictions on the sales of common stock by DT or SoftBank. Moreover, we may be required to file a shelf registration statement with respect to the common stock and certain debt securities held by DT and SoftBank, which would facilitate the resale by DT or SoftBank of all or any portion of the shares of our common stock they hold. The sale of shares of our common stock by DT or SoftBank (other than in transactions involving the purchase of all of our outstanding shares) could significantly increase the number of shares available in the market, which could cause a decrease in our stock price. In addition, even if DT or SoftBank does not sell a large number of their shares into the market, their right to transfer a large number of shares into the market may depress our stock price.
Our stock price may be volatile and may fluctuate based upon factors that have little or nothing to do with our business, financial condition and operating results.
The trading prices of the securities of communications companies historically have been highly volatile, and the trading price of our common stock may be subject to wide fluctuations. Our stock price may fluctuate in reaction to a number of events and factors that may include, among other things:
•adverse economic, political or market conditions in the U.S. and international markets, including those caused by the COVID-19 pandemic;
•our or our competitors’ actual or anticipated operating and financial results;
•introduction of new products and services by us or our competitors or changes in service plans or pricing by us or our competitors;
•analyst projections, predictions and forecasts, analyst target prices for our securities and changes in, or our failure to meet, securities analysts’ expectations;
•realization of the expected benefits and synergies of the Transactions, or market or analyst expectations with respect thereto;
•transactions in our common stock by major investors;
•share repurchases by us or purchases by DT or SoftBank;
•DT’s financial performance and results of operations, or actions implied or taken by DT or SoftBank;
•entry of new competitors into our markets or perceptions of increased price competition, including a price war;
•our performance, including subscriber growth, and our financial and operational performance;
•market perceptions relating to our services, network, handsets, and deployment of our LTE and 5G platforms and our access to iconic handsets, services, applications, or content;
•market perceptions of the wireless communications services industry and valuation models for us and the industry;
•conditions or trends in the Internet and the industry sectors in which we operate;
•changes in our credit rating or future prospects;
•changes in interest rates;
•changes in our capital structure, including issuance of additional debt or equity to the public;
•the availability or perceived availability of additional capital in general and our access to such capital;
•actual or anticipated consolidation, or other strategic mergers or acquisition activities involving us or our competitors, or other participants in related or adjacent industries, or market speculation regarding such activities;
•disruptions of our operations or service providers or other vendors necessary to our network operations; and
•availability of additional spectrum, whether by the announcement, commencement, bidding and closing of auctions for new spectrum or the acquisition of companies that own spectrum, and the extent to which we or our competitors succeed in acquiring additional spectrum.
In addition, the stock market has been volatile and has experienced significant price and volume fluctuations in the past, which may continue for the foreseeable future. Severe market fluctuations, such as those experienced recently with regard to COVID-19, oil and other commodity prices, concerns over sovereign debt risk, trade policies and tariffs affecting other countries, and those that may arise from global and political tensions or weak economic conditions, have had and may continue to have a significant impact on the trading price of securities issued by many companies, including companies in the communications industry. These changes frequently occur irrespective of the operating performance of the affected companies. Hence, the trading price of our common stock could fluctuate based upon factors that have little or nothing to do with our business, financial condition and operating results.
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 foreseeable future.
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 foreseeable future. Our credit facilities and indentures governing our long-term debt to affiliates and third parties contain covenants that, among other things, restrict our ability to declare or pay dividends on our common stock. We currently intend to use future earnings, if any, to invest in our business and for general corporate purposes, including the integration of T-Mobile’s and Sprint’s businesses. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future, and capital appreciation, if any, of our common stock will be the sole source of potential gain.
Risks Related to Integration
Although we expect that the Transactions will result in synergies and other benefits, those synergies and benefits may not be realized in the amounts anticipated, or may not be realized within the expected time frame, and risks associated with the foregoing may also result from the extended delay in the completion of the Transactions.
Our ability to realize the anticipated benefits of the Transactions will depend, to a large extent, on our ability to integrate our and Sprint’s businesses in a manner that facilitates growth opportunities and achieves the projected standalone cost savings and revenue growth trends identified by each company without adversely affecting current revenues and investments in future growth. In addition, some of the anticipated synergies are not expected to occur for a significant time period following the completion of the Transactions and will require substantial capital expenditures in the near term.
As a result of the delays experienced in the completion of the Transactions and the COVID-19 pandemic, our anticipated synergies and other benefits of the Transactions may be reduced or eliminated, including a delay in the integration of, or inability to integrate, the networks of T-Mobile and Sprint to launch a broad and deep nationwide 5G network. In addition, asset divestitures, such as the Divestiture Transaction and Government Commitments, may further reduce the amounts of realized synergies from our initial estimates.
Even if we are able to integrate the two companies successfully, the anticipated benefits of the Transactions, including the expected synergies and network benefits, may not be realized fully or at all or may take longer to realize than expected.
Our business and Sprint’s businesses may not be integrated successfully or such integration may be more difficult, time consuming or costly than expected. Operating costs, customer loss and business disruption, including difficulties in completing the Divestiture Transaction, satisfying all of the Government Commitments and maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.
The combination of two independent businesses is complex, costly and time-consuming, and may divert significant management attention and resources to combining our and Sprint’s business practices and operations. This process, as well as the Divestiture Transaction and the Government Commitments, may disrupt our business or otherwise impact our ability to compete. The failure to meet the challenges involved in combining our and Sprint’s businesses, and to realize the anticipated benefits of the Transactions could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations. The overall combination of our and Sprint’s businesses, the completion of the Divestiture Transaction and compliance with the Government Commitments may also result in material unanticipated problems, expenses, liabilities, competitive responses and impacts, and loss of customer and other business relationships. The difficulties of combining the operations of the companies, completing the Divestiture Transaction and satisfying all of the Government Commitments include, among others:
•diversion of management attention to integration matters;
•difficulties in integrating operations and systems, including intellectual property and communications systems, administrative and information technology infrastructure, supplier and vendor arrangements and financial reporting and internal control systems;
•challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies;
•the material weakness in Sprint’s internal control over financial reporting and differences in control environments and cultures, and the potential identification of other material weaknesses while we work to integrate the companies and align guidelines, principles and practices;
•differences in control environments and cultures, and the potential identification of other material weaknesses while we work to integrate and align guidelines, principles and practices;
•alignment of key performance measurements may result in a greater need to communicate and manage clear expectations while we work to integrate and align guidelines and practices;
•difficulties in integrating employees and attracting and retaining key personnel;
•the transition of management to the combined company management team, and the need to address possible differences in corporate cultures and management philosophies;
•challenges in retaining existing customers and obtaining new customers;
•difficulties in achieving anticipated cost savings, synergies, accretion targets, business opportunities, financing plans and growth prospects from the combination;
•difficulties in managing the expanded operations of a significantly larger and more complex company;
•the impact of the additional debt financing incurred in connection with the Transactions;
•challenges in managing the Divestiture Transaction process, the ongoing commercial and transition services arrangements to be entered into in connection with the Divestiture Transaction, and known or unknown liabilities arising in connection therewith;
•an increase in competition from DISH and other third parties that DISH may enter into commercial agreements with, who are significantly larger and with greater resources and scale advantages as compared to us;
•known or potential unknown liabilities of Sprint that are larger than expected; and
•other potential adverse consequences and unforeseen increased expenses or liabilities associated with the Transactions, the Divestiture Transaction and the Government Commitments.
Additionally, uncertainties over the integration process could cause customers, suppliers, distributors, dealers, retailers and others to seek to change or cancel our existing business relationships or to refuse to renew existing relationships. Suppliers, distributors and content and application providers may also delay or cease developing new products for us that are necessary for the operations of our business due to uncertainties. Competitors may also target our existing customers by highlighting potential uncertainties and integration difficulties.
Some of these factors are outside our control, and any one of them could result in lower revenues, higher costs and diversion of management time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the integration is successful, the full benefits of the Transactions including, among others, the synergies, cost
savings or sales or growth opportunities may not be realized, as a result of the Divestiture Transaction, the Government Commitments and/or the other actions and conditions we have agreed to in connection with the Transactions, or otherwise. Further, we have incurred, and expect to continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Transactions. Additional unanticipated costs may be incurred in the integration process and in connection with the Divestiture Transaction and the Government Commitments, including potential penalties that could arise if we fail to fulfill our obligations thereunder. As a result, it cannot be assured that we will realize the full benefits expected from the Transactions within the anticipated time frames or at all.
Failure to complete the Divestiture Transaction could compel us to pursue an alternative divestiture transaction, which we may not be able to complete on favorable terms or at all.
To facilitate the FCC’s review and approval of the FCC license transfers associated with the Transactions, and to resolve the DOJ’s investigation into the Transactions, we committed to the Divestiture Transaction.
If we are unable to complete the Divestiture Transaction, subject to certain limitations, we would be required to pursue an alternative divestiture transaction or transactions. In particular, we committed to the FCC (i) to divest Sprint’s Boost Mobile and Sprint prepaid wireless brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers of Shenandoah Telecommunications Company and Swiftel Communications, Inc.) (the “Boost Assets”) through a market-based process to a serious and credible buyer, (ii) to offer the Boost Assets buyer terms for a six-year wholesale MVNO agreement with wholesale rates that will meaningfully improve upon the commercial terms reflected in the most favorable of T-Mobile’s and Sprint’s three largest MVNO agreements, and (iii) to identify the buyer of the Boost Assets and submit the negotiated MVNO agreement to the FCC within 120 days of the closing of the Transactions (subject to two 30-day extensions). There is no assurance that we will be able to complete the Divestiture Transaction or any other divestiture transactions on terms that are favorable to us, or at all. Moreover, any such alternative divestiture transaction would be subject to FCC review and approval and could cause the DOJ, other regulators or other parties to challenge the Transactions, potentially resulting in monetary liability, civil penalties, litigation expense and divestiture of some or all of the other assets acquired in the Transactions.
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.On April 30, 2020, we entered into an amendment (the “Third Amendment”) to the Third Amended and Restated Receivables Purchase and Administration Agreement, dated as of October 23, 2018 (as amended on December 21, 2018 and on February 14, 2020, and as further amended by the Third Amendment, the “EIP Receivables Facility”), by and among T-Mobile Handset Funding LLC, as transferor, T-Mobile Financial LLC, individually and as servicer, T-Mobile US, Inc. and T-Mobile USA, Inc., jointly and severally as guarantors, Royal Bank of Canada, as Administrative Agent, and the various funding agents party thereto. The Third Amendment provides, for a period of up to 7 months, (i) flexibility for modifications to accounts receivable sold in the EIP Receivables Facility that are impacted by COVID-19 and (ii) exclusion of such accounts receivable from all pool performance triggers.
This summary of the Third Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Third Amendment, a copy of which will be subsequently filed with the SEC.
Item 6. Exhibits
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| | | | 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 |
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| | | | Incorporated by Reference | | | | | | |
Exhibit No. | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herein |
2.1* | | Amendment No. 2, dated as of February 20, 2020, to the Business Combination Agreement, dated as of April 29, 2018, by and among T-Mobile US, Inc., Huron Merger Sub LLC, Superior Merger Sub Corporation, Sprint Corporation, Starburst I, Inc., Galaxy Investment Holdings, Inc., and for the limited purposes set forth therein, Deutsche Telekom AG, Deutsche Telekom Holding B.V., and SoftBank Group Corp., as amended. | | 8-K | | 2/20/2020 | | 2.1 | | |
3.1 | | | | 8-K | | 4/1/2020 | | 3.1 | | |
3.2 | | | | 8-K | | 4/1/2020 | | 3.2 | | |
10.1 | | Second Amendment to the Third Amended and Restated Receivables Purchase and Administration Agreement, dated as of February 14, 2020, among T-Mobile Handset Funding LLC, as transferor, T-Mobile Financial LLC, as servicer, T-Mobile US, Inc. and T-Mobile USA, Inc., jointly and severally as guarantors, Royal Bank of Canada, as Administrative Agent, and the various funding Agents party to the RPAA. | | | | | | | | X |
10.2 | | | | 8-K | | 2/20/2020 | | 10.1 | | |
10.3** | | | | | | | | | | X |
10.4** | | | | | | | | | | X |
10.5** | | | | | | | | | | X |
10.6** | | | | | | | | | | X |
10.7** | | | | | | | | | | X |
10.8** | | | | | | | | | | X |
22.1 | | | | | | | | | | X |
31.1 | | | | | | | | | | X |
31.2 | | | | | | | | | | X |
32.1*** | | | | | | | | | | X |
32.2*** | | | | | | | | | | X |
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 |
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*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 |
104 | | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).
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* | | This filing excludes certain schedules pursuant to Item 601(a)(5) of Regulation S-K, which the registrant agrees to furnish supplementally to the Securities and Exchange Commission upon request by the Commission. |
** | | 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.