|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Revenues | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | — |
| | $ | 7,609 |
| | $ | 551 |
| | $ | (229 | ) | | $ | 7,931 |
|
Equipment revenues | — |
| | — |
| | 2,370 |
| | 1 |
| | (46 | ) | | 2,325 |
|
Other revenues | — |
| | 2 |
| | 267 |
| | 55 |
| | (9 | ) | | 315 |
|
Total revenues | — |
| | 2 |
| | 10,246 |
| | 607 |
| | (284 | ) | | 10,571 |
|
Operating expenses | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 1,522 |
| | 8 |
| | — |
| | 1,530 |
|
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 2,556 |
| | 262 |
| | (46 | ) | | 2,772 |
|
Selling, general and administrative | — |
| | 6 |
| | 3,201 |
| | 216 |
| | (238 | ) | | 3,185 |
|
Depreciation and amortization | — |
| | — |
| | 1,611 |
| | 23 |
| | — |
| | 1,634 |
|
Total operating expenses | — |
| | 6 |
| | 8,890 |
| | 509 |
| | (284 | ) | | 9,121 |
|
Operating income (loss) | — |
| | (4 | ) | | 1,356 |
| | 98 |
| | — |
| | 1,450 |
|
Other income (expense) | | | | | | | | | | | |
Interest expense | — |
| | (120 | ) | | (28 | ) | | (48 | ) | | — |
| | (196 | ) |
Interest expense to affiliates | — |
| | (129 | ) | | (4 | ) | | — |
| | 5 |
| | (128 | ) |
Interest income | — |
| | 6 |
| | 4 |
| | 1 |
| | (5 | ) | | 6 |
|
Other expense, net | — |
| | (59 | ) | | (5 | ) | | — |
| | — |
| | (64 | ) |
Total other expense, net | — |
| | (302 | ) | | (33 | ) | | (47 | ) | | — |
| | (382 | ) |
Income (loss) before income taxes | — |
| | (306 | ) | | 1,323 |
| | 51 |
| | — |
| | 1,068 |
|
Income tax expense | — |
| | — |
| | (277 | ) | | (9 | ) | | — |
| | (286 | ) |
Earnings of subsidiaries | 782 |
| | 1,088 |
| | 23 |
| | — |
| | (1,893 | ) | | — |
|
Net income | $ | 782 |
| | $ | 782 |
| | $ | 1,069 |
| | $ | 42 |
| | $ | (1,893 | ) | | $ | 782 |
|
Other comprehensive income (loss), net of tax | | | | | | | | | | | |
Other comprehensive income, net of tax | 3 |
| | 3 |
| | 3 |
| | — |
| | (6 | ) | | 3 |
|
Total comprehensive income | $ | 785 |
| | $ | 785 |
| | $ | 1,072 |
| | $ | 42 |
| | $ | (1,899 | ) | | $ | 785 |
|
Condensed Consolidating Statement of Comprehensive Income Information
Six Months Ended June 30, 2019
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Revenues | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | — |
| | $ | 15,851 |
| | $ | 1,499 |
| | $ | (647 | ) | | $ | 16,703 |
|
Equipment revenues | — |
| | — |
| | 4,890 |
| | 2 |
| | (113 | ) | | 4,779 |
|
Other revenues | — |
| | 9 |
| | 549 |
| | 101 |
| | (82 | ) | | 577 |
|
Total revenues | — |
| | 9 |
| | 21,290 |
| | 1,602 |
| | (842 | ) | | 22,059 |
|
Operating expenses | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 3,236 |
| | 15 |
| | (56 | ) | | 3,195 |
|
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 5,216 |
| | 574 |
| | (113 | ) | | 5,677 |
|
Selling, general and administrative | — |
| | 1 |
| | 7,089 |
| | 568 |
| | (673 | ) | | 6,985 |
|
Depreciation and amortization | — |
| | — |
| | 3,142 |
| | 43 |
| | — |
| | 3,185 |
|
Total operating expense | — |
| | 1 |
| | 18,683 |
| | 1,200 |
| | (842 | ) | | 19,042 |
|
Operating income | — |
| | 8 |
| | 2,607 |
| | 402 |
| | — |
| | 3,017 |
|
Other income (expense) | | | | | | | | | | | |
Interest expense | — |
| | (226 | ) | | (41 | ) | | (94 | ) | | — |
| | (361 | ) |
Interest expense to affiliates | — |
| | (211 | ) | | (9 | ) | | — |
| | 10 |
| | (210 | ) |
Interest income | — |
| | 10 |
| | 10 |
| | 2 |
| | (10 | ) | | 12 |
|
Other expense, net | — |
| | (11 | ) | | (4 | ) | | — |
| | — |
| | (15 | ) |
Total other expense, net | — |
| | (438 | ) | | (44 | ) | | (92 | ) | | — |
| | (574 | ) |
Income (loss) before income taxes | — |
| | (430 | ) | | 2,563 |
| | 310 |
| | — |
| | 2,443 |
|
Income tax expense | — |
| | — |
| | (531 | ) | | (65 | ) | | — |
| | (596 | ) |
Earnings of subsidiaries | 1,847 |
| | 2,277 |
| | 17 |
| | — |
| | (4,141 | ) | | — |
|
Net income | $ | 1,847 |
| | $ | 1,847 |
| | $ | 2,049 |
| | $ | 245 |
| | $ | (4,141 | ) | | $ | 1,847 |
|
| | | | | | | | | | | |
Net income | $ | 1,847 |
| | $ | 1,847 |
| | $ | 2,049 |
| | $ | 245 |
| | $ | (4,141 | ) | | $ | 1,847 |
|
Other comprehensive (loss) income, net of tax | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | (481 | ) | | (481 | ) | | 168 |
| | — |
| | 313 |
| | (481 | ) |
Total comprehensive income | $ | 1,366 |
| | $ | 1,366 |
| | $ | 2,217 |
| | $ | 245 |
| | $ | (3,828 | ) | | $ | 1,366 |
|
| | | | | | | | | | | |
Condensed Consolidating Statement of Comprehensive Income Information
Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Revenues | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | — |
| | $ | 15,096 |
| | $ | 1,091 |
| | $ | (450 | ) | | $ | 15,737 |
|
Equipment revenues | — |
| | — |
| | 4,777 |
| | 1 |
| | (100 | ) | | 4,678 |
|
Other revenues | — |
| | 3 |
| | 516 |
| | 110 |
| | (18 | ) | | 611 |
|
Total revenues | — |
| | 3 |
| | 20,389 |
| | 1,202 |
| | (568 | ) | | 21,026 |
|
Operating expenses | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 3,102 |
| | 17 |
| | — |
| | 3,119 |
|
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | — |
| | — |
| | 5,220 |
| | 498 |
| | (101 | ) | | 5,617 |
|
Selling, general and administrative | — |
| | 6 |
| | 6,358 |
| | 452 |
| | (467 | ) | | 6,349 |
|
Depreciation and amortization | — |
| | — |
| | 3,165 |
| | 44 |
| | — |
| | 3,209 |
|
Total operating expenses | — |
| | 6 |
| | 17,845 |
| | 1,011 |
| | (568 | ) | | 18,294 |
|
Operating income (loss) | — |
| | (3 | ) | | 2,544 |
| | 191 |
| | — |
| | 2,732 |
|
Other income (expense) | | | | | | | | | | | |
Interest expense | — |
| | (294 | ) | | (57 | ) | | (96 | ) | | — |
| | (447 | ) |
Interest expense to affiliates | — |
| | (295 | ) | | (9 | ) | | — |
| | 10 |
| | (294 | ) |
Interest income | — |
| | 12 |
| | 9 |
| | 1 |
| | (10 | ) | | 12 |
|
Other (expense) income, net | — |
| | (91 | ) | | 37 |
| | — |
| | — |
| | (54 | ) |
Total other expense, net | — |
| | (668 | ) | | (20 | ) | | (95 | ) | | — |
| | (783 | ) |
Income (loss) before income taxes | — |
| | (671 | ) | | 2,524 |
| | 96 |
| | — |
| | 1,949 |
|
Income tax expense | — |
| | — |
| | (476 | ) | | (20 | ) | | — |
| | (496 | ) |
Earnings of subsidiaries | 1,453 |
| | 2,124 |
| | 17 |
| | — |
| | (3,594 | ) | | — |
|
Net income | $ | 1,453 |
| | $ | 1,453 |
| | $ | 2,065 |
| | $ | 76 |
| | $ | (3,594 | ) | | $ | 1,453 |
|
| | | | | | | | | | | |
Net income | $ | 1,453 |
| | $ | 1,453 |
| | $ | 2,065 |
| | $ | 76 |
| | $ | (3,594 | ) | | $ | 1,453 |
|
Other comprehensive loss, net of tax | | | | | | | | | | | |
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total comprehensive income | $ | 1,453 |
| | $ | 1,453 |
| | $ | 2,065 |
| | $ | 76 |
| | $ | (3,594 | ) | | $ | 1,453 |
|
Condensed Consolidating Statement of Cash Flows Information
Three Months Ended June 30, 2019
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (124 | ) | | $ | 3,112 |
| | $ | (686 | ) | | $ | (155 | ) | | $ | 2,147 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (1,740 | ) | | (49 | ) | | — |
| | (1,789 | ) |
Purchases of spectrum licenses and other intangible assets, including deposits | — |
| | — |
| | (665 | ) | | — |
| | — |
| | (665 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 8 |
| | 831 |
| | — |
| | 839 |
|
Net cash (used in) provided by investing activities | — |
| | — |
| | (2,397 | ) | | 782 |
| | — |
| | (1,615 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from borrowing on revolving credit facility, net | — |
| | 880 |
| | — |
| | — |
| | — |
| | 880 |
|
Repayments of revolving credit facility | — |
| | — |
| | (880 | ) | | — |
| | — |
| | (880 | ) |
Repayments of financing lease obligations | — |
| | — |
| | (229 | ) | | — |
| | — |
| | (229 | ) |
Repayments of long-term debt | — |
| | — |
| | (600 | ) | | — |
| | — |
| | (600 | ) |
Intercompany advances, net | — |
| | (756 | ) | | 688 |
| | 68 |
| | — |
| | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | (155 | ) | | 155 |
| | — |
|
Other, net | 1 |
| | — |
| | (6 | ) | | — |
| | — |
| | (5 | ) |
Net cash provided (used in) by financing activities | 1 |
| | 124 |
| | (1,059 | ) | | (87 | ) | | 155 |
| | (866 | ) |
Change in cash and cash equivalents | 1 |
| | — |
| | (344 | ) | | 9 |
| | — |
| | (334 | ) |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 3 |
| | 2 |
| | 1,314 |
| | 120 |
| | — |
| | 1,439 |
|
End of period | $ | 4 |
| | $ | 2 |
| | $ | 970 |
| | $ | 129 |
| | $ | — |
| | $ | 1,105 |
|
Condensed Consolidating Statement of Cash Flows Information
Three Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | (1 | ) | | $ | (258 | ) | | $ | 2,932 |
| | $ | (1,282 | ) | | $ | (130 | ) | | $ | 1,261 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (1,624 | ) | | (5 | ) | | — |
| | (1,629 | ) |
Purchases of spectrum licenses and other intangible assets, including deposits | — |
| | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 12 |
| | 1,311 |
| | — |
| | 1,323 |
|
Acquisition of companies, net of cash acquired | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
Equity investment in subsidiary | — |
| | — |
| | (26 | ) | | — |
| | 26 |
| | — |
|
Other, net | — |
| | — |
| | 33 |
| | — |
| | — |
| | 33 |
|
Net cash (used in) provided by investing activities | — |
| | — |
| | (1,638 | ) | | 1,306 |
| | 26 |
| | (306 | ) |
Financing activities | | | | | | | | | | | |
Payments of consent fees related to long-term debt | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
Proceeds from borrowing on revolving credit facility, net | — |
| | 2,070 |
| | — |
| | — |
| | — |
| | 2,070 |
|
Repayments of revolving credit facility | — |
| | — |
| | (2,195 | ) | | — |
| | — |
| | (2,195 | ) |
Repayments of financing lease obligations | — |
| | — |
| | (154 | ) | | (1 | ) | | — |
| | (155 | ) |
Repayments of long-term debt | — |
| | — |
| | (2,350 | ) | | — |
| | — |
| | (2,350 | ) |
Repurchases of common stock | (405 | ) | | — |
| | — |
| | — |
| | — |
| | (405 | ) |
Intercompany advances, net | 405 |
| | (1,810 | ) | | 1,406 |
| | (1 | ) | | — |
| | — |
|
Equity investment from parent | — |
| | — |
| | — |
| | 26 |
| | (26 | ) | | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (181 | ) | | — |
| | — |
| | (181 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | (130 | ) | | 130 |
| | — |
|
Other, net | 1 |
| | — |
| | (4 | ) | | — |
| | — |
| | (3 | ) |
Net cash provided (used in) by financing activities | 1 |
| | 260 |
| | (3,526 | ) | | (106 | ) | | 104 |
| | (3,267 | ) |
Change in cash and cash equivalents | — |
| | 2 |
| | (2,232 | ) | | (82 | ) | | — |
| | (2,312 | ) |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 1 |
| | 1 |
| | 2,395 |
| | 130 |
| | — |
| | 2,527 |
|
End of period | $ | 1 |
| | $ | 3 |
| | $ | 163 |
| | $ | 48 |
| | $ | — |
| | $ | 215 |
|
Condensed Consolidating Statement of Cash Flows Information
Six Months Ended June 30, 2019
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (372 | ) | | $ | 5,909 |
| | $ | (1,703 | ) | | $ | (295 | ) | | $ | 3,539 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (3,666 | ) | | (54 | ) | | — |
| | (3,720 | ) |
Purchases of spectrum licenses and other intangible assets, including deposits | — |
| | — |
| | (850 | ) | | — |
| | — |
| | (850 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 17 |
| | 1,979 |
| | — |
| | 1,996 |
|
Other, net | — |
| | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) |
Net cash (used in) provided by investing activities | — |
| | — |
| | (4,506 | ) | | 1,925 |
| | — |
| | (2,581 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from borrowing on revolving credit facility, net | — |
| | 1,765 |
| | — |
| | — |
| | — |
| | 1,765 |
|
Repayments of revolving credit facility | — |
| | — |
| | (1,765 | ) | | — |
| | — |
| | (1,765 | ) |
Repayments of financing lease obligations | — |
| | — |
| | (314 | ) | | (1 | ) | | — |
| | (315 | ) |
Repayments of long-term debt | — |
| | — |
| | (600 | ) | | — |
| | — |
| | (600 | ) |
Intercompany advances, net | — |
| | (1,392 | ) | | 1,310 |
| | 82 |
| | — |
| | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (104 | ) | | — |
| | — |
| | (104 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | (295 | ) | | 295 |
| | — |
|
Other, net | 2 |
| | — |
| | (11 | ) | | — |
| | — |
| | (9 | ) |
Net cash provided (used in) by financing activities | 2 |
| | 373 |
| | (1,512 | ) | | (214 | ) | | 295 |
| | (1,056 | ) |
Change in cash and cash equivalents | 2 |
| | 1 |
| | (109 | ) | | 8 |
| | — |
| | (98 | ) |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 2 |
| | 1 |
| | 1,079 |
| | 121 |
| | — |
| | 1,203 |
|
End of period | $ | 4 |
| | $ | 2 |
| | $ | 970 |
| | $ | 129 |
| | $ | — |
| | $ | 1,105 |
|
Condensed Consolidating Statement of Cash Flows Information
Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Parent | | Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
Operating activities | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (662 | ) | | $ | 5,306 |
| | $ | (2,483 | ) | | $ | (130 | ) | | $ | 2,031 |
|
Investing activities | | | | | | | | | | | |
Purchases of property and equipment | — |
| | — |
| | (2,990 | ) | | (5 | ) | | — |
| | (2,995 | ) |
Purchases of spectrum licenses and other intangible assets, including deposits | — |
| | — |
| | (79 | ) | | — |
| | — |
| | (79 | ) |
Proceeds related to beneficial interests in securitization transactions | — |
| | — |
| | 25 |
| | 2,593 |
| | — |
| | 2,618 |
|
Acquisition of companies, net of cash | — |
| | — |
| | (338 | ) | | — |
| | — |
| | (338 | ) |
Equity investment in subsidiary | — |
| | — |
| | (26 | ) | | — |
| | 26 |
| | — |
|
Other, net | — |
| | — |
| | 26 |
| | — |
| | — |
| | 26 |
|
Net cash (used in) provided by investing activities | — |
| | — |
| | (3,382 | ) | | 2,588 |
| | 26 |
| | (768 | ) |
Financing activities | | | | | | | | | | | |
Proceeds from issuance of long-term debt | — |
| | 2,494 |
| | — |
| | — |
| | — |
| | 2,494 |
|
Payments of consent fees related to long-term debt | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
Proceeds from borrowing on revolving credit facility, net | — |
| | 4,240 |
| | — |
| | — |
| | — |
| | 4,240 |
|
Repayments of revolving credit facility | �� |
| | — |
| | (3,920 | ) | | — |
| | — |
| | (3,920 | ) |
Repayments of financing lease obligations | — |
| | — |
| | (326 | ) | | (1 | ) | | — |
| | (327 | ) |
Repayments of long-term debt | — |
| | — |
| | (3,349 | ) | | — |
| | — |
| | (3,349 | ) |
Repurchases of common stock | (1,071 | ) | | — |
| | — |
| | — |
| | — |
| | (1,071 | ) |
Intercompany advances, net | 995 |
| | (6,070 | ) | | 5,085 |
| | (10 | ) | | — |
| | — |
|
Equity investment from parent | — |
| | — |
| | — |
| | 26 |
| | (26 | ) | | — |
|
Tax withholdings on share-based awards | — |
| | — |
| | (84 | ) | | — |
| | — |
| | (84 | ) |
Cash payments for debt prepayment or debt extinguishment costs | — |
| | — |
| | (212 | ) | | — |
| | — |
| | (212 | ) |
Intercompany dividend paid | — |
| | — |
| | — |
| | (130 | ) | | 130 |
| | — |
|
Other, net | 3 |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
|
Net cash (used in) provided by financing activities | (73 | ) | | 664 |
| | (2,847 | ) | | (115 | ) | | 104 |
| | (2,267 | ) |
Change in cash and cash equivalents | (73 | ) | | 2 |
| | (923 | ) | | (10 | ) | | — |
| | (1,004 | ) |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | 74 |
| | 1 |
| | 1,086 |
| | 58 |
| | — |
| | 1,219 |
|
End of period | $ | 1 |
| | $ | 3 |
| | $ | 163 |
| | $ | 48 |
| | $ | — |
| | $ | 215 |
|
The following table summarizes T-Mobile’s supplemental cash flow information: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Interest payments, net of amounts capitalized | $ | 608 | | | $ | 245 | | | $ | 949 | | | $ | 585 | |
Operating lease payments | $ | 1,269 | | | $ | 703 | | | $ | 2,144 | | | $ | 1,391 | |
Income tax payments | $ | 31 | | | $ | 40 | | | $ | 55 | | | $ | 72 | |
Non-cash investing and financing activities | | | | | | | |
| | | | | | | |
Non-cash beneficial interest obtained in exchange for securitized receivables | $ | 1,486 | | | $ | 1,616 | | | $ | 3,099 | | | $ | 3,128 | |
Non-cash consideration for the acquisition of Sprint | $ | 33,533 | | | $ | — | | | $ | 33,533 | | | $ | — | |
Decrease in accounts payable and accrued liabilities for purchases of property and equipment | $ | (38) | | | $ | (113) | | | $ | (339) | | | $ | (446) | |
Leased devices transferred from inventory to property and equipment | $ | 1,444 | | | $ | 167 | | | $ | 1,753 | | | $ | 314 | |
Returned leased devices transferred from property and equipment to inventory | $ | (538) | | | $ | (67) | | | $ | (597) | | | $ | (124) | |
Short-term debt assumed for financing of property and equipment | $ | 38 | | | $ | 50 | | | $ | 38 | | | $ | 300 | |
Operating lease right-of-use assets obtained in exchange for lease obligations | $ | 658 | | | $ | 1,400 | | | $ | 1,213 | | | $ | 2,094 | |
Financing lease right-of-use assets obtained in exchange for lease obligations | $ | 515 | | | $ | 368 | | | $ | 693 | | | $ | 548 | |
Note 20 – Subsequent Events
On July 1, 2020, pursuant to the Asset Purchase Agreement, upon the terms and subject to the conditions thereof, we completed the Prepaid Transaction. Upon closing of the transaction, we received $1.4 billion from DISH for the Prepaid Business, subject to a working capital adjustment. See Note 12 - Discontinued OperationsIndex for further information.
On July 4, 2020, we redeemed $1.0 billion aggregate principal amount of our 6.500% Senior Notes due 2024 and $1.25 billion aggregate principal amount of our 5.125% Senior Notes to affiliates due 2021. See Note 8 - Debtfor further information.
Upon receipt of the Condensed Consolidated Financial Statementsnecessary regulatory approvals on July 16, 2020, the sale of 5.0 million shares of our common stock to Marcelo Claure occurred simultaneously with our purchase of an equivalent number of shares of our common stock from SBGC at the same price per share. See Note 14 - SoftBank Equity Transaction for further information.
On July 27, 2020, the Rights Offering exercise period closed and on August 3, 2020, the Rights Offering closed, resulting in the sale of 19,750,000 shares of our common stock. The net proceeds used from the Rights Offering were used to purchase shares of our common stock from SBGC. See Note 14 - SoftBank Equity Transaction for further information.
In August 2020, we expect to deliver a notice of redemption on $1.7 billion aggregate principal amount of our 6.375% Senior Notes due 2025 and expect to redeem the Senior Notes on September 1, 2020. See Note 8 - Debtfor further information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including information concerning our future results of operations, are forward-looking statements. These forward-looking statements are generally identified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could” or similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties 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, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, as supplemented by the Risk Factors included in Part II, Item 1A below, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:
the •failure to obtain, or delays in obtaining, required regulatory approvals forrealize the expected benefits and synergies of the merger (the “Merger”) with Sprint Corporation (“Sprint”), pursuant to the Business Combination Agreement with Sprint and the other parties named therein (as amended, the “Business Combination Agreement”) and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”), risks associated with the actions and conditions we have agreed to in connection with such approvals, and the risk that such approvals may result in the imposition of additional conditions that, if accepted by the parties, could adversely affect the combined company or the expected benefits of the Transactions, or the failure to satisfy any of the other conditions to the Transactions on a timely basis or at all;
the occurrence of events that may give rise to a right of one or both of the parties to terminate the Business Combination Agreement;
adverse effects on the market price of our common stock or on our operating results because of a failure to complete the Merger in the anticipated timeframe, on the anticipated terms or at all;
inability to obtain the financing contemplated to be obtained in connection with the Transactions on the expected terms or timing or at all;
the ability of us, Sprint and the combined company to make payments on debt or to repay existing or future indebtedness when due or to comply with the covenants contained therein;
adverse changes in the ratings of our or Sprint’s debt securities or adverse conditions in the credit markets;
negative effects of the announcement, pendency or consummation of the Transactions on the market price of our common stock and on our or Sprint’s operating results, including as a result of changes in key customer, supplier, employee or other business relationships;
significant costs related to the Transactions, including financing costs and unknown liabilities of Sprint or that may arise;
failure to realize the expected benefits and synergies of the Transactions in the expected timeframes, in part or at all;
•adverse economic, political or market conditions in the U.S. and international markets, including those caused by the COVID-19 pandemic, and the impact that any of the foregoing may have on us and our customers and other stakeholders;
•costs of or difficulties related to the integration ofin integrating Sprint’s network and operations into our network and operations, including intellectual property and communications systems, administrative and information technology infrastructure and accounting, financial reporting and internal control systems, and the alignmentsystems;
•changes in key customers, suppliers, employees or other business relationships as a result of the two companies’ guidelines and practices;
costs or difficulties related to the completion of Divestiture Transaction and the satisfactionconsummation of the Government Commitments (as defined below);Transactions;
•the risk that our business, investor confidence in our financial results and stock price may be adversely affected if our internal controls are not effective;
•the risk of litigation orfuture material weaknesses resulting from the differences between T-Mobile’s and Sprint’s internal controls environments as we work to integrate and align policies and practices;
•the impacts of the actions we have taken and conditions we have agreed to in connection with the regulatory actions related toproceedings and approvals of the Transactions including the antitrust litigationPrepaid Transaction (as defined in Note 2 - Business Combinations of the Notes to the Condensed Consolidated Financial Statements) the complaint and proposed final judgment (the “Consent Decree”) agreed to by us, Deutsche Telekom AG (“DT”), Sprint, SoftBank Group Corp. (“SoftBank”) and DISH Network Corporation (“DISH”) with the U.S. District Court for the District of Columbia, which was approved by the Court on April 1, 2020, the proposed commitments filed with the Secretary of the FCC, which we announced on May 20, 2019, certain national security commitments and undertakings, and any other commitments or undertakings entered into, including but not limited to those we have made to certain states and nongovernmental organizations (collectively, the “Government Commitments”); •the ongoing commercial and transition services arrangements that we entered into with DISH in connection with such Prepaid Transaction, which we completed on July 1, 2020 (collectively, the “Divestiture Transaction”);
•the assumption of significant liabilities, including the liabilities of Sprint in connection with, and significant costs, including financing costs, related to the Transactions brought byTransactions;
•our ability to make payments on debt or to repay existing or future indebtedness when due or to comply with the attorneys general of thirteen states and the District of Columbia;covenants contained therein;
the inability of us, Sprint or the combined company to retain and hire key personnel;
the risk that certain contractual restrictions contained•adverse changes in the Business Combination Agreement during the pendencyratings of the Transactions could adversely affect our debt securities or Sprint’s ability to pursue business opportunities or strategic transactions;
adverse economic, political or market conditions in the U.S. and internationalcredit markets;
•natural disasters, public health crises, including the COVID-19 pandemic, terrorist attacks or similar incidents;
•competition, industry consolidation and changes in the market for wireless services, which could negatively affect our ability to attract and retain customers;
•the effects of any future merger, investment, or acquisition involving us, as well as the effects of mergers, investments or acquisitions in the technology, media and telecommunications industry;
•breaches of our and/or our third-party vendors’ networks, information technology and data security, resulting in unauthorized access to customer confidential information;
•inability to implement and maintain effective cybersecurity measures over critical business systems;
•challenges in implementing our business strategies or funding our operations, including payment for additional spectrum or network upgrades;
the possibility that we may be unable to renew our spectrum licenses on attractive terms or acquire new spectrum licenses at reasonable costs and terms;
•difficulties in managing growth in wireless data services, including network quality;
•material changes in available technology and the effects of such changes, including product substitutions and deployment costs and performance;
•the timing, scope and financial impact of our deployment of advanced network and business technologies;
•the impact on occurrence of high fraud rates related to device financing, customer credit cards, dealers, subscriptions, or account take over fraud;
•our networks and business from major technology equipment failures;
inability to implementretain and maintain effective cyber security measures over critical business systems;hire key personnel;
breaches of our and/or our third-party vendors’ networks, information technology (“IT”) and data security, resulting in unauthorized access to customer confidential information;
natural disasters, terrorist attacks or similar incidents;
unfavorable outcomes of existing or future litigation;
•any changes in the regulatory environments in which we operate, including any increase in restrictions on the ability to operate our networks and changes in data privacy laws;
any disruption•unfavorable outcomes of existing or failure of our third parties’future litigation or key suppliers’ provisioning of productsregulatory actions, including litigation or services;
material adverse changes in labor matters, including labor campaigns, negotiations or additional organizing activity, and any resulting financial, operational and/or reputational impact;
changes in accounting assumptions that regulatory agencies, including the Securities and Exchange Commission (“SEC”), may require, which could result in an impact on earnings;
changes in tax laws, regulations and existing standards and the resolution of disputes with any taxing jurisdictions;
the possibility that the reset process under our trademark license results in changesactions related to the royalty rates for our trademarks;Transactions;
•the possibility that we may be unable to adequately protect our intellectual property rights or be accused of infringing the intellectual property rights of others;
our business, investor confidence•changes in our financial resultstax laws, regulations and stock priceexisting standards and the resolution of disputes with any taxing jurisdictions;
•the possibility that we may be adversely affected ifunable to renew our internal controls are not effective;spectrum leases on attractive terms or acquire new spectrum licenses or leases at reasonable costs and terms;
•any disruption or failure of third parties (including key suppliers) to provide products or services;
•material adverse changes in labor matters, including labor campaigns, negotiations or additional organizing activity, and any resulting financial, operational and/or reputational impact;
•changes in accounting assumptions that regulatory agencies, including the occurrence of high fraud rates related to device financing, credit card, dealers, or subscriptions;U.S. Securities and Exchange Commission (the “SEC”), may require, which could result in an impact on earnings; and
•interests of a majority stockholderour significant stockholders that may differ from the interests of other stockholders.
Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. In this Form 10-Q, unless the context indicates otherwise, references to “T-Mobile,” “T-Mobile US,” “our Company,” “the Company,” “we,” “our,” and “us” refer to T-Mobile US, Inc., 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.
Overview
The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our condensed consolidated financial statements with the following:
•A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results;
•Context to the financial statements; and
Information that allows assessment of the likelihood that past performance is indicative of future performance.
Our MD&A is performed on a consolidated basis and is inclusive of the results and operations of Sprint prospectively from the close of our Merger on April 1, 2020. The Merger increased our customer base, enhanced our spectrum portfolio, altered our
product mix by increasing the portion of customers who finance their devices with leasing programs and created redundancies within our network. We anticipate an initial increase in our combined operating costs which we expect to decrease as we realize synergies. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities.
Our MD&A is provided as a supplement to, and should be read together with, our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019,2020, included in Part I, Item 1 of this Form 10-Q and audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 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.
BusinessBeginning with the second quarter of 2020, we have discontinued the use of “Branded” to describe the results and metrics associated with our flagship brands including T-Mobile, Metro by T-Mobile, and Sprint.
Sprint Merger
Transaction Overview
In April 2019, we introduced TVisionTM Home, a rebranded and upgraded version of Layer3 TV. TVisionTM Home delivers what customers want most from high-end home TV, including a premium TV experience and HD and 4K channels. TVisionTM Home launched in eight markets.
In April 2019, we launched T-Mobile MONEY nationwide, offering customers a no-fee, interest-earning, mobile-first checking account which can be opened and managed from customers’ smartphones. Accounts are held at BankMobile, a Division of Customers Bank.
Magenta Plans
In June 2019, we rebranded our T-Mobile ONE and ONE Plus plans to Magenta and Magenta Plus. The Magenta plan adds 3GB of high-speed smartphone hotspot, or tethering, per line and unlimited 3G tethering thereafter and includes a Netflix Basic subscription for customers with family plans. The Magenta Plus plan benefits remain the same as the ONE Plus plan and includes a Netflix Standard subscription for customers with family plans.
Proposed Sprint Transaction
On April 29, 2018,1, 2020, we entered into the Business Combination Agreement to mergecompleted our Merger with Sprint, in an all-stock transaction at a fixed exchange ratiocommunications company offering a comprehensive range of 0.10256 shareswireless and wireline communications products and services. As a result, Sprint and its subsidiaries became wholly-owned consolidated subsidiaries of T-Mobile common stock forT-Mobile. Upon completion of the Merger, each share of Sprint common stock or 9.75was exchanged for 0.10256 shares of Sprint common stock for each share of T-Mobile common stock. After adjustments and fractional shares, we issued 373,396,310 shares of T-Mobile common stock to Sprint stockholders. The combined company will be named “T-Mobile”fair value of the T-Mobile common stock provided in exchange for Sprint common stock was approximately $31.3 billion. Additional components of consideration included the repayment of certain of Sprint’s debt, replacement of equity awards attributable to pre-combination services and contingent consideration issuable to SoftBank.
We accounted for the acquisition as a business combination. Our preliminary purchase price allocation as of the date of acquisition resulted in an aggregate fair value of assets acquired of $93.8 billion, including Spectrum licenses of $45.4 billion, assumed liabilities of $53.0 billion and the recognition of $9.2 billion in goodwill.
After closing of the Merger, DT and SoftBank held, directly or indirectly, approximately 43.6% and 24.7%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 31.7% of the outstanding T-Mobile common stock held by other stockholders.
On June 22, 2020, we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transactionof the Notes to the Condensed Consolidated Financial Statements. On August 3, 2020, upon completion of the SoftBank Monetization, DT and SoftBank held, directly or indirectly, approximately 43.4% and 8.6% respectively, of the outstanding T-Mobile common stock, with the remaining approximately 48.0% of the outstanding T-Mobile common stock held by other stockholders. As a result of the Proxy Agreements, DT has voting control as of August 3, 2020 over approximately 52.4% of the outstanding T-Mobile common stock. In addition, as provided for in the Master Framework Agreement, DT also holds certain call options over approximately 101.5 million shares of our common stock held by SBGC.
Sprint PCS (specifically Sprint Spectrum L.P.) is party to a variety of publicly filed agreements with Shenandoah Personal Communications Company (“Shentel”), pursuant to which Shentel is the exclusive provider of Sprint PCS’s wireless mobility communications network products in certain parts of Virginia, West Virginia, Kentucky, Ohio, and Pennsylvania to approximately 1.1 million subscribers. Sprint PCS has at least through August 29, 2020 to determine whether it will exercise an option to purchase Shentel’s wireless telecommunications network assets. Should Sprint PCS exercise the purchase option, there will be an appraisal process, which could be subject to various legal challenges. If Sprint PCS declines to do so, Shentel has an opportunity to purchase the legacy T-Mobile wireless telecommunications network assets in the Shentel service area and, should it decline to do so within 60 days, the affiliate agreement states that Sprint PCS must sell or decommission T-Mobile’s legacy wireless telecommunications network assets and transfer subscribers in the Shentel service area within two years.
Sale of Boost Mobile and Sprint Prepaid Brands
In connection with obtaining regulatory approval for the Merger, is expectedon July 1, 2020, DISH acquired the prepaid wireless business operated under the Boost Mobile and Sprint prepaid brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers of Shentel and Swiftel Communications, Inc.), including customer accounts, inventory, contracts, intellectual property and certain other specified assets (the “Prepaid Business”), and assumed certain related liabilities (the “Prepaid Transaction”). The assets and liabilities associated with the Prepaid Transaction are presented as held for sale in our Condensed Consolidated Balance Sheets as of June 30, 2020. The results of the Prepaid Business from April 1, 2020 through June 30, 2020 are presented in Income from discontinued operations, net of tax in our Condensed Consolidated Statements of Comprehensive Income and do not include corporate and administrative expenses not directly attributable to the operations of the Prepaid Business.
Upon the closing of the Prepaid Transaction, we entered into a Master Network Services Agreement (the “MVNO Agreement”) providing for the provisioning of network services to customers of the Prepaid Business for a period of up to seven years following the closing of the Prepaid Transaction. The revenue generated through this agreement will be presented within Wholesale revenues in our Condensed Consolidated Statements of Comprehensive Income beginning upon the close of the Prepaid Transaction on July 1, 2020.
We have included the pre-tax results of our discontinued operations in our determination of Adjusted EBITDA, a Non-GAAP measure, to reflect contributions of the Prepaid Business that will be replaced by the MVNO Agreement beginning on July 1, 2020. See “Adjusted EBITDA” in in the “Performance Measures” section of this MD&A
Impact on Results of Operations and Performance Measures for the Three and Six Months Ended June 30, 2020
The Merger has altered the size and scope of our operations, impacting our assets, liabilities, obligations, capital requirements and performance measures. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities. As a combined company, we expect to be able to achieve synergies, rapidly launch a broad and deep nationwide 5G network, accelerate innovation, and increase competition in the U.S. wireless, video and broadband industries. Immediately followingAmong the expected synergies are reduction in redundant cell sites from combining networks, back office and information technology efficiencies and the evolution of our distribution and retail footprint including the combining of the Sprint and T-Mobile brand operations, unifying under the T-Mobile brand nationwide starting on August 2, 2020.
Merger-Related Costs
Merger-related costs generally include transaction costs such as legal and professional services, restructuring costs including severance and store rationalization and other integration costs to achieve synergies in network, retail, IT and back office operations. Transaction costs and restructuring costs are disclosed in Note 2 – Business Combinations and Note 18 - Restructuring Costs, respectively. Merger-related costs have been excluded from the calculation of Adjusted EBITDA, a non-GAAP financial measure, as we do not consider these costs to be reflective of our ongoing operating performance. See “Adjusted EBITDA” in the “Performance Measures” section of this MD&A. Cash payments for merger-related costs are included in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.
Merger-related costs during the three and six months ended June 30, 2020 and 2019 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | Change | | |
| 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Merger-related costs | | | | | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization | $ | 40 | | | $ | — | | | $ | 40 | | | NM | | $ | 40 | | | $ | — | | | $ | 40 | | | NM |
Selling, general & administrative | 758 | | | 222 | | | 536 | | | 241 | % | | 901 | | | 335 | | | 566 | | | 169 | % |
Total Merger-related costs | $ | 798 | | | $ | 222 | | | $ | 576 | | | 259 | % | | $ | 941 | | | $ | 335 | | | $ | 606 | | | 181 | % |
| | | | | | | | | | | | | | | |
Cash payments for Merger-related costs | $ | 370 | | | $ | 151 | | | $ | 219 | | | 145 | % | | $ | 531 | | | $ | 185 | | | $ | 346 | | | 187 | % |
NM - Not Meaningful
COVID-19 Pandemic
The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies, and financial markets worldwide, and has caused significant volatility in the U.S. and international debt and equity markets. The impact of COVID-19 has been wide-ranging, including, but not limited to, the temporary closures of many businesses and schools, “shelter in place” orders, travel restrictions, social distancing guidelines and other governmental, business and individual actions taken in response to the COVID-19 pandemic. These restrictions have impacted, and will continue to impact, our business, including the demand for our products and services and the ways in which our customers purchase and use them. In addition, the COVID-19 pandemic has resulted in economic uncertainty and a significant increase in unemployment in the United States, which could affect our customers’ purchasing decisions and ability to make timely payments. During the quarter, while the impact of the COVID-19 pandemic peaked and subsequently subsided in some jurisdictions, leading to phased re-openings, other areas have seen resurgences of COVID-19 cases and continuing or renewed containment measures.
As a critical communications infrastructure provider as designated by the government, our focus has been on providing crucial connectivity to our customers and impacted communities while ensuring the safety and well-being of our employees.
Our Response
We have taken a variety of steps to help mitigate the impact of COVID-19 on our customers and to protect the health and well-being of our workforce and communities:
To Protect and Support Our Employees and Communities
•Before the Merger, it is anticipatedin mid-March, approximately 80% of T-Mobile and 70% of Sprint company-owned store locations, as well as many third-party retailer locations, that Deutsche Telekom AG (“DT”)sell our T-Mobile, Metro by T-Mobile and SoftBank Group Corp. (“SoftBank”) will hold, directlySprint brands, were temporarily closed. In compliance with the regulations of various states, we have since reopened a number of our previously closed stores.
•We supplemented pay for certain of our employees and commissions for third-party dealers impacted by COVID-19 and provided access to incremental paid time off for employees experiencing symptoms, taking care of children who were home due to school closures or indirectly,caring for individuals impacted by COVID-19;
•We implemented remote working arrangements for many employees with more than 14,000 internal care employees and over 31,000 global care employees transitioned to a work-from-home environment. We also encouraged our corporate and administrative employees to work remotely, if possible.
To Keep Our Customers Connected
•In March, we committed to the FCC’s Keep Americans Connected pledge (the “Pledge”), and at the FCC’s request, later extended our commitment to June 30, 2020. During this period, we pledged to:
•Not terminate service to any residential or small business customers because of their inability to pay their bills due to disruptions caused by the COVID-19 pandemic; and
•Waive any late fees that any residential or small business customers incur because of their economic circumstances related to the COVID-19 pandemic.
•After the Pledge extension ended, we continued to work with our customers to help them maintain service and become current on their accounts, while avoiding financial hardship.
•We also took additional temporary steps in March to ensure that all current T-Mobile customers with smartphone data plans were provided connectivity to learn and work remotely through June 30, 2020, including:
•Providing unlimited high-speed smartphone data to current customers as of March 13, 2020 who had legacy plans without unlimited high-speed data (excluding roaming);
•Giving T-Mobile postpaid and Metro by T-Mobile customers on smartphone plans with mobile hotspot data the ability to add 10GB of Smartphone Mobile HotSpot each month (20GB total);
•Working with our Lifeline partners to provide customers up to 5GB per month of free data;
•Increasing the data allowance, at no extra charge, to schools and students using our EmpowerED digital learning program to ensure each participant has access to at least 20GB of data per month; and
•Providing free international calling to landlines (and in many cases mobile numbers) to countries that were significantly impacted by COVID-19 through May 13, 2020.
•In addition, during the pandemic we:
•Offered our customers creative, new COVID-safe solutions such as virtual selling and curbside pickup;
•Launched T-Mobile Connect, a new, competitive $15 per month prepaid option we had previously announced but launched in March 2020, ahead of schedule to provide a reliable, low-cost connection for many Americans facing financial strain;
•Partnered with multiple spectrum holders and the FCC to successfully deploy additional 600 MHz spectrum on a temporary basis, effectively doubling total 600 MHz LTE capacity across the nation to help ensure customers can stay connected during this critical time;
•Worked to keep our network fully diluted basis, approximately 41.7%operational as an essential service to first responders, 911 communications and 27.4%,our customers and continued to expand our 5G network, while adhering to governmental guidelines; and
•We unveiled our latest Un-carrier move, Scam Shield, a service to help block robocalls and reduce scam calls for customers by using a free app that gives the user control over T-Mobile’s anti-scam protections like Scam ID, Scam Block, and Caller ID. Scam Shield is available to all our customers to combat the rapid increase in scams, including those related to COVID-19.
We continue to monitor the COVID-19 pandemic and its impacts and may adjust our actions as needed to continue to serve our employees and communities and to provide our products and services to our employees and communities.
Impact on Results of Operations and Performance Measures for the Three and Six Months Ended June 30, 2020
For the three and six months ended June 30, 2020, we incurred $341 million and $458 million, respectively, before taxes, in supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, which are included in Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income. Substantially all of these costs were incurred from March onward, as COVID-19 had a minimal impact on our expenses in January and February. These costs have been excluded from the calculation of Adjusted EBITDA, a non-GAAP financial measure, as they represent direct, incremental costs as a result of our response to COVID-19 that we do not consider to be indicative of our ongoing operating performance. See “Adjusted EBITDA” in the “Performance Measures” section of this MD&A.
Additional impacts of COVID-19 for the three and six months ended June 30, 2020, which primarily impacted our results from March onward, include:
•Lower net customer additions due to lower switching activity in the industry from social distancing rules and temporary retail store closures, which impacted our ability to sell devices and services and to persuade potential customers to switch to our network during the crisis;
•Lower postpaid phone and prepaid churn due to social distancing rules and retail store closures;
•Lower Total service revenues from lower net customer additions and customer concessions as part of our commitments to the Pledge and other efforts to keep our customers connected;
•Lower Equipment revenues and lower Cost of equipment sales due to lower switching activity in the industry from social distancing rules and retail store closures, which impacted our ability to sell devices; and
•Higher bad debt expense due to the recording of estimated losses associated with the adoption of the outstanding T-Mobile common stock, with the remaining approximately 30.9% of the outstanding T-Mobile common stock held by other stockholders, based on closing share prices and certain other assumptions as of December 31, 2018. The consummation of the Merger remains subject to regulatory approvals and certain other customary closing conditions. We expect to receive final federal regulatory approval in the third quarter of 2019 and currently anticipate that the Merger will be permitted to close in the second half of the year.
For more information regarding our Business Combination Agreement, see Note 3 – Business Combinations of the Notes to the Condensed Consolidated Financial Statements.
T-Mobile Added to S&P 500
T-Mobile was added to the S&P 500 Index effective prior to the open of trading on July 15, 2019. We were added to the S&P 500 GICS (Global Industry Classification Standard) Wireless Telecommunication Services Sub-Industry index.
Accounting Pronouncements Adopted During the Current Year
Leases
On January 1, 2019, we adopted the new lease standard. See Note 1 – Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements for information regardingcredit loss standard, which includes the impact of our adoptioncommitment to the Pledge through collection holds and the macro-economic impacts of COVID-19.
Expected Continued Impact on Results of Operations and Performance Measures
We will continue to monitor developments regarding the COVID-19 pandemic and evaluate the appropriate steps we need to take as a business to align with guidelines from state, local and federal government agencies and to do what is best for our employees and customers. We expect our business, liquidity, financial condition, and operating results to continue to be adversely impacted by the COVID-19 pandemic for the remainder of 2020 and thereafter. The extent to which the COVID-19 pandemic impacts our business, operations and financial results will depend on numerous future developments that we are not able to predict at this time, including the duration and scope of the new lease standard.
pandemic, the success of governmental, business and
individual actions that have been and continue to be taken in response to the Condensed Consolidated Financial Statementspandemic, and the impact on economic activity from the pandemic and actions taken in response. Such impacts may include:
•Lower net customer additions due to lower switching activity in the industry from social distancing rules, temporary retail store closures and reduced consumer spending caused by widespread unemployment and other adverse economic effects, partially offset by lower churn;
•Lower Equipment revenues and lower Cost of equipment sales from lower device sales due to lower switching activity in the industry from social distancing rules and temporary retail store closures, which will impact our ability to sell devices;
•Higher bad debt expense on our service and equipment installment plan (“EIP”) receivable portfolios due to adverse macro-economic conditions. Should these adverse conditions worsen, our operating and financial results could be negatively impacted;
•Continued costs to protect and support our employees and customers, which increased during the second quarter as a result of a full quarter of COVID-19 impacts compared to the first quarter because COVID-19 primarily only impacted costs during the last month of the first quarter;
•Higher device insurance fulfillment costs due to a lower supply of returned devices; and
•Potential disruptions in our supply chains.
In addition, we have reevaluated, and continue to assess, our spending, including for marketing purposes like advertising, capital projects like build-out of our stores, travel, third-party services and certain operating expenses. We have taken actions to adjust our spending given the significant uncertainty around the magnitude and duration of any recessionary impacts arising from the COVID-19 pandemic.
Un-Carrier Moves
Scam Shield
On July 16, 2020, we unveiled our latest Un-carrier move with a comprehensive set of protections against scams and robocalls. The move, called Scam Shield, is our response to the growing number of scam calls with an unparalleled set of free safeguards, including technology built into T-Mobile’s network, to protect customers in the T-Mobile family of brands against scams and robocalls. Scam Shield addresses this complex problem with a solution designed to help stop scammers, give the customer more information about the identity of the caller and protect their personal information.
Brand and Retail Unification
On August 2, 2020, we unified our retail operations and rebranded thousands of Sprint stores to T-Mobile stores while rolling out the tools and systems across our distribution footprint to serve all customers in all stores. At the same time, we launched our 4 lines for $25 each per month limited time promotion, giving customers unlimited data and 5G access.
Results of Operations
Highlights for the three months ended June 30, 2019, compared to the same period in 2018
Total revenues of $11.0 billion for the three months ended June 30, 2019 increased $408 million, or 4%, primarily driven by growth in service revenues as further discussed below.
Service revenues of $8.4 billion for the three months ended June 30, 2019 increased $495 million, or 6%, primarily due to growth in our average branded customer base driven by the continued growth in existing and Greenfield markets, including the growing success of new customer segments and rate plans such as Unlimited 55+, Military, Business and Essentials, along with record low churn and growth in wearables and other connected devices, partially offset by lower postpaid phone and prepaid Average Revenue Per User (“ARPU”).
Equipment revenues of $2.3 billion for the three months ended June 30, 2019 decreased $62 million, or 3%, primarily due to a decrease in the number of devices sold, excluding purchased leased devices, partially offset by a higher average revenue per device sold.
Operating income of $1.5 billion for the three months ended June 30, 2019 increased $91 million, or 6%, primarily due to higher Service revenues, partially offset by higher Selling, general and administrative expenses, including merger-related costs of $222 million, compared to $41 million for the three months ended June 30, 2018, and higher Costs of services. Operating income for the three months ended June 30, 2018 benefited from hurricane related reimbursements of $70 million.
Net income of $939 million for the three months ended June 30, 2019 increased $157 million, or 20%, primarily due to higher Operating income and lower Other expense. The impact of merger-related costs was $175 million, net of tax, for the three months ended June 30, 2019, compared to $39 million for the three months ended June 30, 2018. Net income for the three months ended June 30, 2018 benefited from hurricane related reimbursements of $45 million, net of tax.
| |
• | Adjusted EBITDA, a non-GAAP financial measure, of $3.5 billion for the three months ended June 30, 2019 increased $228 million, or 7%, primarily due to higher Operating income driven by the factors described above. See “Performance Measures” for additional information. |
| |
• | Net cash provided by operating activities of $2.1 billion for the three months ended June 30, 2019 increased $886 million, or 70%. See “Liquidity and Capital Resources” for additional information. |
| |
• | Free Cash Flow, a non-GAAP financial measure, of $1.2 billion for the three months ended June 30, 2019 increased $395 million, or 51%. Free Cash Flow includes $151 million and $17 million in payments for merger-related costs for the three months ended June 30, 2019 and 2018, respectively. See “Liquidity and Capital Resources” for additional information. |
Highlights for the six months ended June 30, 2019, compared to the same period in 2018
Total revenues of $22.1 billion for the six months ended June 30, 2019 increased $1.0 billion, or 5%, primarily driven by growth in service and equipment revenues as further discussed below.
Service revenues of $16.7 billion for the six months ended June 30, 2019 increased $966 million, or 6%, primarily due to growth in our average branded customer base driven by the continued growth in existing and Greenfield markets, including the growing success of new customer segments and rate plans such as Unlimited 55+, Military, Business and Essentials, along with record low churn and growth in wearables and other connected devices, partially offset by lower postpaid phone and prepaid ARPU.
Equipment revenues of $4.8 billion for the six months ended June 30, 2019 increased $101 million, or 2%, primarily due to a higher average revenue per device sold, partially offset by a decrease in the number of devices sold, excluding purchased leased devices.
Operating income of $3.0 billion for the six months ended June 30, 2019 increased $285 million, or 10%, primarily due to higher Total revenues, partially offset by higher Selling, general and administrative expenses, including merger-related costs of $335 million, compared to $41 million for the six months ended June 30, 2018, and higher Cost of services. Operating income for the six months ended June 30, 2018, benefited from hurricane related reimbursements, net of costs, of $34 million.
Net income of $1.8 billion for the six months ended June 30, 2019 increased $394 million, or 27%, primarily due to higher Operating income and lower Interest expense and Interest expense to affiliates, partially offset by higher Income tax expense. The impact of merger-related costs was $268 million, net of tax, for the six months ended June 30, 2019, compared to $39 million for the six months ended June 30, 2018. Net income for the six months ended June 30, 2018 benefited from hurricane related reimbursements, net of costs, of $22 million, net of tax.
| |
• | Adjusted EBITDA, a non-GAAP financial measure, of $6.7 billion for the six months ended June 30, 2019 increased $556 million, or 9%, primarily due to higher Operating income driven by the factors described above. See “Performance Measures” for additional information. |
| |
• | Net cash provided by operating activities of $3.5 billion for the six months ended June 30, 2019 increased $1.5 billion, or 74%. See “Liquidity and Capital Resources” for additional information. |
| |
• | Free Cash Flow, a non-GAAP financial measure, of $1.8 billion for the six months ended June 30, 2019 increased $345 million, or 24%. Free Cash Flow includes $185 million and $17 million in payments for merger-related costs for the six months ended June 30, 2019 and 2018, respectively. See “Liquidity and Capital Resources” for additional information. |
Set forth below is a summary of our unaudited condensed consolidated financial results:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | | | Change | | | | | | |
(in millions) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | | | $ | | % | | | | |
Revenues | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Postpaid revenues | $ | 9,959 | | | $ | 5,613 | | | $ | 4,346 | | | 77 | % | | $ | 15,846 | | | $ | 11,106 | | | | | $ | 4,740 | | | 43 | % | | | | |
Prepaid revenues | 2,311 | | | 2,379 | | | (68) | | | (3) | % | | 4,684 | | | 4,765 | | | | | (81) | | | (2) | % | | | | |
Wholesale revenues | 408 | | | 313 | | | 95 | | | 30 | % | | 733 | | | 617 | | | | | 116 | | | 19 | % | | | | |
Roaming and other service revenues | 552 | | | 241 | | | 311 | | | 129 | % | | 813 | | | 449 | | | | | 364 | | | 81 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total service revenues | 13,230 | | | 8,546 | | | 4,684 | | | 55 | % | | 22,076 | | | 16,937 | | | | | 5,139 | | | 30 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Equipment revenues | 4,269 | | | 2,263 | | | 2,006 | | | 89 | % | | 6,386 | | | 4,779 | | | | | 1,607 | | | 34 | % | | | | |
Other revenues | 172 | | | 170 | | | 2 | | | 1 | % | | 322 | | | 343 | | | | | (21) | | | (6) | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total revenues | 17,671 | | | 10,979 | | | 6,692 | | | 61 | % | | 28,784 | | | 22,059 | | | | | 6,725 | | | 30 | % | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | 3,098 | | | 1,649 | | | 1,449 | | | 88 | % | | 4,737 | | | 3,195 | | | | | 1,542 | | | 48 | % | | | | |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | 3,667 | | | 2,661 | | | 1,006 | | | 38 | % | | 6,196 | | | 5,677 | | | | | 519 | | | 9 | % | | | | |
Selling, general and administrative | 5,604 | | | 3,543 | | | 2,061 | | | 58 | % | | 9,292 | | | 6,985 | | | | | 2,307 | | | 33 | % | | | | |
Impairment expense | 418 | | | — | | | 418 | | | NM | | 418 | | | — | | | | | 418 | | | NM | | | | |
Depreciation and amortization | 4,064 | | | 1,585 | | | 2,479 | | | 156 | % | | 5,782 | | | 3,185 | | | | | 2,597 | | | 82 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | 16,851 | | | 9,438 | | | 7,413 | | | 79 | % | | 26,425 | | | 19,042 | | | | | 7,383 | | | 39 | % | | | | |
Operating income | 820 | | | 1,541 | | | (721) | | | (47) | % | | 2,359 | | | 3,017 | | | | | (658) | | | (22) | % | | | | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Interest expense | (776) | | | (182) | | | (594) | | | 326 | % | | (961) | | | (361) | | | | | (600) | | | 166 | % | | | | |
Interest expense to affiliates | (63) | | | (101) | | | 38 | | | (38) | % | | (162) | | | (210) | | | | | 48 | | | (23) | % | | | | |
Interest income | 6 | | | 4 | | | 2 | | | 50 | % | | 18 | | | 12 | | | | | 6 | | | 50 | % | | | | |
Other expense, net | (195) | | | (22) | | | (173) | | | 786 | % | | (205) | | | (15) | | | | | (190) | | | 1,267 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total other expense, net | (1,028) | | | (301) | | | (727) | | | 242 | % | | (1,310) | | | (574) | | | | | (736) | | | 128 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations before income taxes | (208) | | | 1,240 | | | (1,448) | | | (117) | % | | 1,049 | | | 2,443 | | | | | (1,394) | | | (57) | % | | | | |
Income tax expense | (2) | | | (301) | | | 299 | | | (99) | % | | (308) | | | (596) | | | | | 288 | | | (48) | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations | (210) | | | 939 | | | (1,149) | | | (122) | % | | 741 | | | 1,847 | | | | | (1,106) | | | (60) | % | | | | |
Income from discontinued operations, net of tax | 320 | | | — | | | 320 | | | NM | | 320 | | | — | | | | | 320 | | | NM | | | | |
Net income | $ | 110 | | | $ | 939 | | | $ | (829) | | | (88) | % | | $ | 1,061 | | | $ | 1,847 | | | | | $ | (786) | | | (43) | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Statement of Cash Flows Data | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | $ | 777 | | | $ | 2,147 | | | $ | (1,370) | | | (64) | % | | 2,394 | | | $ | 3,539 | | | | | $ | (1,145) | | | (32) | % | | | | |
Net cash used in investing activities | (6,356) | | | (1,615) | | | (4,741) | | | 294 | % | | (7,936) | | | (2,581) | | | | | (5,355) | | | 207 | % | | | | |
Net cash provided by (used in) financing activities | 15,628 | | | (866) | | | 16,494 | | | (1,905) | % | | 15,175 | | | (1,056) | | | | | 16,231 | | | (1,537) | % | | | | |
Non-GAAP Financial Measures | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 7,017 | | | $ | 3,461 | | | $ | 3,556 | | | 103 | % | | $ | 10,682 | | | $ | 6,745 | | | | | $ | 3,937 | | | 58 | % | | | | |
Free Cash Flow, excluding gross payments for the settlement of interest rate swaps | 1,441 | | 1,169 | | 272 | | 23 | % | | 2,173 | | 1,787 | | | | 386 | | 22 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
NM - Not Meaningful
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in millions) | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % |
Revenues | | | | | | | | | | | | | | | |
Branded postpaid revenues | $ | 5,613 |
| | $ | 5,164 |
| | $ | 449 |
| | 9 | % | | $ | 11,106 |
| | $ | 10,234 |
| | $ | 872 |
| | 9 | % |
Branded prepaid revenues | 2,379 |
| | 2,402 |
| | (23 | ) | | (1 | )% | | 4,765 |
| | 4,804 |
| | (39 | ) | | (1 | )% |
Wholesale revenues | 313 |
| | 275 |
| | 38 |
| | 14 | % | | 617 |
| | 541 |
| | 76 |
| | 14 | % |
Roaming and other service revenues | 121 |
| | 90 |
| | 31 |
| | 34 | % | | 215 |
| | 158 |
| | 57 |
| | 36 | % |
Total service revenues | 8,426 |
| | 7,931 |
| | 495 |
| | 6 | % | | 16,703 |
| | 15,737 |
| | 966 |
| | 6 | % |
Equipment revenues | 2,263 |
| | 2,325 |
| | (62 | ) | | (3 | )% | | 4,779 |
| | 4,678 |
| | 101 |
| | 2 | % |
Other revenues | 290 |
| | 315 |
| | (25 | ) | | (8 | )% | | 577 |
| | 611 |
| | (34 | ) | | (6 | )% |
Total revenues | 10,979 |
| | 10,571 |
| | 408 |
| | 4 | % | | 22,059 |
| | 21,026 |
| | 1,033 |
| | 5 | % |
Operating expenses | | | | | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization shown separately below | 1,649 |
| | 1,530 |
| | 119 |
| | 8 | % | | 3,195 |
| | 3,119 |
| | 76 |
| | 2 | % |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | 2,661 |
| | 2,772 |
| | (111 | ) | | (4 | )% | | 5,677 |
| | 5,617 |
| | 60 |
| | 1 | % |
Selling, general and administrative | 3,543 |
| | 3,185 |
| | 358 |
| | 11 | % | | 6,985 |
| | 6,349 |
| | 636 |
| | 10 | % |
Depreciation and amortization | 1,585 |
| | 1,634 |
| | (49 | ) | | (3 | )% | | 3,185 |
| | 3,209 |
| | (24 | ) | | (1 | )% |
Total operating expense | 9,438 |
| | 9,121 |
| | 317 |
| | 3 | % | | 19,042 |
| | 18,294 |
| | 748 |
| | 4 | % |
Operating income | 1,541 |
| | 1,450 |
| | 91 |
| | 6 | % | | 3,017 |
| | 2,732 |
| | 285 |
| | 10 | % |
Other income (expense) | | | | | | | | | | | | | | | |
Interest expense | (182 | ) | | (196 | ) | | 14 |
| | (7 | )% | | (361 | ) | | (447 | ) | | 86 |
| | (19 | )% |
Interest expense to affiliates | (101 | ) | | (128 | ) | | 27 |
| | (21 | )% | | (210 | ) | | (294 | ) | | 84 |
| | (29 | )% |
Interest income | 4 |
| | 6 |
| | (2 | ) | | (33 | )% | | 12 |
| | 12 |
| | — |
| | — | % |
Other expense, net | (22 | ) | | (64 | ) | | 42 |
| | (66 | )% | | (15 | ) | | (54 | ) | | 39 |
| | (72 | )% |
Total other expense, net | (301 | ) | | (382 | ) | | 81 |
| | (21 | )% | | (574 | ) | | (783 | ) | | 209 |
| | (27 | )% |
Income before income taxes | 1,240 |
| | 1,068 |
| | 172 |
| | 16 | % | | 2,443 |
| | 1,949 |
| | 494 |
| | 25 | % |
Income tax expense | (301 | ) | | (286 | ) | | (15 | ) | | 5 | % | | (596 | ) | | (496 | ) | | (100 | ) | | 20 | % |
Net income | $ | 939 |
| | $ | 782 |
| | $ | 157 |
| | 20 | % | | $ | 1,847 |
| | $ | 1,453 |
| | $ | 394 |
| | 27 | % |
Statement of Cash Flows Data | | | | | | | | | | | | | | | |
Net cash provided by operating activities | $ | 2,147 |
| | $ | 1,261 |
| | $ | 886 |
| | 70 | % | | $ | 3,539 |
| | $ | 2,031 |
| | $ | 1,508 |
| | 74 | % |
Net cash used in investing activities | (1,615 | ) | | (306 | ) | | (1,309 | ) | | 428 | % | | (2,581 | ) | | (768 | ) | | (1,813 | ) | | 236 | % |
Net cash used in financing activities | (866 | ) | | (3,267 | ) | | 2,401 |
| | (73 | )% | | (1,056 | ) | | (2,267 | ) | | 1,211 |
| | (53 | )% |
Non-GAAP Financial Measures | | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 3,461 |
| | $ | 3,233 |
| | $ | 228 |
| | 7 | % | | $ | 6,745 |
| | $ | 6,189 |
| | $ | 556 |
| | 9 | % |
Free Cash Flow | 1,169 |
| | 774 |
| | 395 |
| | 51 | % | | 1,787 |
| | 1,442 |
| | 345 |
| | 24 | % |
The following discussion and analysis areis for the three and six months ended June 30, 2019,2020, compared to the same period in 20182019 unless otherwise stated.
Total revenues increased $408 million,$6.7 billion, or 4%61%, for the three months ended and $1.0increased $6.7 billion, or 5%30%, for the six months ended June 30, 2019, as2020. The components of these changes are discussed below.
Branded postpaidPostpaid revenues increased $449 million,$4.3 billion, or 9%77%, for the three months ended and $872 million,increased $4.7 billion, or 9%43%, for the six months ended June 30, 2019,2020 primarily from:
•Higher average branded postpaid phone customers, primarily from growthcustomers acquired in our customer base driven by the continued growth in existingMerger and Greenfield markets, including the growing success of new customer segments and rate plans such as Unlimited 55+, Military, Businesswell as continued growth in existing and Essentials, along with record low churn; andGreenfield markets;
•Higher average branded postpaid other customers, driven by higher wearablesprimarily from customers acquired in the Merger and growth in wearable products, specifically the Apple Watch, as well as in other connected devices specifically the Apple watch; partially offset byprimarily due to growth in educational institution customers on lower average rate plans; and
| |
• | Lower branded•Higher postpaid phone ARPU. See “Branded Postpaid Phone ARPU” in the “Performance Measures” section of this MD&A. |
Branded prepaid revenues were essentially flat for the three and six months ended June 30, 2019, with higher average branded prepaid customers driven by the continued success of our prepaid brands, offset by lower branded prepaid ARPU. See “Branded Prepaid“Postpaid Phone ARPU” in the “Performance Measures” section of this MD&A.
WholesalePrepaid revenues increased $38decreased$68 million or 14%, for the three months ended and $76 million, or 14%, for the six months ended June 30, 2019, primarily from the continued success of our Mobile Virtual Network Operator (“MVNO”) partnerships.
Roaming and other service revenues increased $31 million, or 34%, for the three months ended and $57 million, or 36%, for the six months ended June 30, 2019, primarily from increases in domestic roaming revenues.
Equipment revenues decreased $62 million, or 3%, for the three months ended and increased $101decreased $81 million, or 2%, for the six months ended June 30, 2019.2020, primarily from:
•Lower average prepaid customers primarily from a base adjustment, recorded on July 18, 2019, for certain T-Mobile prepaid products now offered and distributed by a current MVNO partner; partially offset by
•Higher prepaid phone ARPU. See “Prepaid Phone ARPU” in the “Performance Measures” section of this MD&A.
Wholesale revenues increased $95 million, or 30%, for the three months ended and increased $116 million, or 19%, for the six months ended June 30, 2020, primarily from customers acquired in the Merger and the continued success of our MVNO partnerships.
Roaming and other service revenues increased$311 million, or129%, for the three months ended and increased $364 million, or 81%, for the six months ended June 30, 2020, primarily from:
•Inclusion of wireline operations acquired in the Merger;
•Higher Lifeline, advertising and affiliate revenues primarily due to operations acquired in the Merger; partially offset by
•Lower international roaming due to the impact of COVID-19 and lower domestic roaming due to the receipt of roaming revenue from Sprint in periods before the Merger.
Equipment revenues increased$2.0 billion, or 89%, for the three months ended and increased $1.6 billion, or 34%, for the six months ended June 30, 2020.
The decreaseincrease for the three months ended June 30, 2019,2020, was primarily from:
A decrease•An increase of $86$1.3 billion in lease revenues due to a higher number of customer devices under lease, primarily from leases acquired in the Merger;
•An increase of $353 million in device sales revenues,revenue, excluding purchased leased devices, primarily from:
An 11% decreasefrom a 20% increase in the number of devices sold, excluding purchased lease devices; partially offset byleased devices, due to an increase in our customer base primarily due to the Merger and an increase in connected device sales, primarily to educational institutions;
Higher average revenue per device sold•An increase of $231 million in equipment sales from leased devices, primarily due to an increase in purchased leased devices as a result of the high-end device mix;Merger; and
A decrease of $34 million in lease revenues primarily due to a lower number of customer devices under lease; partially offset by
•An increase of $27$165 million in revenues primarily related to proceeds from liquidationsthe liquidation of inventory; andreturned devices as a result of the Merger.
An increase of $25 million in other equipment-related revenues.
The increase for the six months ended June 30, 2019,2020, was primarily from:
•An increase of $50$1.3 billion in lease revenues due to a higher number of customer devices under lease, primarily from leases acquired in the Merger;
•An increase of $232 million in equipment sales from leased devices, primarily due to an increase in purchased leased devices as a result of the Merger; and
•An increase of $176 million in revenues primarily related to the liquidation of returned devices as a result of the Merger; partially offset by
•A decrease of $33 million in device sales revenues,revenue, excluding purchased leased devices, primarily from:
Higher•Lower average revenue per device sold due to an increase in the high-endlower-end device mix and lower promotions;mix; partially offset by
•A 10% decrease1% increase in the number of devices sold, excluding purchased leased devices;
A $53 milliondevices, due to an increase in other equipment-related revenues; and
A $21 million increase related to proceeds from liquidation of inventory; partially offset by
A $44 million decrease in lease revenuesour customer base primarily due to the Merger and an increase in connected device sales to educational institutions, offset by social distancing rules and retail store closures arising from COVID-19, which had a lower numberstronger impact in the first quarter of customer devices under lease.2020.
Other revenues decreased $25 million, or 8%,were essentially flat for the three months ended and $34decreased $21 million, or 6%, for the six months ended June 30, 2019, primarily from:2020.
A decrease of $46 million for the three months ended and $92 million for the six months ended June 30, 2019 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 volume of devices financed; and
Higher advertising revenues.
Operating expenses increased $317 million, $7.4 billion,or 3%79%, for the three months ended and $748 million,increased $7.4 billion, or 4%39%, for the six months ended June 30, 2019, primarily from higher Selling, general and administrative expenses and Cost2020. The components of services asthese changes are discussed below.
Cost of services, exclusive of depreciation and amortization, increased $119 million, $1.4 billion,or 8%88%, for the three months ended and $76 million,increased $1.5 billion, or 2%48%, for the six months ended June 30, 2019.2020 primarily from:
The•An increase for the three months ended June 30, 2019, was primarily from:
Higher costs for employee-relatedin expenses associated with leases, backhaul agreements and network expansion; and
Hurricane-related reimbursements of $70 million includedtower expenses acquired in the three months ended June 30, 2018;Merger and the continued build-out of our nationwide 5G network;
•Higher employee-related and benefit-related costs primarily due to increased headcount as a result of the Merger;
•Costs associated with wireline operations acquired in the Merger;
•An increase in repair and maintenance costs, primarily due to the Merger; and
•An increase in regulatory and roaming costs primarily due to the Merger, partially offset by lower international roaming costs.
Lower regulatory program costs; and
The positive impact of the new lease standard of approximately $95 million included in the three months ended June 30, 2019 resulting from the decrease in the average lease term and the change in accounting conclusion for certain sale-leaseback sites.
The increase for the six months ended June 30, 2019, was primarily from:
Higher costs for employee-related expenses, customer appreciation programs and network expansion; and
Hurricane-related reimbursements, net of costs, of $34 million included in the six months ended June 30, 2018; partially offset by
Lower regulatory program costs;
The positive impact of the new lease standard of approximately $190 million in the first half of 2019 resulting from the decrease in the average lease term and the change in accounting conclusion for certain sale-leaseback sites.
Cost of equipment sales, exclusive of depreciation and amortization, decreased $111 million, increased$1.0 billion, or 4%38%, for the three months ended and increased $60$519 million, or 1%9%, for the six months ended June 30, 2019.2020.
The decreaseincrease for the three months ended June 30, 2019,2020, was primarily from:
A decrease•An increase of $87$416 million in device cost of equipment sales, excluding purchased leased devices, primarily from:
An 11% decrease•A 20% increase in the number of devices sold, excluding purchased lease devices;leased devices, due to an increase in our customer base primarily due to the Merger and an increase in connected device sales primarily to educational institutions; partially offset by
Higher•Lower average costcosts per device sold due to an increase in high-endthe low-end device mix; and
A decrease of $46 million in extended warranty costs; partially offset by
•An increase of $36$314 million in costs related to the liquidation of inventory.returned devices as a result of the Merger and higher extended warranty costs; and
•An increase of $292 million in leased device cost of equipment sales, primarily due to an increase in purchased leased devices as a result of the Merger.
The increase for the six months ended June 30, 2019,2020, was primarily from:
•An increase of $113$326 million in costs related to the liquidation of returned devices as a result of the Merger as well as higher extended warranty costs; and
•An increase of $299 million in leased device cost of equipment sales, primarily due to an increase in purchased leased devices as a result of the Merger; partially offset by
•A decrease of $72 million in device cost of equipment sales, excluding purchased leased devices, primarily from:
Higher•Lower average cost per device sold due to an increase in high-endthe low-end device mix; partially offset by
•A 10% decrease1% increase in the number of devices sold, excluding purchased lease devices; and
AnMerger and an increase of $44 million in costs relatedconnected device sales to the liquidation of inventory and increased volumes; partiallyeducational institutions, offset by social distancing rules and retail store closures arising from COVID-19, which had a stronger impact in the first quarter of 2020.
A decrease of $70 million in extended warranty costs; and
A decrease of $27 million from lower volume of returned devices at the end of the lease term.
Selling, general and administrative expenses increased $358 million, $2.1 billion,or 11%58%, for the three months ended and $636 million,increased $2.3 billion, or 10%33%, for the six months ended June 30, 2019.2020.
The increase for the three months ended June 30, 2019,2020, was primarily from:
An increase of $181 million in merger-related costs;
•Higher employee-related costs relateddue to outsourced functions and employee-related costs; and
Higher commissions expense resulting from an increase in the number of $80employees primarily from the Merger;
•Higher external labor and professional services, advertising, lease and rent expense primarily from the Merger;
•$758 million of Merger-related costs including transaction costs associated with legal and professional services and restructuring costs including severance and store rationalization, compared to $222 million of Merger-related costs in amortizationthe three months ended June 30, 2019;
•Higher commission expense relatedprimarily due to commission costs that were capitalized beginning uponan increase in our retail workforce from the adoption of ASC 606 on January 1, 2018;Merger, partially offset by lower commissions capitalized in excess of commissions expensed, including a net benefit from new contract costs capitalized subsequent to Merger close that are in excess of the related amortization; and
•Higher bad debt expense from lower gross customer additionsprimarily due to customers acquired as a result of the Merger and compensation structure changes.the recording of estimated losses associated with the new credit loss standard including $125 million of incremental bad debt for the estimated macro-economic impacts of COVID-19 of which $46 million is related to our commitments to the Pledge.
•Selling, general and administrative expenses for the three months ended June 30, 2020, included $341 million of supplemental employee payroll, third party commissions and cleaning-related COVID-19 costs.
The increase for the six months ended June 30, 2019,2020, was primarily from:
An•Higher employee-related costs due to an increase in the number of $294employees primarily from the Merger;
•Higher external labor and professional services, advertising, lease and rent expense from the Merger;
•$901 million of Merger-related costs including transaction costs associated with legal and professional services and restructuring costs including severance and store rationalization, compared to $335 million of Merger-related costs in merger-related costs;the six months ended June 30, 2019;
•Higher costs relatedcommission expense primarily due to outsourced functions;
Higher commissions expense resultingan increase in our retail workforce from the Merger and an increase of $161$87 million in amortization expense related to commission costs that were capitalized beginning upon the adoptioncommissions expensed in excess of ASC 606 on January 1, 2018;commissions capitalized; partially offset by a net benefit from new contract costs capitalized subsequent to Merger close that are in excess of the related amortization as these costs will amortize into expense over time and lower commissions expense from lower gross customer additions and compensation structure changes;
•Higher legal-related expenses from recording an estimated accrual associated with the FCC Notice of Apparent Liability and commitments associated with the Merger; and
•Higher employee-relatedbad debt expense primarily due to customers acquired as a result of the Merger and the recording of estimated losses associated with the new credit loss standard including $155 million of incremental bad debt for the estimated macro-economic impacts of COVID-19 of which $46 million is related to our commitments to the Pledge.
•Selling, general and administrative expenses for the six months ended June 30, 2020, included $458 million of supplemental employee payroll, third party commissions and cleaning-related COVID-19 costs.
Impairment expense was $418 million for the three and six months ended June 30, 2020 and consisted of the following:
•A $218 million impairment on the goodwill in the Layer3 reporting unit; and
•A $200 million impairment on the capitalized software development costs related to our postpaid billing system.
Depreciation and amortization decreased $49 million, increased$2.5 billion, or 3%156%, for the three months ended and $24 million,increased $2.6 billion, or 1%82%, for the six months ended June 30, 2019,2020, primarily from:as a result of the Merger including:
Lower•Higher depreciation expense from assets acquired in the Merger, excluding leased devices, and network expansion from the continued build-out of our nationwide 5G network;
•Higher depreciation expense on leased devices resulting from a lowerhigher total number of customer devices under lease; partially offset bylease, primarily from customers acquired in the Merger; and
The continued deployment of low band spectrum, including 600 MHz, and laying•Higher amortization from intangible assets acquired in the groundwork for 5G.Merger.
Operating income, the components of which are discussed above, increased $91decreased $721 million, or 6%47%, for the three months ended and $285decreased $658 million, or 10%22%, for the six months ended June 30, 2019.2020.
Interest expense decreased $14increased$594 million, or 7%326%, for the three months ended and $86increased $600 million, or 19%166%, for the six months ended June 30, 2019. 2020 primarily from:
•The assumption of debt with a fair value of $31.8 billion in connection with the Merger;
•The issuance of an aggregate of $19.0 billion in Senior Secured Notes and the entry into a $4.0 billion secured term loan in April 2020 in connection with the Merger; and
•Amortization of $39 million related to interest rate swap derivatives beginning upon settlement in April 2020.
Interest expense to affiliates decreased $38 million, or 38%, for the three months ended and decreased $48 million, or 23%, for the six months ended June 30, 2020.
The decrease for the three months ended June 30, 2020, was primarily from:
•The redemption of an aggregate of $4.0 billion in Senior Notes to Affiliates and the repayment of an aggregate of $4.0 billion in Incremental term loan facility to affiliates in April 2020; partially offset by
•Lower capitalized interest.
The decrease for the six months ended June 30, 2019,2020, was primarily from:
•The redemption of an aggregate of $4.0 billion in Senior Notes to Affiliates and the repayment of an aggregate of $4.0 billion in Incremental term loan facility to affiliates in 2020; and
•The redemption of $600 million in Senior Reset Notes in April 20182019; partially offset by
•Lower capitalized interest.
Other expense, net increased$173 million for the three months ended and increased $190 million for the six months ended June 30, 2020, primarily from losses on the extinguishment of aggregate principal amount of $2.4the $19.0 billion New Secured Bridge Loan Facility and $4.0 billion Senior Notes with various interest ratesto Affiliates.
(Loss) income from continuing operations before income taxes, the components of which are discussed above, was ($208) million and maturity dates;$1.2 billion for the three months ended June 30, 2020 and 2019, respectively, and was $1.0 billion and $2.4 billion for the six months ended June 30, 2020 and 2019, respectively.
Interest
(Loss) income from continuing operations before income taxes for the three and six months ended June 30, 2020 was primarily impacted by:
•Merger-related costs including restructuring costs;
•Impairment expense; and
•Make-whole commissions and incremental bad debt as a result of the macro-economic impacts of COVID-19.
Income tax expense to affiliates decreased $27$299 million, or 21%99%, for the three months ended and $84decreased $288 million, or 29%48%, for the six months ended June 30, 2019, primarily from:2020.
An increase of $18 million in capitalized interest costs for the three months ended and $61 million for six months ended June 30, 2019, 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 expense, net decreased $42 million, or 66%,The decrease for the three months ended June 30, 20192020, was primarily from:
•Lower income before income taxes; partially offset by
•A negative effective tax rate due to a small pre-tax loss primarily attributable to expenses that are not deductible for tax purposes including our Layer3 goodwill impairment and decreased $39 million, or 72%,certain merger-related costs. The effective tax rate was (0.7)% for the three months ended June 30, 2020 and 24.4% for the three months ended June 30, 2019.
The decrease for the six months ended June 30, 2019,2020, was primarily from:
An $86 million loss during the three months ended June 30, 2018 on the early redemption of $2.5 billion of DT Senior Reset Notes due 2021 and 2022;•Lower income before income taxes; partially offset by
•A $30 million gain during the three months ended June 30, 2018 on the sale of auctionhigher effective tax rate, securities which were originally acquired with MetroPCS;primarily due to a reduction in income before income taxes and
During the three months ended June 30, 2019, a $28 million redemption premium on the DT Senior Reset Notes; partially offset by the write-off embedded derivatives upon redemption of the debt which resulted an increase in a gain of $11 million.
Additional items impacting the six months ended June 30, 2019 include the following:
A $25 million bargain purchase gain as part of our purchase price allocationexpenses that are not deductible for income tax purposes primarily related to the acquisition of Iowa Wireless Services, LLC (“IWS”)our Layer 3 goodwill impairment and a $15 million gain on our previously held equity interest in IWS, both recognized during the three months ended March 31, 2018; partially offset by
A $32 million loss on the early redemption of $1.0 billion of 6.125% Senior Notes due 2022 during the three months ended March 31, 2018.
Incomecertain Merger-related costs. The effective tax expense increased $15 million, or 5%, for the three months endedrate was 29.4% and $100 million, or 20%,24.4% for the six months ended June 30, 2020 and 2019, respectively.
(Loss) income from continuing operations, was $(210) million and $939 million for the three months ended June 30, 2020 and 2019, respectively, and was $741 million and $1.8 billion for the six months ended June 30, 2020 and 2019, respectively,
primarily fromdue to lower Operating income and higher income before taxes,Interest expense, partially offset by a reductionlower Income tax expense.
Income from discontinued operations, net of tax was $320 million for both the three and six months ended June 30, 2020 and consists of the results of the Prepaid Business that was divested on July 1, 2020. The components of discontinued operations, net of tax from April 1, 2020 through June 30, 2020 are presented in certain non-deductible expenses.the table below:
| | | | | | | | | |
| | | Three and Six Months Ended June 30, 2020 |
(in millions) | | | |
Major classes of line items constituting pretax income from discontinued operations | | | |
Prepaid revenues | | | $ | 973 | |
Roaming and other service revenues | | | 27 | |
Total service revenues | | | 1,000 | |
Equipment revenues | | | 270 | |
Total revenues | | | 1,270 | |
Cost of services | | | 25 | |
Cost of equipment sales | | | 499 | |
Selling, general and administrative | | | 314 | |
Total operating expenses | | | 838 | |
Pretax income from discontinued operations | | | 432 | |
Income tax expense | | | (112) | |
Net income from discontinued operations | | | $ | 320 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net income, the components of which are discussed above, increased $157decreased $829 million, or 20%88%, for the three months ended and $394decreased $786 million, or 27%43%, for the six months ended June 30, 2019,2020, primarily due to higherlower Operating income and lowerhigher interest expense, and interest expense to affiliates, partially offset by higherIncome from discontinued operations, net of tax and lower Income tax expense.
Net income for the three months ended June 30, 2020 included the following:
•Merger-related costs, net of tax, of $635 million for the three months ended June 30, 2020, compared to $175 million for the three months ended June 30, 2019.
•The negative impact of supplemental employee payroll, net of government reimbursements, third-party commissions and $268cleaning-related COVID-19 costs, net of tax, of $253 million for the three months ended June 30, 2020, compared to no impact for the three months ended June 30, 2019.
•Impairment expense of $366 million, net of tax, for the three and six months ended June 30, 2019, respectively,2020, compared to merger-related costs of $39 million, net of tax, for both the three and six months ended June 30, 2018; and
Hurricane related reimbursements, net costs, of $45 million and $22 million, net of tax, for the three and six months ended June 30, 2018, respectively. There were no impacts from hurricanes for the three and six months ended June 30, 2019.
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:
|
| | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 | | Change |
(in millions) | $ | | % |
Other current assets | $ | 678 |
| | $ | 645 |
| | $ | 33 |
| | 5 | % |
Property and equipment, net | 312 |
| | 297 |
| | 15 |
| | 5 | % |
Goodwill | 218 |
| | 218 |
| | — |
| | NM |
|
Tower obligations | 2,171 |
| | 2,173 |
| | (2 | ) | | — | % |
Total stockholders' deficit | (1,254 | ) | | (1,142 | ) | | (112 | ) | | 10 | % |
NM - Not Meaningful
The most significant components of the results of operations of our Non-Guarantor Subsidiaries were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in millions) | 2019 | | 2018 | $ | | % | 2019 | | 2018 | $ | | % |
Service revenues | $ | 767 |
| | $ | 551 |
| | $ | 216 |
| | 39 | % | | $ | 1,499 |
| | $ | 1,091 |
| | $ | 408 |
| | 37 | % |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | 302 |
| | 262 |
| | 40 |
| | 15 | % | | 574 |
| | 498 |
| | 76 |
| | 15 | % |
Selling, general and administrative | 293 |
| | 216 |
| | 77 |
| | 36 | % | | 568 |
| | 452 |
| | 116 |
| | 26 | % |
Total comprehensive income | 118 |
| | 42 |
| | 76 |
| | 181 | % | | 245 |
| | 76 |
| | 169 |
| | 222 | % |
The change to the results of operations of our Non-Guarantor Subsidiariesimpairment expense for the three months ended June 30, 2019, was primarily from:2019. The impairment of goodwill of $218 million in the Layer3 reporting unit is not deductible for tax purposes.
Higher Service revenues, primarily due to an increase in activity of the non-guarantor subsidiary that provides premium services, primarily driven by a net increase in average revenue as well as growth in our customer base related to a premium service that launched at the end of August 2018 and sales of the new product; partially offset by
Higher Cost of equipment sales, exclusive of depreciation and amortization, primarily due to higher cost devices used for device insurance claims fulfillment, partially offset by an increase in device liquidations; 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, changes in fair value of the deferred purchase price assets for sold EIP receivables and certain employee-related costs from the non-guarantor Layer3 TV subsidiary.
The change to the results of operations of our Non-Guarantor SubsidiariesNet income for the six months ended June 30, 2019, was primarily from:2020, included the following:
Higher Service revenues, primarily due•Merger-related costs, net of tax, of $752 million for the six months ended June 30, 2020, compared to an increase$268 million for the six months ended June 30, 2019.
•The negative impact of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, net of tax, of $339 million for the six months ended June 30, 2020, compared to no impact for the six months ended June 30, 2019.
•Impairment expense of $366 million, net of tax, for the six months ended June 30, 2020, compared to no impairment expense for the six months ended June 30, 2019. The impairment of goodwill of $218 million in activitythe Layer3 reporting unit is not deductible for tax purposes.
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 premium services, 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 growthno longer requiring guarantor cash flow information, financial information for non-guarantor subsidiaries, nor a reconciliation to the consolidated results.
On April 1, 2020, in our customer base related to a premium service that launched atconnection with the end of August 2018 and salesclosing of the new product; partially offsetMerger, we assumed certain registered debt to third parties issued by Sprint, Sprint Communications, Inc. and Sprint Capital Corporation (collectively, the “Sprint Issuers”).
Higher Selling, general
Pursuant to the applicable indentures and administrative expenses, primarily duesupplemental indentures, the long-term debt to an increase in billing services fees due to an increase in rate duringaffiliates and third parties issued by T-Mobile USA, Inc. and the fourth quarter of 2018Sprint Issuers (collectively, the “Issuers”) is fully and an increase in program expensesunconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain employee-related costs from the non-guarantor Layer3 TV subsidiary; and
Higher Cost of equipment sales, exclusive of depreciation and amortization, primarily due to higher cost devices used for device insurance claims fulfillment, partially offset by an increase in device liquidations.
All other results of operations of the Parent, IssuerParent’s 100% owned subsidiaries (“Guarantor Subsidiaries”).
The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures and credit facilities governing the long-term debt contain covenants that, among other things, limit the ability of the Issuers 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 Issuers to loan funds or make payments to Parent. However, the Issuers 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 of the debt issued by T-Mobile USA, Inc. 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) | June 30, 2020 | | December 31, 2019 | | | | |
Current assets | $ | 23,105 | | | $ | 8,177 | | | | | |
Noncurrent assets | 163,040 | | | 77,684 | | | | | |
Current liabilities | 21,487 | | | 11,885 | | | | | |
Noncurrent liabilities | 101,662 | | | 45,187 | | | | | |
Due to non-guarantors | 7,054 | | | — | | | | | |
Due from non-guarantors | — | | | 346 | | | | | |
Due to related parties | 6,067 | | | 14,173 | | | | | |
Due from related parties | 24 | | | 20 | | | | | |
The summarized results of
operations. See Note 14 – Guarantor Financial Informationoperations information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | Year Ended December 31, 2019 | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | |
Total revenues | $ | 28,071 | | | $ | 43,431 | | | | | | | | | | | | | | | |
Operating income | 1,525 | | | 4,761 | | | | | | | | | | | | | | | |
Net income | 1,061 | | | 3,468 | | | | | | | | | | | | | | | |
Revenue from non-guarantors | 656�� | | | 974 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Notes to the Condensed Consolidated Financial Statements.
The summarized balance sheet information for the consolidated obligor group of debt issued by Sprint and Sprint Communications, Inc. is presented in the table below:
| | | | | | | | | |
(in millions) | June 30, 2020 | | | | |
Current assets | $ | 1,619 | | | | | |
Noncurrent assets | 130,938 | | | | | |
Current liabilities | 4,716 | | | | | |
Noncurrent liabilities | 64,845 | | | | | |
| | | | | |
Due from non-guarantors | 49,254 | | | | | |
Due to related parties | 6,025 | | | | | |
| | | | | |
The summarized results of operations information for the consolidated obligor group of debt issued by Sprint and Sprint Communications, Inc. is presented in the table below:
| | | | | |
| Three Months Ended June 30, 2020 |
(in millions) | |
Total revenues | $ | 2 | |
Operating income | (15) | |
Net income | 110 | |
Revenue from non-guarantors | 2 | |
| |
The summarized balance sheet information for the consolidated obligor group of debt issued by Sprint Capital Corporation is presented in the table below:
| | | | | |
(in millions) | June 30, 2020 |
Current assets | $ | 1,619 | |
Noncurrent assets | 136,235 | |
Current liabilities | 4,788 | |
Noncurrent liabilities | 70,070 | |
| |
Due from non-guarantors | 58,276 | |
Due to related parties | 6,025 | |
| |
The summarized results of operations information for the consolidated obligor group of debt issued by Sprint Capital Corporation is presented in the table below:
| | | | | | | |
| Three Months Ended June 30, 2020 | | |
(in millions) | | | |
Total revenues | $ | 2 | | | |
Operating income | (15) | | | |
Net income | 110 | | | |
Revenue from non-guarantors | 2 | | | |
| | | |
Performance Measures
In managing our business and assessing financial performance, we supplement the information provided by our financial statements with other operating or statistical data and non-GAAP financial measures. These operating and financial measures are utilized by our management to evaluate our operating performance and, in certain cases, our ability to meet liquidity requirements. Although companies in the wireless industry may not define each of these measures in precisely the same way, we believe that these measures facilitate comparisons with other companies in the wireless industry on key operating and financial measures.
Total The performance measures presented below include the impact of the Merger on a prospective basis from the close date of April 1, 2020. Historical results were not restated.
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 thatCustomers 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 brandedpostpaid customers include customers of T-Mobile and Sprint. Our prepaid customers include customers
of T-Mobile and Metro by T-Mobile. Wholesale
The following table sets forth the number of ending customers:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2020 | | | | | | Change | | | | | | |
(in thousands) | 2020 | | 2019 | | | | # | | % | | | | |
Customers, end of period | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Postpaid phone customers (1) | 65,105 | | | 38,590 | | | | | 26,515 | | | 69 | % | | | | |
Postpaid other customers (1) | 12,648 | | | 6,056 | | | | | 6,592 | | | 109 | % | | | | |
| | | | | | | | | | | | | |
Total postpaid customers | 77,753 | | | 44,646 | | | | | 33,107 | | | 74 | % | | | | |
Prepaid customers (1), (2) | 20,574 | | | 21,337 | | | | | (763) | | | (4) | % | | | | |
| | | | | | | | | | | | | |
Total customers | 98,327 | | | 65,983 | | | | | 32,344 | | | 49 | % | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(1) Includes customers include Machine-to-Machine (“M2M”)acquired in connection with the Merger and MVNO customers that operate on our network but are managed by wholesale partners.certain customer base adjustments. See Customer Base Adjustments and Net Customer Additions tables below.
(2) 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 Mobile Virtual Network Operator (“MVNO”)MVNO partner. Upon the effective date, the agreement resulted inAs a result, we included a base adjustment in the third quarter of 2019 to reduce branded prepaid customers by 616,000 as we will no longer actively support the branded product offering. Prospectively, new customer activity associated with these products will be recorded within wholesale customers and revenue for these customers will be recorded within wholesale revenues in our Condensed Consolidated Statements of Comprehensive Income.616,000.
The following table sets forth the number of ending customers:
|
| | | | | | | | | | | |
| June 30, 2019 | | June 30, 2018 | | Change |
(in thousands) | # | | % |
Customers, end of period | | | | | | | |
Branded postpaid phone customers | 38,590 |
| | 35,430 |
| | 3,160 |
| | 9 | % |
Branded postpaid other customers | 6,056 |
| | 4,652 |
| | 1,404 |
| | 30 | % |
Total branded postpaid customers | 44,646 |
| | 40,082 |
| | 4,564 |
| | 11 | % |
Branded prepaid customers | 21,337 |
| | 20,967 |
| | 370 |
| | 2 | % |
Total branded customers | 65,983 |
| | 61,049 |
| | 4,934 |
| | 8 | % |
Wholesale customers | 17,069 |
| | 14,570 |
| | 2,499 |
| | 17 | % |
Total customers, end of period | 83,052 |
| | 75,619 |
| | 7,433 |
| | 10 | % |
Branded Customers
Total branded customers increased 4,934,000,32,344,000, or 8%49%, primarily from:
•Higher branded postpaid phone customers driven byprimarily due to postpaid phone customers acquired in the growingMerger and the success of new customer segments and rate plans such as Unlimited 55+, Military, Business and Essentials and continued growth in existing and Greenfield markets, along with record-low churn, partially offset by competitive activity;promotional activities; and
•Higher branded postpaid other customers primarily due to strengthpostpaid other customers acquired in gross customer additions from wearablesthe Merger and growth in wearable products, specifically the Apple Watch as well as other connected devices; anddevices primarily due to growth in educational institution customers; partially offset by
Higher branded•Lower prepaid customers driven primarily by a reduction of 616,000 customers resulting from a base adjustment for certain T-Mobile prepaid products now offered and distributed by a current MVNO partner, partially offset by the continued success of our prepaid brands due to promotional activities and rate plan offers,offers.
Customer Base Adjustments
Certain adjustments were made to align the customer reporting policies of T-Mobile and growth in connected devices, along with lower churn.Sprint.
Wholesale
Wholesale customers increased 2,499,000, or 17%, primarily dueThe adjustments made to the continued successreported T-Mobile and Sprint ending customer base as of March 31, 2020 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Postpaid phone customers | | Postpaid other customers | | Total postpaid customers | | Prepaid customers | | Total customers |
Reconciliation to beginning customers | | | | | | | | | |
T-Mobile customers as reported, end of period March 31, 2020 | 40,797 | | | 7,014 | | | 47,811 | | | 20,732 | | | 68,543 | |
Sprint customers as reported, end of period March 31, 2020 | 25,916 | | | 8,428 | | | 34,344 | | | 8,256 | | | 42,600 | |
Total combined customers, end of period March 31, 2020 | 66,713 | | | 15,442 | | | 82,155 | | | 28,988 | | | 111,143 | |
Adjustments | | | | | | | | | |
Reseller reclassification to wholesale customers (1) | (199) | | | (2,872) | | | (3,071) | | | — | | | (3,071) | |
EIP reclassification from postpaid to prepaid (2) | (963) | | | — | | | (963) | | | 963 | | | — | |
Divested prepaid customers (3) | — | | | — | | | — | | | (9,207) | | | (9,207) | |
Rate plan threshold (4) | (182) | | | (918) | | | (1,100) | | | — | | | (1,100) | |
Customers with non-phone devices (5) | (226) | | | 226 | | | — | | | — | | | — | |
Collection policy alignment (6) | (150) | | | (46) | | | (196) | | | — | | | (196) | |
Miscellaneous adjustments (7) | (141) | | | (43) | | | (184) | | | (302) | | | (486) | |
Total Adjustments | (1,861) | | | (3,653) | | | (5,514) | | | (8,546) | | | (14,060) | |
Adjusted beginning customers as of April 1, 2020 | 64,852 | | | 11,789 | | | 76,641 | | | 20,442 | | | 97,083 | |
(1) In connection with the closing of the Merger, we refined our definition of wholesale customers resulting in the reclassification of certain postpaid and prepaid reseller customers to wholesale customers. Starting with the three months ended March 31, 2020, we discontinued reporting wholesale customers to focus on postpaid and prepaid customers and wholesale revenues, which we consider more relevant than the number of wholesale customers given the expansion of M2M and MVNO partnerships.IoT products.
(2) Prepaid customers with a device installment billing plan historically included as Sprint postpaid customers have been reclassified to prepaid customers to align with T-Mobile policy.
(3) Customers associated with the Sprint wireless prepaid and Boost Mobile brands that were divested on July 1, 2020, have been excluded from our reported customers.
(5) Customers with postpaid phone rate plans without a phone (e.g., non-phone devices) have been reclassified from postpaid phone to postpaid other customers to align with T-Mobile policy.
(6) Certain Sprint customers subject to collection activity for Notesan extended period of time have been excluded from our reported customers to the Condensed Consolidated Financial Statements
align with T-Mobile policy.(7) Miscellaneous insignificant adjustments to align with T-Mobile policy.
Net Customer Additions
The following table sets forth the number of net customer additions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | | | Change | | | | | | |
(in thousands) | 2020 | | 2019 | | # | | % | | 2020 | | 2019 | | | | # | | % | | | | |
Net customer additions | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Postpaid phone customers | 253 | | | 710 | | | (457) | | | (64) | % | | 705 | | | 1,366 | | | | | (661) | | | (48) | % | | | | |
Postpaid other customers | 859 | | | 398 | | | 461 | | | 116 | % | | 1,184 | | | 761 | | | | | 423 | | | 56 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total postpaid customers | 1,112 | | | 1,108 | | | 4 | | | NM | | 1,889 | | | 2,127 | | | | | (238) | | | (11) | % | | | | |
Prepaid customers (1) | 133 | | | 131 | | | 2 | | | 2 | % | | 5 | | | 200 | | | | | (195) | | | (98) | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total customers | 1,245 | | | 1,239 | | | 6 | | | NM | | 1,894 | | | 2,327 | | | | | (433) | | | (19) | % | | | | |
Acquired customers, net of base adjustments | 29,228 | | | — | | | 29,228 | | | NM | | 29,228 | | | — | | | | | 29,228 | | | NM | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2019 | | 2018 | # | | % | 2019 | | 2018 | | # Change |
| % Change |
Net customer additions | | | | | | | | | | | | | | | |
Branded postpaid phone customers | 710 |
| | 686 |
| | 24 |
| | 3 | % | | 1,366 |
| | 1,303 |
| | 63 |
| | 5 | % |
Branded postpaid other customers | 398 |
| | 331 |
| | 67 |
| | 20 | % | | 761 |
| | 719 |
| | 42 |
| | 6 | % |
Total branded postpaid customers | 1,108 |
| | 1,017 |
| | 91 |
| | 9 | % | | 2,127 |
| | 2,022 |
| | 105 |
| | 5 | % |
Branded prepaid customers | 131 |
| | 91 |
| | 40 |
| | 44 | % | | 200 |
| | 290 |
| | (90 | ) | | (31 | )% |
Total branded customers | 1,239 |
| | 1,108 |
| | 131 |
| | 12 | % | | 2,327 |
| | 2,312 |
| | 15 |
| | 1 | % |
Wholesale customers | 512 |
| | 471 |
| | 41 |
| | 9 | % | | 1,074 |
| | 700 |
| | 374 |
| | 53 | % |
Total net customer additions | 1,751 |
| | 1,579 |
| | 172 |
| | 11 | % | | 3,401 |
| | 3,012 |
| | 389 |
| | 13 | % |
NM - Not Meaningful
(1) On July 18, 2019, we entered into an agreement whereby certain T-Mobile 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 prepaid customers by 616,000.
Branded Customers
Total branded net customer additions increased 131,000, or 12%,6,000, for the three months ended and increased 15,000,decreased 433,000, or 1%19%, for the six months ended June 30, 2019.2020.
The increase for the three months ended June 30, 20192020 was primarily from:
•Higher branded postpaid other net customer additions primarily due to higher gross customer additions from connected devices primarily
due to educational institution additions, partially offset by lower switching activity in the industry from social distancing rules and lower churn;retail store closures due to COVID-19; and
•Higher branded prepaid net customer additions primarily due to lower churn and promotional activity in the marketplace partially offset by the impact of continued promotional activitieslower switching activity in the marketplace;industry from social distancing rules and retail store closures due to COVID-19; partially offset by
Higher branded•Lower postpaid phone net customer additions primarily due to record-low churn.lower switching activity in the industry from social distancing rules and retail store closures due to COVID-19 and an increase in churn from the inclusion of the customer base acquired in the Merger.
The increasedecrease for the six months ended June 30, 20192020 was primarily from:
Higher branded•Lower postpaid phone net customer additions primarily due to record-low churn;lower switching activity in the industry from social distancing rules and retail store closures due to COVID-19 and an increase in churn from the inclusion of the customer base acquired in the Merger; and
•Lower prepaid net customers additions primarily due to lower switching activity in the industry from social distancing rules and retail store closures due to COVID-19, partially offset by lower churn and promotional activity in the marketplace; partially offset by
•Higher branded postpaid other net customer additions primarily due to higher gross customer additions from connected devices partially offset by higher deactivations from a growing customer base; partially offset by
Lower branded prepaid net customer additions primarily due to continued promotional activities in the marketplace,educational institution additions and lower churn, partially offset by lower churn.
Wholesale
Wholesale net customer additions increased 41,000, or 9%, forswitching activity in the three months endedindustry from social distancing rules and increased 374,000, or 53%, for the six months ended June 30, 2019 primarilyretail store closures due to higher gross additions from the continued success of our M2M and MVNO partnerships.COVID-19.
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:
|
| | | | | | | | | | | |
| June 30, 2019 | | June 30, 2018 | | Change |
# | | % |
Branded postpaid customers per account | 3.08 |
| | 2.97 |
| | 0.11 |
| | 4 | % |
Branded postpaid customers per account increased 4% primarily from continued growth of new customer segments and rate plans such as Unlimited 55+, Military, Business and Essentials, promotional activities targeting families and the continued success of connected devices and wearables.
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 June 30, | | Bps Change | | Six Months Ended June 30, | | Bps Change |
2019 | | 2018 | 2019 | | 2018 |
Branded postpaid phone churn | 0.78 | % | | 0.95 | % | | -17 bps | | 0.83 | % | | 1.01 | % | | -18 bps |
Branded prepaid churn | 3.49 | % | | 3.81 | % | | -32 bps | | 3.67 | % | | 3.87 | % | | -20 bps |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Bps Change | | Six Months Ended June 30, | | | | | | Bps Change | | |
| 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
Postpaid phone churn | 0.80 | % | | 0.78 | % | | 2 bps | | 0.82 | % | | 0.83 | % | | | | -1 bps | | |
Prepaid churn | 2.81 | % | | 3.49 | % | | -68 bps | | 3.17 | % | | 3.67 | % | | | | -50 bps | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Branded postpaidPostpaid phone churn increased two basis points for the three months ended June 30, 2020, primarily due to the inclusion of the customer base acquired in the Merger, offset by lower switching activity in the industry due to social distancing rules and temporary retail store closures arising from COVID-19.
Postpaid phone churn decreased 17one basis point for the six months ended June 30, 2020, primarily impacted by lower switching activity in the industry due to social distancing rules and temporary retail store closures arising from COVID-19, offset by the inclusion of the customer base acquired in the Merger.
Prepaid churn decreased 68 basis points for the three months ended and decreased 1850 basis points for the six months ended June 30, 2019, primarily from increased customer satisfaction and loyalty from ongoing improvements to network quality, industry-leading customer service and the overall value of our offerings.
Branded prepaid churn decreased 32 basis points for the three months ended and decreased 20 basis points for the six months ended June 30, 2019,2020, primarily due to lower switching activity in the industry due to social distancing rules and temporary retail store closures arising from COVID-19 and the continued success of our prepaid brands due to promotional activities and rate plan offersoffers.
During the three and six months ended June 30, 2020, we have seen lower churn due to social distancing rules and temporary retail store closures arising from the COVID-19 pandemic.
Total Postpaid Accounts
A postpaid account is generally defined as well asa billing account number that generates revenue. Postpaid accounts are generally comprised of customers that are qualified for postpaid service utilizing phones, wearables, DIGITS or other connected devices which includes tablets and SyncUp products, where they generally pay after receiving service.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2020 | | | | | | Change | | |
(in thousands) | 2020 | | 2019 | | | | # | | % |
Accounts, end of period | | | | | | | | | |
Total postpaid customer accounts(1) | 25,486 | | | 14,480 | | | | | 11,006 | | | 76 | % |
(1) Includes accounts acquired in connection with the Merger and certain account base adjustments. See Account Base Adjustments table below.
Total postpaid customer accounts increased 11,006,000, or 76%, primarily due to 10,150,000 accounts acquired in the Merger, the growing success of new customer satisfactionsegments and loyaltyrate plans, continued growth in existing and Greenfield markets, improvements in network quality, industry-leading customer service, along with promotional activities, partially offset by lower switching activity in the industry from ongoing improvementssocial distancing rules and temporary retail store closures arising from COVID-19.
Account Base Adjustments
Certain adjustments were made to network quality.align the account reporting policies of T-Mobile and Sprint.
reported T-Mobile and Sprint ending account base as of March 31, 2020 are presented below:
| | | | | | | | |
(in thousands) | | Postpaid Accounts |
Reconciliation to beginning accounts | | |
T-Mobile accounts as reported, end of period March 31, 2020 | | 15,244 | |
Sprint accounts, end of period March 31, 2020 | | 11,246 | |
Total combined accounts, end of period March 31, 2020 | | 26,490 | |
Adjustments | | |
Reseller reclassification to wholesale accounts (1) | | (1) | |
EIP reclassification from postpaid to prepaid (2) | | (963) | |
Rate plan threshold (3) | | (18) | |
Collection policy alignment (4) | | (76) | |
Miscellaneous adjustments (5) | | (47) | |
Total Adjustments | | (1,105) | |
Adjusted beginning accounts as of April 1, 2020 | | 25,385 | |
(1) In connection with the closing of the Merger, we refined our definition of wholesale accounts resulting in the reclassification of certain postpaid and prepaid reseller accounts to wholesale accounts.
(2) Prepaid accounts with a customer with a device installment billing plan historically included as Sprint postpaid accounts have been reclassified to prepaid accounts to align with T-Mobile policy.
(3) Accounts with customers who have rate plans with monthly recurring charges which are considered insignificant have been excluded from our reported accounts.
(4) Certain Sprint accounts subject to collection activity for an extended period of time have been excluded from our reported accounts to align with T-Mobile policy.
(5) Miscellaneous insignificant adjustments to align with T-Mobile policy.
Average Revenue Per User
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 postpaidPostpaid 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.
The following table illustrates the calculation of our operating measure ARPU and reconciles this measure to the related service revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except average number of customers and ARPU) | Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | | | Change | | | | | | |
| 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | | | S | | % | | | | |
Calculation of Postpaid Phone ARPU | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Postpaid service revenues | $ | 9,959 | | | $ | 5,613 | | | $ | 4,346 | | | 77 | % | | $ | 15,846 | | | $ | 11,106 | | | | | $ | 4,740 | | | 43 | % | | | | |
Less: Postpaid other revenues | (618) | | | (326) | | | (292) | | | 90 | % | | (928) | | | (636) | | | | | (292) | | | 46 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Postpaid phone service revenues | $ | 9,341 | | | $ | 5,287 | | | $ | 4,054 | | | 77 | % | | $ | 14,918 | | | $ | 10,470 | | | | | $ | 4,448 | | | 42 | % | | | | |
Divided by: Average number of postpaid phone customers (in thousands) and number of months in period | 64,889 | | | 38,226 | | | 26,663 | | | 70 | % | | 52,737 | | | 37,865 | | | | | 14,872 | | | 39 | % | | | | |
Postpaid phone ARPU | $ | 47.99 | | | $ | 46.10 | | | $ | 1.89 | | | 4 | % | | $ | 47.15 | | | $ | 46.09 | | | | | $ | 1.06 | | | 2 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Calculation of Prepaid ARPU | | | | | | | | | | | | | | | | | | | | | |
Prepaid service revenues | $ | 2,311 | | | $ | 2,379 | | | $ | (68) | | | (3) | % | | $ | 4,684 | | | $ | 4,765 | | | | | $ | (81) | | | (2) | % | | | | |
Divided by: Average number of prepaid customers (in thousands) and number of months in period | 20,380 | | | 21,169 | | | (789) | | | (4) | % | | 20,570 | | | 21,146 | | | | | (576) | | | (3) | % | | | | |
Prepaid ARPU | $ | 37.80 | | | $ | 37.46 | | | $ | 0.34 | | | 1 | % | | $ | 37.95 | | | $ | 37.56 | | | | | $ | 0.39 | | | 1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except average number of customers and ARPU) | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
2019 | | 2018 | | $ | | % | | 2019 | | 2018 | $ | | % |
Calculation of Branded Postpaid Phone ARPU | | | | | | | | | | | | | | | |
Branded postpaid service revenues | $ | 5,613 |
| | $ | 5,164 |
| | $ | 449 |
| | 9 | % | | $ | 11,106 |
| | $ | 10,234 |
| | $ | 872 |
| | 9 | % |
Less: Branded postpaid other revenues | (326 | ) | | (272 | ) | | (54 | ) | | 20 | % | | (636 | ) | | (531 | ) | | (105 | ) | | 20 | % |
Branded postpaid phone service revenues | $ | 5,287 |
| | $ | 4,892 |
| | $ | 395 |
| | 8 | % | | $ | 10,470 |
| | $ | 9,703 |
| | $ | 767 |
| | 8 | % |
Divided by: Average number of branded postpaid phone customers (in thousands) and number of months in period | 38,226 |
| | 35,051 |
| | 3,175 |
| | 9 | % | | 37,865 |
| | 34,711 |
| | 3,154 |
| | 9 | % |
Branded postpaid phone ARPU | $ | 46.10 |
| | $ | 46.52 |
| | $ | (0.42 | ) | | (1 | )% | | $ | 46.09 |
| | $ | 46.59 |
| | $ | (0.50 | ) | | (1 | )% |
Calculation of Branded Prepaid ARPU | | | | |
|
| |
|
| | | | | |
|
| |
|
|
Branded prepaid service revenues | $ | 2,379 |
| | $ | 2,402 |
| | $ | (23 | ) | | (1 | )% | | $ | 4,765 |
| | $ | 4,804 |
| | $ | (39 | ) | | (1 | )% |
Divided by: Average number of branded prepaid customers (in thousands) and number of months in period | 21,169 |
| | 20,806 |
| | 363 |
| | 2 | % | | 21,146 |
| | 20,695 |
| | 451 |
| | 2 | % |
Branded prepaid ARPU | $ | 37.46 |
| | $ | 38.48 |
| | $ | (1.02 | ) | | (3 | )% | | $ | 37.56 |
| | $ | 38.69 |
| | $ | (1.13 | ) | | (3 | )% |
Branded Postpaid Phone ARPU
Branded postpaidPostpaid phone ARPU decreased $0.42,increased $1.89, or 4%, for the three months ended and increased $1.06, or 2%, for the six months ended June 30, 2020; primarily due to:
•The net impact of customers acquired in the Merger, which have higher ARPU (net of changes arising from the reduction in base due to policy adjustments and reclassification of certain ARPU components from the acquired customers being moved to other revenue lines);
•Continued growth in existing and Greenfield markets; and
•Higher premium service revenues; partially offset by
•A reduction in certain non-recurring charges including the impact of COVID-19.
Prepaid ARPU
Prepaid ARPU increased $0.34, or 1%, for the three months ended and $0.50,increased $0.39, or 1%, for the six months ended June 30, 2019.2020, primarily due to:
•The impacts of certain adjustments to our customer base, including the removal of certain prepaid customers associated with products now offered and distributed by a current MVNO partner as those customers had lower ARPU; partially offset by
•Dilution from our promotional activities; and
•A reduction in certain non-recurring charges to customer accounts in connection with our response to COVID-19.
Average Revenue Per Account
Average Revenue per Account (“ARPA”) represents the average monthly postpaid service revenue earned per account. We believe postpaid ARPA provides management, investors and analysts with useful information to assess and evaluate our postpaid service revenue realization and assist in forecasting our future postpaid service revenues on a per account basis. We consider postpaid ARPA to be indicative of our revenue growth potential given the increase in the average number of 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 decreasefollowing table illustrates the calculation of our operating measure ARPA and reconciles this measure to the related service revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except average number of accounts, ARPA) | Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | | | Change | | | | | | |
| 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | | | $ | | % | | | | |
Calculation of Postpaid ARPA | | | | | | | | | | | | | | | | | | | | | |
Postpaid service revenues | $ | 9,959 | | | $ | 5,613 | | | $ | 4,346 | | | 77 | % | | $ | 15,846 | | | $ | 11,106 | | | | | $ | 4,740 | | | 43 | % | | | | |
Divided by: Average number of postpaid accounts (in thousands) and number of months in period | 25,424 | | | 14,354 | | | 11,070 | | | 77 | % | | 20,289 | | | 14,231 | | | | | 6,058 | | | 43 | % | | | | |
Postpaid ARPA | $ | 130.57 | | | $ | 130.36 | | | $ | 0.21 | | | NM | | $ | 130.16 | | | $ | 130.07 | | | | | $ | 0.09 | | | NM | | | | |
NM - Not Meaningful
Postpaid ARPA
Postpaid ARPA was essentially flat for the three months ended June 30, 2019, was primarily due to:
A reduction in regulatory program revenues from the continued adoption of tax inclusive plans;
The ongoing growth in our Netflix offering, which totaled $0.61 for the threeand six months ended June 30, 2019, and decreased branded postpaid phone ARPU by $0.30 compared to2020.` Substantially offsetting impacts include:
•The net impact of customers acquired in the three months ended June 30, 2018;Merger; as well as
A reduction in certain non-recurring charges; and
•The growing success of new customer segments and rate plans, such as Unlimited 55+, Military, Businessincluding further penetration in connected devices; and Essentials; partially
•Higher premium service revenues; offset by
Higher premium services revenue.
The decrease for the six months ended June 30, 2019, was primarily due to:
A reduction in regulatory program revenues from the continued adoption of tax inclusive plans;
The ongoing growth•An increase in our Netflix offering, which totaled $0.56 for the six months ended June 30, 2019,promotional activities; and decreased branded postpaid phone ARPU by $0.28 compared to the six months ended June 30, 2018; and
•A reduction in certain non-recurring charges; partially offset bycharges including the impact of COVID-19.
Higher premium services revenue.
We continue to expect Branded postpaid phone ARPU in full-year 2019 to remain generally stable within a range from plus 1% to minus 1%, compared to full-year 2018.
Branded Prepaid ARPU
Branded prepaid ARPU decreased $1.02, or 3%, for the three months ended and $1.13, or 3%, for the six months ended June 30, 2019.
The decrease for the three months ended June 30, 2019, was primarily due to:
Dilution from promotional rate plans; and
Growth in our Amazon Prime offering - included as a benefit with certain Metro by T-Mobile unlimited rate plans as of Q4 2018 - which impacted prepaid ARPU by $0.47 for the three months ended June 30, 2019; partially offset by
| |
• | An increase in certain non-recurring charges.
|
The decrease for the six months ended June 30, 2019, was primarily due to:
Dilution from promotional rate plans; and
Growth in our Amazon Prime offering - included as a benefit with certain Metro by T-Mobile unlimited rate plans as of Q4 2018 - which impacted prepaid ARPU by $0.39 for the six months ended June 30, 2019; partially offset by
An increase in certain non-recurring charges.
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,Merger, incremental costs directly attributable to COVID-19 and impairment expense, as they are not indicative of our ongoing operating performance, as well as certain other nonrecurring income and expenses. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for income from operations, net income or any other measure of financial performance reported in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
The following table illustrates the calculation of Adjusted EBITDA and reconciles Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | | | Change | | | | | | |
(in millions) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net income | $ | 110 | | | $ | 939 | | | $ | (829) | | | (88) | % | | $ | 1,061 | | | $ | 1,847 | | | | | $ | (786) | | | (43) | % | | | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | | |
Income from discontinued operations, net of tax | (320) | | | — | | | (320) | | | NM | | (320) | | | — | | | | | (320) | | | NM | | | | |
(Loss) income from continuing operations | (210) | | | 939 | | | (1,149) | | | (122) | % | | 741 | | | 1,847 | | | | | (1,106) | | | (60) | % | | | | |
Interest expense | 776 | | | 182 | | | 594 | | | 326 | % | | 961 | | | 361 | | | | | 600 | | | 166 | % | | | | |
Interest expense to affiliates | 63 | | | 101 | | | (38) | | | (38) | % | | 162 | | | 210 | | | | | (48) | | | (23) | % | | | | |
Interest income | (6) | | | (4) | | | (2) | | | 50 | % | | (18) | | | (12) | | | | | (6) | | | 50 | % | | | | |
Other expense, net | 195 | | | 22 | | | 173 | | | 786 | % | | 205 | | | 15 | | | | | 190 | | | 1,267 | % | | | | |
Income tax expense | 2 | | | 301 | | | (299) | | | (99) | % | | 308 | | | 596 | | | | | (288) | | | (48) | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Operating income | 820 | | | 1,541 | | | (721) | | | (47) | % | | 2,359 | | | 3,017 | | | | | (658) | | | (22) | % | | | | |
Depreciation and amortization | 4,064 | | | 1,585 | | | 2,479 | | | 156 | % | | 5,782 | | | 3,185 | | | | | 2,597 | | | 82 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Operating income from discontinued operations (1) | 432 | | | — | | | 432 | | | NM | | 432 | | | — | | | | | 432 | | | NM | | | | |
Stock-based compensation (2) | 139 | | | 111 | | | 28 | | | 25 | % | | 262 | | | 204 | | | | | 58 | | | 28 | % | | | | |
Merger-related costs | 798 | | | 222 | | | 576 | | | 259 | % | | 941 | | | 335 | | | | | 606 | | | 181 | % | | | | |
COVID-19-related costs | 341 | | | — | | | 341 | | | NM | | 458 | | | — | | | | | 458 | | | NM | | | | |
Impairment expense | 418 | | | — | | | 418 | | | NM | | 418 | | | — | | | | | 418 | | | NM | | | | |
Other, net (3) | 5 | | | 2 | | | 3 | | | 150 | % | | 30 | | | 4 | | | | | 26 | | | 650 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 7,017 | | | $ | 3,461 | | | $ | 3,556 | | | 103 | % | | $ | 10,682 | | | $ | 6,745 | | | | | $ | 3,937 | | | 58 | % | | | | |
Net income margin (Net income divided by Service revenues) | 1 | % | | 11 | % | | | | -1,000 bps | | 5 | % | | 11 | % | | | | | | -600 bps | | | | |
Adjusted EBITDA margin (Adjusted EBITDA divided by Service revenues) | 53 | % | | 40 | % | | | | 1,300 bps | | 48 | % | | 40 | % | | | | | | 800 bps | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in millions) | 2019 | | 2018 | $ | | % | 2019 | | 2018 | $ | | % |
Net income | $ | 939 |
| | $ | 782 |
| | $ | 157 |
| | 20 | % | | $ | 1,847 |
| | $ | 1,453 |
| | $ | 394 |
| | 27 | % |
Adjustments: | | | | |
|
| |
|
| | | | | |
|
| |
|
|
Interest expense | 182 |
| | 196 |
| | (14 | ) | | (7 | )% | | 361 |
| | 447 |
| | (86 | ) | | (19 | )% |
Interest expense to affiliates | 101 |
| | 128 |
| | (27 | ) | | (21 | )% | | 210 |
| | 294 |
| | (84 | ) | | (29 | )% |
Interest income | (4 | ) | | (6 | ) | | 2 |
| | (33 | )% | | (12 | ) | | (12 | ) | | — |
| | — | % |
Other (income) expense, net | 22 |
| | 64 |
| | (42 | ) | | (66 | )% | | 15 |
| | 54 |
| | (39 | ) | | (72 | )% |
Income tax expense (benefit) | 301 |
| | 286 |
| | 15 |
| | 5 | % | | 596 |
| | 496 |
| | 100 |
| | 20 | % |
Operating income | 1,541 |
| | 1,450 |
| | 91 |
| | 6 | % | | 3,017 |
| | 2,732 |
| | 285 |
| | 10 | % |
Depreciation and amortization | 1,585 |
| | 1,634 |
| | (49 | ) | | (3 | )% | | 3,185 |
| | 3,209 |
| | (24 | ) | | (1 | )% |
Stock-based compensation (1) | 111 |
| | 106 |
| | 5 |
| | 5 | % | | 204 |
| | 202 |
| | 2 |
| | 1 | % |
Merger-related costs | 222 |
| | 41 |
| | 181 |
| | 441 | % | | 335 |
| | 41 |
| | 294 |
| | 717 | % |
Other, net (2) | 2 |
| | 2 |
| | — |
| | — | % | | 4 |
| | 5 |
| | (1 | ) | | (20 | )% |
Adjusted EBITDA | $ | 3,461 |
| | $ | 3,233 |
| | $ | 228 |
| | 7 | % | | $ | 6,745 |
| | $ | 6,189 |
| | $ | 556 |
| | 9 | % |
Net income margin (Net income divided by service revenues) | 11 | % | | 10 | % | |
|
| | 100 bps |
| | 11 | % | | 9 | % | |
|
| | 200 bps |
|
Adjusted EBITDA margin (Adjusted EBITDA divided by service revenues) | 41 | % | | 41 | % | |
|
| | 0 bps |
| | 40 | % | | 39 | % | |
|
| | 100 bps |
|
NM - Not Meaningful | |
(1) | Stock-based compensation includes payroll tax impacts and may not agree to stock-based compensation expense in the condensed consolidated financial statements. Additionally, certain stock-based compensation expenses associated with the Transactions have been included in Merger-related costs. |
| |
(2) | Other, net may not agree to the Condensed Consolidated Statements of Comprehensive Income primarily due to certain non-routine operating activities, such as other special items that would not be expected to reoccur or are not reflective of T-Mobile’s ongoing operating performance, and are therefore excluded in Adjusted EBITDA. |
(1)Following the Prepaid Transaction, starting on July 1, 2020, we will provide MVNO services to customers of the divested brands. We have included the operating income from discontinued operations in our determination of Adjusted EBITDA to reflect contributions of the Prepaid Business that will be replaced by the MVNO Agreement beginning on July 1, 2020 in order to enable management, analysts and investors to better assess ongoing operating performance and trends.
(2)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.
(3)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 $228 million,$3.6 billion, or 7%103%, for the three months ended and $556 million,increased $3.9 billion, or 9%58%, for the six months ended June 30, 2019.2020.
The Merger increased our customer base, increased our spectrum portfolio, altered our product mix by increasing the portion of customers who financed their devices with leasing programs and impacted our network and operating cost.
The increase for the three months ended June 30, 2019,2020 was primarily due to:
•Higher service revenues, as further discussed above; and
•Higher equipment revenues, as further discussed above; partially offset by
•Higher Cost of services expenses, excluding Merger-related costs;
•Higher Selling, general and administrative expenses;expenses, excluding Merger-related costs and supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs; and
•Higher Cost of services expenses; andequipment sales.
The impact from hurricane-related reimbursements of $70 million for the three months ended June 30, 2018. There was no impact from hurricanes for the three months ended June 30, 2019.
The increase for the six months ended June 30, 2019,2020 was primarily due to:
•Higher service revenues, as further discussed above; and
The positive impact of the new lease standard of approximately $98 million;•Higher equipment revenues, as further discussed above; partially offset by
•Higher Cost of services expenses, excluding Merger-related costs;
•Higher Selling, general and administrative expenses;expenses, excluding Merger-related costs and supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs; and
•Higher Cost of services expenses; andequipment sales.
•The impact from hurricane-related reimbursements, netcommission costs capitalization and amortization, including a benefit from new costs capitalized as result of costs, of $34the merger, reduced Adjusted EBITDA by $87 million included infor the six months ended for the June 30, 2020, compared to the six months ended June 30, 2018. There was no impact from hurricanes for the six months ended June 30, 2019.
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 facilitiesthe New Revolving Credit Facility (as defined below). In connection with DT. Upon consummationthe 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 and six months ended June 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | | | Change | | | | | | |
(in millions) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | | | $ | | % | | | | |
Net cash provided by operating activities | $ | 777 | | | $ | 2,147 | | | $ | (1,370) | | | (64) | % | | $ | 2,394 | | | $ | 3,539 | | | | | $ | (1,145) | | | (32) | % | | | | |
Net cash used in investing activities | (6,356) | | | (1,615) | | | (4,741) | | | 294 | % | | (7,936) | | | (2,581) | | | | | (5,355) | | | 207 | % | | | | |
Net cash provided by (used in) financing activities | 15,628 | | | (866) | | | 16,494 | | | (1,905) | % | | 15,175 | | | (1,056) | | | | | 16,231 | | | (1,537) | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in millions) | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % |
Net cash provided by operating activities | $ | 2,147 |
| | $ | 1,261 |
| | $ | 886 |
| | 70 | % | | $ | 3,539 |
| | $ | 2,031 |
| | $ | 1,508 |
| | 74 | % |
Net cash used in investing activities | (1,615 | ) | | (306 | ) | | (1,309 | ) | | 428 | % | | (2,581 | ) | | (768 | ) | | (1,813 | ) | | 236 | % |
Net cash used in financing activities | (866 | ) | | (3,267 | ) | | 2,401 |
| | (73 | )% | | (1,056 | ) | | (2,267 | ) | | 1,211 |
| | (53 | )% |
Operating Activities
Net cash provided by operating activities increased $886 million,decreased $1.4 billion, or 70%64%, for the three months ended and $1.5decreased $1.1 billion, or 74%32%, for the six months ended June 30, 2019.2020.
The increasedecrease for the three months ended June 30, 2019,2020, was primarily from:
•A $817 million decrease$3.7 billion increase in net cash outflows from changes in working capital, primarily due to the one-time impact of $2.3 billion in gross payments for the settlement of interest rate swaps related to Merger financing for the three months ended June 30, 2020, higher use from Other current and long-term liabilities, Accounts payable and accrued liabilities and Inventories, partially offset by lower use from Accounts receivable, Other currentreceivable; and long-term assets, Equipment installment plan receivables and Accounts payable and accrued liabilities; and
A $157 million increase in•Lower Net income; partially offset by
•Higher net non-cash adjustments to Net income.
•Net cash provided by operating activities includes $370 million and $151 million in payments for Merger-related costs for the three months ended June 30, 2020 and 2019, respectively.
•Net cash provided by operating activities includes $243 million and $0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the three months ended June 30, 2020 and 2019, respectively.
The increasedecrease for the six months ended June 30, 2019,2020, was primarily from:
•A $1.0$3.7 billion decreaseincrease in net cash outflows from changes in working capital, primarily due to lowerthe one-time impact of $2.3 billion in gross payments for the settlement of interest rate swaps related to Merger financing for the six months ended June 30, 2020, including higher use from Other current and long-term liabilities, Accounts payable and accrued liabilities and Other current and long-term liabilities,Inventories, partially offset by higherlower use from inventories;Accounts receivable; and
A $394 million increase in•Lower Net income; partially offset by
•Higher net non-cash adjustments to Net income.
Changes in Operating lease right-of-use assets and Short and long-term operating lease liabilities are now presented in Changes in operating assets and liabilities due to the adoption of the new lease standard. The net impact of changes in these accounts decreased •Net cash provided by operating activities by $52includes $531 million and $139$185 million in payments for Merger-related costs for the three and six months ended June 30, 2020 and 2019, respectively.
Investing Activities
Net cash used in investing activities increased $1.3$4.7 billion, or 428%294%, for the three months ended and $1.8increased $5.4 billion, or 236%207%, for the six months ended June 30, 2019.2020.
The use of cash for the three months ended June 30, 2019,2020, was primarily from:
•$1.85.0 billion in cash paid for the acquisition of Sprint, net of cash and restricted cash acquired;
•$2.3 billion in Purchases of property and equipment, including capitalized interest, primarily driven by growth infrom network build as weintegration related to the Merger and the continued deploymentbuild-out of low band spectrum, including 600 MHz,our nationwide 5G network; and started laying the groundwork for 5G; and
•$665745 million in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by
•$8391.2 billion related to derivative contracts under collateral exchange arrangements, for more information regarding these contracts, see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements; and •$602 million in Proceeds related to beneficial interests in securitization transactions.
The use of cash for the six months ended June 30, 2019,2020, was primarily from:
•$3.75.0 billion in cash paid for the acquisition of Sprint, net of cash and restricted cash acquired;
•$4.0 billion in Purchases of property and equipment, including capitalized interest, primarily driven by growth infrom network build as weintegration related to the Merger and the continued deploymentbuild-out of low band spectrum, including 600 MHz,our nationwide 5G network; and started laying the groundwork for 5G; and
•$850844 million in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by
•$2.01.5 billion in Proceeds related to beneficial interests in securitization transactions.transactions; and
•$632 million related to derivative contracts under collateral exchange arrangements, for more information regarding these contracts, see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements.
Financing Activities
Net cash used inprovided by (used in) financing activities decreased $2.4increased $16.5 billion or 73%, for the three months ended and $1.2$16.2 billion or 53%, for the six months ended June 30, 2019.2020.
The usesource of cash for the three months ended June 30, 2019, was primarily from:
$600 million for Repayments of long-term debt; and
$229 million for Repayments of financing lease obligations.
Activity under the revolving credit facility included borrowing and full repayment of $880 million, for a net of $0 impact.
The use of cash for the six months ended June 30, 2019,2020, was primarily from:
•$60026.7 billion in Proceeds from the issuance of long-term debt, net of discounts and issuance costs, driven primarily by the issuance of $23.0 billion in Senior Secured Notes and a draw of $4.0 billion on the New Secured Term Loan Facility;
•$18.7 billion in Proceeds from the issuance of short-term debt, net of discounts and issuance costs, driven by a $19.0 billion draw on the New Secured Bridge Loan Facility in connection with the closing of the Merger; and
•$300 million in net proceeds from the SoftBank Equity transaction, see Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements; partially offset by
•$18.9 billion in Repayments of short-term debt, net of refunds for issuance costs, for the repayment of the $19.0 billion draw on the New Secured Bridge Loan Facility; and
•$10.5 billion in Repayments of long-term debt;
$315 million for Repayments of financing lease obligations; and
$104 million for Tax withholdings on share-based awards.
Activity underdebt driven by the revolving credit facility included borrowing and full repayment of $1.8our $4.0 billion Incremental Term Loan Facility with DT, $4.0 billion of Senior Notes held by DT, $2.3 billion of outstanding principal for a netthe termination of $0 impact.the accounts receivable facility assumed in the Merger, and $219 million in principal payments for the Senior Secured Notes assumed in the Merger.
Cash and Cash Equivalents
As of June 30, 2019,2020, our Cash and cash equivalents were $1.1$11.1 billion compared to $1.2$1.5 billion at December 31, 2018.2019.
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.extinguishment. Free Cash Flow and Free Cash Flow, excluding gross payments for the settlement of interest rate swaps, 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in millions) | 2019 | | 2018 | $ | | % | 2019 | | 2018 | $ | | % |
Net cash provided by operating activities | $ | 2,147 |
| | $ | 1,261 |
| | $ | 886 |
| | 70 | % | | $ | 3,539 |
| | $ | 2,031 |
| | $ | 1,508 |
| | 74 | % |
Cash purchases of property and equipment | (1,789 | ) | | (1,629 | ) | | (160 | ) | | 10 | % | | (3,720 | ) | | (2,995 | ) | | (725 | ) | | 24 | % |
Proceeds related to beneficial interests in securitization transactions | 839 |
| | 1,323 |
| | (484 | ) | | (37 | )% | | 1,996 |
| | 2,618 |
| | (622 | ) |
| (24 | )% |
Cash payments for debt prepayment or debt extinguishment costs | (28 | ) | | (181 | ) | | 153 |
| | (85 | )% | | (28 | ) | | (212 | ) | | 184 |
|
| (87 | )% |
Free Cash Flow | $ | 1,169 |
| | $ | 774 |
| | $ | 395 |
| | 51 | % | | $ | 1,787 |
| | $ | 1,442 |
| | $ | 345 |
| | 24 | % |
We have presented the impact of the sales in the table below, which illustrates the reconciliation of Free Cash Flow and Free Cash Flow, excluding gross payments for the settlement of interest rate swaps and reconciles each from Net cash provided by operating activities, which we consider to be the most directly comparable GAAP financial measure.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Change | | | | Six Months Ended June 30, | | | | | | Change | | | | | | |
(in millions) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | $ | 777 | | | $ | 2,147 | | | $ | (1,370) | | | (64) | % | | $ | 2,394 | | | $ | 3,539 | | | | | $ | (1,145) | | | (32) | % | | | | |
Cash purchases of property and equipment | (2,257) | | | (1,789) | | | (468) | | | 26 | % | | (4,010) | | | (3,720) | | | | | (290) | | | 8 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Proceeds related to beneficial interests in securitization transactions | 602 | | | 839 | | | (237) | | | (28) | % | | 1,470 | | | 1,996 | | | | | (526) | | | (26) | % | | | | |
Cash payments for debt prepayment or debt extinguishment costs | (24) | | | (28) | | | 4 | | | (14) | % | | (24) | | | (28) | | | | | 4 | | | (14) | % | | | | |
Free Cash Flow | (902) | | | 1,169 | | | (2,071) | | | (177) | % | | (170) | | | 1,787 | | | | | (1,957) | | | (110) | % | | | | |
Gross cash paid for the settlement of interest rate swaps | 2,343 | | | — | | | 2,343 | | | NM | | 2,343 | | | — | | | | | 2,343 | | | NM | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Free Cash Flow, excluding gross payments for the settlement of interest rate swaps | $ | 1,441 | | | $ | 1,169 | | | $ | 272 | | | 23 | % | | $ | 2,173 | | | $ | 1,787 | | | | | $ | 386 | | | 22 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
NM - Not Meaningful
Free Cash Flow, excluding gross payments for the settlement of interest rate swaps related to Merger financing, increased $395$272 million, or 51%23%, for the three months ended and $345increased $386 million, or 24%22%, for the six months ended June 30, 2019.2020.
The increase for the three months ended June 30, 2019,2020, was from:impacted by the following:
Higher•Lower Net cash provided by operating activities, as described above;
•Higher Cash purchases of property and equipment, including capitalized interest of $119 million and $125 million for the three months ended June 30, 2020 and 2019, respectively, from network integration related to the Merger and the continued build-out of our nationwide 5G network;
Lower Cash payments for debt extinguishment costs; partially offset by
•Lower Proceeds related to our deferred purchase price from securitization transactions; and
Higher Cash purchases•The one-time impact of property and equipment, net of capitalized interest of $125 million and $102 milliongross payments for the three months ended June 30, 2019 and 2018, respectively.settlement of interest rate swaps related to Merger financing of $2.3 billion, which is excluded from the calculation Free Cash Flow.
•Free Cash Flow includes $151$370 million and $17$151 million in payments for merger-relatedMerger-related costs for the three months ended June 30, 2020 and 2019, and 2018, respectively.
•Free Cash Flow includes $243 million and $0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the three months ended June 30, 2020 and 2019, respectively.
The increase for the six months ended June 30, 2019,2020, was from:impacted by the following:
Higher•Lower Net cash provided by operating activities, as described above; and
Lower Cash payments for debt extinguishment costs; partially offset by
Higher Cash Purchases of property and equipment, net of capitalized interest of $243 million and $145 million for the six months ended June 30, 2019 and 2018, respectively; and
•Lower Proceeds related to our deferred purchase price from securitization transactions.transactions;
•Higher Cash purchases of property and equipment, including capitalized interest of $231 million and $243 million for the six months ended June 30, 2020 and 2019, respectively, from network integration related to the Merger and the continued build-out of our nationwide 5G network; and
•The one-time impact of gross payments for the settlement of interest rate swaps related to Merger financing of $2.3 billion, which is excluded from the calculation Free Cash Flow.
•Free Cash Flow includes $185$531 million and $17$185 million in payments for merger-relatedMerger-related costs for the six months ended June 30, 2020 and 2019, respectively.
•Free Cash Flow includes $255 million and 2018,$0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the six months ended June 30, 2020 and 2019, respectively.
Borrowing Capacity and Debt Financing
As of June 30, 2019,2020, our total debt was $25.2and financing lease liabilities were $75.0 billion, excluding our tower obligations, of which $24.9$67.5 billion was classified as long-term debt.
debt and $1.4 billion was classified as long-term financing lease liabilities.
Effective April 28, 2019, we redeemed $600 million aggregate principal amount of our DT Senior Reset Notes. The notes were redeemed at a redemption price equal to 104.666% of the principal amount of the notes (plus accrued and unpaid interest thereon) and were paid on April 29, 2019. The redemption premium was $28 million and was included in Other expense, net in our Condensed Consolidated Statements of Comprehensive Income and in Cash payments for debt prepayment or debt extinguishment costs in our Condensed Consolidated Statements of Cash Flows
.
Certain components of the reset features were required to be bifurcated from the DT Senior Reset Notes and were separately accounted for as embedded derivatives. The write-off of embedded derivatives upon redemption resulted in a gain of $11 million which was included in Other expense, net in our Condensed Consolidated Statements of Comprehensive Income. See Note 7 - Fair Value Measurements for further information.
We maintain 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, with a maturity date of December 29, 2021. As of June 30, 2019 and December 31, 2018, there were no outstanding borrowings under the revolving credit facility.
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 June 30, 2019 and December 31, 2018,2020, there waswere no outstanding balance.balances.
We maintain vendor financing arrangements primarily with our primarymain network equipment suppliers. Under the respective agreements, we can obtain extended financing terms. During the three and six months ended June 30, 2020, we repaid $151 million and $176 million, respectively, under the vendor financing arrangements. Payments on certain 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 June 30, 2020 and December 31, 2019, there was $300 million inthe outstanding borrowingsbalance under the vendor financing agreements. Asarrangements and other debt was $353 million and $25 million, respectively.
On April 1, 2020, in connection with the closing of December 31,the Merger, T-Mobile USA and certain of its affiliates, as guarantors, entered into a 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”).
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”).
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’s 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, T-Mobile USA entered into a commitment letter, dated as of April 29, 2018 there was no(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 financial institutions, including certain financing fees on the secured term loan commitment and fees for structuring, funding, and providing the commitments. On April 1, 2020, in connection with the closing of the Merger, we paid $355 million in Commitment Letter fees to certain financial institutions which were recognized in Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income.
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 balance.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.
For more information regarding our borrowing capacity and debt financing, see Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements.
Consents on Debt
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. If the Merger is consummated, we will make payments for requisite consents to DT. There was no payment accrued as of June 30, 2019.
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. IfOn 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. There was no payment accruedholders of $95 million.
In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a Financing Matters Agreement, dated as of June 30, 2019.
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. 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.
For more information regarding consents on debt, see Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements.
Interest Rate Lock Derivatives
In April 2020, in connection with the issuance of an aggregate of $19.0 billion in Senior Secured Notes, we terminated our interest rate lock derivative. At the time of termination, the interest rate lock derivatives were a liability of $2.3 billion, of which $1.2 billion was cash-collateralized. Consequently, the net cash required to settle the interest rate lock derivatives was an additional $1.1 billion and was paid at termination.
For more information regarding the termination of our interest rate lock derivative, see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements.
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 and stock purchases.debt.
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 IssuerIssuers 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 IssuerIssuers to loan funds or make payments to the Parent. However, the Issuer isIssuers are 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 June 30, 2019.2020.
The Merger
In connection with the closing of the Merger, on April 1, 2020, we assumed Sprint’s liabilities, which include accounts payable and accrued liabilities, short-term debt, operating and financing lease liabilities, net pension plan liabilities, deferred tax liabilities and long-term debt with an aggregate fair value of $31.8 billion.
Financing Lease Facilities
We have entered into uncommitted financing lease facilities with certain partners whichthat provide us with the ability to enter into financing leases for network equipment and services. As of June 30, 2019,2020, we have committed to $3.4$4.6 billion of financing
leases under these financing lease facilities, of which $316$473 million and $407$646 million was executed during the three and six months ended June 30, 2019,2020, respectively. We expect to enter into up to an additional $493$554 million 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-outintegration of our network to utilize ouracquired Sprint 2.5 GHz spectrum licenses and existing 600 MHz spectrum licenses. Welicenses as we build out our nationwide 5G network.
Since April 1, 2020, we have incurred, and expect cash purchasesto incur significant capital expenditures in the near term related to the integration of the T-Mobile and Sprint businesses in order to fully realize the anticipated synergies associated with the Merger, including the reduction in redundant cell sites from combining networks, back office and information technology efficiencies and the evolution of our distribution and retail footprint including the combining of the Sprint and T-Mobile brand operations.
Spectrum Auction
In March 2020, the FCC announced that we were the winning bidder of 2,384 licenses in Auction 103 (37/39 GHz and cash purchases47 GHz spectrum bands) for an aggregate price of property and equipment, including capitalized interest, to be at$873 million, net of an incentive payment of $59 million. At the very high endinception of Auction 103 in October 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 purchase price of the rangelicenses won in the auction. On April 8, 2020, we paid the FCC the remaining $698 million of $5.8 to $6.1 billion in 2019. This includes expendituresthe purchase price for the continued deploymentlicenses won in the auction. Prior to the Merger, the FCC announced that Sprint was the winning bidder of 600 MHz127 licenses in Auction 103 (37/39 GHz and laying47 GHz spectrum bands). All payments related to the groundwork for 5G deployment. This does not include propertylicenses won were made by Sprint prior the Merger.
Share RepurchasesDebt Redemptions
On December 6, 2017, our BoardPrior to June 30, 2020, we delivered a notice of Directors authorized a stock repurchase program for up to $1.5redemption on $1.0 billion aggregate principal amount of our common stock through December 31, 2018 (the “2017 Stock Repurchase Program”). Repurchased shares are retired.6.500% Senior Notes due 2024. The 2017 Stock Repurchase Program completednotes were redeemed on April 29, 2018.
On April 27, 2018, our Board of Directors authorized an increase in the total stock repurchase programJuly 4, 2020 at a redemption price equal to $9.0 billion, consisting102.170% of the $1.5principal amount of the notes (plus accrued and unpaid interest thereon), payable on July 6, 2020. The redemption premium was approximately $22 million and the write off of issuance costs and consent fees was approximately $12 million. The outstanding principal amount was reclassified from Long-term debt to Short-term debt in our Condensed Consolidated Balance Sheets as of June 30, 2020.
Prior to June 30, 2020, we also delivered a notice of redemption on $1.25 billion in repurchases previously completed and up to an additional $7.5 billion of repurchasesaggregate principal amount of our common stock.5.125% Senior Notes to affiliates due 2021. The additional $7.5 billion repurchase authorization is contingent upon the terminationnotes were redeemed on July 4, 2020 at a redemption price equal to 100% of the Business Combination Agreement and the abandonmentprincipal amount of the Transactions contemplated undernotes (plus accrued and unpaid interest thereon), payable on July 6, 2020. The write off of discounts were approximately $12 million. The outstanding principal amount was reclassified from Long-term debt to Short-term debt in our Condensed Consolidated Balance Sheets as of June 30, 2020.
In August 2020, we expect to deliver a notice of redemption on $1.7 billion aggregate principal amount of our 6.375% Senior Notes due 2025 and expect to redeem the Business Combination Agreement.Senior Notes on September 1, 2020.
For more information regarding debt redemptions, see Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements.
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.
Between April 2 to April 6, 2020, in connection with the issuance of senior secured notes, we terminated our interest rate lock derivatives.
For more information regarding our interest rate lock derivatives, see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements.
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.
For more information regarding our contractual commitments and purchase obligations, see Note 17 - Commitments and Contingenciesof the Notes to the Condensed Consolidated Financial Statements.
The following table summarizes our contractual obligations and borrowings as of June 30, 2020 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Less Than 1 Year | | 1 - 3 Years | | 4 - 5 Years | | More Than 5 Years | | Total |
Long-term debt (1) | $ | 5,076 | | | $ | 11,102 | | | $ | 16,184 | | | $ | 38,286 | | | $ | 70,648 | |
Interest on long-term debt | 3,559 | | | 6,187 | | | 4,653 | | | 9,632 | | | 24,031 | |
Financing lease liabilities, including imputed interest | 1,094 | | | 1,250 | | | 155 | | | 85 | | | 2,584 | |
Tower obligations (2) | 391 | | | 763 | | | 588 | | | 768 | | | 2,510 | |
Operating lease liabilities, including imputed interest | 4,771 | | | 7,467 | | | 5,031 | | | 5,021 | | | 22,290 | |
Purchase obligations (3) | 4,248 | | | 3,483 | | | 1,629 | | | 1,323 | | | 10,683 | |
Spectrum leases and service credits (4) | 277 | | | $ | 595 | | | $ | 588 | | | $ | 5,160 | | | $ | 6,620 | |
Total contractual obligations | $ | 19,416 | | | $ | 30,847 | | | $ | 28,828 | | | $ | 60,275 | | | $ | 139,366 | |
(1)Represents principal amounts of long-term debt to affiliates and third parties at maturity, excluding unamortized premiums, discounts, debt issuance costs, consent fees, and financing lease obligations. See Note 8 – Debt of the Notes to the Condensed Consolidated Financial Statements for further information. (2)Future minimum payments, including principal and interest payments, related to the tower obligations. See Note 9 – Tower Obligations of the Notes to the Condensed Consolidated Financial Statements for further information. (3)The minimum commitment for certain obligations is based on termination penalties that could be paid to exit the contracts. Termination penalties are included in the above table as payments due as of the earliest we could exit the contract, typically in less than one year. For certain contracts that include fixed volume purchase commitments and fixed prices for various products, the purchase obligations are calculated using fixed volumes and contractually fixed prices for the products that are expected to be purchased. This table does not include open purchase orders as of June 30, 2020 under normal business purposes. See Note 17 – Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements for further information. (4)Spectrum lease agreements are typically for five to ten years with two automatic renewal provisions, bringing the total term of the agreements up to 30 years.
Certain commitments and obligations are included in the table based on the year of required payment or an estimate of the year of payment. Other long-term liabilities have been omitted from the table above due to the uncertainty of the timing of payments, combined with the absence of historical trending to be used as a predictor of such payments. See Note 19 – Additional Financial Information of the Notes to the Condensed Consolidated Financial Statements for further information.
The purchase obligations reflected in the table above are primarily commitments to purchase spectrum licenses, wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. Where we are committed to make a minimum payment to the supplier regardless of whether we take delivery, we have included only that minimum payment as a purchase obligation. The acquisition of spectrum licenses is subject to regulatory approval and other customary closing conditions.
Related Party Transactions
SoftBank
On June 22, 2020, we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transactionof the Notes to the Condensed Consolidated Financial Statements. On August 3, 2020, upon completion of the SoftBank Monetization, DT and SoftBank held, directly or indirectly, approximately 43.4% and 8.6%, respectively, of our outstanding common stock, with the remaining approximately 48.0% of our outstanding common stock held by other stockholders. As a result of the Proxy Agreements, DT has voting control as of August 3, 2020 over approximately 52.4% of the outstanding T-Mobile common stock. In addition, as provided for in the Master Framework Agreement, DT also holds certain call options over approximately 101.5 million shares of our common stock held by SBGC.
On July 27, 2020, in connection with the SoftBank Monetization, the Rights Offering exercise period closed, and on August 3, 2020, the Rights Offering closed, resulting in the sale of 19,750,000 shares of our common stock.
Marcelo Claure
On June 22, 2020, we entered into a Master Framework Agreement which provided for the purchase of shares of our common stock by Marcelo Claure, a member of our board of directors, from us at a specified price.
For more information regarding our related party transactions with Marcelo Claure, see Note 14 - SoftBank Equity Transactionof the Notes to the Condensed Consolidated Financial Statements.
Brightstar
We have arrangements with Brightstar, a subsidiary of SoftBank, whereby Brightstar provides supply chain and inventory management services to us in our indirect channels.
Deutsche Telekom
We have related party transactions associated with DT or its affiliates in the ordinary course of business, including intercompany servicing and licensing.
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.
On July 4, 2020, we redeemed $1.25 billion aggregate principal amount of our 5.125% Senior Notes to affiliates due 2021.
For more information regarding our related party debt transactions, see Note 8 - Debtof the Notes to the Condensed Consolidated Financial Statements. 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 June 30, 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.either DT or SoftBank. We have relied upon DT and SoftBank for information regarding their respective 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: MTN 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 June 30, 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 June 30, 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 June 30, 20192020 were less than $0.1 million. We understand that DT intends to continue these activities.
Separately, SoftBank, through one of its non-U.S. subsidiaries, provides roaming services in Iran through Irancell Telecommunications Services Company. During the three months ended June 30, 2020, SoftBank had no gross revenues from such services and no net profit was generated. We understand that the SoftBank subsidiary intends to continue such services. This subsidiary also provides telecommunications services in the ordinary course of business to accounts affiliated with the Embassy of Iran in Japan. During the three months ended June 30, 2020, SoftBank estimates that gross revenues and net profit generated by such services were both under $3,500. We understand that the SoftBank subsidiary is obligated under contract and intends to continue such services.
In addition, SoftBank, through one of its non-U.S. indirect subsidiaries, provides office supplies to the Embassy of Iran in Japan. SoftBank estimates that gross revenue and net profit generated by such services during the three months ended June 30, 2020 were under $1,000 and $200, respectively. We understand that the SoftBank subsidiary intends to continue such 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 June 30, 2019,2020, we derecognized net receivables of $2.6 billion upon sale through these arrangements. See
For more information regarding these off-balance sheet arrangements, see Note 54 – Sales of Certain Receivables of the Notes to the Condensed Consolidated Financial Statements for further information.Statements.
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 and in Note 1 - Summary of Significant Accounting Policies, 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, and which are hereby incorporated by reference herein other than the updated risk factors below.
Evaluation of Goodwill and Indefinite-Lived Intangible Assets for Impairment
We assess the carrying value of our goodwill and other indefinite-lived intangible assets, such as our spectrum licenses, for potential impairment annually as of December 31, or more frequently if events or changes in circumstances indicate such assets might be impaired.
We have identified two reporting units for which discrete financial information is available and results are regularly reviewed by management: wireless and Layer3. The policyLayer3 reporting unit consists of the assets and liabilities of Layer3 TV, Inc., which was acquired in January 2018. The wireless reporting unit consists of the remaining assets and liabilities of T-Mobile US, Inc., excluding Layer3 TV, Inc. We separately evaluate these reporting units for impairment.
When assessing goodwill for impairment we may elect to first perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. If we do not perform a qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative test. We recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. We employed a qualitative approach to assess the wireless reporting unit. The fair value of the wireless reporting unit is determined using a market approach, which is based on market capitalization. We recognize market capitalization is subject to volatility and will monitor changes in market capitalization to determine whether declines, if any, necessitate an interim impairment review. In the event market capitalization does decline below its book value, we will consider the length, severity and reasons for the decline when assessing whether potential impairment exists, including considering whether a control premium should be
added to the market capitalization. We believe short-term fluctuations in share price may not necessarily reflect the underlying aggregate fair value. No events or change in circumstances have occurred in the current quarter that indicate the fair value of the Wireless reporting unit may be below its carrying amount at June 30, 2020.
Concurrent with the acquisition, management also revisited the plans for our TVisionTM Home service offering and the integration of this offering with the Sprint customer base. Additionally, we expect our significantly enhanced spectrum position following the Merger will allow us to accelerate our in-home broadband internet service strategy. The enhanced in-home broadband opportunity, along with the acquisition of certain content rights, has created a strategic shift in our TVisionTM Home service offering allowing us the ability to develop a video product which will be complementary to the in-home broadband offering. Management has updated its forecast, which includes a reimagining of the stand-alone product offering to potential customers that is critical because itexpected to launch by the end of 2020. Based on these events and changes in circumstances, we determined that recoverability of the carrying amount of goodwill for the Layer3 reporting unit should be evaluated for impairment. We employed a quantitative approach to assess the Layer3 reporting unit. The fair value of the Layer3 reporting unit is determined using an income approach, which is based on estimated discounted future cash flows.
We made estimates and assumptions regarding future cash flows, discount rates and long-term growth rates to determine the reporting unit’s estimated fair value. The key assumptions used were as follows:
•expected cash flows underlying the Layer3 business plan for the periods 2020 through 2025, which took into account assumptions for a delayed launch, estimates of subscribers for TVision services, average revenue and content cost per subscriber, operating costs and capital expenditures;
•Cash flows beyond 2025 were projected to grow at a long-term growth rate estimated at 3%. Estimating a long-term growth rate requires management to make difficult, subjectivesignificant judgment about future business strategies as well as micro- and complex judgments about mattersmacro-economic environments that are inherently uncertainuncertain; 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.
Leases
•We adopted the new lease standard on January 1, 2019 and recognized right-of-use assets and lease liabilities for operating leases that have not previously been recorded.
Significant Judgments:
The most significant judgments and impacts upon adoption of the standard include the following:
In evaluating contracts to determine if they qualify asused a lease, we consider factors such as if we have obtained or transferred substantially all of the rights to the underlying asset through exclusivity, if we can or if we have transferred the ability to direct the use of the asset by making decisions about how and for what purpose the asset will be used and if the lessor has substantive substitution rights.
We recognized right-of-use assets and operating lease liabilities for operating leases that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent and deferred rent which we remeasured at adoption due to the application of hindsight to our lease term estimates. Deferred and prepaid rent will no longer be presented separately.
Capital lease assets previously included within Property and equipment, net, were reclassified to financing lease right-of-use assets and capital lease liabilities previously included in Short-term debt and Long-term debt were reclassified to financing lease liabilities in our Condensed Consolidated Balance Sheet.
| |
• | Certain line items in the Condensed Consolidated Statements of Cash Flows and the “Supplementary disclosure of cash flow information” have been renamed to align with the new terminology presented in the new lease standard; “Repayment of capital lease obligations” is now presenting as “Repayments of financing lease obligations” and “Assets acquired under capital lease obligations” is now presenting as “Financing lease right-of-use assets obtained in exchange for lease obligations.” In the “Operating Activities” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease right-of-use assets” and “Short and long-term operating lease liabilities” which represent the change in the operating lease asset and liability, respectively. Additionally, in the “Supplemental disclosure of cash flow information” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease payments,” and in the “Noncash investing and financing activities” section we have added “Operating lease right-of-use assets obtained in exchange for lease obligations.”
|
In determining the discount rate usedof 30% to measurerisk adjust 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 based on an estimated secured rate comprised of a risk-free LIBOR rate plus a credit spread as secured by our assets.
Certain of our lease agreements include rental payments based on changes in the consumer price index (“CPI”). Lease liabilities are not remeasured as a result of changes in the CPI; instead, changes in the CPI are treated as variable lease payments and are excluded from the measurement of the right-of-use asset and lease liability. These payments are recognized in the period in which the related obligation was incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We elected the use of hindsight whereby we applied current lease term assumptions that are applied to new leasescash flow projections in determining the expected lease term period for all cell sites. Upon adoptionestimated fair value.
The carrying value of the new lease standardLayer3 reporting unit exceeded its estimated fair value as of June 30, 2020. Accordingly, during the three and applicationsix months ended June 30, 2020 we recorded an impairment loss of hindsight$218 million, which is included in “Impairment expense” in our expected lease term has shortened to reflect payments due for the initial non-cancelable lease term only. This assessment corresponds toconsolidated statements of comprehensive income.
For more information regarding our lease term assessment for new leases and aligns with the payments that have been disclosed as lease commitments in prior years. As a result, the average remaining lease term for cell sites has decreased from approximately nine to five years based on lease contracts in effect at transition on January 1, 2019. The aggregate impact of using the hindsight is an estimated decrease in Total operating expense of $240 million in fiscal year 2019.
We were also required to reassess the previously failed sale-leasebacks of certain T-Mobile-owned wireless communication tower sites and determine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a sale should be recognized.
We concluded that a sale has not occurred for the 6,200 tower sites transferred to 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 for 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 in fiscal year 2019.
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
We are exposed to economic risks in the normal course of business, primarily from changes in interest rates, including changes in investment yields and changes in spreads due to credit risk and other factors. These risks, along with other business risks, impact our cost of capital. Our policy is to manage exposure related to fluctuations in interest rates in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. We have established interest rate risk limits that are closely monitored by measuring interest rate sensitivities of our debt portfolio.
Through March 31, 2020, we were exposed to changes in interest rates on our Incremental Term Loan Facility with DT, our majority stockholder. On April 1, 2020, in connection with the closing of the Merger, we drew down on a $19.0 billion New Secured Bridge Loan Facility and a $4.0 billion New Secured Term Loan Facility. We used a portion of the net proceeds from the draw down of the secured facilities to repay our $4.0 billion Incremental Term Loan Facility with DT. See Note 8 - LeasesDebt of the Notes to the Condensed Consolidated Financial Statements for further information.information regarding the issuance of New Secured Bridge Loan Facility and New Secured Term Loan Facility.
Accounting Pronouncements Not Yet Adopted
Through April 1, 2020, we were exposed to changes in the benchmark interest rate associated with our interest rate lock derivatives. Between April 2 to April 6, 2020, in connection with the issuance of an aggregate of $19.0 billion in Senior Secured Notes, we terminated our interest rate lock derivatives. See Note 1 – Summary of Significant Accounting Policies8 - Debt of the Notes to the Condensed Consolidated Financial Statements for further information regarding recently issued accounting standards.the issuance of senior secured notes. At the time of termination, the
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changesinterest rate lock derivatives were a liability of $2.3 billion, of which $1.2 billion was cash-collateralized. Consequently, the net cash outflow required to settle the interest rate risklock derivatives was an additional $1.1 billion and was paid at termination. Aggregate changes in fair value, net of tax, of $1.7 billion is presented in Accumulated other comprehensive loss as previously disclosedof June 30, 2020. Upon the termination of the interest rate derivatives, we began amortizing the Accumulated other comprehensive loss with the derivatives into Interest expense over periods of 8 to 10 years. For both the three and six months ended June 30, 2020, $39 million was amortized from Accumulated other comprehensive loss into Interest expense in Part II, Item 7Athe Condensed Consolidated Statements of our Annual Report on Form 10-K for the year ended December 31, 2018.Comprehensive Income.
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 include the use of a Disclosure Committee which is comprised of representatives from our Accounting, Legal, Treasury, Technology, Risk Management, Government Affairs and Investor Relations functions and 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
ThereOn April 1, 2020, we completed our Merger with Sprint and have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. Given the significance of the Sprint acquisition and the complexity of systems and business processes, we intend to exclude the acquired Sprint business from our assessment and report on internal control over financial reporting for the year ending December 31, 2020. Other than as discussed above, there were no 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
In addition toOther than the other information containedupdated risk factors below, there have been no material changes in this Form 10-Q, the Risk Factors asrisk factors previously disclosed in Part I,II, Item 1AIA of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which amended and restated the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, and the following2019. These 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 Proposed TransactionsWireless Industry
The closingCOVID-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 has resulted in a recession beginning in February 2020. 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. During the quarter, while the impact of the TransactionsCOVID-19 pandemic peaked and subsequently subsided in some jurisdictions, leading to phased re-openings, other areas have seen resurgences of COVID-19 cases and continuing or renewed containment measures.
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. We continue to monitor conditions and will re-open and re-close stores as needed to ensure the safety of both customers and employees. Our plans to potentially re-open and re-close additional stores depend on safe and healthy operating environments and compliance with 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 Pledge ensuring residential and small business customers with financial impacts resulting from the pandemic do not lose service. We extended the Pledge until June 30 and, despite the Pledge ending, expect to continue to work with our customers to help them maintain service and become current on their accounts, which may impact our financial results. In addition, these initiatives may continue to 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.
Any material weaknesses we identify while we work to integrate and align policies, 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 subject 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 a number of conditions, includingan exemption for business combinations during the receipt of approvals from various governmental entities,most recent fiscal year, which may not approvewe plan to utilize due to the Transactions, may delay the approvals for, or may impose conditions or restrictions on, jeopardize or delay completion of, or reduce or delay the anticipated benefitsMerger. Any identified material weakness in internal control over financial reporting will still be reported, as obligated.
While we work to integrate and align policies, principles and practices of the Transactions, and if these conditions are not satisfied or waived,two companies following the Transactions will not be completed.
The completionMerger, as a result of the Transactions is subjectdifferences in control environments and cultures, we could potentially identify material weaknesses that could result in materially inaccurate financial statements, materially inaccurate disclosures, or failure to a number of conditions, including, among others, obtaining certain governmental authorizations, consents, ordersprevent error or other approvals, includingfraud for the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the receipt of required approvals from the Federal Communications Commission (“FCC”) and certain state and territorial public utility commissions or similar state and foreign regulatory bodies, and the absence of any injunction prohibiting the Transactions or any legal requirements enacted by a court or other governmental entity preventing the completion of the Transactions. In connection with these required approvals, we have agreed to significant actions and conditions, including the planned divestiture of Sprint’s prepaid wireless businesses to DISH Network Corporation and ongoing commercial and transition services arrangements tocombined company. There can be entered into in connection with such divestiture, which we and Sprint announced on July 26, 2019 (the “Divestiture Transaction”), a stipulation and order and proposed final judgment with the U.S. Department of Justice, which we and Sprint announced on July 26, 2019 (the “Consent Decree”), the proposed commitments contained in the ex parte presentation filed with the Secretary of the FCC, which we and Sprint announced on May 20, 2019 (the “FCC Commitments”) and any other commitments or undertakings we may enter into with governmental authorities at the federal and state level (collectively, with the Consent Decree and the FCC Commitments, the “Government Commitments”). There is no assurance that remediation of any material weaknesses identified during integration of the remaining required authorizations, consents, orders or other approvalstwo companies, will be obtained or that they will be obtainedcompleted in a timely manner or whether theythat the remedial measures will prevent other control deficiencies or material weaknesses. Subsequent testing of the operational effectiveness of the financial reporting systems and internal controls will be necessary to conclude that any material weaknesses identified have been fully remediated. 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, 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 additional required actions, conditions,various inherent limitations, or restrictions onincluding judgments used in decision-making, the combined company’s business, operations or assets. In addition, the attorneys general of thirteen statesnature and the District of Columbia have commenced litigation seeking an order prohibiting the consummationcomplexity of the Transactions. Such litigation, and such required actions, conditions,transactions we undertake, assumptions about the likelihood of future events, the soundness of our systems, cost limitations, and restrictions, may jeopardizeother factors. If we or delay completionour independent registered public accounting firm is unable to conclude that we have effective internal control over financial reporting, or if material weaknesses in our internal controls are discovered, such as through the identification of any material weaknesses as we complete our assessment of Sprint’s legacy control environment, or occur in the Transactions, reducefuture or delay the anticipated benefits of the Transactions or allow the parties to the Business Combination Agreement to terminate the Business Combination Agreement, whichwe otherwise must restate our financial statements, it could result in a material adverse effect onmaterially and adversely affect our or the combined company’s business, financial condition or operating results.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.
In connection with the Merger, we are evaluating the long-term billing system architecture strategy for our customers. Our long-term strategy is to facilitate the migration of Sprint’s legacy customers onto T-Mobile’s existing billing platforms. The combined company will operate and maintain multiple billing systems until such migration is completed. Any unanticipated difficulties, disruption, or significant delays could have adverse operational, financial, and reputational effects on our business.
Following the closing of the Merger, the combined company is operating and maintaining multiple billing systems. We expect to continue to do so until successful migration of Sprint’s legacy customers to T-Mobile’s existing billing platforms. We may encounter unanticipated difficulties or experience delays in the ongoing integration efforts with respect to billing, causing major system or business disruptions. In addition, we or the supporting vendors 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 these billing systems 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.
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, is alsoDT and SoftBank entered into the SoftBank Proxy Agreement, and on June 22, 2020, DT, CM LLC, and Marcelo Claure entered into the Claure Proxy Agreement. Pursuant to the Proxy Agreements, at any meeting of our stockholders, the shares of our common stock beneficially owned by SoftBank or CM LLC 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 T-Mobile USA havingNASDAQ 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 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 minimum credit ratings ondebt 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 closing datesize of the Transactions (after giving effect to the Merger) from at least twoour board of three specified credit rating agencies,directors, (e) subject to certain qualifications. Inexceptions, issuing equity of 10% or more of the eventthen-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. We are also restricted from amending our certificate of incorporation and bylaws in any manner that we terminatecould adversely affect DT’s rights under the Business CombinationAmended and Restated Stockholders’ Agreement for as long as DT 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 connection withthe best interests of the Company and our stockholders or that may be in the best interests of our other stockholders.
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 failuresale 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 satisfyacquire, or discouraging a third party from seeking to acquire, the closing condition relatedCompany. DT and SoftBank as significant stockholders 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 specified minimum credit ratings, theninterests 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 certain circumstances,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 may be requiredare obligated to pay SprintDT a royalty in an amount equal to $600 million. If0.25% (the “royalty rate”) of the Transactions are not completed by November 1, 2019 (or, if the Marketing Periodnet revenue (as defined in the Business Combination Agreement)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 started and is in effect at such date, then January 2, 2020)),50% or if there is a final and non-appealable order or injunction preventing the consummationless of the Transactions,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 SprintDT may terminate the Business Combination Agreement. The Business Combination Agreement may alsotrademark license and such termination shall be terminated ifeffective, in the other conditions to closing are not satisfied,case of clause (i) above, on the third anniversary after notice of termination and, we and Sprint may also mutually decide to terminatein the Business Combination Agreement.
Failure to completecase of clause (ii) above, on the Merger could negatively impact us and our business, assets, liabilities, prospects, outlook, financial conditionsecond anniversary after notice of termination. A further increase in the royalty rate or resultstermination of operations.
If the Merger is not completed for any reason, we may be subject to a number of material risks. The price of our common stock may decline to the extent that its current market price reflects a market assumption that the Merger will be completed. In addition, some costs related to the Transactions must be paid by us whether or not the Transactions are completed. Furthermore,
we may experience negative reactions from our stockholders, customers, employees, suppliers, distributors, retailers, dealers and others who deal with us, whichtrademark license could have ana material adverse effect on our business, financial condition and resultsoperating results.
In addition, it is expected that if the Merger is not completed, we will continue to lack the network, scale and financial resources of the current market share leaders in, and other companies that have more recently begun providing, wireless services. Further, if the Merger is not completed, it is expected that we will not be able to deploy a nationwide 5G network on the same scale and on the same timeline as the combined company, and therefore will continue to be limited in their respective abilities to compete effectively in the 5G era.
We are subject to various uncertainties, including litigation and contractual restrictions and requirements while the Transactions are pending that could disrupt our or the combined company’s business and adversely affect our or the combined company’s business, assets, liabilities, prospects, outlook, financial condition and results of operations.
Uncertainty about the effect of the Transactions on employees, customers, suppliers, vendors, distributors, dealers and retailers may have an adverse effect on us or the combined company. These uncertainties may impair the ability to attract, retain and motivate key personnel during the pendency of the Transactions and, if the Transactions are completed, for a period of time thereafter, as existing and prospective employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the combined company’s business following the completion of the Transactions could be negatively impacted. We or the combined company may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent. Additionally, these uncertainties could cause customers, suppliers, distributors, dealers, retailers and others to seek to change or cancel existing business relationships with us or the combined company or fail to renew existing relationships. Suppliers, distributors and content and application providers may also delay or cease developing for us or the combined company new products that are necessary for the operations of its business due to the uncertainty created by the Transactions. Competitors may also target our existing customers by highlighting potential uncertainties and integration difficulties that may result from the Transactions.
The Business Combination Agreement also restricts us, without Sprint’s consent, from taking certain actions outside of the ordinary course of business while the Transactions are pending, including, among other things, certain acquisitions or dispositions of businesses and assets, entering into or amending certain contracts, repurchasing or issuing securities, making capital expenditures and incurring indebtedness, in each case subject to certain exceptions. These restrictions may have a significant negative impact on our business, results of operations and financial condition.
Management and financial resources have been diverted and will continue to be diverted toward the completion of the Transactions. We have incurred, and expect to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Transactions. These costs could adversely affect our or the combined company’s financial condition and results of operations.
In addition, we and our affiliates are involved in various disputes, governmental and/or regulatory inspections, investigations and proceedings and litigation matters that arise from time to time, including the antitrust litigation related to the Transactions brought by the attorneys general of thirteen states and the District of Columbia, and it is possible that an unfavorable resolution of these matters could prevent the consummation of the Transactions and/or adversely affect us and our results of operations, financial condition and cash flows and the results of operations, financial condition and cash flows of the combined company.
The Business Combination Agreement contains provisions that restrict the ability of our Board to pursue alternatives to the Transactions.
The Business Combination Agreement contains non-solicitation provisions that restrict our ability to solicit, initiate, knowingly encourage or knowingly take any other action designed to facilitate, any inquiries regarding, or the making of, any proposal the completion of which would constitute an alternative transaction for purposes of the Business Combination Agreement. In addition, the Business Combination Agreement does not permit us to terminate the Business Combination Agreement in order to enter into an agreement providing for, or to complete, such an alternative transaction.
Our directors and officers may have interests in the Transactions different from the interests of our stockholders.
Certain of our directors and executive officers negotiated the terms of the Business Combination Agreement. Our directors and executive officers may have interests in the Transactions that are different from, or in addition to, those of our stockholders. These interests include, but are not limited to, the continued service of certain of our directors as directors of the combined company, the continued employment of certain of our executive officers by the combined company, severance agreements and
amended employment terms and other rights held by our directors and executive officers, and provisions in the Business Combination Agreement regarding continued indemnification of and advancement of expenses to our directors and officers.
Risks Related to Integration and the Combined Company
Although we expect that the Transactions will result in synergies and other benefits, those synergies and benefits may not be realized or may not be realized within the expected time frame.
Our ability to realize the anticipated benefits of the Transactions will depend, to a large extent, on the combined company’s 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 to be fully realized. Even if the combined company is 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 businessbusinesses 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 following the Transactions. Revenues following the Transactions may be lower 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.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, theour activities of the combined company and could adversely affect theour results of operations of the combined company.operations. The overall combination of our and Sprint’s businesses, the completion of the Divestiture Transaction and the 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:
the •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;
•differences in control environments and cultures, and auditor expectations may result in futurethe potential identification of material weaknesses significant deficiencies, and/or control deficiencies while we work to integrate the companies and align guidelinespolicies, 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 the companies and align guidelinespolicies and practices;
•difficulties in integrating employees and attracting and retaining key personnel;
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 expected to be incurred in connection with the Transactions;
•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 divestiture process for expanded operations of a significantly larger and more complex company;
•the Divestiture Transaction and in conjunction withimpact of the ongoing commercial and transition services arrangements to be entered intoadditional debt financing incurred in connection with the Divestiture Transaction;Transactions;
difficulties•the possible unfavorable outcomes in satisfyingconnection with the large number of Government Commitmentsrelationship between Sprint PCS and Shentel, including disadvantageous pricing pursuant to the contractual appraisal process for purchasing (or selling) wireless telecommunications assets in the required timeframesregion, costly and lengthy proceedings related to disputes, and delays and other adverse effects on operations and business in the tracking and monitoringShentel service area;
•known or potential unknown liabilities of them, including the network build-out obligations under the FCC Commitments;
contingent liabilitiesSprint that are larger than expected; and
•other potential unknown liabilities, 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 of our control, and/or will be outside the control of the combined company, and any one of them could result in lower revenues, higher costs and diversion of management time and energy, which could materially impact theour business, financial condition and results of operations of the combined company.operations. In addition, even if the operations of our and Sprint’s businesses are integrated successfully,integration is successful, the full benefits of the Merger may not be realized,Transactions including, among others, the synergies, cost savings or sales or growth opportunities that are expected, includingmay 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. These benefits may not be achieved withinFurther, 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 anticipated time frame or at all. Further, additionalTransactions. Additional unanticipated costs may be incurred in the integration of our and Sprint’s businessesprocess 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. All of these factors could cause dilution to the earnings per share of the combined company, decrease or delay the projected accretive effect of the Merger, and negatively impact the price of our common stock following the Merger. As a result, it cannot be assured that the combination of T-Mobile and Sprintwe will result in the realization ofrealize the full benefits expected from the Transactions within the anticipated time frames or at all.
The indebtedness ofOur business may be adversely impacted if we are not able to successfully manage the combined company followingongoing commercial and transition services arrangements entered into in connection with the completion ofDivestiture Transaction and known or unknown liabilities arising in connection therewith.
On July 1, 2020, we completed the Transactions will be substantially greater than the indebtedness of each of T-Mobile and Sprint on a standalone basis prior to the execution of the Business Combination Agreement. This increased level of indebtedness could adversely affect the combined company’s business flexibility and increase its borrowing costs.
Divestiture Transaction. In connection with the Transactions,closing of the Divestiture Transaction, we and Sprint have conducted,DISH entered into certain commercial and expect to conduct, certain pre-Merger financing transactions, which will be used in part to prepaytransition services arrangements, including a portion of ourMaster Network Services Agreement (the “MNSA”) and Sprint’s existing indebtedness and to fund liquidity needs. After giving effecta Spectrum Purchase Agreement (the “Spectrum Purchase Agreement”). Pursuant to the pre-Merger financing transactions andMNSA, DISH will receive network services from the Transactions, we anticipate thatCompany for a period of seven years. As set forth in the combined companyMNSA, the Company will have consolidated indebtedness of upprovide to approximately $69.0 billion to $71.0 billion, based on estimated June 30, 2019 debt and cash balances, and excluding tower obligations and operating lease liabilities.
Our substantially increased indebtedness following the Transactions could have the effect,DISH, among other things, (a) legacy network services for certain Boost Mobile prepaid end users on the Sprint network, (b) T-Mobile network services for certain end users that have been migrated to the T-Mobile network or provisioned on the T-Mobile network by or on behalf of reducing our flexibilityDISH and (c) infrastructure mobile network operator services to respondassist in the access and integration of the DISH network. Pursuant to changing business, economic, marketthe Spectrum Purchase Agreement, DISH is expected to purchase all of Sprint’s 800 MHz spectrum (approximately 13.5 MHz of nationwide spectrum) for a total of approximately $3.6 billion. The covered spectrum sale will not occur before the third anniversary of the Merger (i.e., not before April 1, 2023) but must be divested within the later of three years after the closing of the Divestiture Transaction and industry conditions and increasingfive days after receipt of the amountapproval from the FCC for the transfer, following an application for FCC approval to be filed by the third anniversary of cash requiredthe closing of the Merger. T-Mobile may exercise an option to meet interest payments. In addition, this increased levellease back 4 MHz (2 MHz downlink + 2 MHz uplink) of indebtednessthe spectrum for two years following the Transactions may reduce funds available to support efforts to combine our and Sprint’s businesses and realize the expected benefitsclosing of the Transactions,800 MHz spectrum sale at the same per person rate used to calculate the purchase price paid by DISH to T-Mobile – a rate of approximately $68 million per year.
Failure to successfully manage these ongoing commercial and transition services arrangements entered into in connection with the Divestiture Transaction and liabilities arising in connection therewith may result in material unanticipated problems, including diversion of management time and energy, significant expenses and liabilities. There may also reduce funds available for capital expenditures, share repurchasesbe other potential adverse consequences and other activities that may put the combined company at a competitive disadvantage relative to other companies with lower debt levels. Further, it may be necessary for the combined company to incur substantial additional indebtedness in the future, subject to the restrictions contained in its debt instruments, which could increase the risksunforeseen increased expenses or liabilities associated with the capital structureDivestiture Transaction, the occurrence of the combined company.
Because of the substantial indebtedness of the combined company following the completion of the Transactions, there is a risk that the combined company may not be able to service its debt obligations in accordance with their terms.
The ability of the combined company to service its substantial debt obligations following the Transactions will depend in part on future performance, which will be affected by business, economic, market and industry conditions and other factors, including the ability of the combined company to achieve the expected benefits of the Transactions. There is no guarantee that the combined company will be able to generate sufficient cash flow to service its debt obligations when due. If the combined company is unable to meet such obligations or fails to comply with the financial and other restrictive covenants contained in the agreements governing such debt obligations, it may be required to refinance all or part of its debt, sell important strategic assets at unfavorable prices or make additional borrowings. The combined company may not be able to, at any given time, refinance its debt, sell assets or make additional borrowings on commercially reasonable terms or at all, which could have a material adverse effect on its business, financial condition and results of operations after the Transactions.
Some or all of the combined company’s variable-rate indebtedness may use the LIBOR as a benchmark for establishing the rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequence of these developments 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 of these risks could have a material adverse effect onmaterially impact our business, financial condition, liquidity and operating results.
The agreements governing the combined company’s indebtednessresults of operations. In addition, there may be an increase in competition from DISH and other financings will include restrictive covenantsthird parties that limit the combined company’s operating flexibility.
TheDISH may enter into commercial agreements governing the combined company’s indebtednesswith, who are significantly larger and other financings will impose material operatingwith greater resources and financial restrictions on the combined company. These restrictions, subject in certain casesscale advantages as compared to customary baskets, exceptions and maintenance and incurrence-based financial tests, may limit the combined company’s 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 or buying assets, properties or licenses;
developing assets, properties or licenses which the combined company has or in the future may procure;
creating liens on assets securing indebtedness or other obligations;
participating in future 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 the combined company’s ability to obtain debt financing, make share repurchases, refinance or pay principal on its outstanding indebtedness, complete acquisitions for cash or indebtedness or react to business, economic, market and industry conditions and other changes in its operating environment or the economy. Any future indebtedness that the combined company incurs may contain similar or more restrictive covenants. Any failure to comply with the restrictions of the combined company’s debt agreementsus. Such increased competition may result in an eventour loss of default under these agreements, which in turn may result in defaults or acceleration of obligations under thesecustomers and other agreements, giving the combined company’s lenders the right to terminate any commitments they had made to provide it with further funds and to require the combined company to repay all amounts then outstanding.business relationships.
The financing of the Transactions is not assured.
Although we have received debt financing commitments from lenders to provide various financing arrangements to facilitate the Transactions, the obligation of the lenders to provide these facilities is subject to a number of conditions and the financing of the Transactions may not be obtained on the expected terms or at all.
In particular, we have received commitments for $30.0 billion in debt financing to fund the Transactions, which is comprised of (i) a $4.0 billion secured revolving credit facility, (ii) a $7.0 billion term loan credit facility and (iii) a $19.0 billion secured bridge loan facility. Our reliance on the financing from the $19.0 billion secured bridge loan facility commitment is intended to be reduced through one or more secured note offerings or other long-term financings prior to the Merger closing. However, there can be no assurance that we will be able to issue any such secured notes or other long-term financings on terms we find acceptable or at all, especially in light of the recent debt market volatility, in which case we may have to exercise some or all of the commitments under the secured bridge facility to fund the Transactions. Accordingly, the costs of financing for the Transactions may be higher than expected.
Credit rating downgrades could adversely affect the businesses, cash flows, financial condition and operating results of T-Mobile and, following the Transactions, the combined company.
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 or, following the completion of the Transactions, obligations to the combined company’s obligors. Each rating agency reviews these ratings periodically and there can be no assurance that such ratings will be maintained in the future. A downgrade in the rating of us and/or Sprint could adversely affect the businesses, cash flows, financial condition and operating results of T-Mobile and, following the Transactions, the combined company.
We have incurred, and will incur, direct and indirect costs as a result of the Transactions.
We have incurred, and will incur, substantial expenses in connection with and as a result of completing the Transactions, the Divestiture Transaction and the compliance with the Government Commitments, and over a period of time following the
completion of the Transactions, the combined company also expects to incur substantial expenses in connection with integrating and coordinating our and Sprint’s businesses, operations, policies and procedures. A portion of the transaction costs related to the Transactions will be incurred regardless of whether the Transactions are completed. While we have assumed that a certain level of transaction 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 will exceed the costs historically borne by us. These costs could adversely affect our financial condition and results of operations prior to the Transactions and the financial condition and results of operations of the combined company following the Transactions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.Unregistered Sales of Equity Securities
The following transactions were executed in connection with the SoftBank Monetization as disclosed in SoftBank’s Schedule 13D/A filed on June 15, 2020.
Trust Securities Offering
On June 26, 2020, the 2020 Cash Mandatory Exchangeable Trust, a Delaware statutory trust (“Trust”) unaffiliated with us, closed a private Mandatory Exchangeable Offering of its 2020 Cash Mandatory Exchangeable Trust Securities (“Trust Securities”) for an aggregate offering price of $2,000,000,000, including the full exercise by the initial purchasers of their option to purchase an additional $139,535,000 aggregate offering price of the Trust Securities. At the closing of the Mandatory Exchangeable Offering, we sold 19,417,400 shares of our common stock to the Trust in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). We transferred to SBGC the cash proceeds received from such sale of shares of our common stock to the Trust and we did not retain any proceeds. In addition, in connection with the sale of the shares of our common stock to the Trust, we received a contingent value right note representing the right to receive on June 1, 2023 a number of shares of common stock based on the daily volume-weighted average price of shares of common stock during an observation period and we sold, assigned and transferred such note to SBGC. The Trust is required to use a portion of the net proceeds from the Mandatory Exchangeable Offering to purchase U.S. Treasury securities to fund quarterly distributions on the Trust Securities, and the holders of the Trust Securities will be entitled to a final mandatory exchange cash amount on June 1, 2023 that will depend on the daily volume-weighted average price of shares of our common stock during an observation period before the final exchange date. We are not affiliated with the Trust, will not retain any proceeds from the offering of the Trust Securities, and will have no ongoing interest, economic or otherwise, in the Trust Securities.
Director Purchase
Pursuant to the Master Framework Agreement, we entered into a Share Purchase Agreement, dated as of June 22, 2020, together with Marcelo Claure and CM LLC pursuant to which we sold 5,000,000 shares of our common stock to CM LLC, an entity controlled by Mr. Claure (in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act) at a price of $103.00 per share. Mr. Claure’s purchase was funded with the proceeds of a loan from SoftBank. Pursuant to our policy on securities trading, such shares may not be pledged, directly or indirectly, as collateral for a loan. The shares of our common stock we sold to CM LLC were purchased from SBGC pursuant to the Share Repurchase Agreement. We transferred to SBGC the cash proceeds received from CM LLC and we did not retain any proceeds.
Share Repurchases
Share repurchase activity during the three months ended June 30, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Total Number of Shares Purchased (1) | | Average Price Paid per Share (2) | | Total number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
4/1/20 - 4/30/20 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
5/1/20 - 5/31/20 | — | | | — | | | — | | | — | |
6/1/20 - 6/30/20 | 178,564,426 | | | 99.80 | | | — | | | — | |
Total | $ | 178,564,426 | | | $ | 99.80 | | | $ | — | | | $ | — | |
(1) In connection with the SoftBank Monetization, SBGC sold or committed to sell shares of our common stock through indirect transactions including (i) the registered Public Equity Offering of 154,147,026 shares of our common stock we resold (including shares purchased pursuant to the underwriters’ full exercise of their option to purchase additional shares), (ii) the private Mandatory Exchangeable Offering of Trust Securities by the Trust, to which we resold 19,417,400 shares of our common stock (including shares delivered as a result of the initial purchasers’ full exercise of their option to purchase additional trust securities) and (iii) following the receipt of necessary regulatory approvals, a resale by us of 5,000,000 shares of our common stock to an entity controlled by Marcelo Claure, one of our directors (the “Director Purchase”). Pursuant to the Share Repurchase Agreement, for every share of common stock we resold in the Public Equity Offering, the Mandatory Exchangeable Offering and the Director Purchase, we agreed to repurchase one share of common stock from SBGC for consideration equivalent to that we received in such sales. Consequently, the Public Equity Offering, the Mandatory Exchangeable Offering and the Director Purchase did not involve gain or loss to us and did not affect the number of outstanding shares of common stock or our capitalization. Further, we are not affiliated with the Trust, will not retain any proceeds from the offering of the Trust Securities, and will have no ongoing interest, economic or otherwise, in the Trust Securities.
Amounts in the table above include 5,000,000 shares repurchased with respect to the Director Purchase, which settled in July 2020 following receipt of regulatory approvals.
(2) The consideration we paid to SBGC in respect of the shares purchased was equal to the consideration we received for the shares we sold. Accordingly, we made no net cash outlay in connection with the sale and purchase transactions. The volume-weighted average price of the cash consideration was approximately $99.80 per share. In addition to this cash amount, we assigned to SBGC a Contingent Value Right Note issued by the Trust, representing the right to receive on June 1, 2023 a number of shares of our common stock based on the daily volume-weighted average price of shares of our common stock during an observation period.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | | | | | |
Exhibit No. | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herein |
| | | | | | | | | | |
2.1 | | | | 8-K | | 6/17/2020 | | 2.1 | | |
3.1 | | | | 8-K | | 4/1/2020 | | 3.1 | | |
3.2 | | | | 8-K | | 4/1/2020 | | 3.2 | | |
4.1 | | | | 8-K | | 4/13/2020 | | 4.1 | | |
4.2 | | | | 8-K | | 4/13/2020 | | 4.2 | | |
4.3 | | | | 8-K | | 4/13/2020 | | 4.3 | | |
4.4 | | | | 8-K | | 4/13/2020 | | 4.4 | | |
4.5 | | | | 8-K | | 4/13/2020 | | 4.5 | | |
4.6 | | | | 8-K | | 4/13/2020 | | 4.6 | | |
4.7 | | | | | | | | | | X |
4.8 | | | | 8-K | | 6/26/2020 | | 4.2 | | |
4.9 | | | | 8-K | | 6/26/2020 | | 4.3 | | |
4.10 | | | | 8-K | | 6/26/2020 | | 4.4 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
4.11 | | | | 8-K | | 6/26/2020 | | 4.5 | | |
4.12 | | | | | | | | | | X |
4.13 | | | | | | | | | | X |
4.14 | | | | 10-Q (SEC File No. 001-04721) | | 11/2/1998 | | 4(b) | | |
4.15 | | | | 8-K (SEC File No. 001-04721) | | 2/3/1999 | | 4(b) | | |
4.16 | | | | 8-K (SEC File No. 001-04721) | | 10/29/2001 | | 99 | | |
4.17 | | | | 8-K (SEC File No. 001-04721) | | 9/11/2013 | | 4.5 | | |
4.18 | | | | 8-K (SEC File No. 001-04721) | | 5/18/2018 | | 4.1 | | |
4.19 | | Fifth Supplemental Indenture, dated as of April 1, 2020, by and among Sprint Capital Corporation, Sprint Communications, Inc., Sprint Corporation, T-Mobile US, Inc., T-Mobile USA, Inc. and The Bank of New York Mellon Trust Company, N.A. (as successor to Bank One, N.A.), as trustee. | | | | | | | | X |
4.20 | | | | 8-K (SEC File No. 001-04721) | | 11/9/2011 | | 4.1 | | |
4.21 | | | | 8-K (SEC File No. 001-04721) | | 11/9/2011 | | 4.2 | | |
4.22 | | | | 8-K (SEC File No. 001-04721) | | 8/14/2012 | | 4.1 | | |
4.23 | | | | 8-K (SEC File No. 001-04721) | | 11/14/2012 | | 4.1 | | |
4.24 | | | | 8-K (SEC File No. 001-04721) | | 11/20/2012 | | 4.1 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
4.25 | | | | 8-K (SEC File No. 001-04721) | | 9/11/2013 | | 4.4 | | |
4.26 | | | | 8-K (SEC File No. 001-04721) | | 5/14/2018 | | 4.2 | | |
4.27 | | Sixteenth Supplemental Indenture, dated as of April 1, 2020, by and among Sprint Communications, Inc., T-Mobile US, Inc., T-Mobile USA, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. | | | | | | | | X |
4.28 | | | | 8-K (SEC File No. 001-04721) | | 9/11/2013 | | 4.1 | | |
4.29 | | | | 8-K (SEC File No. 001-04721) | | 9/11/2013 | | 4.2 | | |
4.30 | | | | 8-K (SEC File No. 001-04721) | | 9/11/2013 | | 4.3 | | |
4.31 | | | | 8-K (SEC File No. 001-04721) | | 12/12/2013 | | 4.1 | | |
4.32 | | | | 8-K (SEC File No. 001-04721) | | 2/24/2015 | | 4.1 | | |
4.33 | | | | 8-K (SEC File No. 001-04721) | | 2/22/2018 | | 4.1 | | |
4.34 | | | | 8-K (SEC File No. 001-04721) | | 5/14/2018 | | 4.1 | | |
| | | | | | | | | | |
4.35 | | | | 8-K (SEC File No. 001-04721) | | 2/3/2020 | | 4.2 | | |
4.36 | | Eighth Supplemental Indenture, dated as of April 1, 2020, by and among Sprint Corporation, Sprint Communications, Inc., T-Mobile US, Inc., T-Mobile USA, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. | | | | | | | | X |
4.37 | | | | 8-K (SEC File No. 001-04721) | | 3/12/2018 | | 4.1 | | |
4.38 | | | | 8-K (SEC File No. 001-04721) | | 6/6/2018 | | 4.1 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
4.39 | | | | 8-K (SEC File No. 001-04721) | | 1/31/2019 | | 4.1 | | |
4.40 | | | | 8-K (SEC File No. 001-04721) | | 11/2/2016 | | 4.1 | | |
4.41 | | | | 8-K (SEC File No. 001-04721) | | 11/2/2016 | | 4.2 | | |
4.42 | | | | 8-K (SEC File No. 001-04721) | | 3/21/2018 | | 10.2 | | |
4.43 | | | | 8-K (SEC File No. 001-04721) | | 3/21/2018 | | 10.1 | | |
4.44 | | | | 8-K | | 4/13/2020 | | 4.7 | | |
4.45 | | | | 8-K | | 6/26/2020 | | 4.2 | | |
4.46 | | | | 13D/A | | 6/24/2020 | | 49 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
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 |
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).
| | | | | | | | |
| | | | | | | | | | | |
| | SIGNATURES | | Incorporated by Reference | | |
Exhibit No. | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herein |
10.1* | | | | | | | | | | X |
10.2* | | | | | | | | | | X |
10.3* | | | | | | | | | | X |
10.4* | | | | | | | | | | X |
10.5 | |
| | | | | | | | X |
31.1 | | | | | | | | | | X |
31.2 | | | | | | | | | | X |
32.1** | | | | | | | | | | |
32.2** | | | | | | | | | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | X |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | X |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | X |
|
| | |
* | | Indicates a management contract or compensatory plan or arrangement. |
** | | Furnished herein. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | T-MOBILE US, INC. | |
| | | |
August 6, 2020 | | T-MOBILE US, INC./s/ Peter Osvaldik | |
| | Peter Osvaldik | |
July 26, 2019 | | /s/ J. Braxton Carter | |
| | J. Braxton Carter | |
| | Executive Vice President and Chief Financial Officer | |
| | (Principal Financial Officer and Authorized Signatory) | |