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”) of T-Mobile US, Inc. (“T-Mobile,” “we,” “our,” “us” or the “Company”) 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 that 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, 2021 and Part II, Item 1A of this Form 10-Q, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:
•adverse impact caused by the COVID-19 pandemic (the “Pandemic”), including supply chain shortages;
•competition, industry consolidation and changes in the market for wireless services;
•disruption, data loss or other security breaches, such as the criminal cyberattack we became aware of in August 2021;
•our inability to take advantage of technological developments on a timely basis;
•our inability to retain or motivate key personnel, hire qualified personnel or maintain our corporate culture;
•system failures and business disruptions, allowing for unauthorized use of or interference with our network and other systems;
•the scarcity and cost of additional wireless spectrum, and regulations relating to spectrum use;
•the impacts of the actions we have taken and conditions we have agreed to in connection with the regulatory proceedings and approvals of the Transactions (as defined below), including the acquisition by DISH Network Corporation (“DISH”) of 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 Shenandoah Personal Communications Company LLC and Swiftel Communications, Inc.), including customer accounts, inventory, contracts, intellectual property and certain other specified assets, and the assumption of certain related liabilities (collectively, the “Prepaid Transaction”), the complaint and proposed final judgment agreed to by us, Deutsche Telekom AG (“DT”), Sprint Corporation, now known as Sprint LLC (“Sprint”), SoftBank Group Corp. (“SoftBank”) and 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 Federal Communications Commission (“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”), and the challenges in satisfying the Government Commitments in the required time frames and the significant cumulative costs incurred in tracking and monitoring compliance;
•adverse economic, political or market conditions in the U.S. and international markets, including changes resulting from increases in inflation, impacts of current geopolitical instability caused by the war in Ukraine, and those caused by the Pandemic;
•our inability to manage the ongoing commercial and transition services arrangements entered into in connection with the Prepaid Transaction, and known or unknown liabilities arising in connection therewith;
•the effects of any future acquisition, investment, or merger involving us;
•any disruption or failure of our third parties (including key suppliers) to provide products or services for the operation of our business;
•our substantial level of indebtedness and our inability to service our debt obligations in accordance with their terms or to comply with the restrictive covenants contained therein;
•changes in the credit market conditions, credit rating downgrades or an inability to access debt markets;
•restrictive covenants including the agreements governing our indebtedness and other financings;
•the risk of future material weaknesses we may identify while we continue to work to integrate and align policies, principles and practices of the two companies following the Merger (as defined below), or any other failure by us to maintain effective internal controls, and the resulting significant costs and reputational damage;
•any changes in regulations or in the regulatory framework under which we operate;
•laws and regulations relating to the handling of privacy and data protection;
•unfavorable outcomes of existing or future legal proceedings, including these proceedings and inquiries relating to the criminal cyberattack we became aware of in August 2021;
•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 offering of regulated financial services products and exposure to a wide variety of state and federal regulations;
•new or amended tax laws or regulations or administrative interpretations and judicial decisions affecting the scope or application of tax laws or regulations;
•our exclusive forum provision as provided in our Certificate of Incorporation;
•interests of our significant stockholders that may differ from the interests of other stockholders;
•future sales of our common stock by DT and SoftBank and our inability to attract additional equity financing outside the United States due to foreign ownership limitations by the FCC;
•failure to realize the expected benefits and synergies of the merger (the “Merger”) with 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”) in the expected time frames or in the amounts anticipated;
•any delay and costs of, or difficulties in, integrating our business and Sprint’s business and operations, and unexpected additional operating costs, customer loss and business disruptions, including challenges in maintaining relationships with employees, customers, suppliers or vendors; and
•unanticipated difficulties, disruption, or significant delays in our long-term strategy to migrate Sprint’s legacy customers onto T-Mobile’s existing billing platforms.
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.
Investors and others should note that we announce material information to our investors using our investor relations website (https://investor.t-mobile.com), newsroom website (https://t-mobile.com/news), press releases, SEC filings and public conference calls and webcasts. We intend to also use certain social media accounts as means of disclosing information about us and our services and for complying with our disclosure obligations under Regulation FD (the @TMobileIR Twitter account (https://twitter.com/TMobileIR), the @MikeSievert Twitter account (https://twitter.com/MikeSievert), which Mr. Sievert also uses as a means for personal communications and observations, and the @TMobileCFO Twitter Account (https://twitter.com/tmobilecfo) and our Chief Financial Officer’s LinkedIn account (https://www.linkedin.com/in/peter-osvaldik-3887394), both of which Mr. Osvaldik also uses as a means for personal communication 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 condensed consolidated financial statements; and
•Information that allows assessment of the likelihood that past performance is indicative of future performance.
Our MD&A is provided as a supplement to, and should be read together with, our unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022, 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, 2021. 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.
Sprint Merger and Integration Activities
Merger-Related Costs
Merger-related costs associated with the Merger and acquisitions of affiliates generally include:
•Integration costs to achieve efficiencies in network, retail, information technology and back office operations, migrate customers to the T-Mobile network and billing systems and the impact of legal matters assumed as part of the Merger;
•Restructuring costs, including severance, store rationalization and network decommissioning; and
•Transaction costs, including legal and professional services related to the completion of the transactions.
Restructuring costs are disclosed in Note 12 – Restructuring Costs of the Notes to the Condensed Consolidated Financial Statements. Merger-related costs have been excluded from our calculations of Adjusted EBITDA and Core Adjusted EBITDA, which are non-GAAP financial measures, as we do not consider these costs to be reflective of our ongoing operating performance. See “Adjusted EBITDA and Core Adjusted EBITDA” in the “Performance Measures” section of this MD&A. Net cash payments for Merger-related costs, including payments related to our restructuring plan, are included in Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows.
Merger-related costs are presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | Three Months Ended March 31, | | Change | | |
| | | | | | | | 2022 | | 2021 | | | | $ | | % | | | | |
Merger-related costs | | | | | | | | | | | | | | | | | | | | | |
Cost of services, exclusive of depreciation and amortization | | | | | | | | | $ | 607 | | | $ | 136 | | | | | $ | 471 | | | 346 | % | | | | |
Cost of equipment sales, exclusive of depreciation and amortization | | | | | | | | | 751 | | | 17 | | | | | 734 | | | NM | | | | |
Selling, general and administrative | | | | | | | | | 55 | | | 145 | | | | | (90) | | | (62) | % | | | | |
Total Merger-related costs | | | | | | | | | $ | 1,413 | | | $ | 298 | | | | | $ | 1,115 | | | 374 | % | | | | |
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Net cash payments for Merger-related costs | | | | | | | | | $ | 893 | | | $ | 277 | | | | | $ | 616 | | | 222 | % | | | | |
NM - Not Meaningful
We expect to incur a total of $12.0 billion of Merger-related costs, excluding capital expenditures, of which $7.9 billion has been incurred since the beginning of 2018, including $700 million of costs incurred by Sprint prior to the Merger. We expect to incur the remaining $4.1 billion to complete our integration and restructuring activities over the next two years with substantially all costs incurred by the end of 2023.
Total Merger related costs for the twelve months ended December 31, 2022 are expected to be between $4.5 billion to $5.0 billion, including $1.4 billion incurred during the three months ended March 31, 2022. We are evaluating additional restructuring initiatives which are dependent on consultations and negotiation with certain counterparties and the expected impact on our business operations, which could affect the amount or timing of the restructuring costs and related payments. We expect our principal sources of funding to be sufficient to meet our liquidity requirements and anticipated payments associated with the restructuring initiatives.
Restructuring
Upon the close of the Merger, we began implementing restructuring initiatives to realize cost efficiencies from the Merger. The major activities associated with the restructuring initiatives to date include:
•Contract termination costs associated with rationalization of retail stores, distribution channels, duplicative network and backhaul services and other agreements;
•Severance costs associated with the reduction of redundant processes and functions; and
•The decommissioning of certain small cell sites and distributed antenna systems to achieve synergies in network costs.
For more information regarding our restructuring activities, see Note 12 – Restructuring Costs of the Notes to the Condensed Consolidated Financial Statements.
Anticipated Impacts
Synergies
As a result of our ongoing restructuring activities, we expect to realize synergies by eliminating redundancies within our combined network as well as other business processes and operations. For full-year 2022, we expect synergies from Selling, general and administrative expense reductions of $2.3 billion to $2.4 billion and Cost of service expense reductions of $1.6 billion to $1.7 billion.
Other Potential Impacts
The operation of the legacy Sprint CDMA and LTE networks is partially supported by legacy Sprint’s Wireline network acquired through the Merger. We expect that the legacy Sprint CDMA and LTE networks will be decommissioned during 2022. In accordance with ASC 360-10, we assess long-lived assets for impairment when events or circumstances indicate that long-lived assets might be impaired. We expect that the decommissioning of the legacy Sprint CDMA and LTE networks will trigger impairments of certain Wireline long-lived assets as these assets will no longer support our wireless network and the associated customers and cash flows. The potential non-cash impairment charges are not expected to have a material impact on our condensed consolidated financial statements.
Cyberattack
As we previously reported, we were subject to a criminal cyberattack involving unauthorized access to T-Mobile’s systems. We promptly located and closed the unauthorized access to our systems. Our forensic investigation was completed in October 2021, although our overall investigation into the incident is ongoing. There are no material updates with respect to the August 2021 cyberattack and subsequent inquiries, investigations, litigations and remedial measures from our Annual Report on Form 10-K for the year ended December 31, 2021, except as disclosed in Note 11 – Commitment and Contingencies. We have incurred certain cyberattack-related expenses that were not material and expect to continue to incur additional expenses in future periods, including costs to remediate the attack, provide additional customer support and enhance customer protection, only some of which may be covered and reimbursable by insurance. We also intend to commit substantial additional resources towards cybersecurity initiatives over the next several years.
COVID-19 Pandemic
The 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. In addition, the Pandemic has resulted in economic uncertainty, which could affect our customers’ purchasing decisions and ability to make timely payments. Current and future Pandemic-related restrictions on, or disruptions of, transportation networks and supply chain shortages could impact our ability to acquire handsets or other end user devices in amounts sufficient to meet customer demand and to obtain the equipment required to meet our current and future network build-out plans. We will continue to monitor the Pandemic and its impacts and may adjust our actions as needed to continue to provide our products and services to our communities and employees.
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.
Results of Operations
Set forth below is a summary of our consolidated financial results: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | | | Change | | |
(in millions) | | | | | | | | | 2022 | | 2021 | | | | $ | | % | | | | |
Revenues | | | | | | | | | | | | | | | | | | | | | |
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Postpaid revenues | | | | | | | | | $ | 11,201 | | | $ | 10,303 | | | | | $ | 898 | | | 9 | % | | | | |
Prepaid revenues | | | | | | | | | 2,455 | | | 2,351 | | | | | 104 | | | 4 | % | | | | |
Wholesale and other service revenues | | | | | | | | | 1,472 | | | 1,538 | | | | | (66) | | | (4) | % | | | | |
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Total service revenues | | | | | | | | | 15,128 | | | 14,192 | | | | | 936 | | | 7 | % | | | | |
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Equipment revenues | | | | | | | | | 4,694 | | | 5,346 | | | | | (652) | | | (12) | % | | | | |
Other revenues | | | | | | | | | 298 | | | 221 | | | | | 77 | | | 35 | % | | | | |
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Total revenues | | | | | | | | | 20,120 | | | 19,759 | | | | | 361 | | | 2 | % | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | |
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Cost of services, exclusive of depreciation and amortization shown separately below | | | | | | | | | 3,727 | | | 3,384 | | | | | 343 | | | 10 | % | | | | |
Cost of equipment sales, exclusive of depreciation and amortization shown separately below | | | | | | | | | 5,946 | | | 5,142 | | | | | 804 | | | 16 | % | | | | |
Selling, general and administrative | | | | | | | | | 5,056 | | | 4,805 | | | | | 251 | | | 5 | % | | | | |
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Depreciation and amortization | | | | | | | | | 3,585 | | | 4,289 | | | | | (704) | | | (16) | % | | | | |
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Total operating expenses | | | | | | | | | 18,314 | | | 17,620 | | | | | 694 | | | 4 | % | | | | |
Operating income | | | | | | | | | 1,806 | | | 2,139 | | | | | (333) | | | (16) | % | | | | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | |
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Interest expense, net | | | | | | | | | (864) | | | (835) | | | | | (29) | | | 3 | % | | | | |
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Other expense, net | | | | | | | | | (11) | | | (125) | | | | | 114 | | | (91) | % | | | | |
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Total other expense, net | | | | | | | | | (875) | | | (960) | | | | | 85 | | | (9) | % | | | | |
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Income before income taxes | | | | | | | | | 931 | | | 1,179 | | | | | (248) | | | (21) | % | | | | |
Income tax expense | | | | | | | | | (218) | | | (246) | | | | | 28 | | | (11) | % | | | | |
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Net income | | | | | | | | | $ | 713 | | | $ | 933 | | | | | $ | (220) | | | (24) | % | | | | |
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Statement of Cash Flows Data | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | | | | | | | $ | 3,845 | | | $ | 3,661 | | | | | $ | 184 | | | 5 | % | | | | |
Net cash used in investing activities | | | | | | | | | (5,092) | | | (11,239) | | | | | 6,147 | | | (55) | % | | | | |
Net cash (used in) provided by financing activities | | | | | | | | | (2,136) | | | 3,874 | | | | | (6,010) | | | (155) | % | | | | |
Non-GAAP Financial Measures | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | | | | | | | | 6,950 | | | 6,905 | | | | | 45 | | | 1 | % | | | | |
Core Adjusted EBITDA | | | | | | | | | 6,463 | | | 5,864 | | | | | 599 | | | 10 | % | | | | |
Free Cash Flow | | | | | | | | | 1,649 | | | 1,304 | | | | 345 | | 26 | % | | | | |
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The following discussion and analysis is for the three months ended March 31, 2022, compared to the same period in 2021 unless otherwise stated.
Total revenues increased $361 million, or 2%. The components of these changes are discussed below.
Postpaid revenues increased $898 million, or 9%, primarily from:
•Higher average postpaid accounts; and
Prepaid revenues increased $104 million, or 4%, primarily from:
•Higher average prepaid customers.
Wholesale and other service revenues were essentially flat.
Equipment revenues decreased $652 million, or 12%, primarily from:
•A decrease of $554 million in lease revenues and a decrease of $139 million in customer purchases of leased devices primarily due to a lower number of customer devices under lease as a result of the continued strategic shift from device financing from leasing to EIP; partially offset by
•An increase of $67 million in device sales revenue, excluding purchased leased devices, primarily from:
•An increase in the number of devices sold, including higher upgrade volume; partially offset by
•Lower average revenue per device sold primarily due to higher promotions, which included promotions for Sprint customers to facilitate their migration to the T-Mobile network, partially offset by an increase in the high-end phone mix.
Other revenues were essentially flat.
Operating expenses increased $694 million, or 4%. The components of this change are discussed below.
Cost of services, exclusive of depreciation and amortization, increased $343 million, or 10%, primarily from:
•An increase of $471 million in Merger-related costs related to network decommissioning and integration costs; and
•Higher lease expenses related to a new tower master lease agreement; partially offset by
•Higher realized Merger synergies.
Cost of equipment sales, exclusive of depreciation and amortization, increased $804 million, or 16%, primarily from:
•An increase of $987 million in device cost of equipment sales, excluding purchased leased devices, primarily from:
•An increase in the number of devices sold, including higher upgrade volume, primarily to facilitate the migration of Sprint customers to the T-Mobile network; and
•Higher average costs per device sold due to an increase in the high-end device mix; partially offset by
•A decrease of $284 million in customer purchases of leased devices primarily due to a lower number of customer devices under lease as a result of the continued strategic shift from device financing from leasing to EIP.
•Merger-related costs, primarily to facilitate the migration of Sprint customers to the T-Mobile network, were $751 million for the three months ended March 31, 2022, compared to $17 million for the three months ended March 31, 2021.
Selling, general and administrative expenses increased $251 million, or 5%, primarily from:
•Higher bad debt expense primarily due to estimated credit losses normalizing from muted Pandemic levels, as well as higher EIP receivables driven by higher equipment sales and a mix shift in device financing; partially offset by
•Lower Merger-related costs and higher realized Merger synergies.
•Selling, general and administrative expenses for the three months ended March 31, 2022 included $55 million of Merger-related costs primarily related to integration, restructuring and legal-related expenses, offset by legal settlement gains, compared to $145 million of Merger-related costs for the three months ended March 31, 2021.
Depreciation and amortization decreased $704 million, or 16%, primarily from:
•Lower depreciation expense on leased devices resulting from a lower number of total customer devices under lease; and
•Certain 4G-related network assets becoming fully depreciated; partially offset by
•Higher depreciation expense, excluding leased devices, from the continued build-out of our nationwide 5G network.
Operating income, the components of which are discussed above, decreased $333 million, or 16%.
Interest expense, net was essentially flat.
Other expense, net decreased $114 million, or 91%, primarily from lower losses on the extinguishment of debt.
Income before income taxes, the components of which are discussed above, was $931 million and $1.2 billion for the three months ended March 31, 2022 and 2021, respectively.
Income tax expense decreased $28 million, or 11%, primarily from:
•Lower Income before income taxes; partially offset by
•A higher effective tax rate, primarily from:
•A decrease in excess tax benefits related to the vesting of restricted stock awards; and
•Reduced benefits from tax credits.
Our effective tax rate was 23.3% and 20.9% for the three months ended March 31, 2022 and 2021, respectively.
Net income, the components of which are discussed above, decreased $220 million, or 24%, and included the following:
•Merger-related costs, net of tax, of $1.1 billion for the three months ended March 31, 2022, compared to $220 million for the three months ended March 31, 2021.
Guarantor Financial Information
In connection with our Merger with Sprint, we assumed certain registered debt to third parties issued by Sprint, Sprint Communications LLC, formerly known as Sprint Communications, Inc. (“Sprint Communications”) and Sprint Capital Corporation (collectively, the “Sprint Issuers”).
Pursuant to the applicable indentures and supplemental indentures, the Senior Notes to affiliates and third parties issued by T-Mobile USA, Inc. and the Sprint Issuers (collectively, the “Issuers”) are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of Parent’s 100% owned subsidiaries (“Guarantor Subsidiaries”).
Pursuant to the applicable indentures and supplemental indentures, the Senior Secured Notes to third parties issued by T-Mobile USA, Inc. are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by Parent and the Guarantor
Subsidiaries, except for the guarantees of Sprint, Sprint Communications and Sprint Capital Corporation, which are provided on a senior unsecured basis.
The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures, supplemental indentures and credit agreements governing the long-term debt contain covenants that, among other things, limit the ability of the Issuers or borrowers 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 agreements, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuers or borrowers to loan funds or make payments to Parent. However, the Issuers or borrowers and Guarantor Subsidiaries are allowed to make certain permitted payments to Parent under the terms of the indentures, supplemental indentures and credit agreements.
Basis of Presentation
The following tables include summarized financial information of the obligor groups of debt issued by T-Mobile USA, Inc., Sprint, Sprint Communications and Sprint Capital Corporation. The summarized financial information of each obligor group is presented on a combined basis with balances and transactions within the obligor group eliminated. Investments in and the equity in earnings of non-guarantor subsidiaries, which would otherwise be consolidated in accordance with GAAP, are excluded from the below summarized financial information pursuant to SEC Regulation S-X Rule 13-01.
The summarized balance sheet information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below: | | | | | | | | | | | | | | | |
(in millions) | March 31, 2022 | | December 31, 2021 | | | | |
Current assets | $ | 16,068 | | | $ | 19,522 | | | | | |
Noncurrent assets | 182,515 | | | 174,980 | | | | | |
Current liabilities | 20,188 | | | 22,195 | | | | | |
Noncurrent liabilities | 122,025 | | | 115,126 | | | | | |
Due to non-guarantors | 8,554 | | | 8,208 | | | | | |
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Due to related parties | 2,815 | | | 3,842 | | | | | |
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The summarized results of operations information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below: | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | | | | | | | Year Ended December 31, 2021 |
(in millions) | | | | |
Total revenues | $ | 19,477 | | | | | | | | | $ | 78,538 | |
Operating income | 891 | | | | | | | | | 3,835 | |
Net (loss) income | (48) | | | | | | | | | 402 | |
Revenue from non-guarantors | 578 | | | | | | | | | 1,769 | |
Operating expenses to non-guarantors | 653 | | | | | | | | | 2,655 | |
Other expense to non-guarantors | (41) | | | | | | | | | (148) | |
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The summarized balance sheet information for the consolidated obligor group of debt issued by Sprint and Sprint Communications is presented in the table below: | | | | | | | | | | | | | |
(in millions) | March 31, 2022 | | December 31, 2021 | | |
Current assets | $ | 7,992 | | | $ | 11,969 | | | |
Noncurrent assets | 12,038 | | | 10,347 | | | |
Current liabilities | 13,237 | | | 15,136 | | | |
Noncurrent liabilities | 69,674 | | | 70,262 | | | |
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Due from non-guarantors | 88 | | | 1,787 | | | |
Due to related parties | 2,815 | | | 3,842 | | | |
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The summarized results of operations information for the consolidated obligor group of debt issued by Sprint and Sprint Communications is presented in the table below: | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | Year Ended December 31, 2021 |
(in millions) |
Total revenues | $ | 1 | | | $ | 7 | |
Operating loss | (529) | | | (751) | |
Net loss | (851) | | | (2,161) | |
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Other income, net, from non-guarantors | 337 | | | 1,706 | |
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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) | March 31, 2022 | | December 31, 2021 |
Current assets | $ | 7,992 | | | $ | 11,969 | |
Noncurrent assets | 21,043 | | | 19,375 | |
Current liabilities | 13,307 | | | 15,208 | |
Noncurrent liabilities | 75,125 | | | 75,753 | |
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Due from non-guarantors | 9,093 | | | 10,814 | |
Due to related parties | 2,815 | | | 3,842 | |
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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 March 31, 2022 | | Year Ended December 31, 2021 |
(in millions) | |
Total revenues | $ | 1 | | | $ | 7 | |
Operating loss | (529) | | | (751) | |
Net loss | (832) | | | (2,590) | |
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Other income, net, from non-guarantors | 430 | | | 2,076 | |
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Affiliates Whose Securities Collateralize the Senior Secured Notes
The collateral arrangements relating to securities of affiliates that collateralize the Senior Secured Notes are the same as those described in the section entitled “Affiliates Whose Securities Collateralize the Notes and the Guarantees” in the Company’s Registration Statement on Form S-4/A filed with the SEC on April 22, 2022, which section is incorporated herein by reference.
The assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the condensed consolidated financial statements of the Company.
Performance Measures
In managing our business and assessing financial performance, we supplement the information provided by our condensed consolidated 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 Postpaid Accounts
A postpaid account is generally defined as a billing account number that generates revenue. Postpaid accounts generally consist of customers that are qualified for postpaid service utilizing phones, High Speed Internet, wearables, DIGITS or other connected devices, which include tablets and SyncUp products, where they generally pay after receiving service.
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| As of March 31, | | Change | | | | | | |
(in thousands) | 2022 | | 2021 | | # | | % | | | | | | | | | | | | | | |
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Total postpaid customer accounts (1)(2) | 27,507 | | | 26,014 | | | 1,493 | | | 6 | % | | | | | | | | | | | | | | |
(1) Customers impacted by the decommissioning of the legacy Sprint CDMA network, who did not migrate to the T-Mobile network, have been excluded from our postpaid account base resulting in the removal of 57,000 postpaid accounts in the first quarter of 2022.
(2) In the first quarter of 2021, we acquired 4,000 postpaid accounts through our acquisition of an affiliate.
Total postpaid customer accounts increased 1,493,000, or 6%, primarily due to the continued focus on growing new relationships with customers driven by higher switching activity and growth in new and under-penetrated segments, including High Speed Internet.
Postpaid Net Account Additions
The following table sets forth the number of postpaid net account additions:
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| | | | | Three Months Ended March 31, | | Change | | |
(in thousands) | | | | | | | | | 2022 | | 2021 | | | | # | | % | | | | |
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Postpaid net account additions | | | | | | | | | 348 | | | 257 | | | | | 91 | | | 35 | % | | | | |
Postpaid net account additions increased 91,000, or 35%, primarily due to the continued focus on growing new relationships with customers driven by higher switching activity and growth in new and under-penetrated segments, including High Speed Internet.
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. Customers are qualified either for postpaid service utilizing phones, High Speed Internet, wearables, DIGITS or other connected devices, which include tablets and SyncUp products, where they generally pay after receiving service, or prepaid service, where they generally pay in advance of receiving service.
The following table sets forth the number of ending customers: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, | | Change | | | | | | |
(in thousands) | 2022 | | 2021 | | # | | % | | | | | | | | | | | | | | |
Customers, end of period | | | | | | | | | | | | | | | | | | | | | |
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Postpaid phone customers (1) (2) | 70,656 | | | 67,402 | | | 3,254 | | | 5 | % | | | | | | | | | | | | | | |
Postpaid other customers (1) (2) | 17,767 | | | 15,170 | | | 2,597 | | | 17 | % | | | | | | | | | | | | | | |
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Total postpaid customers | 88,423 | | | 82,572 | | | 5,851 | | | 7 | % | | | | | | | | | | | | | | |
Prepaid customers | 21,118 | | | 20,865 | | | 253 | | | 1 | % | | | | | | | | | | | | | | |
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Total customers | 109,541 | | | 103,437 | | | 6,104 | | | 6 | % | | | | | | | | | | | | | | |
Acquired customers, net of base adjustments (1) (2) | (558) | | | 12 | | | (570) | | | NM | | | | | | | | | | | | | | |
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(1) Customers impacted by the decommissioning of the legacy Sprint CDMA network, who did not migrate to the T-Mobile network, have been excluded from our postpaid customer base resulting in the removal of 212,000 postpaid phone customers and 349,000 postpaid other customers in the first quarter of 2022. In connection with our acquisition of companies, we included a base adjustment in the first quarter of 2022 to increase postpaid phone customers by 17,000 and reduce postpaid other customers by 14,000.
(2) In the first quarter of 2021, we acquired 11,000 postpaid phone customers and 1,000 postpaid other customers through our acquisition of an affiliate.
NM - Not Meaningful
Total customers increased 6,104,000, or 6%, primarily from:
•Higher postpaid phone customers, primarily due to the continued focus on growing new relationships with customers, driven by higher switching activity and growth in new and under-penetrated segments;
•Higher postpaid other customers, primarily due to growth in other connected devices, including growth in High Speed Internet and wearable products; and
•Higher prepaid customers, primarily due to the continued success of our prepaid business due to promotional activity and rate plan offers; partially offset by lower prepaid industry demand associated with continued industry shift to postpaid plans.
Total customers included High Speed Internet customers of 984,000 and 193,000 as of March 31, 2022 and 2021, respectively.
Net Customer Additions
The following table sets forth the number of net customer additions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change | | |
(in thousands) | | | | | | | 2022 | | 2021 | | | | # | | % | | | | |
Net customer additions | | | | | | | | | | | | | | | | | | | | | |
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Postpaid phone customers | | | | | | | | | 589 | | | 773 | | | | | (184) | | | (24) | % | | | | |
Postpaid other customers | | | | | | | | | 729 | | | 437 | | | | | 292 | | | 67 | % | | | | |
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Total postpaid customers | | | | | | | | | 1,318 | | | 1,210 | | | | | 108 | | | 9 | % | | | | |
Prepaid customers | | | | | | | | | 62 | | | 151 | | | | | (89) | | | (59) | % | | | | |
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Total customers | | | | | | | | | 1,380 | | | 1,361 | | | | | 19 | | | 1 | % | | | | |
Acquired customers, net of base adjustments | | | | | | | | | (558) | | | 12 | | | | | (570) | | | NM | | | | |
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NM - Not Meaningful
Total net customer additions increased 19,000, or 1%, primarily from:
•Higher postpaid other net customer additions, primarily due to an increase in High Speed Internet customers, connected devices and wearables; partially offset by
•Lower postpaid phone net customer additions driven by a focus on deepening Sprint customer relationships in the prior year in order to decrease churn, as Sprint customers historically had fewer lines per account, partially offset by higher industry switching activity and lower churn; and
•Lower prepaid net customer additions associated with the continued industry shift to postpaid plans, partially offset by lower churn.
•High Speed Internet net customer additions included in postpaid other net customer additions were 329,000 and 93,000 for the three months ended March 31, 2022 and 2021, respectively. High Speed Internet net customer additions included in prepaid net customer additions were 9,000 for the three months ended March 31, 2022. There were no prepaid High Speed Internet customer additions for the three months ended March 31, 2021.
Churn
Churn represents the number of customers whose service was disconnected as a percentage of the average number of customers during the specified period further divided by the number of months in the period. The number of customers whose service was disconnected is presented net of customers that subsequently have their service restored within a certain period of time. We believe that churn provides management, investors and analysts with useful information to evaluate customer retention and loyalty.
The following table sets forth the churn: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change | | |
| | | 2022 | | 2021 | | | | |
Postpaid phone churn | | | | | | | 0.93 | % | | 0.98 | % | | | | -5 bps | | |
Prepaid churn | | | | | | | 2.67 | % | | 2.78 | % | | | | -11 bps | | |
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Postpaid phone churn decreased 5 basis points, primarily from:
•Reduced Sprint churn as we progress through the integration process; partially offset by
•More normalized switching activity relative to the muted Pandemic-driven conditions a year ago.
Prepaid churn decreased 11 basis points, primarily from:
•Promotional activity; partially offset by
•More normalized switching activity relative to the muted Pandemic-driven conditions a year ago.
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 High Speed Internet, wearables, DIGITS or other connected devices, which include tablets and SyncUp products.
The following table sets forth our operating measure ARPA: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in dollars) | | | | | Three Months Ended March 31, | | Change | | |
| | | | | | | | 2022 | | 2021 | | | $ | | % | | | |
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Postpaid ARPA | | | | | | | | | $ | 136.53 | | | $ | 132.91 | | | | | $ | 3.62 | | | 3 | % | | | | |
Postpaid ARPA increased $3.62, or 3%, primarily from:
•Higher premium services, including Magenta Max; and
•An increase in customers per account, including from the success of High Speed Internet; partially offset by
•Increased promotional activity.
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. Postpaid phone ARPU excludes postpaid other customers and related revenues, which include High Speed Internet, wearables, DIGITS and other connected devices such as tablets and SyncUp products.
The following table sets forth our operating measure ARPU:
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(in dollars) | | | | | Three Months Ended March 31, | | Change | | |
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Postpaid phone ARPU | | | | | | | | | $ | 48.41 | | | $ | 47.30 | | | | | $ | 1.11 | | | 2 | % | | | | |
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Prepaid ARPU | | | | | | | | | $ | 39.19 | | | $ | 37.81 | | | | | $ | 1.38 | | | 4 | % | | | | |
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Postpaid Phone ARPU
Postpaid phone ARPU increased $1.11, or 2%, and was primarily impacted by:
•Higher premium services, including Magenta Max; partially offset by
•Increased promotional activity.
Prepaid ARPU
Prepaid ARPU increased $1.38, or 4%, primarily due to higher premium services.
Adjusted EBITDA and Core Adjusted EBITDA
Adjusted EBITDA represents earnings before Interest expense, net of Interest income, Income tax expense, Depreciation and amortization, stock-based compensation and certain income and expenses not reflective of our ongoing operating performance. Core Adjusted EBITDA represents Adjusted EBITDA less device lease revenues. Adjusted EBITDA margin represents Adjusted EBITDA divided by Service revenues. Core Adjusted EBITDA margin represents Core Adjusted EBITDA divided by Service revenues.
Adjusted EBITDA, Adjusted EBITDA margin, Core Adjusted EBITDA and Core Adjusted EBITDA margin are non-GAAP financial measures 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. We use Adjusted EBITDA and Core Adjusted EBITDA as benchmarks to evaluate our operating performance in comparison to our competitors. Management believes analysts and investors use Adjusted EBITDA and Core Adjusted EBITDA as supplemental measures to evaluate overall operating performance and facilitate comparisons with other wireless communications services companies because they are 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, stock-based compensation and Merger-related costs including network decommissioning costs, as they are not indicative of our ongoing operating performance, as well as certain nonrecurring income and expenses. Management believes analysts and investors use Core Adjusted EBITDA because it normalizes for the transition in the Company’s device financing strategy, by excluding the impact of device lease revenues from Adjusted EBITDA, to align with the exclusion of the related depreciation expense on leased devices from Adjusted EBITDA. Adjusted EBITDA, Adjusted EBITDA margin, Core Adjusted EBITDA and Core Adjusted EBITDA margin have limitations as analytical tools and should not be considered in isolation or as substitutes for income from operations, net income or any other measure of financial performance reported in accordance with GAAP.
The following table illustrates the calculation of Adjusted EBITDA and Core Adjusted EBITDA and reconciles Adjusted EBITDA and Core Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure:
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| | | | | Three Months Ended March 31, | | Change | | |
(in millions) | | | | | | | 2022 | | 2021 | | | $ | | % | | | |
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Net income | | | | | | | | | $ | 713 | | | $ | 933 | | | | | $ | (220) | | | (24) | % | | | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | | |
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Interest expense, net | | | | | | | | | 864 | | | 835 | | | | | 29 | | | 3 | % | | | | |
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Other expense, net | | | | | | | | | 11 | | | 125 | | | | | (114) | | | (91) | % | | | | |
Income tax expense | | | | | | | | | 218 | | | 246 | | | | | (28) | | | (11) | % | | | | |
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Operating income | | | | | | | | | 1,806 | | | 2,139 | | | | | (333) | | | (16) | % | | | | |
Depreciation and amortization | | | | | | | | | 3,585 | | | 4,289 | | | | | (704) | | | (16) | % | | | | |
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Stock-based compensation (1) | | | | | | | | | 136 | | | 130 | | | | | 6 | | | 5 | % | | | | |
Merger-related costs | | | | | | | | | 1,413 | | | 298 | | | | | 1,115 | | | 374 | % | | | | |
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Other, net (2) | | | | | | | | | 10 | | | 49 | | | | | (39) | | | (80) | % | | | | |
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Adjusted EBITDA | | | | | | | | | 6,950 | | | 6,905 | | | | | 45 | | | 1 | % | | | | |
Lease revenues | | | | | | | | | (487) | | | (1,041) | | | | | 554 | | | (53) | % | | | | |
Core Adjusted EBITDA | | | | | | | | | $ | 6,463 | | | $ | 5,864 | | | | | $ | 599 | | | 10 | % | | | | |
Net income margin (Net income divided by Service revenues) | | | | | | | | | 5 | % | | 7 | % | | | | | | -200 bps | | | | |
Adjusted EBITDA margin (Adjusted EBITDA divided by Service revenues) | | | | | | | | | 46 | % | | 49 | % | | | | | | -300 bps | | | | |
Core Adjusted EBITDA margin (Core Adjusted EBITDA divided by Service revenues) | | | | | | | | | 43 | % | | 41 | % | | | | | | 200 bps | | | | |
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(1)Stock-based compensation includes payroll tax impacts and may not agree with 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 with 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 from Adjusted EBITDA and Core Adjusted EBITDA.
Core Adjusted EBITDA increased $599 million, or 10%, for the three months ended March 31, 2022. The components comprising Core Adjusted EBITDA are discussed further above.
The increase was primarily due to:
•Higher Total service revenues; and
•Lower Cost of services, excluding Merger-related costs; partially offset by
•Higher Selling, general and administrative expenses, excluding Merger-related costs; and
•Lower Equipment revenues, excluding Lease revenues.
Adjusted EBITDA increased $45 million, or 1%, for the three months ended March 31, 2022. The change was primarily due to the increase in Core Adjusted EBITDA, discussed above, partially offset by a decrease in Lease revenues of $554 million for the three months ended March 31, 2022.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations, proceeds from issuance of debt and common stock, financing leases, the sale of certain receivables and the Revolving Credit Facility (as defined below). 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change | | |
(in millions) | | | | | | | | | 2022 | | 2021 | | | | $ | | % | | | | |
Net cash provided by operating activities | | | | | | | | | $ | 3,845 | | | $ | 3,661 | | | | | $ | 184 | | | 5 | % | | | | |
Net cash used in investing activities | | | | | | | | | (5,092) | | | (11,239) | | | | | 6,147 | | | (55) | % | | | | |
Net cash (used in) provided by financing activities | | | | | | | | | (2,136) | | | 3,874 | | | | | (6,010) | | | (155) | % | | | | |
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Operating Activities
Net cash provided by operating activities increased $184 million, or 5%, primarily from:
•A $1.0 billion decrease in net cash outflows from changes in working capital, primarily due to lower use of cash from Accounts payable and accrued liabilities, Short- and long-term operating lease liabilities and Operating lease right-of-use assets, partially offset by higher use of cash from Accounts receivable and Inventories; partially offset by
•An $820 million decrease in Net income, adjusted for non-cash income and expense.
•Net cash provided by operating activities includes $893 million and $277 million in net payments for Merger-related costs for the three months ended March 31, 2022 and 2021, respectively.
Investing Activities
Net cash used in investing activities decreased $6.1 billion, or 55%. The use of cash was primarily from:
•$3.4 billion in Purchases of property and equipment, including capitalized interest, from network integration related to the Merger and the accelerated build-out of our nationwide 5G network;
•$2.8 billion in Purchases of spectrum licenses and other intangible assets, including deposits, primarily due to $2.8 billion paid for spectrum licenses won at the conclusion of Auction 110 in February 2022; partially offset by
•$1.2 billion in Proceeds related to beneficial interests in securitization transactions.
Financing Activities
Net cash provided by financing activities decreased $6.0 billion, or 155%. The use of cash was primarily from:
•$1.6 billion in Repayments of long-term debt;
•$302 million in Repayments of financing lease obligations; and
•$172 million in Tax withholdings on share-based awards.
Cash and Cash Equivalents
As of March 31, 2022, our Cash and cash equivalents were $3.2 billion compared to $6.6 billion at December 31, 2021.
Free Cash Flow
Free Cash Flow represents Net cash provided by operating activities less cash payments for Purchases of property and equipment, including Proceeds related to beneficial interests in securitization transactions, less Cash payments for debt prepayment or debt extinguishment. Free Cash Flow is a non-GAAP financial measure utilized by management, investors and analysts of our financial information to evaluate cash available to pay debt and provide further investment in the business.
The table below provides a reconciliation of Free Cash Flow to Net cash provided by operating activities, which we consider to
be the most directly comparable GAAP financial measure.
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| | | | | Three Months Ended March 31, | | Change | | |
(in millions) | | | | | | | 2022 | | 2021 | | | | $ | | % | | | |
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Net cash provided by operating activities | | | | | | | | | $ | 3,845 | | | $ | 3,661 | | | | | $ | 184 | | | 5 | % | | | | |
Cash purchases of property and equipment | | | | | | | | | (3,381) | | | (3,183) | | | | | (198) | | | 6 | % | | | | |
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Proceeds related to beneficial interests in securitization transactions | | | | | | | | | 1,185 | | | 891 | | | | | 294 | | | 33 | % | | | | |
Cash payments for debt prepayment or debt extinguishment costs | | | | | | | | | — | | | (65) | | | | | 65 | | | (100) | % | | | | |
Free Cash Flow | | | | | | | | | $ | 1,649 | | | $ | 1,304 | | | | | $ | 345 | | | 26 | % | | | | |
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Free Cash Flow increased $345 million, or 26%. The increase was primarily impacted by the following:
•Higher Proceeds related to beneficial interests in securitization transactions; and
•Higher Net cash provided by operating activities, as described above; partially offset by
•Higher Cash purchases of property and equipment, including capitalized interest.
•Free Cash Flow includes $893 million and $277 million in net payments for Merger-related costs for the three months ended March 31, 2022 and 2021, respectively.
Borrowing Capacity
We maintain a revolving credit facility (the “Revolving Credit Facility”) with an aggregate commitment amount of $5.5 billion. As of March 31, 2022, there was no outstanding balance under the Revolving Credit Facility.
Debt Financing
As of March 31, 2022, our total debt and financing lease liabilities were $75.0 billion, excluding our tower obligations, of which $68.4 billion was classified as long-term debt and $1.4 billion was classified as long-term financing lease liabilities.
During the three months ended March 31, 2022, we repaid short- and long-term debt with an aggregate principal amount of $1.6 billion. There were no new issuances or borrowings during the three months ended March 31, 2022.
Subsequent to March 31, 2022, on April 15, 2022, we repaid at maturity $1.25 billion of our 5.375% Senior Notes to affiliates due 2022.
For more information regarding our debt financing transactions, see Note 6 – Debt of the Notes to the Condensed Consolidated Financial Statements.
Spectrum Auction
In January 2022, the FCC announced that we were the winning bidder of 199 licenses in Auction 110 (mid-band spectrum) for an aggregate purchase price of $2.9 billion. At the inception of Auction 110 in September 2021, we deposited $100 million. We paid the FCC the remaining $2.8 billion for the licenses won in the auction in February 2022.
Off-Balance Sheet Arrangements
We have arrangements, as amended from time to time, to sell certain EIP accounts receivable and service accounts receivable on a revolving basis as a source of liquidity. As of March 31, 2022, we derecognized net receivables of $2.5 billion upon sale through these arrangements.
For more information regarding these off-balance sheet arrangements, see Note 3 – Sales of Certain Receivables 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 debt, 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, redemption of debt, tower obligations and the execution of our integration plan.
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 to comply with the Government Commitments, and we are also expected to incur substantial restructuring expenses in connection with integrating and coordinating T-Mobile’s and Sprint’s businesses, operations, policies and procedures. See “Restructuring” of this MD&A. While we have assumed that a certain level of Merger-related expenses will be incurred, factors beyond our control, including required consultation and negotiation with certain counterparties, could affect the total amount or the timing of these expenses. 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 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, supplemental indentures and credit agreements governing our long-term debt to affiliates and third parties, excluding financing leases, contain covenants that, among other things, limit the ability of the Issuers or borrowers and the Guarantor Subsidiaries to incur more debt, pay dividends and make distributions on our common stock, make certain investments, repurchase stock, create liens or other encumbrances, enter into transactions with affiliates, enter into transactions that restrict dividends or distributions from subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit agreements, indentures and supplemental indentures relating to the long-term debt to affiliates and third parties restrict the ability of the Issuers or borrowers to loan funds or make payments to Parent. However, the Issuers or borrowers are allowed to make certain permitted payments to Parent under the terms of each of the credit agreements, indentures and supplemental indentures relating to the long-term debt to affiliates and third parties. We were in compliance with all restrictive debt covenants as of March 31, 2022.
Financing Lease Facilities
We have entered into uncommitted financing lease facilities with certain third parties that provide us with the ability to enter into financing leases for network equipment and services. As of March 31, 2022, we have committed to $6.6 billion of financing leases under these financing lease facilities, of which $299 million was executed during the three months ended March 31, 2022. We expect to enter into up to an additional $901 million in financing lease commitments during the year ending December 31, 2022.
Capital Expenditures
Our liquidity requirements have been driven primarily by capital expenditures for spectrum licenses, the construction, expansion and upgrading of our network infrastructure and the integration of the networks, spectrum, technology, personnel, customer base and business practices of T-Mobile and Sprint. Property and equipment capital expenditures primarily relate to the integration of our network and spectrum licenses, including acquired Sprint PCS and 2.5 GHz spectrum licenses and existing 600 MHz spectrum licenses as we build out our nationwide 5G network. We expect the majority of our remaining capital expenditures related to these efforts to occur in 2022, after which we expect a reduction in capital expenditure requirements.
Stockholder Returns
We have never declared or paid any cash dividends on our common stock, and we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future.
We may use cash to repurchase shares of our common stock, subject to, among other things, approval by the Board of Directors and our sufficient access to sources of liquidity, including potentially debt capital markets.
Related Party Transactions
We have related party transactions associated with DT, SoftBank or their affiliates in the ordinary course of business, including intercompany servicing and licensing.
As of April 29, 2022, DT and SoftBank held, directly or indirectly, approximately 48.3% and 3.2%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 48.5% of the outstanding T-Mobile common stock held by other stockholders. As a result of the Proxy, Lock-Up and ROFR Agreement, dated April 1, 2020, by and between DT and SoftBank and the Proxy, Lock-Up and ROFR Agreement, dated June 22, 2020, by and among DT, Claure Mobile LLC, and Marcelo Claure, DT has voting control, as of April 29, 2022, over approximately 51.8% of the outstanding T-Mobile common stock.
Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act of 1934, as amended (“Exchange Act”). Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.
As of the date of this report, we are not aware of any activity, transaction or dealing by us or any of our affiliates for the three months ended March 31, 2022, 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 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: Irancell Telecommunications Services Company, Telecommunication Kish Company, Mobile Telecommunication Company of Iran, and Telecommunication Infrastructure Company of Iran. In addition, during the three months ended March 31, 2022, DT, through certain of its non-U.S. subsidiaries, provided basic telecommunications services to four 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, Europäisch-Iranische Handelsbank, CPG Engineering & Commercial Services GmbH and Golgohar Trade and Technology GmbH. These services have been terminated or are in the process of being terminated. For the three months ended March 31, 2022, 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 that operate a fixed-line network in their respective European home countries (in particular Germany), provides telecommunications services in the ordinary course of business to the Embassy of Iran in those European countries. Gross revenues and net profits recorded from these activities for the three months ended March 31, 2022 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 March 31, 2022, 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 March 31, 2022, SoftBank estimates that gross revenues and net profit generated by such services were both under $0.1 million. 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 March 31, 2022, were both under $0.1 million. We understand that the SoftBank subsidiary intends to continue such activities.
Critical Accounting Policies and Estimates
Preparation of our condensed consolidated financial statements in accordance with 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. 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, 2021, and which are hereby incorporated by reference herein.
Accounting Pronouncements Not Yet Adopted
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the market risk as previously disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.
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 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
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.