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 timing and effects of any future acquisition, disposition, 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 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 and increased costs from 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;
•our 2022 Stock Repurchase Program (as defined in Note 9 – Repurchases of Common Stock of the Notes to the Condensed Consolidated Financial Statements) may not be fully consummated, and our share repurchase program may not enhance long-term stockholder value; •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 and nine months ended September 30, 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, Network Integration and Decommissioning 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 15 – 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
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | | | $ | | % | | | | |
| Merger-related costs | | | | | | | | | | | | | | | | | | | | | |
| Cost of services, exclusive of depreciation and amortization | $ | 812 | | | $ | 279 | | | $ | 533 | | | 191 | % | | $ | 2,380 | | | $ | 688 | | | | | $ | 1,692 | | | 246 | % | | | | |
| Cost of equipment sales, exclusive of depreciation and amortization | 258 | | | 236 | | | 22 | | | 9 | % | | 1,468 | | | 340 | | | | | 1,128 | | | 332 | % | | | | |
| Selling, general and administrative | 226 | | | 440 | | | (214) | | | (49) | % | | 529 | | | 836 | | | | | (307) | | | (37) | % | | | | |
| Total Merger-related costs | $ | 1,296 | | | $ | 955 | | | $ | 341 | | | 36 | % | | $ | 4,377 | | | $ | 1,864 | | | | | $ | 2,513 | | | 135 | % | | | | |
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| Net cash payments for Merger-related costs | $ | 942 | | | $ | 617 | | | $ | 325 | | | 53 | % | | $ | 2,742 | | | $ | 1,084 | | | | | $ | 1,658 | | | 153 | % | | | | |
We expect to incur a total of $12.0 billion of Merger-related costs, excluding capital expenditures, of which $10.9 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 $1.1 billion to complete our integration and restructuring activities over the next year with substantially all costs incurred by the end of 2023.
Total Merger-related costs for the year ending December 31, 2022, are expected to be between $4.8 billion to $5.0 billion, including $1.3 billion and $4.4 billion incurred during the three and nine months ended September 30, 2022, respectively. 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.
Network Integration
To achieve Merger synergies in network costs, we are performing rationalization activities to identify duplicative networks, backhaul services and other agreements in addition to decommissioning certain small cell sites and distributed antenna systems. These initiatives also include the acceleration or termination of certain of our operating and financing leases for cell sites, switch sites and network equipment. As of September 30, 2022, we have decommissioned substantially all targeted Sprint macro sites.
To allow for the realization of these synergies associated with network integration, we retired certain legacy networks, including the legacy Sprint CDMA network in the second quarter and the LTE network in the third quarter of 2022. Customers impacted by the decommissioning of these networks have been excluded from our customer base and postpaid account base. See the “Performance Measures” section of this MD&A for more details.
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 Merger synergies in network costs.
For more information regarding our restructuring activities, see Note 15 – Restructuring Costs of the Notes to the Condensed Consolidated Financial Statements.
Other Impacts
Anticipated Merger Synergies
As a result of our ongoing restructuring and integration activities, we expect to realize Merger synergies by eliminating redundancies within our combined network as well as other business processes and operations. For full-year 2022, we expect Merger synergies from Selling, general and administrative expense reductions of $2.4 billion, Cost of service expense reductions of $2.0 billion to $2.1 billion and avoided network expenses of $1.3 billion.
Wireline Impacts
Previously, the operation of the legacy Sprint CDMA and LTE wireless networks was supported by the legacy Sprint Wireline network. During the second quarter of 2022, we retired the legacy Sprint CDMA network and began the orderly shut-down of the LTE network. We determined that the retirement of the legacy Sprint CDMA and LTE wireless networks triggered the need to assess the Wireline long-lived assets for impairment, as these assets no longer support our wireless network and the associated customers and cash flows in a significant manner. The results of this assessment indicated that certain Wireline long-lived assets were impaired, and as a result, we recorded non-cash impairment expense of $477 million related to Wireline Property and equipment, Operating lease right-of-use assets and Other intangible assets for the nine months ended September 30, 2022, all of which relates to the impairment recognized during the three months ended June 30, 2022. We continue to provide Wireline services to existing Wireline customers.
For more information regarding this non-cash impairment, see Note 10 – Wireline of the Notes to the Condensed Consolidated Financial Statements.
On September 6, 2022, we entered into a Purchase Agreement to sell the Wireline Business for a total purchase price of $1. In addition, at the consummation of the Wireline Transaction, we will enter into an agreement for IP transit services for $700 million. Subject to the satisfaction or waiver of certain conditions and the other terms and conditions of the Purchase Agreement, the Wireline Transaction is expected to close in the second half of 2023. As a result of the Purchase Agreement and related anticipated Wireline Transaction, we concluded that the Wireline Business met the held for sale criteria upon entering into the Purchase Agreement. As such, the assets and liabilities of the Wireline Business disposal group are classified as held for sale and presented within Other current assets and Other current liabilities on our Condensed Consolidated Balance Sheets as of September 30, 2022. In connection with the expected sale of the Wireline Business and classification of related assets and liabilities as held for sale, we recognized a pre-tax loss of $1.1 billion during the three and nine months ended September 30, 2022, which is included within Loss on disposal group held for sale on our Condensed Consolidated Statements of Comprehensive Income. The fair value of the Wireline Business disposal group, less costs to sell, will be reassessed during each reporting period it remains classified as held for sale, and any remeasurement to the lower of carrying amount or fair value less costs to sell will be reported as an adjustment to the Loss on disposal group held for sale.
For more information regarding the Purchase Agreement to sell the Wireline Business, see Note 10 – Wireline of the Notes to the 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. 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 14 – Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements.
In connection with the proposed class action settlement and the separate settlements reached with a number of consumers, we recorded a total pre-tax charge of approximately $400 million in the second quarter of 2022. We expect to continue to incur additional expenses in future periods, including costs to remediate the attack, resolve inquiries by various government authorities, provide additional customer support and enhance customer protection, only some of which may be covered and reimbursable by insurance. In addition to the committed aggregate incremental spend of $150 million for data security and related technology in 2022 and 2023 under the proposed settlement agreement, we intend to commit substantial additional resources towards cybersecurity initiatives over the next several years.
During the three and nine months ended September 30, 2022, we recognized $50 million in reimbursements from insurance carriers for costs incurred related to the August 2021 cyberattack. We are pursuing additional reimbursements from insurance carriers for costs incurred related to the August 2021 cyberattack.
COVID-19 Pandemic and Other Macroeconomic Trends
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.
Other macroeconomic trends may result in adverse impacts on our business, and we continue to monitor these potential impacts, including higher inflation, rising interest rates, potential economic recession and changes in the Federal Reserve’s monetary policy and geopolitical risks, including the war in Ukraine. Such scenarios and uncertainties may affect, among others, expected credit loss activity as well as certain fair value estimates.
Inflation Reduction Act
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law. The IRA includes several changes to existing tax law, including a minimum tax on adjusted financial statement income of applicable corporations and an excise tax on certain corporate stock buybacks. The tax provisions included in the IRA are generally effective beginning January 1, 2023, and no significant impact to the 2022 consolidated financial statements is anticipated. Management continues to review the IRA tax provisions to assess impacts to our future consolidated financial statements.
Results of Operations
Set forth below is a summary of our consolidated financial results: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | | | Change | | |
| (in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | | | $ | | % | | | | |
| Revenues | | | | | | | | | | | | | | | | | | | | | |
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| Postpaid revenues | $ | 11,548 | | | $ | 10,804 | | | $ | 744 | | | 7 | % | | $ | 34,194 | | | $ | 31,599 | | | | | $ | 2,595 | | | 8 | % | | | | |
| Prepaid revenues | 2,484 | | | 2,481 | | | 3 | | | — | % | | 7,408 | | | 7,259 | | | | | 149 | | | 2 | % | | | | |
| Wholesale and other service revenues | 1,329 | | | 1,437 | | | (108) | | | (8) | % | | 4,203 | | | 4,548 | | | | | (345) | | | (8) | % | | | | |
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| Total service revenues | 15,361 | | | 14,722 | | | 639 | | | 4 | % | | 45,805 | | | 43,406 | | | | | 2,399 | | | 6 | % | | | | |
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| Equipment revenues | 3,855 | | | 4,660 | | | (805) | | | (17) | % | | 12,679 | | | 15,221 | | | | | (2,542) | | | (17) | % | | | | |
| Other revenues | 261 | | | 242 | | | 19 | | | 8 | % | | 814 | | | 706 | | | | | 108 | | | 15 | % | | | | |
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| Total revenues | 19,477 | | | 19,624 | | | (147) | | | (1) | % | | 59,298 | | | 59,333 | | | | | (35) | | | — | % | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | |
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| Cost of services, exclusive of depreciation and amortization shown separately below | 3,712 | | | 3,538 | | | 174 | | | 5 | % | | 11,499 | | | 10,413 | | | | | 1,086 | | | 10 | % | | | | |
| Cost of equipment sales, exclusive of depreciation and amortization shown separately below | 4,982 | | | 5,145 | | | (163) | | | (3) | % | | 16,036 | | | 15,740 | | | | | 296 | | | 2 | % | | | | |
| Selling, general and administrative | 5,118 | | | 5,212 | | | (94) | | | (2) | % | | 16,030 | | | 14,840 | | | | | 1,190 | | | 8 | % | | | | |
| Impairment expense | — | | | — | | | — | | | NM | | 477 | | | — | | | | | 477 | | | NM | | | | |
| Loss on disposal group held for sale | 1,071 | | | — | | | 1,071 | | | NM | | 1,071 | | | — | | | | | 1,071 | | | NM | | | | |
| Depreciation and amortization | 3,313 | | | 4,145 | | | (832) | | | (20) | % | | 10,389 | | | 12,511 | | | | | (2,122) | | | (17) | % | | | | |
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| Total operating expenses | 18,196 | | | 18,040 | | | 156 | | | 1 | % | | 55,502 | | | 53,504 | | | | | 1,998 | | | 4 | % | | | | |
| Operating income | 1,281 | | | 1,584 | | | (303) | | | (19) | % | | 3,796 | | | 5,829 | | | | | (2,033) | | | (35) | % | | | | |
| Other expense, net | | | | | | | | | | | | | | | | | | | | | |
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| Interest expense, net | (827) | | | (836) | | | 9 | | | (1) | % | | (2,542) | | | (2,521) | | | | | (21) | | | 1 | % | | | | |
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| Other expense, net | (3) | | | (60) | | | 57 | | | (95) | % | | (35) | | | (186) | | | | | 151 | | | (81) | % | | | | |
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| Total other expense, net | (830) | | | (896) | | | 66 | | | (7) | % | | (2,577) | | | (2,707) | | | | | 130 | | | (5) | % | | | | |
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| Income before income taxes | 451 | | | 688 | | | (237) | | | (34) | % | | 1,219 | | | 3,122 | | | | | (1,903) | | | (61) | % | | | | |
| Income tax benefit (expense) | 57 | | | 3 | | | 54 | | | NM | | (106) | | | (520) | | | | | 414 | | | (80) | % | | | | |
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| Net income | $ | 508 | | | $ | 691 | | | $ | (183) | | | (26) | % | | $ | 1,113 | | | $ | 2,602 | | | | | $ | (1,489) | | | (57) | % | | | | |
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| Statement of Cash Flows Data | | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | $ | 4,391 | | | $ | 3,477 | | | $ | 914 | | | 26 | % | | $ | 12,445 | | | $ | 10,917 | | | | | $ | 1,528 | | | 14 | % | | | | |
| Net cash used in investing activities | (2,555) | | | (4,152) | | | 1,597 | | | (38) | % | | (10,206) | | | (17,474) | | | | | 7,268 | | | (42) | % | | | | |
| Net cash provided by (used in) financing activities | 1,927 | | | (3,060) | | | 4,987 | | | (163) | % | | (1,953) | | | 237 | | | | | (2,190) | | | NM | | | | |
| Non-GAAP Financial Measures | | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | 7,039 | | | 6,811 | | | 228 | | | 3 | % | | 20,993 | | | 20,622 | | | | | 371 | | | 2 | % | | | | |
| Core Adjusted EBITDA | 6,728 | | | 6,041 | | | 687 | | | 11 | % | | 19,809 | | | 17,897 | | | | | 1,912 | | | 11 | % | | | | |
| Free Cash Flow | 2,065 | | | 1,559 | | 506 | | 32 | % | | 5,472 | | | 4,534 | | | | 938 | | 21 | % | | | | |
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NM - Not Meaningful
The following discussion and analysis is for the three and nine months ended September 30, 2022, compared to the same period in 2021 unless otherwise stated.
Total revenues decreased slightly for the three months ended and were relatively flat for the nine months ended September 30, 2022. The components of these changes are discussed below.
Postpaid revenues increased $744 million, or 7%, for the three months ended and increased $2.6 billion, or 8%, for the nine months ended September 30, 2022, primarily from:
•Higher average postpaid accounts; and
Prepaid revenues were flat for the three months ended and increased $149 million, or 2%, for the nine months ended September 30, 2022.
The increase for the nine months ended September 30, 2022, was primarily from:
•Higher average prepaid customers; and
Wholesale and other service revenues decreased $108 million, or 8%, for the three months ended and decreased $345 million, or 8%, for the nine months ended September 30, 2022.
The decrease for the three months ended September 30, 2022, was primarily from:
•Lower MVNO and Wireline revenues.
The decrease for the nine months ended September 30, 2022, was primarily from:
•Lower advertising, Wireline and MVNO revenues; partially offset by
•Higher Lifeline revenues.
Equipment revenues decreased $805 million, or 17%, for the three months ended and decreased $2.5 billion, or 17%, for the nine months ended September 30, 2022.
The decrease for the three months ended September 30, 2022, was primarily from:
•A decrease of $458 million in lease revenues and a decrease of $158 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 in device financing from leasing to EIP; and
•A decrease of $102 million in device sales revenue, excluding purchased leased devices, primarily from:
•A decrease in the number of devices sold due to fewer prepaid and postpaid upgrades; and
•An increase in contra-revenue primarily driven by higher imputed interest rates on equipment installment plans, which is recognized in Other revenues over the device financing term; partially offset by
•Higher average revenue per device sold primarily due to an increase in the high-end phone mix.
The decrease for the nine months ended September 30, 2022, was primarily from:
•A decrease of $1.5 billion in lease revenues and a decrease of $493 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 in device financing from leasing to EIP; and
•A decrease of $310 million in device sales revenue, excluding purchased leased devices, primarily from:
•Lower average revenue per device sold, primarily driven by higher promotions, which included promotions for Sprint customers to facilitate their migration to the T-Mobile network; and
•An increase in contra-revenue primarily driven by higher imputed interest rates on equipment installment plans, which is recognized in Other revenues over the device financing term; partially offset by
•An increase in the number of devices sold, including higher upgrade volume for Sprint customers to facilitate their migration to the T-Mobile network, partially offset by lower prepaid upgrades.
Other revenues increased slightly for the three months ended and increased $108 million, or 15%, for the nine months ended September 30, 2022.
The increase for the nine months ended September 30, 2022, was primarily from:
•Higher interest income driven by higher imputed interest rates on equipment installment plans which is recognized over the device financing term.
Total operating expenses increased slightly for the three months ended and increased $2.0 billion, or 4%, for the nine months ended September 30, 2022. The components of this change are discussed below.
Cost of services, exclusive of depreciation and amortization, increased $174 million, or 5%, for the three months ended and increased $1.1 billion, or 10%, for the nine months ended September 30, 2022.
The increase for the three months ended September 30, 2022, was primarily from:
•An increase of $533 million in Merger-related costs related to network decommissioning and integration costs; and
•Higher site costs related to the continued build-out of our nationwide 5G network; partially offset by
•Higher realized Merger synergies.
The increase for the nine months ended September 30, 2022, was primarily from:
•An increase of $1.7 billion in Merger-related costs related to network decommissioning and integration costs; and
•Higher site costs related to the continued build-out of our nationwide 5G network; partially offset by
•Higher realized Merger synergies.
Cost of equipment sales, exclusive of depreciation and amortization, decreased $163 million, or 3%, for the three months ended and increased $296 million, or 2%, for the nine months ended September 30, 2022.
The decrease for the three months ended September 30, 2022, was primarily from:
•A decrease of $225 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 in device financing from leasing to EIP; and
•A decrease of $81 million in device cost of equipment sales, excluding purchased leased devices, primarily from:
•A decrease in the number of devices sold due to fewer prepaid and postpaid upgrades; partially offset by
•Higher average cost per device sold, driven by an increase in the high-end phone mix; partially offset by
•Higher device insurance claims and warranty fulfillment.
•Merger-related costs, primarily to facilitate the migration of Sprint customers to the T-Mobile network, were $258 million for the three months ended September 30, 2022, compared to $236 million for the three months ended September 30, 2021.
The increase for the nine months ended September 30, 2022, was primarily from:
•An increase of $871 million in device cost of equipment sales, excluding purchased leased devices, primarily from:
•Higher average costs per device sold due to an increase in the high-end device mix; and
•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, partially offset by lower prepaid upgrades; and
•Higher device insurance claims and warranty fulfillment; partially offset by
•A decrease of $807 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 in device financing from leasing to EIP.
•Merger-related costs, primarily to facilitate the migration of Sprint customers to the T-Mobile network, were $1.5 billion for the nine months ended September 30, 2022, compared to $340 million for the nine months ended September 30, 2021.
Selling, general and administrative expenses decreased $94 million, or 2%, for the three months ended and increased $1.2 billion, or 8%, for the nine months ended September 30, 2022.
The decrease for the three months ended September 30, 2022, was primarily from:
•Lower Merger-related costs and higher realized Merger synergies; and
•Gains from the sale of certain IP addresses held by the Wireline Business; partially offset by
•Higher bad debt expense driven by higher receivable balances, as well as normalization relative to muted Pandemic levels a year ago.
•Selling, general and administrative expenses for the three months ended September 30, 2022, included $226 million of Merger-related costs, primarily related to integration and restructuring, compared to $440 million of Merger-related costs for the three months ended September 30, 2021.
The increase for the nine months ended September 30, 2022, was primarily from:
•Higher bad debt expense driven by higher receivable balances, as well as normalization relative to muted Pandemic levels a year ago and estimated potential future macroeconomic impacts; and
•Higher legal-related expenses, net of recoveries, including $400 million recognized in June 2022 for the settlement of certain litigation associated with the August 2021 cyberattack; partially offset by
•Higher realized Merger synergies and lower Merger-related costs; and
•Gains from the sale of certain IP addresses held by the Wireline Business
•Selling, general and administrative expenses for the nine months ended September 30, 2022, included $529 million of Merger-related costs, primarily related to integration, restructuring and legal-related expenses, offset by legal settlement gains, compared to $836 million of Merger-related costs for the nine months ended September 30, 2021.
Impairment expense was $477 million for the nine months ended September 30, 2022, due to the non-cash impairment of certain Wireline Property and equipment, Operating lease right-of-use assets and Other intangible assets. See Note 10 - Wireline of the Notes to the Condensed Consolidated Financial Statements for additional information. There was no impairment expense for the three months ended September 30, 2022, or the three and nine months ended September 30, 2021.
Loss on disposal group held for sale was $1.1 billion for the three and nine months ended September 30, 2022, due to the agreement for the sale of the Wireline Business. See Note 10 - Wireline of the Notes to the Condensed Consolidated Financial Statements for additional information. There was no loss on disposal group held for sale for the three and nine months ended September 30, 2021.
Depreciation and amortization decreased $832 million, or 20%, for the three months ended and decreased $2.1 billion, or 17%, for the nine months ended September 30, 2022, 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, including assets impacted by the decommissioning of the legacy Sprint CDMA and LTE networks; 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 $303 million, or 19%, for the three months ended and decreased $2.0 billion, or 35%, for the nine months ended September 30, 2022.
Interest expense, net was essentially flat and was impacted by the following:
•Lower average debt outstanding and a lower average effective interest rate due to the retirement of higher interest rate debt and the issuance of a lower gross principal amount of lower interest rate debt; offset by
•Lower capitalized interest related to the deployment of our 600 MHz spectrum.
Other expense, net decreased $57 million, or 95%, for the three months ended and decreased $151 million, or 81%, for the nine months ended September 30, 2022. The decrease for the three and nine months ended September 30, 2022, was primarily from lower losses on the extinguishment of debt.
Income before income taxes, the components of which are discussed above, was $451 million and $688 million for the three months ended September 30, 2022 and 2021, respectively, and was $1.2 billion and $3.1 billion for the nine months ended September 30, 2022 and 2021, respectively.
Income tax benefit increased $54 million for the three months ended September 30, 2022 primarily from:
•Tax benefits associated with internal restructuring; and
•Lower Income before income taxes; partially offset by
•Tax benefits recognized in the third quarter of 2021 associated with legal entity reorganization related to historical Sprint entities, including a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions, that did not impact 2022.
Our effective tax rate was (12.4)% and (0.3)% for the three months ended September 30, 2022 and 2021, respectively.
Income tax expense decreased $414 million, or 80%, for the nine months ended September 30, 2022, primarily from:
•Lower Income before income taxes; and
•Tax benefits associated with internal restructuring; partially offset by
•Tax benefits recognized in the third quarter of 2021 associated with legal entity reorganization related to historical Sprint entities, including a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions, that did not impact 2022; and
•A decrease in excess tax benefits related to the vesting of restricted stock awards.
Our effective tax rate was 8.7% and 16.7% for the nine months ended September 30, 2022 and 2021, respectively.
Net income, the components of which are discussed above, was $508 million and $691 million for the three months ended September 30, 2022 and 2021, respectively, and was $1.1 billion and $2.6 billion for the nine months ended September 30, 2022 and 2021, respectively.
Net income for the three months ended September 30, 2022, included the following:
•Merger-related costs, net of tax, of $972 million for the three months ended September 30, 2022, compared to $707 million for the three months ended September 30, 2021.
•Loss on disposal group held for sale of $803 million, net of tax, for the three months ended September 30, 2022, compared to no loss on disposal group held for sale for the three months ended September 30, 2021.
Net income for the nine months ended September 30, 2022, included the following:
•Merger-related costs, net of tax, of $3.3 billion for the nine months ended September 30, 2022, compared to $1.4 billion for the nine months ended September 30, 2021.
•Loss on disposal group held for sale of $803 million, net of tax, for the nine months ended September 30, 2022, compared to no loss on disposal group held for sale for the nine months ended September 30, 2021.
•Impairment expense of $358 million, net of tax, for the nine months ended September 30, 2022, compared to no impairment expense for the nine months ended September 30, 2021.
•Legal-related expenses, net of recoveries, including from the impact of the settlement of certain litigation associated with the August 2021 cyberattack, of $286 million, net of tax, for the nine months ended September 30, 2022.
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) | September 30, 2022 | | December 31, 2021 | | | | |
| Current assets | $ | 20,131 | | | $ | 19,522 | | | | | |
| Noncurrent assets | 181,426 | | | 174,980 | | | | | |
| Current liabilities | 24,836 | | | 22,195 | | | | | |
| Noncurrent liabilities | 119,797 | | | 115,126 | | | | | |
| Due to non-guarantors | 8,171 | | | 8,208 | | | | | |
| | | | | | | |
| Due to related parties | 1,535 | | | 3,842 | | | | | |
| | | | | | | |
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: | | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, 2022 | | | | | | | | Year Ended
December 31, 2021 |
| (in millions) | | | | |
| Total revenues | $ | 57,423 | | | | | | | | | $ | 78,538 | |
| Operating income | 1,144 | | | | | | | | | 3,835 | |
| Net (loss) income | (1,178) | | | | | | | | | 402 | |
| Revenue from non-guarantors | 1,823 | | | | | | | | | 1,769 | |
| Operating expenses to non-guarantors | 1,981 | | | | | | | | | 2,655 | |
| Other expense to non-guarantors | (192) | | | | | | | | | (148) | |
| | | | | | | | | |
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) | September 30, 2022 | | December 31, 2021 | | |
| Current assets | $ | 12,020 | | | $ | 11,969 | | | |
| Noncurrent assets | 9,661 | | | 10,347 | | | |
| Current liabilities | 17,394 | | | 15,136 | | | |
| Noncurrent liabilities | 62,408 | | | 70,262 | | | |
| Due to non-guarantors | 923 | | | — | | | |
| Due from non-guarantors | — | | | 1,787 | | | |
| Due to related parties | 1,535 | | | 3,842 | | | |
| | | | | |
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: | | | | | | | | | | | |
| Nine Months Ended
September 30, 2022 | | Year Ended
December 31, 2021 |
| (in millions) |
| Total revenues | $ | 5 | | | $ | 7 | |
| Operating loss | (2,805) | | | (751) | |
| Net income (loss) | 3,382 | | | (2,161) | |
| | | |
| | | |
| Other income, net, from non-guarantors | 603 | | | 1,706 | |
| | | |
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) | September 30, 2022 | | December 31, 2021 |
| Current assets | $ | 12,020 | | | $ | 11,969 | |
| Noncurrent assets | 17,733 | | | 19,375 | |
| Current liabilities | 17,465 | | | 15,208 | |
| Noncurrent liabilities | 66,871 | | | 75,753 | |
| | | |
| Due from non-guarantors | 8,072 | | | 10,814 | |
| Due to related parties | 1,535 | | | 3,842 | |
| | | |
The summarized results of operations information for the consolidated obligor group of debt issued by Sprint Capital Corporation is presented in the table below: | | | | | | | | | | | |
| Nine Months Ended
September 30, 2022 | | Year Ended
December 31, 2021 |
| (in millions) | |
| Total revenues | $ | 5 | | | $ | 7 | |
| Operating loss | (2,805) | | | (751) | |
| Net income (loss) | 3,456 | | | (2,590) | |
| | | |
| | | |
| Other income, net, from non-guarantors | 900 | | | 2,076 | |
| | | |
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, | | Change | | | | | | |
| (in thousands) | 2022 | | 2021 | | # | | % | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total postpaid customer accounts (1) (2) | 28,212 | | | 26,901 | | | 1,311 | | | 5 | % | | | | | | | | | | | | | | |
(1) Customers impacted by the decommissioning of the legacy Sprint CDMA and LTE and T-Mobile UMTS networks have been excluded from our postpaid account base resulting in the removal of 57,000 postpaid accounts in the first quarter of 2022 and 69,000 postpaid accounts in the second quarter of 2022.
(2) In the first quarter of 2021, we acquired 4,000 postpaid accounts through our acquisition of an affiliate. In the third quarter of 2021, we acquired 270,000 postpaid accounts through our acquisition of the Wireless Assets of Shentel.
Total postpaid customer accounts increased 1,311,000, or 5%, primarily due to the Company’s differentiated growth strategy in new and under-penetrated markets, including continued growth in High Speed Internet.
Postpaid Net Account Additions
The following table sets forth the number of postpaid net account additions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| (in thousands) | 2022 | | 2021 | | # | | % | | 2022 | | 2021 | | | | # | | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Postpaid net account additions | 394 | | | 268 | | | 126 | | | 47 | % | | 1,122 | | | 873 | | | | | 249 | | | 29 | % | | | | |
Postpaid net account additions increased 126,000, or 47%, for the three months ended and increased 249,000, or 29%, for the nine months ended September 30, 2022, primarily due to the Company’s differentiated growth strategy in new and under-penetrated markets, including continued growth in 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 September 30, | | Change | | | | | | |
| (in thousands) | 2022 | | 2021 | | # | | % | | | | | | | | | | | | | | |
| Customers, end of period | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Postpaid phone customers (1) (2) | 71,907 | | | 69,418 | | | 2,489 | | | 4 | % | | | | | | | | | | | | | | |
Postpaid other customers (1) (2) | 18,507 | | | 16,495 | | | 2,012 | | | 12 | % | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total postpaid customers | 90,414 | | | 85,913 | | | 4,501 | | | 5 | % | | | | | | | | | | | | | | |
Prepaid customers (1) | 21,341 | | | 21,007 | | | 334 | | | 2 | % | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total customers | 111,755 | | | 106,920 | | | 4,835 | | | 5 | % | | | | | | | | | | | | | | |
Adjustments to customers (1) (2) | (1,878) | | | 818 | | | (2,696) | | | NM | | | | | | | | | | | | | | |
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(1) Customers impacted by the decommissioning of the legacy Sprint CDMA and LTE and T-Mobile UMTS networks have been excluded from our customer base resulting in the removal of 212,000 postpaid phone customers and 349,000 postpaid other customers in the first quarter of 2022 and 284,000 postpaid phone customers, 946,000 postpaid other customers and 28,000 prepaid customers in the second 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. Certain customers now serviced through reseller contracts were removed from our reported postpaid customer base resulting in the removal of 42,000 postpaid phone customers and 20,000 postpaid other customers in the second quarter of 2022.
(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. In the third quarter of 2021, we acquired 716,000 postpaid phone customers and 90,000 postpaid other customers through our acquisition of the Wireless Assets from Shentel.
NM - Not Meaningful
Total customers increased 4,835,000, or 5%, primarily from:
•Higher postpaid phone customers, primarily due to growth in new customer account relationships;
•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 2,122,000 and 422,000 as of September 30, 2022 and 2021, respectively.
Net Customer Additions
The following table sets forth the number of net customer additions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| (in thousands) | 2022 | | 2021 | # | | % | 2022 | | 2021 | | | | # | | % | | | | |
| Net customer additions | | | | | | | | | | | | | | | | | | | | | |
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| Postpaid phone customers | 854 | | | 673 | | | 181 | | | 27 | % | | 2,166 | | | 2,073 | | | | | 93 | | | 4 | % | | | | |
| Postpaid other customers | 773 | | | 586 | | | 187 | | | 32 | % | | 2,435 | | | 1,672 | | | | | 763 | | | 46 | % | | | | |
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| Total postpaid customers | 1,627 | | | 1,259 | | | 368 | | | 29 | % | | 4,601 | | | 3,745 | | | | | 856 | | | 23 | % | | | | |
| Prepaid customers | 105 | | | 66 | | | 39 | | | 59 | % | | 313 | | | 293 | | | | | 20 | | | 7 | % | | | | |
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| Total customers | 1,732 | | | 1,325 | | | 407 | | | 31 | % | | 4,914 | | | 4,038 | | | | | 876 | | | 22 | % | | | | |
| Adjustments to customers | — | | | 806 | | | (806) | | | (100) | % | | (1,878) | | | 818 | | | | | (2,696) | | | NM | | | | |
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NM - Not Meaningful
Total net customer additions increased 407,000, or 31%, for the three months ended and increased 876,000, or 22%, for the nine months ended September 30, 2022.
The increase for the three months ended September 30, 2022, was primarily from:
•Higher postpaid other net customer additions, primarily due to continued growth in High Speed Internet, partially offset by lower net additions from mobile internet devices and wearables;
•Higher postpaid phone net customer additions, primarily due to higher gross additions driven by growth in new customer account relationships and lower churn; and
•Higher prepaid net customer additions, primarily due to the introduction of our High Speed Internet offering.
•High Speed Internet net customer additions included in postpaid other net customer additions were 488,000 and 134,000 for the three months ended September 30, 2022 and 2021, respectively. High Speed Internet net customer additions included in prepaid net customer additions were 90,000 for the three months ended September 30, 2022. Our prepaid High Speed Internet launch was in the first quarter of 2022. Therefore, there were no prepaid High Speed Internet net customer additions for the three months ended September 30, 2021.
The increase for the nine months ended September 30, 2022, was primarily from:
•Higher postpaid other net customer additions, primarily due to an increase in High Speed Internet net customer additions and wearables, partially offset by lower net additions from mobile internet devices;
•Higher postpaid phone net customer additions, primarily due to lower churn and higher gross additions driven by growth in new account relationships; and
•Higher prepaid net customer additions, primarily due to the introduction of our High Speed Internet offering, partially offset by the continued industry shift to postpaid plans.
•High Speed Internet net customer additions included in postpaid other net customer additions were 1,314,000 and 322,000 for the nine months ended September 30, 2022 and 2021, respectively. High Speed Internet net customer additions included in prepaid net customer additions were 162,000 for the nine months ended September 30, 2022. Our prepaid High Speed Internet launch was in the first quarter of 2022. Therefore, there were no prepaid High Speed Internet net customer additions for the nine months ended September 30, 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
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| 2022 | | 2021 | 2022 | | 2021 | | | | |
| Postpaid phone churn | 0.88 | % | | 0.96 | % | | -8 bps | | 0.87 | % | | 0.93 | % | | | | -6 bps | | |
| Prepaid churn | 2.88 | % | | 2.90 | % | | -2 bps | | 2.71 | % | | 2.76 | % | | | | -5 bps | | |
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Postpaid phone churn decreased 8 basis points for the three months ended and decreased 6 basis points for the nine months ended September 30, 2022, primarily from:
•Reduced Sprint churn as we progress through the integration process; partially offset by
•More normalized switching activity and payment performance relative to the muted Pandemic-driven conditions a year ago.
Prepaid churn decreased 2 basis points for the three months ended and decreased 5 basis points for the nine months ended September 30, 2022, primarily from:
•Promotional activity; partially offset by
•More normalized switching activity and payment performance 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
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | | $ | | % | | | |
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| Postpaid ARPA | $ | 137.49 | | | $ | 134.54 | | | $ | 2.95 | | | 2 | % | | $ | 137.32 | | | $ | 133.68 | | | | | $ | 3.64 | | | 3 | % | | | | |
Postpaid ARPA increased $2.95, or 2%, for the three months ended and increased $3.64, or 3%, for the nine months ended September 30, 2022.
The increase for the three months ended September 30, 2022, was primarily from:
•Higher premium services, including Magenta Max;
•Continued adoption of High Speed Internet from existing accounts; and
•Higher non-recurring charges relative to muted Pandemic levels; partially offset by
•An increase in High Speed Internet only accounts; and
•An increase in promotional impacts for Sprint customers from the network transition.
The increase for the nine months ended September 30, 2022, was primarily from:
•Higher premium services, including Magenta Max;
•Continued adoption of High Speed Internet from existing accounts; and
•Higher non-recurring charges relative to muted Pandemic levels; partially offset by
•An increase in promotional impacts for Sprint customers from the network transition; and
•An increase in High Speed Internet only accounts.
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
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | | $ | | % | | | |
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| Postpaid phone ARPU | $ | 48.89 | | | $ | 48.06 | | | $ | 0.83 | | | 2 | % | | $ | 48.75 | | | $ | 47.66 | | | | | $ | 1.09 | | | 2 | % | | | | |
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| Prepaid ARPU | 38.86 | | | 39.49 | | | (0.63) | | | (2) | % | | 38.92 | | | 38.61 | | | | | 0.31 | | | 1 | % | | | | |
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Postpaid Phone ARPU
Postpaid phone ARPU increased $0.83, or 2%, for the three months ended and increased $1.09, or 2%, for the nine months ended September 30, 2022, primarily due to:
•Higher premium services, including Magenta Max; and
•Higher non-recurring charges relative to muted Pandemic levels; partially offset by
•An increase in promotional impacts for Sprint customers from the network transition; and
•Higher lines per account driven by deepening Sprint relationships.
Prepaid ARPU
Prepaid ARPU decreased $0.63, or 2%, for the three months ended and increased $0.31, or 1%, for the nine months ended September 30, 2022.
The decrease for the three months ended September 30, 2022, was primarily from:
•Increased promotional activity; partially offset by
•An increase in one-time fees.
The increase for the nine months ended September 30, 2022, was primarily from:
•Higher premium services; partially offset by
•Increased promotional activity.
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, Merger-related costs, including network decommissioning costs, impairment expense, losses on disposal groups held for sale and certain legal-related recoveries and expenses, 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
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| (in millions) | 2022 | | 2021 | $ | | % | 2022 | | 2021 | | | $ | | % | | | |
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| Net income | $ | 508 | | | $ | 691 | | | $ | (183) | | | (26) | % | | $ | 1,113 | | | $ | 2,602 | | | | | $ | (1,489) | | | (57) | % | | | | |
| Adjustments: | | | | | | | | | | | | | | | | | | | | | |
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| Interest expense, net | 827 | | | 836 | | | (9) | | | (1) | % | | 2,542 | | | 2,521 | | | | | 21 | | | 1 | % | | | | |
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| Other expense, net | 3 | | | 60 | | | (57) | | | (95) | % | | 35 | | | 186 | | | | | (151) | | | (81) | % | | | | |
| Income tax (benefit) expense | (57) | | | (3) | | | (54) | | | NM | | 106 | | | 520 | | | | | (414) | | | (80) | % | | | | |
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| Operating income | 1,281 | | | 1,584 | | | (303) | | | (19) | % | | 3,796 | | | 5,829 | | | | | (2,033) | | | (35) | % | | | | |
| Depreciation and amortization | 3,313 | | | 4,145 | | | (832) | | | (20) | % | | 10,389 | | | 12,511 | | | | | (2,122) | | | (17) | % | | | | |
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Stock-based compensation (1) | 145 | | | 127 | | | 18 | | | 14 | % | | 430 | | | 386 | | | | | 44 | | | 11 | % | | | | |
| Merger-related costs | 1,296 | | | 955 | | | 341 | | | 36 | % | | 4,377 | | | 1,864 | | | | | 2,513 | | | 135 | % | | | | |
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| Impairment expense | — | | | — | | | — | | | NM | | 477 | | | — | | | | | 477 | | | NM | | | | |
Legal-related (recoveries) expenses, net (2) | (19) | | | — | | | (19) | | | NM | | 381 | | | — | | | | | 381 | | | NM | | | | |
| Loss on disposal group held for sale | 1,071 | | | — | | | 1,071 | | | NM | | 1,071 | | | — | | | | | 1,071 | | | NM | | | | |
Other, net (3) | (48) | | | — | | | (48) | | | NM | | 72 | | | 32 | | | | | 40 | | | 125 | % | | | | |
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| Adjusted EBITDA | 7,039 | | | 6,811 | | | 228 | | | 3 | % | | 20,993 | | | 20,622 | | | | | 371 | | | 2 | % | | | | |
| Lease revenues | (311) | | | (770) | | | 459 | | | (60) | % | | (1,184) | | | (2,725) | | | | | 1,541 | | | (57) | % | | | | |
Core Adjusted EBITDA | $ | 6,728 | | | $ | 6,041 | | | $ | 687 | | | 11 | % | | $ | 19,809 | | | $ | 17,897 | | | | | $ | 1,912 | | | 11 | % | | | | |
| Net income margin (Net income divided by Service revenues) | 3 | % | | 5 | % | | | | -200 bps | | 2 | % | | 6 | % | | | | | | -400 bps | | | | |
| Adjusted EBITDA margin (Adjusted EBITDA divided by Service revenues) | 46 | % | | 46 | % | | | | — bps | | 46 | % | | 48 | % | | | | | | -200 bps | | | | |
Core Adjusted EBITDA margin (Core Adjusted EBITDA divided by Service revenues) | 44 | % | | 41 | % | | | | 300 bps | | 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 on the condensed consolidated financial statements. Additionally, certain stock-based compensation expenses associated with the Transactions have been included in Merger-related costs.
(2)Legal-related (recoveries) expenses, net, consists of the settlement of certain litigation associated with the August 2021 cyberattack and is presented net of insurance recoveries.
(3)Other, net, primarily consists of certain severance, restructuring and other expenses and income, including gains from the sale of IP addresses, not directly attributable to the Merger which would not be expected to reoccur or are not reflective of T-Mobile’s ongoing operating performance (“special items”), and are, therefore, excluded from Adjusted EBITDA and Core Adjusted EBITDA.
NM - Not meaningful
Core Adjusted EBITDA increased $687 million, or 11%, for the three months ended and increased $1.9 billion, or 11%, for the nine months ended September 30, 2022. The components comprising Core Adjusted EBITDA are discussed further above.
The increase for the three months ended September 30, 2022, was primarily due to:
•Higher Total service revenues;
•Lower Cost of services, excluding Merger-related costs; and
•Lower Cost of equipment sales, excluding Merger-related costs; partially offset by
•Lower Equipment revenues, excluding lease revenues; and
•Higher Selling, general and administrative expenses, excluding Merger-related costs and other special items, such as gains from the sale of IP addresses.
The increase for the nine months ended September 30, 2022, was primarily due to:
•Higher Total service revenues;
•Lower Cost of equipment sales, excluding Merger-related costs; and
•Lower Cost of services, excluding Merger-related costs; partially offset by
•Higher Selling, general and administrative expenses, excluding Merger-related costs, certain legal-related expenses, net of recoveries, and other special items, such as gains from the sale of IP addresses; and
•Lower Equipment revenues, excluding lease revenues.
Adjusted EBITDA increased $228 million, or 3%, for the three months ended and increased $371 million, or 2%, for the nine months ended September 30, 2022. The slight increases were primarily due to the fluctuations in Core Adjusted EBITDA, discussed above, including changes in Lease revenues. Lease revenues decreased $459 million for the three months ended and decreased $1.5 billion for the nine months ended September 30, 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, 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
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| (in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | | | $ | | % | | | | |
| Net cash provided by operating activities | $ | 4,391 | | | $ | 3,477 | | | $ | 914 | | | 26 | % | | $ | 12,445 | | | $ | 10,917 | | | | | $ | 1,528 | | | 14 | % | | | | |
| Net cash used in investing activities | (2,555) | | | (4,152) | | | 1,597 | | | (38) | % | | (10,206) | | | (17,474) | | | | | 7,268 | | | (42) | % | | | | |
| Net cash provided by (used in) financing activities | 1,927 | | | (3,060) | | | 4,987 | | | (163) | % | | (1,953) | | | 237 | | | | | (2,190) | | | (924) | % | | | | |
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Operating Activities
Net cash provided by operating activities increased $914 million, or 26%, for the three months ended and increased $1.5 billion, or 14%, for the nine months ended September 30, 2022.
The increase for the three months ended September 30, 2022, was primarily from:
•A $1.4 billion decrease in net cash outflows from changes in working capital, primarily due to lower use of cash from Short- and long-term operating lease liabilities, including the impact of a $1.0 billion advance rent payment related to the modification of one of our master lease agreements during the three months ended September 30, 2021, Other current and long-term liabilities and Equipment installment plan receivables, partially offset by higher use of cash from Accounts receivable; partially offset by
•A $468 million decrease in Net income, adjusted for non-cash income and expense.
•Net cash provided by operating activities includes the impact of $942 million and $617 million in net payments for Merger-related costs for the three months ended September 30, 2022 and 2021, respectively.
The increase for the nine months ended September 30, 2022, was primarily from:
•A $3.9 billion decrease in net cash outflows from changes in working capital, primarily due to lower use of cash from Short- and long-term operating lease liabilities, including the impact of a $1.0 billion advance rent payment related to the modification of one of our master lease agreements during the nine months ended September 30, 2021, Accounts payable and accrued liabilities, Equipment installment plan receivables, other Current and long-term liabilities and
Operating lease right-of-use assets, partially offset by higher use of cash from Accounts receivable and Inventories; partially offset by
•A $2.4 billion decrease in Net income, adjusted for non-cash income and expense.
•Net cash provided by operating activities includes the impact of $2.7 billion and $1.1 billion in net payments for Merger-related costs for the nine months ended September 30, 2022 and 2021, respectively.
Investing Activities
Net cash used in investing activities decreased $1.6 billion, or 38%, for the three months ended and decreased $7.3 billion, or 42%, for the nine months ended September 30, 2022.
The use of cash for the three months ended September 30, 2022, was primarily from:
•$3.6 billion in Purchases of property and equipment, including capitalized interest, from the accelerated build-out of our nationwide 5G network, including from network integration related to the Merger; and
•$360 million in Purchases of spectrum licenses and other intangible assets, including deposits, primarily due to $239 million paid for spectrum licenses won at the conclusion of Auction 108 in September 2022; partially offset by
•$1.3 billion in Proceeds related to beneficial interests in securitization transactions.
The use of cash for the nine months ended September 30, 2022, was primarily from:
•$10.6 billion in Purchases of property and equipment, including capitalized interest, from the accelerated build-out of our nationwide 5G network, including from network integration related to the Merger; and
•$3.3 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 and $304 million paid in total for spectrum licenses won at the conclusion of Auction 108 in September 2022; partially offset by
•$3.6 billion in Proceeds related to beneficial interests in securitization transactions.
Financing Activities
Net cash provided by financing activities increased $5.0 billion from a net use of cash for the three months ended September 30, 2021, to a net source of cash for the three months ended September 30, 2022. Net cash used in financing activities increased $2.2 billion from a net source of cash for the nine months ended September 30, 2021, to a net use of cash for the nine months ended September 30, 2022.
The net source of cash for the three months ended September 30, 2022, was primarily from:
•$3.0 billion in Proceeds from issuance of long-term debt; partially offset by
•$557 million in Repurchases of common stock; and
•$311 million in Repayments of financing lease obligations.
The net use of cash for the nine months ended September 30, 2022, was primarily from:
•$3.1 billion in Repayments of long-term debt;
•$901 million in Repayments of financing lease obligations;
•$557 million in Repurchases of common stock; and
•$225 million in Tax withholdings on share-based awards; partially offset by
•$3.0 billion in Proceeds from issuance of long-term debt.
Cash and Cash Equivalents
As of September 30, 2022, our Cash and cash equivalents were $6.9 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 from sales of tower sites and 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
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | |
| (in millions) | 2022 | | 2021 | $ | | % | 2022 | | 2021 | | | $ | | % | | | |
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| Net cash provided by operating activities | $ | 4,391 | | | $ | 3,477 | | | $ | 914 | | | 26 | % | | $ | 12,445 | | | $ | 10,917 | | | | | $ | 1,528 | | | 14 | % | | | | |
| Cash purchases of property and equipment, including capitalized interest | (3,634) | | | (2,944) | | | (690) | | | 23 | % | | (10,587) | | | (9,397) | | | | | (1,190) | | | 13 | % | | | | |
| Proceeds from sales of tower sites | — | | | — | | | — | | | NM | | — | | | 31 | | | | | (31) | | | (100) | % | | | | |
| Proceeds related to beneficial interests in securitization transactions | 1,308 | | | 1,071 | | | 237 | | | 22 | % | | 3,614 | | | 3,099 | | | | | 515 | | | 17 | % | | | | |
| Cash payments for debt prepayment or debt extinguishment costs | — | | | (45) | | | 45 | | | (100) | % | | — | | | (116) | | | | | 116 | | | (100) | % | | | | |
| Free Cash Flow | $ | 2,065 | | | $ | 1,559 | | | $ | 506 | | | 32 | % | | $ | 5,472 | | | $ | 4,534 | | | | | $ | 938 | | | 21 | % | | | | |
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Free Cash Flow increased $506 million, or 32%, for the three months ended and increased $938 million, or 21%, for the nine months ended September 30, 2022.
The increase for the three months ended September 30, 2022, was primarily impacted by the following:
•Higher Net cash provided by operating activities, as described above; and
•Higher Proceeds related to beneficial interests in securitization transactions, which were offset in Net cash provided by operating activities; partially offset by
•Higher Cash purchases of property and equipment, including capitalized interest.
•Free Cash Flow includes $942 million and $617 million in net payments for Merger-related costs for the three months ended September 30, 2022 and 2021, respectively.
The increase for the nine months ended September 30, 2022, was primarily impacted by the following:
•Higher Net cash provided by operating activities, as described above; and
•Higher Proceeds related to beneficial interests in securitization transactions, which were offset in Net cash provided by operating activities; partially offset by
•Higher Cash purchases of property and equipment, including capitalized interest.
•Free Cash Flow includes $2.7 billion and $1.1 billion in net payments for Merger-related costs for the nine months ended September 30, 2022 and 2021, respectively.
During the three and nine months ended September 30, 2022 and 2021, there were no significant net cash proceeds from securitization.
Borrowing Capacity
We maintain a revolving credit facility (the “Revolving Credit Facility”) with an aggregate commitment amount of $5.5 billion. As of September 30, 2022, there was no outstanding balance under the Revolving Credit Facility.
Subsequent to September 30, 2022, on October 17, 2022, we entered into an Amended and Restated Credit Agreement, which, among other things, increased the aggregate commitment amount of the Revolving Credit Facility to $7.5 billion. See Note 6 - Debt of the Notes to the Condensed Consolidated Financial Statements for more information regarding the Amended and Restated Credit Agreement.
Debt Financing
As of September 30, 2022, our total debt and financing lease liabilities were $76.6 billion, excluding our tower obligations, of which $66.3 billion was classified as long-term debt and $1.6 billion was classified as long-term financing lease liabilities.
During the nine months ended September 30, 2022, we issued long-term debt for net proceeds of $3.0 billion and repaid short- and long-term debt with an aggregate principal amount of $3.1 billion.
Subsequent to September 30, 2022, on October 12, 2022, we issued $750 million of 4.910% Class A senior ABS Notes to third-party investors in a private placement transaction.
For more information regarding our debt financing transactions, see Note 6 – Debt of the Notes to the Condensed Consolidated Financial Statements.
Spectrum Auctions
In January 2022, the Federal Communications Commission (“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.
In September 2022, the FCC announced that we were the winning bidder of 7,156 licenses in Auction 108 (2.5 GHz) for an aggregate price of $304 million. At the inception of Auction 108 in June 2022, we deposited $65 million. We paid the FCC the remaining $239 million for the licenses won in the auction in September 2022.
License Purchase Agreements
On August 8, 2022, we entered into License Purchase Agreements to acquire spectrum in the 600 MHz band from Channel 51 License Co LLC and LB License Co, LLC in exchange for total cash consideration of $3.5 billion.
Off-Balance Sheet Arrangements
We have arrangements, as amended from time to time, to sell certain EIP accounts receivable and service accounts receivable on a revolving basis as a source of liquidity. As of September 30, 2022, we derecognized net receivables of $2.4 billion upon sale through these arrangements.
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 long-lived assets in private party transactions, repurchase shares, or for the refinancing of existing long-term debt on an opportunistic basis. Excluding liquidity that could be needed for spectrum acquisitions, other long-lived assets or for any potential stockholder returns, 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, share repurchases and the execution of our integration plan.
We determine future liquidity requirements for operations, capital expenditures and share repurchases based in large part upon projected financial and operating performance, and opportunities to acquire additional spectrum or repurchase shares. 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” in 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, create liens or other encumbrances, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. We were in compliance with all restrictive debt covenants as of September 30, 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 September 30, 2022, we have committed to $7.5 billion of financing leases under these financing lease facilities, of which $325 million and $1.2 billion was executed during the three and nine months ended September 30, 2022, respectively. We expect to enter into up to an additional $40 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 and customer base 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, as we build out our nationwide 5G network. We expect a reduction in capital expenditures related to these efforts following 2022. Future capital expenditure requirements will include the deployment of our recently acquired C-band and 3.45 GHz licenses.
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.
During the three and nine months ended September 30, 2022, we repurchased shares of our common stock for a total purchase price of $669 million, all of which were purchased under the 2022 Stock Repurchase program and occurred during the period from September 8, 2022, through September 30, 2022. As of September 30, 2022, we had up to approximately $13.3 billion remaining under the 2022 Stock Repurchase Program, of which up to approximately $2.3 billion was available for the remainder of 2022.
Subsequent to September 30, 2022, from October 1, 2022, through October 20, 2022, we repurchased additional shares of our common stock for a total purchase price of $815 million. As of October 20, 2022, we had up to approximately $12.5 billion remaining under the 2022 Stock Repurchase Program, of which up to approximately $1.5 billion is available for the remainder of 2022.
Related Party Transactions
We have related party transactions associated with DT or its affiliates in the ordinary course of business, including intercompany servicing and licensing.
As of October 20, 2022, DT and SoftBank held, directly or indirectly, approximately 48.6% and 3.2%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 48.2% 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 October 20, 2022, over approximately 52.2% 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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.