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Section 1: 10-Q (TMUS FORM 10-Q)

TMUS 03/31/2014 FORM 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 1-33409
T-MOBILE US, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
 
20-0836269
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
12920 SE 38th Street, Bellevue, Washington
 
98006-1350
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(425) 378-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer     x                        Accelerated filer             ¨
Non-accelerated filer     ¨ (Do not check if a smaller reporting company)     Smaller reporting company     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Shares Outstanding as of April 28, 2014

Common Stock, $0.00001 par value per share
 
802,928,895





T-Mobile US, Inc.
Form 10-Q
For the Quarter Ended March 31, 2014

Table of Contents

 
 
 
 
 
 
 











2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

T-Mobile US, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

(in millions, except share and per share amounts)
March 31,
2014
 
December 31,
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
5,471

 
$
5,891

Accounts receivable, net of deferred interest and allowances of $420 and $381
3,560

 
3,619

Accounts receivable from affiliates
60

 
41

Inventory
676

 
586

Current portion of deferred tax assets, net
923

 
839

Assets held-for-sale
1,362

 
614

Other current assets
905

 
638

Total current assets
12,957

 
12,228

Property and equipment, net of accumulated depreciation of $20,282 and $19,649
15,427

 
15,349

Goodwill
1,683

 
1,683

Spectrum licenses
17,383

 
18,122

Other intangible assets, net of accumulated amortization of $560 and $476
1,123

 
1,204

Other assets
1,596

 
1,367

Total assets
$
50,169

 
$
49,953

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities
$
4,792

 
$
4,567

Current payables and short-term debt to affiliates
309

 
199

Short-term debt
151

 
244

Deferred revenue
459

 
445

Other current liabilities
399

 
353

Total current liabilities
6,110

 
5,808

Long-term debt to affiliates
5,600

 
5,600

Long-term debt
14,331

 
14,345

Long-term financial obligation
2,504

 
2,496

Deferred tax liabilities
4,614

 
4,645

Deferred rents
2,183

 
2,113

Other long-term liabilities
671

 
701

Total long-term liabilities
29,903

 
29,900

Commitments and contingencies


 


Stockholders' equity
 
 
 
Preferred stock, par value $0.00001 per share, 100,000,000 shares authorized; no shares issued and outstanding

 

Common stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 804,187,802 and 803,262,309 shares issued, 802,805,297 and 801,879,804 shares outstanding

 

Additional paid-in capital
37,395

 
37,330

Treasury stock, at cost, 1,382,505 and 1,382,505 shares issued

 

Accumulated other comprehensive income

 
3

Accumulated deficit
(23,239
)
 
(23,088
)
Total stockholders' equity
14,156

 
14,245

Total liabilities and stockholders' equity
$
50,169

 
$
49,953


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

T-Mobile US, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended March 31,
(in millions, except shares and per share amounts)
2014
 
2013
Revenues
 
 
 
Branded postpaid revenues
$
3,447

 
$
3,263

Branded prepaid revenues
1,648

 
503

Wholesale revenues
174

 
149

Roaming and other service revenues
68

 
90

Total service revenues
5,337

 
4,005

Equipment sales
1,448

 
606

Other revenues
90

 
66

Total revenues
6,875

 
4,677

Operating expenses
 
 

Cost of services, exclusive of depreciation and amortization shown separately below
1,464

 
1,109

Cost of equipment sales
2,286

 
886

Selling, general and administrative
2,096

 
1,506

Depreciation and amortization
1,055

 
755

MetroPCS transaction and integration costs
12

 
13

Restructuring costs

 
31

Other, net
(10
)
 
(2
)
Total operating expenses
6,903

 
4,298

Operating income (loss)
(28
)
 
379

Other income (expense)
 
 

Interest expense to affiliates
(18
)
 
(178
)
Interest expense
(276
)
 
(51
)
Interest income
75

 
35

Other expense, net
(6
)
 
(6
)
Total other expense, net
(225
)
 
(200
)
Income (loss) before income taxes
(253
)
 
179

Income tax expense (benefit)
(102
)
 
72

Net income (loss)
$
(151
)
 
$
107

Other comprehensive income (loss), net of tax
 
 
 
Net loss on cross currency interest rate swaps, net of tax effect of $0 and ($26)

 
(43
)
Net gain on foreign currency translation, net of tax effect of $0 and $25

 
42

Unrealized loss on available-for-sale securities, net of tax effect of ($1) and $0
(3
)
 

Other comprehensive loss, net of tax
(3
)
 
(1
)
Total comprehensive income (loss)
$
(154
)
 
$
106

Earnings (loss) per share
 
 

Basic
$
(0.19
)
 
$
0.20

Diluted
(0.19
)
 
0.20

Weighted average shares outstanding
 
 

Basic
802,520,723

 
535,286,077

Diluted
802,520,723

 
535,286,077


The accompanying notes are an integral part of these condensed consolidated financial statements.


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Table of Contents

T-Mobile US, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
Three Months Ended March 31,
(in millions)
2014
 
2013
Operating activities
 
 
 
Net cash provided by operating activities
$
759

 
$
909

 
 
 
 
Investing activities
 
 
 
Purchases of property and equipment
(947
)
 
(1,076
)
Purchases of intangible assets

 
(49
)
Short term affiliate loan receivable, net

 
275

Investments in unconsolidated affiliates, net
(11
)
 

Other, net
(7
)
 
(4
)
Net cash used in investing activities
(965
)
 
(854
)
 
 
 
 
Financing activities
 
 
 
Repayments of short-term debt for purchases of property and equipment
(226
)
 

Proceeds from exercise of stock options
14

 

Other, net
(2
)
 

Net cash used in financing activities
(214
)
 

 
 
 
 
Change in cash and cash equivalents
(420
)
 
55

Cash and cash equivalents
 
 
 
Beginning of period
5,891

 
394

End of period
$
5,471

 
$
449


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

T-Mobile US, Inc.
Notes to the Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited condensed consolidated financial statements of T-Mobile US, Inc. (“T-Mobile” or the “Company”) include all adjustments of a normal recurring nature necessary for the fair presentation of the results for the interim periods presented. The results for the interim periods are not necessarily indicative of those for the full year. The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

The condensed consolidated financial statements include the balances and results of operations of T-Mobile and its consolidated subsidiaries. T-Mobile consolidates all majority-owned subsidiaries over which it exercises control, as well as variable interest entities (“VIE”) where it is deemed to be the primary beneficiary and VIEs which cannot be deconsolidated. Intercompany transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2 – Acquisitions and Other Transactions

Spectrum License Transactions

In January 2014, T-Mobile entered into agreements with Verizon Communications Inc. (“Verizon”) for the acquisition of 700 MHz A-Block spectrum licenses for approximately $2.4 billion in cash and the transfer of certain Advanced Wireless Services spectrum (“AWS spectrum”) and Personal Communications Service spectrum (“PCS spectrum”). The acquired spectrum covers more than 150 million people in 23 major metropolitan markets, comprising approximately 50 percent of the U.S. population or 70 percent of T-Mobile’s existing customer base. A non-cash gain is expected to be recognized upon closing of the transaction. See Note 8 – Subsequent Events for further information regarding the closing of the transaction.

In November 2013, the Company entered into an agreement with Verizon to exchange certain AWS spectrum and PCS spectrum.  A non-cash gain is expected to be recognized upon close of the transaction. See Note 8 – Subsequent Events for further information regarding the closing of the transaction. 

Spectrum licenses to be transferred under various agreements are included in assets held for sale at their carrying value of $1.4 billion and $614 million as of March 31, 2014 and December 31, 2013, respectively.

Factoring Arrangement

Transaction Overview

In February 2014, T-Mobile entered into a two-year factoring arrangement to sell certain service accounts receivable on a revolving basis, subject to a maximum funding limit of $500 million. Sales of receivables occur daily and are settled on a monthly basis. The receivables consist of service charges currently due from customers and are short-term in nature. In connection with the factoring arrangement, the Company formed a wholly owned subsidiary and bankruptcy remote special purpose entity (“Factoring SPE”). Pursuant to the factoring arrangement, certain subsidiaries of T-Mobile will transfer selected receivables to the Factoring SPE.  The Factoring SPE will then sell the receivables to an unaffiliated entity (“Factoring VIE”), which was established to facilitate the sale of ownership interest in the receivables to certain third parties.

Variable Interest Entity

The Company determined the Factoring VIE is a VIE as it lacks sufficient equity to finance its activities. The Company has a variable interest in the Factoring VIE, but is not the primary beneficiary as it lacks the power to direct the activities that most significantly impact the Factoring VIE’s economic performance. As the Company has determined it is not the primary beneficiary and does not hold any equity interest, the results of the Factoring VIE are not consolidated into the Company’s condensed consolidated financial statements.


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Table of Contents

Sale of Receivables

The sales of receivables through the factoring arrangement are treated as sales of financial assets. Upon sale, T-Mobile derecognizes the receivables, as well as the related allowances, and recognizes the net proceeds in cash provided by operating activities. Any resulting gains or losses from the sale of receivables, as well as factoring fees, are recognized in selling, general and administrative expenses.

As of March 31, 2014, T-Mobile derecognized net receivables of $546 million upon sale through the factoring arrangement.  For the three months ended March 31, 2014, T-Mobile received net cash proceeds of $434 million. The proceeds were net of a receivable for the remainder of the purchase price (“deferred purchase price”), which is received from collections on the service receivables. The deferred purchase price is classified as a trading security and carried at fair value with unrealized gains and losses from changes in fair value included in selling, general and administrative expense. The fair value of the deferred purchase price is determined based on a discounted cash flow model which uses unobservable inputs (Level 3 inputs), including customer default rates. Due to the short-term nature of the underlying financial assets, the carrying value approximated fair value. Other current assets related to the factoring arrangement, which were held by the Factoring SPE and primarily consisted of the deferred purchase price, were $99 million as of March 31, 2014.

For the three months ended March 31, 2014, T-Mobile recognized a net expense, which included losses from the sale of receivables, factoring fees and unrealized losses related to the deferred purchase price, of $13 million included in selling, general and administrative expenses.

Continuing Involvement

T-Mobile has continuing involvement with the sold receivables as it services the receivables and is required to repurchase certain receivables, including aged receivables and receivables where write off is imminent, pursuant to the factoring arrangement. T-Mobile will continue to service the customer and their related receivables, including facilitating customer payment collection, in exchange for a monthly servicing fee. As the receivables are sold on a revolving basis, the customer payment collections are reinvested in new receivable sales. While servicing the receivables, the same policies and procedures are applied to the sold receivables that apply to owned receivables, and T-Mobile continues to maintain normal relationships with its customers.

In addition, T-Mobile has continuing involvement related to the sold receivables as it may be responsible for absorbing additional credit losses pursuant to the agreement. The Company’s maximum exposure to loss related to the involvement with the Factoring VIE was $279 million as of March 31, 2014. The maximum exposure to loss, which is required disclosure under GAAP, represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby the Company would not receive the portion of the contractual proceeds withheld by the Factoring VIE and would also be required to repurchase the maximum amount of receivables pursuant to the agreement without consideration for any recovery.  As T-Mobile believes the probability of these circumstances occurring is very remote, the maximum exposure to loss is not an indication of the Company’s expected loss.

Transaction with MetroPCS

On April 30, 2013, the business combination involving T-Mobile USA, Inc. (“T-Mobile USA”) and MetroPCS Communications, Inc. (“MetroPCS”) was completed. In connection with the business combination, MetroPCS acquired all of the outstanding capital stock of T-Mobile USA beneficially owned by Deutsche Telekom AG (“Deutsche Telekom”) in consideration for the issuance of shares of common stock representing a majority of the fully diluted shares of the combined company. MetroPCS was subsequently renamed T-Mobile US, Inc. and is the consolidated parent of the Company’s subsidiaries, including T-Mobile USA. The business combination was accounted for as a reverse acquisition with T-Mobile USA as the accounting acquirer. Accordingly, T-Mobile USA’s historical financial statements became the historical financial statements of the combined company. The common shares outstanding and earnings (loss) per share presented for periods up to April 30, 2013 reflect the common shares issued to T-Mobile Global Holding GmbH, an indirect wholly-owned subsidiary of Deutsche Telekom, in connection with the reverse acquisition. Additionally, the acquired assets and liabilities of MetroPCS were included in the condensed consolidated balance sheets as of April 30, 2013 and the results of its operations and cash flows are included in the condensed consolidated statements of comprehensive income (loss) and cash flows for periods beginning after May 1, 2013.



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Table of Contents

Note 3 – Equipment Installment Plan Receivables

T-Mobile offers certain retail customers the option to pay for their devices and other purchases in installments over a period of up to 24 months using an Equipment Installment Plan (“EIP”). The carrying values of EIP receivables approximate fair value as the receivables are recorded at their present value, net of the deferred interest and additional allowance for credit losses. At the time of sale, the Company imputes interest, inclusive of credit risk, on the EIP receivables and records the deferred interest as a reduction to equipment sales and as an allowance against the related accounts receivable. Interest income is recognized over the financed installment term.

The following table summarizes the EIP receivables:
(in millions)
March 31,
2014
 
December 31,
2013
EIP receivables, gross
$
3,487

 
$
2,882

Deferred interest
(304
)
 
(276
)
EIP receivables, net of deferred interest
3,183

 
2,606

Allowance for credit losses
(97
)
 
(60
)
EIP receivables, net
$
3,086

 
$
2,546



 

Classified on the balance sheet as:
 
 
 
Accounts receivable, net
$
1,807

 
$
1,471

Other assets
1,279

 
1,075

EIP receivables, net
$
3,086

 
$
2,546


Based upon customer credit profiles, T-Mobile classifies EIP receivables into the credit categories of “Prime” and “Subprime”. T-Mobile uses proprietary scoring systems that measure the credit quality of the EIP receivables using several factors, such as credit bureau information, consumer credit risk scores and service plan characteristics. Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. Customers within the Subprime category may be required to pay a significant down payment on their equipment purchases. In addition, certain customers within the Subprime category are required to pay an advance deposit.

The balance and aging of the EIP receivables on a gross basis by credit category were as follows:
 
March 31, 2014
 
December 31, 2013
(in millions)
Prime
 
Subprime
 
Total
 
Prime
 
Subprime
 
Total
Unbilled
$
1,765

 
$
1,562

 
$
3,327

 
$
1,482

 
$
1,270

 
$
2,752

Billed - Current
57

 
56

 
113

 
45

 
45

 
90

Billed - Past Due
18

 
29

 
47

 
15

 
25

 
40

EIP receivables, gross
$
1,840

 
$
1,647

 
$
3,487

 
$
1,542

 
$
1,340

 
$
2,882


EIP receivables for which invoices have not yet been generated for the customer are considered Unbilled. EIP receivables for which invoices have been generated but which are not past the contractual due date are considered Billed - Current. EIP receivables for which invoices have been generated and the payment is past the contractual due date are considered Billed - Past Due.

T-Mobile maintains an additional allowance for credit losses exceeding the credit risk recorded as deferred interest. The allowance is based on a number of factors, including collection experience, aging of the accounts receivable portfolio, credit quality of the customer base, and other qualitative factors such as macro-economic conditions. T-Mobile writes off account balances if collection efforts were unsuccessful and future collection is unlikely based on customer credit ratings and the length of time from the original billing date. Equipment sales that are not reasonably assured to be collectible are recorded on a cash basis as payments are received.


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Table of Contents

Activity in the deferred interest and allowance for credit losses for the EIP receivables was as follows:
(in millions)
March 31,
2014
Deferred interest and allowance for credit losses, beginning of period
$
336

Bad debt expense
68

Write-offs, net of recoveries
(31
)
Change in deferred interest on short-term and long-term EIP receivables
28

Deferred interest and allowance for credit losses, end of period
$
401


Note 4 – Fair Value Measurements and Derivative Instruments

Derivative Financial Instruments

Embedded Derivatives

In connection with the business combination with MetroPCS, T-Mobile issued senior reset notes to Deutsche Telekom. The interest rates are adjusted at the reset dates to rates defined in the applicable supplemental indentures to manage interest rate risk related to the senior reset notes. The Company determined certain components of the reset feature are required to be bifurcated from the senior reset notes and separately accounted for as embedded derivative instruments not designated as hedges. T-Mobile held five embedded derivatives as of March 31, 2014 and December 31, 2013, respectively.

The embedded derivatives are carried at fair value with unrealized gains and losses from changes in fair value included in interest expense to affiliates. The fair value of the embedded derivatives was determined using a lattice-based valuation model by determining the fair value of the senior reset notes with and without the embedded derivatives included. The fair value of the senior reset notes with the embedded derivatives utilizes the contractual term of each senior reset note, reset rates calculated based on the spread between specified yield curves and the yield curve on T-Mobile long-term debt adjusted pursuant to the applicable supplemental indentures, and interest rate volatility. Interest rate volatility is a significant unobservable input (Level 3) as it is derived based on weighted risk free rate volatility and credit spread volatility. Significant increases or decreases in the weighting of risk free volatility and credit spread volatility, in isolation, would result in a higher or lower fair value of the embedded derivatives. The embedded derivatives were classified as Level 3 in the fair value hierarchy.

Interest Rate Swaps

Prior to the closing of the business combination with MetroPCS, T-Mobile managed interest rate risk related to its long-term debt to affiliates by entering into interest rate swap agreements. T-Mobile held seven interest rate swaps with a total notional amount of $3.6 billion as of December 31, 2012. These interest rate swap agreements were not designated as hedging instruments.

In April 2013, prior to the closing of the business combination with MetroPCS, Deutsche Telekom recapitalized T-Mobile by retiring the existing T-Mobile long-term debt to affiliates and all related derivative instruments, which included the interest rate swaps. The related balance in accumulated other comprehensive income (“AOCI”) was reclassified into net income (loss). As of March 31, 2014 and December 31, 2013, there were no outstanding interest rate swaps.

Cross Currency Interest Rate Swaps

Prior to the closing of the business combination with MetroPCS, T-Mobile managed foreign currency risk along with interest rate risk through cross currency interest rate swap agreements related to its intercompany Euro denominated long-term debt to affiliates, which were entered into upon assumption of the notes to fix the future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses over the terms of the long-term debt to affiliates extending to 2025. T-Mobile had three cross currency interest rate swaps with a total notional amount of $2.3 billion as of December 31, 2012. These cross currency interest rate swaps were designated as cash flow hedges and met the criteria for hedge accounting. The hedges were evaluated as highly effective prior to the closing of the business combination with MetroPCS, thus no gains (losses) were recognized due to hedge ineffectiveness.

In April 2013, prior to the closing of the business combination with MetroPCS, Deutsche Telekom recapitalized T-Mobile by retiring the existing T-Mobile long-term debt to affiliates and all related derivative instruments, which included cross currency interest rate swaps. The related balance in AOCI was reclassified into net income (loss). As of March 31, 2014 and December 31, 2013, there were no outstanding cross currency interest rate swaps.

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Table of Contents

Fair values of derivative instruments measured on a recurring basis by level were as follows:
 
Balance Sheet Location
 
March 31, 2014
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Embedded derivatives
Other assets
 
$

 
$

 
$
48

 
$
48


 
Balance Sheet Location
 
December 31, 2013
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Embedded derivatives
Other long-term liabilities
 
$

 
$

 
$
13

 
$
13


The following table summarizes the activity related to derivatives instruments:
 
Three Months Ended March 31,
(in millions)
2014
 
2013
Loss recognized in other comprehensive loss:
 
 
 
Cross currency interest rate swaps
$

 
$
(74
)
Gain recognized in interest expense to affiliates:
 
 
 
Embedded derivatives
61

 

Interest rate swaps

 
2

Cross currency interest rate swaps

 
5


Long-term Debt

The fair value of the Company’s long-term debt to affiliates was determined based on a discounted cash flow approach which considers the future cash flows discounted at current rates. The approach includes an estimate for the stand-alone credit risk of T-Mobile. The Company’s long-term debt to affiliates were classified as Level 2 in the fair value hierarchy. The fair value of the Company’s long-term debt to third parties was determined based on quoted market prices in active markets, and therefore are classified as Level 1 in the fair value hierarchy.

The carrying amounts and fair values of the Company’s long-term debt were as follows:
 
March 31, 2014
 
December 31, 2013
(in millions)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt to affiliates
$
5,600

 
$
5,991

 
$
5,600

 
$
5,866

Long-term debt to third parties principal, excluding capital leases
13,600

 
14,516

 
13,600

 
14,251


Although the Company has determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop fair value estimates for the long-term debt. The fair value estimates are based on information available as of March 31, 2014 and December 31, 2013. As such, the Company’s estimates are not necessarily indicative of the amount that the Company could realize in a current market exchange.

Note 5 – Commitments and Contingencies

Commitments

Purchase Commitments

In January 2014, T-Mobile entered into agreements with Verizon for the acquisition of 700 MHz A-Block spectrum licenses for cash and the transfer of certain AWS spectrum and PCS spectrum. As a result of the transaction, T-Mobile assumed additional future minimum payments for non-cancelable purchase commitments of approximately $2.4 billion. See Note 2 – Acquisitions and Other Transactions for further information regarding the spectrum license transaction.


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Table of Contents

Guarantee Liabilities

T-Mobile offers a handset upgrade program that provides eligible customers a specified-price trade-in right to upgrade their handset.  Participating customers must finance their handset using an EIP.  Upon upgrading, the customer will receive a credit in the amount of the outstanding EIP balance provided they trade in their eligible used handset in good working condition and purchase a new handset from T-Mobile.

For customers who enroll in the trade-in programs, the Company defers the portion of equipment sales revenue which represents the estimated value of the specified-price trade-in right guarantee.  The guarantee liabilities are valued based on various economic and customer behavioral assumptions, including the customer's estimated remaining EIP balance at trade-in, the expected fair value of the used handset at trade-in, and probability and timing of trade-in.  When the customer upgrades their handset, the difference between the trade-in credit to the customer and the fair value of the returned handset is recorded against the guarantee liabilities.  Guarantee liabilities included in other current liabilities were $264 million and $191 million as of March 31, 2014 and December 31, 2013, respectively.  The estimated EIP receivable balance if all enrolled handset upgrade program customers were to claim their benefit, not including any trade-in value of the required used handset, was $1.7 billion and $1.2 billion as of March 31, 2014 and December 31, 2013, respectively. This is not an indication of the Company’s expected loss exposure because it does not consider the expected fair value of the used handset, which is required to be in good working condition at trade-in, nor does it consider the probability and timing of trade-in.

Contingencies and Litigation

As of March 31, 2014, T-Mobile was a defendant in one putative stockholder derivative and class action lawsuit challenging the business combination with MetroPCS and alleging that the various defendants breached fiduciary duties, or aided and abetted in the alleged breach of fiduciary duties, to the MetroPCS stockholders by entering into the transaction - Adam Golovoy et al. v. Deutsche Telekom et al., Cause No. CC-12-06144-A (Dallas, Texas County Court at Law).  (Six other cases have either been dismissed or have settled.)  The complaint alleged claims for relief including, among other things, rescission to the extent the terms of the business combination have already been implemented, damages for the breaches of fiduciary duty, and the payment of plaintiffs’ attorneys’ fees and costs.  The Golovoy case was settled and dismissed in April 2014.

T-Mobile and its subsidiaries are involved in various lawsuits, regulatory proceedings, and other similar matters, including class actions and intellectual property claims, that arise in the ordinary course of business. Specifically, T-Mobile faces actual and potential litigation and other legal proceedings that challenge customer billing and other business practices, and seek awards of damages, restitution, and/or penalties. For example, state Attorneys General and other government agencies have engaged in investigations and inquiries regarding third-party billing (or “cramming”), and are seeking restitution and changes in business practices by carriers and content providers. Legal proceedings are inherently unpredictable, and often present complex legal and factual issues and can include claims for large amounts of damages or other remedies. While T-Mobile currently does not expect that these proceedings, individually or in the aggregate, will have a material adverse effect on T-Mobile’s financial position, an unfavorable outcome of some or all of these proceedings could have a material adverse impact on our results of operations or cash flows for a particular period. This assessment is based on T-Mobile’s current understanding of relevant facts and circumstances. As such, T-Mobile’s view of these matters is subject to inherent uncertainties and may change in the future.

Note 6 – Additional Financial Information

Supplemental Balance Sheet Information

Cash and Cash Equivalents

T-Mobile is required to restrict cash equivalents as collateral for certain agreements.  Restricted cash equivalents included in other current assets were $100 million as of March 31, 2014 and December 31, 2013 respectively.


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Accumulated Other Comprehensive Income

The following table presents the effects on net income (loss) of amounts reclassified from AOCI (in millions):
 
 
 
 
Amount Reclassified from AOCI to Income
AOCI Component
 
Location
 
Three Months Ended March 31, 2013
Cross Currency Interest Rate Swaps
 
Interest expense to affiliates
 
$
(5
)
 
 
Income tax effect
 
2

Total reclassifications
 
Net of tax
 
$
(3
)

Supplemental Statements of Comprehensive Income (Loss) Information

Earnings (Loss) Per Share

The computation of basic and diluted earnings (loss) per share was as follows:
 
Three Months Ended March 31,
(in millions, except shares and per share amounts)
2014
 
2013
Basic and Diluted Earnings (Loss) Per Share:
 
 
 
Net income (loss)
$
(151
)
 
$
107

 
 
 
 
Weighted average shares outstanding - basic
802,520,723

 
535,286,077

Dilutive effect of outstanding stock options and awards

 

Weighted average shares outstanding - diluted
802,520,723

 
535,286,077

 
 
 
 
Earnings (loss) per share - basic
$
(0.19
)
 
$
0.20

Earnings (loss) per share - diluted
(0.19
)
 
0.20


Potentially dilutive securities were not included in the computation of diluted earnings (loss) per share for certain periods if to do so would have been antidilutive.  As the Company incurred a net loss for the three months ended March 31, 2014, all outstanding stock options of 5,485,186 and unvested stock awards of 23,591,949 as of March 31, 2014 were excluded.  Unvested performance stock units were based on the number of shares ultimately expected to vest based on T-Mobile’s business performance against the specified performance goal.

Supplemental Statements of Cash Flows Information

The following table summarizes T-Mobile’s supplemental cash flows information:
 
Three Months Ended March 31,
(in millions)
2014
 
2013
Interest and income tax payments:
 
 
 
Interest payments
$
286

 
$
258

Income tax refunds, net

 
(4
)
Noncash investing and financing activities:
 
 
 
Increase (decrease) in accounts payable for purchases of property and equipment
(13
)
 
111

Short-term debt outstanding for financing of property and equipment purchases
133

 




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Note 7 – Guarantor Financial Information

Pursuant to the applicable indentures and supplemental indentures, the long-term debt, excluding capital leases, issued by T-Mobile USA (“Issuer”) is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of the Issuer’s wholly owned subsidiaries (“Guarantor Subsidiaries”). The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures governing the long-term debt contain covenants that, among other things, limit the ability of the Issuer and the Guarantor Subsidiaries to: incur more debt; pay dividends and make distributions; make certain investments; repurchase stock; create liens or other encumbrances; enter into transactions with affiliates; enter into transactions that restrict dividends or distributions from subsidiaries; and merge, consolidate, or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the indentures and the supplemental indentures relating to the long-term debt restrict the ability of the Issuer to loan funds or make payments to Parent. However, the Issuer and Guarantor Subsidiaries are allowed to make certain permitted payments to the Parent under the terms of the indentures and the supplemental indentures.

In February 2014, T-Mobile entered into a factoring arrangement to sell certain service accounts receivable on a revolving basis. In connection with the factoring arrangement, the Company formed the Factoring SPE, which is included in the Non-Guarantor Subsidiaries condensed consolidating financial information. See Note 2 – Acquisitions and Other Transactions for further information regarding the factoring arrangement.

Presented below is the condensed consolidating financial information as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014, and March 31, 2013, respectively. As the business combination was treated as a “reverse acquisition” and the Issuer was treated as the accounting acquirer, the Issuer’s historical financial statements are the historical financial statements of Parent for comparative purposes. As a result the Parent column only reflects activity in the condensed consolidating financial statements presented below for periods subsequent to the consummation of the business combination on April 30, 2013. The equity method of accounting is used to account for ownership interests in subsidiaries, where applicable.


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Condensed Consolidating Balance Sheet Information
As of March 31, 2014
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,979

 
$
2,232

 
$
63

 
$
197

 
$

 
$
5,471

Accounts receivable, net

 

 
3,427

 
133

 

 
3,560

Accounts receivable from affiliates

 

 
60

 

 

 
60

Inventory

 

 
676

 

 

 
676

Current portion of deferred tax assets, net

 

 
908

 
15

 

 
923

Assets held-for-sale

 

 
1,362

 

 

 
1,362

Other current assets

 

 
788

 
117

 

 
905

Total current assets
2,979

 
2,232

 
7,284

 
462

 

 
12,957

Property and equipment, net of accumulated depreciation

 

 
14,852

 
575

 

 
15,427

Goodwill

 

 
1,683

 

 

 
1,683

Spectrum licenses

 

 
17,383

 

 

 
17,383

Other intangible assets, net of accumulated amortization

 

 
1,123

 

 

 
1,123

Investments in subsidiaries, net
11,333

 
29,211

 
99

 

 
(40,643
)
 

Intercompany receivables

 

 
239

 

 
(239
)
 

Other assets
2

 
76

 
1,507

 
68

 
(57
)
 
1,596

Total assets
$
14,314

 
$
31,519

 
$
44,170

 
$
1,105

 
$
(40,939
)
 
$
50,169

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$

 
$
262

 
$
4,360

 
$
170

 
$

 
$
4,792

Current payables and short-term debt to affiliates

 
136

 
173

 

 

 
309

Short-term debt

 
133

 
18

 

 

 
151

Deferred revenue

 

 
459

 

 

 
459

Other current liabilities

 

 
399

 

 

 
399

Total current liabilities

 
531

 
5,409

 
170

 

 
6,110

Long-term debt to affiliates

 
5,600

 

 

 

 
5,600

Long-term debt

 
13,998

 
333

 

 

 
14,331

Long-term financial obligation

 

 
366

 
2,138

 

 
2,504

Deferred tax liabilities

 

 
4,671

 

 
(57
)
 
4,614

Deferred rents

 

 
2,183

 

 

 
2,183

Negative carrying value of subsidiaries, net

 

 
792

 

 
(792
)
 

Intercompany payables
158

 
57

 

 
24

 
(239
)
 

Other long-term liabilities

 

 
671

 

 

 
671

 Total long-term liabilities
158

 
19,655

 
9,016

 
2,162

 
(1,088
)
 
29,903

Total stockholders' equity
14,156

 
11,333

 
29,745

 
(1,227
)
 
(39,851
)
 
14,156

Total liabilities and stockholders' equity
$
14,314

 
$
31,519

 
$
44,170

 
$
1,105

 
$
(40,939
)
 
$
50,169



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Table of Contents

Condensed Consolidating Balance Sheet Information
As of December 31, 2013
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,960

 
$
2,698

 
$
57

 
$
176

 
$

 
$
5,891

Accounts receivable, net

 

 
3,541

 
78

 

 
3,619

Accounts receivable from affiliates

 

 
41

 

 

 
41

Inventory

 

 
586

 

 

 
586

Current portion of deferred tax assets, net

 

 
824

 
15

 

 
839

Assets held-for-sale

 

 
614

 

 

 
614

Other current assets

 

 
636

 
2

 

 
638

Total current assets
2,960

 
2,698

 
6,299

 
271

 

 
12,228

Property and equipment, net of accumulated depreciation

 

 
14,754

 
595

 

 
15,349

Goodwill

 

 
1,683

 

 

 
1,683

Spectrum licenses

 

 
18,122

 

 

 
18,122

Other intangible assets, net of accumulated amortization

 

 
1,204

 

 

 
1,204

Investments in subsidiaries, net
11,484

 
29,123

 

 

 
(40,607
)
 

Intercompany receivables

 

 
418

 

 
(418
)
 

Other assets
2

 
24

 
1,292

 
93

 
(44
)
 
1,367

Total assets
$
14,446

 
$
31,845

 
$
43,772

 
$
959

 
$
(41,069
)
 
$
49,953

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$

 
$
273

 
$
4,218

 
$
76

 
$

 
$
4,567

Current payables and short-term debt to affiliates

 
56

 
143

 

 

 
199

Short-term debt

 
226

 
18

 

 

 
244

Deferred revenue

 

 
445

 

 

 
445

Other current liabilities

 

 
313

 
40

 

 
353

Total current liabilities

 
555

 
5,137

 
116

 

 
5,808

Long-term debt to affiliates

 
5,600

 

 

 

 
5,600

Long-term debt

 
14,010

 
335

 

 

 
14,345

Long-term financial obligation

 

 
365

 
2,131

 

 
2,496

Deferred tax liabilities

 

 
4,689

 

 
(44
)
 
4,645

Deferred rents

 

 
2,113

 

 

 
2,113

Negative carrying value of subsidiaries, net

 

 
779

 

 
(779
)
 

Intercompany payables
201

 
183

 

 
34

 
(418
)
 

Other long-term liabilities

 
13

 
688

 

 

 
701

 Total long-term liabilities
201

 
19,806

 
8,969

 
2,165

 
(1,241
)
 
29,900

Total stockholders' equity
14,245

 
11,484

 
29,666

 
(1,322
)
 
(39,828
)
 
14,245

Total liabilities and stockholders' equity
$
14,446

 
$
31,845

 
$
43,772

 
$
959

 
$
(41,069
)
 
$
49,953



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Table of Contents

Condensed Consolidating Statement of Comprehensive Income (Loss) Information
Three Months Ended March 31, 2014
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$

 
$

 
$
5,150

 
$
265

 
$
(78
)
 
$
5,337

Equipment sales

 

 
1,597

 

 
(149
)
 
1,448

Other revenues

 

 
58

 
34

 
(2
)
 
90

Total revenues

 

 
6,805

 
299

 
(229
)
 
6,875

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of services

 

 
1,460

 
4

 

 
1,464

Cost of equipment sales

 

 
2,313

 
138

 
(165
)
 
2,286

Selling, general and administrative

 

 
2,060

 
100

 
(64
)
 
2,096

Depreciation and amortization

 

 
1,035

 
20

 

 
1,055

MetroPCS transaction and integration costs

 

 
12

 

 

 
12

Other, net

 

 
(10
)
 

 

 
(10
)
Total operating expenses

 

 
6,870

 
262

 
(229
)
 
6,903

Operating income (loss)

 

 
(65
)
 
37

 

 
(28
)
Other income (expense)
 
 
 
 
 
 
 
 
 
 
 
Interest expense to affiliates

 
(18
)
 

 

 

 
(18
)
Interest expense

 
(214
)
 
(18
)
 
(44
)
 

 
(276
)
Interest income

 

 
75

 

 

 
75

Other income (expense), net

 
(8
)
 
2

 

 

 
(6
)
Total other income (expense), net

 
(240
)
 
59

 
(44
)
 

 
(225
)
Loss before income taxes

 
(240
)
 
(6
)
 
(7
)
 

 
(253
)
Income tax expense

 

 
(100
)
 
(2
)
 

 
(102
)
Earnings (loss) of subsidiaries
(151
)
 
89

 
(15
)
 

 
77

 

Net income (loss)
(151
)
 
(151
)
 
79

 
(5
)
 
77

 
(151
)
Other comprehensive loss, net of tax
(3
)
 
(3
)
 
(3
)
 

 
6

 
(3
)
Total comprehensive income (loss)
$
(154
)
 
$
(154
)
 
$
76

 
$
(5
)
 
$
83

 
$
(154
)


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Table of Contents

Condensed Consolidating Statement of Comprehensive Income (Loss) Information
Three Months Ended March 31, 2013
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$

 
$

 
$
3,855

 
$
176

 
$
(26
)
 
$
4,005

Equipment sales

 

 
767

 

 
(161
)
 
606

Other revenues

 

 
56

 
42

 
(32
)
 
66

Total revenues

 

 
4,678

 
218

 
(219
)
 
4,677

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of services

 

 
1,122

 
19

 
(32
)
 
1,109

Cost of equipment sales

 

 
932

 
130

 
(176
)
 
886

Selling, general and administrative

 

 
1,481

 
36

 
(11
)
 
1,506

Depreciation and amortization

 

 
735

 
20

 

 
755

MetroPCS transaction and integration costs

 

 
13

 

 

 
13

Restructuring costs

 

 
31

 

 

 
31

Other, net

 

 
(2
)
 

 

 
(2
)
Total operating expenses

 

 
4,312

 
205

 
(219
)
 
4,298

Operating income

 

 
366

 
13

 

 
379

Other income (expense)
 
 
 
 
 
 
 
 
 
 
 
Interest expense to affiliates

 
(178
)
 

 

 

 
(178
)
Interest expense

 

 
(8
)
 
(43
)
 

 
(51
)
Interest income

 

 
35

 

 

 
35

Other expense, net

 
(6
)
 

 

 

 
(6
)
Total other income (expense), net

 
(184
)
 
27

 
(43
)
 

 
(200
)
Income (loss) before income taxes

 
(184
)
 
393

 
(30
)
 

 
179

Income tax expense (benefit)

 

 
81

 
(9
)
 

 
72

Earnings (loss) of subsidiaries

 
291

 
(14
)
 

 
(277
)
 

Net income (loss)

 
107

 
298

 
(21
)
 
(277
)
 
107

Other comprehensive income (loss), net of tax

 
(1
)
 
1

 

 
(1
)
 
(1
)
Total comprehensive income (loss)
$

 
$
106

 
$
299

 
$
(21
)
 
$
(278
)
 
$
106








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Condensed Consolidating Statement of Cash Flows Information
Three Months Ended March 31, 2014
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
5

 
$
(466
)
 
$
1,199

 
$
21

 
$

 
$
759

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 

 
(947
)
 

 

 
(947
)
Investments in unconsolidated affiliates, net

 

 
(11
)
 

 

 
(11
)
Other, net

 

 
(7
)
 

 

 
(7
)
Net cash used in investing activities

 

 
(965
)
 

 

 
(965
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Repayments of short-term debt for purchases of property and equipment

 

 
(226
)
 

 

 
(226
)
Proceeds from exercise of stock options
14

 

 

 

 

 
14

Other, net

 

 
(2
)
 

 

 
(2
)
Net cash provided by (used in) financing activities
14

 

 
(228
)
 

 

 
(214
)
 
 
 
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
19

 
(466
)
 
6

 
21

 

 
(420
)
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
2,960

 
2,698

 
57

 
176

 

 
5,891

End of period
$
2,979

 
$
2,232

 
$
63

 
$
197

 
$

 
$
5,471


Condensed Consolidating Statement of Cash Flows Information
Three Months Ended March 31, 2013
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$

 
$

 
$
896

 
$
13

 
$

 
$
909

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 

 
(1,076
)
 

 

 
(1,076
)
Purchases of intangible assets

 

 
(49
)
 

 

 
(49
)
Short term affiliate loan receivable, net

 

 
275

 

 

 
275

Other, net

 

 
(4
)
 

 

 
(4
)
Net cash used in investing activities

 

 
(854
)
 

 

 
(854
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents

 

 
42

 
13

 

 
55

Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
 
Beginning of period

 

 
287

 
107

 

 
394

End of period
$

 
$

 
$
329

 
$
120

 
$

 
$
449



18

Table of Contents

Note 8 – Subsequent Events

Spectrum License Transactions

In January 2014, T-Mobile entered into agreements with Verizon for the acquisition of 700 MHz A-Block spectrum licenses for cash and the transfer of certain AWS spectrum and PCS spectrum.  Upon clo