Sprint Q3 2012 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
or
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o | | 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 1-04721
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SPRINT NEXTEL CORPORATION
(Exact name of registrant as specified in its charter)
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KANSAS | 48-0457967 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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6200 Sprint Parkway, Overland Park, Kansas | 66251 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (800) 829-0965
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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 o
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 o
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.
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Large accelerated filer | x | | Accelerated filer | o |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
COMMON SHARES OUTSTANDING AT NOVEMBER 5, 2012:
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VOTING COMMON STOCK | |
Series 1 | 3,004,614,019 |
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SPRINT NEXTEL CORPORATION
TABLE OF CONTENTS
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| | Page Reference |
Item | PART I — FINANCIAL INFORMATION | |
1. | | |
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2. | | |
3. | | |
4. | | |
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| PART II — OTHER INFORMATION | |
1. | | |
1A. | | |
2. | | |
3. | | |
4. | | |
5. | | |
6. | | |
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PART I —FINANCIAL INFORMATION
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Item 1. | Financial Statements (Unaudited) |
SPRINT NEXTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (in millions, except share and per share data) |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 5,645 |
| | $ | 5,447 |
|
Short-term investments | 684 |
| | 150 |
|
Accounts and notes receivable, net of allowance for doubtful accounts of $183 and $219 | 3,440 |
| | 3,206 |
|
Device and accessory inventory | 996 |
| | 913 |
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Deferred tax assets | 75 |
| | 130 |
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Prepaid expenses and other current assets | 771 |
| | 491 |
|
Total current assets | 11,611 |
| | 10,337 |
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Investments | 1,141 |
| | 1,996 |
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Property, plant and equipment, net | 13,108 |
| | 14,009 |
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Intangible assets | | | |
Goodwill | 359 |
| | 359 |
|
FCC licenses and other | 20,631 |
| | 20,453 |
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Definite-lived intangible assets, net | 1,401 |
| | 1,616 |
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Other assets | 721 |
| | 613 |
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Total assets | $ | 48,972 |
| | $ | 49,383 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
Current liabilities: | | | |
Accounts payable | $ | 3,210 |
| | $ | 2,348 |
|
Accrued expenses and other current liabilities | 4,427 |
| | 4,143 |
|
Current portion of long-term debt, financing and capital lease obligations | 310 |
| | 8 |
|
Total current liabilities | 7,947 |
| | 6,499 |
|
Long-term debt, financing and capital lease obligations | 20,994 |
| | 20,266 |
|
Deferred tax liabilities | 7,089 |
| | 6,986 |
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Other liabilities | 4,443 |
| | 4,205 |
|
Total liabilities | 40,473 |
| | 37,956 |
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Commitments and contingencies |
| |
|
Shareholders' equity: | | | |
Common shares, voting, par value $2.00 per share, 6.5 billion shares authorized, 3.003 and 2.996 billion shares issued | 6,007 |
| | 5,992 |
|
Paid-in capital | 46,752 |
| | 46,716 |
|
Accumulated deficit | (43,494 | ) | | (40,489 | ) |
Accumulated other comprehensive loss | (766 | ) | | (792 | ) |
Total shareholders' equity | 8,499 |
| | 11,427 |
|
Total liabilities and shareholders' equity | $ | 48,972 |
| | $ | 49,383 |
|
See Notes to the Consolidated Financial Statements
SPRINT NEXTEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (in millions, except per share amounts) |
Net operating revenues | $ | 8,763 |
| | $ | 8,333 |
| | $ | 26,340 |
| | $ | 24,957 |
|
Net operating expenses: | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization included below) | 5,093 |
| | 4,611 |
| | 15,189 |
| | 13,596 |
|
Selling, general and administrative | 2,391 |
| | 2,320 |
| | 7,208 |
| | 7,131 |
|
Severance, exit costs and asset impairments | 22 |
| | — |
| | 290 |
| | — |
|
Depreciation and amortization | 1,488 |
| | 1,194 |
| | 5,050 |
| | 3,684 |
|
Other, net | — |
| | — |
| | (282 | ) | | — |
|
| 8,994 |
| | 8,125 |
| | 27,455 |
| | 24,411 |
|
Operating (loss) income | (231 | ) | | 208 |
| | (1,115 | ) | | 546 |
|
Other expense: | | | | | | | |
Interest expense | (377 | ) | | (236 | ) | | (996 | ) | | (724 | ) |
Equity in losses of unconsolidated investments and other, net | (112 | ) | | (261 | ) | | (783 | ) | | (1,261 | ) |
| (489 | ) | | (497 | ) | | (1,779 | ) | | (1,985 | ) |
Loss before income taxes | (720 | ) | | (289 | ) | | (2,894 | ) | | (1,439 | ) |
Income tax expense | (47 | ) | | (12 | ) | | (110 | ) | | (148 | ) |
Net loss | $ | (767 | ) | | $ | (301 | ) | | $ | (3,004 | ) | | $ | (1,587 | ) |
| | | | | | | |
Basic and diluted net loss per common share | $ | (0.26 | ) | | $ | (0.10 | ) | | $ | (1.00 | ) | | $ | (0.53 | ) |
Basic and diluted weighted average common shares outstanding | 3,003 |
| | 2,996 |
| | 3,001 |
| | 2,994 |
|
| | | | | | | |
Other comprehensive income, net of tax: | | | | | | | |
Net unrealized holding gains (losses) on securities and other | $ | 1 |
| | $ | (6 | ) | | $ | (5 | ) | | $ | 12 |
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Net unrecognized net periodic pension and other postretirement benefits | 14 |
| | 9 |
| | 31 |
| | 27 |
|
Other comprehensive income | 15 |
| | 3 |
| | 26 |
| | 39 |
|
Comprehensive loss | $ | (752 | ) | | $ | (298 | ) | | $ | (2,978 | ) | | $ | (1,548 | ) |
See Notes to the Consolidated Financial Statements
SPRINT NEXTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2012 | | 2011 |
| (in millions) |
Cash flows from operating activities: | | | |
Net loss | $ | (3,004 | ) | | $ | (1,587 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Asset impairments | 84 |
| | — |
|
Depreciation and amortization | 5,050 |
| | 3,684 |
|
Provision for losses on accounts receivable | 413 |
| | 370 |
|
Share-based compensation expense | 57 |
| | 51 |
|
Deferred income taxes | 142 |
| | 114 |
|
Equity in losses of unconsolidated investments and other, net | 783 |
| | 1,261 |
|
Gains from asset dispositions and exchanges | (29 | ) | | — |
|
Contribution to pension plan | (108 | ) | | (124 | ) |
Spectrum hosting contract termination | (236 | ) | | — |
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Other changes in assets and liabilities: | | | |
Accounts and notes receivable | (526 | ) | | (387 | ) |
Inventories and other current assets | (348 | ) | | (268 | ) |
Accounts payable and other current liabilities | 395 |
| | (862 | ) |
Non-current assets and liabilities, net | 55 |
| | 316 |
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Other, net | 55 |
| | 34 |
|
Net cash provided by operating activities | 2,783 |
| | 2,602 |
|
Cash flows from investing activities: | | | |
Capital expenditures | (2,784 | ) | | (2,221 | ) |
Expenditures relating to FCC licenses | (152 | ) | | (199 | ) |
Investment in Clearwire | (128 | ) | | — |
|
Proceeds from sales and maturities of short-term investments | 958 |
| | 840 |
|
Purchases of short-term investments | (1,492 | ) | | (780 | ) |
Other, net | 13 |
| | (10 | ) |
Net cash used in investing activities | (3,585 | ) | | (2,370 | ) |
Cash flows from financing activities: | | | |
Proceeds from debt and financings | 3,577 |
| | — |
|
Repayments of debt and capital lease obligations | (2,508 | ) | | (1,655 | ) |
Debt financing costs | (90 | ) | | (3 | ) |
Other, net | 21 |
| | 14 |
|
Net cash provided by (used in) financing activities | 1,000 |
| | (1,644 | ) |
Net increase (decrease) in cash and cash equivalents | 198 |
| | (1,412 | ) |
Cash and cash equivalents, beginning of period | 5,447 |
| | 5,173 |
|
Cash and cash equivalents, end of period | $ | 5,645 |
| | $ | 3,761 |
|
See Notes to the Consolidated Financial Statements
SPRINT NEXTEL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in millions)
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| | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balance, December 31, 2011 | 2,996 |
| | $ | 5,992 |
| | $ | 46,716 |
| | $ | (40,489 | ) | | $ | (792 | ) | | $ | 11,427 |
|
Net loss | | | | | | | (3,004 | ) | | | | (3,004 | ) |
Other comprehensive income, net of tax | | | | | | | | | 26 |
| | 26 |
|
Issuance of common shares, net | 7 |
| | 15 |
| | 6 |
| | | | | | 21 |
|
Share-based compensation expense | | | | | 30 |
| | | | | | 30 |
|
Other, net | | | | | | | (1 | ) | | | | (1 | ) |
Balance, September 30, 2012 | 3,003 |
| | $ | 6,007 |
| | $ | 46,752 |
| | $ | (43,494 | ) | | $ | (766 | ) | | $ | 8,499 |
|
See Notes to the Consolidated Financial Statements
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INDEX
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SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Note 1. | Basis of Presentation |
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2011. Unless the context otherwise requires, references to “Sprint,” “we,” “us,” “our” and the “Company” mean Sprint Nextel Corporation and its consolidated subsidiaries.
The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.
Certain prior period amounts have been reclassified to conform to the current period presentation.
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Note 2. | New Accounting Pronouncements |
In May 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance regarding Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which resulted in common requirements for measuring fair value and for disclosing information about fair value measurement under both U.S. GAAP and International Financial Reporting Standards (IFRS), including a consistent definition of the term "fair value." The amendments were effective beginning in the first quarter of 2012, and did not have a material effect on our consolidated financial statements.
In December 2011, the FASB issued authoritative guidance regarding Disclosures about Offsetting Assets and Liabilities, which requires common disclosure requirements to allow investors to better compare and assess the effect of offsetting arrangements on financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The standard will be effective beginning in the first quarter of 2013, requires retrospective application, and will only affect disclosures in the footnotes to the financial statements. In October 2012, the FASB tentatively decided to limit the scope of this authoritative literature to derivatives, repurchase agreements, and securities lending and securities borrowing arrangements. The FASB directed the staff to draft a proposed Accounting Standards Update for vote at a later meeting. We are currently evaluating the impact, if any, on our consolidated financial statement disclosures and, based on the proposed scope revision, do not expect this authoritative literature to impact our existing disclosures.
In July 2012, the FASB issued authoritative guidance regarding Testing Indefinite-Lived Intangible Assets for Impairment, which is intended to reduce the cost and complexity of the annual impairment test for indefinite-lived intangible assets by providing entities with the option of performing an elective qualitative assessment to determine whether further impairment testing is necessary. The standard will be effective for annual and interim indefinite-lived intangible asset impairment tests performed beginning the first quarter of 2013, with early adoption permitted under certain circumstances. We expect to early adopt the provisions of this standard as part of our 2012 annual assessment of indefinite-lived intangible assets.
The components of investments were as follows:
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| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (in millions) |
Marketable equity securities | $ | 46 |
| | $ | 43 |
|
Equity method and other investments | 1,095 |
| | 1,953 |
|
| $ | 1,141 |
| | $ | 1,996 |
|
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Equity Method Investment in Clearwire
Sprint's Ownership Interest
Sprint's investment in Clearwire Corporation and its consolidated subsidiary Clearwire Communications LLC (together, "Clearwire") is one of the ways we participate in the fourth generation (4G) wireless broadband market. Sprint offers certain 4G products utilizing Clearwire's 4G wireless Worldwide Interoperability for Microwave Access (WiMAX) broadband network in available markets. As of September 30, 2012, Sprint held approximately 48.2% of a non-controlling economic interest in Clearwire Communications LLC and a 48.2% non-controlling voting interest in Clearwire Corporation (together, “Equity Interests”) for which the carrying value totaled $764 million, which is equivalent to a $1.08 per share carrying value. In June 2012, Sprint exercised its right to repurchase approximately 78 million Class B Voting shares at par value of $0.0001 per share for approximately eight thousand dollars, previously surrendered in June 2011, resulting in Sprint's non-controlling voting interest now being equivalent to its non-controlling economic interest.
In addition to our Equity Interests, Sprint held two notes receivable from Clearwire as of September 30, 2012. On January 2, 2012, in conjunction with new long-term pricing agreements reached between the two companies in the fourth quarter of 2011, Sprint provided $150 million to Clearwire in exchange for a promissory note. The note has a stated interest rate of 11.5% that matures in two installments of $75 million plus accrued interest in January 2013 and in January 2014. The difference between the fair value of the note and its face value at the date of issuance has been recorded as a prepaid expense, which will be amortized over the service period to cost of service. Sprint, at its sole discretion, can choose to offset any amounts payable by Clearwire under this promissory note against amounts owed by Sprint under the mobile virtual network operator (MVNO) agreement. Additionally, Sprint holds a note receivable from Clearwire issued in 2008 with a fixed interest rate of 12% and a maturity date of December 2015. The total carrying value of the notes receivable, which includes accretion related to premiums for both notes and fees associated with the 2009 replacement of the 2008 note, was $316 million and $178 million as of September 30, 2012 and December 31, 2011, respectively. The carrying value of Sprint's Equity Interests, together with the long-term portion of the carrying value of the notes receivable, are included in the line item "Investments" in Sprint's consolidated balance sheets. The current portion of the carrying value of the notes receivable is included in the line item "Prepaid expenses and other current assets" in Sprint's consolidated balance sheets.
Equity in Losses and Summarized Financial Information
Equity in losses from Clearwire were $208 million and $927 million for the three and nine-month periods ended September 30, 2012 and $271 million and $1.3 billion for the three and nine-month periods ended September 30, 2011, respectively. Sprint's losses from its investment in Clearwire consist of Sprint's share of Clearwire's net loss and other adjustments, if any, such as non-cash impairment of Sprint's investment, gains or losses associated with the dilution of Sprint's ownership interest resulting from Clearwire's equity issuances, and other items recognized by Clearwire Corporation that do not affect Sprint's economic interest. Sprint's equity in losses from Clearwire include charges that were associated with Clearwire's write-off of certain network and other assets that no longer meet its strategic plans that were $41 million for the nine-month period ended September 30, 2012 and $15 million and $309 million for the three and nine-month periods ended September 30, 2011, respectively. The nine-month period ended September 30, 2012 also includes a $204 million pre-tax impairment recognized in the second quarter 2012 reflecting Sprint's reduction in the carrying value of its investment in Clearwire to an estimated fair value.
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for Clearwire is as follows:
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (in millions) |
Revenues | $ | 314 |
| | $ | 332 |
| | $ | 954 |
| | $ | 892 |
|
Operating expenses | (647 | ) | | (731 | ) | | (2,020 | ) | | (2,850 | ) |
Operating loss | $ | (333 | ) | | $ | (399 | ) | | $ | (1,066 | ) | | $ | (1,958 | ) |
Net loss from continuing operations before non-controlling interests | $ | (320 | ) | | $ | (479 | ) | | $ | (1,312 | ) | | $ | (2,212 | ) |
Net loss from discontinued operations before non-controlling interests | $ | (173 | ) | | $ | (5 | ) | | $ | (179 | ) | | $ | (79 | ) |
Sprint's Recoverability
At each financial reporting measurement date, we evaluate the excess, if any, of Sprint's carrying value over the estimated fair value of our investment in Clearwire to determine if such excess, an implied unrealized loss, is other-than-temporary. Our evaluation considers, among other things, both observable and unobservable inputs, including Clearwire's market capitalization, historical volatility associated with Clearwire's common stock, the duration of a decline in Clearwire's average trading stock price below Sprint's per share carrying value, potential tax benefits, governance rights associated with our non-controlling voting interest, and our expectation of the duration of our ongoing relationship, as well as other factors. Based upon the evaluation of factors described above, we recognized a non-cash impairment of $204 million in the second quarter 2012 to reflect a reduction to our best estimate of fair value associated with our non-controlling economic interests. The determination of an estimate of fair value for a non-public security, such as our non-controlling economic interest, is subject to significant judgment and uncertainty. Clearwire's stock price is subject to significant volatility. Based on our analysis, we expect to recover the carrying value of our investment in Clearwire as of September 30, 2012. Declines in Clearwire's stock price subsequent to September 30, 2012, if any, will be evaluated in future periods for impairment of our remaining investment. Our proportionate share of the underlying net assets of Clearwire exceeds the carrying value of our equity investment by approximately $338 million, which is primarily related to our non-cash impairments recognized in prior periods.
Clearwire Related-Party Transactions
Sprint's equity method investment in Clearwire includes agreements by which we resell wireless data services utilizing Clearwire's 4G WiMAX network. In addition, Clearwire utilizes the third generation (3G) Sprint network to provide dual-mode service to its customers in those areas where access to its 4G WiMAX network is not yet available. Amounts included in our consolidated balance sheets related to our agreement to purchase 4G WiMAX services from Clearwire as of September 30, 2012 and December 31, 2011 totaled $119 million and $5 million, respectively, for prepaid expenses and other current assets and $155 million and $77 million, respectively, for accounts payable, accrued expense and other liabilities. Cost of services and products included in our consolidated statements of comprehensive loss related to our agreement to purchase 4G WiMAX services from Clearwire totaled $103 million and $312 million for the three and nine-month periods ended September 30, 2012, and $111 million and $263 million for the three and nine-month periods ended September 30, 2011, respectively.
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Note 4. | Financial Instruments |
Cash and cash equivalents, accounts and notes receivable, and accounts payable are carried at cost, which approximates fair value. Our short-term investments (consisting primarily of time deposits, commercial paper, and Treasury securities), totaling $684 million and $150 million as of September 30, 2012 and December 31, 2011, respectively, are recorded at amortized cost, and the respective carrying amounts approximate fair value. The fair value of our marketable equity securities totaling $46 million and $43 million as of September 30, 2012 and December 31, 2011, respectively, is measured on a recurring basis using quoted prices in active markets.
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of current and long-term debt is determined based on quoted prices in active markets or by using other observable inputs that are derived principally from or corroborated by observable market data. The fair value of financing and capital lease obligations is estimated using a valuation model based on the lease terms of the obligations and market-based parameters such as bond interest rates. The following table presents carrying amounts and estimated fair values of our current and long-term debt, financing and capital lease obligations:
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| | | | | | | | | | | | | | | | | | | |
| Carrying amount | | Estimated Fair Value Using Input Type |
| | Quoted prices in active markets | | Observable | | Unobservable | | Total estimated fair value |
| (in millions) |
September 30, 2012 | $ | 21,304 |
| | $ | 16,166 |
| | $ | 6,617 |
| | $ | — |
| | $ | 22,783 |
|
December 31, 2011 | $ | 20,274 |
| | $ | 12,567 |
| | $ | 5,732 |
| | $ | — |
| | $ | 18,299 |
|
| |
Note 5. | Property, Plant and Equipment |
Property, plant and equipment consists primarily of network equipment and other long-lived assets used to provide service to our subscribers. In the first quarter 2012, we formalized our plans to take off-air roughly one-third, or 9,600 cell sites, of our total Nextel platform by the middle of 2012 with the remaining sites to be taken off-air by the end of 2013. As a result, in the first quarter 2012, we revised our estimates to shorten the expected useful lives of Nextel platform assets through the expected benefit period of the underlying assets through 2013 and also revised the expected timing and amount of our asset retirement obligations. During the second quarter 2012, as a result of our progress in taking Nextel platform sites off-air and our progress toward notifying and transitioning customers off the Nextel platform, we further reduced our estimated benefit period for the remaining Nextel platform assets through the middle of 2013 resulting in incremental depreciation expense during the period. The amounts reflected as depreciation expense are dependent upon the expected useful lives of assets, which includes our expectation of the timing of assets to be phased out of service, and could result in further revision during the decommissioning period. In addition, increasing data usage driven by more subscribers on the Sprint platform and a continuing shift in our subscriber base to smartphones is expected to require additional legacy 3G Sprint platform equipment that will not be utilized beyond the final deployment of Network Vision's multi-mode technology, which began in 2011 and is expected to continue through the middle of 2014. As a result, the estimated useful lives of such equipment will be shortened, as compared to similar prior capital expenditures, through the date on which Network Vision equipment is deployed and in-service. The incremental effect of accelerated depreciation expense totaled approximately $400 million and $1.7 billion for the three and nine-month periods ended September 30, 2012, of which the majority related to shortened useful lives of Nextel platform assets.
In connection with Network Vision, certain spectrum licenses that were not previously placed in service are now being prepared for their intended use. As qualifying activities are performed related to Network Vision, interest expense primarily related to the carrying value of these spectrum licenses is being capitalized to construction in progress within property, plant and equipment, which ceases as the spectrum is ready for its intended use. Interest expense capitalized in connection with the construction of long-lived assets totaled $52 million and $269 million for the three and nine-month periods ended September 30, 2012 and $103 million and $304 million for the three and nine-month periods ended September 30, 2011, respectively. Construction in progress (including any capitalized interest) associated with Network Vision is expected to be depreciated using the straight-line method over a weighted average useful life of approximately eight years, once the assets are placed in service. Property, plant, and equipment as of September 30, 2012 includes non-cash additions of approximately $900 million along with corresponding increases in accounts payable and accrued expenses and other current liabilities.
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of property, plant and equipment, and the related accumulated depreciation were as follows:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (in millions) |
Land | $ | 330 |
| | $ | 333 |
|
Network equipment, site costs and related software | 37,152 |
| | 37,600 |
|
Buildings and improvements | 4,886 |
| | 4,895 |
|
Non-network internal use software, office equipment and other | 1,846 |
| | 2,111 |
|
Construction in progress | 2,522 |
| | 1,752 |
|
Less accumulated depreciation | (33,628 | ) | | (32,682 | ) |
Property, plant and equipment, net | $ | 13,108 |
| | $ | 14,009 |
|
Indefinite-Lived Intangible Assets
|
| | | | | | | | | | | |
| December 31, 2011 | | Net Additions | | September 30, 2012 |
| | | (in millions) | | |
FCC licenses | $ | 20,044 |
| | $ | 178 |
| | $ | 20,222 |
|
Trademarks | 409 |
| | — |
| | 409 |
|
Goodwill | 359 |
| | — |
| | 359 |
|
| $ | 20,812 |
| | $ | 178 |
| | $ | 20,990 |
|
We hold 1.9 gigahertz (GHz), 800 megahertz (MHz), and 900 MHz Federal Communications Commission (FCC) licenses authorizing the use of radio frequency spectrum to deploy our wireless services. We also hold FCC licenses that are not yet placed in service but that we intend to use in accordance with FCC requirements. As long as the Company acts within the requirements and constraints of the regulatory authorities, the renewal and extension of these licenses is reasonably certain at minimal cost. We are not aware of any technology being developed that would render this spectrum obsolete and have concluded that these licenses are indefinite-lived intangible assets. Our Sprint and Boost Mobile trademarks have also been identified as indefinite-lived intangible assets. Goodwill represents the excess of consideration paid over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations.
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets Subject to Amortization
Sprint's customer relationships are amortized using the sum of the years' digits method. We reduce the gross carrying value and associated accumulated amortization when specified intangible assets become fully amortized. During the third quarter 2012, we reduced the gross carrying value and accumulated amortization by approximately $107 million associated with fully amortized intangible assets primarily related to customer relationships in connection with the 2007 acquisition of Northern PCS.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2012 | | December 31, 2011 |
| Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| | | | | | | (in millions) | | | | |
Customer relationships | 4 years | | $ | 234 |
| | $ | (224 | ) | | $ | 10 |
| | $ | 341 |
| | $ | (297 | ) | | $ | 44 |
|
Other intangible assets |
| | | | | | | | | | | | |
Trademarks | 10 to 37 years | | 1,168 |
| | (657 | ) | | 511 |
| | 1,169 |
| | (585 | ) | | 584 |
|
Reacquired rights | 9 to 14 years | | 1,571 |
| | (752 | ) | | 819 |
| | 1,571 |
| | (652 | ) | | 919 |
|
Other | 9 to 10 years | | 134 |
| | (73 | ) | | 61 |
| | 126 |
| | (57 | ) | | 69 |
|
Total other intangible assets | | | 2,873 |
| | (1,482 | ) | | 1,391 |
| | 2,866 |
| | (1,294 | ) | | 1,572 |
|
Total definite-lived intangible assets | | | $ | 3,107 |
| | $ | (1,706 | ) | | $ | 1,401 |
| | $ | 3,207 |
| | $ | (1,591 | ) | | $ | 1,616 |
|
Accounts payable at September 30, 2012 and December 31, 2011 include liabilities in the amounts of $100 million and $121 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.
| |
Note 8. | Long-Term Debt, Financing and Capital Lease Obligations |
|
| | | | | | | | | | | | | | | |
| Interest Rates | | Maturities | | September 30, 2012 | | December 31, 2011 |
| | | | | | | | | (in millions) |
Notes | | | | | | | | | | | |
Senior notes | | | | | | | | | | | |
Sprint Nextel Corporation | 6.00 | - | 11.50% | | 2016 | - | 2022 | | $ | 7,000 |
| | $ | 4,500 |
|
Sprint Capital Corporation | 6.88 | - | 8.75% | | 2019 | - | 2032 | | 6,204 |
| | 6,204 |
|
Serial redeemable senior notes | | | | | | | | | | | |
Nextel Communications, Inc. | 5.95 | - | 7.38% | | 2014 | - | 2015 | | 2,280 |
| | 4,780 |
|
Guaranteed notes | | | | | | | | | | | |
Sprint Nextel Corporation | 7.00 | - | 9.00% | | 2018 | - | 2020 | | 4,000 |
| | 3,000 |
|
Secured notes | | | | | | | | | | | |
iPCS, Inc. | 2.57 | - | 3.69% | | 2013 | - | 2014 | | 481 |
| | 481 |
|
Credit facilities | | | | | | | | | | | |
Bank credit facility | 4.38% | | 2013 | | — |
| | — |
|
Export Development Canada | 5.39% | | 2015 | | 500 |
| | 500 |
|
Secured equipment credit facility | 2.03% | | 2017 | | 77 |
| | — |
|
Financing obligation | 9.50% | | 2030 | | 698 |
| | 698 |
|
Capital lease obligations and other | 4.11 | - | 15.49% | | 2014 | - | 2022 | | 77 |
| | 71 |
|
Net (discounts) premiums | | | | | | | | | (13 | ) | | 40 |
|
| | | | | | | | | 21,304 |
| | 20,274 |
|
Less current portion | | | | | | | | | (310 | ) | | (8 | ) |
Long-term debt, financing and capital lease obligations | | | | | | | | | $ | 20,994 |
| | $ | 20,266 |
|
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2012, Sprint Nextel Corporation, the parent corporation, had $11.5 billion in principal amount of debt outstanding, including amounts drawn under the credit facilities. In addition, as of September 30, 2012 $9.0 billion in principal amount of our long-term debt issued by wholly-owned subsidiaries was guaranteed by the parent, of which approximately $6.8 billion was fully and unconditionally guaranteed. The indentures and financing arrangements governing certain subsidiaries' debt contain provisions that limit cash dividend payments on subsidiary common stock. The transfer of cash in the form of advances from the subsidiaries to the parent corporation generally is not restricted. Cash interest payments, net of amounts capitalized of $269 million and $304 million, totaled $912 million and $804 million during the nine-month periods ended September 30, 2012 and 2011, respectively.
Notes
Notes consist of senior notes, serial redeemable senior notes, and guaranteed notes, all of which are unsecured, as well as secured notes of iPCS, Inc. (iPCS), which are secured solely with the underlying assets of iPCS. Cash interest on all of the notes is generally payable semi-annually in arrears. As of September 30, 2012, approximately $19.8 billion of the notes were redeemable at the Company's discretion at the then-applicable redemption prices plus accrued interest.
As of September 30, 2012, approximately $8.8 billion of our senior notes and guaranteed notes provided holders with the right to require us to repurchase the notes if a change of control triggering event (as defined in our indentures and supplemental indentures governing applicable notes) occurs, which includes both a change of control (which will occur upon consummation of the SoftBank transaction, see Note 15) and a ratings decline of the applicable notes by each of Moody's Investor Services and Standard & Poor's Rating Services. If we are required to make a change of control offer, we will offer a cash payment equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest.
On March 1, 2012, the Company issued $1.0 billion aggregate principal amount of 9.125% notes due 2017 and $1.0 billion aggregate principal amount of 7.00% guaranteed notes due 2020. Interest is payable semi-annually on March 1 and September 1. The Company, at its option, may redeem some or all of either series of the notes at any time prior to maturity. The 2020 guaranteed notes are guaranteed by the Company's subsidiaries that guarantee its revolving bank credit facility and its facility with Export Development Canada (EDC). On June 8, 2012, the Company redeemed $1.0 billion of the $1.473 billion then outstanding Nextel Communications, Inc. 6.875% notes due 2013 plus accrued and unpaid interest.
On August 14, 2012, the Company issued $1.5 billion aggregate principal amount of 7.00% notes due 2020. Interest is payable semi-annually on February 15 and August 15. The Company, at its option, may redeem some or all of the notes at any time prior to maturity. On August 24, 2012, the Company redeemed all $473 million of the then outstanding Nextel Communications, Inc. 6.875% notes due 2013 and $1.0 billion of the approximately $2.1 billion then outstanding Nextel Communications, Inc. 7.375% notes due 2015, plus accrued and unpaid interest on both series of notes.
Credit Facilities
In May 2012, certain of our subsidiaries entered into a $1.0 billion secured equipment credit facility to finance equipment-related purchases from Ericsson for Network Vision. The cost of funds under this facility includes a fixed interest rate of 2.03%, and export credit agency premiums and other fees that, in total, equate to an expected effective interest rate of approximately 6% based on assumptions such as timing and amounts of drawdowns. The facility is secured by a lien on the equipment purchased and is fully and unconditionally guaranteed by the parent. The facility is equally divided into two consecutive tranches of $500 million, with drawdown availability contingent upon Sprint's equipment-related purchases from Ericsson, up to the maximum of each tranche. The first tranche of $500 million may be drawn upon through May 31, 2013, while the second tranche of $500 million may be drawn upon beginning April 1, 2013 through May 31, 2014. Interest and fully-amortizing principal payments are payable semi-annually on March 30 and September 30, with a final maturity date of March 2017 for both tranches. As of September 30, 2012, we had drawn approximately $77 million on the first tranche of the facility. The covenants under the secured equipment credit facility are similar to those of our revolving bank
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
credit facility, our EDC facility, and those of our guaranteed notes due 2018 and 2020.
As of September 30, 2012, approximately $1.0 billion in letters of credit were outstanding under our $2.2 billion revolving bank credit facility, including the letter of credit required by the 2004 FCC Report and Order to reconfigure the 800 MHz band (the "Report and Order"). As a result, the Company had $1.2 billion of borrowing capacity available under the revolving bank credit facility as of September 30, 2012. Our revolving bank credit facility expires in October 2013. The terms of the revolving bank credit facility provide for an interest rate equal to the London Interbank Offered Rate (LIBOR) plus a spread that varies depending on the Company's credit ratings. The Company's unsecured loan agreement with EDC has terms similar to those of the revolving bank credit facility, except that under the terms of the EDC loan, repayments of outstanding amounts cannot be re-drawn. As of September 30, 2012, the EDC loan was fully drawn. In addition, as of September 30, 2012, up to $423 million was available through May 31, 2013 under the first tranche of our secured equipment credit facility, although the use of such funds is limited to equipment-related purchases from Ericsson.
Under the terms of Sprint's and its consolidated subsidiaries' existing credit facilities, if a change of control occurs, we will be required to repay all outstanding balances in the amount of $577 million as of September 30, 2012, under the EDC facility, the secured equipment credit facility, and our revolving bank credit facility, as well as letters of credit issued of approximately $1.0 billion under our revolving bank credit facility .
Financing, Capital Lease and Other Obligations
We have approximately 3,000 cell sites that we sold and subsequently leased back. Terms extend through 2021, with renewal options for an additional 20 years. These cell sites continue to be reported as part of our property, plant and equipment due to our continued involvement with the property sold and the transaction is accounted for as a financing. Our capital lease and other obligations are primarily for the use of wireless network equipment.
Covenants
As of September 30, 2012, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. A default under any of our borrowings could trigger defaults under our other debt obligations, which in turn could result in the maturities being accelerated. Certain indentures that govern our outstanding notes require compliance with various covenants, including covenants that limit the Company's ability to sell all or substantially all of its assets, covenants that limit the ability of the Company and its subsidiaries to incur indebtedness, and covenants that limit the ability of the Company and its subsidiaries to incur liens, as defined by the terms of the indentures.
We are currently restricted from paying cash dividends because our ratio of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and certain other non-recurring items, as defined in the credit facility (adjusted EBITDA), exceeds 2.5 to 1.0.
| |
Note 9. | Severance, Exit Costs and Asset Impairments |
Severance and Exit Costs Activity
For the three and nine-month periods ended September 30, 2012, we recognized costs of $22 million and $206 million, respectively, solely attributable to our Wireless segment, primarily related to lease exit costs associated with taking certain Nextel platform sites off-air in 2012, for which we no longer expect to receive any economic benefit. In addition, for the three and nine-month periods ended September 30, 2012, we recognized costs of $12 million ($8 million Wireless; $4 million Wireline) and $39 million ($21 million Wireless; $18 million Wireline), respectively, in "Cost of services and products" within the consolidated statements of comprehensive loss related to payments that will continue to be made under our backhaul access contracts for which we will no longer be receiving any economic benefit. We did not recognize any severance or exit costs in the nine-month period ended September 30, 2011. We expect to incur significant additional exit costs in the future as we continue to take Nextel platform sites off-air and transition our existing backhaul architecture to a replacement technology for our remaining network sites. We estimate the amount of lease exit costs to be recognized in future periods for sites estimated to be taken off-air during 2013 to be approximately $300 to $400 million, depending upon the timing and remaining
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
expected contractual payments. The amount of exit costs expected to be recognized with backhaul access contracts cannot be estimated at this time.
The following provides the activity in the severance and exit costs liability included in "Accounts payable", "Accrued expenses and other current liabilities" and "Other liabilities" within the consolidated balance sheets:
|
| | | | | | | | | | | | | | | |
| | | 2012 Activity | | |
| December 31, 2011 | | Net Expense | | Cash Payments and Other | | September 30, 2012 |
| (in millions) |
Lease exit costs | $ | 58 |
| | $ | 206 |
| | $ | (28 | ) | | $ | 236 |
|
Severance costs | 21 |
| | — |
| | (4 | ) | | 17 |
|
Access exit costs | — |
| | 39 |
| | (1 | ) | | 38 |
|
| $ | 79 |
| | $ | 245 |
| | $ | (33 | ) | | $ | 291 |
|
Asset Impairments
For the nine-month period ended September 30, 2012, we recorded asset impairments of $84 million of construction in progress costs consisting of $18 million associated with a decision to utilize fiber backhaul, which we expect to be more cost effective, rather than microwave backhaul and $66 million of capitalized assets specific to the spectrum hosting arrangement that we no longer intend to deploy (see Note 11). For the three-month period ended September 30, 2012 and the nine-month period ended September 30, 2011, there were no asset impairments recorded.
The differences that caused our effective income tax rates to vary from the 35% U.S. federal statutory rate for income taxes were as follows:
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2012 | | 2011 |
| (in millions) |
Income tax benefit at the federal statutory rate | $ | 1,013 |
| | $ | 504 |
|
Effect of: | | | |
State income taxes, net of federal income tax effect | 104 |
| | (7 | ) |
Change in valuation allowance | (1,210 | ) | | (654 | ) |
Other, net | (17 | ) | | 9 |
|
Income tax expense | $ | (110 | ) | | $ | (148 | ) |
Effective income tax rate | (3.8 | )% | | (10.3 | )% |
The realization of deferred tax assets, including net operating loss carryforwards, is dependent on the generation of future taxable income sufficient to realize the tax deductions, carryforwards and credits. However, our history of consecutive annual losses reduces our ability to rely on expectations of future income in evaluating the ability to realize our deferred tax assets. Valuation allowances on deferred tax assets are recognized if it is determined that it is more likely than not that the asset will not be realized. As a result, the Company recognized an increase in the valuation allowance of $1.2 billion and $654 million for the nine-month periods ended September 30, 2012 and 2011, respectively, on deferred tax assets primarily related to federal and state net operating loss carryforwards generated during the periods. The valuation allowance was $5.1 billion and $3.9 billion as of September 30, 2012 and December 31, 2011, respectively. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits.
Income tax expense of $110 million and $148 million for the nine-month periods ended September 30, 2012 and 2011, respectively, is primarily attributable to taxable temporary differences from amortization of FCC licenses. FCC licenses are amortized over 15 years for income tax purposes but, because these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. This difference results in net
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
deferred income tax expense since the taxable temporary difference cannot be scheduled to reverse during the loss carryforward period. In addition, during the nine-month period ended September 30, 2012, a $33 million tax benefit was recorded as a result of the successful resolution of various state income tax uncertainties. During the nine-month period ended September 30, 2011, a $52 million expense was recorded as a result of changes in corporate state income tax laws.
As of September 30, 2012 and December 31, 2011, we maintained a liability related to unrecognized tax benefits of $211 million and $225 million, respectively. Cash was paid for net income taxes of $26 million and $33 million during the nine-month periods ended September 30, 2012 and 2011, respectively.
Our Network Vision multi-mode network technology is designed to utilize a single base station capable of handling various spectrum bands, including Sprint's 800 MHz and 1.9 GHz spectrum as well as spectrum bands owned or accessed by other parties. In June 2011, we entered into a 15-year arrangement with LightSquared LP and LightSquared Inc. (collectively, “LightSquared”). Under the terms of the arrangement, and in conjunction with our Network Vision deployment, we agreed to deploy and operate a long term evolution (LTE) network capable of utilizing the 1.6 GHz spectrum licensed to or available to LightSquared during the term of the arrangement, a service we refer to as "spectrum hosting."
On March 16, 2012, because certain conditions were not met by LightSquared, we elected to terminate the arrangement. Because we have no future performance obligations with respect to the arrangement, we recognized $236 million of the $310 million of advanced payments received from LightSquared as other operating income within "Other, net" in the first quarter 2012. We also refunded $65 million in prepayments LightSquared made to cover Sprint's costs that were not ultimately incurred by us. In April 2012, we refunded approximately $2 million of the remaining $9 million of advanced payments as finalization of all remaining outstanding items subject to the termination and unwind provisions of the original arrangement. We recognized the remaining $7 million of advanced payments as operating income during the second quarter of 2012. During the first quarter 2012, we impaired approximately $66 million of capitalized assets that the Company no longer intends to deploy as a result of the termination of the spectrum hosting arrangement with LightSquared (see Note 9). The net gain of $170 million recorded in the first quarter of 2012 will be substantially offset in future periods by operating expenses related to non-cancellable executory contracts with vendors that the Company entered into in contemplation of providing the spectrum hosting services to LightSquared.
| |
Note 12. | Commitments and Contingencies |
Litigation, Claims and Assessments
In March 2009, a shareholder brought suit, Bennett v. Sprint Nextel Corp., in the U.S. District Court for the District of Kansas, alleging that the Company and three of our former officers violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by failing adequately to disclose certain alleged operational difficulties subsequent to the Sprint-Nextel merger, and by purportedly issuing false and misleading statements regarding the write-down of goodwill. The plaintiff seeks class action status for purchasers of our common stock from October 26, 2006 to February 27, 2008. On January 6, 2011, the Court denied our motion to dismiss. Subsequently, our motion to certify the January 6, 2011 order for an interlocutory appeal was denied, and discovery has begun. Plaintiff moved to certify a class of bondholders as well as owners of common stock, and we have opposed that motion. We believe the complaint is without merit and intend to defend the matter vigorously. We do not expect the resolution of this matter to have a material adverse effect on our financial position or results of operations.
In addition, five related shareholder derivative suits were filed against the Company and certain of our present and/or former officers and directors. The first, Murphy v. Forsee, was filed in state court in Kansas on April 8, 2009, was removed to federal court, and was stayed by the court pending resolution of the motion to dismiss the Bennett case; the second, Randolph v. Forsee, was filed on July 15, 2010 in state court in Kansas, was removed to federal court, and was remanded back to state court; the third, Ross-Williams v. Bennett, et al., was filed in state court in Kansas on February 1, 2011; the fourth, Price v. Forsee, et al., was filed in state court in Kansas on April
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15, 2011; and the fifth, Hartleib v. Forsee, et. al., was filed in federal court in Kansas on July 14, 2011. These cases are essentially stayed while we proceed with discovery in the Bennett case. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
On April 19, 2012, the New York Attorney General filed a complaint alleging that Sprint has fraudulently failed to collect and pay more than $100 million in New York sales taxes on receipts from its sale of wireless telephone services since July 2005. The complaint seeks recovery of triple damages as well as penalties and interest. We moved to dismiss the complaint on June 14, 2012; that motion is fully briefed and we are awaiting a decision by the court. We believe the complaint is without merit and intend to defend this matter vigorously. On July 23, 2012, the SEC issued a formal order of investigation relating to the Company's sales tax collection. The Company is cooperating with the staff of the SEC in connection with the investigation. The Company cannot predict the outcome of, or the time-frame for, the conclusion of the SEC investigation. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
In addition, seven related shareholder derivative suits were filed against the Company and certain of its current and former officers and directors. Each suit alleges generally that the individual defendants breached their fiduciary duties to the Company and its shareholders by allegedly permitting, and failing to disclose, the actions alleged in the suit filed by the New York Attorney General. One suit, filed by the Louisiana Municipal Police Employees Retirement System, is pending in federal court in New York; one suit is pending in state court in Johnson County, Kansas; and five suits are pending in federal court in Kansas. The six Kansas suits have been stayed by agreement among the parties. The defendants filed a motion to dismiss the New York suit on September 19, 2012, and the parties are in the process of briefing that motion. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
Sprint is currently involved in numerous court actions alleging that Sprint is infringing various patents. Most of these cases effectively seek only monetary damages. A small number of these cases are brought by companies that sell products and seek injunctive relief as well. These cases have progressed to various degrees and a small number may go to trial if they are not otherwise resolved. Adverse resolution of these cases could require us to pay significant damages, cease certain activities, or cease selling the relevant products and services. In many circumstances, we would be indemnified for monetary losses that we incur with respect to the actions of our suppliers or service providers. We do not expect the resolution of these cases to have a material adverse effect on our financial position or results of operations.
Various other suits, inquiries, proceedings and claims, either asserted or unasserted, including purported class actions typical for a large business enterprise and intellectual property matters, are possible or pending against us or our subsidiaries. If our interpretation of certain laws or regulations, including those related to various state matters such as sales, use or property taxes, were found to be mistaken, it could result in payments by us. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations.
Spectrum Reconfiguration Obligations
The Report and Order includes rules regarding interference in the 800 MHz band and a comprehensive plan to reconfigure the 800 MHz band. The Report and Order provides for the exchange of a portion of our 800 MHz FCC spectrum licenses, and requires us to fund the cost incurred by public safety systems and other incumbent licensees to reconfigure the 800 MHz spectrum band. In addition, we received licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band; however, we were required to relocate and reimburse the incumbent licensees in this band for their costs of relocation to another band designated by the FCC. We completed all of our 1.9 GHz incumbent relocation and reimbursement obligations in the second half of 2010.
The minimum cash obligation is $2.8 billion under the Report and Order. We are, however, obligated to pay the full amount of the costs relating to the reconfiguration plan, even if those costs exceed $2.8 billion. As required under the terms of the Report and Order, a letter of credit has been secured to provide assurance that funds will be available to pay the relocation costs of the incumbent users of the 800 MHz spectrum. We submit the qualified 800 MHz relocation costs to the FCC for review for potential letter of credit reductions on a periodic basis.
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As a result of these reviews, our letter of credit was reduced from $2.5 billion at the start of the project to $884 million as of September 30, 2012, as approved by the FCC.
Total payments directly attributable to our performance under the Report and Order, from the inception of the program, are approximately $3.1 billion, of which $150 million was incurred related to FCC licenses during the nine-month period ended September 30, 2012. When incurred, these costs are generally accounted for either as property, plant and equipment or as additions to FCC licenses. Although costs incurred to date have exceeded $2.8 billion, not all of those costs have been reviewed and accepted as eligible by the transition administrator. Regardless, we continue to estimate that total eligible direct costs attributable to the spectrum reconfigurations will exceed the minimum cash obligation of $2.8 billion. This estimate is dependent on significant assumptions including the final licensee costs and costs associated with relocating licensees in the Mexican border region for which there is currently no approved border plan.
Completion of the 800 MHz band reconfiguration was initially required by June 26, 2008. The FCC continues to grant 800 MHz public safety licensees additional time to complete their band reconfigurations which, in turn, delays Sprint's access to some of our 800 MHz replacement channels. Accordingly, we will continue to transition to our 800 MHz replacement channels consistent with public safety licensees' reconfiguration progress. We anticipate that the continuing reconfiguration progress will be sufficient to support the 800 MHz portion of Sprint's Network Vision rollout. On May 24, 2012, the FCC revised its rules to authorize Sprint to deploy wireless broadband services, such as CDMA and LTE, on its 800 MHz spectrum, including channels that become available to Sprint upon completion of the 800 MHz band reconfiguration program.
Basic loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share adjusts basic earnings (loss) per common share, computed using the treasury stock method, for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially dilutive common shares issuable under our equity-based compensation plans where the average market price exceeded the exercise price were 12 million and 34 million shares as of September 30, 2012 and 2011, respectively. All such potentially dilutive shares were antidilutive for the nine-month periods ended September 30, 2012 and 2011 and, therefore, have no effect on our determination of dilutive weighted average number of shares outstanding.
Sprint operates two reportable segments: Wireless and Wireline.
| |
• | Wireless primarily includes retail, wholesale, and affiliate revenue from a wide array of wireless voice and data transmission services and equipment revenue from the sale of wireless devices and accessories in the U.S., Puerto Rico and the U.S. Virgin Islands. |
| |
• | Wireline primarily includes revenue from domestic and international wireline voice and data communication services, including services to the cable multiple systems operators that resell our local and long distance services and use our back office systems and network assets in support of their telephone services provided over cable facilities primarily to residential end-use subscribers. |
We define segment earnings as wireless or wireline operating (loss) income before other segment expenses such as depreciation, amortization, severance, exit costs, goodwill impairments, asset impairments, and other items, if any, solely and directly attributable to the segment representing items of a non-recurring or unusual nature. Expenses and income items excluded from segment earnings are managed at the corporate level. Transactions between segments are generally accounted for based on estimated market rates, which we believe approximate fair value. The Company generally re-establishes these rates at the beginning of each fiscal year. Over the past several years, there has been an industry-wide trend of lower rates due to increased competition from other wireline and wireless communications companies as well as cable and Internet service providers.
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Segment financial information is as follows:
|
| | | | | | | | | | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Three Months Ended September 30, 2012 | | | | | | | |
Net operating revenues | $ | 8,042 |
| | $ | 717 |
| | $ | 4 |
| | $ | 8,763 |
|
Inter-segment revenues(1) | — |
| | 222 |
| | (222 | ) | | — |
|
Total segment operating expenses | (6,924 | ) | | (781 | ) | | 221 |
| | (7,484 | ) |
Segment earnings | $ | 1,118 |
| | $ | 158 |
| | $ | 3 |
| | 1,279 |
|
Less: | | | | | | | |
Depreciation and amortization | | | | | | | (1,488 | ) |
Other, net(2) | | | | | | | (22 | ) |
Operating loss | | | | | | | (231 | ) |
Interest expense | | | | | | | (377 | ) |
Equity in losses of unconsolidated investments and other, net | | | | | $ | (112 | ) | | (112 | ) |
Loss before income taxes | | | | | | | $ | (720 | ) |
| | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Three Months Ended September 30, 2011 | | | | | | | |
Net operating revenues | $ | 7,516 |
| | $ | 816 |
| | $ | 1 |
| | $ | 8,333 |
|
Inter-segment revenues(1) | — |
| | 246 |
| | (246 | ) | | — |
|
Total segment operating expenses | (6,302 | ) | | (878 | ) | | 249 |
| | (6,931 | ) |
Segment earnings | $ | 1,214 |
| | $ | 184 |
| | $ | 4 |
| | 1,402 |
|
Less: | | | | | | | |
Depreciation and amortization | | | | | | | (1,194 | ) |
Other, net | | | | | | | — |
|
Operating income | | | | | | | 208 |
|
Interest expense | | | | | | | (236 | ) |
Equity in losses of unconsolidated investments and other, net | | | | | $ | (261 | ) | | (261 | ) |
Loss before income taxes | | | | | | | $ | (289 | ) |
| | | | | | | |
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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| | | | | | | | | | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Nine Months Ended September 30, 2012 | | | | | | | |
Net operating revenues | $ | 24,059 |
| | $ | 2,272 |
| | $ | 9 |
| | $ | 26,340 |
|
Inter-segment revenues(1) | — |
| | 660 |
| | (660 | ) | | — |
|
Total segment operating expenses | (20,590 | ) | | (2,464 | ) | | 657 |
| | (22,397 | ) |
Segment earnings | $ | 3,469 |
| | $ | 468 |
| | $ | 6 |
| | 3,943 |
|
Less: | | | | | | | |
Depreciation and amortization | | | | | | | (5,050 | ) |
Other, net(2) | | | | | | | (8 | ) |
Operating loss | | | | | | | (1,115 | ) |
Interest expense | | | | | | | (996 | ) |
Equity in losses of unconsolidated investments and other, net | | | | | $ | (783 | ) | | (783 | ) |
Loss before income taxes | | | | | | | $ | (2,894 | ) |
| | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Nine Months Ended September 30, 2011 | | | | | | | |
Net operating revenues | $ | 22,381 |
| | $ | 2,571 |
| | $ | 5 |
| | $ | 24,957 |
|
Inter-segment revenues(1) | — |
| | 701 |
| | (701 | ) | | — |
|
Total segment operating expenses | (18,782 | ) | | (2,650 | ) | | 705 |
| | (20,727 | ) |
Segment earnings | $ | 3,599 |
| | $ | 622 |
| | $ | 9 |
| | 4,230 |
|
Less: | | | | | | | |
Depreciation and amortization | | | | | | | (3,684 | ) |
Other, net | | | | | | | — |
|
Operating income | | | | | | | 546 |
|
Interest expense | | | | | | | (724 | ) |
Equity in losses of unconsolidated investments and other, net | | | | | $ | (1,261 | ) | | (1,261 | ) |
Loss before income taxes | | | | | | | $ | (1,439 | ) |
| | | | | | | |
Other Information | Wireless | | Wireline | | Corporate and Other | | Consolidated |
| (in millions) |
Capital expenditures for the nine months ended September 30, 2012 | $ | 2,413 |
| | $ | 186 |
| | $ | 185 |
| | $ | 2,784 |
|
Capital expenditures for the nine months ended September 30, 2011 | $ | 1,899 |
| | $ | 135 |
| | $ | 187 |
| | $ | 2,221 |
|
_________________
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(1) | Inter-segment revenues consist primarily of wireline services provided to the Wireless segment for resale to or use by wireless subscribers. |
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(2) | Other, net for the three-month period ended September 30, 2012 consists of $22 million of lease exit costs associated with taking certain Nextel platform sites off-air in 2012 (see Note 9). Other, net for the nine-month period ended September 30, 2012 consists of net operating income of $236 million associated with the termination of the spectrum hosting arrangement with LightSquared (see Note 11), a gain of $29 million on spectrum swap transactions, and a benefit of $17 million resulting from favorable developments relating to access cost disputes associated with prior periods, partially offset by $206 million of lease exit costs and $84 million of asset impairment charges. |
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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| | | | | | | | | | | | | | | |
Operating Revenues by Service and Products | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| (in millions) |
Three Months Ended September 30, 2012 | | | | | | | |
Wireless services | $ | 7,171 |
| | $ | — |
| | $ | — |
| | $ | 7,171 |
|
Wireless equipment | 750 |
| | — |
| | — |
| | 750 |
|
Voice | — |
| | 399 |
| | (131 | ) | | 268 |
|
Data | — |
| | 95 |
| | (45 | ) | | 50 |
|
Internet | — |
| | 428 |
| | (47 | ) | | 381 |
|
Other | 121 |
| | 17 |
| | 5 |
| | 143 |
|
Total net operating revenues | $ | 8,042 |
| | $ | 939 |
| | $ | (218 | ) | | $ | 8,763 |
|
| | | | | | | |
| Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| (in millions) |
Three Months Ended September 30, 2011 | | | | | | | |
Wireless services | $ | 6,836 |
| | $ | — |
| | $ | — |
| | $ | 6,836 |
|
Wireless equipment | 616 |
| | — |
| | — |
| | 616 |
|
Voice | — |
| | 474 |
| | (166 | ) | | 308 |
|
Data | — |
| | 124 |
| | (41 | ) | | 83 |
|
Internet | — |
| | 447 |
| | (39 | ) | | 408 |
|
Other | 64 |
| | 17 |
| | 1 |
| | 82 |
|
Total net operating revenues | $ | 7,516 |
| | $ | 1,062 |
| | $ | (245 | ) | | $ | 8,333 |
|
| | | | | | | |
| Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| (in millions) |
Nine Months Ended September 30, 2012 | | | | | | | |
Wireless services | $ | 21,473 |
| | $ | — |
| | $ | — |
| | $ | 21,473 |
|
Wireless equipment | 2,238 |
| | — |
| | — |
| | 2,238 |
|
Voice | — |
| | 1,242 |
| | (388 | ) | | 854 |
|
Data | — |
| | 302 |
| | (132 | ) | | 170 |
|
Internet | — |
| | 1,330 |
| | (141 | ) | | 1,189 |
|
Other | 348 |
| | 58 |
| | 10 |
| | 416 |
|
Total net operating revenues | $ | 24,059 |
| | $ | 2,932 |
| | $ | (651 | ) | | $ | 26,340 |
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| | | | | | | |
| Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| (in millions) |
Nine Months Ended September 30, 2011 | | | | | | | |
Wireless services | $ | 20,193 |
| | $ | — |
| | $ | — |
| | $ | 20,193 |
|
Wireless equipment | 2,001 |
| | — |
| | — |
| | 2,001 |
|
Voice | — |
| | 1,440 |
| | (475 | ) | | 965 |
|
Data | — |
| | 357 |
| | (121 | ) | | 236 |
|
Internet | — |
| | 1,419 |
| | (106 | ) | | 1,313 |
|
Other | 187 |
| | 56 |
| | 6 |
| | 249 |
|
Total net operating revenues | $ | 22,381 |
| | $ | 3,272 |
| | $ | (696 | ) | | $ | 24,957 |
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(1) | Revenues eliminated in consolidation consist primarily of wireline services provided to the Wireless segment for resale to or use by wireless subscribers. |
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Note 15. | Subsequent Events |
SoftBank Transaction
On October 15, 2012, SOFTBANK CORP. and certain of its wholly-owned subsidiaries (together, "SoftBank") and Sprint entered into a Bond Purchase Agreement (Bond Agreement) and an Agreement and Plan of Merger (Merger Agreement) pursuant to which SoftBank would invest, in aggregate, approximately $20.1 billion for an approximately 70% controlling interest in a subsidiary (New Sprint), an entity owning 100% of the equity interest in Sprint subsequent to consummation of the transaction, with the remaining 30% interest in New Sprint being publicly traded.
Bond Agreement
Under the Bond Agreement, on October 22, 2012, Sprint issued a convertible bond (Bond) to SoftBank with a face amount of $3.1 billion, stated interest rate of 1%, and maturity date of October 15, 2019, which is convertible into 590,476,190 shares of Sprint common stock at $5.25 per share, or approximately 19.65% of the current outstanding shares of Sprint common stock (pre-conversion). Interest on the Bond will be due and payable in cash semiannually in arrears on April 15 and October 15 of each year, commencing on April 15, 2013. Upon receipt of regulatory approval, the Bond will be converted into Sprint shares immediately prior to consummation of the merger and may not otherwise be converted prior to the termination of the Merger Agreement. Conversion of the Bond is subject in any case to receipt of any required approvals and, subject to certain exceptions, to receipt of waivers under the Company's existing credit facilities. Subject to certain exceptions, SoftBank may not transfer the Bond without Sprint's consent.
Merger Agreement
In the merger, which is subject to shareholder and regulatory approval, SoftBank will further capitalize New Sprint with an additional $17.0 billion. Approximately $4.9 billion will be used to purchase a new issuance of New Sprint common stock at $5.25 per share and the remaining consideration, approximately $12.1 billion, will be distributed to Sprint shareholders in exchange for their shares of Sprint. Sprint shareholders can elect to receive cash consideration of $7.30 per share or one share of New Sprint per share of Sprint subject to proration. Upon consummation of the merger, SoftBank will receive a five-year warrant to purchase 54,579,924 shares in New Sprint at $5.25 per share for consideration of approximately $300 million upon exercise. Upon consummation of the merger, Sprint will be a wholly-owned subsidiary of New Sprint. New Sprint will be renamed Sprint Corporation and will be a publicly traded company, with 70% ownership held by SoftBank and 30% publicly traded, based on the assumed exercise of outstanding warrants. The Merger Agreement contains customary conditions and covenants for a transaction of this nature, including certain termination rights, whereby Sprint may be required to pay a termination fee of $600 million to SoftBank.
Under the terms of the EDC facility, the secured equipment credit facility and our revolving credit facility, consummation of the merger would constitute a change of control that would require repayment of all outstanding balances thereunder. Amounts outstanding under the EDC facility and secured equipment credit facility, which were approximately $577 million in the aggregate at September 30, 2012, would become due and payable at the time of closing. In addition, our $2.2 billion revolving bank credit facility would expire upon a change of control, of which approximately $1.0 billion was outstanding as of September 30, 2012 through letters of credit, including the letter of credit required by the Report and Order. Sprint expects to enter into discussions with existing lenders under these arrangements to obtain waivers for the proposed transaction.
As of September 30, 2012, approximately $8.8 billion of our senior notes and guaranteed notes provided holders with the right to require us to repurchase the notes if a change of control triggering event (as defined in our indenture and supplemental indentures governing applicable notes) occurs, which includes both a change of control (which will occur upon consummation of the merger) and a ratings decline of the applicable notes by each of Moody's Investor Services and Standard & Poor's Rating Services. If we are required to make a change of control offer, we will offer a cash payment equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest.
SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company has recently received several complaints asserting class actions for breach of fiduciary duty and other theories relating to the transaction. The Company intends to vigorously defend these lawsuits and because these cases are still in the preliminary stages, has not yet determined what effect the lawsuits will have, if any, on its financial position, results of operations or cash flows.
Clearwire
On October 17, 2012, in accordance with the Clearwire Equityholders' Agreement, one of Clearwire's equityholders, Eagle River Holdings, LLC (Eagle River) notified Sprint and the other parties to the Equityholders' Agreement of its intent to sell its ownership in 30.9 million shares of Class A Common Stock and 2.7 million shares of Class B Interests (together, “Interests”) for a total purchase price of $100 million in cash. In response to the notification, Sprint informed Eagle River of its desire to purchase all of the Interests (or in the event that one or more of the other equityholders elects to purchase Interests, the maximum number of Interests Sprint is entitled to purchase). Upon the closing of the purchase, Sprint's ownership interest in Clearwire would be within a range of 50.0% to 50.5% dependent upon the final number of shares acquired and excluding any additional share issuances prior to the close of the purchase. Sprint's existing right under the Clearwire Equityholders' Agreement provides that Sprint can nominate seven of the thirteen directors to the Clearwire Board. One of the Sprint designees is required to be an independent director for NASDAQ listing purposes. Upon closing of the Eagle River transaction, Sprint will no longer be subject to the requirement that one of its seven designees be such an independent director of Sprint; however, Sprint will not obtain the right to control the actions of Clearwire. In addition, upon closing, the composition of the remaining board seats will be modified so that the Nominating Committee of the Clearwire Board will have the right to nominate three independent directors to the Clearwire Board, while the remaining investors under the Clearwire Equityholders' Agreement will have the right to nominate three directors. Prior to closing of the transaction, the Nominating Committee had the right to nominate two independent directors to the Clearwire Board, while the remaining investors under the Clearwire Equityholders' Agreement had the right to nominate four directors. Sprint will continue to account for its ownership interests in Clearwire under the equity method of accounting given the significant participative governance rights provided to the minority holders in Clearwire.
As a result of the consummation of Sprint's purchase of additional Interests, Clearwire could be considered a subsidiary under certain agreements relating to our indebtedness. At that time, certain actions or defaults by Clearwire would, if viewed as a subsidiary, result in a breach of covenants, including potential cross-default provisions, under certain agreements relating to our indebtedness. The Clearwire Equityholders' Agreement provides Sprint with the right to unilaterally surrender voting securities to reduce its voting security percentage below 50% which, if exercised, would eliminate the potential for Clearwire to be considered a subsidiary of Sprint under those debt agreements and would significantly mitigate the possibility of an event, with respect to Clearwire, that would cross-default against Sprint's debt obligations. Subsequent to the consummation of Sprint's purchase of additional Interests, Sprint may exercise its right to reduce its voting security percentage below 50%. The exercise of this right does not impact our ability to nominate seven of Clearwire's thirteen Board seats.
Acquisition of Assets from U.S. Cellular
On November 6, 2012, Sprint entered into a definitive agreement with United States Cellular Corporation (U.S. Cellular) to acquire PCS spectrum and approximately 585,000 customers in parts of Illinois, Indiana, Michigan, Missouri and Ohio, including the Chicago and St. Louis markets, for $480 million in cash. Sprint has agreed, in connection with the acquisition, to reimburse U.S. Cellular for certain network shutdown costs in these markets. These costs are expected to range from $130 million to $150 million on a net present value basis, but in no event will Sprint's reimbursement obligation exceed $200 million on an undiscounted basis. The additional spectrum will be used to supplement Sprint's coverage in these areas. Sprint and U.S. Cellular will enter into transition services agreements as a condition to closing of the acquisition which will outline the terms of services to be provided by U.S. Cellular during the period after closing and prior to the transfer of the acquired customers to Sprint's network. The transaction is subject to customary regulatory approvals and is expected to close in mid 2013.
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
OVERVIEW
Sprint Nextel Corporation, including its consolidated subsidiaries, (“Sprint,” “we,” “us,” “our” or the “Company”) is a communications company offering a comprehensive range of wireless and wireline communications products and services that are designed to meet the needs of individual consumers, businesses, government subscribers, and resellers. The communications industry has been and will continue to be highly competitive on the basis of the quality and types of services and devices offered, as well as price. The Company is currently undergoing a significant multi-year program, Network Vision, to upgrade its existing wireless communication network, including the decommissioning of its Nextel platform for which we expect to re-purpose valuable spectrum resources that currently support that network (see “Overview - Network Vision”). To support our business and expected capital requirements associated with Network Vision, we have raised debt financing of approximately $7.5 billion during 2011 and 2012 as well as a secured equipment credit facility with a remaining availability of up to $923 million as of September 30, 2012 (see “Liquidity and Capital Resources - Liquidity”).
During the Network Vision modernization program, we intend to achieve growth by focusing on the addition of profitable subscribers on the Sprint platform, including the recapture of subscribers from the Nextel platform, as we execute on the planned shutdown of the Nextel platform. In the first quarter of 2012, we formalized our plans to decommission the Nextel platform and ceased using approximately one-third, or 9,600 cell sites in the middle of 2012. We expect the remainder of the Nextel platform, or approximately 20,000 sites, to be substantially shut down by the middle of 2013. Since the first quarter 2011, we have achieved approximately 2.4 million net postpaid subscriber additions on the Sprint platform, inclusive of approximately 1.7 million postpaid subscribers recaptured from the Nextel platform, while the Nextel postpaid platform has incurred approximately 3.4 million net subscriber losses. We are competing with other wireless service providers to maintain the ongoing customer relationship with the Nextel subscribers through service provided on our Sprint platform.
During the nine-month period ended September 30, 2012, we have achieved a recapture rate of approximately 56% of the Nextel platform postpaid subscribers, based on net postpaid subscribers that terminated service on the Nextel platform during that same period. In addition, recaptured Nextel platform subscribers, on average, carry a slightly higher average revenue per subscriber on the Sprint platform as a result of smartphone adoption by such subscribers. At September 30, 2012, there were approximately 3.1 million Nextel platform subscribers, of which approximately 2.3 million and 800,000 represent postpaid and prepaid, respectively. More than 80% of the remaining 2.3 million Nextel platform postpaid subscribers represent business accounts. Accordingly, although we will continue to pursue the recapture of these subscribers, we expect the level of competition for these subscribers as well as the timing of business customer decisions to cause the rate of recapture for subsequent periods to decline through the final shutdown of the Nextel platform. Prospectively, our efforts will continue to focus on profitable growth through service provided on an enhanced wireless network on the Sprint platform while continuing to improve the customer experience, strengthen our brands and generate operating cash flow.
Description of the Company
We are the third largest wireless communications company in the United States based on wireless revenue, one of the largest providers of wireline long distance services, and one of the largest Internet carriers in the nation. Our services are provided through our ownership of extensive wireless networks, an all-digital global long distance network and a Tier 1 Internet backbone. We offer wireless and wireline voice and data transmission services to subscribers in all 50 states, Puerto Rico and the U.S. Virgin Islands under the Sprint corporate brand, which includes our retail brands of Sprint®, Boost Mobile®, Virgin Mobile®, and Assurance Wireless® on networks that utilize third generation (3G) code division multiple access (CDMA), integrated Digital Enhanced Network (iDEN), or Internet protocol (IP) technologies. We also offer fourth generation (4G) services through our deployment of Long Term Evolution (LTE) as part of our network modernization plan, Network Vision, and also utilize Worldwide Interoperability for Microwave Access (WiMAX) technology through our mobile virtual network operator (MVNO) wholesale relationship with Clearwire Corporation and its subsidiary Clearwire Communications LLC (together "Clearwire"). We utilize these networks to offer our wireless and wireline subscribers differentiated products and services whether through the use of a single network or a combination of these networks. We offer wireless services on a postpaid and prepaid payment basis to retail subscribers and also on a wholesale and affiliate basis, which includes the sale of wireless services that utilize the Sprint network but are sold under the wholesaler's brand. We
provide a broad suite of wireline voice and data communications services to other communications companies and targeted business and consumer subscribers. In addition, we provide voice, data, and IP communication services to our Wireless segment, and IP and other services to cable Multiple System Operators (MSOs) that resell our local and long distance services and use our back office systems and network assets in support of their telephone service provided over cable facilities primarily to residential end-use subscribers.
Our business strategy is to be responsive to changing customer mobility demands by being innovative and differentiated in the marketplace. Our future growth plans and strategy revolve around achieving the following three key priorities:
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• | Improve the customer experience; |
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• | Strengthen our brands; and |
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• | Generate operating cash flow. |
We have reduced confusion over pricing plans and complex bills with our Simply Everything® and Everything Data plans and our Any Mobile AnytimeSM feature. We also offer price plans tailored to business subscribers such as Business Advantage, which allows for the flexibility to mix and match plans that include voice, voice and messaging, or voice, messaging and data to meet individual business needs and also allows the Any Mobile Anytime feature with certain plans. To simplify and improve the customer experience, we continue to offer Ready Now, which trains our subscribers before they leave the store on how to use their mobile devices. We aim to increase our business customers' productivity by providing differentiated services that utilize the advantages of combining IP networks with wireless technology. This differentiation enables us to retain and acquire both wireline, wireless and combined wireline-wireless subscribers on our networks. We have also continued to focus on further improving customer care. We implemented initiatives that are designed to improve call center processes and procedures, and standardized our performance measures through various metrics, including customer satisfaction ratings with respect to customer care, first call resolution, and calls per subscriber. Our product strategy is to provide our customers with a broad array of device selections and applications and services that run on these devices to meet the growing needs of customer mobility. Our multi-functional device portfolio includes many cutting edge devices from various original equipment manufacturers (OEMs). Our mobile broadband portfolio consists of devices such as hotspots, which allow the connection of multiple WiFi enabled devices. Our networks can also be accessed through our portfolio of embedded tablets and laptop devices.
We support the open development of applications, content, and devices on our network platforms through products and services such as Google Voice™, which allows for functionality such as one phone number for all devices (home, wireless, office, etc.), routing calls between devices, and in-call options to switch between devices during a call, and Google Wallet™, which provides the ability to store loyalty, gift and credit cards, and to tap and pay while you shop using your wireless device. We have recently introduced Sprint Guardian, a collection of mobile safety and device security bundles that provide families relevant tools to help stay safe and secure, and Pinsight Media+, a new advertising service giving advertisers the power to reach consumers on their mobile device by providing more relevant advertising based on information consumers choose to share about their location and mobile Web browsing history. In addition, we enable a variety of business and consumer third-party relationships through our portfolio of machine-to-machine solutions, which we offer on a retail postpaid and wholesale basis. Our machine-to-machine solutions portfolio provides a secure, real-time, and reliable wireless two-way data connection across a broad range of connected devices, including OEM devices and after-market in-vehicle connectivity and electric vehicle charging stations, point-of-sale systems, kiosks and vending machines, asset tracking, digital signage, security, smartgrid utilities, medical equipment, and a variety of other consumer electronics and appliances.
Our prepaid portfolio currently includes multiple brands, each designed to appeal to specific subscriber segments. Boost Mobile serves subscribers who are voice and text messaging-centric with its popular Monthly Unlimited plan with Shrinkage service where bills are reduced after six on-time payments. Virgin Mobile serves subscribers who are device and data-oriented with our Beyond Talk™ plans and our broadband plan, Broadband2Go, which offer subscribers control, flexibility, and connectivity through various communication vehicles. Virgin Mobile is also designated as a Lifeline-only Eligible Telecommunications Carrier in certain states which provides service for the Lifeline program under our Assurance Wireless brand. Assurance Wireless provides eligible subscribers who meet income requirements or are receiving government assistance with a free wireless phone and 250 free minutes of local and long-distance monthly service.
We have focused our wholesale business on enabling our diverse network of customers to successfully
grow their business by providing them with an array of network, product, and device solutions. This allows our customers to customize this full suite of value-added solutions to meet the growing demands of their businesses. As part of these growing demands, some of our wholesale MVNO's are also selling prepaid services under the Lifeline program.
In addition to our brand and customer-oriented goals, we continue to focus on generating increased operating cash flow through competitive rate plans for postpaid and prepaid subscribers, multi-branded strategies, and effectively managing our cost structure. Certain of our strategic decisions, such as Network Vision and the introduction of the iPhone®, which on average carries a higher equipment net subsidy, will result in a reduction in cash flows from operations in the near term. However, we believe these actions will generate long-term benefits, including growth in valuable postpaid subscribers, a reduction in variable cost of service per unit and long-term accretion to cash flows from operations. See “Liquidity and Capital Resources” for more information.
Network Vision
In December 2010, we announced Network Vision, a multi-year network infrastructure initiative intended to provide subscribers with an enhanced network experience by improving voice quality, coverage, and data speeds, while enhancing network flexibility, reducing operating costs, and improving environmental sustainability through the utilization of multiple spectrum bands onto a single multi-mode base station. In addition to implementing these multi-mode base stations, this plan encompasses next-generation push-to-talk technology with broadband capabilities and the integration of multi-mode chipsets into smartphones, tablets and other broadband devices, including machine-to-machine products. Through the deployment of Network Vision, we are migrating to a single nationwide network allowing for the consolidation and optimization of our 800 megahertz (MHz) and 1.9 gigahertz (GHz) spectrum, as well as other spectrum owned by third-parties, into multi-mode stations allowing us to repurpose spectrum to enhance coverage, particularly around the in-building experience. The multi-mode technology also utilizes software-based solutions with interchangeable hardware to provide greater network flexibility, which also allows for the deployment of LTE. As we migrate to a single nationwide network, we have begun to decommission the Nextel platform, which has enabled us to begin eliminating some of the ongoing fixed costs of this network. As a result, we expect to continue the trend of net losses of retail subscribers on our Nextel platform as we target retention of these subscribers to the Sprint platform during the period in which we are preparing for the shutdown of the Nextel platform, which began during the first quarter 2012 and is expected to continue through the middle of 2013. The net losses on the Nextel platform are expected to fluctuate depending on the timing of subscriber decisions and the nature of the subscriber base affected by our decommissioning efforts. Accordingly, although we will continue to pursue the recapture of these subscribers, we expect the level of competition for these subscribers as well as the timing of business customer decisions to cause the rate of recapture for subsequent periods to decline as we approach the final shutdown of the Nextel platform.
Work has begun on approximately 38,000 cell sites, and we powered on-air our first multi-mode base station on December 6, 2011. As of September 30, 2012 we had launched LTE in 24 cities. Further deployments of Network Vision technology, including LTE market launches and enhancements of our 3G technology, are expected to continue through the middle of 2014. We expect Network Vision to bring financial benefit to the Company through migration to one common network, which is expected to reduce network maintenance and operating costs through capital efficiencies, reduced energy costs, lower roaming expenses, backhaul savings, and reduction in total cell sites. Our expectation of financial savings is affected by multiple variables, including our expectation of the timeliness of deployment across our existing network footprint. We revised our plan to bring 12,000 multi-mode base stations on-air by the end of 2012 to the first quarter of 2013. The deployment of multi-mode technology is project managed by Sprint but dependent upon three primary OEMs, each of which has responsibility for a geographical territory across the United States. We have recently experienced delays with vendor execution, backhaul connectivity delays, shortages in equipment such as fiber cable and antennas, as well as other regulatory and environmental issues. However, we expect that we will recover from these delays and we are still forecasting to have the majority of the sites on-air by the end of 2013 with expected completion of Network Vision deployment by the middle of 2014.
The deployment related to changes in technology have resulted in incremental charges during the period of implementation of our multi-mode technology and Nextel platform decommissioning including, but not limited to, an increase in depreciation associated with existing assets related to both the Nextel and Sprint platforms due to changes in our estimates of the remaining useful lives of long-lived assets, changes in the expected timing and amount of asset retirement obligations, and lease exit and other contract termination costs. In the first quarter of
2012, we formalized our plans to take off-air roughly one-third, or 9,600 cell sites, of our total Nextel platform by the middle of 2012 with the remaining sites to be taken off-air by the end of 2013. As a result, in the first quarter 2012, we revised our estimates to shorten the expected useful lives of Nextel platform assets through the expected benefit period of the underlying assets through 2013 and also revised the expected timing and amount of our asset retirement obligations. During the second quarter 2012, as a result of progress in taking Nextel platform sites off-air and progress toward notifying and transitioning customers off the Nextel platform, we further reduced our estimated benefit period for the remaining Nextel platform assets through the middle of 2013 resulting in incremental depreciation expense. The amounts reflected as depreciation expense are dependent upon the expected useful lives of assets, which includes our expectation of the timing of assets to be phased out of service, and could result in further revision during the decommissioning period. We estimate the incremental effect of accelerated depreciation related to Nextel platform assets and related asset retirement obligations in our full year 2012 results to be in the range of approximately $1.8 billion to $1.9 billion. The remaining net book value of Nextel platform assets as of September 30, 2012 was approximately $1.5 billion, which we expect to recognize as depreciation expense on an approximately ratable basis through June 30, 2013. As of the end of the third quarter 2012 we achieved the 2012 target to take 9,600 cell sites off-air which has resulted in lease exit costs totaling approximately $206 million. We expect to complete our transition of customers from the Nextel platform to our Sprint platform as early as June 2013, which should allow us to take off-air the remainder of our Nextel platform sites. We expect to incur significant additional charges in the future under other tower lease agreements as we continue to take off-air Nextel platform sites as well as transition our existing backhaul architecture to a replacement technology for our remaining network sites.
We are also experiencing increased data usage driven by more subscribers on the Sprint platform and a continuing shift in our subscriber base to smartphones, which has required additional capital expenditures of legacy 3G Sprint platform equipment (legacy equipment). As we deploy Network Vision, we intend to maximize the use of previously deployed legacy equipment when possible; however, based on our capacity needs during the implementation period of Network Vision, we expect additional legacy equipment expenditures that will not be utilized beyond the final deployment of Network Vision's multi-mode technology, which is expected to continue through the middle of 2014. As a result, the estimated useful lives of such equipment have been shortened, as compared to similar prior capital expenditures, which we also expect will contribute to an increase in depreciation expense. There is approximately $1.6 billion in net book value of legacy equipment currently in-service with shortened estimated useful lives, which is resulting in accelerated depreciation as of September 30, 2012. In addition, capital expenditures of approximately $200 million related to legacy equipment are included in construction in progress as of September 30, 2012, which we also expect to have a shortened estimated useful life when placed in-service. Furthermore, based on current estimates of increased data usage, we expect additional capital expenditures of legacy equipment until our network modernization is substantially complete.
RESULTS OF OPERATIONS |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (in millions) |
Wireless segment earnings | $ | 1,118 |
| | $ | 1,214 |
| | $ | 3,469 |
| | $ | 3,599 |
|
Wireline segment earnings | 158 |
| | 184 |
| | 468 |
| | 622 |
|
Corporate, other and eliminations | 3 |
| | 4 |
| | 6 |
| | 9 |
|
Consolidated segment earnings | 1,279 |
| | 1,402 |
| | 3,943 |
| | 4,230 |
|
Depreciation and amortization | (1,488 | ) | | (1,194 | ) | | (5,050 | ) | | (3,684 | ) |
Other, net | (22 | ) | | — |
| | (8 | ) | | — |
|
Operating (loss) income | (231 | ) | | 208 |
| | (1,115 | ) | | 546 |
|
Interest expense | (377 | ) | | (236 | ) | | (996 | ) | | (724 | ) |
Equity in losses of unconsolidated investments and other, net | (112 | ) | | (261 | ) | | (783 | ) | | (1,261 | ) |
Income tax expense | (47 | ) | | (12 | ) | | (110 | ) | | (148 | ) |
Net loss | $ | (767 | ) | | $ | (301 | ) | | $ | (3,004 | ) | | $ | (1,587 | ) |
Consolidated segment earnings decreased $123 million, or 9%, and $287 million, or 7%, in the three and nine-month periods ended September 30, 2012 as compared to the same periods in 2011. Consolidated segment earnings consist of our Wireless and Wireline segments, which are discussed below, and Corporate, other and eliminations.
Depreciation and Amortization Expense
Depreciation expense increased $297 million, or 27%, and $1.5 billion, or 44%, in the three and nine-month periods ended September 30, 2012 compared to the same periods in 2011. The Network Vision deployment is resulting in incremental charges during the period of implementation including, but not limited to, an increase in depreciation associated with existing assets related to both the Nextel and Sprint platforms, due to changes in our estimates of the remaining useful lives of long-lived assets, and the expected timing and amount of asset retirement obligations, which we expect to continue to have a material impact on our results of operations during 2012 and 2013. The incremental effect of accelerated depreciation due to the implementation of Network Vision was approximately $400 million and $1.7 billion, of which the majority related to the Nextel platform, during the three and nine-month periods ended September 30, 2012. The increase related to accelerated depreciation was slightly offset by a net decrease in depreciation as a result of assets that became fully depreciated or were retired. The amount of accelerated depreciation in the first and second quarter 2012 was disproportionately higher than the third quarter 2012, primarily as a result of our initial phase of taking Nextel platform sites off-air. The amount of accelerated depreciation for the remainder of 2012 and each of the first two quarters of 2013 is expected to remain consistent with the third quarter 2012 based on our current estimate of the remaining time we will receive benefit from these assets. In addition to the incremental depreciation expense resulting from revisions to estimated useful lives, we plan to increase capital expenditures during the period of implementation of Network Vision, which is also expected to result in an increase in depreciation expense over the next several years as those assets are placed in service.
Amortization expense declined $3 million, or 4%, and $97 million, or 30%, in the three and nine-month periods ended September 30, 2012 as compared to the same periods in 2011, primarily due to the absence of amortization for customer relationship intangible assets related to the 2006 acquisition of Nextel Partners, Inc. and the 2009 acquisition of Virgin Mobile USA, Inc., which became fully amortized in the second quarter 2011. Customer relationships are amortized using the sum-of-the-years'-digits method, resulting in higher amortization rates in early periods that decline over time.
Other, net
The following table provides additional information of items included in “Other, net” for the three and nine-month periods ended September 30, 2012 and 2011.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (in millions) |
Severance, exit costs and asset impairments | $ | (22 | ) | | $ | — |
| | $ | (290 | ) | | $ | — |
|
Spectrum hosting contract termination | — |
| | — |
| | 236 |
| | — |
|
Gains from asset dispositions and exchanges | — |
| | — |
| | 29 |
| | — |
|
Favorable developments relating to access cost disputes | — |
| | — |
| | 17 |
| | — |
|
Total | $ | (22 | ) | | $ | — |
| | $ | (8 | ) | | $ | — |
|
Other, net represented expenses of $22 million and $8 million in the three and nine-month periods ended September 30, 2012, respectively, as compared to zero in the same periods in 2011. Severance, exit costs, and asset impairments include lease exit costs associated with taking certain Nextel platform sites off-air in the second and third quarter 2012 and asset impairments in the first quarter 2012, which consisted of $18 million of assets associated with a decision to utilize fiber backhaul, which we expect to be more cost effective, rather than microwave backhaul and $66 million of capitalized assets that we no longer intend to deploy as a result of the termination of the spectrum hosting arrangement with LightSquared in the first quarter 2012. We did not accrue lease exit costs for certain sites taken off-air in the second and third quarter of 2012 as these sites are subject to agreements under which we expect to continue to receive economic benefit for the remaining term. As a result of this factor, as well as the variability of factors that are used in the estimate of lease exit costs, the relationship of the costs recognized in the current quarter to the number of sites taken off-air is not necessarily indicative of future per-site charges as we complete our transition of Nextel customers and continue to take sites off-air. Spectrum hosting contract termination is due to the recognition of $236 million of the total $310 million paid by LightSquared in 2011 as operating income in "Other, net" due to the termination of our spectrum hosting arrangement with LiqhtSquared. Additional information related to these items can be found in the Notes to the Consolidated Financial Statements.
Interest Expense
Interest expense increased $141 million, or 60%, and $272 million, or 38%, in the three and nine-month periods ended September 30, 2012, respectively, as compared to the same periods in 2011, primarily due to increased weighted average long-term debt balances as a result of 2011 and 2012 debt issuances partially offset by 2011 and 2012 debt repayments, in addition to increased effective interest rates as well as reductions in the amount of interest capitalized primarily related to spectrum licenses. We expect interest capitalization related to spectrum licenses not previously utilized to continue to decline as we plan to have a substantial portion of the value of our spectrum licenses to be ready for use during 2012. The effective interest rate, which includes capitalized interest, on the weighted average long-term debt balance of $21.3 billion and $18.5 billion was 8.0% and 7.3% for the three-month periods ended September 30, 2012 and 2011, respectively. The effective interest rate, which includes capitalized interest, on the weighted average long-term debt balance of $21.3 billion and $18.7 billion was 7.9% and 7.2% for the nine-month periods ended September 30, 2012 and 2011, respectively. See “Liquidity and Capital Resources” for more information on the Company's financing activities.
Equity in Losses of Unconsolidated Investments and Other, net
Equity in losses of unconsolidated investments and other, net primarily consists of our proportionate share of losses from our equity method investments and also includes other miscellaneous income/(expense). Equity losses associated with our investment in Clearwire consist of Sprint's share of Clearwire's net loss and other adjustments such as gains or losses associated with the dilution of Sprint's ownership interest resulting from Clearwire's equity issuances, Sprint's impairment, if any, of its investment in Clearwire, and other items recognized by Clearwire Corporation that do not affect Sprint's economic interest. We expect Clearwire to continue to generate net losses in the near term as it executes its business plan, including its announced deployment of an LTE network. Equity in losses from Clearwire were $208 million and $271 million for the three-month periods ended September 30, 2012 and 2011, and $927 million and $1.3 billion for the nine-month periods ended September 30,
2012 and 2011, respectively. Sprint's equity in losses from Clearwire include charges that were associated with Clearwire's write-off of certain network and other assets that no longer meet its strategic plans. These charges were $15 million for the three-month period ended September 30, 2011, and $41 million and $309 million for the nine-month periods ended September 30, 2012 and 2011, respectively.
The nine-month period ended September 30, 2012 also includes a $204 million pre-tax impairment recognized in the second quarter 2012 reflecting Sprint's reduction in the carrying value of its investment in Clearwire to an estimated fair value. Additional declines in the estimated fair value of Clearwire may require us to evaluate the decline in relation to the carrying value of our investment in Clearwire. A conclusion by us that additional declines in the estimated fair value of Clearwire are other than temporary could result in an additional impairment of a portion, or all, of our remaining carrying value of $764 million as of September 30, 2012. Each $.10 per share change in the value of Clearwire's traded stock price results in a $70.5 million change in the estimated fair value of our equity investment based on Sprint's equity interest as of September 30, 2012.
Income Tax Expense
The consolidated effective tax rate was an expense of approximately 4% and 10% during the nine-month periods ended September 30, 2012 and 2011, respectively. The income tax expense for the nine-month periods ended September 30, 2012 and 2011 is primarily attributable to taxable temporary differences from amortization of FCC licenses and includes a $1.2 billion and a $654 million net increase to the valuation allowance for federal and state deferred tax assets primarily related to net operating loss carryforwards generated during the respective periods. The income tax expense for the nine-month period ended September 30, 2012 also includes a $33 million tax benefit resulting from the resolution of various state income tax uncertainties. The income tax expense for the nine-month period ended September 30, 2011 also includes a $52 million expense resulting from changes in corporate state income tax laws. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits. Additional information related to items impacting the effective tax rates can be found in the Notes to the Consolidated Financial Statements.
Segment Earnings - Wireless
Wireless segment earnings are primarily a function of wireless service revenue, costs to acquire subscribers, network and interconnection costs to serve those subscribers and other Wireless segment operating expenses. The costs to acquire our subscribers include revenue from the sale of wireless devices and accessories offset by the cost at which we sell our devices, referred to as equipment net subsidies, as well as the marketing and sales costs incurred to attract those subscribers. Network costs primarily represent switch and cell site costs and interconnection costs, which generally consist of per-minute usage fees and roaming fees paid to other carriers. The remaining costs associated with operating the Wireless segment include the costs to operate our customer care organization and administrative support. Wireless service revenue, costs to acquire subscribers, and variable network and interconnection costs fluctuate with the changes in our subscriber base and their related usage, but some cost elements do not fluctuate in the short term with these changes.
As shown by the table above under “Results of Operations,” Wireless segment earnings represented approximately 88% of our total consolidated segment earnings as of September 30, 2012. The wireless industry is subject to competition to retain and acquire subscribers of wireless services. Most markets in which we operate have high rates of penetration for wireless services. Wireless carriers accordingly must attract a greater proportion of new subscribers from competitors rather than from first time subscribers. Within the Wireless segment, postpaid wireless services represent the most significant contributors to earnings, and are driven by the number of postpaid subscribers to our services, as well as the average revenue per subscriber or user (ARPU). Wireless segment earnings have declined over the last several years, primarily resulting from subscriber losses associated with our Nextel platform postpaid offerings. To address and reduce net postpaid subscriber losses, we have taken initiatives to strengthen the Sprint brand and continue to increase market awareness of the improvements that have been achieved in the customer experience. We have also introduced new devices, including the iPhone® in the fourth quarter of 2011, improving our overall lineup and providing a competitive portfolio for customer selection, as well as competitive rate plans providing simplicity and value.
The Company has significantly improved net postpaid subscriber results on the Sprint platform subsequent to the first quarter 2009 as a result of the actions taken. In conjunction with Network Vision, the Company continues to focus on the growth of the Sprint platform including the targeted retention of Nextel platform
subscribers through competitive offerings on the Sprint platform, which includes Sprint Direct Connect. As a result of our plans and increased competition for these subscribers, we expect that subscriber churn on the Nextel platform, both postpaid and prepaid, will increase as we progress toward the decommissioning of the Nextel platform. Although the Company continues to experience net losses of Nextel platform postpaid subscribers, beginning in 2010, wireless service revenue has increased primarily as a result of growth in subscribers from our prepaid business as well as increased postpaid ARPU and subscribers on the Sprint platform.
The following table provides an overview of the results of operations of our Wireless segment for the three and nine-month periods ended September 30, 2012 and 2011.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
Wireless Segment Earnings | 2012 | | 2011 | | 2012 | | 2011 |
| (in millions) |
Sprint platform | $ | 5,626 |
| | $ | 5,071 |
| | $ | 16,573 |
| | $ | 14,835 |
|
Nextel platform | 310 |
| | 618 |
| | 1,236 |
| | 2,019 |
|
Total postpaid | 5,936 |
| | 5,689 |
| | 17,809 |
| | 16,854 |
|
Sprint platform | 1,126 |
| | 878 |
| | 3,207 |
| | |