Sprint Corp 9-30-14 10Q
Table of Contents    

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
—————————————————————
FORM 10-Q
—————————————————————
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
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
—————————————————————
SPRINT CORPORATION
(Exact name of registrant as specified in its charter)
—————————————————————
Delaware
46-1170005
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
6200 Sprint Parkway, Overland Park, Kansas
66251
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (855) 848-3280
—————————————————————
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.
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 OCTOBER 31, 2014:
Sprint Corporation Common Stock
3,955,981,006

 



Table of Contents

SPRINT CORPORATION
TABLE OF CONTENTS
 
 
 
Page
Reference  
Item
PART I — FINANCIAL INFORMATION
 
1.
 
 
 
 
 
2.
3.
4.
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
1.
1A.
2.
3.
4.
5.
6.






Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements (Unaudited)

SPRINT CORPORATION
CONSOLIDATED BALANCE SHEETS  
 
Successor
 
September 30,
 
March 31,
 
2014
 
2014
 
(in millions, except share and per share data)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
4,135

 
$
4,970

Short-term investments
1,167

 
1,220

Accounts and notes receivable, net of allowance for doubtful accounts and deferred interest of $303 and $197
3,942

 
3,607

Device and accessory inventory
1,124

 
982

Deferred tax assets
90

 
128

Prepaid expenses and other current assets
812

 
672

Total current assets
11,270

 
11,579

Property, plant and equipment, net
17,557

 
16,299

Intangible assets


 
 
Goodwill
6,343

 
6,383

FCC licenses and other
41,800

 
41,978

Definite-lived intangible assets, net
6,696

 
7,558

Other assets
1,044

 
892

Total assets
$
84,710

 
$
84,689

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
4,351

 
$
3,163

Accrued expenses and other current liabilities
5,439

 
5,544

Current portion of long-term debt, financing and capital lease obligations
808

 
991

Total current liabilities
10,598

 
9,698

Long-term debt, financing and capital lease obligations
31,458

 
31,787

Deferred tax liabilities
14,331

 
14,207

Other liabilities
3,660

 
3,685

Total liabilities
60,047

 
59,377

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, voting, par value $0.01 per share, 9.0 billion authorized, 3.955 billion and 3.941 billion issued at September 30, 2014 and March 31, 2014
40

 
39

Paid-in capital
27,453

 
27,354

Accumulated deficit
(2,780
)
 
(2,038
)
Accumulated other comprehensive loss
(50
)
 
(43
)
Total stockholders' equity
24,663

 
25,312

Total liabilities and stockholders' equity
$
84,710

 
$
84,689

See Notes to the Consolidated Financial Statements

1
Table of Contents



SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
Successor
 
 
Predecessor
 
Three Months Ended
 
Six Months Ended
 
 
10 Days Ended
 
101 Days Ended
 
September 30,
 
September 30,
 
 
July 10,
 
2014
 
2013
 
2014
 
2013
 
 
2013
 
2013
 
(in millions, except per share amounts)
Net operating revenues
$
8,488

 
$
7,749

 
$
17,277

 
$
7,749

 
 
$
932

 
$
9,809

Net operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization included below)
4,801

 
4,342

 
9,479

 
4,342

 
 
567

 
5,612

Selling, general and administrative
2,301

 
2,259

 
4,585

 
2,281

 
 
289

 
2,731

Severance and exit costs
284

 
103

 
311

 
103

 
 
(5
)
 
627

Depreciation
898

 
942

 
1,766

 
942

 
 
113

 
1,676

Amortization
396

 
461

 
809

 
461

 
 
8

 
77

 
8,680

 
8,107

 
16,950


8,129

 
 
972

 
10,723

Operating (loss) income
(192
)
 
(358
)
 
327


(380
)


(40
)
 
(914
)
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(510
)
 
(416
)
 
(1,022
)
 
(416
)
 
 
(275
)
 
(703
)
Equity in losses of unconsolidated investments, net
—

 
—

 
—

 
—

 
 
(23
)
 
(280
)
Gain on previously-held equity interests
—

 
—

 
—

 
—

 
 
2,926

 
2,926

Other income, net
8

 
165

 
9

 
12

 
 
2

 
19

 
(502
)
 
(251
)
 
(1,013
)

(404
)
 
 
2,630


1,962

(Loss) income before income taxes
(694
)
 
(609
)
 
(686
)

(784
)
 
 
2,590


1,048

Income tax expense
(71
)
 
(90
)
 
(56
)
 
(29
)
 
 
(1,508
)
 
(1,563
)
Net (loss) income
$
(765
)
 
$
(699
)
 
$
(742
)

$
(813
)
 
 
$
1,082


$
(515
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net (loss) income per common share
$
(0.19
)
 
$
(0.18
)
 
$
(0.19
)
 
$
(0.24
)
 
 
$
0.35

 
$
(0.17
)
Diluted net (loss) income per common share
$
(0.19
)
 
$
(0.18
)
 
$
(0.19
)
 
$
(0.24
)
 
 
$
0.30

 
$
(0.17
)
Basic weighted average common shares outstanding
3,949

 
3,802

 
3,947

 
3,439

 
 
3,086

 
3,038

Diluted weighted average common shares outstanding
3,949

 
3,802

 
3,947

 
3,439

 
 
3,640

 
3,038

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding (losses) gains on securities and other
$
(6
)
 
$
4

 
$
(6
)
 
$
100

 
 
$
(47
)

$
(11
)
Net unrecognized net periodic pension and other postretirement benefits
(1
)
 
—

 
(1
)
 
—

 
 
5


20

Other comprehensive (loss) income
(7
)
 
4

 
(7
)
 
100

 
 
(42
)

9

Comprehensive (loss) income
$
(772
)
 
$
(695
)
 
$
(749
)
 
$
(713
)
 
 
$
1,040


$
(506
)
See Notes to the Consolidated Financial Statements

2
Table of Contents




SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS



 
Successor
 
 
Predecessor
 
Six Months Ended
 
 
101 Days Ended
 
September 30,
 
 
July 10,
 
2014
 
2013
 
 
2013
 
(in millions)
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
$
(742
)
 
$
(813
)
 
 
$
(515
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
2,575

 
1,403

 
 
1,753

Provision for losses on accounts receivable
493

 
119

 
 
111

Share-based and long-term incentive compensation expense
65

 
58

 
 
20

Deferred income tax expense
28

 
23

 
 
1,562

Equity in losses of unconsolidated investments, net
—

 
—

 
 
280

Gain on previously-held equity interests
—

 
—

 
 
(2,926
)
Interest expense related to beneficial conversion feature on convertible bond
—

 
—

 
 
247

Contribution to pension plan
(22
)
 
—

 
 
—

Amortization and accretion of long-term debt premiums and discounts
(149
)
 
(86
)
 
 
(5
)
Other changes in assets and liabilities:
 
 
 
 
 
 
Accounts and notes receivable
(828
)
 
(54
)
 
 
(65
)
Inventories and other current assets
(155
)
 
(72
)
 
 
55

Accounts payable and other current liabilities
503

 
159

 
 
1,014

Non-current assets and liabilities, net
(124
)
 
(153
)
 
 
191

Other, net
63

 
118

 
 
9

Net cash provided by operating activities
1,707

 
702

 
 
1,731

Cash flows from investing activities:
 
 
 
 
 
 
Capital expenditures
(2,389
)
 
(1,878
)
 
 
(1,759
)
Expenditures relating to FCC licenses
(79
)
 
(31
)
 
 
(70
)
Reimbursements relating to FCC licenses
95

 
—

 
 
—

Acquisitions, net of cash acquired
—

 
(14,112
)
 
 
(4,039
)
Investment in Clearwire (including debt securities)
—

 
—

 
 
(228
)
Proceeds from sales and maturities of short-term investments
1,842

 
479

 
 
1,164

Purchases of short-term investments
(1,789
)
 
(815
)
 
 
(295
)
Increase in restricted cash
—

 
(3,050
)
 
 
—

Proceeds from sales of assets and FCC licenses
101

 
3

 
 
4

Other, net
(6
)
 
(3
)
 
 
(4
)
Net cash used in investing activities
(2,225
)
 
(19,407
)
 
 
(5,227
)
Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from debt and financings
—

 
6,826

 
 
—

Repayments of debt, financing and capital lease obligations
(363
)
 
(497
)
 
 
(303
)
Debt financing costs
—

 
(107
)
 
 
(1
)
Proceeds from issuance of common stock and warrants, net
46

 
18,552

 
 
53

Other, net
—

 
(14
)
 
 
—

Net cash (used in) provided by financing activities
(317
)
 
24,760

 
 
(251
)
Net (decrease) increase in cash and cash equivalents
(835
)
 
6,055

 
 
(3,747
)
Cash and cash equivalents, beginning of period
4,970

 
3

 
 
6,275

Cash and cash equivalents, end of period
$
4,135

 
$
6,058

 
 
$
2,528

See Notes to the Consolidated Financial Statements

3
Table of Contents



SPRINT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
 
 
Successor
 
Common Stock
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Shares
 
Amount
 
 
Balance, March 31, 2014
3,941

 
$
39

 
$
27,354

 
$
(2,038
)
 
$
(43
)
 
$
25,312

Net loss
—

 
—

 
—

 
(742
)
 
—

 
(742
)
Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Issuance of common stock, net
14

 
1

 
45

 
—

 
—

 
46

Share-based compensation expense
—

 
—

 
54

 
—

 
—

 
54

Balance, September 30, 2014
3,955

 
$
40

 
$
27,453

 
$
(2,780
)
 
$
(50
)
 
$
24,663


See Notes to the Consolidated Financial Statements

4
Table of Contents



SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INDEX
 
 
 
Page
Reference
1.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 
 
7.
 
 
 
8.
 
 
 
9.
 
 
 
10.
 
 
 
11.
 
 
 
12.
 
 
 
13.
 
 
 
14.
 
 
 
15.
 
 
 
16.
 
 
 
17.
 
 
 



5
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 transition report on Form 10-K for the period ended March 31, 2014. Unless the context otherwise requires, references to "Sprint," "we," "us," "our" and the "Company" mean Sprint Corporation and its consolidated subsidiaries for all periods presented, inclusive of Successor and Predecessor periods (each as defined below), and references to "Sprint Communications" are to Sprint Communications, Inc. and its consolidated subsidiaries.
On July 10, 2013 (SoftBank Merger Date), SoftBank Corp. and certain of its wholly-owned subsidiaries (together, "SoftBank") completed the merger (SoftBank Merger) with Sprint Nextel Corporation (Sprint Nextel) contemplated by the Agreement and Plan of Merger, dated as of October 15, 2012 (as amended, the Merger Agreement), and the Bond Purchase Agreement, dated as of October 15, 2012 (as amended, the Bond Agreement). As a result of the SoftBank Merger, Starburst II, Inc. (Starburst II) became the parent company of Sprint Nextel. Immediately thereafter, Starburst II changed its name to Sprint Corporation and Sprint Nextel changed its name to Sprint Communications, Inc. In connection with the change of control, as a result of the SoftBank Merger, Sprint Communications' assets and liabilities were adjusted to fair value on the closing date of the SoftBank Merger. The consolidated financial statements distinguish between the predecessor period (Predecessor) relating to Sprint Communications for periods prior to the SoftBank Merger and the successor period (Successor) relating to Sprint Corporation, formerly known as Starburst II for periods subsequent to the incorporation of Starburst II on October 5, 2012. The Successor financial information represents the activity and accounts of Sprint Corporation, which includes the activity and accounts of Starburst II prior to the close of the SoftBank Merger on July 10, 2013 and Sprint Communications, inclusive of the consolidation of Clearwire Corporation and its wholly-owned subsidiary Clearwire Communications LLC (together, "Clearwire"), prospectively following completion of the SoftBank Merger, beginning on July 11, 2013. The accounts and operating activity of Starburst II prior to the close of the SoftBank Merger primarily related to merger expenses that were incurred in connection with the SoftBank Merger (recognized in selling, general and administrative expense) and interest related to the $3.1 billion convertible bond (Bond) Sprint Communications, Inc. issued to Starburst II. The Predecessor financial information represents the historical basis of presentation for Sprint Communications for the 10-day and 101-day periods ended July 10, 2013 prior to the SoftBank Merger. As a result of the valuation of assets acquired and liabilities assumed at fair value at the time of the SoftBank Merger, the financial statements for the Successor period are presented on a measurement basis different than the Predecessor period (Sprint Communications historical cost) and are, therefore, not comparable. In addition, in order to align with SoftBank’s reporting schedule, our Board of Directors approved a change in fiscal year end to March 31, effective March 31, 2014. References herein to fiscal year 2014 refer to the twelve-month period ending March 31, 2015. See Note 3. Significant Transactions for additional information regarding the SoftBank Merger.
On July 9, 2013 (Clearwire Acquisition Date), Sprint Communications completed the acquisition of the remaining equity interests in Clearwire that it did not already own for approximately $3.5 billion, net of cash acquired, or $5.00 per share (Clearwire Acquisition). The consideration paid was allocated to assets acquired and liabilities assumed based on their estimated fair values at the time of the Clearwire Acquisition. The effects of the Clearwire Acquisition are included in the Predecessor period financial information and are therefore included in the allocation of the consideration transferred at the closing date of the SoftBank Merger.
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.


6
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 2.
New Accounting Pronouncements
In April 2014, the FASB issued authoritative guidance regarding Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The updated guidance defines discontinued operations as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, the disclosure requirements for discontinued operations were expanded and new disclosures for individually significant dispositions that do not qualify as discontinued operations are required. The guidance is effective prospectively for fiscal years and interim reporting periods within those years beginning after December 15, 2014, with early adoption permitted for transactions that have not been reported in financial statements previously issued or available for issuance. The standard will be effective for the Company's fiscal year beginning April 1, 2015 and will be applied to relevant future transactions.
In May 2014, the FASB issued new authoritative literature, Revenue from Contracts with Customers. The issuance is part of a joint effort by the FASB and the International Accounting Standards Board (IASB) to enhance financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The new standard will supersede much of the existing authoritative literature for revenue recognition. The standard and related amendments will be effective for the Company for its annual reporting period beginning April 1, 2017, including interim periods within that reporting period. Early application is not permitted. Entities are allowed to transition to the new standard by either retrospective application or recognizing the cumulative effect. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied and the estimated impact it will have on our consolidated financial statements.
In June 2014, the FASB issued authoritative guidance regarding Compensation - Stock Compensation, which provides guidance on how to treat performance targets that can be achieved after the requisite service period. The updated guidance requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition and accounted for under current guidance as opposed to a nonvesting condition that would impact the grant-date fair value of the award. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 with early adoption permitted. Entities may apply the amendments either (i) prospectively to all awards granted or modified after the effective date; or (ii) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter with the cumulative effect as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented. The Company does not expect the adoption of this guidance to have a material effect on our consolidated financial statements.
In August 2014, the FASB issued authoritative guidance regarding Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The updated guidance requires management to perform interim and annual assessments on whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related disclosures, if required. The standard will be effective for the Company’s fiscal year ending March 31, 2017, although early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on our consolidated financial statements.


7
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 3.
Significant Transactions
Acquisition of Remaining Interest in Clearwire
On July 9, 2013, Sprint Communications completed the Clearwire Acquisition. The cash consideration paid totaled approximately $3.5 billion, net of cash acquired of $198 million. Approximately $125 million of the cash consideration was accrued as "Accrued expenses and other current liabilities" on the consolidated balance sheet for dissenting shares relating to stockholders who exercised their appraisal rights.
The fair value of consideration, which is measured at the estimated fair value of each element of consideration transferred as of the Clearwire Acquisition Date, was determined as the sum of (a) approximately $3.7 billion of cash transferred to Clearwire stockholders, which included $125 million of cash relating to dissenting shares, (b) approximately $3.3 billion representing the estimated fair value of Clearwire shares held by Sprint Communications immediately preceding the acquisition and (c) approximately $59 million of share-based payment awards (replacement awards) exchanged for awards held by Clearwire employees.
Purchase Price Allocation
The consideration transferred has been allocated to assets acquired and liabilities assumed based on their estimated fair values at the time of the Clearwire Acquisition. The allocation of consideration transferred was based on management's judgment after evaluating several factors, including a valuation assessment. Management finalized its purchase price allocation during the quarter ended June 30, 2014. Adjustments made since the initial purchase price allocation decreased recorded goodwill by approximately $269 million and were primarily attributable to a reduction of approximately $270 million made to deferred tax liabilities as a result of additional analysis. The remaining adjustments were insignificant.
The following table summarizes the purchase price allocation of consideration in the Clearwire Acquisition:
Purchase Price Allocation (in millions):
Current assets
$
778

Property, plant and equipment
1,245

Identifiable intangibles
12,870

Goodwill
437

Other assets
25

Current liabilities
(1,070
)
Long-term debt
(4,288
)
Deferred tax liabilities
(2,130
)
Other liabilities
(876
)
Net assets acquired
$
6,991

The excess of the consideration transferred over the estimated fair values of assets acquired and liabilities assumed was recorded as goodwill.
SoftBank Transaction
As discussed above, the SoftBank Merger was completed on July 10, 2013. Sprint Communications, Inc. stockholders received consideration in a combination of both cash and stock, subject to proration. Consideration paid in the SoftBank Merger was $14.1 billion, net of cash acquired of $2.5 billion, and the estimated fair value of the 22% interest in Sprint Corporation issued to the then existing stockholders of Sprint Communications, Inc.
In addition, pursuant to the Bond Agreement, on October 15, 2012, Sprint Communications, Inc. issued a Bond to Starburst II with a principal amount of $3.1 billion, interest rate of 1%, and maturity date of October 15, 2019, which was converted into 590,476,190 shares of Sprint Communications, Inc. common stock at $5.25 per share immediately prior to the close of the SoftBank Merger. As a result of the completion of the SoftBank Merger and subsequent open market stock purchases, SoftBank owned approximately 80% of the outstanding voting common stock of Sprint Corporation as of September 30, 2014. Other Sprint stockholders owned the remaining approximately 20% as of September 30, 2014.

8
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Consideration Transferred and Investments by SoftBank
The fair value of consideration transferred, which is measured at the estimated fair value of each element of consideration transferred as of the SoftBank Merger Date, was determined as the sum of (a) approximately $16.6 billion of cash transferred to Sprint Communications, Inc. stockholders, (b) approximately $5.3 billion representing shares of Sprint issued to Sprint Communications, Inc. stockholders and (c) approximately $193 million of share-based payment awards (replacement awards) exchanged for awards held by Sprint employees.
Additionally, SoftBank invested approximately $5.0 billion of capital contributions in Sprint. The fair value of the investments by SoftBank was determined based on the cash transferred, including $3.1 billion to purchase the Bond and $1.9 billion at the close of the SoftBank Merger.
Purchase Price Allocation
The consideration transferred has been allocated to assets acquired and liabilities assumed based on their estimated fair values as of the SoftBank Merger Date, inclusive of the Clearwire Acquisition described above. The excess of the consideration transferred over the estimated fair values of assets acquired and liabilities assumed was recorded as goodwill. Goodwill resulting from the SoftBank Merger is allocated to the Wireless segment. The allocation of consideration transferred was based on management's judgment after evaluating several factors, including a valuation assessment. Management finalized its purchase price allocation during the quarter ended June 30, 2014. Adjustments made since the initial purchase price allocation decreased recorded goodwill by approximately $476 million. Indefinite-lived intangible assets increased by approximately $300 million due to additional analyses performed by management during the quarter ended December 31, 2013 and the quarter ended June 30, 2014 related to the value assigned to certain FCC licenses. The remainder of the decrease is due to insignificant changes in various accounts.
The following table summarizes the purchase price allocation of consideration transferred:
Purchase Price Allocation (in millions):
Current assets
$
8,576

Investments
133

Property, plant and equipment
14,558

Identifiable intangibles
50,672

Goodwill
6,343

Other assets
244

Current liabilities
(10,623
)
Long-term debt
(29,481
)
Deferred tax liabilities
(14,256
)
Other liabilities
(3,989
)
Net assets acquired, prior to conversion of the Bond
22,177

Conversion of Bond
3,100

Net assets acquired, after conversion of the Bond
$
25,277

Accounts Receivable Facility
Transaction Overview
On May 16, 2014, certain wholly-owned subsidiaries of Sprint entered into a two-year committed facility (Receivables Facility) to sell certain accounts receivable (the Receivables) on a revolving basis, subject to a maximum funding limit of $1.3 billion. The actual amount available to draw upon varies based on eligible receivables as defined in the agreement, therefore, the amount available to withdraw will vary. In connection with the Receivables Facility, Sprint formed wholly-owned subsidiaries that are bankruptcy-remote special purpose entities (SPEs). Pursuant to the Receivables Facility, certain Sprint subsidiaries (Originators) will transfer selected Receivables to the SPEs. The SPEs will then sell the Receivables to a bank agent on behalf of unaffiliated multi-seller asset-backed commercial paper conduits (Conduits) or their sponsoring banks. Sales of eligible Receivables to the Conduits may occur daily and are settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility, respectively. The Receivables primarily consist of wireless service charges currently due from subscribers and are short-term in nature. A subsidiary of Sprint will service the Receivables in exchange for a monthly servicing fee, and Sprint guarantees the performance of obligations of the servicer and

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

the Originators under the Receivables Facility. As of September 30, 2014, Sprint had not sold any Receivables to the Conduits and the amount available under the Receivables Facility was $1.1 billion.
Receivables sold will be treated as a sale for accounting purposes. The expected accounting impacts include the de-recognition of Receivables sold by the SPEs to the Conduits, recognition of cash received in exchange for the sale and recognition at fair value of a receivable due to Sprint from the Conduits for the difference between the Receivables sold and the cash received, less estimated fees and other items.
Each SPE’s sole business consists of the purchase or acceptance through capital contributions of the Receivables from the Originators and the subsequent retransfer of, or granting of a security interest in, such Receivables to the bank agent under the Receivables Facility. In addition, each SPE is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of the SPE’s assets prior to any assets or value in the SPE becoming available to the Originators or Sprint, and the assets of the SPE are not available to pay creditors of Sprint or any of its affiliates (other than any other SPE).
Variable Interest Entity
Sprint determined the Conduits are considered variable interest entities (VIEs) because they lack sufficient equity to finance their activities. Sprint's interests in the Receivables purchased by the Conduits, which are comprised of the net receivables due to Sprint, are not considered variable interests because they are in assets which represent less than 50% of the total activity of the Conduits.

Note 4.
Installment Receivables
Certain subscribers have the option to purchase handsets in installments over a 24-month period. The carrying value of installment receivables approximates fair value because the receivables are recorded at their present value, net of the deferred interest and allowance for credit losses. At the time of sale, we impute the interest on the installment receivable and record it as a reduction to equipment revenue and as a reduction to the face amount of the related receivable. Interest income is recognized over the term of the installment contract as operating revenue. Short-term installment receivables are recorded in "Accounts and notes receivable, net" and long-term installment receivables are recorded in "Other assets" in the consolidated balance sheets.
The following table summarizes the installment receivables:

Successor
 
September 30,
2014
 
March 31,
2014
 
(in millions)
Installment receivables, gross
$
1,494

 
$
740

Deferred interest
(133
)
 
(77
)
Installment receivables, net of deferred interest
1,361


663

Allowance for credit losses
(141
)
 
(47
)
Installment receivables, net
$
1,220

 
$
616


 
 

Classified on the consolidated balance sheets as:
 
 

Accounts and notes receivable, net
$
818

 
$
299

Other assets
402

 
317

Installment receivables, net
$
1,220

 
$
616

We categorize our installment receivables as prime and subprime based upon subscriber credit profiles and as unbilled, billed-current and billed-past due based upon the age of the receivable. We use proprietary scoring systems that measure the credit quality of our receivables using several factors, such as credit bureau information, subscriber credit risk scores and service plan characteristics. Payment history is subsequently monitored to further evaluate credit profiles. Prime subscriber receivables are those with lower delinquency risk and subprime subscriber receivables are those with higher delinquency risk. Subscribers within the subprime category may be required to pay a down payment on their equipment purchases. In addition, certain subscribers within the subprime category are required to pay an advance deposit. Installment receivables for which invoices have not yet been generated for the customer are considered unbilled. Installment receivables for which invoices have been generated but which are not past the contractual due date are considered billed - current.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Installment receivables for which invoices have been generated and the payment is approximately ten days past the contractual due date are considered billed - past due. Account balances are written-off if collection efforts were unsuccessful and future collection is unlikely based on the length of time from the day accounts become past due.
The balance and aging of installment receivables on a gross basis by credit category were as follows:
 
Successor
 
September 30, 2014
 
March 31, 2014
 
Prime
 
Subprime
 
Total
 
Prime
 
Subprime
 
Total
 
(in millions)
Unbilled
$
1,003

 
$
384

 
$
1,387

 
$
466

 
$
242

 
$
708

Billed - current
45

 
22

 
67

 
16

 
9

 
25

Billed - past due
17

 
23

 
40

 
5

 
2

 
7

Installment receivables, gross
$
1,065


$
429


$
1,494


$
487


$
253


$
740

Activity in the deferred interest and allowance for credit losses for the installment receivables for the six-month period ended September 30, 2014 was as follows:
 
Successor
 
Six Months Ended
September 30,
 
Three Months Ended
March 31,
 
2014
 
2014
 
(in millions)
Deferred interest and allowance for credit losses, beginning of period
$
124

 
$
13

Bad debt expense
188

 
44

Write-offs, net of recoveries
(94
)
 
—

Change in deferred interest on short-term and long-term installment receivables
56

 
67

Deferred interest and allowance for credit losses, end of period
$
274

 
$
124


Note 5.
Financial Instruments
Cash and cash equivalents, accounts and notes receivable, and accounts payable are carried at cost, which approximates fair value. Short-term investments (consisting primarily of time deposits and commercial paper), totaling approximately $1.2 billion as of each of the Successor periods ended September 30, 2014 and March 31, 2014, are recorded at amortized cost, and the respective carrying amounts approximate fair value using quoted prices in active markets. The fair value of marketable equity securities totaling $45 million and $50 million as of the Successor periods ended September 30, 2014 and March 31, 2014, are measured on a recurring basis using quoted prices in active markets. The estimated fair value of the majority of our current and long-term debt, excluding our credit facilities, 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 following table presents carrying amounts and estimated fair values of current and long-term debt:
 
Successor
 
Carrying amount at September 30, 2014
 
Estimated Fair Value Using Input Type
 
 
Quoted prices in active markets
 
Observable
 
Unobservable
 
Total estimated fair value
 
(in millions)
Current and long-term debt
$
31,816

 
$
26,595

 
$
4,954

 
$
1,135

 
$
32,684

 
Successor
 
Carrying amount at March 31, 2014
 
Estimated Fair Value Using Input Type
 
 
Quoted prices in active markets
 
Observable
 
Unobservable
 
Total estimated fair value
 
(in millions)
Current and long-term debt
$
32,277

 
$
27,516

 
$
5,421

 
$
1,262

 
$
34,199



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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 6.
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. Property plant and equipment for the six-month periods ended September 30, 2014 and 2013 included non-cash additions of approximately $570 million and $50 million, respectively, along with corresponding increases in "Accounts payable" and "Accrued expenses and other current liabilities." Also included in Property, plant and equipment for the Successor six-month period ended September 30, 2014 are non-cash additions of approximately $70 million related to leased handsets along with a corresponding decrease in "Device and accessory inventory."
The following table presents the components of property, plant and equipment, and the related accumulated depreciation:
 
Successor
 
September 30,
2014
 
March 31,
2014
 
(in millions)
Land
$
265

 
$
265

Network equipment, site costs and related software
16,810

 
14,902

Buildings and improvements
752

 
745

Non-network internal use software, office equipment and other
1,084

 
866

Construction in progress
2,598

 
1,970

Less: accumulated depreciation
(3,952
)
 
(2,449
)
Property, plant and equipment, net
$
17,557

 
$
16,299


Note 7.
Intangible Assets
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consist of FCC licenses, which were acquired primarily through FCC auctions and business combinations, certain of our trademarks, and goodwill. At September 30, 2014, we held 1.9 GHz, 800 MHz and 2.5 GHz FCC licenses authorizing the use of radio frequency spectrum to deploy our wireless services. 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. Accordingly, we have concluded that FCC licenses are 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 (see Note 3. Significant Transactions).
During the quarter ended June 30, 2014, the Company entered into definitive agreements with various counterparties to sell certain FCC licenses held by its Wireless Segment. During the quarter ended September 30, 2014, an agreement totaling $100 million received regulatory approval and was settled. As of September 30, 2014, the carrying value of FCC licenses still pending regulatory approval that was reclassed from FCC licenses into held for sale was approximately $200 million and is included within “Prepaid expenses and other current assets” on the consolidated balance sheets. These remaining sales are not expected to have a material impact on the Company's consolidated results of operations.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
Successor
 
March 31,
2014
 
Net
Reductions
 
September 30,
2014
 
(in millions)
FCC licenses
$
36,043

 
$
(178
)
 
$
35,865

Trademarks
5,935

 
—

 
5,935

Goodwill
6,383

 
(40
)
(1 
) 
6,343

 
$
48,361

 
$
(218
)
 
$
48,143

 _________________
(1)
Net reduction to goodwill for the Successor six-month period ended September 30, 2014 of approximately $40 million was the result of purchase price allocation adjustments, which consisted of a $44 million decrease associated with the SoftBank Merger and a $4 million increase associated with the Clearwire Acquisition.
Intangible Assets Subject to Amortization
Customer relationships are amortized using the sum-of-the-months' digits method, while all other definite-lived intangible assets are amortized using the straight line method over the estimated useful lives of the respective assets. We reduce the gross carrying value and associated accumulated amortization when specified intangible assets become fully amortized. Amortization expense related to favorable spectrum and tower leases are recognized in cost of services.
 
 
 
Successor
 
 
 
September 30, 2014
 
March 31, 2014
 
Useful Lives
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
 
 
(in millions)
Customer relationships
4 to 8 years
 
$
6,923

 
$
(2,071
)
 
$
4,852

 
$
6,923

 
$
(1,289
)
 
$
5,634

Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Favorable spectrum leases
23 years
 
884

 
(51
)
 
833

 
884

 
(30
)
 
854

Favorable tower leases
3 to 7 years
 
589

 
(134
)
 
455

 
589

 
(80
)
 
509

Trademarks
34 years
 
520

 
(19
)
 
501

 
520

 
(12
)
 
508

Other
4 to 10 years
 
67

 
(12
)
 
55

 
60

 
(7
)
 
53

Total other intangible assets
 
2,060


(216
)

1,844


2,053


(129
)

1,924

Total definite-lived intangible assets
 
$
8,983


$
(2,287
)

$
6,696


$
8,976


$
(1,418
)

$
7,558


Note 8.
Accounts Payable
Accounts payable at September 30, 2014 and March 31, 2014 include liabilities in the amounts of $81 million and $91 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 9.
Long-Term Debt, Financing and Capital Lease Obligations
 
 
 
 
 
 
 
 
 
 
Successor
 
Interest Rates
 
Maturities
 
September 30,
2014
 
March 31,
2014
 
 
 
 
 
 
 
 
 
(in millions)
Notes
 
 
 
 
 
 
 
 
 
 
 
Senior notes
 
 
 
 
 
 
 
 
 
 
 
Sprint Corporation
7.13
-
7.88%
 
2021
-
2024
 
$
9,000

 
$
9,000

Sprint Communications, Inc.
6.00
-
11.50%
 
2016
-
2022
 
9,280

 
9,280

Sprint Capital Corporation
6.88
-
8.75%
 
2019
-
2032
 
6,204

 
6,204

Guaranteed notes
 
 
 
 
 
 
 
 
 
 
 
Sprint Communications, Inc.
7.00
-
9.00%
 
2018
-
2020
 
4,000

 
4,000

Secured notes
 
 
 
 
 
 
 
 
 
 
 
iPCS, Inc.
3.49%
 
2014
 
—

 
181

Clearwire Communications LLC (1)
14.75%
 
2016
 
300

 
300

Exchangeable notes
 
 
 
 
 
 
 
 
 
 
 
Clearwire Communications LLC (1)
8.25%
 
2040
 
629

 
629

Credit facilities
 
 
 
 
 
 
 
 
 
 
 
Bank credit facility
2.75%
 
2018
 
—

 
—

Export Development Canada
3.58%
 
2015
 
500

 
500

Secured equipment credit facility
2.03%
 
2017
 
635

 
762

Financing obligation
6.09%
 
2021
 
301

 
327

Capital lease obligations and other
2.35
-
10.52%
 
2015
-
2023
 
158

 
187

Net premiums
 
 
 
 
 
 
 
 
1,259

 
1,408

 
 
 
 
 
 
 
 
 
32,266

 
32,778

Less current portion
 
 
 
 
 
 
 
 
(808
)
 
(991
)
Long-term debt, financing and capital lease obligations
 
 
 
 
 
 
 
 
$
31,458

 
$
31,787

________ 
(1)
Notes of Clearwire Communications LLC are also direct obligations of Clearwire Finance, Inc. and are guaranteed by certain Clearwire subsidiaries.
As of September 30, 2014, Sprint Corporation, the parent corporation, had $9.0 billion in principal amount of senior notes outstanding. In addition, as of September 30, 2014, the outstanding principal amount of senior notes issued by Sprint Communications, Inc. and Sprint Capital Corporation, guaranteed notes issued by Sprint Communications, Inc., and exchangeable notes issued by Clearwire Communications LLC, totaling $20.1 billion in principal amount of our long-term debt issued by 100% owned subsidiaries, was fully and unconditionally guaranteed by Sprint Corporation. The indentures and financing arrangements governing certain of our subsidiaries' debt contain provisions that limit cash dividend payments on subsidiary common stock. Except in the case of secured notes issued by Clearwire Communications LLC, the transfer of cash from subsidiaries to the parent corporation generally is not restricted.
Cash interest payments, net of amounts capitalized of $25 million and $14 million, totaled $1.2 billion and $309 million during the Successor six-month periods ended September 30, 2014 and 2013, respectively. Cash interest payments, net of amounts capitalized of $1 million and $14 million, totaled $6 million and $509 million during the Predecessor 10-day and 101-day periods ended July 10, 2013, respectively.
Notes
As of September 30, 2014, our outstanding notes consisted of senior notes, guaranteed notes, and exchangeable notes, all of which are unsecured, as well as secured notes of Clearwire Communications LLC, which are secured solely by assets of Clearwire Communications LLC and certain of its subsidiaries. Cash interest on all of the notes is generally payable semi-annually in arrears. As of September 30, 2014, approximately $28.6 billion aggregate principal amount of the notes was redeemable at the Company's discretion at the then-applicable redemption prices plus accrued interest.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2014, approximately $20.1 billion aggregate principal amount of our senior notes and guaranteed notes provide holders with the right to require us to repurchase the notes if a change of control triggering event (as defined in the applicable indentures and supplemental indentures) occurs. As of September 30, 2014, approximately $300 million aggregate principal amount of Clearwire Communications LLC notes provide holders with the right to require us to repurchase the notes if a change of control occurs (as defined in the applicable indentures and supplemental indentures). If we are required to make such 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.
Upon the close of the Clearwire Acquisition, the Clearwire Communications, LLC 8.25% Exchangeable Notes due 2040 became exchangeable at any time, at the holder’s option, for a fixed amount of cash equal to $706.21 for each $1,000 principal amount of notes surrendered. As a result, $444 million, which is the total cash consideration payable upon an exchange of all $629 million principal amount of notes outstanding, is now classified as a current debt obligation. The remaining carrying value of these notes is classified as a long-term debt obligation.
Debt retirements
On May 1, 2014, the Company retired the remaining $181 million in principal amount upon maturity of its outstanding iPCS, Inc. Second Lien Secured Floating Rate Notes due 2014 plus accrued and unpaid interest.
Credit Facilities
Bank credit facility
On February 10, 2014, the Company amended its unsecured revolving bank credit facility to provide additional lender commitments to bring the total capacity from $3.0 billion to $3.3 billion. The unsecured revolving bank credit facility expires in February 2018. Borrowings under the revolving bank credit facility bear interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus a spread that varies depending on the Company’s credit ratings. As of September 30, 2014, approximately $918 million in letters of credit were outstanding under this credit facility, including the letter of credit required by the Report and Order (see Note 12. Commitments and Contingencies). As a result of the outstanding letters of credit, which directly reduce the availability of borrowings, the Company had approximately $2.4 billion of borrowing capacity available under this facility as of September 30, 2014. The unsecured loan agreement with Export Development Canada (EDC Agreement) and secured equipment credit facility provide for terms similar to those of the revolving bank credit facility, except that under the terms of the EDC Agreement and the secured equipment credit facility, repayments of outstanding amounts cannot be re-drawn. As of September 30, 2014, the EDC Agreement was fully drawn.
Secured equipment credit facility
As of September 30, 2014, both tranches of the secured equipment credit facility totaling $1.0 billion were fully drawn. We made a regularly scheduled principal repayment of $127 million during the Successor three and six-month periods ended September 30, 2014. 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%. The facility is secured by a lien on the equipment purchased from Ericsson, Inc. and is fully and unconditionally guaranteed by Sprint Communications, Inc.
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
Certain indentures and financing arrangements governing our debt also require compliance with various covenants, including covenants that limit the ability of the Company and its subsidiaries to sell all or substantially all of its assets, limit the ability of the Company and its subsidiaries to incur indebtedness and liens, and require that we maintain certain financial ratios, each as defined by the terms of the indentures, supplemental indentures and financing arrangements.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2014, 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 certain of our other debt obligations, which in turn could result in the maturities being accelerated.
Under our revolving bank credit facility and other bank agreements, we are currently restricted from paying cash dividends because our ratio of total indebtedness to adjusted EBITDA (each as defined in the applicable agreements) exceeds 2.5 to 1.0.

Note 10.
Severance and Exit Costs
For the Successor three and six-month periods ended September 30, 2014, we recognized lease exit costs primarily associated with call center and retail store closures as well as our network modernization plan and severance costs associated with reductions in our work force. In addition, we recognized access exit costs 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.
As a result of our network modernization and the completion of the significant transactions (see Note 3. Significant Transactions), we expect to incur additional exit costs in the future related to the transition of our existing backhaul architecture to a replacement technology for our network and the efforts associated with the integration of our Significant Transactions, such as further evaluation of the future use of Clearwire cell sites, among other initiatives. These additional exit costs are expected to range between approximately $75 million to $175 million, of which the majority are expected to be incurred by March 31, 2016.
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:
 
Successor
 
March 31,
2014
 
Net
Expense
 
Cash Payments
and Other
 
September 30,
2014
 
(in millions)
Lease exit costs
$
650

 
$
13

(1) 
$
(220
)
 
$
443

Severance costs
197

 
269

(2) 
(177
)
 
289

Access exit costs
124

 
29

(3) 
(60
)
 
93

 
$
971

 
$
311

 
$
(457
)
 
$
825

 _________________
(1)
For the Successor three and six-month periods ended September 30, 2014, we recognized costs of $10 million and $13 million ( Wireless only).
(2)
For the Successor three and six-month periods ended September 30, 2014, we recognized costs of $263 million ($228 million Wireless, $35 million Wireline) and $269 million ($233 million Wireless, $36 million Wireline), respectively.
(3)
For the Successor three and six-month periods ended September 30, 2014, we recognized costs of $11 million ($9 million Wireless, $2 million Wireline) and $29 million ($24 million Wireless, $5 million Wireline), respectively.


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 11.
Income Taxes
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:
 
Successor
 
 
Predecessor
 
Six Months Ended
September 30,
 
 
101 Days Ended
July 10,
 
2014
 
2013
 
 
2013
 
(in millions)
Income tax benefit (expense) at the federal statutory rate
$
240

 
$
274

 
 
$
(367
)
Effect of:
 
 
 
 
 
 
State income taxes, net of federal income tax effect
—

 
35

 
 
(31
)
Change in federal and state valuation allowance
(297
)
 
(327
)
 
 
(1,145
)
Other, net
1

 
(11
)
 
 
(20
)
Income tax expense
$
(56
)
 
$
(29
)
 
 
$
(1,563
)
Effective income tax rate
(8.2
)%
 
(3.7
)%
 
 
149.1
%
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 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 its valuation allowance of $297 million during the Successor six-month period ended September 30, 2014 primarily attributable to the net increase in deferred tax assets related to the federal and state net operating loss carryforwards generated during the period offset by a $73 million decrease related to the planned disposition of certain FCC licenses. The planned disposition of the FCC licenses results in the ability to schedule the reversal of the temporary difference to generate future taxable income during the net operating loss carryforward period when evaluating the ability to realize our deferred tax assets. The Company recognized income tax expense to increase the valuation allowance by $327 million and $1.1 billion during the Successor six-month period ended September 30, 2013 and Predecessor 101-day period ended July 10, 2013, respectively, on deferred tax assets primarily related to losses incurred during the period. 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 $56 million for the Successor six-month period ended September 30, 2014 is primarily attributable to taxable temporary differences from the tax amortization of FCC licenses during the period offset by a $73 million decrease in valuation allowance attributable to the planned disposition of certain FCC licenses. Income tax expense of $29 million for the Successor six-month period ended September 30, 2013 is primarily attributable to taxable temporary differences from amortization of FCC licenses. Income tax expense of $1.6 billion for the Predecessor 101-day period ended July 10, 2013 is primarily attributable to taxable temporary differences from the $2.9 billion gain on the previously-held equity interests in Clearwire. The gain on the previously-held equity interests in Clearwire was principally attributable to the increase in the fair value of FCC licenses held by Clearwire. 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. These temporary differences result in net deferred income tax expense since they cannot be scheduled to reverse during the loss carryforward period.
As of September 30, 2014 and March 31, 2014, we maintained unrecognized tax benefits of $159 million and $160 million, respectively. Cash paid for income taxes, net was $40 million for the Successor six-month period ended September 30, 2014 and insignificant for the Successor six-month period ended September 30, 2013 as well as during the Predecessor 101-day period ended July 10, 2013.


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 12.
Commitments and Contingencies
Litigation, Claims and Assessments
In March 2009, a stockholder brought suit, Bennett v. Sprint Nextel Corp., in the U.S. District Court for the District of Kansas, alleging that Sprint Communications and three of its former officers violated Section 10(b) of the Exchange Act 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 Sprint Communications common stock from October 26, 2006 to February 27, 2008. On January 6, 2011, the Court denied the motion to dismiss. Subsequently, our motion to certify the January 6, 2011 order for an interlocutory appeal was denied, and discovery is continuing. The plaintiff moved to certify a class of bondholders as well as owners of common stock, and on March 27, 2014, the court certified a class including bondholders as well as stockholders. On April 11, 2014, we filed a petition to appeal that certification order to the Tenth Circuit Court of Appeals. The petition was denied on May 23, 2014. Sprint Communications believes the complaint is without merit and intends to continue 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 stockholder derivative suits were filed against Sprint Communications and certain of its 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 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 the Bennett case is in the discovery phase. 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 Communications 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. Sprint Communications moved to dismiss the complaint on June 14, 2012. On July 1, 2013, the court entered an order denying the motion to dismiss in large part, although it did dismiss certain counts or parts of certain counts. Sprint Communications has appealed that order and the intermediate appellate court affirmed the order of the trial court. Our petition for leave to bring an interlocutory appeal to the highest court in New York was granted, and we expect briefing of that appeal to continue through 2014. We believe the complaint is without merit and intend to continue to defend this 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.
Eight related stockholder derivative suits have been filed against Sprint Communications and certain of its current and former officers and directors. Each suit alleges generally that the individual defendants breached their fiduciary duties to Sprint Communications and its stockholders 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, was dismissed by a federal court. Two suits were filed in state court in Johnson County, Kansas and one of those suits was dismissed as premature; and five suits are pending in federal court in Kansas. The remaining Kansas suits have been stayed. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
Sprint Communications, Inc. is also a defendant in a complaint filed by stockholders of Clearwire Corporation asserting claims for breach of fiduciary duty by Sprint Communications, and related claims and otherwise challenging the Clearwire Acquisition. ACP Master, LTD, et al. v. Sprint Nextel Corp., et al., was filed April 26, 2013, in Chancery Court in Delaware. Our motion to dismiss the suit was denied, and discovery has begun. Plaintiffs in the ACP Master, LTD suit have also filed suit requesting an appraisal of the fair value of their Clearwire stock, and discovery is proceeding in that case. Sprint Communications intends to defend the ACP Master, LTD cases vigorously, and, because they are still in the preliminary stage, we have not yet determined what effect the lawsuit will have, if any, on our financial position or results of operations.

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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.
In October 2013, the FCC Enforcement Bureau began to issue notices of apparent liability (NALs) to other Lifeline providers, imposing fines for intracarrier duplicate accounts identified by the government during its audit function. Those audits also identified a small percentage of potentially duplicative intracarrier accounts related to our Assurance Wireless business. No NAL has yet been issued with respect to Sprint and we do not know if one will be issued. Further, we are not able to reasonably estimate the amount of any claim for penalties that might be asserted. However, based on the information currently available, if a claim is asserted by the FCC, Sprint does not believe that any amount ultimately paid would be material to the Company’s results of operations or financial position. 
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 federal or state matters such as sales, use or property taxes, or other charges 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
In 2004, the FCC adopted a Report and Order that included new 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. Also, in exchange, we received licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band.
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. Since the inception of the program, we have incurred payments of approximately $3.4 billion directly attributable to our performance under the Report and Order, including approximately $73 million during the Successor six-month period ended September 30, 2014. When incurred, these costs are generally accounted for either as property, plant and equipment or as additions to FCC licenses. Although costs incurred through September 30, 2014 have exceeded $2.8 billion, not all of those costs have been reviewed and accepted as eligible by the transition administrator. During the Successor three-month period ended June 30, 2014, we received a cash payment of approximately $95 million, which represented a reimbursement of prior reconfiguration costs incurred by us that also benefited spectrum recently auctioned by the FCC. We do not expect any further reimbursements.
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 our 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. 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. We anticipate that the continuing reconfiguration progress will be sufficient to support the 800 MHz portion of our network modernization. In January 2013, we submitted a Request for Declaratory Ruling to the FCC requesting two items: (i) that it declare that Sprint will not owe any anti-windfall payment to the US Treasury, because we have exceeded the $2.8 billion of required expenditures, and (ii) that the FCC remove the $850 million minimum for the letter of credit and allow further reductions based on quarterly estimates of remaining obligations. In September 2014, the FCC granted, in part, our request by

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

authorizing our letter of credit to be reduced to $457 million, which was executed on October 6, 2014, with further quarterly reductions allowed upon approval of our requests. In addition, it directed the transition administrator to undertake an assessment of the anti-windfall calculation.
Guarantee Liabilities
Under certain of our wireless service plans, we offer an option to our subscribers to purchase, on a monthly basis, an annual trade-in right (the option). At the trade-in date, a subscriber who has elected to purchase a handset in an installment billing arrangement will receive a credit in the amount of the outstanding balance of the installment contract provided the subscriber trades-in an eligible used handset in good working condition and purchases a new handset from Sprint. Additionally, the subscriber must have purchased the option for the 12 consecutive months preceding the trade-in. When a subscriber elects the option, the total estimated arrangement proceeds associated with the subscriber are reduced by the estimated fair value of current customer obligation of the fixed-price trade-in credit (guarantee liability) and the remaining proceeds are allocated amongst the other deliverables in the arrangement. The guarantee liability is estimated based on assumptions, including, but not limited to, the expected fair value of the used handset at trade-in, subscribers’ estimated remaining balance of the remaining installment payments, and the probability and timing of the trade-in. When the subscriber elects to exercise the trade-in right, the difference between the outstanding balance of the installment receivable and the estimated fair value of the returned handset is recorded as a reduction of the guarantee liability. If the subscriber elects to stop purchasing the option prior to, or after, becoming eligible to exercise the trade-in right, we recognize the amount of the associated guarantee liability as operating revenue. At each reporting date, we reevaluate our estimate of the guarantee liability. If all subscribers who elected the option were to claim their benefit at the earliest contractual time of eligible trade-in, the maximum amount of the guarantee liability (i.e., the estimated unpaid balance of the subscribers' installment contracts) would be approximately $429 million at September 30, 2014. This amount is not an indication of the Company's expected loss exposure because it does not consider the expected fair value of the used handset, which is required to be returned to us in good working condition at trade-in, nor does it consider the probability and timing of trade-in. The total guarantee liabilities associated with the option, which are recorded in "Accrued expenses and other current liabilities" in the consolidated balance sheets, were immaterial.
Note 13.
Per Share Data
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share adjusts basic net income (loss) per common share, computed using the treasury stock method, for the effects of potentially dilutive common shares, if the effect is not antidilutive. Outstanding options and restricted stock units (exclusive of participating securities included in basic weighted average common shares outstanding) that had no effect on our computation of dilutive weighted average number of shares outstanding as their effect would have been antidilutive were approximately 67 million and 66 million as of the Successor periods ended September 30, 2014 and 2013, respectively, in addition to all 55 million shares issuable under the warrant held by SoftBank. The warrant was issued to SoftBank at the close of the SoftBank Merger and is exercisable at $5.25 per share at the option of SoftBank, in whole or in part, at any time on or prior to July 10, 2018. For the Predecessor 101-day period ended July 10, 2013, outstanding options and restricted stock units (exclusive of participating securities) that had no effect on our computation of dilutive weighted average number of shares outstanding as their effect would have been antidilutive were approximately 61 million, in addition to all 590 million shares issuable under the convertible bond issued by Sprint Communications to Starburst II in 2012.

Note 14.
Segments
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 (handsets and tablets) 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 provided to other communications companies and targeted business and consumer subscribers, in addition to our Wireless segment.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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. Expense and income items excluded from segment earnings are managed at the corporate level. Transactions between segments are generally accounted for based on 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.
Segment financial information is as follows:  
Successor
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
Net operating revenues
$
7,929

 
$
555

 
$
4

 
$
8,488

Inter-segment revenues(1)
—

 
153

 
(153
)
 
—

Total segment operating expenses
(6,559
)
 
(681
)
 
138

 
(7,102
)
Segment earnings
$
1,370

 
$
27

 
$
(11
)
 
1,386

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(898
)
Amortization
 
 
 
 
 
 
(396
)
Other, net(2)
 
 
 
 
 
 
(284
)
Operating loss
 
 
 
 
 
 
(192
)
Interest expense
 
 
 
 
 
 
(510
)
Other income, net
 
 
 
 
 
 
8

Loss before income taxes
 
 
 
 
 
 
$
(694
)
 
 
 
 
 
 
 
 
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
Net operating revenues
$
7,159

 
$
586

 
$
4

 
$
7,749

Inter-segment revenues(1)
—

 
191

 
(191
)
 
—

Total segment operating expenses
(6,034
)
 
(660
)
 
193

 
(6,501
)
Segment earnings
$
1,125

 
$
117

 
$
6

 
1,248

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(942
)
Amortization
 
 
 
 
 
 
(461
)
Other, net(2)
 
 
 
 
 
 
(203
)
Operating loss
 
 
 
 
 
 
(358
)
Interest expense
 
 
 
 
 
 
(416
)
Other income, net
 
 
 
 
 
 
165

Loss before income taxes
 
 
 
 
 
 
$
(609
)
 
 
 
 
 
 
 
 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Six Months Ended September 30, 2014
 
 
 
 
 
 
 
Net operating revenues
$
16,122

 
$
1,148

 
$
7

 
$
17,277

Inter-segment revenues(1)
—

 
306

 
(306
)
 
—

Total segment operating expenses
(12,959
)
 
(1,392
)
 
287

 
(14,064
)
Segment earnings
$
3,163

 
$
62

 
$
(12
)
 
3,213

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(1,766
)
Amortization
 
 
 
 
 
 
(809
)
Other, net(2)
 
 
 
 
 
 
(311
)
Operating income
 
 
 
 
 
 
327

Interest expense
 
 
 
 
 
 
(1,022
)
Other income, net
 
 
 
 
 
 
9

Loss before income taxes
 
 
 
 
 
 
$
(686
)
 
 
 
 
 
 
 
 
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Six Months Ended September 30, 2013
 
 
 
 
 
 
 
Net operating revenues
$
7,159

 
$
586

 
$
4

 
$
7,749

Inter-segment revenues(1)
—

 
191

 
(191
)
 
—

Total segment operating expenses
(6,034
)
 
(660
)
 
171

 
(6,523
)
Segment earnings
$
1,125

 
$
117

 
$
(16
)
 
1,226

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(942
)
Amortization
 
 
 
 
 
 
(461
)
Other, net(2)
 
 
 
 
 
 
(203
)
Operating loss
 
 
 
 
 
 
(380
)
Interest expense
 
 
 
 
 
 
(416
)
Other income, net
 
 
 
 
 
 
12

Loss before income taxes
 
 
 
 
 
 
$
(784
)
 
 
 
 
 
 
 
 
Other Information
Wireless
 
Wireline
 
Corporate and
Other
 
Consolidated
 
(in millions)
Capital expenditures for the six months ended September 30, 2014
$
2,109

 
$
124

 
$
156

 
$
2,389

Capital expenditures for the six months ended September 30, 2013
$
1,743

 
$
73

 
$
62

 
$
1,878


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Predecessor
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
10 Days Ended July 10, 2013
 
 
 
 
 
 
 
Net operating revenues
$
858

 
$
74

 
$
—

 
$
932

Inter-segment revenues(1)
—

 
24

 
(24
)
 
—

Total segment operating expenses
(777
)
 
(83
)
 
23

 
(837
)
Segment earnings
$
81

 
$
15

 
$
(1
)
 
95

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(113
)
Amortization
 
 
 
 
 
 
(8
)
Other, net(2)
 
 
 
 
 
 
(14
)
Operating loss
 
 
 
 
 
 
(40
)
Interest expense
 
 
 
 
 
 
(275
)
Equity in losses of unconsolidated investments
 
 
 
 
$
(23
)
 
 
Gain on previously-held equity interests
 
 
 
 
2,926

 
2,903

Other income, net
 
 
 
 
 
 
2

Income before income taxes
 
 
 
 
 
 
$
2,590

 
 
 
 
 
 
 
 
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
101 Days Ended July 10, 2013
 
 
 
 
 
 
 
Net operating revenues
$
9,036

 
$
769

 
$
4

 
$
9,809

Inter-segment revenues(1)
—

 
239

 
(239
)
 
—

Total segment operating expenses
(7,661
)
 
(864
)
 
235

 
(8,290
)
Segment earnings
$
1,375

 
$
144

 
$
—

 
1,519

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(1,676
)
Amortization
 
 
 
 
 
 
(77
)
Other, net(2)
 
 
 
 
 
 
(680
)
Operating loss
 
 
 
 
 
 
(914
)
Interest expense
 
 
 
 
 
 
(703
)
Equity in losses of unconsolidated investments
 
 
 
 
$
(280
)
 
 
Gain on previously-held equity interests
 
 
 
 
2,926

 
2,646

Other income, net
 
 
 
 
 
 
19

Income before income taxes
 
 
 
 
 
 
$
1,048