T-Mobile US, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including information concerning our future results of operations, are forward-looking statements. These forward-looking statements are generally identified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could” or similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. The following important factors, along with the Risk Factors included in Part II, Item 1A below and the risk factors previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which amended and restated the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, as further amended by the risk factors previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements: • failure to realize the expected benefits and synergies of the merger (the “Merger”) with Sprint Corporation (“Sprint”), pursuant to the Business Combination Agreement with Sprint and the other parties named therein (as amended, the “Business Combination Agreement”) and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”) in the expected timeframes, in part or at all; • adverse economic, political or market conditions in the U.S. and international markets, including those caused by the COVID-19 pandemic, and the impact that any of the foregoing may have on us and our customers and other stakeholders; • costs of or difficulties in integrating Sprint’s network and operations into our network and operations, including intellectual property and communications systems, administrative and information technology infrastructure and accounting, financial reporting and internal control systems; • changes in key customers, suppliers, employees or other business relationships as a result of the consummation of the Transactions; • the risk that our business, investor confidence in our financial results and stock price may be adversely affected if our internal controls are not effective; • the risk of future material weaknesses resulting from the differences between T-Mobile’s and Sprint’s internal controls environments as we work to integrate and align policies and practices; • the impacts of the actions we have taken and conditions we have agreed to in connection with the regulatory proceedings and approvals of the Transactions including the Prepaid Transaction (as defined in Note 2 - Business Combination of the Notes to the Condensed Consolidated Financial Statements) the complaint and proposed final judgment (the “Consent Decree”) agreed to by us, Deutsche Telekom AG (“DT”), Sprint, SoftBank Group Corp. (“SoftBank”) and DISH Network Corporation (“DISH”) with the U.S. District Court for the District of Columbia, which was approved by the Court on April 1, 2020, the proposed commitments filed with the Secretary of the FCC, which we announced on May 20, 2019, certain national security commitments and undertakings, and any other commitments or undertakings entered into, including but not limited to those we have made to certain states and nongovernmental organizations (collectively, the “Government Commitments”); • the ongoing commercial and transition services arrangements that we entered into with DISH in connection with such Prepaid Transaction, which we completed on July 1, 2020 (collectively, the “Divestiture Transaction”); • the assumption of significant liabilities, including the liabilities of Sprint in connection with, and significant costs, including financing costs, related to the Transactions; • our ability to make payments on debt or to repay existing or future indebtedness when due or to comply with the covenants contained therein; • adverse changes in the ratings of our debt securities or adverse conditions in the credit markets; • natural disasters, public health crises, including the COVID-19 pandemic, terrorist attacks or similar incidents; • competition, industry consolidation and changes in the market for wireless services, which could negatively affect our ability to attract and retain customers; • the effects of any future merger, investment, or acquisition involving us, as well as the effects of mergers, investments or acquisitions in the technology, media and telecommunications industry; • breaches of our and/or our third-party vendors’ networks, information technology and data security, resulting in unauthorized access to customer confidential information; 57 Table of Contents • inability to implement and maintain effective cybersecurity measures over critical business systems; • challenges in implementing our business strategies or funding our operations, including payment for additional spectrum or network upgrades; • the impact on our networks and business from major system and network failures; • difficulties in managing growth in wireless data services, including network quality; • material changes in available technology and the effects of such changes, including product substitutions and deployment costs and performance; • the timing, scope and financial impact of our deployment of advanced network and business technologies; • the occurrence of high fraud rates related to device financing, customer credit cards, dealers, subscriptions, or account take over fraud; • our inability to retain and hire key personnel; • any changes in the regulatory environments in which we operate, including any increase in restrictions on the ability to operate our networks and changes in data privacy laws; • unfavorable outcomes of existing or future litigation or regulatory actions, including litigation or regulatory actions related to the Transactions; • the possibility that we may be unable to adequately protect our intellectual property rights or be accused of infringing the intellectual property rights of others; • changes in tax laws, regulations and existing standards and the resolution of disputes with any taxing jurisdictions; • the possibility that we may be unable to renew our spectrum leases on attractive terms or acquire new spectrum licenses or leases at reasonable costs and terms; • any disruption or failure of third parties (including key suppliers) to provide products or services; • material adverse changes in labor matters, including labor campaigns, negotiations or additional organizing activity, and any resulting financial, operational and/or reputational impact; • changes in accounting assumptions that regulatory agencies, including the U.S. Securities and Exchange Commission (the “SEC”), may require, which could result in an impact on earnings; and • interests of our significant stockholders that may differ from the interests of other stockholders. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. In this Form 10-Q, unless the context indicates otherwise, references to “T-Mobile,” “our Company,” “the Company,” “we,” “our,” and “us” refer to T-Mobile US, Inc. as a standalone company prior to April 1, 2020, the date we completed the Merger with Sprint, and on and after April 1, 2020, refer to the combined company as a result of the Merger. Investors and others should note that we announce material financial and operational information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use certain social media accounts as means of disclosing information about us and our services and for complying with our disclosure obligations under Regulation FD (the @TMobileIR Twitter account (https://twitter.com/TMobileIR) and the @MikeSievert Twitter (https://twitter.com/MikeSievert) account, which Mr. Sievert also uses as a means for personal communications and observations). The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these social media channels in addition to following our press releases, SEC filings and public conference calls and webcasts. The social media channels that we intend to use as a means of disclosing the information described above may be updated from time to time as listed on our investor relations website. Overview The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our condensed consolidated financial statements with the following: • A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results; • Context to the financial statements; and • Information that allows assessment of the likelihood that past performance is indicative of future performance. 58 Table of Contents Our MD&A is performed on a consolidated basis and is inclusive of the results and operations of Sprint prospectively from the close of our Merger on April 1, 2020. The Merger enhanced our spectrum portfolio, increased our customer base, altered our product mix by increasing the portion of customers who finance their devices with leasing programs and created opportunity for synergies in our operations. We anticipate an initial increase in our combined operating costs which we expect to decrease as we realize synergies. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities. Our MD&A is provided as a supplement to, and should be read together with, our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2020, included in Part I, Item 1 of this Form 10-Q and audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019. Except as expressly stated, the financial condition and results of operations discussed throughout our MD&A are those of T-Mobile US, Inc. and its consolidated subsidiaries. Beginning with the second quarter of 2020, we have discontinued the use of “Branded” to describe the results and metrics associated with our flagship brands including T-Mobile and Metro by T-Mobile. Sprint Merger Transaction Overview On April 1, 2020, we completed our Merger with Sprint, a communications company offering a comprehensive range of wireless and wireline communications products and services. As a result, Sprint and its subsidiaries became wholly owned consolidated subsidiaries of T-Mobile. The Merger has altered the size and scope of our operations, impacting our assets, liabilities, obligations, capital requirements and performance measures. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities. As a combined company, we expect to be able to enhance the breadth and depth of our nationwide 5G network, accelerate innovation, increase competition in the U.S. wireless, video and broadband industries and achieve significant synergies and cost reductions by eliminating redundancies within the combined network as well as other business processes and operations For more information regarding the Merger, see Note 2 – Business Combinations of the Notes to the Condensed Consolidated Financial Statements. On June 22, 2020, we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements. Brand and Retail Unification On August, 2, 2020, we combined the Sprint and T-Mobile operations under the T-Mobile brand nationwide. We combined our retail operations and rebranded thousands of Sprint stores to T-Mobile stores while implementing the tools and systems across our distribution footprint to serve all customers in all stores. Sale of Boost Mobile and Sprint Prepaid Brands In connection with obtaining regulatory approval for the Merger, on July 1, 2020, DISH acquired the prepaid wireless business operated under the Boost Mobile and Sprint prepaid brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers of Shentel and Swiftel Communications, Inc.), including customer accounts, inventory, contracts, intellectual property and certain other specified assets (the “Prepaid Business”), and assumed certain related liabilities (the “Prepaid Transaction”). For more information, see Note 12 - Discontinued Operations of the Notes to the Condensed Consolidated Financial Statements. Upon the closing of the Prepaid Transaction, we entered into a Master Network Services Agreement (the “MVNO Agreement”) providing for the provisioning of network services to customers of the Prepaid Business for a period of up to seven years following the closing of the Prepaid Transaction. The revenue generated through this agreement is presented within Wholesale revenues in our Condensed Consolidated Statements of Comprehensive Income as of the close of the Prepaid Transaction on July 1, 2020. 59 Table of Contents We included the pre-tax results of our discontinued operations in our determination of Adjusted EBITDA, a Non-GAAP measure, to reflect contributions of the Prepaid Business that was replaced by the MVNO Agreement beginning on July 1, 2020. See “Adjusted EBITDA” in the “ Performance Measures ” section of this MD&A. Merger-Related Costs Merger-related costs generally include: • Transaction costs, including legal and professional services related to the completion of the Merger; • Restructuring costs, including severance, store rationalization and network decommissioning; and • Integration costs to achieve efficiencies in network, retail, information technology and back office operations. Transaction and restructuring costs are disclosed in Note 2 – Business Combination and Note 18 - Restructuring Costs , respectively. Merger-related costs have been excluded from our calculation of Adjusted EBITDA, a non-GAAP financial measure, as we do not consider these costs to be reflective of our ongoing operating performance. See “Adjusted EBITDA” in the “ Performance Measures ” section of this MD&A. Cash payments for Merger-related costs, including payments related to our restructuring plan, are included in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. Merger-related costs during the three and nine months ended September 30, 2020 and 2019 are presented below: (in millions) Three Months Ended September 30, Change Nine Months Ended September 30, Change 2020 2019 $ % 2020 2019 $ % Merger-related costs Cost of services, exclusive of depreciation and amortization $ 79 $ — $ 79 NM $ 119 $ — $ 119 NM Selling, general and administrative 209 159 50 31 % 1,110 494 616 125 % Total Merger-related costs $ 288 $ 159 $ 129 81 % $ 1,229 $ 494 $ 735 149 % Cash payments for Merger-related costs $ 379 $ 124 $ 255 206 % $ 910 $ 309 $ 601 194 % NM - Not Meaningful Merger-related costs will be impacted by restructuring and integration activities expected to occur over the next three years as we implement initiatives to realize cost efficiencies from the Merger. Transaction costs including legal and professional service fees related to the completion of the Merger are expected to decrease in periods subsequent to the close of the Merger. Restructuring Upon the close of the Merger, we began implementing restructuring initiatives to realize cost efficiencies from the Merger. The major activities associated with the restructuring initiatives to date include: • Contract termination costs associated with rationalization of retail stores, distribution channels, duplicative backhaul services and other agreements; • Severance costs associated with the reduction of redundant processes and functions; and • The decommissioning of certain small cell sites and distributed antenna systems to achieve synergies in network costs. Anticipated Impacts Our restructuring activities are expected to occur over the next three years with substantially all costs incurred by fiscal year 2023. We are evaluating additional restructuring initiatives which are dependent on consultations and negotiation with certain counterparties and the expected impact on our business operations, which could affect the amount or timing of the restructuring costs and related payments. We expect our principal sources of funding to be sufficient to meet our liquidity requirements and anticipated payments associated with the restructuring initiatives. 60 Table of Contents As a result of our ongoing restructuring activities, we expect to realize cost efficiencies by eliminating redundancies within our combined network as well as other business processes and operations. We expect these activities to result in a reduction of expenses within Cost of services and Selling, general and administrative in our Condensed Consolidated Statements of Comprehensive Income. COVID-19 Pandemic The COVID-19 Pandemic (the “Pandemic”) has resulted in a widespread health crisis that has adversely affected businesses, economies, and financial markets worldwide, and has caused significant volatility in the U.S. and international debt and equity markets. The impact of the Pandemic has been wide-ranging, including, but not limited to, the temporary closures of many businesses and schools, “shelter in place” orders, travel restrictions, social distancing guidelines and other governmental, business and individual actions taken in response to the Pandemic. These restrictions have impacted, and will continue to impact, our business, including the demand for our products and services and the ways in which our customers purchase and use them. In addition, the Pandemic has resulted in economic uncertainty and a significant increase in unemployment in the United States, which could affect our customers’ purchasing decisions and ability to make timely payments. Throughout the year, the Pandemic has peaked, subsided and seen a resurgence, leading to phased re-openings, as well as, continuing or renewed containment measures. As a critical communications infrastructure provider as designated by the government, our focus has been on providing crucial connectivity to our customers and impacted communities while ensuring the safety and well-being of our employees. Our Response We have taken a variety of steps to help mitigate the impact of the Pandemic on our customers and to protect the health and well-being of our workforce and communities: To Protect and Support Our Employees and Communities • Before the Merger, in mid-March, approximately 80% of T-Mobile and 70% of Sprint company-owned store locations, as well as many third-party retailer locations, that sell our T-Mobile, Metro by T-Mobile and Sprint brands, were temporarily closed. In compliance with the regulations of various states, we have since reopened substantially all our previously closed stores. • At the onset of the Pandemic, we supplemented pay for certain of our employees and commissions for third-party dealers and provided access to incremental paid time off for employees experiencing symptoms, taking care of children who were home due to school closures or caring for individuals impacted by the Pandemic. • We implemented remote working arrangements for many employees with a significant portion of our internal and global care employees transitioned to a work-from-home environment. We also encouraged our corporate and administrative employees to work remotely, if possible. To Keep Our Customers Connected • In March, we committed to the FCC’s Keep Americans Connected pledge (the “Pledge”), and at the FCC’s request, later extended our commitment to June 30, 2020. During this period, we pledged to: • Not terminate service to any residential or small business customers because of their inability to pay their bills due to disruptions caused by the Pandemic; and • Waive any late fees that any residential or small business customers incurred because of their economic circumstances related to the Pandemic. • After the Pledge extension ended, we continued to work with our customers to help them maintain service and become current on their accounts, while avoiding financial hardship. • We also took additional temporary steps in March to ensure that all current T-Mobile customers with smartphone data plans were provided connectivity to learn and work remotely through June 30, 2020, including: • Providing unlimited high-speed smartphone data to current customers as of March 13, 2020 who had legacy plans without unlimited high-speed data (excluding roaming); 61 Table of Contents • Giving T-Mobile postpaid and Metro by T-Mobile customers on smartphone plans with mobile hotspot data the ability to add 10GB of Smartphone Mobile HotSpot each month (20GB total); • Working with our Lifeline partners to provide customers up to 5GB per month of free data; • Increasing the data allowance, at no extra charge, to schools and students using our EmpowerED digital learning program to ensure each participant had access to at least 20GB of data per month; and • Providing free international calling to landlines (and in many cases mobile numbers) to countries that were significantly impacted by the Pandemic through May 13, 2020. • In addition: • We are offering our customers creative, new COVID-safe solutions such as virtual selling and curbside pickup; • We partnered with multiple spectrum holders and the FCC to successfully deploy additional 600 MHz spectrum on a temporary basis (through June 30, 2020), effectively doubling total 600 MHz LTE capacity across the nation to help ensure customers can stay connected during this critical time; and • We are working to keep our network fully operational as an essential service to first responders, 911 communications and our customers and continued to expand our 5G network, while adhering to governmental guidelines. We continue to monitor the Pandemic and its impacts and may adjust our actions as needed to continue to provide our products and services to our communities and employees. Impact on Results of Operations and Performance Measures for the Nine Months Ended September 30, 2020 For the nine months ended September 30, 2020, we incurred $458 million, before taxes, in supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, which are included in Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income. These costs have been excluded from the calculation of Adjusted EBITDA, a non-GAAP financial measure, as they represent direct, incremental costs as a result of our response to the Pandemic. Subsequent to June 30, 2020, supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs were not significant. See “Adjusted EBITDA” in the “ Performance Measures ” section of this MD&A. Expected Continued Impact on Results of Operations and Performance Measures We will continue to monitor developments regarding the Pandemic and evaluate the appropriate steps needed to align with guidelines from state, local and federal government agencies and to do what is best for our employees and customers. The extent to which the Pandemic impacts our business, operations and financial results will depend on numerous future developments that we are not able to predict at this time, including the duration and scope of the Pandemic, the success of governmental, business and individual actions that have been and continue to be taken in response to the Pandemic, and the impact on economic activity from the Pandemic and actions taken in response. Such impacts may include: • Lower net customer additions due to lower switching activity in the industry from reduced store traffic due to temporary retail store closures and reduced consumer spending caused by widespread unemployment and other adverse economic effects, partially offset by lower churn; • Lower Equipment revenues and lower Cost of equipment sales from lower device sales due to lower switching activity in the industry from reduced store traffic due to temporary retail store closures, which may impact our ability to sell devices; • Higher bad debt expense on our service and equipment installment plan (“EIP”) receivable portfolios due to adverse macro-economic conditions. Should these adverse conditions worsen, our operating and financial results could be negatively impacted; • Continued costs to protect and support our employees and customers; and • Potential disruptions in our supply chains. In addition, we have reevaluated, and continue to assess, our spending, including for marketing purposes like advertising, capital projects like build-out of our stores, travel, third-party services and certain operating expenses. We have taken actions to adjust our spending given the significant uncertainty around the magnitude and duration of any recessionary impacts arising from the Pandemic. For additional risks to our business and industry, see Item 1A. Risk Factors . 62 Table of Contents Results of Operations Set forth below is a summary of our unaudited condensed consolidated financial results: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in millions) 2020 2019 $ % 2020 2019 $ % Revenues Postpaid revenues $ 10,209 $ 5,746 $ 4,463 78 % $ 26,055 $ 16,852 $ 9,203 55 % Prepaid revenues 2,383 2,385 (2) NM 7,067 7,150 (83) (1) % Wholesale revenues 930 321 609 190 % 1,663 938 725 77 % Roaming and other service revenues 617 261 356 136 % 1,430 710 720 101 % Total service revenues 14,139 8,713 5,426 62 % 36,215 25,650 10,565 41 % Equipment revenues 4,953 2,186 2,767 127 % 11,339 6,965 4,374 63 % Other revenues 180 162 18 11 % 502 505 (3) (1) % Total revenues 19,272 11,061 8,211 74 % 48,056 33,120 14,936 45 % Operating expenses Cost of services, exclusive of depreciation and amortization shown separately below 3,314 1,733 1,581 91 % 8,051 4,928 3,123 63 % Cost of equipment sales, exclusive of depreciation and amortization shown separately below 4,367 2,704 1,663 62 % 10,563 8,381 2,182 26 % Selling, general and administrative 4,876 3,498 1,378 39 % 14,168 10,483 3,685 35 % Impairment expense — — — NM 418 — 418 NM Depreciation and amortization 4,150 1,655 2,495 151 % 9,932 4,840 5,092 105 % Total operating expenses 16,707 9,590 7,117 74 % 43,132 28,632 14,500 51 % Operating income 2,565 1,471 1,094 74 % 4,924 4,488 436 10 % Other income (expense) Interest expense (765) (184) (581) 316 % (1,726) (545) (1,181) 217 % Interest expense to affiliates (44) (100) 56 (56) % (206) (310) 104 (34) % Interest income 3 5 (2) (40) % 21 17 4 24 % Other (expense) income, net (99) 3 (102) NM (304) (12) (292) NM Total other expense, net (905) (276) (629) 228 % (2,215) (850) (1,365) 161 % Income from continuing operations before income taxes 1,660 1,195 465 39 % 2,709 3,638 (929) (26) % Income tax expense (407) (325) (82) 25 % (715) (921) 206 (22) % Income from continuing operations 1,253 870 383 44 % 1,994 2,717 (723) (27) % Income from discontinued operations, net of tax — — — NM 320 — 320 NM Net income $ 1,253 $ 870 $ 383 44 % $ 2,314 $ 2,717 $ (403) (15) % Statement of Cash Flows Data Net cash provided by operating activities $ 2,772 $ 1,748 $ 1,024 59 % $ 5,166 $ 5,287 $ (121) (2) % Net cash used in investing activities (1,132) (657) (475) 72 % (9,068) (3,238) (5,830) 180 % Net cash (used in) provided by financing activities (6,144) (543) (5,601) 1,031 % 9,031 (1,599) 10,630 (665) % Non-GAAP Financial Measures Adjusted EBITDA 7,129 3,396 3,733 110 % 17,811 10,141 7,670 76 % Free Cash Flow, excluding gross payments for the settlement of interest rate swaps 352 1,134 (782) (69) % 2,525 2,921 (396) (14) % NM - Not Meaningful 63 Table of Contents The following discussion and analysis is for the three and nine months ended September 30, 2020, compared to the same period in 2019 unless otherwise stated. Total revenues increased $8.2 billion, or 74%, for the three months ended and increased $14.9 billion, or 45%, for the nine months ended September 30, 2020. The components of these changes are discussed below. Postpaid revenues increased $4.5 billion, or 78%, for the three months ended and increased $9.2 billion, or 55%, for the nine months ended September 30, 2020 primarily from: • Higher average postpaid phone customers, primarily from customers acquired in the Merger and the success of new customer segments and rate plans as well as continued growth in existing and new markets; • Higher average postpaid other customers, primarily from customers acquired in the Merger and growth in other connected devices, primarily due to growth in educational institution customers, as well as in wearable products; and • Higher postpaid phone ARPU. See “Postpaid Phone ARPU” in the “ Performance Measures ” section of this MD&A. Prepaid revenues were essentially flat for the three and nine months ended September 30, 2020 and were primarily impacted by: • Lower average prepaid customers; offset by • Higher prepaid ARPU. See “Prepaid ARPU” in the “ Performance Measures ” section of this MD&A. Wholesale revenues increased $609 million, or 190%, for the three months ended and increased $725 million, or 77%, for the nine months ended September 30, 2020, primarily from: • Our Master Network Service Agreement with DISH, which went into effect on July 1, 2020; • Customers acquired in the Merger; and • The continued success of our existing MVNO partnerships. Roaming and other service revenues increased $356 million, or 136%, for the three months ended and increased $720 million, or 101%, for the nine months ended September 30, 2020, primarily from: • Inclusion of wireline operations acquired in the Merger; and • Higher Lifeline, advertising and affiliate revenues primarily due to operations acquired in the Merger; partially offset by • Lower international roaming due to the impact of the Pandemic and lower domestic roaming due to revenue generated from Sprint customers roaming on the T-Mobile network in periods before the Merger. Equipment revenues increased $2.8 billion , or 127%, for the three months ended and increased $4.4 billion, or 63%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020, was primarily from: • An increase of $1.2 billion in lease revenues due to a higher number of customer devices under lease, primarily from leases acquired in the Merger; • An increase of $965 million in device sales revenue, excluding purchased leased devices and devices sold to educational institutions, primarily from: • A 27% increase in the number of devices sold, excluding purchased leased devices and devices sold to educational institutions, due to an increase in our customer base primarily due to the Merger; and • Higher average revenue per device sold due to an increase in the high-end device mix due to the Merger; • An increase of $298 million in revenues primarily related to the liquidation of returned devices as a result of the Merger; and 64 Table of Contents • An increase of $211 million in equipment sales from leased devices, primarily due to an increase in purchased leased devices as a result of the Merger. The increase for the nine months ended September 30, 2020, was primarily from: • An increase of $2.5 billion in lease revenues due to a higher number of customer devices under lease, primarily from leases acquired in the Merger; • An increase of $925 million in device sales revenue, excluding purchased leased devices and devices sold to educational institutions, primarily from: • A 9% increase in the number of devices sold, excluding purchased leased devices and devices sold to educational institutions; and • Higher average revenue per device sold due to an increase in the high-end device mix due to the Merger; • An increase of $470 million in revenues primarily related to the liquidation of returned devices as a result of the Merger; and • An increase of $444 million in equipment sales from leased devices, primarily due to an increase in purchased leased devices as a result of the Merger. Operating expenses increased $7.1 billion, or 74%, for the three months ended and increased $14.5 billion, or 51%, for the nine months ended September 30, 2020. The components of these changes are discussed below. Cost of services , exclusive of depreciation and amortization, increased $1.6 billion, or 91%, for the three months ended and increased $3.1 billion, or 63%, for the nine months ended September 30, 2020 primarily from: • An increase in expenses associated with leases, backhaul agreements and other network expenses acquired in the Merger and the continued build-out of our nationwide 5G network; • An increase in repair and maintenance costs, primarily due to the Merger; • Higher employee-related and benefit-related costs primarily due to increased headcount as a result of the Merger; and • An increase in regulatory and roaming costs primarily due to the Merger. • An increase of $79 million and $119 million for the three and nine months ended September 30, 2020, respectively, in Merger-related costs including incremental costs associated with accelerating amortization of the right-of-use assets and the decommissioning of certain small cell sites and distributed antenna systems. Cost of equipment sales , exclusive of depreciation and amortization, increased $1.7 billion , or 62%, for the three months ended and increased $2.2 billion, or 26%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020, was primarily from: • An increase of $1.0 billion in device cost of equipment sales, excluding purchased leased devices and devices sold to educational institutions, primarily from: • A 27% increase in the number of devices sold, excluding purchased leased devices and devices sold to educational institutions, due to an increase in our customer base primarily due to the Merger, and • Higher average costs per device sold due to an increase in the high-end device mix due to the Merger; • An increase of $339 million in costs related to the liquidation of returned devices as a result of the Merger and higher cost devices used for device insurance claims fulfillment; and • An increase of $256 million in leased device cost of equipment sales, primarily due to an increase in purchased leased devices as a result of the Merger. 65 Table of Contents The increase for the nine months ended September 30, 2020, was primarily from: • An increase of $922 million in device cost of equipment sales, excluding purchased leased devices and devices sold to educational institutions, primarily from: • A 9% increase in the number of devices sold, excluding purchased leased devices and devices sold to educational institutions, due to an increase in our customer base primarily due to the Merger and • Higher average costs per device sold due to an increase in the high-end device mix due to the Merger; • An increase of $665 million in costs related to the liquidation of returned devices as a result of the Merger and higher cost devices used for device insurance claims fulfillment; and • An increase of $555 million in leased device cost of equipment sales, primarily due to an increase in purchased leased devices as a result of the Merger. Selling, general and administrative expenses increased $1.4 billion, or 39%, for the three months ended and increased $3.7 billion, or 35%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020, was primarily from: • Higher employee-related costs due to an increase in the number of employees primarily from the Merger; • Higher external labor and professional services, advertising and lease and rent expense primarily from the Merger; • Higher commission expense due to higher gross customer additions primarily from the Merger; and • $209 million of Merger-related costs primarily related to restructuring costs including severance and store rationalization, compared to $159 million of Merger-related costs in the three months ended September 30, 2019. The increase for the nine months ended September 30, 2020, was primarily from: • Higher employee-related costs due to an increase in the number of employees primarily from the Merger and costs associated with our restructuring plan; • Higher external labor and professional services, lease and rent and advertising expense from the Merger; • $1.1 billion of Merger-related costs including transaction costs associated with legal and professional services and restructuring costs including severance and store rationalization, compared to $494 million of Merger-related costs in the nine months ended September 30, 2019; • Higher commission expense primarily due to higher gross customer additions primarily from the Merger and an increase of $69 million related to commissions expensed in excess of commissions capitalized, including the impact of a net benefit from contract costs capitalized subsequent to Merger close as these costs will amortize into expense over time, partially offset by lower commissions expense due to lower prepaid gross additions and compensation structure changes; • Higher bad debt expense primarily due to customers acquired as a result of the Merger and the recording of estimated losses associated with the new credit loss standard, including $155 million of incremental bad debt for the estimated macro-economic impacts of the Pandemic, of which $46 million is related to our commitments to the Pledge; and • Higher legal-related expenses from recording an estimated accrual associated with the FCC Notice of Apparent Liability and commitments associated with the Merger. • Selling, general and administrative expenses for the nine months ended September 30, 2020 included $458 million of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs. 66 Table of Contents Impairment expense was $418 million for the nine months ended September 30, 2020, and consisted of the following: • A $218 million impairment on the goodwill in the Layer3 reporting unit; and • A $200 million impairment on the capitalized software development costs related to our postpaid billing system. • There was no impairment expense for the three months ended September 30, 2020, or the three and nine months ended September 30, 2019. For more information regarding the impairments above, see Note 5 – Property and Equipmen t and Note 6 – Goodwill, Spectrum License Transactions and Oth er Intangible Assets of the Notes to the Condensed Consolidated Financial Statements. Depreciation and amortization increased $2.5 billion , or 151%, for the three months ended and increased $5.1 billion, or 105%, for the nine months ended September 30, 2020, primarily as a result of the Merger including: • Higher depreciation expense from assets acquired in the Merger, excluding leased devices, and network expansion from the continued build-out of our nationwide 5G network; • Higher depreciation expense on leased devices resulting from a higher total number of customer devices under lease, primarily from customers acquired in the Merger; and • Higher amortization from intangible assets acquired in the Merger. Operating income , the components of which are discussed above, increased $1.1 billion, or 74%, for the three months ended and increased $436 million, or 10%, for the nine months ended September 30, 2020. Interest expense increased $581 million, or 316%, for the three months ended and increased $1.2 billion, or 217%, for the nine months ended September 30, 2020, primarily from: • The assumption of debt with a fair value of $31.8 billion in connection with the Merger; • The issuance of an aggregate of $19.0 billion in Senior Secured Notes and the entry into a $4.0 billion secured term loan in April 2020 in connection with the Merger; and • Amortization of interest rate swap derivatives beginning upon settlement in April 2020. Interest expense to affiliates decreased $56 million, or 56%, for the three months ended and decreased $104 million, or 34%, for the nine months ended September 30, 2020, primarily from the redemption of an aggregate of $4.0 billion in Senior Notes to affiliates and the repayment of an aggregate of $4.0 billion in Incremental term loan facility to affiliates in April 2020. Other (expense) income, net increased $102 million for the three months ended and increased $292 million for the nine months ended September 30, 2020, primarily from losses on the extinguishment of debt. Income from continuing operations before income taxes, the components of which are discussed above, was $1.7 billion and $1.2 billion for the three months ended September 30, 2020 and 2019, respectively, and was $2.7 billion and $3.6 billion for the nine months ended September 30, 2020 and 2019, respectively. Income tax expense increased $82 million, or 25%, for the three months ended and decreased $206 million, or 22%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020, was primarily from: • Higher income before income taxes; partially offset by • A lower effective tax rate, primarily due to increases in income before taxes and excess tax benefits and the benefit of a reduction in the valuation allowance against deferred tax assets related to federal tax credits. The effective tax rate was 24.5% for the three months ended September 30, 2020 and 27.1% for the three months ended September 30, 2019. The decrease for the nine months ended September 30, 2020, was primarily from: 67 Table of Contents • Lower income before income taxes; partially offset by • A higher effective tax rate, primarily due to a reduction in income before income taxes and an increase in expenses that are not deductible for income tax purposes primarily related to our Layer 3 goodwill impairment and certain Merger-related costs. The effective tax rate was 26.4% and 25.3% for the nine months ended September 30, 2020 and 2019, respectively. Income from continuing operations, was $1.3 billion and $870 million for the three months ended September 30, 2020 and 2019, respectively, and was $2.0 billion and $2.7 billion for the nine months ended September 30, 2020 and 2019, respectively. The increase for the three months ended September 30, 2020, was primarily from: • Higher operating income; partially offset by • Higher Interest expense; • Higher Other (expense) income, net; and • Higher Income tax expense The decrease for the nine months ended September 30, 2020, was primarily from: • Higher Interest expense; and • Higher Other (expense) income, net; partially offset by • Higher operating income; and • Lower Income tax expense Income from discontinued operations, net of tax was $320 million for the nine months ended September 30, 2020, and consists of the results of the Prepaid Business that was divested on July 1, 2020. There were no discontinued operations for the three months ended September 30, 2020 and for the three and nine months ended September 30, 2019. For more information regarding the Prepaid Transaction, see Note 12 – Discontinued Operations of the Notes to the Condensed Consolidated Financial Statements. For more information regarding the Prepaid Transaction, see Note 12 – Discontinued Operations of the Notes to the Condensed Consolidated Financial Statements. Net income , the components of which are discussed above, increased $383 million, or 44%, for the three months ended and decreased $403 million, or 15%, for the nine months ended September 30, 2020. Net income for the three months ended September 30, 2020 included merger-related costs, net of tax, of $208 million for the three months ended September 30, 2020, compared to $128 million for the three months ended September 30, 2019. Net income for the nine months ended September 30, 2020, included the following: • Merger-related costs, net of tax, of $960 million for the nine months ended September 30, 2020, compared to $396 million for the nine months ended September 30, 2019. • The negative impact of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, net of tax, of $339 million for the nine months ended September 30, 2020, compared to no impact for the nine months ended September 30, 2019. • Impairment expense of $366 million, net of tax, for the nine months ended September 30, 2020, compared to no impairment expense for the nine months ended September 30, 2019. The impairment of goodwill of $218 million in the Layer3 reporting unit is not deductible for tax purposes. Guarantor Financial Information On March 2, 2020, the SEC adopted amendments to the financial disclosure requirements for guarantors and issuers of guaranteed securities, as well for affiliates whose securities collateralize a registrant’s securities. We early adopted the requirements of the amendments on January 1, 2020, which included replacing guarantor condensed consolidating financial 68 Table of Contents information with summarized financial information for the consolidated obligor group (Parent, Issuer, and Guarantor Subsidiaries) as well as no longer requiring guarantor cash flow information, financial information for non-guarantor subsidiaries, nor a reconciliation to the consolidated results. On April 1, 2020, in connection with the closing of the Merger, we assumed certain registered debt to third parties issued by Sprint, Sprint Communications, Inc. and Sprint Capital Corporation (collectively, the “Sprint Issuers”). Amounts previously disclosed for the estimated values of certain acquired assets and liabilities assumed have been revised based on additional information arising subsequent to the initial valuation. These revisions to the estimated values did not have a significant impact on our summarized financial information for the consolidated obligor group. Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties issued by T-Mobile USA, Inc. and the Sprint Issuers (collectively, the “Issuers”) is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of Parent’s 100% owned subsidiaries (“Guarantor Subsidiaries”). The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures and credit facilities governing the long-term debt contain covenants that, among other things, limit the ability of the Issuers and the Guarantor Subsidiaries to incur more debt, pay dividends and make distributions, make certain investments, repurchase stock, create liens or other encumbrances, enter into transactions with affiliates, enter into transactions that restrict dividends or distributions from subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuers to loan funds or make payments to Parent. However, the Issuers and Guarantor Subsidiaries are allowed to make certain permitted payments to Parent under the terms of the indentures and the supplemental indentures. In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. We early adopted the standard on January 1, 2020 and have applied the standard retrospectively to all periods presented. Upon the adoption of the standard, deferred tax assets of non-guarantor entities in aggregate of $163 million were reclassified and netted with the deferred tax liabilities of the guarantor obligor group of the debt issued by T-Mobile USA, Inc. The adoption of this standard did not have a material impact on our condensed consolidated financial statements for the nine months ended September 30, 2020. In March 2020, certain Guarantor Subsidiaries became Non-Guarantor Subsidiaries. Certain prior period amounts have been reclassified to conform to the current period’s presentation. The summarized balance sheet information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below: (in millions) September 30, 2020 December 31, 2019 Current assets $ 18,035 $ 8,177 Noncurrent assets 173,466 77,684 Current liabilities 17,765 11,885 Noncurrent liabilities 109,249 45,187 Due to non-guarantors 7,183 — Due from non-guarantors — 346 Due to related parties 4,846 14,173 Due from related parties 19 20 The summarized results of operations information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below: Nine Months Ended September 30, 2020 Year Ended December 31, 2019 (in millions) Total revenues $ 47,076 $ 43,431 Operating income 3,353 4,761 Net income 2,314 3,468 Revenue from non-guarantors 1,088 974 69 Table of Contents The summarized balance sheet information for the consolidated obligor group of debt issued by Sprint and Sprint Communications, Inc. is presented in the table below: (in millions) September 30, 2020 Current assets $ 1,051 Noncurrent assets 128,190 Current liabilities 3,317 Noncurrent liabilities 61,437 Due from non-guarantors 25,231 Due to related parties 4,774 The summarized results of operations information for the consolidated obligor group of debt issued by Sprint and Sprint Communications, Inc. is presented in the table below: Six Months Ended September 30, 2020 (in millions) Total revenues $ 4 Operating loss (17) Net income 1,363 Revenue from non-guarantors 4 The summarized balance sheet information for the consolidated obligor group of debt issued by Sprint Capital Corporation is presented in the table below: (in millions) September 30, 2020 Current assets $ 1,051 Noncurrent assets 133,354 Current liabilities 3,388 Noncurrent liabilities 66,530 Due from non-guarantors 34,259 Due to related parties 4,774 The summarized results of operations information for the consolidated obligor group of debt issued by Sprint Capital Corporation is presented in the table below: Six Months Ended September 30, 2020 (in millions) Total revenues $ 4 Operating loss (17) Net income 1,363 Revenue from non-guarantors 4 Performance Measures In managing our business and assessing financial performance, we supplement the information provided by our financial statements with other operating or statistical data and non-GAAP financial measures. These operating and financial measures are utilized by our management to evaluate our operating performance and, in certain cases, our ability to meet liquidity requirements. Although companies in the wireless industry may not define each of these measures in precisely the same way, we believe that these measures facilitate comparisons with other companies in the wireless industry on key operating and financial measures. The performance measures presented below include the impact of the Merger on a prospective basis from the close date of April 1, 2020. Historical results were not restated. 70 Table of Contents Customers A customer is generally defined as a SIM number with a unique T-Mobile identifier which is associated with an account that generates revenue. Customers are qualified either for postpaid service utilizing phones, wearables, DIGITS or other connected devices which includes tablets and SyncUp products, where they generally pay after receiving service, or prepaid service, where they generally pay in advance. Our postpaid customers include customers of T-Mobile. Our prepaid customers include customers of T-Mobile and Metro by T-Mobile. The following table sets forth the number of ending customers: As of September 30, 2020 Change (in thousands) 2020 2019 # % Customers, end of period Postpaid phone customers (1) 65,794 39,344 26,450 67 % Postpaid other customers (1) 13,938 6,376 7,562 119 % Total postpaid customers 79,732 45,720 34,012 74 % Prepaid customers (1) 20,630 20,783 (153) (1) % Total customers 100,362 66,503 33,859 51 % (1) Includes customers acquired in connection with the Merger and certain customer base adjustments. See Customer Base Adjustments and Net Customer Additions tables below. Total customers increased 33,859,000, or 51%, primarily from: • Higher postpaid phone customers primarily due to customers acquired in the Merger and the success of new customer segments and rate plans and continued growth in existing and new markets, along with promotional activities; and • Higher postpaid other customers primarily due to customers acquired in the Merger and growth in other connected devices primarily related to educational institution customers and wearable products; partially offset by • Lower prepaid customers primarily due to the customer base adjustments made to align the customer reporting policies of T-Mobile and Sprint, partially offset by the continued success of our prepaid business due to promotional activities and rate plan offers. Customer Base Adjustments Certain adjustments were made to align the customer reporting policies of T-Mobile and Sprint. The adjustments made to the reported T-Mobile and Sprint ending customer base as of March 31, 2020 are presented below: (in thousands) Postpaid phone customers Postpaid other customers Total postpaid customers Prepaid customers Total customers Reconciliation to beginning customers T-Mobile customers as reported, end of period March 31, 2020 40,797 7,014 47,811 20,732 68,543 Sprint customers as reported, end of period March 31, 2020 25,916 8,428 34,344 8,256 42,600 Total combined customers, end of period March 31, 2020 66,713 15,442 82,155 28,988 111,143 Adjustments Reseller reclassification to wholesale customers (1) (199) (2,872) (3,071) — (3,071) EIP reclassification from postpaid to prepaid (2) (963) — (963) 963 — Divested prepaid customers (3) — — — (9,207) (9,207) Rate plan threshold (4) (182) (918) (1,100) — (1,100) Customers with non-phone devices (5) (226) 226 — — — Collection policy alignment (6) (150) (46) (196) — (196) Miscellaneous adjustments (7) (141) (43) (184) (302) (486) Total Adjustments (1,861) (3,653) (5,514) (8,546) (14,060) Adjusted beginning customers as of April 1, 2020 64,852 11,789 76,641 20,442 97,083 71 Table of Contents (1) In connection with the closing of the Merger, we refined our definition of wholesale customers resulting in the reclassification of certain postpaid and prepaid reseller customers to wholesale customers. Starting with the three months ended March 31, 2020, we discontinued reporting wholesale customers to focus on postpaid and prepaid customers and wholesale revenues, which we consider more relevant than the number of wholesale customers given the expansion of M2M and IoT products. (2) Prepaid customers with a device installment billing plan historically included as Sprint postpaid customers have been reclassified to prepaid customers to align with T-Mobile policy. (3) Customers associated with the Sprint wireless prepaid and Boost Mobile brands that were divested on July 1, 2020, have been excluded from our reported customers. (4) Customers who have rate plans with monthly recurring charges which are considered insignificant have been excluded from our reported customers. (5) Customers with postpaid phone rate plans without a phone (e.g., non-phone devices) have been reclassified from postpaid phone to postpaid other customers to align with T-Mobile policy. (6) Certain Sprint customers subject to collection activity for an extended period of time have been excluded from our reported customers to align with T-Mobile policy. (7) Miscellaneous insignificant adjustments to align with T-Mobile policy. Net Customer Additions The following table sets forth the number of net customer additions: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2020 2019 # % 2020 2019 # % Net customer additions Postpaid phone customers 689 754 (65) (9) % 1,394 2,120 (726) (34) % Postpaid other customers 1,290 320 970 303 % 2,474 1,081 1,393 129 % Total postpaid customers 1,979 1,074 905 84 % 3,868 3,201 667 21 % Prepaid customers 56 62 (6) (10) % 61 262 (201) (77) % Total customers 2,035 1,136 899 79 % 3,929 3,463 466 13 % Acquired customers, net of base adjustments — — — NM 29,228 — 29,228 NM NM - Not Meaningful Total net customer additions increased 899,000, or 79%, for the three months ended and increased 466,000, or 13%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020, was primarily from: • Higher postpaid other net customer additions primarily due to higher gross additions from connected devices primarily due to educational institution additions, partially offset by lower switching activity in the industry from reduced store traffic arising from the Pandemic; partially offset by • Lower postpaid phone net customer additions primarily due to higher churn from customer acquired in the merger, partially offset by lower switching activity in the industry from reduced store traffic arising from the Pandemic; and • Lower prepaid net customer additions primarily due to lower switching activity in the industry from reduced store traffic arising from the Pandemic, partially offset by lower churn. The increase for the nine months ended September 30, 2020, was primarily from: • Higher postpaid other net customer additions primarily due to higher gross additions from connected devices primarily due to educational institution additions and lower churn, partially offset by lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic; partially offset by • Lower postpaid phone net customer additions primarily due to higher churn from customer acquired in the merger, partially offset by lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic; and • Lower prepaid net customers additions primarily due to lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic, partially offset by lower churn. 72 Table of Contents Churn Churn represents the number of customers whose service was disconnected as a percentage of the average number of customers during the specified period. The number of customers whose service was disconnected is presented net of customers that subsequently have their service restored within a certain period of time. We believe that churn provides management, investors and analysts with useful information to evaluate customer retention and loyalty. The following table sets forth the churn: Three Months Ended September 30, Bps Change Nine Months Ended September 30, Bps Change 2020 2019 2020 2019 Postpaid phone churn 0.90 % 0.89 % 1 bps 0.85 % 0.85 % — bps Prepaid churn 2.86 % 3.98 % -112 bps 3.07 % 3.77 % -70 bps Postpaid phone churn was essentially flat for the three and nine months ended September 30, 2020, primarily due to the inclusion of the customer base acquired in the Merger, offset by lower switching activity in the industry due to reduced store traffic due to temporary retail store closures arising from the Pandemic. Prepaid churn decreased 112 basis points for the three months ended and decreased 70 basis points for the nine months ended September 30, 2020, primarily due to lower switching activity in the industry due to reduced store traffic due to temporary retail store closures arising from the Pandemic and the continued success of our prepaid products due to promotional activities and rate plan offers. During the nine months ended September 30, 2020, we have seen lower churn due to reduced store traffic due to temporary retail store closures arising from the Pandemic. Total Postpaid Accounts A postpaid account is generally defined as a billing account number that generates revenue. Postpaid accounts are generally comprised of customers that are qualified for postpaid service utilizing phones, wearables, DIGITS or other connected devices which includes tablets and SyncUp products, where they generally pay after receiving service. As of September 30, 2020 Change (in thousands) 2020 2019 # % Accounts, end of period Total postpaid customer accounts (1) 25,623 14,734 10,889 74 % (1) Includes accounts acquired in connection with the Merger and certain account base adjustments. See Account Base Adjustments table below. Total postpaid customer accounts increased 10,889,000, or 74%, primarily due to 10,150,000 accounts acquired in the Merger, the success of new customer segments and rate plans, continued growth in existing and new markets, along with promotional activities, improvements in network quality and industry-leading customer service, partially offset by lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic. 73 Table of Contents Account Base Adjustments Certain adjustments were made to align the account reporting policies of T-Mobile and Sprint. The adjustments made to the reported T-Mobile and Sprint ending account base as of March 31, 2020 are presented below: (in thousands) Postpaid Accounts Reconciliation to beginning accounts T-Mobile accounts as reported, end of period March 31, 2020 15,244 Sprint accounts, end of period March 31, 2020 11,246 Total combined accounts, end of period March 31, 2020 26,490 Adjustments Reseller reclassification to wholesale accounts (1) (1) EIP reclassification from postpaid to prepaid (2) (963) Rate plan threshold (3) (18) Collection policy alignment (4) (76) Miscellaneous adjustments (5) (47) Total Adjustments (1,105) Adjusted beginning accounts as of April 1, 2020 25,385 (1) In connection with the closing of the Merger, we refined our definition of wholesale accounts resulting in the reclassification of certain postpaid and prepaid reseller accounts to wholesale accounts. (2) Prepaid accounts with a customer with a device installment billing plan historically included as Sprint postpaid accounts have been reclassified to prepaid accounts to align with T-Mobile policy. (3) Accounts with customers who have rate plans with monthly recurring charges which are considered insignificant have been excluded from our reported accounts. (4) Certain Sprint accounts subject to collection activity for an extended period of time have been excluded from our reported accounts to align with T-Mobile policy. (5) Miscellaneous insignificant adjustments to align with T-Mobile policy. Average Revenue Per User ARPU represents the average monthly service revenue earned from customers. We believe ARPU provides management, investors and analysts with useful information to assess and evaluate our service revenue per customer and assist in forecasting our future service revenues generated from our customer base. Postpaid phone ARPU excludes postpaid other customers and related revenues which includes wearables, DIGITS and other connected devices such as tablets and SyncUp products. The following table illustrates the calculation of our operating measure ARPU and reconciles this measure to the related service revenues: (in millions, except average number of customers and ARPU) Three Months Ended September 30, Change Nine Months Ended September 30, Change 2020 2019 $ % 2020 2019 S % Calculation of Postpaid Phone ARPU Postpaid service revenues $ 10,209 $ 5,746 $ 4,463 78 % $ 26,055 $ 16,852 $ 9,203 55 % Less: Postpaid other revenues (677) (346) (331) 96 % (1,605) (982) (623) 63 % Postpaid phone service revenues 9,532 5,400 4,132 77 % 24,450 15,870 8,580 54 % Divided by: Average number of postpaid phone customers (in thousands) and number of months in period 65,437 38,944 26,493 68 % 56,971 38,225 18,746 49 % Postpaid phone ARPU $ 48.55 $ 46.22 $ 2.33 5 % $ 47.69 $ 46.13 $ 1.56 3 % Calculation of Prepaid ARPU Prepaid service revenues $ 2,383 $ 2,385 $ (2) — % $ 7,067 $ 7,150 $ (83) (1) % Divided by: Average number of prepaid customers (in thousands) and number of months in period 20,632 20,837 (205) (1) % 20,591 21,043 (452) (2) % Prepaid ARPU $ 38.49 $ 38.16 $ 0.33 1 % $ 38.13 $ 37.76 $ 0.37 1 % 74 Table of Contents Postpaid Phone ARPU Postpaid phone ARPU increased $2.33, or 5%, for the three months ended and increased $1.56, or 3%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020 was primarily due to: • The net impact of customers acquired in the Merger, which have higher ARPU (net of changes arising from the reduction in base due to policy adjustments and reclassification of certain ARPU components from the acquired customers being moved to other revenue lines); and • Higher premium service revenues; partially offset by • An increase in our promotional activities; and • A reduction in certain non-recurring charges. The increase for the nine months ended September 30, 2020 was primarily due to: • The net impact of customers acquired in the Merger, which have higher ARPU (net of changes arising from the reduction in base due to policy adjustments and reclassification of certain ARPU components from the acquired customers being moved to other revenue lines); and • Higher premium service revenues; partially offset by • A reduction in certain non-recurring charges including the impact of the Pandemic. Prepaid ARPU Prepaid ARPU increased $0.33, or 1%, for the three months ended and increased $0.37, or 1%, for the nine months ended September 30, 2020, primarily due to: • The impacts of certain adjustments to our customer base, including the removal of certain prepaid customers associated with products now offered and distributed by a current MVNO partner as those customers had lower ARPU; partially offset by • Dilution from promotional rate plans; and • A reduction in certain non-recurring charges. Average Revenue Per Account Average Revenue per Account (“ARPA”) represents the average monthly postpaid service revenue earned per account. We believe postpaid ARPA provides management, investors and analysts with useful information to assess and evaluate our postpaid service revenue realization and assist in forecasting our future postpaid service revenues on a per account basis. We consider postpaid ARPA to be indicative of our revenue growth potential given the increase in the average number of postpaid phone customers per account and increases in postpaid other customers, including wearables, DIGITS or other connected devices which includes tablets and SyncUp products. The following table illustrates the calculation of our operating measure ARPA and reconciles this measure to the related service revenues: (in millions, except average number of accounts, ARPA) Three Months Ended September 30, Change Nine Months Ended September 30, Change 2020 2019 $ % 2020 2019 $ % Calculation of Postpaid ARPA Postpaid service revenues $ 10,209 $ 5,746 $ 4,463 78 % $ 26,055 $ 16,852 $ 9,203 55 % Divided by: Average number of postpaid accounts (in thousands) and number of months in period 25,582 14,602 10,980 75 % 22,054 14,355 7,699 54 % Postpaid ARPA $ 133.03 $ 131.15 $ 1.88 1 % $ 131.27 $ 130.44 $ 0.83 1 % NM - Not Meaningful 75 Table of Contents Postpaid ARPA Postpaid ARPA increased $1.88, or 1%, for the three months ended and increased $0.83, or 1%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020 was primarily due to: • An increase in the average account size, including further penetration in connected devices, and the success of new customer segments and rate plans; • Higher premium service revenues; and • The net impact of customers acquired in the Merger; partially offset by • An increase in our promotional activities; and • A reduction in certain non-recurring charges. The increase for the nine months ended September 30, 2020 was primarily due to: • An increase in the average account size, including further penetration in connected devices, and the success of new customer segments and rate plans; • Higher premium service revenues; • The net impact of customers acquired in the Merger; partially offset by • An increase in our promotional activities; and • A reduction in certain non-recurring charges including the impact of the Pandemic. Adjusted EBITDA Adjusted EBITDA represents earnings before Interest expense, net of Interest income, Income tax expense, Depreciation and amortization, non-cash Stock-based compensation and certain income and expenses not reflective of our operating performance. Net income margin represents Net income divided by Service revenues. Adjusted EBITDA margin represents Adjusted EBITDA divided by Service revenues. Adjusted EBITDA is a non-GAAP financial measure utilized by our management to monitor the financial performance of our operations. We use Adjusted EBITDA internally as a measure to evaluate and compensate our personnel and management for their performance, and as a benchmark to evaluate our operating performance in comparison to our competitors. Management believes analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate overall operating performance and facilitate comparisons with other wireless communications services companies because it is indicative of our ongoing operating performance and trends by excluding the impact of interest expense from financing, non-cash depreciation and amortization from capital investments, non-cash stock-based compensation, network decommissioning costs, costs related to the Merger, incremental costs directly attributable to COVID-19 and impairment expense, as they are not indicative of our ongoing operating performance, as well as certain other nonrecurring income and expenses. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for income from operations, net income or any other measure of financial performance reported in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). 76 Table of Contents The following table illustrates the calculation of Adjusted EBITDA and reconciles Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in millions) 2020 2019 $ % 2020 2019 $ % Net income $ 1,253 $ 870 $ 383 44 % $ 2,314 $ 2,717 $ (403) (15) % Adjustments: Income from discontinued operations, net of tax — — — NM (320) — (320) NM Income from continuing operations 1,253 870 383 44 % 1,994 2,717 (723) (27) % Interest expense 765 184 581 316 % 1,726 545 1,181 217 % Interest expense to affiliates 44 100 (56) (56) % 206 310 (104) (34) % Interest income (3) (5) 2 (40) % (21) (17) (4) 24 % Other expense, net 99 (3) 102 NM 304 12 292 NM Income tax expense 407 325 82 25 % 715 921 (206) (22) % Operating income 2,565 1,471 1,094 74 % 4,924 4,488 436 10 % Depreciation and amortization 4,150 1,655 2,495 151 % 9,932 4,840 5,092 105 % Operating income from discontinued operations (1) — — — NM 432 — 432 NM Stock-based compensation (2) 125 108 17 16 % 387 312 75 24 % Merger-related costs 288 159 129 81 % 1,229 494 735 149 % COVID-19-related costs (3) — — — NM 458 — 458 NM Impairment expense — — — NM 418 — 418 NM Other, net (4) 1 3 (2) (67) % 31 7 24 343 % Adjusted EBITDA $ 7,129 $ 3,396 $ 3,733 110 % $ 17,811 $ 10,141 $ 7,670 76 % Net income margin (Net income divided by Service revenues) 9 % 10 % -100 bps 6 % 11 % -500 bps Adjusted EBITDA margin (Adjusted EBITDA divided by Service revenues) 50 % 39 % 1,100 bps 49 % 40 % 900 bps NM - Not Meaningful (1) Following the Prepaid Transaction, starting on July 1, 2020, we provide MVNO services to DISH. We have included the operating income from discontinued operations from April 1, 2020 through June 30, 2020, in our determination of Adjusted EBITDA to reflect contributions of the Prepaid Business that were replaced by the MVNO Agreement beginning on July 1, 2020 in order to enable management, analysts and investors to better assess ongoing operating performance and trends. (2) Stock-based compensation includes payroll tax impacts and may not agree to stock-based compensation expense in the condensed consolidated financial statements. Additionally, certain stock-based compensation expenses associated with the Transactions have been included in Merger-related costs. (3) Supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs were not significant for the three months ended September 30, 2020. (4) Other, net may not agree to the Condensed Consolidated Statements of Comprehensive Income primarily due to certain non-routine operating activities, such as other special items that would not be expected to reoccur or are not reflective of T-Mobile’s ongoing operating performance, and are therefore excluded in Adjusted EBITDA. Adjusted EBITDA increased $3.7 billion, or 110%, for the three months ended and increased $7.7 billion, or 76%, for the nine months ended September 30, 2020. The components comprising Adjusted EBITDA are discussed further above. The increase for the three months ended September 30, 2020 was primarily due to: • Higher service revenues; and • Higher equipment revenues; partially offset by • Higher Cost of equipment sales; • Higher Cost of services expenses, excluding Merger-related costs; and • Higher Selling, general and administrative expenses, excluding Merger-related costs. 77 Table of Contents The increase for the nine months ended September 30, 2020 was primarily due to: • Higher service revenues; and • Higher equipment revenues; partially offset by • Higher Cost of services expenses, excluding Merger-related costs; • Higher Cost of equipment sales; and • Higher Selling, general and administrative expenses, excluding Merger-related costs and supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs. • The impact from commission costs capitalization and amortization, including a net benefit from costs capitalized as result of the Merger, reduced Adjusted EBITDA by $69 million for the nine months ended for the September 30, 2020, compared to the nine months ended September 30, 2019. Liquidity and Capital Resources Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations, proceeds from issuance of long-term debt and common stock, financing leases, the sale of certain receivables, financing arrangements of vendor payables which effectively extend payment terms and the New Revolving Credit Facility (as defined below). In connection with the closing of the Merger on April 1, 2020, we incurred a substantial amount of additional third-party indebtedness which increased our future financial commitments, including aggregate interest payments. Further, the incurrence of additional indebtedness may inhibit our ability to incur new debt under the terms governing our existing and future indebtedness, which may make it more difficult for us to incur new debt in the future to finance our business strategy. Cash Flows The following is a condensed schedule of our cash flows for the three and nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in millions) 2020 2019 $ % 2020 2019 $ % Net cash provided by operating activities $ 2,772 $ 1,748 $ 1,024 59 % $ 5,166 $ 5,287 $ (121) (2) % Net cash used in investing activities (1,132) (657) (475) 72 % (9,068) (3,238) (5,830) 180 % Net cash (used in) provided by financing activities (6,144) (543) (5,601) NM 9,031 (1,599) 10,630 (665) % Operating Activities Net cash provided by operating activities increased $1.0 billion, or 59%, for the three months ended and decreased $121 million, or 2%, for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2020, was primarily from: • Higher net non-cash adjustments to Net income, primarily from depreciation and amortization; and • Higher Net income; partially offset by • A $2.1 billion increase in net cash outflows from changes in working capital, primarily due to higher use from Accounts receivable, Accounts payable and accrued liabilities and Inventories. • Net cash provided by operating activities includes $379 million and $124 million in payments for Merger-related costs for the three months ended September 30, 2020 and 2019, respectively. • Net cash provided by operating activities includes $198 million and $0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the three months ended September 30, 2020 and 2019, respectively. 78 Table of Contents The decrease for the nine months ended September 30, 2020, was primarily from: • A $5.8 billion increase in net cash outflows from changes in working capital, primarily due to the one-time impact of $2.3 billion in gross payments for the settlement of interest rate swaps related to Merger financing for the nine months ended September 30, 2020, included in the use from Other current and long-term liabilities, as well as higher use from Accounts payable and accrued liabilities and Inventories; and • Lower Net income; partially offset by • Higher net non-cash adjustments to Net income, primarily from depreciation and amortization. • Net cash provided by operating activities includes $910 million and $309 million in payments for Merger-related costs for the nine months ended September 30, 2020 and 2019, respectively. • Net cash provided by operating activities includes $454 million and $0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the nine months ended September 30, 2020 and 2019, respectively. Investing Activities Net cash used in investing activities increased $475 million, or 72%, for the three months ended and increased $5.8 billion, or 180%, for the nine months ended September 30, 2020. The use of cash for the three months ended September 30, 2020, was primarily from: • $3.2 billion in Purchases of property and equipment, including capitalized interest, from network integration related to the Merger and the continued build-out of our nationwide 5G network; partially offset by • $1.2 billion in Proceeds from the divestiture of the prepaid business; • $855 million in Proceeds related to beneficial interests in securitization transactions; and • $17 million in net Refunds of spectrum licenses and other intangible assets, including deposits, primarily due to refunds of spectrum license deposits. The use of cash for the nine months ended September 30, 2020, was primarily from: • $7.2 billion in Purchases of property and equipment, including capitalized interest, from network integration related to the Merger and the continued build-out of our nationwide 5G network; • $5.0 billion in cash paid for the acquisition of Sprint, net of cash and restricted cash acquired; and • $827 million in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by • $2.3 billion in Proceeds related to beneficial interests in securitization transactions; • $1.2 billion in Proceeds from the divestiture of the prepaid business; and • $632 million related to derivative contracts under collateral exchange arrangements, for more information regarding these contracts; see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements. Financing Activities Net cash (used in) provided by financing activities decreased $5.6 billion for the three months ended and increased $10.6 billion for the nine months ended September 30, 2020. The use of cash for the three months ended September 30, 2020, was primarily from: • $5.7 billion in Repayments of long-term debt driven by the repayment of $1.7 billion aggregate principal amount of our 6.375% Senior Notes due 2025, $1.5 billion aggregate principal amount of our 7.000% Senior Notes due 2020, $1.25 billion aggregate principal amount of 5.125% Senior Notes due 2021 held by DT, $1.0 billion aggregate principal amount of our 6.500% Senior Notes due 2024, and $219 million aggregate principal amount of our 3.360% Senior Secured Series 2016-1 A-1 Notes due 2021; and • $246 million in Repayments of financing lease obligations. 79 Table of Contents The source of cash for the nine months ended September 30, 2020, was primarily from: • $26.7 billion in Proceeds from the issuance of long-term debt, net of discounts and issuance costs, driven primarily by the issuance of $23.0 billion in Senior Secured Notes and a draw of $4.0 billion on the New Secured Term Loan Facility; • $18.7 billion in Proceeds from the issuance of short-term debt, net of discounts and issuance costs, driven by a $19.0 billion draw on the New Secured Bridge Loan Facility in connection with the closing of the Merger; and • $304 million in net proceeds from the SoftBank Equity transaction, see Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements; partially offset by • $18.9 billion in Repayments of short-term debt, net of refunds for issuance costs, for the repayment of the $19.0 billion draw on the New Secured Bridge Loan Facility; • $16.2 billion in Repayments of long-term debt driven by the repayment of $5.3 billion aggregate principal amount of 5.125% Senior Notes due 2021 held by DT, our $4.0 billion Incremental Term Loan Facility with DT, $2.3 billion of outstanding principal for the termination of the accounts receivable facility assumed in the Merger, $1.7 billion aggregate principal amount of our 6.375% Senior Notes due 2025, $1.5 billion aggregate principal amount of our 7.000% Senior Notes due 2020, $1.0 billion aggregate principal amount of our 6.500% Senior Notes due 2024 and $438 million aggregate principal amount of our 3.360% Senior Secured Series 2016-1 A-1 Notes due 2021; and • $764 million in Repayments of financing lease obligations. Cash and Cash Equivalents As of September 30, 2020, our Cash and cash equivalents were $6.6 billion compared to $1.5 billion at December 31, 2019. Free Cash Flow Free Cash Flow represents Net cash provided by operating activities less cash payments for Purchases of property and equipment, including Proceeds from sales of tower sites and Proceeds related to beneficial interests in securitization transactions, less Cash payments for debt prepayment or debt extinguishment. Free Cash Flow and Free Cash Flow, excluding gross payments for the settlement of interest rate swaps, are non-GAAP financial measures utilized by our management, investors and analysts of our financial information to evaluate cash available to pay debt and provide further investment in the business. The table below illustrates the reconciliation of Free Cash Flow and Free Cash Flow, excluding gross payments for the settlement of interest rate swaps from Net cash provided by operating activities, which we consider to be the most directly comparable GAAP financial measure. Three Months Ended September 30, Change Nine Months Ended September 30, Change (in millions) 2020 2019 $ % 2020 2019 $ % Net cash provided by operating activities $ 2,772 $ 1,748 $ 1,024 59 % $ 5,166 $ 5,287 $ (121) (2) % Cash purchases of property and equipment (3,217) (1,514) (1,703) 112 % (7,227) (5,234) (1,993) 38 % Proceeds related to beneficial interests in securitization transactions 855 900 (45) (5) % 2,325 2,896 (571) (20) % Cash payments for debt prepayment or debt extinguishment costs (58) — (58) NM (82) (28) (54) 193 % Free Cash Flow 352 1,134 (782) (69) % 182 2,921 (2,739) (94) % Gross cash paid for the settlement of interest rate swaps — — — NM 2,343 — 2,343 NM Free Cash Flow, excluding gross payments for the settlement of interest rate swaps $ 352 $ 1,134 $ (782) (69) % $ 2,525 $ 2,921 $ (396) (14) % NM - Not Meaningful Free Cash Flow, excluding gross payments for the settlement of interest rate swaps related to Merger financing, decreased $782 million, or 69%, for the three months ended and decreased $396 million, or 14%, for the nine months ended September 30, 2020. 80 Table of Contents The decrease for the three months ended September 30, 2020, was primarily impacted by the following: • Higher Cash purchases of property and equipment, including capitalized interest of $108 million and $118 million for the three months ended September 30, 2020 and 2019, respectively, from network integration related to the Merger and the continued build-out of our nationwide 5G network; partially offset by • Higher Net cash provided by operating activities, as described above. • Free Cash Flow includes $379 million and $124 million in payments for Merger-related costs for the three months ended September 30, 2020 and 2019, respectively. • Free Cash Flow includes $198 million and $0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the three months ended September 30, 2020 and 2019, respectively. The decrease for the nine months ended September 30, 2020, was primarily impacted by the following: • Higher Cash purchases of property and equipment, including capitalized interest of $339 million and $361 million for the nine months ended September 30, 2020 and 2019, respectively, from network integration related to the Merger and the continued build-out of our nationwide 5G network; and • Lower Proceeds related to our deferred purchase price from securitization transactions; and • The one-time impact of gross payments for the settlement of interest rate swaps related to Merger financing of $2.3 billion, which is excluded from the calculation Free Cash Flow. • Free Cash Flow includes $910 million and $309 million in payments for Merger-related costs for the nine months ended September 30, 2020 and 2019, respectively. • Free Cash Flow includes $454 million and $0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the nine months ended September 30, 2020 and 2019, respectively. Borrowing Capacity We maintain a financing arrangement with Deutsche Bank AG, which allows for up to $108 million in borrowings. Under the financing arrangement, we can effectively extend payment terms for invoices payable to certain vendors. As of September 30, 2020, there were no outstanding balances under such financing arrangements. We maintain vendor financing arrangements primarily with our main network equipment suppliers. Under the respective agreements, we can obtain extended financing terms. During the three and nine months ended September 30, 2020, we repaid $231 million and $407 million, respectively, associated with the vendor financing arrangements and other financial liabilities. These payments are included in Repayments of short-term debt for purchases of inventory, property and equipment and other financial liabilities, in our Condensed Consolidated Statements of Cash Flows. As of September 30, 2020 and December 31, 2019, the outstanding balance under the vendor financing arrangements and other financial liabilities was $312 million and $25 million, respectively. On April 1, 2020, in connection with the closing of the Merger, T-Mobile USA and certain of its affiliates, as guarantors, entered into a Credit Agreement (the “New Credit Agreement”) with certain financial institutions named therein, providing for a $4.0 billion secured term loan facility and a $4.0 billion revolving credit facility (the “New Revolving Credit Facility”). On September 16, 2020, we increased the aggregate commitment under the New Revolving Credit Facility to $5.5 billion through an amendment to the Credit Agreement. As of September 30, 2020, there was no outstanding balance under the New Revolving Credit Facility. Subsequent to September 30, 2020, on October 9, 2020, we repaid at par all of the outstanding amounts under, and terminated, our New Secured Term Loan Facility. Subsequent to September 30, 2020, on October 30, 2020, we entered into a $5.0 billion senior secured term loan commitment with certain financial institutions. Up to $5.0 billion of loans under the commitment may be drawn at any time (subject to customary conditions precedent) through June 30, 2021. If drawn, the facility matures in 364 days with one six-month extension exercisable at our discretion. Proceeds may be used for general corporate purposes and will accrue interest at a rate of LIBOR plus a margin of 1.25% per annum. 81 Table of Contents Debt Financing As of September 30, 2020, our total debt and financing lease liabilities were $69.2 billion, excluding our tower obligations, of which $63.1 billion was classified as long-term debt and $1.4 billion was classified as long-term financing lease liabilities. During the nine months ended September 30, 2020, we issued short- and long-term debt for proceeds of $45.5 billion and redeemed and repaid short- and long-term debt totaling $35.4 billion. Additionally, in connection with the closing of the Merger, we assumed certain indebtedness of Sprint totaling $31.8 billion. Subsequent to September 30, 2020, on October 6, 2020, T-Mobile USA issued $500 million of 2.050% Senior Secured Notes due 2028, $750 million of 2.550% Senior Secured Notes due 2031, $1.25 billion of 3.000% Senior Secured Notes due 2041, and $1.5 billion of 3.300% Senior Secured Notes due 2051. On October 9, 2020, we used the net proceeds of $4.0 billion to repay at par all of the outstanding amounts under, and terminate, the New Secured Term Loan Facility. Subsequent to September 30, 2020, on October 28, 2020, T-Mobile USA issued $1.0 billion of 2.250% Senior Secured Notes due 2031, $1.25 billion of 3.000% Senior Secured Notes due 2041, $1.5 billion of 3.300% Senior Secured Notes due 2051 and $1.0 billion of 3.600% Senior Secured Notes due 2060. We intend to use the net proceeds of $4.6 billion for general corporate purposes, which may include among other things, acquisitions of additional spectrum and refinancing existing indebtedness on an ongoing basis. Subsequent to September 30, 2020, on October 30, 2020, we entered into a $5.0 billion senior secured term loan commitment with certain financial institutions. Up to $5.0 billion of loans under the commitment may be drawn at any time (subject to customary conditions precedent) through June 30, 2021. If drawn, the facility matures in 364 days with one six-month extension exercisable at our discretion. Proceeds may be used for general corporate purposes and will accrue interest at a rate of LIBOR plus a margin of 1.25% per annum. For more information regarding our debt financing transactions, see Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements. Spectrum Auction In March 2020, the FCC announced that we were the winning bidder of 2,384 licenses in Auction 103 (37/39 GHz and 47 GHz spectrum bands) for an aggregate price of $873 million, net of an incentive payment of $59 million. At the inception of Auction 103 in October 2019, we deposited $82 million with the FCC. Upon conclusion of Auction 103 in March 2020, we made a down payment of $93 million for the purchase price of the licenses won in the auction. On April 8, 2020, we paid the FCC the remaining $698 million of the purchase price for the licenses won in the auction. Prior to the Merger, the FCC announced that Sprint was the winning bidder of 127 licenses in Auction 103 (37/39 GHz and 47 GHz spectrum bands). All payments related to the licenses won were made by Sprint prior the Merger. For more information regarding our spectrum licenses, see Note 6 - Goodwill, Spectrum License Transactions and Other Intangible Assets of the Notes to the Condensed Consolidated Financial Statements. Interest Rate Lock Derivatives In April 2020, in connection with the issuance of an aggregate of $19.0 billion in Senior Secured Notes, we terminated our interest rate lock derivative. At the time of termination, the interest rate lock derivatives were a liability of $2.3 billion, of which $1.2 billion was cash collateralized. Consequently, the net cash required to settle the interest rate lock derivatives was an additional $1.1 billion and was paid at termination. For more information regarding the termination of our interest rate lock derivative, see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements. 82 Table of Contents Future Sources and Uses of Liquidity We may seek additional sources of liquidity, including through the issuance of additional long-term debt in 2020, to continue to opportunistically acquire spectrum licenses or other assets in private party transactions or for the refinancing of existing long-term debt on an opportunistic basis. Excluding liquidity that could be needed for spectrum acquisitions, or for other assets, we expect our principal sources of funding to be sufficient to meet our anticipated liquidity needs for business operations for the next 12 months as well as our longer-term liquidity needs. Our intended use of any such funds is for general corporate purposes, including for capital expenditures, spectrum purchases, opportunistic investments and acquisitions, redemption of high yield callable debt and the execution of our integration plan. We determine future liquidity requirements, for both operations and capital expenditures, based in large part upon projected financial and operating performance, and opportunities to acquire additional spectrum. We regularly review and update these projections for changes in current and projected financial and operating results, general economic conditions, the competitive landscape and other factors. We have incurred, and will incur, substantial expenses as a result of completing the Transactions, the Divestiture Transaction and compliance with the Government Commitments, and we are also expected to incur substantial restructuring expenses in connection with integrating and coordinating T-Mobile’s and Sprint’s businesses, operations, policies and procedures. While we have assumed that a certain level of Merger-related expenses will be incurred, factors beyond our control, including required consultation and negotiation with certain counterparties, could affect the total amount or the timing of these expenses. These expenses could exceed the costs historically borne by us and adversely affect our financial condition and results of operations. There are a number of additional risks and uncertainties, including those due to the impact of the COVID-19 pandemic, that could cause our financial and operating results and capital requirements to differ materially from our projections, which could cause future liquidity to differ materially from our assessment. The indentures and credit facilities governing our long-term debt to affiliates and third parties, excluding financing leases, contain covenants that, among other things, limit the ability of the Issuers and the Guarantor Subsidiaries to incur more debt, pay dividends and make distributions on our common stock, make certain investments, repurchase stock, create liens or other encumbrances, enter into transactions with affiliates, enter into transactions that restrict dividends or distributions from subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt to affiliates and third parties restrict the ability of the Issuers to loan funds or make payments to Parent. However, the Issuers are allowed to make certain permitted payments to Parent under the terms of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt to affiliates and third parties. We were in compliance with all restrictive debt covenants as of September 30, 2020. The Merger In connection with the closing of the Merger, on April 1, 2020, we assumed Sprint’s liabilities, which include accounts payable and accrued liabilities, short-term debt, operating and financing lease liabilities, net pension plan liabilities, deferred tax liabilities and long-term debt with an aggregate fair value of $31.8 billion. For more information regarding the Merger, see Note 2 – Business Combination of the Notes to the Condensed Consolidated Financial Statements. Financing Lease Facilities We have entered into uncommitted financing lease facilities with certain partners that provide us with the ability to enter into financing leases for network equipment and services. As of September 30, 2020, we have committed to $4.8 billion of financing leases under these financing lease facilities, of which $211 million and $857 million was executed during the three and nine months ended September 30, 2020, respectively. We expect to enter into up to an additional $343 million in financing lease commitments during 2020. Capital Expenditures Our liquidity requirements have been driven primarily by capital expenditures for spectrum licenses and the construction, expansion and upgrading of our network infrastructure. Property and equipment capital expenditures primarily relate to the integration of our acquired Sprint 2.5 GHz spectrum licenses and existing 600 MHz spectrum licenses as we build out our nationwide 5G network. 83 Table of Contents Since April 1, 2020, we have incurred, and expect to continue to incur significant capital expenditures in the near term related to the integration of the T-Mobile and Sprint businesses in order to fully realize the anticipated synergies associated with the Merger, including the reduction in redundant cell sites from combining networks, back office and information technology efficiencies and the evolution of our distribution and retail footprint including the combining of the Sprint and T-Mobile brand operations. For more information regarding our property and equipment and spectrum licenses, see Note 5 – Property and Equipment and Note 6 - Goodwill, Spectrum License Transactions and Other Intangible Assets of the Notes to the Condensed Consolidated Financial Statements, respectively. Dividends We have never paid or declared any cash dividends on our common stock, and we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Our credit facilities and the indentures and supplemental indentures governing our long-term debt to affiliates and third parties, excluding financing leases, contain covenants that, among other things, restrict our ability to declare or pay dividends on our common stock. Contractual Obligations In connection with the regulatory approvals of the Transactions, we made commitments to various state and federal agencies, including the DOJ and FCC. For more information regarding these commitments, see Note 17 – Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements. The contractual commitments and purchase obligations of Sprint were assumed upon the completion of the Merger. These contractual commitments and purchase obligations are primarily commitments to purchase wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business. For more information regarding our contractual commitments and purchase obligations, see Note 17 - Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements. The following table summarizes our contractual obligations and borrowings as of September 30, 2020 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods: (in millions) Less Than 1 Year 1 - 3 Years 4 - 5 Years More Than 5 Years Total Long-term debt (1) $ 3,680 $ 12,977 $ 10,103 $ 38,184 $ 64,944 Interest on long-term debt 3,384 5,869 4,242 9,218 22,713 Financing lease liabilities, including imputed interest 1,100 1,218 150 72 2,540 Tower obligations (2) 393 738 591 694 2,416 Operating lease liabilities, including imputed interest 4,717 8,115 6,086 19,184 38,102 Purchase obligations (3) 4,174 3,399 1,561 1,549 10,683 Spectrum leases and service credits (4) 328 698 609 5,103 6,738 Total contractual obligations $ 17,776 $ 33,014 $ 23,342 $ 74,004 $ 148,136 (1) Represents principal amounts of long-term debt to affiliates and third parties at maturity, excluding unamortized premiums, discounts, debt issuance costs, consent fees, and financing lease obligations. See Note 8 – Debt of the Notes to the Condensed Consolidated Financial Statements for further information. (2) Future minimum payments, including principal and interest payments, related to the tower obligations. See Note 9 – Tower Obligations of the Notes to the Condensed Consolidated Financial Statements for further information. (3) The minimum commitment for certain obligations is based on termination penalties that could be paid to exit the contracts. Termination penalties are included in the above table as payments due as of the earliest we could exit the contract, typically in less than one year. For certain contracts that include fixed volume purchase commitments and fixed prices for various products, the purchase obligations are calculated using fixed volumes and contractually fixed prices for the products that are expected to be purchased. This table does not include open purchase orders as of September 30, 2020 under normal business purposes. See Note 17 – Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements for further information. (4) Spectrum lease agreements are typically for five to 10 years with automatic renewal provisions, bringing the total term of the agreements up to 30 years. Certain commitments and obligations are included in the table based on the year of required payment or an estimate of the year of payment. Other long-term liabilities have been omitted from the table above due to the uncertainty of the timing of payments, 84 Table of Contents combined with the absence of historical trending to be used as a predictor of such payments. See Note 19 – Additional Financial Information of the Notes to the Condensed Consolidated Financial Statements for further information. The purchase obligations reflected in the table above are primarily commitments to purchase spectrum licenses, wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. Where we are committed to make a minimum payment to the supplier regardless of whether we take delivery, we have included only that minimum payment as a purchase obligation. The acquisition of spectrum licenses is subject to regulatory approval and other customary closing conditions. Related Party Transactions SoftBank On June 22, 2020, we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements. As of September 30, 2020, DT and SoftBank held, directly or indirectly, approximately 43.4% and 8.6%, respectively, of our outstanding common stock, with the remaining approximately 48.0% of our outstanding common stock held by other stockholders. As a result of the Proxy Agreements, DT has voting control as of September 30, 2020 over approximately 52.4% of the outstanding T-Mobile common stock. In addition, as provided for in the Master Framework Agreement, DT also holds certain call options over approximately 101.5 million shares of our common stock held by SBGC. On July 27, 2020, in connection with the SoftBank Monetization, the Rights Offering exercise period closed, and on August 3, 2020, the Rights Offering closed, resulting in the sale of 19,750,000 shares of our common stock. For more information regarding our related party transactions with SoftBank, see Note 2 - Business Combination and Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements. Marcelo Claure On June 22, 2020, we entered into a Master Framework Agreement which provided for the purchase of shares of our common stock by Marcelo Claure, a member of our board of directors, from us at a specified price. For more information regarding our related party transactions with Marcelo Claure, see Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements. Brightstar We have arrangements with Brightstar, a subsidiary of SoftBank, whereby Brightstar provides supply chain and inventory management services to us in our indirect channels. For more information regarding our related party transactions with Brightstar, see Note 1 - Summary of Significant Accounting Policies and Note 19 - Additional Financial Information of the Notes to the Condensed Consolidated Financial Statements. Deutsche Telekom We have related party transactions associated with DT or its affiliates in the ordinary course of business, including intercompany servicing and licensing. For more information regarding these transactions, see Note 19 - Additional Financial Information of the Notes to the Condensed Consolidated Financial Statements. On April 1, 2020, in connection with the closing of the Merger, we repaid our $4.0 billion Incremental Term Loan Facility with DT and repurchased from DT $4.0 billion of indebtedness to affiliates, consisting of $2.0 billion of 5.300% Senior Notes due 2021 and $2.0 billion of 6.000% Senior Notes due 2024 as well as made an additional payment for requisite consents to DT of $13 million. On July 4, 2020, we redeemed $1.25 billion aggregate principal amount of our 5.125% Senior Notes to affiliates due 2021. 85 Table of Contents For more information regarding our related party debt transactions, see Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements. Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934 Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act of 1934, as amended (“Exchange Act”). Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law. As of the date of this report, we are not aware of any activity, transaction or dealing by us or any of our affiliates for the three months ended September 30, 2020, that requires disclosure in this report under Section 13(r) of the Exchange Act, except as set forth below with respect to affiliates that we do not control and that are our affiliates solely due to their common control with either DT or SoftBank. We have relied upon DT and SoftBank for information regarding their respective activities, transactions and dealings. DT, through certain of its non-U.S. subsidiaries, is party to roaming and interconnect agreements with the following mobile and fixed line telecommunication providers in Iran, some of which are or may be government-controlled entities: Irancell Telecommunications Services Company, Telecommunication Kish Company, Mobile Telecommunication Company of Iran, and Telecommunication Infrastructure Company of Iran. In addition, during the three months ended September 30, 2020, DT, through certain of its non-U.S. subsidiaries, provided basic telecommunications services to three customers in Germany identified on the Specially Designated Nationals and Blocked Persons List maintained by the U.S. Department of Treasury’s Office of Foreign Assets Control: Bank Melli, Bank Sepah, and Europäisch-Iranische Handelsbank. These services have been terminated or are in the process of being terminated. For the three months ended September 30, 2020, gross revenues of all DT affiliates generated by roaming and interconnection traffic and telecommunications services with the Iranian parties identified herein were less than $0.1 million, and the estimated net profits were less than $0.1 million. In addition, DT, through certain of its non-U.S. subsidiaries that operate a fixed-line network in their respective European home countries (in particular Germany), provides telecommunications services in the ordinary course of business to the Embassy of Iran in those European countries. Gross revenues and net profits recorded from these activities for the three months ended September 30, 2020 were less than $0.1 million. We understand that DT intends to continue these activities. Separately, SoftBank, through one of its non-U.S. subsidiaries, provides roaming services in Iran through Irancell Telecommunications Services Company. During the three months ended September 30, 2020, SoftBank had no gross revenues from such services and no net profit was generated. We understand that the SoftBank subsidiary intends to continue such services. This subsidiary also provides telecommunications services in the ordinary course of business to accounts affiliated with the Embassy of Iran in Japan. During the three months ended September 30, 2020, SoftBank estimates that gross revenues and net profit generated by such services were both under $0.1 million. We understand that the SoftBank subsidiary is obligated under contract and intends to continue such services. In addition, SoftBank, through one of its non-U.S. indirect subsidiaries, provides office supplies to the Embassy of Iran in Japan. SoftBank estimates that gross revenue and net profit generated by such services during the three months ended September 30, 2020, were both under $0.1 million. We understand that the SoftBank subsidiary intends to continue such activities. Off-Balance Sheet Arrangements We have arrangements, as amended from time to time, to sell certain EIP accounts receivable and service accounts receivable on a revolving basis as a source of liquidity. As of September 30, 2020, we derecognized net receivables of $2.5 billion upon sale through these arrangements. For more information regarding these off-balance sheet arrangements, see Note 4 – Sales of Certain Receivables of the Notes to the Condensed Consolidated Financial Statements. 86 Table of Contents Critical Accounting Policies and Estimates Preparation of our condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Except as described below and in Note 1 - Summary of Significant Accounting Policies , there have been no material changes to the critical accounting policies and estimates as previously disclosed in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019, and which are hereby incorporated by reference herein other than the updated risk factors below. Evaluation of Goodwill and Indefinite-Lived Intangible Assets for Impairment We assess the carrying value of our goodwill and other indefinite-lived intangible assets, such as our spectrum licenses, for potential impairment annually as of December 31, or more frequently if events or changes in circumstances indicate such assets might be impaired. We have identified two reporting units for which discrete financial information is available and results are regularly reviewed by management: wireless and Layer3. The Layer3 reporting unit consists of the assets and liabilities of Layer3 TV, Inc., which was acquired in January 2018. The wireless reporting unit consists of the remaining assets and liabilities of T-Mobile US, Inc., excluding Layer3 TV, Inc. We separately evaluate these reporting units for impairment. When assessing goodwill for impairment we may elect to first perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. If we do not perform a qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative test. We recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. We employed a qualitative approach to assess the wireless reporting unit. The fair value of the wireless reporting unit is determined using a market approach, which is based on market capitalization. We recognize market capitalization is subject to volatility and will monitor changes in market capitalization to determine whether declines, if any, necessitate an interim impairment review. In the event market capitalization does decline below its book value, we will consider the length, severity and reasons for the decline when assessing whether potential impairment exists, including considering whether a control premium should be added to the market capitalization. We believe short-term fluctuations in share price may not necessarily reflect the underlying aggregate fair value. No events or change in circumstances have occurred in the current quarter that indicate the fair value of the Wireless reporting unit may be below its carrying amount at September 30, 2020. Concurrent with the acquisition, management also revisited the plans for our TVision TM Home service offering and the integration of this offering with the Sprint customer base. Additionally, we expect our significantly enhanced spectrum position following the Merger will allow us to accelerate our in-home broadband internet service strategy. The enhanced in-home broadband opportunity, along with the acquisition of certain content rights, created a strategic shift in our TVision TM Home service offering allowing us the ability to develop a video product which will be complementary to the in-home broadband offering. As of June 30, 2020, management updated its forecast, which included a reimagining of the stand-alone product offering to potential customers that is expected to launch by the end of 2020. Based on these events and changes in circumstances, we determined that recoverability of the carrying amount of goodwill for the Layer3 reporting unit should be evaluated for impairment. We employed a quantitative approach to assess the Layer3 reporting unit. The fair value of the Layer3 reporting unit was determined using an income approach, which was based on estimated discounted future cash flows. We made estimates and assumptions regarding future cash flows, discount rates and long-term growth rates to determine the reporting unit’s estimated fair value. The key assumptions used were as follows: • Expected cash flows underlying the Layer3 business plan for the periods 2020 through 2025, which took into account assumptions for a delayed launch, estimates of subscribers for TVision services, average revenue and content cost per subscriber, operating costs and capital expenditures; • Cash flows beyond 2025 were projected to grow at a long-term growth rate estimated at 3%. Estimating a long-term growth rate requires significant judgment about future business strategies as well as micro- and macro-economic environments that are inherently uncertain; and • We used a discount rate of 30% to risk adjust the cash flow projections in determining the estimated fair value. 87 Table of Contents The carrying value of the Layer3 reporting unit exceeded its estimated fair value as of June 30, 2020. Accordingly, during the nine months ended September 30, 2020, we recorded an impairment loss of $218 million, which is included in “Impairment expense” in our Condensed Consolidated Statements of Comprehensive Income. For more information regarding our impairment assessments, see Note 1 - Summary of Significant Accounting Policies and Note 6 – Goodwill, Spectrum License Transactions and Other Intangible Assets of the Notes to the Condensed Consolidated Financial Statements. Accounting Pronouncements Not Yet Adopted For information regarding recently issued accounting standards, see Note 1 – Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements.