Item 2. Management’s Discussion and Analysis
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 I, Item 1A of this Form 10-Q, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:
• natural disasters, public health crises, including the COVID-19 pandemic (the “Pandemic”), terrorist attacks or similar incidents;
• adverse economic, political or market conditions in the U.S. and international markets, including those caused by the Pandemic;
• competition, industry consolidation and changes in the market condition for wireless services;
• data loss or other security breaches;
• the scarcity and cost of additional wireless spectrum, and regulations relating to spectrum use;
• our inability to retain or motivate key personnel, hire qualified personnel or maintain our corporate culture;
• our inability to take advantage of technological developments on a timely basis;
• system failures and business disruptions, allowing for unauthorized use of or interference with our network and other systems;
• the impacts of the actions we have taken and conditions we have agreed to in connection with the regulatory proceedings and approvals of the Transactions (as defined below), including the acquisition by DISH Network Corporation (“DISH”) of the prepaid wireless business operated under the Boost Mobile and Sprint prepaid brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers of Shenandoah Personal Communications Company LLC (“Shentel”) and Swiftel Communications, Inc.), including customer accounts, inventory, contracts, intellectual property and certain other specified assets (the “Prepaid Business”), and the assumption of certain related liabilities (the “Prepaid Transaction”), the complaint and proposed final judgment (the “Consent Decree”) agreed to by us, Deutsche Telekom AG (“DT”), Sprint Corporation (“Sprint”), SoftBank Group Corp. (“SoftBank”) and DISH with the U.S. District Court for the District of Columbia, which was approved by the Court on April 1, 2020, the proposed commitments filed with the Secretary of the Federal Communications Commission (“FCC”), which we announced on May 20, 2019, certain national security commitments and undertakings, and any other commitments or undertakings entered into including but not limited to those we have made to certain states and nongovernmental organizations (collectively, the “Government Commitments”), and the challenges in satisfying the Government Commitments in the required time frames and the significant cumulative cost incurred in tracking, monitoring and complying with them;
• our inability to manage the ongoing commercial and transition services arrangements that we entered into with DISH in connection with the Prepaid Transaction, which we completed on July 1, 2020 (collectively, the “Divestiture Transaction”), and known or unknown liabilities arising in connection therewith;
• the effects of any future acquisition, investment, or merger involving us;
• any disruption or failure of our third parties (including key suppliers) to provide products or services for the operation of our business;
• the occurrence of high fraud rates or volumes related to device financing, customer payment cards, third-party dealers, employees, subscriptions, identities or account takeover fraud;
• our substantial level of indebtedness and our inability to service our debt obligations in accordance with their terms or to comply with the restrictive covenants contained therein;
• adverse changes in the ratings of our debt securities or adverse conditions in the credit markets;
• the risk of future material weaknesses we may identify while we work to integrate and align policies, principles and practices of the two companies following the Merger (as defined below), or any other failure by us to maintain effective internal controls, and the resulting significant costs and reputational damage;
• any changes in regulations or in the regulatory framework under which we operate;
• laws and regulations relating to the handling of privacy and data protection;
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• unfavorable outcomes of existing or future legal proceedings;
• our offering of regulated financial services products and exposure to a wide variety of state and federal regulations;
• new or amended tax laws or regulations or administrative interpretations and judicial decisions affecting the scope or application of tax laws or regulations;
• the possibility that we may be unable to renew our spectrum leases on attractive terms or the possible revocation of our existing licenses in the event that we violate applicable laws;
• interests of our significant stockholders that may differ from the interests of other stockholders;
• future sales of our common stock by DT and SoftBank and our inability to attract additional equity financing outside the United States due to foreign ownership limitations by the FCC;
• the volatility of our stock price and our lack of plan to pay cash dividends in the foreseeable future;
• failure to realize the expected benefits and synergies of the merger (the “Merger”) with Sprint, pursuant to the Business Combination Agreement with Sprint and the other parties named therein (as amended, the “Business Combination Agreement”) and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”) in the expected timeframes or in the amounts anticipated;
• any delay and costs of, or difficulties in, integrating our business and Sprint’s business and operations, and unexpected additional operating costs, customer loss and business disruption, including maintaining relationships with employees, customers, suppliers or vendors;
• unanticipated difficulties, disruption, or significant delays in our long-term strategy to migrate Sprint’s legacy customers onto T-Mobile’s existing billing platforms; and
• changes to existing or the issuance of new accounting standards by the Financial Accounting Standards Board or other regulatory agencies.
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 account (https://twitter.com/MikeSievert), 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.
Our MD&A is performed on a consolidated basis and is inclusive of the results and operations of Sprint prospectively from the close of the Merger on April 1, 2020. The Merger enhanced our spectrum portfolio, increased our customer base, altered our product mix and created opportunities 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.
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Our MD&A is provided as a supplement to, and should be read together with, our unaudited condensed consolidated financial statements for the three months ended March 31, 2021, 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, 2020. Except as expressly stated, the financial condition and results of operations discussed throughout our MD&A are those of T-Mobile US, Inc. and its consolidated subsidiaries.
Sprint Merger
Transaction Overview
On April 1, 2020, we completed the 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 Combination of the Notes to the Condensed Consolidated Financial Statements.
Merger-Related Costs
Merger-related costs generally include:
• Integration costs to achieve efficiencies in network, retail, information technology and back office operations;
• Restructuring costs, including severance, store rationalization and network decommissioning; and
• Transaction costs, including legal and professional services related to the completion of the Merger and acquisitions of affiliates.
Transaction and restructuring costs are disclosed in Note 2 – Business Combination and Note 1 2 - Restructuring Costs , respectively. Merger-related costs have been excluded from our calculations of Adjusted EBITDA and Core Adjusted EBITDA, which are non-GAAP financial measures, as we do not consider these costs to be reflective of our ongoing operating performance. See “Adjusted EBITDA and Core Adjusted EBITDA” in the “ Performance Measures ” section of this MD&A. 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 months ended March 31, 2021 and 2020 are presented below:
(in millions) Three Months Ended March 31, Change
2021 2020 $ %
Merger-related costs
Cost of services, exclusive of depreciation and amortization $ 136 $ — $ 136 NM
Cost of equipment sales 17 — 17 NM
Selling, general and administrative 145 143 2 1 %
Total Merger-related costs $ 298 $ 143 $ 155 108 %
Cash payments for Merger-related costs $ 277 $ 161 $ 116 72 %
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 and acquisitions of affiliates, are expected to decrease in periods subsequent to the close of the Merger.
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Restructuring
Upon the close of the Merger, we began implementing restructuring initiatives to realize cost efficiencies from the Merger. The major activities associated with the restructuring initiatives to date include:
• Contract termination costs associated with rationalization of retail stores, distribution channels, duplicative network and backhaul services and other agreements;
• Severance costs associated with the reduction of redundant processes and functions; and
• The decommissioning of certain small cell sites and distributed antenna systems to achieve synergies in network costs.
Anticipated Impacts
Our restructuring activities are expected to occur over the next three years with substantially all costs incurred by the end of 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.
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 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 this past year, the Pandemic has peaked, subsided and seen a resurgence, leading to phased re-openings, as well as continuing or renewed containment measures. The introduction and expanding availability of vaccines, as well as our continued social distancing measures and incremental cleaning efforts, have facilitated the continued operation of our retail stores. We will continue to monitor the Pandemic and its impacts and may adjust our actions as needed to continue to provide our products and services to our communities and employees.
As a critical communications infrastructure provider as designated by the government, our focus has been on providing crucial connectivity to our customers and impacted communities while ensuring the safety and well-being of our employees.
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Results of Operations
Set forth below is a summary of our consolidated financial results:
Three Months Ended March 31, Change
(in millions) 2021 2020 $ %
Revenues
Postpaid revenues $ 10,303 $ 5,887 $ 4,416 75 %
Prepaid revenues 2,351 2,373 (22) (1) %
Wholesale revenues 897 325 572 176 %
Roaming and other service revenues 641 261 380 146 %
Total service revenues 14,192 8,846 5,346 60 %
Equipment revenues 5,346 2,117 3,229 153 %
Other revenues 221 150 71 47 %
Total revenues 19,759 11,113 8,646 78 %
Operating expenses
Cost of services, exclusive of depreciation and amortization shown separately below 3,384 1,639 1,745 106 %
Cost of equipment sales, exclusive of depreciation and amortization shown separately below 5,142 2,529 2,613 103 %
Selling, general and administrative 4,805 3,688 1,117 30 %
Depreciation and amortization 4,289 1,718 2,571 150 %
Total operating expenses 17,620 9,574 8,046 84 %
Operating income 2,139 1,539 600 39 %
Other income (expense)
Interest expense (792) (185) (607) 328 %
Interest expense to affiliates (46) (99) 53 (54) %
Interest income 3 12 (9) (75) %
Other expense, net (125) (10) (115) NM
Total other expense, net (960) (282) (678) 240 %
Income before income taxes 1,179 1,257 (78) (6) %
Income tax expense (246) (306) 60 (20) %
Net income $ 933 $ 951 $ (18) (2) %
Statement of Cash Flows Data
Net cash provided by operating activities $ 3,661 $ 1,617 $ 2,044 126 %
Net cash used in investing activities (11,239) (1,580) (9,659) 611 %
Net cash provided by (used in) financing activities 3,874 (453) 4,327 NM
Non-GAAP Financial Measures
Adjusted EBITDA 6,905 3,665 3,240 88 %
Core Adjusted EBITDA 5,864 3,500 2,364 68 %
Free Cash Flow 1,304 732 572 78 %
NM - Not Meaningful
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The following discussion and analysis is for the three months ended March 31, 2021, compared to the same period in 2020 unless otherwise stated.
Total revenues increased $8.6 billion, or 78%. The components of this change are discussed below.
Postpaid revenues increased $4.4 billion, or 75%, 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, along with promotional activities;
• Higher average postpaid other customers, primarily from customers acquired in the Merger and growth in other connected devices, primarily related to public and educational sector customers; and
• Higher postpaid phone ARPU, primarily as a result of customers acquired in the Merger. See “Postpaid Phone ARPU” in the “ Performance Measures ” section of this MD&A.
Prepaid revenues were essentially flat.
Wholesale revenues increased $572 million, or 176%, primarily from:
• Our Master Network Service Agreement with DISH, which went into effect on July 1, 2020; and
• Customers acquired in the Merger.
Roaming and other service revenues increased $380 million, or 146%, 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 domestic roaming due to revenue generated from Sprint customers roaming on the T-Mobile network in periods before the Merger.
Equipment revenues increased $3.2 billion, or 153%, primarily from:
• An increase of $1.7 billion in device sales revenue, excluding purchased leased devices, primarily from:
• An increase in the number of devices sold, excluding purchased leased devices, due to an increase in our customer base primarily due to the Merger; and
• Higher average revenue per device sold, excluding purchased leased devices, due to an increase in the high-end device mix primarily driven by a larger postpaid customer base as a result of the Merger;
• An increase of $876 million in lease revenues due to a higher number of customer devices under lease, primarily from leases acquired in the Merger;
• An increase of $237 million in sales of leased devices, primarily due to a larger base of leased devices as a result of the Merger; and
• An increase of $227 million in revenues primarily related to the liquidation of a higher volume of returned devices primarily as a result of the Merger.
Other revenues increased $71 million, or 47%, primarily from higher interest income on our EIP receivables.
Operating expenses increased $8.0 billion, or 84%. The components of this change are discussed below.
Cost of services , exclusive of depreciation and amortization, increased $1.7 billion, or 106%, primarily from:
• An increase in expenses associated with leases, backhaul agreements and other network expenses acquired in the
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Merger and the continued build-out of our nationwide 5G network;
• Higher employee-related and benefit-related costs primarily due to increased headcount as a result of the Merger;
• An increase of $136 million for the three months ended March 31, 2021, in Merger-related costs including incremental costs associated with network decommissioning and integration; and
• An increase in repair and maintenance costs, primarily due to the Merger and severe weather occurring during the three months ended March 31, 2021.
Cost of equipment sales , exclusive of depreciation and amortization, increased $2.6 billion, or 103%, primarily from:
• An increase of $2.0 billion in device cost of equipment sales, excluding purchased leased devices, primarily from:
• An increase in the number of devices sold, excluding purchased leased devices, due to an increase in our customer base primarily due to the Merger; and
• Higher average costs per device sold, excluding purchased leased devices, due to an increase in the high-end device mix primarily driven by a larger postpaid customer base as a result of the Merger;
• An increase of $255 million in leased device cost of equipment sales, primarily due to a larger base of leased devices as a result of the Merger; and
• An increase of $159 million in costs related to the liquidation of a higher volume of returned devices primarily as a result of the Merger.
Selling, general and administrative expenses increased $1.1 billion, or 30%, primarily from:
• Higher external labor and professional services, advertising and lease expense from the Merger;
• Higher employee-related costs due to an increase in the number of employees primarily from the Merger; and
• Higher commission expense, primarily due to higher gross customer additions; partially offset by
• Lower bad debt expense.
• Selling, general and administrative expenses for the three months ended March 31, 2020 included $117 million of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs. There were insignificant COVID-19 costs for the three months ended March 31, 2021.
• Merger-related costs of $145 million, including transaction costs associated with legal and professional service and restructuring costs including severance and store rationalization, in the three months ended March 31, 2021, compared to $143 million of Merger-related costs in the three months ended March 31, 2020.
Depreciation and amortization increased $2.6 billion, or 150%, primarily as a result of the Merger, including:
• Higher depreciation expense from assets acquired in the Merger, excluding leased devices, and expansion from the continued build-out of our nationwide 5G network;
• Higher depreciation expense on leased devices resulting from a larger base of leased devices as a result of the Merger; and
• Higher amortization from intangible assets acquired in the Merger.
Operating income , the components of which are discussed above, increased $600 million, or 39%.
Interest expense increased $607 million, or 328%, primarily from:
• The assumption of debt with a fair value of $31.8 billion in connection with the Merger;
• The issuance of an aggregate principal amount of $31.8 billion of Senior Secured Notes in 2020;
• Amortization of interest rate swap derivatives beginning upon settlement in April 2020; and
• The issuance of an aggregate principal amount of $3.0 billion of Senior Notes in January 2021; partially offset by
• The repayment of an aggregate principal amount of $4.2 billion of Senior Notes in 2020.
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Interest expense to affiliates decreased $53 million, or 54%, primarily from the redemption of an aggregate principal amount of $5.25 billion of Senior Notes to affiliates and the repayment of an aggregate principal amount of $4.0 billion in Incremental term loan facility to affiliates in 2020, partially offset by lower capitalized interest.
Other expense, net increased $115 million, primarily from losses on the extinguishment of debt.
Income before income taxes , the components of which are discussed above, decreased $78 million, or 6%.
Income tax expense decreased $60 million, or 20%, primarily from:
• An increase in excess tax benefits related to the vesting of restricted stock awards and lower income before taxes for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.
• The effective tax rate was 20.9% and 24.4% for the three months ended March 31, 2021 and 2020, respectively.
Net income , the components of which are discussed above, decreased $18 million, or 2%, and included the following:
• Merger-related costs, net of tax, of $220 million for the three months ended March 31, 2021, compared to $117 million for the three months ended March 31, 2020.
• The negative impact of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, net of tax, of $86 million for the three months ended March 31, 2020, compared to no impact for the three months ended March 31, 2021.
Guarantor Financial Information
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 adjusted 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 Senior Notes to affiliates and third parties issued by T-Mobile USA, Inc. and the Sprint Issuers (collectively, the “Issuers”) are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of Parent’s 100% owned subsidiaries (“Guarantor Subsidiaries”).
Pursuant to the applicable indentures and supplemental indentures, the Senior Secured Notes to third parties issued by T-Mobile USA, Inc. are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by Parent and the Guarantor Subsidiaries, except for the Unsecured Guarantees of Sprint Corporation, Sprint Communications, Inc., and Sprint Capital Corporation, which are provided on a senior unsecured basis.
The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures, supplemental indentures and credit agreements governing the long-term debt contain covenants that, among other things, limit the ability of the Issuers or borrowers and the Guarantor Subsidiaries to incur more debt, pay dividends and make distributions, make certain investments, repurchase stock, create liens or other encumbrances, enter into transactions with affiliates, enter into transactions that restrict dividends or distributions from subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit agreements, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuers or borrowers to loan funds or make payments to Parent. However, the Issuers or borrowers and Guarantor Subsidiaries are allowed to make certain permitted payments to Parent under the terms of the indentures, supplemental indentures and credit agreements.
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Basis of Presentation
The following tables include summarized financial information of the obligor groups of debt issued by T-Mobile USA, Inc., Sprint, Sprint Communications, Inc., and Sprint Capital Corporation. The summarized financial information of each obligor group is presented on a combined basis with balances and transactions within the obligor group eliminated. Investments in and the equity in earnings of non-guarantor subsidiaries which would otherwise be consolidated in accordance with U.S. GAAP are excluded from the below summarized financial information pursuant to SEC Regulation S-X Rule 13-01.
The summarized balance sheet information for the consolidated obligor group of debt issued by T-Mobile USA, Inc. is presented in the table below:
(in millions) March 31, 2021 December 31, 2020
Current assets $ 17,615 $ 22,638
Noncurrent assets 173,783 165,294
Current liabilities 17,959 19,982
Noncurrent liabilities 117,678 112,930
Due to non-guarantors 7,697 7,433
Due to related parties 4,829 4,873
Due from related parties 20 22
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:
Three Months Ended March 31, 2021
Year Ended December 31, 2020
(in millions)
Total revenues $ 19,429 $ 67,112
Operating income 1,429 4,335
Net income 335 1,148
Revenue from non-guarantors 404 1,496
Operating expenses to non-guarantors 656 2,127
Other expense to non-guarantors (36) (114)
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) March 31, 2021 December 31, 2020
Current assets $ 620 $ 2,646
Noncurrent assets 29,521 26,278
Current liabilities 4,192 4,209
Noncurrent liabilities 69,002 65,161
Due from non-guarantors 29,257 25,993
Due to related parties 4,789 4,786
The summarized results of operations information for the consolidated obligor group of debt issued by Sprint and Sprint Communications, Inc., since the acquisition of Sprint on April 1, 2020, is presented in the table below:
Three Months Ended March 31, 2021 Nine Months Ended December 31, 2020
(in millions)
Total revenues $ 2 $ 10
Operating loss (1) (15)
Net loss (495) (2,229)
Revenue from non-guarantors 2 6
Other income, net, from non-guarantors 680 1,084
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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) March 31, 2021 December 31, 2020
Current assets $ 620 $ 2,646
Noncurrent assets 38,586 35,330
Current liabilities 4,263 4,281
Noncurrent liabilities 74,083 70,253
Due from non-guarantors 38,322 35,046
Due to related parties 4,789 4,786
The summarized results of operations information for the consolidated obligor group of debt issued by Sprint Capital Corporation, since the acquisition of Sprint on April 1, 2020, is presented in the table below:
Three Months Ended March 31, 2021 Nine Months Ended December 31, 2020
(in millions)
Total revenues $ 2 $ 10
Operating loss (1) (15)
Net loss (475) (2,165)
Revenue from non-guarantors 2 6
Other income, net, from non-guarantors 773 1,085
Affiliates Whose Securities Collateralize Securities Registered or Being Registered
For a description of the collateral arrangements relating to securities of affiliates that collateralize the Senior Secured Notes, please refer to the section entitled “Affiliates Whose Securities Collateralize the Notes and the Guarantees” in the Company’s Registration Statement on Form S-4/A filed with the SEC on April 21, 2021, which section is incorporated herein by reference.
The assets, liabilities and results of operations of the combined affiliates whose securities are pledged as Collateral are not materially different than the corresponding amounts presented in the condensed consolidated financial statements of the Company.
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.
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, home internet, wearables, DIGITS or other connected devices, which include tablets and SyncUp products, where they generally pay after receiving service, or prepaid service, where they generally pay in advance of receiving service.
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The following table sets forth the number of ending customers:
As of March 31, 2021 Change
(in thousands) 2021 2020 # %
Customers, end of period
Postpaid phone customers (1)(2)
67,402 40,797 26,605 65 %
Postpaid other customers (1)(2)
15,170 7,014 8,156 116 %
Total postpaid customers 82,572 47,811 34,761 73 %
Prepaid customers (1)
20,865 20,732 133 1 %
Total customers 103,437 68,543 34,894 51 %
Acquired customers, net of base adjustments (2)
12 — 12 NM
NM - Not Meaningful
(1) Includes customers acquired in connection with the Merger and certain customer base adjustments. See Customer Base Adjustments and Net Customer Additions tables below.
(2) In the first quarter of 2021, we acquired 11,000 postpaid phone customers and 1,000 postpaid other customers through our acquisition of an affiliate.
Total customers increased 34,894,000, 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 ongoing promotional activities;
• Higher postpaid other customers, primarily due to customers acquired in the Merger and growth in other connected devices, primarily related to public and educational sector customers and wearable products; and
• Higher prepaid customers, primarily due to the continued success of our prepaid business due to ongoing promotional activities and rate plan offers, partially offset by customer base adjustments made to align the customer reporting policies of T-Mobile and Sprint.
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
(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.
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(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 (Losses)
The following table sets forth the number of net customer additions (losses):
Three Months Ended March 31, Change
(in thousands) 2021 2020 # %
Net customer additions
Postpaid phone customers 773 452 321 71 %
Postpaid other customers 437 325 112 34 %
Total postpaid customers 1,210 777 433 56 %
Prepaid customers 151 (128) 279 NM
Total customers 1,361 649 712 110 %
NM - Not Meaningful
Total net customer additions increased 712,000, or 110%, primarily from:
• Higher postpaid phone net customer additions, primarily due to expanded retail presence as a result of the Merger and increased retail store traffic due to closures arising from the Pandemic in the prior period, as well as increased growth from T-Mobile for Business, partially offset by higher churn from customers acquired in the Merger;
• Higher prepaid net customer additions, primarily due to lower churn; and
• Higher postpaid other net customer additions, primarily due to expanded retail presence as a result of the Merger, higher gross additions from connected devices, and increased retail store traffic due to closures arising from the Pandemic in the prior period and lower churn.
Churn
Churn represents the number of customers whose service was disconnected as a percentage of the average number of customers during the specified period further divided by the number of months in the period. The number of customers whose service was disconnected is presented net of customers that subsequently have their service restored within a certain period of time. We believe that churn provides management, investors and analysts with useful information to evaluate customer retention and loyalty.
The following table sets forth the churn:
Three Months Ended March 31, Change
2021 2020
Postpaid phone churn 0.98 % 0.86 % 12 bps
Prepaid churn 2.78 % 3.52 % -74 bps
Postpaid phone churn increased 12 basis points, primarily due to the inclusion of the customer base acquired in the Merger with higher churn.
Prepaid churn decreased 74 basis points, primarily due to lower switching activity and improved quality of recently acquired customers.
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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, home internet, wearables, DIGITS or other connected devices which include tablets and SyncUp products, where they generally pay after receiving service.
As of March 31, 2021 Change
(in thousands) 2021 2020 # %
Accounts, end of period
Total postpaid customer accounts (1)
26,014 15,244 10,770 71 %
(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 10,770,000, or 71%, 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, including our home internet product, along with ongoing promotional activities.
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.
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Average Revenue Per User
ARPU represents the average monthly service revenue earned from customers. We believe ARPU provides management, investors and analysts with useful information to assess and evaluate our service revenue per customer and assist in forecasting our future service revenues generated from our customer base. Postpaid phone ARPU excludes postpaid other customers and related revenues, which include home internet, 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 March 31, Change
2021 2020 $ %
Calculation of Postpaid Phone ARPU
Postpaid service revenues $ 10,303 $ 5,887 $ 4,416 75 %
Less: Postpaid other revenues (820) (310) (510) 165 %
Postpaid phone service revenues 9,483 5,577 3,906 70 %
Divided by: Average number of postpaid phone customers (in thousands) and number of months in period 66,834 40,585 26,249 65 %
Postpaid phone ARPU $ 47.30 $ 45.80 $ 1.50 3 %
Calculation of Prepaid ARPU
Prepaid service revenues $ 2,351 $ 2,373 $ (22) (1) %
Divided by: Average number of prepaid customers (in thousands) and number of months in period 20,728 20,759 (31) — %
Prepaid ARPU $ 37.81 $ 38.11 $ (0.30) (1) %
Postpaid Phone ARPU
Postpaid phone ARPU increased $1.50, or 3%, 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
• Ongoing promotional activity.
Prepaid ARPU
Prepaid ARPU decreased $0.30, or 1%, primarily due to ongoing promotional activity.
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 home internet, wearables, DIGITS or other connected devices, which include tablets and SyncUp products.
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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 March 31, Change
2021 2020 $ %
Calculation of Postpaid ARPA
Postpaid service revenues $ 10,303 $ 5,887 $ 4,416 75 %
Divided by: Average number of postpaid accounts (in thousands) and number of months in period 25,840 15,155 10,685 71 %
Postpaid ARPA $ 132.91 $ 129.47 $ 3.44 3 %
Postpaid ARPA
Postpaid ARPA increased $3.44, or 3%, primarily due to:
• An increase in customers per account, including further penetration in connected devices;
• Higher premium service revenues; and
• The net impact of customers acquired in the Merger; partially offset by
• Ongoing promotional activity.
Adjusted EBITDA and Core Adjusted EBITDA
Beginning in the first quarter of 2021, we are disclosing Core Adjusted EBITDA as a financial measure to improve comparability as we de-emphasize device leasing programs as part of our value proposition.
Adjusted EBITDA represents earnings before Interest expense, net of Interest income, Income tax expense, Depreciation and amortization, stock-based compensation and certain income and expenses not reflective of our ongoing operating performance. Core Adjusted EBITDA represents Adjusted EBITDA less device lease revenues. Net income margin represents Net income divided by Service revenues. Adjusted EBITDA margin represents Adjusted EBITDA divided by Service revenues. Core Adjusted EBITDA margin represents Core Adjusted EBITDA divided by Service revenues.
Adjusted EBITDA and Core Adjusted EBITDA are non-GAAP financial measures utilized by our management to monitor the financial performance of our operations. We use Adjusted EBITDA internally as a measure to evaluate and compensate our personnel and management for their performance. We use Adjusted EBITDA and Core Adjusted EBITDA as benchmarks to evaluate our operating performance in comparison to our competitors. Management believes analysts and investors use Adjusted EBITDA and Core Adjusted EBITDA as supplemental measures to evaluate overall operating performance and facilitate comparisons with other wireless communications services companies because they are indicative of our ongoing operating performance and trends by excluding the impact of interest expense from financing, non-cash depreciation and amortization from capital investments, stock-based compensation, Merger-related costs including network decommissioning costs and incremental costs directly attributable to the Pandemic, as they are not indicative of our ongoing operating performance, as well as certain other nonrecurring income and expenses. Management believes analysts and investors use Core Adjusted EBITDA because it normalizes for the transition in the Company’s device financing strategy, by excluding the impact of device lease revenues from Adjusted EBITDA, to align with the exclusion of the related depreciation expense on leased devices from Adjusted EBITDA. Adjusted EBITDA and Core Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for income from operations, net income or any other measure of financial performance reported in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
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The following table illustrates the calculation of Adjusted EBITDA and Core Adjusted EBITDA and reconciles Adjusted EBITDA and Core Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure:
Three Months Ended March 31, Change
(in millions) 2021 2020 $ %
Net income $ 933 $ 951 $ (18) (2) %
Adjustments:
Interest expense 792 185 607 328 %
Interest expense to affiliates 46 99 (53) (54) %
Interest income (3) (12) 9 (75) %
Other expense, net 125 10 115 NM
Income tax expense 246 306 (60) (20) %
Operating income 2,139 1,539 600 39 %
Depreciation and amortization 4,289 1,718 2,571 150 %
Stock-based compensation (1)
130 123 7 6 %
Merger-related costs 298 143 155 108 %
COVID-19-related costs — 117 (117) (100) %
Other, net (2)
49 25 24 96 %
Adjusted EBITDA 6,905 3,665 3,240 88 %
Lease revenues (1,041) (165) (876) 531 %
Core Adjusted EBITDA
$ 5,864 $ 3,500 $ 2,364 68 %
Net income margin (Net income divided by Service revenues) 7 % 11 % -400 bps
Adjusted EBITDA margin (Adjusted EBITDA divided by Service revenues) 49 % 41 % 800 bps
Core Adjusted EBITDA margin (Core Adjusted EBITDA divided by Service revenues)
41 % 40 % 100 bps
NM - Not Meaningful
(1) 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.
(2) 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 and Core Adjusted EBITDA.
Adjusted EBITDA increased $3.2 billion or 88%. The components comprising Adjusted EBITDA are discussed further above. The increase was primarily due to:
• Higher Total service revenues; and
• Higher Equipment revenues, including an increase in lease revenues of $876 million; partially offset by
• Higher Cost of equipment sales, excluding Merger-related costs;
• Higher Cost of services expenses, excluding Merger-related costs; and
• Higher Selling, general and administrative expenses, excluding Merger-related costs and supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs.
Core Adjusted EBITDA increased $2.4 billion or 68%. The increase was primarily due to an increase in Adjusted EBITDA, as discussed above, excluding lease revenues.
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 Revolving Credit Facility (as defined below). Further, the incurrence of additional indebtedness may inhibit our ability to incur new debt under the terms governing our existing and future indebtedness, which may make it more difficult for us to incur new debt in the future to finance our business strategy.
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Cash Flows
The following is a condensed schedule of our cash flows for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, Change
(in millions) 2021 2020 $ %
Net cash provided by operating activities $ 3,661 $ 1,617 $ 2,044 126 %
Net cash used in investing activities (11,239) (1,580) (9,659) 611 %
Net cash provided by (used in) financing activities 3,874 (453) 4,327 NM
NM - Not meaningful
Operating Activities
Net cash provided by operating activities increased $2.0 billion, or 126%, primarily from:
• A $2.5 billion increase in Net income, adjusted for non-cash income and expense; partially offset by
• A $436 million increase in net cash outflows from changes in working capital, primarily due to higher use of cash from Accounts payable and accrued liabilities, Equipment installment plan receivables and Other current and long-term liabilities, partially offset by lower use from Accounts receivable and Inventories.
• Net cash provided by operating activities includes $277 million and $161 million in payments for Merger-related costs for the three months ended March 31, 2021 and 2020, respectively.
Investing Activities
Net cash used in investing activities increased $9.7 billion, or 611%. The use of cash was primarily from:
• $8.9 billion in Purchases of spectrum licenses and other intangible assets, including deposits, primarily due to $8.9 billion paid for spectrum licenses won at the conclusion of Auction 107 in March 2021; and
• $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
• $891 million in Proceeds related to beneficial interests in securitization transactions.
Financing Activities
Net cash provided by (used in) financing activities increased $4.3 billion. The source of cash was primarily from:
• $6.8 billion in Proceeds from issuance of long-term debt, net of issuance costs, from the issuance of $6.8 billion in Senior Notes; partially offset by
• $2.2 billion in Repayments of long-term debt driven by the redemption of $2.0 billion aggregate principal amount of our 6.500% Senior Notes due 2026 and repayments of $219 million aggregate principal amount of our 3.360% Senior Secured Series 2016-1 A-1 Notes due 2021;
• $287 million in Repayments of financing lease obligations; and
• $218 million in Tax withholdings on share-based awards.
Cash and Cash Equivalents
As of March 31, 2021, our Cash and cash equivalents were $6.7 billion compared to $10.4 billion at December 31, 2020.
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Free Cash Flow
Free Cash Flow represents Net cash provided by operating activities less cash payments for Purchases of property and equipment, including Proceeds related to beneficial interests in securitization transactions, less Cash payments for debt prepayment or debt extinguishment. Free Cash Flow is a non-GAAP financial measure utilized by 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 provides a reconciliation of Free Cash Flow to Net cash provided by operating activities, which we consider to be the most directly comparable GAAP financial measure.
Three Months Ended March 31, Change
(in millions) 2021 2020 $ %
Net cash provided by operating activities $ 3,661 $ 1,617 $ 2,044 126 %
Cash purchases of property and equipment (3,183) (1,753) (1,430) 82 %
Proceeds related to beneficial interests in securitization transactions 891 868 23 3 %
Cash payments for debt prepayment or debt extinguishment costs (65) — (65) NM
Free Cash Flow $ 1,304 $ 732 $ 572 78 %
NM - Not Meaningful
Free Cash Flow increased $572 million, or 78%. The increase was primarily impacted by the following:
• Higher Net cash provided by operating activities, as described above; partially offset by
• Higher Cash purchases of property and equipment, including capitalized interest of $84 million and $112 million for the three months ended March 31, 2021 and 2020, respectively, from network integration related to the Merger and the continued build-out of our nationwide 5G network.
• Free Cash Flow includes $277 million and $161 million in payments for Merger-related costs for the three months ended March 31, 2021 and 2020, 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 March 31, 2021, there were no outstanding balances under such financing arrangement.
We also maintain vendor financing arrangements primarily with our main network equipment suppliers. Under the respective agreements, we can obtain extended financing terms. During the three months ended March 31, 2021, we repaid $55 million 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 March 31, 2021, the outstanding balance under the vendor financing arrangements and other financial liabilities was $186 million, of which $96 million was assumed in connection with the closing of the Merger. As of March 31, 2020, there were no outstanding borrowings under the vendor financing agreements.
We maintain a revolving credit facility (the “Revolving Credit Facility”) with an aggregate commitment amount of $5.5 billion. As of March 31, 2021, there was no outstanding balance under the Revolving Credit Facility.
On October 30, 2020, we entered into a $5.0 billion senior secured term loan commitment with certain financial institutions. On January 14, 2021, we issued an aggregate of $3.0 billion of Senior Notes. The senior secured term loan commitment was reduced by an amount equal to the aggregate gross proceeds of the Senior Notes, which reduced the commitment to $2.0 billion. On March 23, 2021, we issued an aggregate of $3.8 billion of Senior Notes. The senior secured term loan commitment was terminated upon the issuance of the $3.8 billion of Senior Notes.
Debt Financing
As of March 31, 2021, our total debt and financing lease liabilities were $77.9 billion, excluding our tower obligations, of which $71.1 billion was classified as long-term debt and $1.3 billion was classified as long-term financing lease liabilities.
During the three months ended March 31, 2021, we issued long-term debt for net proceeds of $6.8 billion and redeemed and repaid short- and long-term debt with an aggregate principal amount of $2.3 billion.
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For more information regarding our debt financing transactions, see Note 7 - Debt of the Notes to the Condensed Consolidated Financial Statements.
Spectrum Auction
In March 2021, the FCC announced that we were the winning bidder of 142 licenses in Auction 107 (C-band spectrum) for an aggregate purchase price of $9.3 billion, excluding relocation costs. At the inception of Auction 107 in October 2020, we deposited $438 million. Upon conclusion of Auction 107 in March 2021, we paid the FCC the remaining $8.9 billion for the licenses won in the auction. We expect to incur an additional $1.2 billion in relocation costs which will be paid through 2024.
For more information regarding our spectrum licenses, see Note 5 - Goodwill, Spectrum License Transactions and Other Intangi ble Assets of the Notes to the Condensed Consolidated Financial Statements.
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 March 31, 2021, 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.
Future Sources and Uses of Liquidity
We may seek additional sources of liquidity, including through the issuance of additional long-term debt in 2021, 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 to comply with the Government Commitments, and we are also expected to incur substantial restructuring expenses in connection with integrating and coordinating T-Mobile’s and Sprint’s businesses, operations, policies and procedures. While we have assumed that a certain level of Merger-related expenses will be incurred, factors beyond our control, including required consultation and negotiation with certain counterparties, could affect the total amount or the timing of these expenses. These expenses could exceed the costs historically borne by us and adversely affect our financial condition and results of operations. There are a number of additional risks and uncertainties, including those due to the impact of the Pandemic, that could cause our financial and operating results and capital requirements to differ materially from our projections, which could cause future liquidity to differ materially from our assessment.
The indentures, supplemental indentures and credit agreements governing our long-term debt to affiliates and third parties, excluding financing leases, contain covenants that, among other things, limit the ability of the Issuers or borrowers and the Guarantor Subsidiaries to incur more debt, 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 agreements, indentures and supplemental indentures relating to the long-term debt to affiliates and third parties restrict the ability of the Issuers or borrowers to loan funds or make payments to Parent. However, the Issuers or borrowers are allowed to make certain permitted payments to Parent under the terms of each of the credit agreements, 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 March 31, 2021.
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Shentel Wireless Asset Acquisition
Sprint PCS (specifically Sprint Spectrum L.P.) is party to a variety of publicly filed agreements with Shentel, pursuant to which Shentel is the exclusive provider of Sprint PCS’s wireless mobility communications network products in certain parts of Maryland, North Carolina, Virginia, West Virginia, Kentucky, Ohio and Pennsylvania. Pursuant to one such agreement, the Sprint PCS Management Agreement, dated November 5, 1999 (as amended, supplemented and modified from time to time, the “Management Agreement”), Sprint PCS was granted an option to purchase Shentel’s wireless telecommunications assets used to provide services pursuant to the Management Agreement. On August 26, 2020, Sprint, now our indirect subsidiary, on behalf of and as the direct or indirect owner of Sprint PCS, exercised its option by delivering a binding notice of exercise to Shentel. T-Mobile’s exercise of its option triggered a requirement for the parties to engage three independent valuation providers to calculate the “entire business value” (the “Entire Business Value”) of such wireless telecommunications assets, pursuant to a formula and valuation process prescribed in the Management Agreement.
On February 1, 2021, in accordance with the Management Agreement and other agreed-upon terms, the Entire Business Value of Shentel’s wireless telecommunications assets used to provide services pursuant to the Management Agreement was determined to be $2.1 billion, and correspondingly, the base purchase price for such wireless telecommunications assets shall be ninety percent (90%) of that Entire Business Value amount ($1.9 billion), subject to certain other purchase price adjustments prescribed by the Management Agreement and such additional purchase price adjustments agreed by the parties. The parties are negotiating the remaining outstanding terms of a definitive agreement to govern the purchase of Shentel’s wireless telecommunication assets and expect the transaction to close in the third quarter of 2021 after satisfying customary conditions to closing.
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 March 31, 2021, we have committed to $5.2 billion of financing leases under these financing lease facilities, of which $108 million was executed during the three months ended March 31, 2021. We expect to enter into up to an additional $1.1 billion in financing lease commitments during the year ending December 31, 2021.
Capital Expenditures
Our liquidity requirements have been driven primarily by capital expenditures for spectrum licenses, the construction, expansion and upgrading of our network infrastructure and the integration of the networks, spectrum, technology, personnel, customer base and business practices of T-Mobile and Sprint. Property and equipment capital expenditures primarily relate to the integration of our spectrum licenses, including the pending acquisition of C-band licenses won in Auction 107, acquired Sprint 2.5 GHz spectrum licenses and existing 600 MHz spectrum licenses as we build out our nationwide 5G network. We expect the majority of our remaining capital expenditures related to these efforts to occur in 2021 and 2022, after which we expect a reduction in capital expenditure requirements.
For more information regarding our spectrum licenses, see Note 5 - Goodwill, Spectrum License Transactions and Other Intangible Assets of the Notes to the Condensed Consolidated Financial Statements.
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.
Related Party Transactions
We have related party transactions associated with DT, SoftBank or their affiliates in the ordinary course of business, including intercompany servicing and licensing.
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,
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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 March 31, 2021, 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 March 31, 2021, DT, through certain of its non-U.S. subsidiaries, provided basic telecommunications services to two 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 and Europäisch-Iranische Handelsbank. These services have been terminated or are in the process of being terminated. For the three months ended March 31, 2021, 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 March 31, 2021 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 March 31, 2021, 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 March 31, 2021, 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 March 31, 2021, were both under $0.1 million. We understand that the SoftBank subsidiary intends to continue such activities.
Critical Accounting Policies and Estimates
Preparation of our condensed consolidated financial statements in accordance with 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. 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, 2020, and which are hereby incorporated by reference herein.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the interest rate risk as previously disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020.
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