10-Q 1 sprintq2201110-q.htm FORM 10-Q Sprint Q2 2011 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
—————————————————————
FORM 10-Q
—————————————————————
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to  
   
Commission File number 1-04721
—————————————————————
SPRINT NEXTEL CORPORATION
(Exact name of registrant as specified in its charter)
—————————————————————
KANSAS
48-0457967
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
6200 Sprint Parkway, Overland Park, Kansas
66251
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (800) 829-0965
—————————————————————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  o    No   x
COMMON SHARES OUTSTANDING AT JULY 29, 2011:
VOTING COMMON STOCK
 
Series 1
2,994,420,126

 


SPRINT NEXTEL CORPORATION
TABLE OF CONTENTS
 





PART I —FINANCIAL INFORMATION

Item 1.
Financial Statements (Unaudited)

SPRINT NEXTEL CORPORATION
CONSOLIDATED BALANCE SHEETS  
 
June 30,
2011
 
December 31, 2010
 
(in millions, except share and
per share data)
ASSETS
Current assets
 
 
 
Cash and cash equivalents
$
3,956

 
$
5,173

Short-term investments
315

 
300

Accounts and notes receivable, net of allowance for doubtful accounts of $187 and $197
3,082

 
3,036

Device and accessory inventory
1,160

 
670

Deferred tax assets
165

 
185

Prepaid expenses and other current assets
504

 
516

Total current assets
9,182

 
9,880

Investments
2,393

 
3,389

Property, plant and equipment, net
14,379

 
15,214

Intangible assets
 
 
 
Goodwill
359

 
359

FCC licenses and other
20,468

 
20,336

Definite-lived intangible assets, net
1,766

 
2,009

Other assets
496

 
467

 
$
49,043

 
$
51,654

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
 
 
 
Accounts payable
$
3,035

 
$
2,662

Accrued expenses and other current liabilities
3,340

 
3,573

Current portion of long-term debt, financing and capital lease obligations
2,256

 
1,656

Total current liabilities
8,631

 
7,891

Long-term debt, financing and capital lease obligations
16,278

 
18,535

Deferred tax liabilities
6,913

 
6,802

Other liabilities
3,895

 
3,880

Total liabilities
35,717

 
37,108

Commitments and contingencies

 

Shareholders' equity
 
 
 
Common shares, voting, par value $2.00 per share, 6.5 billion shares authorized,
2.993 and 3.008 billion shares issued, 2.993 and 2.988 billion shares outstanding
5,987

 
6,016

Paid-in capital
46,690

 
46,841

Treasury shares, at cost

 
(227
)
Accumulated deficit
(38,885
)
 
(37,582
)
Accumulated other comprehensive loss
(466
)
 
(502
)
Total shareholders' equity
13,326

 
14,546

 
$
49,043

 
$
51,654

See Notes to the Consolidated Financial Statements

1


SPRINT NEXTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
 
(in millions, except per share amounts)
Net operating revenues
$
8,311

 
$
8,025

 
$
16,624

 
$
16,110

Net operating expenses
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization included below)
4,589

 
4,230

 
8,985

 
8,428

Selling, general and administrative
2,408

 
2,294

 
4,811

 
4,703

Depreciation
1,121

 
1,261

 
2,243

 
2,536

Amortization
114

 
374

 
247

 
774

Other, net

 
(71
)
 

 
(88
)
 
8,232

 
8,088

 
16,286

 
16,353

Operating income (loss)
79

 
(63
)
 
338

 
(243
)
Other expense
 
 
 
 
 
 
 
Interest expense
(239
)
 
(381
)
 
(488
)
 
(753
)
Equity in losses of unconsolidated investments and other, net
(588
)
 
(269
)
 
(1,000
)
 
(511
)
 
(827
)
 
(650
)
 
(1,488
)
 
(1,264
)
Loss before income taxes
(748
)
 
(713
)
 
(1,150
)
 
(1,507
)
Income tax expense
(99
)
 
(47
)
 
(136
)
 
(118
)
Net loss
$
(847
)
 
$
(760
)
 
$
(1,286
)
 
$
(1,625
)
Basic and diluted loss per common share
$
(0.28
)
 
$
(0.25
)
 
$
(0.43
)
 
$
(0.54
)
Basic and diluted weighted average common shares outstanding
2,994

 
2,988

 
2,993

 
2,985

 
 
See Notes to the Consolidated Financial Statements

2


SPRINT NEXTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended
 
June 30,
 
2011
 
2010
 
(in millions)
Cash flows from operating activities
 
 
 
Net loss
$
(1,286
)
 
$
(1,625
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,490

 
3,310

Provision for losses on accounts receivable
199

 
219

Share-based compensation expense
37

 
36

Deferred income taxes
115

 
110

Equity in losses of unconsolidated investments and other, net
1,000

 
511

Contribution to pension plan
(112
)
 

Other changes in assets and liabilities:
 
 
 
Accounts and notes receivable
(244
)
 
(184
)
Inventories and other current assets
(495
)
 
(109
)
Accounts payable and other current liabilities
129

 
107

Other, net
161

 
2

Net cash provided by operating activities
1,994

 
2,377

Cash flows from investing activities
 
 
 
Capital expenditures
(1,403
)
 
(922
)
Expenditures relating to FCC licenses
(128
)
 
(248
)
Investment in Clearwire

 
(58
)
Proceeds from sales and maturities of short-term investments
625

 
155

Purchases of short-term investments
(640
)
 
(50
)
Other, net
(18
)
 
8

Net cash used in investing activities
(1,564
)
 
(1,115
)
Cash flows from financing activities
 
 
 
Repayments of debt and capital lease obligations
(1,653
)
 
(754
)
Debt financing costs
(3
)
 
(51
)
Other, net
9

 
1

Net cash used in financing activities
(1,647
)
 
(804
)
Net (decrease) increase in cash and cash equivalents
(1,217
)
 
458

Cash and cash equivalents, beginning of period
5,173

 
3,819

Cash and cash equivalents, end of period
$
3,956

 
$
4,277

See Notes to the Consolidated Financial Statements

3


SPRINT NEXTEL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in millions)
 
 
Common Shares
 
Paid-in
Capital
 
Treasury Shares
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Balance, December 31, 2010
3,008

 
$
6,016

 
$
46,841

 
20

 
$
(227
)
 
$
(37,582
)
 
$
(502
)
 
$
14,546

Net loss
 
 
 
 
 
 
 
 
 
 
(1,286
)
 
 
 
(1,286
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
36

 
36

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,250
)
Issuance of common shares, net
4

 
9

 
(4
)
 
(1
)
 
21

 
(17
)
 
 
 
9

Share-based compensation expense
 
 
 
 
21

 
 
 
 
 
 
 
 
 
21

Conversion of series 2 to series 1 common shares
(19
)
 
(38
)
 
(168
)
 
(19
)
 
206

 
 
 
 
 

Balance, June 30, 2011
2,993

 
$
5,987

 
$
46,690

 

 
$

 
$
(38,885
)
 
$
(466
)
 
$
13,326

 

See Notes to the Consolidated Financial Statements

4


SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INDEX
 



5





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2010. Unless the context otherwise requires, references to “Sprint,” “we,” “us,” “our” and the “Company” mean Sprint Nextel Corporation and its consolidated subsidiaries.
The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.
Certain prior period amounts have been reclassified to conform to the current period presentation.

Note 2.
New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance regarding Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs which resulted in common requirements for measuring fair value and for disclosing information about fair value measurement under both U.S. GAAP and International Financial Reporting Standards (IFRS), including a consistent definition of the term "fair value". The amendments will be effective beginning in the first quarter of 2012, and we are currently evaluating their impact, if any, on our consolidated financial statements.
In June 2011, the FASB issued authoritative guidance regarding Comprehensive Income: Presentation of Comprehensive Income which amends existing guidance to present the components of net income and comprehensive income in either one or two consecutive financial statements, eliminating the option to present other comprehensive income in the statement of changes in shareholders' equity. The amendments will be effective beginning in the first quarter of 2012, require retrospective application, and will only effect presentation of information in our primary financial statements.

Note 3.
Investments
The components of investments were as follows:
 
June 30,
2011
 
December 31, 2010
 
(in millions)
Marketable equity securities
$
48

 
$
39

Equity method and other investments
2,345

 
3,350

 
$
2,393

 
$
3,389

Equity Method Investment in Clearwire
Sprint's Ownership Interest
Sprint's investment in Clearwire Corporation and its consolidated subsidiary Clearwire Communications LLC (together, "Clearwire") is part of our long-term plan to participate in the fourth generation (4G) wireless broadband market, and to benefit from Clearwire's entry into that market. Sprint and other investors are offering 4G products utilizing Clearwire's 4G wireless broadband network in available markets.
As of June 30, 2011, Sprint holds approximately 54% of a non-controlling economic interest in Clearwire in the form of 532 million Class B non-voting common interests (Class B Non-voting) in Clearwire Communications LLC and a 49.7% non-controlling voting interest in the form of 454 million shares of Class B voting common stock (Class B Voting) of Clearwire Corporation (together, “Class B Common Interests”) for which

6





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

the carrying value totaled $2.1 billion. In June 2011, Sprint exercised its right to unilaterally surrender approximately 78 million shares of Class B Voting, which resulted in a reduction of our voting interest from approximately 54% to 49.7%. The surrender had no impact on Sprint's economic interest or governance rights in Clearwire and Sprint maintained the right to buy back the shares surrendered for a price equal to the par value of those shares. Each share of Clearwire Corporation Class B Voting, together with one Clearwire Communications LLC Class B Non-voting, is exchangeable for one share of Clearwire Corporation's Class A common stock, a publicly traded security. If Sprint does not elect to buy back shares surrendered, any Class B Non-voting shares in excess of Class B Voting shares could be sold separately, subject to certain restrictions. In addition to Class B Common Interests, Sprint holds a note receivable from Clearwire with a fixed interest rate of 12% and a maturity date of December 2015. The carrying value of the note receivable was $177 million as of June 30, 2011 and December 31, 2010. The carrying value of Sprint's Class B Common Interests, together with the carrying value of the note receivable, are included in the line item "Investments" in Sprint's consolidated balance sheet. Equity in losses from Clearwire were $594 million and $1.0 billion for the three and six-month periods ended June 30, 2011 and $300 million and $550 million for the three and six-month periods ended June 30, 2010, respectively. Sprint's losses from its investment in Clearwire consist of Sprint's share of Clearwire's net loss and other adjustments such as gains or losses associated with the dilution of Sprint's ownership interest resulting from Clearwire's equity issuances.
Sprint's Recoverability
Sprint's ability to recover the carrying value of $2.1 billion as of June 30, 2011 depends, in part, upon Clearwire's ability to obtain sufficient additional funding to support its operations and its ability to successfully develop, deploy and maintain its 4G network. Uncertainty regarding Clearwire's timing and ability to obtain sufficient additional funding could result in significant changes to Clearwire's stock price and value. A sustained decline in the estimated fair value of Clearwire that would be deemed to be other-than-temporary could result in a material impairment to the carrying value of our investment. We do not intend to sell our 54% economic interest in the foreseeable future, and recoverability of our equity investment is not affected by short-term fluctuations in Clearwire's stock price.
Clearwire has reported significant net losses since its formation and we expect Clearwire to continue to generate net losses in the near term. The carrying value of Sprint's investment in Clearwire has declined approximately $1.8 billion since Clearwire's formation in November 2008, primarily resulting from Sprint's share in equity of net losses of Clearwire, resulting in a decline in Sprint's per share carrying value of Clearwire from $10.65 as of December 31, 2008 to $3.92 as of June 30, 2011. As of June 30, 2011, based on the assumed exchange of our Class B Common Interests for Class A Common Stock, the carrying value of Sprint's investment in Clearwire of $3.92 per share over Clearwire's closing stock price of $3.78 per share was equivalent to an excess of $75 million.
At each financial reporting measurement date, we evaluate the excess, if any, of Sprint's carrying value over the estimated fair value of our investment in Clearwire to determine if such excess, an implied unrealized loss, is other-than-temporary. Our evaluations consider, among other things, Clearwire's market capitalization, which assumes expectations of future performance, as well as Clearwire's historical stock price, including historical and implied volatility associated with Clearwire's common stock. Based on our evaluations, we believe that as of June 30, 2011 the implied unrealized loss in value is the result of a temporary decline (See Note 15).
Summarized financial information for Clearwire is as follows:  
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
 
(in millions)
Revenues
$
323

 
$
117

 
$
559

 
$
218

Operating expenses
(1,234
)
 
(628
)
 
(2,118
)
 
(1,124
)
Operating loss
$
(911
)
 
$
(511
)
 
$
(1,559
)
 
$
(906
)
Net loss from continuing operations before non-controlling interests
$
(940
)
 
$
(537
)
 
$
(1,733
)
 
$
(964
)
Net loss from discontinued operations before non-controlling interests
$
(33
)
 
$
(10
)
 
$
(74
)
 
$
(23
)

7





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 4.
Financial Instruments
Cash and cash equivalents, accounts and notes receivable, and accounts payable are carried at cost, which approximates fair value. Our short-term investments (consisting primarily of time deposits and treasury securities), totaling $315 million and $300 million as of June 30, 2011 and December 31, 2010, respectively, are recorded at amortized cost, and the respective carrying amounts approximate fair value. The fair value of our marketable equity securities totaling $48 million and $39 million as of June 30, 2011 and December 31, 2010, respectively, is measured on a recurring basis using quoted prices in active markets.
The estimated fair value of long-term debt, financing and capital lease obligations, including current maturities is based on current market prices or interest rates. The following table presents carrying amounts and estimated fair values of our current and long-term debt, financing and capital lease obligations:
 
 
June 30, 2011
 
December 31, 2010
 
Carrying Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(in millions)
Current and long-term debt, financing and capital lease obligations
$
18,534

 
$
18,930

 
$
20,191

 
$
20,007


Note 5.
Property, Plant and Equipment
Property, plant and equipment consists primarily of network equipment and other long-lived assets used to provide service to our subscribers. Changes in technology or in our intended use of these assets, including our ability to successfully test and deploy our network modernization plan, Network Vision, as well as changes in economic or industry factors or in our business or prospects, may cause the estimated period of use or the value of these assets to change. In connection with Network Vision, certain spectrum licenses that were not previously placed in service are now expected to be utilized. As qualifying activities are performed related to Network Vision, interest expense primarily related to the carrying value of these spectrum licenses is being capitalized to construction in progress within property, plant and equipment. Interest expense capitalized was $102 million and $201 million for the three and six-month periods ended June 30, 2011 and $4 million and $7 million for the three and six-month periods ended June 30, 2010, respectively. Construction in progress (including any capitalized interest) associated with Network Vision is expected to be depreciated using the straight-line method based on estimated economic useful lives, which are expected to be depreciated over a weighted average useful life of approximately 8 years, once the assets are placed in-service. The components of property, plant and equipment, and the related accumulated depreciation were as follows:
 
 
June 30,
2011
 
December 31,
2010
 
(in millions)
Land
$
333

 
$
332

Network equipment, site costs and related software
38,009

 
37,514

Buildings and improvements
4,820

 
4,823

Non-network internal use software, office equipment and other
2,387

 
2,465

Construction in progress
1,256

 
995

Less accumulated depreciation
(32,426
)
 
(30,915
)
Property, plant and equipment, net
$
14,379

 
$
15,214

 


8





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 6.
Intangible Assets
Indefinite-Lived Intangible Assets
 
December 31,
2010
 
Net
Additions
 
June 30,
2011
 
(in millions)
FCC licenses
$
19,927

 
$
132

 
$
20,059

Trademarks
409

 

 
409

Goodwill
359

 

 
359

 
$
20,695

 
$
132

 
$
20,827

We hold Federal Communications Commission (FCC) licenses authorizing the use of radio frequency spectrum to deploy our wireless services: 1.9 gigahertz (GHz) licenses utilized in the code division multiple access (CDMA) network, and 800 megahertz (MHz) and 900 MHz licenses utilized in the integrated Digital Enhanced Network (iDEN) network. We also hold FCC licenses that are not yet placed in service but that we intend to use in accordance with FCC requirements. As long as the Company acts within the requirements and constraints of the regulatory authorities, the renewal and extension of these licenses is reasonably certain at minimal cost. We are not aware of any technology being developed that would render this spectrum obsolete and have concluded that these licenses are indefinite-lived intangible assets. Our Sprint and Boost Mobile trademarks have been identified as indefinite-lived intangible assets. Goodwill represents the excess of consideration paid over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. The carrying value of our goodwill is included in our wireless segment and resulted from the December 2009 acquisitions of Virgin Mobile USA and iPCS, Inc (iPCS).
Intangible Assets Subject to Amortization
 
 
 
June 30, 2011
 
December 31, 2010
 
Useful Lives
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
 
 
 
 
 
 
(in millions)
 
 
 
 
Customer relationships
4 to 5 years
 
$
1,925

 
$
(1,845
)
 
$
80

 
$
1,925

 
$
(1,717
)
 
$
208

Other intangible assets

 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
10 to 37 years
 
1,169

 
(538
)
 
631

 
1,169

 
(490
)
 
679

Reacquired rights
9 to 14 years
 
1,571

 
(585
)
 
986

 
1,571

 
(519
)
 
1,052

Other
9 to 16 years
 
121

 
(52
)
 
69

 
116

 
(46
)
 
70

Total other intangible assets
 
 
2,861

 
(1,175
)
 
1,686

 
2,856

 
(1,055
)
 
1,801

Total definite-lived intangible assets
 
 
$
4,786

 
$
(3,020
)
 
$
1,766

 
$
4,781

 
$
(2,772
)
 
$
2,009



Note 7.
Accounts Payable
Accounts payable at June 30, 2011 and December 31, 2010 include liabilities in the amounts of $107 million and $123 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.


9





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 8.
Long-Term Debt, Financing and Capital Lease Obligations
 
 
Interest
Rates
 
Maturities
 
June 30,
2011
 
December 31,
2010
 
 
 
 
 
(in millions)
Notes
 
 
 
 
 
 
 
Senior notes
 
 
 
 
 
 
 
Sprint Nextel Corporation
6.00 - 9.25%
 
2016 - 2022
 
$
3,500

 
$
3,500

Sprint Capital Corporation
6.88 - 8.75%
 
2012 - 2032
 
8,204

 
9,854

Serial redeemable senior notes
 
 
 
 
 
 
 
Nextel Communications, Inc.
5.95 - 7.38%
 
2013 - 2015
 
4,780

 
4,780

Secured notes
 
 
 
 
 
 
 
iPCS, Inc.
2.40 - 3.52%
 
2013 - 2014
 
481

 
481

Credit facilities - Sprint Nextel Corporation
 
 
 
 
 
 
 
Bank credit facility
3.50%
 
2013
 

 

Export Development Canada
3.46 - 4.16%
 
2012 - 2015
 
750

 
750

Financing obligation
9.50%
 
2030
 
698

 
698

Capital lease obligations and other
4.11 - 15.49%
 
2014 - 2022
 
75

 
76

Net premiums
 
 
 
 
46

 
52

 
 
 
 
 
18,534

 
20,191

Less current portion
 
 
 
 
(2,256
)
 
(1,656
)
Long-term debt, financing and capital lease obligations
 
 
 
 
$
16,278

 
$
18,535

As of June 30, 2011, Sprint Nextel Corporation, the parent corporation, had $4.3 billion in principal of debt outstanding, including the credit facilities. In addition, $13.5 billion in principal of our long-term debt issued by wholly-owned subsidiaries is guaranteed by the parent, of which approximately $8.7 billion is fully and unconditionally guaranteed. The indentures and financing arrangements of certain subsidiaries' debt contain provisions that limit cash dividend payments on subsidiary common stock. The transfer of cash in the form of advances from the subsidiaries to the parent corporation generally is not restricted. Cash interest payments totaled $529 million and $739 million during the six-month periods ended June 30, 2011 and 2010, respectively.
Notes
Notes consist of senior and serial redeemable senior notes that are unsecured, and secured notes of iPCS which are secured solely with the underlying assets of iPCS. The Company may elect to pay interest on a portion of the iPCS secured notes entirely in cash or by increasing the principal amount. Cash interest on the remaining notes is generally payable semiannually in arrears. Approximately $16.8 billion of the notes are redeemable at the Company's discretion at the then applicable redemption price plus accrued interest. On January 31, 2011, the Company paid $1.65 billion in principal plus accrued and unpaid interest on its outstanding Sprint Capital Corporation 7.625% senior notes as scheduled.
Credit Facilities
As of June 30, 2011, $1.2 billion in letters of credit, which includes a $1.1 billion letter of credit required by the FCC's Report and Order to reconfigure the 800 MHz band (the "Report and Order"), were outstanding under our $2.1 billion revolving bank credit facility. As a result, the Company had $900 million of borrowing capacity available under this revolving bank credit facility as of June 30, 2011. The terms of this credit facility provide for an interest rate equal to the London Interbank Offered Rate (LIBOR) plus a spread that varies depending on the Company's credit ratings. As of June 30, 2011, the unsecured loan agreement with Export Development Canada (EDC) is fully drawn and has terms similar to those of the revolving bank credit facility. Under terms of the EDC loan, repayments of outstanding amounts cannot be re-drawn.

10





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Financing, Capital Lease and Other Obligations
We have approximately 3,000 cell sites, which we sold and subsequently leased back space. Terms extend over a period of 10 years, beginning in 2008, with renewal options for an additional 20 years. The cell sites continue to be reported as part of our property, plant and equipment due to our continued involvement with the property sold and the transaction is accounted for as a financing. Our capital lease and other obligations are primarily for the use of communication switches.
Covenants
As of June 30, 2011, the Company is in compliance with all restrictive and financial covenants associated with its borrowings. A default under any of our borrowings could trigger defaults under our other debt obligations, which in turn could result in the maturities being accelerated. Certain indentures that govern our outstanding notes also require compliance with various covenants, including limitations on the incurrence of indebtedness and liens by the Company and its subsidiaries, as defined by the terms of the indentures. As of June 30, 2011, we own a 54% non-controlling economic interest in Clearwire. As previously reported, Clearwire could have been considered a subsidiary under certain agreements relating to our indebtedness and, as such, certain actions or defaults by Clearwire would have, if viewed as a subsidiary, resulted in a breach of covenants, including potential cross-default provisions, under certain agreements relating to our indebtedness. In December 2010, as a result of an amendment to the Clearwire equityholders' agreement, Sprint obtained the right to unilaterally surrender voting securities to reduce its voting security percentage below 50%. In June 2011, Sprint exercised this right and surrendered approximately 78 million shares of Class B voting common stock of Clearwire Corporation, which resulted in a reduction of our voting interest from 53.7% to 49.7% and eliminated the potential for Clearwire to be considered a subsidiary of Sprint.
We are currently restricted from paying cash dividends because our ratio of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and certain other non-recurring items, as defined in the credit facility (adjusted EBITDA), exceeds 2.5 to 1.0. The Company is also obligated to repay the credit facilities if certain change-of-control events occur.

Note 9.
Income Taxes
The differences that caused our effective income tax rates to vary from the 35% U.S. federal statutory rate for income taxes were as follows:
 
Six Months Ended
 
June 30,
 
2011
 
2010
 
(in millions)
Income tax benefit at the federal statutory rate
$
403

 
$
527

Effect of:
 
 
 
State income taxes, net of federal income tax effect
(10
)
 
46

Change in valuation allowance
(533
)
 
(667
)
Other, net
4

 
(24
)
Income tax expense
$
(136
)
 
$
(118
)
Effective income tax rate
(11.8
)%
 
(7.8
)%

11





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The realization of deferred tax assets, including net operating loss carryforwards, is dependent on the generation of future taxable income sufficient to realize the tax deductions, carryforwards and credits. However, our recent history of consecutive annual losses, in addition to the uncertainty concerning the forecasted income for 2011 and beyond, reduces our ability to rely on expectations of future income in evaluating the ability to realize our deferred tax assets. Valuation allowances on deferred tax assets are recognized if it is determined that it is more likely than not that the asset will not be realized. As a result, the Company recognized an increase in the valuation allowance of $533 million for the six-month period ended June 30, 2011 on deferred tax assets primarily related to federal and state net operating loss carryforwards generated during the period. The valuation allowance was $3.1 billion and $2.6 billion as of June 30, 2011 and December 31, 2010, respectively. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits. The net carrying value of certain of our deferred tax assets totaling approximately $340 million are dependent, in part, on the ability to realize value from our equity investment in Clearwire.
Income tax expense of $136 million for the six-month period ended June 30, 2011 is primarily attributable to taxable temporary differences from amortization of FCC licenses. FCC licenses are amortized over 15 years for income tax purposes but, because these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. This difference results in net deferred income tax expense since the taxable temporary difference cannot be scheduled to reverse during the loss carryforward period. In addition, during the second quarter 2011, a $52 million expense was recorded as a result of the effect of recently enacted changes in Michigan's corporate state income tax laws. Of the $52 million, $33 million was recognized within "State income taxes, net of federal income tax effect" and $19 million was recognized as "Change in valuation allowance" in the table above.
As of June 30, 2011 and December 31, 2010, we maintained a liability related to unrecognized tax benefits of $225 million and $228 million, respectively. Cash was paid for net income taxes of $31 million and $21 million during the six-month periods ended June 30, 2011 and 2010, respectively.

Note 10.
Spectrum Hosting Arrangement
Sprint's Network Vision multi-mode network technology is designed to utilize a single base station capable of handling various spectrum bands, including Sprint's 800 MHz and 1.9 GHz spectrum as well as spectrum bands owned or accessed by other parties. In June 2011, Sprint entered into a 15-year arrangement with LightSquared LP and LightSquared Inc. (collectively, “LightSquared”). Under the terms of the arrangement, and in conjunction with our Network Vision deployment, Sprint agreed to deploy and operate a fourth generation long term evolution (4G LTE) network capable of utilizing spectrum licensed to or available to LightSquared during the term of the arrangement, a service we refer to as “spectrum hosting”. The spectrum hosting arrangement will allow LightSquared the ability to provide capacity on a 4G LTE network to their wholesale customers, including Sprint. Sprint expects to receive consideration consisting of cash and 4G LTE credits (collectively, "Arrangement Consideration"). These 4G LTE credits can be used by Sprint to purchase 4G LTE capacity during the term of the arrangement should Sprint elect to provide 4G LTE services to its customers. The Arrangement Consideration will be recognized as revenue over the period of Sprint's estimated initial performance obligation to deliver spectrum hosting services. The Arrangement Consideration will be allocated to each market and revenue recognition will commence upon the activation of each market, which is expected to occur on a staggered basis over a two to three year period. The estimated period of Sprint's initial performance obligation is expected to be approximately eight years for each market based upon the expected timing of a network upgrade and on the weighted average estimated useful life of the equipment and related assets used to provide network services. The network equipment purchased by Sprint to service the hosting arrangement will be capitalized and depreciated over the shorter of the asset's useful life or the estimated initial performance period. Our costs to operate and maintain the equipment will be recognized as incurred. The arrangement generally provides for payment of spectrum hosting services in advance of services rendered by Sprint. Cash payments received in the three-month period ended June 30, 2011 totaled $90 million and an additional $200 million was received in July 2011. All of the advanced payments have been recorded as deferred revenue.

12





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 11.
Commitments and Contingencies
Litigation, Claims and Assessments
A number of cases that allege Sprint Communications Company L.P. failed to obtain easements from property owners during the installation of its fiber optic network in the 1980's have been filed in various courts. Several of these cases sought certification of nationwide classes, and in one case, a nationwide class was certified. In 2003, a nationwide settlement of these claims was approved by the U.S. District Court for the Northern District of Illinois, but objectors appealed the preliminary approval order to the Seventh Circuit Court of Appeals, which overturned the settlement and remanded the case to the trial court for further proceedings. We reached an agreement in principle to settle the claims for an amount not material to our consolidated financial position or results of operations. The Court issued its preliminary approval of the settlement on July 17, 2008, but on September 10, 2009, the Court announced that it would not approve the settlement. The Court did not decide whether the settlement was fair or in the best interest of class members, but denied on jurisdictional grounds. As a result, the agreement terminated, and the parties have continued their efforts to reach a settlement. We have begun to settle some suits on a statewide basis, and have received preliminary court approval of settlements in Idaho, Illinois, North Dakota and Alabama. We do not expect the resolution of this matter to have a material adverse effect on our consolidated financial position or results of operations.
On January 6, 2011, the U.S. District Court for the District of Kansas denied our motion to dismiss a shareholder lawsuit, Bennett v. Sprint Nextel Corp., that alleges that the company and three of its former officers violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by failing adequately to disclose certain alleged operational difficulties subsequent to the Sprint-Nextel merger, and by purportedly issuing false and misleading statements regarding the write-down of goodwill. The complaint was originally filed in March 2009 and is allegedly brought on behalf of purchasers of our common stock stock from October 26, 2006 to February 27, 2008. Our motion to certify the January 6, 2011 order for an interlocutory (or interim) appeal was denied, and discovery has begun. We believe the complaint is without merit and intend to defend the matter vigorously. We do not expect the resolution of this matter to have a material adverse effect on our consolidated financial position or results of operations.
Five related shareholder derivative suits were filed against the Company and certain of its present and/or former officers and directors. The first, Murphy v. Forsee, was filed in state court in Kansas in April 2009, was removed to federal court, and was stayed by the court pending resolution of the motion to dismiss the Bennett case. The second, Randolph v. Forsee, was filed in July 2010 in state court in Kansas, was removed to federal court, and was remanded back to state court. The third, Ross-Williams v. Bennett, et al., was filed in state court in Kansas on February 1, 2011; a fourth suit, Price v. Forsee, et al., was filed in state court in Kansas on April 15, 2011; and a fifth suit, Hartleib v. Forsee, et. al., was filed in federal court in Kansas on July 14, 2011. The parties are discussing a schedule for these cases going forward in light of the pendency of the Bennett case.
Various other suits, proceedings and claims, including purported class actions typical for a large business enterprise, are pending against us or our subsidiaries. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position or results of operations.
Spectrum Reconfiguration Obligations
In 2004, the FCC adopted a Report and Order that included new rules regarding interference in the 800 MHz band and a comprehensive plan to reconfigure the 800 MHz band. The Report and Order provides for the exchange of a portion of our 800 MHz FCC spectrum licenses, and requires us to fund the cost incurred by public safety systems and other incumbent licensees to reconfigure the 800 MHz spectrum band. In addition, we received licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band; however, we were required to relocate and reimburse the incumbent licensees in this band for their costs of relocation to another band designated by the FCC.

13





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The minimum cash obligation is approximately $2.8 billion under the Report and Order. We are, however, obligated to pay the full amount of the costs relating to the reconfiguration plan, even if those costs exceed $2.8 billion. As required under the terms of the Report and Order, a letter of credit has been secured to provide assurance that funds will be available to pay the relocation costs of the incumbent users of the 800 MHz spectrum. We submit the qualified 800 MHz relocation costs to the FCC for review for potential letter of credit reductions on a periodic basis. As a result of these reviews, our letter of credit was reduced from $2.5 billion at the start of the project to $1.1 billion as of June 30, 2011, as approved by the FCC.
Total payments directly attributable to our performance under the Report and Order, from the inception of the program, are approximately $3.0 billion, of which $132 million was incurred related to FCC licenses during the six-month period ended June 30, 2011. When incurred, these costs are generally accounted for either as property, plant and equipment or as additions to the FCC licenses intangible asset. Although costs incurred to date have exceeded $2.8 billion, not all of those costs have been reviewed and accepted as eligible by the Transition Administrator. Regardless, we continue to estimate that total direct costs attributable to the spectrum reconfigurations will exceed the minimum cash obligation of $2.8 billion. This estimate is dependent on significant assumptions including the final licensee costs and costs associated with relocating licensees in the Mexican border region for which there is currently no approved border plan. In addition, we are entitled to receive reimbursement from the mobile satellite service (MSS) entrants for their pro rata portion of our costs (approximately $200 million) of clearing a portion of the 1.9 GHz spectrum. On September 29, 2010, the FCC affirmed the obligation of the MSS entrants to reimburse us and we are pursuing expeditious implementation of the FCC's decision, although there is uncertainty around the MSS entrants' ability to reimburse. However, the FCC's decision recognizes that uncertainty and allows us to pursue other avenues to obtain reimbursement from those entrants or their affiliates.
Completion of the 800 MHz band reconfiguration was initially required by June 26, 2008. The FCC continues to grant 800 MHz public safety licensees additional time to complete their band reconfigurations which, in turn, delays Sprint's access to some of our 800 MHz replacement channels. Under an October 2008 FCC Order, March 31, 2010 was the target date for us to begin to relinquish some of our 800 MHz channels on a region-by-region basis prior to receiving all of our FCC-designated 800 MHz replacement channels. On March 31, 2010, however, the FCC granted Sprint's request that it delay the March 31, 2010 deadline for one year until March 31, 2011 in 21 markets where public safety licensees have not yet moved off most of Sprint's replacement channels. On February 11, 2011, Sprint filed a similar request for relief for only 9 markets. On March 31, 2011, the FCC granted the request and extended the deadline for Sprint to relinquish 800 MHz spectrum in the 9 requested markets for one year until March 31, 2012.
Accordingly, we will continue to transition to our 800 MHz replacement channels consistent with public safety licensees' reconfiguration progress. We completed all of our 1.9 GHz incumbent relocation and reimbursement obligations in the second half of 2010.

Note 12.
Compensation Plans
As of June 30, 2011, Sprint sponsored four incentive plans: the 2007 Omnibus Incentive Plan (2007 Plan); the 1997 Long-Term Incentive Program (1997 Program); the Nextel Incentive Equity Plan (Nextel Plan) and the Management Incentive Stock Option Plan (MISOP), (together, "Compensation Plans"). Sprint also sponsors an Employee Stock Purchase Plan (ESPP). Under the 2007 Plan, we may grant share and non-share based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other equity-based and cash awards to employees, outside directors and certain other service providers. Options are generally granted with an exercise price equal to the market value of the underlying shares on the grant date, generally vest on an annual basis over three or four years, and generally have a contractual term of ten years. Restricted stock units generally have performance and service requirements or service requirements only with vesting periods ranging from one to three years. Performance-based restricted stock units awarded in 2011 and 2010 have three distinct one-year performance periods and are granted in each period once the performance objectives are established. Employees and directors who are granted restricted stock units are not required to pay for the shares but generally must remain employed with us, or continue to serve as a member of our board of directors,

14





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

until the restrictions lapse, which is typically three years for employees and one year for directors. The Compensation Committee of our board of directors, or one or more executive officers should the Compensation Committee so authorize, as provided in the 2007 Plan, will determine the terms of each equity-based award. No new grants can be made under the 1997 Program, the Nextel Plan or the MISOP.
For the three-month period ended June 30, 2011, the number of shares available and reserved for future grants under the 2007 Plan increased by about 8 million to approximately 162 million common shares, as the number of shares available under the 2007 Plan is increased by any shares originally granted under the 1997 Program, the Nextel Plan or the MISOP that are forfeited, expired, or otherwise terminated. As of June 30, 2011, restricted stock units and options to acquire about 58 million shares were outstanding under the 2007 Plan, restricted stock units and options to acquire about 10 million shares were outstanding under the 1997 Program, options to acquire about 3 million shares were outstanding under the Nextel Plan and options to acquire about 5 million common shares were outstanding under the MISOP. As of June 30, 2011, the ESPP has approximately 80 million common shares authorized and reserved for future purchases. We use new shares to satisfy share-based awards or treasury shares, if available.
Compensation Costs
The cost of employee services received in exchange for share-based awards classified as equity is measured using the estimated fair value of the award on the date of the grant, and that cost is recognized over the period that the award recipient is required to provide service in exchange for the award. Awards of instruments classified as liabilities are measured at the estimated fair value at each reporting date through settlement. Share-based compensation cost related to awards with graded vesting is recognized using the straight-line method.
Pre-tax share and non-share based compensation charges from our incentive plans included in net loss were $19 million and $37 million for the three and six-month periods ended June 30, 2011, and $18 million and $36 million for the three and six-month periods ended June 30, 2010. The net income tax benefit (expense) recognized in the consolidated financial statements for share-based compensation awards for the same four periods was $3 million, $8 million, $(4) million and $(6) million, respectively.
As of June 30, 2011, there was $70 million of total unrecognized compensation cost related to non-vested incentive awards that are expected to be recognized over a weighted average period of 1.86 years. Cash received from exercise under all share-based payment arrangements, net of shares surrendered for employee tax obligations, was $8 million and $3 million for the six-month periods ended June 30, 2011 and 2010, respectively.
Options
The fair value of each option award is estimated on the grant date using the Black-Scholes option valuation model, based on several assumptions including the risk-free interest rate, volatility, expected dividend yield and expected term. Options outstanding as of June 30, 2011 include options granted under the 2007 Plan, the 1997 Program, the Nextel Plan and the MISOP, as discussed above.
Options to purchase approximately 1 million and 8 million shares were granted during the three and six-month periods ended June 30, 2011, respectively. The weighted average grant date fair value of options awarded during the six-month period ended June 30, 2011 was $1.89, compared to $1.97 for the same prior year period. The total intrinsic value of options exercised was $3 million during the six-month period ended June 30, 2011 and immaterial during the six-month period ended June 30, 2010.
Restricted Stock Units
The fair value of each restricted stock unit award is calculated using the share price at the date of grant. Restricted stock units outstanding consist of those units granted under the 2007 Plan and the 1997 Program, as discussed above. Restricted stock units granted in the three-month period ended June 30, 2011 were insignificant and approximately 4 million restricted stock units were granted in the six-month period ended June 30, 2011.

15





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The total fair value of restricted stock units vested during the three and six-month periods ended June 30, 2011 was $3 million and $15 million, respectively. The total fair value of restricted stock units vested during the three and six-month periods ended June 30, 2010 was $11 million and $32 million, respectively. The weighted-average grant date fair value of restricted stock units granted during the six-month period ended June 30, 2011 was $4.27 per unit, compared with $3.46 per unit for the same prior year period.
Certain restricted stock units outstanding as of June 30, 2011 are entitled to dividend equivalents paid in cash, if dividends are declared and paid on common shares, but performance-based restricted stock units are not entitled to dividend equivalent payments until the applicable performance and service criteria have been met.

Note 13.
Shareholders' Equity and Per Share Data
In the first quarter 2011, certain holders of our Series 2 common stock exercised their rights to convert 35 million Series 2 shares to 35 million Series 1 shares, resulting in a $38 million and $168 million reduction to common shares and paid-in capital, respectively, and a corresponding $206 million reduction in treasury shares.
Basic loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share adjusts basic earnings (loss) per common share, computed using the treasury stock method, for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially dilutive common shares issuable under our equity-based compensation plans where the average market price exceeded the exercise price were 42 million and 33 million shares as of June 30, 2011 and 2010, respectively. All such potentially dilutive shares were antidilutive for the three and six-month periods ended June 30, 2011 and 2010 and, therefore, have no effect on our determination of dilutive weighted average number of shares outstanding.

Note 14.
Segments
Sprint operates two reportable segments: Wireless and Wireline.
Wireless primarily includes retail and wholesale revenue from a wide array of wireless mobile telephone and wireless data transmission services and the sale of wireless devices and accessories in the U.S., Puerto Rico and the U.S. Virgin Islands.
Wireline primarily includes revenue from domestic and international wireline voice and data communication services, including services to the cable multiple systems operators that resell our local and long distance service and use our back office systems and network assets in support of their telephone services provided over cable facilities.
We define segment earnings as wireless or wireline operating (loss) income before other segment expenses such as depreciation, amortization, severance, exit costs, goodwill and asset impairments, and merger and integration expenses solely and directly attributable to the segment. Expenses and income items excluded from segment earnings are managed at the corporate level. Transactions between segments are generally accounted for based on market rates which we believe approximate fair value. The Company generally re-establishes these rates at the beginning of each fiscal year. Over the past several years, there has been an industry-wide trend of lower rates due to increased competition from other wireline and wireless communications companies as well as cable and internet service providers.

16





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Segment financial information is as follows:  
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Three Months Ended June 30, 2011
 
 
 
 
 
 
 
Net operating revenues
$
7,452

 
$
857

 
$
2

 
$
8,311

Inter-segment revenues(1) 

 
233

 
(233
)
 

Total segment operating expenses
(6,350
)
 
(880
)
 
233

 
(6,997
)
Segment earnings
$
1,102

 
$
210

 
$
2

 
1,314

Less:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
(1,235
)
Other, net
 
 
 
 
 
 

Operating income
 
 
 
 
 
 
79

Interest expense
 
 
 
 
 
 
(239
)
Equity in losses of unconsolidated
investments and other, net
 
 
 
 
$
(588
)
 
(588
)
Loss before income taxes
 
 
 
 
 
 
$
(748
)
 
 
 
 
 
 
 
 
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Three Months Ended June 30, 2010
 
 
 
 
 
 
 
Net operating revenues
$
7,014

 
$
1,010

 
$
1

 
$
8,025

Inter-segment revenues(1) 

 
262

 
(262
)
 

Total segment operating expenses
(5,790
)
 
(999
)
 
265

 
(6,524
)
Segment earnings
$
1,224

 
$
273

 
$
4

 
1,501

Less:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
(1,635
)
Other, net(2)
 
 
 
 
 
 
71

Operating loss
 
 
 
 
 
 
(63
)
Interest expense
 
 
 
 
 
 
(381
)
Equity in losses of unconsolidated
investments and other, net
 
 
 
 
$
(269
)
 
(269
)
Loss before income taxes
 
 
 
 
 
 
$
(713
)
 
 
 
 
 
 
 
 


17





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Six Months Ended June 30, 2011
 
 
 
 
 
 
 
Net operating revenues
$
14,865

 
$
1,755

 
$
4

 
$
16,624

Inter-segment revenues(1) 

 
455

 
(455
)
 

Total segment operating expenses
(12,480
)
 
(1,772
)
 
456

 
(13,796
)
Segment earnings
$
2,385

 
$
438

 
$
5

 
2,828

Less:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
(2,490
)
Other, net
 
 
 
 
 
 

Operating income
 
 
 
 
 
 
338

Interest expense
 
 
 
 
 
 
(488
)
Equity in losses of unconsolidated
investments and other, net
 
 
 
 
$
(1,000
)
 
(1,000
)
Loss before income taxes
 
 
 
 
 
 
$
(1,150
)
 
 
 
 
 
 
 
 
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Six Months Ended June 30, 2010
 
 
 
 
 
 
 
Net operating revenues
$
14,062

 
$
2,045

 
$
3

 
$
16,110

Inter-segment revenues(1) 

 
524

 
(524
)
 

Total segment operating expenses
(11,642
)
 
(2,017
)
 
528

 
(13,131
)
Segment earnings
$
2,420

 
$
552

 
$
7

 
2,979

Less:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
(3,310
)
Other, net(2)
 
 
 
 
 
 
88

Operating loss
 
 
 
 
 
 
(243
)
Interest expense
 
 
 
 
 
 
(753
)
Equity in losses of unconsolidated
investments and other, net
 
 
 
 
$
(511
)
 
(511
)
Loss before income taxes
 
 
 
 
 
 
$
(1,507
)
 
 
 
 
 
 
 
 
Other Information
Wireless
 
Wireline
 
Corporate and
Other
 
Consolidated
 
(in millions)
Capital expenditures for the six months ended June 30, 2011
$
1,187

 
$
99

 
$
117

 
$
1,403

Capital expenditures for the six months ended June 30, 2010
$
699

 
$
106

 
$
117

 
$
922

 _________________
(1)    Inter-segment revenues consist primarily of wireline services provided to the Wireless segment for resale to or use by wireless subscribers.
(2)    Other, net for the three and six-month periods ended June 30, 2010 consists primarily of severance and exit costs offset by a benefit relating to access cost disputes associated with prior periods.

18





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Operating Revenues by Service and Products
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Three Months Ended June 30, 2011
 
 
 
 
 
 
 
Wireless services
$
6,708

 
$

 
$

 
$
6,708

Wireless equipment
690

 

 

 
690

Voice

 
480

 
(156
)
 
324

Data

 
117

 
(43
)
 
74

Internet

 
475

 
(35
)
 
440

Other
54

 
18

 
3

 
75

Total net operating revenues
$
7,452

 
$
1,090

 
$
(231
)
 
$
8,311

 
 
 
 
 
 
 
 
 
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Three Months Ended June 30, 2010
 
 
 
 
 
 
 
Wireless services
$
6,397

 
$

 
$

 
$
6,397

Wireless equipment
566

 

 

 
566

Voice

 
568

 
(175
)
 
393

Data

 
133

 
(36
)
 
97

Internet

 
552

 
(52
)
 
500

Other
51

 
19

 
2

 
72

Total net operating revenues
$
7,014

 
$
1,272

 
$
(261
)
 
$
8,025

 
 
 
 
 
 
 
 
 
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Six Months Ended June 30, 2011
 
 
 
 
 
 
 
Wireless services
$
13,357

 
$

 
$

 
$
13,357

Wireless equipment
1,385

 

 

 
1,385

Voice

 
966

 
(309
)
 
657

Data

 
233

 
(80
)
 
153

Internet

 
972

 
(67
)
 
905

Other
123

 
39

 
5

 
167

Total net operating revenues
$
14,865

 
$
2,210

 
$
(451
)
 
$
16,624

 
 
 
 
 
 
 
 
 
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Six Months Ended June 30, 2010
 
 
 
 
 
 
 
Wireless services
$
12,829

 
$

 
$

 
$
12,829

Wireless equipment
1,133

 

 

 
1,133

Voice

 
1,153

 
(352
)
 
801

Data

 
271

 
(69
)
 
202

Internet

 
1,105

 
(103
)
 
1,002

Other
100

 
40

 
3

 
143

Total net operating revenues
$
14,062

 
$
2,569

 
$
(521
)
 
$
16,110

_______________
(1)    Revenues eliminated in consolidation consist primarily of wireline services provided to the Wireless segment for resale to or use by wireless subscribers.

19





SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 15.
Subsequent Events

As of June 30, 2011, the carrying value of Sprint's investment in Clearwire of $3.92 per share over Clearwire's closing stock price of $3.78 per share was equivalent to an excess of $75 million. Clearwire's stock price began to decline below its June 30, 2011 closing price subsequent to July 10, 2011 and closed at $2.47 per share as of August 3, 2011, resulting in an excess of the carrying value of Sprint's investment in Clearwire as compared to Clearwire's closing stock price of approximately $771 million. A $.10 change in Clearwire's per share closing stock price is equivalent to a corresponding change in the estimated value of our investment in Clearwire by approximately $53.2 million based on an assumed conversion of 532 million Class B Common Interests. The decline in Clearwire's stock price subsequent to June 30, 2011, did not result in a change to our conclusion regarding the realizability of the carrying value of our investment in Clearwire and certain of our deferred tax assets (see Notes 3 and 9) at June 30, 2011 given the short duration of the severe decline. We do not intend to sell our investment in Clearwire in the forseeable future, and recoverability of our investment is not affected by short-term fluctuations in Clearwire's stock price. However, a sustained decline in the trading price of Clearwire's common stock below our per share carrying value, an element of consideration for recoverability, could result in a determination that our investment in Clearwire may not be recoverable, resulting in a material non-cash impairment in our consolidated financial statements up to the entire amount of our investment, including the note receivable, of $2.3 billion.


20


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW     
Sprint Nextel Corporation, including its subsidiaries, (“Sprint,” “we,” “us,” “our” or the “Company”) is a communications company offering a comprehensive range of wireless and wireline communications products and services that are designed to meet the needs of individual consumers, businesses, government subscribers and resellers. The communications industry has been and will continue to be highly competitive on the basis of price, the types of services and devices offered and the quality of service. As discussed below in “Effects on our Wireless Business of Postpaid Subscriber Losses,” the Company has experienced significant losses of subscribers in the critical postpaid wireless market since the third quarter 2006, but, as a result of steps taken to attract and retain such subscribers, has reduced net subscriber losses beginning in 2009.
Description of the Company
We are the third largest wireless communications company in the United States based on wireless revenue, one of the largest providers of wireline long distance services and one of the largest carriers of Internet traffic in the nation. Our services are provided through our ownership of extensive wireless networks, an all-digital global long distance network and a Tier 1 Internet backbone. We offer wireless and wireline voice and data transmission services to subscribers in all 50 states, Puerto Rico and the U.S. Virgin Islands under the Sprint corporate brand which includes our retail brands of Sprint®, Nextel®, Boost Mobile®, Virgin Mobile® and Assurance Wireless on networks that utilize third generation (3G) code division multiple access (CDMA), national push-to-talk integrated Digital Enhanced Network (iDEN), or Internet protocol (IP) technologies. We also offer fourth generation (4G) services utilizing Worldwide Interoperability for Microwave Access (WiMAX) technology through our mobile virtual network operator (MVNO) wholesale relationship with Clearwire Corporation and its subsidiary Clearwire Communications LLC (together "Clearwire"). Sprint 4G is currently available in 71 markets. We utilize these networks to offer our wireless and wireline subscribers differentiated products and services whether through the use of a single network or a combination of these networks. We offer wireless services on a postpaid and prepaid payment basis to retail subscribers and also on a wholesale and affiliate basis, which includes the sale of wireless services to resellers that utilize the Sprint network but are sold under the wholesaler's brand. We provide a broad suite of wireline voice and data communications services to other communications companies and targeted business and consumer subscribers. In addition, we provide voice, data and IP communication services to our Wireless segment and IP and other services to cable Multiple System Operators (MSOs) that resell our local and long distance services and use our back office systems and network assets in support of their telephone service provided over cable facilities primarily to residential end-user subscribers.
Our business strategy is to be responsive to changing customer mobility demands by being innovative and differentiated in the marketplace. Our future growth plans and strategy revolve around achieving the following three key priorities:
Improve the customer experience;
Strengthen our brands; and
Generate operating cash flow.    
We have reduced confusion over pricing plans and complex bills with our Simply Everything® and Everything Data plans and our Any Mobile AnytimeSM feature. We also offer price plans tailored to business subscribers such as Business Advantage, which allows for the flexibility to mix and match plans that include voice, voice and messaging, or voice, messaging and data to meet individual business needs and also allows the Any Mobile AnytimeSM feature with certain plans. To simplify and improve the customer experience, we introduced the Sprint Free Guarantee, which gives any customer opening a new line of service the chance to try Sprint for 30 days for free (excluding overages and premium services not included in price plans). In addition, we have continued to offer Ready Now, which trains our customers before they leave the store on how to use their mobile devices. For our business customers, we aim to increase their productivity by providing differentiated services that utilize the advantages of combining IP networks with wireless technology. This differentiation enables us to acquire and retain both wireline, wireless and combined wireline-wireless subscribers on our networks. We have also continued to focus on further improving customer care. We implemented initiatives that are designed to improve call center processes and procedures, and standardized our performance measures through various metrics, including customer satisfaction ratings with respect to customer care, first call resolution and calls per subscriber.

21


Our product strategy is to provide our customers with a broad array of device selections and applications and services that run on these devices to meet the growing needs of customer mobility. In June we launched America's first 4G device with a 3D display, the HTC EVO 3D. Our multi-functional device portfolio also includes other 4G devices such as the Nexus S 4G, and the HTC EVO Shift 4G. In addition to 4G phones, our portfolio includes the Kyocera Echo, the first dual-touchscreen Android smartphone, and the Motorola i1, which is the world's first Direct Connect® Android-powered smartphone, as well as the LG Optimus S, the HTC Arriveand the BlackBerry Curve and BlackBerry® Style. Our mobile broadband portfolio consists of devices such as the Sierra Wireless Overdrive Pro 3G/4G Mobile Hotspot, which allows the connection of up to eight WiFi enabled devices and the MiFi® 3G/4G Mobile Hotspot by Novatel Wireless, which allows connections of up to five devices. Our networks can also be accessed through our portfolio of tablet and laptop devices such as the new Samsung Galaxy Tab 10.1, BlackBerry® 4G PlayBook, Motorola Xoom and HTC EVO View 4G or the Dell Inspiron11z laptop.
We support the open development of applications, content and devices on our network platforms through services such as Google Voice and the new announced Google Wallet, which is an application using near field communication technology to enable smartphones to make purchases at select merchants. We have also launched several Sprint ID packs that download applications, widgets and other content related to a person's interests at the push of a button. In addition, we enable a variety of business and consumer third-party relationships through our portfolio of machine-to-machine solutions on a postpaid and wholesale basis. The machine-to-machine solutions portfolio provides a secure, real-time and reliable wireless two-way data connection across a broad range of devices including original equipment manufacturer devices and after-market in-vehicle connectivity and Electric Vehicle charging stations, point-of-sale systems, kiosks and vending machines, asset tracking, digital signage, security, Smartgrid/utilities, medical equipment and a variety of other consumer electronics and appliances.
Our prepaid portfolio currently includes multiple brands, each designed to appeal to specific customer segments. Boost Mobile serves customers who are voice and text messaging-centric with its popular $50 Monthly Unlimited plan with Shrinkage service where bills are reduced after six on-time payments. Virgin Mobile serves customers who are device and data-oriented with Beyond Talk plans and our broadband plan, Broadband2Go, that offer consumers control, flexibility and connectivity through various communication vehicles. Assurance Wireless provides eligible customers, who meet income requirements or are receiving government assistance, with a free wireless phone and 250 free minutes of national, local, and long-distance monthly service.
We have focused our wholesale business to enable our diverse network of customers to successfully grow their business by providing them with an array of network, product and device solutions. This allows our customers to customize this full suite of value-added solutions to meet the ever growing demands of their business.
In addition to our brand and customer-oriented goals, we continue to focus on generating increased operating cash flow through competitive rate plans for postpaid and prepaid subscribers, multi-branded strategies and effectively managing our cost structure to align with the reduced revenues from fewer postpaid subscribers. We believe these actions, as well as our ability to stabilize consolidated revenues resulting from our growth in prepaid subscribers and improvements in postpaid subscriber trends, will allow us to continue to maintain an adequate cash position.
Network Vision
In December 2010, we announced Network Vision, a multi-year network infrastructure initiative intended to provide customers with an enhanced network experience by improving voice quality, coverage and data speeds, while enhancing network flexibility, reducing operating costs, and improving environmental sustainability by enabling the aggregation of multiple spectrum bands onto a single multi-mode base station. In addition to implementing these multi-mode base stations, this plan encompasses next-generation push-to-talk technology with broadband capabilities and the integration of multi-mode chipsets into smartphones, tablets and other broadband devices, including machine-to-machine capabilities. Consolidating and optimizing the use of our 800 megahertz (MHz), 1.9 gigahertz (GHz) as well as other spectrum owned by third-parties into multi-mode stations should allow us to repurpose spectrum to enhance coverage, particularly around the in-building experience. The multi-mode technology also utilizes software-based solutions with interchangeable hardware to provide greater network flexibility, which allows for opportunities to evaluate new 4G technologies to better utilize our available spectrum.

22


The first stages of equipment testing began in the first quarter of 2011 and, if successful, deployment is expected to begin in the latter half of 2011 and continue over approximately three years. As Network Vision is implemented, the size and power required to operate the network is expected to be reduced. We expect the plan to bring financial benefit to the Company through convergence to one common network, which is expected to reduce network maintenance and operating costs through capital efficiencies, reduced energy costs, lower roaming expenses, backhaul savings and the eventual reduction in total cell sites by migrating to a single network technology platform and also by reducing the cost of handling expanded data traffic.
We have entered into agreements relating to Network Vision to deploy a cost-effective, innovative network to enhance the voice quality and data speeds by supporting multiple technologies and multiple spectrum bands on one network. The successful testing and deployment related to these changes in technology is expected to result in incremental charges during the period of implementation including, but not limited to, an increase in depreciation and amortization associated with existing assets, primarily associated with iDEN-related assets, due to changes in our estimates of the remaining useful lives of long-lived assets, and the expected timing of asset retirement obligations, which could have a material impact on our consolidated financial statements. As of June 30, 2011, the remaining net carrying value of iDEN-related assets, a component of property, plant and equipment, was approximately $4 billion with a composite estimated useful life of 4.5 years resulting in depreciation expense of approximately $800 million annually. Accordingly, absent additional capital investments or changes in expected remaining useful lives of existing equipment, a substantial portion of iDEN-related assets would be fully depreciated by the end of 2015. Successful completion of Network Vision earlier than the end of 2015 would result in an acceleration of these depreciation and amortization costs. Furthermore, Sprint is experiencing increased usage of data by subscribers, which has required additional capital expenditures of data capacity equipment on our current CDMA network. Once Network Vision is implemented across most markets, certain of this equipment, utilized for current CDMA network technology, may not be able to be used which could result in shorter than normal estimated useful lives resulting in depreciation expense recognized over the shortened period.
Spectrum Hosting
Sprint's Network Vision multi-mode network technology is designed to utilize a single base station capable of handling various spectrum bands, including Sprint's 800 MHz and 1.9 GHz spectrum as well as spectrum bands owned or accessed by other parties. In June 2011, Sprint entered into a 15-year arrangement with LightSquared LP and LightSquared Inc. (collectively, “LightSquared”). Under the terms of the arrangement, and in conjunction with our Network Vision deployment, Sprint agreed to deploy and operate a fourth generation long term evolution (4G LTE) network capable of utilizing the 1.6 GHz spectrum licensed to or available to LightSquared during the term of the arrangement, a service we refer to as “spectrum hosting”. The arrangement contains contingencies related to possible interference issues with LightSquared's spectrum, including the right of Sprint to terminate the arrangement if certain conditions are not met either by September 30, 2011 or December 31, 2011. If Sprint exercises its termination right, only those payments received from LightSquared that have not been contractually earned, including amounts not expended or contractually committed to support hosting services, will be required to be refunded to LightSquared. During the term of the arrangement, Sprint has the right to purchase 50% of expected 4G LTE capacity generated on the 4G LTE network. In the event the arrangement is terminated for LightSquared's material breach, non-payment or insolvency, Sprint maintains a second lien on certain of LightSquared's spectrum related assets.
The spectrum hosting arrangement will allow LightSquared the ability to provide capacity on a 4G LTE network (4G LTE capacity) to their wholesale customers, including Sprint. LightSquared will pay cash and credits (4G LTE credits) to Sprint during both the build-out and operating phases of the arrangement, which are established on a fixed fee per tower basis. Sprint estimates it will receive cash payments from LightSquared totaling approximately $9 billion, as well as 4G LTE credits valued at approximately $4.5 billion, during the estimated period of Sprint's initial performance obligation. Sprint, at its option, can elect to redeem 4G LTE credits to purchase 4G LTE capacity during the term of the arrangement assuming Sprint elects to incorporate 4G LTE as part of its 4G offerings to subscribers. If Sprint expects not to utilize any of LightSquared's 4G LTE capacity, the 4G LTE credits would not be recognized in our consolidated financial statements as they would not represent a future economic benefit to us.

23


The consideration received, cash and 4G LTE credits, will be allocated to each market and revenue recognition will commence upon the activation of each market, which is expected to occur on a staggered basis over a two to three year period. The estimated period of Sprint's initial performance obligation is expected to be approximately eight years for each market based upon the expected timing of a network upgrade and the weighted average estimated useful life of the equipment and related assets used to provide network services. Upon a network upgrade, Sprint expects to replace and or upgrade the underlying equipment used to provide the spectrum hosting services. The initial revenue recognition period for the hosting services is subject to revision based on the expected timing of a network upgrade. In the event Sprint elects, in its sole discretion, to upgrade and/or replace equipment, LightSquared has the ability to either terminate the arrangement for a specified termination fee or continue to purchase spectrum hosting services, which would result in an adjustment to the initial contractual fees designed to reflect market rates for the new equipment cost and for ongoing operation and maintenance related to the delivery of hosting services.
The network equipment purchased by Sprint to service the hosting arrangement will be capitalized and depreciated over the shorter of the asset's useful life or the estimated initial performance period. Our costs to operate and maintain the equipment will be recognized as incurred. Cash payments received and recorded as deferred revenue through this spectrum hosting arrangement totaled $90 million for the second quarter 2011 and an additional $200 million was received in July 2011.
Effects on our Wireless Business of Postpaid Subscriber Losses
As shown by the table below under “Results of Operations,” Wireless segment earnings represents approximately 84% of Sprint's total consolidated segment earnings. The wireless industry is subject to competition to acquire and retain subscribers of wireless services. Most markets in which we operate have high rates of penetration for wireless services. Wireless carriers accordingly must attract a greater proportion of new subscribers from competitors rather than from first time subscribers. Within the Wireless segment, postpaid wireless services represent the most significant contributors to earnings, and are driven by the number of postpaid subscribers to our services, as well as the average revenue per subscriber or user (ARPU).
To address and reduce postpaid subscriber losses, we have taken initiatives to strengthen the Sprint brand and continue to increase market awareness of the improvements that have been achieved in the customer experience, including the speed and dependability of our networks. We have also introduced new devices improving our overall lineup and providing a competitive portfolio for customer selection, as well as competitive new rate plans providing simplicity and value. We believe these actions had a favorable impact on net postpaid subscriber trends, and we expect these to further improve our subscriber results.
The Company has demonstrated significant improvement in net postpaid subscriber results subsequent to the first quarter 2009. Although the Company continues to experience net losses of iDEN postpaid subscribers, these subscribers generally have a lower ARPU and have been partially offset by net additions of CDMA postpaid subscribers which, on average, carry a higher ARPU. The Company expects to continue the trend of net postpaid subscriber losses on the iDEN network as we focus efforts on growth in Sprint-branded subscribers on the CDMA network. In addition, we seek to migrate push-to-talk subscribers on the iDEN network through providing competitive Sprint-branded offerings on the CDMA network. For the three-month period ended June 30, 2011, net postpaid subscriber losses of 101,000 represent an improvement of 127,000, or 56% compared to the same period one year ago and net prepaid subscriber additions of 674,000 represent an improvement of 501,000, or 290% for the same period. For the six-month period ended June 30, 2011, net postpaid subscriber losses of 215,000 represent an improvement of 591,000, or 73% compared to the same period one year ago and net prepaid subscriber additions of 1.5 million represent an improvement of 999,000, or 192% for the same period. As a result, wireless retail service revenue has begun to stabilize primarily due to the increased service revenue associated with our prepaid wireless offerings and increased postpaid ARPU due to premium data add-on fees associated with smartphones. If our trend of improved postpaid subscriber results does not continue, it could have a material negative impact on our financial condition, results of operations and liquidity in 2011 and beyond. The Company believes the actions that have been taken, as described above, and that continue to be taken in marketing, customer service, device offerings, and network quality, should continue to improve net postpaid subscriber results.


24


RESULTS OF OPERATIONS
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
 
(in millions)
Wireless segment earnings
$
1,102

 
$
1,224

 
$
2,385

 
$
2,420

Wireline segment earnings
210

 
273

 
438

 
552

Corporate, other and eliminations
2

 
4

 
5

 
7

Consolidated segment earnings
1,314

 
1,501

 
2,828

 
2,979

Depreciation and amortization
(1,235
)
 
(1,635
)
 
(2,490
)
 
(3,310
)
Other, net

 
71

 

 
88

Operating income (loss)
79

 
(63
)
 
338

 
(243
)
Interest expense
(239
)
 
(381
)
 
(488
)
 
(753
)
Equity in losses of unconsolidated investments and other, net
(588
)
 
(269
)
 
(1,000
)
 
(511
)
Income tax expense
(99
)
 
(47
)
 
(136
)
 
(118
)
Net loss
$
(847
)
 
$
(760
)
 
$
(1,286
)
 
$
(1,625
)
Consolidated segment earnings decreased $187 million, or 12%, and $151 million, or 5%, in the three and six-month periods ended June 30, 2011 as compared to the same periods in 2010. Consolidated segment earnings consist of our Wireless and Wireline segments, which are discussed below, and Corporate, other and eliminations.
Depreciation and Amortization Expense
During the first quarter 2011, Sprint completed its annual study of estimated useful lives of depreciable assets, which reflects a reduction in the replacement rate of capital additions and was a primary factor for a decrease to depreciation expense of $140 million, or 11%, and $293 million, or 12%, in the three and six-month periods ended June 30, 2011 compared to the same periods in 2010. As a result of expected increased capital expenditures related to Network Vision, we expect depreciation expense to begin to increase over the next several years as those assets are placed into service. Amortization expense declined $260 million, or 70%, and $527 million, or 68%, in the three and six-month periods ended June 30, 2011 as compared to the same periods in 2010, primarily due to the absence of amortization for customer relationship intangible assets related to the 2005 acquisition of Nextel which became fully amortized in the second quarter 2010. Customer relationships are amortized using the sum-of-the-years'-digits method, resulting in higher amortization rates in early periods that decline over time.
Other, net
Other, net recognized for the three and six-month periods ended June 30, 2010 consisted of a benefit resulting from favorable developments relating to access cost disputes with certain exchange carriers slightly offset by severance and exit costs primarily related to exit costs incurred as a result of vacating certain office space that was no longer utilized.
Interest Expense
Interest expense decreased $142 million, or 37%, and $265 million, or 35%, in the three and six-month periods ended June 30, 2011 as compared to the same periods in 2010, primarily due to a $98 million and $194 million increase, respectively, in the amount of interest capitalized. The increase in capitalized interest is related to our plan to deploy certain spectrum licenses as part of Network Vision that were not previously utilized. We expect full year capitalized interest related to these spectrum licenses to be approximately $400 million. The reduction in interest expense also includes decreases of $31 million and $52 million in the three and six-month periods ended June 30, 2011 as a result of the repayment of $1.65 billion of Sprint Capital Corporation 7.625% senior notes in January 2011. The effective interest rate on the weighted average long-term debt balance of $18.5 billion and $20.9 billion was 7.2% and 7.3% for the three-month periods ended June 30, 2011 and 2010, respectively. The effective interest rate on the weighted average long-term debt balance of $18.8 billion and $20.9 billion was 7.2% for both the six-month periods ended June 30, 2011 and 2010, respectively. See “Liquidity and Capital Resources” for more information on the Company's financing activities.

25


Equity in Losses of Unconsolidated Investments and Other, net
This item consists mainly of our proportionate share of losses from our equity method investments and also includes other miscellaneous income/(expense). Equity losses associated with the investment in Clearwire consists of Sprint's share of Clearwire's net loss and other adjustments such as gains or losses associated with the dilution of Sprint's ownership interest resulting from Clearwire's equity issuances. Equity in losses from Clearwire were $594 million and $300 million for the three-month periods ended June 30, 2011 and 2010, and $1.0 billion and $550 million for the six-month periods ended June 30, 2011 and 2010, respectively. Sprint's equity in losses from Clearwire include charges of approximately $202 million and $294 million for the three and six-month periods ended June 30, 2011,which are associated with Clearwire's abandonment of network and other assets that no longer meet their strategic plans.
Clearwire owns and operates a next generation mobile broadband network that provides high-speed residential and mobile Internet access services and residential voice services in communities throughout the country. Clearwire is an early stage company, and as such, has heavily invested in building its network and acquiring other assets necessary to expand the business during 2009 and 2010, which has resulted in increased operating losses and reduced liquidity. We expect Clearwire to continue to generate net losses in the near term as it executes its business plan. Our intent to hold our investment in Clearwire is based, in part, on our growing subscriber base of 4G subscribers that utilize Clearwire's network. However, a sustained decline in the trading price of Clearwire's common stock below our per share carrying value, an element of consideration for recoverability, could result in a determination that our investment in Clearwire may not be recoverable, resulting in a material non-cash impairment in our consolidated financial statements up to the entire amount of our investment, including the note receivable, of $2.3 billion.
Income Tax Expense
The consolidated effective tax rate was an expense of approximately 12% and 8% during each of the six-month periods ended June 30, 2011 and 2010, respectively. The income tax expense for the six-month periods ended June 30, 2011 and 2010 includes a $533 million and $667 million net increase to the valuation allowance for federal and state deferred tax assets primarily related to net operating loss carryforwards generated during the respective periods. The 2011 increase to the valuation allowance is also inclusive of $19 million associated with federal income tax effects of recently enacted changes in Michigan's corporate state income tax laws, which occurred in the second quarter, and resulted in a total charge to income tax expense of $52 million. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits. Additional information related to items impacting the effective tax rates can be found in the Notes to the Consolidated Financial Statements.

Segment Earnings - Wireless
Wireless segment earnings are primarily a function of wireless service revenue, costs to acquire subscribers, network and interconnection costs to serve those subscribers and other Wireless segment operating expenses. Our Wireless segment generates revenues from the sale of wireless services, the sale of wireless devices and accessories and the sale of wholesale and other services. The costs to acquire our subscribers include the net cost at which we sell our devices, referred to as equipment net subsidy, as well as the marketing and sales costs incurred to attract those subscribers. Network costs primarily represent switch and cell site costs and interconnection costs, which generally consist of per-minute usage fees and roaming fees paid to other carriers. The remaining costs associated with operating the Wireless segment include the costs to operate our customer care organization and administrative support. Wireless service revenue, costs to acquire subscribers, and variable network and interconnection costs fluctuate with the changes in our subscriber base and their related usage, but some cost elements do not fluctuate in the short term with these changes.

26


The following table provides an overview of the results of operations of our Wireless segment for the three and six-month periods ended June 30, 2011 and 2010.
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Wireless Earnings
2011
 
2010
 
2011
 
2010
 
(in millions)
Postpaid
$
5,594

 
$
5,469

 
$
11,165

 
$
11,008

Prepaid
1,114

 
928

 
2,192

 
1,821

Retail service revenue
6,708

 
6,397

 
13,357

 
12,829

Wholesale, affiliate and other revenue
54

 
51

 
123

 
100

Total service revenue
6,762

 
6,448

 
13,480

 
12,929

Cost of services (exclusive of depreciation and amortization)
(2,237
)
 
(2,066
)
 
(4,284
)
 
(4,113
)
Service gross margin
4,525

 
4,382

 
9,196

 
8,816

Service gross margin percentage
67
 %
 
68
 %
 
68
 %
 
68
 %
Equipment revenue
690

 
566

 
1,385

 
1,133

Cost of products
(1,838
)
 
(1,580
)
 
(3,650
)
 
(3,146
)
Equipment net subsidy
(1,148
)
 
(1,014
)
 
(2,265
)
 
(2,013
)
Equipment net subsidy percentage
(166
)%
 
(179
)%
 
(164
)%
 
(178
)%
Selling, general and administrative expense
(2,275
)
 
(2,144
)
 
(4,546
)
 
(4,383
)
Wireless segment earnings
$
1,102

 
$
1,224

 
$
2,385

 
$
2,420

Service Revenue
Service revenue consists of fixed monthly recurring charges, variable usage charges and miscellaneous fees such as activation fees, directory assistance, roaming, equipment protection, late payment and early termination charges and certain regulatory related fees, net of service credits. The ability of our Wireless segment to generate service revenues is primarily a function of:
revenue generated from each subscriber, which in turn is a function of the types and amount of services utilized by each subscriber and the rates charged for those services; and
the number of subscribers that we serve, which in turn is a function of our ability to acquire new and retain existing subscribers.
Retail comprises those subscribers to whom Sprint directly provides wireless services, whether those services are provided on a postpaid or a prepaid basis. Retail service revenue increased $311 million, or 5%, and $528 million, or 4%, for the three and six-month periods ended as compared to the same periods in 2010. The increase in retail service revenue was driven by attracting more subscribers to our Boost and Virgin Mobile prepaid brands who are choosing higher rate plans to take advantage of international offerings as well as the increased availability of smartphones in addition to increased subscribers from new market launches for our Assurance Wireless brand. In addition, an increase in postpaid service revenue reflects an increase related to our premium data add-on required for all smartphones and greater popularity of unlimited and bundled plans, which was partially offset by a decrease in overage charges on voice and data.
Wholesale and affiliates are those subscribers who are served through 3G MVNO and affiliate relationships and other arrangements through which wireless services are sold by Sprint to other companies that resell those services to subscribers. Wholesale, affiliate and other revenues increased $3 million, or 6%, and $23 million, or 23%, for the three and six-month periods ended as compared to the same periods in 2010 primarily as a result of growth in our 3G MVNO relationships. Approximately 35% of our wholesale and affiliate subscribers represent a growing number of devices that utilize our network through our machine-to-machine solutions. These devices generate revenue from usage which varies depending on the solution being utilized. Average revenue per subscriber for machine-to-machine solutions is generally significantly lower than revenue from other wholesale and affiliate subscribers; however, the cost to service these customers is also lower resulting in a higher profit margin as a percent of revenue.

27


Average Monthly Service Revenue per Subscriber and Subscriber Trends
The table below summarizes average number of retail subscribers and average revenue per subscriber for the three and six-month periods ended June 30, 2011 and 2010. Additional information about the number of subscribers, net additions to subscribers, ARPU and average rates of monthly postpaid and prepaid customer churn for each quarter since the first quarter 2010 may be found in the table on the following page.
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
 
(subscribers in thousands)
 
(subscribers in thousands)
Average postpaid subscribers(1) 
32,907

 
33,233

 
32,981

 
33,435

Average prepaid subscribers(1) 
13,482

 
11,053

 
13,070

 
10,945

ARPU(2):
 
 
 
 
 
 
 
Postpaid
$
57

 
$
55

 
$
56

 
$
55

Prepaid
28

 
28

 
28

 
28

Average retail
48

 
48

 
48

 
48

 
_______________
(1)    Average prepaid subscribers for the three and six-month periods ended June 30, 2011 are exclusive of 49,000 subscribers transferred to wholesale and affiliates as a result of a sale and transfer of customers to an affiliate in the third quarter 2010.
(2)    ARPU is calculated by dividing service revenue by the sum of the average number of subscribers. Changes in average monthly service revenue reflect subscribers who change rate plans, the level of voice and data usage, the amount of service credits which are offered to subscribers, plus the net effect of average monthly revenue generated by new subscribers and deactivating subscribers. 
Postpaid ARPU for the three and six-month periods ended June 30, 2011 increased as compared to the same periods in 2010 primarily due to increased revenues for premium data add-ons and greater popularity of unlimited and bundled plans, partially offset by decreases in overage charges on voice and data. Prepaid ARPU for the three and six-month periods ended June 30, 2011 remained flat compared to the same periods in 2010. Although prepaid ARPU decreased as a result of the net additions of our Assurance Wireless brand whose subscribers carry a lower ARPU, this decrease was offset by an increase in ARPU for the remaining prepaid brands as subscribers are choosing higher priced plans to take advantage of international offerings and the increased availability of smartphones.

28


The following table shows (a) net additions (losses) of wireless subscribers for each quarter beginning with the first quarter 2010, (b) our total subscribers as of the end of each quarterly period, (c) our average monthly postpaid and prepaid service revenue per subscriber and (d) our average rates of monthly postpaid and prepaid customer churn.
 
 
March 31,
2010
 
June 30,
2010
 
September 30,
2010
 
December 31,
2010
 
March 31,
2011
 
June 30,
2011
Net additions (losses) (in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid(1):
 
 
 
 
 
 
 
 
 
 
 
 
iDEN
 
(447
)
 
(364
)
 
(383
)
 
(395
)
 
(367
)
 
(327
)
CDMA(2)
 
(131
)
 
136

 
276

 
453

 
253

 
226

Total retail postpaid
 
(578
)
 
(228
)
 
(107
)
 
58

 
(114
)
 
(101
)
Prepaid:
 
 
 
 
 
 
 
 
 
 
 
 
iDEN
 
(44
)
 
(465
)
 
(700
)
 
(768
)
 
(560
)
 
(475
)
CDMA
 
392

 
638

 
1,171

 
1,414

 
1,406

 
1,149

Total retail prepaid
 
348

 
173

 
471

 
646

 
846

 
674

Wholesale and affiliates
 
155

 
166

 
280

 
393

 
389

 
519

Total Wireless
 
(75
)