10-Q 1 tmus03312017form10-q.htm TMUS FORM 10-Q Document


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 March 31, 2017
or
¨
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: 1-33409
tmuslogo.jpg
T-MOBILE US, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
 
20-0836269
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
12920 SE 38th Street, Bellevue, Washington
 
98006-1350
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(425) 378-4000
(Registrant’s telephone number, including area code)

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 ¨
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 ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.

Large accelerated filer     x                        Accelerated filer             ¨
Non-accelerated filer     ¨ (Do not check if a smaller reporting company)    Smaller reporting company     ¨
Emerging growth company    ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Shares Outstanding as of April 19, 2017

Common Stock, $0.00001 par value per share
 
830,835,887




T-Mobile US, Inc.
Form 10-Q
For the Quarter Ended March 31, 2017





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
T-Mobile US, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except share and per share amounts)
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
7,501

 
$
5,500

Accounts receivable, net of allowances of $100 and $102
1,851

 
1,896

Equipment installment plan receivables, net
1,880

 
1,930

Accounts receivable from affiliates
37

 
40

Inventories
1,021

 
1,111

Asset purchase deposit
2,203

 
2,203

Other current assets
1,406

 
1,537

Total current assets
15,899

 
14,217

Property and equipment, net
21,235

 
20,943

Goodwill
1,683

 
1,683

Spectrum licenses
27,150

 
27,014

Other intangible assets, net
338

 
376

Equipment installment plan receivables due after one year, net
975

 
984

Other assets
768

 
674

Total assets
$
68,048

 
$
65,891

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities
$
6,160

 
$
7,152

Payables to affiliates
256

 
125

Short-term debt
7,542

 
354

Deferred revenue
934

 
986

Other current liabilities
393

 
405

Total current liabilities
15,285

 
9,022

Long-term debt
13,105

 
21,832

Long-term debt to affiliates
9,600

 
5,600

Tower obligations
2,614

 
2,621

Deferred tax liabilities
4,842

 
4,938

Deferred rent expense
2,635

 
2,616

Other long-term liabilities
1,004

 
1,026

Total long-term liabilities
33,800

 
38,633

Commitments and contingencies (Note 9)


 


Stockholders' equity
 
 
 
5.50% Mandatory Convertible Preferred Stock Series A, par value $0.00001 per share, 100,000,000 shares authorized; 20,000,000 and 20,000,000 shares issued and outstanding; $1,000 and $1,000 aggregate liquidation value

 

Common Stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 832,259,647 and 827,768,818 shares issued, 830,804,268 and 826,357,331 shares outstanding

 

Additional paid-in capital
38,877

 
38,846

Treasury stock, at cost, 1,455,379 and 1,411,487 shares issued
(4
)
 
(1
)
Accumulated other comprehensive income
2

 
1

Accumulated deficit
(19,912
)
 
(20,610
)
Total stockholders' equity
18,963

 
18,236

Total liabilities and stockholders' equity
$
68,048

 
$
65,891


The accompanying notes are an integral part of these condensed consolidated financial statements.

3


T-Mobile US, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
(in millions, except share and per share amounts)
 
 
(As Adjusted - See Note 1)
Revenues
 
 
 
Branded postpaid revenues
$
4,725

 
$
4,302

Branded prepaid revenues
2,299

 
2,025

Wholesale revenues
270

 
200

Roaming and other service revenues
35

 
51

Total service revenues
7,329

 
6,578

Equipment revenues
2,043

 
1,851

Other revenues
241

 
235

Total revenues
9,613

 
8,664

Operating expenses
 
 
 
Cost of services, exclusive of depreciation and amortization shown separately below
1,408

 
1,421

Cost of equipment sales
2,686

 
2,374

Selling, general and administrative
2,955

 
2,749

Depreciation and amortization
1,564

 
1,552

Cost of MetroPCS business combination

 
36

Gains on disposal of spectrum licenses
(37
)
 
(636
)
Total operating expenses
8,576

 
7,496

Operating income
1,037

 
1,168

Other income (expense)
 
 
 
Interest expense
(339
)
 
(339
)
Interest expense to affiliates
(100
)
 
(79
)
Interest income
7

 
3

Other income (expense), net
2

 
(2
)
Total other expense, net
(430
)
 
(417
)
Income before income taxes
607

 
751

Income tax benefit (expense)
91

 
(272
)
Net income
698

 
479

Dividends on preferred stock
(14
)
 
(14
)
Net income attributable to common stockholders
$
684

 
$
465

 
 
 
 
Net income
$
698

 
$
479

Other comprehensive income (loss), net of tax
 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax effect of $1 and $(2)
1

 
(3
)
Other comprehensive income (loss)
1

 
(3
)
Total comprehensive income
$
699

 
$
476

Earnings per share
 
 
 
Basic
$
0.83

 
$
0.57

Diluted
$
0.80

 
$
0.56

Weighted average shares outstanding
 
 
 
Basic
827,723,034

 
819,431,761

Diluted
869,395,250

 
859,382,827


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


T-Mobile US, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
(in millions)
2017
 
2016
Operating activities
 
 
 
Net income
$
698

 
$
479

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
1,564

 
1,552

Stock-based compensation expense
67

 
52

Deferred income tax expense (benefit)
(97
)
 
264

Bad debt expense
93

 
121

Losses from sales of receivables
95

 
52

Deferred rent expense
20

 
32

Gains on disposal of spectrum licenses
(37
)
 
(636
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable
(68
)
 
(202
)
Equipment installment plan receivables
(13
)
 
109

Inventories
44

 
(801
)
Deferred purchase price from sales of receivables
(19
)
 
21

Other current and long-term assets
(11
)
 
185

Accounts payable and accrued liabilities
(651
)
 
(492
)
Other current and long-term liabilities
45

 
288

Other, net
(17
)
 
1

Net cash provided by operating activities
1,713

 
1,025

Investing activities
 
 
 
Purchases of property and equipment, including capitalized interest of $48 and $36
(1,528
)
 
(1,335
)
Purchases of spectrum licenses and other intangible assets, including deposits
(14
)
 
(594
)
Sales of short-term investments

 
75

Other, net
(8
)
 
(6
)
Net cash used in investing activities
(1,550
)
 
(1,860
)
Financing activities
 
 
 
Proceeds from issuance of long-term debt
5,495

 

Repayments of capital lease obligations
(90
)
 
(36
)
Repayments of long-term debt
(3,480
)
 
(5
)
Tax withholdings on share-based awards
(92
)
 
(46
)
Dividends on preferred stock
(14
)
 
(14
)
Other, net
19

 
1

Net cash provided by (used in) financing activities
1,838

 
(100
)
Change in cash and cash equivalents
2,001

 
(935
)
Cash and cash equivalents
 
 
 
Beginning of period
5,500

 
4,582

End of period
$
7,501

 
$
3,647

Supplemental disclosure of cash flow information
 
 
 
Interest payments, net of amounts capitalized
$
495

 
$
415

Income tax payments
15

 
2

Noncash investing and financing activities
 
 
 
Decrease in accounts payable for purchases of property and equipment
(325
)
 
(127
)
Leased devices transferred from inventory to property and equipment
243

 
784

Returned leased devices transferred from property and equipment to inventory
(197
)
 
(131
)
Issuance of short-term debt for financing of property and equipment
288

 
150

Assets acquired under capital lease obligations
284

 
124


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


T-Mobile US, Inc.
Index for Notes to the Condensed Consolidated Financial Statements



6


T-Mobile US, Inc.
Notes to the Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited condensed consolidated financial statements of T-Mobile US, Inc. (“T-Mobile,” “we,” “our,” “us” or the “Company”) include all adjustments of a normal recurring nature necessary for the fair presentation of the results for the interim periods presented. The results for the interim periods are not necessarily indicative of those for the full year. The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

The condensed consolidated financial statements include the balances and results of operations of T-Mobile and our consolidated subsidiaries. We consolidate majority-owned subsidiaries over which we exercise control, as well as variable interest entities (“VIE”) where we are deemed to be the primary beneficiary and VIEs which cannot be deconsolidated, such as those related to Tower obligations. Intercompany transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires our management to make estimates and assumptions which affect the financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which our management believes are reasonable under the circumstances. These estimates are inherently subject to judgment and actual results could differ from those estimates.

Change in Accounting Principle

Effective January 1, 2017, the imputed discount on Equipment Installment Plan (“EIP”) receivables, which is amortized over the financed installment term using the effective interest method, and was previously presented within Interest income in our Condensed Consolidated Statements of Comprehensive Income, is now presented within Other revenues in our Condensed Consolidated Statements of Comprehensive Income. We believe this presentation is preferable because it provides a better representation of amounts earned from our major ongoing operations and aligns with industry practice thereby enhancing comparability. We have applied this change retrospectively and presented the effect on the three months ended March 31, 2017 and 2016, in the table below:
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
(in millions)
Unadjusted
 
Change in accounting principle
 
As adjusted
 
As filed
 
Change in accounting principle
 
As adjusted
Other revenues
$
179

 
$
62

 
$
241

 
$
170

 
$
65

 
$
235

Total revenues
9,551

 
62

 
9,613

 
8,599

 
65

 
8,664

Operating income
975

 
62

 
1,037

 
1,103

 
65

 
1,168

Interest income
69

 
(62
)
 
7

 
68

 
(65
)
 
3

Total other expense, net
(368
)
 
(62
)
 
(430
)
 
(352
)
 
(65
)
 
(417
)
Net income
698

 

 
698

 
479

 

 
479


The change in accounting principle did not have an impact on basic or diluted earnings per share for the three months ended March 31, 2017 and 2016 or Accumulated deficit as of March 31, 2017 or December 31, 2016.

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), and has since modified the standard with several ASU’s.

The standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.

We plan to adopt the standard when it becomes effective for us beginning January 1, 2018.

The guidance permits two methods of adoption, the full retrospective method applying the standard to each prior reporting period presented, or the modified retrospective method with a cumulative effect of initially applying the guidance recognized at

7


the date of initial application. The standard also allows entities to apply certain practical expedients at their discretion. We currently anticipate adopting the standard using the modified retrospective method with a cumulative catch up adjustment and providing additional disclosures comparing results to previous rules.

We continue to evaluate the impact of the new standard but anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impacts may include the following items:

Whether our EIP contracts contain a significant financing component, which is similar to our current practice of imputing interest, and would similarly impact the amount of revenue recognized at the time of an EIP sale and whether or not a portion of the revenue is recognized as interest and included in other revenues, rather than equipment revenues.
As we currently expense contract acquisition costs, we believe that the requirement to defer incremental contract acquisition costs and recognize them over the term of the initial contract and anticipated renewal contracts to which the costs relate will have a significant impact to our consolidated financial statements.
Whether bill credits earned over time result in extended service contracts, which would impact the allocation and timing of revenue recognition between service revenue and equipment revenue.
Overall, with the exception of the aforementioned impacts, we do not expect that the new standard will result in a substantive change to the method of allocation of contract revenues between various services and equipment, nor to the timing of when revenues are recognized for most of our service contracts.

We are still in the process of evaluating these impacts, and our initial assessment may change as we continue to refine our systems, processes and assumptions.

We are in the process of implementing significant new revenue accounting systems, processes and internal controls over revenue recognition which will ultimately assist us in the application of the new standard.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard requires all lessees to report a right-of-use asset and a lease liability for most leases. The income statement recognition is similar to existing lease accounting and is based on lease classification. The standard requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. We are currently evaluating the standard, which will require recognizing and measuring leases at the beginning of the earliest period presented using a modified retrospective approach. We plan to adopt the standard when it becomes effective for us beginning January 1, 2019 and expect adoption of the standard will result in the recognition of right to use assets and liabilities that have not previously been recorded, which will have a material impact on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The standard will become effective for us beginning January 1, 2020, and will require a cumulative-effect adjustment to Accumulated deficit as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). Early adoption is permitted for us as of January 1, 2019. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements and the timing of adoption.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard is intended to reduce current diversity in practice and provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard will become effective for us beginning January 1, 2018, and will require a retrospective approach. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the timing of adoption. The standard will impact the presentation of cash flows related to beneficial interests in securitization, which is the deferred purchase price, resulting in a reclassification of cash inflows classified as Operating activities to Investing activities of approximately $1.0 billion and $900 million for the three months ended March 31, 2017 and March 31, 2016, respectively, in our condensed consolidated statement of cash flows.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory,

8


be recognized when the transfer occurs. The standard will become effective for us beginning January 1, 2018 and will require any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. Early adoption is permitted. We are currently evaluating the standard, but expect that it will not have a material impact on our condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The standard requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU does not define the terms “restricted cash” and “restricted cash equivalents.” The standard will be effective for us beginning January 1, 2018 and will require a retrospective approach. Early adoption is permitted. We are currently evaluating the standard, but expect that it will not have a material impact on our condensed consolidated financial statements. 

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (“the Step 2 test”) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The standard will become effective for us beginning January 1, 2020 and must be applied to any annual or interim goodwill impairment assessments after that date. Early adoption is permitted. We are currently evaluating the standard and timing of adoption, but expect that it will not have a material impact on our condensed consolidated financial statements.

Note 2 – Equipment Installment Plan Receivables

We offer certain retail customers the option to pay for their devices and accessories in installments over a period of up to 24 months using an EIP.

The following table summarizes the EIP receivables:
(in millions)
March 31,
2017
 
December 31,
2016
EIP receivables, gross
$
3,159

 
$
3,230

Unamortized imputed discount
(202
)
 
(195
)
EIP receivables, net of unamortized imputed discount
2,957

 
3,035

Allowance for credit losses
(102
)
 
(121
)
EIP receivables, net
$
2,855

 
$
2,914


 
 
 
Classified on the balance sheet as:
 
 
 
Equipment installment plan receivables, net
$
1,880

 
$
1,930

Equipment installment plan receivables due after one year, net
975

 
984

EIP receivables, net
$
2,855

 
$
2,914


We use a proprietary credit scoring model that measures the credit quality of a customer at the time of application for mobile communications service using several factors, such as credit bureau information, consumer credit risk scores and service plan characteristics. Based upon customer credit profiles, we classify EIP receivables into the credit categories of “Prime” and “Subprime.” Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. Subprime customers may be required to make a down payment on their equipment purchases. In addition, certain customers within the Subprime category are required to pay an advance deposit.

EIP receivables for which invoices have not yet been generated for the customer are classified as Unbilled. EIP receivables for which invoices have been generated but which are not past the contractual due date are classified as Billed – Current. EIP receivables for which invoices have been generated and the payment is past the contractual due date are classified as Billed – Past Due.


9


The balance and aging of the EIP receivables on a gross basis by credit category were as follows:
 
March 31, 2017
 
December 31, 2016
(in millions)
Prime
 
Subprime
 
Total
 
Prime
 
Subprime
 
Total
Unbilled
$
1,274

 
$
1,694

 
$
2,968

 
$
1,343

 
$
1,686

 
$
3,029

Billed – Current
49

 
76

 
125

 
51

 
77

 
128

Billed – Past Due
24

 
42

 
66

 
25

 
48

 
73

EIP receivables, gross
$
1,347

 
$
1,812

 
$
3,159

 
$
1,419

 
$
1,811

 
$
3,230


Activity for the three months ended March 31, 2017 and 2016, in the unamortized imputed discount and allowance for credit losses balances for the EIP receivables was as follows:
(in millions)
March 31,
2017
 
March 31,
2016
Imputed discount and allowance for credit losses, beginning of period
$
316

 
$
333

Bad debt expense
56

 
62

Write-offs, net of recoveries
(75
)
 
(81
)
Change in imputed discount on short-term and long-term EIP receivables
48

 
28

Impacts from sales of EIP receivables
(41
)
 
(19
)
Imputed discount and allowance for credit losses, end of period
$
304

 
$
323


The EIP receivables had weighted average effective imputed interest rates of 9.4% and 9.0% as of March 31, 2017 and
December 31, 2016, respectively.

Note 3 – Sales of Certain Receivables

We have entered into transactions to sell certain service and EIP accounts receivables. The transactions, including our continuing involvement with the sold receivables and the respective impacts to our financial statements, are described below.

Sales of Service Receivables

Overview of the Transaction

In 2014, we entered into an arrangement to sell certain service accounts receivables on a revolving basis and in November 2016, the arrangement was amended to increase the maximum funding commitment to $950 million (the “service receivable sale arrangement”) with a scheduled expiration date in March 2018. As of March 31, 2017 and December 31, 2016, the service receivable sale arrangement provided funding of $752 million and $907 million, respectively. Sales of receivables occur daily and are settled on a monthly basis. The receivables consist of service charges currently due from customers and are short-term in nature.

In connection with the service receivable sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity to sell service accounts receivables (the “Service BRE”). The Service BRE does not qualify as a Variable Interest Entity (“VIE”), and due to the significant level of control we exercise over the entity, it is consolidated. Pursuant to the arrangement, certain of our wholly-owned subsidiaries transfer selected receivables to the Service BRE.  The Service BRE then sells the receivables to an unaffiliated entity (the “Service VIE”), which was established to facilitate the sale of beneficial ownership interests in the receivables to certain third parties.

Variable Interest Entity

We determined that the Service VIE qualifies as a VIE as it lacks sufficient equity to finance its activities. We have a variable interest in the Service VIE, but are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the Service VIE’s economic performance. Those activities include committing the Service VIE to legal agreements to purchase or sell assets, selecting which receivables are purchased in the service receivable sale arrangement, determining whether the Service VIE will sell interests in the purchased service receivables to other parties, funding of the entities and servicing of receivables. We do not hold the power to direct the key decisions underlying these activities. For example, while we act as the servicer of the sold receivables, which is considered a significant activity of the Service VIE, we are acting as an agent in our capacity as the servicer and the counterparty to the service receivable sale arrangement has the ability to remove us as the servicing agent of the receivables at will with no recourse available to us. As we have determined we are not the primary beneficiary, the results of the Service VIE are not consolidated into our condensed consolidated financial

10


statements.

The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to our variable interest in the Service VIE:
(in millions)
March 31,
2017
 
December 31,
2016
Other current assets
$
227

 
$
207

Accounts payable and accrued liabilities
38

 
17

Other current liabilities
127

 
129


Sales of EIP Receivables

Overview of the Transaction

In 2015, we entered into an arrangement to sell certain EIP accounts receivables on a revolving basis and in June 2016, the EIP sale arrangement was amended to increase the maximum funding commitment to $1.3 billion (the “EIP sale arrangement”) with a scheduled expiration date in November 2017. As of March 31, 2017 and December 31, 2016, the EIP sale arrangement provided funding of $1.2 billion each period. Sales of EIP receivables occur daily and are settled on a monthly basis. The receivables consist of customer EIP balances, which require monthly customer payments for up to 24 months.

In connection with this EIP sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity (the “EIP BRE”). Pursuant to the EIP sale arrangement, our wholly-owned subsidiary transfers selected receivables to the EIP BRE. The EIP BRE then sells the receivables to a non-consolidated and unaffiliated third-party entity for which we do not exercise any level of control, nor does the entity qualify as a VIE.

Variable Interest Entity

We determined that the EIP BRE is a VIE as its equity investment at risk lacks the obligation to absorb a certain portion of its expected losses. We have a variable interest in the EIP BRE and determined that we are the primary beneficiary based on our ability to direct the activities which most significantly impact the EIP BRE’s economic performance. Those activities include selecting which receivables are transferred into the EIP BRE and sold in the EIP sale arrangement and funding of the EIP BRE. Additionally, our equity interest in the EIP BRE obligates us to absorb losses and gives us the right to receive benefits from the EIP BRE that could potentially be significant to the EIP BRE. Accordingly, we determined that we are the primary beneficiary, and include the balances and results of operations of the EIP BRE in our condensed consolidated financial statements.

The following table summarizes the carrying amounts and classification of assets, which consists primarily the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to the EIP BRE:
(in millions)
March 31,
2017
 
December 31,
2016
Other current assets
$
348

 
$
371

Other assets
104

 
83

Other long-term liabilities
3

 
4


In addition, the EIP BRE is a separate legal entity with its own separate creditors who will be entitled, prior to any liquidation of the EIP BRE, to be satisfied prior to any value in the EIP BRE becoming available to us. Accordingly, the assets of the EIP BRE may not be used to settle our general obligations and creditors of the EIP BRE have limited recourse to our general credit.

Sales of Receivables

The transfers of service receivables and EIP receivables to the non-consolidated entities are accounted for as sales of financial assets. Once identified for sale, the receivable is recorded at the lower of cost or fair value. Upon sale, we derecognize the net carrying amount of the receivables. We recognize the net cash proceeds in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

The proceeds are net of the deferred purchase price, consisting of a receivable from the purchasers that entitles us to certain collections on the receivables. We recognize the collection of the deferred purchase price in Net cash provided by operating

11


activities as it is dependent on collection of the customer receivables and is not subject to significant interest rate risk. The deferred purchase price represents a financial asset that is primarily tied to the creditworthiness of the customers and which can be settled in such a way that we may not recover substantially all of our recorded investment, due to default by the customers on the underlying receivables. We elected, at inception, to measure the deferred purchase price at fair value with changes in fair value included in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income. The fair value of the deferred purchase price is determined based on a discounted cash flow model which uses primarily unobservable inputs (Level 3 inputs), including customer default rates. As of March 31, 2017 and December 31, 2016, our deferred purchase price related to the sales of service receivables and EIP receivables was $678 million and $659 million, respectively.

The following table summarizes the impacts of the sale of certain service receivables and EIP receivables in our Condensed Consolidated Balance Sheets:
(in millions)
March 31,
2017
 
December 31,
2016
Derecognized net service receivables and EIP receivables
$
2,354

 
$
2,502

Other current assets
575

 
578

of which, deferred purchase price
574

 
576

Other long-term assets
104

 
83

of which, deferred purchase price
104

 
83

Accounts payable and accrued liabilities
38

 
17

Other current liabilities
127

 
129

Other long-term liabilities
3

 
4

Net cash proceeds since inception
1,886

 
2,030

Of which:
 
 
 
Change in net cash proceeds during the year-to-date period
(144
)
 
536

Net cash proceeds funded by reinvested collections
2,030

 
1,494


We recognized losses from sales of receivables of $95 million and $52 million for the three months ended March 31, 2017 and 2016, respectively. These losses from sales of receivables were recognized in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income. Losses from sales of receivables include adjustments to the receivables’ fair values and changes in fair value of the deferred purchase price.

Continuing Involvement

Pursuant to the sale arrangements described above, we have continuing involvement with the service receivables and EIP receivables we sell as we service the receivables and are required to repurchase certain receivables, including ineligible receivables, aged receivables and receivables where write-off is imminent. We continue to service the customers and their related receivables, including facilitating customer payment collection, in exchange for a monthly servicing fee. As the receivables are sold on a revolving basis, the customer payment collections on sold receivables may be reinvested in new receivable sales. While servicing the receivables, we apply the same policies and procedures to the sold receivables as we apply to our owned receivables, and we continue to maintain normal relationships with our customers. Pursuant to the EIP sale arrangement, under certain circumstances, we are required to deposit cash or replacement EIP receivables primarily for contracts terminated by customers under our Just Upgrade My Phone (“JUMP!”) Program.

In addition, we have continuing involvement with the sold receivables as we may be responsible for absorbing additional credit losses pursuant to the sale arrangements. Our maximum exposure to loss related to the involvement with the service receivables and EIP receivables sold under the sale arrangements was $1.1 billion as of March 31, 2017. The maximum exposure to loss, which is a required disclosure under GAAP, represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby we would not receive the deferred purchase price portion of the contractual proceeds withheld by the purchasers and would also be required to repurchase the maximum amount of receivables pursuant to the sale arrangements without consideration for any recovery. As we believe the probability of these circumstances occurring is remote, the maximum exposure to loss is not an indication of our expected loss.


12


Note 4 – Spectrum License Transactions

The following table summarizes our spectrum license activity during the first quarter of 2017:
(in millions)
Spectrum Licenses
Balance at December 31, 2016
$
27,014

Spectrum license acquisitions
134

Spectrum licenses transferred to held for sale
(1
)
Costs to clear spectrum
3

Balance at March 31, 2017
$
27,150


Spectrum License Exchange

During the three months ended March 31, 2017, we closed on an agreement with a third party for the exchange of certain spectrum licenses. Upon closing of the transaction, we recorded the spectrum licenses received at their estimated fair value of approximately $123 million and recognized a gain of $37 million included in Gains on disposal of spectrum licenses in our Condensed Consolidated Statements of Comprehensive Income.

Subsequent to March 31, 2017, on April 17, 2017, we entered into an agreement with a third party for the exchange of certain AWS and PCS spectrum licenses. The licenses are included on our Condensed Consolidated Balance Sheets in Spectrum licenses as of March 31, 2017. The transaction is expected to close during the second half of 2017, subject to regulatory approvals and customary closing conditions.

Broadcast Incentive Auction

Subsequent to March 31, 2017, on April 13, 2017, the Federal Communications Commission (the “FCC”) announced that we were the winning bidder of 1,525 licenses in the 600 MHz spectrum auction for an aggregate price of $8.0 billion. At the inception of the auction in June 2016, we deposited $2.2 billion with the FCC which, based on the outcome of the auction, is sufficient to cover our down payment obligation due on April 27, 2017. The deposit is included in Asset purchase deposit on our Condensed Consolidated Balance Sheets. We are required to pay the remaining $5.8 billion of the purchase price to the FCC on or before May 11, 2017 and expect to receive the licenses at the conclusion of the FCC’s standard post-auction licensing process. We intend to fund the remainder of the purchase price using cash reserves and by issuing debt to Deutsche Telekom AG (“DT”), our majority stockholder, pursuant to existing purchase commitments. See Note 6 - Debt for further information.

Note 5 – Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying amounts and fair values of our short-term investments and long-term debt included in our Condensed Consolidated Balance Sheets were as follows:
 
Level within the Fair Value Hierarchy
 
March 31, 2017
 
December 31, 2016
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Deferred purchase price assets
3
 
$
678

 
$
678

 
$
659

 
$
659

Liabilities:
 
 
 
 
 
 
 
 
 
Senior Notes to third parties
1
 
$
18,600

 
$
19,674

 
$
18,600

 
$
19,584

Senior Reset Notes to affiliates
2
 
5,600

 
5,903

 
5,600

 
5,955

Incremental Term Loan Facility to affiliates
2
 
4,000

 
4,002

 

 

Senior Secured Term Loans
2
 

 

 
1,980

 
2,005

Guarantee liabilities
3
 
132

 
132

 
135

 
135



13


Long-term Debt

The fair value of our Senior Notes to third parties was determined based on quoted market prices in active markets, and therefore was classified as Level 1 in the fair value hierarchy. The fair value of the Senior Secured Term Loans, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates was determined based on a discounted cash flow approach using quoted prices of instruments with similar terms and maturities and an estimate for our standalone credit risk. Accordingly, our Senior Secured Term Loans, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were classified as Level 2 in the fair value hierarchy.

Although we have determined the estimated fair values using available market information and commonly accepted valuation methodologies, considerable judgment was required in interpreting market data to develop fair value estimates for the Senior Secured Term Loans, Incremental term loan facility to affiliates, and Senior Reset Notes to affiliates. The fair value estimates were based on information available as of March 31, 2017 and December 31, 2016. As such, our estimates are not necessarily indicative of the amount we could realize in a current market exchange.

Deferred Purchase Price Assets

In connection with the sales of certain service and EIP receivables pursuant to the sale arrangements, we have deferred purchase price assets measured at fair value that are based on a discounted cash flow model using unobservable Level 3 inputs, including customer default rates. See Note 3 – Sales of Certain Receivables for further information.

Guarantee Liabilities

We offer a device trade-in program, JUMP!, which provides eligible customers a specified-price trade-in right to upgrade their device. For customers who enroll in the device trade-in program, we defer the portion of equipment revenues which represents the estimated fair value of the specified-price trade-in right guarantee incorporating the expected probability and timing of the handset upgrade and the estimated fair value of the used handset which is returned. Accordingly, our guarantee liabilities were classified as Level 3 in the fair value hierarchy. When customers upgrade their device, the difference between the trade-in credit to the customer and the fair value of the returned device is recorded against the guarantee liabilities. Guarantee liabilities are included in Other current liabilities in our Condensed Consolidated Balance Sheets.

The total estimated remaining gross EIP receivable balances of all enrolled handset upgrade program customers, which are the remaining EIP amounts underlying the JUMP! guarantee, including EIP receivables that have been sold, was $2.1 billion as of March 31, 2017. This is not an indication of our expected loss exposure as it does not consider the expected fair value of the used handset or the probability and timing of the trade-in.

Note 6 – Debt

The following table sets forth the debt balances and activity as of, and for the three months ended, March 31, 2017:
(in millions)
December 31,
2016
 
Issuances and Borrowings
 
Note Redemptions
 
Extinguishments
 
Principal Reclassifications
 
Other (1)
 
March 31,
2017
Short-term debt
$
354

 
$

 
$

 
$
(20
)
 
$
6,750

 
$
458

 
$
7,542

Long-term debt
21,832

 
1,495

 
(1,500
)
 
(1,960
)
 
(6,750
)
 
(12
)
 
$
13,105

Long-term debt to affiliates
5,600

 
4,000

 

 

 

 

 
9,600

Total debt
$
27,786

 
$
5,495

 
$
(1,500
)
 
$
(1,980
)
 
$

 
$
446

 
$
30,247

(1)
Other includes: $296 million issuances of short-term debt related to vendor financing arrangements, of which $288 million is related to financing of property and equipment; as well as activity associated with capital leases, and the amortization of premiums.

Issuances and Borrowings

On January 25, 2017, T-Mobile USA, Inc. (“T-Mobile USA”), and certain of its affiliates, as guarantors, entered into an agreement to borrow $4.0 billion under a secured term loan facility (“Incremental Term Loan Facility”) with DT, our majority stockholder, to refinance $1.98 billion of outstanding secured term loans under its Term Loan Credit Agreement dated November 9, 2015, with the remaining net proceeds from the transaction intended to be used to redeem callable high yield debt. The Incremental Term Loan Facility increased DT’s incremental term loan commitment provided to T-Mobile USA under that certain First Incremental Facility Amendment dated as of

14


December 29, 2016, from $660 million to $2.0 billion and provided T-Mobile USA with an additional $2.0 billion incremental term loan commitment.

On January 31, 2017, the loans under the Incremental Term Loan Facility were drawn in two tranches; (i) $2.0 billion of which bears interest at a rate equal to a per annum rate of LIBOR plus a margin of 2.00% and matures on November 9, 2022, and (ii) $2.0 billion of which bears interest at a rate equal to a per annum rate of LIBOR plus a margin of 2.25% and matures on January 31, 2024.

On March 31, 2017, the Incremental Term Loan Facility was further amended to waive all interim principal payments. The outstanding principal balance will be due at maturity. No issuance costs were incurred related to this debt agreement for the three months ended March 31, 2017.

On March 16, 2017, T-Mobile USA and certain of its affiliates, as guarantors, (i) issued $500 million of public 4.000% Senior Notes due 2022, (ii) issued $500 million of public 5.125% Senior Notes due 2025 and (iii) issued $500 million of public 5.375% Senior Notes due 2027. We intend to use the net proceeds of $1.495 billion from the transaction to redeem callable high yield debt. Issuance costs related to the public debt issuance totaled $5 million for the three months ended March 31, 2017.

Notes Redemptions

During the three months ended, March 31, 2017, we made the following note redemptions:
(in millions)
Principal Amount
 
Redemption
Date
 
Redemption Price (1)
6.625% Senior Notes due 2020
$
1,000

 
February 10, 2017
 
102.208
%
5.250% Senior Notes due 2018
500

 
March 6, 2017
 
101.313
%
Total note redemptions
$
1,500

 
 
 
 
(1)
The Redemption price is equal to redemption percentage of the principal amount of the notes (plus accrued and unpaid interest thereon).

Prior to March 31, 2017, we delivered a note redemption on $1.75 billion aggregate principal amount of our 6.250% Senior Notes due 2021. This balance was redeemed on April 3, 2017, at a redemption price equal to 103.125% of the principal amount of the notes (plus accrued and unpaid interest thereon). The outstanding principal amount was reclassified from Long-term debt to Short-term debt in our Condensed Consolidated Balance Sheets as of March 31, 2017.

As of March 31, 2017, the following note redemptions were delivered and the Senior Notes will be redeemed on April 28, 2017. The outstanding principal amounts were reclassified from Long-term debt to Short-term debt in our Condensed Consolidated Balance Sheets:
(in millions)
Principal Amount
 
Redemption
Date
 
Redemption Price (1)
6.464% Senior Notes due 2019
$
1,250

 
April 28, 2017
 
100.000
%
6.542% Senior Notes due 2020
1,250

 
April 28, 2017
 
101.636
%
6.633% Senior Notes due 2021
1,250

 
April 28, 2017
 
103.317
%
6.731% Senior Notes due 2022
1,250

 
April 28, 2017
 
103.366
%
Total redemptions delivered and not yet redeemed
$
5,000

 
 
 
 
(1)
The Redemption price is equal to redemption percentage of the principal amount of the notes (plus accrued and unpaid interest thereon).

Related Party Debt Commitments

During the three months ended March 31, 2017, we entered into the following debt agreements with DT. These agreements did not have an impact on our total debt balance as of March 31, 2017; however, they will result in sources and uses of cash in subsequent periods.

On March 13, 2017, DT agreed to purchase $1.0 billion in aggregate principal amount of 4.000% Senior Notes due 2022, $1.25 billion in aggregate principal amount of 5.125% Senior Notes due 2025 and $1.25 billion in aggregate principal amount of 5.375% Senior Notes due 2027 (the “new DT notes”) directly from T-Mobile USA and certain of its affiliates, as guarantors, with no underwriting discount.




The closing of the issuance and sale of $3.0 billion in aggregate principal amount of the new DT notes to DT is expected to occur on April 28, 2017, and the closing of the issuance and sale of the remaining $500 million in aggregate principal amount of the 5.375% Senior Notes due 2027 to DT is expected to occur on or about September 18, 2017.

Additionally, we issued a call notice and on April 28, 2017, we will redeem through net settlement all of the $1.25 billion outstanding aggregate principal amount of the 6.288% Senior Reset Notes to affiliates due 2019 and $1.25 billion in aggregate principal amount of the 6.366% Senior Reset Notes to affiliates due 2020 for a portion of the new DT notes. The 6.288% Senior Reset Notes to affiliates due 2019 and 6.366% Senior Reset Notes to affiliates due 2020 will be redeemed at a redemption price equal to 103.144% and 103.183%, respectively, of the principal amount.

Semi-annual interest due April 28, 2017, is required to be paid in the usual manner. The Senior Reset Notes to affiliates are classified as Long-term debt to affiliates in our Condensed Consolidated Balance Sheets as of March 31, 2017, as we have the intent and ability to exchange them for a portion of the new DT notes, which will be classified as Long-term debt to affiliates.

Broadcast Incentive Auction and Related Party Debt Commitments

Subsequent to March 31, 2017, we exercised our option under existing purchase agreements and will issue the following Senior Notes to DT on May 9, 2017 and use the proceeds to fund a portion of the purchase price of spectrum licenses won in the 600 MHz spectrum auction. See Note 4 - Spectrum License Transactions for further information.
(in millions)
Principal Amount
 
Purchase
Price
5.300% Senior Notes due 2021
$
2,000

 
100.000
%
6.000% Senior Notes due 2024
1,350

 
103.016
%
6.000% Senior Notes due 2024
650

 
103.678
%
Total
$
4,000

 
 

Note 7 – Income Taxes

Within our Condensed Consolidated Statements of Comprehensive Income, we recorded an Income tax benefit of $91 million during the three months ended March 31, 2017, compared to Income tax expense of $272 million during the same period in 2016, a change of $363 million, or 133%, primarily from lower income before income taxes and a lower effective tax rate. The effective tax rate was a benefit of (15.0)% for the three months ended March 31, 2017, compared to an expense of 36.2% for the same period in 2016. The change in the effective income tax rate was primarily due to the recognition of a $270 million tax benefit related to a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions. The effective tax rate was further decreased by the recognition of $56 million of excess tax benefits related to share-based payments for the three months ended March 31, 2017, compared to $19 million for the same period in 2016.

During the three months ended March 31, 2017, due to ongoing analysis of positive and negative evidence related to the utilization of the deferred tax assets, we determined that a portion of the valuation allowance was no longer necessary. Positive evidence supporting the release of a portion of the valuation allowance included reaching a position of cumulative income over a three year period in the state jurisdictions as well as projecting sustained earnings in those jurisdictions. Due to this positive evidence, we reduced the valuation allowance which resulted in a decrease to Deferred tax liabilities in our Condensed Consolidated Balance Sheets. We will continue to monitor positive and negative evidence related to the utilization of the remaining deferred tax assets for which a valuation allowance continues to be provided. It is possible that we may release additional portions of the remaining valuation allowance within the next 9 months.




Note 8 – Earnings Per Share

The computation of basic and diluted earnings per share was as follows:
 
Three Months Ended March 31,
(in millions, except shares and per share amounts)
2017
 
2016
Net income
$
698

 
$
479

Less: Dividends on mandatory convertible preferred stock
(14
)
 
(14
)
Net income attributable to common stockholders - basic
684

 
465

Add: Dividends related to mandatory convertible preferred stock
14

 
14

Net income attributable to common stockholders - diluted
$
698

 
$
479

 
 
 
 
Weighted average shares outstanding - basic
827,723,034

 
819,431,761

Effect of dilutive securities:
 
 
 
Outstanding stock options and unvested stock awards
9,434,950

 
7,713,800

Mandatory convertible preferred stock
32,237,266

 
32,237,266

Weighted average shares outstanding - diluted
869,395,250

 
859,382,827

 
 
 
 
Earnings per share - basic
$
0.83

 
$
0.57

Earnings per share - diluted
$
0.80

 
$
0.56

 
 
 
 
Potentially dilutive securities:
 
 
 
Outstanding stock options and unvested stock awards
9,993

 
967,839


Potentially dilutive securities were not included in the computation of diluted earnings per share if to do so would have been anti-dilutive.

Note 9 – Commitments and Contingencies

Commitments

Renewable Energy Purchase Agreement

T-Mobile USA has entered into a renewable energy purchase agreement with Red Dirt Wind Project, LLC. The agreement is based on the expected operation of a wind energy-generating facility located in Oklahoma and will remain in effect until the twelfth anniversary of the facility´s entry into commercial operation, which is expected to occur by the end of 2017. The renewable energy purchase agreement consists of two components: (1) an energy forward agreement that is net settled based on energy prices and the energy output generated by the facility and (2) a commitment to purchase the renewable energy credits (“RECs”) associated with the energy output generated by the facility. T-Mobile USA will net settle the forward agreement and acquire the RECs monthly by paying, or receiving, an aggregate net payment based on two variables (1) the facility’s energy output, which has an estimated maximum capacity of approximately 160 megawatts and (2) the difference between (a) an initial fixed price, subject to annual escalation, and (b) current local marginal energy prices during the monthly settlement period. We have determined that the renewable energy purchase agreement does not meet the definition of a derivative because the expected energy output of the facility may not be reliably estimated (the arrangement lacks a notional amount). Our participation in the renewable energy purchase agreement did not require an upfront investment or capital commitment. We do not control the activities that most significantly impact the energy-generating facility nor do we receive specific energy output from it. No amounts were settled under the agreement during the three months ended March 31, 2017.

Federal Communications Commission Broadcast Incentive Auction

In April 2017, the FCC announced the results of its broadcast incentive auction of 600 MHz spectrum. We will pay an aggregate bid price of $8.0 billion for the spectrum obtained through the auction. A deposit of $2.2 billion was provided to the FCC in June 2016, and the remaining purchase price of $5.8 billion is required to be paid to the FCC on or prior to May 11, 2017.

We intend to fund the remaining purchase price using cash reserves and issuing $4.0 billion of high-yield notes to DT pursuant to existing purchase commitments. See Note 10 - Subsequent Events for further information.

17



Related-Party Commitments

During the quarter, we entered into certain debt related transactions with affiliates. See Note 6 - Debt for further information.

Contingencies and Litigation

We are involved in various lawsuits, claims, government agency investigations and enforcement actions, and other proceedings (“Litigation Matters”) that arise in the ordinary course of business, which include numerous court actions alleging that we are infringing various patents. Virtually all of the patent infringement cases are brought by non-practicing entities and effectively seek only monetary damages, although they occasionally seek injunctive relief as well. The Litigation Matters described above have progressed to various stages and some of them may proceed to trial, arbitration, hearing or other adjudication that could include an award of monetary or injunctive relief in the coming 12 months, if they are not otherwise resolved. We have established an accrual with respect to certain of these matters, where appropriate, which is reflected in the condensed consolidated financial statements but that we do not consider, individually or in the aggregate, material. An accrual is established when we believe it is both probable that a loss has been incurred and an amount can be reasonably estimated. For other matters, where we have not determined that a loss is probable or because the amount of loss cannot be reasonably estimated, we have not recorded an accrual due to various factors typical in contested proceedings, including but not limited to: uncertainty concerning legal theories and their resolution by courts or regulators; uncertain damage theories and demands; and a less than fully developed factual record. While we do not expect that the ultimate resolution of these proceedings, individually or in the aggregate will have a material adverse effect on our financial position, an unfavorable outcome of some or all of these proceedings could have a material adverse impact on results of operations or cash flows for a particular period. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future.

Note 10 – Subsequent Events

Note Redemptions

During April 2017, we redeemed $1.75 billion aggregate principal amount of debt. See Note 6 - Debt for further information.

Broadcast Incentive Auction

On April 13, 2017, the FCC announced that we were the winning bidder of 1,525 licenses in the 600 MHz spectrum auction for an aggregate purchase price of $8.0 billion. See Note 4 - Spectrum License Transactions for further information. We exercised our option to issue $4.0 billion of high-yield notes to DT. The notes will be issued on May 9, 2017 to pay for a portion of the purchase price. See Note 6 - Debt for further information.

Spectrum License Exchange

On April 17, 2017, we entered into an agreement with a third party for the exchange of certain AWS and PCS spectrum licenses. See Note 4 - Spectrum License Transactions for further information.

Note 11 – Guarantor Financial Information

Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties, excluding Senior Secured Term Loans and capital leases, issued by T-Mobile USA (“Issuer”) is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of the Issuer’s 100% owned subsidiaries (“Guarantor Subsidiaries”).

In January 2017, T-Mobile USA, and certain of its affiliates, as guarantors, borrowed $4.0 billion under the Incremental Term Loan Facility to refinance $1.98 billion of outstanding secured term loans under its Term Loan Credit Agreement dated November 9, 2015, with the remaining net proceeds from the transaction intended to be used to redeem callable high yield debt.

In March 2017, T-Mobile USA and certain of its affiliates, as guarantors, (i) issued $500 million of public 4.000% Senior Notes due 2022, (ii) issued $500 million of public 5.125% Senior Notes due 2025 and (iii) issued $500 million of public 5.375% Senior Notes due 2027.

See Note 6 - Debt for further information.

18



The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures governing the long-term debt contain covenants that, among other things, limit the ability of the Issuer and the Guarantor Subsidiaries to: incur more debt; pay dividends and make distributions; make certain investments; repurchase stock; create liens or other encumbrances; enter into transactions with affiliates; enter into transactions that restrict dividends or distributions from subsidiaries; and merge, consolidate, or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the indentures and the supplemental indentures relating to the long-term debt restrict the ability of the Issuer to loan funds or make payments to Parent. However, the Issuer and Guarantor Subsidiaries are allowed to make certain permitted payments to the Parent under the terms of the indentures and the supplemental indentures.

Presented below is the condensed consolidating financial information as of March 31, 2017 and December 31, 2016, and for the three months ended March 31, 2017 and 2016.


19


Condensed Consolidating Balance Sheet Information
March 31, 2017
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
360

 
$
3,138

 
$
3,937

 
$
66

 
$

 
$
7,501

Accounts receivable, net

 

 
1,618

 
233

 

 
1,851

Equipment installment plan receivables, net

 

 
1,880

 

 

 
1,880

Accounts receivable from affiliates

 
6

 
37

 

 
(6
)
 
37

Inventories

 

 
1,021

 

 

 
1,021

Asset purchase deposit

 

 
2,203

 

 

 
2,203

Other current assets

 

 
831

 
575

 

 
1,406

Total current assets
360

 
3,144

 
11,527

 
874

 
(6
)
 
15,899

Property and equipment, net (1)

 

 
20,878

 
357

 

 
21,235

Goodwill

 

 
1,683

 

 

 
1,683

Spectrum licenses

 

 
27,150

 

 

 
27,150

Other intangible assets, net

 

 
338

 

 

 
338

Investments in subsidiaries, net
18,381

 
36,147

 

 

 
(54,528
)
 

Intercompany receivables
222

 
8,302

 

 

 
(8,524
)
 

Equipment installment plan receivables due after one year, net

 

 
975

 

 

 
975

Other assets

 
7

 
464

 
297

 

 
768

Total assets
$
18,963

 
$
47,600

 
$
63,015

 
$
1,528

 
$
(63,058
)
 
$
68,048

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$

 
$
279

 
$
5,596

 
$
285

 
$

 
$
6,160

Payables to affiliates

 
198

 
64

 

 
(6
)
 
256

Short-term debt

 
7,116

 
426

 

 

 
7,542

Deferred revenue

 

 
934

 

 

 
934

Other current liabilities

 

 
247

 
146

 

 
393

Total current liabilities

 
7,593

 
7,267

 
431

 
(6
)
 
15,285

Long-term debt

 
11,918

 
1,187

 

 

 
13,105

Long-term debt to affiliates

 
9,600

 

 

 

 
9,600

Tower obligations (1)

 

 
399

 
2,215

 

 
2,614

Deferred tax liabilities

 

 
4,842

 

 

 
4,842

Deferred rent expense

 

 
2,635

 

 

 
2,635

Negative carrying value of subsidiaries, net

 

 
582

 

 
(582
)
 

Intercompany payables

 

 
8,298

 
226

 
(8,524
)
 

Other long-term liabilities

 
108

 
893

 
3

 

 
1,004

 Total long-term liabilities

 
21,626

 
18,836

 
2,444

 
(9,106
)
 
33,800

Total stockholders' equity (deficit)
18,963

 
18,381

 
36,912

 
(1,347
)
 
(53,946
)
 
18,963

Total liabilities and stockholders' equity
$
18,963

 
$
47,600

 
$
63,015

 
$
1,528

 
$
(63,058
)
 
$
68,048

(1)
Assets and liabilities for Non-Guarantor Subsidiaries are primarily included in VIEs related to the 2012 Tower Transaction. See Note 8 – Tower Obligations included in the Annual Report on Form 10-K for the year ended December 31, 2016.


20


Condensed Consolidating Balance Sheet Information
December 31, 2016
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
358

 
$
2,733

 
$
2,342

 
$
67

 
$

 
$
5,500

Accounts receivable, net

 

 
1,675

 
221

 

 
1,896

Equipment installment plan receivables, net

 

 
1,930

 

 

 
1,930

Accounts receivable from affiliates

 

 
40

 

 

 
40

Inventories

 

 
1,111

 

 

 
1,111

Asset purchase deposit

 

 
2,203

 

 

 
2,203

Other current assets

 

 
972

 
565

 

 
1,537

Total current assets
358

 
2,733

 
10,273

 
853

 

 
14,217

Property and equipment, net (1)

 

 
20,568

 
375

 

 
20,943

Goodwill

 

 
1,683

 

 

 
1,683

Spectrum licenses

 

 
27,014

 

 

 
27,014

Other intangible assets, net

 

 
376

 

 

 
376

Investments in subsidiaries, net
17,682

 
35,095

 

 

 
(52,777
)
 

Intercompany receivables
196

 
6,826

 

 

 
(7,022
)
 

Equipment installment plan receivables due after one year, net

 

 
984

 

 

 
984

Other assets

 
7

 
600

 
262

 
(195
)
 
674

Total assets
$
18,236

 
$
44,661

 
$
61,498

 
$
1,490

 
$
(59,994
)
 
$
65,891

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$

 
$
423

 
$
6,474

 
$
255

 
$

 
$
7,152

Payables to affiliates

 
79

 
46

 

 

 
125

Short-term debt

 
20

 
334

 

 

 
354

Deferred revenue

 

 
986

 

 

 
986

Other current liabilities

 

 
258

 
147

 

 
405

Total current liabilities

 
522

 
8,098

 
402

 

 
9,022

Long-term debt

 
20,741

 
1,091

 

 

 
21,832

Long-term debt to affiliates

 
5,600

 

 

 

 
5,600

Tower obligations (1)

 

 
400

 
2,221

 

 
2,621

Deferred tax liabilities

 

 
5,133

 

 
(195
)
 
4,938

Deferred rent expense

 

 
2,616

 

 

 
2,616

Negative carrying value of subsidiaries, net

 

 
568

 

 
(568
)
 

Intercompany payables

 

 
6,785

 
237

 
(7,022
)
 

Other long-term liabilities

 
116

 
906

 
4

 

 
1,026

 Total long-term liabilities

 
26,457

 
17,499

 
2,462

 
(7,785
)
 
38,633

Total stockholders' equity (deficit)
18,236

 
17,682

 
35,901

 
(1,374
)
 
(52,209
)
 
18,236

Total liabilities and stockholders' equity
$
18,236

 
$
44,661

 
$
61,498

 
$
1,490

 
$
(59,994
)
 
$
65,891

(1)
Assets and liabilities for Non-Guarantor Subsidiaries are primarily included in VIEs related to the 2012 Tower Transaction. See Note 8 – Tower Obligations included in the Annual Report on Form 10-K for the year ended December 31, 2016.





21


Condensed Consolidating Statement of Comprehensive Income Information
Three Months Ended March 31, 2017
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$

 
$

 
$
7,018

 
$
525

 
$
(214
)
 
$
7,329

Equipment revenues

 

 
2,143

 

 
(100
)
 
2,043

Other revenues

 

 
194

 
52

 
(5
)
 
241

Total revenues

 

 
9,355

 
577

 
(319
)
 
9,613

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation and amortization shown separately below

 

 
1,402

 
6

 

 
1,408

Cost of equipment sales

 

 
2,540

 
246

 
(100
)
 
2,686

Selling, general and administrative

 

 
2,928

 
246

 
(219
)
 
2,955

Depreciation and amortization

 

 
1,546

 
18

 

 
1,564

Cost of MetroPCS business combination

 

 

 

 

 

Gains on disposal of spectrum licenses

 

 
(37
)
 

 

 
(37
)
Total operating expenses

 

 
8,379

 
516

 
(319
)
 
8,576

Operating income

 

 
976

 
61

 

 
1,037

Other income (expense)
 
 
 
 
 
 
 
 
 
 
 
Interest expense

 
(264
)
 
(27
)
 
(48
)
 

 
(339
)
Interest expense to affiliates

 
(99
)
 
(7
)
 

 
6

 
(100
)
Interest income

 
9

 
4

 

 
(6
)
 
7

Other income (expense), net

 
3

 
(1
)
 

 

 
2

Total other expense, net

 
(351
)
 
(31
)
 
(48
)
 

 
(430
)
Income (loss) before income taxes

 
(351
)
 
945

 
13

 

 
607

Income tax benefit (expense)

 

 
96

 
(5
)
 

 
91

Earnings (loss) of subsidiaries
698

 
1,049

 
(31
)
 

 
(1,716
)
 

Net income
698

 
698

 
1,010

 
8

 
(1,716
)
 
698

Dividends on preferred stock
(14
)
 

 

 

 

 
(14
)
Net income attributable to common stockholders
$
684

 
$
698

 
$
1,010

 
$
8

 
$
(1,716
)
 
$
684

 
 
 
 
 
 
 
 
 
 
 
 
Net Income
$
698

 
$
698

 
$
1,010

 
$
8

 
$
(1,716
)
 
$
698

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
1

 
1

 
1

 
1

 
(3
)
 
1

Total comprehensive income
$
699

 
$
699

 
$
1,011

 
$
9

 
$
(1,719
)
 
$
699



22


Condensed Consolidating Statement of Comprehensive Income Information
Three Months Ended March 31, 2016
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries (As adjusted - See Note 1)
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated (As adjusted - See Note 1)
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$

 
$

 
$
6,287

 
$
463

 
$
(172
)
 
$
6,578

Equipment revenues

 

 
1,981

 

 
(130
)
 
1,851

Other revenues

 

 
191

(1)
48

 
(4
)
 
235

Total revenues

 

 
8,459

(1)
511

 
(306
)
 
8,664

Operating expenses