10-Q 1 tmus06302017form10-q.htm 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 June 30, 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 July 17, 2017

Common Stock, $0.00001 par value per share
 
831,048,573




T-Mobile US, Inc.
Form 10-Q
For the Quarter Ended June 30, 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)
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
181

 
$
5,500

Accounts receivable, net of allowances of $83 and $102
1,719

 
1,896

Equipment installment plan receivables, net
2,060

 
1,930

Accounts receivable from affiliates
32

 
40

Inventories
1,208

 
1,111

Asset purchase deposit

 
2,203

Other current assets
1,580

 
1,537

Total current assets
6,780

 
14,217

Property and equipment, net
21,423

 
20,943

Goodwill
1,683

 
1,683

Spectrum licenses
35,060

 
27,014

Other intangible assets, net
296

 
376

Equipment installment plan receivables due after one year, net
1,102

 
984

Other assets
815

 
674

Total assets
$
67,159

 
$
65,891

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities
$
6,225

 
$
7,152

Payables to affiliates
155

 
125

Short-term debt
522

 
354

Short-term debt to affiliates
680

 

Deferred revenue
851

 
986

Other current liabilities
395

 
405

Total current liabilities
8,828

 
9,022

Long-term debt
13,206

 
21,832

Long-term debt to affiliates
14,086

 
5,600

Tower obligations
2,606

 
2,621

Deferred tax liabilities
5,188

 
4,938

Deferred rent expense
2,660

 
2,616

Other long-term liabilities
971

 
1,026

Total long-term liabilities
38,717

 
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; 832,476,169 and 827,768,818 shares issued, 831,021,302 and 826,357,331 shares outstanding

 

Additional paid-in capital
38,946

 
38,846

Treasury stock, at cost, 1,454,867 and 1,411,487 shares issued
(4
)
 
(1
)
Accumulated other comprehensive income
3

 
1

Accumulated deficit
(19,331
)
 
(20,610
)
Total stockholders' equity
19,614

 
18,236

Total liabilities and stockholders' equity
$
67,159

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
(in millions, except share and per share amounts)
 
 
(As Adjusted - See Note 1)
 
 
 
(As Adjusted - See Note 1)
Revenues
 
 
 
 
 
 
 
Branded postpaid revenues
$
4,820

 
$
4,509

 
$
9,545

 
$
8,811

Branded prepaid revenues
2,334

 
2,119

 
4,633

 
4,144

Wholesale revenues
234

 
207

 
504

 
407

Roaming and other service revenues
57

 
53

 
92

 
104

Total service revenues
7,445

 
6,888

 
14,774

 
13,466

Equipment revenues
2,506

 
2,188

 
4,549

 
4,039

Other revenues
262

 
211

 
503

 
446

Total revenues
10,213

 
9,287

 
19,826

 
17,951

Operating expenses
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation and amortization shown separately below
1,518

 
1,429

 
2,926

 
2,850

Cost of equipment sales
2,846

 
2,619

 
5,532

 
4,993

Selling, general and administrative
2,915

 
2,772

 
5,870

 
5,521

Depreciation and amortization
1,519

 
1,575

 
3,083

 
3,127

Cost of MetroPCS business combination

 
59

 

 
95

Gains on disposal of spectrum licenses
(1
)
 

 
(38
)
 
(636
)
Total operating expense
8,797

 
8,454

 
17,373

 
15,950

Operating income
1,416

 
833

 
2,453

 
2,001

Other income (expense)
 
 
 
 
 
 
 
Interest expense
(265
)
 
(368
)
 
(604
)
 
(707
)
Interest expense to affiliates
(131
)
 
(93
)
 
(231
)
 
(172
)
Interest income
6

 
3

 
13

 
6

Other expense, net
(92
)
 
(3
)
 
(90
)
 
(5
)
Total other expense, net
(482
)
 
(461
)
 
(912
)
 
(878
)
Income before income taxes
934

 
372

 
1,541

 
1,123

Income tax expense
(353
)
 
(147
)
 
(262
)
 
(419
)
Net income
581

 
225

 
1,279

 
704

Dividends on preferred stock
(14
)
 
(14
)
 
(28
)
 
(28
)
Net income attributable to common stockholders
$
567

 
$
211

 
$
1,251

 
$
676

 
 
 
 
 
 
 
 
Net Income
$
581

 
$
225

 
$
1,279

 
$
704

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net of tax effect $1, $2, $2 and $0
1

 
3

 
2

 

Other comprehensive income
1

 
3

 
2

 

Total comprehensive income
$
582

 
$
228

 
$
1,281

 
$
704

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.68

 
$
0.26

 
$
1.51

 
$
0.82

Diluted
$
0.67

 
$
0.25

 
$
1.47

 
$
0.81

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
830,971,528

 
822,434,490

 
829,356,255

 
820,933,126

Diluted
870,456,447

 
829,752,956

 
870,853,652

 
829,662,053


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 June 30,
 
Six Months Ended June 30,
(in millions)
2017
 
2016
 
2017
 
2016
Operating activities
 
 
 
 
 
 
 
Net income
$
581

 
$
225

 
$
1,279

 
$
704

Adjustments to reconcile net income to net cash provided by operating activities

 
 
 
 
 
 
Depreciation and amortization
1,519

 
1,575

 
3,083

 
3,127

Stock-based compensation expense
72

 
60

 
139

 
112

Deferred income tax expense
345

 
140

 
248

 
404

Bad debt expense
82

 
119

 
175

 
240

Losses from sales of receivables
80

 
46

 
175

 
98

Deferred rent expense
20

 
33

 
40

 
65

Gains on disposal of spectrum licenses
(1
)
 

 
(38
)
 
(636
)
Changes in operating assets and liabilities
 
 
 
 
 
 
 
Accounts receivable
21

 
(105
)
 
(47
)
 
(307
)
Equipment installment plan receivables
(353
)
 
343

 
(366
)
 
452

Inventories
(185
)
 
3

 
(141
)
 
(798
)
Deferred purchase price from sales of receivables
1

 
(204
)
 
(18
)
 
(183
)
Other current and long-term assets
(135
)
 
(56
)
 
(146
)
 
129

Accounts payable and accrued liabilities
56

 
(345
)
 
(595
)
 
(837
)
Other current and long term liabilities
(189
)
 
(74
)
 
(144
)
 
214

Other, net
(85
)
 
8

 
(102
)
 
9

Net cash provided by operating activities
1,829

 
1,768

 
3,542

 
2,793

Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment, including capitalized interest of $34, $18, $82 and $54
(1,347
)
 
(1,349
)
 
(2,875
)
 
(2,684
)
Purchases of spectrum licenses and other intangible assets, including deposits
(5,791
)
 
(2,245
)
 
(5,805
)
 
(2,839
)
Sales of short-term investments

 
2,923

 

 
2,998

Other, net
5

 
4

 
(3
)
 
(2
)
Net cash used in investing activities
(7,133
)
 
(667
)
 
(8,683
)
 
(2,527
)
Financing activities
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt
4,485

 
997

 
9,980

 
997

Proceeds from borrowing on revolving credit facility
1,855

 

 
1,855

 

Repayments of revolving credit facility
(1,175
)
 

 
(1,175
)
 

Repayments of capital lease obligations
(119
)
 
(43
)
 
(209
)
 
(79
)
Repayments of short-term debt for purchases of inventory, property and equipment, net
(292
)
 
(150
)
 
(292
)
 
(150
)
Repayments of long-term debt
(6,750
)
 
(5
)
 
(10,230
)
 
(10
)
Tax withholdings on share-based awards
(3
)
 
(3
)
 
(95
)
 
(49
)
Dividends on preferred stock
(14
)
 
(14
)
 
(28
)
 
(28
)
Other, net
(3
)
 
8

 
16

 
9

Net cash (used in) provided by financing activities
(2,016
)
 
790

 
(178
)
 
690

Change in cash and cash equivalents
(7,320
)
 
1,891

 
(5,319
)
 
956

Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
7,501

 
3,647

 
5,500

 
4,582

End of period
$
181

 
$
5,538

 
$
181

 
$
5,538

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
Interest payments, net of amounts capitalized, $79, $0, $79, $0 of which recorded as debt discount (Note 6)
$
727

 
$
399

 
$
1,222

 
$
814

Income tax payments
6

 
17

 
21

 
19

Changes in accounts payable for purchases of property and equipment
8

 
(101
)
 
(317
)
 
(228
)
Leased devices transferred from inventory to property and equipment
270

 
157

 
513

 
941

Returned leased devices transferred from property and equipment to inventory
(273
)
 
(105
)
 
(470
)
 
(236
)
Issuance of short-term debt for financing of property and equipment
2

 

 
290

 
150

Assets acquired under capital lease obligations
313

 
171

 
597

 
295


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
(Unaudited)

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 (Tower obligations are 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). 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 and six months ended June 30, 2017 and 2016, in the tables below:
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
(in millions)
Unadjusted
 
Change in Accounting Principle
 
As Adjusted
 
As Filed
 
Change in Accounting Principle
 
As Adjusted
Other revenues
$
194

 
$
68

 
$
262

 
$
146

 
$
65

 
$
211

Total revenues
10,145

 
68

 
10,213

 
9,222

 
65

 
9,287

Operating income
1,348

 
68

 
1,416

 
768

 
65

 
833

Interest income
74

 
(68
)
 
6

 
68

 
(65
)
 
3

Total other expense, net
(414
)
 
(68
)
 
(482
)
 
(396
)
 
(65
)
 
(461
)
Net income
581

 

 
581

 
225

 

 
225


 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
(in millions)
Unadjusted
 
Change in Accounting Principle
 
As Adjusted
 
As Filed
 
Change in Accounting Principle
 
As Adjusted
Other revenues
$
373

 
$
130

 
$
503

 
$
316

 
$
130

 
$
446

Total revenues
19,696

 
130

 
19,826

 
17,821

 
130

 
17,951

Operating income
2,323

 
130

 
2,453

 
1,871

 
130

 
2,001

Interest income
143

 
(130
)
 
13

 
136

 
(130
)
 
6

Total other expense, net
(782
)
 
(130
)
 
(912
)
 
(748
)
 
(130
)
 
(878
)
Net income
1,279

 

 
1,279

 
704

 

 
704



7


The change in accounting principle did not have an impact on basic or diluted earnings per share for the three and six months ended June 30, 2017 and 2016, or Accumulated deficit as of June 30, 2017 or December 31, 2016.

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), and has since modified the standard with several ASU’s. The standard is effective for us, and we will adopt the standard, on January 1, 2018.

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.

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 the date of initial application. The standard also allows entities to apply certain practical expedients at their discretion. We are adopting the standard using the modified retrospective method with a cumulative catch up adjustment and will provide 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. We plan to utilize the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less.
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 due to changes in the terms and mix of the contractual arrangements we have with customers. New products or offerings, or changes to current offerings may yield significantly different impacts than currently expected.

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 (Topic 842).” 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 the 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

8


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 from Operating activities to Investing activities of approximately $800 million and $900 million for the three months ended June 30, 2017 and 2016, respectively, and $1.8 billion for both the six months ended June 30, 2017 and 2016 in our condensed consolidated statement of cash flows. The standard will also impact the presentation of cash payments for debt prepayment or debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities of $159 million and $188 million for the three and six months ended June 30, 2017, 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, 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.


9


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)
June 30,
2017
 
December 31,
2016
EIP receivables, gross
$
3,496

 
$
3,230

Unamortized imputed discount
(231
)
 
(195
)
EIP receivables, net of unamortized imputed discount
3,265

 
3,035

Allowance for credit losses
(103
)
 
(121
)
EIP receivables, net
$
3,162

 
$
2,914


 
 
 
Classified on the balance sheet as:
 
 
 
Equipment installment plan receivables, net
$
2,060

 
$
1,930

Equipment installment plan receivables due after one year, net
1,102

 
984

EIP receivables, net
$
3,162

 
$
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.

The balance and aging of the EIP receivables on a gross basis by credit category were as follows:
 
June 30, 2017
 
December 31, 2016
(in millions)
Prime
 
Subprime
 
Total
 
Prime
 
Subprime
 
Total
Unbilled
$
1,416

 
$
1,871

 
$
3,287

 
$
1,343

 
$
1,686

 
$
3,029

Billed – Current
57

 
83

 
140

 
51

 
77

 
128

Billed – Past Due
24

 
45

 
69

 
25

 
48

 
73

EIP receivables, gross
$
1,497

 
$
1,999

 
$
3,496

 
$
1,419

 
$
1,811

 
$
3,230


Activity for the six months ended June 30, 2017 and 2016, in the unamortized imputed discount and allowance for credit losses balances for the EIP receivables was as follows:
(in millions)
June 30,
2017
 
June 30,
2016
Imputed discount and allowance for credit losses, beginning of period
$
316

 
$
333

Bad debt expense
119

 
126

Write-offs, net of recoveries
(137
)
 
(137
)
Change in imputed discount on short-term and long-term EIP receivables
121

 
83

Impacts from sales of EIP receivables
(85
)
 
(91
)
Imputed discount and allowance for credit losses, end of period
$
334

 
$
314


The EIP receivables had weighted average effective imputed interest rates of 9.7% and 9.0% as of June 30, 2017 and December 31, 2016, respectively.


10


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 June 30, 2017 and December 31, 2016, the service receivable sale arrangement provided funding of $879 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 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)
June 30,
2017
 
December 31,
2016
Other current assets
$
223

 
$
207

Accounts payable and accrued liabilities

 
17

Other current liabilities
145

 
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 June 30, 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

11


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 of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to the EIP BRE:
(in millions)
June 30,
2017
 
December 31,
2016
Other current assets
$
349

 
$
371

Other assets
106

 
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 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 June 30, 2017 and December 31, 2016, our deferred purchase price related to the sales of service receivables and EIP receivables was $676 million and $659 million, respectively.


12


The following table summarizes the impacts of the sale of certain service receivables and EIP receivables in our Condensed Consolidated Balance Sheets:
(in millions)
June 30,
2017
 
December 31,
2016
Derecognized net service receivables and EIP receivables
$
2,422

 
$
2,502

Other current assets
572

 
578

of which, deferred purchase price
570

 
576

Other long-term assets
106

 
83

of which, deferred purchase price
106

 
83

Accounts payable and accrued liabilities

 
17

Other current liabilities
145

 
129

Other long-term liabilities
3

 
4

Net cash proceeds since inception
1,952

 
2,030

Of which:
 
 
 
Change in net cash proceeds during the year-to-date period
(78
)
 
536

Net cash proceeds funded by reinvested collections
2,030

 
1,494


We recognized losses from sales of receivables of $80 million and $46 million for the three months ended June 30, 2017 and 2016, respectively, and $175 million and $98 million for the six months ended June 30, 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 $1.2 billion as of June 30, 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.

Note 4 – Spectrum License Transactions

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

Spectrum license acquisitions
8,130

Spectrum licenses transferred to held for sale
(87
)
Costs to clear spectrum
3

Balance at June 30, 2017
$
35,060



13


Spectrum License Exchange

In March 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.

In April 2017, we entered into an agreement with a third party for the exchange of certain AWS and PCS spectrum licenses. The transaction is expected to close during the second half of 2017, subject to regulatory approvals and customary closing conditions. Our spectrum licenses to be transferred as part of the exchange transaction were reclassified as assets held for sale and were included in Other current assets in our Condensed Consolidated Balance Sheets at their carrying value of $86 million as of June 30, 2017.

Broadcast Incentive Auction

In April 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, was sufficient to cover our down payment obligation due in April 2017. In May 2017, we paid the FCC the remaining $5.8 billion 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. The licenses are included in Spectrum licenses as of June 30, 2017, on our Condensed Consolidated Balance Sheets. We expect to begin deployment of these licenses on our network in the second half of 2017.

Note 5 – Fair Value Measurements

The carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts receivable from affiliates, accounts payable, and borrowings under our senior secured revolving credit facility with DT approximate fair value due to the short-term maturities of these instruments.

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
 
June 30, 2017
 
December 31, 2016
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Deferred purchase price assets
3
 
$
676

 
$
676

 
$
659

 
$
659

Liabilities:
 
 
 
 
 
 
 
 
 
Guarantee liabilities
3
 
124

 
124

 
135

 
135

 
Level within the Fair Value Hierarchy
 
June 30, 2017
 
December 31, 2016
(in millions)
 
Principal Amount
 
Fair Value
 
Principal Amount
 
Fair Value
Liabilities:
 
 
 
 
 
 
 
 
 
Senior Notes to third parties
1
 
$
11,850

 
$
12,691

 
$
18,600

 
$
19,584

Senior Notes to affiliates
2
 
7,000

 
7,243

 

 

Senior Reset Notes to affiliates
2
 
3,100

 
3,343

 
5,600

 
5,955

Incremental Term Loan Facility to affiliates
2
 
4,000

 
4,000

 

 

Senior Secured Term Loans
2
 

 

 
1,980

 
2,005


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, Senior Notes to affiliates and Senior Reset Notes to affiliates was determined based on a

14


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, Senior Notes 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, Senior Notes to affiliates and Senior Reset Notes to affiliates. The fair value estimates were based on information available as of June 30, 2017 and December 31, 2016. As such, our estimates are not necessarily indicative of the amount we could realize in a current market exchange. As of June 30, 2017, the carrying value of the Incremental Term Loan Facility to affiliates approximates fair value, due to our ability to call the facility without penalty.

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 $2.2 billion as of June 30, 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 six months ended, June 30, 2017:
(in millions)
December 31,
2016
 
Issuances and Borrowings (1)
 
Note Redemptions (1)
 
Extinguishments (1)
 
Other (2)
 
June 30,
2017
Short-term debt
$
354

 
$

 
$

 
$
(20
)
 
$
188

 
$
522

Long-term debt
21,832

 
1,495

 
(8,365
)
 
(1,947
)
 
191

 
13,206

Total debt to third parties
22,186

 
1,495

 
(8,365
)
 
(1,967
)
 
379

 
13,728

Short-term debt to affiliates

 
680

 

 

 

 
680

Long-term debt to affiliates
5,600

 
8,485

 

 

 
1

 
14,086

Total debt to affiliates
5,600

 
9,165

 

 

 
1

 
14,766

Total debt
$
27,786

 
$
10,660

 
$
(8,365
)
 
$
(1,967
)
 
$
380

 
$
28,494

(1)
Issuances and borrowings, note redemptions and extinguishments are recorded net of related issuance costs, discounts and premiums. Issuances and borrowings for Short-term debt to affiliates represents net outstanding borrowings on our senior secured revolving credit facility.
(2)
Other includes: $298 million issuances of short-term debt related to vendor financing arrangements, of which $290 million is related to financing of property and equipment. During the six months ended June 30, 2017, we repaid $292 million under the vendor financing arrangements. As of June 30, 2017, vendor financing arrangements totaled $6 million. Vendor financing arrangements are included in Short-term debt within Total current liabilities in our Condensed Consolidated Balance Sheets. Additional activity in Other includes capital leases and the amortization of discounts and premiums. As of June 30, 2017 and December 31, 2016, capital leases outstanding totaled $1.8 billion and $1.4 billion, respectively.


15


Debt to Third Parties

Issuances and Borrowings

During the six months ended June 30, 2017, we issued the following Senior Notes:
(in millions)
Principal Issuances
 
Issuance Costs
 
Net proceeds from issuance of long-term debt
4.000% Senior Notes due 2022
$
500

 
$
2

 
$
498

5.125% Senior Notes due 2025
500

 
2

 
498

5.375% Senior Notes due 2027
500

 
1

 
499

Total
$
1,500

 
$
5

 
$
1,495


On March 16, 2017, T-Mobile USA and certain of its affiliates, as guarantors, issued a total of $1.5 billion of public Senior Notes with various interest rates and maturity dates. Issuance costs related to the public debt issuance totaled $5 million for the six months ended June 30, 2017. We used the net proceeds of $1.495 billion from the transaction to redeem callable high yield debt.

Notes Redemptions

During the six months ended June 30, 2017, we made the following note redemptions:
(in millions)
Principal Amount
 
Write-off of premiums, discounts and issuance costs (1)
 
Call Penalties (1) (2)
 
Redemption
Date
 
Redemption Price
6.625% Senior Notes due 2020
$
1,000

 
$
(45
)
 
$
22

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

 
1

 
7

 
March 4, 2017
 
101.313
%
6.250% Senior Notes due 2021
1,750

 
(71
)
 
55

 
April 1, 2017
 
103.125
%
6.464% Senior Notes due 2019
1,250

 

 

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

 

 
21

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

 

 
41

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

 

 
42

 
April 28, 2017
 
103.366
%
Total note redemptions
$
8,250

 
$
(115
)
 
$
188

 
 
 
 
(1)
Write-off of premiums, discounts, issuance costs and call penalties are included in Other expense, net in our Condensed Consolidated Statements of Comprehensive Income. Write-off of premiums, discounts and issuance costs are included in Other, net within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.
(2)
The call penalty is the excess paid over the principal amount. Call penalties are included within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

Debt to Affiliates

Issuances and Borrowings

During the six months ended June 30, 2017, we made the following borrowings:
(in millions)
Net proceeds from issuance of long-term debt
 
Extinguishments
 
Write-off of discounts and issuance costs (1)
LIBOR plus 2.00% Senior Secured Term Loan due 2022
$
2,000

 
$

 
$

LIBOR plus 2.25% Senior Secured Term Loan due 2024
2,000

 

 

LIBOR plus 2.750% Senior Secured Term Loan

 
(1,980
)
 
13

Total
$
4,000

 
$
(1,980
)
 
$
13

(1)
Write-off of discounts and issuance costs are included in Other expense, net in our Condensed Consolidated Statements of Comprehensive Income and Other, net within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

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 senior secured term loans under its Term Loan Credit Agreement dated November 9, 2015, with the remaining net proceeds from the transaction used to redeem callable high yield debt. The

16


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 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. No issuance fees were incurred related to this debt agreement for the six months ended June 30, 2017.

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.

During the six months ended June 30, 2017, we issued the following Senior Notes:
(in millions)
Principal Issuances (Redemptions)
 
Discounts (1)
 
Net proceeds from issuance of long-term debt
4.000% Senior Notes due 2022
$
1,000

 
$
(23
)
 
$
977

5.125% Senior Notes due 2025
1,250

 
(28
)
 
1,222

5.375% Senior Notes due 2025
750

 
(28
)
 
722

6.288% Senior Reset Notes due 2019
(1,250
)
 

 
(1,250
)
6.366% Senior Reset Notes due 2020
(1,250
)
 

 
(1,250
)
Total
$
500

 
$
(79
)
 
$
421

(1)
Discounts reduce Proceeds from borrowing on revolving credit facility and are included within Net cash (used in) provided by financing activities in our Condensed Consolidated Statements of Cash Flows.

On March 13, 2017, DT agreed to purchase a total of $3.5 billion in aggregate principal amounts of Senior Notes with various interest rates and maturity dates (the “new DT Notes”).

Through net settlement in April 2017, we issued to DT a total of $3.0 billion in aggregate principal amount of the new DT Notes and redeemed all of the $2.5 billion in outstanding aggregate principal amount of Senior Reset Notes with various interest rates and maturity dates (the “old DT Notes”).

The redemption prices of the old DT Notes were 103.144% and 103.183%, resulting in a total of $79 million in early redemption fees. These early redemption fees were recorded as discounts on the issuance of the new DT Notes. The proceeds from the net settlement were $421 million and are included in Proceeds from issuance of long-term debt in our Condensed Consolidated Statements of Cash Flows.

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.

During the six months ended June 30, 2017, we also issued the following Senior Notes:
(in millions)
Principal Issuances
 
Premium
 
Net proceeds from issuance of long-term debt
5.300% Senior Notes due 2021
$
2,000

 
$

 
$
2,000

6.000% Senior Notes due 2024
1,350

 
40

 
1,390

6.000% Senior Notes due 2024
650

 
24

 
674

Total
$
4,000

 
$
64

 
$
4,064


On May 9, 2017, we exercised our option under existing purchase agreements and issued Senior Notes to DT. The proceeds were used to fund a portion of the purchase price of spectrum licenses won in the 600 MHz spectrum auction. Net proceeds from these issuances include $64 million in debt premiums. See Note 4 - Spectrum License Transactions for further information.


17


Revolving Credit Facility

We had $680 million and $0 million outstanding borrowings under our $1.5 billion senior secured revolving credit facility with DT as of June 30, 2017, and December 31, 2016, respectively. Proceeds and borrowings from the revolving credit facility are presented in Proceeds from borrowing on revolving credit facility and Repayments of revolving credit facility within Net cash (used in) provided by financing activities in our Condensed Consolidated Statements of Cash Flows.

Note 7 – Income Taxes

Within our Condensed Consolidated Statements of Comprehensive Income, we recorded an Income tax expense of $353 million and $147 million for the three months ended June 30, 2017 and 2016, respectively, and $262 million and $419 million for the six months ended June 30, 2017 and 2016, respectively. The change in each period was primarily from higher income before income taxes offset by a lower effective tax rate. The effective tax rate was 37.8% and 39.5% for the three months ended June 30, 2017 and 2016, respectively, and 17.0% and 37.3% for the six months ended June 30, 2017 and 2016, respectively. The change in the effective income tax rate for the six months ended June 30, 2017, was primarily due to a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions that resulted in the recognition of $270 million in tax benefits in the first quarter of 2017 and the recognition of an additional $11 million in tax benefits in the second quarter of 2017. Total tax benefits were $281 million through June 30, 2017. The effective tax rate was further decreased by the recognition of $60 million of excess tax benefits related to share-based payments for the six months ended June 30, 2017, compared to $21 million for the same period in 2016.

During the first quarter of 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 6 months.

Note 8 – Earnings Per Share

The computation of basic and diluted earnings per share was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except shares and per share amounts)
2017
 
2016
 
2017
 
2016
Net income
$
581

 
$
225

 
$
1,279

 
$
704

Less: Dividends on mandatory convertible preferred stock
(14
)
 
(14
)
 
(28
)
 
(28
)
Net income attributable to common stockholders - basic
567

 
211

 
1,251

 
676

Add: Dividends related to mandatory convertible preferred stock
14

 

 
28

 

Net income attributable to common stockholders - diluted
$
581

 
$
211

 
$
1,279

 
$
676

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
830,971,528

 
822,434,490

 
829,356,255

 
820,933,126

Effect of dilutive securities:
 
 
 
 
 
 
 
Outstanding stock options and unvested stock awards
7,247,653

 
7,318,466

 
9,260,131

 
8,728,927

Mandatory convertible preferred stock
32,237,266

 

 
32,237,266

 

Weighted average shares outstanding - diluted
870,456,447

 
829,752,956

 
870,853,652

 
829,662,053

 
 
 
 
 
 
 
 
Earnings per share - basic
$
0.68

 
$
0.26

 
$
1.51

 
$
0.82

Earnings per share - diluted
$
0.67

 
$
0.25

 
$
1.47

 
$
0.81

 
 
 
 
 
 
 
 
Potentially dilutive securities:
 
 
 
 
 
 
 
Outstanding stock options and unvested stock awards
48,397

 
307,573

 
71,734

 
465,765

Mandatory convertible preferred stock

 
32,237,266

 

 
32,237,266


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

18



Note 9 – Commitments and Contingencies

Commitments

Operating Leases and Purchase Commitments

Future minimum payments for non-cancelable operating leases and purchase commitments are summarized below:
(in millions)
Operating Leases
 
Purchase Commitments
Year ending June 30,
 
 
 
2018
$
2,397

 
$
2,133

2019
2,132

 
1,166

2020
1,829

 
988

2021
1,452

 
721

2022
1,116

 
648

Thereafter
2,260

 
837

Total
$
11,186

 
$
6,493


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). The renewable energy purchase agreement does not contain any unconditional purchase obligations because amounts under the agreement are not fixed and determinable. 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 six months ended June 30, 2017.

Related-Party Commitments

During the six months ended June 30, 2017, 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

19


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 – 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 in aggregate principal amount of public 4.000% Senior Notes due 2022, (ii) issued $500 million in aggregate principal amount of public 5.125% Senior Notes due 2025 and (iii) issued $500 million in aggregate principal amount of public 5.375% Senior Notes due 2027.

In April 2017, T-Mobile USA and certain of its affiliates, as guarantors, (i) issued $1.0 billion in aggregate principal amount of 4.000% Senior Notes due 2022, (ii) issued $1.25 billion in aggregate principal amount of 5.125% Senior Notes due 2025 and (iii) issued $750 million in aggregate principal amount of 5.375% Senior Notes due 2027. Additionally, T-Mobile USA and certain of its affiliates, as guarantors, redeemed 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.

In May 2017, T-Mobile USA and certain of its affiliates, as guarantors, (i) issued $2.0 billion in aggregate principal amount of 5.300% Senior Notes due 2021, (ii) issued $1.35 billion in aggregate principal amount of 6.000% Senior Notes due 2024 and (iii) issued $650 million in aggregate principal amount of 6.000% Senior Notes due 2024.

See Note 6 - Debt for further information.

The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures and credit facilities governing the long-term debt contain covenants that, among other things, limit the ability of the 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 credit facilities, indentures and 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 June 30, 2017 and December 31, 2016, and for the three and six months ended June 30, 2017 and 2016.

20


Condensed Consolidating Balance Sheet Information
June 30, 2017
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
43

 
$
1

 
$
121

 
$
16

 
$

 
$
181

Accounts receivable, net

 

 
1,485

 
234

 

 
1,719

Equipment installment plan receivables, net

 

 
2,060

 

 

 
2,060

Accounts receivable from affiliates

 

 
32

 

 

 
32

Inventories

 

 
1,208

 

 

 
1,208

Other current assets

 

 
1,010

 
570

 

 
1,580

Total current assets
43

 
1

 
5,916

 
820

 

 
6,780

Property and equipment, net (1)

 

 
21,083

 
340

 

 
21,423

Goodwill

 

 
1,683

 

 

 
1,683

Spectrum licenses

 

 
35,060

 

 

 
35,060

Other intangible assets, net

 

 
296

 

 

 
296

Investments in subsidiaries, net
19,272

 
37,056

 

 

 
(56,328
)
 

Intercompany receivables
299

 
9,367

 

 

 
(9,666
)
 

Equipment installment plan receivables due after one year, net

 

 
1,102

 

 

 
1,102

Other assets

 
3

 
507

 
305

 

 
815

Total assets
$
19,614

 
$
46,427

 
$
65,647

 
$
1,465

 
$
(65,994
)
 
$
67,159

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

 
$
261

 
$
5,705

 
$
259

 
$

 
$
6,225

Payables to affiliates

 
119

 
36

 

 

 
155

Short-term debt

 
5

 
517

 

 

 
522

Short-term debt to affiliates

 
680

 

 

 

 
680

Deferred revenue

 

 
851

 

 

 
851

Other current liabilities

 

 
230

 
165

 

 
395

Total current liabilities

 
1,065

 
7,339

 
424

 

 
8,828

Long-term debt

 
11,915

 
1,291

 

 

 
13,206

Long-term debt to affiliates

 
14,086

 

 

 

 
14,086

Tower obligations (1)

 

 
396

 
2,210

 

 
2,606

Deferred tax liabilities

 

 
5,188

 

 

 
5,188

Deferred rent expense

 

 
2,660

 

 

 
2,660

Negative carrying value of subsidiaries, net

 

 
567

 

 
(567
)
 

Intercompany payables

 

 
9,445

 
221

 
(9,666
)
 

Other long-term liabilities

 
89

 
878

 
4

 

 
971

Total long-term liabilities

 
26,090

 
20,425

 
2,435

 
(10,233
)
 
38,717

Total stockholders' equity (deficit)
19,614

 
19,272

 
37,883

 
(1,394
)
 
(55,761
)
 
19,614

Total liabilities and stockholders' equity
$
19,614

 
$
46,427

 
$
65,647

 
$
1,465

 
$
(65,994
)
 
$
67,159

(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 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