10-Q 1 tmus09302018form10-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 September 30, 2018
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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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     ¨                        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 October 25, 2018

Common Stock, $0.00001 par value per share
 
848,393,022





T-Mobile US, Inc.
Form 10-Q
For the Quarter Ended September 30, 2018

Table of Contents




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)
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
329

 
$
1,219

Accounts receivable, net of allowances of $70 and $86
1,652

 
1,915

Equipment installment plan receivables, net
2,366

 
2,290

Accounts receivable from affiliates
12

 
22

Inventories
958

 
1,566

Other current assets
1,969

 
1,903

Total current assets
7,286

 
8,915

Property and equipment, net
22,502

 
22,196

Goodwill
1,901

 
1,683

Spectrum licenses
35,553

 
35,366

Other intangible assets, net
229

 
217

Equipment installment plan receivables due after one year, net
1,223

 
1,274

Other assets
1,488

 
912

Total assets
$
70,182

 
$
70,563

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities
$
6,500

 
$
8,528

Payables to affiliates
226

 
182

Short-term debt
783

 
1,612

Deferred revenue
696

 
779

Other current liabilities
367

 
414

Total current liabilities
8,572

 
11,515

Long-term debt
11,993

 
12,121

Long-term debt to affiliates
14,581

 
14,586

Tower obligations
2,565

 
2,590

Deferred tax liabilities
4,370

 
3,537

Deferred rent expense
2,761

 
2,720

Other long-term liabilities
985

 
935

Total long-term liabilities
37,255

 
36,489

Commitments and contingencies (Note 15)


 


Stockholders' equity
 
 
 
Common Stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 849,890,566 and 860,861,998 shares issued, 848,380,679 and 859,406,651 shares outstanding

 

Additional paid-in capital
37,956

 
38,629

Treasury stock, at cost, 1,509,887 and 1,455,347 shares issued
(7
)
 
(4
)
Accumulated other comprehensive income

 
8

Accumulated deficit
(13,594
)
 
(16,074
)
Total stockholders' equity
24,355

 
22,559

Total liabilities and stockholders' equity
$
70,182

 
$
70,563


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 September 30,
 
Nine Months Ended September 30,
(in millions, except share and per share amounts)
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Branded postpaid revenues
$
5,244

 
$
4,920

 
$
15,478

 
$
14,465

Branded prepaid revenues
2,395

 
2,376

 
7,199

 
7,009

Wholesale revenues
338

 
274

 
879

 
778

Roaming and other service revenues
89

 
59

 
247

 
151

Total service revenues
8,066

 
7,629

 
23,803

 
22,403

Equipment revenues
2,391

 
2,118

 
7,069

 
6,667

Other revenues
382

 
272

 
993

 
775

Total revenues
10,839

 
10,019

 
31,865

 
29,845

Operating expenses
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation and amortization shown separately below
1,586

 
1,594

 
4,705

 
4,520

Cost of equipment sales
2,862

 
2,617

 
8,479

 
8,149

Selling, general and administrative
3,314

 
3,098

 
9,663

 
8,968

Depreciation and amortization
1,637

 
1,416

 
4,846

 
4,499

Gains on disposal of spectrum licenses

 
(29
)
 

 
(67
)
Total operating expense
9,399

 
8,696

 
27,693

 
26,069

Operating income
1,440

 
1,323

 
4,172

 
3,776

Other income (expense)
 
 
 
 
 
 
 
Interest expense
(194
)
 
(253
)
 
(641
)
 
(857
)
Interest expense to affiliates
(124
)
 
(167
)
 
(418
)
 
(398
)
Interest income
5

 
2

 
17

 
15

Other income (expense), net
3

 
1

 
(51
)
 
(89
)
Total other expense, net
(310
)
 
(417
)
 
(1,093
)
 
(1,329
)
Income before income taxes
1,130

 
906

 
3,079

 
2,447

Income tax expense
(335
)
 
(356
)
 
(831
)
 
(618
)
Net income
795

 
550

 
2,248

 
1,829

Dividends on preferred stock

 
(13
)
 

 
(41
)
Net income attributable to common stockholders
$
795

 
$
537

 
$
2,248

 
$
1,788

 
 
 
 
 
 
 
 
Net income
$
795

 
$
550

 
$
2,248

 
$
1,829

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

 
1

 

 
3

Other comprehensive income

 
1

 

 
3

Total comprehensive income
$
795

 
$
551

 
$
2,248

 
$
1,832

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.94

 
$
0.65

 
$
2.65

 
$
2.15

Diluted
$
0.93

 
$
0.63

 
$
2.62

 
$
2.10

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
847,087,120

 
831,189,779

 
849,960,290

 
829,974,146

Diluted
853,852,764

 
871,420,065

 
858,248,568

 
871,735,511


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 September 30,
 
Nine Months Ended September 30,
(in millions)
2018
 
2017
 
2018
 
2017
Operating activities
 
 
 
 
 
 
 
Net income
$
795

 
$
550

 
$
2,248

 
$
1,829

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
Depreciation and amortization
1,637

 
1,416

 
4,846

 
4,499

Stock-based compensation expense
115

 
82

 
324

 
221

Deferred income tax expense
284

 
347

 
762

 
595

Bad debt expense
80

 
123

 
209

 
298

Losses from sales of receivables
48

 
67

 
127

 
242

Deferred rent expense
10

 
21

 
21

 
61

Losses on redemption of debt

 

 
122

 
86

Gains on disposal of spectrum licenses

 
(29
)
 

 
(67
)
Changes in operating assets and liabilities
 
 
 
 
 
 
 
Accounts receivable
(1,238
)
 
(1,022
)
 
(3,247
)
 
(2,676
)
Equipment installment plan receivables
(335
)
 
(355
)
 
(843
)
 
(1,148
)
Inventories
(115
)
 
113

 
43

 
(28
)
Other current and long-term assets
(193
)
 
(184
)
 
(309
)
 
(330
)
Accounts payable and accrued liabilities
(265
)
 
(12
)
 
(1,372
)
 
(607
)
Other current and long-term liabilities
39

 
60

 
(21
)
 
(84
)
Other, net
52

 
75

 
35

 
75

Net cash provided by operating activities
914

 
1,252

 
2,945

 
2,966

Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment, including capitalized interest of $101, $29, $246 and $111
(1,362
)
 
(1,441
)
 
(4,357
)
 
(4,316
)
Purchases of spectrum licenses and other intangible assets
(22
)
 
(15
)
 
(101
)
 
(5,820
)
Proceeds related to beneficial interests in securitization transactions
1,338

 
1,110

 
3,956

 
3,126

Acquisition of companies, net of cash acquired

 

 
(338
)
 

Other, net
4

 
1

 
30

 
(2
)
Net cash used in investing activities
(42
)
 
(345
)
 
(810
)
 
(7,012
)
Financing activities
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt

 
500

 
2,494

 
10,480

Payments of consent fees related to long-term debt

 

 
(38
)
 

Proceeds from borrowing on revolving credit facility
1,810

 
1,055

 
6,050

 
2,910

Repayments of revolving credit facility
(2,130
)
 
(1,735
)
 
(6,050
)
 
(2,910
)
Repayments of capital lease obligations
(181
)
 
(141
)
 
(508
)
 
(350
)
Repayments of short-term debt for purchases of inventory, property and equipment, net
(246
)
 
(4
)
 
(246
)
 
(296
)
Repayments of long-term debt

 

 
(3,349
)
 
(10,230
)
Repurchases of common stock

 

 
(1,071
)
 

Tax withholdings on share-based awards
(5
)
 
(6
)
 
(89
)
 
(101
)
Dividends on preferred stock

 
(13
)
 

 
(41
)
Cash payments for debt prepayment or debt extinguishment costs

 

 
(212
)
 
(188
)
Other, net
(6
)
 
(5
)
 
(6
)
 
11

Net cash used in financing activities
(758
)
 
(349
)
 
(3,025
)
 
(715
)
Change in cash and cash equivalents
114

 
558

 
(890
)
 
(4,761
)
Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
215

 
181

 
1,219

 
5,500

End of period
$
329

 
$
739

 
$
329

 
$
739

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
Interest payments, net of amounts capitalized
$
366

 
$
343

 
$
1,303

 
$
1,565

Income tax payments
29

 
2

 
40

 
23

Noncash beneficial interest obtained in exchange for securitized receivables
1,263

 
972

 
3,596

 
2,980

Noncash investing and financing activities
 
 
 
 
 
 
 
Changes in accounts payable for purchases of property and equipment
$
78

 
$
(141
)
 
$
(672
)
 
$
(458
)
Leased devices transferred from inventory to property and equipment
229

 
262

 
813

 
775

Returned leased devices transferred from property and equipment to inventory
(74
)
 
(165
)
 
(246
)
 
(635
)
Issuance of short-term debt for financing of property and equipment

 
1

 
291

 
291

Assets acquired under capital lease obligations
133

 
138

 
451

 
735


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 – Summary of Significant Accounting Policies

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, 2017.

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 our Annual Report on Form 10-K for the year ended December 31, 2017). 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.

Accounting Pronouncements Adopted During the Current Year

Revenue

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and has since modified the standard with several ASUs (collectively, the “new revenue standard”). The new revenue 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 adopted the new revenue standard on January 1, 2018, using the modified retrospective method with the cumulative effect of initially applying the guidance recognized at the date of initial application. Comparative information has not been restated and continues to be reported under the standards in effect for those periods. We have applied the new revenue standard only to contracts not completed as of the date of initial application, referred to as open contracts. We have elected the practical expedient that permits an entity to reflect the aggregate effect of all of the modifications (on a contract-by-contract basis) that occurred before the date of initial application in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations. Electing this practical expedient does not have a significant impact on our financial statements due to the short-term duration of most of our contracts and the nature of our contract modifications.

We have implemented significant new revenue accounting systems, processes and internal controls over revenue recognition to assist us in the application of the new revenue standard.

Revenue Recognition

We primarily generate our revenue from providing wireless services to customers and selling or leasing devices and accessories. Our contracts with customers may involve multiple performance obligations, which include wireless services, wireless devices or a combination thereof, and we allocate the transaction price between each performance obligation based on its relative standalone selling price.


7


Significant Judgments

The most significant judgments affecting the amount and timing of revenue from contracts with our customers include the following items:

For transactions where we recognize a significant financing component, judgment is required to determine the discount rate. For equipment installment plan (“EIP”) sales, the discount rate used to adjust the transaction price primarily reflects current market interest rates and the estimated credit risk of the customer.
Our products are generally sold with a right of return, which is accounted for as variable consideration when estimating the amount of revenue to recognize. Expected device returns are estimated based on historical experience.
Sales of equipment to indirect dealers who have been identified as our customer (referred to as the sell-in model) often include credits subsequently paid to the dealer as a reimbursement for any discount promotions offered to the end consumer. These credits (payments to a customer) are accounted for as variable consideration when estimating the amount of revenue to recognize from the sales of equipment to indirect dealers and are estimated based on historical experience and other factors, such as expected promotional activity.
Promotional bill credits offered to a customer on an equipment sale that are paid over time and are contingent on the customer maintaining a service contract may result in an extended service contract based on whether a substantive penalty is deemed to exist. Determining whether contingent bill credits result in a substantive termination penalty, and determining the term over which a substantive termination penalty exists, may require significant judgment.
For capitalized contract costs, determining the amortization period as well as assessing the indicators of impairment may require significant judgment.
The determination of the standalone selling price for contracts that involve more than one product or service (or performance obligation) may require significant judgment.
The identification of distinct performance obligations within our service plans may require significant judgment.

Wireless Services Revenue

We generate our wireless services revenues from providing access to, and usage of, our wireless communications network. Service revenues also include revenues earned for providing value added services to customers, such as handset insurance services. Service contracts are billed monthly either in advance or arrears, or are prepaid. Generally, service revenue is recognized as we satisfy our performance obligation to transfer service to our customers. We typically satisfy our stand-ready performance obligations, including unlimited wireless services, evenly over the contract term. For usage-based and prepaid wireless services, we satisfy our performance obligations when services are rendered.

Revenue for service contracts that we assess are not probable of collection is not recognized until the contract is completed and cash is received. Collectibility is re-assessed when there is a significant change in facts or circumstances. Our assessment of collectibility considers whether we may limit our exposure to credit risk through our right to stop transferring additional service in the event the customer is delinquent.

Consideration payable to a customer is treated as a reduction of the total transaction price, unless the payment is in exchange for a distinct good or service, such as certain commissions paid to dealers.
 
Revenue is recorded net of costs paid to another party for performance obligations where we arrange for the other party to transfer goods or services to the customer (i.e., when we are acting as an agent). For example, performance obligations relating to services provided by third-party content providers where T-Mobile neither controls a right to the content provider’s service nor controls the underlying service itself are presented net because T-Mobile is acting as an agent.

Federal Universal Service Fund and other regulatory fees are assessed by various governmental authorities in connection with the services we provide to our customers and are included in Cost of services. When we separately bill and collect these regulatory fees from customers, they are recorded in Total service revenues in our Condensed Consolidated Statements of Comprehensive Income.

We have made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by T-Mobile from a customer (for example, sales, use, value added, and some excise taxes).


8


Equipment Revenues

We generate equipment revenues from the sale or lease of mobile communication devices and accessories. For performance obligations related to equipment contracts, we typically transfer control at a point in time when the device or accessory is delivered to, and accepted by, the customer or dealer. We have elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. We estimate variable consideration (e.g. device returns or certain payments to indirect dealers) based on historical experience as well as other factors, such as expected trends. Equipment sales not probable of collection are generally recorded as payments are received. Our assessment of collectibility considers contract terms such as down payments that reduce our exposure to credit risk.

We offer certain customers the option to pay for devices and accessories in installments using an EIP. Generally, we recognize as a reduction of the total transaction price the effects of a financing component in contracts where customers purchase their devices and accessories on an EIP with a term of more than one year, including those financing components that are not considered to be significant to the contract. However, we have elected the practical expedient to not recognize the effects of a significant financing component for contracts where we expect, at contract inception, that the period between the transfer of a performance obligation to a customer and the customer’s payment for that performance obligation will be one year or less.

In addition, for customers who enroll in our Just Upgrade My Phone (“JUMP!”®) program, we recognize a liability based on the estimated fair value of the specified-price trade-in right guarantee. The fair value of the guarantee is deducted from the transaction price under the new revenue standard, and the remaining transaction price is allocated to other elements of the contract, including service and equipment performance obligations. See “Guarantee Liabilities” in Note 1 - Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2017.

In 2015, we introduced JUMP! On Demand, which allows customers to lease a device and upgrade their leased wireless device for a new device up to one time per month. To date, all of our leased wireless devices are accounted for as operating leases and estimated contract consideration is allocated between lease elements and non-lease elements (such as service and equipment performance obligations) based on the relative standalone selling price of each performance obligation in the contract. Lease revenues are recorded as equipment revenues and recognized as earned on a straight-line basis over the lease term. Lease revenues on contracts not probable of collection are limited to the amount of payments received. See “Property and Equipment” in Note 1 - Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Contract Balances

Generally, T-Mobile devices and service plans are available at standard prices, which are maintained on price lists and published on our website and/or within our retail stores.

For contracts that involve more than one product or service that are identified as separate performance obligations, the transaction price is allocated to the performance obligations based on their relative standalone selling prices. Standalone selling price is the price at which T-Mobile would sell the good or service separately to a customer and is most commonly evidenced by the price at which T-Mobile sells that good or service separately in similar circumstances and to similar customers.

A contract asset is recorded when revenue is recognized in advance of our right to receive consideration (i.e., we must perform additional services in order to receive consideration). Amounts are recorded as receivables when our right to consideration is unconditional. When consideration is received, or we have an unconditional right to consideration in advance of delivery of goods or services, a contract liability is recorded. The transaction price can include non-refundable upfront fees, which are allocated to the identifiable performance obligations.

Contract assets are included in Other current assets and Other assets and contract liabilities are included in Deferred revenue in our Condensed Consolidated Balance Sheets.


9


Contract Modifications

Our service contracts allow customers to frequently modify their contracts without incurring penalties in many cases. Each time a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a separate contract, as if there is a termination of the existing contract and creation of a new contract, or if the modification should be considered a change associated with the existing contract. We typically do not have significant impacts from contract modifications.

Contract Costs

We incur certain incremental costs to obtain a contract that we expect to recover, such as sales commissions. We record an asset when these incremental costs to obtain a contract are incurred and amortize them on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.

We amortize deferred costs incurred to obtain service contracts on a straight-line basis over the term of the initial contract and anticipated renewal contracts to which the costs relate. However, we have elected the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less.

Incremental costs to obtain equipment contracts (e.g., commissions paid on device and accessory sales) are recognized when the equipment is transferred to the customer.

Financial Statement Impacts of Applying the New Revenue Standard

The cumulative effect of initially applying the new revenue standard to all open contracts as of January 1, 2018 is as follows:
 
January 1, 2018
(in millions)
Beginning Balance
 
Cumulative Effect Adjustment
 
Beginning Balance, As Adjusted
Assets
 
 
 
 
 
Other current assets
$
1,903

 
$
140

 
$
2,043

Other assets
912

 
150

 
1,062

Liabilities and Stockholders’ Equity
 
 
 
 
 
Deferred revenue
$
779

 
$
4

 
$
783

Deferred tax liabilities
3,537

 
73

 
3,610

Accumulated deficit
(16,074
)
 
213

 
(15,861
)

The most significant impacts upon adoption of the new revenue standard on January 1, 2018 include the following items:

A deferred contract cost asset of $150 million was recorded at transition in Other assets in our Condensed Consolidated Balance Sheets for incremental contract acquisition costs paid on open contracts, which consists primarily of commissions paid to acquire branded postpaid service contracts; and
A contract asset of $140 million was recorded at transition in Other current assets in our Condensed Consolidated Balance Sheets primarily for contracts with promotional bill credits offered to customers on equipment sales that are paid over time and are contingent on the customer maintaining a service contract.


10


Financial statement results as reported under the new revenue standard as compared to the previous revenue standard for the three and nine months ended and as of September 30, 2018 are as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
(in millions, except per share amounts)
Previous Revenue Standard
 
New Revenue Standard
 
Change
 
Previous Revenue Standard
 
New Revenue Standard
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
Branded postpaid revenues
$
5,242

 
$
5,244

 
$
2

 
$
15,503

 
$
15,478

 
$
(25
)
Branded prepaid revenues
2,396

 
2,395

 
(1
)
 
7,203

 
7,199

 
(4
)
Wholesale revenues
295

 
338

 
43

 
836

 
879

 
43

Roaming and other service revenues
89

 
89

 

 
247

 
247

 

Total service revenues
8,022

 
8,066

 
44

 
23,789

 
23,803

 
14

Equipment revenues
2,286

 
2,391

 
105

 
6,791

 
7,069

 
278

Other revenues
382

 
382

 

 
993

 
993

 

Total revenues
10,690

 
10,839

 
149

 
31,573

 
31,865

 
292

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation and amortization shown separately below
1,562

 
1,586

 
24

 
4,655

 
4,705

 
50

Cost of equipment sales
2,867

 
2,862

 
(5
)
 
8,491

 
8,479

 
(12
)
Selling, general and administrative
3,320

 
3,314

 
(6
)
 
9,724

 
9,663

 
(61
)
Depreciation and amortization
1,637

 
1,637

 

 
4,846

 
4,846

 

Total operating expenses
9,386

 
9,399

 
13

 
27,716

 
27,693

 
(23
)
Operating income
1,304

 
1,440

 
136

 
3,857

 
4,172

 
315

Total other expense, net
(310
)
 
(310
)
 

 
(1,093
)
 
(1,093
)
 

Income before income taxes
994

 
1,130

 
136

 
2,764

 
3,079

 
315

Income tax expense
(300
)
 
(335
)
 
(35
)
 
(750
)
 
(831
)
 
(81
)
Net income
$
694

 
$
795

 
$
101

 
$
2,014

 
$
2,248

 
$
234

Earnings per share
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
0.82

 
0.94

 
0.12

 
2.37

 
2.65

 
0.28

Diluted earnings per share
0.81

 
0.93

 
0.12

 
2.35

 
2.62

 
0.27


 
September 30, 2018
(in millions)
Previous Revenue Standard
 
New Revenue Standard
 
Change
Assets
 
 
 
 
 
Other current assets
$
1,874

 
$
1,969

 
$
95

Other assets
969

 
1,488

 
519

Liabilities and Stockholders’ Equity
 
 
 
 
 
Deferred revenue
$
682

 
$
696

 
$
14

Deferred tax liabilities
4,216

 
4,370

 
154

Accumulated deficit
(14,040
)
 
(13,594
)
 
446


The most significant impacts to financial statement results as reported under the new revenue standard as compared to the previous revenue standard for the current reporting period are as follows:

Under the new revenue standard, certain commissions paid to dealers previously recognized as a reduction to Equipment revenues in our Condensed Consolidated Statements of Comprehensive Income are now recorded as commission costs in Selling, general and administrative expense.
Contract costs capitalized for new contracts will accumulate in Other assets in our Condensed Consolidated Balance Sheets during 2018. As a result, there will be a net benefit to Operating income in our Condensed Consolidated Statements of Comprehensive Income during 2018 as capitalization of costs exceed amortization. As capitalized costs amortize into expense over time, the accretive benefit to Operating income anticipated in 2018 is expected to moderate in 2019 and normalize in 2020.

11


For contracts with promotional bill credits that are contingent on the customer maintaining a service contract that result in an extended service contract, a contract asset is recorded when control of the equipment transfers to the customer and is subsequently amortized as a reduction to Total service revenues in our Condensed Consolidated Statements of Comprehensive Income over the extended contract term.

See disclosures related to Contracts with Customers under the new revenue standard in Note 11 - Revenue from Contracts with Customers.

Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (the “new cash flow standard”). The new cash flow 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. We adopted the new cash flow standard on January 1, 2018, which was the date it became effective for us. We have applied the new cash flow standard retrospectively to all periods presented. The new cash flow standard impacted the presentation of cash flows related to our beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities of $1.3 billion and $1.1 billion for the three months ended September 30, 2018 and 2017, respectively, and $4.0 billion and $3.1 billion for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. The new cash flow standard also impacted the presentation of our cash payments for debt prepayment and debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities of $212 million and $188 million for the nine months ended September 30, 2018 and 2017, respectively, in our Condensed Consolidated Statements of Cash Flows. There were no cash payments for debt prepayment and debt extinguishment costs during the three months ended September 30, 2018 and 2017.

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities,” and has since modified the standard in February 2018 with ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall” (Subtopic 825-10). The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The standard became effective for us, and we adopted the standard, on January 1, 2018. The standard requires the impact of adoption to be recorded to retained earnings under a modified retrospective approach. The implementation of this standard did not have a material impact on our condensed consolidated financial statements.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes (Topic 740): 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 became effective for us, and we adopted the standard, on January 1, 2018. The standard requires any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. The implementation of this standard did not have a material impact on our condensed consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and has since modified the standard with several ASUs (collectively, the “new lease standard”). The new lease standard requires most lessees to report a right-of-use asset and a lease liability. The income statement recognition is similar to existing lease accounting and is based on lease classification. The new lease standard requires lessees and lessors to classify most leases using principles similar to existing lease accounting. For lessors, the new lease standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The new lease standard provides entities two options for applying the modified retrospective approach (1) retrospectively to each prior reporting period presented in the financial statements with the cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented or (2) retrospectively at the beginning of the period of adoption (January 1, 2019) through a cumulative-effect adjustment. TMUS plans to adopt the standard by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application.


12


Our evaluation of the new lease standard is ongoing and includes assessing which of our arrangements qualify as a lease through detailed contract reviews and targeted inquiries and aggregating and validating lease data and related information as well as determining whether previous conclusions for certain transactions, such as failed sale leaseback arrangements under the previous lease standard, Leases (Topic 840), would change under the new lease standard. We are in the process of implementing significant new lease accounting systems, and cross-functional teams are working to update processes and identify new internal controls over lease recognition, which will ultimately assist in the application of the new lease standard. Additionally, we are assessing the practical expedients and policy elections provided by the new leasing standard.

We plan to adopt the new lease standard when it becomes effective for us beginning January 1, 2019 and the adoption of the new lease standard will result in the recognition of right-of-use assets and lease liabilities that have not previously been recorded, which we expect will have a material impact on our condensed consolidated financial statements.

Financial Instruments

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 collectability 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.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvement to Accounting for Hedging Activities.” The standard modified the guidance for the designation and measurement of qualifying hedging relationships and the presentation of hedge results. We adopted this standard on October 1, 2018 and will apply the standard to hedging transactions prospectively.

Cloud Computing Arrangements

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will become effective for us beginning January 1, 2020 and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted for us at any time. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements and the timing of adoption.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not have, or are not believed by management to have, a significant impact on our present or future consolidated financial statements.

Note 2 - Significant Transactions

Business Combinations

During the nine months ended September 30, 2018, we completed the following acquisitions which were accounted for as business combinations:

On January 1, 2018, we closed on our previously announced Unit Purchase Agreement to acquire the remaining equity in Iowa Wireless Services, LLC (“IWS”), a 54% owned unconsolidated subsidiary, for a purchase price of $25 million.

On January 22, 2018, we completed our acquisition of television innovator Layer3 TV, Inc. (“Layer3 TV”) for cash consideration of $318 million.


13


Proposed Sprint Transaction

On April 29, 2018, we entered into a Business Combination Agreement (the “Business Combination Agreement”) to merge with Sprint Corporation (“Sprint”).

See Note 3 - Business Combinations for further information.

Hurricane Impacts

During the first quarter of 2018, we recognized $36 million in incremental costs to maintain services in Puerto Rico related to hurricanes that occurred in 2017. Additional costs incurred during the second and the third quarters related to hurricanes that occurred in 2017 were immaterial and are expected to be immaterial in the fourth quarter of 2018. During the first quarter of 2018, we received reimbursement payments from our insurance carriers of $94 million, previously accrued for as a receivable as of December 31, 2017. During the second quarter of 2018, we received reimbursement payments of $70 million. During the third quarter of 2018, we received reimbursement payments of $81 million and accrued an additional receivable of $63 million for reimbursement payments agreed to with our insurance carriers as of September 30, 2018 and received in October 2018.

During the third quarter of 2018, our operations in North Carolina and South Carolina experienced losses related to a hurricane, and we recognized $6 million in costs associated with these losses. Additional costs related to the hurricane are expected to be immaterial in the fourth quarter of 2018.

In October 2018, our operations in Florida experienced immaterial losses related to a hurricane. Additional costs related to the hurricane are expected to be incurred during the remainder of the fourth quarter of 2018.

The following table shows the hurricane impacts in our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
(in millions, except per share amounts)
Gross
 
Reim-
bursement
 
Net
 
Gross
 
Reim-
bursement
 
Net
Increase (decrease)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Other revenues
$

 
$
71

 
$
71

 
$

 
$
71

 
$
71

Total revenues
$

 
$
71

 
$
71

 
$

 
$
71

 
$
71

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of services
$
6

 
$
(60
)
 
$
(54
)
 
$
42

 
$
(130
)
 
$
(88
)
Selling, general and administrative

 
(13
)
 
(13
)
 

 
(13
)
 
(13
)
Total operating expenses
$
6

 
$
(73
)
 
$
(67
)
 
$
42

 
$
(143
)
 
$
(101
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
$
(6
)
 
$
144

 
$
138

 
$
(42
)
 
$
214

 
$
172

Net income (loss)
(4
)
 
92

 
88

 
(27
)
 
137

 
110

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
$
(0.01
)
 
$
0.11

 
$
0.10

 
$
(0.03
)
 
$
0.16

 
$
0.13

Earnings per share - diluted
(0.01
)
 
0.11

 
0.10

 
(0.03
)
 
0.16

 
0.13


14



The following table shows the hurricane impacts in our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017:
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
(in millions, except per share amounts)
Gross
 
Reim-
bursement
 
Net
 
Gross
 
Reim-
bursement
 
Net
Increase (decrease)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Branded postpaid revenues
$
(20
)
 
$

 
$
(20
)
 
$
(20
)
 
$

 
$
(20
)
Of which, postpaid phone revenues
(19
)
 

 
(19
)
 
(19
)
 

 
(19
)
Branded prepaid revenues
(11
)
 

 
(11
)
 
(11
)
 

 
(11
)
Wholesale revenues

 

 

 

 

 

Total service revenues
(31
)
 

 
(31
)
 
(31
)
 

 
(31
)
Roaming and other service revenues

 

 

 

 

 

Equipment revenues
(8
)
 

 
(8
)
 
(8
)
 

 
(8
)
Total revenues
$
(39
)
 
$

 
$
(39
)
 
$
(39
)
 
$

 
$
(39
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of services
$
69

 
$

 
$
69

 
$
69

 
$

 
$
69

Cost of equipment sales
4

 

 
4

 
4

 

 
4

Selling, general and administrative
36

 

 
36

 
36

 

 
36

Of which, bad debt
20

 

 
20

 
20

 

 
20

Total operating expenses
$
109

 
$

 
$
109

 
$
109

 
$

 
$
109

 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
$
(148
)
 
$

 
$
(148
)
 
$
(148
)
 
$

 
$
(148
)
Net income (loss)
(90
)
 

 
(90
)
 
(90
)
 

 
(90
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
$
(0.11
)
 
$

 
$
(0.11
)
 
$
(0.11
)
 
$

 
$
(0.11
)
Earnings per share - diluted
(0.10
)
 

 
(0.10
)
 
(0.10
)
 

 
(0.10
)

Sales of Certain Receivables

In February 2018, the service receivable sale arrangement was amended to extend the scheduled expiration date to March 2019. In October 2018, we amended and restated the EIP sale arrangement to, among other things, extend the scheduled expiration date to November 2020 and expand the types of EIP receivables that may be sold. See Note 5 – Sales of Certain Receivables for further information.

Debt

During the nine months ended September 30, 2018, we completed significant transactions with both third parties and affiliates related to the issuance, borrowing and redemption of debt. See Note 9 - Debt for further information.

Repurchases of Common Stock

During the first half of 2018, we made additional repurchases of our common stock. Additionally, during the first quarter of 2018, Deutsche Telekom AG (“DT”), our majority stockholder and an affiliated purchaser, made additional purchases of our common stock. See Note 12 – Repurchases of Common Stock for further information.

Note 3 - Business Combinations

Proposed Sprint Transactions

On April 29, 2018, we entered into a Business Combination Agreement to merge with Sprint in an all-stock transaction at a fixed exchange ratio of 0.10256 shares of T-Mobile common stock for each share of Sprint common stock, or 9.75 shares of Sprint common stock for each share of T-Mobile common stock (the “Merger”). The combined company will be named “T-Mobile” and, as a result of the Merger, is expected to be able to rapidly launch a nationwide 5G network, accelerate innovation

15


and increase competition in the U.S. wireless, video and broadband industries. Neither T-Mobile nor Sprint on its own could generate comparable benefits to consumers.

The Merger and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”)
have been approved by the boards of directors of T-Mobile and Sprint. Immediately following the Merger, it is anticipated that DT and SoftBank Group Corp. will hold, directly or indirectly, on a fully diluted basis, approximately 41.7% and 27.3%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 31.0% of the outstanding T-Mobile common stock held by other stockholders, based on closing share prices and certain other assumptions as of October 1, 2018.

In connection with the entry into the Business Combination Agreement, T-Mobile USA, Inc. (“T-Mobile USA”) entered into a commitment letter, dated as of April 29, 2018 (as amended and restated on May 15, 2018, the “Commitment Letter”), with certain financial institutions named therein that have committed to provide up to $38.0 billion in secured and unsecured debt financing. As permitted by the terms of the Commitment Letter, on June 6, 2018, T-Mobile USA reduced the initial aggregate commitment under the Commitment Letter by $8.0 billion such that the remaining size of the commitment is currently $30.0 billion. The funding of the debt facilities provided for in the Commitment Letter is subject to the satisfaction of the conditions set forth therein, including consummation of the Merger. The proceeds of the debt financing provided for in the Commitment Letter will be used to refinance certain existing debt of us, Sprint and our and Sprint’s respective subsidiaries and for post-closing working capital needs of the combined company. In connection with the financing provided for in the Commitment Letter, we expect to incur certain fees if the Merger closes, including fees for the financial institutions structuring and providing the commitments for the secured term loan facility, secured revolving loan facility and the secured bridge loan, and certain take-out fees associated with the issuance of permanent secured bond debt in lieu of the secured bridge loan. We expect to incur up to approximately $275 million in fees if the Merger were to close on or after January 29, 2019. The fees increase to up to approximately $340 million if the closing date occurs on or after April 29, 2019. We have not accrued these fees as of September 30, 2018. We also may be required to draw down on the $7.0 billion secured term loan facility on May 1, 2019, and would be required to place the proceeds in escrow and pay interest thereon until the Merger closes.

In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a Financing Matters Agreement, dated as of April 29, 2018, pursuant to which DT agreed, among other things, to consent to the incurrence by T-Mobile USA of secured debt in connection with and after the consummation of the Merger. In connection with receiving the requisite consents, we made upfront payments to DT of $7 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt to affiliates in our Condensed Consolidated Balance Sheets. See Note 9 - Debt for further information.

On May 18, 2018, under the terms and conditions described in the Consent Solicitation Statement dated as of May 14, 2018, (the “Consent Solicitation Statement”) we obtained consents necessary to effect certain amendments to certain existing debt of us and our subsidiaries. In connection with receiving the requisite consents, we made upfront payments to third-party note holders of approximately $31 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt. We paid third-party bank fees associated with obtaining the requisite consents of $6 million during the second quarter of 2018, which we recognized as Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income.

Under the terms of Business Combination Agreement, Sprint may be required to reimburse us for 33% of the upfront consent and related bank fees we paid, or $14 million, if the Business Combination Agreement is terminated. We have not accrued the reimbursement of these fees as of September 30, 2018. On May 18, 2018, Sprint also obtained consents necessary to effect certain amendments to certain existing debt of it and its subsidiaries. In connection with receiving the requisite consents, Sprint’s made upfront payments to third-party note holders and related bank fees of $241 million during the second quarter of 2018. Under the terms of Business Combination Agreement, we may also be required to reimburse Sprint for 67% of the upfront consent and related bank fees it paid, or $161 million, if the Business Combination Agreement is terminated. We have not accrued these fees as of September 30, 2018.

For the three and nine months ended September 30, 2018, we recognized costs associated with the Transactions of $53 million and $94 million, respectively. These costs generally included bank fees associated with obtaining the requisite consents on debt to third parties, consulting and legal fees and were recognized as Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income.

The consummation of the Transactions is subject to regulatory approvals and certain other customary closing conditions. The transaction is expected to close during the first half of 2019. The Business Combination Agreement contains certain termination rights for both Sprint and us. If we terminate the Business Combination Agreement in connection with a failure to satisfy the closing condition related to specified minimum credit ratings for the combined company on the closing date of the Merger

16


(after giving effect to the Merger) from at least two of the three credit rating agencies, then in certain circumstances, we may be required to pay Sprint an amount equal to $600 million.

On June 18, 2018, we filed the Public Interest Statement and applications for approval of our Merger with Sprint with the Federal Communications Commission (the “FCC”). On July 18, 2018, the FCC issued a Public Notice formally accepting our applications and establishing a period for public comment. On September 11, 2018, the FCC issued a letter informing us it is pausing its informal 180-day transaction shot clock to allow for a thorough review by FCC staff and third parties of newly-submitted and anticipated modeling provided by us and Sprint.

On July 30, 2018, we filed a registration statement on Form S-4 with the SEC related to the Merger.  The registration statement became effective on October 29, 2018.

Acquisition of Layer3 TV

On January 22, 2018, we completed our acquisition of television innovator Layer3 TV for cash consideration of $318 million. The consideration included a $5 million payment that was made after the closing date in the second quarter of 2018. Upon closing of the transaction, Layer3 TV became a wholly-owned consolidated subsidiary. Layer3 TV acquires and distributes digital entertainment programming primarily through the internet to residential customers, offering direct to home digital television and multi-channel video programming distribution services. This transaction represented an opportunity to acquire a complementary service to our existing wireless service to advance our video strategy.

We accounted for the purchase of Layer3 TV as a business combination. Costs related to this acquisition were immaterial to our Condensed Consolidated Statements of Comprehensive Income. The grant-date fair value of cash-based and share-based incentive compensation awards attributable to post-combination services was approximately $37 million.

The following table shows the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation:
(in millions)
January 22,
2018
Assets acquired
 
Cash and cash equivalents
$
2

Other current assets
14

Property and equipment, net
11

Intangible assets
100

Goodwill
218

Deferred tax assets
2

Total assets acquired
$
347

Liabilities assumed
 
Accounts payable and accrued liabilities
$
27

Short-term debt
2

Total liabilities assumed
29

Total consideration transferred
$
318


We recognized a liability of $21 million within Accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheets and an associated indemnification asset of $12 million in our Condensed Consolidated Balance Sheets related to minimum commitments under acquired content agreements. As of September 30, 2018, the $12 million has been received.

Goodwill of $218 million is calculated as the excess of the purchase price paid over the net assets acquired. The goodwill recorded as part of the Layer3 TV acquisition primarily reflects industry knowledge of the retained management team, as well as intangible assets that do not qualify for separate recognition. None of the goodwill is deductible for tax purposes. See Note 6 - Goodwill for further information.

As part of the transaction, we acquired an identifiable intangible asset of developed technology with an estimated fair value of $100 million, which is being amortized on a straight-line basis over a useful life of 5 years.

The financial results from the acquisition of Layer3 TV since the closing date through September 30, 2018 were not material to our Condensed Consolidated Statements of Comprehensive Income.

17



Acquisition of Iowa Wireless

On January 1, 2018 (the “IWS Acquisition Date”), we closed on our previously announced Unit Purchase Agreement to acquire the remaining equity in IWS, a 54% owned unconsolidated subsidiary, for a purchase price of $25 million. We accounted for our acquisition of IWS as a business combination.

Prior to the IWS Acquisition Date, we accounted for our previously-held investment in IWS under the equity method as we had significant influence, but not control. Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. As such, we valued our previously held equity interest in IWS at $56 million as of the IWS Acquisition Date and recognized a gain of $15 million.

The following table highlights the consideration transferred, the fair value of our previously held equity interest and bargain purchase:
(in millions)
January 1,
2018
Consideration transferred:
 
Cash paid
$
25

Previously held equity interest:
 
Acquisition date fair value of previously held equity interest
56

Bargain purchase gain
25

Net assets acquired
$
106


As part of the acquisition of IWS, we recognized a bargain purchase gain of approximately $25 million, which represents the fair value of the identifiable net assets acquired, primarily IWS spectrum licenses, in excess of the purchase price and fair value of our previously held equity interest. We were in a favorable position to acquire the remaining shares of IWS as a result of our previously held 54% equity interest in IWS, an unprofitable business with valuable spectrum holdings.

The following table shows the amounts recognized as of the IWS Acquisition Date for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation:
(in millions)
January 1,
2018
Assets acquired
 
Current assets
 
Cash and cash equivalents
$
3

Accounts receivable, net
6

Equipment installment plan receivables, net
3

Inventories
1

Other current assets
2

Total current assets
15

Property and equipment, net
36

Spectrum licenses
87

Total assets acquired
$
138

Liabilities assumed
 
Accounts payable and accrued liabilities
$
6

Deferred revenue
2

Total current liabilities
8

Deferred tax liabilities
17

Other long-term liabilities
7

Total long-term liabilities
24

Net assets acquired
$
106


We included both the gain on our previously held equity interest in IWS and the bargain purchase gain within Other income (expense), net for the nine months ended September 30, 2018.

18



Pro forma information

The acquisitions of Layer3 TV and IWS were not material to our prior period consolidated results on a pro forma basis.

Note 4 – Receivables and Allowance for Credit Losses

Our portfolio of receivables is comprised of two portfolio segments, accounts receivable and EIP receivables. Our accounts receivable segment primarily consists of amounts currently due from customers, including service and leased device receivables, other carriers and third-party retail channels.

Based upon customer credit profiles, we classify the EIP receivables segment into two customer classes of “Prime” and “Subprime.” Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. 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.

To determine a customer’s credit profile, we use a proprietary credit scoring model that measures the credit quality of a customer at the time of application for wireless communications service using several factors, such as credit bureau information, consumer credit risk scores and service plan characteristics.

The following table summarizes the EIP receivables, including imputed discounts and related allowance for credit losses:
(in millions)
September 30,
2018
 
December 31,
2017
EIP receivables, gross
$
3,978

 
$
3,960

Unamortized imputed discount
(273
)
 
(264
)
EIP receivables, net of unamortized imputed discount
3,705

 
3,696

Allowance for credit losses
(116
)
 
(132
)
EIP receivables, net
$
3,589

 
$
3,564

Classified on the balance sheet as:
 
 
 
Equipment installment plan receivables, net
$
2,366

 
$
2,290

Equipment installment plan receivables due after one year, net
1,223

 
1,274

EIP receivables, net
$
3,589

 
$
3,564


To determine the appropriate level of the allowance for credit losses, we consider a number of credit quality indicators, including historical credit losses and timely payment experience as well as current collection trends such as write-off frequency and severity, aging of the receivable portfolio, credit quality of the customer base and other qualitative factors such as macro-economic conditions.

We write off account balances if collection efforts are unsuccessful and the receivable balance is deemed uncollectible, based on customer credit quality and the aging of the receivable.

For EIP receivables, subsequent to the initial determination of the imputed discount, we assess the need for and, if necessary, recognize an allowance for credit losses to the extent the amount of estimated probable losses on the gross EIP receivable balances exceed the remaining unamortized imputed discount balances.

The EIP receivables had weighted average effective imputed interest rates of 10.2% and 9.6% as of September 30, 2018 and December 31, 2017, respectively.


19


Activity for the nine months ended September 30, 2018 and 2017, in the allowance for credit losses and unamortized imputed discount balances for the accounts receivable and EIP receivable segments were as follows:
 
September 30, 2018
 
September 30, 2017
(in millions)
Accounts Receivable Allowance
 
EIP Receivables Allowance
 
Total
 
Accounts Receivable Allowance
 
EIP Receivables Allowance
 
Total
Allowance for credit losses and imputed discount, beginning of period
$
86

 
$
396

 
$
482

 
$
102

 
$
316

 
$
418

Bad debt expense
46

 
163

 
209

 
83

 
215

 
298

Write-offs, net of recoveries
(62
)
 
(179
)
 
(241
)
 
(99
)
 
(205
)
 
(304
)
Change in imputed discount on short-term and long-term EIP receivables
N/A

 
155

 
155

 
N/A

 
163

 
163

Impact on the imputed discount from sales of EIP receivables
N/A

 
(146
)
 
(146
)
 
N/A

 
(126
)
 
(126
)
Allowance for credit losses and imputed discount, end of period
$
70

 
$
389

 
$
459

 
$
86

 
$
363

 
$
449


Management considers the aging of receivables to be an important credit indicator. The following table provides delinquency status for the unpaid principal balance for receivables within the EIP portfolio segment, which we actively monitor as part of our current credit risk management practices and policies:
 
September 30, 2018
 
December 31, 2017
(in millions)
Prime
 
Subprime
 
Total EIP Receivables, gross
 
Prime
 
Subprime
 
Total EIP Receivables, gross
Current - 30 days past due
$
1,661

 
$
2,226

 
$
3,887

 
$
1,727

 
$
2,133

 
$
3,860

31 - 60 days past due
13

 
31

 
44

 
17

 
29

 
46

61 - 90 days past due
6

 
15

 
21

 
6

 
16

 
22

More than 90 days past due
6

 
20

 
26

 
8

 
24

 
32

Total receivables, gross
$
1,686

 
$
2,292

 
$
3,978

 
$
1,758

 
$
2,202

 
$
3,960


Note 5 – Sales of Certain Receivables

We have entered into transactions to sell certain service and EIP accounts receivable. The transactions, including our continuing involvement with the sold receivables and the respective impacts to our condensed consolidated 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 receivable 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”) and extend the scheduled expiration date to March 2018. In February 2018, the service receivable sale arrangement was again amended to extend the scheduled expiration date to March 2019. In April 2018, the service receivable sale arrangement was again amended to update certain terms and covenants contained therein to make them consistent with analogous terms and covenants in the documentation of our other financing arrangements. As of September 30, 2018 and December 31, 2017, the service receivable sale arrangement provided funding of $830 million and $880 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 receivable (the “Service BRE”). The Service BRE does not qualify as a 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.


20


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 entity 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 balances and results of the Service VIE are not included 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 our variable interest in the Service VIE:
(in millions)
September 30,
2018
 
December 31,
2017
Other current assets
$
299

 
$
236

Accounts payable and accrued liabilities
11

 
25

Other current liabilities
174

 
180


Sales of EIP Receivables

Overview of the Transaction

In 2015, we entered into an arrangement to sell certain EIP accounts receivable on a revolving basis and in August 2017, the EIP sale arrangement was amended to reduce the maximum funding commitment to $1.2 billion (the “EIP sale arrangement”) and extend the scheduled expiration date to November 2018. In December 2017, the EIP sale arrangement was again amended to increase the maximum funding commitment to $1.3 billion. In April 2018, the EIP sale arrangement was again amended to update certain terms and covenants contained therein to make them consistent with analogous terms and covenants in the documentation of our other financing arrangements. As of both September 30, 2018 and December 31, 2017, the EIP sale arrangement provided funding of $1.3 billion. 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 October 2018, we amended and restated the EIP sale arrangement to, among other things, extend the scheduled expiration date to November 2020 and expand the types of EIP receivables that may be sold.

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 third-party 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.


21


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)
September 30,
2018
 
December 31,
2017
Other current assets
$
405

 
$
403

Other assets
98

 
109

Other long-term liabilities
22

 
3


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 cash proceeds received upon sale in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. We recognize proceeds 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 investing activities in our Condensed Consolidated Statements of Cash Flows as Proceeds related to beneficial interests in securitization transactions.

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 September 30, 2018 and December 31, 2017, our deferred purchase price related to the sales of service receivables and EIP receivables was $800 million and $745 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)
September 30,
2018
 
December 31,
2017
Derecognized net service receivables and EIP receivables
$
2,682

 
$
2,725

Other current assets
704

 
639

of which, deferred purchase price
702

 
636

Other long-term assets
98

 
109

of which, deferred purchase price
98

 
109

Accounts payable and accrued liabilities
11

 
25

Other current liabilities
174

 
180

Other long-term liabilities
22

 
3

Net cash proceeds since inception
1,915

 
2,058

Of which:
 
 
 
Change in net cash proceeds during the year-to-date period
(143
)
 
28

Net cash proceeds funded by reinvested collections
2,058

 
2,030


We recognized losses from sales of receivables of $48 million and $67 million for the three months ended September 30, 2018 and 2017, respectively, and $127 million and $242 million for the nine months ended September 30, 2018 and 2017, 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.


22


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 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 $1.3 billion as of September 30, 2018. 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 6 - Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2018, are as follows:
(in millions)
Goodwill
Historical goodwill
$
12,449

Accumulated impairment losses at December 31, 2017
(10,766
)
Balance as of December 31, 2017
1,683

Goodwill from acquisition of Layer3 TV
218

Balance as of September 30, 2018
$
1,901

Accumulated impairment losses at September 30, 2018
$
(10,766
)

On January 22, 2018, we completed our acquisition of television innovator Layer3 TV. This purchase was accounted for as a business combination resulting in $218 million in goodwill. Layer3 TV is a separate reporting unit and the acquired goodwill will be tested for impairment at this level. See Note 3 - Business Combinations for additional information.

Note 7 – Spectrum License Transactions

The following table summarizes our spectrum license activity for the nine months ended September 30, 2018:
(in millions)
Spectrum Licenses
Balance at December 31, 2017
$
35,366

Spectrum license acquisitions
137

Costs to clear spectrum
50

Balance at September 30, 2018
$
35,553


We had the following spectrum license transactions in the nine months ended September 30, 2018:

We recorded spectrum licenses received as part of our acquisition of the remaining equity interest in IWS at their estimated fair value of approximately $87 million. See Note 3 - Business Combinations for further information.

We closed on multiple spectrum purchase agreements in which we acquired total spectrum licenses of approximately $50 million for cash consideration.

In September 2018, we signed a reciprocal long-term lease agreement with Sprint in which both parties have the right to use a portion of spectrum owned by the other party. This executory agreement does not qualify as an acquisition of

23


spectrum licenses, and we have not capitalized amounts related to the lease. The reciprocal long-term lease is a distinct transaction from the Merger. See Note 15 – Commitments and Contingencies for further information.


Note 8 – Fair Value Measurements

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

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 5 – Sales of Certain Receivables for further information.

The carrying amounts and fair values of our assets measured at fair value on a recurring basis included in our Condensed Consolidated Balance Sheets were as follows:
 
Level within the Fair Value Hierarchy
 
September 30, 2018
 
December 31, 2017
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Deferred purchase price assets
3
 
$
800

 
$
800

 
$
745

 
$
745


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 within the fair value hierarchy. The fair values of our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were determined based on a discounted cash flow approach using market interest rates of instruments with similar terms and maturities and an estimate for our standalone credit risk. Accordingly, our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were classified as Level 2 within 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 Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates. The fair value estimates were based on information available as of September 30, 2018 and December 31, 2017. As such, our estimates are not necessarily indicative of the amount we could realize in a current market exchange.

The carrying amounts and fair values of our short-term and long-term debt included in our Condensed Consolidated Balance Sheets were as follows:
 
Level within the Fair Value Hierarchy
 
September 30, 2018
 
December 31, 2017
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Liabilities:
 
 
 
 
 
 
 
 
 
Senior Notes to third parties
1
 
$
10,949

 
$
11,168

 
$
11,910

 
$
12,540

Senior Notes to affiliates
2
 
9,983

 
9,990

 
7,486

 
7,852

Incremental Term Loan Facility to affiliates
2
 
4,000

 
3,997

 
4,000

 
4,020

Senior Reset Notes to affiliates
2
 
598

 
648

 
3,100

 
3,260



24


Note 9 – Debt

Activity for the nine months ended September 30, 2018, related to our debt was as follows:
(in millions)
December 31,
2017
 
Proceeds from Issuances and Borrowings (1)(3)
 
Note Redemptions(1)(3)
 
Repayments
 
Reclassifications (1)
 
Consent Fees
 
Other (2)
 
September 30,
2018
Short-term debt
$
1,612

 
$

 
$
(3,424
)
 
$

 
$
2,425

 
$

 
$
170

 
$
783

Long-term debt
12,121

 
2,494

 

 

 
(2,425
)
 
(31
)
 
(166
)
 
11,993

Total debt to third parties
13,733

 
2,494

 
(3,424
)
 

 

 
(31
)
 
4

 
12,776

Short-term debt to affiliates

 
6,050

 

 
(6,050
)
 

 

 

 

Long-term debt to affiliates
14,586

 

 

 

 

 
(7
)
 
2

 
14,581

Total debt to affiliates
14,586

 
6,050

 

 
(6,050
)
 

 
(7
)
 
2

 
14,581

Total debt
$
28,319

 
$
8,544

 
$
(3,424
)
 
$
(6,050
)
 
$

 
$
(38
)
 
$
6