T-MOBILE US 
Overview
The objectives of our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are to provide users of our consolidated financial statements with the following:
•A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results; •Context to the financial statements; and •Information that allows assessment of the likelihood that past performance is indicative of future performance. Our MD&A is performed on a consolidated basis and is inclusive of the results and operations of Sprint prospectively from the close of our Merger onApril 1, 2020 . The Merger enhanced our spectrum portfolio, increased our customer base, altered our product mix by increasing the portion of customers who finance their devices with leasing programs and created opportunity for synergies in our operations. We anticipate an initial increase in our combined operating costs which we expect to decrease as we realize synergies. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities. Our MD&A is provided as a supplement to, and should be read together with, our audited consolidated financial statements as ofDecember 31, 2020 and 2019, and for each of the three years in the period endedDecember 31, 2020 , included in Part I I , Item 8 of this Form 10-K. Except as expressly stated, the financial condition and results of operations discussed throughout our MD&A are those ofT-Mobile US, Inc. and its consolidated subsidiaries.
Beginning with the second quarter of 2020, we have discontinued the use of "Branded" to describe the results and metrics associated with our flagship brands including T-Mobile and Metro by T-Mobile.
Sprint Merger
Transaction Overview
OnApril 1, 2020 , we completed our Merger with Sprint, a communications company offering a comprehensive range of wireless and wireline communications products and services. As a result, Sprint and its subsidiaries became wholly owned consolidated subsidiaries of T-Mobile. The Merger has altered the size and scope of our operations, impacting our assets, liabilities, obligations, capital requirements and performance measures. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities. As a combined company, we expect to be able to enhance the breadth and depth of our nationwide 5G network, accelerate innovation, increase competition in theU.S. wireless, video and broadband industries and achieve significant synergies and cost reductions by eliminating redundancies within the combined network as well as other business processes and operations.
For more information regarding the Merger, see Note 2 - Business Combination of the Notes to the Consolidated Financial Statements.
OnJune 22, 2020 , we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transaction of the Notes to the Consolidated Financial Statements. 30 -------------------------------------------------------------------------------- Table of Contents Brand and Retail Unification
On
Sale of Boost Mobile and Sprint Prepaid Brands
In connection with obtaining regulatory approval for the Merger, onJuly 1, 2020 , DISH acquired the prepaid wireless business operated under the Boost Mobile and Sprint prepaid brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers ofShentel and Swiftel Communications, Inc. ), including customer accounts, inventory, contracts, intellectual property and certain other specified assets (the "Prepaid Business"), and assumed certain related liabilities (the "Prepaid Transaction"). For more information, see Note 12 - Discontinued Operations of the Notes to the Consolidated Financial Statements. Upon the closing of the Prepaid Transaction, we entered into a Master Network Services Agreement (the "MVNO Agreement") providing for the provisioning of network services to customers of the Prepaid Business for a period of up to seven years following the closing of the Prepaid Transaction. The revenue generated through this agreement is presented within Wholesale revenues in our Consolidated Statements of Comprehensive Income following the close of the Prepaid Transaction onJuly 1, 2020 . We included the pre-tax results of our discontinued operations in our determination of Adjusted EBITDA, a Non-GAAP measure, to reflect contributions of the Prepaid Business that was replaced by the MVNO Agreement beginning onJuly 1, 2020 . See "Adjusted EBITDA" in the " Performance Measures " section of this MD&A. Merger-Related Costs
Merger-related costs generally include:
•Integration costs to achieve efficiencies in network, retail, information technology and back office operations; •Restructuring costs, including severance, store rationalization and network decommissioning; and •Transaction costs, including legal and professional services related to the completion of the Merger. Transaction and restructuring costs are disclosed in Note 2 - Business Combination and Note 1 9 - Restructuring Costs , respectively. Merger-related costs have been excluded from our calculation of Adjusted EBITDA, a non-GAAP financial measure, as we do not consider these costs to be reflective of our ongoing operating performance. See "Adjusted EBITDA" in the " Performance Measures " section of this MD&A. Cash payments for Merger-related costs, including payments related to our restructuring plan, are included in Net cash provided by operating activities in our Consolidated Statements of Cash Flows. Merger-related costs during the years endedDecember 31, 2020 , 2019 and 2018 are presented below: Year Ended December 31, 2020 Versus 2019 2019 Versus 2018 (in millions) 2020 2019 2018 $ Change % Change $ Change % Change Merger-related costs Cost of services, exclusive of depreciation and amortization$ 646 $ - $ -$ 646 NM $ - NM Cost of equipment sales 6 - - 6 NM - NM Selling, general and administrative 1,263 620 196 643 104 % 424 216 % Total Merger-related costs$ 1,915 $ 620 $ 196 $ 1,295 209 %$ 424 216 % Cash payments for Merger-related costs$ 1,493 $ 442 $ 86 $ 1,051 238 %$ 356 414 % NM - Not Meaningful Merger-related costs will be impacted by restructuring and integration activities expected to occur over the next three years as we implement initiatives to realize cost efficiencies from the Merger. Transaction costs, including legal and professional service fees related to the completion of the Merger, are expected to decrease in periods subsequent to the close of the Merger. 31 -------------------------------------------------------------------------------- Table of Contents Restructuring Upon the close of the Merger, we began implementing restructuring initiatives to realize cost efficiencies from the Merger. The major activities associated with the restructuring initiatives to date include: •Contract termination costs associated with rationalization of retail stores, distribution channels, duplicative network and backhaul services and other agreements; •Severance costs associated with the reduction of redundant processes and functions; and •The decommissioning of certain small cell sites and distributed antenna systems to achieve synergies in network costs.
Anticipated Impacts
Our restructuring activities are expected to occur over the next three years with substantially all costs incurred by the end of fiscal year 2023. We are evaluating additional restructuring initiatives which are dependent on consultations and negotiation with certain counterparties and the expected impact on our business operations, which could affect the amount or timing of the restructuring costs and related payments. We expect our principal sources of funding to be sufficient to meet our liquidity requirements and anticipated payments associated with the restructuring initiatives. As a result of our ongoing restructuring activities, we expect to realize cost efficiencies by eliminating redundancies within our combined network as well as other business processes and operations. We expect these activities to result in a reduction of expenses within Cost of services and Selling, general and administrative in our Consolidated Statements of Comprehensive Income.
COVID-19 Pandemic
The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies, and financial markets worldwide, and has caused significant volatility in theU.S. and international debt and equity markets. The impact of the Pandemic has been wide-ranging, including, but not limited to, the temporary closures of many businesses and schools, "shelter in place" orders, travel restrictions, social distancing guidelines and other governmental, business and individual actions taken in response to the Pandemic. These restrictions have impacted, and will continue to impact, our business, including the demand for our products and services and the ways in which our customers purchase and use them. In addition, the Pandemic has resulted in economic uncertainty and a significant increase in unemployment inthe United States , which could affect our customers' purchasing decisions and ability to make timely payments. Throughout the year, the Pandemic has peaked, subsided and seen a resurgence, leading to phased re-openings, as well as continuing or renewed containment measures.
As a critical communications infrastructure provider as designated by the government, our focus has been on providing crucial connectivity to our customers and impacted communities while ensuring the safety and well-being of our employees.
Our Response
We have taken a variety of steps to help mitigate the impact of the Pandemic on our customers and to protect the health and well-being of our workforce and communities:
To Protect and Support Our Employees and Communities
•Before the Merger, in mid-March, approximately 80% of T-Mobile and 70% of
Sprint company-owned store locations, as well as many third-party retailer
locations that sell our T-Mobile, Metro by T-Mobile and Sprint brands were
temporarily closed. In compliance with the regulations of various states, we
have since reopened substantially all of our previously closed stores.
•At the onset of the Pandemic, we supplemented pay for certain of our employees
and commissions for third-party dealers and provided access to incremental paid
time off for employees experiencing symptoms, taking care of children who were
home due to school closures or caring for individuals impacted by the Pandemic.
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•We implemented remote working arrangements for many employees with a
significant portion of our internal and global care employees transitioned to a
work-from-home environment. We also encouraged our corporate and administrative
employees to work remotely, if possible.
•We also continue to encourage healthy practices such as social distancing and
hand washing and have increased cleaning and sanitation in all our facilities
and stores.
To Keep Our Customers Connected
•In March, we committed to theFCC 's Keep Americans Connected pledge, and at theFCC 's request, later extended our commitment toJune 30, 2020 . During this period, we pledged to: •Not terminate service to any residential or small business customers because of their inability to pay their bills due to disruptions caused by the Pandemic; and •Waive any late fees that any residential or small business customers incurred because of their economic circumstances related to the Pandemic. •After the Pledge extension ended, we continued to work with our customers to help them maintain service and become current on their accounts, while avoiding financial hardship. •We also took additional temporary steps in March to ensure that all current T-Mobile customers with smartphone data plans were provided connectivity to learn and work remotely throughJune 30, 2020 , including: •Providing unlimited high-speed smartphone data to current customers as ofMarch 13, 2020 who had legacy plans without unlimited high-speed data (excluding roaming); •Giving T-Mobile postpaid and Metro by T-Mobile customers on smartphone plans with mobile hotspot data the ability to add 10GB of Smartphone Mobile HotSpot each month (20GB total); •Working with our Lifeline partners to provide customers up to 5GB per month of free data; •Increasing the data allowance, at no extra charge, to schools and students using our EmpowerED digital learning program to ensure each participant had access to at least 20GB of data per month; and •Providing free international calling to landlines (and, in many cases, mobile numbers) to countries that were significantly impacted by the Pandemic throughMay 13, 2020 . •In addition: •We are offering our customers creative, new COVID-safe solutions such as virtual selling and curbside pickup; •We partnered with multiple spectrum holders and theFCC to successfully deploy additional 600 MHz spectrum on a temporary basis (throughJune 30, 2020 ), effectively doubling total 600 MHz LTE capacity across the nation to help ensure customers can stay connected during this critical time; and •We are working to keep our network fully operational as an essential service to first responders, 911 communications and our customers and continue to expand our 5G network, while adhering to governmental guidelines. We continue to monitor the Pandemic and its impacts and may adjust our actions as needed to continue to provide our products and services to our communities and employees.
Impact on Results of Operations and Performance Measures for the Year Ended
For the year endedDecember 31, 2020 , we incurred$458 million , before taxes, in supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, which are included in Selling, general and administrative expenses in our Consolidated Statements of Comprehensive Income. These costs have been excluded from the calculation of Adjusted EBITDA, a non-GAAP financial measure, as they represent direct, incremental costs as a result of our response to the Pandemic. See "Adjusted EBITDA" in the " Performance Measures " section of this MD&A.
Expected Continued Impact on Results of Operations and Performance Measures
We continue to monitor developments regarding the Pandemic and evaluate the
appropriate steps needed to align with guidelines from state, local and federal
government agencies and do what is best for our employees and customers. The
extent to which the Pandemic impacts our business, operations and financial
results will depend on numerous future developments that we are not able to
predict at this time, including the duration and scope of the Pandemic, the
success of governmental, business
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and individual actions that have been and continue to be taken in response to
the Pandemic, and the impact on economic activity from the Pandemic and actions
taken in response. Such impacts may include:
•Lower net customer additions due to lower switching activity in the industry
from reduced store traffic due to temporary retail store closures and reduced
consumer spending caused by widespread unemployment and other adverse economic
effects, partially offset by lower churn;
•Lower Equipment revenues and lower Cost of equipment sales from lower device
sales due to lower switching activity in the industry from reduced store traffic
due to temporary retail store closures, which may impact our ability to sell
devices;
•Higher bad debt expense on our service and EIP receivable portfolios due to
adverse macro-economic conditions. Should these adverse conditions worsen, our
operating and financial results could be negatively impacted;
•Continued costs to protect and support our employees and customers; and
•Potential disruptions in our supply chains.
In addition, we have reevaluated, and continue to assess, our spending, including for marketing purposes like advertising, capital projects like build-out of our stores, travel, third-party services and certain operating expenses. We have taken actions to adjust our spending given the significant uncertainty around the magnitude and duration of any recessionary impacts arising from the Pandemic.
For additional risks to our business and industry, see Item 1A. Risk Factors .
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Results of Operations
Set forth below is a summary of our consolidated financial results:
Year Ended December 31 2020 Versus 2019 2019 Versus 2018
(in millions) 2020 2019 2018 $ Change % Change $ Change % Change
Revenues
Postpaid revenues $ 36,306 $ 22,673 $ 20,862 $ 13,633 60 % $ 1,811 9 %
Prepaid revenues 9,421 9,543 9,598 (122) (1) % (55) (1) %
Wholesale revenues 2,590 1,279 1,183 1,311 103 % 96 8 %
Roaming and other service
revenues 2,078 1,005 798 1,073 107 % 207 26 %
Total service revenues 50,395 34,500 32,441 15,895 46 % 2,059 6 %
Equipment revenues 17,312 9,840 10,009 7,472 76 % (169) (2) %
Other revenues 690 658 860 32 5 % (202) (23) %
Total revenues 68,397 44,998 43,310 23,399 52 % 1,688 4 %
Operating expenses
Cost of services, exclusive
of depreciation and
amortization shown
separately below 11,878 6,622 6,307 5,256 79 % 315 5 %
Cost of equipment sales,
exclusive of depreciation
and amortization shown
separately below 16,388 11,899 12,047 4,489 38 % (148) (1) %
Selling, general and
administrative 18,926 14,139 13,161 4,787 34 % 978 7 %
Impairment expense 418 - - 418 NM - NM
Depreciation and
amortization 14,151 6,616 6,486 7,535 114 % 130 2 %
Total operating expenses 61,761 39,276 38,001 22,485 57 % 1,275 3 %
Operating income 6,636 5,722 5,309 914 16 % 413 8 %
Other income (expense)
Interest expense (2,483) (727) (835) (1,756) 242 % 108 (13) %
Interest expense to
affiliates (247) (408) (522) 161 (39) % 114 (22) %
Interest income 29 24 19 5 21 % 5 26 %
Other expense, net (405) (8) (54) (397) 4,963 % 46 (85) %
Total other expense, net (3,106) (1,119) (1,392) (1,987) 178 % 273 (20) %
Income from continuing
operations before income
taxes 3,530 4,603 3,917 (1,073) (23) % 686 18 %
Income tax expense (786) (1,135) (1,029) 349 (31) % (106) 10 %
Income from continuing
operations 2,744 3,468 2,888 (724) (21) % 580 20 %
Income from discontinued
operations, net of tax 320 - - 320 NM - NM
Net income $ 3,064 $ 3,468 $ 2,888 $ (404) (12) % $ 580 20 %
Statement of Cash Flows Data
Net cash provided by
operating activities $ 8,640 $ 6,824 $ 3,899 $ 1,816 27 % $ 2,925 75 %
Net cash used in investing
activities (12,715) (4,125) (579) (8,590) 208 % (3,546) 612 %
Net cash provided by (used
in) financing activities 13,010 (2,374) (3,336) 15,384 (648) % 962 (29) %
Non-GAAP Financial Measures
Adjusted EBITDA 24,557 13,383 12,398 11,174 83 % 985 8 %
Free Cash Flow, excluding
gross payments for the
settlement of interest rate
swaps 3,001 4,319 3,552 (1,318) (31) % 767 22 %
NM - Not Meaningful
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The following discussion and analysis is for the year ended December 31, 2020 ,
compared to the same period in 2019 unless otherwise stated. For a discussion
and analysis of the year ended December 31, 2019 , compared to the same period in
2018, please refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Part II, Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2019 , filed with the SEC on
February 6, 2020 .
Total revenues increased
Postpaid revenues increased
•Higher average postpaid phone customers, primarily from customers acquired in the Merger and the success of new customer segments and rate plans, as well as continued growth in existing and new markets; •Higher average postpaid other customers, primarily from customers acquired in the Merger and growth in other connected devices (tablets and wearable products) and growth in public and educational sector customers; and •Higher postpaid phone ARPU, primarily as a result of customers acquired in the Merger. See "Postpaid Phone ARPU" in the " Performance Measures " section of this MD&A.
Prepaid revenues were essentially flat.
Wholesale revenues increased
•Our Master Network Service Agreement with DISH, which went into effect onJuly 1, 2020 ; and •Customers acquired in the Merger.
Roaming and other service revenues increased
•Inclusion of wireline operations acquired in the Merger; and •Higher Lifeline, advertising and affiliate revenues primarily due to operations acquired in the Merger; partially offset by •Lower international roaming due to the impact of the Pandemic, and lower domestic roaming due to revenue generated from Sprint customers roaming on the T-Mobile network in periods before the Merger.
Equipment revenues increased
•An increase of$3.6 billion in lease revenues due to a higher number of customer devices under lease, primarily from leases acquired in the Merger; •An increase of$2.5 billion in device sales revenue, excluding purchased leased devices, primarily from: •An increase in the number of devices sold, excluding purchased leased devices, due to an increase in our customer base primarily due to the Merger; and •Higher average revenue per device sold, excluding purchased leased devices, due to an increase in the high-end device mix due to the Merger; •An increase of$625 million in sales of leased devices, primarily due to an increase in purchased leased devices as a result of the Merger; and •An increase of$622 million in revenues primarily related to the liquidation of a higher volume of returned devices primarily as a result of the Merger.
Operating expenses increased
Cost of services, exclusive of depreciation and amortization, increased
•An increase in expenses associated with leases, backhaul agreements and other network expenses, such as roaming,
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acquired in the Merger and the continued build-out of our nationwide 5G network;
•An increase of $646 million for the year ended December 31, 2020 , in
Merger-related costs including incremental costs associated with accelerating
amortization of right-of-use assets for terminated cell sites leases and the
decommissioning of certain small cell sites and distributed antenna systems;
•Higher employee-related and benefit-related costs primarily due to increased
headcount as a result of the Merger;
•An increase in repair and maintenance costs, primarily due to the Merger; and
•An increase in regulatory and roaming costs primarily due to the Merger.
Cost of equipment sales, exclusive of depreciation and amortization, increased
•An increase of$2.8 billion in device cost of equipment sales, excluding purchased leased devices, primarily from: •An increase in the number of devices sold, excluding purchased leased devices, due to an increase in our customer base primarily due to the Merger; and •Higher average costs per device sold, excluding purchased leased devices, due to an increase in the high-end device mix due to the Merger; •An increase of$759 million in leased device cost of equipment sales, primarily due to an increase in purchased leased devices as a result of the Merger; and •An increase of$511 million in costs related to the liquidation of a higher volume of returned devices primarily as a result of the Merger.
Selling, general and administrative expenses increased
•Higher employee-related costs due to an increase in the number of employees primarily from the Merger; •Higher external labor and professional services, lease and advertising expense from the Merger; •$1.3 billion of Merger-related costs, including transaction costs associated with legal and professional services and restructuring costs including severance and store rationalization, compared to$620 million of Merger-related costs in the year endedDecember 31, 2019 ; •Higher commission expense, primarily due to: •Higher gross customer additions primarily due to the increased size of the company as a result of the Merger, partially offset by lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic; partially offset by •Lower commissions expense due to lower prepaid gross additions and compensation structure changes; •Higher bad debt expense, primarily due to customers acquired as a result of the Merger and the recording of estimated losses associated with the new credit loss standard, including incremental bad debt for the estimated macro-economic impacts of the Pandemic; and •Higher legal-related expenses from recording an estimated accrual associated with theFCC Notice of Apparent Liability and commitments associated with the Merger. •Selling, general and administrative expenses for the year endedDecember 31, 2020 included$458 million of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs.
Impairment expense was
•A$218 million impairment on the goodwill in the Layer3 reporting unit; and •A$200 million impairment on the capitalized software development costs related to our postpaid billing system. •There was no impairment expense for the year endedDecember 31, 2019 . For more information regarding the impairments above, see Note 5 - Property and Equipmen t and Note 6 - Goodwill, Spectrum License Transactions and Oth er Intangible Assets of the Notes to the Consolidated Financial Statements. 37
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Depreciation and amortization increased
•Higher depreciation expense from assets acquired in the Merger, excluding leased devices, and network expansion from the continued build-out of our nationwide 5G network; •Higher depreciation expense on leased devices resulting from a higher total number of customer devices under lease, primarily from customers acquired in the Merger; and •Higher amortization from intangible assets acquired in the Merger.
Operating income, the components of which are discussed above, increased
Interest expense increased
•The assumption of debt with a fair value of$31.8 billion in connection with the Merger; •The issuance of an aggregate of$19.0 billion in Senior Secured Notes and the entry into a$4.0 billion secured term loan inApril 2020 in connection with the Merger; •Amortization of interest rate swap derivatives beginning upon settlement inApril 2020 ; and •The issuance of an aggregate of$8.75 billion in Senior Secured Notes inOctober 2020 . Interest expense to affiliates decreased$161 million , or 39%, primarily from the redemption of an aggregate of$5.25 billion in Senior Notes to affiliates and the repayment of an aggregate of$4.0 billion in Incremental term loan facility to affiliates in 2020, partially offset by lower capitalized interest.
Other expense, net increased
Income from continuing operations before income taxes, the components of which
are discussed above, was
Income tax expense decreased
•Lower income before income taxes; and •A lower effective tax rate, primarily due to changes in state income taxes and excess tax benefits, partially offset by an increase in non-deductible expenses, including certain Merger-related costs. The effective tax rate was 22.3% and 24.7% for the years endedDecember 31, 2020 and 2019, respectively.
Income from continuing operations decreased
•Higher Interest expense; and •Higher Other expense, net; partially offset by •Higher operating income; and •Lower Income tax expense. Income from discontinued operations, net of tax was$320 million for the year endedDecember 31, 2020 , and consists of the results of the Prepaid Business that was divested onJuly 1, 2020 . There were no discontinued operations for the year endedDecember 31, 2019 . For more information regarding the Prepaid Transaction, see Note 12 - Discontinued Operations of the Notes to the Consolidated Financial Statements. 38 -------------------------------------------------------------------------------- Table of Contents Net income, the components of which are discussed above, decreased$404 million , or 12%, and included the following: •Merger-related costs, net of tax, of$1.5 billion for the year endedDecember 31, 2020 , compared to$501 million for the year endedDecember 31, 2019 . •The negative impact of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, net of tax, of$339 million for the year endedDecember 31, 2020 , compared to no impact for the year endedDecember 31, 2019 . •Impairment expense of$366 million , net of tax, for the year endedDecember 31, 2020 , compared to no impairment expense for the year endedDecember 31, 2019 .
Guarantor Financial Information
OnMarch 2, 2020 , theSEC adopted amendments to the financial disclosure requirements for guarantors and issuers of guaranteed securities, as well for affiliates whose securities collateralize a registrant's securities. We early adopted the requirements of the amendments onJanuary 1, 2020 , which included replacing guarantor condensed consolidating financial information with summarized financial information for the consolidated obligor group (Parent, Issuer, and Guarantor Subsidiaries) and no longer requiring guarantor cash flow information, financial information for non-guarantor subsidiaries, or a reconciliation to the consolidated results. OnApril 1, 2020 , in connection with the closing of the Merger, we assumed certain registered debt to third parties issued by Sprint,Sprint Communications, Inc. andSprint Capital Corporation (collectively, the "Sprint Issuers"). Amounts previously disclosed for the estimated values of certain acquired assets and liabilities assumed have been adjusted based on additional information arising subsequent to the initial valuation. These revisions to the estimated values did not have a significant impact on our summarized financial information for the consolidated obligor group. Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties issued byT-Mobile USA, Inc. and the Sprint Issuers (collectively, the "Issuers") is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile ("Parent") and certain of Parent's 100% owned subsidiaries ("Guarantor Subsidiaries"). The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures, supplemental indentures and credit agreements governing the long-term debt contain covenants that, among other things, limit the ability of the Issuers or borrowers and the Guarantor Subsidiaries to incur more debt, pay dividends and make distributions, make certain investments, repurchase stock, create liens or other encumbrances, enter into transactions with affiliates, enter into transactions that restrict dividends or distributions from subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit agreements, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuers or borrowers to loan funds or make payments to Parent. However, the Issuers or borrowers and Guarantor Subsidiaries are allowed to make certain permitted payments to Parent under the terms of the indentures, supplemental indentures and credit agreements. InDecember 2019 , the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. We early adopted the standard onJanuary 1, 2020 and have applied the standard retrospectively to all periods presented. Upon the adoption of the standard, deferred tax assets of non-guarantor entities in aggregate of$163 million were reclassified and netted with the deferred tax liabilities of the guarantor obligor group of the debt issued byT-Mobile USA, Inc. The adoption of this standard did not have a material impact on our consolidated financial statements for the year endedDecember 31, 2020 . InMarch 2020 , certain Guarantor Subsidiaries became non-Guarantor Subsidiaries. Certain prior period amounts have been reclassified to conform to the current period's presentation. In connection with the preparation of our guarantor financial information for the year endedDecember 31, 2020 , we determined that the summarized balance sheet information and summarized results of operations for the consolidated obligor group of debt issued byT-Mobile USA, Inc. , as presented in our Quarterly Reports on Form 10-Q for the quarterly periods endedMarch 31, 2020 ,June 30, 2020 , andSeptember 30, 2020 , should be adjusted to exclude investments in non-guarantor subsidiaries and the related equity method income from non-guarantor subsidiaries as of and for the year-to-date periods endingDecember 31, 2019 ,March 31, 2020 ,June 30, 2020 andSeptember 30, 2020 . We also determined the summarized balance sheet information 39 -------------------------------------------------------------------------------- Table of Contents and summarized results of operations for the consolidated obligor groups of debt issued by Sprint,Sprint Communications, Inc. andSprint Capital Corporation , as presented in our Quarterly Reports on Form 10-Q for the quarterly periods endedJune 30, 2020 , andSeptember 30, 2020 , should be adjusted as well to exclude investments in their respective non-guarantor subsidiaries for the year-to-date periods endingJune 30, 2020 andSeptember 30, 2020 . Therefore, we have updated the historical summarized financial information for these periods and obligor groups as set forth below. This adjustment does not impact the Consolidated Financial Statements for any quarterly or annual periods and does not impact guarantor financial information filed prior to our adoption of the new disclosure requirements for guarantors and issuers of guaranteed securities onJanuary 1, 2020 . Basis of Presentation The following tables include summarized financial information of the obligor groups of debt issued byT-Mobile USA, Inc. , Sprint,Sprint Communications, Inc. , andSprint Capital Corporation . The summarized financial information of each obligor group is presented on a combined basis with balances and transactions within the obligor group eliminated. Investments in and the equity in earnings of non-guarantor subsidiaries which would otherwise be consolidated in accordance withU.S. GAAP are excluded from the below summarized financial information pursuant to SEC Regulation S-X Rule 13-01.
The summarized balance sheet information for the consolidated obligor group of
debt issued by
September 30, December 31, December 31,
(in millions) March 31, 2020 June 30, 2020 2020 2020 2019
Current assets $ 8,431 $ 23,105 $ 18,035 $ 22,638 $ 8,177
Noncurrent assets 77,827 154,164 164,220 165,294 77,684
Current liabilities 14,125 21,487 17,765 19,982 11,885
Noncurrent liabilities 41,330 101,662 109,249 112,930 43,448
Due to non-guarantors - 7,054 7,183 7,433 -
Due from non-guarantors 358 - - - 346
Due to related parties 14,215 6,067 4,846 4,873 14,173
Due from related parties 26 24 19 22 20
The summarized results of operations information for the consolidated obligor
group of debt issued by
Nine Months
Three Months Ended Year Ended Year Ended
Ended Six Months Ended September 30, December 31, December 31,
(in millions) March 31, 2020 June 30, 2020 2020 2020 2019
Total revenues $ 10,694 $ 28,071 $ 47,076 $ 67,112 $ 43,431
Operating income 1,309 1,525 3,353 4,335 4,761
Net income 809 412 1,029 1,148 2,860
Revenue from
non-guarantors 259 656 1,088 1,496 974
Operating expenses to
non-guarantors 129 775 1,443 2,127 668
Other expense to
non-guarantors - (40) (77) (114) -
The summarized balance sheet information for the consolidated obligor group of
debt issued by Sprint and Sprint Communications, Inc. is presented in the table
below:
(in millions) June 30, 2020 September 30, 2020 December 31, 2020
Current assets $ 1,619 $ 1,051 $ 2,646
Noncurrent assets 49,525 25,512 26,278
Current liabilities 4,716 3,317 4,209
Noncurrent liabilities 64,845 61,437 65,161
Due from non-guarantors 49,254 25,231 25,993
Due to related parties 6,025 4,774 4,786
Due from related parties - 5 -
40-------------------------------------------------------------------------------- Table of Contents The summarized results of operations information for the consolidated obligor group of debt issued bySprint andSprint Communications, Inc. , since the acquisition of Sprint onApril 1, 2020 , is presented in the table below: Nine Months Three Months Ended Six Months Ended Ended December (in millions) June 30, 2020 September 30, 2020 31, 2020 Total revenues $ 2 $ 4 $ 10 Operating loss (15) (17) (15) Net loss (819) (1,651) (2,229) Revenue from non-guarantors 2 4 6 Other income, net, from non-guarantors 367 732 1,084 The summarized balance sheet information for the consolidated obligor group of debt issued bySprint Capital Corporation is presented in the table below: (in millions) June 30, 2020 September 30, 2020 December 31, 2020 Current assets$ 1,619 $ 1,051 $ 2,646 Noncurrent assets 58,547 34,540 35,330 Current liabilities 4,788 3,388 4,281 Noncurrent liabilities 70,070 66,530 70,253 Due from non-guarantors 58,276 34,259 35,046 Due to related parties 6,025 4,774 4,786 Due from related parties - 5 - The summarized results of operations information for the consolidated obligor group of debt issued bySprint Capital Corporation , since the acquisition of Sprint onApril 1, 2020 , is presented in the table below: Nine Months Three Months Ended Six Months Ended Ended December (in millions) June 30, 2020 September 30, 2020 31, 2020 Total revenues $ 2 $ 4 $ 10 Operating loss (15) (17) (15) Net loss (804) (1,608) (2,165) Revenue from non-guarantors 2 4 6 Other income, net, from non-guarantors 366 732 1,085 Performance Measures In managing our business and assessing financial performance, we supplement the information provided by our financial statements with other operating or statistical data and non-GAAP financial measures. These operating and financial measures are utilized by our management to evaluate our operating performance and, in certain cases, our ability to meet liquidity requirements. Although companies in the wireless industry may not define each of these measures in precisely the same way, we believe that these measures facilitate comparisons with other companies in the wireless industry on key operating and financial measures. The performance measures presented below include the impact of the Merger on a prospective basis from the close date ofApril 1, 2020 . Historical results were not restated. Customers A customer is generally defined as a SIM number with a unique T-Mobile identifier which is associated with an account that generates revenue. Customers are qualified either for postpaid service utilizing phones, wearables, DIGITS or other connected devices, which include tablets and SyncUp products, where they generally pay after receiving service, or prepaid service, where they generally pay in advance of receiving service. Our postpaid customers include customers of T-Mobile. Our prepaid customers include customers of T-Mobile and Metro by T-Mobile. 41 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the number of ending customers: As of December 31, 2020 Versus 2019 2019 Versus 2018 (in thousands) 2020 2019 2018 # % # % Customers, end of period Postpaid phone customers (1) 66,618 40,345 37,224 26,273 65 % 3,121 8 % Postpaid other customers (1) 14,732 6,689 5,295 8,043 120 % 1,394
26 %
Total postpaid customers 81,350 47,034 42,519 34,316 73 % 4,515 11 % Prepaid customers (1),(2) 20,714 20,860 21,137 (146) (1) % (277) (1) % Total customers 102,064 67,894 63,656 34,170 50 % 4,238 7 % Adjustment to prepaid customers (2) - (616) - 616 (100) % (616) NM NM - Not Meaningful (1) Includes customers acquired in connection with the Merger and certain customer base adjustments. See Customer Base Adjustments and Net Customer Additions tables below. (2) OnJuly 18, 2019 , we entered into an agreement whereby certain T-Mobile prepaid products will now be offered and distributed by a current MVNO partner. As a result, we included a base adjustment in the third quarter of 2019 to reduce prepaid customers by 616,000.
Total customers increased 34,170,000, or 50%, primarily from:
•Higher postpaid phone customers, primarily due to customers acquired in the Merger and the success of new customer segments and rate plans and continued growth in existing and new markets, along with promotional activities; and •Higher postpaid other customers, primarily due to customers acquired in the Merger and growth in other connected devices primarily related to public and educational sector customers and wearable products; partially offset by •Lower prepaid customers, primarily due to the customer base adjustments made to align the customer reporting policies of T-Mobile and Sprint, partially offset by the continued success of our prepaid business due to promotional activities and rate plan offers. Customer Base Adjustments
Certain adjustments were made to align the customer reporting policies of T-Mobile and Sprint.
The adjustments made to the reported T-Mobile and Sprint ending customer base as ofMarch 31, 2020 , are presented below: (in thousands) Postpaid phone customers Postpaid other customers Total postpaid customers Prepaid customers Total customers Reconciliation to beginning customers T-Mobile customers as reported, end of period March 31, 2020 40,797 7,014 47,811 20,732 68,543 Sprint customers as reported, end of period March 31, 2020 25,916 8,428 34,344 8,256 42,600 Total combined customers, end of period March 31, 2020 66,713 15,442 82,155 28,988 111,143
Adjustments
Reseller reclassification to wholesale customers (1) (199) (2,872) (3,071) - (3,071) EIP reclassification from postpaid to prepaid (2) (963) - (963) 963 - Divested prepaid customers (3) - - - (9,207) (9,207) Rate plan threshold (4) (182) (918) (1,100) - (1,100) Customers with non-phone devices (5) (226) 226 - - - Collection policy alignment (6) (150) (46) (196) - (196) Miscellaneous adjustments (7) (141) (43) (184) (302) (486) Total Adjustments (1,861) (3,653) (5,514) (8,546) (14,060) Adjusted beginning customers as of April 1, 2020 64,852 11,789 76,641 20,442 97,083 (1) In connection with the closing of the Merger, we refined our definition of wholesale customers resulting in the reclassification of certain postpaid and prepaid reseller customers to wholesale customers. Starting with the three months endedMarch 31, 2020 , we discontinued reporting wholesale customers to focus on postpaid and prepaid customers and wholesale revenues, which we consider more relevant than the number of wholesale customers given the expansion of M2M and IoT products. (2) Prepaid customers with a device installment billing plan historically included as Sprint postpaid customers have been reclassified to prepaid customers to align with T-Mobile policy. (3) Customers associated with the Sprint wireless prepaid and Boost Mobile brands that were divested onJuly 1, 2020 , have been excluded from our reported customers. (4) Customers who have rate plans with monthly recurring charges which are considered insignificant have been excluded from our reported customers. 42 -------------------------------------------------------------------------------- Table of Contents (5) Customers with postpaid phone rate plans without a phone (e.g., non-phone devices) have been reclassified from postpaid phone to postpaid other customers to align with T-Mobile policy. (6) Certain Sprint customers subject to collection activity for an extended period of time have been excluded from our reported customers to align with T-Mobile policy. (7) Miscellaneous insignificant adjustments to align with T-Mobile policy.
Net Customer Additions
The following table sets forth the number of net customer additions:
Year Ended December 31, 2020 Versus 2019 2019 Versus 2018
(in thousands) 2020 2019 2018 # % # %
Net customer additions
Postpaid phone customers 2,218 3,121 3,097 (903) (29) % 24 1 %
Postpaid other customers 3,268 1,394 1,362 1,874 134 % 32 2 %
Total postpaid customers 5,486 4,515 4,459 971 22 % 56 1 %
Prepaid customers (1) 145 339 460 (194) (57) % (121) (26) %
Total customers 5,631 4,854 4,919 777 16 % (65) (1) %Acquired customers, net of base adjustments 29,228 - - 29,228 NM - NM NM - Not Meaningful (1) OnJuly 18, 2019 , we entered into an agreement whereby certain T-Mobile prepaid products will now be offered and distributed by a current MVNO partner. As a result, we included a base adjustment in the third quarter of 2019 to reduce prepaid customers by 616,000.
Total net customer additions increased 777,000, or 16%, primarily from:
•Higher postpaid other net customer additions, primarily due to higher gross additions from connected devices, primarily due to public and educational sector additions and lower churn, partially offset by lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic; partially offset by •Lower postpaid phone net customer additions, primarily due to higher churn from customers acquired in the Merger and lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic; and •Lower prepaid gross customer additions, partially offset by lower churn, both primarily due to lower switching activity in the industry from reduced store traffic due to retail store closures arising from the Pandemic.
Churn
Churn represents the number of customers whose service was disconnected as a percentage of the average number of customers during the specified period. The number of customers whose service was disconnected is presented net of customers that subsequently have their service restored within a certain period of time. We believe that churn provides management, investors and analysts with useful information to evaluate customer retention and loyalty.
The following table sets forth the churn:
Bps Change
Year Ended December 31, 2020 Versus Bps Change 2019
2019 Versus 2018
2020 2019 2018
Postpaid phone churn 0.90 % 0.89 % 1.01 % 1 bps -12 bps
Prepaid churn 3.03 % 3.82 % 3.96 % -79 bps -14 bps
Postpaid phone churn was essentially flat, primarily due to the inclusion of the
customer base acquired in the Merger with higher churn, offset by lower
switching activity in the industry due to reduced store traffic due to temporary
retail store closures arising from the Pandemic.
Prepaid churn decreased 79 basis points, primarily due to lower switching activity in the industry due to reduced store traffic due to temporary retail store closures arising from the Pandemic and the continued success of our prepaid products due to promotional activities and rate plan offers.
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Total Postpaid Accounts
A postpaid account is generally defined as a billing account number that
generates revenue. Postpaid accounts are generally comprised of customers that
are qualified for postpaid service utilizing phones, wearables, DIGITS or other
connected devices which include tablets and SyncUp products, where they
generally pay after receiving service.
As of December 31, 2020 Versus 2019 2019 Versus 2018
(in thousands) 2020 2019 2018 # Change % Change # Change % Change
Accounts, end of period
Total postpaid customer
accounts(1) 25,754 15,047 14,015 10,707 71 % 1,032 7 %
(1) Includes accounts acquired in connection with the Merger and certain account base adjustments. See Account Base Adjustments table below.
Total postpaid customer accounts increased 10,707,000, or 71%, primarily due to 10,150,000 accounts acquired in the Merger, the success of new customer segments and rate plans, continued growth in existing and new markets, along with promotional activities, improvements in network quality and industry-leading customer service, partially offset by lower switching activity in the industry from reduced store traffic due to retail store closures resulting from the Pandemic.
Account Base Adjustments
Certain adjustments were made to align the account reporting policies of T-Mobile and Sprint.
The adjustments made to the reported T-Mobile and Sprint ending account base as ofMarch 31, 2020 are presented below: (in thousands) Postpaid
Accounts
Reconciliation to beginning accounts T-Mobile accounts as reported, end of periodMarch 31, 2020
15,244
Sprint accounts, end of periodMarch 31, 2020
11,246
Total combined accounts, end of periodMarch 31, 2020
26,490
Adjustments
Reseller reclassification to wholesale accounts (1)
(1)
EIP reclassification from postpaid to prepaid (2)
(963)
Rate plan threshold (3)
(18)
Collection policy alignment (4)
(76)
Miscellaneous adjustments (5)
(47)
Total Adjustments
(1,105)
Adjusted beginning accounts as ofApril 1, 2020
25,385
(1) In connection with the closing of the Merger, we refined our definition of wholesale accounts resulting in the reclassification of certain postpaid and prepaid reseller accounts to wholesale accounts. (2) Prepaid accounts with a customer with a device installment billing plan historically included as Sprint postpaid accounts have been reclassified to prepaid accounts to align with T-Mobile policy. (3) Accounts with customers who have rate plans with monthly recurring charges which are considered insignificant have been excluded from our reported accounts. (4) Certain Sprint accounts subject to collection activity for an extended period of time have been excluded from our reported accounts to align with T-Mobile policy. (5) Miscellaneous insignificant adjustments to align with T-Mobile policy.
Average Revenue Per User
ARPU represents the average monthly service revenue earned from customers. We
believe ARPU provides management, investors and analysts with useful information
to assess and evaluate our service revenue per customer and assist in
forecasting our future service revenues generated from our customer base.
Postpaid phone ARPU excludes postpaid other customers and related revenues,
which include wearables, DIGITS and other connected devices such as tablets and
SyncUp products.
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The following table illustrates the calculation of our operating measure ARPU and reconciles this measure to the related service revenues:
(in millions, except Year Ended December 31, 2020 Versus 2019 2019 Versus 2018 average number of customers and ARPU) 2020 2019 2018 $ Change % Change $ Change % Change Calculation of Postpaid Phone ARPU Postpaid service revenues$ 36,306 $ 22,673 $ 20,862 $ 13,633 60 %$ 1,811 9 % Less: Postpaid other revenues (2,367) (1,344) (1,117) (1,023) 76 % (227) 20 % Postpaid phone service revenues 33,939 21,329 19,745 12,610 59 % 1,584 8 % Divided by: Average number of postpaid phone customers (in thousands) and number of months in period 59,249 38,602 35,458 20,647 53 % 3,144 9 % Postpaid phone ARPU$ 47.74 $ 46.04 $ 46.40 $ 1.70 4 %$ (0.36) (1) % Calculation of Prepaid ARPU Prepaid service revenues$ 9,421 $ 9,543 $ 9,598 $ (122) (1) %$ (55) (1) % Divided by: Average number of prepaid customers (in thousands) and number of months in period 20,594 20,955 20,761 (361) (2) % 194 1 % Prepaid ARPU$ 38.12 $ 37.95 $ 38.53 $ 0.17 - %$ (0.58) (2) % Postpaid Phone ARPU
Postpaid phone ARPU increased
•The net impact of customers acquired in the Merger, which have higher ARPU (net of changes arising from the reduction in base due to policy adjustments and reclassification of certain ARPU components from the acquired customers being moved to other revenue lines); and •Higher premium service revenues; partially offset by •An increase in our promotional activities.
Prepaid ARPU
Prepaid ARPU was essentially flat and was primarily impacted by:
•The impacts of certain adjustments to our customer base, including the removal of certain prepaid customers associated with products now offered and distributed by a current MVNO partner as those customers had lower ARPU; offset by •Dilution from promotional rate plans; and •A reduction in certain non-recurring charges.
Average Revenue Per Account
Average Revenue per Account ("ARPA") represents the average monthly postpaid
service revenue earned per account. We believe postpaid ARPA provides
management, investors and analysts with useful information to assess and
evaluate our postpaid service revenue realization and assist in forecasting our
future postpaid service revenues on a per account basis. We consider postpaid
ARPA to be indicative of our revenue growth potential given the increase in the
average number of postpaid phone customers per account and increases in postpaid
other customers, including wearables, DIGITS or other connected devices, which
include tablets and SyncUp products.
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The following table illustrates the calculation of our operating measure ARPA
and reconciles this measure to the related service revenues:
(in millions, except average Year Ended December 31, 2020 Versus 2019 2019 Versus 2018
number of accounts, ARPA) 2020 2019 2018 $ Change % Change $ Change % Change
Calculation of Postpaid ARPA
Postpaid service revenues $ 36,306 $ 22,673 $ 20,862 $ 13,633 60 % $ 1,811 9 %
Divided by: Average number
of postpaid accounts (in
thousands) and number of
months in period 22,959 14,486 13,492 8,473 58 % 994 7 %
Postpaid ARPA $ 131.78 $ 130.43 $ 128.86 $ 1.35 1 % $ 1.57 1 %
Postpaid ARPA
Postpaid ARPA increased
•An increase in customers per account, including further penetration in connected devices, and the success of new customer segments and rate plans; •Higher premium service revenues; and •The net impact of customers acquired in the Merger; partially offset by •An increase in our promotional activities; and •A reduction in certain non-recurring charges, including from the impact of the Pandemic. Adjusted EBITDA Adjusted EBITDA represents earnings before Interest expense, net of Interest income, Income tax expense, Depreciation and amortization, non-cash Stock-based compensation and certain income and expenses not reflective of our ongoing operating performance. Net income margin represents Net income divided by Service revenues. Adjusted EBITDA margin represents Adjusted EBITDA divided by Service revenues. Adjusted EBITDA is a non-GAAP financial measure utilized by our management to monitor the financial performance of our operations. We use Adjusted EBITDA internally as a measure to evaluate and compensate our personnel and management for their performance, and as a benchmark to evaluate our operating performance in comparison to our competitors. Management believes analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate overall operating performance and facilitate comparisons with other wireless communications services companies because it is indicative of our ongoing operating performance and trends by excluding the impact of interest expense from financing, non-cash depreciation and amortization from capital investments, non-cash stock-based compensation, Merger-related costs including network decommissioning costs, incremental costs directly attributable to COVID-19 and impairment expense, as they are not indicative of our ongoing operating performance, as well as certain other nonrecurring income and expenses. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for income from operations, net income or any other measure of financial performance reported in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). 46
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Table of Contents The following table illustrates the calculation of Adjusted EBITDA and reconciles Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure:
Year Ended December 31, 2020 Versus 2019 2019 Versus 2018(in millions) 2020 2019 2018 $ Change % Change $ Change % Change Net income$ 3,064 $ 3,468 $ 2,888 $ (404) (12) %$ 580 20 % Adjustments: Income from discontinued operations, net of tax (320) - - (320) NM - NM Income from continuing operations 2,744 3,468 2,888 (724) (21) % 580 20 % Interest expense 2,483 727 835 1,756 242 % (108) (13) % Interest expense to affiliates 247 408 522 (161) (39) % (114) (22) % Interest income (29) (24) (19) (5) 21 % (5) 26 % Other expense, net 405 8 54 397 4,963 % (46) (85) % Income tax expense 786 1,135 1,029 (349) (31) % 106 10 % Operating income 6,636 5,722 5,309 914 16 % 413 8 % Depreciation and amortization 14,151 6,616 6,486 7,535 114 % 130 2 % Operating income from discontinued operations (1) 432 - - 432 NM - NM Stock-based compensation (2) 516 423 389 93 22 % 34 9 % Merger-related costs 1,915 620 196 1,295 209 % 424 216 % COVID-19-related costs 458 - - 458 NM - NM Impairment expense 418 - - 418 NM - NM Other, net (3) 31 2 18 29 1,450 % (16) (89) % Adjusted EBITDA$ 24,557 $ 13,383 $ 12,398 $ 11,174 83 %$ 985 8 % Net income margin (Net income divided by Service revenues) 6 % 10 % 9 % -400 bps 100 bps Adjusted EBITDA margin (Adjusted EBITDA divided by Service revenues) 49 % 39 % 38 % 1,000 bps 100 bps NM - Not Meaningful (1)Following the Prepaid Transaction, starting onJuly 1, 2020 , we provide MVNO services to DISH. We have included the operating income from discontinued operations fromApril 1, 2020 throughJune 30, 2020 , in our determination of Adjusted EBITDA to reflect contributions of the Prepaid Business that were replaced by the MVNO Agreement beginning onJuly 1, 2020 in order to enable management, analysts and investors to better assess ongoing operating performance and trends. (2)Stock-based compensation includes payroll tax impacts and may not agree to stock-based compensation expense in the consolidated financial statements. Additionally, certain stock-based compensation expenses associated with the Transactions have been included in Merger-related costs. (3)Other, net may not agree to the Consolidated Statements of Comprehensive Income primarily due to certain non-routine operating activities, such as other special items that would not be expected to reoccur or are not reflective of T-Mobile's ongoing operating performance, and are therefore excluded in Adjusted EBITDA.
Adjusted EBITDA increased
•Higher Total service revenues; and •Higher Equipment revenues; partially offset by •Higher Cost of services expenses, excluding Merger-related costs; •Higher Cost of equipment sales; and •Higher Selling, general and administrative expenses, excluding Merger-related costs and supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations, proceeds from issuance of long-term debt and common stock, financing leases, the sale of certain receivables, financing arrangements of vendor payables which effectively extend payment terms and the New Revolving Credit Facility (as defined below). In connection with the closing of the Merger onApril 1, 2020 , we incurred a substantial amount of additional third-party indebtedness which increased our future financial commitments, including aggregate interest payments. Further, the incurrence of additional indebtedness may inhibit our ability to incur new debt under the terms governing our existing and future indebtedness, which 47 -------------------------------------------------------------------------------- Table of Contents may make it more difficult for us to incur new debt in the future to finance our business strategy. See "Risk Factors - Risks Related to Our Indebtedness."
Cash Flows
The following is a condensed schedule of our cash flows for the years ended
Year Ended December 31, 2020 Versus 2019 2019 Versus 2018
(in millions) 2020 2019 2018 $ % $ %
Net cash provided by
operating activities $ 8,640 $ 6,824 $ 3,899 $ 1,816 27 % $ 2,925 75 %
Net cash used in investing
activities (12,715) (4,125) (579) (8,590) 208 % (3,546) 612 %
Net cash provided by (used
in) financing activities 13,010 (2,374) (3,336) 15,384 (648) % 962 (29) %
Operating Activities
Net cash provided by operating activities increased
•Higher Net income, excluding non-cash income and expenses; partially offset by •A$6.3 billion increase in net cash outflows from changes in working capital, primarily due to the one-time impact of$2.3 billion in gross payments for the settlement of interest rate swaps related to Merger financing for the year endedDecember 31, 2020 , included in the use of cash from Other current and long-term liabilities, as well as higher use of cash from Accounts payable and accrued liabilities and Inventories. •Net cash provided by operating activities includes$1.5 billion and$442 million in payments for Merger-related costs for the years endedDecember 31, 2020 and 2019, respectively. •Net cash provided by operating activities includes$458 million in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the year endedDecember 31, 2020 .
Investing Activities
Net cash used in investing activities increased
•$11.0 billion in Purchases of property and equipment, including capitalized interest, from network integration related to the Merger and the continued build-out of our nationwide 5G network; •$5.0 billion in cash paid for the acquisition of Sprint, net of cash and restricted cash acquired; and •$1.3 billion in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by •$3.1 billion in Proceeds related to beneficial interests in securitization transactions; •$1.2 billion in Proceeds from the divestiture of prepaid business; and •$632 million related to derivative contracts under collateral exchange arrangements, for more information regarding these contracts, see Note 7 - Fair Value Measurements of the Notes to the Consolidated Financial Statements. Financing Activities
Net cash provided by (used in) financing activities increased
•$35.3 billion in Proceeds from the issuance of long-term debt, net of discounts and issuance costs, driven primarily by the issuance of$31.8 billion in Senior Secured Notes and a draw of$4.0 billion on the New Secured Term Loan Facility; •$18.7 billion in Proceeds from the issuance of short-term debt, net of discounts and issuance costs, driven by a$19.0 billion draw on the New Secured Bridge Loan Facility in connection with the closing of the Merger; and •$304 million in net proceeds from the SoftBank Equity transaction, see Note 14 - SoftBank Equity Transaction of the Notes to the Consolidated Financial Statements; partially offset by •$20.4 billion in Repayments of long-term debt driven by the repayment of$5.3 billion aggregate principal amount of Senior Notes held by DT, our$4.0 billion Incremental Term Loan Facility with DT, our$4.0 billion New Secured Term Loan Facility,$2.3 billion of outstanding principal for the termination of the accounts receivable facility assumed in the Merger,$4.2 billion aggregate principal amount of Senior Notes held by third parties and$656 million 48 -------------------------------------------------------------------------------- Table of Contents aggregate principal amount of our 3.360% Senior Secured Series 2016-1 A-1 Notes due 2021; •$18.9 billion in Repayments of short-term debt, net of refunds for issuance costs, for the repayment of the$19.0 billion draw on theNew Secured Bridge Loan Facility; and •$1.0 billion in Repayments of financing lease obligations.
Cash and Cash Equivalents
As of
Free Cash Flow
Free Cash Flow represents Net cash provided by operating activities less cash
payments for Purchases of property and equipment, including Proceeds from sales
of tower sites and Proceeds related to beneficial interests in securitization
transactions, less Cash payments for debt prepayment or debt extinguishment.
Free Cash Flow and Free Cash Flow, excluding gross payments for the settlement
of interest rate swaps, are non-GAAP financial measures utilized by our
management, investors and analysts of our financial information to evaluate cash
available to pay debt and provide further investment in the business.
The table below provides reconciliations of Free Cash Flow and Free Cash Flow,
excluding gross payments for the settlement of interest rate swaps to Net cash
provided by operating activities, which we consider to be the most directly
comparable GAAP financial measure.
Year Ended December 31, 2020 Versus 2019 2019 Versus 2018
(in millions) 2020 2019 2018 $ % $ Change % Change
Net cash provided by
operating activities $ 8,640 $ 6,824 $ 3,899 $ 1,816 27 % $ 2,925 75 %
Cash purchases of property
and equipment (11,034) (6,391) (5,541) (4,643) 73 % (850) 15 %
Proceeds from sales of
tower sites - 38 - (38) (100) % 38 NM
Proceeds related to
beneficial interests in
securitization
transactions 3,134 3,876 5,406 (742) (19) % (1,530) (28) %
Cash payments for debt
prepayment or debt
extinguishment costs (82) (28) (212) (54) 193 % 184 (87) %
Free Cash Flow 658 4,319 3,552 (3,661) (85) % 767 22 %
Gross cash paid for the
settlement of interest
rate swaps 2,343 - - 2,343 NM - NM
Free Cash Flow, excluding
gross payments for the
settlement of interest
rate swaps $ 3,001 $ 4,319 $ 3,552 $ (1,318) (31) % $ 767 22 %
NM - Not Meaningful
Free Cash Flow, excluding gross payments for the settlement of interest rate
swaps related to Merger financing, decreased $1.3 billion , or 31%. The decrease
was primarily impacted by the following:
•Higher Cash purchases of property and equipment, including capitalized interest
of $440 million and $473 million for the years ended December 31, 2020 and 2019,
respectively, from network integration related to the Merger and the continued
build-out of our nationwide 5G network; and
•Lower Proceeds related to our deferred purchase price from securitization
transactions; partially offset by
•Higher Net cash provided by operating activities, as described above. Net cash
provided by operating activities was impacted by the following:
•$1.5 billion and $442 million in payments for Merger-related costs for the
years ended December 31, 2020 and 2019, respectively.
•$458 million in payments for supplemental employee payroll, third-party
commissions and cleaning-related COVID-19 costs for the year ended December 31,
2020 .
•The calculation of Free Cash Flow, excluding gross payments for the settlement
of interest rate swaps, excludes the one-time impact of gross payments for the
settlement of interest rate swaps related to Merger financing of $2.3 billion .
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Borrowing Capacity
We maintain a financing arrangement with Deutsche Bank AG, which allows for up to$108 million in borrowings. Under the financing arrangement, we can effectively extend payment terms for invoices payable to certain vendors. As ofDecember 31, 2020 , there were no outstanding balances under such financing arrangement. We also maintain vendor financing arrangements primarily with our main network equipment suppliers. Under the respective agreements, we can obtain extended financing terms. Additionally, we assumed financial liabilities with certain vendors in connection with the closing of the Merger and incurred additional financial liabilities with DISH at the closing of the Prepaid Transaction. During the year endedDecember 31, 2020 , we repaid$481 million associated with the vendor financing arrangements and other financial liabilities, of which$342 million was associated with financial liabilities assumed in connection with the closing of the Merger. These payments are included in Repayments of short-term debt for purchases of inventory, property and equipment and other financial liabilities, in our Consolidated Statements of Cash Flows. As ofDecember 31, 2020 and 2019, the outstanding balance under the vendor financing arrangements and other financial liabilities was$240 million and$25 million , respectively. OnApril 1, 2020 , in connection with the closing of the Merger,T-Mobile USA and certain of its affiliates, as guarantors, entered into a Credit Agreement with certain financial institutions named therein, providing for a$4.0 billion secured term loan facility (the "New Secured Term Loan Facility") and a$4.0 billion revolving credit facility (the "New Revolving Credit Facility"). OnSeptember 16, 2020 , we increased the aggregate commitment under the New Revolving Credit Facility to$5.5 billion through an amendment to the Credit Agreement. OnOctober 9, 2020 , we repaid at par all of the outstanding amounts under, and terminated, our New Secured Term Loan Facility. As ofDecember 31, 2020 , there was no outstanding balance under the New Revolving Credit Facility. OnOctober 30, 2020 , we entered into a$5.0 billion senior secured term loan commitment with certain financial institutions. Subsequent toDecember 31, 2020 , onJanuary 14, 2021 , we issued an aggregate of$3.0 billion in Senior Notes. The senior secured term loan commitment was reduced by an amount equal to the aggregate gross proceeds of the Senior Notes, which reduced the commitment to$2.0 billion . Up to$2.0 billion of loans under the commitment may be drawn at any time (subject to customary conditions precedent) throughJune 30, 2021 . If drawn, the facility matures in 364 days with one six-month extension exercisable at our discretion. Proceeds may be used for general corporate purposes and will accrue interest at a rate of LIBOR plus a margin of 1.25% per annum.
Debt Financing
As of
During the year endedDecember 31, 2020 , we issued short- and long-term debt for net proceeds of$54.2 billion and redeemed and repaid short- and long-term debt with an aggregate principal amount of$39.9 billion . Additionally, in connection with the closing of the Merger, we assumed certain indebtedness of Sprint totaling$31.8 billion . OnOctober 6, 2020 ,T-Mobile USA and certain of its affiliates, as guarantors, issued an aggregate of$4.0 billion in Senior Secured Notes bearing interest rates ranging from 2.050% to 3.300% and maturing in 2028 through 2051. OnOctober 9, 2020 , we used the net proceeds of$4.0 billion to repay at par all of the outstanding amounts under, and terminate, our New Secured Term Loan Facility. OnOctober 28, 2020 ,T-Mobile USA and certain of its affiliates, as guarantors, issued an aggregate of$4.75 billion in Senior Secured Notes bearing interest rates ranging from 2.250% to 3.600% and maturing in 2031 through 2060. We intend to use the net proceeds of$4.6 billion for general corporate purposes, which may include among other things, acquisitions of additional spectrum and refinancing existing indebtedness on an ongoing basis. 50 -------------------------------------------------------------------------------- Table of Contents OnOctober 30, 2020 , we entered into a$5.0 billion senior secured term loan commitment with certain financial institutions. Subsequent toDecember 31, 2020 , onJanuary 14, 2021 ,T-Mobile USA issued$1.0 billion of 2.250% Senior Notes due 2026,$1.0 billion of 2.625% Senior Notes due 2029, and$1.0 billion of 2.875% Senior Notes due 2031. We intend to use the net proceeds of$3.0 billion for general corporate purposes, which may include among other things, financing acquisitions of additional spectrum and refinancing existing indebtedness on an ongoing basis. A portion of the senior secured term loan commitments were reduced by an amount equal to the aggregate gross proceeds of the Senior Notes, which reduced the commitment to$2.0 billion . Up to$2.0 billion of loans under the commitment may be drawn at any time (subject to customary conditions precedent) throughJune 30, 2021 . If drawn, the facility matures in 364 days with one six-month extension exercisable at our discretion. Proceeds may be used for general corporate purposes and will accrue interest at a rate of LIBOR plus a margin of 1.25% per annum.
For more information regarding our debt financing transactions, see Note 8 - Debt of the Notes to the Consolidated Financial Statements.
Spectrum Auction
InMarch 2020 , theFCC announced that we were the winning bidder of 2,384 licenses in Auction 103 (37/39 GHz and 47 GHz spectrum bands) for an aggregate price of$873 million , net of an incentive payment of$59 million . At the inception of Auction 103 inOctober 2019 , we deposited$82 million with theFCC . Upon conclusion of Auction 103 inMarch 2020 , we made a down payment of$93 million for the purchase price of the licenses won in the auction. OnApril 8, 2020 , we paid theFCC the remaining$698 million of the purchase price for the licenses won in the auction. Prior to the Merger, theFCC announced that Sprint was the winning bidder of 127 licenses in Auction 103 (37/39 GHz and 47 GHz spectrum bands). All payments related to the licenses won were made by Sprint prior the Merger. For more information regarding our spectrum licenses, see Note 6 -Goodwill , Spectrum License Transactions and Other Intangible Assets of the Notes to the Consolidated Financial Statements.
Interest Rate Lock Derivatives
InApril 2020 , in connection with the issuance of an aggregate of$19.0 billion in Senior Secured Notes, we terminated our interest rate lock derivative. At the time of termination, the interest rate lock derivatives were a liability of$2.3 billion , of which$1.2 billion was cash collateralized. Consequently, the net cash required to settle the interest rate lock derivatives was an additional$1.1 billion and was paid at termination.
For more information regarding the termination of our interest rate lock derivative, see Note 7 - Fair Value Measurements of the Notes to the Consolidated Financial Statements.
Future Sources and Uses of Liquidity
We may seek additional sources of liquidity, including through the issuance of
additional long-term debt in 2021, to continue to opportunistically acquire
spectrum licenses or other assets in private party transactions or for the
refinancing of existing long-term debt on an opportunistic basis. Excluding
liquidity that could be needed for spectrum acquisitions, or for other assets,
we expect our principal sources of funding to be sufficient to meet our
anticipated liquidity needs for business operations for the next 12 months as
well as our longer-term liquidity needs. Our intended use of any such funds is
for general corporate purposes, including for capital expenditures, spectrum
purchases, opportunistic investments and acquisitions, redemption of high yield
callable debt and the execution of our integration plan.
We determine future liquidity requirements, for both operations and capital
expenditures, based in large part upon projected financial and operating
performance, and opportunities to acquire additional spectrum. We regularly
review and update these projections for changes in current and projected
financial and operating results, general economic conditions, the competitive
landscape and other factors. We have incurred, and will incur, substantial
expenses as a result of completing the Transactions, the Divestiture Transaction
and compliance with the Government Commitments, and we are also expected to
incur substantial restructuring expenses in connection with integrating and
coordinating T-Mobile's and Sprint's businesses, operations, policies and
procedures. While we have assumed that a certain level of Merger-related
expenses will be incurred, factors beyond our control, including required
consultation and negotiation with certain counterparties, could affect the total
amount or the timing of these expenses. These expenses could exceed the costs
historically borne by us and adversely affect our financial condition and
results of operations. There are a number of additional risks and uncertainties,
including those due to the impact of the Pandemic, that could cause our
financial and operating results and capital requirements to differ materially
from our projections, which could cause future liquidity to differ materially
from our assessment. See "Risk Factors - Risk Related to our
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Business and Wireless Industry - The Pandemic has adversely affected, and will
continue to adversely affect, our business, liquidity, financial condition, and
operating results."
The indentures, supplemental indentures and credit agreements governing our
long-term debt to affiliates and third parties, excluding financing leases,
contain covenants that, among other things, limit the ability of the Issuers or
borrowers and the Guarantor Subsidiaries to incur more debt, pay dividends and
make distributions on our common stock, make certain investments, repurchase
stock, create liens or other encumbrances, enter into transactions with
affiliates, enter into transactions that restrict dividends or distributions
from subsidiaries, and merge, consolidate or sell, or otherwise dispose of,
substantially all of their assets. Certain provisions of each of the credit
agreements, indentures and supplemental indentures relating to the long-term
debt to affiliates and third parties restrict the ability of the Issuers or
borrowers to loan funds or make payments to Parent. However, the Issuers or
borrowers are allowed to make certain permitted payments to Parent under the
terms of each of the credit agreements, indentures and supplemental indentures
relating to the long-term debt to affiliates and third parties. We were in
compliance with all restrictive debt covenants as of December 31, 2020 .
The Merger
In connection with the closing of the Merger, onApril 1, 2020 , we assumed Sprint's liabilities, which include accounts payable and accrued liabilities, short-term debt, operating and financing lease liabilities, net pension plan liabilities, deferred tax liabilities and long-term debt with an aggregate fair value of$31.8 billion .
For more information regarding the Merger, see Note 2 - Business Combination of the Notes to the Consolidated Financial Statements.
Shentel Wireless Asset Acquisition
Sprint PCS (specificallySprint Spectrum L.P. ) is party to a variety of publicly filed agreements withShenandoah Personal Communications Company LLC ("Shentel"), pursuant to which Shentel is the exclusive provider of Sprint PCS's wireless mobility communications network products in certain parts ofMaryland ,North Carolina ,Virginia ,West Virginia ,Kentucky ,Ohio andPennsylvania . Pursuant to one such agreement, the Sprint PCS Management Agreement, datedNovember 5, 1999 (as amended, supplemented and modified from time to time, the "Management Agreement"), Sprint PCS was granted an option to purchase Shentel's wireless telecommunications assets used to provide services pursuant to the Management Agreement. OnAugust 26, 2020 , Sprint, now our indirect subsidiary, on behalf of and as the direct or indirect owner of Sprint PCS, exercised its option by delivering a binding notice of exercise to Shentel. T-Mobile's exercise of its option triggered a requirement for the parties to engage three independent valuation providers (the "Valuation Providers") to calculate the "entire business value" (the "Entire Business Value") of such wireless telecommunications assets, pursuant to a formula and valuation process prescribed in the Management Agreement. Subsequent toDecember 31, 2020 , onFebruary 1, 2021 , in accordance with the Management Agreement and other agreed-upon terms, the Valuation Providers determined and calculated the Entire Business Value of Shentel's wireless telecommunications assets used to provide services pursuant to the Management Agreement to be$2.1 billion , and correspondingly, the base purchase price for such wireless telecommunications assets shall be ninety percent (90%) of that Entire Business Value amount ($1.9 billion ), subject to certain other purchase price adjustments prescribed by the Management Agreement and such additional purchase price adjustments agreed by the parties. The parties are negotiating the remaining outstanding terms of a definitive agreement to govern the purchase of Shentel's wireless telecommunication assets and expect the transaction to close in the second quarter of 2021 after satisfying customary conditions to closing. Financing Lease Facilities We have entered into uncommitted financing lease facilities with certain partners that provide us with the ability to enter into financing leases for network equipment and services. As ofDecember 31, 2020 , we have committed to$5.1 billion of financing leases under these financing lease facilities, of which$1.2 billion was executed during the year endedDecember 31, 2020 . We expect to enter into up to an additional$1.2 billion in financing lease commitments during the year endingDecember 31, 2021 .
Capital Expenditures
Our liquidity requirements have been driven primarily by capital expenditures
for spectrum licenses, the construction, expansion and upgrading of our network
infrastructure and the integration of the networks, spectrum, technology,
personnel, customer base and business practices of T-Mobile and Sprint. Property
and equipment capital expenditures primarily relate to the integration of our
acquired Sprint 2.5 GHz spectrum licenses and existing 600 MHz spectrum licenses
as we build out our
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nationwide 5G network. We expect the majority of our remaining capital
expenditures related to these efforts to occur in 2021 and 2022, after which we
expect capital expenditure requirements to reduce.
We expect cash purchases of property and equipment to range from
For more information regarding our property and equipment and spectrum licenses,
see Note 5 - Property and Equipment and Note 6 -
Dividends
We have never paid or declared any cash dividends on our common stock, and we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Our credit facilities and the indentures and supplemental indentures governing our long-term debt to affiliates and third parties, excluding financing leases, contain covenants that, among other things, restrict our ability to declare or pay dividends on our common stock.
Contractual Obligations
In connection with the regulatory approvals of the Transactions, we made
commitments to various state and federal agencies, including the
For more information regarding these commitments, see Note 1 8 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements.
The contractual commitments and purchase obligations of Sprint were assumed upon the completion of the Merger. These contractual commitments and purchase obligations are primarily commitments to purchase wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business.
For more information regarding our contractual commitments and purchase obligations, see Note 1 8 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements.
The following table summarizes our contractual obligations and borrowings as ofDecember 31, 2020 , and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods: Less Than 1 More Than 5 (in millions) Year 1 - 3 Years 4 - 5 Years Years Total Long-term debt (1)$ 4,486 $ 11,960 $
9,891
3,477 5,938 4,317 13,817 27,549
Financing lease liabilities,
including imputed interest 1,121 1,217 229 61 2,628
Tower obligations (2) 397 716 598 624 2,335
Operating lease liabilities,
including imputed interest 4,903 8,113 6,146 18,940 38,102
Purchase obligations (3) 5,033 4,462 2,392 1,723 13,610
Spectrum leases and service
credits (4) 338 675 594 5,077 6,684
Total contractual obligations
24,167
(1)Represents principal amounts of long-term debt to affiliates and third parties at maturity, excluding unamortized premiums, discounts, debt issuance costs, consent fees, and financing lease obligations. See Note 8 - Debt of the Notes to the Consolidated Financial Statements for further information. (2)Future minimum payments, including principal and interest payments, related to the tower obligations. See Note 9 - Tower Obligations of the Notes to the Consolidated Financial Statements for further information. (3)The minimum commitment for certain obligations is based on termination penalties that could be paid to exit the contracts. Termination penalties are included in the above table as payments due as of the earliest we could exit the contract, typically in less than one year. For certain contracts that include fixed volume purchase commitments and fixed prices for various products, the purchase obligations are calculated using fixed volumes and contractually fixed prices for the products that are expected to be purchased. This table does not include open purchase orders as ofDecember 31, 2020 under normal business purposes. See Note 1 8 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements for further information. (4)Spectrum lease agreements are typically for five to 10 years with automatic renewal provisions, bringing the total term of the agreements up to 30 years. Certain commitments and obligations are included in the table based on the year of required payment or an estimate of the year of payment. Other long-term liabilities have been omitted from the table above due to the uncertainty of the timing of payments, combined with the lack of historical trends to predict future payments. See Note 20 - Additional Financial Information of the Notes to the Consolidated Financial Statements for further information. 53
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The purchase obligations reflected in the table above are primarily commitments to purchase spectrum licenses, wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. Where we are committed to make a minimum payment to the supplier regardless of whether we take delivery, we have included only that minimum payment as a purchase obligation. The acquisition of spectrum licenses is subject to regulatory approval and other customary closing conditions.
Related Party Transactions
SoftBank
OnFebruary 20, 2020 , T-Mobile, SoftBank and DT entered into a Letter Agreement as described in Note 2 - Business Combination . The Letter Agreement requires T-Mobile to issue to SoftBank 48,751,557 shares of T-Mobile common stock, subject to the terms and conditions set forth in the Letter Agreement, for no additional consideration, if certain conditions are met. OnJune 22, 2020 , we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transaction of the Notes to the Consolidated Financial Statements. As ofDecember 31, 2020 , DT and SoftBank held, directly or indirectly, approximately 43.4% and 8.6%, respectively, of our outstanding common stock, with the remaining approximately 48.0% of our outstanding common stock held by other stockholders. As a result of the Proxy Agreements, DT has voting control as ofDecember 31, 2020 , over approximately 52.3% of the outstanding T-Mobile common stock. In addition, as provided for in the Master Framework Agreement, DT also holds certain call options over approximately 101.5 million shares of our common stock held bySoftBank Group Capital Ltd. , a wholly owned subsidiary of SoftBank.
On
For more information regarding our related party transactions with SoftBank, see
Note 2 - Business Combination and Note 14 - SoftBank Equity Transaction of the Notes to the Consolidated Financial Statements.
OnJune 22, 2020 , we entered into a Master Framework Agreement which provided for the purchase of shares of our common stock byMarcelo Claure , a member of our board of directors, from us at a specified price.
For more information regarding our related party transactions with
Brightstar
We had arrangements with Brightstar, a subsidiary of SoftBank, whereby Brightstar provided supply chain and inventory management services to us in our indirect channels.
For more information regarding our related party transactions with Brightstar, see Note 1 - Summary of Significant Accounting Policies and Note
20 - Additional Financial Information of the Notes to the Consolidated Financial Statements.
Deutsche Telekom
We have related party transactions associated with DT or its affiliates in the ordinary course of business, including intercompany servicing and licensing.
For more information regarding these transactions, see Note 20 - Additional Financial Information of the Notes to the Consolidated Financial Statements.
OnApril 1, 2020 , in connection with the closing of the Merger, we repaid our$4.0 billion Incremental Term Loan Facility with DT and repurchased from DT$4.0 billion of indebtedness to affiliates, consisting of$2.0 billion of 5.300% Senior Notes due 54
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2021 and
On
For more information regarding our related party debt transactions, see Note 8 - Debt of the Notes to the Consolidated Financial Statements.
Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012
added Section 13(r) to the Exchange Act of 1934, as amended ("Exchange
Act"). Section 13(r) requires an issuer to disclose in its annual or quarterly
reports, as applicable, whether it or any of its affiliates knowingly engaged in
certain activities, transactions or dealings relating to Iran or with designated
natural persons or entities involved in terrorism or the proliferation of
weapons of mass destruction. Disclosure is required even where the activities,
transactions or dealings are conducted outside the U.S. by non-U.S. affiliates
in compliance with applicable law, and whether or not the activities are
sanctionable under U.S. law.
As of the date of this report, we are not aware of any activity, transaction or
dealing by us or any of our affiliates for the year ended December 31, 2020 ,
that requires disclosure in this report under Section 13(r) of the Exchange Act,
except as set forth below with respect to affiliates that we do not control and
that are our affiliates solely due to their common control with either DT or
SoftBank. We have relied upon DT and SoftBank for information regarding their
respective activities, transactions and dealings.
DT, through certain of its non-U.S. subsidiaries, is party to roaming and
interconnect agreements with the following mobile and fixed line
telecommunication providers in Iran , some of which are or may be
government-controlled entities: Irancell Telecommunications Services Company ,
Telecommunication Kish Company , Mobile Telecommunication Company of Iran , and
Telecommunication Infrastructure Company of Iran . In addition, during the year
ended December 31, 2020 , DT, through certain of its non-U.S. subsidiaries,
provided basic telecommunications services to three customers in Germany
identified on the Specially Designated Nationals and Blocked Persons List
maintained by the U.S. Department of Treasury's Office of Foreign Assets
Control : Bank Melli , Bank Sepah , and Europäisch-Iranische Handelsbank. These
services have been terminated or are in the process of being terminated. For the
year ended December 31, 2020 , gross revenues of all DT affiliates generated by
roaming and interconnection traffic and telecommunications services with the
Iranian parties identified herein were less than $0.1 million , and the estimated
net profits were less than $0.1 million .
In addition, DT, through certain of its non-U.S. subsidiaries that operate a
fixed-line network in their respective European home countries (in particular
Germany ), provides telecommunications services in the ordinary course of
business to the Embassy of Iran in those European countries. Gross revenues and
net profits recorded from these activities for the year ended December 31, 2020
were less than $0.1 million . We understand that DT intends to continue these
activities.
Separately, SoftBank, through one of its non-U.S. subsidiaries, provides roaming
services in Iran through Irancell Telecommunications Services Company . During
the nine months from the acquisition of Sprint on April 1, 2020 through
December 31, 2020 , SoftBank had no gross revenues from such services and no net
profit was generated. We understand that the SoftBank subsidiary intends to
continue such services. This subsidiary also provides telecommunications
services in the ordinary course of business to accounts affiliated with the
Embassy of Iran in Japan . During the nine months from the acquisition of Sprint
on April 1, 2020 through December 31, 2020 , SoftBank estimates that gross
revenues and net profit generated by such services were both under $0.1 million .
We understand that the SoftBank subsidiary is obligated under contract and
intends to continue such services.
In addition, SoftBank, through one of its non-U.S. indirect subsidiaries,
provides office supplies to the Embassy of Iran in Japan . SoftBank estimates
that gross revenue and net profit generated by such services during the nine
months from the acquisition of Sprint on April 1, 2020 through December 31,
2020 , were both under $0.1 million . We understand that the SoftBank subsidiary
intends to continue such activities.
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Off-Balance Sheet Arrangements
We have arrangements, as amended from time to time, to sell certain EIP accounts
receivable and service accounts receivable on a revolving basis as a source of
liquidity. As of December 31, 2020 , we derecognized net receivables of $2.5
billion upon sale through these arrangements.
For more information regarding these off-balance sheet arrangements, see Note
4 - Sales of Certain Receivables of the Notes to the Consolidated Financial
Statements.
Critical Accounting Policies and Estimates
Our significant accounting policies are fundamental to understanding our results of operations and financial condition as they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. See Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for further information. Three of these policies, discussed below, are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Actual results could differ from those estimates.
Management and the Audit Committee of the Board of Directors have reviewed and approved these critical accounting policies.
Depreciation
Our property and equipment balance represents a significant component of our consolidated assets. We record property and equipment at cost, and we generally depreciate property and equipment on a straight-line basis over the estimated useful life of the assets. If all other factors were to remain unchanged, we expect that a one-year increase in the useful lives of our in-service property and equipment, exclusive of leased devices, would have resulted in a decrease of approximately$2.9 billion in our 2020 depreciation expense and that a one-year decrease in the useful life would have resulted in an increase of approximately$3.5 billion in our 2020 depreciation expense.
See Note 1 - Summary of Significant Accounting Policies and Note 5 - Property and Equipment of the Notes to the Consolidated Financial Statements for information regarding depreciation of assets, including management's underlying estimates of useful lives.
Evaluation of
Goodwill and other indefinite-lived intangible assets, such as our spectrum licenses, are not amortized but tested for potential impairment annually, as ofDecember 31 , or more frequently if events or changes in circumstances indicate such assets might be impaired. We test goodwill on a reporting unit basis by comparing the estimated fair value of each reporting unit to its book value. If the fair value exceeds the book value, then no impairment is measured. We have identified two reporting units for which discrete financial information is available and results are regularly reviewed by management: wireless and Layer3. The Layer3 reporting unit consists of the assets and liabilities ofLayer3 TV, Inc. , which was acquired inJanuary 2018 . The services provided by the Layer3 reporting unit are branded TVisionTM. The wireless reporting unit consists of the remaining assets and liabilities ofT-Mobile US, Inc. , excludingLayer3 TV, Inc. We separately evaluate these reporting units for impairment. When assessing goodwill for impairment we may elect to first perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. If we do not perform a qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative test. We recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. We employed a qualitative approach to assess the wireless reporting unit. The fair value of the wireless reporting unit is determined using a market approach, which is based on market capitalization. We recognize market capitalization is subject to volatility and will monitor changes in market capitalization to determine whether declines, if any, necessitate an interim impairment review. In the event market capitalization does decline below its book value, we will consider the length, severity and reasons for the decline when assessing whether potential impairment exists, including considering whether a control premium should be added to the market capitalization. We believe short-term fluctuations in share price may not necessarily reflect the underlying 56 -------------------------------------------------------------------------------- Table of Contents aggregate fair value. No events or change in circumstances have occurred that indicate the fair value of the wireless reporting unit may be below its carrying amount atDecember 31, 2020 . Concurrent with the consummation of the Merger, management also revisited the plans for our TVisionTM services offering and the integration of this offering with the Sprint customer base. Additionally, we expect our significantly enhanced spectrum position following the Merger will allow us to accelerate our in-home broadband internet service strategy. The enhanced in-home broadband opportunity, along with the acquisition of certain content rights, created a strategic shift in our TVisionTM services offering allowing us the ability to develop a video product which will be complementary to the in-home broadband offering. Based on these events and changes in circumstances, we determined that recoverability of the carrying amount of goodwill for the Layer3 reporting unit should be evaluated for impairment. We employed a quantitative approach to assess the Layer3 reporting unit. The fair value of the Layer3 reporting unit was determined using an income approach, which was based on estimated discounted future cash flows.
We made estimates and assumptions regarding future cash flows, discount rates and long-term growth rates to determine the reporting unit's estimated fair value. The key assumptions used were as follows:
•Expected cash flows underlying the TVisionTM business plan for the periods 2020 through 2025, which took into account assumptions for a delayed launch, estimates of subscribers for TVisionTM services, average revenue and content cost per subscriber, operating costs and capital expenditures; •Cash flows beyond 2025 were projected to grow at a long-term growth rate estimated at 3%. Estimating a long-term growth rate requires significant judgment about future business strategies as well as micro- and macro-economic environments that are inherently uncertain; and •We used a discount rate of 30% to risk adjust the cash flow projections in determining the estimated fair value. The carrying value of the Layer3 reporting unit exceeded its estimated fair value as ofJune 30, 2020 . Accordingly, during the year endedDecember 31, 2020 , we recorded an impairment loss of$218 million , which is included in Impairment expense in our Consolidated Statements of Comprehensive Income. This impairment reduced the goodwill assigned to the Layer3 reporting unit to zero. We test spectrum licenses for impairment on an aggregate basis, consistent with our management of the overall business at a national level. We may elect to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an intangible asset is less than its carrying value. If we do not perform the qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of the intangible asset is less than its carrying amount, we calculate the estimated fair value of the intangible asset. If the estimated fair value of the spectrum licenses is lower than their carrying amount, an impairment loss is recognized. We estimate fair value using the Greenfield methodology, which is an income approach, to estimate the price at which an orderly transaction to sell the asset would take place between market participants at the measurement date under current market conditions. The Greenfield methodology values the spectrum licenses by calculating the cash flow generating potential of a hypothetical start-up company that goes into business with no assets except the asset to be valued (in this case, spectrum licenses) and makes investments required to build an operation comparable to current use. The value of the spectrum licenses can be considered as equal to the present value of the cash flows of this hypothetical start-up company. We base the assumptions underlying the Greenfield methodology on a combination of market participant data and our historical results, trends and business plans. Future cash flows in the Greenfield methodology are based on estimates and assumptions of market participant revenues, EBITDA margin, network build-out period and a long-term growth rate for a market participant. The cash flows are discounted using a weighted average cost of capital. The valuation approaches utilized to estimate fair value for the purposes of the impairment tests of goodwill and spectrum licenses require the use of assumptions and estimates, which involve a degree of uncertainty. If actual results or future expectations are not consistent with the assumptions, this may result in the recording of significant impairment charges on goodwill or spectrum licenses. The most significant assumptions within the valuation models are the discount rate, revenues, EBITDA margins, capital expenditures and long-term growth rate.
For more information regarding our impairment assessments, see Note 1 -
Summary of Significant Accounting Policies and Note 6 -
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Income Taxes
Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates expected to be in effect when these
differences are realized. A valuation allowance is recorded when it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The ultimate realization of a deferred tax asset depends on the
ability to generate sufficient taxable income of the appropriate character and
in the appropriate taxing jurisdictions within the carryforward periods
available.
We account for uncertainty in income taxes recognized in the financial
statements in accordance with the accounting guidance for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. We assess whether it is more likely than not that a tax
position will be sustained upon examination based on the technical merits of the
position and adjust the unrecognized tax benefits in light of changes in facts
and circumstances, such as changes in tax law, interactions with taxing
authorities and developments in case law.
Accounting Pronouncements Not Yet Adopted
For information regarding recently issued accounting standards, see Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements.
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