Notes to the Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Description of Business
T-Mobile US, Inc. (“T-Mobile,” “we,” “our,” “us” or the “Company”), together with its consolidated subsidiaries, is a leading provider of mobile communications services, including voice, messaging and data, under its flagship brands, T-Mobile and Metro™ by T-Mobile ("Metro by T-Mobile"), in the United States (“U.S.”), Puerto Rico and the U.S. Virgin Islands. All of our revenues were earned in, and all of our long-lived assets are located in, the U.S., Puerto Rico and the U.S. Virgin Islands. We provide mobile communications services primarily using our 4G Long-Term Evolution (“LTE”) network and our newly deployed 5G technology network. We also offer a wide selection of wireless devices, including handsets, tablets and other mobile communication devices, and accessories for sale, as well as financing through Equipment Installment Plans (“EIP”) and leasing through JUMP! On Demand™. Additionally, we provide reinsurance for handset insurance policies and extended warranty contracts offered to our mobile communications customers.
Basis of Presentation
The consolidated financial statements include the balances and results of operations of T-Mobile and our consolidated subsidiaries. We consolidate majority-owned subsidiaries over which we exercise control, as well as variable interest entities (“VIE”) where we are deemed to be the primary beneficiary and VIEs, which cannot be deconsolidated, such as those related to Tower obligations. Intercompany transactions and balances have been eliminated in consolidation. We operate as a single operating segment.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires our management to make estimates and assumptions which affect the financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which our management believes are reasonable under the circumstances. These estimates are inherently subject to judgment and actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform to the current year's presentation. See “Accounting Pronouncements Adopted During the Current Year” below.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid money market funds and U.S. Treasury securities with remaining maturities of three months or less at the date of purchase.
Receivables and Allowance for Credit Losses
Accounts receivable consist primarily of amounts currently due from customers, other carriers and third-party retail channels. Accounts receivable not held for sale are reported in the balance sheet at outstanding principal adjusted for any charge-offs and the allowance for credit losses. Accounts receivable held for sale are reported at the lower of amortized cost or fair value. We have an arrangement to sell the majority of service accounts receivable on a revolving basis, which are treated as sales of financial assets.
We offer certain retail customers the option to pay for their devices and certain other purchases in installments typically over a period of 24, but up to 36, months using an EIP. EIP receivables not held for sale are reported in our Consolidated Balance Sheets at outstanding principal adjusted for any charge-offs, allowance for credit losses and unamortized discounts. At the time of an installment sale, we impute a discount for interest if the EIP term exceeds 12 months as there is no stated rate of interest on the EIP receivables. The EIP receivables are recorded at their present value, which is determined by discounting future cash payments at the imputed interest rate. The difference between the recorded amount of the EIP receivables and their unpaid principal balance (i.e., the contractual amount due from the customer) results in a discount which is allocated to the performance obligations in the arrangement and recorded as a reduction in transaction price in Total service revenues and Equipment revenues in our Consolidated Statements of Comprehensive Income. We determine the imputed discount rate based primarily on current market interest rates and the estimated credit risk on the EIP receivables. As a result, we do not recognize a separate credit loss allowance at the time of issuance as the effects of uncertainty about future cash flows resulting from credit risk are included in the initial present value measurement of the receivable. The imputed discount on EIP receivables is
amortized over the financed installment term using the effective interest method and recognized as Other revenues in our Consolidated Statements of Comprehensive Income.
Subsequent to the initial determination of the imputed discount, we assess the need for and, if necessary, recognize an allowance for credit losses to the extent the amount of estimated probable losses on the gross EIP receivable balances exceed the remaining unamortized imputed discount balances.
Total imputed discount and allowances were approximately 7.0% and 8.1% of the total amount of gross accounts receivable, including EIP receivables, at December 31, 2019 and 2018, respectively.
The current portion of the EIP receivables is included in Equipment installment plan receivables, net and the long-term portion of the EIP receivables is included in Equipment installment plan receivables due after one year, net in our Consolidated Balance Sheets. We have an arrangement to sell certain EIP receivables on a revolving basis, which are treated as sales of financial assets.
We maintain an allowance for credit losses and determine its appropriateness through an established process that assesses the losses inherent in our receivables portfolio. We develop and document our allowance methodology at the portfolio segment level - accounts receivable portfolio and EIP receivable portfolio segments. While we attribute portions of the allowance to our respective accounts receivable and EIP portfolio segments, the entire allowance is available to absorb credit losses inherent in the total receivables portfolio.
Our process involves procedures to appropriately consider the unique risk characteristics of our accounts receivable and EIP receivable portfolio segments. For each portfolio segment, losses are estimated collectively for groups of receivables with similar characteristics. Our allowance levels are influenced by receivable volumes, receivable delinquency status, historical loss experience and other conditions influencing loss expectations, such as macro-economic conditions.
Inventories
Inventories consist primarily of wireless devices and accessories, which are valued at the lower of cost or net realizable value. Cost is determined using standard cost which approximates average cost. Shipping and handling costs paid to wireless device and accessories vendors, and costs to refurbish used devices recovered through our device upgrade programs are included in the standard cost of inventory. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We record inventory write-downs to net realizable value for obsolete and slow-moving items based on inventory turnover trends and historical experience.
Long-Lived Assets
Long-lived assets include assets that do not have indefinite lives, such as property and equipment and other intangible assets. All of our long-lived assets are located in the U.S., including Puerto Rico and the U.S. Virgin Islands. We assess potential impairments to our long-lived assets when events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If any indicators of impairment are present, we test recoverability. The carrying value of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated from the use and eventual disposition of the asset or asset group. If the undiscounted cash flows do not exceed the asset or asset group’s carrying amount, then an impairment loss is recorded, measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value.
Property and Equipment
Property and equipment consists of buildings and equipment, wireless communications systems, leasehold improvements, capitalized software, leased wireless devices and construction in progress. Buildings and equipment include certain network server equipment. Wireless communications systems include assets to operate our wireless network and IT data centers, including tower assets and leasehold improvements and assets related to the liability for the retirement of long-lived assets. Leasehold improvements include asset improvements other than those related to the wireless network.
Property and equipment are recorded at cost less accumulated depreciation and impairments, if any, in Property and equipment, net on our Consolidated Balance Sheets. We generally depreciate property and equipment over the period the property and equipment provide economic benefit. Depreciable life studies are performed periodically to confirm the appropriateness of depreciable lives for certain categories of property and equipment. These studies take into account actual usage, physical wear
and tear, replacement history and assumptions about technology evolution. When these factors indicate the useful life of an asset is different from the previous assessment, the remaining book value is depreciated prospectively over the adjusted remaining estimated useful life. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the related lease term.
JUMP! On Demand allows customers to lease a device over a period of up to 18 months and upgrade it for a new device up to one time per month. To date, all of our leased devices were classified as operating leases. At operating lease inception, leased wireless devices are transferred from inventory to property and equipment. Leased wireless devices are depreciated to their estimated residual value over the period expected to provide utility to us, which is generally shorter than the lease term and considers expected losses. Revenues associated with the leased wireless devices, net of incentives, are generally recognized over the lease term. Upon device upgrade or at lease end, customers must return or purchase their device. Returned devices transferred from Property and equipment, net are recorded as inventory and are valued at the lower of cost or net realizable value with any write-down recognized as Cost of equipment sales in our Consolidated Statements of Comprehensive Income.
Costs of major replacements and improvements are capitalized. Repair and maintenance expenditures which do not enhance or extend the asset’s useful life are charged to operating expenses as incurred. Construction costs, labor and overhead incurred in the expansion or enhancement of our wireless network are capitalized. Capitalization commences with pre-construction period administrative and technical activities, which includes obtaining leases, zoning approvals and building permits, and ceases at the point at which the asset is ready for its intended use. We capitalize interest associated with the acquisition or construction of certain property and equipment. Capitalized interest is reported as a reduction in interest expense and depreciated over the useful life of the related assets.
We record an asset retirement obligation for the fair value of legal obligations associated with the retirement of tangible long-lived assets and a corresponding increase in the carrying amount of the related asset in the period in which the obligation is incurred. In periods subsequent to initial measurement, we recognize changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate. Over time, the liability is accreted to its present value and the capitalized cost is depreciated over the estimated useful life of the asset. Our obligations relate primarily to certain legal obligations to remediate leased property on which our network infrastructure and administrative assets are located.
We capitalize certain costs incurred in connection with developing or acquiring internal use software. Capitalization of software costs commences once the final selection of the specific software solution has been made and management authorizes and commits to funding the software project. Capitalized software costs are included in Property and equipment, net in our Consolidated Balance Sheets and are amortized on a straight-line basis over the estimated useful life of the asset. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.
Other Intangible Assets
Intangible assets that do not have indefinite useful lives are amortized over their estimated useful lives. Customer lists are amortized using the sum-of-the-years'-digits method over the expected period in which the relationship is expected to contribute to future cash flows. The remaining finite-lived intangible assets are amortized using the straight-line method.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill is allocated to our two reporting units, wireless and Layer3.
Spectrum Licenses
Spectrum licenses are carried at costs incurred to acquire the spectrum licenses and the costs to prepare the spectrum licenses for their intended use, such as costs to clear acquired spectrum licenses. The Federal Communications Commission (“FCC”) issues spectrum licenses which provide us with the exclusive right to utilize designated radio frequency spectrum within specific geographic service areas to provide wireless communications services. While spectrum licenses are issued for a fixed period of time, typically for up to fifteen years, the FCC has granted license renewals routinely and at a nominal cost. The spectrum licenses held by us expire at various dates. We believe we will be able to meet all requirements necessary to secure renewal of our spectrum licenses at nominal costs. Moreover, we determined there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of our spectrum licenses. Therefore, we determined the spectrum licenses should be treated as indefinite-lived intangible assets.
At times, we enter into agreements to sell or exchange spectrum licenses. Upon entering into the arrangement, if the transaction has been deemed to have commercial substance, spectrum licenses are reviewed for impairment and transferred at their carrying value, net of any impairment, to assets held for sale included in Other current assets in our Consolidated Balance Sheets until approval and completion of the exchange or sale. Upon closing of the transaction, spectrum licenses acquired as part of an exchange of nonmonetary assets are valued at fair value and the difference between the fair value of the spectrum licenses obtained, book value of the spectrum licenses transferred and cash paid, if any, is recognized as a gain and included in Gains on disposal of spectrum licenses in our Consolidated Statements of Comprehensive Income. Our fair value estimates of spectrum licenses are based on information for which there is little or no observable market data. If the transaction lacks commercial substance or the fair value is not measurable, the acquired spectrum licenses are recorded at the book value of the assets transferred or exchanged.
Impairment
We assess the carrying value of our goodwill and other indefinite-lived intangible assets, such as our spectrum licenses, for potential impairment annually as of December 31, or more frequently if events or changes in circumstances indicate such assets might be impaired.
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 the two reporting units, wireless and Layer3, 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 test our 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 for the difference. We estimate fair value using the Greenfield methodology, which is an income approach based on discounted cash flows associated with the intangible asset, 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.
Guarantee Liabilities
We offer a device trade-in program, Just Upgrade My Phone (“JUMP!”), which provides eligible customers a specified-price trade-in right to upgrade their device. Upon enrollment, participating customers must finance the purchase of a device on an EIP and have a qualifying T-Mobile monthly wireless service plan, which is treated as an arrangement with multiple performance obligations when entered into at or near the same time. Upon a qualifying JUMP! program upgrade, the customer’s remaining EIP balance is settled provided they trade-in their eligible used device in good working condition and purchase a new device from us on a new EIP.
For customers who enroll in JUMP!, we recognize a liability and reduce revenue for the portion of revenue which represents the estimated fair value of the specified-price trade-in right guarantee. The guarantee liability is valued based on various economic and customer behavioral assumptions, which requires judgment, including estimating the customer's remaining EIP balance at trade-in, the expected fair value of the used device at trade-in, and the probability and timing of trade-in. When customers upgrade their device, the difference between the EIP balance credit to the customer and the fair value of the returned device is recorded against the guarantee liabilities. All assumptions are reviewed periodically.
Fair Value Measurements
We carry certain assets and liabilities at fair value. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs based on the observability as of the measurement date, is as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities;
Level 2 Observable inputs other than the quoted prices in active markets for identical assets and liabilities; and
Level 3 Unobservable inputs for which there is little or no market data, which require us to develop assumptions of what market participants would use in pricing the asset or liability.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the placement of assets and liabilities being measured within the fair value hierarchy.
The carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts receivable from affiliates and accounts payable approximate fair value due to the short-term maturities of these instruments. The carrying values of EIP receivables approximate fair value as the receivables are recorded at their present value, net of unamortized discount and allowance for credit losses. There were no financial instruments with a carrying value materially different from their fair value, based on quoted market prices or rates for the same or similar instruments, or internal valuation models.
Derivative Financial Instruments
Derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. We do not use derivatives for trading or speculative purposes.
For derivative instruments designated as cash flow hedges associated with forecasted debt issuances, changes in fair value are reported as a component of Accumulated other comprehensive loss until reclassified into Interest expense in the same period the hedged transaction affects earnings, generally over the life of the related debt. Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities.
Revenue Recognition (effective January 1, 2018)
We primarily generate our revenue from providing wireless services to customers and selling or leasing devices and accessories. Our contracts with customers may involve multiple performance obligations, which include wireless services, wireless devices or a combination thereof, and we allocate the transaction price between each performance obligation based on its relative standalone selling price.
Significant Judgments
The most significant judgments affecting the amount and timing of revenue from contracts with our customers include the following items:
•Revenue for service contracts that we assess are not probable of collection is not recognized until the contract is completed or terminated and cash is received. Collectibility is re-assessed when there is a significant change in facts or circumstances. Our assessment of collectibility considers whether we may limit our exposure to credit risk through our right to stop transferring additional service in the event the customer is delinquent as well as certain contract terms such as down payments that reduce our exposure to credit risk. Customer credit behavior is inherently uncertain. See “Receivables and Allowance for Credit Losses”, above, for more discussion on how we assess credit risk.
•Promotional EIP bill credits offered to a customer on an equipment sale that are paid over time and are contingent on the customer maintaining a service contract may result in an extended service contract based on whether a substantive penalty is deemed to exist. Determining whether contingent EIP bill credits result in a substantive termination penalty may require significant judgment.
•The identification of distinct performance obligations within our service plans may require significant judgment.
•Revenue is recorded net of costs paid to another party for performance obligations where we arrange for the other party to transfer goods or services to the customer (i.e., when we are acting as an agent). For example, performance obligations relating to services provided by third-party content providers where we neither control a right to the content provider’s service nor control the underlying service itself are presented net because we are acting as an agent. The determination of whether we control the underlying service or right to the service prior to our transfer to the customer requires, at times, significant judgment.
•For transactions where we recognize a significant financing component, judgment is required to determine the discount rate. For EIP sales, the discount rate used to adjust the transaction price primarily reflects current market interest rates and the estimated credit risk of the customer. Customer credit behavior is inherently uncertain. See “Receivables and Allowance for Credit Losses”, above, for more discussion on how we assess credit risk.
•Our products are generally sold with a right of return, which is accounted for as variable consideration when estimating the amount of revenue to recognize. Device return levels are estimated based on the expected value method as there are a large number of contracts with similar characteristics and the outcome of each contract is independent of the others. Historical return rate experience is a significant input to our expected value methodology.
•Sales of equipment to indirect dealers who have been identified as our customer (referred to as the sell-in model) often include credits subsequently paid to the dealer as a reimbursement for any discount promotions offered to the end consumer. These credits (payments to a customer) are accounted for as variable consideration when estimating the amount of revenue to recognize from the sales of equipment to indirect dealers and are estimated based on historical experience and other factors, such as expected promotional activity.
•The determination of the standalone selling price for contracts that involve more than one performance obligation may require significant judgment, such as when the selling price of a good or service is not readily observable.
•For capitalized contract costs, determining the amortization period over which such costs are recognized as well as assessing the indicators of impairment may require significant judgment.
Wireless Services Revenue
We generate our wireless services revenues from providing access to, and usage of, our wireless communications network. Service revenues also include revenues earned for providing value added services to customers, such as handset insurance services. Service contracts are billed monthly either in advance or arrears, or are prepaid. Generally, service revenue is recognized as we satisfy our performance obligation to transfer service to our customers. We typically satisfy our stand-ready performance obligations, including unlimited wireless services, evenly over the contract term. For usage-based and prepaid wireless services, we satisfy our performance obligations when services are rendered.
Consideration payable to a customer is treated as a reduction of the total transaction price, unless the payment is in exchange for a distinct good or service, such as certain commissions paid to dealers.
Federal Universal Service Fund (“USF”) and other fees are assessed by various governmental authorities in connection with the services we provide to our customers and are included in Cost of services. When we separately bill and collect these regulatory fees from customers, they are recorded gross in Total service revenues in our Consolidated Statements of Comprehensive Income. For the years ended December 31, 2019, 2018 and 2017, we recorded approximately $93 million, $161 million and $258 million, respectively, of USF fees on a gross basis.
We have made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer (e.g., sales, use, value added, and some excise taxes).
Equipment Revenues
We generate equipment revenues from the sale or lease of mobile communication devices and accessories. For performance obligations related to equipment contracts, we typically transfer control at a point in time when the device or accessory is delivered to, and accepted by, the customer or dealer. We have elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. We estimate variable consideration (e.g., device returns or certain payments to indirect dealers) primarily based on historical experience. Equipment sales not probable of collection are generally recorded as payments are received. Our assessment of collectibility considers contract terms such as down payments that reduce our exposure to credit risk.
We offer certain customers the option to pay for devices and accessories in installments using an EIP. Generally, we recognize as a reduction of the total transaction price the effects of a financing component in contracts where customers purchase their devices and accessories on an EIP with a term of more than one year, including those financing components that are not considered to be significant to the contract. However, we have elected the practical expedient to not recognize the effects of a
significant financing component for contracts where we expect, at contract inception, that the period between the transfer of a performance obligation to a customer and the customer’s payment for that performance obligation will be one year or less.
In addition, for customers who enroll in our JUMP! program, we recognize a liability based on the estimated fair value of the specified-price trade-in right guarantee. The fair value of the guarantee is deducted from the transaction price and the remaining transaction price is allocated to other elements of the contract, including service and equipment performance obligations. See “Guarantee Liabilities” above for further information.
JUMP! On Demand allows customers to lease a device over a period of up to 18 months and upgrade it for a new device up to one time per month. To date, all of our leased wireless devices are accounted for as operating leases and estimated contract consideration is allocated between lease elements and non-lease elements (such as service and equipment performance obligations) based on the relative standalone selling price of each performance obligation in the contract. Lease revenues are recorded as equipment revenues and recognized as earned on a straight-line basis over the lease term. Lease revenues on contracts not probable of collection are limited to the amount of payments received. See “Property and Equipment” above for further information.
Contract Balances
Generally, our devices and service plans are available at standard prices, which are maintained on price lists and published on our website and/or within our retail stores.
For contracts that involve more than one product or service that are identified as separate performance obligations, the transaction price is allocated to the performance obligations based on their relative standalone selling prices. The standalone selling price is the price at which we would sell the good or service separately to a customer and is most commonly evidenced by the price at which we sell that good or service separately in similar circumstances and to similar customers.
A contract asset is recorded when revenue is recognized in advance of our right to receive consideration (i.e., we must perform additional services in order to receive consideration). Amounts are recorded as receivables when our right to consideration is unconditional. When consideration is received, or we have an unconditional right to consideration in advance of delivery of goods or services, a contract liability is recorded. The transaction price can include non-refundable upfront fees, which are allocated to the identifiable performance obligations.
Contract assets are included in Other current assets and Other assets and contract liabilities are included in Deferred revenue in our Consolidated Balance Sheets.
Contract Modifications
Our service contracts allow customers to frequently modify their contracts without incurring penalties in many cases. Each time a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a separate contract, as if there is a termination of the existing contract and creation of a new contract, or if the modification should be considered a change associated with the existing contract. We typically do not have significant impacts from contract modifications.
Contract Costs
We incur certain incremental costs to obtain a contract that we expect to recover, such as sales commissions. We record an asset when these incremental costs to obtain a contract are incurred and amortize them on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.
We amortize deferred costs incurred to obtain service contracts on a straight-line basis over the term of the initial contract and anticipated renewal contracts to which the costs relate, currently 24 months for postpaid service contracts. However, we have elected the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less for prepaid service contracts.
Incremental costs to obtain equipment contracts (e.g., commissions paid on device and accessory sales) are recognized when the equipment is transferred to the customer.
See Note 1 - Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2017 for more discussion regarding the accounting policies that governed revenue recognition prior to January 1, 2018.
Advertising Expense
We expense the cost of advertising and other promotional expenditures to market our services and products as incurred. For the years ended December 31, 2019, 2018 and 2017, advertising expenses included in Selling, general and administrative expenses in our Consolidated Statements of Comprehensive Income were $1.6 billion, $1.7 billion and $1.8 billion, respectively.
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.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of adjustments, net of tax, related to unrealized gains (losses) on cash flow hedges and available-for-sale securities. This is reported in Accumulated other comprehensive loss as a separate component of stockholders’ equity until realized in earnings.
Stock-Based Compensation
Stock-based compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”), is measured at fair value on the grant date and recognized as expense, net of expected forfeitures, over the related service period. The fair value of stock awards is based on the closing price of our common stock on the date of grant. RSUs are recognized as expense using the straight-line method. PRSUs are recognized as expense following a graded vesting schedule with their performance re-assessed and updated on a quarterly basis, or more frequently as changes in facts and circumstances warrant.
Earnings Per Share
Basic earnings per share is computed by dividing Net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of outstanding stock options, RSUs and PRSUs, calculated using the treasury stock method, and prior to the conversion of our preferred stock in December 2017, potentially dilutive common shares included mandatory convertible preferred stock calculated using the if-converted method. See Note 14 - Earnings Per Share for further information.
Variable Interest Entities
VIEs are entities that lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, have equity investors that do not have the ability to make significant decisions relating to the entity's operations through voting rights, do not have the obligation to absorb the expected losses or do not have the right to receive the residual returns of the entity. The most common type of VIE is a special purpose entity (“SPE”). SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. SPEs are generally structured to insulate investors from claims on the SPE's assets by creditors of other entities, including the creditors of the seller of the assets.
The primary beneficiary is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party which has both the power to direct the activities of an entity that most significantly impact the VIE's economic performance, and through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. We consolidate VIEs when we are deemed to be the primary beneficiary or when the VIE cannot be deconsolidated.
In assessing which party is the primary beneficiary, all the facts and circumstances are considered, including each party’s role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (such as asset managers and servicers) or have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.
Accounting Pronouncements Adopted During the Current Year
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842),” and has since modified the standard with several ASUs (collectively, the “new lease standard”). The new lease standard was effective for us, and we adopted the standard, on January 1, 2019.
We adopted the standard by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application and as a result did not restate the prior periods presented in the Consolidated Financial Statements.
The new lease standard provides for a number of optional practical expedients in transition. We did not elect the “package of practical expedients” and as a result reassessed under the new lease standard our prior accounting conclusions about lease identification, lease classification and initial direct costs. We elected to use hindsight for determining the reasonably certain lease term. We did not elect the practical expedient pertaining to land easements as it is not applicable to us.
The new lease standard provides practical expedients and policy elections for an entity’s ongoing accounting. Generally, we elected the practical expedient to not separate lease and non-lease components in arrangements whereby we are the lessee. For arrangements in which we are the lessor of wireless devices, we did not elect this practical expedient. We did not elect the short-term lease recognition exemption, which includes the recognition of right-of-use assets and lease liabilities for existing short-term leases at transition. We have also applied this election to all active leases at transition.
The most significant judgments and impacts upon adoption of the standard include the following:
•In evaluating contracts to determine if they qualify as a lease, we consider factors such as if we have obtained or transferred substantially all of the rights to the underlying asset through exclusivity, if we can or if we have transferred the ability to direct the use of the asset by making decisions about how and for what purpose the asset will be used and if the lessor has substantive substitution rights.
•We recognized right-of-use assets and operating lease liabilities for operating leases that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent and deferred rent, which we remeasured at adoption due to the application of hindsight to our lease term estimates. Deferred and prepaid rent are no longer presented separately.
•Capital lease assets previously included within Property and equipment, net were reclassified to financing lease right-of-use assets, and capital lease liabilities previously included in Short-term debt and Long-term debt were reclassified to financing lease liabilities in our Consolidated Balance Sheet.
•Certain line items in the Consolidated Statements of Cash Flows and the “Supplemental disclosure of cash flow information” have been renamed to align with the new terminology presented in the new lease standard; “Repayment of capital lease obligations” is now presented as “Repayments of financing lease obligations” and “Assets acquired under capital lease obligations” is now presented as “Financing lease right-of-use assets obtained in exchange for lease obligations.” In the “Operating Activities” section of the Consolidated Statements of Cash Flows we have added “Operating lease right-of-use assets” and “Short and long-term operating lease liabilities” which represent the change
in the operating lease asset and liability, respectively. Additionally, in the “Supplemental disclosure of cash flow information” section of the Consolidated Statements of Cash Flows we have added “Operating lease payments,” and in the “Noncash investing and financing activities” section we have added “Operating lease right-of-use assets obtained in exchange for lease obligations.”
•In determining the discount rate used to measure the right-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our incremental borrowing rate is based on an estimated secured rate comprised of a risk-free LIBOR rate plus a credit spread as secured by our assets. Determining a credit spread as secured by our assets may require significant judgment.
•Certain of our lease agreements include rental payments based on changes in the consumer price index (“CPI”). Lease liabilities are not remeasured as a result of changes in the CPI; instead, changes in the CPI are treated as variable lease payments and are excluded from the measurement of the right-of-use asset and lease liability. These payments are recognized in the period in which the related obligation was incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
•We elected the use of hindsight whereby we applied current lease term assumptions that are applied to new leases in determining the expected lease term period for all cell sites. Upon adoption of the new lease standard and application of hindsight, our expected lease term has shortened to reflect payments due for the initial non-cancelable lease term only. This assessment corresponds to our lease term assessment for new leases and aligns with the payments that have been disclosed as lease commitments in prior years. As a result, the average remaining lease term for cell sites has decreased from approximately nine to five years based on lease contracts in effect at transition on January 1, 2019. The aggregate impact of using hindsight is an estimated decrease in Total operating expenses of $240 million in fiscal year 2019.
•We were also required to reassess the previously failed sale-leasebacks of certain T-Mobile-owned wireless communications tower sites and determine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a sale should be recognized. Determining whether the transfer of control criteria has been met requires significant judgement.
•We concluded that a sale has not occurred for the 6,200 tower sites transferred to Crown Castle International Corp. (“CCI”) pursuant to a master prepaid lease arrangement; therefore, these sites will continue to be accounted for as failed sale-leasebacks.
•We concluded that a sale should be recognized for the 900 tower sites transferred to CCI pursuant to the sale of a subsidiary and for the 500 tower sites transferred to Phoenix Tower International (“PTI”). Upon adoption on January 1, 2019, we derecognized our existing long-term financial obligation and the tower-related property and equipment associated with these 1,400 previously failed sale-leaseback tower sites and recognized a lease liability and right-of-use asset for the leaseback of the tower sites. The impacts from the change in accounting conclusion are primarily a decrease in Other revenues of $44 million and a decrease in Interest expense of $34 million in fiscal year 2019.
•Rental revenues and expenses associated with co-location tower sites are presented on a net basis under the new lease standard. These revenues and expenses were presented on a gross basis under the former lease standard.
Including the impacts from a change in the accounting conclusion on the 1,400 previously failed sale-leaseback tower sites, the cumulative effect of initially applying the new lease standard on January 1, 2019 is as follows:
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|
January 1, 2019
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|
|
|
|
(in millions)
|
Beginning Balance
|
|
Cumulative Effect Adjustment
|
|
Beginning Balance, As Adjusted
|
Assets
|
|
|
|
|
|
Other current assets
|
$
|
1,676
|
|
|
$
|
(78)
|
|
|
$
|
1,598
|
|
Property and equipment, net
|
23,359
|
|
|
(2,339)
|
|
|
21,020
|
|
Operating lease right-of-use assets
|
—
|
|
|
9,251
|
|
|
9,251
|
|
Financing lease right-of-use assets
|
—
|
|
|
2,271
|
|
|
2,271
|
|
Other intangible assets, net
|
198
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|
|
(12)
|
|
|
186
|
|
Other assets
|
1,623
|
|
|
(71)
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|
|
1,552
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|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
7,741
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|
|
(65)
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|
|
7,676
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|
Other current liabilities
|
787
|
|
|
28
|
|
|
815
|
|
Short-term and long-term debt
|
12,965
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|
|
(2,015)
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|
|
10,950
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|
Tower obligations
|
2,557
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|
|
(345)
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|
|
2,212
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|
Deferred tax liabilities
|
4,472
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|
|
231
|
|
|
4,703
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|
Deferred rent expense
|
2,781
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|
|
(2,781)
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|
|
—
|
|
Short-term and long-term operating lease liabilities
|
—
|
|
|
11,364
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|
|
11,364
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|
Short-term and long-term financing lease liabilities
|
—
|
|
|
2,016
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|
|
2,016
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|
Other long-term liabilities
|
967
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|
|
(64)
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|
|
903
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|
Accumulated deficit
|
(12,954)
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|
|
653
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|
|
(12,301)
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Including the impacts from the change in the accounting conclusion on the 1,400 previously failed sale-leaseback tower sites and the change in presentation on the income statement of the 6,200 tower sites for which a sale did not occur, the cumulative effects of initially applying the new lease standard for the year ended December 31, 2019 are estimated as follows:
•The aggregate impact is a decrease in Other revenues of $185 million, a decrease in Total operating expenses of $380 million, a decrease in Interest expense of $34 million and an increase to Net income of $175 million.
•The impact on our Consolidated Statements of Cash Flows is a decrease in Net cash provided by operating activities of $10 million and a decrease in Net cash used in financing activities of $10 million.
For arrangements where we are the lessor, including arrangements to lease devices to our service customers, the adoption of the new lease standard did not have a material impact on our financial statements as these leases are classified as operating leases.
Device lease payments are presented as Equipment revenues and recognized as earned on a straight-line basis over the lease term. Recognition of equipment revenue on lease contracts that are determined to not be probable of collection is limited to the amount of payments received. We have made an accounting policy election to exclude from the consideration in the contract all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer (e.g., sales, use, value added, and some excise taxes).
At operating lease inception, leased wireless devices are transferred from Inventory to Property and equipment, net. Leased wireless devices are depreciated to their estimated residual value over the period expected to provide utility to us, which is generally shorter than the lease term and considers expected losses. Returned devices transferred from Property and equipment, net, are recorded as Inventory and are valued at the lower of cost or market with any write-down to market recognized as Cost of equipment sales in our Consolidated Statements of Comprehensive Income.
We do not have any leasing transactions with related parties. See Note 15 - Leases for further information.
We have implemented significant new lease accounting systems, processes and internal controls over lease accounting to assist us in the application of the new lease standard.
Lease Expense
We have operating leases for cell sites, retail locations, corporate offices and dedicated transportation lines, some of which have escalating rentals during the initial lease term and during subsequent optional renewal periods. We recognize a right-of-use asset and lease liability for operating leases based on the net present value of future minimum lease payments. Lease expense is recognized on a straight-line basis over the non-cancelable lease term and renewal periods that are considered reasonably certain.
We consider several factors in assessing whether renewal periods are reasonably certain of being exercised, including the continued maturation of our network nationwide, technological advances within the telecommunications industry and the availability of alternative sites.
We have financing leases for certain network equipment. The financing leases do not have renewal options and contain a bargain purchase option at the end of the lease. We recognize a right-of-use asset and lease liability for financing leases based on the net present value of future minimum lease payments. Lease expense for our financing leases is comprised of the amortization of the right-of-use asset and interest expense recognized based on the effective interest method.
Accounting Pronouncements Not Yet Adopted
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and has since modified the standard with several ASUs (collectively, the “new credit loss standard”). The new credit loss standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The new credit loss standard will become effective for us beginning on January 1, 2020, and requires a cumulative-effect adjustment to Accumulated deficit as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).
We will adopt the new credit loss standard on January 1, 2020, and plan to recognize lifetime expected credit losses at the inception of our credit risk exposures whereas we currently recognize credit losses only when it is probable that they have been incurred. We will also recognize expected credit losses on our EIP receivables, excluding consideration of any unamortized discount on those receivables resulting from the imputation of interest. We currently offset our estimate of incurred losses on our EIP receivables by the amount of the related unamortized discounts on those receivables. We have developed an expected credit loss model and are refining the inputs including the forward-looking loss indicators. The estimated impact of the new credit loss standard on our receivables portfolio as of December 31, 2019, would be an increase to our allowance for credit losses of $85 million to $95 million, a decrease to our net deferred tax liabilities of $22 million to $25 million and an increase to our Accumulated deficit of $63 million to $70 million.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We will adopt the standard on a prospective basis beginning on the effective date of January 1, 2020. Upon adoption of the standard, implementation costs are capitalized in the period incurred, which will result in an increase to Other assets in our Consolidated Balance Sheets. These capitalized amounts will be amortized over the term of the hosting arrangement to Cost of services or Selling, general and administrative expenses in our Consolidated Statements of Comprehensive Income based on the nature of the hosting arrangement. The impact of this standard on our Consolidated Financial Statements is dependent on the nature and composition of the hosting arrangements entered into subsequent to adoption.
Income Taxes
In December 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. The standard will become effective for us beginning January 1, 2021. Early adoption is permitted for us at any time. We are currently evaluating the impact this guidance will have on our Consolidated Financial Statements and the timing of adoption.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (the “SEC”) did not have, or are not expected to have, a significant impact on our present or future Consolidated Financial Statements.
Note 2 – Business Combinations
Proposed Sprint Transactions
On April 29, 2018, we entered into a Business Combination Agreement to merge with Sprint in an all-stock transaction at a fixed exchange ratio of 0.10256 shares of T-Mobile common stock for each share of Sprint common stock, or 9.75 shares of Sprint common stock for each share of T-Mobile common stock (the “Merger”). The combined company will be named “T-Mobile” and, as a result of the Merger, is expected to be able to rapidly launch a broad and deep nationwide 5G network, accelerate innovation and increase competition in the U.S. wireless, video and broadband industries. Neither T-Mobile nor Sprint on its own could generate comparable benefits to consumers.
The Merger and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”) have been approved by the boards of directors of T-Mobile and Sprint and the required approvals of the stockholders of each of T-Mobile and Sprint have been obtained. Immediately following the Merger, it is anticipated that Deutsche Telekom AG (“DT”) and SoftBank Group Corp. (“SoftBank”) will hold, directly or indirectly, on a fully diluted basis, approximately 41.5% and 27.2%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 31.3% of the outstanding T-Mobile common stock held by other stockholders, based on closing share prices and certain other assumptions as of December 31, 2019.
In connection with the entry into the Business Combination Agreement, T-Mobile USA, Inc. (“T-Mobile USA”) entered into commitment letter, dated as of April 29, 2018 (as amended and restated on May 15, 2018 and on September 6, 2019, the “Commitment Letter”). The funding of the debt facilities provided for in the Commitment Letter is subject to the satisfaction of the conditions set forth therein, including consummation of the Merger. The proceeds of the debt financing provided for in the Commitment Letter will be used to refinance certain existing debt of us, Sprint and our and Sprint’s respective subsidiaries and for post-closing working capital needs of the combined company. See Note 8 – Debt for further information.
In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a Financing Matters Agreement, dated as of April 29, 2018 (the “Financing Matters Agreement”), pursuant to which DT agreed, among other things, to consent to, subject to certain conditions, certain amendments to certain existing debt owed to DT, in connection with the Merger. If the Merger is consummated, we will make payments for requisite consents to DT of $13 million. There was no payment accrued as of December 31, 2019. See Note 8 – Debt for further information.
On May 18, 2018, under the terms and conditions described in the Consent Solicitation Statement dated as of May 14, 2018 (the "Consent Solicitation Statement"), we obtained consents necessary to effect certain amendments to certain existing debt of us and our subsidiaries. If the Merger is consummated, we will make payments for requisite consents to third-party note holders of $95 million. There were no consent payments accrued as of December 31, 2019.
Under the terms of the Business Combination Agreement, if the Business Combination Agreement is terminated, Sprint may be required to reimburse us for 33% of the consent, bank, and other fees we paid or accrued, which totaled $18 million as of December 31, 2019. There were no reimbursements accrued as of December 31, 2019. Sprint also obtained consents necessary to effect certain amendments to certain existing debt of Sprint and its subsidiaries. In connection with receiving the requisite consents, Sprint made upfront payments to third-party note holders and related bank fees of $242 million. Under the terms of the Business Combination Agreement, if the Business Combination Agreement is terminated, we may also be required to reimburse Sprint for 67% of the upfront consent and related bank fees it paid, which totaled $162 million as of December 31, 2019. There were no fees accrued as of December 31, 2019.
We recognized Merger-related costs of $620 million and $196 million for the years ended December 31, 2019 and 2018, respectively. These costs generally included consulting and legal fees and were recognized as Selling, general and administrative expenses in our Consolidated Statements of Comprehensive Income. Payments for Merger-related costs were $442 million and $86 million for the years ended December 31, 2019 and 2018, respectively, and were recognized within Net cash provided by operating activities in our Consolidated Statements of Cash Flows.
The Business Combination Agreement contains certain termination rights for both Sprint and us. If we terminate the Business Combination Agreement in connection with a failure to satisfy the closing condition related to specified minimum credit ratings for the combined company on the closing date of the Merger (after giving effect to the Merger) from at least two of the three credit rating agencies, then in certain circumstances, we may be required to pay Sprint an amount equal to $600 million.
On June 18, 2018, we filed a Public Interest Statement and applications for approval of the Merger with the FCC. On July 18, 2018, the FCC issued a Public Notice formally accepting our applications and establishing a period for public comment. On May 20, 2019, to facilitate the FCC’s review and approval of the FCC license transfers associated with the proposed Merger, we and Sprint filed with the FCC a written ex parte presentation (the “Presentation”) relating to the proposed Merger. The Presentation included proposed commitments from us and Sprint. The FCC approved the Merger on November 5, 2019.
On June 11, 2019, a number of state attorneys general filed a lawsuit against us, DT, Sprint, and SoftBank in the U.S. District Court for the Southern District of New York, alleging that the Merger, if consummated, would violate Section 7 of the Clayton Act and so should be enjoined. After it was filed, several additional states joined the lawsuit. Of the states that joined the lawsuit, two have subsequently withdrawn from the suit having resolved their concerns with the Merger. We believe the plaintiffs’ claims are without merit, and have defended the case vigorously. Trial concluded after two weeks of witness testimony and presentation of document evidence. We are now waiting for the trial court’s ruling. On November 25, 2019, individual consumers filed a similar lawsuit in the Northern District of California. That case has been stayed pending the outcome of the New York litigation.
On July 26, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Sprint and DISH Network Corporation (“DISH”). We and Sprint are collectively referred to as the “Sellers.” Pursuant to the Asset Purchase Agreement, upon the terms and subject to the conditions thereof, following the consummation of the Merger, DISH will acquire Sprint’s prepaid wireless business, currently operated under the Boost Mobile and Sprint prepaid brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers of Shenandoah Telecommunications Company and Swiftel Communications, Inc.), including customer accounts, inventory, contracts, intellectual property and certain other specified assets (the “Prepaid Business”), and will assume certain related liabilities (the “Prepaid Transaction”). DISH will pay the Sellers $1.4 billion for the Prepaid Business, subject to a working capital adjustment. The consummation of the Prepaid Transaction is subject to the consummation of the Merger and other customary closing conditions.
At the closing of the Prepaid Transaction, the Sellers and DISH will enter into (i) a License Purchase Agreement pursuant to which (a) the Sellers will sell certain 800 MHz spectrum licenses held by Sprint to DISH for a total of approximately $3.6 billion in a transaction to be completed, subject to certain additional closing conditions, following an application for FCC approval to be filed three years following the closing of the Merger and (b) the Sellers will have the option to lease back from DISH, as needed, a portion of the spectrum sold for an additional two years following the closing of the spectrum sale transaction, (ii) a Transition Services Agreement providing for the Sellers’ provision of transition services to DISH in connection with the Prepaid Business for a period of up to three years following the closing of the Prepaid Transaction, (iii) a Master Network Services Agreement providing for the Sellers’ provision of network services to customers of the Prepaid Business for a period of up to seven years following the closing of the Prepaid Transaction, and (iv) an Option to Acquire Tower and Retail Assets offering DISH the option to acquire certain decommissioned towers and retail locations from the Sellers, subject to obtaining all necessary third-party consents, for a period of up to five years following the closing of the Prepaid Transaction.
On July 26, 2019, in connection with the entry into the Asset Purchase Agreement, we and the other parties to the Business Combination Agreement entered into Amendment No. 1 (the “Amendment”) to the Business Combination Agreement. The Amendment extended the Outside Date (as defined in the Business Combination Agreement) to November 1, 2019, or, if the Marketing Period (as defined in the Business Combination Agreement) had started and was in effect at such date, then January 2, 2020. Because the Transactions were not completed by the Outside Date, each of T-Mobile and Sprint currently has the right to terminate the Business Combination Agreement or the terms may be amended.
On July 26, 2019, the U.S. Department of Justice (the “DOJ”) filed a complaint and a proposed final judgment (the “Proposed Consent Decree”) agreed to by us, DT, Sprint, SoftBank and DISH with the U.S. District Court for the District of Columbia.
The Proposed Consent Decree would fully resolve DOJ’s investigation into the Merger and would require the parties to, among other things, carry out the divestitures to be made pursuant to the Asset Purchase Agreement described above upon closing of the Merger. The Proposed Consent Decree is subject to judicial approval.
The consummation of the Merger remains subject to certain closing conditions. We expect the Merger will be permitted to close in early 2020.
Note 3 – Receivables and Allowance for Credit Losses
Our portfolio of receivables is comprised of two portfolio segments: accounts receivable and EIP receivables. Our accounts receivable segment primarily consists of amounts currently due from customers, including service and leased device receivables, other carriers and third-party retail channels.
Based upon customer credit profiles, we classify the EIP receivables segment into two customer classes of “Prime” and “Subprime.” Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. Customers may be required to make a down payment on their equipment purchases. In addition, certain customers within the Subprime category are required to pay an advance deposit.
To determine a customer’s credit profile, we use a proprietary credit scoring model that measures the credit quality of a customer using several factors, such as credit bureau information, consumer credit risk scores and service and device plan characteristics.
The following table summarizes the EIP receivables, including imputed discounts and related allowance for credit losses:
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|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
EIP receivables, gross
|
$
|
4,582
|
|
|
$
|
4,534
|
|
Unamortized imputed discount
|
(299)
|
|
|
(330)
|
|
|
|
|
|
EIP receivables, net of unamortized imputed discount
|
4,283
|
|
|
4,204
|
|
Allowance for credit losses
|
(100)
|
|
|
(119)
|
|
|
|
|
|
EIP receivables, net
|
$
|
4,183
|
|
|
$
|
4,085
|
|
Classified on the balance sheet as:
|
|
|
|
Equipment installment plan receivables, net
|
$
|
2,600
|
|
|
$
|
2,538
|
|
Equipment installment plan receivables due after one year, net
|
1,583
|
|
|
1,547
|
|
|
|
|
|
EIP receivables, net
|
$
|
4,183
|
|
|
$
|
4,085
|
|
|
|
|
|
|
|
|
|
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|
To determine the appropriate level of the allowance for credit losses, we consider a number of credit quality factors, including historical credit losses and timely payment experience as well as current collection trends such as write-off frequency and severity, aging of the receivable portfolio, credit quality of the customer base and other qualitative factors such as macro-economic conditions.
We write off account balances if collection efforts are unsuccessful and the receivable balance is deemed uncollectible, based on factors such as customer credit ratings and the length of time from the original billing date.
For EIP receivables, subsequent to the initial determination of the imputed discount, we assess the need for and, if necessary, recognize an allowance for credit losses to the extent the amount of estimated incurred losses on the gross EIP receivable balances exceed the remaining unamortized imputed discount balances.
The EIP receivables had weighted average effective imputed interest rates of 8.8% and 10.0% as of December 31, 2019, and 2018, respectively.
Activity for the years ended December 31, 2019, 2018 and 2017, in the allowance for credit losses and unamortized imputed discount balances for the accounts receivable and EIP receivables segments were as follows:
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|
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|
|
|
|
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|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
(in millions)
|
Accounts Receivable Allowance
|
|
EIP Receivables Allowance
|
|
Total
|
|
Accounts Receivable Allowance
|
|
EIP Receivables Allowance
|
|
Total
|
|
Accounts Receivable Allowance
|
|
EIP Receivables Allowance
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses and imputed discount, beginning of period
|
$
|
67
|
|
|
$
|
449
|
|
|
$
|
516
|
|
|
$
|
86
|
|
|
$
|
396
|
|
|
$
|
482
|
|
|
$
|
102
|
|
|
$
|
316
|
|
|
$
|
418
|
|
Bad debt expense
|
77
|
|
|
230
|
|
|
307
|
|
|
69
|
|
|
228
|
|
|
297
|
|
|
104
|
|
|
284
|
|
|
388
|
|
Write-offs, net of recoveries
|
(83)
|
|
|
(249)
|
|
|
(332)
|
|
|
(88)
|
|
|
(240)
|
|
|
(328)
|
|
|
(120)
|
|
|
(273)
|
|
|
(393)
|
|
Change in imputed discount on short-term and long-term EIP receivables
|
N/A
|
|
|
136
|
|
|
136
|
|
|
N/A
|
|
|
250
|
|
|
250
|
|
|
N/A
|
|
|
252
|
|
|
252
|
|
Impact on the imputed discount from sales of EIP receivables
|
N/A
|
|
|
(167)
|
|
|
(167)
|
|
|
N/A
|
|
|
(185)
|
|
|
(185)
|
|
|
N/A
|
|
|
(183)
|
|
|
(183)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses and imputed discount, end of period
|
$
|
61
|
|
|
$
|
399
|
|
|
$
|
460
|
|
|
$
|
67
|
|
|
$
|
449
|
|
|
$
|
516
|
|
|
$
|
86
|
|
|
$
|
396
|
|
|
$
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management considers the aging of receivables to be an important credit indicator. The following table provides delinquency status for the unpaid principal balance for receivables within the EIP portfolio segment, which we actively monitor as part of our current credit risk management practices and policies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
(in millions)
|
Prime
|
|
Subprime
|
|
Total EIP Receivables, gross
|
|
Prime
|
|
Subprime
|
|
Total EIP Receivables, gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Current - 30 days past due
|
$
|
2,384
|
|
|
$
|
2,108
|
|
|
$
|
4,492
|
|
|
$
|
1,987
|
|
|
$
|
2,446
|
|
|
$
|
4,433
|
|
31 - 60 days past due
|
13
|
|
|
28
|
|
|
41
|
|
|
15
|
|
|
32
|
|
|
47
|
|
61 - 90 days past due
|
7
|
|
|
17
|
|
|
24
|
|
|
6
|
|
|
19
|
|
|
25
|
|
More than 90 days past due
|
7
|
|
|
18
|
|
|
25
|
|
|
7
|
|
|
22
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables, gross
|
$
|
2,411
|
|
|
$
|
2,171
|
|
|
$
|
4,582
|
|
|
$
|
2,015
|
|
|
$
|
2,519
|
|
|
$
|
4,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 – Sales of Certain Receivables
We have entered into transactions to sell certain service and EIP receivables. The transactions, including our continuing involvement with the sold receivables and the respective impacts to our Consolidated Financial Statements, are described below.
Sales of Service Accounts Receivable
Overview of the Transaction
In 2014, we entered into an arrangement to sell certain service accounts receivable on a revolving basis (the “service receivable sale arrangement”). The maximum funding commitment of the service receivable sale arrangement is $950 million. In February 2019, the service receivable sale arrangement was amended to extend the scheduled expiration date, as well as certain third-party credit support under the arrangement, to March 2021. As of December 31, 2019 and 2018, the service receivable sale arrangement provided funding of $924 million and $774 million, respectively. Sales of receivables occur daily and are settled on a monthly basis. The receivables consist of service charges currently due from customers and are short-term in nature.
In connection with the service receivable sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity, to sell service accounts receivable (the “Service BRE”). The Service BRE does not qualify as a VIE, and due to the significant level of control we exercise over the entity, it is consolidated. Pursuant to the service receivable sale arrangement, certain of our wholly-owned subsidiaries transfer selected receivables to the Service BRE. The Service BRE then sells the receivables to an unaffiliated entity (the “Service VIE”), which was established to facilitate the sale of beneficial ownership interests in the receivables to certain third parties.
Variable Interest Entity
We determined that the Service VIE qualifies as a VIE as it lacks sufficient equity to finance its activities. We have a variable interest in the Service VIE but are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the Service VIE’s economic performance. Those activities include committing the Service VIE to legal agreements to purchase or sell assets, selecting which receivables are purchased in the service receivable sale arrangement, determining whether the Service VIE will sell interests in the purchased service receivables to other parties, funding of the entity and servicing of receivables. We do not hold the power to direct the key decisions underlying these activities. For example, while we act as the servicer of the sold receivables, which is considered a significant activity of the Service VIE, we are acting as an agent in our capacity as the servicer and the counterparty to the service receivable sale arrangement has the ability to remove us as the servicing agent of the receivables at will with no recourse available to us. As we have determined we are not the primary beneficiary, the balances and results of the Service VIE are not included in our Consolidated Financial Statements.
The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Consolidated Balance Sheets that relate to our variable interest in the Service VIE:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Other current assets
|
$
|
350
|
|
|
$
|
339
|
|
Accounts payable and accrued liabilities
|
25
|
|
|
59
|
|
Other current liabilities
|
342
|
|
|
149
|
|
Sales of EIP Receivables
Overview of the Transaction
In 2015, we entered into an arrangement to sell certain EIP accounts receivable on a revolving basis (the “EIP sale arrangement”). The maximum funding commitment of the EIP sale arrangement is $1.3 billion, and the scheduled expiration date is November 2020.
As of both December 31, 2019 and 2018, the EIP sale arrangement provided funding of $1.3 billion. Sales of EIP receivables occur daily and are settled on a monthly basis.
In connection with this EIP sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity (the “EIP BRE”). Pursuant to the EIP sale arrangement, our wholly-owned subsidiary transfers selected receivables to the EIP BRE. The EIP BRE then sells the receivables to a non-consolidated and unaffiliated third-party entity for which we do not exercise any level of control, nor does the third-party entity qualify as a VIE.
Variable Interest Entity
We determined that the EIP BRE is a VIE as its equity investment at risk lacks the obligation to absorb a certain portion of its expected losses. We have a variable interest in the EIP BRE and determined that we are the primary beneficiary based on our ability to direct the activities which most significantly impact the EIP BRE’s economic performance. Those activities include selecting which receivables are transferred into the EIP BRE and sold in the EIP sale arrangement and funding of the EIP BRE. Additionally, our equity interest in the EIP BRE obligates us to absorb losses and gives us the right to receive benefits from the EIP BRE that could potentially be significant to the EIP BRE. Accordingly, we include the balances and results of operations of the EIP BRE in our Consolidated Financial Statements.
The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price, and liabilities included in our Consolidated Balance Sheets that relate to the EIP BRE:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Other current assets
|
$
|
344
|
|
|
$
|
321
|
|
Other assets
|
89
|
|
|
88
|
|
Other long-term liabilities
|
18
|
|
|
22
|
|
In addition, the EIP BRE is a separate legal entity with its own separate creditors who will be entitled, prior to any liquidation of the EIP BRE, to be satisfied prior to any value in the EIP BRE becoming available to us. Accordingly, the assets of the EIP BRE may not be used to settle our general obligations and creditors of the EIP BRE have limited recourse to our general credit.
Sales of Receivables
The transfers of service receivables and EIP receivables to the non-consolidated entities are accounted for as sales of financial assets. Once identified for sale, the receivable is recorded at the lower of cost or fair value. Upon sale, we derecognize the net carrying amount of the receivables.
We recognize the cash proceeds received upon sale in Net cash provided by operating activities in our Consolidated Statements of Cash Flows. We recognize proceeds net of the deferred purchase price, consisting of a receivable from the purchasers that entitles us to certain collections on the receivables. We recognize the collection of the deferred purchase price in Net cash used in investing activities in our Consolidated Statements of Cash Flows as Proceeds related to beneficial interests in securitization transactions.
The deferred purchase price represents a financial asset that is primarily tied to the creditworthiness of the customers and which can be settled in such a way that we may not recover substantially all of our recorded investment, due to default by the customers on the underlying receivables. We elected, at inception, to measure the deferred purchase price at fair value with changes in fair value included in Selling, general and administrative expense in our Consolidated Statements of Comprehensive Income. The fair value of the deferred purchase price is determined based on a discounted cash flow model which uses primarily unobservable inputs (Level 3 inputs), including customer default rates. As of December 31, 2019, and 2018, our deferred purchase price related to the sales of service receivables and EIP receivables was $781 million and $746 million, respectively.
The following table summarizes the impact of the sale of certain service receivables and EIP receivables in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Derecognized net service receivables and EIP receivables
|
$
|
2,584
|
|
|
$
|
2,577
|
|
Other current assets
|
694
|
|
|
660
|
|
of which, deferred purchase price
|
692
|
|
|
658
|
|
Other long-term assets
|
89
|
|
|
88
|
|
of which, deferred purchase price
|
89
|
|
|
88
|
|
Accounts payable and accrued liabilities
|
25
|
|
|
59
|
|
Other current liabilities
|
342
|
|
|
149
|
|
Other long-term liabilities
|
18
|
|
|
22
|
|
Net cash proceeds since inception
|
1,944
|
|
|
1,879
|
|
Of which:
|
|
|
|
Change in net cash proceeds during the year-to-date period
|
65
|
|
|
(179)
|
|
Net cash proceeds funded by reinvested collections
|
1,879
|
|
|
2,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognized losses from sales of receivables, including adjustments to the receivables’ fair values and changes in fair value of the deferred purchase price, of $130 million, $157 million and $299 million for the years ended December 31, 2019, 2018 and 2017, respectively, in Selling, general and administrative expense in our Consolidated Statements of Comprehensive Income.
Continuing Involvement
Pursuant to the sale arrangements described above, we have continuing involvement with the service receivables and EIP receivables we sell as we service the receivables and are required to repurchase certain receivables, including ineligible receivables, aged receivables and receivables where write-off is imminent. We continue to service the customers and their related receivables, including facilitating customer payment collection, in exchange for a monthly servicing fee. As the receivables are sold on a revolving basis, the customer payment collections on sold receivables may be reinvested in new receivable sales. While servicing the receivables, we apply the same policies and procedures to the sold receivables as we apply to our owned receivables, and we continue to maintain normal relationships with our customers. Pursuant to the EIP sale
arrangement, under certain circumstances, we are required to deposit cash or replacement EIP receivables primarily for contracts terminated by customers under our JUMP! Program.
In addition, we have continuing involvement with the sold receivables as we may be responsible for absorbing additional credit losses pursuant to the sale arrangements. Our maximum exposure to loss related to the involvement with the service receivables and EIP receivables sold under the sale arrangements was $1.1 billion as of December 31, 2019. The maximum exposure to loss, which is a required disclosure under U.S. GAAP, represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby we would not receive the deferred purchase price portion of the contractual proceeds withheld by the purchasers and would also be required to repurchase the maximum amount of receivables pursuant to the sale arrangements without consideration for any recovery. We believe the probability of these circumstances occurring is remote and the maximum exposure to loss is not an indication of our expected loss.
Note 5 – Property and Equipment
The components of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Useful Lives
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
Buildings and equipment
|
Up to 40 years
|
|
$
|
2,587
|
|
|
$
|
2,428
|
|
Wireless communications systems
|
Up to 20 years
|
|
34,353
|
|
|
35,282
|
|
Leasehold improvements
|
Up to 12 years
|
|
1,345
|
|
|
1,299
|
|
Capitalized software
|
Up to 10 years
|
|
12,705
|
|
|
11,712
|
|
Leased wireless devices
|
Up to 18 months
|
|
1,139
|
|
|
1,159
|
|
Construction in progress
|
|
|
2,973
|
|
|
2,776
|
|
Accumulated depreciation and amortization
|
|
|
(33,118)
|
|
|
(31,297)
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
$
|
21,984
|
|
|
$
|
23,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We capitalize interest associated with the acquisition or construction of certain property and equipment and spectrum intangible assets. We recognized capitalized interest of $473 million, $362 million and $136 million for the years ended December 31, 2019, 2018 and 2017, respectively.
In December 2019, we sold 168 T-Mobile-owned wireless communications tower sites to an unrelated third party in exchange for net proceeds of $38 million which are included in Proceeds from sales of tower sites within Net cash used in investing activities in our Consolidated Statements of Cash Flows. A gain of $13 million was recognized as a reduction in Cost of services, exclusive of depreciation and amortization, in our Consolidated Statements of Comprehensive Income. We lease back space at certain of the sold tower sites for an initial term of ten years, followed by optional renewals.
Total depreciation expense relating to property and equipment was $6.0 billion, $6.4 billion and $5.8 billion for the years ended December 31, 2019, 2018 and 2017, respectively. Included in the total depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $543 million, $940 million and $1.0 billion, respectively, related to leased wireless devices.
Asset retirement obligations are primarily for certain legal obligations to remediate leased property on which our network infrastructure and administrative assets are located.
Activity in our asset retirement obligations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Asset retirement obligations, beginning of year
|
$
|
609
|
|
|
$
|
562
|
|
Liabilities incurred
|
35
|
|
|
26
|
|
Liabilities settled
|
(2)
|
|
|
(9)
|
|
Accretion expense
|
32
|
|
|
30
|
|
Changes in estimated cash flows
|
(15)
|
|
|
—
|
|
|
|
|
|
Asset retirement obligations, end of year
|
$
|
659
|
|
|
$
|
609
|
|
|
|
|
|
Classified on the balance sheet as:
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
$
|
659
|
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The corresponding assets, net of accumulated depreciation, related to asset retirement obligations were $159 million and $194 million as of December 31, 2019 and 2018, respectively.
Note 6 – Goodwill, Spectrum License Transactions and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018, are as follows:
|
|
|
|
|
|
(in millions)
|
Goodwill
|
|
|
Historical goodwill
|
$
|
12,449
|
|
Goodwill from acquisition of Layer3 TV
|
218
|
|
Accumulated impairment losses at December 31, 2018
|
(10,766)
|
|
|
|
Balance as of December 31, 2018
|
1,901
|
|
Goodwill from acquisition in 2019
|
29
|
|
|
|
Balance as of December 31, 2019
|
$
|
1,930
|
|
Accumulated impairment losses at December 31, 2019
|
$
|
(10,766)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2019, we completed our acquisition of a mobile marketing company, for cash consideration of $32 million. Upon closing of the transaction, the acquired company became a wholly-owned consolidated subsidiary to T-Mobile. We recorded Goodwill of approximately $29 million, calculated as the excess of the purchase price paid over the fair value of net assets acquired. The acquired goodwill was allocated to our wireless reporting unit and will be tested for impairment at this level.
The assets acquired and liabilities assumed were not material to our Consolidated Balance Sheets. The financial results from the acquisition closing date through December 31, 2019 were not material to our Consolidated Statements of Comprehensive Income. The acquisition was not material to our prior period consolidated results on a pro forma basis.
Spectrum Licenses
The following table summarizes our spectrum license activity for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2019
|
|
2018
|
Spectrum licenses, beginning of year
|
$
|
35,559
|
|
|
$
|
35,366
|
|
|
|
|
|
Spectrum license acquisitions
|
857
|
|
|
138
|
|
Spectrum licenses transferred to held for sale
|
—
|
|
|
(1)
|
|
Costs to clear spectrum
|
49
|
|
|
56
|
|
|
|
|
|
Spectrum licenses, end of year
|
$
|
36,465
|
|
|
$
|
35,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of significant spectrum transactions for the year ended December 31, 2019:
•In June 2019, the FCC announced that we were the winning bidder of 2,211 licenses in the 24 GHz and 28 GHz spectrum auctions for an aggregate price of $842 million.
•At the inception of the 28 GHz spectrum auction in October 2018, we deposited $20 million with the FCC. Upon conclusion of the 28 GHz spectrum auction in February 2019, we made an additional payment of $19 million for the purchase price of licenses won in the auction.
•At the inception of the 24 GHz spectrum auction in February 2019, we deposited $147 million with the FCC. Upon conclusion of the 24 GHz spectrum auction in June 2019, we made an additional payment of $656 million for the purchase price of licenses won in the auction.
The licenses are included in Spectrum licenses as of December 31, 2019, in our Consolidated Balance Sheets. Cash payments to acquire spectrum licenses and payments for costs to clear spectrum are included in Purchases of spectrum licenses and other intangible assets, including deposits in our Consolidated Statements of Cash Flows for the year ended December 31, 2019.
The following is a summary of significant spectrum transactions for the year ended December 31, 2018:
•We recorded spectrum licenses received as part of our acquisition of the remaining equity interest in Iowa Wireless Services, LLC, at their estimated fair value of approximately $87 million.
•We closed on multiple spectrum purchase agreements in which we acquired total spectrum licenses of approximately $50 million for cash consideration.
•In 2018, we signed a reciprocal long-term lease arrangement with Sprint in which both parties have the right to use a portion of spectrum owned by the other party. This executory agreement does not qualify as an acquisition of spectrum licenses, and we have not capitalized amounts related to the lease. The reciprocal long-term lease is a distinct transaction from the Merger.
Goodwill and Other Intangible Assets Impairment Assessments
Our impairment assessment of goodwill and other indefinite-lived intangible assets (spectrum licenses) resulted in no impairment as of December 31, 2019 and 2018.
Other Intangible Assets
The components of Other intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
(in millions)
|
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
Up to 6 years
|
|
$
|
1,104
|
|
|
$
|
(1,104)
|
|
|
$
|
—
|
|
|
$
|
1,104
|
|
|
$
|
(1,086)
|
|
|
$
|
18
|
|
Trademarks and patents
|
Up to 19 years
|
|
323
|
|
|
(258)
|
|
|
65
|
|
|
312
|
|
|
(225)
|
|
|
87
|
|
Other
|
Up to 28 years
|
|
100
|
|
|
(50)
|
|
|
50
|
|
|
149
|
|
|
(56)
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
$
|
1,527
|
|
|
$
|
(1,412)
|
|
|
$
|
115
|
|
|
$
|
1,565
|
|
|
$
|
(1,367)
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets subject to amortization was $82 million, $124 million and $163 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The estimated aggregate future amortization expense for intangible assets subject to amortization are summarized below:
|
|
|
|
|
|
(in millions)
|
Estimated Future Amortization
|
Year Ending December 31,
|
|
|
|
2020
|
$
|
83
|
|
2021
|
14
|
|
2022
|
3
|
|
2023
|
3
|
|
2024
|
3
|
|
Thereafter
|
9
|
|
|
|
Total
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 – Fair Value Measurements
The carrying values of Cash and cash equivalents, Accounts receivable, Accounts receivable from affiliates, Accounts payable and accrued liabilities, borrowings under vendor financing arrangements with our primary network equipment suppliers, and borrowings under our revolving credit facility with DT, our majority stockholder, approximate fair value due to the short-term maturities of these instruments.
Derivative Financial Instruments
Interest rate lock derivatives
Periodically, we use derivatives to manage exposure to market risk, such as interest rate risk. We designated certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow hedge) to help minimize significant, unplanned fluctuations in cash flows caused by interest rate volatility. We do not use derivatives for trading or speculative purposes.
We record interest rate lock derivatives on our Consolidated Balance Sheets at fair value that is derived primarily from observable market data, including yield curves. Interest rate lock derivatives were classified as Level 2 in the fair value
hierarchy. Cash flows associated with qualifying hedge derivative instruments are presented in the same category on the Consolidated Statements of Cash Flows as the item being hedged.
In October 2018, we entered into interest rate lock derivatives with notional amounts of $9.6 billion. The fair value of interest rate lock derivatives was a liability of $1.2 billion and $447 million as of December 31, 2019 and 2018, respectively, and was included in Other current liabilities in our Consolidated Balance Sheets. As of the years ended December 31, 2019 and 2018, no amounts were accrued or amortized into Interest expense in the Consolidated Statements of Comprehensive Income. Aggregate changes in fair value, net of tax, of $868 million and $332 million are presented in Accumulated other comprehensive loss as of December 31, 2019, and 2018, respectively.
In November 2019, we extended the mandatory termination date on our interest rate lock derivatives to June 3, 2020. In December 2019, we made net collateral transfers to certain of our derivative counterparties totaling $632 million, which included variation margin transfers to (or from) such derivative counterparties based on daily market movements. These collateral transfers are included in Other current assets in our Consolidated Balance Sheets and in Net cash related to derivative contracts under collateral exchange arrangements within Net cash used in investing activities in our Consolidated Statements of Cash Flows. The interest rate lock derivatives will be settled upon the earlier of the issuance of fixed-rate debt or the mandatory termination date. Upon settlement of the interest rate lock derivatives, we will receive, or make, a cash payment in the amount of the fair value of the cash flow hedge as of the settlement date.
Embedded derivatives
In connection with our business combination with MetroPCS, we issued senior reset notes to DT. We determined certain components of the reset feature are required to be bifurcated from the senior reset notes and separately accounted for as embedded derivative instruments.
The interest rates on our senior reset notes to DT were adjusted at the reset dates to rates defined in the applicable supplemental indentures to manage interest rate risk related to the senior reset notes. Our embedded derivatives are recorded at fair value primarily based on unobservable inputs and were classified as Level 3 in the fair value hierarchy for 2019 and 2018.
Effective April 28, 2019, we redeemed $600 million aggregate principal amount of our 9.332% Senior Reset Notes due 2023 held by DT. The notes were redeemed at a redemption price equal to 104.666% of the principal amount of the notes (plus accrued and unpaid interest thereon) and were paid on April 29, 2019. The write-off of embedded derivatives upon redemption of the DT Senior Reset Notes resulted in a gain of $11 million and is included in Other expense, net in our Consolidated Statements of Comprehensive Income. The fair value of embedded derivative instruments was $19 million as of December 31, 2018, and is included in Other long-term liabilities in our Consolidated Balance Sheets. For the years ended December 31, 2019, 2018, and 2017, we recognized $8 million, $29 million and $52 million from the gain activity related to embedded derivatives instruments in Interest expense to affiliates in our Consolidated Statements of Comprehensive Income.
Deferred Purchase Price Assets
In connection with the sales of certain service and EIP accounts receivable pursuant to the sale arrangements, we have deferred purchase price assets measured at fair value that are based on a discounted cash flow model using unobservable Level 3 inputs, including customer default rates. See Note 4 – Sales of Certain Receivables for further information.
The carrying amounts and fair values of our assets measured at fair value on a recurring basis included in our Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level within the Fair Value Hierarchy
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
(in millions)
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
Deferred purchase price assets
|
3
|
|
$
|
781
|
|
|
$
|
781
|
|
|
$
|
746
|
|
|
$
|
746
|
|
Long-term Debt
The fair value of our Senior Notes to third parties was determined based on quoted market prices in active markets, and therefore was classified as Level 1 within the fair value hierarchy. The fair values of our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were determined based on a discounted cash flow approach using market interest rates of instruments with similar terms and maturities and an estimate for our standalone credit risk.
Accordingly, our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were classified as Level 2 within the fair value hierarchy.
Although we have determined the estimated fair values using available market information and commonly accepted valuation methodologies, considerable judgment was required in interpreting market data to develop fair value estimates for the Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates. The fair value estimates were based on information available as of December 31, 2019, and 2018. As such, our estimates are not necessarily indicative of the amount we could realize in a current market exchange.
The carrying amounts and fair values of our short-term and long-term debt included in our Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level within the Fair Value Hierarchy
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
(in millions)
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Senior Notes to third parties
|
1
|
|
$
|
10,958
|
|
|
$
|
11,479
|
|
|
$
|
10,950
|
|
|
$
|
10,945
|
|
Senior Notes to affiliates
|
2
|
|
9,986
|
|
|
10,366
|
|
|
9,984
|
|
|
9,802
|
|
Incremental Term Loan Facility to affiliates
|
2
|
|
4,000
|
|
|
4,000
|
|
|
4,000
|
|
|
3,976
|
|
Senior Reset Notes to affiliates
|
2
|
|
—
|
|
|
—
|
|
|
598
|
|
|
640
|
|
Guarantee Liabilities
We offer a device trade-in program, JUMP!, which provides eligible customers a specified-price trade-in right to upgrade their device. For customers who enroll in JUMP!, we recognize a liability and reduce revenue for the portion of revenue which represents the estimated fair value of the specified-price trade-in right guarantee, incorporating the expected probability and timing of handset upgrade and the estimated fair value of the handset which is returned. Accordingly, our guarantee liabilities were classified as Level 3 within the fair value hierarchy. When customers upgrade their device, the difference between the EIP balance credit to the customer and the fair value of the returned device is recorded against the guarantee liabilities. Guarantee liabilities are included in Other current liabilities in our Consolidated Balance Sheets.
The carrying amounts of our guarantee liabilities measured at fair value on a non-recurring basis included in our Consolidated Balance Sheets were $62 million and $73 million as of December 31, 2019, and 2018, respectively.
The total estimated remaining gross EIP receivable balances of all enrolled handset upgrade program customers, which are the remaining EIP amounts underlying the JUMP! guarantee, including EIP receivables that have been sold, was $3.0 billion as of December 31, 2019. This is not an indication of our expected loss exposure as it does not consider the expected fair value of the used handset or the probability and timing of the trade-in.
Note 8 – Debt
Debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
5.300% Senior Notes to affiliates due 2021
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
|
|
|
4.000% Senior Notes to affiliates due 2022
|
1,000
|
|
|
1,000
|
|
4.000% Senior Notes due 2022
|
500
|
|
|
500
|
|
|
|
|
|
Incremental term loan facility to affiliates due 2022
|
|
2,000
|
|
|
2,000
|
|
6.000% Senior Notes due 2023
|
1,300
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
9.332% Senior Reset Notes to affiliates due 2023
|
—
|
|
|
600
|
|
6.000% Senior Notes due 2024
|
1,000
|
|
|
1,000
|
|
6.500% Senior Notes due 2024
|
1,000
|
|
|
1,000
|
|
6.000% Senior Notes to affiliates due 2024
|
1,350
|
|
|
1,350
|
|
6.000% Senior Notes to affiliates due 2024
|
650
|
|
|
650
|
|
Incremental term loan facility to affiliates due 2024
|
|
2,000
|
|
|
2,000
|
|
5.125% Senior Notes to affiliates due 2025
|
1,250
|
|
|
1,250
|
|
5.125% Senior Notes due 2025
|
500
|
|
|
500
|
|
6.375% Senior Notes due 2025
|
1,700
|
|
|
1,700
|
|
6.500% Senior Notes due 2026
|
2,000
|
|
|
2,000
|
|
4.500% Senior Notes due 2026
|
1,000
|
|
|
1,000
|
|
4.500% Senior Notes to affiliates due 2026
|
1,000
|
|
|
1,000
|
|
5.375% Senior Notes due 2027
|
500
|
|
|
500
|
|
5.375% Senior Notes to affiliates due 2027
|
1,250
|
|
|
1,250
|
|
4.750% Senior Notes due 2028
|
1,500
|
|
|
1,500
|
|
4.750% Senior Notes to affiliates due 2028
|
1,500
|
|
|
1,500
|
|
Capital leases (1)
|
—
|
|
|
2,015
|
|
|
|
|
|
Unamortized premium on debt to affiliates
|
|
43
|
|
|
52
|
|
|
|
|
|
Unamortized discount on Senior Notes to affiliates
|
|
(53)
|
|
|
(64)
|
|
Financing arrangements for property and equipment
|
|
25
|
|
|
—
|
|
Debt issuance costs and consent fees
|
|
(46)
|
|
|
(56)
|
|
|
|
|
|
Total debt
|
|
24,969
|
|
|
27,547
|
|
|
|
|
|
|
|
|
|
Less: Current portion of capital leases
|
|
—
|
|
|
841
|
|
Less: Financing arrangements for property and equipment
|
|
25
|
|
|
—
|
|
Total long-term debt
|
|
$
|
24,944
|
|
|
$
|
26,706
|
|
Classified on the balance sheet as:
|
|
|
|
|
Long-term debt
|
|
$
|
10,958
|
|
|
$
|
12,124
|
|
Long-term debt to affiliates
|
|
13,986
|
|
|
14,582
|
|
Total long-term debt
|
|
$
|
24,944
|
|
|
$
|
26,706
|
|
Debt to Affiliates
During the year ended December 31, 2019, we made the following note redemption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Principal Amount
|
|
Write -off of Embedded Derivatives (1)
|
|
Other (2)
|
|
Redemption
Date
|
|
Redemption Price
|
9.332% Senior Notes due 2023
|
$
|
600
|
|
|
$
|
11
|
|
|
$
|
28
|
|
|
April 28, 2019
|
|
104.6660
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Certain components of the reset features were required to be bifurcated from the DT Senior Reset Notes and separately accounted for as embedded derivative instruments. The write-off of embedded derivatives upon redemption resulted in a gain and is included in Other expense, net in our Consolidated Statements of Comprehensive Income and in Losses on redemption of debt within Net cash provided by operating activities in our Consolidated Statements of Cash Flows.
(2)Cash for the premium portion of the redemption price set forth in the indenture governing the DT Senior Reset Notes, plus accrued but unpaid interest on the DT Senior Reset Notes. The redemption premium was included in Other expense, net in our Consolidated Statements of Comprehensive Income and in Cash payments for debt prepayment or debt extinguishment costs in our Consolidated Statements of Cash Flows.
Incremental Term Loan Facility
In March 2018, we amended the terms of our secured term loan facility (“Incremental Term Loan Facility”) with DT, our majority stockholder. Following this amendment, the applicable margin payable on LIBOR indexed loans is 1.50% under the $2.0 billion Incremental Term Loan Facility maturing on November 9, 2022 and 1.75% under the $2.0 billion Incremental Term Loan Facility maturing on January 31, 2024. The amendment also modified the Incremental Term Loan Facility to update certain covenants and other provisions to make them substantially consistent, subject to certain additional carve outs, with our most recently issued public notes. No issuance fees were incurred related to this debt facility for the years ended December 31, 2019 and 2018.
Commitment Letter
In connection with the entry into the Business Combination Agreement, T-Mobile USA entered into a commitment letter, dated as of April 29, 2018 (as amended and restated on May 15, 2018 and on September 6, 2019, the “Commitment Letter”), with certain financial institutions named therein that have committed to provide up to $30.0 billion in secured and unsecured debt financing, including a $4.0 billion secured revolving credit facility, a $7.0 billion secured term loan facility, and a $19.0 billion secured bridge loan facility. On September 6, 2019, T-Mobile USA amended and restated the Commitment Letter which (i) reduced the commitments under the secured term loan facility from $7.0 billion to $4.0 billion and (ii) extended the commitments thereunder through May 1, 2020. The funding of the debt facilities provided for in the Commitment Letter is subject to the satisfaction of the conditions set forth therein, including consummation of the Merger. The proceeds of the debt financing provided for in the Commitment Letter will be used to refinance certain existing debt of us, Sprint and our and Sprint’s respective subsidiaries and for post-closing working capital needs of the combined company.
In connection with the financing provided for in the Commitment Letter, we expect to incur certain fees payable to the financial institutions, including certain financing fees on the secured term loan commitment. If the Merger closes, we will incur additional fees for the financial institutions structuring and providing the commitments and certain take-out fees associated with the issuance of permanent secured bond debt in lieu of the secured bridge loan. In total, we may incur up to approximately $340 million in fees associated with the Commitment Letter. We began incurring certain Commitment Letter fees on November 1, 2019, which were recognized in Selling, general and administrative expenses in our Consolidated Statements of Comprehensive Income. There were $12 million of fees accrued as of December 31, 2019.
Financing Matters Agreement
Pursuant to the Financing Matters Agreement, DT agreed, among other things, to consent to the incurrence by T-Mobile USA of secured debt in connection with and after the consummation of the Merger, and to provide a lock up on sales thereby as to certain senior notes of T-Mobile USA held thereby. In addition, T-Mobile USA agreed, among other things, to repay and terminate, upon closing of the Merger, the Incremental Term Loan Facility and the revolving credit facility of T-Mobile USA which are provided by DT, as well as $2.0 billion of T-Mobile USA’s 5.300% Senior Notes due 2021 and $2.0 billion of T-Mobile USA’s 6.000% Senior Notes due 2024. In addition, T-Mobile USA and DT agreed, upon closing of the Merger, to amend the $1.25 billion of T-Mobile USA’s 5.125% Senior Notes due 2025 and $1.25 billion of T-Mobile USA’s 5.375% Senior Notes due 2027 to change the maturity dates thereof to April 15, 2021 and April 15, 2022, respectively (the “2025 and 2027 Amendments”). In connection with receiving the requisite consents, we made upfront payments to DT of $7 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt to affiliates in our Consolidated Balance Sheets. In accordance with the consents received from DT, on December 20, 2018, T-Mobile USA, the guarantors and Deutsche Bank Trust Company Americas, as trustee, executed and delivered the 38th supplemental indenture to
the Indenture, pursuant to which, with respect to certain T-Mobile USA Senior Notes held by DT, the Proposed Amendments (as defined below under “Consents on Debt to Third Parties”) and the 2025 and 2027 Amendments will become effective immediately prior to the consummation of the Merger. If the Merger is consummated, we will make additional payments for requisite consents to DT of $13 million. There were no additional payments accrued as of December 31, 2019 and 2018.
Consents on Debt to Third Parties
On May 18, 2018, under the terms and conditions described in the Consent Solicitation Statement, we obtained consents necessary to effect certain amendments to our Senior Notes to third parties in connection with the Business Combination Agreement. Pursuant to the Consent Solicitation Statement, third-party note holders agreed, among other things, to consent to increasing the amount of Secured Indebtedness under Credit Facilities that can be incurred from the greater of $9.0 billion and 150% of Consolidated Cash Flow to the greater of $9.0 billion and an amount that would not cause the Secured Debt to Cash Flow Ratio (calculated net of cash and cash equivalents) to exceed 2.00x (the “Ratio Secured Debt Proposed Amendments”) and in each case as such capitalized term is defined in the Indenture. In connection with receiving the requisite consents for the Ratio Secured Debt Proposed Amendments, we made upfront payments to third-party note holders of $17 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt in our Consolidated Balance Sheets. These upfront payments increased the effective interest rate of the related debt.
In addition, note holders agreed, among other things, to allow certain entities related to Sprint’s existing spectrum securitization notes program (“Existing Sprint Spectrum Program”) to be non-guarantor Restricted Subsidiaries, provided that the principal amount of the spectrum notes issued and outstanding under the Existing Sprint Spectrum Program does not exceed $7.0 billion and that the principal amount of such spectrum notes reduces the amount available under the Credit Facilities ratio basket, and to revise the definition of GAAP to mean generally accepted accounting principles in effect from time to time, unless the Company elects to “freeze” GAAP as of any date, and to exclude the effect of the changes in the accounting treatment of lease obligations (the “Existing Sprint Spectrum and GAAP Proposed Amendments,” and together with the Ratio Secured Debt Proposed Amendments, the “Proposed Amendments”). In connection with receiving the requisite consents for the Existing Sprint Spectrum and GAAP Proposed Amendments, we made upfront payments to third-party note holders of $14 million during the second quarter of 2018. These payments were recognized as a reduction to Long-term debt in our Consolidated Balance Sheets. These upfront payments increased the effective interest rate of the related debt.
In connection with obtaining the requisite consents, on May 20, 2018, T-Mobile USA, the guarantors and Deutsche Bank Trust Company Americas, as trustee, executed and delivered the 37th supplemental indenture to the Indenture, pursuant to which, with respect to each of the Notes, the Proposed Amendments will become effective immediately prior to the consummation of the Merger.
We paid third-party bank fees associated with obtaining the requisite consents related to the Proposed Amendments of $6 million during the second quarter of 2018, which we recognized as Selling, general and administrative expenses in our Consolidated Statements of Comprehensive Income. If the Merger is consummated, we will make additional payments to third-party note holders for requisite consents related to the Ratio Secured Debt Proposed Amendments of up to $54 million and additional payments to third-party note holders for requisite consents related to the Existing Sprint Spectrum and GAAP Proposed Amendments of up to $41 million. There were no payments accrued as of December 31, 2019.
Financing Arrangements
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. The interest rate on the financing arrangement is determined based on LIBOR plus a specified margin per the arrangement. Obligations under the financing arrangement are included in Short-term debt in our Consolidated Balance Sheets. As of December 31, 2019 and 2018, there were no outstanding balances.
We maintain vendor financing arrangements with our primary network equipment suppliers. Under the respective agreements, we can obtain extended financing terms. During the year ended December 31, 2019, we utilized $800 million and repaid $775 million under the vendor financing arrangements. Invoices subject to extended payment terms have various due dates through the first quarter of 2020. Payments on vendor financing agreements are included in Repayments of short-term debt for purchases of inventory, property and equipment, net, in our Consolidated Statements of Cash Flows. As of December 31, 2019, there was $25 million in outstanding borrowings under the vendor financing agreements which were included in Short-term debt in our Consolidated Balance Sheets. As of December 31, 2018, there was no outstanding balance.
Revolving Credit Facility
We maintain a $2.5 billion revolving credit facility with DT which is comprised of a $1.0 billion unsecured revolving credit agreement and a $1.5 billion secured revolving credit agreement. In December 2019, we amended the terms of the revolving credit facility with DT to extend the maturity date to December 29, 2022.
The proceeds and borrowings from the revolving credit facility are presented in Proceeds from borrowing on revolving credit facility and Repayments of revolving credit facility within Net cash used in financing activities in our Consolidated Statements of Cash Flows. As of December 31, 2019 and 2018, there were no outstanding borrowings under the revolving credit facility.
Standby Letters of Credit
For the purposes of securing our obligations to provide handset insurance services, we maintain an agreement for standby letters of credit with JP Morgan Chase Bank, N.A. (“JP Morgan Chase”). For purposes of securing our general purpose obligations, we maintain a letter of credit reimbursement agreement with Deutsche Bank.
The following table summarizes the outstanding standby letters of credit under each agreement:
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|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
JP Morgan Chase
|
$
|
20
|
|
|
$
|
20
|
|
Deutsche Bank
|
93
|
|
|
66
|
|
|
|
|
|
Total outstanding balance
|
$
|
113
|
|
|
$
|
86
|
|
Note 9 – Tower Obligations
In 2012, we conveyed to CCI the exclusive right to manage and operate approximately 7,100 T-Mobile-owned wireless communications tower sites in exchange for net proceeds of $2.5 billion (the “2012 Tower Transaction”). Rights to approximately 6,200 of the tower sites were transferred to CCI via a master prepaid lease with site lease terms ranging from 23 to 37 years (“CCI Lease Sites”), while the remaining tower sites were sold to CCI (“CCI Sales Sites”). CCI has fixed-price purchase options for the CCI Lease Sites totaling approximately $2.0 billion, exercisable at the end of the lease term. We lease back space at certain tower sites for an initial term of ten years, followed by optional renewals at customary terms.
In 2015, we conveyed to PTI the exclusive right to manage and operate certain T-Mobile-owned wireless communications tower sites (“PTI Sales Sites”) in exchange for net proceeds of approximately $140 million (the “2015 Tower Transaction”). Rights to approximately 150 of the tower sites remain operated by PTI under a management agreement. We lease back space at certain tower sites for an initial term of ten years, followed by optional renewals at customary terms.
Assets and liabilities associated with the operation of the tower sites were transferred to special purpose entities (“SPEs”). Assets included ground lease agreements or deeds for the land on which the towers are situated, the towers themselves and existing subleasing agreements with other mobile network operator tenants, who lease space at the tower sites. Liabilities included the obligation to pay ground lease rentals, property taxes and other executory costs. Upon closing of the 2012 Tower Transaction, CCI acquired all of the equity interests in the SPE containing CCI Sales Sites and an option to acquire the CCI Lease Sites at the end of their respective lease terms and entered into a master lease agreement under which we agreed to lease back space at certain of the tower sites. Upon closing of the 2015 Tower Transaction, PTI acquired all of the equity interests in the SPEs containing PTI Sales Sites and entered into a master lease agreement under which we agreed to lease back space at certain of the tower sites.
We determined the SPEs containing the CCI Lease Sites (“Lease Site SPEs”) are VIEs as our equity investment lacks the power to direct the activities that most significantly impact the economic performance of the VIEs. These activities include managing tenants and underlying ground leases, performing repair and maintenance on the towers, the obligation to absorb expected losses and the right to receive the expected future residual returns from the purchase option to acquire the CCI Lease Sites. As we determined that we are not the primary beneficiary and do not have a controlling financial interest in the Lease Site SPEs, the balances and operating results of the Lease Site SPEs are not included in our Consolidated Financial Statements.
Due to our continuing involvement with the tower sites, we previously determined that we were precluded from applying sale-leaseback accounting. We recorded long-term financial obligations in the amount of the net proceeds received and recognized interest on the tower obligations at a rate of approximately 8% for the 2012 Tower Transaction and 5% for the 2015 Tower Transaction using the effective interest method. The tower obligations are increased by interest expense and amortized through
contractual leaseback payments made by us to CCI or PTI and through net cash flows generated and retained by CCI or PTI from operation of the tower sites. The principal payments on the tower obligations are included in Other, net within Net cash used in financing activities in our Consolidated Statements of Cash Flows. Our historical tower site asset costs are reported in Property and equipment, net in our Consolidated Balance Sheets and are depreciated.
Upon adoption of the new leasing standard we were required to reassess the previously failed sale-leasebacks and determine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a sale should be recognized. We concluded that a sale has not occurred for the CCI Lease Sites and these sites continue to be accounted for as a failed sale-leaseback. We concluded that a sale had occurred for the CCI Sales Sites and the PTI Sales Sites and therefore we derecognized our existing long-term financial obligation and the tower-related property and equipment associated with these sites as part of the cumulative effect adjustment on January 1, 2019. See Note 1 - Summary of Significant Accounting Policies for further information.
The following table summarizes the balances of the failed sale-leasebacks in the Consolidated Balance Sheets:
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|
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(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Property and equipment, net
|
$
|
198
|
|
|
$
|
329
|
|
Tower obligations
|
2,236
|
|
|
2,557
|
|
Future minimum payments related to the tower obligations are approximately $160 million for the year ending December 31, 2020, $321 million in total for the years ending December 31, 2021 and 2022, $320 million in total for years ending December 31, 2023 and 2024, and $467 million in total for years thereafter.
We are contingently liable for future ground lease payments through the remaining term of the CCI Lease Sites. These contingent obligations are not included in Operating lease liabilities as any amount due is contractually owed by CCI based on the subleasing arrangement.
Note 10 – Revenue from Contracts with Customers
Disaggregation of Revenue
We provide wireless communications services to three primary categories of customers:
•Branded postpaid customers generally include customers who are qualified to pay after receiving wireless communications services utilizing phones, wearables, DIGITS, or other connected devices which includes tablets and SyncUP DRIVE™;
•Branded prepaid customers generally include customers who pay for wireless communications services in advance. Our branded prepaid customers include customers of T-Mobile and Metro by T-Mobile; and
•Wholesale customers include Machine-to-Machine (“M2M”) and Mobile Virtual Network Operator (“MVNO”) customers that operate on our network but are managed by wholesale partners.
Branded postpaid service revenues, including branded postpaid phone revenues and branded postpaid other revenues, were as follows:
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|
|
|
|
|
|
Year Ended December 31,
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|
|
|
|
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Branded postpaid service revenues
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded postpaid phone revenues
|
|
|
|
|
$
|
21,329
|
|
|
$
|
19,745
|
|
|
$
|
18,371
|
|
Branded postpaid other revenues
|
|
|
|
|
1,344
|
|
|
1,117
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
Total branded postpaid service revenues
|
|
|
|
|
$
|
22,673
|
|
|
$
|
20,862
|
|
|
$
|
19,448
|
|
|
|
|
|
|
|
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|
We operate as a single operating segment. The balances presented within each revenue line item in our Consolidated Statements of Comprehensive Income represent categories of revenue from contracts with customers disaggregated by type of product and service. Service revenues also include revenues earned for providing value added services to customers, such as handset insurance services. Revenue generated from the lease of mobile communication devices is included within Equipment revenues in our Consolidated Statements of Comprehensive Income.
Equipment revenues from the lease of mobile communication devices were as follows:
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|
|
Year Ended December 31,
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|
|
|
|
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Equipment revenues from the lease of mobile communication devices
|
|
|
|
|
$
|
599
|
|
|
$
|
692
|
|
|
$
|
877
|
|
Contract Balances
The opening and closing balances of our contract asset and contract liability balances from contracts with customers as of December 31, 2018 and December 31, 2019, were as follows:
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|
|
(in millions)
|
Contract Assets
|
|
Contract Liabilities
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
$
|
51
|
|
|
$
|
645
|
|
|
|
Balance as of December 31, 2019
|
63
|
|
|
560
|
|
|
|
|
|
|
|
|
|
Change
|
$
|
12
|
|
|
$
|
(85)
|
|
|
|
|
|
|
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|
Contract assets primarily represent revenue recognized for equipment sales with promotional bill credits offered to customers that are paid over time and are contingent on the customer maintaining a service contract. The change in the contract asset balance includes customer activity related to new promotions, offset by billings on existing contracts and impairment which is recognized as bad debt expense. The current portion of our Contract Assets of approximately $50 million and $51 million as of December 31, 2019 and 2018, respectively, was included in Other current assets in our Consolidated Balance Sheets.
Contract liabilities are recorded when fees are collected, or we have an unconditional right to consideration (a receivable) in advance of delivery of goods or services. The change in contract liabilities is primarily related to the migration of customers to unlimited rate plans. Contract liabilities are included in Deferred revenue in our Consolidated Balance Sheets.
Revenues for the years ended December 31, 2019 and 2018, include the following:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
|
|
|
|
2019
|
|
2018
|
Amounts included in the beginning of year contract liability balance
|
|
|
|
|
$
|
643
|
|
|
$
|
710
|
|
Remaining Performance Obligations
As of December 31, 2019, the aggregate amount of transaction price allocated to remaining service performance obligations for branded postpaid contracts with promotional bill credits that result in an extended service contract is $237 million. We expect to recognize this revenue as service is provided over the extended contract term in the next 24 months.
Certain of our wholesale, roaming and other service contracts include variable consideration based on usage. This variable consideration has been excluded from the disclosure of remaining performance obligations. As of December 31, 2019, the aggregate amount of the contractual minimum consideration for wholesale, roaming and other service contracts is $1.3 billion, $894 million and $791 million for 2020, 2021 and 2022 and beyond, respectively. These contracts have a remaining duration ranging from less than one year to ten years.
Information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less have been excluded from the above, which primarily consists of monthly service contracts.
Contract Costs
The total balance of deferred incremental costs to obtain contracts was $906 million and $644 million as of December 31, 2019 and 2018, respectively. Deferred contract costs incurred to obtain postpaid service contracts are amortized over a period of 24 months. The amortization period is monitored to reflect any significant change in assumptions. Amortization of deferred contract costs is included in Selling, general and administrative expenses in our Consolidated Statements of Comprehensive Income and was $604 million and $267 million for the years ended December 31, 2019 and 2018, respectively.
The deferred contract cost asset is assessed for impairment on a periodic basis. There were no impairment losses recognized on deferred contract cost assets for the years ended December 31, 2019 and 2018.