Item 2.06. Material Impairments.
As previously reported, on April 1, 2020, T-Mobile US, Inc. ("T-Mobile," "we"
or "us") completed its merger (the "Merger") with Sprint Corporation
("Sprint"), pursuant to that certain Business Combination Agreement, dated as of
April 29, 2018, by and among T-Mobile, Sprint and the other parties thereto. In
connection with the continuing integration of the businesses of T-Mobile and
Sprint, T-Mobile concluded on June 16, 2020 that it will be required to
recognize impairment charges relating to the U2 Postpaid Impairment and Layer3
Goodwill Impairment, discussed below. T-Mobile estimates that these impairments
will result in non-cash impairment charges of $418 million in the quarter ending
June 30, 2020. These non-cash impairment charges are preliminary, unaudited, and
subject to change pending completion of our quarter-end closing review
procedures.
U2 Postpaid Impairment
In connection with the Merger, we are evaluating the long-term billing system
architecture strategy for our postpaid customers. In order to facilitate
customer migration from the Sprint legacy billing platform, our postpaid billing
system replacement plan and associated development will no longer serve our
future needs. As a result, we anticipate a non-cash impairment of $200 million
(the "U2 Postpaid Impairment"), related to capitalized software development
costs, for the quarter ended June 30, 2020. Any impairment would impact Net
Income but would be excluded from Adjusted EBITDA.
Layer3 Goodwill Impairment
We expect our significantly enhanced spectrum position will allow us to
accelerate our in-home broadband internet service strategy. The enhanced
in-home broadband opportunity, along with the acquisition of certain content
rights has created a strategic shift in our TVisionTM Home service offering to
developing a video product which will be complementary to the in-home broadband
offering and which we believe is necessary to enable higher penetration into the
in-home broadband market. We believe the strategic shift will allow for greater
competition and customer value by offering a more complete product suite for
these customers. As a result of the change in the stand-alone product offering
plans and timing, we are completing an interim goodwill impairment analysis for
the stand-alone Layer3 reporting unit. We anticipate the analysis will result
in a non-cash impairment in the Layer3 reporting unit goodwill of $218 million
(the "Layer3 Goodwill Impairment") for the quarter ended June 30, 2020. Any
impairment would impact Net Income but would be excluded from Adjusted EBITDA.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
On June 15, 2020, the Board of Directors (the "Board") of T-Mobile appointed
Peter Osvaldik, who currently serves as Senior Vice President, Finance and Chief
Accounting Officer of T-Mobile, to Executive Vice President and Chief Financial
Officer ("CFO") of T-Mobile, effective as of July 1, 2020, replacing J. Braxton
Carter, who will retire from his position as Executive Vice President and CFO of
T-Mobile, effective as of July 1, 2020. To facilitate a smooth transition, Mr.
Carter will provide certain consulting services to T-Mobile for a period of up
to six months following his retirement. Also on June 15, 2020, the Board
appointed Dara Bazzano as Senior Vice President and Chief Accounting Officer
("CAO") of T-Mobile, effective as of July 20, 2020. Mr. Osvaldik will continue
to serve as the principal accounting officer of T-Mobile until July 20, 2020.
Mr. Osvaldik, age 43, has served as Senior Vice President and Chief Accounting
Officer for T-Mobile since June 20, 2016. Previously, Mr. Osvaldik served as
Vice President, External Reporting & Technical Accounting of T-Mobile from
January 2016 to June 2016. From May 2014 to December 2015, he served as Chief
Accounting Officer at Outerwall Inc. (formerly known as Coinstar, Inc.), a
provider of automated retail solutions, including movie and video game rental
kiosks as well as coin-counting kiosks. Prior to that, he served in various
other capacities at Outerwall, Inc. Prior to joining Outerwall, Mr. Osvaldik was
a Senior Manager at PricewaterhouseCoopers LLP ("PwC"), a national public
accounting firm. Mr. Osvaldik received a Bachelor's degree in Accounting and
Biochemistry from Western Washington University.
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Ms. Bazzano, age 52, previously served as Chief Accounting Officer at CBRE
Group, Inc. ("CBRE"), the world's largest commercial real estate services and
investment firm, from May 2018 to June 2020, and as Senior Vice President,
Global Finance at CBRE from April 2018 to May 2018. Prior to joining CBRE, Ms.
Bazzano served as Global Controller and Chief Accounting Officer at The Gap,
Inc., a leading global retailer offering clothing, accessories, and personal
care products, from July 2013 to April 2018. Prior to that Ms. Bazzano served
as an Assurance Partner at PwC and KPMG where she served numerous roles over 13
years. Ms. Bazzano received a Bachelor's degree in Accounting from California
State University, Sacramento.
In addition, on June 15, 2020, the Compensation Committee (the "Committee") of
the Board approved (i) new compensation terms for Mr. Osvaldik (the "Osvaldik
Compensation") that will take effect upon his commencement as Executive Vice
President and CFO, (ii) an offer of employment letter with Ms. Bazzano (the
"Bazzano Offer Letter") that will govern the terms of Ms. Bazzano's service as
Senior Vice President and CAO of T-Mobile and (iii) the terms of a consulting
agreement between Mr. Carter and T-Mobile (the "Carter Consulting Agreement")
pursuant to which Mr. Carter will provide consulting services to T-Mobile
following his retirement as Executive Vice President and CFO, for a period of
three months, with an option by T-Mobile to extend the agreement for an
additional three months until December 31, 2020.
The material terms of the Osvaldik Compensation, the Bazzano Offer Letter and
the Carter Consulting Agreement are described below.
Osvaldik Compensation
In connection with Mr. Osvaldik's appointment as Executive Vice President and
CFO of T-Mobile, effective July 1, 2020, Mr. Osvaldik will receive an annual
base salary of $750,000 and an annual short-term incentive ("STI") award
targeted at 150% of base salary. In addition, commencing with calendar year
2021, Mr. Osvaldik will be eligible for annual long-term incentive ("LTI")
awards with an annual aggregate grant-date target value (as determined by the
Committee) equal to 200% of base salary (or $3,750,000).
In addition, in connection with Mr. Osvaldik's commencement as Executive Vice
President and CFO, he will be granted a one-time award of performance-based
restricted stock units (the "Osvaldik PRSUs") with an aggregate grant-date
target value of $1,000,000. The Osvaldik PRSUs will be eligible to cliff-vest on
the third anniversary of the grant date, based on T-Mobile's total shareholder
return relative to T-Mobile's peer group during the applicable performance
period and subject to Mr. Osvaldik's continued employment through the vesting
date (subject to accelerated vesting as provided in the applicable award
agreement). In addition, Mr. Osvaldik will receive a one-time cash payment of
$600,000 upon his commencement as Executive Vice President and CFO.
Bazzano Offer Letter
The Bazzano Offer Letter provides that Ms. Bazzano will serve as T-Mobile's
Senior Vice President and CAO, effective July 20, 2020. Pursuant to the Bazzano
Offer Letter, Ms. Bazzano is entitled to (i) an annual base salary equal to
$490,000, (ii) commencing with calendar year 2020, an annual STI award targeted
at 75% of her base salary, payable based on the attainment of pre-established
performance goals, (iii) employee benefits to the same extent and on the same
terms as such benefits are provided generally by T-Mobile to similarly-situated
executives, (iv) relocation assistance for the costs associated with Ms.
Bazzano's move to the Bellevue, Washington area in accordance with the terms of
T-Mobile's Relocation Policy, and (v) commencing with calendar year 2021, annual
LTI awards with an annual aggregate target grant-date value that is no less than
100% of the sum of her then-current base salary and target STI.
Additionally, Ms. Bazzano will receive a one-time sign-on bonus in an amount
equal to $100,000, payable within 30 days after her commencement as Senior Vice
President and CAO, subject to her continued employment through the payment date.
If Ms. Bazzano voluntarily terminates employment with T-Mobile or is terminated
by T-Mobile for cause within twelve months following July 20, 2020, Ms. Bazzano
will be required to repay the full amount of the sign-on bonus to T-Mobile.
--------------------------------------------------------------------------------
In connection with Ms. Bazzano's commencement as Senior Vice President and CAO,
Ms. Bazzano will be granted the following one-time LTI awards:
(i) a one-time award of restricted stock units (the "Special RSUs") with respect
. . .
Item 7.01 Regulation FD Disclosure.
On June 17, 2020, T-Mobile issued a press release announcing the appointment of
Mr. Osvaldik as Executive Vice President and CFO, a copy of which is attached
hereto as Exhibit 99.1 and is incorporated herein by reference.
The information contained in Item 7.01 and Exhibit 99.1, shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or otherwise subject to the liabilities of that
section, nor shall it be deemed incorporated by reference in any filing under
the Securities Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such a filing.
Postpaid Net Customer Additions
We also now expect total Postpaid net customer additions for Q2 2020 to be
between 800,000 to 900,000, up from 0 to 150,000, reflecting a faster recovery
in retail than expected as well as new opportunities in T-Mobile for Business.
The increase from our prior guidance is primarily driven by higher Postpaid
other net additions.
Merger-Related Costs
As highlighted in T-Mobile's results of operations and financial condition as of
and for the quarter ended March 31, 2020 and associated earnings call, guidance
for Merger-related costs for the quarter ending June 30, 2020 of $500 to $600
million before taxes excluded any incremental opportunities to accelerate
synergy realization through a potential pull forward of additional spending into
the quarter ending June 30, 2020, such as severance related restructuring, store
rationalization and network build expenses. We now expect an incremental $300
million before taxes in Merger-related costs related to identified opportunities
to accelerate synergy realization, primarily related to severance expense, for a
total updated range of $800 to $900 million before taxes in Merger-related costs
for the quarter ending June 30, 2020. These incremental expenses will impact
Net Income but will be excluded from Adjusted EBITDA.
COVID-19 Costs
Also highlighted in T-Mobile's results of operations and financial condition as
of and for the quarter ended March 31, 2020 and associated earnings call,
guidance for COVID-19 costs for the quarter ending June 30, 2020 were expected
to be $450 to $550 million before taxes. We now expect these costs to be in the
range of $350 to $450 million before taxes. These costs are excluded from
Adjusted EBITDA but will impact Net income and cash flows.
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Revised Guidance Summary
Including the elements discussed in Item 2.06 above, we expect the following
updated before tax expenses for the quarter ending June 30, 2020, which will
impact Net Income but will be excluded from Adjusted EBITDA:
• Merger-Related costs of $800 to $900 million before taxes;
• COVID-19 costs of $350 to $450 million before taxes; and
• Non-Cash Impairment related costs of $418 million before taxes. These non-cash
impairment charges are preliminary, unaudited, and subject to change pending
completion of our quarter-end closing review procedures.
We also expect Postpaid net customer additions for Q2 2020 to be between 800,000
to 900,000, primarily driven by higher Postpaid other net additions.
Other guidance elements for Q2 2020 remain unchanged.
Item 8.01. Other Events.
SOX Exemption
In accordance with guidance issued by the Securities and Exchange Commission,
registrants are permitted to exclude acquired businesses from management's
report on internal control over financial reporting for a period not to extend
beyond one year from the date of acquisition or beyond more than one annual
management report on internal control over financial reporting. T-Mobile is in
the process of assessing and integrating the internal control, compliance and
operations over financial reporting of Sprint. Given the significance of the
Sprint acquisition and complexity of its systems and business processes, we
intend to exclude the acquired Sprint business from our assessment and report on
internal control over financial reporting for the year ending December 31, 2020.
Unaudited Pro Forma Condensed Combined Financial Information
Included in this Current Report on Form 8-K as Exhibit 99.2 are the unaudited
pro forma condensed combined balance sheet as of March 31, 2020 and the
unaudited pro forma condensed combined statement of operations for the three
months ended March 31, 2020 and the year ended December 31, 2019, giving effect
to the Merger and related transactions.
The pro forma financial information included in this Current Report on Form 8-K
has been presented for informational purposes only. It does not purport to
represent the actual results of operations that T-Mobile and Sprint would have
achieved had the companies been combined during the periods presented in the pro
forma financial information and is not intended to project the future results of
operations that the combined company may achieve after the Merger. The
financial statements of the combined company may reflect significant differences
due to final purchase price accounting, accounting policy alignment and other
adjustments and assumptions. This unaudited pro forma condensed combined
financial information should be read in conjunction with:
• the separate historical unaudited consolidated financial statements of T-Mobile
as of and for the three months ended March 31, 2020, included in T-Mobile's
Quarterly Report on Form 10-Q filed on May 6, 2020;
• the separate historical audited consolidated financial statements of T-Mobile
as of and for the year ended December 31, 2019, included in T-Mobile's Annual
Report on Form 10-K filed on February 6, 2020;
• the separate historical unaudited consolidated financial statements of Sprint
as of and for the nine months ended December 31, 2019, included in Sprint's
Quarterly Report on Form 10-Q filed on January 27, 2020; and
• the separate historical audited consolidated financial statements of Sprint as
of and for the year ended March 31, 2020, included in the Current Report on
Form 8-K filed by T-Mobile US on May 18, 2020.
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Item 9.01. Financial Statements and Exhibits.
The following exhibits are provided as part of this Current Report on Form 8-K:
(d) Exhibits:
Exhibit No. Description
99.1 Press Release, dated June 17, 2020.
99.2 Unaudited pro forma condensed combined balance sheet of T-Mobile as
of March 31, 2020, the unaudited pro forma condensed combined
statement of operations for the three months ended March 31, 2020 and
the year ended December 31, 2019 and the notes thereto.
104 Cover Page Interactive Data File (the cover page XBRL tags are
embedded within the Inline XBRL document)
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Cautionary Statement Regarding Forward-Looking Statements
The information contained in this Current Report on Form 8-K includes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than statements of
historical fact, including information concerning T-Mobile US, Inc.'s estimates
as to impairment charges and severance and termination costs, and expectations
regarding management's report on internal control over financial reporting for
the year ending December 31, 2020, are forward-looking statements. These
forward-looking statements are generally identified by the words "anticipate",
"believe", "estimate", "expect", "intend", "may", "could" or similar
expressions. Forward-looking statements are based on current expectations and
assumptions, which are subject to risks and uncertainties and may cause actual
results to differ materially from the forward-looking statements. Important
factors that could affect future results and cause those results to differ
materially from those expressed in the forward-looking statements include, among
others, the following: the failure to realize the expected benefits and
synergies of the merger with Sprint, pursuant to the Business Combination
Agreement with Sprint and the other parties named therein (as amended, the
"Business Combination Agreement") and the other transactions contemplated by the
Business Combination Agreement (collectively, the "Transactions") in the
expected timeframes, in part or at all; adverse economic, political or market
conditions in the U.S. and international markets, including those caused by the
COVID-19 pandemic; costs of or difficulties in integrating Sprint's network and
operations into our network and operations, including intellectual property and
communications systems, administrative and information technology infrastructure
and accounting, financial reporting and internal control systems; changes in key
customers, suppliers, employees or other business relationships as a result of
the consummation of the Transactions; our ability to make payments on debt or to
repay existing or future indebtedness when due or to comply with the covenants
contained therein; adverse changes in the ratings of our debt securities or
adverse conditions in the credit markets; the assumption of significant
liabilities, including the liabilities of Sprint, in connection with, and
significant costs, including financing costs, related to, the Transactions; the
risk of future material weaknesses resulting from the differences between
T-Mobile's and Sprint's internal controls environments as we work to integrate
and align guidelines and practices; the impacts of the actions we have taken and
conditions we have agreed to in connection with the regulatory approvals of the
Transactions including costs or difficulties related to the completion of the
divestiture of Sprint's prepaid wireless businesses to DISH Network Corporation
and the satisfaction of any related government commitments to such divestiture
and any other commitments or undertakings that we have entered into; natural
disasters, public health crises, including the COVID-19 pandemic, terrorist
attacks or similar incidents, and the impact that any of the foregoing may have
on us and our customers and other stakeholders; competition, industry
consolidation and changes in the market for wireless services, which could
negatively affect our ability to attract and retain customers; the effects of
any future merger, investment, or acquisition involving us, as well as the
effects of mergers, investments or acquisitions in the technology, media and
telecommunications industry; our business, investor confidence in our financial
results and stock price may be adversely affected if our internal controls are
not effective; the effects of the material weakness in Sprint's internal
controls over financial reporting or the identification of any additional
material weaknesses as we complete our assessment of the Sprint control
environment; breaches of our and/or our third-party vendors' networks,
information technology and data security, resulting in unauthorized access to
customer confidential information; the inability to implement and maintain
effective cyber-security measures over critical business systems; challenges in
implementing our business strategies or funding our operations, including
payment for additional spectrum or network upgrades; the impact on our networks
and business from major system and network failures; difficulties in managing
growth in wireless data services, including network quality; material changes in
available technology and the effects of such changes, including product
substitutions and deployment costs and performance; the timing, scope and
financial impact of our deployment of advanced network and business
technologies; the occurrence of high fraud rates related to device financing,
credit cards, dealers or subscriptions; our inability to retain and hire key
personnel; any changes in the regulatory environments in which we operate,
including any increase in restrictions on the ability to operate our networks
and changes in data privacy laws; unfavorable outcomes of existing or future
litigation or regulatory actions, including litigation or regulatory actions
related to the Transactions; the possibility that we may be unable to adequately
protect our intellectual property rights or be accused of infringing the
intellectual property rights of others; changes in tax laws, regulations and
existing standards and the resolution of disputes with any taxing jurisdictions;
the possibility that we may be unable to renew our spectrum licenses on
attractive terms or acquire new spectrum licenses at reasonable costs and terms;
any disruption or failure of our third parties' (including key suppliers')
provisioning of products or services; material adverse changes in labor matters,
including labor campaigns, negotiations or additional organizing activity, and
any resulting financial, operational and/or reputational impact; changes in
accounting assumptions that regulatory agencies, including the Securities and
Exchange Commission, may require, which could result in an impact on earnings;
ongoing purchase price accounting allocations, accounting policy alignments and
other adjustments and assumptions; and interests of our significant stockholders
that may differ from the interests of other stockholders. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements, except
as required by law.
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