T-MOBILE US Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q ("Form 10-Q") 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 our future results of operations, 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 that
may cause actual results to differ materially from the forward-looking
statements. The following important factors, along with the Risk Factors
included in Part II, Item 1A below, could affect future results and cause those
results to differ materially from those expressed in the forward-looking
statements:
•failure to realize the expected benefits and synergies of the merger (the
"Merger") with Sprint Corporation ("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, and the impact that
any of the foregoing may have on us and our customers and other stakeholders;
•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;
•the risk that our business, investor confidence in our financial results and
stock price may be adversely affected if our internal controls are not
effective;
•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 policies and practices;
•the impacts of the actions we have taken and conditions we have agreed to in
connection with the regulatory proceedings and approvals of the Transactions
including the Prepaid Transaction (as defined in Note 2 - Business
Combinations of the Notes to the Condensed Consolidated Financial Statements)
the complaint and proposed final judgment (the "Consent Decree") agreed to by
us, Deutsche Telekom AG ("DT"), Sprint, SoftBank Group Corp. ("SoftBank") and
DISH Network Corporation ("DISH") with the U.S. District Court for the District
of Columbia , which was approved by the Court on April 1, 2020 , the proposed
commitments filed with the Secretary of the FCC , which we announced on May 20,
2019 , certain national security commitments and undertakings, and any other
commitments or undertakings entered into, including but not limited to those we
have made to certain states and nongovernmental organizations (collectively, the
"Government Commitments");
•the ongoing commercial and transition services arrangements that we entered
into with DISH in connection with such Prepaid Transaction, which we completed
on July 1, 2020 (collectively, the "Divestiture Transaction");
•the assumption of significant liabilities, including the liabilities of Sprint
in connection with, and significant costs, including financing costs, related to
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;
•natural disasters, public health crises, including the COVID-19 pandemic,
terrorist attacks or similar incidents;
•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;
•breaches of our and/or our third-party vendors' networks, information
technology and data security, resulting in unauthorized access to customer
confidential information;
•inability to implement and maintain effective cybersecurity measures over
critical business systems;
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•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, customer credit
cards, dealers, subscriptions, or account take over fraud;
•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 leases on
attractive terms or acquire new spectrum licenses or leases at reasonable costs
and terms;
•any disruption or failure of third parties (including key suppliers) to provide
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 U.S.
Securities and Exchange Commission (the "SEC"), may require, which could result
in an impact on earnings; 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. In this Form 10-Q, unless the context
indicates otherwise, references to "T-Mobile," "our Company," "the Company,"
"we," "our," and "us" refer to T-Mobile US, Inc. as a standalone company prior
to April 1, 2020 , the date we completed the Merger with Sprint, and on and after
April 1, 2020 , refer to the combined company as a result of the Merger.
Investors and others should note that we announce material financial and
operational information to our investors using our investor relations website,
press releases, SEC filings and public conference calls and webcasts. We intend
to also use certain social media accounts as means of disclosing information
about us and our services and for complying with our disclosure obligations
under Regulation FD (the @TMobileIR Twitter account
(https://twitter.com/TMobileIR) and the @MikeSievert Twitter
(https://twitter.com/MikeSievert) account, which Mr. Sievert also uses as a
means for personal communications and observations). The information we post
through these social media channels may be deemed material. Accordingly,
investors should monitor these social media channels in addition to following
our press releases, SEC filings and public conference calls and webcasts. The
social media channels that we intend to use as a means of disclosing the
information described above may be updated from time to time as listed on our
investor relations website.
Overview
The objectives of our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are to provide users of our condensed consolidated financial statements with the following:
•A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results; •Context to the financial statements; and •Information that allows assessment of the likelihood that past performance is indicative of future performance. Our MD&A is performed on a consolidated basis and is inclusive of the results and operations of Sprint prospectively from the close of our Merger onApril 1, 2020 . The Merger increased our customer base, enhanced our spectrum portfolio, altered our 54 -------------------------------------------------------------------------------- Table of Contents product mix by increasing the portion of customers who finance their devices with leasing programs and created redundancies within our network. We anticipate an initial increase in our combined operating costs which we expect to decrease as we realize synergies. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities. Our MD&A is provided as a supplement to, and should be read together with, our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2020, included in Part I, Item 1 of this Form 10-Q and audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Except as expressly stated, the financial condition and results of operations discussed throughout our MD&A are those ofT-Mobile US, Inc. and its consolidated subsidiaries.
Beginning with the second quarter of 2020, we have discontinued the use of "Branded" to describe the results and metrics associated with our flagship brands including T-Mobile, Metro by T-Mobile, and Sprint.
Sprint Merger
Transaction Overview
OnApril 1, 2020 , we completed our Merger with Sprint, a communications company offering a comprehensive range of wireless and wireline communications products and services. As a result, Sprint and its subsidiaries became wholly-owned consolidated subsidiaries of T-Mobile. Upon completion of the Merger, each share of Sprint common stock was exchanged for 0.10256 shares of T-Mobile common stock. After adjustments and fractional shares, we issued 373,396,310 shares of T-Mobile common stock to Sprint stockholders. The fair value of the T-Mobile common stock provided in exchange for Sprint common stock was approximately$31.3 billion . Additional components of consideration included the repayment of certain of Sprint's debt, replacement of equity awards attributable to pre-combination services and contingent consideration issuable to SoftBank. We accounted for the acquisition as a business combination. Our preliminary purchase price allocation as of the date of acquisition resulted in an aggregate fair value of assets acquired of$93.8 billion , including Spectrum licenses of$45.4 billion , assumed liabilities of$53.0 billion and the recognition of$9.2 billion in goodwill. After closing of the Merger, DT and SoftBank held, directly or indirectly, approximately 43.6% and 24.7%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 31.7% of the outstanding T-Mobile common stock held by other stockholders.
For more information regarding the Merger, see Note 2 - Business Combinations of the Notes to the Condensed Consolidated Financial Statements.
OnJune 22, 2020 , we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements. OnAugust 3, 2020 , upon completion of the SoftBank Monetization, DT and SoftBank held, directly or indirectly, approximately 43.4% and 8.6% respectively, of the outstanding T-Mobile common stock, with the remaining approximately 48.0% of the outstanding T-Mobile common stock held by other stockholders. As a result of the Proxy Agreements, DT has voting control as ofAugust 3, 2020 over approximately 52.4% of the outstanding T-Mobile common stock. In addition, as provided for in the Master Framework Agreement, DT also holds certain call options over approximately 101.5 million shares of our common stock held by SBGC. Sprint PCS (specificallySprint Spectrum L.P. ) is party to a variety of publicly filed agreements withShenandoah Personal Communications Company ("Shentel"), pursuant to which Shentel is the exclusive provider of Sprint PCS's wireless mobility communications network products in certain parts ofVirginia ,West Virginia ,Kentucky ,Ohio , andPennsylvania to approximately 1.1 million subscribers. Sprint PCS has at least throughAugust 29, 2020 to determine whether it will exercise an option to purchase Shentel's wireless telecommunications network assets. Should Sprint PCS exercise the purchase option, there will be an appraisal process, which could be subject to various legal challenges. If Sprint PCS declines to do so, Shentel has an opportunity to purchase the legacy T-Mobile wireless telecommunications network assets in the Shentel service area and, should it decline to do so within 60 days, the affiliate agreement states that Sprint PCS must sell or decommission T-Mobile's legacy wireless telecommunications network assets and transfer subscribers in the Shentel service area within two years. 55 -------------------------------------------------------------------------------- Table of Contents Sale of Boost Mobile and Sprint Prepaid Brands In connection with obtaining regulatory approval for the Merger, onJuly 1, 2020 , DISH acquired the prepaid wireless business operated under the Boost Mobile and Sprint prepaid brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers ofShentel and Swiftel Communications, Inc. ), including customer accounts, inventory, contracts, intellectual property and certain other specified assets (the "Prepaid Business"), and assumed certain related liabilities (the "Prepaid Transaction"). The assets and liabilities associated with the Prepaid Transaction are presented as held for sale in our Condensed Consolidated Balance Sheets as ofJune 30, 2020 . The results of the Prepaid Business fromApril 1, 2020 throughJune 30, 2020 are presented in Income from discontinued operations, net of tax in our Condensed Consolidated Statements of Comprehensive Income and do not include corporate and administrative expenses not directly attributable to the operations of the Prepaid Business. Upon the closing of the Prepaid Transaction, we entered into a Master Network Services Agreement (the "MVNO Agreement") providing for the provisioning of network services to customers of the Prepaid Business for a period of up to seven years following the closing of the Prepaid Transaction. The revenue generated through this agreement will be presented within Wholesale revenues in our Condensed Consolidated Statements of Comprehensive Income beginning upon the close of the Prepaid Transaction onJuly 1, 2020 . We have included the pre-tax results of our discontinued operations in our determination of Adjusted EBITDA, a Non-GAAP measure, to reflect contributions of the Prepaid Business that will be replaced by the MVNO Agreement beginning onJuly 1, 2020 . See "Adjusted EBITDA" in in the " Performance Measures " section of this MD&A
For more information regarding the Prepaid Transaction, see Note 12 - Discontinued Operations of the Notes to the Condensed Consolidated Financial Statements.
Impact on Results of Operations and Performance Measures for the Three and Six
Months Ended
The Merger has altered the size and scope of our operations, impacting our assets, liabilities, obligations, capital requirements and performance measures. We expect the trends and results of operations of the combined company to be materially different than those of the standalone entities. As a combined company, we expect to be able to achieve synergies, rapidly launch a broad and deep nationwide 5G network, accelerate innovation, and increase competition in theU.S. wireless, video and broadband industries. Among the expected synergies are reduction in redundant cell sites from combining networks, back office and information technology efficiencies and the evolution of our distribution and retail footprint including the combining of the Sprint and T-Mobile brand operations, unifying under the T-Mobile brand nationwide starting onAugust 2, 2020 . Merger-Related Costs Merger-related costs generally include transaction costs such as legal and professional services, restructuring costs including severance and store rationalization and other integration costs to achieve synergies in network, retail, IT and back office operations. Transaction costs and restructuring costs are disclosed in Note 2 - Business Combinations and Note 18 - Restructuring Costs , respectively. Merger-related costs have been excluded from the calculation of Adjusted EBITDA, a non-GAAP financial measure, as we do not consider these costs to be reflective of our ongoing operating performance. See "Adjusted EBITDA" in the " Performance Measures " section of this MD&A. Cash payments for merger-related costs are included in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. Merger-related costs during the three and six months endedJune 30, 2020 and 2019 are presented below: Six Months Ended Three Months Ended June 30, Change June 30, Change (in millions) 2020 2019 $ % 2020 2019 $ % Merger-related costs Cost of services, exclusive of depreciation and amortization $ 40 $ -$ 40 NM$ 40 $ -$ 40 NM Selling, general & administrative 758 222 536 241 % 901 335 566 169 % Total Merger-related costs$ 798 $ 222 $ 576 259 %$ 941 $ 335 $ 606 181 % Cash payments for Merger-related costs$ 370 $ 151 $ 219 145 %$ 531 $ 185 $ 346 187 % 56
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Table of Contents NM - Not Meaningful COVID-19 Pandemic The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies, and financial markets worldwide, and has caused significant volatility in theU.S. and international debt and equity markets. The impact of COVID-19 has been wide-ranging, including, but not limited to, the temporary closures of many businesses and schools, "shelter in place" orders, travel restrictions, social distancing guidelines and other governmental, business and individual actions taken in response to the COVID-19 pandemic. These restrictions have impacted, and will continue to impact, our business, including the demand for our products and services and the ways in which our customers purchase and use them. In addition, the COVID-19 pandemic has resulted in economic uncertainty and a significant increase in unemployment inthe United States , which could affect our customers' purchasing decisions and ability to make timely payments. During the quarter, while the impact of the COVID-19 pandemic peaked and subsequently subsided in some jurisdictions, leading to phased re-openings, other areas have seen resurgences of COVID-19 cases and continuing or renewed containment measures.
As a critical communications infrastructure provider as designated by the government, our focus has been on providing crucial connectivity to our customers and impacted communities while ensuring the safety and well-being of our employees.
Our Response
We have taken a variety of steps to help mitigate the impact of COVID-19 on our customers and to protect the health and well-being of our workforce and communities:
To Protect and Support Our Employees and Communities
•Before the Merger, in mid-March, approximately 80% of T-Mobile and 70% of Sprint company-owned store locations, as well as many third-party retailer locations, that sell our T-Mobile, Metro by T-Mobile and Sprint brands, were temporarily closed. In compliance with the regulations of various states, we have since reopened a number of our previously closed stores. •We supplemented pay for certain of our employees and commissions for third-party dealers impacted by COVID-19 and provided access to incremental paid time off for employees experiencing symptoms, taking care of children who were home due to school closures or caring for individuals impacted by COVID-19; •We implemented remote working arrangements for many employees with more than 14,000 internal care employees and over 31,000 global care employees transitioned to a work-from-home environment. We also encouraged our corporate and administrative employees to work remotely, if possible.
To Keep Our Customers Connected
•In March, we committed to theFCC 's Keep Americans Connected pledge (the "Pledge"), and at theFCC 's request, later extended our commitment toJune 30, 2020 . During this period, we pledged to: •Not terminate service to any residential or small business customers because of their inability to pay their bills due to disruptions caused by the COVID-19 pandemic; and •Waive any late fees that any residential or small business customers incur because of their economic circumstances related to the COVID-19 pandemic. •After the Pledge extension ended, we continued to work with our customers to help them maintain service and become current on their accounts, while avoiding financial hardship. •We also took additional temporary steps in March to ensure that all current T-Mobile customers with smartphone data plans were provided connectivity to learn and work remotely throughJune 30, 2020 , including: •Providing unlimited high-speed smartphone data to current customers as ofMarch 13, 2020 who had legacy plans without unlimited high-speed data (excluding roaming); •Giving T-Mobile postpaid and Metro by T-Mobile customers on smartphone plans with mobile hotspot data the ability to add 10GB of Smartphone Mobile HotSpot each month (20GB total); •Working with our Lifeline partners to provide customers up to 5GB per month of free data; 57 -------------------------------------------------------------------------------- Table of Contents •Increasing the data allowance, at no extra charge, to schools and students using our EmpowerED digital learning program to ensure each participant has access to at least 20GB of data per month; and •Providing free international calling to landlines (and in many cases mobile numbers) to countries that were significantly impacted by COVID-19 throughMay 13, 2020 . •In addition, during the pandemic we: •Offered our customers creative, new COVID-safe solutions such as virtual selling and curbside pickup; •Launched T-Mobile Connect, a new, competitive$15 per month prepaid option we had previously announced but launched inMarch 2020 , ahead of schedule to provide a reliable, low-cost connection for many Americans facing financial strain; •Partnered with multiple spectrum holders and theFCC to successfully deploy additional 600 MHz spectrum on a temporary basis, effectively doubling total 600 MHz LTE capacity across the nation to help ensure customers can stay connected during this critical time; •Worked to keep our network fully operational as an essential service to first responders, 911 communications and our customers and continued to expand our 5G network, while adhering to governmental guidelines; and •We unveiled our latestUn -carrier move, Scam Shield, a service to help block robocalls and reduce scam calls for customers by using a free app that gives the user control over T-Mobile's anti-scam protections like Scam ID, Scam Block, and Caller ID. Scam Shield is available to all our customers to combat the rapid increase in scams, including those related to COVID-19.
We continue to monitor the COVID-19 pandemic and its impacts and may adjust our actions as needed to continue to serve our employees and communities and to provide our products and services to our employees and communities.
Impact on Results of Operations and Performance Measures for the Three and Six
Months Ended
For the three and six months endedJune 30, 2020 , we incurred$341 million and$458 million , respectively, before taxes, in supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, which are included in Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income. Substantially all of these costs were incurred from March onward, as COVID-19 had a minimal impact on our expenses in January and February. These costs have been excluded from the calculation of Adjusted EBITDA, a non-GAAP financial measure, as they represent direct, incremental costs as a result of our response to COVID-19 that we do not consider to be indicative of our ongoing operating performance. See "Adjusted EBITDA" in the " Performance Measures " section of this MD&A. Additional impacts of COVID-19 for the three and six months endedJune 30, 2020 , which primarily impacted our results from March onward, include: •Lower net customer additions due to lower switching activity in the industry from social distancing rules and temporary retail store closures, which impacted our ability to sell devices and services and to persuade potential customers to switch to our network during the crisis; •Lower postpaid phone and prepaid churn due to social distancing rules and retail store closures; •Lower Total service revenues from lower net customer additions and customer concessions as part of our commitments to the Pledge and other efforts to keep our customers connected; •Lower Equipment revenues and lower Cost of equipment sales due to lower switching activity in the industry from social distancing rules and retail store closures, which impacted our ability to sell devices; and •Higher bad debt expense due to the recording of estimated losses associated with the adoption of the new credit loss standard, which includes the impact of our commitment to the Pledge through collection holds and the macro-economic impacts of COVID-19.
Expected Continued Impact on Results of Operations and Performance Measures
We will continue to monitor developments regarding the COVID-19 pandemic and
evaluate the appropriate steps we need to take as a business to align with
guidelines from state, local and federal government agencies and to do what is
best for our employees and customers. We expect our business, liquidity,
financial condition, and operating results to continue to be adversely impacted
by the COVID-19 pandemic for the remainder of 2020 and thereafter. The extent to
which the COVID-19 pandemic impacts our business, operations and financial
results will depend on numerous future developments that we are not able to
predict at this time, including the duration and scope of the pandemic, the
success of governmental, business and
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individual actions that have been and continue to be taken in response to the
pandemic, and the impact on economic activity from the pandemic and actions
taken in response. Such impacts may include:
•Lower net customer additions due to lower switching activity in the industry
from social distancing rules, temporary retail store closures and reduced
consumer spending caused by widespread unemployment and other adverse economic
effects, partially offset by lower churn;
•Lower Equipment revenues and lower Cost of equipment sales from lower device
sales due to lower switching activity in the industry from social distancing
rules and temporary retail store closures, which will impact our ability to sell
devices;
•Higher bad debt expense on our service and equipment installment plan ("EIP")
receivable portfolios due to adverse macro-economic conditions. Should these
adverse conditions worsen, our operating and financial results could be
negatively impacted;
•Continued costs to protect and support our employees and customers, which
increased during the second quarter as a result of a full quarter of COVID-19
impacts compared to the first quarter because COVID-19 primarily only impacted
costs during the last month of the first quarter;
•Higher device insurance fulfillment costs due to a lower supply of returned
devices; and
•Potential disruptions in our supply chains.
In addition, we have reevaluated, and continue to assess, our spending, including for marketing purposes like advertising, capital projects like build-out of our stores, travel, third-party services and certain operating expenses. We have taken actions to adjust our spending given the significant uncertainty around the magnitude and duration of any recessionary impacts arising from the COVID-19 pandemic.
For additional risks to our business and industry, see Item 1A. Risk Factors .
Un -Carrier Moves Scam Shield OnJuly 16, 2020 , we unveiled our latestUn -carrier move with a comprehensive set of protections against scams and robocalls. The move, called Scam Shield, is our response to the growing number of scam calls with an unparalleled set of free safeguards, including technology built into T-Mobile's network, to protect customers in the T-Mobile family of brands against scams and robocalls. Scam Shield addresses this complex problem with a solution designed to help stop scammers, give the customer more information about the identity of the caller and protect their personal information.
Brand and Retail Unification
OnAugust 2, 2020 , we unified our retail operations and rebranded thousands of Sprint stores to T-Mobile stores while rolling out the tools and systems across our distribution footprint to serve all customers in all stores. At the same time, we launched our 4 lines for$25 each per month limited time promotion, giving customers unlimited data and 5G access. 59 -------------------------------------------------------------------------------- Table of Contents Results of Operations Set forth below is a summary of our unaudited condensed consolidated financial results: Six Months Ended Three Months Ended June 30, Change June 30, Change (in millions) 2020 2019 $ % 2020 2019 $ % Revenues Postpaid revenues$ 9,959 $ 5,613 $ 4,346 77 %$ 15,846 $ 11,106 $ 4,740 43 % Prepaid revenues 2,311 2,379 (68) (3) % 4,684 4,765 (81) (2) % Wholesale revenues 408 313 95 30 % 733 617 116 19 % Roaming and other service revenues 552 241 311 129 % 813 449 364 81 % Total service revenues 13,230 8,546 4,684 55 % 22,076 16,937 5,139 30 % Equipment revenues 4,269 2,263 2,006 89 % 6,386 4,779 1,607 34 % Other revenues 172 170 2 1 % 322 343 (21) (6) % Total revenues 17,671 10,979 6,692 61 % 28,784 22,059 6,725 30 % Operating expenses Cost of services, exclusive of depreciation and amortization shown separately below 3,098 1,649 1,449 88 % 4,737 3,195 1,542 48 % Cost of equipment sales, exclusive of depreciation and amortization shown separately below 3,667 2,661 1,006 38 % 6,196 5,677 519 9 % Selling, general and administrative 5,604 3,543 2,061 58 % 9,292 6,985 2,307 33 % Impairment expense 418 - 418 NM 418 - 418 NM Depreciation and amortization 4,064 1,585 2,479 156 % 5,782 3,185 2,597 82 % Total operating expenses 16,851 9,438 7,413 79 % 26,425 19,042 7,383 39 % Operating income 820 1,541 (721) (47) % 2,359 3,017 (658) (22) %
Other income (expense)
Interest expense (776) (182) (594) 326 % (961) (361) (600) 166 % Interest expense to affiliates (63) (101) 38 (38) % (162) (210) 48 (23) % Interest income 6 4 2 50 % 18 12 6 50 % Other expense, net (195) (22) (173) 786 % (205) (15) (190) 1,267 % Total other expense, net (1,028) (301) (727) 242 % (1,310) (574) (736) 128 % (Loss) income from continuing operations before income taxes (208) 1,240 (1,448) (117) % 1,049 2,443 (1,394) (57) % Income tax expense (2) (301) 299 (99) % (308) (596) 288 (48) % (Loss) income from continuing operations (210) 939 (1,149) (122) % 741 1,847 (1,106) (60) % Income from discontinued operations, net of tax 320 - 320 NM 320 - 320 NM Net income $ 110$ 939 $ (829) (88) %$ 1,061 $ 1,847 $ (786) (43) % Statement of Cash Flows Data Net cash provided by operating activities $ 777$ 2,147 $ (1,370) (64) % 2,394$ 3,539 $ (1,145) (32) % Net cash used in investing activities (6,356) (1,615) (4,741) 294 % (7,936) (2,581) (5,355) 207 % Net cash provided by (used in) financing activities 15,628 (866) 16,494 (1,905) % 15,175 (1,056) 16,231 (1,537) % Non-GAAP Financial Measures Adjusted EBITDA$ 7,017 $ 3,461 $ 3,556 103 %$ 10,682 $ 6,745 $ 3,937 58 % Free Cash Flow, excluding gross payments for the settlement of interest rate swaps 1,441 1,169 272 23 % 2,173 1,787 386 22 % NM - Not Meaningful 60 -------------------------------------------------------------------------------- Table of Contents The following discussion and analysis is for the three and six months endedJune 30, 2020 , compared to the same period in 2019 unless otherwise stated.
Total revenues increased
Postpaid revenues increased$4.3 billion , or 77%, for the three months ended and increased$4.7 billion , or 43%, for the six months endedJune 30, 2020 primarily from: •Higher average postpaid phone customers, primarily from customers acquired in the Merger and the growing success of new customer segments and rate plans as well as continued growth in existing and Greenfield markets; •Higher average postpaid other customers, primarily from customers acquired in the Merger and growth in wearable products, specifically the Apple Watch, as well as in other connected devices primarily due to growth in educational institution customers on lower average rate plans; and •Higher postpaid phone ARPU. See "Postpaid Phone ARPU" in the " Performance Measures " section of this MD&A. Prepaid revenues decreased$68 million , or 3%, for the three months ended and decreased$81 million , or 2%, for the six months endedJune 30, 2020 , primarily from: •Lower average prepaid customers primarily from a base adjustment, recorded onJuly 18, 2019 , for certain T-Mobile prepaid products now offered and distributed by a current MVNO partner; partially offset by •Higher prepaid phone ARPU. See "Prepaid Phone ARPU" in the " Performance Measures " section of this MD&A. Wholesale revenues increased$95 million , or 30%, for the three months ended and increased$116 million , or 19%, for the six months endedJune 30, 2020 , primarily from customers acquired in the Merger and the continued success of our MVNO partnerships.
Roaming and other service revenues increased
•Inclusion of wireline operations acquired in the Merger; •Higher Lifeline, advertising and affiliate revenues primarily due to operations acquired in the Merger; partially offset by •Lower international roaming due to the impact of COVID-19 and lower domestic roaming due to the receipt of roaming revenue from Sprint in periods before the Merger.
Equipment revenues increased
The increase for the three months ended
•An increase of$1.3 billion in lease revenues due to a higher number of customer devices under lease, primarily from leases acquired in the Merger; •An increase of$353 million in device sales revenue, excluding purchased leased devices, primarily from a 20% increase in the number of devices sold, excluding purchased leased devices, due to an increase in our customer base primarily due to the Merger and an increase in connected device sales, primarily to educational institutions; •An increase of$231 million in equipment sales from leased devices, primarily due to an increase in purchased leased devices as a result of the Merger; and •An increase of$165 million in revenues primarily related to the liquidation of returned devices as a result of the Merger.
The increase for the six months ended
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•An increase of $1.3 billion in lease revenues due to a higher number of
customer devices under lease, primarily from leases acquired in the Merger;
•An increase of $232 million in equipment sales from leased devices, primarily
due to an increase in purchased leased devices as a result of the Merger; and
•An increase of $176 million in revenues primarily related to the liquidation of
returned devices as a result of the Merger; partially offset by
•A decrease of $33 million in device sales revenue, excluding purchased leased
devices, primarily from:
•Lower average revenue per device sold due to an increase in the lower-end
device mix; partially offset by
•A 1% increase in the number of devices sold, excluding purchased leased
devices, due to an increase in our customer base primarily due to the Merger and
an increase in connected device sales to educational institutions, offset by
social distancing rules and retail store closures arising from COVID-19, which
had a stronger impact in the first quarter of 2020.
Other revenues were essentially flat for the three months ended and decreased
Operating expenses increased$7.4 billion , or 79%, for the three months ended and increased$7.4 billion , or 39%, for the six months endedJune 30, 2020 . The components of these changes are discussed below. Cost of services, exclusive of depreciation and amortization, increased$1.4 billion , or 88%, for the three months ended and increased$1.5 billion , or 48%, for the six months endedJune 30, 2020 primarily from: •An increase in expenses associated with leases, backhaul agreements and tower expenses acquired in the Merger and the continued build-out of our nationwide 5G network; •Higher employee-related and benefit-related costs primarily due to increased headcount as a result of the Merger; •Costs associated with wireline operations acquired in the Merger; •An increase in repair and maintenance costs, primarily due to the Merger; and •An increase in regulatory and roaming costs primarily due to the Merger, partially offset by lower international roaming costs. Cost of equipment sales, exclusive of depreciation and amortization, increased$1.0 billion , or 38%, for the three months ended and increased$519 million , or 9%, for the six months endedJune 30, 2020 .
The increase for the three months ended
•An increase of$416 million in device cost of equipment sales, excluding purchased leased devices, primarily from: •A 20% increase in the number of devices sold, excluding purchased leased devices, due to an increase in our customer base primarily due to the Merger and an increase in connected device sales primarily to educational institutions; partially offset by •Lower average costs per device sold due to an increase in the low-end device mix; •An increase of$314 million in costs related to the liquidation of returned devices as a result of the Merger and higher extended warranty costs; and •An increase of$292 million in leased device cost of equipment sales, primarily due to an increase in purchased leased devices as a result of the Merger. 62
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The increase for the six months ended
•An increase of$326 million in costs related to the liquidation of returned devices as a result of the Merger as well as higher extended warranty costs; and •An increase of$299 million in leased device cost of equipment sales, primarily due to an increase in purchased leased devices as a result of the Merger; partially offset by •A decrease of$72 million in device cost of equipment sales, excluding purchased leased devices, primarily from: •Lower average cost per device sold due to an increase in the low-end device mix; partially offset by •A 1% increase in the number of devices sold, excluding purchased leased devices, due to an increase in our customer base primarily due to the Merger and an increase in connected device sales to educational institutions, offset by social distancing rules and retail store closures arising from COVID-19, which had a stronger impact in the first quarter of 2020. Selling, general and administrative expenses increased$2.1 billion , or 58%, for the three months ended and increased$2.3 billion , or 33%, for the six months endedJune 30, 2020 .
The increase for the three months ended
•Higher employee-related costs due to an increase in the number of employees primarily from the Merger; •Higher external labor and professional services, advertising, lease and rent expense primarily from the Merger; •$758 million of Merger-related costs including transaction costs associated with legal and professional services and restructuring costs including severance and store rationalization, compared to$222 million of Merger-related costs in the three months endedJune 30, 2019 ; •Higher commission expense primarily due to an increase in our retail workforce from the Merger, partially offset by commissions capitalized in excess of commissions expensed, including a net benefit from new contract costs capitalized subsequent to Merger close that are in excess of the related amortization; and •Higher bad debt expense primarily due to customers acquired as a result of the Merger and the recording of estimated losses associated with the new credit loss standard including$125 million of incremental bad debt for the estimated macro-economic impacts of COVID-19 of which$46 million is related to our commitments to the Pledge. •Selling, general and administrative expenses for the three months endedJune 30, 2020 , included$341 million of supplemental employee payroll, third party commissions and cleaning-related COVID-19 costs.
The increase for the six months ended
•Higher employee-related costs due to an increase in the number of employees primarily from the Merger; •Higher external labor and professional services, advertising, lease and rent expense from the Merger; •$901 million of Merger-related costs including transaction costs associated with legal and professional services and restructuring costs including severance and store rationalization, compared to$335 million of Merger-related costs in the six months endedJune 30, 2019 ; •Higher commission expense primarily due to an increase in our retail workforce from the Merger and an increase of$87 million related to commissions expensed in excess of commissions capitalized; partially offset by a net benefit from new contract costs capitalized subsequent to Merger close that are in excess of the related amortization as these costs will amortize into expense over time and lower commissions expense from compensation structure changes; •Higher legal-related expenses from recording an estimated accrual associated with theFCC Notice of Apparent Liability and commitments associated with the Merger; and •Higher bad debt expense primarily due to customers acquired as a result of the Merger and the recording of estimated losses associated with the new credit loss standard including$155 million of incremental bad debt for the estimated macro-economic impacts of COVID-19 of which$46 million is related to our commitments to the Pledge. •Selling, general and administrative expenses for the six months endedJune 30, 2020 , included$458 million of supplemental employee payroll, third party commissions and cleaning-related COVID-19 costs. 63 -------------------------------------------------------------------------------- Table of Contents Impairment expense was$418 million for the three and six months endedJune 30, 2020 and consisted of the following: •A$218 million impairment on the goodwill in the Layer3 reporting unit; and •A$200 million impairment on the capitalized software development costs related to our postpaid billing system. For more information regarding the impairments above, see Note 5 - Property and Equipmen t and Note 6 - Goodwill, Spectrum License Transactions and Ot h er Intangible Asse t s of the Notes to the Condensed Consolidated Financial Statements. Depreciation and amortization increased$2.5 billion , or 156%, for the three months ended and increased$2.6 billion , or 82%, for the six months endedJune 30, 2020 , primarily as a result of the Merger including: •Higher depreciation expense from assets acquired in the Merger, excluding leased devices, and network expansion from the continued build-out of our nationwide 5G network; •Higher depreciation expense on leased devices resulting from a higher total number of customer devices under lease, primarily from customers acquired in the Merger; and •Higher amortization from intangible assets acquired in the Merger. Operating income, the components of which are discussed above, decreased$721 million , or 47%, for the three months ended and decreased$658 million , or 22%, for the six months endedJune 30, 2020 .
Interest expense increased
•The assumption of debt with a fair value of$31.8 billion in connection with the Merger; •The issuance of an aggregate of$19.0 billion in Senior Secured Notes and the entry into a$4.0 billion secured term loan inApril 2020 in connection with the Merger; and •Amortization of$39 million related to interest rate swap derivatives beginning upon settlement inApril 2020 .
Interest expense to affiliates decreased
The decrease for the three months ended
•The redemption of an aggregate of
The decrease for the six months ended
•The redemption of an aggregate of$4.0 billion in Senior Notes to Affiliates and the repayment of an aggregate of$4.0 billion in Incremental term loan facility to affiliates in 2020; and •The redemption of$600 million in Senior Reset Notes inApril 2019 ; partially offset by •Lower capitalized interest.
Other expense, net increased
(Loss) income from continuing operations before income taxes, the components of which are discussed above, was($208) million and$1.2 billion for the three months endedJune 30, 2020 and 2019, respectively, and was$1.0 billion and$2.4 billion for the six months endedJune 30, 2020 and 2019, respectively. 64
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(Loss) income from continuing operations before income taxes for the three and six months endedJune 30, 2020 was primarily impacted by: •Merger-related costs including restructuring costs; •Impairment expense; and •Make-whole commissions and incremental bad debt as a result of the macro-economic impacts of COVID-19.
Income tax expense decreased
The decrease for the three months ended
•Lower income before income taxes; partially offset by •A negative effective tax rate due to a small pre-tax loss primarily attributable to expenses that are not deductible for tax purposes including our Layer3 goodwill impairment and certain merger-related costs. The effective tax rate was (0.7)% for the three months endedJune 30, 2020 and 24.4% for the three months endedJune 30, 2019 .
The decrease for the six months ended
•Lower income before income taxes; partially offset by •A higher effective tax rate, primarily due to a reduction in income before income taxes and an increase in expenses that are not deductible for income tax purposes primarily related to our Layer 3 goodwill impairment and certain Merger-related costs. The effective tax rate was 29.4% and 24.4% for the six months endedJune 30, 2020 and 2019, respectively. (Loss) income from continuing operations, was$(210) million and$939 million for the three months endedJune 30, 2020 and 2019, respectively, and was$741 million and$1.8 billion for the six months endedJune 30, 2020 and 2019, respectively, primarily due to lower Operating income and higher Interest expense, partially offset by lower Income tax expense. Income from discontinued operations, net of tax was$320 million for both the three and six months endedJune 30, 2020 and consists of the results of the Prepaid Business that was divested onJuly 1, 2020 . The components of discontinued operations, net of tax fromApril 1, 2020 throughJune 30, 2020 are presented in the table below: Three and Six Months Ended (in millions) June 30, 2020 Major classes of line items constituting pretax income from discontinued operations Prepaid revenues $ 973 Roaming and other service revenues 27 Total service revenues 1,000 Equipment revenues 270 Total revenues 1,270 Cost of services 25 Cost of equipment sales 499 Selling, general and administrative 314 Total operating expenses 838 Pretax income from discontinued operations 432 Income tax expense (112) Net income from discontinued operations $ 320
For more information regarding the Prepaid Transaction, see Note 12 - Discontinued Operations of the Notes to the Condensed Consolidated Financial Statements.
Net income, the components of which are discussed above, decreased$829 million , or 88%, for the three months ended and decreased$786 million , or 43%, for the six months endedJune 30, 2020 , primarily due to lower Operating income and higher interest expense, partially offset by Income from discontinued operations, net of tax and lower Income tax expense. 65 -------------------------------------------------------------------------------- Table of Contents Net income for the three months endedJune 30, 2020 included the following: •Merger-related costs, net of tax, of$635 million for the three months endedJune 30, 2020 , compared to$175 million for the three months endedJune 30, 2019 . •The negative impact of supplemental employee payroll, net of government reimbursements, third-party commissions and cleaning-related COVID-19 costs, net of tax, of$253 million for the three months endedJune 30, 2020 , compared to no impact for the three months endedJune 30, 2019 . •Impairment expense of$366 million , net of tax, for the three months endedJune 30, 2020 , compared to no impairment expense for the three months endedJune 30, 2019 . The impairment of goodwill of$218 million in the Layer3 reporting unit is not deductible for tax purposes.
Net income for the six months ended
•Merger-related costs, net of tax, of$752 million for the six months endedJune 30, 2020 , compared to$268 million for the six months endedJune 30, 2019 . •The negative impact of supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs, net of tax, of$339 million for the six months endedJune 30, 2020 , compared to no impact for the six months endedJune 30, 2019 . •Impairment expense of$366 million , net of tax, for the six months endedJune 30, 2020 , compared to no impairment expense for the six months endedJune 30, 2019 . The impairment of goodwill of$218 million in the Layer3 reporting unit is not deductible for tax purposes.
Guarantor Financial Information
OnMarch 2, 2020 , theSEC adopted amendments to the financial disclosure requirements for guarantors and issuers of guaranteed securities, as well for affiliates whose securities collateralize a registrant's securities. We early adopted the requirements of the amendments onJanuary 1, 2020 , which included replacing guarantor condensed consolidating financial information with summarized financial information for the consolidated obligor group (Parent, Issuer, and Guarantor Subsidiaries) as well as no longer requiring guarantor cash flow information, financial information for non-guarantor subsidiaries, nor a reconciliation to the consolidated results.
On
Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties issued byT-Mobile USA, Inc. and the Sprint Issuers (collectively, the "Issuers") is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile ("Parent") and certain of the Parent's 100% owned subsidiaries ("Guarantor Subsidiaries"). The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures and credit facilities governing the long-term debt contain covenants that, among other things, limit the ability of the Issuers and the Guarantor Subsidiaries to incur more debt, pay dividends and make distributions, make certain investments, repurchase stock, create liens or other encumbrances, enter into transactions with affiliates, enter into transactions that restrict dividends or distributions from subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuers to loan funds or make payments to Parent. However, the Issuers and Guarantor Subsidiaries are allowed to make certain permitted payments to the Parent under the terms of the indentures and the supplemental indentures. InDecember 2019 , the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. We early adopted the standard onJanuary 1, 2020 and have applied the standard retrospectively to all periods presented. Upon the adoption of the standard, deferred tax assets of non-guarantor entities in aggregate of$163 million were reclassified and netted with the deferred tax liabilities of the guarantor obligor group of the debt issued byT-Mobile USA, Inc. The adoption of this standard did not have an impact on our condensed consolidated financial statements. 66 -------------------------------------------------------------------------------- Table of Contents InMarch 2020 , certain Guarantor Subsidiaries became Non-Guarantor Subsidiaries. Certain prior period amounts have been reclassified to conform to the current period's presentation.
The summarized balance sheet information for the consolidated obligor group of
debt issued by
June 30, 2020 December 31, 2019
Current assets $ 23,105 $ 8,177
Noncurrent assets 163,040 77,684
Current liabilities 21,487 11,885
Noncurrent liabilities 101,662 45,187
Due to non-guarantors 7,054 -
Due from non-guarantors - 346
Due to related parties 6,067 14,173
Due from related parties 24 20
The summarized results of operations information for the consolidated obligor
group of debt issued by
Six Months Ended Year Ended December
(in millions) June 30, 2020 31, 2019
Total revenues $ 28,071 $ 43,431
Operating income 1,525 4,761
Net income 1,061 3,468
Revenue from non-guarantors 656 974
The summarized balance sheet information for the consolidated obligor group of
debt issued by Sprint and Sprint Communications, Inc. is presented in the table
below:
(in millions) June 30, 2020
Current assets $ 1,619
Noncurrent assets 130,938
Current liabilities 4,716
Noncurrent liabilities 64,845
Due from non-guarantors 49,254
Due to related parties 6,025
The summarized results of operations information for the consolidated obligor
group of debt issued by Sprint and Sprint Communications, Inc. is presented in
the table below:
(in millions) Three Months Ended June 30, 2020
Total revenues $ 2
Operating income (15)
Net income 110
Revenue from non-guarantors 2
The summarized balance sheet information for the consolidated obligor group of
debt issued by
(in millions) June 30, 2020 Current assets$ 1,619 Noncurrent assets 136,235 Current liabilities 4,788 Noncurrent liabilities 70,070 Due from non-guarantors 58,276 Due to related parties 6,025 67
-------------------------------------------------------------------------------- Table of Contents The summarized results of operations information for the consolidated obligor group of debt issued bySprint Capital Corporation is presented in the table below: (in millions) Three Months Ended June 30, 2020 Total revenues $ 2 Operating income (15) Net income 110 Revenue from non-guarantors 2
Performance Measures
In managing our business and assessing financial performance, we supplement the information provided by our financial statements with other operating or statistical data and non-GAAP financial measures. These operating and financial measures are utilized by our management to evaluate our operating performance and, in certain cases, our ability to meet liquidity requirements. Although companies in the wireless industry may not define each of these measures in precisely the same way, we believe that these measures facilitate comparisons with other companies in the wireless industry on key operating and financial measures. The performance measures presented below include the impact of the Merger on a prospective basis from the close date ofApril 1, 2020 . Historical results were not restated. Customers A customer is generally defined as a SIM number with a unique T-Mobile identifier which is associated with an account that generates revenue. Customers are qualified either for postpaid service utilizing phones, wearables, DIGITS or other connected devices which includes tablets and SyncUp products, where they generally pay after receiving service, or prepaid service, where they generally pay in advance. Our postpaid customers include customers of T-Mobile and Sprint. Our prepaid customers include customers of T-Mobile and Metro by T-Mobile.
The following table sets forth the number of ending customers:
As of June 30, 2020 Change
(in thousands) 2020 2019 # %
Customers, end of period
Postpaid phone customers (1) 65,105 38,590 26,515 69 %
Postpaid other customers (1) 12,648 6,056 6,592 109 %
Total postpaid customers 77,753 44,646 33,107 74 %
Prepaid customers (1), (2) 20,574 21,337 (763) (4) %
Total customers 98,327 65,983 32,344 49 %
(1) Includes customers acquired in connection with the Merger and certain
customer base adjustments. See Customer Base Adjustments and Net Customer
Additions tables below.
(2) On July 18, 2019 , we entered into an agreement whereby certain T-Mobile
prepaid products will now be offered and distributed by a current MVNO partner.
As a result, we included a base adjustment in the third quarter of 2019 to
reduce prepaid customers by 616,000.
Total customers increased 32,344,000, or 49%, primarily from:
•Higher postpaid phone customers primarily due to postpaid phone customers
acquired in the Merger and the success of new customer segments and rate plans
and continued growth in existing and Greenfield markets, along with promotional
activities; and
•Higher postpaid other customers primarily due to postpaid other customers
acquired in the Merger and growth in wearable products, specifically the Apple
Watch as well as other connected devices primarily due to growth in educational
institution customers; partially offset by
•Lower prepaid customers driven primarily by a reduction of 616,000 customers
resulting from a base adjustment for certain T-Mobile prepaid products now
offered and distributed by a current MVNO partner, partially offset by the
continued success of our prepaid brands due to promotional activities and rate
plan offers.
Customer Base Adjustments
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Certain adjustments were made to align the customer reporting policies of T-Mobile and Sprint.
The adjustments made to the reported T-Mobile and Sprint ending customer base as
of
Postpaid phone Postpaid other Total postpaid
(in thousands) customers customers customers Prepaid customers Total customers
Reconciliation to beginning customers
T-Mobile customers as reported, end of
period March 31, 2020 40,797 7,014 47,811 20,732 68,543
Sprint customers as reported, end of period March 31, 2020 25,916 8,428 34,344 8,256
42,600
Total combined customers, end of period March 31, 2020 66,713 15,442 82,155 28,988
111,143
Adjustments
Reseller reclassification to wholesale customers (1) (199) (2,872) (3,071) -
(3,071)
EIP reclassification from postpaid to prepaid (2) (963) - (963) 963 - Divested prepaid customers (3) - - - (9,207)
(9,207)
Rate plan threshold (4) (182) (918) (1,100) -
(1,100)
Customers with non-phone devices (5) (226) 226 - - - Collection policy alignment (6) (150) (46) (196) -
(196)
Miscellaneous adjustments (7) (141) (43) (184) (302) (486) Total Adjustments (1,861) (3,653) (5,514) (8,546) (14,060) Adjusted beginning customers as of April 1, 2020 64,852 11,789 76,641 20,442 97,083 (1) In connection with the closing of the Merger, we refined our definition of wholesale customers resulting in the reclassification of certain postpaid and prepaid reseller customers to wholesale customers. Starting with the three months endedMarch 31, 2020 , we discontinued reporting wholesale customers to focus on postpaid and prepaid customers and wholesale revenues, which we consider more relevant than the number of wholesale customers given the expansion of M2M and IoT products. (2) Prepaid customers with a device installment billing plan historically included as Sprint postpaid customers have been reclassified to prepaid customers to align with T-Mobile policy. (3) Customers associated with the Sprint wireless prepaid and Boost Mobile brands that were divested onJuly 1, 2020 , have been excluded from our reported customers. (4) Customers who have rate plans with monthly recurring charges which are considered insignificant have been excluded from our reported customers. (5) Customers with postpaid phone rate plans without a phone (e.g., non-phone devices) have been reclassified from postpaid phone to postpaid other customers to align with T-Mobile policy. (6) Certain Sprint customers subject to collection activity for an extended period of time have been excluded from our reported customers to align with T-Mobile policy. (7) Miscellaneous insignificant adjustments to align with T-Mobile policy.
Net Customer Additions
The following table sets forth the number of net customer additions:
Six Months Ended
Three Months Ended June 30 , Change June 30 , Change
(in thousands) 2020 2019 # % 2020 2019 # %
Net customer additions
Postpaid phone customers 253 710 (457) (64) % 705 1,366 (661) (48) %
Postpaid other customers 859 398 461 116 % 1,184 761 423 56 %
Total postpaid customers 1,112 1,108 4 NM 1,889 2,127 (238) (11) %
Prepaid customers (1) 133 131 2 2 % 5 200 (195) (98) %
Total customers 1,245 1,239 6 NM 1,894 2,327 (433) (19) %
Acquired customers, net
of base adjustments 29,228 - 29,228 NM 29,228 - 29,228 NM
NM - Not Meaningful
(1) On July 18, 2019 , we entered into an agreement whereby certain T-Mobile
prepaid products will now be offered and distributed by a current MVNO partner.
As a result, we included a base adjustment in the third quarter of 2019 to
reduce prepaid customers by 616,000.
Total net customer additions increased 6,000, for the three months ended and
decreased 433,000, or 19%, for the six months ended
The increase for the three months ended
•Higher postpaid other net customer additions primarily due to higher gross additions from connected devices primarily
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due to educational institution additions, partially offset by lower switching
activity in the industry from social distancing rules and retail store closures
due to COVID-19; and
•Higher prepaid net customer additions primarily due to lower churn and
promotional activity in the marketplace partially offset by lower switching
activity in the industry from social distancing rules and retail store closures
due to COVID-19; partially offset by
•Lower postpaid phone net customer additions primarily due to lower switching
activity in the industry from social distancing rules and retail store closures
due to COVID-19 and an increase in churn from the inclusion of the customer base
acquired in the Merger.
The decrease for the six months ended
•Lower postpaid phone net customer additions primarily due to lower switching activity in the industry from social distancing rules and retail store closures due to COVID-19 and an increase in churn from the inclusion of the customer base acquired in the Merger; and •Lower prepaid net customers additions primarily due to lower switching activity in the industry from social distancing rules and retail store closures due to COVID-19, partially offset by lower churn and promotional activity in the marketplace; partially offset by •Higher postpaid other net customer additions primarily due to higher gross additions from connected devices primarily due to educational institution additions and lower churn, partially offset by lower switching activity in the industry from social distancing rules and retail store closures due to COVID-19.
Churn
Churn represents the number of customers whose service was disconnected as a percentage of the average number of customers during the specified period. The number of customers whose service was disconnected is presented net of customers that subsequently have their service restored within a certain period of time. We believe that churn provides management, investors and analysts with useful information to evaluate customer retention and loyalty.
The following table sets forth the churn:
Six Months Ended
Three Months Ended June 30, Bps Change June 30, Bps Change
2020 2019 2020 2019
Postpaid phone churn 0.80 % 0.78 % 2 bps 0.82 % 0.83 % -1 bps
Prepaid churn 2.81 % 3.49 % -68 bps 3.17 % 3.67 % -50 bps
Postpaid phone churn increased two basis points for the three months ended June
30, 2020 , primarily due to the inclusion of the customer base acquired in the
Merger, offset by lower switching activity in the industry due to social
distancing rules and temporary retail store closures arising from COVID-19.
Postpaid phone churn decreased one basis point for the six months ended
Prepaid churn decreased 68 basis points for the three months ended and decreased 50 basis points for the six months endedJune 30, 2020 , primarily due to lower switching activity in the industry due to social distancing rules and temporary retail store closures arising from COVID-19 and the continued success of our prepaid brands due to promotional activities and rate plan offers. During the three and six months endedJune 30, 2020 , we have seen lower churn due to social distancing rules and temporary retail store closures arising from the COVID-19 pandemic. 70
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Total Postpaid Accounts
A postpaid account is generally defined as a billing account number that
generates revenue. Postpaid accounts are generally comprised of customers that
are qualified for postpaid service utilizing phones, wearables, DIGITS or other
connected devices which includes tablets and SyncUp products, where they
generally pay after receiving service.
As of June 30, 2020 Change
(in thousands) 2020 2019 # %
Accounts, end of period
Total postpaid customer accounts(1) 25,486 14,480 11,006 76 %
(1) Includes accounts acquired in connection with the Merger and certain account base adjustments. See Account Base Adjustments table below. Total postpaid customer accounts increased 11,006,000, or 76%, primarily due to 10,150,000 accounts acquired in the Merger, the growing success of new customer segments and rate plans, continued growth in existing and Greenfield markets, improvements in network quality, industry-leading customer service, along with promotional activities, partially offset by lower switching activity in the industry from social distancing rules and temporary retail store closures arising from COVID-19.
Account Base Adjustments
Certain adjustments were made to align the account reporting policies of T-Mobile and Sprint.
The adjustments made to the reported T-Mobile and Sprint ending account base as ofMarch 31, 2020 are presented below: (in thousands) Postpaid
Accounts
Reconciliation to beginning accounts T-Mobile accounts as reported, end of periodMarch 31, 2020
15,244
Sprint accounts, end of periodMarch 31, 2020
11,246
Total combined accounts, end of periodMarch 31, 2020
26,490
Adjustments
Reseller reclassification to wholesale accounts (1)
(1)
EIP reclassification from postpaid to prepaid (2)
(963)
Rate plan threshold (3)
(18)
Collection policy alignment (4)
(76)
Miscellaneous adjustments (5)
(47)
Total Adjustments
(1,105)
Adjusted beginning accounts as ofApril 1, 2020
25,385
(1) In connection with the closing of the Merger, we refined our definition of wholesale accounts resulting in the reclassification of certain postpaid and prepaid reseller accounts to wholesale accounts. (2) Prepaid accounts with a customer with a device installment billing plan historically included as Sprint postpaid accounts have been reclassified to prepaid accounts to align with T-Mobile policy. (3) Accounts with customers who have rate plans with monthly recurring charges which are considered insignificant have been excluded from our reported accounts. (4) Certain Sprint accounts subject to collection activity for an extended period of time have been excluded from our reported accounts to align with T-Mobile policy. (5) Miscellaneous insignificant adjustments to align with T-Mobile policy.
Average Revenue Per User
ARPU represents the average monthly service revenue earned from customers. We
believe ARPU provides management, investors and analysts with useful information
to assess and evaluate our service revenue per customer and assist in
forecasting our future service revenues generated from our customer base.
Postpaid phone ARPU excludes postpaid other customers and related revenues which
includes wearables, DIGITS and other connected devices such as tablets and
SyncUp products.
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The following table illustrates the calculation of our operating measure ARPU and reconciles this measure to the related service revenues:
(in millions, except Six Months Ended average number of customers Three Months EndedJune 30 , ChangeJune 30 , Change and ARPU) 2020 2019 $ % 2020 2019 S % Calculation of Postpaid Phone ARPU Postpaid service revenues$ 9,959 $ 5,613 $ 4,346 77 %$ 15,846 $ 11,106 $ 4,740 43 % Less: Postpaid other revenues (618) (326) (292) 90 % (928) (636) (292) 46 % Postpaid phone service revenues$ 9,341 $ 5,287 $ 4,054 77 %$ 14,918 $ 10,470 $ 4,448 42 % Divided by: Average number of postpaid phone customers (in thousands) and number of months in period 64,889 38,226 26,663 70 % 52,737 37,865 14,872 39 % Postpaid phone ARPU$ 47.99 $ 46.10 $ 1.89 4 %$ 47.15 $ 46.09 $ 1.06 2 % Calculation of Prepaid ARPU Prepaid service revenues$ 2,311 $ 2,379 $ (68) (3) %$ 4,684 $ 4,765 $ (81) (2) % Divided by: Average number of prepaid customers (in thousands) and number of months in period 20,380 21,169 (789) (4) % 20,570 21,146 (576) (3) % Prepaid ARPU$ 37.80 $ 37.46 $ 0.34 1 %$ 37.95 $ 37.56 $ 0.39 1 %
Postpaid Phone ARPU
Postpaid phone ARPU increased
•The net impact of customers acquired in the Merger, which have higher ARPU (net of changes arising from the reduction in base due to policy adjustments and reclassification of certain ARPU components from the acquired customers being moved to other revenue lines); •Continued growth in existing and Greenfield markets; and •Higher premium service revenues; partially offset by •A reduction in certain non-recurring charges including the impact of COVID-19.
Prepaid ARPU
Prepaid ARPU increased
•The impacts of certain adjustments to our customer base, including the removal of certain prepaid customers associated with products now offered and distributed by a current MVNO partner as those customers had lower ARPU; partially offset by •Dilution from our promotional activities; and •A reduction in certain non-recurring charges to customer accounts in connection with our response to COVID-19.
Average Revenue Per Account
Average Revenue per Account ("ARPA") represents the average monthly postpaid
service revenue earned per account. We believe postpaid ARPA provides
management, investors and analysts with useful information to assess and
evaluate our postpaid service revenue realization and assist in forecasting our
future postpaid service revenues on a per account basis. We consider postpaid
ARPA to be indicative of our revenue growth potential given the increase in the
average number of postpaid phone customers per account and increases in postpaid
other customers, including wearables, DIGITS or other connected devices which
includes tablets and SyncUp products.
The following table illustrates the calculation of our operating measure ARPA and reconciles this measure to the related service revenues:
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Six Months Ended
(in millions, except average Three Months Ended June 30 ,
Change June 30, Change
number of accounts, ARPA) 2020 2019 $ % 2020 2019 $ %
Calculation of Postpaid ARPA
Postpaid service revenues $ 9,959 $ 5,613 $ 4,346 77 % $ 15,846 $ 11,106 $ 4,740 43 %
Divided by: Average number
of postpaid accounts (in
thousands) and number of
months in period 25,424 14,354 11,070 77 % 20,289 14,231 6,058 43 %
Postpaid ARPA $ 130.57 $ 130.36 $ 0.21 NM $ 130.16 $ 130.07 $ 0.09 NM
NM - Not Meaningful
Postpaid ARPA
Postpaid ARPA was essentially flat for the three months ended and six months
ended
•The net impact of customers acquired in the Merger; as well as •The growing success of new customer segments and rate plans, including further penetration in connected devices; and •Higher premium service revenues; offset by •An increase in our promotional activities; and •A reduction in certain non-recurring charges including the impact of COVID-19.
Adjusted EBITDA
Adjusted EBITDA represents earnings before Interest expense, net of Interest income, Income tax expense, Depreciation and amortization, non-cash Stock-based compensation and certain income and expenses not reflective of our operating performance. Net income margin represents Net income divided by Service revenues. Adjusted EBITDA margin represents Adjusted EBITDA divided by Service revenues. Adjusted EBITDA is a non-GAAP financial measure utilized by our management to monitor the financial performance of our operations. We use Adjusted EBITDA internally as a measure to evaluate and compensate our personnel and management for their performance, and as a benchmark to evaluate our operating performance in comparison to our competitors. Management believes analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate overall operating performance and facilitate comparisons with other wireless communications services companies because it is indicative of our ongoing operating performance and trends by excluding the impact of interest expense from financing, non-cash depreciation and amortization from capital investments, non-cash stock-based compensation, network decommissioning costs, costs related to the Merger, incremental costs directly attributable to COVID-19 and impairment expense, as they are not indicative of our ongoing operating performance, as well as certain other nonrecurring income and expenses. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for income from operations, net income or any other measure of financial performance reported in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). 73
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Table of Contents The following table illustrates the calculation of Adjusted EBITDA and reconciles Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure:
Six Months Ended
Three Months Ended June 30 , Change June 30 , Change
(in millions) 2020 2019 $ % 2020 2019 $ %
Net income $ 110 $ 939 $ (829) (88) % $ 1,061 $ 1,847 $ (786) (43) %
Adjustments:
Income from discontinued
operations, net of tax (320) - (320) NM (320) - (320) NM
(Loss) income from continuing
operations (210) 939 (1,149) (122) % 741 1,847 (1,106) (60) %
Interest expense 776 182 594 326 % 961 361 600 166 %
Interest expense to affiliates 63 101 (38) (38) % 162 210 (48) (23) %
Interest income (6) (4) (2) 50 % (18) (12) (6) 50 %
Other expense, net 195 22 173 786 % 205 15 190 1,267 %
Income tax expense 2 301 (299) (99) % 308 596 (288) (48) %
Operating income 820 1,541 (721) (47) % 2,359 3,017 (658) (22) %
Depreciation and amortization 4,064 1,585 2,479 156 % 5,782 3,185 2,597 82 %
Operating income from discontinued
operations (1) 432 - 432 NM 432 - 432 NM
Stock-based compensation (2) 139 111 28 25 % 262 204 58 28 %
Merger-related costs 798 222 576 259 % 941 335 606 181 %
COVID-19-related costs 341 - 341 NM 458 - 458 NM
Impairment expense 418 - 418 NM 418 - 418 NM
Other, net (3) 5 2 3 150 % 30 4 26 650 %
Adjusted EBITDA $ 7,017 $ 3,461 $ 3,556 103 % $ 10,682 $ 6,745 $ 3,937 58 %
Net income margin (Net income
divided by Service revenues) 1 % 11 % -1,000 bps 5 % 11 % -600 bps
Adjusted EBITDA margin (Adjusted
EBITDA divided by Service
revenues) 53 % 40 % 1,300 bps 48 % 40 % 800 bps
NM - Not Meaningful
(1)Following the Prepaid Transaction, starting on July 1, 2020 , we will provide
MVNO services to customers of the divested brands. We have included the
operating income from discontinued operations in our determination of Adjusted
EBITDA to reflect contributions of the Prepaid Business that will be replaced by
the MVNO Agreement beginning on July 1, 2020 in order to enable management,
analysts and investors to better assess ongoing operating performance and
trends.
(2)Stock-based compensation includes payroll tax impacts and may not agree to
stock-based compensation expense in the condensed consolidated financial
statements. Additionally, certain stock-based compensation expenses associated
with the Transactions have been included in Merger-related costs.
(3)Other, net may not agree to the Condensed Consolidated Statements of
Comprehensive Income primarily due to certain non-routine operating activities,
such as other special items that would not be expected to reoccur or are not
reflective of T-Mobile's ongoing operating performance, and are therefore
excluded in Adjusted EBITDA.
Adjusted EBITDA increased
The Merger increased our customer base, increased our spectrum portfolio, altered our product mix by increasing the portion of customers who financed their devices with leasing programs and impacted our network and operating cost.
The increase for the three months ended
•Higher service revenues, as further discussed above; and
•Higher equipment revenues, as further discussed above; partially offset by
•Higher Cost of services expenses, excluding Merger-related costs;
•Higher Selling, general and administrative expenses, excluding Merger-related
costs and supplemental employee payroll, third-party commissions and
cleaning-related COVID-19 costs; and
•Higher Cost of equipment sales.
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The increase for the six months ended June 30, 2020 was primarily due to:
•Higher service revenues, as further discussed above; and
•Higher equipment revenues, as further discussed above; partially offset by
•Higher Cost of services expenses, excluding Merger-related costs;
•Higher Selling, general and administrative expenses, excluding Merger-related
costs and supplemental employee payroll, third-party commissions and
cleaning-related COVID-19 costs; and
•Higher Cost of equipment sales.
•The impact from commission costs capitalization and amortization, including a
benefit from new costs capitalized as result of the merger, reduced Adjusted
EBITDA by $87 million for the six months ended for the June 30, 2020 , compared
to the six months ended June 30, 2019 .
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations, proceeds from issuance of long-term debt and common stock, financing leases, the sale of certain receivables, financing arrangements of vendor payables which effectively extend payment terms and the New Revolving Credit Facility (as defined below). In connection with the closing of the Merger onApril 1, 2020 , we incurred a substantial amount of additional third-party indebtedness which increased our future financial commitments, including aggregate interest payments. Further, the incurrence of additional indebtedness may inhibit our ability to incur new debt under the terms governing our existing and future indebtedness, which may make it more difficult for us to incur new debt in the future to finance our business strategy.
Cash Flows
The following is a condensed schedule of our cash flows for the three and six
months ended
Six Months Ended
Three Months Ended June 30, Change June 30, Change
(in millions) 2020 2019 $ % 2020 2019 $ %
Net cash provided by
operating activities $ 777 $ 2,147 $ (1,370) (64) % $ 2,394 $ 3,539 $ (1,145) (32) %
Net cash used in investing
activities (6,356) (1,615) (4,741) 294 % (7,936) (2,581) (5,355) 207 %
Net cash provided by (used
in) financing activities 15,628 (866) 16,494 (1,905) % 15,175 (1,056) 16,231 (1,537) %
Operating Activities
Net cash provided by operating activities decreased $1.4 billion , or 64%, for
the three months ended and decreased $1.1 billion , or 32%, for the six months
ended June 30, 2020 .
The decrease for the three months ended
•A$3.7 billion increase in net cash outflows from changes in working capital, primarily due to the one-time impact of$2.3 billion in gross payments for the settlement of interest rate swaps related to Merger financing for the three months endedJune 30, 2020 , higher use from Other current and long-term liabilities, Accounts payable and accrued liabilities and Inventories, partially offset by lower use from Accounts receivable; and •Lower Net income; partially offset by •Higher net non-cash adjustments to Net income. •Net cash provided by operating activities includes$370 million and$151 million in payments for Merger-related costs for the three months endedJune 30, 2020 and 2019, respectively. •Net cash provided by operating activities includes$243 million and$0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the three months endedJune 30, 2020 and 2019, respectively. 75 -------------------------------------------------------------------------------- Table of Contents The decrease for the six months endedJune 30, 2020 , was primarily from: •A$3.7 billion increase in net cash outflows from changes in working capital, primarily due to the one-time impact of$2.3 billion in gross payments for the settlement of interest rate swaps related to Merger financing for the six months endedJune 30, 2020 , including higher use from Other current and long-term liabilities, Accounts payable and accrued liabilities and Inventories, partially offset by lower use from Accounts receivable; and •Lower Net income; partially offset by •Higher net non-cash adjustments to Net income. •Net cash provided by operating activities includes$531 million and$185 million in payments for Merger-related costs for the six months endedJune 30, 2020 and 2019, respectively. •Net cash provided by operating activities includes$255 million and$0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the six months endedJune 30, 2020 and 2019, respectively. Investing Activities Net cash used in investing activities increased$4.7 billion , or 294%, for the three months ended and increased$5.4 billion , or 207%, for the six months endedJune 30, 2020 .
The use of cash for the three months ended
•$5.0 billion in cash paid for the acquisition of Sprint, net of cash and restricted cash acquired; •$2.3 billion in Purchases of property and equipment, including capitalized interest, from network integration related to the Merger and the continued build-out of our nationwide 5G network; and •$745 million in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by •$1.2 billion related to derivative contracts under collateral exchange arrangements, for more information regarding these contracts, see Note
7
- Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements; and •$602 million in Proceeds related to beneficial interests in securitization transactions.
The use of cash for the six months ended
•$5.0 billion in cash paid for the acquisition of Sprint, net of cash and restricted cash acquired; •$4.0 billion in Purchases of property and equipment, including capitalized interest, from network integration related to the Merger and the continued build-out of our nationwide 5G network; and •$844 million in Purchases of spectrum licenses and other intangible assets, including deposits; partially offset by •$1.5 billion in Proceeds related to beneficial interests in securitization transactions; and •$632 million related to derivative contracts under collateral exchange arrangements, for more information regarding these contracts, see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements. Financing Activities
Net cash provided by (used in) financing activities increased
The source of cash for the three and six months ended
•$26.7 billion in Proceeds from the issuance of long-term debt, net of discounts and issuance costs, driven primarily by the issuance of$23.0 billion in Senior Secured Notes and a draw of$4.0 billion on the New Secured Term Loan Facility; •$18.7 billion in Proceeds from the issuance of short-term debt, net of discounts and issuance costs, driven by a$19.0 billion draw on the New Secured Bridge Loan Facility in connection with the closing of the Merger; and •$300 million in net proceeds from the SoftBank Equity transaction, see Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements; partially offset by 76 -------------------------------------------------------------------------------- Table of Contents •$18.9 billion in Repayments of short-term debt, net of refunds for issuance costs, for the repayment of the$19.0 billion draw on theNew Secured Bridge Loan Facility; and •$10.5 billion in Repayments of long-term debt driven by the repayment of our$4.0 billion Incremental Term Loan Facility with DT,$4.0 billion of Senior Notes held by DT,$2.3 billion of outstanding principal for the termination of the accounts receivable facility assumed in the Merger, and$219 million in principal payments for the Senior Secured Notes assumed in the Merger.
Cash and Cash Equivalents
As of
Free Cash Flow
Free Cash Flow represents Net cash provided by operating activities less cash
payments for Purchases of property and equipment, including Proceeds from sales
of tower sites and Proceeds related to beneficial interests in securitization
transactions, less Cash payments for debt prepayment or debt extinguishment.
Free Cash Flow and Free Cash Flow, excluding gross payments for the settlement
of interest rate swaps, is a non-GAAP financial measure utilized by our
management, investors and analysts of our financial information to evaluate cash
available to pay debt and provide further investment in the business.
We have presented the impact of the sales in the table below, which illustrates
the reconciliation of Free Cash Flow and Free Cash Flow, excluding gross
payments for the settlement of interest rate swaps and reconciles each from Net
cash provided by operating activities, which we consider to be the most directly
comparable GAAP financial measure.
Six Months Ended
Three Months Ended June 30 , Change June 30 , Change
(in millions) 2020 2019 $ % 2020 2019 $ %
Net cash provided by
operating activities $ 777 $ 2,147 $ (1,370) (64) % $ 2,394 $ 3,539 $ (1,145) (32) %
Cash purchases of property
and equipment (2,257) (1,789) (468) 26 % (4,010) (3,720) (290) 8 %
Proceeds related to
beneficial interests in
securitization transactions 602 839 (237) (28) % 1,470 1,996 (526) (26) %
Cash payments for debt
prepayment or debt
extinguishment costs (24) (28) 4 (14) % (24) (28) 4 (14) %
Free Cash Flow (902) 1,169 (2,071) (177) % (170) 1,787 (1,957) (110) %
Gross cash paid for the
settlement of interest rate
swaps 2,343 - 2,343 NM 2,343 - 2,343 NM
Free Cash Flow, excluding
gross payments for the
settlement of interest rate
swaps $ 1,441 $ 1,169 $ 272 23 % $ 2,173 $ 1,787 $ 386 22 %
NM - Not Meaningful
Free Cash Flow, excluding gross payments for the settlement of interest rate
swaps related to Merger financing, increased $272 million , or 23%, for the three
months ended and increased $386 million , or 22%, for the six months ended June
30, 2020 .
The increase for the three months ended
•Lower Net cash provided by operating activities, as described above; •Higher Cash purchases of property and equipment, including capitalized interest of$119 million and$125 million for the three months endedJune 30, 2020 and 2019, respectively, from network integration related to the Merger and the continued build-out of our nationwide 5G network; •Lower Proceeds related to our deferred purchase price from securitization transactions; and •The one-time impact of gross payments for the settlement of interest rate swaps related to Merger financing of$2.3 billion , which is excluded from the calculation Free Cash Flow. •Free Cash Flow includes$370 million and$151 million in payments for Merger-related costs for the three months endedJune 30, 2020 and 2019, respectively. •Free Cash Flow includes$243 million and$0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the three months endedJune 30, 2020 and 2019, respectively. 77
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The increase for the six months ended
•Lower Net cash provided by operating activities, as described above; •Lower Proceeds related to our deferred purchase price from securitization transactions; •Higher Cash purchases of property and equipment, including capitalized interest of$231 million and$243 million for the six months endedJune 30, 2020 and 2019, respectively, from network integration related to the Merger and the continued build-out of our nationwide 5G network; and •The one-time impact of gross payments for the settlement of interest rate swaps related to Merger financing of$2.3 billion , which is excluded from the calculation Free Cash Flow. •Free Cash Flow includes$531 million and$185 million in payments for Merger-related costs for the six months endedJune 30, 2020 and 2019, respectively. •Free Cash Flow includes$255 million and$0 in payments for supplemental employee payroll, third-party commissions and cleaning-related COVID-19 costs for the six months endedJune 30, 2020 and 2019, respectively.
Borrowing Capacity and Debt Financing
As ofJune 30, 2020 , our total debt and financing lease liabilities were$75.0 billion , excluding our tower obligations, of which$67.5 billion was classified as long-term debt and$1.4 billion was classified as long-term financing lease liabilities. We maintain a financing arrangement with Deutsche Bank AG, which allows for up to$108 million in borrowings. Under the financing arrangement, we can effectively extend payment terms for invoices payable to certain vendors. As ofJune 30, 2020 , there were no outstanding balances. We maintain vendor financing arrangements primarily with our main network equipment suppliers. Under the respective agreements, we can obtain extended financing terms. During the three and six months endedJune 30, 2020 , we repaid$151 million and$176 million , respectively, under the vendor financing arrangements. Payments on certain vendor financing agreements are included in Repayments of short-term debt for purchases of inventory, property and equipment, net, in our Condensed Consolidated Statements of Cash Flows. As ofJune 30, 2020 andDecember 31, 2019 , the outstanding balance under the vendor financing arrangements and other debt was$353 million and$25 million , respectively. OnApril 1, 2020 , in connection with the closing of the Merger,T-Mobile USA and certain of its affiliates, as guarantors, entered into aBridge Loan Credit Agreement with certain financial institutions named therein, providing for a$19.0 billion secured bridge loan facility ("New Secured Bridge Loan Facility"). OnApril 1, 2020 , in connection with the closing of the Merger,T-Mobile USA and certain of its affiliates, as guarantors, entered into a Credit Agreement (the "New Credit Agreement") with certain financial institutions named therein, providing for a$4.0 billion secured term loan facility ("New Secured Term Loan Facility") and a$4.0 billion revolving credit facility ("New Revolving Credit Facility"). OnApril 1, 2020 , in connection with the closing of the Merger, we drew down on our$19.0 billion New Secured Bridge Loan Facility and our$4.0 billion New Secured Term Loan Facility. We used the net proceeds of$22.6 billion from the draw down of the secured facilities to repay our$4.0 billion Incremental Term Loan Facility with DT and to repurchase from DT$4.0 billion of indebtedness to affiliates, consisting of$2.0 billion of 5.300% Senior Notes due 2021 and$2.0 billion of 6.000% Senior Notes due 2024, as well as to redeem certain debt of Sprint and Sprint's subsidiaries, including the secured term loans due 2024 with a total principal amount outstanding of$5.9 billion , accounts receivable facility with a total amount outstanding of$2.3 billion , and Sprint's 7.250% Guaranteed Notes due 2028 with a total principal amount outstanding of$1.0 billion , and for post-closing general corporate purposes of the combined company. 78 -------------------------------------------------------------------------------- Table of Contents In connection with the entry into the Business Combination Agreement,T-Mobile USA entered into a commitment letter, dated as ofApril 29, 2018 (as amended and restated onMay 15, 2018 and onSeptember 6, 2019 , the "Commitment Letter"). In connection with the financing provided for in the Commitment Letter, we incurred certain fees payable to the financial institutions, including certain financing fees on the secured term loan commitment and fees for structuring, funding, and providing the commitments. OnApril 1, 2020 , in connection with the closing of the Merger, we paid$355 million in Commitment Letter fees to certain financial institutions which were recognized in Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income. OnApril 9, 2020 ,T-Mobile USA and certain of its affiliates, as guarantors, issued$3.0 billion of 3.500% Senior Secured Notes due 2025,$4.0 billion of 3.750% Senior Secured Notes due 2027,$7.0 billion of 3.875% Senior Secured Notes due 2030,$2.0 billion of 4.375% Senior Secured Notes due 2040, and$3.0 billion of 4.500% Senior Secured Notes due 2050 and used the net proceeds of$18.8 billion together with cash on hand to repay at par all of the outstanding amounts under, and terminate, our$19.0 billion New SecuredBridge Loan Facility. Additionally, in connection with the repayment of our New Secured Bridge Loan Facility, we received a reimbursement of$71 million , which represents a portion of the Commitment Letter fees that were paid to certain financial institutions when we drew down on the New Secured Bridge Loan Facility onApril 1, 2020 .
For more information regarding our borrowing capacity and debt financing, see
Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements.
Consents on Debt
OnMay 18, 2018 , under the terms and conditions described in the Consent Solicitation Statement dated as ofMay 14, 2018 , we obtained consents necessary to effect certain amendments to certain of our existing debt and certain existing debt of our subsidiaries. OnApril 1, 2020 , in connection with the closing of the Merger, we made payments for requisite consents to third-party note holders of$95 million . In connection with the entry into the Business Combination Agreement,DT andT-Mobile USA entered into a Financing Matters Agreement, dated as ofApril 29, 2018 , pursuant to which DT agreed, among other things, to consent to the incurrence byT-Mobile USA of secured debt in connection with and after the consummation of the Merger. OnApril 1, 2020 , in connection with the closing of the Merger, we made an additional payment for requisite consents to DT of$13 million .
For more information regarding consents on debt, see Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements.
Interest Rate Lock Derivatives
InApril 2020 , in connection with the issuance of an aggregate of$19.0 billion in Senior Secured Notes, we terminated our interest rate lock derivative. At the time of termination, the interest rate lock derivatives were a liability of$2.3 billion , of which$1.2 billion was cash-collateralized. Consequently, the net cash required to settle the interest rate lock derivatives was an additional$1.1 billion and was paid at termination.
For more information regarding the termination of our interest rate lock derivative, see Note 7 - Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements.
Future Sources and Uses of Liquidity
We may seek additional sources of liquidity, including through the issuance of
additional long-term debt in 2020, to continue to opportunistically acquire
spectrum licenses or other assets in private party transactions or for the
refinancing of existing long-term debt on an opportunistic basis. Excluding
liquidity that could be needed for spectrum acquisitions, or for other assets,
we expect our principal sources of funding to be sufficient to meet our
anticipated liquidity needs for business operations for the next 12 months as
well as our longer-term liquidity needs. Our intended use of any such funds is
for general corporate purposes, including for capital expenditures, spectrum
purchases, opportunistic investments and acquisitions and redemption of high
yield callable debt.
We determine future liquidity requirements, for both operations and capital
expenditures, based in large part upon projected financial and operating
performance, and opportunities to acquire additional spectrum. We regularly
review and update these projections for changes in current and projected
financial and operating results, general economic conditions, the competitive
landscape and other factors. We have incurred, and will incur, substantial
expenses as a result of completing the Transactions, the Divestiture Transaction
and compliance with the Government Commitments, and we are also expected to
incur substantial
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expenses in connection with integrating and coordinating T-Mobile's and Sprint's
businesses, operations, policies and procedures. While we have assumed that a
certain level of transaction-related expenses will be incurred, factors beyond
our control could affect the total amount or the timing of these expenses. Many
of the expenses that will be incurred, by their nature, are difficult to
estimate accurately. These expenses could exceed the costs historically borne by
us and adversely affect our financial condition and results of operations. There
are a number of additional risks and uncertainties, including those due to the
impact of the COVID-19 pandemic, that could cause our financial and operating
results and capital requirements to differ materially from our projections,
which could cause future liquidity to differ materially from our assessment.
The indentures and credit facilities governing our long-term debt to affiliates
and third parties, excluding financing leases, contain covenants that, among
other things, limit the ability of the Issuers and the Guarantor Subsidiaries to
incur more debt, pay dividends and make distributions on our common stock, make
certain investments, repurchase stock, create liens or other encumbrances, enter
into transactions with affiliates, enter into transactions that restrict
dividends or distributions from subsidiaries, and merge, consolidate or sell, or
otherwise dispose of, substantially all of their assets. Certain provisions of
each of the credit facilities, indentures and supplemental indentures relating
to the long-term debt to affiliates and third parties restrict the ability of
the Issuers to loan funds or make payments to the Parent. However, the Issuers
are allowed to make certain permitted payments to the Parent under the terms of
each of the credit facilities, indentures and supplemental indentures relating
to the long-term debt to affiliates and third parties. We were in compliance
with all restrictive debt covenants as of June 30, 2020 .
The Merger
In connection with the closing of the Merger, onApril 1, 2020 , we assumed Sprint's liabilities, which include accounts payable and accrued liabilities, short-term debt, operating and financing lease liabilities, net pension plan liabilities, deferred tax liabilities and long-term debt with an aggregate fair value of$31.8 billion .
For more information regarding the Merger, see Note 2 - Business Combinations of the Notes to the Condensed Consolidated Financial Statements.
Financing Lease Facilities
We have entered into uncommitted financing lease facilities with certain partners that provide us with the ability to enter into financing leases for network equipment and services. As ofJune 30, 2020 , we have committed to$4.6 billion of financing leases under these financing lease facilities, of which$473 million and$646 million was executed during the three and six months endedJune 30, 2020 , respectively. We expect to enter into up to an additional$554 million in financing lease commitments during 2020.
Capital Expenditures
Our liquidity requirements have been driven primarily by capital expenditures for spectrum licenses and the construction, expansion and upgrading of our network infrastructure. Property and equipment capital expenditures primarily relate to the integration of our acquired Sprint 2.5 GHz spectrum licenses and existing 600 MHz spectrum licenses as we build out our nationwide 5G network. SinceApril 1, 2020 , we have incurred, and expect to incur significant capital expenditures in the near term related to the integration of the T-Mobile and Sprint businesses in order to fully realize the anticipated synergies associated with the Merger, including the reduction in redundant cell sites from combining networks, back office and information technology efficiencies and the evolution of our distribution and retail footprint including the combining of the Sprint and T-Mobile brand operations.
For more information regarding our property and equipment and spectrum licenses,
see Note 5 - Property and Equipment and Note 6 -
Spectrum License Transactions and Other I nt angible
A ssets of the Notes to the Condensed Consolidated Financial Statements, respectively.
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Spectrum Auction
In March 2020 , the FCC announced that we were the winning bidder of 2,384
licenses in Auction 103 (37/39 GHz and 47 GHz spectrum bands) for an aggregate
price of $873 million , net of an incentive payment of $59 million . At the
inception of Auction 103 in October 2019 , we deposited $82 million with the FCC .
Upon conclusion of Auction 103 in March 2020 , we made a down payment of $93
million for the purchase price of the licenses won in the auction. On April 8,
2020 , we paid the FCC the remaining $698 million of the purchase price for the
licenses won in the auction. Prior to the Merger, the FCC announced that Sprint
was the winning bidder of 127 licenses in Auction 103 (37/39 GHz and 47 GHz
spectrum bands). All payments related to the licenses won were made by Sprint
prior the Merger.
For more information regarding our spectrum licenses, see Note 6 -
Debt Redemptions Prior toJune 30, 2020 , we delivered a notice of redemption on$1.0 billion aggregate principal amount of our 6.500% Senior Notes due 2024. The notes were redeemed onJuly 4, 2020 at a redemption price equal to 102.170% of the principal amount of the notes (plus accrued and unpaid interest thereon), payable onJuly 6, 2020 . The redemption premium was approximately$22 million and the write off of issuance costs and consent fees was approximately$12 million . The outstanding principal amount was reclassified from Long-term debt to Short-term debt in our Condensed Consolidated Balance Sheets as ofJune 30, 2020 . Prior toJune 30, 2020 , we also delivered a notice of redemption on$1.25 billion aggregate principal amount of our 5.125% Senior Notes to affiliates due 2021. The notes were redeemed onJuly 4, 2020 at a redemption price equal to 100% of the principal amount of the notes (plus accrued and unpaid interest thereon), payable onJuly 6, 2020 . The write off of discounts were approximately$12 million . The outstanding principal amount was reclassified from Long-term debt to Short-term debt in our Condensed Consolidated Balance Sheets as ofJune 30, 2020 .
In
For more information regarding debt redemptions, see Note 8 - Debt of the Notes to the Condensed Consolidated Financial Statements.
Dividends
We have never paid or declared any cash dividends on our common stock, and we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Our credit facilities and the indentures and supplemental indentures governing our long-term debt to affiliates and third parties, excluding financing leases, contain covenants that, among other things, restrict our ability to declare or pay dividends on our common stock.
Contractual Obligations
In connection with the regulatory approvals of the Transactions, we made
commitments to various state and federal agencies, including the DOJ and
For more information regarding these commitments, see Note 1 7 - Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements.
Between
For more information regarding our interest rate lock derivatives, see Note 7
- Fair Value Measurements of the Notes to the Condensed Consolidated Financial
Statements.
The contractual commitments and purchase obligations of Sprint were assumed upon
the completion of the Merger. These contractual commitments and purchase
obligations are primarily commitments to purchase wireless devices, network
services, equipment, software, marketing sponsorship agreements and other items
in the ordinary course of business.
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For more information regarding our contractual commitments and purchase
obligations, see Note 1 7 - Commitments and Contingencies of the
Notes to the Condensed Consolidated Financial Statements.
The following table summarizes our contractual obligations and borrowings as of
June 30, 2020 and the timing and effect that such commitments are expected to
have on our liquidity and capital requirements in future periods:
Less Than 1 More Than 5
(in millions) Year 1 - 3 Years 4 - 5 Years Years Total
Long-term debt (1) $ 5,076 $ 11,102 $ 16,184 $ 38,286 $ 70,648
Interest on long-term debt 3,559 6,187 4,653 9,632 24,031
Financing lease liabilities,
including imputed interest 1,094 1,250 155 85 2,584
Tower obligations (2) 391 763 588 768 2,510
Operating lease liabilities,
including imputed interest 4,771 7,467 5,031 5,021 22,290
Purchase obligations (3) 4,248 3,483 1,629 1,323 10,683
Spectrum leases and service
credits (4) 277 $ 595 $ 588 $ 5,160 $ 6,620
Total contractual obligations $ 19,416 $ 30,847 $ 28,828 $ 60,275 $ 139,366
(1)Represents principal amounts of long-term debt to affiliates and third
parties at maturity, excluding unamortized premiums, discounts, debt issuance
costs, consent fees, and financing lease obligations. See Note 8 - Debt of
the Notes to the Condensed Consolidated Financial Statements for further
information.
(2)Future minimum payments, including principal and interest payments, related
to the tower obligations. See Note 9 - Tower Obligations of the Notes to the
Condensed Consolidated Financial Statements for further information.
(3)The minimum commitment for certain obligations is based on termination
penalties that could be paid to exit the contracts. Termination penalties are
included in the above table as payments due as of the earliest we could exit the
contract, typically in less than one year. For certain contracts that include
fixed volume purchase commitments and fixed prices for various products, the
purchase obligations are calculated using fixed volumes and contractually fixed
prices for the products that are expected to be purchased. This table does not
include open purchase orders as of June 30, 2020 under normal business purposes.
See Note 17 - Commitments and Contingencies of the Notes to the Condensed
Consolidated Financial Statements for further information.
(4)Spectrum lease agreements are typically for five to ten years with two
automatic renewal provisions, bringing the total term of the agreements up to 30
years.
Certain commitments and obligations are included in the table based on the year
of required payment or an estimate of the year of payment. Other long-term
liabilities have been omitted from the table above due to the uncertainty of the
timing of payments, combined with the absence of historical trending to be used
as a predictor of such payments. See Note 1 9 - Additional Financial
Information of the Notes to the Condensed Consolidated Financial Statements for further information.
The purchase obligations reflected in the table above are primarily commitments to purchase spectrum licenses, wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. Where we are committed to make a minimum payment to the supplier regardless of whether we take delivery, we have included only that minimum payment as a purchase obligation. The acquisition of spectrum licenses is subject to regulatory approval and other customary closing conditions.
Related Party Transactions
SoftBank
OnJune 22, 2020 , we entered into a Master Framework Agreement and related transactions with SoftBank to facilitate the SoftBank Monetization as described in Note 14 - SoftBank Equity Transaction of the Notes to the Condensed Consolidated Financial Statements. OnAugust 3, 2020 , upon completion of the SoftBank Monetization, DT and SoftBank held, directly or indirectly, approximately 43.4% and 8.6%, respectively, of our outstanding common stock, with the remaining approximately 48.0% of our outstanding common stock held by other stockholders. As a result of the Proxy Agreements, DT has voting control as ofAugust 3, 2020 over approximately 52.4% of the outstanding T-Mobile common stock. In addition, as provided for in the Master Framework Agreement, DT also holds certain call options over approximately 101.5 million shares of our common stock held by SBGC.
On
For more information regarding our related party transactions with SoftBank, see
Note 2 - Business Combination and Note 14 -
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SoftBank Eq uity Trans action of the Notes to the Condensed Consolidated Financial Statements.
OnJune 22, 2020 , we entered into a Master Framework Agreement which provided for the purchase of shares of our common stock byMarcelo Claure , a member of our board of directors, from us at a specified price.
For more information regarding our related party transactions with
Brightstar
We have arrangements with Brightstar, a subsidiary of SoftBank, whereby Brightstar provides supply chain and inventory management services to us in our indirect channels.
For more information regarding our related party transactions with Brightstar, see Note 1 - Summary of Significant Accounting Policies and Note 19 - Additional Financial Information of the Notes to the Condensed Consolidated Financial Statements.
We have related party transactions associated with DT or its affiliates in the ordinary course of business, including intercompany servicing and licensing.
For more information regarding these transactions, see Note 1 9 - Additional Financial Information of the Notes to the Condensed Consolidated Financial Statements.
OnApril 1, 2020 , in connection with the closing of the Merger, we repaid our$4.0 billion Incremental Term Loan Facility with DT and repurchased from DT$4.0 billion of indebtedness to affiliates, consisting of$2.0 billion of 5.300% Senior Notes due 2021 and$2.0 billion of 6.000% Senior Notes due 2024 as well as made an additional payment for requisite consents to DT of$13 million .
On
For more information regarding our related party debt transactions, see Note 8
- Debt of the Notes to the Condensed Consolidated Financial Statements.
Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange
Act of 1934
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012
added Section 13(r) to the Exchange Act of 1934, as amended ("Exchange
Act"). Section 13(r) requires an issuer to disclose in its annual or quarterly
reports, as applicable, whether it or any of its affiliates knowingly engaged in
certain activities, transactions or dealings relating to Iran or with designated
natural persons or entities involved in terrorism or the proliferation of
weapons of mass destruction. Disclosure is required even where the activities,
transactions or dealings are conducted outside the U.S. by non-U.S. affiliates
in compliance with applicable law, and whether or not the activities are
sanctionable under U.S. law.
As of the date of this report, we are not aware of any activity, transaction or
dealing by us or any of our affiliates for the three months ended June 30, 2020 ,
that requires disclosure in this report under Section 13(r) of the Exchange Act,
except as set forth below with respect to affiliates that we do not control and
that are our affiliates solely due to their common control with either DT or
SoftBank. We have relied upon DT and SoftBank for information regarding their
respective activities, transactions and dealings.
DT, through certain of its non-U.S. subsidiaries, is party to roaming and
interconnect agreements with the following mobile and fixed line
telecommunication providers in Iran , some of which are or may be
government-controlled entities: Irancell Telecommunications Services Company ,
Telecommunication Kish Company , Mobile Telecommunication Company of Iran , and
Telecommunication Infrastructure Company of Iran . In addition, during the three
months ended June 30, 2020 , DT, through certain of its non-U.S. subsidiaries,
provided basic telecommunications services to three customers in Germany
identified on the Specially Designated Nationals and Blocked Persons List
maintained by the U.S. Department of Treasury's Office of Foreign Assets
Control : Bank Melli , Bank Sepah , and Europäisch-Iranische Handelsbank. These
services have been terminated or are in the process of being terminated. For the
three months ended June 30, 2020 , gross revenues of all DT affiliates
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generated by roaming and interconnection traffic and telecommunications services
with the Iranian parties identified herein were less than $0.1 million , and the
estimated net profits were less than $0.1 million .
In addition, DT, through certain of its non-U.S. subsidiaries that operate a
fixed-line network in their respective European home countries (in particular
Germany ), provides telecommunications services in the ordinary course of
business to the Embassy of Iran in those European countries. Gross revenues and
net profits recorded from these activities for the three months ended June 30,
2020 were less than $0.1 million . We understand that DT intends to continue
these activities.
Separately, SoftBank, through one of its non-U.S. subsidiaries, provides roaming
services in Iran through Irancell Telecommunications Services Company . During
the three months ended June 30, 2020 , SoftBank had no gross revenues from such
services and no net profit was generated. We understand that the SoftBank
subsidiary intends to continue such services. This subsidiary also provides
telecommunications services in the ordinary course of business to accounts
affiliated with the Embassy of Iran in Japan . During the three months ended June
30, 2020 , SoftBank estimates that gross revenues and net profit generated by
such services were both under $3,500 . We understand that the SoftBank subsidiary
is obligated under contract and intends to continue such services.
In addition, SoftBank, through one of its non-U.S. indirect subsidiaries,
provides office supplies to the Embassy of Iran in Japan . SoftBank estimates
that gross revenue and net profit generated by such services during the three
months ended June 30, 2020 were under $1,000 and $200 , respectively. We
understand that the SoftBank subsidiary intends to continue such activities.
Off-Balance Sheet Arrangements
We have arrangements, as amended from time to time, to sell certain EIP accounts receivable and service accounts receivable on a revolving basis as a source of liquidity. As ofJune 30, 2020 , we derecognized net receivables of$2.6 billion upon sale through these arrangements. For more information regarding these off-balance sheet arrangements, see Note 4 - Sales of Certain Receivables of the Notes to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Preparation of our condensed consolidated financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Except as described below and in Note 1 - Summary of Significant Accounting P oli cies , there have been no material changes to the critical accounting policies and estimates as previously disclosed in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , and which are hereby incorporated by reference herein other than the updated risk factors below.
Evaluation of
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
We have identified two reporting units for which discrete financial information is available and results are regularly reviewed by management: wireless and Layer3. The Layer3 reporting unit consists of the assets and liabilities ofLayer3 TV, Inc. , which was acquired inJanuary 2018 . The wireless reporting unit consists of the remaining assets and liabilities ofT-Mobile US, Inc. , excludingLayer3 TV, Inc. We separately evaluate these reporting units for impairment. When assessing goodwill for impairment we may elect to first perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. If we do not perform a qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative test. We recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. We employed a qualitative approach to assess the wireless reporting unit. The fair value of the wireless reporting unit is determined using a market approach, which is based on market capitalization. We recognize market capitalization is subject to volatility and will monitor changes in market capitalization to determine whether declines, if any, necessitate an interim impairment review. In the event market capitalization does decline below its book value, we will consider the length, severity and reasons for the decline when assessing whether potential impairment exists, including considering whether a control premium should be 84 -------------------------------------------------------------------------------- Table of Contents added to the market capitalization. We believe short-term fluctuations in share price may not necessarily reflect the underlying aggregate fair value. No events or change in circumstances have occurred in the current quarter that indicate the fair value of the Wireless reporting unit may be below its carrying amount atJune 30, 2020 . Concurrent with the acquisition, management also revisited the plans for our TVisionTM Home service offering and the integration of this offering with the Sprint customer base. Additionally, we expect our significantly enhanced spectrum position following the Merger will allow us to accelerate our in-home broadband internet service strategy. The enhanced in-home broadband opportunity, along with the acquisition of certain content rights, has created a strategic shift in our TVisionTM Home service offering allowing us the ability to develop a video product which will be complementary to the in-home broadband offering. Management has updated its forecast, which includes a reimagining of the stand-alone product offering to potential customers that is expected to launch by the end of 2020. Based on these events and changes in circumstances, we determined that recoverability of the carrying amount of goodwill for the Layer3 reporting unit should be evaluated for impairment. We employed a quantitative approach to assess the Layer3 reporting unit. The fair value of the Layer3 reporting unit is determined using an income approach, which is based on estimated discounted future cash flows.
We made estimates and assumptions regarding future cash flows, discount rates and long-term growth rates to determine the reporting unit's estimated fair value. The key assumptions used were as follows:
•expected cash flows underlying the Layer3 business plan for the periods 2020 through 2025, which took into account assumptions for a delayed launch, estimates of subscribers for TVision services, average revenue and content cost per subscriber, operating costs and capital expenditures; •Cash flows beyond 2025 were projected to grow at a long-term growth rate estimated at 3%. Estimating a long-term growth rate requires significant judgment about future business strategies as well as micro- and macro-economic environments that are inherently uncertain; and •We used a discount rate of 30% to risk adjust the cash flow projections in determining the estimated fair value. The carrying value of the Layer3 reporting unit exceeded its estimated fair value as ofJune 30, 2020 . Accordingly, during the three and six months endedJune 30, 2020 we recorded an impairment loss of$218 million , which is included in "Impairment expense" in our consolidated statements of comprehensive income. For more information regarding our impairment assessments, see Note 1 - Summary of Significant Accounting Policies and Note 6 - Goodwill, Spectrum License Transactions and Other Intangible Assets of the Notes to the Condensed Consolidated Financial Statements.
Accounting Pronouncements Not Yet Adopted
For information regarding recently issued accounting standards, see Note 1 - Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements.
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