Edgar Filing: T-Mobile US, Inc.

TMUS 03/31/2014 FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-33409

T-MOBILE US, INC.

(Exact name of registrant as specified in its charter)



DELAWARE		20-0836269
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12920 SE 38th Street, Bellevue, Washington		98006-1350
(Address of principal executive offices)		(Zip Code)

(425) 378-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Shares Outstanding as of April 28, 2014
Common Stock, $0.00001 par value per share		802,928,895

T-Mobile US, Inc.

Form 10-Q

For the Quarter Ended March 31, 2014

Table of Contents



PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
	SIGNATURE	32

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

T-Mobile US, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)



(in millions, except share and per share amounts)	March 31, 2014			December 31, 2013
Assets
Current assets
Cash and cash equivalents	$	5,471		$	5,891
Accounts receivable, net of deferred interest and allowances of $420 and $381	3,560			3,619
Accounts receivable from affiliates	60			41
Inventory	676			586
Current portion of deferred tax assets, net	923			839
Assets held-for-sale	1,362			614
Other current assets	905			638
Total current assets	12,957			12,228
Property and equipment, net of accumulated depreciation of $20,282 and $19,649	15,427			15,349
Goodwill	1,683			1,683
Spectrum licenses	17,383			18,122
Other intangible assets, net of accumulated amortization of $560 and $476	1,123			1,204
Other assets	1,596			1,367
Total assets	$	50,169		$	49,953
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities	$	4,792		$	4,567
Current payables and short-term debt to affiliates	309			199
Short-term debt	151			244
Deferred revenue	459			445
Other current liabilities	399			353
Total current liabilities	6,110			5,808
Long-term debt to affiliates	5,600			5,600
Long-term debt	14,331			14,345
Long-term financial obligation	2,504			2,496
Deferred tax liabilities	4,614			4,645
Deferred rents	2,183			2,113
Other long-term liabilities	671			701
Total long-term liabilities	29,903			29,900
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $0.00001 per share, 100,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 804,187,802 and 803,262,309 shares issued, 802,805,297 and 801,879,804 shares outstanding	—			—
Additional paid-in capital	37,395			37,330
Treasury stock, at cost, 1,382,505 and 1,382,505 shares issued	—			—
Accumulated other comprehensive income	—			3
Accumulated deficit	(23,239		)	(23,088		)
Total stockholders' equity	14,156			14,245
Total liabilities and stockholders' equity	$	50,169		$	49,953

The accompanying notes are an integral part of these condensed consolidated financial statements.

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T-Mobile US, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three Months Ended March 31,
(in millions, except shares and per share amounts)	2014			2013
Revenues
Branded postpaid revenues	$	3,447		$	3,263
Branded prepaid revenues	1,648			503
Wholesale revenues	174			149
Roaming and other service revenues	68			90
Total service revenues	5,337			4,005
Equipment sales	1,448			606
Other revenues	90			66
Total revenues	6,875			4,677
Operating expenses
Cost of services, exclusive of depreciation and amortization shown separately below	1,464			1,109
Cost of equipment sales	2,286			886
Selling, general and administrative	2,096			1,506
Depreciation and amortization	1,055			755
MetroPCS transaction and integration costs	12			13
Restructuring costs	—			31
Other, net	(10		)	(2		)
Total operating expenses	6,903			4,298
Operating income (loss)	(28		)	379
Other income (expense)
Interest expense to affiliates	(18		)	(178		)
Interest expense	(276		)	(51		)
Interest income	75			35
Other expense, net	(6		)	(6		)
Total other expense, net	(225		)	(200		)
Income (loss) before income taxes	(253		)	179
Income tax expense (benefit)	(102		)	72
Net income (loss)	$	(151	)	$	107
Other comprehensive income (loss), net of tax
Net loss on cross currency interest rate swaps, net of tax effect of $0 and ($26)	—			(43		)
Net gain on foreign currency translation, net of tax effect of $0 and $25	—			42
Unrealized loss on available-for-sale securities, net of tax effect of ($1) and $0	(3		)	—
Other comprehensive loss, net of tax	(3		)	(1		)
Total comprehensive income (loss)	$	(154	)	$	106
Earnings (loss) per share
Basic	$	(0.19	)	$	0.20
Diluted	(0.19		)	0.20
Weighted average shares outstanding
Basic	802,520,723			535,286,077
Diluted	802,520,723			535,286,077

The accompanying notes are an integral part of these condensed consolidated financial statements.

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T-Mobile US, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended March 31,
(in millions)	2014			2013
Operating activities
Net cash provided by operating activities	$	759		$	909

Investing activities
Purchases of property and equipment	(947		)	(1,076		)
Purchases of intangible assets	—			(49		)
Short term affiliate loan receivable, net	—			275
Investments in unconsolidated affiliates, net	(11		)	—
Other, net	(7		)	(4		)
Net cash used in investing activities	(965		)	(854		)

Financing activities
Repayments of short-term debt for purchases of property and equipment	(226		)	—
Proceeds from exercise of stock options	14			—
Other, net	(2		)	—
Net cash used in financing activities	(214		)	—

Change in cash and cash equivalents	(420		)	55
Cash and cash equivalents
Beginning of period	5,891			394
End of period	$	5,471		$	449

The accompanying notes are an integral part of these condensed consolidated financial statements.

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T-Mobile US, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited condensed consolidated financial statements of T-Mobile US, Inc. (“T-Mobile” or the “Company”) include all adjustments of a normal recurring nature necessary for the fair presentation of the results for the interim periods presented. The results for the interim periods are not necessarily indicative of those for the full year. The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

The condensed consolidated financial statements include the balances and results of operations of T-Mobile and its consolidated subsidiaries. T-Mobile consolidates all majority-owned subsidiaries over which it exercises control, as well as variable interest entities (“VIE”) where it is deemed to be the primary beneficiary and VIEs which cannot be deconsolidated. Intercompany transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2 – Acquisitions and Other Transactions

Spectrum License Transactions

In January 2014, T-Mobile entered into agreements with Verizon Communications Inc. (“Verizon”) for the acquisition of 700 MHz A-Block spectrum licenses for approximately $2.4 billion in cash and the transfer of certain Advanced Wireless Services spectrum (“AWS spectrum”) and Personal Communications Service spectrum (“PCS spectrum”). The acquired spectrum covers more than 150 million people in 23 major metropolitan markets, comprising approximately 50 percent of the U.S. population or 70 percent of T-Mobile’s existing customer base. A non-cash gain is expected to be recognized upon closing of the transaction. See Note 8 – Subsequent Events for further information regarding the closing of the transaction.

In November 2013, the Company entered into an agreement with Verizon to exchange certain AWS spectrum and PCS spectrum. A non-cash gain is expected to be recognized upon close of the transaction. See Note 8 – Subsequent Events for further information regarding the closing of the transaction.

Spectrum licenses to be transferred under various agreements are included in assets held for sale at their carrying value of $1.4 billion and $614 million as of March 31, 2014 and December 31, 2013, respectively.

Factoring Arrangement

Transaction Overview

In February 2014, T-Mobile entered into a two-year factoring arrangement to sell certain service accounts receivable on a revolving basis, subject to a maximum funding limit of $500 million. Sales of receivables occur daily and are settled on a monthly basis. The receivables consist of service charges currently due from customers and are short-term in nature. In connection with the factoring arrangement, the Company formed a wholly owned subsidiary and bankruptcy remote special purpose entity (“Factoring SPE”). Pursuant to the factoring arrangement, certain subsidiaries of T-Mobile will transfer selected receivables to the Factoring SPE. The Factoring SPE will then sell the receivables to an unaffiliated entity (“Factoring VIE”), which was established to facilitate the sale of ownership interest in the receivables to certain third parties.

Variable Interest Entity

The Company determined the Factoring VIE is a VIE as it lacks sufficient equity to finance its activities. The Company has a variable interest in the Factoring VIE, but is not the primary beneficiary as it lacks the power to direct the activities that most significantly impact the Factoring VIE’s economic performance. As the Company has determined it is not the primary beneficiary and does not hold any equity interest, the results of the Factoring VIE are not consolidated into the Company’s condensed consolidated financial statements.

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Sale of Receivables

The sales of receivables through the factoring arrangement are treated as sales of financial assets. Upon sale, T-Mobile derecognizes the receivables, as well as the related allowances, and recognizes the net proceeds in cash provided by operating activities. Any resulting gains or losses from the sale of receivables, as well as factoring fees, are recognized in selling, general and administrative expenses.

As of March 31, 2014, T-Mobile derecognized net receivables of $546 million upon sale through the factoring arrangement. For the three months ended March 31, 2014, T-Mobile received net cash proceeds of $434 million. The proceeds were net of a receivable for the remainder of the purchase price (“deferred purchase price”), which is received from collections on the service receivables. The deferred purchase price is classified as a trading security and carried at fair value with unrealized gains and losses from changes in fair value included in selling, general and administrative expense. The fair value of the deferred purchase price is determined based on a discounted cash flow model which uses unobservable inputs (Level 3 inputs), including customer default rates. Due to the short-term nature of the underlying financial assets, the carrying value approximated fair value. Other current assets related to the factoring arrangement, which were held by the Factoring SPE and primarily consisted of the deferred purchase price, were $99 million as of March 31, 2014.

For the three months ended March 31, 2014, T-Mobile recognized a net expense, which included losses from the sale of receivables, factoring fees and unrealized losses related to the deferred purchase price, of $13 million included in selling, general and administrative expenses.

Continuing Involvement

T-Mobile has continuing involvement with the sold receivables as it services the receivables and is required to repurchase certain receivables, including aged receivables and receivables where write off is imminent, pursuant to the factoring arrangement. T-Mobile will continue to service the customer and their related receivables, including facilitating customer payment collection, in exchange for a monthly servicing fee. As the receivables are sold on a revolving basis, the customer payment collections are reinvested in new receivable sales. While servicing the receivables, the same policies and procedures are applied to the sold receivables that apply to owned receivables, and T-Mobile continues to maintain normal relationships with its customers.

In addition, T-Mobile has continuing involvement related to the sold receivables as it may be responsible for absorbing additional credit losses pursuant to the agreement. The Company’s maximum exposure to loss related to the involvement with the Factoring VIE was $279 million as of March 31, 2014. The maximum exposure to loss, which is required disclosure under GAAP, represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby the Company would not receive the portion of the contractual proceeds withheld by the Factoring VIE and would also be required to repurchase the maximum amount of receivables pursuant to the agreement without consideration for any recovery. As T-Mobile believes the probability of these circumstances occurring is very remote, the maximum exposure to loss is not an indication of the Company’s expected loss.

Transaction with MetroPCS

On April 30, 2013, the business combination involving T-Mobile USA, Inc. (“T-Mobile USA”) and MetroPCS Communications, Inc. (“MetroPCS”) was completed. In connection with the business combination, MetroPCS acquired all of the outstanding capital stock of T-Mobile USA beneficially owned by Deutsche Telekom AG (“Deutsche Telekom”) in consideration for the issuance of shares of common stock representing a majority of the fully diluted shares of the combined company. MetroPCS was subsequently renamed T-Mobile US, Inc. and is the consolidated parent of the Company’s subsidiaries, including T-Mobile USA. The business combination was accounted for as a reverse acquisition with T-Mobile USA as the accounting acquirer. Accordingly, T-Mobile USA’s historical financial statements became the historical financial statements of the combined company. The common shares outstanding and earnings (loss) per share presented for periods up to April 30, 2013 reflect the common shares issued to T-Mobile Global Holding GmbH, an indirect wholly-owned subsidiary of Deutsche Telekom, in connection with the reverse acquisition. Additionally, the acquired assets and liabilities of MetroPCS were included in the condensed consolidated balance sheets as of April 30, 2013 and the results of its operations and cash flows are included in the condensed consolidated statements of comprehensive income (loss) and cash flows for periods beginning after May 1, 2013.

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Note 3 – Equipment Installment Plan Receivables

T-Mobile offers certain retail customers the option to pay for their devices and other purchases in installments over a period of up to 24 months using an Equipment Installment Plan (“EIP”). The carrying values of EIP receivables approximate fair value as the receivables are recorded at their present value, net of the deferred interest and additional allowance for credit losses. At the time of sale, the Company imputes interest, inclusive of credit risk, on the EIP receivables and records the deferred interest as a reduction to equipment sales and as an allowance against the related accounts receivable. Interest income is recognized over the financed installment term.

The following table summarizes the EIP receivables:



(in millions)	March 31, 2014			December 31, 2013
EIP receivables, gross	$	3,487		$	2,882
Deferred interest	(304		)	(276		)
EIP receivables, net of deferred interest	3,183			2,606
Allowance for credit losses	(97		)	(60		)
EIP receivables, net	$	3,086		$	2,546

Classified on the balance sheet as:
Accounts receivable, net	$	1,807		$	1,471
Other assets	1,279			1,075
EIP receivables, net	$	3,086		$	2,546

Based upon customer credit profiles, T-Mobile classifies EIP receivables into the credit categories of “Prime” and “Subprime”. T-Mobile uses proprietary scoring systems that measure the credit quality of the EIP receivables using several factors, such as credit bureau information, consumer credit risk scores and service plan characteristics. Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. Customers within the Subprime category may be required to pay a significant down payment on their equipment purchases. In addition, certain customers within the Subprime category are required to pay an advance deposit.

The balance and aging of the EIP receivables on a gross basis by credit category were as follows:



	March 31, 2014						December 31, 2013
(in millions)	Prime		Subprime		Total		Prime		Subprime		Total
Unbilled	$	1,765	$	1,562	$	3,327	$	1,482	$	1,270	$	2,752
Billed - Current	57		56		113		45		45		90
Billed - Past Due	18		29		47		15		25		40
EIP receivables, gross	$	1,840	$	1,647	$	3,487	$	1,542	$	1,340	$	2,882

EIP receivables for which invoices have not yet been generated for the customer are considered Unbilled. EIP receivables for which invoices have been generated but which are not past the contractual due date are considered Billed - Current. EIP receivables for which invoices have been generated and the payment is past the contractual due date are considered Billed - Past Due.

T-Mobile maintains an additional allowance for credit losses exceeding the credit risk recorded as deferred interest. The allowance is based on a number of factors, including collection experience, aging of the accounts receivable portfolio, credit quality of the customer base, and other qualitative factors such as macro-economic conditions. T-Mobile writes off account balances if collection efforts were unsuccessful and future collection is unlikely based on customer credit ratings and the length of time from the original billing date. Equipment sales that are not reasonably assured to be collectible are recorded on a cash basis as payments are received.

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Activity in the deferred interest and allowance for credit losses for the EIP receivables was as follows:



(in millions)	March 31, 2014
Deferred interest and allowance for credit losses, beginning of period	$	336
Bad debt expense	68
Write-offs, net of recoveries	(31		)
Change in deferred interest on short-term and long-term EIP receivables	28
Deferred interest and allowance for credit losses, end of period	$	401

Note 4 – Fair Value Measurements and Derivative Instruments

Derivative Financial Instruments

Embedded Derivatives

In connection with the business combination with MetroPCS, T-Mobile issued senior reset notes to Deutsche Telekom. The interest rates are adjusted at the reset dates to rates defined in the applicable supplemental indentures to manage interest rate risk related to the senior reset notes. The Company determined certain components of the reset feature are required to be bifurcated from the senior reset notes and separately accounted for as embedded derivative instruments not designated as hedges. T-Mobile held five embedded derivatives as of March 31, 2014 and December 31, 2013, respectively.

The embedded derivatives are carried at fair value with unrealized gains and losses from changes in fair value included in interest expense to affiliates. The fair value of the embedded derivatives was determined using a lattice-based valuation model by determining the fair value of the senior reset notes with and without the embedded derivatives included. The fair value of the senior reset notes with the embedded derivatives utilizes the contractual term of each senior reset note, reset rates calculated based on the spread between specified yield curves and the yield curve on T-Mobile long-term debt adjusted pursuant to the applicable supplemental indentures, and interest rate volatility. Interest rate volatility is a significant unobservable input (Level 3) as it is derived based on weighted risk free rate volatility and credit spread volatility. Significant increases or decreases in the weighting of risk free volatility and credit spread volatility, in isolation, would result in a higher or lower fair value of the embedded derivatives. The embedded derivatives were classified as Level 3 in the fair value hierarchy.

Interest Rate Swaps

Prior to the closing of the business combination with MetroPCS, T-Mobile managed interest rate risk related to its long-term debt to affiliates by entering into interest rate swap agreements. T-Mobile held seven interest rate swaps with a total notional amount of $3.6 billion as of December 31, 2012. These interest rate swap agreements were not designated as hedging instruments.

In April 2013, prior to the closing of the business combination with MetroPCS, Deutsche Telekom recapitalized T-Mobile by retiring the existing T-Mobile long-term debt to affiliates and all related derivative instruments, which included the interest rate swaps. The related balance in accumulated other comprehensive income (“AOCI”) was reclassified into net income (loss). As of March 31, 2014 and December 31, 2013, there were no outstanding interest rate swaps.

Cross Currency Interest Rate Swaps

Prior to the closing of the business combination with MetroPCS, T-Mobile managed foreign currency risk along with interest rate risk through cross currency interest rate swap agreements related to its intercompany Euro denominated long-term debt to affiliates, which were entered into upon assumption of the notes to fix the future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses over the terms of the long-term debt to affiliates extending to 2025. T-Mobile had three cross currency interest rate swaps with a total notional amount of $2.3 billion as of December 31, 2012. These cross currency interest rate swaps were designated as cash flow hedges and met the criteria for hedge accounting. The hedges were evaluated as highly effective prior to the closing of the business combination with MetroPCS, thus no gains (losses) were recognized due to hedge ineffectiveness.

In April 2013, prior to the closing of the business combination with MetroPCS, Deutsche Telekom recapitalized T-Mobile by retiring the existing T-Mobile long-term debt to affiliates and all related derivative instruments, which included cross currency interest rate swaps. The related balance in AOCI was reclassified into net income (loss). As of March 31, 2014 and December 31, 2013, there were no outstanding cross currency interest rate swaps.

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Fair values of derivative instruments measured on a recurring basis by level were as follows:



	Balance Sheet Location	March 31, 2014
(in millions)	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Embedded derivatives	Other assets	$	—	$	—	$	48	$	48



	Balance Sheet Location	December 31, 2013
(in millions)	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Embedded derivatives	Other long-term liabilities	$	—	$	—	$	13	$	13

The following table summarizes the activity related to derivatives instruments:



	Three Months Ended March 31,
(in millions)	2014		2013
Loss recognized in other comprehensive loss:
Cross currency interest rate swaps	$	—	$	(74	)
Gain recognized in interest expense to affiliates:
Embedded derivatives	61		—
Interest rate swaps	—		2
Cross currency interest rate swaps	—		5

Long-term Debt

The fair value of the Company’s long-term debt to affiliates was determined based on a discounted cash flow approach which considers the future cash flows discounted at current rates. The approach includes an estimate for the stand-alone credit risk of T-Mobile. The Company’s long-term debt to affiliates were classified as Level 2 in the fair value hierarchy. The fair value of the Company’s long-term debt to third parties was determined based on quoted market prices in active markets, and therefore are classified as Level 1 in the fair value hierarchy.

The carrying amounts and fair values of the Company’s long-term debt were as follows:



	March 31, 2014				December 31, 2013
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt to affiliates	$	5,600	$	5,991	$	5,600	$	5,866
Long-term debt to third parties principal, excluding capital leases	13,600		14,516		13,600		14,251

Although the Company has determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop fair value estimates for the long-term debt. The fair value estimates are based on information available as of March 31, 2014 and December 31, 2013. As such, the Company’s estimates are not necessarily indicative of the amount that the Company could realize in a current market exchange.

Note 5 – Commitments and Contingencies

Commitments

Purchase Commitments

In January 2014, T-Mobile entered into agreements with Verizon for the acquisition of 700 MHz A-Block spectrum licenses for cash and the transfer of certain AWS spectrum and PCS spectrum. As a result of the transaction, T-Mobile assumed additional future minimum payments for non-cancelable purchase commitments of approximately $2.4 billion. See Note 2 – Acquisitions and Other Transactions for further information regarding the spectrum license transaction.

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Guarantee Liabilities

T-Mobile offers a handset upgrade program that provides eligible customers a specified-price trade-in right to upgrade their handset. Participating customers must finance their handset using an EIP. Upon upgrading, the customer will receive a credit in the amount of the outstanding EIP balance provided they trade in their eligible used handset in good working condition and purchase a new handset from T-Mobile.

For customers who enroll in the trade-in programs, the Company defers the portion of equipment sales revenue which represents the estimated value of the specified-price trade-in right guarantee. The guarantee liabilities are valued based on various economic and customer behavioral assumptions, including the customer's estimated remaining EIP balance at trade-in, the expected fair value of the used handset at trade-in, and probability and timing of trade-in. When the customer upgrades their handset, the difference between the trade-in credit to the customer and the fair value of the returned handset is recorded against the guarantee liabilities. Guarantee liabilities included in other current liabilities were $264 million and $191 million as of March 31, 2014 and December 31, 2013, respectively. The estimated EIP receivable balance if all enrolled handset upgrade program customers were to claim their benefit, not including any trade-in value of the required used handset, was $1.7 billion and $1.2 billion as of March 31, 2014 and December 31, 2013, respectively. This is not an indication of the Company’s expected loss exposure because it does not consider the expected fair value of the used handset, which is required to be in good working condition at trade-in, nor does it consider the probability and timing of trade-in.

Contingencies and Litigation

As of March 31, 2014, T-Mobile was a defendant in one putative stockholder derivative and class action lawsuit challenging the business combination with MetroPCS and alleging that the various defendants breached fiduciary duties, or aided and abetted in the alleged breach of fiduciary duties, to the MetroPCS stockholders by entering into the transaction - Adam Golovoy et al. v. Deutsche Telekom et al., Cause No. CC-12-06144-A (Dallas, Texas County Court at Law). (Six other cases have either been dismissed or have settled.) The complaint alleged claims for relief including, among other things, rescission to the extent the terms of the business combination have already been implemented, damages for the breaches of fiduciary duty, and the payment of plaintiffs’ attorneys’ fees and costs. The Golovoy case was settled and dismissed in April 2014.

T-Mobile and its subsidiaries are involved in various lawsuits, regulatory proceedings, and other similar matters, including class actions and intellectual property claims, that arise in the ordinary course of business. Specifically, T-Mobile faces actual and potential litigation and other legal proceedings that challenge customer billing and other business practices, and seek awards of damages, restitution, and/or penalties. For example, state Attorneys General and other government agencies have engaged in investigations and inquiries regarding third-party billing (or “cramming”), and are seeking restitution and changes in business practices by carriers and content providers. Legal proceedings are inherently unpredictable, and often present complex legal and factual issues and can include claims for large amounts of damages or other remedies. While T-Mobile currently does not expect that these proceedings, individually or in the aggregate, will have a material adverse effect on T-Mobile’s financial position, an unfavorable outcome of some or all of these proceedings could have a material adverse impact on our results of operations or cash flows for a particular period. This assessment is based on T-Mobile’s current understanding of relevant facts and circumstances. As such, T-Mobile’s view of these matters is subject to inherent uncertainties and may change in the future.

Note 6 – Additional Financial Information

Supplemental Balance Sheet Information

Cash and Cash Equivalents

T-Mobile is required to restrict cash equivalents as collateral for certain agreements. Restricted cash equivalents included in other current assets were $100 million as of March 31, 2014 and December 31, 2013 respectively.

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Accumulated Other Comprehensive Income

The following table presents the effects on net income (loss) of amounts reclassified from AOCI (in millions):



		Amount Reclassified from AOCI to Income
AOCI Component	Location	Three Months Ended March 31, 2013
Cross Currency Interest Rate Swaps	Interest expense to affiliates	$	(5	)
	Income tax effect	2
Total reclassifications	Net of tax	$	(3	)

Supplemental Statements of Comprehensive Income (Loss) Information

Earnings (Loss) Per Share

The computation of basic and diluted earnings (loss) per share was as follows:



	Three Months Ended March 31,
(in millions, except shares and per share amounts)	2014			2013
Basic and Diluted Earnings (Loss) Per Share:
Net income (loss)	$	(151	)	$	107

Weighted average shares outstanding - basic	802,520,723			535,286,077
Dilutive effect of outstanding stock options and awards	—			—
Weighted average shares outstanding - diluted	802,520,723			535,286,077

Earnings (loss) per share - basic	$	(0.19	)	$	0.20
Earnings (loss) per share - diluted	(0.19		)	0.20

Potentially dilutive securities were not included in the computation of diluted earnings (loss) per share for certain periods if to do so would have been antidilutive. As the Company incurred a net loss for the three months ended March 31, 2014, all outstanding stock options of 5,485,186 and unvested stock awards of 23,591,949 as of March 31, 2014 were excluded. Unvested performance stock units were based on the number of shares ultimately expected to vest based on T-Mobile’s business performance against the specified performance goal.

Supplemental Statements of Cash Flows Information

The following table summarizes T-Mobile’s supplemental cash flows information:



	Three Months Ended March 31,
(in millions)	2014			2013
Interest and income tax payments:
Interest payments	$	286		$	258
Income tax refunds, net	—			(4		)
Noncash investing and financing activities:
Increase (decrease) in accounts payable for purchases of property and equipment	(13		)	111
Short-term debt outstanding for financing of property and equipment purchases	133			—

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Note 7 – Guarantor Financial Information

Pursuant to the applicable indentures and supplemental indentures, the long-term debt, excluding capital leases, issued by T-Mobile USA (“Issuer”) is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of the Issuer’s wholly 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 governing the long-term debt contain covenants that, among other things, limit the ability of the Issuer 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 indentures and the supplemental indentures relating to the long-term debt restrict the ability of the Issuer to loan funds or make payments to Parent. However, the Issuer and Guarantor Subsidiaries are allowed to make certain permitted payments to the Parent under the terms of the indentures and the supplemental indentures.

In February 2014, T-Mobile entered into a factoring arrangement to sell certain service accounts receivable on a revolving basis. In connection with the factoring arrangement, the Company formed the Factoring SPE, which is included in the Non-Guarantor Subsidiaries condensed consolidating financial information. See Note 2 – Acquisitions and Other Transactions for further information regarding the factoring arrangement.

Presented below is the condensed consolidating financial information as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014, and March 31, 2013, respectively. As the business combination was treated as a “reverse acquisition” and the Issuer was treated as the accounting acquirer, the Issuer’s historical financial statements are the historical financial statements of Parent for comparative purposes. As a result the Parent column only reflects activity in the condensed consolidating financial statements presented below for periods subsequent to the consummation of the business combination on April 30, 2013. The equity method of accounting is used to account for ownership interests in subsidiaries, where applicable.

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Condensed Consolidating Balance Sheet Information

As of March 31, 2014



(in millions)	Parent		Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	2,979	$	2,232	$	63	$	197		$	—		$	5,471
Accounts receivable, net	—		—		3,427		133			—			3,560
Accounts receivable from affiliates	—		—		60		—			—			60
Inventory	—		—		676		—			—			676
Current portion of deferred tax assets, net	—		—		908		15			—			923
Assets held-for-sale	—		—		1,362		—			—			1,362
Other current assets	—		—		788		117			—			905
Total current assets	2,979		2,232		7,284		462			—			12,957
Property and equipment, net of accumulated depreciation	—		—		14,852		575			—			15,427
Goodwill	—		—		1,683		—			—			1,683
Spectrum licenses	—		—		17,383		—			—			17,383
Other intangible assets, net of accumulated amortization	—		—		1,123		—			—			1,123
Investments in subsidiaries, net	11,333		29,211		99		—			(40,643		)	—
Intercompany receivables	—		—		239		—			(239		)	—
Other assets	2		76		1,507		68			(57		)	1,596
Total assets	$	14,314	$	31,519	$	44,170	$	1,105		$	(40,939	)	$	50,169
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities	$	—	$	262	$	4,360	$	170		$	—		$	4,792
Current payables and short-term debt to affiliates	—		136		173		—			—			309
Short-term debt	—		133		18		—			—			151
Deferred revenue	—		—		459		—			—			459
Other current liabilities	—		—		399		—			—			399
Total current liabilities	—		531		5,409		170			—			6,110
Long-term debt to affiliates	—		5,600		—		—			—			5,600
Long-term debt	—		13,998		333		—			—			14,331
Long-term financial obligation	—		—		366		2,138			—			2,504
Deferred tax liabilities	—		—		4,671		—			(57		)	4,614
Deferred rents	—		—		2,183		—			—			2,183
Negative carrying value of subsidiaries, net	—		—		792		—			(792		)	—
Intercompany payables	158		57		—		24			(239		)	—
Other long-term liabilities	—		—		671		—			—			671
Total long-term liabilities	158		19,655		9,016		2,162			(1,088		)	29,903
Total stockholders' equity	14,156		11,333		29,745		(1,227		)	(39,851		)	14,156
Total liabilities and stockholders' equity	$	14,314	$	31,519	$	44,170	$	1,105		$	(40,939	)	$	50,169

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Condensed Consolidating Balance Sheet Information

As of December 31, 2013



(in millions)	Parent		Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	2,960	$	2,698	$	57	$	176		$	—		$	5,891
Accounts receivable, net	—		—		3,541		78			—			3,619
Accounts receivable from affiliates	—		—		41		—			—			41
Inventory	—		—		586		—			—			586
Current portion of deferred tax assets, net	—		—		824		15			—			839
Assets held-for-sale	—		—		614		—			—			614
Other current assets	—		—		636		2			—			638
Total current assets	2,960		2,698		6,299		271			—			12,228
Property and equipment, net of accumulated depreciation	—		—		14,754		595			—			15,349
Goodwill	—		—		1,683		—			—			1,683
Spectrum licenses	—		—		18,122		—			—			18,122
Other intangible assets, net of accumulated amortization	—		—		1,204		—			—			1,204
Investments in subsidiaries, net	11,484		29,123		—		—			(40,607		)	—
Intercompany receivables	—		—		418		—			(418		)	—
Other assets	2		24		1,292		93			(44		)	1,367
Total assets	$	14,446	$	31,845	$	43,772	$	959		$	(41,069	)	$	49,953
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities	$	—	$	273	$	4,218	$	76		$	—		$	4,567
Current payables and short-term debt to affiliates	—		56		143		—			—			199
Short-term debt	—		226		18		—			—			244
Deferred revenue	—		—		445		—			—			445
Other current liabilities	—		—		313		40			—			353
Total current liabilities	—		555		5,137		116			—			5,808
Long-term debt to affiliates	—		5,600		—		—			—			5,600
Long-term debt	—		14,010		335		—			—			14,345
Long-term financial obligation	—		—		365		2,131			—			2,496
Deferred tax liabilities	—		—		4,689		—			(44		)	4,645
Deferred rents	—		—		2,113		—			—			2,113
Negative carrying value of subsidiaries, net	—		—		779		—			(779		)	—
Intercompany payables	201		183		—		34			(418		)	—
Other long-term liabilities	—		13		688		—			—			701
Total long-term liabilities	201		19,806		8,969		2,165			(1,241		)	29,900
Total stockholders' equity	14,245		11,484		29,666		(1,322		)	(39,828		)	14,245
Total liabilities and stockholders' equity	$	14,446	$	31,845	$	43,772	$	959		$	(41,069	)	$	49,953

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Condensed Consolidating Statement of Comprehensive Income (Loss) Information

Three Months Ended March 31, 2014



(in millions)	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Revenues
Service revenues	$	—		$	—		$	5,150		$	265		$	(78	)	$	5,337
Equipment sales	—			—			1,597			—			(149		)	1,448
Other revenues	—			—			58			34			(2		)	90
Total revenues	—			—			6,805			299			(229		)	6,875
Operating expenses
Cost of services	—			—			1,460			4			—			1,464
Cost of equipment sales	—			—			2,313			138			(165		)	2,286
Selling, general and administrative	—			—			2,060			100			(64		)	2,096
Depreciation and amortization	—			—			1,035			20			—			1,055
MetroPCS transaction and integration costs	—			—			12			—			—			12
Other, net	—			—			(10		)	—			—			(10		)
Total operating expenses	—			—			6,870			262			(229		)	6,903
Operating income (loss)	—			—			(65		)	37			—			(28		)
Other income (expense)
Interest expense to affiliates	—			(18		)	—			—			—			(18		)
Interest expense	—			(214		)	(18		)	(44		)	—			(276		)
Interest income	—			—			75			—			—			75
Other income (expense), net	—			(8		)	2			—			—			(6		)
Total other income (expense), net	—			(240		)	59			(44		)	—			(225		)
Loss before income taxes	—			(240		)	(6		)	(7		)	—			(253		)
Income tax expense	—			—			(100		)	(2		)	—			(102		)
Earnings (loss) of subsidiaries	(151		)	89			(15		)	—			77			—
Net income (loss)	(151		)	(151		)	79			(5		)	77			(151		)
Other comprehensive loss, net of tax	(3		)	(3		)	(3		)	—			6			(3		)
Total comprehensive income (loss)	$	(154	)	$	(154	)	$	76		$	(5	)	$	83		$	(154	)

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Condensed Consolidating Statement of Comprehensive Income (Loss) Information

Three Months Ended March 31, 2013



(in millions)	Parent		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Revenues
Service revenues	$	—	$	—		$	3,855		$	176		$	(26	)	$	4,005
Equipment sales	—		—			767			—			(161		)	606
Other revenues	—		—			56			42			(32		)	66
Total revenues	—		—			4,678			218			(219		)	4,677
Operating expenses
Cost of services	—		—			1,122			19			(32		)	1,109
Cost of equipment sales	—		—			932			130			(176		)	886
Selling, general and administrative	—		—			1,481			36			(11		)	1,506
Depreciation and amortization	—		—			735			20			—			755
MetroPCS transaction and integration costs	—		—			13			—			—			13
Restructuring costs	—		—			31			—			—			31
Other, net	—		—			(2		)	—			—			(2		)
Total operating expenses	—		—			4,312			205			(219		)	4,298
Operating income	—		—			366			13			—			379
Other income (expense)
Interest expense to affiliates	—		(178		)	—			—			—			(178		)
Interest expense	—		—			(8		)	(43		)	—			(51		)
Interest income	—		—			35			—			—			35
Other expense, net	—		(6		)	—			—			—			(6		)
Total other income (expense), net	—		(184		)	27			(43		)	—			(200		)
Income (loss) before income taxes	—		(184		)	393			(30		)	—			179
Income tax expense (benefit)	—		—			81			(9		)	—			72
Earnings (loss) of subsidiaries	—		291			(14		)	—			(277		)	—
Net income (loss)	—		107			298			(21		)	(277		)	107
Other comprehensive income (loss), net of tax	—		(1		)	1			—			(1		)	(1		)
Total comprehensive income (loss)	$	—	$	106		$	299		$	(21	)	$	(278	)	$	106

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Condensed Consolidating Statement of Cash Flows Information

Three Months Ended March 31, 2014



(in millions)	Parent		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Consolidating and Eliminating Adjustments		Consolidated
Operating activities
Net cash provided by (used in) operating activities	$	5	$	(466	)	$	1,199		$	21	$	—	$	759

Investing activities
Purchases of property and equipment	—		—			(947		)	—		—		(947		)
Investments in unconsolidated affiliates, net	—		—			(11		)	—		—		(11		)
Other, net	—		—			(7		)	—		—		(7		)
Net cash used in investing activities	—		—			(965		)	—		—		(965		)

Financing activities
Repayments of short-term debt for purchases of property and equipment	—		—			(226		)	—		—		(226		)
Proceeds from exercise of stock options	14		—			—			—		—		14
Other, net	—		—			(2		)	—		—		(2		)
Net cash provided by (used in) financing activities	14		—			(228		)	—		—		(214		)

Change in cash and cash equivalents	19		(466		)	6			21		—		(420		)
Cash and cash equivalents
Beginning of period	2,960		2,698			57			176		—		5,891
End of period	$	2,979	$	2,232		$	63		$	197	$	—	$	5,471

Condensed Consolidating Statement of Cash Flows Information

Three Months Ended March 31, 2013



(in millions)	Parent		Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Consolidating and Eliminating Adjustments		Consolidated
Operating activities
Net cash provided by operating activities	$	—	$	—	$	896		$	13	$	—	$	909

Investing activities
Purchases of property and equipment	—		—		(1,076		)	—		—		(1,076		)
Purchases of intangible assets	—		—		(49		)	—		—		(49		)
Short term affiliate loan receivable, net	—		—		275			—		—		275
Other, net	—		—		(4		)	—		—		(4		)
Net cash used in investing activities	—		—		(854		)	—		—		(854		)

Financing activities
Net cash provided by financing activities	—		—		—			—		—		—

Change in cash and cash equivalents	—		—		42			13		—		55
Cash and cash equivalents
Beginning of period	—		—		287			107		—		394
End of period	$	—	$	—	$	329		$	120	$	—	$	449

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Note 8 – Subsequent Events

Spectrum License Transactions

In January 2014, T-Mobile entered into agreements with Verizon for the acquisition of 700 MHz A-Block spectrum licenses for cash and the transfer of certain AWS spectrum and PCS spectrum. Upon closing of the transaction in April 2014, T-Mobile paid Verizon $2.4 billion in cash and transferred AWS spectrum and PCS spectrum. T-Mobile will recognize the 700 MHz A-Block spectrum licenses received at fair value and a non-cash gain upon finalization of the valuation in the second quarter.

In November 2013, the Company entered into an agreement with Verizon to exchange certain AWS spectrum and PCS spectrum. Upon closing of the transaction in April 2014, T-Mobile transferred AWS spectrum and PCS spectrum to Verizon. T-Mobile will recognize the AWS licenses and PCS licenses received at fair value and a non-cash gain upon finalization of the valuation in the second quarter.

See Note 2 – Acquisitions and Other Transactions for further information regarding the spectrum license transactions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this report include 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 possible or assumed future results of operations, are forward-looking statements. These forward-looking statements are generally identified by the words “anticipates,” “believes,” “estimates,” “expects,” or similar expressions.

Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties and may cause actual results to differ materially from the forward-looking statements. The following important factors could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:


•	adverse conditions in the U.S. and international economies or disruptions to the credit and financial markets;


•	competition in the wireless services market;


•	the ability to complete and realize expected synergies and other benefits of acquisitions;


•	the inability to implement our business strategies or ability to fund our wireless operations, including payme