UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
or
¨ | 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.
DELAWARE | 20-0836269 | |
(State of incorporation) | (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) | ||
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $0.00001 par value per share | NYSE | |
5.50% Mandatory Convertible Preferred Stock, Series A, $0.00001 par value per share | NYSE | |
Securities registered pursuant to Section 12(g) of the Act: | ||
None. | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 Act). Yes ¨ No x
As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $9.1 billion based on the closing sale price as reported on the NYSE. As of February 17, 2015, there were 807,778,654 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference certain portions of the definitive Proxy Statement for the registrant’s Annual Meeting of Stockholders, which definitive Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
T-Mobile US, Inc.
Form 10-K
For the Year Ended December 31, 2014
Table of Contents
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Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K (“Form 10-K”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including information concerning our future results of operations, are forward-looking statements. These forward-looking statements are generally identified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend” 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, along with the Risk Factors included in Part I, Item 1A of this Form 10-K, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:
• | adverse conditions in the United States (“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 payment for additional spectrum, network upgrades, and technological advancements; |
• | the ability to renew our spectrum licenses on attractive terms or acquire new spectrum licenses; |
• | the ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum licenses at reasonable costs and terms; |
• | material changes in available technology; |
• | the timing, scope and financial impact of our deployment of advanced network and business technologies; |
• | the impact on our networks and business from major technology equipment failures; |
• | breaches of network or information technology security, natural disasters or terrorist attacks or existing or future litigation and any resulting financial impact not covered by insurance; |
• | any changes in the regulatory environments in which we operate, including any increase in restrictions on the ability to operate our networks; |
• | any disruption of our key suppliers’ provisioning of products or services; |
• | material adverse changes in labor matters, including labor negotiations or additional organizing activity, and any resulting financial and/or operational impact; |
• | changes in accounting assumptions that regulatory agencies, including the Securities and Exchange Commission (“SEC”), may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; and, |
• | changes in tax laws, regulations and existing standards and the resolution of disputes with any taxing jurisdictions. |
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-K, unless the context indicates otherwise, references to “T-Mobile,” “T-Mobile US,” “our Company,” “the Company,” “we,” “our,” and “us” refer to T-Mobile US, Inc., a Delaware corporation, and its wholly-owned subsidiaries.
PART I.
Item 1. Business
Business Overview
We are the Un-carrier™. Un-satisfied with the status quo. Un-afraid to innovate. T-Mobile is the fastest growing wireless company in the U.S., based on customer growth in 2014, currently providing wireless communications services, including voice, messaging and data, to over 55 million customers in the postpaid, prepaid, and wholesale markets. The Un-carrier proposition is an approach that seeks to listen to the customer, address their pain points, bring innovation to the industry, and improve the wireless experience for all. In practice, this means offering customers a great service on a nationwide 4G Long-Term Evolution (“LTE”) network, devices when and how they want them, and plans that are simple, affordable and without unnecessary restrictions. Going forward, we will continue to listen and respond to our customers, refine and improve the Un-carrier proposition, and deliver the best value experience in the industry.
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History
T-Mobile USA, Inc. (“T-Mobile USA”) was formed in 1994 as VoiceStream Wireless PCS (“VoiceStream”), a subsidiary of Western Wireless Corporation (“Western Wireless”). VoiceStream was spun off from Western Wireless in 1999, acquired by Deutsche Telekom AG (“Deutsche Telekom”) in 2001 and renamed T-Mobile USA, Inc. in 2002.
T-Mobile US, Inc. was formed in 2013 through the business combination between T-Mobile USA and MetroPCS Communications, Inc. (“MetroPCS”). Under the terms of the business combination with MetroPCS, Deutsche Telekom received shares of common stock representing a majority ownership interest in the combined company in exchange for its transfer of all of T-Mobile USA’s common stock. The business combination aimed to provide us with expanded scale, spectrum, and financial resources to compete aggressively with other, larger U.S. wireless communication providers. 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. See Note 2 – Business Combination with MetroPCS of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information regarding the business combination.
Business Strategy
We generate revenue by offering affordable wireless communication services to our postpaid, prepaid and wholesale customers, as well as a wide selection of wireless devices and accessories. We provide service, devices and accessories across our flagship brands, T-Mobile and MetroPCS, through our owned and operated retail stores, third party distributors and our websites (www.T-Mobile.com and www.MetroPCS.com). The information on our websites is not part of this Form 10-K. Our most significant expenses are related to acquiring and retaining high-quality customers, compensating employees, and operating and expanding our network.
We continue to aggressively pursue our strategy, which includes the following elements:
Un-carrier Value Proposition
We introduced our Un-carrier proposition with the objective of eliminating customer pain points from the unnecessary complexity of the wireless communication industry. We believe Un-carrier phases 1.0 through 8.0 have been successful as evidenced by our strong customer growth since the launch of the Un-carrier proposition in 2013. We provided service to over 55 million customers as of December 31, 2014, compared to 47 million as of December 31, 2013.
Phases 1.0 through 8.0 of our Un-carrier proposition are described below:
• | Unlimited Data, No Annual Service Contract – In March 2013, we introduced Simple Choice™ plans, which eliminated annual service contracts and provided customers with affordable rate plans. Customers on Simple Choice plans can purchase the most popular smartphones and if qualified, pay for them with a low out-of-pocket payment and 24 affordable interest-free monthly installments. |
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• | JUMP! – In July 2013, we announced Just Upgrade My Phone (“JUMP!™”) as phase 2.0, which allows participating customers to upgrade their eligible device when they want and not when they are told. In addition, participants benefit from handset insurance and extended warranty protection, protecting them from lost, stolen and damaged devices. |
• | International Roaming and Tablets Un-leashed – In October 2013, we unveiled phase 3.0, which provides our Simple Choice customers reduced United States to international calling rates, and messaging and data roaming while traveling abroad in over 100 countries at no extra cost with Simple Global™. In November 2013, we launched part 2 of phase 3.0, allowing every T-Mobile tablet user to use up to 200 MB of free LTE data every month for as long as they own their tablet and use it on our network, even if they are not yet a T-Mobile mobile internet customer. |
• | Contract Freedom – In January 2014, we announced phase 4.0, which eliminated one of the last remaining obstacles for customers wanting to switch from other carriers to T-Mobile by offering to reimburse customers’ early termination fees (“ETF”) when they switch from other carriers and trade in their eligible device. |
• | Test Drive – In June 2014, we released phase 5.0, which allows consumers to test our network using an Apple® iPhone® 5s with unlimited nationwide service for seven days at no charge. |
• | Music Freedom – In June 2014, we introduced phase 6.0, which allows Simple Choice customers to stream music from popular music services without it counting against their high-speed data allotment. Additionally, we launched Rhapsody® unRadio in partnership with Rhapsody for a limited time, which allows eligible Simple Choice customers with our newest unlimited 4G data service to stream music at no additional cost. We are also offering Rhapsody unRadio at a discounted price for our eligible customers. |
• | Wi-Fi Un-leashed – In September 2014, we launched phase 7.0, which delivers coverage to customers in more places. With Wi-Fi Un-leashed, we provide Wi-Fi calling and texting for Simple Choice customers on capable smartphones. In addition, we unveiled the T-Mobile Personal CellSpot™, a new device which provides customers with greater coverage in their home. Finally, through a new partnership with Gogo®, customers with compatible devices can send and receive unlimited text, picture messages and receive visual voicemails on any Gogo-equipped U.S.-based flight for free. |
• | Data Stash – In December 2014, we introduced phase 8.0, giving customers the ability to roll their unused high-speed data automatically each month into a personal Data Stash™ so they can use it when they need it for up to a year. Starting in January 2015, Data Stash became available at no extra charge to every T-Mobile customer with a postpaid Simple Choice plan who has purchased additional LTE data, 3GB or more for smartphones and 1 GB or more for tablets. In addition, beginning in January 2015, we will provide a one-time Free Data Stash to start with of 10 GB of LTE data to all qualifying customers, which will expire at the end of 2015. |
Network Modernization and Expansion
We have substantially completed the process of upgrading our network to LTE, which provides our customers with the fastest nationwide LTE services. Our LTE network covered 265 million people as of December 31, 2014, compared to more than 200 million people as of December 31, 2013. This surpassed our year-end goal of covering 250 million people with the fastest nationwide LTE network. We are targeting 300 million people with LTE by the end of 2015. In addition, we are currently in the process of building out our network to utilize our recently acquired 700 MHz A-Block spectrum licenses, which will boost network reach, improve in-building coverage and extend coverage to more areas.
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Below is a map showing our coverage, including LTE, in the U.S.:
In addition, we were the first U.S. carrier to introduce Voice over LTE (“VoLTE”) on a nationwide basis. Further, the migration of customers from the MetroPCS brand legacy Code Division Multiple Access (“CDMA”) network onto T-Mobile’s LTE and Evolved High Speed Packet Access Plus (“HSPA+”) network continues to be ahead of schedule, providing faster network performance for MetroPCS customers with compatible handsets.
In 2014, we completed transactions for the acquisition of 700 MHz A-Block, Advanced Wireless Service (“AWS”) and Personal Communications Service (“PCS”) spectrum licenses, primarily from Verizon Communications, Inc. (“Verizon”), for cash and the exchange of certain AWS and PCS spectrum licenses. In addition, in 2014, we entered into transactions, which are expected to close in 2015, with various other companies to acquire additional 700 MHz A-Block, AWS and PCS spectrum licenses, which covers more than 40 million people, for cash and the exchange of certain AWS and PCS spectrum licenses. The transactions are subject to regulatory approval and other customary closing conditions. Upon closing of these pending transactions, we will own 700 MHz A-Block spectrum covering 190 million people. In January 2015, the Federal Communications Commission (“FCC”) announced T-Mobile was the winning bidder of AWS spectrum licenses covering approximately 97 million people for an aggregate bid price of $1.8 billion. T-Mobile expects to receive the AWS spectrum licenses, subject to regulatory approval, in the second quarter of 2015.
Customer Experience
The success of our Un-carrier proposition and continued modernization of the network has further repositioned T-Mobile as a provider of dependable high-speed LTE service with a full range of desirable devices and provides our customers with an unrivaled customer experience. We have continued to focus on retaining customers through churn reduction initiatives to improve customer experience. Branded postpaid phone churn improved to 1.58% in 2014, compared to 1.69% in 2013 and 2.33% in 2012. These results reinforce our position as an organization with a strong focus and commitment to providing an outstanding customer experience whether customers call in, come in to our stores, or access our website.
Aligned Cost Structure
We continue to pursue a low-cost business operating model to drive cost savings, which can then be reinvested in the business. These cost-reduction programs are on-going as we continue to simplify our business and drive operational efficiencies and cost savings in areas, such as network optimization, customer roaming, customer service and improved customer collection rates.
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We expect the business combination with MetroPCS to deliver at least $1.5 billion in annual run-rate synergies in operating and capital expenditures by 2016. A portion of these savings have been, and will continue to be, reinvested into growth of our business.
Customers
T-Mobile provides wireless communication services to three primary categories of customers: branded postpaid, branded prepaid and wholesale. Branded postpaid customers generally include customers that are qualified to pay after incurring wireless communication service. Branded prepaid customers generally include customers who pay in advance. Our branded prepaid customers include customers of the T-Mobile, MetroPCS and certain partner brands. Wholesale customers, which include Machine-to-Machine (“M2M”) and Mobile Virtual Network Operators (“MVNO”), operate on the T-Mobile network, but are managed by wholesale partners.
We generate the majority of our service revenues by providing wireless communication services to branded postpaid customers. In 2014, 64% of our service revenues were generated by providing wireless communication services to branded postpaid customers, compared to 31% from branded prepaid customers and 5% from wholesale customers, roaming and other services. Therefore, our ability to acquire and retain branded postpaid customers is important to our business in the generation of service revenues, equipment sales and other revenues. Our branded postpaid net customer additions were 4.9 million in 2014, compared to 2.0 million in 2013. Growth in our branded postpaid customer additions resulted primarily from strong customer response to our network modernization, Un-carrier proposition and promotions for services and devices.
Services and Products
T-Mobile provides wireless communication services through a variety of service plan options. We also offer a wide selection of wireless devices, including smartphones, tablets and other mobile communication devices, which are manufactured by various suppliers. Services, devices and accessories are offered directly to consumers through our owned and operated retail stores, as well as through our websites. In addition, we sell devices and accessories to dealers and other third party distributors for resale through independent third-party retail outlets and a variety of third-party websites.
Service plan options include our Value and Simple Choice (“Simple Choice”) plans, which allow customers to subscribe for wireless services separately from the purchase of a handset. We introduced our Simple Choice plans as part of phase 1.0 of our Un-carrier proposition in 2013, which eliminated annual service contracts and simplified the lineup of consumer rate plans to one affordable plan for unlimited voice and messaging services with the option to add data services. Depending on their credit profile, customers are qualified either for postpaid or prepaid service. As part of the ongoing movement towards simplifying the business, we continued to drive the penetration of Simple Choice plans within our base. The proportion of branded postpaid customers on Simple Choice plans was 89% as of December 31, 2014, up from 69% as of December 31, 2013.
Customers on our Simple Choice, benefit from reduced monthly service charges and can choose whether to use their own compatible handset on our network or purchase a handset from us or one of our dealers. Depending on their credit profile, qualifying customers who purchase a device from us have the option of financing all or a portion of the purchase price at the time of sale over an installment period using our Equipment Installment Plan (“EIP”). In addition, qualifying customers who finance their initial handset device with an EIP can enroll in JUMP! to later upgrade their device. Upon qualifying JUMP! program upgrades, the customers’ remaining EIP balance is settled provided they trade in their used handset at the time of upgrade in good working condition and purchase a new handset from us on a new EIP. Our Simple Choice plans result in increased equipment revenue for each handset sold compared to traditional bundled price plans that typically offer a significant handset discount but involve higher monthly service charges.
Network
Our nationwide network covers all major metropolitan areas and approximately 90% of people in the U.S., excluding roaming coverage. Over the last two years, we have continued to build out our network to be Data Strong™, meaning we have the most dense network in the nation, with more cell sites per customer than any other nationwide wireless communication provider, and we have concentrated our cell sites where our customers need data most.
We provide mobile communication services utilizing low-band spectrum licenses, consisting of 700 MHz A-Block, and mid-band spectrum licenses, such as AWS and PCS. We had an average of approximately 82 MHz of spectrum in the top 25 major metropolitan areas as of December 31, 2014. This is compared to an average of approximately 77 MHz of spectrum in the top 25 major metropolitan areas as of December 31, 2013. Over the last year, we have entered into various agreements for the acquisition of 700 MHz A-Block, AWS and PCS spectrum licenses. In addition, we will seek to opportunistically acquire
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additional spectrum in private party transactions and government auctions to further enhance our portfolio of U.S. nationwide broadband spectrum.
We provide wireless communication services through a number of technologies, including LTE, HSPA+, Universal Mobile Telecommunications Systems (“UMTS”), General Packet Radio Service (“GPRS”), Enhanced Data rates for GSM Evolution (“EDGE”), Global System for Mobile Communications (“GSM”) and CDMA. We have substantially completed the process of upgrading our network to LTE using our mid-band spectrum licenses, which offers our customers faster data transfer speeds, greater connectivity and increased coverage. Not only does our network offer the fastest nationwide LTE network and the most consistent LTE speeds based on download speed, it currently has more capacity per customer than any other nationwide communications provider. In addition to expanding our LTE coverage, we are enhancing our network through an aggressive deployment of Wideband LTE of at least 15x15 MHz, which delivers faster LTE speeds. We have deployed Wideband LTE in 121 metropolitan areas as of December 31, 2014 and expect Wideband LTE to be available in 150 metropolitan areas by the end of 2015. We have also begun to launch low-band LTE using our recently acquired 700 MHz A-Block spectrum licenses. We offered five devices capable of using low-band LTE in 2014 and are working with our device partners to ensure all new LTE devices that launch in 2015 will be low-band capable. As part of the integration following the business combination, we are in the process of decommissioning the MetroPCS CDMA network and redundant cell sites, while also integrating select MetroPCS assets in certain metropolitan areas into the overall network. We have moved more than 70% of the MetroPCS spectrum licenses onto the T-Mobile network to provide faster LTE performance in many key markets. Upon completion of the migration of the MetroPCS customer base, we expect to have approximately 61,000 equivalent cell sites, including macro sites and certain distributed antenna system (“DAS”) network nodes from the MetroPCS network.
Distribution
We had approximately 62,000 total points of distribution, including approximately 10,000 T-Mobile and MetroPCS branded locations and 52,000 third-party and national retailer locations, as well as distribution through our websites, as of December 31, 2014. We had approximately 70,000 points of distribution as of December 31, 2013 and 61,000 as of December 31, 2012. Our distribution density in major metropolitan areas provides customers with the convenience of having retail and service locations close to where they live and work.
Competition
The wireless telecommunications industry is highly competitive. We are the fourth largest provider of postpaid service plans and the largest provider of prepaid service plans in the U.S. as measured by customers. Our competitors include other national carriers, such as AT&T Inc. (“AT&T”), Verizon and Sprint Corporation (“Sprint”), which offer predominantly contract-based service plans. AT&T and Verizon are significantly larger than us and may enjoy greater resources and scale advantages as compared to us. In addition, our competitors include numerous smaller regional carriers and MVNOs, such as TracFone Wireless, Inc., many of which offer no-contract, prepaid service plans. Competitors also include providers who offer similar communication services, such as voice and messaging, using alternative technologies or services. Competitive factors within the wireless telecommunications industry include pricing, market saturation, service and product offerings, customer experience, network investment and quality, development and deployment of technologies, availability of additional spectrum licenses, and regulatory changes. Some competitors have shown a willingness to use aggressive pricing as a source of differentiation. Taken together, the competitive factors we face will continue to put pressure on margins as companies compete to retain the current customer base and continue to add new customers.
Employees
As of December 31, 2014, we employed approximately 45,000 full-time and part-time employees, including network, retail, customer support and back office functions, of which approximately 30 employees were covered by a collective bargaining agreement, as of December 31, 2014.
Regulation
The FCC regulates many key aspects of our business, including licensing, construction, the operation and use of our network, modifications of our network, control and ownership of our business, the sale of certain business assets, domestic roaming arrangements and interconnection agreements, pursuant to its authority under the Communications Act of 1934, as amended (“Communications Act”). The FCC has a number of complex requirements and proceedings that affect our operations and that could increase our costs or diminish our revenues. For example, the FCC has rules regarding provision of 911 and E-911 services, porting telephone numbers, interconnection, roaming, internet openness, and the universal service and Lifeline programs. Many of these and other issues are being considered in ongoing proceedings, and we cannot predict whether or how
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such actions will affect our business, financial condition, or results of operations. Our ability to provide services and generate revenues could be harmed by adverse regulatory action or changes to existing laws and regulations. In addition, regulation of companies that offer competing services can impact our business indirectly.
Wireless communications providers must be licensed by the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the rules and policies governing the use of the spectrum as adopted by the FCC. The FCC issues each license for a fixed period of time, typically 10 years in the case of cellular, PCS and point-to-point microwave licenses. AWS licenses have an initial term of 15 years, with successive 10-year terms thereafter. While the FCC has generally renewed licenses given to operating companies like us, the FCC has authority to both revoke a license for cause and to deny a license renewal if a renewal is not in the public interest. Furthermore, we could be subject to fines, forfeitures and other penalties for failure to comply with FCC regulations, even if any such non-compliance was unintentional. In extreme cases, penalties can include revocation of our licenses. The loss of any licenses, or any related fines or forfeitures, could adversely affect our business, results of operations and financial condition.
Additionally, Congress’ and the FCC’s allocation of additional spectrum for broadband commercial mobile radio service (“CMRS”), which includes cellular, PCS and specialized mobile radio, could significantly increase competition. We cannot assess the impact that any developments that may occur in the U.S. economy or any future spectrum allocations by the FCC may have on license values. FCC spectrum auctions and other market developments may adversely affect the market value of our licenses in the future. A significant decline in the value of our licenses could adversely affect our financial condition and results of operations. In addition, the FCC periodically reviews its policies on how to evaluate a carrier’s spectrum holdings in the context of transactions and auctions. A change in these policies could affect spectrum resources and competition among us and other carriers.
Congress and the FCC have imposed limitations on foreign ownership of CMRS licensees that exceed 20% direct ownership or 25% indirect ownership. The FCC has ruled that higher levels of indirect foreign ownership, even up to 100%, are presumptively consistent with the public interest albeit subject to review. Consistent with that established policy, the FCC has issued a declaratory ruling authorizing up to 100% ownership of our company by Deutsche Telekom. This declaratory ruling, and our licenses, are conditioned on Deutsche Telekom’s and the Company’s compliance with a network security agreement with the Department of Justice, the Federal Bureau of Investigation and the Department of Homeland Security. Failure to comply with the terms of this agreement could result in fines, injunctions and other penalties, including potential revocation of our spectrum licenses.
While the Communications Act generally preempts state and local governments from regulating the entry of, or the rates charged by, wireless communication providers, certain state and local governments regulate other terms and conditions of wireless service, including billing, termination of service arrangements and the imposition of early termination fees, advertising, network outages, the use of handsets while driving, zoning and land use. Further, the FCC and the Federal Aviation Administration regulate the siting, lighting and construction of transmitter towers and antennae. Tower siting and construction are also subject to state and local zoning, as well as federal statutes regarding environmental and historic preservation. The future costs to comply with all relevant regulations are to some extent unknown and regulations could result in higher operating expenses in the future.
Available Information
T-Mobile’s Form 10-K and all other reports and amendments filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our website at investor.t-mobile.com or at www.sec.gov as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our corporate governance guidelines, code of business conduct, code of ethics for senior financial officers and charters for the audit, compensation, nominating and corporate governance and executive committees of our board of directors are also posted on the Investor Relations section of T-Mobile’s website at investor.t-mobile.com. The information on our websites is not part of this or any other report T-Mobile files with, or furnishes to, the SEC.
Investors and others should note 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. T-Mobile intends to also use @TMobileIR (https://twitter.com/TMobileIR) and @JohnLegere (https://twitter.com/JohnLegere), which Mr. Legere also uses as a means for personal communications and observations, as a means of disclosing information about the Company, its services and other matters and for complying with its disclosure obligations under Regulation FD. 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 the Company’s press releases, SEC filings, public conference calls and webcasts. The social
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media channels T-Mobile intends to use as a means of disclosing the information described above may be updated from time to time as listed on the Company’s investor relations website.
Item 1A. Risk Factors
In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating T-Mobile. Our business, financial condition, liquidity, or results of operations could be materially adversely affected by any of these risks.
Risks Related to Our Business and the Wireless Industry
The scarcity and cost of additional wireless spectrum, and regulations relating to spectrum use, may adversely affect our business strategy and financial planning.
We will need to acquire additional spectrum in order to continue our customer growth, expand into new metropolitan areas, maintain our quality of service, meet increasing customer demands, and deploy new technologies. We will be at a competitive disadvantage and possibly experience erosion in the quality of service in certain markets if we fail to gain access to necessary spectrum before reaching capacity, especially below 1 GHz - low band spectrum.
The continued interest in, and aggregation of, spectrum by the largest national carriers may reduce our ability to acquire spectrum from other carriers or otherwise negatively impact our ability to gain access to spectrum through other means. As a result, we may need to acquire spectrum through government auctions and/or enter into spectrum sharing arrangements, which are subject to certain risks and uncertainties. For example, the FCC has encountered resistance to its plans to make additional spectrum available, which has created uncertainty about the timing and availability of spectrum through government auctions.
In addition, the FCC may impose conditions on the use of new wireless broadband mobile spectrum, including new restrictions or rules governing the use or access to current or future spectrum. This could increase pressure on capacity. Additional conditions that may be imposed by the FCC include heightened build-out requirements, limited renewal rights, clearing obligations, or open access or net neutrality requirements that may make it less attractive or less economical to acquire spectrum. The FCC has a pending notice of proposed rulemaking to examine whether the current spectrum screen used in acquisitions of spectrum should be changed or whether a spectrum cap should be imposed. In addition, rules may be established for future government spectrum auctions that may negatively impact our ability to obtain spectrum economically or in appropriate configurations or coverage areas.
If we cannot acquire needed spectrum from the government or otherwise, if new competitors acquire spectrum that will allow them to provide services competitive with our services, or if we cannot deploy services on a timely basis without burdensome conditions, at adequate cost, and while maintaining network quality levels, then our ability to attract and retain customers and our associated financial performance could be materially adversely affected.
Increasing competition for wireless customers could adversely affect our operating results.
We have multiple wireless competitors in each of our service areas, some of which have greater resources than us, and compete for customers based principally on service/device offerings, price, call quality, data use experience, coverage area, and customer service. In addition, we are facing growing competition from providers offering services using alternative wireless technologies and IP-based networks, as well as traditional wireline networks. We expect market saturation to continue to cause the wireless industry’s customer growth rate to be moderate in comparison with historical growth rates or possibly negative, leading to increased competition for customers. We also expect that our customers’ growing appetite for data services will place increased demands on our network capacity. This competition and our capacity issues will continue to put pressure on pricing and margins as companies compete for potential customers. Our ability to compete will depend on, among other things, continued absolute and relative improvement in network quality and customer services, effective marketing and selling of products and services, attractive pricing, and cost management, all of which will involve significant expenses.
Joint ventures, mergers, acquisitions and strategic alliances in the wireless industry have resulted in and are expected to result in larger competitors competing for a limited number of customers. The two largest national wireless communication providers currently serve a significant percentage of all wireless customers and hold significant spectrum and other resources. Our largest competitors may be able to enter into exclusive handset, device, or content arrangements, execute pervasive advertising and marketing campaigns, or otherwise improve their cost position relative to ours. In addition, the refusal of our large competitors to provide critical access to resources and inputs, such as roaming services on reasonable terms, may improve their position within the wireless broadband mobile services industry. These factors, together with the effects of the increasing
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aggregate penetration of wireless services in all metropolitan areas and the ability of our larger competitors to use resources to build out their networks and to quickly deploy advanced technologies, have made it more difficult for smaller carriers like us to attract and retain customers, and may adversely affect our competitive position and ability to grow, which would have a material adverse effect on our business, financial condition, and operating results.
If our efforts to maintain the privacy and security of customer, employee, supplier or other proprietary or sensitive information are not successful at preventing a regulatory investigation, significant data breach or failure of compliance, we could incur substantial additional costs, become subject to litigation and enforcement actions, and suffer reputational damage.
Our business, like that of most retailers and wireless companies, involves the receipt, storage and transmission of customers’ personal information, consumer preferences and payment card information, as well as confidential information about our employees, our suppliers and our Company (“confidential information”). Cyber-attacks such as denial of service, other malicious attacks, unauthorized access or distribution of confidential information by third parties or employees, errors by third party suppliers or other breaches of security could disrupt our internal systems and applications, impair our ability to provide services to our customers or protect the privacy and confidentiality of our confidential information. Our information systems are vulnerable to continuously evolving data breach and information security risks. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deceiving our employees or third party service providers. Hardware, software or applications we develop, have developed on our behalf, or we obtain from third parties may contain defects in design or manufacture or other problems that could compromise information security. The methods used to obtain unauthorized access, disable or degrade service, or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time.
Although we have implemented and regularly review and update processes and procedures to protect against unauthorized access to or use of sensitive data and to prevent data loss, the ever-evolving threats require us to continually evaluate and adapt our systems and processes. We cannot assure you that our systems and processes will be adequate to safeguard against all information security breaches or misuses of data. The actions we take may not be adequate to repel a significant attack or prevent a breach, unauthorized access by third parties or employees or errors by third party suppliers. If we are subject to a significant attack or breach, unauthorized access, errors of third party suppliers or other security breaches, we may incur significant costs, be subject to regulatory investigations and sanctions and private litigation, and may suffer damage to our business reputation that negatively impacts customer confidence, any or all of which could materially adversely affect our results of operations and financial condition.
Our reputation and financial condition could be materially adversely affected by system failures, business disruptions, and unauthorized use of or interference with our network and other systems.
To be successful, we must provide our customers with reliable, trustworthy service and protect the communications, location, and personal information shared or generated by our customers. We rely upon our systems and networks, and the systems and networks of other providers and suppliers, to provide and support our services and, in some cases, to protect our customers’ and our information. Failure of our or others’ systems, networks and infrastructure may prevent us from providing reliable service, or may allow for the unauthorized use of or interference with our networks and other systems. Examples of these risks include:
• | human error such as responding to deceptive communications or unintentionally executing malicious code; |
• | physical damage, power surges or outages, or equipment failure, including those as a result of severe weather, natural disasters, terrorist attacks, and acts of war; |
• | theft of customer/proprietary information: intrusion and theft of data offered for sale, competitive (dis)advantage, and/or corporate extortion; |
• | unauthorized access to our information technology, billing, customer care and provisioning systems and networks, and those of our suppliers and other providers; |
• | supplier failures or delays; and |
• | other systems failures or outages. |
Such events could cause us to lose customers, lose revenue, incur expenses, suffer reputational and goodwill damages, and subject us to litigation or governmental investigation. Remediation costs could include liability for information loss, repairing infrastructure and systems, and/or costs of incentives offered to customers. Our insurance may not cover, or be adequate to fully reimburse us for, costs and losses associated with such events.
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We rely on third-parties to provide specialized products or services for the operation of our business, and a failure or inability by such parties to provide these products or services could adversely affect our business, results of operations, and financial condition.
We depend heavily on suppliers and other third parties in order for us to efficiently operate our business. Our business is complex, and it is not unusual for multiple vendors located in multiple locations to help us to develop, maintain, and troubleshoot products and services, such as network components, software development services, and billing and customer service support. Our suppliers often provide services outside of the U.S., which carries associated additional regulatory and legal obligations. We generally rely upon the suppliers to provide contractual assurances and accurate information regarding risks associated with their provision of products or services in accordance with our expectations and standards, and they may fail to do so.
Generally, there are multiple sources for the types of products and services we purchase or use. However, we currently rely on one key supplier for billing services, a limited number of suppliers for voice and data communications transport services, network infrastructure, equipment, handsets, and other devices, and payment processing services, among other products and services we rely on. Disruptions with respect to such suppliers, or failure of such suppliers to adequately perform, could have a material adverse on our financial performance.
In the past, our suppliers, contractors and third-party retailers have not always performed at the levels we expect or at the levels required by their contracts. Our business could be severely disrupted if key suppliers, contractors, service providers, or third-party retailers fail to comply with their contracts or become unable to continue the supply due to patent or other intellectual property infringement actions, or other disruptions. Our business could also be disrupted if we experience delays or service degradation during any transition to a new outsourcing provider or other supplier, or we were required to replace the supplied products or services with those from another source, especially if the replacement became necessary on short notice. Any such disruptions could have a material adverse effect on our business, results of operations and financial condition.
We are in the process of transferring our customer billing systems from our existing third-party vendor to a new third-party vendor. Any unanticipated difficulties, disruption or significant delays could have adverse operational, financial, and reputational effects on our business.
We are in the initial stages of implementing a new customer billing system, which involves moving to a new platform through utilization of a phased deployment approach. The first release phase is scheduled for 2015. Post implementation, we plan to operate both the existing and new billing systems in parallel to aid in the transition to the new system until all phases of the conversion are complete.
If the implementation causes major system disruptions or if we fail to implement the new billing system in a timely or effective manner, customer experience may be negatively impacted, which could cause material adverse effects on our operational and financial performance. In addition, the third-party billing services vendor may experience errors, cyber-attacks or other operational disruptions that could negatively impact us and over which we may have limited control. Interruptions and/or failure of this new billing services system could disrupt our operations and impact our ability to provide or bill for our services, retain customers or attract new customers. Any occurrence of the foregoing could cause material adverse effects on our operations and financial condition, material weaknesses in our internal control over financial reporting, and reputational damage.
If we are unable to attract and retain wireless subscribers our financial performance will be impaired.
We incur capital expenditures and operating expenses in order to improve and enhance our products, services, network quality and coverage, applications, and content to remain competitive and to keep up with our customer demand. If we fail to improve and enhance our products and services or expand the capacity of, or make upgrades to, our network to remain competitive, or if we fail to maintain access to desired handsets, content and features, or otherwise keep up with customer demand, our ability to attract and retain customers would be adversely affected.
In particular, our gross new subscriber activations may decrease and our subscriber churn may increase, leaving us unable to meet the assumptions of our business plan. Even if we effectively manage the factors described above that are within our control, there can be no assurance that our existing customers will not switch to another wireless communications provider or that we will be able to attract new customers. Our business, results of operations and financial condition, could be materially adversely affected if we are unable to grow our customer base at the levels we project, or achieve the aggregate levels of customer penetration that we currently believe are possible with our business model.
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If we are unable to take advantage of technological developments on a timely basis, then we may experience a decline in demand for our services or face challenges in implementing or evolving our business strategy.
In order to grow and remain competitive, we will need to adapt to future changes in technology, enhance our existing offerings, and introduce new offerings to address our current and potential customers’ changing demands. For example, we are in the process of transforming and upgrading our network to deploy LTE Release 10 and use multimode integrated radios that can handle GSM, HSPA+ and LTE. As part of our network upgrade program, we expect to install new GSM, HSPA+, and LTE equipment on approximately 40,000 cell sites, and GSM and LTE on approximately 12,000 cell sites. This work is planned to be substantially completed in 2015. However, enhancing our network is subject to risk from equipment changes and migration of customers from existing spectrum bands. Scheduling and supplier delays, unexpected or increased costs, technological constraints, regulatory permitting issues, subscriber dissatisfaction, and other risks could cause delays in launching new network capabilities, which could result in significant costs or reduce the anticipated benefits of the upgrades. As it relates to our current upgrade plans, these risks will be reduced as work is completed. In general, the development of new services in the wireless telecommunications industry will require us to anticipate and respond to the continuously changing demands of our customers, which we may not be able to do accurately or timely. We could experience a material adverse effect on our business, operations, financial position, and operating results if our new services fail to retain or gain acceptance in the marketplace or if costs associated with these services are higher than anticipated.
The agreements governing our indebtedness include restrictive covenants that limit our operating flexibility.
The agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions, subject in certain cases to customary baskets, exceptions and incurrence-based ratio tests, may limit our ability to engage in some transactions, including the following:
• | incurring additional indebtedness and issuing preferred stock; |
• | paying dividends, redeeming capital stock or making other restricted payments or investments; |
• | selling or buying assets, properties or licenses; |
• | developing assets, properties or licenses which we have or in the future may procure; |
• | creating liens on assets; |
• | participating in future FCC auctions of spectrum or private sales of spectrum; |
• | engaging in mergers, acquisitions, business combinations, or other transactions; |
• | entering into transactions with affiliates; and |
• | placing restrictions on the ability of subsidiaries to pay dividends or make other payments. |
These restrictions could limit our ability to react to changes in our operating environment or the economy. Any future indebtedness that we incur may contain similar or more restrictive covenants. Any failure to comply with the restrictions of our debt agreements may result in an event of default under these agreements, which in turn may result in defaults or acceleration of obligations under these agreements and other agreements, giving our lenders the right to terminate any commitments they had made to provide us with further funds and to require us to repay all amounts then outstanding. Any of these events would have a material adverse effect on our financial position and performance.
Our significant indebtedness could adversely affect our business, financial condition and operating results.
Our ability to make payments on our debt, to repay our existing indebtedness when due, and to fund operations and significant planned capital expenditures will depend on our ability to generate cash in the future, which is in turn subject to the operational risks described elsewhere in this section. Our debt service obligations could have material adverse effects on our operations and financial results, including by:
• | limiting our ability to borrow money, sell stock or similar equity linked securities to fund our operational, financing or strategic needs; |
• | limiting our flexibility in planning for, or reacting to, changes in our business or the communications industry or pursuing growth opportunities; |
• | reducing the amount of cash available for other operational or strategic needs; and |
• | placing us at a competitive disadvantage to competitors who are less leveraged than we are. |
In addition, the $5.6 billion in principal amount of the senior reset notes we issued to Deutsche Telekom in connection with the business combination between T-Mobile and MetroPCS bears interest at rates which will be reset at dates between April 2015 and April 2016. If the resets result in interest rate increases, debt service requirements will increase, which could adversely affect our cash flow. While we have and may enter into agreements limiting our exposure to higher interest rates in the future,
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any such agreements may not offer complete protection from this risk, and any portion not subject to such agreements would have full exposure to higher interest rates. Any of these risks could have a material adverse effect on our business, financial condition, and operating results.
Economic and market conditions may adversely affect our business and financial performance, as well as our access to financing on favorable terms or at all.
Our business and financial performance are sensitive to changes in general economic conditions, including changes in interest rates, consumer credit conditions, consumer debt levels, consumer confidence, rates of inflation (or concerns about deflation), unemployment rates, energy costs and other macro-economic factors. Market and economic conditions have been unprecedented and challenging in recent years. Concerns about the systemic impact of a long-term downturn, underemployment and unemployment, energy costs, the availability and cost of credit and unstable housing and credit markets have contributed to market volatility and economic uncertainty.
Continued or renewed market turbulence and weak economic conditions may materially adversely affect our business and financial performance in a number of ways. Our services are available to a broad customer base, a significant segment of which may be more vulnerable to weak economic conditions. We may have greater difficulty in gaining new customers within this segment and existing customers may be more likely to terminate service due to an inability to pay. In addition, instability in the global financial markets has resulted in periodic volatility in the credit, equity, and fixed income markets. This volatility could limit our access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain financing on terms that are acceptable to us, or at all.
Weak economic conditions and credit conditions may also adversely impact our suppliers and dealers, some of which have filed for or may be considering bankruptcy, or may experience cash flow or liquidity problems or are unable to obtain or refinance credit such that they may no longer be able to operate. Any of these could adversely impact our ability to distribute, market, or sell our products and services. Difficult, or worsening, general economic conditions could have a material adverse effect on our business, financial condition and results of operations.
Our business and stock price may be adversely affected if our internal controls are not effective.
As a public company, we are required under Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC rules and regulations promulgated thereunder to establish, maintain and annually evaluate the effectiveness of internal control over financial reporting, which is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The information technology, or IT, systems on which we rely extensively to operate, transact and otherwise manage our business and to effectively and timely report our financial results, are an important part of our internal control over financial reporting. Each each year we are required to document and test our internal control over financial reporting, including these IT systems; our management is required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.
We cannot assure you that we will not discover material weaknesses our IT controls or other aspects of our internal control over financial reporting in the future. The existence of one or more material weaknesses could result in errors in our financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we are unable to comply with the requirements of Section 404 in a timely manner or if we conclude that our internal control over financial reporting is not effective, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
Our financial performance will be impaired if we experience high fraud rates related to device financing, credit cards, dealers, or subscriptions.
Our operating costs could increase substantially as a result of fraud, including device financing, customer credit card, subscription or dealer fraud. If our fraud detection strategies and processes are not successful in detecting and controlling fraud, whether directly or by way of the systems, processes, and operations of third parties such as national retailers, dealers and others, the resulting loss of revenue or increased expenses could have a materially adverse impact on our financial condition and results of operations.
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We rely on highly-skilled personnel throughout all levels of our business. Our business could be harmed if we are unable to retain or motivate key personnel, hire qualified personnel, or maintain our corporate culture.
We believe that our future success depends in substantial part on our ability to recruit, hire, motivate, develop, and retain talented and highly-skilled personnel. Achieving this objective may be difficult due to many factors, including fluctuations in economic and industry conditions, competitors’ hiring practices, employee tolerance for the significant amount of change within and demands on our company and our industry, and the effectiveness of our compensation programs. If we do not succeed in retaining and motivating our existing key employees and in attracting new key personnel, we may be unable to meet our business plan and, as a result, our revenue growth and profitability may be materially adversely affected.
Risk related to Legal and Regulatory Matters
We operate throughout the U.S., Puerto Rico, and the U.S. Virgin Islands, and as such are subject to regulatory and legislative action by applicable local, state and federal governmental entities, which may increase our costs of providing products or services, or require us to change our business operations, products, or services or subject us to material adverse impacts if we fail to comply with such regulations.
The FCC regulates the licensing, construction, modification, operation, ownership, sale, and interconnection of wireless communications systems, as do some state and local regulatory agencies. Additionally, the Federal Trade Commission (“FTC”) and other federal agencies, such as the Consumer Financial Protection Board (“CFPB”), have jurisdiction over consumer protection and elimination and prevention of anticompetitive business practices with respect to the provision of non-common carrier services. We cannot assure you that the FCC, FTC, CFPB or any other federal, state or local agencies having jurisdiction over our business will not adopt regulations or take other enforcement or other actions that would adversely affect our business, impose new costs, or require changes in current or planned operations. We are subject to regulatory oversight by the FCC, FTC, and/or other federal agencies, as well as judicial review and actions, on issues related to the wireless industry that include, but are not limited to: roaming, spectrum allocation and licensing, pole attachments, intercarrier compensation, Universal Service Fund (“USF”), net neutrality, special access, 911 services, consumer protection including cramming, bill shock, and handset unlocking, consumer privacy, and cybersecurity. We are also subject to regulations in connection with other aspects of our business, including handset financing activities.
In addition, states are increasingly focused on the quality of service and support that wireless communication providers provide to their customers and several states have proposed or enacted new and potentially burdensome regulations in this area. A number of state Public Utility Commissions and state legislatures have introduced proposals in recent years seeking to regulate carriers’ business practices. We also face potential investigations by, and inquiries from or actions by state Public Utility Commissions and state Attorneys General. We also cannot assure you that Congress will not amend the Communications Act, from which the FCC obtains its authority and which serves to limit state authority, or enact other legislation in a manner that could be adverse to our business. Enactment of additional state or federal regulations may increase our costs of providing services (including, through universal service programs, requiring us to subsidize wireline competitors) or require us to change our services. Failure to comply with applicable regulations could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, we could be subject to fines, forfeitures, and other penalties (including, in extreme cases, revocation of our licenses) for failure to comply with FCC or other governmental regulations, even if any such non-compliance was unintentional. The loss of any licenses, or any related fines or forfeitures, could adversely affect our business, results of operations, and financial condition.
Unfavorable outcomes of legal proceedings may adversely affect our business and financial condition.
We are regularly involved in a number of legal proceedings before various state and federal courts, the FCC, the FTC, the CFPB, and state and local regulatory agencies. Such legal proceedings can be complex, costly, and highly disruptive to business operations by diverting the attention and energies of management and other key personnel. The assessment of the outcome of legal proceedings, including our potential liability, if any, is a highly subjective process that requires judgments about future events that are not within our control. The outcome of litigation or other legal proceedings, including amounts ultimately received or paid upon settlement, may differ materially from amounts accrued in the financial statements. In addition, litigation or similar proceedings could impose restraints on our current or future manner of doing business. Such potential outcomes including judgments, awards, settlements or orders could have a material adverse effect on our business, financial condition, operating results, or ability to do business.
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We increasingly offer products that include highly regulated financial services. These products expose us to a wide variety of state and federal regulations.
The introduction of additional financial services offerings to our customers has expanded our regulatory compliance obligations. If we fail to remain compliant with any of these regulations, then we face the risk of:
• | Increased consumer complaints and potential examinations or enforcement actions by federal and state regulatory agencies, including but not limited to the CFPB, Federal Deposit Insurance Corporation and FTC; |
• | Violation of financial services and consumer protections regulations may result in regulatory fines, penalties, enforcement actions, civil litigation, and/or class action lawsuits. |
We may be unable to protect our intellectual property. Additionally, we use equipment, software, technology, and content in the operation of our business, which may subject us to third-party intellectual property claims and we may be adversely affected by litigation involving our suppliers
We rely on a combination of patent, service mark, trademark, and trade secret laws and contractual restrictions to establish and protect our proprietary rights, all of which offer only limited protection. The steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary rights. Moreover, others may independently develop processes and technologies that are competitive to ours. We cannot be sure that any legal actions against such infringers will be successful, even when our rights have been infringed. We cannot assure you that our pending or future patent applications will be granted or enforceable, or that the rights granted under any patent that may be issued will provide us with any competitive advantages. In addition, we cannot assure you that any trademark or service mark registrations will be issued with respect to pending or future applications or will provide adequate protection of our brands. We do not have insurance coverage for intellectual property losses, and as such, a charge for an anticipated settlement, or an adverse ruling awarding damages, represents unplanned loss events. Any of these factors could have material adverse effects on our business, results of operations and financial condition.
We are a defendant in numerous intellectual property lawsuits, including patent infringement lawsuits, which exposes us to the risk of adverse financial impact either by way of significant settlement amounts or damage awards. As we adopt new technologies and new business systems, and provide customers with new products and/or services, we may face additional infringement claims. These claims could require us to cease certain activities or to cease selling relevant products and services. These claims can be time-consuming and costly to defend, and divert management resources. In addition to litigation directly involving our Company, our vendors and suppliers can be threatened with patent litigation and/or subjected to the threat of disruption or blockage of sale, use, or importation of products, posing the risk of supply chain interruption to particular products and associated services exposing us to material adverse operational and financial impacts.
Our business may be impacted by new or changing tax laws or regulations and actions by federal, state or local agencies, or how judicial authorities apply tax laws.
We calculate, collect, and remit various taxes and regulatory fees to numerous federal, state and local governmental authorities in connection with the products and services we provide. These fees include federal USF contributions and common carrier regulatory fees. Many state and local governments levy various taxes and fees on our sales of products and services to customers and on our purchases of telecommunications equipment and services from vendors and various telecommunications carriers. Further, we impose surcharges on customers to reimburse the company for taxes, regulatory assessments and other costs we incur to comply with governmental regulatory mandates. In many cases, the applicability and method of calculating these surcharges, taxes and fees may be uncertain, and our calculation, assessment or remittance of these amounts may be contested by either customers or governmental authorities. In the event that we have incorrectly described, disclosed, calculated, assessed or remitted amounts that were due to governmental authorities, we could be subject to additional taxes, fines, penalties, or other adverse actions, which could materially impact our operations or financial condition. In the event that federal, state and/or local municipalities were to significantly increase taxes and regulatory fees on our services or seek to impose new ones, it could have a material adverse effect on our margins and financial and operational results.
Our wireless licenses are subject to renewal and may be revoked in the event that we violate applicable laws.
Our existing wireless licenses are subject to renewal upon the expiration of the 10-year or 15-year period for which they are granted. Historically, the FCC has approved our license renewal applications. However, the Communications Act provides that licenses may be revoked for cause and license renewal applications denied if the FCC determines that a renewal would not serve the public interest. In addition, our licenses are subject to our compliance with the terms set forth in the agreement pertaining to national security among Deutsche Telekom, the Federal Bureau of Investigation, the Department of Justice, the
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Department of Homeland Security and the Company. The failure of Deutsche Telekom or the Company to comply with the terms of this agreement could result in fines, injunctions, and other penalties, including potential revocation or non-renewal of our spectrum licenses. If we fail to timely file to renew any wireless license, or fail to meet any regulatory requirements for renewal, including construction and substantial service requirements, we could be denied a license renewal. Many of our wireless licenses are subject to interim or final construction requirements and there is no guarantee that the FCC will find our construction, or the construction of prior licensees, sufficient to meet the build-out or renewal requirements. The FCC has pending a rulemaking proceeding to reevaluate, among other things, its wireless license renewal showings and standards and may in this or other proceedings promulgate changes or additional substantial requirements or conditions to its renewal rules, including revising license build out requirements. Accordingly, we cannot assure you that the FCC will renew our wireless licenses upon their expiration. If any of our wireless licenses were to be revoked or not renewed upon expiration, we would not be permitted to provide services under that license, which could have a material adverse effect on our business, results of operations, and financial condition.
Our business could be adversely affected by findings of product liability for health/safety risks from wireless devices and transmission equipment, as well as by changes to regulations/radio frequency emission standards.
We do not manufacture devices or other equipment sold by us, and we depend on our suppliers to provide defect-free and safe equipment. Suppliers are required by applicable law to manufacture their devices to meet certain governmentally imposed safety criteria. However, even if the devices we sell meet the regulatory safety criteria, we could be held liable with the equipment manufacturers and suppliers for any harm caused by products we sell if such products are later found to have design or manufacturing defects. We generally seek to enter into indemnification agreements with the manufacturers who supply us with devices to protect us from losses associated with product liability, but we cannot guarantee that we will be fully protected against all losses associated with a product that is found to be defective.
Allegations have been made that the use of wireless handsets and wireless transmission equipment, such as cell towers, may be linked to various health concerns, including cancer and brain tumors. Lawsuits have been filed against manufacturers and carriers in the industry claiming damages for alleged health problems arising from the use of wireless handsets. In addition, the FCC recently indicated that it plans to gather additional data regarding wireless handset emissions to update its assessment of this issue. The media has also reported incidents of handset battery malfunction, including reports of batteries that have overheated. These allegations may lead to changes in regulatory standards. There have also been other allegations regarding wireless technology, including allegations that wireless handset emissions may interfere with various electronic medical devices (including hearing aids and pacemakers), airbags, and anti-lock brakes.
Additionally, there are safety risks associated with the use of wireless devices while operating vehicles or equipment. Concerns over any of these risks and the effect of any legislation, rules or regulations that have been and may be adopted in response to these risks could limit our ability to sell our wireless services.
Related to Ownership of our Common Stock
We are controlled by Deutsche Telekom, whose interests may differ from the interests of our other stockholders.
Deutsche Telekom beneficially owns and possesses majority voting power of the fully diluted shares of our common stock. Through its control of the voting power of our common stock and the rights granted to Deutsche Telekom in our certificate of incorporation and the Stockholder’s Agreement, Deutsche Telekom controls the election of a majority of our directors and all other matters requiring the approval of our stockholders. By virtue of Deutsche Telekom’s voting control, we are a “controlled company”, as defined in the New York Stock Exchange (“NYSE”), listing rules, and are not subject to NYSE requirements that would otherwise require us to have a majority of independent directors, a nominating committee composed solely of independent directors, or a compensation committee composed solely of independent directors.
In addition, our certificate of incorporation and the Stockholder’s Agreement restrict us from taking certain actions without Deutsche Telekom’s prior written consent as long as Deutsche Telekom beneficially owns 30% or more of the outstanding shares of our common stock, including the incurrence of debt (excluding certain permitted debt) if our consolidated ratio of debt to cash flow for the most recently ended four full fiscal quarters for which financial statements are available would exceed 5.25 to 1.0 on a pro forma basis, the acquisition of any business, debt or equity interests, operations or assets of any person for consideration in excess of $1 billion, the sale of any of our or our subsidiaries’ divisions, businesses, operations or equity interests for consideration in excess of $1 billion, any change in the size of our board of directors, the issuances of equity securities in excess of 10% of our outstanding shares or to repurchase debt held by Deutsche Telekom, the repurchase or redemption of equity securities or the declaration of extraordinary or in-kind dividends or distributions other than on a pro rata basis, or the termination or hiring of our chief executive officer. These restrictions could prevent us from taking actions that
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our board of directors may otherwise determine are in the best interests of the Company and our stockholders or that may be in the best interests of our other stockholders.
Deutsche Telekom effectively has control over all matters submitted to our stockholders for approval, including the election or removal of directors, changes to our certificate of incorporation, a sale or merger of our company and other transactions requiring stockholder approval under Delaware law. Deutsche Telekom may have strategic, financial, or other interests different from our other stockholders, including as the holder of a substantial amount of our indebtedness, and may make decisions adverse to the interests of our other stakeholders.
Future sales or issuances of our common stock, including sales by Deutsche Telekom, could have a negative impact on our stock price.
We cannot predict the effect, if any, that market sales of shares or the availability of shares of our common stock will have on the prevailing trading price of our common stock from time to time. Sales of a substantial number of shares of our common stock could cause our stock price to decline.
We and Deutsche Telekom are parties to the Stockholder’s Agreement pursuant to which Deutsche Telekom is free to transfer its shares in public sales without notice, as long as such transactions would not result in the transferee owning 30% or more of the outstanding shares of our common stock. If a transfer would exceed the 30% threshold, it is prohibited unless the transferee makes a binding offer to purchase all of the other outstanding shares on the same price and terms. The Stockholder’s Agreement does not otherwise impose any other restrictions on the sales of common stock by Deutsche Telekom. Moreover, we have filed a shelf registration statement with respect to the common stock and certain debt securities held by Deutsche Telekom, which would facilitate the resale by Deutsche Telekom of all or any portion of the shares of our common stock it holds. The sale of shares of our common stock by Deutsche Telekom (other than in transactions involving the purchase of all of our outstanding shares) could significantly increase the number of shares available in the market, which could cause a decrease in our stock price. In addition, even if Deutsche Telekom does not sell a large number of its shares into the market, its right to transfer a large number of shares into the market may depress our stock price.
In addition, we have reserved up to 38.684 million shares of common stock for issuance upon conversion of our 5.50% Mandatory Convertible Preferred Stock, Series A ( “preferred stock”), subject to certain anti-dilution adjustments. The dividends on the preferred stock may also be paid in cash or, subject to certain limitations, shares of common stock or any combination of cash and shares of common stock. The issuance of additional shares of common stock upon conversion of, or in connection with the payment of dividends upon, the mandatory convertible preferred stock may depress our stock price.
Our stock price may be volatile, and may fluctuate based upon factors that have little or nothing to do with our business, financial condition, and operating results.
The trading prices of the securities of communications companies historically have been highly volatile, and the trading price of our common stock may be subject to wide fluctuations. Our stock price may fluctuate in reaction to a number of events and factors that may include, among other things:
• | our or our competitors’ actual or anticipated operating and financial results; introduction of new products and services by us or our competitors or changes in service plans or pricing by us or our competitors; |
• | analyst projections, predictions and forecasts, analyst target prices for our securities and changes in, or our failure to meet, securities analysts’ expectations; |
• | Deutsche Telekom’s financial performance, results of operation, or actions implied or taken by Deutsche Telekom; |
• | entry of new competitors into our markets or perceptions of increased price competition, including a price war; |
• | our performance, including subscriber growth, and our financial and operational metric performance; |
• | market perceptions relating to our services, network, handsets and deployment of our LTE platform and our access to iconic handsets, services, applications or content; |
• | market perceptions of the wireless communications industry and valuation models for us and the industry; |
• | changes in our credit rating or future prospects; |
• | the availability or perceived availability of additional capital in general and our access to such capital; |
• | actual or anticipated consolidation, or other strategic mergers or acquisition activities involving us or our competitors or market speculations regarding such activities; |
• | disruptions of our operations or service providers or other vendors necessary to our network operations; the general state of the U.S. and world economies; and |
• | availability of additional spectrum, whether by the announcement, commencement, bidding and closing of auctions for new spectrum or the acquisition of companies that own spectrum. |
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In addition, the stock market has been volatile in the recent past and has experienced significant price and volume fluctuations, which may continue for the foreseeable future. This volatility has had a significant impact on the trading price of securities issued by many companies, including companies in the communications industry. These changes frequently occur irrespective of the operating performance of the affected companies. Hence, the trading price of our common stock could fluctuate based upon factors that have little or nothing to do with our business, financial condition and operating results.
Our stockholder rights plan could prevent a change in control of our Company in instances in which some stockholders may believe a change in control is in their best interests.
We have a stockholder rights plan (“Rights Plan”) in effect. The Rights Plan will cause substantial dilution to a person or group that attempts to acquire our Company on terms that our board of directors does not believe are in our and our stockholders’ best interest. The Rights Plan is intended to protect stockholders in the event of an unfair or coercive offer to acquire the Company and to provide our board of directors with adequate time to evaluate unsolicited offers. The Rights Plan may prevent or make takeovers or unsolicited corporate transactions with respect to our Company more difficult, even if stockholders may consider such transactions favorable, possibly including transactions in which stockholders might otherwise receive a premium for their shares.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2014, we leased approximately 62,000 cell sites, 70 switching centers and 10 data centers, totaling approximately 2.0 million square feet. In addition, we had 17 leased call centers, totaling approximately 1.3 million square feet, and 20 leased warehouses, totaling approximately 450,000 square feet. We also leased approximately 2,300 retail locations, including stores and kiosks ranging in size from approximately 300 square feet to 11,000 square feet.
We currently lease office space totaling approximately 1.0 million square feet for our corporate headquarters in Bellevue, Washington. We use these offices for engineering and administrative purposes. We also lease space throughout the U.S., totaling approximately 1.4 million square feet as of December 31, 2014, for use by our regional offices primarily for administrative, engineering and sales purposes.
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Item 3. Legal Proceedings
See Note 13 – Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for information regarding certain legal proceedings in which we are involved.
Item 4. Mine Safety Disclosures
None.
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has traded on the NYSE under the symbol “TMUS” since May 1, 2013, the first trading day after the closing of the business combination with MetroPCS. As of December 31, 2014, there were 328 registered stockholders of record of our common stock, but we estimate the total number of stockholders to be much higher as a number of our shares are held by brokers or dealers for their customers in street name. For periods prior to the closing of the business combination with MetroPCS, the prices represent the high and low sales prices of our common stock, as reported by the NYSE under the symbol “PCS”, adjusted to reflect the 1-for-2 reverse stock split effected on April 30, 2013, but not adjusted on a per share basis for the aggregate cash payment of $1.5 billion to MetroPCS stockholders in connection with the business combination. See also Note 2 – Business Combination with MetroPCS of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
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The high and low common stock sales prices per share were as follows:
High | Low | ||||||
Year Ended December 31, 2014 | |||||||
First Quarter | $ | 33.92 | $ | 29.06 | |||
Second Quarter | 35.50 | 27.62 | |||||
Third Quarter | 34.55 | 28.25 | |||||
Fourth Quarter | 29.60 | 24.26 | |||||
Year Ended December 31, 2013 | |||||||
First Quarter | $ | 22.08 | $ | 18.28 | |||
Second Quarter | 25.02 | 16.01 | |||||
Third Quarter | 26.66 | 22.74 | |||||
Fourth Quarter | 34.10 | 24.90 | |||||
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 unsecured revolving credit facility with Deutsche Telekom and the indentures and supplemental indentures governing our long-term debt, excluding capital leases, contain covenants that, among other things, restrict our ability to declare or pay dividends on our common stock. In addition, no dividend may be declared or paid on our common stock, other than dividends payable solely in shares of our common stock, unless all accrued dividends for all completed dividend periods have been declared and paid on our preferred stock. Other than to pay dividends on our preferred stock, we currently intend to retain future earnings, if any, to invest in our business. Subject to Delaware law, our board of directors will determine the payment of future dividends on our common stock, if any, and the amount of any dividends in light of:
• | any applicable contractual or charter restrictions limiting our ability to pay dividends; |
• | our earnings and cash flows; |
• | our capital requirements; |
• | our future needs for cash; |
• | our financial condition; and |
• | other factors our board of directors deems relevant. |
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Performance Graph
The graph below compares the five-year cumulative total returns of T-Mobile, the NYSE Composite index, the S&P 500 index and the Dow Jones US Mobile Telecommunications TSM index. The graph tracks the performance of a $100 investment, with the reinvestment of all dividends, from December 31, 2009 to December 31, 2014. For periods prior to the closing of the business combination with MetroPCS, our stock price performance represents the stock price of MetroPCS, adjusted to reflect the 1-for-2 reverse stock split effected on April 30, 2013.
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Item 6. Selected Financial Data
The following selected financial data are derived from our consolidated financial statements. In connection with the business combination with MetroPCS, the selected financial data prior to May 1, 2013 represents T-Mobile USA’s historical financial data. The data below should be read in conjunction with Risk Factors included in Part 1, Item 1A, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 and Financial Statements and Supplementary Data included in Part II, Item 8 of this Form 10-K.
Selected Financial Data
(in millions, except per share and customer amounts) | As of and for the Year Ended December 31, | ||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Statement of Operations Data | |||||||||||||||||||
Total service revenues | $ | 22,375 | $ | 19,068 | $ | 17,213 | $ | 18,481 | $ | 18,733 | |||||||||
Total revenues | 29,564 | 24,420 | 19,719 | 20,618 | 21,347 | ||||||||||||||
Operating income (loss) | 1,416 | 996 | (6,397 | ) | (4,279 | ) | 2,705 | ||||||||||||
Total other expense, net | (1,003 | ) | (945 | ) | (589 | ) | (655 | ) | (526 | ) | |||||||||
Income tax expense (benefit) | 166 | 16 | 350 | (216 | ) | 822 | |||||||||||||
Net income (loss) | 247 | 35 | (7,336 | ) | (4,718 | ) | 1,354 | ||||||||||||
Earnings (loss) per share: | |||||||||||||||||||
Basic | 0.31 | 0.05 | (13.70 | ) | (8.81 | ) | 2.53 | ||||||||||||
Diluted | 0.30 | 0.05 | (13.70 | ) | (8.81 | ) | 2.53 | ||||||||||||
Other Financial Data | |||||||||||||||||||
Net cash provided by operating activities | $ | 4,146 | $ | 3,545 | $ | 3,862 | $ | 4,980 | $ | 4,905 | |||||||||
Purchases of property and equipment | (4,317 | ) | (4,025 | ) | (2,901 | ) | (2,729 | ) | (2,819 | ) | |||||||||
Purchases of spectrum licenses and other intangible assets, including deposits | (2,900 | ) | (381 | ) | (387 | ) | (23 | ) | (18 | ) | |||||||||
Net cash provided by financing activities | 2,524 | 4,044 | 57 | — | 123 | ||||||||||||||
Total customers (in thousands) | 55,018 | 46,684 | 33,389 | 33,185 | 33,734 | ||||||||||||||
Balance Sheet Data | |||||||||||||||||||
Cash and cash equivalents | $ | 5,315 | $ | 5,891 | $ | 394 | $ | 390 | $ | 109 | |||||||||
Property and equipment, net | 16,245 | 15,349 | 12,807 | 12,703 | 13,213 | ||||||||||||||
Spectrum licenses | 21,955 | 18,122 | 14,550 | 12,814 | 15,282 | ||||||||||||||
Total assets | 56,653 | 49,953 | 33,622 | 40,609 | 46,291 | ||||||||||||||
Total debt, excluding long-term financial obligation | 21,960 | 20,189 | 14,945 | 15,627 | 16,293 | ||||||||||||||
Stockholders’ equity | 15,663 | 14,245 | 6,115 | 15,785 | 20,492 | ||||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except as expressly stated, the financial condition and results of operations discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are those of T-Mobile US, Inc. and its consolidated subsidiaries.
Overview
The MD&A is intended to provide a reader of our financial statements with a narrative explanation from the perspective of management of our financial condition, results of operations, liquidity and certain other factors that may affect future results. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited Consolidated Financial Statements for the three years ended December 31, 2014 included in Part II, Item 8 of this Form 10-K.
Business Overview
We are the Un-carrier. Un-satisfied with the status quo. Un-afraid to innovate. T-Mobile is the fastest growing wireless company in the U.S., based on customer growth in 2014, currently providing wireless communications services, including voice, messaging and data, to over 55 million customers in the postpaid, prepaid, and wholesale markets. The Un-carrier proposition is an approach that seeks to listen to the customer, address their pain points, bring innovation to the industry, and
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improve the wireless experience for all. In practice, this means offering customers a great service on a nationwide LTE network, devices when and how they want them, and plans that are simple, affordable and without unnecessary restrictions. Going forward, we will continue to listen and respond to our customers, refine and improve the Un-carrier proposition, and deliver the best value experience in the industry.
Our Un-carrier proposition is first and foremost about the customer. In 2014, we continued to aggressively address customer pain points with the launch of the following phases of our Un-carrier proposition:
• | Contract Freedom – In January 2014, we announced phase 4.0, which reimburses customers’ ETFs when they switch from other carriers and trade in their eligible device. |
• | Test Drive – In June 2014, we released phase 5.0, which allows consumers to test our network and an Apple iPhone 5s with unlimited nationwide service for seven days at no charge. |
• | Music Freedom – In June 2014, we introduced phase 6.0, which allows Simple Choice customers to stream music from popular music services without it counting against their high-speed data allotment. Additionally, we launched Rhapsody unRadio, which is available to our eligible Simple Choice customers at no additional cost or at a discounted price. |
• | Wi-Fi Un-leashed – In September 2014, we launched phase 7.0, which provides Wi-Fi calling and texting for Simple Choice customers on capable smartphones. In addition, we unveiled the T-Mobile Personal CellSpot, a new device which provides customers with greater coverage in their home. Finally, through a new partnership with Gogo, customers with compatible devices can send and receive unlimited text, picture messages and receive visual voicemails on any Gogo-equipped U.S.-based flight for free. |
• | Data Stash – In December 2014, we introduced phase 8.0, giving customers the ability to roll their unused high-speed data automatically each month into a personal Data Stash so they can use it when they need it for up to a year. Starting in January 2015, Data Stash will be automatically available at no extra charge to every T-Mobile customer with a postpaid Simple Choice plan who has purchased additional LTE data, 3GB or more for smartphones and 1 GB or more for tablets. In addition, beginning in January 2015, we will provide a one-time Free Data Stash to start with of 10 GB of LTE data to all qualifying customers, which will expire at the end of 2015. |
Financial Highlights
Our primary financial focus is on growing Adjusted EBITDA, which we expect to continue to improve in 2015. Adjusted EBITDA increased to $5.6 billion in 2014, compared to $4.9 billion in 2013 and 2012. Adjusted EBITDA is primarily driven by increasing revenues. We generate revenues by offering affordable wireless communication services to our postpaid, prepaid and wholesale customers, as well as through sale of a wide selection of wireless devices and accessories. Total revenues increased to $29.6 billion in 2014 compared to $24.4 billion in 2013 and $19.7 billion in 2012. We introduced our Un-carrier proposition in 2013 with the objective of eliminating customer pain points from the unnecessary complexity of the wireless communication industry. We believe Un-carrier phases 1.0 through 8.0 have been successful as evidenced by our strong customer growth momentum since the launch of our Un-carrier proposition. Total net customer additions were 8,334,000 in 2014, a significant improvement compared to 4,377,000 in 2013 and 203,000 in 2012.
We generate the majority of our service revenues by providing wireless communication services to branded postpaid customers. Our ability to acquire and retain branded postpaid customers is important to our business in the generation of revenues. Total branded postpaid net customer additions were 4,886,000 in 2014, a significant improvement compared to net customer additions of 2,006,000 in 2013 and net customer losses of 2,074,000 in 2012. In addition, we have continued to focus on retaining customers through churn reduction initiatives to improve customer experience. Branded postpaid phone churn improved to 1.58% in 2014, compared to 1.69% in 2013 and 2.33% in 2012. Improvements in branded postpaid net customer additions and churn were driven by the continued success of our Un-carrier proposition and strong customer response to promotions. We expect further growth in our branded postpaid net customer additions in 2015 as we continue to offer competitive pricing and improve our network and customer experience.
We have also increased our service revenues from branded prepaid customers through the business combination with MetroPCS in 2013 and the expansion of the MetroPCS brand in 2014. In addition, we experienced increases in equipment sales from significant growth in the number of devices sold on higher gross customer additions and upgrade volumes, including redemptions through JUMP!.
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Our most significant expenses are related to acquiring and retaining high-quality customers, compensating employees, and operating and expanding our network. We expect operating expenses will continue to increase to support our strong customer growth. Operating expenses were $28.1 billion in 2014, compared to $23.4 billion in 2013 and $26.1 billion in 2012. Improvements in gross customer additions caused significant growth in the number of devices sold, which resulted in higher cost of equipment sales, and employee-related costs, such as commissions. In addition, employee-related costs increased as a result of increases in the number of retail and customer support employees needed to support customer growth. We also increased promotional activities to attract new customers. We have incurred expenses as part of the network modernization due to increased depreciation expense related to the build out of the LTE network and costs related to decommissioning of the MetroPCS CDMA network and certain other redundant cell sites.
Liquidity and Capital Resources Highlights
The success of our Un-carrier proposition and continued modernization of our network has further repositioned T-Mobile to provide customers with an unrivaled customer experience, which requires substantial investment in our business. Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations, proceeds from the issuance of long-term debt and the issuance of common and preferred stock, the sale of certain service receivables related to a factoring arrangement, and financing arrangements of vendor payables which effectively extend payment terms. In 2014, we completed an offering of new senior unsecured notes in aggregate principal amounts of $3.0 billion, using a portion of the proceeds from the issuance of the notes to redeem senior unsecured notes of $1.0 billion with a higher interest rate, and completed a public offering of 20 million shares of preferred stock for net proceeds of $982 million. See Note 8 – Debt and Note 14 – Additional Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. In addition, in 2014, we entered into a two-year factoring arrangement to sell certain service accounts receivable on a revolving basis with a current maximum funding limit of $640 million. See Note 4 – Factoring Arrangement of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
We have substantially completed the process of upgrading our network to LTE, which provides our customers with the fastest nationwide LTE services. Our LTE network covered 265 million people as of December 31, 2014, compared to more than 200 million people as of December 31, 2013. This surpassed our year-end goal of covering 250 million people with the fastest nationwide LTE network. We are targeting 300 million people with LTE by the end of 2015. In addition, we are currently in the process of building out our network to utilize our recently acquired 700 MHz A-Block spectrum licenses. Cash capital expenditures for property and equipment, which are primarily related to our network modernization, were $4.3 billion in 2014 compared to $4.0 billion in 2013 and $2.9 billion in 2012. We expect cash capital expenditures for property and equipment to be in the range of $4.4 billion to $4.7 billion in 2015.
We provide mobile communication services using spectrum licenses, consisting of 700 MHz A-Block, AWS and PCS licenses. In 2014, we completed transactions for the acquisition of 700 MHz A-Block, AWS and PCS spectrum licenses, primarily from Verizon, with an aggregate fair value of $4.8 billion, which covers approximately 150 million people, in exchange for cash and the transfer of certain AWS and PCS spectrum. In addition, in 2014, we entered into agreements, which are expected to close in 2015, for the acquisition of 700 MHz A-Block, AWS and PCS spectrum licenses with an estimated aggregate fair value of approximately $0.5 billion, which cover more than 40 million people, for cash and the exchange of certain AWS and PCS spectrum licenses, which cover approximately 6 million people. The transactions are subject to regulatory approval and other customary closing conditions. Upon closing of these pending transactions, we will own 700 MHz A-Block covering 190 million people in total. In January 2015, the FCC announced T-Mobile was the winning bidder of AWS spectrum licenses covering approximately 97 million people for an aggregate bid price of $1.8 billion. T-Mobile expects to receive the AWS spectrum licenses, subject to regulatory approval, in the second quarter of 2015. These transactions are expected to further enhance our portfolio of U.S. nationwide broadband spectrum. See Note 6 – Goodwill, Spectrum Licenses and Intangible Assets and Note 16 – Subsequent Events of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. In 2015, we will seek to opportunistically acquire additional spectrum in private party transactions to further enhance our portfolio of U.S. nationwide broadband spectrum and enable the expansion of LTE coverage to new markets.
See “Results of Operations” below for further discussion of changes in revenues and operating expenses and “Performance Measures” for a description of performance measures, such as Adjusted EBITDA and churn. The comparability of results in this Form 10-K for the year ended December 31, 2014 and 2013 is affected by the inclusion of MetroPCS results after the completion of the business combination on April 30, 2013.
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Results of Operations
Set forth below is a summary of consolidated results:
Year Ended December 31, | Percentage Change 2014 Versus 2013 | Percentage Change 2013 Versus 2012 | |||||||||||||||
(in millions) | 2014 | 2013 | 2012 | ||||||||||||||
Revenues | |||||||||||||||||
Branded postpaid revenues | $ | 14,392 | $ | 13,166 | $ | 14,521 | 9 | % | (9 | )% | |||||||
Branded prepaid revenues | 6,986 | 4,945 | 1,715 | 41 | % | NM | |||||||||||
Wholesale revenues | 731 | 613 | 544 | 19 | % | 13 | % | ||||||||||
Roaming and other service revenues | 266 | 344 | 433 | (23 | )% | (21 | )% | ||||||||||
Total service revenues | 22,375 | 19,068 | 17,213 | 17 | % | 11 | % | ||||||||||
Equipment sales | 6,789 | 5,033 | 2,242 | 35 | % | 124 | % | ||||||||||
Other revenues | 400 | 319 | 264 | 25 | % | 21 | % | ||||||||||
Total revenues | 29,564 | 24,420 | 19,719 | 21 | % | 24 | % | ||||||||||
Operating expenses | |||||||||||||||||
Cost of services, exclusive of depreciation and amortization shown separately below | 5,788 | 5,279 | 4,661 | 10 | % | 13 | % | ||||||||||
Cost of equipment sales | 9,621 | 6,976 | 3,437 | 38 | % | 103 | % | ||||||||||
Selling, general and administrative | 8,863 | 7,382 | 6,796 | 20 | % | 9 | % | ||||||||||
Depreciation and amortization | 4,412 | 3,627 | 3,187 | 22 | % | 14 | % | ||||||||||
Cost of MetroPCS business combination | 299 | 108 | 7 | NM | NM | ||||||||||||
Impairment charges | — | — | 8,134 | NM | NM | ||||||||||||
Gains on disposal of spectrum licenses | (840 | ) | (2 | ) | (205 | ) | NM | (99 | )% | ||||||||
Other, net | 5 | 54 | 99 | (91 | )% | (45 | )% | ||||||||||
Total operating expenses | 28,148 | 23,424 | 26,116 | 20 | % | (10 | )% | ||||||||||
Operating income (loss) | 1,416 | 996 | (6,397 | ) | 42 | % | NM | ||||||||||
Other income (expense) | |||||||||||||||||
Interest expense to affiliates | (278 | ) | (678 | ) | (661 | ) | (59 | )% | 3 | % | |||||||
Interest expense | (1,073 | ) | (545 | ) | — | 97 | % | NM | |||||||||
Interest income | 359 | 189 | 77 | 90 | % | NM | |||||||||||
Other income (expense), net | (11 | ) | 89 | (5 | ) | NM | NM | ||||||||||
Total other expense, net | (1,003 | ) | (945 | ) | (589 | ) | 6 | % | 60 | % | |||||||
Income (loss) before income taxes | 413 | 51 | (6,986 | ) | NM | NM | |||||||||||
Income tax expense | 166 | 16 | 350 | NM | (95 | )% | |||||||||||
Net income (loss) | $ | 247 | $ | 35 | $ | (7,336 | ) | NM | NM | ||||||||
NM – Not Meaningful
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenues
Branded postpaid revenues increased $1.2 billion, or 9%, in 2014, compared to 2013. The increase was primarily attributable to growth in the number of average branded postpaid customers driven by the continued success of our Un-carrier proposition and strong customer response to promotions for services and devices. Additional increases resulted from customer adoption of upgrade and insurance programs and changes in requalification requirements for corporate discount programs. The increase was partially offset by lower branded postpaid average revenue per account (“ARPA”). See “Performance Measures” for a description of ARPA. Branded postpaid ARPA was negatively impacted by continued growth of our Simple Choice plans, which have lower monthly service charges compared to traditional bundled plans. Branded postpaid customers on Simple Choice plans increased over the past twelve months to 89% of the branded postpaid customer base as of December 31, 2014, compared to 69% as of December 31, 2013.
Branded prepaid revenues increased $2.0 billion, or 41% in 2014, compared to 2013. The increase was primarily driven by growth of the customer base from the expansion of the MetroPCS brand and an increase in promotional activities. In addition, the inclusion of MetroPCS operating results for the full year period following the business combination in April 2013 contributed to the increase.
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Wholesale revenues increased $118 million, or 19%, in 2014, compared to 2013. The increase was primarily attributable to growth in customer programs and monthly plans, including data, offered by our MVNO partners and changes to our MVNO contractual arrangements.
Roaming and other service revenues decreased $78 million, or 23%, in 2014, compared to 2013, primarily due to a decline in ETFs following our introduction of the no annual service contract feature of the Simple Choice plan launched in March 2013.
Equipment sales increased $1.8 billion, or 35%, in 2014, compared to 2013. The increase was primarily attributable to significant growth in the number of devices sold due to higher gross customer additions and higher device upgrade volumes, including JUMP! redemptions. The volume of device sales increased 48% in 2014, compared to 2013. Additionally, the inclusion of MetroPCS operating results for the full year period in 2014 following the business combination in April 2013 contributed to the increase. The increase was partially offset by reimbursements of other carriers’ ETFs and a lower average revenue per device sold.
We financed $5.8 billion of equipment sales revenues through EIP during 2014, an increase from $3.3 billion in 2013, resulting from growth of our Simple Choice plans. Additionally, customers had associated EIP billings of $3.6 billion in 2014, compared to $1.5 billion in 2013.
Other revenues increased $81 million, or 25%, in 2014, compared to 2013. The increase was primarily due to higher co-location rental income from leasing space on wireless communication towers to third parties and higher lease income associated with spectrum license lease agreements resulting from spectrum swap transactions.
Operating Expenses
Cost of services increased $509 million, or 10%, in 2014, compared to 2013. The increase was primarily due to the inclusion of MetroPCS operating results for the full year period in 2014 following the business combination in April 2013. Additionally, higher lease expense primarily relating to spectrum license lease agreements resulting from spectrum swap transactions contributed to the increase.
Cost of equipment sales increased $2.6 billion, or 38%, in 2014, compared to 2013. The increase was primarily attributable to significant growth in the number of devices sold due to higher gross customer additions and higher device upgrade volumes, including JUMP! redemptions. Additionally, the inclusion of MetroPCS operating results for the full year period in 2014 following the business combination in April 2013 contributed to the increase. The volume of device sales increased 48% in 2014, compared to 2013. The increase was partially offset by a lower average cost per device sold.
Selling, general and administrative increased $1.5 billion, or 20%, in 2014, compared to 2013. The increase was primarily due to higher employee-related costs as a result of increases in the number of retail and customer support employees, higher commissions driven by increased gross customer additions and higher promotional costs. Additionally, the inclusion of MetroPCS operating results for the full year period in 2014 following the business combination in April 2013 and higher stock-based compensation contributed to the increase.
Depreciation and amortization increased $785 million, or 22%, in 2014, compared to 2013. The increase was primarily associated with the build-out of the T-Mobile LTE network, which increased the depreciable asset base. Additionally, the inclusion of MetroPCS operating results for the full year period in 2014 following the business combination in April 2013, including accelerated depreciation related to the decommissioning of the MetroPCS CDMA network, contributed to the increase.
Cost of MetroPCS business combination of $299 million in 2014 primarily reflects network decommissioning costs associated with the business combination. In 2014, we began decommissioning the MetroPCS CDMA network and certain other redundant network cell sites. Network decommissioning costs, which are excluded from Adjusted EBITDA, primarily relate to the acceleration of lease costs for cell sites that would have otherwise been recognized as cost of services over the remaining lease term had we not decommissioned the cell sites. We intend to decommission certain cell sites and incur additional network decommissioning costs in the range of $500 million to $600 million, a majority of which are expected to be recognized in 2015. See Note 2 – Business Combination with MetroPCS of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more information. Cost of MetroPCS business combination of $108 million in 2013 reflects personnel-related costs and professional services costs associated with the business combination.
Gains on disposal of spectrum licenses of $840 million in 2014 primarily consisted of non-cash gains from spectrum license transactions with Verizon, and to a lesser extent, a non-cash gain from a spectrum license transaction with AT&T during the
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fourth quarter of 2014. See Note 6 – Goodwill, Spectrum Licenses and Intangible Assets of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more information.
Other, net decreased $49 million, or 91%, in 2014, compared to 2013. The decrease was primarily due to our 2013 restructuring program to align our operations to our new strategy and position the company for future growth. Costs associated with the 2013 restructuring program primarily consisted of severance and other personnel-related costs.
Other Income (Expense)
Interest expense to affiliates decreased $400 million, or 59%, in 2014, compared to 2013. The decrease was primarily due to lower debt balances with Deutsche Telekom in 2014, resulting from the recapitalization of T-Mobile prior to the business combination in April 2013 and Deutsche Telekom’s sale of non-reset notes in the aggregate principal amount of $5.6 billion in October 2013. To a lesser extent, additional decreases resulted from fair value adjustments related to embedded derivative instruments associated with the senior reset notes issued to Deutsche Telekom in the recapitalization.
Interest expense increased $528 million, or 97% in 2014, compared to 2013. The increase was primarily the result of higher debt balances in 2014 compared to 2013, including senior notes issued in 2013, the assumption of MetroPCS long-term debt in connection with the business combination in April 2013, the reclassification of non-reset notes from long-term debt to affiliates to long-term debt following Deutsche Telekom’s sale of the non-reset notes in October 2013, and to a lesser extent, the issuance of new senior unsecured notes in September 2014.
Interest income increased $170 million, or 90% in 2014, compared to 2013. The increase was the result of significant growth in devices financed through EIP. Interest associated with EIP receivables is imputed at the time of sale and then recognized over the financed installment term.
Other income (expense), net decreased $100 million in 2014, compared to 2013. The decrease was primarily due to the recognition of foreign currency translation gains in 2013 related to the retirement of derivative instruments prior to the business combination in April 2013. This decrease was offset in part by a non-cash gain recognized in 2014 on the extinguishment of $1.0 billion of 7.875% senior notes due in 2018.
Income Taxes
Income tax expense increased $150 million in 2014, compared to 2013. The increase was primarily due to higher pre-tax income. The effective tax rate was 40.2% in 2014, compared to 31.4% in 2013. The increase in the effective tax rate for 2014 compared to 2013 was primarily due to an increase in the valuation allowance on certain state income tax attributes, which was partially offset by an increase in federal tax credits and a reduction in the effect of Puerto Rico taxes on the effective tax rate.
Guarantor Subsidiaries
Pursuant to the indenture and the supplemental indentures, the long-term debt, excluding capital leases, are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile US, Inc. (“Parent”) and certain of T-Mobile USA’s (“Issuer”) 100% owned subsidiaries (“Guarantor Subsidiaries”). In 2014, T-Mobile entered into a two-year 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.
The financial condition of the Parent, Issuer and Guarantor Subsidiaries is substantially similar to the Company’s consolidated financial condition. Similarly, the results of operations of the Parent, Issuer and Guarantor Subsidiaries are substantially similar to the Company’s consolidated results of operations. As of December 31, 2014 and December 31, 2013, the most significant components of the financial condition of the Non-Guarantor Subsidiaries were property and equipment of $537 million and $595 million, respectively, long-term financial obligations of $2.3 billion and $2.1 billion, respectively, and stockholders’ deficit of $1.5 billion and $1.3 billion, respectively. The most significant components of the results of operations of our Non-Guarantor Subsidiaries in 2014 were services revenues of $1.3 billion, offset by costs of equipment sales of $702 million resulting in a net comprehensive loss of $38 million. Similarly, for 2013, services revenues of $823 million were offset by costs of equipment sales of $552 million, resulting in a net comprehensive loss of $52 million.
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Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Revenues
Branded postpaid revenues decreased $1.4 billion, or 9%, in 2013, compared to 2012. The decrease was primarily attributable to lower ARPA. Branded postpaid ARPA was negatively impacted by the growth of our Simple Choice plans which have lower priced rate plans than other branded postpaid rate plans. Compared to other traditional bundled postpaid price plans, Simple Choice plans result in lower service revenues but higher equipment sales at the time of the purchase as the plans do not include a bundled sale of a discounted device. Branded postpaid customers on Simple Choice plans more than doubled over the past twelve months to 69% of the branded postpaid customer base at December 31, 2013, compared to 30% at December 31, 2012.
Branded prepaid revenues increased $3.2 billion in 2013, compared to 2012. Of the increase, approximately $2.9 billion was due to the inclusion of MetroPCS’s operating results following the business combination in April 2013. Excluding MetroPCS operating results, the increase in 2013 resulted primarily from an increase in average branded prepaid customers driven by the success of T-Mobile’s monthly prepaid service plans, including data services that also have higher ARPU.
Wholesale revenues increased $69 million, or 13%, in 2013, compared to 2012. The increase was primarily attributable to growth of the average number of MVNO customers for the period. The increase in MVNO customers was due in part to growth of government subsidized Lifeline programs offered by our MVNO partners along with MVNO partnerships launched in the fourth quarter of 2012. However, a significant portion of our MVNO partners’ recent customer growth has been in lower ARPU products that result in revenues that do not increase in proportion with customer growth.
Roaming and other service revenues decreased $89 million, or 21%, in 2013, compared to 2012. The decrease was primarily attributable to lower early termination fees of $58 million due to the no annual service contract features of Simple Choice plans launched in March 2013. Additionally, international voice and domestic data revenues decreased due to rate reductions negotiated with certain roaming partners.
Equipment sales increased $2.8 billion, or 124%, in 2013, compared to 2012. The increase was primarily attributable to significant growth in the number of devices sold and an increase in the rate of customers upgrading their device. Additionally, equipment sales increased due to growth in the sales of smartphones, which have higher average revenue per device sold as compared to other devices. This was driven by our introduction of both the Apple iPhone 5 and the Samsung Galaxy S®4 in the second quarter of 2013, and the Apple iPhone 5s and iPhone 5c in the third quarter of 2013. Additionally, the inclusion of MetroPCS’s operating results following the business combination in April 2013 contributed approximately $450 million to the increase in equipment sales in 2013.
We financed $3.3 billion of equipment sales revenues through equipment installment plans in 2013, a significant increase from $946 million in 2012 resulting from growth in Simple Choice plans. Additionally, customers had associated equipment installment plan billings of $1.5 billion in 2013, compared to $450 million in 2012.
Other revenues increased $55 million, or 21%, in 2013, compared to 2012 due primarily to an increase in imputed rental income on wireless communication tower sites.
Operating Expenses
Cost of services increased $618 million, or 13%, in 2013, compared to 2012. Of the increase, approximately $800 million was due to the inclusion of the operating results of MetroPCS following the business combination in April 2013. Cost of services, excluding MetroPCS, decreased due to lower roaming expenses of $126 million related to reduced roaming rates negotiated with certain roaming partners. Additionally, due to the network transition to enhanced telecommunication lines with higher capacity, we were able to accommodate higher data volumes at a lower cost.
Cost of equipment sales increased $3.5 billion, or 103%, in 2013, compared to 2012. The increase in cost of equipment sales was primarily attributable to a 67% increase in the volume of devices sold during 2013. The increase was partially attributable to higher average cost per device sold due in part to a 90% increase in the sale of smartphones units in 2013, compared to 2012. Additionally, the inclusion of MetroPCS’s operating results following the business combination in April 2013 contributed approximately $950 million to the increase in cost of equipment sales in 2013.
Selling, general and administrative increased $586 million, or 9%, in 2013, compared to 2012. Of the increase, approximately $650 million was attributable to the inclusion of operating results of MetroPCS following the business
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combination in April 2013. Selling, general and administrative expenses, excluding MetroPCS, decreased $61 million, or 1%, primarily driven by $241 million in lower bad debt expense, net of recoveries, as a result of improved credit quality of our customer portfolio. This decrease was partially offset by higher commission expenses driven by increased gross customer additions in 2013.
Depreciation and amortization increased $440 million, or 14%, in 2013, compared to 2012. Depreciation and amortization attributable to MetroPCS following the business combination in April 2013 was approximately $550 million. Depreciation and amortization expenses, excluding MetroPCS, decreased in 2013 as 2012 included increased depreciation expense due to the shortening of useful lives of certain network equipment to be replaced in connection with network modernization efforts.
Cost of MetroPCS business combination increased $101 million in 2013, compared to 2012 due primarily to personnel related costs associated with the change in control, professional services costs and network integration expenses associated with the business combination between T-Mobile USA and MetroPCS. See also Note 2 – Business Combination with MetroPCS of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Gain on disposal of spectrum licenses of $205 million in 2012 primarily consisted of non-cash gains related to an AWS spectrum license exchange with Verizon.
Other, net of $54 million in 2013 relates primarily to our 2013 cost restructuring program to align our operations to our new strategy and position the company for future growth. Costs associated with the 2013 restructuring program primarily consist of severance and other personnel-related costs. Other, net of $99 million in 2012 related primarily to the consolidation of our call center operations in 2012.
Other Income (Expense)
Interest expense to affiliates increased $17 million, or 3%, in 2013, compared to 2012. Prior to the closing of the business combination with MetroPCS, Deutsche Telekom recapitalized T-Mobile USA by retiring its long-term debt to affiliates of $14.5 billion and all related derivative instruments, in exchange for new senior unsecured notes of $11.2 billion. Later in 2013, Deutsche Telekom sold the senior non-reset notes resulting in an aggregate principal reduction of $5.6 billion in long-term debt to affiliates. The increase in interest expense to affiliates was primarily due to losses related to the retirement of derivative instruments associated with the extinguishment of the long-term debt to affiliates prior to the business combination, and higher average interest rates on the new senior unsecured notes. See also Note 8 – Debt and Note 14 – Additional Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Interest expense increased $545 million in 2013, compared to 2012. The increase in interest expense is primarily the result of MetroPCS long-term debt assumed during the second quarter of 2013 in connection with the business combination, as well as new senior notes issued during 2013. Additionally, interest expense of approximately $200 million in 2013 related to the long-term financial obligation resulting from the Tower Transaction that closed on November 30, 2012. The Tower Transaction and related impacts are further described in Note 9 – Tower Transaction and Related Long-Term Financial Obligation of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Interest income increased $112 million in 2013, compared to 2012. The increase in interest income is the result of the significant growth in handsets financed through our equipment installment plans in 2013. Imputed interest associated with our EIP receivables is imputed at the time of sale and then recognized over the financed installment term.
Other income (expense), net increased $94 million in 2013, compared to 2012. The increase in other income (expense), net was primarily due to the recognition of gains related to the retirement of derivative instruments associated with the pre-business combination long-term debt to affiliates. See also Note 8 – Debt and Note 14 – Additional Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Income Taxes
Income tax expense decreased $334 million in 2013, compared to 2012. The decrease in income tax expense was primarily due to lower pre-tax income, exclusive of impairment charges. The effective tax rate was 31.4% and (5.0)% for the years ended December 31, 2013 and 2012, respectively. The change in the effective tax rate for 2013 compared to 2012 was primarily due to the impact of the goodwill impairment recorded in 2012.
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Guarantor Subsidiaries
In 2013, T-Mobile entered into an agreement with Cook Inlet Voice and Data Services, Inc. (“Cook Inlet”) to acquire all of Cook Inlet's interest in Cook Inlet/VoiceStream GSM VII PCS Holdings LLC, (“CIVS VII”), a fully consolidated Non-Guarantor Subsidiary. The transaction was completed in July 2013 and resulted in CIVS VII becoming an indirect wholly-owned subsidiary of T-Mobile USA. CIVS VII was subsequently combined with, and the net assets transferred to, T-Mobile License LLC, a wholly-owned Restricted Subsidiary of T-Mobile USA.
The financial condition of the Parent, Issuer and Guarantor Subsidiaries is substantially similar to the Company’s consolidated financial condition. Similarly, the results of operations of the Parent, Issuer and Guarantor Subsidiaries are substantially similar to the Company’s consolidated results of operations. The change in the financial condition of the Non-Guarantor Subsidiaries was primarily due to the transfer of the net assets of CIVS VII into the Guarantor Subsidiaries consolidating balance sheet information as described above. As of December 31, 2013, the most significant components of the financial condition of the Non-Guarantor Subsidiaries were property and equipment of $595 million, long-term financial obligations of $2.1 billion, and stockholders’ deficit of $1.3 billion. The most significant components of the results of operations of our Non-Guarantor Subsidiaries in 2012, were services revenues of $712 million were offset by costs of equipment sales of $449 million, resulting in a net comprehensive income of $72 million.
Performance Measures
In managing our business and assessing financial performance, we supplement the information provided by the 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 key operating performance comparisons with other companies in the wireless industry.
Total Customers
A customer is generally defined as a SIM card with a unique T-Mobile identity number which is associated with an account that generates revenue. Branded customers generally include customers that are qualified either for postpaid service, where they generally pay after incurring service, or prepaid service, where they generally pay in advance. Wholesale customers include M2M and MVNO customers that operate on our network, but are managed by wholesale partners.
The following table sets forth the number of ending customers:
(in thousands) | December 31, 2014 | December 31, 2013 | December 31, 2012 | |||||
Customers, end of period | ||||||||
Branded postpaid phone customers | 25,844 | 21,797 | 19,858 | |||||
Branded postpaid mobile broadband customers | 1,341 | 502 | 435 | |||||
Total branded postpaid customers | 27,185 | 22,299 | 20,293 | |||||
Branded prepaid customers | 16,316 | 15,072 | 5,826 | |||||
Total branded customers | 43,501 | 37,371 | 26,119 | |||||
M2M customers | 4,421 | 3,602 | 3,090 | |||||
MVNO customers | 7,096 | 5,711 | 4,180 | |||||
Total wholesale customers | 11,517 | 9,313 | 7,270 | |||||
Total customers, end of period | 55,018 | 46,684 | 33,389 | |||||
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The following table sets forth the number of net customer additions (losses):
Year Ended December 31, | ||||||||
(in thousands) | 2014 | 2013 | 2012 | |||||
Net customer additions (losses) | ||||||||
Branded postpaid phone customers | 4,047 | 1,938 | (2,092 | ) | ||||
Branded postpaid mobile broadband customers | 839 | 68 | 18 | |||||
Total branded postpaid customers | 4,886 | 2,006 | (2,074 | ) | ||||
Branded prepaid customers | 1,244 | 328 | 1,007 | |||||
Total branded customers | 6,130 | 2,334 | (1,067 | ) | ||||
M2M customers | 819 | 512 | 660 | |||||
MVNO customers | 1,385 | 1,531 | 610 | |||||
Total wholesale customers | 2,204 | 2,043 | 1,270 | |||||
Total net customer additions | 8,334 | 4,377 | 203 | |||||
Acquired customers | — | 8,918 | — | |||||
Net customer additions were 8,334,000 in 2014, compared to net customer additions of 4,377,000 in 2013. At December 31, 2014, we had 55.0 million customers, an 18% increase from the customer total as of December 31, 2013, as a result of growth in all customer categories, as described below.
Net customer additions, excluding customers acquired as a result of the MetroPCS business combination were 4,377,000 in 2013, compared to 203,000 net customer additions in 2012. At December 31, 2013, we had 46.7 million customers, a 40% increase from the customer total as of December 31, 2012. The increase was primarily driven by the addition of MetroPCS’s customer base due to the completion of the business combination during the second quarter of 2013, which increased the branded prepaid customer base by 8,918,000.
Branded Customers
Branded postpaid phone net customer additions were 4,047,000 in 2014, compared to branded postpaid phone net customer additions of 1,938,000 in 2013. The increase in customer development was attributable to increased new customer activations and improved branded postpaid phone churn driven by the continued success of our Un-carrier proposition and strong customer response to promotions for services and devices. Additional increases in customer development resulted from the launch of new popular devices.
Branded postpaid phone net customer additions were 1,938,000 in 2013, compared to branded postpaid phone net customer losses of 2,092,000 in 2012. The significant improvement in customer development was primarily attributable to improved branded postpaid phone churn, increased new customer activations and qualified upgrades of branded prepaid customers to branded postpaid plans. Branded postpaid phone net customer additions benefited from the launch of Simple Choice plans as a component of the Un-carrier proposition and launch of popular devices in 2013. These factors drove incremental gross additions for branded postpaid phone customers and improved churn as further described below.
Branded postpaid mobile broadband net customer additions were 839,000 in 2014, compared to branded postpaid mobile broadband net customer additions of 68,000 in 2013. The significant increase was driven by strong customer response to promotions for mobile broadband services and devices.
Branded postpaid mobile broadband net customer additions were 68,000 in 2013, compared to branded postpaid mobile broadband net customer additions of 18,000 in 2012. The increase was driven by the positive customer response to the “Tablets Un-leashed” promotion launched in October 2013.
Branded prepaid net customer additions were 1,244,000 in 2014, compared to branded prepaid net customer additions of 328,000 in 2013. The increase in customer development was attributable to higher branded prepaid gross customer additions due to the growth and expansion of the MetroPCS brand, including the launch into additional markets following the MetroPCS business combination in April 2013. This increase was offset in part by higher deactivations from the competitive environment in the prepaid market.
Branded prepaid net customer additions, excluding customers of MetroPCS acquired as a result of the business combination, were 328,000 in 2013, compared to 1,007,000 branded prepaid net customer additions in 2012. The decrease was partly a result of qualified upgrades of branded prepaid customers to branded postpaid plans as the Un-carrier proposition eliminates
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annual service contracts to credit worthy customers that have historically been utilizing prepaid products. In addition, the robust competitive environment in the prepaid market resulted in higher branded prepaid customer deactivations, partially offset by higher branded prepaid gross customer additions due in part to the expansion of the MetroPCS brand, including the launch into 30 additional markets since the completion of the business combination.
Wholesale
Wholesale net customer additions were 2,204,000 in 2014, compared to wholesale net customer additions of 2,043,000 in 2013. The increase was primarily attributable to higher M2M gross customer additions resulting from strong activation volume, partially offset by a decrease in MVNO net customer additions driven by higher churn. T-Mobile offers its M2M customers innovative products and solutions to assist them in embracing the Internet of Things (“IoT”). MVNO customers continued to grow, although at a slower rate in 2014 than 2013. MVNO partners often have relationships with multiple carriers and through steering their business towards carriers offering promotions, can impact specific carriers’ results.
Wholesale net customer additions were 2,043,000 in 2013, compared to wholesale net customer additions of 1,270,000 in 2012. The growth in MVNO customers was due in part to government subsidized Lifeline programs offered by our MVNO partners along with ongoing growth from MVNO partnerships launched in the fourth quarter of 2012.
Customers Per Account
Customers per account is calculated by dividing the number of branded postpaid customers as of the end of the period by the number of branded postpaid accounts as of the end of the period. An account may include branded postpaid phone and mobile broadband customers. We believe branded postpaid customers per account provides management with useful information to evaluate our branded postpaid customer base on a per account basis.
Year Ended December 31, | ||||||||
2014 | 2013 | 2012 | ||||||
Branded postpaid customers per account | 2.36 | 2.18 | 2.17 | |||||
Branded postpaid customers per account were 2.36 as of December 31, 2014, compared to 2.18 as of December 31, 2013. The increase was primarily due to an increase in the average number of branded postpaid phone customers per account resulting from promotions for services, including the “4 for $100” offer, and increased penetration of mobile broadband devices.
Branded postpaid customers per account as of December 31, 2013 was consistent compared to December 31, 2012.
Churn
Churn represents the number of customers whose service was discontinued as a percentage of the average number of customers during the specified period. The number of customers whose service was discontinued is presented net of customers that subsequently have their service restored. We believe that churn provides management with useful information to evaluate customer retention and loyalty.
Year Ended December 31, | ||||||||
2014 | 2013 | 2012 | ||||||
Branded postpaid phone churn | 1.58 | % | 1.69 | % | 2.33 | % | ||
Branded prepaid churn | 4.76 | % | 5.37 | % | 6.44 | % | ||
Branded postpaid phone churn was 1.58% for the year ended December 31, 2014, an 11 basis point improvement compared to 1.69% in 2013. The year over year improvement in branded postpaid phone churn was impacted by the continued success of our Un-carrier initiatives resulting in increased customer loyalty.
Branded postpaid phone churn was 1.69% for the year ended December 31, 2013, a 64 basis point improvement compared to 2.33% in 2012. The significant improvements were due in part to the continued focus on churn reduction initiatives, such as improving network quality and the customer sales experience. Additionally, our no annual service contracts announced in the first quarter of 2013 gained positive traction with customers. We also began offering new handsets in 2013, such as Apple iPhone products and the Samsung Galaxy S4, which improved customer retention compared to the same periods in 2012.
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Branded prepaid churn was 4.76% for the year ended December 31, 2014, a 61 basis point improvement compared to 5.37% in 2013. The improvement was primarily due to the inclusion and growth of MetroPCS customers, which represent the largest portion of the branded prepaid customer base and historically have lower rates of churn than T-Mobile branded prepaid customers.
Branded prepaid churn was 5.37% for the year ended December 31, 2013, a 107 basis point improvement compared to 6.44% in 2012. The improvement was primarily a result of the completion of the business combination with MetroPCS during the second quarter of 2013. MetroPCS customers are now the largest portion of the branded prepaid customer base and have historically had lower rates of churn than the historical T-Mobile branded prepaid business. Consequently, branded prepaid churn was impacted positively by the inclusion of MetroPCS customers.
Average Revenue Per Account, Average Billings Per Account, Average Revenue Per User, and Average Billings Per User
Average Revenue Per Account (“ARPA”) represents the average monthly branded postpaid service revenue earned per account. An account may include branded postpaid phone and mobile broadband customers. We believe branded postpaid ARPA provides management, investors and analysts with useful information to assess and evaluate our branded postpaid service revenue realization and assist in forecasting our future branded postpaid service revenues on a per account basis. We consider branded postpaid ARPA to be indicative of our revenue growth potential given the increase in the average number of branded postpaid phone customers per account and increased penetration of mobile broadband devices.
Average Billings Per Account (“ABPA”) represents the average monthly branded postpaid customer billings per account. We believe branded postpaid ABPA provides management, investors and analysts with useful information to evaluate average branded postpaid customer billings per account as it is indicative of estimated cash collections, including equipment installments payments, from our customers each month on a per account basis.
Average Revenue Per User (“ARPU”) represents the average monthly service revenue earned from customers. Branded postpaid phone ARPU excludes mobile broadband customers and related revenues. We believe branded postpaid phone ARPU and branded postpaid ARPA are useful metrics when assessing the realization of branded postpaid service revenues.
We believe branded prepaid ARPU provides management, investors and analysts with useful information to assess and evaluate our branded prepaid service revenue realization and assist in forecasting our future branded prepaid service revenues on a per customer basis.
Average Billings Per User (“ABPU”) represents the average monthly branded postpaid customer billings. We believe branded postpaid ABPU and branded postpaid ABPA are useful metrics when evaluating average branded postpaid customer billings.
The following tables illustrate the calculation of ARPA and ABPA and reconcile these measures to the related service revenues, which we consider to be the most directly comparable GAAP financial measure to ARPA and ABPA:
Year Ended December 31, | |||||||||||
(in millions, except average number of accounts, ARPA and ABPA) | 2014 | 2013 | 2012 | ||||||||
Calculation of Branded Postpaid ARPA: | |||||||||||
Branded postpaid service revenues | $ | 14,392 | $ | 13,166 | $ | 14,521 | |||||
Divided by: Average number of branded postpaid accounts (in thousands) and number of months in period | 11,008 | 9,638 | 9,975 | ||||||||
Branded postpaid ARPA | $ | 108.95 | $ | 113.84 | $ | 121.31 | |||||
Calculation of Branded Postpaid ABPA: | |||||||||||
Branded postpaid service revenues | $ | 14,392 | $ | 13,166 | $ | 14,521 | |||||
Add: EIP billings | 3,596 | 1,471 | 450 | ||||||||
Total billings for branded postpaid customers | $ | 17,988 | $ | 14,637 | $ | 14,971 | |||||
Divided by: Average number of branded postpaid accounts (in thousands) and number of months in period | 11,008 | 9,638 | 9,975 | ||||||||
Branded postpaid ABPA | $ | 136.17 | $ | 126.55 | $ | 125.07 | |||||
Branded postpaid ARPA decreased $4.89, or 4%, for 2014, compared to 2013. The decrease was primarily due to the continued growth of customers on Simple Choice plans, which have lower monthly service charges compared to traditional bundled plans, and promotions for services, including the “4 for $100” offer.
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Branded postpaid ARPA decreased $7.47, or 6%, for 2013, compared to 2012. The decrease was primarily due to the continued growth of customers on Simple Choice plans, which have lower monthly service charges compared to traditional bundled plans. This was offset in part by increased data revenues from continued growth in smartphone penetration.
Branded postpaid ABPA increased $9.62, or 8%, for 2014 compared to 2013, and increased $1.48, or 1%, for 2013 compared to 2012. The increases were primarily due to growth in devices financed through EIP, offset in part by lower branded postpaid ARPA.
The following tables illustrate the calculation of ARPU and ABPU and reconcile these measures to the related service revenues, which we consider to be the most directly comparable GAAP financial measure to ARPU and ABPU:
Year Ended December 31, | |||||||||||
(in millions, except average number of customers, ARPU and ABPU) | 2014 | 2013 | 2012 | ||||||||
Calculation of Branded Postpaid Phone ARPU: | |||||||||||
Branded postpaid service revenues | $ | 14,392 | $ | 13,166 | $ | 14,521 | |||||
Less: Branded postpaid mobile broadband revenues | (261 | ) | (169 | ) | (185 | ) | |||||
Branded postpaid phone service revenues | $ | 14,131 | $ | 12,997 | $ | 14,336 | |||||
Divided by: Average number of branded postpaid phone customers (in thousands) and number of months in period | 23,817 | 20,424 | 20,872 | ||||||||
Branded postpaid phone ARPU | $ | 49.44 | $ | 53.03 | $ | 57.23 | |||||
Calculation of Branded Postpaid ABPU: | |||||||||||
Branded postpaid service revenues | $ | 14,392 | $ | 13,166 | $ | 14,521 | |||||
Add: EIP billings | 3,596 | 1,471 | 450 | ||||||||
Total billings for branded postpaid customers | $ | 17,988 | $ | 14,637 | $ | 14,971 | |||||
Divided by: Average number of branded postpaid customers (in thousands) and number of months in period | 24,683 | 20,858 | 21,306 | ||||||||
Branded postpaid ABPU | $ | 60.73 | $ | 58.48 | $ | 58.56 | |||||
Calculation of Branded Prepaid ARPU: | |||||||||||
Branded prepaid service revenues | $ | 6,986 | $ | 4,945 | $ | 1,715 | |||||
Divided by: Average number of branded prepaid customers (in thousands) and number of months in period | 15,691 | 11,913 | 5,325 | ||||||||
Branded prepaid ARPU | $ | 37.10 | $ | 34.59 | $ | 26.85 | |||||
Branded postpaid phone ARPU decreased $3.59, or 7%, for 2014, compared to 2013. The decrease was primarily due to the continued growth of customers on Simple Choice plans, which have lower monthly service charges compared to traditional bundled plans, and promotions for services, including the “4 for $100” offer.
Branded postpaid phone ARPU decreased $4.20, or 7%, for 2013, compared to 2012. The decrease was primarily due to the continued growth of customers on Simple Choice plans, which have lower monthly service charges compared to traditional bundled plans. This was offset in part by increased data revenues from continued growth in smartphone penetration.
Branded postpaid ABPU increased $2.25, or 4% for 2014, compared to 2013. The increase was primarily due to growth in devices financed through EIP, offset in part by lower branded postpaid phone ARPU.
Branded postpaid ABPU decreased $0.08 for 2013, compared to 2012. The decrease was primarily due lower branded postpaid phone ARPU, offset in part by growth in devices financed through EIP.
Branded prepaid ARPU increased $2.51 or 7% for 2014, compared to 2013. The increase was primarily due to the inclusion and growth of the MetroPCS customer base, which generate higher ARPU than the rest of T-Mobile’s branded prepaid customers.
Branded prepaid ARPU increased $7.74 or 29% for 2013, compared to 2012. The increase was primarily due to the inclusion of MetroPCS customer base, which generate higher ARPU than the rest of T-Mobile’s branded prepaid customers, as well as the growth of monthly prepaid service plans, which include data services and have higher ARPU than other pay-as-you-go prepaid plans.
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Adjusted EBITDA
Adjusted EBITDA represents earnings before interest expense (net of interest income), tax, depreciation, amortization, stock-based compensation and expenses not reflective of T-Mobile’s ongoing operating performance. Adjusted EBITDA margin is 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 metric 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 also uses Adjusted EBITDA to measure our ability to provide cash flows to meet future debt services, capital expenditures and working capital requirements, and fund future growth. We believe analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate overall operating performance and facilitate comparisons with other wireless communications companies. 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 with GAAP.
The following table illustrates the calculation of Adjusted EBITDA and reconciles Adjusted EBITDA to net income (loss)which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA:
Year Ended December 31, | |||||||||||
(in millions) | 2014 | 2013 | 2012 | ||||||||
Net income (loss) | $ | 247 | $ | 35 | $ | (7,336 | ) | ||||
Adjustments: | |||||||||||
Interest expense to affiliates | 278 | 678 | 661 | ||||||||
Interest expense | 1,073 | 545 | — | ||||||||
Interest income | (359 | ) | (189 | ) | (77 | ) | |||||
Other expense (income), net | 11 | (89 | ) | 5 | |||||||
Income tax expense | 166 | 16 | 350 | ||||||||
Operating income (loss) | 1,416 | 996 | (6,397 | ) | |||||||
Depreciation and amortization | 4,412 | 3,627 | 3,187 | ||||||||
Cost of MetroPCS business combination | 299 | 108 | 7 | ||||||||
Stock based compensation (1) | 211 | 100 | — | ||||||||
Gains on disposal of spectrum licenses (1) | (720 | ) | — | (156 | ) | ||||||
Impairment charges | — | — | 8,134 | ||||||||
Other, net (1) | 18 | 54 | 111 | ||||||||
Adjusted EBITDA | $ | 5,636 | $ | 4,885 | $ | 4,886 | |||||
Adjusted EBITDA margin | 25 | % | 26 | % | 28 | % | |||||
(1) | Stock-based compensation includes tax impacts and may not agree to stock based compensation expense in the consolidated financial statements. Gains on disposal of spectrum licenses and Other, net transactions may not agree in total to the Gains on disposal of spectrum licenses and Other, net in the Consolidated Statements of Comprehensive Income (Loss) primarily due to certain routine operating activities, such as insignificant or routine spectrum license exchanges that would be expected to reoccur, and are therefore included in Adjusted EBITDA. |
Adjusted EBITDA increased 15% for 2014, compared to 2013. Adjusted EBITDA was positively impacted by increased branded postpaid revenues resulting from the continued success of our Un-carrier value proposition and strong customer response to promotional activities, as well as the inclusion of MetroPCS operating results since the business combination in 2013, including branded prepaid revenue growth from expansion of the MetroPCS brand. These increases were partially offset by higher selling, general and administrative expenses and losses on equipment sales.
Adjusted EBITDA was consistent for 2013, compared to 2012. The inclusion of MetroPCS’s operating results since May 1, 2013, contributed approximately $1.0 billion in Adjusted EBITDA for 2013. Excluding the Adjusted EBITDA contributed by MetroPCS’s operating results, Adjusted EBITDA was negatively impacted by the reduction in service revenues, which declined primarily due to impacts from customers migrating to Simple Choice plans, which result in lower ARPU. Additionally, Adjusted EBITDA was negatively impacted by increases in cost of equipment sales from higher sales volumes, partially offset by increases in equipment sales. Increases in costs of equipment sales and equipment sales were driven by higher gross customer additions and the launch of new handsets in 2013. In addition, equipment sales increased in 2013 due to a higher proportion of customers choosing Simple Choice plans for which we do not include a bundled sale of a discounted device.
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Adjusted EBITDA in the first quarter of 2015 is expected to be significantly impacted by a large investment to front end customer growth in 2015, similar to what we did in 2014. In addition, the first quarter of 2015 will reflect the accounting treatment of Un-carrier 8.0 - Data Stash, which is expected to have a non-cash impact in the range of $100 million to $150 million. The accounting treatment of the initial 10 GB allotment, which is a revenue deferral, is expected to fully reverse itself during 2015.
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 issuance of common and preferred stock, the sale of certain service receivables related to a factoring arrangement, and financing arrangements of vendor payables which effectively extend payment terms. In addition, we have entered into an unsecured revolving credit facility with Deutsche Telekom that allows for up to $500 million in borrowings. As of December 31, 2014, our cash and cash equivalents were $5.3 billion. We expect our current sources of funding to be sufficient to meet the anticipated liquidity requirements of the Company in the next 12 months and intend to use our current sources of funding for general corporate purposes, including capital investments, enhancing our financial flexibility and opportunistically acquiring additional spectrum in private party transactions. We determine future liquidity requirements, for both operations and capital expenditures, based in large part upon projected financial and operating performance. 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. There are a number of risks and uncertainties 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. We may seek to raise additional debt or equity capital to the extent our projections regarding our liquidity requirements change or on an opportunistic basis when there are favorable market conditions. Further, we may consider entering into factoring arrangements to sell certain EIP receivables as an additional source of liquidity.
Prior to the completion of the business combination with MetroPCS in April 2013, our sources of liquidity were cash and cash equivalents and short-term investments with Deutsche Telekom included in accounts receivable from affiliates, and cash generated from operations.
As of December 31, 2014, our total capital consisted of total debt of $22.0 billion, excluding our long-term financial obligation related to the tower transaction, and stockholders’ equity of $15.7 billion. In 2014, we completed an offering of new senior unsecured notes in aggregate principal amounts of $3.0 billion and used a portion of the proceeds from the issuance of the notes to redeem senior unsecured notes of $1.0 billion with a higher interest rate. In addition, in 2014, we completed a public offering of 20 million shares of preferred stock for net proceeds of $982 million. Unless converted earlier, each share of the preferred stock will automatically convert in 2017 into between 1.6119 and 1.9342 shares of common stock depending on the applicable market value of the common stock. See Note 8 – Debt and Note 14 – Additional Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.
In 2014, we completed transactions for the acquisition of 700 MHz A-Block, AWS and PCS spectrum licenses, primarily with Verizon, for cash and the transfer of certain AWS and PCS spectrum licenses. Upon closing of the transactions in 2014, we paid $2.5 billion with cash on hand and transferred certain AWS and PCS spectrum licenses. In addition, in 2014, the FCC began conducting an auction of AWS spectrum licenses and T-Mobile provided the FCC with a deposit of $417 million in connection with the auction. In January 2015, the FCC announced T-Mobile was the winning bidder of AWS spectrum licenses covering approximately 97 million people for an aggregate bid price of $1.8 billion. T-Mobile will pay the FCC the remaining $1.4 billion for the AWS spectrum licenses in March 2015 with cash on hand. T-Mobile expects to receive the AWS spectrum licenses, subject to regulatory approval, in the second quarter of 2015.
In 2014, we entered into a two-year factoring arrangement to sell certain receivables on a revolving basis as an additional source of liquidity. The factoring arrangement has a current maximum funding limit of $640 million, subject to change upon notification to certain third parties. We sold receivables related to the factoring arrangement for net cash proceeds of $610 million in 2014. See Note 4 – Factoring Arrangement of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.
The indentures governing the long-term debt, excluding capital leases, contain covenants that, among other things, limit our ability 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 indentures and the supplemental indentures relating to the long-term debt restrict the ability of the Issuer to loan funds or make payments to the Parent. However, the Issuer is allowed to make certain permitted payments to the
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Parent under the terms of each of the indentures and the supplemental indentures relating to the long-term debt. We were in compliance with all restrictive debt covenants as of December 31, 2014.
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.
The property and equipment capital expenditures in 2014 and 2013 primarily relate to our network modernization and deployment of LTE. The capital expenditures in 2012 were primarily associated with the continued expansion of our network coverage. During 2012, we were developing plans to deploy LTE in 2013 after the terminated AT&T transaction. As such, capital spending was lower in 2012 than in subsequent periods.
We expect cash capital expenditures for property and equipment to be in the range of $4.4 billion to $4.7 billion in 2015. This does not include purchases of spectrum licenses.
Cash Flows
The following table summarizes the consolidated statements of cash flows:
Year Ended December 31, | |||||||||||
(in millions) | 2014 | 2013 | 2012 | ||||||||
Net cash provided by operating activities | $ | 4,146 | $ | 3,545 | $ | 3,862 | |||||
Net cash used in investing activities | (7,246 | ) | (2,092 | ) | (3,915 | ) | |||||
Net cash provided by financing activities | 2,524 | 4,044 | 57 | ||||||||
The historical cash flows of T-Mobile USA should not be considered representative of the anticipated cash flows of T-Mobile US, Inc., the combined company resulting from the business combination.
Operating Activities
Cash provided by operating activities was $4.1 billion in 2014, compared to $3.5 billion in 2013. The increase in cash flow provided by operating activities was driven by several factors. Our operating income, exclusive of non-cash items such as depreciation and amortization and gains from spectrum license transactions, increased slightly compared to the prior year. This was primarily a result of increases in branded postpaid revenues due to our acceleration of customer growth partially offset by higher selling, general and administrative costs and losses on equipment sales. Net changes in working capital increased slightly. This was primarily a result of increases in accounts payable and accrued liabilities due to the timing of vendor payments and proceeds from the sales of certain service receivables related to the factoring arrangement. The increases in working capital were mostly offset by increases in EIP receivables as the result of significant growth in devices financed through EIP and increases in inventories.
Cash provided by operating activities was $3.5 billion in 2013, compared to $3.9 billion in 2012. The decrease in cash flow provided by operating activities was driven by several factors. Our operating income, exclusive of non-cash items such as impairment charges and depreciation and amortization, declined compared to the same period in the prior year primarily as a result of decreases in branded postpaid revenues. Net changes in working capital decreased slightly due to increases in EIP receivables, offset in part by increases in accounts payable and accrued liabilities due in part to timing of vendor payments.
Investing Activities
Cash used in investing activities was $7.2 billion in 2014, compared to $2.1 billion used in 2013. In 2014, cash used in investing activities primarily consisted of purchases of property and equipment of $4.3 billion as a result of our network modernization and purchases of intangible assets of $2.9 billion due primarily to the acquisition of 700 MHz A-Block spectrum licenses. In 2013, cash used in investing activities primarily consisted of purchases of property and equipment of $4.0 billion as a result of our network modernization. This was partially offset by cash and cash equivalents acquired in connection with the business combination with MetroPCS of $2.1 billion and the settlement of a short-term loan receivable, net with Deutsche Telekom of $300 million.
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Cash used in investing activities was $2.1 billion in 2013, compared to $3.9 billion used in 2012. The decrease was primarily due to the cash and cash equivalents acquired in connection with the business combination with MetroPCS of $2.1 billion. The decrease was partially offset by $1.1 billion higher purchases of property and equipment in 2013, as compared to 2012, as a result of T-Mobile’s network modernization in 2013 described above.
Financing Activities
Cash provided by financing activities was $2.5 billion in 2014, compared to $4.0 billion in 2013. The decrease was primarily due to higher repayments of long-term debt of $1.0 billion, lower net proceeds from the issuance of stock of $805 million, higher net repayments of short-term debt of $174 million and lower proceeds from the exercise of stock options of $110 million. The decrease was partially offset by higher net proceeds from the issuance of long-term debt of $499 million.
Cash provided by financing activities was $4.0 billion in 2013, compared to $57 million in 2012. The increase was primarily due to net proceeds of $2.5 billion from the issuance of long-term debt, net proceeds from the issuance of common stock of $1.8 billion, and proceeds from the exercises of stock options issued of $137 million. The increase was offset by repayments of short-term debt for purchases of property and equipment of $244 million, the purchase of Cook Inlet's interest in CIVS VII of $80 million, and a distribution to Deutsche Telekom of $41 million in connection with the recapitalization of T-Mobile USA effected immediately prior to the completion of the business combination with MetroPCS.
Contractual Obligations
Current accounting standards require disclosure of material obligations and commitments to make future payments under contracts, such as debt, lease agreements, and purchase obligations. See Note 8 – Debt and Note 13 – Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
The following table provides aggregate information about T-Mobile’s contractual obligations as of December 31, 2014:
(in millions) | Less Than 1 Year | 1 - 3 Years | 4 - 5 Years | More Than 5 Years | Total | ||||||||||||||
Long-term debt (1) | $ | — | $ | — | $ | 3,000 | $ | 18,200 | $ | 21,200 | |||||||||
Interest on long-term debt | 1,320 | 2,644 | 2,563 | 3,000 | 9,527 | ||||||||||||||
Capital lease obligations, including interest | 49 | 102 | 107 | 319 | 577 | ||||||||||||||
Vendor financing arrangements | 64 | — | — | — | 64 | ||||||||||||||
Financial obligation (2) | 166 | 332 | 332 | 1,316 | 2,146 | ||||||||||||||
Operating leases, including dedicated transportation lines | 2,289 | 4,073 | 3,420 | 5,520 | 15,302 | ||||||||||||||
Non-dedicated transportation lines | 715 | 1,389 | 945 | 935 | 3,984 | ||||||||||||||
Purchase obligations (3) | 1,496 | 2,898 | 20 | — | 4,414 | ||||||||||||||
Network decommissioning (4) | 80 | 85 | 57 | 63 | 285 | ||||||||||||||
Total contractual obligations | $ | 6,099 | $ | 11,438 | $ | 10,387 | $ | 29,290 | $ | 57,214 | |||||||||
(1) | Represents principal amounts of long-term debt at maturity, excluding unamortized premium from purchase price allocation fair value adjustment, capital lease obligations and vendor financing arrangements. |
(2) | Future minimum payments, including principal and interest payments and imputed lease rental income, related to the long-term financial obligation recorded in connection with the Tower Transaction. See Note 9 – Tower Transaction and Related Long-Term Financial Obligation of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information. |
(3) | T-Mobile calculated the minimum obligation for certain agreements to purchase goods or services based on termination fees that can be paid to exit the contract. Termination penalties are included in the above table as payments due in less than one year, as this is the earliest T-Mobile could exit these contracts. 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 December 31, 2014 under normal business purposes. |
(4) | Represents future undiscounted cash flows related to decommissioned MetroPCS CDMA network and certain other redundant cell sites as of December 31, 2014. See Note 2 – Business Combination with MetroPCS of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information. |
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, excluding network decommissioning, 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. In addition, dividends on preferred stock have been excluded from the table above as no dividends were declared for the year ended December 31, 2014. See Note 14 – Additional Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.
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The purchase obligations reflected in the table above are primarily commitments to purchase handsets and accessories, equipment, software, programming and network services, and marketing activities, which will be used or sold in the ordinary course of business. These amounts do not represent T-Mobile’s entire anticipated purchases in the future, but represent only those items for which T-Mobile is contractually committed. The Company also has purchase obligations that vary with the level of the Company’s sales of certain products. The future development of sales of those products could result in purchase obligations in excess of the amounts shown in the table above. Where T-Mobile is committed to make a minimum payment to the supplier regardless of whether it takes delivery, T-Mobile has included only that minimum payment as a purchase obligation. Additionally, included within purchase obligations are amounts for the acquisition of spectrum licenses, which are subject to regulatory approval and other customary closing conditions.
Off-Balance Sheet Arrangements
In 2014, T-Mobile entered into a two-year factoring arrangement to sell certain service accounts receivable on a revolving basis as an additional source of liquidity. As of December 31, 2014, T-Mobile derecognized net receivables of $768 million upon
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sale through the factoring arrangement. See Note 4 – Factoring Arrangement of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.
Related Party Transactions
See Note 14 – Additional Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for information regarding related party transactions.
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 in 2014 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 Deutsche Telekom. We have relied upon Deutsche Telekom for information regarding their activities, transactions and dealings.
Deutsche Telekom, 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: Gostaresh Ertebatat Taliya, Irancell Telecommunications Services Company (“MTN Irancell”), Telecommunication Kish Company, Mobile Telecommunication Company of Iran, and Telecommunication Infrastructure Company of Iran. In 2014, gross revenues of all Deutsche Telekom affiliates generated by roaming and interconnection traffic with Iran were less than $2 million and estimated net profits were less than $2 million.
In addition, Deutsche Telekom, through certain of its non-U.S. subsidiaries, operating 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 in 2014 were less than $0.4 million. We understand that Deutsche Telekom intends to continue these activities.
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Critical Accounting Policies and Estimates
Preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“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. Significant accounting policies are fundamental to understanding our financial condition and results as they require the use of estimates and assumptions which affect the financial statements and accompanying notes. See Note 1 – Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.
Critical accounting policies, which we discuss further below, are those which are both most important to the portrayal of our financial condition and results, and require management to make difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters which are inherently uncertain. Estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. These estimates are inherently subject to judgment and actual results could differ from those estimates.
Allowances
We maintain an allowance for estimated losses resulting from the failure of customers to make required payments. When determining the allowance, we consider the probability of recovery based on past experience taking into account current collection trends and general economic factors. Collection risks are assessed for each type of receivable, including EIP receivables, based upon historical and expected write-offs, net of recoveries, and an analysis of the aged accounts receivable balances with reserves generally increasing as the receivable ages. To the extent that actual loss experience differs significantly from historical trends or assumptions, the required allowance amounts could differ from the estimate. We write off account balances if collection efforts are unsuccessful and future collection is unlikely, based on customer credit ratings and the length of time from the original billing date.
We offer certain retail customers the option to pay for devices and other accessories in installments using an EIP. At the time of an installment sale, we impute a discount for interest as there is no stated rate of interest on the EIP receivables and record the EIP receivables at their present value, which is determined by discounting all expected future payments at the imputed interest rate. The difference between the present value of the EIP receivables and their face amount results in a discount which is recorded as a direct reduction to the carrying value with a corresponding reduction to equipment sales. We determine the imputed discount rate based primarily on current market interest rates and the amount of expected credit losses on the EIP receivables. As a result, we do not recognize a separate valuation allowance at the time of issuance as the effects of uncertainty about future cash flows are included in the initial present value measurement of the receivable. The current portion of the EIP receivables is included in equipment installment plan receivables, net and the long-term portion of the EIP receivables is included in equipment installment plan receivables due after one year, net. The imputed discount on EIP receivables is amortized over the financed installment term using the interest method and recognized as interest income in other income (expenses), net.
Subsequent to the initial determination of the imputed discount, we assess the need for and, if necessary, recognize an allowance for credit losses to the extent the expected credit losses on the gross EIP receivables exceed the remaining unamortized imputed discount balances. 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.
Total imputed discount and allowances as of December 31, 2014 and 2013 was approximately 7.4% and 8.6%, respectively, of the total amount of gross accounts receivable, including EIP receivables.
Depreciation
Depreciation commences once assets have been placed in service and is computed using the straight-line method over the estimated useful life of each asset. Depreciable life studies are performed periodically to confirm the appropriateness of depreciable lives for certain categories of property, plant and equipment. These studies take into account actual usage, physical wear and tear, replacement history and assumptions about technology evolution. When these factors indicate that an asset’s useful life is different from the previous assessment, the remaining book values are depreciated prospectively over the adjusted remaining estimated useful life. See Note 1 – Summary of Significant Accounting Policies and Note 5 – Property and Equipment of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for information regarding depreciation of assets, including management’s underlying estimates of useful lives.
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Evaluation of Goodwill and Indefinite-Lived Intangible Assets for Impairment
We assess the carrying value of goodwill and other indefinite-lived intangible assets (spectrum licenses) for potential impairment annually as of December 31 or more frequently if events or changes in circumstances indicate that assets might be impaired.
We may elect to first perform a qualitative assessment to determine whether it is more likely than not the fair value of the single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If we do not perform a qualitative assessment, or if the qualitative assessment indicates it is more likely than not the fair value of the single reporting unit is less than its carrying amount, goodwill is tested for impairment based on a two-step test. In the first step, we compare the fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using a market method, which is based on market capitalization. We recognize market capitalization is subject to volatility and will monitor changes in market capitalization to determine whether declines, if any, necessitate an interim impairment review. In the event market capitalization does decline below its book value, we will consider the length, severity and reasons for the decline when assessing whether potential impairment exists, including considering whether a control premium should be added to the market capitalization. We believe short-term fluctuations in share price may not necessarily reflect the underlying aggregate fair value. Historically, we estimated the fair value of the reporting unit using a discounted cash flow approach due to the absence of comparable observable market data. The discounted cash flow method utilizes future cash flow assumptions based on estimates of revenues, EBITDA margin and a long-term growth rate taking into consideration expected industry and market conditions. The cash flows are then discounted using a weighted average cost of capital reflecting the risks associated with the business and the projected cash flows. If the carrying amount of the reporting unit exceeds the fair value, the second step of the test is performed.
In the second step, we determine the fair values of all of the assets and liabilities of the reporting unit, including those that currently may not be recorded. The excess of the fair value of the reporting unit over the sum of the fair value of all of those assets and liabilities represents the implied goodwill amount. If the implied fair value of goodwill is lower than the carrying amount of goodwill, then an impairment loss is recognized for the difference.
We test spectrum licenses for impairment on an aggregate basis, consistent with the management of the overall business at a national level. We may elect to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an intangible asset group is less than its carrying value. If we do not perform the qualitative assessment, or if the qualitative assessment indicates it is more likely than not the fair value of the intangible asset group is less than its carrying amount, we calculate the estimated fair value of the intangible asset group. If the carrying amount of spectrum licenses exceeds the fair value, an impairment loss is recognized. We estimate the fair value of the spectrum licenses using the Greenfield approach, which is an income approach that estimates the price at which an orderly transaction to sell the asset would take place between market participants at the measurement date under current market conditions. The Greenfield approach values the spectrum licenses by calculating the cash flow generating potential of a hypothetical start-up company that goes into business with no assets except the asset to be valued (in this case, spectrum licenses). The value of the spectrum licenses can be considered as equal to the present value of the cash flows of this hypothetical start-up company. We base the assumptions underlying the Greenfield approach on a combination of market participant data and our historical results, trends and business plans. Future cash flows in the Greenfield approach are based on estimates and assumptions of market participant revenues, EBITDA margin, network build-out period, and a long-term growth rate for a market participant. The cash flows are discounted using a weighted average cost of capital.
The valuation approaches utilized to estimate fair value for the purposes of the impairment tests of goodwill and spectrum licenses require the use of assumptions and estimates, which involve a degree of uncertainty. If actual results or future expectations are not consistent with the assumptions, this may result in the recording of significant impairment charges on goodwill or spectrum licenses. The most significant assumptions within the valuation models are the discount rate, revenues, EBITDA margins and the long-term growth rate. As a result of an impairment test performed in 2012, we recorded an impairment charge on goodwill. See Note 1 – Summary of Significant Accounting Policies and Note 6 – Goodwill, Spectrum Licenses and Intangible Assets of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for information regarding our annual impairment test and impairment charges.
Guarantee Liabilities
In 2013, we introduced a handset upgrade program, JUMP!, which provides enrolled customers a specific-price trade-in right to upgrade their device. Participating customers must purchase a device from us, have a qualifying monthly wireless service plan with us, and finance their handset using our EIP, which is treated as a single multiple-element arrangement when entered into at
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or near the same time. Upon qualifying JUMP! program upgrades, the customers’ remaining EIP balance is settled provided they trade in their eligible used device in good working condition and purchase a new handset from us on a new EIP.
For customers who enroll in the trade-in program, we defer a 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, which require judgment, including the customer's estimated remaining EIP balance at trade-in, the expected fair value of the used device at trade-in, and probability and timing of trade-in. When the customer upgrades their device, the difference between the trade-in credit to the customer and the fair value of the returned handset is recorded against the guarantee liabilities. All assumptions are reviewed periodically.
Rent Expense
Most of the leases on our tower sites have fixed rent escalations which provide for periodic increases in the amount of rent payable over time. We calculate straight-line rent expense for each of these leases based on the fixed non-cancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in such amount that a renewal appears, at lease inception, to be reasonably assured. We make significant assumptions at lease inception in determining and assessing the factors that constitute a “penalty”. In doing so, we primarily consider costs incurred in acquiring and developing new sites, the useful life of site improvements and equipment costs, future economic conditions and the extent to which improvements in wireless technologies can be incorporated into a current assessment of whether an economic compulsion will exist in the future to renew a lease.
Income Taxes
We recognize deferred tax assets and liabilities based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to be in effect when these differences are realized. A valuation allowance is maintained against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of a deferred tax asset depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions within the carryforward periods available. We consider many factors when determining whether a valuation allowance is needed, including recent cumulative earnings experience by taxing jurisdiction, expectations of future income, the carryforward periods available for tax reporting purposes and other relevant factors.
We account for uncertainty in income taxes recognized in the financial statements in accordance with the accounting guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We assess whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position and adjust the unrecognized tax benefits in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law.
Recently Issued Accounting Standards
See Note 1 – Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for information regarding recently issued accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to economic risks in the normal course of business, primarily from changes in interest rates. These risks, along with other business risks, impact our cost of capital. Our policy is to manage exposure related to fluctuations in interest rates in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. We have established interest rate risk limits that are closely monitored by measuring interest rate sensitivities of our debt and embedded derivative instruments portfolios. We do not foresee significant changes in the strategies used to manage market risk in the near future.
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Interest Rate Risk
We are exposed to changes in interest rates, primarily on our long-term debt to affiliates, which consist of the senior reset notes. As of December 31, 2014, we had $5.6 billion in long-term debt with Deutsche Telekom comprised of senior reset notes. Changes in interest rates can lead to significant fluctuations in the fair value of our long-term debt to affiliates.
To perform the sensitivity analysis on the long-term debt to affiliates, we assessed the risk of a change in the fair value from the effect of a hypothetical interest rate change of 100 basis points. As of December 31, 2014, the change in the fair value of our long-term debt to affiliates, based on this hypothetical change, is shown in the table below:
Fair Value Assuming | |||||||||||
(in millions) | Fair Value | +100 Basis Point Shift | -100 Basis Point Shift | ||||||||
Long-term debt to affiliates | $ | 5,780 | $ | 5,744 | $ | 5,816 | |||||
To manage interest rate risk, the interest rates on the senior reset notes are adjusted at the reset dates to rates defined in the applicable supplemental indenture. We determined certain components of the reset feature are required to be bifurcated from the senior reset notes and separately accounted for as embedded derivative instruments. As of December 31, 2014, we had $5 million in embedded derivatives related to the senior reset notes. The fair value of the embedded derivatives was determined based on 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 certain T-Mobile long-term debt, and interest rate volatility. Interest rate volatility is derived based on weighted risk-free rate volatility and credit spread volatility. Changes in the spreads between the specified yield curves and the yield curve on certain T-Mobile long-term debt can lead to fluctuations in the fair value of our embedded derivatives.
To perform sensitivity analysis on the embedded derivatives, we assessed the risk of loss in fair values from the effect of a hypothetical spread change between specified yield curves and the yield curve on certain T-Mobile long-term debt of 10 basis points on our portfolio of embedded derivatives. As of December 31, 2014, the change in the fair value of our embedded derivatives, based on this hypothetical change, is shown in the table below:
Fair Value Assuming | |||||||||||
(in millions) | Fair Value | +10 Basis Point Shift | -10 Basis Point Shift | ||||||||
Embedded derivatives | $ | 5 | $ | 27 | $ | (17 | ) | ||||
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Item 8. Financial Statements and Supplementary Data
Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of T-Mobile US, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income (loss), of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of T-Mobile US, Inc. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which were integrated audits in 2013 and 2014). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
Seattle, Washington
February 19, 2015
46
T-Mobile US, Inc.
Consolidated Balance Sheets
(in millions, except share and per share amounts) | December 31, 2014 | December 31, 2013 | |||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 5,315 | $ | 5,891 | |||
Accounts receivable, net of allowances of $83 and $109 | 1,865 | 2,148 | |||||
Equipment installment plan receivables, net | 3,062 | 1,471 | |||||
Accounts receivable from affiliates | 76 | 41 | |||||
Inventories | 1,085 | 586 | |||||
Deferred tax assets, net | 988 | 839 | |||||
Other current assets | 1,593 | 1,252 | |||||
Total current assets | 13,984 | 12,228 | |||||
Property and equipment, net | 16,245 | 15,349 | |||||
Goodwill | 1,683 | 1,683 | |||||
Spectrum licenses | 21,955 | 18,122 | |||||
Other intangible assets, net | 870 | 1,204 | |||||
Equipment installment plan receivables due after one year, net | 1,628 | 1,075 | |||||
Other assets | 288 | 292 | |||||
Total assets | $ | 56,653 | $ | 49,953 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | $ | 7,364 | $ | 4,567 | |||
Current payables to affiliates | 231 | 199 | |||||
Short-term debt | 87 | 244 | |||||
Deferred revenue | 459 | 445 | |||||
Other current liabilities | 635 | 353 | |||||
Total current liabilities | 8,776 | 5,808 | |||||
Long-term debt | 16,273 | 14,345 | |||||
Long-term debt to affiliates | 5,600 | 5,600 | |||||
Long-term financial obligation | 2,521 | 2,496 | |||||
Deferred tax liabilities | 4,873 | 4,645 | |||||
Deferred rents | 2,331 | 2,113 | |||||
Other long-term liabilities | 616 | 701 | |||||
Total long-term liabilities | 32,214 | 29,900 | |||||
Commitments and contingencies | |||||||
Stockholders' equity | |||||||
5.50% Mandatory Convertible Preferred Stock Series A, par value $0.00001 per share, 100,000,000 shares authorized; 20,000,000 and 0 shares issued; $1,000 and $0 aggregate liquidation value | — | — | |||||
Common Stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 808,851,108 and 803,262,309 shares issued | — | — | |||||
Additional paid-in capital | 38,503 | 37,330 | |||||
Treasury stock, at cost, 1,382,505 and 1,382,505 shares issued | — | — | |||||
Accumulated other comprehensive income | 1 | 3 | |||||
Accumulated deficit | (22,841 | ) | (23,088 | ) | |||
Total stockholders' equity | 15,663 | 14,245 | |||||
Total liabilities and stockholders' equity | $ | 56,653 | $ | 49,953 | |||
The accompanying notes are an integral part of these consolidated financial statements.
47
T-Mobile US, Inc.
Consolidated Statements of Comprehensive Income (Loss)
Year Ended December 31, | |||||||||||
(in millions, except shares and per share amounts) | 2014 | 2013 | 2012 | ||||||||
Revenues | |||||||||||
Branded postpaid revenues | $ | 14,392 | $ | 13,166 | $ | 14,521 | |||||
Branded prepaid revenues | 6,986 | 4,945 | 1,715 | ||||||||
Wholesale revenues | 731 | 613 | 544 | ||||||||
Roaming and other service revenues | 266 | 344 | 433 | ||||||||
Total service revenues | 22,375 | 19,068 | 17,213 | ||||||||
Equipment sales | 6,789 | 5,033 | 2,242 | ||||||||
Other revenues | 400 | 319 | 264 | ||||||||
Total revenues | 29,564 | 24,420 | 19,719 | ||||||||
Operating expenses | |||||||||||
Cost of services, exclusive of depreciation and amortization shown separately below | 5,788 | 5,279 | 4,661 | ||||||||
Cost of equipment sales | 9,621 | 6,976 | 3,437 | ||||||||
Selling, general and administrative | 8,863 | 7,382 | 6,796 | ||||||||
Depreciation and amortization | 4,412 | 3,627 | 3,187 | ||||||||
Cost of MetroPCS business combination | 299 | 108 | 7 | ||||||||
Impairment charges | — | — | 8,134 | ||||||||
Gains on disposal of spectrum licenses | (840 | ) | (2 | ) | (205 | ) | |||||
Other, net | 5 | 54 | 99 | ||||||||
Total operating expenses | 28,148 | 23,424 | 26,116 | ||||||||
Operating income (loss) | 1,416 | 996 | (6,397 | ) | |||||||
Other income (expense) | |||||||||||
Interest expense to affiliates | (278 | ) | (678 | ) | (661 | ) | |||||
Interest expense | (1,073 | ) | (545 | ) | — | ||||||
Interest income | 359 | 189 | 77 | ||||||||
Other income (expense), net | (11 | ) | 89 | (5 | ) | ||||||
Total other expense, net | (1,003 | ) | (945 | ) | (589 | ) | |||||
Income (loss) before income taxes | 413 | 51 | (6,986 | ) | |||||||
Income tax expense | 166 | 16 | 350 | ||||||||
Net income (loss) | $ | 247 | $ | 35 | $ | (7,336 | ) | ||||
Other comprehensive income (loss), net of tax | |||||||||||
Net gain on cross currency interest rate swaps, net of tax effect of $0, $13 and $57 | — | 23 | 95 | ||||||||
Net loss on foreign currency translation, net of tax effect of $0, ($37) and ($16) | — | (62 | ) | (27 | ) | ||||||
Unrealized gain (loss) on available-for-sale securities, net of tax effect of ($1), $1 and $0 | (2 | ) | 1 | 1 | |||||||
Other comprehensive income (loss), net of tax | (2 | ) | (38 | ||||||||