Annual Statements Open main menu

T-Mobile US, Inc. - Quarter Report: 2019 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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
tmuslogo.jpg
T-MOBILE US, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-0836269
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

12920 SE 38th Street
Bellevue, Washington
(Address of principal executive offices)
98006-1350
(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
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $0.00001 per share
 
TMUS
 
The NASDAQ Stock Market LLC

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  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer                             Accelerated filer             
Non-accelerated filer                             Smaller reporting company        
Emerging growth company    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes  No 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Shares Outstanding as of October 23, 2019

Common Stock, par value $0.00001 per share
 
855,574,798





T-Mobile US, Inc.
Form 10-Q
For the Quarter Ended September 30, 2019

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
T-Mobile US, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except share and per share amounts)
September 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,653

 
$
1,203

Accounts receivable, net of allowances of $61 and $67
1,822

 
1,769

Equipment installment plan receivables, net
2,425

 
2,538

Accounts receivable from affiliates
20

 
11

Inventory
801

 
1,084

Other current assets
1,737

 
1,676

Total current assets
8,458

 
8,281

Property and equipment, net
22,098

 
23,359

Operating lease right-of-use assets
10,914

 

Financing lease right-of-use assets
2,855

 

Goodwill
1,930

 
1,901

Spectrum licenses
36,442

 
35,559

Other intangible assets, net
144

 
198

Equipment installment plan receivables due after one year, net
1,469

 
1,547

Other assets
1,799

 
1,623

Total assets
$
86,109

 
$
72,468

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities
$
6,406

 
$
7,741

Payables to affiliates
252

 
200

Short-term debt
475

 
841

Deferred revenue
608

 
698

Short-term operating lease liabilities
2,232

 

Short-term financing lease liabilities
1,013

 

Other current liabilities
1,883

 
787

Total current liabilities
12,869

 
10,267

Long-term debt
10,956

 
12,124

Long-term debt to affiliates
13,986

 
14,582

Tower obligations
2,241

 
2,557

Deferred tax liabilities
5,296

 
4,472

Operating lease liabilities
10,614

 

Financing lease liabilities
1,440

 

Deferred rent expense

 
2,781

Other long-term liabilities
936

 
967

Total long-term liabilities
45,469

 
37,483

Commitments and contingencies (Note 12)


 


Stockholders' equity
 
 
 
Common Stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 857,072,063 and 851,675,119 shares issued, 855,557,671 and 850,180,317 shares outstanding

 

Additional paid-in capital
38,433

 
38,010

Treasury stock, at cost, 1,514,392 and 1,494,802 shares issued
(8
)
 
(6
)
Accumulated other comprehensive loss
(1,070
)
 
(332
)
Accumulated deficit
(9,584
)
 
(12,954
)
Total stockholders' equity
27,771

 
24,718

Total liabilities and stockholders' equity
$
86,109

 
$
72,468


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

3

Index for Notes to the Condensed Consolidated Financial Statements

T-Mobile US, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except share and per share amounts)
2019
 
2018
2019
 
2018
Revenues
 
 
 
 
 
 
 
Branded postpaid revenues
$
5,746

 
$
5,244

 
$
16,852

 
$
15,478

Branded prepaid revenues
2,385

 
2,395

 
7,150

 
7,199

Wholesale revenues
321

 
338

 
938

 
879

Roaming and other service revenues
131

 
89

 
346

 
247

Total service revenues
8,583

 
8,066

 
25,286

 
23,803

Equipment revenues
2,186

 
2,391

 
6,965

 
7,069

Other revenues
292

 
382

 
869

 
993

Total revenues
11,061

 
10,839

 
33,120

 
31,865

Operating expenses
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation and amortization shown separately below
1,733

 
1,586

 
4,928

 
4,705

Cost of equipment sales, exclusive of depreciation and amortization shown separately below
2,704

 
2,862

 
8,381

 
8,479

Selling, general and administrative
3,498

 
3,314

 
10,483

 
9,663

Depreciation and amortization
1,655

 
1,637

 
4,840

 
4,846

Total operating expense
9,590

 
9,399

 
28,632

 
27,693

Operating income
1,471

 
1,440

 
4,488

 
4,172

Other income (expense)
 
 
 
 
 
 
 
Interest expense
(184
)
 
(194
)
 
(545
)
 
(641
)
Interest expense to affiliates
(100
)
 
(124
)
 
(310
)
 
(418
)
Interest income
5

 
5

 
17

 
17

Other income (expense), net
3

 
3

 
(12
)
 
(51
)
Total other expense, net
(276
)
 
(310
)
 
(850
)
 
(1,093
)
Income before income taxes
1,195

 
1,130

 
3,638

 
3,079

Income tax expense
(325
)
 
(335
)
 
(921
)
 
(831
)
Net income
$
870

 
$
795

 
$
2,717

 
$
2,248

 
 
 
 
 
 
 
 
Net income
$
870

 
$
795

 
$
2,717

 
$
2,248

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
Unrealized loss on cash flow hedges, net of tax effect of $88, $0, $256, and $0
(257
)
 

 
(738
)
 

Other comprehensive loss
(257
)
 

 
(738
)
 

Total comprehensive income
$
613

 
$
795

 
$
1,979

 
$
2,248

Earnings per share
 
 
 
 
 
 
 
Basic
$
1.02

 
$
0.94

 
$
3.18

 
$
2.65

Diluted
$
1.01

 
$
0.93

 
$
3.15

 
$
2.62

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
854,578,241

 
847,087,120

 
853,391,370

 
849,960,290

Diluted
862,690,751

 
853,852,764

 
862,854,654

 
858,248,568


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

4

Index for Notes to the Condensed Consolidated Financial Statements

T-Mobile US, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019
 
2018
 
2019
 
2018
Operating activities
 
 
 
 
 
 
 
Net income
$
870

 
$
795

 
$
2,717

 
$
2,248

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
Depreciation and amortization
1,655

 
1,637

 
4,840

 
4,846

Stock-based compensation expense
126

 
115

 
366

 
324

Deferred income tax expense
294

 
284

 
849

 
762

Bad debt expense
74

 
80

 
218

 
209

Losses from sales of receivables
28

 
48

 
91

 
127

Deferred rent expense

 
10

 

 
21

Losses on redemption of debt

 

 
19

 
122

Changes in operating assets and liabilities
 
 
 
 
 
 
 
Accounts receivable
(745
)
 
(1,238
)
 
(2,693
)
 
(3,247
)
Equipment installment plan receivables
(78
)
 
(335
)
 
(478
)
 
(843
)
Inventories
(36
)
 
(115
)
 
(139
)
 
43

Operating lease right-of-use assets
491

 

 
1,395

 

Other current and long-term assets
(118
)
 
(193
)
 
(288
)
 
(309
)
Accounts payable and accrued liabilities
(395
)
 
(265
)
 
(339
)
 
(1,372
)
Short and long-term operating lease liabilities
(549
)
 

 
(1,592
)
 

Other current and long-term liabilities
42

 
39

 
136

 
(21
)
Other, net
89

 
52

 
185

 
35

Net cash provided by operating activities
1,748

 
914

 
5,287

 
2,945

Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment, including capitalized interest of $118 and $101 and $361 and $246
(1,514
)
 
(1,362
)
 
(5,234
)
 
(4,357
)
Purchases of spectrum licenses and other intangible assets, including deposits
(13
)
 
(22
)
 
(863
)
 
(101
)
Proceeds related to beneficial interests in securitization transactions
900

 
1,338

 
2,896

 
3,956

Acquisition of companies, net of cash acquired
(31
)
 

 
(31
)
 
(338
)
Other, net
1

 
4

 
(6
)
 
30

Net cash used in investing activities
(657
)
 
(42
)
 
(3,238
)
 
(810
)
Financing activities
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt

 

 

 
2,494

Payments of consent fees related to long-term debt

 

 

 
(38
)
Proceeds from borrowing on revolving credit facility
575

 
1,810

 
2,340

 
6,050

Repayments of revolving credit facility
(575
)
 
(2,130
)
 
(2,340
)
 
(6,050
)
Repayments of financing lease obligations
(235
)
 
(181
)
 
(550
)
 
(508
)
Repayments of short-term debt for purchases of inventory, property and equipment, net
(300
)
 
(246
)
 
(300
)
 
(246
)
Repayments of long-term debt

 

 
(600
)
 
(3,349
)
Repurchases of common stock

 

 

 
(1,071
)
Tax withholdings on share-based awards
(4
)
 
(5
)
 
(108
)
 
(89
)
Cash payments for debt prepayment or debt extinguishment costs

 

 
(28
)
 
(212
)
Other, net
(4
)
 
(6
)
 
(13
)
 
(6
)
Net cash used in financing activities
(543
)
 
(758
)
 
(1,599
)
 
(3,025
)
Change in cash and cash equivalents
548

 
114

 
450

 
(890
)
Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
1,105

 
215

 
1,203

 
1,219

End of period
$
1,653

 
$
329

 
$
1,653

 
$
329

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
Interest payments, net of amounts capitalized
$
327

 
$
366

 
$
912

 
$
1,303

Operating lease payments (1)
703

 

 
2,094

 

Income tax payments
5

 
29

 
77

 
40

Noncash investing and financing activities
 
 
 
 
 
 
 
Noncash beneficial interest obtained in exchange for securitized receivables
$
1,734

 
$
1,263

 
$
4,862

 
$
3,596

(Decrease) increase in accounts payable for purchases of property and equipment
(460
)
 
78

 
(906
)
 
(672
)
Leased devices transferred from inventory to property and equipment
298

 
229

 
612

 
813

Returned leased devices transferred from property and equipment to inventory
(65
)
 
(74
)
 
(189
)
 
(246
)
Short-term debt assumed for financing of property and equipment
475

 

 
775

 
291

Operating lease right-of-use assets obtained in exchange for lease obligations
989

 

 
3,083

 

Financing lease right-of-use assets obtained in exchange for lease obligations
395

 
133

 
943

 
451

(1) On January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” which requires certain supplemental cash flow disclosures. Where these disclosures or a comparable figure were not required under the former lease standard, we have not retrospectively presented historical amounts. See Note 1 – Summary of Significant Accounting Policies for additional details.
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Index for Notes to the Condensed Consolidated Financial Statements

T-Mobile US, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(in millions, except shares)
Common Stock Outstanding
 
Treasury Shares at Cost
 
Par Value and Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity
Balance as of June 30, 2019
854,452,642

 
$
(8
)
 
$
38,242

 
$
(813
)
 
$
(10,454
)
 
$
26,967

Net income

 

 

 

 
870

 
870

Other comprehensive loss

 

 

 
(257
)
 

 
(257
)
Stock-based compensation

 

 
140

 

 

 
140

Exercise of stock options
19,619

 

 

 

 

 

Stock issued for employee stock purchase plan
955,849

 

 
55

 

 

 
55

Issuance of vested restricted stock units
179,155

 

 

 

 

 

Shares withheld related to net share settlement of stock awards and stock options
(53,349
)
 

 
(4
)
 

 

 
(4
)
Distribution from NQDC plan
3,755

 

 

 

 

 

Balance as of September 30, 2019
855,557,671

 
$
(8
)
 
$
38,433

 
$
(1,070
)
 
$
(9,584
)
 
$
27,771

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
850,180,317

 
$
(6
)
 
$
38,010

 
$
(332
)
 
$
(12,954
)
 
$
24,718

Net income

 

 

 

 
2,717

 
2,717

Other comprehensive loss

 

 

 
(738
)
 

 
(738
)
Stock-based compensation

 

 
404

 

 

 
404

Exercise of stock options
70,754

 

 
1

 

 

 
1

Stock issued for employee stock purchase plan
2,091,650

 

 
124

 

 

 
124

Issuance of vested restricted stock units
4,729,270

 

 

 

 

 

Forfeiture of restricted stock awards
(20,769
)
 

 

 

 

 

Shares withheld related to net share settlement of stock awards and stock options
(1,474,011
)
 

 
(108
)
 

 

 
(108
)
Transfer RSU from NQDC plan
(19,540
)
 
(2
)
 
2

 

 

 

Prior year retained earnings

 

 

 

 
653

 
653

Balance as of September 30, 2019
855,557,671

 
$
(8
)
 
$
38,433

 
$
(1,070
)
 
$
(9,584
)
 
$
27,771



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

6

Index for Notes to the Condensed Consolidated Financial Statements

T-Mobile US, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(in millions, except shares)
Common Stock Outstanding
 
Treasury Shares at Cost
 
Par Value and Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Stockholders' Equity
Balance as of June 30, 2018
847,225,746

 
$
(7
)
 
$
37,786

 
$

 
$
(14,389
)
 
$
23,390

Net income

 

 

 

 
795

 
795

Stock-based compensation

 

 
127

 

 

 
127

Exercise of stock options
36,973

 

 

 

 

 

Stock issued for employee stock purchase plan
942,475

 

 
48

 

 

 
48

Issuance of vested restricted stock units
251,953

 

 

 

 

 

Shares withheld related to net share settlement of stock awards and stock options
(77,323
)
 

 
(5
)
 

 

 
(5
)
Distribution from NQDC plan
855

 

 

 

 

 

Balance as of September 30, 2018
848,380,679

 
$
(7
)
 
$
37,956

 
$

 
$
(13,594
)
 
$
24,355

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
859,406,651

 
$
(4
)
 
$
38,629

 
$
8

 
$
(16,074
)
 
$
22,559

Net income

 

 

 

 
2,248

 
2,248

Stock-based compensation

 

 
361

 

 

 
361

Exercise of stock options
174,514

 

 
3

 

 

 
3

Stock issued for employee stock purchase plan
2,011,970

 

 
103

 

 

 
103

Issuance of vested restricted stock units
4,707,512

 

 

 

 

 

Issuance of restricted stock awards
354,459

 

 

 

 

 

Shares withheld related to net share settlement of stock awards and stock options
(1,481,129
)
 

 
(89
)
 

 

 
(89
)
Repurchases of common stock
(16,738,758
)
 

 
(1,054
)
 

 

 
(1,054
)
Transfer RSU from NQDC plan
(54,540
)
 
(3
)
 
3

 

 

 

Prior year retained earnings

 

 

 
(8
)
 
232

 
224

Balance as of September 30, 2018
848,380,679

 
$
(7
)
 
$
37,956

 
$

 
$
(13,594
)
 
$
24,355


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


7

Index for Notes to the Condensed Consolidated Financial Statements

T-Mobile US, Inc.
Index for Notes to the Condensed Consolidated Financial Statements



8

Index for Notes to the Condensed Consolidated Financial Statements

T-Mobile US, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 1 – Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements of T-Mobile US, Inc. (“T-Mobile,” “we,” “our,” “us” or “the Company”) include all adjustments of a normal recurring nature necessary for the fair presentation of the results for the interim periods presented. The results for the interim periods are not necessarily indicative of those for the full year. The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The condensed consolidated financial statements include the balances and results of operations of T-Mobile and our consolidated subsidiaries. We consolidate majority-owned subsidiaries over which we exercise control, as well as variable interest entities (“VIE”) where we are deemed to be the primary beneficiary and VIEs which cannot be deconsolidated, such as those related to Tower obligations (Tower obligations are included in VIEs related to the 2012 Tower Transaction. See Note 8 - Tower Obligations for further information). Intercompany transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires our management to make estimates and assumptions which affect the financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which our management believes are reasonable under the circumstances. These estimates are inherently subject to judgment and actual results could differ from those estimates.

Accounting Pronouncements Adopted During the Current Year

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” and has since modified the standard with several ASUs (collectively, the “new lease standard”). The new lease standard is effective for us, and we adopted the standard, on January 1, 2019.

We adopted the standard by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application and as a result did not restate the prior periods presented in the Condensed Consolidated Financial Statements.

The new lease standard provides for a number of optional practical expedients in transition. We did not elect the “package of practical expedients” and as a result reassessed under the new lease standard our prior accounting conclusions about lease identification, lease classification and initial direct costs. We elected to use hindsight for determining the reasonably certain lease term. We did not elect the practical expedient pertaining to land easements as it is not applicable to us.

The new lease standard provides practical expedients and policy elections for an entity’s ongoing accounting. Generally, we elected the practical expedient to not separate lease and non-lease components in arrangements whereby we are the lessee. For arrangements in which we are lessor we did not elect this practical expedient. We did not elect the short-term lease recognition exemption, which includes the recognition of right-of-use assets and lease liabilities for existing short-term leases at transition. We have also applied this election to all active leases at transition.

The most significant judgments and impacts upon adoption of the standard include the following:

In evaluating contracts to determine if they qualify as a lease, we consider factors such as if we have obtained or transferred substantially all of the rights to the underlying asset through exclusivity, if we can or if we have transferred the ability to direct the use of the asset by making decisions about how and for what purpose the asset will be used and if the lessor has substantive substitution rights.

We recognized right-of-use assets and operating lease liabilities for operating leases that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments.

9

Index for Notes to the Condensed Consolidated Financial Statements

The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent and deferred rent, which we remeasured at adoption due to the application of hindsight to our lease term estimates. Deferred and prepaid rent will no longer be presented separately.

Capital lease assets previously included within Property and equipment, net were reclassified to financing lease right-of-use assets, and capital lease liabilities previously included in Short-term debt and Long-term debt were reclassified to financing lease liabilities in our Condensed Consolidated Balance Sheet.

Certain line items in the Condensed Consolidated Statements of Cash Flows and the “Supplemental disclosure of cash flow information” have been renamed to align with the new terminology presented in the new lease standard; “Repayment of capital lease obligations” is now presented as “Repayments of financing lease obligations” and “Assets acquired under capital lease obligations” is now presented as “Financing lease right-of-use assets obtained in exchange for lease obligations.” In the “Operating Activities” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease right-of-use assets” and “Short and long-term operating lease liabilities” which represent the change in the operating lease asset and liability, respectively. Additionally, in the “Supplemental disclosure of cash flow information” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease payments,” and in the “Noncash investing and financing activities” section we have added “Operating lease right-of-use assets obtained in exchange for lease obligations.”

In determining the discount rate used to measure the right-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our incremental borrowing rate is based on an estimated secured rate comprised of a risk-free LIBOR rate plus a credit spread as secured by our assets.

Certain of our lease agreements include rental payments based on changes in the consumer price index (“CPI”). Lease liabilities are not remeasured as a result of changes in the CPI; instead, changes in the CPI are treated as variable lease payments and are excluded from the measurement of the right-of-use asset and lease liability. These payments are recognized in the period in which the related obligation was incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We elected the use of hindsight whereby we applied current lease term assumptions that are applied to new leases in determining the expected lease term period for all cell sites. Upon adoption of the new lease standard and application of hindsight, our expected lease term has shortened to reflect payments due for the initial non-cancelable lease term only. This assessment corresponds to our lease term assessment for new leases and aligns with the payments that have been disclosed as lease commitments in prior years. As a result, the average remaining lease term for cell sites has decreased from approximately nine to five years based on lease contracts in effect at transition on January 1, 2019. The aggregate impact of using hindsight is an estimated decrease in Total operating expense of $240 million in fiscal year 2019.

We were also required to reassess the previously failed sale-leasebacks of certain T-Mobile-owned wireless communication tower sites and determine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a sale should be recognized.

We concluded that a sale has not occurred for the 6,200 tower sites transferred to Crown Castle International Corp. (“CCI”) pursuant to a master prepaid lease arrangement; therefore, these sites will continue to be accounted for as failed sale-leasebacks.

We concluded that a sale should be recognized for the 900 tower sites transferred to CCI pursuant to the sale of a subsidiary and for the 500 tower sites transferred to Phoenix Tower International (“PTI”). Upon adoption on January 1, 2019, we derecognized our existing long-term financial obligation and the tower-related property and equipment associated with these 1,400 previously failed sale-leaseback tower sites and recognized a lease liability and right-of-use asset for the leaseback of the tower sites. The estimated impacts from the change in accounting conclusion are primarily a decrease in Other revenues of $44 million and a decrease in Interest expense of $34 million in fiscal year 2019.

Rental revenues and expenses associated with co-location tower sites are presented on a net basis under the new lease standard. These revenues and expenses were presented on a gross basis under the former lease standard.

10

Index for Notes to the Condensed Consolidated Financial Statements

Including the impacts from a change in the accounting conclusion on the 1,400 previously failed sale-leaseback tower sites, the cumulative effect of initially applying the new lease standard on January 1, 2019 is as follows:
 
January 1, 2019
(in millions)
Beginning Balance

Cumulative Effect Adjustment

Beginning Balance, As Adjusted
Assets
 
 
 
 
 
Other current assets
$
1,676

 
$
(78
)
 
$
1,598

Property and equipment, net
23,359

 
(2,339
)
 
21,020

Operating lease right-of-use assets

 
9,251

 
9,251

Financing lease right-of-use assets

 
2,271

 
2,271

Other intangible assets, net
198

 
(12
)
 
186

Other assets
1,623

 
(71
)
 
1,552

Liabilities and Stockholders’ Equity
 
 
 
 
 
Accounts payable and accrued liabilities
7,741

 
(65
)
 
7,676

Other current liabilities
787

 
28

 
815

Short-term and long-term debt
12,965

 
(2,015
)
 
10,950

Tower obligations
2,557

 
(345
)
 
2,212

Deferred tax liabilities
4,472

 
231

 
4,703

Deferred rent expense
2,781

 
(2,781
)
 

Short-term and long-term operating lease liabilities

 
11,364

 
11,364

Short-term and long-term financing lease liabilities

 
2,016

 
2,016

Other long-term liabilities
967

 
(64
)
 
903

Accumulated deficit
$
(12,954
)
 
$
653

 
$
(12,301
)


Including the impacts from the change in the accounting conclusion on the 1,400 previously failed sale-leaseback tower sites and the change in presentation on the income statement of the 6,200 tower sites for which a sale did not occur, the cumulative effects of initially applying the new lease standard for the year ended December 31, 2019 are estimated as follows:

The aggregate impact is a decrease in Other revenues of $185 million, a decrease in Total operating expenses of $380 million, a decrease in Interest expense of $34 million and an increase to Net income of $175 million.

The expected impact on our Condensed Consolidated Statements of Cash Flows is a decrease in Net cash provided by operating activities of $10 million and a decrease in Net cash used in financing activities of $10 million.

For arrangements where we are the lessor, including arrangements to lease devices to our service customers, the adoption of the new lease standard did not have a material impact on our financial statements as these leases are classified as operating leases.

Device lease payments are presented as Equipment revenues and recognized as earned on a straight-line basis over the lease term. Recognition of equipment revenue on lease contracts that are determined to not be probable of collection are limited to the amount of payments received. We have made an accounting policy election to exclude from the consideration in the contract all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer (for example, sales, use, value added, and some excise taxes).

At operating lease inception, leased wireless devices are transferred from Inventory to Property and equipment, net. Leased wireless devices are depreciated to their estimated residual value over the period expected to provide utility to us, which is generally shorter than the lease term and considers expected losses. Returned devices transferred from Property and equipment, net, are recorded as Inventory and are valued at the lower of cost or market with any write-down to market recognized as Cost of equipment sales in our Consolidated Statements of Comprehensive Income.

We do not have any leasing transactions with related parties. See Note 11 - Leases for further information.

We have implemented significant new lease accounting systems, processes and internal controls over lease accounting to assist us in the application of the new lease standard.


11

Index for Notes to the Condensed Consolidated Financial Statements

Accounting Pronouncements Not Yet Adopted

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and has since modified the standard with several ASUs (collectively, the “new credit loss standard”). The new credit loss standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The new credit loss standard will become effective for us beginning January 1, 2020, and will require a cumulative-effect adjustment to Accumulated deficit as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).

We will adopt the new credit loss standard on January 1, 2020, and will recognize lifetime expected credit losses at the inception of our credit risk exposures whereas we currently recognize credit losses only when it is probable that they have been incurred. We will also recognize expected credit losses on our EIP receivables, excluding consideration of any unamortized discount on those receivables. We currently offset our estimate of probable losses on our equipment installment plan (“EIP”) receivables by the amount of the related unamortized discounts on those receivables. We have developed an expected credit loss model and are refining the inputs including the forward-looking loss indicators. The estimated impact of the new credit loss standard on our receivables portfolio as of September 30, 2019, would be an increase to our allowance for credit losses of $70 million to $90 million, an increase to deferred tax assets of approximately $20 million and an increase to Accumulated deficit of $50 million to $70 million.

Cloud Computing Arrangements

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will become effective for us beginning January 1, 2020, and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact this guidance will have on our Consolidated Financial Statements. We will adopt the standard on January 1, 2020.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (the “SEC”) did not have, or are not expected to have, a significant impact on our present or future Consolidated Financial Statements.

Note 2 - Significant Transactions

Business Combinations

Proposed Sprint Transaction

On April 29, 2018, we entered into a Business Combination Agreement (as amended, the “Business Combination Agreement”) to merge with Sprint Corporation (“Sprint”). See Note 3 - Business Combinations for further information.

Acquisition

In July 2019, we completed our acquisition of a mobile marketing company for cash consideration of $32 million. See Note 3 - Business Combinations for further information.

Sales of Certain Receivables

In February 2019, the service receivable sale arrangement was amended to extend the scheduled expiration date, as well as extend certain third-party credit support under the arrangement, to March 2021.


12

Index for Notes to the Condensed Consolidated Financial Statements

Note Redemption

Effective April 28, 2019, we redeemed $600 million aggregate principal amount of our 9.332% Senior Reset Notes due 2023 (the “DT Senior Reset Notes”) held by Deutsche Telekom AG (“DT”), our majority stockholder. The notes were redeemed at a redemption price equal to 104.666% of the principal amount of the notes (plus accrued and unpaid interest thereon) and were paid on April 29, 2019. The redemption premium was $28 million during the three months ended June 30, 2019 and was included in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income and in Cash payments for debt prepayment or debt extinguishment costs in our Condensed Consolidated Statements of Cash Flows.

Certain components of the reset features were required to be bifurcated from the DT Senior Reset Notes and were separately accounted for as embedded derivatives. The write-off of embedded derivatives upon redemption resulted in a gain of $11 million during the three months ended June 30, 2019 and was included in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income. See Note 7 - Fair Value Measurements for further information.

Note 3 – Business Combinations

Proposed Sprint Transactions

On April 29, 2018, we entered into a Business Combination Agreement to merge with Sprint in an all-stock transaction at a fixed exchange ratio of 0.10256 shares of T-Mobile common stock for each share of Sprint common stock, or 9.75 shares of Sprint common stock for each share of T-Mobile common stock (the “Merger”). The combined company will be named “T-Mobile” and, as a result of the Merger, is expected to be able to rapidly launch a broad and deep nationwide 5G network, accelerate innovation and increase competition in the U.S. wireless, video and broadband industries. Neither T-Mobile nor Sprint on its own could generate comparable benefits to consumers.

The Merger and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”) have been approved by the boards of directors of T-Mobile and Sprint and the required approvals of the stockholders of each of T-Mobile and Sprint have been obtained. Immediately following the Merger, it is anticipated that DT and SoftBank Group Corp. (“SoftBank”) will hold, directly or indirectly, on a fully diluted basis, approximately 41.7% and 27.4%, respectively, of the outstanding T-Mobile common stock, with the remaining approximately 30.9% of the outstanding T-Mobile common stock held by other stockholders, based on closing share prices and certain other assumptions as of December 31, 2018.

In connection with the entry into the Business Combination Agreement, T-Mobile USA, Inc. (“T-Mobile USA”) entered into a commitment letter, dated as of April 29, 2018 (as amended and restated on May 15, 2018, the “Commitment Letter”). On September 6, 2019, T-Mobile USA amended and restated the Commitment Letter which (i) reduced the commitments under the secured term loan facility from $7 billion to $4 billion and (ii) extended the commitments thereunder through May 1, 2020. The funding of the debt facilities provided for in the Commitment Letter is subject to the satisfaction of the conditions set forth therein, including consummation of the Merger. The proceeds of the debt financing provided for in the Commitment Letter will be used to refinance certain existing debt of us, Sprint and our and Sprint’s respective subsidiaries and for post-closing working capital needs of the combined company. We will incur certain fees on the secured term loan facility beginning on November 1, 2019. We expect to incur certain additional fees in connection with the financing provided for in the Commitment Letter, if the Merger is consummated. There were no fees accrued as of September 30, 2019.

In connection with the entry into the Business Combination Agreement, DT and T-Mobile USA entered into a financing matters agreement, dated as of April 29, 2018, pursuant to which DT agreed, among other things, to consent to the incurrence by T-Mobile USA of secured debt in connection with and after the consummation of the Merger. If the Merger is consummated, we will make payments for requisite consents to DT. There were no consent payments accrued as of September 30, 2019.

On May 18, 2018, under the terms and conditions described in the Consent Solicitation Statement dated as of May 14, 2018, we obtained consents necessary to effect certain amendments to certain existing debt of us and our subsidiaries. If the Merger is consummated, we will make payments for requisite consents to third-party note holders. There were no consent payments accrued as of September 30, 2019.

Under the terms of the Business Combination Agreement, Sprint may be required to reimburse us for 33% of the upfront consent and related bank fees we paid, or $14 million, if the Business Combination Agreement is terminated. There were no reimbursements accrued as of September 30, 2019. On May 18, 2018, Sprint also obtained consents necessary to effect certain amendments to certain existing debt of Sprint and its subsidiaries. Under the terms of the Business Combination Agreement, we may also be required to reimburse Sprint for 67% of the upfront consent and related bank fees it paid, or $162 million, if the Business Combination Agreement is terminated. There were no fees accrued as of September 30, 2019.

13

Index for Notes to the Condensed Consolidated Financial Statements


We recognized merger-related costs of $159 million and $53 million for the three months ended September 30, 2019 and 2018, respectively, and $494 million and $94 million for the nine months ended September 30, 2019 and 2018, respectively. These costs generally included consulting and legal fees and were recognized as Selling, general and administrative expenses in our Condensed Consolidated Statements of Comprehensive Income.

The consummation of the Transactions remains subject to regulatory approvals and certain other customary closing conditions. We now expect the Merger will be permitted to close in early 2020. The Business Combination Agreement contains certain termination rights for both Sprint and us. If we terminate the Business Combination Agreement in connection with a failure to satisfy the closing condition related to specified minimum credit ratings for the combined company on the closing date of the Merger (after giving effect to the Merger) from at least two of the three credit rating agencies, then in certain circumstances, we may be required to pay Sprint an amount equal to $600 million.

On June 18, 2018, we filed the Public Interest Statement and applications for approval of the Merger with the Federal Communications Commission (“FCC”). On July 18, 2018, the FCC issued a Public Notice formally accepting our applications and establishing a period for public comment. On May 20, 2019, to facilitate the FCC’s review and approval of the FCC license transfers associated with the proposed Merger, we and Sprint filed with the FCC a written ex parte presentation (the “Presentation”) relating to the proposed Merger. The Presentation included proposed commitments from us and Sprint. Following the Presentation, we received statements of support for the Merger by the FCC Chairman Ajit Pai and Commissioners Carr and O’Rielly. The Federal Communications Commission voted to approve the Merger on October 16, 2019.

On June 11, 2019, a number of state attorneys general filed a lawsuit against us, DT, Sprint, and SoftBank Group Corp. in the U.S. District Court for the Southern District of New York, alleging that the Merger, if consummated, would violate Section 7 of the Clayton Act and so should be enjoined. After it was filed, several additional states joined the lawsuit. Of the states that joined the lawsuit, two have subsequently withdrawn from the suit having resolved their concerns with the Merger. Discovery in the lawsuit is ongoing, and the court has set a trial date of December 9, 2019. We believe the plaintiffs’ claims are without merit, and we intend to defend the lawsuit vigorously.

On July 26, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Sprint and DISH Network Corporation (“DISH”). We and Sprint are collectively referred to as the “Sellers.” Pursuant to the Asset Purchase Agreement, upon the terms and subject to the conditions thereof, following the consummation of the Merger, DISH will acquire Sprint’s prepaid wireless business, currently operated under the Boost Mobile, Virgin Mobile and Sprint prepaid brands (excluding the Assurance brand Lifeline customers and the prepaid wireless customers of Shenandoah Telecommunications Company and Swiftel Communications, Inc.), including customer accounts, inventory, contracts, intellectual property and certain other specified assets (the “Prepaid Business”), and will assume certain related liabilities (the “Prepaid Transaction”). DISH will pay the Sellers $1.4 billion for the Prepaid Business, subject to a working capital adjustment. The consummation of the Prepaid Transaction is subject to the consummation of the Merger and other customary closing conditions.

At the closing of the Prepaid Transaction, the Sellers and DISH will enter into (i) a License Purchase Agreement pursuant to which (a) the Sellers will sell certain 800 MHz spectrum licenses held by Sprint to DISH for a total of approximately $3.6 billion in a transaction to be completed, subject to certain additional closing conditions, following an application for FCC approval to be filed three years following the closing of the Merger and (b) the Sellers will have the option to lease back from DISH, as needed, a portion of the spectrum sold for an additional two years following the closing of the spectrum sale transaction, (ii) a Transition Services Agreement providing for the Sellers’ provision of transition services to DISH in connection with the Prepaid Business for a period of up to three years following the closing of the Prepaid Transaction, (iii) a Master Network Services Agreement providing for the Sellers’ provision of network services to customers of the Prepaid Business for a period of up to seven years following the closing of the Prepaid Transaction, and (iv) an Option to Acquire Tower and Retail Assets offering DISH the option to acquire certain decommissioned towers and retail locations from the Sellers, subject to obtaining all necessary third-party consents, for a period of up to five years following the closing of the Prepaid Transaction.

On July 26, 2019, in connection with the entry into the Asset Purchase Agreement, we and the other parties to the Business Combination Agreement entered into Amendment No. 1 (the “Amendment”) to the Business Combination Agreement. The Amendment extends the Outside Date (as defined in the Business Combination Agreement) to November 1, 2019, or, if the Marketing Period (as defined in the Business Combination Agreement) has started and is in effect at such date, then January 2, 2020. The Amendment also provides that the closing of the Merger will occur on the first business day of the first month (other than the third month of any calendar quarter) where such first business day is at least three business days following the satisfaction or waiver of all of the conditions to the closing of the Merger, or, if the Marketing Period has not ended at the time

14

Index for Notes to the Condensed Consolidated Financial Statements

of such satisfaction or waiver, the closing shall occur on the earlier of (a) any date during or after the Marketing Period specified by T-Mobile (subject to the consent of Sprint to the extent such date falls after the Outside Date) or (b) the first business day of the first month (other than the third month of any calendar quarter) where such first business day is at least three business days following the final day of the Marketing Period. The Amendment also modifies the Business Combination Agreement so as to limit the actions the parties may be required to undertake or agree to in order to obtain any remaining governmental consents or avoid an action or proceeding by any governmental entity in connection with the Transactions, recognizing the substantial undertakings already agreed to by the parties, including the transactions contemplated by the Asset Purchase Agreement.

On July 26, 2019, the U.S. Department of Justice (the “DOJ”) filed a complaint and a proposed final judgment (the “Proposed Consent Decree”) agreed to by us, DT, Sprint, SoftBank and DISH with the U.S. District Court for the District of Columbia. The Proposed Consent Decree would fully resolve DOJ’s investigation into the Merger and would require the parties to, among other things, carry out the divestitures to be made pursuant to the Asset Purchase Agreement described above upon closing of the Merger. The Proposed Consent Decree is subject to judicial approval.

The consummation of the Merger remains subject to regulatory approvals and certain other customary closing conditions. We now expect the Merger will be permitted to close in early 2020.

Acquisition

In July 2019, we completed our acquisition of a mobile marketing company, for cash consideration of $32 million. Upon closing of the transaction, the acquired company became a wholly-owned consolidated subsidiary to T-Mobile. We recorded Goodwill of approximately $29 million, calculated as the excess of the purchase price paid over the fair value of net assets acquired. The acquired goodwill was allocated to our wireless reporting unit and will be tested for impairment at this level.

The assets acquired and liabilities assumed were not material to our Condensed Consolidated Balance Sheets. The financial results from the acquisition closing date through September 30, 2019 were not material to our Condensed Consolidated Statements of Comprehensive Income. The acquisition was not material to our prior period consolidated results on a pro forma basis.

Note 4 – Receivables and Allowance for Credit Losses

Our portfolio of receivables is comprised of two portfolio segments: accounts receivable and EIP receivables. Our accounts receivable segment primarily consists of amounts currently due from customers, including service and leased device receivables, other carriers and third-party retail channels.

Based upon customer credit profiles, we classify the EIP receivables segment into two customer classes of “Prime” and “Subprime.” Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. Customers may be required to make a down payment on their equipment purchases. In addition, certain customers within the Subprime category are required to pay an advance deposit.

To determine a customer’s credit profile, we use a proprietary credit scoring model that measures the credit quality of a customer using several factors, such as credit bureau information, consumer credit risk scores and service and device plan characteristics.


15

Index for Notes to the Condensed Consolidated Financial Statements

The following table summarizes the EIP receivables, including imputed discounts and related allowance for credit losses:
(in millions)
September 30,
2019
 
December 31,
2018
EIP receivables, gross
$
4,289

 
$
4,534

Unamortized imputed discount
(294
)
 
(330
)
EIP receivables, net of unamortized imputed discount
3,995

 
4,204

Allowance for credit losses
(101
)
 
(119
)
EIP receivables, net
$
3,894

 
$
4,085

Classified on the balance sheet as:
 
 
 
Equipment installment plan receivables, net
$
2,425

 
$
2,538

Equipment installment plan receivables due after one year, net
1,469

 
1,547

EIP receivables, net
$
3,894

 
$
4,085



To determine the appropriate level of the allowance for credit losses, we consider a number of credit quality factors, including historical credit losses and timely payment experience as well as current collection trends such as write-off frequency and severity, aging of the receivable portfolio, credit quality of the customer base and other qualitative factors such as macro-economic conditions.

We write off account balances if collection efforts are unsuccessful and the receivable balance is deemed uncollectible, based on customer credit quality and the aging of the receivable.

For EIP receivables, subsequent to the initial determination of the imputed discount, we assess the need for and, if necessary, recognize an allowance for credit losses to the extent the amount of estimated probable losses on the gross EIP receivable balances exceed the remaining unamortized imputed discount balances.

The EIP receivables had weighted average effective imputed interest rates of 9.2% and 10.0% as of September 30, 2019, and December 31, 2018, respectively.

Activity for the nine months ended September 30, 2019 and 2018, in the allowance for credit losses and unamortized imputed discount balances for the accounts receivable and EIP receivables segments were as follows:
 
September 30, 2019
 
September 30, 2018
(in millions)
Accounts Receivable Allowance
 
EIP Receivables Allowance
 
Total
Accounts Receivable Allowance
 
EIP Receivables Allowance
 
Total
Allowance for credit losses and imputed discount, beginning of period
$
67

 
$
449

 
$
516

 
$
86

 
$
396

 
$
482

Bad debt expense
51

 
167

 
218

 
46

 
163

 
209

Write-offs, net of recoveries
(57
)
 
(185
)
 
(242
)
 
(62
)
 
(179
)
 
(241
)
Change in imputed discount on short-term and long-term EIP receivables
N/A

 
91

 
91

 
N/A

 
155

 
155

Impact on the imputed discount from sales of EIP receivables
N/A

 
(127
)
 
(127
)
 
N/A

 
(146
)
 
(146
)
Allowance for credit losses and imputed discount, end of period
$
61

 
$
395

 
$
456

 
$
70

 
$
389

 
$
459



Management considers the aging of receivables to be an important credit indicator. The following table provides delinquency status for the unpaid principal balance for receivables within the EIP portfolio segment, which we actively monitor as part of our current credit risk management practices and policies:
 
September 30, 2019
 
December 31, 2018
(in millions)
Prime
 
Subprime
 
Total EIP Receivables, gross
 
Prime
 
Subprime
 
Total EIP Receivables, gross
Current - 30 days past due
$
2,178

 
$
2,021

 
$
4,199

 
$
1,987

 
$
2,446

 
$
4,433

31 - 60 days past due
13

 
26

 
39

 
15

 
32

 
47

61 - 90 days past due
6

 
17

 
23

 
6

 
19

 
25

More than 90 days past due
7

 
21

 
28

 
7

 
22

 
29

Total receivables, gross
$
2,204

 
$
2,085

 
$
4,289

 
$
2,015

 
$
2,519

 
$
4,534




16

Index for Notes to the Condensed Consolidated Financial Statements

Note 5 – Sales of Certain Receivables

We have entered into transactions to sell certain service and EIP receivables. The transactions, including our continuing involvement with the sold receivables and the respective impacts to our condensed consolidated financial statements, are described below.

Sales of Service Accounts Receivable

Overview of the Transaction

In 2014, we entered into an arrangement to sell certain service accounts receivable on a revolving basis (the “service receivable sale arrangement”). The maximum funding commitment of the service receivable sale arrangement is $950 million. In February 2019, the service receivable sale arrangement was amended to extend the scheduled expiration date, as well as certain third-party credit support under the arrangement, to March 2021. As of September 30, 2019 and December 31, 2018, the service receivable sale arrangement provided funding of $950 million and $774 million, respectively. Sales of receivables occur daily and are settled on a monthly basis. The receivables consist of service charges currently due from customers and are short-term in nature.

In connection with the service receivable sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity, to sell service accounts receivable (the “Service BRE”). The Service BRE does not qualify as a VIE, and due to the significant level of control we exercise over the entity, it is consolidated. Pursuant to the service receivable sale arrangement, certain of our wholly-owned subsidiaries transfer selected receivables to the Service BRE. The Service BRE then sells the receivables to an unaffiliated entity (the “Service VIE”), which was established to facilitate the sale of beneficial ownership interests in the receivables to certain third parties.

Variable Interest Entity

We determined that the Service VIE qualifies as a VIE as it lacks sufficient equity to finance its activities. We have a variable interest in the Service VIE but are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the Service VIE’s economic performance. Those activities include committing the Service VIE to legal agreements to purchase or sell assets, selecting which receivables are purchased in the service receivable sale arrangement, determining whether the Service VIE will sell interests in the purchased service receivables to other parties, funding of the entity and servicing of receivables. We do not hold the power to direct the key decisions underlying these activities. For example, while we act as the servicer of the sold receivables, which is considered a significant activity of the Service VIE, we are acting as an agent in our capacity as the servicer and the counterparty to the service receivable sale arrangement has the ability to remove us as the servicing agent of the receivables at will with no recourse available to us. As we have determined we are not the primary beneficiary, the balances and results of the Service VIE are not included in our condensed consolidated financial statements.

The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to our variable interest in the Service VIE:
(in millions)
September 30,
2019
 
December 31,
2018
Other current assets
$
352

 
$
339

Accounts payable and accrued liabilities
1

 
59

Other current liabilities
275

 
149



Sales of EIP Receivables

Overview of the Transaction

In 2015, we entered into an arrangement to sell certain EIP accounts receivable on a revolving basis (the “EIP sale arrangement”). The maximum funding commitment of the EIP sale arrangement is $1.3 billion, and the scheduled expiration date is November 2020.

17

Index for Notes to the Condensed Consolidated Financial Statements


As of both September 30, 2019 and December 31, 2018, the EIP sale arrangement provided funding of $1.3 billion. Sales of EIP receivables occur daily and are settled on a monthly basis.

In connection with this EIP sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity (the “EIP BRE”). Pursuant to the EIP sale arrangement, our wholly-owned subsidiary transfers selected receivables to the EIP BRE. The EIP BRE then sells the receivables to a non-consolidated and unaffiliated third-party entity for which we do not exercise any level of control, nor does the third-party entity qualify as a VIE.

Variable Interest Entity

We determined that the EIP BRE is a VIE as its equity investment at risk lacks the obligation to absorb a certain portion of its expected losses. We have a variable interest in the EIP BRE and determined that we are the primary beneficiary based on our ability to direct the activities which most significantly impact the EIP BRE’s economic performance. Those activities include selecting which receivables are transferred into the EIP BRE and sold in the EIP sale arrangement and funding of the EIP BRE. Additionally, our equity interest in the EIP BRE obligates us to absorb losses and gives us the right to receive benefits from the EIP BRE that could potentially be significant to the EIP BRE. Accordingly, we include the balances and results of operations of the EIP BRE in our condensed consolidated financial statements.

The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to the EIP BRE:
(in millions)
September 30,
2019
 
December 31,
2018
Other current assets
$
347

 
$
321

Other assets
85

 
88

Other long-term liabilities
21

 
22



In addition, the EIP BRE is a separate legal entity with its own separate creditors who will be entitled, prior to any liquidation of the EIP BRE, to be satisfied prior to any value in the EIP BRE becoming available to us. Accordingly, the assets of the EIP BRE may not be used to settle our general obligations and creditors of the EIP BRE have limited recourse to our general credit.

Sales of Receivables

The transfers of service receivables and EIP receivables to the non-consolidated entities are accounted for as sales of financial assets. Once identified for sale, the receivable is recorded at the lower of cost or fair value. Upon sale, we derecognize the net carrying amount of the receivables.

We recognize the cash proceeds received upon sale in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. We recognize proceeds net of the deferred purchase price, consisting of a receivable from the purchasers that entitles us to certain collections on the receivables. We recognize the collection of the deferred purchase price in Net cash used in investing activities in our Condensed Consolidated Statements of Cash Flows as Proceeds related to beneficial interests in securitization transactions.

The deferred purchase price represents a financial asset that is primarily tied to the creditworthiness of the customers and which can be settled in such a way that we may not recover substantially all of our recorded investment, due to default by the customers on the underlying receivables. We elected, at inception, to measure the deferred purchase price at fair value with changes in fair value included in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income. The fair value of the deferred purchase price is determined based on a discounted cash flow model which uses primarily unobservable inputs (Level 3 inputs), including customer default rates. As of September 30, 2019, and December 31, 2018, our deferred purchase price related to the sales of service receivables and EIP receivables was $782 million and $746 million, respectively.


18

Index for Notes to the Condensed Consolidated Financial Statements

The following table summarizes the impact of the sale of certain service receivables and EIP receivables in our Condensed Consolidated Balance Sheets:
(in millions)
September 30,
2019
 
December 31,
2018
Derecognized net service receivables and EIP receivables
$
2,664

 
$
2,577

Other current assets
699

 
660

of which, deferred purchase price
698

 
658

Other long-term assets
85

 
88

of which, deferred purchase price
85

 
88

Accounts payable and accrued liabilities
1

 
59

Other current liabilities
275

 
149

Other long-term liabilities
21

 
22

Net cash proceeds since inception
1,953

 
1,879

Of which:
 
 
 
Change in net cash proceeds during the year-to-date period
74

 
(179
)
Net cash proceeds funded by reinvested collections
1,879

 
2,058



We recognized losses from sales of receivables, including adjustments to the receivables’ fair values and changes in fair value of the deferred purchase price, of $28 million and $48 million for the three months ended September 30, 2019 and 2018, respectively, and $91 million and $127 million for the nine months ended September 30, 2019 and 2018, respectively, in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income.

Continuing Involvement

Pursuant to the sale arrangements described above, we have continuing involvement with the service receivables and EIP receivables we sell as we service the receivables and are required to repurchase certain receivables, including ineligible receivables, aged receivables and receivables where write-off is imminent. We continue to service the customers and their related receivables, including facilitating customer payment collection, in exchange for a monthly servicing fee. As the receivables are sold on a revolving basis, the customer payment collections on sold receivables may be reinvested in new receivable sales. While servicing the receivables, we apply the same policies and procedures to the sold receivables as we apply to our owned receivables, and we continue to maintain normal relationships with our customers. Pursuant to the EIP sale arrangement, under certain circumstances, we are required to deposit cash or replacement EIP receivables primarily for contracts terminated by customers under our JUMP! Program.

In addition, we have continuing involvement with the sold receivables as we may be responsible for absorbing additional credit losses pursuant to the sale arrangements. Our maximum exposure to loss related to the involvement with the service receivables and EIP receivables sold under the sale arrangements was $1.2 billion as of September 30, 2019. The maximum exposure to loss, which is a required disclosure under U.S. GAAP, represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby we would not receive the deferred purchase price portion of the contractual proceeds withheld by the purchasers and would also be required to repurchase the maximum amount of receivables pursuant to the sale arrangements without consideration for any recovery. We believe the probability of these circumstances occurring is remote and the maximum exposure to loss is not an indication of our expected loss.

Note 6 – Spectrum License Transactions

Spectrum Licenses

The following table summarizes our spectrum license activity for the nine months ended September 30, 2019:
(in millions)
2019
Balance at December 31, 2018
$
35,559

Spectrum license acquisitions
857

Spectrum licenses transferred to held for sale

Costs to clear spectrum
26

Balance at September 30, 2019
$
36,442



19

Index for Notes to the Condensed Consolidated Financial Statements


The following is a summary of significant spectrum transactions for the nine months ended September 30, 2019:

Millimeter Wave Spectrum Auctions

In June 2019, the FCC announced that we were the winning bidder of 2,211 licenses in the 24 GHz and 28 GHz spectrum auction for an aggregate price of $842 million.

At the inception of the 28 GHz spectrum auction in October 2018, we deposited $20 million with the FCC. Upon conclusion of the 28 GHz spectrum auction in February 2019, we made an additional payment of $19 million for the purchase price of licenses won in the auction.

At the inception of the 24 GHz spectrum auction in February 2019, we deposited $147 million with the FCC. Upon conclusion of the 24 GHz spectrum auction in June 2019, we made an additional payment of $656 million for the purchase price of licenses won in the auction.

The licenses are included in Spectrum licenses as of September 30, 2019, in our Condensed Consolidated Balance Sheets. Cash payments to acquire spectrum licenses and payments for costs to clear spectrum are included in Purchases of spectrum licenses and other intangible assets, including deposits in our Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2019.

Note 7 – Fair Value Measurements

The carrying values of Cash and cash equivalents, Accounts receivable, Accounts receivable from affiliates, Accounts payable and accrued liabilities, and borrowings under our revolving credit facility with DT, our majority stockholder, approximate fair value due to the short-term maturities of these instruments.

Derivative Financial Instruments

Interest rate lock derivatives
Periodically, we use derivatives to manage exposure to market risk, such as interest rate risk. We designate certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow hedge) to help minimize significant, unplanned fluctuations in cash flows caused by interest rate volatility. We do not use derivatives for trading or speculative purposes.
We record interest rate lock derivatives on our Condensed Consolidated Balance Sheets at fair value that is derived primarily from observable market data, including yield curves. Interest rate lock derivatives were classified as Level 2 in the fair value hierarchy. Cash flows associated with qualifying hedge derivative instruments are presented in the same category on the Condensed Consolidated Statements of Cash Flows as the item being hedged.
In October 2018, we entered into interest rate lock derivatives with notional amounts of $9.6 billion. The fair value of interest rate lock derivatives was a liability of $1.4 billion and $447 million as of September 30, 2019 and December 31, 2018, respectively, and were included in Other current liabilities in our Condensed Consolidated Balance Sheets. As of and for the three and nine months ended September 30, 2019, no amounts were accrued or amortized into Interest expense in the Condensed Consolidated Statements of Comprehensive Income. Aggregate changes in fair value, net of tax, of $1.1 billion and $332 million are presented in Accumulated other comprehensive loss as of September 30, 2019, and December 31, 2018, respectively.
The interest rate lock derivatives will be settled upon the earlier of the issuance of fixed-rate debt or the current mandatory termination date of December 3, 2019. We expect to extend the mandatory termination date, at which time we may elect to provide cash collateral up to the fair value of the derivatives on the effective date. If we provide any such cash collateral to any of our derivative counterparties, we will begin making (or receiving), depending on daily market movements, variation margin payments to (or from) such derivative counterparties. Upon settlement of the interest rate lock derivatives, we will receive, or make, a cash payment in the amount of the fair value of the cash flow hedge as of the settlement date. There were no cash payments or receipts associated with these derivatives for the three and nine months ended September 30, 2019.


20

Index for Notes to the Condensed Consolidated Financial Statements

Embedded derivatives
Effective April 28, 2019, we redeemed $600 million aggregate principal amount of our 9.332% Senior Reset Notes due 2023 held by DT. The notes were redeemed at a redemption price equal to 104.666% of the principal amount of the notes (plus accrued and unpaid interest thereon) and were paid on April 29, 2019. The write-off of embedded derivatives upon redemption of the DT Senior Reset Notes resulted in a gain of $11 million during the three months ended June 30, 2019 and was included in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income.
Deferred Purchase Price Assets

In connection with the sales of certain service and EIP accounts receivable pursuant to the sale arrangements, we have deferred purchase price assets measured at fair value that are based on a discounted cash flow model using unobservable Level 3 inputs, including customer default rates. See Note 5 – Sales of Certain Receivables for further information.

The carrying amounts and fair values of our assets measured at fair value on a recurring basis included in our Condensed Consolidated Balance Sheets were as follows:
 
Level within the Fair Value Hierarchy
 
September 30, 2019
 
December 31, 2018
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Deferred purchase price assets
3
 
$
782

 
$
782

 
$
746

 
$
746



Long-term Debt

The fair value of our Senior Notes to third parties was determined based on quoted market prices in active markets, and therefore was classified as Level 1 within the fair value hierarchy. The fair values of our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were determined based on a discounted cash flow approach using market interest rates of instruments with similar terms and maturities and an estimate for our standalone credit risk. Accordingly, our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates were classified as Level 2 within the fair value hierarchy.

Although we have determined the estimated fair values using available market information and commonly accepted valuation methodologies, considerable judgment was required in interpreting market data to develop fair value estimates for the Senior Notes to affiliates, Incremental Term Loan Facility to affiliates and Senior Reset Notes to affiliates. The fair value estimates were based on information available as of September 30, 2019, and December 31, 2018. As such, our estimates are not necessarily indicative of the amount we could realize in a current market exchange.

The carrying amounts and fair values of our short-term and long-term debt included in our Condensed Consolidated Balance Sheets were as follows:
 
Level within the Fair Value Hierarchy
 
September 30, 2019
 
December 31, 2018
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Liabilities:
 
 
 
 
 
 
 
 
 
Senior Notes to third parties
1
 
$
10,956

 
$
11,506

 
$
10,950

 
$
10,945

Senior Notes to affiliates
2
 
9,986

 
10,384

 
9,984

 
9,802

Incremental Term Loan Facility to affiliates
2
 
4,000

 
4,000

 
4,000

 
3,976

Senior Reset Notes to affiliates
2
 

 

 
598

 
640




21

Index for Notes to the Condensed Consolidated Financial Statements

Guarantee Liabilities

We offer a device trade-in program, JUMP!, which provides eligible customers a specified-price trade-in right to upgrade their device. For customers who enroll in JUMP!, we recognize a liability and reduce revenue for the portion of revenue which represents the estimated fair value of the specified-price trade-in right guarantee, incorporating the expected probability and timing of handset upgrade and the estimated fair value of the handset which is returned. Accordingly, our guarantee liabilities were classified as Level 3 within the fair value hierarchy. When customers upgrade their device, the difference between the EIP balance credit to the customer and the fair value of the returned device is recorded against the guarantee liabilities. Guarantee liabilities are included in Other current liabilities in our Condensed Consolidated Balance Sheets.

The carrying amounts of our guarantee liabilities measured at fair value on a non-recurring basis included in our Condensed Consolidated Balance Sheets were $65 million and $73 million as of September 30, 2019, and December 31, 2018, respectively.

The total estimated remaining gross EIP receivable balances of all enrolled handset upgrade program customers, which are the remaining EIP amounts underlying the JUMP! guarantee, including EIP receivables that have been sold, was $2.9 billion as of September 30, 2019. This is not an indication of our expected loss exposure as it does not consider the expected fair value of the used handset or the probability and timing of the trade-in.

Note 8 – Tower Obligations

In 2012, we conveyed to CCI the exclusive right to manage and operate approximately 7,100 T-Mobile-owned wireless communication tower sites in exchange for net proceeds of $2.5 billion (the “2012 Tower Transaction”). Rights to approximately 6,200 of the tower sites were transferred to CCI via a master prepaid lease with site lease terms ranging from 23 to 37 years (“CCI Lease Sites”), while the remaining tower sites were sold to CCI (“CCI Sales Sites”). CCI has fixed-price purchase options for the CCI Lease Sites totaling approximately $2.0 billion, exercisable at the end of the lease term. We lease back space at certain tower sites for an initial term of ten years, followed by optional renewals at customary terms.

In 2015, we conveyed to PTI the exclusive right to manage and operate certain T-Mobile-owned wireless communication tower sites (“PTI Sales Sites”) in exchange for net proceeds of approximately $140 million (the “2015 Tower Transaction”). As of September 30, 2019, rights to approximately 150 of the tower sites remain operated by PTI under a management agreement. We lease back space at certain tower sites for an initial term of ten years, followed by optional renewals at customary terms.

Assets and liabilities associated with the operation of the tower sites were transferred to special purpose entities (“SPEs”). Assets included ground lease agreements or deeds for the land on which the towers are situated, the towers themselves and existing subleasing agreements with other mobile network operator tenants, who lease space at the tower sites. Liabilities included the obligation to pay ground lease rentals, property taxes and other executory costs. Upon closing of the 2012 Tower Transaction, CCI acquired all of the equity interests in the SPE containing CCI Sales Sites and an option to acquire the CCI Lease Sites at the end of their respective lease terms and entered into a master lease agreement under which we agreed to lease back space at certain of the tower sites. Upon closing of the 2015 Tower Transaction, PTI acquired all of the equity interests in the SPEs containing PTI Sales Sites and entered into a master lease agreement under which we agreed to lease back space at certain of the tower sites.

We determined the SPEs containing the CCI Lease Sites (“Lease Site SPEs”) are VIEs as our equity investment lacks the power to direct the activities that most significantly impact the economic performance of the VIEs. These activities include managing tenants and underlying ground leases, performing repair and maintenance on the towers, the obligation to absorb expected losses and the right to receive the expected future residual returns from the purchase option to acquire the CCI Lease Sites. As we determined that we are not the primary beneficiary and do not have a controlling financial interest in the Lease Site SPEs, the balances and operating results of the Lease Site SPEs are not included in our condensed consolidated financial statements.

Due to our continuing involvement with the tower sites, we previously determined that we were precluded from applying sale-leaseback accounting. We recorded long-term financial obligations in the amount of the net proceeds received and recognized interest on the tower obligations at a rate of approximately 8% for the 2012 Tower Transaction and 5% for the 2015 Tower Transaction using the effective interest method. The tower obligations are increased by interest expense and amortized through contractual leaseback payments made by us to CCI or PTI and through net cash flows generated and retained by CCI or PTI from operation of the tower sites. Our historical tower site asset costs continue to be reported in Property and equipment, net in our Condensed Consolidated Balance Sheets and are depreciated.

Upon adoption of the new leasing standard we were required to reassess the previously failed sale-leasebacks and determine whether the transfer of the assets to the tower operator under the arrangement met the transfer of control criteria in the revenue standard and whether a sale should be recognized. We concluded that a sale has not occurred for the CCI Lease Sites and these sites continue to be accounted for as a failed sale-leaseback. We concluded that a sale had occurred for the CCI Sales Sites and the PTI Sales Sites and therefore we derecognized our existing long-term financial obligation and the tower-related property and equipment associated with these sites as part of the cumulative effect adjustment on January 1, 2019.

The following table summarizes the balances of the failed sale-leasebacks in the Condensed Consolidated Balance Sheets:
(in millions)
September 30,
2019
 
December 31,
2018
Property and equipment, net
$
211

 
$
329

Tower obligations
2,241

 
2,557



Future minimum payments related to the tower obligations are approximately $158 million for the year ending September 30, 2020, $315 million in total for the years ending September 30, 2021 and 2022, $315 million in total for years ending September 30, 2023 and 2024, and $498 million in total for years thereafter.


22

Index for Notes to the Condensed Consolidated Financial Statements

We are contingently liable for future ground lease payments through the remaining term of the CCI Lease Sites. These contingent obligations are not included in Operating lease liabilities as any amount due is contractually owed by CCI based on the subleasing arrangement. See Note 11 - Leases for further information.

Note 9 – Revenue from Contracts with Customers

Disaggregation of Revenue

We provide wireless communication services to three primary categories of customers:

Branded postpaid customers generally include customers who are qualified to pay after receiving wireless communication services utilizing phones, wearables, DIGITS, or connected devices which includes tablets and SyncUP DRIVE™
Branded prepaid customers generally include customers who pay for wireless communication services in advance. Our branded prepaid customers include customers of T-Mobile and Metro by T-Mobile; and
Wholesale customers include Machine-to-Machine (“M2M”) and Mobile Virtual Network Operator (“MVNO”) customers that operate on our network but are managed by wholesale partners.

Branded postpaid service revenues, including branded postpaid phone revenues and branded postpaid other revenues, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

2018
 
2019
 
2018
Branded postpaid service revenues
 
 
 
 
 
 
 
Branded postpaid phone revenues
$
5,400

 
$
4,955

 
$
15,870

 
$
14,658

Branded postpaid other revenues
346

 
289

 
982

 
820

Total branded postpaid service revenues
$
5,746

 
$
5,244

 
$
16,852

 
$
15,478



We operate as a single operating segment. The balances presented within each revenue line item in our Condensed Consolidated Statements of Comprehensive Income represent categories of revenue from contracts with customers disaggregated by type of product and service. Service revenues also include revenues earned for providing value added services to customers, such as handset insurance services. Revenue generated from the lease of mobile communication devices is included within Equipment revenues in our Condensed Consolidated Statements of Comprehensive Income.

Equipment revenues from the lease of mobile communication devices were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019
 
2018
 
2019

2018
Equipment revenues from the lease of mobile communication devices
$
142

 
$
176

 
$
446

 
$
524



Contract Balances

The opening and closing balances of our contract asset and contract liability balances from contracts with customers as of December 31, 2018 and September 30, 2019, were as follows:
(in millions)
Contract Assets
 
Contract Liabilities
Balance as of December 31, 2018
$
51

 
$
645

Balance as of September 30, 2019
55

 
550

Change
$
4

 
$
(95
)


Contract assets primarily represent revenue recognized for equipment sales with promotional bill credits offered to customers that are paid over time and are contingent on the customer maintaining a service contract. The change in the contract asset balance includes customer activity related to new promotions, offset by billings on existing contracts and impairment which is recognized as bad debt expense. The current portion of our Contract Assets of approximately $44 million and $51 million as of September 30, 2019 and December 31, 2018, respectively, was included in Other current assets in our Condensed Consolidated Balance Sheets.


23

Index for Notes to the Condensed Consolidated Financial Statements

Contract liabilities are recorded when fees are collected, or we have an unconditional right to consideration (a receivable) in advance of delivery of goods or services. The change in contract liabilities is primarily related to the migration of customers to unlimited rate plans. Contract liabilities are included in Deferred revenue in our Condensed Consolidated Balance Sheets.

Revenues for the three and nine months ended September 30, 2019 and 2018, include the following:

Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019
 
2018
 
2019
 
2018
Amounts included in the beginning of year contract liability balance
$
39

 
$
23

 
$
642

 
$
582



Remaining Performance Obligations

As of September 30, 2019, the aggregate amount of transaction price allocated to remaining service performance obligations for branded postpaid contracts with promotional bill credits that result in an extended service contract is $229 million. We expect to recognize this revenue as service is provided over the extended contract term in the next 24 months.

Certain of our wholesale, roaming and other service contracts include variable consideration based on usage. This variable consideration has been excluded from the disclosure of remaining performance obligations. As of September 30, 2019, the aggregate amount of the contractual minimum consideration for wholesale, roaming and other service contracts is $336 million, $1.2 billion and $1.6 billion for 2019, 2020 and 2021 and beyond, respectively. These contracts have a remaining duration of less than one to eleven years.

Information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less have been excluded from the above, which primarily consists of monthly service contracts. The aggregate amount of the transaction price allocated to remaining performance obligations includes the estimated amount to be invoiced to the customer.

Contract Costs

The total balance of deferred incremental costs to obtain contracts as of September 30, 2019, was $831 million compared to $644 million as of December 31, 2018. Deferred contract costs incurred to obtain postpaid service contracts are amortized over a period of 24 months. The amortization period is monitored to reflect any significant change in assumptions. Amortization of deferred contract costs was $162 million and $79 million for the three months ended September 30, 2019 and 2018, respectively, and $415 million and $171 million for the nine months ended September 30, 2019 and 2018, respectively.

The deferred contract cost asset is assessed for impairment on a periodic basis. There were no impairment losses recognized on deferred contract cost assets for the three and nine months ended September 30, 2019 and 2018.


24

Index for Notes to the Condensed Consolidated Financial Statements

Note 10 – Earnings Per Share

The computation of basic and diluted earnings per share was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except shares and per share amounts)
2019
 
2018
 
2019
 
2018
Net income
$
870

 
$
795

 
$
2,717

 
$
2,248

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
854,578,241

 
847,087,120

 
853,391,370

 
849,960,290

Effect of dilutive securities:
 
 
 
 
 
 
 
Outstanding stock options and unvested stock awards
8,112,510

 
6,765,644

 
9,463,284

 
8,288,278

Weighted average shares outstanding - diluted
862,690,751

 
853,852,764

 
862,854,654

 
858,248,568

 
 
 
 
 
 
 
 
Earnings per share - basic
$
1.02

 
$
0.94

 
$
3.18

 
$
2.65

Earnings per share - diluted
$
1.01

 
$
0.93

 
$
3.15

 
$
2.62

 
 
 
 
 
 
 
 
Potentially dilutive securities:
 
 
 
 
 
 
 
Outstanding stock options and unvested stock awards
241

 
537,810

 
30,314

 
779,644



As of September 30, 2019, we had authorized 100 million shares of preferred stock, with a par value of $0.00001 per share. There was no preferred stock outstanding as of September 30, 2019 and 2018.

Potentially dilutive securities were not included in the computation of diluted earnings per share if to do so would have been anti-dilutive.

Note 11 - Leases

Leases (Topic 842) Disclosures

Lessee

We are lessee for non-cancellable operating and finance leases for cell sites, switch sites, retail stores and office facilities with contractual terms through 2029. The majority of cell site leases have an initial non-cancelable term of five to ten years with several renewal options that can extend the lease term from five to thirty-five years. In addition, we have finance leases for network equipment that generally have a non-cancelable lease term of two to five years; the finance leases do not have renewal options and contain a bargain purchase option at the end of the lease.

The components of lease expense were as follows:
(in millions)
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease expense
$
657

 
$
1,893

Financing lease expense:
 
 
 
Amortization of right-of-use assets
146

 
376

Interest on lease liabilities
21

 
61

Total financing lease expense
167

 
437

Variable lease expense
62

 
185

Total lease expense
$
886

 
$
2,515




25

Index for Notes to the Condensed Consolidated Financial Statements

Information relating to the lease term and discount rate is as follows:
 
September 30, 2019
Weighted Average Remaining Lease Term (Years)
 
Operating leases
6

Financing leases
3

Weighted Average Discount Rate
 
Operating leases
4.9
%
Financing leases
4.3
%


Maturities of lease liabilities as of September 30, 2019, were as follows:
(in millions)
Operating Leases
 
Finance Leases
Twelve Months Ending September 30,
 
 
 
2020
$
2,716

 
$
1,073

2021
2,557

 
764

2022
2,311

 
467

2023
1,905

 
102

2024
1,602

 
75

Thereafter
4,009

 
131

Total lease payments
$
15,100

 
$
2,612

Less imputed interest
2,254

 
159

Total
$
12,846

 
$
2,453



Interest payments for financing leases for the three and nine months ended September 30, 2019, were $20 million and $61 million, respectively.

As of September 30, 2019, we have additional operating leases for cell sites and commercial properties that have not yet commenced with lease payments of approximately $315 million.

As of September 30, 2019, we were contingently liable for future ground lease payments related to the tower obligations. These contingent obligations are not included in the above table as the amounts owed are contractually owed by CCI based on the subleasing arrangement. See Note 8 - Tower Obligations for further information.

Lessor

JUMP! On Demand allows customers to lease a device (handset or tablet) over a period of 18 months and upgrade it for a new device up to one time per month. Upon device upgrade or at lease end, customers must return or purchase their device. The purchase price at the expiration of the lease is established at lease commencement and reflects the estimated residual value of the device, which reflects the estimated fair value of the underlying asset at the end of the lease term. The JUMP! On Demand leases do not contain any residual value guarantees or variable lease payments, and there are no restrictions or covenants imposed by these leases. Leased wireless devices are included in Property and equipment, net in our Condensed Consolidated Balance Sheets.

The components of leased wireless devices under our JUMP! On Demand program were as follows:
(in millions)
September 30,
2019
 
December 31,
2018
Leased wireless devices, gross
$
1,033

 
$
1,159

Accumulated depreciation
(490
)
 
(622
)
Leased wireless devices, net
$
543

 
$
537




26

Index for Notes to the Condensed Consolidated Financial Statements

For equipment revenues from the lease of mobile communication devices, see Note 9 - Revenue from Contracts with Customers.

Future minimum payments expected to be received over the lease term related to the leased wireless devices, which exclude optional residual buy-out amounts at the end of the lease term, are summarized below:
(in millions)
Total
Twelve Months Ending September 30,
 
2020
$
350

2021
73

Total
$
423



Leases (Topic 840) Disclosures

On January 1, 2019, we adopted the new lease standard using a modified-retrospective approach by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application and did not restate the prior periods presented in our Consolidated Financial Statements. As such, prior periods presented in our Consolidated Financial Statements continue to be in accordance with the former lease standard, Topic 840 Leases. See Note 1 - Summary of Significant Accounting Policies for further information.

Operating Leases

Under the previous lease standard, we had non-cancellable operating leases for cell sites, switch sites, retail stores and office facilities. As of December 31, 2018, these leases had contractual terms expiring through 2028, with the majority of cell site leases having an initial non-cancelable term of five to ten years with several renewal options. In addition, we had operating leases for dedicated transportation lines with varying expiration terms through 2027.

Our commitments under leases existing as of December 31, 2018 were approximately $2.7 billion for the year ending December 31, 2019, $4.7 billion in total for the years ending December 31, 2020 and 2021, $3.3 billion in total for the years ending December 31, 2022 and 2023 and $3.8 billion in total for years thereafter.

Total rent expense under operating leases, including dedicated transportation lines, was $759 million and $2.3 billion for the three and nine months ended September 30, 2018, and was classified as Cost of services and Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income.

Lessor

As of December 31, 2018, the future minimum payments expected to be received over the lease term related to the leased wireless devices, which exclude optional residual buy-out amounts at the end of the lease term, are summarized below:
(in millions)
Total
Year Ended December 31,
 
2019
$
419

2020
59

Total
$
478


Capital Leases

Within property and equipment, wireless communication systems include capital lease agreements for network equipment with varying expiration terms through 2033. Capital lease assets and accumulated amortization were $3.1 billion and $867 million as of December 31, 2018.


27

Index for Notes to the Condensed Consolidated Financial Statements

As of December 31, 2018, the future minimum payments required under capital leases, including interest and maintenance, over their remaining terms are summarized below:
(in millions)
Future Minimum Payments
Year Ended December 31,
 
2019
$
909

2020
631

2021
389

2022
102

2023
66

Thereafter
106

Total
$
2,203

Included in Total
 
Interest
$
143

Maintenance
45



Note 12 – Commitments and Contingencies

Purchase Commitments

We have commitments for non-dedicated transportation lines with varying expiration terms through 2035. In addition, we have commitments to purchase and lease spectrum licenses, wireless devices, network services, equipment, software, marketing sponsorship agreements and other items in the ordinary course of business, with various terms through 2043. These amounts are not reflective of our entire anticipated purchases under the related agreements but are determined based on the non-cancelable quantities or termination amounts to which we are contractually obligated.

Our purchase obligations are approximately $4.2 billion for the year ending September 30, 2020, $3.2 billion in total for the years ending September 30, 2021 and 2022, $1.8 billion in total for the years ending September 30, 2023 and 2024 and $1.5 billion in total for the years thereafter.

In September 2018, we signed a reciprocal long-term spectrum lease with Sprint. The lease includes an offsetting amount to be received from Sprint for the lease of our spectrum. Lease payments began in the fourth quarter of 2018. The minimum commitment under this lease as of September 30, 2019, is $495 million. The reciprocal long-term lease is a distinct transaction from the Merger.

Under the previous lease standard certain of our network backhaul arrangements were accounted for as operating leases. Obligations under these agreements were included within our operating lease commitments as of December 31, 2018.

These agreements no longer qualify as leases under the new lease standard. Our commitments under these agreements as of September 30, 2019, were approximately $152 million for the year ending September 30, 2020, $250 million in total for the years ended September 30, 2021 and 2022, $166 million in total for the years ended September 30, 2023 and 2024, and $204 million in total for years thereafter.

Interest rate lock derivatives
In October 2018, we entered into interest rate lock derivatives with notional amounts of $9.6 billion. These interest rate lock derivatives were designated as cash flow hedges to reduce variability in cash flows due to changes in interest payments attributable to increases or decreases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. The fair value of interest rate lock derivatives as of September 30, 2019, was a liability of $1.4 billion and is included in Other current liabilities in our Condensed Consolidated Balance Sheets. See Note 7 – Fair Value Measurements for further information.

Renewable Energy Purchase Agreements
In April 2019, T-Mobile USA entered into a Renewable Energy Purchase Agreement (“REPA”) with a third party that is based on the expected operation of a solar photovoltaic electrical generation facility located in Texas and will remain in effect until the fifteenth anniversary of the facility’s entry into commercial operation. Commercial operation of the facility is expected to

28

Index for Notes to the Condensed Consolidated Financial Statements

occur in July 2021. The REPA consists of an energy forward agreement that is net settled based on energy prices and the energy output generated by the facility. We have determined that the REPA does not meet the definition of a derivative because the expected energy output of the facility may not be reliably estimated (the arrangement lacks a notional amount). The REPA does not contain any unconditional purchase obligations because amounts under the agreement are not fixed and determinable. Our participation in the REPA did not require an upfront investment or capital commitment. We do not control the activities that most significantly impact the energy-generating facility, nor do we direct the use of, or receive specific energy output from, the facility.

Contingencies and Litigation

Litigation Matters

We are involved in various lawsuits and disputes, claims, government agency investigations and enforcement actions, and other proceedings (“Litigation Matters”) that arise in the ordinary course of business, which include claims of patent infringement (most of which are asserted by non-practicing entities primarily seeking monetary damages), class actions, and proceedings to enforce FCC rules and regulations. The Litigation Matters described above have progressed to various stages and some of them may proceed to trial, arbitration, hearing or other adjudication that could result in fines, penalties, or awards of monetary or injunctive relief in the coming 12 months if they are not otherwise resolved. We have established an accrual with respect to certain of these matters, where appropriate, which is reflected in the Consolidated Financial Statements but that is not considered to be, individually or in the aggregate, material. An accrual is established when we believe it is both probable that a loss has been incurred and an amount can be reasonably estimated. For other matters, where we have not determined that a loss is probable or because the amount of loss cannot be reasonably estimated, we have not recorded an accrual due to various factors typical in contested proceedings, including but not limited to uncertainty concerning legal theories and their resolution by courts or regulators, uncertain damage theories and demands, and a less than fully developed factual record. While we do not expect that the ultimate resolution of these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, an unfavorable outcome of some or all of these proceedings could have a material adverse impact on results of operations or cash flows for a particular period. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future.

Note 13 – Guarantor Financial Information

Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties issued by T-Mobile USA (“Issuer”) is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of the Issuer’s 100% owned subsidiaries (“Guarantor Subsidiaries”).

The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures and credit facilities governing the long-term debt contain covenants that, among other things, limit the ability of the Issuer and the Guarantor Subsidiaries to incur more debt, pay dividends and make distributions, make certain investments, repurchase stock, create liens or other encumbrances, enter into transactions with affiliates, enter into transactions that restrict dividends or distributions from subsidiaries, and merge, consolidate or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuer to loan funds or make payments to Parent. However, the Issuer and Guarantor Subsidiaries are allowed to make certain permitted payments to the Parent under the terms of the indentures and the supplemental indentures.

On October 23, 2018, SLMA LLC was formed as a limited liability company in Delaware to serve as an escrow subsidiary to facilitate the contemplated issuance of notes by Parent in connection with the Transactions. SLMA LLC is an indirect, 100% owned finance subsidiary of Parent, as such term is used in Rule 3-10(b) of Regulation S-X, and has been designated as an unrestricted subsidiary under the Issuer’s existing debt securities. Any debt securities that may be issued from time to time by SLMA LLC will be fully and unconditionally guaranteed by Parent.

In September 2019, certain Non-Guarantor Subsidiaries became Guarantor Subsidiaries. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

Presented below is the condensed consolidating financial information as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and 2018.


29

Index for Notes to the Condensed Consolidated Financial Statements

Condensed Consolidating Balance Sheet Information
September 30, 2019
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
1

 
$
1,539

 
$
108

 
$

 
$
1,653

Accounts receivable, net

 

 
1,524

 
298

 

 
1,822

Equipment installment plan receivables, net

 

 
2,425

 

 

 
2,425

Accounts receivable from affiliates

 
5

 
20

 

 
(5
)
 
20

Inventory

 

 
801

 

 

 
801

Other current assets

 

 
1,042

 
695

 

 
1,737

Total current assets
5

 
6

 
7,351

 
1,101

 
(5
)
 
8,458

Property and equipment, net (1)

 

 
21,891

 
207

 

 
22,098

Operating lease right-of-use assets

 

 
10,914

 

 

 
10,914

Financing lease right-of-use assets

 

 
2,855

 

 

 
2,855

Goodwill

 

 
1,930

 

 

 
1,930

Spectrum licenses

 

 
36,442

 

 

 
36,442

Other intangible assets, net

 

 
144

 

 

 
144

Investments in subsidiaries, net
27,946

 
50,500

 

 

 
(78,446
)
 

Intercompany receivables and note receivables

 
4,603

 

 

 
(4,603
)
 

Equipment installment plan receivables due after one year, net

 

 
1,469

 

 

 
1,469

Other assets

 
9

 
1,720

 
210

 
(140
)
 
1,799

Total assets
$
27,951

 
$
55,118

 
$
84,716

 
$
1,518

 
$
(83,194
)
 
$
86,109

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$

 
$
136

 
$
6,005

 
$
265

 
$

 
$
6,406

Payables to affiliates

 
177

 
80

 

 
(5
)
 
252

Short-term debt

 
475

 

 

 

 
475

Deferred revenue

 

 
608

 

 

 
608

Short-term operating lease liabilities

 

 
2,232

 

 

 
2,232

Short-term financing lease liabilities

 

 
1,013

 

 

 
1,013

Other current liabilities

 
1,442

 
145

 
296

 

 
1,883

Total current liabilities

 
2,230

 
10,083

 
561

 
(5
)
 
12,869

Long-term debt

 
10,956

 

 

 

 
10,956

Long-term debt to affiliates

 
13,986

 

 

 

 
13,986

Tower obligations (1)

 

 
75

 
2,166

 

 
2,241

Deferred tax liabilities

 

 
5,436

 

 
(140
)
 
5,296

Operating lease liabilities

 

 
10,614

 

 

 
10,614

Financing lease liabilities

 

 
1,440

 

 

 
1,440

Negative carrying value of subsidiaries, net

 

 
787

 

 
(787
)
 

Intercompany payables and debt
180

 

 
4,075

 
348

 
(4,603
)
 

Other long-term liabilities

 

 
915

 
21

 

 
936

Total long-term liabilities
180

 
24,942

 
23,342

 
2,535

 
(5,530
)
 
45,469

Total stockholders' equity (deficit)
27,771

 
27,946

 
51,291

 
(1,578
)
 
(77,659
)
 
27,771

Total liabilities and stockholders' equity
$
27,951

 
$
55,118

 
$
84,716

 
$
1,518

 
$
(83,194
)
 
$
86,109

(1)
Assets and liabilities for Non-Guarantor Subsidiaries are primarily included in VIEs related to the 2012 Tower Transaction. See Note 8 – Tower Obligations for further information.


30

Index for Notes to the Condensed Consolidated Financial Statements

Condensed Consolidating Balance Sheet Information
December 31, 2018
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2

 
$
1

 
$
1,082

 
$
118

 
$

 
$
1,203

Accounts receivable, net

 

 
1,510

 
259

 

 
1,769

Equipment installment plan receivables, net

 

 
2,538

 

 

 
2,538

Accounts receivable from affiliates

 

 
11

 

 

 
11

Inventory

 

 
1,084

 

 

 
1,084

Other current assets

 

 
1,032

 
644

 

 
1,676

Total current assets
2

 
1

 
7,257

 
1,021

 

 
8,281

Property and equipment, net (1)

 

 
23,113

 
246

 

 
23,359

Goodwill

 

 
1,901

 

 

 
1,901

Spectrum licenses

 

 
35,559

 

 

 
35,559

Other intangible assets, net

 

 
198

 

 

 
198

Investments in subsidiaries, net
25,314

 
46,516

 

 

 
(71,830
)
 

Intercompany receivables and note receivables

 
5,174

 

 

 
(5,174
)
 

Equipment installment plan receivables due after one year, net

 

 
1,547

 

 

 
1,547

Other assets

 
7

 
1,540

 
217

 
(141
)
 
1,623

Total assets
$
25,316

 
$
51,698

 
$
71,115

 
$
1,484

 
$
(77,145
)
 
$
72,468

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$

 
$
228

 
$
7,263

 
$
250

 
$

 
$
7,741

Payables to affiliates

 
157

 
43

 

 

 
200

Short-term debt

 

 
841

 

 

 
841

Deferred revenue

 

 
698

 

 

 
698

Other current liabilities

 
447

 
164

 
176

 

 
787

Total current liabilities

 
832

 
9,009

 
426

 

 
10,267

Long-term debt

 
10,950

 
1,174

 

 

 
12,124

Long-term debt to affiliates

 
14,582

 

 

 

 
14,582

Tower obligations (1)

 

 
384

 
2,173

 

 
2,557

Deferred tax liabilities

 

 
4,613

 

 
(141
)
 
4,472

Deferred rent expense

 

 
2,781

 

 

 
2,781

Negative carrying value of subsidiaries, net

 

 
676

 

 
(676
)
 

Intercompany payables and debt
598

 

 
4,258