Business context and reporting period
This is MetroPCS Communications, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2013, not a post-combination T-Mobile US filing. MetroPCS operated prepaid wireless services in U.S. metropolitan markets and reported one segment. The proposed combination with T-Mobile had been approved by MetroPCS stockholders on April 24, 2013; the filing anticipated closing after April 30.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1.287 billion | $1.277 billion | Up 1% |
| Service revenue | $1.101 billion | $1.159 billion | Down 5% |
| Equipment revenue | $186.0 million | $117.8 million | Up 58% |
| Operating income | $107.8 million | $98.3 million | Up 10% |
| Net income | $19.4 million | $21.0 million | Down 8% |
| Diluted EPS | $0.05 | $0.06 | Down $0.01 |
| Operating cash flow | $223.5 million | $136.9 million | Up $86.6 million |
| Capital expenditures | $154.6 million | $144.0 million | Up $10.6 million |
Operating margin was approximately 8.4%, versus 7.7% a year earlier; net margin was approximately 1.5%, versus 1.6%. Operating cash flow less cash purchases of property and equipment was approximately $68.8 million. Adjusted EBITDA, a non-GAAP measure, was $291.1 million, up from $262.4 million.
At March 31, cash and cash equivalents were $2.701 billion. A further $3.475 billion was restricted cash from the March debt offering and held in a segregated account pending the transaction. Total debt, including capital leases and net of discount, was approximately $8.257 billion, including $2.450 billion classified as current; stockholders’ equity was $3.392 billion. The large restricted-cash balance should not be treated as freely available liquidity.
Operationally, quarter-end customers were 8.995 million, down 5% year over year. Quarterly net additions were 108,668, compared with 131,654. Average monthly churn improved to 2.9% from 3.1%; ARPU rose to $40.96 from $40.56; CPGA was $236.14 versus $235.45; and CPU improved to $22.21 from $22.87.
Material changes versus the prior comparable period
- Total revenue was nearly flat: higher handset revenue more than offset lower service revenue. Management attributed the service decline mainly to a net loss of 482,922 customers over the preceding twelve months, partly offset by higher ARPU.
- Operating income improved as cost of service and equipment costs declined, but SG&A rose 10% and depreciation and amortization rose 13%, reflecting marketing, reactivation commissions, transaction-related professional fees, and network investment.
- Net income fell despite higher operating income, mainly because interest expense increased 9% and income tax expense increased 64%. The prior-year tax comparison included a $3.7 million benefit from a state tax settlement.
- Operating cash flow increased, primarily due to a more favorable working-capital contribution. Investing cash outflow rose sharply because $3.475 billion of note proceeds was placed in restricted cash; financing inflow reflected the $3.5 billion note issuance.
Outlook, transaction, risks, and unusual items
- Management forecast 2013 capital expenditures of $800 million to $900 million, mainly for network coverage, capacity, and 4G LTE upgrades. It stated that cash and anticipated operating cash flows were expected to support near-term operations and planned investment.
- The proposed transaction contemplated a $1.5 billion aggregate cash payment to MetroPCS stockholders, with Deutsche Telekom’s T-Mobile Holding receiving 74% and existing MetroPCS holders retaining 26% of the combined company. An April 14 amendment reduced planned debt issued to Deutsche Telekom by $3.8 billion, cut its interest rate by 50 basis points, and extended the lock-up period to 18 months. The filing expected completion after April 30, subject to closing.
- The $3.5 billion of 2013 notes was subject to special mandatory redemption if the transaction was terminated or not completed by January 17, 2014. Redemption would be at par if by September 30, 2013, or 101% thereafter, plus accrued interest. The proceeds were therefore restricted pending the transaction.
- Debt was substantial, and approximately $2.4 billion under the senior secured facility bore floating rates. Management estimated that a 100-basis-point LIBOR increase would add about $10.4 million to annual interest expense on the unhedged variable-rate portion.
- Stockholder litigation challenged the proposed transaction in Delaware, Texas, and New York, alleging fiduciary-duty and proxy-disclosure violations. Plaintiffs sought injunctive relief and damages; MetroPCS said it would defend the claims vigorously. The filing reported no material changes to previously disclosed risk factors.
- Other commitments included approximately $161.2 million under a backhaul/interconnection pricing agreement, $23.5 million under sponsorship agreements, $16.6 million under managed-service agreements, and $14.8 million under a handset purchase agreement. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether and when the combination closed, and the final terms and financing of the combined company.
- How restricted note proceeds were used, and the resulting debt balance, maturity profile, interest burden, and available liquidity after closing.
- Whether customer losses, net additions, churn, ARPU, and handset economics improved or deteriorated after the reporting period.
- Actual 2013 capital expenditures and whether network investment translated into improved service, customer retention, and cash generation.
- Developments and potential financial or closing effects from transaction-related litigation and other contingencies.