T-Mobile US, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. This is an annual report, not a standalone Q4 filing. Sprint results are consolidated only from the April 1, 2020 merger close, so reported 2020 growth is not directly comparable with 2019.
Business context and operating performance
T-Mobile provides wireless services and devices under the T-Mobile and Metro by T-Mobile brands. At year-end, it reported 102.1 million customers and 5G coverage of 280 million people across 1.6 million square miles. The Sprint merger added customers and spectrum, including 2.5 GHz mid-band spectrum; network integration and customer migration are expected to continue over several years.
Financial highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $68.397 billion | $44.998 billion |
| Service revenue | $50.395 billion | $34.500 billion |
| Operating income | $6.636 billion | $5.722 billion |
| Net income | $3.064 billion | $3.468 billion |
| Diluted EPS | $2.65 | $4.02 |
| Operating cash flow | $8.640 billion | $6.824 billion |
| Free cash flow | $0.658 billion | $4.319 billion |
| Free cash flow, excluding gross interest-rate-swap settlement payments | $3.001 billion | $4.319 billion |
| Cash and cash equivalents at year-end | $10.385 billion | $1.528 billion |
| Total debt and financing lease liabilities, excluding tower obligations | $73.632 billion | $27.272 billion |
Fourth-quarter 2020 revenue was $20.341 billion, operating income $1.712 billion, continuing-operations income $750 million and net income $750 million. The filing does not provide a clear standalone Q4 cash-flow figure.
2020 Adjusted EBITDA, a non-GAAP measure, was $24.557 billion, up 83%; its reported margin was 49% of service revenue, versus 39% in 2019. Net income margin was 6%, versus 10%. Free cash flow excluding swap settlement payments fell 31% to $3.001 billion; reported free cash flow was depressed in part by $2.343 billion of gross cash payments for settlement of interest-rate swaps.
Material changes versus prior year
- Revenue rose 52%, primarily reflecting Sprint’s consolidation, increased postpaid customers and device revenues. Postpaid revenue rose 60%; prepaid revenue declined 1%.
- Operating income increased 16%, but net income fell 12% as higher interest and other expense outweighed operating-income growth. Interest expense rose to $2.483 billion from $727 million, principally reflecting merger-related borrowing.
- Capital spending increased: cash purchases of property and equipment were $11.034 billion versus $6.391 billion. Investing cash outflow also included $5.0 billion for the Sprint acquisition, partly offset by $1.224 billion of prepaid-business divestiture proceeds.
- Year-end debt and financing lease liabilities increased substantially after the merger. Cash was higher, but free cash flow was lower amid network investment, integration spending and swap settlements.
- Net income included $1.915 billion of merger-related costs, $458 million of incremental COVID-19 costs and $418 million of impairment expense. Impairments included $218 million against Layer3 goodwill and $200 million against postpaid billing-system software.
Outlook, risks and contingencies
- Management expects cash purchases of property and equipment of $11.7–$12.0 billion in 2021, with most remaining network integration and 5G build-out capital spending in 2021 and 2022; capital expenditure needs are expected to decline thereafter.
- Management expects principal funding sources to cover anticipated liquidity needs, while noting uncertainty from the pandemic, integration, restructuring, spectrum purchases and regulatory commitments. Merger-related restructuring is expected to continue over three years, with substantially all costs incurred by the end of 2023.
- The company expects merger synergies and cost reductions but warns they may be delayed, reduced or not realized. Sprint billing-system migration, network integration, customer retention and alignment of controls remain execution risks.
- Major risks include COVID-19 effects on customer payments and demand, intense price competition, cyber and data-security incidents, spectrum cost and availability, substantial indebtedness, regulatory obligations and legal proceedings. T-Mobile had agreed to extensive 5G build-out and other government commitments; failure to meet them could trigger penalties.
- DISH acquired the Boost Mobile and Sprint prepaid businesses on July 1, 2020, for approximately $1.4 billion. T-Mobile continues to provide network services to DISH under an agreement of up to seven years. DISH is also expected to purchase Sprint’s 800 MHz spectrum for approximately $3.6 billion, subject to conditions and regulatory approval; the sale was not expected before April 2023.
- A $200 million FCC Lifeline consent-decree payment was funded by SoftBank under an indemnity arrangement; additional covered Lifeline liabilities are expected to be reimbursed, subject to the agreement. T-Mobile also accrued an estimated amount for a separate FCC customer-privacy notice of apparent liability; the filing does not state the accrued amount here.
- Subsequent to year-end, T-Mobile issued $3.0 billion of senior notes in January 2021 and reported a $2.0 billion remaining term-loan commitment. It expected to close the Shentel wireless-asset purchase in Q2 2021 at a base price of about $1.9 billion, subject to adjustments and customary conditions.
Most important facts for investors to verify
- How much of reported growth and Adjusted EBITDA reflects acquired Sprint operations versus underlying organic performance, given the April 1 merger date and customer-base adjustments.
- Progress and cost of 5G deployment, Sprint network and billing migration, customer retention, and realization and timing of merger synergies.
- Debt repayment capacity and liquidity after planned capital expenditures, lease and contractual obligations, spectrum spending and potential Shentel acquisition costs.
- Whether COVID-19-related bad debt, customer payment support and retail or supply-chain effects materially change operating results.
- Resolution and financial exposure from FCC and state proceedings, merger commitments, DISH arrangements and other legal contingencies.
- Control coverage: management and the auditor concluded internal controls were effective, but certain Sprint controls covering approximately 14% of consolidated assets and 30% of revenue were excluded from the 2020 assessment and audit.