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Sprint Nextel Corp. Series 1 Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 5, 2011 05:19PM
Sprint Nextel Corp. Series 1 (S) filed Quarterly Report for the period ended 2011-03-31. Sprint Nextel Corp. has a market cap of $15.76 billion; its shares were traded at around $5.27 with and P/S ratio of 0.5.
Highlight of Business Operations:
We have entered into agreements relating to Network Vision to deploy a cost-effective, innovative network to enhance the voice quality and data speeds by supporting multiple technologies and multiple spectrum bands on one network. The successful testing and deployment related to these changes in technology will result in incremental charges during the period of implementation including, but not limited to, an increase in depreciation and amortization associated with existing assets, such as iDEN based assets, due to changes in our estimates of the remaining useful lives of long-lived assets, and the expected timing of asset retirement obligations, which could have a material impact on our consolidated financial statements. The successful testing of push-to-talk technology on the CDMA network as part of the deployment of Network Vision in our test markets in 2011 would result in accelerated depreciation and amortization expense expected to range from $1.0 billion to $1.5 billion in total if implementation can be completed by the end of 2014. Successful completion of Network Vision earlier or later than the end of 2014 would result in an acceleration or delay, respectively, of these depreciation and amortization costs. Until the uncertainties related to the testing, such as timing and coverage, and deployment of the push-to-talk technology are resolved, the estimated remaining useful lives of the assets expected to be impacted remain unchanged.
The Company has demonstrated significant improvement in net postpaid subscriber results subsequent to the first quarter 2009. For the three-month period ended March 31, 2011, net postpaid subscriber losses of 114,000 represent an improvement of 464,000, or 80% compared to the same period one year ago and prepaid net additions of 846,000 represent an improvement of 498,000, or 143% for the same period. As a result, wireless retail service revenue has begun to stabilize primarily due to the increased service revenue associated with our prepaid wireless offerings. The net losses of postpaid subscribers in the first quarter 2011 can be expected to cause wireless postpaid service revenue for the remainder of the year to be approximately $13 million lower; however, this effect is offset by net additions of prepaid subscribers in the first quarter 2011 which can be expected to cause wireless prepaid service revenue for the remainder of the year to be $147 million higher if these prepaid subscribers remain with the Company throughout 2011. If our trend of improved postpaid subscriber results does not continue, it could have a material negative impact on our financial condition, results of operations and liquidity in 2011 and beyond. The Company believes the actions that have been taken, as described above, and that continue to be taken in marketing, customer service, device offerings, and network quality, should continue to improve net postpaid subscriber results.
During the first quarter 2011, Sprint completed its annual study of estimated useful lives of depreciable assets, which reflects a reduction in the replacement rate of capital additions and was a primary factor for a decrease to depreciation expense of $153 million, or 12%, in the three-month period ended March 31, 2011 from the same period in 2010. However, we expect depreciation expense to begin to increase over the next several years as a result of increased capital expenditures related to Network Vision as those assets are placed into service. In addition, the successful testing of push-to-talk technology on the CDMA network as part of the deployment of Network Vision in our test markets in 2011 would result in a shortening of remaining useful lives of certain long-lived assets resulting in accelerated depreciation and amortization expense expected to range from $1.0 billion to $1.5 billion in total if implementation can be completed by the end of 2014. Amortization expense declined $267 million, or 67%, in the three-month period ended March 31, 2011 from the three-month period ended March 31, 2010, primarily due to the absence of amortization for customer relationship intangible assets related to the 2005 acquisition of Nextel which became fully amortized in 2010. Customer relationships are amortized using the sum-of-the-years'-digits method, resulting in higher amortization rates in early periods that decline over time.
Interest expense decreased $123 million, or 33%, in the three-month period ended March 31, 2011 as compared to the same period in 2010, primarily due to a $96 million increase in the amount of interest capitalized. The increase in capitalized interest was related to our plan to deploy certain spectrum licenses as part of Network Vision that were not previously utilized. We expect full year capitalized interest related to these spectrum licenses to be approximately $400 million. Additionally, interest expense decreased by $21 million as a result of the repayment of $1.65 billion of Sprint Capital Corporation 7.625% senior notes in January 2011. The effective interest rate on the weighted average long-term debt balance of $19.0 billion and $21.1 billion was 7.2% and 7.0% for the first quarter 2011 and 2010, respectively. See “Liquidity and Capital Resources” for more information on the Company's financing activities.
This item consists mainly of our proportionate share of losses from our equity method investments and also includes other miscellaneous income/(expense). Equity losses associated with the investment in Clearwire consists of Sprint's share of Clearwire's net loss and other adjustments such as gains or losses associated with the dilution of Sprint's ownership interest resulting from Clearwire's equity issuances. Equity in losses from Clearwire were $418 million and $250 million for the three-month periods ended March 31, 2011 and 2010, respectively. Sprint's equity in losses from Clearwire for the three-month period ended March 31, 2011 includes approximately $92 million of charges associated with Clearwire's abandonment of network projects that no longer meet their strategic network plans.
The consolidated effective tax rate was an expense of approximately 9% during each of the three-month periods ended March 31, 2011 and 2010. The income tax expense for the three-month periods ended March 31, 2011 and 2010 includes a $196 million and $365 million net increase to the valuation allowance for federal and state deferred tax assets related to net operating loss carryforwards generated during the periods, respectively. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits. Additional information related to items impacting the effective tax rates can be found in the Notes to the Consolidated Financial Statements.
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