Sprint Filings

In all honesty, it doesn't take much to confuse me anymore. For example, I am confused as to how anyone can let an Asian woman drive a car without fearing for their life, find Kathy Griffin funny, or consider Renee Zellweger pretty (she looks like an ant eater crossed with a horse). But I am even more confused by Sprint's latest filing in which they are issuing an additional $1.3 billion in unsecured debt. Before I delve into my lack of understanding, let's look at the summary of the offering: (click pic to view larger image)



Essentially, Sprint is offering up $1.3 billion in bonds in which they will pay 8.375% in interest until the bond matures in August 2017*. The bonds are unsecured (i.e. if Sprint goes bankrupt you might not get your money back) and can be called (by Sprint) before the maturity date. All of that is relatively straightforward. The question I have is this: why the offering?

In the same filing, it is noted that "as of June 30, 2009, our consolidated indebtedness was approximately $21.0 billion." And, more tellingly, is this part:

The degree to which we incur additional debt could have important consequences to holders of the notes, including:

•	limiting our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes;
•	requiring us to dedicate a substantial portion of our cash flows from operations to the payment of indebtedness and not for other purposes, such as working capital and capital expenditures;
•	limiting our flexibility to plan for, or react to, changes in our businesses;
•	making us more indebted than some of our competitors, which may place us at a competitive disadvantage; and
•	making us more vulnerable to a downturn in our businesses.

The second bullet above is something I've touched on a few times (score one for me) - namely that Sprint is going to have use its cash flow to pay off debt. So we agree, in this case, debt is bad. So, more debt makes that problem worse. Besides all of that, they already have "a $4.5 billion revolving credit facility." So, again, why the debt offering and, more importantly, why now?

As it is explained, Sprint intends to use the "net proceeds from this offering for general corporate purposes." That, to me, means absolutely nothing; it is annoyingly - and I assume purposefully - vague. That could be a $1.3 billion raise for Hesse - lord knows he deserves it - for all I know. Or, maybe it's so Bob Brust can take some more non-business flights around the country. I hear the Rockies are nice this time of year.

So, much like usual, I do not have the answers. My best guess is they are going to use it to pay short-term maturing debt in hopes of saving some cash flow and then (hopefully) they can make the bond payments in due time. In other words, borrow from Creditor B so you can pay off Creditor A and then pay off Creditor B after Sprint stabilizes. And, if that is what they're banking on, well...I'm not sure who's more confused then - me or Sprint.


* - After underwriting and commissions, the net proceeds to Sprint (before expenses) is $1,258,725,000.

Previous Post: The 10-Q, Part I - The Overview
Previous Post: The 10-Q, Part II - The Balance Sheet
Previous Post: The 10-Q, Part III - Return of the Income Statement
Previous Post:The 10-Q, Part IV - Cash Flow (It's All About the Benjamins)

Well, we've finally come to the part where I pretend like I know what I'm talking about and then I make some vague, open-to-interpretation comments on Sprint's short term and long term future. You know, kind of like Dan Hesse does. My predictions though, hopefully, are reality-based due to my thorough (hey, I looked at it) review of Sprint's 1st Qtr 10-Q statement. So, let's get to it...

Short-Term
Sprint's balance sheet is getting worse and will continue to get worse. By the same token, net income will continue to be negative. Not exactly encouraging. On the positive side, Sprint is generating some positive cash flow. Yet, in both the short and long term, Sprint is going to have to use that cash to pay down maturing debt. I don't see anyway around that. So, cash flow must continue to be positive or Sprint faces a very real risk of going bankrupt (not within a year but relatively soon). Since Sprint is shrinking in terms of revenue they will most likely have to continue to cut costs in order to retain a large positive cash flow...more layoffs, anyone? So, here are my predictions:

• Sprint will lose at least another 1.75 million customers for this year (3rd and 4th qtrs combined)
• More reshuffling of executives (like re-arranging deck chairs on the Titanic)
  
• Cash flow will continue to be positive but will shrink over the next year which will lead to...
• Some limited layoffs (i.e. more outsourcing and/or rebadging)
  

Long-Term (> 1 year but less than 3 years)
It's almost impossible to make any accurate long-term predictions simply due to the unbelievable amount of variables and parameters. Just ask any supporter of anthropogenic global warming. But, that's not going to stop me from making such predictions. So, let me just say, I don't think Sprint is going to go bankrupt but it is a real possibility. In fact, if Sprint is not able to start adding customers on a net basis (or, at the very least, stem the subscriber losses), then they will not be able to meet their debt obligation at some point in the next few years. They have too much maturing debt and they will not be able to get reasonable financing in order to "roll over" that debt. That's not to say Sprint would no longer exist; it just wouldn't exist in its current form. Having said all that - and I'm not sure why - I still remain optimistic that that will not come to pass. So, some predictions:

• Sprint will undertake more "novel" ways to cut costs (similar to the Ericsson outsourcing deal) as they are forced to deal with their ability to stop subscriber losses
  
• Net subscriber losses, though, will eventually stabilize in late 2010
  
• Large growth in pre-paid but continued losses in post-paid (which, on net, will cancel each other out in terms of net subscribers)
  
• Once stabilized, smaller overall revenue due to higher percentage of pre-paid customers
• Sprint will, at some point, be forced to dump WiMax
  

Is Sprint a viable company in the short-term? Yes. Is Sprint a viable company in the long-term? Probably. Even if it is, I think there have been too many poorly-executed strategic decisions to "right the ship" and see any growth in the foreseeable future. Every botched decision - from the merger, to marketing, to IDEN stupidity (sell it? keep it? reduce spending? no, wait, increase spending?), to not pursuing the iPhone, to the woeful impact of Dan's "nukes" - has hampered this company to the point where the best it can hope for right now is remaining in business. It has been said that "hope never abandons you; you abandon it" and Sprint shouldn't abandon it quite yet.*

* Of course, it has also been said that "hope is the worst of evils, for it prolongs the torments of man." But the other quote sounded better.

First, I know it's been awhile since I've made a post. I'm sure I've upset my loyal readers (Hi Mom & Dad!) by my lack of blogging dedication so let me say that I do apologize. It's just that I was so upset after the death of Michael Jackson* that I could not bring myself to post with my usual wit and charm. So, now that I've taken time to recover, I have a new found sense of energy and vigor. As such, I will be posting more of the worthless drivel that I used to post; at least until the next celebrity death.

* - Does anyone realize why Michael Jackson went to heaven after Farrah Fawcett? It's because he always did like coming in a little behind.

Clearly a lot has happened to Sprint in my blogging absence. For one, the long rumored outsourcing of the Sprint network to Ericsson is a done deal. Also, Sprint recently acquired pre-paid operator Virgin Mobile. While that deal has been criticized, I must admit it does fit into Sprint's long term plans to buy successful companies and run them into the ground. So, they have that going for them.

And, just a few days ago, Sprint released its (in my not-so-humble opinion) horrific 2nd Qtr results and, in doing so, tanked the Sprint stock. In fact, I haven't seen anything go down that fast since I watched a Shannon Tweed movie on Cinemax (incidentally, Shannon looks great for being 75). Anyways, in announcing the results, Dan Hesse said "Job One" was to increase subscribers. The Sprint CEO, ladies and gentlemen! He's been on the job for almost 2 years and he just now realizes (or announces) that the priority is to add customers? Are you f'ing kidding me? Good lord, even former potato Terri Schiavo could've figured that out and she died four years ago. What other brilliant insights do you for us, Dan? Maybe you can comment on how Sprint needs to improve customer service and reduce churn. Or maybe you can explain that Sprint needs to increase revenue and decrease costs while leaving out the roadmap on how to accomplish said goal. I think Dan should write a book on how to be a CEO; he can title it "How to Screw Up a CEO Gig You Didn't Deserve In the First Place" (subtitle: "How to Point Out the Obvious, Run a Business into Oblivion, and Get Paid Millions to do so"). It'd be pages of mindless platitudes, trite sayings, and, for good measure, he could top it off with some cliched fillers. A best seller, I'm sure.

Anyways - back to my point - even an anonymous schmuck with no background in economics or accounting who looked at a few quarterly reports for about 10-15 minutes total realized that Sprint must increase customers and, in turn, revenue. Hell, in a previous post, I even wrote "However, even if they continue to cut operating expenses they are still losing hundreds of millions of dollars each quarter. They must find a way to stop losing revenue." So, how long did it take me to reach that conclusion? Apparently less time than it took the CEO. So, even with all the changes recently, at least some things remain consistent. It's good to be back.

Previous Post: The 10-Q, Part I - The Overview
Previous Post: The 10-Q, Part II - The Balance Sheet
Previous Post: The 10-Q, Part III - Return of the Income Statement


At left: Unfortunately for Dan Hesse, his early rap career was cut short because of his woeful lack of talent. Luckily, he had a CEO gig to fall back on.


I think everyone, implicitly, understands that generating cash flow is a positive thing. Even rappers, with their limited faculties, understand positive cash flow is a good thing. After all, without it, how would they be able to buy stuff like solid-gold zippers on their Tommy jeans? How would they be able to pop Cristal while coolin' out with their hizoes? How would they get through life considering they have other no skills or talents? Well, as P.Diddy (or whatever his name is now) said "It's all about the Benjamins." Ben. Ja. Mins. While I don't have my rapper to English translator handy I'm pretty sure that means money. Anyways, back to the point, cash flow is a good thing. In terms of Sprint's business, let's take a look at their recent quarter cash flow (note: this is a long post so if you just care about the results, skip to the last couple paragraphs. You're welcome) ...

So what is cash flow and how does it relate to the income statement and balance sheet? Let's have investopedia explain:

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit.

There are 3 main parts to the cash flow statement:

1. Core Operations - how much cash is generated from Sprint's products and services
   
2. Investing - changes to equipment, assets, or investments
   
3. Financing - changes to debts, loans, or dividends
   

So, on balance, the cash flow is simply a measure of this quarter's incoming and outgoing cash from those three components (not all items on the balance sheet and income statements actually involve cash). So, what is Sprint's cash flow? Maybe somewhat surprisingly to all the nay-sayers, Sprint actually generates a positive cash flow. In fact, for the 1st Qtr of 2009, Sprint generated a net cash flow of $825 million. Of course, they still lost money overall for the quarter. Still, it is nice to see that, at least, it's not a negative cash flow. That would be very, very bad. Like giving David Carradine a rope and some KY Jelly bad (too soon?).

So, all is well then, right? Sprint is on solid footing and all the doomsday predictions are just inaccurate ramblings from "haters"? Well, not necessarily. Let's dig a bit deeper into the numbers and compare them with some of the previous quarters.

1st Qtr '09 (in Billions)	% Chg vs 4th Qtr '08	% Chg vs 1st Qtr '08
Cash from Operations : $1.4B	26.44%	- 35.31%
Cash from Investing : -$.6B	-11.55%	69.76%
Net Change in Cash : $.825B	294.12%	66.08%

Now, I purposefully left off "Cash from Financing" from the above chart -- and I'll detail the reason shortly. But, before I do that, let's look at each of the above line items in detail.

Cash from Operations - $1.363 billion in the first quarter. Clearly, the bigger this number is the better. As you can see, Sprint generated 26.44% more cash in the first Qtr of '09 versus the 4th Qtr of '08. However, they generated 35.31% less than last year at the same time.

Cash from Investing - -$560 million in the first quarter. Ugh. While it's almost a 70% improvement versus last year, the vast majority of that is due to reduced capital expenditures.

Cash from Financing - here's where it's a bit tricky. In the 4th Qtr of '08, Sprint actually reduced debt by over 1 billion dollars whereas they increased debt in 1st Qtr of '08. In 2009 (so far), they essentially did neither. Cash from financing for the quarter was a paltry $22 million. Those facts would've, to me, misrepresented the percentage numbers in the table above which is why I excluded them.

Now, to reiterate (although, come to think of it, does anyone really "iterate"?), Sprint generated $825 million in cash in the first quarter. Last year over the same period, they generated over $2.4 billion but much of it ($2.1 billion) was due to raising money (increased debt) which is treated as cash in to the business. By the same token, Sprint's cash flow was a negative $425 million in the 4th Qtr of '08 but much of that was due to the retirement of debt which is treated as cash out of the business.

Now, if you read all that, I commend you because I made most of it up. Just kidding. But, you are probably wondering what it all means. I personally think the cash flow statement is encouraging albeit with a couple caveats. One is that - and there's no surprise here - Sprint's business is shrinking. For the long-term health of the company, that must change or at least stabilize. Secondly, it's going to be increasingly more difficult (in my opinion) to get any kind of debt financing at a reasonable rate. As such, Sprint will (most likely) start using its cash to pay down any debt that is maturing. That is going to be a direct hit on cash flow and they better continue to generate enough cash flow to pay down that debt. That will be a challenge. However, doing so will benefit Sprint long term as they will not paying millions of dollars in interest on that debt.

In my next post, I'll have a synopsis on everything I covered in relation to the 10-Q and give some final thoughts on Sprint's short term and long term financial health.

Previous Post: The 10-Q, Part I - The Overview
Previous Post: The 10-Q, Part II - The Balance Sheet

In my last post, I promised to look at the Sprint's income statement. And, if To Catch a Predator has taught us anything, it is this: if you can't trust an anonymous guy on the internet, who can you trust? So, let's look at the income statement...

We all pretty much need income for the basic necessities of today's modern world - things such as food, shelter, and call girls. Companies are really no different. No, they don't need call girls (although that would be a morale booster and make for interesting "casual" Fridays) but they do need a steady stream of income to survive. Well, unless, you are politically connected enough to where you can run your company into the ground yet have the government bailout you out with unsuspecting taxpayer money under the guise of protecting American jobs and averting financial catastrophe for the nation. Not that that happens today.

An income statement is a report that shows how much revenue a company earned over a period of time. For the 10-Q, that is one quarter. An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses over the defined period. Pretty simple stuff. In fact, it's so simple that most women can even understand it. ("Income Statement: So Easy a Woman Can Understand It." Sorry, ladies.)

Much like my illuminating post on the balance sheet, I'm going to do year-over-year ("seasonally adjusted") and quarter-over-quarter comparisons for the income statement. Again, I'll take the data from google (which comes from filings). Let's go to the grossly simplified scorecard:

1st Qtr '09 (in Billions)	% Chg vs 4th Qtr '08	% Chg vs 1st Qtr '08
Revenue : $8.2B	- 2.62%	- 12.05%
Op Expense : $8.7B	-14.40%	-11.55%
Net Income : -$.59B	-63.36%	17.62%

Like last time, you can view the detailed spreadsheet here. Let's take these one at a time:

Revenue - the amount of money Sprint brought in during the quarter. In this case, $8.209 billion. Ideally, you want this number to be getting larger as it means sales (or the amount of money from sales) are increasing. You can see Sprint had a 12.05% decline versus a year ago and a 2.62% decline versus last quarter. That is not an encouraging sign. At all.

Operating Expense - the amount of money spent supporting the company's "day to day" operations. In Sprint's case, the number is $8.7 billion. That is an improvement over the other two quarters as operating expense fell by 14.40% and 11.55% respectively. Obviously, a significant portion of this is due to the "right-sizing" of the company and its operations to align it better with the revenue being produced.

Net Income - the "bottom line" or net profits or loses after factoring in income expenses (the interest paid on the money that was borrowed) and taxes. Really, the most important one on the income statement. And this is where Sprint is still falling short. In 1st Qtr '09, Sprint's Net Income was -$.594 billion. In other words, they lost almost $600 million dollars. Yet, bad as that is, that is a 63% improvement over the 4th Qtr '08 when they lost $1.621 billion dollars. On the flip side, it is 17.62% worse than 1st Qtr '08 when they "only" lost $505 million.

So, where does that leave Sprint? First, after looking at the balance sheet and income statements, I'm awed by how horrible the 4th Qtr of '08 truly was. Scary, even. Like standing in between a herd (yes, they travel in herds) of fat girls and the last pint of Haagen-Dazs scary. As such, Sprint does show significant improvement from 4th Qtr '08. They lost a lot less money and revenue "only" shrank by 2.6%.

But, when compared to 1st Qtr '08, things look worse. Not only has revenue shrunk by 12% but Sprint actually lost 17.62% more money. So, even with them slashing operating expenses the bottom line actually was worse as compared to one year ago. Not a good combination.

So which is the "real" Sprint? The Sprint that improved significantly versus 4th Qtr or the Sprint that is worse as compared to year ago? At this point, I don't know if we can tell. However, even if they continue to cut operating expenses they are still losing hundreds of millions of dollars each quarter. They must find a way to stop losing revenue. It's that simple. How they do that, however, is not that simple. Not in a recession. Not when they continue to lose millions of post-paid subscribers. Not when they're banking on pre-paid subscribers for revenue and growth opportunities. Not when churn is much higher than competitors like Verizon. Good luck, Mr. Hesse - you're going to need it.

I'll be back soon with a post on Sprint's cash flows.

Previous Post: The 10-Q, Part I - The Overview

A balance sheet. The words themselves are bland enough but actually deciphering the balance sheet is even worse. It's the antithesis of excitement. Or - think of it this way - it's almost as bad as watching The View. But, much like the US in The Iraq War, I just don't know when to quit. So, let's take a look...

The balance sheet provides detailed information about a company's assets and their liabilities. Assets are things a company owns that have value. This can include physical property (land, cell towers, handsets, etc) as well as non-physical "stuff" (patents, trademarks, etc). Liabilities are what a company owes to others. This can include things such as borrowed money, payroll, and taxes. The difference between the assets and liabilities is called Shareholders' Equity (which can be negative). Assuming you're past third grade math, this basic equation should help you understand what I just said mathematically:

Assets = Liabilities + Shareholders' Equity or Assets - Liabilities = Equity

If you haven't followed all that then you should re-read the last paragraph. And you probably should not have children. But try re-reading it first.

In order to have a fair comparison, I'm going to compare Sprint's '09 1st Qtr balance sheet with Sprint's '08 4th Qtr and Sprint's '08 1st Qtr balance sheets. Why those two comparisons? For one, I want to see if Sprint improved versus last quarter. And, secondly, there is some seasonality involved in results. For example, in housing, the spring and summer months typically have higher home sales. So, in order to get some accurate housing sale data you must compare current results versus results from a year ago (instead of comparing versus just the previous month). That same principle needs to applied here as well. Now, I'm going to "cheat" here and take the balance sheet results listed in Google finance. The table below lists the major facets of the balance sheet and compares 1st Qtr '09 versus 4th Qtr of '08 and 1st Qtr of '08. As hopefully you expected, everything in green below is an improvement while everything in red is a decrement.

1st Qtr '09 (in Billions)	% Chg vs 4th Qtr '08	% Chg vs 1st Qtr '08
Cash & Equivalents - $4.5B	+22.35%	- 3.45%
Total Current Assets - $8.9B	+6.70%	-13.79%
Total Assets - $57.2B	-1.76%	-12.58%
Total Current Liabilities - $7B	10.89%	-20.25%
Total Liabilities - $38.2B	-1.19%	-12.61%
Shareholder Equity - $19.1B	-2.89%	-12.54%

You can view the entire detailed spreadsheet here. Current Assets are things Sprint expects to convert to cash within a year while current liabilities are obligations they expect to pay off within a year.

So, what's the bottom line? Sprint's total assets are down 12.58% from a year ago (bad). Sprint's total liabilities are down 12.61% (good). In fact, the percent change in assets and liabilities is virtually identical (as compared to 1 yr ago). The reduction in liabilities is a good thing albeit with a caveat as it can signal significant reduction in spending on things such as payroll and network expansion. Of course, Sprint does not have any other prudent options right now. You may be tempted to say "Well, that's okay - Sprint is shrinking, yes, but both liabilities and assets are shrinking at the same rate."

But that doesn't tell the whole story. Since assets are much larger than liabilities (which is a good thing), the fact that assets shrunk at the same percentage rate as liabilities is bad. A 12% change in $65.4 B (last year's assets at this time) is much a larger overall change than a 12% change in $43.7 B (last year's liabilities at this time). This can be seen by the overall decline in shareholder equity or net worth of the company. In short, as measured by the company's net worth, the balance sheet is worse year-over-year and quarter-over-quarter.

Is there hope? Possibly. It could be like many economists hope about the economy - that the rate of decline is lessening which, in turn, implies a turn around. Besides being a logical fallacy, those same economists failed to see the recession in the first place. But, back to Sprint, it's not enough to simply look at the balance sheet and declare the overall health or health trend of the company. Although, the deterioration of the balance sheet is definitely not encouraging. In the next segments, I'll turn my attention to the Income and Cash Flow statements...

The Financial Statement Avenger was a "big" hit at this year's American Institute of Certified Public Accountants meeting


Reading a financial statement is a lot like having sex with a fat girl - you're oddly intrigued, you're not sure where to start, and you really hope your friends don't find out about it later. And let's just say I know what I'm talking about as I just read Sprint's latest 10-Q statement. Not to mention I've been with more fat girls than Jenny Craig. In all instances, it ended up being a much larger undertaking than I initially expected yet, no matter how painful the experience, I felt compelled to finish the job . So it is with me and the 10-Q.

For the unaware, the 10-Q is a federally mandated form all publicly traded companies must file with the SEC. The 10-Q includes unaudited financial statements and provides a continuing view of the company's financial position during the year and the report must be filed for each of the first three fiscal quarters of the company's fiscal year.

In order to understand a financial statement let's first define what exactly we are going to be looking at. There are four main parts of a financial statement:

1. Balance Sheet - details information on the company's assets (what they own) and liabilities (what they owe).
2. Income Statement - how much revenue the company earned over a period of time.
3. Cash Flow Statement - the company's inflows and outflows of cash; needed to pay its expenses and purchase any assets. It is derived from the balance sheet and income statements.
   
4. Statement of Shareholders' Equity - the money that would be left if a company sold all of its assets and paid off all of its liabilities. Sometimes called net worth or capital.

The first 3 are the most important as they can be used (hopefully) to show the financial health of the company. Or, at least, the trend of the health of the company. Even then, understanding all the accounting nuances can be difficult to incorporate into any analysis. That is the goal, though; to come up with a rational, objective measurement of Sprint's financial health. But, like I tell the chubby chicks, "I aim to please but you should just be happy that you're getting something for free." Since the 10-Q is 36 pages of information and since I have a life (a TV does not watch itself, after all), I'm going to break down the the various parts of the financial statement into a series of upcoming posts. Think the Friday the 13th series - although hopefully infinitely more entertaining. To be continued...