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.