Sprint Filings

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...

At left: Sprint's newest board member works on the potential Ericsson outsourcing deal. And places an order for bananas.





It has been said that if you took an infinite number of randomly typing monkeys that they, eventually, would produce some of the world's greatest literary works. In fact, I'm pretty sure that's how romance novels are written today. "Fascinating", you may say, "but what does that have to do with anything?" Well, for one, everyone loves monkeys. Humans love monkeys so much we destroy their habitat, dress them up as people for laughs, and then put them in cages to live out their now sad, miserable lives. That's what I call true love. But, the point is that the infinite monkey theorem can also be applied to the Board of Directors. In fact, it has been noted that monkeys can out pick stock professionals; so why then could they not outperform the Board?

Obviously, I am only (sort of) joking when comparing monkeys to the Board. After all, I don't know of any monkeys that have made decisions that led to a 80% drop in stock value since the merger (see chart - Sprint vs. S&P500 vs. North American Telecom Index.). But I am digressing from the original intent of this post - what do board members get for leading Sprint to such prosperity and riches? Let's take a peek...

Each outside director is paid a $70,000 annual base salary plus meeting fees and additional retainers. Not unreasonable sounding, at least to me. They work hard and it's not like they're hiring outside firms to study such issues as executive compensation. Actually, scratch that last part as "for 2008 and year-to-date 2009, the Compensation Committee...retained Frederic W. Cook & Co., Inc. as its independent compensation consultant." Also mentioned is that "our CEO periodically discusses the design of compensation programs and the compensation levels of our other named executive officers and certain key personnel with the Compensation Committee." Now, I'm clearly not an ethicist but that seems poor judgment on the part of the board - allowing the CEO to have input into executive compensation issues when he is the top executive.

But, back to the board. They are, after all, providing a valuable service to Sprint and it's not like they're serving on other boards too. Umm, well, nevermind that one too. The current (current as of the 2009 proxy filing) board members actually serve on a combined 19 other boards. It would seem difficult to devote enough time and energy to Sprint while serving other companies as well but, then again, I could be wrong as there is a first time for everything. But it's not like members get other perks like, say, unlimited number of wireless units including accessories, wireless long distance, and long distance calling cards (max $12,000). And it's not like they get the following for simply attending a meeting:

• $2,000 for in-person meetings
• $1,000 for meetings "held telephonically"

All told, during 2008, the board of directors held 17 meetings with all directors attending at least 75% of board and committee meetings. I'm not sure what legally constitutes a meeting ("Everyone here? Alright, meeting adjourned") but I'm glad to see they're on top of things. Oh, I forget to mention some additonal perks. What are the additional retainers needed to keep these vitally important individuals?

• the Chairman (James Hance) receives an additional $150,000
• the Chair of the Audit Committee (James Hance) receives an additional $20,000
• the Chair of the Compensation Committee (Gordon Bethune) receives an additional $15,000
• the Chairs of the Finance (Robert Bennett) and Corporate Governance Committees (Irvine Hockaday) each receive an additional $10,000

All things considered, being a member of this club is not a bad gig if you can get it. Beats Costco, at least. So, what did Sprint pay in 2008 in total compensation (cash, stock, & other) to all board members (current & former, excluding Hesse)? Here's the breakdown:

• James Hance - $436,036
• Robert Bennett - $265,516
• Gordon Bethune - $264,864
• Larry Glasscock - $257,864
• Irvine Hockaday - $251,194
• V. Janet Hill - $250,690
• Rodney O' Neal - $242,864
• William R. Nuti - $109,222 (joined board on 6/9/08)
• Sven-Christer Nilsson - $46,432 (joined board on 11/10/08)

All told, in 2008 Sprint paid $2,633,617 to current and former board members (not including Hesse). And $2,633,617 sure can buy a lot of bananas. Here's the compensation table lifted from page 14 of the proxy:

At left: Ever wonder what happens at Sprint's annual Board meetings? A board member prepares to wrestle in a vat of jelly while shareholders cheer him on.





In keeping with my theme of not really doing any investigative work and merely pointing out information already contained in Sprint's 2009 proxy, I would now like to say a few words about the Board of Directors. Those words are "they suck." And, if you don't believe me, well that was the opinion of the independent research firm The Corporate Library (TCL). While they did not state their opinion as eloquently as I did, they did rate the B.O.D. as a "D" overall. Now, unless you are George W. Bush, that is nothing to be proud of. So, what did TCL say about the B.O.D?

• "D" overall (reiterated just so it sinks in)
  
• "High Governance Risk Assessment"
• "Very High Concern" in Executive pay

Some other governance issues were identified as well (note, I'm not sure they are directly attributed to TCL but they are mentioned in the proxy). Specifically, for shareholders, there is:

• No right to cumulative voting
• No right to act by written consent
• No right to call a special meeting
• No right to vote on executive pay

And, to me, this quote from the proxy summarizes up the overall concerns:

• "Our management should have the leadership initiative to adopt the above Board accountability items instead of leaving it to shareholders to take the initiative in proposing such improvements."

Now, maybe you're thinking, "Well, sure they've made mistakes. They're only human. Sprint did not do well so of course the Board would be rated low. It's not like the Board is the problem. Let he who is without sin, cast the first stone!" Well, TCL disagrees with you and casts away:

• Irvine Hockaday was designated a “Problem Director” due to his involvement with the proposed Sprint merger with WorldCom that led to the acceleration of $1.7 billion in stock options even though the merger ultimately failed
• Irvine Hockaday and Janet Hill were designated “Accelerated Vesting” directors due to their accelerating stock option vesting to avoid recognizing the related cost.

And, as it turns out, 6 of the current 11 members (and 1 former member) of the Board coincidentally also served on other boards that were also rated "D" by TCL. Of the 5 who didn't, 1 is Dan Hesse who, I would imagine, will not and cannot serve on another board while CEO. Of the remaining 4, 3 have been on Sprint's board for less than a year. Excluding Hesse, the only member of the board who has served more than a year and did not serve on another "D" rated board is James Hance - who is the retired Vice Chairman of Bank of America. And we all know how well they are doing (thanks to taxpayer money).

So, who are the other folks that also helped screw up other companies? Well, leading the way, was one Mr. Irvine Hockaday who served on 3 other boards that received a "D" (4 total - Sprint, Ford, Estee Lauder, and Crown Media). "Funny" enough, he only served on a total of 4 boards. Well done Mr. Hockaday! You are a fortress of ineptitude. With the loss of shareholder value in those companies, you've probably screwed over more retirees than Medicaid. Luckily for Sprint, Mr. Hockaday is retiring from the Board to pursue his dream of eating live puppies in front of school children (addendum: see end of post). After all, he's not getting any younger and why wait to crush the hopes and dreams of adults when you can do it to kids?

Hot on Irvine's heels, is one Mr. Rodney O'Neal who served on 2 other boards that received a "D" (Sprint, Goodyear, and Delphi). Well done, Rodney! You have some work to do to catch Irvine but I have faith that you too can become as terrible at this as he is. Shoot for the stars and when you don't make it, blame it on the little guy. Not to be excluded from the party of incompetence, 5 other Sprint board members (of which, 4 are still on the board) served on other "D" rated boards - Gordon Bethune (Honeywell), Ralph Whitworth (no longer at Sprint; Sovereign Bancorp), Janet Hill (Wendy's/Arby's), Robert Bennett (Liberty Media), and Larry Glasscock (WellPoint).

In my next post, I'll take a closer look at the compensation provided to the board. But, in the meantime, I will be hard at work figuring out how I too can become a rich, old white guy so I can serve on the board. Wish me luck.

author's note: I do not know if Irvine Hockaday eats live puppies. Presumably he does not. Besides, they are better cooked.

Recently, I received a comment and some emails stating, effectively, my "populist drivel" was "nonsense" and "stupid." That is borderline libel and I take great offense to that. Everyone knows I am nothing close to popular and my writing is not drivel but more like poppycock. But, it did get me thinking (for a change) and I would like clarify a couple things about my posts:

1. I do not believe in the vague, Utopian, and socialistic nature of "fairness" as it concerns salaries. It's quite simple, an employee gets paid a certain amount of money because, in theory, he/she is worth more than that amount in value to the company (incidentally, that's why minimum wage laws actually raise unemployment as marginal workers who don't provide more value than the minimum wage will not get hired. Look at that; I not only entertain but I also educate. You're welcome). An employee produces a good (or service) and, in return, the company provides compensation for his or her production. It should be a win-win situation. But, that is not to say that there cannot be errors in the process. And the results say that Sprint has erred a lot. As proof, look no further than the hiring of (and golden parachute given to) Gary Forsee. So while I may rant against some executives and their pay, so long as they did not commit fraud, they really did nothing wrong. A quote I saw somewhere (fortune cookie?) said it best - "Do not judge so that you will not be judged." But...Sprint is a public company that, ultimately, answers to its shareholders. And they are doing a terrible job. So, that means I will not blindly accept the given results and agree with the Board's actions. Do I want to have my cake and eat it too? Hell yes I do. What good is the cake if you just have to look at it? You think America became great (and fat) just by looking at the cake?
2. I fully encourage everyone to do their own research and come to their own conclusions on anything and everything. Feel free to disagree with me and, in fact, if you have valid points I fully encourage it. I always like to hear dissenting opinions, no matter how wrong they might be. But, if you do disagree, at least attack my arguments (or lack thereof) and not me personally. Or, if you do, at least make it somewhat clever or entertaining. From now on, stupid personal attacks on me is going to be like playing "Marco Polo" with Helen Keller - I won't hear it, I won't see it, and I won't respond to it.
   

In my next few posts, I'll be checking in on the Board (and how they were rated by an independent research firm) and, hopefully, delving into the financial health of the company via the 10-k and Sprint's first quarter results.