Sprint - Nextel 2015 Annual Report Download - page 58

Table of Contents
We offer device financing plans, including the installment billing program and our leasing program, that allow subscribers to forgo traditional service
contracts and pay less upfront for devices in exchange for lower monthly service fees, early upgrade options, or both. While a majority of the revenue associated
with installment sales is recognized at the time of sale along with the related cost of products, lease revenue is recorded monthly over the term of the lease and the
cost of the device is depreciated to its estimated residual value generally over the lease term, which creates a positive impact to Wireless segment earnings. If the
mix of leased devices continues to increase, we expect this positive impact on the financial results of Wireless segment earnings to continue and depreciation
expense to increase. However, this benefit to Wireless segment earnings will be partially offset by the Handset Sale-Leaseback Tranche 1 transaction that was
consummated in November 2015 where we sold and subsequently leased back certain devices leased to our customers. As a result, our cost of the devices sold to
MLS is no longer recorded as depreciation expense, but rather recognized as rent expense within "Cost of products" during the leaseback periods. The installment
billing and leasing programs will continue to require a greater use of operating cash flows in the earlier part of the contracts as the subscriber will generally pay
less upfront than traditional subsidized programs because they are financing the device. The Receivables Facility and our relationship with MLS were established
as mechanisms to mitigate the use of cash from purchasing devices from OEMs to fulfill our installment billing and leasing programs.
To meet our liquidity requirements, we look to a variety of sources. In addition to our existing cash and cash equivalents, short-term investments, and
cash generated from operating activities, we raise funds as necessary from external sources. We rely on the ability to issue debt and equity securities, the ability to
access other forms of financing, including debt financing, proceeds from the sale of certain accounts receivable and future lease receivables under our Receivables
Facility, proceeds from future sale-leaseback transactions, such as spectrum, devices, and equipment, and the borrowing capacity available under our credit
facilities to support our short- and long-term liquidity requirements. In April 2016, we entered into the Network Equipment Sale-Leaseback to sell and lease-back
certain network equipment for total cash proceeds of approximately $2.2 billion, the Handset Sale-Leaseback Tranche 2 for total cash proceeds of approximately
$1.1 billion, and executed a new unsecured financing facility of $2.0 billion . We believe our existing available liquidity and cash flows from operations will be
sufficient to meet our funding requirements over the next twelve months, including debt service requirements and other significant future contractual obligations.
To maintain an adequate amount of available liquidity and execute our current business plan, which includes, among other things, network deployment
and maintenance, subscriber growth, data usage capacity needs and the expected achievement of a cost structure intended to improve profitability and to meet our
long-term debt service requirements and other significant future contractual obligations, we will need to continue to raise additional funds from external sources.
Possible future financing sources include, among others, additional tranches under the Handset Sale-Leaseback to include additional devices, a transaction to
monetize certain spectrum holdings, refinancing our debt, or sale-leasebacks of certain real estate. In addition, we are pursuing extended payment terms with
certain vendors. If we are unable to obtain external funding, execute on our cost reduction initiatives, or are not successful in attracting valuable subscribers such as
postpaid handset (versus tablet) subscribers, our expectation of longer-term benefits from our operations would be adversely affected, which may lead to defaults
under certain of our borrowings.
Depending on the amount of any difference in actual results versus what we currently expect, it may make it difficult for us to generate sufficient
EBITDA to remain in compliance with our financial covenants or be able to meet our debt service obligations, which could result in acceleration of our
indebtedness, or adversely impact our ability to raise additional funding through the sources described above, or both. If such events occur, we may engage with
our lenders to obtain appropriate waivers or amendments of our credit facilities or refinance borrowings, or seek funding from other external sources, although
there is no assurance we would be successful in any of these actions.
A default under certain of our borrowings could trigger defaults under certain of our other debt obligations, which in turn could result in the maturities
being accelerated. Certain indentures and other agreements also require compliance with various covenants, including covenants that limit the Company's ability to
sell all or substantially all of its assets, limit the Company and its subsidiaries' ability to incur indebtedness and liens, and require that we maintain certain financial
ratios, each as defined by the terms of the indentures, related supplemental indentures and other agreements.
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