01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
MetroPCS Communications, Inc. (NYSE: PCS) reported its 2012 Form 10-K, filed March 1, 2013, describing a business that is the fifth-largest facilities-based wireless provider in the U.S. by customers, with about 8.9 million customers at December 31, 2012 and service in 13 major metropolitan areas.
Full-year 2012 total revenue rose 5% to $5.10 billiona, operating income rose 10% to $824 million, and net income rose 31% to $394 million. Adjusted EBITDA reached $1.51 billion, up from $1.33 billion. Growth was not the driver, however: the company lost about 460,000 net customers in 2012 after adding 1.19 million in 2011, as management prioritized profitability and cash flow over subscriber growth, and gross additions fell 37%.
The filing is dominated by the pending Business Combination Agreement with Deutsche Telekom's T-Mobile USA, signed October 3, 2012. Under the deal, MetroPCS will pay stockholders a $1.5 billionb cash recapitalization, effect a 1-for-2 reverse split, and issue Deutsche Telekom 74% of the combined company, leaving existing holders with 26%. Deutsche Telekom would also receive up to $18.5 billion of senior notes.
The company would be renamed T-Mobile US, with Deutsche Telekom controlling the board and major decisions. Closing is expected in the first half of 2013, subject to antitrust, FCC, CFIUS, and stockholder approvals. Termination fees run $150 millionc payable by MetroPCS and $250 million payable by Deutsche Telekom if regulatory approval fails.
Several lawsuits challenging the deal are pending in Delaware and Texas. For investors, the key tension is between solid 2012 earnings and cash generation on one side and a shrinking subscriber base and a transaction that transfers control and sharply increases leverage on the other.
Operating cash flow was $1.18 billiond, and cash and short-term investments were $2.6 billion, with capital expenditures of $846 million. Stock price was $10.03 at January 31, 2013, and the stock traded between roughly $5.59 and $13.57 during 2012.
02—Key points
Key Highlights
- Total revenue of $5.10 billion (+5%); service revenue $4.54 billion (+3%) and equipment revenue $562 million (+34%).
- Net income of $394.2 million (+31%) and diluted EPS of $1.07, helped by a $52.5 million settlement gain on auction rate securities and a lower effective tax rate of 35.1%.
- Net customer losses of 459,936 in 2012 versus net additions of 1.19 million in 2011; churn improved to 3.4% from 3.8%, and gross additions fell 37%.
- Adjusted EBITDA of $1.51 billion (+14%); CPGA rose to $216 from $173 and CPU to $20.38 from $19.56, reflecting higher acquisition costs and 4G LTE investment.
- Proposed T-Mobile transaction: $1.5 billion cash recapitalization, 1-for-2 reverse split, and Deutsche Telekom receiving 74% of the combined company, leaving existing holders with 26%.
- Up to $18.5 billion of new senior unsecured debt, a $150 million termination fee payable by MetroPCS, and a $250 million reverse fee payable by Deutsche Telekom on regulatory failure.
- Strong liquidity with $2.6 billion in cash and short-term investments, $4.4 billion of debt, and 2013 capex guidance of $800–900 million; the company pays no dividends.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2012, T-Mobile US, Inc. lost $0.37.
- Revenue$19.72B100.0%
- Cost of revenue−$2.93B14.9%
- Gross profit$16.79B85.1%
- Operating costs−$23.19B117.6%
- Operating income−$6.40B32.4%
- Interest, other & tax−$939.0M4.8%
- Net income−$7.34B37.2%
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $19.72B$20.62B | −4.4% |
| Cost of Revenue | $2.93B$2.91B | +0.6% |
| Gross Profit | $16.79B$17.70B | −5.2% |
| SG&A Expenses | $6.80B$6.73B | +1.0% |
| Operating Expenses | $26.12B$24.90B | +4.9% |
| Operating Income | -$6.40B-$4.28B | −49.5% |
| Interest Expense | $0$0 | — |
| Net Income | -$7.34B-$4.72B | −55.5% |
| EPS (Basic) | $-13.70$-8.81 | −55.5% |
| EPS (Diluted) | $-13.70$-8.81 | −55.5% |
| Shares Outstanding (Basic) | 535.29M535.29M | 0.0% |
| Shares Outstanding (Diluted) | 535.29M535.29M | 0.0% |
05—Questions
Frequently Asked Questions
Why did revenue grow while the customer base shrank in 2012?
Revenue growth came mainly from higher equipment revenue (up $142 million, driven by fewer retailer commissions and higher average handset prices) and a $0.06 increase in ARPU to $40.63, offset by 459,936 net customer losses. Management said it prioritized Adjusted EBITDA and cash flow over customer growth, and it cited competitive pressure, economic weakness, and demand for 4G data.
What will existing MetroPCS stockholders own after the T-Mobile transaction?
After the reverse split and $1.5 billion cash payment, Deutsche Telekom's designee would hold 74% of the fully diluted shares of the combined company, and existing stockholders would hold about 26%. Stockholders would also receive their pro rata share of the cash payment (about $4.06 per pre-split share). Ownership percentages are fixed and will not adjust for changes in either company's value before closing.
What are the main risks to completing the deal?
The deal needs HSR antitrust clearance, FCC approval (including a foreign-ownership declaratory ruling), CFIUS review, NYSE listing approval, and MetroPCS stockholder approval. Stockholder lawsuits in Delaware and Texas seek to enjoin or rescind it. A competing bid could also trigger the $150 million termination fee. The company expects closing in the first half of 2013, but the outside date is October 3, 2013, extendable to January 3, 2014.
How would the combination change the company's debt and control?
The combined company would carry substantially more debt, including up to $18.5 billion of new senior unsecured notes, some subject to pricing resets two to three years after issuance. Deutsche Telekom would control the board and approve major actions while holding 30% or more of the stock, and it could acquire up to 80.1% without board approval. The company would be a 'controlled company' exempt from several NYSE governance requirements.
Is the company generating enough cash to fund its operations and growth?
The company reported operating cash flow of $1.18 billion in 2012, up from $1.06 billion in 2011, and held $2.6 billion of cash and short-term investments. Management believes this is sufficient for near-term liquidity and planned capital investments. Its 2013 capex guidance is $800–900 million. Its senior secured credit facility includes an undrawn $100 million revolver, and it has interest rate hedges on $1.4 billion of its floating-rate debt.
06—Continue