Document
Table of Contents    

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
—————————————————————
FORM 10-Q
—————————————————————
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2016
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to  
   
Commission File number 1-04721
—————————————————————
SPRINT CORPORATION
(Exact name of registrant as specified in its charter)
—————————————————————
Delaware
46-1170005
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
6200 Sprint Parkway, Overland Park, Kansas
66251
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (855) 848-3280
—————————————————————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  o    No   x
COMMON SHARES OUTSTANDING AT FEBRUARY 3, 2017:
Sprint Corporation Common Stock
3,987,167,109

 



Table of Contents

SPRINT CORPORATION
TABLE OF CONTENTS
 
 
 
Page
Reference  
Item
PART I — FINANCIAL INFORMATION
 
1.
 
 
 
 
 
2.
3.
4.
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
1.
1A.
2.
3.
4.
5.
6.






Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements (Unaudited)

SPRINT CORPORATION
CONSOLIDATED BALANCE SHEETS  
 
December 31,
 
March 31,
 
2016
 
2016
 
(in millions, except share and per share data)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,707

 
$
2,641

Short-term investments
2,349

 
—

Accounts and notes receivable, net of allowance for doubtful accounts and deferred interest of $46 and $39, respectively
1,236

 
1,099

Device and accessory inventory
1,296

 
1,173

Prepaid expenses and other current assets
1,984

 
1,920

Total current assets
10,572

 
6,833

Property, plant and equipment, net
19,333

 
20,297

Intangible assets


 
 
Goodwill
6,579

 
6,575

FCC licenses and other
40,556

 
40,073

Definite-lived intangible assets, net
3,582

 
4,469

Other assets
673

 
728

Total assets
$
81,295

 
$
78,975

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
2,894

 
$
2,899

Accrued expenses and other current liabilities
4,189

 
4,374

Current portion of long-term debt, financing and capital lease obligations
6,554

 
4,690

Total current liabilities
13,637

 
11,963

Long-term debt, financing and capital lease obligations
30,759

 
29,268

Deferred tax liabilities
14,238

 
13,959

Other liabilities
3,665

 
4,002

Total liabilities
62,299

 
59,192

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, voting, par value $0.01 per share, 9.0 billion authorized, 3.985 billion and 3.975 billion issued, respectively
40

 
40

Paid-in capital
27,694

 
27,563

Treasury shares, at cost
—

 
(3
)
Accumulated deficit
(8,301
)
 
(7,378
)
Accumulated other comprehensive loss
(437
)
 
(439
)
Total stockholders' equity
18,996

 
19,783

Total liabilities and stockholders' equity
$
81,295

 
$
78,975

See Notes to the Consolidated Financial Statements

1
Table of Contents



SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
 
(in millions, except per share amounts)
Net operating revenues:
 
 
 
 
 
 
 
Service
$
6,323

 
$
6,683

 
$
19,252

 
$
20,600

Equipment
2,226

 
1,424

 
5,556

 
3,509

 
8,549

 
8,107

 
24,808


24,109

Net operating expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization included below)
1,925

 
2,348

 
6,125

 
7,194

Cost of products (exclusive of depreciation and amortization included below)
1,985

 
1,589

 
5,097

 
4,244

Selling, general and administrative
2,080

 
2,129

 
5,992

 
6,540

Severance and exit costs
19

 
209

 
30

 
247

Depreciation
1,837

 
1,549

 
5,227

 
4,202

Amortization
255

 
316

 
813

 
994

Other, net
137

 
164

 
230

 
386

 
8,238

 
8,304

 
23,514


23,807

Operating income (loss)
311

 
(197
)
 
1,294


302

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(619
)
 
(546
)
 
(1,864
)
 
(1,630
)
Other (expense) income, net
(60
)
 
4

 
(67
)
 
13

 
(679
)
 
(542
)
 
(1,931
)

(1,617
)
Loss before income taxes
(368
)
 
(739
)
 
(637
)

(1,315
)
Income tax expense
(111
)
 
(97
)
 
(286
)
 
(126
)
Net loss
$
(479
)
 
$
(836
)
 
$
(923
)

$
(1,441
)
 
 
 
 
 
 
 
 
Basic net loss per common share
$
(0.12
)
 
$
(0.21
)
 
$
(0.23
)
 
$
(0.36
)
Diluted net loss per common share
$
(0.12
)
 
$
(0.21
)
 
$
(0.23
)
 
$
(0.36
)
Basic weighted average common shares outstanding
3,983

 
3,970

 
3,979

 
3,969

Diluted weighted average common shares outstanding
3,983

 
3,970

 
3,979

 
3,969

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Net unrealized holding losses on securities and other
$
(5
)
 
$
(9
)
 
$
—

 
$
(16
)
Net unrecognized net periodic pension and other postretirement benefits
—

 
2

 
2

 
5

Other comprehensive (loss) income
(5
)
 
(7
)
 
2

 
(11
)
Comprehensive loss
$
(484
)
 
$
(843
)
 
$
(921
)
 
$
(1,452
)
See Notes to the Consolidated Financial Statements

2
Table of Contents




SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS



 
Nine Months Ended
 
December 31,
 
2016
 
2015
 
(in millions)
Cash flows from operating activities:
 
 
 
Net loss
$
(923
)
 
$
(1,441
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,040

 
5,196

Provision for losses on accounts receivable
406

 
385

Share-based and long-term incentive compensation expense
57

 
58

Deferred income tax expense
276

 
120

Gains from asset dispositions and exchanges
(354
)
 
—

Amortization of long-term debt premiums, net
(234
)
 
(236
)
Loss on disposal of property, plant and equipment
368

 
228

Contract terminations
96

 
—

Other changes in assets and liabilities:
 
 
 
Accounts and notes receivable
(542
)
 
(1,482
)
Deferred purchase price from sale of receivables
(220
)
 
2,048

Inventories and other current assets
(2,254
)
 
(2,165
)
Accounts payable and other current liabilities
(97
)
 
(816
)
Non-current assets and liabilities, net
(313
)
 
112

Other, net
594

 
596

Net cash provided by operating activities
2,900

 
2,603

Cash flows from investing activities:
 
 
 
Capital expenditures - network and other
(1,421
)
 
(3,958
)
Capital expenditures - leased devices
(1,530
)
 
(1,724
)
Expenditures relating to FCC licenses
(46
)
 
(75
)
Proceeds from sales and maturities of short-term investments
2,649

 
377

Purchases of short-term investments
(4,998
)
 
(252
)
Proceeds from sales of assets and FCC licenses
126

 
36

Proceeds from sale-leaseback transaction
—

 
1,136

Other, net
26

 
(25
)
Net cash used in investing activities
(5,194
)
 
(4,485
)
Cash flows from financing activities:
 
 
 
Proceeds from debt and financings
6,830

 
755

Repayments of debt, financing and capital lease obligations
(3,266
)
 
(727
)
Debt financing costs
(272
)
 
(1
)
Other, net
68

 
20

Net cash provided by financing activities
3,360

 
47

Net increase (decrease) in cash and cash equivalents
1,066

 
(1,835
)
Cash and cash equivalents, beginning of period
2,641

 
4,010

Cash and cash equivalents, end of period
$
3,707

 
$
2,175

See Notes to the Consolidated Financial Statements

3
Table of Contents



SPRINT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
 
 
Common Stock
 
Paid-in
Capital
 
Treasury Shares
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Shares
 
Amount
Shares
 
Amount
Balance, March 31, 2016
3,974

 
$
40

 
$
27,563

 
1

 
$
(3
)
 
$
(7,378
)
 
$
(439
)
 
$
19,783

Net loss
 
 
 
 
 
 
 
 
 
 
(923
)
 
 
 
(923
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
2

 
2

Issuance of common stock, net
11

 
 
 
32

 
(1
)
 
3

 

 
 
 
35

Share-based compensation expense
 
 
 
 
56

 
 
 
 
 
 
 
 
 
56

Capital contribution by SoftBank
 
 
 
 
6

 
 
 
 
 
 
 
 
 
6

Other, net
 
 
 
 
37

 
 
 
 
 
 
 
 
 
37

Balance, December 31, 2016
3,985

 
$
40

 
$
27,694

 
—

 
$
—

 
$
(8,301
)
 
$
(437
)
 
$
18,996


See Notes to the Consolidated Financial Statements

4
Table of Contents



SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INDEX
 
 
 
Page
Reference
1.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 
 
7.
 
 
 
8.
 
 
 
9.
 
 
 
10.
 
 
 
11.
 
 
 
12.
 
 
 
13.
 
 
 
14.
 
 
 
15.
 
 
 
16.
 
 
 



5
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended March 31, 2016. Unless the context otherwise requires, references to "Sprint," "we," "us," "our" and the "Company" mean Sprint Corporation and its consolidated subsidiaries for all periods presented, and references to "Sprint Communications" are to Sprint Communications, Inc. and its consolidated subsidiaries.
The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.
Certain prior period amounts have been reclassified to conform to the current period presentation.

Note 2.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued new authoritative literature, Revenue from Contracts with Customers, and has subsequently modified several areas of the standard in order to provide additional clarity and improvements. The issuance is part of a joint effort by the FASB and the International Accounting Standards Board (IASB) to enhance financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The new standard will supersede much of the existing authoritative literature for revenue recognition. In July 2015, the FASB deferred the effective date of this standard. As a result, the standard and related amendments will be effective for the Company's fiscal year beginning April 1, 2018, including interim periods within that fiscal year. Early application is permitted, but not before the original effective date of April 1, 2017.
Two adoption methods are available for implementation of the standard update related to the recognition of revenue from contracts with customers. Under one method, the guidance is applied retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, the guidance is applied only to the most current period presented, recognizing the cumulative effect of the change as an adjustment to the beginning balance of retained earnings, and also requires additional disclosures comparing the results to the previous guidance. The Company is currently evaluating the guidance, including which implementation approach will be applied. We expect this guidance to have a material impact on our consolidated financial statements.
In January 2015, the FASB issued authoritative guidance on Extraordinary and Unusual Items, eliminating the concept of extraordinary items. The issuance is part of the FASB’s initiative to reduce complexity in accounting standards. Under the current guidance, an entity is required to separately classify, present and disclose events and transactions that meet the criteria for extraordinary classification. Under the new guidance, reporting entities will no longer be required to consider whether an underlying event or transaction is extraordinary, however, presentation and disclosure guidance for items that are unusual in nature or occur infrequently was retained and expanded to include items that are both unusual in nature and infrequently occurring. The amendments are effective for the Company’s fiscal year beginning April 1, 2016, and did not have a material impact on our consolidated financial statements. 
In February 2015, the FASB issued authoritative guidance regarding Consolidation, which provides guidance to management when evaluating whether they should consolidate certain legal entities. The updated guidance modifies evaluation criteria of limited partnerships and similar legal entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships. All legal entities will be subject to reevaluation under the revised consolidation model. The standard is effective for the Company’s fiscal year beginning April 1, 2016, including interim reporting periods within this fiscal year and did not have a material impact on our consolidated financial statements.

6
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In July 2015, the FASB issued authoritative guidance regarding Inventory, which simplifies the subsequent measurement of certain inventories by replacing today’s lower of cost or market test with a lower of cost and net realizable value test. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standard will be effective for the Company’s fiscal year beginning April 1, 2017, including interim periods within this fiscal year. The Company does not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In September 2015, the FASB issued authoritative guidance amending Business Combinations, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. The amendments are effective for the Company's fiscal year beginning April 1, 2016, including interim periods within this fiscal year and, will be applied, as necessary, to future business combinations. The amendments are to be applied prospectively to adjustments that occur after the effective date.
In January 2016, the FASB issued authoritative guidance regarding Financial Instruments, which amended guidance on the classification and measurement of financial instruments. Under the new guidance, entities will be required to measure equity investments that are not consolidated or accounted for under the equity method at fair value with any changes in fair value recorded in net income, unless the entity has elected the new practicability exception. For financial liabilities measured using the fair value option, entities will be required to separately present in other comprehensive income the portion of the changes in fair value attributable to instrument-specific credit risk. Additionally, the guidance amends certain disclosure requirements associated with the fair value of financial instruments. The standard will be effective for the Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year. The Company does not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued authoritative guidance regarding Leases. The new standard will supersede much of the existing authoritative literature for leases. This guidance requires lessees, among other things, to recognize right-of-use assets and liabilities on their balance sheet for all leases with lease terms longer than twelve months. The standard will be effective for the Company for its fiscal year beginning April 1, 2019, including interim periods within that fiscal year, with early application permitted. Entities are required to use modified retrospective application for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements with the option to elect certain transition reliefs. The Company is currently evaluating the guidance and expects it to have a material impact on our consolidated financial statements, however we are still assessing the overall impact.
In June 2016, the FASB issued authoritative guidance regarding Financial Instruments - Credit Losses, which requires entities to use a Current Expected Credit Loss impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The entity's estimate would consider relevant information about past events, current conditions and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses. The standard will be effective for the Company's fiscal year beginning April 1, 2020, including interim reporting periods within that fiscal year, although early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued authoritative guidance regarding Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It provides guidance on eight specific cash flow issues. The standard will be effective for the Company for its fiscal years beginning after April 1, 2018, including interim periods within that fiscal year, with early adoption permitted. The Company is currently evaluating the guidance and assessing the impact it will have on our consolidated financial statements.
In October 2016, the FASB issued authoritative guidance regarding Income Taxes, which amended guidance for the income tax consequences of intra-entity transfers of assets other than inventory. Under the new guidance, entities will be required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, thereby eliminating the recognition exception within current guidance. The standard will be effective for the

7
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Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year. The Company is currently evaluating the guidance and assessing the impact it will have on our consolidated financial statements.
In November 2016, the FASB issued authoritative guidance regarding Statement of Cash Flows: Restricted Cash, requiring that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard will be effective for the Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year, with early adoption permitted. The Company is currently evaluating the guidance and assessing the impact it will have on our consolidated financial statements.
In January 2017, the FASB issued authoritative guidance amending Business Combinations: Clarifying the Definition of a Business, to clarify the definition of a business with the objective of providing a more robust framework to assist management when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company for its fiscal year beginning April 1, 2018, including interim periods within that fiscal year, with early application permitted. The amendments are to be applied prospectively to business combinations that occur after the effective date.

Note 3.
Funding Sources
Our device leasing and installment billing programs require a greater use of operating cash flows in the earlier part of the device contracts as our subscribers will generally pay less upfront than a traditional subsidy program. The Accounts Receivable Facility and the Handset Sale-Leaseback transactions described below were designed in large part to mitigate the significant use of cash from purchasing devices from original equipment manufacturers (OEMs) to fulfill our installment billing and leasing programs. We also entered into the Network Equipment Sale-Leaseback transaction in April 2016 to sell and leaseback certain network equipment to unrelated bankruptcy-remote special purpose entities (SPEs) that provided $2.2 billion in cash proceeds. Additionally, in October 2016 we entered into a spectrum financing transaction whereby a portion of our spectrum holdings was used as collateral to issue $3.5 billion in senior secured notes.
Accounts Receivable Facility
Transaction Overview
Our Accounts Receivable Facility (Receivables Facility) provides us the opportunity to sell certain wireless service, installment receivables, and future amounts due from customers who lease certain devices from us to unaffiliated third parties (the Purchasers). The maximum funding limit under the Receivables Facility is $4.3 billion with an expiration of November 2017 (see Note 16. Subsequent Events). The Receivables Facility was amended in November 2016 to, among other things, reallocate the Purchasers' commitments between service, installment and future lease receivables. The amendment was in response to changing trends in the financing methods selected by customers. While we have the right to decide how much cash to receive from each sale, the maximum amount of cash available to us varies based on a number of factors and currently represents approximately 50% of the total amount of the eligible receivables sold to the Purchasers. As of December 31, 2016, the total amount available to be drawn was $6 million. The proceeds from the sale of these receivables are comprised of a combination of cash and a deferred purchase price receivable (DPP). The DPP is realized by us upon the ultimate collection of the underlying receivables sold to the Purchasers or upon Sprint's election to receive additional advances in cash from the Purchasers subject to the total availability under the Receivables Facility.
Wireless service and installment receivables sold are treated as a sale of financial assets and Sprint derecognizes these receivables, as well as the related allowances, and recognizes the net proceeds received in cash provided by operating activities on the consolidated statements of cash flows. The net amount drawn for wireless service and installment receivables was $1.8 billion as of December 31, 2016. The fees associated with these sales are recognized in "Selling, general and administrative" in the consolidated statements of comprehensive loss. The sale of future lease receivables is treated as a financing transaction. Accordingly, the proceeds received are reflected as cash provided by financing activities on the consolidated statements of cash flows and the fees are recognized as "Interest expense" in the consolidated statements of comprehensive loss.

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Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Transaction Structure
Sprint contributes certain wireless service, installment and future lease receivables, as well as the associated leased devices to Sprint's wholly-owned consolidated bankruptcy-remote SPEs. At Sprint's direction, the SPEs have sold, and will continue to sell, wireless service, installment and future lease receivables to Purchasers or to a bank agent on behalf of the Purchasers. Leased devices will remain with the SPEs and continue to be depreciated over their estimated useful life. At December 31, 2016, the net book value of devices contributed to the SPEs was approximately $965 million.
Each SPE is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE’s assets prior to any assets in the SPE becoming available to Sprint. Accordingly, the assets of the SPE are not available to pay creditors of Sprint or any of its affiliates (other than any other SPE), although collections from these receivables in excess of amounts required to repay the advances, yield and fees of the Purchasers and other creditors of the SPEs may be remitted to Sprint during and after the term of the Receivables Facility.
Sprint has no retained interest in the receivables sold, other than collection and administrative responsibilities and its right to the DPP. Sales of eligible receivables by the SPEs generally occur daily and are settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility. A subsidiary of Sprint services the receivables in exchange for a monthly servicing fee, and Sprint guarantees the performance of the servicing obligations under the Receivables Facility.
DPP
The DPP related to our wireless service and installment receivables, which amounted to approximately $1.4 billion and $1.2 billion as of December 31, 2016 and March 31, 2016, respectively, is classified as a trading security within "Prepaid expenses and other current assets" in the consolidated balance sheets and is recorded at its estimated fair value. The fair value of the DPP is estimated using a discounted cash flow model, which relies principally on unobservable inputs such as the nature and credit class of the sold receivables and subscriber payment history, and for installment receivables sold, the estimated timing of upgrades and upgrade payment amounts for those with upgrade options. Accretable yield on the DPP is recognized as interest revenue within net operating service revenue on the consolidated statements of comprehensive loss and other changes in the fair value of the DPP are recognized in "Selling, general and administrative" in the consolidated statements of comprehensive loss. Changes in the fair value of the DPP did not have a material impact on our statements of comprehensive loss for the three and nine-month periods ended December 31, 2016. Changes to the unobservable inputs used to determine the fair value did not and are not expected to result in a material change in the fair value of the DPP.
During the nine-month period ended December 31, 2016, we remitted $185 million of funds to the Purchasers because the amount of cash proceeds received by us under the facility exceeded the maximum funding limit, which increased the total amount of the DPP due to Sprint. We also elected to receive $625 million of cash, which decreased the total amount of the DPP due to Sprint. In addition, during the nine-month period ended December 31, 2016, sales of new receivables exceeded cash collections on previously sold receivables such that the DPP increased by $660 million.
Continuing Involvement
Sprint has continuing involvement in the receivables sold by the SPEs to the Purchasers because a subsidiary of Sprint services the receivables. Additionally, in accordance with the Receivables Facility, Sprint is required to repurchase aged receivables, or those that will be written off in accordance with Sprint's credit and collection policies, both of which result from subscriber non-payment. Sprint recognizes assets and liabilities, as applicable, with respect to its continuing involvement at fair value. Sprint's continuing involvement did not have a material impact on its financial statements as of December 31, 2016.
Variable Interest Entity
Sprint determined that certain of the Purchasers, which are multi-seller asset-backed commercial paper conduits (Conduits) are considered variable interest entities because they lack sufficient equity to finance their activities. Sprint's interest in the service and installment receivables purchased by the Conduits, which is comprised of the DPP due to Sprint, is not considered variable because it consists of assets that represent less than 50% of the total activity of the Conduits.

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Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Handset Sale-Leasebacks
In December 2015 and May 2016, we sold certain iPhone® devices being leased by our customers to Mobile Leasing Solutions, LLC (MLS), a company formed by a group of equity investors, including SoftBank Group Corp. (SoftBank), and then subsequently leased the devices back. Under the agreements, Sprint generally maintains the customer leases, continues to collect and record lease revenue from the customer and remits monthly rental payments to MLS during the leaseback periods.
Under the agreements, Sprint contributed the devices and the associated customer leases to wholly-owned consolidated bankruptcy-remote special purpose entities of Sprint (SPE Lessees). The SPE Lessees then sold the devices and transferred certain specified customer lease end rights and obligations, such as the right to receive the proceeds from customers who elect to purchase the device at the end of the customer lease term, to MLS in exchange for a combination of cash and DPP. Settlement for the DPP occurs near the end of the agreement and can be reduced to the extent that MLS experiences a loss on the device (either not returned or sold at an amount less than the expected residual value of the device), but only to the extent of the device's DPP balance. In the event that MLS sells the devices returned from our customers at a price greater than the expected device residual value, Sprint has the potential to share some of the excess proceeds.
The SPE Lessees retain all rights to the underlying customer leases, such as the right to receive the rental payments during the device leaseback period, other than the aforementioned certain specified customer lease end rights. Each SPE Lessee is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE Lessee, to be satisfied out of the SPE Lessee’s assets prior to any assets in the SPE Lessee becoming available to Sprint. Accordingly, the assets of the SPE Lessee are not available to pay creditors of Sprint or any of its affiliates. The SPE Lessees are obligated to pay the full monthly rental payments under each device lease to MLS regardless of whether our customers make lease payments on the devices leased to them or whether the customer lease is canceled. Sprint has guaranteed to MLS the performance of the agreements and undertakings of the SPE Lessees under the transaction documents.
Handset Sale-Leaseback Tranche 1 (Tranche 1)
In December 2015, Sprint transferred devices with a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billion and a DPP of $126 million. We recorded the sale, removed the devices from our balance sheet, and classified the leasebacks as operating leases. The difference between the fair value and the net book value of the devices sold was recognized as a loss on disposal of property, plant and equipment in the amount of $65 million and was included in "Other, net" in the consolidated statements of comprehensive loss for the three and nine-month periods ended December 31, 2015. The cash proceeds received in the transaction were reflected as cash provided by investing activities on the consolidated statements of cash flows and payments made to MLS under the leaseback are reflected as "Cost of products" in the consolidated statements of comprehensive loss. Rent expense related to MLS totaled $117 million and $494 million during the three and nine-month periods ended December 31, 2016, respectively, and is reflected within cash flows from operations. The monthly rental payments for the devices leased backed by us were expected to approximate the amount of cash received from the associated customer leases during the weighted average leaseback period. In December 2016, Sprint terminated Tranche 1 by repurchasing the devices and related customer lease end rights and obligations from MLS for consideration of $371 million of net cash payments and the DPP of $126 million. As a result of the transaction, Sprint recorded $477 million of property, plant and equipment, $16 million of other assets, and was released from certain liabilities. Additionally, the leaseback was canceled and there will be no future rental payments owed to MLS related to Tranche 1. The impact to the consolidated statements of comprehensive loss as a result of the termination was immaterial.
Handset Sale-Leaseback Tranche 2 (Tranche 2)
In May 2016, Sprint transferred devices with a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billion and a DPP of $186 million. Unlike Tranche 1, Tranche 2 was accounted for as a financing. Accordingly, the devices remain in "Property, plant and equipment, net" in the consolidated balance sheets and we continue to depreciate the assets to their estimated residual values over the respective customer lease terms. At December 31, 2016, the net book value of devices transferred to MLS was approximately $725 million.
The proceeds received are reflected as cash provided by financing activities in the consolidated statements of cash flows and payments made to MLS will be reflected as principal repayments and interest expense over the respective terms. We have elected to account for the financing obligation at fair value. Accordingly, changes in the fair value of the financing

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

obligation are recognized in "Other (expense) income, net" in the consolidated statements of comprehensive loss over the course of the arrangement.
Tranche 2 primarily includes devices from our iPhone Forever Program, whereas these devices were specifically excluded from Tranche 1. The iPhone Forever Program provides our leasing customers the ability to upgrade their devices and to enter into a new lease agreement, subject to certain conditions, upon Apple's release of a next generation device. Upon a customer exercising their iPhone Forever upgrade right, Sprint has the option to terminate the existing leaseback by immediately remitting all unpaid device leaseback payments and returning the device to MLS. Alternatively, Sprint is required to transfer the title in the new device to MLS in exchange for the title in the original device (Exchange Option). If Sprint elects the Exchange Option, we are required to continue to pay existing device leaseback rental related to the original device, among other requirements.
To address the introduction of the upgrade feature into the sale-leaseback structure, among other factors, numerous contractual terms from Tranche 1 were modified, which shifted certain risks of ownership in the devices away from MLS to Sprint and resulted in Tranche 2 being accounted for as a financing. For instance, the device leaseback periods are generally longer in Tranche 2 as compared to Tranche 1, and the resulting amounts committed to be paid by the Company represent the initial proceeds received from MLS plus interest. This mitigates MLS's exposure to certain risks for non-returned and damaged devices, as well as to declines in device residual values.
Network Equipment Sale-Leaseback
In April 2016, Sprint sold and leased back certain network equipment to unrelated bankruptcy-remote special purpose entities (collectively, "Network LeaseCo"). The network equipment acquired by Network LeaseCo was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including SoftBank. Sprint's payments to Network LeaseCo during the leaseback period are used by Network LeaseCo to service their debt.
Network LeaseCo is a variable interest entity for which Sprint is the primary beneficiary. As a result, Sprint is required to consolidate Network LeaseCo and our consolidated financial statements include Network LeaseCo's debt and the related financing cash inflows. The network assets included in the transaction, which had a net book value of approximately $3.0 billion and consisted primarily of equipment located at cell towers, remain on Sprint's consolidated financial statements and continue to be depreciated over their respective estimated useful lives. At December 31, 2016, these network assets had a net book value of approximately $2.5 billion.
The proceeds received were reflected as cash provided by financing activities in the consolidated statements of cash flows and payments made to Network LeaseCo are reflected as principal repayments and interest expense over the respective terms. Sprint has the option to purchase the equipment at the end of the leaseback term for a nominal amount. All intercompany transactions between Network LeaseCo and Sprint are eliminated in our consolidated financial statements. Principal and interest payments on the borrowings from the external investors will be repaid in staggered, unequal payments through January 2018 with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017.
Spectrum Financing
In October 2016, Sprint transferred certain directly held and third-party leased spectrum licenses (collectively, "the Spectrum Portfolio") to wholly-owned bankruptcy-remote special purpose entities (collectively, "the Spectrum Financing SPEs"). The Spectrum Portfolio, which represents approximately 14% of Sprint's total spectrum holdings on a MHz-pops basis, was used as collateral to raise an initial $3.5 billion in senior secured notes at 3.36% from external investors under a $7.0 billion program. Sprint can utilize this financing structure to potentially raise up to an additional $3.5 billion subject to certain conditions. The notes will be repaid over a five-year term, with interest only payments over the first four quarters and amortizing quarterly principal and interest payments thereafter through September 2021.
Sprint Communications, Inc. simultaneously entered into a long-term lease with the Spectrum Financing SPEs for the ongoing use of the Spectrum Portfolio. Sprint Communications, Inc. is required to make monthly lease payments to the Spectrum Financing SPEs, at a market rate in an amount sufficient to service the notes. As the Spectrum Financing SPEs are wholly-owned Sprint subsidiaries, these entities are consolidated and all intercompany activity has been eliminated.
As a result of this transaction, our $2.5 billion unsecured financing facility was terminated.


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 4.
Financial Instruments
The Company carries certain assets and liabilities at fair value. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs based on the observability as of the measurement date, is as follows: quoted prices in active markets for identical assets or liabilities; observable inputs other than the quoted prices in active markets for identical assets and liabilities; and unobservable inputs for which there is little or no market data, which require the Company to develop assumptions of what market participants would use in pricing the asset or liability.
The carrying amount of cash and cash equivalents, accounts and notes receivable, and accounts payable approximates fair value. Short-term investments (consisting primarily of time deposits and commercial paper) are recorded at amortized cost, and the respective carrying amounts approximate fair value. Short-term investments totaled approximately $2.3 billion as of December 31, 2016 and Sprint did not hold any short-term investments as of March 31, 2016. The fair value of marketable equity securities totaling $50 million and $46 million as of December 31, 2016 and March 31, 2016, respectively, are measured on a recurring basis using quoted prices in active markets.
Except for our financing transaction with MLS, current and long-term debt and our other financings are carried at amortized cost. The Company elected to measure the financing obligation with MLS at fair value as a means to better reflect the economic substance of the arrangement. The Tranche 2 financing obligation, which amounted to $554 million at December 31, 2016 and is reported in "Current portion of long-term debt, financing and capital lease obligations" in our consolidated balance sheets, is the only eligible financial instrument for which we have elected the fair value option.
The fair value of the financing obligation, which was determined at the outset of the arrangement using a discounted cash flow model, was derived by unobservable inputs such as customer churn rates, customer upgrade probabilities, and the likelihood that Sprint will elect the Exchange Option versus the termination option upon a customer upgrade. Any gains or losses resulting from changes in the fair value of the financing obligation are included in “Other (expense) income, net” on the consolidated statements of comprehensive loss. During the nine-month period ended December 31, 2016, the change in fair value of the financing obligation resulted in a loss of approximately $30 million. During the nine-month period ended December 31, 2016, the payments made to MLS totaled $502 million.
The estimated fair value of the majority of our current and long-term debt, excluding our credit facilities, future lease receivables and borrowings under our Network Equipment Sale-Leaseback and Tranche 2 transactions, is determined based on quoted prices in active markets or by using other observable inputs that are derived principally from, or corroborated by, observable market data.
The following table presents carrying amounts and estimated fair values of current and long-term debt:
 
Carrying amount at December 31, 2016
 
Estimated Fair Value Using Input Type
 
 
Quoted prices in active markets
 
Observable
 
Unobservable
 
Total estimated fair value
 
(in millions)
Current and long-term debt
$
36,870

 
$
29,457

 
$
4,391

 
$
4,758

 
$
38,606

 
Carrying amount at March 31, 2016
 
Estimated Fair Value Using Input Type
 
 
Quoted prices in active markets
 
Observable
 
Unobservable
 
Total estimated fair value
 
(in millions)
Current and long-term debt
$
33,645

 
$
21,757

 
$
4,474

 
$
2,130

 
$
28,361



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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 5.
Property, Plant and Equipment
Property, plant and equipment consists primarily of network equipment and other long-lived assets used to provide service to our subscribers. Non-cash accruals included in property, plant and equipment (excluding leased devices) totaled $325 million and $763 million as of December 31, 2016 and 2015, respectively.
The following table presents the components of property, plant and equipment and the related accumulated depreciation:
 
December 31,
2016
 
March 31,
2016
 
(in millions)
Land
$
260

 
$
260

Network equipment, site costs and related software
21,696

 
21,500

Buildings and improvements
808

 
798

Non-network internal use software, office equipment, leased devices and other
8,450

 
6,182

Construction in progress
1,460

 
1,249

Less: accumulated depreciation
(13,341
)
 
(9,692
)
Property, plant and equipment, net
$
19,333

 
$
20,297

In September 2014, Sprint introduced a leasing program, whereby qualified subscribers can lease a device for a contractual period of time. At the end of the lease term, the subscriber has the option to turn in the device, continue leasing the device, or purchase the device. As of December 31, 2016, substantially all of our device leases were classified as operating leases. At lease inception, the devices leased through Sprint's direct channels are reclassified from inventory to property, plant and equipment. For those devices leased through indirect channels, Sprint purchases the device to be leased from the retailer at lease inception. The devices are then depreciated using the straight-line method to their estimated residual value generally over the term of the lease.
The following table presents leased devices and the related accumulated depreciation:
 
December 31,
2016
 
March 31,
2016
 
(in millions)
Leased devices
$
7,099

 
$
4,913

Less: accumulated depreciation
(2,645
)
 
(1,267
)
Leased devices, net
$
4,454

 
$
3,646

During the nine-month periods ended December 31, 2016 and 2015, there were non-cash transfers to leased devices of approximately $2.3 billion and $2.6 billion, respectively, along with a corresponding decrease in "Device and accessory inventory." Non-cash accruals included in leased devices totaled $166 million and $306 million as of December 31, 2016 and 2015, respectively, for devices purchased from indirect dealers that were leased to our subscribers. Depreciation expense incurred on all leased devices was $837 million and $2.2 billion for the three and nine-month periods ended December 31, 2016, respectively, and $535 million and $1.2 billion for the same periods in 2015, respectively.
During the three and nine-month periods ended December 31, 2016, we recorded $137 million and $368 million, respectively, of loss on disposal of property, plant and equipment, net of recoveries, which is included in "Other, net" in our consolidated statements of comprehensive loss. These losses primarily resulted from the write-off of leased devices associated with lease cancellations prior to the scheduled customer lease terms where customers did not return the devices to us. If customers continue to not return devices, we may continue to have similar losses in future periods. During the three and nine-month periods ended December 31, 2015, we recorded $78 million and $163 million, respectively, of loss on disposal of property, plant and equipment, net of recoveries, which is included in "Other, net" in our consolidated statements of comprehensive loss. These losses resulted from the write-off of leased devices associated with lease cancellations prior to the scheduled customer lease terms where customers did not return the devices to us and cell site construction costs and other network costs that are no longer recoverable as a result of changes in the Company's network plans.


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 6.
Intangible Assets
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consist of FCC licenses, which were acquired primarily through FCC auctions and business combinations, certain of our trademarks, and goodwill. At December 31, 2016, we held 1.9 GHz, 800 MHz and 2.5 GHz FCC licenses authorizing the use of radio frequency spectrum to deploy our wireless services. As long as the Company acts within the requirements and constraints of the regulatory authorities, the renewal and extension of these licenses is reasonably certain at minimal cost. Accordingly, we have concluded that FCC licenses are indefinite-lived intangible assets. Our Sprint and Boost Mobile trademarks have also been identified as indefinite-lived intangible assets. Goodwill represents the excess of consideration paid over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations.
The following provides the activity of indefinite-lived intangible assets within the consolidated balance sheets:
 
March 31,
2016
 
Net
Additions
 
December 31,
2016
 
(in millions)
FCC licenses (1)
$
36,038

 
$
483

 
$
36,521

Trademarks
4,035

 
—

 
4,035

Goodwill
6,575

 
4

 
6,579

 
$
46,648

 
$
487

 
$
47,135

_________________
(1)
Net additions within FCC licenses includes $85 million of spectrum acquired from the Shentel transaction (see Note 8. Long-Term Debt, Financing and Capital Lease Obligations) and an increase from spectrum license exchanges described below during the nine-month period ended December 31, 2016.
Spectrum License Exchanges
In the second quarter of fiscal year 2016, we exchanged certain spectrum licenses with other carriers in non-cash transactions. As a result, we recorded a non-cash gain of $354 million, which represented the difference between the fair value and the net book value of the spectrum transferred to the other carriers. The gain was presented in "Other, net" in the consolidated statements of comprehensive loss for the nine-month period ended December 31, 2016.
Assessment of Impairment
Our annual impairment testing date for goodwill and indefinite-lived intangible assets is January 1 of each year; however, we test for impairment between our annual tests if an event occurs or circumstances change that indicate that the asset may be impaired, or in the case of goodwill, that the fair value of the reporting unit is below its carrying amount. We did not record an impairment during the nine-month period ended December 31, 2016.
The determination of fair value requires considerable judgment and is highly sensitive to changes in underlying assumptions. Consequently, there can be no assurance that the estimates and assumptions made for the purposes of the goodwill, spectrum and trademarks impairment tests will prove to be an accurate prediction of the future. Continued, sustained declines in the Company’s operating results, future forecasted cash flows, growth rates and other assumptions, as well as significant, sustained declines in the Company’s stock price and related market capitalization could impact the underlying key assumptions and our estimated fair values, potentially leading to a future material impairment of goodwill or other indefinite-lived intangible assets.
Intangible Assets Subject to Amortization
Customer relationships are amortized using the sum-of-the-months' digits method, while all other definite-lived intangible assets are amortized using the straight line method over the estimated useful lives of the respective assets. We reduce the gross carrying value and associated accumulated amortization when specified intangible assets become fully amortized. Amortization expense related to favorable spectrum and tower leases is recognized in "Cost of services" in our consolidated statements of comprehensive loss.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
December 31, 2016
 
March 31, 2016
 
Useful Lives
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
 
 
(in millions)
Customer relationships
4 to 8 years
 
$
6,923

 
$
(4,824
)
 
$
2,099

 
$
6,923

 
$
(4,045
)
 
$
2,878

Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Favorable spectrum leases
23 years
 
870

 
(129
)
 
741

 
881

 
(110
)
 
771

Favorable tower leases
3 to 7 years
 
589

 
(367
)
 
222

 
589

 
(302
)
 
287

Trademarks
34 years
 
520

 
(55
)
 
465

 
520

 
(43
)
 
477

Other
4 to 10 years
 
90

 
(35
)
 
55

 
83

 
(27
)
 
56

Total other intangible assets
 
2,069


(586
)

1,483


2,073


(482
)

1,591

Total definite-lived intangible assets
 
$
8,992


$
(5,410
)

$
3,582


$
8,996


$
(4,527
)

$
4,469


Note 7.
Accounts Payable
Accounts payable at December 31, 2016 and March 31, 2016 include liabilities in the amounts of $83 million and $66 million, respectively, for payments issued in excess of associated bank balances but not yet presented for collection.

Note 8.
Long-Term Debt, Financing and Capital Lease Obligations
 
 
Interest Rates
 
Maturities
 
December 31,
2016
 
March 31,
2016
 
 
 
 
 
 
 
 
 
(in millions)
Notes
 
 
 
 
 
 
 
 
 
 
 
Senior notes
 
 
 
 
 
 
 
 
 
 
 
Sprint Corporation
7.13
-
7.88%
 
2021
-
2025
 
$
10,500

 
$
10,500

Sprint Communications, Inc.
6.00
-
11.50%
 
2017
-
2022
 
7,280

 
9,280

Sprint Capital Corporation
6.88
-
8.75%
 
2019
-
2032
 
6,204

 
6,204

Senior secured notes
 
 
 
 
 
 
 
 
 
 
 
Sprint Spectrum Co LLC, Sprint Spectrum Co II LLC, Sprint Spectrum Co III LLC
3.36%
 
2021
 
3,500

 
—

Guaranteed notes
 
 
 
 
 
 
 
 
 
 
 
Sprint Communications, Inc.
7.00
-
9.00%
 
2018
-
2020
 
4,000

 
4,000

Secured notes
 
 
 
 
 
 
 
 
 
 
 
Clearwire Communications LLC (1)
14.75%
 
2016
 
—

 
300

Exchangeable notes
 
 
 
 
 
 
 
 
 
 
 
Clearwire Communications LLC (1)(2)
8.25%
 
2017
 
629

 
629

Credit facilities
 
 
 
 
 
 
 
 
 
 
 
Bank credit facility
4.00%
 
2018
 
—

 
—

Export Development Canada (EDC)
4.48
-
6.23%
 
2017
-
2019
 
550

 
550

Secured equipment credit facilities
2.03
-
3.27%
 
2017
-
2021
 
586

 
805

Financing obligations, capital lease and other obligations
2.35
-
10.63%
 
2017
-
2024
 
3,881

 
1,093

Net premiums and debt financing costs
 
 
 
 
 
 
 
 
183

 
597

 
 
 
 
 
 
 
 
 
37,313

 
33,958

Less current portion
 
 
 
 
 
 
 
 
(6,554
)
 
(4,690
)
Long-term debt, financing and capital lease obligations
 
 
 
 
 
 
 
 
$
30,759

 
$
29,268

_________________
 (1)    Notes of Clearwire Communications LLC are also direct obligations of Clearwire Finance, Inc. and are guaranteed by certain Clearwire subsidiaries.
(2)    The $629 million Clearwire 8.25% Exchangeable Notes have both a par call and put on December 1, 2017 resulting in the balance
being classified as a current debt obligation as of December 31, 2016.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2016, Sprint Corporation, the parent corporation, had $10.5 billion in aggregate principal amount of senior notes outstanding. In addition, as of December 31, 2016, the outstanding principal amount of senior notes issued by Sprint Communications, Inc. and Sprint Capital Corporation, guaranteed notes issued by Sprint Communications, Inc., exchangeable notes issued by Clearwire Communications LLC, the EDC agreement, the secured equipment credit facilities, the installment payment obligations, and the Network Equipment Sale-Leaseback and Handset Sale-Leaseback Tranche 2 financing obligations, collectively totaled $22.3 billion in principal amount of our long-term debt issued by 100% owned subsidiaries, was fully and unconditionally guaranteed by Sprint Corporation. Although certain financing agreements restrict the ability of Sprint Communications, Inc. and its subsidiaries to distribute cash to Sprint Corporation, the ability of the subsidiaries to distribute cash to their respective parents, including to Sprint Communications, Inc., is generally not restricted.
Cash interest payments, net of amounts capitalized of $32 million and $40 million, totaled $1.9 billion and $1.8 billion during the nine-month periods ended December 31, 2016 and 2015, respectively.
Notes
As of December 31, 2016, our outstanding notes consisted of senior notes, guaranteed notes, and exchangeable notes, all of which are unsecured, as well as senior secured notes associated with our Spectrum Financing transaction. Cash interest on all of the notes is generally payable semi-annually in arrears with the exception of the Spectrum Financing senior secured notes, which are payable quarterly. As of December 31, 2016, $31.3 billion aggregate principal amount of the notes was redeemable at the Company's discretion at the then-applicable redemption prices plus accrued interest.
As of December 31, 2016, $25.1 billion aggregate principal amount of our senior notes and guaranteed notes provided holders with the right to require us to repurchase the notes if a change of control triggering event (as defined in the applicable indentures and supplemental indentures) occurs.
Upon the close of the acquisition of Clearwire Corporation (Clearwire Acquisition), the Clearwire Communications LLC 8.25% Exchangeable Notes due 2040 became exchangeable at any time, at the holder’s option, for a fixed amount of cash equal to $706.21 for each $1,000 principal amount of notes surrendered. On December 1, 2017 the Exchangeable Notes can be tendered at the holder’s option for 100% of the par value plus accrued interest resulting in the entire balance being classified as a current debt obligation as of December 31, 2016.
During the three-month period ended December 31, 2016, the Company repaid $2.0 billion aggregate principal upon maturity of its outstanding Sprint Communications, Inc. 6% senior notes and $300 million in aggregate principal of its Clearwire Communications LLC 14.75% secured notes.
In October 2016, Sprint transferred the Spectrum Portfolio to the Spectrum Financing SPEs. The Spectrum Portfolio, which represents approximately 14% of Sprint's total spectrum holdings on a MHz-pops basis, was used as collateral to raise an initial $3.5 billion in senior secured notes at 3.36% from external investors under a $7.0 billion program. Sprint can utilize this financing structure to potentially raise up to an additional $3.5 billion, subject to certain conditions. The notes will be repaid over a five-year term, with interest only payments over the first four quarters and amortizing quarterly principal and interest payments thereafter through September 2021. As of December 31, 2016, approximately $219 million of the total principal outstanding was classified as "Current portion of long-term debt" in the consolidated balance sheets. Total debt finance costs incurred and capitalized in connection with the issuance of notes were approximately $95 million.
Credit Facilities
Unsecured Financing Facility
During the three-month period ended June 30, 2016, Sprint Communications entered into an unsecured financing facility for $2.5 billion. In October 2016, this facility was terminated as a result of entering into the Spectrum Financing transaction described in Note 3. Funding Sources. During the three and nine-months periods ended December 31, 2016, the company recognized the remaining debt finance costs of $74 million associated with the terminated unsecured financing facility, which is included in "Other (expense) income, net" on the consolidated statements of comprehensive loss.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Bank Credit Facility
The Company has a $3.3 billion unsecured revolving bank credit facility that expires in February 2018. Borrowings under the revolving bank credit facility bear interest at a rate equal to LIBOR plus a spread that varies depending on the Company’s credit ratings. As of December 31, 2016, approximately $274 million in letters of credit were outstanding under this credit facility, including the letter of credit required by the Report and Order (see Note 11. Commitments and Contingencies). As a result of the outstanding letters of credit, which directly reduce the availability of borrowings, the Company had approximately $3.0 billion of borrowing capacity available under the revolving bank credit facility as of December 31, 2016. The required ratio (Leverage Ratio) of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and other non-recurring items, as defined by the credit facility (adjusted EBITDA), may not exceed 6.25 to 1.0 through the quarter ending December 31, 2016 and 6.0 to 1.0 each fiscal quarter ending thereafter through expiration of the facility. The facility allows us to reduce our total indebtedness for purposes of calculating the Leverage Ratio by subtracting from total indebtedness the amount of any cash contributed into a segregated reserve account, provided that, after such cash contribution, our cash remaining on hand for operations exceeds $2.0 billion. Upon transfer, the cash contribution will remain restricted until and to the extent it is no longer required for the Leverage Ratio to remain in compliance.
EDC Agreement
As of December 31, 2016, the unsecured EDC agreement provided for covenant terms similar to those of the unsecured revolving bank credit facility. However, under the terms of the EDC agreement, repayments of outstanding amounts cannot be re-drawn. As of December 31, 2016, the total principal amount of our borrowings under the EDC facility was $550 million. On February 3, 2017, we amended the EDC agreement to provide for security and covenant terms similar to our new secured term loan and revolving bank credit facility.
Secured Equipment Credit Facilities
Eksportkreditnamnden (EKN)
In 2013, we had fully drawn and began to repay the EKN secured equipment credit facility totaling $1.0 billion, which was used to finance certain network-related purchases from Ericsson. During the nine-month period ended December 31, 2016, we made principal repayments totaling $127 million on the facility, resulting in a total principal amount of $127 million outstanding at December 31, 2016.
Finnvera plc (Finnvera)
The Finnvera secured equipment credit facility provides us with the ability to borrow up to $800 million to finance network-related purchases from Nokia Solutions and Networks US LLC, USA. The facility, which initially could be drawn upon as many as three consecutive tranches, now has one tranche remaining and available for borrowing through October 2017. Such borrowings are contingent upon the amount and timing of Sprint's network-related purchases. During the nine-month period ended December 31, 2016, we made principal repayments totaling $28 million on the facility, resulting in a total principal amount of $168 million outstanding at December 31, 2016.
K-sure
The K-sure secured equipment credit facility provides for the ability to borrow up to $750 million to finance network-related purchases from Samsung Telecommunications America, LLC. The facility can be divided in up to three consecutive tranches of varying size with borrowings available until May 2018, contingent upon the amount of network-related purchases made by Sprint. During the nine-month period ended December 31, 2016, we made principal repayments totaling $65 million on the facility, resulting in a total principal amount of $258 million outstanding at December 31, 2016.
Delcredere | Ducroire (D/D)
The D/D secured equipment credit facility provides for the ability to borrow up to $250 million to finance network equipment-related purchases from Alcatel-Lucent USA Inc. The principal balance outstanding at December 31, 2016 was $32 million.
Borrowings under the EKN, Finnvera, K-sure and D/D secured equipment credit facilities are each secured by liens on the respective equipment purchased pursuant to each facility's credit agreement. In addition, repayments of outstanding amounts borrowed under the secured equipment credit facilities cannot be redrawn. Each of these facilities is

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

fully and unconditionally guaranteed by both Sprint Communications, Inc. and Sprint Corporation. As of February 3, 2017, the secured equipment credit facilities have certain key covenants similar to those in our new secured term loan and revolving bank credit facility.
Financing Obligations
Financing of Future Lease Receivables
In the three-month period ended March 31, 2016, we sold approximately $1.2 billion in total of future amounts due from customers who lease certain devices from us in exchange for cash proceeds of $600 million through our Receivables Facility (see Note 3. Funding Sources). The difference between the amount sold and the cash received represents additional collateral to the lenders. The sale was accounted for as a financing and the $600 million cash proceeds were, accordingly, reflected as debt in our consolidated balance sheets. The associated leased devices continue to be reported as part of our "Property, plant and equipment, net" in our consolidated balance sheets and continue to be depreciated over their estimated useful life.
During the nine-month period ended December 31, 2016, we repaid $153 million to the Purchasers, which reduced the principal amount outstanding to $447 million as of December 31, 2016.
Network Equipment Sale-Leaseback
In April 2016, Sprint sold and leased back certain network equipment to Network LeaseCo. The network equipment acquired by Network LeaseCo, which is consolidated by us, was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including SoftBank. Principal and interest payments on the borrowings from the external investors will be repaid in staggered, unequal payments through January 2018 with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017 (see Note 3. Funding Sources).
Handset Sale-Leaseback Tranche 2
In May 2016, Sprint entered into a second transaction with MLS to sell and leaseback certain iPhone® devices leased by our customers. Upon the transfer of devices with a net book value of approximately $1.3 billion to MLS, Sprint received cash proceeds of $1.1 billion. Unlike Tranche 1, the proceeds from Tranche 2 were accounted for as a financing (see Note 3. Funding Sources). During the nine-month period ended December 31, 2016, we repaid $502 million to MLS, which reduced the principal amount of the financing obligation to $554 million as of December 31, 2016.
Tower Financing
We have approximately 3,000 cell sites that we sold and subsequently leased back during 2008. Terms extend through 2021, with renewal options for an additional 20 years. These cell sites continue to be reported as part of our "Property, plant and equipment, net" in our consolidated balance sheets due to our continued involvement with the property sold and the transaction is accounted for as a financing.
Capital Lease and Other Obligations
On August 10, 2015, Shenandoah Telecommunications Company (Shentel) entered into a definitive agreement to acquire one of our wholesale partners, NTELOS Holdings Corp (nTelos). In connection with this definitive agreement, we entered into a series of agreements with Shentel to, among other things, acquire certain assets such as spectrum, terminate our existing wholesale arrangement with nTelos, and amend our existing affiliate agreement with Shentel to primarily include the subscribers formerly under the wholesale arrangement with nTelos. The agreements also expanded the area in which Shentel provides wireless service to Sprint customers and provided for more favorable economic terms. In April 2016, we received regulatory approval and the transaction closed in May 2016. The total consideration for this transaction included $181 million, on a net present value basis, of notes payable to Shentel. Sprint will satisfy its obligations under the notes payable over an expected term of five to six years. FCC licenses acquired from Shentel had a total value of $85 million. $96 million of the total purchase was recorded in “Other, net” in the consolidated statements of comprehensive loss as a contract termination in the quarter ended June 30, 2016, which related to the termination of our pre-existing wholesale arrangement with nTelos. The remainder of our capital lease and other obligations are primarily for the use of wireless network equipment.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Covenants
Certain indentures and other agreements require compliance with various covenants, including covenants that limit the ability of the Company and its subsidiaries to sell all or substantially all of its assets, limit the ability of the Company and its subsidiaries to incur indebtedness and liens, and require that we maintain certain financial ratios, each as defined by the terms of the indentures, supplemental indentures and financing arrangements.
As of December 31, 2016, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. A default under any of our borrowings could trigger defaults under certain of our other debt obligations, which in turn could result in the maturities being accelerated.
Under our revolving bank credit facility and certain other agreements, we are currently restricted from paying cash dividends because our ratio of total indebtedness to adjusted EBITDA (each as defined in the applicable agreements) exceeds 2.5 to 1.0.

Note 9.
Severance and Exit Costs
Severance and exit costs consist of lease exit costs primarily associated with tower and cell sites, access exit costs related to payments that will continue to be made under our backhaul access contracts for which we will no longer be receiving any economic benefit, and severance costs associated with reductions in our work force.
The following provides the activity in the severance and exit costs liability included in "Accounts payable," "Accrued expenses and other current liabilities" and "Other liabilities" within the consolidated balance sheets:
 
March 31,
2016
 
Net
 (Benefit) Expense
 
Cash Payments
and Other
 
December 31,
2016
 
(in millions)
Lease exit costs
$
338

 
$
(3
)
(1) 
$
(100
)
 
$
235

Severance costs
150

 
15

(2) 
(145
)
 
20

Access exit costs
37

 
20

(3) 
(24
)
 
33

 
$
525

 
$
32

 
$
(269
)
 
$
288

 _________________
(1)
For the three and nine-month periods ended December 31, 2016, we recognized costs of $2 million (Wireless only) and a benefit of $3 million ($5 million benefit Wireless, $2 million costs Wireline), respectively. The Wireless benefit for the nine-month period resulted from the reversal of certain lease exit cost reserves associated with the shutdown of the Clearwire WiMAX network on March 31, 2016.
(2)
For the three and nine-month periods ended December 31, 2016, we recognized costs of $6 million (Wireless only) and $15 million (Wireless only), respectively.
(3)
For the three and nine-month periods ended December 31, 2016, $11 million ($6 million Wireless, $5 million Wireline) and $18 million ($8 million Wireless, $10 million Wireline), respectively, were recognized as "Severance and exit costs." For the nine-month period ended December 31, 2016, $2 million (Wireline only) was recognized as "Cost of services."
We continually refine our network strategy and evaluate other potential network initiatives to improve the overall performance of our network. Additionally, a major cost reduction initiative is underway, which may include headcount reductions, among other actions, to reduce operating expenses and improve our operating cash flows. As a result of these ongoing activities, we may incur future material charges associated with lease and access exit costs, severance, asset impairments, and accelerated depreciation, among others.


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Note 10.
Income Taxes
The differences that caused our effective income tax rates to differ from the 35% U.S. federal statutory rate for income taxes were as follows:
 
Nine Months Ended
December 31,
 
2016
 
2015
 
(in millions)
Income tax benefit at the federal statutory rate
$
223

 
$
460

Effect of:
 
 
 
State income taxes, net of federal income tax effect
8

 
33

State law changes, net of federal income tax effect
3

 
23

Increase deferred tax liability on FCC licenses
(46
)
 
—

Tax benefit from organizational restructuring
42

 
—

Change in federal and state valuation allowance
(522
)
 
(647
)
Other, net
6

 
5

Income tax expense
$
(286
)
 
$
(126
)
Effective income tax rate
(44.9
)%
 
(9.6
)%
The realization of deferred tax assets, including net operating loss carryforwards, is dependent on the generation of future taxable income sufficient to realize the tax deductions, carryforwards and credits. However, our history of annual losses reduces our ability to rely on expectations of future income in evaluating the ability to realize our deferred tax assets. Valuation allowances on deferred tax assets are recognized if it is determined that it is more likely than not that the asset will not be realized. As a result, the Company recognized income tax expense to increase the valuation allowance by $522 million and $647 million during the nine-month periods ended December 31, 2016 and 2015, respectively, on deferred tax assets primarily related to losses incurred during the period that were not currently realizable and expenses recorded during the period that were not currently deductible for income tax purposes. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits.
We believe it is more likely than not that our remaining deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets.
Income tax expense of $286 million for the nine-month period ended December 31, 2016 was primarily attributable to taxable temporary differences from the tax amortization of FCC licenses and tax expense on pre-tax gains from spectrum license exchanges during the period, partially offset by tax benefits from the reversal of certain state income tax valuation allowance on deferred tax assets. As a result of organizational restructuring, which drove a sustained increase in the profitability of specific legal entities, we revised our estimate regarding the realizability of the involved entities’ deferred state tax assets and recorded a state tax benefit of $42 million. Additionally, in conjunction with the Spectrum Financing and resulting change in state taxability footprint, we recognized tax expense of $46 million to increase the deferred tax liability for the temporary differences between the carrying amounts of our FCC licenses for financial statement purposes and their tax bases. Income tax expense of $126 million for the nine-month period ended December 31, 2015 was primarily attributable to taxable temporary differences from the tax amortization of FCC licenses, partially offset by tax benefits recorded from changes in state income tax laws enacted during the period. FCC licenses are amortized over 15 years for income tax purposes but, because these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. These temporary differences cannot be scheduled to reverse during the loss carryforward period against our deferred tax assets. As a result, a valuation allowance is recorded against our loss carryforward and other excess deferred tax assets resulting in a net deferred tax expense.
As of December 31, 2016 and March 31, 2016, we maintained unrecognized tax benefits of $176 million and $166 million, respectively. Cash paid for income taxes, net, was $34 million for each of the nine-month periods ended December 31, 2016 and 2015.

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In March 2016, the FASB issued authoritative guidance on Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting which, in part, eliminates the additional paid-in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The company has elected to early adopt this guidance effective April 1, 2016. The early adoption of this guidance did not have a material effect on our consolidated financial statements.

Note 11.
Commitments and Contingencies
Litigation, Claims and Assessments
In March 2009, a stockholder brought suit, Bennett v. Sprint Nextel Corp., in the U.S. District Court for the District of Kansas, alleging that Sprint Communications and three of its former officers violated Section 10(b) of the Exchange Act and Rule 10b-5 by failing adequately to disclose certain alleged operational difficulties subsequent to the Sprint-Nextel merger, and by purportedly issuing false and misleading statements regarding the write-down of goodwill. The district court granted final approval of a settlement in August 2015, which did not have a material impact to our financial statements. Five stockholder derivative suits related to this 2009 stockholder suit were filed against Sprint Communications and certain of its present and/or former officers and directors. The first, Murphy v. Forsee, was filed in state court in Kansas on April 8, 2009, was removed to federal court, and was stayed by the court pending resolution of the motion to dismiss the Bennett case; the second, Randolph v. Forsee, was filed on July 15, 2010 in state court in Kansas, was removed to federal court, and was remanded back to state court; the third, Ross-Williams v. Bennett, et al., was filed in state court in Kansas on February 1, 2011; the fourth, Price v. Forsee, et al., was filed in state court in Kansas on April 15, 2011; and the fifth, Hartleib v. Forsee, et al., was filed in federal court in Kansas on July 14, 2011. These cases were essentially stayed while the Bennett case was pending, and we have reached an agreement in principle to settle the matters, by agreeing to some governance provisions and by paying plaintiffs' attorneys fees in an immaterial amount. The court approved the settlement but reduced the plaintiff's attorneys fees; the attorneys fees issue is on appeal.
On April 19, 2012, the New York Attorney General filed a complaint alleging that Sprint Communications has fraudulently failed to collect and pay more than $100 million in New York sales taxes on receipts from its sale of wireless telephone services since July 2005. The complaint also seeks recovery of triple damages under the False Claims Act, as well as penalties and interest. Sprint Communications moved to dismiss the complaint on June 14, 2012. On July 1, 2013, the court entered an order denying the motion to dismiss in large part, although it did dismiss certain counts or parts of certain counts. Sprint Communications appealed that order and the intermediate appellate court affirmed the order of the trial court. On October 20, 2015, the Court of Appeals of New York affirmed the decision of the appellate court that the tax statute requires us to collect and remit the disputed taxes. Our petition for certiorari to the U.S. Supreme Court on grounds of federal preemption was denied. We accrued $180 million during the year ended March 31, 2016 associated with this matter. We will continue to defend this matter vigorously and we do not expect the resolution of this matter to have a material adverse effect on our financial position or results of operations.
Eight related stockholder derivative suits have been filed against Sprint Communications and certain of its current and former officers and directors. Each suit alleges generally that the individual defendants breached their fiduciary duties to Sprint Communications and its stockholders by allegedly permitting, and failing to disclose, the actions alleged in the suit filed by the New York Attorney General. One suit, filed by the Louisiana Municipal Police Employees Retirement System, was dismissed by a federal court. Two suits were filed in state court in Johnson County, Kansas and one of those suits was dismissed as premature; and five suits are pending in federal court in Kansas. The remaining Kansas suits have been stayed pending resolution of the Attorney General's suit. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
Sprint Communications, Inc. is also a defendant in a complaint filed by stockholders of Clearwire Corporation asserting claims for breach of fiduciary duty by Sprint Communications, and related claims and otherwise challenging the Clearwire Acquisition. ACP Master, LTD, et al. v. Sprint Nextel Corp., et al., was filed April 26, 2013, in Chancery Court in Delaware. Plaintiffs in the ACP Master, LTD suit have also filed suit requesting an appraisal of the fair value of their Clearwire stock. Trial of those cases took place in October and November, 2016, and the parties are in the process of submitting their post-trial briefings. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.

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Sprint is currently involved in numerous court actions alleging that Sprint is infringing various patents. Most of these cases effectively seek only monetary damages. A small number of these cases are brought by companies that sell products and seek injunctive relief as well. These cases have progressed to various degrees and a small number may go to trial if they are not otherwise resolved. Adverse resolution of these cases could require us to pay significant damages, cease certain activities, or cease selling the relevant products and services. In many circumstances, we would be indemnified for monetary losses that we incur with respect to the actions of our suppliers or service providers. We do not expect the resolution of these cases to have a material adverse effect on our financial position or results of operations.
In October 2013, the FCC Enforcement Bureau began to issue notices of apparent liability (NALs) to other Lifeline providers, imposing fines for intracarrier duplicate accounts identified by the government during its audit function. Those audits also identified a small percentage of potentially duplicative intracarrier accounts related to our Assurance Wireless business. No NAL has yet been issued with respect to Sprint and we do not know if one will be issued. Further, we are not able to reasonably estimate the amount of any claim for penalties that might be asserted. However, based on the information currently available, if a claim is asserted by the FCC, Sprint does not believe that any amount ultimately paid would be material to the Company’s results of operations or financial position. 
Various other suits, inquiries, proceedings and claims, either asserted or unasserted, including purported class actions typical for a large business enterprise and intellectual property matters, are possible or pending against us or our subsidiaries. During the nine-month period ended December 31, 2016, we recorded a $103 million charge associated with a state tax matter which is presented in our consolidated statements of comprehensive loss within "Other, net". If our interpretation of certain laws or regulations, including those related to various federal or state matters such as sales, use or property taxes, or other charges were found to be mistaken, it could result in payments by us. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations.
Spectrum Reconfiguration Obligations
In 2004, the FCC adopted a Report and Order that included new rules regarding interference in the 800 MHz band and a comprehensive plan to reconfigure the 800 MHz band. The Report and Order provides for the exchange of a portion of our 800 MHz FCC spectrum licenses, and requires us to fund the cost incurred by public safety systems and other incumbent licensees to reconfigure the 800 MHz spectrum band. Also, in exchange, we received licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band.
The minimum cash obligation is $2.8 billion under the Report and Order. We are, however, obligated to pay the full amount of the costs relating to the reconfiguration plan, even if those costs exceed $2.8 billion. As required under the terms of the Report and Order, a letter of credit has been secured to provide assurance that funds will be available to pay the relocation costs of the incumbent users of the 800 MHz spectrum. The letter of credit was initially $2.5 billion, but has been reduced during the course of the proceeding to $189 million as of December 31, 2016. Since the inception of the program, we have incurred payments of approximately $3.5 billion directly attributable to our performance under the Report and Order, including approximately $15 million and $43 million during the three and nine-month periods ended December 31, 2016, respectively. When incurred, substantially all costs are accounted for as additions to FCC licenses with the remainder as property, plant and equipment. Although costs incurred through December 31, 2016 have exceeded $2.8 billion, not all of those costs have been reviewed and accepted as eligible by the transition administrator.
Completion of the 800 MHz band reconfiguration was initially required by June 26, 2008 and public safety reconfiguration is nearly complete across the country with the exception of the States of Arizona, California, Texas and New Mexico. The FCC continues to grant the remaining 800 MHz public safety licensees additional time to complete their band reconfigurations which, in turn, delays our access to our 800 MHz replacement channels in these areas. In the areas where band reconfiguration is complete, Sprint has received its replacement spectrum in the 800 MHz band and Sprint is deploying 3G CDMA and 4G LTE on this spectrum in combination with its spectrum in the 1.9 GHz and 2.5 GHz bands.


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Note 12.
Per Share Data
Basic net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share adjusts basic net loss per common share, computed using the treasury stock method, for the effects of potentially dilutive common shares, if the effect is not antidilutive. Outstanding options and restricted stock units (exclusive of participating securities) that had no effect on our computation of dilutive weighted average number of shares outstanding as their effect would have been antidilutive were approximately 118 million shares and 83 million shares as of the periods ended December 31, 2016 and 2015, respectively, in addition to 62 million total shares issuable under warrants, of which 55 million relate to shares issuable under the warrant held by SoftBank. The warrant was issued to SoftBank at the close of the merger with SoftBank and is exercisable at $5.25 per share at the option of SoftBank, in whole or in part, at any time on or prior to July 10, 2018.


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Note 13.
Segments
Sprint operates two reportable segments: Wireless and Wireline.
•
Wireless primarily includes retail, wholesale, and affiliate revenue from a wide array of wireless voice and data transmission services and equipment revenue from the sale of wireless devices (handsets and tablets) and accessories in the U.S., Puerto Rico and the U.S. Virgin Islands.
•
Wireline primarily includes revenue from domestic and international wireline voice and data communication services provided to other communications companies and targeted business subscribers, in addition to our Wireless segment.
We define segment earnings as wireless or wireline operating (loss) income before other segment expenses such as depreciation, amortization, severance, exit costs, goodwill impairments, asset impairments, and other items, if any, solely and directly attributable to the segment representing items of a non-recurring or unusual nature. Expense and income items excluded from segment earnings are managed at the corporate level. Transactions between segments are generally accounted for based on market rates, which we believe approximate fair value. The Company generally re-establishes these rates at the beginning of each fiscal year. Over the past several years, there has been an industry-wide trend of lower rates due to increased competition from other wireline and wireless communications companies, as well as cable and Internet service providers.
Segment financial information is as follows:  
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Three Months Ended December 31, 2016
 
 
 
 
 
 
 
Net operating revenues
$
8,172

 
$
372

 
$
5

 
$
8,549

Inter-segment revenues(1)
—

 
125

 
(125
)
 
—

Total segment operating expenses
(5,775
)
 
(449
)
 
125

 
(6,099
)
Segment earnings
$
2,397

 
$
48

 
$
5

 
2,450

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(1,837
)
Amortization
 
 
 
 
 
 
(255
)
Other, net(2)
 
 
 
 
 
 
(47
)
Operating income
 
 
 
 
 
 
311

Interest expense
 
 
 
 
 
 
(619
)
Other expense, net
 
 
 
 
 
 
(60
)
Loss before income taxes
 
 
 
 
 
 
$
(368
)
 
 
 
 
 
 
 
 
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Three Months Ended December 31, 2015
 
 
 
 
 
 
 
Net operating revenues
$
7,670

 
$
434

 
$
3

 
$
8,107

Inter-segment revenues(1)
—

 
147

 
(147
)
 
—

Total segment operating expenses
(5,804
)
 
(548
)
 
143

 
(6,209
)
Segment earnings
$
1,866

 
$
33

 
$
(1
)
 
1,898

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(1,549
)
Amortization
 
 
 
 
 
 
(316
)
Other, net(2)
 
 
 
 
 
 
(230
)
Operating loss
 
 
 
 
 
 
(197
)
Interest expense
 
 
 
 
 
 
(546
)
Other income, net
 
 
 
 
 
 
4

Loss before income taxes
 
 
 
 
 
 
$
(739
)
 
 
 
 
 
 
 
 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Nine Months Ended December 31, 2016
 
 
 
 
 
 
 
Net operating revenues
$
23,620

 
$
1,177

 
$
11

 
$
24,808

Inter-segment revenues(1)
—

 
386

 
(386
)
 
—

Total segment operating expenses
(16,460
)
 
(1,473
)
 
379

 
(17,554
)
Segment earnings
$
7,160

 
$
90

 
$
4

 
7,254

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(5,227
)
Amortization
 
 
 
 
 
 
(813
)
Other, net(2)
 
 
 
 
 
 
80

Operating income
 
 
 
 
 
 
1,294

Interest expense
 
 
 
 
 
 
(1,864
)
Other expense, net
 
 
 
 
 
 
(67
)
Loss before income taxes
 
 
 
 
 
 
$
(637
)
 
 
 
 
 
 
 
 
Statement of Operations Information
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations
 
Consolidated
 
(in millions)
Nine Months Ended December 31, 2015
 
 
 
 
 
 
 
Net operating revenues
$
22,726

 
$
1,372

 
$
11

 
$
24,109

Inter-segment revenues(1)
—

 
448

 
(448
)
 
—

Total segment operating expenses
(16,807
)
 
(1,749
)
 
435

 
(18,121
)
Segment earnings
$
5,919

 
$
71

 
$
(2
)
 
5,988

Less:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
(4,202
)
Amortization
 
 
 
 
 
 
(994
)
Other, net(2)
 
 
 
 
 
 
(490
)
Operating income
 
 
 
 
 
 
302

Interest expense
 
 
 
 
 
 
(1,630
)
Other income, net
 
 
 
 
 
 
13

Loss before income taxes
 
 
 
 
 
 
$
(1,315
)
 
 
 
 
 
 
 
 
Other Information
Wireless
 
Wireline
 
Corporate and
Other
 
Consolidated
 
(in millions)
Capital expenditures for the nine months ended December 31, 2016
$
2,654

 
$
74

 
$
223

 
$
2,951

Capital expenditures for the nine months ended December 31, 2015
$
5,236

 
$
205

 
$
241

 
$
5,682

 _________________
(1)
Inter-segment revenues consist primarily of wireline services provided to the Wireless segment for resale to, or use by, wireless subscribers.
(2)
Other, net for the three and nine-month periods ended December 31, 2016 consists of $19 million and $30 million expense, respectively, of severance and exit costs as well as a $28 million loss on disposal of property, plant and equipment related to cell site construction costs that are no longer recoverable as a result of changes in our network plans recognized in the three-month period ended December 31, 2016. In addition, the nine-month period ended December 31, 2016 includes a $354 million non-cash gain related to spectrum license exchanges with other carriers, a $103 million charge related to a state tax matter, and $113 million of contract termination costs primarily related to the termination of our pre-existing wholesale arrangement with nTelos as a result of the Shentel transaction. Losses totaling $109 million and $340 million relating to the write-off of leased devices associated with lease cancellations were excluded from Other, net and included within Wireless segment earnings for the three and nine-month periods ended December 31, 2016, respectively. Other, net for the three and nine-month periods ended December 31, 2015 consists of $209 million and $247 million, respectively, of severance and exit costs and $21 million and $178 million, respectively, of accruals for legal reserves related to various pending legal suits and proceedings. In addition, the nine-month period ended December 31, 2015 includes an $85 million loss on disposal of property, plant and equipment related to cell site construction costs that are no longer recoverable as a result of changes in our network plans and $20 million of income resulting from a revision to our estimate of a previously recorded reserve. Losses totaling approximately $143 million relating to the write-off of leased devices associated with lease cancellations of $78 million and the loss on sale of devices to MLS under the Handset Sale-Leaseback Tranche 1 transaction for $65 million were excluded from Other, net and included within Wireless segment earnings for the three and nine-month periods ended December 31, 2015.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Operating Revenues by Service and Products
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Three Months Ended December 31, 2016
 
 
 
 
 
 
 
Wireless services
$
5,763

 
$
—

 
$
—

 
$
5,763

Wireless equipment
2,226

 
—

 
—

 
2,226

Voice
—

 
153

 
(61
)
 
92

Data
—

 
41

 
(23
)
 
18

Internet
—

 
281

 
(38
)
 
243

Other
183

 
22

 
2

 
207

Total net operating revenues
$
8,172

 
$
497

 
$
(120
)
 
$
8,549

 
 
 
 
 
 
 
 
Operating Revenues by Service and Products
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Three Months Ended December 31, 2015
 
 
 
 
 
 
 
Wireless services
$
6,058

 
$
—

 
$
—

 
$
6,058

Wireless equipment
1,424

 
—

 
—

 
1,424

Voice
—

 
201

 
(82
)
 
119

Data
—

 
42

 
(17
)
 
25

Internet
—

 
317

 
(48
)
 
269

Other
188

 
21

 
3

 
212

Total net operating revenues
$
7,670

 
$
581

 
$
(144
)
 
$
8,107

 
 
 
 
 
 
 
 
Operating Revenues by Service and Products
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Nine Months Ended December 31, 2016
 
 
 
 
 
 
 
Wireless services
$
17,555

 
$
—

 
$
—

 
$
17,555

Wireless equipment
5,556

 
—

 
—

 
5,556

Voice
—

 
506

 
(196
)
 
310

Data
—

 
127

 
(67
)
 
60

Internet
—

 
871

 
(119
)
 
752

Other
509

 
59

 
7

 
575

Total net operating revenues
$
23,620

 
$
1,563

 
$
(375
)
 
$
24,808

 
 
 
 
 
 
 
 
Operating Revenues by Service and Products
Wireless
 
Wireline
 
Corporate,
Other and
Eliminations(1)
 
Consolidated
 
(in millions)
Nine Months Ended December 31, 2015
 
 
 
 
 
 
 
Wireless services
$
18,631

 
$
—

 
$
—

 
$
18,631

Wireless equipment
3,509

 
—

 
—

 
3,509

Voice
—

 
646

 
(249
)
 
397

Data
—

 
134

 
(55
)
 
79

Internet
—

 
968

 
(140
)
 
828

Other
586

 
72

 
7

 
665

Total net operating revenues
$
22,726

 
$
1,820

 
$
(437
)
 
$
24,109

 
 
 
 
 
 
 
 
_______________
(1)
Revenues eliminated in consolidation consist primarily of wireline services provided to the Wireless segment for resale to or use by wireless subscribers.


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 14.
Related-Party Transactions
Sprint has entered into various arrangements with SoftBank or its controlled affiliates (SoftBank Parties) or with third parties to which SoftBank Parties are also parties, including for international wireless roaming, wireless and wireline call termination, real estate, logistical management, and other services.
Brightstar
We have arrangements with Brightstar US, Inc. (Brightstar), whereby Brightstar provides supply chain and inventory management services to us in our indirect channels and whereby Sprint may sell new and used devices and new accessories to Brightstar for its own purposes. We have provided a $1.0 billion credit line to Brightstar to facilitate certain of these arrangements. As a result, we shifted our concentration of credit risk away from our indirect channel partners to Brightstar. As Brightstar is a subsidiary of SoftBank, we expect SoftBank will provide the necessary support to ensure that Brightstar will fulfill its obligations to us under these agreements. However, we have no assurance that SoftBank will provide such support.
The supply chain and inventory management arrangement provides, among other things, that Brightstar may purchase inventory from the OEMs or Sprint to sell directly to our indirect dealers. As compensation for these services, we remit per unit fees to Brightstar for each device sold to dealers or retailers in our indirect channels. During the three and nine-month periods ended December 31, 2016 and 2015, we incurred fees under these arrangements totaling $15 million and $43 million, and $29 million and $82 million, respectively. We may also purchase new and used devices and accessories from Brightstar to be sold in our direct channels or to be used to fulfill service and repair needs.
Amounts included in our consolidated financial statements associated with these arrangements with Brightstar were as follows:
Consolidated balance sheets:
December 31,
2016
 
March 31,
2016
 
(in millions)
Accounts receivable
$
219

 
$
197

Accounts payable
$
126

 
$
96

Consolidated statements of comprehensive loss:
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Equipment revenues
$
480

 
$
598

 
$
1,107

 
$
1,375

Cost of products
$
403

 
$
601

 
$
1,021

 
$
1,362

SoftBank
In November 2015 and April 2016, Sprint entered into Handset Sale-Leaseback transactions with MLS, a company formed by a group of equity investors, including SoftBank, to sell and leaseback certain devices, which are currently being leased by our customers, for total cash proceeds of approximately $2.2 billion. SoftBank's equity investment in MLS totaled $79 million. Brightstar provides reverse logistics and remarketing services to MLS with respect to the devices.
In December 2016, Handset Sale-Leaseback Tranche 1 was terminated and the associated devices were repurchased by Sprint from MLS. With the cash proceeds, MLS repurchased the equity units from its investors including SoftBank. As a result, SoftBank's remaining equity investment in MLS totaled $39 million.
In April 2016, Sprint sold and leased back certain network equipment to Network LeaseCo. The network equipment acquired by Network LeaseCo, which is consolidated by us, was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including $250 million from SoftBank. Principal and interest payments on the borrowings from the external investors will be repaid in staggered, unequal payments through January 2018 (See Note 3. Funding Sources) with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017.
All other transactions under agreements with SoftBank Parties, in the aggregate, were immaterial through the period ended December 31, 2016.

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 15.
Guarantor Financial Information
On September 11, 2013, Sprint Corporation issued $2.25 billion aggregate principal amount of 7.250% notes due 2021 and $4.25 billion aggregate principal amount of 7.875% notes due 2023 in a private placement transaction with registration rights. On December 12, 2013, Sprint Corporation issued $2.5 billion aggregate principal amount of 7.125% notes due 2024 in a private placement transaction with registration rights. Each of these issuances is fully and unconditionally guaranteed by Sprint Communications, Inc. (Subsidiary Guarantor), which is a 100% owned subsidiary of Sprint Corporation (Parent/Issuer). In connection with the foregoing, the registration rights agreements with respect to the notes required the Company and Sprint Communications, Inc. to use their reasonable best efforts to cause an offer to exchange the notes for a new issue of substantially identical exchange notes registered under the Securities Act of 1933. Accordingly, in November 2014, we completed an exchange offer for these notes in compliance with our registration obligations. We did not receive any proceeds from this exchange offer. In addition, on February 24, 2015, Sprint Corporation issued $1.5 billion aggregate principal amount of 7.625% notes due 2025, which are fully and unconditionally guaranteed by Sprint Communications, Inc.
During the nine-month period ended December 31, 2016, there was a non-cash equity contribution from the Subsidiary Guarantor to the non-guarantor subsidiaries primarily as a result of organizational restructuring for tax purposes of approximately $600 million.
Under the Subsidiary Guarantor's revolving bank credit facility and certain other finance agreements, the Subsidiary Guarantor is currently restricted from paying cash dividends to the Parent/Issuer because the ratio of total indebtedness to adjusted EBITDA (each as defined in the applicable agreement) exceeds 2.5 to 1.0.
Sprint has a Receivables Facility providing for the sale of eligible wireless service, installment and certain future lease receivables. In November 2015, Sprint entered into the Tranche 1 transaction to sell and leaseback certain leased devices, which was subsequently terminated in December 2016. In April 2016, Sprint entered into the Tranche 2 transaction to sell and leaseback certain leased devices and a Network Equipment Sale-Leaseback to sell and leaseback certain network equipment. In connection with the Receivables Facility, Tranches 1 and 2 and the Network Equipment Sale-Leaseback, Sprint formed certain wholly-owned consolidated bankruptcy-remote SPEs and SPE Lessees that are included in the non-guarantor subsidiaries condensed consolidated financial information. Each SPE and SPE Lessee is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE or SPE Lessee, to be satisfied out of the SPE or SPE Lessee’s assets prior to any assets in the SPE and SPE Lessee becoming available to Sprint (see Note 3. Funding Sources).
We have accounted for investments in subsidiaries using the equity method. Presented below is the condensed consolidating financial information.


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET
 
As of December 31, 2016
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
3,117

 
$
590

 
$
—

 
$
3,707

Short-term investments
—

 
2,329

 
20

 
—

 
2,349

Accounts and notes receivable, net
195

 
1

 
1,235

 
(195
)
 
1,236

Device and accessory inventory
—

 
—

 
1,296

 
—

 
1,296

Prepaid expenses and other current assets
—

 
15

 
1,969

 
—

 
1,984

Total current assets
195

 
5,462

 
5,110

 
(195
)
 
10,572

Investments in subsidiaries
18,988

 
23,932

 
—

 
(42,920
)
 
—

Property, plant and equipment, net
—

 
—

 
19,333

 
—

 
19,333

Due from consolidated affiliate
25

 
13,125

 
—

 
(13,150
)
 
—

Note receivable from consolidated affiliate
10,390

 
575

 
—

 
(10,965
)
 
—

Intangible assets
 
 
 
 
 
 
 
 
 
Goodwill
—

 
—

 
6,579

 
—

 
6,579

FCC licenses and other
—

 
—

 
40,556

 
—

 
40,556

Definite-lived intangible assets, net
—

 
—

 
3,582

 
—

 
3,582

Other assets
—

 
103

 
570

 
—

 
673

Total assets
$
29,598

 
$
43,197

 
$
75,730

 
$
(67,230
)
 
$
81,295

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
—

 
$
2,894

 
$
—

 
$
2,894

Accrued expenses and other current liabilities
212

 
560

 
3,612

 
(195
)
 
4,189

Current portion of long-term debt, financing and capital lease obligations
—

 
2,583

 
3,971

 
—

 
6,554

Total current liabilities
212

 
3,143

 
10,477

 
(195
)
 
13,637

Long-term debt, financing and capital lease obligations
10,390

 
9,773

 
10,596

 
—

 
30,759

Deferred tax liabilities
—

 
—

 
14,238

 
—

 
14,238

Note payable due to consolidated affiliate
—

 
10,390

 
575

 
(10,965
)
 
—

Other liabilities
—

 
903

 
2,762

 
—

 
3,665

Due to consolidated affiliate
—

 
—

 
13,150

 
(13,150
)
 
—

Total liabilities
10,602

 
24,209

 
51,798

 
(24,310
)
 
62,299

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Total stockholders' equity
18,996

 
18,988

 
23,932

 
(42,920
)
 
18,996

Total liabilities and stockholders' equity
$
29,598

 
$
43,197

 
$
75,730

 
$
(67,230
)
 
$
81,295



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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED CONSOLIDATING BALANCE SHEET
 
As of March 31, 2016
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
2,154

 
$
487

 
$
—

 
$
2,641

Accounts and notes receivable, net
87

 
27

 
1,099

 
(114
)
 
1,099

Device and accessory inventory
—

 
—

 
1,173

 
—

 
1,173

Prepaid expenses and other current assets
—

 
12

 
1,908

 
—

 
1,920

Total current assets
87

 
2,193

 
4,667

 
(114
)
 
6,833

Investments in subsidiaries
19,783

 
23,129

 
—

 
(42,912
)
 
—

Property, plant and equipment, net
—

 
—

 
20,297

 
—

 
20,297

Due from consolidated affiliate
50

 
19,518

 
—

 
(19,568
)
 
—

Note receivable from consolidated affiliate
10,377

 
245

 
—

 
(10,622
)
 
—

Intangible assets
 
 
 
 
 
 
 
 
 
Goodwill
—

 
—

 
6,575

 
—

 
6,575

FCC licenses and other
—

 
—

 
40,073

 
—

 
40,073

Definite-lived intangible assets, net
—

 
—

 
4,469

 
—

 
4,469

Other assets
—

 
1,127

 
620

 
(1,019
)
 
728

Total assets
$
30,297

 
$
46,212

 
$
76,701

 
$
(74,235
)
 
$
78,975

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
—

 
$
2,899

 
$
—

 
$
2,899

Accrued expenses and other current liabilities
137

 
531

 
3,820

 
(114
)
 
4,374

Current portion of long-term debt, financing and capital lease obligations
—

 
3,065

 
1,625

 
—

 
4,690

Total current liabilities
137

 
3,596

 
8,344

 
(114
)
 
11,963

Long-term debt, financing and capital lease obligations
10,377

 
11,495

 
8,415

 
(1,019
)
 
29,268

Deferred tax liabilities
—

 
—

 
13,959

 
—

 
13,959

Note payable due to consolidated affiliate
—

 
10,377

 
245

 
(10,622
)
 
—

Other liabilities
—

 
961

 
3,041

 
—

 
4,002

Due to consolidated affiliate
—

 
—

 
19,568

 
(19,568
)
 
—

Total liabilities
10,514

 
26,429

 
53,572

 
(31,323
)
 
59,192

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Total stockholders' equity
19,783

 
19,783

 
23,129

 
(42,912
)
 
19,783

Total liabilities and stockholders' equity
$
30,297

 
$
46,212

 
$
76,701

 
$
(74,235
)
 
$
78,975


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
 
For the Three Months Ended December 31, 2016
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
Net operating revenues
$
—

 
$
—

 
$
8,549

 
$
—

 
$
8,549

Net operating expenses:
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization included below)
—

 
—

 
1,925

 
—

 
1,925

Cost of products (exclusive of depreciation and amortization included below)
—

 
—

 
1,985

 
—

 
1,985

Selling, general and administrative
—

 
—

 
2,080

 
—

 
2,080

Severance and exit costs
—

 
—

 
19

 
—

 
19

Depreciation
—

 
—

 
1,837

 
—

 
1,837

Amortization
—

 
—

 
255

 
—

 
255

Other, net
—

 
—

 
137

 
—

 
137

 
—

 
—

 
8,238

 
—

 
8,238

Operating income
—

 
—

 
311

 
—

 
311

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income
198

 
43

 
4

 
(233
)
 
12

Interest expense
(198
)
 
(409
)
 
(245
)
 
233

 
(619
)
(Losses) earnings of subsidiaries
(479
)
 
(38
)
 
—

 
517

 
—

Other (expense) income, net
—

 
(75
)
 
3

 
—

 
(72
)
 
(479
)
 
(479
)
 
(238
)
 
517

 
(679
)
(Loss) income before income taxes
(479
)
 
(479
)
 
73

 
517

 
(368
)
Income tax expense
—

 
—

 
(111
)
 
—

 
(111
)
Net (loss) income
(479
)
 
(479
)
 
(38
)
 
517

 
(479
)
Other comprehensive (loss) income
(5
)
 
(5
)
 
(4
)
 
9

 
(5
)
Comprehensive (loss) income
$
(484
)
 
$
(484
)
 
$
(42
)
 
$
526

 
$
(484
)

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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
 
For the Three Months Ended December 31, 2015
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
Net operating revenues
$
—

 
$
—

 
$
8,107

 
$
—

 
$
8,107

Net operating expenses:
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization included below)
—

 
—

 
2,348

 
—

 
2,348

Cost of products (exclusive of depreciation and amortization included below)
—

 
—

 
1,589

 
—

 
1,589

Selling, general and administrative
—

 
—

 
2,129

 
—

 
2,129

Severance and exit costs
—

 
—

 
209

 
—

 
209

Depreciation
—

 
—

 
1,549

 
—

 
1,549

Amortization
—

 
—

 
316

 
—

 
316

Other, net
—

 
—

 
164

 
—

 
164

 
—

 
—

 
8,304

 
—

 
8,304

Operating loss
—

 
—

 
(197
)
 
—

 
(197
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income
198

 
39

 
2

 
(236
)
 
3

Interest expense
(198
)
 
(406
)
 
(178
)
 
236

 
(546
)
(Losses) earnings of subsidiaries
(838
)
 
(471
)
 
—

 
1,309

 
—

Other income, net
—

 
—

 
1

 
—

 
1

 
(838
)
 
(838
)
 
(175
)
 
1,309

 
(542
)
(Loss) income before income taxes
(838
)
 
(838
)
 
(372
)
 
1,309

 
(739
)
Income tax benefit (expense)
2

 
—

 
(99
)
 
—

 
(97
)
Net (loss) income
(836
)
 
(838
)
 
(471
)
 
1,309

 
(836
)
Other comprehensive (loss) income
(7
)
 
(7
)
 
(4
)
 
11

 
(7
)
Comprehensive (loss) income
$
(843
)
 
$
(845
)
 
$
(475
)
 
$
1,320

 
$
(843
)


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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
 
For the Nine Months Ended December 31, 2016
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
Net operating revenues
$
—

 
$
—

 
$
24,808

 
$
—

 
$
24,808

Net operating expenses:
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization included below)
—

 
—

 
6,125

 
—

 
6,125

Cost of products (exclusive of depreciation and amortization included below)
—

 
—

 
5,097

 
—

 
5,097

Selling, general and administrative
—

 
—

 
5,992

 
—

 
5,992

Severance and exit costs
—

 
—

 
30

 
—

 
30

Depreciation
—

 
—

 
5,227

 
—

 
5,227

Amortization
—

 
—

 
813

 
—

 
813

Other, net
—

 
—

 
230

 
—

 
230

 
—

 
—

 
23,514

 
—

 
23,514

Operating income
—

 
—

 
1,294

 
—

 
1,294

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income
593

 
105

 
13

 
(674
)
 
37

Interest expense
(593
)
 
(1,271
)
 
(674
)
 
674

 
(1,864
)
(Losses) earnings of subsidiaries
(923
)
 
320

 
—

 
603

 
—

Other expense, net
—

 
(77
)
 
(27
)
 
—

 
(104
)
 
(923
)
 
(923
)
 
(688
)
 
603

 
(1,931
)
(Loss) income before income taxes
(923
)
 
(923
)
 
606

 
603

 
(637
)
Income tax expense
—

 
—

 
(286
)
 
—

 
(286
)
Net (loss) income
(923
)
 
(923
)
 
320

 
603

 
(923
)
Other comprehensive income (loss)
2

 
2

 
3

 
(5
)
 
2

Comprehensive (loss) income
$
(921
)
 
$
(921
)
 
$
323

 
$
598

 
$
(921
)



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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
 
For the Nine Months Ended December 31, 2015
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
Net operating revenues
$
—

 
$
—

 
$
24,109

 
$
—

 
$
24,109

Net operating expenses:
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization included below)
—

 
—

 
7,194

 
—

 
7,194

Cost of products (exclusive of depreciation and amortization included below)
—

 
—

 
4,244

 
—

 
4,244

Selling, general and administrative
—

 
—

 
6,540

 
—

 
6,540

Severance and exit costs
—

 
—

 
247

 
—

 
247

Depreciation
—

 
—

 
4,202

 
—

 
4,202

Amortization
—

 
—

 
994

 
—

 
994

Other, net
—

 
—

 
386

 
—

 
386

 
—

 
—

 
23,807

 
—

 
23,807

Operating income
—

 
—

 
302

 
—

 
302

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income
593

 
118

 
3

 
(707
)
 
7

Interest expense
(593
)
 
(1,220
)
 
(524
)
 
707

 
(1,630
)
(Losses) earnings of subsidiaries
(1,443
)
 
(341
)
 
—

 
1,784

 
—

Other income, net
—

 
—

 
6

 
—

 
6

 
(1,443
)
 
(1,443
)
 
(515
)
 
1,784

 
(1,617
)
(Loss) income before income taxes
(1,443
)
 
(1,443
)
 
(213
)
 
1,784

 
(1,315
)
Income tax benefit (expense)
2

 
—

 
(128
)
 
—

 
(126
)
Net (loss) income
(1,441
)
 
(1,443
)
 
(341
)
 
1,784

 
(1,441
)
Other comprehensive (loss) income
(11
)
 
(11
)
 
(6
)
 
17

 
(11
)
Comprehensive (loss) income
$
(1,452
)
 
$
(1,454
)
 
$
(347
)
 
$
1,801

 
$
(1,452
)




34
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 
For the Nine Months Ended December 31, 2016
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
—

 
$
(1,168
)
 
$
4,186

 
$
(118
)
 
$
2,900

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures - network and other
—

 
—

 
(1,421
)
 
—

 
(1,421
)
Capital expenditures - leased devices
—

 
—

 
(1,530
)
 
—

 
(1,530
)
Expenditures relating to FCC licenses
—

 
—

 
(46
)
 
—

 
(46
)
Proceeds from sales and maturities of short-term investments
—

 
2,614

 
35

 
—

 
2,649

Purchases of short-term investments
—

 
(4,943
)
 
(55
)
 
—

 
(4,998
)
Change in amounts due from/due to consolidated affiliates
—

 
6,865

 
—

 
(6,865
)
 
—

Proceeds from sales of assets and FCC licenses
—

 
—

 
126

 
—

 
126

Intercompany note advance to consolidated affiliate
—

 
(392
)
 
—

 
392

 
—

Proceeds from intercompany note advance to consolidated affiliate
—

 
62

 
—

 
(62
)
 
—

Other, net
—

 
—

 
26

 
—

 
26

Net cash provided by (used in) investing activities
—

 
4,206

 
(2,865
)
 
(6,535
)
 
(5,194
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from debt and financings
—

 
—

 
6,830

 
—

 
6,830

Repayments of debt, financing and capital lease obligations
—

 
(2,000
)
 
(1,266
)
 
—

 
(3,266
)
Debt financing costs
—

 
(110
)
 
(162
)
 
—

 
(272
)
Intercompany dividends paid to parent
—

 
—

 
(118
)
 
118

 
—

Change in amounts due from/due to consolidated affiliates
—

 
—

 
(6,865
)
 
6,865

 
—

Intercompany note advance from parent
—

 
—

 
392

 
(392
)
 
—

Repayments of intercompany note advance from parent
—

 
—

 
(62
)
 
62

 
—

Other, net
—

 
35

 
33

 
—

 
68

Net cash (used in) provided by financing activities
—

 
(2,075
)
 
(1,218
)
 
6,653

 
3,360

Net increase in cash and cash equivalents
—

 
963

 
103

 
—

 
1,066

Cash and cash equivalents, beginning of period
—

 
2,154

 
487

 
—

 
2,641

Cash and cash equivalents, end of period
$
—

 
$
3,117

 
$
590

 
$
—

 
$
3,707


35
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 
For the Nine Months Ended December 31, 2015
 
Parent/Issuer
 
Subsidiary Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in millions)
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
—

 
$
(1,029
)
 
$
3,800

 
$
(168
)
 
$
2,603

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures - network and other
—

 
—

 
(3,958
)
 
—

 
(3,958
)
Capital expenditures - leased devices
—

 
—

 
(1,724
)
 
—

 
(1,724
)
Expenditures relating to FCC licenses
—

 
—

 
(75
)
 
—

 
(75
)
Proceeds from sales and maturities of short-term investments
—

 
317

 
60

 
—

 
377

Purchases of short-term investments
—

 
(197
)
 
(55
)
 
—

 
(252
)
Change in amounts due from/due to consolidated affiliates
1

 
(568
)
 
—

 
567

 
—

Proceeds from sales of assets and FCC licenses
—

 
—

 
36

 
—

 
36

Proceeds from sale-leaseback transaction
—

 
—

 
1,136

 
—

 
1,136

Intercompany note advance to consolidated affiliate
—

 
(159
)
 
—

 
159

 
—

Proceeds from intercompany note advance to consolidated affiliate
—

 
54

 
—

 
(54
)
 
—

Other, net
—

 
—

 
(25
)
 
—

 
(25
)
Net cash provided by (used in) investing activities
1

 
(553
)
 
(4,605
)
 
672

 
(4,485
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from debt and financings
—

 
250

 
505

 
—

 
755

Repayments of debt, financing and capital lease obligations
—

 
(500
)
 
(227
)
 
—

 
(727
)
Debt financing costs
(1
)
 
—

 
—

 
—

 
(1
)
Intercompany dividends paid to parent
—

 
—

 
(168
)
 
168

 
—

Change in amounts due from/due to consolidated affiliates
—

 
—

 
567

 
(567
)
 
—

Intercompany note advance from parent
—

 
—

 
159

 
(159
)
 
—

Repayments of intercompany not advance from parent
—

 
—

 
(54
)
 
54

 
—

Other, net
—

 
10

 
10

 
—

 
20

Net cash (used in) provided by financing activities
(1
)
 
(240
)
 
792

 
(504
)
 
47

Net decrease in cash and cash equivalents
—

 
(1,822
)
 
(13
)
 
—

 
(1,835
)
Cash and cash equivalents, beginning of period
—

 
3,492

 
518

 
—

 
4,010

Cash and cash equivalents, end of period
$
—

 
$
1,670

 
$
505

 
$
—

 
$
2,175



36
Table of Contents

Index for Notes to the Consolidated Financial Statements


SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 16.
Subsequent Events
New Secured Term Loan and Revolving Credit Facility
On February 3, 2017, we entered into a new credit agreement for $6.0 billion, consisting of a $4.0 billion, seven-year secured term loan that matures in February 2024 and a $2.0 billion secured revolving bank credit facility that expires in February 2021. The term loan has an interest rate equal to LIBOR plus 250 basis points and the bank facility has an interest rate equal to LIBOR plus a spread that varies depending on the Company's leverage ratio. The new credit facility replaced the $3.3 billion unsecured revolving bank credit facility that was due to expire in February 2018.
Insurance Program Master Services Agreement
Effective January 1, 2017, we entered into a new Master Services Agreement with a vendor to provide post-sale device support services (including device insurance) to subscribers. Under the new agreement, the vendor will be the primary obligor and bear the risk of loss with regards to claims and related costs. As a result, revenue will be accounted for and presented on a net basis, whereas historically the amounts were presented on a gross basis. Sprint will remit premiums to the vendor who will pay Sprint a monthly recurring commission per subscriber for the duration of the agreement.
Accounts Receivable Facility
On February 3, 2017, the Company executed certain amendments to the Receivables Facility. The maturity date was extended to November 2018 and Sprint obtained the right to repurchase, under certain conditions, the financial assets transferred to the conduits. As a result of adding the repurchase feature, Sprint gained effective control over the financial assets. Accordingly, all sales of wireless service and installment receivables to the conduits will be reflected as financings. All cash inflows and outflows under the Receivables Facility will be reported as financing activities in the consolidated statements of cash flows prospectively.
     




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Table of Contents

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW
Sprint Corporation, including its consolidated subsidiaries, is a communications company offering a comprehensive range of wireless and wireline communications products and services that are designed to meet the needs of individual consumers, businesses, government subscribers, and resellers. Unless the context otherwise requires, references to "Sprint," "we," "us," "our" and the "Company" mean Sprint Corporation and its consolidated subsidiaries for all periods presented, and references to "Sprint Communications" are to Sprint Communications, Inc. and its consolidated subsidiaries. 
Description of the Company
We are one of the largest wireless communications companies in the U.S., as well as a provider of wireline services. Our services are provided through our ownership of extensive wireless networks, an all-digital global wireline network and a Tier 1 Internet backbone.
We offer wireless and wireline services to subscribers in all 50 states, Puerto Rico, and the U.S. Virgin Islands under the Sprint corporate brand, which includes our retail brands of Sprint®, Boost Mobile®, Virgin Mobile®, and Assurance Wireless® on our wireless networks utilizing various technologies including third generation (3G) code division multiple access (CDMA) and fourth generation (4G) services utilizing Long Term Evolution (LTE). We utilize these networks to offer our wireless and wireline subscribers differentiated products and services whether through the use of a single network or a combination of these networks.
Wireless
We offer wireless services on a postpaid and prepaid payment basis to retail subscribers and also on a wholesale basis, which includes the sale of wireless services that utilize the Sprint network but are sold under the wholesaler's brand.
Postpaid
In our postpaid portfolio, we offer several price plans for both consumer and business subscribers. Many of our price plans include unlimited talk, text and data or allow subscribers to purchase monthly data allowances. We also offer family plans that include multiple lines of service under one account. We offer these plans with subsidy, installment billing or leasing programs. The subsidy program requires a service contract and allows for a subscriber to purchase a handset at a discount for a new line of service. Our installment billing program does not require a service contract and offers service plans at lower monthly rates compared to subsidy plans, but requires the subscriber to pay full or near full price for the handset over monthly installments. Our leasing program also does not require a service contract, provides for service plans at lower monthly rates compared to subsidy plans and allows qualified subscribers to lease a device and make payments for use of the device over the term of the lease. At the end of the lease term, the subscriber can either turn in the device, continue leasing the device or purchase the device.
Prepaid
Our prepaid portfolio currently includes multiple brands, each designed to appeal to specific subscriber uses and demographics. Sprint Prepaid primarily serves as a complementary offer to our Sprint Postpaid offer for those subscribers who want plans that are affordable, simple and flexible without a long-term commitment. Boost Mobile primarily serves subscribers that are looking for value without data limits. Virgin Mobile primarily serves subscribers that are looking to optimize spend but need solutions that offer control, flexibility and connectivity through various plans with high speed data options. Virgin Mobile is also designated as a Lifeline-only Eligible Telecommunications Carrier in certain states and provides service for the Lifeline program under our Assurance Wireless brand. Assurance Wireless provides eligible subscribers who meet income requirements or are receiving government assistance, with a free wireless phone, 350 free local and long distance voice minutes each month and unlimited free texts under the Lifeline program. The Lifeline program requires applicants to meet certain eligibility requirements and existing subscribers must recertify as to those requirements annually.
Wholesale
We have focused our wholesale business on enabling our diverse network of customers to successfully grow their business by providing them with an array of network, product, and device solutions. This allows our customers to customize this full suite of value-added solutions to meet the growing demands of their businesses. As part of these growing demands, some of our wholesale mobile virtual network operators (MVNO) are also selling prepaid services under the Lifeline program.

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We continue to support the open development of applications, content, and devices on the Sprint platform. In addition, we enable a variety of business and consumer third-party relationships through our portfolio of machine-to-machine solutions, which we offer on a retail postpaid and wholesale basis. Our machine-to-machine solutions portfolio provides a secure, real-time and reliable wireless two-way data connection across a broad range of connected devices.
Wireline
We provide a broad suite of wireline voice and data communication services to other communications companies and targeted business subscribers. In addition, our Wireline segment provides voice, data and IP communication services to our Wireless segment. We provide long distance services and operate all-digital global long distance and Tier 1 IP networks.
Business Strategies and Key Priorities
Our business strategy is to be responsive to changing customer mobility demands of existing and potential customers, and to expand our business into new areas of customer value and economic opportunity through innovation and differentiation. To help lay the foundation for these future growth opportunities, our strategy revolves around targeted investment, in the following key priority areas:
•
Provide a network that delivers the consistent reliability, capacity and speed that customers demand;
•
Achieve a more competitive cost position in the industry through simplification;
•
Increase subscriber acquisition and retention and reduce churn;
•
Create an alternative financial structure to fuel growth and maximize shareholder value;
•
Attract and retain the best talent in the industry; and
•
Deliver a simplified and improved customer experience.    
To provide a network that delivers the consistent reliability, capacity and speed that customers demand, we expect to continue to optimize our 3G data network and invest in LTE deployment across all of our spectrum bands. We also expect to deploy new technologies that will help strengthen our competitive position, including the expected use of Voice over LTE, more extensive use of Wi-Fi and the use of small cells to further densify our network.
To achieve a more competitive cost position, we have established an Office of Cost Management with responsibility for identifying, operationalizing, and monitoring sustained improvements in operating costs and efficiencies. Also, we have deployed new cost management and planning tools across the entire organization to more effectively monitor expenditures.
We are focused on attracting and retaining subscribers by improving our sales and marketing initiatives. We have expanded our direct retail store presence through our relationship with RadioShack, as well as our Direct to You service that brings the Sprint store experience to our customers. We have demonstrated our value proposition through our new price plans, promotions, and payment programs and have deployed new local marketing and civic engagement initiatives in key markets.
Our current strategy also includes transactions that continue to leverage our assets such as the Accounts Receivable Facility, the Handset Sale-Leaseback transactions, as well as the Network Equipment Sale-Leaseback. In October 2016, we also entered into a Spectrum Financing transaction involving a portion of our spectrum holdings. Each of these transactions are described in more detail in "Liquidity and Capital Resources." Additionally, cost reduction initiatives are underway to reduce operating expenses and improve our operating cash flows.
We have built a stronger management team by attracting outside talent with world class experience and credentials while retaining selected members of the incumbent management team. To deliver a simplified and improved customer experience, we are focusing on key subscriber touch points, pursuing process improvements and deploying platforms to simplify and enhance the interactions between us and our customers. In addition, we have established a customer experience team to support our focus on net promoter score as an important key measure of customer satisfaction.
Network
We continue to increase coverage and capacity by densifying and optimizing our existing network. Densification, which includes increasing the number of small cells and antennas, is intended to enhance coverage and capacity across the network. We expect the densification efforts to cost significantly less than our historical macro cell site builds (i.e. adding traditional cell towers). We are also deploying new technologies, such as carrier aggregation, which allows us to move more data at faster speeds over the same spectrum. Additionally, our introduction of tri-band devices, which support each of our spectrum bands, allows us to manage and operate our network more efficiently and at a lower cost. We have continued to see positive results from these infrastructure upgrades in key U.S. markets.

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Table of Contents

Today, the 2.5 GHz spectrum band carries the highest percentage of Sprint's LTE data traffic. We have significant additional capacity to grow the use of our 2.5 GHz spectrum holdings into the future. Sprint believes it is well-positioned with spectrum holdings of more than 160 MHz of 2.5 GHz spectrum in the top 100 markets in the U.S.
Overall, our densification and optimization efforts are expected to continue to enhance the customer experience by adding data capacity, increasing the wireless data speeds available to our customers, and improving network coverage for both voice and data services. While circumstances may change in the future, we believe that our substantial spectrum holdings are sufficient to allow us to continue to provide consistent network reliability, capacity, and speed, as well as to provide current and future customers a highly competitive wireless experience. As we continue to refine our network strategy and evaluate other potential network initiatives, we may incur future material charges associated with lease and access exit costs, loss from asset dispositions or accelerated depreciation, among others.
Shentel Transaction
On August 10, 2015, Shenandoah Telecommunications Company (Shentel) entered into a definitive agreement to acquire one of our wholesale partners, NTELOS Holdings Corp (nTelos). In connection with this definitive agreement, we entered into a series of agreements with Shentel to, among other things, acquire certain assets such as spectrum, terminate our existing wholesale arrangement with nTelos, and amend our existing affiliate agreement with Shentel to primarily include the subscribers formerly under the wholesale arrangement with nTelos. The agreements also expanded the area in which Shentel provides wireless service to Sprint customers and provided for more favorable economic terms. In April 2016, we received regulatory approval, and the transaction closed in May 2016. The total consideration for this transaction included $181 million, on a net present value basis, of notes payable to Shentel. Sprint will satisfy its obligations under the notes payable over an expected term of five to six years. FCC licenses acquired from Shentel had a total value of $85 million. $96 million of the total purchase was recorded in “Other, net” in the consolidated statements of comprehensive loss as a contract termination in the quarter ended June 30, 2016, which related to the termination of our pre-existing wholesale arrangement with nTelos.

RESULTS OF OPERATIONS
Consolidated Results of Operations
The following table provides an overview of the consolidated results of operations.
 
Three Months Ended
Nine Months Ended
 
December 31,
December 31,
 
2016
 
2015
2016
 
2015
 
(in millions)
Wireless segment earnings
$
2,397

 
$
1,866

$
7,160

 
$
5,919

Wireline segment earnings
48

 
33

90

 
71

Corporate, other and eliminations
5

 
(1
)
4

 
(2
)
Consolidated segment earnings
2,450

 
1,898

7,254

 
5,988

Depreciation
(1,837
)
 
(1,549
)
(5,227
)
 
(4,202
)
Amortization
(255
)
 
(316
)
(813
)
 
(994
)
Other, net
(47
)
 
(230
)
80

 
(490
)
Operating income (loss)
311

 
(197
)
1,294

 
302

Interest expense
(619
)
 
(546
)
(1,864
)
 
(1,630
)
Other (expense) income, net
(60
)
 
4

(67
)
 
13

Income tax expense
(111
)
 
(97
)
(286
)
 
(126
)
Net loss
$
(479
)
 
$
(836
)
$
(923
)
 
$
(1,441
)

40
Table of Contents

Depreciation Expense
Depreciation expense increased $288 million, or 19%, and $1.0 billion, or 24%, in the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015, primarily due to increased depreciation on leased devices as a result of the continued growth of the device leasing program. Depreciation expense incurred on all leased devices was $837 million and $2.2 billion for the three and nine-month periods ended December 31, 2016, respectively, and $535 million and $1.2 billion for the same periods in 2015, respectively.
Amortization Expense
Amortization expense decreased $61 million, or 19%, and $181 million, or 18%, in the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015, primarily due to customer relationship intangible assets that are amortized using the sum-of-the-months'-digits method, which results in higher amortization rates in early periods that will decline over time.
Other, net
The following table provides additional information regarding items included in "Other, net" for the three and nine-month periods ended December 31, 2016 and 2015.
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Severance and exit costs
$
(19
)
 
$
(209
)
 
$
(30
)
 
$
(247
)
Litigation and other contingencies
—

 
(21
)
 
(103
)
 
(178
)
Loss on disposal of property, plant and equipment
(28
)
 
—

 
(28
)
 
(85
)
Contract terminations
—

 
—

 
(113
)
 
—

Gains from asset dispositions and exchanges
—

 
—

 
354

 
—

Revision to estimate of a previously recorded reserve
—

 
—

 
—

 
20

Total
$
(47
)
 
$
(230
)
 
$
80

 
$
(490
)
Other, net represented an expense of $47 million and a benefit of $80 million in the three and nine-month periods ended December 31, 2016, respectively. During the three and nine-month periods ended December 31, 2016, we recognized severance and exit costs expense of $19 million and $30 million, respectively. During the nine-month period ended December 31, 2016, we recorded a $103 million charge associated with a state tax matter, a $354 million non-cash gain as a result of spectrum license exchanges with other carriers and $113 million of contract terminations that were primarily related to the termination of our pre-existing wholesale arrangement with nTelos as a result of the Shentel transaction. During the three and nine-month periods ended December 31, 2016, we recorded a $28 million loss on disposal of property, plant and equipment related to cell site construction costs that are no longer recoverable as a result of changes in our network plans.
Other, net represented an expense of $230 million and $490 million in the three and nine-month periods ended December 31, 2015, respectively. During the three and nine-month periods ended December 31, 2015, we recognized accruals of $21 million and $178 million, respectively, for ongoing legal matters. In addition, we recognized severance and exit costs in the three and nine-month periods ended December 31, 2015, which included $176 million and $194 million, respectively, of severance primarily associated with reductions in work force and $33 million and $53 million, respectively, of lease and access exit costs primarily associated with tower and cell sites and backhaul access contracts for which we will no longer be receiving any economic benefit. During the nine-month period ended December 31, 2015, we recorded an $85 million loss on disposal of property, plant and equipment primarily related to cell site construction costs that are no longer recoverable as a result of changes in our network plans. During the three-month period ended June 30, 2015, we revised our estimate of a previously recorded reserve, resulting in $20 million of income.
Interest Expense
Interest expense increased $73 million, or 13%, and $234 million, or 14%, in the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015, primarily due to interest associated with the Network Equipment Sale-Leaseback, the Handset Sale-Leaseback Tranche 2, the unsecured financing facility and the Spectrum Financing transaction. The effective interest rate, which includes capitalized interest, on the weighted average long-term debt balance of $38.4 billion and $37.1 billion was 6.6% and 6.8% for the three and nine-month periods ended December 31, 2016, respectively. The effective interest rate, which includes capitalized interest, on the weighted average

41
Table of Contents

long-term debt balance of $33.7 billion and $33.8 billion was 6.6% for both the three and nine-month periods ended December 31, 2015, respectively. See “Liquidity and Capital Resources” for more information on the Company's financing activities.
Other (expense) income, net
Other (expense) income, net represented an expense of $60 million and $67 million in the three and nine-month periods ended December 31, 2016, respectively. The expense was primarily due to recognizing the remaining debt finance costs of $74 million associated with the terminated unsecured financing facility in the three-month period ended December 31, 2016.
Income Taxes
The income tax expense of $111 million and $286 million for the three and nine-month periods ended December 31, 2016, respectively, represented consolidated effective tax rates of approximately (30)% and (45)%, respectively. Income tax expense for both periods was primarily attributable to tax expense resulting from taxable temporary differences from amortization of FCC licenses and tax expense to increase our deferred tax liability on FCC licenses temporary differences. Income tax expense for the nine-month period ended December 31, 2016 included tax expense on pre-tax gains from spectrum license exchanges during the period, partially offset by tax benefits from the reversal of certain state income tax valuation allowance on deferred tax assets. The income tax expense of $97 million and $126 million for the three and nine-month periods ended December 31, 2015, respectively, represented consolidated effective tax rates of approximately (13)% and (10)%, respectively. Income tax expense for both periods was primarily attributable to tax expense resulting from taxable temporary differences from amortization of FCC licenses. The income tax expense for the nine-month period ended December 31, 2015 was partially offset by tax benefits from changes in state income tax laws enacted during the periods.

Segment Earnings - Wireless
Wireless segment earnings are a function of wireless service revenue, the sale of wireless devices (handsets and tablets), broadband devices, connected devices and accessories, leasing wireless devices, in addition to costs to acquire subscribers and network and interconnection costs to serve those subscribers, as well as other Wireless segment operating expenses. The costs to acquire our subscribers include the cost at which we sell our devices, as well as the marketing and sales costs incurred to attract those subscribers. Network costs primarily represent switch and cell site costs, backhaul costs, and interconnection costs, which generally consist of per-minute usage fees and roaming fees paid to other carriers. The remaining costs associated with operating the Wireless segment include the costs to operate our customer care organization and administrative support. Wireless service revenue, costs to acquire subscribers, and variable network and interconnection costs fluctuate with the changes in our subscriber base and their related usage, but some cost elements do not fluctuate in the short-term with these changes.
As shown by the table above under "Consolidated Results of Operations," Wireless segment earnings represented almost all of our total consolidated segment earnings for the three and nine-month periods ended December 31, 2016 and 2015. Within the Wireless segment, postpaid wireless services represent the most significant contributors to earnings, and is driven by the number of postpaid subscribers utilizing our services, as well as average revenue per user (ARPU). The wireless industry is subject to competition to retain and acquire subscribers of wireless services. Most markets in which we operate have high rates of penetration for wireless services.
Device Financing Programs
In September 2013, we introduced an installment billing program that allows subscribers to purchase a device by paying monthly installments generally over 24 months. In September 2014, we introduced a leasing program, whereby qualified subscribers can lease a device for a contractual period of time.
Under the installment billing program, we recognize a majority of the revenue associated with future expected installment payments at the time of sale of the device. As compared to our traditional subsidy program, this results in better alignment of the equipment revenue with the cost of the device. The impact to Wireless earnings from the sale of devices under our installment billing program is neutral except for the impact from the time value of money element related to the imputed interest on the installment receivable.
Under the leasing program, qualified subscribers can lease a device for a contractual period of time. At the end of the lease term, the subscriber has the option to turn in their device, continue leasing their device, or purchase the device. As of December 31, 2016, substantially all of our device leases were classified as operating leases. As a result, at lease inception, the devices are reclassified from inventory to property, plant and equipment when leased through Sprint's direct channels. For

42
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leases in the indirect channel, we purchase the devices at lease inception from the dealer, which is then capitalized to property, plant and equipment. 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. During the three and nine-month periods ended December 31, 2016 and 2015, we leased devices through our Sprint direct channels totaling approximately $1.1 billion, $2.3 billion, $1.0 billion and $2.6 billion, respectively. These devices were reclassified from inventory to property, plant and equipment and, as such, the cost of the device was not recorded as cost of products compared to when purchased under the installment billing or the traditional subsidy program, which resulted in a significant positive impact to Wireless segment earnings. Depreciation expense incurred on all leased devices for the three and nine-month periods ended December 31, 2016 and 2015, was $837 million, $2.2 billion, $535 million and $1.2 billion, respectively. 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 was partially offset by the Handset Sale-Leaseback Tranche 1 (Tranche 1) transaction that was consummated in November 2015 whereby we sold and subsequently leased back certain devices leased to our customers (see Handset Sale-Leaseback Tranche 1 in "Liquidity and Capital Resources" for further details). As a result, the cost to us of the devices sold to Mobile Leasing Solutions, LLC (MLS) under Tranche 1 was no longer recorded as depreciation expense, but rather was recognized as rent expense within “Cost of products” in the consolidated statements of comprehensive loss during the leaseback periods until Tranche 1 was terminated in conjunction with the repurchase of devices in December 2016.
Our device leasing and installment billing programs require a greater use of operating cash flows in the earlier part of the device contracts as our subscribers will generally pay less upfront than a traditional subsidy program. The Accounts Receivable Facility and the Handset Sale-Leaseback transactions discussed in "Liquidity and Capital Resources" were designed to mitigate the significant use of cash from purchasing devices from original equipment manufacturers (OEMs) to fulfill our installment billing and leasing programs.
Wireless Segment Earnings Trends
Sprint offers lower monthly service fees without a traditional contract as an incentive to attract subscribers to certain of our service plans. These lower rates for service are available whether the subscriber brings their own handset, pays the full or near full retail price of the handset, purchases the handset under our installment billing program, or leases their handset through our leasing program. As the adoption rates of these plans increase throughout our base of subscribers, we expect our postpaid ARPU to continue to decline as a result of lower pricing associated with our price plans offered in conjunction with device financing options as compared to our traditional subsidy program, which reflect higher service revenue and lower equipment revenue; however, we also expect higher equipment revenue due to the installment billing and leasing programs to substantially offset these declines. Since inception, the combination of lower priced plans, and our installment billing and leasing programs have been accretive to Wireless segment earnings. We expect that trend to continue with the magnitude of the impact being dependent upon the rate of subscriber adoption.
We began to experience net losses of postpaid handset subscribers in mid-2013. Since the release of our price plans offered in conjunction with device financing options, results have shown improvement in trends of handset subscribers; however, there can be no assurance that this trend will continue. We have taken initiatives to provide the best value in wireless service while continuing to enhance our network performance, coverage and capacity in order to attract and retain valuable handset subscribers. In addition, we are evaluating our cost model to operationalize a more effective cost structure.
As a result of canceling our leaseback in connection with the termination of Tranche 1, we expect an increase to wireless segment earnings of approximately $0.2 billion and a neutral impact to net loss during calendar year 2017.



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The following table provides an overview of the results of operations of our Wireless segment.
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
Wireless Segment Earnings
2016
 
2015
 
2016
 
2015
 
(in millions)
Postpaid
$
4,686

 
$
4,813

 
$
14,184

 
$
14,670

Prepaid
1,077

 
1,224

 
3,371

 
3,783

Other(1)
—

 
21

 
—

 
178

Retail service revenue
5,763

 
6,058

 
17,555

 
18,631

Wholesale, affiliate and other
183

 
188

 
509

 
586

Total service revenue
5,946

 
6,246

 
18,064

 
19,217

Cost of services (exclusive of depreciation and amortization)
(1,649
)
 
(2,031
)
 
(5,226
)
 
(6,147
)
Service gross margin
4,297

 
4,215

 
12,838

 
13,070

Service gross margin percentage
72
%
 
67
%
 
71
%
 
68
%
Equipment revenue
2,226

 
1,424

 
5,556

 
3,509

Cost of products (exclusive of depreciation and amortization)
(1,985
)
 
(1,589
)
 
(5,097
)
 
(4,244
)
Selling, general and administrative expense
(2,032
)
 
(2,041
)
 
(5,797
)
 
(6,273
)
Loss on disposal of property, plant and equipment
(109
)
 
(143
)
 
(340
)
 
(143
)
Wireless segment earnings
$
2,397

 
$
1,866

 
$
7,160

 
$
5,919

___________________
(1)
Represents service revenue primarily related to the acquisition of Clearwire on July 9, 2013.
Service Revenue
Our Wireless segment generates service revenue from the sale of wireless services and the sale of wholesale and other services. Service revenue consists of fixed monthly recurring charges, variable usage charges and miscellaneous fees such as activation fees, directory assistance, roaming, equipment protection, late payment and early termination charges, and certain regulatory related fees, net of service credits.
The ability of our Wireless segment to generate service revenue is primarily a function of:
•
revenue generated from each subscriber, which in turn is a function of the types and amount of services utilized by each subscriber and the rates charged for those services; and
•
the number of subscribers that we serve, which in turn is a function of our ability to retain existing subscribers and acquire new subscribers.
Retail comprises those subscribers to whom Sprint directly provides wireless services, whether those services are provided on a postpaid or a prepaid basis. We also categorize our retail subscribers as prime and subprime based upon subscriber credit profiles. We use proprietary scoring systems that measure the credit quality of our subscribers using several factors, such as credit bureau information, subscriber credit risk scores and service plan characteristics. Payment history is subsequently monitored to further evaluate subscriber credit profiles. Wholesale and affiliates are those subscribers who are served through MVNO and affiliate relationships and other arrangements. Under the MVNO relationships, wireless services are sold by Sprint to other companies that resell those services to subscribers.
Retail service revenue decreased $295 million, or 5%, and $1.1 billion, or 6%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015. The decrease was primarily due to a lower average revenue per postpaid subscriber driven by an increase in subscribers on lower price plans, combined with a decrease in average prepaid subscribers driven by higher churn and the impact of the shutdown of the Clearwire WiMAX network on March 31, 2016. The decrease was partially offset by an increase in average postpaid subscribers.
Effective January 1, 2017, we entered into a new Master Services Agreement with a vendor to provide post-sale device support services (including device insurance) to subscribers. Under the new agreement, the vendor bears the risk of loss with regards to claims and related costs, which Sprint will no longer incur. Sprint will remit premiums to the vendor who will pay Sprint a monthly recurring commission per subscriber for the duration of the agreement. Additionally, under the terms of the new agreement, the vendor will be the primary obligor in the agreement with the subscriber and, as such, revenue will be accounted for and presented on a net basis, whereas historically the amounts were presented on a gross basis. The change is expected to result in reductions in service revenue by approximately $700 million to $800 million in calendar

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year 2017. Because the vendor, not Sprint, will be fulfilling the services, we expect the reductions in service revenue to be more than offset by greater reductions in cost of services expense.
Wholesale, affiliate and other revenues decreased $5 million, or 3%, and $77 million, or 13%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015, primarily due to a decline in Lifeline and prepaid resellers combined with the impact of the shutdown of the Clearwire WiMAX network, partially offset by growth in connected devices in both periods and an increase in imputed interest associated with installment billing on handsets in the three-month period. Approximately 66% of our total wholesale and affiliate subscribers represent connected devices. These devices generate revenue from usage, which varies depending on the solution being utilized.
Average Monthly Service Revenue per Subscriber and Subscriber Trends
The table below summarizes average number of retail subscribers. Additional information about the number of subscribers, net additions (losses) to subscribers, and average rates of monthly postpaid and prepaid subscriber churn for each quarter since the quarter ended June 30, 2015 may be found in the tables on the following pages.
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
 
(subscribers in thousands)
Average postpaid subscribers 
31,431

 
30,683

 
31,153

 
30,443

Average prepaid subscribers 
12,997

 
14,966

 
13,662

 
15,442

Average retail subscribers 
44,428

 
45,649

 
44,815

 
45,885

The table below summarizes ARPU. Additional information about ARPU for each quarter since the quarter ended June 30, 2015 may be found in the tables on the following pages.
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
ARPU(1):
 
 
 
 
 
 
 
Postpaid
$
49.70

 
$
52.41

 
$
50.59

 
$
53.86

Prepaid
$
27.61

 
$
27.49

 
$
27.41

 
$
27.89

Average retail
$
43.24

 
$
44.24

 
$
43.53

 
$
45.12

_______________________ 
(1)
ARPU is calculated by dividing service revenue by the sum of the monthly average number of subscribers in the applicable service category. Changes in average monthly service revenue reflect subscribers for either the postpaid or prepaid service category who change rate plans, the level of voice and data usage, the amount of service credits which are offered to subscribers, plus the net effect of average monthly revenue generated by new subscribers and deactivating subscribers.
Postpaid ARPU for the three and nine-month periods ended December 31, 2016 decreased compared to the same periods in 2015 primarily due to the impact of subscriber migration to our service plans associated with device financing options, resulting in lower service fees. We expect Sprint platform postpaid ARPU to continue to decline during fiscal year 2016 as a result of lower service fees associated with our price plans offered in conjunction with device financing options; however, as a result of our installment billing and leasing programs, we expect increasing equipment revenues to more than offset these declines. Prepaid ARPU decreased for the nine-month period ended December 31, 2016 compared to the same period in 2015 primarily due to increased competition resulting in a decline in average subscribers primarily in the Virgin Mobile brand combined with the revenue impact of subscribers choosing lower priced plans in the Boost brand. Prepaid ARPU for the three-month period ended December 31, 2016 increased primarily in the Boost brand.

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The following table shows (a) net additions (losses) of wireless subscribers, (b) our total subscribers, and (c) end of period connected device subscribers as of the end of each quarterly period beginning with the quarter ended June 30, 2015.
 
June 30,
2015
 
Sept 30,
2015
 
Dec 31,
2015
 
March 31,
2016
 
June 30, 2016
 
Sept 30,
2016
 
Dec 31,
2016
Net additions (losses) (in thousands)(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sprint platform(2):
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid
310

 
378

 
501

 
56

 
180

 
344

 
405

Prepaid
(366
)
 
(188
)
 
(491
)
 
(264
)
 
(331
)
 
(427
)
 
(501
)
Wholesale and affiliates
731

 
866

 
481

 
655

 
528

 
823

 
673

Total Sprint platform
675

 
1,056

 
491

 
447

 
377

 
740

 
577

Transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid
(60
)
 
(70
)
 
(238
)
 
—

 
—

 
—

 
—

Prepaid
(66
)
 
(64
)
 
(231
)
 
—

 
—

 
—

 
—

Wholesale
(22
)
 
(12
)
 
(241
)
 
—

 
—

 
—

 
—

Total Transactions
(148
)
 
(146
)
 
(710
)
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total retail postpaid
250

 
308

 
263

 
56

 
180

 
344

 
405

Total retail prepaid
(432
)
 
(252
)
 
(722
)
 
(264
)
 
(331
)
 
(427
)
 
(501
)
Total wholesale and affiliate
709

 
854

 
240

 
655

 
528

 
823

 
673

Total Wireless
527

 
910

 
(219
)
 
447

 
377

 
740

 
577

 
 
 
 
 
 
 
 
 
 
 
 
 
 
End of period subscribers (in thousands)(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sprint platform(2):
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid(3)(4)
30,016

 
30,394

 
30,895

 
30,951

 
30,945

 
31,289

 
31,694

Prepaid(3)(5)
15,340

 
15,152

 
14,661

 
14,397

 
13,974

 
13,547

 
11,812

Wholesale and affiliates(3)(4)(5)(6)
11,456

 
12,322

 
12,803

 
13,458

 
14,534

 
15,357

 
16,009

Total Sprint platform
56,812

 
57,868

 
58,359

 
58,806

 
59,453

 
60,193

 
59,515

Transactions(7):
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid
308

 
238

 
—

 
—

 
—

 
—

 
—

Prepaid
295

 
231

 
—

 
—

 
—

 
—

 
—

Wholesale
253

 
241

 
—

 
—

 
—

 
—

 
—

Total Transactions
856

 
710

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total retail postpaid(3)(4)
30,324

 
30,632

 
30,895

 
30,951

 
30,945

 
31,289

 
31,694

Total retail prepaid(3)(5)
15,635

 
15,383

 
14,661

 
14,397

 
13,974

 
13,547

 
11,812

Total wholesale and affiliates(3)(4)(5)(6)
11,709

 
12,563

 
12,803

 
13,458

 
14,534

 
15,357

 
16,009

Total Wireless
57,668

 
58,578

 
58,359

 
58,806

 
59,453

 
60,193

 
59,515

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental data - connected devices
 
 
 
 
 
 
 
 
 
 
 
 
 
End of period subscribers (in thousands)(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail postpaid
1,439

 
1,576

 
1,676

 
1,771

 
1,822

 
1,874

 
1,960

Wholesale and affiliates
6,620

 
7,338

 
7,930

 
8,575

 
9,244

 
9,951

 
10,594

Total
8,059

 
8,914

 
9,606

 
10,346

 
11,066

 
11,825

 
12,554

_______________________ 
(1)
A subscriber is defined as an individual line of service associated with each device activated by a customer. Subscribers that transfer from their original service category classification to another platform, or another service line within the same platform, are reflected as a net loss to the original service category and a net addition to their new service category. There is no net effect for such subscriber changes to the total wireless net additions (losses) or end of period subscribers.
(2)
Sprint platform refers to the Sprint network that supports the wireless service we provide through our multiple brands.
(3)
As part of the Shentel transaction, 186,000 and 92,000 subscribers were transferred from postpaid and prepaid, respectively, to affiliates. An additional 270,000 of nTelos' subscribers are now part of our affiliate relationship with Shentel and are being reported in wholesale and affiliate subscribers during the quarter ended June 30, 2016.
(4)
End of period connected devices are included in total retail postpaid or wholesale and affiliates end of period subscriber totals for all periods presented.
(5)
During the three-month period ended December 31, 2016, the Company aligned all prepaid brands, including prepaid affiliate subscribers, under one churn and retention program. As a result of this change, end of period prepaid and affiliate subscribers as of December 31, 2016 were reduced by 1,234,000 and 21,000, respectively. See "Subscriber Results" below for more information.
(6)
Subscribers through some of our MVNO relationships have inactivity either in voice usage or primarily as a result of the nature of the device, where activity only occurs when data retrieval is initiated by the end-user and may occur infrequently. Although we continue to provide these subscribers access to our network through our MVNO relationships, approximately 1,750,000 subscribers at December 31, 2016 through these MVNO relationships have been inactive for at least six months, with no associated revenue during the six-month period ended December 31, 2016.
(7)
End of period transactions subscribers reflected postpaid, prepaid and wholesale subscribers acquired as a result of the acquisition of Clearwire. We had no remaining transaction subscribers primarily due to the shutdown of the WiMAX network on March 31, 2016.

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The following table shows our average rates of monthly postpaid and prepaid subscriber churn as of the end of each quarterly period beginning with the quarter ended June 30, 2015.
 
June 30,
2015
 
Sept 30,
2015
 
Dec 31,
2015
 
March 31,
2016
 
June 30,
2016
 
Sept 30,
2016
 
Dec 31,
2016
Monthly subscriber churn rate(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sprint platform:
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid
1.56
%
 
1.54
%
 
1.62
%
 
1.72
%
 
1.56
%
 
1.52
%
 
1.67
%
Prepaid
5.08
%
 
5.06
%
 
5.82
%
 
5.65
%
 
5.55
%
 
5.63
%
 
5.80
%
Transactions(2):
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid
6.07
%
 
8.55
%
 
NM

 
NM

 
NM

 
NM

 
NM

Prepaid
7.23
%
 
8.51
%
 
NM

 
NM

 
NM

 
NM

 
NM

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total retail postpaid
1.61
%
 
1.61
%
 
1.87
%
 
1.72
%
 
1.56
%
 
1.52
%
 
1.67
%
Total retail prepaid
5.13
%
 
5.12
%
 
6.29
%
 
5.65
%
 
5.55
%
 
5.63
%
 
5.80
%
_______________________ 
(1)
Churn is calculated by dividing net subscriber deactivations for the quarter by the sum of the average number of subscribers for each month in the quarter. For postpaid accounts comprising multiple subscribers, such as family plans and enterprise accounts, net deactivations are defined as deactivations in excess of subscriber activations in a particular account within 30 days. Postpaid and prepaid churn consist of both voluntary churn, where the subscriber makes his or her own determination to cease being a subscriber, and involuntary churn, where the subscriber's service is terminated due to a lack of payment or other reasons.
(2)
Subscriber churn related to the acquisition of Clearwire.
The following table shows our postpaid and prepaid ARPU as of the end of each quarterly period beginning with the quarter ended June 30, 2015.
 
June 30,
2015
 
Sept 30,
2015
 
Dec 31,
2015
 
March 31,
2016
 
June 30,
2016
 
Sept 30,
2016
 
Dec 31,
2016
ARPU
 
 
 
 
 
 
 
 
 
 
 
 
 
Sprint platform:
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid
$
55.48

 
$
53.99

 
$
52.48

 
$
51.68

 
$
51.54

 
$
50.54

 
$
49.70

Prepaid
$
27.81

 
$
27.66

 
$
27.44

 
$
27.72

 
$
27.34

 
$
27.31

 
$
27.61

Transactions(1):
 
 
 
 
 
 
 
 
 
 
 
 
 
Postpaid
$
40.47

 
$
40.62

 
$
31.62

 
$
—

 
$
—

 
$
—

 
$
—

Prepaid
$
46.10

 
$
45.82

 
$
34.61

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total retail postpaid
$
55.31

 
$
53.87

 
$
52.41

 
$
51.68

 
$
51.54

 
$
50.54

 
$
49.70

Total retail prepaid
$
28.18

 
$
27.97

 
$
27.49

 
$
27.72

 
$
27.34

 
$
27.31

 
$
27.61

_______________________
(1)
Subscriber ARPU related to the acquisition of Clearwire.

Subscriber Results
Sprint Platform Subscribers
Retail Postpaid — During the three-month period ended December 31, 2016, net postpaid subscriber additions were 405,000 compared to 501,000 in the same period in 2015. The lower net additions in the current quarter were driven by tablet subscriber losses.
Retail Prepaid — During the three-month period ended December 31, 2016, we lost 501,000 net prepaid subscribers compared to 491,000 in the same period in 2015. The net losses in the quarter were primarily due to subscriber losses in Boost and Virgin Mobile due to continued competition in the market. Historically, prepaid and prepaid affiliate subscribers were generally deactivated between 60 and 150 days from the later of the date of initial activation or replenishment; however, prior to account deactivation, targeted retention programs can be offered to qualifying subscribers to maintain ongoing service by providing up to an additional 150 days to make a replenishment. At September 30, 2016, each of our prepaid brands had different churn rules and retention programs. As a part of our ongoing efforts to simplify and drive consistency across our prepaid business, as well as tighten the customer engagement criteria, we have aligned all prepaid brands under one churn and retention program as of December 31, 2016. Therefore, all prepaid and prepaid affiliate subscribers are now deactivated 60 days from the later of the date of initial activation or the most recent replenishment date. As a result of these changes, we have approximately 1.2 million fewer prepaid subscribers and 21,000 fewer prepaid affiliate subscribers in the base as of December 31, 2016. However, because we have deactivated customers with no engagement, we do not expect a material impact to future prepaid revenue. If these changes had been implemented for our prepaid subscriber

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base at the beginning of the quarter rather than the end, and thus been in effect for the entire three month period, we estimate churn would have been 5.84% versus 5.80% and ARPU would have been $30.11 versus $27.61.
Wholesale and Affiliate Subscribers — Wholesale and affiliate subscribers represent customers that are served on our networks through companies that resell our wireless services to their subscribers, customers residing in affiliate territories and connected devices that utilize our network. Of the 16.0 million Sprint platform subscribers included in wholesale and affiliates, approximately 66% represent connected devices. Wholesale and affiliate subscriber net additions were 673,000 during the three-month period ended December 31, 2016 compared to 481,000 during the same period in 2015, inclusive of net additions of connected devices totaling 643,000 and 592,000, respectively. The increase in net additions in the three-month period ended December 31, 2016 was primarily attributable to growth in connected devices and subscribers under the Lifeline program, partially offset by a decline in subscribers through our prepaid and postpaid resellers.
Transactions Subscribers
As part of the acquisition of Clearwire in July 2013, we acquired 788,000 postpaid subscribers (exclusive of Sprint platform wholesale subscribers acquired through our MVNO relationship with Clearwire that were transferred to postpaid subscribers within Transactions), 721,000 prepaid subscribers, and 93,000 wholesale subscribers. We have no remaining transaction subscribers due to the shutdown of the Clearwire WiMAX network on March 31, 2016.
Cost of Services
Cost of services consists primarily of:
•
costs to operate and maintain our networks, including direct switch and cell site costs, such as rent, utilities, maintenance, labor costs associated with network employees, and spectrum frequency leasing costs;
•
fixed and variable interconnection costs, the fixed component of which consists of monthly flat-rate fees for facilities leased from local exchange carriers and other providers based on the number of cell sites and switches in service in a particular period and the related equipment installed at each site, and the variable component of which generally consists of per-minute usage fees charged by wireline providers for calls terminating on their networks, which fluctuate in relation to the level and duration of those terminating calls;
•
long distance costs paid to the Wireline segment;
•
costs to service and repair devices;
•
regulatory fees;
•
roaming fees paid to other carriers; and
•
fixed and variable costs relating to payments to third parties for the subscriber use of their proprietary data applications, such as messaging, music and cloud services and connected vehicle fees.
Cost of services decreased $382 million, or 19%, and $921 million, or 15%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015, primarily due to decreases in network costs such as rent, utilities, backhaul and labor associated with our network improvements and the shutdown of the WiMAX network on March 31, 2016, combined with decreases in roaming and interconnection costs primarily due to lower rates.
Equipment Revenue and Cost of Products
We recognize equipment revenue and corresponding costs of devices when title and risk of loss passes to the indirect dealer or end-use subscriber, assuming all other revenue recognition criteria are met. Our devices are sold under the subsidy program, the installment billing program, or leased under the leasing program. Under the subsidy program, we offer certain incentives to retain and acquire subscribers such as new devices at discounted prices. The cost of these incentives is recorded as a reduction to equipment revenue upon activation of the device with a service contract. Under the installment billing program, the device is sold at or near full retail price and we recognize most of the future expected installment payments at the time of sale of the device.
Cost of products includes equipment costs (primarily devices and accessories), order fulfillment related expenses, and write-downs of device and accessory inventory related to shrinkage and obsolescence. Additionally, cost of products is reduced by any rebates that are earned from the equipment manufacturers. Cost of products in excess of the net revenue generated from equipment sales is referred to in the industry as equipment net subsidy. As subscribers migrate from acquiring devices through our subsidy program to installment billing or choose to lease under our leasing program, equipment net subsidy continues to decline. We also make incentive payments to certain indirect dealers who purchase devices directly from OEMs or other device distributors. Those payments are recognized as selling, general and administrative expenses when the device is activated with a Sprint service plan because Sprint does not recognize any equipment revenue or cost of products for those transactions. (See Selling, General and Administrative Expense below.)

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The net impact to equipment revenue and cost of products from the sale of devices under our installment billing program is relatively neutral except for the impact from the time value of money element related to the imputed interest on the installment receivables. Under the leasing program, lease revenue is recorded over the term of the lease. The cost of the leased device is depreciated to its estimated residual value generally over the lease term. During the three and nine-month periods ended December 31, 2016 and 2015, we leased devices through our Sprint direct channels totaling approximately $1.1 billion, $2.3 billion, $1.0 billion and $2.6 billion, respectively, which were reclassified from inventory to property, plant and equipment and, as such, the cost of the device was not recorded as cost of products compared to when purchased under the installment billing or the traditional subsidy programs.
Equipment revenue increased $802 million, or 56%, and $2.0 billion, or 58%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015. The increase in equipment revenue for the three and nine-month periods ended December 31, 2016 was primarily due to higher revenue from the leasing program as more subscribers are choosing to lease their device, combined with higher average sales price per postpaid devices sold and an increase in postpaid devices sold. Cost of products increased $396 million, or 25%, and $853 million, or 20%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015 primarily due to an increase in postpaid devices sold combined with lease payments to MLS associated with Handset Sale-Leaseback Tranche 1, partially offset by a decrease in prepaid devices sold.
Selling, General and Administrative Expense
Sales and marketing costs primarily consist of subscriber acquisition costs, including commissions paid to our indirect dealers, third-party distributors and retail sales force for new device activations and upgrades, residual payments to our indirect dealers, commission payments made to OEMs or other device distributors for direct source handsets, payroll and facilities costs associated with our retail sales force, marketing employees, advertising, media programs and sponsorships, including costs related to branding. General and administrative expenses primarily consist of costs for billing, customer care and information technology operations, bad debt expense and administrative support activities, including collections, legal, finance, human resources, corporate communications, and strategic planning.
Sales and marketing expense decreased $30 million, or 2%, and $159 million, or 4%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015. The decrease in the nine-month period was primarily due to lower overall marketing spend as a result of cost reduction initiatives. The decrease in the three-month period was primarily due to lower sales commission expense and a decrease in payments to OEMs for direct source handsets as a result of lower volume of device sales.
General and administrative costs increased $21 million, or 3%, and decreased $317 million, or 13%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015. The decrease in the nine-month period was primarily due to lower customer care costs and other general and administrative costs as a result of cost reduction initiatives, partially offset by higher bad debt expense. The increase in the three-month period was primarily due to higher bad debt expense, partially offset by lower customer care costs as a result of cost reduction initiatives.
Bad debt expense increased $69 million, or 65%, and $29 million, or 8%, for the three and nine-month periods ended December 31, 2016, respectively. The increase was primarily related to increased installment billing accounts with higher reserve rates, partially offset by aging and rate improvements related to service bad debt. We reassess our allowance for doubtful accounts quarterly.
Loss on Disposal of Property, Plant and Equipment
For the three and nine-month periods ended December 31, 2016, loss on the disposal of property, plant and equipment, net of recoveries, of $109 million and $340 million, respectively, resulted from the write-off of leased devices associated with lease cancellations prior to the scheduled customer lease terms where customers did not return the devices to us. If customers continue to not return devices, we may continue to have similar losses in future periods. Similar losses are and have been incurred for devices sold under our subsidy program as equipment net subsidy.

Segment Earnings - Wireline
We provide a broad suite of wireline voice and data communications services to other communications companies and targeted business subscribers. In addition, we provide voice, data and IP communication services to our Wireless segment. We provide long distance services and operate all-digital global long distance and Tier 1 IP networks. Our services and products include domestic and international data communications using various protocols such as multiprotocol label switching technologies (MPLS), IP, managed network services, Voice over Internet Protocol (VoIP), Session Initiated Protocol (SIP), and traditional voice services. Our IP services can also be combined with wireless services. Such services

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include our Sprint Mobile Integration service, which enables a wireless handset to operate as part of a subscriber's wireline voice network, and our DataLinkSM service, which uses our wireless networks to connect a subscriber location into their primarily wireline wide-area IP/MPLS data network, making it easier for businesses to adapt their network to changing business requirements. In addition to providing services to our business customers, the wireline network is carrying increasing amounts of voice and data traffic for our Wireless segment as a result of growing usage by our wireless subscribers.
We continue to assess the portfolio of services provided by our Wireline business and are focusing our efforts on IP-based data services and de-emphasizing stand-alone voice services and non-IP-based data services. We also continue to provide voice services primarily to business consumers. Our Wireline segment markets and sells its services primarily through direct sales representatives.
Wireline segment earnings are primarily a function of wireline service revenue, network and interconnection costs, and other Wireline segment operating expenses. Network costs primarily represent special access costs and interconnection costs, which generally consist of domestic and international per-minute usage fees paid to other carriers. The remaining costs associated with operating the Wireline segment include the costs to operate our customer care and billing organizations in addition to administrative support. Wireline service revenue and variable network and interconnection costs fluctuate with the changes in our customer base and their related usage, but some cost elements do not fluctuate in the short-term with changes in our customer usage. Our wireline services provided to our Wireless segment are generally accounted for based on market rates, which we believe approximate fair value. The Company generally re-establishes these rates at the beginning of each fiscal year. Over the past several years, there has been an industry wide trend of lower rates due to increased competition from other wireline and wireless communications companies, as well as cable and Internet service providers. Declines in Wireline segment earnings related to intercompany pricing rates do not affect our consolidated results of operations as our Wireless segment benefits from an equivalent reduction in cost of services.
The following table provides an overview of the results of operations of our Wireline segment.
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
Wireline Segment Earnings
2016
 
2015
 
2016
 
2015
 
(in millions)
Voice
$
153

 
$
201

 
$
506

 
$
646

Data
41

 
42

 
127

 
134

Internet
281

 
317

 
871

 
968

Other
22

 
21

 
59

 
72

Total net service revenue
497

 
581

 
1,563

 
1,820

Cost of services (exclusive of depreciation)
(400
)
 
(466
)
 
(1,284
)
 
(1,495
)
Service gross margin
97

 
115

 
279

 
325

Service gross margin percentage
20
%
 
20
%
 
18
%
 
18
%
Selling, general and administrative expense
(49
)
 
(82
)
 
(189
)
 
(254
)
Wireline segment earnings
$
48

 
$
33

 
$
90

 
$
71

Wireline Revenue
Voice Revenues
Voice revenues for the three and nine-month periods ended December 31, 2016 decreased $48 million, or 24%, and $140 million, or 22%, respectively, compared to the same periods in 2015. The decrease was driven by lower volume and overall rate declines primarily due to decreases in international hubbing volumes as the company continues to de-emphasize certain voice services, combined with the decline in prices for the sale of services to our Wireless segment for the three and nine-month periods ended December 31, 2016. Voice revenues generated from the sale of services to our Wireless segment represented 40% and 39% of total voice revenues for the three and nine-month periods ended December 31, 2016, respectively, compared to 41% and 39%, for the same periods in 2015, respectively.
Data Revenues
Data revenues reflect sales of data services, primarily Private Line and managed network services bundled with non-IP-based data access. Data revenues decreased $1 million, or 2%, and $7 million, or 5%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015 as a result of customer churn

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primarily related to Private Line. Data revenues generated from the provision of services to the Wireless segment represented 56% and 53% of total data revenue for the three and nine-month periods ended December 31, 2016, respectively, and 40% and 41% for the same periods in 2015, respectively.
Internet Revenue
IP-based data services revenue reflects sales of Internet services, including MPLS, VoIP, SIP, and managed services bundled with IP-based data access. IP-based data services revenue decreased $36 million, or 11%, and $97 million, or 10%, for the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015 primarily due to fewer IP customers. In addition, revenue was also impacted by a decline in prices for the sale of services to our Wireless segment. Sale of services to our Wireless segment represented 14% of total Internet revenues for both the three and nine-month periods ended December 31, 2016, compared to 15% and 14%, respectively, for the same periods in 2015.
Other Revenues
Other revenues, which primarily consist of sales of customer premises equipment, increased $1 million, or 5%, and decreased $13 million, or 18%, in the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015.
Costs of Services
Costs of services include access costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by our domestic subscribers, costs to operate and maintain our networks, and costs of equipment. Costs of services decreased $66 million, or 14%, and $211 million, or 14%, in the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015. The decrease was primarily due to lower international voice volume and rates combined with lower access expense as the result of savings initiatives and declining voice and IP rate and volumes. Service gross margin percentage stayed relatively flat at 20% and 18% in each of the three and nine-month periods ended December 31, 2016 and 2015, respectively.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $33 million, or 40%, and $65 million, or 26%, in the three and nine-month periods ended December 31, 2016, respectively, compared to the same periods in 2015. The decrease was primarily due to lower shared administrative and employee-related costs required to support the Wireline segment as a result of the decline in revenue. Total selling, general and administrative expense as a percentage of net services revenue was 10% and 12% for the three and nine-month periods ended December 31, 2016, respectively, as compared to 14% for each of the same periods in 2015.

LIQUIDITY AND CAPITAL RESOURCES
Cash Flow 
 
Nine Months Ended
 
December 31,
 
2016
 
2015
 
(in millions)
Net cash provided by operating activities
$
2,900

 
$
2,603

Net cash used in investing activities
$
(5,194
)
 
$
(4,485
)
Net cash provided by financing activities
$
3,360

 
$
47

Operating Activities
Net cash provided by operating activities of $2.9 billion in the nine-month period ended December 31, 2016 increased $297 million from the same period in 2015. The increase was primarily due to lower vendor and labor-related payments of $1.2 billion, which were primarily due to reduced operating costs resulting from the Company's ongoing cost reduction initiatives, partially offset by $831 million of decreased cash received primarily due to an increase in the deferred purchase price receivable (DPP) as a result of increased accounts receivables sold and a decline in net cash received related to our Accounts Receivable Facility (Receivables Facility). Cash activity related to our Receivables Facility included cash remitted to unaffiliated third parties (Purchasers) for receivables collected in the amount of $185 million and $500 million during the nine-month periods ended December 31, 2016 and 2015, respectively. In addition, during the nine-month periods ended December 31, 2016 and 2015, we elected to receive $625 million and $1.2 billion, respectively, related to our Receivables Facility. Also, during the nine-month period ended December 31, 2016 we had increased interest payments of $79 million primarily due to the Network Equipment Sale-Leaseback, the unsecured financing facility and the Spectrum Financing transaction.
Investing Activities
Net cash used in investing activities in the nine-month period ended December 31, 2016 increased by $709 million compared to the same period in 2015, primarily due to increased net purchases of short-term investments of $2.5 billion. This increase was offset by decreased network and other capital expenditures of approximately $2.5 billion and decreased purchases of $194 million of leased devices from indirect dealers. Included in the purchases of leased devices was $477 million of repurchased devices due to the termination of the Handset Sale-Leaseback Tranche 1. Net cash used in investing activities for the nine-month period ended December 31, 2015 included proceeds of $1.1 billion from Tranche 1.
Financing Activities
Net cash provided by financing activities was $3.4 billion during the nine-month period ended December 31, 2016, which was primarily due to cash receipts of $2.2 billion, $1.1 billion and $3.5 billion from the Network Equipment Sale-Leaseback, Handset Sale-Leaseback Tranche 2 and Spectrum Financing, respectively. These receipts were partially offset by repayments of $502 million, $220 million and $153 million for the Handset Sale-Leaseback Tranche 2, secured equipment credit facilities and financing of future lease receivables, respectively. We also retired $2.0 billion in principal amount of Sprint Communications, Inc. 6% senior notes due 2016 and $300 million principal amount of Clearwire Communications LLC 14.75% secured notes due 2016. In addition, we paid a total of $272 million in debt finance costs for the unsecured financing facility, Network Equipment Sale-Leaseback and Spectrum Financing transaction.
Net cash provided by financing activities was $47 million during the nine-month period ended December 31, 2015, which was primarily due to draws of $208 million, $266 million and $32 million on our Finnvera plc (Finnvera), K-sure and Delcredere | Ducroire (D/D) secured equipment credit facilities, respectively. These draws were partially offset by repayments related to our secured equipment credit facilities of $155 million, capital lease repayments of $67 million and a $500 million repayment of the Export Development Canada (EDC) credit facility. In addition, we amended our unsecured EDC agreement to add an additional tranche totaling $250 million due December 2017.
Working Capital
We had negative working capital of $3.1 billion and $5.1 billion as of December 31, 2016 and March 31, 2016, respectively. The change in working capital was primarily the result of $3.4 billion of net cash provided by financing activities as described above plus approximately $500 million of changes to other working capital items, partially offset by an increase in the current portion of long-term debt, financing and capital lease obligations of $1.9 billion.
Long-Term Debt and Other Funding Sources

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Our device leasing and installment billing programs require a greater use of operating cash flows in the earlier part of the device contracts as our subscribers will generally pay less upfront than a traditional subsidy program. The Receivable Facility and the Handset Sale-Leaseback transactions described below were designed in large part to mitigate the significant use of cash from purchasing devices from OEMs to fulfill our installment billing and leasing programs.
Accounts Receivable Facility
Transaction Overview
Our Receivables Facility provides us the opportunity to sell certain wireless service, installment receivables and future amounts due from customers who lease certain devices from us to the Purchasers. The maximum funding limit under the Receivables Facility is $4.3 billion. The Receivables Facility was amended in November 2016 to, among other things, reallocate the Purchasers' commitments between service, installment and future lease receivables. The amendment was in response to changing trends in the financing methods selected by customers. On February 3, 2017, the Receivables Facility was further amended by the Company to extend the maturity date to November 2018 and obtain the right to repurchase, under certain conditions, the financial assets transferred to the conduits. While we have the right to decide how much cash to receive from each sale, the maximum amount of cash available to us varies based on a number of factors and currently represents approximately 50% of the total amount of the eligible receivables sold to the Purchasers. As of December 31, 2016, the total amount available to be drawn was $6 million. The proceeds from the sale of these receivables are comprised of a combination of cash and a DPP. The DPP is realized by us upon the ultimate collection of the underlying receivables sold to the Purchasers or upon Sprint's election to receive additional advances in cash from the Purchasers subject to the total availability under the Receivables Facility.
Wireless service and installment receivables sold are treated as a sale of financial assets and Sprint derecognizes these receivables, as well as the related allowances, and recognizes the net proceeds received in cash provided by operating activities on the consolidated statements of cash flows. The net amount drawn for wireless service and installment receivables was $1.8 billion as of December 31, 2016. The fees associated with these sales are recognized in "Selling, general and administrative" in the consolidated statements of comprehensive loss.
The sale of future lease receivables is treated as a financing transaction. Accordingly, the proceeds received are reflected as cash provided by financing activities on the consolidated statements of cash flows and the fees are recognized as "Interest expense" in the consolidated statements of comprehensive loss. During the nine-month period ended December 31, 2016, we repaid $153 million to the Purchasers, which reduced the principal amount outstanding to $447 million as of December 31, 2016.
Transaction Structure
Sprint contributes certain wireless service, installment and future lease receivables, as well as the associated leased devices to Sprint's wholly-owned consolidated bankruptcy-remote special purpose entities (SPEs). At Sprint's direction, the SPEs have sold, and will continue to sell, wireless service, installment and future lease receivables to Purchasers or to a bank agent on behalf of the Purchasers. Leased devices will remain with the SPEs and continue to be depreciated over their estimated useful life. At December 31, 2016, the net book value of devices contributed to the SPEs was approximately $965 million.
Each SPE is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE's assets prior to any assets in the SPE becoming available to Sprint. Accordingly, the assets of the SPE are not available to pay creditors of Sprint or any of its affiliates (other than any other SPE), although collections from these receivables in excess of amounts required to repay the advances, yield and fees of the Purchasers and other creditors of the SPEs may be remitted to Sprint during and after the term of the Receivables Facility.
Sprint has no retained interest in the receivables sold, other than collection and administrative responsibilities and its right to the DPP. Sales of eligible receivables by the SPEs generally occur daily and are settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility. A subsidiary of Sprint services the receivables in exchange for a monthly servicing fee, and Sprint guarantees the performance of the servicing obligations under the Receivables Facility.
DPP
The DPP related to our wireless service and installment receivables, which amounted to approximately $1.4 billion and $1.2 billion as of December 31, 2016 and March 31, 2016, respectively, is classified as a trading security within "Prepaid expenses and other current assets" in the consolidated balance sheets and is recorded at its estimated fair value. The fair value of the DPP is estimated using a discounted cash flow model, which relies principally on unobservable inputs such

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as the nature and credit class of the sold receivables and subscriber payment history, and for installment receivables sold, the estimated timing of upgrades and upgrade payment amounts for those with upgrade options. Accretable yield on the DPP is recognized as interest revenue within net operating service revenue on the consolidated statements of comprehensive loss and other changes in the fair value of the DPP are recognized in "Selling, general and administrative" in the consolidated statements of comprehensive loss. Changes in the fair value of the DPP did not have a material impact on our statements of comprehensive loss for the three and nine-month periods ended December 31, 2016. Changes to the unobservable inputs used to determine the fair value did not and are not expected to result in a material change in the fair value of the DPP.
During the nine-month period ended December 31, 2016, we remitted $185 million of funds to the Purchasers because the amount of cash proceeds received by us under the facility exceeded the maximum funding limit, which increased the total amount of the DPP due to Sprint. We also elected to receive $625 million of cash, which decreased the total amount of the DPP due to Sprint. In addition, during the nine-month period ended December 31, 2016, sales of new receivables exceeded cash collections on previously sold receivables such that the DPP increased by $660 million.
Handset Sale-Leasebacks
In December 2015 and May 2016, we sold certain iPhone® devices being leased by our customers to MLS, a company formed by a group of equity investors, including SoftBank Group Corp. (SoftBank), and then subsequently leased the devices back. Under the agreements, Sprint generally maintains the customer leases, continues to collect and record lease revenue from the customer and remits monthly rental payments to MLS during the leaseback periods.
Under the agreements, Sprint contributed the devices and the associated customer leases to wholly-owned consolidated bankruptcy-remote special purpose entities of Sprint (SPE Lessees). The SPE Lessees then sold the devices and transferred certain specified customer lease end rights and obligations, such as the right to receive the proceeds from customers who elect to purchase the device at the end of the customer lease term, to MLS in exchange for a combination of cash and DPP. Settlement for the DPP occurs near the end of the agreement and can be reduced to the extent that MLS experiences a loss on the device (either not returned or sold at an amount less than the expected residual value of the device), but only to the extent of the device's DPP balance. In the event that MLS sells the devices returned from our customers at a price greater than the expected device residual value, Sprint has the potential to share some of the excess proceeds.
The SPE Lessees retain all rights to the underlying customer leases, such as the right to receive the rental payments during the device leaseback period, other than the aforementioned certain specified customer lease end rights. Each SPE Lessee is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE Lessee, to be satisfied out of the SPE Lessee’s assets prior to any assets in the SPE Lessee becoming available to Sprint. Accordingly, the assets of the SPE Lessee are not available to pay creditors of Sprint or any of its affiliates. The SPE Lessees are obligated to pay the full monthly rental payments under each device lease to MLS regardless of whether our customers make lease payments on the devices leased to them or whether the customer lease is canceled. Sprint has guaranteed to MLS the performance of the agreements and undertakings of the SPE Lessees under the transaction documents.
Handset Sale-Leaseback Tranche 1 (Tranche 1)
In December 2015, Sprint transferred devices with a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billion and a DPP of $126 million. We recorded the sale, removed the devices from our balance sheet, and classified the leasebacks as operating leases. The difference between the fair value and the net book value of the devices sold was recognized as a loss on disposal of property, plant and equipment in the amount of $65 million and was included in "Other, net" in the consolidated statements of comprehensive loss for the three and nine-month periods ended December 31, 2015. The cash proceeds received in the transaction were reflected as cash provided by investing activities on the consolidated statements of cash flows and payments made to MLS under the leaseback are reflected as "Cost of products" in the consolidated statements of comprehensive loss. Rent expense related to MLS totaled $117 million and $494 million during the three and nine-month periods ended December 31, 2016, respectively, and is reflected within cash flows from operations. The monthly rental payments for the devices leased backed by us were expected to approximate the amount of cash received from the associated customer leases during the weighted average leaseback period. In December 2016, Sprint terminated Tranche 1 by repurchasing the devices and related customer lease end rights and obligations from MLS for consideration of $371 million of net cash payments and the DPP of $126 million. As a result of the transaction, Sprint recorded $477 million of property, plant and equipment, $16 million of other assets, and was released from certain liabilities. Additionally, the leaseback was canceled and there will be no future rental payments owed to MLS related to Tranche 1. The impact to the consolidated statements of comprehensive loss as a result of the termination was immaterial.
Handset Sale-Leaseback Tranche 2 (Tranche 2)

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In May 2016, Sprint transferred devices with a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billion and a DPP of $186 million. Unlike Tranche 1, Tranche 2 was accounted for as a financing. Accordingly, the devices remain in "Property, plant and equipment, net" in the consolidated balance sheets and we continue to depreciate the assets to their estimated residual values over the respective customer lease terms. At December 31, 2016, the net book value of devices transferred to MLS was approximately $725 million.
The proceeds received are reflected as cash provided by financing activities in the consolidated statements of cash flows and payments made to MLS will be reflected as principal repayments and interest expense over the respective terms. We have elected to account for the financing obligation at fair value. Accordingly, changes in the fair value of the financing obligation are recognized in "Other (expense) income, net" in the consolidated statements of comprehensive loss over the course of the arrangement.
Tranche 2 primarily includes devices from our iPhone Forever Program, whereas these devices were specifically excluded from Tranche 1. The iPhone Forever Program provides our leasing customers the ability to upgrade their devices and to enter into a new lease agreement, subject to certain conditions, upon Apple's release of a next generation device. Upon a customer exercising their iPhone Forever upgrade right, Sprint has the option to terminate the existing leaseback by immediately remitting all unpaid device leaseback payments and returning the device to MLS. Alternatively, Sprint is required to transfer the title in the new device to MLS in exchange for the title in the original device (Exchange Option). If Sprint elects the Exchange Option, we are required to continue to pay existing device leaseback rental related to the original device, among other requirements.
To address the introduction of the upgrade feature into the sale-leaseback structure, among other factors, numerous contractual terms from Tranche 1 were modified, which shifted certain risks of ownership in the devices away from MLS to Sprint and resulted in Tranche 2 being accounted for as a financing. For instance, the device leaseback periods are generally longer in Tranche 2 as compared to Tranche 1, and the resulting amounts committed to be paid by the Company represent the initial proceeds received from MLS plus interest. This mitigates MLS's exposure to certain risks for non-returned and damaged devices, as well as to declines in device residual values.
During the nine-month period ended December 31, 2016, we repaid $502 million to MLS, which reduced the principal amount of the financing obligation to $554 million as of December 31, 2016.
Network Equipment Sale-Leaseback
In April 2016, Sprint sold and leased back certain network equipment to unrelated bankruptcy-remote special purpose entities (collectively, "Network LeaseCo"). The network equipment acquired by Network LeaseCo was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including SoftBank. Sprint's payments to Network LeaseCo during the leaseback period are used by Network LeaseCo to service their debt.
Network LeaseCo is a variable interest entity for which Sprint is the primary beneficiary. As a result, Sprint is required to consolidate Network LeaseCo and our consolidated financial statements include Network LeaseCo's debt and the related financing cash inflows. The network assets included in the transaction, which had a net book value of approximately $3.0 billion and consisted primarily of equipment located at cell towers, remain on Sprint's consolidated financial statements and continue to be depreciated over their respective estimated useful lives. At December 31, 2016, these network assets had a net book value of approximately $2.5 billion.
The proceeds received were reflected as cash provided by financing activities in the consolidated statements of cash flows and payments made to Network LeaseCo are reflected as principal repayments and interest expense over the respective terms. Sprint has the option to purchase the equipment at the end of the leaseback term for a nominal amount. All intercompany transactions between Network LeaseCo and Sprint are eliminated in our consolidated financial statements. Principal and interest payments on the borrowings from the external investors will be repaid in staggered, unequal payments through January 2018 with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017.
Spectrum Financing
In October 2016, Sprint transferred certain directly held and third-party leased spectrum licenses (collectively, "the Spectrum Portfolio") to wholly-owned bankruptcy-remote special purpose entities (collectively, "the Spectrum Financing SPEs"). The Spectrum Portfolio, which represents approximately 14% of Sprint's total spectrum holdings on a MHz-pops basis, was used as collateral to raise an initial $3.5 billion in senior secured notes at 3.36% from external investors under a $7.0 billion program. Sprint can utilize this financing structure to potentially raise up to an additional $3.5 billion subject to certain conditions. The notes will be repaid over a five-year term, with interest only payments over the first four quarters and amortizing quarterly principal and interest payments thereafter through September 2021.

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Sprint Communications, Inc. simultaneously entered into a long-term lease with the Spectrum Financing SPEs for the ongoing use of the Spectrum Portfolio. Sprint Communications, Inc. is required to make monthly lease payments to the Spectrum Financing SPEs, at a market rate in an amount sufficient to service the notes. As the Spectrum Financing SPEs are wholly-owned Sprint subsidiaries, these entities are consolidated and all intercompany activity has been eliminated.
As of December 31, 2016, approximately $219 million of the total principal outstanding was classified as "Current portion of long-term debt" in the consolidated balance sheets.
As a result of this transaction, our $2.5 billion unsecured financing facility was terminated.
Long-Term Debt
During the three-month period ended December 31, 2016, the Company repaid $2.0 billion aggregate principal upon maturity of its outstanding Sprint Communications, Inc. 6% senior notes and $300 million aggregate principal of its Clearwire Communications LLC 14.75% secured notes.
Credit Facilities
Bank Credit Facility
Our unsecured revolving bank credit facility that expires in February 2018 requires a ratio (Leverage Ratio) of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and other non-recurring items, as defined by the credit facility (adjusted EBITDA), not to exceed 6.25 to 1.0 through the quarter ending December 31, 2016 and 6.0 to 1.0 each fiscal quarter ending thereafter through expiration of the facility. The facility allows us to reduce our total indebtedness for purposes of calculating the Leverage Ratio by subtracting from total indebtedness the amount of any cash contributed into a segregated reserve account, provided that, after such cash contribution, our cash remaining on hand for operations exceeds $2.0 billion. Upon transfer, the cash contribution will remain restricted until and to the extent it is no longer required for the Leverage Ratio to remain in compliance.
New Secured Loan and Revolving Credit Facility
On February 3, 2017, we entered into a new credit agreement for $6.0 billion, consisting of a $4.0 billion, seven-year secured term loan that matures in February 2024 and a $2.0 billion secured revolving bank credit facility that expires in February 2021. The term loan has an interest rate equal to LIBOR plus 250 basis points and the bank facility has an interest rate equal to LIBOR plus a spread that varies depending on the Company's leverage ratio. The new credit facility replaced the $3.3 billion unsecured revolving bank credit facility described above that was due to expire in February 2018.
Export Development Canada (EDC) agreement
As of December 31, 2016, the unsecured EDC agreement provided for covenant terms similar to those of the unsecured revolving bank credit facility. However, under the terms of the EDC agreement, repayments of outstanding amounts cannot be re-drawn. As of December 31, 2016, the total principal amount of our borrowings under the EDC facility was $550 million. On February 3, 2017, we amended the EDC agreement to provide for security and covenant terms similar to our new secured term loan and revolving bank credit facility.
Unsecured Financing Facility
During the three-month period ended June 30, 2016, Sprint Communications entered into an unsecured financing facility for $2.5 billion. In October 2016, this facility was terminated upon entering into the Spectrum Financing transaction in accordance with its terms.
Secured equipment credit facilities
Eksportkreditnamnden (EKN)
In 2013, we had fully drawn and began to repay the EKN secured equipment credit facility totaling $1.0 billion, which was used to finance certain network-related purchases from Ericsson. During the nine-month period ended December 31, 2016, we made principal repayments totaling $127 million on the facility, resulting in a total principal amount of $127 million outstanding at December 31, 2016.
Finnvera plc (Finnvera)
The Finnvera secured equipment credit facility provides for the ability to borrow up to $800 million to finance network-related purchases from Nokia Solutions and Networks US LLC, USA. The facility, which initially could be drawn upon as many as three consecutive tranches, now has one tranche remaining and available for borrowing through October 2017. Such borrowings are contingent upon the amount and timing of Sprint's network-related purchases. During the nine-

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month period ended December 31, 2016, we made principal repayments totaling $28 million on the facility, resulting in a total principal amount of $168 million outstanding at December 31, 2016.
K-sure
The K-sure secured equipment credit facility provides for the ability to borrow up to $750 million to finance network-related purchases from Samsung Telecommunications America, LLC. The facility can be divided in up to three consecutive tranches of varying size with borrowings available until May 2018, contingent upon the amount of network-related purchases made by Sprint. During the nine-month period ended December 31, 2016, we made principal repayments totaling $65 million on the facility, resulting in a total principal amount of $258 million outstanding at December 31, 2016.
Delcredere | Ducroire (D/D)
The D/D secured equipment credit facility provides for the ability to borrow up to $250 million to finance network equipment-related purchases from Alcatel-Lucent USA Inc. The principal balance outstanding at December 31, 2016 was $32 million.
Borrowings under the EKN, Finnvera, K-sure and D/D secured equipment credit facilities are each secured by liens on the respective equipment purchased pursuant to each facility's credit agreement. In addition, repayments of outstanding amounts borrowed under the secured equipment credit facilities cannot be redrawn. Each of these facilities is fully and unconditionally guaranteed by both Sprint Communications, Inc. and Sprint Corporation. As of February 3, 2017, the secured equipment credit facilities have certain key covenants similar to those in our new secured term loan and revolving bank credit facility.
As of December 31, 2016, our Leverage Ratio, as defined by the revolving bank credit facility, the unsecured EDC Agreement and all other equipment credit facilities, all in accordance with the respective covenants in effect as of that date, was 3.6 to 1.0. Because our Leverage Ratio exceeded 2.5 to 1.0 at period end, we were restricted from paying cash dividends.
Liquidity and Capital Resources
As of December 31, 2016, our liquidity, including cash and cash equivalents, short-term investments, available borrowing capacity under our revolving bank credit facility and availability under our Receivables Facility was $9.1 billion. Our cash and cash equivalents and short-term investments totaled $6.1 billion as of December 31, 2016 compared to $2.6 billion as of March 31, 2016. As of December 31, 2016, we had availability of approximately $3.0 billion under the revolving bank credit facility. Amounts available under our Receivables Facility as of December 31, 2016 totaled $6 million.
In addition, we had a combined available borrowing capacity of $1.2 billion under our Finnvera, K-sure and D/D secured equipment credit facilities as of December 31, 2016. However, utilization of these facilities is dependent upon the amount and timing of network-related purchases from the applicable suppliers, as well as the period of time remaining to complete any further borrowings available under each facility.
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. 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 a traditional subsidy program 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, some of which may be secured by our assets, 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. We believe our existing available liquidity and cash flows from operations will be sufficient to meet our

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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 additional handset and receivables financing transactions, and raising additional funds through spectrum-backed notes. In addition, we are pursuing extended payment terms and increased facilities 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 subscribers, 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 earnings before interest, taxes, depreciation and amortization and other non-recurring items (adjusted 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 governing our debt obligations require compliance with various covenants, including covenants that limit the Company's ability to sell certain 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.
In determining our expectation of future funding needs in the next twelve months and beyond, we have made several assumptions regarding:
•
projected revenues and expenses relating to our operations, including those related to our installment billing and leasing programs, along with the success of initiatives such as our expectations of achieving a more competitive cost structure through cost reduction initiatives and increasing our postpaid handset subscriber base;
•
cash needs related to our installment billing and device leasing programs;
•
availability under the Receivables Facility, which terminates in November 2018;
•
continued availability of our new secured term loan that matures in February 2024 and secured revolving bank credit facility, which expires in February 2021 for $6.0 billion less outstanding letters of credit;
•
remaining availability of approximately $1.2 billion of our secured equipment credit facilities for eligible capital expenditures, and any corresponding principal, interest, and fee payments;
•
raising additional funds from external sources;
•
the expected use of cash and cash equivalents in the near-term;
•
anticipated levels and timing of capital expenditures, including assumptions regarding lower unit costs, the capacity additions and upgrading of our networks and the deployment of new technologies in our networks, FCC license acquisitions, and purchases of leased devices from our indirect dealers;
•
any additional contributions we may make to our pension plan;
•
any scheduled principal payments on debt, secured equipment credit facilities and EDC, including approximately $21.8 billion coming due over the next five years;
•
estimated residual values of devices related to our device lease program; and
•
other future contractual obligations and general corporate expenditures.
Our ability to fund our needs from external sources is ultimately affected by the overall capacity of, and financing terms available in the banking and securities markets, and the availability of other financing alternatives, as well as our performance and our credit ratings. Given our recent financial performance, as well as the volatility in these markets, we continue to monitor them closely and to take steps to maintain financial flexibility at a reasonable cost of capital.
The outlooks and credit ratings from Moody's Investor Service, Standard & Poor's Ratings Services, and Fitch Ratings for certain of Sprint Corporation's outstanding obligations were:

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Rating 
Rating Agency
 
Issuer Rating
 
Unsecured  Notes
 
Guaranteed Notes
 
Bank Credit Facility
 
Outlook
Moody's
 
B2
 
B3
 
B1
 
Ba3
 
Stable
Standard and Poor's
 
B
 
B
 
B+
 
B+
 
Stable
Fitch
 
B+
 
B+
 
BB
 
BB
 
Stable



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FUTURE CONTRACTUAL OBLIGATIONS
There have been no significant changes to our future contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2016. Below is a graph depicting our future principal maturities of debt as of December 31, 2016.debtmaturities013017a03.jpg* This table excludes (i) our unsecured revolving bank credit facility, which will expire in 2018 and has no outstanding balance, (ii) $274 million in letters of credit outstanding under the unsecured revolving bank credit facility, (iii) $480 million of capital lease and other obligations, and (iv) net premiums and debt financing costs.

OFF-BALANCE SHEET FINANCING
Sprint has a Receivables Facility providing for the sale of eligible wireless service, installment and certain future lease receivables, with a maximum funding limit of $4.3 billion and an expiration date of November 2018. In connection with the Receivables Facility, Sprint formed certain wholly-owned consolidated bankruptcy-remote SPEs. At Sprint's direction, the SPEs sell wireless service and installment receivables to unaffiliated third parties or to a bank agent. Sales of eligible receivables generally occur daily and are settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility. The net amount drawn for wireless service and installment receivables was $1.8 billion as of December 31, 2016.
On February 3, 2017, the Company executed certain amendments to the Receivables Facility and obtained the right to repurchase, under certain conditions, the financial assets transferred to the conduits. As a result of adding the repurchase feature, Sprint gained effective control over the financial assets. Accordingly, all sales of wireless service and installment receivables to the conduits will be reflected as financings. All cash inflows and outflows under the Receivables Facility will be reported as financing activities on the consolidated statements of cash flows prospectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Sprint applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with U.S. GAAP. Inherent in such policies are certain key assumptions and estimates made by management. Management regularly updates its estimates used in the preparation of the consolidated financial statements based on its latest assessment of the current and projected business and general economic environment. Additional information regarding the Company's Critical Accounting Policies and Estimates is included in Item 7. of the Company's Annual Report on Form 10-K for the year ended March 31, 2016.


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FINANCIAL STRATEGIES
General Risk Management Policies
Our board of directors has adopted a financial risk management policy that authorizes us to enter into derivative transactions, and all transactions comply with the policy. We do not purchase or hold any derivative financial instruments for speculative purposes with the exception of equity rights obtained in connection with commercial agreements or strategic investments, usually in the form of warrants to purchase common shares.
Derivative instruments are primarily used for hedging and risk management purposes. Hedging activities may be done for various purposes, including, but not limited to, mitigating the risks associated with an asset, liability, committed transaction or probable forecasted transaction. We seek to minimize counterparty credit risk through credit approval and review processes, credit support agreements, continual review and monitoring of all counterparties, and thorough legal review of contracts. Exposure to market risk is controlled by regularly monitoring changes in hedge positions under normal and stress conditions to ensure they do not exceed established limits.

OTHER INFORMATION
We routinely post important information on our website at www.sprint.com/investors. Information contained on or accessible through our website is not part of this report.

FORWARD-LOOKING STATEMENTS
We include certain estimates, projections and other forward-looking statements in our annual, quarterly and current reports, and in other publicly available material. Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements.
These statements reflect management's judgments based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, subscriber and network usage, subscriber growth and retention, technologies, products and services, pricing, operating costs, the timing of various events, and the economic and regulatory environment.
Future performance cannot be assured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:
•
our ability to obtain additional financing, including monetizing certain of our assets, including under our existing or future programs to monetize a portion of our network or spectrum holdings, or to modify the terms of our existing financing, on terms acceptable to us, or at all;
•
our ability to continue to receive the expected benefits of our existing financings such as receivable and handset financings, including any future tranches;
•
our ability to retain and attract subscribers and to manage credit risks associated with our subscribers;
•
the ability of our competitors to offer products and services at lower prices due to lower cost structures or otherwise;
•
the effective implementation of our plans to improve the quality of our network, including timing, execution, technologies, costs, and performance of our network;
•
failure to improve subscriber churn, bad debt expense, accelerated cash use, costs and write-offs, including with respect to changes in expected residual values related to any of our service plans, including installment billing and leasing programs;
•
the ability to generate sufficient cash flow to fully implement our plans to improve and enhance the quality of our network and service plans, improve our operating margins, implement our business strategies, and provide competitive new technologies;
•
the effects of vigorous competition on a highly penetrated market, including the impact of competition on the prices we are able to charge subscribers for services and devices we provide and on the geographic areas served by our network;
•
the impact of installment billing and leasing handsets; the impact of increased purchase commitments; the overall demand for our service plans, including the impact of decisions of new or existing subscribers

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between our service offerings; and the impact of new, emerging and competing technologies on our business;
•
our ability to provide the desired mix of integrated services to our subscribers;
•
our ability to continue to access our spectrum and acquire additional spectrum capacity;
•
changes in available technology and the effects of such changes, including product substitutions and deployment costs and performance;
•
volatility in the trading price of our common stock, current economic conditions and our ability to access capital, including debt or equity;
•
the impact of various parties not meeting our business requirements, including a significant adverse change in the ability or willingness of such parties to provide service and products, including distribution, or infrastructure equipment for our network;
•
the costs and business risks associated with providing new services and entering new geographic markets;
•
the effects of any future merger or acquisition involving us, as well as the effect of mergers, acquisitions and consolidations, and new entrants in the communications industry, and unexpected announcements or developments from others in our industry;
•
our ability to comply with restrictions imposed by the U.S. Government as a condition to our merger with SoftBank;
•
the effects of any material impairment of our goodwill or other indefinite-lived intangible assets;
•
the impacts of new accounting standards or changes to existing standards that the Financial Accounting Standards Board or other regulatory agencies issue, including the Securities and Exchange Commission (SEC);
•
unexpected results of litigation filed against us or our suppliers or vendors;
•
the costs or potential customer impact of compliance with regulatory mandates including, but not limited to, compliance with the FCC's Report and Order to reconfigure the 800 MHz band and government regulation regarding "net neutrality";
•
equipment failure, natural disasters, terrorist acts or breaches of network or information technology security;
•
one or more of the markets in which we compete being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes, or other external factors over which we have no control;
•
the impact of being a "controlled company" exempt from many corporate governance requirements of the NYSE; and
•
other risks referenced from time to time in this report and other filings of ours with the SEC, including Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended March 31, 2016.
The words "may," "could," "should," "estimate," "project," "forecast," "intend," "expect," "anticipate," "believe," "target," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report. Readers are cautioned that other factors, although not listed above, could also materially affect our future performance and operating results. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. We are not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report, including unforeseen events.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to the market risk associated with unfavorable movements in interest rates, foreign currencies, and equity prices. The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors. There have been no material changes to our market risk policies or our market risk sensitive instruments and positions as described in our Annual Report on Form 10-K for the year ended March 31, 2016.

Item 4.
Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-Q, is reported in accordance with the SEC's rules. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Quarterly Report on Form 10-Q as of December 31, 2016, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the disclosure controls and procedures were effective as of December 31, 2016 in providing reasonable assurance that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and in providing reasonable assurance that the information is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.
Internal controls over our financial reporting continue to be updated as necessary to accommodate modifications to our business processes and accounting procedures. There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II — OTHER INFORMATION
Item 1.
Legal Proceedings
In March 2009, a stockholder brought suit, Bennett v. Sprint Nextel Corp., in the U.S. District Court for the District of Kansas, alleging that Sprint Communications and three of its former officers violated Section 10(b) of the Exchange Act and Rule 10b-5 by failing adequately to disclose certain alleged operational difficulties subsequent to the Sprint-Nextel merger, and by purportedly issuing false and misleading statements regarding the write-down of goodwill. The district court granted final approval of a settlement in August 2015, which did not have a material impact to our financial statements. Five stockholder derivative suits related to this 2009 stockholder suit were filed against Sprint Communications and certain of its present and/or former officers and directors. The first, Murphy v. Forsee, was filed in state court in Kansas on April 8, 2009, was removed to federal court, and was stayed by the court pending resolution of the motion to dismiss the Bennett case; the second, Randolph v. Forsee, was filed on July 15, 2010 in state court in Kansas, was removed to federal court, and was remanded back to state court; the third, Ross-Williams v. Bennett, et al., was filed in state court in Kansas on February 1, 2011; the fourth, Price v. Forsee, et al., was filed in state court in Kansas on April 15, 2011; and the fifth, Hartleib v. Forsee, et al., was filed in federal court in Kansas on July 14, 2011. These cases were essentially stayed while the Bennett case was pending, and we have reached an agreement in principle to settle the matters, by agreeing to some governance provisions and by paying plaintiffs' attorneys fees in an immaterial amount. The court approved the settlement but reduced the amount of the plaintiffs' attorneys fees; the attorneys fees issue is on appeal.
Sprint Communications, Inc. is also a defendant in a complaint filed by stockholders of Clearwire Corporation asserting claims for breach of fiduciary duty by Sprint Communications, and related claims and otherwise challenging the Clearwire Acquisition. ACP Master, LTD, et al. v. Sprint Nextel Corp., et al., was filed April 26, 2013, in Chancery Court in Delaware. Plaintiffs in the ACP Master, LTD suit have also filed suit requesting an appraisal of the fair value of their Clearwire stock. Trial of those cases took place in October and November, 2016, and the parties are in the process of submitting their post-trial briefing. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
Various other suits, inquiries, proceedings and claims, either asserted or unasserted, including purported class actions typical for a large business enterprise and intellectual property matters, are possible or pending against us. If our interpretation of certain laws or regulations, including those related to various federal or state matters such as sales, use or property taxes, or other charges were found to be mistaken, it could result in payments by us. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations. During the quarter ended December 31, 2016, there were no material developments in the status of these legal proceedings.

Item 1A.
Risk Factors
There have been no material changes to our risk factors as described in our Annual Report on Form 10-K for the year ended March 31, 2016.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None

Item 3.
Defaults Upon Senior Securities
None

Item 4.
Mine Safety Disclosures
None


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Item 5.
Other Information
Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Securities Exchange Act of 1934. Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, including, among other matters, transactions or dealings relating to the government of Iran. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.
After the merger with SoftBank, SoftBank acquired control of Sprint. During the three-month period ended December 31, 2016, SoftBank, through one of its non-U.S. subsidiaries, provided roaming services in Iran through Telecommunications Services Company (MTN Irancell), which is or may be a government-controlled entity. During such period, SoftBank had no gross revenues from such services and no net profit was generated. This subsidiary also provided telecommunications services in the ordinary course of business to accounts affiliated with the Embassy of Iran in Japan. During the three-month period ended December 31, 2016, SoftBank estimates that gross revenues and net profit generated by such services were both under $500. Sprint was not involved in, and did not receive any revenue from, any of these activities. These activities have been conducted in accordance with applicable laws and regulations, and they are not sanctionable under U.S. or Japanese law. Accordingly, with respect to Telecommunications Services Company (MTN Irancell), the relevant SoftBank subsidiary intends to continue such activities. With respect to services provided to accounts affiliated with the Embassy of Iran in Japan, the relevant SoftBank subsidiary is obligated under contract to continue such services.
In addition, during the three-month period ended December 31, 2016, SoftBank, through one of its non-U.S. indirect subsidiaries, provided office supplies to the Embassy of Iran in Japan. SoftBank estimates that gross revenue and net profit generated by such services were under $1,700 and $350, respectively. Sprint was not involved in, and did not receive any revenue from any of these activities. Accordingly, the relevant SoftBank subsidiary intends to continue such activities.

Item 6.
Exhibits
The Exhibit Index attached to this Quarterly Report on Form 10-Q is hereby incorporated by reference.




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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
SPRINT CORPORATION
(Registrant)
 
 
By:
/s/    PAUL W. SCHIEBER, JR.
 
 
Paul W. Schieber, Jr.
Vice President and Controller
(Principal Accounting Officer)
Date: February 6, 2017


 



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Exhibit Index
Exhibit No.
 
Exhibit Description
 
Form
 
Incorporated by Reference
 
Filed/Furnished
Herewith
 
SEC
File No.
 
Exhibit
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
 
(3) Articles of Incorporation and Bylaws
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1
 
Amended and Restated Certificate of Incorporation
 
8-K
 
001-04721
 
3.1

 
7/11/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
 
Amended and Restated Bylaws
 
8-K
 
001-04721
 
3.2

 
8/7/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4) Instruments Defining the Rights of Security Holders, including Indentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1
 
Indenture, dated as of October 27, 2016, by and among Sprint Spectrum Co LLC, Sprint Spectrum Co II LLC, Sprint Spectrum Co III LLC and Deutsche Bank Trust Company Americas, as trustee and securities intermediary
 
8-K
 
001-04721
 
4.1

 
11/2/2016
 
 
4.2
 
Series 2016-1 Supplement, dated as of October 27, 2016, among Sprint Spectrum Co LLC, Sprint Spectrum Co II LLC, Sprint Spectrum Co III LLC and Deutsche Bank Trust Company Americas, as trustee and securities intermediary
 
8-K
 
001-04721
 
4.2

 
11/2/2016
 
 
4.3
 
Form of the Series 2016-1 3.360% Senior Secured Notes, Class A-1 (included in Exhibit 4.2)
 
8-K
 
001-04721
 
4.3

 
11/2/2016
 
 
4.4
 
Tenth Supplemental Indenture, dated as of August 9, 2016, by and among Virgin Mobile USA - Evolution, Inc., as new guarantor, Sprint Communications, Inc., The Bank of New York Mellon Trust Company, N.A., as trustee
 
 
 
 
 
 
 
 
 
*
4.5
 
Eleventh Supplemental Indenture, dated as of November 16, 2016, by and among Sprint Communications, Inc., The Bank of New York Mellon Trust Company, N.A., as trustee and certain subsidiaries of Sprint Corporation as new guarantors
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
(10) Material Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
Sprint Corporation Amended and Restated 2015 Omnibus Incentive Plan
 
 
 
 
 
 
 
 
 
*
10.2
 
Employment Agreement, dated May 31, 2015, by and between Sprint Corporation and Kevin Crull
 
10-Q
 
001-04721
 
10.3

 
8/7/2015
 
 
10.3
 
Retention Award Letter for Roger Sole effective as of January 18, 2017
 
 
 
 
 
 
 
 
 
*
10.4
 
Guarantee and Collateral Agreement, dated October 27, 2016, among Deutsche Bank Trust Company Americas, Sprint Spectrum PledgeCo LLC, Sprint Spectrum PledgeCo II LLC, Sprint Spectrum PledgeCo III LLC, Sprint Spectrum License Holder LLC, Sprint Spectrum License Holder II LLC and Sprint Spectrum License Holder III LLC.
 
8-K
 
001-04721
 
10.1

 
11/2/2016
 
 
10.5
 
Intra-Company Spectrum Lease Agreement, dated as of October 27, 2016, among Sprint Spectrum License Holder LLC, Sprint Spectrum License Holder II LLC and Sprint Spectrum License Holder III LLC, Sprint Communications, Inc., Sprint Intermediate Holdco LLC, Sprint Intermediate Holdco II LLC, Sprint Intermediate Holdco III LLC and the guarantors named therein
 
8-K
 
001-04721
 
10.2

 
11/2/2016
 
 

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Exhibit No.
 
Exhibit Description
 
Form
 
Incorporated by Reference
 
Filed/Furnished
Herewith
 
SEC
File No.
 
Exhibit
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
 
10.6
 
First Amendment to Second Amended and Restated Receivables Purchase Agreement, dated as of November 18, 2016, by and among Sprint Spectrum L.P., as initial servicer, the Sellers party thereto, the various Conduit Purchasers, Committed Purchasers and Purchaser Agents party thereto, Mizuho Bank, Ltd., as Collateral Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as SCC Administrative Agent, and SMBC Nikko Securities America, Inc. as Lease Administrative Agent
 
 
 
 
 
 
 
 
 
*
10.7
 
Amended and Restated First Step Transfer Agreement (Tranche 2), dated as of December 8, 2016, by and among Sprint Spectrum L.P., the Originators from time to time party thereto, and the Lessees from time to time party thereto
 
 
 
 
 
 
 
 
 
*
10.8
 
Amended and Restated Second Step Transfer Agreement (Tranche 2), dated as of December 8, 2016, by and among Mobile Leasing Solutions, LLC acting for itself and on behalf of Series 2 thereof and the Lessees from time to time party thereto
 
 
 
 
 
 
 
 
 
*
10.9
 
Amended and Restated Master Lease Agreement (Tranche 2), dated as of December 8, 2016, by and among Sprint Spectrum L.P., the Lessees from time to time party thereto, Mizuho Bank, Ltd., and Mobile Leasing Solutions, LLC acting for itself and on behalf of Series 2 thereof
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
(12) Statement re Computation of Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
12
 
Computation of Ratio of Earnings to Fixed Charges
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
(31) and (32) Officer Certifications
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer Pursuant to Securities Exchange Act of 1934 Rule 13a-14(a)
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Securities Exchange Act of 1934 Rule 13a-14(a)
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
(101) Formatted in XBRL (Extensible Business Reporting Language)
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
*
 
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
*
_________________
*
Filed or furnished, as required.

67