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CLEARWIRE CORP /DE - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis summarizes the significant factors
affecting our results of operations, financial conditions and liquidity position
for the three months ended March 31, 2012 and 2011, and should be read in
conjunction with our condensed consolidated financial statements and related
notes included elsewhere in this filing.
Forward-Looking Statements
Statements and information included in this Quarterly Report on Form 10-Q that
are not purely historical are forward-looking statements within the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. When
used in this report, the words "believe," "expect," "anticipate," "intend,"
"estimate," "evaluate," "opinion," "may," "could," "future," "potential,"
"probable," "if," "will" and similar expressions generally identify
forward-looking statements.
Forward-looking statements in this Quarterly Report on Form 10-Q represent our
beliefs, projections and predictions about future events. These statements are
necessarily subjective and involve known and unknown risks, uncertainties and
other important factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from any future results,
performance or achievement described in or implied by such statements. Actual
results may differ materially from the expected results described in our
forward-looking statements, including with respect to the correct measurement
and identification of factors affecting our business or the extent of their
likely impact, the accuracy and completeness of publicly available information
relating to the factors upon which our business strategy is based, or the
success of our business. The factors or uncertainties that could cause actual
results, performance or achievement to differ materially from forward-looking
statements contained in this report are described in Part II, Item 1A, Risk
Factors, and elsewhere in this report.
Overview
We are a leading provider of fourth generation, or 4G, wireless broadband
services. We build and operate next generation mobile broadband networks that
provide high-speed mobile Internet and residential Internet access services in
communities throughout the country. As of March 31, 2012, we offered our
services in 88 markets in the United States covering an estimated 134 million
people, including an estimated 132 million people covered by our 4G mobile
broadband networks in 71 markets. Our 4G mobile broadband network provides a
connection anywhere within our coverage area.
In our current 4G mobile broadband markets in the United States, we offer our
services through retail channels and through our wholesale partners. Sprint
Nextel Corporation, which we refer to as Sprint, accounts for primarily all of
our wholesale sales to date, and offers services in each of our 4G markets. We
have also recently entered into wholesale arrangements with Simplexity,
FreedomPop and Leap Wireless. We ended the quarter with approximately 1.3
million retail and 9.7 million wholesale subscribers. We are currently focused
on growing our revenue by continuing to build our wholesale business and to
leverage our retail business, reducing expenses and seeking additional capital
for our current business and to continue the development of our network.
Over the long term, we will need to expand our revenue base by increasing sales
to our existing wholesale partners and by adding additional wholesale partners.
To be successful with either, we believe it is necessary that we deploy Long
Term Evolution, which we refer to as LTE, technology, which is currently being
adopted by most wireless operators in the United States as their next generation
wireless technology.
We believe that, as the demand for mobile broadband services continues its rapid
growth, Sprint and other service providers will find it difficult, if not
impossible, to satisfy their customers' demands with their existing spectrum
holdings. By deploying LTE, we believe that we will be able to take advantage of
our leading spectrum position to offer offload data capacity to Sprint and other
existing and future mobile broadband service providers for resale to their
customers on a cost effective basis.
Initially, we plan to overlay up to 8,000 of our existing Worldwide
Interoperability of Microwave Access technology 802.16e standard, which we refer
to as mobile WiMAX, sites with Time Division Duplex LTE, which we refer to as
TDD-LTE, over 20 MHz-wide channels. We plan to focus primarily on sites in
densely populated urban areas where we currently experience the highest
concentration of usage of our mobile WiMAX services, although we will also
consider sites in other areas where Sprint and other current and future
wholesale partners express a need for excess data capacity and where we believe
we will be most likely to generate sufficient revenues.
The success of our current plans will depend to a large extent on whether we
succeed in the following areas: adding new
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)
wholesale partners with substantial offload data capacity needs and generating
or exceeding the revenue levels we currently expect for that portion of our
business; maintaining our retail base and revenues while continuing to realize
the benefits from cost savings initiatives; deploying LTE technology on our
network; and raising additional capital.
Liquidity and Capital Resource Requirements
During the three months ended March 31, 2012, we incurred $561.0 million of net
losses from continuing operations. We generated $59.8 million of cash from
operating activities of continuing operations and spent $21.9 million of cash on
capital expenditures in the improvement and maintenance of our networks. Capital
expenditures in 2012 are expected to amount to approximately $350.0 million to
$400.0 million with most of the spend anticipated to occur in the second half of
the year. While we generated cash from operating activities in the first quarter
of 2012, we do not expect our operations to generate cumulative positive cash
flows during the next twelve months.
As of March 31, 2012, we had available cash and short-term investments of
approximately $1.43 billion. On January 27, 2012, we announced the completion of
an offering by our operating subsidiary, Clearwire Communications LLC, which we
refer to as Clearwire Communications, of $300.0 million aggregate principal
amount of 14.75% first-priority senior secured notes due 2016, which we refer to
as 2016 Senior Secured Notes, at an issue price of 100%. On March 15, 2012, we
entered into securities purchase agreements with certain institutional
investors, pursuant to which we sold shares of Clearwire Corporation Class A
common stock, which we refer to as Class A Common Stock, for an aggregate price
of $83.5 million, which we refer to as the Purchase Price, and in connection
with the sale, Clearwire Communications repurchased $100.0 million in aggregate
principal amount of our 8.25% exchangeable notes due 2040, which we refer to as
Exchangeable Notes, for a total price equal to the Purchase Price.
Under an amendment of the 4G MVNO agreement with Sprint signed in November 2011,
which we refer to as the November 2011 4G MVNO Amendment, Sprint will pay us
$925.9 million for unlimited 4G mobile WiMAX services for resale to its retail
subscribers in 2012 and 2013, approximately two-thirds of which is payable for
service provided in 2012, and the remainder for service provided in 2013. Of the
$925.9 million, $175.9 million will be paid as an offset to principal and
interest due under a $150.0 million dollar promissory note issued by us to
Sprint. We will also receive the final $10.9 million in prepayments from Sprint
in the remainder of 2012, which will be applied against re-wholesaling revenue
in 2012 and 2013 and usage-based revenue in 2014 and thereafter.
As of March 31, 2012, we believe that we had sufficient cash to fund the
near-term liquidity needs of our business for at least the next 12 months based
on the cash and short term investments we had on hand as of the end of the
quarter, the ongoing impact of our 2011 expense reductions, and the cash we
expect to receive for our mobile WiMAX services from our retail business and
from Sprint under the November 2011 4G MVNO Amendment. If our business fails to
perform as we expect or if we incur unforeseen expenses, we may be required to
raise additional capital in the near term to fund our current business,
including the deployment of our LTE network. Also, we believe we will need to
raise substantial additional capital to fund our business and meet our financial
obligations beyond the next 12 months.
The amount of additional capital we will need over the long term, and the timing
of our capital needs, will depend on a number of factors, many of which are
outside of our control and subject to a number of uncertainties. The primary
factors determining the amount of additional capital we will require include:
the amount of wholesale revenues we receive from our existing wholesale
partners, our ability to obtain new wholesale partners and generate significant
revenues from such partners, the timing of deployment of our LTE network which
will depend on our vendors' ability to meet our planned timelines and our
ability to integrate with Sprint's network, the costs we incur in deploying our
LTE network which could be substantially higher than we currently expect if we
are unable to secure equipment or services from vendors on the terms we expect
or if we encounter other unexpected problems with our vendors or with the
deployment, the amount of cash generated by our retail business, our ability to
maintain reduced operating expenses and the accuracy of our other projections of
future financial performance.
The amount and timing of additional financings, if any, to satisfy our long term
capital needs are difficult to estimate at this time. We could pursue a number
of alternatives for securing additional capital. We may seek additional equity
and debt financing from a number of potential sources, including new and
existing strategic investors, private or public offerings and vendors. With the
recent trading price of our Class A Common Stock, any additional equity
financings would be extremely dilutive to our
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stockholders, while any additional debt financings could increase our future
financial commitments, including aggregate interest payments on our existing and
new indebtedness, to levels that we find unsustainable. Further, with our
recently completed debt financing, we have maximized the amount of secured
indebtedness we may incur under our existing indentures, which may make
additional debt financings more difficult to obtain on acceptable terms, or at
all. Other sources of additional capital could include, among other things, a
sale of certain of our assets, such as excess spectrum, that we believe are not
essential for our business.
If we are unable to raise sufficient additional capital to meet our long term
capital needs, or we fail to sell a sufficient amount of additional services to
Sprint and new wholesale partners over the long term, our business prospects,
financial condition and results of operations will likely be materially and
adversely affected, and we will be forced to consider all available
alternatives.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these condensed consolidated
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates used, including those related to long-lived assets and
intangible assets, including spectrum, derivatives, operating leases and
deferred tax asset valuation allowance.
Our accounting policies require management to make complex and subjective
judgments. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on our historical experience, terms of
existing contracts, observance of trends in the industry, or information
provided by outside sources, as appropriate. Additionally, changes in accounting
estimates are reasonably likely to occur from period to period. These factors
could have a material impact on our financial statements, the presentation of
our financial condition, changes in financial condition or results of
operations.
We have identified the following significant change in our critical accounting
estimates during the three months ended March 31, 2012 as compared to the
critical accounting estimates disclosed in Management's Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report
on Form 10-K for the year ended December 31, 2011.
Property, Plant and Equipment
A significant portion of our total assets is property, plant and equipment,
which we refer to as PP&E. PP&E represented $2.72 billion of our $8.89 billion
in total assets as of March 31, 2012. We calculate depreciation on these assets
using the straight-line method based on estimated economic useful lives. The
estimated useful life of equipment is determined based on historical usage of
identical or similar equipment, with consideration given to technological
changes and industry trends that could impact the network architecture and asset
utilization. Since changes in technology or in our intended use of these assets,
as well as changes in broad economic or industry factors, may cause the
estimated period of use of these assets to change, we periodically review these
factors to assess the remaining life of our asset base. When these factors
indicate that an asset's useful life is different from the previous assessment,
we depreciate the remaining book values prospectively over the adjusted
remaining estimated useful life.
During the first quarter of 2012, as a result of Sprint's recent announcement
that it plans to decommission its iDEN network, we evaluated the remaining
useful lives of our Network and base station equipment co-located at iDEN sites
identified by Sprint to be decommissioned. We concluded that, for certain of the
Network and base station equipment at these sites, it is not likely that we
would continue to operate our equipment at the current location once Sprint
decommissions its site and therefore, we determined the useful lives of the
Network and base station equipment at these sites should be accelerated
beginning in the first quarter of 2012 from a weighted-average remaining useful
life of approximately 5 years to approximately 1 - 2 years based on the expected
date of decommissioning. We will continue to monitor the estimated useful lives
of our network assets as our plans continue to evolve. Any further adjustments
to those lives would likely result in increased depreciation expense in future
periods.
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)Results of Operations
The following table sets forth operating data for the periods presented (in
thousands, except percentages).
Three Months Ended March 31, Percentage
2012 2011 Change
Revenues:
Retail revenues $ 204,810 $ 175,241 16.9%
Wholesale revenues 117,821 60,895 93.5%
Other revenues 8 672 (98.8)%
Total revenues 322,639 236,808 36.2%
Operating expenses:
Cost of goods and services and network costs
(exclusive of items shown separately below) 263,790 240,145 9.8%
Selling, general and administrative expense 142,655 214,864 (33.6)%
Depreciation and amortization 177,973 182,474 (2.5)%
Spectrum lease expense 79,708 74,821 6.5%
Loss from abandonment of network and other assets 80,400 171,862 (53.2)%
Total operating expenses 744,526 884,166 (15.8)%
Operating loss (421,887 ) (647,358 ) 34.8%
Other income (expense):
Interest income 264 840 (68.6)%
Interest expense (136,686 ) (119,920 ) (14.0)%
Loss on derivative instruments (4,862 ) (26,781 ) (81.8)%
Other income (expense), net (13,268 ) 290 N/M
Total other income (expense), net (154,552 ) (145,571 ) (6.2)%
Loss from continuing operations before income
taxes (576,439 ) (792,929 ) 27.3%
Income tax benefit (provision) 15,413 (231 ) N/M
Net loss from continuing operations (561,026 ) (793,160 ) 29.3%
Less: non-controlling interests in net loss from
continuing operations of consolidated
subsidiaries 378,972 576,283 (34.2)%
Net loss from continuing operations attributable
to Clearwire Corporation (182,054 ) (216,877 ) 16.1%
Net loss from discontinued operations
attributable to Clearwire Corporation 231 (10,078 ) 102.3%
Net loss attributable to Clearwire Corporation $ (181,823 ) $ (226,955 ) 19.9%
Revenues
Retail revenues are primarily generated from subscription and modem lease fees
for our 4G and Pre-4G services, as well as from sales of 4G devices and fees for
other services such as email and VoIP. Wholesale revenues are primarily
generated from service fees for our 4G services.
The $29.6 million increase in retail revenues for the three months ended March
31, 2012 compared to the same period in 2011 is due primarily to growth in
subscribers and an increase in equipment revenues as we have discontinued the
option for our new retail customers to lease equipment in favor of a
purchase-only model. Our ending retail subscribers increased from 1.2 million at
March 31, 2011 to 1.3 million at March 31, 2012. As we currently do not expect
to expand into additional markets, we expect retail revenues to remain
relatively consistent with the amount recognized in 2011.
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)
Recognition of wholesale revenue during the three months ended March 31, 2012
compared to the same period in the prior year in 2011 changed from usage-based
pricing to fixed pricing. Under the November 2011 4G MVNO Amendment, Sprint will
pay us $925.9 million for unlimited 4G mobile WiMAX services for resale to its
retail subscribers in 2012 and 2013, approximately two-thirds of which is
payable for service provided in 2012, and the remainder for service provided in
2013. Of the $925.9 million, $175.9 million will be paid as an offset to
principal and interest due under a $150.0 million promissory note issued by us
to Sprint. Of the amount due, $900.0 million will be recognized on a
straight-line basis over 2012 and 2013 and the remaining $25.9 million will be
recorded as an offset to the interest cost associated with the promissory note.
Wholesale revenue of $117.8 million during the three months ended March 31, 2012
primarily represents the current period straight-line recognition of the $900.0
million due from Sprint.
Wholesale revenue of $60.9 million during the three months ended March 31, 2011
comprised of usage-based fees received from our wholesale partners, primarily
Sprint. Wholesale revenue during the three months ended March 31, 2011 was based
upon minimal wholesale rate inputs due to the fact that issues around pricing
for the wholesale transactions with Sprint were resolved subsequent to the end
of the quarter. Had the amendments to the wholesale agreement with Sprint signed
in April 2011 been in effect as of March 31, 2011, our pro forma wholesale
revenues for the first quarter of 2011 would have increased by an additional
$16.1 million due to usage during the quarter. See the Pro Forma Reconciliation
for further information.
Sprint is a significant wholesale customer of our 4G wireless broadband
services. During the three months ended March 31, 2012 and 2011, wholesale
revenue recorded attributable to Sprint comprised approximately 36% and 25% of
total revenues, respectively, and substantially all of our wholesale revenues.
Due to the significance of wholesale revenue from Sprint to total revenues for
the three months ended March 31, 2012 and the impact of changing from
usage-based pricing to fixed pricing agreed to in the November 2011 4G MVNO
Amendment, we currently expect total wholesale revenues for 2012 to be less than
that recognized in 2011. Therefore, in order to grow our revenues beyond the
fixed fees for WiMAX services in 2012 and 2013 provided in the November 2011 4G
MVNO Amendment, we are focusing our efforts on deploying our LTE network and
leveraging that network to add new wholesale partners and to generate
usage-based revenue from Sprint under the November 2011 4G MVNO Amendment.
Cost of Goods and Services and Network Costs (exclusive of depreciation and
amortization)
Cost of goods and services and network costs primarily includes tower and
network costs, provision of excessive and obsolete equipment, cost of goods sold
and cost of services. Tower costs including rents, utilities, and backhaul,
which is the transporting of data traffic between distributed sites and a
central point in the market or Point of Presence, which we refer to as POP.
Network costs primarily consist of network repair and maintenance costs, rent
for POP facilities and costs to transport data traffic between POP sites. Cost
of goods sold include the cost of customer premise equipment sold to
subscribers, and cost of services include, among other things, costs incurred to
provide 3G wireless services to our dual-mode customers.
The change in Cost of goods and services and network costs during the three
months ended March 31, 2012 as compared to the same period in 2011 resulted
primarily from an increase in the provision for excessive and obsolete
equipment. The provision for excessive and obsolete equipment was $58.7 million
for the three months ended March 31, 2012 compared to $6.5 million for the same
period in 2011 driven primarily by an increase in the provision for network
equipment not required to support our network deployment plans or sparing
requirements which was identified as we solidified our LTE network architecture.
Partially offsetting the increase in the provision for excessive and obsolete
equipment was a decrease in tower and network costs and cost of services. For
the three months ended March 31, 2012, we incurred approximately $167.1 million
in tower and network costs, compared to $180.6 million in the prior year. The
decrease is primarily due to a decrease in the number of tower leases resulting
from termination activities undertaken as a result of our cost savings
initiatives in 2011.
Additionally, for the three months ended March 31, 2012, we incurred
approximately $1.8 million in cost of services, compared to $11.1 million in the
prior year. The decrease is primarily due to a reduction in the costs to provide
3G wireless services as we curtailed the sale of dual-mode devices in 2011.
In 2012, we expect costs of goods sold to increase as we have discontinued the
option for our new retail customers to lease equipment in favor of a
purchase-only model. We expect tower and network costs needed to operate our
existing network, excluding
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)
the impact of charges related to recognition of cease-to-use liabilities, if
any, to remain consistent with the level of costs incurred in the first quarter
of 2012. With the deployment of our LTE network, we expect network costs to
increase slightly.
Selling, General and Administrative Expense
Selling, general and administrative, which we refer to as SG&A, expenses include
all of the following: costs associated with advertising, public relations,
promotions and other market development programs; facilities costs; third-party
professional service fees; customer care; sales commissions; bad debt expense;
property and other operating taxes; and administrative support activities,
including executive, finance and accounting, IT, legal, human resources,
treasury and other shared services.
The decrease in SG&A expenses for the three months ended March 31, 2012 as
compared to the same period in 2011 is primarily due to lower general and
administrative expenses resulting from workforce reductions and the impact of
our outsourcing arrangement with Teletech, as well as lower sales and marketing
expenses due to our cost containment efforts. . Additionally, our recent shift
to a no contract retail offering and the resulting revision of our existing
commission arrangements, resulted in lower commission expense. During the three
months ended March 31, 2012 compared to the same period in 2011, employee costs
decreased $43.5 million, or 55.1%, commissions costs decreased $11.3 million, or
47.8% and marketing and advertising costs decreased $4.5 million, or 14.0%.
We expect total SG&A expense to decrease in 2012 as compared to 2011 as we
continue to experience the effects of our cost containment measures, as well as
the workforce reductions that commenced in November 2010 and continued in 2011.
However, we expect expenses to increase during the first half of 2012 as
compared to the fourth quarter of 2011 as we incur advertising costs to continue
to support the launch of our new no contract retail offering.
Depreciation and Amortization
Depreciation and amortization expense primarily represents depreciation recorded
on PP&E and amortization of intangible assets. The decrease during the three
months ended March 31, 2012 as compared to the same period in 2011 is primarily
a result of a decrease in the amount of leased customer premise equipment, which
we refer to as CPE, subject to depreciation as we have discontinued the option
for our new retail customers to lease equipment in favor of a purchase-only
model. This decrease was partially offset by an increase in depreciation
beginning in March 2012 on Network and base station equipment co-located at iDEN
sites which Sprint plans to decommission, as further discussed above in
"Critical Accounting Policies and Estimates".
We expect depreciation and amortization in 2012 to increase slightly as compared
with 2011 due to the change in estimated useful lives of the Network and base
station equipment co-located at iDEN sites which Sprint plans to decommission,
partially offset by a decrease in depreciation and amortization as the amount of
leased CPE subject to depreciation continues to decline.
Spectrum Lease Expense
Total spectrum lease expense recorded was as follows (in thousands):
Three Months Ended March 31,
2012 2011
Spectrum lease payments $ 43,293 $ 40,073
Non-cash spectrum lease expense 22,199 21,115
Amortization of spectrum leases 14,216 13,633
Total spectrum lease expense $ 79,708 $ 74,821
Total spectrum lease expense increased $4.9 million for the three months ended
March 31, 2012 as compared to the same period in 2011 as a result of the renewal
of spectrum leases held by us at higher rates.
While we do not expect to add a significant number of new spectrum leases in
2012, we do expect our spectrum lease expense to increase. As we renew the
existing leases, they are replaced with new leases, usually at a higher lease
cost per month, but with longer terms.
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)Loss from Abandonment of Network and Other Assets
We periodically assess assets that have not yet been deployed in our networks,
including equipment and cell site development costs, classified as construction
in progress. During the three months ended March 31, 2012, we solidified our LTE
network architecture, including identifying the first approximately 5,000 sites
at which we expect to deploy LTE technology. As a result, we evaluated the
costs included in construction in progress in conjunction with those network
deployment plans. Any projects that are not required to deploy LTE technology
at those sites, or that are no longer viable due to the development of the LTE
network architecture were abandoned and the related costs written down. This
assessment resulted in the write-downs of network equipment and cell site
development costs of $80.0 million during the three months ended March 31, 2012.
During 2010, we invested heavily in building, deploying and augmenting our
network. With the substantial completion of our prior build plans in early 2011
and due to the uncertainty of the extent and timing of future expansion of the
network, as well as our intent to deploy LTE, alongside mobile WiMAX, in areas
of expected high usage concentration, we decided to abandon certain projects
that no longer fit within management's strategic network plans. During the three
months ended March 31, 2011, we incurred approximately $26.1 million for the
abandonment of network projects that no longer met management's strategic
network plans.
Additionally, in connection with our cost savings initiatives, we identified,
evaluated and terminated certain unutilized tower leases that no longer fit
within management's deployment plan, or when early termination was not available
under the terms of the lease, we advised our landlords of our intention not to
renew. The costs for projects included in construction in progress related to
leases for which we have initiated such termination actions were written down,
resulting in a charge of $145.4 million for the three months ended March 31,
2011.
As we continue to revise our business plans in response to changes in our
strategy, our commitment under the November 2011 4G MVNO Amendment and funding
availability, additional assets could be identified for abandonment, for which
there could be associated write-downs.
Interest Expense
Interest expense recorded was as follows (in thousands):
Three Months Ended March 31,
2012 2011
Senior secured notes $ 100,548 $ 92,277
Second-priority secured notes 15,254 15,897
Exchangeable notes 20,437 20,799
Vendor financing notes 735 923
Capital lease obligations 1,886 2,258
Total interest expense on debt 138,860 132,154
Less: capitalized interest (2,174 ) (12,234 )
Total interest expense $ 136,686 $ 119,920
Three Months Ended March 31,
2012 2011
Interest coupon (1) $ 128,672 $ 121,541
Accretion of debt discount and amortization of debt
premium, net 10,188 10,613
Capitalized interest (2,174 ) (12,234 )
Total interest expense $ 136,686 $ 119,920
(1) For the three months ended March 31, 2012, includes $2.5 million of coupon
interest relating to Exchangeable Notes which was settled in the non-cash
Exchange Transaction.
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)
The increase in interest expense and interest coupon for the three months ended
March 31, 2012 as compared to the same period in 2011 is due to the addition of
$300.0 million of 2016 Senior Secured Notes in January 2012. In addition, the
amount of interest capitalized during the period declined due to the substantial
completion of our WiMAX network build in early 2011.
As a result of the issuance of an additional $300.0 million of 2016 Senior
Secured Notes in January 2012, we expect interest cost to increase in 2012
relative to 2011. However, we also expect the amount of interest capitalized to
increase as we begin to deploy LTE technology on our network.
Loss on Derivative Instruments
In connection with the issuance of the exchangeable notes in December 2010, we
recognized derivative liabilities relating to the exchange options embedded in
those notes, which we refer to as the Exchange Options. The change in estimated
fair value of the Exchange Options is required to be recognized in earnings
during the period. For the three months ended March 31, 2012, we recorded a loss
of $4.9 million for the change in estimated fair value of the Exchange Options
compared to a loss of $26.8 million for the three months ended March 31, 2011.
We expect the gain (loss) on derivative instruments to fluctuate significantly
in 2012 due to the sensitivity of the estimated fair value of the Exchange
Options to valuation inputs such as stock price and volatility. See Item 7A,
Quantitative and Qualitative Disclosures About Market Risk - Stock Price Risk.
Income Tax Benefit (Provision)
The resulting income tax benefit for the three months ended March 31, 2012
compared to the income tax provision for the same period in 2011 is due to a
deferred tax benefit recorded to reflect the effect of the post-change net
operating losses generated in 2012 deemed to be realizable up to the reversing
temporary differences. The increase to the deferred tax asset caused a decrease
in the net deferred liability for our continuing operations.
We currently plan to sell or otherwise dispose of our operations in Spain and
Belgium. If successful, certain intercompany loans related to our international
operations will likely be considered uncollectible for federal income tax
purposes and, as a result, there would likely be an increase to the deferred tax
liability of our discontinued operations of up to approximately $165.0 million
along with a corresponding deferred tax expense for our discontinued operations.
Other Income (Expense), net
Other expense, net for the three months ended March 31, 2012 is primarily
composed of the loss of $10.1 million recorded in connection with the repurchase
of $100.0 million in aggregate principal amount of our exchangeable notes in
March 2012 using the proceeds from the sale of an equivalent amount of Class A
Common Stock.
Net Income (Loss) from Discontinued Operations Attributable to Clearwire
Corporation
The net income (loss) from discontinued operations attributable to Clearwire
Corporation represents our portion of the total net income (loss) from
discontinued operations. The net income from discontinued operations
attributable to Clearwire Corporation for the three months ended March 31, 2012
as compared to the net loss from discontinued operations attributable to
Clearwire Corporation in the same period in 2011 is due primarily to Clearwire
Corporation's share of the net gain realized from the sale of our operations in
Germany during the three months ended March 31, 2012. Clearwire Corporation's
share of this gain, which was included as discontinued operations, was
approximately $4.0 million for the three months ended March 31, 2012. During the
same period in 2011, the net loss from discontinued operations attributable to
Clearwire Corporation included Clearwire Corporation's share of impairment
charges of approximately $7.4 million related to assets in our international
subsidiaries.
Pro Forma Reconciliation
The unaudited pro forma condensed consolidated statement of operations that
follows is presented for informational purposes only and should not be taken as
representative of the future consolidated results of operations of Clearwire
Corporation, which
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)we refer to as Clearwire or the Company.
The following unaudited pro forma condensed consolidated statements of
operations for the three months ended March 31, 2011 were prepared using the
unaudited condensed consolidated statement of operations of Clearwire for the
three months ended March 31, 2011. The unaudited pro forma condensed
consolidated statements of operations should be read in conjunction with the
separate historical financial statements and accompanying notes thereto.
The pricing provisions agreed to in the April 18, 2011 amendment of the 4G MVNO
agreement with Sprint were applicable from and after January 1, 2011. However,
in accordance with generally accepted accounting principles in the United States
applicable to revenue recognition, our first quarter 2011 results did not
reflect the additional revenues due to us as a result of the amendments
contained in this agreement which was signed on April 18, 2011. During the
second quarter of 2011, we recognized revenue of approximately $16.1 million
attributable to services provided in the first quarter of 2011. Had the
agreement been in effect as of March 31, 2011, our pro forma revenues for the
first quarter of 2011 would have increased by $16.1 million, and the pro forma
Net loss from continuing operations attributable to Clearwire Corporation would
have decreased by $4.0 million ($0.02 per share).
The following table provides a reconciliation from the as reported results to
the pro forma results for the three months ended March 31, 2011 (in thousands):
Three Months Ended March 31, 2011
Amounts as Pro Forma
reported Adjustments(1) amounts
Revenues:
Retail revenue $ 175,241 $ - $ 175,241
Wholesale revenue 60,895 16,079 76,974
Other revenue 672 - 672
Total revenues 236,808 16,079 252,887
Total expenses (1,029,968 ) - (1,029,968 )
Net loss from continuing operations (793,160 ) 16,079 (777,081 )
Non-controlling interests in net loss from
continuing operations of consolidated
subsidiaries 576,283 (12,087 ) 564,196
Net loss from continuing operations
attributable to Clearwire Corporation (216,877 ) 3,992 (212,885 )
Net loss from discontinued operations
attributable to Clearwire Corporation (10,078 ) - (10,078 )
Net loss attributable to Clearwire Corporation $ (226,955 ) $ 3,992 $ (222,963 )
Net loss from continuing operations
attributable to Clearwire Corporation per Class
A common share:
Basic $ (0.89 ) $ (0.87 )
Diluted $ (0.89 ) $ (0.87 )
Net loss attributable to Clearwire Corporation
per Class A common share:
Basic $ (0.93 ) $ (0.91 )
Diluted $ (0.93 ) $ (0.91 )
(1) Wholesale revenue adjustment reflects the additional revenue resulting from
computation of first quarter 2011 revenue using the usage-based pricing agreed
to in the April 18, 2011 agreement.
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)
Cash Flow Analysis
The following table presents a summary of our cash flows and beginning and
ending cash balances for the three months ended March 31, 2012 and 2011 (in
thousands):
Three Months Ended March 31,
3/31/2012 3/31/2011Net cash provided by (used in) operating activities $ 65,651
$ (246,954 )
Net cash used in investing activities (926,987 ) (802,228 )
Net cash provided by (used in) financing activities 287,500 (929 )
Effect of foreign currency exchange rates on cash and cash
equivalents
(2,269 ) 227
Total net decrease in cash and cash equivalents (576,105 ) (1,049,884 )
Cash and cash equivalents at beginning of period 893,744 1,233,562
Cash and cash equivalents at end of period 317,639 183,678
Less: cash and cash equivalents of discontinued operations
at end of period
7,505 1,745
Cash and cash equivalents of continuing operations at end
of period $ 310,134 $ 181,933
Operating Activities
Net cash provided by operating activities increased $312.6 million for the three
months ended March 31, 2012 as compared to the same period in 2011 primarily due
to higher cash collections from our primary wholesale partner, Sprint, and
receipt of $150.0 million under a promissory note issued by us to Sprint. While
we generated cash from operating activities in the first quarter of 2012, we do
not expect our operations to generate cumulative positive cash flows during the
next twelve months.
Investing Activities
During the three months ended March 31, 2012, net cash used in investing
activities increased $124.8 million as compared to the same period in 2011. This
change is due primarily to a $362.4 million increase in net maturities, year
over year, of available-for-sale securities which are invested in short-term
investments consisting principally of United States Government and Agency
Issues, which was partially offset by a decrease of approximately $249.4 million
in cash paid for property, plant and equipment. During 2011 our focus had been
on maintenance and operational performance of the networks. With our intended
deployment of a high capacity LTE network primarily in densely populated urban
areas, we anticipate that capital expenditures will increase in 2012 compared to
2011.
Financing Activities
Net cash provided by financing activities increased $288.4 million for the three
months ended March 31, 2012 as compared to the same period in 2011 due primarily
to the receipt of proceeds of $294.8 million from the issuance of the 2016
Senior Secured Notes in January 2012.
Contractual Obligations
The contractual obligations of our continuing operations presented in the table
below represent our estimates of future cash payments under fixed contractual
obligations and commitments as of March 31, 2012. Changes in our business needs
or interest rates, as well as actions by third parties and other factors, may
cause these estimates to change. Because these estimates are complex and
necessarily subjective, our actual cash payments in future periods are likely to
vary from those presented in the table. The following table summarizes our
contractual obligations including principal and interest payments under our debt
obligations, payments under our spectrum lease obligations, and other
contractual obligations as of March 31, 2012 (in thousands):
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CLEARWIRE CORPORATION AND SUBSIDIARIES (Continued)
Less Than
Contractual Obligations Total 1 Year 1 - 3 Years 3 - 5 Years Over 5 Years
Long-term debt obligations $ 4,420,052 $ 15,896 $ 27,182 $ 3,247,724 $ 1,129,250
Interest payments on long-term
debt obligations(1) 3,418,463 504,723 1,021,046 666,029 1,226,665
Operating lease obligations(2) 1,819,252 266,453 735,503 441,249
376,047
Operating lease payments for
assumed renewal periods(2)(3) 8,586,910 443 67,817 372,039 8,146,611
Spectrum lease obligations 6,222,370 130,290 347,135 351,742 5,393,203
Spectrum service credits and
signed spectrum agreements 106,927 6,049 6,396 6,396 88,086
Capital lease obligations(4) 105,798 9,416 26,535 19,201 50,646
Purchase agreements(5) 211,018 115,978 80,087 8,200 6,753
Total $ 24,890,790 $ 1,049,248 $ 2,311,701 $ 5,112,580 $ 16,417,261
____________________________________
(1) Includes $1.19 billion relating to contractual interest payments on the
Exchangeable Notes beyond the expected repayment in 2017.
(2) Includes executory costs of $53.0 million. Amounts include all lease payments
for the contractual lease term including any remaining future lease payments
for leases where notice of intent not to renew has been sent as a result of
the lease termination initiatives.
(3) Amounts include lease payments for assumed renewal periods where renewal is
likely.
(4) Payments include $41.4 million representing interest.
(5) Purchase agreements includes purchase commitments with take-or-pay
obligations and/or volume commitments for equipment that are non-cancelable
and minimum purchases we have committed to purchase from suppliers over time
for goods and services regardless of whether suppliers fully deliver them.
They include, among other things, agreements for backhaul, subscriber devices
and IT related and other services. The amounts actually paid under some of
these "other" agreements will likely be higher than the minimum commitments
due to variable components of these agreements.
In addition, we are party to various arrangements that are conditional in nature
and create an obligation to make payments only upon the occurrence of certain
events, such as the actual delivery and acceptance of products or services.
Because it is not possible to predict the timing or amount that may be due under
these conditional arrangements, no such amounts have been included in the table
above. The table above also excludes blanket purchase order amounts where the
orders are subject to cancellation or termination at our discretion or where the
quantity of goods and services to be purchased or the payment terms are unknown
because such purchase orders are not firm commitments.
We do not have any obligations that meet the definition of an off-balance-sheet
arrangement that have or are reasonably likely to have a material effect on our
financial statements.
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