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 September 30, 2002
-------------------------------------------------
OR
[ ] 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)
KANSAS 48-0457967
- --------------------------------- --------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
- ----------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (913) 624-3000
----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 these reports), and (2) has been subject to these filing
requirements for the past 90 days.
Yes X No
----------- -------
COMMON SHARES OUTSTANDING AT OCTOBER 31, 2002:
FON COMMON STOCK 894,558,003
PCS COMMON STOCK:
Series 1 683,923,978
Series 2 280,720,490
Series 3 34,441,023
CLASS A COMMON STOCK 43,118,018
TABLE OF CONTENTS
Page
Reference
Part I - Financial Information
Item 1. Financial Statements
Consolidated Financial Statements (including Consolidating Information)
Consolidated Statements of Operations 1
Consolidated Statements of Comprehensive Income (Loss) 5
Consolidated Balance Sheets 9
Consolidated Statements of Cash Flows 13
Consolidated Statement of Shareholders' Equity 15
Condensed Notes to Consolidated Financial Statements 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
Item 4. Controls and Procedures 52
Part II - Other Information
Item 1. Legal Proceedings 53
Item 2. Changes in Securities 53
Item 3. Defaults Upon Senior Securities 53
Item 4. Submission of Matters to a Vote of Security Holders 53
Item 5. Other Information 53
Item 6. Exhibits and Reports on Form 8-K 54
Signature 56
Certifications 57
Exhibits
(10)(a) Material Contracts
(12) Computation of Ratios of Earnings to Fixed Charges
Part I.
Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
- --------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Quarters Ended September 30, 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 6,787 $ 6,574
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 2,984 3,382
Selling, general and administrative 1,900 1,785
Depreciation 1,257 1,094
Amortization 1 65
Restructuring and asset impairments 121 -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 6,263 6,326
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 524 248
Interest expense (345) (290)
Intergroup interest charge - -
Other income (expense), net 74 (100)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes 253 (142)
Income tax (expense) benefit 224 (30)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations 477 (172)
Discontinued operation, net 42 38
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 519 (134)
Preferred stock dividends (paid) received (1) (1)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ 518 $ (135)
-- ------------- --- -------------
Diluted Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Diluted weighted average common shares
Basic Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Basic weighted average common shares
DIVIDENDS PER COMMON SHARE
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ---------------------------------- ----------------------------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (175) $ (180) $ 3,805 $ 4,103 $ 3,157 $ 2,651
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(175) (180) 1,681 2,046 1,478 1,516
(8) (4) 953 1,056 955 733
- - 670 636 587 458
- - - 5 1 60
- - 126 - (5) -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(183) (184) 3,430 3,743 3,016 2,767
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
8 4 375 360 141 (116)
- 4 (75) (90) (270) (204)
- - 82 77 (82) (77)
(8) (8) 17 (57) 65 (35)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 399 290 (146) (432)
- - 85 (174) 139 144
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 484 116 (7) (288)
- - 42 38 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 526 154 (7) (288)
- - 2 2 (3) (3)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 528 $ 156 $ (10) $ (291)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.54 $ 0.13 $ (0.01) $ (0.29)
0.05 0.05 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.59 $ 0.18 $ (0.01) $ (0.29)
--- ------------- -- ------------- -- ------------- --- -------------
894.6 889.6 1,018.6 993.0
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.54 $ 0.13 $ (0.01) $ (0.29)
0.05 0.05 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.59 $ 0.18 $ (0.01) $ (0.29)
--- ------------- -- ------------- -- ------------- --- -------------
892.9 887.2 1,018.6 993.0
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.125 $ 0.125 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Year-to-Date September 30, 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 20,102 $ 18,999
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 9,210 9,478
Selling, general and administrative 5,407 5,273
Depreciation 3,625 3,118
Amortization 4 321
Restructuring and asset impairments 144 -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 18,390 18,190
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 1,712 809
Interest expense (1,044) (906)
Intergroup interest charge - -
Other expense, net (234) (146)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes 434 (243)
Income tax (expense) benefit 37 (37)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations 471 (280)
Discontinued operation, net 120 112
Extraordinary items, net - (1)
Cumulative effect of change in
accounting principles, net - 2
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 591 (167)
Preferred stock dividends (paid) received (5) (5)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ 586 $ (172)
-- ------------- --- -------------
Diluted Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Diluted weighted average common shares
Basic Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Basic weighted average common shares
DIVIDENDS PER COMMON SHARE
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ---------------------------------- ----------------------------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (444) $ (463) $ 11,523 $ 12,496 $ 9,023 $ 6,966
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(444) (463) 5,338 6,130 4,316 3,811
(24) (8) 2,875 3,272 2,556 2,009
- - 1,971 1,821 1,654 1,297
- - - 17 4 304
- - 126 - 18 -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(468) (471) 10,310 11,240 8,548 7,421
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
24 8 1,213 1,256 475 (455)
- 15 (232) (269) (812) (652)
- - 255 214 (255) (214)
(24) (23) (181) (53) (29) (70)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,055 1,148 (621) (1,391)
- - (261) (500) 298 463
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 794 648 (323) (928)
- - 120 112 - -
- - - (1) - -
- - - - - 2
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 914 759 (323) (926)
- - 5 5 (10) (10)
- ---- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 919 $ 764 $ (333) $ (936)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.89 $ 0.73 $ (0.33) $ (0.95)
0.14 0.13 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 1.03 $ 0.86 $ (0.33) $ (0.95)
--- ------------- -- ------------- -- ------------- --- -------------
893.2 888.3 1,014.2 983.7
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.90 $ 0.73 $ (0.33) $ (0.95)
0.13 0.13 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 1.03 $ 0.86 $ (0.33) $ (0.95)
--- ------------- -- ------------- -- ------------- --- -------------
891.2 886.3 1,014.2 983.7
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.375 $ 0.375 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
- --------------------------------------------- ----------------- ----------------- -- -------------------------------
Quarters Ended September 30, 2002 2001
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 519 $ (134)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Loss
Unrealized holding losses on securities (18) (22)
Income tax benefit 7 8
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding losses on securities
during the period (11) (14)
Reclassifications adjustment for gains on securities included
in net income (loss) (1) (15)
Foreign currency translation adjustments - (5)
Reclassifications adjustment for foreign currency translation
gains (losses) included in net income (loss) (7) 31
Unrealized gains (losses) on qualifying cash flow hedges 6 (2)
Income tax expense (2) -
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on qualifying
cash flow hedges during the period 4 (2)
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total other comprehensive loss (15) (5)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ 504 $ (139)
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ------------------------------- -- ----------------------------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 526 $ 154 $ (7) $ (288)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 4 (18) (26) - -
- (2) 7 10 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 2 (11) (16) - -
- - (1) (15) - -
- - - (5) - -
- - - 31 (7) -
- - 6 (2) - -
- - (2) - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 4 (2) - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 2 (8) (7) (7) -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ 2 $ 518 $ 147 $ (14) $ (288)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
- --------------------------------------------- ----------------- ----------------- -- -------------------------------
Year-to-Date September 30, 2002 2001
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 591 $ (167)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Loss
Unrealized holding gains (losses) on securities (48) 6
Income tax benefit (expense) 19 (2)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities
during the period (29) 4
Reclassifications adjustment for gains on securities included
in net income (loss) (2) (15)
Foreign currency translation adjustments 3 (17)
Reclassifications adjustment for foreign currency translation
gains (losses) included in net income (loss) (7) 31
Unrealized gains (losses) on qualifying cash flow hedges 34 (8)
Income tax expense (8) -
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on qualifying
cash flow hedges 26 (8)
Cumulative effect of change in accounting principles - (9)
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total other comprehensive loss (9) (14)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ 582 $ (181)
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ------------------------------- -- ----------------------------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 914 $ 759 $ (323) $ (926)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 8 (48) (2) - -
- (3) 19 1 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 5 (29) (1) - -
- - (2) (15) - -
- - (2) (16) 5 (1)
- - - 31 (7) -
- - 34 (8) - -
- - (8) - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 26 (8) - -
- - - (9) - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 5 (7) (18) (2) (1)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ 5 $ 907 $ 741 $ (325) $ (927)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS
Sprint Corporation
-----------------------------------
(millions) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and equivalents $ 738 $ 313
Accounts receivable, net of consolidated allowance for doubtful accounts of
$426 and $397 3,248 3,547
Inventories 717 690
Deferred tax asset 795 36
Prepaid expenses 400 280
Intergroup receivable - -
Current tax benefit receivable from the FON Group - -
Other 291 328
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 6,189 5,194
Assets of discontinued operation 332 377
Property, plant and equipment
FON Group 35,002 34,072
PCS Group 16,644 14,634
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 51,646 48,706
Accumulated depreciation (22,744) (19,746)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 28,902 28,960
Investments in and advances to affiliates 238 288
Intangibles
Goodwill 4,401 4,733
Spectrum licenses 4,619 4,995
Other intangibles 761 838
- -------------------------------------------------------------------------------------------------------------------------
Total intangibles 9,781 10,566
Accumulated amortization (739) (1,506)
- -------------------------------------------------------------------------------------------------------------------------
Net intangibles 9,042 9,060
Other assets 1,300 1,914
- -------------------------------------------------------------------------------------------------------------------------
Total $ 46,003 $ 45,793
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ----------------------------------- -----------------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2002 2001 2002 2001 2002 2001
- ------------------------------------- ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 101 $ 134 $ 637 $ 179
- - 1,821 2,156 1,427 1,391
- - 198 248 519 442
- - 31 36 764 -
- - 227 145 173 135
(285) (234) 285 234 - -
(16) - - - 16 -
- - 149 164 142 164
- ---------------------------------------- ------------------------------- -----------------------------------
(301) (234) 2,812 3,117 3,678 2,311
- - 332 377 - -
- - 35,002 34,072 - -
- - - - 16,644 14,634
- ------------------------------------- ----------------------------------- -----------------------------------
- - 35,002 34,072 16,644 14,634
(50) (47) (18,020) (16,581) (4,674) (3,118)
- ------------------------------------- ----------------------------------- -----------------------------------
(50) (47) 16,982 17,491 11,970 11,516
(280) (280) 416 417 102 151
- - 27 27 4,374 4,706
- - 1,520 1,566 3,099 3,429
- - 23 46 738 792
- ------------------------------------- ----------------------------------- -----------------------------------
- - 1,570 1,639 8,211 8,927
- - (2) (74) (737) (1,432)
- ------------------------------------- ----------------------------------- -----------------------------------
- - 1,568 1,565 7,474 7,495
- - 953 1,197 347 717
- ------------------------------------- ----------------------------------- -----------------------------------
$ (631) $ (561) $ 23,063 $ 24,164 $ 23,571 $ 22,190
- ------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued)
Sprint Corporation
-----------------------------------
(millions, except per share data) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 1,226 $ 4,401
Accounts payable 2,316 2,895
Accrued interconnection costs 733 588
Accrued taxes 454 456
Advance billings 532 479
Accrued restructuring costs 175 389
Payroll and employee benefits 456 565
Accrued interest 396 309
Intergroup payable - -
Other 965 1,049
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,253 11,131
Liabilities of discontinued operation 229 290
Noncurrent liabilities
Long-term debt and capital lease obligations 19,433 16,501
Equity unit notes 1,725 1,725
Deferred income taxes 2,418 1,586
Postretirement and other benefit obligations 920 940
Other 722 748
- -------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 25,218 21,500
Redeemable preferred stock 256 256
Shareholders' equity
Common stock
Class A FT, par value $.50 per share, 100.0 shares authorized, 43.1 shares
issued and outstanding 22 22
FON, par value $2.00 per share, 4,200.0 shares authorized, 893.5 and 888.8
shares issued and outstanding 1,787 1,778
PCS, par value $1.00 per share, 4,600.0 shares authorized, 998.5 and 986.7
shares issued and outstanding 998 987
Capital in excess of par or stated value 9,912 10,076
Retained earnings (deficit) 323 (261)
Accumulated other comprehensive income 5 14
Combined attributed net assets - -
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,047 12,616
- -------------------------------------------------------------------------------------------------------------------------
Total $ 46,003 $ 45,793
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------ ----------------------------------- -----------------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2002 2001 2002 2001 2002 2001
- ------------------------------------ ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 1,166 $ 2,056 $ 60 $ 2,345
- - 706 1,427 1,610 1,468
- - 720 569 13 19
(16) - 252 227 218 229
- - 239 247 293 232
- - 170 389 5 -
- - 365 445 91 120
- - 13 47 383 262
(285) (234) - - 285 234
(50) (47) 540 586 475 510
- ------------------------------------ ----------------------------------- -----------------------------------
(351) (281) 4,171 5,993 3,433 5,419
- - 229 290 - -
- - 3,169 3,258 16,264 13,243
- - - - 1,725 1,725
- - 1,949 1,585 469 1
- - 920 940 - -
- - 319 384 403 364
- ------------------------------------ ----------------------------------- -----------------------------------
- - 6,357 6,167 18,861 15,333
(280) (280) 10 10 526 526
22 22 - - - -
1,787 1,778 - - - -
998 987 - - - -
9,912 10,076 - - - -
323 (261) - - - -
5 14 - - - -
(13,047) (12,616) 12,296 11,704 751 912
- ------------------------------------ ----------------------------------- -----------------------------------
- - - - - -
- ------------------------------------ ----------------------------------- -----------------------------------
$ (631) $ (561) $ 23,063 $ 24,164 $ 23,571 $ 22,190
- ------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(millions) Sprint Corporation
----------------------------------
Consolidated
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date September 30, 2002 2001
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
Net income (loss) $ 591 $ (167)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Discontinued operation, net (120) (112)
Equity in net losses of affiliates 105 144
Depreciation and amortization 3,629 3,439
Deferred income taxes 526 160
Losses on write-down of assets 396 159
Changes in assets and liabilities:
Accounts receivable, net 325 (170)
Inventories and other current assets (159) 228
Accounts payable and other current liabilities (665) (354)
Current tax benefit receivable from the FON Group - -
Affiliate receivables and payables, net - -
Noncurrent assets and liabilities, net (57) (122)
Other, net (145) (82)
- ---------------------------------------------------------------------- ------------- --- ------------- -- -------------
Net cash provided by operating activities of continuing operations 4,426 3,123
Net cash provided by operating activities of discontinued operation 106 114
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash provided by operating activities 4,532 3,237
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (3,628) (6,760)
Investments in affiliates, net (14) (61)
Proceeds from sales of assets 97 286
Other, net - 33
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities of continuing operations (3,545) (6,502)
Net cash used by investing activities of discontinued operation (2) -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (3,547) (6,502)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from debt 6,023 4,877
Payments on debt (6,286) (3,620)
Proceeds from equity unit notes - 1,725
Proceeds from common stock issued 2 605
Dividends paid (341) (340)
Other, net 42 20
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by financing activities (560) 3,267
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 425 2
Cash and Equivalents at Beginning of Period 313 203
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 738 $ 205
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 914 $ 759 $ (323) $ (926)
- - (120) (112) - -
- - 12 64 93 80
- - 1,971 1,838 1,658 1,601
- - 376 389 150 (229)
- 395 159 1 -
- - 335 295 (10) (465)
(2) (66) 26 (93) 204
(16) 28 (891) (509) 242 127
16 (26) - - (16) 26
- - (28) 69 28 (69)
- 2 (37) (169) (20) 45
- (2) (122) (115) (23) 35
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 2,739 2,694 1,687 429
- - 106 114 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 2,845 2,808 1,687 429
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,550) (3,899) (2,078) (2,861)
- - (26) (32) 12 (29)
- - 66 249 31 37
- - - 33 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,510) (3,649) (2,035) (2,853)
- - (2) - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,512) (3,649) (2,035) (2,853)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,287 1,554 4,736 3,323
- - (2,270) (292) (4,016) (3,328)
- - - - - 1,725
- - 1 22 1 583
- - (330) (329) (11) (11)
- - (54) (136) 96 156
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,366) 819 806 2,448
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (33) (22) 458 24
- - 134 86 179 117
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 101 $ 64 $ 637 $ 141
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
Year-to-Date September 30, 2002
- ----------------------------------------------------------------------------------------------------------------
Capital in
FON PCS Excess of
Class A FT Common Common Par or Stated
Common Stock Stock Stock Value
- ----------------------------------------------------------------------------------------------------------------
Beginning 2002 balance $ 22 $ 1,778 $ 987 $ 10,076
Net income (loss) - - - -
FON common stock dividends - - - (336)
PCS preferred stock dividends - - - (5)
FON Series 1 common stock issued - 9 - 44
PCS Series 1 common stock issued - - 12 84
Intergroup stock compensation - - - -
Other, net - - (1) 49
- ----------------------------------------------------------------------------------------------------------------
September 2002 balance $ 22 $ 1,787 $ 998 $ 9,912
------------------------------------------------------------------
Shares Outstanding
- ------------------------------------------------------------------------------------------------
Beginning 2002 balance 43.1 888.8 986.7
FON Series 1 common stock issued - 4.7 -
PCS Series 1 common stock issued - - 11.8
- ------------------------------------------------------------------------------------------------
September 2002 balance 43.1 893.5 998.5
--------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
- ------------------------------------------------------------------------------------
Accumulated
Retained Other Combined Attributed Net Assets
Earnings Comprehensive Consolidated ------------------------------
(Deficit) Income Total Sprint FON Group Sprint PCS Group
- ------------------------------------------------------------------------------------
$ (261) $ 14 $ 12,616 $ 11,704 $ 912
591 - 591 914 (323)
- - (336) (336) -
- - (5) 6 (11)
- - 53 53 -
- - 96 - 96
- - - (71) 71
(7) (9) 32 26 6
- ------------------------------------------------------------------------------------
$ 323 $ 5 $ 13,047 $ 12,296 $ 751
- ------------------------------------------------------------------------------------
PART I.
Item 1.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Sprint Corporation
- --------------------------------------------------------------------------------
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the
consolidated interim financial statements reflect all adjustments, consisting
only of normal recurring accruals, needed to fairly present Sprint Corporation's
consolidated financial position, results of operations, cash flows and
comprehensive income (loss).
Certain information and footnote disclosures normally included in consolidated
financial statements prepared according to accounting principles generally
accepted in the United States have been condensed or omitted. As a result, you
should read these financial statements along with Sprint Corporation's 2001 Form
10-K/A. Operating results for the 2002 year-to-date period do not necessarily
represent the results that may be expected for the year ending December 31,
2002.
- --------------------------------------------------------------------------------
1. Basis of Consolidation and Presentation
- --------------------------------------------------------------------------------
Tracking Stock
FON common stock and PCS common stock are intended to reflect the financial
results and economic value of the FON and PCS Groups. However, they are classes
of common stock of Sprint, not of the group they are intended to track.
Accordingly, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
but rather represent a direct equity interest in our assets and liabilities as a
whole.
Board Discretion Regarding Tracking Stocks
Sprint's Board has the discretion to, among other things, make operating and
financial decisions that could favor one group over the other and, subject to
the restrictions in Sprint's articles of incorporation, to change the allocation
of the assets and liabilities that comprise each of the FON Group and the PCS
Group without shareholder approval. Under the applicable corporate law, Sprint's
Board owes its fiduciary duties to all of Sprint's shareholders and there is no
Board of Directors that owes separate duties to the holders of either the FON
common stock or the PCS common stock. The Tracking Stock Policies provide that
the Board, in resolving material matters in which the holders of FON common
stock and PCS common stock have potentially divergent interests, will act in the
best interests of Sprint and all of its common shareholders after giving fair
consideration to the potentially divergent interests of the holders of the
separate classes of Sprint common stock. These policies may be changed by the
Board without shareholder approval. Given the Board's discretion in these
matters, it may be difficult to assess the future prospects of each group based
on past performance.
Consolidation and Comparative Presentation
The consolidated financial statements include the accounts of Sprint, its wholly
owned subsidiaries and subsidiaries it controls. Investments in entities in
which Sprint exercises significant influence, but does not control, are
accounted for using the equity method (see Note 2).
The consolidated financial statements are prepared using accounting principles
generally accepted in the United States. These principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical, Sprint
uses other indirect methods, including time studies, to estimate the allocation
of costs to each group. Cost allocation methods other than time studies include
factors (general, marketing or headcount) derived from the operating unit's
relative share of the predefined category referenced (e.g. headcount). Sprint
believes that the costs allocated are comparable to the costs that would be
incurred if the groups would have been operating on a stand-alone basis. Costs
for shared services totaled approximately $131 million and $132 million in the
2002 and 2001 third quarters and $383 million and $402 million in the 2002 and
2001 year-to-date periods, respectively. The percentage of these costs allocated
to the PCS Group were approximately 31% and 24% in the 2002 and 2001 third
quarters and 29% and 21% in the 2002 and 2001 year-to-date periods,
respectively, with the balance remaining in the FON Group. The allocation of
shared services may change at the discretion of Sprint's Board and does not
require shareholder approval.
Allocation of Group Financing
Financing activities for the groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the groups is specifically allocated
to and reflected in the financial statements of the applicable group. Interest
expense is allocated to the PCS Group based on an interest rate that is
substantially equal to the rate it would be able to obtain from third parties as
a wholly owned Sprint subsidiary, but without the benefit of any guarantee by
Sprint or any member of the FON Group. That interest rate is higher than the
rate Sprint obtains on borrowings. The difference between Sprint's actual
interest rate and the rate charged to the PCS Group is reflected as a reduction
in the FON Group's interest expense and totaled $82 million and $77 million in
the 2002 and 2001 third quarters and $255 million and $214 million in the 2002
and 2001 year-to-date periods, respectively. These amounts are reflected in the
"Intergroup interest charge" on the Consolidated Statements of Operations.
Under Sprint's centralized cash management program, one group may advance funds
to the other group. These advances are accounted for as short-term borrowings
between the groups and bear interest at a market rate that is substantially
equal to the rate that group would be able to obtain from third parties on a
short-term basis.
The allocation of group financing activities may change at the discretion of
Sprint's Board and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. Sprint adopted a tax
sharing agreement which provided for the allocation of income taxes between the
two groups. The FON Group's income taxes are calculated as if it files returns
which exclude the PCS Group. The PCS Group's income taxes reflect the PCS
Group's incremental cumulative impact on Sprint's consolidated income taxes.
Intergroup tax payments are satisfied on the date Sprint's related tax payment
is due to or the refund is received from the applicable tax authority.
The original tax sharing agreement applied to tax years ending on or before
December 31, 2001. In December 2001, Sprint adopted a continuation of this tax
sharing arrangement except for the elimination of certain provisions addressing
certain types of acquisitions or restructurings, which never became operable
under the original agreement.
2. Investments
- --------------------------------------------------------------------------------
Investments in Securities
In the 2002 second quarter, Sprint completed an analysis of the valuation of its
cost method investment in EarthLink, Inc. preferred shares which resulted in a
write-down of $241 million to market value. This charge is included in "Other
expense, net" on Sprint's Consolidated Statements of Operations.
Investments in and Advances to Affiliates
At the end of September 2002, investments accounted for using the equity method
consisted primarily of the PCS Group's investments in Virgin Mobile, U.S.A and
SVC BidCo L.P. (BidCo).
In 2001, investments accounted for using the equity method included the FON
Group's investments in Intelig Telecomunicacoes, Ltda., and other investments
and the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V.
(Pegaso) and BidCo.
In the third quarter of 2002, Sprint sold its investment in Pegaso to Telefonica
Moviles. Sprint also reached an agreement with Pegaso and the other shareholders
of Pegaso for payment in connection with the cancellation of the Company's
Services Contract. Sprint's book investment in Pegaso was zero due to previous
recognition of its share of losses. Sprint received $28 million from Telefonica
Moviles in the third quarter, and in October 2002 received an additional final
payment, net of foreign withholding tax, of $35 million for its share of Pegaso.
In the second quarter of 2002, Call-Net, a Canadian long-distance provider,
finalized a comprehensive recapitalization proposal that altered Sprint's
existing ownership in this investment which has been carried at zero value since
the 2000 fourth quarter. Sprint invested approximately $16 million in new
Call-Net shares as part of this proposal. Since this is an equity method
investment, Sprint recognized previously unrecognized losses in the amount of
this additional investment. Additionally, Sprint and Call-Net agreed to a new
ten year branding and technology services agreement for which Sprint receives
royalties.
In the second quarter of 2002, Sprint received $38 million from BidCo
representing its share of the FCC's return of 85% of the deposit for licenses in
the NextWave spectrum auction.
Also in the second quarter of 2002, a new agreement was entered into with the
Virgin Group for funding of Virgin Mobile USA. Under the terms of the agreement,
Sprint will fund up to $150 million, with the majority in the form of discounted
network services and the remainder in cash, and the Virgin Group will fund up to
$150 million in cash. Virgin Mobile USA launched services in June 2002.
Combined, unaudited, summarized financial information (100% basis) of entities
accounted for using the equity method was as follows:
Quarters Ended Year-to-Date
September 30, September 30,
--- ------------------------------- -- -------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
Net operating revenues $ 18 $ 157 $ 148 $ 507
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (31) $ (72) $ (142) $ (358)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (34) $ (191) $ (305) $ (499)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (3) $ (55) $ (105) $ (128)
--- ------------- -- -------------- -- ------------- --- -------------
- --------------------------------------------------------------------------------
3. Income Taxes
- --------------------------------------------------------------------------------
The differences that caused Sprint's effective income tax rates to vary from the
35% federal statutory rate for income taxes related to continuing operations
were as follows:
Sprint Sprint Sprint
Corporation FON PCS
Year-to-Date September 30, 2002 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 152 $ 369 $ (217)
Effect of:
State income taxes, net of federal income tax effect 5 25 (20)
Equity in losses of foreign joint ventures (56) 1 (57)
Previous investment write downs (130) (130) -
Other, net (8) (4) (4)
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ (37) $ 261 $ (298)
--- ------------- --- -------------- -- --------------
Effective income tax rate NM 24.7% 48.0%
--- ------------- --- -------------- -- --------------
Sprint Sprint Sprint
Corporation FON PCS
Year-to-Date September 30, 2001 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ (85) $ 402 $ (487)
Effect of:
State income taxes, net of federal income tax effect 14 46 (32)
Equity in losses of foreign joint ventures 28 - 28
Goodwill amortization 35 6 29
Write down of equity method investments 55 55 -
Other, net (10) (9) (1)
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ 37 $ 500 $ (463)
--- ------------- --- -------------- -- --------------
Effective income tax rate NM 43.6% 33.3%
--- ------------- --- -------------- -- --------------
NM = Not meaningful
In the 2002 third quarter, Sprint reached a definitive agreement to sell
its directory publishing business to R.H. Donnelley. Due to the anticipated
gain on this sale, Sprint recognized $292 million of tax benefits in the
quarter on previously recorded investment losses. The difference between
the benefit recognized in the quarter and the year-to-date impact reflected
in the above reconciliation consists primarily of the tax benefits on
equity losses and the write down of EarthLink, Inc. stock that occurred in
the 2002 first and second quarters.
- --------------------------------------------------------------------------------
4. Accounting for Derivative Instruments
- --------------------------------------------------------------------------------
Sprint's derivative instruments include interest rate swaps, stock warrants, net
purchased equity options embedded in forward sale contracts and foreign currency
forward contracts. Sprint's derivative transactions are used principally for
hedging purposes and comply with Board-approved policies. Senior finance
management receives frequent status updates of all outstanding derivative
positions.
Interest Rate Swaps
The interest rate swaps met all the required criteria under derivative
accounting rules for the assumption of perfect effectiveness resulting in no
recognition of changes in their fair value in earnings upon adoption or during
the life of the swap. Sprint held both cash flow hedges and fair value hedges in
interest rate swaps for some of the periods presented. As of June 30, 2002,
Sprint no longer held any interest rate swaps.
Sprint recorded a $12 million pre-tax increase to other comprehensive income
in the 2002 year-to-date period resulting from gains on cash flow hedges. The
change in other comprehensive income is included in "Net unrealized gains
(losses) on qualifying cash flow hedges" on the Consolidated Statements of
Comprehensive Income (Loss).
Sprint recorded a $2 million reduction in other comprehensive income in the 2001
third quarter and an $8 million decline in the 2001 year-to-date period as a
result of losses on cash flow hedges.
Stock Warrants
The stock warrants are not designated as hedging instruments and changes in the
fair value of these derivative instruments are recognized in earnings during the
period of change.
Sprint's net derivative losses on stock warrants were immaterial in the 2002
third quarter. Sprint recorded net derivative losses in earnings of $3 million
after tax for the 2002 year-to-date period due to changes in the fair value of
the stock warrants.
Sprint's activity associated with stock warrants was immaterial in the 2001
third quarter and year-to-date periods.
Net Purchased Equity Options
The net purchased equity options are designated as cash flow hedges and changes
in value are recognized in other comprehensive loss.
Sprint recorded a $4 million after tax increase to other comprehensive income in
the 2002 third quarter and a $14 million after tax increase in the 2002
year-to-date period resulting from gains on these cash flow hedges. There were
no net purchased equity options held during the 2001 third quarter or the 2001
year-to-date period. The changes in other comprehensive income are included in
"Net unrealized gains (losses) on qualifying cash flow hedges" on the
Consolidated Statements of Comprehensive Income (Loss).
Foreign Currency Forward Contracts
Foreign currency forward contracts held during the period were not designated as
hedges and changes in the fair value of these derivative instruments are
recognized in earnings during the period of change. The activity associated with
these contracts was immaterial in all periods presented.
Cumulative Effect Upon Adoption
Sprint adopted Financial Accounting Standards Board Statement (SFAS) No. 133 on
January 1, 2001, which resulted in a cumulative reduction in net loss of $2
million after tax and a cumulative reduction in other comprehensive income of $9
million. The reduction in net loss was due to changes in the fair value of the
stock warrants that are not designated as hedging instruments and is recorded as
a "Cumulative effect of change in accounting principles, net" on the
Consolidated Statements of Operations. The reduction in other comprehensive
income results from a decrease in fair value of cash flow hedges resulting from
interest rate fluctuations. The decrease is recorded in "Cumulative effect of
change in accounting principles" on the Consolidated Statements of Comprehensive
Income (Loss). The net derivative gains and losses are included in "Other income
(expense), net" on the Consolidated Statements of Operations.
- --------------------------------------------------------------------------------
5. Goodwill and Other Intangible Assets
- --------------------------------------------------------------------------------
Sprint adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January
1, 2002. This standard prescribes the accounting treatment for both identifiable
intangibles and goodwill after initial recognition. Upon adoption of the
standard, amortization of goodwill and indefinite life intangibles ceased and
accumulated amortization as of December 31, 2001 reduced the carrying value of
these assets. Periodic impairment testing of these assets is now required.
Definite life intangibles continue to be amortized over their useful lives.
Sprint identified spectrum licenses, which include related microwave relocation
costs, and its trademark as indefinite life intangibles. Concurrent with
adoption, Sprint evaluated for impairment its goodwill and indefinite life
intangibles in accordance with the standard's guidance and determined these
assets were not impaired.
The following table adjusts net income (loss) and basic and diluted earnings
(loss) per share in the prior periods to exclude amortization, net of any
related tax effects on goodwill and indefinite lived intangibles.
Consolidated FON Group PCS Group
--------- -- ---------- --------- -- ---------- ---------- -- ---------
Quarters ended September 30, 2002 2001 2002 2001 2002 2001
- ----------------------------------- -- --------- -- ---------- -- --------- -- ---------- -- ---------- -- ---------
(millions, except per share amounts)
Reported net income (loss) $ 519 $ (134) $ 526 $ 154 $ (7) $ (288)
Add back:
Goodwill amortization - 30 - - - 30
Spectrum license amortization - 18 - 5 - 13
-- --------- -- ---------- -- --------- -- ---------- -- ---------- -- -------
Adjusted net income (loss) $ 519 $ (86) $ 526 $ 159 $ (7) $ (245)
-- --------- -- ---------- -- --------- -- ---------- -- ---------- -- ---------
Basic and diluted earnings per
share
Reported basic and diluted
earnings (loss) per share $ 0.59 $ 0.18 $ (0.01) $ (0.29)
Add back:
Goodwill amortization - - - 0.03
Spectrum license amortization - - - 0.01
-- --------- -- ---------- -- ---------- -- --------
Adjusted basic and diluted
earnings (loss) per share $ 0.59 $ 0.18 $ (0.01) $ (0.25)
-- --------- -- ---------- -- ---------- -- ---------
Consolidated FON Group PCS Group
--------- -- ---------- --------- -- ---------- ---------- -- ---------
Year-to-date September 30, 2002 2001 2002 2001 2002 2001
- ----------------------------------- -- --------- -- ---------- -- --------- -- ---------- -- ---------- -- ---------
(millions, except per share amounts)
Reported net income (loss) $ 591 $ (167) $ 914 $ 759 $ (323) $ (926)
Add back:
Goodwill amortization - 92 - - - 92
Spectrum license amortization - 56 - 16 - 40
-- --------- -- ---------- -- --------- -- ---------- -- --------- -- ---------
Adjusted net income (loss) $ 591 $ (19) $ 914 $ 775 S (323) $ (794)
-- --------- -- ---------- -- --------- -- ---------- -- --------- -- ---------
Basic and diluted earnings per
share
Reported basic and diluted
earnings (loss) per share $ 1.03 $ 0.86 $ (0.33) $ (0.95)
Add back:
Goodwill amortization - - - 0.09
Spectrum license amortization - 0.02 - 0.04
-- --------- -- ---------- -- --------- -- ---------
Adjusted basic and diluted
earnings (loss) per share $ 1.03 $ 0.88 $ (0.33) $ (0.82)
-- --------- -- ---------- -- --------- -- ---------
- --------------------------------------------------------------------------------
6. Restructuring Activity
- --------------------------------------------------------------------------------
In the 2002 third quarter, Sprint announced a restructuring integrating its
E|Solutions' Web hosting sales, mobile computing consulting, marketing, and
product sales support capabilities into Sprint Business while integrating its
customer service operations into Network Services. Additionally, Sprint
announced that its global markets division will discontinue offering and
supporting facilities-based Digital Subscriber Line (DSL) services to customers.
These decisions resulted in a $202 million pre-tax charge consisting of asset
write-offs, severance costs associated with work force reductions, and
termination of real estate leases and other contractual obligations. The charge
for asset impairments was $142 million, severance costs totaled $22 million, and
the remaining $38 million was accrued for other exit costs associated with the
restructuring. Sprint expects to pay the severance and other exit costs by the
third quarter of 2003.
The severance charge is associated with the involuntary employee separation of
approximately 1,100 employees. As of September 30, 2002, approximately 850 of
the employee separations had been completed.
In the 2002 first quarter, the PCS Group announced plans to close five PCS
customer solution centers, as well as additional steps to reduce operating costs
in its network, sales and distribution, and customer solutions business units.
These decisions resulted in a $23 million pre-tax restructuring charge
consisting of severance costs associated with work force reductions of $13
million and other exit costs, primarily for the termination of real estate
leases, of $10 million.
The severance charge is associated with the expected involuntary employee
separation of approximately 2,600 employees. As of September 30, 2002,
substantially all of the employee separations had been completed.
In the 2002 third quarter Sprint performed an analysis to finalize the
restructuring estimates recorded in the 2002 first quarter. This analysis
resulted in a reserve reduction of $6 million primarily associated with real
estate lease terminations.
Activity relating to the 2002 first quarter restructuring in the 2002
year-to-date period is summarized as follows:
- ------------------------------------------------------------------------------------------------------------------
Activity
-------------------------------------------
Total
Restructuring September 30, 2002
Charge Cash Payments Adjustments Liability Balance
- ------------------------------------------------------------------------------------------------------------------
Severance $ 13 $ 10 $ - $ 3
Other exit costs 10 2 (6) 2
- ------------------------------------------------------------------------------------------------------------------
Total $ 23 $ 12 $ (6) $ 5
--------------------------------------------------------------------------------------
In the 2001 fourth quarter, Sprint terminated its efforts to provide its Sprint
ION consumer and business offerings and announced plans to reduce operating
costs in the business units that comprise its FON Group. These efforts included
consolidation and streamlining of marketing and network operations, as well as
streamlining corporate support functions. Operating losses generated by ION were
nominal in the 2002 third quarter and $11 million in the year-to-date period
compared to $160 million and $481 million for the same periods a year ago.
These decisions resulted in a $1,814 million pre-tax charge consisting of asset
write-offs, severance costs associated with work force reductions, and
termination of supplier agreements, real estate leases, and other contractual
obligations. The charge for asset impairments was $1,327 million, severance
costs totaled $231 million, and the remaining $256 million was accrued for other
exit costs associated with the restructuring.
The severance charge is associated with the involuntary employee separation of
approximately 6,000 employees. As of September 30, 2002, substantially all of
the employee separations had been completed.
In the 2002 third quarter, Sprint performed an analysis to finalize the
restructuring estimates recorded in the 2001 fourth quarter. This analysis
resulted in a reserve reduction of $42 million primarily associated with exit
costs and a $34 million reduction in the estimated asset impairment.
Activity relating to the 2001 fourth quarter restructuring in the 2002
year-to-date period is summarized as follows:
- ----------------------------------------------------------------------------------------------------------------------
Activity
-------------------------------------------------
December 31, 2001 Cash September 30, 2002
Liability Balance Payments Adjustments Liability Balance
- ----------------------------------------------------------------------------------------------------------------------
Severance $ 160 $ 122 $ 19 $ 57
Other exit costs 230 102 (61) 67
- ----------------------------------------------------------------------------------------------------------------------
Total $ 390 $ 224 $ (42) $ 124
-----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. Discontinued Operation
- --------------------------------------------------------------------------------
In the 2002 third quarter, Sprint reached a definitive agreement to sell its
directory publishing business to R.H. Donnelley for $2.23 billion in cash. The
sale is subject to regulatory approval and is expected to close in early 2003.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets," Sprint has presented the directory publishing business as a
discontinued operation in the consolidated financial statements. Summary
financial information is as follows:
----------------- -----------------
September 30, December 31,
2002 2001
--------------------------------------------------- -----------------------------------
(millions)
Assets of discontinued operation
Accounts receivable, net $ 235 $ 260
Prepaids 93 109
Other assets 4 8
--------------------------------------------------- -- -------------- -- --------------
Total assets of discontinued operation $ 332 $ 377
-- -------------- -- --------------
Liabilities of discontinued operation
Advance billings and other $ 229 $ 290
-- -------------- -- --------------
Quarters Ended
September 30,
-- -------------- -- --------------
2002 2001
--------------------------------------------------- -- -------------- -- --------------
(millions)
Net operating revenues $ 133 $ 141
-- -------------- -- --------------
Income before income taxes $ 66 $ 63
-- -------------- -- --------------
Year-to-Date
September 30,
-- -------------- -- --------------
2002 2001
--------------------------------------------------- -- -------------- -- --------------
(millions)
Net operating revenues $ 409 $ 416
-- -------------- -- --------------
Income before income taxes $ 193 $ 186
-- -------------- -- --------------
- --------------------------------------------------------------------------------
8. Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
In August 2002, Sprint closed on a new $700 million global markets division
accounts receivable asset securitization facility that replaces the previous $1
billion facility. The reduction in size is due primarily to a smaller gross
receivable pool for the global markets division today versus 1999 when the
original facility was established. The new facility is a three-year program
subject to annual renewals. As of September 30, 2002, Sprint had drawn $530
million from this facility which was collateralized by approximately $1.7
billion of gross receivables.
In August 2002, Sprint closed on a new $1.5 billion revolving bank credit
facility. The facility is unsecured, with no springing liens, and is structured
as a 364-day credit line with a subsequent one-year term-out option.
This new facility replaced an existing $2 billion facility that would have
expired in August 2003. In previous periods, the unused $2 billion facility
supported Sprint's reclassification of short-term borrowings to long-term debt.
As it was replaced by a facility that is short-term in nature, Sprint is no
longer able to make this reclassification. Accordingly, beginning in the 2002
third quarter, all of Sprint's short-term borrowings are reflected in
"Short-term borrowings and current maturities of long-term debt" on the
Consolidated Balance Sheets. At the end of September 2002, Sprint had short-term
borrowings of $680 million consisting of the previously discussed $530 million
and $150 million of other bank notes.
In June 2002, Sprint closed on a new PCS Group accounts receivable asset
securitization facility. This facility provides Sprint with up to $500 million
of additional liquidity. This is a three-year facility, subject to annual
renewals.
To date, we have not drawn against the facility. At September 30,
2002, the facility was collateralized by approximately $1.3 billion of gross
receivables.
In March 2002, Sprint issued $5 billion of debt securities through a private
placement. These borrowings have a weighted average interest rate of 8.4% and
have maturities ranging from 2005 to 2032. The proceeds were allocated 5% to the
FON Group and 95% to the PCS Group and were used to repay debt and for general
corporate purposes. As a condition to the sale of the securities, Sprint agreed
to conduct an exchange offer that allowed the original securities to be
exchanged for substantially identical securities registered with the SEC. This
exchange offer was completed in June 2002.
- --------------------------------------------------------------------------------
9. Litigation, Claims and Assessments
- --------------------------------------------------------------------------------
A number of putative class action cases that allege Sprint failed to obtain
easements from property owners during the installation of its fiber optic
network are in process, some of them seeking certification as nationwide
classes. Settlement negotiations directed to a nationwide, industry-wide
settlement of these claims have resulted in an agreement, not yet approved by
the Court. Sprint has previously accrued for the estimated settlement costs of
these suits.
In July 2002, the Federal Communications Commission released a declaratory
ruling in a matter referred to it by the federal district court for the Western
District of Missouri in Sprint's suit against AT&T Corp for the collection of
terminating access charges. The FCC ruled that although nothing prohibited
wireless carriers from charging for access to their networks, interexchange
carriers were not required to pay such charges absent a contractual obligation
to do so. The FCC referred the matter back to the Western District of Missouri.
AT&T has appealed this decision to the D.C. Circuit Court of Appeals. Management
cannot predict, with certainty, the final outcome of this action, but believes
adequate provisions have been recorded in the PCS Group's results of operations.
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its current
and former officers and directors in the Jackson County, Missouri, Circuit
Court. The complaint alleges that the individual defendants breached their
fiduciary duties to Sprint and were unjustly enriched by making undisclosed
amendments to Sprint's stock option plans, by failing to disclose certain
information concerning regulatory approval of the proposed merger of Sprint and
WorldCom, and by overstating Sprint's earnings for the first quarter of 2000.
The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two
substantially identical derivative actions by other shareholders were filed and
have been consolidated.
On September 30, 2002, the U.S. District Court for the District of Kansas
granted in substantial part the motion of defendants Sprint and certain of its
directors and officers to dismiss a purported class action lawsuit alleging
violation of the federal securities laws that was initially filed in June 2001
by New England Healthcare Employees Pension Fund and other institutional
shareholders. The allegations that were not dismissed assert that defendants
knew in April 2000 that Sprint's proposed merger with WorldCom would be rejected
by regulatory authorities but failed to publicly disclose that information. The
plaintiffs seek damages in an unspecified amount.
Various other suits arising in the ordinary course of business are pending
against Sprint.
While it is not possible to determine the ultimate disposition of each of these
proceedings, Sprint believes that the outcome of such proceedings, individually
or in the aggregate, will not have a material adverse effect on the financial
condition or results of operations of Sprint, the FON Group or the PCS Group.
- --------------------------------------------------------------------------------
10. Other Financial Information
- --------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Sprint's allowance for doubtful accounts are as follows:
----------------- ----------------
September 30, December 31,
2002 2001
--------------------------------------------------------------------------------------
(millions)
FON Group $ 264 $ 257
PCS Group 162 140
--------------------------------------------------------------------------------------
Consolidated $ 426 $ 397
----------------------------------
Supplemental Cash Flows Information
Sprint's cash paid (received) for interest and income taxes was as follows:
Year-to-Date
September 30,
--------------- -- --------------
2002 2001
-------------------------------------------------------------------------------------
(millions)
Interest (net of capitalized interest) $ 969 $ 725
---------------------------------
Income taxes $ (453) $ 12
---------------------------------
Sprint's noncash activities included the following:
Year-to-Date
September 30,
---------------------------------
2002 2001
-------------------------------------------------------------------------------------
(millions)
Common stock issued under Sprint's employee
benefit stock plans $ 147 $ 124
---------------------------------
Tax benefit from stock options exercised $ - $ 8
---------------------------------
Contribution to equity investment $ 35 $ -
---------------------------------
Fair value of equity unit purchase contract
adjustment payment liability $ - $ 53
---------------------------------
Stock received for stock options exercised $ - $ 3
---------------------------------
- --------------------------------------------------------------------------------
11. Segment Information
- --------------------------------------------------------------------------------
Sprint is divided into three main lines of business: the global markets
division, the local division, and the PCS wireless telephony products and
services business, also known as the PCS Group. Other consists primarily of
wholesale distribution of telecommunications products.
Sprint manages its segments to the operating income (loss) level of reporting.
Items below operating income (loss) are held at a corporate level and only
attributed to the group level. The reconciliation from operating income to net
income is shown on the face of the Consolidated Statements of Operations in the
consolidating information.
Segment financial information was as follows:
- ----------------------------------------------------------------------------------------------------------------
Global Corporate
Quarters Ended Markets Local PCS and
September 30, Division(1) Division Other(2) Group(1) Eliminations(3) Consolidated
- ----------------------------------------------------------------------------------------------------------------
(millions)
2002
Net operating revenues $ 2,231 $ 1,569 $ 229 $ 3,157 $ (399) $ 6,787
Affiliated revenues 171 68 155 5 (399) -
Operating income (loss) (63) 450 (6) 141 2 524
2001
Net operating revenues $ 2,505 $ 1,564 $ 293 $ 2,651 $ (439) $ 6,574
Affiliated revenues 168 70 180 21 (439) -
Operating income (loss) (119) 477 10 (116) (4) 248
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Global Corporate
Year-to-Date Markets Local PCS and
September 30, Division(1) Division Other(2) Group(1) Eliminations(3) Consolidated
- ----------------------------------------------------------------------------------------------------------------
(millions)
2002
Net operating revenues $ 6,848 $ 4,657 $ 649 $ 9,023 $ (1,075) $ 20,102
Affiliated revenues 495 218 409 (47) (1,075) -
Operating income (loss) (168) 1,412 (16) 475 9 1,712
2001
Net operating revenues $ 7,635 $ 4,669 $ 986 $ 6,966 $ (1,257) $ 18,999
Affiliated revenues 451 193 568 45 (1,257) -
Operating income (loss) (141) 1,381 44 (455) (20) 809
- ----------------------------------------------------------------------------------------------------------------
(1) Affiliate revenues in the 2002 year-to-date period reflect the adjustment
of the wireless access revenue previously recorded regarding inter-segment
revenue between the global markets division and the PCS Group.
(2) In the 2002 third quarter, Sprint reached a definitive agreement to sell
its directory publishing business to R.H. Donnelley for $2.23 billion in
cash. The sale is expected to close in early 2003. As of the 2002 third
quarter, operations of the directory publishing business are reported as a
discontinued operation for all periods presented. See Note 7 for additional
information.
(3) Revenues eliminated in consolidation consist principally of local access
charged to the global markets division by the local division, equipment
purchases from the wholesale distribution business, interexchange services
provided to the local division, long-distance services provided to the PCS
Group for resale to PCS customers and for internal business use, Caller ID
services provided by the local division to the PCS Group and handset
purchases from the PCS Group.
Net operating revenues by product and services were as follows:
- ----------------------------------------------------------------------------------------------------------------------
Global
Quarters Ended Markets Local PCS
September 30, Division(1) Division Other(2) Group Eliminations(3) Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2002
Voice $ 1,433 $ - $ - $ - $ (171) $ 1,262
Data 445 - - - - 445
Internet 258 - - - - 258
Local service - 765 - - - 765
Network access - 511 - - (52) 459
Long distance - 155 - - - 155
Wireless services - - - 3,157 (5) 3,152
Other 95 138 229 - (171) 291
----------------------------------------------------------------------------------
Total net operating revenues $ 2,231 $ 1,569 $ 229 $ 3,157 $ (399) $ 6,787
----------------------------------------------------------------------------------
2001
Voice $ 1,683 $ - $ - $ - $ (168) $ 1,515
Data 473 - - - - 473
Internet 241 - - - - 241
Local service - 732 - - (1) 731
Network access - 507 - - (52) 455
Long distance - 186 - - - 186
Wireless services - - - 2,651 (21) 2,630
Other 108 139 293 - (197) 343
----------------------------------------------------------------------------------
Total net operating revenues $ 2,505 $ 1,564 $ 293 $ 2,651 $ (439) $ 6,574
----------------------------------------------------------------------------------
(1) Beginning in the 2002 first quarter, equipment revenue for all periods
presented is reported as part of Other revenues. This reclassification had
no impact on total net operating revenues.
(2) In the 2002 third quarter, Sprint reached a definitive agreement to sell
its directory publishing business to R.H. Donnelley for $2.23 billion in
cash. The sale is expected to close in early 2003. As of the 2002 third
quarter, operations of the directory publishing business are reported as a
discontinued operation for all periods presented. See Note 7 for additional
information.
(3) Revenues eliminated in consolidation consist principally of local access
charged to the global markets division by the local division, equipment
purchases from the wholesale distribution business, interexchange services
provided to the local division, long-distance services provided to the PCS
Group for resale to PCS customers and for internal business use, Caller ID
services provided by the local division to the PCS Group and handset
purchases from the PCS Group.
- ----------------------------------------------------------------------------------------------------------------------
Global
Year-to-Date Markets Local PCS
September 30, Division(1) Division Other(2) Group Eliminations(3)Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2002
Voice $ 4,437 $ - $ - $ - $ (495) $ 3,942
Data 1,396 - - - - 1,396
Internet 750 - - - - 750
Local service - 2,289 - - - 2,289
Network access - 1,519 - - (164) 1,355
Long distance - 479 - - - 479
Wireless services - - - 9,023 47 9,070
Other 265 370 649 - (463) 821
----------------------------------------------------------------------------------
Total net operating revenues $ 6,848 $ 4,657 $ 649 $ 9,023 $ (1,075) $ 20,102
----------------------------------------------------------------------------------
2001
Voice $ 5,110 $ - $ - $ - $ (451) $ 4,659
Data 1,432 - - - - 1,432
Internet 726 - - - - 726
Local service - 2,199 - - (3) 2,196
Network access - 1,521 - - (147) 1,374
Long distance - 549 - - - 549
Wireless services - - - 6,966 (45) 6,921
Other 367 400 986 - (611) 1,142
----------------------------------------------------------------------------------
Total net operating revenues $ 7,635 $ 4,669 $ 986 $ 6,966 $ (1,257) $ 18,999
----------------------------------------------------------------------------------
(1) Beginning in the 2002 first quarter, equipment revenue for all periods
presented is reported as part of Other revenues. This reclassification had
no impact on total net operating revenues.
(2) In the 2002 third quarter, Sprint reached a definitive agreement to sell
its directory publishing business to R.H. Donnelley for $2.23 billion in
cash. The sale is expected to close in early 2003. As of the 2002 third
quarter, operations of the directory publishing business are reported as a
discontinued operation for all periods presented. See Note 7 for additional
information.
(3) Revenues eliminated in consolidation consist principally of local access
charged to the global markets division by the local division, equipment
purchases from the wholesale distribution business, interexchange services
provided to the local division, long-distance services provided to the PCS
Group for resale to PCS customers and for internal business use, Caller ID
services provided by the local division to the PCS Group and handset
purchases from the PCS Group.
- --------------------------------------------------------------------------------
12. Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The objective of this statement is to change
accounting guidance for recognition of a liability for exit and disposal
activities. EITF Issue 94-3 allowed a company to recognize a liability upon
management's intent to exit or dispose of an activity. SFAS No. 146 requires
that a liability for costs associated with an exit or disposal activity is
recognized when the liability is incurred. The liability, when recognized, is
measured at its fair value. The fair value will be calculated based on a
discount rate that equates to a risk-free rate adjusted for the effect of the
entity's credit standing. Sprint will apply the provisions of this statement for
exit or disposal activities initiated after December 31, 2002.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections."
The primary impact of this action on Sprint will be the reporting of gains and
losses from the early extinguishment of debt in other income or expense instead
of as extraordinary items unless the criteria in APB Opinion 30 of unusual in
nature and infrequent in occurrence are met. Once adopted in 2003, restatement
will be required of extraordinary items resulting from the early extinguishment
of debt that do not meet the criteria of APB Opinion 30.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The objective of this statement is to provide accounting guidance
for legal obligations associated with the retirement of long-lived assets by
requiring the fair value of a liability for the asset retirement obligation to
be recognized in the period in which it is incurred. When the liability is
initially recognized, the asset retirement costs should also be capitalized by
increasing the carrying amount of the related long-lived asset. The liability is
then accreted to its present value each period and the capitalized costs are
depreciated over the useful life of the associated asset. Sprint is currently
assessing its legal obligations and, accordingly, has not yet determined the
expected impact of adopting this standard. This statement is effective for
fiscal years beginning after June 15, 2002. Sprint will adopt this standard on
January 1, 2003.
- --------------------------------------------------------------------------------
13. Subsequent Events
- --------------------------------------------------------------------------------
Dividend Declaration
In October 2002, Sprint's Board of Directors declared a dividend of 12.5 cents
per share on the FON common stock. The dividend will be paid December 30, 2002.
PCS Restructuring
On November 14, 2002, the PCS Group announced it would reduce its operating
expenses through a work force reduction of approximately 1,600 employees and 500
contractors. This action is expected to create a more competitive cost structure
for the business. The severance-related costs associated with the work force
reduction are expected to result in a pre-tax charge of approximately $31
million in the 2002 fourth quarter. When fully implemented, these actions are
expected to result in annualized cash cost savings of approximately $170
million.
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Corporation
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Forward-looking Information
- --------------------------------------------------------------------------------
Sprint includes certain estimates, projections and other forward-looking
statements in its reports and in other publicly available material. Statements
regarding expectations, including performance assumptions, estimates relating to
capital requirements and the expected closing date of the sale of the directory
publishing business, 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, demand for our products and
services, pricing, costs to acquire customers and provide service, timing and
cost of planned capital expenditures, and general economic conditions.
Future performance cannot be ensured. Actual results may differ materially from
those in the forward-looking statements. Some factors that could cause actual
results to differ include:
o extent and duration of the current economic downturn;
o the effects of vigorous competition in the markets in which
Sprint operates;
o the costs and business risks associated with providing new
services and entering new markets necessary to provide nationwide
or global services;
o adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations;
o the ability of the PCS Group to continue to grow a significant
market presence;
o the ability of the PCS Group to improve its profitability and
reduce its cash requirements;
o the effects of mergers and consolidations within the
telecommunications industry and unexpected announcements or
developments from others in the telecommunications industry;
o the uncertainties related to the outcome of bankruptcies of
others within the telecommunication industry;
o the uncertainties related to Sprint's strategic investments;
o the impact of any unusual items resulting from ongoing
evaluations of Sprint's business strategies;
o the impact of new technologies on Sprint's business;
o unexpected results of litigation filed against Sprint;
o the possibility of one or more of the markets in which Sprint
competes being impacted by changes in political or other factors
such as monetary policy, legal and regulatory changes, including
the impact of the Telecommunications Act of 1996 (Telecom Act),
or other external factors over which Sprint has no control; and
o other risks referenced from time to time in Sprint's filings with
the Securities and Exchange Commission (SEC).
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements are found throughout Management's Discussion and Analysis. The reader
should not place undue reliance on forward-looking statements, which speak only
as of the date of this report. Sprint is not obligated to publicly release any
revisions to forward-looking statements to reflect events after the date of this
report or unforeseen events. Sprint provides a detailed discussion of risk
factors in various SEC filings, including its 2001 Form 10-K/A, and you are
encouraged to review these filings.
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
Sprint is a global communications company and a leader in integrating
long-distance, local service, and wireless communications. Sprint is also one of
the largest carriers of Internet traffic using its tier one Internet protocol
network, which provides connectivity to any point on the Internet either through
its own network or via direct connections with other backbone providers. Sprint
is the nation's third-largest provider of long distance services, operating
all-digital long distance and tier one Internet protocol networks. In addition,
the local division currently serves approximately 8.1 million access lines in 18
states. Sprint also operates a 100% digital PCS wireless network with licenses
to provide service to the entire United States population using a single
frequency band and a single technology.
Sprint operates in industries that have been and continue to be subject to
consolidation and dynamic change. Therefore, Sprint routinely reassesses its
business strategies. In light of current events and specific changes in
telecommunications, including bankruptcies, over-capacity and the economic
downturn, Sprint continues to assess the implications on its operations. Any
such assessment may impact the valuation of its long-lived assets.
As part of its overall business strategy, Sprint regularly evaluates
opportunities to expand and complement its business and may at any time be
discussing or negotiating a transaction that, if consummated, could have a
material effect on its business, financial condition, liquidity or results of
operations.
In the 2002 third quarter, Sprint reached a definitive agreement to sell its
directory publishing business to R.H. Donnelley for $2.23 billion in cash. The
sale is subject to regulatory approval and is expected to close in early 2003.
Operating Segments
Sprint's business is divided into three main lines of business: the global
markets division, the local division and the PCS wireless telephony products and
services business. The FON Group includes the global markets division, the local
division, and other businesses consisting primarily of wholesale distribution of
telecommunications products. The FON common stock is intended to reflect the
financial results and economic value of these activities. The PCS Group includes
the PCS wireless telephony products and services business and the PCS common
stock is intended to reflect the financial results and economic value of this
activity.
Board Discretion Regarding Tracking Stocks
FON common stock and PCS common stock are intended to reflect the financial
results and economic value of the FON and PCS Groups. However, they are classes
of common stock of Sprint, not of the group they are intended to track.
Accordingly, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
but rather represent a direct equity interest in our assets and liabilities as a
whole.
Sprint's Board has the discretion to, among other things, make operating and
financial decisions that could favor one group over the other and, subject to
the restrictions in Sprint's articles of incorporation, to change the allocation
of the assets and liabilities that comprise each of the FON Group and the PCS
Group without shareholder approval. Under the applicable corporate law, Sprint's
Board owes its fiduciary duties to all of Sprint's shareholders and there is no
Board of Directors that owes separate duties to the holders of either the FON
common stock or the PCS common stock. The Tracking Stock Policies provide that
the Board, in resolving material matters in which the holders of FON common
stock and PCS common stock have potentially divergent interests, will act in the
best interests of Sprint and all of its common shareholders after giving fair
consideration to the potentially divergent interests of the holders of the
separate classes of Sprint common stock. These policies may be changed by the
Board without shareholder approval. Given the Board's discretion in these
matters, it may be difficult to assess the future prospects of each group based
on past performance.
- --------------------------------------------------------------------------------
General Overview of the Sprint FON Group
- --------------------------------------------------------------------------------
Global Markets Division
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include domestic
and international voice; data communications using various protocols such as
Internet protocol (IP) and frame relay (a data service that transfers packets of
data over Sprint's network); and managed network services. In addition, the
global markets division provides web and applications hosting, consulting
services, and colocation services. The global markets division also reflects the
costs of establishing international data communications operations.
Through this division Sprint also provides broadband services over Multipoint
Multichannel Distribution Services (MMDS) spectrum. The global markets
division's operating results reflect the development costs and the operating
revenues and expenses of these broadband fixed wireless services. In the 2001
fourth quarter, Sprint announced it would halt further deployment of MMDS
services using current direct site access technology. Current customers continue
to receive service. Sprint is pursuing alternative strategies with respect to
the spectrum leases and licenses.
In the 2001 fourth quarter, a decision was made to terminate Sprint ION consumer
and business offerings and restructure operations in the global markets division
to respond to the national economic downturn, industry wide pricing pressures
and excess capacity. These actions, which resulted in a $1.7 billion charge to
the global market division, were taken to respond to these unprecedented changes
in the industry in an effort to more readily capture the voice market, to better
focus on enterprise data and Internet services and aggressively manage costs. In
the 2002 third quarter, Sprint performed an analysis to finalize the
restructuring estimates associated with these actions which resulted in a net
favorable adjustment of $76 million. See Note 6 of Condensed Notes to
Consolidated Financial Statements for additional information.
Local Division
The local division (LTD) consists mainly of regulated local phone companies
serving approximately 8.1 million access lines in 18 states. LTD provides local
voice and data services, including Digital Subscriber Line (DSL), for customers
within its franchise territories, access by phone customers and other carriers
to LTD's local network, nationwide long distance services to residential
customers and other services within specified calling areas to business
customers, and sales of telecommunications equipment.
The FON Group also includes other businesses consisting primarily of wholesale
distribution of telecommunication products and its investments in EarthLink,
Inc., an Internet service provider; Call-Net, a long distance provider in
Canada; Intelig Telecommunicacoes Ltda. (Intelig), a long distance provider in
Brazil; and certain other telecommunications investments and ventures.
- --------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates a 100%
digital PCS wireless network in the United States with licenses to provide
services to the entire U.S. population using a single frequency band and a
single technology. The PCS Group, together with third party affiliates, operates
PCS systems in over 300 metropolitan markets, including the 100 largest U.S.
metropolitan areas. The PCS Group's service, including third party affiliates,
now reaches a quarter billion people. The PCS Group provides nationwide service
through:
o operating its own digital network in major U.S. metropolitan
areas,
o affiliating with other companies, mainly in and around smaller
U.S. metropolitan areas,
o roaming on other providers' analog cellular networks using
multi-mode handsets, and
o roaming on other providers' digital networks that use code
division multiple access (CDMA).
Sprint launched nationwide 3G service in the 2002 third quarter. The service,
marketed as "PCS Vision", allows consumer and business customers to use their
Vision-enabled PCS devices to take and receive pictures, check personal and
corporate e-mail, play games with full-color graphics and polyphonic sounds and
browse the Internet wirelessly with speeds up to 144 kbps (with average speeds
of 50 to 70 kbps).
The PCS Group also provides wholesale PCS services to companies that resell the
services to their customers on a retail basis. These companies pay the PCS Group
a discounted price for their customers' usage, but bear the costs of acquisition
and customer service.
The PCS Group also includes its investment in Virgin Mobile U.S.A. (Virgin
Mobile), a joint venture to market wireless services, and SVC BidCo L.P., a
joint venture to acquire wireless spectrum rights. These investments are
accounted for using the equity method.
The wireless industry, including the PCS Group, typically generates a
significantly higher number of subscriber additions and handset sales in the
fourth quarter of each year compared to the remaining quarters. This is due to
the use of retail distribution, which is dependent on the holiday shopping
season; the timing of new products and service introductions; and aggressive
marketing and sales promotions.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 3,805 $ 4,103 $ 11,523 $ 12,496
PCS Group 3,157 2,651 9,023 6,966
Intergroup eliminations (175) (180) (444) (463)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 6,787 $ 6,574 $ 20,102 $ 18,999
--- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues increased 3% in the 2002 third quarter and 6% in the 2002
year-to-date period compared to the same 2001 periods reflecting growth in the
PCS Group offset somewhat by declining FON Group long distance voice revenues
and product distribution revenues.
Income (Loss) from continuing operations was as follows:
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 484 $ 116 $ 794 $ 648
PCS Group (7) (288) (323) (928)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from continuing operations $ 477 $ (172) $ 471 $ (280)
--- ------------- -- -------------- -- ------------- --- -------------
In the 2002 third quarter, income from continuing operations includes a one-time
charge of $23 million to reflect loss on receivables due to the WorldCom
bankruptcy, a $76 million net charge for restructuring and asset impairments,
and a gain on the sale of an equity method investment of $67 million. One-time
items also include a previously unrecognizable tax benefit of $292 million
related to previously recorded investment losses. In the 2002 second quarter,
loss from continuing operations includes the effect of net one-time charges of
$216 million. This amount includes a $25 million gain relating to the sale of
TranXact customer contracts and a write-down of our investment in EarthLink,
Inc. of $241 million to current market value.
In the 2001 third quarter, loss from continuing operations includes one-time
losses of $157 million from the write-down of an equity method investment, an $8
million loss from the sale of an investment, and a curtailment gain of $75
million resulting from the modification of certain retirement plan benefits. In
the 2001 first quarter, loss from continuing operations includes a one-time gain
of $9 million from investment activities.
As a result of the July 2002 WorldCom, Inc. Chapter 11 bankruptcy filing, Sprint
continues to evaluate its risks regarding its WorldCom receivables and its
ongoing business relationship with WorldCom. In the 2002 third quarter, income
from continuing operations includes a one-time, after-tax charge of $23 million
to reflect loss on receivables due to the WorldCom bankruptcy. In addition to
being a Sprint customer, WorldCom, under various long-term lease and services
agreements, provides Sprint access to network facilities that compose
approximately 20% of Sprint's long distance fiber network and a larger
percentage of network traffic. These network facilities are also shared or
utilized by WorldCom. If WorldCom failed to meet its commitments under these
agreements, Sprint would have to pursue alternative strategies to provide this
capacity that could result in delays, interruptions or additional expenses
associated with the offering of our services. This could potentially have a
material adverse effect on our business and results of operations until such
strategies are implemented. Sprint does not anticipate, or have indications,
that WorldCom does not intend to meet its commitments.
Effective January 1, 2002, Sprint adopted SFAS No. 142, which resulted in the
elimination of the ongoing amortization of goodwill, spectrum licenses, and
other indefinite life intangible assets. As a result of this change,
amortization expense decreased approximately $59 million in the 2002 third
quarter and $179 million in the 2002
year-to-date period from the same 2001 periods. Amortization expense
decreased an additional $5 million in the 2002 third quarter and $138
million year-to-date due to the full amortization of some intangibles in
2001.
- --------------------------------------------------------------------------------
Segmental Results of Operations
- --------------------------------------------------------------------------------
Global Markets Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues(1)
Voice $ 1,433 $ 1,683 $ (250) (14.9)%
Data 445 473 (28) (5.9)%
Internet 258 241 17 7.1%
Other 95 108 (13) (12.0)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 2,231 2,505 (274) (10.9)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,189 1,544 (355) (23.0)%
Selling, general and administrative 604 724 (120) (16.6)%
Depreciation and amortization 378 356 22 6.2%
Restructuring and asset impairments 123 - 123 NM
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,294 2,624 (330) (12.6)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (63) $ (119) $ 56 47.1%
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues(1)
Voice $ 4,437 $ 5,110 $ (673) (13.2)%
Data 1,396 1,432 (36) (2.5)%
Internet 750 726 24 3.3%
Other 265 367 (102) (27.8)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 6,848 7,635 (787) (10.3)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 3,939 4,561 (622) (13.6)%
Selling, general and administrative 1,855 2,223 (368) (16.6)%
Depreciation and amortization 1,099 992 107 10.8%
Restructuring and asset impairments 123 - 123 NM
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 7,016 7,776 (760) (9.8)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (168) $ (141) $ (27) 19.1%
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
NM = Not meaningful
(1) Beginning in the 2002 first quarter equipment revenue is reported as a part
of Other revenues. This reclassification had no impact on total net
operating revenues. 2001 results have been restated to conform to the
current year presentation.
Net Operating Revenues
Net operating revenues decreased 11% in the 2002 third quarter and 10% in the
2002 year-to-date period from the same 2001 periods. The overall revenue
decrease reflects pricing pressures on voice services and a decline in
professional services, legacy data services, and other data services revenues.
Revenues will likely continue to be negatively impacted by pricing pressures. In
addition, the Regional Bell Operating Companies (RBOCs) continue to obtain
regulatory clearance to provide in-region long distance services which increases
competition.
Voice Revenues
Voice revenues decreased 15% in the 2002 third quarter and 13% in the 2002
year-to-date period from the same 2001 periods due to a decline in consumer
voice revenues resulting from wireless and e-mail substitution and RBOC entry.
Voice revenues, in certain segments, continued to be impacted by pricing
pressures in the year-to-date period. Business voice revenues also declined as
the traffic mix shifted toward lower yield customers. Revenues associated with
sales to the PCS Group are priced at our most competitive rates. Minute growth
was 3% in the 2002 third quarter and 9% in the 2002 year-to-date period compared
to the same 2001 periods. The minute growth, driven in part by the increase in
business minutes sold to the PCS Group, was more than offset by the continued
competitive pricing environment.
Data Revenues
Data revenues decreased 6% in the 2002 third quarter and 3% in the 2002
year-to-date period from the same 2001 periods due to declines in private line
services partially offset by increases in asynchronous transfer mode (ATM)
services. However, ATM pricing continues to be competitive.
Internet Revenues
Internet revenues increased 7% in the 2002 third quarter and 3% in the 2002
year-to-date period from the same 2001 periods. Dedicated IP and Web hosting
services drove this increase; however, they were partially offset by continued
declines in Dial-up Internet service provider related revenues due to pricing
declines with Sprint's largest customer for these services.
Other Revenues
Other revenues decreased 12% in the 2002 third quarter and 28% in the 2002
year-to-date period from the same 2001 periods. The decrease is due to declines
in professional services, equipment sales and legacy data services.
Revenue Reserves
All revenues are recognized when the earnings process is complete in accordance
with SEC Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial
Statements (SAB101). Significant estimates and assumptions are required,
however, to determine the expected conversion of these revenues into cash
collected. Because of this, the global markets division recognizes several types
of reserves and adjustments against revenue.
These reserves include:
o billing adjustment reserves for pricing changes and usage
disputes with customers (principally related to our business
and wholesale customer base),
o discount reserves for special pricing agreements and volume
based incentives, and
o fraud reserves for unauthorized usage.
Each of these reserves requires management's judgment and is based on historical
trending, industry norms, regulatory decisions and recognition of current market
indicators regarding general economic conditions.
Costs of Services and Products
Costs of services and products include interconnection costs paid to local phone
companies, other domestic service providers and foreign phone companies to
complete calls made by the division's domestic customers, costs to operate and
maintain the long distance network and the IP network, and costs of equipment.
These costs decreased 23% in the 2002 third quarter and 14% in the 2002
year-to-date period from the same 2001 periods.
Interconnection costs decreased 17% in the 2002 third quarter and 10% in the
2002 year-to-date period from the same 2001 periods due to network efficiency
initiatives, regulatory rate reductions and lower negotiated rates, partially
offset by volume growth. Additionally, interconnection costs were favorably
impacted in the 2002 year-to-date period by the second quarter $17 million
adjustment related to terminating access charges billed by the PCS Group.
All other costs of services and products decreased 33% in the 2002 third quarter
and 21% in the 2002 year-to-date period compared to the same 2001 periods mainly
due to decreased network operating costs derived from Sprint's 2001 fourth
quarter restructuring actions, as well as other cost containment efforts.
Total costs of services and products for the global markets division were 53.3%
of net operating revenues in the 2002 third quarter and 57.5% in the 2002
year-to-date period compared to 61.6% and 59.7% for the same periods a year ago.
Excluding Sprint ION related costs, total costs of services and products for the
global markets division were 53.3% of net operating revenues in the 2002 third
quarter and 57.4% in the 2002 year-to-date period compared to 58.8% and 57.2%
for the same periods a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses decreased 17% in the 2002
third quarter and year-to-date periods from the same 2001 periods. The decrease
is due to the 2001 fourth quarter restructuring and a strong emphasis on cost
control. SG&A expense was 27.1% of net operating revenues in the 2002 third
quarter and year-to-date periods compared to 28.9% and 29.1% for the same
periods a year ago.
SG&A includes charges for estimated bad debt expense. The reserve for bad debts
requires management's judgment and is based on customer specific indicators, as
well as historical trending, industry norms, regulatory decisions and
recognition of current market indicators about general economic conditions. Bad
debt expense as a percentage of net revenues was 3.9% in the 2002 third quarter
and 3.6% in the 2002 year-to-date period compared to 3.6% and 3.5% in the same
2001 periods. Reserve for bad debt as a percent of outstanding accounts
receivable was 13.1% at the end of the 2002 third quarter and 12.7% at year-end
2001.
Excluding Sprint ION related costs, SG&A expense was 27.1% of net operating
revenue in the 2002 third quarter and 27.0% in the 2002 year-to-date period
compared to 27.2% and 27.0% for the same periods a year ago.
Depreciation and Amortization Expense
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense increased 6% in the
2002 third quarter and 11% in the 2002 year-to-date period from the same periods
a year ago. These increases are attributable to an increased asset base to meet
anticipated increases in demand for voice and data-related services and other
growth initiatives. This relatively large year over year increase in
depreciation expense is expected to continue throughout 2002. Depreciation and
amortization expense was 16.9% of net operating revenues in the 2002 third
quarter and 16.0% in the 2002 year-to-date period compared to 14.2% and 13.0%
for the same periods a year ago.
Excluding Sprint ION related costs, depreciation and amortization expense was
16.9% of net operating revenue in the 2002 third quarter and 16.1% in the 2002
year-to-date period compared to 12.3% and 11.4% in the same periods a year ago.
Restructuring and Asset Impairment
Sprint recorded a net restructuring charge and asset impairment of $123 million
to the global markets division in the 2002 third quarter. This consisted of a
$202 million charge for the termination of high-speed data services as well as
additional steps to reduce operating costs. The charge was partially offset by a
$79 million adjustment to finalize the restructuring charge taken in the 2001
fourth quarter to abandon the ION initiative and restructure operations in the
global markets division to respond to the national economic downturn, industry
wide pricing pressures and excess capacity. These 2001 fourth quarter actions,
which resulted in a $1.7 billion charge to the global market division, were
taken to respond to these unprecedented changes in the industry in an effort to
more readily capture the voice market, to better focus on enterprise data and
Internet services and aggressively manage costs.
Local Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
----------------------------------- ------------------------------
2002 2001 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 765 $ 732 $ 33 4.5%
Network access 511 507 4 0.8%
Long distance 155 186 (31) (16.7)%
Other 138 139 (1) (0.7)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 1,569 1,564 5 0.3%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 502 496 6 1.2%
Selling, general and administrative 323 307 16 5.2%
Depreciation 291 284 7 2.5%
Restructuring 3 - 3 NM
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,119 1,087 32 2.9%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 450 $ 477 $ (27) (5.7)%
--- ------------- -- -------------- -- -------------
Operating margin 28.7% 30.5%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
----------------------------------- ------------------------------
2002 2001 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 2,289 $ 2,199 $ 90 4.1%
Network access 1,519 1,521 (2) (0.1)%
Long distance 479 549 (70) (12.8)%
Other 370 400 (30) (7.5)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 4,657 4,669 (12) (0.3)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,431 1,476 (45) (3.0)%
Selling, general and administrative 946 972 (26) (2.7)%
Depreciation 865 840 25 3.0%
Restructuring 3 - 3 NM
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 3,245 3,288 (43) (1.3)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 1,412 $ 1,381 $ 31 2.2%
--- ------------- -- -------------- -- -------------
Operating margin 30.3% 29.6%
--- ------------- -- --------------
NM = Not meaningful
Net Operating Revenues
Net operating revenues increased less than 1% in the 2002 third quarter and
decreased less than 1% in the 2002 year-to-date period from the same 2001
periods as growth in local services was offset by declines in long distance
services and equipment sales. The local division ended the 2002 third quarter
with approximately 8.1 million switched access lines, a 2% decrease during the
past 12 months. The reduction in access lines is driven by the economic
slowdown, wireless and cable substitution, and losses to competitive local
providers. However, many of our line losses were offset by increases in other
categories such as DSL or high capacity circuits. On a voice-grade equivalent
basis, which includes both traditional switched services and high capacity
lines, voice-grade equivalents grew 10% during the past 12 months.
Local Service Revenues
Local service revenues, derived from local exchange services, grew 5% in the
2002 third quarter and 4% in the 2002 year-to-date period from the same 2001
periods primarily on the strength of a 16% year-to-date increase in vertical
service revenue driven by the success of bundled offerings. Revenues from prison
contracts implemented last year also aided local service revenues. The strong
growth was partially offset by a 2% year-to-date decline in basic area services
due to the overall decline in access lines.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 1% in the 2002 third quarter and
decreased less than 1% in the 2002 year-to-date period from the same 2001
periods. Strong growth in special access services in the 2002 third quarter was
offset by a 4% decline in access minutes of use, as well as by
regulator-mandated access rate reductions.
Long Distance Revenues
Long distance revenues are mainly derived from providing nationwide long
distance services to residential customers within Sprint's local franchise
territories and other services within specified regional calling areas, or
LATAs, to residential and business customers. These revenues declined 17%
in the 2002 third quarter and 13% in the 2002 year-to-date period from the
same 2001 periods. This was primarily due to a decline in total long
distance minutes of use, as customers shifted more of their communications
to wireless, e-mail and instant messaging.
Other Revenues
Other revenues decreased 1% in the 2002 third quarter and 8% in the 2002
year-to-date period from the same 2001 periods. This is principally due to
reduced equipment sales.
Revenue Reserves
All revenues are recognized when the earnings process is complete in accordance
with SAB101. Significant estimates and assumptions are required, however, to
determine the expected conversion of these revenues into cash collected. Because
of this, the local division recognizes several types of reserves and adjustments
against revenues. These reserves include:
o billing adjustment reserves for pricing changes, volume discounts and
usage disputes with customers (principally related to our business and
wholesale customer base),
o fraud reserves for unauthorized usage, and
o return and rebate reserves for equipment sales.
Each of these reserves requires management's judgment and is based on historical
trending, industry norms, regulatory decisions and recognition of current market
indicators about general economic conditions.
Costs of Services and Products
Costs of services and products include costs to operate and maintain the local
network and costs of equipment sales. These costs increased 1% in the 2002 third
quarter and decreased 3% in the 2002 year-to-date period from the same 2001
periods. The 2002 third quarter increase is driven by higher maintenance expense
and increased cost of equipment sales.
The 2002 year-to-date reduction is driven mainly by a reduction in reciprocal
compensation expense, reduced volume of equipment sales, and a decline in other
taxes due to changes in certain state tax laws. Costs of services and products
were 32.0% of net operating revenues in the 2002 third quarter and 30.7% in the
2002 year-to-date period compared to 31.7% and 31.6% for the same periods a year
ago.
Selling, General and Administrative Expense
SG&A expense increased 5% in the 2002 third quarter and decreased 3% in the 2002
year-to-date period from the same 2001 periods. The 2002 third quarter increase
is due to higher bad debt expense resulting from a $27 million charge associated
with the WorldCom bankruptcy. The 2002 year-to-date decrease is due to a decline
in advertising expenses and the success of cost containment initiatives
including the benefits of the restructuring announced in the 2001 fourth
quarter. SG&A expense was 20.6% of net operating revenues in the 2002 third
quarter and 20.3% in the 2002 year-to-date period compared to 19.6% and 20.8%
for the same periods a year ago.
The reserve for bad debts requires management's judgment and is based on
customer specific indicators, as well as historical trending, industry norms,
regulatory decisions and recognition of current market indicators about general
economic conditions. Bad debt expense as a percentage of net revenues was 3.2%
in the 2002 third quarter and 2.7% in the 2002 year-to-date period compared to
2.4% and 2.6% in the same periods a year ago. Reserve for bad debt as a percent
of outstanding accounts receivable was 12.2% at the end of the 2002 third
quarter compared to 6.9% at year-end 2001. Improved bad debt experience with end
user customers was more than offset by the need to establish reserves for some
competitive local exchange carriers and long distance companies with financial
difficulties.
Depreciation Expense
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation expense increased 3% in the 2002 third quarter
and year-to-date periods from the same 2001 periods reflecting additional
capital spending to support voice-grade equivalent growth, service improvements,
and ongoing build out of DSL services. Depreciation expense was 18.5% of net
operating revenues in the 2002 third quarter and 18.6% in the 2002 year-to-date
period compared to 18.2% and 18.0% for the same periods a year ago.
PCS Group
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 3,157 $ 2,651 $ 506 19.1%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,478 1,516 (38) (2.5)%
Selling, general and administrative 955 733 222 30.3%
Depreciation 587 458 129 28.2%
Amortization 1 60 (59) (98.3)%
Restructuring (5) - (5) NM
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 3,016 2,767 249 9.0%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ 141 $ (116) $ 257 NM
-- ------------- -- -------------- -- -------------
Operating income before depreciation
and amortization $ 729 $ 402 $ 327 81.3%
-- ------------- -- -------------- -- -------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 9,023 $ 6,966 $ 2,057 29.5%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 4,316 3,811 505 13.3%
Selling, general and administrative 2,556 2,009 547 27.2%
Depreciation 1,654 1,297 357 27.5%
Amortization 4 304 (300) (98.7)%
Restructuring 18 - 18 NM
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 8,548 7,421 1,127 15.2%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ 475 $ (455) $ 930 NM
-- ------------- -- -------------- -- -------------
Operating income before depreciation
and amortization $ 2,133 $ 1,146 $ 987 86.1%
-- ------------- -- -------------- -- -------------
NM = Not meaningful
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail chain and the service revenues generated by sales to its customers
accounted for 22% of net operating revenues in the 2002 third quarter and
year-to-date periods. These revenues were 23% of net operating revenues in the
2001 third quarter and year-to-date periods.
Net Operating Revenues
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Customers (millions) 14.5 12.4 14.5 12.4
--- ------------- -- -------------- -- ------------- --- -------------
Average monthly service revenue
per user (ARPU) $ 63 $ 62 $ 62 $ 61
--- ------------- -- -------------- -- ------------- --- -------------
Customer churn rate 3.8% 2.6% 3.3% 2.4%
--- ------------- -- -------------- -- ------------- --- -------------
The PCS Group's net operating revenues include service revenues and sales of
handsets and accessory equipment. Service revenues consist of monthly recurring
charges, usage charges and a pro rata portion of activation fees associated with
the PCS Group's subscriber base. Service revenues increased 24% in the 2002
third quarter and 31% in the 2002 year-to-date period from the same 2001 periods
mainly reflecting an increase in the number of customers and maintaining stable
ARPU. The 2002 third quarter saw increased pricing pressures which were offset
by increases in usage. Average monthly usage increased by about two hours when
compared to the 2001 third quarter.
The PCS Group reported a decline of approximately 78,000 customers in the 2002
third quarter ending the period with approximately 14.5 million customers
compared to approximately 12.4 million customers at the end of the 2001 third
quarter. The main drivers of the decline in net additions were company initiated
disconnects of Clear Pay customers for non-payment and a reduction in Sprint's
share of new decisions. The total number of customers served on the PCS network,
including affiliates, at the end of the quarter was more than 17 million.
The customer churn rate in the 2002 third quarter was 3.8% compared to 2.6% for
the same 2001 period. The increase, year-over-year, resulted primarily from
company initiated churn, as well as a slight increase in the voluntary churn
rate. Recognizing the impact of increased churn from the Clear Pay program, the
PCS Group has initiated more stringent credit checks on potential customers, as
well as, deposit requirements in many categories.
Revenues from sales of handsets and accessories were approximately 10.9% of net
operating revenues in the 2002 third quarter and 10.4% in the 2002 year-to-date
period compared to 14.3% and 11.7% for the same 2001 periods. As part of the PCS
Group's marketing plans, handsets are normally sold at prices below the PCS
Group's cost.
Revenue Reserves
All revenues are recognized when the earnings process is complete in accordance
with SAB101. Significant estimates and assumptions are required, however, to
determine the expected conversion of these revenues into cash collected. Because
of this, the PCS Group recognizes several types of reserves and adjustments
against revenue. These reserves include:
o billing adjustment reserve for disputes with customers,
o cancellation fee and late fee reserves
o fraud reserves for unauthorized usage,
o access reserves for disputed charges with local exchange carriers and
inter-exchange carriers, and
o return and rebate reserves for equipment sales.
Each of these reserves requires management's judgment and is based on historical
trending, industry norms, regulatory decisions and recognition of current market
indicators about general economic conditions.
Operating Expenses
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Acquisition costs per gross customer
addition (CPGA)(1) $ 395 $ 285 $ 350 $ 300
--- ------------- -- -------------- -- ------------- --- -------------
Monthly cash costs per user (CCPU)(1) $ 33 $ 35 $ 32 $ 35
--- ------------- -- -------------- -- ------------- --- -------------
(1) Beginning in 2002, PCS changed its method of calculating both CPGA and CCPU.
Customer service provided in Sprint retail stores and handset subsidies for
existing customers, both previously part of the calculation of CPGA, are now
included in the calculation of CCPU. Activation customer care cost has been
removed from the calculation of CCPU and is now included in the calculation
of CPGA. Prior period metrics have been restated to be in conformity with
current year presentation.
CPGA is a measure of the costs of acquiring a new subscriber, consisting of
equipment subsidies and marketing costs, divided by handset activations for new
PCS customers. CPGA increased approximately 39% in the 2002 third quarter and
17% in the 2002 year-to-date period from the same 2001 periods. The CPGA
increase is primarily attributable to marketing costs and equipment subsidies
associated with the launch of PCS Vision, as well as costs being spread across
lower gross customer additions.
CCPU is a measure of the cash costs to operate the business on a per user basis,
consisting of costs of service revenues, service delivery and other general and
administrative costs, divided by average subscribers. CCPU decreased
approximately 6% in the 2002 third quarter and 9% in the 2002 year-to-date
period from the same 2001 periods. Improvements realized in the third quarter of
2002 were driven by lower customer solutions costs and network and information
technology costs per user partially offset by higher bad debt expense per user.
The gains are largely driven by scale efficiencies and cost containment efforts
in customer solutions.
The PCS Group's costs of services and products mainly include handset and
accessory costs, switch and cell site expenses, customer care costs and other
network-related costs. These costs decreased 3% in the 2002 third quarter and
increased 13% in the 2002 year-to-date period from the same 2001 periods. The
2002 third quarter decrease is primarily due to fewer handset sales. The
year-to-date increase is primarily due to network support of a larger customer
base, expanded market coverage, and increased unit handset costs. These
increases are somewhat offset by scale benefits resulting from the increased
customer base and decreases in customer solutions expense. Handset and equipment
costs were 40% of total costs of services and products in the 2002 third quarter
and 39% in the 2002 year-to-date period compared to 42% and 37% for the same
periods a year ago. Costs of services and products were 46.8% of net operating
revenues in the 2002 third quarter and 47.8% in the 2002 year-to-date period
compared to 57.2% and 54.7% for the same periods a year ago.
SG&A expense mainly includes marketing costs to promote products and services as
well as related salary and benefit costs. SG&A expense increased 30% in the 2002
third quarter and 27% in the 2002 year-to-date period from the same 2001 periods
reflecting increased marketing costs associated with PCS Vision launch and
increased bad debt expense. SG&A expense was 30.3% of net operating revenues in
the 2002 third quarter and 28.3% in the 2002 year-to-date period compared to
27.6% and 28.8% for the same periods a year ago.
The reserve for bad debts requires management's judgment and is based on
customer specific indicators, as well as historical trending, industry norms,
regulatory decisions and recognition of current market indicators about general
economic conditions. Bad debt expense as a percentage of net revenues was 6.6%
in the 2002 third quarter and 5.4% in the 2002 year-to-date period compared to
3.9% and 3.5% in the same periods a year ago. Reserve for bad debt as a percent
of outstanding accounts receivable was 10.2% at the end of the 2002 third
quarter and 9.1% at year-end 2001. In the 2002 third quarter, the PCS Group
removed cancellation fee and late fee reserves from the allowance for doubtful
accounts. These amounts are considered revenue adjustments. Prior periods have
been reclassified to conform to the current presentation. Bad debt expense, as
well as the reserve, increased in the third quarter due to provisions for
write-offs in the sub-prime customer segments.
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense consists mainly of
depreciation of network assets and amortization of definite life intangible
assets. The definite life intangible assets include various customer bases,
which became fully amortized in August 2002.
Depreciation expense increased 28% in the 2002 third quarter and year-to-date
periods from the same 2001 periods mainly reflecting depreciation of the network
assets placed in service during 2001 and the first half of 2002.
Amortization expense decreased to $1 million in the 2002 third quarter and $4
million in the 2002 year-to-date period from $60 million and $304 million in the
same periods a year ago. Amortization of goodwill and indefinite life
intangibles ceased upon adoption of SFAS No. 142 at January 1, 2002. Periodic
impairment testing of indefinite life intangibles is now required. This
implementation is discussed in Note 5 of the Condensed Notes to Consolidated
Financial Statements. Intangibles becoming fully amortized in the third quarter
of 2001 accounts for $6 million of the quarter-over-quarter decline in
amortization expense and $139 million of the year-to-date decline, while SFAS
No. 142 implementation accounts for the remaining $53 million
quarter-over-quarter decline and $161 million of the year-to-date decline.
Depreciation and amortization expense was 18.6% of net operating revenues in the
2002 third quarter and 18.4% in the 2002 year-to-date period compared to 19.5%
and 23.0% for the same periods a year ago.
In the 2002 third quarter, PCS finalized the charges associated with its closing
of five PCS customer solution centers, as well as additional steps to reduce
operating costs in the PCS business units, originally estimated at $23 million.
As a result of finalizing this estimate, PCS realized an increase to operating
income of $6 million.
On November 14, 2002, the PCS Group announced it would reduce its operating
expenses through a work force reduction of approximately 1,600 employees and 500
contractors. This action is expected to create a more competitive cost structure
for the business. The severance-related costs associated with the work force
reduction are expected to result in a pre-tax charge of approximately $31
million in the 2002 fourth quarter. When fully implemented, these actions are
expected to result in annualized cash cost savings of approximately $170
million.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Sprint's effective interest rate on long-term debt was 7.0% in the 2002 third
quarter and year-to-date periods compared to 6.9% in both 2001 periods. The
increase in interest rate is primarily due to additional borrowings with higher
interest rates. Interest costs on short-term borrowings, including short-term
borrowings classified as long-term debt, and interest costs on deferred
compensation plans have been excluded so as not to distort the effective
interest rate on long-term debt. See "Liquidity and Capital Resources" for more
information on Sprint's financing activities.
Other Income (Expense), net
Other income (expense), net consisted of the following:
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Dividend and interest income $ 4 $ 7 $ 25 $ 24
Equity in net losses of affiliates (4) (55) (105) (128)
Net losses from investments - (177) (253) (177)
Gains on sales of assets 67 - 117 13
OPEB liability curtailment gain - 120 - 120
Royalties 3 - 9 -
Foreign currency translation 7 - 7 -
Other, net (3) 5 (34) 2
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 74 $ (100) $ (234) $ (146)
--- ------------- -- -------------- -- ------------- --- -------------
In the 2002 third quarter, equity in net losses of affiliates was driven by the
PCS Group's investment in Virgin Mobile. In the 2002 year-to-date period, equity
in net losses of affiliates was driven by the PCS Group's investments in Virgin
Mobile and Pegaso and the FON Group's investment in Call-Net. In the 2001 third
quarter and year-to-date periods, equity in net losses of affiliates was driven
by the PCS Group's investment in Pegaso and the FON Group's investment in
Intelig.
Net losses from investments in the 2002 year-to-date period mainly include the
write-down of EarthLink, Inc. preferred shares to current market value and the
write-down of the investment in Intelig.
In September of 2002, Sprint recognized a one-time gain of $67 million related
to the sale of its investment in Pegaso. Sprint's net book investment in Pegaso
was zero at the end of the 2002 second quarter. In realizing this sale, a $7
million foreign currency translation adjustment previously carried in Other
Comprehensive Income was recognized. In the 2002 year-to-date period, gains on
sales of assets were driven by the sale of Sprint's investment in Pegaso,
certain customer contracts and stock received during a company's
demutualization.
In the 2001 year-to-date period, gains on sales of assets mainly include the
sale of PCS customers to a PCS third party affiliate.
The OPEB liability gain in the 2001 third quarter resulted from an amendment of
certain medical retirement plan benefits.
Beginning in January 2002, Call-Net began making a royalty payment of 2.5% of
revenues to Sprint. Currently, this is approximately $3 million per quarter.
Income Taxes
See Note 3 of Condensed Notes to Consolidated Financial Statements for
information about the differences that caused the effective income tax rates to
vary from the federal statutory rate for income taxes related to continuing
operations.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
Total consolidated assets were as follows:
September 30, December 31,
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 23,063 $ 24,164
PCS Group 23,571 22,190
Intergroup eliminations (631) (561)
------------------------------------------------------------------------
Consolidated assets $ 46,003 $ 45,793
----------------------------------
Sprint's consolidated assets increased $210 million in the 2002
year-to-date period. Cash and equivalents increased $425 million due to
improved operating cash flows and reduced capital expenditures. Net
property, plant, and equipment decreased $58 million. Capital expenditures
were more than offset by depreciation expense and the 2002 third quarter
asset impairment. The remaining significant change within consolidated
assets includes the $241 million write down of our investment in EarthLink,
Inc. See "Liquidity and Capital Resources" for more information about
changes in Sprint's Consolidated Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Sprint's Board of Directors has the power to make determinations that may impact
the financial and liquidity position of each of the tracking stock groups. This
power includes the ability to prioritize the use of capital and debt capacity,
to determine cash management policies and to make decisions regarding the timing
and amount of capital expenditures. The actions of the Board of Directors are
subject to its fiduciary duties to all shareholders of Sprint, and not just to
the holders of a particular class of common stock. Given the above, it may be
difficult for investors to assess each group's liquidity and capital resources
and in turn the future prospects of each group based on past performance.
Operating Activities
Year-to-Date
September 30,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 2,845 $ 2,808
PCS Group 1,687 429
------------------------------------------------------------------------
Cash flows provided by operating
activities $ 4,532 $ 3,237
----------------------------------
Cash flow from operations increased $1.3 billion in the 2002 year-to-date period
from the same 2001 period. Sprint's improved operating cash flows were driven
mainly by the PCS Group's EBITDA (Operating income (loss) plus depreciation,
amortization and one-time items) improvement of $988 million. The FON Group also
contributed to the improvement with $246 million in EBITDA growth, as cost
controls and reductions have mitigated the revenue erosion seen in the global
markets division. The remaining increase was primarily due to the receipt of
$480 million of tax refunds generated by the economic stimulus bill passed in
the 2002 first quarter, partially offset by higher working capital requirements.
Investing Activities
Year-to-Date
September 30,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ (1,512) $ (3,649)
PCS Group (2,035) (2,853)
------------------------------------------------------------------------
Cash flows used by
investing activities $ (3,547) $ (6,502)
----------------------------------
The FON Group's capital expenditures totaled $1.6 billion in the 2002
year-to-date period and $3.9 billion in the same 2001 period. Global markets
division capital expenditures were incurred mainly to enhance network
reliability and upgrade capabilities for providing new products and services.
The local division incurred capital expenditures to accommodate voice grade
equivalent growth, expand capabilities for providing enhanced services and
continue the build-out of high-speed DSL services. Other FON Group capital
expenditures were incurred mainly for Sprint's World Headquarters Campus, which
is substantially complete. The decline in FON Group capital expenditures in 2002
was driven mainly by the termination of Sprint ION and reduced spending for
data-related services. PCS Group capital expenditures were $2.1 billion in the
2002 year-to-date period and $2.9 billion in the same 2001 period. Capital
expenditures in both years were mainly for the continued PCS network expansion
and fill-in, and the deployment of 3G technology which was launched nationwide
in the 2002 third quarter.
"Investments in affiliates, net" consist of either cash contributions to or
distributions from Sprint's investments. The FON Group's investments in
affiliates consist of cash contributions to Call-Net and Intelig in the 2002
year-to-date period and cash contributions to Intelig in the 2001 year-to-date
period. The PCS Group's investments in affiliates mainly reflect a refund from
BidCo in the 2002 year-to-date period and cash contributions to Pegaso in the
2001 year-to-date period. The refund from BidCo resulted from a FCC decision to
return 85% of the deposits from the Nextwave Spectrum auction due to significant
delays in awarding the licenses arising from various legal and regulatory
issues. See Note 2 of the Condensed Notes to Consolidated Financial Statements
for more information on Sprint's investments.
Proceeds from sales of assets in the 2002 year-to-date period mainly include
proceeds from the sale of the PCS Group's investment in Pegaso and sales of
certain customer contracts, investment securities, and other administrative
assets. The 2001 year-to-date period mainly includes proceeds from sales of PCS
customers to an affiliate and certain network and administrative assets.
Financing Activities
Year-to-Date
September 30,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ (1,366) $ 819
PCS Group 806 2,448
------------------------------------------------------------------------
Cash flows provided (used) by
financing activities $ (560) $ 3,267
----------------------------------
Financing activities include a net debt reduction of $263 million in the 2002
year-to-date period compared to a net increase of $3.0 billion in the same 2001
period. The reduction in the debt requirements in the 2002 year-to-date period
is due to the Company's continuing operating cash flow improvement and reduced
capital expenditures.
Sprint paid cash dividends of $341 million in the 2002 year-to-date period
compared to $340 million in the same 2001 period.
Capital Requirements
Sprint's 2002 investing activities, mainly consisting of capital expenditures,
are expected to total $5.4 billion. This excludes any funding for Nextwave
spectrum, as there have been significant delays in awarding the licenses arising
from various legal and regulatory issues. This potential funding would be
approximately $300 million. FON Group capital expenditures are expected to be
$2.3 billion. PCS Group capital expenditures are expected to be $3.1 billion.
Sprint continues to review capital expenditures and will adjust capital
investment in concert with growth. Dividend payments are expected to approximate
$459 million in 2002. Sprint expects these capital requirements and dividend
payments to be funded by cash generated from operations and other investment
activities.
Liquidity
In March 2002, Sprint issued $5 billion of debt securities through a private
placement. These borrowings have a weighted average interest rate of 8.4% and
have maturities ranging from 2005 to 2032. The proceeds were allocated 5% to the
FON Group and 95% to the PCS Group and were used to repay debt and for general
corporate purposes. As a condition to the sale of the securities, Sprint agreed
to conduct an exchange offer that allowed the original securities to be
exchanged for substantially identical securities registered with the SEC. This
exchange offer was completed in June 2002.
In March 2002, Sprint entered into a nine-month $700 million term loan facility
secured by assets related to Sprint's directory publishing business. To date, we
have not drawn against the facility.
In June 2002, Sprint closed on a new PCS Group accounts receivable asset
securitization facility. This facility provides Sprint with up to $500 million
of additional liquidity. Although this is a three-year facility, it includes an
annual renewal provision. The maximum amount of funding available is based on
numerous factors and will fluctuate each month. As of September 30, 2002,
approximately $340 million would be available. To date, we have not drawn
against the facility.
In August 2002, Sprint closed on a new $700 million global markets division
accounts receivables asset securitization facility. Similar to the PCS accounts
receivables facility, the new global markets facility is a three-year program
subject to annual renewal and does not include any ratings triggers that would
allow the lenders involved to terminate the facility in the event of a
downgrade. The maximum amount of funding available is based on numerous factors
and will fluctuate each month. At the end of the quarter, Sprint had $530
million outstanding under the facility.
In August 2002, Sprint closed on a new $1.5 billion revolving bank credit
facility. The facility is unsecured, with no springing liens, and is structured
as a 364-day credit line with a subsequent one-year term-out option. Sprint has
no plans to draw against the new facility.
Sprint has reduced its outstanding commercial paper from peak levels of nearly
$4 billion earlier this year to zero today. In addition, Sprint expects
continued improvements in operating cash flows and has multiple sources of
liquidity. As a result, the Company believes the new facilities provide ample
capacity.
Certain other notes payable relate to a separate revolving credit facility of
$150 million which expires in December 2002. Sprint made a $150 million
investment in the entity that provides this credit at the time it was formed in
1997. Upon expiration, Sprint expects to liquidate this investment and receive a
cash distribution approximating its original investment.
In September 2002, Sprint announced that it had reached a definitive agreement
to sell its directory publishing business, Sprint Publishing & Advertising, to
R.H. Donnelley for $2.23 billion in cash. The sale is subject to regulatory
approval and is expected to close in early 2003.
Excluding the $150 million revolving credit facility discussed earlier, debt
maturities for the remainder of 2002 total approximately $125 million. Debt
maturities during 2003 total approximately $1.4 billion. The above sources of
liquidity, in addition to Sprint's $738 million cash balance at September 30,
2002, more than fund these requirements, with no dependence on the commercial
paper markets.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $5.2 billion at the end of
September 2002 under the most restrictive of its debt covenants. Sprint is
currently in compliance with all debt covenants associated with its borrowings.
Fitch Ratings (Fitch) currently rates Sprint's long-term senior unsecured debt
at BBB with a stable outlook. Fitch rates Sprint's short-term debt at F2.
Standard & Poor's Corporate Ratings (Standard & Poor's) currently rates Sprint's
long-term senior unsecured debt at BBB- with a stable outlook. Standard & Poor's
rates Sprint's short-term debt at A3.
Moody's Investors Service (Moody's) currently rates Sprint's long-term senior
unsecured debt at Baa3 with a negative outlook. Moody's rates Sprint's
short-term debt at P3.
The undrawn loan facilities described above have interest rates equal to LIBOR
or Prime Rate plus a spread that varies depending on our credit ratings.
Sprint's ability to fund its capital needs is ultimately impacted by the overall
capacity and terms of the commercial paper, bank, term-debt and equity markets.
There is significant volatility in the markets at this time caused by the
economic downturn, recent business failures and reduced confidence in the
financial accounting process. Sprint continues to monitor the markets closely
and to take steps to maintain as much financial flexibility as possible, while
maintaining a reasonable capital structure cost. Sprint currently does not plan
to access the commercial paper market as a result of the downgrade of its
short-term debt rating to A3/P3 in June 2002.
Sprint does not participate in, nor secure, financings for any unconsolidated,
limited purpose entities (SPE).
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
General Risk Management Policies
Sprint selectively enters into interest rate swap and cap agreements to manage
its exposure to interest rate changes on its debt. Sprint also enters into
forward contracts and options in foreign currencies to reduce the impact of
changes in foreign exchange rates. Sprint seeks to minimize counterparty credit
risk through stringent credit approval and review processes, the selection of
only the most creditworthy counterparties, continual review and monitoring of
all counterparties, and thorough legal review of contracts. Sprint also controls
exposure to market risk by regularly monitoring changes in foreign exchange and
interest rate positions under normal and stress conditions to ensure they do not
exceed established limits.
Sprint's derivative transactions are used principally for hedging purposes and
comply with Board-approved policies. Senior management receives frequent status
updates of all outstanding derivative positions.
Interest Rate Risk Management
Fair Value Hedges
Sprint enters into interest rate swap agreements to minimize exposure to
interest rate movements and achieve an optimal mixture of floating and
fixed-rate debt while minimizing liquidity risk. The interest rate swap
agreements designated as fair value hedges effectively convert Sprint's
fixed-rate debt to a floating rate by receiving fixed rate amounts in exchange
for floating rate interest payments over the life of the agreement without an
exchange of the underlying principal amount. As of September 30, 2002, Sprint
had no outstanding fair value hedges.
Cash Flow Hedges
Sprint enters into interest rate swap agreements designated as cash flow hedges
to reduce the impact of interest rate movements on future interest expense by
effectively converting a portion of its floating-rate debt to a fixed-rate. As
of September 30, 2002, Sprint had no outstanding interest rate cash flow hedges.
Other Derivatives
In certain business transactions, Sprint is granted warrants to purchase the
securities of other companies at fixed rates. These warrants are supplemental to
the terms of the business transaction and are not designated as hedging
instruments.
During 2002, Sprint entered into forward sale contracts with net purchased
equity option derivatives to monetize equity securities held as available for
sale. The derivatives have been designated as cash flow hedges to reduce the
variability in expected cash flows related to the forecasted sale of the
underlying equity securities.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on reducing
transaction exposure to optimize consolidated cash flow. Sprint's primary
transaction exposure results from payments made to and received from overseas
telecommunications companies for completing international calls made by Sprint's
domestic customers. These international operations were not material to the
consolidated financial position at September 30, 2002 or results of operations
or cash flows for the quarter ended September 30, 2002. Sprint has not entered
into any significant foreign currency forward contracts or other derivative
instruments to reduce the effects of adverse fluctuations in foreign exchange
rates. As a result, Sprint was not subject to material foreign exchange risk.
PART I.
Item 3
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The risk inherent in Sprint's market risk sensitive instruments and positions is
the potential loss arising from adverse changes in those factors. Sprint is
susceptible to certain risks related to changes in interest rates and foreign
currency exchange rate fluctuations. Sprint does not purchase or hold any
derivative financial instruments for trading purposes.
Interest Rate Risk
The communications industry is a capital intensive, technology driven business.
Sprint is subject to interest rate risk primarily associated with its
borrowings. Sprint selectively enters into interest rate swap and cap agreements
to manage its exposure to interest rate changes on its debt. Approximately 95%
of Sprint's debt at September 30, 2002 is fixed-rate debt. While changes in
interest rates impact the fair value of this debt, there is no impact to
earnings and cash flows because Sprint intends to hold these obligations to
maturity unless refinancing conditions are favorable.
Sprint performs interest rate sensitivity analyses on its variable rate debt.
These analyses indicate that a 1% change in interest rates would have an annual
impact of $14 million pre-tax on the statements of operations and cash flows at
September 30, 2002. While Sprint's variable-rate debt is subject to earnings and
cash flows impacts as interest rates change, it is not subject to changes in
fair values. Sprint also prepared a value-at-risk analysis to assess the
worst-case impact of past market movements on Sprint's long-term debt portfolio.
Based on that analysis, which used average interest rates from 1980 to present,
Sprint is 95% confident that the fair value of outstanding debt would not
increase above Sprint's book value over the next six months.
Foreign Currency Risk
Sprint also enters into forward contracts and options in foreign currencies to
reduce the impact of changes in foreign exchange rates. Sprint uses foreign
currency derivatives to hedge its foreign currency exposure related to
settlement of international telecommunications access charges. The dollar
equivalent of Sprint's net foreign currency payables was $17 million at
September 30, 2002. The potential immediate pre-tax loss to Sprint that would
result from a hypothetical 10% change in foreign currency exchange rates based
on these positions would be less than $3 million.
PART I.
Item 4
Item 4. Controls and Procedures
In response to adoption of the Sarbanes-Oxley Act of 2002, Sprint formalized its
disclosure controls and procedures. In connection with the preparation of this
Form 10-Q and within 90 days before the filing of the report, Sprint's Chief
Executive Officer and Chief Financial Officer directed Sprint's internal
auditors to conduct a review of the effectiveness of these disclosure controls
and procedures and report their conclusions. The Chief Executive Officer and
Chief Financial Officer also met with other members of management, members of
the financial accounting and legal departments, and Sprint's independent
auditors to discuss and evaluate Sprint's disclosures and the effectiveness of
the disclosure controls and procedures. Based on these discussions and the
report of the internal auditors, the Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of the disclosure controls and
procedures was effective and enabled Sprint to disclose all material financial
and non-financial information affecting its businesses. No significant changes
were made in Sprint's internal controls or in other factors that could
significantly affect those controls after the date of the evaluation.
PART II.
Other Information
PART II. - Other Information
Item 1. Legal Proceedings
On September 30, 2002, the U.S. District Court for the District of
Kansas granted in substantial part the motion of defendants Sprint and
certain of its directors and officers to dismiss a purported class
action lawsuit alleging violation of the federal securities laws
initially filed in June 2001 by New England Healthcare Employees
Pension Fund and other institutional shareholders. The allegations that
were not dismissed assert that defendants knew in April 2000 that
Sprint's proposed merger with WorldCom would be rejected by regulatory
authorities but failed to publicly disclose that information. The
plaintiffs seek damages in an unspecified amount.
While it is not possible to determine the ultimate disposition of this
proceeding, Sprint believes that the outcome of the proceeding will not
have a material adverse effect on the financial condition or results of
operations of Sprint, the FON Group or the PCS Group.
Item 2. Changes in Securities
There were no reportable events during the quarter ended September 30,
2002.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended September 30,
2002.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended September 30,
2002.
Item 5. Other Information
Ratios of Earnings to Fixed Charges
Sprint's ratio of earnings to fixed charges was 1.45 in the 2002 third
quarter and 1.30 in the 2002 year-to-date period. Sprint's earnings, as
adjusted, were inadequate to cover fixed charges by $135 million in the
2001 third quarter and by $235 million in the 2001 year-to-date period.
The ratio of earnings to fixed charges was computed by dividing fixed
charges into the sum of earnings, after certain adjustments, and fixed
charges. Earnings include income or loss from continuing operations
before income taxes plus net losses in equity method investees, less
capitalized interest. Fixed charges include interest on all debt of
continuing operations, including amortization of debt issuance costs,
and the interest component of operating rents.
Health of CEO
On November 11, 2002, Sprint announced that William T. Esrey, the
Company's chairman and chief executive officer, has been diagnosed with
lymphoma, a cancer of the lymphatic system, and will begin chemotherapy
to treat the disease.
Doctors at Duke University Medical Center, where Esrey was diagnosed,
have informed him that the lymphoma is considered highly treatable and
they anticipate a full recovery. Esrey's doctors advised that the
normal course of treatment involves a few hours one day every three to
four weeks. Esrey will continue to handle his full day-to-day
responsibilities as chairman and chief executive officer while
undergoing treatment.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession:
(a) Stock Purchase Agreement, by and between Sprint
Corporation, Centel Directories LLC and R. H. Donnelley
Corporation, dated as of September 21, 2002 (filed as
Exhibit 2 to Sprint Corporation's Current Report on
Form 8-K dated September 21, 2002, and incorporated
herein by reference).
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended (filed as Exhibit
3(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, and
incorporated herein by reference).
(b) Bylaws, as amended (filed as Exhibit 3.2 to Amendment
No. 4 to Sprint Corporation's Registration Statement on
Form 8-A relating to Sprint's Series 1 PCS Common
Stock, filed April 17, 2002, and incorporated herein by
reference).
(4) Instruments defining the Rights of Sprint's Security Holders:
(a) The rights of Sprint's equity security holders are
defined in the Fifth, Sixth, Seventh and Eighth
Articles of Sprint's Articles of Incorporation. See
Exhibit 3(a).
(b) Provisions regarding Stockholders' Meetings are set
forth in Article III of the Bylaws. Provisions
regarding the Capital Stock Committee are set forth in
Article IV, Section 12 of the Bylaws. See Exhibit 3(b).
(c) Rights Agreement dated as of November 23, 1998, between
Sprint Corporation and UMB Bank, n.a. (filed as Exhibit
4.1 to Amendment No. 1 to Sprint Corporation's
Registration Statement on Form 8-A relating to Sprint's
PCS Group Rights, filed November 25, 1998, and
incorporated herein by reference).
(d) Amended and Restated Standstill Agreement dated
November 23, 1998, by and among Sprint Corporation,
France Telecom and Deutsche Telekom AG (filed as
Exhibit 4E to Post-Effective Amendment No. 2 to Sprint
Corporation's Registration Statement on Form S-3 (No.
33-58488) and incorporated herein by reference), as
amended by the Master Transfer Agreement dated January
21, 2000 between and among France Telecom, Deutsche
Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH,
Atlas Telecommunications, S.A., Sprint Corporation,
Sprint Global Venture, Inc. and the JV Entities set
forth in Schedule II thereto (filed as Exhibit 2 to
Sprint Corporation's Current Report on Form 8-K dated
January 26, 2000 and incorporated herein by reference).
(e) Tracking Stock Policies of Sprint Corporation (filed as
Exhibit 4(c) to Sprint Corporation's Annual Report on
Form 10-K/A for the year ended December 31, 2001 and
incorporated herein by reference).
(10) Material Contracts:
(a) 364-Day Credit Agreement dated as of August 9, 2002,
among Sprint Corporation and Sprint Capital
Corporation, as Borrowers, the initial Lenders named
therein, as Initial Lenders, Citibank, N.A., as
Administrative Agent, Salomon Smith Barney Inc. and
J.P. Morgan Securities Inc., as joint lead arrangers
and as book managers, JPMorgan Chase Bank, as
syndication agent, and Bank of America, N.A., Deutsche
Bank AG New York Branch and UBS AG, Stamford Branch, as
documentation agents.
(12) Computation of Ratios of Earnings to Fixed Charges
Sprint will furnish to the Securities and Exchange Commission, upon request, a
copy of the instruments defining the rights of holders of long-term debt that
does not exceed 10% of the total assets of Sprint.
(b) Reports on Form 8-K
Sprint filed a Current Report on Form 8-K dated August 6, 2002, that
reported that Sprint's Chief Executive Officer and Chief Financial
Officer had sent to the SEC their sworn statements in compliance with
the SEC's order requiring the filing of sworn statements relating to
the 2001 Form 10-K and other documents filed with the SEC under the
Securities Exchange Act of 1934 after the 2001 Form 10-K. The
statements were included in the Current Report.
Sprint filed a Current Report on Form 8-K dated August 9, 2002, in
which it included pro forma information adjusting net income (loss) and
basic and diluted earnings (loss) per share in 2001, 2000 and 1999 to
exclude amortization, net of related tax effects, on goodwill and
indefinite lived intangibles, as a result of the adoption of SFAS No.
142 on January 1, 2002.
Sprint filed a Current Report on Form 8-K dated September 21, 2002, in
which it reported that it had entered into a definitive agreement to
sell its directory publishing business.
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/ John P. Meyer
-----------------------------------
John P. Meyer
Senior Vice President -- Controller
Principal Accounting Officer
Dated: November 14, 2002
CERTIFICATIONS
I, William T. Esrey, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sprint Corporation;
2 Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ William T. Esrey
----------------------------------------
William T. Esrey
Chairman and Chief Executive Officer
CERTIFICATIONS
I, Robert J. Dellinger, Executive Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sprint Corporation;
2 Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert J. Dellinger
----------------------------------------
Robert J. Dellinger
Executive Vice President
and Chief Financial Officer