e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2008
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OR
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-32421
NII HOLDINGS, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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91-1671412
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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1875 Explorer Street, Suite 1000
Reston, Virginia
(Address of Principal
Executive Offices)
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20190
(Zip
Code)
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(703) 390-5100
(Registrants
Telephone Number, Including Area Code)
Not Applicable
(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 such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Number of Shares Outstanding
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Title of Class
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|
on November 3, 2008
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Common Stock, $0.001 par value per share
|
|
165,782,002
|
NII
HOLDINGS, INC. AND SUBSIDIARIES
INDEX
1
PART I
FINANCIAL INFORMATION
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|
Item 1.
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Financial
Statements.
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NII
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
Unaudited
|
|
|
|
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September 30,
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December 31,
|
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|
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2008
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2007
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|
|
ASSETS
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Current assets
|
|
|
|
|
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|
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Cash and cash equivalents
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|
$
|
1,393,514
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|
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$
|
1,370,165
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Short-term investments
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90,420
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|
241,764
|
|
Accounts receivable, less allowance for doubtful accounts of
$30,615 and $20,204
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|
|
529,339
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|
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438,348
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Handset and accessory inventory
|
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161,839
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|
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107,314
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|
Deferred income taxes, net
|
|
|
142,249
|
|
|
|
121,512
|
|
Prepaid expenses and other
|
|
|
121,550
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|
|
|
110,736
|
|
|
|
|
|
|
|
|
|
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Total current assets
|
|
|
2,438,911
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|
|
|
2,389,839
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Property, plant and equipment, net
|
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2,130,101
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|
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1,853,082
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Intangible assets, net
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391,837
|
|
|
|
410,447
|
|
Deferred income taxes, net
|
|
|
522,511
|
|
|
|
541,406
|
|
Other assets
|
|
|
277,862
|
|
|
|
241,962
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,761,222
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|
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$
|
5,436,736
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities
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|
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|
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Accounts payable
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$
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131,867
|
|
|
$
|
125,040
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|
Accrued expenses and other
|
|
|
459,251
|
|
|
|
436,703
|
|
Deferred revenues
|
|
|
131,631
|
|
|
|
109,640
|
|
Accrued interest
|
|
|
19,762
|
|
|
|
12,439
|
|
Current portion of long-term debt
|
|
|
92,757
|
|
|
|
70,448
|
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
835,268
|
|
|
|
754,270
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|
Long-term debt
|
|
|
2,291,569
|
|
|
|
2,196,069
|
|
Deferred revenues
|
|
|
30,474
|
|
|
|
32,892
|
|
Deferred credits
|
|
|
129,016
|
|
|
|
158,621
|
|
Other long-term liabilities
|
|
|
167,259
|
|
|
|
126,511
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|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,453,586
|
|
|
|
3,268,363
|
|
|
|
|
|
|
|
|
|
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Commitments and contingencies (Note 5)
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|
|
|
|
|
|
|
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Stockholders equity
|
|
|
|
|
|
|
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Undesignated preferred stock, par value $0.001,
10,000 shares authorized 2008 and 2007, no
shares issued or outstanding 2008 and 2007
|
|
|
|
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|
Common stock, par value $0.001, 600,000 shares
authorized 2008 and 2007, 165,782 shares issued
and outstanding 2008, 169,910 shares issued and
outstanding 2007
|
|
|
166
|
|
|
|
170
|
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Paid-in capital
|
|
|
958,188
|
|
|
|
1,091,672
|
|
Retained earnings
|
|
|
1,364,428
|
|
|
|
1,003,799
|
|
Accumulated other comprehensive (loss) income
|
|
|
(15,146
|
)
|
|
|
72,732
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,307,636
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|
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|
2,168,373
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|
|
|
|
|
|
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Total liabilities and stockholders equity
|
|
$
|
5,761,222
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|
|
$
|
5,436,736
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Operating revenues
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
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Service and other revenues
|
|
$
|
3,106,909
|
|
|
$
|
2,279,326
|
|
|
$
|
1,116,106
|
|
|
$
|
827,486
|
|
Digital handset and accessory revenues
|
|
|
172,987
|
|
|
|
76,826
|
|
|
|
66,619
|
|
|
|
26,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,279,896
|
|
|
|
2,356,152
|
|
|
|
1,182,725
|
|
|
|
854,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
848,557
|
|
|
|
609,827
|
|
|
|
305,565
|
|
|
|
223,617
|
|
Cost of digital handsets and accessories
|
|
|
455,876
|
|
|
|
320,608
|
|
|
|
162,478
|
|
|
|
112,066
|
|
Selling, general and administrative
|
|
|
1,054,013
|
|
|
|
771,508
|
|
|
|
384,056
|
|
|
|
282,060
|
|
Depreciation
|
|
|
285,490
|
|
|
|
209,877
|
|
|
|
102,712
|
|
|
|
73,552
|
|
Amortization
|
|
|
25,434
|
|
|
|
7,040
|
|
|
|
8,907
|
|
|
|
3,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,669,370
|
|
|
|
1,918,860
|
|
|
|
963,718
|
|
|
|
694,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
610,526
|
|
|
|
437,292
|
|
|
|
219,007
|
|
|
|
159,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(124,092
|
)
|
|
|
(89,592
|
)
|
|
|
(42,466
|
)
|
|
|
(35,610
|
)
|
Interest income
|
|
|
53,324
|
|
|
|
45,040
|
|
|
|
16,796
|
|
|
|
22,358
|
|
Foreign currency transaction (losses) gains, net
|
|
|
(16,128
|
)
|
|
|
12,637
|
|
|
|
(56,434
|
)
|
|
|
6,838
|
|
Debt conversion expense
|
|
|
|
|
|
|
(26,455
|
)
|
|
|
|
|
|
|
(26,455
|
)
|
Other expense, net
|
|
|
(12,786
|
)
|
|
|
(986
|
)
|
|
|
(7,611
|
)
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,682
|
)
|
|
|
(59,356
|
)
|
|
|
(89,715
|
)
|
|
|
(34,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
510,844
|
|
|
|
377,936
|
|
|
|
129,292
|
|
|
|
124,951
|
|
Income tax provision
|
|
|
(150,215
|
)
|
|
|
(128,026
|
)
|
|
|
(37,506
|
)
|
|
|
(43,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
360,629
|
|
|
$
|
249,910
|
|
|
$
|
91,786
|
|
|
$
|
81,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share, basic
|
|
$
|
2.16
|
|
|
$
|
1.52
|
|
|
$
|
0.55
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share, diluted
|
|
$
|
2.06
|
|
|
$
|
1.40
|
|
|
$
|
0.54
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
basic
|
|
|
167,312
|
|
|
|
164,942
|
|
|
|
165,696
|
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
diluted
|
|
|
186,196
|
|
|
|
185,098
|
|
|
|
174,415
|
|
|
|
183,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
$
|
(88,362
|
)
|
|
$
|
53,544
|
|
|
$
|
(290,928
|
)
|
|
$
|
11,454
|
|
Reclassification for gains on derivatives included in other
expense, net
|
|
|
171
|
|
|
|
456
|
|
|
|
25
|
|
|
|
60
|
|
Unrealized gains on derivatives, net
|
|
|
313
|
|
|
|
469
|
|
|
|
15
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
(87,878
|
)
|
|
|
54,469
|
|
|
|
(290,888
|
)
|
|
|
11,623
|
|
Net income
|
|
|
360,629
|
|
|
|
249,910
|
|
|
|
91,786
|
|
|
|
81,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
272,751
|
|
|
$
|
304,379
|
|
|
$
|
(199,102
|
)
|
|
$
|
93,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Balance, January 1, 2008
|
|
|
169,910
|
|
|
$
|
170
|
|
|
$
|
1,091,672
|
|
|
$
|
1,003,799
|
|
|
$
|
72,732
|
|
|
$
|
2,168,373
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360,629
|
|
|
|
|
|
|
|
360,629
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,878
|
)
|
|
|
(87,878
|
)
|
Purchase of common stock
|
|
|
(5,555
|
)
|
|
|
(5
|
)
|
|
|
(242,665
|
)
|
|
|
|
|
|
|
|
|
|
|
(242,670
|
)
|
Share-based payment expense for equity-based awards
|
|
|
|
|
|
|
|
|
|
|
53,172
|
|
|
|
|
|
|
|
|
|
|
|
53,172
|
|
Exercise of stock options
|
|
|
1,427
|
|
|
|
1
|
|
|
|
33,763
|
|
|
|
|
|
|
|
|
|
|
|
33,764
|
|
Tax benefit on exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
22,246
|
|
|
|
|
|
|
|
|
|
|
|
22,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
|
165,782
|
|
|
$
|
166
|
|
|
$
|
958,188
|
|
|
$
|
1,364,428
|
|
|
$
|
(15,146
|
)
|
|
$
|
2,307,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
NII
HOLDINGS, INC. AND SUBSIDIARIES
For the Nine Months Ended September 30, 2008 and 2007
(in thousands)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
360,629
|
|
|
$
|
249,910
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Amortization of debt financing costs
|
|
|
6,753
|
|
|
|
4,683
|
|
Depreciation and amortization
|
|
|
310,924
|
|
|
|
216,917
|
|
Provision for losses on accounts receivable
|
|
|
60,728
|
|
|
|
33,199
|
|
Foreign currency transaction losses (gains), net
|
|
|
16,128
|
|
|
|
(12,637
|
)
|
Deferred income tax (benefit) provision
|
|
|
(41,853
|
)
|
|
|
31,336
|
|
Utilization of deferred credit
|
|
|
|
|
|
|
(5,031
|
)
|
Share-based payment expense
|
|
|
53,288
|
|
|
|
51,159
|
|
Excess tax benefit from share-based payment
|
|
|
(14,634
|
)
|
|
|
|
|
Loss on short-term investments
|
|
|
4,368
|
|
|
|
|
|
Accretion of asset retirement obligations
|
|
|
5,754
|
|
|
|
4,271
|
|
Other, net
|
|
|
2,112
|
|
|
|
(1,562
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
|
(170,131
|
)
|
|
|
(129,059
|
)
|
Handset and accessory inventory
|
|
|
(57,136
|
)
|
|
|
(39,435
|
)
|
Prepaid expenses and other
|
|
|
(15,313
|
)
|
|
|
(24,171
|
)
|
Other long-term assets
|
|
|
(52,186
|
)
|
|
|
(38,679
|
)
|
Accounts payable, accrued expenses and other
|
|
|
107,531
|
|
|
|
98,017
|
|
Current deferred revenue
|
|
|
25,234
|
|
|
|
15,455
|
|
Other long-term liabilities
|
|
|
14,454
|
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
616,650
|
|
|
|
455,195
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(656,224
|
)
|
|
|
(499,748
|
)
|
Payments for acquisitions, purchases of licenses and other
|
|
|
(7,983
|
)
|
|
|
(44,180
|
)
|
Proceeds from sales of short-term investments
|
|
|
607,950
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(455,486
|
)
|
|
|
|
|
Transfers to restricted cash
|
|
|
(2,826
|
)
|
|
|
(12,259
|
)
|
Other
|
|
|
1,930
|
|
|
|
1,568
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(512,639
|
)
|
|
|
(554,619
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments to purchase common stock
|
|
|
(242,670
|
)
|
|
|
(329,980
|
)
|
Proceeds from issuance of convertible notes
|
|
|
|
|
|
|
1,200,000
|
|
Borrowings under syndicated loan facilities
|
|
|
125,000
|
|
|
|
|
|
Repayments under syndicated loan facilities
|
|
|
(31,922
|
)
|
|
|
(9,152
|
)
|
Proceeds from stock option exercises
|
|
|
33,764
|
|
|
|
89,610
|
|
Payment of debt financing costs
|
|
|
|
|
|
|
(23,090
|
)
|
Excess tax benefit from share-based payment
|
|
|
14,634
|
|
|
|
|
|
Proceeds from tower financing transactions
|
|
|
27,271
|
|
|
|
13,213
|
|
Repayments under capital leases, license financing, tower
financing and other transactions
|
|
|
(7,971
|
)
|
|
|
(4,014
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(81,894
|
)
|
|
|
936,587
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
1,232
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
23,349
|
|
|
|
836,812
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,370,165
|
|
|
|
708,591
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,393,514
|
|
|
$
|
1,545,403
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
|
|
Note 1.
|
Basis of
Presentation
|
General. Our unaudited condensed
consolidated financial statements have been prepared under the
rules and regulations of the Securities and Exchange Commission,
or the SEC. While they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for complete financial
statements, they reflect all adjustments that, in the opinion of
management, are necessary for a fair presentation of the results
for interim periods. In addition, the year-end condensed
consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures
required by accounting principles generally accepted in the
United States of America.
You should read these condensed consolidated financial
statements in conjunction with the consolidated financial
statements and notes contained in our 2007 annual report on
Form 10-K
and our quarterly reports on
Form 10-Q
for the quarters ended March 31, 2008 and June 30,
2008. You should not expect results of operations for interim
periods to be an indication of the results for a full year.
Accumulated Other Comprehensive
Income. The components of our accumulated
other comprehensive income, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Cumulative foreign currency translation adjustment
|
|
$
|
(13,729
|
)
|
|
$
|
74,633
|
|
Unrealized losses on derivatives
|
|
|
(1,417
|
)
|
|
|
(1,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(15,146
|
)
|
|
$
|
72,732
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Cash paid for capital expenditures, including capitalized
interest
|
|
$
|
656,224
|
|
|
$
|
499,748
|
|
Change in capital expenditures accrued and unpaid or financed,
including accreted interest capitalized
|
|
|
(15,802
|
)
|
|
|
(33,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
640,422
|
|
|
$
|
465,931
|
|
|
|
|
|
|
|
|
|
|
Interest costs
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
124,092
|
|
|
$
|
89,592
|
|
Interest capitalized
|
|
|
6,398
|
|
|
|
4,266
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
130,490
|
|
|
$
|
93,858
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
85,220
|
|
|
$
|
60,191
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
184,274
|
|
|
$
|
94,930
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2008 and 2007, we
had $4.5 million and $12.0 million, respectively, in
non-cash financing activities related to co-location capital
lease obligations on our communication towers.
Net Income Per Common Share, Basic and
Diluted. Basic net income per common share
includes no dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. Diluted net income per common share reflects the
potential dilution of securities that could participate in our
earnings,
6
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
but not securities that are antidilutive, including stock
options with an exercise price greater than the average market
price of our common stock.
As presented for the nine months ended September 30, 2008,
our calculation of diluted net income per share includes common
shares resulting from shares issuable upon the potential
exercise of stock options under our stock-based employee
compensation plans and our restricted stock, as well as common
shares resulting from the potential conversion of our 3.125%
convertible notes and our 2.75% convertible notes. We did not
include 9.2 million in antidilutive stock options in the
calculation of diluted net income per common share for the nine
months ended September 30, 2008. Further, we did not
include an immaterial amount of our restricted stock because its
effect would also have been antidilutive to our net income per
common share for this period.
As presented for the three months ended September 30, 2008,
our calculation of diluted net income per share includes common
shares resulting from shares issuable upon the potential
exercise of stock options under our stock-based employee
compensation plans and our restricted stock, as well as common
shares resulting from the potential conversion of our 2.75%
convertible notes. We did not include in the calculation of
diluted net income per common share 9.2 million options to
purchase shares of common stock that were outstanding during the
period and the common shares resulting from the potential
conversion of our 3.125% convertible notes because their effect
would have been antidilutive to our net income per common share
for that period.
As presented for the nine and three months ended
September 30, 2007, our calculation of diluted net income
per share includes common shares resulting from shares issuable
upon the potential exercise of stock options under our
stock-based employee compensation plans and our restricted
stock, as well as common shares resulting from the potential
conversion of our 2.875% convertible notes and our 2.75%
convertible notes. We did not include 6.0 million and
4.6 million in antidilutive stock options in the
calculations of diluted net income per common share for the nine
and three months ended September 30, 2007, respectively. In
addition, we did not include the common shares resulting from
the potential conversion of our 3.125% convertible notes that we
issued in the second quarter of 2007 because their effect would
have been antidilutive to our net income per common share for
that period.
The following tables provide a reconciliation of the numerators
and denominators used to calculate basic and diluted net income
per common share as disclosed in our condensed consolidated
statements of operations for the nine and three months ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
360,629
|
|
|
|
167,312
|
|
|
$
|
2.16
|
|
|
$
|
249,910
|
|
|
|
164,942
|
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
|
4,051
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
612
|
|
|
|
|
|
Convertible notes, net of capitalized interest and taxes
|
|
|
23,632
|
|
|
|
17,132
|
|
|
|
|
|
|
|
8,781
|
|
|
|
15,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
384,261
|
|
|
|
186,196
|
|
|
$
|
2.06
|
|
|
$
|
258,691
|
|
|
|
185,098
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
91,786
|
|
|
|
165,696
|
|
|
$
|
0.55
|
|
|
$
|
81,666
|
|
|
|
170,000
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
3,268
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
301
|
|
|
|
|
|
Convertible notes, net of capitalized interest and taxes
|
|
|
1,673
|
|
|
|
6,989
|
|
|
|
|
|
|
|
2,126
|
|
|
|
10,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
93,459
|
|
|
|
174,415
|
|
|
$
|
0.54
|
|
|
$
|
83,792
|
|
|
|
183,621
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Common Stock. In January
2008, our Board of Directors authorized a program to purchase
shares of our common stock for cash. The Board approved the
purchase of shares having an aggregate market value of up to
$500.0 million, depending on market conditions and other
factors. During the first nine months of 2008, we purchased a
total of 5,555,033 shares of our common stock for
$242.7 million. We did not purchase any shares of our
common stock during the three months ended September 30,
2008. During the nine months ended September 30, 2007, we
purchased a total of 4,043,725 shares of our common stock
for $330.0 million under our first program to purchase
shares of our common stock for cash, which was approved by our
Board of Directors in May 2007. We treat purchases under both
programs as effective retirements of the purchased shares and
therefore reduce our reported shares issued and outstanding by
the number of shares purchased. In addition, we record the
excess of the purchase price over the par value of the common
stock as a reduction to paid-in capital.
Reclassifications. We have reclassified
certain prior year amounts in our unaudited condensed
consolidated financial statements to conform to our current year
presentation. Specifically, for the nine and three months ended
September 30, 2007, we corrected the classification of
$20.4 million and $7.7 million, respectively, from
cost of service to cost of digital handset and accessory sales
related to costs incurred in connection with replacement
handsets sold to current customers. These revisions did not have
a material impact on previously reported balances.
New Accounting Pronouncements. In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS 157, which
provides guidance for using fair value to measure assets and
liabilities when required for recognition or disclosure
purposes. SFAS No. 157 does not expand the use of fair
value or determine when fair value should be used in the
financial statements. In February 2008, the FASB issued Staff
Position
No. 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purpose of Lease
Classification or Measurement Under Statement 13, or FSP
No. 157-1,
in order to amend SFAS No. 157 to exclude from its
scope FASB Statement No. 13, Accounting for
Leases, or SFAS No. 13, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement. In addition, in February
2008, the FASB issued Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157, or
FSP
No. 157-2,
which defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for
those that are recognized or disclosed at fair value on a
recurring basis (at least annually). In accordance with FSP
No. 157-2,
we partially adopted SFAS No. 157 for financial assets
and liabilities in the first quarter of fiscal year 2008.
SFAS No. 157 did not have a material impact on our
condensed consolidated financial statements. We are currently
evaluating the impact, if any, that SFAS 157 may have on
any future condensed consolidated financial statements related
to non-financial assets and non-financial liabilities. See
Note 2 for additional information and related disclosures
regarding our fair value measurements.
8
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
Unrealized gains and losses on items for which the fair value
option has been elected are required to be included in earnings.
SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be
carried at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We adopted
SFAS No. 159 in the first quarter of fiscal year 2008.
SFAS No. 159 did not have a material impact on our
condensed consolidated financial statements as we elected not to
measure any eligible items at fair value.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141(R), which replaces
SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest
in the acquiree, the goodwill acquired and the expenses incurred
in connection with the acquisition. SFAS No. 141(R)
also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal
years beginning after December 15, 2008. Earlier adoption
is not permitted. As a result, we will apply the provisions of
SFAS No. 141(R) prospectively to business combinations
that close on or after January 1, 2009. We are currently
evaluating the impact, if any, the adoption of
SFAS No. 141(R) may have on our condensed consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of Accounting Research
Bulletin No. 51, or SFAS No. 160.
SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest and the
valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
is effective for fiscal years beginning after December 15,
2008. Earlier adoption is not permitted. We do not believe that
its adoption will have a material impact on our condensed
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB Statement
No. 133 or SFAS No. 161, which amends and
expands the disclosure requirements of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities to require qualitative disclosure about
objectives and strategies in using derivatives, quantitative
disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about the underlying
credit-risk-related contingent features in derivative
agreements. SFAS No. 161 is intended to improve
financial reporting by requiring transparency about the location
and amounts of derivative instruments in an entitys
financial statements; how derivative instruments and related
hedged items are accounted for under SFAS No. 133; and
how derivative instruments and related hedged items affect its
financial position, financial performance and cash flows.
SFAS No. 161 is effective for financial statements
issued for fiscal years beginning after November 15, 2008.
We are currently evaluating the potential impact, if any, that
the adoption of SFAS No. 161 may have on our condensed
consolidated financial statements.
In April 2008, the FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets, or FSP
FAS 142-3.
FSP
FAS 142-3
amends the factors considered in developing renewal or extension
assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets, in order to improve the
consistency between the useful life of the recognized intangible
asset and the period of expected cash flows used to measure the
fair value of the asset. FSP
FAS 142-3
applies to: (1) intangible assets that are acquired
individually or with a group of other assets, and
(2) intangible assets acquired both in business
combinations and asset acquisitions. FSP
FAS 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. As a
result, we will apply the provisions of FSP
FAS 142-3
prospectively to intangible assets acquired on
9
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
or after January 1, 2009. We are currently evaluating the
potential impact, if any, the adoption of FSP
FAS 142-3
may have on our condensed consolidated financial statements.
In May 2008, the FASB issued Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), or FSP APB
14-1. FSP
APB 14-1
requires that issuers of certain convertible debt instruments
that may be settled in cash upon conversion, including partial
cash settlement, separately account for the liability and equity
components (ie. the embedded conversion option) and recognize
the accretion of the resulting discount on the debt as interest
expense. FSP APB
14-1 is
effective for fiscal years beginning after December 15,
2008 and for interim periods within those fiscal years. It is
required to be applied retrospectively to convertible debt
instruments that were outstanding during any period presented in
the financial statements issued after the effective date. We
believe that the adoption of FSP APB
14-1 in 2009
will result in an increase in the amount of non-cash interest
expense with respect to our convertible debt securities and a
corresponding reduction in our reported net income and diluted
earnings per share for all periods presented in our condensed
consolidated financial statements. We are currently quantifying
the effect the adoption of
FSP APB 14-1
will have on our condensed consolidated financial statements.
|
|
Note 2.
|
Fair
Value Measurements
|
On January 1, 2008, we adopted SFAS No. 157 for
financial assets and liabilities. SFAS No. 157 defines
fair value, provides guidance for measuring fair value and
requires certain disclosures with respect to the processes used
to measure the fair value of financial assets and liabilities.
SFAS No. 157 does not require any new fair value
measurements, but rather applies to all other accounting
pronouncements that require or permit fair value measurements.
SFAS No. 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a
market-based measurement that is determined based on assumptions
that market participants would use in pricing an asset or
liability. Valuation techniques discussed under
SFAS No. 157 include the market approach (comparable
market prices), the income approach (present value of future
income or cash flow based on current market expectations) and
the cost approach (cost to replace the service capacity of an
asset or replacement cost). SFAS No. 157 utilizes a
three-tier fair value hierarchy, which prioritizes the inputs to
the valuation techniques used to measure fair value. The
following is a brief description of the three levels in the fair
value hierarchy:
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or
liabilities.
Level 2: Inputs other than quoted prices
in active markets that are observable for the asset or
liability, either directly or indirectly.
Level 3: Unobservable inputs that reflect
the reporting entitys own assumptions.
The following table summarizes the financial instruments
measured at fair value on a recurring basis in the accompanying
condensed consolidated balance sheet as of September 30,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of September 30, 2008
|
|
|
Fair Value as of
|
|
|
|
Using the Fair Value Hierarchy
|
|
|
September 30,
|
|
Short-Term Investments
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2008
|
|
|
Available for sale securities Nextel Brazil
investments
|
|
$
|
4,178
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,178
|
|
Available for sale securities Enhanced cash fund
|
|
|
|
|
|
|
86,242
|
|
|
|
|
|
|
|
86,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,178
|
|
|
$
|
86,242
|
|
|
$
|
|
|
|
$
|
90,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our short-term investments are composed of $4.2 million in
investments made by Nextel Brazil in two different investment
funds and an $86.2 million investment in an enhanced cash
fund that invests primarily in asset
10
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
backed securities. We classify these investments as available
for sale securities under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities.
The Nextel Brazil investment funds invest primarily in Brazilian
government bonds, long-term, low-risk bank certificates of
deposit and Brazilian corporate debentures. The net asset values
of the investments were determined using Level 1 inputs
within the fair value hierarchy because their net asset values
trade with sufficient observable activity to support the
Level 1 fair value measurement.
We received $151.2 million in distributions in the first
nine months of 2008 from our investment in the enhanced cash
fund. As of September 30, 2008, the net asset value per
unit of interest in the enhanced cash fund had declined to $0.96
from $0.99 as of December 31, 2007. We determined the net
asset value of this investment using Level 2 inputs within
the fair value hierarchy because the underlying assets to the
fund are fair valued in observable markets or with corroborating
observable market data. Due to the changing credit market
conditions, we evaluated the decline in the market value of the
enhanced cash fund and determined that unrealized losses related
to that fund should be recognized as other-than-temporary. As a
result, we recognized a $4.4 million pre-tax loss related
to the decline in the fair value of our investment in the
enhanced cash fund during the first nine months of 2008. In
accordance with our accounting policy, we will continue to
assess future declines in fair value to determine whether
additional losses should be realized. Due to the recent
liquidity issues and related volatility in the credit and equity
markets, the net asset value of this investment declined
subsequent to September 30, 2008. This decline reduced the
value of our remaining investment in this fund by an additional
$3.1 million.
We have the right at our option to receive an in-kind
distribution of the underlying assets in the enhanced cash fund,
but to date we have not exercised this option. As a result,
decisions regarding the sale of the investments held by the
enhanced cash fund are currently being made by the fund manager.
If we were to elect to receive the in-kind distribution, we
could actively manage the investment decisions with respect to
the underlying assets, including electing to sell those assets
or hold them to maturity, rather than relying on the fund
manager to make those decisions. As a result of this right to
elect to receive an in-kind distribution, we classified our
investment in the fund as a current asset as of
September 30, 2008.
As of September 30, 2008, no assets or liabilities are
measured at fair value on a nonrecurring basis.
|
|
Note 3.
|
Intangible
Assets
|
Our intangible assets consist of our licenses, customer base and
trade name, all of which have finite useful lives, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
451,896
|
|
|
$
|
(60,059
|
)
|
|
$
|
391,837
|
|
|
$
|
446,222
|
|
|
$
|
(35,775
|
)
|
|
$
|
410,447
|
|
Customer base
|
|
|
42,829
|
|
|
|
(42,829
|
)
|
|
|
|
|
|
|
42,617
|
|
|
|
(42,617
|
)
|
|
|
|
|
Trade name and other
|
|
|
1,746
|
|
|
|
(1,746
|
)
|
|
|
|
|
|
|
1,796
|
|
|
|
(1,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
496,471
|
|
|
$
|
(104,634
|
)
|
|
$
|
391,837
|
|
|
$
|
490,635
|
|
|
$
|
(80,188
|
)
|
|
$
|
410,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based solely on the carrying amount of amortizable intangible
assets existing as of September 30, 2008 and current
foreign currency exchange rates, we estimate amortization
expense for each of the next five years ending December 31 to be
as follows (in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
Years
|
|
Expense
|
|
|
2008
|
|
$
|
33,482
|
|
2009
|
|
|
32,191
|
|
2010
|
|
|
32,191
|
|
2011
|
|
|
32,191
|
|
2012
|
|
|
32,191
|
|
Actual amortization expense to be reported in future periods
could differ from these estimates as a result of additional
acquisitions of intangibles, as well as changes in foreign
currency exchange rates and other relevant factors. See
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations. Business
Overview for more information related to changes in
foreign currency exchange rates. During the three months ended
September 30, 2008 and 2007, we did not acquire, dispose of
or write down any goodwill or intangible assets with indefinite
useful lives.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
3.125% convertible notes due 2012
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
2.75% convertible notes due 2025
|
|
|
349,996
|
|
|
|
349,996
|
|
Brazil syndicated loan facility
|
|
|
300,000
|
|
|
|
175,000
|
|
Mexico syndicated loan facility
|
|
|
249,300
|
|
|
|
279,355
|
|
Tower financing obligations
|
|
|
196,847
|
|
|
|
177,199
|
|
Capital lease obligations
|
|
|
77,308
|
|
|
|
75,436
|
|
Brazil spectrum license financing
|
|
|
8,130
|
|
|
|
9,446
|
|
Other
|
|
|
2,745
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
2,384,326
|
|
|
|
2,266,517
|
|
Less: current portion
|
|
|
(92,757
|
)
|
|
|
(70,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,291,569
|
|
|
$
|
2,196,069
|
|
|
|
|
|
|
|
|
|
|
3.125% Convertible Notes. For the
fiscal quarter ended September 30, 2008, the closing sale
price of our common stock did not exceed 120% of the conversion
price of $118.32 per share for at least 20 trading days in the
30 consecutive trading days ending on September 30, 2008.
As a result, the conversion contingency was not met as of
September 30, 2008.
2.75% Convertible Notes. For the
fiscal quarter ended September 30, 2008, the closing sale
price of our common stock did not exceed 120% of the conversion
price of $50.08 per share for at least 20 trading days in the 30
consecutive trading days ending on September 30, 2008. As a
result, the conversion contingency was not met as of
September 30, 2008.
12
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Syndicated Loan Facilities. In
September 2007, Nextel Brazil entered into a $300.0 million
syndicated loan facility. Of the total amount of the facility,
$45.0 million is denominated in U.S. dollars with a
floating interest rate based on LIBOR plus a specified margin
ranging from 2.00% to 2.50% (Tranche A 4.79%
and 7.35% as of September 30, 2008 and December 31,
2007, respectively). The remaining $255.0 million is
denominated in U.S. dollars with a floating interest rate
based on LIBOR plus a specified margin ranging from 1.75% to
2.25% (Tranche B 4.54% and 7.10% as of
September 30, 2008 and December 31, 2007,
respectively). Tranche A matures on September 14,
2014, and Tranche B matures on September 14, 2012.
As of December 31, 2007, Nextel Brazil had borrowed
$26.2 million in term loans under Tranche A and
$148.8 million in term loans under Tranche B of this
syndicated loan facility. During the first quarter of 2008,
Nextel Brazil borrowed the remaining $18.8 million in term
loans under Tranche A and $106.2 million in term loans
under Tranche B of this syndicated loan facility.
In addition, a portion of Nextel Mexicos syndicated loan
facility bears a floating interest rate based on LIBOR plus a
specified margin. The interest rate on the portions of both the
Brazil and Mexico syndicated loan facilities that have interest
rates based on LIBOR are reset each quarter. LIBOR rates have
recently increased significantly due to a severe tightening in
the global credit markets. If these conditions continue, when
the LIBOR rate resets, Nextel Brazil and Nextel Mexico will
incur increased interest expense related to their syndicated
loans.
Tower Financing Obligations. We have an
agreement with American Tower Corporation for the sale-leaseback
of communication towers in Mexico and Brazil that we recognize
as financing obligations. During the nine months ended
September 30, 2008, Nextel Mexico sold 181 towers to
American Tower, which increased its tower financing obligation
by $23.1 million and Nextel Brazil sold 54 towers to
American Tower, which increased its tower financing obligation
by $5.6 million. Following the sale of these towers, we no
longer have any further contractual obligation or right to
transfer towers to American Tower Corporation.
|
|
Note 5.
|
Commitments
and Contingencies
|
Brazilian
Contingencies.
Nextel Brazil has received various assessment notices from state
and federal Brazilian authorities asserting deficiencies in
payments related primarily to value-added taxes, excise taxes on
imported equipment and other non-income based taxes. Nextel
Brazil has filed various administrative and legal petitions
disputing these assessments. In some cases, Nextel Brazil has
received favorable decisions, which are currently being appealed
by the respective governmental authority. In other cases, Nextel
Brazils petitions have been denied, and Nextel Brazil is
currently appealing those decisions. Nextel Brazil is also
disputing various other claims.
As of September 30, 2008 and December 31, 2007, Nextel
Brazil had accrued liabilities of $21.1 million and
$20.2 million, respectively, related to contingencies, all
of which were classified in accrued contingencies reported as a
component of other long-term liabilities. Of the total accrued
liabilities as of both September 30, 2008 and
December 31, 2007, Nextel Brazil had $10.8 million in
unasserted claims. We currently estimate the range of reasonably
possible losses related to matters for which Nextel Brazil has
not accrued liabilities, as they are not deemed probable, to be
between $267.9 million and $271.9 million as of
September 30, 2008. We are continuing to evaluate the
likelihood of probable and reasonably possible losses, if any,
related to all known contingencies. As a result, future
increases or decreases to our accrued liabilities may be
necessary and will be recorded in the period when such amounts
are determined to be probable and estimable.
Argentine
Contingencies.
As of September 30, 2008 and December 31, 2007, Nextel
Argentina had accrued liabilities of $37.0 million and
$32.2 million, respectively, related primarily to local
turnover taxes, universal service tax and local government
13
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims, all of which were classified in accrued contingencies
and accrued non-income taxes reported as components of accrued
expenses and other.
Turnover Tax. The government of the city of
Buenos Aires imposes a turnover tax rate of 6% of revenues for
cellular companies while maintaining a 3% rate for other
telecommunications services. From a regulatory standpoint, we
are not considered a cellular company, although, as noted below,
the city of Buenos Aires made claims to the effect that the
higher turnover tax rate should apply to our services. As a
result, until April 2006, Nextel Argentina paid the turnover tax
at a rate of 3% and recorded a liability and related expense for
the differential between the higher rate applicable to cellular
carriers and the 3% rate, plus interest.
In March 2006, Nextel Argentina received an unfavorable decision
from the city of Buenos Aires related to the determination of
whether it is a cellular company for purposes of this tax. In
addition, the city of Buenos Aires confirmed a previously
assessed penalty equal to 80% of the principal amount of the
additional tax from December 1997 through May 2004. In April
2006, Nextel Argentina decided to pay under protest
$18.8 million, which represented the total amount of
principal and interest, related to this turnover tax.
In August 2006, Nextel Argentina filed a lawsuit against the
city of Buenos Aires to pursue the reimbursement of the
$18.8 million paid under protest in April 2006. Subsequent
to this payment, Nextel Argentina paid $4.2 million, plus
interest, under protest, for the period April 2006 through
December 2006 related to this tax.
In December 2006, the city of Buenos Aires issued new laws,
which Nextel Argentina believes support its position that it
should be taxed at the general 3% rate and not at the 6%
cellular rate. Beginning in January 2007, Nextel Argentina
determined that it would continue to accrue and pay the 3%
general turnover tax rate and would continue with its efforts to
obtain reimbursement of amounts previously paid under protest in
excess of that level, but would discontinue its prior practice
of accruing for the incremental difference in the cellular rate
over the general rate.
In March 2007, Nextel Argentina filed an administrative claim to
recover the amounts paid under protest from April 2006 through
December 2006. In November 2007, Nextel Argentina received a
$4.2 million tax refund, plus interest, as the result of a
resolution issued by the tax authorities of the city of Buenos
Aires with respect to the amounts paid from April 2006 through
December 2006 relating to this tax. Nextel Argentina believes
that the tax refund clarifies and confirms that only the 3%
general turnover tax rate is applicable to our services. The
resolution also indicated that the city of Buenos Aires will
defer the decision of the pending lawsuit to pursue the
reimbursement of the $18.8 million paid under protest in
April 2006 until the court issues a ruling on the case. In
addition, Nextel Argentina unconditionally and unilaterally
committed to donate $3.4 million to charitable
organizations.
Similarly, one of the provincial governments in another one of
the markets where Nextel Argentina operates also increased their
turnover tax rate from 4.55% to 6% of revenues for cellular
companies relating to services provided in that jurisdiction.
Nextel Argentina continues to pay the turnover tax in this
province at the existing rate and accrues a liability for the
incremental difference in the rate on interconnect revenues. As
of September 30, 2008 and December 31, 2007, Nextel
Argentina had accrued $8.9 million and $6.8 million,
respectively, for local turnover taxes in this province, which
are included as components of accrued expenses and other.
Universal Service Tax. Nextel Argentina is
subject to the Universal Service Regulation, which imposes a tax
on telecommunications licensees, equal to 1% of
telecommunications service revenue minus applicable taxes and
specified related costs.
Under the Universal Service Regulation, the license holder can
choose either to pay the resulting amount into a fund for
universal service development or to participate directly in
offering services to specific geographical areas under an annual
plan designed by the federal government. Although the
regulations state that this tax would be applicable beginning
January 1, 2001, the authorities did not take the necessary
actions to implement the tax. However, a subsequent resolution,
issued by the Secretary of Communications in May 2005, prohibits
14
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
telecommunications operators from itemizing the tax in customer
invoices or passing through the tax to customers. In addition,
following the Secretarys instructions, the Argentine
Comision Nacional de Comunicaciones, or CNC, ordered Nextel
Argentina, among other operators, to reimburse the amounts
collected as universal service contributions, plus interest. In
June 2007, the Secretary of Communications issued a resolution
requiring new universal service tax contributions to be
deposited into a financial institution. Nextel Argentina began
depositing these contributions in September 2007, effective for
the period beginning July 1, 2007. In April 2008, a new
decree was issued by the Secretary of Communications addressing
a number of issues relevant to the implementation of the regime.
This new decree would enable license holders to satisfy previous
outstanding obligations under the regime by providing services
under existing or new programs that are approved as Universal
Service programs by the Secretary of Communications.
As a result of various events, during 2005, Nextel Argentina
accrued for the maximum liability due to customers for amounts
billed during all periods ending December 31, 2005, plus
interest. Nextel Argentina continued accruing the higher amount
during the first quarter of 2006 while maintaining its position
that there is no basis for this reimbursement to customers. As
of April 1, 2006, Nextel Argentina changed its rate plan
structure, which eliminated all other charges and any further
contingencies related to this tax. In April 2006, Nextel
Argentina filed a judicial claim against the legislation passed
in May 2005, which is currently pending. As of
September 30, 2008 and December 31, 2007, the accrual
for the liability to Nextel Argentinas customers was
$8.4 million and $7.7 million, respectively, which is
included as a component of accrued expenses and other.
Legal
Proceedings.
We are subject to claims and legal actions that may arise in the
ordinary course of business. We do not believe that any of these
pending claims or legal actions will have a material effect on
our business, financial condition, results of operations or cash
flows.
We are subject to income taxes in both the United States and the
non-U.S. jurisdictions
in which we operate. Certain of our entities are under
examination by the relevant taxing authorities for various tax
years. The earliest years that remain subject to examination by
jurisdiction are: Chile 1993; U.S. 1995;
Mexico 2001; Argentina 2002; Peru and
Brazil 2003. We regularly assess the potential
outcome of current and future examinations in each of the taxing
jurisdictions when determining the adequacy of the provision for
income taxes.
The following table shows a reconciliation of our unrecognized
tax benefits according to FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, or
FIN No. 48, for the nine months ended
September 30, 2008 (in thousands):
|
|
|
|
|
Unrecognized tax benefits December 31, 2007
|
|
$
|
67,955
|
|
Additions for current year tax positions
|
|
|
6,642
|
|
Additions for prior year tax positions
|
|
|
696
|
|
Lapse of statute of limitations
|
|
|
(615
|
)
|
Settlements with taxing authorities
|
|
|
(155
|
)
|
Foreign currency translation adjustment
|
|
|
328
|
|
|
|
|
|
|
Unrecognized tax benefits September 30, 2008
|
|
$
|
74,851
|
|
|
|
|
|
|
The unrecognized tax benefits as of December 31, 2007 and
September 30, 2008 include $49.2 million and
$57.3 million, respectively, of tax benefits that could
potentially reduce our future effective tax rate, if recognized.
We record interest and penalties associated with uncertain tax
positions as a component of our income tax provision.
15
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We assessed the realizability of our deferred tax assets during
the third quarter of 2008, consistent with the methodology we
employed for 2007, and determined that the realizability of
those deferred assets has not changed for the markets in which
we operate. In that assessment, we considered the reversal of
existing temporary differences associated with deferred tax
assets and liabilities, future taxable income, tax planning
strategies and historical and future pre-tax book income (as
adjusted for permanent differences between financial and tax
accounting items) in order to determine if it is
more-likely-than-not that the deferred tax asset
will be realized. As of September 30, 2008, our Brazilian
entity Nextel Telecomunicacoes S.A. (Brazil S.A.) continues to
maintain a 100% valuation allowance against its net deferred tax
assets; however, we believe it is reasonably possible that the
valuation allowance could be released in the near term if Brazil
S.A. generates a level of sufficient pre-tax U.S. GAAP
income. Additionally, due to the expected repatriation of
certain earnings of our Argentine and Mexican subsidiaries
during the current year and the two following years, we released
a portion of the U.S. valuation allowance that related to
excess stock option deductions, resulting in an increase to
paid-in capital.
In 1998, Nextel Peru entered into a
10-year tax
stability agreement with the Peruvian government that suspends
its net operating loss carryforwards from expiring until Nextel
Peru generates taxable income. Once Nextel Peru generates
taxable income, Nextel Peru has four years to utilize those tax
loss carryforwards and any taxable income in excess of the tax
loss carryforwards will be taxed at 30%. During 2005, 2006 and
2007, Nextel Peru generated taxable income and utilized a
portion of the tax loss carryforwards. The remaining tax loss
carryforwards in Peru will expire on December 31, 2008 if
not used by that date. At this time, we believe it is
more-likely-than-not that these tax loss carryforwards will be
fully utilized prior to their expiration. The 1998 tax stability
agreement effectively expired on January 1, 2008. Nextel
Peru is negotiating a new tax stability agreement with the
Peruvian government that is expected to be signed later this
year. The new tax stability agreement is expected to maintain
the current 2008 applicable income tax laws for a period of
20 years beginning in 2008.
During 2004, Nextel Mexico amended its Mexican Federal income
tax returns in order to reverse a benefit previously claimed for
a disputed provision of the Federal income tax law covering
deductions and gains from the sale of property. We filed the
amended returns in order to avoid potential penalties and we
also filed administrative petitions seeking clarification of our
right to the tax benefits claimed on the original income tax
returns. The tax authorities constructively denied our
administrative petitions in January 2005 and in May 2005 we
filed an annulment suit challenging the constructive denial.
Resolution of the annulment suit is pending. Based on an opinion
by our independent legal counsel in Mexico, we believe it is
probable that we will recover this amount. Our consolidated
balance sheets as of September 30, 2008 and
December 31, 2007 include $16.1 and $16.0 million,
respectively, in income taxes receivable, which are included as
components of other non-current assets. The income tax benefit
for this item was related to our income tax provision for the
years ended December 31, 2005, 2004 and 2003.
On October 1, 2007, the Mexican government enacted
amendments to the Mexican tax law that became effective
January 1, 2008. The amendments established a new minimum
corporate tax, eliminated the existing minimum asset tax and
established a new withholding tax system on cash deposits in
bank accounts. The new minimum corporate tax is a supplemental
tax that supersedes the current asset tax and applies when and
to the extent the tax computed under the new minimum corporate
tax exceeds the amounts that would be payable under the existing
Mexican income tax. The new minimum corporate tax is computed on
a cash basis rather than on an accrual basis, and is calculated
based on gross revenues, with no deductions allowed for cost of
goods sold, non-taxable salaries and wages, interest expense,
depreciation, amortization, foreign currency transaction gains
and losses or existing net income tax operating losses from
prior years. This tax is being phased in at a rate of 16.5% for
2008, 17% for 2009 and a final tax rate of 17.5% for 2010 and
thereafter. For purposes of the minimum corporate tax, Nextel
Mexico will generally deduct the value of depreciable assets and
inventory as an expense when these assets are acquired. Certain
tax credits may be available to reduce the amount of new minimum
corporate tax that is payable.
We believe that the new minimum corporate tax is an income tax
to which SFAS No. 109, Accounting for Income
Taxes, is applicable. After evaluating the impact that the
new minimum corporate tax will have on Nextel
16
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Mexico, we concluded that Nextel Mexico is not expecting to
incur any material minimum corporate tax liability in this year
or future years and no adjustment to our deferred income tax
provision is necessary.
|
|
Note 7.
|
Segment
Reporting
|
We have determined that our reportable segments are those that
are based on our method of internal reporting, which
disaggregates our business by geographical location. Our
reportable segments are: (1) Mexico, (2) Brazil,
(3) Argentina and (4) Peru. The operations of all
other businesses that fall below the segment reporting
thresholds are included in the Corporate and other
segment below. This segment includes our Chilean operating
companies and our corporate operations in the U.S. We
evaluate performance of these segments and provide resources to
them based on operating income before depreciation and
amortization and impairment, restructuring and other charges,
which we refer to as segment earnings. Because we do not view
share-based compensation as an important element of operational
performance, we recognize share-based payment expense at the
corporate level and exclude it when evaluating the business
performance of our segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intercompany
|
|
|
|
|
|
|
Mexico
|
|
|
Brazil
|
|
|
Argentina
|
|
|
Peru
|
|
|
and other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,583,235
|
|
|
$
|
976,665
|
|
|
$
|
378,379
|
|
|
$
|
163,170
|
|
|
$
|
6,415
|
|
|
$
|
(955
|
)
|
|
$
|
3,106,909
|
|
Digital handset and accessory revenues
|
|
|
67,622
|
|
|
|
54,936
|
|
|
|
36,443
|
|
|
|
13,986
|
|
|
|
|
|
|
|
|
|
|
|
172,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,650,857
|
|
|
$
|
1,031,601
|
|
|
$
|
414,822
|
|
|
$
|
177,156
|
|
|
$
|
6,415
|
|
|
$
|
(955
|
)
|
|
$
|
3,279,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
602,513
|
|
|
$
|
282,728
|
|
|
$
|
127,995
|
|
|
$
|
33,371
|
|
|
$
|
(125,157
|
)
|
|
$
|
|
|
|
$
|
921,450
|
|
Management fee
|
|
|
(25,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,200
|
|
|
|
(31
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(148,674
|
)
|
|
|
(109,489
|
)
|
|
|
(28,652
|
)
|
|
|
(15,107
|
)
|
|
|
(8,882
|
)
|
|
|
(120
|
)
|
|
|
(310,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
428,670
|
|
|
|
173,239
|
|
|
|
99,343
|
|
|
|
18,264
|
|
|
|
(108,839
|
)
|
|
|
(151
|
)
|
|
|
610,526
|
|
Interest expense
|
|
|
(47,343
|
)
|
|
|
(40,609
|
)
|
|
|
(2,111
|
)
|
|
|
(104
|
)
|
|
|
(39,757
|
)
|
|
|
5,832
|
|
|
|
(124,092
|
)
|
Interest income
|
|
|
34,710
|
|
|
|
4,297
|
|
|
|
2,246
|
|
|
|
772
|
|
|
|
17,131
|
|
|
|
(5,832
|
)
|
|
|
53,324
|
|
Foreign currency transaction gains (losses), net
|
|
|
9,696
|
|
|
|
(26,280
|
)
|
|
|
86
|
|
|
|
(314
|
)
|
|
|
653
|
|
|
|
31
|
|
|
|
(16,128
|
)
|
Other (expense) income, net
|
|
|
(239
|
)
|
|
|
(7,319
|
)
|
|
|
45
|
|
|
|
|
|
|
|
(5,273
|
)
|
|
|
|
|
|
|
(12,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
425,494
|
|
|
$
|
103,328
|
|
|
$
|
99,609
|
|
|
$
|
18,618
|
|
|
$
|
(136,085
|
)
|
|
$
|
(120
|
)
|
|
$
|
510,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
172,465
|
|
|
$
|
325,142
|
|
|
$
|
63,103
|
|
|
$
|
40,744
|
|
|
$
|
38,968
|
|
|
$
|
|
|
|
$
|
640,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,280,982
|
|
|
$
|
574,264
|
|
|
$
|
293,538
|
|
|
$
|
128,947
|
|
|
$
|
2,454
|
|
|
$
|
(859
|
)
|
|
$
|
2,279,326
|
|
Digital handset and accessory revenues
|
|
|
18,093
|
|
|
|
25,257
|
|
|
|
24,270
|
|
|
|
9,201
|
|
|
|
5
|
|
|
|
|
|
|
|
76,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,299,075
|
|
|
$
|
599,521
|
|
|
$
|
317,808
|
|
|
$
|
138,148
|
|
|
$
|
2,459
|
|
|
$
|
(859
|
)
|
|
$
|
2,356,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
491,556
|
|
|
$
|
145,575
|
|
|
$
|
100,877
|
|
|
$
|
26,019
|
|
|
$
|
(109,818
|
)
|
|
$
|
|
|
|
$
|
654,209
|
|
Management fee
|
|
|
(29,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,700
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(106,788
|
)
|
|
|
(67,734
|
)
|
|
|
(22,505
|
)
|
|
|
(15,202
|
)
|
|
|
(4,983
|
)
|
|
|
295
|
|
|
|
(216,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
355,068
|
|
|
|
77,841
|
|
|
|
78,372
|
|
|
|
10,817
|
|
|
|
(85,101
|
)
|
|
|
295
|
|
|
|
437,292
|
|
Interest expense
|
|
|
(44,765
|
)
|
|
|
(22,221
|
)
|
|
|
(1,904
|
)
|
|
|
(95
|
)
|
|
|
(28,403
|
)
|
|
|
7,796
|
|
|
|
(89,592
|
)
|
Interest income
|
|
|
20,948
|
|
|
|
501
|
|
|
|
3,417
|
|
|
|
499
|
|
|
|
27,471
|
|
|
|
(7,796
|
)
|
|
|
45,040
|
|
Foreign currency transaction gains, net
|
|
|
899
|
|
|
|
10,041
|
|
|
|
1,301
|
|
|
|
371
|
|
|
|
25
|
|
|
|
|
|
|
|
12,637
|
|
Debt conversion expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,455
|
)
|
|
|
|
|
|
|
(26,455
|
)
|
Other income (expense), net
|
|
|
2,183
|
|
|
|
(3,162
|
)
|
|
|
1,586
|
|
|
|
|
|
|
|
(1,593
|
)
|
|
|
|
|
|
|
(986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
334,333
|
|
|
$
|
63,000
|
|
|
$
|
82,772
|
|
|
$
|
11,592
|
|
|
$
|
(114,056
|
)
|
|
$
|
295
|
|
|
$
|
377,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
200,059
|
|
|
$
|
177,927
|
|
|
$
|
42,702
|
|
|
$
|
29,966
|
|
|
$
|
15,277
|
|
|
$
|
|
|
|
$
|
465,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intercompany
|
|
|
|
|
|
|
Mexico
|
|
|
Brazil
|
|
|
Argentina
|
|
|
Peru
|
|
|
and other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
559,134
|
|
|
$
|
360,081
|
|
|
$
|
137,258
|
|
|
$
|
57,531
|
|
|
$
|
2,411
|
|
|
$
|
(309
|
)
|
|
$
|
1,116,106
|
|
Digital handset and accessory revenues
|
|
|
28,391
|
|
|
|
20,049
|
|
|
|
13,048
|
|
|
|
5,131
|
|
|
|
|
|
|
|
|
|
|
|
66,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
587,525
|
|
|
$
|
380,130
|
|
|
$
|
150,306
|
|
|
$
|
62,662
|
|
|
$
|
2,411
|
|
|
$
|
(309
|
)
|
|
$
|
1,182,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
211,033
|
|
|
$
|
107,480
|
|
|
$
|
46,178
|
|
|
$
|
10,741
|
|
|
$
|
(44,806
|
)
|
|
$
|
|
|
|
$
|
330,626
|
|
Management fee
|
|
|
(8,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,400
|
|
|
|
17
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(52,518
|
)
|
|
|
(40,496
|
)
|
|
|
(10,297
|
)
|
|
|
(5,218
|
)
|
|
|
(3,090
|
)
|
|
|
|
|
|
|
(111,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
150,098
|
|
|
|
66,984
|
|
|
|
35,881
|
|
|
|
5,523
|
|
|
|
(39,496
|
)
|
|
|
17
|
|
|
|
219,007
|
|
Interest expense
|
|
|
(15,611
|
)
|
|
|
(14,534
|
)
|
|
|
(724
|
)
|
|
|
(68
|
)
|
|
|
(13,172
|
)
|
|
|
1,643
|
|
|
|
(42,466
|
)
|
Interest income
|
|
|
12,858
|
|
|
|
1,037
|
|
|
|
379
|
|
|
|
154
|
|
|
|
4,011
|
|
|
|
(1,643
|
)
|
|
|
16,796
|
|
Foreign currency transaction (losses) gains, net
|
|
|
(6,819
|
)
|
|
|
(51,747
|
)
|
|
|
2,759
|
|
|
|
(152
|
)
|
|
|
(458
|
)
|
|
|
(17
|
)
|
|
|
(56,434
|
)
|
Other (expense) income, net
|
|
|
(80
|
)
|
|
|
(5,767
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(1,765
|
)
|
|
|
|
|
|
|
(7,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
140,446
|
|
|
$
|
(4,027
|
)
|
|
$
|
38,296
|
|
|
$
|
5,457
|
|
|
$
|
(50,880
|
)
|
|
$
|
|
|
|
$
|
129,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
45,756
|
|
|
$
|
105,832
|
|
|
$
|
22,842
|
|
|
$
|
18,188
|
|
|
$
|
12,522
|
|
|
$
|
|
|
|
$
|
205,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
458,665
|
|
|
$
|
217,163
|
|
|
$
|
105,437
|
|
|
$
|
45,457
|
|
|
$
|
1,072
|
|
|
$
|
(308
|
)
|
|
$
|
827,486
|
|
Digital handset and accessory revenues
|
|
|
7,445
|
|
|
|
7,531
|
|
|
|
8,616
|
|
|
|
3,320
|
|
|
|
5
|
|
|
|
|
|
|
|
26,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
466,110
|
|
|
$
|
224,694
|
|
|
$
|
114,053
|
|
|
$
|
48,777
|
|
|
$
|
1,077
|
|
|
$
|
(308
|
)
|
|
$
|
854,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
180,616
|
|
|
$
|
51,487
|
|
|
$
|
37,050
|
|
|
$
|
8,146
|
|
|
$
|
(40,639
|
)
|
|
$
|
|
|
|
$
|
236,660
|
|
Management fee
|
|
|
(9,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,900
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(38,574
|
)
|
|
|
(25,077
|
)
|
|
|
(7,637
|
)
|
|
|
(4,318
|
)
|
|
|
(1,713
|
)
|
|
|
98
|
|
|
|
(77,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
132,142
|
|
|
|
26,410
|
|
|
|
29,413
|
|
|
|
3,828
|
|
|
|
(32,452
|
)
|
|
|
98
|
|
|
|
159,439
|
|
Interest expense
|
|
|
(15,453
|
)
|
|
|
(7,879
|
)
|
|
|
(780
|
)
|
|
|
(28
|
)
|
|
|
(14,068
|
)
|
|
|
2,598
|
|
|
|
(35,610
|
)
|
Interest income
|
|
|
8,039
|
|
|
|
187
|
|
|
|
1,380
|
|
|
|
158
|
|
|
|
15,192
|
|
|
|
(2,598
|
)
|
|
|
22,358
|
|
Foreign currency transaction (losses) gains, net
|
|
|
(309
|
)
|
|
|
5,802
|
|
|
|
995
|
|
|
|
317
|
|
|
|
33
|
|
|
|
|
|
|
|
6,838
|
|
Debt conversion expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,455
|
)
|
|
|
|
|
|
|
(26,455
|
)
|
Other (expense) income, net
|
|
|
(77
|
)
|
|
|
(1,608
|
)
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
58
|
|
|
|
|
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
124,342
|
|
|
$
|
22,912
|
|
|
$
|
31,017
|
|
|
$
|
4,274
|
|
|
$
|
(57,692
|
)
|
|
$
|
98
|
|
|
$
|
124,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
43,301
|
|
|
$
|
50,908
|
|
|
$
|
16,935
|
|
|
$
|
6,309
|
|
|
$
|
7,089
|
|
|
$
|
|
|
|
$
|
124,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
850,966
|
|
|
$
|
815,687
|
|
|
$
|
219,229
|
|
|
$
|
133,350
|
|
|
$
|
111,156
|
|
|
$
|
(287
|
)
|
|
$
|
2,130,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
2,537,254
|
|
|
$
|
1,726,804
|
|
|
$
|
463,930
|
|
|
$
|
269,754
|
|
|
$
|
763,767
|
|
|
$
|
(287
|
)
|
|
$
|
5,761,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
803,393
|
|
|
$
|
673,462
|
|
|
$
|
183,889
|
|
|
$
|
107,532
|
|
|
$
|
84,972
|
|
|
$
|
(166
|
)
|
|
$
|
1,853,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
2,297,580
|
|
|
$
|
1,540,227
|
|
|
$
|
444,125
|
|
|
$
|
231,018
|
|
|
$
|
923,952
|
|
|
$
|
(166
|
)
|
|
$
|
5,436,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8.
|
Related
Party Transaction
|
In August 2008, we entered into agreements with Steven M.
Shindler, our executive chairman, pursuant to which we provide
management services relating to a Falcon 2000EX aircraft, which
we refer to as the managed aircraft, that is leased by SMS
Services LLC, or SMS Services, an entity controlled by
Mr. Shindler, and leased by SMS Services without crew to
certain parties including Mr. Shindler. Under the terms of
these agreements, we provide flight crew, maintenance and other
administrative services necessary to support the operation of
the managed aircraft in exchange for compensation in the form of
a monthly management fee and a right to lease the managed
aircraft without crew for up to 100 hours per year in
exchange for a nominal lease payment pursuant to the lease
agreement between us and SMS Services. Both the aircraft
management and leasing agreements expire in August 2010 and are
automatically renewed for one year terms thereafter unless we or
any other party to the agreements elect to withdraw by providing
120 days advance notice of non-renewal.
The agreements relating to the management and operation of the
managed aircraft provide that certain costs relating to the
operation of the managed aircraft, such as maintenance, repair
and insurance costs, are passed through to the operators of the
managed aircraft, including Mr. Shindler and us. Those
agreements also provide for an allocation of the compensation
expense, except for stock-based compensation expense, relating
to employees of our aviation department among the operators
based on an estimate of the combined proportional usage of our
aircraft and the managed aircraft, subject to adjustment if the
actual use deviates substantially from the estimate. Direct
operating costs relating to the use of the managed aircraft such
as fuel costs, landing and over-flight fees, and other fees and
expenses are borne by the party using the aircraft for the
specific flight. For the three months ended September 30,
2008, we charged and received $194 thousand from
Mr. Shindler for these costs.
We determined that the terms and conditions of both the aircraft
management and leasing agreements are at amounts which would be
no less favorable than those negotiated with independent third
parties. For the three months ended September 30, 2008, we
recognized management fee revenue and rental expense of $47
thousand and $57 thousand, respectively, amounts which reflect
the fair values of those activities. We received $5 thousand in
net management fees from Mr. Shindler during the three
months ended September 30, 2008.
19
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
INDEX TO
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
21
|
|
|
|
|
21
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
26
|
|
|
|
|
26
|
|
|
|
|
27
|
|
|
|
|
34
|
|
|
|
|
38
|
|
|
|
|
42
|
|
|
|
|
45
|
|
|
|
|
48
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
54
|
|
|
|
|
55
|
|
20
Introduction
The following is a discussion and analysis of:
|
|
|
|
|
our consolidated financial condition and results of operations
for the nine- and three-month periods ended September 30,
2008 and 2007; and
|
|
|
|
significant factors which we believe could affect our
prospective financial condition and results of operations.
|
You should read this discussion in conjunction with our 2007
annual report on
Form 10-K
and our quarterly reports on
Form 10-Q
for the three months ended March 31, 2008 and June 30,
2008, including, but not limited to, the discussion regarding
our critical accounting judgments, as described below.
Historical results may not indicate future performance. See
Forward Looking Statements for risks and
uncertainties that may impact our future performance.
Business
Overview
We provide digital wireless communication services, primarily
targeted at meeting the needs of customers who use our services
in their businesses and individuals that have medium to high
usage patterns, both of whom value our multi-function handsets,
including our Nextel Direct
Connect®
feature, and our high level of customer service. We provide
these services through operating companies located in selected
Latin American markets, under the
Nexteltm brand,
with our principal operations located in major business centers
and related transportation corridors of Mexico, Brazil,
Argentina, Peru and Chile. The markets we serve are generally
characterized by high population densities in major urban and
suburban centers, which we refer to as major business centers,
and where we believe there is a concentration of the
countrys business users and economic activity. We believe
that vehicle traffic congestion, low wireline service
penetration and the expanded coverage of wireless networks in
these major business centers encourage the use of the mobile
wireless communications services that we offer.
Our networks support multiple digital wireless services,
including:
|
|
|
|
|
mobile telephone service, including advanced calling features
such as speakerphone, conference calling, voice-mail, call
forwarding and additional line service;
|
|
|
|
Nextel Direct
Connect®
service, which allows subscribers anywhere on our network to
talk to each other instantly, on a push-to-talk
basis, private one-to-one call or group call;
|
|
|
|
International Direct
Connect®
service, together with Sprint Nextel Corporation and
TELUS Corporation, which allows subscribers to communicate
instantly across national borders with our subscribers in
Mexico, Brazil, Argentina, Peru and Chile, with Sprint Nextel
Corporation subscribers using compatible handsets in the United
States and with TELUS subscribers using compatible handsets in
Canada;
|
|
|
|
text messaging services, mobile internet services,
e-mail
services including
Blackberrytm
services, location-based services, which include the use of
Global Positioning System (GPS) technologies, digital media
services and advanced
Javatm
enabled business applications; and
|
|
|
|
international roaming services.
|
Our principal objective is to generate increased revenues in our
Latin American markets by providing differentiated wireless
communications services that are valued by our customers, while
improving our profitability and cash flow over the long term. We
plan to continue to expand the coverage and capacity of our
networks in our existing markets and increase our existing
subscriber base while managing our costs in a manner designed to
support that growth and improving our operating results. We will
seek to add subscribers at rates and other terms that are
competitive with other offerings in the market, but that are
consistent with our strategy of finding the optimal balance of
growth and profitability regardless of the competitive landscape.
We may also explore financially attractive opportunities to
expand our network coverage in areas that we do not currently
serve. Based on market data that continues to show lower
wireless penetration in our markets relative to other regions of
the world and our current market share in those markets, we
believe that we can continue to
21
generate growth in our subscriber base and revenues while
improving our profitability and cash flow over the long term.
Although the economies in the countries where we operate have,
in recent periods, been relatively more stable compared to
historical periods, those economies have historically been
volatile. During the three months ended September 30, 2008,
the United States and global economies experienced a significant
downturn. That downturn will affect to varying degrees the
growth of the economies in the countries in which our operating
companies conduct business. If these global economic conditions
continue or worsen, or have a more significant impact in the
countries in which we operate, it may adversely affect our
results of operations. In addition, over the course of the last
two years, the inflation rate in Argentina has risen
significantly, and we expect that it may continue to remain
elevated over the next several years, which will increase our
costs and could reduce the profitability of our operations in
Argentina.
In September 2008 and subsequent to the end of the third
quarter, the values of the currencies in the countries in which
our operating companies conduct business have depreciated
significantly relative to the U.S. dollar. Because nearly
all of our revenues are earned in
non-U.S. currencies,
and a significant portion of our outstanding debt is denominated
in U.S. dollars, the depreciation of those local currencies
relative to the U.S. dollar could make it more costly for
us to service our debt obligations in the future. In addition,
we pay for some of our operating expenses and capital
expenditures in U.S. dollars. The depreciation of the local
currencies results in increased costs to us for imported
equipment and may, at the same time, decrease demand for our
products and services in the affected markets. Further, because
we report our results of operations in U.S. dollars,
changes in relative currency valuations may result in reductions
in our reported revenues, operating income and earnings, as well
as negative adjustments to the carrying value of our assets,
including the value of cash investments in local currencies. As
of September 30, 2008, approximately 44% of our total cash
and cash equivalents was held in currencies other than
U.S. dollars, with a majority held in Mexican pesos.
Accordingly, if the values of the local currencies relative to
the U.S. dollar remain at the average levels that prevailed
during October 2008 or if these values depreciate further, we
would expect our operating results in future periods, and the
value of our assets held in local currencies, to be adversely
affected.
We believe that the wireless communications industry in the
markets in which we operate has been and will continue to be
highly competitive on the basis of price, the types of services
offered, the diversity of handsets offered and quality of
service. In each of our markets, we compete with at least two
large, well-capitalized competitors with substantial financial
and other resources. Some of these competitors have the ability
to offer bundled telecommunications services that include local,
long distance and data services, and can offer a larger variety
of handsets with a wide range of prices, brands and features.
Although competitive pricing and variety and pricing of handsets
are often important factors in a customers decision making
process, we believe that the users who primarily make up our
targeted customer base are also likely to base their purchase
decisions on quality of service and customer support, as well as
on the availability of differentiated features and services,
like our Direct Connect services, that make it easier for them
to communicate quickly, efficiently and economically.
The key components of our strategy are as follows:
Focusing on Major Business Centers in Key Latin American
Markets. We operate primarily in large urban
markets, including five of the six largest cities in Latin
America, which have a concentration of medium to high usage
business customers and consumers. We target these markets
because we believe they have favorable long-term growth
prospects for our wireless communications services while
offering the cost benefits associated with providing services in
more concentrated population centers. In addition, the cities in
which we operate account for a high proportion of total economic
activity in each of their respective countries and provide us
with a large potential market. We believe that there are
significant opportunities for growth in these markets due to the
high demand for wireless communications services and the large
number of potential customers within our targeted customer
groups.
Targeting High Value Customers. Our main focus
is on customers who purchase services under contract and
primarily use our services in their businesses and individuals
that have medium to high usage patterns, both of whom value our
multi-function handsets, including our Nextel Direct Connect
feature and our high level of customer service. In our current
customer base, our typical customer has between 3 and 30
handsets, and some of
22
our largest customers have over 500 handsets; however, new
customers that we have recently acquired generally have a lower
number of handsets per customer.
Providing Differentiated Services. We
differentiate ourselves from our competitors by offering unique
services like our push-to-talk digital radio
communication service, which we refer to as Direct Connect. This
service, which is available throughout our service areas,
provides significant value to our customers by eliminating the
long distance and domestic roaming fees charged by other
wireless service providers, while also providing added
functionality due to the near-instantaneous nature of the
communication and the ability to communicate on a one-to-many
basis. Our competitors have introduced competitive push-to-talk
over cellular products, but we believe that the quality of our
Direct Connect service is superior at this time. We add further
value by customizing data applications that enhance the
productivity of our business customers, such as vehicle and
delivery tracking, order entry processing and workforce
monitoring applications.
Delivering Superior Customer Service. In
addition to our unique service offerings, we seek to further
differentiate ourselves by generally providing a higher level of
customer service than our competitors. We work proactively with
our customers to match them with service plans offering greater
value based on their usage patterns. After analyzing customer
usage and expense data, we strive to minimize a customers
per minute costs while increasing overall usage of our array of
services, thereby providing higher value to our customers while
increasing our monthly revenues. This goal is also furthered by
our efforts during and after the sales process to educate
customers about our services, multi-function handsets and rate
plans. In addition, we have implemented proactive customer
retention programs to increase customer satisfaction and
retention.
Selectively Expanding our Service Areas. We
believe that we have significant opportunities to grow through
selective expansion of our service into additional areas in some
of the countries in which we currently operate, particularly in
Brazil and Chile where our coverage is not as extensive as in
other markets. Such expansion may involve building out certain
areas in which we already have spectrum, obtaining additional
800 MHZ spectrum in new areas which would enable us to expand
our network service areas, and further developing our business
in key urban areas. In addition, we may consider selectively
expanding into other Latin American countries where we do not
currently operate. We are currently expanding significantly our
service areas in Brazil in connection with our 2008 growth
objectives and recently announced our plans to make additional
investments in Brazil in order to add more capacity to Nextel
Brazils network, support its growth and expand its
geographic coverage, including expansion into the northeast
region of the country. See Capital Expenditures for
a discussion of the factors that drive our capital spending.
Preserving the iDEN Opportunity. The iDEN
networks that we operate allow us to offer differentiated
services like Direct Connect while offering high quality voice
telephony and innovative data services. The iDEN technology is
unique in that it is the only widespread, commercially available
digital technology that operates on non-contiguous spectrum,
which is important to us because much of the spectrum that our
operating companies hold in each of the markets we serve is
non-contiguous. Because Motorola is the sole supplier of iDEN
technology, we are dependent on Motorolas support of the
evolution of the iDEN technology and of the development of new
features, functionality and handset models. Sprint Nextel
Corporation is the largest customer of Motorola with respect to
iDEN technology and, in the past, has provided significant
support with respect to new product development for that
technology. In recent years, Sprint Nextel Corporation has
reduced its commitment to the development of new iDEN handsets
and features, and there has been a decline in the number of
handsets purchased by them; however, Sprint Nextel Corporation
has recently announced the launch of several new iDEN handsets,
and there has been an increase in the level of Sprint Nextel
Corporations advertising and promotion of iDEN services.
In light of the reduction in Sprint Nextel Corporations
development efforts, we have increased our effort and support of
iDEN handset product development and now lead the majority of
that development activity in support of our customers
needs. In addition, we have entered into arrangements with
Motorola that are designed to provide us with a continued source
of iDEN network equipment and handsets in an environment in
which Sprint Nextels purchases and support of future
development of that equipment may decline. Specifically, in
September 2006, we entered into agreements to extend our
relationship with Motorola for the supply of iDEN handsets and
iDEN network infrastructure through December 31, 2011.
Under these agreements, Motorola agreed to maintain an adequate
supply of the iDEN handsets and equipment used in our business
for the term of the agreement and to continue to invest in the
development of new iDEN devices and infrastructure features. In
addition, we agreed to
23
annually escalating handset volume purchase commitments and
certain pricing parameters for handsets and infrastructure
linked to the volume of our purchases. If we do not meet the
specified handset volume commitments, we would be required to
pay an additional amount based on any shortfall of actual
purchased handsets compared to the related annual volume
commitment. During the first quarter of 2008, Motorola announced
plans to separate its mobile devices division into a separate
public entity through a spin-off of that division; however, in
October 2008, Motorola announced its intention to delay this
spin-off. While we cannot determine the impact of
Motorolas planned separation of the mobile devices
business on its iDEN business, Motorolas obligations under
our existing agreements, including the obligation to supply us
with iDEN handsets and network equipment, remain in effect.
Planning for the Future. Another key component
in our overall strategy is to expand and improve the innovative
and differentiated services we offer and evaluate the
technologies necessary to provide those services. One such
initiative is to develop and offer a broader range of data
services on our networks and to evaluate the feasibility of
offering next generation voice and broadband data services in
the future. This focus on offering innovative and differentiated
services requires that we continue to invest in, evaluate and,
if appropriate, deploy new services and enhancements to our
existing services as well as, in some cases, consider and pursue
acquisitions of assets that include spectrum licenses to deploy
these services, including in auctions of newly available
spectrum and through transactions involving acquisitions of
existing spectrum rights. We continue to remain interested in
participating in auctions of this nature, particularly in Brazil
and Mexico, to the extent that obtaining new spectrum can be
achieved on terms that are consistent both with our business
plans and technology strategy.
Technology Strategy. As part of our ongoing
assessment of our ability to meet our customers current
and future needs, we continually review alternate technologies
to assess their technical performance, cost and functional
capabilities. These reviews may involve the deployment of the
technologies under consideration on a trial basis in order to
evaluate their capabilities and market demand for the supported
services. We will deploy a new technology beyond the minimum
levels required by the terms of our spectrum licenses only if it
is warranted by expected customer demand and when the
anticipated benefits of services supported by the new technology
outweigh the costs of providing those services. Our decision
whether and how to deploy alternative technologies, as well as
our choice of alternative technologies, would likely be affected
by a number of factors, including the types of features and
services supported by the technology and our assessment of the
demand for those features and services, the availability and
pricing of related equipment, the spectrum bands available for
purchase in our markets and whether other wireless carriers are
operating or plan to operate a particular technology in those
spectrum bands, our need to continue to support iDEN-based
services for our existing customer base either on an ongoing or
transitional basis and the availability and terms of any
financing that we would be required to raise in order to fund
the deployment of an alternative technology. See Future
Capital Needs and Resources for more information.
In July 2007, we were awarded a nationwide license of
35 MHz of 1.9 GHz spectrum in Peru for a term of
20 years through a governmental auction process that
requires us to deploy new digital network technology within
specified timeframes throughout Peru, including in areas that we
do not currently serve. We are in the process of developing and
deploying a third generation network in Peru using this
spectrum. The regulatory authorities in Peru recently approved
our plans for the deployment of this new network. We believe
that these plans will enable us to significantly increase the
size of our opportunity in Peru by allowing us to offer new and
differentiated services to a larger base of potential customers.
We refer to our operating companies by the countries in which
they operate, such as Nextel Mexico, Nextel Brazil, Nextel
Argentina, Nextel Peru and Nextel Chile.
See Forward Looking Statements for information on
risks and uncertainties that could affect the above objectives.
For information regarding commitments and contingencies, see
Note 5 to our condensed consolidated financial statements.
24
Digital
Handsets in Commercial Service
The table below provides an overview of our total handsets in
commercial service in the countries indicated as of
September 30, 2008 and December 31, 2007. For purposes
of the table, handsets in commercial service represent all
handsets with active customer accounts on the networks in each
of the listed countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico
|
|
|
Brazil
|
|
|
Argentina
|
|
|
Peru
|
|
|
Chile
|
|
|
Total
|
|
|
|
(handsets in thousands)
|
|
|
Digital handsets in commercial service
December 31, 2007
|
|
|
2,140
|
|
|
|
1,290
|
|
|
|
812
|
|
|
|
477
|
|
|
|
10
|
|
|
|
4,729
|
|
Net subscriber additions
|
|
|
445
|
|
|
|
385
|
|
|
|
126
|
|
|
|
143
|
|
|
|
11
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital handsets in commercial service
September 30, 2008
|
|
|
2,585
|
|
|
|
1,675
|
|
|
|
938
|
|
|
|
620
|
|
|
|
21
|
|
|
|
5,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies and Estimates
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and
expenses and related disclosures of contingent assets and
liabilities in the consolidated financial statements and
accompanying notes. Although we believe that our estimates,
assumptions and judgments are reasonable, they are based upon
information presently available. Due to the inherent uncertainty
involved in making those estimates, actual results reported in
future periods could differ from those estimates.
As described in more detail in our 2007 Annual Report on
Form 10-K
under Managements Discussion and Analysis of
Financial Condition and Results of Operations, we consider
the following accounting policies to be the most important to
our financial position and results of operations or policies
that require us to exercise significant judgment
and/or
estimates:
|
|
|
|
|
revenue recognition;
|
|
|
|
allowance for doubtful accounts;
|
|
|
|
depreciation of property, plant and equipment;
|
|
|
|
amortization of intangible assets;
|
|
|
|
asset retirement obligations;
|
|
|
|
foreign currency;
|
|
|
|
loss contingencies;
|
|
|
|
stock-based compensation; and
|
|
|
|
income taxes.
|
There have been no material changes to our critical accounting
policies and estimates during the nine months ended
September 30, 2008 compared to those discussed in our 2007
annual report of
Form 10-K
under Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Ratio of
Earnings to Fixed Charges
|
|
|
|
|
Three Months
|
|
Ended
|
|
September 30,
|
|
2008
|
|
2007
|
|
|
3.17x
|
|
|
3.67x
|
|
25
For the purpose of computing the ratio of earnings to fixed
charges, earnings consist of income from continuing operations
before income taxes plus fixed charges and amortization of
capitalized interest less capitalized interest. Fixed charges
consist of:
|
|
|
|
|
interest on all indebtedness, amortization of debt financing
costs and amortization of original issue discount;
|
|
|
|
interest capitalized; and
|
|
|
|
the portion of rental expense we believe is representative of
interest.
|
Reclassifications
We have reclassified certain prior year amounts in our unaudited
condensed consolidated financial statements to conform to our
current year presentation. Specifically, for the nine and three
months ended September 30, 2007, we corrected the
classification of $20.4 million and $7.7 million,
respectively, from cost of service to cost of digital handset
and accessory sales related to costs incurred in connection with
replacement handsets sold to current customers. These revisions
did not have a material impact on previously reported balances.
Results
of Operations
Operating revenues primarily consist of wireless service
revenues and revenues generated from the sale of digital
handsets and accessories. Service revenues primarily include
fixed monthly access charges for mobile telephone service and
digital two-way radio and other services, including revenues
from calling party pays programs and variable charges for
airtime and digital two-way radio usage in excess of plan
minutes, long-distance charges and international roaming
revenues derived from calls placed by our customers. Digital
handset and accessory revenues represent revenues we earn on the
sale of digital handsets and accessories to our customers.
In addition, we also have other less significant sources of
revenues. These revenues primarily include revenues generated
from our handset maintenance programs, roaming revenues
generated from other companies customers that roam on our
networks and co-location rental revenues from third-party
tenants that rent space on our towers.
Cost of revenues primarily includes the cost of providing
wireless service and the cost of digital handset and accessory
sales. Cost of providing service consists largely of costs of
interconnection with local exchange carrier facilities and
direct switch and transmitter and receiver site costs, including
property taxes, expenses related to our handset maintenance
programs, insurance costs, utility costs, maintenance costs,
spectrum license fees and rent for the network switches and
transmitter sites used to operate our networks. Interconnection
costs have fixed and variable components. The fixed component of
interconnection costs consists of monthly flat-rate fees for
facilities leased from local exchange carriers, primarily for
circuits required to connect our transmitter sites to our
network switches and to connect our switches. The variable
component of interconnection costs, which fluctuates in relation
to the volume and duration of wireless calls, generally consists
of per-minute use fees charged by wireline and wireless
providers for wireless calls from our digital handsets that
terminate on those providers networks. Cost of digital
handset and accessory sales consists largely of the cost of the
handset and accessories, order fulfillment and
installation-related expenses, as well as write-downs of digital
handset and related accessory inventory for shrinkage or
obsolescence.
Our service and other revenues and the variable component of our
cost of service are primarily driven by the number of digital
handsets in service and not necessarily by the number of
customers, as one customer may purchase one or many digital
handsets. Our digital handset and accessory revenues and cost of
digital handset and accessory sales are primarily driven by the
number of new handsets placed into service, as well as handset
upgrades provided to existing customers during the year.
Selling and marketing expenses include all of the expenses
related to acquiring customers. General and administrative
expenses include expenses related to revenue-based taxes,
billing, customer care, collections including bad debt, repairs
and maintenance of management information systems, spectrum
license fees, corporate overhead and share-based payment for
stock options and restricted stock.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
3,106,909
|
|
|
|
95
|
%
|
|
$
|
2,279,326
|
|
|
|
97
|
%
|
|
$
|
827,583
|
|
|
|
36
|
%
|
Digital handset and accessory revenues
|
|
|
172,987
|
|
|
|
5
|
%
|
|
|
76,826
|
|
|
|
3
|
%
|
|
|
96,161
|
|
|
|
125
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,279,896
|
|
|
|
100
|
%
|
|
|
2,356,152
|
|
|
|
100
|
%
|
|
|
923,744
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(848,557
|
)
|
|
|
(26
|
)%
|
|
|
(609,827
|
)
|
|
|
(27
|
)%
|
|
|
(238,730
|
)
|
|
|
39
|
%
|
Cost of digital handsets and accessories
|
|
|
(455,876
|
)
|
|
|
(14
|
)%
|
|
|
(320,608
|
)
|
|
|
(13
|
)%
|
|
|
(135,268
|
)
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,304,433
|
)
|
|
|
(40
|
)%
|
|
|
(930,435
|
)
|
|
|
(40
|
)%
|
|
|
(374,008
|
)
|
|
|
40
|
%
|
Selling and marketing expenses
|
|
|
(435,077
|
)
|
|
|
(13
|
)%
|
|
|
(312,380
|
)
|
|
|
(13
|
)%
|
|
|
(122,697
|
)
|
|
|
39
|
%
|
General and administrative expenses
|
|
|
(618,936
|
)
|
|
|
(19
|
)%
|
|
|
(459,128
|
)
|
|
|
(20
|
)%
|
|
|
(159,808
|
)
|
|
|
35
|
%
|
Depreciation and amortization
|
|
|
(310,924
|
)
|
|
|
(9
|
)%
|
|
|
(216,917
|
)
|
|
|
(9
|
)%
|
|
|
(94,007
|
)
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
610,526
|
|
|
|
19
|
%
|
|
|
437,292
|
|
|
|
18
|
%
|
|
|
173,234
|
|
|
|
40
|
%
|
Interest expense, net
|
|
|
(124,092
|
)
|
|
|
(4
|
)%
|
|
|
(89,592
|
)
|
|
|
(4
|
)%
|
|
|
(34,500
|
)
|
|
|
39
|
%
|
Interest income
|
|
|
53,324
|
|
|
|
2
|
%
|
|
|
45,040
|
|
|
|
2
|
%
|
|
|
8,284
|
|
|
|
18
|
%
|
Foreign currency transaction (losses) gains, net
|
|
|
(16,128
|
)
|
|
|
(1
|
)%
|
|
|
12,637
|
|
|
|
1
|
%
|
|
|
(28,765
|
)
|
|
|
(228
|
)%
|
Debt conversion expense
|
|
|
|
|
|
|
|
|
|
|
(26,455
|
)
|
|
|
(1
|
)%
|
|
|
26,455
|
|
|
|
(100
|
)%
|
Other expense, net
|
|
|
(12,786
|
)
|
|
|
|
|
|
|
(986
|
)
|
|
|
|
|
|
|
(11,800
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
510,844
|
|
|
|
16
|
%
|
|
|
377,936
|
|
|
|
16
|
%
|
|
|
132,908
|
|
|
|
35
|
%
|
Income tax provision
|
|
|
(150,215
|
)
|
|
|
(5
|
)%
|
|
|
(128,026
|
)
|
|
|
(5
|
)%
|
|
|
(22,189
|
)
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
360,629
|
|
|
|
11
|
%
|
|
$
|
249,910
|
|
|
|
11
|
%
|
|
$
|
110,719
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,116,106
|
|
|
|
94
|
%
|
|
$
|
827,486
|
|
|
|
97
|
%
|
|
$
|
288,620
|
|
|
|
35
|
%
|
Digital handset and accessory revenues
|
|
|
66,619
|
|
|
|
6
|
%
|
|
|
26,917
|
|
|
|
3
|
%
|
|
|
39,702
|
|
|
|
147
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,182,725
|
|
|
|
100
|
%
|
|
|
854,403
|
|
|
|
100
|
%
|
|
|
328,322
|
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(305,565
|
)
|
|
|
(26
|
)%
|
|
|
(223,617
|
)
|
|
|
(27
|
)%
|
|
|
(81,948
|
)
|
|
|
37
|
%
|
Cost of digital handsets and accessories
|
|
|
(162,478
|
)
|
|
|
(14
|
)%
|
|
|
(112,066
|
)
|
|
|
(12
|
)%
|
|
|
(50,412
|
)
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(468,043
|
)
|
|
|
(40
|
)%
|
|
|
(335,683
|
)
|
|
|
(39
|
)%
|
|
|
(132,360
|
)
|
|
|
39
|
%
|
Selling and marketing expenses
|
|
|
(158,103
|
)
|
|
|
(13
|
)%
|
|
|
(115,602
|
)
|
|
|
(14
|
)%
|
|
|
(42,501
|
)
|
|
|
37
|
%
|
General and administrative expenses
|
|
|
(225,953
|
)
|
|
|
(19
|
)%
|
|
|
(166,458
|
)
|
|
|
(19
|
)%
|
|
|
(59,495
|
)
|
|
|
36
|
%
|
Depreciation and amortization
|
|
|
(111,619
|
)
|
|
|
(9
|
)%
|
|
|
(77,221
|
)
|
|
|
(9
|
)%
|
|
|
(34,398
|
)
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
219,007
|
|
|
|
19
|
%
|
|
|
159,439
|
|
|
|
19
|
%
|
|
|
59,568
|
|
|
|
37
|
%
|
Interest expense, net
|
|
|
(42,466
|
)
|
|
|
(3
|
)%
|
|
|
(35,610
|
)
|
|
|
(4
|
)%
|
|
|
(6,856
|
)
|
|
|
19
|
%
|
Interest income
|
|
|
16,796
|
|
|
|
1
|
%
|
|
|
22,358
|
|
|
|
2
|
%
|
|
|
(5,562
|
)
|
|
|
(25
|
)%
|
Foreign currency transaction (losses) gains, net
|
|
|
(56,434
|
)
|
|
|
(5
|
)%
|
|
|
6,838
|
|
|
|
1
|
%
|
|
|
(63,272
|
)
|
|
|
NM
|
|
Debt conversion expense
|
|
|
|
|
|
|
|
|
|
|
(26,455
|
)
|
|
|
(3
|
)%
|
|
|
26,455
|
|
|
|
(100
|
)%
|
Other expense, net
|
|
|
(7,611
|
)
|
|
|
(1
|
)%
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
(5,992
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
129,292
|
|
|
|
11
|
%
|
|
|
124,951
|
|
|
|
15
|
%
|
|
|
4,341
|
|
|
|
3
|
%
|
Income tax provision
|
|
|
(37,506
|
)
|
|
|
(3
|
)%
|
|
|
(43,285
|
)
|
|
|
(5
|
)%
|
|
|
5,779
|
|
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
91,786
|
|
|
|
8
|
%
|
|
$
|
81,666
|
|
|
|
10
|
%
|
|
$
|
10,120
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
During 2007 and continuing into the first nine months of 2008,
we significantly expanded our subscriber base across all of our
markets with the majority of this growth concentrated in Mexico
and Brazil. As a result, both our consolidated revenues and
consolidated operating expenses increased substantially from the
first nine months of 2007 to the first nine months of 2008. Both
our consolidated operating margin and our other consolidated
operating expenses as a percentage of consolidated operating
revenues remained relatively stable from the first nine months
of 2007 to the same period in 2008. During the first nine months
of 2008, we experienced a higher consolidated customer turnover
rate, which resulted primarily from the more competitive sales
environment in Mexico. While we have implemented initiatives
that have recently begun to stabilize our customer turnover
rate, the competitive conditions we face may adversely affect
our ability to retain customers, particularly in Mexico.
Coverage expansion and network improvements resulted in
consolidated capital expenditures totaling $640.4 million
for the nine months ended September 30, 2008, which
represented a $174.5 million increase from the comparable
period in 2007. This increase in capital expenditures was the
result of the expansion of both the geographic coverage and the
quality and capacity of our networks, particularly in Brazil and
Mexico, consistent
28
with our plan to continue to expand our consolidated customer
base in both new and existing areas in those markets. While we
expect that the amounts invested by Nextel Brazil and Nextel
Mexico to expand the coverage of their networks and to improve
their quality and capacity will continue to represent the
majority of our total capital expenditure investments in the
future, we expect the capital expenditures invested by Nextel
Brazil to increase due to our decision to expand our network
coverage in Brazil. In addition, our deployment of a new network
in Peru will require significant capital expenditures throughout
the remainder of 2008 and in subsequent years. See Future
Capital Needs and Resources Capital
Expenditures. for more information.
As described in more detail in the discussion of segment results
below, our results of operations for the nine and three months
ended September 30, 2008 were affected by the appreciation
of local currencies relative to the U.S. dollar,
particularly in Brazil. As a result, the components of our
consolidated results of operations for the nine and three months
ended September 30, 2008 reflect higher increases in
U.S. dollar-denominated revenues and expenses than would
have occurred if it were not for the impact of the appreciation
in the values of the local market currencies relative to the
U.S. dollar. While our results reflect the impact of the
appreciation of local currencies relative to the
U.S. dollar for the nine and three months ended
September 30, 2008, the values of these local currencies in
each of our markets have depreciated significantly relative to
the U.S. dollar subsequent to September 30, 2008. Our
operating results in future periods will be adversely affected
if the values of the local currencies relative to the
U.S. dollar remain at the average levels that prevailed
during October 2008 or if those values depreciate further.
The $827.6 million, or 36%, and $288.6 million, or
35%, increases in consolidated service and other revenues from
the nine and three months ended September 30, 2007 to the
same periods in 2008 are primarily due to 35% and 34% increases
in the average number of total digital handsets in service,
primarily in Mexico and Brazil. These increases are the result
of continued strong demand for our services and our balanced
growth and expansion strategy. Average consolidated revenues per
handset remained relatively stable from the nine and three
months ended September 30, 2007 to the same periods in 2008.
The $96.2 million, or 125%, and $39.7 million, or
147%, increases in consolidated digital handset and accessory
revenues from the nine and three months ended September 30,
2007 to the same periods in 2008 are primarily due to 89% and
99% increases in handset upgrades for existing subscribers,
increases in the average price per handset upgrade due to the
launch of new handset models and 32% and 33% increases in
handset sales to new subscribers.
The $238.7 million, or 39%, and $81.9 million, or 37%,
increases in consolidated cost of service from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are principally a result of the following:
|
|
|
|
|
$115.3 million, or 35%, and $39.2 million, or 33%,
increases in consolidated interconnect costs resulting from 24%
and 25% increases in consolidated interconnect minutes of use
and an increase, primarily in Brazil, in the proportion of
mobile-to-mobile minutes of use, which generally have higher per
minute interconnection costs;
|
|
|
|
$56.9 million, or 30%, and $20.5 million, or 30%,
increases in consolidated direct switch and transmitter and
receiver site costs resulting from a 19% increase in the total
number of sites in service from September 30, 2007 to
September 30, 2008, as well as increased operating and
maintenance costs per site for new and existing sites; and
|
|
|
|
$41.7 million, or 62%, and $14.8 million, or 60%,
increases in consolidated service and repair costs mainly
resulting from 35% and 28% increases in the number of
subscribers participating under our handset maintenance
programs, as well as higher costs per handset serviced.
|
The $135.3 million, or 42%, and $50.4 million, or 45%,
increases in consolidated cost of digital handset and accessory
sales from the nine and three months ended September 30,
2007 to the same periods in 2008 are primarily
29
due to 32% and 33% increases in handset sales to new customers
and 89% and 99% increases in handset upgrades for existing
subscribers.
|
|
3.
|
Selling and
marketing expenses
|
The $122.7 million, or 39%, and $42.5 million, or 37%,
increases in consolidated selling and marketing expenses from
the nine and three months ended September 30, 2007 to the
same periods in 2008 are principally a result of the following:
|
|
|
|
|
$55.9 million, or 45%, and $14.7 million, or 31%,
increases in consolidated indirect commissions resulting from
34% and 35% increases in total gross subscriber additions
generated through external sales channels and increased
commission rates in Mexico;
|
|
|
|
$46.2 million, or 41%, and $16.5 million, or 40%,
increases in consolidated payroll expenses and direct
commissions resulting from 30% increases in total gross
subscriber additions generated by internal sales personnel over
both periods, as well as higher payroll and related costs due to
increases in selling and marketing personnel necessary to
support continued sales growth; and
|
|
|
|
$17.5 million, or 28%, and $10.4 million, or 46%,
increases in consolidated advertising expenses, primarily in
Mexico and Brazil, mainly related to the launch of new markets
in connection with our expansion plan and increased advertising
initiatives related to overall subscriber growth.
|
|
|
4.
|
General and
administrative expenses
|
The $159.8 million, or 35%, and $59.5 million, or 36%,
increases in consolidated general and administrative expenses
from the nine and three months ended September 30, 2007 to
the same periods in 2008 are primarily a result of the following:
|
|
|
|
|
$55.0 million, or 46%, and $20.7 million, or 47%,
increases in consolidated customer care expenses, mainly payroll
and related expenses, resulting from additional customer care
personnel necessary to support a larger customer base, as well
as increased salaries;
|
|
|
|
$34.9 million, or 16%, and $12.9 million, or 17%,
increases in general corporate costs largely due to higher
personnel costs related to increases in headcount and higher
facilities-related expenses due to continued subscriber growth
and expansion into new areas;
|
|
|
|
$27.5 million, or 83%, and $10.1 million, or 89%,
increases in consolidated bad debt expense, primarily as a
result of the 39% and 38% increases in consolidated operating
revenues and a decrease in collection rates in Mexico. As a
result, bad debt expense as a percentage of revenue increased
from 1.4% for the nine months ended September 30, 2007 to
1.9% for the same period in 2008 and from 1.3% for the third
quarter of 2007 to 1.8% for the third quarter of 2008;
|
|
|
|
$24.0 million, or 72%, and $8.4 million, or 67%,
increases in revenue-based taxes in Brazil that we report on a
gross basis as both service and other revenues and general and
administrative expenses; and
|
|
|
|
$15.4 million, or 37%, and $7.0 million, or 47%,
increases in information technology expenses primarily related
to higher payroll and related expenses, increased expenses
related to the implementation of new billing systems and
increased maintenance costs.
|
|
|
5.
|
Depreciation
and amortization
|
The $94.0 million, or 43%, and $34.4 million, or 45%,
increases in consolidated depreciation and amortization from the
nine and three months ended September 30, 2007 to the same
periods in 2008 are primarily due to a 28% increase in our
consolidated property, plant and equipment in service from
September 30, 2007 to September 30, 2008 resulting
from the continued expansion of our networks, mainly in Brazil
and Mexico, as well as $17.1 million and $4.8 million
increases in amortization related to the 3.4 GHz licenses
that Mexico began using in September 2007.
30
The $34.5 million, or 39%, and $6.9 million, or 19%,
increases in consolidated interest expense from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily due to the following:
|
|
|
|
|
$17.6 million and $6.4 million increases in interest
incurred on our towers financing transactions and capital lease
obligations in Mexico and Brazil from the nine and three months
ended September 30, 2007 to the same periods in 2008
primarily due to increases in both the number of towers financed
and capital leases;
|
|
|
|
a $15.6 million increase in interest expense from the nine
months ended September 30, 2007 to the same period in 2008
due to the issuance of our 3.125% convertible notes during the
second quarter of 2007, partially offset by a $4.8 million
decrease in interest expense over the same period due to the
conversion of our 2.875% convertible notes in the third quarter
of 2007; and
|
|
|
|
$11.1 million and $3.8 million in interest incurred on
borrowings under Nextel Brazils syndicated loan facility
that were funded between October 2007 and March 2008, partially
offset by $3.4 million and $1.5 million decreases in
interest expense due to a principal payment made by Nextel
Mexico on its syndicated loan facility in April 2008.
|
|
|
7.
|
Foreign
currency transaction (losses) gains, net
|
Consolidated foreign currency transaction losses of
$16.1 million and $56.4 million for the nine and three
months ended September 30, 2008 are primarily a result of
the impact of the depreciation of the Brazilian real relative to
the U.S. dollar during the third quarter of 2008 on Nextel
Brazils U.S. dollar-denominated liabilities,
primarily its syndicated loan facility.
Consolidated foreign currency transaction gains of
$12.6 million and $6.8 million for the nine and three
months ended September 30, 2007 are primarily a result of
the impact of the appreciation of the value of the Brazilian
real relative to the U.S. dollar on Nextel Brazils
U.S. dollar-denominated liabilities, primarily its
short-term intercompany payables.
|
|
8.
|
Debt
conversion expense
|
The $26.5 million in debt conversion expense for the nine
and three months ended September 30, 2007 represents cash
consideration that we paid in connection with the tender offer
for 99.99% of our 2.875% convertible notes during the third
quarter of 2007.
The $22.2 million, or 17%, increase in the consolidated
income tax provision from the nine months ended
September 30, 2007 to the same period in 2008 is primarily
due to the $132.9 million, or 35%, increase in income
before taxes. This increase in tax expense is partially offset
by 2008 tax benefits in certain of our foreign markets generated
in the third quarter and discussed below.
The $5.8 million, or 13%, decrease in the consolidated
income tax provision from the three months ended
September 30, 2007 to the same period in 2008 is primarily
due to tax benefits in certain of our foreign markets, including
a business reorganization that resulted in the generation of tax
credits and the anticipated fourth quarter declaration of tax
deductible dividends.
31
Segment
Results
We evaluate performance of our segments and provide resources to
them based on operating income before depreciation and
amortization and impairment, restructuring and other charges,
which we refer to as segment earnings. Because we do not view
share-based compensation as an important element of operational
performance, we recognize share-based payment expense at the
corporate level and exclude it when evaluating the business
performance of our segments. The tables below provide a summary
of the components of our consolidated segments for the nine and
three months ended September 30, 2008 and 2007. The results
of Nextel Chile are included in Corporate and other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Nine Months Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
September 30, 2008
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
1,650,857
|
|
|
|
50
|
%
|
|
$
|
(588,468
|
)
|
|
|
45
|
%
|
|
$
|
(459,876
|
)
|
|
|
44
|
%
|
|
$
|
602,513
|
|
Nextel Brazil
|
|
|
1,031,601
|
|
|
|
31
|
%
|
|
|
(431,342
|
)
|
|
|
33
|
%
|
|
|
(317,531
|
)
|
|
|
30
|
%
|
|
|
282,728
|
|
Nextel Argentina
|
|
|
414,822
|
|
|
|
13
|
%
|
|
|
(188,239
|
)
|
|
|
14
|
%
|
|
|
(98,588
|
)
|
|
|
9
|
%
|
|
|
127,995
|
|
Nextel Peru
|
|
|
177,156
|
|
|
|
6
|
%
|
|
|
(91,099
|
)
|
|
|
7
|
%
|
|
|
(52,686
|
)
|
|
|
5
|
%
|
|
|
33,371
|
|
Corporate and other
|
|
|
6,415
|
|
|
|
|
|
|
|
(6,240
|
)
|
|
|
1
|
%
|
|
|
(125,332
|
)
|
|
|
12
|
%
|
|
|
(125,157
|
)
|
Intercompany eliminations
|
|
|
(955
|
)
|
|
|
|
|
|
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
3,279,896
|
|
|
|
100
|
%
|
|
$
|
(1,304,433
|
)
|
|
|
100
|
%
|
|
$
|
(1,054,013
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Three Months Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
September 30, 2008
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
587,525
|
|
|
|
50
|
%
|
|
$
|
(211,838
|
)
|
|
|
45
|
%
|
|
$
|
(164,654
|
)
|
|
|
43
|
%
|
|
$
|
211,033
|
|
Nextel Brazil
|
|
|
380,130
|
|
|
|
32
|
%
|
|
|
(154,032
|
)
|
|
|
33
|
%
|
|
|
(118,618
|
)
|
|
|
31
|
%
|
|
|
107,480
|
|
Nextel Argentina
|
|
|
150,306
|
|
|
|
13
|
%
|
|
|
(67,523
|
)
|
|
|
14
|
%
|
|
|
(36,605
|
)
|
|
|
9
|
%
|
|
|
46,178
|
|
Nextel Peru
|
|
|
62,662
|
|
|
|
5
|
%
|
|
|
(32,604
|
)
|
|
|
7
|
%
|
|
|
(19,317
|
)
|
|
|
5
|
%
|
|
|
10,741
|
|
Corporate and other
|
|
|
2,411
|
|
|
|
|
|
|
|
(2,355
|
)
|
|
|
1
|
%
|
|
|
(44,862
|
)
|
|
|
12
|
%
|
|
|
(44,806
|
)
|
Intercompany eliminations
|
|
|
(309
|
)
|
|
|
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
1,182,725
|
|
|
|
100
|
%
|
|
$
|
(468,043
|
)
|
|
|
100
|
%
|
|
$
|
(384,056
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Nine Months Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
September 30, 2007
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
1,299,075
|
|
|
|
55
|
%
|
|
$
|
(453,836
|
)
|
|
|
49
|
%
|
|
$
|
(353,683
|
)
|
|
|
46
|
%
|
|
$
|
491,556
|
|
Nextel Brazil
|
|
|
599,521
|
|
|
|
25
|
%
|
|
|
(254,211
|
)
|
|
|
27
|
%
|
|
|
(199,735
|
)
|
|
|
26
|
%
|
|
|
145,575
|
|
Nextel Argentina
|
|
|
317,808
|
|
|
|
14
|
%
|
|
|
(147,746
|
)
|
|
|
16
|
%
|
|
|
(69,185
|
)
|
|
|
9
|
%
|
|
|
100,877
|
|
Nextel Peru
|
|
|
138,148
|
|
|
|
6
|
%
|
|
|
(72,856
|
)
|
|
|
8
|
%
|
|
|
(39,273
|
)
|
|
|
5
|
%
|
|
|
26,019
|
|
Corporate and other
|
|
|
2,459
|
|
|
|
|
|
|
|
(2,645
|
)
|
|
|
|
|
|
|
(109,632
|
)
|
|
|
14
|
%
|
|
|
(109,818
|
)
|
Intercompany eliminations
|
|
|
(859
|
)
|
|
|
|
|
|
|
859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
2,356,152
|
|
|
|
100
|
%
|
|
$
|
(930,435
|
)
|
|
|
100
|
%
|
|
$
|
(771,508
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Three Months Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
September 30, 2007
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
466,110
|
|
|
|
55
|
%
|
|
$
|
(160,147
|
)
|
|
|
48
|
%
|
|
$
|
(125,347
|
)
|
|
|
45
|
%
|
|
$
|
180,616
|
|
Nextel Brazil
|
|
|
224,694
|
|
|
|
26
|
%
|
|
|
(95,961
|
)
|
|
|
28
|
%
|
|
|
(77,246
|
)
|
|
|
27
|
%
|
|
|
51,487
|
|
Nextel Argentina
|
|
|
114,053
|
|
|
|
13
|
%
|
|
|
(52,472
|
)
|
|
|
16
|
%
|
|
|
(24,531
|
)
|
|
|
9
|
%
|
|
|
37,050
|
|
Nextel Peru
|
|
|
48,777
|
|
|
|
6
|
%
|
|
|
(26,390
|
)
|
|
|
8
|
%
|
|
|
(14,241
|
)
|
|
|
5
|
%
|
|
|
8,146
|
|
Corporate and other
|
|
|
1,077
|
|
|
|
|
|
|
|
(1,021
|
)
|
|
|
|
|
|
|
(40,695
|
)
|
|
|
14
|
%
|
|
|
(40,639
|
)
|
Intercompany eliminations
|
|
|
(308
|
)
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
854,403
|
|
|
|
100
|
%
|
|
$
|
(335,683
|
)
|
|
|
100
|
%
|
|
$
|
(282,060
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with accounting principles generally accepted in
the United States, we translated the results of operations of
our operating segments using the average exchange rates for the
nine and three months ended September 30, 2008 and 2007.
The following table presents the average exchange rates we used
to translate the results of operations of our operating
segments, as well as changes from the average exchange rates
utilized in the prior period. Because the U.S. dollar is
the functional currency in Peru, Nextel Perus results of
operations are not significantly impacted by changes in the
U.S. dollar to Peruvian sol exchange rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Percent Change
|
|
|
Mexican peso
|
|
|
10.52
|
|
|
|
10.95
|
|
|
|
4
|
%
|
Brazilian real
|
|
|
1.69
|
|
|
|
2.00
|
|
|
|
19
|
%
|
Argentine peso
|
|
|
3.11
|
|
|
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Percent Change
|
|
|
Mexican peso
|
|
|
10.31
|
|
|
|
10.96
|
|
|
|
6
|
%
|
Brazilian real
|
|
|
1.67
|
|
|
|
1.92
|
|
|
|
15
|
%
|
Argentine peso
|
|
|
3.04
|
|
|
|
3.14
|
|
|
|
3
|
%
|
While our results of operations reflect the impact of the
appreciation of the value of local currencies relative to the
U.S. dollar for the nine and three months ended
September 30, 2008, the values of these local currencies in
each of our markets have depreciated significantly relative to
the U.S. dollar subsequent to September 30, 2008. Our
operating results in future periods will be adversely affected
if the value of these local currencies relative to the
U.S. dollar remain at the average levels that prevailed
during October 2008 or if those values depreciate further.
33
A discussion of the results of operations for each of our
reportable segments is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexicos
|
|
|
|
|
|
Mexicos
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,583,235
|
|
|
|
96
|
%
|
|
$
|
1,280,982
|
|
|
|
99
|
%
|
|
$
|
302,253
|
|
|
|
24
|
%
|
Digital handset and accessory revenues
|
|
|
67,622
|
|
|
|
4
|
%
|
|
|
18,093
|
|
|
|
1
|
%
|
|
|
49,529
|
|
|
|
274
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,650,857
|
|
|
|
100
|
%
|
|
|
1,299,075
|
|
|
|
100
|
%
|
|
|
351,782
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(308,858
|
)
|
|
|
(19
|
)%
|
|
|
(251,656
|
)
|
|
|
(19
|
)%
|
|
|
(57,202
|
)
|
|
|
23
|
%
|
Cost of digital handsets and accessories
|
|
|
(279,610
|
)
|
|
|
(17
|
)%
|
|
|
(202,180
|
)
|
|
|
(16
|
)%
|
|
|
(77,430
|
)
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(588,468
|
)
|
|
|
(36
|
)%
|
|
|
(453,836
|
)
|
|
|
(35
|
)%
|
|
|
(134,632
|
)
|
|
|
30
|
%
|
Selling and marketing expenses
|
|
|
(243,927
|
)
|
|
|
(15
|
)%
|
|
|
(184,160
|
)
|
|
|
(14
|
)%
|
|
|
(59,767
|
)
|
|
|
32
|
%
|
General and administrative expenses
|
|
|
(215,949
|
)
|
|
|
(13
|
)%
|
|
|
(169,523
|
)
|
|
|
(13
|
)%
|
|
|
(46,426
|
)
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
602,513
|
|
|
|
36
|
%
|
|
|
491,556
|
|
|
|
38
|
%
|
|
|
110,957
|
|
|
|
23
|
%
|
Management fee
|
|
|
(25,169
|
)
|
|
|
(1
|
)%
|
|
|
(29,700
|
)
|
|
|
(2
|
)%
|
|
|
4,531
|
|
|
|
(15
|
)%
|
Depreciation and amortization
|
|
|
(148,674
|
)
|
|
|
(9
|
)%
|
|
|
(106,788
|
)
|
|
|
(9
|
)%
|
|
|
(41,886
|
)
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
428,670
|
|
|
|
26
|
%
|
|
|
355,068
|
|
|
|
27
|
%
|
|
|
73,602
|
|
|
|
21
|
%
|
Interest expense, net
|
|
|
(47,343
|
)
|
|
|
(3
|
)%
|
|
|
(44,765
|
)
|
|
|
(3
|
)%
|
|
|
(2,578
|
)
|
|
|
6
|
%
|
Interest income
|
|
|
34,710
|
|
|
|
2
|
%
|
|
|
20,948
|
|
|
|
2
|
%
|
|
|
13,762
|
|
|
|
66
|
%
|
Foreign currency transaction gains, net
|
|
|
9,696
|
|
|
|
1
|
%
|
|
|
899
|
|
|
|
|
|
|
|
8,797
|
|
|
|
NM
|
|
Other (expense) income, net
|
|
|
(239
|
)
|
|
|
|
|
|
|
2,183
|
|
|
|
|
|
|
|
(2,422
|
)
|
|
|
(111
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
425,494
|
|
|
|
26
|
%
|
|
$
|
334,333
|
|
|
|
26
|
%
|
|
$
|
91,161
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
559,134
|
|
|
|
95
|
%
|
|
$
|
458,665
|
|
|
|
98
|
%
|
|
$
|
100,469
|
|
|
|
22
|
%
|
Digital handset and accessory revenues
|
|
|
28,391
|
|
|
|
5
|
%
|
|
|
7,445
|
|
|
|
2
|
%
|
|
|
20,946
|
|
|
|
281
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
587,525
|
|
|
|
100
|
%
|
|
|
466,110
|
|
|
|
100
|
%
|
|
|
121,415
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(109,826
|
)
|
|
|
(19
|
)%
|
|
|
(91,541
|
)
|
|
|
(19
|
)%
|
|
|
(18,285
|
)
|
|
|
20
|
%
|
Cost of digital handsets and accessories
|
|
|
(102,012
|
)
|
|
|
(17
|
)%
|
|
|
(68,606
|
)
|
|
|
(15
|
)%
|
|
|
(33,406
|
)
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(211,838
|
)
|
|
|
(36
|
)%
|
|
|
(160,147
|
)
|
|
|
(34
|
)%
|
|
|
(51,691
|
)
|
|
|
32
|
%
|
Selling and marketing expenses
|
|
|
(87,471
|
)
|
|
|
(15
|
)%
|
|
|
(66,200
|
)
|
|
|
(14
|
)%
|
|
|
(21,271
|
)
|
|
|
32
|
%
|
General and administrative expenses
|
|
|
(77,183
|
)
|
|
|
(13
|
)%
|
|
|
(59,147
|
)
|
|
|
(13
|
)%
|
|
|
(18,036
|
)
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
211,033
|
|
|
|
36
|
%
|
|
|
180,616
|
|
|
|
39
|
%
|
|
|
30,417
|
|
|
|
17
|
%
|
Management fee
|
|
|
(8,417
|
)
|
|
|
(1
|
)%
|
|
|
(9,900
|
)
|
|
|
(2
|
)%
|
|
|
1,483
|
|
|
|
(15
|
)%
|
Depreciation and amortization
|
|
|
(52,518
|
)
|
|
|
(9
|
)%
|
|
|
(38,574
|
)
|
|
|
(9
|
)%
|
|
|
(13,944
|
)
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
150,098
|
|
|
|
26
|
%
|
|
|
132,142
|
|
|
|
28
|
%
|
|
|
17,956
|
|
|
|
14
|
%
|
Interest expense, net
|
|
|
(15,611
|
)
|
|
|
(3
|
)%
|
|
|
(15,453
|
)
|
|
|
(3
|
)%
|
|
|
(158
|
)
|
|
|
1
|
%
|
Interest income
|
|
|
12,858
|
|
|
|
2
|
%
|
|
|
8,039
|
|
|
|
2
|
%
|
|
|
4,819
|
|
|
|
60
|
%
|
Foreign currency transaction losses, net
|
|
|
(6,819
|
)
|
|
|
(1
|
)%
|
|
|
(309
|
)
|
|
|
|
|
|
|
(6,510
|
)
|
|
|
NM
|
|
Other expense, net
|
|
|
(80
|
)
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
140,446
|
|
|
|
24
|
%
|
|
$
|
124,342
|
|
|
|
27
|
%
|
|
$
|
16,104
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
34
Nextel Mexico continues to be our largest and most profitable
market segment, comprising 50% of our consolidated operating
revenues and generating a 36% segment earnings margin for the
nine months ended September 30, 2008, which was slightly
lower than the margin reported for the nine months ended
September 30, 2007. During the first nine months of
2008, Nextel Mexicos results of operations reflected
increased costs incurred in connection with its expansion
efforts, including network, personnel and other expenses,
related to the expansion of the coverage, and the quality and
capacity of its network to support subscriber growth during the
period.
Over the past year, some of Nextel Mexicos competitors
have significantly lowered their prices for postpaid wireless
services, offered free or significantly discounted handsets,
specifically targeted some of Nextel Mexicos largest
corporate customers, offered various incentives to Nextel
Mexicos customers to switch service providers, including
reimbursement of cancellation fees, and offered bundled
telecommunications services that include local, long distance
and data services. Nextel Mexico is addressing these competitive
actions by, among other things, launching attractive commercial
campaigns offering handsets to new and existing customers and
offering more competitive rate plans, which result in lower
average revenues per subscriber. In addition, beginning in the
third quarter of 2007 and continuing into 2008, Nextel Mexico
took a number of steps to improve its competitiveness including
the implementation of an increase in its commission rates and
other modifications to its compensation arrangements with its
external sales channels in an effort to promote additional sales
through these channels. These changes to the compensation
arrangements have led to an increase in indirect commission
expense during the first nine months of 2008 compared to the
first nine months of 2007 and are expected to continue for the
remainder of 2008. The more competitive environment in Mexico
also resulted in lower average revenue per subscriber in local
currency and a higher customer turnover rate during the nine
months ended September 30, 2008 compared to the same period
in 2007. As Nextel Mexico continues to expand its customer base
in both new and existing markets and continues to address a more
competitive sales environment, Nextel Mexicos average
revenue per subscriber could continue to decline on a local
currency basis during the remainder of 2008. While we have
implemented initiatives that have recently begun to stabilize
the customer turnover rate in Mexico, the competitive conditions
we face there may adversely affect our ability to retain
customers.
Coverage expansion and network improvements in Mexico resulted
in capital expenditures totaling $172.5 million for the
nine months ended September 30, 2008, which represents 27%
of our consolidated capital expenditures for the first nine
months of 2008 and which is a decrease from 43% of consolidated
capital expenditures during the first nine months of 2007. While
we expect that Nextel Mexico will continue to represent a
significant portion of our total capital expenditures in the
future, as we continue to increase the coverage and capacity of
our networks in our existing markets, we expect its percentage
of total capital expenditures to decrease now that its expansion
plans launched in 2005 are substantially complete and as we
pursue more aggressive expansion plans in our other markets. We
expect subscriber growth in Mexico to continue as we build a
customer base in new markets that were recently launched.
The average value of the Mexican peso for the nine and three
months ended September 30, 2008 appreciated relative to the
U.S. dollar by 4% and 6%, respectively, from the same
periods in 2007. As a result, the components of Nextel
Mexicos results of operations for the nine and three
months ended September 30, 2008 after translation into
U.S. dollars reflect slightly higher increases in
U.S. dollar-denominated revenues and expenses than would
have occurred if it were not for the impact of the appreciation
in the average values of the peso relative to the
U.S. dollar. While the Mexican peso appreciated relative to
the U.S. dollar during the nine and three months ended
September 30, 2008, there has been a significant
depreciation in the value of the Mexican peso relative to the
U.S. dollar subsequent to September 30, 2008. Nextel
Mexicos results of operations will be adversely affected
in future periods if the average values of the Mexican peso
relative to the U.S. dollar remain at the levels that
prevailed during October 2008 or if those values depreciate
further.
35
The $302.3 million, or 24%, and $100.5 million, or
22%, increases in service and other revenues from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily due to the following:
|
|
|
|
|
33% and 31% increases in the average number of digital handsets
in service resulting from growth in Nextel Mexicos
existing markets, as well as the expansion of service coverage
into new markets launched in the second half of 2007 and in
2008; and
|
|
|
|
$20.8 million, or 38%, and $7.0 million, or 34%,
increases in revenues generated from Nextel Mexicos
handset maintenance program as a result of increases in the
number of subscribers participating in this program.
|
These increases were partially offset by declines in average
service revenue per subscriber due to the launch of more
competitive rate plans described above.
The $49.5 million and $20.9 million increases in
digital handset and accessory revenues from the nine and three
months ended September 30, 2007 to the same periods in 2008
are primarily due to 73% and 104% increases in handset upgrades
for existing subscribers over both periods, 28% and 30%
increases in handset sales to new subscribers and increases in
the average price paid by subscribers for handset upgrades and
handset sales.
The $57.2 million, or 23%, and $18.3 million, or 20%,
increases in cost of service from the nine and three months
ended September 30, 2007 to the same periods in 2008 are
principally a result of the following:
|
|
|
|
|
$17.7 million, or 13%, and $5.6 million, or 12%,
increases in interconnect costs, largely as a result of 13% and
12% increases in interconnect system minutes of use;
|
|
|
|
$17.0 million, or 19%, and $6.4 million, or 20%,
increases in direct switch and transmitter and receiver site
costs resulting from a 10% increase in the number of sites in
service from September 30, 2007 to September 30, 2008,
as well as increased operating and maintenance costs per site
for new and existing sites;
|
|
|
|
$9.1 million, or 45%, and $2.2 million, or 29%,
increases in service and repair costs largely due increased
costs of repairs as well as a 20% increase in the number of
subscribers participating in Nextel Mexicos handset
maintenance program; and
|
|
|
|
$8.4 million and $3.0 million increases in facilities
and administrative costs largely due to higher product support
costs.
|
The $77.4 million, or 38%, and $33.4 million, or 49%,
increases in cost of digital handset and accessory sales from
the nine and three months ended September 30, 2007 to the
same periods in 2008 are primarily due to 73% and 104% increases
in handset upgrades for existing subscribers over both periods,
as well as 28% and 30% increases in handset sales to new
subscribers, partially offset by a reduction in handset unit
costs.
|
|
3.
|
Selling and
marketing expenses
|
The $59.8 million, or 32%, and $21.3 million, or 32%,
increases in selling and marketing expenses from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily a result of the following:
|
|
|
|
|
$37.7 million, or 44%, and $8.4 million, or 26%,
increases in indirect commissions, primarily due to 30% and 34%
increases in gross subscriber additions generated by Nextel
Mexicos external sales channels, as well as increased
commission rates that Nextel Mexico implemented during the third
quarter of 2007;
|
|
|
|
$16.2 million, or 30%, and $6.1 million, or 32%,
increases in direct commissions and payroll expenses,
principally due to 26% and 25% increases in gross subscriber
additions generated by Nextel Mexicos internal sales
personnel, as well as an increase in average direct commission
earned per handset sale; and
|
|
|
|
$5.8 million, or 16%, and $6.9 million, or 57%,
increases in advertising costs resulting from the launch of new
rate plans, as well as an increase in advertising expenses
during the third quarter of 2008 designed specifically to
increase the market awareness of the Nextel brand name in Mexico.
|
36
|
|
4.
|
General and
administrative expenses
|
The $46.4 million, or 27%, and $18.0 million, or 30%,
increases in general and administrative expenses from the nine
and three months ended September 30, 2007 to the same
periods in 2008 are largely a result of the following:
|
|
|
|
|
$20.3 million, or 103%, and $7.6 million, or 113%,
increases in bad debt expense, which increased as percentages of
revenue from 1.5% and 1.4% for the nine and three months ended
September 30, 2007 to 2.4% for the nine and three months
ended September 30, 2008, primarily due to a decrease in
customer collections from new subscribers that have higher
credit risk;
|
|
|
|
$19.1 million, or 31%, and $7.3 million, or 33%,
increases in customer care expenses primarily due to increases
in payroll and employee related expenses which were caused by
27% and 24% increases in customer care personnel necessary to
support a growing customer base; and
|
|
|
|
$4.4 million, or 30%, and $1.9 million, or 36%,
increases in information technology expenses resulting from
increases in systems maintenance expenses, as well as increases
in payroll and related expenses caused by more information
technology personnel.
|
|
|
5.
|
Depreciation
and amortization
|
The $41.9 million, or 39%, and $13.9 million, or 36%,
increases in depreciation and amortization from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily due to higher depreciation related to a
17% increase in Nextel Mexicos property, plant and
equipment in service resulting from the continued build-out of
Nextel Mexicos network in connection with its growth
objectives, as well as $17.1 million and $4.8 million
increases in amortization related to the 3.4 GHz licenses
that Nextel Mexico began using in September 2007.
The $13.8 million, or 66%, and $4.8 million, or 60%,
increases in interest income from the nine and three months
ended September 30, 2007 to the same periods in 2008 are
primarily a result of higher average cash balances.
|
|
7.
|
Foreign
currency transaction gains (losses), net
|
Foreign currency transaction gains of $9.7 million for the
nine months ended September 30, 2008 are primarily due to
the impact of the appreciation of the value of the Mexican peso
against the U.S. dollar on Nextel Mexicos
U.S. dollar-denominated net liabilities.
Foreign currency transaction losses of $6.8 million for the
three months ended September 30, 2008 are primarily due to
the impact of the depreciation of the value of the Mexican peso
against the U.S. dollar during the third quarter of 2008 on
Nextel Mexicos U.S. dollar-denominated net
liabilities.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazils
|
|
|
|
|
|
Brazils
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
976,665
|
|
|
|
95
|
%
|
|
$
|
574,264
|
|
|
|
96
|
%
|
|
$
|
402,401
|
|
|
|
70
|
%
|
Digital handset and accessory revenues
|
|
|
54,936
|
|
|
|
5
|
%
|
|
|
25,257
|
|
|
|
4
|
%
|
|
|
29,679
|
|
|
|
118
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,031,601
|
|
|
|
100
|
%
|
|
|
599,521
|
|
|
|
100
|
%
|
|
|
432,080
|
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(344,258
|
)
|
|
|
(33
|
)%
|
|
|
(197,099
|
)
|
|
|
(33
|
)%
|
|
|
(147,159
|
)
|
|
|
75
|
%
|
Cost of digital handsets and accessories
|
|
|
(87,084
|
)
|
|
|
(9
|
)%
|
|
|
(57,112
|
)
|
|
|
(10
|
)%
|
|
|
(29,972
|
)
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(431,342
|
)
|
|
|
(42
|
)%
|
|
|
(254,211
|
)
|
|
|
(43
|
)%
|
|
|
(177,131
|
)
|
|
|
70
|
%
|
Selling and marketing expenses
|
|
|
(125,633
|
)
|
|
|
(12
|
)%
|
|
|
(81,976
|
)
|
|
|
(13
|
)%
|
|
|
(43,657
|
)
|
|
|
53
|
%
|
General and administrative expenses
|
|
|
(191,898
|
)
|
|
|
(19
|
)%
|
|
|
(117,759
|
)
|
|
|
(20
|
)%
|
|
|
(74,139
|
)
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
282,728
|
|
|
|
27
|
%
|
|
|
145,575
|
|
|
|
24
|
%
|
|
|
137,153
|
|
|
|
94
|
%
|
Depreciation and amortization
|
|
|
(109,489
|
)
|
|
|
(10
|
)%
|
|
|
(67,734
|
)
|
|
|
(11
|
)%
|
|
|
(41,755
|
)
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
173,239
|
|
|
|
17
|
%
|
|
|
77,841
|
|
|
|
13
|
%
|
|
|
95,398
|
|
|
|
123
|
%
|
Interest expense, net
|
|
|
(40,609
|
)
|
|
|
(4
|
)%
|
|
|
(22,221
|
)
|
|
|
(4
|
)%
|
|
|
(18,388
|
)
|
|
|
83
|
%
|
Interest income
|
|
|
4,297
|
|
|
|
1
|
%
|
|
|
501
|
|
|
|
|
|
|
|
3,796
|
|
|
|
NM
|
|
Foreign currency transaction (losses) gains, net
|
|
|
(26,280
|
)
|
|
|
(3
|
)%
|
|
|
10,041
|
|
|
|
2
|
%
|
|
|
(36,321
|
)
|
|
|
NM
|
|
Other expense, net
|
|
|
(7,319
|
)
|
|
|
(1
|
)%
|
|
|
(3,162
|
)
|
|
|
|
|
|
|
(4,157
|
)
|
|
|
131
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
103,328
|
|
|
|
10
|
%
|
|
$
|
63,000
|
|
|
|
11
|
%
|
|
$
|
40,328
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
360,081
|
|
|
|
95
|
%
|
|
$
|
217,163
|
|
|
|
97
|
%
|
|
$
|
142,918
|
|
|
|
66
|
%
|
Digital handset and accessory revenues
|
|
|
20,049
|
|
|
|
5
|
%
|
|
|
7,531
|
|
|
|
3
|
%
|
|
|
12,518
|
|
|
|
166
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,130
|
|
|
|
100
|
%
|
|
|
224,694
|
|
|
|
100
|
%
|
|
|
155,436
|
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(125,677
|
)
|
|
|
(33
|
)%
|
|
|
(74,696
|
)
|
|
|
(34
|
)%
|
|
|
(50,981
|
)
|
|
|
68
|
%
|
Cost of digital handsets and accessories
|
|
|
(28,355
|
)
|
|
|
(8
|
)%
|
|
|
(21,265
|
)
|
|
|
(9
|
)%
|
|
|
(7,090
|
)
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154,032
|
)
|
|
|
(41
|
)%
|
|
|
(95,961
|
)
|
|
|
(43
|
)%
|
|
|
(58,071
|
)
|
|
|
61
|
%
|
Selling and marketing expenses
|
|
|
(46,703
|
)
|
|
|
(12
|
)%
|
|
|
(32,356
|
)
|
|
|
(14
|
)%
|
|
|
(14,347
|
)
|
|
|
44
|
%
|
General and administrative expenses
|
|
|
(71,915
|
)
|
|
|
(19
|
)%
|
|
|
(44,890
|
)
|
|
|
(20
|
)%
|
|
|
(27,025
|
)
|
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
107,480
|
|
|
|
28
|
%
|
|
|
51,487
|
|
|
|
23
|
%
|
|
|
55,993
|
|
|
|
109
|
%
|
Depreciation and amortization
|
|
|
(40,496
|
)
|
|
|
(10
|
)%
|
|
|
(25,077
|
)
|
|
|
(11
|
)%
|
|
|
(15,419
|
)
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
66,984
|
|
|
|
18
|
%
|
|
|
26,410
|
|
|
|
12
|
%
|
|
|
40,574
|
|
|
|
154
|
%
|
Interest expense, net
|
|
|
(14,534
|
)
|
|
|
(4
|
)%
|
|
|
(7,879
|
)
|
|
|
(4
|
)%
|
|
|
(6,655
|
)
|
|
|
84
|
%
|
Interest income
|
|
|
1,037
|
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
|
850
|
|
|
|
NM
|
|
Foreign currency transaction (losses) gains, net
|
|
|
(51,747
|
)
|
|
|
(14
|
)%
|
|
|
5,802
|
|
|
|
3
|
%
|
|
|
(57,549
|
)
|
|
|
NM
|
|
Other expense, net
|
|
|
(5,767
|
)
|
|
|
(1
|
)%
|
|
|
(1,608
|
)
|
|
|
(1
|
)%
|
|
|
(4,159
|
)
|
|
|
259
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax
|
|
$
|
(4,027
|
)
|
|
|
(1
|
)%
|
|
$
|
22,912
|
|
|
|
10
|
%
|
|
$
|
(26,939
|
)
|
|
|
(118
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
38
Over the last three years, Nextel Brazils subscriber base
and segment earnings have increased as a result of a continued
focus on customer service, the expansion of its network and
significant improvements in its operating cost structure. In
addition to these factors, as a result of the improvement in the
Brazilian economy over the same period and increasing demand for
its services, Nextel Brazil has continued to experience growth
in its existing markets and has made significant investments in
new markets. Coverage expansion and network improvements
resulted in capital expenditures totaling $325.1 million
for the first nine months of 2008, which represented 51% of our
consolidated capital expenditure investments during that period.
We believe that Nextel Brazils network expansion and
quality improvements are contributing factors to its low
customer turnover rate and subscriber growth. Consistent with
the expansion plans that we announced in 2007 and 2008, we have
recently made significant investments in Brazil in order to add
more capacity to, and improve the quality of, Nextel
Brazils network in order to support its growth and expand
its geographic coverage, which includes expansion into the
northeast region of the country.
The average exchange rates of the Brazilian real for the nine
and three months ended September 30, 2008 appreciated
relative to the U.S. dollar by 19% and 15% from the same
periods in 2007. As a result, the components of Nextel
Brazils results of operations for the nine and three
months ended September 30, 2008, after translation into
U.S. dollars, reflect more significant increases in
U.S. dollar-denominated revenues and expenses than would
have occurred if the Brazilian real had not appreciated relative
to the U.S. dollar. While the Brazilian real appreciated
relative to the U.S. dollar during the nine and three
months ended September 30, 2008, there has been a
significant depreciation in the value of the Brazilian real
relative to the U.S. dollar subsequent to
September 30, 2008. Nextel Brazils results of
operations in future periods will be adversely affected if
average values of the Brazilian real relative to the
U.S. dollar remain at the levels that prevailed during
October 2008 or if those values depreciate further.
The $402.4 million, or 70%, and $142.9 million, or
66%, increases in service and other revenues from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily a result of the following:
|
|
|
|
|
42% and 41% increases in the average number of digital handsets
in service resulting from growth in Nextel Brazils
existing markets and the expansion of service coverage into new
markets in connection with its balanced growth and expansion
objectives;
|
|
|
|
19% and 15% appreciation of the Brazilian real relative to the
U.S. dollar during those periods;
|
|
|
|
$27.5 million, or 68%, and $9.4 million, or 62%,
increases in revenues generated from Nextel Brazils
handset maintenance program as a result of 53% and 63% increases
in the number of subscribers participating in this
program; and
|
|
|
|
slight increases in local currency-based average revenue per
subscriber.
|
The $29.7 million, or 118%, and $12.5 million, or
166%, increases in digital handset and accessory revenues from
the nine and three months ended September 30, 2007 to the
same periods in 2008 are primarily due to 134% and 97% increases
in handset upgrades for existing subscribers, as well as 36% and
42% increases in handset sales to new subscribers.
The $147.2 million, or 75%, and $51.0 million, or 68%,
increases in cost of service from the nine and three months
ended September 30, 2007 to the same periods in 2008 are
primarily due to the following:
|
|
|
|
|
$85.6 million, or 81%, and $28.8 million, or 69%,
increases in interconnect costs resulting from 53% and 57%
increases in interconnect minutes of use over both periods, as
well as increases in per minute costs due to increased rates by
fixed carriers;
|
|
|
|
$30.7 million, or 46%, and $10.6 million, or 44%,
increases in direct switch and transmitter and receiver site
costs resulting from a 30% increase in the number of sites in
service from September 30, 2007 to September 30,
2008; and
|
39
|
|
|
|
|
$24.2 million, or 160%, and $9.5 million, or 184%,
increases in service and repair costs largely due to 53% and 63%
increases in the number of subscribers participating in Nextel
Brazils handset maintenance program and increased costs of
repairs related to a change in the mix of handsets.
|
The increases in cost of service also resulted from the 19% and
15% appreciation of the Brazilian real relative to the
U.S. dollar during 2008 compared to 2007.
The $30.0 million, or 52%, and $7.1 million, or 33%,
increases in cost of digital handset and accessory sales from
the nine and three months ended September 30, 2007 to the
same periods in 2008 are primarily due to 36% and 42% increases
in handset sales to new subscribers, as well as 134% and 97%
increases in handset upgrades for existing subscribers,
partially offset by a decrease in handset costs resulting from a
larger proportion of SIM card sales, which have a significantly
lower cost per unit sold than the cost per unit sold for
handsets.
|
|
3.
|
Selling and
marketing expenses
|
The $43.7 million, or 53%, and $14.3 million, or 44%,
increases in selling and marketing expenses from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are principally due to the following:
|
|
|
|
|
$21.2 million, or 57%, and $7.7 million, or 56%,
increases in payroll and direct commissions largely as a result
of 43% and 52% increases in gross subscriber additions generated
by Nextel Brazils internal sales force and higher payroll
and related costs related to increases in selling and marketing
personnel necessary to support continued sales growth;
|
|
|
|
$11.1 million, or 55%, and $2.4 million, or 26%,
increases in advertising expenses resulting from the launch of
new markets in connection with Nextel Brazils expansion
plan, its continued print and media campaigns for various
products and services, consistent with Nextel Brazils
growth objectives and its sponsorship of the Copa Nextel Stock
Car races, a professional racecar event; and
|
|
|
|
$9.6 million, or 44%, and $3.8 million, or 44%,
increases in indirect commissions resulting from 28% and 30%
increases in gross subscriber additions generated through Nextel
Brazils external sales channels.
|
All of these increases were also affected by the 19% and 15%
appreciation of the Brazilian real relative to the
U.S. dollar during 2008 compared to 2007.
|
|
4.
|
General and
administrative expenses
|
The $74.1 million, or 63%, and $27.0 million, or 60%,
increases in general and administrative expenses from the nine
and three months ended September 30, 2007 to the same
periods in 2008 are primarily a result of the following:
|
|
|
|
|
$26.3 million, or 76%, and $9.9 million, or 74%,
increases in customer care expenses resulting from 41% and 40%
increases in customer care personnel necessary to support a
larger customer base, as well as increases in the number of
stores;
|
|
|
|
$24.0 million, or 72%, and $8.4 million, or 67%,
increases in revenue-based taxes that we report on a gross basis
as both service and other revenues and general and
administrative expenses, primarily due to the 70% and 66%
increases in Nextel Brazils service and other revenues;
|
|
|
|
$12.1 million, or 41%, and $5.2 million, or 46%,
increases in general corporate costs primarily resulting from
18% and 19% increases in general and administrative personnel
necessary to support Nextel Brazils expansion, as well as
increases in facilities costs due to expansion into new markets;
|
|
|
|
$6.2 million, or 65%, and $1.7 million, or 46%,
increases in bad debt expense as a result of the 72% and 69%
increases in Nextel Brazils operating revenues. Bad debt
expense as a percentage of consolidated operating revenues
decreased slightly from 1.6% for the nine months ended
September 30, 2007 to 1.5% for the nine months ended
September 30, 2008 and from 1.6% for the third quarter of
2007 to 1.4% for the third quarter of 2008; and
|
|
|
|
$5.6 million, or 55%, and $1.9 million, or 50%,
increases in information technology expenses related to the
expansion of Nextel Brazils network and systems
maintenance expenses.
|
40
All of these increases were also affected by the 19% and 15%
appreciation of the Brazilian real relative to the
U.S. dollar during 2008 compared to 2007.
|
|
5.
|
Depreciation
and amortization
|
The $41.8 million, or 62%, and $15.4 million, or 61%,
increases in depreciation and amortization from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily due to a 39% increase in Nextel
Brazils property, plant and equipment in service resulting
from the continued build-out of Nextel Brazils network, as
well as the appreciation of the Brazilian real relative to the
U.S. dollar.
The $18.4 million, or 83%, and $6.7 million, or 84%,
increases in interest expense from the nine and three months
ended September 30, 2007 to the same periods in 2008 are
primarily the result of $11.1 million and $3.8 million
of interest incurred on borrowings under Nextel Brazils
syndicated loan facility that were funded between October 2007
and March 2008, increased interest incurred on Nextel
Brazils tower financing and capital lease obligations due
to increases in both the number of towers financed and the
number of capital leases in Brazil and the appreciation of the
Brazilian real relative to the U.S. dollar.
|
|
7.
|
Foreign
currency transaction (losses) gains, net
|
Net foreign currency transaction losses of $26.3 million
and $51.7 million for the nine and three months ended
September 30, 2008 are a result of the impact of the
depreciation of the value of the Brazilian real against the
U.S. dollar during the third quarter of 2008 on Nextel
Brazils U.S. dollar-denominated syndicated loan
facility.
Net foreign currency transaction gains of $10.0 million and
$5.8 million for the nine and three months ended
September 30, 2007 are a result of the impact of the
appreciation of the value of the Brazilian real against the
U.S. dollar during 2007 on Nextel Brazils
U.S. dollar-denominated short-term intercompany payables.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentinas
|
|
|
|
|
|
Argentinas
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
378,379
|
|
|
|
91
|
%
|
|
$
|
293,538
|
|
|
|
92
|
%
|
|
$
|
84,841
|
|
|
|
29
|
%
|
Digital handset and accessory revenues
|
|
|
36,443
|
|
|
|
9
|
%
|
|
|
24,270
|
|
|
|
8
|
%
|
|
|
12,173
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,822
|
|
|
|
100
|
%
|
|
|
317,808
|
|
|
|
100
|
%
|
|
|
97,014
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(132,825
|
)
|
|
|
(32
|
)%
|
|
|
(109,815
|
)
|
|
|
(34
|
)%
|
|
|
(23,010
|
)
|
|
|
21
|
%
|
Cost of digital handsets and accessories
|
|
|
(55,414
|
)
|
|
|
(13
|
)%
|
|
|
(37,931
|
)
|
|
|
(12
|
)%
|
|
|
(17,483
|
)
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188,239
|
)
|
|
|
(45
|
)%
|
|
|
(147,746
|
)
|
|
|
(46
|
)%
|
|
|
(40,493
|
)
|
|
|
27
|
%
|
Selling and marketing expenses
|
|
|
(34,072
|
)
|
|
|
(8
|
)%
|
|
|
(24,128
|
)
|
|
|
(8
|
)%
|
|
|
(9,944
|
)
|
|
|
41
|
%
|
General and administrative expenses
|
|
|
(64,516
|
)
|
|
|
(16
|
)%
|
|
|
(45,057
|
)
|
|
|
(14
|
)%
|
|
|
(19,459
|
)
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
127,995
|
|
|
|
31
|
%
|
|
|
100,877
|
|
|
|
32
|
%
|
|
|
27,118
|
|
|
|
27
|
%
|
Depreciation and amortization
|
|
|
(28,652
|
)
|
|
|
(7
|
)%
|
|
|
(22,505
|
)
|
|
|
(7
|
)%
|
|
|
(6,147
|
)
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
99,343
|
|
|
|
24
|
%
|
|
|
78,372
|
|
|
|
25
|
%
|
|
|
20,971
|
|
|
|
27
|
%
|
Interest expense, net
|
|
|
(2,111
|
)
|
|
|
(1
|
)%
|
|
|
(1,904
|
)
|
|
|
|
|
|
|
(207
|
)
|
|
|
11
|
%
|
Interest income
|
|
|
2,246
|
|
|
|
1
|
%
|
|
|
3,417
|
|
|
|
1
|
%
|
|
|
(1,171
|
)
|
|
|
(34
|
)%
|
Foreign currency transaction gains, net
|
|
|
86
|
|
|
|
|
|
|
|
1,301
|
|
|
|
|
|
|
|
(1,215
|
)
|
|
|
(93
|
)%
|
Other income, net
|
|
|
45
|
|
|
|
|
|
|
|
1,586
|
|
|
|
|
|
|
|
(1,541
|
)
|
|
|
(97
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
99,609
|
|
|
|
24
|
%
|
|
$
|
82,772
|
|
|
|
26
|
%
|
|
$
|
16,837
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
137,258
|
|
|
|
91
|
%
|
|
$
|
105,437
|
|
|
|
92
|
%
|
|
$
|
31,821
|
|
|
|
30
|
%
|
Digital handset and accessory revenues
|
|
|
13,048
|
|
|
|
9
|
%
|
|
|
8,616
|
|
|
|
8
|
%
|
|
|
4,432
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,306
|
|
|
|
100
|
%
|
|
|
114,053
|
|
|
|
100
|
%
|
|
|
36,253
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(47,538
|
)
|
|
|
(32
|
)%
|
|
|
(39,271
|
)
|
|
|
(34
|
)%
|
|
|
(8,267
|
)
|
|
|
21
|
%
|
Cost of digital handsets and accessories
|
|
|
(19,985
|
)
|
|
|
(13
|
)%
|
|
|
(13,201
|
)
|
|
|
(12
|
)%
|
|
|
(6,784
|
)
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,523
|
)
|
|
|
(45
|
)%
|
|
|
(52,472
|
)
|
|
|
(46
|
)%
|
|
|
(15,051
|
)
|
|
|
29
|
%
|
Selling and marketing expenses
|
|
|
(12,920
|
)
|
|
|
(8
|
)%
|
|
|
(8,997
|
)
|
|
|
(8
|
)%
|
|
|
(3,923
|
)
|
|
|
44
|
%
|
General and administrative expenses
|
|
|
(23,685
|
)
|
|
|
(16
|
)%
|
|
|
(15,534
|
)
|
|
|
(14
|
)%
|
|
|
(8,151
|
)
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
46,178
|
|
|
|
31
|
%
|
|
|
37,050
|
|
|
|
32
|
%
|
|
|
9,128
|
|
|
|
25
|
%
|
Depreciation and amortization
|
|
|
(10,297
|
)
|
|
|
(7
|
)%
|
|
|
(7,637
|
)
|
|
|
(6
|
)%
|
|
|
(2,660
|
)
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
35,881
|
|
|
|
24
|
%
|
|
|
29,413
|
|
|
|
26
|
%
|
|
|
6,468
|
|
|
|
22
|
%
|
Interest expense, net
|
|
|
(724
|
)
|
|
|
(1
|
)%
|
|
|
(780
|
)
|
|
|
(1
|
)%
|
|
|
56
|
|
|
|
(7
|
)%
|
Interest income
|
|
|
379
|
|
|
|
|
|
|
|
1,380
|
|
|
|
1
|
%
|
|
|
(1,001
|
)
|
|
|
(73
|
)%
|
Foreign currency transaction gains, net
|
|
|
2,759
|
|
|
|
2
|
%
|
|
|
995
|
|
|
|
1
|
%
|
|
|
1,764
|
|
|
|
177
|
%
|
Other income, net
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(89
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
38,296
|
|
|
|
25
|
%
|
|
$
|
31,017
|
|
|
|
27
|
%
|
|
$
|
7,279
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Over the course of the last two years, the inflation rate in
Argentina has risen significantly, and we expect that it may
continue to remain elevated over the next several years. The
higher inflation rate has resulted primarily in higher personnel
costs. In addition, in recent quarters, Nextel Argentinas
customer turnover rate has increased slightly because of the
economic issues in Argentina. If the economic conditions in
Argentina continue or worsen, Nextel Argentinas results of
operations may be adversely affected.
The average value of the Argentine peso remained relatively
constant relative to the U.S. dollar for the nine months
ended September 30, 2008 compared to the same period in
2007. As a result, the components of Nextel Argentinas
results of operations for the nine months ended
September 30, 2008 after translation into U.S. dollars
are generally comparable to its results of operations for the
same period in 2007. The average value of the Argentine peso
appreciated 3% relative to the U.S. dollar for the three
months ended September 30, 2008 compared to the same period
in 2007. As a result, the components of Nextel Argentinas
results of operations for the three months ended
September 30, 2008 after translation into U.S. dollars
reflect slightly higher increases in
U.S. dollar-denominated revenues and expenses than would
have occurred if the Argentine peso had not appreciated relative
to the U.S. dollar.
The $84.8 million, or 29%, and $31.8 million, or 30%,
increases in service and other revenues from the nine and three
months ended September 30, 2007 to the same periods in 2008
are primarily a result of the following:
|
|
|
|
|
24% and 23% increases in the average number of digital handsets
in service, resulting mostly from growth in Nextel
Argentinas existing markets;
|
|
|
|
increases in average revenue per subscriber; and
|
|
|
|
$11.7 million, or 38%, and $4.0 million, or 35%,
increases in revenues generated from Nextel Argentinas
handset maintenance program as a result of 25% and 20% increases
in the number of subscribers participating in the program and
increased maintenance program revenue per handset.
|
The $12.2 million, or 50%, and $4.4 million, or 51%,
increases in digital handset and accessory revenues from the
nine and three months ended September 30, 2007 to the same
periods in 2008 are primarily due to increases in handset
upgrades for existing subscribers, as well as 21% and 17%
increases in handset sales to new subscribers.
The $23.0 million, or 21%, and $8.3 million, or 21%,
increases in cost of service from the nine and three months
ended September 30, 2007 to the same periods in 2008 are
principally a result of the following:
|
|
|
|
|
$11.0 million, or 19%, and $4.1 million, or 20%,
increases in interconnect costs largely as a result of 13% and
10% increases in interconnect system minutes of use, as well as
an increase in the proportion of mobile-to-mobile minutes of
use, which generally have higher per minute costs;
|
|
|
|
$4.8 million, or 20%, and $2.0 million, or 24%,
increases in direct switch and transmitter and receiver site
costs due to a 23% increase in the number of sites in service
from September 30, 2007 to September 30, 2008; and
|
|
|
|
$4.5 million, or 17%, and $1.2 million, or 12%,
increases in service and repair costs, largely due to 25% and
20% increases in the number of subscribers participating in
Nextel Argentinas handset maintenance program.
|
The $17.5 million, or 46%, and $6.8 million, or 51%,
increases in cost of digital handset and accessory sales from
the nine and three months ended September 30, 2007 to the
same periods in 2008 are primarily due to 21% and 17% increases
in handset sales to new subscribers as well as 108% and 104%
increases in handset upgrades for existing subscribers,
partially offset by lower costs per handset upgrade.
43
|
|
3.
|
Selling and
marketing expenses
|
The $9.9 million, or 41%, and $3.9 million, or 44%,
increases in selling and marketing expenses from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily due to the following:
|
|
|
|
|
$4.7 million, or 42%, and $1.4 million, or 35%,
increases in indirect commissions, principally resulting from
25% and 17% increases in gross subscriber additions generated by
Nextel Argentinas external sales channels, as well as
increases in indirect commissions earned per subscriber
addition; and
|
|
|
|
$4.4 million, or 52%, and $1.4 million, or 42%,
increases in payroll and direct commissions, mostly due to 16%
and 17% increases in gross subscriber additions generated by
Nextel Argentinas internal sales personnel, as well as
higher payroll and related costs related to increases in selling
and marketing personnel necessary to support continued sales
growth and significant increases in salaries consistent with the
ongoing inflation that we are experiencing in Argentina.
|
|
|
4.
|
General and
administrative expenses
|
The $19.5 million, or 43%, and $8.2 million, or 52%,
increases in general and administrative expenses from the nine
and three months ended September 30, 2007 to the same
periods in 2008 are primarily a result of the following:
|
|
|
|
|
$10.0 million, or 41%, and $4.5 million, or 57%,
increases in general corporate costs resulting from certain
revenue-based taxes as well as increases in payroll and related
expenses caused by increases in general and administrative
personnel and significant increases in salaries consistent with
the ongoing inflation that we are experiencing in Argentina;
|
|
|
|
$5.8 million, or 50%, and $2.2 million, or 51%,
increases in customer care expenses resulting from increases in
customer care personnel necessary to support a larger customer
base and significant increases in salaries consistent with the
ongoing inflation that we are experiencing in Argentina; and
|
|
|
|
$2.4 million, or 37%, and $0.7 million, or 31%,
increases in information technology expenses caused by increases
in information technology personnel, higher software maintenance
costs and increases in salaries consistent with the ongoing
inflation that we are experiencing in Argentina.
|
|
|
5.
|
Depreciation
and amortization
|
The $6.1 million, or 27%, and $2.7 million, or 35%,
increases in depreciation and amortization from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are primarily due to a 41% increase in Nextel
Argentinas property, plant and equipment in service.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Perus
|
|
|
|
|
|
Perus
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
163,170
|
|
|
|
92
|
%
|
|
$
|
128,947
|
|
|
|
93
|
%
|
|
$
|
34,223
|
|
|
|
27
|
%
|
Digital handset and accessory revenues
|
|
|
13,986
|
|
|
|
8
|
%
|
|
|
9,201
|
|
|
|
7
|
%
|
|
|
4,785
|
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,156
|
|
|
|
100
|
%
|
|
|
138,148
|
|
|
|
100
|
%
|
|
|
39,008
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(58,919
|
)
|
|
|
(33
|
)%
|
|
|
(50,326
|
)
|
|
|
(37
|
)%
|
|
|
(8,593
|
)
|
|
|
17
|
%
|
Cost of digital handsets and accessories
|
|
|
(32,180
|
)
|
|
|
(18
|
)%
|
|
|
(22,530
|
)
|
|
|
(16
|
)%
|
|
|
(9,650
|
)
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,099
|
)
|
|
|
(51
|
)%
|
|
|
(72,856
|
)
|
|
|
(53
|
)%
|
|
|
(18,243
|
)
|
|
|
25
|
%
|
Selling and marketing expenses
|
|
|
(22,093
|
)
|
|
|
(13
|
)%
|
|
|
(14,905
|
)
|
|
|
(11
|
)%
|
|
|
(7,188
|
)
|
|
|
48
|
%
|
General and administrative expenses
|
|
|
(30,593
|
)
|
|
|
(17
|
)%
|
|
|
(24,368
|
)
|
|
|
(17
|
)%
|
|
|
(6,225
|
)
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
33,371
|
|
|
|
19
|
%
|
|
|
26,019
|
|
|
|
19
|
%
|
|
|
7,352
|
|
|
|
28
|
%
|
Depreciation and amortization
|
|
|
(15,107
|
)
|
|
|
(9
|
)%
|
|
|
(15,202
|
)
|
|
|
(11
|
)%
|
|
|
95
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
18,264
|
|
|
|
10
|
%
|
|
|
10,817
|
|
|
|
8
|
%
|
|
|
7,447
|
|
|
|
69
|
%
|
Interest expense, net
|
|
|
(104
|
)
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
9
|
%
|
Interest income
|
|
|
772
|
|
|
|
1
|
%
|
|
|
499
|
|
|
|
|
|
|
|
273
|
|
|
|
55
|
%
|
Foreign currency transaction (losses) gains, net
|
|
|
(314
|
)
|
|
|
|
|
|
|
371
|
|
|
|
|
|
|
|
(685
|
)
|
|
|
(185
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
18,618
|
|
|
|
11
|
%
|
|
$
|
11,592
|
|
|
|
8
|
%
|
|
$
|
7,026
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Perus
|
|
|
|
|
|
Perus
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
57,531
|
|
|
|
92
|
%
|
|
$
|
45,457
|
|
|
|
93
|
%
|
|
$
|
12,074
|
|
|
|
27
|
%
|
Digital handset and accessory revenues
|
|
|
5,131
|
|
|
|
8
|
%
|
|
|
3,320
|
|
|
|
7
|
%
|
|
|
1,811
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,662
|
|
|
|
100
|
%
|
|
|
48,777
|
|
|
|
100
|
%
|
|
|
13,885
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(21,040
|
)
|
|
|
(34
|
)%
|
|
|
(17,691
|
)
|
|
|
(36
|
)%
|
|
|
(3,349
|
)
|
|
|
19
|
%
|
Cost of digital handsets and accessories
|
|
|
(11,564
|
)
|
|
|
(18
|
)%
|
|
|
(8,699
|
)
|
|
|
(18
|
)%
|
|
|
(2,865
|
)
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,604
|
)
|
|
|
(52
|
)%
|
|
|
(26,390
|
)
|
|
|
(54
|
)%
|
|
|
(6,214
|
)
|
|
|
24
|
%
|
Selling and marketing expenses
|
|
|
(8,264
|
)
|
|
|
(13
|
)%
|
|
|
(5,582
|
)
|
|
|
(11
|
)%
|
|
|
(2,682
|
)
|
|
|
48
|
%
|
General and administrative expenses
|
|
|
(11,053
|
)
|
|
|
(18
|
)%
|
|
|
(8,659
|
)
|
|
|
(18
|
)%
|
|
|
(2,394
|
)
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
10,741
|
|
|
|
17
|
%
|
|
|
8,146
|
|
|
|
17
|
%
|
|
|
2,595
|
|
|
|
32
|
%
|
Depreciation and amortization
|
|
|
(5,218
|
)
|
|
|
(8
|
)%
|
|
|
(4,318
|
)
|
|
|
(9
|
)%
|
|
|
(900
|
)
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,523
|
|
|
|
9
|
%
|
|
|
3,828
|
|
|
|
8
|
%
|
|
|
1,695
|
|
|
|
44
|
%
|
Interest expense, net
|
|
|
(68
|
)
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
(40
|
)
|
|
|
143
|
%
|
Interest income
|
|
|
154
|
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(3
|
)%
|
Foreign currency transaction (losses) gains, net
|
|
|
(152
|
)
|
|
|
|
|
|
|
316
|
|
|
|
1
|
%
|
|
|
(468
|
)
|
|
|
(148
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
5,457
|
|
|
|
9
|
%
|
|
$
|
4,274
|
|
|
|
9
|
%
|
|
$
|
1,183
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We plan to develop and deploy a third generation network in Peru
using 1.9 GHz spectrum we acquired in 2007. Earlier this
year, the regulatory authorities in Peru approved our plans for
the deployment of this new network. We believe that these plans
will enable us to significantly increase the size of our
opportunity in Peru by allowing us to offer new and
differentiated services to a larger base of potential customers.
Because the U.S. dollar is the functional currency in Peru,
Nextel Perus results of operations are not significantly
impacted by changes in the U.S. dollar to Peruvian sol
exchange rate.
The $34.2 million, or 27%, and $12.1 million, or 27%,
increases in service and other revenues from the nine and three
months ended September 30, 2007 to the same periods in 2008
are primarily due to 41% and 43% increases in the average number
of digital handsets in service, partially offset by decreases in
average revenue per subscriber mainly resulting from an increase
in the percentage of subscribers in Nextel Perus
subscriber base who purchase service under its prepaid rate
plans, which have lower average monthly revenues per subscriber.
The $4.8 million, or 52%, and $1.8 million, or 55%,
increases in digital handset and accessory revenues from the
nine and three months ended September 30, 2007 to the same
periods in 2008 are primarily due to 49% and 38% increases in
handset sales to new subscribers, as well as increases in
handset upgrades for existing subscribers.
46
The $8.6 million, or 17%, and $3.3 million, or 19%,
increases in cost of service from the nine and three months
ended September 30, 2007 to the same periods in 2008 are
largely a result of the following:
|
|
|
|
|
$3.8 million, or 74%, and $1.7 million, or 94%,
increases in service and repair costs largely due to 64% and 49%
increases in the number of subscribers participating in Nextel
Perus handset maintenance program and increased costs per
handset serviced; and
|
|
|
|
$3.0 million, or 27%, and $1.0 million, or 26%,
increases in direct switch and transmitter and receiver site
costs due to a 13% increase in the number of sites in service
from September 30, 2007 to September 30, 2008, as well
as increases in operating and maintenance costs per site.
|
The $9.7 million, or 43%, and $2.9 million, or 33%,
increases in cost of digital handset and accessory sales from
the nine and three months ended September 30, 2007 to the
same periods in 2008 are largely a result of 49% and 38%
increases in handset sales to new subscribers, as well as
increases in handset upgrades for existing subscribers.
|
|
3.
|
Selling and
marketing expenses
|
The $7.2 million, or 48%, and $2.7 million, or 48%,
increases in selling and marketing expenses from the nine and
three months ended September 30, 2007 to the same periods
in 2008 are largely a result of the following:
|
|
|
|
|
$3.8 million, or 94%, and $1.1 million, or 68%,
increases in indirect commissions as a result of 80% and 79%
increases in handset sales by Nextel Perus external sales
channels; and
|
|
|
|
$3.0 million, or 37%, and $0.9 million, or 31%,
increases in direct commissions and payroll expenses principally
due to higher payroll and related costs caused by increases in
selling and marketing personnel necessary to support continued
sales growth.
|
|
|
4.
|
General and
administrative expenses
|
The $6.2 million, or 26%, and $2.4 million, or 28%,
increases in general and administrative expenses from the nine
and three months ended September 30, 2007 to the same
periods in 2008 are primarily due to the following:
|
|
|
|
|
$3.1 million, or 36%, and $1.0 million, or 31%,
increases in customer care expenses, mainly caused by increases
in customer care and billing operations personnel needed to
support a growing customer base; and
|
|
|
|
$3.1 million, or 36%, and $1.4 million, or 43%,
increases in general corporate costs resulting from increases in
payroll and related expenses caused by increases in general and
administrative personnel necessary to develop Nextel Perus
new network.
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
and other
|
|
|
|
|
|
and other
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
6,415
|
|
|
|
100
|
%
|
|
$
|
2,454
|
|
|
|
100
|
%
|
|
$
|
3,961
|
|
|
|
161
|
%
|
Digital handset and accessory revenues
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,415
|
|
|
|
100
|
%
|
|
|
2,459
|
|
|
|
100
|
%
|
|
|
3,956
|
|
|
|
161
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(4,652
|
)
|
|
|
(72
|
)%
|
|
|
(1,790
|
)
|
|
|
(73
|
)%
|
|
|
(2,862
|
)
|
|
|
160
|
%
|
Cost of digital handsets and accessories
|
|
|
(1,588
|
)
|
|
|
(25
|
)%
|
|
|
(855
|
)
|
|
|
(35
|
)%
|
|
|
(733
|
)
|
|
|
86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,240
|
)
|
|
|
(97
|
)%
|
|
|
(2,645
|
)
|
|
|
(108
|
)%
|
|
|
(3,595
|
)
|
|
|
136
|
%
|
Selling and marketing expenses
|
|
|
(9,352
|
)
|
|
|
(146
|
)%
|
|
|
(7,211
|
)
|
|
|
(293
|
)%
|
|
|
(2,141
|
)
|
|
|
30
|
%
|
General and administrative expenses
|
|
|
(115,980
|
)
|
|
|
NM
|
|
|
|
(102,421
|
)
|
|
|
NM
|
|
|
|
(13,559
|
)
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment losses
|
|
|
(125,157
|
)
|
|
|
NM
|
|
|
|
(109,818
|
)
|
|
|
NM
|
|
|
|
(15,339
|
)
|
|
|
14
|
%
|
Management fee
|
|
|
25,200
|
|
|
|
NM
|
|
|
|
29,700
|
|
|
|
NM
|
|
|
|
(4,500
|
)
|
|
|
(15
|
)%
|
Depreciation and amortization
|
|
|
(8,882
|
)
|
|
|
(138
|
)%
|
|
|
(4,983
|
)
|
|
|
(203
|
)%
|
|
|
(3,899
|
)
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(108,839
|
)
|
|
|
NM
|
|
|
|
(85,101
|
)
|
|
|
NM
|
|
|
|
(23,738
|
)
|
|
|
28
|
%
|
Interest expense, net
|
|
|
(39,757
|
)
|
|
|
NM
|
|
|
|
(28,403
|
)
|
|
|
NM
|
|
|
|
(11,354
|
)
|
|
|
40
|
%
|
Interest income
|
|
|
17,131
|
|
|
|
267
|
%
|
|
|
27,471
|
|
|
|
NM
|
|
|
|
(10,340
|
)
|
|
|
(38
|
)%
|
Foreign currency transaction gains, net
|
|
|
653
|
|
|
|
10
|
%
|
|
|
25
|
|
|
|
1
|
%
|
|
|
628
|
|
|
|
NM
|
|
Debt conversion expense
|
|
|
|
|
|
|
NM
|
|
|
|
(26,455
|
)
|
|
|
NM
|
|
|
|
26,455
|
|
|
|
(100
|
)%
|
Other expense, net
|
|
|
(5,273
|
)
|
|
|
(82
|
)%
|
|
|
(1,593
|
)
|
|
|
(65
|
)%
|
|
|
(3,680
|
)
|
|
|
231
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(136,085
|
)
|
|
|
NM
|
|
|
$
|
(114,056
|
)
|
|
|
NM
|
|
|
$
|
(22,029
|
)
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
and other
|
|
|
|
|
|
and other
|
|
|
Change from
|
|
|
|
September 30,
|
|
|
Operating
|
|
|
September 30,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
2,411
|
|
|
|
100
|
%
|
|
$
|
1,072
|
|
|
|
100
|
%
|
|
$
|
1,339
|
|
|
|
125
|
%
|
Digital handset and accessory revenues
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,411
|
|
|
|
100
|
%
|
|
|
1,077
|
|
|
|
100
|
%
|
|
|
1,334
|
|
|
|
124
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization
included below)
|
|
|
(1,793
|
)
|
|
|
(75
|
)%
|
|
|
(726
|
)
|
|
|
(68
|
)%
|
|
|
(1,067
|
)
|
|
|
147
|
%
|
Cost of digital handsets and accessories
|
|
|
(562
|
)
|
|
|
(23
|
)%
|
|
|
(295
|
)
|
|
|
(27
|
)%
|
|
|
(267
|
)
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,355
|
)
|
|
|
(98
|
)%
|
|
|
(1,021
|
)
|
|
|
(95
|
)%
|
|
|
(1,334
|
)
|
|
|
131
|
%
|
Selling and marketing expenses
|
|
|
(2,745
|
)
|
|
|
(114
|
)%
|
|
|
(2,467
|
)
|
|
|
(229
|
)%
|
|
|
(278
|
)
|
|
|
11
|
%
|
General and administrative expenses
|
|
|
(42,117
|
)
|
|
|
NM
|
|
|
|
(38,228
|
)
|
|
|
NM
|
|
|
|
(3,889
|
)
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment losses
|
|
|
(44,806
|
)
|
|
|
NM
|
|
|
|
(40,639
|
)
|
|
|
NM
|
|
|
|
(4,167
|
)
|
|
|
10
|
%
|
Management fee
|
|
|
8,400
|
|
|
|
NM
|
|
|
|
9,900
|
|
|
|
NM
|
|
|
|
(1,500
|
)
|
|
|
(15
|
)%
|
Depreciation and amortization
|
|
|
(3,090
|
)
|
|
|
(128
|
)%
|
|
|
(1,713
|
)
|
|
|
(159
|
)%
|
|
|
(1,377
|
)
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(39,496
|
)
|
|
|
NM
|
|
|
|
(32,452
|
)
|
|
|
NM
|
|
|
|
(7,044
|
)
|
|
|
22
|
%
|
Interest expense, net
|
|
|
(13,172
|
)
|
|
|
NM
|
|
|
|
(14,068
|
)
|
|
|
NM
|
|
|
|
896
|
|
|
|
(6
|
)%
|
Interest income
|
|
|
4,011
|
|
|
|
166
|
%
|
|
|
15,192
|
|
|
|
NM
|
|
|
|
(11,181
|
)
|
|
|
(74
|
)%
|
Foreign currency transaction (losses) gains, net
|
|
|
(458
|
)
|
|
|
(19
|
)%
|
|
|
33
|
|
|
|
3
|
%
|
|
|
(491
|
)
|
|
|
NM
|
|
Debt conversion expense
|
|
|
|
|
|
|
NM
|
|
|
|
(26,455
|
)
|
|
|
NM
|
|
|
|
26,455
|
|
|
|
(100
|
)%
|
Other (expense) income, net
|
|
|
(1,765
|
)
|
|
|
(73
|
)%
|
|
|
58
|
|
|
|
5
|
%
|
|
|
(1,823
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(50,880
|
)
|
|
|
NM
|
|
|
$
|
(57,692
|
)
|
|
|
NM
|
|
|
$
|
6,812
|
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
For the nine and three months ended September 30, 2008,
corporate and other operating revenues and cost of revenues
primarily represent the results of digital operations reported
by Nextel Chile. For the nine and three months ended
September 30, 2007, corporate and other operating revenues
and cost of revenues primarily represent the results of both
digital and analog operations reported by Nextel Chile. We plan
to significantly expand and enhance our network in Chile over
the next several years, which will require additional
investments in capital expenditures and will likely result in a
modest level of
start-up
losses.
|
|
1.
|
General and
administrative expenses
|
The $13.6 million, or 13%, increase in general and
administrative expenses from the nine months ended
September 30, 2007 to the same period in 2008 is primarily
due to an increase in corporate personnel expenses related to
our new technology and other initiatives, increased consulting
expenses and a $2.3 million increase in stock-based
compensation expense.
The $3.9 million, or 10%, increase in general and
administrative expenses from the three months ended
September 30, 2007 to the same period in 2008 is primarily
due to an increase in corporate personnel expenses related to
our new technology and other initiatives and increased
consulting expenses, partially offset by a $2.8 million
decrease in stock-based compensation expense.
49
The $11.4 million, or 40%, increase in net interest expense
from the nine months ended September 30, 2007 to the same
period in 2008 is substantially the result of a
$15.6 million increase in interest expense due to the
issuance of our 3.125% convertible notes during the second
quarter of 2007, partially offset by a $4.8 million
decrease in interest expense due to the conversion of our 2.875%
convertible notes in the third quarter of 2007.
The $10.3 million, or 38%, and $11.2 million, or 74%,
decreases in interest income from the nine and three months
ended September 30, 2007 to the same periods in 2008 are
primarily due to the impact of decreases in interest rates on
average cash balances in the United States, as well as a
decrease in the average cash balances from the third quarter of
2007 to the third quarter of 2008.
|
|
4.
|
Debt
conversion expense
|
The $26.5 million in debt conversion expense for the nine
and three months ended September 30, 2007 represents cash
consideration that we paid in connection with the tender offer
for 99.99% of our 2.875% convertible notes in the third quarter
of 2007.
|
|
5.
|
Other
(expense) income, net
|
The $3.7 million and $1.8 million increases in other
expense, net, from the nine and three months ended
September 30, 2007 to the same periods in 2008 are
primarily due to a loss we recognized related to a decline in
the value of our investment in a short-term investment fund in
the United States resulting from changing market conditions. We
believe that if these credit market conditions continue to
deteriorate we could experience further losses in this
short-term investment.
Liquidity
and Capital Resources
We had working capital, which is defined as total current assets
less total current liabilities, of $1,603.6 million as of
September 30, 2008, a $32.0 million decrease compared
to working capital of $1,635.6 million as of
December 31, 2007. Our working capital includes
$1,393.5 million in cash and cash equivalents as of
September 30, 2008, of which about 44% was held in
currencies other than U.S. dollars, with a majority held in
Mexican pesos, and $90.4 million of short-term investments.
A substantial portion of our cash and cash equivalents held in
U.S. dollars is maintained in U.S. treasury security
funds, and our cash and cash equivalents held in local
currencies is typically maintained in highly liquid overnight
securities and certificates of deposit.
In January 2008, our Board of Directors authorized a program to
purchase shares of our common stock for cash. The Board approved
the purchase of shares having an aggregate market value of up to
$500.0 million, depending on market conditions and other
factors. During the first nine months of 2008, we purchased a
total of 5,555,033 shares of our common stock for
$242.7 million. We did not purchase any shares of our
common stock during the three months ended September 30,
2008. During the first nine months of 2007, we purchased a total
of 4,043,725 shares of our common stock for approximately
$330.0 million under our first program to purchase shares
of our common stock for cash, which was approved by our Board of
Directors in May 2007. We treat purchases of our common stock
under this program as effective retirements of the purchased
shares and therefore reduce our reported shares issued and
outstanding by the number of shares purchased. In addition, we
record the excess of the purchase price over the par value of
the common stock as a reduction to paid-in capital.
We recognized net income of $360.6 million for the nine
months ended September 30, 2008 compared to
$249.9 million for the nine months ended September 30,
2007. During the nine months ended September 30, 2008 and
2007, our operating revenues more than offset our operating
expenses, excluding depreciation and amortization, and cash
capital expenditures.
Because we report our results of operations in
U.S. dollars, changes in relative currency valuations may
result in reductions in the reported value of our assets,
including the value of cash and cash equivalents held in local
currencies. Accordingly, if the values of the currencies in the
countries in which our operating companies conduct
50
business relative to the U.S. dollar remain at the average
levels that prevailed during October 2008 or if these values
depreciate further, we would expect the reported value of our
assets held in local currencies to be adversely affected.
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Net cash provided by operating activities
|
|
$
|
616,650
|
|
|
$
|
455,195
|
|
|
$
|
161,455
|
|
Net cash used in investing activities
|
|
|
(512,639
|
)
|
|
|
(554,619
|
)
|
|
|
41,980
|
|
Net cash (used in) provided by financing activities
|
|
|
(81,894
|
)
|
|
|
936,587
|
|
|
|
(1,018,481
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,232
|
|
|
|
(351
|
)
|
|
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
23,349
|
|
|
|
836,812
|
|
|
|
(813,463
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,370,165
|
|
|
|
708,591
|
|
|
|
661,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,393,514
|
|
|
$
|
1,545,403
|
|
|
$
|
(151,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating activities provided us with $616.7 million of
cash during the nine months ended September 30, 2008, a
$161.5 million increase from the nine months ended
September 30, 2007. The increase was primarily due to
higher operating income resulting from our profitable growth
strategy and less cash used for working capital.
We used $512.6 million of cash in our investing activities
during the nine months ended September 30, 2008, a
$42.0 million decrease from the nine months ended
September 30, 2007 primarily due to $151.2 million in
distributions we received from our investment in an enhanced
cash fund similar to, but not in the legal form of, a money
market fund that invests primarily in asset-backed securities.
Cash capital expenditures increased $156.5 million from
$499.7 million during the nine months ended
September 30, 2007 to $656.2 million during the nine
months ended September 30, 2008, primarily due to the
continued expansion of the geographic coverage and capacity of
our networks, primarily in Brazil and Mexico.
We used $81.9 million of cash in our financing activities
during the nine months ended September 30, 2008, primarily
due to $242.7 million in cash we used to purchase our
common stock and $31.9 million in repayments under Nextel
Mexicos syndicated loan facility, partially offset by
$125.0 million in borrowings under Nextel Brazils
syndicated loan facility and $27.3 million increase in
proceeds from our towers financing transactions in Mexico and
Brazil. Our financing activities provided us with
$936.6 million of cash during the nine months ended
September 30, 2007 due primarily to $1,200.0 million
in cash we received from the issuance of our 3.125% convertible
notes and $89.6 million in proceeds we received from stock
option exercises, partially offset by $330.0 million in
cash we used to purchase our common stock.
Future
Capital Needs and Resources
Capital Resources. Our ongoing capital
resources depend on a variety of factors, including our existing
cash and cash equivalents balances, the value of our short-term
investments, cash flows generated by our operating companies and
external financial sources that may be available.
Our ability to generate sufficient net cash from our operating
activities is dependent upon, among other things:
|
|
|
|
|
the amount of revenue we are able to generate and collect from
our customers;
|
|
|
|
the amount of operating expenses required to provide our
services;
|
|
|
|
the cost of acquiring and retaining customers, including the
subsidies we incur to provide handsets to both our new and
existing customers;
|
|
|
|
our ability to continue to increase the size of our subscriber
base; and
|
|
|
|
fluctuations in foreign exchange rates.
|
51
Capital Needs and Contractual
Obligations. We currently anticipate that our
future capital needs will principally consist of funds required
for:
|
|
|
|
|
operating expenses relating to our networks;
|
|
|
|
capital expenditures to expand and enhance our networks, as
discussed below under Capital Expenditures;
|
|
|
|
operating and capital expenditures related to the deployment of
a next generation network in Peru;
|
|
|
|
future spectrum or other related purchases;
|
|
|
|
debt service requirements, including tower financing and capital
lease obligations;
|
|
|
|
cash taxes; and
|
|
|
|
other general corporate expenditures.
|
The following table sets forth the amounts and timing of
contractual payments for our most significant contractual
obligations determined as of September 30, 2008. The
information in the table reflects future unconditional payments
and is based upon, among other things, the current terms of the
relevant agreements, appropriate classification of items under
accounting principles generally accepted in the United States
that are currently in effect and certain assumptions, such as
future interest rates. Future events could cause actual payments
to differ significantly from these amounts. See Forward
Looking Statements. Except as required by law, we disclaim
any obligation to modify or update the information contained in
the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Contractual Obligations
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Convertible notes(1)
|
|
$
|
47,125
|
|
|
$
|
94,250
|
|
|
$
|
1,256,750
|
|
|
$
|
465,523
|
|
|
$
|
1,863,648
|
|
Tower financing obligations(1)
|
|
|
58,274
|
|
|
|
116,500
|
|
|
|
116,417
|
|
|
|
337,562
|
|
|
|
628,753
|
|
Syndicated loan facilities(2)
|
|
|
114,323
|
|
|
|
392,213
|
|
|
|
115,037
|
|
|
|
10,783
|
|
|
|
632,356
|
|
Capital lease obligations(3)
|
|
|
13,940
|
|
|
|
27,872
|
|
|
|
43,311
|
|
|
|
86,151
|
|
|
|
171,274
|
|
Spectrum fees(4)
|
|
|
14,258
|
|
|
|
28,516
|
|
|
|
28,516
|
|
|
|
170,452
|
|
|
|
241,742
|
|
Operating leases(5)
|
|
|
128,109
|
|
|
|
207,917
|
|
|
|
140,441
|
|
|
|
180,629
|
|
|
|
657,096
|
|
Purchase obligations(6)
|
|
|
754,743
|
|
|
|
73,175
|
|
|
|
8,831
|
|
|
|
5,254
|
|
|
|
842,003
|
|
Other long-term obligations(7)
|
|
|
19,643
|
|
|
|
20,076
|
|
|
|
41,447
|
|
|
|
201,436
|
|
|
|
282,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$
|
1,150,415
|
|
|
$
|
960,519
|
|
|
$
|
1,750,750
|
|
|
$
|
1,457,790
|
|
|
$
|
5,319,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts include estimated principal and interest payments
over the full term of the obligation based on our expectations
as to future interest rates, assuming the current payment
schedule. The $350.0 million repayment of the principal
balance of our 2.75% convertible notes due 2025 is included in
the table above in the column labeled more than
5 years. However, in accordance with the terms of
these notes, if the notes are not converted, the noteholders
have the right to require us to repurchase the notes in August
2010 at a repurchase price equal to 100% of their principal
amount plus accrued and unpaid interest. |
|
(2) |
|
These amounts include principal and interest payments associated
with Nextel Mexico and Nextel Brazils syndicated loan
facilities. |
|
(3) |
|
These amounts represent principal and interest payments due
under our co-location agreements, including with American Tower,
and our existing corporate aircraft lease. The amounts related
to our existing aircraft lease exclude amounts that are
contingently due in the event of our default under the lease,
but do include remaining amounts due under the letter of credit
provided for our new corporate aircraft. |
|
(4) |
|
These amounts do not include variable fees based on certain
operating revenues and are subject to increases in the Mexican
Consumer Pricing Index. |
|
(5) |
|
These amounts principally include future lease costs related to
our transmitter and receiver sites and switches and office
facilities. |
52
|
|
|
(6) |
|
These amounts include maximum contractual purchase obligations
under various agreements with our vendors, as well as estimated
amounts related to interconnection agreements in Mexico. |
|
(7) |
|
These amounts include our current estimates of asset retirement
obligations based on our expectations as to future retirement
costs, inflation rates and timing of retirements, as well as
amounts related to our FIN 48 liabilities. |
We entered into an agreement with Motorola during 2006, which
requires us to purchase a certain amount of handsets each year
through December 31, 2011. Prices for handsets that will be
purchased in years subsequent to 2008 were not stipulated in the
agreement as they will be negotiated annually. As a result, we
are not able to quantify the dollar amount of minimum purchases
required under this agreement for years subsequent to 2008, and
therefore, they are not included in the table above.
Capital Expenditures. Our capital
expenditures, including capitalized interest, were
$640.4 million for the nine months ended September 30,
2008 compared to $465.9 million for the nine months ended
September 30, 2007. In each of these periods, a substantial
portion of our capital expenditures was invested in Mexico and
Brazil. We expect to continue to focus our capital spending in
these two markets. Specifically, we recently announced our plans
to make additional investments in Brazil in order to add more
capacity to Nextel Brazils network, support its growth and
expand its geographic coverage, including expansion into the
northeast region of the country. In the future, we expect to
finance our capital spending using the most effective
combination of cash from operations, cash on hand, cash from the
sale or maturity of our short-term investments and proceeds from
external financing that may become available. Our capital
spending is expected to be driven by several factors, including:
|
|
|
|
|
the expansion of the coverage of our networks to new market
areas;
|
|
|
|
the construction of additional transmitter and receiver sites to
increase system capacity and maintain system quality and the
installation of related switching equipment in some of our
existing market coverage areas;
|
|
|
|
the enhancement of our network coverage around some major market
areas;
|
|
|
|
the deployment within required timeframes of a next generation
network that utilizes the 1.9 GHz spectrum that we acquired
in Peru in 2007;
|
|
|
|
potential funding of future spectrum acquisitions and
development and deployment of any future next generation
networks; and
|
|
|
|
non-network
related information technology projects.
|
Our future capital expenditures may be affected by future
technology improvements and technology choices. For example,
Motorola developed a technology upgrade to the iDEN network, the
6:1 voice coder software upgrade, which is designed to increase
the capacity of iDEN networks for interconnect calls without
requiring additional network infrastructure equipment. Beginning
in 2004, we started selling handsets that can operate on the new
6:1 voice coder, and we have deployed the related network
software modifications that are necessary to utilize this
technology in some of our markets. We have experienced voice
quality problems related to certain types of calls made using
the 6:1 voice coder technology and in some markets, we have
adjusted the network software to reduce the number of calls
completed using the 6:1 voice coder technology in order to
balance our network capacity needs with the need to maintain
voice quality. Because we have not used the 6:1 voice coder
technology to its full capacity, we have invested more capital
in our infrastructure to satisfy our network capacity needs than
would have been necessary if we had been able to complete a
higher percentage of calls using the technology, and we may make
similar investments in the future as we optimize our network to
meet our capacity and voice quality requirements. If we were to
decide to significantly curtail the use of the 6:1 voice coder
technology in all of our markets, these investments could be
significant. See Forward Looking Statements.
Future Outlook. We believe that our
current business plan, which contemplates significant network
expansion in Brazil, some continued network expansion in Mexico,
Argentina and Chile, and the construction of a new,
complementary next generation network in Peru, will not require
any additional external funding, and we will be able to operate
and grow our business while servicing our debt obligations.
Nevertheless, we will continue to assess opportunities to raise
additional funding or to replace existing funding if conditions
are economically attractive for us. See Forward Looking
Statements.
53
In making this assessment of the adequacy of our funding, we
have considered:
|
|
|
|
|
cash and cash equivalents on hand and short-term-investments
available to fund our operations;
|
|
|
|
expected cash flows from operations;
|
|
|
|
the anticipated level of capital expenditures, including minimum
build-out requirements, relating to the deployment of the next
generation network that utilizes the 1.9 GHz spectrum we
acquired in Peru;
|
|
|
|
our scheduled debt service; and
|
|
|
|
income taxes.
|
The anticipated cash needs of our business, as well as the
conclusions presented herein as to the adequacy of the available
sources of cash and timing on our ability to generate net income
could change significantly:
|
|
|
|
|
if our business plans change, including as a result of changes
in technology;
|
|
|
|
if we decide to expand into new markets or further in our
existing markets, as a result of the construction of additional
portions of our networks or the acquisition of competitors or
others;
|
|
|
|
if we are successful in winning spectrum in auctions;
|
|
|
|
if currency values in our markets significantly depreciate in
value against the U.S. dollar;
|
|
|
|
if economic conditions in any of our markets change generally;
|
|
|
|
if competitive practices in the mobile wireless
telecommunications industry change materially from those
currently prevailing or from those now anticipated; or
|
|
|
|
if other presently unexpected circumstances arise that have a
material effect on the cash flow or profitability of our mobile
wireless business.
|
Any of these events or circumstances could involve significant
additional funding needs in excess of the identified currently
available sources, and could require us to raise additional
capital to meet those needs. Our assessment does not take into
consideration purchases of additional spectrum and network
equipment to support the deployment of future next generation
networks or the costs associated with the deployment of those
networks other than the planned deployment of the next
generation network in Peru.
Our ability to seek additional capital, if necessary, is subject
to a variety of additional factors that we cannot presently
predict with certainty, including:
|
|
|
|
|
the commercial success of our operations;
|
|
|
|
the volatility and demand of the capital markets; and
|
|
|
|
the future market prices of our securities.
|
Recent financial market conditions in debt and equity markets in
the United States and global markets have resulted in
substantial decline in the amount of funding available to
corporate borrowers. As a result, available funding is both more
costly and provided on terms that are less favorable to
borrowers. If these conditions continue or worsen, it will be
increasingly difficult for us to raise additional capital in
order to meet significant changes in our cash needs that result
from the factors identified above or from our decision to
acquire spectrum or deploy future technologies.
Forward
Looking Statements
Safe Harbor Statement under the Private
Securities Litigation Reform Act of
1995. Certain statements made in this
quarterly report on
Form 10-Q
are not historical or current facts, but deal with potential
future circumstances and developments. They can be identified by
the use of forward-looking words such as believes,
expects, intends, plans,
may, will, would,
could, should or anticipates
or other comparable words, or by discussions of strategy that
involve risks and uncertainties. We caution you that these
forward-looking statements are only predictions, which are
subject to risks and uncertainties, including technical
uncertainties,
54
financial variations and changes in the regulatory environment,
industry growth and trend predictions. We have attempted to
identify, in context, some of the factors that we currently
believe may cause actual future experience and results to differ
from our current expectations regarding the relevant matter or
subject area. The operation and results of our wireless
communications business also may be subject to the effects of
other risks and uncertainties in addition to the other
qualifying factors identified in this Item, including, but not
limited to:
|
|
|
|
|
our ability to meet the operating goals established by our
business plan;
|
|
|
|
general economic conditions in the United States or in Latin
America and in the market segments that we are targeting for our
services;
|
|
|
|
the political and social conditions in the countries in which we
operate, including political instability, which may affect the
economies of our markets and the regulatory schemes in these
countries;
|
|
|
|
the impact of foreign exchange volatility in our markets as
compared to the U.S. dollar and related currency
depreciation in countries in which our operating companies
conduct business;
|
|
|
|
our ability to access sufficient debt or equity capital to meet
any future operating and financial needs;
|
|
|
|
reasonable access to and the successful performance of the
technology being deployed in our service areas, and improvements
thereon, including technology deployed in connection with the
introduction of digital two-way mobile data or Internet
connectivity services in our markets;
|
|
|
|
the availability of adequate quantities of system infrastructure
and subscriber equipment and components at reasonable pricing to
meet our service deployment and marketing plans and customer
demand;
|
|
|
|
Motorolas ability and willingness to provide handsets and
related equipment and software applications or to develop new
technologies or features for us, including the timely
development and availability of new handsets with expanded
applications and features;
|
|
|
|
the risk of deploying new technologies, including the potential
need for additional funding to support that deployment, the risk
that new services supported by the new technology will not
attract enough subscribers to support the related costs of
deploying or operating the new technology, the need to
significantly increase our employee base and the potential
distraction of management;
|
|
|
|
our ability to successfully scale our billing, collection,
customer care and similar back-office operations to keep pace
with customer growth, increased system usage rates and growth or
to successfully deploy new systems that support those functions;
|
|
|
|
the success of efforts to improve and satisfactorily address any
issues relating to our network performance;
|
|
|
|
future legislation or regulatory actions relating to our SMR
services, other wireless communication services or
telecommunications generally;
|
|
|
|
the ability to achieve and maintain market penetration and
average subscriber revenue levels sufficient to provide
financial viability to our network business;
|
|
|
|
the quality and price of similar or comparable wireless
communications services offered or to be offered by our
competitors, including providers of cellular services and
personal communications services;
|
|
|
|
market acceptance of our new service offerings; and
|
|
|
|
other risks and uncertainties described in this quarterly report
on
Form 10-Q
and from time to time in our other reports filed with the
Securities and Exchange Commission, including in our 2007 annual
report on
Form 10-K.
|
Effect of
New Accounting Standards
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS 157, which
provides guidance for using fair value to measure assets and
liabilities when required for recognition or disclosure
purposes. SFAS No. 157 does not expand the use of fair
value or determine when fair value should be used in the
financial
55
statements. In February 2008, the FASB issued Staff Position
No. 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purpose of Lease
Classification or Measurement Under Statement 13, or FSP
No. 157-1,
in order to amend SFAS No. 157 to exclude from its
scope FASB Statement No. 13, Accounting for
Leases, or SFAS No. 13, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement. In addition, in February
2008, the FASB issued Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157, or
FSP
No. 157-2,
which defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for
those that are recognized or disclosed at fair value on a
recurring basis (at least annually). In accordance with FSP
No. 157-2,
we partially adopted SFAS No. 157 for financial assets
and liabilities in the first quarter of fiscal year 2008.
SFAS No. 157 did not have a material impact on our
condensed consolidated financial statements. We are currently
evaluating the impact, if any, that SFAS 157 may have on
any future condensed consolidated financial statements related
to
non-financial
assets and
non-financial
liabilities. See Note 2 for additional information and
related disclosures regarding our fair value measurements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
Unrealized gains and losses on items for which the fair value
option has been elected are required to be included in earnings.
SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be
carried at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We adopted
SFAS No. 159 in the first quarter of fiscal year 2008.
SFAS No. 159 did not have a material impact on our
condensed consolidated financial statements as we elected not to
measure any eligible items at fair value.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141(R), which replaces
SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest
in the acquiree, the goodwill acquired and the expenses incurred
in connection with the acquisition. SFAS No. 141(R)
also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal
years beginning after December 15, 2008. Earlier adoption
is not permitted. As a result, we will apply the provisions of
SFAS No. 141(R) prospectively to business combinations
that close on or after January 1, 2009. We are currently
evaluating the impact, if any, the adoption of
SFAS No. 141(R) may have on our condensed consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of Accounting Research
Bulletin No. 51, or SFAS No. 160.
SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest and the
valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
is effective for fiscal years beginning after December 15,
2008. Earlier adoption is not permitted. We do not believe that
its adoption will have a material impact on our condensed
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB Statement
No. 133 or SFAS No. 161, which amends and
expands the disclosure requirements of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities to require qualitative disclosure about
objectives and strategies in using derivatives, quantitative
disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about the underlying
credit-risk-related contingent features in derivative
agreements. SFAS No. 161 is intended to improve
financial reporting by requiring transparency about the location
and amounts of derivative instruments in an entitys
financial statements; how derivative instruments and related
hedged items are accounted for under SFAS No. 133; and
how derivative instruments and related hedged items affect its
financial position, financial performance and cash flows.
56
SFAS No. 161 is effective for financial statements
issued for fiscal years beginning after November 15, 2008.
We are currently evaluating the potential impact, if any, that
the adoption of SFAS No. 161 may have on our condensed
consolidated financial statements.
In April 2008, the FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets, or FSP
FAS 142-3.
FSP
FAS 142-3
amends the factors considered in developing renewal or extension
assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets, in order to improve the
consistency between the useful life of the recognized intangible
asset and the period of expected cash flows used to measure the
fair value of the asset. FSP
FAS 142-3
applies to: (1) intangible assets that are acquired
individually or with a group of other assets, and
(2) intangible assets acquired both in business
combinations and asset acquisitions. FSP
FAS 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. As a
result, we will apply the provisions of FSP
FAS 142-3
prospectively to intangible assets acquired on or after
January 1, 2009. We are currently evaluating the potential
impact, if any, the adoption of FSP
FAS 142-3
may have on our condensed consolidated financial statements.
In May 2008, the FASB issued Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), or FSP APB
14-1. FSP
APB 14-1
requires that issuers of certain convertible debt instruments
that may be settled in cash upon conversion, including partial
cash settlement, separately account for the liability and equity
components (ie. the embedded conversion option) and recognize
the accretion of the resulting discount on the debt as interest
expense. FSP APB
14-1 is
effective for fiscal years beginning after December 15,
2008 and for interim periods within those fiscal years. It is
required to be applied retrospectively to convertible debt
instruments that were outstanding during any period presented in
the financial statements issued after the effective date. We
believe that the adoption of FSP APB
14-1 in 2009
will result in an increase in the amount of non-cash interest
expense with respect to our convertible debt securities and a
corresponding reduction in our reported net income and diluted
earnings per share for all periods presented in our condensed
consolidated financial statements. We are currently quantifying
the effect the adoption of FSP APB
14-1 will
have on our condensed consolidated financial statements.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Our revenues are primarily denominated in foreign currencies,
while a significant portion of our operations are financed in
U.S. dollars through our convertible notes, a portion of
our syndicated loan facility in Mexico and our syndicated loan
facility in Brazil. As a result, fluctuations in exchange rates
relative to the U.S. dollar expose us to foreign currency
exchange risks. These risks include the impact of translating
our local currency reported earnings into U.S. dollars when
the U.S. dollar strengthens against the local currencies of
our foreign operations. In addition, Nextel Mexico, Nextel
Brazil, Nextel Argentina and Nextel Chile purchase some capital
assets and the majority of handsets in U.S. dollars, but
record the related revenue generated from their operations in
local currency.
We enter into derivative transactions only for hedging or risk
management purposes. We have not and will not enter into any
derivative transactions for speculative or profit generating
purposes. As of September 30, 2008, we have not entered
into any derivative transactions to hedge our foreign currency
transaction risk during 2008 or any future period.
Interest rate changes expose our fixed rate long-term borrowings
to changes in fair value and expose our variable rate long-term
borrowings to changes in future cash flows. As of
September 30, 2008, $1,890.0 million, or 79%, of our
total consolidated debt was fixed rate debt, and the remaining
$494.3 million, or 21%, of our total consolidated debt was
variable rate debt. In July 2005, Nextel Mexico entered into an
interest rate swap agreement to hedge the variability of future
cash flows associated with the $31.0 million Mexican
peso-denominated variable interest rate portion of its
syndicated loan facility. Under the interest rate swap, Nextel
Mexico agreed to exchange the difference between the variable
Mexican reference rate, TIIE, and a fixed interest rate, based
on a notional amount of $31.4 million. The interest rate
swap fixed the amount of interest expense associated with this
portion of the Mexico syndicated loan facility commencing on
August 31, 2005 and will continue over the life of the
facility.
The table below presents principal amounts, related interest
rates by year of maturity and aggregate amounts as of
September 30, 2008 for our fixed rate debt obligations,
including our convertible notes, our syndicated loan facilities
in Mexico and Brazil, our tower financing obligations and our
interest rate swap, all of which have been
57
determined at their fair values. In addition, the
$350.0 million repayment of the principal balance of our
2.75% convertible notes due 2025 is included in the table below
in the column labeled thereafter. However, in
accordance with the terms of these notes, if the notes are not
converted, the noteholders have the right to require us to
repurchase the notes in August 2010 at a repurchase price equal
to 100% of their principal amount plus accrued and unpaid
interest.
The changes in the fair values of our consolidated debt compared
to their fair values as of December 31, 2007 reflect
changes in applicable market conditions, the funding of the
remaining amounts available under Nextel Brazils
syndicated loan facility and the addition of incremental tower
financing obligations resulting from sales of towers during the
first nine months of 2008. All of the information in the table
is presented in U.S. dollar equivalents, which is our
reporting currency. The actual cash flows associated with our
consolidated long-term debt are denominated in U.S. dollars
(US$), Mexican pesos (MP) and Brazilian reais (BR).
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Year of Maturity
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|
September 30, 2008
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|
|
December 31, 2007
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|
|
1 Year
|
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|
2 Years
|
|
|
3 Years
|
|
|
4 Years
|
|
|
5 Years
|
|
|
Thereafter
|
|
|
Total
|
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|
Fair Value
|
|
|
Total
|
|
|
Fair Value
|
|
|
|
(dollars in thousands)
|
|
|
Long-Term Debt:
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Fixed Rate (US$)
|
|
$
|
1,793
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|
|
$
|
1,885
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|
|
$
|
1,899
|
|
|
$
|
1,220,165
|
|
|
$
|
|
|
|
$
|
352,703
|
|
|
$
|
1,578,445
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|
|
$
|
1,293,478
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|
|
$
|
1,576,982
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|
|
$
|
1,489,671
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|
Average Interest Rate
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
2.8
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
3.2
|
%
|
|
|
|
|
Fixed Rate (MP)
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$
|
42,256
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|
|
$
|
24,917
|
|
|
$
|
7,759
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|
|
$
|
9,130
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|
|
$
|
10,754
|
|
|
$
|
123,110
|
|
|
$
|
217,926
|
|
|
$
|
130,624
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|
|
$
|
211,801
|
|
|
$
|
211,801
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|
Average Interest Rate
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|
|
11.9
|
%
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|
|
12.4
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%
|
|
|
15.4
|
%
|
|
|
15.4
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%
|
|
|
15.4
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%
|
|
|
15.3
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%
|
|
|
14.4
|
%
|
|
|
|
|
|
|
14.5
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%
|
|
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|
|
Fixed Rate (BR)
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$
|
3,276
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|
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$
|
3,781
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|
|
$
|
4,579
|
|
|
$
|
5,435
|
|
|
$
|
6,660
|
|
|
$
|
69,866
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|
|
$
|
93,597
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|
|
$
|
45,193
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|
|
$
|
96,134
|
|
|
$
|
96,134
|
|
Average Interest Rate
|
|
|
19.1
|
%
|
|
|
19.9
|
%
|
|
|
20.3
|
%
|
|
|
21.0
|
%
|
|
|
21.7
|
%
|
|
|
24.2
|
%
|
|
|
23.3
|
%
|
|
|
|
|
|
|
24.8
|
%
|
|
|
|
|
Variable Rate (US$)
|
|
$
|
20,260
|
|
|
$
|
81,039
|
|
|
$
|
237,639
|
|
|
$
|
81,039
|
|
|
$
|
26,396
|
|
|
$
|
10,227
|
|
|
$
|
456,600
|
|
|
$
|
394,812
|
|
|
$
|
331,600
|
|
|
$
|
331,600
|
|
Average Interest Rate
|
|
|
4.6
|
%
|
|
|
4.6
|
%
|
|
|
4.2
|
%
|
|
|
4.6
|
%
|
|
|
4.6
|
%
|
|
|
4.6
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
6.8
|
%
|
|
|
|
|
Variable Rate (MP)
|
|
$
|
25,172
|
|
|
$
|
12,586
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37,758
|
|
|
$
|
35,008
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Average Interest Rate
|
|
|
9.5
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.5
|
%
|
|
|
|
|
|
|
8.7
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%
|
|
|
|
|
Interest Rate Swap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Variable to Fixed
|
|
$
|
13,300
|
|
|
$
|
6,651
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,951
|
|
|
$
|
(145
|
)
|
|
$
|
26,420
|
|
|
$
|
(546
|
)
|
Average Pay Rate
|
|
|
10.8
|
%
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
%
|
|
|
|
|
|
|
10.8
|
%
|
|
|
|
|
Average Receive Rate
|
|
|
9.5
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.5
|
%
|
|
|
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
Item 4.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and
reported within the time periods required by the Securities and
Exchange Commission and that such information is accumulated and
communicated to the Companys management, including our
chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
As of the end of the period covered in this report, an
evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures was carried out under the
supervision and with the participation of our management teams
in the United States and in our operating companies, including
our chief executive officer and chief financial officer. Based
on and as of the date of such evaluation, our chief executive
officer and chief financial officer concluded that the design
and operation of our disclosure controls and procedures were
effective.
Changes
in Internal Control over Financial Reporting
During the third quarter of 2008, we completed an upgrade of the
customer billing system in our Peruvian subsidiary. There have
been no other changes in the Companys internal control
over financial reporting during the most recently completed
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control
over financial reporting.
58
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
We are subject to claims and legal actions that may arise in the
ordinary course of business. We do not believe that any of these
pending claims or legal actions will have a material effect on
our business, financial condition, results of operations or cash
flows.
For information on our various loss contingencies, see
Note 5 to our condensed consolidated financial statements
above.
Foreign
Currency Volatility
With regard to the risk factor described in our 2007 annual
report on
Form 10-K
under Item 1A. Risk Factors 4.b. We
are subject to fluctuations in currency exchange rates and
limitations on the expatriation or conversion of currencies,
which may result in significant financial charges, increased
costs of operations or decreased demand for our products and
services, there has been a significant depreciation in
the value of the local currencies in all of our markets relative
to the U.S. dollar during September 2008 and subsequent to
the end of the third quarter. Because nearly all of our revenues
are earned in
non-U.S. currencies,
and a significant portion of our outstanding debt is denominated
in U.S. dollars, the depreciation in the value of local
currencies in the countries in which our operating companies
conduct business relative to the U.S. dollar could make it
more costly for us to service our debt obligations in the
future. In addition, we pay for some of our operating expenses
and capital expenditures in U.S. dollars. The depreciation
of the local currencies results in increased costs to us for
imported equipment and may, at the same time, decrease demand
for our products and services in the affected markets.
In addition, because we report our results of operations in
U.S. dollars, changes in relative foreign currency
valuations may result in reductions in our reported revenues,
operating income and earnings, as well as negative adjustments
to the carrying value of our assets, including the value of cash
investments in local currencies. As of September 30, 2008,
approximately 44% of our total cash and cash equivalents was
held in currencies other than U.S. dollars, with a majority
held in Mexican pesos. Accordingly, if the value of local
currencies in the countries in which our operating companies
conduct business relative to the U.S. dollar remain at the
average levels that prevailed during October 2008 or if these
values depreciate further, we would expect our operating results
in future periods, and the value of our assets held in local
currencies, to be adversely affected.
Changes
in Economic Conditions
With regard to the risk factor described in our 2007 annual
report on
Form 10-K
under Item 1A. Risk Factors 4.a. We
face economic and political risks in our markets, which may
limit our ability to implement our strategy and our financial
flexibility and may disrupt our operations or hurt our
performance, during the three months ended
September 30, 2008, the United States and global economies
experienced a significant downturn. That downturn will affect to
varying degrees the growth of the economies in the countries in
which our operating companies conduct business. If these global
economic conditions continue or worsen, or have a more
significant impact in the countries in which we operate, it may
adversely affect our results of operations.
Regulatory
Matters
With regard to the risk factor described in our 2007 annual
report on
Form 10-K
under Item 1A. Risk Factors 6.
Government regulations determine how we operate in various
countries which could limit our growth and strategic
plans, in April 2008, one of our competitors in Brazil
filed a complaint with the Agencia Nacional de Telecomunicacoes,
or Anatel, alleging that Nextel Brazil was offering services to
customers in a manner that violates our license and the SMR
regulations applicable to us and the services we offer.
Specifically, the competitor alleged that Nextel Brazil was
offering services to non-business customers in a manner that
does not comply with the regulations that govern how we offer
our services in Brazil. In May 2008, the Anatel notified Nextel
Brazil that it had initiated an administrative proceeding
relating to the complaint. We believe that we are operating in a
manner
59
that is consistent with our license and the applicable
regulations and intend to oppose any claims made or actions
taken against us based on the matters raised in the
competitors complaint. However, if the Anatel were to take
actions in response to the competitors complaint that
require us to implement limitations or restrictions on the
manner in which we offer services in Brazil, those actions could
have an adverse effect on our ability to attract new customers
to our services, and our results of operations in Brazil could
be adversely affected.
Except as noted above, there have been no material changes in
our risk factors from those disclosed in our 2007 annual report
on
Form 10-K.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
31
|
.1
|
|
Statement of Chief Executive Officer Pursuant to
Rule 13a-14(a).
|
|
31
|
.2
|
|
Statement of Chief Financial Officer Pursuant to
Rule 13a-14(a).
|
|
32
|
.1
|
|
Statement of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
|
|
32
|
.2
|
|
Statement of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.
|
60
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.
|
|
|
|
By:
|
/s/ CATHERINE
E. NEEL
|
Catherine E. Neel
Vice President and Controller
(on behalf of the registrant and as
chief accounting officer)
Date: November 5, 2008
61
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
31
|
.1
|
|
Statement of Chief Executive Officer Pursuant to
Rule 13a-14(a).
|
|
31
|
.2
|
|
Statement of Chief Financial Officer Pursuant to
Rule 13a-14(a).
|
|
32
|
.1
|
|
Statement of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
|
|
32
|
.2
|
|
Statement of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.
|
62