You question about being redundant is not at all. Recently I answered
a question that was similar in structure about Wal-Mart ? and that
person wanted to stick to FINANCE issues only. In that case I stuck
to decisions on which a CFO would take the lead. You can read it
?Optimal Financial Strategies,? (Omnivorous-GA, July 27, 2005)
However, your question seems to deal more with Working Capital and
The acquisition of Nextel was announced during 2004 but is NOT
reflected in the company?s balance sheet and income statement, as it
was only approved by the U.S. Department of Justice in early August,
2005. Nevertheless, it presents a challenge to the company and its
working capital because it calls for a cash payment to Nextel
shareholders of as much as $2.8 billion, according to the 2004 annual
?Sprint Corporation, Form 10-K for 2004?
Working capital is defined as current assets (CA) minus current
liabilities (CL) and here?s a summary of what?s on the Sprint balance
(All numbers in millions)
2004 CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . $4,556
Accounts receivable . . . . . . . . $3,107
Inventories . . . . . . . . . . . $ 651
Deferred tax asset . . . . . . . . . $1,049
Prepaid expenses . . . . . . . . . . $ 274
Other . . . . . . . . . . . . . . . .$ 336
TOTAL CA = $9,975
2004 CURRENT LIABILITIES
Current portion of LT debt . . . $1,288
Accounts payable . . . . . . . . $2,261
Accrued interconnect cost . . . .$ 410
Accrued taxes . . . . . . . . . .$ 404
Advance billings . . . . . . . . $ 644
Accrued restructure cost . . . . $ 168
Accrued interest . . . . . . . . $ 335
Other . . . . . . . . . . . . . .$ 964
TOTAL CL = $6,902
2004 NET WORKING CAPITAL = $3,073
2004 ANNUAL REVENUES = $27,428
2004 NET INCOME (LOSS) = ($1,028)
EVALUATING WORKING CAPITAL
Is $3 billion in working capital adequate for a $27 billion company?
The quick ratio (CA/CL) is 1.45 and analysts like to see numbers in
the 1.5 ? 2.0 range but industries can vary highly.
It?s always helpful to look at competition to see where they stand.
Wall Street analysts refer to the U.S. wireless business, the core of
what Sprint is targeting with the Nextel acquisition, as the ?Big 4,?
including Sprint Nextel, Cingular Wireless, Verizon Wireless, and
T-Mobile. Indeed, with the industry in a strong consolidation phase,
Deutsche Telecom has considered selling T-Mobile because its 18
million customers might not be competitive against the larger
Kansas City Star
?T-Mobile rumors revived,? (Lander and Belson, July 6, 2005)
Only Verizon and Sprint Nextel of the ?Big 4?are public (Cingular
combined with Bell South and became a private LLC). But here are
summary statistics for Verizon:
?Verizon Communications, Balance Sheet,? (June 30, 2005)
CA = $16,669
CL = $27,442
Sales = $73,220
Several things stand out in this comparison:
? Sprint Nextel has positive working capital vs. negative working
capital for a company that?s more than 2.5 times larger.
? Sprint Nextel?s cash position at $4.556 billion is much stronger
than Verizon?s $3.001 billion in cash and marketable securities
? Current portion of LT debt is 4.4% of sales. At Verizon it is 11.9% of sales.
? Receivables are almost 48 days for Verizon. They are 41.3 days for Sprint.
However, Verizon did better in net income, recording $8.17 billion in
income during 2004. But Sprint?s loss came largely because of a
write-down of $3.54 billion in long-distance assets, which is a
non-cash expense and wouldn?t effect either CA or CL ? unless we
counted the tax refund that comes with the loss.
Net: Sprint is doing well versus its public competitor in WC.
WHAT ARE THE FINANCE STRATEGIES?
Finance strategies in this consolidating communications industry are
combined tightly with operational goals, so it requires a detailed
reading of the Sprint annual report (and a close eye on everything
that management says). Luckily, Sprint provides a detailed annual
Some of the key activities that management is taking are:
1. Spinning off the local phone carrier portion of the business to
shareholders and recapitalize the company in the process. The local
phone business contributes $6.021 billion in revenues and $1.766
billion in earnings but its 7.7 million subscribers are scattered
across 18 states. The company has proposed it as a company with
long-term debt of $7.25 billion, according to Prudential Equity Group
? or roughly half of the $15.9 billion on the current balance sheet.
This prompted CIBC World Markets analysts to comment, ?After the Local
spin-out (Sprint Nextel) could potentially be debt-free in 2008.?
What could the company do better? Accelerate the spin-out of ?Local?
? expected in the next 9-12 months.
2. Hold down the cost of the Nextel acquisition. According to
Prudential Equity, each of the 270 million Nextel shares gets $0.8463
in the merger, holding the cash cost down to $228.5 million ? far less
than the $2.8 billion in cash originally discussed last December.
3. Continue to generate cash. By the end of Q2, 2005 cash and
equivalents rose to $6.8 billion from the $4.6 billion at year-end.
Some of that came from making its wireless towers more profitable by
concluding a leasing arrangement with Global Signal in February, 2005.
And part came from the sale of the company?s audio conferencing
business. The company has repeatedly sold portions of its businesses
that don't fit with long-term direction, including its telephone
directory business -- sold to R.H. Donnelly in 2002 for $2.23 billion
4. Use interest rate swaps to lower the cost-of-capital (see annual
report section on ?Interest Expense.?)
CONVERSION OF STOCK & LIQUIDITY
By recombining the FON and PCS stocks, the only real impact on Sprint
was an increase in the dividends being paid due to the increase in
common shares outstanding. The company went from 1.8 billion shares
of FON and 1.035 billion of PCS to 2.95 billion shares outstanding.
FON shares paid a dividend of $0.50 per share and PCS paid no
dividends, so the result was an increase in total dividend expense
from $457 million in 2003 to $670 million in 2004 (see ?Consolidated
Statements of Cash Flows.?
Where did the accounting credit come from with the translation of PCS
stock to FON stock? Because FON has a par value of $2 and PCS had a
par value of $1, the company took it from ?capital in excess of par
value.? That?s an equity account with no impact on Working Capital.
Google search strategy:
? supplemented a Google search with a service available at my local
library called Investext. Investext provides text of Wall Street
analysts reports on public companies.
? Use the SEC Edgar database
? Search Google Answers for FON information
One final note, with a bit of historical perspective. Sprint has
become a leading U.S. brand name, but has been a leading company under
several names, including United Telecommunications. It became Sprint
(FON) only in the mid-1980s:
?Was Sprint [ticker = FON] being traded on NYSE in 1980??
(Omnivorous-GA, Aug. 20, 2005)