XNAS:NIHD NII Holdings Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF               
THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2012
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF          
THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from          to          
 
 
 
Commission file number 0-32421
NII HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
91-1671412
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
1875 Explorer Street, Suite 1000
Reston, Virginia
 (Address of principal executive offices)
 
20190
 (Zip Code)
(703) 390-5100
(Registrant's 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes 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):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
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 Act).  Yes o     No þ
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Number of Shares Outstanding
Title of Class
on July 31, 2012
Common Stock, $0.001 par value per share
171,627,203




                                    

NII HOLDINGS, INC. AND SUBSIDIARES
INDEX
 
 
Page
 
 
 
 
 
 
 
 

2


                                    

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

NII HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
Unaudited
 
June 30, 2012
 
December 31, 2011
 
 
 
(Revised) (1)
ASSETS
Current assets
 

 
 

Cash and cash equivalents
$
1,829,251

 
$
2,322,919

Short-term investments
132,927

 
343,422

Accounts receivable, less allowance for doubtful accounts of $68,856 and $66,252
794,428

 
858,471

Handset and accessory inventory
270,924

 
277,291

Deferred income taxes, net
182,853

 
201,833

Prepaid expenses and other
406,316

 
331,408

Total current assets
3,616,699

 
4,335,344

Property, plant and equipment, net
3,630,570

 
3,481,869

Intangible assets, net
1,151,751

 
1,182,380

Deferred income taxes, net
432,468

 
410,162

Other assets
418,553

 
411,203

Total assets
$
9,250,041

 
$
9,820,958

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
 

 
 

Accounts payable
$
319,540

 
$
377,679

Accrued expenses and other
875,201

 
1,005,465

Deferred revenues
158,083

 
159,150

Current portion of long-term debt
210,889

 
573,465

Total current liabilities
1,563,713

 
2,115,759

Long-term debt
4,408,498

 
4,244,752

Deferred revenues
14,656

 
15,585

Deferred credits
52,040

 
61,156

Other long-term liabilities
257,301

 
243,335

Total liabilities
6,296,208

 
6,680,587

Commitments and contingencies (Note 4)
 
 
 
Stockholders’ equity
 

 
 

Undesignated preferred stock, par value $0.001, 10,000 shares authorized — 2012
  and 2011, no shares issued or outstanding — 2012 and 2011

 

Common stock, par value $0.001, 600,000 shares authorized — 2012 and 2011,
  171,627 shares issued and outstanding — 2012, 171,177 shares issued and
  outstanding — 2011
171

 
171

Paid-in capital
1,462,566

 
1,440,079

Retained earnings
2,134,249

 
2,224,171

Accumulated other comprehensive loss
(643,153
)
 
(524,050
)
Total stockholders’ equity
2,953,833

 
3,140,371

Total liabilities and stockholders’ equity
$
9,250,041

 
$
9,820,958

_______________________________________
(1) As described in Note 8 to these condensed consolidated financial statements, we have revised our prior period financial statements to correct certain immaterial errors.
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


                                    

NII HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Unaudited
 
Six Months Ended June 30,
 
Three Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
(Revised)
 
 
 
(Revised)
Operating revenues
 
 
 

 
 
 
 

Service and other revenues
$
2,964,842

 
$
3,216,686

 
$
1,421,121

 
$
1,670,493

Handset and accessory revenues
164,131

 
164,713

 
74,704

 
82,165

 
3,128,973

 
3,381,399

 
1,495,825

 
1,752,658

Operating expenses
 
 
 

 
 
 
 

Cost of service (exclusive of depreciation and
  amortization included below)
864,334

 
893,611

 
421,304

 
448,734

Cost of handsets and accessories
462,987

 
418,212

 
234,297

 
206,456

Selling, general and administrative
1,235,461

 
1,158,042

 
628,969

 
620,358

Depreciation
323,604

 
304,544

 
162,999

 
157,228

Amortization
19,027

 
19,416

 
9,296

 
10,293

 
2,905,413

 
2,793,825

 
1,456,865

 
1,443,069

Operating income
223,560

 
587,574

 
38,960

 
309,589

Other (expense) income
 
 
 

 
 
 
 

Interest expense, net
(169,942
)
 
(177,947
)
 
(81,329
)
 
(96,519
)
Interest income
12,232

 
15,811

 
6,042

 
9,600

Foreign currency transaction (losses) gains, net
(53,010
)
 
24,100

 
(38,697
)
 
15,606

Other expense, net
(14,483
)
 
(8,358
)
 
(5,473
)
 
(3,991
)
 
(225,203
)
 
(146,394
)
 
(119,457
)
 
(75,304
)
(Loss) income before income tax provision
(1,643
)
 
441,180

 
(80,497
)
 
234,285

Income tax provision
(88,279
)
 
(218,846
)
 
(23,014
)
 
(111,541
)
Net (loss) income
$
(89,922
)
 
$
222,334

 
$
(103,511
)
 
$
122,744

 
 
 
 
 
 
 
 
Net (loss) income, per common share, basic
$
(0.52
)
 
$
1.31

 
$
(0.60
)
 
$
0.72

Net (loss) income, per common share, diluted
$
(0.52
)
 
$
1.29

 
$
(0.60
)
 
$
0.71

 
 
 
 
 
 
 
 
Weighted average number of common shares
  outstanding, basic
171,355

 
170,038

 
171,529

 
170,381

Weighted average number of common shares
  outstanding, diluted
171,355

 
172,752

 
171,529

 
172,963

 
 
 
 
 
 
 
 
Comprehensive (loss) income, net of income taxes
 
 
 
 
 
 
 
  Foreign currency translation adjustment
$
(117,444
)
 
$
178,127

 
$
(298,115
)
 
$
103,377

  Other
(1,659
)
 
(465
)
 
(331
)
 
(977
)
  Other comprehensive (loss) income
(119,103
)
 
177,662

 
(298,446
)
 
102,400

  Net (loss) income
(89,922
)
 
222,334

 
(103,511
)
 
122,744

    Total comprehensive (loss) income
$
(209,025
)
 
$
399,996

 
$
(401,957
)
 
$
225,144



The accompanying notes are an integral part of these condensed consolidated financial statements.

4


                                    

NII HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2012
(in thousands)
Unaudited
 
Common Stock
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
Balance, January 1, 2012 - Revised
171,177

 
$
171

 
$
1,440,079

 
$
2,224,171

 
$
(524,050
)
 
$
3,140,371

Net loss

 

 

 
(89,922
)
 

 
(89,922
)
Other comprehensive loss, net of taxes

 

 

 

 
(119,103
)
 
(119,103
)
Purchase of convertible notes

 

 
(526
)
 

 

 
(526
)
Share-based payment expense for equity-based
  awards

 

 
27,316

 

 

 
27,316

Exercise of stock options
450

 

 
139

 

 

 
139

Other

 

 
(4,442
)
 

 

 
(4,442
)
Balance, June 30, 2012
171,627

 
$
171

 
$
1,462,566

 
$
2,134,249

 
$
(643,153
)
 
$
2,953,833









































The accompanying notes are an integral part of these condensed consolidated financial statements.

5


                                    

NII HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2012 and 2011
(in thousands)
Unaudited
 
2012
 
2011
 
 
 
(Revised)
Cash flows from operating activities:
 

 
 

Net (loss) income
$
(89,922
)
 
$
222,334

Adjustments to reconcile net (loss) income to net cash provided by
 operating activities:
 

 
 

Amortization of debt discount and financing costs
14,623

 
28,504

Depreciation and amortization
342,631

 
323,960

Provision for losses on accounts receivable
88,477

 
73,421

Foreign currency transaction losses (gains), net
53,010

 
(24,100
)
Deferred income tax benefit
(36,862
)
 
(7,972
)
Share-based payment expense
27,316

 
30,758

Other, net
31,380

 
15,824

Change in assets and liabilities:
 

 
 

Accounts receivable, gross
(58,475
)
 
(212,241
)
Handset and accessory inventory
5,515

 
30,491

Prepaid expenses and other
(132,897
)
 
37,573

Other long-term assets
(53,347
)
 
1,122

Accounts payable, accrued expenses and other
1,883

 
81,871

Net cash provided by operating activities
193,332

 
601,545

Cash flows from investing activities:
 

 
 

Capital expenditures
(542,271
)
 
(449,839
)
Purchase of long-term and short-term investments
(777,677
)
 
(1,237,593
)
Proceeds from sales of long-term and short-term investments
987,191

 
1,373,700

Transfers from restricted cash
23,062

 
89,360

Payments for acquisitions, purchases of licenses, capitalized interest and
  other
(52,835
)
 
(98,418
)
Net cash used in investing activities
(362,530
)
 
(322,790
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of senior notes

 
750,000

Borrowings under equipment financing facilities
186,179

 

Repayments of convertible notes
(212,782
)
 

Repayments under syndicated loan facilities and other borrowings
(183,520
)
 
(244,507
)
Repayments of import financing
(104,680
)
 
(63,523
)
Other, net
(10,363
)
 
46,752

Net cash (used in) provided by financing activities
(325,166
)
 
488,722

Effect of exchange rate changes on cash and cash equivalents
696

 
(1,225
)
Net (decrease) increase in cash and cash equivalents
(493,668
)
 
766,252

Cash and cash equivalents, beginning of period
2,322,919

 
1,767,501

Cash and cash equivalents, end of period
$
1,829,251

 
$
2,533,753



The accompanying notes are an integral part of these condensed consolidated financial statements.

6




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 annual report on Form 10-K for the year ended December 31, 2011 and our quarterly report on Form 10-Q for the three months ended March 31, 2012. See Note 8 for revisions to the condensed consolidated financial statements included in these previously filed documents. You should not expect results of operations for interim periods to be an indication of the results for a full year.
Accumulated Other Comprehensive Loss.    The components of our accumulated other comprehensive loss, net of taxes, are as follows:
 
 
June 30, 2012
 
December 31, 2011
 
(in thousands)
Cumulative foreign currency translation adjustment
$
(636,233
)
 
$
(518,790
)
Other
(6,920
)
 
(5,260
)
 
$
(643,153
)
 
$
(524,050
)
Supplemental Cash Flow Information.
 
Six Months Ended June 30,
 
2012
 
2011
 
 
 
(Revised)
 
(in thousands)
Capital expenditures
 

 
 

Cash paid for capital expenditures, including capitalized interest on
  property, plant and equipment
$
542,271

 
$
449,839

Change in capital expenditures accrued and unpaid or financed, including
  accreted interest capitalized
48,678

 
65,241

 
$
590,949

 
$
515,080

Interest costs
 

 
 

Interest expense, net
$
169,942

 
$
177,947

Interest capitalized
74,854

 
21,948

 
$
244,796

 
$
199,895

For the six months ended June 30, 2012, we had $131.2 million in non-cash financing, primarily related to borrowings under our equipment financing facilities in Mexico and Chile, the short-term financing of imported handsets and infrastructure in Brazil and co-location capital lease obligations on our communication towers in Brazil and Mexico. For the six months ended June 30, 2011, we had $931.3 million in non-cash financing, primarily related to the long-term financing of the spectrum that was awarded to Nextel Brazil in June 2011 and refinanced in December 2011, the short-term financing of imported handsets and infrastructure in Brazil and co-location capital lease obligations on our communication towers in Brazil and Mexico.
Revenue-Based Taxes.  We record revenue-based taxes and other excise taxes on a gross basis as a component of both service and other revenues and selling, general and administrative expenses in our consolidated financial statements. For the six and three months ended June 30, 2012, we recognized $110.5 million and $52.0 million, respectively, in revenue-based taxes and other excise taxes. For the six and three months ended June 30, 2011, we recognized $122.9 million and $64.3 million, respectively, in revenue-based taxes and other excise taxes.

7




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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, 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 six and three months ended June 30, 2012, our calculation of diluted net income per share is based on the weighted average number of common shares outstanding during the period and does not include other potential common shares, including shares issuable upon the potential exercise of stock options under our stock-based employee compensation plans, restricted common shares issued under those plans and common shares resulting from the potential conversion of our 3.125% convertible notes prior to their maturity, since their effect would be antidilutive to our net loss for those periods.
As presented for the six and three months ended June 30, 2011, our calculation of diluted net income per share includes common shares issuable upon the potential exercise of stock options under our stock-based employee compensation plans and restricted common shares issued under those plans. We did not include the common shares that could be issued upon conversion of our 3.125% convertible notes in our calculation of diluted net income per common share because their effect would have been antidilutive to our net income per common share for those periods. Further, for the six and three months ended June 30, 2011, we did not include 9.6 million common shares issuable upon exercise of stock options nor did we include an immaterial amount of our restricted common shares in our calculation of diluted net income per common share because their effect would also have been antidilutive to our net income per common share for those periods.
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 consolidated statements of operations for the three months ended June 30, 2012 and 2011:
 
Six Months Ended June 30, 2012
 
Six Months Ended June 30, 2011
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
 
 
 
 
 
(Revised)
 
 
 
(Revised)
 
(in thousands, except per share data)
Basic net (loss) income per
  common share:
 

 
 

 
 

 
 
 
 
 
 
Net (loss) income
$
(89,922
)
 
171,355

 
$
(0.52
)
 
$
222,334

 
170,038

 
$
1.31

Effect of dilutive securities:
 

 
 

 
 

 
 
 
 
 
 
Stock options

 

 
 

 

 
2,405

 
 
Restricted stock

 

 
 

 

 
308

 
 
Convertible notes, net of
  capitalized interest and taxes

 

 
 
 
1

 
1

 
 
Diluted net (loss) income per
  common share:
 

 
 

 
 

 
 
 
 
 
 
Net (loss) income on which
  diluted earnings per share is
  calculated
$
(89,922
)
 
171,355

 
$
(0.52
)
 
$
222,335

 
172,752

 
$
1.29



8




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended June 30, 2012
 
Three Months Ended June 30, 2011
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
 
 
 
 
 
(Revised)
 
 
 
(Revised)
 
(in thousands, except per share data)
Basic net (loss) income per
  common share:
 
 
 
 
 
 
 

 
 

 
 

Net (loss) income
$
(103,511
)
 
$
171,529

 
$
(0.60
)
 
$
122,744

 
170,381

 
$
0.72

Effect of dilutive securities:
 
 
 
 
 
 
 

 
 

 
 

Stock options

 

 
 
 

 
2,317

 
 

Restricted stock

 

 
 
 

 
264

 
 

Convertible notes, net of
  capitalized interest and taxes

 

 
 
 

 
1

 
 

Diluted net (loss) income per
  common share:
 
 
 
 
 
 
 

 
 

 
 

Net (loss) income on which
  diluted earnings per share is
  calculated
$
(103,511
)
 
$
171,529

 
$
(0.60
)
 
$
122,744

 
172,963

 
$
0.71

Share Repurchases. Our Board of Directors has given us general authorization to repurchase shares of common stock in order to satisfy employee withholding tax obligations related to stock-based compensation. During the six and three months ended June 30, 2012, we repurchased 130,935 and 129,903 shares, respectively, at an aggregate cost of approximately $2.6 million and $2.5 million, respectively, to satisfy employee withholding taxes related to stock-based compensation. We did not repurchase any shares to satisfy employee withholding taxes during the six or three months ended June 30, 2011.
New Accounting Pronouncements.  There were no new accounting standards issued during the six or three months ended June 30, 2012 that materially impacted our condensed consolidated financial statements.

Note 2.        Debt
 
June 30, 2012
 
December 31, 2011
 
(in thousands)
 
 
 
(Revised)
Senior notes, net
$
2,723,436

 
$
2,721,658

Spectrum financing
643,151

 
693,038

General financing
410,376

 
547,130

Capital leases and tower financing obligations
319,901

 
292,461

Equipment financing
417,671

 
179,779

Convertible notes, net

 
206,480

Import financing
102,915

 
173,954

Other
1,937

 
3,717

Total debt
4,619,387

 
4,818,217

Less: current portion
(210,889
)
 
(573,465
)
 
$
4,408,498

 
$
4,244,752


Equipment Financing.

In April 2012, Nextel Brazil entered into a U.S. dollar-denominated loan agreement with the China Development Bank, under which Nextel Brazil is able to borrow up to $500.0 million to finance infrastructure equipment and certain other costs related to the deployment of its WCDMA-based network. This financing has a floating interest rate based on LIBOR plus 2.90% and may limit our ability to pay dividends and other upstream payments. Loans under this agreement have a three-year borrowing period,

9




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

a seven-year repayment term beginning in 2015 and a final maturity of June 2022. In June 2012, Nextel Brazil borrowed $124.3 million under this loan agreement.
Convertible Notes.
3.125% Convertible Notes.  During the first quarter of 2012, we purchased $74.0 million face amount of our 3.125% convertible notes through a combination of open market purchases and private transactions for an aggregate purchase price of $74.4 million, plus accrued interest. In connection with these transactions, we incurred an immaterial amount of direct external costs, we recognized an immaterial loss on extinguishment of debt, and we allocated an immaterial amount of the purchase price to paid-in capital. We repaid the remaining $135.7 million principal balance of our 3.125% convertible notes when they matured on June 15, 2012.
Adoption of Authoritative Guidance on Convertible Debt Instruments.  As a result of adopting the Financial Accounting Standards Board's, or the FASB’s, authoritative guidance on convertible debt instruments, we are required to separately account for the debt and equity components of our 3.125% convertible notes in a manner that reflects our nonconvertible debt (unsecured debt) borrowing rate. The debt and equity components recognized for our 3.125% convertible notes were as follows (in thousands):
 
June 30, 2012
 
December 31, 2011
 
 
 
 
Principal amount of convertible notes
$

 
$
209,788

Unamortized discount on convertible notes

 
3,308

Net carrying amount of convertible notes

 
206,480

Carrying amount of equity component

 
174,891

The amount of interest expense recognized on our 3.125% convertible notes and effective interest rates for the six and three months ended June 30, 2012 and 2011 were as follows (dollars in thousands):
 
Six Months Ended June 30,
 
2012
 
2011
 
 
 
 
Contractual coupon interest
$
2,383

 
$
17,188

Amortization of discount on convertible notes
2,718

 
19,404

Interest expense, net
$
5,101

 
$
36,592

Effective interest rate on convertible notes
7.15
%
 
7.15
%

 
Three Months Ended June 30,
 
2012
 
2011
 
 
 
 
Contractual coupon interest
$
936

 
$
8,594

Amortization of discount on convertible notes
1,081

 
9,730

Interest expense, net
$
2,017

 
$
18,324

Effective interest rate on convertible notes
7.15
%
 
7.15
%

Note 3.        Fair Value Measurements
Available-for-Sale Securities.
Our available-for-sale securities include short-term investments made by Nextel Brazil in two investment funds and certificates of deposit with two Brazilian banks. These funds invest primarily in Brazilian government bonds, long-term bank certificates of deposit and Brazilian corporate debentures. We account for these securities at fair value in accordance with the FASB's authoritative guidance surrounding the accounting for investments in debt and equity securities. The fair value of the securities is based on the net asset value of the funds. In our judgment, these securities trade with sufficient daily observable market

10




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

activity to support a Level 1 classification within the fair value hierarchy.
The following tables set forth the classification within the fair value hierarchy of our financial instruments measured at fair value on a recurring basis in the accompanying condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011 (in thousands):
 
Fair Value Measurements as of
 
Total
 
June 30, 2012
 
Fair Value as of
 
Using the Fair Value Hierarchy
 
June 30,
Financial Instruments
Level 1
 
Level 2
 
Level 3
 
2012
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities — Nextel Brazil investments
$
132,927

 
$

 
$

 
$
132,927


 
Fair Value Measurements as of
 
Total
 
December 31, 2011
 
Fair Value as of
 
Using the Fair Value Hierarchy
 
December 31,
Financial Instruments
Level 1
 
Level 2
 
Level 3
 
2011
Short-term investment:
 

 
 

 
 

 
 

Available-for-sale securities — Nextel Brazil investments
$
117,620

 
$

 
$

 
$
117,620

Financial Instruments.
Held-to-Maturity Investments.
We periodically invest some of our cash holdings in certain securities that we intend to hold to maturity. These held-to-maturity securities include investments in U.S. treasury securities, as well as investments in securities issued by U.S. government agencies and backed by the U.S. government with maturities ranging from one to fourteen months. We account for held-to-maturity securities at amortized cost. We determined the fair value of our held-to-maturity investments in U.S. treasury securities based on quoted market prices for the individual instruments. In our judgment, these securities trade with sufficient daily observable market activity to support a Level 1 classification within the fair value hierarchy. We determined the fair value of our investments in corporate bonds based on reported trade data in a broker dealer market for the individual instruments. We consider these measurements to be Level 2 in the fair value hierarchy. All of our held-to-maturity investments matured during the second quarter of 2012. The gross unrecognized holding gains and losses as of December 31, 2011 relating to these investments were not material. The carrying amounts and estimated fair values of our held-to-maturity investments as of December 31, 2011 are as follows:
 
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
Short-term investments:
 
 
 
Held-to-maturity securities — U.S. Agencies
$
74,803

 
$
75,075

Held-to-maturity securities — U.S. Treasuries
150,999

 
151,678

 
$
225,802

 
$
226,753


11




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Long-Term Debt Instruments.
The carrying amounts and estimated fair values of our long-term debt instruments are as follows:
 
June 30, 2012
 
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(in thousands)
Senior notes
$
2,723,436

 
$
2,537,885

 
$
2,721,658

 
$
2,880,375

Spectrum financing
643,151

 
634,217

 
693,038

 
768,735

General financing
410,376

 
396,178

 
547,130

 
502,438

Convertible notes

 

 
206,480

 
210,837

Equipment financing
417,671

 
354,194

 
179,779

 
169,075

 
$
4,194,634

 
$
3,922,474

 
$
4,348,085

 
$
4,531,460

We estimated the fair values of our convertible notes, which matured during the second quarter of 2012, and our senior notes using quoted market prices in a broker dealer market, which may be adjusted for certain factors such as historical trading levels and market data for our notes, credit default spreads, stock volatility assumptions with respect to our convertible notes and other corroborating market or internally generated data. Because our fair value measurement includes market data, corroborating market data and some internally generated information, we consider this Level 2 in the fair value hierarchy.
We estimated the fair values of our equipment and spectrum financings using primarily Level 3 inputs such as U.S. Treasury yield curves, prices of comparable bonds, LIBOR and zero-coupon yield curves, U.S. treasury bond rates and credit spreads on comparable publicly traded bonds.
General financing consists primarily of loans with certain banks and other lenders in Brazil and Mexico, and as of December 31, 2011, a syndicated loan facility in Peru that we repaid during the first quarter of 2012. We estimated the fair value of these loans utilizing primarily Level 3 inputs such as U.S. treasury security yield curves, prices of comparable bonds, LIBOR and zero-coupon yield curves, Treasury bond rates and credit spreads on comparable publicly traded bonds. We believe that the fair value of our short-term bank loans approximate their carrying value primarily because of the short maturities of the agreements prior to realization and consider these measurements to be Level 3 in the fair value hierarchy.
Other Financial Instruments.
We estimate the fair value of our financial instruments other than our available-for-sale securities, including cash and cash equivalents, held-to-maturity investments, accounts receivable, accounts payable, derivative instruments and debt. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings contained in the consolidated balance sheets approximate their fair values due to the short-term nature of these instruments. The fair values of our derivative and other non-current instruments are immaterial.

Note 4.        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 Brazil’s petitions have been denied, and Nextel Brazil is currently appealing those decisions. Nextel Brazil is also disputing various other claims. Nextel Brazil did not reverse any material accrued liabilities related to contingencies during the six or three months ended June 30, 2012.
As of June 30, 2012 and December 31, 2011, Nextel Brazil had accrued liabilities of $58.1 million and $59.1 million, respectively, related to contingencies, all of which were classified in accrued contingencies reported as a component of other long-term liabilities, and $19.4 million and $27.4 million of which related to unasserted claims, respectively. 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 $249.1 million and $253.1 million as of June 30, 2012. 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

12




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

our accrued liabilities may be necessary and will be recorded in the period when such amounts are determined to be probable and reasonably estimable.
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.

Note 5.        Income Taxes
 
Six Months Ended June 30,
 
Three Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
(Revised)
 
 
 
(Revised)
 
(in thousands)
(Loss) income before income
   tax provision
$
(1,643
)
 
$
441,180

 
$
(80,497
)
 
$
234,285

 
 
 
 
 
 
 
 
Current income tax provision
$
(125,141
)
 
$
(226,818
)
 
$
(46,405
)
 
$
(112,272
)
Deferred income tax benefit
36,862

 
7,972

 
23,391

 
731

Total income tax provision
$
(88,279
)
 
$
(218,846
)
 
$
(23,014
)
 
$
(111,541
)

The decreases in the consolidated income tax provision for the six and three months ended June 30, 2012 compared to the same periods in 2011 are primarily due to decreases of $442.8 million and $314.8 million, respectively, in consolidated income before income tax provision. However, increases in the loss before income tax provision recognized in the U.S. and Chile during 2012 required full valuation allowances, which prevented an income tax benefit from being recognized on these losses. Recognizing no income tax benefit for the U.S. and Chilean losses resulted in consolidated income tax expense for the six and three months ended June 30, 2012, despite recognizing a consolidated loss before income tax provision for these periods.
 
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. - 1999; Mexico - 2003; Argentina - 2005; Peru and Brazil - 2006; and Luxembourg, Netherlands and Spain - 2009. 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 the FASB’s authoritative guidance on accounting for uncertainty in income taxes, for the six months ended June 30, 2012 (in thousands):
Unrecognized tax benefits - December 31, 2011
$
35,572

Additions for current year tax positions
1,820

Additions for prior year tax positions

Reductions for current year tax positions

Reductions for prior year tax positions

Lapse of statute of limitations

Settlements with taxing authorities

Foreign currency translation adjustment
(266
)
Unrecognized tax benefits - June 30, 2012
$
37,126


The unrecognized tax benefits that could potentially reduce our future effective tax rate, if recognized, were $5.5 million and $5.7 million as of June 30, 2012 and December 31, 2011, respectively.
We record interest and penalties associated with uncertain tax positions as a component of our income tax provision.

13




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We assessed the realizability of our deferred tax assets during the second quarter of 2012, consistent with the methodology we employed for the same period in 2011. 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 a result of this assessment, in 2011, we recorded a full valuation allowance on our U.S. companies' deferred tax assets and have maintained the same position for 2012. For our other companies, we determined that the realizability of their deferred assets had not changed. We will continue to evaluate the amount of the valuation allowance for all of our foreign and U.S. companies throughout the remainder of 2012 to determine the appropriate level of valuation allowance.

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. In March 2011, we were officially notified that the courts denied our petition based on the economic substance of our interpretation. Therefore, during the first quarter of 2011, we reversed the income tax receivable previously recorded on the financial statements and recorded a $14.5 million increase in income tax expense with respect to this item.


Note 6.        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) Brazil, (2) Mexico, (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, amortization and impairment, restructuring and other charges, which we refer to as segment earnings.

14




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Brazil
 
Mexico
 
Argentina
 
Peru
 
Corporate and
other
 
Intercompany
Eliminations
 
Consolidated
 
(in thousands)
Six Months Ended June 30, 2012
 

 
 

 
 

 
 

 
 

 
 

 
 

Operating revenues
$
1,536,821

 
$
1,065,565

 
$
333,648

 
$
175,189

 
$
20,783

 
$
(3,033
)
 
$
3,128,973

Segment earnings (losses)
$
421,223

 
$
297,071

 
$
81,924

 
$
4,017

 
$
(242,424
)
 
$
4,380

 
$
566,191

Less:
 

 
 

 
 

 
 

 
 

 
 

 
 

Depreciation and amortization
 

 
 

 
 

 
 

 
 

 
 

 
(342,631
)
Foreign currency transaction losses, net
 

 
 

 
 

 
 

 
 

 
 

 
(53,010
)
Interest expense and other, net
 

 
 

 
 

 
 

 
 

 
 

 
(172,193
)
Loss before income tax provision
 

 
 

 
 

 
 

 
 

 
 

 
$
(1,643
)
Capital expenditures
$
225,042

 
$
199,626

 
$
24,425

 
$
20,008

 
$
121,848

 
$

 
$
590,949

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2011
  (Revised)
 

 
 

 
 

 
 

 
 

 
 

 
 

Operating revenues
$
1,728,169

 
$
1,155,314

 
$
311,564

 
$
173,827

 
$
14,872

 
$
(2,347
)
 
$
3,381,399

Segment earnings (losses)
$
589,098

 
$
403,610

 
$
86,274

 
$
15,053

 
$
(186,934
)
 
$
4,433

 
$
911,534

Less:
 

 
 

 
 

 
 

 
 

 
 

 
 

Depreciation and amortization
 

 
 

 
 

 
 

 
 

 
 

 
(323,960
)
Foreign currency transaction gains, net
 

 
 

 
 

 
 

 
 

 
 

 
24,100

Interest expense and other, net
 

 
 

 
 

 
 

 
 

 
 

 
(170,494
)
Income before income tax provision
 

 
 

 
 

 
 

 
 

 
 

 
$
441,180

Capital expenditures
$
211,374

 
$
130,570

 
$
29,347

 
$
46,466

 
$
97,323

 
$

 
$
515,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$
712,521

 
$
521,103

 
$
165,131

 
$
86,401

 
$
12,609

 
$
(1,940
)
 
$
1,495,825

Segment earnings (losses)
$
183,228

 
$
128,361

 
$
35,175

 
$
(4,359
)
 
$
(133,871
)
 
$
2,721

 
$
211,255

Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 

 
 

 
 

 
 

 
 

 
 

 
(172,295
)
Foreign currency transaction losses, net
 

 
 

 
 

 
 

 
 

 
 

 
(38,697
)
Interest expense and other, net
 

 
 

 
 

 
 

 
 

 
 

 
(80,760
)
Loss before income tax provision
 

 
 

 
 

 
 

 
 

 
 

 
$
(80,497
)
Capital expenditures
$
146,067

 
$
106,080

 
$
13,425

 
$
10,550

 
$
89,542

 
$

 
$
365,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2011
  (Revised)
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$
908,928

 
$
588,308

 
$
160,850

 
$
88,170

 
$
7,466

 
$
(1,064
)
 
$
1,752,658

Segment earnings (losses)
$
300,610

 
$
223,262

 
$
42,323

 
$
7,875

 
$
(100,272
)
 
$
3,312

 
$
477,110

Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
 
 
(167,521
)
Foreign currency transaction gains, net
 
 
 
 
 
 
 
 
 
 
 
 
15,606

Interest expense and other, net
 
 
 
 
 
 
 
 
 
 
 
 
(90,910
)
Income before income tax provision
 
 
 
 
 
 
 
 
 
 
 
 
$
234,285

Capital expenditures
$
115,564

 
$
93,188

 
$
17,176

 
$
23,524

 
$
51,467

 
$

 
$
300,919

 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 

 
 

 
 

 
 

 
 

 
 

 
 

Identifiable assets
$
3,912,715

 
$
2,250,194

 
$
444,962

 
$
581,720

 
$
2,060,737

 
$
(287
)
 
$
9,250,041

December 31, 2011 (Revised)
 

 
 

 
 

 
 

 
 

 
 

 
 

Identifiable assets
$
4,070,433

 
$
2,346,307

 
$
427,428

 
$
597,891

 
$
2,379,186

 
$
(287
)
 
$
9,820,958




15




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7.    Condensed Consolidating Financial Statements
In 2011, we issued $1.45 billion in aggregate principal amount of our 7.625% senior notes due in 2021. In addition, during 2009, we issued senior notes totaling $1.3 billion in aggregate principal amount comprised of our 10.0% senior notes due 2016 and our 8.875% senior notes due 2019. We refer to the senior notes issued in 2011 and 2009 collectively as the "senior notes." All of these senior notes are senior unsecured obligations of NII Capital Corp., our wholly-owned domestic subsidiary, and are guaranteed on a senior unsecured basis by NII Holdings and all of its current and future first tier and domestic restricted subsidiaries, other than NII Capital Corp. No foreign subsidiaries will guarantee the senior notes unless they are first tier subsidiaries of NII Holdings. These guarantees are full and unconditional, as well as joint and several.
In connection with the issuance of the senior notes and the guarantees thereof, we are required to provide certain condensed consolidating financial information. Included in the tables below are condensed consolidating balance sheets as of June 30, 2012 and December 31, 2011, as well as condensed consolidating statements of operations for the six and three months ended June 30, 2012 and 2011 and condensed consolidating statements of cash flows for the six months ended June 30, 2012 and 2011, of: (a) the parent company, NII Holdings, Inc.; (b) the subsidiary issuer, NII Capital Corp.; (c) the guarantor subsidiaries on a combined basis; (d) the non-guarantor subsidiaries on a combined basis; (e) consolidating adjustments; and (f) NII Holdings, Inc. and subsidiaries on a consolidated basis.

16




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2012

 
NII Holdings,
Inc. (Parent)
 
NII Capital
Corp. (Issuer)(1)
 
Guarantor
Subsidiaries(2)
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
 
(in thousands)
ASSETS
Current assets
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
938,926

 
$

 
$
2,484

 
$
887,841

 
$

 
$
1,829,251

Short-term investments

 

 

 
132,927

 

 
132,927

Accounts receivable, net
5,938

 
54,740

 
74,722

 
798,285

 
(139,257
)
 
794,428

Handset and accessory inventory

 

 

 
270,924

 

 
270,924

Deferred income taxes, net

 

 
6,902

 
185,618

 
(9,667
)
 
182,853

Prepaid expenses and other
803

 

 
11,225

 
394,288

 

 
406,316

Total current assets
945,667

 
54,740

 
95,333

 
2,669,883

 
(148,924
)
 
3,616,699

Property, plant and
  equipment, net

 

 
231,126

 
3,399,731

 
(287
)
 
3,630,570

Investments in and advances
  to affiliates
3,179,695

 
2,801,597

 
2,890,199

 

 
(8,871,491
)
 

Intangible assets, net
18,000

 

 

 
1,133,751

 

 
1,151,751

Deferred income taxes, net
20,264

 

 

 
432,468

 
(20,264
)
 
432,468

Other assets
2,376,889

 
3,799,919

 
725,451

 
500,793

 
(6,984,499
)
 
418,553

Total assets
$
6,540,515

 
$
6,656,256

 
$
3,942,109

 
$
8,136,626

 
$
(16,025,465
)
 
$
9,250,041

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
$

 
$

 
$
6,907

 
$
312,633

 
$

 
$
319,540

Accrued expenses and other
601,097

 
181,849

 
1,602,713

 
1,245,000

 
(2,755,458
)
 
875,201

Deferred revenues

 

 

 
158,083

 

 
158,083

Current portion of long-term debt

 

 
12,588

 
198,301

 

 
210,889

Total current liabilities
601,097

 
181,849

 
1,622,208

 
1,914,017

 
(2,755,458
)
 
1,563,713

Long-term debt
23

 
2,723,436

 
47,803

 
1,637,236

 

 
4,408,498

Deferred revenues

 

 

 
14,656

 

 
14,656

Deferred credits

 

 
22,252

 
50,052

 
(20,264
)
 
52,040

Other long-term liabilities
2,985,562

 

 
15,833

 
1,630,466

 
(4,374,560
)
 
257,301

Total liabilities
3,586,682

 
2,905,285

 
1,708,096

 
5,246,427

 
(7,150,282
)
 
6,296,208

Total stockholders’ equity
2,953,833

 
3,750,971

 
2,234,013

 
2,890,199

 
(8,875,183
)
 
2,953,833

Total liabilities and
  stockholders’ equity
$
6,540,515

 
$
6,656,256

 
$
3,942,109

 
$
8,136,626

 
$
(16,025,465
)
 
$
9,250,041

_______________________________________
(1)
NII Capital Corp. is the issuer of our 7.625% senior notes due 2021, our 10.0% senior notes due 2016 and our 8.875% senior notes due 2019.
(2)
Represents our subsidiaries that have provided guarantees of the obligations of NII Capital Corp. under our 7.625% senior notes due 2021, our 10.0% senior notes due 2016 and our 8.875% senior notes due 2019.

17




NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET - REVISED
As of December 31, 2011

 
NII Holdings,
Inc. (Parent)
 
NII Capital
Corp. (Issuer)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
 
(in thousands)
ASSETS
Current assets
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
1,042,358

 
$
956

 
$
8,416

 
$
1,271,189

 
$

 
$
2,322,919

Short-term investments
225,802

 

 

 
117,620

 

 
343,422

Accounts receivable, net
13,643

 
79,719

 
168,769

 
864,961

 
(268,621
)
 
858,471

Handset and accessory inventory

 

 

 
277,291

 

 
277,291

Deferred income taxes, net

 

 
6,873

 
199,318

 
(4,358
)
 
201,833

Prepaid expenses and other
1,483

 

 
8,552

 
321,385

 
(12
)
 
331,408

Total current assets
1,283,286

 
80,675

 
192,610

 
3,051,764

 
(272,991
)
 
4,335,344

Property, plant and
  equipment, net

 

 
190,208

 
3,291,948

 
(287
)
 
3,481,869

Investments in and advances
  to affiliates
3,222,579

 
2,902,888

 
3,001,920

 

 
(9,127,387
)
 

Intangible assets, net
18,000

 

 

 
1,164,380

 

 
1,182,380

Deferred income taxes, net
45,740

 

 

 
410,162

 
(45,740
)
 
410,162

Other assets
2,348,372

 
3,799,519

 
606,845

 
470,516

 
(6,814,049
)
 
411,203

Total assets
$
6,917,977

 
$
6,783,082

 
$
3,991,583

 
$
8,388,770

 
$
(16,260,454
)
 
$
9,820,958

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
$

 
$

 
$
2,546

 
$
375,133

 
$

 
$
377,679

Accrued expenses and other
635,303

 
191,992

 
1,601,508

 
1,337,187

 
(2,760,525
)