Quarterly Report (10-q)

Date : 05/10/2019 @ 9:06PM
Source : Edgar (US Regulatory)
Stock : Nii Holdings, Inc. (NIHD)
Quote : 1.81  0.01 (0.56%) @ 11:01PM

Quarterly Report (10-q)

                                    


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 March 31, 2019
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 001-37488
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)
 
 
12110 Sunset Hills Road, Suite 600
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o

 
Accelerated filer  þ



 
Non-accelerated filer  o

 
Smaller reporting company  o
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o      

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 by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  þ      No  o

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
NIHD
Nasdaq Global Select Market

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 May 6, 2019
Common Stock, $0.001 par value per share
101,580,702




                                    

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
 
March 31, 2019
 
December 31, 2018
 
 
 
 
ASSETS
Current assets
 

 
 

Cash and cash equivalents
$
94,610

 
$
142,486

Short-term investments
25,271

 
32,329

Accounts receivable, net of allowance for doubtful accounts of $24,217 and $19,637
104,585

 
99,885

Handset and accessory inventory
1,461

 
1,949

Prepaid expenses and other
249,628

 
245,916

Total current assets
475,555

 
522,565

Property, plant and equipment, net
147,377

 
143,930

Intangible assets, net
158,894

 
162,156

Operating lease right-of-use assets
359,677

 

Other assets
240,765

 
231,179

Total assets
$
1,382,268

 
$
1,059,830

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
 

 
 

Accounts payable
$
34,506

 
$
39,147

Accrued expenses and other
288,289

 
298,990

Operating lease liabilities
48,159

 

Current portion of long-term debt
22,941

 
21,350

Total current liabilities
393,895

 
359,487

Long-term debt
622,764

 
632,857

Long-term operating lease liabilities
373,550

 

Other long-term liabilities
192,799

 
249,055

Total liabilities
1,583,008

 
1,241,399

Commitments and contingencies (Note 9)


 


Stockholders’ deficit
 

 
 

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

 

Common stock, par value $0.001, 140,000 shares authorized, 101,581 shares issued and outstanding — 2019, 101,323 shares issued and outstanding — 2018
102

 
101

Paid-in capital
2,143,479

 
2,143,240

Accumulated deficit
(2,245,937
)
 
(2,236,883
)
Accumulated other comprehensive loss
(7,615
)
 
(8,435
)
Total NII Holdings stockholders’ deficit
(109,971
)
 
(101,977
)
Noncontrolling interest
(90,769
)
 
(79,592
)
Total deficit
(200,740
)
 
(181,569
)
Total liabilities and stockholders’ deficit
$
1,382,268

 
$
1,059,830




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

3


                                    

NII HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
Unaudited
 
Three Months Ended
 
March 31,
 
2019
 
2018
Operating revenues
 
 
 
Service and other revenues
$
146,015

 
$
176,200

Handset and accessory revenues
800

 
5,041

 
146,815

 
181,241

Operating expenses
 

 
 

Cost of service (exclusive of depreciation and amortization included below)
61,377

 
84,507

Cost of handsets and accessories
5,081

 
9,065

Selling, general and administrative
65,329

 
90,886

Impairment, restructuring and other charges, net
5,791

 
2,351

Depreciation
5,043

 
4,134

Amortization
3,313

 
3,591

 
145,934

 
194,534

Operating income (loss)
881

 
(13,293
)
Other (expense) income
 

 
 

Interest expense, net
(29,322
)
 
(26,606
)
Interest income
3,769

 
5,386

Foreign currency transaction losses, net
(1,618
)
 
(1,188
)
Other income (expense), net
28,129

 
(6,330
)
 
958

 
(28,738
)
Income (loss) from continuing operations before income taxes
1,839

 
(42,031
)
Income taxes

 

Net income (loss) from continuing operations
1,839

 
(42,031
)
Loss from discontinued operations, net of income taxes
(2,697
)
 
(121
)
Net loss
(858
)
 
(42,152
)
Net loss attributable to noncontrolling interest
(5,763
)
 
(11,256
)
Net income (loss) attributable to NII Holdings
$
4,905

 
$
(30,896
)
 
 
 
 
Net income (loss) from continuing operations per common share, basic and diluted
$
0.02

 
$
(0.42
)
Net loss from discontinued operations per common share, basic and diluted
(0.03
)
 

Net loss per common share, basic and diluted
$
(0.01
)
 
$
(0.42
)
 
 
 
 
Weighted average number of common shares outstanding, basic
101,390

 
100,385

 
 
 
 
Weighted average number of common shares outstanding, diluted
103,235

 
100,385

 
 
 
 
Comprehensive income (loss), net of income taxes
 
 
 
  Foreign currency translation adjustment
$
820

 
$
1,549

  Other comprehensive income
820

 
1,549

  Net income (loss) attributable to NII Holdings
4,905

 
(30,896
)
    Total comprehensive income (loss)
$
5,725

 
$
(29,347
)




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

4


                                    

NII HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands)
Unaudited

 
Common Stock
 
Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total NII Holdings Stockholders’ Deficit
 
Noncontrolling Interest
 
Total Deficit
 
Shares
 
Amount
 
 
 
 
 
 
Balance, December 31, 2018
101,323

 
$
101

 
$
2,143,240

 
$
(2,236,883
)
 
$
(8,435
)
 
$
(101,977
)
 
$
(79,592
)
 
$
(181,569
)
Implementation of lease accounting standard

 

 

 
(13,959
)
 

 
(13,959
)
 
(5,946
)
 
(19,905
)
Net income (loss)

 

 

 
4,905

 

 
4,905

 
(5,763
)
 
(858
)
Other comprehensive income

 

 

 

 
820

 
820

 
443

 
1,263

Share-based compensation activity
258

 
1

 
239

 

 

 
240

 
89

 
329

Balance, March 31, 2019
101,581

 
$
102

 
$
2,143,479

 
$
(2,245,937
)
 
$
(7,615
)
 
$
(109,971
)
 
$
(90,769
)
 
$
(200,740
)


 
Common Stock
 
Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total NII Holdings Stockholders’ Deficit
 
Noncontrolling Interest
 
Total Deficit
 
Shares
 
Amount
 
 
 
 
 
 
Balance, December 31, 2017
100,384

 
$
100

 
$
2,139,299

 
$
(2,127,903
)
 
$
(47,239
)
 
$
(35,743
)
 
$
(75,445
)
 
$
(111,188
)
Implementation of revenue recognition accounting standard

 

 

 
34,100

 

 
34,100

 
14,603

 
48,703

Net loss

 

 

 
(30,896
)
 

 
(30,896
)
 
(11,256
)
 
(42,152
)
Other comprehensive income

 

 

 

 
1,549

 
1,549

 
676

 
2,225

Share-based compensation activity
1

 

 
586

 

 

 
586

 
109

 
695

Balance, March 31, 2018
100,385

 
$
100

 
$
2,139,885

 
$
(2,124,699
)
 
$
(45,690
)
 
$
(30,404
)
 
$
(71,313
)
 
$
(101,717
)



























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
(in thousands)
Unaudited
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(858
)
 
$
(42,152
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Loss from discontinued operations
2,697

 
121

Amortization of debt discounts and financing costs
2,258

 
109

Depreciation and amortization
8,356

 
7,725

Provision for losses on accounts receivable
14,122

 
12,917

Foreign currency transaction losses, net
1,618

 
1,188

Impairment charges and (gains) losses on disposals of fixed assets
(5,103
)
 
759

Share-based payment expense
492

 
611

Gain on derivative instrument
(31,467
)
 

Other, net
378

 
(919
)
Change in assets and liabilities:
 
 
 
Accounts receivable
(19,782
)
 
(16,023
)
Prepaid value-added taxes
(6,398
)
 
(4,153
)
Handset and accessory inventory
476

 
(1,917
)
Prepaid expenses and other
(1,111
)
 
(12,692
)
Other long-term assets
(7,695
)
 
(3,150
)
Accrued value-added taxes
(308
)
 
6,067

Other long-term liabilities
8,327

 
1,779

Accounts payable, accrued expenses, deferred revenues and other
(3,445
)
 
5,065

Net cash used in operating activities
(37,443
)
 
(44,665
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(15,017
)
 
(11,115
)
Purchases of investments
(124,189
)
 
(197,533
)
Proceeds from sales of investments
131,404

 
162,624

Change in deposits, net
425

 
41,309

Other, net
(621
)
 
(1,518
)
Total investing cash used in continuing operations
(7,998
)
 
(6,233
)
Total investing cash provided by discontinued operations

 
14

Net cash used in investing activities
(7,998
)
 
(6,219
)
Cash flows from financing activities:
 
 
 
Repayments under equipment financing facility and local bank loans
(484
)
 
(478
)
Repayments under finance leases and other
(1,479
)
 
(2,082
)
Payments of debt financing costs

 
(4,130
)
Other
(287
)
 

Net cash used in financing activities
(2,250
)
 
(6,690
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
47

 
716

Net decrease in cash, cash equivalents and restricted cash
(47,644
)
 
(56,858
)
Cash, cash equivalents and restricted cash, beginning of period
250,739

 
305,778

Cash, cash equivalents and restricted cash, end of period
$
203,095

 
$
248,920













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
Overview. Unless the context requires otherwise, "NII Holdings, Inc.," "NII Holdings," "NII," "we," "our," "us" and "the Company" refer to the combined businesses of NII Holdings, Inc. and its consolidated subsidiaries. Our unaudited condensed consolidated financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission, or the SEC. While these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States 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. We refer to our majority-owned Brazilian operating company, Nextel Telecomunicações Ltda., as Nextel Brazil.
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, 2018. You should not expect results of operations for interim periods to be an indication of the results for a full year. Our consolidated results from continuing operations in this quarterly report on Form 10-Q include the results of operations of Nextel Brazil and our corporate headquarters.
Proposed Sale of Nextel Brazil. On March 18, 2019, NII Holdings and NII International Holdings S.à r.l., or NIIH, a wholly-owned subsidiary of NII Holdings, entered into a purchase agreement with América Móvil, S.A.B. de C.V., or AMX, and AI Brazil Holdings B.V., or AI Brazil Holdings, pursuant to which NII Holdings and AI Brazil Holdings will sell their jointly-owned wireless operations in Brazil. Specifically, NIIH will sell all of the issued and outstanding shares of NII Brazil Holdings S.à r.l., or NIIBH, to AMX. We refer to this transaction as the Nextel Brazil transaction. Also pursuant to the purchase agreement, concurrent to, and as a condition of, the consummation of the Nextel Brazil transaction, AI Brazil Holdings will sell all of its interests in Nextel Holdings S.à r.l., or Nextel Holdings, to NIIBH. We refer to this transaction as the AI Brazil Holdings transaction. At the closing of the Nextel Brazil transaction and the AI Brazil Holdings transaction, AMX will indirectly own all of the issued and outstanding shares of Nextel Brazil.

Under the terms of the purchase agreement, AMX will acquire all of the issued and outstanding shares of NIIBH for an aggregate purchase price of $905.0 million , less net debt and subject to certain adjustments at closing, including reimbursement for capital expenditures up to a budgeted amount from March 1, 2019 to closing, a working capital adjustment (subject, in the case of an increase in net working capital, to a cap based on budgeted changes in working capital through the earlier of closing or December 31, 2019), and a deduction for the amount, if any, by which certain budgeted selling and marketing costs exceed actual spending on such costs from March 1, 2019 to closing. NII Holdings will receive its pro rata share of the net purchase price after deducting a preferred return due to AI Brazil Holdings and deducting certain transaction expenses and increases in accrued tax contingencies, if any. AMX will place $30.0 million of NII Holdings' portion of the net proceeds into an 18 -month escrow account to secure NII Holdings’ indemnification obligations under the purchase agreement.

In addition, in connection with the Nextel Brazil transaction, NII Holdings and AI Brazil Holdings have entered into an agreement relating to the Nextel Brazil transaction that includes the resolution of a dispute regarding the investment of funds into Nextel Holdings from an escrow related to NII Holdings' sale of its operations in Mexico, or the Mexico escrow. Under this agreement, the parties have agreed that AI Brazil Holdings will receive, after the closing of the Nextel Brazil transaction, the first $10.0 million recovered from the Mexico escrow followed by 6% of the value of additional funds recovered from the Mexico escrow, in both cases, if and when funds are released. NII Holdings has also agreed to indemnify AI Brazil Holdings for damages that may arise from certain tax contingencies, transaction expenses, transaction-related litigation and other matters in connection with its participation in the Nextel Brazil transaction.

The closing of the transactions contemplated by the purchase agreement are subject to the satisfaction of customary conditions, including approval of the stockholders of NII Holdings, receipt of required regulatory and antitrust approvals, and either an amendment eliminating certain successor obligations contemplated under, or an escrow agreement providing for a deposit in accordance with, NII’s indenture with respect to our 4.25% convertible senior notes due 2023.


7




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

The purchase agreement includes certain termination rights for each party and provides that, in specified circumstances, NII Holdings is required to pay a termination fee of $25.0 million . In the event that the purchase agreement is terminated because NII Holdings' stockholders fail to approve the Nextel Brazil transaction, NII Holdings is obligated to reimburse AMX for its documented out-of-pocket expenses incurred in connection with the purchase agreement and the transactions contemplated thereby, up to $2.0 million .

The purchase agreement contains customary representations, warranties and covenants made by NII, NIIH, AMX and AI Brazil Holdings. Among other things, NIIH has agreed to conduct NIIBH’s and each of its subsidiaries’ business in the ordinary course, use reasonable best efforts to operate its business in accordance with its budget for the year 2019 and the year 2020, if applicable, and use commercially reasonable efforts to maintain and preserve its business organization and preserve certain business relations.

In connection with the proposed sale of Nextel Brazil, NII Holdings' Board of Directors has approved a plan to dissolve and wind up its operations following the completion of this transaction. This dissolution is also subject to approval by NII Holdings' stockholders.
Minority Investment. On June 5, 2017, NII Holdings and AINMT Holdings AB, or ice group, an international telecommunications company operating primarily in Norway under the "ice.net" brand, along with certain affiliates of the Company and ice group, entered into an investment agreement and a shareholders agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings, a subsidiary of NII Holdings that indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. In connection with the initial investment, ice group received 50.0 million shares of cumulative preferred voting stock in Nextel Holdings, and we received 116.6 million shares of common stock in this entity. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement. In September 2018, ice group completed a sale of its 30% ownership interest in Nextel Holdings by selling the shares of its intermediary holding company, AI Brazil Holdings, to AI Media Holdings (NMT) LLC ( 90% ) and Bridford Music B.V. ( 10% ). During 2018, AI Brazil Holdings made an additional $15.9 million investment in Nextel Holdings to maintain its current ownership level. Since we continue to have a controlling interest in Nextel Brazil, we have consolidated this entity and its subsidiaries.

The investment agreement provided for, after ice group’s initial investment, the Company's contribution of proceeds arising from the release of funds deposited in escrow in connection with the sale of our Mexican operations through a 115 account, which is a contribution without the issuance of additional equity. See Note 6 for more information regarding escrowed funds. We do not believe that this requirement survives the termination of the investment agreement and intend for all future contributions by NII Holdings to Nextel Holdings to be made through capital contributions with additional equity being issued to us. ice group and AI Brazil Holdings notified the Company that they believe future escrow proceeds received by NII Holdings from the escrow account must be contributed to Nextel Holdings through the 115 account without the issuance of equity, which would result in 30% of the disputed escrow being subject to AI Brazil Holdings' non-controlling interest. Although our aforementioned agreement with AI Brazil Holdings resolves this dispute, to the extent the Nextel Brazil transaction is not completed and the related settlement between us and AI Brazil Holdings is not consummated, AI Brazil Holdings’ non-controlling interest in future escrow proceeds received by NII Holdings would remain in dispute.
Sources of Funding. As of March 31, 2019, our consolidated sources of funding included $119.9 million in cash and short-term investments and $106.1 million in cash held in escrow to secure our indemnification obligations in connection with the sale of Nextel Mexico. In addition, AI Brazil Holdings may fund up to 30% of the cash needs that arise at Nextel Holdings and its subsidiaries in order to maintain its current ownership in Nextel Holdings.
On April 1, 2019, Nextel Brazil was notified that it was awarded credits for its past PIS and COFINS tax overpayments, plus interest, totaling approximately 783 million Brazilian reais, or $200.9 million based on foreign currency exchange rates in effect at the time. Under the terms of the purchase agreement with AMX, Nextel Brazil may not use these PIS and COFINS tax credits, except for specific purposes at the request of AMX. Should the proposed sale of Nextel Brazil not be completed, these tax credits would become available for Nextel Brazil's use, pending authorization from the Brazilian tax authorities. See Note 9 for more information regarding these tax credits.

8




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

If the proposed sale of Nextel Brazil is not ultimately completed, and if we are able to recover a significant amount of the remaining cash held in the Mexico escrow in 2019, we believe our current sources of funding described above will provide us with sufficient liquidity to fund our current business plan for the next few years. However, our business plan is based on a number of assumptions, including assumptions regarding the recovery of the Mexico escrow, our ability to maintain subscriber turnover levels similar to those we experienced in 2018 and to date in 2019, and continued investments from AI Brazil Holdings. If the proposed sale of Nextel Brazil is not completed and if the ultimate amount recovered from our cash held in the Mexico escrow does not meet our current forecasted amount or we do not recover substantially all of our previously requested escrowed funds in 2019, we would likely need to alter our business plan or obtain additional funding. In addition, if our actual results of operations differ from our business plan or AI Brazil Holdings decides not to provide additional capital, our business may be negatively affected, which would require us to alter our business plan or obtain additional funding.
In connection with the completion of the proposed sale of Nextel Brazil, we will receive approximately 70% of the final net proceeds, subject to certain adjustments at closing, including reimbursement for capital expenditures and working capital investments made from March 1, 2019 to closing, after deducting a $2.0 million preferred share return due to AI Brazil Holdings and deducting certain transaction expenses and increases in accrued tax contingencies, if any. In addition, $30.0 million of our portion of the net proceeds will be placed into an 18-month escrow account to secure NII Holdings' indemnification obligations under the purchase agreement. We expect we will incur significant cash expenditures related to the completion of the sale and the dissolution of our remaining business subsequent to the transaction.
Revision of Prior Period Financial Statements. In connection with the preparation of our condensed consolidated financial statements for the three months ended September 30, 2018, we determined that certain errors existed in our previously filed financial statements. Specifically, for the three months ended March 31, 2018, service and other revenues were understated by $0.2 million , cost of service was overstated by $4.4 million , impairment, restructuring and other charges, net was understated by $4.2 million and depreciation was overstated by $0.7 million . In addition, other comprehensive income was understated by an immaterial amount. These errors were the result of improperly recording expenses for certain non-income based tax credits and restructuring charges for certain transmitter and receiver sites. We evaluated these errors in accordance with the SEC's authoritative guidance on materiality and the quantification of the effect of prior period misstatements on financial statements, and we determined that the impact of these errors on our prior period financial statements is immaterial. However, since the correction of these errors in the third quarter of 2018 could have been considered material to our results of operations for the three months ended September 30, 2018, we revised our prior period financial statements to correct these errors.
For the three months ended March 31, 2018, the correction of these errors resulted in a $1.2 million decrease in operating loss, loss from continuing operations and net loss, a $0.4 million decrease in net loss attributable to noncontrolling interest and a $0.8 million decrease in net loss attributable to NII Holdings. In addition, for the three months ended March 31, 2018, the correction of these errors resulted in a $0.01 decrease in both net loss from continuing operations per basic and diluted common share and net loss attributable to NII Holdings per basic and diluted common share.
Recently Adopted Accounting Standards. In February 2016, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, No. 2016-02, "Leases," which we refer to as ASC 842. ASC 842 replaced existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. We implemented ASC 842 on January 1, 2019 using the modified retrospective method. We did not retroactively adjust prior periods. In utilizing the modified retrospective method, we recognized the cumulative effect of applying the standard at the date of initial application. We will disclose our results under both the new and old standards for the first year after adoption. See Note 2 for more information regarding the adoption of ASC 842.
Recently Issued Accounting Pronouncements. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” which amends the scope and transition requirements of ASU 2016-13. The standard requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. This standard will become effective beginning January 1, 2020 and will require a modified retrospective approach, which will result in a cumulative effect adjustment to accumulated deficit as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements.
Reclassifications. We have reclassified some prior period amounts in our condensed consolidated financial statements to conform to our current presentation.

9




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

Note 2.
Leases

Overview. On January 1, 2019, we implemented ASC 842 using the modified retrospective method. We selected this adoption date as our date of initial application. As a result, we have not updated financial information related to, nor have we provided the disclosures required under ASC 842 for, periods prior to January 1, 2019. The primary changes to our policies relate to recognizing most leases on our condensed consolidated balance sheet as liabilities with corresponding right-of-use, or ROU, assets, as well as the derecognition of certain accrued liabilities related to lease exit costs.
We have entered into various agreements under which we lease ground or rooftop space on which to locate our transmitter and receiver sites, as well as space on transmitter and receiver sites owned by third parties. In addition, in the past, we have sold and subsequently leased back space on certain transmitter and receiver sites that we historically accounted for as financing arrangements as a result of our continuing involvement with these properties. We continue to account for these transactions as financing arrangements since the leasebacks are classified as finance leases. Most of our leases provide for annual increases in our rent payments based on changes in locally-based consumer price indices. Leases related to our transmitter and receiver sites are generally renewable for additional terms.
We determine if an arrangement is a lease at inception. We record operating leases as operating lease ROU assets and current and long-term operating lease liabilities on our condensed consolidated balance sheet. We record finance leases as a component of property, plant and equipment, net, current portion of long-term debt and long-term debt on our condensed consolidated balance sheet. We recognize ROU assets and liabilities related to operating leases based on the present value of the future lease payments over the term of the lease at the lease's inception date, except in situations where the right-of-use had already been abandoned at the date of initial application. In these cases, we do not record an ROU asset as the assets are already deemed to have been impaired in full. For those leases that do not provide an implicit rate, we use our incremental borrowing rate based on information available at the later of the date of initial application or lease commencement date when determining the present value of future payments. ROU assets related to operating leases include any lease payments made to date and initial direct costs incurred, if any, net of any lease incentives received. Our lease terms may include options to extend or not terminate the lease when it is reasonably certain that this option will be exercised. We recognize lease expense related to operating leases on a straight line basis over the term of the lease, except in situations where the ROU asset is impaired. In these cases, we recognize operating lease expense related to lease liability accretion utilizing the effective interest rate method.
Practical Expedients. The modified retrospective approach included a package of optional practical expedients that we elected to apply. Among other things, these expedients permitted us not to reassess prior conclusions regarding lease identification, lease classification and initial direct costs under ASC 842. We also elected the allowable practical expedient that permitted us to use hindsight while performing evaluations of our leases. ASC 842 also provided practical expedients for certain ongoing accounting situations. We elected the short-term lease recognition and measurement exemption, which allowed us not to recognize ROU assets or lease liabilities for all leases with a term of 12 months or less, including existing short-term leases of those assets in transition. We also elected the non-separation practical expedient that allowed us not to separate lease and non-lease components for substantially all of our leases.
For the three months ended March 31, 2019, the components of lease expense were as follows (in thousands):
Operating leases (included in cost of service, selling, general and administrative and impairment, restructuring and other charges, net)
$
27,208

 
 

Finance leases:
 
Amortization of ROU assets (included in depreciation)
291

Interest on lease liabilities (included in interest expense, net)
6,664

 
 
Total lease expense
$
34,163

During the first quarter of 2019, the new ROU assets we recognized for both finance and operating leases in exchange for lease obligations were immaterial. In addition, amortization related to ROU assets and changes in lease liabilities are included as components of the other long-term liabilities and accounts payable, accrued expenses, deferred revenues and other line items in our condensed consolidated statement of cash flows.

10




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

As of and for the three months ended March 31, 2019, supplemental cash flow and other information related to leases was as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
 

Operating cash flows used for operating leases
$
30,258

Operating cash flows used for finance leases
$
6,664

Financing cash flows used for finance leases
$
1,479

 
 
Weighted average remaining lease term:
 
Operating leases
9.7 years

Finance leases
6.6 years

 
 
Weighted average discount rate:
 
Operating leases
16.3
%
Finance leases
45.3
%

Components of Transition Adjustment. As of January 1, 2019, the cumulative impact of the implementation of ASC 842 included the recognition of lease liabilities and corresponding ROU assets for operating leases, as well as the derecognition of certain accrued liabilities related to lease exit costs and the remeasurement of finance leases due to the application of the hindsight practical expedient. These effects resulted in the following adoption impacts (in thousands):

 
December 31, 2018
 
Impact of ASC 842 Adoption
 
January 1, 2019
Current assets
$
522,565

 
$

 
$
522,565

Property, plant and equipment, net
143,930

 
2,402

 
146,332

Operating lease right-of-use assets

 
370,979

 
370,979

Other non-current assets
393,335

 

 
393,335

Total assets
$
1,059,830

 
$
373,381

 
$
1,433,211

 
 
 
 
 
 
Operating lease liabilities
$

 
$
48,004

 
$
48,004

Other current liabilities
338,137

 
(4,598
)
 
333,539

Current portion of long-term debt
21,350

 
1,378

 
22,728

Total current liabilities
359,487

 
44,784

 
404,271

 
 
 
 
 
 
Long-term debt
632,857

 
(3,255
)
 
629,602

Long-term operating lease liabilities

 
387,861

 
387,861

Other long-term liabilities
249,055

 
(36,104
)
 
212,951

Total liabilities
1,241,399

 
393,286

 
1,634,685

 
 
 
 
 
 
Total deficit
(181,569
)
 
(19,905
)
 
(201,474
)
Total liabilities and stockholders' deficit
$
1,059,830

 
$
373,381

 
$
1,433,211


Maturities. For the rolling 12-month periods subsequent to March 31, 2019, future payments for all finance and operating lease obligations that have initial or remaining noncancelable lease terms exceeding one year, net of rental income, are as follows (in thousands):

11




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

 
Finance
Leases
 
Operating
Leases
 
Total
Year 1
$
27,562

 
$
110,474

 
$
138,036

Year 2
27,965

 
104,447

 
132,412

Year 3
27,573

 
98,463

 
126,036

Year 4
26,554

 
88,415

 
114,969

Year 5
26,195

 
75,641

 
101,836

Thereafter
44,375

 
392,943

 
437,318

Total lease payments
180,224

 
870,383

 
1,050,607

Less: unrecognized interest
(119,695
)
 
(448,674
)
 
(568,369
)
Total
$
60,529

 
$
421,709

 
$
482,238


The amounts included in the table above are presented net of taxes of approximately 10% for all periods.

As previously calculated under ASC 840, "Leases," or ASC 840, and as disclosed in our annual report on Form 10-K for the year ended December 31, 2018, total future minimum payments for all capital and operating lease obligations as of December 31, 2018 were $1.7 billion . The amounts presented in the table above as calculated under ASC 842 do not include payments related to assumed renewal periods for certain leases, which represented a significant decrease from the amounts calculated under ASC 840.


Note 3.
Revenues and Contract Costs

A description of the principal activities from which Nextel Brazil generates its revenue is as follows:

Service and Other Revenues. Nextel Brazil's wireless service revenues primarily consist of access charges for providing customers with voice, data or messaging services over the contract period. The typical length of our service contracts is 12 months for individual customers and 24 months for corporate customers. We record all revenue net of taxes collected from customers, which are subsequently remitted to governmental authorities.

Handset and Accessory Revenues. We recognize handset and accessory revenue when a subscriber takes possession of a device. The transaction price of the handset sold, if any, is billed at the time of sale. Although more than 90% of our subscribers typically purchase services only and acquire a handset separately, the remainder of our subscriber base purchases a handset offered at a discounted price bundled with services.

Significant Judgments and Estimates. Nextel Brazil's subscribers generally enter into service contracts with a commitment period in exchange for discounts on handsets and/or service fees. The penalty applied upon early termination of a contract declines over time in proportion to the remaining commitment period. We concluded that the commitment period should be identical to the contract period since, at any point, the early termination penalty is significant relative to the remaining monthly service fees under the contract.

In cases where a contract includes both a handset and accessories, for which we recognize handset and accessory revenue at a point in time, and services, for which we recognize revenue ratably over time, judgment is required to determine the SSP for each distinct performance obligation in order to allocate consideration properly. We use a range of amounts to estimate SSP when we sell each of the products and services separately.

Remaining Performance Obligations. As of March 31, 2019, we have $320.4 million of remaining performance obligations under open service contracts. For these service contracts, we expect to recognize $313.2 million in operating revenues in the period from April 1, 2019 through March 31, 2020 and $7.2 million thereafter.


12




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

Contract Assets and Liabilities. Contract assets primarily relate to the remaining portion of future service billings allocated to handsets and recognized into revenue upon handset delivery at the inception of the contract. As of March 31, 2019 and December 31, 2018, Nextel Brazil had $1.5 million and $2.5 million in total contract assets, respectively, $1.2 million and $2.0 million of which we classified as a component of prepaid expenses and other in our condensed consolidated balance sheet. We transfer contract assets to receivables when Nextel Brazil's right to bill becomes unconditional.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
Contract liabilities primarily relate to upfront fees for wireless services for which the services have not yet been provided. As of March 31, 2019 and December 31, 2018, Nextel Brazil had $1.7 million and $2.0 million in total contract liabilities, respectively, substantially all of which we classified as a component of accrued expenses and other in our condensed consolidated balance sheet. The changes to both the contract asset and contract liability balances during the period, which include opening balances amortized into revenue, were not significant.

Cost to Obtain Contracts with Customers. We recognize an asset for the incremental costs of obtaining a contract with a customer. These costs include commissions and related costs for sales employees of Nextel Brazil, and commissions payable to our third party distribution channel partners. Under the previous accounting standard, we expensed commissions as incurred. As of March 31, 2019 and December 31, 2018, Nextel Brazil had $37.1 million and $37.5 million of deferred commissions, respectively, related to expenses required to obtain a contract. Of these total deferred commissions, as of March 31, 2019 and December 31, 2018, we recorded $21.2 million and $21.5 million , respectively, as a component of prepaid expenses and other and the remaining $15.9 million and $16.0 million , respectively, as a component of other assets in our condensed consolidated balance sheet. In addition, Nextel Brazil recorded $5.9 million and $4.1 million in total commissions expense, respectively, during the three months ended March 31, 2019 and 2018 as a component of selling, general and administrative expenses in our condensed consolidated statement of comprehensive loss.


Note 4.
Impairment, Restructuring and Other Charges, Net

Total impairment, restructuring and other charges, net for the first quarters of 2019 and 2018 were as follows (in thousands):

 
Three Months Ended March 31,
 
2019
 
2018
Brazil:
 
 
 
Transmitter and receiver site lease restructuring costs (1)
$
2,817

 
$
15,012

Reversal of previously accrued restructuring charges - site swaps (2)

 
(13,698
)
Severance

 
590

Other restructuring costs
2,313

 
(607
)
Asset impairments
661

 
733

 
5,791

 
2,030

Corporate:

 

Severance

 
321

 

 
321

Total impairment, restructuring and other charges, net
$
5,791

 
$
2,351

(1)
These amounts primarily represent future lease costs for certain transmitter and receiver sites that were no longer required in Nextel Brazil's business. These amounts also include accretion expense related to the associated liabilities.

(2)
In an effort to further reduce costs, in the first quarter of 2018, Nextel Brazil entered into arrangements with certain of its tower lessors for the right to exchange approximately 600 unused transmitter and receiver sites for other sites. During the first quarter of 2018, Nextel Brazil identified approximately 250 transmitter and receiver sites that it planned to exchange pursuant to these arrangements. As a result, in the first quarter of 2018, Nextel Brazil reversed $13.7 million of previously accrued restructuring charges related to these site exchanges.


13




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

As of March 31, 2019, total accrued restructuring charges were as follows (in thousands):

Balance, December 31, 2018
$
74,632

  Restructuring charges, net
1,504

  Cash payments and other
(4,851
)
  Implementation of lease accounting standard
(39,704
)
  Foreign currency translation adjustment
(73
)
Balance, March 31, 2019
$
31,508


Note 5.
Supplemental Financial Statement Information

Restricted Cash.

Our restricted cash relates to cash held in escrow in connection with the sale of Nextel Mexico and certain judicial deposits of cash in Brazil related to litigation involving tax and other matters. A reconciliation from cash and cash equivalents as presented in our condensed consolidated balance sheets to cash, cash equivalents and restricted cash as reported in our condensed consolidated statements of cash flows is as follows:

 
March 31,
 
December 31,
 
2019
 
2018
 
2018
 
2017
 
(in thousands)
 
 
Cash and cash equivalents
$
94,610

 
$
136,297

 
$
142,486

 
$
193,888

Cash in escrow (included in prepaid expenses and other)
106,102

 
110,038

 
106,089

 
110,024

Other (included in other assets)
2,383

 
2,585

 
2,164

 
1,866

Cash, cash equivalents and restricted cash
$
203,095

 
$
248,920

 
$
250,739

 
$
305,778



Prepaid Expenses and Other.

The components of our prepaid expenses and other current assets are as follows:
 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Cash in escrow
$
106,102

 
$
106,089

Judicial deposits
57,471

 
57,175

Value-added taxes
50,131

 
43,803

Deferred commissions
21,200

 
21,460

Other prepaid expenses
10,684

 
9,381

Other current assets
4,040

 
8,008

 
$
249,628

 
$
245,916



14




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

Property, Plant and Equipment, Net.
During the three months ended March 31, 2019 and 2018, we capitalized immaterial amounts of interest. The components of our property, plant and equipment, net are as follows:
 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Land
$
415

 
$
417

Building and leasehold improvements
652

 
650

Network equipment, communication towers and network software
119,593

 
108,876

Software, office equipment, furniture and fixtures and other
36,614

 
31,482

Less: Accumulated depreciation and amortization
(32,765
)
 
(26,858
)
 
124,509

 
114,567

Construction in progress
22,868

 
29,363

 
$
147,377

 
$
143,930



Intangible Assets, Net.
Our intangible assets include the following:
 
 
 
March 31, 2019
 
December 31, 2018
 
Average Useful Life (Years)
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
 
 
(in thousands) 
Amortizable intangible assets:
 
 
 

 
 

 
 

 
 

 
 

 
 

Licenses
26
 
$
170,535

 
$
(13,084
)
 
$
157,451

 
$
170,640

 
$
(11,387
)
 
$
159,253

Customer relationships
4
 
12,988

 
(11,545
)
 
1,443

 
13,062

 
(10,159
)
 
2,903

 
 
 
$
183,523

 
$
(24,629
)
 
$
158,894

 
$
183,702

 
$
(21,546
)
 
$
162,156

Based on the carrying amount of our intangible assets as of March 31, 2019 and current exchange rates, we estimate amortization expense for each of the next five years ending December 31 to be as follows (in thousands):
Y ears
Estimated Amortization Expense
2019
$
9,938

2020
6,909

2021
6,909

2022
6,909

2023
6,909

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.



15




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

Other Assets.   
The components of our other long-term assets are as follows:
 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Judicial deposits
$
121,575

 
$
116,220

Cash collateral related to contingencies
48,710

 
47,899

Other
70,480

 
67,060

 
$
240,765

 
$
231,179


Accrued Expenses and Other.
The components of our accrued expenses and other are as follows:
 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Contingencies
$
76,683

 
$
74,111

Network system and information technology
50,443

 
52,207

Non-income based taxes
37,325

 
37,817

Payroll related items and commissions
26,409

 
27,100

License fees
14,138

 
20,706

Other
83,291

 
87,049

 
$
288,289

 
$
298,990


Other Long-Term Liabilities.
The components of our other long-term liabilities are as follows:

 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Withholding taxes
$
81,929

 
$
78,440

Accrued lease terminations and other restructuring charges
32,436

 
67,125

Conversion option for convertible senior notes
2,110

 
33,577

Accrued interest on Brazil spectrum financing
38,378

 
30,864

Other
37,946

 
39,049

 
$
192,799

 
$
249,055

Accumulated Other Comprehensive Loss. As of March 31, 2019 and December 31, 2018 , the tax impact on our accumulated other comprehensive loss was not material. In addition, as of March 31, 2019 and December 31, 2018, all of our accumulated other comprehensive loss represented cumulative foreign currency translation adjustment.


16




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

Supplemental Cash Flow Information.
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Capital expenditures
 
 
 

Cash paid for capital expenditures, including capitalized interest on property, plant and equipment
$
15,017

 
$
11,115

Change in capital expenditures accrued and unpaid or financed, including interest capitalized
(8,166
)
 
(2,824
)
 
$
6,851

 
$
8,291

We did not have any significant non-cash investing or financing activities during the three months ended March 31, 2019 and 2018.
Diluted Net Income (Loss) From Continuing Operations Per Common Share.    As presented for the three months ended March 31, 2019 and 2018, our calculation of diluted net income (loss) from continuing operations per common share is based on the weighted average number of common shares outstanding during those periods and includes other potential common shares, including common shares resulting from the potential conversion of our convertible senior notes, common shares issuable upon the potential exercise of stock options under our stock-based employee compensation plans or restricted common shares issued under those plans when those shares are dilutive.
For the three months ended March 31, 2019, we did not include 18.5 million common shares related to the potential conversion of our convertible senior notes, 1.4 million stock options and 1.8 million restricted common shares in our calculation of diluted net income from continuing operations per common share because their effect would have been antidilutive. In addition, for the three months ended March 31, 2018, we did not include 3.3 million stock options and 0.1 million restricted common shares in our calculation of diluted net loss from continuing operations per common share because their effect would have been antidilutive.


Note 6.
Discontinued Operations

Sale of Nextel Mexico. On April 30, 2015, NII Holdings, together with our wholly-owned subsidiary NIU Holdings LLC, completed the sale of our Mexican operations to New Cingular Wireless, an indirect subsidiary of AT&T. The transaction was structured as a sale of all of the outstanding stock of the parent company of Comunicaciones Nextel de Mexico, S.A. de C.V., or Nextel Mexico, for a purchase price of $1.875 billion , including $187.5 million deposited in escrow to satisfy potential indemnification claims. In 2016, we paid $4.0 million , plus interest, out of escrow to settle an indemnification claim, and in July 2018, we utilized $4.0 million of cash held in escrow to settle tax audits for the years 2010 and 2011 discussed below. As of March 31, 2019, $73.5 million of the cash held in escrow has been released to us and $106.1 million , which includes interest, remains deposited in escrow related to certain potential tax indemnity claims made by New Cingular Wireless. While we are required to continue to indemnify New Cingular Wireless for any valid claims that arise in the future, New Cingular Wireless is not permitted to make any additional claims against the escrow account.

The potential tax indemnity claims submitted by New Cingular Wireless purport to relate to various ongoing tax audits by the Mexican tax authorities for Nextel Mexico and several of its entities for the years 2010 through 2014. Of the total potential tax claims, $12.2 million relates to actual assessments that Nextel Mexico has received. Although we appealed these assessments, in April 2019, our appeals were denied. We intend to initiate a judicial process to protect our interests against these assessments. The remaining amounts relate to unassessed matters. New Cingular Wireless' claims include $35.5 million related to the tax audit of Nextel Mexico’s income tax return for 2010 and $36.9 million related to the tax audit of Nextel Mexico's income tax return for 2011. The remaining $37.6 million of potential tax claims, including the $12.2 million in assessments, relates primarily to non-income tax-based audits for the years 2011 through 2014. As of March 31, 2019, we had accrued $7.7 million for probable losses associated with these audits.


17




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

During July 2018, the tax audits related to Nextel Mexico's main operating company's income tax returns for the years 2010 and 2011 were finalized, and we filed amended tax returns. We settled the tax liabilities associated with these tax audits utilizing existing tax credits, with the exception of $4.0 million that we paid utilizing cash held in escrow. As a result, of the $72.4 million in combined claims relating to the tax audits of the years 2010 and 2011, we have requested that New Cingular Wireless agree to the release of $68.3 million from escrow. New Cingular Wireless has disagreed with our interpretation of the escrow and purchase agreements related to the timing of release requirements for escrowed funds. On February 11, 2019, our subsidiary NIU Holdings initiated review of this matter by the United States Bankruptcy Court for the Southern District of New York, which we refer to as the Bankruptcy Court, that approved the transaction with New Cingular Wireless in connection with our emergence from Chapter 11 bankruptcy, and on March 25, 2019, we filed a claim against New Cingular Wireless to recoup the $68.3 million from escrow. This difference of interpretation has delayed and will continue to delay the release of the remaining amount of cash in escrow.

During March 2019, the tax audit related to Nextel Mexico's main operating company's income tax return for the year 2013 was finalized, and we filed an amended tax return. The tax audit for the year 2013 represented $1.1 million of the total claims outstanding. We are continuing to work with the Mexican tax authorities to settle the open non-income tax-based audits and accelerate the release of the remaining escrow.

On May 7, 2019, we received a letter from New Cingular Wireless formally notifying us of pending tax audits for pre-closing periods that were not included in the tax indemnity claims notices previously submitted by New Cingular Wireless against the Mexico escrow account. We were already aware of the tax audits referenced in the letter, had assumed their defense, and will continue to work with the Mexican tax authorities to resolve them as expeditiously as possible. While we are required to indemnify New Cingular Wireless for any actual cash payments made to resolve any tax claims that may be asserted by the Mexican tax authorities from these audits, New Cingular Wireless may not make a claim against the Mexico escrow account for any tax claims that may arise from these audits. In addition, New Cingular Wireless has indicated that it may continue to make additional claims for indemnification related to open audits in the future.

There can be no assurance as to the outcome of the foregoing tax audits or indemnity claims.


Note 7.
Debt

The components of our debt are as follows:
 
March 31, 2019
 
December 31, 2018
 
(in thousands)
Brazil equipment financing
$
238,335

 
$
238,380

Brazil bank loans
168,917

 
169,946

Brazil spectrum financing
104,058

 
104,344

Convertible senior notes
73,866

 
72,264

Brazil finance lease and tower financing obligations
60,529

 
69,273

Total debt
645,705

 
654,207

Less: current portion
(22,941
)
 
(21,350
)
 
$
622,764

 
$
632,857


18




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

Convertible Senior Notes. In August 2018, we privately placed $100.0 million aggregate principal amount of 4.25% convertible senior notes due 2023, which we refer to as the convertible senior notes. We also granted the initial purchaser an option to purchase up to an additional $15.0 million principal amount of convertible senior notes, which was exercised in full. As a result, we issued a total of $115.0 million principal amount of convertible senior notes at par for total gross proceeds of $115.0 million . The convertible senior notes bear interest at a rate of 4.25% per year on the principal amount of the notes, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2019. The convertible senior notes mature on August 15, 2023, unless earlier converted or repurchased, when the entire principal balance of $115.0 million will be due. In addition, and subject to specified exceptions, upon the occurrence of a fundamental change, the noteholders have the right to require us to repurchase the notes for cash at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date. The convertible senior notes are convertible into shares of our common stock at an initial conversion rate of 160.9658 shares per $1,000 principal amount of notes, or 18,511,067 aggregate common shares, representing an initial conversion price of $6.21 per share, subject to adjustment in certain situations. The convertible senior notes are convertible, subject to adjustment, prior to the close of business on the business day immediately preceding February 15, 2023 only under certain circumstances. On or after February 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, noteholders may convert their notes at any time, regardless of the aforementioned circumstances. For the fiscal quarter ended March 31, 2019, the closing sale price of our common stock did not exceed 130% of the conversion price of $6.21 per share for at least 20 trading days in the 30 consecutive trading days ending on March 31, 2019. As a result, the conversion contingency was not met as of March 31, 2019. We have the option to satisfy the conversion of the convertible senior notes in shares of our common stock, in cash or a combination of both.
The conversion feature embedded in the convertible senior notes meets the criteria of an embedded derivative in accordance with the FASB's authoritative guidance for derivatives. As a result, we separated the value of the conversion feature from the notes and recorded the derivative liability at its fair value on our condensed consolidated balance sheet. As of March 31, 2019 and December 31, 2018, we recorded the $2.1 million and $33.6 million fair values of the derivative liability, respectively, as a component of other long-term liabilities in our condensed consolidated balance sheet. See Note 8 for more information on this conversion feature.
Absent an amendment to the indenture to the convertible senior notes, at the closing of the proposed sale of Nextel Brazil, AMX will place a portion of the net proceeds payable to us in an escrow account in an amount equal to the outstanding principal and unpaid interest due through maturity. 

Note 8.
Fair Value Measurements
Financial Instruments.
Short-Term Investments.
As of March 31, 2019 and December 31, 2018 , short-term investments held by Nextel Brazil included $25.3 million and $32.3 million , respectively, in funds that invest primarily in Brazilian government bonds and long-term bank certificates of deposit. During the three months ended March 31, 2019 and 2018, we did not have any material unrealized gains or losses associated with these investments.
We account for our short-term investments at fair value. The fair value of Nextel Brazil's investment funds is measured based on the funds' net asset value as a practical expedient, which is excluded from the fair value hierarchy.

19




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

Debt Instruments.
The carrying amounts and estimated fair values of our debt instruments are as follows:
 
March 31, 2019
 
December 31, 2018
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(in thousands)
Brazil equipment financing
$
238,335

 
$
235,275

 
$
238,380

 
$
233,581

Brazil bank loans
$
168,917

 
$
126,308

 
$
169,946

 
$
119,218

Brazil spectrum financing
$
104,058

 
$
144,010

 
$
104,344

 
$
123,531

Convertible senior notes
$
73,866

 
$
110,877

 
$
72,264

 
$
80,704

We estimated the fair value of our convertible senior notes, as well as Nextel Brazil's bank loans, equipment financing and spectrum financing utilizing inputs such as U.S. Treasury security yield curves, prices of comparable bonds, LIBOR, U.S. Treasury bond rates and credit spreads on comparable publicly traded bonds. We consider these fair value measurements to be Level 3 in the fair value hierarchy.
Conversion Option for Convertible Senior Notes.
We estimate the fair value of the conversion option embedded in the convertible senior notes using a binomial lattice model with daily nodes from the valuation date to the maturity date of the convertible senior notes. This model considers stock price, risk-free rates, credit spreads, dividend yields and expected volatility. We record gains or losses related to changes in the fair value of the conversion option derivative liability during the period. During the three months ended March 31, 2019, we recorded a $31.5 million gain as a component of other income (expense), net in our condensed consolidated statement of comprehensive income (loss) related to the change in the fair value of the conversion option. We consider this fair value measurement to be Level 3 in the fair value hierarchy.
Other Financial Instruments.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable contained in our condensed consolidated balance sheets approximate their fair values due to the short-term nature of these instruments.


Note 9.
Commitments and Contingencies

PIS and COFINS Tax Credits.

Over the course of the last several years, we and many other Brazilian companies have filed lawsuits against the Brazilian government disputing whether state value-added taxes, referred to as ICMS, should be included in gross revenue for the purposes of calculating certain federal taxes levied on gross revenues, referred to as PIS and COFINS taxes. In March 2017, the Brazilian Supreme Court issued a decision on another company's case that established that ICMS should be excluded from the calculation of PIS and COFINS prospectively. Based on this ruling, Nextel Brazil immediately began excluding ICMS from its PIS and COFINS tax calculations. However, the Brazilian Supreme Court decision was not specific to Nextel Brazil's case, and therefore, Nextel Brazil was not yet entitled to credits for past overpayments.

On April 1, 2019, Nextel Brazil was notified by court order that it was awarded credits for its past PIS and COFINS tax overpayments, plus interest, totaling approximately 783 million Brazilian reais, or $200.9 million based on foreign currency exchange rates in effect at the time. As a result, in the first quarter of 2019, Nextel Brazil recognized an asset and corresponding benefit for PIS and COFINS credits of 59 million Brazilian reais, net of a success fee, or $11.2 million based on foreign currency exchange rates in effect at the time, which represented the portion of PIS and COFINS taxes that were paid subsequent to our emergence from Chapter 11 bankruptcy, which was when we applied fresh start accounting. Nextel Brazil will recognize the remaining balance of these credits as a benefit when the credits are utilized. Nextel Brazil has five years to utilize these credits. We currently expect that Nextel Brazil will generate sufficient tax liabilities in the ordinary course of business to fully utilize these tax credits prior to their expiration. However, under the terms of the purchase agreement with AMX, Nextel Brazil may not use these PIS and COFINS tax credits prior to closing the transaction, except for specific purposes at the request of AMX. In addition,

20




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

prior to utilizing these credits, Nextel Brazil is required to obtain authorization from the Brazilian tax authorities, which has not yet been completed.

Brazil Roaming and RAN Sharing Commitments.

In May 2016, Nextel Brazil entered into an amendment to a nationwide roaming voice and data services agreement with Telefonica Brazil, S.A., or Telefonica, to reduce the usage rates for its roaming traffic. Concurrently, Nextel Brazil entered into a 10 -year radio access network, or RAN, sharing agreement with Telefonica, under which Telefonica will permit Nextel Brazil to use some of its tower and equipment infrastructure to transmit telecommunications signals on Nextel Brazil's spectrum. These agreements require Nextel Brazil to meet certain commitments over a five -year period totaling 800 million Brazilian reais, or approximately $246.2 million based on foreign currency exchange rates at the time, which replaced the remaining commitments under the original roaming agreement. As of March 31, 2019, Nextel Brazil had 180 million Brazilian reais, or $46.1 million based on current foreign currency exchange rates, in remaining commitments related to its roaming agreement and 223 million Brazilian reais, or $57.2 million based on current foreign currency exchange rates, in remaining commitments related to its RAN sharing agreement.

Contingencies.

Nextel Brazil has received various assessment notices from municipal, state and federal Brazilian authorities asserting deficiencies in payments related primarily to value-added taxes 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. In connection with these petitions, Nextel Brazil is regularly required to make a judicial guarantee through a deposit of cash to cover the amount in dispute in order to file and/or appeal claims. As of March 31, 2019 and December 31, 2018, Nextel Brazil also had contingencies related to certain consumer, contract and labor-related matters, some of which are secured by judicial guarantees. Even in cases where there is no probable loss, Nextel Brazil may in the future be subject to litigation involving tax and other matters requiring material judicial deposits of cash that will not be released until the pending matter is resolved.
As of both March 31, 2019 and December 31, 2018 , Nextel Brazil had accrued liabilities of $76.3 million related to contingencies, of which $6.6 million and $6.7 million related to unasserted claims, respectively. We currently estimate the reasonably possible losses related to matters for which Nextel Brazil has not accrued liabilities, as they are not deemed probable, to be approximately $900.0 million as of March 31, 2019 . We continue 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 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 10.
Income Taxes

The realization of deferred tax assets is dependent on the generation of future taxable income sufficient to realize our tax loss carryforwards and other tax deductions. Valuation allowances are required to be recognized on deferred tax assets unless it is determined that it is “more-likely-than-not” that the asset will be realized. In 2017 and 2018, w e maintained full valuation allowances on the deferred tax assets of our foreign operating companies, our U.S. parent company and subsidiaries and our foreign holding companies due to substantial negative evidence such as the recent history of cumulative losses and the projected losses for the remainder of 2019 and subsequent years. We maintained this same valuation allowance position through the first quarter of 2019 .



21




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

Note 11.
Segment Reporting
We have determined our reportable segment based on our method of internal reporting, which disaggregates our business by geographic location. We evaluate performance and provide resources to it based on operating income before depreciation, amortization and impairment, restructuring and other charges, net, which we refer to as segment earnings. Nextel Brazil is our only reportable operating segment.

 
Nextel Brazil
 
Corporate
 
Consolidated
 
(in thousands)
Three Months Ended March 31, 2019
 

 
 

 
 

Operating revenues
$
146,815

 
$

 
$
146,815

Segment earnings (losses)
$
23,109

 
$
(8,081
)
 
$
15,028

Less:
 

 
 

 
 

Impairment, restructuring and other charges, net
 
 
 
 
(5,791
)
Depreciation and amortization
 

 
 

 
(8,356
)
Foreign currency transaction losses, net
 

 
 

 
(1,618
)
Interest expense and other, net
 

 
 

 
2,576

Income from continuing operations before income tax benefit
 

 
 

 
$
1,839

Capital expenditures
$
6,851

 
$

 
$
6,851

 
 
 
 
 
 
Three Months Ended March 31, 2018
 

 
 

 
 

Operating revenues
$
181,220

 
$
21

 
$
181,241

Segment earnings (losses)
$
1,045

 
$
(4,262
)
 
$
(3,217
)
Less:
 

 
 

 
 

Impairment, restructuring and other charges, net
 
 
 
 
(2,351
)
Depreciation and amortization
 

 
 

 
(7,725
)
Foreign currency transaction losses, net
 

 
 

 
(1,188
)
Interest expense and other, net
 

 
 

 
(27,550
)
Loss from continuing operations before income tax benefit
 

 
 

 
$
(42,031
)
Capital expenditures
$
8,291

 
$

 
$
8,291

 
 
 
 
 
 
March 31, 2019
 

 
 

 
 

Identifiable assets
$
1,187,252

 
$
195,016

 
$
1,382,268

December 31, 2018
 

 
 

 
 

Identifiable assets
$
857,385

 
$
202,445

 
$
1,059,830



22


                                    

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations



23


                                    

Introduction
The following is a discussion and analysis of:
our consolidated financial condition as of March 31, 2019 and December 31, 2018 and our consolidated results of operations for the three months ended March 31, 2019 and 2018; and
significant factors that we believe could affect our prospective financial condition and results of operations.
You should read this discussion in conjunction with our 2018 annual report on Form 10-K, including, but not limited to, the discussion regarding our critical accounting policies and estimates, as described below. Historical results may not indicate future performance. See "Forward-Looking and Cautionary Statements" and "Item 1A. — Risk Factors" in our 2018 annual report on Form 10-K for risks and uncertainties that may impact our future performance. We refer to our majority-owned Brazilian operating company, Nextel Telecomunicações Ltda., as Nextel Brazil.

Executive Overview
Proposed Sale of Nextel Brazil. On March 18, 2019, NII Holdings and NII International Holdings S.à r.l., or NIIH, a wholly-owned subsidiary of NII Holdings, entered into a purchase agreement with América Móvil, S.A.B. de C.V., or AMX, and AI Brazil Holdings B.V., or AI Brazil Holdings, pursuant to which NII Holdings and AI Brazil Holdings will sell their jointly-owned wireless operations in Brazil. Specifically, NIIH will sell all of the issued and outstanding shares of NII Brazil Holdings S.à r.l., or NIIBH, to AMX. We refer to this transaction as the Nextel Brazil transaction. Also pursuant to the purchase agreement, concurrent to, and as a condition of, the consummation of the Nextel Brazil transaction, AI Brazil Holdings will sell all of its interests in Nextel Holdings S.à r.l., or Nextel Holdings, to NIIBH. We refer to this transaction as the AI Brazil Holdings transaction. At the closing of the Nextel Brazil transaction and the AI Brazil Holdings transaction, AMX will indirectly own all of the issued and outstanding shares of Nextel Brazil.
Under the terms of the purchase agreement, AMX will acquire all of the issued and outstanding shares of NIIBH for an aggregate purchase price of $905.0 million, less net debt and subject to certain adjustments at closing, including reimbursement for capital expenditures up to a budgeted amount from March 1, 2019 to closing, a working capital adjustment (subject, in the case of an increase in net working capital, to a cap based on budgeted changes in working capital through the earlier of closing or December 31, 2019), and a deduction for the amount, if any, by which certain budgeted selling and marketing costs exceed actual spending on such costs from March 1, 2019 to closing. NII Holdings will receive its pro rata share of the net purchase price after deducting a preferred return due to AI Brazil Holdings and deducting certain transaction expenses and increases in accrued tax contingencies, if any. AMX will place $30.0 million of NII Holdings' portion of the net proceeds into an 18-month escrow account to secure NII Holdings' indemnification obligations under the purchase agreement.

In addition, in connection with the Nextel Brazil transaction, NII Holdings and AI Brazil Holdings have entered into an agreement relating to the Nextel Brazil transaction that includes the resolution of a dispute regarding the investment of funds into Nextel Holdings from an escrow related to NII Holdings' sale of its operations in Mexico, or the Mexico escrow. Under this agreement, the parties have agreed that AI Brazil Holdings will receive, after the closing of the Nextel Brazil transaction, the first $10.0 million recovered from the Mexico escrow followed by 6% of the value of additional funds recovered from the Mexico escrow, in both cases, if and when funds are released. NII Holdings has also agreed to indemnify AI Brazil Holdings for damages that may arise from certain tax contingencies, transaction expenses, transaction-related litigation and other matters in connection with its participation in the Nextel Brazil transaction.

The closing of the transactions contemplated by the purchase agreement are subject to the satisfaction of customary conditions, including approval of the stockholders of NII Holdings, receipt of required regulatory and antitrust approvals, and either an amendment eliminating certain successor obligations contemplated under, or an escrow agreement providing for a deposit in accordance with, NII Holdings' indenture with respect to our 4.25% convertible senior notes due 2023. Among other things, NIIH has agreed to conduct NIIBH’s and each of its subsidiaries’ business in the ordinary course, use reasonable best efforts to operate its business in accordance with its budget for the year 2019 and the year 2020, if applicable, and use commercially reasonable efforts to maintain and preserve its business organization and preserve certain business relations.

In connection with the proposed sale of Nextel Brazil, NII Holdings' Board of Directors has approved a plan to dissolve and wind up its operations following the completion of this transaction. This dissolution is also subject to approval by NII Holdings' stockholders.


24


                                    

The foregoing description of the purchase agreement and transactions is a summary. For more information, please see the purchase agreement filed as Exhibit 10.3 to this quarterly report on Form 10-Q and our definitive proxy statement filed on May 6, 2019. Investors and security holders are urged to read the proxy statement and any other relevant documents that have been or will be filed with the Securities and Exchange Commission, or the SEC, carefully and in their entirety because they contain important information about the transactions.

Minority Investment. On June 5, 2017, NII Holdings and AINMT Holdings AB, or ice group, an international telecommunications company operating primarily in Norway under the "ice.net" brand, along with certain affiliates of the Company and ice group, entered into an investment agreement and a shareholders agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings, a subsidiary of NII Holdings that indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. In connection with the initial investment, ice group received 50.0 million shares of cumulative preferred voting stock in Nextel Holdings, and we received 116.6 million shares of common stock in this entity. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement. In September 2018, ice group completed a sale of its 30% ownership interest in Nextel Holdings by selling the shares of its intermediary holding company, AI Brazil Holdings, to AI Media Holdings (NMT) LLC (90%) and Bridford Music B.V. (10%). During 2018, AI Brazil Holdings made an additional $15.9 million investment in Nextel Holdings to maintain its current ownership level. Since we continue to have a controlling interest in Nextel Brazil, we have consolidated this entity and its subsidiaries.
Nextel Brazil Business Overview. We provide wireless communication services under the Nextel TM brand in Brazil with our principal operations located in major urban and suburban centers with high population densities and related transportation corridors where there is a concentration of Brazil’s population and economic activity, including primarily Rio de Janeiro and São Paulo. Nextel Brazil operates a wideband code division multiple access, or WCDMA, network, which has been upgraded to offer long-term evolution, or LTE, services in certain areas. We are also a party to a roaming agreement that allows us to offer our subscribers nationwide voice and data services outside of our network's footprint. Our target market is individual consumers who use our services to meet both professional and personal needs. Our target subscribers generally exhibit above average usage, revenue and loyalty characteristics. We believe our subscribers are attracted to the services and pricing plans we offer, the quality of and data speeds provided by our network and our dedicated customer service.
The services we currently offer include:
mobile telephone voice and wireless data services;
international voice and data roaming services; and
value-added services, including sports, music and entertainment streaming capabilities; online education; and access to national and international WiFi hotspot networks.
Our original network utilized integrated digital enhanced network, or iDEN, technology to provide mobile services on our 800 megahertz, or MHz, spectrum holdings. During the last several years, Nextel Brazil experienced iDEN subscriber losses and overall declines in its iDEN service revenue. In response to continued subscriber losses on its iDEN network, in late 2017, Nextel Brazil decided to wind down its iDEN operations. After migrating some subscribers to its WCDMA network, Nextel Brazil disconnected all of its remaining iDEN subscribers at the end of the second quarter of 2018.

The majority of our subscribers purchase services from us by acquiring subscriber identity module, or SIM, cards from us and using these SIM cards in handsets that they acquire separately from other sources. As of March 31, 2019, Nextel Brazil had about 3.438 million total subscriber units in commercial service, which we estimate to be about 4% of total postpaid mobile handsets and other devices in commercial service in Brazil. We refer to these subscriber units in commercial service collectively as our subscriber base.
Pending the completion of the sale of Nextel Brazil, we expect to continue to operate our business in the ordinary course. Our goal is to grow our subscriber base and revenues by providing differentiated wireless communications services that are valued by our existing and potential subscribers. We have also been taking actions to reduce costs in our business to lower our spending and preserve our liquidity in the near term while improving our profitability and cash flow over the long term. Our strategy for achieving these goals is based on several core principles, including:
offering a unique and superior customer-centric experience, including a reliable and high quality wireless network and rate plan flexibility;
continuing to implement cost reduction strategies and reconfiguring our network architecture in order to lower cash costs per user, gain scale advantages, create an agile organization and improve overall profitability;

25


                                    

offering simple and valuable service plans that generate higher average revenue per user, or ARPU, and result in lower subscriber turnover; and
building on the strength of the unique positioning of the Nextel brand.
Recently, Brazil experienced one of the worst economic recessions in its history, characterized by years of negative wage growth, a net loss of jobs, higher unemployment and lower consumer confidence. These economic conditions and trends resulted in a decline in the amount of consumer disposable income that is available to purchase telecommunications services and negatively impacted Nextel Brazil's results of operations for recent prior years. Although recent data indicates that Brazil's economy is beginning to recover, the growth is slow with gradual improvements.
In recent years, we have implemented changes in our business to better align our organization and costs with our operational and financial results and improve our customers' experience. These changes have included a transition to lower cost subscriber acquisition channels, initiatives to reduce operating costs, including headcount reductions, and projects designed to gain operational and capital expenditure efficiencies in Brazil, all of which were intended to reduce costs while maintaining the support necessary to meet our subscribers' needs. We expect that, if we can continue to maintain subscriber turnover levels similar to those experienced in 2018 and to date and grow our WCDMA subscriber base, we will be able to generate higher revenues in the future. See “ Liquidity and Capital Resources ” and “ Future Capital Needs and Resources ” for more information.


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 judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in our condensed consolidated financial statements and accompanying notes. Although we believe that our estimates and judgments are reasonable, they are based on presently available information. 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 2018 annual report on Form 10-K under “Management's 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;
valuation of long-lived assets;
foreign currency;
loss contingencies; and
income taxes.
Addition of Lease Accounting Policy. As a result of the implementation of Accounting Standards Update, or ASU, No. 2016-02, "Leases," which we refer to as ASC 842, beginning January 1, 2019, we recognized most of our leases on our condensed consolidated balance sheet as liabilities with corresponding right-of-use, or ROU, assets and derecognized certain accrued liabilities related to lease exit costs.
In those situations where we have agreements under which we lease ground or rooftop space on which to locate our transmitter and receiver sites owned by third parties, as well as in situations where we have sold and subsequently leased back space on certain transmitter and receiver sites, we continue to account for these transactions as financing arrangements since the leasebacks are classified as finance leases.
We determine if an arrangement is a lease at inception. We record operating leases as operating lease ROU assets and current and long-term operating lease liabilities on our condensed consolidated balance sheet. We record finance leases as a component of property, plant and equipment, net, current portion of long-term debt and long-term debt on our condensed consolidated balance sheet. We recognize ROU assets and liabilities related to operating leases based on the present value of the future lease payments over the term of the lease at the lease's inception date, except in situations where the right-of-use had already been abandoned at the date of initial application. In these cases, we did not record an ROU asset as the assets were already deemed to have been impaired in full. For those leases that do not provide an implicit rate, we use our incremental borrowing rate based on information

26


                                    

available at the later of the date of initial application or lease commencement date when determining the present value of future payments. ROU assets related to operating leases include any lease payments made to date and initial direct costs incurred, if any, net of any lease incentives received. Our lease terms may include options to extend or not terminate the lease when it is reasonably certain that this option will be exercised. We recognize lease expense related to operating leases on a straight line basis over the term of the lease, except in situations where the ROU asset is impaired. In these cases, we recognize operating lease expense related to lease liability accretion utilizing the effective interest rate method.
Other than the addition of lease accounting as a critical accounting policy, there have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2019.

Results of Operations
In accordance with accounting principles generally accepted in the U.S., we translated the results of operations of our Brazilian operating segment into U.S. dollars using the average foreign currency exchange rates for the applicable period. The following table presents the average foreign currency exchange rates we used to translate Nextel Brazil's results of operations, as well as changes from the average foreign currency exchange rates utilized in the prior period.
 
Three Months Ended March 31,
 
Actual Percent Change From Prior Year
 
2019
 
2018
 
Brazilian real
3.77

 
3.24

 
(16
)%

The following table presents the foreign currency exchange rates in effect at the end of each of the quarters in 2018, as well as at the end of the first quarter of 2019.
 
2018
 
2019
 
March
 
June
 
September
 
December
 
March
Brazilian real
3.32

 
3.86

 
4.00

 
3.87

 
3.90


The percentage amounts presented in the “Actual Change from Previous Year” and the “Constant Currency Change from Previous Year” columns in the tables below reflect the positive (better, or B,) or negative (worse, or W,) growth rates for each of the line items. In addition, to provide better transparency into Nextel Brazil's results of operations, we present the year-over-year percentage change in each of the line items presented on a consolidated basis and for Nextel Brazil on a constant currency basis in the "Constant Currency Change from Previous Year" columns in the tables below. The comparison of results for these line items on a constant currency basis shows the impact of changes in foreign currency exchange rates (i) by adjusting the relevant measures for the three months ended March 31, 2018 to amounts that would have resulted if the average foreign currency exchange rate for the three months ended March 31, 2018 was the same as the average foreign currency exchange rate that was in effect for the three months ended March 31, 2019; and (ii) by comparing the constant currency financial measures for the three months ended March 31, 2018 to the actual financial measures for the three months ended March 31, 2019. This constant currency comparison applies consistent exchange rates to the operating revenues earned in Brazilian reais and to the other components of segment earnings for the three months ended March 31, 2018. The constant currency information reflected in the tables below is not a measurement under accounting principles generally accepted in the U.S. and should be considered in addition to, but not as a substitute for, the information contained in our results of operations.

27


                                    

a.    Consolidated
 
Three Months Ended
March 31, 2019
 
Three Months Ended
March 31, 2018
 
Actual Change from
Previous Year
 
Constant Currency Change from Previous Year
 
 
 
Dollars
 
B(W) Change
 
B(W) Change
 
(dollars in thousands)
 
 
Brazil segment earnings
23,109

 
1,045

 
22,064

 
NM

 
NM

Corporate segment losses
(8,081
)
 
(4,262
)
 
(3,819
)
 
(90
)%
 
(90
)%
Consolidated segment earnings (losses)
15,028

 
(3,217
)
 
18,245

 
NM

 
NM

Impairment, restructuring and other charges, net
(5,791
)
 
(2,351
)
 
(3,440
)
 
(146
)%
 
(180
)%
Depreciation and amortization
(8,356
)
 
(7,725
)
 
(631
)
 
(8
)%
 
(26
)%
Operating income (loss)
881

 
(13,293
)
 
14,174

 
107
 %
 
107
 %
Interest expense, net
(29,322
)
 
(26,606
)
 
(2,716
)
 
(10
)%
 
(28
)%
Interest income
3,769

 
5,386

 
(1,617
)
 
(30
)%
 
(19
)%
Foreign currency transaction losses, net
(1,618
)
 
(1,188
)
 
(430
)
 
(36
)%
 
(58
)%
Other income (expense), net
28,129

 
(6,330
)
 
34,459

 
NM

 
NM

Income (loss) from continuing operations before income tax benefit
1,839

 
(42,031
)
 
43,870

 
104
 %
 
105
 %
Income taxes

 

 

 
NM

 
NM

Net income (loss) from continuing operations
1,839

 
(42,031
)
 
43,870

 
104
 %
 
105
 %
Loss from discontinued operations, net of income taxes
(2,697
)
 
(121
)
 
(2,576
)
 
NM

 
NM

Net loss
(858
)
 
(42,152
)
 
41,294

 
98
 %
 
98
 %
Net loss attributable to noncontrolling interest
(5,763
)
 
(11,256
)
 
5,493

 
49
 %
 
49
 %
Net income (loss) attributable to NII Holdings
$
4,905

 
$
(30,896
)
 
$
35,801

 
116
 %
 
119
 %
_______________________________________
NM-Not Meaningful
We define segment earnings as operating loss before depreciation, amortization and impairment, restructuring and other charges, net. We recognized consolidated segment earnings of $15.0 million during the three months ended March 31, 2019 compared to consolidated segment losses of $3.2 million during the same period in 2018. Our consolidated results include the results of operations of our Brazil segment and our corporate operations in the sections that follow.

1.
Impairment, restructuring and other charges, net

Consolidated impairment, restructuring and other charges, net recognized in the first quarter of 2019 included $2.8 million in restructuring charges related to future lease costs for certain transmitter and receiver sites that were no longer required in Nextel Brazil's business, as well as accretion expense related to the associated liabilities.

Consolidated impairment, restructuring and other charges, net recognized in the first quarter of 2018 primarily consisted of the following:

$15.0 million in restructuring costs related to future lease costs for approximately 150 iDEN-related transmitter and receiver sites and the separation of approximately 75 employees; partially offset by

the reversal of $13.7 million in previously accrued restructuring charges related to approximately 250 transmitter and receiver sites that Nextel Brazil has identified as sites that it plans to exchange with certain of its tower lessors.

2.
Other income (expense), net

Other income, net of $28.1 million for the first quarter of 2019 is primarily due to the $31.5 million gain related to the change in the fair value of the conversion option included in our convertible senior notes.



28


                                    


b.    Nextel Brazil
 
Three Months Ended
March 31, 2019
 
% of
Nextel Brazil’s
Operating Revenues
 
Three Months Ended
March 31, 2018
 
% of
Nextel Brazil’s
Operating Revenues
 
Actual Change from
Previous Year
 
Constant Currency Change from Previous Year
 
 
 
 
 
Dollars
 
B(W) Change
 
B(W) Change
 
(dollars in thousands)
 
 
Service and other revenues
$
146,015

 
99
 %
 
$
176,179

 
97
 %
 
$
(30,164
)
 
(17
)%
 
(4
)%
Handset and accessory revenues
800

 
1
 %
 
5,041

 
3
 %
 
(4,241
)
 
(84
)%
 
(82
)%
Cost of handsets and accessories
(5,081
)
 
(4
)%
 
(9,065
)
 
(5
)%
 
3,984

 
44
 %
 
35
 %
Handset and accessory net subsidy
(4,281
)
 
(3
)%
 
(4,024
)
 
(2
)%
 
(257
)
 
(6
)%
 
(24
)%
Cost of service (exclusive of
  depreciation and amortization)
(61,377
)
 
(44
)%
 
(84,507
)
 
(46
)%
 
23,130

 
27
 %
 
16
 %
Selling and marketing expenses
(18,176
)
 
(12
)%
 
(21,231
)
 
(12
)%
 
3,055

 
14
 %
 

General and administrative expenses
(39,072
)
 
(27
)%
 
(65,372
)
 
(36
)%
 
26,300

 
40
 %
 
31
 %
Segment earnings
$
23,109

 
16
 %
 
$
1,045

 
1
 %
 
$
22,064

 
NM

 
NM

_______________________________________
NM-Not Meaningful
The average value of the Brazilian real depreciated relative to the U.S. dollar during the three months ended March 31, 2019 by 16% compared to the average value that prevailed during the three months ended March 31, 2018. As a result, the components of Nextel Brazil's results of operations for the three months ended March 31, 2019, after translation into U.S. dollars, reflect lower revenues and expenses in U.S. dollars than would have occurred if the Brazilian real had not depreciated relative to the U.S. dollar. To the extent the value of the Brazilian real depreciates further relative to the U.S. dollar, Nextel Brazil's future reported results of operations will be adversely affected.

We use the term "subscriber unit," which we also refer to as a subscriber, to represent an active SIM card, which is the level at which we track subscribers. The table below provides an overview of Nextel Brazil's subscriber units in commercial service on both its iDEN and WCDMA networks, as well as Nextel Brazil's subscriber turnover rates for each of the quarters in 2018 and for the first quarter of 2019. We calculate subscriber turnover by dividing subscriber deactivations for the period by the average number of subscriber units during that period.


29


                                    

 
Three Months Ended
 
March 31, 2018
 
June 30, 2018
 
September 30, 2018
 
December 31, 2018
 
March 31, 2019
 
(subscribers in thousands)
WCDMA subscriber units
2,896.1

 
3,023.8

 
3,121.0

 
3,206.7

 
3,306.0

iDEN subscriber units
349.6

 
230.4

 

 

 

Total subscriber units in commercial service — beginning of period
3,245.7

 
3,254.2

 
3,121.0

 
3,206.7

 
3,306.0

 
 
 
 
 
 
 
 
 
 
WCDMA net subscriber additions
92.9

 
65.7

 
85.7

 
99.3

 
132.1

iDEN net subscriber losses
(84.4
)
 
(198.9
)
 

 

 

Total net subscriber additions (losses)
8.5

 
(133.2
)
 
85.7

 
99.3

 
132.1

 
 
 
 
 
 
 
 
 
 
Migrations from iDEN to WCDMA
34.8

 
31.5

 

 

 

 
 
 
 
 
 
 
 
 
 
WCDMA subscriber units