Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016 |
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 001-34295
SIRIUS XM HOLDINGS INC.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 38-3916511
|
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
1290 Avenue of the Americas, 11th Floor | | |
New York, New York | | 10104 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 584-5100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
|
| | | | | | |
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
|
| | | |
(Class) | | (Outstanding as of July 22, 2016) |
COMMON STOCK, $0.001 PAR VALUE | | 4,877,889,221 | SHARES |
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
(in thousands, except per share data) | 2016 | | 2015 | | 2016 | | 2015 |
Revenue: | |
| | |
| | | | |
Subscriber revenue | $ | 1,033,284 |
| | $ | 940,077 |
| | $ | 2,042,966 |
| | $ | 1,851,547 |
|
Advertising revenue | 33,521 |
| | 28,839 |
| | 65,062 |
| | 55,712 |
|
Equipment revenue | 27,858 |
| | 29,263 |
| | 54,979 |
| | 54,104 |
|
Other revenue | 140,903 |
| | 125,031 |
| | 273,569 |
| | 242,837 |
|
Total revenue | 1,235,566 |
| | 1,123,210 |
| | 2,436,576 |
| | 2,204,200 |
|
Operating expenses: | |
| | |
| | | | |
Cost of services: | |
| | |
| | | | |
Revenue share and royalties | 264,385 |
| | 331,517 |
| | 516,129 |
| | 544,495 |
|
Programming and content | 83,645 |
| | 69,370 |
| | 168,745 |
| | 140,516 |
|
Customer service and billing | 93,712 |
| | 91,932 |
| | 190,579 |
| | 184,029 |
|
Satellite and transmission | 34,847 |
| | 21,714 |
| | 58,385 |
| | 43,018 |
|
Cost of equipment | 9,728 |
| | 10,930 |
| | 19,507 |
| | 19,775 |
|
Subscriber acquisition costs | 128,956 |
| | 136,504 |
| | 261,405 |
| | 258,764 |
|
Sales and marketing | 91,358 |
| | 86,493 |
| | 180,084 |
| | 165,237 |
|
Engineering, design and development | 18,893 |
| | 16,088 |
| | 38,334 |
| | 31,048 |
|
General and administrative | 81,178 |
| | 72,137 |
| | 158,683 |
| | 151,960 |
|
Depreciation and amortization | 66,708 |
| | 67,096 |
| | 134,335 |
| | 132,123 |
|
Total operating expenses | 873,410 |
| | 903,781 |
| | 1,726,186 |
| | 1,670,965 |
|
Income from operations | 362,156 |
| | 219,429 |
| | 710,390 |
| | 533,235 |
|
Other income (expense): | |
| | |
| | | | |
Interest expense | (83,396 | ) | | (75,380 | ) | | (161,796 | ) | | (145,288 | ) |
Other income | 2,515 |
| | 4,221 |
| | 13,363 |
| | 4,944 |
|
Total other expense | (80,881 | ) | | (71,159 | ) | | (148,433 | ) | | (140,344 | ) |
Income before income taxes | 281,275 |
| | 148,270 |
| | 561,957 |
| | 392,891 |
|
Income tax expense | (108,260 | ) | | (45,421 | ) | | (217,603 | ) | | (184,350 | ) |
Net income | $ | 173,015 |
| | $ | 102,849 |
| | $ | 344,354 |
| | $ | 208,541 |
|
Foreign currency translation adjustment, net of tax | (15 | ) | | (9 | ) | | 434 |
| | (9 | ) |
Total comprehensive income | $ | 173,000 |
| | $ | 102,840 |
| | $ | 344,788 |
| | $ | 208,532 |
|
Net income per common share: | |
| | |
| | | | |
Basic | $ | 0.04 |
| | $ | 0.02 |
| | $ | 0.07 |
| | $ | 0.04 |
|
Diluted | $ | 0.03 |
| | $ | 0.02 |
| | $ | 0.07 |
| | $ | 0.04 |
|
Weighted average common shares outstanding: | |
| | |
| | | | |
Basic | 4,938,820 |
| | 5,443,590 |
| | 5,002,070 |
| | 5,506,818 |
|
Diluted | 4,988,247 |
| | 5,507,601 |
| | 5,049,571 |
| | 5,570,445 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
(in thousands, except per share data) | June 30, 2016 | | December 31, 2015 |
ASSETS | (unaudited) |
|
|
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 476,453 |
| | $ | 111,838 |
|
Receivables, net | 225,380 |
| | 234,782 |
|
Inventory, net | 26,276 |
| | 22,295 |
|
Related party current assets | 4,912 |
| | 5,941 |
|
Prepaid expenses and other current assets | 200,356 |
| | 187,033 |
|
Total current assets | 933,377 |
| | 561,889 |
|
Property and equipment, net | 1,373,874 |
| | 1,415,401 |
|
Intangible assets, net | 2,568,648 |
| | 2,593,346 |
|
Goodwill | 2,205,107 |
| | 2,205,107 |
|
Related party long-term assets | 4,900 |
| | — |
|
Deferred tax assets | 910,510 |
| | 1,115,731 |
|
Other long-term assets | 143,429 |
| | 155,188 |
|
Total assets | $ | 8,139,845 |
| | $ | 8,046,662 |
|
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable and accrued expenses | $ | 617,848 |
| | $ | 625,313 |
|
Accrued interest | 97,103 |
| | 91,655 |
|
Current portion of deferred revenue | 1,815,426 |
| | 1,771,915 |
|
Current maturities of long-term debt | 5,611 |
| | 4,764 |
|
Related party current liabilities | 2,840 |
| | 2,840 |
|
Total current liabilities | 2,538,828 |
| | 2,496,487 |
|
Deferred revenue | 163,386 |
| | 157,609 |
|
Long-term debt | 6,096,808 |
| | 5,443,614 |
|
Related party long-term liabilities | 9,375 |
| | 10,795 |
|
Deferred tax liabilities | 6,681 |
| | 6,681 |
|
Other long-term liabilities | 99,886 |
| | 97,967 |
|
Total liabilities | 8,914,964 |
| | 8,213,153 |
|
Commitments and contingencies (Note 13) |
|
| |
|
|
Stockholders’ (deficit) equity: | |
| | |
|
Common stock, par value $0.001; 9,000,000 shares authorized; 4,893,341 and 5,153,451 shares issued; 4,888,341 and 5,147,647 outstanding at June 30, 2016 and December 31, 2015, respectively | 4,893 |
| | 5,153 |
|
Accumulated other comprehensive loss, net of tax | (68 | ) | | (502 | ) |
Additional paid-in capital | 3,826,370 |
| | 4,783,795 |
|
Treasury stock, at cost; 5,000 and 5,804 shares of common stock at June 30, 2016 and December 31, 2015, respectively | (19,458 | ) | | (23,727 | ) |
Accumulated deficit | (4,586,856 | ) | | (4,931,210 | ) |
Total stockholders’ (deficit) equity | (775,119 | ) | | (166,491 | ) |
Total liabilities and stockholders’ (deficit) equity | $ | 8,139,845 |
| | $ | 8,046,662 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Accumulated Other Comprehensive (Loss) Income | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Total Stockholders’ (Deficit) Equity |
(in thousands) | | Shares | | Amount | | | | Shares | | Amount | | |
Balance at December 31, 2015 | | 5,153,451 |
| | $ | 5,153 |
| | $ | (502 | ) | | $ | 4,783,795 |
| | 5,804 |
| | $ | (23,727 | ) | | $ | (4,931,210 | ) | | $ | (166,491 | ) |
Comprehensive income, net of tax | | — |
| | — |
| | 434 |
| | — |
| | — |
| | — |
| | 344,354 |
| | 344,788 |
|
Share-based payment expense | | — |
| | — |
| | — |
| | 43,331 |
| | — |
| | — |
| | — |
| | 43,331 |
|
Exercise of options and vesting of restricted stock units | | 2,145 |
| | 2 |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Minimum withholding taxes on net share settlement of stock-based compensation | | — |
| | — |
| | — |
| | (5,384 | ) | | — |
| | — |
| | — |
| | (5,384 | ) |
Common stock repurchased | | — |
| | — |
| | — |
| | — |
| | 261,451 |
| | (991,363 | ) | | — |
| | (991,363 | ) |
Common stock retired | | (262,255 | ) | | (262 | ) | | — |
| | (995,370 | ) | | (262,255 | ) | | 995,632 |
| | — |
| | — |
|
Balance at June 30, 2016 | | 4,893,341 |
| | $ | 4,893 |
| | $ | (68 | ) | | $ | 3,826,370 |
| | 5,000 |
| | $ | (19,458 | ) | | $ | (4,586,856 | ) | | $ | (775,119 | ) |
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | |
| For the Six Months Ended June 30, |
(in thousands) | 2016 | | 2015 |
Cash flows from operating activities: | | | |
Net income | $ | 344,354 |
| | $ | 208,541 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 134,335 |
| | 132,123 |
|
Non-cash interest expense, net of amortization of premium | 4,230 |
| | 3,868 |
|
Provision for doubtful accounts | 25,707 |
| | 21,919 |
|
Amortization of deferred income related to equity method investment | (1,388 | ) | | (1,388 | ) |
Gain on unconsolidated entity investments, net | (8,451 | ) | | — |
|
Dividend received from unconsolidated entity investment | 7,160 |
| | 7,677 |
|
Loss on disposal of assets | 12,912 |
| | — |
|
Share-based payment expense | 47,870 |
| | 38,941 |
|
Deferred income taxes | 205,221 |
| | 177,739 |
|
Other non-cash purchase price adjustments | — |
| | (1,394 | ) |
Changes in operating assets and liabilities: | |
| | |
|
Receivables | (16,305 | ) | | (41,665 | ) |
Inventory | (3,981 | ) | | (5,202 | ) |
Related party, net | (2,191 | ) | | (4,117 | ) |
Prepaid expenses and other current assets | (14,052 | ) | | (44,821 | ) |
Other long-term assets | 15,081 |
| | (62,663 | ) |
Accounts payable and accrued expenses | (12,869 | ) | | 199,532 |
|
Accrued interest | 5,448 |
| | 16,803 |
|
Deferred revenue | 49,288 |
| | 66,179 |
|
Other long-term liabilities | 1,919 |
| | 269 |
|
Net cash provided by operating activities | 794,288 |
| | 712,341 |
|
Cash flows from investing activities: | |
| | |
|
Additions to property and equipment | (67,172 | ) | | (61,229 | ) |
Purchases of restricted and other investments | (3,953 | ) | | (3,966 | ) |
Net cash used in investing activities | (71,125 | ) | | (65,195 | ) |
Cash flows from financing activities: | |
| | |
|
Taxes paid in lieu of shares issued for stock-based compensation | (5,379 | ) | | (15,420 | ) |
Proceeds from long-term borrowings and revolving credit facility, net of costs | 1,387,294 |
| | 1,259,346 |
|
Repayment of long-term borrowings and revolving credit facility | (744,831 | ) | | (660,549 | ) |
Common stock repurchased and retired | (995,632 | ) | | (1,084,194 | ) |
Net cash used in financing activities | (358,548 | ) | | (500,817 | ) |
Net increase in cash and cash equivalents | 364,615 |
| | 146,329 |
|
Cash and cash equivalents at beginning of period | 111,838 |
| | 147,724 |
|
Cash and cash equivalents at end of period | $ | 476,453 |
| | $ | 294,053 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
|
| | | | | | | |
| For the Six Months Ended June 30, |
(in thousands) | 2016 | | 2015 |
Supplemental Disclosure of Cash and Non-Cash Flow Information | | | |
Cash paid during the period for: | | | |
Interest, net of amounts capitalized | $ | 148,398 |
| | $ | 118,265 |
|
Non-cash investing and financing activities: | | | |
Capital lease obligations incurred to acquire assets | $ | 6,647 |
| | $ | 7,487 |
|
Treasury stock not yet settled | $ | 19,458 |
| | $ | 35,795 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
| |
(1) | Business & Basis of Presentation |
Business
We transmit music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive music and other channels, plus features such as SiriusXM On Demand and MySXM, over our Internet radio service, including through applications for mobile devices. We are also a leader in providing connected vehicle services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle operators while providing marketing and operational benefits to automakers and their dealers.
We have agreements with every major automaker (“OEMs”) to offer satellite radio in their vehicles. We also acquire subscribers through marketing to owners and lessees of previously owned vehicles that include factory-installed satellite radios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retailers online and at locations nationwide and through our website. Satellite radio services are also offered to customers of certain rental car companies.
Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly plan. We offer discounts for prepaid, longer term subscription plans, as well as a multiple subscription discount. We also derive revenue from activation and other fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic and data services.
In certain cases, a subscription to our radio services is included in the sale or lease price of new or previously owned vehicles. The length of these subscriptions varies but is typically three to twelve months. We receive payments for these subscriptions from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.
Liberty Media Corporation (“Liberty Media”) beneficially owns, directly and indirectly, over 50% of the outstanding shares of our common stock. As a result, we are a “controlled company” for the purposes of the NASDAQ corporate governance requirements. Liberty Media owns interests in a range of media, communications and entertainment businesses.
Recent Development
On May 12, 2016, our subsidiary, Sirius XM Radio Inc. (“Sirius XM”), entered into an arrangement agreement (the “Arrangement Agreement”) with Sirius XM Canada Holdings Inc. ("Sirius XM Canada"), an entity in which Sirius XM currently holds an approximate 37% economic interest and 25% voting interest. Pursuant to the Arrangement Agreement, Sirius XM and certain Canadian shareholders will form a new company to acquire shares of Sirius XM Canada not already owned by them pursuant to a plan of arrangement (the “Transaction”). In connection with the Transaction, Sirius XM Canada’s shareholders will be entitled to elect to receive, for each share of Sirius XM Canada held, C$4.50 (U.S. $3.50 as of May 12, 2016) in (i) cash, (ii) shares of our common stock, (iii) a security exchangeable for shares of our common stock, or (iv) a combination thereof; provided that no more than 50% of the total consideration in the Transaction (or up to 35,000 shares) will be issued in our common stock and exchangeable shares. All of the obligations of Sirius XM under the Arrangement Agreement are guaranteed by us.
Following the Transaction, Sirius XM is expected to hold a 70% economic interest and 33% voting interest in Sirius XM Canada, with the remainder of the voting power and economic interest held by Slaight Communications and Obelysk Media, two of Sirius XM Canada’s current Canadian shareholders. Sirius XM expects to contribute to Sirius XM Canada approximately U.S. $275,000 in connection with the Transaction (assuming that all shareholders elect to receive cash in connection with the Transaction), which amount is expected to be used to pay the cash consideration to Sirius XM Canada’s shareholders and will be decreased proportionately if shareholders elect to receive consideration in shares of our common stock or securities exchangeable for our common stock.
The Transaction is subject to the approval of two-thirds of the shareholders of Sirius XM Canada, as well as a majority of the minority shareholders of Sirius XM Canada. The Transaction is also subject to receipt of court and Canadian Radio-
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
Television and Telecommunications Commission approval. Pending receipt of all necessary approvals, the Transaction is expected to close no later than end of the fourth quarter of 2016.
Basis of Presentation
This Quarterly Report on Form 10-Q presents information for Sirius XM Holdings Inc. (“Holdings”). Holdings has no operations independent of its wholly-owned subsidiary Sirius XM.
The accompanying unaudited consolidated financial statements of Holdings and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the financial statements presented in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
Certain numbers in our prior period consolidated financial statements have been reclassified to conform to our current period presentation. All significant intercompany transactions have been eliminated in consolidation. In the opinion of our management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 have been made.
Interim results are not necessarily indicative of the results that may be expected for a full year. This Quarterly Report on Form 10-Q should be read together with our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on February 2, 2016.
Public companies are required to disclose certain information about their reportable operating segments. Operating segments are defined as significant components of an enterprise for which separate financial information is available and is evaluated on a regular basis by the chief operating decision makers in deciding how to allocate resources to an individual segment and in assessing performance of the segment. We have determined that we have one reportable segment as our chief operating decision maker, our Chief Executive Officer, assesses performance and allocates resources based on the consolidated results of operations of our business.
We have evaluated events subsequent to the balance sheet date and prior to the filing of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2016 and have determined no events have occurred that would require adjustment to our unaudited consolidated financial statements. For a discussion of subsequent events that do not require adjustment to our unaudited consolidated financial statements refer to Note 15.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates. Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include asset impairment, depreciable lives of our satellites, share-based payment expense, and income taxes.
| |
(2) | Summary of Significant Accounting Policies |
Fair Value Measurements
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are based on unadjusted quoted prices in active markets for identical instruments. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. As of June 30, 2016 and December 31, 2015, the carrying amounts of cash and cash equivalents, receivables, and accounts payable approximated fair value due to the short-term nature of these instruments.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
Our assets and liabilities measured at fair value were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Sirius XM Canada Holdings Inc. (“Sirius XM Canada”) - investment (a) | $ | 166,808 |
| | — |
| | — |
| | $ | 166,808 |
| | $ | 141,850 |
| | — |
| | — |
| | $ | 141,850 |
|
Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Debt (b) | — |
| | $ | 6,264,195 |
| | — |
| | $ | 6,264,195 |
| | — |
| | $ | 5,649,173 |
| | — |
| | $ | 5,649,173 |
|
| |
(a) | This amount approximates fair value. The carrying value of our investment in Sirius XM Canada was $4,590 and $0 as of June 30, 2016 and December 31, 2015, respectively. |
| |
(b) | The fair value for non-publicly traded instruments is based upon estimates from a market maker and brokerage firm. Refer to Note 10 for information related to the carrying value of our debt as of June 30, 2016 and December 31, 2015. |
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture calculations, and classification on the statement of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. We plan to early adopt this ASU in the third quarter of 2016, and we expect to recognize approximately $300 million of additional tax-effected net operating losses related to excess share-based compensation deductions that were previously not recorded in our financial statements. This will increase our Deferred tax assets and decrease our Accumulated deficit in our consolidated financial statements upon adoption of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires a company to recognize lease assets and liabilities arising from operating leases in the statement of financial position. This ASU does not significantly change the previous lease guidance for how a lessee should recognize the recognition, measurement, and presentation of expenses and cash flows arising from a lease. Additionally, the criteria for classifying a finance lease versus an operating lease are substantially the same as the previous guidance. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We plan to adopt this ASU on January 1, 2019. We plan to use a modified retrospective approach to adopt this ASU. We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which amended the effective date of this ASU to fiscal years beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016. We plan to adopt this ASU on January 1, 2018. In 2016, the FASB issued additional guidance which clarified principal versus agent considerations, identification of performance obligations and the implementation guidance for licensing. In addition, the FASB issued guidance regarding practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectibility, non-cash consideration and the presentation of sales and other similar taxes. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
Basic net income per common share is calculated by dividing the income available to common stockholders by the weighted average common shares outstanding during each reporting period. Diluted net income per common share adjusts the weighted average number of common shares outstanding for the potential dilution that could occur if common stock equivalents (stock options and restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method. We had no participating securities during the three and six months ended June 30, 2016 and 2015.
Common stock equivalents of 232,784 and 113,067 for the three months ended June 30, 2016 and 2015, respectively, and 238,391 and 114,443 for the six months ended June 30, 2016 and 2015, respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Numerator: | |
| | |
| | | | |
Net income available to common stockholders for basic and diluted net income per common share | $ | 173,015 |
| | $ | 102,849 |
| | $ | 344,354 |
| | $ | 208,541 |
|
Denominator: | |
| | |
| | |
| | |
Weighted average common shares outstanding for basic net income per common share | 4,938,820 |
| | 5,443,590 |
| | 5,002,070 |
| | 5,506,818 |
|
Weighted average impact of dilutive equity instruments | 49,427 |
| | 64,011 |
| | 47,501 |
| | 63,627 |
|
Weighted average shares for diluted net income per common share | 4,988,247 |
| | 5,507,601 |
| | 5,049,571 |
| | 5,570,445 |
|
Net income per common share: | |
| | |
| | |
| | |
Basic | $ | 0.04 |
| | $ | 0.02 |
| | $ | 0.07 |
| | $ | 0.04 |
|
Diluted | $ | 0.03 |
| | $ | 0.02 |
| | $ | 0.07 |
| | $ | 0.04 |
|
Receivables, net, includes customer accounts receivable, receivables from distributors and other receivables.
Customer accounts receivable, net, includes receivables from our subscribers and advertising customers and is stated at amounts due, net of an allowance for doubtful accounts. Our allowance for doubtful accounts is based upon our assessment of various factors. We consider historical experience, the age of the receivable balances, current economic conditions and other factors that may affect the counterparty’s ability to pay. Bad debt expense is included in Customer service and billing expense in our unaudited consolidated statements of comprehensive income.
Receivables from distributors primarily include billed and unbilled amounts due from OEMs for services included in the sale or lease price of vehicles, as well as billed amounts due from wholesale distributors of our satellite radios. Other receivables primarily include amounts due from manufacturers of our radios, modules and chipsets where we are entitled to subsidies and royalties based on the number of units produced. We have not established an allowance for doubtful accounts for our receivables from distributors or other receivables as we have historically not experienced any significant collection issues with OEMs or other third parties.
Receivables, net, consists of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Gross customer accounts receivable | $ | 102,266 |
| | $ | 98,740 |
|
Allowance for doubtful accounts | (6,974 | ) | | (6,118 | ) |
Customer accounts receivable, net | $ | 95,292 |
| | $ | 92,622 |
|
Receivables from distributors | 106,484 |
| | 120,012 |
|
Other receivables | 23,604 |
| | 22,148 |
|
Total receivables, net | $ | 225,380 |
| | $ | 234,782 |
|
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
Inventory consists of finished goods, refurbished goods, chipsets and other raw material components used in manufacturing radios. Inventory is stated at the lower of cost or market. We record an estimated allowance for inventory that is considered slow moving or obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for resale in our direct to consumer distribution channel and components held for resale by us is reported as a component of Cost of equipment in our unaudited consolidated statements of comprehensive income. The provision related to inventory consumed in our OEM and retail distribution channel is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of comprehensive income.
Inventory, net, consists of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Raw materials | $ | 12,971 |
| | $ | 11,085 |
|
Finished goods | 23,401 |
| | 21,159 |
|
Allowance for obsolescence | (10,096 | ) | | (9,949 | ) |
Total inventory, net | $ | 26,276 |
| | $ | 22,295 |
|
Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired in business combinations. Our annual impairment assessment of our single reporting unit is performed as of the fourth quarter of each year, and an assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. If the carrying value of goodwill exceeds its fair value, an impairment loss is recognized.
As of June 30, 2016, there were no indicators of impairment, and no impairment loss was recorded for goodwill during the three and six months ended June 30, 2016 and 2015. As of June 30, 2016, the cumulative balance of goodwill impairments recorded since the July 2008 merger (the “Merger”) between our wholly owned subsidiary, Vernon Merger Corporation, and XM Satellite Radio Holdings Inc. (“XM”), was $4,766,190, which was recognized during the year ended December 31, 2008.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
Our intangible assets include the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2016 | | December 31, 2015 |
| Weighted Average Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Indefinite life intangible assets: | | | |
| | |
| | |
| | |
| | |
| | |
|
FCC licenses | Indefinite | | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
| | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
|
Trademark | Indefinite | | 250,000 |
| | — |
| | 250,000 |
| | 250,000 |
| | — |
| | 250,000 |
|
Definite life intangible assets: | | | |
| | |
| | |
| | |
| | |
| | |
|
Subscriber relationships | 9 years | | 380,000 |
| | (351,214 | ) | | 28,786 |
| | 380,000 |
| | (336,822 | ) | | 43,178 |
|
OEM relationships | 15 years | | 220,000 |
| | (39,111 | ) | | 180,889 |
| | 220,000 |
| | (31,778 | ) | | 188,222 |
|
Licensing agreements | 12 years | | 45,289 |
| | (28,819 | ) | | 16,470 |
| | 45,289 |
| | (26,977 | ) | | 18,312 |
|
Proprietary software | 8 years | | 27,215 |
| | (18,783 | ) | | 8,432 |
| | 27,215 |
| | (17,752 | ) | | 9,463 |
|
Developed technology | 10 years | | 2,000 |
| | (1,583 | ) | | 417 |
| | 2,000 |
| | (1,483 | ) | | 517 |
|
Leasehold interests | 7.4 years | | — |
| | — |
| | — |
| | 132 |
| | (132 | ) | | — |
|
Total intangible assets | | | $ | 3,008,158 |
| | $ | (439,510 | ) | | $ | 2,568,648 |
| | $ | 3,008,290 |
| | $ | (414,944 | ) | | $ | 2,593,346 |
|
Indefinite Life Intangible Assets
We have identified our FCC licenses and the XM trademark as indefinite life intangible assets after considering the expected use of the assets, the regulatory and economic environment within which they are used and the effects of obsolescence on their use.
We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. The following table outlines the years in which each of our satellite licenses expires:
|
| | |
FCC satellite licenses | | Expiration year |
SIRIUS FM-1* | | 2017 |
SIRIUS FM-2* | | 2017 |
SIRIUS FM-3* | | 2017 |
SIRIUS FM-5 | | 2025 |
SIRIUS FM-6 | | 2022 |
XM-3 | | 2021 |
XM-4 | | 2022 |
XM-5 | | 2018 |
* As of April 7, 2016, these satellites were no longer being used to transmit satellite radio. We plan to deorbit these satellites during 2016.
Prior to expiration of our FCC licenses, we are required to apply for a renewal of our FCC licenses. The renewal and extension of our licenses is reasonably certain at minimal cost, which is expensed as incurred. Each of the FCC licenses authorizes us to use the radio spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.
Our annual impairment assessment of our identifiable indefinite intangible assets is performed as of the fourth quarter of each year. An assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. If the carrying value of the intangible assets exceeds its fair value, an impairment loss is recognized. As of June 30, 2016, there were no indicators of impairment, and no impairment loss was recorded for intangible assets with indefinite lives during the three and six months ended June 30, 2016 and 2015.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
Definite Life Intangible Assets
Amortization expense for all definite life intangible assets was $12,258 and $13,021 for the three months ended June 30, 2016 and 2015, respectively, and $24,698 and $26,244 for the six months ended June 30, 2016 and 2015, respectively. Expected amortization expense for the remaining period in 2016, each of the fiscal years 2017 through 2020 and for periods thereafter is as follows:
|
| | | | |
Years ending December 31, | | Amount |
2016 (remaining) | | $ | 23,847 |
|
2017 | | 34,882 |
|
2018 | | 19,463 |
|
2019 | | 19,026 |
|
2020 | | 18,446 |
|
Thereafter | | 119,330 |
|
Total definite life intangible assets, net | | $ | 234,994 |
|
| |
(8) | Property and Equipment |
Property and equipment, net, consists of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Satellite system | $ | 2,388,000 |
| | $ | 2,388,000 |
|
Terrestrial repeater network | 126,417 |
| | 117,127 |
|
Leasehold improvements | 50,608 |
| | 49,407 |
|
Broadcast studio equipment | 79,955 |
| | 70,888 |
|
Capitalized software and hardware | 495,519 |
| | 466,464 |
|
Satellite telemetry, tracking and control facilities | 75,925 |
| | 75,440 |
|
Furniture, fixtures, equipment and other | 79,817 |
| | 81,871 |
|
Land | 38,411 |
| | 38,411 |
|
Building | 60,624 |
| | 60,487 |
|
Construction in progress | 98,720 |
| | 101,324 |
|
Total property and equipment | 3,493,996 |
| | 3,449,419 |
|
Accumulated depreciation and amortization | (2,120,122 | ) | | (2,034,018 | ) |
Property and equipment, net | $ | 1,373,874 |
| | $ | 1,415,401 |
|
Construction in progress consists of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Satellite system | $ | — |
| | $ | 12,912 |
|
Terrestrial repeater network | 1,037 |
| | 25,578 |
|
Capitalized software | 74,628 |
| | 37,064 |
|
Other | 23,055 |
| | 25,770 |
|
Construction in progress | $ | 98,720 |
| | $ | 101,324 |
|
Depreciation expense on property and equipment was $54,450 and $54,075 for the three months ended June 30, 2016 and 2015, respectively, and $109,637 and $105,879 for the six months ended June 30, 2016 and 2015, respectively. We retired property and equipment of $36,512 and $8,239 during the six months ended June 30, 2016 and 2015, respectively. We recognized a loss on disposal of assets of $12,912, which has been recorded in Satellite and transmission expense in our
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
unaudited consolidated statements of comprehensive income during the three and six months ended June 30, 2016, which related to the disposal of certain obsolete spare parts for a future satellite.
Satellites
As of June 30, 2016, we owned a fleet of eight satellites, of which five were operating. The chart below provides certain information on our satellites as of June 30, 2016:
|
| | | | |
Satellite Description | | Year Delivered | | Estimated End of Depreciable Life |
FM-1* | | 2000 | | 2013 |
FM-2* | | 2000 | | 2013 |
FM-3* | | 2000 | | 2015 |
FM-5 | | 2009 | | 2024 |
FM-6 | | 2013 | | 2028 |
XM-3 | | 2005 | | 2020 |
XM-4 | | 2006 | | 2021 |
XM-5 | | 2010 | | 2025 |
* Satellite was fully depreciated as of June 30, 2016. As of April 7, 2016, these satellites were no longer being used to transmit satellite radio. We plan to deorbit these satellites during 2016.
| |
(9) | Related Party Transactions |
In the normal course of business, we enter into transactions with related parties.
Liberty Media
Liberty Media has beneficially owned over 50% of our outstanding common stock since January 2013 and has two executives and one of its directors on our board of directors. Gregory B. Maffei, the President and Chief Executive Officer of Liberty Media, is the Chairman of our board of directors.
Sirius XM Canada
We hold an equity method investment in Sirius XM Canada. We own approximately 47,300 of Sirius XM Canada’s Class A shares on a converted basis, representing an approximate 37% equity interest and an approximate 25% voting interest. We primarily provide programming and content services to Sirius XM Canada and are reimbursed from Sirius XM Canada for certain product development costs, production and distribution of chipset radios, as well as for information technology and streaming support costs. Refer to Note 1 Business & Basis of Presentation for information on the pending transaction with Sirius XM Canada.
We had the following related party balances associated with Sirius XM Canada:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Related party current assets | $ | 4,912 |
| | $ | 5,941 |
|
Related party long-term assets | $ | 4,900 |
| | $ | — |
|
Related party current liabilities | $ | 2,840 |
| | $ | 2,840 |
|
Related party long-term liabilities | $ | 9,375 |
| | $ | 10,795 |
|
Our related party current asset balances primarily consist of activation fees and programming and chipset costs for which we are reimbursed. Our related party long-term asset balance as of June 30, 2016 primarily included our investment balance in Sirius XM Canada. Our related party liabilities as of June 30, 2016 and December 31, 2015 included $2,776 for the current portion of deferred revenue and $9,252 and $10,639, respectively, for the long-term portion of deferred revenue recorded as of the Merger date related to agreements with XM Canada, now Sirius XM Canada. These costs are being amortized on a straight line basis through 2020.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
We recorded the following revenue and other income associated with Sirius XM Canada in our unaudited consolidated statements of comprehensive income:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenue (a) | $ | 10,667 |
| | $ | 12,979 |
| | $ | 20,578 |
|
| $ | 26,496 |
|
Other income | |
| | |
| |
|
|
|
|
|
Share of net earnings (b) | $ | 2,177 |
| | $ | — |
| | $ | 8,451 |
|
| $ | — |
|
Dividends (c) | $ | — |
| | $ | 4,013 |
| | $ | 3,575 |
|
| $ | 4,989 |
|
| |
(a) | Under our agreements with Sirius XM Canada, we currently receive a percentage-based royalty of 10% and 15% for certain types of subscription revenue earned by Sirius XM Canada for Sirius and XM platforms, respectively; and additional royalties for premium services and royalties for activation fees and reimbursements for other charges. We record revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of comprehensive income. The current license and services agreement entered into with Sirius Canada will expire in 2017. The current license agreement entered into with XM Canada will expire in 2020. |
| |
(b) | We recognize our proportionate share of earnings or losses of Sirius XM Canada as they occur as a component of Other income in our unaudited consolidated statements of comprehensive income on a one month lag. |
| |
(c) | Sirius XM Canada paid gross dividends to us of $3,973 and $4,013 during the three months ended June 30, 2016 and 2015, respectively, and $7,548 and $7,990 during the six months ended June 30, 2016 and 2015, respectively. These dividends were first recorded as a reduction to our investment balance in Sirius XM Canada to the extent a balance existed and then as Other income for the remaining portion. |
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
Our debt as of June 30, 2016 and December 31, 2015 consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Carrying value(a) at |
Issuer / Borrower | | Issued | | Debt | | Maturity Date | | Interest Payable | | Principal Amount at June 30, 2016 | | June 30, 2016 | | December 31, 2015 |
Sirius XM (b) | | May 2013 | | 4.25% Senior Notes (the "4.25% Notes") | | May 15, 2020 | | semi-annually on May 15 and November15 | | $ | 500,000 |
| | $ | 496,671 |
| | $ | 496,282 |
|
Sirius XM (b) | | September 2013 | | 5.875% Senior Notes (the "5.875% Notes") | | October 1, 2020 | | semi-annually on April 1 and October 1 | | 650,000 |
| | 645,207 |
| | 644,720 |
|
Sirius XM (b) | | August 2013 | | 5.75% Senior Notes (the "5.75% Notes") | | August 1, 2021 | | semi-annually on February 1 and August 1 | | 600,000 |
| | 596,048 |
| | 595,720 |
|
Sirius XM (b) | | May 2013 | | 4.625% Senior Notes (the "4.625% Notes") | | May 15, 2023 | | semi-annually on May 15 and November 15 | | 500,000 |
| | 495,854 |
| | 495,602 |
|
Sirius XM (b) | | May 2014 | | 6.00% Senior Notes (the "6.00% Notes") | | July 15, 2024 | | semi-annually on January 15 and July 15 | | 1,500,000 |
| | 1,485,866 |
| | 1,485,196 |
|
Sirius XM (b) | | March 2015 | | 5.375% Senior Notes (the "5.375% Notes due 2025") | | April 15, 2025 | | semi-annually on April 15 and October 15 | | 1,000,000 |
| | 989,887 |
| | 989,446 |
|
Sirius XM (b)(c) | | May 2016 | | 5.375% Senior Notes (the "5.375% Notes due 2026") | | July 15, 2026 | | semi-annually on January 15 and July 15 | | 1,000,000 |
| | 988,838 |
| | — |
|
Sirius XM (b)(d) | | August 2012 | | 5.25% Senior Secured Notes (the "5.25% Notes") | | August 15, 2022 | | semi-annually on February 15 and August 15 | | 400,000 |
| | 395,950 |
| | 395,675 |
|
Sirius XM (e) | | December 2012 | | Senior Secured Revolving Credit Facility (the "Credit Facility") | | June 16, 2020 | | variable fee paid quarterly | | 1,750,000 |
| | — |
| | 340,000 |
|
Sirius XM | | Various | | Capital leases | | Various | | n/a | | n/a |
| | 16,441 |
| | 12,892 |
|
Total Debt | | 6,110,762 |
| | 5,455,533 |
|
Less: total current maturities | | 5,611 |
| | 4,764 |
|
Less: total deferred financing costs for Notes | | 8,343 |
| | 7,155 |
|
Total long-term debt | | $ | 6,096,808 |
| | $ | 5,443,614 |
|
| |
(a) | The carrying value of the obligations is net of any remaining unamortized original issue discount. |
| |
(b) | Substantially all of our domestic wholly-owned subsidiaries have guaranteed these notes. |
| |
(c) | In May 2016, Sirius XM issued $1,000,000 aggregate principal amount of 5.375% Senior Notes due 2026, with an original issuance discount of $11,250. |
| |
(d) | The liens securing the 5.25% Notes are equal and ratable to the liens granted to secure the Credit Facility. |
| |
(e) | In December 2012, Sirius XM entered into a five-year Credit Facility with a syndicate of financial institutions for $1,250,000. In June 2015, Sirius XM entered into an amendment to increase the total borrowing capacity under the Credit Facility to $1,750,000 and to extend the maturity to June 2020. Sirius XM's obligations under the Credit Facility are guaranteed by certain of its material domestic subsidiaries and are secured by a lien on substantially all of Sirius XM's assets and the assets of its material domestic subsidiaries. Interest on borrowings is payable on a monthly basis and accrues at a rate based on LIBOR plus an applicable rate. Sirius XM is also required to pay a variable fee on the average daily unused portion of the Credit Facility which is payable on a quarterly basis. The variable rate for the unused portion of the Credit Facility was 0.30% per annum as of June 30, 2016. As of June 30, 2016, $1,750,000 was available for future borrowing under the Credit Facility. Sirius XM's outstanding borrowings under the Credit Facility are classified as Long-term debt within our unaudited consolidated balance sheets due to the long-term maturity of this debt. |
Covenants and Restrictions
Under the Credit Facility, Sirius XM, our wholly-owned subsidiary, must comply with a debt maintenance covenant that it not exceed a total leverage ratio, calculated as consolidated total debt to consolidated operating cash flow, of 5.0 to 1.0. The Credit Facility generally requires compliance with certain covenants that restrict Sirius XM's ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign,
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
lease or otherwise dispose of all or substantially all of Sirius XM's assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions.
The indentures governing Sirius XM's notes restrict Sirius XM's non-guarantor subsidiaries' ability to create, assume, incur or guarantee additional indebtedness without such non-guarantor subsidiary guaranteeing each such series of notes on a pari passu basis. The indentures governing the notes also contain covenants that, among other things, limit Sirius XM's ability and the ability of its subsidiaries to create certain liens; enter into sale/leaseback transactions; and merge or consolidate.
Under Sirius XM's debt agreements, the following generally constitute an event of default: (i) a default in the payment of interest; (ii) a default in the payment of principal; (iii) failure to comply with covenants; (iv) failure to pay other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; (v) certain events of bankruptcy; (vi) a judgment for payment of money exceeding a specified aggregate amount; and (vii) voidance of subsidiary guarantees, subject to grace periods where applicable. If an event of default occurs and is continuing, our debt could become immediately due and payable.
At June 30, 2016 and December 31, 2015, we were in compliance with our debt covenants.
Common Stock, par value $0.001 per share
We are authorized to issue up to 9,000,000 shares of common stock. There were 4,893,341 and 5,153,451 shares of common stock issued and 4,888,341 and 5,147,647 shares outstanding on June 30, 2016 and December 31, 2015, respectively.
As of June 30, 2016, common stock of 356,766 shares were reserved for issuance in connection with outstanding incentive stock based awards and common stock to be granted to members of our board of directors, employees and third parties.
Stock Repurchase Program
Since December 2012, our board of directors has approved for repurchase an aggregate of $8,000,000 of our common stock. Our board of directors did not establish an end date for this stock repurchase program. Shares of common stock may be purchased from time to time on the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act, in privately negotiated transactions, including transactions with Liberty Media and its affiliates, or otherwise. As of June 30, 2016, our cumulative repurchases since December 2012 under our stock repurchase program totaled 2,044,947 shares for $7,292,503, and $707,497 remained available under our stock repurchase program.
The following table summarizes our total share repurchase activity for the six months ended:
|
| | | | | | | | | | | | | | |
| | June 30, 2016 | | June 30, 2015 |
Share Repurchase Type | | Shares | | Amount | | Shares | | Amount |
Open Market (a) | | 261,451 |
| | $ | 991,363 |
| | 288,156 |
| | $ | 1,093,955 |
|
| |
(a) | As of June 30, 2016, $19,458 of common stock repurchases had not settled, nor been retired, and were recorded as Treasury stock within our unaudited consolidated balance sheets and unaudited consolidated statements of stockholders’ (deficit) equity. |
Preferred Stock, par value $0.001 per share
We are authorized to issue up to 50,000 shares of undesignated preferred stock with a liquidation preference of $0.001 per share. There were no shares of preferred stock issued or outstanding as of June 30, 2016 and December 31, 2015.
We recognized share-based payment expense of $24,177 and $19,524 for the three months ended June 30, 2016 and 2015, respectively, and $47,870 and $38,941 for the six months ended June 30, 2016 and 2015, respectively.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
2015 Long-Term Stock Incentive Plan
In May 2015, our stockholders approved the Sirius XM Holdings Inc. 2015 Long-Term Stock Incentive Plan (the “2015 Plan”). Employees, consultants and members of our board of directors are eligible to receive awards under the 2015 Plan. The 2015 Plan provides for the grant of stock options, restricted stock awards, restricted stock units and other stock-based awards that the compensation committee of our board of directors deem appropriate. Vesting and other terms of stock-based awards are set forth in the agreements with the individuals receiving the awards. Stock-based awards granted under the 2015 Plan are generally subject to a vesting requirement. Stock options generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of common stock upon vesting. As of June 30, 2016, 230,845 shares of common stock were available for future grants under the 2015 Plan.
Other Plans
We maintain four other share-based benefit plans — the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan, the XM 2007 Stock Incentive Plan, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan and the XM 1998 Shares Award Plan. No further awards may be made under these plans.
The following table summarizes the weighted-average assumptions used to compute the fair value of options granted to employees and members of our board of directors:
|
| | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Risk-free interest rate | 1.2% | | 1.3% | | 1.2% | | 1.3% |
Expected life of options — years | 3.79 | | 3.83 | | 3.78 | | 3.83 |
Expected stock price volatility | 24% | | 26% | | 24% | | 26% |
Expected dividend yield | 0% | | 0% | | 0% | | 0% |
There were no options granted to third parties during the three and six months ended June 30, 2016 and 2015. Since we have not historically paid dividends on our common stock, the dividend yield used in the Black-Scholes-Merton option value was zero for all periods.
The following table summarizes stock option activity under our share-based plans for the six months ended June 30, 2016:
|
| | | | | | | | | | | | |
| Options | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding as of December 31, 2015 | 338,481 |
| | $ | 3.29 |
| | | | |
Granted | 16,007 |
| | $ | 3.87 |
| | | | |
Exercised | (6,694 | ) | | $ | 1.97 |
| | | | |
Forfeited, cancelled or expired | (8,446 | ) | | $ | 4.43 |
| | | | |
Outstanding as of June 30, 2016 | 339,348 |
| | $ | 3.32 |
| | 7.26 | | $ | 216,996 |
|
Exercisable as of June 30, 2016 | 113,974 |
| | $ | 2.47 |
| | 5.37 | | $ | 168,234 |
|
The weighted average grant date fair value per share of options granted during the six months ended June 30, 2016 was $0.78. The total intrinsic value of stock options exercised during the six months ended June 30, 2016 and 2015 was $12,942 and $39,795, respectively. During the six months ended June 30, 2016, the number of net settled shares which were issued as a result of stock option exercises was 2,020.
We recognized share-based payment expense associated with stock options of $18,987 and $16,553 for the three months ended June 30, 2016 and 2015, respectively, and $38,026 and $33,244 for the six months ended June 30, 2016 and 2015, respectively.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
The following table summarizes the restricted stock unit and stock award activity under our share-based plans for the six months ended June 30, 2016:
|
| | | | | | |
| Shares | | Grant Date Fair Value Per Share |
Nonvested as of December 31, 2015 | 16,088 |
| | $ | 3.73 |
|
Granted | 1,814 |
| | $ | 3.91 |
|
Vested | (193 | ) | | $ | 3.91 |
|
Forfeited | (292 | ) | | $ | 3.67 |
|
Nonvested as of June 30, 2016 | 17,417 |
| | $ | 3.74 |
|
The total intrinsic value of restricted stock units and stock awards vesting during the six months ended June 30, 2016 and 2015 was $765 and $300, respectively. During the six months ended June 30, 2016, the number of net settled shares which were issued as a result of restricted stock units and stock awards vesting was 125.
We recognized share-based payment expense associated with restricted stock units and stock awards of $5,190 and $2,971 during the three months ended June 30, 2016 and 2015, respectively, and $9,844 and $5,697 for the six months ended June 30, 2016 and 2015, respectively.
Total unrecognized compensation costs related to unvested share-based payment awards for stock options and restricted stock units granted to employees, members of our board of directors and third parties at June 30, 2016 and December 31, 2015, net of estimated forfeitures, were $211,320 and $261,628, respectively. The total unrecognized compensation costs at June 30, 2016 are expected to be recognized over a weighted-average period of 2.4 years.
401(k) Savings Plan
Sirius XM sponsors the Sirius XM Radio Inc. 401(k) Savings Plan (the “Sirius XM Plan”) for eligible employees. The Sirius XM Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax eligible earnings, subject to certain defined limits. We match 50% of an employee’s voluntary contributions per pay period on the first 6% of an employee’s pre-tax salary up to a maximum of 3% of eligible compensation. We may also make additional discretionary matching, true-up matching and non-elective contributions to the Sirius XM Plan. Employer matching contributions under the Sirius XM Plan vest at a rate of 33.33% for each year of employment and are fully vested after three years of employment for all current and future contributions. Our cash employer matching contributions are not used to purchase shares of our common stock on the open market, unless the employee elects our common stock as their investment option for this contribution. We recognized $1,526 and $1,513 in expense during the three months ended June 30, 2016 and 2015, respectively, and $3,217 and $4,540 in expense during six months ended June 30, 2016 and 2015, respectively.
Sirius XM Holdings Inc. Deferred Compensation Plan
In 2015, we adopted the Sirius XM Holdings Inc. Deferred Compensation Plan (the “DCP”). The DCP allows members of our board of directors and certain eligible employees to defer all or a portion of their base salary, cash incentive compensation and/or board of directors’ compensation, as applicable, each plan year starting in 2016. Pursuant to the terms of the DCP, we may elect to make additional contributions beyond amounts deferred by participants, but we are under no obligation to do so. We have established a grantor (or “rabbi”) trust to facilitate the payment of our obligations under the DCP.
As of June 30, 2016, the fair value of the investments in the trust was $4,240, which is included in Other long-term assets in our unaudited consolidated balance sheets and is classified as trading securities. Trading gains and losses associated with the trust are recorded in Other income within our unaudited consolidated statements of comprehensive income. The associated liability is recorded within Other long-term liabilities in our unaudited consolidated balance sheets, and any increase or decrease in the liability is recorded in General and administration expense within our unaudited consolidated statements of comprehensive income.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
| |
(13) | Commitments and Contingencies |
The following table summarizes our expected contractual cash commitments as of June 30, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| Thereafter |
| Total |
Debt obligations | $ | 2,886 |
|
| $ | 5,485 |
|
| $ | 4,477 |
|
| $ | 3,169 |
|
| $ | 1,150,424 |
|
| $ | 5,000,000 |
|
| $ | 6,166,441 |
|
Cash interest payments | 143,500 |
|
| 348,922 |
|
| 341,027 |
|
| 340,928 |
|
| 328,730 |
|
| 1,058,688 |
|
| 2,561,795 |
|
Satellite and transmission | 8,052 |
|
| 3,919 |
|
| 4,267 |
|
| 4,623 |
|
| 4,717 |
|
| 9,756 |
|
| 35,334 |
|
Programming and content | 120,628 |
|
| 228,410 |
|
| 205,859 |
|
| 188,103 |
|
| 163,382 |
|
| 298,650 |
|
| 1,205,032 |
|
Marketing and distribution | 12,093 |
|
| 14,963 |
|
| 12,584 |
|
| 10,141 |
|
| 4,645 |
|
| 4,600 |
|
| 59,026 |
|
Satellite incentive payments | 5,749 |
|
| 13,296 |
|
| 14,302 |
|
| 10,652 |
|
| 7,918 |
|
| 35,609 |
|
| 87,526 |
|
Operating lease obligations | 20,147 |
|
| 44,530 |
|
| 42,943 |
|
| 38,773 |
|
| 36,384 |
|
| 180,227 |
|
| 363,004 |
|
Other | 76,542 |
|
| 22,494 |
|
| 7,814 |
|
| 1,213 |
|
| 384 |
|
| 40 |
|
| 108,487 |
|
Total (1) | $ | 389,597 |
|
| $ | 682,019 |
|
| $ | 633,273 |
|
| $ | 597,602 |
|
| $ | 1,696,584 |
|
| $ | 6,587,570 |
|
| $ | 10,586,645 |
|
| |
(1) | The table does not include our reserve for uncertain tax positions, which at June 30, 2016 totaled $5,072, as the specific timing of any cash payments cannot be projected with reasonable certainty. |
Debt obligations. Debt obligations include principal payments on outstanding debt and capital lease obligations.
Cash interest payments. Cash interest payments include interest due on outstanding debt and capital lease payments through maturity.
Satellite and transmission. We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater networks.
Programming and content. We have entered into various programming agreements. Under the terms of these agreements, our obligations include fixed payments, advertising commitments and revenue sharing arrangements. Our future revenue sharing costs are dependent upon many factors and are difficult to estimate; therefore, they are not included in our minimum contractual cash commitments.
Marketing and distribution. We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. Certain programming and content agreements also require us to purchase advertising on properties owned or controlled by the licensors. We also reimburse automakers for certain engineering and development costs associated with the incorporation of satellite radios into new vehicles they manufacture.
Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of certain of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to XM-3 and XM-4 meeting their fifteen-year design life. Boeing may also be entitled to additional incentive payments up to $10,000 if our XM-4 satellite continues to operate above baseline specifications during the five years beyond the satellite’s fifteen-year design life.
Space Systems/Loral, the manufacturer of certain of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to XM-5, FM-5 and FM-6 meeting their fifteen-year design life.
Operating lease obligations. We have entered into both cancelable and non-cancelable operating leases for office space, equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements and rent escalations that have initial terms ranging from one to fifteen years, and certain leases have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.
Other. We have entered into various agreements with third parties for general operating purposes. In addition to the minimum contractual cash commitments described above, we have entered into agreements with other variable cost arrangements. These future costs are dependent upon many factors and are difficult to anticipate; however, these costs may be
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
substantial. We may enter into additional programming, distribution, marketing and other agreements that contain similar variable cost provisions. The cost of our stock acquired but not paid for as of June 30, 2016 is also included in this category.
We do not have any other significant off-balance sheet financing arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Legal Proceedings
In the ordinary course of business, we are a defendant or party to various claims and lawsuits, including those discussed below.
We record a liability when we believe that it is both probable that a liability will be incurred, and the amount of loss can be reasonably estimated. We evaluate developments in legal matters that could affect the amount of liability that has been previously accrued and make adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. We may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others, because: (i) the damages sought are indeterminate; (ii) the proceedings are in the relative early stages; (iii) there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) there remain significant factual issues to be determined or resolved; (vi) the relevant law is unsettled; or (vii) the proceedings involve novel or untested legal theories. In such instances, there may be considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.
Telephone Consumer Protection Act Suits. We are a defendant in several purported class action suits that allege that we, or call center vendors acting on our behalf, made calls which violate provisions of the Telephone Consumer Protection Act of 1991 (the “TCPA”). The plaintiffs in these actions allege, among other things, that we called mobile phones using an automatic telephone dialing system without the consumer’s prior consent or, alternatively, after the consumer revoked his or her prior consent. In one of the actions, the plaintiff also alleges that we violated the TCPA’s call time restrictions and, in one of the other actions, the plaintiff also alleges that we violated the TCPA’s do not call restrictions. These purported class action cases are titled Erik Knutson v. Sirius XM Radio Inc., No. 12-cv-0418-AJB-NLS (S.D. Cal.), Francis W. Hooker v. Sirius XM Radio Inc., No. 4:13-cv-3 (E.D. Va.), Yefim Elikman v. Sirius XM Radio Inc. and Career Horizons, Inc., No. 1:15-cv-02093 (N.D. Ill.), and Anthony Parker v. Sirius XM Radio Inc., No. 8:15-cv-01710-JSM-EAJ (M.D. Fla), and are described in Item 3., Legal Proceedings, in our Annual Report on Form 10-K for the year ended December 31, 2015.
On April 5, 2016, we entered into a memorandum of understanding to settle these purported class action suits. The settlement is expected to resolve the claims of consumers beginning in February 2008 relating to telemarketing calls to their mobile telephones. As part of this settlement, we will agree to pay $35,000 in cash (from which notice, administration and other costs and attorneys’ fees will be paid), to offer participating class members the option of receiving three months of our Select service for no charge, and to enter into agreements to make modifications to the practices of certain call center vendors. The memorandum of understanding is subject to the execution of a definitive settlement agreement and court approval, neither of which can be assured.
Pre-1972 Sound Recording Matters. In August 2013, SoundExchange, Inc. filed a complaint in the United States District Court for the District of Columbia alleging that we underpaid royalties for statutory licenses during the 2007-2012 period in violation of the regulations established by the Copyright Royalty Board for that period. SoundExchange principally alleges that we improperly reduced our calculation of gross revenues, on which the royalty payments are based, by deducting non-recognized revenue attributable to pre-1972 recordings and Premier package revenue that is not “separately charged” as required by the regulations. SoundExchange is seeking compensatory damages of not less than $50,000 and up to $100,000 or more, payment of late fees and interest, and attorneys’ fees and costs.
In August 2014, the United States District Court for the District of Columbia granted our motion to dismiss the complaint without prejudice on the grounds that the case properly should be pursued before the Copyright Royalty Board rather than the district court. In December 2014, SoundExchange filed a petition with the Copyright Royalty Board requesting an order interpreting the applicable regulations.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
This matter is titled SoundExchange, Inc. v. Sirius XM Radio, Inc., No.13-cv-1290-RJL (D.D.C.), and Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, United States Copyright Royalty Board, No. 2006-1 CRB DSTRA. Information concerning the action is publicly available in filings under the docket numbers. The outcome of this matter is inherently unpredictable and subject to significant uncertainties, many of which are beyond our control. No provision was made for losses to the extent such are not probable and estimable. We believe we have substantial defenses to the claims asserted, and intend to defend this action vigorously.
Other Matters. In the ordinary course of business, we are a defendant in various other lawsuits and arbitration proceedings, including derivative actions; actions filed by subscribers, both on behalf of themselves and on a class action basis; former employees; parties to contracts or leases; and owners of patents, trademarks, copyrights or other intellectual property. None of these other matters, in our opinion, is likely to have a material adverse effect on our business, financial condition or results of operations.
We file a consolidated federal income tax return for all of our wholly-owned subsidiaries, including Sirius XM. Income tax expense for the three months ended June 30, 2016 and 2015 was $108,260 and $45,421, respectively, and $217,603 and $184,350 for the six months ended June 30, 2016 and 2015, respectively. Our effective tax rate for the three and six months ended June 30, 2016 was 38.5% and 38.7%, respectively. We estimate our annual effective tax rate for the year ending December 31, 2016 will be 38.0%. Our effective tax rate for the three and six months ended June 30, 2015 was 30.6% and 46.9%, respectively, primarily due to the effect of a tax law change in the District of Columbia during the three months ended March 31, 2015 and in New York City during the three months ended June 30, 2015. The tax law change in the District of Columbia will reduce our future taxes and thus we will use less of certain net operating losses in the future which resulted in a $44,392 increase in our valuation allowance during the three months ended March 31, 2015. The tax law change in New York City will increase certain net operating losses to be utilized in the future which resulted in a $16,945 increase in our deferred tax asset during the three months ended June 30, 2015.
As of June 30, 2016 and December 31, 2015, we had a valuation allowance related to deferred tax assets of $47,773 and $49,095, respectively, that were not likely to be realized due to certain net operating loss limitations and acquired net operating losses that we were not more likely than not going to utilize.
Stock Repurchase Program
For the period from July 1, 2016 to July 22, 2016, we repurchased 11,655 shares of our common stock on the open market for an aggregate purchase price of $47,395, including fees and commissions.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
All amounts referenced in this Item 2 are in thousands, except per subscriber and per installation amounts, unless otherwise stated.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2015.
Special Note Regarding Forward-Looking Statements
The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, particularly the risk factors described under “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2015 and “Management’s Discussion and Analysis of Financial Condition and Results or Operations” herein and in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2015.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
| |
• | we face substantial competition and that competition is likely to increase over time; |
| |
• | our ability to attract and retain subscribers in the future is uncertain; |
| |
• | consumer protection laws and their enforcement could damage our business; |
| |
• | the unfavorable outcome of pending or future litigation; |
| |
• | the market for music rights is changing and is subject to significant uncertainties; |
| |
• | our business depends in large part upon the auto industry; |
| |
• | general economic conditions can affect our business; |
| |
• | if we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer; |
| |
• | other existing or future government laws and regulations could harm our business; |
| |
• | failure of our satellites would significantly damage our business; |
| |
• | interruption or failure of our information technology and communications systems could negatively impact our results and our brand; |
| |
• | we may not realize the benefits of acquisitions or other strategic initiatives; |
| |
• | rapid technological and industry changes could adversely impact our services; |
| |
• | failure of third parties to perform could adversely affect our business; |
| |
• | our service may experience harmful interference from new and existing wireless operations; |
| |
• | failure to comply with FCC requirements could damage our business; |
| |
• | we may from time to time modify our business plan, and these changes could adversely affect us and our financial condition; |
| |
• | we have a significant amount of indebtedness, and our revolving credit facility contains certain covenants that restrict our current and future operations; |
| |
• | our studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities; |
| |
• | our principal stockholder has significant influence, including over actions requiring stockholder approval, and its interests may differ from the interests of other holders of our common stock; |
| |
• | we are a “controlled company” within the meaning of the NASDAQ listing rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements; and |
| |
• | our business may be impaired by third-party intellectual property rights. |
Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Executive Summary
We transmit music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive music and other channels, plus features such as SiriusXM On Demand and MySXM, over our Internet radio service, including through applications for mobile devices. We are also a leader in providing connected vehicle services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle operators while providing marketing and operational benefits to automakers and their dealers.
We have agreements with every major automaker (“OEMs”) to offer satellite radio in their vehicles. We also acquire subscribers through marketing to owners and lessees of previously owned vehicles that include factory-installed satellite radios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retailers online and at locations nationwide and through our website. Satellite radio services are also offered to customers of certain rental car companies.
As of June 30, 2016, we had approximately 30.6 million subscribers of which approximately 25.1 million were self-pay subscribers and approximately 5.5 million were paid promotional subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers for subscriptions included in the sale or lease price of a vehicle; subscribers to our Internet services who do not also have satellite radio subscriptions; and certain subscribers to our weather, traffic, and data services who do not also have satellite radio subscriptions. Subscribers and subscription related revenues and expenses associated with our connected vehicle services and the Sirius XM Canada service are not included in our subscriber count or subscriber-based operating metrics.
Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly plan. We offer discounts for prepaid, longer term subscription plans, as well as a multiple subscription discount. We also derive revenue from activation and other fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic and data services.
In certain cases, a subscription to our radio services is included in the sale or lease price of new vehicles or previously owned vehicles. The length of these subscriptions varies but is typically three to twelve months. We receive payments for these subscriptions from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.
Liberty Media beneficially owns, directly and indirectly, over 50% of the outstanding shares of our common stock. As a result, we are a “controlled company” for the purposes of the NASDAQ corporate governance requirements. Liberty Media owns interests in a range of media, communications and entertainment businesses.
Recent Development
On May 12, 2016, our subsidiary, Sirius XM Radio Inc. (“Sirius XM”), entered into an arrangement agreement (the “Arrangement Agreement”) with Sirius XM Canada Holdings Inc. ("Sirius XM Canada"), an entity in which Sirius XM currently holds an approximate 37% economic interest and 25% voting interest. Pursuant to the Arrangement Agreement, Sirius XM and certain Canadian shareholders will form a new company to acquire shares of Sirius XM Canada not already owned by them pursuant to a plan of arrangement (the “Transaction”). In connection with the Transaction, Sirius XM Canada’s shareholders will be entitled to elect to receive, for each share of Sirius XM Canada held, C$4.50 (U.S. $3.50 as of May 12, 2016) in (i) cash, (ii) shares of our common stock, (iii) a security exchangeable for shares of our common stock, or (iv) a combination thereof; provided that no more than 50% of the total consideration in the Transaction (or up to 35,000 shares) will be issued in our common stock and exchangeable shares. All of the obligations of Sirius XM under the Arrangement Agreement are guaranteed by us.
Following the Transaction, Sirius XM is expected to hold a 70% economic interest and 33% voting interest in Sirius XM Canada, with the remainder of the voting power and economic interest held by Slaight Communications and Obelysk Media, two of Sirius XM Canada’s current Canadian shareholders. Sirius XM expects to contribute to Sirius XM Canada approximately U.S. $275,000 in connection with the Transaction (assuming that all shareholders elect to receive cash in connection with the Transaction), which amount is expected to be used to pay the cash consideration to Sirius XM Canada’s shareholders and will be decreased proportionately if shareholders elect to receive consideration in shares of our common stock or securities exchangeable for our common stock.
The Transaction is subject to the approval of two-thirds of the shareholders of Sirius XM Canada, as well as a majority of the minority shareholders of Sirius XM Canada. The Transaction is also subject to receipt of court and Canadian Radio-Television and Telecommunications Commission approval. Pending receipt of all necessary approvals, the Transaction is expected to close no later than end of the fourth quarter of 2016.
Results of Operations
Set forth below are our results of operations for the three and six months ended June 30, 2016 compared with the three and six months ended June 30, 2015.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unaudited | | 2016 vs 2015 Change |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | Three Months | | Six Months |
| 2016 | | 2015 | | 2016 | | 2015 | | Amount | | % | | Amount | | % |
Revenue: | | | | | | | | | | | | | | | |
Subscriber revenue | $ | 1,033,284 |
| | $ | 940,077 |
| | $ | 2,042,966 |
|
| $ | 1,851,547 |
| | $ | 93,207 |
| | 10 | % | | $ | 191,419 |
| | 10 | % |
Advertising revenue | 33,521 |
| | 28,839 |
| | 65,062 |
|
| 55,712 |
| | 4,682 |
| | 16 | % | | 9,350 |
| | 17 | % |
Equipment revenue | 27,858 |
| | 29,263 |
| | 54,979 |
|
| 54,104 |
| | (1,405 | ) | | (5 | )% | | 875 |
| | 2 | % |
Other revenue | 140,903 |
| | 125,031 |
| | 273,569 |
|
| 242,837 |
| | 15,872 |
| | 13 | % | | 30,732 |
| | 13 | % |
Total revenue | 1,235,566 |
| | 1,123,210 |
| | 2,436,576 |
|
| 2,204,200 |
| | 112,356 |
| | 10 | % | | 232,376 |
| | 11 | % |
Operating expenses: | | | | |
|
|
| | | | | | | | |
Cost of services: | | | | |
|
|
| | | | | | | | |
Revenue share and royalties | 264,385 |
| | 331,517 |
| | 516,129 |
|
| 544,495 |
| | (67,132 | ) | | (20 | )% | | (28,366 | ) | | (5 | )% |
Programming and content | 83,645 |
| | 69,370 |
| | 168,745 |
|
| 140,516 |
| | 14,275 |
| | 21 | % | | 28,229 |
| | 20 | % |
Customer service and billing | 93,712 |
| | 91,932 |
| | 190,579 |
|
| 184,029 |
| | 1,780 |
| | 2 | % | | 6,550 |
| | 4 | % |
Satellite and transmission | 34,847 |
| | 21,714 |
| | 58,385 |
|
| 43,018 |
| | 13,133 |
| | 60 | % | | 15,367 |
| | 36 | % |
Cost of equipment | 9,728 |
| | 10,930 |
| | 19,507 |
|
| 19,775 |
| | (1,202 | ) | | (11 | )% | | (268 | ) | | (1 | )% |
Subscriber acquisition costs | 128,956 |
| | 136,504 |
| | 261,405 |
|
| 258,764 |
| | (7,548 | ) | | (6 | )% | | 2,641 |
| | 1 | % |
Sales and marketing | 91,358 |
| | 86,493 |
| | 180,084 |
|
| 165,237 |
| | 4,865 |
| | 6 | % | | 14,847 |
| | 9 | % |
Engineering, design and development | 18,893 |
| | 16,088 |
| | 38,334 |
|
| 31,048 |
| | 2,805 |
| | 17 | % | | 7,286 |
| | 23 | % |
General and administrative | 81,178 |
| | 72,137 |
| | 158,683 |
|
| 151,960 |
| | 9,041 |
| | 13 | % | | 6,723 |
| | 4 | % |
Depreciation and amortization | 66,708 |
| | 67,096 |
| | 134,335 |
|
| 132,123 |
| | (388 | ) | | (1 | )% | | 2,212 |
| | 2 | % |
Total operating expenses | 873,410 |
| | 903,781 |
| | 1,726,186 |
|
| 1,670,965 |
| | (30,371 | ) | | (3 | )% | | 55,221 |
| | 3 | % |
Income from operations | 362,156 |
| | 219,429 |
| | 710,390 |
|
| 533,235 |
| | 142,727 |
| | 65 | % | | 177,155 |
| | 33 | % |
Other income (expense): | | | | |
|
|
| | | | | | | | |
Interest expense | (83,396 | ) | | (75,380 | ) | | (161,796 | ) |
| (145,288 | ) | | (8,016 | ) | | (11 | )% | | (16,508 | ) | | (11 | )% |
Other income | 2,515 |
| | 4,221 |
| | 13,363 |
|
| 4,944 |
| | (1,706 | ) | | (40 | )% | | 8,419 |
| | 170 | % |
Total other expense | (80,881 | ) | | (71,159 | ) | | (148,433 | ) |
| (140,344 | ) | | (9,722 | ) | | (14 | )% | | (8,089 | ) | | (6 | )% |
Income before income taxes | 281,275 |
| | 148,270 |
| | 561,957 |
|
| 392,891 |
| | 133,005 |
| | 90 | % | | 169,066 |
| | 43 | % |
Income tax expense | (108,260 | ) | | (45,421 | ) | | (217,603 | ) |
| (184,350 | ) | | (62,839 | ) | | (138 | )% | | (33,253 | ) | | (18 | )% |
Net income | $ | 173,015 |
| | $ | 102,849 |
| | $ | 344,354 |
|
| $ | 208,541 |
| | $ | 70,166 |
| | 68 | % | | $ | 135,813 |
| | 65 | % |
Total Revenue
Subscriber Revenue includes subscription, activation and other fees.
For the three months ended June 30, 2016 and 2015, subscriber revenue was $1,033,284 and $940,077, respectively, an increase of 10%, or $93,207. For the six months ended June 30, 2016 and 2015, subscriber revenue was $2,042,966 and $1,851,547, respectively, an increase of 10%, or $191,419. The increase was primarily attributable to an increase in the
daily weighted average number of subscribers and increases in certain of our self-pay subscription rates, partially offset by subscription discounts and limited channel plans offered in customer acquisition and retention programs.
We expect subscriber revenues to increase based on the growth of our subscriber base, the effects of increases in certain of our subscription rates and the sale of additional services to subscribers.
Advertising Revenue includes the sale of advertising on certain non-music channels.
For the three months ended June 30, 2016 and 2015, advertising revenue was $33,521 and $28,839, respectively, an increase of 16%, or $4,682. For the six months ended June 30, 2016 and 2015, advertising revenue was $65,062 and $55,712, respectively, an increase of 17%, or $9,350. The increase was primarily due to a greater number of advertising spots sold and transmitted as well as increased rates per spot.
We expect our advertising revenue to continue to grow as more advertisers are attracted to our national platform and growing subscriber base and as we launch additional non-music channels.
Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.
For the three months ended June 30, 2016 and 2015, equipment revenue was $27,858 and $29,263, respectively, a decrease of 5%, or $1,405. For the six months ended June 30, 2016 and 2015, equipment revenue was $54,979 and $54,104, respectively, an increase of 2%, or $875. The decrease for the three month period was driven by lower sales to distributors, partially offset by higher OEM royalties. The increase for the six month period was driven by higher royalties from an increase in OEM production and a higher royalty rate, partially offset by lower sales to distributors.
We expect equipment revenue to fluctuate based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume of equipment sales in our aftermarket and direct to consumer business.
Other Revenue includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our connected vehicle business, our Canadian affiliate and ancillary revenues.
For the three months ended June 30, 2016 and 2015, other revenue was $140,903 and $125,031, respectively, an increase of 13%, or $15,872. For the six months ended June 30, 2016 and 2015, other revenue was $273,569 and $242,837, respectively, an increase of 13%, or $30,732. The increase was driven by revenues from the U.S. Music Royalty Fee due to higher subscriber volumes on the rate which was increased in the first quarter of 2015 as well as an increase in subscribers.
We expect other revenue to increase as our growing subscriber base drives higher U.S. Music Royalty Fees.
Operating Expenses
Revenue Share and Royalties include distribution and content provider revenue share, royalties for transmitting content and web streaming, and advertising revenue share.