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 SEPTEMBER 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 October 25, 2016)
COMMON STOCK, $0.001 PAR VALUE
 
4,824,886,096
SHARES

 

Table of Contents

SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Item No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents


SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(in thousands, except per share data)
2016
 
2015
 
2016
 
2015
Revenue:
 

 
 

 
 
 
 
Subscriber revenue
$
1,069,746

 
$
974,471

 
$
3,112,712

 
$
2,826,018

Advertising revenue
34,268

 
33,131

 
99,330

 
88,843

Equipment revenue
31,306

 
25,875

 
86,285

 
79,979

Other revenue
142,326

 
136,235

 
415,895

 
379,072

Total revenue
1,277,646

 
1,169,712

 
3,714,222

 
3,373,912

Operating expenses:
 

 
 

 
 
 
 
Cost of services:
 

 
 

 
 
 
 
Revenue share and royalties
272,823

 
238,620

 
788,952

 
783,115

Programming and content
89,015

 
75,707

 
257,760

 
216,223

Customer service and billing
94,923

 
94,492

 
285,502

 
278,521

Satellite and transmission
22,224

 
22,743

 
80,609

 
65,761

Cost of equipment
9,674

 
9,246

 
29,181

 
29,021

Subscriber acquisition costs
120,111

 
133,009

 
381,516

 
391,773

Sales and marketing
99,194

 
90,541

 
279,278

 
255,778

Engineering, design and development
19,254

 
16,132

 
57,588

 
47,180

General and administrative
90,369

 
67,234

 
249,052

 
219,194

Depreciation and amortization
67,880

 
70,404

 
202,215

 
202,527

Total operating expenses
885,467

 
818,128

 
2,611,653

 
2,489,093

Income from operations
392,179

 
351,584

 
1,102,569

 
884,819

Other income (expense):
 

 
 

 
 
 
 
Interest expense
(89,092
)
 
(76,624
)
 
(250,888
)
 
(221,912
)
Other income
2,370

 
4,133

 
15,733

 
9,077

Total other expense
(86,722
)
 
(72,491
)
 
(235,155
)
 
(212,835
)
Income before income taxes
305,457

 
279,093

 
867,414

 
671,984

Income tax expense
(111,556
)
 
(112,543
)
 
(326,108
)
 
(296,893
)
Net income
$
193,901

 
$
166,550

 
$
541,306

 
$
375,091

Foreign currency translation adjustment, net of tax
(14
)
 
(91
)
 
420

 
(100
)
Total comprehensive income
$
193,887

 
$
166,459

 
$
541,726

 
$
374,991

Net income per common share:
 

 
 

 
 
 
 
Basic
$
0.04

 
$
0.03

 
$
0.11

 
$
0.07

Diluted
$
0.04

 
$
0.03

 
$
0.11

 
$
0.07

Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
4,870,281

 
5,297,797

 
4,957,820

 
5,436,378

Diluted
4,919,829

 
5,346,438

 
5,005,133

 
5,487,116

 
See accompanying notes to the unaudited consolidated financial statements.


2
Table of Contents

SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, 2016
 
December 31, 2015
ASSETS
(unaudited)



Current assets:
 

 
 

Cash and cash equivalents
$
572,382

 
$
111,838

Receivables, net
233,419

 
234,782

Inventory, net
28,030

 
22,295

Related party current assets
5,249

 
5,941

Prepaid expenses and other current assets
202,289

 
187,033

Total current assets
1,041,369

 
561,889

Property and equipment, net
1,381,114

 
1,415,401

Intangible assets, net
2,556,568

 
2,593,346

Goodwill
2,205,107

 
2,205,107

Related party long-term assets
6,163

 
—

Deferred tax assets
1,101,014

 
1,115,731

Other long-term assets
131,492

 
155,188

Total assets
$
8,422,827

 
$
8,046,662

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
620,599

 
$
625,313

Accrued interest
108,370

 
91,655

Current portion of deferred revenue
1,811,283

 
1,771,915

Current maturities of long-term debt
358,701

 
4,764

Related party current liabilities
3,015

 
2,840

Total current liabilities
2,901,968

 
2,496,487

Deferred revenue
170,662

 
157,609

Long-term debt
5,743,389

 
5,443,614

Related party long-term liabilities
8,665

 
10,795

Deferred tax liabilities
6,681

 
6,681

Other long-term liabilities
97,976

 
97,967

Total liabilities
8,929,341

 
8,213,153

Commitments and contingencies (Note 13)


 


Stockholders’ (deficit) equity:
 

 
 

Common stock, par value $0.001; 9,000,000 shares authorized; 4,846,154 and 5,153,451 shares issued; 4,843,154 and 5,147,647 outstanding at September 30, 2016 and December 31, 2015, respectively
4,846

 
5,153

Accumulated other comprehensive loss, net of tax
(82
)
 
(502
)
Additional paid-in capital
3,597,256

 
4,783,795

Treasury stock, at cost; 3,000 and 5,804 shares of common stock at September 30, 2016 and December 31, 2015, respectively
(12,526
)
 
(23,727
)
Accumulated deficit
(4,096,008
)
 
(4,931,210
)
Total stockholders’ (deficit) equity
(506,514
)
 
(166,491
)
Total liabilities and stockholders’ (deficit) equity
$
8,422,827

 
$
8,046,662


See accompanying notes to the unaudited consolidated financial statements.

3
Table of Contents

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
)
Cumulative effect of change in accounting principle
 
—


—


—


—

 
—

 
—

 
293,896


293,896

Comprehensive income, net of tax
 
—

 
—

 
420

 
—

 
—

 
—

 
541,306

 
541,726

Share-based payment expense
 
—

 
—

 
—

 
70,903

 
—

 
—

 
—

 
70,903

Exercise of options and vesting of restricted
stock units
 
10,558

 
11

 
—

 
337

 
—

 
—

 
—

 
348

Minimum withholding taxes on net share
settlement of stock-based compensation
 
—

 
—

 
—

 
(32,813
)
 
—

 
—

 
—

 
(32,813
)
Common stock repurchased
 
—

 
—

 
—

 
—

 
315,051

 
(1,214,083
)
 
—

 
(1,214,083
)
Common stock retired
 
(317,855
)
 
(318
)
 
—

 
(1,224,966
)
 
(317,855
)
 
1,225,284

 
—

 
—

Balance at September 30, 2016
 
4,846,154

 
$
4,846

 
$
(82
)
 
$
3,597,256

 
3,000

 
$
(12,526
)
 
$
(4,096,008
)
 
$
(506,514
)

See accompanying notes to the unaudited consolidated financial statements.


4
Table of Contents

SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 
For the Nine Months Ended September 30,
(in thousands)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
541,306

 
$
375,091

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
202,215

 
202,527

Non-cash interest expense, net of amortization of premium
6,571

 
5,851

Provision for doubtful accounts
39,629

 
34,031

Amortization of deferred income related to equity method investment
(2,082
)
 
(2,082
)
Gain on unconsolidated entity investments, net
(9,725
)
 
—

Dividend received from unconsolidated entity investment
7,160

 
11,260

Loss on disposal of assets
12,912

 
—

Share-based payment expense
77,890

 
62,334

Deferred income taxes
308,613

 
285,478

Other non-cash purchase price adjustments
—

 
(1,394
)
Changes in operating assets and liabilities:
 

 
 

Receivables
(38,266
)
 
(50,651
)
Inventory
(5,735
)
 
(7,346
)
Related party, net
(2,373
)
 
(14,020
)
Prepaid expenses and other current assets
(15,985
)
 
(70,758
)
Other long-term assets
26,668

 
(51,842
)
Accounts payable and accrued expenses
(1,841
)
 
26,584

Accrued interest
16,715

 
14,923

Deferred revenue
52,421

 
81,626

Other long-term liabilities
11

 
(658
)
Net cash provided by operating activities
1,216,104

 
900,954

Cash flows from investing activities:
 

 
 

Additions to property and equipment
(132,246
)
 
(90,943
)
Purchases of restricted and other investments
(4,168
)
 
(3,966
)
Net cash used in investing activities
(136,414
)
 
(94,909
)
Cash flows from financing activities:
 

 
 

Proceeds from exercise of stock options
348

 
259

Taxes paid in lieu of shares issued for stock-based compensation
(32,603
)
 
(39,622
)
Proceeds from long-term borrowings and revolving credit facility, net of costs
1,387,257

 
1,579,323

Repayment of long-term borrowings and revolving credit facility
(748,864
)
 
(693,456
)
Common stock repurchased and retired
(1,225,284
)
 
(1,647,728
)
Net cash used in financing activities
(619,146
)
 
(801,224
)
Net increase in cash and cash equivalents
460,544

 
4,821

Cash and cash equivalents at beginning of period
111,838

 
147,724

Cash and cash equivalents at end of period
$
572,382

 
$
152,545


See accompanying notes to the unaudited consolidated financial statements.

5
Table of Contents

SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
 
For the Nine Months Ended September 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
$
222,110

 
$
192,927

Income taxes paid
$
15,857

 
$
8,163

Non-cash investing and financing activities:
 
 
 
Capital lease obligations incurred to acquire assets
$
6,647

 
$
7,487

Treasury stock not yet settled
$
12,526

 
$
25,104


See accompanying notes to the unaudited consolidated financial statements.


6
Table of Contents
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.
As of September 30, 2016, Liberty Media Corporation (“Liberty Media”) beneficially owned, directly and indirectly, approximately 65% 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
Recapitalization of Sirius XM Canada
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.

7
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

The Transaction has been approved by the stockholders of Sirius XM Canada and has received the required court approval. The Transaction remains subject to receipt of Canadian Radio-Television and Telecommunications Commission approval. Pending receipt of this approval, the Transaction is expected to close in 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 September 30, 2016 and for the three and nine months ended September 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 nine months ended September 30, 2016 and have determined that 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 September 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.

8
Table of Contents
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:
 
September 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)
$
171,297

 
—

 
—

 
$
171,297

 
$
141,850

 
—

 
—

 
$
141,850

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Debt (b)
—

 
$
6,422,566

 
—

 
$
6,422,566

 
—

 
$
5,649,173

 
—

 
$
5,649,173

(a)
This amount approximates fair value.  The carrying value of our investment in Sirius XM Canada was $5,853 and $0 as of September 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 September 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 elected to early adopt ASU 2016-09 in the third quarter of 2016, which required that any adjustments be reflected as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption of ASU 2016-09 was the recognition of excess tax benefits in our provision for income taxes of $1,101 and $1,950 for the three months ended March 31, 2016 and June 30, 2016, respectively. The adoption of this ASU impacted our previously reported quarterly results during fiscal year 2016 as follows:
 
For the Three Months Ended

For the Six Months Ended
 
March 31, 2016

June 30, 2016

June 30, 2016
Income statements:
As reported
 
As adjusted
 
As reported
 
As adjusted
 
As reported

As adjusted
Income tax expense
$
(109,343
)
 
$
(108,242
)
 
$
(108,260
)

$
(106,310
)

$
(217,603
)

$
(214,552
)
Net income
$
171,339


$
172,440


$
173,015


$
174,965


$
344,354


$
347,405

Net income per common share - basic
$
0.03

 
$
0.03

 
$
0.04

 
$
0.04

 
$
0.07

 
$
0.07

Net income per common share - diluted
$
0.03

 
$
0.03

 
$
0.03

 
$
0.04

 
$
0.07

 
$
0.07

Additionally, we recognized net operating losses related to excess share-based compensation tax return deductions that were previously tracked off balance sheet but not recorded in our financial statements. As of January 1, 2016, the cumulative effect in the amount of $293,896, net of a $1,946 reserve for an uncertain tax position, was recorded as an increase to our Deferred tax assets and decrease to our Accumulated deficit in our unaudited consolidated balance sheets as a result of this cumulative effect of change in accounting principle.
Additional amendments to this ASU related to income taxes and minimum statutory withholding tax requirements had no impact to accumulated deficit, where the cumulative effect of these changes are required to be recorded. Further, there was no impact to our classification of awards as either equity or liabilities. We also elected to true-up forfeitures in the period of adoption and in the future will recognize forfeitures as they occur.
This ASU also required excess tax benefits to be separated from other income tax cash flows and classified as an operating activity, however there was no impact to the consolidated statement of cash flows as we have not had any excess tax

9
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

benefits (windfalls) recorded for book purposes. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated statement of cash flows as such cash flows have historically been presented as a financing activity.
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. This ASU must be adopted using a modified retrospective approach. We plan to adopt this ASU on January 1, 2019. 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.


(3)
Earnings per Share
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 nine months ended September 30, 2016 and 2015.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

Common stock equivalents of 192,134 and 162,433 for the three months ended September 30, 2016 and 2015, respectively, and 239,205 and 127,231 for the nine months ended September 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 September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 

 
 

 
 
 
 
Net income available to common stockholders for basic and diluted net income per common share
$
193,901

 
$
166,550

 
$
541,306

 
$
375,091

Denominator:
 

 
 

 
 

 
 
Weighted average common shares outstanding for basic net income per common share
4,870,281

 
5,297,797

 
4,957,820

 
5,436,378

Weighted average impact of dilutive equity instruments
49,548

 
48,641

 
47,313

 
50,738

Weighted average shares for diluted net income per common share
4,919,829

 
5,346,438

 
5,005,133

 
5,487,116

Net income per common share:
 

 
 

 
 

 
 
Basic
$
0.04

 
$
0.03

 
$
0.11

 
$
0.07

Diluted
$
0.04

 
$
0.03

 
$
0.11

 
$
0.07


(4)
Receivables, net
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:
 
September 30, 2016
 
December 31, 2015
Gross customer accounts receivable
$
108,110

 
$
98,740

Allowance for doubtful accounts
(7,443
)
 
(6,118
)
Customer accounts receivable, net
$
100,667

 
$
92,622

Receivables from distributors
107,172

 
120,012

Other receivables
25,580

 
22,148

Total receivables, net
$
233,419

 
$
234,782



(5)
Inventory, net
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

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

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:
 
September 30, 2016
 
December 31, 2015
Raw materials
$
11,618

 
$
11,085

Finished goods
25,937

 
21,159

Allowance for obsolescence
(9,525
)
 
(9,949
)
Total inventory, net
$
28,030

 
$
22,295



(6)
Goodwill
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 a reporting unit below its carrying amount.  If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized.
As of September 30, 2016, there were no indicators of impairment, and no impairment loss was recorded for goodwill during the three and nine months ended September 30, 2016 and 2015.  As of September 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.


(7)
Intangible Assets
Our intangible assets include the following:
 
 
 
September 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

 
(358,140
)
 
21,860

 
380,000

 
(336,822
)
 
43,178

OEM relationships
15 years
 
220,000

 
(42,778
)
 
177,222

 
220,000

 
(31,778
)
 
188,222

Licensing agreements
12 years
 
45,289

 
(29,741
)
 
15,548

 
45,289

 
(26,977
)
 
18,312

Proprietary software
8 years
 
27,215

 
(19,298
)
 
7,917

 
27,215

 
(17,752
)
 
9,463

Developed technology
10 years
 
2,000

 
(1,633
)
 
367

 
2,000

 
(1,483
)
 
517

Leasehold interests
7.4 years
 
—

 
—

 
—

 
132

 
(132
)
 
—

Total intangible assets
 
 
$
3,008,158

 
$
(451,590
)
 
$
2,556,568

 
$
3,008,290

 
$
(414,944
)
 
$
2,593,346



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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

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-5
 
2025
SIRIUS FM-6
 
2022
XM-3
 
2021
XM-4
 
2022
XM-5
 
2018
* As of April 7, 2016, this satellite was no longer being used to transmit satellite radio.  We plan to complete the deorbiting of this satellite during the fourth quarter of 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 lived 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 September 30, 2016, there were no indicators of impairment, and no impairment loss was recorded for intangible assets with indefinite lives during the three and nine months ended September 30, 2016 and 2015.
Definite Life Intangible Assets
Amortization expense for all definite life intangible assets was $12,080 and $12,824 for the three months ended September 30, 2016 and 2015, respectively, and $36,778 and $39,068 for the nine months ended September 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)
 
$
11,767

2017
 
34,882

2018
 
19,463

2019
 
19,026

2020
 
18,446

Thereafter
 
119,330

Total definite life intangible assets, net
 
$
222,914




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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

(8)
Property and Equipment
Property and equipment, net, consists of the following:
 
September 30, 2016
 
December 31, 2015
Satellite system
$
1,845,173

 
$
2,388,000

Terrestrial repeater network
125,266

 
117,127

Leasehold improvements
53,269

 
49,407

Broadcast studio equipment
80,425

 
70,888

Capitalized software and hardware
503,015

 
466,464

Satellite telemetry, tracking and control facilities
76,376

 
75,440

Furniture, fixtures, equipment and other
81,878

 
81,871

Land
38,411

 
38,411

Building
60,727

 
60,487

Construction in progress
145,431

 
101,324

Total property and equipment
3,009,971

 
3,449,419

Accumulated depreciation and amortization
(1,628,857
)
 
(2,034,018
)
Property and equipment, net
$
1,381,114

 
$
1,415,401

Construction in progress consists of the following:
 
September 30, 2016
 
December 31, 2015
Satellite system
$
19,313

 
$
12,912

Terrestrial repeater network
692

 
25,578

Capitalized software
101,554

 
37,064

Other
23,872

 
25,770

Construction in progress
$
145,431

 
$
101,324

Depreciation expense on property and equipment was $55,800 and $57,580 for the three months ended September 30, 2016 and 2015, respectively, and $165,437 and $163,459 for the nine months ended September 30, 2016 and 2015, respectively.  We retired property and equipment of $583,562 and $12,774 during the nine months ended September 30, 2016 and 2015, respectively, which included approximately $542,827 related to satellites during 2016. We recognized a loss on disposal of assets of $12,912, which has been recorded in Satellite and transmission expense in our unaudited consolidated statements of comprehensive income during the nine months ended September 30, 2016, which related to the disposal of certain obsolete spare parts for a future satellite.
We capitalize a portion of the interest on funds borrowed to finance the construction and launch of our satellites and launch vehicles. Capitalized interest is recorded as part of the asset’s cost and depreciated over the satellite’s useful life. Capitalized interest costs for the three and nine months ended September 30, 2016 was $107, which related to the construction of our SXM-7 and SXM-8 satellites.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

Satellites
As of September 30, 2016, we owned a fleet of six satellites, of which five were operating.  The chart below provides certain information on our satellites as of September 30, 2016:
Satellite Description
 
Year Delivered
 
Estimated End of
Depreciable Life
SIRIUS FM-1*
 
2000
 
2013
SIRIUS FM-5
 
2009
 
2024
SIRIUS FM-6
 
2013
 
2028
XM-3
 
2005
 
2020
XM-4
 
2006
 
2021
XM-5
 
2010
 
2025
* Satellite was fully depreciated as of September 30, 2016. As of April 7, 2016, this satellite was no longer being used to transmit satellite radio.  We plan to complete the deorbiting of this satellite during the fourth quarter of 2016.


(9)
Related Party Transactions 
In the normal course of business, we enter into transactions with related parties.

Liberty Media
As of September 30, 2016, Liberty Media beneficially owned, directly and indirectly, approximately 65% of the outstanding shares of our common stock 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. We have not had any related party transactions with Liberty Media during the three and nine months ended September 30, 2016 and 2015.

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:
 
September 30, 2016
 
December 31, 2015
Related party current assets
$
5,249

 
$
5,941

Related party long-term assets
$
6,163

 
$
—

Related party current liabilities
$
3,015

 
$
2,840

Related party long-term liabilities
$
8,665

 
$
10,795

Our related party current asset balances primarily consist of activation fees and streaming and chipset costs for which we are reimbursed.  Our related party long-term asset balance as of September 30, 2016 primarily included our investment balance in Sirius XM Canada. Our related party liabilities as of September 30, 2016 and December 31, 2015 included $2,776 for the current portion of deferred revenue and $8,557 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.

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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 September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue (a)
$
11,551

 
$
17,941

 
$
32,129


$
44,437

Other income
 

 
 

 





Share of net earnings (b)
$
1,274

 
$
—

 
$
9,725


$
—

Dividends (c)
$
—

 
$
3,891

 
$
3,575


$
8,880

(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 the 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)
Pursuant to the Arrangement Agreement, Sirius XM Canada did not pay any dividends during the three months ended September 30, 2016. Sirius XM Canada paid gross dividends to us of $3,891 during the three months ended September 30, 2015 and $7,548 and $11,881 during the nine months ended September 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.



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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

(10)
Debt
Our debt as of September 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 September 30, 2016
 
September 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 November 15
 
$
500,000

 
$
496,869

 
$
496,282

Sirius XM
(b)(f)
 
September 2013
 
5.875% Senior Notes
(the "5.875% Notes")
 
October 1, 2020
 
semi-annually on April 1 and October 1
 
650,000

 
645,456

 
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

 
596,216

 
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

 
495,982

 
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

 
1,486,208

 
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

 
990,112

 
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

 
989,047

 
—

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

 
396,090

 
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

 
14,192

 
12,892

Total Debt
 
6,110,172

 
5,455,533

Less: total current maturities (f)
 
358,701

 
4,764

Less: total deferred financing costs for Notes
 
8,082

 
7,155

Total long-term debt
 
$
5,743,389

 
$
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)
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 0.25% per annum as of September 30, 2016.  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. For a discussion of subsequent events refer to Note 15.
(f)
On August 25, 2016, we called for the redemption of $650,000 outstanding principal balance of the 5.875% Notes on October 1, 2016. As of September 30, 2016, $353,965 of the 5.875% Notes, which is net of $5,132 of original issue discount and deferred financing costs, was classified as current maturities of long-term debt and $290,903 of principal amount was classified as long-term debt within our unaudited consolidated balance sheets. For a discussion of subsequent events refer to Note 15.
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,

17
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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

(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, 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 September 30, 2016 and December 31, 2015, we were in compliance with our debt covenants.


(11)
Stockholders’ Equity
Common Stock, par value $0.001 per share
We are authorized to issue up to 9,000,000 shares of common stock. There were 4,846,154 and 5,153,451 shares of common stock issued and 4,843,154 and 5,147,647 shares outstanding on September 30, 2016 and December 31, 2015, respectively.
As of September 30, 2016, there were 374,087 shares of common stock reserved for issuance in connection with outstanding stock based awards and common stock to be granted to members of our board of directors, employees and third parties.
Stock Repurchase Program
As of September 30, 2016, our board of directors had 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 September 30, 2016, our cumulative repurchases since December 2012 under our stock repurchase program totaled 2,098,548 shares for $7,515,223, and $484,777 remained available under our stock repurchase program.
The following table summarizes our total share repurchase activity for the nine months ended:
 
 
September 30, 2016
 
September 30, 2015
Share Repurchase Type
 
Shares
 
Amount
 
Shares
 
Amount
Open Market (a)
 
315,051

 
$
1,214,083

 
432,616

 
$
1,646,798

(a)
As of September 30, 2016, $12,526 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 September 30, 2016 and December 31, 2015.



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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

(12)
Benefit Plans 
We recognized share-based payment expense of $30,020 and $23,393 for the three months ended September 30, 2016 and 2015, respectively, and $77,890 and $62,334 for the nine months ended September 30, 2016 and 2015, respectively.
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.  Stock-based awards granted under the 2015 Plan are generally subject to a graded vesting requirement, which is generally three to four years from the grant date, and may include performance requirements.  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 September 30, 2016, 181,711 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 September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Risk-free interest rate
1.1%
 
1.4%
 
1.1%
 
1.4%
Expected life of options — years
4.48
 
4.22
 
4.27
 
4.20
Expected stock price volatility
22%
 
26%
 
22%
 
26%
Expected dividend yield
0%
 
0%
 
0%
 
0%
There were no options granted to third parties during the three and nine months ended September 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 nine months ended September 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
53,346

 
$
4.13

 
 
 
 
Exercised
(36,824
)
 
$
2.58

 
 
 
 
Forfeited, cancelled or expired
(9,992
)
 
$
4.32

 
 
 
 
Outstanding as of September 30, 2016
345,011

 
$
3.47

 
7.49
 
$
244,220

Exercisable as of September 30, 2016
137,541

 
$
2.80

 
6.14
 
$
188,511

The weighted average grant date fair value per share of options granted during the nine months ended September 30, 2016 was $0.83.  The total intrinsic value of stock options exercised during the nine months ended September 30, 2016 and 2015 was $59,531 and $85,387, respectively.  During the nine months ended September 30, 2016, the number of net settled shares which were issued as a result of stock option exercises was 8,171.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

We recognized share-based payment expense associated with stock options of $21,484 and $19,418 for the three months ended September 30, 2016 and 2015, respectively, and $59,510 and $52,662 for the nine months ended September 30, 2016 and 2015, respectively.
The following table summarizes the restricted stock unit, including performance-based restricted stock units ("PRSUs"), and stock award activity under our share-based plans for the nine months ended September 30, 2016:
 
Shares
 
Grant Date
Fair Value
Per Share
Nonvested as of December 31, 2015
16,088

 
$
3.73

Granted
17,453

 
$
4.21

Vested
(4,009
)
 
$
3.66

Forfeited
(456
)
 
$
3.71

Nonvested as of September 30, 2016
29,076

 
$
4.02

The total intrinsic value of restricted stock units and stock awards vesting during the nine months ended September 30, 2016 and 2015 was $16,890 and $9,565, respectively. During the nine months ended September 30, 2016, the number of net settled shares which were issued as a result of restricted stock units vesting and the number of shares issued from stock awards granted totaled 2,387.
On August 5, 2016, we granted 3,036 PRSUs to certain employees, the vesting of which is subject to the employee's continuing employment and our achievement of certain performance goals. The awards cliff vest on the three-year anniversary of the grant date. We believe it is probable that the performance target applicable to these PRSUs will be achieved.
We recognized share-based payment expense associated with restricted stock units and stock awards of $8,536 and $3,975 during the three months ended September 30, 2016 and 2015, respectively, and $18,380 and $9,672 for the nine months ended September 30, 2016 and 2015, respectively. The three months ended September 30, 2016 included $669 of compensation expense related to PRSUs.
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 September 30, 2016 and December 31, 2015 were $281,678 and $261,628, respectively.  The total unrecognized compensation costs at September 30, 2016 are expected to be recognized over a weighted-average period of 2.7 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 $1,640 and $1,486 in expense during the three months ended September 30, 2016 and 2015, respectively, and $4,857 and $6,026 in expense during nine months ended September 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.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

 As of September 30, 2016, the fair value of the investments in the trust was $4,625, 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. 


(13)
Commitments and Contingencies 
The following table summarizes our expected contractual cash commitments as of September 30, 2016:
 
2016

2017

2018

2019

2020

Thereafter

Total
Debt obligations
$
359,733


$
5,485


$
4,477


$
3,169


$
791,328


$
5,000,000


$
6,164,192

Cash interest payments
69,363


348,034


340,140


340,041


328,098


1,058,688


2,484,364

Satellite and transmission
29,594


94,416


68,300


51,927


25,721


24,756


294,714

Programming and content
58,968


302,814


279,001


260,155


222,332


356,825


1,480,095

Marketing and distribution
9,163


17,304


15,744


12,986


7,445


7,400


70,042

Satellite incentive payments
3,176


13,296


14,302


10,652


9,310


79,785


130,521

Operating lease obligations
7,620


44,917


43,425


39,279


36,764


180,791


352,796

Other
21,175


25,515


8,519


1,209


380


40


56,838

Total (1)
$
558,792


$
851,781


$
773,908


$
719,418


$
1,421,378


$
6,708,285


$
11,033,562

(1)
The table does not include our reserve for uncertain tax positions, which at September 30, 2016 totaled $5,427, 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. During the quarter ended September 30, 2016, we entered into an agreement with Space Systems/Loral to design and build two replacement satellites, SXM-7 and SXM-8, for our service.
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, which we expect to occur.  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, which we expect to occur.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

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 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 September 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.
We have entered into an agreement 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 have made a $35,000 payment to a settlement fund (from which notice, administration and other costs and attorneys’ fees will be paid), and are offering participating class members the option of receiving three months of our Select service for no charge, and will enter into agreements to make modifications to the practices of certain call center vendors. The settlement is subject to final court approval, which cannot 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

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

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. We have submitted legal briefs and other evidence supporting our position that our payments and practices complied with the regulations established by the Copyright Royalty Board for statutory licenses during the 2007-2012 period or, in the event that the Judges should find that the applicable regulations were unclear, that the Judges should clarify the regulations and confirm that our payments and practices complied with the regulations for that period. Briefing in this matter is complete and a decision from the Copyright Royalty Board is pending.
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.


(14)
Income Taxes
We file a consolidated federal income tax return for all of our wholly-owned subsidiaries, including Sirius XM.  For the three months ended September 30, 2016 and 2015, income tax expense was $111,556 and $112,543, respectively. For the nine months ended September 30, 2016 and 2015, income tax expense was $326,108 and $296,893, respectively.
Our effective tax rate for the three and nine months ended September 30, 2016 was 36.5% and 37.6%, respectively. Our effective tax rate for the three and nine months ended September 30, 2015 was 40.3% and 44.2%, respectively. Our effective tax rate for the nine months ended September 30, 2015 was impacted by tax law changes in the District of Columbia and New York City. The tax law change in the District of Columbia will reduce our future tax 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 $14,831 increase in our deferred tax asset during the three months ended June 30, 2015.
As of September 30, 2016 and December 31, 2015, we had a valuation allowance related to deferred tax assets of $49,257 and $49,095, respectively, that were not likely to be realized due to certain net operating loss limitations and acquired net operating losses that were not more likely than not going to be utilized.


(15)
Subsequent Events
Debt Redemption
On October 1, 2016, we redeemed $650,000 in principal amount of our outstanding 5.875% Notes for an approximate purchase price of $669,097, including premium, which will result in the recognition of a Loss on extinguishment of debt and credit facilities, net, of approximately $24,229 in the fourth quarter of 2016. This redemption was funded with $359,097 of Cash and cash equivalents and $310,000 of additional borrowings under our Credit Facility.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in thousands, except per share amounts)

Capital Return Program
For the period from October 1, 2016 to October 25, 2016, we repurchased 18,548 shares of our common stock on the open market for an aggregate purchase price of $76,791, including fees and commissions.
On October 26, 2016, our board of directors approved an additional $2,000,000 for repurchase of our common stock.  The new approval increases the amount of common stock that we have been authorized to repurchase to an aggregate of $10,000,000. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions, including in accelerated stock repurchase transactions and transactions with Liberty Media and its affiliates. We intend to fund the additional repurchases through a combination of cash on hand, cash generated by operations and future borrowings.
On October 26, 2016, our board of directors also declared the first quarterly dividend on our common stock in the amount of $0.01 per share of common stock payable on November 30, 2016 to stockholders of record as of the close of business on November 9, 2016. Our board of directors expects that this dividend will be the first of regular quarterly dividends, in an aggregate annual amount of $0.04 per share of common stock.

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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;

25
Table of Contents

•
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 September 30, 2016, we had approximately 31.0 million subscribers of which approximately 25.5 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.
As of September 30, 2016, Liberty Media beneficially owned, directly and indirectly, approximately 65% 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.

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Recent Development
Recapitalization of Sirius XM Canada
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 has been approved by the stockholders of Sirius XM Canada and has received the required court approval. The Transaction remains subject to receipt of Canadian Radio-Television and Telecommunications Commission approval. Pending receipt of this approval, the Transaction is expected to close in the fourth quarter of 2016.


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Table of Contents

Results of Operations
Set forth below are our results of operations for the three and nine months ended September 30, 2016 compared with the three and nine months ended September 30, 2015.
 

 
2016 vs 2015 Change
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
Three Months
 
Nine Months
 
2016
 
2015
 
2016
 
2015
 
Amount
 
%
 
Amount
 
%
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscriber revenue
$
1,069,746

 
$
974,471

 
$
3,112,712


$
2,826,018

 
$
95,275

 
10
 %
 
$
286,694

 
10
 %
Advertising revenue
34,268

 
33,131

 
99,330


88,843

 
1,137

 
3
 %
 
10,487

 
12
 %
Equipment revenue
31,306

 
25,875

 
86,285


79,979

 
5,431

 
21
 %
 
6,306

 
8
 %
Other revenue
142,326

 
136,235

 
415,895


379,072

 
6,091

 
4
 %
 
36,823

 
10
 %
Total revenue
1,277,646

 
1,169,712

 
3,714,222


3,373,912

 
107,934

 
9
 %
 
340,310

 
10
 %
Operating expenses:
 
 
 
 



 
 
 
 
 
 
 
 
Cost of services:
 
 
 
 



 
 
 
 
 
 
 
 
Revenue share and royalties
272,823

 
238,620

 
788,952


783,115

 
34,203

 
14
 %
 
5,837

 
1
 %
Programming and content
89,015

 
75,707

 
257,760


216,223

 
13,308

 
18
 %
 
41,537

 
19
 %
Customer service and billing
94,923

 
94,492

 
285,502


278,521

 
431

 
0
 %
 
6,981

 
3
 %
Satellite and transmission
22,224

 
22,743

 
80,609


65,761

 
(519
)
 
(2
)%
 
14,848

 
23
 %
Cost of equipment
9,674

 
9,246

 
29,181


29,021

 
428

 
5
 %
 
160

 
1
 %
Subscriber acquisition costs
120,111

 
133,009

 
381,516


391,773

 
(12,898
)
 
(10
)%
 
(10,257
)
 
(3
)%
Sales and marketing
99,194

 
90,541

 
279,278


255,778

 
8,653

 
10
 %
 
23,500

 
9
 %
Engineering, design and development
19,254

 
16,132

 
57,588


47,180

 
3,122

 
19
 %
 
10,408

 
22
 %
General and administrative
90,369

 
67,234

 
249,052


219,194

 
23,135

 
34
 %
 
29,858

 
14
 %
Depreciation and amortization
67,880

 
70,404

 
202,215


202,527

 
(2,524
)
 
(4
)%
 
(312
)
 
0
 %
Total operating expenses
885,467

 
818,128

 
2,611,653


2,489,093

 
67,339

 
8
 %
 
122,560

 
5
 %
Income from operations
392,179

 
351,584

 
1,102,569


884,819

 
40,595

 
12
 %
 
217,750

 
25
 %
Other income (expense):
 
 
 
 



 
 
 
 
 
 
 
 
Interest expense
(89,092
)
 
(76,624
)
 
(250,888
)

(221,912
)
 
(12,468
)