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 MARCH 31, 2019 |
OR
|
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | FOR THE TRANSITION PERIOD FROM __________ TO ________ |
COMMISSION FILE NUMBER 001-34295
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
Former name, former address and former fiscal year, if changed since last report: Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
|
| | | | |
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o |
| | | |
Smaller reporting company o | | Emerging growth company o | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate 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 April 22, 2019) |
COMMON STOCK, $0.001 PAR VALUE | | 4,607,284,743 | 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 March 31, |
(in millions, except per share data) | 2019 | | 2018 |
Revenue: | |
| | |
|
Subscriber revenue | $ | 1,458 |
| | $ | 1,258 |
|
Advertising revenue | 209 |
| | 42 |
|
Equipment revenue | 41 |
| | 35 |
|
Other revenue | 36 |
| | 40 |
|
Total revenue | 1,744 |
| | 1,375 |
|
Operating expenses: | |
| | |
|
Cost of services: | |
| | |
|
Revenue share and royalties | 492 |
| | 310 |
|
Programming and content | 106 |
| | 101 |
|
Customer service and billing | 113 |
| | 94 |
|
Transmission | 31 |
| | 22 |
|
Cost of equipment | 6 |
| | 7 |
|
Subscriber acquisition costs | 108 |
| | 123 |
|
Sales and marketing | 183 |
| | 107 |
|
Engineering, design and development | 54 |
| | 31 |
|
General and administrative | 135 |
| | 85 |
|
Depreciation and amortization | 107 |
| | 72 |
|
Acquisition and other related costs | 76 |
| | — |
|
Total operating expenses | 1,411 |
| | 952 |
|
Income from operations | 333 |
| | 423 |
|
Other income (expense): | |
| | |
|
Interest expense | (90 | ) | | (90 | ) |
Loss on extinguishment of debt | (1 | ) | | — |
|
Other income | 1 |
| | 36 |
|
Total other expense | (90 | ) | | (54 | ) |
Income before income taxes | 243 |
| | 369 |
|
Income tax expense | (81 | ) | | (80 | ) |
Net income | $ | 162 |
| | $ | 289 |
|
Foreign currency translation adjustment, net of tax | 7 |
| | (9 | ) |
Total comprehensive income | $ | 169 |
| | $ | 280 |
|
Net income per common share: | |
| | |
|
Basic | $ | 0.04 |
| | $ | 0.06 |
|
Diluted | $ | 0.03 |
| | $ | 0.06 |
|
Weighted average common shares outstanding: | |
| | |
|
Basic | 4,571 |
| | 4,491 |
|
Diluted | 4,678 |
| | 4,586 |
|
Dividends declared per common share | $ | 0.0121 |
| | $ | 0.0110 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
(in millions, except per share data) | March 31, 2019 |
| December 31, 2018 |
ASSETS | (unaudited) |
|
|
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 62 |
| | $ | 54 |
|
Receivables, net | 592 |
| | 233 |
|
Inventory, net | 20 |
| | 22 |
|
Related party current assets | 12 |
| | 11 |
|
Prepaid expenses and other current assets | 221 |
| | 158 |
|
Total current assets | 907 |
| | 478 |
|
Property and equipment, net | 1,586 |
| | 1,513 |
|
Intangible assets, net | 3,581 |
| | 2,501 |
|
Goodwill | 3,831 |
| | 2,290 |
|
Related party long-term assets | 448 |
| | 960 |
|
Deferred tax assets | 298 |
| | 293 |
|
Operating lease right-of-use assets | 428 |
|
| — |
|
Other long-term assets | 146 |
| | 138 |
|
Total assets | $ | 11,225 |
| | $ | 8,173 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable and accrued expenses | $ | 1,072 |
| | $ | 736 |
|
Accrued interest | 86 |
| | 128 |
|
Current portion of deferred revenue | 1,994 |
| | 1,932 |
|
Current maturities of debt | 4 |
| | 3 |
|
Operating lease current liabilities | 46 |
|
| — |
|
Related party current liabilities | 4 |
| | 4 |
|
Total current liabilities | 3,206 |
| | 2,803 |
|
Long-term deferred revenue | 145 |
| | 149 |
|
Long-term debt | 7,181 |
| | 6,885 |
|
Related party long-term liabilities | 3 |
| | 4 |
|
Deferred tax liabilities | 48 |
| | 47 |
|
Operating lease liabilities | 397 |
|
| — |
|
Other long-term liabilities | 91 |
| | 102 |
|
Total liabilities | 11,071 |
| | 9,990 |
|
Commitments and contingencies (Note 15) |
|
| |
|
|
Stockholders’ equity (deficit): | |
| | |
|
Common stock, par value $0.001 per share; 9,000 shares authorized; 4,650 and 4,346 shares issued; 4,645 and 4,346 outstanding at March 31, 2019 and December 31, 2018, respectively | 5 |
| | 4 |
|
Accumulated other comprehensive income (loss), net of tax | 1 |
| | (6 | ) |
Additional paid-in capital | 2,071 |
| | 242 |
|
Treasury stock, at cost; 5 and 0 shares of common stock at March 31, 2019 and December 31, 2018, respectively | (28 | ) | | — |
|
Accumulated deficit | (1,895 | ) | | (2,057 | ) |
Total stockholders’ equity (deficit) | 154 |
| | (1,817 | ) |
Total liabilities and stockholders’ equity (deficit) | $ | 11,225 |
| | $ | 8,173 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Accumulated Other Comprehensive Income (Loss) | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
(in millions) | | Shares | | Amount | | | | Shares | | Amount | | |
Balance at December 31, 2018 | | 4,346 |
| | $ | 4 |
| | $ | (6 | ) | | $ | 242 |
| | — |
| | $ | — |
| | $ | (2,057 | ) | | $ | (1,817 | ) |
Comprehensive income, net of tax | | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | 162 |
| | 169 |
|
Share-based payment expense | | — |
| | — |
| | — |
| | 74 |
| | — |
| | — |
| | — |
| | 74 |
|
Exercise of options and vesting of restricted stock units | | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Withholding taxes on net share settlement of stock-based compensation | | — |
| | — |
| | — |
| | (34 | ) | | — |
| | — |
| | — |
| | (34 | ) |
Cash dividends paid on common stock, $0.0121 per share | | — |
| | — |
| | — |
| | (57 | ) | | — |
| | — |
| | — |
| | (57 | ) |
Issuance of common stock as part of Pandora Acquisition | | 392 |
| | 1 |
| | — |
| | 2,354 |
| | — |
| | — |
| | — |
| | 2,355 |
|
Equity component of convertible note | | — |
| | — |
| | — |
| | 68 |
| | — |
| | — |
| | — |
| | 68 |
|
Common stock repurchased | | — |
| | — |
| | — |
| | — |
| | 101 |
| | (604 | ) | | — |
| | (604 | ) |
Common stock retired | | (96 | ) | | — |
| | — |
| | (576 | ) | | (96 | ) | | 576 |
| | — |
| | — |
|
Balance at March 31, 2019 | | 4,650 |
| | $ | 5 |
| | $ | 1 |
| | $ | 2,071 |
| | 5 |
| | $ | (28 | ) | | $ | (1,895 | ) | | $ | 154 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Accumulated Other Comprehensive Income (Loss) | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
(in millions) | | Shares | | Amount | | | | Shares | | Amount | | |
Balance at December 31, 2017 | | 4,531 |
| | $ | 4 |
| | $ | 19 |
| | $ | 1,713 |
| | 3 |
| | $ | (17 | ) | | $ | (3,243 | ) | | $ | (1,524 | ) |
Cumulative effect of change in accounting principles | | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | 14 |
| | 18 |
|
Comprehensive income, net of tax | | — |
| | — |
| | (9 | ) | | — |
| | — |
| | — |
| | 289 |
| | 280 |
|
Share-based payment expense | | — |
| | — |
| | — |
| | 29 |
| | — |
| | — |
| | — |
| | 29 |
|
Exercise of options and vesting of restricted stock units | | 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Withholding taxes on net share settlement of stock-based compensation | | — |
| | — |
| | — |
| | (24 | ) | | — |
| | — |
| | — |
| | (24 | ) |
Cash dividends paid on common stock, $0.0110 per share | | — |
| | — |
| | — |
| | (49 | ) | | — |
| | — |
| | — |
| | (49 | ) |
Common stock repurchased | | — |
| | — |
| | — |
| | — |
| | 52 |
| | (295 | ) | | — |
| | (295 | ) |
Common stock retired | | (55 | ) | | — |
| | — |
| | (309 | ) | | (55 | ) | | 309 |
| | — |
| | — |
|
Balance at March 31, 2018 | | 4,481 |
| | $ | 4 |
| | $ | 14 |
| | $ | 1,360 |
| | — |
| | $ | (3 | ) | | $ | (2,940 | ) | | $ | (1,565 | ) |
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | |
| For the Three Months Ended March 31, |
(in millions) | 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net income | $ | 162 |
| | $ | 289 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 107 |
| | 72 |
|
Non-cash interest expense, net of amortization of premium | 4 |
| | 2 |
|
Provision for doubtful accounts | 14 |
| | 11 |
|
Amortization of deferred income related to equity method investment | (1 | ) | | (1 | ) |
Loss on extinguishment of debt | 1 |
| | — |
|
Loss (gain) on unconsolidated entity investments, net | 4 |
| | (1 | ) |
Gain on fair value instrument | — |
| | (31 | ) |
Dividend received from unconsolidated entity investment | — |
| | 1 |
|
Share-based payment expense | 70 |
| | 34 |
|
Deferred income taxes | 77 |
| | 72 |
|
Changes in operating assets and liabilities: | |
| | |
|
Receivables | (13 | ) | | (14 | ) |
Inventory | 2 |
| | 3 |
|
Related party, net | (1 | ) | | (2 | ) |
Prepaid expenses and other current assets | (31 | ) | | (8 | ) |
Other long-term assets | 1 |
| | 6 |
|
Operating lease right-of-use assets | 19 |
| | — |
|
Accounts payable and accrued expenses | 15 |
| | (38 | ) |
Accrued interest | (42 | ) | | (53 | ) |
Deferred revenue | 20 |
| | 66 |
|
Operating lease liabilities | (17 | ) | | — |
|
Other long-term liabilities | 5 |
| | 7 |
|
Net cash provided by operating activities | 396 |
| | 415 |
|
Cash flows from investing activities: | |
| | |
|
Additions to property and equipment | (90 | ) | | (81 | ) |
Purchases of other investments | (6 | ) | | (7 | ) |
Cash received from Pandora Acquisition | 313 |
| | — |
|
Sale of short-term investments | 72 |
| | — |
|
Investments in related parties and other equity investees | (5 | ) |
| — |
|
Repayment from related party | — |
| | 3 |
|
Net cash provided by (used in) investing activities | 284 |
| | (85 | ) |
Cash flows from financing activities: | |
| | |
|
Taxes paid from net share settlements for stock-based compensation | (33 | ) | | (23 | ) |
Revolving credit facility, net of deferred financing costs | 143 |
| | 65 |
|
Proceeds from sale of capped call security | 3 |
|
| — |
|
Principal payments of long-term borrowings | (152 | ) | | (4 | ) |
Common stock repurchased and retired | (576 | ) | | (309 | ) |
Dividends paid | (57 | ) |
| (49 | ) |
Net cash used in financing activities | (672 | ) | | (320 | ) |
Net decrease in cash, cash equivalents and restricted cash | 8 |
| | 10 |
|
Cash, cash equivalents and restricted cash at beginning of period | 65 |
| | 79 |
|
Cash, cash equivalents and restricted cash at end of period(1) | $ | 73 |
| | $ | 89 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
|
| | | | | | | |
| For the Three Months Ended March 31, |
(in millions) | 2019 | | 2018 |
Supplemental Disclosure of Cash and Non-Cash Flow Information | | | |
Cash paid during the period for: | | | |
Interest, net of amounts capitalized | $ | 128 |
| | $ | 139 |
|
Income taxes paid | $ | 1 |
| | $ | 6 |
|
Non-cash investing and financing activities: | | | |
Treasury stock not yet settled | $ | (28 | ) | | $ | 14 |
|
Fair value of shares issued related to acquisition of a business | $ | 2,355 |
| | $ | — |
|
Accumulated other comprehensive income (loss), net of tax | $ | 7 |
| | $ | (9 | ) |
| |
(1) | The following table reconciles cash, cash equivalents and restricted cash per the statement of cash flows to the balance sheet. The restricted cash balances are primarily due to letters of credit which have been issued to the landlords of leased office space. The terms of the letters of credit primarily extend beyond one year. |
|
| | | | | | | | | | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | | December 31, 2017 |
Cash and cash equivalents | $ | 62 |
| | $ | 54 |
| | $ | 79 |
| | $ | 69 |
|
Restricted cash included in Other long-term assets | 11 |
| | 11 |
| | 10 |
| | 10 |
|
Total cash, cash equivalents and restricted cash at end of period | $ | 73 |
| | $ | 65 |
| | $ | 89 |
| | $ | 79 |
|
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 millions, except per share amounts)
| |
(1) | Business & Basis of Presentation |
This Quarterly Report on Form 10-Q presents information for Sirius XM Holdings Inc. (“Holdings”). The terms “Holdings,” “we,” “us,” “our,” and “our company” as used herein, and unless otherwise stated or indicated by context, refer to Sirius XM Holdings Inc. and its subsidiaries. “Sirius XM” refers to our wholly owned subsidiary Sirius XM Radio Inc. and its subsidiaries. “Pandora” refers to Sirius XM's wholly owned subsidiary Pandora Media, LLC (the successor to Pandora Media, Inc.) and its subsidiaries. Holdings has no operations independent of Sirius XM and Pandora.
Business
We operate two complementary audio entertainment businesses - our Sirius XM business and our Pandora business.
Sirius XM
Our Sirius XM business transmits 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. Satellite radios are primarily distributed through automakers, retailers and our website. Subscribers can also receive music and other channels, plus certain other features, over our Internet radio service, including through applications for mobile devices, home devices and other consumer electronic equipment. The primary source of revenue from our Sirius XM business is generated from subscription fees, with most of our customers subscribing to monthly, quarterly, semi-annual or annual plans. We also derive revenue from advertising on select non-music channels, direct sales of our satellite radios and accessories, and other ancillary services. As of March 31, 2019, our Sirius XM business had approximately 34.2 million subscribers.
In addition to our audio entertainment businesses, we provide connected vehicle services to several automakers and directly to consumers through aftermarket devices. These services are designed to enhance safety, security and the driving experience. We also offer a suite of data services that includes graphical weather, fuel prices, sports schedules and scores and movie listings, a traffic information service that includes information as to road closings, traffic flow and incident data to consumers with compatible in-vehicle navigation systems, and real-time weather services designed for improving situational awareness in vehicles, boats and planes. Sirius XM also holds a 70% equity interest and 33% voting interest in Sirius XM Canada Holdings Inc. ("Sirius XM Canada").
Pandora
Our Pandora business operates a music discovery platform, offering a personalized experience for each listener wherever and whenever they want to listen to music, whether through mobile devices, car speakers or connected devices in the home. Pandora enables listeners to create personalized stations and playlists, as well as search and play songs and albums on-demand. Pandora is available as an ad-supported radio service, a radio subscription service, called Pandora Plus, and an on-demand subscription service, called Pandora Premium. As of March 31, 2019, Pandora had approximately 6.9 million subscribers. The majority of revenue from our Pandora business is generated from advertising on our ad-supported radio service. In addition, as a result of the May 2018 acquisition of AdsWizz Inc. by Pandora, we provide a comprehensive digital audio advertising technology platform, which connects audio publishers and advertisers. As of March 31, 2019, our Pandora business had approximately 66.0 million active users.
Liberty Media
As of March 31, 2019, Liberty Media Corporation (“Liberty Media”) beneficially owned, directly and indirectly, approximately 68% 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.
Basis of Presentation
The accompanying unaudited consolidated financial statements of Holdings have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All significant intercompany transactions have been eliminated in consolidation. Certain numbers in our prior period consolidated financial statements and footnotes have been reclassified or
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
consolidated to conform to our current period presentation. Music Royalty Fee revenue was reported as Other revenue in our March 31, 2018 Quarterly Report on Form 10-Q. This revenue was reclassified to Subscriber revenue to conform with the current period presentation.
|
| | | | | | | | | | | |
| For the Three Months Ended March 31, 2018 |
| As Reported | | Reclassification | | Current Year |
Subscriber revenue | $ | 1,117 |
| | $ | 141 |
| | $ | 1,258 |
|
Advertising revenue | 42 |
| | — |
| | 42 |
|
Equipment revenue | 35 |
| | — |
| | 35 |
|
Other revenue | 181 |
| | (141 | ) | | 40 |
|
Total revenue | $ | 1,375 |
| | $ | — |
| | $ | 1,375 |
|
In the opinion of our management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 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, 2018, which was filed with the SEC on January 30, 2019.
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 maker in deciding how to allocate resources to an individual segment and in assessing performance of the segment. We have determined that we have two reportable segments as our chief operating decision maker, our Chief Executive Officer, assesses performance and allocates resources based on the financial results of these segments. Refer to Note 16 for information related to our segments.
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 months ended March 31, 2019 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 18.
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, income taxes, and the purchase accounting related to the Pandora Acquisition (defined below).
On February 1, 2019, through a series of transactions, Pandora Media, Inc., became an indirect wholly owned subsidiary of Sirius XM and continues to operate as Pandora Media, LLC (the “Pandora Acquisition”). In connection with the Pandora Acquisition, we purchased all of the outstanding shares of the capital stock of Pandora for $2,355 by converting each outstanding share of Pandora common stock into 1.44 shares of our common stock and we also canceled our preferred stock investment in Pandora for $524 for total consideration of $2,879. Net cash acquired was $313. As part of the Pandora Acquisition, Holdings unconditionally guaranteed all of the payment obligations of Pandora under its outstanding 1.75% convertible senior notes due 2020 and 1.75% convertible senior notes due 2023.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
The table below shows the value of the consideration paid in connection with the Pandora Acquisition:
|
| | | |
| Total |
Pandora common stock outstanding | 272 |
|
Exchange ratio | 1.44 |
|
Common stock issued | 392 |
|
Price per share of Holdings common stock | $ | 5.83 |
|
Value of common stock issued to Pandora stockholders | $ | 2,285 |
|
Value of replacement equity awards attributable to pre-combination service | $ | 70 |
|
Consideration of common stock and replacement equity awards for pre-combination service | $ | 2,355 |
|
Sirius XM’s Pandora preferred stock investment (related party fair value instrument) canceled | $ | 524 |
|
Total consideration for transactions | $ | 2,879 |
|
Value attributed to par at $0.001 par value | $ | 1 |
|
Balance to capital in excess of par value | $ | 2,354 |
|
The table below summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date:
|
| | | |
Acquired Assets: | |
Cash and cash equivalents | $ | 313 |
|
Receivables, net | 361 |
|
Prepaid expenses and other current assets | 109 |
|
Property and equipment | 65 |
|
Intangible assets | 1,107 |
|
Goodwill | 1,541 |
|
Deferred tax assets | 83 |
|
Operating lease right-of-use assets | 96 |
|
Long term assets | 7 |
|
Total assets | $ | 3,682 |
|
| |
Assumed Liabilities: | |
Accounts payable and accrued expenses | $ | 302 |
|
Deferred revenue | 37 |
|
Operating lease current liabilities | 27 |
|
Current maturities of debt | 151 |
|
Long-term debt (a) | 218 |
|
Operating lease liabilities | 62 |
|
Other long-term liabilities | 6 |
|
Total liabilities | $ | 803 |
|
Total Consideration | $ | 2,879 |
|
| |
(a) | In order to present the assets acquired and liabilities assumed, the conversion feature associated with the convertible notes for $68 has been included within Long-term debt in the table above and included within Additional paid-in-capital within our unaudited statements of stockholders' equity (deficit). Refer to note 12 for additional information. |
The Pandora Acquisition was accounted for using the acquisition method of accounting. The initial purchase price allocation is preliminary and is subject to revision as permitted by ASC 805, Business Combinations. The primary areas of the purchase price allocation that are not yet finalized are related to certain current assets, contingencies and tax balances. The excess purchase price over identifiable net tangible and intangible assets of $1,541 has been recorded to Goodwill in our unaudited consolidated balance sheets as of March 31, 2019. A total of $776 has been allocated to identifiable intangible assets subject to amortization and relates to the assessed fair value of the acquired customer relationships and software and technology
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
and is being amortized over the estimated weighted average useful lives of 8 and 5 years, respectively. A total of $331 has been allocated to identifiable indefinite lived intangible assets and relates to the assessed fair value of the acquired trademarks. The fair value assessed for the majority of the remaining assets acquired and liabilities assumed equaled their carrying value. Goodwill represents synergies and economies of scale expected from the combination of services. Goodwill has been allocated to the Pandora segment. Additionally, in connection with the Pandora Acquisition, we acquired gross net operating loss (“NOL”) carryforwards of approximately $1,199 for federal income tax purposes available to offset future taxable income. The acquired NOL's are limited by Section 382 of the Internal Revenue Code. Those limitations are not expected to impact our ability to fully utilize those NOL's within the carryforward period.
We recognized acquisition related costs of $76 that were expensed in Acquisition and other related costs in our unaudited consolidated statements of comprehensive income during the three months ended March 31, 2019.
Pro Forma Financial Information
Pandora was consolidated into our financial statements starting on the acquisition date, February 1, 2019. The aggregate revenue and net loss of Pandora consolidated into our financial statements since the date of acquisition was $251 and $122, respectively, for the three months ended March 31, 2019. The following pro forma financial information presents our results as if the Pandora Acquisition had occurred on January 1, 2018:
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Total revenue | $ | 1,860 |
| | $ | 1,697 |
|
Net income | $ | 181 |
| | $ | 172 |
|
These pro forma results are based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had the acquisition actually occurred on January 1, 2018 and are not indicative of our consolidated results of operations in future periods. The pro forma results primarily include adjustments related to amortization of acquired intangible assets, depreciation of property and equipment, acquisition costs and associated tax impacts.
| |
(3) | 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 March 31, 2019 and December 31, 2018, the carrying amounts of cash and cash equivalents, receivables, and accounts payable approximated fair value due to the short-term nature of these instruments.
Our assets and liabilities measured at fair value were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Pandora investment (a) | — |
| | — |
| | — |
| | $ | — |
| | — |
| | $ | 523 |
| | — |
| | $ | 523 |
|
Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Debt (b) | — |
| | $ | 7,403 |
| | — |
| | $ | 7,403 |
| | — |
| | $ | 6,633 |
| | — |
| | $ | 6,633 |
|
| |
(a) | During the year ended December 31, 2017, Sirius XM completed a $480 preferred stock investment in Pandora. Prior to the Pandora Acquisition, we elected the fair value option to account for this investment. This investment was canceled in conjunction with the Pandora Acquisition. Refer to Note 2 for information on this acquisition. |
| |
(b) | The fair value for non-publicly traded debt is based upon estimates from a market maker and brokerage firm. Refer to Note 12 for information related to the carrying value of our debt as of March 31, 2019 and December 31, 2018. |
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income of $1 was primarily comprised of the cumulative foreign currency translation adjustments related to our investment in and loan to Sirius XM Canada (refer to Note 11 for additional information). During the three months ended March 31, 2019 and 2018, we recorded foreign currency translation adjustment income (loss) of $7 and $(9), respectively, net of tax (expense) benefit of $(2) and $3, respectively.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of income as the costs related to the hosting fees. The guidance in this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after adoption. This ASU will not have a material impact on our consolidated statements of operations.
Recently Adopted Accounting Policies
ASU 2016-02, Leases (Topic 842). In February 2016, FASB issued ASU 2016-02 which requires companies 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, measure, and present 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. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods. We adopted this ASU on January 1, 2019 and elected the additional transition method per ASU 2018-11. Our leases consist of repeater leases, facility leases and equipment leases. We elected the package of practical expedients permitted under the transition guidance within the new standard.
Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of approximately $347 and $369, respectively, as of January 1, 2019. The standard did not impact our consolidated statements of operations, consolidated statements of cash flows or debt. Additionally, we did not record a cumulative effect adjustment to opening retained earnings.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
The effect of the changes made to our consolidated balance sheet as of January 1, 2019 for the adoption of ASU 2016-02 is included in the table below.
|
| | | | | | | | | | | |
| Balance at December 31, 2018 | | Adjustments Due to ASU 2016-02 | | Balance at January 1, 2019 |
Balance Sheet | | | | | |
Assets: | | | | | |
Operating lease right-of-use assets | $ | — |
| | $ | 347 |
| | $ | 347 |
|
| | | | | |
Liabilities: | | | | | |
Accounts payable and accrued expenses | $ | 736 |
| | $ | (1 | ) | | $ | 735 |
|
Operating lease current liabilities | — |
| | 30 |
| | 30 |
|
Operating lease liabilities | — |
| | 339 |
| | 339 |
|
Other long-term liabilities | 102 |
| | (21 | ) | | 81 |
|
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, restricted stock units and convertible debt) were exercised or converted into common stock, calculated using the treasury stock method. We had no participating securities during the three months ended March 31, 2019 and 2018.
Common stock equivalents of 60 and 44 for the three months ended March 31, 2019 and 2018, respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive. We issued 392 shares of our common stock in connection with the Pandora Acquisition.
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Numerator: | |
| | |
|
Net Income available to common stockholders for basic net income per common share | $ | 162 |
| | $ | 289 |
|
Effect of interest on assumed conversions of convertible debt, net of tax | 1 |
| | — |
|
Net Income available to common stockholders for dilutive net income per common share | $ | 163 |
| | $ | 289 |
|
Denominator: | |
| | |
|
Weighted average common shares outstanding for basic net income per common share | 4,571 |
| | 4,491 |
|
Weighted average impact of assumed Convertible Notes | 25 |
| | — |
|
Weighted average impact of dilutive equity instruments | 82 |
| | 95 |
|
Weighted average shares for diluted net income per common share | 4,678 |
| | 4,586 |
|
Net income per common share: | |
| | |
|
Basic | $ | 0.04 |
| | $ | 0.06 |
|
Diluted | $ | 0.03 |
| | $ | 0.06 |
|
Receivables, net, includes customer accounts receivable, receivables from distributors and other receivables.
Customer accounts receivable, net, includes receivables from our subscribers, advertising customers and other 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.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
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:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Gross customer accounts receivable | $ | 465 |
| | $ | 105 |
|
Allowance for doubtful accounts | (20 | ) | | (7 | ) |
Customer accounts receivable, net | $ | 445 |
| | $ | 98 |
|
Receivables from distributors | 121 |
| | 107 |
|
Other receivables | 26 |
| | 28 |
|
Total receivables, net | $ | 592 |
| | $ | 233 |
|
Inventory consists of finished goods, refurbished goods, chipsets and other raw material components used in manufacturing radios and connected vehicle devices. 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 channel is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of comprehensive income.
Inventory, net, consists of the following:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Raw materials | $ | 6 |
| | $ | 5 |
|
Finished goods | 20 |
| | 23 |
|
Allowance for obsolescence | (6 | ) | | (6 | ) |
Total inventory, net | $ | 20 |
| | $ | 22 |
|
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 two reporting units 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. ASC 350, Intangibles - Goodwill and Other, states that an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
As of March 31, 2019, there were no indicators of impairment, and no impairment losses were recorded for goodwill during the three months ended March 31, 2019 and 2018. As of March 31, 2019, the cumulative balance of goodwill impairments recorded since the July 2008 merger between our wholly owned subsidiary, Vernon Merger Corporation, and XM Satellite Radio Holdings Inc. (“XM”), was $4,766, which was recognized during the year ended December 31, 2008.
As a result of the Pandora Acquisition, we recorded additional goodwill of $1,541 during the three months ended March 31, 2019 at our Pandora reporting unit. The goodwill of the acquired company is not deductible for tax purposes. Refer to Note 2 for information on this acquisition.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Our intangible assets include the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2019 | | December 31, 2018 |
| 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 | | $ | 2,084 |
| | $ | — |
| | $ | 2,084 |
| | $ | 2,084 |
| | $ | — |
| | $ | 2,084 |
|
Trademarks | Indefinite | | 251 |
| | — |
| | 251 |
| | 251 |
| | — |
| | 251 |
|
Definite life intangible assets: | | | |
| | |
| | |
| | |
| | |
| | |
|
OEM relationships | 15 years | | 220 |
| | (79 | ) | | 141 |
| | 220 |
| | (76 | ) | | 144 |
|
Licensing agreements | 12 years | | 45 |
| | (39 | ) | | 6 |
| | 45 |
| | (38 | ) | | 7 |
|
Software and technology | 7 years | | 35 |
| | (21 | ) | | 14 |
| | 35 |
| | (20 | ) | | 15 |
|
Due to Pandora Acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite life intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks | Indefinite |
| $ | 331 |
|
| $ | — |
|
| $ | 331 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Definite life intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships | 8 years |
| 403 |
|
| (9 | ) |
| 394 |
|
| — |
|
| — |
|
| — |
|
Software and technology | 5 years |
| 373 |
|
| (13 | ) |
| 360 |
|
| — |
|
| — |
|
| — |
|
Total intangible assets | | | $ | 3,742 |
| | $ | (161 | ) | | $ | 3,581 |
| | $ | 2,635 |
| | $ | (134 | ) | | $ | 2,501 |
|
Indefinite Life Intangible Assets
We have identified our FCC licenses and the Pandora, XM and Automatic trademarks 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. As part of the Pandora Acquisition, we also identified $331 related to its trademarks, for which the fair value was determined using the relief from royalty method as of the acquisition date.
We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. Each of the FCC licenses authorizes us to use radio spectrum, a reusable resource that does not deplete or exhaust over time.
Our annual impairment assessment of our identifiable indefinite life 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 March 31, 2019, there were no indicators of impairment, and no
impairment loss was recognized for intangible assets with indefinite lives during the three months ended March 31, 2019 and
2018.
Definite Life Intangible Assets
Amortization expense for all definite life intangible assets was $27 and $6 for the three months ended March 31, 2019 and 2018, respectively. There were no retirements of definite lived intangible assets during the three months ended March 31, 2019. As part of the Pandora Acquisition, $776 was allocated to identifiable intangible assets subject to amortization and related to the assessed fair value of customer relationships and software and technology, which was determined by using the multi-period excess earnings method and the relief from royalty method, respectively, as of the acquisition date.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
The expected amortization expense for each of the fiscal years 2019 through 2023 and for periods thereafter is as follows:
|
| | | | |
Years ending December 31, | | Amount |
2019 (remaining) | | $ | 114 |
|
2020 | | 152 |
|
2021 | | 146 |
|
2022 | | 144 |
|
2023 | | 134 |
|
Thereafter | | 225 |
|
Total definite life intangible assets, net | | $ | 915 |
|
| |
(9) | Property and Equipment |
Property and equipment, net, consists of the following:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Satellite system | $ | 1,587 |
| | $ | 1,587 |
|
Terrestrial repeater network | 99 |
| | 98 |
|
Leasehold improvements | 76 |
| | 58 |
|
Broadcast studio equipment | 112 |
| | 111 |
|
Capitalized software and hardware | 875 |
| | 824 |
|
Satellite telemetry, tracking and control facilities | 80 |
| | 76 |
|
Furniture, fixtures, equipment and other | 101 |
| | 97 |
|
Land | 38 |
| | 38 |
|
Building | 63 |
| | 63 |
|
Construction in progress | 486 |
| | 412 |
|
Total property and equipment | 3,517 |
| | 3,364 |
|
Accumulated depreciation and amortization | (1,931 | ) | | (1,851 | ) |
Property and equipment, net | $ | 1,586 |
| | $ | 1,513 |
|
Construction in progress consists of the following:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Satellite system | $ | 321 |
| | $ | 296 |
|
Terrestrial repeater network | 5 |
| | 5 |
|
Capitalized software and hardware | 117 |
| | 77 |
|
Other | 43 |
| | 34 |
|
Construction in progress | $ | 486 |
| | $ | 412 |
|
Depreciation and amortization expense on property and equipment was $80 and $66 for the three months ended March 31, 2019 and 2018, respectively. There were no retirements of property and equipment during the three months ended March 31, 2019 and 2018.
We capitalize a portion of the interest on funds borrowed to finance the construction and launch of our satellites. Capitalized interest is recorded as part of the asset’s cost and depreciated over the satellite’s useful life. Capitalized interest costs were $4 and $2 for the three months ended March 31, 2019 and 2018, respectively, which related to the construction of our SXM-7 and SXM-8 satellites. We also capitalize a portion of stock based compensation related to employee time for capitalized software projects. Capitalized stock based compensation costs were $3 for the three months ended March 31, 2019. We did not capitalize any stock based compensation for the three months ended March 31, 2018.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Satellites
As of March 31, 2019, we owned a fleet of five satellites. The chart below provides certain information on our satellites as of March 31, 2019:
|
| | | | |
Satellite Description | | Year Delivered | | Estimated End of Depreciable Life |
SIRIUS FM-5 | | 2009 | | 2024 |
SIRIUS FM-6 | | 2013 | | 2028 |
XM-3 | | 2005 | | 2020 |
XM-4 | | 2006 | | 2021 |
XM-5 | | 2010 | | 2025 |
Each satellite requires an FCC license and prior to the expiration of each license, we are required to apply for a renewal of the FCC satellite licenses. The renewal and extension of our licenses is reasonably certain at minimal cost, which is expensed as incurred.
The following table outlines the years in which each of our satellite licenses expires:
|
| | |
FCC satellite licenses | | Expiration year |
SIRIUS FM-5 | | 2025 |
SIRIUS FM-6 | | 2022 |
XM-3 | | 2021 |
XM-4 | | 2022 |
XM-5 | | 2026 |
We have operating and finance leases for offices, terrestrial repeaters, data centers and certain equipment. Our leases have remaining lease terms of less than 1 year to 19 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases within 1 year. We elected the practical expedient to account for the lease and non-lease components as a single component. Additionally, we elected the practical expedient to not recognize right-of-use assets or lease liabilities for short-term leases, which are those leases with a term of twelve months or less at the lease commencement date.
The components of lease expense were as follows:
|
| | | |
| For the Three Months Ended March 31, |
| 2019 |
Operating lease cost | $ | 17 |
|
Finance lease cost |
|
Amortization of right-of-use assets | 1 |
|
Sublease income | (1 | ) |
Total lease cost | $ | 17 |
|
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Supplemental cash flow information related to leases was as follows:
|
| | | |
| For the Three Months Ended March 31, |
| 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 17 |
|
Financing cash flows from finance leases | $ | 1 |
|
| |
Right-of-use assets obtained in exchange for lease obligations: |
|
Operating leases | $ | 2 |
|
Supplemental balance sheet information related to leases was as follows:
|
| | | |
| March 31, 2019 |
Operating Leases | |
Operating lease right-of-use assets | $ | 428 |
|
| |
Operating lease current liabilities | 46 |
|
Operating lease liabilities | 397 |
|
Total operating lease liabilities | $ | 443 |
|
|
| | | |
| March 31, 2019 |
Finance Leases | |
Property and equipment, gross | $ | 31 |
|
Accumulated depreciation | (22 | ) |
Property and equipment, net | $ | 9 |
|
| |
Current maturities of debt | $ | 4 |
|
Long-term debt | 1 |
|
Total finance lease liabilities | $ | 5 |
|
|
| |
| March 31, 2019 |
Weighted Average Remaining Lease Term |
|
Operating leases | 10 years |
Finance leases | 2 years |
|
| | |
| March 31, 2019 |
Weighted Average Discount Rate |
|
Operating leases | 5.3 | % |
Finance leases | 1.9 | % |
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Maturities of lease liabilities were as follows:
|
| | | | | | | |
| Operating Leases | | Finance Leases |
Year ending December 31, |
|
|
|
2019 (remaining) | $ | 48 |
|
| $ | 3 |
|
2020 | 70 |
|
| 2 |
|
2021 | 59 |
|
| 1 |
|
2022 | 56 |
|
| — |
|
2023 | 53 |
|
| — |
|
Thereafter | 290 |
|
| — |
|
Total future minimum lease payments | 576 |
|
| 6 |
|
Less imputed interest | (133 | ) |
| (1 | ) |
Total | $ | 443 |
|
| $ | 5 |
|
As of March 31, 2019, we had entered into an additional operating lease for office space that has not yet commenced of $33. This operating lease will commence in the second quarter of 2019 with a lease term of 11 years.
| |
(11) | Related Party Transactions |
In the normal course of business, we enter into transactions with related parties such as Liberty Media and Sirius XM Canada.
Liberty Media
As of March 31, 2019, Liberty Media beneficially owned, directly and indirectly, approximately 68% of the outstanding shares of our common stock. Liberty Media 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
On May 25, 2017, Sirius XM completed a recapitalization of Sirius XM Canada (the “Transaction”), which is now a privately held corporation.
Following the Transaction, Sirius XM holds a 70% equity interest and 33% voting interest in Sirius XM Canada, with the remainder of the voting power and equity interests held by two of Sirius XM Canada’s previous shareholders. The total consideration from Sirius XM to Sirius XM Canada, excluding transaction costs, during the year ended December 31, 2017 was $309, which included $130 in cash and we issued 35 shares of our common stock with an aggregate value of $179 to the holders of the shares of Sirius XM Canada acquired in the Transaction. Sirius XM received common stock, non-voting common stock and preferred stock of Sirius XM Canada. We own 591 shares of preferred stock of Sirius XM Canada, which has a liquidation preference of one Canadian dollar per share.
In connection with the Transaction, Sirius XM also made a loan to Sirius XM Canada in the aggregate amount of $131. The loan is denominated in Canadian dollars and is considered a long-term investment with any unrealized gains or losses reported within Accumulated other comprehensive (loss) income. The loan has a term of fifteen years, bears interest at a rate of 7.62% per annum and includes customary covenants and events of default, including an event of default relating to Sirius XM Canada’s failure to maintain specified leverage ratios. The terms of the loan require Sirius XM Canada to prepay a portion of the outstanding principal amount of the loan within sixty days of the end of each fiscal year in an amount equal to any cash on hand in excess of C$10 at the last day of the financial year if all target dividends have been paid in full. During the three months ended March 31, 2019 and 2018, Sirius XM Canada repaid less than $1 and $3 of the principal amount of the loan, respectively.
In connection with the Transaction, Sirius XM also entered into a Services Agreement and an Advisory Services Agreement with Sirius XM Canada. Each agreement has a thirty year term. Pursuant to the Services Agreement, Sirius XM Canada pays Sirius XM 25% of its gross revenues on a monthly basis through December 31, 2021 and 30% of its gross
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
revenues on a monthly basis thereafter. Pursuant to the Advisory Services Agreement, Sirius XM Canada pays Sirius XM 5% of its gross revenues on a monthly basis. These agreements superseded and replaced the former agreements between Sirius XM Canada and its predecessors and Sirius XM.
Sirius XM Canada is accounted for as an equity method investment, and its results are not consolidated in our unaudited consolidated financial statements. Sirius XM Canada does not meet the requirements for consolidation as we do not have the ability to direct the most significant activities that impact Sirius XM Canada's economic performance.
We had the following related party balances associated with Sirius XM Canada:
|
| | | | | | | |
| March 31, 2019 |
| December 31, 2018 |
Related party current assets | $ | 12 |
| | $ | 11 |
|
Related party long-term assets | $ | 448 |
| | $ | 437 |
|
Related party current liabilities | $ | 4 |
| | $ | 4 |
|
Related party long-term liabilities | $ | 3 |
| | $ | 4 |
|
As of March 31, 2019 and December 31, 2018, our related party current asset balance included amounts due under the Services Agreement and Advisory Services Agreement and certain amounts related to transactions outside the scope of the new services arrangements. Our related party long-term assets balance as of March 31, 2019 and December 31, 2018 included the carrying value of our investment balance in Sirius XM Canada of $320 and $311, respectively, and, as of March 31, 2019 and December 31, 2018, also included $128 and $126, respectively, for the long-term value of the outstanding loan to Sirius XM Canada. Our related party liabilities for both March 31, 2019 and December 31, 2018 included $3 for the current portion of deferred revenue and $2 for the long-term portion of deferred revenue recorded as of the date of the Sirius and XM merger related to agreements with legacy XM Canada, now Sirius XM Canada. These costs are being amortized on a straight line basis through 2020.
Sirius XM Canada paid gross dividends to us of less than $1 during each of the three months ended March 31, 2019 and 2018. Dividends are first recorded as a reduction to our investment balance in Sirius XM Canada to the extent a balance exists and then as Other income for any remaining portion.
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 March 31, |
| 2019 | | 2018 |
Revenue (a) | $ | 24 |
| | $ | 24 |
|
Other income | |
| | |
|
Share of net earnings (b) | $ | 3 |
| | $ | 1 |
|
Interest income (c) | $ | 2 |
|
| $ | 3 |
|
| |
(a) | We record revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of comprehensive income. |
| |
(b) | For both the three months ended March 31, 2019 and 2018, Share of net earnings included $1 of amortization expense related to equity method intangible assets. |
| |
(c) | This interest income relates to the loan to Sirius XM Canada and is recorded as Other income (expense) in our unaudited consolidated statements of comprehensive income. |
Pandora
The $523 preferred stock investment in Pandora as of December 31, 2018 was canceled in conjunction with the Pandora Acquisition. Refer to Note 2 for information on this acquisition.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Our debt as of March 31, 2019 and December 31, 2018 consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Carrying value(a) at |
Issuer / Borrower | | Issued | | Debt | | Maturity Date | | Interest Payable | | Principal Amount at March 31, 2019 | | March 31, 2019 | | December 31, 2018 |
Pandora (b) (c) |
| December 2015 |
| 1.75% Convertible Senior Notes |
| December 1, 2020 |
| semi-annually on June 1 and December 1 |
| $ | 1 |
|
| $ | 1 |
|
| $ | — |
|
Sirius XM (d) | | July 2017 | | 3.875% Senior Notes | | August 1, 2022 | | semi-annually on February 1 and August 1 | | 1,000 |
| | 994 |
| | 994 |
|
Sirius XM (d) | | May 2013 | | 4.625% Senior Notes | | May 15, 2023 | | semi-annually on May 15 and November 15 | | 500 |
| | 497 |
| | 497 |
|
Pandora (b) (e) |
| June 2018
|
| 1.75% Convertible Senior Notes |
| December 1, 2023 |
| semi-annually on June 1 and December 1 |
| 193 |
|
| 151 |
|
| — |
|
Sirius XM (d) | | May 2014 | | 6.00% Senior Notes | | July 15, 2024 | | semi-annually on January 15 and July 15 | | 1,500 |
| | 1,490 |
| | 1,490 |
|
Sirius XM (d) | | March 2015 | | 5.375% Senior Notes | | April 15, 2025 | | semi-annually on April 15 and October 15 | | 1,000 |
| | 993 |
| | 992 |
|
Sirius XM (d) | | May 2016 | | 5.375% Senior Notes | | July 15, 2026 | | semi-annually on January 15 and July 15 | | 1,000 |
| | 991 |
| | 991 |
|
Sirius XM (d) | | July 2017 | | 5.00% Senior Notes | | August 1, 2027 | | semi-annually on February 1 and August 1 | | 1,500 |
| | 1,488 |
| | 1,487 |
|
Sirius XM (f) | | December 2012 | | Senior Secured Revolving Credit Facility (the "Credit Facility") | | June 29, 2023 | | variable fee paid quarterly | | 1,750 |
| | 582 |
| | 439 |
|
Sirius XM | | Various | | Finance leases | | Various | | n/a | | n/a |
| | 5 |
| | 5 |
|
Total Debt | | 7,192 |
| | 6,895 |
|
Less: total current maturities | | 4 |
| | 3 |
|
Less: total deferred financing costs | | 7 |
| | 7 |
|
Total long-term debt | | $ | 7,181 |
| | $ | 6,885 |
|
| |
(a) | The carrying value of the obligations is net of any remaining unamortized original issue discount. |
| |
(b) | Holdings has unconditionally guaranteed all of the payment obligations of Pandora under these notes. |
| |
(c) | We acquired $152 in principal amount of the 1.75% Convertible Senior Notes due 2020 as part of the Pandora Acquisition. On February 14, 2019, Pandora announced a tender offer to repurchase for cash any and all of its outstanding 1.75% Convertible Senior Notes due 2020 at a price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to, but not including, the repurchase date. On March 18, 2019, we purchased $151 in aggregate principal amount of the 1.75% Convertible Senior Notes due 2020 that had been validly tendered and not validly withdrawn in the repurchase offer. We recorded $1 Loss on extinguishment of debt in connection with this transaction. In addition, we unwound the capped call security acquired as part of the Pandora Acquisition in March 2019 for $3. |
| |
(d) | Substantially all material domestic subsidiaries, including Pandora and its subsidiaries, that guarantee the credit facility have guaranteed these notes. |
| |
(e) | We acquired $193 in principal amount of the 1.75% Convertible Senior Notes due 2023 as part of the Pandora Acquisition. We allocate the principal amount of the 1.75% Convertible Senior Notes due 2023 between the liability and equity components. The value assigned to the debt components of the 1.75% Convertible Senior Notes due 2023 is the estimated fair value as of the issuance date of similar debt without the conversion feature. The difference between the fair value of the debt and this estimated fair value represents the value which has been assigned to the equity component. The equity component is recorded to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the Notes over the carrying amount of the liability component is recorded as a debt discount, and is being amortized to interest expense using the effective interest method through the December 1, 2023 maturity date. The 1.75% Convertible Senior Notes due 2023 were not convertible and not redeemable as of March 31, 2019. As a result, we have classified the debt as Long-term within our unaudited consolidated balance sheets. This classification will be reassessed each reporting period. |
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
| |
(f) | In June 2018, Sirius XM entered into an amendment to extend the maturity of the Credit Facility to June 2023. Sirius XM's obligations under the Credit Facility are guaranteed by certain of its material domestic subsidiaries, including Pandora and its 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 March 31, 2019. All of 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. Additionally, the amount available for future borrowing under the Credit Facility is reduced by letters of credit issued for the benefit of Pandora, which were $1 as of March 31, 2019. |
Covenants and Restrictions
Under the Credit Facility, Sirius XM, our wholly owned subsidiary, must comply with a debt maintenance covenant that it cannot 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, 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.
Pandora Convertible Notes
Pandora's 1.75% Convertible Senior Notes due 2020 (the “Pandora 2020 Notes”) and Pandora's 1.75% Convertible Senior Notes due 2023 (the “Pandora 2023 Notes” and, together with the Pandora 2020 Notes, the “Pandora Convertible Notes”) are unsecured, senior obligations of Pandora. Holdings has guaranteed the payment and performance obligations of Pandora under each series of the Pandora Convertible Notes and the indentures governing such Pandora Convertible Notes.
The Pandora 2020 Notes will mature on December 1, 2020, unless earlier repurchased or redeemed by Pandora or converted in accordance with their terms. Upon consummation of the Pandora Acquisition, the conversion rate applicable to the Pandora 2020 Notes was 87.7032 shares of Holdings’ common stock per $1,000 principal amount of the Pandora 2020 Notes. Pandora has irrevocably elected and determined to settle all conversion obligations from and after February 1, 2019 with respect to the Pandora 2020 Notes solely in cash. During the three months ended March 31, 2019, Pandora purchased $151 in aggregate principal amount of the Pandora 2020 Notes. See footnote (c) to the table above.
The Pandora 2023 Notes will mature on December 1, 2023, unless earlier repurchased or redeemed by Pandora or converted in accordance with their terms. Upon consummation of the Pandora Acquisition, the conversion rate applicable to the Pandora 2023 Notes was 150.4466 shares of Holdings common stock per $1,000 principal amount of the Pandora 2023 Notes.
The indentures governing the Pandora Convertible Notes contain covenants that limit Pandora’s ability to merge or consolidate and provide for customary events of default, which include nonpayment of principal or interest, breach of covenants, payment defaults or acceleration of other indebtedness and certain events of bankruptcy.
At March 31, 2019 and December 31, 2018, we were in compliance with our debt covenants.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Common Stock, par value $0.001 per share
We are authorized to issue up to 9,000 shares of common stock. There were 4,650 and 4,346 shares of common stock issued and 4,645 and 4,346 shares outstanding on March 31, 2019 and December 31, 2018, respectively. As part of the Pandora Acquisition, we issued 392 shares of our common stock.
As of March 31, 2019, there were 337 shares of common stock reserved for issuance in connection with outstanding stock based awards to be granted to members of our board of directors, employees and third parties.
Quarterly Dividends
During the three months ended March 31, 2019, we declared and paid the following dividends:
|
| | | | | | | | | | | | |
Declaration Date | | Dividend Per Share | | Record Date | | Total Amount | | Payment Date |
January 29, 2019 | | $ | 0.0121 |
| | February 11, 2019 | | $ | 57 |
| | February 28, 2019 |
Stock Repurchase Program
As of March 31, 2019, our board of directors had approved for repurchase an aggregate of $14,000 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 March 31, 2019, our cumulative repurchases since December 2012 under our stock repurchase program totaled 2,784 shares for $11,278, and $2,722 remained available for future share repurchases under our stock repurchase program.
The following table summarizes our total share repurchase activity for the three months ended:
|
| | | | | | | | | | | | | | |
| | March 31, 2019 | | March 31, 2018 |
Share Repurchase Type | | Shares | | Amount | | Shares | | Amount |
Open Market and Privately Negotiated Repurchases (a) | | 101 |
| | $ | 604 |
| | 52 |
| | $ | 295 |
|
| |
(a) | As of March 31, 2019, $28 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. For a discussion of subsequent events refer to Note 18. |
Preferred Stock, par value $0.001 per share
We are authorized to issue up to 50 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 March 31, 2019 and 2018.
We recognized share-based payment expense of $70 and $34 for the three months ended March 31, 2019 and 2018, respectively. This amount includes $21 of share-based compensation expense recorded in Acquisition and other related costs in our unaudited consolidated statements of comprehensive income during the three months ended March 31, 2019.
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 deems 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. Stock options generally expire ten years from the date of grant. Restricted stock units include performance-based restricted stock units
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
(“PRSUs”), the vesting of which are subject to the achievement of performance goals and the employee's continued employment and generally cliff vest on the third anniversary of the grant date. Each restricted stock unit entitles the holder to receive one share of common stock upon vesting. As of March 31, 2019, 153 shares of common stock were available for future grants under the 2015 Plan.
In connection with the Pandora Acquisition, we assumed all shares available for issuance (including any shares that later become available for issuance in accordance with the terms of the applicable plans) under each of the 2014 Stock Incentive Plan of AdsWizz Inc., the Pandora Media, Inc. 2011 Equity Incentive Plan, the Pandora Media, Inc. 2004 Stock Plan and the TheSavageBeast.com, Inc. 2000 Stock Incentive Plan, which were previously approved by stockholders of Pandora or the applicable adopting entity. All shares available under these stock plans became additional shares available for grant pursuant to the terms of the 2015 Plan (as adjusted, to the extent appropriate, to reflect the application of the exchange ratio). Subject to certain limitations set forth in the 2015 Plan, such shares may be used for awards under the 2015 Plan.
Other Plans
We maintain six additional share-based benefit plans — the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan, the 2014 Stock Incentive Plan of AdsWizz Inc., the Pandora Media, Inc. 2011 Equity Incentive Plan, the Pandora Media, Inc. 2004 Stock Plan and the TheSavageBeast.com, Inc. 2000 Stock Incentive Plan. Excluding dividend equivalent units granted as a result of a declared dividend, 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:
|
| | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Risk-free interest rate | 2.5% | | 2.4% |
Expected life of options — years | 3.36 | | 3.57 |
Expected stock price volatility | 26% | | 21% |
Expected dividend yield | 0.8% | | 0.7% |
The following table summarizes stock option activity under our share-based plans for the three months ended March 31, 2019:
|
| | | | | | | | | | | | |
| Options | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding as of December 31, 2018 | 243 |
| | $ | 4.22 |
| | | | |
Options granted in connection with Pandora Acquisition | 7 |
|
| $ | 3.85 |
| | | | |
Granted | 13 |
| | $ | 6.00 |
| | | | |
Exercised | (4 | ) | | $ | 3.58 |
| | | | |
Forfeited, cancelled or expired | (1 | ) | | $ | 5.48 |
| | | | |
Outstanding as of March 31, 2019 | 258 |
| | $ | 4.30 |
| | 6.15 | | $ | 386 |
|
Exercisable as of March 31, 2019 | 150 |
| | $ | 3.66 |
| | 5.05 | | $ | 303 |
|
The weighted average grant date fair value per share of stock options granted during the three months ended March 31, 2019 was $1.26. The total intrinsic value of stock options exercised during the three months ended March 31, 2019 and 2018 was $10 and $55, respectively. During the three months ended March 31, 2019, the number of net settled shares which were issued as a result of stock option exercises was 1.
In connection with the Pandora Acquisition, each option granted by Pandora under its stock incentive plans to purchase shares of Pandora common stock, whether vested or unvested, was assumed and converted into an option to purchase shares of our common stock, with appropriate adjustments (based on the 1.44 exchange ratio) to the exercise price and number of shares
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
of our common stock subject to such option, and has the same vesting schedule and exercise conditions as in effect as of immediately prior to the closing of the Pandora Acquisition; provided, that any Pandora stock option that had an exercise price per share that was equal to or greater than the value, at the closing of the Pandora Acquisition, of our common stock issued as merger consideration in exchange for each share of Pandora common stock, was canceled without payment. We recorded $8 to Goodwill related to pre-acquisition replacement equity awards attributable to pre-combination service.
We recognized share-based payment expense associated with stock options of $20 and $19 for the three months ended March 31, 2019 and 2018, respectively.
The following table summarizes the restricted stock unit, including PRSU, activity under our share-based plans for the three months ended March 31, 2019:
|
| | | | | | |
| Shares | | Grant Date Fair Value Per Share |
Nonvested as of December 31, 2018 | 35 |
| | $ | 5.50 |
|
Units granted in connection with Pandora Acquisition | 48 |
| | $ | 5.83 |
|
Granted | 11 |
| | $ | 5.92 |
|
Vested | (13 | ) | | $ | 5.82 |
|
Forfeited | (2 | ) | | $ | 5.79 |
|
Nonvested as of March 31, 2019 | 79 |
| | $ | 5.69 |
|
The total intrinsic value of restricted stock units, including PRSUs, vesting during the three months ended March 31, 2019 and 2018 was $74 and $1, respectively. During the three months ended March 31, 2019, the number of net settled shares which were issued as a result of restricted stock units vesting totaled 7. During the three months ended March 31, 2019, we granted 5 PRSUs to certain employees. We believe it is probable that the performance target applicable to these PRSUs will be achieved.
In connection with the Pandora Acquisition, each unvested restricted stock unit granted by Pandora under its stock incentive plans was assumed and converted into an unvested restricted stock unit of Holdings, with appropriate adjustments (based on the 1.44 exchange ratio) to the number of shares of our common stock to be received, and has the same vesting schedule and settlement date as in effect as of immediately prior to the closing of the Pandora Acquisition. We recorded $62 to Goodwill related to pre-acquisition replacement equity awards attributable to pre-combination service
In connection with the cash dividend paid during the three months ended March 31, 2019, we granted less than 1 restricted stock units, including PRSUs, in accordance with the terms of existing award agreements. These grants did not result in any additional incremental share-based payment expense being recognized during the three months ended March 31, 2019.
We recognized share-based payment expense associated with restricted stock units, including PRSUs, of $50 and $15 for the three months ended March 31, 2019 and 2018, respectively.
Total unrecognized compensation costs related to unvested share-based payment awards for stock options and restricted stock units, including PRSUs, granted to employees, members of our board of directors and third parties at March 31, 2019 and December 31, 2018 was $477 and $254, respectively. The total unrecognized compensation costs at March 31, 2019 are expected to be recognized over a weighted-average period of 2.0 years.
401(k) Savings Plans
Sirius XM Radio Inc. 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
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
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 $2 in expense during both the three months ended March 31, 2019 and 2018 in connection with the Sirius XM Plan.
Pandora Media, LLC 401(k) Profit Sharing Plan and Trust
Pandora sponsors the Pandora Media, LLC 401(k) Profit Sharing Plan and Trust (the “Pandora Plan”) for eligible employees. The Pandora Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax eligible earnings, subject to certain defined limits. There is no employer matching of employee's contributions.
Sirius XM Holdings Inc. Deferred Compensation Plan
The Sirius XM Holdings Inc. Deferred Compensation Plan (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’ cash compensation, as applicable. 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.
Contributions to the DCP, net of withdrawals, for the three months ended March 31, 2019 and 2018 were $6 and $7, respectively. As of March 31, 2019 and 2018, the fair value of the investments held in the trust were $30 and $22, respectively, which is included in Other long-term assets in our unaudited consolidated balance sheets and classified as trading securities. Trading gains and losses associated with these investments 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. For the three months ended March 31, 2019 and 2018, we recorded an immaterial amount of unrealized gains and losses on investments, respectively, held in the trust.
| |
(15) | Commitments and Contingencies |
The following table summarizes our expected contractual cash commitments as of March 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| Thereafter |
| Total |
Debt obligations | $ | 3 |
|
| $ | 2 |
|
| $ | 1 |
|
| $ | 1,000 |
|
| $ | 1,275 |
|
| $ | 5,000 |
|
| $ | 7,281 |
|
Cash interest payments | 232 |
|
| 367 |
|
| 367 |
|
| 367 |
|
| 304 |
|
| 632 |
|
| 2,269 |
|
Satellite and transmission | 76 |
|
| 51 |
|
| 4 |
|
| 2 |
|
| 1 |
|
| 3 |
|
| 137 |
|
Programming and content | 193 |
|
| 227 |
|
| 129 |
|
| 56 |
|
| 33 |
|
| 130 |
|
| 768 |
|
Sales and marketing | 28 |
|
| 12 |
|
| 11 |
|
| 7 |
|
| 4 |
|
| 11 |
|
| 73 |
|
Satellite incentive payments | 8 |
|
| 10 |
|
| 9 |
|
| 9 |
|
| 9 |
|
| 53 |
|
| 98 |
|
Operating lease obligations | 49 |
|
| 74 |
|
| 59 |
|
| 52 |
|
| 45 |
|
| 171 |
|
| 450 |
|
Advertising sales commitments | 15 |
|
| 20 |
|
| 15 |
|
| — |
|
| — |
|
| — |
|
| 50 |
|
Royalties, minimum guarantees and other | 337 |
|
| 181 |
|
| 100 |
|
| 30 |
|
| 12 |
|
| 7 |
|
| 667 |
|
Total (1) | $ | 941 |
|
| $ | 944 |
|
| $ | 695 |
|
| $ | 1,523 |
|
| $ | 1,683 |
|
| $ | 6,007 |
|
| $ | 11,793 |
|
| |
(1) | The table does not include our reserve for uncertain tax positions, which at March 31, 2019 totaled $8. |
Debt obligations. Debt obligations include principal payments on outstanding debt and finance 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 several third parties to design, build, launch and insure two satellites, SXM-7 and SXM-8. We also have entered into agreements with third parties to operate and maintain satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater networks.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Programming and content. We have entered into various programming and content agreements. Under the terms of these agreements, our obligations include fixed payments, advertising commitments and revenue sharing arrangements. In certain of these agreements, the 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.
Sales and marketing. We have entered into various marketing, sponsorship and distribution agreements to promote our brands 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.
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 upon XM-3 and XM-4 meeting their fifteen-year design life, which we expect to occur. Boeing may also be entitled to up to $10 of additional incentive payments if our XM-4 satellite continues to operate above baseline specifications during the five years beyond the satellite’s fifteen-year design life, which is currently not expected to occur.
Space Systems/Loral, the manufacturer of certain of our in-orbit satellites, may be entitled to future in-orbit performance payments upon XM-5, SIRIUS FM-5 and SIRIUS FM-6 meeting their fifteen-year design life, which we expect to occur.