UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | FOR THE FISCAL YEAR ENDED DECEMBER 31, 20132016 |
OR
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| 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)
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| Delaware | | 38-3916511
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(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
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12211290 Avenue of the Americas, 36th11th Floor | | |
| New York, New York | | 1002010104 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 584-5100
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class: | | Name of Each Exchange on Which Registered: |
| Common Stock, par value $0.001 per share | | The Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
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| | (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
The aggregate market value of the registrant’s common stock held by non-affiliates of Sirius XM Radio Inc., the predecessor of the registrant, as of June 30, 20132016 was $9,917,422,172.$6,800,292,544. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.
The number of shares of the registrant’s common stock outstanding as of January 31, 20142017 was 6,097,317,573.4,715,160,369.
DOCUMENTS INCORPORATED BY REFERENCE
Information included in our definitive proxy statement for our 20142017 annual meeting of stockholders scheduled to be held on Monday,Thursday, May 19, 201418, 2017 is incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
20132016 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K presents information for Sirius XM Holdings Inc. (“Holdings”) and also contains the financial results of Sirius XM Radio Inc. (“Sirius XM”) on a combined basis.. The terms “we,” “us,” “our,” and “our company” as used herein and unless otherwise stated or indicated by context, refer to Sirius XM Radio Inc. (“Sirius XM”) and its subsidiaries prior to the corporate reorganization described below and to Sirius XM Holdings Inc. and its subsidiaries after such corporate reorganization.subsidiaries.
Sirius XM Holdings Inc.
Effective November 15, 2013, we completed a corporate reorganization. As part of the reorganization, Holdings replaced Sirius XM as our publicly held corporation and Sirius XM becameis a wholly-owned subsidiary of Holdings. Holdings was incorporated in the State of Delaware on May 21, 2013. Holdings has no operations independent of its subsidiary Sirius XM.
Relationship with Liberty Media
As of December 31, 2016, Liberty Media Corporation (“Liberty Media”) beneficially owned, directly and indirectly, approximately 67% of the outstanding shares of Holdings’ common stock. Liberty Media owns interests in a range of media, communications and entertainment businesses.
Sirius XM Radio Inc.
We broadcasttransmit 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 theour Internet radio service, including through applications for mobile devices.
devices, home devices and other consumer electronic equipment. 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.
As of December 31, 2013,2016, we had 25,559,310approximately 31.3 million subscribers. Our subscribers include:
subscribers under our regular and discounted pricing plans;
subscribers that have prepaid, including payments 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 and Backseat TV services.
services who do not also have satellite radio subscriptions.
Our primary source of revenue is subscription fees, with most of our customers subscribing on anto annual, semi-annual, quarterly or monthly basis.plans. We offer discounts for prepaid and longer term subscription plans, as well as discounts fora multiple subscriptions.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 data and Backseat TVdata services.
Our satellite radios are primarily distributed through automakers; retail locationsstores nationwide; and through our website. We have agreements with every major automaker to offer satellite radios 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. Satellite radio services are also offered to customers of certain rental car companies.
We are also a leader in providing connected vehicle applications and services. On November 4, 2013, we purchased the connected vehicle business of Agero, Inc. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle owners while providing marketing and operational benefits to automakers and their dealers. Subscribers to our connected vehicle services are not included in our subscriber count.
Liberty Media Corporation ("Liberty Media") beneficially owns, directly and indirectly, over 50% of the outstanding shares of our common stock. Liberty Media owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its interests in Charter Communications, Live Nation Entertainment and Barnes & Noble, and minority equity investments in Time Warner Inc., Time Warner Cable, and Viacom.
Recent Development
On January 3, 2014, Holdings' Board of Directors received a non-binding letter from Liberty Media proposing a transaction pursuant to which all outstanding shares of common stock of Holdings not owned by Liberty Media would be converted into the right to receive 0.0760 of a new share of Liberty Series C common stock, which would have no voting rights. Liberty Media indicated that immediately prior to such conversion, Liberty Media intends to distribute, on a 2 to 1 basis, shares of such Series C common stock to all holders of record of Liberty Media's Series A and B common stock. Upon the completion of the proposed transaction, Liberty Media indicated that it expects that Holdings' public stockholders would own approximately 39% of Liberty Media's then-outstanding common stock.
Holdings' Board of Directors has formed a Special Committee of independent directors to consider Liberty Media’s proposal. The Board of Directors has selected Joan L. Amble, James P. Holden and Eddy W. Hartenstein to serve on the Special Committee. The Special Committee is chaired by Mr. Hartenstein.
The Special Committee has retained Evercore Group L.L.C. to act as its financial advisor and Weil, Gotshal & Manges LLP to act as its legal counsel to assist and advise it in connection with its evaluation of Liberty Media’s proposal.
Liberty Media’s proposal noted that the transaction will be conditioned on the approval of both the Special Committee and a majority of the public stockholders of Holdings, other than Liberty Media. Liberty Media also noted that the approval by the Liberty Media stockholders of the issuance of the Series C common shares in the proposed transaction would also be required under applicable Nasdaq Stock Market requirements.
The letter provides that no legally binding obligation with respect to any transaction exists unless and until mutually acceptable definitive documentation is executed and delivered with respect thereto. There can be no assurance that the transaction proposed by Liberty Media or any related transaction will be completed or, if completed, will have any specified terms, including with respect to pricing or timing.
Programming
We offer a dynamic programming lineup of commercial-free music plus sports, entertainment, comedy, talk, news, traffic and weather,news, including:
an extensive selection of music genres, ranging from rock, pop and hip-hop to country, dance, jazz, Latin and classical;
live play-by-play sports from major leagues and colleges;
a multitude of talk and entertainment channels for a variety of audiences;
a wide range of national, international and financial news; and
continuous, local traffic reports for 22 metropolitan markets throughout the United States.
exclusive limited run channels.
Our diverse spectrum of programming, including our lineup of exclusive material, is a significant differentiator from terrestrial radio and other audio entertainment providers. We make changes to our programming lineup from time to time as we strive to attract new subscribers and offer content which appeals to a broad range of audiences and to our existing subscribers. The channel line-ups for our services are available at siriusxm.com.
Internet Radio Service
We stream select music and non-music channels over the Internet. Our Internet radio service also includes certain channels and features that are not available on our satellite radio service. Access to our Internet servicesradio service is offered to subscribers for a fee. We have available products that provide access to our Internet services without the need for a personal computer. We also offer applications to allow consumers to access our Internet servicesradio service on smartphones, tablets, computers, home devices and tablet computers.other consumer electronic equipment.
We also offer two innovative Internet-based products,SiriusXM Internet Radio offers listeners enhanced programming discovery and the ability to connect with content currently playing across our commercial-free music, sports, comedy, news, talk and entertainment channels or available through SiriusXM On Demand and MySXM. Demand.
SiriusXM On Demand offers our Internet radio subscribers listening on our online media player and on smartphones the ability to choose their favorite episodes from a catalog of content to listen to whenever they want. Launched in 2013, MySXM permits listenerssubscribers to personalize our existing commercial-free music and comedy channels to create a more tailored listening experience. Channel-specific sliders allow users to create over 100 variations of each of more than 50 channels by adjusting characteristics like library depth, familiarity, music style, tempo, region, and multiple other channel-specific attributes. SiriusXM On Demand and MySXM are offered to our Internet radio subscribers at no extra charge.
360L
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Distribution of Radios
Automakers
We distribute satellite radios through the sale and lease of new vehicles. We have agreements with every major automaker to offer satellite radios in their vehicles. Satellite radios are available as a factory or dealer-installed option in substantially all vehicle makes sold in the United States.
ManyMost automakers include a subscription to our radio service in the sale or lease of their new vehicles. In certain cases, we receive subscription payments from automakers in advance of the activation of our service. We share with certain automakers a portion of the revenues we derive from subscribers using vehicles equipped to receive our service. We also reimburse various automakers for certain costs associated with the satellite radios installed in new vehicles, including in certain cases hardware costs, engineering expenses and promotional and advertising expenses.
Previously Owned Vehicles
We also acquire subscribers through the sale and lease of previously owned vehicles with factory-installed satellite radios. We have entered into agreements with many automakers to market subscriptions to purchasers and lessees of vehicles which include satellite radios sold through their certified pre-owned programs. We also work directly with franchise and independent dealers on programs for non-certified vehicles.
We have developed systems and methods to identify purchasers and lessees of previously owned vehicles which include satellite radios and have established marketing plans to promote our services to these potential subscribers.
Retail
We sell satellite and Internet radios directly to consumers through our website. Satellite and Internet radios are also marketed and distributed through major national and regional retailers.
Our Satellite Radio Systems
Our satellite radio systems are designed to provide clear reception in most areas despite variations in terrain, buildings and other obstructions. We continually monitor our infrastructure and regularly evaluate improvements in technology.
Our satellite radio systems have three principal components:
satellites, terrestrial repeaters and other satellite facilities;
studios; and
radios.
Satellites, Terrestrial Repeaters and Other Satellite Facilities
Satellites. We currently ownprovide our service through a fleet of tenfive orbiting satellites, fivetwo in the Sirius system, FM-1, FM-2, FM-3, FM-5 and FM-6, and fivethree in the XM system, XM-1, XM-2, XM-3, XM-4 and XM-5. FourOur XM-5 satellite serves as a spare for both the XM and Sirius systems.
Our satellite constellation operates in geostationary orbits. During 2016, we transitioned the Sirius network to a geostationary orbit system using our FM-5 and FM-6 satellites. As part of thesethis service transition, in 2016, our FM-1, FM-2 and FM-3 satellites, are currently usedwhich had operated in highly inclined elliptical orbits, were moved into disposal orbits. In 2016, we also entered into an agreement for the design and construction of two new satellites, SXM-7 and SXM-8, which we plan to launch into geostationary orbits in 2019 and 2020, respectively, as spares, two of which are expected to be de-orbited in 2014 as they reach the end of their useful lives.replacements for XM-3 and XM-4.
Satellite Insurance. We hold in-orbit insurance for our FM-5, FM-6 and XM-5 satellites which will expire in 2014, 2014 and 2015, respectively. We maydo not renew thesehave in-orbit insurance policies when they expire, as we may consider the premium costs to be uneconomical relative to the risk of satellite failure. These policies provide coverage for a total, constructive total or partial loss of the satellite that occurs prior to expiration of the applicable policy. The insurance does not cover the full cost of constructing, launching and insuring newcovering our satellites, nor will it protect us from the adverse effect on business operations due to the loss of a satellite. The policies contain standard commercial satellite insurance provisions, including coverage exclusions. We do not insure satellites for their full expected useful lives as we consider the premium costs to be uneconomical relative to the risk of satellite failure.
Terrestrial Repeaters. In some areas with high concentrations of tall buildings, such as urban centers, signals from our satellites may be blocked and reception of satellite signals can be adversely affected. In other areas with a high density of next generation wireless systems our service may experience interference. In many of these areas, we have deployed terrestrial repeaters to supplement satelliteand enhance our signal coverage. We operate approximately 700over 1,000 terrestrial repeaters across the United States as part of our systems across the United States.systems.
Other Satellite Facilities. We control and communicate with our satellites from facilities in North America and maintainAmerica. During 2016, we maintained earth stations in Panama and Ecuador to control and communicate with severalthree of our Sirius satellites.satellites, FM-1, FM-2 and FM-3. We plan to end operations in Panama and Ecuador in 2017. Our satellites are monitored, tracked and controlled by a third party satellite operator.
Studios
Our programming originates principally from studios in New York City and Washington D.C., and, to a lesser extent, from smaller studio facilitiesstudios in Cleveland, Los Angeles, Memphis, Nashville and Austin.a variety of smaller venues across the country. Our corporate headquarters is based in New York City offices house our corporate headquarters.City. Both our New York City and Washington D.C. offices house facilities for programming origination, programming personnel and facilities to transmit programming.
Radios
Radios are manufactured in three principal configurations - as in-dash radios, Dock & Play radios and home or commercial units.
We do not manufacture radios. We have authorized manufacturers and distributors to produce and distribute radios, and have licensed our technology to various electronics manufacturers to develop, manufacture and distribute radios under certain brands. We do manage various aspects of the production of satellite and Internet radios. To facilitate the sale of radios, we may subsidize a portion of the radio manufacturing costs to reduce the hardware price to consumers.
Connected Vehicle Services
We are a leader in providing connected vehicle applications and services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle ownersoperators while providing marketing and operational benefits to automakers and their dealers. We offer a portfolio of location-based services through two-way wireless connectivity, including safety, security, convenience, maintenance and data services, remote vehicles diagnostics, and stolen or parked vehicle locator services, and monitoring of vehicle emission systems.
We entered the connected vehicle services business in 2012 with an agreement with Nissan North America to become the exclusive provider of a comprehensive suite of premium services for Nissan branded vehicles. On November 4, 2013, we purchased the connected vehicle business of Agero, Inc. As a result of this acquisition, ourservices. Our connected vehicle business provides services to several automakers, including Acura, BMW,Audi, Fiat Chrysler, Honda, Hyundai, Infiniti, Lexus,Jaguar Land Rover, Nissan, Subaru and Toyota. We expect that this acquisition will enhance our presence in connected vehicle services through our businesses’ existing automaker relationships, subscriber base, full-service product offering and technology platform. We also anticipate that this acquisition will better position us to bring innovative connected vehicle services to the global automotive market.
Subscribers to our connected vehicle services are not included in our subscriber count.count or subscriber-based operating metrics.
Canada
We own approximately 38%37% of the equity of Sirius XM Canada Holdings Inc. (“Sirius XM Canada”), the satellite radio provider in Canada. Subscribers to the services offered by Sirius XM Canada are not included in our subscriber count.count or subscriber-based operating metrics.
On May 12, 2016, our subsidiary, Sirius XM, entered into an arrangement agreement (the “Arrangement Agreement”) with Sirius XM Canada. 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 million 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 Holdings.
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 million 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 early in the the second quarter of 2017.
Other Services
Commercial Accounts. Our programming is available for commercial establishments. Commercial subscription accounts are available through providers of in-store entertainment solutions and directly from us. Certain commercial subscribers are included in our subscriber count.
Satellite Television Service. Certain of our music channels are offered as part of certain programming packages on the DISH Network satellite television service. Subscribers to the DISH Network satellite television service are not included in our subscriber count.
Subscribers to the following services are not included in our subscriber count, unless the applicable service is purchased by the subscriber separately and not as part of a radio subscription to our services:
Backseat TV. We offer Backseat TV, a service offering television content designed primarily for children, in the backseat of vehicles.
Travel Link. We offer Travel Link, a suite of data services that includes graphical weather, fuel prices, sports schedules and scores and movie listings.
Real-Time Traffic Services. We offer services that provide graphic information as to road closings, traffic flow and incident data to consumers with compatible in-vehicle navigation systems.
Real-Time Weather Services. We offer several real-time weather services designed for improving situational awareness in vehicle, marine and/or aviation use.
Competition
Satellite Radio
We face significant competition for both listeners and advertisers in our satellite radio business, including from providers of radio or other audio services. Our digital competitors are making in-roads into vehicles, where we are currently the prominentleading alternative to traditional AM/FM radio.
Traditional AM/FM Radio. Our services compete with traditional AM/FM radio. ManySeveral traditional radio companies are substantial entities owning large numbers of radio stations or other media properties. The radio broadcasting industry is highly competitive. Traditional AM/FM broadcasters are also aggressively pursuing Internet radio, wireless Internet-based distribution arrangements and data services.
Traditional AM/FM radio has a well-established demand for its services and offers free broadcasts paid for by commercial advertising rather than by subscription fees like satellite radio.fees. Many radio stations offer information programming of a local nature, such as local news and sports. The availability of traditional free AM/FM radio reduces the likelihood that customers would be willing to pay for our subscription services and, by offering free broadcasts, it may impose limits on what we can charge for our services. Some AM/FM radio stations have reduced the number of commercials per hour, expanded the range of music played on the air and experimented with new formats in order to lure customers away from satellite radio.
HD Radio. Many radio stations broadcast digital signals, which have clarity similar to our signals. These stations do not charge a subscription fee for their digital signals but do generally carry advertising. Traditional AM/FM broadcasters are also complementing their HD Radio efforts by aggressively pursuing Internet radio, wireless Internet-based distribution arrangements and data services.
Internet Radio and Internet-Enabled Smartphones.Internet-Based Competitors. Internet radio services often have no geographic limitations and provide listeners with radio programming from across the country and around the world. Major media companies and online providers, including Amazon, Apple, Google Play, Pandora, Spotify and Clear Channel,iHeartRadio, make high fidelity digital streams available through the Internet for free or, in some cases, for a fraction ofless than the cost of a satellite radio subscription. These services compete directly with our services, at home, in the automobile, and wherever audio entertainment is consumed.
Smartphones, most of which have the capability of interfacing with vehicles, can play recorded or cached content and access Internet radio via dedicated applications or browsers. These applications are often free to the user and offer music and talk content as long as the user is subscribed to a sufficiently large mobile data plan. Leading audio smartphone radio applications include Pandora, Spotify, iTunes Radio and iheartradio. Certain of these applications alsoservices include advanced functionality, such as personalization, and allow the user to access large libraries of content. These services may become integrated into connected carscompete directly with our services, at home, in the future.
Mobile networks have enabled a steady increase in thevehicles, and wherever audio quality and reliability of mobile Internet radio streaming, and thisentertainment is expected to further increase as fourth generation networks become the standard. We expect that improvements from higher bandwidths, wider programming selection, and advancements in functionality are likely to continue making Internet radio and smartphone applications an increasingly significant competitor, particularly in vehicles.consumed.
Advanced In-Dash Infotainment Systems. Nearly all automakers have deployed or are planning to deploy integrated multimedia systems in dashboards, such as Ford's SYNC, Toyota's Entune,including in many cases Apple CarPlay and BMW/Mini's Connected.Android Auto and products from Apple and Google. These systems can combine control of audio entertainment from a variety of sources, including AM/FM/HD radio broadcasts, satellite radio, Internet radio, smartphone applications and stored audio, with navigation and other advanced applications such as restaurant bookings, movie show times and financial information. Internet radio and other data are typically connected to the system via a bluetooth link tothrough an Internet-enabled smartphone or wireless modem installed in the vehicle, and the entire system may be controlled by touchscreen or voice recognition. These systems enhance the attractiveness of our Internet-based competitioncompetitors by making such applications more prominent, easier to access, and safer to use in the car. Similar systems are also available in the aftermarket and sold through retailers.
Direct Broadcast Satellite and Cable Audio. A number of providers offer specialized audio services through either direct broadcast satellite or cable audio systems. These services are targeted to fixed locations, mostly in-home. The radio service offered by direct broadcast satellite and cable audio is often included as part of a package of digital services with video service, and video customers generally do not pay an additional monthly charge for the audio service.
Other Digital Media Services. The audio entertainment marketplace continues to evolve rapidly, with a steady emergence of new media platforms and portable devices that compete with our services now or that could compete with those services in the future.
Traffic News Services
A number of providers compete with our traffic news services, including ClearChannel and Radiate Media/Cumulus. In addition, in-dashservices. In-dash navigation is also being threatened by increasingly capable smartphones that provide data services through a direct vehicle interface. Most of these smartphones offer GPS mapping often with sophisticated data-based turn-by-turn navigation.
Connected Vehicle Services
Our connected vehicle services business operates in a highly competitive environment. Our major competitors includeenvironment and competes with several providers, including Verizon Telematics and Sprint.Telematics. OnStar, a division of General Motors, also offers connected vehicle services in GM vehicles. We also compete with wireless devices such as mobile phones carriers of mobile communications and, to a lesser extent, with systems developed internally by automakers. We compete against other connected vehicle service providers for automaker arrangements on the
basis of innovation, service quality and reliability, technical capabilities and systems customization, scope of service, industry experience, past performance and price.
Government Regulation
As operators of a privately ownedprivately-owned satellite system, we are regulated by the FCC under the Communications Act of 1934, principally with respect to:
the licensing of our satellite systems;
preventing interference with or to other users of radio frequencies; and
compliance with FCC rules established specifically for U.S. satellites and satellite radio services.
Any assignment or transfer of control of our FCC licenses must be approved by the FCC. The FCC's order approving the merger of our wholly-owned subsidiary, Vernon Merger Corporation, with and into XM Satellite Radio Holdings Inc. in July 2008 (the “Merger”) requires us to comply with certain voluntary commitments we made as part of the FCC Merger proceeding. We believe we comply with those commitments.
In 1997, we were the winning bidders for FCC licenses to operate a satellite digital audio radio service and provide other ancillary services. Our FCC licenses for our Sirius satellites expire in 2017.2022 and 2025. Our FCC licenses for our XM satellites expire in 2014, 2018, 2021 and 2021.2022. We anticipate that, absent significant misconduct on our part, the FCC will renew our licenses to permit operation of our satellites for their useful lives, and grant a licenselicenses for any replacement satellites.
In some areas with high concentrations of tall buildings, such as urban centers, signals from our satellites may be blocked and reception can be adversely affected. In many of these areas, we have installed terrestrial repeaters to supplement our satellite signal coverage. The FCC has established rules governing terrestrial repeaters and has granted us a license through 2027 to operate our repeater network.
In manycertain cases, we obtain FCC certifications for satellite radios, including satellite radios that include FM modulators. We believe our radios that are in production comply with all applicable FCC rules.
We are required to obtain export licenses or other approvals from the United States government to export certain ground control equipment, satellite communications/control services and technical data related to our satellites and their operations. The deliverytransfer of such equipment, services and technical data to destinations outside the United States andor to foreign persons is subject to strict export control and prior approval requirements from the United States government (including prohibitions on the sharing of certain satellite-related goods and services with China).
Changes in law or regulations relating to communications policy or to matters affecting our services could adversely affect our ability to retain our FCC licenses or the manner in which we operate.
Copyrights to Programming
In connection with our satellite radio music programming, we must negotiate and enter into royalty arrangements with two sets of rights holders: Holders of copyrights in musical works (that is, the music and lyrics) and holders of copyrights in sound recordings (that is, the actual recording of a work).
Musical works rights holders, generally songwriters and music publishers, arehave been traditionally represented by performing rights organizations such as the American Society of Composers, Authors and Publishers (“ASCAP”), Broadcast Music, Inc. (“BMI”) and SESAC, Inc. (“SESAC”). The market for rights relating to musical works is changing rapidly. Songwriters and music publishers have withdrawn from the traditional performing rights organizations, particularly ASCAP and BMI, and new entities, such as Global Music Rights LLC (“GMR”), have been formed to represent rights holders. These organizations negotiate fees with copyright users, collect royalties and distribute them to the rights holders. We have arrangements with all of these organizations. The changing market for musical works may have an adverse effect on us, including increasing our costs or limiting the musical works available to us.
Sound recording rights holders, typically large record companies, are primarily represented by SoundExchange, an organization which negotiates licenses, and collects and distributes royalties on behalf of record companies and performing artists. Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998, we may negotiate royalty arrangements with the owners of sound recording copyright owners,recordings fixed after February 15, 1972, or if negotiation is unsuccessful, the royalty rate is established by the Copyright Royalty Board (the “CRB”) of the Library of Congress.
The CRB has issued its determination regarding the royalty rate payable by us under the statutory license covering the performance of sound recordings fixed after February 15, 1972 over our satellite digital audio radio service, and the making of ephemeral (server) copies in support of such performances, for the five-year period ending on December 31, 2017. Under the terms of the CRB's existing decision, we will pay a royalty based on gross revenues, subject to certain exclusions, of 9.5% for 2014, 10.0% for 2015, 10.5% for 2016, and 11% for 2017. The rate for 20132016 was 9.0%10.5%. A proceeding is underway before the CRB to determine the royalty rate payable by us under the statutory license covering the performance of sound recordings fixed after February 15, 1972 over our satellite digital audio radio service, and the making of ephemeral (server) copies in support of such performances, for the five-year period ending on December 31, 2022.
The revenue currently subject to royalty includes subscription revenue from our U.S. satellite digital audio radio subscribers and advertising revenue from channels, other than those channels that make only incidental performances of sound recordings. Exclusions from revenue subject to the statutory license fee include, among other things, revenue from channels, programming and products or other services offered for a separate charge where such channels make only incidental performances of sound recordings; revenue from equipment sales; revenue from current and future data services (including video and connected vehicle services) offered for a separate charge; intellectual property royalties received by us; credit card, invoice and fulfillment service fees; and bad debt expense. The regulations also allow us to further reduce our monthly royalty fee in proportion to the percentage of our performances that feature pre-1972 recordings (which are not subject to federal copyright protection) as well as those that are licensed directly from the copyright holder, rather than through the statutory license.
To secure the rights to stream music content over the Internet, including to mobile devices, we also must obtain licenses from, and pay royalties to, copyright owners of musical compositions and in certain cases, sound recordings. We have arrangements with ASCAP, SESAC, BMI and BMIGMR to license the musical compositions we stream over the Internet. The licensing of certain sound recordings fixed after February 15, 1972 for use on the Internet is also subject to the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998 on terms established by the CRB. In 2013,2016, we paid a per performance rate for the streaming of certain sound recordings on the Internet of $0.00210 per play, which$0.0022. In accordance with the CRB's 2016 decision, this royalty rate will changeis expected to $0.00220 per play in 2014 and $0.00240 in 2015. Proceedingsincrease during the period 2018 through 2020 based on the consumer price index.
Our rights to establish rates forperform certain copyrighted sound recordings (that is, the streamingactual recording of a work) that were fixed after February 15, 1972 are governed by United States federal law, the Copyright Act. In contrast, our rights to perform certain sound recordings on the Internet after 2015, known as the Webcasting IV proceeding, commenced in January 2014that were fixed before the CRB.February 15, 1972 are governed by state law.
Trademarks
We have registered, and intend to maintain, the trademarktrademarks “Sirius”, “XM”, “SiriusXM” and the “Dog design” logo“SXM” with the United States Patent and Trademark Office in connection with the services we offer. We are not aware of any material claims of infringement or other challenges to our right to use the “Sirius”, “XM”, “SiriusXM” or “SiriusXM” trademark or the “Dog design” logo“SXM” trademarks in the United States. We also have registered, and intend to maintain, trademarks for the names of certain of our channels. We have also registered the trademarks “Sirius”, “XM”, and the “Dog design” logo“SiriusXM” in Canada. We have granted a license to use certain of our trademarks in Canada to Sirius XM Canada.
Personnel
As of December 31, 2013,2016, we had 2,1952,402 full-time employees. In addition, we rely upon a number of part-time employees, consultants, other advisors and outsourced relationships. None of our employees are represented by a labor union, and we believe that our employee relations are good.
Corporate Information and Available Information
Our executive offices are located at 12211290 Avenue of the Americas, 36th11th floor, New York, New York 1002010104 and our telephone number is (212) 584-5100. Our internet address is www.siriusxm.com. Our annual, quarterly and current reports, and any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), may be accessed free of charge through our website after we have electronically filed or furnished such material with the SEC. Siriusxm.com (including any other reference to such address in this Annual Report) is an inactive textual reference only, meaning that the information contained on or accessible from the website is not part of this Annual Report on Form 10-K and is not incorporated in this report by reference.
Executive Officers of the Registrant
Certain information regarding our executive officers as of January 31, 20142017 is provided below:
|
| | |
Name | Age | Position |
| James E. Meyer | 5962 | Chief Executive Officer |
| Scott A. Greenstein | 5457 | President and Chief Content Officer |
| David J. Frear | 60 | Senior Executive Vice President and Chief Financial Officer |
| Dara F. Altman | 5558 | Executive Vice President and Chief Administrative Officer |
| James A. Cady | 56 | Executive Vice President, Operations, Products and Connected Vehicle |
| Stephen Cook | 5861 | Executive Vice President, Sales and Automotive |
| Patrick L. Donnelly | 5255 | Executive Vice President, General Counsel and Secretary |
David J. Frear | 57 | Executive Vice President and Chief Financial Officer |
Enrique Rodriguez | 51 | Executive Vice President, Operations and Products |
| Katherine Kohler Thomson | 4750 | Executive Vice President, Chief Marketing Officer |
| Joseph A. Verbrugge | 47 | Executive Vice President, Sales and Development |
James E. Meyerhas served as our Chief Executive Officer since December 2012. From May 2004 to December 2012, Mr. Meyer was our President, Operations and Sales. Prior to May 2004, Mr. Meyer was President of Aegis Ventures Incorporated, a consulting firm that provides general management services. From December 2001 until 2002, Mr. Meyer served as special advisor to the Chairman of Thomson S.A., a leading consumer electronics company. From January 1997 until December 2001, Mr. Meyer served as the Senior Executive Vice President for Thomson as well as a member of the executive committee. From 1992 until 1996, Mr. Meyer served as Thomson's Senior Vice President of Product Management. Mr. Meyer is Chairman of the Board of Directors and a director of ROVITivo Corporation.
Scott A. Greenstein has served as our President and Chief Content Officer since May 2004. Prior to May 2004, Mr. Greenstein was Chief Executive Officer of The Greenstein Group, a media and entertainment consulting firm. From 1999 until 2002, he was Chairman of USA Films, a motion picture production, marketing and distribution company. From 1997 until 1999, Mr. Greenstein was Co-President of October Films, a motion picture production, marketing and distribution company. Prior to joining October Films, Mr. Greenstein was Senior Vice President of Motion Pictures, Music, New Media and Publishing at Miramax Films, and held senior positions at Viacom Inc.
David J. Frear has served as our Senior Executive Vice President and Chief Financial Officer since June 2015. From June 2003 to June 2015, he served as our Executive Vice President and Chief Financial Officer. From 1999 to 2003, Mr. Frear was Executive Vice President and Chief Financial Officer of Savvis Communications Corporation, a global managed service provider, delivering internet protocol applications for business customers. Mr. Frear also served as a director of Savvis. From 1993 to 1998, Mr. Frear was Senior Vice President and Chief Financial Officer of Orion Network Systems Inc., an international satellite communications company that was acquired by Loral Space & Communications Ltd. in 1998. From 1990 to 1993, Mr. Frear was Chief Financial Officer of Millicom Incorporated, a cellular, paging and cable television company. Prior to joining Millicom, he was an investment banker at Bear, Stearns & Co., Inc. and Credit Suisse. Mr. Frear is a member of the board of directors of The NASDAQ Stock Market LLC, NASDAQ PHLX LLC, and NASDAQ BX, Inc., subsidiaries of Nasdaq, Inc., a leading provider of trading, clearing, exchange technology, listing, information and public company services.
Dara F. Altman has served as our Executive Vice President and Chief Administrative Officer since September 2008. From January 2006 until September 2008, Ms. Altman served as Executive Vice President, Business and Legal Affairs, of XM. Ms. Altman was Executive Vice President of Business Affairs for Discovery Communications from 1997 to 2005. From 1993 to 1997, Ms. Altman served as Senior Vice President and General Counsel of Reiss Media Enterprises, which owned Request TV, a national pay-per-view service. Before Request TV, Ms. Altman served as counsel for Home Box Office. Ms. Altman started her career as an attorney at the law firm of Willkie Farr & Gallagher LLP.
James A. Cady has served as our Executive Vice President, Operations, Products and Connected Vehicle, since July 2015 and, prior to July 2015, served as Senior Vice President and General Manager of our Connected Services Platform since February 2014. Mr. Cady served as the Chief Executive Officer and President of Slacker, Inc., an internet music service provider, from August 2009 until February 2014. He was the President and Chief Operating Officer of Slacker, Inc. from May 2006 until August 2009. From September 2004 until May 2006, he served as the Chief Executive Officer and President of LightPointe Communications, Inc., a manufacturer of wireless data transmission equipment. Prior to that time, Mr. Cady served in a variety of roles at an assortment of technology companies, including WatchGuard Technologies Inc., a manufacturer of computer security solutions; Rio, a division of SONICblue, Incorporated; Diamond Multimedia Systems, a manufacturer of
various multimedia components; Supra Corp., a producer of hardware for computers; Moore Company, a wholesale distributor of consumer electronics; and Atari Corp., a manufacturer of computer and video games.
Stephen Cookhas served as our Executive Vice President, Sales and Automotive, since January 2013. Mr. Cook served as our Group Vice President and General Manager, Automotive Division, from July 2008 until January 2013. Mr. Cook served as Executive Vice President, Automotive, of XM from July 2006 to July 2008. He also served as XM's Executive Vice President, Sales and Marketing, from January 2002 until July 2006, and as XM's Senior Vice President, Sales and Marketing, from February 1999 until January 2002. Prior to joining XM, Mr. Cook was Chief Operating Officer for Conxus Communications. From 1990 to 1997, Mr. Cook held management positions with GTE's cellular operations. Prior to that time, Mr. Cook worked in brand management for Procter & Gamble.
Patrick L. Donnelly has served as our Executive Vice President, General Counsel and Secretary, since May 1998. From June 1997 to May 1998, he was Vice President and Deputy General Counsel of ITT Corporation, a hotel, gaming and entertainment company that was acquired by Starwood Hotels & Resorts Worldwide, Inc. in February 1998. From October 1995 to June 1997, he was assistant general counsel of ITT Corporation. Prior to October 1995, Mr. Donnelly was an attorney at the law firm of Simpson Thacher & Bartlett LLP.
David J. FrearKatherine Kohler Thomson has served as our Executive Vice President, and Chief Financial Officer since June 2003. From 1999 to 2003, Mr. Frear was Executive Vice President and Chief Financial Officer of Savvis Communications Corporation, a global managed service provider, delivering internet protocol applications for business customers. Mr. Frear also served as a director
of Savvis. From 1993 to 1998, Mr. Frear was Senior Vice President and Chief Financial Officer of Orion Network Systems Inc., an international satellite communications company that was acquired by Loral Space & Communications Ltd. in 1998. From 1990 to 1993, Mr. Frear was Chief Financial Officer of Millicom Incorporated, a cellular, paging and cable television company. Prior to joining Millicom, he was an investment banker at Bear, Stearns & Co., Inc. and Credit Suisse.
Enrique Rodriguez has served as our Executive Vice President, Operations and Products, since January 2013. He served as our Group Vice President from October 2012 until January 2013. Mr. Rodriguez was the Senior Vice President and General Manager of Cisco System Inc.'s Service Provider Video Technology Group from May 2010 until December 2011. Mr. Rodriguez served as Corporate Vice President for the TV Division of Microsoft Corp. from June 2006 until April 2010. Prior to heading Microsoft's TV Division, Mr. Rodriguez served as Vice President of Xbox Partnerships for Microsoft. Before joining Microsoft in 2003, Rodriguez spent over 20 years at Thomson/RCA in a variety of engineering and executive roles.
Katherine Kohler Thomson was appointed as our Executive Vice President, Chief Marketing Officer, insince December 2013. Ms. Thomson was the President and Chief Operating Officer of the Los Angeles Times Media Group from May 2011 until November 2013. She was also the Chief Operating Officer of Tribune Publishing Company, Inc. from April 2013 until November 2013. Ms. Thomson served as Vice President, Business Operations of FLO TV, a division of Qualcomm Incorporated that delivered live television to mobile devices, from September 2009 until May 2011. From September 2008 through September 2009, she was Executive Vice President and Chief of Staff at the Los Angeles Times Media Group. She joined the Los Angeles Times Media Group from Energy Innovations, an affordable solar energy provider, where she was Chief Operating Officer from August 2007 until September 2008. Prior to that time, she spent fourteen years in a variety of positions at DIRECTV, culminating in the role of Senior Vice President, Sales and Marketing Operations.
Joseph A. Verbrugge has served as our Executive Vice President, Sales and Development, since December 2015. Mr. Verbrugge previously served as ourSenior Vice President and General Manager, Automotive Remarketing and Retail Sales, from April 2012 until December 2015; as our Senior Vice President, Automotive Remarketing, from February 2010 until April 2012; and as our Senior Vice President, AutomotivePartnerships, from September 2008 until February 2010. From January 2007 through September 2008, he was Senior Vice President, Automotive Accounts/Partnerships and International Operations, of XM; from May 2006 until January 2007, Mr. Verbrugge served asSenior Vice President, Administration and International Operations of XM; from January 2005 until May 2006, he was Vice President, International Operations, of XM; and from September 2004 until January 2005 he served as Vice President, Special Projects, of XM. Prior to joining XM, Mr. Verbrugge was a consultant with The Dealy Strategy Group LLC, a management consulting firm specializing in international satellite communications and information services companies, from 1999 until 2004. From 1992 until 1995, Mr. Verbrugge was a bond representative with Aetna Life and Casualty Company, an insurance company.
In addition to the other information in this Annual Report on Form 10-K, including the information under the caption Item 1. Business “Competition,” the following risk factors should be considered carefully in evaluating us and our business. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Annual Report on Form 10-K. See “Special Note RegardingAbout Forward-Looking Statements” following this Item 1A. Risk Factors.
We face substantial competition and that competition is likely to increase over time.
We face substantial competition from other providers of radio and other audio services. Our ability to retainattract and attractretain subscribers depends on our success in creating and providing popular or unique music, entertainment, news and sports programming. Our subscribers can obtain certain similar content for free through terrestrial radio stations, or Internet radio services and Internet streaming services. Audio content delivered via the Internet, including through mobile devices that are easily integrated in vehicles, is increasingly competitive with our services. In addition, automakers and aftermarket manufacturers have introduced factory-installed radios capable of accessing Internet-delivered audio entertainment and connecting to Internet-delivered content on smartphones. A summary of various services that compete with us is contained in the section entitled “Item 1. Business-Competition”Business - Competition” of this Annual Report on Form 10-K for the year ended December 31, 2013.
10-K.
Competition could result in lower subscription, advertising or other revenue orand an increase in our marketing, promotion or other expenses and, consequently, lower our earnings and free cash flow. We cannot assure you we will be able to compete
successfully with our existing or future competitors or that competition will not have a material adverse effectimpact on our business,operations and financial condition or results of operations.
condition.
Our ability to attract and retain subscribers in the future is uncertain.
Our ability to retain our subscribers, or increase the number of subscribers to our service, is uncertain and subject to many factors, including:
the production and sale or lease of new vehicles in the United States;
the price of our service;
the health of the economy;
the production and sale of new vehicles in the United States;
the rate at which existing self-pay subscribers buy and sell new and used vehicles in the United States;
our ability to convince owners and lessees of new and previously owned vehicles that include satellite radios to purchase subscriptions to our service;
the effectiveness of our marketing programs;
the entertainment value of our programming;
our ability to respond to evolving consumer tastes; and
actions by our competitors, such as terrestrial radio and other audio entertainment and information providers.
As part of our business, we experience, and expect to experience in the future, subscriber turnover (i.e., churn). Some elements of our business strategy may result in churn increasing. For example, our work to acquire subscribers purchasing or leasing pre-owned vehicles may attract subscribers of more limited economic means; our product and marketing efforts may attract more price sensitive subscribers; and our efforts to increase the penetration of satellite radios in new, lower priced vehicle lines may result in the growth of more economy-minded subscribers; our work to acquire subscribers purchasing or leasing pre-owned vehicles may attract subscribers of more limited economic means; and our product and marketing efforts may attract more price sensitive subscribers.
If we are unable to retain current subscribers at expected rates, or the costs of retaining subscribers are higher than expected, our financial performance and operating results could be adversely affected. We cannot predict how successful we will be at retaining customers who purchase or lease vehicles that include a prepaid promotional subscription to our satellite radio service. A substantial portion of our subscribers are on discounted pricing plans and our ability to retain these subscribers or migrate them to higher priced plans is uncertain. We spend substantial amounts on advertising and marketing and in transactions with automakers, retailers and others to obtain and attract subscribers.
Average monthly revenue per subscriber, which we refer to as ARPU, is another key metric we use to analyze our business. Over the past several years, we have focused substantial attention and efforts on balancing ARPU and subscriber additions. Our ability to increase or maintain ARPU over time is uncertain and depends upon various factors, including:
the value consumers perceive in our service;
our ability to add and retain compelling programming;
the increasing competition we experience from terrestrial and Internet radio and other audio entertainment and information providers;
our ability to increase prices; and
discounted offers we may make to attract new subscribers and retain existing subscribers.
Our profitability could be adversely affected if we are unable to consistently attract new subscribers and retain our current subscribers at prices and margins consistent with our past performance.
Our service may experience harmful interference from new wireless operations.
The development of new applications and services in spectrum adjacent to the frequencies licensed to us for satellite radio and ancillary services, as well as the combination of signals in other frequencies, may cause harmful interference to our satellite radio service in certain areas of the United States. Certain operations or combination of operations permitted by the FCC in spectrum, other than our licensed frequencies, results in the loss of signal to our service, and the reception of our satellite radio service can be adversely affected in certain areas. Elimination of this interference may not be possible in all cases. In other cases, our efforts to reduce this interference may require extensive engineering efforts and additions to our terrestrial infrastructure. These mitigation efforts may be costly and take several years to implement and may not be entirely effective. In certain cases, we are dependent on the FCC to assist us in preventing harmful interference to our service.
Consumer protection laws and their enforcement could damage our business.
We engage in extensive marketing efforts to attract and retain subscribers to our services. We employ a wide variety of communications tools as part of our marketing campaigns, including telemarketing efforts and email solicitations. Consumer protection laws cover nearly all aspects of our marketing efforts, including the content of our advertising, the terms of consumer offers and the manner in which we communicate with subscribers and prospective subscribers. The nature of our business requires us to expend significant resources to try to ensure that our marketing activities comply with federal and state laws, rules and regulations relating to consumer protection, including laws relating to telemarketing activities and privacy. There can
be no assurance that these efforts will be successful or that we will not have to expend even greater resources towards compliance efforts.
Modifications to federal and state laws, rules and regulations concerning consumer protection, including decisions by federal and state courts and agencies interpreting these laws, could have an adverse impact on our ability to attract and retain subscribers to our services. There can be no assurance that new laws or regulations will not be enacted or adopted, preexisting laws or regulations will not be more strictly enforced or that our varied operations will comply with all applicable laws, which could have a material adverse impact on our operations and financial condition.
The unfavorable outcome of pending or future litigation could have a material adverse impact on our operations and financial condition.
We are parties to several legal proceedings arising out of various aspects of our business, including class actions arising out of our marketing practices and subscription plans. The outcome of these proceedings may not be favorable, and one or more unfavorable outcomes could have a material adverse impact on our financial condition. See “Item 3. Legal Proceedings” below.
The market for music rights is changing and is subject to significant uncertainties.
We must maintain music programming royalty arrangements with, and pay license fees to, owners of rights in musical works. Traditionally, BMI, ASCAP and SESAC have negotiated for these copyright users, collected royalties and distributed them to songwriters and music publishers. These traditional arrangements are changing rapidly. Owners of rights in musical works have withdrawn from BMI, ASCAP and SESAC and new entities, such as GMR, have been formed to represent owners of musical works. In addition, Committees of Congress have held hearings on substantial revisions of the Copyright Act. The fracturing of the traditional system for licensing rights in musical works may have significant consequences to our business, including increasing licensing costs and reducing the availability of certain pieces for use on our services.
Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998, we also must pay royalties to copyright owners of sound recordings fixed after February 15, 1972. Those royalty rates may be established through negotiation or, if negotiation is unsuccessful, by the CRB. Owners of copyrights in sound recordings have created SoundExchange, a collective organization, to collect and distribute royalties. SoundExchange is exempt by statute from certain U.S. antitrust laws and exercises significant market power in the licensing of sound recordings. Under the terms of the CRB's existing decision governing sound recording royalties for the five-year period ending on December 31, 2017, we will be required to pay a royalty based on our gross revenues, subject to certain exclusions, of 11% for 2017. The CRB proceeding to set royalty rates for the five-year period beginning 2018 is underway.
In addition, SoundExchange alleges that we underpaid royalties for statutory licenses related to sound recording royalties for the period from 2007-2012. See “Item 3. Legal Proceedings” below.
The right to perform certain copyrighted sound recordings that were fixed before February 15, 1972 is governed by state common law principles and, in certain instances, may be subject to state statutes. We are a defendant in litigation in several States, regarding the alleged distribution, duplication and performance of certain copyrighted sound recordings that were fixed before February 15, 1972. During 2015 and 2016, we settled suits with copyright owners for almost all of the pre-1972 works we use. If other state courts or appellate courts in certain states ultimately hold that a performance right exists under various state copyright laws, we may be required to pay additional royalties to perform copyrighted sound recordings that were fixed before February 15, 1972.
Our business depends in large part upon the auto industry.
A substantial portion of our subscription growth has come from purchasers and lessees of new and previously owned automobiles in the United States. The sale and lease of vehicles with satellite radios is an important source of subscribers for our satellite radio service. We have agreements with every major automaker to include satellite radios in new vehicles, although these agreements do not require automakers to install specific or minimum quantities of radios in any given period.
Automotive production and sales are dependent on many factors, including the availability of consumer credit, general economic conditions, consumer confidence and fuel costs. To the extent vehicle sales by automakers decline, or the penetration of factory-installed satellite radios in those vehicles is reduced, subscriber growth for our satellite radio services may be adversely impacted.
Sales of previously owned vehicles represent an increasinga significant source of new subscribers for us. We have agreements with various auto dealers and certain companies operating in the used vehicle market to provide us with data on sales of previously owned satellite radio enabled vehicles. The continuing availability of this information is important to our future growth.
General economic conditions can affect our business.
The purchase of a satellite radio subscription is discretionary, and our business and our financial condition can be negatively affected by general economic conditions. Poor general economic conditions cancould adversely affect subscriber churn, conversion rates and vehicle sales.
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.
The nature of our business involves the receipt and storage of personal information about our subscribers including, in many cases, credit and debit card information. If we fail to protect the security of personal information about our customers or if we experience a significant data security breach, we could be exposed to costly government enforcement actions and private litigation and our reputation could suffer. In addition, our subscribers and potential customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of our services. Such events could lead to lost future sales and adversely affect our results of operations.
We have a program in place to detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our employees, contractors or other agents.
If hackers were able to circumvent our security measures, a release of proprietary information or personal information could occur or we could experience significant disruptions. If our systems become unavailable or suffer a security breach, we may be required to expend significant resources to address these problems, including notification under various federal and state data privacy regulations, and our reputation and operating results could suffer.
Existing or future government laws and regulations could harm our business.
We are subject to many laws, including federal, state, local and foreign laws. These laws and regulations cover issues such as user privacy, behavioral advertising, automatic renewal of agreements, pricing, fraud, electronic waste, mobile and electronic device communications, quality of products and services, taxation, advertising, intellectual property rights and information security. The expansion of these laws, both in terms of their number and their applicability, could harm our business.
Failure of our satellites would significantly damage our business.
The lives of our satellites will vary and dependdepending on a number of factors, including:
degradation and durability of solar panels;
quality of construction;
random failure of satellite components, which could result in significant damage to or loss of a satellite;
amount of fuel the satellite consumes; and
damage or destruction byas a result of electrostatic storms, terrorist attacks, collisions with other objects in space or other events, such as nuclear detonations, occurring in space.
In the ordinary course of operation, satellites experience failures of component parts and operational and performance anomalies. Components on our in-orbit satellites have failed; and from time to time we have experienced anomalies in the operation and performance of these satellites. These failures and anomalies are expected to continue in the ordinary course, and we cannot predict if any of these possible future events will have a material adverse effect on our operations or the life of our existing in-orbit satellites. Any material failure of our satellites could cause us to lose customers and could materially harm our
reputation and our operating results.
Three We hold no in-orbit insurance for our satellites. Additional information regarding our fleet of satellites is contained in the Sirius in-orbit satellites have experienced degradationsection entitled “Item 1. Business - Satellites, Terrestrial Repeaters and Other Satellite Facilities” of this Annual Report on their solar arrays. The degradation these satellites have experienced does not affect current operations. Additional degradation on three Sirius satellites could reduce the estimated lives of those satellites.
Our XM-1 and XM-2 satellites, launched in 2001, experienced progressive degradation problems common to early Boeing 702 class satellites, reached the end of their depreciable lives in 2013 and are expected to be removed from orbit in 2014. Our FM-5 and XM-5 satellites, launched in 2009 and 2010, respectively, have experienced minor degradation on their solar arrays which do not affect current operations. We estimate that our FM-5 and XM-5 satellites will meet their 15-year estimated depreciable lives. Our XM-3 and XM-4 satellites have experienced circuit failures on their solar arrays which do not affect current operations. Additional circuit failures on the satellites could reduce the estimated lives of those satellites. We estimate that our XM-3 satellite, launched in 2005, and our XM-4 satellite, launched in 2006, will meet their 15-year estimated depreciable lives. We estimate that our FM-6 satellite, launched in 2013, will meet its 15-year estimated depreciable life.
Our XM-5 satellite serves as an in-orbit spare for both of our services. In the event of a failure of XM-3, XM-4 or any of the Sirius satellites, service would be maintained through XM-5.
Form 10-K.
In addition, our Sirius network of terrestrial repeaters communicates with a single third-party satellite. Our XM network of terrestrial repeaters communicates with a single XM satellite. If the satellites communicating with the applicable repeater network fail unexpectedly, the services would be disrupted for several hours or longer.
Interruption or failure of our information technology and communications systems could negatively impact our results and our brand.
We operate a complex and growing business. We offer a wide variety of subscription packages at different price points. Our business is dependent on the operation and availability of our information technology and communication systems and those of certain third party service providers. Any degradation in the quality, or any failure, of our systems could reduce our revenues, cause us to lose customers and damage our brand. Although we have implemented practices designed to maintain the availability of our information technology systems and mitigate the harm of any unplanned interruptions, we cannot anticipate all eventualities. We occasionally experience unplanned outages or technical difficulties. We could also experience loss of data or processing capabilities, which could cause us to lose customers and could materially harm our reputation and our operating results.
Our data centers and our information technology and communications systems are vulnerable to damage or interruption from natural disasters, malicious attacks, fire, power loss, telecommunications failures, computer viruses or other attempts to harm our systems.
If hackers were able to circumvent our security measures, we could lose proprietary information or personal information or experience significant disruptions. If our systems become unavailable or suffer a security breach, we may be required to expend significant resources to address these problems, including notification under various federal and state data privacy regulations, and our reputation and operating results could suffer.
We rely on internal systems and external systems maintained by manufacturers, distributors and service providers to take, fulfill and handle customer service requests and host certain online activities. Any interruption or failure of our internal or external systems could prevent us from servicing customers or cause data to be unintentionally disclosed.
If we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions and private litigationOur data centers and our reputation could suffer.
The nature ofinformation technology and communications systems are vulnerable to damage or interruption from natural disasters, malicious attacks, fire, power loss, telecommunications failures, computer viruses or other attempts to harm our business involves the receipt and storage of personal information about our subscribers. If we experience a data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our subscribers and potential customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of our services. Such events could lead to lost future sales and adversely affect our results of operations.
Royalties for music rights have increased and there can be no assurance they will not continue to increase in the future.
We must maintain music programming royalty arrangements with, and pay license fees to, BMI, ASCAP and SESAC. These organizations negotiate with copyright users, collect royalties and distribute them to songwriters and music publishers. We have agreements with ASCAP, BMI and SESAC through 2016. There can be no assurance that the royalties we pay to ASCAP, SESAC, BMI and other songwriters and music publishers will not increase upon expiration of these arrangements.
Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998, we also must pay royalties to copyright owners of sound recordings. Those royalty rates may be established through negotiation or, if negotiation is unsuccessful, by the CRB. Owners of copyrights in sound recordings have created SoundExchange, a collective organization, to collect and distribute royalties. SoundExchange is exempt by statute from certain U.S. antitrust laws and exercises significant market power in the licensing of sound recordings. Under the terms of the CRB's decision governing sound recording royalties for the five-year period ending on December 31, 2017, we will pay a royalty based on gross revenues, subject to certain exclusions, of 9.5% for 2014, 10.0% for 2015, 10.5% for 2016, and 11% for 2017.
The unfavorable outcome of pending or future litigation could have a material adverse effect.
We are parties to several legal proceedings arising out of various aspects of our business, including patent infringement suits, class action lawsuits alleging violations of consumer protection statutes, suits seeking compensation for our use of sound recordings fixed prior to 1972 and actions seeking damages for purported violations of the telephone consumer protection act. We are defending all claims against us. The outcome of these proceedings may not be favorable, and an unfavorable outcome may have a material adverse effect on our business or financial results.
systems.
We may not realize the benefits of acquisitions or other strategic initiatives, including the acquisition of Agero’s connected vehicle business.investments and initiatives.
Our business strategy may include selective acquisitions or other strategic investments and initiatives that allow us to expand our business. The success of any acquisition including our acquisition of Agero’s connected vehicle business, depends upon effective integration of acquired businesses and assets into our operations, which is subject to risks and uncertainties, including realization of any anticipated synergies and cost savings, the ability to retain and attract personnel, the diversion of management’s attention for other business concerns, and undisclosed or potential legal liabilities of the acquired business or assets.
Rapid technological and industry changes could adversely impact our services.
The audio entertainment industry is characterized by rapid technological change, frequent product innovations, changes in customer requirements and expectations, and evolving standards. If we are unable to keep pace with these changes, our business may not succeed. Products using new technologies, or emerging industry standards, could make our technologies less competitive in the marketplace.
Failure of third parties to perform could adversely affect our business.
Our business depends, in part, on various third parties, including:
manufacturers that build and distribute satellite radios;
companies that manufacture and sell integrated circuits for satellite radios;
programming providers and on-air talent;
vendors that operate our call centers;
retailers that market and sell satellite radios and promote subscriptions to our services; and
vendors that have designed or built, and vendors that support or operate, other important elements of our systems.systems, including our satellites.
If one or more of these third parties do not perform in a satisfactory or timely manner, our business could be adversely affected. In addition, a number of third parties on which we depend have experienced, and may in the future experience, financial difficulties or file for bankruptcy protection. Such third parties may not be able to perform their obligations to us in a
timely manner, if at all, as a result of their financial condition or may be relieved of their obligations to us as part of seeking bankruptcy protection.
We design, establish specifications, source or specify parts and components, and manage various aspects of the logistics andof the production of satellite radios. As a result of these activities, we may be exposed to liabilities associated with the design, manufacture and distribution of radios that the providers of an entertainment service would not customarily be subject to, such as liabilities for design defects, patent infringement and compliance with applicable laws, as well as the costs of returned product.
Changes in consumer protection laws and their enforcement could damage our business.
We engage in extensive marketing efforts to attract and retain subscribers to our services. We employ a wide variety of communications tools as part of our marketing campaigns, including telemarketing efforts; print, television, radio and online advertising; and email solicitations.
Consumer protection laws, rules and regulations are extensive and have developed rapidly, particularly at the state level. Consumer protection laws in certain jurisdictions cover nearly all aspects of our marketing efforts, including the content of our advertising, the terms of consumer offers and the manner in which we communicate with subscribers and prospective subscribers. We are engaged in considerable efforts to ensure that all our activities comply with federal and state laws, rules and regulations relating to consumer protection, including laws relating to privacy. Modifications to federal and state laws, rules and regulations concerning consumer protection, including decisions by federal and state courts and agencies interpreting these laws, could have an adverse impact on our ability to attract and retain subscribers to our services. While we monitor the changes in and interpretations of these laws in consumer-related settlements and decisions, and while we believe that we are in material compliance with applicable laws, there can be no assurances that new laws or regulations will not be enacted or adopted, preexisting laws or regulations will not be more strictly enforced or that our varied operations will continue to comply with all applicable laws, which might adversely affect our operations.
A Multistate Working Group of 32 State Attorneys General, led by the Attorney General of the State of Ohio, is investigating certain of our consumer practices. The investigation focuses on practices relating to the cancellation of subscriptions; automatic renewal of subscriptions; charging, billing, collecting, and refunding or crediting of payments from consumers; and soliciting customers. Separate investigations into our consumer practices are being conducted by the Attorneys General of the State of Florida and New York.
Failure to comply with FCC requirements could damage our business.
We hold FCC licenses and authorizations to operate commercial satellite radio services in the United States, including authorizations for satellites and terrestrial repeaters, and related authorizations. The FCC generally grants licenses and authorizations for a fixed term. Although we expect our licenses and authorizations to be renewed in the ordinary course upon their expiration, there can be no assurance that this will be the case. Any assignment or transfer of control of any of our FCC licenses or authorizations must be approved in advance by the FCC.
The operation of our satellite radio systems is subject to significant regulation by the FCC under authority granted through the Communications Act of 1934 and related federal law. We are required, among other things, to operate only within specified frequencies; to meet certain conditions regarding the interoperability of our satellite radios with those of other licensed satellite radio systems; to coordinate our satellite radio services with radio systems operating in the same range of frequencies in neighboring countries; and to coordinate our communications links to our satellites with other systems that operate in the same frequency band. Noncompliance by us with these requirements or other conditions or with other applicable FCC rules and regulations could result in fines, additional license conditions, license revocation or other detrimental FCC actions. There is no guarantee that Congress will not modify the statutory framework governing our services, or that the FCC will not modify its rules and regulations in a manner that would have a material impact on our operations.
The terms of our licenses and the order of the FCC approving the Merger requires us to meet certain conditions. Non-compliance with these conditions could result in fines, additional license conditions, license revocation or other detrimental FCC actions.
Other existing or future government laws and regulations could harm our business.
We are subject to many other federal, state and local laws. These laws and regulations cover issues such as user privacy, behavioral advertising, automatic renewal of agreements, pricing, fraud, electronic waste, mobile and electronic device communications, quality of products and services, taxation, advertising, intellectual property rights and information security. The expansion of these laws, both in terms of their number and their applicability, could harm our business. Similarly, new disclosure and reporting requirements, established under existing or new state or federal laws, such as regulatory rules regarding abusive labor practices in portions of our supply chain, could increase the cost of doing business, adversely affecting our results of operations.
We may from time to time modify our business plan, and these changes could adversely affect us and our financial condition.
We regularly evaluate our plans and strategy. These evaluations often result in changes to our plans and strategy, some of which may be material. These changes in our plans or strategy may include: the acquisition or termination of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and investments in, and/or acquisitions of, other businesses, including acquisitions that are not directly related to our satellite radio business.
OurWe have a significant amount of indebtedness, could adversely affectand our operations and could limitdebt contains certain covenants that restrict our ability to react to changes in the economy or our industry.operations.
As of December 31, 2013,2016, we had an aggregate principal amount of approximately $3.6$5.9 billion of indebtedness and an additional $790.0outstanding, $390.0 million availableof which was outstanding under oura $1.75 billion Senior Secured Revolving Credit Facility.
Our indebtedness has important consequences. For example, it:
increases our vulnerability to general adverse economic and industry conditions;
requires us to dedicate a portion of our cash flow from operations to payments on indebtedness, reducing the availability of cash flow to fund capital expenditures, marketing and other general corporate activities;
limits our ability to borrow additional funds;
limits and may limit our flexibility in planning for, or reacting to, changes in our business and the audio entertainment industry; and
may place us at a competitive disadvantage compared to other competitors.
Certain of the instruments governing our indebtedness contain covenants that, among other things, place certain limitations on our ability to incur more debt, exceed a specified leverage ratio, pay dividends, make distributions, make investments, repurchase stock, create liens, enter into transactions with affiliates, enter into sale lease-back transactions, merge or consolidate, and transfer or sell assets. Failure to comply with the covenants associated with our indebtedness could result in an event of default, which, if not cured or waived, could cause us to seek the protection of the bankruptcy laws, discontinue operations or seek a purchaser for our business or assets.
industry.
Our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities.
An earthquake, hurricane, tornado, flood, terrorist attack or other catastrophic event could damage our broadcast studios, terrestrial repeater networks or satellite uplink facilities, interrupt our service and harm our business.
Any damage to the satellites that transmit to our terrestrial repeater networks would likely result in degradation of the affected service for some subscribers and could result in complete loss of service in certain or all areas. Damage to our satellite uplink facilities could result in a complete loss of our services until we could transfer operations to suitable back-up facilities.
Holdings’Our principal stockholder has significant influence, over our management andincluding over actions requiring general stockholder approval, and its interests may differ from the interests of other holders of Holdings’our common stock.
As of December 31, 2016, Liberty Media beneficially owns over 50%owned approximately 67% of Holdings’ common stock.stock and has the ability to influence our affairs, policies and operations. Two Liberty Media executives and one other member of the board of directors of Liberty Media are members of Holdings’our board of directors. Our board of directors currently has twelve members. Gregory B. Maffei, the President and Chief Executive Officer of Liberty Media, is the Chairman of Holdings’ board of directors.
As a result, Liberty Media has the ability to indirectly control our affairs, policies and operations, such as Our board of directors is responsible for, among other things, the appointment of management, future issuances of common stock or other securities, the payment of dividends, if any, the incurrence of debt, amendments to our certificate of incorporation and bylaws and the entering intoapproval of extraordinary transactions, and their interests may not in all cases be aligned with the interests of other stockholders of Holdings. In addition, various transactions.
Liberty Media will be able to
can also determine the outcome of all matters requiring general stockholder approval, including the election of the board of directors and will be ablechanges to our certificate of incorporation or by-laws. Liberty Media can also cause or prevent a change of control of Holdings or a change in the composition of Holdings’ or our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive Holdings'our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of Holdingsour common stock.
The transaction proposed by In certain cases, the interests of Liberty Media may not occur, may increasebe aligned with the volatilityinterests of the market priceother stockholders of Holdings’ common stock and will result in certain costs and expenses.
On January 3, 2014, Holdings’ Board of Directors received a non-binding letter from Liberty Media proposing a transaction pursuant to which all outstanding shares of common stock of Holdings not owned by Liberty Media would be converted into the right to receive new non-voting shares of Liberty Series C common stock.
The letter provides that no legally binding obligation with respect to any transaction exists unless and until mutually acceptable definitive documentation is executed and delivered with respect thereto. There can be no assurance that the transaction proposed by Liberty Media or any related transaction will be completed or, if completed, will have any specified terms.
The market price of Holdings’ common stock may reflect various assumptions as to whether the proposed transaction with Liberty Media will occur. Variations in the market price of Holdings’ common stock may occur as a result of changing assumptions regarding the proposed transaction, independent of changes in our business, financial condition or prospects or changes in general market or economic conditions. As a result, a definitive agreement regarding a transaction, or a failure to reach a definitive agreement regarding a transaction, could result in a significant change in the market price of Holdings’ common stock.
Holdings.
We expect to incur costs in connection with the consideration of Liberty Media’s proposal, including costs of financial and legal advisors to the Special Committee of the Board of Directors of Holdings and costs associated with legal actions arising out of Liberty Media’s proposal. It is difficult to estimate the aggregate amount of such costs, although they could be substantial.
Holdings isare a “controlled company” within the meaning of the NASDAQ listing rules and, as a result, qualifiesqualify for, and reliesrely on, exemptions from certain corporate governance requirements.
Holdings isWe are a “controlled company” for the purposes of the NASDAQ Stock Market listing rules. As such, Holdings haswe have elected not to comply with certain NASDAQ corporate governance requirements. AAlthough a majority of theour board of directors of Holdings consists of independent directors. Holdings doesdirectors, we do not have a compensation committee and nominating and corporate governance committee that consist entirely of independent directors.
Our business may be impaired by third-party intellectual property rights.
Development of our systems has depended upon the intellectual property that we have developed, as well as intellectual property licensed from third parties. If the intellectual property that we have developed or use is not adequately protected, others will be permitted to and may duplicate portions of our systems or services without liability. In addition, others may challenge, invalidate, render unenforceable or circumvent our intellectual property rights, patents or existing licenses or we may face significant legal costs in connection with defending and enforcing those intellectual property rights. Some of the know-how and technology we have developed, and plan to develop, is not now, nor will it be, covered by U.S. patents or trade secret protections. Trade secret protection and contractual agreements may not provide adequate protection if there is any unauthorized use or disclosure. The loss of necessary technologies could require us to substitute technologies of lower quality performance standards, at greater cost or on a delayed basis, which could harm us.
Other parties may have patents or pending patent applications, which will later mature into patents or inventions that may block or put limits on our ability to operate our system or license technologies. We may have to resort to litigation to enforce our rights under license agreements or to determine the scope and validity of other parties’ proprietary rights in the subject matter of those licenses. This may be expensive and we may not succeed in any such litigation.
Third parties may assert claims or bring suit against us for patent, trademark or copyright infringement, or for other infringement or misappropriation of intellectual property rights. Any such litigation could result in substantial cost, and diversion of effort and adverse findings in any proceeding could subject us to significant liabilities to third parties; require us to seek licenses from third parties; block our ability to operate our systems or license our technology; or otherwise adversely affect our ability to successfully develop and market our satellite radio systems.
Our board of directors declared our first quarterly dividend in October 2016. Although we currently pay a quarterly cash dividend to holders of our common stock, we have no obligation to do so, and our dividend policy may change at any time without notice to our stockholders. The declaration and payment of dividends is at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, limitations imposed by our indebtedness, legal requirements and other factors that our board of directors deems relevant.
Special Note About Forward-Looking Statements
We have made various statements in this Annual Report on Form 10-K that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in our other reports filed with or furnished to the SEC, in our press releases and in other documents. In addition, from time to time, we, through our management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified above, which could cause actual results to differ materially from such statements. The words “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “believe,” “intend,” “plan,” “may,” “should,” “could,” “would,” “likely,” “projection,” “outlook” and similar expressions are intended to identify forward-looking statements. We caution you that the risk factors described above are not exclusive. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements, except as required by law.
ITEM 1B. UNRESOLVED STAFF COMMENTS
| |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. PROPERTIES
Below is a list of the principal properties that we own or lease:
|
| | | | |
| Location | | Purpose | | Own/Lease |
| New York, NY | | Corporate headquarters, office facilities and studio/production facilities | Lease |
New York, NY | Office facilities | Lease |
| Washington, DC | Office and studio/production facilities | Own |
Washington, DC | Office, studio/production facilities and data center | | Own |
| Lawrenceville, NJ | | Office and technical/engineering facilities | | Lease |
| Deerfield Beach, FL | | Office and technical/engineering facilities | | Lease |
| Farmington Hills, MI | | Office and technical/engineering facilities | | Lease |
| Nashville, TN | | Studio/production facilities | | Lease |
| Vernon, NJ | | Technical/engineering facilities | | Own |
| Ellenwood, GA | | Technical/engineering facilities | | Lease |
| Los Angeles, CA | | Studio/production facilities | | Lease |
| Irving, TX | | Office and engineering facilities/call center | | Lease |
We also own or lease other small facilities that we use as offices for our advertising sales personnel, studios and warehouse and maintenance space. These facilities are not material to our business or operations. We also lease properties in Panama and Ecuador that we use as earth stations to command and control satellites.
In addition, we lease or license space at approximately 650610 locations for use in connection with the terrestrial repeater networks that support our satellite radio services. In general, these leases and licenses are for space on building rooftops and communications towers. None of these individual arrangementslocations are material to our business or operations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are a defendant or party to various claims and lawsuits, including thosethe following discussed below. These claims are at various stages of arbitration or adjudication.
State Consumer InvestigationsSoundExchange Royalty Claims. A Multistate Working GroupIn August 2013, SoundExchange, Inc. filed a complaint in the United States District Court for the District of 32 State Attorneys General, ledColumbia alleging that we underpaid royalties for statutory licenses in violation of the regulations established by the Attorney GeneralCopyright Royalty Board for the 2007-2012 period. SoundExchange principally alleges that we improperly reduced our gross revenues applicable to royalties by improperly deducting revenue attributable to pre-1972 recordings and Premier package revenue that is not “separately charged” as required by the regulations. We believe that we properly applied the gross revenue exclusions contained in the regulations established by the Copyright Royalty Board. SoundExchange is seeking compensatory damages of not less than $50 million and up to $100 million 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, in response to our motion to dismiss the complaint, stayed the case on the grounds that it properly should be pursued in the first instance before the Copyright Royalty Board rather than the District Court. In its opinion, the District Court concluded that the gross revenue exclusions in the regulations established by the Copyright Royalty Board for the 2007-2012 period were ambiguous and did not, on their face, make clear whether our royalty calculation approaches were permissible under the regulations. In December 2014, SoundExchange filed a petition with the Copyright Royalty Board requesting an order interpreting the applicable regulations.
On January 10, 2017, the Copyright Royalty Board issued a ruling concluding that we correctly interpreted the revenue exclusions applicable to pre-1972 recordings, but in certain cases did not apply those exclusions properly. The ruling further indicated that we improperly claimed a revenue exclusion based on our Premier package upcharge, because, in the Judges’ view, the portion of the Statepackage that contained programming that did not include sound recordings was not offered for a “separate charge” in accordance with the regulations. The ruling is subject to legal review by the Register of Ohio,Copyrights, and will be transmitted back to the District Court for further proceedings, such as adjudication claims relating to damages and defenses. We intend to exhaust all available options for review and/or appeal of adverse aspects of the Copyright Royalty Board’s ruling, including portions of the ruling which we believe are unclear or inconsistent with the governing law. In addition, we believe we have substantial defenses to those SoundExchange claims that can be asserted before the District Court, and will continue to defend this action vigorously.
This matter is investigatingtitled 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. This matter is not related to certain claims under state law brought by owners of pre-1972 recording copyrights arising out of our consumer practices.use and performance of those recordings.
At December 31, 2016, we concluded that a loss, in excess of our recorded liabilities, is reasonably possible in connection with the SoundExchange royalty claims. The investigation focusesestimable portion of such possible loss ranges from $0 to $70 million, plus any related interest or late fees. Based on practices relatingour defenses, such a loss is not considered probable at this time and no liability for such additional loss has been recorded at December 31, 2016. The matters underlying this estimated range and the estimable portion of reasonably possible losses may change from time to time and the actual possible loss may vary from this estimate.
Telephone Consumer Protection Act Suits. We were a defendant in several purported class action suits that alleged 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”). These purported class action cases were 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).
We have entered into an agreement to the cancellation of subscriptions; automatic renewal of subscriptions; charging, billing, collecting, and refunding or crediting of payments from consumers; and soliciting customers.
A separate investigation into our consumer practices is being conductedsettle these purported class action suits. The settlement was approved by the Attorneys GeneralUnited States District Court for the Eastern District of Virginia in December 2016. The settlement resolves the claims of consumers beginning in February 2008 relating to telemarketing calls to their mobile telephones. Approximately 200 consumers, or less than 0.002% of the Stateconsumers who received notice of Floridathe settlement, opted-out of this class action settlement. As part of this settlement, we made a $35 million payment to a settlement fund (from which notice, administration and other costs and attorneys’ fees are being paid), and are offering participating class members the Stateoption of New York. We are cooperating with these investigations and believereceiving three months of our consumer practices comply with all applicable federal and state laws and regulations.Select service for no charge.
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 actions are,matters, in our opinion, is likely to have a material adverse effect on our business, financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
| |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Holdings’Our common stock is traded on the NASDAQ Global Select Market under the symbol “SIRI.” The following table sets forth the high and low per share sales price for Holdings’our common stock, as reported by NASDAQ, for the periods indicated below:
| | | | | High | | Low | High | | Low |
| Year Ended December 31, 2012 | | |
| Year Ended December 31, 2015 | | | | |
| First Quarter | | $2.36 | | $1.80 | $ | 4.04 |
| | $ | 3.33 |
|
| Second Quarter | | $2.41 | | $1.78 | $ | 4.00 |
| | $ | 3.70 |
|
| Third Quarter | | $2.64 | | $1.84 | $ | 4.01 |
| | $ | 3.31 |
|
| Fourth Quarter | | $3.01 | | $2.55 | $ | 4.20 |
| | $ | 3.69 |
|
| Year Ended December 31, 2013 |
|
| |
| Year Ended December 31, 2016 | | |
| | |
|
| First Quarter |
| $3.25 |
| $2.95 | $ | 4.04 |
| | $ | 3.29 |
|
| Second Quarter |
| $3.63 |
| $2.95 | $ | 4.05 |
| | $ | 3.74 |
|
| Third Quarter |
| $3.99 |
| $3.30 | $ | 4.44 |
| | $ | 3.92 |
|
| Fourth Quarter |
| $4.18 |
| $3.32 | $ | 4.65 |
| | $ | 4.05 |
|
On January 31, 2014,2017, the closing sales price of our common stock on the NASDAQ Global Select Market was $3.58$4.72 per share. On January 31, 2014,2017, there were approximately 10,2718,816 record holders of our common stock. We effected our corporate reorganization on November 15, 2013.
DividendsDividend
On December 28, 2012, Sirius XMNovember 30, 2016, we paid a special cash dividend in the amount of $0.05$0.01 per share of common stock. This was the first cash dividend ever paid by us. The holders of Sirius XM’s former Series B-1 Preferred Stock participated in this cash dividend on an as-converted basis in accordance with its terms. The total amount of this dividend was approximately $327$48.1 million. Sirius XM’s ability to pay dividends is currently limited by covenants under certain of its debt agreements. Holdings’
Our board of directors has not made any determination whether similar special cash dividendsexpects that this dividend will be paidthe first of regular quarterly dividends, in an aggregate annual amount of $0.04 per share of common stock.
On January 24, 2017, our board of directors also declared a quarterly dividend on our common stock in the future.amount of $0.01 per share of common stock payable on February 28, 2017 to stockholders of record as of the close of business on February 7, 2017.
Issuer Purchases of Equity Securities
InAs of December 2012,31, 2016, our board of directors had approved a $2.0for repurchase an aggregate of $10.0 billion of our common stock repurchase program. In October 2013, our board of directors approved an additional $2.0 billion common stock repurchase program. Sirius XM’sstock. Our board of directors did not establish an end date for this stock repurchase program. In connection with the corporate reorganization, this is now a repurchase program of Holdings. During the year ended December 31, 2013, we repurchased 520,257,866 shares of Holdings’ common stock for an aggregate purchase price of $1.8 billion, which includes commissions and fees. Shares of Holdings’ common stock may be purchased from time to time on the open market, andpursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act, in privately negotiated transactions, including in transactions with Liberty Media and its affiliates.affiliates, or otherwise. As of December 31, 2016, our cumulative repurchases since December 2012 under our stock repurchase program totaled 2.2 billion shares for approximately $8.0 billion, and approximately $2.0 billion remained available under our stock repurchase program. The size and timing of these purchasesour repurchases will be based on a number of factors, including price and business and market conditions.
Pursuant to this approval and as part of the share repurchase programs, on October 9, 2013, Sirius XM entered into an agreement with Liberty Media to repurchase $500 million of Holdings’ common stock from Liberty Media through April 2014. In connection with the corporate reorganization, Holdings assumed Sirius XM's obligations under such agreement. Pursuant to the agreement, we repurchased $160 million of Holdings' common stock from Liberty Media as of December 31, 2013. On January 23, 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240 million repurchase of shares of our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date of the final purchase installment under the agreement. As a result of this deferral, we expect to repurchase $340 million of our shares of common stock from Liberty Media on April 25, 2014 at a price of $3.66 per share. We entered into this amendment at the request of the Special Committee of our board of directors that has been formed to review and evaluate the Liberty Media proposal.
The following table provides information about our purchases of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended December 31, 2013:2016:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| October 1, 2013 - October 31, 2013 | | — |
| | $ | — |
| | — |
| | $ | 2,397,639,899 |
|
| November 1, 2013 - November 30, 2013 | | 43,712,265 |
| | $ | 3.66 |
| | 43,712,265 |
| | $ | 2,237,639,895 |
|
| December 1, 2013 - December 31, 2013 | | — |
| | $ | — |
| | — |
| | $ | 2,237,639,895 |
|
| Total | | 43,712,265 |
| | $ | 3.66 |
| | 43,712,265 |
| | $ | 2,237,639,895 |
|
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share (a) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (a) |
| October 1, 2016 - October 31, 2016 | | 24,797,800 |
| | $ | 4.14 |
| | 24,797,800 |
| | $ | 2,382,068,418 |
|
| November 1, 2016 - November 30, 2016 | | 42,526,500 |
| | $ | 4.38 |
| | 42,526,500 |
| | $ | 2,195,781,619 |
|
| December 1, 2016 - December 31, 2016 | | 37,735,900 |
| | $ | 4.49 |
| | 37,735,900 |
| | $ | 2,026,163,058 |
|
| Total | | 105,060,200 |
| | $ | 4.37 |
| | 105,060,200 |
| | |
| |
(1)(a) | These amounts include fees and commissions associated with the shares repurchased. All of these repurchases were made pursuant to our share repurchase program. |
COMPARISON OF CUMULATIVE TOTAL RETURNS
Set forth below is a graph comparing the cumulative performance of our common stock with the Standard & Poor's Composite-500 Stock Index, or the S&P 500, and the NASDAQ Telecommunications Index from December 31, 20082011 to December 31, 2013.2016. The graph assumes that $100 was invested on December 31, 20082011 in each of our common stock, the S&P 500 and the NASDAQ Telecommunications Index. A special dividend with respect to our common stock was declared in 2012 only.and, in November 2016, we paid a $0.01 per share cash dividend, which our board of directors expects will be the first of regular quarterly dividends.
Stockholder Return Performance Table
| | | | | NASDAQ Telecommunications Index | | S&P 500 Index | | Sirius XM Holdings Inc. | NASDAQ
Telecommunications Index | | S&P 500 Index | | Sirius XM Holdings Inc. |
| December 31, 2008 | | $100.00 | | $100.00 | | $100.00 | |
| December 31, 2009 | | $148.24 | | $123.45 | | $500.00 | |
| December 31, 2010 | | $154.06 | | $139.23 | | $1,358.33 | |
| December 31, 2011 | | $134.62 | | $139.23 | | $1,516.67 | $ | 100.00 |
| | $ | 100.00 |
| | $ | 100.00 |
|
| December 31, 2012 | | $137.31 | | $157.90 | | $2,408.33 | $ | 102.00 |
| | $ | 113.41 |
| | $ | 158.79 |
|
| December 31, 2013 | | $170.29 | | $204.63 | | $2,908.33 | $ | 126.50 |
| | $ | 146.98 |
| | $ | 191.76 |
|
| December 31, 2014 | | $ | 137.77 |
| | $ | 163.72 |
| | $ | 192.31 |
|
| December 31, 2015 | | $ | 127.44 |
| | $ | 162.53 |
| | $ | 223.63 |
|
| December 31, 2016 | | $ | 146.39 |
| | $ | 178.02 |
| | $ | 244.51 |
|
Equity Compensation Plan Information
| | | (shares in thousands) | | Column (a) Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Column (b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Column (c) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding Securities Reflected in Column (a)) | |
| Plan Category | | | | | | | |
Plan Category (shares in thousands) | | | Column (a) Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Column (b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(1) | | Column (c) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding Securities Reflected in Column (a)) |
| Equity compensation plans approved by security holders | | 282,694 |
| | $ | 2.43 |
| | 82,806 |
| | 362,541 |
| | $ | 3.50 |
| | 181,148 |
|
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | 282,694 |
| | $ | 2.43 |
| | 82,806 |
| | 362,541 |
| | $ | 3.50 |
| | 181,148 |
|
__________
| |
| (1) | Excludes approximately 29,893 shares underlying restricted stock units, including performance-based restricted stock units (“PRSUs”), from the calculation of the weighted average exercise price. The number of shares to be issued in respect of PRSUs has been calculated based on the assumption that the maximum levels of performance applicable to the PRSUs will be achieved. |
ITEM 6. SELECTED FINANCIAL DATA
The operating and balance sheet data included in the following selected financial data for 20132016 and 2015 have been derived from theour audited consolidated financial statements of Holdings and Sirius XM.statements. Historical operating and balance sheet data included within the following selected financial data for Holdings and Sirius XM from 20092012 through 20122014 is derived from the audited consolidated financial statementsConsolidated Financial Statements of Sirius XM.XM and Holdings. This selected financial data should be read in conjunction with the audited Consolidated Financial Statements of Holdings and Sirius XM and related notes thereto included in Item 8 of this Annual Report on Form 10-K and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | |
| | Sirius XM Holdings Inc. |
| | As of and for the Years Ended December 31, |
| | 2013 (1) | | 2012 (2) | | 2011 | | 2010 | | 2009 (3) |
| (in thousands, except per share data) | | | | | | | | | |
| Statements of Comprehensive Income Data: | | | | | | | | | |
| Total revenue | $ | 3,799,095 |
| | $ | 3,402,040 |
| | $ | 3,014,524 |
| | $ | 2,816,992 |
| | $ | 2,472,638 |
|
| Net income (loss) | $ | 377,215 |
| | $ | 3,472,702 |
| | $ | 426,961 |
| | $ | 43,055 |
| | $ | (538,226 | ) |
| Net income (loss) per share – basic | $ | 0.06 |
| | $ | 0.55 |
| | $ | 0.07 |
| | $ | 0.01 |
| | $ | (0.15 | ) |
| Net income (loss) per share – diluted | $ | 0.06 |
| | $ | 0.51 |
| | $ | 0.07 |
| | $ | 0.01 |
| | $ | (0.15 | ) |
| Weighted average common shares outstanding – basic | 6,227,646 |
| | 4,209,073 |
| | 3,744,606 |
| | 3,693,259 |
| | 3,585,864 |
|
| Weighted average common shares outstanding – diluted | 6,384,791 |
| | 6,873,786 |
| | 6,500,822 |
| | 6,391,071 |
| | 3,585,864 |
|
| Cash dividends per share | $ | — |
| | $ | 0.05 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 134,805 |
| | $ | 520,945 |
| | $ | 773,990 |
| | $ | 586,691 |
| | $ | 383,489 |
|
| Restricted investments | $ | 5,718 |
| | $ | 3,999 |
| | $ | 3,973 |
| | $ | 3,396 |
| | $ | 3,400 |
|
| Total assets | $ | 8,844,780 |
| | $ | 9,054,843 |
| | $ | 7,495,996 |
| | $ | 7,383,086 |
| | $ | 7,322,206 |
|
| Long-term debt, net of current portion | $ | 3,093,821 |
| | $ | 2,430,986 |
| | $ | 3,012,351 |
| | $ | 3,021,763 |
| | $ | 3,063,281 |
|
| Stockholders' equity | $ | 2,745,742 |
| | $ | 4,039,565 |
| | $ | 704,145 |
| | $ | 207,636 |
| | $ | 95,522 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of and for the Years Ended December 31, |
| (in thousands, except per share data) | 2016 (1) | | 2015 | | 2014 | | 2013 (2) | | 2012 (3) |
| Statements of Comprehensive Income Data: | | | | | | | | | |
| Total revenue | $ | 5,017,220 |
| | $ | 4,570,058 |
| | $ | 4,181,095 |
| | $ | 3,799,095 |
| | $ | 3,402,040 |
|
| Net income | $ | 745,933 |
| | $ | 509,724 |
| | $ | 493,241 |
| | $ | 377,215 |
| | $ | 3,472,702 |
|
| Net income per share - basic | $ | 0.15 |
| | $ | 0.09 |
| | $ | 0.09 |
| | $ | 0.06 |
| | $ | 0.55 |
|
| Net income per share - diluted | $ | 0.15 |
| | $ | 0.09 |
| | $ | 0.08 |
| | $ | 0.06 |
| | $ | 0.51 |
|
| Weighted average common shares outstanding - basic | 4,917,050 |
| | 5,375,707 |
| | 5,788,944 |
| | 6,227,646 |
| | 4,209,073 |
|
| Weighted average common shares outstanding - diluted | 4,964,728 |
| | 5,435,166 |
| | 5,862,020 |
| | 6,384,791 |
| | 6,873,786 |
|
| Cash dividends declared per share | $ | 0.01 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.05 |
|
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 213,939 |
| | $ | 111,838 |
| | $ | 147,724 |
| | $ | 134,805 |
| | $ | 520,945 |
|
| Restricted investments | $ | 9,888 |
| | $ | 9,888 |
| | $ | 5,922 |
| | $ | 5,718 |
| | $ | 3,999 |
|
| Total assets (4) | $ | 8,003,595 |
| | $ | 8,046,662 |
| | $ | 8,369,065 |
| | $ | 8,826,959 |
| | $ | 9,024,800 |
|
| Long-term debt, net of current portion (4) | $ | 5,842,764 |
| | $ | 5,443,614 |
| | $ | 4,487,419 |
| | $ | 3,088,701 |
| | $ | 2,400,943 |
|
| Stockholders' (deficit) equity | $ | (792,015 | ) | | $ | (166,491 | ) | | $ | 1,309,837 |
| | $ | 2,745,742 |
| | $ | 4,039,565 |
|
——————_______________________
| |
| (1) | (1)For the year ended December 31, 2016, we recorded $293,896 as an increase to our Deferred tax assets and decrease to our Accumulated deficit as a result of the adoption of Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718).
|
| |
| (2) | The selected financial data for 2013 includes the balances and approximately two months of activity related to the acquisition of the connected vehicle business of Agero, Inc. in November 2013. |
| |
(2) | A special cash dividend was paid during 2012. |
| |
| (3) | The 2009 results and balances reflectFor the adoptionyear ended December 31, 2012, we had an income tax benefit of ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.
|
|
| | | | | | | | | | | | | | | | | | | |
| | Sirius XM Radio Inc. |
| | As of and for the Years Ended December 31, |
| | 2013 (1) (2) | | 2012 (3) | | 2011 | | 2010 | | 2009 (4) |
| (in thousands, except per share data) | | | | | | | | | |
| Statements of Comprehensive Income Data: | | | | | | | | | |
| Total revenue | $ | 3,799,095 |
| | $ | 3,402,040 |
| | $ | 3,014,524 |
| | $ | 2,816,992 |
| | $ | 2,472,638 |
|
| Net (loss) income attributable to Sirius XM Radio Inc.'s stockholder | $ | (66,494 | ) | | $ | 3,472,702 |
| | $ | 426,961 |
| | $ | 43,055 |
| | $ | (538,226 | ) |
| Cash dividends per share | $ | — |
| | $ | 0.05 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 134,805 |
| | $ | 520,945 |
| | $ | 773,990 |
| | $ | 586,691 |
| | $ | 383,489 |
|
| Restricted investments | $ | 5,718 |
| | $ | 3,999 |
| | $ | 3,973 |
| | $ | 3,396 |
| | $ | 3,400 |
|
| Total assets | $ | 8,851,496 |
| | $ | 9,054,843 |
| | $ | 7,495,996 |
| | $ | 7,383,086 |
| | $ | 7,322,206 |
|
| Long-term debt, net of current portion | $ | 3,093,821 |
| | $ | 2,430,986 |
| | $ | 3,012,351 |
| | $ | 3,021,763 |
| | $ | 3,063,281 |
|
| Stockholder equity | $ | 2,301,346 |
| | $ | 4,039,565 |
| | $ | 704,145 |
| | $ | 207,636 |
| | $ | 95,522 |
|
——————
| |
(1)
| The selected financial data for 2013 includes the balances and approximately two months of activity related$2,998,234 due to the acquisitionrelease of the connected vehicle business of Agero, Inc. in November 2013 and the fair value adjustments for debt and equity related instruments. |
| |
(2) | Net income per share for Sirius XM is not presented since Sirius XM is a wholly-owned subsidiary of Holdings. |
| |
(3) | our valuation allowance. A special cash dividend was paid during 2012. |
| |
| (4) | The 2009 results and2012 – 2015 balances reflect the adoption of ASU 2009-15,Accounting Standards Update 2015-03, Accounting for Own-Share Lending Arrangements in ContemplationInterest-Imputation of ConvertibleInterest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance or Other FinancingCosts,. and Accounting Standards Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Agreements. As a result of our adoption of these ASUs, Total Assets was reduced by $7,155, $6,444, $17,821 and $30,043 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively, and Long-term debt, net of current portion, was reduced by $7,155, $6,444, $5,120 and $30,043 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors, including those described under “Item 1A - Risk Factors” and elsewhere in this Annual Report.Report on Form 10-K. See “Special Note RegardingAbout Forward-Looking Statements.”
(All dollar amounts referenced in this Item 7 are in thousands, except per subscriber and per installation amounts, unless otherwise stated)stated.)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
The terms “we,” “us,” “our,” and “our company” as used herein and unless otherwise stated or indicated by context, refer to Sirius XM Radio Inc. and its subsidiaries prior to our corporate reorganization and to Sirius XM Holdings Inc. and its subsidiaries after our corporate reorganization.
Executive Summary
We broadcasttransmit 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 theour Internet radio service, including through applications for mobile devices.
devices, home devices and other consumer electronic equipment. 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 radiosradio in their vehicles from which we acquire a majority of our subscribers.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 ourOur satellite radios are primarily distributed through automakers; retail locations nationwidestores nationwide; and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.
As of December 31, 2013,2016, we had 25,559,310approximately 31.3 million subscribers of which 21,081,817approximately 26.0 million were self-pay subscribers and 4,477,493approximately 5.4 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 Backseat TV services.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 anto annual, semi-annual, quarterly or monthly basis.plans. We offer discounts for prepaid, and longer term subscription plans, as well as discounts fora multiple subscriptions.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 and Backseat TV services.
In certain cases, automakers and dealers include 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 trial subscriptions varies but is typically three to twelve months. We receive subscription payments for these trialssubscriptions from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.
We are also a leader in providing connected vehicle applications and services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle owners while providing marketing and operational benefits to automakers and their dealers. Subscribers to our connected vehicle services are not included in our subscriber count.
As of December 31, 2016, Liberty Media Corporation beneficially owns,owned, directly and indirectly, over 50%approximately 67% 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 broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its interests in Charter Communications, Live Nation Entertainment and Barnes & Noble, and minority equity investments in Time Warner Inc., Time Warner Cable, and Viacom.
businesses.
We also have a 38%hold an equity interestmethod investment in Sirius XM Canada which offers satellite radio services in Canada. Subscribers to theAs of December 31, 2016, we owned an approximate 37% equity interest in Sirius XM Canada service are not included in our subscriber count.
Recent Development
On January 3, 2014, Holdings' Board of Directors received a non-binding letter from Liberty Media proposing a transaction pursuant to which all outstanding shares of common stock of Holdings not owned by Liberty Media would be converted into the right to receive 0.0760 of a new share of Liberty Series C common stock, which would have no voting rights. Liberty Media indicated that immediately prior to such conversion, Liberty Media intends to distribute, on a 2 to1 basis, shares of such Series C common stock to all holders of record of Liberty Media's Series A and B common stock. Upon the completion of the proposed transaction, Liberty Media indicated that it expects that Holdings' public stockholders would own approximately 39% of Liberty Media's then-outstanding common stock.
Holdings' Board of Directors has formed a Special Committee of independent directors to consider Liberty Media’s proposal. The Board of Directors has selected Joan L. Amble, James P. Holden and Eddy W. Hartenstein to serve on the Special Committee. The Special Committee is chaired by Mr. Hartenstein.
The Special Committee has retained Evercore Group L.L.C. to act as its financial advisor and Weil, Gotshal & Manges LLP to act as its legal counsel to assist and advise it in connection with its evaluation of Liberty Media’s proposal.
Liberty Media’s proposal noted that the transaction will be conditioned on the approval of both the Special Committee and a majority of the public stockholders of Holdings, other than Liberty Media. Liberty Media also noted that the approval by the Liberty Media stockholders of the issuance of the Series C common shares in the proposed transaction would also be required under applicable NASDAQ Stock Market requirements.
The letter provides that no legally binding obligation with respect to any transaction exists unless and until mutually acceptable definitive documentation is executed and delivered with respect thereto. There can be no assurance that the transaction proposed by Liberty Media or any related transaction will be completed or, if completed, will have any specified terms, including with respect to pricing or timing.Canada.
Results of Operations
Set forth below are our results of operations for the year endedDecember 31, 20132016 compared with the year ended December 31, 20122015 and the year ended December 31, 20122015 compared with the year endedDecember 31, 2011.2014.
| |
| For the Years Ended December 31, | | 2013 vs 2012 Change | | 2012 vs 2011 Change | For the Years Ended December 31, | | 2016 vs 2015 Change | | 2015 vs 2014 Change |
| 2013 | | 2012 | | 2011 | | Amount | | % | | Amount | | % | 2016 | | 2015 | | 2014 | | Amount | | % | | Amount | | % |
| Revenue: | | | | | | | | | | |
| |
| | | | | | | | | | | | | |
| Subscriber revenue | $ | 3,284,660 |
| | $ | 2,962,665 |
| | $ | 2,595,414 |
| | $ | 321,995 |
| | 11 | % | | $ | 367,251 |
| | 14 | % | $ | 4,196,852 |
|
| $ | 3,824,793 |
| | $ | 3,554,302 |
| | $ | 372,059 |
| | 10 | % | | $ | 270,491 |
| | 8 | % |
| Advertising revenue | 89,288 |
| | 82,320 |
| | 73,672 |
| | 6,968 |
| | 8 | % | | 8,648 |
| | 12 | % | 138,231 |
|
| 122,292 |
| | 100,982 |
| | 15,939 |
| | 13 | % | | 21,310 |
| | 21 | % |
| Equipment revenue | 80,573 |
| | 73,456 |
| | 71,051 |
| | 7,117 |
| | 10 | % | | 2,405 |
| | 3 | % | 118,947 |
|
| 110,923 |
| | 104,661 |
| | 8,024 |
| | 7 | % | | 6,262 |
| | 6 | % |
| Other revenue | 344,574 |
| | 283,599 |
| | 274,387 |
| | 60,975 |
| | 22 | % | | 9,212 |
| | 3 | % | 563,190 |
|
| 512,050 |
| | 421,150 |
| | 51,140 |
| | 10 | % | | 90,900 |
| | 22 | % |
| Total revenue | 3,799,095 |
| | 3,402,040 |
| | 3,014,524 |
| | 397,055 |
| | 12 | % | | 387,516 |
| | 13 | % | 5,017,220 |
|
| 4,570,058 |
| | 4,181,095 |
| | 447,162 |
| | 10 | % | | 388,963 |
| | 9 | % |
| Operating expenses: | | | | | | | | | | | | | |
|
|
| | | | | | | | | | |
| Cost of services: | | | | | | | | | | | | | |
|
|
| | | | | | | | | | |
| Revenue share and royalties | 677,642 |
| | 551,012 |
| | 471,149 |
| | 126,630 |
| | 23 | % | | 79,863 |
| | 17 | % | 1,108,515 |
|
| 1,034,832 |
| | 810,028 |
| | 73,683 |
| | 7 | % | | 224,804 |
| | 28 | % |
| Programming and content | 290,323 |
| | 278,997 |
| | 281,234 |
| | 11,326 |
| | 4 | % | | (2,237 | ) | | (1 | )% | 353,779 |
|
| 293,091 |
| | 297,313 |
| | 60,688 |
| | 21 | % | | (4,222 | ) | | (1 | )% |
| Customer service and billing | 320,755 |
| | 294,980 |
| | 259,719 |
| | 25,775 |
| | 9 | % | | 35,261 |
| | 14 | % | 387,131 |
|
| 377,908 |
| | 370,585 |
| | 9,223 |
| | 2 | % | | 7,323 |
| | 2 | % |
| Satellite and transmission | 79,292 |
| | 72,615 |
| | 75,902 |
| | 6,677 |
| | 9 | % | | (3,287 | ) | | (4 | )% | 103,020 |
|
| 94,609 |
| | 86,013 |
| | 8,411 |
| | 9 | % | | 8,596 |
| | 10 | % |
| Cost of equipment | 26,478 |
| | 31,766 |
| | 33,095 |
| | (5,288 | ) | | (17 | )% | | (1,329 | ) | | (4 | )% | 40,882 |
|
| 42,724 |
| | 44,397 |
| | (1,842 | ) | | (4 | )% | | (1,673 | ) | | (4 | )% |
| Subscriber acquisition costs | 495,610 |
| | 474,697 |
| | 434,482 |
| | 20,913 |
| | 4 | % | | 40,215 |
| | 9 | % | 512,809 |
|
| 532,599 |
| | 493,464 |
| | (19,790 | ) | | (4 | )% | | 39,135 |
| | 8 | % |
| Sales and marketing | 291,024 |
| | 248,905 |
| | 222,773 |
| | 42,119 |
| | 17 | % | | 26,132 |
| | 12 | % | 386,724 |
|
| 354,189 |
| | 336,480 |
| | 32,535 |
| | 9 | % | | 17,709 |
| | 5 | % |
| Engineering, design and development | 57,969 |
| | 48,843 |
| | 53,435 |
| | 9,126 |
| | 19 | % | | (4,592 | ) | | (9 | )% | 82,146 |
|
| 64,403 |
| | 62,784 |
| | 17,743 |
| | 28 | % | | 1,619 |
| | 3 | % |
| General and administrative | 262,135 |
| | 261,905 |
| | 238,738 |
| | 230 |
| | — | % | | 23,167 |
| | 10 | % | 341,106 |
|
| 324,801 |
| | 293,938 |
| | 16,305 |
| | 5 | % | | 30,863 |
| | 10 | % |
| Depreciation and amortization | 253,314 |
| | 266,295 |
| | 267,880 |
| | (12,981 | ) | | (5 | )% | | (1,585 | ) | | (1 | )% | 268,979 |
|
| 272,214 |
| | 266,423 |
| | (3,235 | ) | | (1 | )% | | 5,791 |
| | 2 | % |
| Total operating expenses | 2,754,542 |
| | 2,530,015 |
| | 2,338,407 |
| | 224,527 |
| | 9 | % | | 191,608 |
| | 8 | % | 3,585,091 |
|
| 3,391,370 |
| | 3,061,425 |
| | 193,721 |
| | 6 | % | | 329,945 |
| | 11 | % |
| Income from operations | 1,044,553 |
| | 872,025 |
| | 676,117 |
| | 172,528 |
| | 20 | % | | 195,908 |
| | 29 | % | 1,432,129 |
|
| 1,178,688 |
| | 1,119,670 |
| | 253,441 |
| | 22 | % | | 59,018 |
| | 5 | % |
| Other income (expense): | | | | | | | | | | | | | |
|
|
| | | | | | | | | | |
| Interest expense, net of amounts capitalized | (204,671 | ) | | (265,321 | ) | | (304,938 | ) | | 60,650 |
| | 23 | % | | 39,617 |
| | 13 | % | |
| Interest expense | | (331,225 | ) |
| (299,103 | ) | | (269,010 | ) | | (32,122 | ) | | (11 | )% | | (30,093 | ) | | (11 | )% |
| Loss on extinguishment of debt and credit facilities, net | (190,577 | ) | | (132,726 | ) | | (7,206 | ) | | (57,851 | ) | | (44 | )% | | (125,520 | ) | | nm |
| (24,229 | ) | | — |
| | — |
| | (24,229 | ) | | — | % | | — |
| | — | % |
| Interest and investment income | 6,976 |
| | 716 |
| | 73,970 |
| | 6,260 |
| | 874 | % | | (73,254 | ) | | (99 | )% | |
| Loss on change in value of derivatives | (20,393 | ) | | — |
| | — |
| | (20,393 | ) | | nm |
| | — |
| | nm |
| — |
| | — |
| | (34,485 | ) | | — |
| | — | % | | 34,485 |
| | 100 | % |
| Other income (loss) | 1,204 |
| | (226 | ) | | 3,252 |
| | 1,430 |
| | 633 | % | | (3,478 | ) | | (107 | )% | |
| Other income | | 14,985 |
|
| 12,379 |
| | 14,611 |
| | 2,606 |
| | 21 | % | | (2,232 | ) | | (15 | )% |
| Total other expense | (407,461 | ) | | (397,557 | ) | | (234,922 | ) | | (9,904 | ) | | (2 | )% | | (162,635 | ) | | (69 | )% | (340,469 | ) |
| (286,724 | ) | | (288,884 | ) | | (53,745 | ) | | (19 | )% | | 2,160 |
| | 1 | % |
| Income before income taxes | 637,092 |
| | 474,468 |
| | 441,195 |
| | 162,624 |
| | 34 | % | | 33,273 |
| | 8 | % | 1,091,660 |
|
| 891,964 |
| | 830,786 |
| | 199,696 |
| | 22 | % | | 61,178 |
| | 7 | % |
| Income tax (expense) benefit | (259,877 | ) | | 2,998,234 |
| | (14,234 | ) | | (3,258,111 | ) | | (109 | )% | | 3,012,468 |
| | nm |
| |
| Income tax expense | | (345,727 | ) |
| (382,240 | ) | | (337,545 | ) | | 36,513 |
| | 10 | % | | (44,695 | ) | | (13 | )% |
| Net income | $ | 377,215 |
| | $ | 3,472,702 |
| | $ | 426,961 |
| | $ | (3,095,487 | ) | | (89 | )% | | $ | 3,045,741 |
| | 713 | % | $ | 745,933 |
|
| $ | 509,724 |
| | $ | 493,241 |
| | $ | 236,209 |
| | 46 | % | | $ | 16,483 |
| | 3 | % |
| | | | | | | | | | | | | | | |
| nm - not meaningful | | | | | | | | | | | | | | |
Our results of operations discussed below include Sirius XM Connected Vehicle Services Inc. activity from the acquisition date, November 4, 2013, as well as the impact of purchase price accounting adjustments associated with the acquisition and the Merger. The purchase price accounting adjustments include: (i) the elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. The deferred credits on executory contracts attributable to third party arrangements with an OEM included in revenue share and royalties, subscriber acquisition costs, and sales and marketing concluded with the expiration of the acquired contract during 2013. The impact of these purchase price accounting adjustments is detailed in our Adjusted Revenues and Operating Expenses tables on pages 39 through 45 of our glossary.
Total Revenue
Subscriber Revenueincludes subscription, activation and other fees.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, subscriber revenue was $3,284,660$4,196,852 and $2,962,665,$3,824,793, respectively, an increase of 11%10%, or $321,995.$372,059. The period over period increase was primarily attributable to a 9%an 8% increase in the daily weighted average number of subscribers the impact of the increase in certain of our subscription rates beginning in January 2012 as more subscribers migrated to the higher rates, and an increase in subscriptions to premium services, premier channels and Internet streaming, as well as the inclusion of connected vehicle subscriptiona 3% increase in average monthly revenue in 2013. These increases were partially offset by subscription discounts offered through customer acquisition and retention programs, and an increasing number of lifetime subscription plans that have reached full revenue recognition.per subscriber resulting from certain rate increases.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, subscriber revenue was $2,962,665$3,824,793 and $2,595,414,$3,554,302, respectively, an increase of 14%8%, or $367,251.$270,491. The period over period increase was primarily attributable to a 9%an 8% increase in the daily weighted average number of subscribers theas well as a 1% increase in average monthly revenue per subscriber resulting from certain of our subscription rates beginning in January 2012, and an increase in subscriptions to premium services, including premier channels, data services and Internet streaming. The increase was partially offset by subscription discounts offered through customer acquisition and retention programs.rate increases.
We expect subscriber revenues to increase based on the growth of our subscriber base, including connected vehicle subscribers, promotions, subscription plan mix, and identification of additional revenue streams from subscribers. We increasedthe increases in certain of our subscription rates beginning January 2014.
and the sale of additional services to subscribers.
Advertising Revenueincludes the sale of advertising on certain non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising revenue.channels.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, advertising revenue was $89,288$138,231 and $82,320,$122,292, respectively, an increase of 8%13%, or $6,968.$15,939. The increase was primarily due to a greater number of advertising spots sold and broadcast,transmitted as well as increases in rates charged per spot.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, advertising revenue was $82,320$122,292 and $73,672,$100,982, respectively, an increase of 12%21%, or $8,648.$21,310. The increase was primarily due to a greater number of advertising spots sold and broadcast,transmitted as well as increases in rates charged per spot.
We expect our advertising revenue to continue to grow as more advertisers are attracted to our national platform and growing subscriber base and as we launch additional non-music channels.
Equipment Revenueincludes revenue and royalties from the sale of satellite radios, components and accessories.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, equipment revenue was $80,573$118,947 and $73,456,$110,923, respectively, an increase of 10%7%, or $7,117.$8,024. The increase was driven by an increase in OEM production and an increase in royalty revenue on certain modules starting in the second quarter of 2016, partially offset by lower revenue generated through our distributors and direct to consumer business.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, equipment revenue was $110,923 and $104,661, respectively, an increase of 6%, or $6,262. The increase was driven by royalties from higher OEM production the mix of royalty eligible radios and sales to a lesser extent, improved aftermarket subsidies.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, equipment revenue was $73,456 and $71,051, respectively, an increase of 3%, or $2,405. The increase was driven by royalties from higher OEM production,distributors, partially offset by lower direct to consumer sales.
We expect equipment revenue to fluctuate based on OEM production for which we receiveincrease due to the increase in royalty payments forrevenues associated with the transition of our technology and, to a lesser extent, on the volume and mix of equipment sales in our aftermarket and direct to consumer business.
chipsets.
Other Revenueincludes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our connected vehicle business and our Canadian affiliate and ancillary revenues.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, other revenue was $344,574$563,190 and $283,599,$512,050, respectively, an increase of 10%, or $51,140. The period over period increase was primarily driven by additional revenues from the U.S. Music Royalty Fee due to an increase in the number of subscribers and subscribers paying at a higher rate of 13.9%. These increases were offset by lower non-recurring engineering fees associated with our connected vehicle services, lower activation revenues from our Canadian affiliate and a change in accounting for a programming contract in the third quarter of 2015.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, other revenue was $512,050 and $421,150, respectively, an increase of 22%, or $60,975.$90,900. The increase was driven by revenues from the U.S. Music Royalty Fee as the number of subscribers increased and subscribers onsubject to the 12.5%13.9% rate increased along with an overall increase in subscribers, higher revenue generated from our connected vehicle services, and higher royaltyincreased revenue from our Canadian affiliate.
Other revenue is expected to increase due to an increase in U.S. Music Royalty fees as our subscriber base continues to grow and an increase in revenue from Sirius XM Canada.
Canada related to service agreements following the closing of the expected Transaction.
Operating Expenses
Revenue Share and Royalties include distribution and content provider revenue share, royalties for transmitting content and web streaming, and advertising revenue share.
20122016 vs. 20112015: For the years ended December 31, 20122016 and 2011, other2015, revenue was $283,599share and $274,387,royalties were $1,108,515 and $1,034,832, respectively, an increase of 3%7%, or $9,212.$73,683, but decreased as a percentage of total revenue. The increase was drivendue to overall greater revenues subject to royalty and revenue sharing arrangements, a 5% increase in the statutory royalty rate applicable to our use of post-1972 recordings, and $45,900 related to music royalty legal settlements and reserves recorded in the fourth quarter of 2016. The increase was mitigated by revenues from$128,256 in expense recorded during the U.S. Music Royalty Fee astwelve months ended December 31, 2015 for the numberportion of subscribers increased, and higher royalty revenue fromthe settlement of the Capitol Records LLC et al. v. Sirius XM Canada.Radio Inc. lawsuit
related to our use of pre-1972 sound recordings. We expect other revenuerecorded $39,808 in expense related to increase as our subscriber base drives higher U.S. Music Royalty Fees and asthis settlement through the revenue of our Canadian affiliate grows.
Operating Expenses
Revenue Share and Royalties include distribution and content provider revenue share, advertising revenue share, and broadcast and web streaming royalties. Advertising revenue share is recognized in revenue share and royalties in the period in which the advertising is broadcast.
twelve months ended December 31, 2016.
20132015 vs. 20122014: For the years ended December 31, 20132015 and 2012,2014, revenue share and royalties were $677,642$1,034,832 and $551,012,$810,028, respectively, an increase of 23%28%, or $126,630,$224,804, and increased as a percentage of total revenue. The increase was primarily attributabledue to $128,256 in expense recorded during the year ended December 31, 2015 for the portion of the settlement of the Capitol Records LLC et al. v. Sirius XM Radio Inc. lawsuit related to our use of pre-1972 sound recordings. Revenue share and royalties also increased due to greater revenues subject to royalty and/orand revenue sharing arrangements and a 12.5%5.3% increase in the statutory royalty rate for the performance of post-1972 sound recordings as well as a decrease in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger.recordings.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, revenue share and royalties were $551,012 and $471,149, respectively, an increase of 17%, or $79,863, and increased as a percentage of total revenue. The increase was primarily attributable to greater revenues subject to royalty and/or revenue sharing arrangements and a 7% increase in the statutory royalty rate for the performance of sound recordings, partially offset by an increase in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger.
We expect our revenue share and royalty costs to increase as our revenues grow, our royalty rates increase and as a result of the above noted discontinued deferred credits on executory contracts associated with the Merger.grow. As determined by the Copyright Royalty Board's decision,Board, we have paid or will pay royalties of 9.0%, 8.0% and 7.5% of gross revenues, subject to certain exclusions, for the years ended December 31, 2013, 2012use of certain post-1972 sound recordings on our satellite radio service of 9.5%, 10.0%, 10.5% and 2011, respectively,11% in 2014, 2015, 2016 and will pay 9.5% in 2014.
2017, respectively.
Programming and Contentincludes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees and other amounts.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, programming and content expenses were $290,323$353,779 and $278,997,$293,091, respectively, an increase of 4%21%, or $11,326, but decreased$60,688, and increased as a percentage of total revenue. The increase was primarily due to reductions in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquiredrenewed programming executory contractslicenses as well as increased talent and increased personnelpersonnel-related costs.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, programming and content expenses were $278,997$293,091 and $281,234,$297,313, respectively, a decrease of 1%, or $2,237,$4,222, and decreased as a percentage of total revenue. The decrease was primarily due to savings in contentthe termination of certain programming agreements, partially offset by increases in personnel coststhe addition of new programming arrangements and reductions in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts.personnel-related costs.
Excluding the impact from purchase accounting adjustments, based on our current programming offerings, weWe expect our programming and content expenses to fluctuateincrease as we offer additional programming, and renew or replace expiring agreements. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts will continue to decline, in absolute amount and as a percentage of reported programming and content costs, through 2015. Substantially all of the deferred credits on executory contracts were amortized by the end of 2013.
Customer Service and Billingincludes costs associated with the operation and management of internal and third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, customer service and billing expenses were $320,755$387,131 and $294,980,$377,908, respectively, an increase of 9%2%, or $25,775,$9,223, but remained flatdecreased as a percentage of total revenue. The increase was primarily due to efforts to improve our customer service experience, resulting in higher spend on customer service agents, staffing and training,costs associated with a higher subscriber volumebase driving increased subscriber contacts, increased bad debt expenses, transaction fees, and call center costs, partially offset by lower personnel-related costs and the classification of wireless transmission costs related to our connected vehicle services to Satellite and transmission expense and higher technology costs.in 2016.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, customer service and billing expenses were $294,980$377,908 and $259,719,$370,585, respectively, an increase of 14%2%, or $35,261,$7,323, but remained flatdecreased as a percentage of total revenue. The increase was primarily due to longer average handle time per call anda higher subscriber volumebase driving increased subscriber contactstransaction fees, bad debt expense and higher technology costs.personnel-related costs, partially offset by efficiencies achieved from management initiatives implemented at call centers operated by our vendors.
We expect our customer service and billing expenses to increase as our subscriber base grows and as we attempt to improve the customer service experience for our subscribers.
grows.
Satellite and Transmissionconsists of costs associated with the operation and maintenance of our terrestrial repeater networks; satellites; satellite telemetry, tracking and control systems; terrestrial repeater networks; satellite uplink facilities; broadcast studios; and delivery of our Internet streaming service.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, satellite and transmission expenses were $79,292$103,020 and $72,615,$94,609, respectively, an increase of 9%, or $6,677,$8,411, but remained flatdecreased as a percentage of total revenue. We recorded a loss on disposal of certain obsolete satellite parts of $12,912 in the second quarter of 2016 and a loss on disposal of certain obsolete terrestrial repeaters and related parts of $7,384 in the fourth quarter of 2015. Excluding the losses on disposal of these assets, the increase was driven by inclusion of wireless transmission costs related to our connected vehicle services that were previously recorded to Customer service and billing expense in 2015, partially offset by lower web streaming costs from in-sourcing certain activities.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, satellite and transmission expenses were $94,609 and $86,013, respectively, an increase of 10%, or $8,596, and increased as a percentage of total revenue. The increase was primarily due to increasedthe loss on disposal of certain obsolete terrestrial repeaters and related parts of $7,384, and higher costs associated with our Internet streaming operations.operations, partially offset by lower satellite insurance costs.
2012 vs. 2011: For the years ended December 31, 2012 and 2011,We expect satellite and transmission expenses, were $72,615 and $75,902, respectively, a decreaseexcluding losses from disposal of 4%, or $3,287, and decreased as a percentage of total revenue. The decrease was primarily dueassets, to a reduction of satellite in-orbit insurance expense as we elected not to renew insurance policies on certain satellites.
We expect overall satellite and transmission expenses to increase as we enhance our Internet-based service and add functionality, expand our terrestrial repeater network, and incur in-orbit insurance costs.
remain relatively unchanged.
Cost of Equipmentincludes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, cost of equipment was $26,478$40,882 and $31,766,$42,724, respectively, a decrease of 17%4%, or $5,288,$1,842, and decreased as a percentage of equipment revenue. The decrease was primarily due to lower average cost per product soldaftermarket and lower inventory reserves,direct to consumer sales, partially offset by higher direct to consumer volume compared to prior year periods.inventory reserves.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, cost of equipment was $31,766$42,724 and $33,095,$44,397, respectively, a decrease of 4%, or $1,329,$1,673, and decreased as a percentage of equipment revenue. The decrease was primarily due to lower direct to consumer sales, partially offset by higher inventory reserves.sales to distributors.
We expect cost of equipment to varyfluctuate with changes in sales supply chain management and inventory valuations.
Subscriber Acquisition Costsinclude hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a satellite radio and subscription to our service in the sale or lease price of a new vehicle;automakers; subsidies paid for chip setschipsets and certain other components used in manufacturing radios; device royalties for certain radios and chip sets;chipsets; commissions paid to automakers as incentives to purchase, install and activate satellite radios;retailers; product warranty obligations; freight; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising costs, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, subscriber acquisition costs were $495,610$512,809 and $474,697,$532,599, respectively, a decrease of 4%, or $19,790, and decreased as a percentage of total revenue. The decrease was driven by lower subsidized costs related to the transition of chipsets and reductions to OEM hardware subsidy rates, partially offset by higher radio installations.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, subscriber acquisition costs were $532,599 and $493,464, respectively, an increase of 4%8%, or $20,913,$39,135, but decreased as a percentage of total revenue. The increase was primarily a result of higher subsidiesIncreased costs related to increased OEMa larger number of satellite radio installations and lower benefit to earnings from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger,new vehicles which were partially offset by improved OEM and chipset subsidy rates per vehicle.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, subscriber acquisition costs were $474,697 and $434,482, respectively, an increase of 9%, or $40,215, but decreased as a percentage of total revenue. The increase was primarily a result of higher subsidies related to increased OEM installations occurring in advance of acquiring the subscriber, partially offset by improved OEM subsidy rates per vehicle and increases in the benefit to earnings from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger.
We expect total subscriber acquisition costs to decrease as a result of the expiration of the acquired executory contracts noted above. The decrease will be partially offset by increases influctuate with OEM installations and gross subscriber additions. Changes in contractual OEM subsidy rates andaftermarket volume; however, the cost of subsidized radio components will also impact total subscriber acquisition costs.is expected to decline. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.
Sales and Marketingincludes costs for marketing, advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer acquisition and retention, and personnel. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities performed on our behalf. Customer acquisition and retentionMarketing costs include expenses related to direct mail, outbound telemarketing and email communications.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, sales and marketing expenses were $291,024$386,724 and $248,905,$354,189, respectively, an increase of 17%9%, or $42,119, and increased$32,535, but decreased as a percentage of total revenue. The increase was primarily due to additional subscriber communications, and retention programs associated with a greater number of subscribers and promotional trials.acquisition campaigns as well as higher personnel-related costs.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, sales and marketing expenses were $248,905$354,189 and $222,773,$336,480, respectively, an increase of 12%5%, or $26,132, and remained flat$17,709, but decreased as a percentage of total revenue. The increase was primarily due to additional subscriber communications, and retention programs associated with a greater number of subscribers and promotional trials, andacquisition campaigns as well as higher OEM cooperative marketing.personnel-related costs.
We anticipate that sales and marketing expenses will increase as changes in certain contractual marketing agreements become effective and as we expand programs to retain our existing subscribers, win back former subscribers, and attract new subscribers. We expect the increase in sales and marketing costs to be partially offset by the impact of the expiration of the acquired executory contracts noted above.
Engineering, Design and Development includesconsists primarily of compensation and related costs to develop chip setschipsets and new products and services,including streaming and connected vehicle services,research and development for broadcast information systems and costs associated with the incorporation of our radios into new vehicles manufacturedby automakers.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, engineering, design and development expenses were $57,969$82,146 and $48,843,$64,403, respectively, an increase of 19%28%, or $9,126, but remained flat$17,743, and increased as a percentage of total revenue. The increase was primarily driven by the inclusion of personnel-related costs from our connected vehicle services that were previously recorded in Sales and marketing and General and administrative expense in 2015, partially offset by lower research and development costs.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, engineering, design and development expenses were $64,403 and $62,784, respectively, an increase of 3%, or $1,619, and decreased as a percentage of total revenue. The increase was driven primarily by higher productadditional costs associated with streaming development, costs, costs related to enhanced subscriber features and functionality for our service, and by the reversal of certain non-recurring engineering charges that were recorded in the second quarter of 2012.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, engineering, design and development expenses were $48,843 and $53,435, respectively, a decrease of 9%, or $4,592, and decreased as a percentage of total revenue. The decrease was driven primarily by a reversal of certain non-recurring engineering charges, partially offset by higher product development costs, costs related to the development of enhanced subscriber features and functionality for our service and higherlower personnel costs.
We expect engineering, design and development expenses to increase in future periods as we continue to develop our infrastructure, products and services.
General and Administrative includes executive management, rentprimarily consists of compensation and occupancy,related costs for personnel and facilities, and include costs related to our finance, legal, human resources and information technology, and insurance costs.technologies departments.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, general and administrative expenses were $262,135$341,106 and $261,905,$324,801, respectively, an increase of less than 1%5%, or $230,$16,305, but decreased as a percentage of total revenue. The increase was primarily due to higher information technology costs, offsetdriven by lowerconsulting and legal costs.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, general and administrative expenses were $261,905$324,801 and $238,738,$293,938, respectively, an increase of 10%, or $23,167, but remained flat$30,863, and increased as a percentage of total revenue. The increase was driven primarily due toby higher personnel costs, including share-based payment expenses, office rent expensesreserves for consumer legal settlements and professional fees,facilities costs, partially offset by insurance recoveries and lower litigation settlement charges.professional fees related to the proposal made in January 2014 by Liberty Media to acquire the balance of our common stock not already owned by it.
We expect our general and administrative expenses to increase in future periodsremain flat as a result of, among other things, enhanced information technology, on-going legal costs and personnelwe expect increased costs to support the growth of our business.
business to be offset by lower legal and consulting costs.
Depreciation and Amortizationrepresents the recognition in earnings of the acquisition cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, depreciation and amortization expense was $253,314$268,979 and $266,295,$272,214, respectively, a decrease of 5%1%, or $12,981,$3,235, and decreased as a percentage of total revenue. The decrease was driven byDepreciation decreased as certain satellites reachingreached the end of their estimated service lives partially offset by additional assets placed in-service.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, depreciation and amortization expense was $266,295$272,214 and $267,880,$266,423, respectively, a decreasean increase of 1%2%, or $1,585, and$5,791, but decreased as a percentage of total revenue. The decreaseincrease was driven by reductions in the amortization of subscriber relationships and depreciation recognized on assetsadditional software placed in-service, as certain assets reached the endpartially offset by a reduction of their estimated service lives.
We expect depreciation expense to decrease in future periods due to reduced amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated service lives principally through 2017. These decreases will be partially offset by increased depreciation resulting from our FM-6 satellite being placed into service.and certain satellites reaching the end of their estimated service lives.
Other Income (Expense)
Interest Expense, Net of Amounts Capitalized,includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of satellites and related launch vehicles.debt.
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, interest expense was $204,671$331,225 and $265,321,$299,103, respectively, a decreasean increase of 23%11%, or $60,650.$32,122. The decreaseincrease was primarily due to higher average debt during the year ended December 31, 2016 compared to the year ended December 31, 2015.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, interest expense was $299,103 and $269,010, respectively, an increase of 11%, or $30,093. The increase was primarily due to higher average debt during the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was partially offset by lower average interest rates resulting from the redemption or repayment of $2,535,500and conversion of higher interest rate debt throughout 2012 and 2013, which was replaced with $2,650,000 of lower interest rate debt.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, interest expense was $265,321 and $304,938, respectively, a decrease of 13%, or $39,617. The decrease was primarily due to a lower average outstanding debt balance and a mix of outstanding debt with lower interest rates.during 2014.
We expect interest expense to increase in future periods asto the extent the amount of our total debt outstanding increases and we cease to capitalize interest associated with satellite construction.increases.
Loss on Extinguishment of Debt and Credit Facilities, Net,includes losses incurred as a result of the conversion and retirement of certain debt.
20132016 vs. 20122015: For the yearyears ended December 31, 2013,2016 and 2015, loss on extinguishment of debt and credit facilities, net, was $190,577. The loss in 2013 was recorded on the repayment$24,229 and redemption of our 7.625% Senior Notes due 2018 and our 8.75% Senior Notes due 2015.$0, respectively. During the year ended December 31, 2012,2016, a $132,726 loss was recorded on the repaymentredemption of our 13%then outstanding 5.875% Senior Notes due 2013 and our 9.75% Senior Secured Notes due 2015.2020.
20122015 vs. 20112014: For the year ended December 31, 2012,There was no loss on extinguishment of debt and credit facilities net, was $132,726. The loss was recorded onfor the repayment of our 13% Senior Notes due 2013 and our 9.75% Senior Secured Notes due 2015. During the yearyears ended December 31, 2011, a $7,206 loss was recorded on the repayment of our 11.25% Senior Secured Notes due 20132015 and our 3.25% Convertible Notes due 2011.2014.
Interest and Investment Income includes realized gains and losses, interest income, and our share of the income of Sirius XM Canada.
2013 vs. 2012: For the year ended December 31, 2013, interest and investment income was $6,976 compared to $716 in 2012. The interest and investment income for 2013 and 2012 was primarily due to our share of Sirius XM Canada's net income, partially offset by the amortization expense related to our equity method intangible assets.
2012 vs. 2011: For the year ended December 31, 2012, interest and investment income was $716 compared to $73,970 in 2011. The interest and investment income for 2012 was primarily due to interest on our investments and our share of Sirius XM Canada's net income, partially offset by the amortization expense related to our equity method intangible assets. The interest and investment income for 2011 was primarily due to income from our interests in Sirius XM Canada due to the realized net gain from the XM Canada and Sirius Canada merger in the second quarter of 2011.
Loss on changeChange in valueValue of derivativesDerivatives represents the change in fair value of the commitments under the share repurchase agreement with Liberty Media, which were are accounted for as a derivative.
2016 vs. 2015: There was no loss on change in value of derivatives for the years ended December 31, 2016 and 2015.
20132015 vs. 20122014: For the yearyears ended December 31, 2013, net2015 and 2014, the loss on change in value of derivatives was $20,393 which$0 and $34,485, respectively. The loss in 2014 resulted from thea change in the market value of the sharesour common stock to be repurchasedpurchased under the share repurchase agreement with Liberty Media. We expect toOn April 25, 2014, we completed the final purchase installment under this share repurchase approximately 92,889,000agreement and repurchased $340,000 of our shares of common stock from Liberty Media on April 25, 2014 at a price of $3.66 per share. The value
Other Income primarilyincludes realized gains and losses, interest income, and our share of the derivative will fluctuate based on the movementincome or loss of our stock price.Sirius XM Canada.
2016 vs. 2015: For the years ended December 31, 20122016 and 2011, we did not record any losses on change2015, other income was $14,985 and $12,379, respectively. Other income for the year ended December 31, 2016 was primarily driven by our share of Sirius XM Canada’s net income and dividends received from Sirius XM Canada in valueexcess of derivatives.our investment. Other income for the year ended December 31, 2015 was driven by dividends received from Sirius XM Canada in excess of our investment.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, other income was $12,379 and $14,611, respectively. Other income for the year ended December 31, 2015 was driven by dividends received from Sirius XM Canada in excess of our investment. Other income for the year ended December 31, 2014 was driven by our share of Sirius XM Canada’s net income and a gain from the conversion of certain debentures into shares of Sirius XM Canada, partially offset by the amortization expense related to our equity method intangible assets.
Income Taxes
Income Tax (Expense) BenefitExpense includes the change in our deferred tax assets, foreign withholding taxes and current federal and state tax expenses.
20132016 vs. 20122015: For the yearyears ended December 31, 2013,2016 and 2015, income tax expense was $259,877 compared to income tax benefit of $2,998,234 for 2012.$345,727 and $382,240, respectively. Our annual effective tax rate for the year endingended December 31, 20132016 was 41%31.7%. In the fourth quarter of 2016, we recognized a $66,326 Federal tax credit under the Protecting Americans from Tax Hikes Act of 2015 related to research and development activities, which reduced our effective tax rate by 6.1%.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, income tax expense was $382,240 and $337,545, respectively. Our annual effective tax rate for the year ended December 31, 2015 was 42.9%, which 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 taxes and use less of certain net operating losses in the future. The District of Columbia tax law change resulted in a $44,392 increase in our valuation allowance during the year ended December 31, 2015. The tax law change in New York City will increase certain net operating losses to be utilized in the future. The New York City tax law change resulted in a $14,831 increase in our deferred tax asset during the year ended December 31, 2015. Our effective tax rate for the year ended December 31, 2014 was 40.6% primarily as a resultdue to the impact of $9,545 of non-deductible expenses related to the loss on change in fair value of derivatives. For the year ended December 31, 2012, we released $3,195,651 of valuation allowance duederivative related to the cumulative positive evidence that it is more likely than not that our deferred tax assets will be realized.
2012 vs. 2011: For the year ended December 31, 2012, income tax benefit was $2,998,234 compared to income tax expense of $14,234 for 2011. For the year ended December 31, 2012, we released $3,195,651 of valuation allowance due to the cumulative positive evidence that it is more likely than not that our deferred tax assets will be realized.share repurchase agreement with Liberty Media.
Key Financial and Operating Performance Metrics
30
Subscriber Data
The following table contains subscriber datashare-based payment expense and certain purchase price accounting adjustments related to the merger of Sirius and XM (the “Merger”). Additionally, when applicable, our adjusted EBITDA and free cash flow metrics exclude the effect of significant items that do not relate to the on-going performance of our business. We use these Non-GAAP financial and operating performance measures to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees. See accompanying glossary on pages 38 through 40 for more details and for the years ended December 31, 2013reconciliation to the most directly comparable GAAP measure (where applicable).
We believe these Non-GAAP financial and operating performance measures provide useful information to investors regarding our financial condition and results of operations. We believe investors find these Non-GAAP financial and operating performance measures useful in evaluating our core trends because they provide a direct view of our underlying contractual costs. We believe investors use our adjusted EBITDA to estimate our current enterprise value and to make investment decisions. We believe free cash flow provides useful supplemental information to investors regarding our cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. By providing these Non-GAAP financial and operating performance measures, together with the reconciliations to the most directly comparable GAAP measure (where applicable), 2012we believe we are enhancing investors' understanding of our business and 2011, respectively.our results of operations.
Our Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. In addition, our Non-GAAP financial measures may not be comparable to similarly-titled measures by other companies. Please refer to the glossary (pages 38 through 40) for a further discussion of such Non-GAAP financial and operating performance measures and reconciliations to the most directly comparable GAAP measure (where applicable). Subscribers toand subscription related revenues and expenses associated with our connected vehicle services and Sirius XM Canada are not included in our subscriber count:count or subscriber-based operating metrics.
Set forth below are our subscriber balances as of December 31, 2016 compared to December 31, 2015 and as of December 31, 2015 compared to December 31, 2014: |
| | | | | | | | | | | | | | | | | | | | |
| As of December 31, | | 2016 vs 2015 Change | | 2015 vs 2014 Change |
| 2016 |
| 2015 |
| 2014 | | Amount |
| % | | Amount (a) |
| % |
| Self-pay subscribers | 25,951 |
|
| 24,288 |
|
| 22,523 |
| | 1,663 |
|
| 7 | % | | 1,765 |
| | 8 | % |
| Paid promotional subscribers | 5,395 |
|
| 5,306 |
|
| 4,788 |
| | 89 |
|
| 2 | % | | 517 |
| | 11 | % |
| Ending subscribers | 31,346 |
|
| 29,594 |
|
| 27,311 |
| | 1,752 |
|
| 6 | % | | 2,283 |
| | 8 | % |
| |
| (a) | Amounts may not sum as a result of rounding. |
The following table contains our Non-GAAP financial and operating performance measures which are based on our adjusted results of operations for the years ended December 31, 2016, 2015 and 2014:
|
| | | | | | | | | |
| | | Unaudited |
| | | For the Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| Beginning subscribers | | 23,900,336 |
| | 21,892,824 |
| | 20,190,964 |
|
| Gross subscriber additions | | 10,136,381 |
| | 9,617,771 |
| | 8,696,020 |
|
| Deactivated subscribers | | (8,477,407 | ) | | (7,610,259 | ) | | (6,994,160 | ) |
| Net additions | | 1,658,974 |
| | 2,007,512 |
| | 1,701,860 |
|
| Ending subscribers | | 25,559,310 |
| | 23,900,336 |
| | 21,892,824 |
|
| Self-pay | | 21,081,817 |
| | 19,570,274 |
| | 17,908,742 |
|
| Paid promotional | | 4,477,493 |
| | 4,330,062 |
| | 3,984,082 |
|
| Ending subscribers | | 25,559,310 |
| | 23,900,336 |
| | 21,892,824 |
|
| Self-pay | | 1,511,543 |
| | 1,661,532 |
| | 1,221,943 |
|
| Paid promotional | | 147,431 |
| | 345,980 |
| | 479,917 |
|
| Net additions | | 1,658,974 |
| | 2,007,512 |
| | 1,701,860 |
|
| Daily weighted average number of subscribers | | 24,886,300 |
| | 22,794,170 |
| | 20,903,908 |
|
| Average self-pay monthly churn | | 1.8 | % | | 1.9 | % | | 1.9 | % |
| New vehicle consumer conversion rate | | 44 | % | | 45 | % | | 45 | % |
| Note: See pages 39 through 45 for glossary. | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | 2016 vs 2015 Change |
| 2015 vs 2014 Change |
| | 2016 |
| 2015 | | 2014 | | Amount | | % | | Amount |
| % |
| Self-pay subscribers | 1,663 |
|
| 1,765 |
| | 1,441 |
| | (102 | ) | | (6 | )% | | 324 |
| | 22 | % |
| Paid promotional subscribers | 89 |
|
| 517 |
| | 311 |
| | (428 | ) | | (83 | )% | | 206 |
| | 66 | % |
Net additions (a) | 1,752 |
|
| 2,283 |
| | 1,752 |
| | (531 | ) | | (23 | )% | | 531 |
| | 30 | % |
| Daily weighted average number of subscribers | 30,494 |
|
| 28,337 |
| | 26,284 |
| | 2,157 |
| | 8 | % | | 2,053 |
| | 8 | % |
| Average self-pay monthly churn | 1.9 | % |
| 1.8 | % | | 1.9 | % | | 0.1 | % | | 6 | % | | (0.1 | )% | | (5 | )% |
| New vehicle consumer conversion rate | 39 | % |
| 40 | % | | 41 | % | | (1 | )% | | (3 | )% | | (1 | )% | | (2 | )% |
| |
|
|
| | | | | | | |
| |
|
| ARPU | $ | 12.91 |
|
| $ | 12.53 |
| | $ | 12.38 |
| | $ | 0.38 |
| | 3 | % | | $ | 0.15 |
| | 1 | % |
| SAC, per installation | $ | 31 |
|
| $ | 33 |
| | $ | 34 |
| | $ | (2 | ) | | (6 | )% | | $ | (1 | ) | | (3 | )% |
| Customer service and billing expenses, per average subscriber | $ | 1.00 |
|
| $ | 1.01 |
| | $ | 1.07 |
| | $ | (0.01 | ) | | (1 | )% | | $ | (0.06 | ) | | (6 | )% |
| Adjusted EBITDA | $ | 1,875,775 |
|
| $ | 1,657,617 |
| | $ | 1,467,775 |
| | $ | 218,158 |
| | 13 | % | | $ | 189,842 |
| | 13 | % |
| Free cash flow | $ | 1,509,113 |
|
| $ | 1,315,193 |
| | $ | 1,155,776 |
| | $ | 193,920 |
| | 15 | % | | $ | 159,417 |
| | 14 | % |
| Diluted weighted average common shares outstanding (GAAP) | 4,964,728 |
| | 5,435,166 |
| | 5,862,020 |
| | (470,438 | ) | | (9 | )% | | (426,854 | ) | | (7 | )% |
| |
| (a) | Amounts may not sum as a result of rounding. |
Subscribers. At December 31, 2013,2016, we had 25,559,310approximately 31.3 million subscribers, an increase of 1,658,974approximately 1.8 million subscribers, or 7%6%, from the 23,900,336approximately 29.6 million subscribers as of December 31, 20122015. The increase in total subscribers was primarily due to growth in our self-pay subscriber base, which increased by approximately 1.7 million. The increase in self-pay subscribers was primarily driven by original and subsequent owner trial conversions and subscriber win back programs, partially offset by deactivations..
20132016 vs. 2012:2015: For the years ended December 31, 20132016 and 2012,2015, net additions were 1,658,9741,752 thousand and 2,007,512,2,283 thousand, respectively, a decrease of 17%23%, or 348,538.531 thousand. The period over period decrease was due to a decrease in net additions of paid promotional subscribers as a result of slower growth in vehicle sales. The decrease in self-pay net additions was due to increases in deactivations from our larger subscriber base which were largely offset by trial conversions and subscriber win back programs.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, net additions were 2,283 thousand and 1,752 thousand, respectively, an increase of 30%, or 531 thousand. The increase in gross subscriber additionssubscribers was primarily due to increases in new car salesoriginal and new subscriptions in previously owned vehicles. These increases were offset in part by a change from a paidsubsequent owner trial to an unpaid trial in the fourth quarter of 2013 pursuant to an agreement with an OEM. The increase in deactivated subscribers was due to an increase in paid promotional trial deactivations driven by the growth of paid trial expirations, along with an increase in self-pay deactivations due to an increase in the subscriber base.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, net additions were 2,007,512 and 1,701,860, respectively, an increase of 18%, or 305,652. The improvement was due to the increase in gross subscriber additions, primarily resulting from higher new vehicle shipments and light vehicle sales,conversions, as well as an increaseincreases in the number of conversions from unpaid promotionalshipments by OEMs offering paid trials and returning subscriber activations including consumers in previously owned vehicles.This increase in gross additions wasof inactive radios, partially offset by an increasehigher deactivations related to vehicle turnover and non-pay churn resulting from changes in deactivations. The increase in deactivations was primarily duetelemarketing practices following the Federal Communications Commission’s July 10, 2015 order relating to paid promotional trial deactivations stemming from the growthTelephone Consumer Protection Act of paid trials and increased self-pay deactivations from our larger subscriber base.1991.
Average Self-pay Monthly Churnis derived by dividing the monthly average of self-pay deactivations for the period divided by the average number of self-pay subscribers for the period. (See accompanying glossary on pages 3938 through 4540 for more details.)
20132016 vs. 2012:2015: For the years ended December 31, 20132016 and 2015, our average self-pay monthly churn rate was 1.9% and 1.8%, respectively. The increase was due to an increase in vehicle-related, non-pay, and to a lesser extent voluntary churn.
2015 vs. 2014: For the years ended December 31, 2015 and 2012,2014, our average self-pay monthly churn rate was 1.8% and 1.9%, respectively. The decrease in churn was due to a higher mixreduction in the total number of existing subscribers migrating to paid trials in new vehicles which are not included in average self-pay churn.leaving for voluntary reasons.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, our average self-pay monthly churn rate was 1.9%.
New Vehicle Consumer Conversion Rateis the percentage of owners and lessees of new vehicles that receive our service and convert to become self-paying subscribers after an initial promotional period. The metric excludes rental and fleet vehicles. (See accompanying glossary on pages 3938 through 4540 for more details).
20132016 vs. 2012: 2015: For the years ended December 31, 20132016 and 2012, the2015, our new vehicle consumer conversion rate was 44%39% and 45%40%, respectively. The decrease in the new vehicle consumer conversion rate for the twelve month period was primarily due to certain manual dialing inefficiencies introduced by our call center vendors as a precautionary response to the mixFederal Communications Commission’s July 10, 2015 order relating to the Telephone Consumer Protection Act of sales by OEMs.1991, increased vehicle penetration rate, and lower conversion of first-time buyers and lessees of satellite radio enabled cars.
20122015 vs. 2011:2014: For the years ended December 31, 20122015 and 2011, the2014, our new vehicle consumer conversion rate was 45%.
Adjusted Results of Operations
In this section, we present certain financial performance measures that are not calculated40% and presented41%, respectively. The decrease in accordance with generally accepted accounting principles in the United States (“Non-GAAP”). These Non-GAAP financial measures include: average monthly revenue per subscriber, or ARPU; customer serviceconversion was primarily due to an increased vehicle penetration rate and billing expenses, per average subscriber; subscriber acquisition cost, or SAC, per gross subscriber addition; free cash flow; and adjusted EBITDA. These measures exclude the impact of certain purchase price accounting adjustments. We use these Non-GAAP financial measures to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees.
The purchase price accounting adjustments include the elimination of the earnings benefit of deferred revenue associated with our investment in Sirius XM Canada, the recognition of subscriber revenues not recognized in purchase price accounting and the elimination of the earnings benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and certain programming providers.
We believe the exclusion of share-based payment expense from functional operating expenses is useful given the significant variation in expense that can result from changes in the fair value as determined by the Black-Scholes-Merton model, which varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates, the effect of which is unrelatedthe suspension of certain outbound calling efforts by our vendors as they evaluated the Federal Communications Commission’s July 10, 2015 order relating to the operational conditions that give rise to variationsTelephone Consumer Protection Act of 1991, partially offset by improvements in the components of our operating costs.
Free cash flow isconverting previously active subscribers during a metric that our management and board of directors use to evaluate the cash generated by our operations, net of capital expenditures and other investment activity. In a capital intensive business, with significant investments in satellites, we look at our operating cash flow, net of these investing cash outflows, to determine cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. We believe free cash flow is an indicator of the long-term financial stability of our business. Free cash flow, which is reconciled to “Net cash provided by operating activities”, is a Non-GAAP financial measure. This measure can be calculated by deducting amounts under the captions "Additions to property and equipment" and deducting or adding Restricted and other investment activity from "Net cash provided by operating activities" from the audited consolidated statements of cash flows. Free cash flow should be used in conjunction with other GAAP financial performance measures and may not be comparable to free cash flow measures presented by other companies. Free cash flow should be viewed as a supplemental measure rather than an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt maturities. We believe free cash flow provides useful supplemental information to investors regarding our current and projected cash flow, along with other GAAP measures (such as cash flows from operating and investing activities), to determine our financial condition, and to compare our operating performance to other communications, entertainment and media companies.
We believe these Non-GAAP financial measures provide useful information to investors regarding our financial condition and results of operations. We believe investors find these Non-GAAP financial performance measures useful in evaluating our core trends because it provides a direct view of our underlying contractual costs. We believe investors use our current and projected adjusted EBITDA to estimate our current or prospective enterprise value and to make investment decisions. By providing these Non-GAAP financial measures, together with the reconciliations to the most directly comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations.
These Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. In addition, these Non-GAAP financial measures may not be comparable
to similarly-titled measures by other companies. Please refer to the glossary (pages 39 through 45) for a further discussion of such Non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure.
The following table contains our key operating metrics based on our adjusted results of operations for the years ended December 31, 2013, 2012 and 2011, respectively:
|
| | | | | | | | | | | |
| | Unaudited Adjusted |
| | For the Years Ended December 31, |
| (in thousands, except for per subscriber amounts) | 2013 | | 2012 | | 2011 |
| ARPU | $ | 12.27 |
| | $ | 12.00 |
| | $ | 11.58 |
|
| SAC, per gross subscriber addition | $ | 50 |
| | $ | 54 |
| | $ | 55 |
|
| Customer service and billing expenses, per average subscriber | $ | 1.07 |
| | $ | 1.07 |
| | $ | 1.03 |
|
| Free cash flow | $ | 927,496 |
| | $ | 709,446 |
| | $ | 415,742 |
|
| Adjusted EBITDA | $ | 1,166,140 |
| | $ | 920,343 |
| | $ | 731,018 |
|
|
|
Note: See pages 39 through 45 for a reconciliation to GAAP in the accompanying glossary. |
ARPUis derived from total earned subscriber revenue (excluding revenue derived from our connected vehicle services), net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (For a reconciliation to GAAP see(See the accompanying glossary on pages 3938 through 4540 for more details.)
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, ARPU was $12.27$12.91 and $12.00,$12.53, respectively. The increase was driven primarily by the contribution of the U.S. Music Royalty Fee, the impact of the increaseincreases in certain of our subscription rates, beginning in January 2012, and an increase in subscriptions to premium services, partially offset by growth in subscription discounts offered through customer acquisition and retention programs, and lifetime subscription plans that have reached full revenue recognition.programs.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, ARPU was $12.00$12.53 and $11.58,$12.38, respectively. The increase was driven primarily by the increaseincreases in certain of our subscription rates, beginning in January 2012, and an increase in subscriptions to premium services, partially offset by growth in subscription discounts and limited channel plans offered through customer acquisition and retention programs, and a decrease in the contribution from the U.S. Music Royalty Fee.shift to longer-term promotional data service plans with lower rates.
SAC, Per Gross Subscriber Addition,Installation, is derived from subscriber acquisition costs and margins from the sale of radios, components and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additionssatellite radio installations in new vehicles and shipments of aftermarket radios for the period. (For a reconciliation to GAAP see(See the accompanying glossary on pages 3938 through 4540 for more details.)
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, SAC, per gross subscriber addition,installation, was $31 and $33, respectively. The decrease was driven by lower subsidized costs related to the transition of chipsets as well as lower OEM hardware subsidy rates.
2015 vs. 2014$50: For the years ended December 31, 2015 and $54,2014, SAC, per installation, was $33 and $34, respectively. The decrease was primarily due to lower subsidies per vehicle.on chipsets and improvements in contractual OEM hardware subsidy rates.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, SAC, per gross subscriber addition, was $54 and $55, respectively. The decrease was primarily due to improved OEM subsidy rates per vehicle, partially offset by higher subsidies related to increased OEM installations occurring in advance of acquiring a subscriber.
Customer Service and Billing Expenses, Per Average Subscriber,is derived from total customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (For a reconciliation to GAAP see(See the accompanying glossary on pages 3938 through 4540 for more details.)
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2012,2015, customer service and billing expenses, per average subscriber, were $1.07.$1.00 and $1.01, respectively. The decrease was primarily related to efficiencies achieved from call center process enhancements, partially offset by increased bad debt expense.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, customer service and billing expenses, per average subscriber, were $1.07$1.01 and $1.03,$1.07, respectively. The increasedecrease was driven primarily dueby efficiencies achieved from management initiatives implemented at call centers operated by our vendors, as well as a decrease in the rate at which subscribers call to longer average handle time per call and higher technology costs.cancel service.
Free Cash FlowAdjusted EBITDA. includesEBITDA is defined as net income before interest expense, income tax expense and depreciation and amortization. Adjusted EBITDA excludes the net cash provided by operations, additionsimpact of other income, loss on extinguishment of debt, loss on change in value of derivatives, other non-cash charges, such as certain purchase price accounting adjustments, share-based payment expense, loss on disposal of assets, and legal settlements and reserves related to property and equipment, and restricted and other investment activity. (For a reconciliation to GAAP seethe historical use of sound recordings. (See the accompanying glossary on pages 3938 through 4540 for a reconciliation to GAAP and for more details.)
20132016 vs. 20122015: For the years ended December 31, 20132016 and 2015, adjusted EBITDA was $1,875,775 and $1,657,617, respectively, an increase of 13%, or $218,158. The increase was due to growth in revenues primarily as a result of the increase in our subscriber base and certain of our subscription rates and lower subscriber acquisition costs, partially offset by higher revenue share and royalties costs due to growth in our revenues and royalty rates, programming and content, sales and marketing, and general and administrative costs.
2015 vs. 2014: For the years ended December 31, 2015 and 2014, adjusted EBITDA was $1,657,617 and $1,467,775, respectively, an increase of 13%, or $189,842. The increase was due to growth in adjusted revenues primarily as a result of the increase in our subscriber base and certain of our subscription rates, partially offset by higher costs associated with the growth in our revenues and subscriber base.
Free Cash Flow 2012includes cash provided by operations, net of additions to property and equipment, restricted and other investment activity, the return of capital from investment in unconsolidated entity and excluding the $210,000 pre-1972 sound recordings legal settlement payment made in 2015. (See the accompanying glossary on pages 38 through 40 for a reconciliation to GAAP and for more details.)
2016 vs. 2015,: For the years ended December 31, 2016 and 2015, free cash flow was $927,496$1,509,113 and $709,446,$1,315,193, respectively, an increase of $218,050.$193,920, or 15%. The increase was primarily driven by higher net cash provided by operating activities resulting from improved operating performance, lower interest payments, and higher collections from subscribers and distributors,performance; partially offset by payments relatedan increase in additions to the launch of our FM-6property and equipment resulting primarily from new satellite and the purchase of certain long-lead parts for a future satellite.construction. The $210,000 pre-1972 sound recordings legal settlement payment made in 2015 was excluded from free cash flow.
20122015 vs. 20112014: For the years ended December 31, 20122015 and 2011,2014, free cash flow was $709,446$1,315,193 and $415,742,$1,155,776, respectively, an increase of $293,704. The$159,417, or 14%. Excluding the $210,000 pre-1972 sound recordings legal settlement payment made in 2015, the increase was primarily driven by higher net cash provided by operating activities from improved operating performance, and higher collections from subscribers, and distributors, as well as a decrease in capital expenditures resulting from lower satellite and related launch vehicle construction costs.partially offset by higher interest payments.
Adjusted EBITDA. EBITDA is defined as net income before interest and investment income (loss); interest expense, net of amounts capitalized; income tax benefit (expense) and depreciation and amortization. Adjusted EBITDA removes the impact of other income and expense, losses on extinguishment of debt, loss on change in value of derivatives as well as certain other charges, such as goodwill impairment, certain purchase price accounting adjustments and share-based payment expense. (For a reconciliation to GAAP see the accompanying glossary on pages 39 through 45 for more details.)
2013 vs. 2012: For the years ended December 31, 2013 and 2012, adjusted EBITDA was $1,166,140 and $920,343, respectively, an increase of 27%, or $245,797. The increase was primarily due to increases in adjusted revenues, partially offset by increases in expenses included in adjusted EBITDA. The increase in adjusted revenues was primarily due to the increase in our subscriber base and certain of our subscription rates. The increase in expenses was primarily driven by higher revenue share and royalties expenses associated with growth in revenues, sales and marketing costs related to subscriber communications and retention marketing, customer service and billing costs related to increased agent training and staffing as well as subscriber volume and subscriber acquisition costs.
2012 vs. 2011: For the years ended December 31, 2012 and 2011, adjusted EBITDA was $920,343 and $731,018, respectively, an increase of 26%, or $189,325. The increase was primarily due to increases in adjusted revenues, partially offset by increases in expenses included in adjusted EBITDA. The increase in adjusted revenues was primarily due to the increase in our subscriber base and in certain of our subscription rates. The increase in expenses was primarily driven by higher revenue share and royalties expenses associated with growth in revenues, subscriber acquisition costs related to increased gross subscriber additions and subsidies related to increased OEM installations, customer service and billing costs related to longer average handle times and higher subscriber volume, and sales and marketing costs related to subscriber communications and cooperative marketing, partially offset by lower programming and content costs.
Liquidity and Capital Resources
Cash Flows for the Year Endedyear ended December 31, 2013 Compared2016 compared with the Year Endedyear ended December 31, 20122015 and Year Endedthe year ended December 31, 2012 Compared2015 compared with the Year Endedyear ended December 31, 2011.2014.
As of December 31, 2013 and December 31, 2012, we had $134,805 and $520,945, respectively, of cash and cash equivalents. The following table presents a summary of our cash flow activity for the periods set forth below:
| | | | For the Years Ended December 31, | | | | | For the Years Ended December 31, | |
| | |
| | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 | 2016 | | 2015 | | 2014 | | 2016 vs 2015 | | 2015 vs 2014 |
| Net cash provided by operating activities | $ | 1,102,832 |
| | $ | 806,765 |
| | $ | 543,630 |
| | $ | 296,067 |
| | $ | 263,135 |
| $ | 1,719,237 |
| | $ | 1,244,051 |
| | $ | 1,253,244 |
| | $ | 475,186 |
| | $ | (9,193 | ) |
| Net cash used in investing activities | (700,688 | ) | | (97,319 | ) | | (127,888 | ) | | (603,369 | ) | | 30,569 |
| (210,124 | ) | | (138,858 | ) | | (96,324 | ) | | (71,266 | ) | | (42,534 | ) |
| Net cash used in financing activities | (788,284 | ) | | (962,491 | ) | | (228,443 | ) | | 174,207 |
| | (734,048 | ) | (1,407,012 | ) | | (1,141,079 | ) | | (1,144,001 | ) | | (265,933 | ) | | 2,922 |
|
| Net (decrease) increase in cash and cash equivalents | (386,140 | ) | | (253,045 | ) | | 187,299 |
| | (133,095 | ) | | (440,344 | ) | |
| Net increase (decrease) in cash and cash equivalents | | 102,101 |
| | (35,886 | ) | | 12,919 |
| | 137,987 |
| | (48,805 | ) |
| Cash and cash equivalents at beginning of period | 520,945 |
| | 773,990 |
| | 586,691 |
| | (253,045 | ) | | 187,299 |
| 111,838 |
| | 147,724 |
| | 134,805 |
| | (35,886 | ) | | 12,919 |
|
| Cash and cash equivalents at end of period | $ | 134,805 |
| | $ | 520,945 |
| | $ | 773,990 |
| | $ | (386,140 | ) | | $ | (253,045 | ) | $ | 213,939 |
| | $ | 111,838 |
| | $ | 147,724 |
| | $ | 102,101 |
| | $ | (35,886 | ) |
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities increased by $296,067$475,186 to $1,102,832$1,719,237 for the year ended December 31, 20132016 from $806,765$1,244,051 for the year ended December 31, 20122015. Cash flows provided by operating activities decreased by $9,193 to $1,244,051 for the year ended December 31, 2015 from $1,253,244 for the year ended December 31, 2014.
Our largest source of cash provided by operating activities is generated by subscription and subscription-related revenues. We also generate cash from the sale of advertising on certain non-music channels and the sale of satellite radios, components and accessories. Our primary uses of cash from operating activities include revenue share and royalty payments to
distributors, programming and content providers, and payments to radio manufacturers, distributors and automakers. In addition, uses of cash from operating activities include payments to vendors to service, maintain and acquire subscribers, general corporate expenditures, and compensation and related costs.
Cash provided by operating activities consists of net income adjusted for certain non-cash items, including depreciation, amortization, loss on extinguishment of debt, share-based payment expense, deferred income taxes and other non-cash purchase price adjustments.
The adjustments for the non-cash items increased from the year ended December 31, 2012 to the year ended December 31, 2013 due to the $3,195,651 non-cash change in deferred tax valuation allowance reversal during 2012.
Cash Flows Used in Investing Activities
Cash flows used in investing activities consistswere primarily due to additional spending of capital expenditures$43,300 to construct replacement satellites, improve our terrestrial repeater network and for propertycapitalized software. In 2015, our cash flows used in investing activities also included an increase to our letters of credit issued for the benefit of lessors of certain of our office space. In 2014, our cash flows used in investing activities were primarily due to additional spending to improve our terrestrial repeater network and equipment, as well as thefor capitalized software, partially offset by a special one-time dividend received from our investment in the connected vehicle business purchased from Agero, Inc.Sirius XM Canada of $24,178. We expect to continue to incur significant costs to improve our terrestrial repeater network and broadcast and administrative infrastructure. Our FM-6 satellite was launched during the fourth quarter of 2013.
The increase in cash flows used in investing activities was primarily due to the investment in Sirius XM Connected Vehicle Services Inc., satellite launch-related payments, an increase in spending to enhance our terrestrial repeater network, and the purchase of certain long-lead parts for a future satellite.
construct replacement satellites.
Cash Flows Used in Financing Activities
Cash flows used in financing activities consists of the issuance and repayment of long-term debt, and related party debt, cash flows resulting from the exercise of stock options and the purchase of common stock under our share repurchase program.program and the payment of a cash dividend. Proceeds from long-term debt, related party debt and equity issuances have been used to fund our operations, acquire the connected vehicle business of Agero, Inc., construct and launch new satellites and invest in other infrastructure improvements.
Cash flows provided by financing activities in 2016 were due to the issuance of $1,000,000 aggregate principal amount of 5.375% Senior Notes due 2026 and borrowings under the Credit Facility. Cash flows used in financing activities in 20132016 were primarily due to the repurchasepurchase and retirement of approximately 520,257,866shares of our common stock under our share repurchase program for approximately $1,762,360, and$1,673,518, repayments of borrowings under the Credit Facility, the redemption of $800,000 of
our 8.75% Senior Notes due 2015 and $700,000$650,000 of our 7.625% Senior Notes due 2018. In 2013, we issued $650,000 aggregate principal amount ofthen outstanding 5.875% Senior Notes due 2020 $600,000and the payment of a cash dividend. Cash flows provided by financing activities in 2015 were due to the issuance of $1,000,000 aggregate principal amount of 5.75%5.375% Senior Notes due 2021, $500,000 aggregate principal amount of 4.25% Senior Notes due 2020,2025 and $500,000 aggregate principal amount of 4.625% Senior Notes due 2023.borrowings under the Credit Facility. Cash flows used in financing activities during 2012in 2015 were primarily due to the repaymentpurchase and retirement of the remaining balances of $778,500shares of our 13% Senior Notescommon stock under our repurchase program for $2,018,254 and repayments of borrowings under the Credit Facility. Cash flows used in financing activities in 2014 were primarily due 2013 and $257,000to the purchase of shares of our 9.75% Senior Secured Notes due 2015, partially offset bycommon stock under our repurchase program from $2,496,799 and repayments under the issuance $400,000Credit Facility. In 2014, we issued $1,500,000 aggregate principal amount of 5.25%6.00% Senior Notes due 2022 and the proceeds received from the exercise of stock options.
2024.
Future Liquidity and Capital Resource Requirements
Based upon our current business plans, we expect to fund operating expenses, capital expenditures, including the construction of replacement satellites, working capital requirements, legal settlements, interest payments, taxes and scheduled maturities of our debt with existing cash, cash flow from operations and borrowings under our Credit Facility. As of December 31, 2016, $1,360,000 was available for future borrowing under our Credit Facility. We believe that we have sufficient cash and cash equivalents as well as debt capacity to cover our estimated short-term and long-term funding needs, as well as fund stock repurchases, future dividend payments and strategic opportunities.
Our ability to meet our debt and other obligations depends on our future operating performance and on economic, financial, competitive and other factors. We continually review our operations for opportunities to adjust the timing of expenditures to ensure that sufficient resources are maintained.
We regularly evaluate our business plans and strategy. These evaluations often result in changes to our business plans and strategy, some of which may be material and significantly change our cash requirements. These changes in our business plans or strategy may include: the acquisition of unique or compelling programming; the development and introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions and investments, including acquisitions and investments that are not directly related to our satellite radio business.
Stock RepurchaseCapital Return Program
SinceAs of December 2012,31, 2016, our board of directors hashad approved $4,000,000for repurchasesrepurchase an aggregate of $10,000,000 of our common stock. Our boardAs of directors did not establish an end date for thisDecember 31, 2016, our cumulative repurchases since December 2012 under our stock repurchase program. Shares of common stock may be purchased from time to time on the open marketprogram totaled 2,203,608 shares for $7,973,837, and in privately negotiated transactions, including transactions with Liberty Media and its affiliates.
On October 9, 2013, we entered into an agreement with Liberty Media to repurchase $500 million of our common stock from Liberty Media. Pursuant to the agreement with Liberty Media, we repurchased $160 million of our common stock from Liberty Media as of December 31, 2013. On January 23, 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240 million repurchase of shares of our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date of the final purchase installment under the agreement. As a result of this deferral, we expect to repurchase $340 million of our shares of common stock from Liberty Media on April 25, 2014 at a price of $3.66 per share. We entered into this amendment at the request of the Special Committee of our board of directors that has been formed to review and evaluate the Liberty Media proposal.
During the year endedDecember 31, 2013, we repurchased 520,257,866 shares of our common stock for $1,762,360, including fees and commissions, on the open market and in privately negotiated transactions, including transactions with Liberty Media. All common stock repurchases were settled and retired as of December 31, 2013. As of December 31, 2013, $2,237,640$2,026,163 remained available under our stock repurchase program. We expect
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. That dividend was paid on November 30, 2016 to fund future repurchases throughstockholders of record as of the close of business on November 9, 2016. The total amount of this dividend was approximately $48,079. Our board of directors expects to declare regular quarterly dividends, in an aggregate annual amount of $0.04 per share of common stock.
On January 24, 2017, our board of directors also declared a combinationquarterly dividend on our common stock in the amount of cash$0.01 per share of common stock payable on hand, cash generated by operations and future borrowings.
February 28, 2017 to stockholders of record as of the close of business on February 7, 2017.
Debt Covenants
OurThe indentures governing Sirius XM's senior notes, and the agreement governing ourthe Credit Facility include restrictive covenants. As of December 31, 2013,2016, we were in compliance with the indentures and the agreement governing our Credit Facility.such covenants. For a discussion of our “Debt Covenants,” refer to Note 1311 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We do not have any significant off-balance sheet arrangements other than those disclosed in Note 1614 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Cash Commitments
For a discussion of our “Contractual Cash Commitments,” refer to Note 1614 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Related Party Transactions
For a discussion of “Related Party Transactions,” refer to Note 1110 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods. Accounting estimates require the use of significant management assumptions and judgments as to future events, and the effect of those events cannot be predicted with certainty. The accounting estimates will change as new events occur, more experience is acquired and more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and use outside experts to assist in that evaluation when we deem necessary. We have disclosedidentified all significant accounting policies in Note 32 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of 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. Assessments are performed at other times if events or circumstances indicate it is more likely than not that the asset is impaired. Step one of the impairment assessment compares the fair value of the entity to its carrying value and if the fair value exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds the fair value, the implied fair value of goodwill is compared to the carrying value of goodwill; an impairment loss will be recorded for the amount the carrying value exceeds the implied fair value. AtAccounting Standards Codification (“ASC”) 350-20-35, Goodwill, states that if the carrying amount of the reporting unit is zero or negative, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists based on adverse qualitative factors. As the carrying amount of our one reporting unit was negative as of the date of our annual assessment for 2013,2016, we performed a qualitative analysis to determine whether it was more likely than not that a goodwill impairment exists. We were not aware of any adverse qualitative factors that would indicate any impairment to our goodwill as of the fair valuedate of our single reporting unit substantially exceeded its carrying valueannual assessment for 2016 and therefore was not at riskas of failing step one of ASC 350-20, Goodwill. Subsequent to our annual evaluation of the carrying value of goodwill, thereDecember 31, 2016. No impairment losses were no events or circumstances that triggered the needrecorded for an interim evaluation for impairment. As a result, there were no impairment charges to our goodwill during the years ended December 31, 2013 or 2012.2016, 2015 and 2014.
Long-Lived and Indefinite-Lived Assets. We carry our long-lived assets at cost less accumulated amortization and depreciation. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. At the time an impairment in the value of a long-lived asset is identified, the impairment is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Our annual impairment assessment of indefinite-lived assets, our FCC licenses and XM trademark, is performed as of the fourth quarter of each year and an assessment is made at other times if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. ASU 2012-02,ASC 350-30-35, Testing Indefinite-Lived Intangible AssetsIntangibles - Goodwill and Other, provides for Impairment, establishes an option to first perform a qualitative assessment to determine whether it is more likely than not that an asset is impaired. If the qualitative assessment supports that it is more likely than not that the fair value of the asset exceeds its carrying value, a company is not required to perform a quantitative impairment test. If the qualitative assessment does not support the fair value of the asset, then a quantitative assessment is performed. DuringWe completed qualitative assessments of our FCC licenses and XM trademark during the fourth quarter of 2013, a2016, 2015 and 2014. As of the date of our annual assessment for 2016, 2015 and 2014, our qualitative impairment analysis was performed and we determined thatassessment of the fair value of our FCC licenses and trademarkindefinite intangible assets indicated that such assets substantially exceeded thetheir carrying value and therefore was not at risk of impairment. Our qualitative assessment includes the consideration of our long-term financial projections, current and historical weighted average cost of capital and liquidity factors, legal and regulatory issues and industry and market pressures. Subsequent to our annual evaluation of the carrying value of our long-livedNo impairments were recorded for intangible assets there were no events or circumstances that triggered the need for an impairment evaluation.
There were no changes in the carrying value of ourwith indefinite life intangible assetslives during the years ended December 31, 20132016, 2015 and 2012.
2014.
Useful Life of Broadcast/Transmission System. Our satellite system includes the costs of our satellite construction, launch vehicles, launch insurance, capitalized interest, spare satellites, terrestrial repeater network and satellite uplink facilities. We monitor our satellites for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset is not recoverable.
We operate fivetwo in-orbit Sirius satellites, FM-1, FM-2, FM-3, FM-5 and FM-6. Our FM-1 and FM-2 satellites were launched in 2000 and reached the end of their depreciable lives in 2013, but are still in operation. We estimate that our FM-3, FM-5 and FM-6 satellites launched in 2000, 2009 and 2013, respectively, will operate effectively through the end of their depreciable liveslife in 2015, 2024 and 2028, respectively.
We operate fivethree in-orbit XM satellites, XM-1, XM-2, XM-3, XM-4 and XM-5, three of which function as in-orbit spares. Our XM-1XM-5. We estimate that our XM-3 and XM-2 in-orbit spareXM-4 satellites launched in 2001 reached2005 and 2006, respectively, will reach the end of their depreciable lives in 20132020 and are expected to be removed from orbit in 2014. We estimate that our third in-orbit spare2021, respectively. Our XM-5 satellite XM-5,was launched in 2010, is used as an in-orbit spare for the Sirius and our two other XM systems and is expected to reach the end of its depreciable life in 2025.
Our satellites XM-3, launched in 2005, and XM-4, launched in 2006, will meet their 15-year estimated depreciable lives.
Certain of ourhave been designed to last fifteen-years. Our in-orbit satellites have experienced circuitmay experience component failures onwhich could adversely affect their solar arrays.useful lives. We continue to monitor the operating condition of our in-orbit satellites. Ifsatellites and if events or circumstances indicate that the depreciable lives of our in-orbit satellites have changed, we will modify the depreciable life accordingly. If we were to revise our estimates, our depreciation expense would change. For example, a 10% decrease in the expected depreciable lives of satellites and spacecraft control facilities during 2013 would have resulted in approximately $24,395 of additional depreciation expense.
Income Taxes. Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. In determining
We assess the period in which relatedrecoverability of deferred tax benefits are realized for book purposes, excess share-based compensation deductions included in net operating losses are realized after regular net operating losses are exhausted; excess tax compensation benefits are recorded off-balance sheet asassets at each reporting date and, where applicable, a memo entry until the period the excess tax benefit is realized through a reduction of taxes payable. A valuation allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not be realized. Income tax expense is the sumOur assessment includes an analysis of current income tax plus the change inwhether deferred tax assets will be realized in the ordinary course of operations based on the available positive and liabilities.negative evidence, including the scheduling of deferred tax liabilities and forecasted income from operations. The underlying assumptions we use in forecasting future taxable income require significant judgment. In the event that actual income from operations differs from forecasted amounts, or if we change our estimates of forecasted income from operations, we could record additional charges or reduce allowances in order to adjust the carrying value of deferred tax assets to their realizable amount. Such adjustments could be material to our consolidated financial statements.
As of December 31, 2013,2016, we had a valuation allowance of $7,831$47,682 relating to deferred tax assets that are not more likely than not to be realized due to certain state net operating loss limitations.limitations and acquired net operating losses that we were not likely to be utilized.
ASC 740, Income Taxes, requires a company to first determine whether it is more likely than not that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more likely than not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. If the tax position is not more likely than not to be sustained, the gross amount of the unrecognized tax position will not be recorded in the financial statements but will be shown in tabular format within the uncertain income tax positions. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs due to the following conditions: (1) the tax position is “more likely than not” to be sustained, (2) the tax
position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. A number of years may elapse before an uncertain tax position is effectively settled or until there is a lapse in the applicable statute of limitations. We record interest and penalties related to uncertain tax positions in Income tax expense in our consolidated statements of comprehensive income. As of December 31, 2016, the gross liability for income taxes associated with uncertain tax positions was $303,583.
Glossary
Adjusted EBITDA- EBITDA is defined as net income before interest and investment income (loss); interest expense, net of amounts capitalized; income tax expense and depreciation and amortization. We adjust EBITDA to removeexclude the impact of other income and expense, loss on extinguishment of debt, loss on change in value of derivatives as well as certain other charges discussed below. This measureAdjusted EBITDA is one of the primary Non-GAAP financial measures on which we use to (i) evaluate the performance of our businesses,on-going core operating results period over period, (ii) base our internal budgets and (iii) compensate management. Adjusted EBITDA is a Non-GAAP financial performance measure that excludes (if applicable): (i) certain adjustments as a result of the purchase price accounting for the Merger, (ii) depreciation and amortizationshare-based payment expense and (iii) share-based payment expense. The purchase price accounting adjustments include: (i)other significant operating expense (income) that do not relate to the eliminationon-going performance of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers.our business. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our physical plant, capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our resultspast operating performance with our current performance and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe investors use current and projected adjusted EBITDA to estimate our current and prospective enterprise value and to make investment decisions. Because we fund and build-outof large capital investments in our satellite radio system through the periodic raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation expense. The exclusion of depreciation and amortization expense is useful given significant variation in depreciation and amortization expense that can result from the potential variations in estimated useful lives, all of which can vary widely across different industries or among companies within the same industry. We also believe the exclusion of share-based payment expense is useful givenas it is not directly related to the operational conditions of our business. We also believe the exclusion of the legal settlements and reserves related to the historical use of sound recordings and loss on disposal of assets is useful as they are significant variation in expense that can result from changes in the fair valueexpenses not incurred as determined using the Black-Scholes-Merton model which varies based on assumptions usedpart of our normal operations for the expected life, expected stock price volatility and risk-free interest rates. period.
Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statements of comprehensive income of certain expenses, including share-based payment expense and certain purchase price accounting for the Merger. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income as disclosed in our consolidated statements of comprehensive income. Since adjusted EBITDA is a Non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation of net income to the adjusted EBITDA is calculated as follows (in thousands):
|
| | | | | | | | | | | |
| | Unaudited |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Net income (GAAP): | $ | 377,215 |
| | $ | 3,472,702 |
| | $ | 426,961 |
|
| Add back items excluded from Adjusted EBITDA: | | | | | |
| Purchase price accounting adjustments: | | | | | |
| Revenues (see pages 41-43) | 7,251 |
| | 7,479 |
| | 10,910 |
|
| Operating expenses (see pages 41-43) | (207,854 | ) | | (289,278 | ) | | (277,258 | ) |
| Share-based payment expense, net of purchase price accounting adjustments | 68,876 |
| | 63,822 |
| | 53,369 |
|
| Depreciation and amortization (GAAP) | 253,314 |
| | 266,295 |
| | 267,880 |
|
| Interest expense, net of amounts capitalized (GAAP) | 204,671 |
| | 265,321 |
| | 304,938 |
|
| Loss on extinguishment of debt and credit facilities, net (GAAP) | 190,577 |
| | 132,726 |
| | 7,206 |
|
| Interest and investment (income) (GAAP) | (6,976 | ) | | (716 | ) | | (73,970 | ) |
| Loss on change in value of derivatives (GAAP) | 20,393 |
| | — |
| | — |
|
| Other (income) loss (GAAP) | (1,204 | ) | | 226 |
| | (3,252 | ) |
| Income tax expense (benefit) (GAAP) | 259,877 |
| | (2,998,234 | ) | | 14,234 |
|
| Adjusted EBITDA | $ | 1,166,140 |
|
| $ | 920,343 |
| | $ | 731,018 |
|
Adjusted Revenues and Operating Expenses - We define this Non-GAAP financial measure as our actual revenues and operating expenses adjusted to exclude the impact of certain purchase price accounting adjustments and share-based payment expense. We use this Non-GAAP financial measure to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees. The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses for the years endedDecember 31, 2013, 2012 and 2011:
|
| | | | | | | | | | | | | | | |
| | Unaudited For the Year Ended December 31, 2013 |
| (in thousands) | As Reported | | Purchase Price Accounting Adjustments | | Allocation of Share-based Payment Expense | | Adjusted |
| Revenue: | | | | | | | |
| Subscriber revenue | $ | 3,284,660 |
| | $ | — |
| | $ | — |
| | $ | 3,284,660 |
|
| Advertising revenue | 89,288 |
| | — |
| | — |
| | 89,288 |
|
| Equipment revenue | 80,573 |
| | — |
| | — |
| | 80,573 |
|
| Other revenue | 344,574 |
| | 7,251 |
| | — |
| | 351,825 |
|
| Total revenue | $ | 3,799,095 |
| | $ | 7,251 |
| | $ | — |
| | $ | 3,806,346 |
|
| Operating expenses | | | | | | | |
| Cost of services: | | | | | | | |
| Revenue share and royalties | $ | 677,642 |
| | $ | 122,534 |
| | $ | — |
| | $ | 800,176 |
|
| Programming and content | 290,323 |
| | 8,033 |
| | (7,584 | ) | | 290,772 |
|
| Customer service and billing | 320,755 |
| | — |
| | (2,219 | ) | | 318,536 |
|
| Satellite and transmission | 79,292 |
| | — |
| | (3,714 | ) | | 75,578 |
|
| Cost of equipment | 26,478 |
| | — |
| | — |
| | 26,478 |
|
| Subscriber acquisition costs | 495,610 |
| | 64,365 |
| | — |
| | 559,975 |
|
| Sales and marketing | 291,024 |
| | 12,922 |
| | (14,792 | ) | | 289,154 |
|
| Engineering, design and development | 57,969 |
| | — |
| | (7,405 | ) | | 50,564 |
|
| General and administrative | 262,135 |
| | — |
| | (33,162 | ) | | 228,973 |
|
| Depreciation and amortization (a) | 253,314 |
| | — |
| | — |
| | 253,314 |
|
| Share-based payment expense | — |
| | — |
| | 68,876 |
| | 68,876 |
|
| Total operating expenses | $ | 2,754,542 |
| | $ | 207,854 |
| | $ | — |
| | $ | 2,962,396 |
|
| | | | | | | | |
| (a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for December 31, 2013 was $47,000. |
|
| | | | | | | | | | | | | | | |
| | Unaudited For the Year Ended December 31, 2012 |
| (in thousands) | As Reported | | Purchase Price Accounting Adjustments | | Allocation of Share-based Payment Expense | | Adjusted |
| Revenue: | | | | | | | |
| Subscriber revenue | $ | 2,962,665 |
| | $ | 228 |
| | $ | — |
| | $ | 2,962,893 |
|
| Advertising revenue | 82,320 |
| | — |
| | — |
| | 82,320 |
|
| Equipment revenue | 73,456 |
| | — |
| | — |
| | 73,456 |
|
| Other revenue | 283,599 |
| | 7,251 |
| | — |
| | 290,850 |
|
| Total revenue | $ | 3,402,040 |
| | $ | 7,479 |
| | $ | — |
| | $ | 3,409,519 |
|
| Operating expenses | | | | | | | |
| Cost of services: | | | | | | | |
| Revenue share and royalties | $ | 551,012 |
| | $ | 146,601 |
| | $ | — |
| | $ | 697,613 |
|
| Programming and content | 278,997 |
| | 37,346 |
| | (6,120 | ) | | 310,223 |
|
| Customer service and billing | 294,980 |
| | — |
| | (1,847 | ) | | 293,133 |
|
| Satellite and transmission | 72,615 |
| | — |
| | (3,329 | ) | | 69,286 |
|
| Cost of equipment | 31,766 |
| | — |
| | — |
| | 31,766 |
|
| Subscriber acquisition costs | 474,697 |
| | 90,503 |
| | — |
| | 565,200 |
|
| Sales and marketing | 248,905 |
| | 14,828 |
| | (10,310 | ) | | 253,423 |
|
| Engineering, design and development | 48,843 |
| | — |
| | (6,238 | ) | | 42,605 |
|
| General and administrative | 261,905 |
| | — |
| | (35,978 | ) | | 225,927 |
|
| Depreciation and amortization (a) | 266,295 |
| | — |
| | — |
| | 266,295 |
|
| Share-based payment expense | — |
| | — |
| | 63,822 |
| | 63,822 |
|
| Total operating expenses | $ | 2,530,015 |
| | $ | 289,278 |
| | $ | — |
| | $ | 2,819,293 |
|
| | | | | | | | |
| (a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for December 31, 2012 was $53,000. |
|
| | | | | | | | | | | | | | | |
| | Unaudited For the Year Ended December 31, 2011 |
| (in thousands) | As Reported | | Purchase Price Accounting Adjustments | | Allocation of Share-based Payment Expense | | Adjusted |
| Revenue: | | | | | | | |
| Subscriber revenue | $ | 2,595,414 |
| | $ | 3,659 |
| | $ | — |
| | $ | 2,599,073 |
|
| Advertising revenue | 73,672 |
| | — |
| | — |
| | 73,672 |
|
| Equipment revenue | 71,051 |
| | — |
| | — |
| | 71,051 |
|
| Other revenue | 274,387 |
| | 7,251 |
| | — |
| | 281,638 |
|
| Total revenue | $ | 3,014,524 |
| | $ | 10,910 |
| | $ | — |
| | $ | 3,025,434 |
|
| Operating expenses |
| |
| |
| |
|
| Cost of services: |
| |
| |
| |
|
| Revenue share and royalties | $ | 471,149 |
| | $ | 126,941 |
| | $ | — |
| | $ | 598,090 |
|
| Programming and content | 281,234 |
| | 49,172 |
| | (6,212 | ) | | 324,194 |
|
| Customer service and billing | 259,719 |
| | 18 |
| | (1,502 | ) | | 258,235 |
|
| Satellite and transmission | 75,902 |
| | 313 |
| | (2,678 | ) | | 73,537 |
|
| Cost of equipment | 33,095 |
| | — |
| | — |
| | 33,095 |
|
| Subscriber acquisition costs | 434,482 |
| | 85,491 |
| | — |
| | 519,973 |
|
| Sales and marketing | 222,773 |
| | 15,233 |
| | (8,193 | ) | | 229,813 |
|
| Engineering, design and development | 53,435 |
| | 31 |
| | (4,851 | ) | | 48,615 |
|
| General and administrative | 238,738 |
| | 59 |
| | (29,933 | ) | | 208,864 |
|
| Depreciation and amortization (a) | 267,880 |
| | — |
| | — |
| | 267,880 |
|
| Share-based payment expense (b) | — |
| | — |
| | 53,369 |
| | 53,369 |
|
| Total operating expenses | $ | 2,338,407 |
| | $ | 277,258 |
| | $ | — |
| | $ | 2,615,665 |
|
| | | | | | | | |
| (a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the year ended December 31, 2011 was $59,000. |
| | | | | | | | |
| (b) Amounts related to share-based payment expense included in operating expenses were as follows: |
| | | | | | | | |
| Programming and content | $ | 6,185 |
| | $ | 27 |
| | $ | — |
| | $ | 6,212 |
|
| Customer service and billing | 1,484 |
| | 18 |
| | — |
| | 1,502 |
|
| Satellite and transmission | 2,659 |
| | 19 |
| | — |
| | 2,678 |
|
| Sales and marketing | 8,166 |
| | 27 |
| | — |
| | 8,193 |
|
| Engineering, design and development | 4,820 |
| | 31 |
| | — |
| | 4,851 |
|
| General and administrative | 29,874 |
| | 59 |
| | — |
| | 29,933 |
|
| Total share-based payment expense | $ | 53,188 |
| | $ | 181 |
| | $ | — |
| | $ | 53,369 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
| Net income: | $ | 745,933 |
|
| $ | 509,724 |
| | $ | 493,241 |
|
| Add back items excluded from Adjusted EBITDA: |
|
|
|
|
| | |
| Purchase price accounting adjustments: |
|
|
|
|
| |
|
|
| Revenues | 7,251 |
|
| 7,251 |
| | 7,251 |
|
| Operating expenses | — |
|
| (1,394 | ) | | (3,781 | ) |
| Sound recording legal settlements and reserves | 45,900 |
| | 109,164 |
| | — |
|
| Loss on disposal of assets | 12,912 |
| | 7,384 |
| | — |
|
| Loss on change in value of derivatives | — |
| | — |
| | 34,485 |
|
| Share-based payment expense | 108,604 |
|
| 84,310 |
| | 78,212 |
|
| Depreciation and amortization | 268,979 |
|
| 272,214 |
| | 266,423 |
|
| Interest expense | 331,225 |
|
| 299,103 |
| | 269,010 |
|
| Loss on extinguishment of debt and credit facilities, net | 24,229 |
| | — |
| | — |
|
| Other income | (14,985 | ) |
| (12,379 | ) | | (14,611 | ) |
| Income tax expense | 345,727 |
|
| 382,240 |
| | 337,545 |
|
| Adjusted EBITDA | $ | 1,875,775 |
|
| $ | 1,657,617 |
| | $ | 1,467,775 |
|
ARPU- is derived from total earned subscriber revenue, advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments,excluding revenue associated with our connected vehicle services, divided bythe number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes the U.S. Music Royalty Fee. Purchase price accounting adjustments include the recognition of deferred subscriber revenues not recognized in purchase price accounting associated with the Merger. ARPU is calculated as follows (in thousands, except for subscriber and per subscriber amounts):follows:
|
| | | | | | | | | | | |
| | Unaudited |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Subscriber revenue (GAAP) | $ | 3,284,660 |
| | $ | 2,962,665 |
| | $ | 2,595,414 |
|
| Add: advertising revenue (GAAP) | 89,288 |
| | 82,320 |
| | 73,672 |
|
| Add: other subscription-related revenue (GAAP) | 290,895 |
| | 237,868 |
| | 231,902 |
|
| Add: purchase price accounting adjustments | — |
| | 228 |
| | 3,659 |
|
| | $ | 3,664,843 |
| | $ | 3,283,081 |
| | $ | 2,904,647 |
|
| Daily weighted average number of subscribers | 24,886,300 |
| | 22,794,170 |
| | 20,903,908 |
|
| ARPU | $ | 12.27 |
|
| $ | 12.00 |
| | $ | 11.58 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Subscriber revenue, excluding connected vehicle services | $ | 4,108,547 |
|
| $ | 3,726,340 |
| | $ | 3,466,050 |
|
| Add: advertising revenue | 138,231 |
|
| 122,292 |
| | 100,982 |
|
| Add: other subscription-related revenue | 478,063 |
|
| 410,644 |
| | 336,408 |
|
| | $ | 4,724,841 |
| | $ | 4,259,276 |
| | $ | 3,903,440 |
|
| Daily weighted average number of subscribers | 30,494 |
|
| 28,337 |
| | 26,284 |
|
| ARPU | $ | 12.91 |
|
| $ | 12.53 |
| | $ | 12.38 |
|
Average self-pay monthly churn- is defined as the monthly average of self-pay deactivations for the period divided by the average number of self-pay subscribers for the period.
Customer service and billing expenses, per average subscriber- is derived from total customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, and purchase price accounting adjustments associated with the Merger, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. We believe the exclusion of share-based payment expense in our calculation of customer service and billing expenses, per average subscriber, is useful given the significant variation inas share-based payment expense that can result from changes in the fair market value of our common stock, the effect of which is unrelatednot directly related to the operational conditions that give rise to variations in the components of our customer service and billing expenses. Customer service and billing expenses, per average subscriber, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):follows:
|
| | | | | | | | | | | |
| | Unaudited |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Customer service and billing expenses (GAAP) | $ | 320,755 |
| | $ | 294,980 |
| | $ | 259,719 |
|
| Less: share-based payment expense, net of purchase price accounting adjustments | (2,219 | ) | | (1,847 | ) | | (1,502 | ) |
| Add: purchase price accounting adjustments | — |
| | — |
| | 18 |
|
| | $ | 318,536 |
| | $ | 293,133 |
| | $ | 258,235 |
|
| Daily weighted average number of subscribers | 24,886,300 |
|
| 22,794,170 |
|
| 20,903,908 |
|
| Customer service and billing expenses, per average subscriber | $ | 1.07 |
|
| $ | 1.07 |
| | $ | 1.03 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Customer service and billing expenses, excluding connected vehicle services | $ | 367,978 |
| | $ | 346,789 |
| | $ | 340,094 |
|
| Less: share-based payment expense | (3,735 | ) | | (2,982 | ) | | (2,780 | ) |
| $ | 364,243 |
| | $ | 343,807 |
| | $ | 337,314 |
|
| Daily weighted average number of subscribers | 30,494 |
| | 28,337 |
| | 26,284 |
|
| Customer service and billing expenses, per average subscriber | $ | 1.00 |
| | $ | 1.01 |
| | $ | 1.07 |
|
Free cash flow- is derived from cash flow provided by operating activities, capital expendituresnet of additions to property and equipment, restricted and other investment activity.activity and the return of capital from investment in unconsolidated entity. Free cash flow is a metric that our management and board of directors use to evaluate the cash generated by our operations, net of capital expenditures and other investment activity and significant items that do not relate to the on-going performance of our business. In a capital intensive business, with significant investments in satellites, we look at our operating cash flow, net of these investing cash outflows, to determine cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. We believe free cash flow is an indicator of the long-term financial stability of our business. Free cash flow, which is reconciled to “Net cash provided by operating activities,” is a Non-GAAP financial measure. This measure can be calculated by deducting amounts under the captions “Additions to property and equipment” and deducting or adding Restricted and other investment activity from “Net cash provided by operating activities” from the consolidated statements of cash flows, adjusted for any significant legal settlements. We have excluded the $210,000 payment related to the 2015 pre-1972 sound recordings legal settlement from our free cash flow calculation in the year ended December 31, 2015. Free cash flow should be used in conjunction with other GAAP financial performance measures and may not be comparable to free cash flow measures presented by other companies. Free cash flow should be viewed as a supplemental measure rather than an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt maturities. We believe free cash flow provides useful supplemental information to investors regarding our current cash flow, along with other GAAP measures (such as cash flows from operating and investing activities), to determine our financial condition, and to compare our operating performance to other communications, entertainment and media companies. Free cash flow is calculated as follows (in thousands):follows:
| | | | Unaudited | | | | | | | |
| | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2013 |
| 2012 |
| 2011 | 2016 | | 2015 | | 2014 |
| Cash Flow information | | | | | | | | | |
|
|
| Net cash provided by operating activities | $ | 1,102,832 |
| | $ | 806,765 |
| | $ | 543,630 |
| $ | 1,719,237 |
| | $ | 1,244,051 |
| | $ | 1,253,244 |
|
| Net cash used in investing activities | $ | (700,688 | ) | | $ | (97,319 | ) | | $ | (127,888 | ) | $ | (210,124 | ) | | $ | (138,858 | ) | | $ | (96,324 | ) |
| Net cash used in financing activities | $ | (788,284 | ) | | $ | (962,491 | ) | | $ | (228,443 | ) | $ | (1,407,012 | ) | | $ | (1,141,079 | ) | | $ | (1,144,001 | ) |
| Free Cash Flow | | | | | | | | | |
|
|
| Net cash provided by operating activities | $ | 1,102,832 |
| | $ | 806,765 |
| | $ | 543,630 |
| $ | 1,719,237 |
| | $ | 1,244,051 |
| | $ | 1,253,244 |
|
| Additions to property and equipment | (173,617 | ) | | (97,293 | ) | | (137,429 | ) | (205,829 | ) | | (134,892 | ) | | (121,646 | ) |
| Purchases of restricted and other investments | (1,719 | ) | | (26 | ) | | 9,541 |
| (4,295 | ) | | (3,966 | ) | | — |
|
| Return of capital from investment in unconsolidated entity | | — |
| | — |
| | 24,178 |
|
| Pre-1972 sound recordings legal settlement | | — |
| | 210,000 |
| | — |
|
| Free cash flow | $ | 927,496 |
|
| $ | 709,446 |
| | $ | 415,742 |
| $ | 1,509,113 |
| | $ | 1,315,193 |
| | $ | 1,155,776 |
|
New vehicle consumer conversion rate- is defined as the percentage of owners and lessees of new vehicles that receive our satellite radio service and convert to become self-paying subscribers after the initial promotion period. At the time satellite radio enabled vehicles are sold or leased, the owners or lessees generally receive trial subscriptions ranging from three to twelve months. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure conversion rate three months after the period in which the trial service ends. The metric excludes rental and fleet vehicles.
Subscriber acquisition cost, per gross subscriber additioninstallation- or SAC, per gross subscriber addition,installation, is derived from subscriber acquisition costs and margins from the sale of radios and accessories, excluding purchase price accounting adjustments, divided by the number of gross subscriber additionssatellite radio installations in new vehicles and shipments of aftermarket radios for the period. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit of amortization of deferred credits on executory contracts recognized at the Merger date attributable to an OEM. SAC, per gross subscriber addition,installation, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):follows:
|
| | | | | | | | | | | |
| | Unaudited |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Subscriber acquisition costs (GAAP) | $ | 495,610 |
| | $ | 474,697 |
| | $ | 434,482 |
|
| Less: margin from direct sales of radios and accessories (GAAP) | (54,095 | ) | | (41,690 | ) | | (37,956 | ) |
| Add: purchase price accounting adjustments | 64,365 |
| | 90,503 |
| | 85,491 |
|
| | $ | 505,880 |
| | $ | 523,510 |
| | $ | 482,017 |
|
| Gross subscriber additions | 10,136,381 |
| | 9,617,771 |
| | 8,696,020 |
|
| SAC, per gross subscriber addition | $ | 50 |
|
| $ | 54 |
| | $ | 55 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
| Subscriber acquisition costs | $ | 512,809 |
| | $ | 532,599 |
| | $ | 493,464 |
|
| Less: margin from sales of radios and accessories | (78,065 | ) | | (68,199 | ) | | (60,264 | ) |
| $ | 434,744 |
| | $ | 464,400 |
| | $ | 433,200 |
|
| Installations | 14,203 |
| | 14,041 |
| | 12,788 |
|
| SAC, per installation | $ | 31 |
| | $ | 33 |
| | $ | 34 |
|
Supplementary discussion for Sirius XM:
The consolidated statements of comprehensive income of Sirius XM are essentially identical to the consolidated statements of comprehensive income of Holdings, except for the following:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Net income attributable to Holdings | $ | 377,215 |
| | $ | 3,472,702 |
| | $ | 426,961 |
|
| Loss on change in value of derivative for forward contract with Liberty Media included in Holdings' consolidated statements of comprehensive income (a) | 23,106 |
| | — |
| | — |
|
| Loss on change in fair value of 7% Exchangeable Senior Subordinated Notes due 2014 included in Sirius XM's consolidated statements of comprehensive income (b) | (466,815 | ) | | — |
| | — |
|
| Net income attributable to Sirius XM's sole stockholder | $ | (66,494 | ) | | $ | 3,472,702 |
| | $ | 426,961 |
|
| |
(a) | The fair value of the Share Repurchase Agreement with Liberty Media is recorded in Holdings' consolidated balance sheet, with changes in fair value recorded in Holdings' statements of comprehensive income. The impact of the Share Repurchase Agreement is excluded from Sirius XM's financial statements as the publicly traded common stock being repurchased by Liberty Media resides at Holdings, effective November 15, 2013. |
| |
(b) | The additional fair value in excess of the carrying amount associated with the 7% Exchangeable Senior Subordinated Notes due 2014 is recorded in Sirius XM's consolidated balance sheet, with changes in fair value recorded in Sirius XM's statements of comprehensive income. This is eliminated in Holdings' consolidated balance sheets and statements of comprehensive income.
|
For a discussion and analysis of Sirius XM's financial condition and results, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
As of December 31, 20132016, we did not hold or issue any free-standing derivatives. We hold investments in marketable securities consisting of money market funds and certificates of deposit and investments in debt and equity securities of other entities. We classify our investments in marketable securities as available-for-sale.deposit. These securities are consistent with the objectives contained within our investment policy. The basic objectives of our investment policy are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing yield.
Our debt includes fixed rate instruments and the fair market value of our debt is sensitive to changes in interest rates. OurSirius XM's borrowings under the Senior Secured Revolving Credit Facility (the "Credit Facility") carry a variable interest rate based on LIBOR plus an applicable rate based on ourits debt to operating cash flow ratio. Under our current policies, weWe currently do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See the Index to Consolidated Financial Statements and financial statements and financial statement schedule contained in Item 15 herein.herein, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Controls and Procedures
AsWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of December 31, 2013, anachieving the desired control objectives. An evaluation was performed under the supervision and with the participation of our management, including James E. Meyer, our Chief Executive Officer, and David J. Frear, our Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act). as of December 31, 2016. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2013.2016 at the reasonable assurance level. There has been no change in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the year endedDecember 31, 20132016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our internal control over financial reporting. Our management used the framework inupdated Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992 to perform this evaluation. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was effective as of December 31, 2013.2016.
KPMG LLP, an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Annual Report on Form 10-K, has issued its report on the effectiveness of our internal control over financial reporting which follows this report.
Audit Report of the Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 20132016 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their audit report appearing on page F-2F-3 of this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
| |
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
| |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information about our executive officers is contained in the discussion entitled “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K.
The additional information required by this Item 10 is incorporated in this report by reference to the applicable information in Holdings’our definitive proxy statement for the 20142017 annual meeting of stockholders set forth under the captions Stock Ownership, Governance of the Company, Item 1. Election of Directors and Item 2.3. Ratification of Independent Registered Public Accountants, which we expect to file with the Securities and Exchange Commission prior to April 30, 2014.May 1, 2017.
Code of Ethics
We have adopted a code of ethics that applies to all employees, including executive officers, and to directors. The Code of Ethics is available on the Corporate Governance page of our website at www.siriusxm.com. If we ever were to amend or waive any provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, we intend to satisfy our disclosure obligations with respect to any such waiver or amendment by posting such information on our internet website set forth above rather than filing a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
| |
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated in this report by reference to the applicable information in Holdings’our definitive proxy statement for the 20142017 annual meeting of stockholders set forth under the captions Item 1. Election of Directors Executive Compensationand, Item 2. Ratification of Independent Registered Public AccountantsExecutive Compensation, which we expect to file with the Securities and Exchange Commission prior to April 30, 2014.May 1, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
| |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Certain information required by this item is set forth under the heading “Equity Compensation Plan Information” in Part II, Item 5, of this report.
The additional information required by this Item 12 is incorporated in this report by reference to the applicable information in Holdings’our definitive proxy statement for the 20142017 annual meeting of stockholders set forth under the caption Stock Ownership, which we expect to file with the Securities and Exchange Commission prior to April 30, 2014.May 1, 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
| |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 is incorporated in this report by reference to the applicable information in Holdings’our definitive proxy statement for the 20142017 annual meeting of stockholders set forth under the captions Governance of the Company and Item 1. Election of Directors,which we expect to file with the Securities and Exchange Commission prior to April 30, 2014.May 1, 2017.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
| |
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 is incorporated in this report by reference to the applicable information in Holdings’our definitive proxy statement for the 20142017 annual meeting of stockholders set forth under the caption Item 2.3. Ratification of Independent Registered Public Accountants -Principal Accountant Fees and Services, which we expect to file with the Securities and Exchange Commission prior to April 30, 2014.May 1, 2017.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Documents filed as part of this report:
(1) Financial Statements. See Index to Consolidated Financial Statements appearing on page F-1.
(2) Financial Statement Schedules. See Index to Consolidated Financial Statements appearing on page F-1.
(3) Exhibits. See Exhibit Index following this report, which is incorporated herein by reference.
| |
| ITEM 16. | FORM 10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 4th2nd day of February 2014.2017.
|
| |
| |
| SIRIUS XM HOLDINGS INC. |
| | | |
| By: | | /s/ DAVID J. FREAR |
| | | David J. Frear |
| | | Senior Executive Vice President and |
| | Chief Financial Officer |
| | | (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
| | | |
| Signature | | Title | Date |
| | | | |
/s/ GREGORY B. MAFFEI | | Chairman of the Board of Directors and Director | February 4, 20142, 2017 |
| (Gregory B. Maffei) | |
/s/ JAMES E. MEYER | | Chief Executive Officer and Director (Principal Executive Officer) | February 4, 20142, 2017 |
| (James E. Meyer) | |
/s/ DAVID J. FREAR | | Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) | February 4, 20142, 2017 |
| (David J. Frear) | |
/s/ THOMAS D. BARRY | | Senior Vice President and Controller (Principal Accounting Officer) | February 4, 20142, 2017 |
| (Thomas D. Barry) | |
/s/ JOAN L. AMBLE | | Director | February 4, 20142, 2017 |
| (Joan L. Amble) | |
/s/ ANTHONY J. BATES
| | Director | February 4, 2014 |
(Anthony J. Bates) | |
/s/ GEORGE W. BODENHEIMER | | Director | February 4, 20142, 2017 |
| (George W. Bodenheimer) | |
/s/ DMAVIDARK J. A. FD. CLOWERSARLETON | | Director | February 4, 20142, 2017 |
(David J. A. Flowers)Mark D. Carleton) | |
/s/ EDDY W. HARTENSTEIN | | Director | February 4, 20142, 2017 |
| (Eddy W. Hartenstein) | |
/s/ JAMES P. HOLDEN | | Director | February 4, 20142, 2017 |
| (James P. Holden) | |
/s/ EVAN D. MALONE | | Director | February 4, 20142, 2017 |
| (Evan D. Malone) | |
/s/ JAMES F. MOONEY | | Director | February 4, 20142, 2017 |
| (James F. Mooney) | |
/s/ CARL E. VOGEL | | Director | February 4, 20142, 2017 |
| (Carl E. Vogel) | |
/s/ VANESSA A. WITTMAN | | Director | February 4, 20142, 2017 |
| (Vanessa A. Wittman) | |
/s/ DAVID M. ZASLAV | | Director | February 4, 20142, 2017 |
| (David M. Zaslav) | |
50SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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SIRIUS XM HOLDINGS INC. | |
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SIRIUS XM RADIO INC. | |
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sirius XM Holdings Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Sirius XM Holdings Inc. and subsidiaries as of December 31, 20132016 and 2012,2015, and the related consolidated statements of comprehensive income, stockholders'stockholders’ (deficit) equity, and cash flows for each of the years in the three-year period ended December 31, 2013.2016. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in Item 15(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sirius XM Holdings Inc. and subsidiaries as of December 31, 20132016 and 2012,2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013,2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presentpresents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for share-based payments in 2016 due to the adoption of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sirius XM Holdings Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2013,2016, based on criteria established in Internal Control -– Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 4, 20142, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
New York, New York
February 4, 20142, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sirius XM Holdings Inc. and subsidiaries:
We have audited Sirius XM Holdings Inc. and subsidiaries'subsidiaries’ internal control over financial reporting as of December 31, 2013,2016, based on criteria established inInternal Control -– Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sirius XM Holdings Inc.'s and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sirius XM Holdings Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2016, based on criteria established in Internal Control -– Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sirius XM Holdings Inc. and subsidiaries as of December 31, 20132016 and 2012,2015, and the related consolidated statements of comprehensive income, stockholders'stockholders’ (deficit) equity, and cash flows for each of the years in the three-year period ended December 31, 2013,2016, and our report dated February 4, 20142, 2017 expressed an unqualified opinion on those consolidated financial statements.
New York, New York
February 4, 2014
Report of Independent Registered Public Accounting Firm
The Board of Directors
Sirius XM Radio Inc. and subsidiaries:
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Sirius XM Radio Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income, stockholder equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sirius XM Radio Inc. and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013 in accordance with U.S. generally accepted accounting principles.
New York, New York
February 4, 20142, 2017
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| For the Years Ended December 31, | | For the Years Ended December 31, |
| (in thousands, except per share data) | 2013 | | 2012 | | 2011 | | 2016 | | 2015 | | 2014 |
| Revenue: |
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| | | | | | | | |
| Subscriber revenue | $ | 3,284,660 |
| | $ | 2,962,665 |
| | $ | 2,595,414 |
| | $ | 4,196,852 |
| | $ | 3,824,793 |
| | $ | 3,554,302 |
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| Advertising revenue | 89,288 |
| | 82,320 |
| | 73,672 |
| | 138,231 |
| | 122,292 |
| | 100,982 |
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| Equipment revenue | 80,573 |
| | 73,456 |
| | 71,051 |
| | 118,947 |
| | 110,923 |
| | 104,661 |
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| Other revenue | 344,574 |
| | 283,599 |
| | 274,387 |
| | 563,190 |
| | 512,050 |
| | 421,150 |
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| Total revenue | 3,799,095 |
| | 3,402,040 |
| | 3,014,524 |
| | 5,017,220 |
| | 4,570,058 |
| | 4,181,095 |
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| Operating expenses: |
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| Cost of services: |
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| Revenue share and royalties | 677,642 |
| | 551,012 |
| | 471,149 |
| | 1,108,515 |
| | 1,034,832 |
| | 810,028 |
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| Programming and content | 290,323 |
| | 278,997 |
| | 281,234 |
| | 353,779 |
| | 293,091 |
| | 297,313 |
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| Customer service and billing | 320,755 |
| | 294,980 |
| | 259,719 |
| | 387,131 |
| | 377,908 |
| | 370,585 |
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| Satellite and transmission | 79,292 |
| | 72,615 |
| | 75,902 |
| | 103,020 |
| | 94,609 |
| | 86,013 |
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| Cost of equipment | 26,478 |
| | 31,766 |
| | 33,095 |
| | 40,882 |
| | 42,724 |
| | 44,397 |
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| Subscriber acquisition costs | 495,610 |
| | 474,697 |
| | 434,482 |
| | 512,809 |
| | 532,599 |
| | 493,464 |
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| Sales and marketing | 291,024 |
| | 248,905 |
| | 222,773 |
| | 386,724 |
| | 354,189 |
| | 336,480 |
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| Engineering, design and development | 57,969 |
| | 48,843 |
| | 53,435 |
| | 82,146 |
| | 64,403 |
| | 62,784 |
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| General and administrative | 262,135 |
| | 261,905 |
| | 238,738 |
| | 341,106 |
| | 324,801 |
| | 293,938 |
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| Depreciation and amortization | 253,314 |
| | 266,295 |
| | 267,880 |
| | 268,979 |
| | 272,214 |
| | 266,423 |
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| Total operating expenses | 2,754,542 |
| | 2,530,015 |
| | 2,338,407 |
| | 3,585,091 |
| | 3,391,370 |
| | 3,061,425 |
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| Income from operations | 1,044,553 |
| | 872,025 |
| | 676,117 |
| | 1,432,129 |
| | 1,178,688 |
| | 1,119,670 |
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| Other income (expense): |
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| Interest expense, net of amounts capitalized | (204,671 | ) | | (265,321 | ) | | (304,938 | ) | |
| Interest expense | | | (331,225 | ) | | (299,103 | ) | | (269,010 | ) |
| Loss on extinguishment of debt and credit facilities, net | (190,577 | ) | | (132,726 | ) | | (7,206 | ) | | (24,229 | ) | | — |
| | — |
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| Interest and investment income | 6,976 |
| | 716 |
| | 73,970 |
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| Loss on change in value of derivatives | (20,393 | ) | | — |
| | — |
| | — |
| | — |
| | (34,485 | ) |
| Other income (loss) | 1,204 |
| | (226 | ) | | 3,252 |
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| Other income | | | 14,985 |
| | 12,379 |
| | 14,611 |
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| Total other expense | (407,461 | ) | | (397,557 | ) | | (234,922 | ) | | (340,469 | ) | | (286,724 | ) | | (288,884 | ) |
| Income before income taxes | 637,092 |
| | 474,468 |
| | 441,195 |
| | 1,091,660 |
| | 891,964 |
| | 830,786 |
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| Income tax (expense) benefit | (259,877 | ) | | 2,998,234 |
| | (14,234 | ) | |
| Income tax expense | | | (345,727 | ) | | (382,240 | ) | | (337,545 | ) |
| Net income | $ | 377,215 |
| | $ | 3,472,702 |
| | $ | 426,961 |
| | $ | 745,933 |
| | $ | 509,724 |
| | $ | 493,241 |
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| Realized loss on XM Canada investment foreign currency translation adjustment | — |
| | — |
| | 6,072 |
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| Foreign currency translation adjustment, net of tax | (428 | ) | | 49 |
| | (140 | ) | | 363 |
| | (100 | ) | | (94 | ) |
| Total comprehensive income | $ | 376,787 |
| | $ | 3,472,751 |
| | $ | 432,893 |
| | $ | 746,296 |
| | $ | 509,624 |
| | $ | 493,147 |
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| Net income per common share: |
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| Basic | $ | 0.06 |
| | $ | 0.55 |
| | $ | 0.07 |
| | $ | 0.15 |
| | $ | 0.09 |
| | $ | 0.09 |
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| Diluted | $ | 0.06 |
| | $ | 0.51 |
| | $ | 0.07 |
| | $ | 0.15 |
| | $ | 0.09 |
| | $ | 0.08 |
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| Weighted average common shares outstanding: |
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| | | | | | |
| Basic | 6,227,646 |
| | 4,209,073 |
| | 3,744,606 |
| | 4,917,050 |
| | 5,375,707 |
| | 5,788,944 |
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| Diluted | 6,384,791 |
| | 6,873,786 |
| | 6,500,822 |
| | 4,964,728 |
| | 5,435,166 |
| | 5,862,020 |
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| Dividends declared per common share | | | $ | 0.01 |
| | $ | — |
| | $ | — |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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| | | | | | | |
| | As of December 31, |
| (in thousands, except per share data) | 2016 | | 2015 |
| ASSETS |
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| Current assets: | |
| | |
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| Cash and cash equivalents | $ | 213,939 |
| | $ | 111,838 |
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| Receivables, net | 223,029 |
| | 234,782 |
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| Inventory, net | 20,363 |
| | 22,295 |
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| Related party current assets | 6,170 |
| | 5,941 |
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| Prepaid expenses and other current assets | 179,148 |
| | 187,033 |
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| Total current assets | 642,649 |
| | 561,889 |
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| Property and equipment, net | 1,398,693 |
| | 1,415,401 |
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| Intangible assets, net | 2,544,801 |
| | 2,593,346 |
|
| Goodwill | 2,205,107 |
| | 2,205,107 |
|
| Related party long-term assets | 8,918 |
| | — |
|
| Deferred tax assets | 1,084,330 |
| | 1,115,731 |
|
| Other long-term assets | 119,097 |
| | 155,188 |
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| Total assets | $ | 8,003,595 |
| | $ | 8,046,662 |
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| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | |
| | |
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| Current liabilities: | |
| | |
|
| Accounts payable and accrued expenses | $ | 713,034 |
| | $ | 625,313 |
|
| Accrued interest | 114,633 |
| | 91,655 |
|
| Current portion of deferred revenue | 1,832,609 |
| | 1,771,915 |
|
| Current maturities of long-term debt | 5,485 |
| | 4,764 |
|
| Related party current liabilities | 2,840 |
| | 2,840 |
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| Total current liabilities | 2,668,601 |
| | 2,496,487 |
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| Deferred revenue | 176,319 |
| | 157,609 |
|
| Long-term debt | 5,842,764 |
| | 5,443,614 |
|
| Related party long-term liabilities | 7,955 |
| | 10,795 |
|
| Deferred tax liabilities | 6,418 |
| | 6,681 |
|
| Other long-term liabilities | 93,553 |
| | 97,967 |
|
| Total liabilities | 8,795,610 |
| | 8,213,153 |
|
| Commitments and contingencies (Note 14) |
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|
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| Stockholders’ (deficit) equity: | |
| | |
|
| Common stock, par value $0.001; 9,000,000 shares authorized; 4,746,047 and 5,153,451 shares issued; 4,740,947 and 5,147,647 outstanding at December 31, 2016 and December 31, 2015, respectively | 4,745 |
| | 5,153 |
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| Accumulated other comprehensive loss, net of tax | (139 | ) | | (502 | ) |
| Additional paid-in capital | 3,117,666 |
| | 4,783,795 |
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| Treasury stock, at cost; 5,100 and 5,804 shares of common stock at December 31, 2016 and December 31, 2015, respectively | (22,906 | ) | | (23,727 | ) |
| Accumulated deficit | (3,891,381 | ) | | (4,931,210 | ) |
| Total stockholders’ (deficit) equity | (792,015 | ) | | (166,491 | ) |
| Total liabilities and stockholders’ (deficit) equity | $ | 8,003,595 |
| | $ | 8,046,662 |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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| | | | | | | |
| | As of December 31, |
| | 2013 | | 2012 |
| (in thousands, except share and per share data) | | | |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 134,805 |
| | $ | 520,945 |
|
| Accounts receivable, net | 103,937 |
| | 106,142 |
|
| Receivables from distributors | 88,975 |
| | 104,425 |
|
| Inventory, net | 13,863 |
| | 25,337 |
|
| Prepaid expenses | 110,530 |
| | 122,157 |
|
| Related party current assets | 9,145 |
| | 13,167 |
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| Deferred tax asset | 937,598 |
| | 923,972 |
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| Other current assets | 20,160 |
| | 12,037 |
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| Total current assets | 1,419,013 |
| | 1,828,182 |
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| Property and equipment, net | 1,594,574 |
| | 1,571,922 |
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| Long-term restricted investments | 5,718 |
| | 3,999 |
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| Deferred financing fees, net | 12,604 |
| | 38,677 |
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| Intangible assets, net | 2,700,062 |
| | 2,519,610 |
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| Goodwill | 2,204,553 |
| | 1,815,365 |
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| Related party long-term assets | 30,164 |
| | 44,954 |
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| Long-term deferred tax asset | 868,057 |
| | 1,219,256 |
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| Other long-term assets | 10,035 |
| | 12,878 |
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| Total assets | $ | 8,844,780 |
| | $ | 9,054,843 |
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 578,333 |
| | $ | 587,652 |
|
| Accrued interest | 42,085 |
| | 33,954 |
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| Current portion of deferred revenue | 1,586,611 |
| | 1,474,138 |
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| Current portion of deferred credit on executory contracts | 3,781 |
| | 207,854 |
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| Current maturities of long-term debt | 496,815 |
| | 4,234 |
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| Current maturities of long-term related party debt | 10,959 |
| | — |
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| Related party current liabilities | 20,320 |
| | 6,756 |
|
| Total current liabilities | 2,738,904 |
| | 2,314,588 |
|
| Deferred revenue | 149,026 |
| | 159,501 |
|
| Deferred credit on executory contracts | 1,394 |
| | 5,175 |
|
| Long-term debt | 3,093,821 |
| | 2,222,080 |
|
| Long-term related party debt | — |
| | 208,906 |
|
| Related party long-term liabilities | 16,337 |
| | 18,966 |
|
| Other long-term liabilities | 99,556 |
| | 86,062 |
|
| Total liabilities | 6,099,038 |
| | 5,015,278 |
|
| Commitments and contingencies (Note 16) |
| |
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| Stockholders’ equity: | | | |
| Convertible perpetual preferred stock, series B-1, par value $0.001 (liquidation preference of $0.001 per share); 50,000,000 authorized and 0 and 6,250,100 shares issued and outstanding at December 31, 2013 and 2012, respectively | — |
| | 6 |
|
| Common stock, par value $0.001; 9,000,000,000 shares authorized at December 31, 2013 and 2012; 6,096,220,526 and 5,262,440,085 shares issued and outstanding at December 31, 2013 and 2012, respectively | 6,096 |
| | 5,263 |
|
| Accumulated other comprehensive (loss) income, net of tax | (308 | ) | | 120 |
|
| Additional paid-in capital | 8,674,129 |
| | 10,345,566 |
|
| Accumulated deficit | (5,934,175 | ) | | (6,311,390 | ) |
| Total stockholders’ equity | 2,745,742 |
| | 4,039,565 |
|
| Total liabilities and stockholders’ equity | $ | 8,844,780 |
| | $ | 9,054,843 |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 January 1, 2014 | | 6,096,220 |
| | $ | 6,096 |
| | $ | (308 | ) | | $ | 8,674,129 |
| | — |
| | $ | — |
| | $ | (5,934,175 | ) | | $ | 2,745,742 |
|
| Comprehensive income, net of tax | | — |
| | — |
| | (94 | ) | | — |
| | — |
| | — |
| | 493,241 |
| | 493,147 |
|
| Share-based payment expense | | — |
| | — |
| | — |
| | 78,212 |
| | — |
| | — |
| | — |
| | 78,212 |
|
| Exercise of options and vesting of restricted stock units | | 15,960 |
| | 16 |
| | — |
| | 315 |
| | — |
| | — |
| | — |
| | 331 |
|
| Minimum withholding taxes on net share settlement of stock-based compensation | | — |
| | — |
| | — |
| | (37,320 | ) | | — |
| | — |
| | — |
| | (37,320 | ) |
| Conversion of Exchangeable Notes to common stock | | 272,856 |
| | 273 |
| | — |
| | 502,097 |
| | — |
| | — |
| | — |
| | 502,370 |
|
| Issuance of common stock upon exercise of warrants | | 99 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock repurchased | | — |
| | — |
| | — |
| | — |
| | 739,016 |
| | (2,472,645 | ) | | — |
| | (2,472,645 | ) |
| Common stock retired | | (731,606 | ) | | (732 | ) | | — |
| | (2,445,879 | ) | | (731,606 | ) | | 2,446,611 |
| | — |
| | — |
|
| Balance at December 31, 2014 | | 5,653,529 |
| | $ | 5,653 |
| | $ | (402 | ) | | $ | 6,771,554 |
| | 7,410 |
| | $ | (26,034 | ) | | $ | (5,440,934 | ) | | $ | 1,309,837 |
|
| Comprehensive income, net of tax | | — |
| | — |
| | (100 | ) | | — |
| | — |
| | — |
| | 509,724 |
| | 509,624 |
|
| Share-based payment expense | | — |
| | — |
| | — |
| | 84,310 |
| | — |
| | — |
| | — |
| | 84,310 |
|
| Exercise of options and vesting of restricted stock units | | 19,740 |
| | 20 |
| | — |
| | 240 |
| | — |
| | — |
| | — |
| | 260 |
|
| Minimum withholding taxes on net share settlement of stock-based compensation | | — |
| | — |
| | — |
| | (54,575 | ) | | — |
| | — |
| | — |
| | (54,575 | ) |
| Issuance of common stock upon exercise of warrants | | 6,010 |
| | 6 |
| | — |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
|
| Common stock repurchased | | — |
| | — |
| | — |
| | — |
| | 524,222 |
| | (2,015,947 | ) | | — |
| | (2,015,947 | ) |
| Common stock retired | | (525,828 | ) | | (526 | ) | | — |
| | (2,017,728 | ) | | (525,828 | ) | | 2,018,254 |
| | — |
| | — |
|
| 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 | | — |
| | — |
| | 363 |
| | — |
| | — |
| | — |
| | 745,933 |
| | 746,296 |
|
| Share-based payment expense | | — |
| | — |
| | — |
| | 97,539 |
| | — |
| | — |
| | — |
| | 97,539 |
|
| Exercise of options and vesting of restricted stock units | | 13,411 |
| | 13 |
| | — |
| | 335 |
| | — |
| | — |
| | — |
| | 348 |
|
| Minimum withholding taxes on net share settlement of stock-based compensation | | — |
| | — |
| | — |
| | (42,827 | ) | | — |
| | — |
| | — |
| | (42,827 | ) |
| Cash dividends paid on common shares | | — |
| | — |
| | — |
| | (48,079 | ) | | — |
| | — |
| | — |
| | (48,079 | ) |
| Common stock repurchased | | — |
| | — |
| | — |
| | — |
| | 420,111 |
| | (1,672,697 | ) | | — |
| | (1,672,697 | ) |
| Common stock retired | | (420,815 | ) | | (421 | ) | | — |
| | (1,673,097 | ) | | (420,815 | ) | | 1,673,518 |
| | — |
| | — |
|
| Balance at December 31, 2016 | | 4,746,047 |
| | $ | 4,745 |
| | $ | (139 | ) | | $ | 3,117,666 |
| | 5,100 |
| | $ | (22,906 | ) | | $ | (3,891,381 | ) | | $ | (792,015 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Perpetual
Preferred Stock, Series B-1 | | Common Stock | | | | | | Treasury Stock | | | | |
| (in thousands, except share data) | Shares | | Amount | | Shares | | Amount | | Accumulated Other Comprehensive Income (Loss) | | Additional
Paid-in Capital | | Shares | | Amount | | Accumulated Deficit | | Total
Stockholders’ Equity |
| Balance at January 1, 2011 | 12,500,000 |
| | $ | 13 |
| | 3,933,195,112 |
| | $ | 3,933 |
| | $ | (5,861 | ) | | $ | 10,420,604 |
| | — |
| | $ | — |
| | $ | (10,211,053 | ) | | $ | 207,636 |
|
| Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 5,932 |
| | — |
| | — |
| | — |
| | 426,961 |
| | 432,893 |
|
| Issuance of common stock to employees and employee benefit plans, net of forfeitures | — |
| | — |
| | 1,882,801 |
| | 2 |
| | — |
| | 3,480 |
| | — |
| | — |
| | — |
| | 3,482 |
|
| Share-based payment expense | — |
| | — |
| | — |
| | — |
| | — |
| | 48,581 |
| | — |
| | — |
| | — |
| | 48,581 |
|
| Exercise of options and vesting of restricted stock units | — |
| | — |
| | 13,401,048 |
| | 13 |
| | — |
| | 11,540 |
| | — |
| | — |
| | — |
| | 11,553 |
|
| Issuance of common stock upon exercise of warrants | — |
| | — |
| | 7,122,951 |
| | 7 |
| | — |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
|
| Return of shares under share borrow agreements | — |
| | — |
| | (202,399,983 | ) | | (202 | ) | | — |
| | 202 |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2011 | 12,500,000 |
| | $ | 13 |
| | 3,753,201,929 |
| | $ | 3,753 |
| | $ | 71 |
| | $ | 10,484,400 |
| | — |
| | $ | — |
| | $ | (9,784,092 | ) | | $ | 704,145 |
|
| Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 49 |
| | — |
| | — |
| | — |
| | 3,472,702 |
| | 3,472,751 |
|
| Issuance of common stock to employees and employee benefit plans, net of forfeitures | — |
| | — |
| | 1,571,175 |
| | 2 |
| | — |
| | 3,521 |
| | — |
| | — |
| | — |
| | 3,523 |
|
| Share-based payment expense | — |
| | — |
| | — |
| | — |
| | — |
| | 60,299 |
| | — |
| | — |
| | — |
| | 60,299 |
|
| Exercise of options | — |
| | — |
| | 214,199,297 |
| | 214 |
| | — |
| | 125,695 |
| | — |
| | — |
| | — |
| | 125,909 |
|
| Cash dividends paid on common shares ($0.05) | — |
| | — |
| | — |
| | — |
| | — |
| | (262,387 | ) | | — |
| | — |
| | — |
| | (262,387 | ) |
| Cash dividends paid on preferred shares on as-converted basis | — |
| | — |
| | — |
| | — |
| | — |
| | (64,675 | ) | | — |
| | — |
| | — |
| | (64,675 | ) |
| Conversion of preferred stock to common stock | (6,249,900 | ) | | (7 | ) | | 1,293,467,684 |
| | 1,294 |
| | — |
| | (1,287 | ) | | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2012 | 6,250,100 |
| | $ | 6 |
| | 5,262,440,085 |
| | $ | 5,263 |
| | $ | 120 |
| | $ | 10,345,566 |
| | — |
| | $ | — |
| | $ | (6,311,390 | ) | | $ | 4,039,565 |
|
| Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | (428 | ) | | — |
| | — |
| | — |
| | 377,215 |
| | 376,787 |
|
| Share-based payment expense | — |
| | — |
| | — |
| | — |
| | — |
| | 68,876 |
| | — |
| | — |
| | — |
| | 68,876 |
|
| Exercise of options and vesting of restricted stock units | — |
| | — |
| | 32,841,381 |
| | 32 |
| | — |
| | 19,396 |
| | — |
| | — |
| | — |
| | 19,428 |
|
| Minimum withholding taxes on net share settlement of stock-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | (46,342 | ) | | — |
| | — |
| | — |
| | (46,342 | ) |
| Conversion of preferred stock to common stock | (6,250,100 | ) | | (6 | ) | | 1,293,509,076 |
| | 1,293 |
| | — |
| | (1,287 | ) | | — |
| | — |
| | — |
| | — |
|
| Conversion of Exchangeable Notes to common stock | — |
| | — |
| | 27,687,850 |
| | 28 |
| | — |
| | 45,069 |
| | — |
| | — |
| | — |
| | 45,097 |
|
| Common stock repurchased | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 520,257,866 |
| | (1,764,969 | ) | | — |
| | (1,764,969 | ) |
| Common stock retired | — |
| | — |
| | (520,257,866 | ) | | (520 | ) | | — |
| | (1,764,449 | ) | | (520,257,866 | ) | | 1,764,969 |
| | — |
| | — |
|
| Initial fair value of forward contract | — |
| | — |
| | — |
| | — |
| | — |
| | 7,300 |
| | — |
| | — |
| | — |
| | 7,300 |
|
| Balance at December 31, 2013 | — |
| | $ | — |
| | 6,096,220,526 |
| | $ | 6,096 |
| | $ | (308 | ) | | $ | 8,674,129 |
| | — |
| | $ | — |
| | $ | (5,934,175 | ) | | $ | 2,745,742 |
|
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands) | 2013 |
| 2012 |
| 2011 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 377,215 |
| | $ | 3,472,702 |
| | $ | 426,961 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
| |
| |
|
| Depreciation and amortization | 253,314 |
| | 266,295 |
| | 267,880 |
|
| Non-cash interest expense, net of amortization of premium | 21,698 |
| | 35,924 |
| | 39,515 |
|
| Provision for doubtful accounts | 39,016 |
| | 34,548 |
| | 33,164 |
|
| Amortization of deferred income related to equity method investment | (2,776 | ) | | (2,776 | ) | | (2,776 | ) |
| Loss on extinguishment of debt and credit facilities, net | 190,577 |
| | 132,726 |
| | 7,206 |
|
| Gain on merger of unconsolidated entities | — |
| | — |
| | (75,768 | ) |
| (Gain) loss on unconsolidated entity investments, net | (5,865 | ) | | 420 |
| | 6,520 |
|
| Dividend received from unconsolidated entity investment | 22,065 |
| | 1,185 |
| | — |
|
| Loss on disposal of assets | 351 |
| | 657 |
| | 269 |
|
| Loss on change in value of derivative | 20,393 |
| | — |
| | — |
|
| Share-based payment expense | 68,876 |
| | 63,822 |
| | 53,190 |
|
| Deferred income taxes | 259,787 |
| | (3,001,818 | ) | | 8,264 |
|
| Other non-cash purchase price adjustments | (207,854 | ) | | (289,050 | ) | | (275,338 | ) |
| Distribution from investment in unconsolidated entity | — |
| | — |
| | 4,849 |
|
| Changes in operating assets and liabilities: | | |
|
| |
|
|
| Accounts receivable | (36,189 | ) | | (38,985 | ) | | (13,211 | ) |
| Receivables from distributors | 20,944 |
| | (19,608 | ) | | (17,241 | ) |
| Inventory | 11,474 |
| | 11,374 |
| | (14,793 | ) |
| Related party assets | 2,031 |
| | 9,523 |
| | 30,036 |
|
| Prepaid expenses and other current assets | 16,788 |
| | 647 |
| | 8,525 |
|
| Other long-term assets | 2,973 |
| | 22,779 |
| | 36,490 |
|
| Accounts payable and accrued expenses | (44,009 | ) | | 46,043 |
| | (32,010 | ) |
| Accrued interest | 8,131 |
| | (36,451 | ) | | (2,048 | ) |
| Deferred revenue | 73,593 |
| | 101,311 |
| | 55,336 |
|
| Related party liabilities | (1,991 | ) | | (7,545 | ) | | (1,542 | ) |
| Other long-term liabilities | 12,290 |
| | 3,042 |
| | 152 |
|
| Net cash provided by operating activities | 1,102,832 |
| | 806,765 |
| | 543,630 |
|
| Cash flows from investing activities: | | | | | |
| Additions to property and equipment | (173,617 | ) | | (97,293 | ) | | (137,429 | ) |
| Purchases of restricted and other investments | (1,719 | ) | | (26 | ) | | (826 | ) |
| Acquisition of business, net of cash acquired | (525,352 | ) | | — |
| | — |
|
| Release of restricted investments | — |
| | — |
| | 250 |
|
| Return of capital from investment in unconsolidated entity | — |
| | — |
| | 10,117 |
|
| Net cash used in investing activities | (700,688 | ) | | (97,319 | ) | | (127,888 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from exercise of stock options | 21,968 |
| | 123,369 |
| | 11,553 |
|
| Taxes paid in lieu of shares issued for stock-based compensation | (46,342 | ) | | — |
| | — |
|
| Proceeds from long-term borrowings and revolving credit facility, net of costs | 3,156,063 |
| | 383,641 |
| | — |
|
| Payment of premiums on redemption of debt | (175,453 | ) | | (100,615 | ) | | (5,020 | ) |
| Repayment of long-term borrowings and revolving credit facility | (1,782,160 | ) | | (915,824 | ) | | (234,976 | ) |
| Repayment of related party long-term borrowings | (200,000 | ) | | (126,000 | ) | | — |
|
| Common stock repurchased and retired | (1,762,360 | ) | | — |
| | — |
|
| Dividends paid | — |
| | (327,062 | ) | | — |
|
| Net cash used in financing activities | (788,284 | ) | | (962,491 | ) | | (228,443 | ) |
| Net (decrease) increase in cash and cash equivalents | (386,140 | ) | | (253,045 | ) | | 187,299 |
|
| Cash and cash equivalents at beginning of period | 520,945 |
| | 773,990 |
| | 586,691 |
|
| Cash and cash equivalents at end of period | $ | 134,805 |
| | $ | 520,945 |
| | $ | 773,990 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands) | 2016 | | 2015 | | 2014 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 745,933 |
| | $ | 509,724 |
| | $ | 493,241 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
|
|
| Depreciation and amortization | 268,979 |
| | 272,214 |
| | 266,423 |
|
| Non-cash interest expense, net of amortization of premium | 8,608 |
| | 7,872 |
| | 21,039 |
|
| Provision for doubtful accounts | 55,941 |
| | 47,237 |
| | 44,961 |
|
| Amortization of deferred income related to equity method investment | (2,772 | ) | | (2,776 | ) | | (2,776 | ) |
| Loss on extinguishment of debt and credit facilities, net | 24,229 |
|
| — |
| | — |
|
| Gain on unconsolidated entity investments, net | (12,529 | ) | | — |
| | (5,547 | ) |
| Dividend received from unconsolidated entity investment | 7,160 |
| | 14,788 |
| | 17,019 |
|
| Loss on disposal of assets | 12,912 |
| | 7,384 |
| | — |
|
| Loss on change in value of derivatives | — |
| | — |
| | 34,485 |
|
| Share-based payment expense | 108,604 |
| | 84,310 |
| | 78,212 |
|
| Deferred income taxes | 323,562 |
| | 365,499 |
| | 327,461 |
|
| Other non-cash purchase price adjustments | — |
| | (1,394 | ) | | (3,781 | ) |
| Changes in operating assets and liabilities: | |
| | |
| | |
| Receivables | (44,188 | ) | | (61,440 | ) | | (72,628 | ) |
| Inventory | 1,932 |
| | (2,898 | ) | | (5,534 | ) |
| Related party, net | (3,485 | ) | | (14,953 | ) | | (4,303 | ) |
| Prepaid expenses and other current assets | 7,156 |
| | (67,204 | ) | | (1,195 | ) |
| Other long-term assets | 38,835 |
| | (130,741 | ) | | 3,393 |
|
| Accounts payable and accrued expenses | 78,920 |
| | 52,696 |
| | (17,191 | ) |
| Accrued interest | 22,978 |
| | 11,215 |
| | 38,355 |
|
| Deferred revenue | 79,404 |
| | 145,242 |
| | 48,645 |
|
| Other long-term liabilities | (2,942 | ) | | 7,276 |
| | (7,035 | ) |
| Net cash provided by operating activities | 1,719,237 |
| | 1,244,051 |
| | 1,253,244 |
|
| Cash flows from investing activities: | |
| | |
| | |
| Additions to property and equipment | (205,829 | ) | | (134,892 | ) | | (121,646 | ) |
| Purchases of restricted and other investments | (4,295 | ) | | (3,966 | ) | | — |
|
| Acquisition of business, net of cash acquired | — |
| | — |
| | 1,144 |
|
| Return of capital from investment in unconsolidated entity | — |
| | — |
| | 24,178 |
|
| Net cash used in investing activities | (210,124 | ) | | (138,858 | ) | | (96,324 | ) |
| Cash flows from financing activities: | |
| | |
| | |
| Proceeds from exercise of stock options | 348 |
| | 260 |
| | 331 |
|
| Taxes paid in lieu of shares issued for stock-based compensation | (42,824 | ) | | (54,539 | ) | | (37,318 | ) |
| Proceeds from long-term borrowings and revolving credit facility, net of costs | 1,847,143 |
| | 1,728,571 |
| | 2,406,205 |
|
| Payment of premiums on redemption of debt | (19,097 | ) | | — |
|
| — |
|
| Repayment of long-term borrowings and revolving credit facility | (1,470,985 | ) | | (797,117 | ) | | (1,016,420 | ) |
| Common stock repurchased and retired | (1,673,518 | ) | | (2,018,254 | ) | | (2,496,799 | ) |
| Dividends paid | (48,079 | ) |
| — |
|
| — |
|
| Net cash used in financing activities | (1,407,012 | ) | | (1,141,079 | ) | | (1,144,001 | ) |
| Net increase (decrease) in cash and cash equivalents | 102,101 |
| | (35,886 | ) | | 12,919 |
|
| Cash and cash equivalents at beginning of period | 111,838 |
| | 147,724 |
| | 134,805 |
|
| Cash and cash equivalents at end of period | $ | 213,939 |
| | $ | 111,838 |
| | $ | 147,724 |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Continued
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands) | 2013 | | 2012 | | 2011 |
| Supplemental Disclosure of Cash and Non-Cash Flow Information | | | | | |
| Cash paid during the period for: | | | | | |
| Interest, net of amounts capitalized | $ | 169,781 |
| | $ | 262,039 |
| | $ | 258,676 |
|
| Income taxes paid | 2,783 |
| | 4,935 |
| | — |
|
| Acquisition related costs | 2,902 |
| | — |
| | — |
|
| Non-cash investing and financing activities: |
| |
| |
|
| Capital lease obligations incurred to acquire assets | 11,966 |
| | 12,781 |
| | — |
|
| Conversion of Series B preferred stock to common stock | 1,293 |
| | 1,294 |
| | — |
|
| Common stock issuance upon exercise of warrants | — |
| | — |
| | 7 |
|
| Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs | 45,097 |
| | — |
| | — |
|
| Performance incentive payments | 16,900 |
| | — |
| | — |
|
| Goodwill reduced for the exercise and vesting of certain stock awards | 274 |
| | 19,491 |
| | — |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands, except per share data) | 2013 | | 2012 | | 2011 |
| Revenue: | | | | | |
| Subscriber revenue | $ | 3,284,660 |
| | $ | 2,962,665 |
| | $ | 2,595,414 |
|
| Advertising revenue | 89,288 |
| | 82,320 |
| | 73,672 |
|
| Equipment revenue | 80,573 |
| | 73,456 |
| | 71,051 |
|
| Other revenue | 344,574 |
| | 283,599 |
| | 274,387 |
|
| Total revenue | 3,799,095 |
| | 3,402,040 |
| | 3,014,524 |
|
| Operating expenses: |
| |
| |
|
| Cost of services: |
| |
| |
|
| Revenue share and royalties | 677,642 |
| | 551,012 |
| | 471,149 |
|
| Programming and content | 290,323 |
| | 278,997 |
| | 281,234 |
|
| Customer service and billing | 320,755 |
| | 294,980 |
| | 259,719 |
|
| Satellite and transmission | 79,292 |
| | 72,615 |
| | 75,902 |
|
| Cost of equipment | 26,478 |
| | 31,766 |
| | 33,095 |
|
| Subscriber acquisition costs | 495,610 |
| | 474,697 |
| | 434,482 |
|
| Sales and marketing | 291,024 |
| | 248,905 |
| | 222,773 |
|
| Engineering, design and development | 57,969 |
| | 48,843 |
| | 53,435 |
|
| General and administrative | 262,135 |
| | 261,905 |
| | 238,738 |
|
| Depreciation and amortization | 253,314 |
| | 266,295 |
| | 267,880 |
|
| Total operating expenses | 2,754,542 |
| | 2,530,015 |
| | 2,338,407 |
|
| Income from operations | 1,044,553 |
| | 872,025 |
| | 676,117 |
|
| Other income (expense): |
| |
| |
|
| Interest expense, net of amounts capitalized | (204,671 | ) | | (265,321 | ) | | (304,938 | ) |
| Loss on extinguishment of debt and credit facilities, net | (190,577 | ) | | (132,726 | ) | | (7,206 | ) |
| Interest and investment income | 6,976 |
| | 716 |
| | 73,970 |
|
| Loss on fair value of debt and equity instruments | (464,102 | ) | | — |
| | — |
|
| Other income (loss) | 1,204 |
| | (226 | ) | | 3,252 |
|
| Total other expense | (851,170 | ) | | (397,557 | ) | | (234,922 | ) |
| Income before income taxes | 193,383 |
| | 474,468 |
| | 441,195 |
|
| Income tax (expense) benefit | (259,877 | ) | | 2,998,234 |
| | (14,234 | ) |
| Net (loss) income attributable to Sirius XM Radio Inc.'s sole stockholder | $ | (66,494 | ) | | $ | 3,472,702 |
| | $ | 426,961 |
|
| Realized loss on XM Canada investment foreign currency translation adjustment | — |
| | — |
| | 6,072 |
|
| Foreign currency translation adjustment, net of tax | (428 | ) | | 49 |
| | (140 | ) |
| Total comprehensive (loss) income attributable to Sirius XM Radio Inc.'s sole stockholder | $ | (66,922 | ) | | $ | 3,472,751 |
| | $ | 432,893 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands) | 2016 | | 2015 | | 2014 |
| Supplemental Disclosure of Cash and Non-Cash Flow Information | | | | | |
| Cash paid during the period for: | | | | | |
| Interest, net of amounts capitalized | $ | 292,556 |
| | $ | 269,925 |
| | $ | 199,424 |
|
| Income taxes paid | $ | 20,639 |
| | $ | 12,384 |
| | $ | 8,713 |
|
| Non-cash investing and financing activities: | | | | | |
| Capital lease obligations incurred to acquire assets | $ | 6,647 |
| | $ | 7,487 |
| | $ | 719 |
|
| Treasury stock not yet settled | $ | 22,906 |
| | $ | 23,727 |
| | $ | 26,034 |
|
| Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs | $ | — |
| | $ | — |
| | $ | 502,097 |
|
| Purchase price accounting adjustments to goodwill | $ | — |
| | $ | — |
| | $ | 1,698 |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | As of December 31, |
| | 2013 | | 2012 |
| (in thousands, except share and per share data) | | | |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 134,805 |
| | $ | 520,945 |
|
| Accounts receivable, net | 103,937 |
| | 106,142 |
|
| Receivables from distributors | 88,975 |
| | 104,425 |
|
| Inventory, net | 13,863 |
| | 25,337 |
|
| Prepaid expenses | 110,530 |
| | 122,157 |
|
| Related party current assets | 15,861 |
| | 13,167 |
|
| Deferred tax asset | 937,598 |
| | 923,972 |
|
| Other current assets | 20,160 |
| | 12,037 |
|
| Total current assets | 1,425,729 |
| | 1,828,182 |
|
| Property and equipment, net | 1,594,574 |
| | 1,571,922 |
|
| Long-term restricted investments | 5,718 |
| | 3,999 |
|
| Deferred financing fees, net | 12,604 |
| | 38,677 |
|
| Intangible assets, net | 2,700,062 |
| | 2,519,610 |
|
| Goodwill | 2,204,553 |
| | 1,815,365 |
|
| Related party long-term assets | 30,164 |
| | 44,954 |
|
| Long-term deferred tax asset | 868,057 |
| | 1,219,256 |
|
| Other long-term assets | 10,035 |
| | 12,878 |
|
| Total assets | $ | 8,851,496 |
| | $ | 9,054,843 |
|
| LIABILITIES AND STOCKHOLDER EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 578,332 |
| | $ | 587,652 |
|
| Accrued interest | 42,085 |
| | 33,954 |
|
| Current portion of deferred revenue | 1,586,611 |
| | 1,474,138 |
|
| Current portion of deferred credit on executory contracts | 3,781 |
| | 207,854 |
|
| Current maturities of long-term debt | 963,630 |
| | 4,234 |
|
| Current maturities of long-term related party debt | 10,959 |
| | — |
|
| Related party current liabilities | 4,618 |
| | 6,756 |
|
| Total current liabilities | 3,190,016 |
| | 2,314,588 |
|
| Deferred revenue | 149,026 |
| | 159,501 |
|
| Deferred credit on executory contracts | 1,394 |
| | 5,175 |
|
| Long-term debt | 3,093,821 |
| | 2,222,080 |
|
| Long-term related party debt | — |
| | 208,906 |
|
| Related party long-term liabilities | 16,337 |
| | 18,966 |
|
| Other long-term liabilities | 99,556 |
| | 86,062 |
|
| Total liabilities | 6,550,150 |
| | 5,015,278 |
|
| Commitments and contingencies (Note 16) |
| |
|
| Stockholder equity: |
| | |
| Convertible perpetual preferred stock, series B-1, par value $0.001 (liquidation preference of $0.001 per share); 0 and 50,000,000 authorized and 0 and 6,250,100 shares issued and outstanding at December 31, 2013 and 2012, respectively | — |
| | 6 |
|
| Common stock, par value $0.001; 1,000 and 9,000,000,000 shares authorized and 1,000 and 5,262,440,085 shares issued and outstanding at December 31, 2013 and 2012, respectively | — |
| | 5,263 |
|
| Accumulated other comprehensive (loss) income, net of tax | (308 | ) | | 120 |
|
| Additional paid-in capital | 8,679,538 |
| | 10,345,566 |
|
| Accumulated deficit | (6,377,884 | ) | | (6,311,390 | ) |
| Total stockholder equity | 2,301,346 |
| | 4,039,565 |
|
| Total liabilities and stockholder equity | $ | 8,851,496 |
| | $ | 9,054,843 |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDER EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Perpetual
Preferred Stock, Series B-1 | | Common Stock | | | | | | Treasury Stock | | | | |
| (in thousands, except share data) | Shares | | Amount | | Shares | | Amount | | Accumulated Other Comprehensive Income (Loss) | | Additional
Paid-in Capital | | Shares | | Amount | | Accumulated Deficit | | Total
Stockholder Equity |
| Balance at January 1, 2011 | 12,500,000 |
| | $ | 13 |
| | 3,933,195,112 |
| | $ | 3,933 |
| | $ | (5,861 | ) | | $ | 10,420,604 |
| | — |
| | $ | — |
| | $ | (10,211,053 | ) | | $ | 207,636 |
|
| Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 5,932 |
| | — |
| | — |
| | — |
| | 426,961 |
| | 432,893 |
|
| Issuance of common stock to employees and employee benefit plans, net of forfeitures | — |
| | — |
| | 1,882,801 |
| | 2 |
| | — |
| | 3,480 |
| | — |
| | — |
| | — |
| | 3,482 |
|
| Share-based payment expense | — |
| | — |
| | — |
| | — |
| | — |
| | 48,581 |
| | — |
| | — |
| | — |
| | 48,581 |
|
| Exercise of options and vesting of restricted stock units | — |
| | — |
| | 13,401,048 |
| | 13 |
| | — |
| | 11,540 |
| | — |
| | — |
| | — |
| | 11,553 |
|
| Issuance of common stock upon exercise of warrants | — |
| | — |
| | 7,122,951 |
| | 7 |
| | — |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
|
| Return of shares under share borrow agreements | — |
| | — |
| | (202,399,983 | ) | | (202 | ) | | — |
| | 202 |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2011 | 12,500,000 |
| | $ | 13 |
| | 3,753,201,929 |
| | $ | 3,753 |
| | $ | 71 |
| | $ | 10,484,400 |
| | — |
| | $ | — |
| | $ | (9,784,092 | ) | | $ | 704,145 |
|
| Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 49 |
| | |
| | — |
| | — |
| | 3,472,702 |
| | 3,472,751 |
|
| Issuance of common stock to employees and employee benefit plans, net of forfeitures | — |
| | — |
| | 1,571,175 |
| | 2 |
| | — |
| | 3,521 |
| | — |
| | — |
| | — |
| | 3,523 |
|
| Share-based payment expense | — |
| | — |
| | — |
| | — |
| | — |
| | 60,299 |
| | — |
| | — |
| | — |
| | 60,299 |
|
| Exercise of options | — |
| | — |
| | 214,199,297 |
| | 214 |
| | — |
| | 125,695 |
| | — |
| | — |
| | — |
| | 125,909 |
|
| Cash dividends paid on common shares ($0.05) | — |
| | — |
| | — |
| | — |
| | — |
| | (262,387 | ) | | — |
| | — |
| | — |
| | (262,387 | ) |
| Cash dividends paid on preferred shares | — |
| | — |
| | — |
| | — |
| | — |
| | (64,675 | ) | | — |
| | — |
| | — |
| | (64,675 | ) |
| Conversion of preferred stock to common stock on as-converted basis | (6,249,900 | ) | | (7 | ) | | 1,293,467,684 |
| | 1,294 |
| | — |
| | (1,287 | ) | | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2012 | 6,250,100 |
| | $ | 6 |
| | 5,262,440,085 |
| | $ | 5,263 |
| | $ | 120 |
| | $ | 10,345,566 |
| | — |
| | $ | — |
| | $ | (6,311,390 | ) | | $ | 4,039,565 |
|
| Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | (428 | ) | | — |
| | — |
| | — |
| | (66,494 | ) | | (66,922 | ) |
| Share-based payment expense | — |
| | — |
| | — |
| | — |
| | — |
| | 58,903 |
| | — |
| | — |
| | — |
| | 58,903 |
|
| Exercise of options and vesting of restricted stock units | — |
| | — |
| | 29,157,786 |
| | 28 |
| | — |
| | 19,249 |
| | — |
| | — |
| | — |
| | 19,277 |
|
| Minimum withholding taxes on net share settlement of stock-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | (31,941 | ) | | — |
| | — |
| | — |
| | (31,941 | ) |
| Conversion of preferred stock to common stock | (6,250,100 | ) | | (6 | ) | | 1,293,509,076 |
| | 1,293 |
| | — |
| | (1,287 | ) | | — |
| | — |
| | — |
| | — |
|
| Conversion of Exchangeable Notes to common stock | — |
| | — |
| | 27,687,850 |
| | 28 |
| | — |
| | 45,069 |
| | — |
| | — |
| | — |
| | 45,097 |
|
| Common stock repurchased | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 520,257,866 |
| | (1,764,969 | ) | | — |
| | (1,764,969 | ) |
| Common stock retired | — |
| | — |
| | (520,257,866 | ) | | (520 | ) | | — |
| | (1,764,449 | ) | | (520,257,866 | ) | | 1,764,969 |
| | — |
| | — |
|
| Transfer of common stock to Sirius XM Holdings Inc. | — |
| | — |
| | (6,092,536,931 | ) | | (6,092 | ) | | — |
| | 6,092 |
| | — |
| | — |
| | — |
| | — |
|
| Transfer of forward contract to Sirius XM Holdings Inc. | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (4,964 | ) |
| — |
|
| — |
|
| — |
|
| (4,964 | ) |
| Initial value of forward contract | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7,300 |
|
| — |
|
| — |
|
| — |
|
| 7,300 |
|
| Common stock issued by Sirius XM Radio Inc. to Sirius XM Holdings Inc. | — |
| | — |
| | 1,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2013 | — |
| | $ | — |
| | 1,000 |
| | $ | — |
| | $ | (308 | ) | | $ | 8,679,538 |
| | — |
| | $ | — |
| | $ | (6,377,884 | ) | | $ | 2,301,346 |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands) | 2013 |
| 2012 |
| 2011 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | (66,494 | ) | | $ | 3,472,702 |
| | $ | 426,961 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
| |
| |
|
| Depreciation and amortization | 253,314 |
| | 266,295 |
| | 267,880 |
|
| Non-cash interest expense, net of amortization of premium | 21,698 |
| | 35,924 |
| | 39,515 |
|
| Provision for doubtful accounts | 39,016 |
| | 34,548 |
| | 33,164 |
|
| Amortization of deferred income related to equity method investment | (2,776 | ) | | (2,776 | ) | | (2,776 | ) |
| Loss on extinguishment of debt and credit facilities, net | 190,577 |
| | 132,726 |
| | 7,206 |
|
| Gain on merger of unconsolidated entities | — |
| | — |
| | (75,768 | ) |
| (Gain) loss on unconsolidated entity investments, net | (5,865 | ) | | 420 |
| | 6,520 |
|
| Dividend received from unconsolidated entity investment | 22,065 |
| | 1,185 |
| | — |
|
| Loss on disposal of assets | 351 |
| | 657 |
| | 269 |
|
| Loss on fair value of debt and equity instruments | 464,102 |
| | — |
| | — |
|
| Share-based payment expense | 58,903 |
| | 63,822 |
| | 53,190 |
|
| Deferred income taxes | 259,787 |
| | (3,001,818 | ) | | 8,264 |
|
| Other non-cash purchase price adjustments | (207,854 | ) | | (289,050 | ) | | (275,338 | ) |
| Distribution from investment in unconsolidated entity | — |
| | — |
| | 4,849 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (36,189 | ) | | (38,985 | ) | | (13,211 | ) |
| Receivables from distributors | 20,944 |
| | (19,608 | ) | | (17,241 | ) |
| Inventory | 11,474 |
| | 11,374 |
| | (14,793 | ) |
| Related party assets | (2,246 | ) | | 9,523 |
| | 30,036 |
|
| Prepaid expenses and other current assets | 16,788 |
| | 647 |
| | 8,525 |
|
| Other long-term assets | 2,973 |
| | 22,779 |
| | 36,490 |
|
| Accounts payable and accrued expenses | (44,009 | ) | | 46,043 |
| | (32,010 | ) |
| Accrued interest | 8,131 |
| | (36,451 | ) | | (2,048 | ) |
| Deferred revenue | 73,593 |
| | 101,311 |
| | 55,336 |
|
| Related party liabilities | (1,991 | ) | | (7,545 | ) | | (1,542 | ) |
| Other long-term liabilities | 12,290 |
| | 3,042 |
| | 152 |
|
| Net cash provided by operating activities | 1,088,582 |
| | 806,765 |
| | 543,630 |
|
| Cash flows from investing activities: | | | | | |
| Additions to property and equipment | (173,617 | ) | | (97,293 | ) | | (137,429 | ) |
| Purchases of restricted and other investments | (1,719 | ) | | (26 | ) | | (826 | ) |
| Acquisition of business, net of cash acquired | (525,352 | ) | | — |
| | — |
|
| Release of restricted investments | — |
| | — |
| | 250 |
|
| Return of capital from investment in unconsolidated entity | — |
| | — |
| | 10,117 |
|
| Net cash used in investing activities | (700,688 | ) | | (97,319 | ) | | (127,888 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from exercise of stock options | 21,817 |
| | 123,369 |
| | 11,553 |
|
| Taxes paid in lieu of shares issued for stock-based compensation | (31,941 | ) | | — |
| | — |
|
| Proceeds from long-term borrowings and revolving credit facility, net of costs | 3,156,063 |
| | 383,641 |
| | — |
|
| Payment of premiums on redemption of debt | (175,453 | ) | | (100,615 | ) | | (5,020 | ) |
| Repayment of long-term borrowings and revolving credit facility | (1,782,160 | ) | | (915,824 | ) | | (234,976 | ) |
| Repayment of related party long-term borrowings | (200,000 | ) | | (126,000 | ) | | — |
|
| Common stock repurchased and retired | (1,762,360 | ) | | — |
| | — |
|
| Dividends paid | — |
| | (327,062 | ) | | — |
|
| Net cash used in financing activities | (774,034 | ) | | (962,491 | ) | | (228,443 | ) |
| Net (decrease) increase in cash and cash equivalents | (386,140 | ) | | (253,045 | ) | | 187,299 |
|
| Cash and cash equivalents at beginning of period | 520,945 |
| | 773,990 |
| | 586,691 |
|
| Cash and cash equivalents at end of period | $ | 134,805 |
| | $ | 520,945 |
| | $ | 773,990 |
|
See accompanying notes to the consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands) | 2013 | | 2012 | | 2011 |
| Supplemental Disclosure of Cash and Non-Cash Flow Information | | | | | |
| Cash paid during the period for: | | | | | |
| Interest, net of amounts capitalized | $ | 169,781 |
| | $ | 262,039 |
| | $ | 258,676 |
|
| Income taxes paid | 2,783 |
| | 4,935 |
| | — |
|
| Acquisition related costs | 2,902 |
| | — |
| | — |
|
| Non-cash investing and financing activities: |
| |
| |
|
| Capital lease obligations incurred to acquire assets | 11,966 |
| | 12,781 |
| | — |
|
| Conversion of Series B preferred stock to common stock | 1,293 |
| | 1,294 |
| | — |
|
| Common stock issuance upon exercise of warrants | — |
| | — |
| | 7 |
|
| Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs | 45,097 |
| | — |
| | — |
|
| Performance incentive payments | 16,900 |
| | — |
| | — |
|
| Goodwill reduced for the exercise and vesting of certain stock awards | 274 |
| | 19,491 |
| | — |
|
See accompanying notes to the consolidated financial statements.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
| |
| (1) | Business & Basis of Presentation |
These are the notes to the financial statements of Sirius XM Holdings Inc. (“Holdings”) and Sirius XM Radio Inc. (“Sirius XM”). The terms “we,” “us,” “our,” and “our company” as used herein and unless otherwise stated or indicated by context, refer to Sirius XM Radio Inc. and its subsidiaries prior to the corporate reorganization described below and to Sirius XM Holdings Inc. and its subsidiaries after such corporate reorganization.
Effective November 15, 2013, we completed a corporate reorganization. As part of the reorganization, Holdings replaced Sirius XM as our publicly held corporation and Sirius XM became a wholly-owned subsidiary of Holdings. Holdings was incorporated in the State of Delaware on May 21, 2013. Holdings has no operations independent of its subsidiary Sirius XM.
Business
We broadcasttransmit 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 theour Internet radio service, including through applications for mobile devices.
devices, home devices and other consumer electronic equipment. 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 radiosradio in their vehicles from which we acquire a majority of our subscribers.vehicles. We also acquire subscribers through marketing campaigns 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 ourOur satellite radios are primarily distributed through automakers; retail locations nationwidestores nationwide; and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.
Our primary source of revenue is subscription fees, with most of our customers subscribing on anto annual, semi-annual, quarterly or monthly basis.plans. We offer discounts for prepaid, and longer term subscription plans, as well as discounts fora multiple subscriptions.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 data and Backseat TVdata services.
Our satellite radios are primarily distributed through automakers; retail locations nationwide; and through our website. Satellite radio services are also offered to customers of certain rental car companies.
In certain cases, automakers and dealers include a subscription to our radio services is included in the sale or lease price of new or previously owned vehicles. The length of these trial subscriptions varies but is typically three to twelve months. We receive subscription payments for these trialssubscriptions from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.
We are also a leader in providing connected vehicle applications and services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle owners while providing marketing and operational benefits to automakers and their dealers. Subscribers to our connected vehicle services are not included in our subscriber count.
As of December 31, 2016, Liberty Media Corporation (“Liberty Media”) beneficially owns,owned, directly and indirectly, over 50%approximately 67% 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 broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club,businesses.
Reorganization of Sirius XM Canada
On May 12, 2016, our subsidiary, 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 TruePosition, Inc.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), its interestswhich 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 Charter Communications, Live Nation Entertainmentshares of our common stock or securities exchangeable for our common stock.
The Transaction has been approved by the stockholders of Sirius XM Canada and Barnes & Noble,has received the required court approval. The Transaction remains subject to receipt of Canadian Radio-Television and minority equity investmentsTelecommunications Commission approval. Pending receipt of this approval, the Transaction is expected to close early in Time Warner Inc., Time Warner Cable, and Viacom.the second quarter of 2017.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)
Recent Development
On January 3, 2014, Holdings' Board of Directors received a non-binding letter from Liberty Media proposing a transaction pursuant to which all outstanding shares of common stock of Holdings not owned by Liberty Media would be converted into the right to receive 0.0760 of a newexcept per share of Liberty Series C common stock, which would have no voting rights. Liberty Media indicated that immediately prior to such conversion, Liberty Media intends to distribute, on a 2 to 1 basis, shares of such Series C common stock to all holders of record of Liberty Media's Series A and B common stock. Upon the completion of the proposed transaction, Liberty Media indicated that it expects that Holdings' public stockholders would own approximately 39% of Liberty Media's then-outstanding common stock.amounts)
Holdings' Board of Directors has formed a Special Committee of independent directors to consider Liberty Media’s proposal. The Board of Directors has selected Joan L. Amble, James P. Holden and Eddy W. Hartenstein to serve on the Special Committee. The Special Committee is chaired by Mr. Hartenstein.
The Special Committee has retained Evercore Group L.L.C. to act as its financial advisor and Weil, Gotshal & Manges LLP to act as its legal counsel to assist and advise it in connection with its evaluation of Liberty Media’s proposal.
Liberty Media’s proposal noted that the transaction will be conditioned on the approval of both the Special Committee and a majority of the public stockholders of Holdings, other than Liberty Media. Liberty Media also noted that the approval by the Liberty Media stockholders of the issuance of the Series C common shares in the proposed transaction would also be required under applicable Nasdaq Stock Market requirements.
The letter provides that no legally binding obligation with respect to any transaction exists unless and until mutually acceptable definitive documentation is executed and delivered with respect thereto. There can be no assurance that the transaction proposed by Liberty Media or any related transaction will be completed or, if completed, will have any specified terms, including with respect to pricing or timing.
Basis of Presentation
Our financial statements include the consolidated accountsThis Annual Report on Form 10-K presents information for Sirius XM Holdings and subsidiaries and theInc. (“Holdings”). Holdings has no operations independent of its wholly-owned subsidiary, Sirius XM.
The accompanying consolidated financial statements of Sirius XMHoldings and its subsidiaries whose operating results and financial position are consolidated into Holdings. The consolidated balance sheets and statements of comprehensive income for Holdings are essentially identical to the consolidated balance sheets and consolidated statements of comprehensive income for Sirius XM, with the following exceptions:
Besides the shares which settled in November, the fair value of the share repurchase agreement with Liberty Media is recorded in Holdings' consolidated balance sheet, with changes in fair value recorded in Holdings' statements of comprehensive income.
The additional fair value in excess of the carrying amount associated with the conversion feature for the 7% Exchangeable Senior Subordinated Notes due 2014 is recorded in Sirius XM's consolidated balance sheet, with changes in fair value recorded in Sirius XM's statements of comprehensive income. This is eliminated in Holdings' consolidated balance sheets and statements of comprehensive income.
As a result of our corporate reorganization effective November 15, 2013, all of the outstanding shares of Sirius XM's common stock were converted, on a share for share basis, into identical shares of common stock of Holdings.
Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The combined notes to the consolidated financial statements relate to Holdings and Sirius XM, which, except as noted, are essentially identical.All significant intercompany transactions have been eliminated in consolidation. Certain numbers in our prior period consolidated financial statements and footnotes have been reclassified or consolidated to conform to our current period presentation. All
Public companies are required to disclose certain information about their reportable operating segments. Operating segments are defined as significant intercompany transactionscomponents of an enterprise for which separate financial information is available and balances between Holdingsis evaluated on a regular basis by the chief operating decision makers in deciding how to allocate resources to an individual segment and Sirius XMin 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 their respectiveallocates resources based on the consolidated subsidiaries are eliminated in both setsresults of operations of our business.
We have evaluated events subsequent to the balance sheet date and prior to the filing of this Annual Report on Form 10-K for the year ended December 31, 2016 and have determined that no events have occurred that would require adjustment to our consolidated financial statements. Intercompany transactions between Holdings and Sirius XMFor a discussion of subsequent events that do not eliminate in the Sirius XMrequire adjustment to our consolidated financial statements but do eliminate in the Holdings consolidated financial statements.refer to Note 16.
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 consolidated financial statements include asset impairment, depreciable lives of our satellites, share-based payment expense, and valuation allowances against deferred tax assets.income taxes.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
On November 4, 2013, we purchased all of the outstanding shares of the capital stock of the connected vehicle business of Agero, Inc. ("Agero") for $525,352, net of acquired cash of $1,966. Agero's connected vehicle business provides services to several automakers, including Acura, BMW, Honda, Hyundai, Infiniti, Lexus, Nissan and Toyota. The final working capital calculation associated with this transaction is still in negotiation.
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 | $ | 1,966 |
|
| Other current assets | 8,669 |
|
| Property and equipment | 26,251 |
|
| Intangible assets subject to amortization | 230,663 |
|
| Goodwill | 389,462 |
|
| Other assets | 2,695 |
|
| Total assets | $ | 659,706 |
|
|
|
Assumed Liabilities:
|
|
| Deferred revenue | $ | (28,404 | ) |
| Deferred income tax liabilities, net | (78,127 | ) |
| Other liabilities | (25,857 | ) |
| Total liabilities | $ | (132,388 | ) |
| Total consideration | $ | 527,318 |
|
The transaction was accounted for using the acquisition method of accounting. The initial purchase price allocation is subject to change upon receipt of the final valuation analysis for the connected vehicle business of Agero. The fair value assessed for the majority of the assets acquired and liabilities assumed equaled their carrying value. The excess purchase price over identifiable net tangible assets of $389,462 has been recorded to Goodwill in our consolidated balance sheets as of December 31, 2013. A total of $230,663 has been allocated to identifiable intangible assets subject to amortization and relates to the assessed fair value of the acquired OEM relationships and proprietary software and is being amortized over the estimated weighted average useful lives of 15 and 10 years, respectively.
We recognized acquisition related costs of $2,902 that was expensed in General and administrative expenses in our consolidated statements of comprehensive income during the year ended December 31, 2013. Pro forma financial information related to this acquisition has not been provided as it is not material to our consolidated results of operations.
| |
(3) | Summary of Significant Accounting Policies |
In addition to the significant accounting policies discussed in this Note 2, the following table includes our significant accounting policies that are described in other notes to our consolidated financial statements, including the number and page of the note:
|
| | | | | |
| Significant Accounting Policy | | Note # | | Page # |
| Fair Value Measurements | | 3 |
| | |
| Goodwill | | 7 |
| | |
| Intangible Assets | | 8 |
| | |
| Property and Equipment | | 9 |
| | |
| Equity Method Investments | | 10 |
| | |
| Share-Based Compensation | | 13 |
| | |
| Legal Costs | | 14 |
| | |
| Income Taxes | | 15 |
| | |
Cash and Cash Equivalents
CashOur cash and cash equivalents consist of cash on hand, money market funds, certificates of deposit, in-transit credit card receipts and highly liquid investments purchased with an original maturity of three months or less.
Equity Method Investments
We hold equity method investments in Sirius XM Canada and M-Way Solutions GmbH.
Investments in which we have the ability to exercise significant influence but not control are accounted for pursuant to the equity method of accounting. We recognize our proportionate share of earnings or losses of our affiliates as they occur as a component of Other income (expense) in our consolidated statements of comprehensive income on a one month lag.
The difference between our investment and our share of the fair value of the underlying net assets of our affiliates is first allocated to either finite-lived intangibles or indefinite-lived intangibles and the balance is attributed to goodwill. We follow ASC 350, Intangibles - Goodwill and Other, which requires that equity method finite-lived intangibles be amortized over their estimated useful life while indefinite-lived intangibles and goodwill are not amortized. The amortization of equity
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
method finite-lived intangible assets is recorded in Interest and investment income in our consolidated statements of comprehensive income. We periodically evaluate our equity method investments to determine if there has been an other than temporary decline below carrying value. Equity method finite-lived intangibles, indefinite-lived intangibles and goodwill are included in the carrying amount of the investment.
Property and Equipment
Property and equipment, including satellites, are stated at cost, less accumulated depreciation. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation is calculated using the straight-line method over the following estimated useful life of the asset:
|
| |
Satellite system | 2 - 15 years |
Terrestrial repeater network | 5 - 15 years |
Broadcast studio equipment | 3 - 15 years |
Capitalized software and hardware | 3 - 7 years |
Satellite telemetry, tracking and control facilities | 3 - 15 years |
Furniture, fixtures, equipment and other | 2 - 7 years |
Building | 20 or 30 years |
Leasehold improvements | Lesser of useful life or remaining lease term |
We review long-lived assets, such as property and equipment, and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds the estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset. We did not record any impairments in 2013, 2012 or 2011.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. Our annual impairment assessment of our single reporting unit is performed during the fourth quarter of each year, and an assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. Step one of the impairment assessment compares the fair value to its carrying value and if the fair value exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds the fair value, the implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value exceeds the carrying value then goodwill is not impaired; otherwise, an impairment loss will be recorded by the amount the carrying value exceeds the implied fair value. We did not record any impairments in 2013, 2012 or 2011.
The impairment test for other intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. This test is performed during the fourth quarter of each year, and an assessment is performed at other times if events or circumstances indicate it is more likely than not that the asset is impaired. Our indefinite life intangibles include our FCC licenses and XM trademark. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, established an option to first perform a qualitative assessment to determine whether it is more likely than not that an asset is impaired. If the qualitative assessment supports that it is more likely than not that the fair value of the asset exceeds its carrying value, a quantitative impairment test is not required. If the qualitative assessment does not support the fair value of the asset, then a quantitative assessment is performed. We completed qualitative assessments during the fourth quarter of 2013 and 2012 and no impairments were recorded. We used independent appraisals in 2011 to determine the fair value of our FCC licenses and trademark using the Income and Relief from Royalty approaches, respectively, and no impairment was recorded.
Other intangible assets with finite lives consists primarily of customer relationships, OEM relationships and proprietary software acquired in business combinations, licensing agreements, and certain information technology related costs. These assets are amortized over their respective estimated useful lives to their estimated residual values and reviewed for
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
impairment under the provisions of ASC 360-10-35, Property, Plant and Equipment/Overall/Subsequent Measurement. We review intangible assets subject to amortization for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. No impairment was recorded to our intangible assets with finite lives in 2013, 2012 or 2011.
Revenue Recognition
We derive revenue primarily from subscribers, advertising and direct sales of merchandise.radios and accessories.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in thousands, except per share amounts)
Revenue from subscribers consists primarily of subscription fees daily rental fleet revenue and non-refundable activation and other fees.ancillary subscription based revenues. Revenue is recognized as it is realized or realizable and earned. We recognize subscription fees as our services are provided. At the time of sale, vehicle ownersConsumers purchasing or leasing a vehicle with a subscription to our servicefactory-installed satellite radio typically receive between a three and twelve month prepaid subscription.subscription to our service, certain of which are prepaid. Prepaid subscription fees received from certain automakers are recorded as deferred revenue and amortized to revenue ratably over the service period which commences upon retail sale and activation. There is no revenue recognized for unpaid trial subscriptions.
We recognize revenue from the sale of advertising as the advertising is broadcast.transmitted. Agency fees are calculated based on a stated percentage applied to gross billing revenue for our advertising inventory and are reported as a reduction of advertising revenue. We pay certain third parties a percentage of advertising revenue. Advertising revenue is recorded gross of such revenue share payments as we are the primary obligor in the transaction. Advertising revenue share payments are recorded to Revenue share and royalties during the period in which the advertising is broadcast.transmitted.
Equipment revenue and royalties from the sale of satellite radios, components and accessories are recognized upon shipment, net of discounts and rebates. Shipping and handling costs billed to customers are recorded as revenue. Shipping and handling costs associated with shipping goods to customers are reported as a component of Cost of equipment.
Other revenue primarily includes U.S. Music Royalty Fees which are recorded as other revenue and the cost component as Revenue share and royalties expense. Fees received from subscribers for the U.S. Music Royalty Fee are recorded as deferred revenue and amortized to revenue ratably over the service period which coincides with the recognition of the subscriber's subscription revenue.
We report revenues net of any tax assessed by a governmental authority that is both imposed on, and concurrent with, a specific revenue-producing transaction between a seller and a customer in our consolidated statements of comprehensive income.
ASCAccounting Standards Codification 605, Revenue Recognition,provides guidance on how and when to recognize revenues for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets, such as in our bundled subscription plans. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Consideration must be allocated at the inception of the arrangement to all deliverables based on their relative selling price, which has been determined using vendor specific objective evidence of the selling price to self-pay customers.
Revenue Share
We share a portion of our subscription revenues earned from self-pay subscribers and paid promotional subscribers with certain automakers. The terms of the revenue share agreements vary with each automaker, but are typically based upon the earned audio revenue as reported or gross billed audio revenue. Revenue share is recorded as an expense in our consolidated statements of comprehensive income and not as a reduction to revenue.
Programming Costs
Programming costs which are for a specified number of events are amortized on an event-by-event basis; programming costs which are for a specified season or periodinclude programming through a dedicated channel are amortized over the season or period on a straight-line basis. We allocate a portion of certain programming costs which are related to sponsorship and marketing activities to Sales and marketing expense on a straight-line basis over the term of the agreement.
Advertising Costs
Media is expensed when aired and advertising production costs are expensed as incurred. Market development funds consist of fixed and variable payments to reimburse retailers for the cost of advertising and other product awareness activities. Fixed market development funds are expensed over the periods specified in the applicable agreement; variable costs are expensed when the media is aired andAdvertising production costs are expensed as incurred.include expenses related to marketing and retention activities, including expenses related to direct mail, outbound telemarketing and email communications. We also incur advertising production costs related to cooperative marketing and promotional events and sponsorships. During the years ended December 31, 2013, 20122016, 2015 and 2011,2014, we recorded advertising costs of $178,364, $139,830$226,969, $206,351 and $116,694,$203,945, respectively. These costs are reflected in Sales and marketing expense in our consolidated statements of comprehensive income.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
Subscriber Acquisition Costs
Subscriber acquisition costs consist of costs incurred to acquire new subscribers andwhich include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a satellite radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip setschipsets and certain other components used in manufacturing radios; device royalties for certain radios;radios and chipsets; commissions paid to retailers and automakers as incentives to purchase, install and activate radios; product warranty obligations; freight; and provisions for inventory allowance.allowance attributable to inventory consumed in our OEM and retail distribution channels. Subscriber acquisition costs do not include advertising costs, loyalty payments to distributors and dealers of radios and revenue share payments to automakers and retailers of radios.
Subsidies paid to radio manufacturers and automakers are expensed upon installation, shipment, receipt of product or activation and are included in Subscriber acquisition costs because we are responsible for providing the service to the customers. Commissions paid to retailers and automakers are expensed upon either the sale or activation of radios. Chip setsChipsets that are shipped to radio manufacturers and held on consignment are recorded as inventory and expensed as Subscriber acquisition costs when placed into production by radio manufacturers. Costs for chip setschipsets not held on consignment are expensed as Subscriber acquisition costs when the automaker confirms receipt.
We record product warranty obligations in accordance with ASC 460, Guarantees, which requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. We warrant that certain products sold through our retail and direct to consumer distribution channels will perform in all material respects in accordance with specifications in effect at the time of the purchase of the products by the customer. The product warranty period on our products is 90 days from the purchase date for repair or replacement of components and/or products that contain defects of material or workmanship. We record a liability for costs that we expect to incur under our warranty obligations when the product is shipped from the manufacturer. Factors affecting the warranty liability include the number of units sold, historical experience, anticipated rates of claims and costs per claim. We periodically assess the adequacy of our warranty liability based on changes in these factors.
Research & Development Costs
Research and development costs are expensed as incurred and primarily include the cost of new product development, chip setchipset design, software development and engineering. During the years ended December 31, 2013, 20122016, 2015 and 2011,2014, we recorded research and development costs of $50,564, $42,605$69,025, $54,933 and $48,574,$54,109, respectively. These costs are reported as a component of Engineering, design and development expense in our consolidated statements of comprehensive income.
Share-Based CompensationRecent Accounting Pronouncements
We account for equity instruments grantedIn March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to employees in accordance with ASC 718, Compensation - Stock CompensationEmployee Share-Based Payment Accounting. ASC 718 requiresThe 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 payments to be recognizedtax return deductions that were previously tracked off balance sheet but not recorded in theour financial statements based on fair value. ASC 718 requires forfeitures to be estimated at the timestatements. As of grant and revised in subsequent periods if actual forfeitures differ from initial estimates. We use the Black-Scholes-Merton option-pricing model to value stock option awards and have elected to treat awards with graded vesting as a single award. Share-based compensation expense is recognized ratably over the requisite service period, which is generally the vesting period,January 1, 2016, $293,896, net of forfeitures. We measure restricted stock awards and units using the fair market value of the restricted shares of common stock on the day the award is granted.
Fair valuea $1,946 reserve for an uncertain tax position, was recorded as determined using the Black-Scholes-Merton model varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates. In 2013, 2012 and 2011, we estimated the fair value of awards granted using the hybrid approach for volatility, which weights observable historical volatility and implied volatility of qualifying actively traded options onan increase to our common stock. The expected life assumption represents the weighted-average period stock-based awards are expected to remain outstanding. These expected life assumptions are established through a review of historical exercise behavior of stock-based award grants with similar vesting periods. Where historical patterns do not exist, contractual terms are used. The risk-free interest rate represents the daily treasury yield curve rate at the grant date based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term. Our assumptions may change in future periods.
Stock-based awards granted to employees, non-employees and members of our board of directors include warrants, stock options, restricted stock awards and restricted stock units.
Income Taxes
Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, baseddecrease to our
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
on enactedAccumulated deficit in our consolidated balance sheets as a result of the cumulative effect of this change in accounting principle.
Additional amendments to this ASU related to income taxes and minimum statutory withholding tax lawsrequirements 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 statutoryin the future will recognize forfeitures as they occur. This ASU also required excess tax rates applicablebenefits to be separated from other income tax cash flows and classified as an operating activity, however, prior to adoption, there was no impact to the periods in which the differences are expected to affect taxable income. In determining the period in which relatedconsolidated statement of cash flows as we have not had any excess tax benefits are realized(windfalls) recorded for book purposes, excess share-based compensation deductions includedpurposes. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in net operating losses are realized after regular net operating losses are exhausted; excess tax compensation benefits are recorded off balance-sheetour consolidated statement of cash flows as such cash flows have historically been presented as a memo entry untilfinancing activity.
In February 2016, the period the excess tax benefit is realized through a reduction of taxes payable. A valuation allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.
As of December 31, 2013 and 2012, we maintained a valuation allowance of $7,831 and $9,835, respectively, relating to deferred tax assets that are not likely to be realized due to certain state net operating loss limitations and acquired net operating losses that we are not more likely than not going to be able to utilize.
ASC 740FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires a company to first determine whether itrecognize 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 more likely than not thatpermitted. This ASU must be adopted using a tax position will be sustained basedmodified retrospective approach. We plan to adopt this ASU on its technical merits asJanuary 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. 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. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting date, assuming that taxing authorities will examineperiod presented, or the position and have full knowledgemodified retrospective method, in which case the cumulative effect of all relevant information. A tax position that meets this more likely than not threshold is then measured andapplying the standard would be recognized at the largest amountdate of benefit that is greater than fifty percent likelyinitial application.
We have substantially completed our evaluation of the impact of this ASU on our subscription fees earned from self-pay subscribers and advertising revenue, and based on the preliminary results of our evaluation, we do not expect the application of this ASU to be realized upon effective settlement withhave a taxing authority. Changes inmaterial impact on the recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penaltiesof revenue related to uncertain tax positions in Income tax (expense) benefit inthese revenues. We are still evaluating the impact of this ASU as it relates to other ancillary revenue streams, as well as certain associated expenses. Depending on the results of our consolidated statementsreview, there could be changes to the classification and timing of comprehensive income.recognition of revenues and expenses related to these ancillary areas. We expect to complete our assessment process, including selecting a transition method for adoption, by the end of the third quarter of 2017 along with our implementation process prior to the adoption of this ASU on January 1, 2018.
We report revenues net of any tax assessed by a governmental authority that is both imposed on, and concurrent with, a specific revenue-producing transaction between a seller and a customer in our consolidated statements of comprehensive income.
Fair Value of Financial Instruments | |
| (3) | Fair Value Measurements |
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants. As of December 31, 20132016 and 2012,2015, the carrying amounts of cash and cash equivalents, accounts and other receivables, and accounts payable approximated fair value due to the short-term nature of these instruments. ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for input into valuation techniques as follows:
| |
| i. | Level 1 input -input: unadjusted quoted prices in active markets for identical instrument; |
| |
| ii. | Level 2 input -input: observable market data for the same or similar instrument but not Level 1, including quoted prices for identical or similar assets or liabilities in markets that are active or not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in thousands, except per share amounts)
| |
| iii. | Level 3 input -input: unobservable inputs developed using management's assumptions about the inputs used for pricing the asset or liability. |
Level 2 inputs were utilized to fair value our 7% Exchangeable Senior Subordinated Notes due 2014 by using a binomial lattice model with inputs derived from observable market data. As of December 31, 2013, $466,815 was recorded to Sirius XM's consolidated balance sheet in Current maturities of long-term debt for the fair value of our 7% Exchangeable Senior Subordinated Notes due 2014 in excess of the carrying amount, as the notes are exchangeable into shares of Holdings' common stock. Changes in fair value are recorded in Loss on fair value of debt and equity instruments within Sirius XM's consolidated statements of comprehensive income. We recognized $466,815 in Loss on fair value of debt and equity instruments during the year endedDecember 31, 2013. The additional fair value in excess of the carrying amount of this instrument is eliminated in Holdings' consolidated balance sheets and statements of comprehensive income.
We used Level 2 observable inputs, including the U.S. spot LIBOR curve and other available market data, to fair value the derivative associated with the share repurchase agreement with Liberty Media. The fair value of the derivative associated with the share repurchase agreement with Liberty Media was $15,702 as of December 31, 2013 and is recorded in Holdings' consolidated balance sheet in Related party current liabilities, with changes in fair value recorded to Holdings' statements of comprehensive income. For a further discussion of this derivative, refer to Note 14.
We used Level 3 inputs to fair value the 8% convertible unsecured subordinated debentures issued by Sirius XM Canada. For a further discussion of this derivative, refer to Note 11.
Investments are periodically reviewed for impairment and an impairment is recorded whenever declines in fair value below carrying value are determined to be other than temporary. In making this determination, we consider, among other factors, the severity and duration of the decline as well as the likelihood of a recovery within a reasonable timeframe.
Our assets and liabilities measured at fair value were as follows:
Table of Contents
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 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 - investment (a) | $ | 178,696 |
| | — |
| | — |
| | $ | 178,696 |
| | $ | 141,850 |
| | — |
| | — |
| | $ | 141,850 |
|
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Debt (b) | — |
| | $ | 6,008,205 |
| | — |
| | $ | 6,008,205 |
| | — |
| | $ | 5,649,173 |
| | — |
| | $ | 5,649,173 |
|
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
| |
| (a) | This amount approximates fair value. The carrying value of our investment in Sirius XM Canada was $8,615 and $0 as of December 31, 2016 and 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 11 for information related to the carrying value of our debt as of December 31, 2016 and 2015. |
The fair value for publicly traded instruments is determined using quoted market prices while the fair value for non-publicly traded instruments is based upon estimates from a market maker and brokerage firm. As of December 31, 2013 and 2012, the carrying value of our debt at Holdings' was $3,601,595 and $2,435,220, respectively, and the fair value approximated $4,066,755 and $3,055,076, respectively. This excludes the additional fair value of our 7% Exchangeable Senior Subordinated Notes due 2014 recorded in Sirius XM's consolidated balance sheet as discussed above. The carrying value of our investment in Sirius XM Canada was $26,972 and $37,983 as of December 31, 2013 and 2012, respectively; the fair value approximated $432,200 and $290,900 as of December 31, 2013 and 2012, respectively.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive loss of $308 at December 31, 2013 was primarily comprised of the cumulative foreign currency translation adjustments related to our interest in Sirius XM Canada. During the years endedDecember 31, 2013, 2012 and 2011 we recorded a foreign currency translation adjustment of $(428), $49 and $(140) which is recorded net of taxes of $200, $48 and $11, respectively. In addition, during the year ended December 31, 2011, we recorded a loss on our XM Canada investment from the Canada Merger due to a foreign currency translation adjustment of $6,072.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. An entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This standard was effective for interim and annual periods beginning after December 15, 2012 and is to be applied on a prospective basis. We adopted ASU 2013-02 and will disclose significant amounts reclassified out of accumulated other comprehensive income as such transactions arise. ASU 2013-02 affects financial statement presentation only and has no impact on our results of operations or consolidated financial statements.
Holdings
We utilize the two-class method in calculating basic net income per common share, as our Series B Preferred Stock was considered to be participating securities through January 18, 2013. On January 18, 2013, Liberty Media converted its remaining 6,250,100 outstanding shares of Series B Preferred Stock into 1,293,509,076 shares of common stock. 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 shareadjusts the weighted average number of common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt, preferred(warrants, stock warrants, stock options restricted stock awards and restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method. We had no participating securities during the years ended December 31, 2016, 2015 and 2014.
Common stock equivalents of approximately 365,177,000, 147,125,000 and 419,752,000208,202 for the yearsyear endedDecember 31, 2013, 20122016, and 2011,151,112 and 132,162 for the years ended December 31, 2015 and 2014, respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands, except per share data) | 2013 | | 2012 | | 2011 |
| Numerator: | | | | | |
| Net income | $ | 377,215 |
| | $ | 3,472,702 |
| | $ | 426,961 |
|
| Less: | | | | | |
| Allocation of undistributed income to Series B Preferred Stock | (3,825 | ) | | (1,084,895 | ) | | (174,449 | ) |
| Dividends paid to preferred stockholders | — |
| | (64,675 | ) | | — |
|
| Net income available to common stockholders for basic net income per common share | $ | 373,390 |
| | $ | 2,323,132 |
| | $ | 252,512 |
|
| Add back: | | |
|
| |
|
|
| Allocation of undistributed income to Series B Preferred Stock | 3,825 |
| | 1,084,895 |
| | 174,449 |
|
| Dividends paid to preferred stockholders | — |
| | 64,675 |
| | — |
|
| Effect of interest on assumed conversions of convertible debt | — |
| | 38,500 |
| | — |
|
| Net income available to common stockholders for diluted net income per common share | $ | 377,215 |
| | $ | 3,511,202 |
| | $ | 426,961 |
|
| Denominator: | | |
|
| |
|
|
| Weighted average common shares outstanding for basic net income per common share | 6,227,646 |
| | 4,209,073 |
| | 3,744,606 |
|
| Weighted average impact of assumed Series B Preferred Stock conversion | 63,789 |
| | 2,215,900 |
| | 2,586,977 |
|
| Weighted average impact of assumed convertible debt | — |
| | 298,725 |
| | — |
|
| Weighted average impact of other dilutive equity instruments | 93,356 |
| | 150,088 |
| | 169,239 |
|
| Weighted average shares for diluted net income per common share | 6,384,791 |
| | 6,873,786 |
| | 6,500,822 |
|
| Net income per common share: | | | | | |
| Basic | $ | 0.06 |
| | $ | 0.55 |
| | $ | 0.07 |
|
| Diluted | $ | 0.06 |
| | $ | 0.51 |
| | $ | 0.07 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Numerator: | | | | | |
| Net income available to common stockholders for basic and diluted net income per common share | $ | 745,933 |
| | $ | 509,724 |
| | $ | 493,241 |
|
| Denominator: | |
| | | | |
| Weighted average common shares outstanding for basic net income per common share | 4,917,050 |
| | 5,375,707 |
| | 5,788,944 |
|
| Weighted average impact of dilutive equity instruments | 47,678 |
| | 59,459 |
| | 73,076 |
|
| Weighted average shares for diluted net income per common share | 4,964,728 |
| | 5,435,166 |
| | 5,862,020 |
|
| Net income per common share: | |
| | | | |
| Basic | $ | 0.15 |
| | $ | 0.09 |
| | $ | 0.09 |
|
| Diluted | $ | 0.15 |
| | $ | 0.09 |
| | $ | 0.08 |
|
Sirius XM
Net income per share for Sirius XM is not presented since Sirius XM is a wholly-owned subsidiary of Holdings.
| |
| (5) | Accounts Receivable,Receivables, net |
Receivables, net, includes customer accounts receivable, receivables from distributors and other receivables.
AccountsCustomer accounts receivable, net, areincludes receivables from our subscribers and advertising customers and is stated at amounts due, from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts is based upon our assessment of
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in thousands, except per share amounts)
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 consolidated statements of comprehensive income.
Accounts receivable, net, consists of the following:
|
| | | | | | | |
| | December 31,
2013 | | December 31,
2012 |
| Gross accounts receivable | $ | 113,015 |
| | $ | 117,853 |
|
| Allowance for doubtful accounts | (9,078 | ) | | (11,711 | ) |
| Total accounts receivable, net | $ | 103,937 |
| | $ | 106,142 |
|
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
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 retailers.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. OEMs or other third parties.
Receivables, from distributors consistnet, consists of the following:
|
| | | | | | | |
| | December 31,
2013 | | December 31,
2012 |
| Billed | $ | 38,532 |
| | $ | 53,057 |
|
| Unbilled | 50,443 |
| | 51,368 |
|
| Total | $ | 88,975 |
| | $ | 104,425 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| Gross customer accounts receivable | $ | 105,737 |
| | $ | 98,740 |
|
| Allowance for doubtful accounts | (8,658 | ) | | (6,118 | ) |
| Customer accounts receivable, net | $ | 97,079 |
| | $ | 92,622 |
|
| Receivables from distributors | 98,498 |
| | 120,012 |
|
| Other receivables | 27,452 |
| | 22,148 |
|
| Total receivables, net | $ | 223,029 |
| | $ | 234,782 |
|
Inventory consists of finished goods, refurbished goods, chip setschipsets and other raw material components used in manufacturing radios. Inventory is stated at the lower of cost or market. We record an estimated allowance for inventory that is considered slow moving or obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for resale in our direct to consumer distribution channel and components held for resale by us is reported as a component of Cost of equipment in our 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 consolidated statements of comprehensive income.
Inventory, net, consists of the following:
| | | | December 31,
2013 | | December 31,
2012 | December 31, 2016 | | December 31, 2015 |
| Raw materials | $ | 12,358 |
| | $ | 17,717 |
| $ | 10,219 |
| | $ | 11,085 |
|
| Finished goods | 15,723 |
| | 23,779 |
| 19,581 |
| | 21,159 |
|
| Allowance for obsolescence | (14,218 | ) | | (16,159 | ) | (9,437 | ) | | (9,949 | ) |
| Total inventory, net | $ | 13,863 |
| | $ | 25,337 |
| $ | 20,363 |
| | $ | 22,295 |
|
Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired in business combinations. Our annual impairment assessment of our single reporting unit is performed as of the fourth quarter of each year, and an assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asseta reporting unit below its carrying value.amount. Step one of the impairment assessment compares the fair value to its carrying value and if the fair value exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds the fair value, the implied fair value of goodwill exceeds itsis compared to the carrying value of goodwill. If the implied fair value exceeds the carrying value then goodwill is not impaired; otherwise, an impairment loss will be recorded by the amount the carrying value exceeds the implied fair value. ASC 350-20-35 states that if the carrying amount of the reporting unit is recognized. Atzero or negative, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists based on adverse qualitative factors. As the carrying amount of our one reporting unit was negative as of the date of our annual assessment for 20132016, we performed a qualitative analysis to determine whether it was more likely than not that a goodwill
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and 2012,shares in thousands, except per share amounts)
impairment exists. We were not aware of any adverse qualitative factors that would indicate any impairment to our goodwill as of the fair valuedate of our single reporting unit substantially exceeded its carrying valueannual assessment for 2016 and therefore was not at riskas of failing step one of ASC 350-20, Goodwill. As a result of the acquisition of the connected vehicle business of Agero in November 2013, we recorded additional goodwill of $389,462 during the year ended December 31, 2013. No indicators of impairment were noted subsequent to our annual impairment assessment.
2016.
As of December 31, 2013, thereNo impairment losses were no indicators of impairment, and no impairment loss was recorded for goodwill during the years endedDecember 31, 2013, 20122016, 2015 and 2011.2014. As of December 31, 2013,2016, 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,$4,766,190, which was recognized during the year ended December 31, 2008.2008.
During the years endedDecember 31, 2013 and 2012, we reduced goodwill by $274 and $19,491, respectively, related to the subsequent exercise of certain stock options and vesting of certain restricted stock units that were recorded at fair value in connection with the Merger.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
We recorded intangible assets at fair value related to the Merger that were formerly held by XM Satellite Radio Holdings Inc. In November 2013, we recorded intangible assets at fair value as a result of the acquisition of the connected vehicle business of Agero. Our intangible assets include the following:
| | | | | December 31, 2013 | | December 31, 2012 | | | December 31, 2016 | | December 31, 2015 |
| | Weighted Average Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | Weighted
Average
Useful Lives | | Gross
Carrying
Value | | Accumulated Amortization | | Net Carrying
Value | | Gross
Carrying
Value | | Accumulated Amortization | | Net Carrying
Value |
| Due to the Merger: | | | | | | | | | | | | | |
| Indefinite life intangible assets: | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
| FCC licenses | Indefinite | | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
| | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
| Indefinite | | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
| | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
|
| Trademark | Indefinite | | 250,000 |
| | — |
| | 250,000 |
| | 250,000 |
| | — |
| | 250,000 |
| Indefinite | | 250,000 |
| | — |
| | 250,000 |
| | 250,000 |
| | — |
| | 250,000 |
|
| Definite life intangible assets: | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
| Subscriber relationships | 9 years | | 380,000 |
| | (271,372 | ) | | 108,628 |
| | 380,000 |
| | (233,317 | ) | | 146,683 |
| 9 years | | 380,000 |
| | (364,893 | ) | | 15,107 |
| | 380,000 |
| | (336,822 | ) | | 43,178 |
|
| OEM relationships | | 15 years | | 220,000 |
| | (46,444 | ) | | 173,556 |
| | 220,000 |
| | (31,778 | ) | | 188,222 |
|
| Licensing agreements | 9.1 years | | 45,289 |
| | (19,604 | ) | | 25,685 |
| | 78,489 |
| | (44,161 | ) | | 34,328 |
| 12 years | | 45,289 |
| | (30,664 | ) | | 14,625 |
| | 45,289 |
| | (26,977 | ) | | 18,312 |
|
| Proprietary software | 6 years | | 16,552 |
| | (13,384 | ) | | 3,168 |
| | 16,552 |
| | (12,777 | ) | | 3,775 |
| 8 years | | 27,215 |
| | (19,673 | ) | | 7,542 |
| | 27,215 |
| | (17,752 | ) | | 9,463 |
|
| Developed technology | 10 years | | 2,000 |
| | (1,083 | ) | | 917 |
| | 2,000 |
| | (883 | ) | | 1,117 |
| 10 years | | 2,000 |
| | (1,683 | ) | | 317 |
| | 2,000 |
| | (1,483 | ) | | 517 |
|
| Leasehold interests | 7.4 years | | 132 |
| | (96 | ) | | 36 |
| | 132 |
| | (79 | ) | | 53 |
| 7.4 years | | — |
| | — |
| | — |
| | 132 |
| | (132 | ) | | — |
|
| Due to connected vehicle business of Agero: | | | | | | | | | | | | | |
| Definite life intangible assets: | | | | | | | | | | | | | |
| OEM relationships | 15 years | | $ | 220,000 |
| | $ | (2,444 | ) | | $ | 217,556 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Proprietary software | 10 years | | 10,663 |
| | (245 | ) | | 10,418 |
| | — |
| | — |
| | — |
| |
| Total intangible assets | | $ | 3,008,290 |
| | $ | (308,228 | ) | | $ | 2,700,062 |
| | $ | 2,810,827 |
| | $ | (291,217 | ) | | $ | 2,519,610 |
| | | $ | 3,008,158 |
| | $ | (463,357 | ) | | $ | 2,544,801 |
| | $ | 3,008,290 |
| | $ | (414,944 | ) | | $ | 2,593,346 |
|
Indefinite Life Intangible Assets
We have identified our FCC licenses and the XM trademark as indefinite life intangible assets after considering the expected use of the assets, the regulatory and economic environment within which they are used and the effects of obsolescence on their use.
We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. The following table outlines the years in which each of our satellite licenses expires:
|
| | |
| FCC satellite licenses | | Expiration year |
SIRIUS FM-1FM-5 | | 20172025 |
SIRIUS FM-2FM-6 | | 2017 |
SIRIUS FM-3 | | 2017 |
SIRIUS FM-5 | | 2017 |
SIRIUS FM-6 (1)
| |
|
XM-1 | | 2014 |
XM-2 | | 20142022 |
| XM-3 | | 2021 |
| XM-4 | | 20142022 |
| XM-5 | | 2018 |
| |
(1)
| The FCC license for our FM-6 satellite will be issued for a period of eight years, beginning on the date we certify to the FCC that the satellite has been successfully placed into orbit and that the operations of the satellite fully conform to the terms and conditions of the space station radio authorization. |
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 broadcastradio spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTSIntangibles - Continued
(Dollar amounts in thousands, unless otherwise stated)
Goodwill and OtherIn connection with, provides for an option to first perform a qualitative assessment to determine whether it is more likely than not that an asset is impaired. If the Merger, $250,000qualitative assessment supports that it is more likely than not that the fair value of the purchase price was allocated toasset exceeds its carrying value, a quantitative impairment test is not required. If the XM trademark. Asqualitative assessment does not support the fair value of December 31, 2013, there were no legal, regulatory or contractual limitations associated with the XM trademark.
asset, then a quantitative assessment is performed. Our annual impairment assessment of our identifiable indefinite lived intangible assets is performed as of the fourth quarter of each year.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in thousands, except per share amounts)
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.recognized in an amount equal to that excess.
We completed qualitative assessments of our FCC licenses and XM trademark during the fourth quarter of 2016, 2015 and 2014. As of the date of our annual assessment for 2013,2016, 2015 and 2014, our qualitative impairment assessment of the fair value of our indefinite intangible assets indicated that such assets substantially exceeded their carrying value and therefore was not at risk of impairment.
There No impairments were no indicators of impairment, and no impairment loss was recorded for intangible assets with indefinite lives during the years endedDecember 31, 2013, 20122016, 2015 and 2011.
2014.
Definite Life Intangible Assets
Subscriber relationshipsDefinite-lived intangible assets are amortized on an accelerated basis over 9 years, whichtheir respective estimated useful lives to their estimated residual values, in a pattern that reflects the estimated pattern in whichwhen the economic benefits will be consumed. Other definite lifeconsumed, and are reviewed for impairment under the provisions of ASC 360-10-35, Property, Plant and Equipment/Overall/Subsequent Measurement. We review intangible assets include certain licensing agreements, which are amortized over a weighted average useful lifesubject to amortization for impairment whenever events or circumstances indicate that the carrying amount of 9.1 years on a straight-line basis. The fair valuean asset may not be recoverable. If the sum of the OEM relationshipsexpected cash flows, undiscounted and proprietary software acquiredwithout interest, is less than the carrying amount of the asset, an impairment loss is recognized in November 2013 are being amortized over their estimated weighted average usefulan amount by which the carrying amount of the asset exceeds its fair value. No impairments were recorded for intangible assets with definite lives of 15during the years ended December 31, 2016, 2015 and 10 years, respectively.2014.
Amortization expense for all definite life intangible assets was $50,011, $53,620$48,545, $51,700 and $59,050$55,016 for the years ended December 31, 2013, 20122016, 2015 and 2011,2014, respectively. In 2013, we retired $33,200 in gross carrying value of definite life intangible assets related to licensing agreements that were fully amortized.
Expected amortization expense for each of the fiscal years 20142017 through 20182021 and for periods thereafter is as follows:
|
| | | | |
| Year ending December 31, | | Amount |
| 2014 | | $ | 55,016 |
|
| 2015 | | 51,700 |
|
| 2016 | | 48,545 |
|
| 2017 | | 34,882 |
|
| 2018 | | 19,463 |
|
| Thereafter | | 156,802 |
|
| Total definite life intangible assets, net | | $ | 366,408 |
|
We capitalized a portion of the interest on funds borrowed as part of the cost of constructing our satellites and related launch vehicles. We capitalized interest associated with our FM-6 satellite and related launch vehicle during 2011 through its placement into operation in the fourth quarter 2013. We also incurred interest costs on our debt instruments and on our satellite incentive agreements. The following is a summary of our interest costs:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Interest costs charged to expense | $ | 204,671 |
| | $ | 265,321 |
| | $ | 304,938 |
|
| Interest costs capitalized | 26,445 |
| | 31,982 |
| | 33,522 |
|
| Total interest costs incurred | $ | 231,116 |
| | $ | 297,303 |
| | $ | 338,460 |
|
|
| | | | |
| Years ending December 31, | | Amount |
| 2017 | | $ | 34,882 |
|
| 2018 | | 19,463 |
|
| 2019 | | 19,026 |
|
| 2020 | | 18,446 |
|
| 2021 | | 15,576 |
|
| Thereafter | | 103,754 |
|
| Total definite life intangible assets, net | | $ | 211,147 |
|
Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $21,698, $35,924 and $39,515 for the years ended December 31, 2013, 2012 and 2011, respectively.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
| |
(10)(9) | Property and Equipment |
Property and equipment, including satellites, are stated at cost, less accumulated depreciation. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation is calculated using the straight-line method over the following estimated useful life of the asset:
|
| |
| Satellite system | 15 years |
| Terrestrial repeater network | 5 - 15 years |
| Broadcast studio equipment | 3 - 15 years |
| Capitalized software and hardware | 3 - 7 years |
| Satellite telemetry, tracking and control facilities | 3 - 15 years |
| Furniture, fixtures, equipment and other | 2 - 7 years |
| Building | 20 or 30 years |
| Leasehold improvements | Lesser of useful life or remaining lease term |
We review long-lived assets, such as property and equipment, for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds the estimated future cash flows, an impairment charge is recognized in an amount by which the carrying amount exceeds the fair value of the asset. We did not record any impairments during the years ended December 31, 2016, 2015 and 2014.
Property and equipment, net, consists of the following:
| | | | December 31,
2013 | | December 31,
2012 | December 31, 2016 | | December 31, 2015 |
| Satellite system | $ | 2,407,423 |
| | $ | 1,943,537 |
| $ | 1,586,794 |
| | $ | 2,388,000 |
|
| Terrestrial repeater network | 109,367 |
| | 112,482 |
| 127,854 |
| | 117,127 |
|
| Leasehold improvements | 46,173 |
| | 44,938 |
| 53,898 |
| | 49,407 |
|
| Broadcast studio equipment | 59,020 |
| | 55,823 |
| 84,697 |
| | 70,888 |
|
| Capitalized software and hardware | 298,267 |
| | 232,753 |
| 558,101 |
| | 466,464 |
|
| Satellite telemetry, tracking and control facilities | 63,944 |
| | 62,734 |
| 77,290 |
| | 75,440 |
|
| Furniture, fixtures, equipment and other | 67,275 |
| | 76,028 |
| 90,214 |
| | 81,871 |
|
| Land | 38,411 |
| | 38,411 |
| 38,411 |
| | 38,411 |
|
| Building | 58,662 |
| | 57,816 |
| 61,597 |
| | 60,487 |
|
| Construction in progress | 103,148 |
| | 417,124 |
| 144,954 |
| | 101,324 |
|
| Total property and equipment | 3,251,690 |
| | 3,041,646 |
| 2,823,810 |
| | 3,449,419 |
|
| Accumulated depreciation and amortization | (1,657,116 | ) | | (1,469,724 | ) | (1,425,117 | ) | | (2,034,018 | ) |
| Property and equipment, net | $ | 1,594,574 |
| | $ | 1,571,922 |
| $ | 1,398,693 |
| | $ | 1,415,401 |
|
Construction in progress consists of the following:
| | | | December 31,
2013 | | December 31,
2012 | December 31, 2016 | | December 31, 2015 |
| Satellite system | $ | 11,879 |
| | $ | 376,825 |
| $ | 43,977 |
| | $ | 12,912 |
|
| Terrestrial repeater network | 30,078 |
| | 17,224 |
| 1,139 |
| | 25,578 |
|
| Capitalized software | 39,924 |
| | 18,083 |
| 82,204 |
| | 37,064 |
|
| Other | 21,267 |
| | 4,992 |
| 17,634 |
| | 25,770 |
|
| Construction in progress | $ | 103,148 |
| | $ | 417,124 |
| $ | 144,954 |
| | $ | 101,324 |
|
Depreciation expense on property and equipment was $203,303, $212,675 and $208,830 for the years ended December 31, 2013, 2012 and 2011, respectively. We retired property and equipment of $16,039, $5,251 and $12,158 and recognized a loss on the disposal of assets of $351, $657 and $269 during the years ended December 31, 2013, 2012 and 2011, respectively.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
Depreciation expense on property and equipment was $220,434, $220,514 and $211,407 for the years ended December 31, 2016, 2015 and 2014, respectively. We retired property and equipment of $843,129, $43,833 and $19,398 during the years ended December 31, 2016, 2015 and 2014, respectively, which included approximately $801,206 related to satellites during 2016. We recognized a loss on disposal of assets of $12,912 and $7,384, which has been recorded in Satellite and transmission expense in our consolidated statements of comprehensive income, during the years ended December 31, 2016 and 2015, respectively, which related to the disposal of certain obsolete spare parts for a future satellite and obsolete terrestrial repeaters and related parts, respectively. We did not recognize any loss on disposal of assets during the year ended December 31, 2014.
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 year ended December 31, 2016 was $419, which related to the construction of our SXM-7 and SXM-8 satellites. We did not capitalize any interest costs for the years ended December 31, 2015 and 2014.
Satellites
We currently ownAs of December 31, 2016, we owned a fleet of ten orbitingfive satellites. The chart below provides certain information on these satellites:our satellites as of December 31, 2016:
|
| | | | |
| Satellite Designation | | Year Delivered | | Estimated End of Depreciable Life |
| FM-1* | | 2000 | | 2013 |
| FM-2* | | 2000 | | 2013 |
| FM-3 | | 2000 | | 2015 |
| FM-5 | | 2009 | | 2024 |
| FM-6 | | 2013 | | 2028 |
| XM-1* | | 2001 | | 2013 |
| XM-2* | | 2001 | | 2013 |
| XM-3 | | 2005 | | 2020 |
| XM-4 | | 2006 | | 2021 |
| XM-5 | | 2010 | | 2025 |
* Satellite was fully depreciated as of December 31, 2013 but is still in operation. |
| | | | |
| 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 |
We own five orbiting satellites for use in the Sirius system and five orbiting satellites for use in the XM system. Four of these satellites were manufactured by Boeing Satellite Systems International, Inc., and six were manufactured by Space Systems/Loral.
During the years ended December 31, 2013, 2012 and 2011, we capitalized expenditures, including interest, of $87,061, $32,893 and $81,189, respectively, related to the construction of our FM-6 satellite and related launch vehicle, which was launched and placed into operation in the fourth quarter of 2013.
| |
(11)(10) | Related Party Transactions |
We hadIn the followingnormal course of business, we enter into transactions with related party balances at December 31, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Related party current assets | | Related party long-term assets | | Related party current liabilities | | Related party long-term liabilities | | Related party debt |
| | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
| Liberty Media | $ | 278 |
| | $ | — |
| | $ | — |
| | $ | 757 |
| | $ | 15,766 |
| | $ | 3,980 |
| | $ | — |
| | $ | — |
| | $ | 10,959 |
| | $ | 208,906 |
|
| Sirius XM Canada | 8,867 |
| | 13,167 |
| | 27,619 |
| | 44,197 |
| | 4,554 |
| | 2,776 |
| | 16,337 |
| | 18,966 |
| | — |
| | — |
|
| M-Way | — |
| | — |
| | 2,545 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 9,145 |
| | $ | 13,167 |
| | $ | 30,164 |
| | $ | 44,954 |
| | $ | 20,320 |
| | $ | 6,756 |
| | $ | 16,337 |
| | $ | 18,966 |
| | $ | 10,959 |
| | $ | 208,906 |
|
Liberty Media
In February and March 2009, we entered into several transactions to borrow up to $530,000 from Liberty Media Corporation and its affiliates. AllAs of these loans were repaid in 2009.
As part of the transactions with Liberty Media, in February 2009, we entered into an investment agreement (the “Investment Agreement”) with Liberty Radio, LLC, an indirect wholly-owned subsidiary of Liberty Media. Pursuant to the Investment Agreement, we issued to Liberty Radio, LLC 12,500,000 shares of our Convertible Perpetual Preferred Stock, Series B-1 (the “Series B Preferred Stock”) with a liquidation preference of $0.001 per share in partial consideration for the loan investments. The Series B Preferred Stock was convertible into approximately 40% of our outstanding shares of common stock (after giving effect to such conversion).
In September 2012, Liberty Radio, LLC converted 6,249,900 shares of the Series B Preferred Stock into 1,293,467,684 shares of our common stock. In January 2013, the Federal Communications Commission granted Liberty Media approval to acquire de jure control of us, and Liberty Radio, LLC converted its remaining Series B Preferred Stock into 1,293,509,076 shares of our common stock. In addition, Liberty Media, indirectly through its subsidiaries, purchased an additional 50,000,000 shares of our common stock. As a result of these conversions of Series B Preferred Stock and additional
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
purchases of shares of our common stock,December 31, 2016, Liberty Media beneficially owned, directly and indirectly, over 50%approximately 67% of the outstanding shares of our outstanding common stock as of December 31, 2013.
Two current Liberty Mediaand has two executives and one Liberty Media director are members 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 years ended December 31, 2016 and 2015.
On October 9, 2013,, we entered into an agreement with Liberty Media to repurchase $500,000$500,000 of our common stock from Liberty Media. Pursuant to that agreement, with Liberty Media, we repurchased $160,000$160,000 of our common stock from Liberty Media as of December 31,in 2013. On January 23, and in April 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240,000 repurchase of shares of our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date ofcompleted the final purchase installment under this share repurchase agreement and repurchased the agreement. As a result of this deferral, we expect to repurchase $340,000remaining $340,000 of our shares of common stock from Liberty Media on April 25, 2014 at a price of $3.66$3.66 per share. We entered into this amendment atAs there were certain terms in the requestforward purchase contract that could have caused the obligation to not be fulfilled, the instrument was recorded as a liability and was marked to fair value with $34,485 recorded to Loss on change in value of derivatives within our consolidated statements of comprehensive income during the Special Committeeyear ended December 31, 2014.
During the year ended December 31, 2014, we recognized $1,025 in Interest expense associated with the portion of our board of directors that has been formed to review and evaluate the Liberty Media proposal. See “Note 1 - Recent Developments.”
On January 3, 2014, Holdings' Board of Directors received a non-binding letter from Liberty Media proposing a transaction pursuant to which all outstanding shares of common stock of Holdings not owned by Liberty Media would be converted into the right to receive 0.0760 of a new non-voting share of Liberty Series C common stock. Holdings' Board of Directors has formed a Special Committee to consider Liberty Media’s proposal.
Liberty Media has advised us that as of December 31, 2013 and 2012 it also owned the following:
|
| | | | | | | |
| | December 31,
2013 | | December 31,
2012 |
| 7% Exchangeable Senior Subordinated Notes due 2014 | $ | 11,000 |
| | $ | 11,000 |
|
| 8.75% Senior Notes due 2015 | — |
| | 150,000 |
|
| 7.625% Senior Notes due 2018 | — |
| | 50,000 |
|
| Total principal debt | 11,000 |
| | 211,000 |
|
| Less: discounts | 41 |
| | 2,094 |
|
| Total carrying value of debt | $ | 10,959 |
| | $ | 208,906 |
|
During the year endedDecember 31, 2013, we redeemed $150,000 of our 8.75%7% Exchangeable Senior Subordinated Notes due 2015 and $50,000 of our 7.625% Senior Notes due 20182014 (the “Exchangeable Notes”) held by Liberty Media as part of the redemption of these Notes in their entirety.through November 2014.
As of December 31, 2013 and 2012, we recorded $64 and $3,980, respectively, related to accrued interest with Liberty Media to Related party current liabilities. Sirius XM Canada
We recognized Interest expense associated with debt held by Liberty Media of $13,514, $30,931 and $35,681 for the years ended December 31, 2013, 2012 and 2011, respectively. The fair value of the derivative associated with the share repurchase agreement with Liberty Media was $15,702 ashold an equity method investment in Sirius XM Canada. As of December 31, 20132016, we owned approximately 47,300 of Sirius XM Canada’s Class A shares on a converted basis, representing an approximate 37% equity interest and is recorded in Holdings' consolidated balance sheet in Related party current liabilities, with changes in fair value recordedan approximate 25% voting interest. We primarily provide programming and content services to Holdings' statementsSirius XM Canada and are reimbursed from Sirius XM Canada for certain product development costs, production and distribution of comprehensive income.chipset radios, as well
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
Sirius XM Canada
In June 2011, Canadian Satellite Radio Holdings Inc.,as for information technology and streaming support costs. Refer to Note 1 Business & Basis of Presentation for information on the former parent company of XM Canada, and Sirius Canada completed apending transaction to combine their operations ("the Canada Merger"). In January 2013, Canadian Satellite Radio Holdings Inc. changed its name to Sirius XM Canada Holdings Inc. The combined company operates aswith Sirius XM Canada.
We own approximately 46,700,000 Class A shares on a converted basis of Sirius XM Canada Holdings Inc. representing a 37.5% equity interest and a 25.0% voting interest.
We hadInvestments in which we have the following Related party current asset balances attributableability to Sirius XM Canada at December 31, 2013 and 2012:
|
| | | | | | | |
| | December 31,
2013 | | December 31,
2012 |
| Deferred programming costs and accrued interest | $ | 2,782 |
| | $ | 4,350 |
|
| Dividends receivable | — |
| | 6,176 |
|
| Chip set and other services reimbursement | 2,387 |
| | 2,641 |
|
| Fair value of host contract of debenture | 3,641 |
| | — |
|
| Fair value of embedded derivative of debenture | 57 |
| | — |
|
| Total | $ | 8,867 |
| | $ | 13,167 |
|
We provide Sirius XM Canada with chip sets and other services and weexercise significant influence but not control are reimbursed for these costs. Sirius XM Canada declared dividends of $6,176 during the year ended December 31, 2012 which were not paid until 2013.
We hold an investment in CAD $4,000 face value of 8% convertible unsecured subordinated debentures issued by Sirius XM Canada for which the embedded conversion feature is bifurcated from the host contract. As of December 31, 2013, the debentures are classified as a Related party current asset since they are expected to be redeemed by Sirius XM Canada during the first quarter of 2014. The host contract is accounted for at fair value as an available-for-sale security with changes in fair value recorded to Accumulated other comprehensive income (loss), net of tax. The embedded conversion feature is accounted for at fair value as a derivative with changes in fair value recorded in earnings as Interest and investment income.
Related party long-term asset balances attributable to Sirius XM Canada consisted of the following:
|
| | | | | | | |
| | December 31,
2013 | | December 31,
2012 |
| Non-interest bearing note, principal | $ | 376 |
| | $ | 404 |
|
| Fair value of host contract of debenture | — |
| | 3,877 |
|
| Fair value of embedded derivative of debenture | — |
| | 9 |
|
Investment balance* | 26,972 |
| | 37,983 |
|
| Deferred programming costs and other receivables | 271 |
| | 1,924 |
|
| Total | $ | 27,619 |
| | $ | 44,197 |
|
* The investment balance included equity method goodwill and intangible assets of $26,161 and $27,615 as of December 31, 2013 and 2012, respectively.
We hold a non-interest bearing note issued by Sirius XM Canada. Our interest in Sirius XM Canada is accounted for under the equity method. The excess of the cost of our ownership interest in the equity of Sirius XM Canada over our share of the net assets is recognized as goodwill and intangible assets and is included in the carrying amount of our investment. Equity method goodwill is not amortized. We periodically evaluate this investment to determine if there has been an other than temporary decline below carrying value. Equity method intangible assets are amortized over their respective useful lives, which is recorded in Interest and investment income.
Sirius XM Canada declared quarterly dividends of $16,796 and $7,749 during the years endedDecember 31, 2013 and 2012, respectively, which were recorded as a reduction to our investment balance in Sirius XM Canada.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Related party liabilities attributable to Sirius XM Canada consisted of the following:
|
| | | | | | | |
| | December 31,
2013 | | December 31,
2012 |
| Deferred revenue for NHL licensing fees | $ | 1,500 |
| | $ | — |
|
| Carrying value of deferred revenue | 18,966 |
| | 21,742 |
|
| Deferred revenue for software licensing fees and other | 425 |
| | — |
|
| Total | $ | 20,891 |
| | $ | 21,742 |
|
In 2005, XM entered into agreements to provide XM Canada, now Sirius XM Canada, with the right to offer XM satellite radio service in Canada. The agreements have an initial ten-year term, and Sirius XM Canada has the unilateral option to extend the agreements for an additional five-year term. We receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and an activation fee for each gross activation of an XM Canada subscriber on XM’s system. Sirius XM Canada is obligated to pay us a total of $70,300 for the rights to broadcast and market National Hockey League (“NHL”) games for a ten-year term. We recognize these payments on a gross basis as a principal obligor pursuant to the provisionsequity method of ASC 605, Revenue Recognition. The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, which is amortized on a straight-line basis through 2020, the end of the expected term of the agreements.
accounting. We recorded the following revenue from Sirius XM Canada as Other revenue inrecognize our consolidated statements of comprehensive income:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 * |
| Royalty income | $ | 35,411 |
| | $ | 31,368 |
| | $ | 13,735 |
|
| Amortization of Sirius XM Canada deferred income | 2,776 |
| | 2,776 |
| | 1,388 |
|
| Licensing fee revenue | 5,012 |
| | 4,500 |
| | 3,000 |
|
| Advertising and other reimbursements | 3,001 |
| | 833 |
| | 417 |
|
| Streaming revenue | 2,735 |
| | — |
| | — |
|
| Total revenue from Sirius XM Canada | $ | 48,935 |
| | $ | 39,477 |
| | $ | 18,540 |
|
* Sirius XM Canada commenced operations in June 2011.
Ourproportionate share of net earnings or losses of Sirius XM Canada are recorded to Interest and investmentas they occur as a component of Other income in our consolidated statements of comprehensive income on a one month lag. Our
The difference between our investment and our share of the fair value of the underlying net assets of Sirius XM Canada’s net income was $7,319, $554Canada is first allocated to either finite-lived intangibles or indefinite-lived intangibles and $1,081 for the years ended December 31, 2013, 2012balance is attributed to goodwill. We follow ASC 350, Intangibles - Goodwill and 2011, respectively. We recorded amortization expense related to theOther, which requires that equity method finite-lived intangibles be amortized over their estimated useful life while indefinite-lived intangibles and goodwill are not amortized. The amortization of equity method finite-lived intangible assets of $1,454, $974 and $1,556 for the years ended December 31, 2013, 2012 and 2011, respectively.
Sirius Canada
We had an equity interest of 49% in Sirius Canada until June 21, 2011 when the Canada Merger closed.
In 2005, we entered into a license and services agreement with Sirius Canada. Pursuant to such agreement, we were reimbursed for certain costs incurred to provide Sirius Canada service, including certain costs incurred for the production and distribution of radios, as well as information technology support costs. In consideration for the rights granted pursuant to this license and services agreement, we had the right to receive a royalty equal to a percentage of Sirius Canada’s gross revenues based on subscriber levels (ranging between 5% and 15%) and the number of Canadian-specific channels made available to Sirius Canada.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Weis recorded the following revenue from Sirius Canada. Royalty income is included in Other revenue and dividend income is included in Interest and investment income in our consolidated statements of comprehensive income:income. We periodically evaluate our equity method investments to determine if there has been an other-than temporary decline in fair value below carrying value. Equity method finite-lived intangibles, indefinite-lived intangibles and goodwill are included in the carrying amount of the investment.
We had the following related party balances associated with Sirius XM Canada:
|
| | | |
| | For the Year Ended December 31, |
| | 2011 * |
| Royalty income | $ | 9,945 |
|
| Dividend income | 460 |
|
| Total revenue from Sirius Canada | $ | 10,405 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| Related party current assets | $ | 6,170 |
| | $ | 5,941 |
|
| Related party long-term assets | $ | 8,918 |
| | $ | — |
|
| Related party current liabilities | $ | 2,840 |
| | $ | 2,840 |
|
| Related party long-term liabilities | $ | 7,955 |
| | $ | 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 December 31, 2016 primarily included our investment balance in Sirius Canada combinedXM Canada. Our related party liabilities as of December 31, 2016 and 2015 included $2,776 for the current portion of deferred revenue and $7,867 and $10,639, respectively, for the long-term portion of deferred revenue recorded as of the Merger date related to agreements with XM Canada, in June 2011.
Receivables from royalty and dividend income were utilized to absorb a portion of our share of net losses generated bynow Sirius XM Canada. TotalThese costs reimbursed by Sirius Canada were $5,253 for the year endedDecember 31, 2011.
Our share of net earnings or losses of Sirius Canada was recorded to Interest and investment income in our consolidated statements of comprehensive incomeare being amortized on a one month lag. Our share of Sirius Canada’s net loss was $9,717 for the year endedDecember 31, 2011. The payments received from Sirius Canada in excess of carrying value were $6,748 for the year endedDecember 31, 2011.
XM Canada
We had an equity interest of 21.5% in XM Canada until June 21, 2011 when the Canada Merger closed.
straight line basis through 2020.
We recorded the following revenue fromand other income associated with Sirius XM Canada as Other revenue in our consolidated statements of comprehensive income:
|
| | | |
| | For the Year Ended December 31, |
| | 2011 * |
| Amortization of XM Canada deferred income | $ | 1,388 |
|
| Subscriber and activation fee royalties | 5,483 |
|
| Licensing fee revenue | 3,000 |
|
| Advertising reimbursements | 833 |
|
| Total revenue from XM Canada | $ | 10,704 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Revenue (a) | $ | 45,962 |
|
| $ | 56,397 |
| | $ | 49,691 |
|
| Other income |
|
|
|
|
| | |
|
Share of net earnings (b) | $ | 12,529 |
|
| $ | — |
| | $ | 7,889 |
|
Dividends (c) | $ | 3,575 |
|
| $ | 12,645 |
| | $ | 7,628 |
|
* XM Canada combined with Sirius Canada in June 2011.
Our share of net earnings or losses of XM Canada was recorded to Interest and investment income in our consolidated statements of comprehensive income on a one month lag. Our share of XM Canada’s net loss was $6,045 for the year endedDecember 31, 2011.
M-Way
As part of the acquisition of the connected vehicle business of Agero in November 2013, we acquired a 30% ownership in M-Way Solutions GmbH ("M-Way"), a German mobile software solutions provider, which is accounted for utilizing the equity method of accounting. We have recorded a $2,545 investment in M-Way in Related party long-term assets on our consolidated balance sheet. We also acquired an option to purchase the remaining 70% ownership of M-Way which expires in 2017.
| |
(12)(a) | InvestmentsUnder our agreements with Sirius XM Canada, we currently receive a percentage-based royalty of 10% and 15% for certain types of subscription revenue earned by Sirius XM Canada for Sirius and XM platforms, respectively; and additional royalties for premium services and royalties for activation fees and reimbursements for other charges. We record revenue from Sirius XM Canada as Other revenue in our 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 consolidated statements of comprehensive income on a one month lag. For the year ended December 31, 2014, this amount included amortization related to the equity method intangible assets of $363 and a gain of $1,251 related to the fair value received in excess of the carrying value associated with the redemption of our investment in Sirius XM Canada's 8% convertible unsecured subordinated debentures in February 2014. |
| |
| (c) | Pursuant to the Arrangement Agreement, Sirius XM Canada did not pay any dividends during the second half of the year ended December 31, 2016. Sirius XM Canada paid gross dividends to us of $7,548, $15,645 and $43,492 during the years ended December 31, 2016, 2015 and 2014, 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. |
Long Term Restricted Investments
Restricted investments relate to reimbursement obligations under letters of credit issued for the benefit of lessors of our office space. As of December 31, 2013 and 2012, our Long-term restricted investments were $5,718 and $3,999, respectively. During the year endedDecember 31, 2013, a new letter of credit for $1,719 associated with additional office space was issued for the benefit of a lessor.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
Sirius XM is the sole issuer of all of our debt, other than our 7% Exchangeable Senior Subordinated Notes due 2014. Our debt as of December 31, 20132016 and 20122015 consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Carrying balance at December 31, |
| Issuer | | Issued | | Debt | | Maturity Date | | Interest Payable | | Principal Amount | | 2013 | | 2012 (h) |
Sirius XM and Holdings (a)(b) | | August 2008 | | 7% Exchangeable
Senior Subordinated Notes (the "Exchangeable Notes") | | December 1, 2014 | | semi-annually on June 1 and December 1 | | $ | 502,370 |
| | $ | 500,481 |
| | $ | 545,888 |
|
Sirius XM
(a)(c)(d) | | March 2010 | | 8.75% Senior Notes (the "8.75% Notes") | | April 1, 2015 | | semi-annually on April 1 and October 1 | | 800,000 |
| | — |
| | 792,944 |
|
Sirius XM
(a)(c)(e) | | October 2010 | | 7.625% Senior Notes (the "7.625% Notes") | | November 1, 2018 | | semi-annually on May 1 and November 1 | | 700,000 |
| | — |
| | 690,353 |
|
Sirius XM
(a)(c) | | May 2013 | | 4.25% Senior Notes (the "4.25% Notes") | | May 15, 2020 | | semi-annually on May 15 and November 15 | | 500,000 |
| | 494,809 |
| | — |
|
Sirius XM
(a)(c) | | September 2013 | | 5.875% Senior Notes (the "5.875% Notes") | | October 1, 2020 | | semi-annually on April 1 and October 1 | | 650,000 |
| | 642,914 |
| | — |
|
Sirius XM
(a)(c) | | August 2013 | | 5.75% Senior Notes (the "5.75% Notes") | | August 1, 2021 | | semi-annually on February 1 and August 1 | | 600,000 |
| | 594,499 |
| | — |
|
Sirius XM
(a)(c) | | August 2012 | | 5.25% Senior Notes (the "5.25% Notes") | | August 15, 2022 | | semi-annually on February 15 and August 15 | | 400,000 |
| | 394,648 |
| | 394,174 |
|
Sirius XM
(a)(c) | | May 2013 | | 4.625% Senior Notes (the "4.625% Notes") | | May 15, 2023 | | semi-annually on May15 and November 15 | | 500,000 |
| | 494,653 |
| | — |
|
Sirius XM
(f) | | December 2012 | | Senior Secured Revolving Credit Facility (the "Credit Facility") | | December 5, 2017 | | variable fee paid quarterly | | 1,250,000 |
| | 460,000 |
| | — |
|
| Sirius XM | | Various | | Capital leases | | Various | | n/a | | n/a |
| | 19,591 |
| | 11,861 |
|
| Total Debt | | 3,601,595 |
| | 2,435,220 |
|
| Less: total current maturities (g) | | 507,774 |
| | 4,234 |
|
| Total long-term | | 3,093,821 |
| | 2,430,986 |
|
| Less: long-term related party | | — |
| | 208,906 |
|
| Total long-term, excluding related party | | $ | 3,093,821 |
| | $ | 2,222,080 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Carrying value(a) at |
| Issuer / Borrower | | Issued | | Debt | | Maturity Date | | Interest Payable | | Principal Amount at December 31, 2016 | | December 31, 2016 | | December 31, 2015 |
Sirius XM
(b) | | May 2013 | | 4.25% Senior Notes
(the "4.25% Notes") | | May 15, 2020 | | semi-annually on May 15 and November15 | | $ | 500,000 |
| | $ | 497,069 |
| | $ | 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 | | — |
| | — |
| | 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 |
| | 596,386 |
| | 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 |
| | 496,111 |
| | 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 |
| | 1,486,556 |
| | 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 |
| | 990,340 |
| | 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 |
| | 989,259 |
| | — |
|
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 |
| | 396,232 |
| | 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 |
| | 390,000 |
| | 340,000 |
|
| Sirius XM | | Various | | Capital leases | | Various | | n/a | | n/a |
| | 13,559 |
| | 12,892 |
|
| Total Debt | | 5,855,512 |
| | 5,455,533 |
|
| Less: total current maturities | | 5,485 |
| | 4,764 |
|
| Less: total deferred financing costs for Notes | | 7,263 |
| | 7,155 |
|
| Total long-term debt | | $ | 5,842,764 |
| | $ | 5,443,614 |
|
| |
| (a) | The carrying balancevalue of the Notes areobligations is net of theany remaining unamortized original issue discount. |
| |
| (b) | The Exchangeable Notes are senior subordinated obligations and rank junior in right of payment to our existing and future senior debt and equally in right of payment with our existing and future senior subordinated debt. Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under these Notes on a senior subordinated basis. The Exchangeable Notes are exchangeable at any time at the option of the holder into shares of our common stock at an exchange rate of 543.1372 shares of common stock per $1,000 principal amount of the notes, which is equivalent to an approximate exchange price of $1.841 per share of common stock. In connection with the fundamental change that occurred on January 17, 2013 and the subsequent offer that was made to each holder of the Exchangeable Notes on February 1, 2013, $47,630 in principal amount of the Exchangeable Notes were converted resulting in the issuance of 27,687,850 shares of our common stock. As a result of this conversion, we retired $47,630 in principal amount of the Exchangeable Notes and recognized a proportionate share of unamortized discount and deferred financing fees of $2,533 to Additional paid-in capital for the year endedDecember 31, 2013. No loss was recognized as a result of the conversion. During the year endedDecember 31, 2013, the common stock reserved for conversion in connection with the Exchangeable Notes were considered to be anti-dilutive in our calculation of diluted net income per share. During the year ended2012, the Exchangeable Notes were considered to be dilutive.
|
| |
(c) | Substantially all of our domestic wholly-owned subsidiaries have guaranteed these notes. |
| |
(d)(c) | During the year endedDecember 31, 2013, we purchased $800,000 inIn 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 8.75%5.25% Notes for an aggregate purchase price, including premiumare equal and interest, of $927,860. We recognized an aggregate loss onratable to the extinguishment ofliens granted to secure the 8.75% Notes of $104,818 during the year endedDecember 31, 2013, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.Credit Facility. |
| |
| (e) | During the year endedDecember 31, 2013, we purchased $700,000 in aggregate principal amount of the 7.625% Notes for an aggregate purchase price, including premium and interest, of $797,830. We recognized an aggregate loss on the extinguishment of the 7.625% Notes of $85,759 during the year endedDecember 31, 2013, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.
|
| |
(f) | In December 2012, Sirius XM entered into a five-year Credit Facility with a syndicate of financial institutions for $1,250,000. 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. BorrowingsInterest 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 December 31, 2016. Sirius XM's outstanding borrowings under the Credit
|
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Facility are used for working capital and other general corporate purposes, including dividends, financing of acquisitions and share repurchases. Interest on borrowings is payable on a quarterly 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 currently 0.35% per annum and is payable on a quarterly basis. As of December 31, 2013, $790,000 was available for future borrowing under the Credit Facility. Sirius XM's outstanding borrowings under the Credit Facility are classified as Long-term debt within our consolidated balance sheet as of December 31, 2013 Facility are classified as Long-term debt within our consolidated balance sheets due to the long-term maturity of this debt.
| |
(g) | This balance includes $10,959 in related party current maturities as of December 31, 2013.
|
| |
(h)(f) | DuringOn August 25, 2016, we called for the year endedDecember 31, 2012, we purchased $257,000redemption of our then$650,000 outstanding 9.75% Senior Securedprincipal balance of the 5.875% Notes due 2015 (the "9.75% Notes")on October 1, 2016 for an aggregate purchase price, including premium and interest, of $281,698.$669,097. We recognized an aggregate loss$24,229 to Loss on the extinguishment of the 9.75% Notes of $22,184 during the year endedDecember 31, 2012,debt and credit facilities, net, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishmentas a result of debt and credit facilities, net. During the year endedDecember 31, 2012, we purchased $778,500 of our then outstanding 13% Senior Notes due 2013 (the "13% Notes") for an aggregate purchase price, including interest, of $879,133. We recognized an aggregate loss on the extinguishment of these 13% Notes of $110,542 during the year endedDecember 31, 2012, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.
this redemption. |
The following table reconciles total current debt held at Holdings toF-21
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in thousands, except per share amounts)
Converted Debt
During the total current and long-term debt held at Sirius XM as of year ended December 31, 2013:
|
| | | | |
| | | Carrying amount at December 31, 2013 |
| Total current debt at Holdings | | $ | 507,774 |
|
Additional fair value associated with the Exchangeable Notes (a) | | 466,815 |
|
| Total current debt at Sirius XM | | $ | 974,589 |
|
| Total long-term debt | | $ | 3,093,821 |
|
| Total debt at Sirius XM | | $ | 4,068,410 |
|
| |
(a)
| In connection with our corporate reorganization in November 2013, the Exchangeable Notes were amended such that the settlement of the conversion feature is into shares of Holdings' common stock and Holdings and Sirius XM became co-obligors with respect to the Exchangeable Notes. As of December 31, 2013, $466,815 was recorded to Sirius XM's consolidated balance sheet in Current maturities of long-term debt for the fair value of the Exchangeable Notes in excess of the carrying amount. Changes in fair value are recorded in Loss on fair value of debt and equity instruments within Sirius XM's consolidated statements of comprehensive income. We recognized $466,815 in Loss on fair value of debt and equity instruments during the year endedDecember 31, 2013. The additional fair value in excess of the carrying amount of this instrument is eliminated in Holdings' consolidated balance sheets and statements of comprehensive income.
|
2014, $502,370 in principal amount of the Exchangeable Notes were converted, resulting in the issuance of 272,856 shares of our common stock. No loss was recognized as a result of this conversion.
Covenants and Restrictions
The Exchangeable Notes require compliance with certain covenants that restrict Holdings' and Sirius XM's ability to, among other things, (i) enter into certain transactions with affiliates and (ii) merge or consolidate with another person.
Under the Credit Facility, Sirius XM, our wholly-owned subsidiary, must comply with a debt maintenance covenant that it notcannot exceed a total leverage ratio, calculated as consolidated total consolidated debt to consolidated operating cash flow, of 5.0 to 1.0.1.0. The Credit Facility and the 5.25% Notes generally requirerequires 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 4.25% Notes, 4.625% Notes, 5.75% Notes and 5.875% Notes are subjectindentures 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. In addition, each of these indentures restricts
Under 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.
Under our 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
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
to grace periods where applicable. If an event of default occurs and is continuing, our debt could become immediately due and payable.
At December 31, 20132016 and 2012,2015, we were in compliance with our debt covenants.
| |
(14)(12) | Stockholders’ Equity |
Common Stock, Holdings, par value $0.001$0.001 per share
As a result of our corporate reorganization in November 2013, all of the outstanding shares of Sirius XM's common stock were converted, on a share for share basis, into identical shares of common stock of Holdings. The certificate of incorporation, the bylaws, the executive officers and the board of directors of HoldingsWe are the same as those of Sirius XM in effect immediately prior to the reorganization.
We were authorized to issue up to 9,000,000,0009,000,000 shares of common stock as of December 31, 2013 and 2012.stock. There were 6,096,220,5264,746,047 and 5,262,440,0855,153,451 shares of common stock issued and 4,740,947 and 5,147,647 shares outstanding as of on December 31, 20132016 and 2012,2015, respectively.
As of December 31, 2013, approximately 562,534,0002016, there were 362,541 shares of common stock were reserved for issuance in connection with outstanding convertible debt, warrants, incentive stock based awards and common stock to be granted to members of our board of directors, employees and third parties upon satisfactionparties.
Dividend Declared, $0.01 per share
On October 26, 2016, our board of performance targets.
directors declared a dividend on our common stock in the amount of $0.01 per share of common stock to stockholders of record as of the close of business on November 9, 2016. The dividend was paid in cash on November 30, 2016 in the aggregate amount of $48,079.
Stock Repurchase Program
SinceAs of December 2012,31, 2016, our board of directors hashad approved $4,000,000for repurchasesrepurchase an aggregate of $10,000,000 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, andpursuant 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.
On October 9, 2013, we entered into an agreement with Liberty Media to repurchase $500,000affiliates, or otherwise. As of our common stock from Liberty Media. Pursuant to the agreement with Liberty Media, we repurchased $160,000 of our common stock from Liberty Media as of December 31, 2013. On January 23, 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240,000 repurchase of shares of2016, our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date of the final purchase installment under the agreement. As a result of this deferral, we expect to repurchase $340,000 of our shares of common stock from Liberty Media on April 25, 2014 at a price of $3.66 per share. We entered into this amendment at the request of the Special Committee of our board of directors that has been formed to review and evaluate the Liberty Media proposal. See “Note 1 - Recent Developments.”
The share repurchase agreement was transferred from Sirius XM to Holdings' effective November 15, 2013. Commitments under the share repurchase agreement are accounted for at fair value as a derivative, with changes in fair value recorded in Loss on change in value of derivatives within Holdings' consolidated statements of comprehensive income. Prior to November 15, 2013, changes in fair value were recorded to Loss on fair value of debt and equity instruments in Sirius XM's consolidated statements of comprehensive income.
We recognized $20,393 to Loss on change in value of derivatives in Holdings' consolidated statement of comprehensive income during the year endedcumulative repurchases since December 31, 2013 for the share repurchase agreement, net of a $2,713 gain recognized to Loss on fair value of debt and equity instruments in Sirius XM's consolidated statements of comprehensive income.
During the year endedDecember 31, 2013, we repurchased 520,257,866 shares of our common stock for $1,762,360, including fees and commissions, on the open market and in privately negotiated transactions, including transactions with Liberty Media. All common stock repurchases were settled and retired as of December 31, 2013.
As of December 31, 2013, $2,237,640 remained available for purchase2012 under our stock repurchase program totaled 2,203,608 shares for $7,973,837, and $2,026,163 remained available under our stock repurchase program.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
The following table summarizes our total share repurchase activity for the years ended:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| Share Repurchase Type | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
Open Market (a) | | 420,111 |
| | $ | 1,672,697 |
| | 524,222 |
| | $ | 2,015,947 |
| | 422,965 |
| | $ | 1,426,428 |
|
Liberty Media (b) | | — |
| | — |
| | — |
| | — |
| | 92,889 |
| | 340,000 |
|
May 2014 ASR Agreement (c) | | — |
| | — |
| | — |
| | — |
| | 151,846 |
| | 506,404 |
|
August 2014 ASR Agreement (d) | | — |
| | — |
| | — |
| | — |
| | 71,316 |
| | 250,000 |
|
| Total Repurchases | | 420,111 |
| | $ | 1,672,697 |
| | 524,222 |
| | $ | 2,015,947 |
| | 739,016 |
| | $ | 2,522,832 |
|
| |
| (a) | As of December 31, 2016, $22,906 of common stock repurchases had not settled, nor been retired, and were recorded as Treasury stock within our consolidated balance sheets and consolidated statements of stockholders’ (deficit) equity. |
| |
| (b) | On October 9, 2013, we entered into an agreement to repurchase $500,000 of our common stock from Liberty Media. In April 2014, we completed the final purchase installment and repurchased 92,889 shares of our common stock for $340,000 from Liberty Media at a price of $3.66 per share. As there were certain terms in the forward purchase contract with Liberty Media that could have caused the obligation not to be fulfilled, the instrument was classified as a liability and was marked to fair value with any gain or loss recorded to our consolidated statements of comprehensive income. We recognized $34,485 to Loss on change in value of derivatives in our consolidated statements of comprehensive income during the year ended December 31, 2014. |
| |
| (c) | In May 2014, we entered into an accelerated share repurchase agreement (the “May 2014 ASR Agreement”) under which we prepaid $600,000 to a third-party financial institution to repurchase our common stock. Under the May 2014 ASR Agreement, we received 151,846shares of our common stock which were retired upon receipt and the counterparty returned to us $93,596 for the unused portion of the original prepayment. |
| |
| (d) | In August 2014, we entered into an accelerated share repurchase agreement (the “August 2014 ASR Agreement”) under which we prepaid $250,000to a third-party financial institution to repurchase our common stock. Under the August 2014 ASR Agreement, we received an aggregate of 71,316shares of our common stock that were retired upon receipt. |
Share Lending Arrangements
To facilitate the offering of the Exchangeable Notes, we entered into share lending agreements with Morgan Stanley Capital Services Inc. and UBS AG London Branch in July 2008. All loaned shares were returned to us as of October 2011, and the share lending agreements were terminated.
We recorded interest expense related to the amortization of the costs associated with the share lending arrangement and other issuance costs for our Exchangeable Notes of $12,745, $12,402 and $11,189$12,701 for the yearsyear endedDecember 31, 2013, 2012 and 2011, respectively. As2014. These costs were fully amortized as of December 31, 2013, the unamortized balance of the debt issuance costs was $12,701, with $12,423 recorded in Other current assets and $278 recorded in Related party current assets in our consolidated balance sheet. As of December 31, 2012, the unamortized balance of the debt issuance costs was $27,652, with $27,099 recorded in Deferred financing fees, net, and $553 recorded in Long-term related party assets. These costs will continue to be amortized until the debt is terminated. A portion of the unamortized debt issuance costs was recognized during the year endedDecember 31, 2013 in connection with conversions of2014 as the Exchangeable Notes.Notes matured on December 1, 2014.
CommonPreferred Stock, Sirius XM, par value $0.001 per share
Due to our corporate reorganization in November 2013, 1,000 shares of common stock were authorized, issued and outstanding, andWe are owned by Holdings as of December 31, 2013.
Preferred Stock, Holdings, par value $0.001 per share
We were authorized to issue up to 50,000,00050,000 shares of undesignated preferred stock aswith a liquidation preference of December 31, 2013 and 2012, respectively.
$0.001 per share. There were 6,250,100no shares of Series B Preferred Stockpreferred stock issued andor outstanding as of December 31, 2012 held by Liberty Media. In January 2013, Liberty Media converted its remaining shares of the Series B Preferred Stock into 1,293,509,076 shares of our common stock.
2016 and 2015.
Warrants
As of December 31, 2016, there were no warrants outstanding. We have previously issued warrants to purchase shares of our common stock in connection with distribution and programming and satellite purchase agreements. As of During the year ended December 31, 2013 and 2012, approximately 18,455,0002015, warrants to acquirewith an equal numberexercise price of $2.50 per share were exercised on a net settlement basis, resulting in the issuance of 6,010 shares of our common stockstock. Except for an insignificant amount of warrant expense associated with the extension of the warrants during the three months ended March 31, 2015, we did not incur warrant related expenses during the years ended December 31, 2016, 2015 and 2014. For the year ended December 31, 2014, 16,667 warrants were outstanding and fully vested. Warrants were included in our calculation of diluted net income per common share as the effect was dilutive for the year endedDecember 31, 2013. The warrants expire at various times through 2015. At December 31, 2013 and 2012, the weighted average exercise price of outstanding warrants was $2.55 per share. We did not incur warrant related expenses during the years endedDecember 31, 2013, 2012 or 2011.2014.
|
| | | | | | | | | |
| | | | | | Number of Warrants Outstanding |
| | | | | | December 31, |
| (warrants in thousands) | Average Exercise Price | | Expiration Date | | 2013 | | 2012 |
| NFL | $2.50 | | March 2015 | | 16,667 |
| | 16,667 |
|
| Other distributors and programming providers | $3.00 | | June 2014 | | 1,788 |
| | 1,788 |
|
| Total | | | | | 18,455 |
| | 18,455 |
|
In October 2012, 4,000,000 warrants held by a distributor expired.
We recognized share-based payment expense of $68,876, $63,822$108,604, $84,310 and $51,622$78,212 for the years endedDecember 31, 2013, 20122016, 2015 and 2011,2014, respectively.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
2009We account for equity instruments granted to employees in accordance with ASC 718, Compensation - Stock Compensation. ASC 718 requires all share-based compensation payments to be recognized in the financial statements based on fair value. Upon adoption of ASU 2016-09 as of January 1, 2016 we recorded actual forfeitures and no longer estimate forfeitures. For the years ended December 31, 2015 and 2014 we estimated forfeitures at the time of the grant. We use the Black-Scholes-Merton option-pricing model to value stock option awards and have elected to treat awards with graded vesting as a single award. Share-based compensation expense is recognized ratably over the requisite service period, which is generally the vesting period. We measure restricted stock awards and units using the fair market value of the restricted shares of common stock on the day the award is granted. Stock-based awards granted to employees, non-employees and members of our board of directors include stock options, stock awards and restricted stock units. We apply variable accounting to our non-employee stock-based awards, whereby we remeasure the value of such awards at each balance sheet date.
Fair value as determined using the Black-Scholes-Merton model varies based on assumptions used for the expected life, expected stock price volatility, expected dividend yield and risk-free interest rates. For the years ended December 31, 2016, 2015 and 2014, we estimated the fair value of awards granted using the hybrid approach for volatility, which weights observable historical volatility and implied volatility of qualifying actively traded options on our common stock. The expected life assumption represents the weighted-average period stock-based awards are expected to remain outstanding. These expected life assumptions are established through a review of historical exercise behavior of stock-based award grants with similar vesting periods. Where historical patterns do not exist, contractual terms are used. Dividend yield is based on the current expected annual dividend per share and our stock price. The risk-free interest rate represents the daily treasury yield curve rate at the grant date based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term. Our assumptions may change in future periods.
2015 Long-Term Stock Incentive Plan
In May 2009,2015, our stockholders approved the Sirius XM RadioHoldings Inc. 20092015 Long-Term Stock Incentive Plan (the “2009“2015 Plan”). Employees, consultants and members of our board of directors are eligible to receive awards under the 20092015 Plan. The 20092015 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 may deem appropriate. Vesting and other terms of stock-based awards are set forth in the agreements with the individuals receiving the awards. Stock-based awards granted under the 20092015 Plan are generally subject to a graded vesting requirement. Stock-based awardsrequirement, 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 December 31, 2013, approximately 82,806,0002016, 181,148 shares of common stock were available for future grants under the 20092015 Plan.
During the year ended December 31, 2016, we granted performance-based restricted stock units (“PRSUs”) to certain employees, the vesting of which is subject to the employee's continuing employment and our achievement of certain performance goals. The PRSUs awards cliff vest on the three-year anniversary of the grant date.
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 and the XM Talent Option Plan. No further awards may be made under these plans and all outstanding awards are fully vested.
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 Years Ended December 31, | | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 | | 2016 | | 2015 | | 2014 |
| Risk-free interest rate | 1.4% | | 0.8% | | 1.1% | | 1.1% | | 1.4% | | 1.6% |
| Expected life of options — years | 4.73 | | 5.06 | | 5.27 | | 4.25 | | 4.17 | | 4.72 |
| Expected stock price volatility | 47% | | 49% | | 68% | | 22% | | 26% | | 33% |
| Expected dividend yield | 0% | | 0% | | 0% | | 0% | | 0% | | 0% |
We do not intend to pay regular dividends on our common stock. Accordingly, the dividend yield percentage usedF-24
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in the Black-Scholes-Merton option value is zero for all periods.thousands, except per share amounts)
There were noThe following table summarizes the weighted-average assumptions used to compute the fair value of options granted to third parties, other than non-employee members of our board of directors,directors:
|
| | |
| | For the Year Ended December 31, |
| | 2015 |
| Risk-free interest rate | | 2.0% |
| Expected life of options — years | | 7.00 |
| Expected stock price volatility | | 37% |
| Expected dividend yield | | 0% |
There were no options granted to third parties during the years endedDecember 31, 2013, 20122016 and 2011.2014. Since we have not historically paid dividends on our common stock prior to the fourth quarter of 2016, the dividend yield used in the Black-Scholes-Merton option value was less than one percent for the year ended December 31, 2016 and zero for the years ended December 31, 2015 and 2014.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
The following table summarizes stock option activity under our share-based plans for the years endedDecember 31, 2013, 20122016, 2015 and 2011 (options in thousands):2014:
|
| | | | | | | | | | | | |
| | Options | | Weighted- Average Exercise Price (1) | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Outstanding at the beginning of January 1, 2011 | 401,870 |
| | $ | 1.32 |
| | | | |
| Granted | 77,450 |
| | $ | 1.80 |
| | | | |
| Exercised | (13,300 | ) | | $ | 0.87 |
| | | | |
| Forfeited, cancelled or expired | (26,440 | ) | | $ | 4.15 |
| | | | |
| Outstanding as of December 31, 2011 | 439,580 |
| | $ | 1.25 |
| | | | |
| Granted | 58,626 |
| | $ | 2.53 |
| | | | |
| Exercised | (214,199 | ) | | $ | 0.59 |
| | | | |
| Forfeited, cancelled or expired | (9,495 | ) | | $ | 3.09 |
| | | | |
| Outstanding as of December 31, 2012 | 274,512 |
| | $ | 1.92 |
| | | | |
| Granted | 57,228 |
| | $ | 3.59 |
| | | | |
| Exercised | (61,056 | ) | | $ | 1.31 |
| | | | |
| Forfeited, cancelled or expired | (6,445 | ) | | $ | 2.02 |
| | | | |
| Outstanding as of December 31, 2013 | 264,239 |
| | $ | 2.42 |
| | 7.12 | | $ | 327,398 |
|
| Exercisable as of December 31, 2013 | 114,278 |
| | $ | 2.26 |
| | 5.29 | | $ | 179,549 |
|
| |
(1) | The weighted-average exercise price for options outstanding as of December 28, 2012 were adjusted in 2012 to reflect the reduction to the exercise price related to the December 2012 special cash dividend. |
|
| | | | | | | | | | | | |
| | Options | | Weighted-
Average
Exercise
Price Per Share | | Weighted-
Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| Outstanding at the beginning of January 1, 2014 | 264,239 |
| | $ | 2.42 |
| | | | |
| Granted | 61,852 |
| | $ | 3.39 |
| | | | |
| Exercised | (46,943 | ) | | $ | 1.63 |
| | | | |
| Forfeited, cancelled or expired | (11,294 | ) | | $ | 4.08 |
| | | | |
| Outstanding as of December 31, 2014 | 267,854 |
| | $ | 2.72 |
| | | | |
| Granted | 145,366 |
| | $ | 3.95 |
| | | | |
| Exercised | (57,667 | ) | | $ | 1.88 |
| | | | |
| Forfeited, cancelled or expired | (17,072 | ) | | $ | 4.60 |
| | | | |
| Outstanding as of December 31, 2015 | 338,481 |
| | $ | 3.29 |
| | | | |
| Granted | 55,222 |
| | $ | 4.14 |
| | | | |
| Exercised | (50,728 | ) | | $ | 2.66 |
| | | | |
| Forfeited, cancelled or expired | (10,327 | ) | | $ | 4.30 |
| | | | |
| Outstanding as of December 31, 2016 | 332,648 |
| | $ | 3.50 |
| | 7.33 | | $ | 315,874 |
|
| Exercisable as of December 31, 2016 | 126,580 |
| | $ | 2.82 |
| | 5.99 | | $ | 209,696 |
|
The weighted average grant date fair value per share of options granted during the years endedDecember 31, 2013, 20122016, 2015 and 20112014 was $1.48, $1.09$0.81, $1.11 and $1.04,$1.05, respectively. The total intrinsic value of stock options exercised during the years endedDecember 31, 2013, 20122016, 2015 and 20112014 was $142,491, $399,794$81,204, $117,944, and $13,408,$89,428, respectively. In July 2013, we transitioned to a net-settlement method from a cashless option exercise method for stock options. During the yearyears endedDecember 31, 2013,2016, 2015 and 2014 the number of net settled shares which were issued in the market as a result of stock option exercises was 32,649,857.10,918, 17,652 and 15,228, respectively.
We recognized share-based payment expense associated with stock options of $66,231, $60,299$80,266, $70,084 and $48,038$69,754 for the years endedDecember 31, 2013, 20122016, 2015 and 2011,2014, respectively.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
The following table summarizes the nonvested restricted stock award and restricted stock unit, including PRSUs, and stock award activity under our share-based plans for the years endedDecember 31, 2013, 20122016, 2015 and 2011 (shares in thousands):2014:
|
| | | | | | |
| | Shares | | Grant Date Fair Value |
| Nonvested as of January 1, 2011 | 2,397 |
| | $ | 2.57 |
|
| Granted | — |
| | $ | — |
|
| Vested restricted stock awards | (1,854 | ) | | $ | 3.30 |
|
| Vested restricted stock units | (101 | ) | | $ | 3.08 |
|
| Forfeited | (21 | ) | | $ | 3.05 |
|
| Nonvested as of December 31, 2011 | 421 |
| | $ | 1.46 |
|
| Granted | 8 |
| | $ | — |
|
| Vested restricted stock awards | — |
| | $ | — |
|
| Vested restricted stock units | — |
| | $ | — |
|
| Forfeited | — |
| | $ | — |
|
| Nonvested as of December 31, 2012 | 429 |
| | $ | 3.25 |
|
| Granted | 6,873 |
| | $ | 3.59 |
|
| Vested restricted stock units | (192 | ) | | $ | 3.27 |
|
| Forfeited | (126 | ) | | $ | 3.61 |
|
| Nonvested as of December 31, 2013 | 6,984 |
| | $ | 3.58 |
|
|
| | | | | | |
| | Shares | | Grant Date
Fair Value
Per Share |
| Nonvested at the beginning of January 1, 2014 | 6,984 |
| | $ | 3.58 |
|
| Granted | 6,108 |
| | $ | 3.38 |
|
| Vested | (1,138 | ) | | $ | 3.62 |
|
| Forfeited | (379 | ) | | $ | 3.52 |
|
| Nonvested as of December 31, 2014 | 11,575 |
| | $ | 3.47 |
|
| Granted | 8,961 |
| | $ | 3.92 |
|
| Vested | (3,464 | ) | | $ | 3.44 |
|
| Forfeited | (984 | ) | | $ | 3.52 |
|
| Nonvested as of December 31, 2015 | 16,088 |
| | $ | 3.73 |
|
| Granted | 18,523 |
| | $ | 4.21 |
|
| Vested | (4,212 | ) | | $ | 3.68 |
|
| Forfeited | (506 | ) | | $ | 3.75 |
|
| Nonvested as of December 31, 2016 | 29,893 |
| | $ | 4.03 |
|
The total intrinsic value of restricted stock units and restricted stock units that vestedawards vesting during the years endedDecember 31, 2013, 20122016, 2015 and 20112014 was $605, $0$17,807, $13,720 and $3,178,$4,044, respectively. The weighted average grant date fair valueDuring the years ended December 31, 2016, 2015 and 2014 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 duringtotaled 2,493, 2,088 and 732, respectively. During the year endedDecember 31, 2013 was $3.59.2016, we granted 3,036 PRSUs to certain employees. 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 awards and restricted stock units of $2,645, $0 and $543 during the years endedDecember 31, 2013, 2012 and 2011, respectively.
No restricted stock awards or restricted stock units were granted in 2011. In connection with the special cash dividend paid in December 2012,2016, we granted 8,00070 incremental restricted stock units, to preventincluding PRSUs, in accordance with the economic dilutionterms of the holders of our restricted stock units.existing award agreements. This grant did not result in any additional incremental share-based payment expense being recognized in 2012. There were no2016.
We recognized share-based payment expense associated with restricted stock units granted to third parties duringand stock awards of $28,338, $14,226 and $8,458 for the years endedDecember 31, 2013, 20122016, 2015 and 2011.2014, respectively. The year ended December 31, 2016 included $1,859 of compensation expense related to PRSUs.
Total unrecognized compensation costs related to unvested share-based payment awards for stock options restricted stock awards,and restricted stock units and shares granted to employees, and members of our board of directors and third parties at December 31, 20132016 and 2012, net of estimated forfeitures,2015 were $164,292$266,045 and $129,010,$261,628, respectively. The total unrecognized compensation costs at December 31, 20132016 are expected to be recognized over a weighted-average period of 32.5 years.
401(k) Savings Plan
We sponsorSirius XM sponsors the Sirius XM HoldingsRadio 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 up to per pay period on the first 6% of an employee’s pre-tax salary in cash which is usedup to purchase sharesa maximum of our common stock on3% of eligible compensation. We may also make additional discretionary matching, true-up matching and non-elective contributions to the open market.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. During the year ended December 31, 2013 we contributed $4,181 to the Sirius XM Plan in fulfillment of our matching obligation. During the years ended December 31, 2012 and 2011,Our cash employer matching contributions were made in the form ofare not used to purchase shares of our common stock resultingon the open market, unless the employee elects our common stock as their investment option for this contribution. We recognized $7,104, $8,144 and $5,385 in share-based payment expense of $3,523during years ended December 31, 2016, 2015 and $3,041,2014, respectively.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
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. Pursuant to the terms of the DCP, we may elect to make additional contributions beyond amounts deferred by participants, but we are under no obligation to do so. We have established a grantor (or “rabbi”) trust to facilitate the payment of our obligations under the DCP.
As of December 31, 2016, the fair value of the investments held in the trust was $4,854, which is included in Other long-term assets in our consolidated balance sheets and is classified as trading securities. Trading gains and losses associated with these investments are recorded in Other income within our consolidated statements of comprehensive income. The associated liability is recorded within Other long-term liabilities in our consolidated balance sheets, and any increase or decrease in the liability is recorded in General and administration expense within our consolidated statements of comprehensive income.
| |
(16)(14) | Commitments and Contingencies |
The following table summarizes our expected contractual cash commitments as of December 31, 2013:2016:
| | | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | Thereafter | | Total | 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| Debt obligations | $ | 509,663 |
| | $ | 7,359 |
| | $ | 4,140 |
| | $ | 460,799 |
| | $ | — |
| | $ | 2,650,000 |
| | $ | 3,631,961 |
| $ | 5,485 |
|
| $ | 4,477 |
|
| $ | 3,169 |
|
| $ | 890,428 |
|
| $ | 600,000 |
|
| $ | 4,400,000 |
|
| $ | 5,903,559 |
|
| Cash interest payments | 187,905 |
| | 152,440 |
| | 152,255 |
| | 152,699 |
| | 138,063 |
| | 399,813 |
| | 1,183,175 |
| 318,444 |
|
| 310,505 |
|
| 310,406 |
|
| 294,168 |
|
| 276,125 |
|
| 782,563 |
|
| 2,292,211 |
|
| Satellite and transmission | 37,849 |
| | 13,993 |
| | 4,321 |
| | 3,404 |
| | 3,992 |
| | 16,524 |
| | 80,083 |
| 94,618 |
|
| 67,886 |
|
| 51,675 |
|
| 25,676 |
|
| 19,199 |
|
| 6,933 |
|
| 265,987 |
|
| Programming and content | 245,069 |
| | 218,373 |
| | 96,737 |
| | 72,837 |
| | 60,150 |
| | 108,333 |
| | 801,499 |
| 312,413 |
|
| 284,915 |
|
| 261,953 |
|
| 223,095 |
|
| 154,239 |
|
| 202,700 |
|
| 1,439,315 |
|
| Marketing and distribution | 32,578 |
| | 15,332 |
| | 9,951 |
| | 6,700 |
| | 6,173 |
| | 6,639 |
| | 77,373 |
| 21,574 |
|
| 15,619 |
|
| 13,068 |
|
| 7,612 |
|
| 6,784 |
|
| 750 |
|
| 65,407 |
|
| Satellite incentive payments | 11,511 |
| | 11,439 |
| | 12,290 |
| | 13,212 |
| | 14,212 |
| | 55,398 |
| | 118,062 |
| 12,729 |
|
| 14,302 |
|
| 10,652 |
|
| 9,310 |
|
| 8,448 |
|
| 71,337 |
|
| 126,778 |
|
| Operating lease obligations | 38,181 |
| | 43,053 |
| | 36,860 |
| | 30,475 |
| | 28,825 |
| | 221,626 |
| | 399,020 |
| 41,360 |
|
| 43,506 |
|
| 39,339 |
|
| 36,820 |
|
| 30,332 |
|
| 150,675 |
|
| 342,032 |
|
| Other | 41,021 |
| | 9,989 |
| | 3,209 |
| | 851 |
| | 367 |
| | — |
| | 55,437 |
| 84,157 |
|
| 9,760 |
|
| 2,290 |
|
| 1,461 |
|
| 527 |
|
| 30 |
|
| 98,225 |
|
Total (1) | $ | 1,103,777 |
| | $ | 471,978 |
| | $ | 319,763 |
| | $ | 740,977 |
| | $ | 251,782 |
| | $ | 3,458,333 |
| | $ | 6,346,610 |
| $ | 890,780 |
|
| $ | 750,970 |
|
| $ | 692,552 |
|
| $ | 1,488,570 |
|
| $ | 1,095,654 |
|
| $ | 5,614,988 |
|
| $ | 10,533,514 |
|
| |
| (1) | The table does not include our reserve for uncertain tax positions, which at December 31, 20132016 totaled $1,432,$303,583, 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 year ended December 31, 2016, we entered into an agreement with Space Systems/Loral to design and build two 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. In addition,
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in the event certain new products are not shipped by a distributor to its customers within 90 days of the distributor’s receipt of goods, we have agreed to purchase and take title to the product.thousands, except per share amounts)
Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of fourcertain of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two satellites used in the XM system, XM-3 and XM-4 based on the expected operating performance exceedingmeeting their fifteen-yearfifteen-year design life.life, which we expect to occur. Boeing may also be entitled to an additional $10,000incentive 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-yearfifteen-year design life.
Space Systems/Loral, the manufacturer of sixcertain of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to three satellites, XM-5, FM-5 and FM-6 based onmeeting their expected operating performance exceeding their fifteen-yearfifteen-year design life.
life, which we expect to occur.
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. Total rent recognized in connection with leases for the years ended December 31, 2013, 20122016, 2015 and 20112014 was $39,228, $37,474$46,968, $47,679 and $34,143,$45,107, respectively.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
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 including subscriber growth, 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 common stock acquired but not paid for as of
December 31, 2016isalsoincluded 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 the following 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.
State Consumer InvestigationsSoundExchange Royalty Claims. A Multistate Working GroupIn August 2013, SoundExchange, Inc. filed a complaint in the United States District Court for the District of 32 State Attorneys General, ledColumbia alleging that we underpaid royalties for statutory licenses in violation of the regulations established by the Attorney GeneralCopyright Royalty Board for the 2007-2012 period. SoundExchange principally alleges that we improperly reduced our gross revenues applicable to royalties by improperly deducting revenue attributable to pre-1972 recordings and Premier package revenue that is not “separately charged” as required by the regulations. We believe that we properly applied the gross revenue exclusions contained in the regulations established by the Copyright Royalty Board. 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, in response to our motion to dismiss the complaint, stayed the case on the grounds that it properly should be pursued in the first instance before the Copyright Royalty Board rather than the District Court. In its opinion, the District Court concluded that the gross revenue exclusions in the regulations established by the Copyright Royalty Board for the 2007-2012 period were ambiguous and did not, on their face,
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in thousands, except per share amounts)
make clear whether our royalty calculation approaches were permissible under the regulations. In December 2014, SoundExchange filed a petition with the Copyright Royalty Board requesting an order interpreting the applicable regulations.
On January 10, 2017, the Copyright Royalty Board issued a ruling concluding that we correctly interpreted the revenue exclusions applicable to pre-1972 recordings, but in certain cases did not apply those exclusions properly. The ruling further indicated that we improperly claimed a revenue exclusion based on our Premier package upcharge, because, in the Judges’ view, the portion of the Statepackage that contained programming that did not include sound recordings was not offered for a “separate charge” in accordance with the regulations. The ruling is subject to legal review by the Register of Ohio,Copyrights, and will be transmitted back to the District Court for further proceedings, such as adjudication claims relating to damages and defenses. We intend to exhaust all available options for review and/or appeal of adverse aspects of the Copyright Royalty Board’s ruling, including portions of the ruling which we believe are unclear or inconsistent with the governing law. In addition, we believe we have substantial defenses to those SoundExchange claims that can be asserted before the District Court, and will continue to defend this action vigorously.
This matter is investigatingtitled 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. This matter is not related to certain claims under state law brought by owners of pre-1972 recording copyrights arising out of our consumer practices.use and performance of those recordings.
At December 31, 2016, we concluded that a loss, in excess of our recorded liabilities, is reasonably possible in connection with the SoundExchange royalty claims. The investigation focusesestimable portion of such possible loss ranges from $0 to $70,000, plus any related interest or late fees. Based on practicesour defenses, such a loss is not considered probable at this time and no liability for such additional loss has been recorded at December 31, 2016. The matters underlying this estimated range and the estimable portion of reasonably possible losses may change from time to time and the actual possible loss may vary from this estimate.
Telephone Consumer Protection Act Suits. We were a defendant in several purported class action suits that alleged 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”). These purported class action cases were 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).
We have entered into an agreement to settle these purported class action suits. The settlement was approved by the United States District Court for the Eastern District of Virginia in December 2016. The settlement resolves the claims of consumers beginning in February 2008 relating to the cancellation of subscriptions; automatic renewal of subscriptions; charging, billing, collecting, and refundingtelemarketing calls to their mobile telephones. Approximately 200 consumers, or crediting of payments from consumers; and soliciting customers.
A separate investigation into our consumer practices is being conducted by the Attorneys Generalless than 0.002% of the Stateconsumers who received notice of Floridathe settlement, opted-out of this class action settlement. As part of this settlement, we made a $35,000 payment to a settlement fund (from which notice, administration and other costs and attorneys’ fees are being paid), and are offering participating class members the Stateoption of New York. We are cooperating with these investigations and believereceiving three months of our consumer practices comply with all applicable federal and state laws and regulations.Select service for no charge.
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 actions are,matters, in our opinion, is likely to have a material adverse effect on our business, financial condition or results of operations.
Holdings
There is no current U.S. federal income tax provision, as all federal taxable income was offset by utilizing U.S. federal net operating loss carryforwards. The current state income tax provision is primarily related to taxable income in certain statesStates that have suspended or limited the ability to use net operating loss carryforwards.carryforwards or where net operating losses have been fully utilized. The current foreign income tax provision is primarily related to a reimbursement of foreign withholding taxes on royalty income between us anddividends paid by our Canadian affiliate.
Holdings files a consolidated federal income tax return with its wholly-owned subsidiaries.affiliate to us. Income tax expense (benefit) attributable to Holdings consistedis the sum of current income tax plus the following:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2013 |
| 2012 |
| 2011 |
| Current taxes: | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | — |
|
| State | 5,359 |
| | 1,319 |
| | 3,229 |
|
| Foreign | (5,269 | ) | | 2,265 |
| | 2,741 |
|
| Total current taxes | 90 |
| | 3,584 |
| | 5,970 |
|
| Deferred taxes: | | | | | |
| Federal | 211,044 |
| | (2,729,823 | ) | | 3,991 |
|
| State | 48,743 |
| | (271,995 | ) | | 4,273 |
|
| Total deferred taxes | 259,787 |
| | (3,001,818 | ) | | 8,264 |
|
| Total income tax expense (benefit) | $ | 259,877 |
| | $ | (2,998,234 | ) | | $ | 14,234 |
|
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
We file a consolidated federal income tax return for all of our wholly-owned subsidiaries, including Sirius XM. Income tax expense consisted of the following:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Current taxes: | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | — |
|
| State | (21,782 | ) | | (15,916 | ) | | (7,743 | ) |
| Foreign | (383 | ) | | (825 | ) | | (2,341 | ) |
| Total current taxes | (22,165 | ) | | (16,741 | ) | | (10,084 | ) |
| Deferred taxes: | | | | | |
| Federal | (304,179 | ) | | (318,933 | ) | | (302,350 | ) |
| State | (19,383 | ) | | (46,566 | ) | | (25,111 | ) |
| Total deferred taxes | (323,562 | ) | | (365,499 | ) | | (327,461 | ) |
| Total income tax expense | $ | (345,727 | ) | | $ | (382,240 | ) | | $ | (337,545 | ) |
The following table indicatespresents a reconciliation of the significant elements contributingU.S. federal statutory tax rate and our effective tax rate:
|
| | | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Federal tax expense, at statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income tax expense, net of federal benefit | 2.8 | % | | 2.9 | % | | 3.9 | % |
| Change in valuation allowance | — | % | | 4.9 | % | | — | % |
| Tax credit | (6.1 | )% | | — | % | | — | % |
| Other, net | — | % | | 0.1 | % | | 1.7 | % |
| Effective tax rate | 31.7 | % | | 42.9 | % | | 40.6 | % |
For the year ended December 31, 2016, we recorded a tax credit in the fourth quarter of 2016 under the Protecting Americans from Tax Hikes Act of 2015 related to research and development activities. For the year ended December 31, 2015, we recorded additional tax expense to increase our valuation allowance due to a tax law change in the District of Columbia which will reduce our future tax and thus will limit our ability to use certain net operating losses in the future.
Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the
difference betweenperiods in which the
federal tax expense (benefit) at the statutory rate and at our effective rate: |
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2013 |
| 2012 | | 2011 |
| Federal tax expense, at statutory rate | $ | 222,982 |
| | $ | 166,064 |
| | $ | 154,418 |
|
| State income tax expense, net of federal benefit | 19,031 |
| | 16,606 |
| | 15,751 |
|
| State income rate changes | 8,666 |
| | 2,251 |
| | 3,851 |
|
| Non-deductible expenses | 9,545 |
| | 477 |
| | 457 |
|
| Change in valuation allowance | (4,228 | ) | | (3,195,651 | ) | | (166,452 | ) |
| Other, net | 3,881 |
| | 12,019 |
| | 6,209 |
|
| Income tax expense (benefit) | $ | 259,877 |
| | $ | (2,998,234 | ) | | $ | 14,234 |
|
The tax effects of temporary differences that give riseare expected to significant portions of the deferred tax assets and deferred tax liabilities are presented below: |
| | | | | | | |
| | For the Years Ended December 31, |
| | 2013 |
| 2012 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 2,207,583 |
| | $ | 2,493,239 |
|
| GM payments and liabilities | 1,984 |
| | 80,742 |
|
| Deferred revenue | 606,430 |
| | 511,700 |
|
| Severance accrual | 388 |
| | 46 |
|
| Accrued bonus | 25,830 |
| | 23,798 |
|
| Expensed costs capitalized for tax | 22,679 |
| | 26,569 |
|
| Loan financing costs | 664 |
| | 428 |
|
| Investments | 45,078 |
| | 39,915 |
|
| Stock based compensation | 71,794 |
| | 64,636 |
|
| Other | 31,735 |
| | 34,705 |
|
| Total deferred tax assets | 3,014,165 |
| | 3,275,778 |
|
| Deferred tax liabilities: | | | |
| Depreciation of property and equipment | (188,675 | ) | | (185,007 | ) |
| FCC license | (778,152 | ) | | (772,550 | ) |
| Other intangible assets | (233,983 | ) | | (165,227 | ) |
| Total deferred tax liabilities | (1,200,810 | ) | | (1,122,784 | ) |
| Net deferred tax assets before valuation allowance | 1,813,355 |
| | 2,152,994 |
|
| Valuation allowance | (7,831 | ) | | (9,835 | ) |
| Total net deferred tax asset | $ | 1,805,524 |
| | $ | 2,143,159 |
|
affect taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences can be carried forward under tax law. Management'sOur evaluation of the realizability of deferred tax assets considers both positive and negative evidence, including historical financial performance, scheduled reversal of deferred tax assets and liabilities, projected taxable income and tax planning strategies in making this assessment.strategies. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. The netA valuation allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets are primarily related to gross net operating loss carryforwards of approximately $5,828,461. In addition to the gross book net operating loss carryforwards, we have $702,187 of excess share-based compensation deductions that will not be realized until we utilize the $5,828,461 of net operating losses, resulting in an approximate gross operating loss carryforward on our tax return of $6,530,648.realized.
For the year ended December 31, 2012, our deferred tax asset valuation allowance decreased by $3,350,905in response to cumulative positive evidence in 2012 which outweighed the historical negative evidence from our emergence from
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
cumulative losses in recent years and updated assessments regardingThe tax effects of temporary differences that it was more likely than not that ourgive rise to significant portions of the deferred tax assets will be realized. and deferred tax liabilities, shown before jurisdictional netting, are presented below:
|
| | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards and tax credits | $ | 1,376,012 |
| | $ | 1,447,159 |
|
| Deferred revenue | 760,774 |
| | 730,239 |
|
| Accrued bonus | 35,225 |
| | 31,458 |
|
| Expensed costs capitalized for tax | 19,610 |
| | 19,584 |
|
| Investments | 44,129 |
| | 46,857 |
|
| Stock based compensation | 74,544 |
| | 66,030 |
|
| Other | 31,133 |
| | 37,226 |
|
| Total deferred tax assets | 2,341,427 |
| | 2,378,553 |
|
| Deferred tax liabilities: | | | |
| Depreciation of property and equipment | (259,491 | ) | | (250,821 | ) |
| FCC license | (783,822 | ) | | (779,145 | ) |
| Other intangible assets | (172,520 | ) | | (190,442 | ) |
| Total deferred tax liabilities | (1,215,833 | ) | | (1,220,408 | ) |
| Net deferred tax assets before valuation allowance | 1,125,594 |
| | 1,158,145 |
|
| Valuation allowance | (47,682 | ) | | (49,095 | ) |
| Total net deferred tax asset | $ | 1,077,912 |
| | $ | 1,109,050 |
|
Net operating loss carryforwards and tax credits decrease as a result of the utilization of net operating losses related to current year taxable income. For the year ended December 31, 2016, we recognized $293,896 of additional net operating losses related to excess share-based compensation deductions due to our adoption of ASU 2016-09, Compensation-Stock Compensation (Topic 718) and we recorded a $66,326 tax credit under the Protecting Americans from Tax Hikes Act of 2015 related to research and development activities. The net deferred tax assets were primarily related to gross federal net operating loss carryforwards of approximately $3,245,207.
As of December 31, 2013, the deferred tax asset2016 and 2015, we had a valuation allowance of $7,831 relatesrelated to deferred tax assets that areof $47,682 and $49,095, respectively, which were not likely to be realized due to certain state net operating loss limitations and acquiredlimitations. During the year ended December 31, 2016, we reduced our valuation allowance primarily related to our ability to utilize additional net operating losses that we are not more likely than not goingas a result of a state income tax audit. The increase in valuation allowance during the year ended December 31, 2015 was primarily related to utilize.the tax law change in the District of Columbia for $44,392. These net operating loss carryforwards expire on various dates beginningthrough 2035.
ASC 740, Income Taxes, requires a company to first determine whether it is more likely than not that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more likely than not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. If the tax position is not more likely than not to be sustained, the gross amount of the unrecognized tax position will not be recorded in 2017the financial statements but will be shown in tabular format within the uncertain income tax positions. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs due to the following conditions: (1) the tax position is “more likely than not” to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. A number of years may elapse before an uncertain tax position is effectively settled or until there is a lapse in the applicable statute of limitations. We record interest and endingpenalties related to uncertain tax positions in 2028.Income tax expense in our consolidated statements of comprehensive income.
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollars and shares in thousands, except per share amounts)
As a result of the acquisition of the connected vehicle business of Agero, we established net current deferred tax assets of $767 and net non-current deferred tax liabilities of $78,127. The net non-current deferred tax liabilities are primarily due to intangible assets and the acquired separate return limitation year net operating losses of $4,340; of which $2,224 remain fully valued.
As of December 31, 20132016 and 2012,2015, the gross liability for income taxes associated with uncertain state tax positions was $1,432.$303,583 and $253,277, respectively. If recognized, $1,432$198,664 of unrecognized tax benefits would affect theour effective tax rate. This liability is recordedUncertain tax positions are recognized in Other long-term liabilities.liabilities which, as of December 31, 2016 and 2015, were $4,780 and $3,525, respectively. No penalties have been accrued for. accrued.
We have state income tax audits pending. We do not expect the ultimate outcome of these audits to have a material adverse effect on our financial position or results of operations. We also do not currently anticipate that our existing reserves related to uncertain tax positions as of December 31, 20132016 will significantly increase or decrease during the twelve-monthtwelve month period ending December 31, 2014; however, various2017. Various events could cause our current expectations to change in the future.change. Should our position with respect to the majority of these uncertain tax positions be upheld, the effect would be recorded in our consolidated statements of comprehensive income as part of the income tax provision. Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense. We have recorded interest expense of $40$100 and $55$89 for the years ended December 31, 20132016 and 2012,2015, respectively, related to our unrecognized tax benefits presented below.benefits.
Changes in our uncertain income tax positions, from January 1 through December 31 are presented below:
|
| | | | | | | |
| | 2013 | | 2012 |
| Balance, beginning of year | $ | 1,432 |
| | $ | 1,432 |
|
| Additions for tax positions from prior years | — |
| | — |
|
| Balance, end of year | $ | 1,432 |
| | $ | 1,432 |
|
We have federal and certain state income tax audits pending. We do not expect the ultimate disposition of these audits to have a material adverse affect on our financial position or results of operations.
The increased ownership in us by Liberty Media to over 50% of our outstanding common stock did not create a change of control under Section 382 of the Internal Revenue Code.
Sirius XM
Sirius XM and its wholly-owned subsidiaries are included in the consolidated federal income tax returns of Holdings. However, due to the differences in the Income before income taxes balances between Holdings and Sirius XM in our consolidated statements of comprehensive income, the following table shows the significant elements contributing to the difference between the federal tax expense (benefit) at the statutory rate and at Sirius XM's effective rate:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Federal tax expense, at statutory rate | $ | 67,684 |
| | $ | 166,064 |
| | $ | 154,418 |
|
| State income tax expense, net of federal benefit | 4,467 |
| | 16,606 |
| | 15,751 |
|
| State income rate changes | 8,666 |
| | 2,251 |
| | 3,851 |
|
| Non-deductible expenses | 699 |
| | 477 |
| | 457 |
|
| Change in valuation allowance | (4,228 | ) | | (3,195,651 | ) | | (166,452 | ) |
| Fair value of debt instrument | 178,704 |
| | — |
| | — |
|
| Other, net | 3,885 |
| | 12,019 |
| | 6,209 |
|
| Income tax expense (benefit) | $ | 259,877 |
| | $ | (2,998,234 | ) | | $ | 14,234 |
|
|
| | | | | | | |
| | 2016 | | 2015 |
| Balance, beginning of year | $ | 253,277 |
| | $ | 1,432 |
|
| Increases in tax positions for prior years | — |
| | 251,845 |
|
| Increases in tax positions for current years | 51,738 |
| | — |
|
| Decreases in tax positions for prior years | (1,432 | ) | | — |
|
| Balance, end of year | $ | 303,583 |
| | $ | 253,277 |
|
For the period from January 1, 2017 to January 31, 2017, we repurchased 26,676 shares of our common stock on the open market for an aggregate purchase price of $122,679, including fees and commissions.
On January 24, 2017, our board of directors also declared a quarterly dividend on our common stock in the amount of $0.01 per share of common stock payable on February 28, 2017 to stockholders of record as of the close of business on February 7, 2017.
COMBINED SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amountsDollars and shares in thousands, unless otherwise stated)except per share amounts)
(18) Quarterly Financial Data--Unaudited
| |
| (17) | Quarterly Financial Data--Unaudited |
Our quarterly results of operations are summarized below:
| | | | Sirius XM Holdings Inc. | For the Three Months Ended |
| | For the Three Months Ended | March 31 | | June 30 | | September 30 | | December 31 |
| | March 31 | | June 30 | | September 30 | | December 31 | |
| 2013 | | | | | | | | |
| 2016 | | | | | | | | |
| Total revenue | | $ | 1,201,010 |
| | $ | 1,235,566 |
| | $ | 1,277,646 |
| | $ | 1,302,998 |
|
| Cost of services | | $ | (467,028 | ) | | $ | (486,317 | ) | | $ | (488,659 | ) | | $ | (551,323 | ) |
| Income from operations | | $ | 348,234 |
| | $ | 362,156 |
| | $ | 392,179 |
| | $ | 329,560 |
|
Net income (2) | | $ | 172,440 |
| | $ | 174,965 |
| | $ | 193,901 |
| | $ | 204,627 |
|
Net income per common share--basic (2) | | $ | 0.03 |
| | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.04 |
|
Net income per common share--diluted (2) | | $ | 0.03 |
| | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.04 |
|
| 2015 | | | | | | | | |
| Total revenue | $ | 897,398 |
| | $ | 940,110 |
| | $ | 961,509 |
| | $ | 1,000,078 |
| $ | 1,080,990 |
| | $ | 1,123,210 |
| | $ | 1,169,712 |
| | $ | 1,196,146 |
|
| Cost of services | $ | (330,257 | ) | | $ | (331,465 | ) | | $ | (336,464 | ) | | $ | (396,304 | ) | $ | (406,370 | ) | | $ | (525,463 | ) | | $ | (440,808 | ) | | $ | (470,523 | ) |
| Income from operations | $ | 246,931 |
| | $ | 267,736 |
| | $ | 284,529 |
| | $ | 245,357 |
| $ | 313,806 |
| | $ | 219,429 |
| | $ | 351,584 |
| | $ | 293,869 |
|
| Net income | $ | 123,602 |
| | $ | 125,522 |
| | $ | 62,894 |
| | $ | 65,197 |
| $ | 105,692 |
| | $ | 102,849 |
| | $ | 166,550 |
| | $ | 134,633 |
|
Net income per common share--basic (1) | $ | 0.02 |
| | $ | 0.02 |
| | $ | 0.01 |
| | $ | 0.01 |
| $ | 0.02 |
| | $ | 0.02 |
| | $ | 0.03 |
| | $ | 0.03 |
|
Net income per common share--diluted (1) | $ | 0.02 |
| | $ | 0.02 |
| | $ | 0.01 |
| | $ | 0.01 |
| $ | 0.02 |
| | $ | 0.02 |
| | $ | 0.03 |
| | $ | 0.03 |
|
| 2012 | | | | | | | | |
| Total revenue | $ | 804,722 |
| | $ | 837,543 |
| | $ | 867,360 |
| | $ | 892,415 |
| |
| Cost of services | $ | (292,309 | ) | | $ | (293,975 | ) | | $ | (314,204 | ) | | $ | (328,882 | ) | |
| Income from operations | $ | 199,238 |
| | $ | 227,942 |
| | $ | 231,749 |
| | $ | 213,096 |
| |
| Net income | $ | 107,774 |
| | $ | 3,134,170 |
| | $ | 74,514 |
| | $ | 156,244 |
| |
Net income per common share--basic (1) | $ | 0.02 |
| | $ | 0.49 |
| | $ | 0.01 |
| | $ | 0.02 |
| |
Net income per common share--diluted (1) | $ | 0.02 |
| | $ | 0.48 |
| | $ | 0.01 |
| | $ | 0.02 |
| |
| |
| (1) | The sum of quarterly net income per share applicable to common stockholders (basic and diluted) does not necessarily agree to the net income per share for the year due to the timing of common stock issuances.rounding. |
|
| | | | | | | | | | | | | | | |
| | Sirius XM Radio Inc. |
| | For the Three Months Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
2013 (1) | | | | | | | |
| Total revenue | $ | 897,398 |
| | $ | 940,110 |
| | $ | 961,509 |
| | $ | 1,000,078 |
|
| Cost of services | $ | (330,257 | ) | | $ | (331,465 | ) | | $ | (336,464 | ) | | $ | (396,304 | ) |
| Income from operations | $ | 246,931 |
| | $ | 267,736 |
| | $ | 284,529 |
| | $ | 245,357 |
|
| Net income (loss) attributable to Sirius XM's sole stockholder | $ | 123,602 |
| | $ | 125,522 |
| | $ | 62,894 |
| | $ | (378,512 | ) |
2012 (1) |
| |
| |
| |
|
| Total revenue | $ | 804,722 |
| | $ | 837,543 |
| | $ | 867,360 |
| | $ | 892,415 |
|
| Cost of services | $ | (292,309 | ) | | $ | (293,975 | ) | | $ | (314,204 | ) | | $ | (328,882 | ) |
| Income from operations | $ | 199,238 |
| | $ | 227,942 |
| | $ | 231,749 |
| | $ | 213,096 |
|
| Net income attributable to Sirius XM's sole stockholder | $ | 107,774 |
| | $ | 3,134,170 |
| | $ | 74,514 |
| | $ | 156,244 |
|
| |
(1)(2) | Net income per share for Sirius XM is not presented since Sirius XM is a wholly-owned subsidiaryThese amounts reflect the adoption of Holdings.ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. |
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
Schedule II - Schedule of Valuation and Qualifying Accounts
Holdings and Sirius XM:
| | | (in thousands) | Balance January 1, | | Charged to Expenses (Benefit) | | Write-offs/ Payments/ Other | | Balance December 31, | | | | | | | |
| Description | | | | | | | | Balance January 1, | | Charged to
Expenses (Benefit) | | Write-offs/
Payments/ Other | | Balance December 31, |
| 2011 | | | | | | | | |
| 2014 | | | | | | | | |
| Allowance for doubtful accounts | $ | 10,222 |
| | 33,164 |
| | (33,454 | ) | | $ | 9,932 |
| $ | 9,078 |
| | 44,961 |
| | (46,224 | ) | | $ | 7,815 |
|
| Deferred tax assets—valuation allowance | $ | 3,551,288 |
| | (166,452 | ) | | (24,096 | ) | | $ | 3,360,740 |
| $ | 7,831 |
| | (2,836 | ) | | — |
| | $ | 4,995 |
|
| 2012 | | | | | | | | |
| Allowance for obsolescence | | $ | 14,218 |
| | (335 | ) | | (3,159 | ) | | $ | 10,724 |
|
| 2015 | | | | | | | | |
| Allowance for doubtful accounts | $ | 9,932 |
| | 34,548 |
| | (32,769 | ) | | $ | 11,711 |
| $ | 7,815 |
| | 47,187 |
| | (48,884 | ) | | $ | 6,118 |
|
| Deferred tax assets—valuation allowance | $ | 3,360,740 |
| | (3,195,651 | ) | | (155,254 | ) | | $ | 9,835 |
| $ | 4,995 |
| | 44,100 |
| | — |
| | $ | 49,095 |
|
| 2013 | | | | | | | | |
| Allowance for obsolescence | | $ | 10,724 |
| | (34 | ) | | (741 | ) | | $ | 9,949 |
|
| 2016 | | | | | | | | |
| Allowance for doubtful accounts | $ | 11,711 |
| | 39,016 |
| | (41,649 | ) | | $ | 9,078 |
| $ | 6,118 |
| | 55,941 |
| | (53,401 | ) | | $ | 8,658 |
|
| Deferred tax assets—valuation allowance | $ | 9,835 |
| | (4,228 | ) | | 2,224 |
| | $ | 7,831 |
| $ | 49,095 |
| | (1,019 | ) | | (394 | ) | | $ | 47,682 |
|
| Allowance for obsolescence | | $ | 9,949 |
| | 1,148 |
| | (1,660 | ) | | $ | 9,437 |
|
EXHIBIT INDEX
|
| | | | | |
| Exhibit |
| | Description |
| |
| | |
| 2.1 |
| | Certificate of Ownership and Merger, dated as of January 12, 2011, merging XM Satellite Radio Inc. with and into Sirius XM Radio Inc. (incorporated by reference to Exhibit 3.1 to Sirius XM Radio Inc.’s Current Report on Form 8-K filed on January 12, 2011)2011 (File No. 001-34295)). |
| | | |
| 2.2 |
| | Agreement and Plan of Merger, dated as of November 14, 2013, by and among Sirius XM Radio Inc., Sirius XM Holdings Inc. and Sirius XM Merger Sub Inc. (incorporated by reference to Exhibit 2.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on November 15, 2013)2013 (File No. 001-34295)). |
| | | |
| 3.1 |
| | Amended and Restated Certificate of Incorporation of Sirius XM Holdings Inc. (incorporated by reference to Exhibit 3.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on November 15, 2013)2013 (File No. 001-34295)). |
| | | |
| 3.2 |
| | Amended and Restated By-Laws of Sirius XM Holdings Inc. (incorporated by reference to Exhibit 3.2 to Sirius XM Holdings Inc.'s Current Report on Form 8-K filed on November 15, 2013). |
| | |
3.3 |
| | Amended and Restated Certificate of Incorporation of Sirius XM Radio Inc., as amended (filed herewith). |
| | |
3.4 |
| | Amended and Restated By-Laws of Sirius XM Radio Inc., as amended (filed herewith). |
| | |
3.5 |
| | Certificate of Elimination of Series A Convertible Preferred Stock, Convertible Perpetual Preferred Stock, Series B-1, Convertible Perpetual Non-Voting Preferred Stock, Series B-2, and Series C Junior Preferred Stock of Sirius XM Radio Inc. (incorporated by reference to Exhibit 3.3 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on November 15, 2013)2013 (File No. 001-34295)). |
| | | |
| 4.1 |
| | Form of certificate for shares of Sirius XM Holdings Inc.’s common stock (filed herewith). |
| | |
4.2 |
| | Indenture, dated as of August 1, 2008, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC, XM Radio Inc., Sirius Satellite Radio Inc. and The Bank of New York Mellon, as trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.80 to Sirius XM Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). |
| | |
4.3 |
| | Registration Rights Agreement, dated as of August 1, 2008, among Sirius Satellite Radio Inc., XM Satellite Radio Inc., J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated and UBS Securities LLC, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.81 to Sirius XM Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). |
| | |
4.4 |
| | Supplemental Indenture, dated as of April 14, 2010, among XM Satellite Radio Inc., certain subsidiaries thereof and The Bank of New York Mellon, as trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.4 to XM Satellite Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010). |
| | |
4.5 |
| | Supplemental Indenture, dated as of January 12, 2011, by and among XM Satellite Radio Inc., Sirius XM Radio Inc., the guarantors named therein and The Bank of New York Mellon, as trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.3 to Sirius XM Radio Inc.’s Current Report on Form 8-K filed on January 12, 2011). |
| | |
4.6 |
| | Supplemental Indenture, dated as of November 15, 2013, among Sirius XM Radio Inc., Sirius XM Holdings Inc., the guarantors named therein and The Bank of New York Mellon, as Trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.1 to Sirius XM Holdings Inc.’s Current's Annual Report on Form 8-K filed on November 15, 2013)10-K for the year ended December 31, 2013 (File No. 001-34295)). |
| | | |
4.74.2 |
| | Indenture, dated as of August 13, 2012, among Sirius XM Radio Inc., the guarantors thereto and U.S. Bank National Association, as trustee, relating to Sirius XM Radio Inc.’s 5.25% Senior Secured Notes due 2022 (incorporated by reference to Sirius XM Radio Inc.’s Current Report on Form 8-K filed on August 14, 2012)2012 (File No. 001-34295)). |
| | | |
4.84.3 |
| | Supplemental Indenture, dated as of April 10, 2014, among Sirius XM Radio Inc., the guarantors named therein and U.S. Bank National Association, as trustee, relating to the 5.25% Senior Secured Notes due 2022 (incorporated by reference to Exhibit 4.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on April 10, 2014 (File No. 001-34295)). |
| | |
| 4.4 |
| | Indenture, dated as of May 16, 2013, among Sirius XM Radio Inc., the guarantors named therein and U.S. Bank National Association, as trustee, relating to the 4.25% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to Sirius XM Radio Inc.’s Current Report on Form 8-K filed on May 20, 2013)2013 (File No. 001-34295)). |
| | | |
|
| | | | | |
Exhibit |
| | Description |
4.94.5 |
| | Indenture, dated as of May 16, 2013, among Sirius XM Radio Inc., the guarantors named therein and U.S. Bank National Association, as trustee, relating to the 4.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.2 to Sirius XM Radio Inc.’s Current Report on Form 8-K filed on May 20, 2013)2013 (File No. 001-34295)). |
| | | |
4.104.6 |
| | Indenture, dated as of August 1, 2013, among Sirius XM Radio Inc., the guarantors named therein and U.S. Bank National Association, as trustee, relating to the 5.75% Senior Notes due 2021 (incorporated by reference to Exhibit 4.1 to Sirius XM Radio Inc.’s Current Report on Form 8-K filed on August 1, 2013)2013 (File No. 001-34295)). |
| | | |
4.114.7 |
| | Indenture, dated as of September 24, 2013,May 6, 2014, among Sirius XM Radio Inc., the guarantors named therein and U.S. Bank National Association, as trustee, relating to the 5.875%6.00% Senior Notes due 20202024 (incorporated by reference to Exhibit 4.1 to Sirius XM RadioHoldings Inc.’s Current Report on Form 8-K filed on September 25, 2013)May 7, 2014 (File No. 001-34295)). |
| | | |
4.124.8 |
| | Indenture, dated as of March 6, 2015, among Sirius XM Radio Inc., the guarantors named therein and U.S. Bank National Association as trustee, relating to the 5.375% Senior Notes due 2025 (incorporated by reference to Exhibit 4.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on March 6, 2015 (File No. 001-34295)). |
| | |
| 4.9 |
| | Indenture, dated as of May 23, 2016, among Sirius XM Radio Inc., the guarantors named therein and U.S. Bank National Association, as a trustee, relating to the 5.375% Senior Notes due 2026 (incorporated by reference to Exhibit 4.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on May 24, 2016 (File No. 001-34295)). |
| | |
| 4.10 |
| | Form of Common Stock Purchase Warrant, dated as of January 27, 2009, issued by Sirius XM Radio Inc. to NFL Enterprises LLC (incorporated by reference to Exhibit 4.48 to Sirius XM Radio Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008)2008 (File No. 001-34295)). |
| | | |
4.134.11 |
| | Sirius XM Holdings Inc.’s Assumption of NFL Enterprises LLC Warrant, dated as of November 15, 2013 (filed herewith)(incorporated by reference to Exhibit 4.13 to Sirius XM Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-34295)). |
| | | |
4.144.12 |
| | Amendment No. 1, dated as of March 30, 2015, to the Common Stock Purchase Warrants, each dated January 27, 2009, issued by Sirius XM Holdings Inc., the successor to Sirius XM Radio Inc., to NFL Enterprises LLC (incorporated by reference to Exhibit 4.2 to Sirius XM Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015. (File No. 001-34295)) |
| | |
| 4.13 |
| | Investment Agreement, dated as of February 17, 2009, between Sirius XM Radio Inc. and Liberty Radio LLC (incorporated by reference to Exhibit 4.55 to Sirius XM Radio Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008)2008 (File No. 001-34295)). |
|
| | | |
| Exhibit | | Description |
| | | |
4.15 | | |
| 4.14 |
| | Assignment and Assumption of Investment Agreement among Sirius XM Radio Inc., Sirius XM Holdings Inc. and Liberty Radio LLC, dated as of November 15, 2013 (filed herewith)(incorporated by reference to Exhibit 4.15 to Sirius XM Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-34295)). |
| | | |
| 10.1 |
| | Credit Agreement, dated as of December 5, 2012, among Sirius XM Radio Inc., JPMorgan Chase Bank, N.A. as administrative agent, and the other agents and lenders party thereto (incorporated by reference to Sirius XM Radio Inc.’s Current Report on Form 8-K filed on December 10, 2012)2012 (File No. 001-34295)). |
| | |
| 10.2 |
| | Amendment No. 1, dated as of April 22, 2014, to the Credit Agreement, dated as of December 5, 2012, among Sirius XM Radio Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent for the Lenders, as collateral agent for the Secured Parties and as an Issuing Bank (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on April 22, 2014 (File No. 001-34295)). |
| | |
| 10.3 |
| | Amendment No. 2, dated as of June 16, 2015, to the Credit Agreement, dated as of December 5, 2012, among Sirius XM Radio Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the other agents and lenders parties thereto (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on June 19, 2015 (File No. 001-34295)). |
| | | |
**10.210.4 |
| | Technology Licensing Agreement among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., WorldSpace Management Corporation and American Mobile Satellite Corporation, dated as of January 1, 1998, amended by Amendment No. 1 to Technology Licensing Agreement (incorporated by reference to Exhibit 10.3 to XM Satellite Radio Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007)2007 (File No. 000-27441)). |
| | | |
***10.310.5 |
| | Third Amended and Restated Distribution and Credit Agreement, dated as of February 6, 2008, among General Motors Corporation, XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. (incorporated by reference to Exhibit 10.63 to XM Satellite Radio Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007)2007 (File No. 000-27441)). |
| | | |
**10.410.6 |
| | Third Amended and Restated Satellite Purchase Contract for In-Orbit Delivery, dated as of May 15, 2001, between XM Satellite Radio Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.36 to Amendment No. 1 to XM Satellite Radio Holdings Inc.’s Registration Statement on Form S-3 (File No. 333-89132)). |
| | |
10.5 |
| | Assignment and Novation Agreement, dated as of December 5, 2001, between XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.3 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed on December 6, 2001). |
| | |
**10.6 |
| | Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated as of December 5, 2001, between XM Satellite Radio Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.4 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed on December 6, 2001). |
| | | |
| **10.7 |
| | Amended and Restated Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated May 22, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.53 to XM Satellite Radio Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)2003 (File No. 000-27441)). |
| | | |
| **10.8 |
| | Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated July 31, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.54 to XM Satellite Radio Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)2003 (File No. 000-27441)). |
| | |
|
| | | | | |
Exhibit |
| | Description |
| | | |
| **10.9 |
| | Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated December 19, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.57 to XM Satellite Radio Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003). |
| | |
10.10 |
| | Amended and Restated Assignment and Use Agreement, dated as of January 28, 2003 between XM Satellite Radio Inc. and XM Radio Inc. (incorporated by reference to Exhibit 10.7 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed on January 29, 2003)(File No. 000-27441)). |
| | | |
*10.1110.10 |
| | Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.10 to Sirius XM Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004)2004 (File No. 001-34295)). |
| | | |
*10.1210.11 |
| | Form of Stock Option Agreement between CD Radio Inc. and each Optionee (incorporated by reference to Exhibit 10.16.2 to Sirius XM Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). |
| | |
*10.13 |
| | CD Radio Inc. 401(k) Savings Plan (incorporated by reference to Exhibit 4.4 to CD Radio Inc.’s Registration Statement on Form S-81998 (File No. 333-65473)001-34295)). |
| | | |
*10.1410.12 |
| | XM Satellite Radio Holdings Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to XM Satellite Radio Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)2007 (File No. 000-27441)). |
| | | |
*10.1510.13 |
| | Form of Non-Qualified Stock Option Agreement pursuant to the XM Satellite Radio Holdings Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed June 1, 2007)2007 (File No. 000-27441)). |
| | | |
*10.1610.14 |
| | Form of Restricted Stock Agreement pursuant to the XM Satellite Radio Holdings Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed June 1, 2007)2007 (File No. 000-27441)). |
| | |
|
| | | |
| Exhibit | | Description |
| | | |
*10.1710.15 |
| | Sirius XM Radio 401(k) Savings Plan, January 1, 2009 Restatement (incorporated by reference to Exhibit 10.30 to Sirius XM Radio Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009)2009 (File No. 001-34295)). |
| | | |
*10.1810.16 |
| | Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 4.9 to Sirius XM Radio Inc.’s Registration Statement on Form S-8 (File No. 333- 160386)333-160386)). |
| | | |
*10.1910.17 |
| | Sirius XM Holdings Inc. 2015 Long-Term Stock Incentive Plan (incorporated by reference to Appendix A to Sirius XM Holdings Inc.’s definitive Proxy Statement on Schedule 14A filed on April 6, 2015 (File No. 001-34295)). |
| | |
| *10.18 |
| | Form of Director Non-Qualified Stock Option Agreement pursuant to the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.34 to Sirius XM Radio Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011)2011 (File No. 001-34295)). |
| | |
| *10.19 |
| | Form of Director Non-Qualified Stock Option Agreement pursuant to the Sirius XM Holdings Inc. 2009 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.18 to Sirius XM Holdings Inc.’s Annual Report for the year ended December 31, 2014 (File No. 001-34295)). |
| | | |
| *10.20 |
| | Form of Non-Qualified Stock Option Agreement pursuant to the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.35 to Sirius XM Radio Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011)2011 (File No. 001-34295)). |
| | | |
| *10.21 |
| | Form of Non-Qualified Stock Option Agreement pursuant to the Sirius XM Holdings Inc. 2009 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.20 to Sirius XM Holdings Inc.’s Annual Report filed for the year ended December 31, 2014 (File No. 001-34295)). |
| | |
| *10.22 |
| | Form of Director Non-Qualified Stock Option Agreement pursuant to the Sirius XM Holdings Inc. 2015 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.22 to Sirius XM Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34295)). |
| | |
| *10.23 |
| | Form of Non-Qualified Stock Option Agreement pursuant to the Sirius XM Holdings Inc. 2015 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.23 to Sirius XM Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34295)). |
| | |
| *10.24 |
| | Form of SVP Restricted Stock Unit Agreement pursuant to the Sirius XM Holdings Inc. 2015 Long-Term Stock Incentive Plan (filed herewith). |
| | |
| *10.25 |
| | Form of Performance-Based Restricted Stock Unit Agreement pursuant to the Sirius XM Holdings Inc. 2015 Long-Term Stock Incentive Plan (filed herewith). |
| | |
| *10.26 |
| | Form of SVP Non-Qualified Stock Option Agreement pursuant to the Sirius XM Holdings Inc. 2015 Long-Term Stock Incentive Plan (filed herewith). |
| | |
| *10.27 |
| | Employment Agreement, dated as of August 13, 2013, between Sirius XM Radio Inc. and Stephen R. Cook (filed herewith). |
| | |
| *10.28 |
| | Employment Agreement, dated as of November 1, 2013, between Sirius XM Radio Inc. and Kathrine Kohler Thomson (filed herewith). |
| | |
| *10.29 |
| | Employment Agreement, dated as of June 19, 2015, between Sirius XM Radio Inc. and Dara F Altman (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on June 23, 2015 (File No. 001-34295)). |
| | |
| *10.30 |
| | Employment Agreement, dated as of June 29, 2015, between Sirius XM Radio Inc. and James A. Cady (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on June 30, 2015 (File No. 001-34295)). |
| | |
| *10.31 |
| | Amendment to the Employment Agreement between Sirius XM Radio Inc. and James A Cady, dated as of February 23, 2016 (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (File No. 001-34295)). |
| | |
| *10.32 |
| | Employment Agreement, dated as of July 21, 2011,3, 2015, between Sirius XM Radio Inc. and David J. Frear (incorporated by reference to Exhibit 10.1 to Sirius XM RadioHoldings Inc.’s Current Report on Form 8-K filed on July 22, 2011)8, 2015 (File No. 001-34295)). |
| | | |
*10.2210.33 |
| | Employment Agreement, dated as of August 23, 2011,11, 2015, between Sirius XM Radio Inc. and Dara F. AltmanJames E. Meyer (incorporated by reference to Exhibit 10.1 to Sirius XM RadioHoldings Inc.’s Current Report on Form 8-K filed on August 24, 2011)13, 2015 (File No. 001-34295)). |
| | | |
*10.2310.34 |
| | Form of Option Award Agreement between Sirius XM Radio Inc. and James E. Meyer (incorporated by reference to Exhibit 10.1 to Sirius XM Radio Inc.’s Current Report on Form 8-K filed October 16, 2009)2009 (File No. 001-34295)). |
|
| | | |
| Exhibit | | Description |
| | |
| | | |
*10.2410.35 |
| | Employment Agreement, dated as of April 29, 2013,December 11, 2015, between Sirius XM Radio Inc. and James E. Meyer (incorporatedJoseph A. Verbrugge (incorporated by reference to Exhibit 10.110.29 to Sirius XM RadioHoldings Inc.’s CurrentAnnual Report on Form 8-K dated April 30, 2013)10-K for the year ended December 31, 2015 (File No. 001-34295)). |
| | | |
*10.2510.36 |
| | Employment Agreement, dated as of July 22, 2013,May 24, 2016 between Sirius XM Radio Inc. and Scott A. Greenstein (incorporated by reference to Exhibit 10.1 to Sirius XM RadioHoldings Inc.’s Current Report on Form 8-K dated July 23, 2013)filed on May 26, 2016 (File No. 001-34295)). |
| | | |
*10.2610.37 |
| | FormEmployment Agreement, dated as of Option Award AgreementNovember 22, 2016 between Sirius XM Radio Inc. and Patrick L. Donnelly (incorporated by reference to Exhibit 10.1 to Sirius XM Radio Inc.’s Current Report on Form 8-K filed January 15, 2010). |
| | |
|
| | | | | |
Exhibit |
| | Description |
| | |
*10.27 |
| | Employment Agreement, dated as of January 10, 2014, between Sirius XM Radio Inc. and Patrick L. Donnelly (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on January 14, 2014)(filed herewith). |
| | | |
*10.2810.38 |
| | Assignment and Assumption Agreement, dated as of November 15, 2013, among Sirius XM Holdings Inc. and Sirius XM Radio Inc. (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on November 15, 2013)2013 (File No. 001-34295)). |
| | | |
*10.2910.39 |
| | Omnibus Amendment, dated November 15, 2013, to the XM Satellite Radio Holdings Inc. Talent Option Plan, the XM Satellite Radio Holdings Inc. 1998 Shares Award Plan, as amended, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM Satellite Radio Holdings Inc. 2007 Stock Incentive Plan and the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan and their Related Stock Option Agreements, Restricted Stock Agreements and Restricted Stock Unit Agreements (incorporated by reference to Exhibit 10.2 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on November 15, 2013)2013 (File No. 001-34295)). |
| | |
| *10.40 |
| | Sirius XM Holdings Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on June 30, 2015 (File No. 001-34295)). |
| | | |
| 21.1 |
| | List of Subsidiaries (filed herewith). |
| | | |
| 23.1 |
| | Consent of KPMG LLP (filed herewith). |
| | | |
| 31.1 |
| | Certificate of James E. Meyer, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | | |
| 31.2 |
| | Certificate of David J. Frear, Senior Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | | |
| 32.1 |
| | Certificate of James E. Meyer, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | | |
| 32.2 |
| | Certificate of David J. Frear, Senior Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | | |
101.199.1 |
| | The following financial information fromAmended and Restated Certificate of Incorporation of Sirius XM Radio Inc., as amended (incorporated by reference to Exhibit 3.3 to Sirius XM Holdings Inc. and Sirius XM Radio Inc.’s's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-34295)).
|
| | |
| 99.2 |
| | Amended and Restated By-Laws of Sirius XM Radio Inc., as amended (incorporated by reference to Exhibit 3.4 to Sirius XM Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-34295)). |
| | |
| 101.1 |
| | The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2016 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 20122016, 2015 and 2011;2014; (ii) Consolidated Balance Sheets as of December 31, 20132016 and 2012;2015; (iii) Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2013, 20122016, 2015 and 2011;2014; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 20122016, 2015 and 2011;2014; and (v) Combined Notes to Consolidated Financial Statements. |
_____________________________________
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| |
| * | This document has been identified as a management contract or compensatory plan or arrangement. |
|
| |
** ** | Pursuant to the Commission’s Orders Granting Confidential Treatment under Rule 406 of the Securities Act of 1933 or Rule 24(b)-2 under the Securities Exchange Act of 1934, certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text. |
| |
*** | Confidential treatment has been requested with respect to portions of this Exhibit that have been omitted by redacting a portion of the text. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents
were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
