UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012MARCH 31, 2013 |
OR
|
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | FOR THE TRANSITION PERIOD FROM __________ TO ________ |
COMMISSION FILE NUMBER 001-34295
SIRIUS XM RADIO INC.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 52-1700207 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
1221 Avenue of the Americas, 36th Floor | | |
New York, New York | | 10020 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 584-5100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | |
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
| | | |
(Class) | | (Outstanding as of October 25, 2012)April 26, 2013) |
COMMON STOCK, $0.001 PAR VALUE | | 5,207,146,1656,382,193,346 | SHARES |
SIRIUS XM RADIO INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
(in thousands, except per share data) | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
Revenue: | | | | | | | | | | |
Subscriber revenue | $ | 757,672 |
| | $ | 660,837 |
| | $ | 2,188,199 |
| | $ | 1,922,917 |
| $ | 783,342 |
| | $ | 700,242 |
|
Advertising revenue, net of agency fees | 20,426 |
| | 18,810 |
| | 59,881 |
| | 53,595 |
| |
Advertising revenue | | 20,211 |
| | 18,670 |
|
Equipment revenue | 17,813 |
| | 15,504 |
| | 51,183 |
| | 48,392 |
| 18,156 |
| | 16,953 |
|
Other revenue | 71,449 |
| | 67,399 |
| | 210,362 |
| | 205,882 |
| 75,689 |
| | 68,857 |
|
Total revenue | 867,360 |
| | 762,550 |
| | 2,509,625 |
| | 2,230,786 |
| 897,398 |
| | 804,722 |
|
Operating expenses: |
| |
| | | | | | | |
Cost of services: |
| |
| | | | | | | |
Revenue share and royalties | 141,834 |
| | 117,043 |
| | 409,371 |
| | 340,713 |
| 148,531 |
| | 132,111 |
|
Programming and content | 69,938 |
| | 70,509 |
| | 205,203 |
| | 210,867 |
| 74,610 |
| | 70,095 |
|
Customer service and billing | 77,768 |
| | 64,239 |
| | 212,635 |
| | 192,667 |
| 80,394 |
| | 66,187 |
|
Satellite and transmission | 18,319 |
| | 19,681 |
| | 53,980 |
| | 57,238 |
| 19,695 |
| | 18,110 |
|
Cost of equipment | 6,345 |
| | 5,888 |
| | 19,301 |
| | 19,894 |
| 7,027 |
| | 5,806 |
|
Subscriber acquisition costs | 112,418 |
| | 107,279 |
| | 348,014 |
| | 317,711 |
| 116,111 |
| | 116,121 |
|
Sales and marketing | 60,676 |
| | 55,210 |
| | 176,457 |
| | 154,471 |
| 65,899 |
| | 58,361 |
|
Engineering, design and development | 13,507 |
| | 14,175 |
| | 32,468 |
| | 39,249 |
| 14,842 |
| | 12,690 |
|
General and administrative | 68,235 |
| | 58,635 |
| | 193,786 |
| | 175,469 |
| 56,340 |
| | 59,886 |
|
Depreciation and amortization | 66,571 |
|
| 65,403 |
| | 199,481 |
| | 200,865 |
| 67,018 |
|
| 66,117 |
|
Total operating expenses | 635,611 |
| | 578,062 |
| | 1,850,696 |
| | 1,709,144 |
| 650,467 |
| | 605,484 |
|
Income from operations | 231,749 |
| | 184,488 |
| | 658,929 |
| | 521,642 |
| 246,931 |
| | 199,238 |
|
Other income (expense): |
| |
|
| | | | | | | |
Interest expense, net of amounts capitalized | (70,035 | ) | | (75,316 | ) | | (219,777 | ) | | (229,730 | ) | (46,174 | ) | | (76,971 | ) |
Loss on extinguishment of debt and credit facilities, net | (107,105 | ) | | — |
| | (132,726 | ) | | (7,206 | ) | — |
| | (9,971 | ) |
Interest and investment (loss) income | (321 | ) | | 292 |
| | (3,192 | ) | | 78,590 |
| |
Interest and investment income (loss) | | 1,638 |
| | (1,142 | ) |
Other income (loss) | 113 |
| | 435 |
| | (637 | ) | | 2,235 |
| 247 |
| | (578 | ) |
Total other expense | (177,348 | ) | | (74,589 | ) | | (356,332 | ) | | (156,111 | ) | (44,289 | ) | | (88,662 | ) |
Income before income taxes | 54,401 |
| | 109,899 |
| | 302,597 |
| | 365,531 |
| 202,642 |
| | 110,576 |
|
Income tax benefit (expense) | 20,113 |
| | (5,714 | ) | | 3,013,860 |
| | (9,907 | ) | |
Income tax expense | | (79,040 | ) | | (2,802 | ) |
Net income | $ | 74,514 |
| | $ | 104,185 |
| | $ | 3,316,457 |
| | $ | 355,624 |
| $ | 123,602 |
| | $ | 107,774 |
|
Realized loss on XM Canada investment foreign currency adjustment, net of tax | — |
| | — |
| | — |
| | 6,072 |
| |
Foreign currency translation adjustment, net of tax | — |
| | 110 |
| | (38 | ) | | 187 |
| (172 | ) | | (56 | ) |
Comprehensive income | $ | 74,514 |
| | $ | 104,295 |
| | $ | 3,316,419 |
| | $ | 361,883 |
| |
Total comprehensive income | | $ | 123,430 |
| | $ | 107,718 |
|
Net income per common share: |
| |
|
| | | | | | | |
Basic | $ | 0.01 |
| | $ | 0.02 |
| | $ | 0.52 |
| | $ | 0.06 |
| $ | 0.02 |
| | $ | 0.02 |
|
Diluted | $ | 0.01 |
| | $ | 0.02 |
| | $ | 0.49 |
| | $ | 0.05 |
| $ | 0.02 |
| | $ | 0.02 |
|
Weighted average common shares outstanding: |
| |
|
| |
|
| |
|
|
| |
|
|
Basic | 4,034,122 |
| | 3,747,381 |
| | 3,870,031 |
| | 3,742,309 |
| 6,259,803 |
| | 3,767,443 |
|
Diluted | 6,577,654 |
| | 6,507,370 |
| | 6,848,230 |
| | 6,500,819 |
| 6,606,276 |
| | 6,537,728 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS | | | September 30, 2012 | | December 31, 2011 | March 31, 2013 | | December 31, 2012 |
(in thousands, except share and per share data) | (unaudited) | | | (unaudited) | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 556,270 |
| | $ | 773,990 |
| $ | 206,727 |
| | $ | 520,945 |
|
Accounts receivable, net | 102,963 |
| | 101,705 |
| 107,875 |
| | 106,142 |
|
Receivables from distributors | 87,773 |
| | 84,817 |
| 102,762 |
| | 104,425 |
|
Inventory, net | 35,823 |
| | 36,711 |
| 20,095 |
| | 25,337 |
|
Prepaid expenses | 150,397 |
| | 125,967 |
| 171,248 |
| | 122,157 |
|
Related party current assets | 8,221 |
| | 14,702 |
| 8,255 |
| | 13,167 |
|
Deferred tax asset | 913,010 |
| | 132,727 |
| 970,231 |
| | 923,972 |
|
Other current assets | 8,271 |
| | 6,335 |
| 12,060 |
| | 12,037 |
|
Total current assets | 1,862,728 |
| | 1,276,954 |
| 1,599,253 |
| | 1,828,182 |
|
Property and equipment, net | 1,601,363 |
| | 1,673,919 |
| 1,542,970 |
| | 1,571,922 |
|
Long-term restricted investments | 3,973 |
| | 3,973 |
| 3,999 |
| | 3,999 |
|
Deferred financing fees, net | 32,546 |
| | 42,046 |
| 32,747 |
| | 38,677 |
|
Intangible assets, net | 2,532,455 |
| | 2,573,638 |
| 2,507,019 |
| | 2,519,610 |
|
Goodwill | 1,815,673 |
| | 1,834,856 |
| 1,815,365 |
| | 1,815,365 |
|
Related party long-term assets | 50,104 |
| | 54,953 |
| 41,258 |
| | 44,954 |
|
Long-term deferred tax asset | 1,244,996 |
| | — |
| 1,089,440 |
| | 1,219,256 |
|
Other long-term assets | 11,204 |
| | 35,657 |
| 11,146 |
| | 12,878 |
|
Total assets | $ | 9,155,042 |
| | $ | 7,495,996 |
| $ | 8,643,197 |
| | $ | 9,054,843 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable and accrued expenses | $ | 514,479 |
| | $ | 543,193 |
| $ | 516,526 |
| | $ | 587,652 |
|
Accrued interest | 64,463 |
| | 70,405 |
| 65,008 |
| | 33,954 |
|
Current portion of deferred revenue | 1,426,815 |
| | 1,333,965 |
| 1,516,608 |
| | 1,474,138 |
|
Current portion of deferred credit on executory contracts | 275,567 |
| | 284,108 |
| 140,389 |
| | 207,854 |
|
Current maturities of long-term debt | 4,326 |
| | 1,623 |
| 3,955 |
| | 4,234 |
|
Related party current liabilities | 12,988 |
| | 14,302 |
| 12,647 |
| | 6,756 |
|
Total current liabilities | 2,298,638 |
| | 2,247,596 |
| 2,255,133 |
| | 2,314,588 |
|
Deferred revenue | 158,223 |
| | 198,135 |
| 162,461 |
| | 159,501 |
|
Deferred credit on executory contracts | 6,243 |
| | 218,199 |
| 4,230 |
| | 5,175 |
|
Long-term debt | 2,221,685 |
| | 2,683,563 |
| 2,175,270 |
| | 2,222,080 |
|
Long-term related party debt | 208,742 |
| | 328,788 |
| 209,073 |
| | 208,906 |
|
Deferred tax liability | — |
| | 1,011,084 |
| |
Related party long-term liabilities | 19,660 |
| | 21,741 |
| 18,272 |
| | 18,966 |
|
Other long-term liabilities | 85,676 |
| | 82,745 |
| 81,377 |
| | 86,062 |
|
Total liabilities | 4,998,867 |
| | 6,791,851 |
| 4,905,816 |
| | 5,015,278 |
|
Commitments and contingencies (Note 15) |
| |
|
| |
|
Stockholders’ equity: | | | | | | |
Preferred stock, par value $0.001; 50,000,000 authorized at September 30, 2012 and December 31, 2011: | | | | |
Series A convertible preferred stock; no shares issued and outstanding at September 30, 2012 and December 31, 2011 | — |
| | — |
| |
Convertible perpetual preferred stock, series B-1 (liquidation preference of $0.001 per share at September 30, 2012 and December 31, 2011); 6,250,100 and 12,500,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 6 |
| | 13 |
| |
Common stock, par value $0.001; 9,000,000,000 shares authorized at September 30, 2012 and December 31, 2011; 5,192,364,730 and 3,753,201,929 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 5,192 |
| | 3,753 |
| |
Accumulated other comprehensive income, net of tax | 33 |
| | 71 |
| |
Preferred stock, par value $0.001; 50,000,000 authorized at March 31, 2013 and December 31, 2012: | | | | |
Convertible perpetual preferred stock, series B-1 (liquidation preference of $0.001 per share); 0 and 6,250,100 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively | | — |
| | 6 |
|
Common stock, par value $0.001; 9,000,000,000 shares authorized; 6,442,718,811 and 5,262,440,085 shares issued; 6,433,648,535 and 5,262,440,085 shares outstanding, at March 31, 2013 and December 31, 2012, respectively | | 6,443 |
| | 5,263 |
|
Accumulated other comprehensive (loss) income, net of tax | | (52 | ) | | 120 |
|
Additional paid-in capital | 10,618,579 |
| | 10,484,400 |
| 9,946,701 |
| | 10,345,566 |
|
Treasury stock, at cost; 9,070,276 and 0 shares of common stock at March 31, 2013 and December 31, 2012, respectively | | (27,923 | ) | | — |
|
Accumulated deficit | (6,467,635 | ) | | (9,784,092 | ) | (6,187,788 | ) | | (6,311,390 | ) |
Total stockholders’ equity | 4,156,175 |
| | 704,145 |
| 3,737,381 |
| | 4,039,565 |
|
Total liabilities and stockholders’ equity | $ | 9,155,042 |
| | $ | 7,495,996 |
| $ | 8,643,197 |
| | $ | 9,054,843 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| | | Series A Convertible Preferred Stock | | Convertible Perpetual Preferred Stock, Series B-1 | | Common Stock | | | | | | | | | Convertible Perpetual Preferred Stock, Series B-1 | | Common Stock | | | | | | Treasury Stock | | | | |
(in thousands, except share data) | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Accumulated Other Comprehensive Income | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity | Shares | | Amount | | Shares | | Amount | | Accumulated Other Comprehensive Income (Loss) | | Additional Paid-in Capital | | Shares | | Amount | | Accumulated Deficit | | Total Stockholders’ Equity |
Balance at December 31, 2011 | — |
| | $ | — |
| | 12,500,000 |
| | $ | 13 |
| | 3,753,201,929 |
| | $ | 3,753 |
| | $ | 71 |
| | $ | 10,484,400 |
| | $ | (9,784,092 | ) | | $ | 704,145 |
| |
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 | | | | | | | | | | | | | (38 | ) | | | | 3,316,457 |
| | 3,316,419 |
| — |
| | $ | — |
| | — |
| | $ | — |
| | $ | (172 | ) | | $ | — |
| | — |
| | $ | — |
| | $ | 123,602 |
| | $ | 123,430 |
|
Issuance of common stock to employees and employee benefit plans, net of forfeitures | — |
| | — |
| | — |
| | — |
| | 1,385,591 |
| | 1 |
| | — |
| | 3,010 |
| | — |
| | 3,011 |
| |
Share-based payment expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 43,350 |
| | — |
| | 43,350 |
| — |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
| | $ | 14,518 |
| | — |
| | $ | — |
| | $ | — |
| | $ | 14,518 |
|
Exercise of stock options | — |
| | — |
| | — |
| | — |
| | 144,309,526 |
| | 144 |
| | — |
| | 89,106 |
| | — |
| | 89,250 |
| |
Exercise of options and vesting of restricted stock units | | — |
| | $ | — |
| | 7,195,283 |
| | $ | 7 |
| | $ | — |
| | $ | 8,399 |
| | — |
| | $ | — |
| | $ | — |
| | $ | 8,406 |
|
Conversion of preferred stock to common stock | — |
|
| — |
|
| (6,249,900 | ) |
| (7 | ) |
| 1,293,467,684 |
|
| 1,294 |
|
| — |
|
| (1,287 | ) |
| — |
|
| — |
| (6,250,100 | ) | | $ | (6 | ) | | 1,293,509,076 |
| | $ | 1,293 |
| | $ | — |
| | $ | (1,287 | ) | | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Balance at September 30, 2012 | — |
| | $ | — |
| | 6,250,100 |
| | $ | 6 |
| | 5,192,364,730 |
| | $ | 5,192 |
| | $ | 33 |
| | $ | 10,618,579 |
| | $ | (6,467,635 | ) | | $ | 4,156,175 |
| |
Conversion of Exchangeable Notes to common stock | | — |
| | $ | — |
| | 27,687,850 |
| | $ | 28 |
| | $ | — |
| | $ | 45,069 |
| | — |
| | $ | — |
| | $ | — |
| | $ | 45,097 |
|
Common stock repurchased | | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | 157,183,759 |
| | $ | (493,635 | ) | | $ | — |
| | $ | (493,635 | ) |
Common stock retired | | — |
| | $ | — |
| | (148,113,483 | ) | | $ | (148 | ) | | $ | — |
| | $ | (465,564 | ) | | (148,113,483 | ) | | $ | 465,712 |
| | $ | — |
| | $ | — |
|
Balance at March 31, 2013 | | — |
| | $ | — |
| | 6,442,718,811 |
| | $ | 6,443 |
| | $ | (52 | ) | | $ | 9,946,701 |
| | 9,070,276 |
| | $ | (27,923 | ) | | $ | (6,187,788 | ) | | $ | 3,737,381 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
(in thousands) | 2012 | | 2011 | 2013 | | 2012 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 3,316,457 |
| | $ | 355,624 |
| $ | 123,602 |
| | $ | 107,774 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
|
| |
|
Depreciation and amortization | 199,481 |
| | 200,865 |
| 67,018 |
| | 66,117 |
|
Non-cash interest expense, net of amortization of premium | 30,786 |
| | 29,211 |
| 5,442 |
| | 10,647 |
|
Provision for doubtful accounts | 24,953 |
| | 26,209 |
| 11,410 |
| | 6,208 |
|
Amortization of deferred income related to equity method investment | (2,082 | ) | | (2,082 | ) | (694 | ) | | (694 | ) |
Loss on extinguishment of debt and credit facilities, net | 132,726 |
| | 7,206 |
| — |
| | 9,971 |
|
Gain on merger of unconsolidated entities | — |
| | (84,855 | ) | |
Loss on unconsolidated entity investments, net | 4,014 |
| | 10,259 |
| |
(Gain) loss on unconsolidated entity investments, net | | (1,345 | ) | | 422 |
|
Dividend received from unconsolidated entity investment | | 9,674 |
| | — |
|
Loss on disposal of assets | 567 |
| | 269 |
| 124 |
| | — |
|
Share-based payment expense | 46,361 |
| | 37,574 |
| 14,518 |
| | 14,951 |
|
Deferred income taxes | (3,017,021 | ) | | 7,214 |
| 83,631 |
| | 1,572 |
|
Other non-cash purchase price adjustments | (220,336 | ) | | (203,630 | ) | (70,459 | ) | | (73,956 | ) |
Distribution from investment in unconsolidated entity | — |
| | 4,849 |
| |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (26,211 | ) | | (1,456 | ) | (13,143 | ) | | (12,838 | ) |
Receivables from distributors | (2,956 | ) | | (12,358 | ) | 1,663 |
| | (11,220 | ) |
Inventory | 888 |
| | (14,278 | ) | 5,242 |
| | (80 | ) |
Related party assets | 6,905 |
| | 30,300 |
| 26 |
| | 8,347 |
|
Prepaid expenses and other current assets | (26,367 | ) | | (11,028 | ) | (51,815 | ) | | (65,753 | ) |
Other long-term assets | 24,454 |
| | 23,969 |
| 1,730 |
| | 8,256 |
|
Accounts payable and accrued expenses | (27,384 | ) | | (100,502 | ) | (97,537 | ) | | (96,859 | ) |
Accrued interest | (5,940 | ) | | 6,472 |
| 31,054 |
| | 7,157 |
|
Deferred revenue | 52,777 |
| | 19,653 |
| 47,480 |
| | 56,182 |
|
Related party liabilities | (1,314 | ) | | 696 |
| 5,891 |
| | 2,239 |
|
Other long-term liabilities | 2,774 |
| | (1,547 | ) | (4,597 | ) | | 1,505 |
|
Net cash provided by operating activities | 513,532 |
| | 328,634 |
| 168,915 |
| | 39,948 |
|
| | | | |
Cash flows from investing activities: | | | | | | |
Additions to property and equipment | (73,546 | ) | | (115,065 | ) | (26,434 | ) | | (25,187 | ) |
Release of restricted investments | — |
| | 250 |
| |
Return of capital from investment in unconsolidated entity | — |
| | 10,117 |
| |
Net cash used in investing activities | (73,546 | ) | | (104,698 | ) | (26,434 | ) | | (25,187 | ) |
| | | | |
Cash flows from financing activities: | | | | | | |
Proceeds from exercise of stock options | 89,250 |
| | 9,045 |
| 10,946 |
| | 22,765 |
|
Long-term borrowings, net of costs | 393,687 |
| | — |
| |
Payment of premiums on redemption of debt | (100,615 | ) | | (5,020 | ) | — |
| | (6,602 | ) |
Repayment of long-term borrowings | (914,028 | ) | | (210,060 | ) | (1,933 | ) | | (58,338 | ) |
Repayment of related party long-term borrowings | (126,000 | ) | | — |
| |
Common stock repurchased and retired | | (465,712 | ) | | — |
|
Net cash used in financing activities | (657,706 | ) | | (206,035 | ) | (456,699 | ) | | (42,175 | ) |
Net (decrease) increase in cash and cash equivalents | (217,720 | ) | | 17,901 |
| |
Net decrease in cash and cash equivalents | | (314,218 | ) | | (27,414 | ) |
Cash and cash equivalents at beginning of period | 773,990 |
| | 586,691 |
| 520,945 |
| | 773,990 |
|
Cash and cash equivalents at end of period | $ | 556,270 |
| | $ | 604,592 |
| $ | 206,727 |
| | $ | 746,576 |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued(Continued)
(UNAUDITED)
| | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
(in thousands) | 2012 | | 2011 | 2013 | | 2012 |
Supplemental Disclosure of Cash and Non-Cash Flow Information | | | | | | |
Cash paid during the period for: | | | | | | |
Interest, net of amounts capitalized | $ | 188,997 |
| | $ | 235,096 |
| $ | 2,928 |
| | $ | 56,129 |
|
Non-cash investing and financing activities: | | | |
| |
|
Conversion of Series B preferred stock to common stock | 1,294 |
| | — |
| $ | 1,293 |
| | $ | — |
|
Capital lease obligations incurred to acquire assets | 12,781 |
| | — |
| |
Common stock issuance upon exercise of warrants | — |
| | 7 |
| |
Goodwill reduced for the exercise and vesting of certain stock awards | 19,183 |
| | — |
| |
Treasury stock not yet retired | | $ | 27,923 |
| | $ | — |
|
Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs | | $ | 45,097 |
| | $ | — |
|
See accompanying notes to the unaudited consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
| |
(1) | Business & Basis of Presentation |
Business
We broadcast our 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 certain of our music and other channels, plus new features such as SiriusXM On Demand and MySXM, over the Internet, including through applications for mobile devices. We have agreements with every major automaker (“OEMs”) to offer satellite radios as factory-factory or dealer-installed equipment in their vehicles.vehicles from which we acquire a majority of our subscribers. We also acquire subscribers through the sale or leasemarketing campaigns to owners of previously owned vehicles with factory-installed satellite radios. Weradios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retail locations 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 an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and long-term subscription plans, as well as discounts for multiple subscriptions on each platform.subscriptions. We also derive revenue from activation and other subscription-related fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as our Internet radio, Backseat TV, data, traffic, and weather services.
In certain cases, automakers and dealers include a subscription to our radio services in the sale or lease price of new andor previously owned vehicles. The length of these prepaidtrial subscriptions varies, but is typically three to twelve months. In many cases, we receive subscription payments for these trials from automakers in advance of the activation of our service. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.
| |
(2) | Summary of Significant Accounting Policies |
Liberty Media Corporation beneficially owned as of March 31, 2013, 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 Live Nation Entertainment, Barnes & Noble, and minority equity investments in Time Warner Inc. and Viacom.
Principles of Consolidation
The accompanying consolidated financial statements of Sirius XM Radio Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, these interimCertain information and footnote disclosures normally included in the financial statements do not include allpresented in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
Basis of the information and footnotes required by GAAP for completePresentation
Certain amounts in our prior period consolidated financial statements.statements have been reclassified to conform to our current period presentation. All significant intercompany transactions have been eliminated in consolidation.
Basis of Presentation
In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of September 30, 2012March 31, 2013 and for the three and nine months ended September 30, 2012March 31, 2013 and 20112012 have been made.
Interim results are not necessarily indicative of the results that may be expected for a full year. This Quarterly Report on Form 10-Q should be read together with our Annual Report on Form 10-K for the year endedDecember 31, 20112012, which was filed with the SEC on February 9, 2012.6, 2013.
We have evaluated events subsequent to the balance sheet date and prior to the filing of this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2012March 31, 2013 and have determined that no events have occurred that would require adjustment to our unaudited consolidated financial statements.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include asset impairment, depreciable lives of our satellites, share-based payment expense, and valuation allowances against deferred tax assets.income taxes.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Income Taxes
Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.
Deferred income taxes represent 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 reporting period, 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 the period in which related 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 as a memo entry until the period the excess tax benefit is realized through a reduction of taxes payable. A valuation allowance is recognized or maintained 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.
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. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to uncertain tax positions in Income tax expense in our unaudited consolidated statements of comprehensive income.
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 ourselves and a customer in our unaudited consolidated statements of comprehensive income.
| |
(2) | Summary of Significant Accounting Policies |
Fair Value of Financial Instruments
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 September 30, 2012March 31, 2013 and December 31, 20112012, the carrying value of our debt was $2,434,7532,388,298 and $3,013,9742,435,220, respectively; and the fair value approximated $2,973,3122,974,112 and $3,506,5463,055,076, respectively. The carrying value of our investment in Sirius XM Canada was $35,561 and $37,983 as of March 31, 2013 and December 31, 2012, respectively; and the fair value approximated $295,400 and $290,900 as of March 31, 2013 and December 31, 2012, respectively.
Accumulated Other Comprehensive Income
(Loss)
Accumulated other comprehensive income(loss) of $33(52) at September 30, 2012 iswas primarily comprised of the cumulative foreign currency translation adjustments related to our interest in Sirius XM Canada. During the three months ended September 30, 2012March 31, 2013, we recorded a foreign currency translation adjustment of $0 and during the nine months endedSeptember 30, 2012(172), wewhich was recorded net of a foreign currency translation adjustment losstax benefit of $38, net of tax of $3783.
Recent Accounting Pronouncements
In May 2011,February 2013, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International FinancialASU 2013-02, Comprehensive Income (Topic 220), Reporting Standards (Topic 820) — Fair Value Measurement (“ASU 2011-04”)of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to require an entity to provide a consistent definitioninformation about the amounts reclassified out of fair value and ensureaccumulated 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 the fair value measurement and disclosure requirements are similar between U.S.not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements.that provide additional detail about those amounts. This standard is effective for interim and annual periods beginning after December 15, 20112012 and is to be applied on a prospective basis. We adopted ASU 2011-04 as of January 1, 20122013-02 and the impact was not material to our unaudited consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income (“ASU 2011-05”), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in single continuous statements of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must bewill disclose significant amounts reclassified
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
to net income. This standard is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. The FASB has deferred the requirement to present reclassification adjustments for each component out of accumulated other comprehensive income in both net income and other comprehensive income. Companies are required to either present amounts reclassified out of other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The effective date of this deferral will be consistent with the effective date ofas such transactions arise. ASU 2011-05. We adopted ASU 2011-05 as of January 1, 2012 and disclosed comprehensive income in our unaudited consolidated statements of comprehensive income. ASU 2011-052013-02 affects financial statement presentation only and has no impact on our results of unaudited consolidated financial statements.
In July 2012, the FASB issued Accounting Standards Update 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). The guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If the qualitative assessment supports that it is more likely than not the fair value of the asset exceeds its carrying amount, the company would not be 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. ASU 2012-02 provides for public entities for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We early adopted ASU 2012-02 and will perform a qualitative assessment to determine whether our indefinite-lived intangible assets are impaired as of October 1, 2012, our annual impairment testing date.
We utilize the two-class method ofin calculating basic net income per common share, as our Series B Preferred Stock arewas considered to be participating securities. Basic net income per common share is calculated usingby dividing 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, and preferred stock, warrants, stock options restricted stock and restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method.
On January 18, 2013, Liberty Media converted its remaining 6,250,100 outstanding shares of the Series B Preferred Stock into 1,293,509,076 shares of common stock. Therefore, we had no participating securities as of March 31, 2013 and the converted shares were reflected in our basic net income per common share calculation.
Common stock equivalents of approximately 451,577,000349,681,000 and 417,427,000443,764,000 for the three months ended September 30, 2012March 31, 2013 and 2011, respectively, and 144,014,000 and 407,649,000 for the nine months endedSeptember 30, 2012 and 2011, respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
(in thousands, except per share data) | 2012 | | 2011 | | 2012 | | 2011 |
Net income | $ | 74,514 |
| | $ | 104,185 |
| | $ | 3,316,457 |
| | $ | 355,624 |
|
Less: | | | | | | | |
Allocation of income to Series B Preferred Stock | (27,825 | ) | | (42,550 | ) | | (1,309,647 | ) | | (145,355 | ) |
Net income available to common stockholders for basic net income per common share | 46,689 |
| | 61,635 |
| | 2,006,810 |
| | 210,269 |
|
Add back: | | | | | | | |
Allocation of income to Series B Preferred Stock | 27,825 |
| | 42,550 |
| | 1,309,647 |
| | 145,355 |
|
Effect of interest on assumed conversions of convertible debt | — |
| | — |
| | 28,875 |
| | — |
|
Net income available to common stockholders for diluted net income per common share | $ | 74,514 |
| | $ | 104,185 |
| | $ | 3,345,332 |
| | $ | 355,624 |
|
Weighted average common shares outstanding for basic net income per common share | 4,034,122 |
| | 3,747,381 |
| | 3,870,031 |
| | 3,742,309 |
|
Weighted average impact of assumed Series B Preferred Stock conversion | 2,404,143 |
| | 2,586,977 |
| | 2,525,588 |
| | 2,586,977 |
|
Weighted average impact of assumed convertible debt | — |
| | — |
| | 293,333 |
| | — |
|
Weighted average impact of other dilutive equity instruments | 139,389 |
| | 173,012 |
| | 159,278 |
| | 171,533 |
|
Total shares for diluted net income per common share | 6,577,654 |
| | 6,507,370 |
| | 6,848,230 |
| | 6,500,819 |
|
Net income per common share | | | | |
|
| |
|
|
Basic | $ | 0.01 |
| | $ | 0.02 |
| | $ | 0.52 |
| | $ | 0.06 |
|
Diluted | $ | 0.01 |
| | $ | 0.02 |
| | $ | 0.49 |
| | $ | 0.05 |
|
We identified and corrected an immaterial error affecting the historical presentation of basic earnings per share. The adjustment reflects the Series B Preferred Stock held by an affiliate of Liberty Media as participating securities as the holder of such preferred stock may participate in dividends and distributions ratably with holders of our common stock on an as-converted basis. Net income per common share-basic for the three and nine months endedSeptember 30, 2011 was previously reported as $0.03 and $0.10, respectively, and has been adjusted to be $0.02 and $0.06 for the three and nine months endedSeptember 30, 2011, respectively. The effects of the error were not material to any previously reported quarterly or annual period. The related corrections are reflected in the applicable prior periods.
In September 2012, Liberty Media converted 6,249,900 shares of the Series B Preferred Stock into 1,293,467,684 shares of common stock. |
| | | | | | | |
| For the Three Months Ended March 31, |
(in thousands, except per share data) | 2013 | | 2012 |
Numerator: | | | |
Net income | $ | 123,602 |
| | $ | 107,774 |
|
Less: | | | |
Allocation of undistributed income to Series B Preferred Stock | (4,905 | ) | | (43,876 | ) |
Net income available to common stockholders for basic net income per common share | 118,697 |
| | 63,898 |
|
Add back: | | | |
Allocation of undistributed income to Series B Preferred Stock | 4,905 |
| | 43,876 |
|
Net income available to common stockholders for diluted net income per common share | $ | 123,602 |
| | $ | 107,774 |
|
Denominator: | | | |
Weighted average common shares outstanding for basic net income per common share | 6,259,803 |
| | 3,767,443 |
|
Weighted average impact of assumed Series B Preferred Stock conversion | 258,702 |
| | 2,586,977 |
|
Weighted average impact of other dilutive equity instruments | 87,771 |
| | 183,308 |
|
Weighted average shares for diluted net income per common share | 6,606,276 |
| | 6,537,728 |
|
Net income per common share: |
|
| | |
Basic | $ | 0.02 |
| | $ | 0.02 |
|
Diluted | $ | 0.02 |
| | $ | 0.02 |
|
| |
(4) | Accounts Receivable, net |
Accounts receivable, net, are stated at amounts due from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts considersis based upon our assessment of various factors. We consider historical experience, the age of certainthe receivable balances, current economic conditions and other factors that may affect the counterparty’s ability to pay. Bad debt is included in Customer service and billing expense in our unaudited consolidated statements of comprehensive income.
Accounts receivable, net, consists of the following:
| | | September 30, 2012 | | December 31, 2011 | March 31, 2013 | | December 31, 2012 |
Gross accounts receivable | $ | 113,423 |
| | $ | 111,637 |
| $ | 121,783 |
| | $ | 117,853 |
|
Allowance for doubtful accounts | (10,460 | ) | | (9,932 | ) | (13,908 | ) | | (11,711 | ) |
Total accounts receivable, net | $ | 102,963 |
| | $ | 101,705 |
| $ | 107,875 |
| | $ | 106,142 |
|
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Receivables from distributors include billed and unbilled amounts due from OEMs for radio services included in the sale or lease price of vehicles, as well as billed amounts due from retailers. Receivables from distributors consist of the following:
| | | September 30, 2012 | | December 31, 2011 | March 31, 2013 | | December 31, 2012 |
Billed | $ | 45,187 |
| | $ | 44,618 |
| $ | 56,996 |
| | $ | 53,057 |
|
Unbilled | 42,586 |
| | 40,199 |
| 45,766 |
| | 51,368 |
|
Total | $ | 87,773 |
| | $ | 84,817 |
| $ | 102,762 |
| | $ | 104,425 |
|
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
Inventory consists of finished goods, refurbished goods, chip sets and other raw material components used in manufacturing radios. Inventory is stated at the lower of cost determined on a first-in, first-out basis, or market. We record an estimated allowance for inventory that is considered slow moving, obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for resale in our direct to consumer distribution channel and components held for resale by us is reported as a component of Cost of equipment in our unaudited consolidated statements of comprehensive income. The provision related to inventory consumed in our OEM and retail distribution channel is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of comprehensive income.
Inventory, net, consists of the following:
| | | September 30, 2012 | | December 31, 2011 | March 31, 2013 | | December 31, 2012 |
Raw materials | $ | 20,781 |
| | $ | 24,134 |
| $ | 16,582 |
| | $ | 17,717 |
|
Finished goods | 30,951 |
| | 28,007 |
| 20,694 |
| | 23,779 |
|
Allowance for obsolescence | (15,909 | ) | | (15,430 | ) | (17,181 | ) | | (16,159 | ) |
Total inventory, net | $ | 35,823 |
| | $ | 36,711 |
| $ | 20,095 |
| | $ | 25,337 |
|
Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. We perform anOur annual impairment assessment is performed as of October 1stthe fourth quarter of each year, to determine if goodwill is impaired. Anand 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. At the date of our annual assessment for 2012 and 2011, the fair value of our single reporting unit substantially exceeded its carrying value and therefore was not at risk of failing step one of ASC 350-20, Goodwill.
As of September 30, 2012March 31, 2013, there were no indicators of impairment, and no impairment loss was recorded for goodwill during the three and nine months ended September 30, 2012March 31, 2013 and 20112012.
During the nine months ended As of September 30, 2012March 31, 2013, with the releasecumulative balance of goodwill impairment that had been recorded since the deferred income tax valuation allowance, we reduced goodwill by $19,183 related to the subsequent exercisemerger of certain stock options and vesting of certain restricted stock units that were recorded at fair value in connection with the July 2008 merger between our wholly owned subsidiary, Vernon Merger Corporation, with and into XM Satellite Radio Holdings Inc. in July 2008 (the "Merger") was $4,766,190, which was recognized during the year ended December 31, 2008.
As a result of the Merger, certain intangible assets formerly held by XM Satellite Radio Holdings Inc. were recorded at fair value. These intangible assets consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2013 | | December 31, 2012 |
| Weighted Average Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Indefinite life intangible assets: | | | | | | | | | | | | | |
FCC licenses | Indefinite | | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
| | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
|
Trademark | Indefinite | | 250,000 |
| | — |
| | 250,000 |
| | 250,000 |
| | — |
| | 250,000 |
|
Definite life intangible assets: | | | | | | | | | | | | | |
Subscriber relationships | 9 years | | 380,000 |
| | (243,195 | ) | | 136,805 |
| | 380,000 |
| | (233,317 | ) | | 146,683 |
|
Licensing agreements | 9.1 years | | 78,489 |
| | (46,665 | ) | | 31,824 |
| | 78,489 |
| | (44,161 | ) | | 34,328 |
|
Proprietary software | 6 years | | 16,552 |
| | (12,932 | ) | | 3,620 |
| | 16,552 |
| | (12,777 | ) | | 3,775 |
|
Developed technology | 10 years | | 2,000 |
| | (933 | ) | | 1,067 |
| | 2,000 |
| | (883 | ) | | 1,117 |
|
Leasehold interests | 7.4 years | | 132 |
| | (83 | ) | | 49 |
| | 132 |
| | (79 | ) | | 53 |
|
Total intangible assets | | | $ | 2,810,827 |
| | $ | (303,808 | ) | | $ | 2,507,019 |
| | $ | 2,810,827 |
| | $ | (291,217 | ) | | $ | 2,519,610 |
|
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
Intangible assets consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2012 | | December 31, 2011 |
| Weighted Average Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Indefinite life intangible assets: | | | | | | | | | | | | | |
FCC licenses | Indefinite | | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
| | $ | 2,083,654 |
| | $ | — |
| | $ | 2,083,654 |
|
Trademark | Indefinite | | 250,000 |
| | — |
| | 250,000 |
| | 250,000 |
| | — |
| | 250,000 |
|
Definite life intangible assets: | | | | | | | | | | | | | |
Subscriber relationships | 9 years | | 380,000 |
| | (223,185 | ) | | 156,815 |
| | 380,000 |
| | (191,201 | ) | | 188,799 |
|
Licensing agreements | 9.1 years | | 78,489 |
| | (41,658 | ) | | 36,831 |
| | 78,897 |
| | (34,145 | ) | | 44,752 |
|
Proprietary software | 6 years | | 16,552 |
| | (12,622 | ) | | 3,930 |
| | 16,552 |
| | (11,507 | ) | | 5,045 |
|
Developed technology | 10 years | | 2,000 |
| | (833 | ) | | 1,167 |
| | 2,000 |
| | (683 | ) | | 1,317 |
|
Leasehold interests | 7.4 years | | 132 |
| | (74 | ) | | 58 |
| | 132 |
| | (61 | ) | | 71 |
|
Total intangible assets | | | $ | 2,810,827 |
| | $ | (278,372 | ) | | $ | 2,532,455 |
| | $ | 2,811,235 |
| | $ | (237,597 | ) | | $ | 2,573,638 |
|
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 licenses expires:
|
| | |
FCC satellite licenses | | Expiration year |
SIRIUS FM-1 | | 2017 |
SIRIUS FM-2 | | 2017 |
SIRIUS FM-3 | | 2017 |
SIRIUS FM-5 | | 2017 |
SIRIUS FM-6 (1) | |
|
XM-1 | | 2014 |
XM-2 | | 2014 |
XM-3 | | 20132021 |
XM-4 | | 2014 |
XM-5 | | 2018 |
| |
(1) | We hold an FCC license for our FM-6 satellite, which will expire eight years years from when this satellite is launched and placed into operation. |
Prior to expiration, 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 broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.
In connection with the Merger, $250,000 of the purchase price was allocated to the XM trademark. As of September 30, 2012March 31, 2013, there were no legal, regulatory or contractual limitations associated with the XM trademark.
We will perform anOur annual impairment assessment of our indefinite intangible assets is performed as of October 1stthe fourth quarter of each year to determine if the fair value is less than the carrying amount.year. An assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.
At the date of our annual assessment in 2012 and 2011, our impairment assessment of fair value of our indefinite intangible assets indicated that such assets substantially exceeded their carrying value. As of September 30, 2012March 31, 2013, there were no indicators of impairment, and no impairment loss was recorded for intangible assets with indefinite lives during the three and nine months ended September 30, 2012March 31, 2013 and 20112012.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Definite Life Intangible Assets
Subscriber relationships are amortized on an accelerated basis over 9 years, which reflects the estimated pattern in which the economic benefits will be consumed. Other definite life intangible assets include certain licensing agreements, which are amortized over a weighted average useful life of 9.1 years on a straight-line basis.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
Amortization expense for all definite life intangible assets was $13,19812,591 and $14,57013,926 for the three months ended September 30, 2012March 31, 2013 and 2011, respectively, and $40,775 and $44,833 for the nine months endedSeptember 30, 2012 and 2011, respectively.
Expected amortization expense for the remaining period in 2012,2013, each of the fiscal years 20132014 through 20162017 and for periods thereafter is as follows:
| | Year ending December 31, | | Amount | | Amount |
2012 | | $ | 12,851 |
| |
2013 | | 47,330 |
| | $ | 34,730 |
|
2014 | | 38,852 |
| | 38,852 |
|
2015 | | 37,526 |
| | 35,535 |
|
2016 | | 31,932 |
| | 32,521 |
|
2017 | | | 19,557 |
|
Thereafter | | 30,310 |
| | 12,170 |
|
Total definite life intangible assets, net | | $ | 198,801 |
| | $ | 173,365 |
|
We capitalized a portion of the interest on funds borrowed to financeas part of the construction costscost of constructing our FM-6 satellitesatellites and related launch vehicle. We are currently capitalizing the interest associated with our FM-6 satellite and will continue to capitalize the interestdo so until the launch of our FM-6 satellite.its launch. We also incur interest costs on all of our debt instruments and on our satellite incentive agreements. The following is a summary of our interest costs:
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
Interest costs charged to expense | $ | 70,035 |
| | $ | 75,316 |
| | $ | 219,777 |
| | $ | 229,730 |
| $ | 46,174 |
| | $ | 76,971 |
|
Interest costs capitalized | 8,005 |
| | 8,906 |
| | 24,087 |
| | 24,224 |
| 7,970 |
| | 7,954 |
|
Total interest costs incurred | $ | 78,040 |
| | $ | 84,222 |
| | $ | 243,864 |
| | $ | 253,954 |
| $ | 54,144 |
| | $ | 84,925 |
|
Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $9,7555,442 and $9,97710,647 for the three months ended September 30, 2012March 31, 2013 and 2011, respectively, and $30,786 and $29,211 for the nine months endedSeptember 30, 2012 and 2011, respectively.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
| |
(9) | Property and Equipment |
Property and equipment, net, consists of the following:
| | | September 30, 2012 | | December 31, 2011 | March 31, 2013 | | December 31, 2012 |
Satellite system | $ | 1,943,537 |
| | $ | 1,943,537 |
| $ | 1,943,537 |
| | $ | 1,943,537 |
|
Terrestrial repeater network | 109,993 |
| | 112,440 |
| 112,532 |
| | 112,482 |
|
Leasehold improvements | 44,588 |
| | 43,455 |
| 45,051 |
| | 44,938 |
|
Broadcast studio equipment | 55,414 |
| | 53,903 |
| 56,478 |
| | 55,823 |
|
Capitalized software and hardware | 215,067 |
| | 193,301 |
| 251,480 |
| | 232,753 |
|
Satellite telemetry, tracking and control facilities | 62,270 |
| | 60,539 |
| 62,608 |
| | 62,734 |
|
Furniture, fixtures, equipment and other | 74,684 |
| | 60,283 |
| 64,447 |
| | 76,028 |
|
Land | 38,411 |
| | 38,411 |
| 38,411 |
| | 38,411 |
|
Building | 57,415 |
| | 57,185 |
| 57,850 |
| | 57,816 |
|
Construction in progress | 416,267 |
| | 372,508 |
| 422,195 |
| | 417,124 |
|
Total property and equipment | 3,017,646 |
| | 2,935,562 |
| 3,054,589 |
| | 3,041,646 |
|
Accumulated depreciation and amortization | (1,416,283 | ) | | (1,261,643 | ) | (1,511,619 | ) | | (1,469,724 | ) |
Property and equipment, net | $ | 1,601,363 |
| | $ | 1,673,919 |
| $ | 1,542,970 |
| | $ | 1,571,922 |
|
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
Construction in progress consists of the following:
| | | September 30, 2012 | | December 31, 2011 | March 31, 2013 | | December 31, 2012 |
Satellite system | $ | 369,156 |
| | $ | 343,932 |
| $ | 384,989 |
| | $ | 376,825 |
|
Terrestrial repeater network | 19,267 |
| | 19,194 |
| 19,764 |
| | 17,224 |
|
Other | 27,844 |
| | 9,382 |
| 17,442 |
| | 23,075 |
|
Construction in progress | $ | 416,267 |
| | $ | 372,508 |
| $ | 422,195 |
| | $ | 417,124 |
|
Depreciation and amortization expense on property and equipment was $53,37354,427 and $50,83352,191 for the three months ended September 30, 2012March 31, 2013 and 2011, respectively, and $158,706 and $156,032 for the nine months endedSeptember 30, 2012 and 2011, respectively.
SatellitesWe retired equipment of $12,656 during the three months endedMarch 31, 2013 and recognized a loss on disposal of assets of $124.
Satellites
We currently own a fleet of nine orbiting satellites. The chart below provides certain information on these satellites:
| | Satellite Designation | Year Delivered | | Estimated End of Depreciable Life | | Year Delivered | | Estimated End of Depreciable Life |
FM-1 | 2000 | | 2013 | | 2000 | | 2013 |
FM-2 | 2000 | | 2013 | | 2000 | | 2013 |
FM-3 | 2000 | | 2015 | | 2000 | | 2015 |
FM-5 | 2009 | | 2024 | | 2009 | | 2024 |
XM-1 | 2001 | | 2013 | |
XM-2 | 2001 | | 2013 | |
XM-1* | | | 2001 | | 2013 |
XM-2* | | | 2001 | | 2013 |
XM-3 | 2005 | | 2020 | | 2005 | | 2020 |
XM-4 | 2006 | | 2021 | | 2006 | | 2021 |
XM-5 | 2010 | | 2025 | | 2010 | | 2025 |
* Satellite was fully depreciated as of March 31, 2013.
We own four orbiting satellites for use in the Sirius system. We own five orbiting satellites for use in the XM system.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Four of these satellites were manufactured by Boeing Satellite Systems International and five were manufactured by Space Systems/Loral.
During the three months ended September 30, 2012March 31, 2013 and 20112012, we capitalized expenditures, including interest, of $8,2198,164 and $16,875, respectively, and $25,224 and $67,576 during the nine months endedSeptember 30, 2012 and 20118,665, respectively, related to the construction of our FM-6 satellite and related launch vehicle.
| |
(10) | Related Party Transactions |
We had the following related party balances at September 30, 2012March 31, 2013 and December 31, 20112012:
| | | Related party current assets | | Related party long-term assets | | Related party current liabilities | | Related party long-term liabilities | | Related party long-term debt | Related party current assets | | Related party long-term assets | | Related party current liabilities | | Related party long-term liabilities | | Related party long-term debt |
| September 30, 2012 | | December 31, 2011 | | September 30, 2012 | | December 31, 2011 | | September 30, 2012 | | December 31, 2011 | | September 30, 2012 | | December 31, 2011 | | September 30, 2012 | | December 31, 2011 | March 31, 2013 | | December 31, 2012 | | March 31, 2013 | | December 31, 2012 | | March 31, 2013 | | December 31, 2012 | | March 31, 2013 | | December 31, 2012 | | March 31, 2013 | | December 31, 2012 |
Liberty Media | $ | — |
| | $ | — |
| | $ | 837 |
| | $ | 1,212 |
| | $ | 8,408 |
| | $ | 9,722 |
| | $ | — |
| | $ | — |
| | $ | 208,742 |
| | $ | 328,788 |
| $ | — |
| | $ | — |
| | $ | 675 |
| | $ | 757 |
| | $ | 8,408 |
| | $ | 3,980 |
| | $ | — |
| | $ | — |
| | $ | 209,073 |
| | $ | 208,906 |
|
Sirius XM Canada | 8,221 |
| | 14,702 |
| | 49,267 |
| | 53,741 |
| | 4,580 |
| | 4,580 |
| | 19,660 |
| | 21,741 |
| | — |
| | — |
| 8,255 |
| | 13,167 |
| | 40,583 |
| | 44,197 |
| | 4,239 |
| | 2,776 |
| | 18,272 |
| | 18,966 |
| | — |
| | — |
|
Total | $ | 8,221 |
| | $ | 14,702 |
| | $ | 50,104 |
| | $ | 54,953 |
| | $ | 12,988 |
| | $ | 14,302 |
| | $ | 19,660 |
| | $ | 21,741 |
| | $ | 208,742 |
| | $ | 328,788 |
| $ | 8,255 |
| | $ | 13,167 |
| | $ | 41,258 |
| | $ | 44,954 |
| | $ | 12,647 |
| | $ | 6,756 |
| | $ | 18,272 |
| | $ | 18,966 |
| | $ | 209,073 |
| | $ | 208,906 |
|
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
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. All of these loans were repaid in 2009.
As part of the transactions with Liberty Media, in February 2009, we entered into an Investment Agreementinvestment agreement (the “Investment Agreement”) with an affiliate of Liberty Media Corporation, Liberty Radio, LLC, (collectively, “Liberty Media”).an indirect wholly-owned subsidiary of Liberty Media. Pursuant to the Investment Agreement, in March 2009 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 certainthe loan investments. Liberty Media has representatives onThe Series B Preferred Stock was convertible into approximately 40% of our boardoutstanding shares of directors. common stock (after giving effect to such conversion).
In September 2012, Liberty MediaRadio, LLC converted 6,249,900 shares of the Series B Preferred Stock into 1,293,467,684 shares of our common stock. As of October 25, 2012,In January 2013, the Federal Communications Commission granted Liberty Media owned approximatelyapproval to acquire de jure control of us and Liberty Radio, LLC converted its remaining Series B Preferred Stock into 1,904,291,0001,293,509,076 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 purchases of shares of our common stock, Liberty Media beneficially owned, directly and indirectly, over 50% of our outstanding common stock as of March 31, 2013.
Five current Liberty Media executives are members of our board of directors, and Liberty Media has designated three additional members of our board of directors. Gregory B. Maffei, the President and Chief Executive Officer of Liberty Media, is the Chairman of our board of directors.
Liberty Media has advised us that as of September 30, 2012March 31, 2013 and December 31, 20112012, respectively, it also owned the following:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
8.75% Senior Notes due 2015 | $ | 150,000 |
| | $ | 150,000 |
|
9.75% Senior Secured Notes due 2015 | — |
| | 50,000 |
|
13% Senior Notes due 2013 | — |
| | 76,000 |
|
7% Exchangeable Senior Subordinated Notes due 2014 | 11,000 |
| | 11,000 |
|
7.625% Senior Notes due 2018 | 50,000 |
| | 50,000 |
|
Total principal debt | 211,000 |
| | 337,000 |
|
Less: discounts | 2,258 |
| | 8,212 |
|
Total carrying value of debt | $ | 208,742 |
| | $ | 328,788 |
|
During the three months endedSeptember 30, 2012, we redeemed Liberty Media's $50,000 of 9.75% Senior Secured Notes due 2015 and $76,000 of 13% Senior Notes due 2013 as part of the redemption of these Notes in their entirety. |
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
8.75% Senior Notes due 2015 | $ | 150,000 |
| | $ | 150,000 |
|
7% Exchangeable Senior Subordinated Notes due 2014 | 11,000 |
| | 11,000 |
|
7.625% Senior Notes due 2018 | 50,000 |
| | 50,000 |
|
Total principal debt | 211,000 |
| | 211,000 |
|
Less: discounts | 1,927 |
| | 2,094 |
|
Total carrying value of debt | $ | 209,073 |
| | $ | 208,906 |
|
As of September 30, 2012March 31, 2013 and December 31, 20112012, we recorded $8,408 and $9,7223,980, respectively, related to accrued interest with Liberty Media to Related party current liabilities. We recognized Interest expense associated with debt held by Liberty Media of $8,2424,677 and $8,9348,994 for the three months ended September 30, 2012March 31, 2013 and 2011, respectively, and $26,260 and $26,718 for the nine months endedSeptember 30, 2012 and 2011, respectively.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
Sirius XM Canada
In June 2011,January 2013, Canadian Satellite Radio Holdings Inc. (“CSR”), the parent company of Sirius XM Canada, and Sirius Canada completed a transactionchanged its name to combine their operations (“the Canada Merger”). The combined company operates as Sirius XM Canada.Canada Holdings Inc. We own approximately 46,700,000 Class A shares on a converted basis of CSR,Sirius XM Canada representing a 38.0%37.9% equity interest and a 25.0% voting interest,interest.
We had the following Related party current asset balances attributable to Sirius XM Canada at March 31, 2013 andDecember 31, 2012:
|
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
Deferred programming costs and accrued interest | $ | 4,025 |
|
| $ | 4,350 |
|
Dividends receivable | — |
|
| 6,176 |
|
Chip set and other services reimbursement | 4,230 |
|
| 2,641 |
|
Total | $ | 8,255 |
| | $ | 13,167 |
|
We provide Sirius XM Canada with chip sets and other services and we are reimbursed for these costs.
Related party long-term asset balances attributable to Sirius XM Canada consisted of the following:
|
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
Non-interest bearing note, principal | $ | 396 |
|
| $ | 404 |
|
Fair value of host contract of debenture | 3,724 |
|
| 3,877 |
|
Fair value of embedded derivative of debenture | 49 |
|
| 9 |
|
Investment balance* | 35,561 |
|
| 37,983 |
|
Deferred programming costs and accrued interest | 853 |
|
| 1,924 |
|
Total | $ | 40,583 |
| | $ | 44,197 |
|
* The investment balance includes equity method goodwill and intangible assets of $27,252 and $27,615 as of March 31, 2013 and December 31, 2012, respectively.
We hold a non-interest bearing note in a principal amount of $410, issued by CSR.
Sirius XM Canada Holdings Inc. We also hold an investment in Cdn $4,000 face value of 8% convertible unsecured subordinated debentures issued by CSR,Sirius XM Canada Holdings, Inc., for which the embedded conversion feature is bifurcated from the host contract. 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 loss. As of September 30, 2012, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,747 and $16, respectively. As of December 31, 2011, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,490 and $0, respectively. The carrying values of the host contract and embedded derivative are recorded in Related party long-term assets.income (loss).
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 loss. income (loss).
As of September 30,December 31, 2012, we recorded a receivable of $6,176 for the remaining balance of the dividends due from Sirius XM Canada which was received in January 2013. In January 2013, Sirius XM Canada declared a quarterly cash dividend of Cdn $0.0825 per Class A shares of stock and Cdn $0.0275 per Class B shares of stock for shareholders of record on January 25, 2013. We received $3,752 of the quarterly dividends which was recorded as a reduction of our investment balance in Sirius XM Canada was approximately $42,107, $27,978 of which represents equity method goodwill and intangible assets, and was recorded in Related party long-term assets. As of December 31, 2011, our investment balance in Sirius XM Canada was approximately $45,061, $28,589 of which represented equity method goodwill and intangible assets, and was recorded in Related party long-term assets.Canada.
We provide Sirius XM Canada with chip sets and other services and we are reimbursed for these costs. As of September 30, 2012 and December 31, 2011, amounts due for these costs totaled $5,046 and $7,404, respectively, and is reported as Related party current assets.
As of September 30, 2012, amounts due from Sirius XM Canada also included $6,162 attributable to deferred programming costs and accrued interest, $2,987 of which is reported as Related party long-term assets. As of December 31, 2011, amounts due from Sirius XM Canada included $7,280 attributable to deferred programming costs and accrued interest, $4,780 of which was reported as Related party long-term assets.
As of September 30, 2012 and December 31, 2011, the amounts due to Sirius XM Canada totaled $1,804 and $1,804, respectively, and is reported as Related party current liabilities.
We recorded the following revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of comprehensive income:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Royalty income | $ | 7,924 |
| | $ | 6,468 |
| | $ | 23,425 |
| | $ | 6,468 |
|
Amortization of Sirius XM Canada deferred income | 694 |
| | 694 |
| | 2,082 |
| | 694 |
|
Licensing fee revenue | 1,500 |
| | 1,500 |
| | 4,500 |
| | 1,500 |
|
Advertising reimbursements | — |
| | — |
| | 833 |
| | — |
|
Total revenue from Sirius XM Canada | $ | 10,118 |
| | $ | 8,662 |
| | $ | 30,840 |
| | $ | 8,662 |
|
Our share of net earnings or losses of Sirius XM Canada are recorded to Interest and investment loss in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of Sirius XM Canada’s net loss was $182 for the three months endedSeptember 30, 2012 and $3,403 for the nine months endedSeptember 30, 2012. We recorded amortization expense related to equity method intangible assets of $363 for the three months endedSeptember 30, 2012 and $611 for the nine months endedSeptember 30, 2012. Our share of Sirius XM Canada's net loss was $4,214 for the three and
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
nine months endedSeptember 30, 2011.
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 are 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 have the right to receive a royalty equal to a percentage of Sirius Canada’s gross revenues based on subscriber levels (ranging between 5% to 15%) and the number of Canadian-specific channels made availableRelated party liabilities attributable to Sirius Canada.
We recordedXM Canada consisted of the following revenue from Sirius Canada. Royalty income is included in other revenue and dividend income is included in Interest and investment loss in our unaudited consolidated statements of comprehensive income:following:
|
| | | |
| For the Nine Months Ended September 30, |
| 2011 |
Royalty income | $ | 9,945 |
|
Dividend income | 460 |
|
Total revenue from Sirius Canada | $ | 10,405 |
|
Receivables from royalty and dividend income were utilized to absorb a portion of our share of net losses generated by Sirius Canada. Total costs reimbursed by Sirius Canada were $5,253 for the nine months endedSeptember 30, 2011.
Our share of net earnings or losses of Sirius Canada was recorded to Interest and investment loss in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of Sirius Canada’s net loss was $9,717 for the nine months endedSeptember 30, 2011. The payments received from Sirius Canada in excess of carrying value were $6,748 for the nine months endedSeptember 30, 2011.
XM Canada
We had an equity interest of 21.5% in XM Canada until June 21, 2011 when the Canada Merger closed. |
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
Deferred revenue for NHL licensing fees | $ | 1,463 |
| | $ | — |
|
Carrying value of deferred revenue for NHL games | 21,048 |
| | 21,742 |
|
Total | $ | 22,511 |
| | $ | 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 provisions of ASC 605, Revenue Recognition.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. As of September 30, 2012 and December 31, 2011, the carrying value of deferred revenue related to this agreement was $22,436 and $24,517, respectively.
The Cdn $45,000 standby credit facility we extended to XM Canada was paid and terminated as a result of the Canada Merger. We received $38,815 in cash upon payment of this facility. As a result of the repayment of the credit facility and completion of the Canada Merger, we released a $15,649 valuation allowance related to the absorption of our share of the net loss from our investment in XM Canada as of June 21, 2011.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
We recorded the following revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of comprehensive income:
|
| | | |
| For the Nine Months Ended September 30, |
| 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 Three Months Ended March 31, |
| 2013 | | 2012 |
Royalty income | $ | 8,469 |
| | $ | 7,465 |
|
Amortization of Sirius XM Canada deferred income | 694 |
| | 694 |
|
Licensing fee revenue | 1,171 |
| | 1,500 |
|
Advertising and other reimbursements | 415 |
| | 417 |
|
Total revenue from Sirius XM Canada | $ | 10,749 |
| | $ | 10,076 |
|
Our share of net earnings or losses of Sirius XM Canada isare recorded to Interest and investment lossincome (loss) in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of Sirius XM Canada’s net lossincome (loss) was $6,0451,708 and $(1,645) for the ninethree months ended September 30, 2011March 31, 2013. and 2012, respectively. We recorded amortization expense related to the equity method intangible assets of $363 and $(173) for the three months endedMarch 31, 2013 and 2012, respectively.
(11) Investments
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 September 30, 2012March 31, 2013 and December 31, 20112012, our Long-term restricted investments were $3,973$3,999.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
(12) Debt
Our debt consists of the following:
| | | Conversion Price (per share) | | September 30, 2012 | | December 31, 2011 | Conversion Price (per share) | | March 31, 2013 | | December 31, 2012 |
8.75% Senior Notes due 2015 | N/A |
| | 800,000 |
| | 800,000 |
| N/A |
| | $ | 800,000 |
| | $ | 800,000 |
|
Less: discount | | | (7,754 | ) | | (9,753 | ) | |
9.75% Senior Secured Notes due 2015 | N/A |
| | — |
| | 257,000 |
| |
Less: discount | | | — |
| | (8,356 | ) | |
13% Senior Notes due 2013 | N/A |
| | — |
| | 778,500 |
| |
Less: discount | | | — |
| | (39,504 | ) | | | (6,342 | ) | | (7,056 | ) |
7% Exchangeable Senior Subordinated Notes due 2014 | $ | 1.875 |
| | 550,000 |
| | 550,000 |
| $ | 1.841 |
| | 502,370 |
| | 550,000 |
|
Less: discount | | | (4,591 | ) | | (5,956 | ) | | | (3,307 | ) | | (4,112 | ) |
7.625% Senior Notes due 2018 | N/A |
| | 700,000 |
| | 700,000 |
| N/A |
| | 700,000 |
| | 700,000 |
|
Less: discount | | | (9,970 | ) | | (10,898 | ) | | | (9,319 | ) | | (9,647 | ) |
5.25% Senior Notes due 2022 | N/A |
| | 400,000 |
| | — |
| N/A |
| | 400,000 |
| | 400,000 |
|
Less: discount | | | (5,935 | ) | | — |
| | | (5,710 | ) | | (5,826 | ) |
Other debt: | | | | | | | | | | |
Capital leases | N/A |
| | 13,003 |
| | 2,941 |
| N/A |
| | 10,606 |
| | 11,861 |
|
Total debt | | | 2,434,753 |
| | 3,013,974 |
| | | 2,388,298 |
| | 2,435,220 |
|
Less: total current maturities non-related party | | | 4,326 |
| | 1,623 |
| | | 3,955 |
| | 4,234 |
|
Total long-term | | | 2,430,427 |
| | 3,012,351 |
| | | 2,384,343 |
| | 2,430,986 |
|
Less: related party | | | 208,742 |
| | 328,788 |
| | | 209,073 |
| | 208,906 |
|
Total long-term, excluding related party | | | $ | 2,221,685 |
| | $ | 2,683,563 |
| | | $ | 2,175,270 |
| | $ | 2,222,080 |
|
8.75% Senior Notes due 2015
In March 2010, we issued $800,000 aggregate principal amount of 8.75% Senior Notes due 2015 (the “8.75% Notes”). Interest is payable semi-annually in arrears on April 1 and October 1 of each year at a rate of 8.75% per annum. The 8.75% Notes mature on April 1, 2015. The 8.75% Notes were issued for $786,000, resulting in an aggregate original issuance discount of $14,000. Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 8.75% Notes on a senior unsecured basis.
| |
| 7% Exchangeable Senior Subordinated Notes due 2014 |
In August 2008, we issued $550,000 aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “Exchangeable Notes”). 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 have guaranteed the Exchangeable 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 Exchangeable Notes, which is equivalent to an approximate exchange price of $1.841 per share of common stock. Interest is payable semi-annually in arrears on June 1 and December 1 of each year at a rate of 7% per annum. The Exchangeable Notes mature on December 1, 2014. TheAs a result of Liberty Media's acquisition of our common stock on January 17, 2013, a fundamental change occurred under the indenture governing the Exchangeable Notes. In accordance with the indenture, on February 1, 2013, we made an offer to each holder of the Exchangeable Notes are exchangeableto: (i) repurchase his or her Exchangeable Notes at any time at the optiona purchase price in cash equal to $1,000 per $1,000 principal amount of the holder into shares ofExchangeable Notes (plus accrued and unpaid interest to, but excluding March 1, 2013); (ii) exchange his or her Exchangeable Notes for our common stock, at an initial exchange rate of 533.3333581.3112 shares per $1,000 principal amount of Notes, or (iii) retain his or her Exchangeable Notes pursuant to their terms through maturity on December 1, 2014, or otherwise transfer or exchange them in the ordinary course. Following the expiration of this offer, the exchange rate for the Exchangeable Notes reverted to 543.1372 shares of common stock per $1,000$1,000 principal amount of Exchangeable Notes, which is equivalent to an approximate exchange price of $1.875 per share of common stock. If a holder of the Exchangeable Notes elects to exchange the notes in connection with a corporate transaction that constitutes a fundamental change, the exchange rate will be increased by an additional number of shares of common stock determined by the applicable Indenture.Notes.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
In connection with this offer, $47,630 in principal amount of the Exchangeable Notes were converted resulting in the issuance of 27,687,850 shares of common stock during the three months endedMarch 31, 2013. 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. No loss was recognized as a result of the exchange. As of March 31, 2013, $502,370 aggregate principal amount of the Exchangeable Notes remain outstanding.
During the three months ended September 30, 2012March 31, 2013 and three and nine months endedSeptember 30, 20112012, the common stock reserved for exchangeconversion in connection with the Exchangeable Notes werewas considered to be anti-dilutive in our calculation of diluted net income per share. During the nine months endedSeptember 30, 2012, the Exchangeable Notes were considered to be dilutive.
7.625% Senior Notes due 2018
In October 2010, we issued $700,000 aggregate principal amount of 7.625% Senior Notes due 2018 (the “7.625% Notes”). Interest is payable semi-annually in arrears on May 1 and November 1 of each year at a rate of 7.625% per annum. The 7.625% Notes mature on November 1, 2018. Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 7.625% Notes.
5.25% Senior Notes due 2022
In August 2012, we issued $400,000 aggregate principal amount of 5.25% Senior Notes due 2022 (the “5.25% Notes”). Interest is payable semi-annually in arrears on February 15 and August 15 of each year at a rate of 5.25% per annum. The 5.25% Notes mature on August 15, 2022. Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 5.25% Notes.
Senior Secured Revolving Credit Facility
In December 2012, we entered into a five-year Senior Secured Revolving Credit Facility (the "Credit Facility") with a syndicate of financial institutions for $1,250,000. Our obligations under the Credit Facility are guaranteed by certain of our material domestic subsidiaries and are secured by a lien on substantially all of our assets and the assets of our material domestic subsidiaries. Borrowings under the Credit Facility will be 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. We are also required to pay a variable fee on the average daily unused portion of the Credit Facility which is currently 0.30% per annum and is payable on a quarterly basis. The Credit Facility contains customary covenants, including a maintenance covenant, and events of default. The Credit Facility contains incremental facilities which would allow us to increase or obtain new commitments and/or incur new term loans, subject to the terms of the Credit Facility.
As of March 31, 2013, we had not drawn on the Credit Facility.
Retired Debt Instruments
9.75% Senior Secured Notes due 2015
In August 2009,March 2012, we issuedpurchased $257,00032,572 aggregate principal amount of our then outstanding 9.75% Senior Secured Notes due September 1, 2015(the “"9.75% Notes”Notes")., $9,500 of which was settled in April 2012. The aggregate purchase price for these 9.75% Notes were issued forwas $244,29235,565, resulting in an aggregate original issuance discount of $12,708. Substantially all of our domestic wholly-owned subsidiaries guaranteed our obligations under the 9.75% Notes. The 9.75% Notes and related guarantees were secured by first-priority liens on substantially all of our assets and the assets of the guarantors.
During the three and nine months endedSeptember 30, 2012, we purchased $186,112 and $257,000, respectively, in aggregate principal amounts of the 9.75% Notes for an aggregate purchase price, inclusive of interest, of $204,258 and $281,698, respectively.accrued interest. We recognized an aggregate loss on the extinguishment of thethese 9.75% Notes of $14,352 and $22,184 during the three and nine months endedSeptember 30, 20123,778, respectively, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.net, during the three months endedMarch 31, 2012. The remainder of the 9.75% Notes was repurchased in 2012.
13% Senior Notes due 2013
In July 2008,March 2012, we issuedpurchased $778,50034,254 aggregate principal amount of our then outstanding 13% Senior Notes due 2013 (the “"13% Notes”Notes"). The aggregate purchase price for these 13% Notes would have matured onwas August 1, 2013$39,610. Substantially all of our domestic wholly-owned subsidiaries guaranteed our obligations under the 13% Notes.
During the three and nine months endedSeptember 30, 2012, we purchased $681,517 and $778,500, respectively, in aggregate principal amounts of the 13% Notes for an aggregate purchase price, inclusive of interest, of $765,907 and $879,133, respectively.accrued interest. We recognized an aggregate loss on the extinguishment of thethese 13% Notes of $92,753 and $110,5426,193, during the three and nine months endedSeptember 30, 2012, respectively, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.
3.25% Convertible Notes due 2011
In February 2011, we purchased $94,148 of our then outstanding 3.25% Convertible Notes due 2011 (the "3.25% Notes") at prices between 100.75% and 100.94% of the principal amount plus accrued interest. We recognized a loss on extinguishment of debtnet, for the 3.25% Notes of $2,291 for the ninethree months ended September 30, 2011March 31, 2012, which consisted primarily of cash premiums paid, unamortized discount and deferred financing fees.. The remainder of the 3.25%13% Notes was paid upon maturityrepurchased in the fourth quarter of 2011.2012.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
11.25% Senior Secured Notes due 2013
In January 2011, we purchased the remaining portion of our outstanding 11.25% Senior Secured Notes due 2013 for an aggregate purchase price of $40,376. A loss from extinguishment of debt of $4,915 associated with this purchase was recorded during the nine months endedSeptember 30, 2011.
Covenants and Restrictions
Our debt generally requires compliance with certain covenants that restrict our ability to, among other things, (i) incur additional indebtedness unless our consolidated leverage would be no greater than 6.05.0 times consolidated operating cash flow after the incurrence of the 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 our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions. In addition, under the Credit Facility, we also must comply with a maintenance covenant that we not exceed a total leverage ratio, calculated as total consolidated debt to consolidated operating cash flow, of 5.0 to 1.0.
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 to grace periods where applicable. If an event of default occurs and is continuing, our debt could become immediately due and payable.
At September 30, 2012March 31, 2013 and December 31, 20112012, we were in compliance with our debt covenants.
Common Stock, par value $0.001$0.001 per share
We were authorized to issue up to 9,000,000,000 shares of common stock as of September 30, 2012March 31, 2013 and December 31, 20112012. There were 5,192,364,7306,442,718,811 and 3,753,201,9295,262,440,085 shares of common stock issued and 6,433,648,535 and 5,262,440,085 shares outstanding as of September 30, 2012March 31, 2013 and December 31, 20112012, respectively.
As of September 30, 2012March 31, 2013, approximately 1,954,599,000556,764,000 shares of common stock were reserved for issuance in connection with outstanding convertible debt, preferred stock, warrants, incentive stock awards and common stock to be granted to third parties upon satisfaction of performance targets.
Stock Repurchase Program
In December 2012, our board of directors approved a $2,000,000 common stock repurchase program. Shares of common stock may be purchased from time to time on the open market or in privately negotiated transactions.
From January 1, 2013 through March 31, 2013, we repurchased 157,183,759 shares of common stock for $493,635, including fees and commissions, on the open market. Liberty Media did not participate in the common stock repurchases.
Common stock repurchases are retired upon settlement. As of March 31, 2013, $27,923 of common stock repurchases had not settled and was recorded as Treasury stock within our unaudited consolidated balance sheets and consolidated statements of stockholders' equity. As of March 31, 2013, $1,506,365 remained available for the purchase of common stock under the stock repurchase program.
Share Lending Arrangements
To facilitate the offering of the Exchangeable Notes, we entered into share lending agreements with Morgan Stanley Capital Services Inc. (“MS”) and UBS AG London Branch (“UBS”) in July 2008, under which we2008. All loaned MS and UBS an aggregate of 262,400,000shares of our common stock in exchange for a fee of $0.001 per share. During the third quarter of 2009, MSwere returned to us 60,000,000 sharesas of our common stock borrowed. In October 2011 MS and UBS returned the remaining 202,400,000 shares loaned. The returned shares were retired upon receipt and removed from outstanding common stock. The share lending agreements have beenwere terminated. Under GAAP, the borrowed shares were not considered outstanding for the purpose of computing and reporting our net income (loss) per common share.
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 $3,1393,209 and $1,2762,982, respectively, for the three months ended September 30, 2012March 31, 2013 and 20112012, respectively. As of March 31, 2013, the unamortized balance of the debt issuance costs was $22,238, with $21,751 recorded in Deferred financing fees, net, and $9,181487 and $6,727, respectively, forrecorded in Long-term related party assets. A portion of the unamortized debt issuance costs was recognized during the ninethree months ended September 30, 2012March 31, 2013 and in connection with the conversion of the Exchangeable Notes.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
2011. As of September 30,December 31, 2012, the unamortized balance of the debt issuance costs was $30,87327,652, with $30,25627,099 recorded in deferredDeferred financing fees, net, and $617 recorded in Long-term related party assets. As of December 31, 2011, the unamortized balance of the debt issuance costs was $40,054, with $39,253 recorded in deferred financing fees, net, and $801553 recorded in Long-term related party assets. These costs will continue to be amortized until the debt is terminated.
In January 2004, Sirius Satellite Radio Inc. signed a seven-year agreement with a sports programming provider which expired in February 2011. Upon execution of this agreement, Sirius delivered 15,173,070 shares of common stock valued at $40,967 to that programming provider. These shares of common stock were subject to transfer restrictions which lapsed over time. We recognized share-based payment expense associated with these shares of $1,568 in the nine months endedSeptember 30, 2011.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
Preferred Stock, par value $0.001$0.001 per share
We were authorized to issue up to 50,000,000 shares of undesignated preferred stock as of September 30, 2012March 31, 2013 and December 31, 2011. There were no shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) issued and outstanding as of September 30, 2012 and December 31, 2011., respectively.
There were 6,250,100 and 12,500,000 shares of Series B Preferred Stock issued and outstanding as of September 30,December 31, 2012 and December 31, 2011, respectively.held by Liberty Media. In September 2012,January 2013, Liberty Media converted 6,249,900its remaining shares of the Series B Preferred Stock into 1,293,467,6841,293,509,076 shares of common stock. The Series B Preferred Stock is convertible into shares of our common stock at the rate of 206.9581409 shares of common stock for each share of Series B Preferred Stock, representing approximately 20% of our outstanding shares of common stock (after giving effect to such conversion). As the holder of the Series B Preferred Stock, Liberty Radio LLC is entitled to a number of votes equal to the number of shares of our common stock into which such shares of Series B Preferred Stock are convertible. Liberty Radio LLC will also receive dividends and distributions ratably with our common stock, on an as-converted basis. With respect to dividend rights, the Series B Preferred Stock ranks evenly with our common stock and each other class or series of our equity securities not expressly provided as ranking senior to the Series B Preferred Stock. With respect to liquidation rights, the Series B Preferred Stock ranks evenly with each other class or series of our equity securities not expressly provided as ranking senior to the Series B Preferred Stock, and ranks senior to our common stock.
Warrants
We have issued warrants to purchase shares of our common stock in connection with distribution, programming and satellite purchase agreements. As of September 30, 2012March 31, 2013 and December 31, 20112012, approximately 22,506,00018,455,000 warrants to acquire an equal number of shares of common stock were outstanding and fully vested. These warrantsWarrants were excluded from theincluded in our calculation of diluted net income per common share as the effect was dilutive for the three months endedMarch 31, 2013. They were excluded from the calculation for the three months endedMarch 31, 2012 as the effect would have been anti-dilutive. The warrants expire at various times through 2015. At September 30, 2012March 31, 2013 and December 31, 20112012, the weighted average exercise price of outstanding warrants was $2.632.55 per share. We did not incur warrant related expenses during the three and nine months ended September 30, 2012March 31, 2013 and 20112012.
In February 2011, Daimler AG exercised 16,500,000 warrants to purchase shares of common stock on a net settlement basis, resulting in the issuance of 7,122,951 shares of our common stock.
We recognized share-based payment expense of $17,49214,518 and $13,98314,951 for the three months ended September 30, 2012March 31, 2013 and 2011, respectively, and $46,361 and $36,006 for the nine months endedSeptember 30, 2012 and 2011, respectively.
2009 Long-Term Stock Incentive Plan
In May 2009, our stockholders approved the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (the “2009 Plan”). Employees, consultants and members of our board of directors are eligible to receive awards under the 2009 Plan. The 2009 Plan provides for the grant of stock options, restricted stock, 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 2009 Plan are generally subject to a vesting requirement. Stock-based awards generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of common stock upon vesting. As of September 30, 2012March 31, 2013, approximately 142,977,000144,184,000 shares of common stock were available for future grants under the 2009 Plan.
Other Plans
We maintain four other share-based benefit plans — the XM 2007 Stock Incentive Plan, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM 1998 Shares Award Plan and the XM Talent Option Plan. No further awards may be made under these plans. Outstanding awards under these plans continue to vest.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
The following table summarizes the weighted-average assumptions used to compute the fair value of options granted to employees and members of our board of directors:
|
| | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Risk-free interest rate | 0.8% | | 1.1% | | 0.8% | | 1.1% |
Expected life of options — years | 5.06 | | 5.27 | | 5.13 | | 5.27 |
Expected stock price volatility | 49% | | 68% | | 53% | | 68% |
Expected dividend yield | 0% | | 0% | | 0% | | 0% |
|
| |
| For the Three Months Ended March 31, |
| 2012 |
Risk-free interest rate | 0.8% |
Expected life of options — years | 5.34 |
Expected stock price volatility | 57% |
Expected dividend yield | 0% |
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
There were no options granted to third partiesemployees during the three and nine months ended September 30, 2012March 31, 2013. There were no options granted to third parties or members of our board of directors during the three months endedMarch 31, 2013 and 20112012. We do not intend to pay regular dividends on our common stock. Accordingly, the dividend yield percentage used in the Black-Scholes-Merton option value is zero for all periods.
The following table summarizes stock option activity under our share-based payment plans for the ninethree months ended September 30, 2012March 31, 2013 (options in thousands):
| | | Options | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | Options | | Weighted- Average Exercise Price (1) | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding as of December 31, 2011 | 439,580 |
| | $ | 1.25 |
| | | |
Outstanding as of December 31, 2012 | | 274,512 |
| | $ | 1.92 |
| | |
Granted | 57,776 |
| | $ | 2.52 |
| | | — |
| | $ | — |
| | |
Exercised | (144,310 | ) | | $ | 0.62 |
| | | (7,004 | ) | | $ | 1.21 |
| | |
Forfeited, cancelled or expired | (8,217 | ) | | $ | 3.26 |
| | | (2,292 | ) | | $ | 1.45 |
| | |
Outstanding as of September 30, 2012 | 344,829 |
| | $ | 1.68 |
| | 6.82 | | $ | 384,883 |
| |
Exercisable, September 30, 2012 | 125,959 |
| | $ | 2.08 |
| | 5.33 | | $ | 134,226 |
| |
Outstanding as of March 31, 2013 | | 265,216 |
| | $ | 1.95 |
| | 7.08 | | $ | 349,605 |
|
Exercisable as of March 31, 2013 | | 89,702 |
| | $ | 2.57 |
| | 4.99 | | $ | 95,086 |
|
| |
(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 28, 2012 special cash dividend. |
The weighted average grant date fair value of options granted during the ninethree months ended September 30,March 31, 2012 and 2011was$1.081.02 and $1.04, respectively.. The total intrinsic value of stock options exercised during the ninethree months ended September 30, 2012 and 2011March 31, 2013 was $237,52113,616 and $10,011, respectively..
We recognized share-based payment expense associated with stock options of $16,66014,518 and $13,20113,643 for the three months ended September 30, 2012March 31, 2013 and 2011, respectively, and $43,350 and $33,098 for the nine months endedSeptember 30, 2012 and 2011, respectively.
There were no grants, exercises, forfeitures, cancellations or expirations of our shares ofThe following table summarizes the nonvested restricted stock orunit activity under our share-based payment plans for the three months endedMarch 31, 2013 (shares in thousands):
|
| | | | | | |
| Shares | | Grant Date Fair Value |
Nonvested as of December 31, 2012 | 429 |
| | $ | 3.25 |
|
Granted | — |
| | $ | — |
|
Vested restricted stock units | (192 | ) | | $ | 3.27 |
|
Forfeited | — |
| | $ | — |
|
Nonvested as of March 31, 2013 | 237 |
| | $ | 3.23 |
|
The outstanding nonvested restricted stock units during the three and nine months endedSeptember 30, 2012. As of September 30, 2012, we had 421represent awards of nonvested restricted stock and restricted stock units outstanding which have a weighted average grant date fair value of $1.46. These represent shares issued to members of the board of directors as part of our formerprior director compensation program. The restricted stock units held by two former members of our board of directors vested in January 2013 upon their resignation as members of our board of directors. The remaining nonvested shares will vest on the first anniversary of the date the applicable person ceasesceased to be a director. The total intrinsic value of restricted stock units that vested during the three months endedMarch 31, 2013 was $605.
We recognizeddid not recognize any share-based payment expense associated with restricted stock units and shares of restricted stock of $0 forduring the three months ended September 30, 2012March 31, 2013 and 2011 and $0 and $543 for the nine months endedSeptember 30, 2012 and 2011, respectively..
Total unrecognized compensation costs related to unvested share-based payment awards for stock options and restricted stock units and shares granted to employees and members of our board of directors at September 30, 2012March 31, 2013 and December 31, 20112012, net of estimated forfeitures, waswere $146,028114,074 and $129,983129,010, respectively. The total unrecognized compensation costs at September 30, 2012March 31, 2013 are expected to be recognized over a weighted-average period of three years.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
401(k) Savings Plan
We sponsor the Sirius XM Radio 401(k) Savings Plan (the “Sirius XM Plan”) for eligible employees.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)
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 6% of an employee’s pre-tax salary in cash which is used to purchase shares of our common stock on the open market. During the three months endedMarch 31, 2013, we contributed approximately $1,419 to the Sirius XM Plan in fulfillment of our matching obligation. For the three months endedMarch 31, 2012, employer matching contributions were made in the form of shares of our common stock. 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. Share-based payment expense resulting from the matching contribution to the Sirius XM Plan was $832 and $782for the three months ended September 30,March 31, 2012 andwas 2011$1,308, respectively, and .$3,011 and $2,365 for the nine months endedSeptember 30, 2012 and 2011, respectively.
We may also elect to contribute to the profit sharing portion of the Sirius XM Plan based upon the total eligible compensation of eligible participants. These additional contributions in the form of shares of common stock are determined by the compensation committee of our board of directors. Employees are only eligible to receive profit-sharing contributions during any year in which they are employed on the last day of the year. We did not contribute to the profit sharing portion of the Sirius XM Plan in 2011 and we do not plan to contribute in 2012.
| |
(15) | Commitments and Contingencies |
The following table summarizes our expected contractual cash commitments as of September 30, 2012March 31, 2013:
| | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | Thereafter | | Total | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | Thereafter | | Total |
Long-term debt obligations | $ | 1,146 |
| | $ | 4,234 |
| | $ | 553,406 |
| | $ | 803,355 |
| | $ | 862 |
| | $ | 1,100,000 |
| | $ | 2,463,003 |
| $ | 3,121 |
| | $ | 505,776 |
| | $ | 803,355 |
| | $ | 724 |
| | $ | — |
| | $ | 1,100,000 |
| | $ | 2,412,976 |
|
Cash interest payments | 81,084 |
| | 184,360 |
| | 183,116 |
| | 109,483 |
| | 74,381 |
| | 231,700 |
| | 864,124 |
| 173,023 |
| | 183,584 |
| | 113,285 |
| | 78,193 |
| | 78,865 |
| | 158,375 |
| | 785,325 |
|
Satellite and transmission | 3,675 |
| | 55,106 |
| | 14,927 |
| | 13,157 |
| | 3,597 |
| | 19,154 |
| | 109,616 |
| 64,487 |
| | 27,658 |
| | 13,874 |
| | 4,336 |
| | 3,484 |
| | 20,334 |
| | 134,173 |
|
Programming and content | 44,719 |
| | 201,146 |
| | 171,456 |
| | 163,409 |
| | 13,388 |
| | 1,125 |
| | 595,243 |
| 114,361 |
| | 194,615 |
| | 180,121 |
| | 29,038 |
| | 12,500 |
| | — |
| | 530,635 |
|
Marketing and distribution | 7,887 |
| | 18,417 |
| | 11,588 |
| | 5,377 |
| | 3,117 |
| | 692 |
| | 47,078 |
| 11,846 |
| | 13,793 |
| | 7,400 |
| | 4,013 |
| | 568 |
| | 381 |
| | 38,001 |
|
Satellite incentive payments | 2,435 |
| | 11,804 |
| | 12,542 |
| | 11,658 |
| | 12,529 |
| | 79,959 |
| | 130,927 |
| 6,730 |
| | 12,377 |
| | 11,478 |
| | 12,311 |
| | 13,259 |
| | 69,066 |
| | 125,221 |
|
Operating lease obligations | 9,403 |
| | 38,017 |
| | 31,947 |
| | 34,572 |
| | 24,501 |
| | 224,861 |
| | 363,301 |
| 28,873 |
| | 33,233 |
| | 36,202 |
| | 26,468 |
| | 20,291 |
| | 207,943 |
| | 353,010 |
|
Other | 9,278 |
| | 39,607 |
| | 15,712 |
| | 1,790 |
| | 188 |
| | — |
| | 66,575 |
| 44,968 |
| | 22,940 |
| | 3,806 |
| | 1,044 |
| | 278 |
| | 23 |
| | 73,059 |
|
Total(1) | $ | 159,627 |
| | $ | 552,691 |
| | $ | 994,694 |
| | $ | 1,142,801 |
| | $ | 132,563 |
| | $ | 1,657,491 |
| | $ | 4,639,867 |
| |
Total (1) | | $ | 447,409 |
| | $ | 993,976 |
| | $ | 1,169,521 |
| | $ | 156,127 |
| | $ | 129,245 |
| | $ | 1,556,122 |
| | $ | 4,452,400 |
|
| |
(1) | The table does not include our reserve for uncertain tax positions, which at September 30, 2012March 31, 2013 totaled $1,5651,446, as the specific timing of any cash payments cannot be projected with reasonable certainty. |
Long-term debt obligations. Long-term 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. We have also entered into various agreements to design and construct a satellite and related launch vehicle for use in our systems.
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.
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 vehicles they manufacture. In addition, 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.
Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of four of XM’s in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two of XM’s satellites. As of September 30, 2012March 31, 2013, we have accrued $27,506 related to contingent in-orbit performance payments for our XM-3 and XM-4 satellites based
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
we have accrued $27,613 related to contingent in-orbit performance payments for our XM-3 and XM-4 satellites based on expected operating performance over their fifteen-year design life. Boeing may also be entitled to an additional $10,000 if our XM-4 satellite continues to operate above baseline specifications during the five years beyond the satellite’s fifteen-year design life.
Space Systems/Loral, thea manufacturer of two of our in-orbit satellites, may be entitled to future in-orbit performance payments. As of September 30, 2012March 31, 2013, we have accrued $9,1938,120 and $21,45021,820 related to contingent performance payments for our FM-5 and XM-5 satellites, respectively, based on their expected operating performance over their fifteen-year design life.
Operating lease obligations. We have entered into both cancelable and non-cancelable operating leases for office space, equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements and rent escalations that have initial terms ranging from one to fifteen years, and certain leases that have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.
Other. We have entered into various agreements with third parties for general operating purposes. In addition to the minimum contractual cash commitments described above, we have entered into agreements with other variable cost arrangements. These future costs are dependent upon many factors, 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.
We do not have any other significant off-balance sheet financing arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Legal Proceedings
In the ordinary course of business, we are a defendant or party to various claims and lawsuits, including those discussed below. These claims are at various stages of arbitration or adjudication.
State Consumer Investigations. 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.
A separate investigation into our consumer practices is being conducted by the Attorneys General of the State of Florida and the State of New York. We are cooperating with these investigations and believe our consumer practices comply with all applicable federal and state laws and regulations.
One Twelve, Inc. and Don Buchwald v. Sirius XM Radio Inc. In March 2011, One Twelve, Inc., Howard Stern's production company, and Don Buchwald, Stern's agent, commenced an action against us in the Supreme Court of the State of New York, County of New York. The action alleged that, upon the Merger, we failed to honor our obligations under the performance-based compensation provisions of our prior agreement dated October 2004 with One Twelve and Buchwald, as agent; One Twelve and Buchwald each assert a claim of breach of contract. In April 2012, the Court granted our motion for summary judgment and dismissed with prejudice the suit. The Court found the agreement unambiguous. One Twelve and Buchwald appealed this decision and, in April 2013, the Supreme Court, Appellate Division, First Department, affirmed the decision of the trial court granting summary judgment and dismissing the complaint.
Other Matters. In the ordinary course of business, we are a defendant in various other lawsuits and arbitration proceedings, including derivative actions,actions; actions filed by subscribers, both on behalf of themselves and on a class action basis, and actions filed bybasis; former employees,employees; parties to contracts or leases,leases; and owners of patents, trademarks, copyrights or other intellectual property. Our significant legal proceedingsNone of these other actions are, discussed under Item I, Legal Proceedings, in Part II, Other Information.our opinion, likely to have a material adverse effect on our business, financial condition or results of operations.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)
(16) Income Taxes
Income tax benefit (expense)expense for the three months ended September 30, 2012March 31, 2013 and 2011March 31, 2012 was $20,11379,040 and $(5,714), respectively and for the nine months endedSeptember 30, 2012 and 2011 was $3,013,860 and $(9,907)2,802, respectively.
For three months endedSeptember 30, 2012, we recorded a $24,000 discrete income tax benefit related to the release of the deferred tax valuation allowance for net operating losses we no longer expect to realize against income for the remainder of 2012. We now expect to realize this benefit after 2012. This benefit is due to a decrease in estimated income for 2012 as result of the loss on extinguishment of debt that was recorded during the three months ended September 30, 2012March 31, 2013, we estimate our annual effective tax rate to be 38.5%. IncludingFor the $24,000 discrete item recorded in the quarter, for the ninethree months ended September 30,March 31, 2012, we did not have recorded in aggregateany federal income tax expense as it was offset by a discrete benefitcorresponding release of the valuation allowances related to deferred tax assets. Income tax expense of $3,013,0002,802 for the release ofprincipally related to foreign withholding taxes.
We released significantly all of our deferred tax valuation allowance related to net operating losses that will be realized afterin 2012.
The remaining deferred tax asset As of March 31, 2013, there remains a valuation allowance as of September 30, 2012 of approximately $71,700 relatesrelated to deferred tax assets we expect to realize as a result of pre-tax income anticipated during the fourth quarter of 2012 of $64,200 and deferred tax assets of $7,5009,835 that are not likely to be realized due to certain state net operating loss limitations.
The increased ownership in us by Liberty Media to over 50% of our outstanding common stock did not create a change of control under Internal Revenue Code 382.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)
Special Note Regarding Forward-Looking Statements
The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, particularly the risk factors described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20112012 and “Management’s Discussion and Analysis of Financial Condition and Results or Operations” herein and in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20112012.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
we face substantial competition and that competition is likely to increase over time;
our business depends in large part upon automakers;
general economic conditions can affect our business;
failure of our satellites would significantly damage our business;
our ability to attract and retain subscribers at a profitable level in the future is uncertain;
royalties for music rights have increased and may increase;continue to do so in the future;
failureour business could be adversely affected if we fail to comply with FCC requirements could damage our business;attract and retain qualified executive officers;
the unfavorable outcome of pending or future litigation could have a material adverse effect;
rapid technological and industry changes could adversely impact our services;
failure of third parties to perform could adversely affect our business;
changes in consumer protection laws and their enforcement could damage our business;
failure to comply with FCC requirements could damage our business;
other existing or future government laws and regulations could harm our business;
interruption or failure of our information technology and communication systems could negatively impact our results and brand;
if we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer;
we may from time to time modify our business plan, and these changes could adversely affect us and our financial condition;
our substantial indebtedness could adversely affect our operations and could limit our ability to react to changes in the economy or our industry;
our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities;
electromagnetic interferenceour principal stockholder has significant influence over our management and over actions requiring stockholder approval and its interests may differ from others could damage our business;the interests of other holders of common stock;
we are a "controlled company" within the meaning of the NASDAQ listing rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements; and
our business may be impaired by third-party intellectual property rights; and
Liberty Media Corporation has significant influence over our business and affairs and its interest may differ from ours.rights.
Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Executive Summary
We broadcast our music, sports, news,entertainment, comedy, talk, entertainment,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 certain of our music and other channels, plus new features such as SiriusXM On Demand and MySXM, over the Internet, including through applications for mobile devices.
We have agreements with every major automaker (“OEMs”) to offer satellite radios as factory-factory or dealer-installed equipment in their vehicles from which we acquire thea majority of our subscribers. We also acquire subscribers through the sale or leasemarketing campaigns to owners of previously owned vehicles with factory-installed satellite radios.radios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.
As of September 30, 2012March 31, 2013, we had 23,365,38324,353,226 subscribers of which 19,041,51919,874,660 were self-pay subscribers and 4,323,8644,478,566 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; certain radios activated radios infor daily rental fleet vehicles; certainprograms; subscribers to our Internet services;services who do not also have satellite radio subscriptions; and certain subscribers to our weather, traffic, data and Backseat TV data, traffic, and weather services.
Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and long-term subscription plans, as well as discounts for multiple subscriptions on each platform.subscriptions. We also derive revenue from activation and other subscription-related fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as our Internet radio, Backseat TV, data, traffic, and weather services.
In certain cases, automakers and dealers include a subscription to our radio services in the sale or lease price of new andvehicles or previously owned vehicles. The length of these prepaidtrial subscriptions varies, but is typically three to twelve months. In many cases, we receive subscription payments for these trials from automakers in advance of the activation of our service. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.
Liberty Media Corporation beneficially owned as of March 31, 2013, 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 Live Nation Entertainment, Barnes & Noble, and minority equity investments in Time Warner Inc. and Viacom.
We also have an equity interest in Sirius XM Canada which offers satellite radio services in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count.
We have been discussing with our board of directors the desirability of undertaking a corporate reorganization that would create a new holding company structure: Sirius XM Radio Inc., its business operations and its subsidiaries, would operate as a wholly owned subsidiary of the new holding company. However, no final action has yet been taken by our board of directors to approve any reorganization and such a reorganization would be subject to the approval of the Federal Communications Commission. As a consequence, the timing of any such reorganization, if it were to occur, is uncertain. The business operations of our company - Sirius XM Radio Inc. - and its subsidiaries would not change as a result of the reorganization. As part of such a reorganization, we would form a new parent company, called Sirius XM Holdings Inc. Outstanding shares of our common stock would be automatically converted, on a share for share basis, into identical shares of common stock of Sirius XM Holdings Inc. The certificate of incorporation, the bylaws, the executive officers and the board of directors of the new holding company would be the same as those of our company in effect immediately prior to the reorganization. The common stock of the new holding company would continue to be listed on the NASDAQ Global Select Market.
Results of Operations
Set forth below are our results of operations for the three and nine months ended September 30, 2012March 31, 2013 compared with the three and nine months ended September 30, 2011March 31, 2012.
| |
| Unaudited | | 2012 vs 2011 Change | | 2012 vs 2011 Change | Unaudited | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Three Months | | Nine Months | For the Three Months Ended March 31, | | 2013 vs 2012 Change |
| 2012 | | 2011 | | 2012 | | 2011 | | Amount |
| % | | Amount |
| % | 2013 | | 2012 | | Amount | | % |
Revenue: | | | | | | | | |
|
|
| |
|
|
| | | | |
| |
|
Subscriber revenue | $ | 757,672 |
| | $ | 660,837 |
| | $ | 2,188,199 |
| | $ | 1,922,917 |
| | $ | 96,835 |
|
| 15 | % | | $ | 265,282 |
|
| 14 | % | $ | 783,342 |
| | $ | 700,242 |
| | $ | 83,100 |
| | 12 | % |
Advertising revenue, net of agency fees | 20,426 |
| | 18,810 |
| | 59,881 |
| | 53,595 |
| | 1,616 |
|
| 9 | % | | 6,286 |
|
| 12 | % | |
Advertising revenue | | 20,211 |
| | 18,670 |
| | 1,541 |
| | 8 | % |
Equipment revenue | 17,813 |
| | 15,504 |
| | 51,183 |
| | 48,392 |
| | 2,309 |
|
| 15 | % | | 2,791 |
|
| 6 | % | 18,156 |
| | 16,953 |
| | 1,203 |
| | 7 | % |
Other revenue | 71,449 |
| | 67,399 |
| | 210,362 |
| | 205,882 |
| | 4,050 |
|
| 6 | % | | 4,480 |
|
| 2 | % | 75,689 |
| | 68,857 |
| | 6,832 |
| | 10 | % |
Total revenue | 867,360 |
| | 762,550 |
| | 2,509,625 |
| | 2,230,786 |
| | 104,810 |
|
| 14 | % | | 278,839 |
|
| 12 | % | 897,398 |
| | 804,722 |
| | 92,676 |
| | 12 | % |
Operating expenses: |
| |
| | | | | |
|
|
| |
|
|
|
| |
| |
| |
|
Cost of services: |
| |
| | | | | |
|
|
| |
|
|
|
| |
| |
| |
|
Revenue share and royalties | 141,834 |
| | 117,043 |
| | 409,371 |
| | 340,713 |
| | 24,791 |
|
| 21 | % | | 68,658 |
|
| 20 | % | 148,531 |
| | 132,111 |
| | 16,420 |
| | 12 | % |
Programming and content | 69,938 |
| | 70,509 |
| | 205,203 |
| | 210,867 |
| | (571 | ) |
| (1 | )% | | (5,664 | ) |
| (3 | )% | 74,610 |
| | 70,095 |
| | 4,515 |
| | 6 | % |
Customer service and billing | 77,768 |
| | 64,239 |
| | 212,635 |
| | 192,667 |
| | 13,529 |
|
| 21 | % | | 19,968 |
|
| 10 | % | 80,394 |
| | 66,187 |
| | 14,207 |
| | 21 | % |
Satellite and transmission | 18,319 |
| | 19,681 |
| | 53,980 |
| | 57,238 |
| | (1,362 | ) |
| (7 | )% | | (3,258 | ) |
| (6 | )% | 19,695 |
| | 18,110 |
| | 1,585 |
| | 9 | % |
Cost of equipment | 6,345 |
| | 5,888 |
| | 19,301 |
| | 19,894 |
| | 457 |
|
| 8 | % | | (593 | ) |
| (3 | )% | 7,027 |
| | 5,806 |
| | 1,221 |
| | 21 | % |
Subscriber acquisition costs | 112,418 |
| | 107,279 |
| | 348,014 |
| | 317,711 |
| | 5,139 |
|
| 5 | % | | 30,303 |
|
| 10 | % | 116,111 |
| | 116,121 |
| | (10 | ) | | nm |
|
Sales and marketing | 60,676 |
| | 55,210 |
| | 176,457 |
| | 154,471 |
| | 5,466 |
|
| 10 | % | | 21,986 |
|
| 14 | % | 65,899 |
| | 58,361 |
| | 7,538 |
| | 13 | % |
Engineering, design and development | 13,507 |
| | 14,175 |
| | 32,468 |
| | 39,249 |
| | (668 | ) |
| (5 | )% | | (6,781 | ) |
| (17 | )% | 14,842 |
| | 12,690 |
| | 2,152 |
| | 17 | % |
General and administrative | 68,235 |
| | 58,635 |
| | 193,786 |
| | 175,469 |
| | 9,600 |
|
| 16 | % | | 18,317 |
|
| 10 | % | 56,340 |
| | 59,886 |
| | (3,546 | ) | | (6 | )% |
Depreciation and amortization | 66,571 |
| | 65,403 |
| | 199,481 |
| | 200,865 |
| | 1,168 |
|
| 2 | % | | (1,384 | ) |
| (1 | )% | 67,018 |
| | 66,117 |
| | 901 |
| | 1 | % |
Total operating expenses | 635,611 |
| | 578,062 |
| | 1,850,696 |
| | 1,709,144 |
| | 57,549 |
|
| 10 | % | | 141,552 |
|
| 8 | % | 650,467 |
| | 605,484 |
| | 44,983 |
| | 7 | % |
Income from operations | 231,749 |
| | 184,488 |
| | 658,929 |
| | 521,642 |
| | 47,261 |
|
| 26 | % | | 137,287 |
|
| 26 | % | 246,931 |
| | 199,238 |
| | 47,693 |
| | 24 | % |
Other income (expense): |
| |
| | | | | |
|
|
| |
|
|
|
| |
| |
| |
|
Interest expense, net of amounts capitalized | (70,035 | ) | | (75,316 | ) | | (219,777 | ) | | (229,730 | ) | | 5,281 |
|
| 7 | % | | 9,953 |
|
| 4 | % | (46,174 | ) | | (76,971 | ) | | 30,797 |
| | 40 | % |
Loss on extinguishment of debt and credit facilities, net | (107,105 | ) | | — |
| | (132,726 | ) | | (7,206 | ) | | (107,105 | ) |
| nm |
| | (125,520 | ) |
| nm |
| — |
| | (9,971 | ) | | 9,971 |
| | nm |
|
Interest and investment (loss) income | (321 | ) | | 292 |
| | (3,192 | ) | | 78,590 |
| | (613 | ) |
| (210 | )% | | (81,782 | ) |
| (104 | )% | |
Interest and investment income (loss) | | 1,638 |
| | (1,142 | ) | | 2,780 |
| | 243 | % |
Other income (loss) | 113 |
| | 435 |
| | (637 | ) | | 2,235 |
| | (322 | ) |
| (74 | )% | | (2,872 | ) |
| (129 | )% | 247 |
| | (578 | ) | | 825 |
| | 143 | % |
Total other expense | (177,348 | ) | | (74,589 | ) | | (356,332 | ) | | (156,111 | ) | | (102,759 | ) |
| (138 | )% | | (200,221 | ) |
| (128 | )% | (44,289 | ) | | (88,662 | ) | | 44,373 |
| | 50 | % |
Income before income taxes | 54,401 |
| | 109,899 |
| | 302,597 |
| | 365,531 |
| | (55,498 | ) |
| (50 | )% | | (62,934 | ) |
| (17 | )% | 202,642 |
| | 110,576 |
| | 92,066 |
| | 83 | % |
Income tax benefit (expense) | 20,113 |
| | (5,714 | ) | | 3,013,860 |
| | (9,907 | ) | | 25,827 |
|
| nm |
| | 3,023,767 |
|
| nm |
| |
Income tax expense | | (79,040 | ) | | (2,802 | ) | | (76,238 | ) | | nm |
|
Net income | $ | 74,514 |
| | $ | 104,185 |
| | $ | 3,316,457 |
| | $ | 355,624 |
| | $ | (29,671 | ) |
| (28 | )% | | $ | 2,960,833 |
|
| 833 | % | $ | 123,602 |
| | $ | 107,774 |
| | $ | 15,828 |
| | 15 | % |
nm - not meaningful
Total Revenue
Subscriber Revenue includes subscription, activation and other fees.
For the three months endedSeptember 30, 2012March 31, 2013 and 20112012, subscriber revenue was $757,672783,342 and $660,837700,242, respectively, an increase of 15%12%, or $96,83583,100. For the nine months endedSeptember 30, 2012 and 2011, subscriber revenue was $2,188,199 and $1,922,917, respectively, anThe increase of 14%, or $265,282. These increases werewas primarily attributable to a 9% increase in daily weighted average number of subscribers, the full quarter impact of the increase in certain of our subscription rates beginning in January 2012, and an increase in sales ofsubscriptions to premium services, including Premier packages, data services and internetInternet streaming. The increase was partially offset by subscription discounts offered through customer acquisition and retention programs.programs, an increasing number of lifetime plans that have reached full recognition, and fewer days of revenue in the 2013 quarter.
We expect subscriber revenues to grow based on the growth of our subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices and identification of additional revenue streams from subscribers.
Advertising Revenue includes 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.
For the three months ended September 30, 2012March 31, 2013 and 20112012, advertising revenue was $20,42620,211 and $18,81018,670, respectively, an increase of 9%8%, or $1,6161,541. For the nine months endedSeptember 30, 2012 and 2011, advertising revenue was $59,881 and $53,595, respectively, anThe increase of 12%, or $6,286. These increases werewas primarily due to a greater number of advertising spots sold and broadcast, as well as the increases in the rates charged per spot.spot, and decreased agency fees and commissions.
We expect our advertising revenue to grow as advertisers are attracted by the increase into our subscriber base.platform and as national advertising spend increases.
Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.
For the three months ended September 30, 2012March 31, 2013 and 20112012, equipment revenue was $17,81318,156 and $15,50416,953, respectively, an increase of 15%7%, or $2,3091,203. For the nine months endedSeptember 30, 2012 and 2011, equipment revenue was $51,183 and $48,392, respectively, anThe increase of 6%, or $2,791. These increases werewas driven by royalties from higher OEM production, partially offset by lower aftermarketroyalty rates and directsales to consumer sales.distributors.
We expect equipment revenue to fluctuate based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume and mix of equipment sales in our aftermarket and direct to consumer business.
Other Revenue includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our Canadian affiliate and ancillary revenues.
For the three months ended September 30, 2012March 31, 2013 and 20112012, other revenue was $71,44975,689 and $67,39968,857, respectively, an increase of 6%10%, or $4,0506,832. For the nine months endedSeptember 30, 2012 and 2011, other revenue was $210,362 and $205,882, respectively, anThe increase of 2%, or $4,480. These increases werewas driven by revenues from the U.S. Music Royalty Fee as the number of subscribers increased and the rate charged increased to 12.5%. The increase was also partially driven by higher royalty revenue from Sirius XM Canada.
Other revenue is dependent upon the U.S. Music Royalty Fee and the royalty from our Canadian affiliate. We expect other revenue to increase as our subscriber base drives higher U.S. Music Royalty Fees as more subscribers migrate to the higher rate and as the performance of our Canadian affiliate improves.
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.
For the three months ended September 30, 2012March 31, 2013 and 20112012, revenue share and royalties were $141,834148,531 and $117,043132,111, respectively, an increase of 21%12%, or $24,79116,420, and increasedremained flat as a percentage of total revenue. For the nine months endedSeptember 30, 2012 and 2011, revenue share and royalties were $409,371 and $340,713, respectively, anThe increase of 20%, or $68,658, and increased as a percentage of total revenue. These increases were
was primarily attributable to greater revenues subject to royalty and/or revenue sharing arrangements, and a 7%12.5% increase in the statutory royalty rate for the performance of sound recordings, and increased OEM revenue share, 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. Under the terms of the Copyright Royalty Board's decision, we paid royalties of 8.0%9.0% and 7.5%8.0% of gross revenues, subject to certain exclusions, for the three and nine months endedSeptember 30, 2012 March 31, 2013, and 2011,2012, respectively. The Copyright Royalty Board will issue a decision on future royalty rates in December 2012. The deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger are expected to provide increasing benefits to revenue share and royalties through the expiration of the acquired executory contracts in 2013.
Programming and Content includes 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 purchase advertising on media properties owned or controlled by the licensor, which is allocated to sales and marketing, and pay other guaranteed amounts.
For the three months ended September 30, 2012March 31, 2013 and 20112012, programming and content expenses were $69,93874,610 and $70,50970,095, respectively, a decreasean increase of 1%6%, or $5714,515, andbut decreased as a percentage of total revenue. For theThe nine months endedSeptember 30, 2012increase and 2011, programming and content expenses were $205,203 and $210,867, respectively, a decrease of 3%, or $5,664, and decreased as a percentage of total revenue. These decreases werewas primarily due to savings in content agreements, partially offset by increases in personnel costs 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.contracts, and increased license fees, and personnel costs.
Excluding the impact from purchase accounting adjustments, based on our current programming offerings, we expect our programming and content expenses to decrease as agreements expire and are renewed or replaced on more cost effective terms. 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 will be amortized by the end of 2013.
Customer Service and Billing includes costs associated with the operation and management of third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.
For the three months ended September 30, 2012March 31, 2013 and 20112012, customer service and billing expenses were $77,76880,394 and $64,23966,187, respectively, an increase of 21%, or $13,52914,207, and increased as a percentage of total revenue. For the nine months endedSeptember 30, 2012 and 2011, customer service and billing expenses were $212,635 and $192,667, respectively, anThe increase of 10%, or $19,968, but remained flat as a percentage of total revenue. These increases werewas primarily due to longer average handle time per call and higher contact ratessubscriber volume driving increased subscriber contacts, increased bad debt expense and higher technology costs. The increase for the nine month period was partially offset by fewer calls per subscriber, lower bad debt expense and lower third party collection costs.
We expect our customer service and billing expenses to increase as our subscriber base grows.
Satellite and Transmission consists of costs associated with the operation and maintenance of our satellites; satellite telemetry, tracking and control systems; terrestrial repeater networks; satellite uplink facilities; broadcast studios; and delivery of our Internet streaming service.
For the three months ended September 30, 2012March 31, 2013 and 20112012, satellite and transmission expenses were $18,31919,695 and $19,68118,110, respectively, a decreasean increase of 7%9%, or $1,3621,585, andbut decreasedremained flat as a percentage of total revenue. For theThe nine months endedSeptember 30, 2012increase and 2011, satellite and transmission expenses were $53,980 and $57,238, respectively, a decrease of 6%, or $3,258, and decreased as a percentage of total revenue. These decreases werewas primarily due to a reduction in in-orbit satellite insurance expense.increased costs associated with our streaming operations.
We expect overall satellite and transmission expenses to increase following theas we enhance our Internet-based service and add functionality, launch of our FM-6 satellite and as we add enhanced Internet-based serviceincur in-orbit insurance costs, and functionality.expand our terrestrial repeater network.
Cost of Equipment includes 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.
For the three months ended September 30, 2012March 31, 2013 and 20112012, cost of equipment was $6,3457,027 and $5,8885,806, respectively, an increase of 8%21%, or $4571,221, and remained flatincreased as a percentage of total revenue but decreased as a percentage of equipment revenue. For the nine months endedSeptember 30, 2012 and 2011, cost of equipment was $19,301 and $19,894, respectively, a decrease of 3%, or $593, and remained flat as a percentage of total revenue and decreased as a percentage of equipment revenue. The increase for the three month period was driven by the mix of radios with higher average costs sold, compared to the prior year. The decrease in the nine month period was primarily due to lowerhigher sales to distributors and direct to consumer sales, partially offset by higherlower inventory reserves and radios sold with higher average costs.reserves.
We expect cost of equipment to vary with changes in sales, supply chain management and inventory valuations.
Subscriber Acquisition Costs include 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; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios and chip sets; commissions paid to retailers and automakers as incentives to purchase, install and activate satellite radios; 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, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.
For the three months ended September 30, 2012March 31, 2013 and 20112012, subscriber acquisition costs were $112,418116,111 and $107,279116,121, respectively, an increasea decrease of 5%, or $5,13910, and decreased as a percentage of total revenue. For theThe nine months endedSeptember 30, 2012decrease and 2011, subscriber acquisition costs were $348,014 and $317,711, respectively, an increase of 10%, or $30,303, but decreased as a percentage of total revenue. These increases werewas primarily a result of higher subsidies related to increaseddecreased OEM installations occurring in advance of acquiring the subscriber, partially offset by improved OEM subsidy rates per vehicle and increases in thelower 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 fluctuate with increases or decreases in OEM installations and changes in our gross subscriber additions. Changes in contractual OEM subsidy rates and the cost of subsidized radio components will also impact total subscriber acquisition costs. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit for acquired executory contracts will vary, in absolute amount and as a percentage of reported subscriber acquisition costs, through the expiration of the acquired contracts in 2013. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.
Sales and Marketing includes costs for 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 retention costs include expenses related to direct mail, outbound telemarketing and email communications.
For the three months ended September 30, 2012March 31, 2013 and 20112012, sales and marketing expenses were $60,67665,899 and $55,21058,361, respectively, an increase of 10%13%, or $5,4667,538, andbut remained flat as a percentage of total revenue. For the nine months endedSeptember 30, 2012 and 2011, sales and marketing expenses were $176,457 and $154,471, respectively, anThe increase of 14%, or $21,986, and remained flat as a percentage of total revenue. These increases werewas primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials, and higher OEM cooperative marketing.trials.
SalesWe anticipate that sales and marketing expenses will increase as we launch seasonal advertising and promotional initiatives to attract new subscribers, and launch and expand programs to retain our existing subscribers and win-back former subscribers. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired sales and marketing contracts will continue to decline, in absolute amount and as a percentage of reported sales and marketing costs, through 2013.
Engineering, Design and Development includes costs to develop chip sets and new products and services, research and development for broadcast information systems and costs associated with the incorporation of our radios into vehicles manufactured by automakers.
For the three months ended September 30, 2012March 31, 2013 and 20112012, engineering, design and development expenses were $13,50714,842 and $14,17512,690, respectively, a decrease of 5%, or $668, and decreased as a percentage of total revenue. For
the nine months endedSeptember 30, 2012 and 2011, engineering, design and development expenses were $32,468 and $39,249, respectively, a decreasean increase of 17%, or $6,7812,152, andbut decreasedremained flat as a percentage of total revenue. The decreaseincrease for the three month period was driven primarily by lower product development costs. The decrease for the nine month period was due to a reversal of certain non-recurring engineering charges, partially offset by higher product development costs and costs related to the development of enhanced subscriber features and functionality for our service and higher personnel costs.service.
We expect engineering, design and development expenses to increase in future periods as we develop our next generation chip sets and products.
General and Administrative includes executive management, rent and occupancy, finance, legal, human resources, information technology, insurance and investor relationsinsurance costs.
For the three months ended September 30, 2012March 31, 2013 and 20112012, general and administrative expenses were $68,23556,340 and $58,63559,886, respectively, an increasea decrease of 16%6%, or $9,6003,546, and remained flatdecreased as a percentage of total revenue. For theThe nine months endedSeptember 30, 2012decrease and 2011, general and administrative expenses were $193,786 and $175,469, respectively, an increase of 10%, or $18,317, but remained flat as a percentage of total revenue. These increases werewas primarily due to higher personnel costs, includinglower legal and share-based payment expenses, and legal costs, partially offset by lower litigation settlement charges.higher personnel costs.
We expect our general and administrative expenses to increase in future periods primarily as a result of, among other things, enhanced information technology and personnel costs to support the growth of our business.
Depreciation and Amortization represents the systematic 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.
For the three months ended September 30, 2012March 31, 2013 and 20112012, depreciation and amortization expense was $66,57167,018 and $65,40366,117, respectively, an increase of 2%, or $1,168, and decreased as a percentage of total revenue. For the nine months endedSeptember 30, 2012 and 2011, depreciation and amortization expense was $199,481 and $200,865, respectively, a decrease of 1%, or $1,384901, andbut decreased as a percentage of total revenue. The increase for the three month period was primarily due to additional assets placed in-service, partially offset by reductions in the amortization of subscriber relationships and depreciation recognized on assets placed in-service as certain assets reached the end of their estimated service lives. The decrease for the nine month periodexpense was driven by reductions in the amortizationan increase of subscriber relationships and depreciation recognized on assets placed in-service as certain assets reached the end of their estimated service lives.in-service.
We expect depreciation expensesexpense to increase in future periods as we launch our FM-6 satellite, which will be partially offset by 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.
Other Income (Expense)
Interest Expense, Net of Amounts Capitalized, includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of our satellites and related launch vehicles.
For the three months ended September 30, 2012March 31, 2013 and 20112012, interest expense was $70,03546,174 and $75,31676,971, respectively, a decrease of 7%40%, or $5,28130,797. For the nine months endedSeptember 30, 2012 and 2011, interest expense was $219,777 and $229,730, respectively, aThe decrease of 4% or $9,953. These decreases werewas primarily due to a lower average outstanding debt balance and an improvement in the mix oflower average interest rates on our outstanding debt with lower interest rates.debt.
FollowingWe expect interest expense to decrease in future periods due to debt retirements at maturity, redemptions and repurchases. This will be partially offset by a decrease in capitalized interest following the launch of our FM-6 satellite the capitalization of interest expense related to the construction of our satellites and related launch vehicles will be eliminated, until we begin replacing satellites in our fleet. As a result, we expect interest expense to increase, offset partially by the reduction of our outstanding debt due to retirements at maturity, redemptions and repurchases.future borrowings.
Loss on Extinguishment of Debt and Credit Facilities, Net, includes losses incurred as a result of the conversion and retirement of certain debt.
For the three months ended September 30, 2012March 31, 2013, loss on extinguishment of debt and credit facilities, net, was $107,105. For the nine months endedSeptember 30, 2012 and 2011, loss on extinguishment of debt and credit facilities, net, was $132,726 and $7,206, respectively, an increase of $125,5200. During the three months ended September 30,March 31, 2012, a $107,1059,971 loss was recorded on the partial repayment of our 13% Senior Notes due 2013 and our 9.75% Senior Secured Notes due 2015. During the nine months endedSeptember 30, 2012, a $132,726 loss was recorded on the repayment of our 13% Senior Notes due 2013 and our 9.75% Senior Secured Notes due 2015. During the nine months endedSeptember 30, 2011, a $7,206 loss was incurred on the repayment of our 11.25% Senior Secured Notes due 2013 and the partial repayment of our 3.25% Convertible Notes due 2011.
Interest and Investment Income (Loss) Income includes realized gains and losses, dividends, interest income, our share of Sirius Canada’s and XM Canada’s pre-merger net losses, and our share of the income (loss) of Sirius XM Canada.
For the three months ended September 30, 2012March 31, 2013, interest and investment lossincome was $(321)1,638 compared to a loss of $(1,142) in the 2012 period. The interest and investment income of $292for the same period in 2011. For the nine months endedSeptember 30, 2012, interest and investment loss2013 was$(3,192) compared to interest and investment income of $78,590 for the same period in 2011. The interest and investment losses for both the three and nine month periods of 2012 were primarily due to lossesdividends received from Sirius XM Canada as well as interest on our investments and our share of Sirius XM Canada's net loss. The interest and investment gain forincome, partially offset by the three month period of 2011 was primarily dueamortization expense related to income from our interests in Sirius XM Canada. The interest and investment gain for the nine month period of 2011 was primarily due to the realized net gain from the Canada Merger in the second quarter of 2011.equity method intangible assets.
Income Taxes
Income Tax Benefit (Expense)Expense includes the reversal of substantially all of our deferred income tax valuation allowance, the change in our deferred tax liability related to the difference in accounting for our FCC licenses, which are amortized over 15 years for tax purposes but not amortized for book purposes in accordance with GAAP,assets, foreign withholding taxes on royalty income, and the effect of changes in certaincurrent federal and state laws related to the utilization of net operating losses ("NOLs").tax expenses.
For the three months ended September 30, March 31, 2013 and 2012, income tax benefitexpense was $20,11379,040 compared to income tax expense ofand $(5,714) for the same period in 2011. For the nine months endedSeptember 30, 20122,802, income tax benefit wasrespectively. $3,013,860 compared to income tax expense of $(9,907) for the same period in 2011. Forthree months endedSeptember 30, 2012, we recorded a $24,000 discrete income tax benefit related to the release of the deferred tax valuation allowance for net operating losses we no longer expect to realize against income for the remainder of 2012. We now expect to realize this benefit after 2012. This benefit is due to a decrease in estimated income for 2012 as result of the loss on extinguishment of debt that was recorded during the three months ended September 30, 2012March 31, 2013, we estimate that our annual effective tax rate was 38.5%. Including In 2012, we did not have any federal income tax expense as it was offset by a corresponding release of the valuation allowances related to deferred tax assets. Income tax expense of $24,0002,802 discrete item recorded in the quarter, for the ninethree months ended September 30,March 31, 2012 we have recorded in aggregate a discrete benefit of $3,013,000 for the release of significantly all of our deferred tax valuation allowancewas principally related to net operating losses that will be realized after 2012.foreign withholding taxes.
The remaining deferred tax asset valuation allowance as of September 30, 2012 of approximately $71,700 relates to deferred tax assets we expect to realize as a result of pre-tax income anticipated during the fourth quarter of 2012 of $64,200 and deferred tax assets of $7,500 that are not likely to be realized due to certain state net operating loss limitations.
Subscriber Data
The following table contains subscriber data for the three and nine months ended September 30, 2012March 31, 2013 and 2011,2012, respectively:
| | | | Unaudited | | Unaudited |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended March 31, |
| | 2012 |
| 2011 | | 2012 |
| 2011 | | 2013 | | 2012 |
Beginning subscribers | | 22,919,462 |
|
| 21,016,175 |
| | 21,892,824 |
|
| 20,190,964 |
| | 23,900,336 |
| | 21,892,824 |
|
Gross subscriber additions | | 2,421,586 |
|
| 2,138,131 |
| | 7,064,282 |
|
| 6,369,846 |
| | 2,509,914 |
| | 2,161,693 |
|
Deactivated subscribers | | (1,975,665 | ) |
| (1,804,448 | ) | | (5,591,723 | ) |
| (5,210,952 | ) | | (2,057,024 | ) | | (1,757,097 | ) |
Net additions | | 445,921 |
|
| 333,683 |
| | 1,472,559 |
|
| 1,158,894 |
| | 452,890 |
| | 404,596 |
|
Ending subscribers | | 23,365,383 |
|
| 21,349,858 |
| | 23,365,383 |
|
| 21,349,858 |
| | 24,353,226 |
| | 22,297,420 |
|
| |
|
|
|
|
| |
|
|
|
|
| |
Self-pay | | 19,041,519 |
|
| 17,534,310 |
| | 19,041,519 |
|
| 17,534,310 |
| | 19,874,660 |
| | 18,208,090 |
|
Paid promotional | | 4,323,864 |
|
| 3,815,548 |
| | 4,323,864 |
|
| 3,815,548 |
| | 4,478,566 |
| | 4,089,330 |
|
Ending subscribers | | 23,365,383 |
|
| 21,349,858 |
| | 23,365,383 |
|
| 21,349,858 |
| | 24,353,226 |
| | 22,297,420 |
|
| |
|
|
|
|
| |
|
|
|
|
| |
Self-pay | | 370,553 |
|
| 364,004 |
| | 1,132,777 |
|
| 847,511 |
| | 304,386 |
| | 299,348 |
|
Paid promotional | | 75,368 |
|
| (30,321 | ) | | 339,782 |
|
| 311,383 |
| | 148,504 |
| | 105,248 |
|
Net additions | | 445,921 |
|
| 333,683 |
| | 1,472,559 |
|
| 1,158,894 |
| | 452,890 |
| | 404,596 |
|
| |
|
|
| |
|
|
| |
Daily weighted average number of subscribers | Daily weighted average number of subscribers | 23,008,693 |
|
| 21,107,540 |
| | 22,519,544 |
|
| 20,688,641 |
| Daily weighted average number of subscribers | 24,008,472 |
| | 21,990,863 |
|
| |
|
|
| |
|
|
| |
Average self-pay monthly churn | | 2.0 | % |
| 1.9 | % | | 1.9 | % |
| 1.9 | % | | 2.0 | % | | 1.9 | % |
| |
|
|
| |
|
|
| |
New vehicle consumer conversion rate | | 44 | % |
| 44 | % | | 45 | % |
| 45 | % | | 44 | % | | 45 | % |
Note: See pages 40 through 47 for glossary. | | | | | | | | | |
Note: See pages 37 through 42 for glossary. | | | | | |
Subscribers. At September 30, 2012March 31, 2013, we had 23,365,38324,353,226 subscribers, an increase of 2,015,5252,055,806 subscribers, or 9%, from the 21,349,85822,297,420 subscribers as of September 30, 2011March 31, 2012.
For the three months ended September 30, 2012March 31, 2013 and 20112012, net additions were 445,921452,890 and 333,683404,596, respectively, an increase of 34%12%, or 112,238. For the nine months endedSeptember 30, 2012 and 2011, net additions were 1,472,559 and 1,158,894, respectively, an increase of 27%, or 313,66548,294. The improvements were due to the increase in gross subscriber additions primarily resulting fromof 348,221 was due to higher new vehicle shipments and light vehicle sales, as well as an increase inhigher new and used car vehicle conversions from unpaid promotional trials, and higher returning subscriber activations, including consumers in previously owned vehicles.This increase in gross additions was partially offset by an increase in deactivations.activation volumes. The increase in deactivationsdeactivated subscribers of 299,927 was primarily due to an increase in paid promotional trial deactivations stemming fromdriven by the growth of paid trials along with growth inand increased self-pay deactivations from our larger subscriber base.
Average Self-pay Monthly Churn is derived by dividing the monthly average of self-pay deactivations for thea quarter by the average self-pay subscriber balance for thea quarter. (See accompanying glossary on pages 4037 through 4742 for more details.)
For the three months ended September 30, 2012March 31, 2013 and 20112012, our average self-pay monthly churn rate was 2.0% and 1.9%, respectively. ForThe increase in thenine months endedSeptember 30, 2012 and 2011, our average self-pay monthly churn rate was due, in large part, to higher volumes of subscribers selling their vehicles, resulting in the deactivation of their vehicles' subscription.1.9%.
New Vehicle Consumer Conversion Rate is 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 4037 through 4742 for more details).
For the three months ended September 30, 2012March 31, 2013 and 2011, the new vehicle consumer conversion rate was
44%. For the nine months endedSeptember 30, 2012 and 2011, the new vehicle consumer conversion rate was 44% and 45%., respectively. The decrease in the new vehicle consumer conversion rate was primarily due to the changing mix of sales among OEMs.
Adjusted Results of Operations
In this section, we present certain financial performance measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States of America (“Non-GAAP”). These Non-GAAP financial measures include: average monthly revenue per subscriber, or ARPU; customer service 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.
Our adjusted EBITDA also reallocates share-based payment expense from functional operating expense line items to a separate line within operating expenses. 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 unrelated to the operational conditions that give rise to variations in the components of our operating costs.
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. In a capital intensive business, with significant historical and current 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 (used in) 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 “RestrictedRestricted and other investment activity”activity from "Net cash provided by (used in) operating activities" from the 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. Please refer to the glossary (pages 4037 through 4742) 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 unaudited adjusted results of operations for the three and nine months ended September 30, 2012March 31, 2013 and 20112012, respectively:
| | | Unaudited Adjusted | Unaudited Adjusted |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
(in thousands, except for per subscriber amounts) | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
ARPU | $ | 12.14 |
| | $ | 11.66 |
| | $ | 11.96 |
| | $ | 11.57 |
| $ | 12.05 |
| | $ | 11.77 |
|
SAC, per gross subscriber addition | $ | 51 |
| | $ | 55 |
| | $ | 55 |
| | $ | 55 |
| $ | 51 |
| | $ | 60 |
|
Customer service and billing expenses, per average subscriber | $ | 1.12 |
| | $ | 1.01 |
| | $ | 1.04 |
| | $ | 1.03 |
| $ | 1.11 |
| | $ | 1.00 |
|
Free cash flow | $ | 195,207 |
| | $ | 75,377 |
| | $ | 439,986 |
| | $ | 223,936 |
| $ | 142,481 |
| | $ | 14,761 |
|
Adjusted EBITDA | $ | 244,617 |
| | $ | 197,288 |
| | $ | 689,873 |
| | $ | 563,741 |
| $ | 261,871 |
| | $ | 208,162 |
|
|
|
Note: See pages 4037 through 4742 for glossary. |
ARPU is derived from total earned subscriber revenue, 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. (See accompanying glossary on pages 4037 through 4742 for more details.)
For the three months ended September 30, 2012March 31, 2013 and 20112012, ARPU was $12.1412.05 and $11.6611.77, respectively. For the nine months endedSeptember 30, 2012 and 2011, ARPUThe increase was$11.96 and $11.57, respectively. These increases were driven primarily by the full quarter impact of the increase in certain of our subscription rates beginning in January 2012, an increase in subscriptions to premium services, and an increase in sales of premium services, including Premier packages, data services and streaming, partially offset by an increase in subscriber retention programs, the number of subscribers on promotional plans and a decrease in the contribution fromof the U.S. Music Royalty Fee, due to the December 2010 reductionpartially offset by subscription discounts offered through customer acquisition and retention programs, lifetime plans that have reached full revenue recognition, and fewer days in the rate.2013 quarter.
SAC, Per Gross Subscriber Addition, 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 additions for the period. (See accompanying glossary on pages 4037 through 4742 for more details.)
For the three months ended September 30, 2012March 31, 2013 and 20112012, SAC, per gross subscriber addition, was $51 and $5560, respectively. For the nine months endedSeptember 30, 2012 and 2011, SAC, per gross subscriber addition, was $55. The decrease in the three month period was primarily due to improved OEM subsidy rates per vehicle, partially offset by higher subsidies related to increasedlower OEM installations occurring in advanceas compared to the initial OEM gross adds and the benefit of acquiring the subscriber.returning activations with limited costs.
Customer Service and Billing Expenses, Per Average Subscriber, is derived from total customer service and billing expenses, excluding share-based payment expense, and 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. (See accompanying glossary on pages 4037 through 4742 for more details.)
For the three months ended September 30, 2012March 31, 2013 and 20112012, customer service and billing expenses, per average subscriber, were $1.121.11 and $1.011.00, respectively. These increases wereThe increase was primarily due to longer average handle time per call, higher contact ratesincreased bad debt expense and higher technology costs. For the nine months endedSeptember 30, 2012 and 2011, customer service and billing expenses, per average subscriber were $1.04 and $1.03, respectively.
Free Cash Flow includes the net cash provided by operations, additions to property and equipment, merger related costs and restricted and other investing activity. (See accompanying glossary on pages 4037 through 4742 for more details.)
For the three months ended September 30, 2012March 31, 2013 and 20112012, free cash flow was $195,207142,481 and $75,37714,761, respectively, an increase of $119,830. For the nine months endedSeptember 30, 2012 and 2011, free cash flow was $439,986 and $223,936, respectively, an increase of $216,050127,720. The increases wereincrease was primarily driven by higher net cash provided by operating activities resulting from improved operating performance, driving higher adjusted EBITDAlower interest payments, 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. The increase in the nine month period was partially offset by a decrease in restricted and other investing activities driven by the 2011 return of capital resulting from the Canada Merger.higher non-satellite expenditures.
Adjusted EBITDA. EBITDA is defined as net income (loss) before interest and investment income (loss) income;; 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 as well as certain other charges, such as goodwill impairment; restructuring, impairments and related costs; certain purchase price accounting adjustments and share-based payment expense. (See the accompanying glossary on pages 4037 through 4742 for more details):
For the three months ended September 30, 2012March 31, 2013 and 20112012, adjusted EBITDA was $244,617261,871 and $197,288208,162, respectively, an increase of 24%26%, or $47,329. For the nine months endedSeptember 30, 2012 and 2011, adjusted EBITDA was $689,873 and $563,741, respectively, an increase of 22%, or $126,13253,709. 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.base and the increase 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, higher subscriber acquisitioncustomer service and billing costs related to increased grosslonger average handle times and higher subscriber additions and subsidies related to increased OEM installations,volume, and higher sales and marketing costs related to subscriber communications and cooperative marketing, partially offset by lower programming and content costs.marketing.
Liquidity and Capital Resources
Cash Flows for the NineThree Months Ended September 30, 2012March 31, 2013 Compared with the NineThree Months Ended September 30, 2011March 31, 2012
As of September 30, 2012March 31, 2013 and December 31, 20112012, we had $556,270206,727 and $773,990520,945, 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 Nine Months Ended September 30, | | | For the Three Months Ended March 31, | | |
| 2012 | | 2011 | | 2012 vs. 2011 | 2013 | | 2012 | | 2013 vs. 2012 |
Net cash provided by operating activities | $ | 513,532 |
| | $ | 328,634 |
| | $ | 184,898 |
| $ | 168,915 |
| | $ | 39,948 |
| | $ | 128,967 |
|
Net cash used in investing activities | (73,546 | ) | | (104,698 | ) | | 31,152 |
| (26,434 | ) | | (25,187 | ) | | (1,247 | ) |
Net cash used in financing activities | (657,706 | ) | | (206,035 | ) | | (451,671 | ) | (456,699 | ) | | (42,175 | ) | | (414,524 | ) |
Net (decrease) increase in cash and cash equivalents | (217,720 | ) | | 17,901 |
| | (235,621 | ) | |
Net decrease in cash and cash equivalents | | (314,218 | ) | | (27,414 | ) | | (286,804 | ) |
Cash and cash equivalents at beginning of period | 773,990 |
| | 586,691 |
| | 187,299 |
| 520,945 |
| | 773,990 |
| | (253,045 | ) |
Cash and cash equivalents at end of period | $ | 556,270 |
| | $ | 604,592 |
| | $ | (48,322 | ) | $ | 206,727 |
| | $ | 746,576 |
| | $ | (539,849 | ) |
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities increased by $184,898128,967 to $513,532168,915 for the ninethree months ended September 30, 2012March 31, 2013 from cash provided by operating activities of $328,63439,948 for the ninethree months ended September 30, 2011March 31, 2012. The primary driver of our operating cash flow growth has been improvements in profitability.
Our net income was $3,316,457123,602, and $355,624107,774 for the ninethree months ended September 30, 2012March 31, 2013 and 2011,2012, respectively. Excluding the $3,013,000 non-cash deferred tax valuation allowance reversal, ourOur increase in net income was primarily driven by an increase in our subscriber revenues of $265,28283,100, or 14%, for the nine months endedSeptember 30, 201212%, attributable to a 9%the increase in daily weighted average subscribers, an increase in certain of our subscription rates beginning in January 2012, and an increase in sales ofsubscriptions to premium services, including Premier packages, data services and streaming. Our increase in net income is also attributable to a $30,797, or 40%, decrease in interest expense due to a lower average outstanding debt balance and lower average interest rates on our outstanding debt. Our growth in revenue was partially offset by an increase in our operating expenses of $141,55244,983, or 8%7%. The increase in operating expenses was primarily driven by higher revenue share and royalties expenses associated with growth in revenues higher subscriber acquisitionand the increase in the statutory royalty rate for the performance of sound recordings, customer service and billing costs related to a 11% increase in grosslonger average handle times and higher subscriber additions and subsidies related to increased OEM installations,volume, and higher sales and marketing costs related to subscriber communications and cooperative marketing.
Net non-cash adjustments to net income were $(2,800,551)119,319 and $33,08935,238 for the ninethree months ended September 30, 2012March 31, 2013 and 2011,2012, respectively. Significant components of non-cash expenses, and their impact on
cash flows from operating activities, include the following:
| | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2012 | | 2011 | 2013 | | 2012 |
Depreciation and amortization | $ | 199,481 |
| | $ | 200,865 |
| $ | 67,018 |
| | $ | 66,117 |
|
Loss on extinguishment of debt and credit facilities, net | 132,726 |
| | 7,206 |
| $ | — |
| | $ | 9,971 |
|
Gain on merger of unconsolidated entities | — |
| | (84,855 | ) | |
Share-based payment expense | 46,361 |
| | 37,574 |
| $ | 14,518 |
| | $ | 14,951 |
|
Deferred income taxes | (3,017,021 | ) | | 7,214 |
| $ | 83,631 |
| | $ | 1,572 |
|
Other non-cash purchase price adjustments | (220,336 | ) | | (203,630 | ) | $ | (70,459 | ) | | $ | (73,956 | ) |
Depreciation and amortization expense is expected to increase in future periods as we recognize depreciation expense upon the completion and launch of our FM-6 satellite.
Loss on extinguishment of debt and credit facilities, net, includes losses incurred as a result of retirement of certain debt instruments. Future charges related to the retirement of debt are dependent upon many factors, including the conversion price of debt and our ability to refinance or retire specific debt instruments.
Gain on merger of unconsolidated entities represents the gain on the Canada Merger which closed in June 2011.
Share-based payment expense is expected to increase in future periods as we grant equity awards to our employees and directors. Compensation expense for share-based awards is recorded in the financial statements based on the fair value of the underlying equity awards.
DeferredWe will incur income taxes includes a benefit relatedtax expense as we no longer have the ability to a reversal of substantially allutilize valuation allowances to offset the expense. The income tax expense results in the usage of our deferred income tax valuation allowance as the cumulative positive evidence outweighed the historical negative evidence regarding the likelihood that our deferred tax asset will be realized.net operating losses.
Other non-cash purchase price adjustments include liabilities recorded as a result of the Merger related to executory contracts with an OEM and certain programming providers, as well as amortization resulting from changes in the value of deferred revenue as a result of the Merger.
Changes in operating assets and liabilities reduced operating cash flows for the ninethree months ended September 30, 2012March 31, 2013 and 20112012 by $2,37474,006, and $60,079103,064, respectively. As we continue to grow our subscriber and revenue base, we expect that deferred revenue and amounts due from customers and distributors will continue to increase. Amounts payable to vendors are also expected to increase as our business grows. The timing of payments to vendors and related parties are based in part on contractual commitments.
Cash Flows Used in Investing Activities
Cash flows used forin investing activities consists primarily of capital expenditures for property and equipment. We will continue to incur significant costs to improve our terrestrial repeater network and broadcast and administrative infrastructure. In addition, we will continue to incur capital expenditures associated with our FM-6 satellite. After the launch of our FM-6 satellite, we anticipate no significant satellite capital expenditures for several years until it becomes necessary to replace satellites in our fleet.
The decreaseincrease in cash flows used forin investing activities was primarily due to lower satellite and related launch vehicle construction costs relatedan increase in spending to enhance our FM-6 satellite.terrestrial repeater network.
Cash Flows Used in Financing Activities
Cash flows used in financing activities have generally been the resultconsists of the issuance and repayment of long-term debt and related party debt, and cash proceeds from exercise of stock options.options and the purchase of common stock under our repurchase program. Proceeds from long-term debt, related party debt and equity issuances have been used to fund our operations, construct and launch new satellites and invest in other infrastructure improvements.
Cash flows used in financing activities in 20122013 were primarily due to the repaymentrepurchase of approximately 148,113,483 shares of common stock under our repurchase program, partially offset by proceeds from exercise of stock options. Cash flows used in financing activities during the remaining balancethree months ended March 31, 2012 were primarily driven by the partial repayment of our 13%
Senior Notes due 2013 and our 9.75% Senior Secured Notes due 2015, partially offset by the issuance of our 5.25% Senior Notes due 2022 and the exercise of stock options during the 2015.nine months endedSeptember 30, 2012. The cash flows used in financing activities in 2011 were the result of the repayment of the remaining balance of our 11.25% Senior Secured Notes due 2013 and the partial repayment of our 3.25% Convertible Notes due 2011.
Financings and Capital Requirements35
Future Liquidity and Capital Resource Requirements
We have entered into various agreements to design, construct and launch our satellites in the normal course of business. As disclosed in Note 15 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q, as of September 30, 2012March 31, 2013, we expect to incur satellite and transmission related expenditures of approximately $3,67564,487 for the remainder of 20122013 and $55,10627,658 in 2013,2014, the majority of which is attributable to the construction and expected launch of our FM-6 satellite and related launch vehicle in 2013 and an additional $50,83542,028 thereafter.
Based upon our current business plans, we believe that we have sufficient cash, cash equivalents and marketable securities as well as debt capacity to cover our estimated short-term and long-term funding needs. We expect to fund operating expenses, capital expenditures, working capital requirements, interest payments, taxes and scheduled maturities of our debt with existing cash, and cash flow from operations and borrowings under our Credit Facility, which we believe that we will be able to generate sufficient revenues to meet our cash requirements. For a discussion of our Credit Facility, refer to Note 12 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
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 introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions, including acquisitions that are not directly related to our satellite radio business.
Stock Repurchase Program
In addition,December 2012, our board of directors approved a $2,000,000 common stock repurchase program. Shares of common stock may be purchased from time to time on the open market or in privately negotiated transactions.
From January 1, 2013 through March 31, 2013, we repurchased 157,183,759 shares of common stock for $493,635, including fees and commissions, on the open market. Liberty Media did not participate in the common stock repurchases. We may continue to repurchase shares of our common stock under such programs in the future.
Common stock repurchases are retired upon settlement. As of March 31, 2013, $27,923 of common stock repurchases had not settled and was recorded as Treasury stock within our unaudited consolidated balance sheets and unaudited consolidated statements of stockholders' equity. As of March 31, 2013, $1,506,365 remains available under the stock repurchase program. We expect to fund future repurchases through a combination of cash on hand, cash generated by operations are affected by the FCC order approving the Merger, which imposed certain conditions upon, among other things,and borrowings under our program offerings.Credit Facility.
Debt Covenants
The indentures and the agreement governing our debtCredit Facility include restrictive covenants. As of September 30, 2012March 31, 2013, we were in compliance with the indentures and the agreement governing our debt covenants.Credit Facility. For a discussion of our “Debt Covenants”, refer to Note 12 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any significant off-balance sheet arrangements other than those disclosed in Note 15 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q 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 15 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Related Party Transactions
For a discussion of “Related Party Transactions,” refer to Note 10 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
We have been engaged in discussion with Liberty Media to explore possible transactions with respect to its ownership interest in us, although we have not reached agreement with respect to a specific transaction that would be mutually beneficial to both our common and preferred stockholders. There is no assurance that these discussions will result in any specific action or transaction. We do not expect to disclose developments with respect to these discussions.
Critical Accounting Policies and Estimates
For a discussion of our “Critical Accounting Policies and Estimates,” refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 20112012 and Note 2. There have been no material changes to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Income Taxes.critical accounting policies and estimates since The cumulative positive evidence outweighed the historical negative evidence regarding the likelihood that our deferred tax asset would be realized. As a result, we released $3,013,000 of the valuation allowance established against deferred tax assets during the nine months endedSeptember 30,December 31, 2012.
Glossary
Adjusted EBITDA - EBITDA is defined as net income before interest and investment loss;income (loss); interest expense, net of amounts capitalized; income tax expense and depreciation and amortization. We adjust EBITDA to remove the impact of other income and expense, loss on extinguishment of debt as well as certain other charges discussed below. This measure is one of the primary Non-GAAP financial measures on which we (i) evaluate the performance of our businesses, (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) goodwill impairment, (iii) restructuring, impairments, and related costs, (iv) depreciation and amortization and (v)(iii) share-based payment expense. 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. 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 results 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-out 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 believe the exclusion of restructuring, impairments and related costs is useful given the nature of these expenses. We also believe the exclusion of share-based payment expense is useful given the significant variation in expense that can result from changes in the fair value as determined using the Black-Scholes-Merton model which varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates.
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 | Unaudited |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
Net income (GAAP): | $ | 74,514 |
| | $ | 104,185 |
| | $ | 3,316,457 |
| | $ | 355,624 |
| $ | 123,602 |
| | $ | 107,774 |
|
Add back items excluded from Adjusted EBITDA: | | | | | | | | | | |
Purchase price accounting adjustments: | | | | | | | | | | |
Revenues (see pages 42-45) | 1,854 |
| | 2,292 |
| | 5,599 |
| | 8,951 |
| |
Operating expenses (see pages 42-45) | (73,049 | ) | | (68,878 | ) | | (220,497 | ) | | (205,472 | ) | |
Share-based payment expense, net of purchase price accounting adjustments | 17,492 |
| | 13,983 |
| | 46,361 |
| | 37,755 |
| |
Revenues (see pages 39-40) | | 1,813 |
| | 1,880 |
|
Operating expenses (see pages 39-40) | | (68,409 | ) | | (74,024 | ) |
Share-based payment expense (GAAP) | | 14,518 |
| | 14,951 |
|
Depreciation and amortization (GAAP) | 66,571 |
| | 65,403 |
| | 199,481 |
| | 200,865 |
| 67,018 |
| | 66,117 |
|
Interest expense, net of amounts capitalized (GAAP) | 70,035 |
| | 75,316 |
| | 219,777 |
| | 229,730 |
| 46,174 |
| | 76,971 |
|
Loss on extinguishment of debt and credit facilities, net (GAAP) | 107,105 |
| | — |
| | 132,726 |
| | 7,206 |
| — |
| | 9,971 |
|
Interest and investment loss (income) (GAAP) | 321 |
| | (292 | ) | | 3,192 |
| | (78,590 | ) | |
Other loss (income) (GAAP) | (113 | ) | | (435 | ) | | 637 |
| | (2,235 | ) | |
Income tax (benefit) expense (GAAP) | (20,113 | ) | | 5,714 |
| | (3,013,860 | ) | | 9,907 |
| |
Interest and investment (income) loss (GAAP) | | (1,638 | ) | | 1,142 |
|
Other (income) loss (GAAP) | | (247 | ) | | 578 |
|
Income tax expense (GAAP) | | 79,040 |
| | 2,802 |
|
Adjusted EBITDA | $ | 244,617 |
| | $ | 197,288 |
| | $ | 689,873 |
| | $ | 563,741 |
| $ | 261,871 |
| | $ | 208,162 |
|
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 three and nine months ended September 30, 2012March 31, 2013 and 20112012:
| |
| Unaudited For the Three Months Ended September 30, 2012 | Unaudited For the Three Months Ended March 31, 2013 |
(in thousands) | As Reported |
| Purchase Price Accounting Adjustments |
| Allocation of Share-based Payment Expense |
| Adjusted | As Reported | | Purchase Price Accounting Adjustments | | Allocation of Share-based Payment Expense | | Adjusted |
Revenue: | | | | | | | | | | | | | | |
Subscriber revenue | $ | 757,672 |
|
| $ | 41 |
|
| $ | — |
|
| $ | 757,713 |
| $ | 783,342 |
| | $ | — |
| | $ | — |
| | $ | 783,342 |
|
Advertising revenue, net of agency fees | 20,426 |
|
| — |
|
| — |
|
| 20,426 |
| |
Advertising revenue | | 20,211 |
| | — |
| | — |
| | 20,211 |
|
Equipment revenue | 17,813 |
|
| — |
|
| — |
|
| 17,813 |
| 18,156 |
| | — |
| | — |
| | 18,156 |
|
Other revenue | 71,449 |
|
| 1,813 |
|
| — |
|
| 73,262 |
| 75,689 |
| | 1,813 |
| | — |
| | 77,502 |
|
Total revenue | $ | 867,360 |
|
| $ | 1,854 |
|
| $ | — |
|
| $ | 869,214 |
| $ | 897,398 |
| | $ | 1,813 |
| | $ | — |
| | $ | 899,211 |
|
Operating expenses | |
|
|
|
|
|
| | | | | | | |
Cost of services: | |
|
|
|
|
|
| | | | | | | |
Revenue share and royalties | 141,834 |
|
| 37,199 |
|
| — |
|
| 179,033 |
| $ | 148,531 |
| | $ | 39,761 |
| | $ | — |
| | $ | 188,292 |
|
Programming and content | 69,938 |
|
| 10,431 |
|
| (1,736 | ) |
| 78,633 |
| 74,610 |
| | 2,478 |
| | (1,642 | ) | | 75,446 |
|
Customer service and billing | 77,768 |
|
| — |
|
| (512 | ) |
| 77,256 |
| 80,394 |
| | — |
| | (470 | ) | | 79,924 |
|
Satellite and transmission | 18,319 |
|
| — |
|
| (938 | ) |
| 17,381 |
| 19,695 |
| | — |
| | (850 | ) | | 18,845 |
|
Cost of equipment | 6,345 |
|
| — |
|
| — |
|
| 6,345 |
| 7,027 |
| | — |
| | — |
| | 7,027 |
|
Subscriber acquisition costs | 112,418 |
|
| 21,712 |
|
| — |
|
| 134,130 |
| 116,111 |
| | 22,005 |
| | — |
| | 138,116 |
|
Sales and marketing | 60,676 |
|
| 3,707 |
|
| (2,931 | ) |
| 61,452 |
| 65,899 |
| | 4,165 |
| | (3,061 | ) | | 67,003 |
|
Engineering, design and development | 13,507 |
|
| — |
|
| (1,753 | ) |
| 11,754 |
| 14,842 |
| | — |
| | (1,647 | ) | | 13,195 |
|
General and administrative | 68,235 |
|
| — |
|
| (9,622 | ) |
| 58,613 |
| 56,340 |
| | — |
| | (6,848 | ) | | 49,492 |
|
Depreciation and amortization (a) | 66,571 |
|
| — |
|
| — |
|
| 66,571 |
| 67,018 |
| | — |
| | — |
| | 67,018 |
|
Share-based payment expense | — |
|
| — |
|
| 17,492 |
|
| 17,492 |
| — |
| | — |
| | 14,518 |
| | 14,518 |
|
Total operating expenses | $ | 635,611 |
|
| $ | 73,049 |
|
| $ | — |
|
| $ | 708,660 |
| $ | 650,467 |
| | $ | 68,409 |
| | $ | — |
| | $ | 718,876 |
|
| | | | | | | | | | | | | | |
(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 three months ended September 30, 2012 was $13,000. | |
(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 three months ended March 31, 2013 was $13,000. | | (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 three months ended March 31, 2013 was $13,000. |
|
| | | | | | | | | | | | | | | |
| Unaudited For the Three Months Ended September 30, 2011 |
(in thousands) | As Reported |
| Purchase Price Accounting Adjustments |
| Allocation of Share-based Payment Expense |
| Adjusted |
Revenue: | |
|
|
|
|
|
|
Subscriber revenue | $ | 660,837 |
|
| $ | 479 |
|
| $ | — |
|
| $ | 661,316 |
|
Advertising revenue, net of agency fees | 18,810 |
|
| — |
|
| — |
|
| 18,810 |
|
Equipment revenue | 15,504 |
|
| — |
|
| — |
|
| 15,504 |
|
Other revenue | 67,399 |
|
| 1,813 |
|
| — |
|
| 69,212 |
|
Total revenue | $ | 762,550 |
|
| $ | 2,292 |
|
| $ | — |
|
| $ | 764,842 |
|
Operating expenses | |
|
|
|
|
|
|
Cost of services: | |
|
|
|
|
|
|
Revenue share and royalties | 117,043 |
|
| 32,293 |
|
| — |
|
| 149,336 |
|
Programming and content | 70,509 |
|
| 12,034 |
|
| (1,275 | ) |
| 81,268 |
|
Customer service and billing | 64,239 |
|
| — |
|
| (402 | ) |
| 63,837 |
|
Satellite and transmission | 19,681 |
|
| — |
|
| (735 | ) |
| 18,946 |
|
Cost of equipment | 5,888 |
|
| — |
|
| — |
|
| 5,888 |
|
Subscriber acquisition costs | 107,279 |
|
| 20,620 |
|
| — |
|
| 127,899 |
|
Sales and marketing | 55,210 |
|
| 3,931 |
|
| (2,165 | ) |
| 56,976 |
|
Engineering, design and development | 14,175 |
|
| — |
|
| (1,291 | ) |
| 12,884 |
|
General and administrative | 58,635 |
|
| — |
|
| (8,115 | ) |
| 50,520 |
|
Depreciation and amortization (a) | 65,403 |
|
| — |
|
| — |
|
| 65,403 |
|
Share-based payment expense (b) | — |
|
| — |
|
| 13,983 |
|
| 13,983 |
|
Total operating expenses | $ | 578,062 |
|
| $ | 68,878 |
|
| $ | — |
|
| $ | 646,940 |
|
| | | | | | | |
(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 three months ended September 30, 2011 was $15,000. |
| | | | | | | |
(b) Amounts related to share-based payment expense included in operating expenses were as follows: |
| | | | | | | |
Programming and content | $ | 1,275 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,275 |
|
Customer service and billing | 402 |
|
| — |
|
| — |
|
| 402 |
|
Satellite and transmission | 735 |
|
| — |
|
| — |
|
| 735 |
|
Sales and marketing | 2,165 |
|
| — |
|
| — |
|
| 2,165 |
|
Engineering, design and development | 1,291 |
|
| — |
|
| — |
|
| 1,291 |
|
General and administrative | 8,115 |
|
| — |
|
| — |
|
| 8,115 |
|
Total share-based payment expense | $ | 13,983 |
|
| $ | — |
|
| $ | — |
|
| $ | 13,983 |
|
|
| | | | | | | | | | | | | | | |
| Unaudited For the Nine Months Ended September 30, 2012 |
(in thousands) | As Reported | | Purchase Price Accounting Adjustments | | Allocation of Share-based Payment Expense | | Adjusted |
Revenue: | | | | | | | |
Subscriber revenue | $ | 2,188,199 |
| | $ | 161 |
| | $ | — |
| | $ | 2,188,360 |
|
Advertising revenue, net of agency fees | 59,881 |
| | — |
| | — |
| | 59,881 |
|
Equipment revenue | 51,183 |
| | — |
| | — |
| | 51,183 |
|
Other revenue | 210,362 |
| | 5,438 |
| | — |
| | 215,800 |
|
Total revenue | $ | 2,509,625 |
| | $ | 5,599 |
| | $ | — |
| | $ | 2,515,224 |
|
Operating expenses | | | | | | | |
Cost of services: | | | | | | | |
Revenue share and royalties | 409,371 |
| | 108,069 |
| | — |
| | 517,440 |
|
Programming and content | 205,203 |
| | 32,565 |
| | (4,342 | ) | | 233,426 |
|
Customer service and billing | 212,635 |
| | — |
| | (1,327 | ) | | 211,308 |
|
Satellite and transmission | 53,980 |
| | — |
| | (2,411 | ) | | 51,569 |
|
Cost of equipment | 19,301 |
| | — |
| | — |
| | 19,301 |
|
Subscriber acquisition costs | 348,014 |
| | 69,328 |
| | — |
| | 417,342 |
|
Sales and marketing | 176,457 |
| | 10,535 |
| | (7,343 | ) | | 179,649 |
|
Engineering, design and development | 32,468 |
| | — |
| | (4,467 | ) | | 28,001 |
|
General and administrative | 193,786 |
| | — |
| | (26,471 | ) | | 167,315 |
|
Depreciation and amortization (a) | 199,481 |
| | — |
| | — |
| | 199,481 |
|
Share-based payment expense | — |
| | — |
| | 46,361 |
| | 46,361 |
|
Total operating expenses | $ | 1,850,696 |
| | $ | 220,497 |
| | $ | — |
| | $ | 2,071,193 |
|
| | | | | | | |
(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 nine months ended September 30, 2012 was $41,000. |
| | | Unaudited For the Nine Months Ended September 30, 2011 | Unaudited For the Three Months Ended March 31, 2012 |
(in thousands) | As Reported | | Purchase Price Accounting Adjustments | | Allocation of Share-based Payment Expense | | Adjusted | As Reported | | Purchase Price Accounting Adjustments | | Allocation of Share-based Payment Expense | | Adjusted |
Revenue: | | | | | | | | | | | | | | |
Subscriber revenue | $ | 1,922,917 |
| | $ | 3,513 |
| | $ | — |
| | $ | 1,926,430 |
| $ | 700,242 |
| | $ | 67 |
| | $ | — |
| | $ | 700,309 |
|
Advertising revenue, net of agency fees | 53,595 |
| | — |
| | — |
| | 53,595 |
| |
Advertising revenue | | 18,670 |
| | — |
| | — |
| | 18,670 |
|
Equipment revenue | 48,392 |
| | — |
| | — |
| | 48,392 |
| 16,953 |
| | — |
| | — |
| | 16,953 |
|
Other revenue | 205,882 |
| | 5,438 |
| | — |
| | 211,320 |
| 68,857 |
| | 1,813 |
| | — |
| | 70,670 |
|
Total revenue | $ | 2,230,786 |
| | $ | 8,951 |
| | $ | — |
| | $ | 2,239,737 |
| $ | 804,722 |
| | $ | 1,880 |
| | $ | — |
| | $ | 806,602 |
|
Operating expenses | | | | | | | | | | | | | | |
Cost of services: | | | | | | | | | | | | | | |
Revenue share and royalties | 340,713 |
| | 93,359 |
| | — |
| | 434,072 |
| $ | 132,111 |
| | $ | 34,846 |
| | $ | — |
| | $ | 166,957 |
|
Programming and content | 210,867 |
| | 36,645 |
| | (4,745 | ) | | 242,767 |
| 70,095 |
| | 11,702 |
| | (1,374 | ) | | 80,423 |
|
Customer service and billing | 192,667 |
| | 18 |
| | (1,077 | ) | | 191,608 |
| 66,187 |
| | — |
| | (427 | ) | | 65,760 |
|
Satellite and transmission | 57,238 |
| | 313 |
| | (1,867 | ) | | 55,684 |
| 18,110 |
| | — |
| | (785 | ) | | 17,325 |
|
Cost of equipment | 19,894 |
| | — |
| | — |
| | 19,894 |
| 5,806 |
| | — |
| | — |
| | 5,806 |
|
Subscriber acquisition costs | 317,711 |
| | 64,086 |
| | — |
| | 381,797 |
| 116,121 |
| | 24,085 |
| | — |
| | 140,206 |
|
Sales and marketing | 154,471 |
| | 10,961 |
| | (5,654 | ) | | 159,778 |
| 58,361 |
| | 3,391 |
| | (2,360 | ) | | 59,392 |
|
Engineering, design and development | 39,249 |
| | 31 |
| | (3,407 | ) | | 35,873 |
| 12,690 |
| | — |
| | (1,432 | ) | | 11,258 |
|
General and administrative | 175,469 |
| | 59 |
| | (21,005 | ) | | 154,523 |
| 59,886 |
| | — |
| | (8,573 | ) | | 51,313 |
|
Depreciation and amortization (a) | 200,865 |
| | — |
| | — |
| | 200,865 |
| 66,117 |
| | — |
| | — |
| | 66,117 |
|
Share-based payment expense (b) | — |
| | — |
| | 37,755 |
| | 37,755 |
| — |
| | — |
| | 14,951 |
| | 14,951 |
|
Total operating expenses | $ | 1,709,144 |
| | $ | 205,472 |
| | $ | — |
| | $ | 1,914,616 |
| $ | 605,484 |
| | $ | 74,024 |
| | $ | — |
| | $ | 679,508 |
|
| | | | | | | | | | | | | | |
(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 nine months ended September 30, 2011 was $45,000. | |
| | | | | | | | |
(b) Amounts related to share-based payment expense included in operating expenses were as follows: | |
| | | | | | | | |
Programming and content | $ | 4,718 |
| | $ | 27 |
| | $ | — |
| | $ | 4,745 |
| |
Customer service and billing | 1,059 |
| | 18 |
| | — |
| | 1,077 |
| |
Satellite and transmission | 1,848 |
| | 19 |
| | — |
| | 1,867 |
| |
Sales and marketing | 5,627 |
| | 27 |
| | — |
| | 5,654 |
| |
Engineering, design and development | 3,376 |
| | 31 |
| | — |
| | 3,407 |
| |
General and administrative | 20,946 |
| | 59 |
| | — |
| | 21,005 |
| |
Total share-based payment expense | $ | 37,574 |
| | $ | 181 |
| | $ | — |
| | $ | 37,755 |
| |
(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 three months ended March 31, 2012 was $14,000. | | (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 three months ended March 31, 2012 was $14,000. |
ARPU - is derived from total earned subscriber revenue, 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. 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):
| | | Unaudited | Unaudited |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months March 31, |
| 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
Subscriber revenue (GAAP) | $ | 757,672 |
| | $ | 660,837 |
| | $ | 2,188,199 |
| | $ | 1,922,917 |
| $ | 783,342 |
| | $ | 700,242 |
|
Add: net advertising revenue (GAAP) | 20,426 |
| | 18,810 |
| | 59,881 |
| | 53,595 |
| 20,211 |
| | 18,670 |
|
Add: other subscription-related revenue (GAAP) | 60,095 |
| | 58,168 |
| | 176,569 |
| | 174,341 |
| 64,137 |
| | 57,721 |
|
Add: purchase price accounting adjustments | 41 |
| | 479 |
| | 161 |
| | 3,513 |
| — |
| | 67 |
|
| $ | 838,234 |
| | $ | 738,294 |
| | $ | 2,424,810 |
| | $ | 2,154,366 |
| $ | 867,690 |
| | $ | 776,700 |
|
| | | | | | | | |
Daily weighted average number of subscribers | 23,008,693 |
| | 21,107,540 |
| | 22,519,544 |
| | 20,688,641 |
| 24,008,472 |
| | 21,990,863 |
|
| | | | | | | | |
ARPU | $ | 12.14 |
| | $ | 11.66 |
| | $ | 11.96 |
| | $ | 11.57 |
| $ | 12.05 |
| | $ | 11.77 |
|
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 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 in expense that can result from changes in the fair market value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our customer service and billing expenses. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit associated with incremental share-based payment arrangements recognized at the Merger date. Customer service and billing expenses, per average subscriber, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
| | | Unaudited | Unaudited |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months March 31, |
| 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
Customer service and billing expenses (GAAP) | $ | 77,768 |
| | $ | 64,239 |
| | $ | 212,635 |
| | $ | 192,667 |
| $ | 80,394 |
| | $ | 66,187 |
|
Less: share-based payment expense, net of purchase price accounting adjustments | (512 | ) | | (402 | ) | | (1,327 | ) | | (1,077 | ) | |
Add: purchase price accounting adjustments | — |
| | — |
| | — |
| | 18 |
| |
| 77,256 |
| | 63,837 |
| | 211,308 |
| | 191,608 |
| |
Less: share-based payment expense | | (470 | ) | | (427 | ) |
| | | | | | | | $ | 79,924 |
| | $ | 65,760 |
|
Daily weighted average number of subscribers | 23,008,693 |
| | 21,107,540 |
| | 22,519,544 |
| | 20,688,641 |
| 24,008,472 |
| | 21,990,863 |
|
| | | | | | | | |
Customer service and billing expenses, per average subscriber | $ | 1.12 |
| | $ | 1.01 |
| | $ | 1.04 |
| | $ | 1.03 |
| $ | 1.11 |
| | $ | 1.00 |
|
Free cash flow - is derived from cash flow provided by operating activities, capital expenditures and restricted and other investment activity. Free cash flow is calculated as follows (in thousands):
| | | Unaudited | Unaudited |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months March 31, |
| 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
Cash Flow information | | | | | | | | | | |
Net cash provided by operating activities | $ | 219,809 |
| | $ | 115,144 |
| | $ | 513,532 |
| | $ | 328,634 |
| $ | 168,915 |
| | $ | 39,948 |
|
Net cash used in investing activities | (24,602 | ) | | (39,767 | ) | | (73,546 | ) | | (104,698 | ) | $ | (26,434 | ) | | $ | (25,187 | ) |
Net cash used in financing activities | (507,267 | ) | | 888 |
| | (657,706 | ) | | (206,035 | ) | $ | (456,699 | ) | | $ | (42,175 | ) |
Free Cash Flow | | | | | | | | | | |
Net cash provided by operating activities | $ | 219,809 |
| | $ | 115,144 |
| | $ | 513,532 |
| | $ | 328,634 |
| $ | 168,915 |
| | $ | 39,948 |
|
Additions to property and equipment | (24,602 | ) | | (39,767 | ) | | (73,546 | ) | | (115,065 | ) | (26,434 | ) | | (25,187 | ) |
Restricted and other investment activity | — |
| | — |
| | — |
| | 10,367 |
| |
Free cash flow | $ | 195,207 |
| | $ | 75,377 |
| | $ | 439,986 |
| | $ | 223,936 |
| $ | 142,481 |
| | $ | 14,761 |
|
New vehicle consumer conversion rate - is defined as the percentage of owners and lessees of new vehicles that receive our 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 addition - or SAC, per gross subscriber addition, is derived from subscriber acquisition costs and margins from the sale of radios and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additions 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, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
| | | Unaudited | Unaudited |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months March 31, |
| 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 |
Subscriber acquisition costs (GAAP) | $ | 112,418 |
| | $ | 107,279 |
| | $ | 348,014 |
| | $ | 317,711 |
| $ | 116,111 |
| | $ | 116,121 |
|
Less: margin from direct sales of radios and accessories (GAAP) | (11,468 | ) | | (9,616 | ) | | (31,882 | ) | | (28,498 | ) | (11,129 | ) | | (11,147 | ) |
Add: purchase price accounting adjustments | 21,712 |
| | 20,620 |
| | 69,328 |
| | 64,086 |
| 22,005 |
| | 24,085 |
|
| $ | 122,662 |
| | $ | 118,283 |
| | $ | 385,460 |
| | $ | 353,299 |
| $ | 126,987 |
| | $ | 129,059 |
|
| | | | | | | | |
Gross subscriber additions | 2,421,586 |
| | 2,138,131 |
| | 7,064,282 |
| | 6,369,846 |
| 2,509,914 |
| | 2,161,693 |
|
| | | | | | | | |
SAC, per gross subscriber addition | $ | 51 |
| | $ | 55 |
| | $ | 55 |
| | $ | 55 |
| $ | 51 |
| | $ | 60 |
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
As of September 30, 2012March 31, 2013, we did not have any derivative financial instruments. We do not hold or issue any free-standing derivatives. We hold investments in marketable securities consisting of money market funds and we also hold certificates of deposit and investments in debt and equity securities of other entities. We classify our investments in marketable securities as available-for-sale. These securities are consistent with the investment objectives incontained 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. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
As of September 30, 2012March 31, 2013, an evaluation was performed under the supervision and with the participation of our management, including Mel Karmazin,James E. Meyer, our Chief Executive Officer, and David J. Frear, our 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). 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 September 30, 2012March 31, 2013.
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 quarter ended September 30, 2012March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are a defendant or party to various claims and lawsuits, including those discussed below. These claims are at various stages of arbitration or adjudication.
State Consumer Investigations. A Multistate Working Group of 3132 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.
A separate investigation into our consumer practices is being conducted by the Attorneys General of the State of Florida and the State of New York. We are cooperating with these investigations and believe our consumer practices comply with all applicable federal and state laws and regulations.
Carl Blessing et al. v. Sirius XM Radio Inc. We have settled the case titled Carl Blessing et al. v. Sirius XM Radio Inc. and the settlement has been approved by the United States District Court for the Southern District of New York. Appeals have been filed by 11 individuals seeking to overturn the settlement.
In December 2009, Carl Blessing, a subscriber, filed a lawsuit against us in the United States District Court for the Southern District of New York. Mr. Blessing and several other plaintiffs purported to represent all subscribers who were subject to: an increase in the price for additional-radio subscriptions from $6.99 to $8.99; the imposition of the US Music Royalty Fee; and the elimination of our free Internet service. The suit claimed that the pricing changes showed that our merger with XM lessened competition or led to a monopoly in violation of the Clayton Act and that the merger led to monopolization in violation of the Sherman Act. Earlier the Court dismissed the plaintiffs' claims for breach of contract and granted our motion for summary judgment as to various state law claims.
As part of the settlement, we agreed to: not raise the price of our basic satellite radio service or other programming packages or our Internet services; not increase our US Music Royalty Fee; and not decrease our multi-radio discount prior to January 1, 2012. Existing subscribers were also permitted to renew their current subscription plans at current rates prior to December 31, 2011. Former subscribers who terminated their subscriptions after July 29, 2009 are entitled to receive, at their election, either: one month of our basic satellite radio service or one month of our Internet service, at no charge. We also paid the costs of providing notice to the plaintiff class and reimbursed counsel for the plaintiffs for $13 million of their fees and expenses.
One Twelve, Inc. and Don Buchwald v. Sirius XM Radio IncInc.. In March 2011, One Twelve, Inc., Howard Stern's
production company, and Don Buchwald, Stern's agent, commenced an action against us in the Supreme Court of the State of New York, County of New York. The action alleged that, upon the Merger, we failed to honor our obligations under the performance-based compensation provisions of our prior agreement dated October 2004 with One Twelve and Buchwald, as
agent; One Twelve and Buchwald each assert a claim of breach of contract. In April 2012, the Court granted our motion for summary judgment and dismissed with prejudice the suit. The Court found the agreement unambiguous. One Twelve and Buchwald have appealed this decision.decision and, in April 2013, the Supreme Court, Appellate Division, First Department, affirmed the decision of the trial court granting summary judgment and dismissing the complaint.
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, actions filed bybasis; former employees,employees; parties to contracts or leases,leases; and owners of patents, trademarks, copyrights or other intellectual property. None of these other actions are, in our opinion, likely to have a material adverse effect on our business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in response to Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 20112012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 March 31, 2013:
Not applicable.Issuer Purchases of Equity Securities |
| | | | | | | | | | | | | | |
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 (2) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
January 1, 2013 - January 31, 2013 | | — |
| | $ | — |
| | — |
| | $ | 2,000,000,000 |
|
February 1, 2013 - February 28, 2013 | | 78,899,500 |
| | $ | 3.12 |
| | 78,899,500 |
| | $ | 1,753,479,216 |
|
March 1, 2013 - March 31, 2013 | | 78,284,259 |
| | $ | 3.16 |
| | 78,284,259 |
| | $ | 1,506,365,405 |
|
Total | | 157,183,759 |
| | $ | 3.14 |
| | 157,183,759 |
| | $ | 1,506,365,405 |
|
| |
(1) | These amounts include fees and commissions associated with the share repurchase. |
| |
(2) | On December 6, 2012, we announced that our board of directors approved a $2.0 billion common stock repurchase program. 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 or in privately negotiated transactions. The size and timing of these purchases will be based on a number of factors, including price and business and market conditions. We have repurchased shares of our common stock on the open market. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
None.
ITEM 6. EXHIBITS
See Exhibit Index attached hereto.
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 1st30th day of November 2012.April 2013.
|
| |
| |
SIRIUS XM RADIO INC. |
By: | /s/ David J. Frear |
By: | David/s/ DAVID J. FrearFREAR
|
| David J. Frear |
| Executive Vice President and |
| Chief Financial Officer |
| (Duly Authorized Officer andPrincipal Financial Officer) |
EXHIBIT INDEX
|
| | | | | |
Exhibit | | Description |
4.1 |
| | Indenture,
| | |
*10.1 |
| | Employment Agreement, dated as of August 13, 2012, amongApril 29, 2013, between the Company the guarantors named therein and U.S. Bank National Association, as trustee, relating to the 5.25% Senior Notes due 2022James E. Meyer (incorporated by reference to Exhibit 4.110.1 to the Company's Current Report on Form 8-K filed August 14, 2012)on April 30, 2013).
|
| | | | |
31.1 |
| | Certificate of Mel Karmazin,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, Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
32.1 |
| | Certificate of Mel Karmazin,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, 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). |
| | |
101.1 |
| | The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012March 31, 2013 formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2012March 31, 2013 and 2011;2012; (ii) Consolidated Balance Sheets as of September 30, 2012March 31, 2013 (Unaudited) and December 31, 2011;2012; (iii) Unaudited Consolidated StatementStatements of Stockholders' Equity for the nine months ended September 30, 2012;(Unaudited) as of March 31, 2013; (iv) Unaudited Consolidated Statements of Cash Flows (Unaudited) for the ninethree months ended September 30, 2012March 31, 2013 and 2011;2012; and (v) Notes to Unaudited Consolidated Financial Statements.Statements (Unaudited). |
| | |
____________________
| |
* | This document has been identified as a management contract or compensatory plan or arrangement. | |
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.