The opportunity for acquiring new customers is growing both through additional improvements in the auto sector as well as the used car opportunity we've spoken about. The combination of these two factors should allow us to generate steady top-line growth over the next several years, then slap that expectation against the strong operational leverage characteristics of this business and we should be a significant free cash flow generator over the next several years.
...So the obvious question that arises from this is what will we do with the cash that we accumulate over time. There are only three things a company can deal with a significant amount of excess cash, pay down debt, buy assets to grow the business or return capital to the shareholders.
...assume we keep leverage at a modest level like 3x adjusted EBITDA. In that case, we clearly would not be diverting much of the future cash generation toward reducing debt. In fact, we might more likely increase gross indebtedness over time as we continue to grow the business. So will we buy assets with our excess cash? Perhaps, but we haven't seen anything yet that's worthy of any meaningful investment or acquisition. Then will we return capital to shareholders, although I certainly can't quantify the amount or the timing for this, I think it is reasonable to expect that the company will return capital to shareholders over time.
During 2011 the company retired its 3.25% convertible note, reducing its debt by $0.2 billion. Fast forward to the conference call that took place earlier this week. CFO David Frear stated:
We finished the quarter with $747 million in cash. Net debt to EBITDA improved to 2.9x from 3.1x at year-end. Through today, we have repurchased $130 million face amount of our 9.75% and 13% notes. The 9.75% notes are callable in September, and the 13% notes are due in the middle of next summer, that's 2013. We'll continue to look for opportunities to either repurchase or refinance debt on favorable [*] terms.
*Transcript reads "refinance debt unfavorable," although the context and careful listening clearly indicates he states " refinance debt on favorable"
Note that Frear stated that "Net debt to EBITDA improved to 2.9x from 3.1x at year-end." This is a figure below Karmazin's stated objective of 3x. So is the company preparing to take on more debt? Obviously this is no longer the case.
The 13% notes were issued with a total face value of $778.5 million and the 9.75% notes with a total face value of $257 million, for a combined total of $1,035.5 million. The 10Q showed the balance on the two issues at $744.246 million and $224.428 million at the end of Q1, for a total of $968.7 million. This shows that a total of $66.8 million of face value had been repurchased through the end of Q1.
Since Frear stated that "we have repurchased $130 million face amount," it means that the repurchases have continued during the current quarter, and may even be accelerating. The math shows $130 million - $66.8 million = $63.2 million worth of the notes were repurchased in the month of April.
During the Q&A of the conference call, Karmazin was still calling for returning cash to shareholders, but appears to be moderating his position.
We believe that a good use of our cash, certainly, would be to return capital to our shareholders. We've said that before, nothing has changed. ... So we will continue to be opportunistic as debt is offered to us for us to reduce our more expensive debt. As we are sitting with the cash, we're not getting very much interest, obviously, on that cash. And by retiring some of the debt, as David talked, about makes really good sense for our investors to do while we continue to build up cash in a significant way to consider returning capital to shareholders when the Board makes that decision.
Karmazin had stated "...we clearly would not be diverting much of the future cash generation toward reducing debt. In fact, we might more likely increase gross indebtedness over time as we continue to grow the business." Currently the company is using cash to pay down debt. And while Karmazin still favors returning capital to shareholders, the board has clearly not reached that decision at the current time.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time.