XM Radio 2014 Annual Report Download - page 99

Glossary
Adjusted EBITDA—EBITDA is defined as net income before interest and investment income (loss);
interest expense, net of amounts capitalized; income tax expense and depreciation and
amortization. We adjust EBITDA to exclude the impact of other income and expense, loss on
extinguishment of debt, loss on change in value of derivatives as well as certain other charges
discussed below. This 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) depreciation and amortization and (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 also believe the exclusion of share-based payment expense is useful given
share-based payment expense is not directly related to the operational conditions of our business.
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):
2014 2013 2012
For the Years Ended December 31,
Unaudited
Net income (GAAP): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 493,241 $ 377,215 $ 3,472,702
Add back items excluded from Adjusted EBITDA:
Purchase price accounting adjustments:
Revenues (see pages 19-20) . . . . . . . . . . . . . . . . . . . . . . . . 7,251 7,251 7,479
Operating expenses (see pages 19-20) . . . . . . . . . . . . . . . (3,781) (207,854) (289,278)
Share-based payment expense (GAAP). . . . . . . . . . . . . . . . . 78,212 68,876 63,822
Depreciation and amortization (GAAP) . . . . . . . . . . . . . . . . . . 266,423 253,314 266,295
Interest expense, net of amounts capitalized (GAAP) . . . . 269,010 204,671 265,321
Loss on extinguishment of debt and credit facilities, net
(GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 190,577 132,726
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