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| DTV > SEC Filings for DTV > Form 10-K on 25-Feb-2008 | All Recent SEC Filings |
25-Feb-2008
Annual Report
The following is a discussion of our results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report. Information in this section is organized as follows:
º •
º Summary Results of Operations and Financial Condition
º •
º Significant Events Affecting the Comparability of the Results of
Operations
º •
º Key Terminology Used in Management's Discussion and Analysis of
Financial Condition and Results of Operations
º •
º Executive Overview and Outlook
º •
º Results of Operations
º •
º Liquidity and Capital Resources
º •
º Contractual Obligations, Off-Balance Sheet Arrangements and
Contingencies
º •
º Certain Relationships and Related-Party Transactions
º •
º Critical Accounting Estimates
º •
º Accounting Changes and New Accounting Pronouncements
º •
º Security Ratings
THE DIRECTV GROUP, INC.
SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Years Ended December 31,
-------------------------------------
2007 2006 2005
----------- --------- ---------
(Dollars in Millions, Except Per
Share Amounts)
Consolidated Statements of Operations:
Revenues $ 17,246 $ 14,755 $ 13,164
Operating costs and expenses
Costs of revenues, exclusive of depreciation and
amortization expense
Broadcast programming and other 7,346 6,201 5,485
Subscriber service expenses 1,240 1,111 982
Broadcast operations expenses 323 286 254
Selling, general and administrative expenses, exclusive of
depreciation and amortization expense
Subscriber acquisitions costs 2,096 1,945 2,752
Upgrade and retention costs 976 870 1,117
General and administrative expenses 1,095 1,069 1,133
Gain from disposition of businesses - (118 ) (45 )
Depreciation and amortization expense 1,684 1,034 853
----------- --------- ---------
Total operating costs and expenses 14,760 12,398 12,531
----------- --------- ---------
Operating profit 2,486 2,357 633
Interest income 111 146 150
Interest expense (235 ) (246 ) (238 )
Other, net 26 42 (65 )
----------- --------- ---------
Income from continuing operations before income taxes and
minority interests 2,388 2,299 480
Income tax expense (943 ) (866 ) (172 )
Minority interests in net earnings of subsidiaries (11 ) (13 ) (3 )
----------- --------- ---------
Income from continuing operations 1,434 1,420 305
Income from discontinued operations, net of taxes 17 - 31
----------- --------- ---------
Net income $ 1,451 $ 1,420 $ 336
----------- --------- ---------
Basic earnings per common share:
Income from continuing operations $ 1.20 $ 1.13 $ 0.22
Income from discontinued operations, net of taxes 0.01 - 0.02
----------- --------- ---------
Net income $ 1.21 $ 1.13 $ 0.24
----------- --------- ---------
Diluted earnings per common share:
Income from continuing operations $ 1.20 $ 1.12 $ 0.22
Income from discontinued operations, net of taxes 0.01 - 0.02
----------- --------- ---------
Net income $ 1.21 $ 1.12 $ 0.24
----------- --------- ---------
Weighted average number of common shares outstanding (in
millions)
Basic 1,195 1,262 1,388
Diluted 1,202 1,270 1,395
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December 31,
-------------------------
2007 2006
------------ ---------
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 1,083 $ 2,499
Total current assets 3,146 4,556
Total assets 15,063 15,141
Total current liabilities 3,434 3,322
Long-term debt 3,347 3,395
Minority interests 11 62
Total stockholders' equity 6,302 6,681
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THE DIRECTV GROUP, INC.
SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(continued)
Years Ended December 31,
-------------------------------
2007 2006 2005
---------- -------- -------
(Dollars in Millions)
Other Data:
Operating profit $ 2,486 $ 2,357 $ 633
Add: Depreciation and amortization expense 1,684 1,034 853
---------- -------- -------
Operating profit before depreciation and amortization $ 4,170 $ 3,391 $ 1,486
(1)
---------- -------- -------
Operating profit before depreciation and amortization 24.2 % 23.0 % 11.3 %
margin (1)
Capital expenditures (2) $ 2,696 $ 1,987 $ 924
Net cash provided by operating activities 3,645 3,162 1,172
Net cash used in investing activities (2,822 ) (1,536 ) (723 )
Net cash provided by (used in) financing activities (2,239 ) (2,828 ) 945
Net cash provided by operating activities $ 3,645 $ 3,162 $ 1,172
Less: Cash paid for property and equipment (2,523 ) (1,754 ) (489 )
Less: Cash paid for satellites (169 ) (222 ) (400 )
---------- -------- -------
Free cash flow (3) $ 953 $ 1,186 $ 283
---------- -------- -------
--------------------------------------------------------------------------------
º (1)
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º We believe this measure is useful to investors, along with GAAP measures (such as revenues, operating profit and net income), to compare our operating performance to other communications, entertainment and media service providers. We believe that investors use current and projected operating profit before depreciation and amortization and similar measures to estimate our current or prospective enterprise value and make investment decisions. This metric provides investors with a means to compare operating results exclusive of depreciation and amortization expense. Our management believes this is useful given the significant variation in depreciation and amortization expense that can result from the timing of capital expenditures, the capitalization of intangible assets, potential variations in expected useful lives when compared to other companies and periodic changes to estimated useful lives.
º Operating profit before depreciation and amortization margin is calculated by dividing operating profit before depreciation and amortization by Revenues.
º (2)
º Capital expenditures include cash paid and amounts accrued during the
period for property, equipment and satellites. Beginning March 1, 2006,
capital expenditures include the cost of set-top boxes receivers
capitalized under DIRECTV U.S.' lease program.
º (3)
º Free cash flow, which is a financial measure that is not determined in
accordance with GAAP, can be calculated by deducting amounts under the
captions "Cash paid for property and equipment" and "Cash paid for
satellites" from "Net cash provided by operating activities" from the
Consolidated Statements of Cash Flows. This financial measure should be
used in conjunction with other GAAP financial measures and is not presented
as an alternative measure of cash flows from operating activities, as
determined in accordance with GAAP. Our management and our Board of
Directors use free cash flow to evaluate the cash generated by our current
subscriber base, net of capital expenditures, for the purpose of allocating
resources to activities such as adding new subscribers, retaining and
upgrading existing subscribers, for additional capital expenditures and
other capital investments or transactions and as a measure of performance
for incentive compensation purposes. We believe this measure is useful to
investors, along with other GAAP measures (such as cash flows from
operating and investing activities), to compare our operating performance
to other communications, entertainment and media companies. We believe that
investors also use current and projected free cash flow to determine the
ability of revenues from our current and projected subscriber base to fund
required and discretionary spending and to help determine our financial
value.
THE DIRECTV GROUP, INC.
SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(concluded)
Selected Segment Data
Years Ended December 31,
-------------------------------
2007 2006 2005
--------- -------- --------
(Dollars in Millions)
DIRECTV U.S.
Revenues $ 15,527 $ 13,744 $ 12,216
--------- -------- --------
% of total revenues 90.0 % 93.1 % 92.8 %
Operating profit $ 2,402 $ 2,348 $ 802
Add: Depreciation and amortization expense 1,448 873 698
--------- -------- --------
Operating profit before depreciation and $ 3,850 $ 3,221 $ 1,500
amortization
--------- -------- --------
Operating profit margin 15.5 % 17.1 % 6.6 %
Operating profit before depreciation and 24.8 % 23.4 % 12.3 %
amortization margin
Segment assets $ 12,297 $ 11,687 $ 10,525
Capital expenditures (1) 2,330 1,809 782
DIRECTV Latin America
Revenues $ 1,719 $ 1,013 $ 742
--------- -------- --------
% of total revenues 10.0 % 6.9 % 5.6 %
Operating profit (loss) $ 159 $ 79 $ (19 )
Add: Depreciation and amortization expense 235 165 160
--------- -------- --------
Operating profit before depreciation and $ 394 $ 244 $ 141
amortization
--------- -------- --------
Operating profit margin 9.2 % 7.8 % N/A
Operating profit before depreciation and 22.9 % 24.1 % 19.0 %
amortization margin
Segment assets $ 2,456 $ 2,001 $ 1,148
Capital expenditures (1) 336 178 90
Network Systems
Revenues - - $ 211
--------- -------- --------
% of total revenues - - 1.6 %
Operating loss - - $ (61 )
Add: Depreciation and amortization expense - - -
--------- -------- --------
Operating loss before depreciation and - - $ (61 )
amortization
--------- -------- --------
Segment assets - - -
Capital expenditures (1) - - $ 18
Corporate and Other
Revenues - $ (2 ) $ (5 )
--------- -------- --------
Operating loss $ (75 ) $ (70 ) $ (89 )
Add: Depreciation and amortization expense 1 (4 ) (5 )
--------- -------- --------
Operating loss before depreciation and $ (74 ) $ (74 ) $ (94 )
amortization
--------- -------- --------
Segment assets $ 310 $ 1,453 $ 3,957
Capital expenditures (1) 30 - 34
Total
Revenues $ 17,246 $ 14,755 $ 13,164
--------- -------- --------
Operating profit $ 2,486 $ 2,357 $ 633
Add: Depreciation and amortization expense 1,684 1,034 853
--------- -------- --------
Operating profit before depreciation and $ 4,170 $ 3,391 $ 1,486
amortization
--------- -------- --------
Operating profit margin 14.4 % 16.0 % 4.8 %
Operating profit before depreciation and 24.2 % 23.0 % 11.3 %
amortization margin
Total assets $ 15,063 $ 15,141 $ 15,630
Capital expenditures (1) 2,696 1,987 924
--------------------------------------------------------------------------------
º (1)
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SIGNIFICANT EVENTS AFFECTING THE COMPARABILITY OF THE RESULTS OF OPERATIONS
Acquisitions
Darlene Transaction. On January 30, 2007, we acquired Darlene's 14% equity interest in DLA LLC for $325 million in cash and resolved all outstanding disputes with Darlene. We accounted for this acquisition using the purchase method of accounting.
Sky Transactions. During 2006, we completed the last in a series of transactions that were agreed in October 2004 with News Corporation, Televisa, Globo and Liberty Media International, which we refer to as the Sky Transactions. These transactions were completed as follows:
º •
º On August 23, 2006, we completed the merger of our Brazil business,
Galaxy Brasil Ltda., or GLB, with Sky Brazil and completed the
purchase of News Corporation's and Liberty Media International's
interests in Sky Brazil. We accounted for the Sky Brazil acquisition
using the purchase method of accounting, and began consolidating the
results of Sky Brazil from the date of acquisition. We also accounted
for the reduction of our interest in GLB resulting from the merger as
a partial sale which resulted in us recording a one-time pre-tax gain
during the year ended December 31, 2006 of approximately $61 million
in "Gain from disposition of businesses, net" in the Consolidated
Statements of Operations.
º •
º On February 16, 2006, we completed the acquisition of our equity
interest in Sky Mexico, which included the acquisition of an equity
interest in Sky Mexico in exchange for the sale of our DIRECTV Mexico
subscribers to Sky Mexico and the acquisition of News Corporation's
and Liberty Media International's equity interests in Sky Mexico for
$373 million in cash. As a result of this transaction, we recorded
gains of $57 million during the year ended December 31, 2006 and
$70 million during the year ended December 31, 2005 to "Gain from
disposition of businesses, net "in the Consolidated Statements of
Operations. DIRECTV Mexico ceased operations in 2005 upon completion
of the migration of its subscribers to Sky Mexico.
As a result of the Darlene and Sky transactions, we own 100% of PanAmericana, 74% of Sky Brazil, and 41% of Sky Mexico. Globo owns the other 26% of Sky Brazil and Televisa owns the other 59% of Sky Mexico. The results of PanAmericana and Sky Brazil are consolidated in our results. We account for our 41% interest in Sky Mexico under the equity method of accounting.
Divestiture
HNS-SkyTerra. On April 22, 2005, we completed the sale of a 50% interest in Hughes Network Systems LLC, or HNS LLC, which owned substantially all of the net assets formerly held by HNS, to SkyTerra Communications, Inc. As a result of this transaction, we recorded pre-tax impairment charges of $25 million during the year ended December 31, 2005 to "Gain from disposition of businesses, net "in the Consolidated Statements of Operations to reduce the carrying value of HNS' assets to fair value. As a result of the SkyTerra transaction, subsequent to April 22, 2005, we accounted for our investment in HNS under the equity method of accounting, and accordingly, recorded our interest in HNS' net income in "Other, net" in our Consolidated Statements of Operations until the sale of the remaining interest in January 2006.
See Note 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for further information regarding acquisitions and divestitures.
Other Developments
In addition to the items described above, the following items had a significant effect on the comparability of our operating results for the years ended December 31, 2007, 2006 and 2005:
Lease Program. On March 1, 2006, DIRECTV U.S. introduced a new set-top receiver lease program. Prior to March 1, 2006, we expensed most set-top receivers provided to new and existing DIRECTV U.S. subscribers upon activation as a subscriber acquisition or upgrade and retention cost in the Consolidated Statements of Operations. Subsequent to the introduction of our lease program, we lease most set-top receivers provided to new and existing subscribers, and therefore capitalize the set-top receivers in "Property and equipment, net" in the Consolidated Balance Sheets.
The following table sets forth the amount of DIRECTV U.S. set-top receivers we capitalized, and depreciation expense we recorded, under the lease program for the years presented:
December 31,
----------------------------
Capitalized subscriber leased equipment: 2007 2006
--------------------------------------------------- ------------ ------------
(Dollars in Millions)
Subscriber leased equipment-subscriber acquisitions $ 762 $ 599
Subscriber leased equipment-upgrade and retention 774 473
------------ ------------
Total subscriber leased equipment capitalized $ 1,536 $ 1,072
------------ ------------
Depreciation expense-subscriber leased equipment $ 645 $ 147
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Share Repurchase Program. During 2006 and 2007 our Board of Directors approved multiple authorizations for the repurchase of a total of $5 billion of our common stock, the most recent of which was a $1 billion authorization in August 2007 that was completed in December 2007. Subsequent to December 31, 2007, our Board of Directors authorized the repurchase of an additional $1 billion of our common stock. In 2007 we repurchased 86 million shares for $2,025 million at an average price of $23.48 per share and in 2006 we repurchased 184 million shares for $2,977 million at an average price of $16.16 per share.
KEY TERMINOLOGY USED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues. We earn revenues mostly from monthly fees we charge subscribers for subscriptions to basic and premium channel programming, HD programming and access fees, pay-per-view programming, and seasonal and live sporting events. We also earn revenues from monthly fees that we charge subscribers with multiple non-leased set-top receivers (which we refer to as mirroring fees), monthly fees we charge subscribers for leased set-top receivers, monthly fees we charge subscribers for DVR service, hardware revenues from subscribers who lease or purchase set-top receivers from us, our published programming guide, warranty service fees and advertising services.
Broadcast Programming and Other. These costs primarily include license fees for subscription service programming, pay-per-view programming, live sports and other events. Other costs include expenses associated with the publication and distribution of our programming guide, continuing service fees paid to third parties for active subscribers, warranty service costs and production costs for on-air advertisements we sell to third parties.
Subscriber Service Expenses. Subscriber service expenses include the costs of customer call centers, billing, remittance processing and certain home services expenses, such as in-home repair costs.
Broadcast Operations Expenses. These expenses include broadcast center operating costs, signal transmission expenses (including costs of collecting signals for our local channel offerings), and costs of monitoring, maintaining and insuring our satellites. Also included are engineering expenses associated with deterring theft of our signal.
Subscriber Acquisition Costs. These costs include the cost of set-top receivers and other equipment, commissions we pay to national retailers, independent satellite television retailers, dealers, regional Bell operating companies, and the cost of installation, advertising, marketing and customer call center expenses associated with the acquisition of new subscribers. Set-top receivers leased to new subscribers are capitalized in "Property and Equipment, net" in the Consolidated Balance Sheets and depreciated over their useful lives. The amount of set-top receivers capitalized each period for subscriber acquisitions is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows.
Upgrade and Retention Costs. The majority of upgrade and retention costs . . .
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