Add
DTV to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| DTV > SEC Filings for DTV > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
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 Transactions Affecting the Comparability of the Results of
Operations
º •
º Key Terminology
º •
º Executive Overview and Outlook
º •
º Results of Operations
º •
º Liquidity and Capital Resources
º •
º Contractual Obligations
º •
º Off-Balance Sheet Arrangements
º •
º 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,
2008 2007 2006
(Dollars in Millions, Except Per
Share Amounts)
Consolidated Statements of Operations Data:
Revenues $ 19,693 $ 17,246 $ 14,755
Total operating costs and expenses 16,998 14,760 12,398
Operating profit 2,695 2,486 2,357
Interest income 81 111 146
Interest expense (360 ) (235 ) (246 )
Other, net 55 26 42
Income from continuing operations before
income taxes and minority interests 2,471 2,388 2,299
Income tax expense (864 ) (943 ) (866 )
Minority interests in net earnings of
subsidiaries (92 ) (11 ) (13 )
Income from continuing operations 1,515 1,434 1,420
Income from discontinued operations, net of
taxes 6 17 -
Net income $ 1,521 $ 1,451 $ 1,420
Basic earnings per common share:
Income from continuing operations $ 1.36 $ 1.20 $ 1.13
Income from discontinued operations, net of
taxes 0.01 0.01 -
Net income $ 1.37 $ 1.21 $ 1.13
Diluted earnings per common share:
Income from continuing operations $ 1.36 $ 1.20 $ 1.12
Income from discontinued operations, net of
taxes 0.01 0.01 -
Net income $ 1.37 $ 1.21 $ 1.12
Weighted average number of common shares
outstanding (in millions)
Basic 1,110 1,195 1,262
Diluted 1,114 1,202 1,270
|
December 31,
2008 2007
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 2,005 $ 1,083
Total current assets 4,044 3,146
Total assets 16,539 15,063
Total current liabilities 3,585 3,434
Long-term debt 5,725 3,347
Minority interests 103 11
Total stockholders' equity 4,853 6,302
|
THE DIRECTV GROUP, INC.
SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(continued)
Years Ended December 31,
2008 2007 2006
(Dollars in Millions)
Other Data:
Operating profit before depreciation and
amortization (1)
Operating profit $ 2,695 $ 2,486 $ 2,357
Add: Depreciation and amortization expense 2,320 1,684 1,034
Operating profit before depreciation and $ 5,015 $ 4,170 $ 3,391
amortization
Operating profit before depreciation and 25.5 % 24.2 % 23.0 %
amortization margin
Cash flow information
Net cash provided by operating activities $ 3,910 $ 3,645 $ 3,162
Net cash used in investing activities (2,388 ) (2,822 ) (1,536 )
Net cash used in financing activities (600 ) (2,239 ) (2,828 )
Free cash flow (2)
Net cash provided by operating activities $ 3,910 $ 3,645 $ 3,162
Less: Cash paid for property and equipment (2,101 ) (2,523 ) (1,754 )
Less: Cash paid for satellites (128 ) (169 ) (222 )
Free cash flow $ 1,681 $ 953 $ 1,186
|
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.
Operating profit before depreciation and amortization margin is calculated by dividing operating profit before depreciation and amortization by Revenues.
º (2)
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,
2008 2007 2006
(Dollars in Millions)
DIRECTV U.S.
Revenues $ 17,310 $ 15,527 $ 13,744
% of total revenues 87.9 % 90.0 % 93.1 %
Operating profit $ 2,330 $ 2,402 $ 2,348
Add: Depreciation and amortization 2,061 1,448 873
expense
Operating profit before depreciation and $ 4,391 $ 3,850 $ 3,221
amortization
Operating profit margin 13.5 % 15.5 % 17.1 %
Operating profit before depreciation and 25.4 % 24.8 % 23.4 %
amortization margin
Segment assets $ 12,546 $ 12,297 $ 11,687
Capital expenditures 1,765 2,326 1,798
DIRECTV Latin America
Revenues $ 2,383 $ 1,719 $ 1,013
% of total revenues 12.1 % 10.0 % 6.9 %
Operating profit $ 426 $ 159 $ 79
Add: Depreciation and amortization 264 235 165
expense
Operating profit before depreciation and $ 690 $ 394 $ 244
amortization
Operating profit margin 17.9 % 9.2 % 7.8 %
Operating profit before depreciation and 29.0 % 22.9 % 24.1 %
amortization margin
Segment assets $ 3,301 $ 2,456 $ 2,001
Capital expenditures 447 336 178
Corporate and Other
Revenues - - $ (2 )
Operating loss $ (61 ) $ (75 ) $ (70 )
Add: Depreciation and amortization (5 ) 1 (4 )
expense
Operating loss before depreciation and $ (66 ) $ (74 ) $ (74 )
amortization
Segment assets $ 692 $ 310 $ 1,453
Capital expenditures 17 30 -
Total
Revenues $ 19,693 $ 17,246 $ 14,755
Operating profit $ 2,695 $ 2,486 $ 2,357
Add: Depreciation and amortization 2,320 1,684 1,034
expense
Operating profit before depreciation and $ 5,015 $ 4,170 $ 3,391
amortization
Operating profit margin 13.7 % 14.4 % 16.0 %
Operating profit before depreciation and 25.5 % 24.2 % 23.0 %
amortization margin
Total assets $ 16,539 $ 15,063 $ 15,141
Capital expenditures 2,229 2,692 1,976
|
SIGNIFICANT TRANSACTIONS AFFECTING THE COMPARABILITY OF THE RESULTS OF OPERATIONS
Acquisitions
180 Connect. On July 8, 2008, we acquired 100% of 180 Connect's outstanding common stock and exchangeable shares. Simultaneously, in a separate transaction, UniTek USA, LLC acquired 100% of 180 Connect's cable service operating unit and operations in certain of our installation services markets in exchange for satellite installation operations in certain markets and $7 million in cash. These transactions provide us with control over a significant portion of DIRECTV U.S.' home service provider network. We paid $91 million in cash, net of the $7 million we received from UniTek USA, for the acquisition, including the equity purchase price, repayment of assumed debt and related transaction costs.
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 total operating costs and expenses.
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 in total
operating costs and expenses.
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
Hughes Network Systems. In January 2006, we completed the sale of our 50% interest in Hughes Network Systems LLC, or HNS LLC, to SkyTerra, and resolved a working capital adjustment from the prior transaction, in exchange for $110 million in cash, which resulted in our recording in the first quarter of 2006 a gain of $14 million related to the sale in "Other, net" in the Consolidated Statements of Operations.
Other Developments
In addition to the items described above, the following items had a significant effect on the comparability of our operating results and financial position as of and for the years ended December 31, 2008, 2007 and 2006:
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 ended December 31:
Capitalized subscriber leased equipment: 2008 2007 2006
(Dollars in Millions)
Subscriber leased equipment-subscriber acquisitions $ 599 $ 762 $ 599
Subscriber leased equipment-upgrade and retention 537 774 473
Total subscriber leased equipment capitalized $ 1,136 $ 1,536 $ 1,072
Depreciation expense-subscriber leased equipment $ 1,100 $ 645 $ 147
|
Financing Transactions. In May 2008, DIRECTV U.S. issued $1.5 billion in senior notes and amended its senior secured credit facility to include a new $1.0 billion Term Loan C. The senior notes bear interest at a rate of 7.625% and the principal balance is due in May 2016. The Term Loan C currently bears interest at a rate of 5.25% and was issued at a 1% discount. Principal payments on the Term Loan C began on September 30, 2008. The principal is payable in installments with the final installment due in April 2013.
Share Repurchase Program. During 2006, 2007 and 2008 our Board of Directors approved multiple authorizations for the repurchase of a total of $8.2 billion of our common stock, including a $3 billion authorization in May 2008 that was completed in December 2008. Subsequent to December 31, 2008, our Board of Directors authorized the repurchase of an additional $2 billion of our common stock.
The following table sets forth information regarding shares repurchased and retired for the years ended December 31:
2008 2007 2006
(Amounts in Millions, Except Per
Share Amounts)
Total cost of repurchased and retired shares $ 3,174 $ 2,025 $ 2,977
Average price per share 24.12 23.48 16.16
Number of shares repurchased and retired 131 86 184
|
KEY TERMINOLOGY
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
digital video recorder, or 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, telcos, 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 are associated with upgrade efforts for existing subscribers that we believe will result in higher average monthly revenue per subscriber, or ARPU, and lower churn. Our upgrade efforts include subscriber equipment upgrade programs for DVR, HD and HD DVR receivers and local channels, our multiple set-top receiver offer and similar initiatives. Retention costs also include the costs of installing and providing hardware under our movers program for subscribers relocating to a new residence. Set-top receivers leased to existing subscribers under upgrade and retention programs 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 upgrade and retention programs is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows.
General and Administrative Expenses. General and administrative expenses include departmental costs for legal, administrative services, finance, marketing and information technology. These costs also include expenses for bad debt and other operating expenses, such as legal settlements, and gains or losses from the sale or disposal of fixed assets.
Average Monthly Revenue Per Subscriber. We calculate ARPU by dividing average monthly revenues for the period (total revenues during the period divided by the number of months in the period) by average subscribers for the period. We calculate average subscribers for the period by adding the number of subscribers as of the beginning of the period and for each quarter end in the current year or period and dividing by the sum of the number of quarters in the period plus one.
Average Monthly Subscriber Churn. Average monthly subscriber churn represents the number of subscribers whose service is disconnected, expressed as a percentage of the average total number of subscribers. We calculate average monthly subscriber churn by dividing the average monthly number of
disconnected subscribers for the period (total subscribers disconnected, net of reconnects, during the period divided by the number of months in the period) by average subscribers for the period.
Subscriber Count. The total number of subscribers represents the total number of subscribers actively subscribing to our service, including seasonal subscribers, subscribers who are in the process of relocating and commercial equivalent viewing units. In March 2008, we implemented a change in DIRECTV U.S.' commercial pricing and packaging to increase our competitiveness. As a result, during the first quarter of 2008, DIRECTV U.S. made a one-time downward adjustment to the subscriber count of approximately 71,000 subscribers related to commercial equivalent viewing units.
SAC. We calculate SAC, which represents total subscriber acquisition costs stated on a per subscriber basis, by dividing total subscriber acquisition costs for the period by the number of gross new subscribers acquired during the period. We calculate total subscriber acquisition costs for the period by adding together "Subscriber acquisition costs" expensed during the period and the amount of cash paid for equipment leased to new subscribers during the period.
EXECUTIVE OVERVIEW AND OUTLOOK
The United States and the other countries in which we operate are currently undergoing a period of substantial economic uncertainty. A more severe downturn in economic activity could have a detrimental impact on our forecasted revenue, operating margins, net subscriber additions, free cash flow and net income. Please refer to "Risk Factors" in Item 1A for a further discussion of risks which may affect forecasted results or our business generally.
DIRECTV U.S. Segment
The following discussion of revenues and operating results relates to DIRECTV U.S., which generates 88% of our revenues.
Revenues. In 2008, DIRECTV U.S. revenues increased by 11.5% due to a larger subscriber base and a 6.1% increase in ARPU. In 2009, we anticipate revenues will increase in the high single-digit percentage range due to an increase in total subscribers and ARPU growth of about 4%. ARPU increases are expected to be driven primarily by price increases and the higher penetration of advanced products but will be lower than in 2008 due to the ongoing impact of more competitive promotions offered to both new and existing customers, as well as lower revenues in 2009 from the completion of the lease of one of our backup satellites in early 2009. After accounting for churn, our net new subscriber . . .
|
|