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| DTV > SEC Filings for DTV > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following management's discussion and analysis should be read in conjunction with our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on February 27, 2009, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed with the SEC on May 8, 2009 and for the quarter ended June 30, 2009 filed with the SEC on August 7, 2009 and all of our other filings, including Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report.
This Quarterly Report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "estimate," "anticipate," "intend," "plan," "foresee," "project" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical results or from those expressed or implied by the relevant forward- looking statement. We discuss these risks and uncertainties in detail in Part I, Item 1A of our 2008 Form 10-K.
THE DIRECTV GROUP, INC.
SUMMARY DATA
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(Dollars in Millions,
Except Per Share Amounts)
Consolidated Statements of Operations
Data:
Revenues $ 5,465 $ 4,981 $ 15,584 $ 14,379
Total operating costs and expenses 4,780 4,323 13,773 12,263
Operating profit 685 658 1,811 2,116
Interest income 9 27 25 64
Interest expense (101 ) (103 ) (304 ) (248 )
Other, net 10 11 67 29
Income before income taxes 603 593 1,599 1,961
Income tax expense (219 ) (195 ) (585 ) (712 )
Net income 384 398 1,014 1,249
Less: Net income attributable to
noncontrolling interest (18 ) (35 ) (40 ) (60 )
Net income attributable to The DIRECTV
Group, Inc. $ 366 $ 363 $ 974 $ 1,189
Basic earnings attributable to The DIRECTV
Group, Inc. per common share $ 0.38 $ 0.33 $ 0.97 $ 1.05
Diluted earnings attributable to The
DIRECTV Group, Inc. per common share 0.37 0.33 0.97 1.05
Weighted average number of common shares
outstanding (in millions)
Basic 973 1,106 999 1,131
Diluted 977 1,111 1,003 1,136
September 30, 2009 December 31, 2008
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 3,293 $ 2,005
Total current assets 5,476 4,044
Total assets 17,627 16,539
Total current liabilities 4,269 3,585
Long-term debt 6,591 5,725
Redeemable noncontrolling interest 325 325
Total stockholders' equity 4,094 4,631
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THE DIRECTV GROUP, INC.
SUMMARY DATA-(continued)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(Dollars in Millions,
Except Per Share Amounts)
Other Data:
Operating profit before depreciation and
amortization(1)
Operating profit $ 685 $ 658 $ 1,811 $ 2,116
Add: Depreciation and amortization
expense 663 594 2,008 1,675
Operating profit before depreciation and
amortization $ 1,348 $ 1,252 $ 3,819 $ 3,791
Operating profit before depreciation and
amortization margin(1) 24.7 % 25.1 % 24.5 % 26.4 %
Cash flow information
Net cash provided by operating activities $ 1,158 $ 868 $ 3,198 $ 2,821
Net cash used in investing activities (532 ) (634 ) (1,567 ) (1,738 )
Net cash (used in) provided by financing
activities 395 (1,083 ) (343 ) 822
Free cash flow(2)
Net cash provided by operating activities $ 1,158 $ 868 $ 3,198 $ 2,821
Less: Cash paid for property and
equipment (506 ) (521 ) (1,508 ) (1,480 )
Less: Cash paid for satellites (9 ) (15 ) (40 ) (92 )
Free cash flow $ 643 $ 332 $ 1,650 $ 1,249
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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, for
share repurchase programs 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 DATA-(continued)
(Unaudited)
Selected Segment Data
Corporate
DIRECTV DIRECTV and
U.S. Latin America Other Total
(Dollars in Millions)
Three Months Ended:
September 30, 2009
Revenues $ 4,703 $ 761 $ 1 $ 5,465
% of total revenue 86.1 % 13.9 % - 100.0 %
Operating profit (loss) $ 611 $ 103 $ (29 ) $ 685
Add: Depreciation and amortization
expense 568 96 (1 ) 663
Operating profit (loss) before
depreciation and amortization $ 1,179 $ 199 $ (30 ) $ 1,348
Operating profit before depreciation
and amortization margin 25.1 % 26.1 % N/A 24.7 %
Capital expenditures $ 357 $ 158 $ - $ 515
September 30, 2008
Revenues $ 4,324 $ 658 $ (1 ) $ 4,981
% of total revenue 86.8 % 13.2 % - 100.0 %
Operating profit (loss) $ 532 $ 142 $ (16 ) $ 658
Add: Depreciation and amortization
expense 528 66 - 594
Operating profit (loss) before
depreciation and amortization $ 1,060 $ 208 $ (16 ) $ 1,252
Operating profit before depreciation
and amortization margin 24.5 % 31.6 % N/A 25.1 %
Capital expenditures $ 418 $ 110 $ 8 $ 536
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THE DIRECTV GROUP, INC.
SUMMARY DATA-(concluded)
(Unaudited)
DIRECTV U.S. DIRECTV Latin America Corporate and Other Total
(Dollars in Millions)
Nine Months
Ended:
September 30,
2009
Revenues $ 13,545 $ 2,039 $ - $ 15,584
% of total
revenue 86.9 % 13.1 % - 100.0 %
Operating
profit (loss) $ 1,660 $ 217 $ (66 ) $ 1,811
Add:
Depreciation
and
amortization
expense 1,750 261 (3 ) 2,008
Operating
profit (loss)
before
depreciation
and
amortization $ 3,410 $ 478 $ (69 ) $ 3,819
Operating
profit before
depreciation
and
amortization
margin 25.2 % 23.4 % N/A 24.5 %
Capital
expenditures $ 1,142 $ 405 $ 1 $ 1,548
September 30,
2008
Revenues $ 12,569 $ 1,811 $ (1 ) $ 14,379
% of total
revenue 87.4 % 12.6 % - 100.0 %
Operating
profit (loss) $ 1,842 $ 322 $ (48 ) $ 2,116
Add:
Depreciation
and
amortization
expense 1,493 185 (3 ) 1,675
Operating
profit (loss)
before
depreciation
and
amortization $ 3,335 $ 507 $ (51 ) $ 3,791
Operating
profit before
depreciation
and
amortization
margin 26.5 % 28.0 % N/A 26.4 %
Capital
expenditures $ 1,240 $ 322 $ 10 $ 1,572
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BUSINESS OVERVIEW
The DIRECTV Group, Inc. is a leading provider of digital television entertainment in the United States and Latin America. Our two business segments, DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location, acquire, promote, sell and distribute digital entertainment programming via satellite to residential and commercial subscribers.
DIRECTV U.S. DIRECTV Holdings LLC and its subsidiaries, or DIRECTV U.S., is the largest provider of direct-to-home, or DTH, digital television services and the second largest provider in the multi-channel video programming distribution industry in the United States. As of September 30, 2009, DIRECTV U.S. had approximately 18.4 million subscribers.
DIRECTV U.S. currently broadcasts from a fleet of eleven geosynchronous satellites, including ten owned satellites and one leased satellite. DIRECTV 12 is under construction and is expected to be ready for launch in the fourth quarter of 2009.
DIRECTV Latin America. DIRECTV Latin America is a leading provider of DTH digital television services throughout Latin America. DTVLA is comprised of PanAmericana, which provides services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and certain other countries in the region through our wholly-owned subsidiary, DIRECTV Latin America, LLC, or DLA LLC, our 74% owned subsidiary Sky Brasil Servicos Ltda., which we refer to as Sky Brazil, and our 41% equity method investment in Innova, S. de R.L. de C.V., or Sky Mexico. As of September 30, 2009, PanAmericana had approximately 2.5 million subscribers, Sky Brazil had approximately 1.8 million subscribers and Sky Mexico had approximately 1.8 million subscribers.
SIGNIFICANT TRANSACTIONS
Financing Transactions
In September 2009, DIRECTV U.S. issued $1 billion in five year 4.750% senior notes due in 2014 at a 0.3% discount resulting in $997 million of proceeds. DIRECTV U.S. also issued $1 billion in 10 year 5.875% senior notes due in 2019 at a 0.7% discount resulting in $993 million of proceeds.
On September 22, 2009, DIRECTV U.S. purchased, pursuant to a tender offer, $583 million of its then outstanding $910 million 8.375% senior notes at a price of 103.125% plus accrued and unpaid interest, for a total of $603 million. On September 23, 2009, DIRECTV U.S. exercised its right to redeem the remaining $327 million of the 8.375% senior notes at a price of 102.792% plus accrued and unpaid interest. DIRECTV U.S. redeemed the remaining 8.375% senior notes on October 23, 2009 for a total of $339 million.
The purchase of a portion of our 8.375% senior notes resulted in a third quarter of 2009 pre-tax charge of $23 million, $14 million after tax, of which $18 million resulted from the premium paid for redemption of our 8.375% senior notes and $5 million resulted from the write-off of deferred debt issuance costs and other transaction costs. The charge was recorded in "Other, net" in our Consolidated Statements of Operations. As a result of the redemption of the remaining 8.375% senior notes, we will record a pre-tax charge of $11 million in the fourth quarter of 2009.
Venezuela Exchange Controls
We are required to obtain Venezuelan government approval to exchange Venezuelan bolivars into U.S. dollars at the official rate of 2.15 Venezuelan bolivars per U.S. dollar. Alternatively, a legal parallel exchange process exists, however the rates implied by transactions in the parallel market are significantly higher than the official rate (recently 5 to 6 bolivars per U.S. dollar). The official approval
process has been delayed in recent periods and our Venezuelan subsidiary has relied on the parallel exchange process to settle U.S. dollar obligations and to repatriate accumulated cash balances during 2009. As a result, we recognized a $48 million charge for the three months ended September 30, 2009 and a $168 million charge for the nine months ended September 30, 2009 to "General and administrative expense" in the Consolidated Statements of Operations in connection with the exchange of accumulated Venezuelan cash balances to U.S. dollars in the parallel exchange process. See "Liquidity and Capital Resources" below for additional information.
Sky Brazil Functional Currency
Based on cumulatively significant changes in economic facts and circumstances, we have determined that the local Brazilian currency should be the functional currency of Sky Brazil for purposes of financial statement translation beginning in the second quarter of 2009. As a result of this change in functional currency, changes in exchange rates will result in gain or loss, which will be recorded in "Other, net" in the Consolidated Statements of Operations related to the revaluation of U.S. dollar denominated monetary assets and liabilities, such as cash deposits, notes payable and capital lease obligations held by Sky Brazil. During the third quarter of 2009, we recorded a net foreign currency transaction gain of $19 million in "Other, net" in the Consolidated Statements of Operations related to U.S. dollar denominated monetary assets and liabilities held by Sky Brazil. During the nine months September 30, 2009, we recorded a net foreign currency transaction gain of $57 million in "Other, net" in the Consolidated Statements of Operations related to U.S. dollar denominated monetary assets and liabilities held by Sky Brazil.
Liberty Entertainment Inc. Merger Transaction
On May 3, 2009, The DIRECTV Group, Liberty Media, Liberty Entertainment, Inc., or LEI, and certain subsidiaries of The DIRECTV Group entered into an agreement and plan of merger, which we refer to as the "merger agreement", which, if consummated, will result in the creation of a new public holding company named "DIRECTV" which we refer to as "Holdings", that will own The DIRECTV Group and LEI. Holdings will be owned by the holders of The DIRECTV Group common stock and the holders of LEI common stock immediately prior to the mergers contemplated by the merger agreement.
As a necessary step to the mergers contemplated by the merger agreement, Liberty Media is planning to execute a split-off transaction that would result in the redemption of 90% of the outstanding shares of both series of its Liberty Entertainment common stock in exchange for all of the outstanding shares of two series of common stock of LEI. LEI will hold Liberty Media's entire interest in The DIRECTV Group (currently approximately 57%), 100% of Liberty Sports Holdings LLC, 65% of Game Show Network, LLC and approximately $80 million in cash and cash equivalents, together with approximately $2 billion of indebtedness and a related equity collar. The split-off transaction is conditioned on the approval of the holders of Liberty's Liberty Entertainment common stock.
Costs incurred to complete the transaction, including legal, accounting, financial printing and investment banking fees, will be expensed as incurred. The exchange ratio of LEI common stock to The DIRECTV Group common stock was determined in a manner such that LEI stockholders as a group will receive a premium in the form of a larger economic interest in Holdings than would have been otherwise determined based on the relative fair values of The DIRECTV Group and LEI. This premium, calculated as the fair value of the economic interest to be distributed to LEI stockholders in excess of the fair value of the assets and liabilities of LEI, will be expensed as a disproportionate distribution upon completion of the mergers. In addition, as part of the mergers, Holdings will grant common stock options and SARs to replace the stock based awards of LEI. Pursuant to business
combination accounting standards, any incremental fair value of the replacement awards over the fair value of the replaced LEI awards must also be expensed. Had the merger been completed on September 30, 2009, we estimate that Holdings would have recorded an expense of approximately $289 million on that date for the costs of the transaction, the premium to LEI stockholders, and the incremental fair value of the stock based awards. However, we anticipate the actual amounts to be recorded will change as they will be determined based on acquisition date fair values.
For additional information regarding the proposed merger transactions, refer to Amendment No. 5 to Holdings' Registration Statement on Form S-4 filed with the SEC on October 20, 2009, which has been declared effective. Assuming the receipt of the requisite stockholder approvals and satisfaction of all other conditions, the proposed transactions are expected to close after the meetings of the respective stockholders of Liberty Media and The DIRECTV Group to be held on November 19, 2009.
Lease Program
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
implemented in March 2006 for each of the periods presented:
Three Months Nine Months
Ended Ended
September 30, September 30,
Capitalized subscriber leased equipment: 2009 2008 2009 2008
(Dollars in Millions)
Subscriber leased equipment-subscriber acquisitions $ 136 $ 151 $ 445 $ 432
Subscriber leased equipment-upgrade and retention 95 128 321 373
Total subscriber leased equipment capitalized $ 231 $ 279 $ 766 $ 805
Depreciation expense-subscriber leased equipment $ 335 $ 287 $ 1,012 $ 789
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KEY TERMINOLOGY
The following key terminology is 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 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. Revenues are reported net of customer credits and discounted promotions.
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.
. . .
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