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DTV > SEC Filings for DTV > Form 10-Q on 1-Aug-2014All Recent SEC Filings

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Form 10-Q for DIRECTV


1-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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/A for the year ended December 31, 2013 filed with the SEC on June 30, 2014, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 12, 2014, 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 the use of statements that include phrases such as we "believe", "expect", "anticipate", "intend", "plan", "foresee", "project" or other similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make regarding our outlook for 2014 financial results, liquidity and capital resources.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include economic, business, competitive, national or global political, market and regulatory conditions and the following, each of which is described in more detail in our Annual Report on Form 10-K/A for the year ended December 31, 2013:

º •
º Levels of competition are increasing.

º •
º We depend on others to produce programming and programming costs are increasing.

º •
º Increased subscriber churn or subscriber upgrade and retention costs could materially adversely affect our financial performance.

º •
º Our subscriber acquisition costs could materially increase.

º •
º DIRECTV Latin America is subject to various additional risks associated with doing business internationally, which include political and economic instability and foreign currency exchange rate volatility and controls.

º •
º Our ability to keep pace with technological developments is uncertain.

º •
º Our business relies on intellectual property, some of which is owned by third parties, and we may inadvertently infringe patents and proprietary rights of others.

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º Construction or launch delays on satellites could materially adversely affect our revenues and earnings.

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º Our satellites are subject to significant launch and operational risks.

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º The loss of one or more satellites, none of which is currently insured, could materially adversely affect our business and earnings.


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º •
º Satellite programming signals have been stolen and may be stolen in the future, which could result in lost revenues and would cause us to incur incremental operating costs that do not result in subscriber acquisition.

º •
º The ability to maintain FCC licenses and other regulatory approvals is critical to our business.

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º We may have an indemnity obligation to Liberty Media, which is not limited in amount or subject to any cap, that could be triggered if parts of the 2009 transaction between us and Liberty Media or Liberty Media's 2008 transaction with News Corporation are treated as a taxable transaction.

º •
º We rely on network and information systems and other technology and a disruption or failure of such networks, systems or technology as a result of misappropriation of data or other malfeasance, as well as outages, natural disasters, accidental releases of information or similar events, may disrupt our business.

º •
º We face risks arising from the outcome of various legal proceedings.

º •
º Our strategic initiatives may not be successfully implemented, may not elicit the expected customer response in the market and may result in competitive reactions.

º •
º Those and the other factors that are described in more detail in our Annual Report on Form 10-K/A for the year ended December 31, 2013.

In addition, below are risk factors relating to the proposed AT&T merger transaction:

º •
º The value of the stock portion of the merger consideration is subject to changes based on fluctuations in the value of AT&T common stock, and DIRECTV stockholders may receive stock consideration with a value that, at the time received, is less than $66.50 per share of DIRECTV common stock.

º •
º AT&T and DIRECTV may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger.

º •
º Completion of the merger is subject to conditions and if these conditions are not satisfied or waived, the merger will not be completed.

º •
º In order to complete the merger, AT&T and DIRECTV must make certain governmental filings and obtain certain governmental authorizations, and if such filings and authorizations are not made or granted or are granted with conditions, completion of the merger may be jeopardized or the anticipated benefits of the merger could be reduced.

º •
º AT&T's and DIRECTV's business relationships may be subject to disruption due to uncertainty associated with the merger.

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º The merger agreement limits DIRECTV's ability to pursue alternatives to the merger and may discourage other companies from trying to acquire DIRECTV for greater consideration than what AT&T has agreed to pay.

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º Failure to complete the merger could negatively impact the stock price and the future business and financial results of AT&T and DIRECTV.

º •
º The shares of AT&T common stock to be received by DIRECTV stockholders as a result of the merger will have rights different from the shares of DIRECTV common stock.


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º •
º After the merger, DIRECTV stockholders will have a significantly lower ownership and voting interest in AT&T than they currently have in DIRECTV and will exercise less influence over management.

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may occur and it is not possible for us to predict them all. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future development or otherwise, except as required by law.

CONTENTS

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 Quarterly Report. Information in this section is organized as follows:

º •
º Summary Data

º •
º Business Overview

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º Significant Events Affecting the Comparability of the Results of Operations

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º Key Terminology

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º Results of Operations

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º Liquidity and Capital Resources

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º Contractual Obligations

º •
º Contingencies

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º Certain Relationships and Related-Party Transactions

º •
º Critical Accounting Estimates


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                                    DIRECTV

                                  SUMMARY DATA

                                  (Unaudited)

                                                      Three Months          Six Months
                                                     Ended June 30,       Ended June 30,
                                                     2014      2013       2014       2013
                                                            (Dollars in Millions,
                                                          Except Per Share Amounts)
Consolidated Statements of Operations Data:
Revenues                                           $  8,109   $ 7,700   $ 15,964   $ 15,280
Total operating costs and expenses                    6,685     6,350     13,313     12,688


Operating profit                                      1,424     1,350      2,651      2,592
Interest income                                          12        19         25         41
Interest expense                                       (230 )    (219 )     (462 )     (436 )
Other, net                                               35       (75 )       92        (37 )


Income before income taxes                            1,241     1,075      2,306      2,160
Income tax expense                                     (431 )    (414 )     (927 )     (801 )


Net income                                              810       661      1,379      1,359
Less: Net income attributable to noncontrolling
interest                                                 (4 )      (1 )      (12 )       (9 )


Net income attributable to DIRECTV                 $    806   $   660   $  1,367   $  1,350




Basic earnings attributable to DIRECTV per
common share                                       $   1.60   $  1.19   $   2.70   $   2.39
Diluted earnings attributable to DIRECTV per
common share                                       $   1.59   $  1.18   $   2.67   $   2.37
Weighted average number of total common shares
outstanding (in millions):
Basic                                                   504       556        507        565
Diluted                                                 508       561        512        569




                                                June 30,     December 31,
                                                  2014           2013
                                                  (Dollars in Millions)
           Consolidated Balance Sheets Data:
           Cash and cash equivalents            $   2,290   $        2,180
           Total current assets                     5,869            5,953
           Total assets                            22,126           21,905
           Total current liabilities                6,493            6,530
           Long-term debt                          18,439           18,284
           Redeemable noncontrolling interest           -              375
           Total stockholders' deficit             (6,127 )         (6,544 )


º Reference
º should be made to the Notes to the Consolidated Financial Statements.


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                                    DIRECTV

                            SUMMARY DATA-(continued)

                                  (Unaudited)

                                                      Three Months          Six Months
                                                     Ended June 30,       Ended June 30,
                                                     2014      2013       2014       2013
                                                            (Dollars in Millions)
Other Data:
Operating profit before depreciation and
amortization(1)
Operating profit                                   $  1,424   $ 1,350   $  2,651   $  2,592
Add: Depreciation and amortization expense              729       731      1,443      1,409


Operating profit before depreciation and
amortization                                       $  2,153   $ 2,081   $  4,094   $  4,001




Operating profit before depreciation and
amortization margin                                    26.6 %    27.0 %     25.6 %     26.2 %
Cash flow information
Net cash provided by operating activities          $  1,474   $ 1,474   $  3,064   $  3,010
Net cash used in investing activities                  (802 )    (861 )   (1,509 )   (1,679 )
Net cash provided by (used in) financing
activities                                           (1,396 )      73     (1,129 )     (681 )
Free cash flow(2)
Net cash provided by operating activities             1,474     1,474      3,064      3,010
Less: Cash paid for property and equipment             (767 )    (832 )   (1,417 )   (1,580 )
Less: Cash paid for satellites                          (55 )    (116 )     (109 )     (194 )


Free cash flow                                     $    652   $   526   $  1,538   $  1,236


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                                    DIRECTV

                            SUMMARY DATA-(continued)

                                  (Unaudited)

                             Selected Segment Data

                                                                                      Operating Profit
                                                                 Depreciation and      (Loss) Before
                             Percentage of        Operating        Amortization       Depreciation and
                Revenues     Total Revenues     Profit (Loss)         Expense         Amortization(1)
                                                (Dollars in Millions)
Three Months
Ended
June 30,
2014
DIRECTV
U.S.           $    6,272               77.3 % $         1,319   $             429   $            1,748
Sky Brasil          1,011               12.5 %             114                 175                  289
PanAmericana
and Other             778                9.6 %              28                 121                  149

DIRECTV
Latin
America             1,789               22.1 %             142                 296                  438
Sports
Networks,
Eliminations
and Other              48                0.6 %             (37 )                 4                  (33 )


Total          $    8,109              100.0 % $         1,424   $             729   $            2,153




June 30,
2013
DIRECTV
U.S.           $    5,943               77.2 % $         1,241   $             410   $            1,651
Sky Brasil            942               12.2 %              56                 206                  262
PanAmericana
and Other             744                9.7 %              83                 110                  193

DIRECTV
Latin
America             1,686               21.9 %             139                 316                  455
Sports
Networks,
Eliminations
and Other              71                0.9 %             (30 )                 5                  (25 )


Total          $    7,700              100.0 % $         1,350   $             731   $            2,081


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                                    DIRECTV

                            SUMMARY DATA-(continued)

                                  (Unaudited)

                                                                                      Operating Profit
                                                                 Depreciation and      (Loss) Before
                            Percentage of        Operating         Amortization       Depreciation and
               Revenues     Total Revenues     Profit (Loss)         Expense          Amortization(1)
                                                (Dollars in Millions)
Six Months
Ended
June 30,
2014
DIRECTV
U.S.           $  12,359               77.4 % $         2,562   $              855   $            3,417
Sky Brasil         1,950               12.2 %             262                  338                  600
PanAmericana
and Other          1,560                9.8 %            (146 )                243                   97

DIRECTV
Latin
America            3,510               22.0 %             116                  581                  697
Sports
Networks,
Eliminations
and Other             95                0.6 %             (27 )                  7                  (20 )


Total          $  15,964              100.0 % $         2,651   $            1,443   $            4,094




June 30,
2013
DIRECTV
U.S.           $  11,733               76.8 % $         2,356   $              816   $            3,172
Sky Brasil         1,907               12.4 %             210                  363                  573
PanAmericana
and Other          1,507                9.9 %              46                  216                  262

DIRECTV
Latin
America            3,414               22.3 %             256                  579                  835
Sports
Networks,
Eliminations
and Other            133                0.9 %             (20 )                 14                   (6 )


Total          $  15,280              100.0 % $         2,592   $            1,409   $            4,001


º (1)
º Operating profit before depreciation and amortization, which is a financial measure that is not determined in accordance with accounting principles generally accepted in the United States of America, or GAAP, can be calculated by adding amounts under the caption "Depreciation and amortization expense" to "Operating profit." This measure should be used in conjunction with GAAP financial measures and is not presented as an alternative measure of operating results, as determined in accordance with GAAP. Our management and our Board of Directors use operating profit before depreciation and amortization to evaluate the operating performance of our company and our business segments and to allocate resources and capital to business segments. This metric is also used as a measure of performance for incentive compensation purposes and to measure income generated from operations that could be used to fund capital expenditures, service debt or pay taxes. Depreciation and amortization expense primarily represents an allocation to current expense of the cost of historical capital expenditures and for acquired intangible assets resulting from prior business acquisitions. To compensate for the exclusion of depreciation and amortization expense from operating profit, our management and our Board of Directors separately measure and budget for capital expenditures and business acquisitions.

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


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SUMMARY DATA-(continued)

(Unaudited)

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.


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BUSINESS OVERVIEW

DIRECTV, which we sometimes refer to as the Company, we, or us, is a leading provider of digital television entertainment in the United States and Latin America. We operate two direct-to-home, or DTH, business units: DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location and are engaged in acquiring, promoting, selling and distributing digital entertainment programming primarily via satellite to residential and commercial subscribers. In addition, we own and operate two regional sports networks, or RSNs, hold a minority ownership interest in ROOT SPORTS™ Northwest and own a 42% interest in Game Show Network LLC, or GSN, a television network dedicated to game-related programming and Internet interactive game playing. We account for our investments in ROOT SPORTS Northwest and GSN using the equity method of accounting.

º •
º DIRECTV U.S. DIRECTV Holdings LLC and its subsidiaries, which we refer to as DIRECTV U.S., is the largest provider of DTH digital television services and the second largest provider in the multi-channel video programming distribution, or MVPD, industry in the United States. As of June 30, 2014, DIRECTV U.S. had approximately 20.2 million subscribers.

º •
º DIRECTV Latin America. DIRECTV Latin America Holdings, Inc. and its subsidiaries, or DIRECTV Latin America, is a leading provider of DTH digital television services throughout Latin America. DIRECTV Latin America is comprised of: PanAmericana, which provides services in Argentina, Chile, Colombia, Ecuador, Peru, Puerto Rico, Venezuela and certain other countries in the region, and Sky Brasil Servicos Ltda., or Sky Brasil, which is a 93% owned subsidiary. DIRECTV Latin America also includes our 41% equity method investment in Innova, S. de R.L. de C.V., or Sky Mexico, which we include in the PanAmericana segment. As of June 30, 2014, PanAmericana had approximately 6.9 million subscribers, Sky Brasil had approximately 5.6 million subscribers and Sky Mexico had approximately 6.4 million subscribers.

º •
º DIRECTV Sports Networks. DIRECTV Sports Networks LLC and its subsidiaries, or DSN, is comprised primarily of two wholly owned regional sports networks based in Denver, Colorado and Pittsburgh, Pennsylvania, and a regional sports network based in Seattle, Washington in which DSN retains a noncontrolling interest, each of which operates under the brand name ROOT SPORTS. On April 16, 2013, DSN transferred 100% of its interest in a regional sports network based in Seattle, Washington, or DSN Northwest, to NW Sports Net LLC. The Seattle Mariners have a majority interest in NW Sports Net LLC and DSN retains a noncontrolling interest, which we account for using the equity method of accounting. The operating results of DSN are reported as part of the "Sports Networks, Eliminations and Other" reporting segment.

Proposed AT&T Merger Transaction

On May 18, 2014, DIRECTV and AT&T announced that they have entered into a definitive agreement under which DIRECTV will combine with AT&T in a stock-and-cash transaction. The agreement has been approved unanimously by the Boards of Directors of both companies. Subject to the conditions in the merger agreement, at the effective time of the merger, DIRECTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. The merger is subject to approval by DIRECTV shareholders and review by the U.S. Federal Communications Commission, U.S. Department of Justice, and the Instituto Federal


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de Telecomunicaciones in Mexico. The transaction is expected to close within approximately 12 months of signing.

In connection with the proposed combination with AT&T, Inc., DIRECTV has made certain representations, warranties and covenants in the Agreement and Plan of Merger, which was included as Exhibit 2.1 to the Form 8-K filed with the SEC on May 19, 2014 (the "Merger Agreement"), including, among other things, covenants by the Company to conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger and not to take certain actions prior to the closing of the Merger without the prior approval of AT&T.

. . .

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