10-Q 1 a2225634z10-q.htm 10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission file number 1-34554

DIRECTV GROUP HOLDINGS, LLC
(successor in interest to DIRECTV)
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)
  26-4772533
(I.R.S. Employer Identification No.)

2260 East Imperial Highway
El Segundo, California

(Address of principal executive offices)

 

90245
(Zip Code)

(310) 964-5000
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of July 24, 2015, the registrant had outstanding 504,514,734 shares of common stock.

   


Table of Contents


DIRECTV

TABLE OF CONTENTS

 
  Page No.

Part I—Financial Information (Unaudited)

   

Item 1. Financial Statements

 
 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014

 
2

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014

 
3

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

 
4

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

 
5

Notes to the Consolidated Financial Statements

 
6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 
40

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 
69

Item 4. Controls and Procedures

 
69

Part II—Other Information

 
 

Item 1. Legal Proceedings

 
70

Item 1A. Risk Factors

 
71

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 
71

Item 6. Exhibits

 
72

Signatures

 
73

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DIRECTV

PART I—FINANCIAL INFORMATION (UNAUDITED)

ITEM 1.    FINANCIAL STATEMENTS

        This Form 10-Q has not been reviewed by an independent accountant using professional review standards and procedures, although such a review is required by Rule 10-01(d) of Regulation S-X. The independent accountant previously engaged by DIRECTV is no longer independent as a result of the acquisition of DIRECTV by AT&T Inc. on July 24, 2015. An amendment to this Form 10-Q is expected to be filed once a review has been completed.


CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
 
 
2015
 
2014
 
2015
 
2014
 
 
  (Dollars in Millions,
Except Per Share Amounts)

 

Revenues

  $ 8,441   $ 8,109   $ 16,584   $ 15,964  

Operating costs and expenses

                         

Costs of revenues, exclusive of depreciation and amortization expense

                         

Broadcast programming and other

    3,780     3,498     7,356     6,881  

Subscriber service expenses

    596     574     1,177     1,125  

Broadcast operations expenses

    118     107     235     204  

Selling, general and administrative expenses, exclusive of depreciation and amortization expense

                         

Subscriber acquisition costs

    893     898     1,781     1,725  

Upgrade and retention costs

    344     362     694     683  

General and administrative expenses

    600     517     1,114     971  

Venezuelan currency devaluation charge

                281  

Depreciation and amortization expense

    721     729     1,451     1,443  

Total operating costs and expenses

    7,052     6,685     13,808     13,313  

Operating profit

    1,389     1,424     2,776     2,651  

Interest income

    24     12     46     25  

Interest expense

    (234 )   (230 )   (479 )   (462 )

Other, net

    25     35     32     92  

Income before income taxes

    1,204     1,241     2,375     2,306  

Income tax expense

    (454 )   (431 )   (895 )   (927 )

Net income

    750     810     1,480     1,379  

Less: Net income attributable to noncontrolling interest

    (3 )   (4 )   (3 )   (12 )

Net income attributable to DIRECTV

  $ 747   $ 806   $ 1,477   $ 1,367  

Basic earnings attributable to DIRECTV per common share

  $ 1.48   $ 1.60   $ 2.93   $ 2.70  

Diluted earnings attributable to DIRECTV per common share

  $ 1.47   $ 1.59   $ 2.91   $ 2.67  

Weighted average number of common shares outstanding (in millions):

                         

Basic

    504     504     504     507  

Diluted

    508     508     508     512  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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DIRECTV

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
 
 
 
2015
 
2014
 
2015
 
2014
 
 
  (Dollars in Millions)
 

Net income

  $ 750   $ 810   $ 1,480   $ 1,379  

Other comprehensive income (loss), net of taxes:

                         

Cash flows hedges:

                         

Unrealized gains (losses) arising during the period

    83     6     (38 )   (1 )

Reclassification adjustments included in net income

    (74 )   (28 )   20     (36 )

Foreign currency translation adjustments

    16     32     (116 )   71  

Other comprehensive income (loss)

    25     10     (134 )   34  

Comprehensive income

    775     820     1,346     1,413  

Comprehensive (income) loss attributable to noncontrolling interest

    (8 )   (8 )   10     (19 )

Comprehensive income attributable to DIRECTV

  $ 767   $ 812   $ 1,356   $ 1,394  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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DIRECTV

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
 
June 30,
2015
 
December 31,
2014
 
 
  (Dollars in Millions,
Except Share Data)

 

ASSETS

             

Current assets

             

Cash and cash equivalents

  $ 5,061   $ 4,635  

Accounts receivable, net of allowances of $115 and $109

    2,754     2,800  

Inventories

    425     299  

Deferred income taxes

    65     68  

Prepaid expenses and other

    777     1,017  

Total current assets

    9,082     8,819  

Satellites, net

    3,010     3,040  

Property and equipment, net

    6,477     6,721  

Goodwill

    3,885     3,929  

Intangible assets, net

    946     994  

Investments and other assets

    1,921     1,956  

Total assets

  $ 25,321   $ 25,459  

LIABILITIES AND STOCKHOLDERS' DEFICIT

             

Current liabilities

             

Accounts payable and accrued liabilities

  $ 4,795   $ 5,048  

Unearned subscriber revenues and deferred credits

    572     584  

Current debt

    2,355     1,327  

Total current liabilities

    7,722     6,959  

Long-term debt

    17,157     19,485  

Deferred income taxes

    1,624     1,726  

Other liabilities and deferred credits

    2,281     2,117  

Commitments and contingencies

             

Stockholders' deficit

             

Common stock and additional paid-in capital—$0.01 par value, 3,950,000,000 shares authorized, 504,511,567 and 502,733,342 shares issued and outstanding of common stock at June 30, 2015 and December 31, 2014, respectively

    3,645     3,613  

Accumulated deficit

    (6,931 )   (8,408 )

Accumulated other comprehensive loss

    (552 )   (418 )

Total DIRECTV stockholders' deficit

    (3,838 )   (5,213 )

Noncontrolling interest

    375     385  

Total stockholders' deficit

    (3,463 )   (4,828 )

Total liabilities and stockholders' deficit

  $ 25,321   $ 25,459  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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DIRECTV

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
 
Six Months
Ended
June 30,
 
 
 
2015
 
2014
 
 
  (Dollars in Millions)
 

Cash Flows From Operating Activities

             

Net income

  $ 1,480   $ 1,379  

Adjustments to reconcile net income to net cash provided by operating activities:

             

Depreciation and amortization expense

    1,451     1,443  

Venezuelan currency devaluation charge

        281  

Amortization of deferred revenues and deferred credits

    (23 )   (24 )

Share-based compensation expense

    53     45  

Equity in earnings from unconsolidated affiliates

    (57 )   (78 )

Net foreign currency transaction loss (gain)

    64     (11 )

Dividends received

    7      

Net losses (gains) from sale of investments

    5     (17 )

Deferred income taxes

    94     115  

Excess tax benefit from share-based compensation

    (31 )   (22 )

Other

    14     45  

Change in other operating assets and liabilities:

             

Accounts receivable

    65     133  

Inventories

    (110 )   (29 )

Prepaid expenses and other

    304     122  

Accounts payable and accrued liabilities

    (211 )   (342 )

Unearned subscriber revenue and deferred credits

    2     48  

Other, net

    131     (24 )

Net cash provided by operating activities

    3,238     3,064  

Cash Flows From Investing Activities

             

Cash paid for property and equipment

    (1,251 )   (1,417 )

Cash paid for satellites

    (131 )   (109 )

Cash paid for short-term investments

    (53 )    

Investment in companies, net of cash acquired

    (23 )   (8 )

Proceeds from sale of investments

    2     29  

Other, net

    (4 )   (4 )

Net cash used in investing activities

    (1,460 )   (1,509 )

Cash Flows From Financing Activities

             

Issuance of commercial paper (maturity 90 days or less), net

        25  

Proceeds from short-term borrowings

        270  

Repayment of short-term borrowings

        (235 )

Proceeds from long-term debt

    20     1,329  

Debt issuance costs

        (7 )

Repayment of long-term debt

    (1,255 )   (1,026 )

Repayment of other long-term obligations

    (51 )   (34 )

Common shares repurchased and retired

        (1,386 )

Stock options exercised

    9     10  

Taxes paid in lieu of shares issued for share-based compensation

    (65 )   (57 )

Excess tax benefit from share-based compensation

    31     22  

Other, net

        (40 )

Net cash used in financing activities

    (1,311 )   (1,129 )

Effect of exchange rate changes on Venezuelan cash and cash equivalents

    (41 )   (316 )

Net increase in cash and cash equivalents

    426     110  

Cash and cash equivalents at beginning of the period

    4,635     2,180  

Cash and cash equivalents at end of the period

  $ 5,061   $ 2,290  

Supplemental Cash Flow Information

             

Cash paid for interest

  $ 412   $ 413  

Cash paid for income taxes

    384     767  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of Business and Basis of Presentation

        DIRECTV, which we also 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 locations 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, and also own non-controlling interests in two others, ROOT SPORTS™ Northwest and ROOT SPORTS Southwest (our joint venture with AT&T Inc.). We 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 investment in ROOT SPORTS Northwest, ROOT SPORTS Southwest and GSN using the equity method of accounting.

    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 industry in the United States.

    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 and Other segment.

    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 two regional sports networks based in Seattle, Washington and Houston, Texas in which DSN retains a noncontrolling interest, each of which operates under the brand name ROOT SPORTS. In the fourth quarter of 2014, we acquired a noncontrolling interest in Houston Sports Holdings, LLC, or HSH, the regional sports network based in Houston, Texas. The operating results of DSN are reported as part of the "Sports Networks, Eliminations and Other" reporting segment.

        On July 24, 2015, DIRECTV completed a merger transaction under which DIRECTV merged into Steam Merger Sub, LLC, a wholly-owned direct subsidiary of AT&T Inc., or AT&T. Following the merger, Steam Merger Sub, LLC (a successor in interest to DIRECTV) was renamed DIRECTV Group Holdings, LLC.

        We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. In the opinion of management, all adjustments (consisting only of normal recurring items) that are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2014 filed with the SEC on June 4, 2015, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

with the SEC on May 8, 2015, 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.

        We prepare our consolidated financial statements in conformity with GAAP, which requires us to make estimates and assumptions that affect amounts reported herein. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, our actual results reported in future periods may be affected by changes in those estimates.


Note 2: New Accounting Standards

        Revenue Recognition.    In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09), which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 2017, following the July 2015 approval of a one-year deferral of the effective date by the FASB. We continue to evaluate the impact of the new standard and available adoption methods.

        Long-Term Debt and Debt Issuance Costs.    In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which will result in the reclassification of debt issuance costs from "Other Assets" to inclusion as a reduction of our reportable "Long-Term Debt" balance on our consolidated balance sheets. ASU 2015-03 becomes effective January 1, 2016, subject to early adoption, and will require full retrospective application. We do not expect this new standard to have a material impact on our consolidated balance sheets.


Note 3: Goodwill

        The following table sets forth changes in the carrying amounts of "Goodwill" in the Consolidated Balance Sheets by reportable segment for the six months ended June 30, 2015:

 
   
 
DIRECTV Latin
America
   
   
 
 
   
 
Sports
Networks,
Eliminations
and Other
   
 
 
 
DIRECTV
U.S.
 
Sky
Brasil
 
PanAmericana
and Other
 
Total
 
 
  (Dollars in Millions)
 

Balance as of January 1, 2015

  $ 3,191   $ 305   $ 211   $ 222   $ 3,929  

Sky Brasil foreign currency translation adjustment

        (44 )           (44 )

Balance as of June 30, 2015

  $ 3,191   $ 261   $ 211   $ 222   $ 3,885  

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


Note 4: Debt

        The following table sets forth our outstanding debt as of:

 
 
June 30,
2015
 
December 31,
2014
 
 
  (Dollars in Millions)
 

Current debt

             

Current portion of long-term debt

  $ 2,250   $ 1,200  

Current portion of borrowings under BNDES financing facility

    105     127  

Long-term debt

             

Senior notes

    17,053     19,327  

Borrowings under BNDES financing facility

    73     140  

Borrowings under Desenvolve SP financing facility

    31     18  

Total debt

  $ 19,512   $ 20,812  

        The amount of interest accrued related to our outstanding debt was $322 million at June 30, 2015 and $278 million at December 31, 2014.

Senior Notes

    Six Months Ended June 30, 2015 Financing Transactions

        In March 2015, DIRECTV U.S. repaid the 3.550% senior notes due in 2015, or the 2015 Notes, for the unpaid principal balance of $1,200 million, together with accrued and unpaid interest as of that date, as required by the indenture for the 2015 Notes.

    Six Months Ended June 30, 2014 Financing Transactions

        On March 17, 2014, DIRECTV U.S. issued, pursuant to a registration statement, $1,250 million in aggregate principal of 4.450% senior notes due in 2024 with proceeds, net of an original issue discount, of $1,245 million. We incurred $7 million of debt issuance costs in connection with this transaction.

        On March 20, 2014, we exercised our early redemption right under the indenture of the 4.750% senior notes due in 2014 ("the 2014 Notes") effective April 24, 2014. The redemption price was based on the remaining scheduled payments of principal and interest using a discount rate equal to the Treasury Rate (as defined in the indenture governing the 2014 Notes) plus 40 basis points, together with accrued and unpaid interest as of April 24, 2014. The aggregate principal amount of the 2014 Notes outstanding on March 20, 2014 was $1,000 million and we made a cash payment of $1,022 million in the second quarter of 2014 to redeem such Notes.

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

        The following table sets forth our outstanding senior notes:

 
 
Principal amount
 
Carrying value, net of
unamortized original
issue discounts
 
 
 
June 30,
2015
 
June 30,
2015
 
December 31,
2014
 
 
  (Dollars in Millions)
 

3.550% senior notes due in 2015

  $   $   $ 1,200  

3.125% senior notes due in 2016

    750     750     750  

3.500% senior notes due in 2016

    1,500     1,500     1,499  

2.400% senior notes due in 2017

    1,250     1,249     1,249  

1.750% senior notes due in 2018

    750     746     746  

5.875% senior notes due in 2019

    1,000     997     996  

5.200% senior notes due in 2020

    1,300     1,299     1,299  

4.600% senior notes due in 2021

    1,000     1,000     999  

5.000% senior notes due in 2021(1)

    1,500     1,507     1,506  

3.800% senior notes due in 2022(1)

    1,500     1,521     1,520  

2.750% senior notes due in 2023(2)

    557     555     602  

4.450% senior notes due in 2024(1)

    1,250     1,288     1,285  

3.950% senior notes due in 2025

    1,200     1,192     1,192  

4.375% senior notes due in 2029(2)

    1,179     1,167     1,157  

5.200% senior notes due in 2033(2)

    550     548     543  

6.350% senior notes due in 2040

    500     500     500  

6.000% senior notes due in 2040

    1,250     1,236     1,236  

6.375% senior notes due in 2041

    1,000     1,000     1,000  

5.150% senior notes due in 2042

    1,250     1,248     1,248  

Total senior notes

  $ 19,286   $ 19,303   $ 20,527  

(1)
The carrying values as of June 30, 2015 and December 31, 2014 include the following fair value adjustments, respectively: increases of $11 million and $10 million for the 5.000% senior notes due in 2021, increases of $21 million and $20 million for the 3.800% senior notes due in 2022 and increases of $42 million and $39 million for the 4.450% senior notes due in 2024.

(2)
These amounts reflect the remeasurement of the aggregate principal and carrying value of our foreign currency denominated senior notes to U.S. dollars based on the exchange rates in effect at each of the dates presented.

        The fair value of our senior notes was approximately $20,154 million at June 30, 2015 and $22,044 million at December 31, 2014. We calculated the fair values based on quoted market prices of our senior notes, which is a Level 1 input under accounting guidance for fair value measurements of assets and liabilities.

        All of our senior notes were issued by DIRECTV Holdings LLC and DIRECTV Financing Co., Inc., or the Co-Issuers, and have been registered under the Securities Act of 1933, as amended.

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

        The principal amount of our senior notes which have not been redeemed mature as follows: $2,250 million in 2016, $1,250 million in 2017, $750 million in 2018, $1,000 million in 2019, $1,300 million in 2020 and $12,736 million thereafter.

Revolving Credit Facilities and Commercial Paper

        Concurrent with the AT&T merger transaction close on July 24, 2015, we terminated our revolving credit facilities and commercial paper program which included the ability for us to borrow up to $2.5 billion.

Covenants and Restrictions

        The senior notes include covenants that limit DIRECTV U.S.'s and its subsidiaries' ability to, among other things, (i) incur certain liens, (ii) engage in certain sale leaseback transactions, and (iii) merge, consolidate or sell substantially all of its assets. If DIRECTV U.S. and its subsidiaries fail to comply with these covenants, all or a portion of its borrowings under the senior notes could become immediately payable. The senior notes provide that the borrowings may be required to be prepaid if certain change-in-control events, coupled with a ratings decline, occur.

        DIRECTV Group Holdings, LLC Guarantors.    Following the close of the AT&T merger transaction discussed in Note 1 of the Notes to the Consolidated Financial Statements, DIRECTV Group Holdings, LLC assumed as the successor of DIRECTV the guarantee of the senior notes on the terms set forth in the respective Supplemental Indentures and the Guarantee, dated as of July 24, 2015, with respect to each Supplemental Indenture (collectively, the "Guarantees"). For further information, refer to the Form 8-K filed with the SEC on July 24, 2015 by AT&T Inc.

        DIRECTV Group Holdings, LLC guarantees all of the senior notes outstanding, jointly and severally with DIRECTV Holdings, LLC's material domestic subsidiaries. DIRECTV Group Holdings LLC unconditionally guarantees that the principal and interest on the respective senior notes will be paid in full when due and that the obligations of the Co-Issuers to the holders of the outstanding senior notes will be performed.

        As a result of the Guarantees, holders of the senior notes may have the benefit of DIRECTV Group Holdings, LLC 's interests in the assets and related earnings of our operations that are not held through DIRECTV Holdings LLC and its subsidiaries. Those operations are primarily our DTH digital television services throughout Latin America which are held by DIRECTV Latin America and our regional sports networks which are held by DSN. However, the subsidiaries that own and operate the DIRECTV Latin America business and the regional sports networks have not guaranteed the senior notes.

        The Guarantees are unsecured senior obligations of DIRECTV Group Holdings, LLC and rank equally in right of payment with all of DIRECTV Group Holdings, LLC's existing and future senior debt and rank senior in right of payment to all of DIRECTV Group Holdings, LLC 's future subordinated debt, if any. The Guarantees are effectively subordinated to all existing and future secured obligations, if any, of DIRECTV Group Holdings, LLC to the extent of the value of the assets securing the obligations. DIRECTV Group Holdings, LLC is not subject to the covenants contained in the indentures governing the senior notes and the Guarantees will terminate and be released on the terms set forth in each of the indentures.

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Desenvolve SP Financing Facility

        In the second quarter of 2014, Sky Brasil entered into a Brazilian real denominated financing facility with Desenvolve SP, an agency created by the Sao Paulo State Government for economic development, under which Sky Brasil may borrow funds for the construction of a satellite and broadcast facility. Each borrowing under the facility, including accrued interest, will be repaid in a single installment five years from the date of such borrowing. The financing facility is secured by a third party bank guarantee. As of June 30, 2015, Sky Brasil had borrowings of R$98 million ($31 million) under the facility bearing interest of 2.5% per year. As of December 31, 2014, Sky Brasil had borrowings of R$48 million ($18 million) under the facility bearing interest of 2.5% per year. The U.S. dollar amounts reflect the conversion of the Brazilian real denominated amounts into U.S. dollars based on the exchange rates of R$3.10 / $1.00 and R$2.66 / $1.00 as of June 30, 2015 and December 31, 2014, respectively.

        Borrowings under the Desenvolve SP facility mature as follows: R$48 million ($15 million) in 2019 and R$50 million ($16 million) in 2020.

BNDES Financing Facility

        In March 2013, Sky Brasil entered into a Brazilian real denominated financing facility with Banco Nacional de Desenvolvimento Econômico e Social, or BNDES, a government owned bank in Brazil, under which Sky Brasil may borrow funds for the purchase of set-top receivers. As of June 30, 2015, Sky Brasil had borrowings of R$552 million ($178 million) outstanding under the BNDES facility bearing interest at a weighted-average rate of 5.40% per year. As of December 31, 2014, Sky Brasil had borrowings of R$710 million ($267 million) outstanding under the BNDES facility bearing interest at a weighted-average rate of 5.11% per year. Borrowings under the facility are required to be repaid in 30 monthly installments. The U.S. dollar amounts reflect the conversion of the Brazilian real denominated amounts into U.S. dollars based on the exchange rates of R$3.10 / $1.00 and R$2.66 / $1.00 as of June 30, 2015 and December 31, 2014, respectively.

        Borrowings under the BNDES facility mature as follows: R$174 million ($56 million) in 2015, R$273 million ($88 million) in 2016, R$102 million ($33 million) in 2017 and R$3 million ($1 million) in 2018. The financing facility is collateralized by the financed set-top receivers with an original purchase price of approximately R$1,037 million ($335 million) based on the exchange rate of R$3.10 / $1.00 as of June 30, 2015.

Restricted Cash

        Restricted cash of $13 million as of June 30, 2015 and $10 million as of December 31, 2014 was included as part of "Prepaid expenses and other" in our Consolidated Balance Sheets. The majority of these amounts secure certain of our letters of credit obligations and restrictions on the cash will be removed as the letters of credit expire.

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Note 5: Derivative Financial Instruments

        We use derivative financial instruments primarily to manage the risks associated with fluctuations in foreign currency exchange rates and interest rates. We do not use derivatives for trading or speculative purposes. We record derivative financial instruments in the Consolidated Balance Sheets as either assets or liabilities at fair value. We calculate the fair value of derivative contracts using an income-approach model (discounted cash flow analysis), the use of which is considered a Level 2 valuation technique, using observable inputs, such as yield curves, foreign currency exchange rates, and incorporating counterparty credit risk, as applicable. For derivative financial instruments designated as fair value hedges, the change in the fair value of both the derivative instrument and the hedged item are recognized in earnings in the current period. For derivative financial instruments designated as cash flow hedges, the effective portion of the unrealized gains or losses on the derivative financial instruments are initially reported in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets, and subsequently reclassified to earnings in the same periods during which the hedged item affects earnings. The ineffective portion of the unrealized gains and losses on these derivative financial instruments, if any, is recorded immediately in earnings. We evaluate the effectiveness of our derivative financial instruments at inception and on a quarterly basis.

        The following table sets forth the fair values of assets and liabilities associated with the derivative financial instruments as of:

 
 
Assets
 
Liabilities
 
 
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
 
 
  (Dollars in millions)
 

Cash flow hedges:

                         

Cross-currency swap contracts

  $ 3   $ 8   $ 81   $ 24  

Fair value hedges:

                         

Interest rate swap contracts

        12         6  

Total derivative financial instruments

  $ 3   $ 20   $ 81   $ 30  

        The fair values of the assets associated with derivative financial instruments are recorded in "Investments and other assets" in the Consolidated Balance Sheets and the fair value of the liabilities associated with derivative financial instruments are recorded in "Other liabilities and deferred credits" in the Consolidated Balance Sheets.

        The following table sets forth the notional amounts of outstanding derivative financial instruments as of:

 
 
June 30,
2015
 
December 31,
2014
 
 
  (Dollars in millions)
 

Cash flow hedges:

             

Cross-currency swap contracts

  $ 2,418   $ 2,418  

Fair value hedges:

             

Interest rate swap contracts

        3,000  

Total notional amount of derivative financial instruments

  $ 2,418   $ 5,418  

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        Collateral Arrangements.    We have agreements with our derivative instrument counterparties that include collateral provisions which require a party with an unrealized loss position in excess of certain thresholds to post cash collateral for the amount in excess of the threshold. The threshold levels in our collateral agreements are based on each party's credit ratings. We held no cash collateral from counterparties as of June 30, 2015 and December 31, 2014. We did not have any cash collateral posted with counterparties as of June 30, 2015 and December 31, 2014. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), against the fair value of the derivative instruments.

Cross-Currency Swap Contracts

        In a series of financing transactions, DIRECTV U.S. issued, pursuant to a U.S. registration statement, the following senior notes: £750 million in aggregate principal of 4.375% senior notes due in 2029, €500 million in aggregate principal of 2.750% senior notes due in 2023 and £350 million in aggregate principal of 5.200% senior notes due in 2033. In connection with the issuance of these senior notes, DIRECTV U.S. entered into cross-currency swap contracts to manage the related foreign exchange risk by effectively converting all of the fixed-rate British pound sterling and fixed-rate Euro denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. These cross-currency swaps are designated and qualify as cash flow hedges. The terms of the cross-currency swap contracts correspond to the related hedged senior notes and have maturities ranging from May 2023 to November 2033.

        We calculate the fair value of the cross-currency swap contracts using an income-approach model (discounted cash flow analysis), the use of which is considered a Level 2 valuation technique, using observable inputs, such as foreign currency exchange rates, swap rates, cross-currency basis swap spreads and incorporating counterparty credit risk.

        During the six months ended June 30, 2015, DIRECTV U.S. recorded net remeasurement gains of $32 million in "Other, net" in the Consolidated Statements of Operations related to the remeasurement of the hedged senior notes. To offset these remeasurement gains, we reclassified $32 million ($20 million after tax) from "Accumulated other comprehensive loss" in the Consolidated Balance Sheets to "Other, net" in the Consolidated Statements of Operations. During the six months ended June 30, 2014, DIRECTV U.S. recorded net remeasurement losses of $58 million in "Other, net" in the Consolidated Statements of Operations related to the remeasurement of the hedged senior notes. To offset these remeasurement losses, we reclassified $58 million ($36 million after tax) from "Accumulated other comprehensive loss" in the Consolidated Balance Sheets to "Other, net" in the Consolidated Statements of Operations. These reclassifications eliminate the impact of the remeasurement of the hedged senior notes from our results of operations.

Interest Rate Lock Contracts

        Periodically we entered into interest rate lock contracts such as forward starting swaps and treasury locks to hedge against changes in interest payments attributable to changes in the benchmark interest rate during the period leading up to a forecasted issuance of fixed rate debt. These interest rate locks are designated and qualify as cash flow hedges. On March 17, 2014, DIRECTV U.S. issued $1,250 million in aggregate principal of 4.450% senior notes due in 2024. In connection with this transaction, DIRECTV U.S. settled all then-outstanding forward-starting interest rate swaps, which were previously entered into to protect against unfavorable interest rate changes related to the

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forecasted issuance of debt. These interest rate swaps were designated and qualified as cash flow hedges. As a result of settling these forward-starting interest rate swaps, we recognized $1 million of ineffectiveness in earnings during 2014. As of June 30, 2015, we had $8 million in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets related to these forward-starting interest rate swaps that is being recognized as interest expense over the term of the 4.450% senior notes due in 2024.

Fixed-to-Floating Interest Rate Swap Contracts

        DIRECTV U.S. has entered into fixed-to-floating interest rate swap contracts from time to time in order to manage its interest rate exposure. We designate such swaps as fair value hedges. Depending on market conditions, the mix of our fixed interest rate and floating interest rate debt and other factors, we may periodically discontinue these fair value hedges and terminate our fixed-to-floating interest rate swap contracts by settling the contracts or by entering into offsetting contracts.

        During 2014, DIRECTV U.S. entered into interest rate swap contracts with a total notional amount of $3,000 million, converting a portion of the total aggregate principal amounts of the 5.000% senior notes due in 2021, the 3.800% senior notes due in 2022 and the 4.450% senior notes due in 2024 from a fixed to floating interest rate. In January 2015, DIRECTV U.S. discontinued the fair value hedges and settled these fixed-to-floating interest rate swap contracts. As a result of these settlements, DIRECTV U.S. received cash proceeds of $18 million, which are included in "Net cash provided by operations" in the Consolidated Statements of Cash Flows.

        As of June 30, 2015, there was $74 million of favorable adjustments to the carrying value of the senior notes, which will be amortized to "Interest expense" in the Consolidated Statements of Operations over the remaining term of the hedged senior notes. We calculated the fair value of the interest rate swap contracts using an income-approach model (discounted cash flow analysis), the use of which is considered a Level 2 valuation technique, using observable inputs, such as yield curves. In connection with the settlement of the fixed-to-floating interest rate swap contracts, we recognized a $2 million gain in "Other, net" in the Consolidated Statements of Operations for the quarter ended March 31, 2015. The periodic interest settlements for the interest rate swap contracts are recorded in "Interest expense" in the Consolidated Statements of Operations.


Note 6: Contingencies

Venezuela Devaluation and Foreign Currency Exchange Controls

        Companies operating in Venezuela are required to obtain Venezuelan government approval to exchange Venezuelan bolivars into U.S. dollars and such approval has not consistently been granted for several years. Consequently, our ability to pay U.S. dollar denominated obligations and repatriate cash generated in Venezuela in excess of local operating requirements is limited, which has resulted in increases in the cash balance at our Venezuelan subsidiary, and limited our ability to import set-top receivers and other equipment, limiting the growth of our business in Venezuela.

        As of June 30, 2015, the mechanisms in Venezuela for exchanging Venezuelan bolivars into U.S. dollars were as follows: (i) the official government mechanism operated by the Venezuelan Central Bank, which has a fixed exchange rate of 6.3 Venezuelan bolivars per U.S. dollar mainly reserved for essential goods and services (ii) the auction based Sistema Complementario de Administración de Divisas, or SICAD, which is intended for dividend and royalty remittances as well as certain imports,

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including telecommunications equipment and (iii) an open market currency exchange system Sistema Marginal de Divisas, or SIMADI, which is based on supply and demand. As of June 30, 2015, the SICAD exchange rate was 12.8 Venezuelan bolivars per U.S. dollars and the SIMADI exchange rate was 197.7 Venezuelan bolivars per U.S. dollars.

        Effective March 31, 2014, we changed the exchange rate for remeasuring our Venezuelan subsidiary's monetary net assets from the official exchange rate of 6.3 Venezuelan bolivars per U.S. dollar to the SICAD rate, which was 10.7 Venezuelan bolivars per U.S. dollar as of March 31, 2014. As a result of the devaluation, we recorded a pre-tax charge in "Venezuelan currency devaluation charge" in the Consolidated Statements of Operations of $281 million in the first quarter of 2014, related to the remeasurement of the Venezuelan bolivar denominated net monetary assets of our Venezuelan subsidiary on March 31, 2014.

        As of June 30, 2015, we believe that the SICAD rate was the most representative rate to use for remeasurement, as a limited amount of telecommunications equipment was imported at the SICAD rate during the six months ended June 30, 2015 and the official rate of 6.3 Venezuelan bolivars per U.S. dollar continued to be reserved only for the settlement of U.S. dollar denominated obligations related to purchases of "essential goods and services". In addition, we did not repatriate any amounts at the official rate or through the SICAD mechanism but we were able to repatriate an insignificant amount of Venezuelan bolivars through the SIMADI mechanism during the six months ended June 30, 2015. During the second quarter of 2015, we recorded $39 million in "General and administrative expenses" in the Consolidated Statements of Operations as a result of the change in the SICAD exchange rate to 12.8 Venezuelan bolivars per U.S. dollar as of June 30, 2015 from 12.0 Venezuelan bolivars per U.S. dollar as of March 31, 2015.

        Our Venezuelan subsidiary had Venezuelan bolivar denominated net monetary assets of $595 million, including cash of $629 million, as of June 30, 2015, based on the SICAD exchange rate of 12.8 Venezuelan bolivars per U.S. dollar, as compared to Venezuelan bolivar denominated net monetary assets of $481 million, including cash of $481 million, as of December 31, 2014, based on the SICAD exchange rate of 12.0 Venezuelan bolivars per U.S. dollar. In addition, our Venezuelan subsidiary had $575 million of net property, equipment and intangible assets as of June 30, 2015 as compared to $574 million at December 31, 2014. In the second quarter of 2015, our Venezuelan subsidiary generated revenues of approximately $250 million and operating profit before depreciation and amortization of approximately $80 million. During the six months ended June 30, 2015, our Venezuelan subsidiary generated revenues of approximately $500 million and operating profit before depreciation and amortization of approximately $180 million, excluding the impact of the $39 million exchange rate losses recorded in "General and administrative expenses" as a result of the change in the SICAD exchange rate.

        The exchange rate used to report net monetary assets and operating results of our Venezuelan subsidiary is currently based on the results of periodic SICAD auctions, which are expected to result in fluctuations in reported amounts that could be material to the results of operations in Venezuela in future periods and could materially affect the comparability of results for our Venezuelan subsidiary between periods. Significant uncertainties exist regarding the exchange mechanisms in Venezuela including the nature of transactions that are eligible for repatriation though the official process, SICAD or SIMADI, or any other new exchange mechanism that may emerge, how such mechanisms will operate in the future, as well as the volume of U.S. dollars available under each mechanism. Changes in exchange mechanisms and rates will impact the comparability of our results of operations and

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financial position, and would likely result in significant future devaluations or impairments of tangible and intangible assets.

Litigation

        Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, claims and proceedings are pending against us arising in the ordinary course of business. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or treble damage claims, or demands that, if granted, could require us to pay damages or make other expenditures in amounts that could not be estimated at June 30, 2015. After discussion with counsel representing us in those actions, it is the opinion of management that such litigation is not expected to have a material effect on our consolidated financial statements. We expense legal costs as incurred.

        NFL Sunday Ticket Litigation.    DIRECTV has been served with three putative class actions filed in the U.S; District Court for the Central District of California against DIRECTV and the NFL alleging among other things that the agreement among the defendants for DIRECTV's exclusive distribution of NFL Sunday Ticket violates Sections 1 and 2 of the Sherman Act and that plaintiffs have been overcharged for the televised presentation of out-of-market NFL games. The complaint in Abrahamian v. National Football League, Inc., et al., was served in June 2015, the complaint in Ninth Inning Inc. v. National Football League, Inc., et al. was served in July 2015 and the complaint in Rookie Sports Café, L.L.C., et al., was served in August 2015. The complaints seek injunctions, unspecified treble damages and attorneys' fees. We are confident that our agreement with the NFL does not violate the Sherman Act and intend to vigorously defend the lawsuits.

        Major League Baseball Litigation.    A class was certified by Judge Shira Scheindlin in the case Lerner et al. v. Office of the Commissioner of Baseball et al. filed in May 2015 in federal court for the Southern District of New York. Judge Scheindlin ruled that the plaintiffs were entitled to seek an injunction on behalf of a class of subscribers who had purchased MLB Extra Innings from DIRECTV, Comcast and MLB, to prevent MLB from enforcing league rules that grant member teams exclusive home team territories. The Judge also ruled that the plaintiffs were not entitled to seek damages on behalf of the class. A trial is expected in the fall of 2015. The defendants intend to defend the case and pursue appeals to reverse the numerous errors of law that formed the bases of the trial court's orders.

        Intellectual Property Litigation.    We are a defendant in several unrelated lawsuits claiming infringement of various patents relating to various aspects of our businesses. In certain of these cases other industry participants are also defendants, and also in certain of these cases we expect that any potential liability would be the responsibility of our equipment vendors pursuant to applicable contractual indemnification provisions. Further, in certain of these cases, suppliers of equipment to DIRECTV are also defendants, and DIRECTV has contractual obligations to indemnify and hold harmless those suppliers in those cases. To the extent that the allegations in these lawsuits can be analyzed by us at this stage of their proceedings, we believe the claims are without merit and intend to defend the actions vigorously. We have determined the likelihood of a material liability in such matters is remote or have made appropriate accruals and the final disposition of these claims is not expected to have a material effect on our consolidated financial position. However, if an adverse ruling is made in a lawsuit involving key intellectual property, such ruling could possibly be material to our consolidated results of operations of any one period. No assurance can be given that any adverse outcome would not be material to our consolidated financial position.

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        Early Cancellation Fees.    As previously reported, in 2008, a number of plaintiffs filed putative class action lawsuits in state and federal courts challenging the early cancellation fees we assess our customers when they do not fulfill their programming commitments. We have reached a settlement with the individual plaintiffs in the federal cases. In the California state court action, the United States Supreme Court agreed to review the California Court of Appeal's opinion affirming the denial of our motion to compel arbitration. We believe that our early cancellation fees are adequately disclosed, and represent reasonable estimates of the costs we incur when customers cancel service before fulfilling their programming commitments.

        State and Federal Inquiries.    From time to time, we receive investigative inquiries or subpoenas from state and federal authorities with respect to alleged violations of state and federal statutes. These inquiries may lead to legal proceedings in some cases.

        FTC Litigation.    On March 11, 2015, the Federal Trade Commission, or FTC, filed a lawsuit against DIRECTV and DIRECTV,  LLC in United States District Court for the Northern District of California. The FTC alleges that DIRECTV failed to disclose adequately in our advertisements certain terms and conditions of our programming package offers. The complaint also alleges that DIRECTV violated applicable law by failing adequately to disclose, and to obtain consumers' express consent to, the terms of negative option offers for premium channels. The complaint seeks a permanent injunction to prevent further violations, as well as relief to redress injury to consumers. We believe we have valid defenses to the FTC's claims and we intend to vigorously defend the lawsuit.

        Waste Disposal Inquiry.    In August 2012, DIRECTV U.S. received from the State of California subpoenas and interrogatories related to our generation, handling, record keeping, transportation and disposal of hazardous waste, including universal waste, in the State of California, and the training of employees regarding the same. The investigation is jointly conducted by the Office of the Attorney General and the District Attorney for Alameda County and appears to be part of a broader effort to investigate waste handling and disposal processes of a number of industries. We are continuing to review our policies and procedures applicable to all facilities, cooperating with the investigation and recently began discussions with regulators directed at reaching resolution of this matter.

        Other.    We are subject to other legal proceedings and claims that arise in the ordinary course of our business. The amount of ultimate liability with respect to such actions is not expected to materially affect our financial position, results of operations or liquidity.

Income Tax Matters

        We have received tax assessments from certain foreign jurisdictions and have agreed to indemnify previously divested businesses for certain tax assessments relating to periods prior to their respective divestitures. These assessments are in various stages of the administrative process or litigation. While the outcome of these assessments and other tax issues cannot be predicted with certainty, we believe that the ultimate outcome will not have a material effect on our consolidated financial position or result of operations.

Satellites

        We may purchase in-orbit and launch insurance to mitigate the potential financial impact of satellite launch and in-orbit failures if the premium costs are considered economic relative to the risk of satellite failure. The insurance generally covers a portion of the unamortized book value of covered

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satellites. We do not insure against lost revenues in the event of a total or partial loss of the capacity of a satellite. We generally rely on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the impact a satellite failure could have on our ability to provide service. At June 30, 2015, the net book value of in-orbit satellites was $2,047 million, all of which was uninsured.

Other

        We have an investment with a carrying value of $147 million as of June 30, 2015 in an entity that holds certain soccer rights and provides production services for soccer tournaments in Latin America. In connection with recent FIFA-related developments and investigations, our investment, which we account for following the equity method of accounting, could be adversely impacted and we could be required to record an impairment of our investment depending on on-going developments related to this entity.

        As of June 30, 2015, we were contingently liable under standby letters of credit and bonds in the aggregate amount of $361 million primarily related to judicial deposit and payment guarantees in Latin America and insurance deductibles.


Note 7: Related Party Transactions

        In the ordinary course of our operations, we enter into transactions with related parties as discussed below. Related parties include Globo, which provides programming and advertising to Sky Brasil, and companies in which we hold equity method investments, including Sky Mexico, GSN, HSH and ROOT SPORTS Northwest.

        The majority of payments under contractual arrangements with related parties are pursuant to multi-year programming contracts. Payments under these contracts are typically subject to annual rate increases and are based on the number of subscribers receiving the related programming.

        The following table summarizes revenues and expenses with related parties:

 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
 
 
 
2015
 
2014
 
2015
 
2014
 
 
  (Dollars in Millions)
 

Revenues

  $ 3   $ 2   $ 5   $ 4  

Expenses

    263     300     504     541  

        The following table sets forth the amounts recorded in the Consolidated Balance Sheets for related party transactions as of:

 
 
June 30,
2015
 
December 31,
2014
 
 
  (Dollars in Millions)
 

Accounts receivable

  $ 7   $ 26  

Prepaid expenses and other

    4      

Accounts payable

    128     123  

Short-term liability

    169     149  

Long-term liability

    1     1  

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Note 8: Stockholders' Deficit and Noncontrolling Interest

Capital Stock and Additional Paid-In Capital

        At June 30, 2015, our certificate of incorporation provided for the following capital stock: 3,950,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. DIRECTV common stock is entitled to one vote per share and trades on the NASDAQ, under the ticker "DTV". As of June 30, 2015 and December 31, 2014, there were no outstanding shares of preferred stock.

Share Repurchase Program

        Since 2006 our Board of Directors has approved multiple authorizations for the repurchase of our common stock. In February 2014 our Board of Directors approved an authorization for up to $3.5 billion for repurchases of our common stock. In accordance with the Merger Agreement, we suspended the share repurchase program and agreed to not purchase, repurchase, redeem or otherwise acquire any shares of our capital stock during the pendency of the proposed transaction without AT&T's consent, effective May 18, 2014.

Noncontrolling Interest

        In connection with our acquisition of Sky Brasil in 2006, our partner who holds the remaining 7% interest, Globo Comunicações e Participações S.A., or Globo, was granted the right, until January 2014, to require us to purchase all, but not less than all, of its shares in Sky Brasil. Globo did not exercise its right to require us to purchase its shares in Sky Brasil. That right has now expired and the noncontrolling interest is no longer redeemable. In accordance with Accounting Standards Codification 480, Distinguishing Liabilities from Equity, during the first quarter of 2014, we reclassified $375 million, which was the fair value of Globo's remaining 7% interest, from "Redeemable noncontrolling interest" to "Noncontrolling interest," a component of stockholders' deficit in the Consolidated Balance Sheets. During the first quarter of 2014, we discontinued fair value accounting for this equity instrument.

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        The following table sets forth a reconciliation of stockholders' deficit for the six months ended June 30, 2015:

 
   
 
Stockholders' Deficit
 
 
 
DIRECTV
Common
Shares
 
Common
Stock and
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
DIRECTV
Stockholders'
Deficit
 
Noncontrolling
Interest
 
Total
Stockholders'
Deficit
 
 
  (Amounts in Millions, Except Share Data)
 

Balance as of January 1, 2015

    502,733,342   $ 3,613   $ (8,408 ) $ (418 ) $ (5,213 ) $ 385   $ (4,828 )

Net income

                1,477           1,477     3     1,480  

Stock options exercised and restricted stock units vested and distributed

    1,778,225     (53 )               (53 )         (53 )

Share-based compensation expense

          53                 53           53  

Tax benefit from share-based compensation

          31                 31           31  

Other

          1                 1           1  

Other comprehensive loss

                      (134 )   (134 )         (134 )

CTA adjustment allocated to noncontrolling interest

                                  (13 )   (13 )

Balance as of June 30, 2015

    504,511,567   $ 3,645   $ (6,931 ) $ (552 ) $ (3,838 ) $ 375   $ (3,463 )

        The following table sets forth a reconciliation of stockholders' deficit and redeemable noncontrolling interest for the six months ended June 30, 2014:

 
   
 
Stockholders' Deficit
   
 
 
 
DIRECTV
Common
Shares
 
Common
Stock and
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
DIRECTV
Stockholders'
Deficit
 
Noncontrolling
Interest
 
Total
Stockholders'
Deficit
 
Redeemable
Noncontrolling
Interest
 
 
  (Amounts in Millions, Except Share Data)
   
 

Balance as of January 1, 2014

    519,306,232   $ 3,652   $ (9,874 ) $ (322 ) $ (6,544 ) $   $ (6,544 ) $ 375  

Net income

                1,367           1,367     12     1,379        

Stock repurchased and retired

    (18,774,194 )   (130 )   (1,256 )         (1,386 )         (1,386 )      

Stock options exercised and restricted stock units vested and distributed

    1,693,808     (46 )               (46 )         (46 )      

Share-based compensation expense

          45                 45           45        

Tax benefit from share-based compensation

          22                 22           22        

Other

          1     (14 )         (13 )         (13 )      

Other comprehensive income

                      34     34           34        

CTA adjustment allocated to noncontrolling interest

                                  7     7        

Noncontrolling interest

                                  375     375     (375 )

Balance as of June 30, 2014

    502,225,846   $ 3,544   $ (9,777 ) $ (288 ) $ (6,521 ) $ 394   $ (6,127 ) $  

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Other Comprehensive Income (Loss)

        The following represents the components of other comprehensive income (loss) for each of the periods presented:

 
 
Three Months Ended June 30,
 
 
 
2015
 
2014
 
 
 
Pre-Tax
 
Tax
Benefit
(Expense)
 
Net of
Tax
 
Pre-Tax
 
Tax
Benefit
(Expense)
 
Net of
Tax
 
 
  (Dollars in Millions)
 

Cash flows hedges:

                                     

Unrealized gains arising during the period

  $ 132   $ (49 ) $ 83   $ 10   $ (4 ) $ 6  

Reclassification adjustments included in "Other, net"

    (119 )   45     (74 )   (45 )   17     (28 )

Foreign currency translation adjustments

    37     (21 )   16     58     (26 )   32  

Other comprehensive income          

  $ 50   $ (25 ) $ 25   $ 23   $ (13 ) $ 10  

 

 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
 
 
Pre-Tax
 
Tax
Benefit
(Expense)
 
Net of
Tax
 
Pre-Tax
 
Tax
Benefit
(Expense)
 
Net of
Tax
 
 
  (Dollars in Millions)
 

Cash flows hedges:

                                     

Unrealized losses arising during the period

  $ (62 ) $ 24   $ (38 ) $ (2 ) $ 1   $ (1 )

Reclassification adjustments included in "Other, net"

    32     (12 )   20     (58 )   22     (36 )

Foreign currency translation adjustments

    (181 )   65     (116 )   121     (50 )   71  

Other comprehensive income (loss)

  $ (211 ) $ 77   $ (134 ) $ 61   $ (27 ) $ 34  

Accumulated Other Comprehensive Loss

        The following represents the changes in the components of accumulated other comprehensive loss for each of the periods presented:

 
 
Defined
Benefit
Plan Items
 
Gains (Losses)
on Cash
Flow Hedges
 
Foreign
Currency
Items
 
Accumulated
Other
Comprehensive
Loss
 
 
  (Dollars in Millions)
 

Balance as of January 1, 2015

  $ (141 ) $ 44   $ (321 ) $ (418 )

Other comprehensive loss

        (18 )   (116 )   (134 )

Balance as of June 30, 2015

  $ (141 ) $ 26   $ (437 ) $ (552 )

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


 
 
Defined
Benefit
Plan Items
 
Gains (Losses)
on Cash
Flow Hedges
 
Foreign
Currency
Items
 
Accumulated
Other
Comprehensive
Loss
 
 
  (Dollars in Millions)
 

Balance as of January 1, 2014

  $ (123 ) $ 14   $ (213 ) $ (322 )

Other comprehensive income (loss)

        (37 )   71     34  

Balance as of June 30, 2014

  $ (123 ) $ (23 ) $ (142 ) $ (288 )


Note 9: Earnings Per Common Share

        We compute basic earnings per common share, or EPS, by dividing net income attributable to DIRECTV by the weighted average number of common shares outstanding for the period.

        Diluted EPS considers the effect of common equivalent shares, which consist entirely of common stock options and restricted stock units issued to employees. During the three and six months ended June 30, 2015 and June 30, 2014 we excluded 0.2 million common stock awards from the computation of diluted EPS, because the inclusion of the potential common shares would have had an antidilutive effect.

        The reconciliation of the amounts used in the basic and diluted EPS computation is as follows:

 
 
Income
 
Shares
 
Per Share
Amounts
 
 
  (Dollars and Shares
in Millions,
Except Per Share Amounts)

 

Three Months Ended

                   

June 30, 2015

                   

Basic EPS

                   

Net income attributable to DIRECTV

  $ 747     504   $ 1.48  

Effect of dilutive securities

                   

Dilutive effect of stock options and restricted stock units

        4     (0.01 )

Diluted EPS

                   

Adjusted net income attributable to DIRECTV

  $ 747     508   $ 1.47  

June 30, 2014

                   

Basic EPS

                   

Net income attributable to DIRECTV

  $ 806     504   $ 1.60  

Effect of dilutive securities

                   

Dilutive effect of stock options and restricted stock units

        4     (0.01 )

Diluted EPS

                   

Adjusted net income attributable to DIRECTV

  $ 806     508   $ 1.59  

 

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

 
 
Income
 
Shares
 
Per Share
Amounts
 
 
  (Dollars and Shares
in Millions,
Except Per Share Amounts)

 

Six Months Ended

                   

June 30, 2015

                   

Basic EPS

                   

Net income attributable to DIRECTV

  $ 1,477     504   $ 2.93  

Effect of dilutive securities

                   

Dilutive effect of stock options and restricted stock units

        4     (0.02 )

Diluted EPS

                   

Adjusted net income attributable to DIRECTV

  $ 1,477     508   $ 2.91  

June 30, 2014

                   

Basic EPS

                   

Net income attributable to DIRECTV

  $ 1,367     507   $ 2.70  

Effect of dilutive securities

                   

Dilutive effect of stock options and restricted stock units

        5     (0.03 )

Diluted EPS

                   

Adjusted net income attributable to DIRECTV

  $ 1,367     512   $ 2.67  


Note 10: Segment Reporting

        Our reportable segments, which are differentiated by their products and services as well as geographic location, are DIRECTV U.S., Sky Brasil and PanAmericana and Other, which are engaged in acquiring, promoting, selling and distributing digital entertainment programming primarily via satellite to residential and commercial subscribers, and the Sports Networks, Eliminations and Other segment, which includes our regional sports networks that provide programming devoted to local professional sports teams and college sporting events and locally produce their own programming. Sports Networks, Eliminations and Other also includes the corporate office, eliminations and other entities.

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

        Selected information for our operating segments is reported as follows:

 
 
External
Revenues
 
Intersegment
Revenues
 
Total
Revenues
 
Operating
Profit
(Loss)
 
Depreciation
and
Amortization
Expense
 
Operating
Profit
(Loss) Before
Depreciation
and
Amortization(1)
 
 
  (Dollars in Millions)
 

Three Months Ended

                                     

June 30, 2015

                                     

DIRECTV U.S. 

  $ 6,708   $ 2   $ 6,710   $ 1,373   $ 433   $ 1,806  

Sky Brasil

    781         781     63     143     206  

PanAmericana and Other

    895         895     (5 )   143     138  

DIRECTV Latin America

    1,676         1,676     58     286     344  

Sports Networks, Eliminations and Other

    57     (2 )   55     (42 )   2     (40 )

Total

  $ 8,441   $   $ 8,441   $ 1,389   $ 721   $ 2,110  

June 30, 2014

                                     

DIRECTV U.S. 

  $ 6,270   $ 2   $ 6,272   $ 1,319   $ 429   $ 1,748  

Sky Brasil

    1,011         1,011     114     175     289  

PanAmericana and Other

    778         778     28     121     149  

DIRECTV Latin America

    1,789         1,789     142     296     438  

Sports Networks, Eliminations and Other

    50     (2 )   48     (37 )   4     (33 )

Total

  $ 8,109   $   $ 8,109   $ 1,424   $ 729   $ 2,153  

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


 
 
External
Revenues
 
Intersegment
Revenues
 
Total
Revenues
 
Operating
Profit
(Loss)
 
Depreciation
and
Amortization
Expense
 
Operating
Profit (Loss)
Before
Depreciation
and
Amortization(1)
 
 
  (Dollars in Millions)
 

Six Months Ended

                                     

June 30, 2015

                                     

DIRECTV U.S. 

  $ 13,164   $ 4   $ 13,168   $ 2,622   $ 871   $ 3,493  

Sky Brasil

    1,576         1,576     117     288     405  

PanAmericana

    1,735         1,735     97     287     384  

DIRECTV Latin America

    3,311         3,311     214     575     789  

Sports Networks, Eliminations and Other

    109     (4 )   105     (60 )   5     (55 )

Total

  $ 16,584   $   $ 16,584   $ 2,776   $ 1,451   $ 4,227  

June 30, 2014

                                     

DIRECTV U.S. 

  $ 12,355   $ 4   $ 12,359   $ 2,562   $ 855   $ 3,417  

Sky Brasil

    1,950         1,950     262     338     600  

PanAmericana

    1,560         1,560     (146 )   243     97  

DIRECTV Latin America

    3,510         3,510     116     581     697  

Sports Networks, Eliminations and Other

    99     (4 )   95     (27 )   7     (20 )

Total

  $ 15,964   $   $ 15,964   $ 2,651   $ 1,443   $ 4,094  

(1)
Operating profit (loss) before depreciation and amortization, which is a financial measure that is not determined in accordance with GAAP can be calculated by adding amounts under the caption "Depreciation and amortization expense" to "Operating profit (loss)." 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 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 intangible assets resulting from prior business acquisitions. To compensate for the exclusion of depreciation and amortization expense from operating profit, our management and 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 a means to compare operating results exclusive of depreciation and amortization. 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.

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

        The following represents a reconciliation of operating profit before depreciation and amortization to reported net income on the Consolidated Statements of Operations:

 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
 
 
 
2015
 
2014
 
2015
 
2014
 
 
  (Dollars in Millions)
 

Operating profit before depreciation and amortization

  $ 2,110   $ 2,153   $ 4,227   $ 4,094  

Depreciation and amortization

    (721 )   (729 )   (1,451 )   (1,443 )

Operating profit

    1,389     1,424     2,776     2,651  

Interest income

    24     12     46     25  

Interest expense

    (234 )   (230 )   (479 )   (462 )

Other, net

    25     35     32     92  

Income before income taxes

    1,204     1,241     2,375     2,306  

Income tax expense

    (454 )   (431 )   (895 )   (927 )

Net income

    750     810     1,480     1,379  

Less: Net income attributable to noncontrolling interest

    (3 )   (4 )   (3 )   (12 )

Net income attributable to DIRECTV

  $ 747   $ 806   $ 1,477   $ 1,367  


Note 11: Condensed Consolidating Financial Statements

        As discussed in Note 4, DIRECTV has provided a guarantee of all the outstanding senior notes of DIRECTV Holdings LLC and DIRECTV Financing Co., Inc., or the Co-issuers.

        The following condensed consolidating financial statements of DIRECTV and subsidiaries have been prepared pursuant to rules regarding the preparation of consolidating financial statements of Regulation S-X.

        These condensed consolidating financial statements present the condensed consolidating statements of operations and condensed consolidating statements of comprehensive income for the three and six months ended June 30, 2015 and 2014, the condensed consolidating statements of cash flows for the six months ended June 30, 2015 and 2014, and the condensed consolidating balance sheets as of June 30, 2015 and December 31, 2014.

        The condensed consolidating financial statements are comprised of DIRECTV, or the Parent Guarantor, its indirect 100% owned subsidiaries, DIRECTV Holdings, DIRECTV Financing and each of DIRECTV Holdings' material subsidiaries (other than DIRECTV Financing), or the Guarantor Subsidiaries, as well as other subsidiaries who are not guarantors of the senior notes, or the Non-Guarantor Subsidiaries, and the eliminations necessary to present DIRECTV's financial statements on a consolidated basis. The Non-Guarantor Subsidiaries consist primarily of DIRECTV's DTH digital television services throughout Latin America which are held by DIRECTV Latin America Holdings, Inc. and its subsidiaries, and our regional sports networks which are held by DIRECTV Sports Networks LLC and its subsidiaries. In addition, the Non-Guarantor Subsidiaries include the entity that is the parent of DIRECTV Holdings.

        The accompanying condensed consolidating financial statements are presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries' cumulative results of operations, capital contributions and distributions, and other changes in equity.

        Elimination entries include consolidating and eliminating entries for investments in subsidiaries, intercompany activity and balances, and income taxes.

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2015

 
 
Parent
Guarantor
 
Co-Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
DIRECTV
Consolidated
 
 
  (Dollars in Millions)
 

Revenues

  $   $   $ 6,710   $ 1,772   $ (41 ) $ 8,441  

Operating costs and expenses

                                     

Costs of revenues, exclusive of depreciation and amortization expense

                                     

Broadcast programming and other

            3,121     689     (30 )   3,780  

Subscriber service expenses

            404     194     (2 )   596  

Broadcast operations expenses

            76     44     (2 )   118  

Selling, general and administrative expenses, exclusive of depreciation and amortization expense

                                     

Subscriber acquisition costs

            682     214     (3 )   893  

Upgrade and retention costs

            301     46     (3 )   344  

General and administrative expenses

    30         320     251     (1 )   600  

Depreciation and amortization expense

            433     288         721  

Total operating costs and expenses

    30         5,337     1,726     (41 )   7,052  

Operating profit (loss)

    (30 )       1,373     46         1,389  

Equity in income of consolidated subsidiaries

    764     867         729     (2,360 )    

Interest income

    1         1     22         24  

Interest expense

        (222 )   (1 )   (11 )       (234 )

Other, net

        1     11     13         25  

Income before income taxes

    735     646     1,384     799     (2,360 )   1,204  

Income tax benefit (expense)

    12     83     (517 )   (32 )       (454 )

Net income

    747     729     867     767     (2,360 )   750  

Less: Net income attributable to noncontrolling interest

                (3 )       (3 )

Net income attributable to DIRECTV

  $ 747   $ 729   $ 867   $ 764   $ (2,360 ) $ 747  

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2014

 
 
Parent
Guarantor
 
Co-Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
DIRECTV
Consolidated
 
 
  (Dollars in Millions)
 

Revenues

  $   $   $ 6,272   $ 1,879   $ (42 ) $ 8,109  

Operating costs and expenses

                                     

Costs of revenues, exclusive of depreciation and amortization expense

                                     

Broadcast programming and other

            2,800     736     (38 )   3,498  

Subscriber service expenses

            374     201     (1 )   574  

Broadcast operations expenses

            75     34     (2 )   107  

Selling, general and administrative expenses, exclusive of depreciation and amortization expense

                                     

Subscriber acquisition costs

            661     237         898  

Upgrade and retention costs

            314     48         362  

General and administrative expenses

    30         300     188     (1 )   517  

Depreciation and amortization expense

            429     300         729  

Total operating costs and expenses

    30         4,953     1,744     (42 )   6,685  

Operating profit (loss)

    (30 )       1,319     135         1,424  

Equity in income of consolidated subsidiaries

    826     813         667     (2,306 )    

Interest income

                12         12  

Interest expense

    (1 )   (222 )   (1 )   (6 )       (230 )

Other, net

    (1 )   (18 )   13     41         35  

Income before income taxes

    794     573     1,331     849     (2,306 )   1,241  

Income tax benefit (expense)

    12     94     (518 )   (19 )       (431 )

Net income

    806     667     813     830     (2,306 )   810  

Less: Net income attributable to noncontrolling interest

                (4 )       (4 )

Net income attributable to DIRECTV

  $ 806   $ 667   $ 813   $ 826   $ (2,306 ) $ 806  

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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2015

 
  Parent
Guarantor
  Co-Issuers   Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   DIRECTV
Consolidated
 
 
  (Dollars in Millions)
 

Revenues

  $   $   $ 13,168   $ 3,497   $ (81 ) $ 16,584  

Operating costs and expenses

                                     

Costs of revenues, exclusive of depreciation and amortization expense

                                     

Broadcast programming and other

            6,119     1,305     (68 )   7,356  

Subscriber service expenses

            789     390     (2 )   1,177  

Broadcast operations expenses

            157     82     (4 )   235  

Selling, general and administrative expenses, exclusive of depreciation and amortization expense        

                                     

Subscriber acquisition costs

            1,385     399     (3 )   1,781  

Upgrade and retention costs

            609     88     (3 )   694  

General and administrative expenses

    62         616     437     (1 )   1,114  

Depreciation and amortization expense

            871     580         1,451  

Total operating costs and expenses

    62         10,546     3,281     (81 )   13,808  

Operating profit (loss)

    (62 )       2,622     216         2,776  

Equity in income of consolidated subsidiaries

    1,514     1,618         1,344     (4,476 )    

Interest income

    1     3     1     41         46  

Interest expense

        (453 )   (1 )   (25 )       (479 )

Other, net

        3     17     12         32  

Income before income taxes

    1,453     1,171     2,639     1,588     (4,476 )   2,375  

Income tax benefit (expense)

    24     173     (1,021 )   (71 )       (895 )

Net income

    1,477     1,344     1,618     1,517     (4,476 )   1,480  

Less: Net income attributable to noncontrolling interest

                (3 )       (3 )

Net income attributable to DIRECTV

  $ 1,477   $ 1,344   $ 1,618   $ 1,514   $ (4,476 ) $ 1,477  

29


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DIRECTV

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2014

 
  Parent
Guarantor
  Co-Issuers   Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   DIRECTV
Consolidated
 
 
  (Dollars in Millions)
 

Revenues

  $   $   $ 12,359   $ 3,677   $ (72 ) $ 15,964  

Operating costs and expenses

                                     

Costs of revenues, exclusive of depreciation and amortization expense

                                     

Broadcast programming and other

            5,568     1,377     (64 )   6,881  

Subscriber service expenses

            733     393     (1 )   1,125  

Broadcast operations expenses

            147     61     (4 )   204  

Selling, general and administrative expenses, exclusive of depreciation and amortization expense           

                                     

Subscriber acquisition costs

            1,309     417     (1 )   1,725  

Upgrade and retention costs

            595     89     (1 )   683  

General and administrative expenses

    39         590     343     (1 )   971  

Venezuelan currency devaluation

                281         281  

Depreciation and amortization expense

            855     588         1,443  

Total operating costs and expenses

    39         9,797     3,549     (72 )   13,313  

Operating profit (loss)

    (39 )       2,562     128         2,651  

Equity in income of consolidated subsidiaries

    1,394     1,600         1,315     (4,309 )    

Interest income

            1     24         25  

Interest expense

    (1 )   (442 )   (4 )   (15 )       (462 )

Other, net

    (3 )   (18 )   18     95         92  

Income before income taxes

    1,351     1,140     2,577     1,547     (4,309 )   2,306  

Income tax benefit (expense)

    16     175     (977 )   (141 )       (927 )

Net income

    1,367     1,315     1,600     1,406     (4,309 )   1,379  

Less: Net income attributable to noncontrolling interest

                (12 )       (12 )
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