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

FORM 10-K

(Mark One)    
ý   ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2014

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
(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)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $0.01 par value   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

          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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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 June 30, 2014, the aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates was $34,022,895,210.

          As of February 13, 2015, the registrant had outstanding 502,801,382 shares of common stock.

          Documents incorporated by reference are as follows:

Document
 
Part and Item Number of Form 10-K into which Incorporated

DIRECTV Form 10-K/A to be filed no later than April 30, 2015

  Part I, Item 5
Part III, Items 10 through 14

   


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TABLE OF CONTENTS

 
 
Page No.

Part I

   

Item 1. Business

  2

Item 1A. Risk Factors

  25

Item 1B. Unresolved Staff Comments

  38

Item 2. Properties

  38

Item 3. Legal Proceedings

  38

Item 4. Mine Safety Disclosures

  39

Part II

   

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  40

Item 6. Selected Financial Data

  41

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

  42

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  73

Item 8. Financial Statements and Supplementary Data

  75

Report of Independent Registered Public Accounting Firm

  75

Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012

  76

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012

  77

Consolidated Balance Sheets for the Years Ended December 31, 2014 and 2013

  78

Consolidated Statements of Changes in Stockholders' Deficit and Noncontrolling Interest for the Years Ended December 31, 2014, 2013 and 2012

  79

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

  80

Notes to the Consolidated Financial Statements

  82

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

  136

Item 9A. Controls and Procedures

  136

Item 9B. Other Information

  138

Part III

   

Item 10. Directors, Executive Officers and Corporate Governance

  138

Item 11. Executive Compensation

  138

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  138

Item 13. Certain Relationships and Related Transactions, and Director Independence

  138

Item 14. Principal Accounting Fees and Services

  138

Part IV

   

Item 15. Exhibits, Financial Statement Schedules

  138

Signatures

  145

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CAUTIONARY STATEMENT FOR PURPOSE OF THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

        This Annual Report on Form 10-K may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "estimate," "anticipate," "intend," "plan," "foresee," "project" or other similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make related to our business strategy and regarding our outlook for 2015 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 other risks, each of which is described in more detail in Item 1A-Risk Factors of this Annual Report.

        Any forward-looking statement made by us in this Annual Report on Form 10-K 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 developments or otherwise, except as required by law.

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PART I

ITEM 1.    BUSINESS

        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 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, and retain a non-controlling interest in two other RSNs, all of which operate under the brand name ROOT SPORTS. We also 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 GSN and the two RSNs in which we own non-controlling interest using the equity method of accounting.

        Our vision is to make DIRECTV the best video experience anytime and anywhere for customers in both the United States and Latin America. Our primary strategy for achieving this vision is to combine unique and compelling content along with technological innovation and industry-leading customer service to make DIRECTV the clear choice among consumers throughout the Americas. We believe that our employees' commitment to excellence is integral to the success of this strategy and to the future of our company. We intend to advance a service-oriented culture focused on building lifelong customer relationships while maintaining financial strength and a cost structure that enables profitable growth in the markets we serve.

        The DIRECTV team is committed to our company values: leadership, innovation, decisiveness, agility, teamwork and integrity. We believe sustaining a high level of employee engagement and developing the talent we have among our people cultivates an environment of loyalty and can be directly correlated with increased customer satisfaction, productivity and profitability. Therefore, we have intensified our leadership development programs, and placed an even greater emphasis on diversity and an inclusive workplace culture to foster higher levels of innovation, engagement, cross-functional teamwork and collaboration. We also believe it is important to promote the behaviors that reflect our company values within the communities that we serve through volunteer

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service projects, employee-driven corporate citizenship programs and meaningful educational initiatives that impact and enrich students' curriculum. In addition, we are supporting sustainable business practices company-wide, to help ensure that our planet is healthy for future generations. DIRECTV's common stock trades on the NASDAQ® Global Select Market, or NASDAQ, under the ticker "DTV". DIRECTV was incorporated in Delaware in 2009.

PROPOSED AT&T MERGER TRANSACTION

        DIRECTV's U.S. business operates in a highly competitive market with challenging content economics and business model disruption from new offerings and technologies (See Risk Factors section below). In addition, consumer preferences continue to shift to purchasing a bundle of video and broadband services, as well as watching more content on demand and consuming media through mobile devices. To address these and other strategic challenges, on May 18, 2014, DIRECTV and AT&T announced that they entered into a definitive agreement under which DIRECTV will combine with AT&T in a stock and cash transaction. 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, or the Merger Agreement, was approved unanimously by the Board of Directors of each company and was approved by our stockholders at a special meeting held on September 25, 2014. We believe the proposed combination with AT&T, when completed, will provide us the opportunity to access additional resources to better compete and grow our business despite this environment.

        As discussed more fully in the Registration Statement on Form S-4 filed by AT&T with the Securities and Exchange Commission on July 1, 2014, we believe the combination of AT&T's 21 state wireline footprint, which covers 55 million customer locations, with DIRECTV's best-in-class product and services will allow DIRECTV and AT&T to offer a customer-friendly bundled service that will more effectively compete with similar offers from cable competitors. In addition, we expect to offer a bundle of DIRECTV video and AT&T wireless service nationwide—a service which has over 100 million subscribers—that we believe consumers will find compelling in part due to the continued shift in consumers viewing habits onto their mobile devices. The combination will also provide the possibility to be more efficient with regards to content costs due to the merged company's larger scale combined with the opportunity for programmers to offer their product to a broader set of customers. In addition, the combination of the two companies will potentially allow for new and expanded Internet delivered services as well as a wider roll out of broadband offerings to rural areas, many of which will for the first time have the opportunity to take advantage of lower priced bundled offerings.

        We believe that the proposed transaction, which is subject to regulatory approval, will be approved and completed in the first half of 2015. The following discussion lays out the strengths and strategies of our U.S. and Latin America businesses as they stand today, prior to the consummation of the merger, which is awaiting regulatory approval.

DIRECTV U.S.

        Through DIRECTV U.S., we provide approximately 20.4 million subscribers with access to hundreds of channels of digital-quality video entertainment and audio programming that we transmit directly to subscribers' homes or businesses via high-powered geosynchronous satellites. We also provide video-on-demand, or VOD, by "pushing" top-rated movies onto customers' digital video recorders, or DVRs, for instant viewing, as well as via broadband to our subscribers who have connected their set-top receiver to their broadband service. In addition, our subscribers have the ability to use directv.com or our mobile applications for smartphones and tablets to view authorized content, search program listings and schedule DVR recordings.

        We believe we provide one of the most extensive collections of programming available in the MVPD industry (all of the channel, program and title counts below are roughly as of year end 2014 unless otherwise noted). This includes over 195 national high-definition, or HD, television channels, one dedicated Ultra-HD, or 4K, channel and one dedicated 3D channel. In addition, we offer video-on-demand, or VOD, service named

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DIRECTV CINEMA®, which provides a selection of approximately 12,000 movie and television programs to our broadband-connected subscribers. Through directv.com our subscribers have access to over 21,000 movie and television programs. We also provide local channel coverage to markets covering over 99% of U.S. television households, virtually all in HD.

        We also provide premium professional and collegiate sports programming such as the NFL SUNDAY TICKET package, which allows subscribers to view the largest selection of NFL games available each Sunday during the regular season. Under our contract with the NFL, we have exclusive rights to provide this service, including rights to provide related broadband, HD, VOD, interactive and mobile services.

        To subscribe to the DIRECTV® service, subscribers sign up for our service directly through us or our national retailers, independent satellite television retailers or dealers, or regional telephone companies, which we refer to as telcos. We or one of our home service providers or dealers generally install the receiving equipment. The receiving equipment, which we refer to as a DIRECTV® System, consists of a receiving satellite dish antenna, one or more digital set-top receivers, which are typically leased to the subscriber, and remote controls. After acquiring and installing a DIRECTV System, subscribers activate the DIRECTV service by contacting us and subscribing to one of our programming packages that are tailored to appeal to specific segments of existing and potential customers.

Key Strengths

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Business Strategy

        Our vision is to provide customers with the best video experience in the United States both inside and outside of the home by offering subscribers unique, differentiated and compelling programming through leadership in content, technology and customer service. Due to the rising cost of programming as well as higher costs to acquire new subscribers in an increasingly mature and competitive industry, it is even more important to distinguish and elevate the DIRECTV experience with a focus on delighting our new and existing customers. To fulfill our goals in a profitable and sustainable way we developed a strategy to (1) transform the customer service experience, (2) advance the entertainment experience both inside and outside of the home and (3) strike a balance between growth and profitability.

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Infrastructure

        Satellites.    We currently have a fleet of twelve geosynchronous satellites, including eleven owned satellites and one leased satellite. We have six Ku-Band satellites at the following orbital locations: 101° WL (three), 110° WL (one), 119° WL (one), 95° WL (one-leased). We also have six Ka-Band satellites at our 99° WL (three) and 103° WL (three) orbital locations.

        We have contracted for the construction and launch of one new satellite, D15, which we expect to launch in the first half of 2015. D15 is expected to provide additional HD, replacement and backup capacity.

        Satellite Risk Management.    We may purchase in-orbit and launch insurance to mitigate the potential financial impact of in-orbit and satellite launch failures unless the premium costs are considered to be uneconomical relative to the risk of satellite failure. The insurance generally covers a portion of the unamortized book value of covered 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. However, programming continuity cannot be assured in all instances or in the event of multiple satellite losses. Launch insurance typically covers the time frame from ignition of the launch vehicle through separation of the satellite from the launch vehicle. In the past, we have launched satellites without insurance. As of December 31, 2014, the net book value of DIRECTV U.S.' in-orbit satellites was $1,000 million, all of which was uninsured.

        Digital Broadcast Centers.    To gather programming content, ensure its digital quality, and transmit content to our satellites, we have two digital broadcast centers, located in Castle Rock, Colorado and Los Angeles, California and six uplink facilities. These broadcast centers and uplink facilities provide our national and local standard-definition and HD programming to our customers. We receive programming at the broadcast centers and uplink facilities from content providers via satellite, our back haul fiber optic network, special tape or secured Internet delivery. After receipt, most programming is then digitized, encoded and transmitted to our satellites and selectively staged with multiple content delivery networks for Internet delivery. We designed each broadcast center and uplink facility, our back haul fiber optic network, and content delivery infrastructure with redundant systems to minimize service interruptions; however, programming continuity cannot be assured in all instances or in the event of a catastrophic event at either broadcast center.

        Installation Network.    The DIRECTV Home Service Provider, or HSP, network performs customer installation, upgrade, and service call work for us. We now directly employ over 4,500 technicians. We also utilize an additional 10,000 technicians from four major outsourced companies who have assigned territories and a number of smaller contractors around the United States. The combined workforce completed approximately 90% of all in-home visits in 2014. We set quality standards for all installation, upgrade, and service work, perform quality control procedures against those standards, manage network inventory levels, and monitor overall network performance for nearly all of the installation and service network.

        Customer Service Centers.    As of December 31, 2014, we utilized 52 customer service centers employing almost 19,000 customer service representatives. Most of these customer service centers are operated by Convergys Customer Management Group, Inc., Alorica, Inc., Sitel Operating Corporation, N.E.W. Customer Service Companies, Inc., VXI Global Solutions, Inc. and Teleperformance. We currently own and operate six customer service centers located in: Boise, Idaho; Tulsa, Oklahoma; Huntsville, Alabama; Missoula, Montana; Huntington, West Virginia; and Denver, Colorado that employ approximately 4,100 customer service representatives. Potential

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and existing subscribers can call a single telephone number 24 hours a day, seven days a week, to request assistance for hardware, programming, installation, technical and other support. We continue to increase the functionality of telephone-based and web-based self-care features in order to better manage customer service costs and improve service levels.

Competition

        We face substantial competition in the MVPD industry and from emerging digital media distribution providers. Our competition includes companies that offer video, audio, interactive programming, telephony, data and other entertainment services, such as cable television, other DTH companies, telcos, wireless companies and companies that are developing new technologies, including online video distributors. Many of our competitors have access to substantially greater financial and marketing resources. We believe our brand, the quality and variety of video, audio and interactive programming, quality of picture, access to service, availability of HD and DVR services, customer service and price are the key elements for attaining and retaining subscribers. Our approximately 20.4 million subscribers represent approximately 20% of MVPD subscribers at December 31, 2014.

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DIRECTV LATIN AMERICA

        DIRECTV Latin America is a leading provider of digital television services throughout Latin America. DIRECTV Latin America provides a wide selection of local and international digital-quality video entertainment and audio programming under the DIRECTV and SKY brands to approximately 6.8 million subscribers in PanAmericana and approximately 5.6 million subscribers in Brazil. Including Sky Mexico, DIRECTV and SKY provide service to over 19 million subscribers throughout the region.

        We own 100% of PanAmericana, which provides services in Argentina, Chile, Colombia, Ecuador, Peru, Puerto Rico, Venezuela and certain other countries in the region, 93% of Sky Brasil, which operates in Brazil, and 41% of Sky Mexico, which operates in Mexico, the Dominican Republic and certain countries in Central America. Globo Comunicações e Participações S.A., or Globo, owns the other 7% of Sky Brasil and Grupo Televisa, S.A., or Televisa, owns the other 59% of Sky Mexico. The results of PanAmericana and Sky Brasil are consolidated in our results, and we account for our interest in Sky Mexico under the equity method of accounting.

        We believe we provide one of the most extensive collections of programming available in the Latin America pay television market, including HD sports video content and the most innovative interactive technology across the region. In addition, we have the unique ability to sell superior offerings of our differentiated products and services on a continent-wide basis with an operational cost structure that we believe to be lower than that of our competition. As of December 31, 2014, we provided service to 26% of pay television households in PanAmericana, 30% of pay television households in Brazil and 39% of pay television households in Mexico.

        To subscribe to the DIRECTV or SKY service, customers sign up for our video service directly through us or our regional retailers, or independent satellite television retailers or dealers. We tailor our offers and products to profitably provide our service to various customer segments across the region that have the need and desire for our brand and service. We offer post-paid products and services to customers who meet our standard requirements. For these customers, dealers or one of our home service providers install the receiving equipment. In addition, we offer pre-paid service for customers that desire payment and commitment flexibility. These customers may purchase a standard-definition receiver and antenna and pre-pay their DIRECTV service through one or more means, such as the purchase of a rechargeable card that they can acquire at a retailer or local kiosk. The video service will automatically disconnect once the balance of the customer's pre-payment expires.

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        In addition to traditional pay-television services, in Latin America we continue to focus on selectively pursuing opportunities to acquire spectrum and, where we have acquired spectrum, to build out a technologically robust and profitable fixed wireless broadband service in areas where we have an existing subscriber base and there are weak competitive wireline offerings or access to broadband is limited. We currently have spectrum holdings that cover approximately 50 million households across Argentina, Brazil, Colombia, Venezuela and Peru.

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Business Strategy

        Our vision is to provide customers across Latin America with the best video experience by leveraging DIRECTV Latin America's key strengths while continuing to distinguish our service from our competitors by offering subscribers unique, differentiated and compelling programming through leadership in content, technology, customer service and targeted marketing strategies. Our strategy involves (1) profitably expanding our technological and brand leadership position across all demographic segments, (2) enhancing productivity and effectively managing costs, (3) driving scale and improving margins in core PanAmericana countries and (4) proactively responding and adapting in countries with significant macroeconomic challenges.

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Infrastructure

        Satellites.    We currently provide services in PanAmericana and Brazil from leased transponders on three geosynchronous satellites. Sky Mexico provides its services from leased transponders on a separate satellite. In addition, we lease a backup satellite that serves Sky Brasil and Sky Mexico.

        We have contracted for the lease of one additional satellite for PanAmericana, ISDLA-2, which we expect to be launched in the fourth quarter of 2015. ISDLA-1, which launched in October 2014, has been placed into service and will become the primary satellite for PanAmericana with a substantial increase in channel capacity from the current satellite, and ISDLA-2 is expected to serve as an in-orbit spare for ISDLA-1.

        We have contracted for the construction and launch of a new satellite for Sky Brasil, SKY-Brasil 1, which we expect to launch in the second quarter of 2016. Sky Mexico entered into contracts for the construction and launch of a new satellite for Sky Mexico, SKY-Mexico 1, which we expect to launch in the third quarter of 2015. This will be the first satellite owned by Sky Mexico. SKY-Brasil 1 and SKY-Mexico 1 are expected to provide additional channel and HD capacity for Sky Brasil and Sky Mexico, respectively.

        Digital Broadcast Centers.    Our principal digital broadcast centers are located in the United States, Argentina, Brazil and Venezuela. We also have several smaller satellite uplink facilities in the region.

        Customer Service Centers.    We typically have customer service centers in each of the countries where we operate. In addition, we operate two pan-regional centers located in Colombia that provide primary and backup customer service support to most of the PanAmericana region.

Competition

        The pay television and other emerging broadband, video and data markets in Latin America are highly competitive. In each of our markets, we compete primarily with other providers of pay television, which distribute their programming by cable, satellite, terrestrial microwave systems, traditional over-the-air broadcasting and increasingly, the Internet. In addition, in certain markets we face significant competition from illegal pay television operations. We compete primarily on the basis of programming selection, price, technology and service.

        In most of the markets in which we operate, cable television is our principal competitor. Cable operators typically compete with us principally by offering bundles of video, broadband and telephony services. In most cases, they discount the value of their programming services in order to sell broadband and telephony services. In addition, the cable operators with which we compete are in various stages of upgrading their networks in order to provide digital and HD channels, broadband and telephony services. Most of them have a significant percentage of the customers who still receive analog services, which are offered at a lower cost than the cable operators' digital video services.

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        In addition to competition from cable services, we face significant competition from other providers of DTH services. In most markets there are two to three DTH providers in addition to us. Telefonica, the Spanish telephone company, provides DTH services in Chile, Colombia, Peru and Venezuela through its brand Movistar and in Brazil through its brand Vivo. In Brazil, Telefonica has also agreed to purchase Global Village Telecom, or GVT, which offers a hybrid DTH-IPTV. American Movil provides DTH service branded Claro TV in Brazil, Chile, Colombia, Ecuador and Peru. Oi, the second fixed line incumbent in Brazil (in addition to Telefonica), has provided DTH service since 2009. These competitors have significant resources and have proven their ability to grow their businesses rapidly. They typically focus on offering lower-cost, limited services packages, often in support of their telephony and broadband offerings, which can increase our churn and put pressure on our margins. Also, the existence of multiple DTH operators in a single market dilutes our ability to market our DTH service as an alternative to cable, traditionally our principal competition.

        In a number of markets, existing wireline telephony operators have announced their intention to upgrade their infrastructure in order to provide new and enhanced services, including IPTV video programming. However, to date only a very small number of such upgrades and build outs have been actively pursued on other than a test basis.

ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES

        We review our competitive position on an ongoing basis and, from time to time, consider various acquisitions, strategic alliances and divestitures, including potential wireless broadband investments or alliances, in order to continue to compete effectively, improve our financial results, grow our business and allocate our resources efficiently. We also consider periodically making equity investments in companies which we can jointly provide services to our subscribers. While the transaction with AT&T is pending, we are subject to certain restrictions on potential transactions of this type, unless approved by AT&T.

GOVERNMENT REGULATION

        We are subject to government regulation in the United States, primarily by the FCC and by other federal, state and local authorities. We are subject to similar regulatory agencies in Latin America. We are also subject to the rules and procedures of the International Telecommunication Union, or ITU, a specialized agency of the United Nations, which coordinates global telecommunications networks and services.

        The following is a summary of relevant regulatory issues and is not intended to describe all present and proposed government regulation and legislation affecting our business.

        FCC Regulation Under the Communications Act and Related Acts. The Communications Act and other related acts give the FCC broad authority to regulate the operations of DIRECTV U.S.

        FCC regulations govern, among other issues:

        All of our satellites and earth stations are licensed by the FCC. The FCC generally issues DTH space station licenses for a fifteen-year term and DBS space station and earth station licenses for a ten-year term, which is less than the useful life of a healthy direct broadcast satellite. Upon expiration of the initial license term, the FCC has

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the option to extend a satellite operator's license, authorize operation for a period of time on special temporary authority, or decline to extend the license.

        Currently, we have several applications pending before the FCC, including applications to launch and operate future satellites. In general, the FCC's approval of these applications is required for us to continue to expand our range of service offerings while increasing the robustness of our satellite fleet. We may not obtain these approvals in a timely fashion or at all.

        As a DBS/DTH licensee and operator we are also subject to a variety of Communications Act requirements, FCC regulations and copyright laws that could materially affect our business. They include the following:

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        International Telecommunication Union Rules.    We are required by international rules to coordinate the use of the frequencies on our satellites with other satellite operators who may interfere with us or who may suffer interference from our operations.

        Export Control Regulation.    The delivery of satellite-related technical information for use by foreign manufacturing companies and of satellites and related technical information for the purpose of launch by foreign launch services providers are subject to strict export control and prior approval requirements.

        Other Legal and Regulatory Requirements.    DBS/DTH providers are subject to other federal and state regulatory requirements, such as telemarketing and advertising rules, and subscriber privacy rules similar to those governing other MVPDs. We have agreed with the Federal Trade Commission, or FTC, to (1) review and monitor compliance with telemarketing laws by any companies we authorize to do telemarketing and by independent retailers, (2) investigate and respond to complaints about alleged improper telemarketing and (3) terminate our relationship with marketers or retailers found in violation. Similarly, we have agreed with certain state attorneys general to comply with advertising disclosure requirements and monitor compliance by independent retailers.

        We are also subject to state and federal rules and laws regarding information security. Most of these rules and laws apply to customer information that could be used to commit identity theft. Substantially all of the U.S. states and the District of Columbia have enacted security breach notification laws. These laws generally require that a business give notice to its customers whose financial account information has been disclosed because of a security breach.

        In addition, aspects of DBS/DTH service remain regulated at the state and local level. For example, the FCC has promulgated rules prohibiting restrictions by local government agencies and private organizations on the placement of DBS receiving antennas. Local governments and homeowners associations, however, may continue to regulate the placement of such antennas if necessary to accomplish a clearly defined public safety objective or to preserve a recognized historic district, and may also apply to the FCC for a waiver if there are other local concerns of a special or unusual nature. In addition, a number of state and local governments have attempted to impose consumer protection, customer service and other types of regulation on DBS operators. Also, while

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Congress has prohibited local taxation of DBS service, state taxation is permissible, and many states have imposed such taxes, and additional states have attempted to do so recently. Incident to conducting a consumer directed business, we occasionally receive inquiries or complaints from authorities such as state attorneys general and state consumer protection offices or the FTC. These matters are generally resolved in the ordinary course of business, and DIRECTV has agreed to implement a restitution program for consumers who send eligible complaints related to consumer protection practices.

        In Latin America, DIRECTV Latin America and its subsidiaries are subject to laws and regulations in each country in which we operate that govern many of the same aspects of our operations as in the United States, such as landing rights for satellites; spectrum, earth station and other licenses; must carry and other requirements with respect to the channels we carry; and regulations governing telemarketing and customer service. Regulatory regimes in Latin America are generally less developed than in the United States, and the application of existing laws and regulations to DBS/DTH providers is at times uncertain. In addition, there are certain areas where regulations in Latin America are stricter than in the United States, such as regarding labor and consumer protection laws. Foreign exchange laws in some countries can have a material impact on our ability to repatriate funds to the United States. Also, several countries such as Venezuela, Argentina and Brazil have passed or proposed laws imposing certain "national" content requirements, advertising limitations and other requirements on the content we distribute. Such laws can have an adverse impact on the business of our subsidiaries.

INTELLECTUAL PROPERTY

        All DIRECTV companies maintain active programs for identifying and protecting our important intellectual property. We believe that our growing portfolio of pending and issued patents are important assets. We presently hold over 2,300 issued patents worldwide relating to our past and present businesses, including over 1000 patents developed by, or otherwise relating to, the businesses of DIRECTV U.S. We hold a worldwide portfolio of 1800 trademarks related to the DIRECTV brand, products and services; and that of its related entities. In particular, DIRECTV holds trademark registrations in the US relating to its business, including registrations of the primary "DIRECTV" and the DIRECTV Cyclone Design trademarks. In many instances, these trademarks are licensed royalty-free to third parties for use in support of the DIRECTV U.S. business. We actively protect our important patents, trademarks and other intellectual property rights against unauthorized or improper use by third parties.

ENVIRONMENTAL REGULATION

        We are subject to requirements of federal, state, local and foreign environmental laws and regulations. These include laws regulating air emissions, water discharge, employee safety, and universal and hazardous waste management activities. We have an environmental management function designed to track, facilitate and support our compliance with these requirements and attempt to maintain compliance with all such requirements. We have made and will continue to make, as necessary, capital and other expenditures to comply with environmental requirements. We do not, however, expect capital or other expenditures for environmental compliance to be material in 2015. In addition, we periodically review environmental stewardship concepts (such as green initiatives and energy conservation strategies) and implement these whenever feasible. We have been selected by the Environmental Protection Agency as a 2010, 2011, 2012 and 2013 Energy Star award winner for excellence in energy efficient product design and recognized for our "leadership in advancing technology" to reduce energy while continuing to deliver our service. Environmental requirements are complex, change frequently and have become increasingly more stringent over time. Accordingly, we cannot provide assurance that these requirements will not change or become more stringent in the future in a manner that could have a material adverse effect on our business.

        We are also subject to environmental laws requiring the investigation and cleanup of environmental contamination at facilities we formerly owned or operated or currently own or operate or to which we sent hazardous wastes, including specified universal wastes, for treatment, service, disposal or recycling. We are aware of contamination at one of our former sites. We are in the process of complying with the requirements stipulated

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by the government agency overseeing the site cleanup and have allocated the funds to achieve the decontamination goals.

SEGMENT REPORTING DATA

        Operating segment and principal geographic area data for 2014, 2013 and 2012 are summarized in Note 20 of the Notes to the Consolidated Financial Statements in Item 8, Part II of this Annual Report.

EMPLOYEES

        As of December 31, 2014, DIRECTV U.S. had approximately 16,500 full-time and 450 part-time employees, DIRECTV Latin America had approximately 13,000 full-time and 2,000 part-time employees and DIRECTV Sports Networks and Other had approximately 200 full-time employees.

ACCESS TO COMPANY REPORTS

        Our website address is www.directv.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished, if any, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. We are not incorporating by reference in this Annual Report on Form 10-K any information on our website.

        DIRECTV, and the DIRECTV Cyclone Design logo, DIRECTV CINEMA and Genie are trademarks of The DIRECTV Group, Inc. and/or its affiliated entities. Other trademarks, service marks and trade names appearing in this Annual Report are the property of their respective holders.

ITEM 1A.    RISK FACTORS

        You should carefully consider the following risk factors. The risks described below are not the only ones facing our company.

        Our business, financial condition or results of operations could be materially and adversely affected by the following:

We compete with other MVPDs, some of whom have greater resources than we do and levels of competition are increasing.

        We compete in the MVPD industry against cable television, telcos and wireless companies and other land-based and satellite-based system operators with service offerings including video, audio and interactive programming, broadband and other entertainment services and telephony services. Some of these competitors have greater financial, marketing and other resources than we do.

        Some cable television operators have large, established customer bases and many cable operators have significant investments in, and access to, programming. Cable television operators have advantages relative to our U.S. operations, including or as a result of:

        In addition, certain cable companies and telcos in the U.S. and Latin America are capable of offering bundled video, broadband and telecommunications services. In some cases, it appears that the video component of such bundled offerings is significantly under-priced and, in effect, subsidized by the rates charged for broadband and telephony services. In Latin America, this practice of cross-subsidization is sometimes incentivized

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by higher taxes on pay TV services than on telecommunication and broadband services. These pricing practices can influence customers' willingness to subscribe to our service at rates we consider appropriate.

        Mergers, joint ventures and alliances among wireless or private cable television operators, telcos, broadband service providers and others may result in an increase in the number of providers capable of offering such bundled services.

        We have been unable to secure certain international programming, due to exclusive arrangements of programming providers with certain competitors, which has constrained our ability to compete for subscribers who wish to obtain such programming. And as discussed below, certain cable-affiliated programmers have withheld their programming from us in certain markets, which has further constrained our ability to compete for subscribers in those markets.

        In the United States, various telcos and broadband service providers have deployed fiber optic lines directly to customers' homes or neighborhoods to deliver video services, which compete with the DIRECTV service. It is uncertain whether we will be able to increase our satellite capacity, offer a significant level of new services in existing markets in which we compete or expand to additional markets as may be necessary to compete effectively. Some of these various telcos and broadband service providers also sell the DIRECTV service as part of a bundle with their voice and data services. A new broadly-deployed network with the capability of providing video, voice and data services could present a significant competitive challenge and, in the case of the telcos currently selling the DIRECTV service, could result in such companies focusing less effort and resources on selling the DIRECTV service or declining to sell it at all. We may be unable to develop other distribution methods to make up for lost sales through the telcos.

        As a result of these and other factors, we may not be able to continue to expand our subscriber base or compete effectively against cable television or other MVPD operators in the future.

Emerging digital media competition could materially adversely affect us.

        Our business is focused on video, and we face emerging competition from other providers of digital media, some of which have greater financial, marketing and other resources than we do. In particular, programming offered over the Internet has become more prevalent as the speed and quality of broadband networks have improved. Online video distributors and providers such as Netflix, Hulu, Roku, Amazon, Apple and Google, as well as gaming consoles such as Microsoft's Xbox One and Sony's PS4, are aggressively working to become alternative providers of video services. Such services and the growing availability of online content, coupled with an expanding market for connected devices and Internet-connected televisions, as well as wireless and other emerging mobile technologies that provide for the distribution and viewing of video programming, pose a competitive challenge to traditional MVPDs, as a number of consumers may decide to drop or reduce their traditional MVPD subscription package. Some of these services charge a nominal fee or no fee for access to their content, which could adversely affect our business. Programming suppliers also are making more content available on these alternative forms of distribution.

        Significant changes in consumer behavior with regard to how they obtain video entertainment and information in response to this emerging digital media competition could materially adversely affect our revenues and earnings or otherwise disrupt our business.

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

        Almost all of our programming is provided by third parties unaffiliated with DIRECTV. Typically our programming agreements are multiple-year agreements and contain annual price increases. Upon renewal of expiring contracts, programming suppliers have historically increased the rates they charge us for programming. Often these increases are greater than the rate of inflation. We expect this practice to continue and the negotiations over such increases to become more difficult and potentially disruptive. From time to time during difficult negotiations, programming suppliers have and may in the future, require us to remove their programming our service which can result in customer dissatisfaction and increased churn. Programming expenses will continue to be our largest single expense item in the foreseeable future. Our industry has continued to experience an increase in the cost of programming, especially sports programming and retransmission costs for broadcast programming. Continued increases in programming costs may force us to increase the rates that we charge our subscribers, which could in turn, especially in a difficult economic environment, cause subscribers to terminate their subscriptions or potential new subscribers to refrain from subscribing to our service. Furthermore, due to the economy and other factors, we may be unable to pass programming cost increases on to our subscribers. Alternatively, to attempt to mitigate the effect of price increases, we may refuse to carry certain channels, which could adversely affect subscriber growth or result in higher churn.

        In addition, a limited number of cable-affiliated programmers have in the past denied us access to their programming. As discussed below, the FCC's prohibition on most exclusive distribution arrangements involving cable operators and cable-affiliated programmers expired in 2012, replaced by a case-by-case complaint procedure in which the burden rests with the complainant. Our ability to compete successfully will depend on our ability to continue to obtain desirable programming and deliver it to our subscribers at competitive prices. We may not be able to renew these agreements on favorable terms, or at all, or these agreements may be canceled prior to expiration of their original terms. If we are unable to renew any of these agreements or the other parties cancel the agreements, we may not be able to obtain substitute programming, or what we obtain may not be comparable in quality or cost to our existing programming.

        If we are unable to obtain rights to programming or to pass additional costs on, the potential loss of subscribers and the need to absorb some or all of the additional costs could have a material adverse effect on our earnings or cash flow.

We may experience increased subscriber churn or higher subscriber upgrade and retention.

        Subscriber service cancellations, or churn, have a significant financial impact on the results of operations of any subscription television provider, as does the cost of upgrading and retaining subscribers. Any increase in our upgrade and retention costs for our existing subscribers or increased programming costs may adversely affect our financial performance or cause us to increase our subscription rates, which could increase churn. Churn may also increase due to factors beyond our control, including churn by subscribers who are unable to pay their monthly subscription fees, a slowing economy, significant signal theft, consumer fraud, a maturing subscriber base and competitive offers and alternatives. Any of the risks described in this Annual Report that could potentially have a material adverse impact on our costs or service quality or that could result in higher prices for our subscribers could cause an increase in churn and consequently have a material adverse effect on our earnings and financial performance.

Our subscriber acquisition costs could materially increase.

        We incur costs for subscribers acquired by us and through third parties. These costs are known as subscriber acquisition costs and include the cost of set-top receivers and other equipment, commissions we pay to third parties, and the cost of installation, advertising, marketing and customer call center expenses associated with the acquisition of new subscribers. Our subscriber acquisition costs may materially increase if we offer more costly advanced equipment or services, including connecting our receivers to the customers' broadband service, continue

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or expand current sales promotion activities or introduce more aggressive promotions. Any material increase in subscriber acquisition costs from current levels would negatively impact our earnings and could materially adversely affect our financial performance.

Weakening economic conditions may reduce subscriber spending and our rate of growth of subscriber additions and may increase subscriber churn.

        Our business may be affected by factors that are beyond our control, such as downturns in economic activity, or in the MVPD industry. Factors such as interest rates and the health of the housing market may impact our business. A substantial portion of our revenues comes from residential customers whose spending patterns may be affected by prevailing economic conditions. Our market share in multiple dwelling units such as apartment buildings is lower than that of many of our competitors. If unemployment and foreclosures of single family residences increase, our earnings and financial performance could be negatively affected more than those of our competitors. In addition, if our customers seek alternative means to obtain video entertainment, they may choose to purchase fewer services from us or may discontinue receiving our services. Due to the economic and competitive environment, we may need to spend more, or we may provide greater discounts or credits, to acquire and retain customers who may spend less on our services. If our ARPU decreases or does not increase commensurate with increases in programming or other costs, our margins could become compressed and the long-term value of a customer would then decrease. A weak economy may affect our net subscriber additions and reduce subscriber spending and, if these economic conditions continue or deteriorate, subscriber growth could decline and churn could increase which would have a material adverse effect on our earnings and financial performance.

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

        All of DIRECTV Latin America's operating companies are located outside the continental United States. DIRECTV Latin America operates and has subscribers located throughout Latin America and the Caribbean, which makes it vulnerable to risks of conducting business in foreign markets, including:

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        In the past, the countries that constitute some of DIRECTV Latin America's largest markets, including Brazil, Argentina, Colombia and Venezuela, have experienced economic crises, characterized by exchange rate instability, currency devaluation, high inflation, high interest rates, economic contraction, a reduction or cessation of international capital flows, a reduction of liquidity in the banking sector and high unemployment. These economic conditions have often been related to political instability. If these economic conditions recur, they could substantially reduce the purchasing power of the population in our markets, including the middle-markets which we are targeting, and materially adversely affect our business. Also, foreign currency exchange controls are currently in effect in Venezuela and Argentina, and have adversely affected our ability to repatriate cash balances from those countries.

        Because DIRECTV Latin America offers premium pay television programming, its business may be particularly vulnerable to economic downturns. DIRECTV Latin America has in the past experienced, and may in the future experience, decreases or instability in consumer demand for its programming and increases in subscriber credit problems. DIRECTV Latin America's inability to adjust its business and operations to address these issues, including the inability to pass on price increases to offset inflation, could materially adversely affect its revenues and ability to sustain profitable operations.

Our ability to keep pace with technological developments is uncertain.

        In our industry, changes occur rapidly as new technologies are developed, which could render our services and products obsolete. We may not be able to keep pace with technological developments. If new technologies on which we focus our investments fail to achieve acceptance in the marketplace or our technology does not work and requires significant cost to replace or fix, we could suffer a material adverse effect on our future competitive position, which could cause a reduction in our revenues and earnings. Further, after incurring substantial costs, one or more of the technologies under development by us or any of our strategic partners could become obsolete prior to its introduction.

        Technological innovation depends, to a significant extent, on the work of technically skilled employees. Competition for the services of these employees has been vigorous. We may not be able to continue to attract and retain such employees.

        To access technologies and provide products that are necessary for us to remain competitive, we may make future acquisitions and investments and may enter into strategic partnerships with other companies. Such investments may require a commitment of significant capital and human and other resources. The value of such acquisitions, investments and partnerships and the technology accessed may be highly speculative. Arrangements with third parties can lead to contractual and other disputes and dependence on others for the development and delivery of necessary technology that we may not be able to control or influence. Such relationships may commit us to technologies that are rendered obsolete by other developments or preclude the pursuit of other technologies which may prove to be superior.

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.

        Many entities, including some of our competitors, have or may obtain patents and other intellectual property rights that cover or affect products or services related to those that we currently offer or may offer. If a court determines that one or more of our services or the products used to transmit or receive our services infringes on intellectual property owned by others, we and the applicable manufacturers or vendors may be required to cease developing or marketing those services and products, to obtain licenses from the owners of the intellectual property or to redesign those services and products in such a way as to avoid infringing such intellectual property rights. If a third party holds intellectual property rights, it may not allow us or the applicable manufacturers to use its intellectual property at any price, which could materially adversely affect our competitive position.

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        We may not be aware of all intellectual property rights that our services or the products used to transmit or receive our services may potentially infringe. U.S. patent applications are generally confidential until the Patent and Trademark Office issues a patent. Therefore, we cannot evaluate the extent to which our services or the products used to transmit or receive our services may infringe claims contained in pending patent applications. Further, without lengthy litigation, it is often not possible to determine definitively whether a claim of infringement is valid.

        We cannot estimate the extent to which we may be required in the future to obtain intellectual property licenses or the availability and cost of any such licenses. Those costs, and their impact on our earnings, could be material. Damages in patent infringement cases may also include treble damages. If we are required to pay royalties to third parties, these increased costs could materially adversely affect our operating results. We are currently being sued in patent infringement actions related to use of technologies in our DTH business. There can be no assurance that the courts will conclude that our services or the products used to transmit or receive our services do not infringe on the rights of third parties, that we or the manufacturers would be able to obtain licenses from these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that we or the manufacturers would be able to redesign our services or the products used to transmit or receive our services to avoid infringement. The final disposition of these claims is not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations for any one period. Further, no assurance can be given that any adverse outcome would not be material to our consolidated financial position. See "Legal Proceedings-Intellectual Property Litigation" in Part I, Item 3 which is incorporated by reference herein.

We rely on key executives.

        We believe that our future success will depend to a significant extent upon the performance of certain of our key executives. The loss of certain of our key executives could have a material adverse effect on our business, financial condition and results of operations.

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

        A key component of our business strategy is our ability to expand our offering of new programming and services, including HD and 4K programming. In order to accomplish this goal, we need to construct and launch new satellites. The construction and launch of satellites are often subject to delays, including construction delays, unavailability of launch opportunities due to competition for launch slots, weather, general delays when a launch provider experiences a launch failure, and delays in obtaining regulatory approvals. A significant delay in the delivery of any satellite would materially adversely affect the use of the satellite and thus could materially adversely affect our anticipated revenues and earnings. If satellite construction schedules are not met, there can be no assurance that a launch opportunity will be available at the time a satellite is ready to be launched. Certain delays in satellite construction could also jeopardize a satellite authorization that is conditioned on timely construction and launch of the satellite.

Satellites are subject to significant launch and operational risks.

        Satellites are subject to significant operational risks relating to launch and while in orbit. These risks include launch failure, incorrect orbital placement or improper operation. Launch failures result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take up to 36 months, and to obtain other launch opportunities. Any significant delays or failures in successfully launching and deploying our satellites could materially adversely affect our ability to generate revenues. While we have traditionally purchased insurance covering the launch and, in limited cases, operation of our satellites, such policies typically cover the loss of the satellite itself or a portion thereof, and not the business interruption or other associated direct and indirect costs. In-orbit risks include malfunctions, commonly referred to as anomalies, and collisions with meteoroids, other spacecraft or other space debris. Anomalies occur as a result of satellite

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manufacturing errors, problems with the power systems or control systems of the satellites and general failures resulting from operating satellites in the harsh space environment. We work closely with our satellite manufacturers to determine and eliminate the potential causes of anomalies in new satellites and provide for redundancies of critical components as well as having backup satellite capacity. However, we cannot assure that we will not experience anomalies in the future, nor can we assure you that our backup satellite capacity will be sufficient.

        Any single anomaly or series of anomalies could materially adversely affect our operations and revenues and our relationships with our subscribers, as well as our ability to attract new subscribers for our services. Anomalies may also reduce the expected useful life of a satellite, creating additional expenses due to the need to provide replacement or backup satellites and potentially reducing revenues if service is interrupted. Finally, the occurrence of anomalies may materially adversely affect our ability to insure our satellites at commercially reasonable premiums, if at all.

        Our ability to earn revenue also depends on the usefulness of our satellites. Each satellite has a limited useful life. A number of factors affect the useful life of a satellite, including, among other things:

        Generally, the minimum design life of the satellites in our fleet is between 12 and 16 years. The actual useful lives of the satellites may be shorter or longer, in some cases significantly. Our operating results could be adversely affected if the useful life of any of our satellites were significantly shorter than 12 years from the date of launch.

        In the event of a failure or loss of any of DIRECTV U.S.' satellites, DIRECTV U.S. may relocate another satellite and use it as a replacement for the failed or lost satellite. In the event of a complete satellite failure, DIRECTV U.S.' services provided via that satellite could be unavailable for several days or longer while backup in-orbit satellites are repositioned and services are moved. DIRECTV U.S. is not insured for any resultant lost revenues. The use of backup satellite capacity for DIRECTV U.S. programming may require DIRECTV U.S. to discontinue some programming services due to potentially reduced capacity on the backup satellite. Relocation of a DIRECTV U.S. satellite may not require prior FCC approval if, among other things, the replacement satellite would operate within the authorized or coordinated parameters of the failed or lost satellite. If that is not the case, prior FCC approval would be required. Such FCC approval may not be obtained on a timely basis or at all. DIRECTV U.S. believes we have in-orbit satellite capacity to expeditiously recover transmission of most of our programming in the event one of our in-orbit satellites fails. However, programming continuity cannot be assured in the event of multiple satellite losses.

        DIRECTV Latin America provides its services in PanAmericana and Brazil using leased transponders on two satellites. Sky Mexico provides its services from leased transponders on a separate satellite. Backup satellite capacity is available to serve Sky Brasil and Sky Mexico. In the event of a failure of a satellite used to provide services to Sky Brasil or Sky Mexico, we believe DIRECTV Latin America has sufficient in orbit back-up capacity to recover transmission of most of its programming distributed in those markets. In PanAmericana, DIRECTV Latin America currently has partial designated back up satellite capacity for the region and, by the end of 2015, we expect to have full back up satellite capacity to ensure programming continuity in the event of a satellite loss.

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        In addition, DIRECTV Latin America is dependent on third parties for the orbital slots in which its leased satellites are located. If those third parties fail to adequately protect their rights to continued use of and other rights related to those orbital slots, or fail to take appropriate steps to manage potential conflicts with rights holders for adjacent orbital slots, then DIRECTV Latin America could lose rights to operate from those locations or may otherwise be required to modify or limit its operations from those locations which could materially adversely affect DIRECTV Latin America's transmission capacity and its ability to compete in regions served from those orbital slots.

The loss of a satellite could materially adversely affect our earnings.

        Any launch vehicle failure, or loss or destruction of any of our satellites, even if insured, could have a material adverse effect on our financial condition and results of operations, our ability to comply with FCC regulatory obligations and our ability to fund the construction or acquisition of replacement satellites in a timely fashion, or at all. At December 31, 2014, the net book value of in-orbit satellites was $1,806 million, none of which was insured.

DIRECTV U.S. depends on the Communications Act for access to cable-affiliated programming and changes impacting that access could materially adversely affect us.

        DIRECTV U.S. purchases a substantial percentage of programming from programmers that are affiliated with cable system operators, including key RSNs. Currently, under certain provisions of the Communications Act governing access to programming, cable-affiliated programmers generally must sell and deliver their programming services to all MVPDs on non-discriminatory terms and conditions.

        Any change in the Communications Act or the FCC's rules that would permit programmers that are affiliated with cable system operators to refuse to provide such programming or to impose discriminatory terms or conditions could materially adversely affect our ability to acquire programming on a cost-effective basis, or at all. The Communications Act prohibitions on certain cable industry exclusive contracting practices with cable-affiliated programmers expired in October 2012. Under the remaining rules, DIRECTV may bring complaints on a case-by-case basis alleging that a particular instance of exclusivity constitutes a prohibited "unfair practice" that has the purpose or effect of significantly hindering or preventing DIRECTV from providing programming to consumers. The FCC is currently considering whether to adopt additional safeguards, such as rebuttable presumptions in favor of complainants, but we cannot predict what if any action the FCC will take. Regardless of the outcome of those considerations, the weakening of the program access rules may increase the ability of cable-affiliated programmers to deny DIRECTV access to their programming.

        In addition, certain cable providers have denied in the past and could in the future deny us and other MVPDs access to a limited number of channels created by programmers with which the cable providers are affiliated. In other cases, such programmers have denied MVPDs high-definition feeds of such programming. The cable providers have asserted that they were not required by the Communications Act to provide such programming (or resolution) due to the manner in which that programming is distributed. The FCC adopted rules to close this loophole. However, an evidentiary showing by an MVPD seeking access to such programming would be required and cable operators have vigorously contested such showings.

        DIRECTV U.S. itself is subject to similar restrictions with respect to certain programmers affiliated with us. The FCC imposed a number of conditions on its approval of Liberty Media's acquisition of News Corporation's interest in DIRECTV which continue to apply. Those conditions require DIRECTV U.S. to offer national and regional programming services it controls to all MVPDs on non-exclusive and non-discriminatory terms and conditions, and prohibits DIRECTV U.S. from entering into exclusive arrangements with affiliated programmers or unduly influencing such programmers in their dealings with other MVPDs.

        We are subject to significant regulatory oversight and changes in applicable regulatory requirements could adversely affect our business. You should review the regulatory disclosures under the caption "Item 1—Business—Government Regulation—FCC Regulation Under the Communications Act and Related Acts" which is incorporated herein by reference.

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Changes to and implementation of statutory copyright license requirements may negatively affect our ability to deliver local and distant broadcast stations, as well as other aspects of our business.

        We carry the signals of local and distant broadcast stations pursuant to statutory copyright licenses contained in SHVA, and our carriage of these stations is governed by the FCC and Copyright Office implementing regulations. Any changes to such laws or regulations could limit our ability to deliver local or distant broadcast signals. More generally, we have limited capacity, and the projected number of markets in which we can deliver local broadcast programming will continue to be constrained because of the statutory "carry-one, carry-all" requirement and may be reduced depending on the FCC's interpretation of its rules, as well as judicial decisions. The new "market modification" procedures could also limit our ability to carry local signals, depending on how the FCC implements them. We may not be able to comply with these must carry rules, or compliance may mean that we are not able to use capacity otherwise for new or additional local or national programming services.

        The FCC has adopted rules for "retransmission consent" requiring us to negotiate in good faith with broadcast stations seeking carriage outside of the mandatory carriage regime described elsewhere. Failure to comply with these rules could subject us to administrative sanctions and other penalties. Moreover, the FCC is considering changes to these and other rules related to retransmission consent, which could make negotiations more difficult, increase fees charged for carriage, or result in the increased withholding of broadcast signals.

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

        The delivery of subscription programming requires the use of conditional access technology to limit access to programming to only those who are authorized to view it. The conditional access system uses encryption technology to protect the transmitted signal from unauthorized access. It is illegal to create, sell or otherwise distribute software or devices to circumvent that conditional access technology. However, theft of cable and satellite programming has been widely reported, and the access cards used in our conditional access system have been, and could be compromised in the future.

        We have undertaken various initiatives with respect to our conditional access system to further enhance the security of the DIRECTV signal. We provide our subscribers with advanced access cards that we believe significantly enhance the security of our signal. We believe these access cards have not been compromised. However, we cannot guarantee that these advanced access cards will prevent future theft of our satellite programming signals. There can be no assurance that we will succeed in developing the technology we need to effectively restrict or eliminate signal theft. If our current access cards are compromised, our revenue and our ability to contract for programming could be materially adversely affected. In addition, our operating costs could increase if we attempt to implement additional measures to combat signal theft.

        In addition, particularly in Latin America, we also face other forms of signal theft, including illegal retransmission of our signal through unauthorized cable head-ends and Internet key sharing schemes. If we are not able to contain and combat these and other forms of signal theft, such schemes could limit our growth and materially adversely affect our ability to generate revenue.

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

        If we do not obtain all requisite U.S. regulatory approvals for the construction, launch and operation of any of our existing or future satellites, for the use of frequencies at the orbital locations planned for these satellites or for the provision of service, or the licenses obtained impose operational restrictions on us, our ability to generate revenue and profits could be materially adversely affected. In addition, under certain circumstances, existing licenses are subject to revocation or modification and upon expiration, extension or renewal may not be granted. If existing licenses are not extended or renewed, or are revoked or materially modified, our ability to generate revenue could be materially adversely affected.

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        Other U.S. regulatory risks include:

        All of our FCC satellite authorizations are subject to conditions imposed by the FCC in addition to the FCC's general authority to modify, cancel or revoke those authorizations. Use of FCC licenses and other authorizations are often subject to conditions, including technical requirements and implementation deadlines. Failure to comply with such requirements, or comply in a timely manner, could lead to the loss of authorizations and could have a material adverse effect on our ability to generate revenue. For example, loss of an authorization could potentially reduce the amount of programming and other services available to our subscribers. The materiality of such a loss of authorization would vary based upon, among other things, the orbital location at which the frequencies may be used.

        Moreover, some of our authorizations and future applications may be subject to petitions and oppositions, and there can be no assurance that our authorizations will not be canceled, revoked or modified or that our applications will not be denied. The outcomes of any legislative or regulatory proceedings or their effect on our business cannot be predicted. You should review "Item 1. Business—Government Regulation—FCC Regulation Under the Communications Act and Related Acts," which is incorporated herein by reference.

DIRECTV U.S. has significant debt.

        The carrying value of DIRECTV U.S.' debt, which is guaranteed by DIRECTV, totaled $20,527 million as of December 31, 2014. If we do not have sufficient income or other sources of cash, it could affect our ability to service debt and pay other obligations.

We may not be able to obtain or retain certain foreign regulatory approvals.

        There can be no assurance that any current regulatory approvals held by us are, or will remain, sufficient in the view of foreign regulatory authorities, or that any additional necessary approvals will be granted on a timely basis or at all, in all jurisdictions in which we operate, or that applicable restrictions in those jurisdictions will not be unduly burdensome. The failure to obtain and maintain the authorizations necessary to operate satellites or provide satellite service internationally could have a material adverse effect on our ability to generate revenue and our overall competitive position.

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.

        Because network and information systems and other technologies are critical to our operating activities, network or information system shutdowns caused by events such as computer hacking on our network or our directv.com website, dissemination of computer viruses, worms and other destructive or disruptive software, and other malicious activity including industrial espionage and malicious social engineering, as well as power outages, natural disasters such as earthquakes, terrorist attacks and similar events, pose significant risks. Due to the fast-moving pace of technological advancements, it may be difficult to detect, contain and remediate every such

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event. Such an event could have an adverse impact on our operations, including service disruption, degradation of service, excessive call volume to call centers and damage to our broadcast centers, other properties, equipment and data. Such an event also could result in large expenditures necessary to repair or replace such networks or information systems or to protect them from similar events in the future. Third parties may also experience errors or disruptions that could adversely impact our business operations and over which we have limited control. Significant incidents could result in a disruption of our operations, customer dissatisfaction, or a loss of customers or revenues. The amount and scope of insurance we maintain against losses resulting from these events may not be sufficient to cover our losses or otherwise adequately compensate us for any disruptions to our business that may result. Furthermore, our operating activities could be subject to risks caused by misappropriation, misuse, leakage, falsification and accidental release or loss of information maintained in our information technology systems and networks, including customer, personnel and vendor data. We could be exposed to significant costs if such risks were to materialize, and such events could damage our reputation and credibility and have a negative impact on our revenues. We also could be required to expend significant capital and other resources to remedy any such security breach. As a result of the increasing awareness concerning the importance of safeguarding personal information, the potential misuse of such information and legislation that has been adopted or is being considered regarding the protection, privacy and security of personal information, the liability associated with information-related risks is increasing, particularly for businesses like ours that handle a large amount of personal customer data. The occurrence of any such network or information systems related events or security breaches could have a material adverse effect on our business and results of operations.

        Our DIRECTV Everywhere initiative offers access to our DIRECTV service content through streaming or other access through the Internet and is an important part of our strategy to continue to build the value of our service for our customers. This initiative will become more important as the volume and variety of such programming through streaming increases. The means to provide such access is a combination of proprietary technology and technology provided by our third-party vendors. Disruption or failure of these technologies or a disruption in the Internet could limit or preclude access by our customers to our streaming product.

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

        We are involved in various legal proceedings, including those arising in the ordinary course of business, such as consumer class actions and those described under the caption "Legal Proceedings" in Part I, Item 3 incorporated by reference herein. Such matters include investigations and legal actions by the FTC and state attorneys general where regulators may seek monetary damages and may also seek to require or prohibit certain actions by us with regard to our current or potential customers. While we do not believe that any of these proceedings alone or in the aggregate will have a material effect on our consolidated financial position, an adverse outcome in one or more of these matters or the imposition of conditions by regulators on the conduct of our business could be material to our consolidated results of operations and cash flows for any one period. Further, no assurance can be given that any adverse outcome would not be material to our consolidated financial position.

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

        The Company has identified a number of strategic initiatives that it intends to pursue which are discussed in more detail in the "Business Strategy" section beginning in Part I, Item 1 of this Annual Report. The successful implementation of those strategic initiatives requires an investment of time, talent and money and is dependent upon a number of factors some of which are not within our control. Those factors include the ability to execute such initiatives in the market, the response of existing and potential new customers, and the actions or reactions of competitors. If we fail to properly execute or deliver products or services that do not address customers' expectations, it may have an adverse effect on our ability to retain and attract customers and may increase our costs and reduce our revenues. Similarly, competitive actions or reactions to our initiatives or advancements in technology or competitive products or services could impair our ability to execute or could limit the effectiveness

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of those strategic initiatives. There can be no assurance that we will successfully implement these strategic initiatives or that, if successfully pursued, they will have the desired effect on our business or results of operations.

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

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

        Competition for qualified personnel can be intense. Current and prospective employees of DIRECTV may experience uncertainty about the effect of the merger, which may impair DIRECTV's ability to attract, retain and motivate key management, sales, marketing, technical and other personnel prior to the merger. Employee retention may be particularly challenging during the pendency of the merger, as employees of DIRECTV may experience uncertainty about their future roles with the combined company.

        In addition, there could be disruptions to or distractions for the workforce and management associated with obtaining the required regulatory approvals to close the proposed transaction and planning for the integration of DIRECTV into AT&T once the transaction is approved.

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

        The obligations of AT&T and DIRECTV to complete the merger are subject to satisfaction or waiver of a number of conditions. The obligations of AT&T and DIRECTV are each subject to, among other conditions: (i) receipt of all necessary consents from the FCC for the consummation of the merger, (ii) absence of any applicable law, order or injunction that prohibits completion of the merger, (iii) accuracy of the representations and warranties made in the merger agreement by the other party, subject to certain materiality qualifications, (iv) performance in all material respects by the other party of the material obligations required to be performed by it at or prior to completion of the merger and (v) the absence of a material adverse effect on the other party. In addition, the obligations of AT&T are also subject to receipt of a tax opinion from Sullivan & Cromwell LLP, dated as of the effective time, to the effect that the merger will qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code. The obligations of DIRECTV are also subject to receipt of a tax opinion from Weil, Gotshal and Manges LLP, dated as of the effective time, to the effect that the merger will qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code (see the section entitled "The Merger Agreement-Conditions to Completion of the Merger"). In certain cases, AT&T's obligation to complete the merger is further subject to the relevant governmental approvals having been received without the imposition of, and there being no applicable law imposing, a regulatory material adverse effect (see the definition of regulatory material adverse effect in the section entitled "The Merger Agreement-Regulatory Approvals" beginning on page 87 of the Definitive Proxy Statement of DIRECTV filed with the SEC on August 21, 2014, or the August Proxy Statement).

        For a more complete summary of the conditions that must be satisfied or waived prior to completion of the merger, see the section entitled "The Merger Agreement-Conditions to Completion of the Merger" beginning on page 104 of the August Proxy Statement. The satisfaction of all of the required conditions could delay the completion of the merger for a significant period of time or prevent it from occurring. Any delay in completing the merger could cause AT&T not to realize some or all of the benefits that AT&T expects to achieve if the merger is successfully completed within its expected time frame. Further, there can be no assurance that the conditions to the closing of the merger will be satisfied or waived or that the merger will be completed. See the risk factor entitled "Failure to complete the merger could negatively impact the stock price and the future business and financial results of DIRECTV," below.

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DIRECTV's business relationships may be subject to disruption due to uncertainty associated with the merger.

        Parties with which DIRECTV does business may experience uncertainty associated with the transaction, including with respect to current or future business relationships with AT&T, DIRECTV or the combined company. DIRECTV's business relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than AT&T, DIRECTV or the combined company. These disruptions could have an adverse effect on the business, financial condition, results of operations or prospects of DIRECTV. The risks, and adverse effects, of such disruptions could be exacerbated by a delay in completion of the merger or termination of the Merger Agreement.

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

        If the merger is not completed for any reason, the ongoing business of DIRECTV may be adversely affected and, without realizing any of the benefits of having completed the merger, DIRECTV would be subject to a number of risks, including the following:

        In addition to the above risks, DIRECTV may be required, under certain circumstances, to pay to AT&T the termination fee, which may materially adversely affect DIRECTV's financial results. Further, DIRECTV could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against DIRECTV to perform its obligations under the Merger Agreement. If the merger is not completed, these risks may materialize and may adversely affect DIRECTV's business, financial condition, financial results and stock prices.

We may face other risks described from time to time in periodic reports filed by us with the SEC.

        From time to time, we may disclose other relevant risks in other periodic reports that we file with the SEC. We urge you to consider the above risk factors and any other risks disclosed in such periodic reports carefully in evaluating the forward-looking statements contained in this Annual Report. The forward-looking statements included in this Annual Report are made only as of the date of this Annual Report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

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ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        As of December 31, 2014, we had approximately 231 owned and leased locations operating in the United States and Latin America. The major locations of the DIRECTV U.S. segment include eight administrative offices, two broadcast centers and six call centers. The major locations of the DIRECTV Latin America segment include 13 administrative offices, four broadcast centers and five call centers. We consider our properties adequate for our present needs.

ITEM 3.    LEGAL PROCEEDINGS

        (a)    Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we became or were a party during the year ended December 31, 2014 or subsequent thereto, but before the filing of the report, are summarized below:

        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.

        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 Investigation.    As reported previously, DIRECTV U.S. received a request for information from the Federal Trade Commission, or FTC, on issues similar to those resolved in 2011 with a multistate group of state attorneys general. We have been cooperating with the FTC by providing information about our sales and marketing practices and customer complaints. We have engaged in ongoing negotiations with FTC staff concerning these issues. The FTC staff has recently advised us that they have obtained authority from the Commissioners to file suit and that the damages sought by the FTC in such a proceeding could be substantial. However, until suit is filed, the parties are continuing to engage in discussion regarding a potential settlement.

        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 and cooperating with the investigation.

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        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.

        (b)   The following previously reported legal proceeding was terminated during the fourth quarter ended December 31, 2014.

        DIRECTV Shareholder Litigation-Proposed DIRECTV and AT&T Merger.    As previously reported, beginning on May 21, 2014, and following the May 18, 2014 announcement that DIRECTV had entered into a definitive agreement to combine with AT&T Inc., several shareholder putative class action lawsuits were filed, six in Delaware Chancery Court, or the Delaware Actions, and one in California Superior Court, or the California Action, against DIRECTV, its directors and AT&T Inc., alleging breach of fiduciary duties in connection with the proposed transaction. The complaints generally and collectively asserted that defendants failed to maximize the value of DIRECTV, and sought to enjoin the proposed transaction as well as unspecified damages, costs and fees. An Order consolidating the Delaware Actions and appointing Lead Plaintiff and Lead Counsel was entered on July 21, 2014 and discovery in the Delaware Actions was stayed pending the filing of a Consolidated Complaint. Subsequently, Lead Counsel in the Delaware Actions filed a motion to voluntarily dismiss the Delaware Actions against all defendants and that motion was granted by order entered by the Chancery Court on October 28, 2014. The California Action subsequently has been voluntarily dismissed by plaintiff effective February 9, 2015.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Price

        Our common stock is publicly traded on the NASDAQ Global Select Market under the symbol "DTV." The following table sets forth for the quarters indicated the high and low sales prices for our common stock, as reported on the NASDAQ Global Select Market.

2014  
High
 
Low
 

Fourth Quarter

  $ 88.08   $ 82.04  

Third Quarter

    88.25     83.14  

Second Quarter

    89.46     73.54  

First Quarter

    80.77     67.80  

 

2013  
High
 
Low
 

Fourth Quarter

  $ 69.15   $ 57.40  

Third Quarter

    67.85     57.05  

Second Quarter

    65.81     53.50  

First Quarter

    57.64     47.71  

        As of the close of business on February 13, 2015, there were 42,995 holders of record of our common stock.

Dividend Rights and Other Stockholder Matters

        Holders of our common stock are entitled to such dividends and other distributions in cash, stock or property as may be declared by our Board of Directors in its sole discretion, subject to the preferential and other dividend rights of any outstanding series of our preferred stock. There were no shares of our preferred stock outstanding at December 31, 2014.

        No dividends on our common stock have been declared by our Board of Directors for more than five years. We have no current plans to pay any dividends on our common stock. We currently expect to use our future earnings, if any, for the development of our businesses or other corporate purposes, which may include share repurchases.

        Information regarding compensation plans under which our equity securities may be issued will be included in an amendment to be filed on Form 10-K/A not later than April 30, 2015.

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 a new authorization for up to $3.5 billion for repurchases of our common stock. On May 18, 2014, DIRECTV and AT&T entered into a definitive agreement under which DIRECTV will combine with AT&T in a stock-and-cash transaction. As a result, we have suspended the share repurchase program and agreed to not purchase, repurchase, redeem or otherwise acquire any shares of our capital stock without AT&T's consent unless the Merger Agreement is terminated.

        During the three months ended December 31, 2014 there were no share repurchases.

        For additional information regarding our share repurchases see Note 15 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report.

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ITEM 6.    SELECTED FINANCIAL DATA

 
 
Years Ended December 31,
 
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
  (Dollars in Millions, Except Per Share Amounts)
 

Consolidated Statements of Operations Data:

                               

Revenues

  $ 33,260   $ 31,754   $ 29,740   $ 27,226   $ 24,102  

Total operating costs and expenses

    28,132     26,604     24,655     22,597     20,206  

Operating profit

  $ 5,128   $ 5,150   $ 5,085   $ 4,629   $ 3,896  

Net income attributable to DIRECTV

  $ 2,756   $ 2,859   $ 2,949   $ 2,609   $ 2,198  

Basic earnings attributable to DIRECTV common stockholders per common share

 
$

5.46
 
$

5.22
 
$

4.62
 
$

3.49
 
$

2.31
 

Diluted earnings attributable to DIRECTV common stockholders per common share

 
$

5.40
 
$

5.17
 
$

4.58
 
$

3.47
 
$

2.30
 

Basic and diluted earnings attributable to DIRECTV Class B common stockholders per common share, for the period of November 19, 2009 through June 16, 2010, including $160 million exchange inducement value for the Malone Transaction

 
$

 
$

 
$

 
$

 
$

8.44
 

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

   
 
   
 
   
 
   
 
   
 
 

Basic

    505     548     638     747     870  

Diluted

    510     553     644     752     876  

Weighted average number of Class B common shares outstanding, for the period of November 19, 2009 through June 16, 2010 (in millions):

                               

Basic

                    22  

Diluted

                    22  

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

                               

Basic

    505     548     638     747     880  

Diluted

    510     553     644     752     886  

 

 
 
As of December 31,
 
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
  (Dollars in Millions)
 

Consolidated Balance Sheets Data:

                               

Total assets

  $ 25,459   $ 21,905   $ 20,555   $ 18,423   $ 17,909  

Obligations under capital leases

    982     495     528     545     580  

Long-term debt

    19,485     18,284     17,170     13,464     10,472  

Total stockholders' deficit

    (4,828 )   (6,544 )   (5,431 )   (3,107 )   (194 )

See the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding significant transactions during each of the three years in the period ended December 31, 2014.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT FOR PURPOSE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

        This Annual Report on Form 10-K may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "estimate," "anticipate," "intend," "plan," "foresee," "project" or other similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make related to our business strategy and regarding our outlook for 2015 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 other risks, each of which is described in more detail in Item 1A—Risk Factors of this Annual Report.

        Any forward looking statement made by us in this Annual Report on Form 10-K 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 developments 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 Annual Report. Information in this section is organized as follows:

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SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 
 
Years Ended December 31,
 
 
 
2014
 
2013
 
2012
 
 
  (Dollars in Millions, Except Per Share Amounts)
 

Consolidated Statements of Operations Data:

                   

Revenues

  $ 33,260   $ 31,754   $ 29,740  

Total operating costs and expenses

    28,132     26,604     24,655  

Operating profit

    5,128     5,150     5,085  

Interest income

    68     72     59  

Interest expense

    (898 )   (840 )   (842 )

Other, net

    150     106     140  

Income before income taxes

    4,448     4,488     4,442  

Income tax expense

    (1,673 )   (1,603 )   (1,465 )

Net income

    2,775     2,885     2,977  

Less: Net income attributable to noncontrolling interest

    (19 )   (26 )   (28 )

Net income attributable to DIRECTV

  $ 2,756   $ 2,859   $ 2,949  

Basic earnings attributable to DIRECTV per common share

  $ 5.46   $ 5.22   $ 4.62  

Diluted earnings attributable to DIRECTV per common share

  $ 5.40   $ 5.17   $ 4.58  

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

                   

Basic

    505     548     638  

Diluted

    510     553     644  

 

 
 
December 31,
 
 
 
2014
 
2013
 
 
  (Dollars in Millions)
 

Consolidated Balance Sheets Data:

             

Cash and cash equivalents

  $ 4,635   $ 2,180  

Total current assets

    8,819     5,953  

Total assets

    25,459     21,905  

Total current liabilities

    6,959     6,530  

Long-term debt

    19,485     18,284  

Redeemable noncontrolling interest

        375  

Total stockholders' deficit

    (4,828 )   (6,544 )

Reference should be made to the notes to the Consolidated Financial Statements.

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SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(continued)

 
 
Years Ended December 31,
 
 
 
2014
 
2013
 
2012
 
 
  (Dollars in Millions)
 

Other Data:

                   

Operating profit before depreciation and amortization (1)

                   

Operating profit

  $ 5,128   $ 5,150   $ 5,085  

Add: Depreciation and amortization expense

    2,943     2,828     2,437  

Operating profit before depreciation and amortization

  $ 8,071   $ 7,978   $ 7,522  

Operating profit before depreciation and amortization margin

    24.3 %   25.1 %   25.3 %

Cash flow information

                   

Net cash provided by operating activities

  $ 6,369   $ 6,394   $ 5,634  

Net cash used in investing activities

    (3,363 )   (3,753 )   (3,363 )

Net cash used in financing activities

    (168 )   (2,176 )   (1,242 )

Free cash flow (2)

                   

Net cash provided by operating activities

  $ 6,369   $ 6,394   $ 5,634  

Less: Cash paid for property and equipment

    (2,940 )   (3,409 )   (2,960 )

Less: Cash paid for satellites

    (285 )   (377 )   (389 )

Free cash flow

  $ 3,144   $ 2,608   $ 2,285  

(1)
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 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.

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SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(continued)

(2)
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 service providers. 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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SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(continued)

Selected Segment Data

 
 
Revenues
 
Percent of
Total
Revenues
 
Operating
Profit
(Loss)
 
Depreciation
and
Amortization
Expense
 
Operating
Profit (Loss)
Before
Depreciation
and
Amortization
 
Operating
Profit
Margin
 
Operating
Profit Before
Depreciation
and
Amortization
Margin
 
 
  (Dollars in Millions)
   
 

December 31, 2014

                                           

DIRECTV U.S. 

  $ 26,001     78.2 % $ 4,749   $ 1,722   $ 6,471     18.3 %   24.9 %

Sky Brasil

    3,887     11.7 %   488     687     1,175     12.6 %   30.2 %

PanAmericana and Other

    3,174     9.5 %   (46 )   520     474     NM *   14.9 %

DIRECTV Latin America

    7,061     21.2 %   442     1,207     1,649     6.3 %   23.4 %

Sports Networks, Eliminations and Other

   
198
   
0.6

%
 
(63

)
 
14
   
(49

)
 
NM

*
 
NM

*

Total

  $ 33,260     100.0 % $ 5,128   $ 2,943   $ 8,071     15.4 %   24.3 %

December 31, 2013

                                           

DIRECTV U.S. 

  $ 24,676     77.7 % $ 4,444   $ 1,640   $ 6,084     18.0 %   24.7 %

Sky Brasil

    3,753     11.8 %   529     723     1,252     14.1 %   33.4 %

PanAmericana and Other

    3,091     9.8 %   247     444     691     8.0 %   22.4 %

DIRECTV Latin America

    6,844     21.6 %   776     1,167     1,943     11.3 %   28.4 %

Sports Networks, Eliminations and Other

   
234
   
0.7

%
 
(70

)
 
21
   
(49

)
 
NM

*
 
NM

*

Total

  $ 31,754     100.0 % $ 5,150   $ 2,828   $ 7,978     16.2 %   25.1 %

December 31, 2012

                                           

DIRECTV U.S. 

  $ 23,235     78.1 % $ 4,153   $ 1,501   $ 5,654     17.9 %   24.3 %

Sky Brasil

    3,501     11.8 %   555     533     1,088     15.9 %   31.1 %

PanAmericana and Other

    2,743     9.2 %   400     374     774     14.6 %   28.2 %

DIRECTV Latin America

    6,244     21.0 %   955     907     1,862     15.3 %   29.8 %

Sports Networks, Eliminations and Other

   
261
   
1.0

%
 
(23

)
 
29
   
6
   
NM

*
 
NM

*

Total

  $ 29,740     100.0 % $ 5,085   $ 2,437   $ 7,522     17.1 %   25.3 %

*
Percentage not meaningful.

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SUMMARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(continued)

        The following represents additional selected information for our operating segments as of and for the year ended:

 
 
Segment Assets
 
Capital Expenditures
 
 
  (Dollars in Millions)
 

December 31, 2014

             

DIRECTV U.S. 

  $ 16,719   $ 1,757  

Sky Brasil

    2,654     867  

PanAmericana and Other

    4,671     580  

DIRECTV Latin America

    7,325     1,447  

Sports Networks, Eliminations and Other

   
1,415
   
21
 

Total

  $ 25,459   $ 3,225  

December 31, 2013

             

DIRECTV U.S. 

  $ 13,446   $ 2,050  

Sky Brasil

    2,854     961  

PanAmericana and Other

    4,004     759  

DIRECTV Latin America

    6,858     1,720  

Sports Networks, Eliminations and Other

   
1,601
   
16
 

Total

  $ 21,905   $ 3,786  

December 31, 2012

             

DIRECTV U.S. 

  $ 12,490   $ 1,741  

Sky Brasil

    2,951     812  

PanAmericana and Other

    3,335     786  

DIRECTV Latin America

    6,286     1,598  

Sports Networks, Eliminations and Other

   
1,779
   
10
 

Total

  $ 20,555   $ 3,349  

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SIGNIFICANT EVENTS AFFECTING THE COMPARABILITY OF THE RESULTS OF OPERATIONS

Venezuelan 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.

        In February 2013, the Venezuelan government announced a devaluation of the Venezuelan bolivar from the official exchange rate of 4.3 Venezuelan bolivars per U.S. dollar to an official rate of 6.3 Venezuelan bolivars per U.S. dollar. As a result of the devaluation, we recorded a pre-tax charge in "Venezuelan currency devaluation charge" in the Consolidated Statements of Operations of $166 million ($136 million after tax) in the first quarter of 2013, related to the remeasurement of the bolivar denominated net monetary assets of our Venezuelan subsidiary as of the date of the devaluation.

        In the first quarter of 2013, the Venezuelan government announced a new currency exchange system, the Sistema Complementario de Administración de Divisas, or SICAD 1, which is intended to function as an auction system for participants to exchange Venezuelan bolivars for U.S. dollars. The volume of amounts exchanged through such SICAD 1 system and the resulting exchange rate are published by the Venezuelan Central Bank. Effective January 24, 2014, the Venezuelan government announced that dividends and royalties would be subject to the SICAD 1 program. The SICAD 1 exchange rate, which was 12.0 Venezuelan bolivars per U.S. dollar as of December 31, 2014, is determined by periodic auctions. In February 2014, the Venezuelan government announced SICAD 2, which is an exchange mechanism that became available on March 24, 2014. The exchange rate for SICAD 2 was 49.99 Venezuelan bolivars per U.S. dollar as of December 31, 2014. Additionally, in February 2015, the Venezuelan government announced that the SICAD 2 exchange mechanism would no longer be available and created SIMADI, a new open market currency exchange system.

        We currently believe the SICAD 1 rate is the most representative rate to use for remeasurement, as the official rate of 6.3 Venezuelan bolivars per U.S. dollar will likely be reserved only for the settlement of U.S. dollar denominated obligations related to purchases of "essential goods and services," and the equity of our Venezuelan subsidiary would be realized, if at all, through permitted dividends paid at the SICAD 1 rate. Therefore, as of December 31, 2014, we are continuing to remeasure our Venezuelan subsidiary's financial statements in U.S. dollars using the exchange rate determined by periodic auctions under SICAD 1, which was 12.0 Venezuelan bolivars per U.S. dollar. Prior to March 31, 2014, we used the official exchange rate of 6.3 Venezuelan bolivars per U.S. dollar. 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 bolivar denominated net monetary assets of our Venezuelan subsidiary on March 31, 2014.

        As of December 31, 2014, our Venezuelan subsidiary had Venezuelan bolivar denominated net monetary assets of $481 million, including cash of $481 million, based on the SICAD 1 exchange rate of 12.0 Venezuelan bolivars per U.S. dollar. In 2014, our Venezuelan subsidiary generated revenues of approximately $900 million and operating profit before depreciation and amortization of approximately $400 million, excluding the impact of the $281 million Venezuelan devaluation charge, as well as the impact of additional exchange rate losses in Venezuela recorded during 2014. 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 1 auctions, which is 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. The comparability of our results of operations and financial position in Venezuela will also be affected in the event of additional changes to the currency exchange rate system, further devaluations of the Venezuelan

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bolivar or if we determine in the future that a rate other than the SICAD 1 rate is appropriate for the remeasurement of our Venezuelan bolivar denominated net monetary assets.

Foreign Currency Exchange Rates

        The comparability of our results of operations is impacted by fluctuations in foreign currency exchange rates and the volatility of those foreign currencies has an ongoing impact to our operating results. See "Foreign Currency Risk" in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" for further information.

ECAD

        As previously reported, Escritorio Central de Arrecadacao, or ECAD, the organization responsible for collecting performance rights fees under Brazilian law, had outstanding claims against Sky Brasil, along with other video distributors in Brazil. In the third quarter of 2013, Sky Brasil entered into an agreement with ECAD whereby Sky Brasil agreed to settle all claims for the period from 2004 through December 31, 2013 for a cash payment of $92 million in September 2013. As a result of this settlement, Sky Brasil recognized a $128 million pre-tax gain from the reversal of amounts previously accrued during such period, of which $70 million was recorded as a reduction in "Broadcast programming and other", $37 million was recorded as a reduction in "Interest expense" and $21 million was recorded in "Other, net" in the Consolidated Statements of Operations.

Divestitures

        On April 16, 2013, DSN transferred 100% of its interest in DSN Northwest to NW Sports Net LLC. Upon completion of the transaction, the Seattle Mariners have a majority interest in NW Sports LLC and DSN retains a noncontrolling interest, which we account for using the equity method of accounting. Additionally, DSN provides management oversight and programming services to NW Sports Net LLC as part of management service agreements entered into as part of this transaction. As a result of this transaction, we deconsolidated DSN Northwest and recorded a non-cash, pre-tax charge of approximately $59 million ($56 million after tax) in "Other, net" in the Consolidated Statements of Operations.

        In December 2012, we sold an 18% interest in GSN to our equity partner for $234 million, reducing our ownership interest from 60% to 42%. We recognized a pre-tax gain of $111 million ($68 million after tax) on the sale in "Other, net" in the Consolidated Statements of Operations.

        For additional information regarding the sale of investments, refer to Note 8 of the Notes to the Consolidated Financial Statements in Item 8, Part II of this Annual Report.

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 a new authorization for up to $3.5 billion for repurchases of our common stock. On May 18, 2014 DIRECTV and AT&T entered into a definitive agreement, under which AT&T would combine with DIRECTV in a stock and cash transaction. As a result, we have 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 and without AT&T's consent.

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        The following table sets forth information regarding shares repurchased and retired during the periods presented:

 
 
2014
 
2013
 
2012
 
 
  (Amounts in Millions, Except Per Share Amounts)
 

Total cost of repurchased and retired shares

  $ 1,386   $ 4,000   $ 5,148  

Average price per share

  $ 73.82   $ 57.54   $ 48.24  

Number of shares repurchased and retired

    19     70     107  

AT&T Merger-Related Costs

        On May 18, 2014, DIRECTV and AT&T Inc., or AT&T, announced that they entered into a definitive agreement under which DIRECTV will combine with AT&T in a stock and cash transaction. 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, or the Merger Agreement, was approved unanimously by the Board of Directors of each company and was approved by our stockholders at a special meeting held on September 25, 2014.

        In connection with the proposed merger, we recognized costs of $72 million for the year ended December 31, 2014 in "General and administrative expenses" in the Consolidated Statements of Operations, primarily related to professional services fees. These costs are reported in the "Sports Networks, Eliminations and Other" segment.

KEY TERMINOLOGY

        Revenues.    We earn revenues mostly from monthly fees we charge subscribers for subscriptions to basic and premium channel programming, advanced receiver fees (which include HD, DVR and multi-room viewing), seasonal live sporting events and pay-per-view programming. We also earn revenues from monthly fees we charge subscribers for multiple set-top receivers, hardware revenues from subscribers who lease or purchase set-top receivers from us, warranty service fees and advertising services. Revenues are reported net of customer credits and discounted promotions.

        Broadcast Programming and Other.    These costs primarily include license fees for subscription service programming, pay-per-view programming, seasonal live sporting and other events. Other costs include continuing service fees paid to third parties for active subscribers and warranty service costs.

        Subscriber Service Expenses.    Subscriber service expenses include the costs of customer call centers, billing, remittance processing and service calls.

        Broadcast Operations Expenses.    These expenses include broadcast center operating costs, signal transmission expenses (including costs of collecting signals for our local channel offerings), and costs of monitoring, maintaining and insuring our satellites. Also included are engineering expenses associated with deterring theft of our signal.

        Subscriber Acquisition Costs.    These costs include the cost of set-top receivers and other equipment, commissions we pay to national retailers, independent satellite television retailers, dealers and telcos, and the cost of installation, advertising, marketing and customer call center expenses associated with the acquisition of new subscribers. Set-top receivers leased to new subscribers are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and depreciated over their useful lives. In certain countries in Latin America, where our customer agreements provide for the lease of the entire DIRECTV or SKY System, we also capitalize the costs of the other customer premises equipment and related installation costs. The amount of set-top receivers capitalized each period for subscriber acquisitions is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows.

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        Upgrade and Retention Costs.    Upgrade and retention costs are associated with upgrade efforts for existing subscribers that we believe will result in higher average monthly revenue per subscriber, or ARPU, and lower churn. Our upgrade efforts include subscriber equipment upgrade programs for advanced receivers and similar initiatives. Retention costs also include the costs of installing and providing hardware under our movers program for subscribers relocating to a new residence. Set-top receivers leased to existing subscribers under upgrade and retention programs are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and depreciated over their estimated useful lives. The amount of set-top receivers capitalized each period for upgrade and retention programs is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows.

        General and Administrative Expenses.    General and administrative expenses include departmental costs for legal, administrative services, finance, marketing and information technology. These costs also include expenses for bad debt and other operating expenses, such as legal settlements, and gains or losses from the sale or disposal of fixed assets.

        Average Monthly Revenue Per Subscriber.    We calculate ARPU by dividing average monthly revenues, net of customer credits and discounted promotions, for the period (total revenues during the period divided by the number of months in the period) by average subscribers for the period. We calculate average subscribers for the period by adding the number of subscribers as of the beginning of the period and for each quarter end in the current year or period and dividing by the sum of the number of quarters in the period plus one.

        Average Monthly Subscriber Churn.    Average monthly subscriber churn represents the number of subscribers whose service is disconnected, expressed as a percentage of the average total number of subscribers. We calculate average monthly subscriber churn by dividing the average monthly number of disconnected subscribers for the period (total subscribers disconnected, net of reconnects, during the period divided by the number of months in the period) by average subscribers for the period.

        Subscriber Count.    The total number of subscribers represents the total number of subscribers actively subscribing to our service, including subscribers who have suspended their account for a particular season of the year because they are temporarily away from their primary residence and subscribers who are in the process of relocating and commercial equivalent viewing units.

        SAC.    We calculate SAC, which represents total subscriber acquisition costs stated on a per subscriber basis, by dividing total subscriber acquisition costs for the period by the number of gross new subscribers acquired during the period. We calculate total subscriber acquisition costs for the period by adding together "Subscriber acquisition costs" expensed during the period and the amount of cash paid for equipment leased to new subscribers during the period.

EXECUTIVE OVERVIEW AND OUTLOOK

        Please refer to "Risk Factors" in Item 1A for a discussion of risks that may affect forecasted results of our business generally.

        DIRECTV U.S.    DIRECTV U.S. faces challenges related to the rapid advance of technology that provides consumers with more options both in and out of the home and an industry that is increasingly competitive. In addition, programming content providers are continuing to seek increased rates for their content that is well above inflation, making it more challenging to pass these costs through to our customers.

        Revenue growth at DIRECTV U.S. has been generated by an increase in ARPU and growth of our subscriber base. In 2015, we expect revenue to increase in the mid-single digit percentage range driven primarily by ARPU growth. We also could experience a modest decline in our cumulative subscriber base in 2015, if the AT&T merger is not completed.

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        In 2015, we expect operating profit before depreciation and amortization to grow in the low-single digit percentage range. We expect to continue to be challenged by rising broadcast programming costs; however we intend to manage the impact to our margins by raising prices, increasing the penetration of new and advanced services, as well as driving growth in ancillary revenues such as commercial and ad sales. We also expect to continue productivity improvements, which are expected to reduce costs and improve call center performance, field operations and customer satisfaction. We also expect a greater use of refurbished set-top boxes in 2015. As these costs are expensed, we expect lower margins but also lower capital expenditures.

        We expect total capital expenditures in 2015 to decrease approximately $200 million at DIRECTV U.S from $1.75 billion in 2014, primarily due to a reduction in gross additions, a higher use of refurbished set-top receivers and lower set-top receiver costs.

        DIRECTV Latin America.    Some Latin American countries in which we operate continue to undergo a period of economic uncertainty. We remain committed to our strategy to profitably grow our business across the region in spite of these challenging macroeconomic conditions. Consistent with our strategy in 2014, we are focused on delivering market-leading advanced services for a growing premium subscriber base, and leveraging our scale to further penetrate and profitably serve the rapidly growing mass market. We also intend to improve productivity, while managing our capital investments and cost structure.

        In 2015, we expect gross subscriber additions to decline to about 2 million in Brazil and between 1.5 million and 1.6 million in PanAmericana, excluding Venezuela, mainly due to the lack of the World Cup soccer tournament in 2015. The lower gross additions are expected to reduce net subscriber additions to about 500,000 at DIRECTV Latin America, excluding Venezuela, with net subscriber additions lower both at Sky Brasil and PanAmericana as compared to 2014.

        Excluding the impact of $346 million in charges related to 2014 Venezuelan currency devaluation, as well as any future devaluation of the Venezuelan bolivar, we expect revenues and operating profit before depreciation and amortization to decline in the low-single digit percentage range in 2015. We have assumed further depreciation of some of the major currencies, but our results are highly volatile depending on changes in foreign currency exchange rates, particularly in Argentina, Brazil and Venezuela, as well as changes in the macroeconomic environment. We expect capital expenditures in Latin America to be approximately $1.45 billion, which includes capital expenditures related to subscribers, investments in upgrading DIRECTV Latin America's infrastructure, including satellites and related broadcast facilities, as well as strategic initiatives such as wireless broadband.

        DIRECTV Consolidated.    Excluding expected merger related costs in 2015, we anticipate earnings per common share to increase approximately ten percent from the $5.46 earnings per share reported in 2014 resulting mainly from higher operating profit, partially offset by increased income tax expenses. As discussed above, these estimates are highly volatile depending on changes in foreign currency exchange rates, as well as changes in the macroeconomic and political environment in Latin America.

        We also anticipate free cash flow, or cash provided by operating activities less capital expenditures, to increase in the low single digit percentage range from the $3.1 billion generated in 2014, excluding expected merger related costs in 2015.

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RESULTS OF OPERATIONS

Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013

DIRECTV U.S. Results of Operations

        The following table provides operating results and a summary of key subscriber data for the DIRECTV U.S. segment:

 
   
   
 
Change
 
 
 
2014
 
2013
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 26,001   $ 24,676   $ 1,325     5.4 %

Operating costs and expenses

                         

Costs of revenues, exclusive of depreciation and amortization expense

                         

Broadcast programming and other

    12,343     11,616     727     6.3 %

Subscriber service expenses

    1,519     1,474     45     3.1 %

Broadcast operations expenses

    303     293     10     3.4 %

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

                         

Subscriber acquisition costs

    2,853     2,642     211     8.0 %

Upgrade and retention costs

    1,276     1,350     (74 )   (5.5 )%

General and administrative expenses

    1,236     1,217     19     1.6 %

Depreciation and amortization expense

    1,722     1,640     82     5.0 %

Total operating costs and expenses

    21,252     20,232     1,020     5.0 %

Operating profit

  $ 4,749   $ 4,444   $ 305     6.9 %

Operating profit margin

    18.3 %   18.0 %        

Other data:

                         

Operating profit before depreciation and amortization

  $ 6,471   $ 6,084   $ 387     6.4 %

Operating profit before depreciation and amortization margin

    24.9 %   24.7 %        

Total number of subscribers (in thousands)

    20,352     20,253     99     0.5 %

ARPU

  $ 106.94   $ 102.18   $ 4.76     4.7 %

Average monthly subscriber churn %

    1.52 %   1.50 %       1.3 %

Gross subscriber additions (in thousands)

    3,804     3,790     14     0.4 %

Subscriber disconnections (in thousands)

    3,705     3,621     84     2.3 %

Net subscriber additions (in thousands)

    99     169     (70 )   (41.4 )%

Average subscriber acquisition costs—per subscriber (SAC)

  $ 883   $ 873   $ 10     1.1 %

Capital expenditures:

                         

Property and equipment

  $ 726   $ 648   $ 78     12.0 %

Subscriber leased equipment—subscriber acquisitions

    507     666     (159 )   (23.9 )%

Subscriber leased equipment—upgrade and retention

    451     538     (87 )   (16.2 )%

Satellites

    73     198     (125 )   (63.1 )%

Total capital expenditures

  $ 1,757   $ 2,050   $ (293 )   (14.3 )%

Depreciation expense—subscriber leased equipment

  $ 967   $ 922   $ 45     4.9 %

        Subscribers.    In 2014, net subscriber additions decreased as compared to 2013 as slightly higher gross subscriber additions were offset by higher average monthly churn. The higher average monthly churn was

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primarily due to a more competitive environment including an increased number of subscribers electing to eliminate MVPD services.

        Revenues.    DIRECTV U.S. revenues increased in 2014 as a result of higher ARPU and a larger subscriber base. The increase in ARPU resulted primarily from price increases on programming packages, higher advanced receiver service fees, higher fees for our enhanced warranty program, as well as higher ad sales and commercial revenues, partially offset by increased promotional offers for new and existing customers.

        Operating profit before depreciation and amortization.    Operating profit before depreciation and amortization increased in 2014 as compared to 2013 primarily due to higher revenues coupled with lower upgrade and retention costs, partially offset by higher broadcast programming and other costs and higher subscriber acquisition costs. Upgrade and retention costs decreased primarily due to lower equipment costs. Broadcast programming and other costs increased primarily due to annual program supplier rate increases. Subscriber acquisition costs increased primarily due to an increase in promotional offers targeted at higher quality subscribers and an increase in the use of refurbished equipment.

        Operating profit before depreciation and amortization margin increased in 2014 as compared to 2013 primarily due to the higher revenues coupled with lower upgrade and retention costs, as well as slower relative growth in general and administrative expenses, partially offset by higher broadcast programming and other costs.

        Operating profit.    Operating profit and operating profit margin increased in 2014 compared to 2013 due to an increase in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, partially offset by an increase in depreciation and amortization expense due to higher total capitalized subscriber leased equipment.

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DIRECTV Latin America Results of Operations

        The following table provides operating results and a summary of key subscriber data for the consolidated DIRECTV Latin America operations, which does not include Sky Mexico:

 
   
   
 
Change
 
 
 
2014
 
2013
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 7,061   $ 6,844   $ 217     3.2 %

Operating profit before depreciation and amortization (1)

    1,649     1,943     (294 )   (15.1 )%

Operating profit before depreciation and amortization margin (1)

    23.4 %   28.4 %        

Operating profit (1)

  $ 442   $ 776   $ (334 )   (43.0 )%

Operating profit margin (1)

    6.3 %   11.3 %        

Other data:

                         

ARPU (2)

  $ 48.39   $ 51.64   $ (3.25 )   (6.3 )%

Average monthly total subscriber churn % (2)

    2.39 %   2.37 %       0.8 %

Average monthly post paid subscriber churn % (2)

    1.95 %   2.10 %       (7.1 )%

Total number of subscribers (in thousands) (2) (3)

    12,471     11,568     903     7.8 %

Gross subscriber additions (in thousands) (3) (4)

    4,395     4,382     13     0.3 %

Net subscriber additions (in thousands) (2) (3) (4)

    903     1,239     (336 )   (27.1 )%

Capital expenditures:

                         

Property and equipment

  $ 254   $ 224   $ 30     13.4 %

Subscriber leased equipment—subscriber acquisitions

    666     923     (257 )   (27.8 )%

Subscriber leased equipment—upgrade and retention          

    337     409     (72 )   (17.6 )%

Satellites

    190     164     26     15.9 %

Total capital expenditures

  $ 1,447   $ 1,720   $ (273 )   (15.9 )%

(1)
Amounts include the impact of the Venezuelan devaluation charge of $281 million recorded in the first quarter of 2014 and $166 million recorded in the first quarter of 2013, as well as the ongoing impact of foreign currency exchange fluctuations.

(2)
Based on the results of an internal investigation, we determined that, beginning in 2012, certain employees of Sky Brasil directed activities which were inconsistent with Sky Brasil's authorized policies for subscriber retention and churn management. These activities had the effect of artificially reducing churn and increasing the Sky Brasil subscriber base during portions of 2013. As a result, subscribers who would have previously ceased receiving Sky Brasil service were terminated as subscribers pursuant to Sky Brasil's authorized policies. We estimate that as of March 31, 2013, our subscriber count would have been approximately 200,000 lower than the number of subscribers previously reported if the identified improper actions had not been taken. See the Current Report on Form 8-K filed with the SEC on June 27, 2013 for further details.

(3)
DIRECTV Latin America subscriber data excludes subscribers on the Sky Mexico platform.

(4)
Gross and net subscriber additions exclude 1,000 subscribers acquired in transactions in Brazil during 2013.

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Sky Brasil Results of Operations

        The following table provides operating results and a summary of key subscriber data for the consolidated Sky Brasil operations:

 
   
   
 
Change
 
 
 
2014
 
2013
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 3,887   $ 3,753   $ 134     3.6 %

Operating profit before depreciation and amortization

    1,175     1,252     (77 )   (6.2 )%

Operating profit before depreciation and amortization margin

    30.2 %   33.4 %        

Operating profit

  $ 488   $ 529   $ (41 )   (7.8 )%

Operating profit margin

    12.6 %   14.1 %        

Other data:

                         

ARPU

  $ 58.35   $ 59.97   $ (1.62 )   (2.7 )%

Total number of subscribers (in thousands) (1)

    5,643     5,371     272     5.1 %

Total capital expenditures

  $ 867   $ 961   $ (94 )   (9.8 )%

(1)
See Note (2) on the table showing consolidated DIRECTV Latin America results of operations above.

        Subscribers.    In 2014, net subscriber additions of approximately 272,000 decreased as the higher gross subscriber additions were more than offset by higher subscriber disconnections associated with the larger subscriber base, as well as slightly higher average monthly total subscriber churn in 2014. The increase in gross subscriber additions was driven primarily by higher demand for FIFA World Cup. Average monthly subscriber churn increased due the introduction of the prepaid service, a reduction in credits to existing subscribers and challenging macroeconomic conditions, as well as the migration of key systems that impacted existing subscribers.

        Revenues.    Revenues increased in 2014 as compared to 2013 due to subscriber growth partially offset by a decrease in ARPU. The decrease in ARPU was primarily due to unfavorable exchange rates, partially offset by higher ARPU in local currency terms, which resulted from a reduction in promotional offers to subscribers and an increase in subscribers with advanced services.

        Operating profit before depreciation and amortization.    Operating profit before depreciation and amortization and operating profit before depreciation and amortization margin decreased in 2014 as compared to 2013, as the higher revenues were more than offset by higher broadcast programming and other costs mainly due to the settlement of the ECAD dispute. Also impacting operating profit before depreciation and amortization and operating profit before depreciation and amortization margin were higher expenses resulting from the introduction of a new broadband service and costs associated with the migration of key systems.

        Operating profit.    Operating profit and operating profit margin decreased in 2014 as compared to 2013, primarily due to the decrease in operating profit before depreciation expense and operating profit before depreciation expense margin partially offset by lower depreciation and amortization expense due to changes in foreign exchange rates.

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PanAmericana and Other Results of Operations

        The following table provides operating results and a summary of key subscriber data for the consolidated DIRECTV PanAmericana and Other operations:

 
   
   
 
Change
 
 
 
2014
 
2013
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 3,174   $ 3,091   $ 83     2.7 %

Operating profit before depreciation and amortization (1)

    474     691     (217 )   (31.4 )%

Operating profit before depreciation and amortization margin (1)

    14.9 %   22.4 %        

Operating profit (loss) (1)

  $ (46 ) $ 247   $ (293 )   (118.6 )%

Operating profit margin (1)

    NM*     8.0 %        

Other data:

                         

ARPU

  $ 40.03   $ 44.19   $ (4.16 )   (9.4 )%

Total number of subscribers (in thousands)

    6,828     6,197     631     10.2 %

Total capital expenditures

  $ 580   $ 759   $ (179 )   (23.6 )%

*
Percentage not meaningful.

(1)
Amounts include the impact of the Venezuelan devaluation charges of $281 million recorded in the first quarter of 2014 and $166 million recorded in the first quarter of 2013, as well as the ongoing impact of foreign currency exchange fluctuations.

        Subscribers.    In 2014, net subscriber additions of 631,000 decreased primarily due to higher average monthly subscriber churn and lower gross subscriber additions. Gross subscriber additions decreased primarily from tighter sales filters resulting from challenging macroeconomic conditions. Average monthly subscriber churn increased slightly due to a higher mix of subscribers on the prepaid service.

        Revenues.    Revenues increased in 2014 as compared to 2013 due to subscriber growth, partially offset by a decrease in ARPU. The decrease in ARPU was primarily due to unfavorable exchange rates, primarily in Venezuela and Argentina and a higher penetration of mass market subscribers, partially offset by price increases and an increase in subscribers with advanced services.

        Operating profit before depreciation and amortization.    Operating profit before depreciation and amortization and operating profit before amortization margin decreased in 2014 as compared to 2013, primarily in Venezuela as a result of the $346 million devaluation charge of which $281 million was recorded in "Venezuelan currency devaluation charge" and $65 million was recorded in "General administrative expenses" in the Consolidated Statement of Operations related to the remeasurement of Venezuelan bolivar denominated net monetary assets in 2014 as compared to the $166 million charge recorded in "Venezuelan devaluation charge" in the Consolidated Statements of Operations in 2013. Also contributing to the decrease were unfavorable exchange rates in Argentina, as well as higher broadcast programming costs associated with special events, including the FIFA World Cup and the impact of inflation and the timing of price increases in Venezuela.

        Operating profit.    Operating profit and operating profit margin decreased in 2014 as compared to 2013, due to the decrease in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, as well as an increase in depreciation and amortization expense due to subscriber leased equipment and infrastructure costs capitalized over the last year.

DIRECTV Consolidated Other Income, Income Taxes and Net Income Attributable to Noncontrolling Interest

        Interest income.    Interest income was $68 million in 2014 and $72 million in 2013.

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        Interest expense.    The increase in interest expense to $898 million in 2014 from $840 million in 2013 was a result of a higher average debt balance, partially offset by the settlement of the ECAD dispute in 2013. We capitalized interest costs of $35 million in 2014 and $41 million in 2013.

        Other, net.    The significant components of "Other, net" were as follows:

 
 
2014
 
2013
 
Change
 
 
  (Dollars in Millions)
 

Equity in earnings from unconsolidated affiliates (1)

  $ 133   $ 198   $ (65 )

Interest rate swap gain

    39         39  

Net gains from sale of investments

    26     8     18  

Net foreign currency transaction loss

    (22 )   (52 )   30  

Loss on early extinguishment of debt

    (19 )       (19 )

Other

    (4 )   (3 )   (1 )

Fair-value loss on non-employee stock options

    (3 )   (7 )   4  

DSN Northwest deconsolidation charge

        (59 )   59  

ECAD settlement gain

        21     (21 )

Total

  $ 150   $ 106   $ 44  

        (1)   Includes an increase in equity earnings from Sky Mexico of approximately $60 million related to the recognition of certain one-time tax benefits in 2013.

        Income tax expense.    We recognized income tax expense of $1,673 million in 2014 and $1,603 million in 2013. The effective tax rate for 2014 was 37.6% compared to 35.7% for 2013. The higher effective tax rate in 2014 is primarily attributable to the unfavorable tax impact of the Venezuela currency devaluation and benefits recorded in 2013 for the recognition of uncertain tax benefits due to the expiration of the statute of limitations in federal and foreign tax jurisdictions and the settlement of state-related matters.

        Net income attributable to noncontrolling interest.    Net income attributable to noncontrolling interest was $19 million in 2014 and $26 million in 2013.

Earnings Per Share

        Earnings per share and weighted shares outstanding were as follows for the years ended December 31:

 
 
2014
 
2013
 

Basic earnings attributable to DIRECTV per common share

  $ 5.46   $ 5.22  

Diluted earnings attributable to DIRECTV per common share

  $ 5.40   $ 5.17  

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

             

Basic

    505     548  

Diluted

    510     553  

        The increases in basic and diluted earnings per share were due to a reduction in weighted average shares outstanding resulting from our share repurchase program, partially offset by lower net income attributable to DIRECTV.

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Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012

DIRECTV U.S. Results of Operations

        The following table provides operating results and a summary of key subscriber data for the DIRECTV U.S. segment:

 
   
   
 
Change
 
 
 
2013
 
2012
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 24,676   $ 23,235   $ 1,441     6.2 %

Operating costs and expenses

                         

Costs of revenues, exclusive of depreciation and amortization expense

                         

Broadcast programming and other

    11,616     10,743     873     8.1 %

Subscriber service expenses

    1,474     1,464     10     0.7 %

Broadcast operations expenses

    293     306     (13 )   (4.2 )%

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

                         

Subscriber acquisition costs

    2,642     2,673     (31 )   (1.2 )%

Upgrade and retention costs

    1,350     1,253     97     7.7 %

General and administrative expenses

    1,217     1,142     75     6.6 %

Depreciation and amortization expense

    1,640     1,501     139     9.3 %

Total operating costs and expenses

    20,232     19,082     1,150     6.0 %

Operating profit

  $ 4,444   $ 4,153   $ 291     7.0 %

Operating profit margin

    18.0 %   17.9 %        

Other data:

                         

Operating profit before depreciation and amortization

  $ 6,084   $ 5,654   $ 430     7.6 %

Operating profit before depreciation and amortization margin

    24.7 %   24.3 %        

Total number of subscribers (in thousands)

    20,253     20,084     169     0.8 %

ARPU

  $ 102.18   $ 96.98   $ 5.20     5.4 %

Average monthly subscriber churn %

    1.50 %   1.53 %       (2.0 )%

Gross subscriber additions (in thousands)

    3,790     3,874     (84 )   (2.2 )%

Subscriber disconnections (in thousands)

    3,621     3,675     (54 )   (1.5 )%

Net subscriber additions (in thousands)

    169     199     (30 )   (15.1 )%

Average subscriber acquisition costs—per subscriber (SAC)

  $ 873   $ 859   $ 14     1.6 %

Capital expenditures:

                         

Property and equipment

  $ 648   $ 541   $ 107     19.8 %

Subscriber leased equipment—subscriber acquisitions

    666     656     10     1.5 %

Subscriber leased equipment—upgrade and retention

    538     291     247     84.9 %

Satellites

    198     253     (55 )   (21.7 )%

Total capital expenditures

  $ 2,050   $ 1,741   $ 309     17.7 %

Depreciation expense—subscriber leased equipment

  $ 922   $ 815   $ 107     13.1 %

        Subscribers.    In 2013, net subscriber additions decreased due to lower gross subscriber additions associated with a continued focus on attaining higher quality subscribers, as well as a more challenging competitive environment and a decline in aggregate subscribers across the MVPD industry. This decrease was partially offset by lower average monthly subscriber churn in 2013. In 2012, average monthly churn was unfavorably impacted by a contract dispute with a large programmer that resulted in the removal of several channels from our service

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for nine days. The lower average monthly churn was also due to a greater number of subscribers on contract commitments and auto-bill pay, as well as stricter credit policies in 2013.

        Revenues.    DIRECTV U.S. revenues increased in 2013 as a result of higher ARPU and the larger subscriber base. The increase in ARPU resulted primarily from higher advanced receiver service fees, price increases on programming packages, higher fees for our new enhanced warranty program, as well as higher commercial and ad sales revenues, partially offset by increased promotional offers to new and existing subscribers.

        Operating profit before depreciation and amortization.    Operating profit before depreciation and amortization increased in 2013 as compared to 2012 primarily due to higher revenues and lower subscriber acquisition costs, partially offset by higher broadcast programming and other costs, higher upgrade and retention costs and higher general and administrative costs. Subscriber acquisition costs decreased primarily due to the decrease in gross subscriber additions. SAC per subscriber, which includes the cost of capitalized set-top receivers, increased primarily due to an increase in subscriber demand for advanced products and higher marketing costs per subscriber added. Broadcast programming and other costs increased primarily due to annual program supplier rate increases, a larger subscriber base and increased costs associated with providing the expanded warranty program. Upgrade and retention costs increased in 2013 as compared to 2012 primarily due to a larger number of subscriber upgrades to advanced products related to customer loyalty initiatives. General and administrative costs increased primarily as a result of higher labor costs.

        Operating profit before depreciation and amortization margin increased in 2013 as compared to 2012 driven by the incremental margin generated by higher revenues combined with lower subscriber acquisition costs and mostly unchanged subscriber service expenses. Subscriber service expenses remained relatively unchanged due to continued improvement and efficiency initiatives. These margin improvements were partially offset by relatively higher broadcast programming costs mostly related to annual supplier rate increases.

        Operating profit.    Operating profit and operating profit margin increased in 2013 compared to 2012 due to an increase in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, partially offset by an increase in depreciation and amortization expense due to higher total capitalized subscriber leased equipment.

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DIRECTV Latin America Results of Operations

        The following table provides operating results and a summary of key subscriber data for the consolidated DIRECTV Latin America operations:

 
   
   
 
Change
 
 
 
2013
 
2012
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 6,844   $ 6,244   $ 600     9.6 %

Operating profit before depreciation and amortization

    1,943     1,862     81     4.4 %

Operating profit before depreciation and amortization margin

    28.4 %   29.8 %        

Operating profit

  $ 776   $ 955   $ (179 )   (18.7 )%

Operating profit margin

    11.3 %   15.3 %        

Other data:

                         

ARPU

  $ 51.64   $ 57.25   $ (5.61 )   (9.8 )%

Average monthly total subscriber churn %

    2.37 %   1.81 %       30.9 %

Average monthly post-paid subscriber churn %

    2.10 %   1.50 %       40.0 %

Total number of subscribers (in thousands) (1) (2)

    11,568     10,328     1,240     12.0 %

Gross subscriber additions (in thousands) (1) (2)

    4,382     4,417     (35 )   (0.8 )%

Net subscriber additions (in thousands) (1) (2)

    1,239     2,439     (1,200 )   (49.2 )%

Capital expenditures:

                         

Property and equipment

  $ 224   $ 214   $ 10     4.7 %

Subscriber leased equipment—subscriber acquisitions

    923     837     86     10.3 %

Subscriber leased equipment—upgrade and retention

    409     419     (10 )   (2.4 )%

Satellites

    164     128     36     28.1 %

Total capital expenditures

  $ 1,720   $ 1,598   $ 122     7.6 %

(1)
These amounts include the impact of the $166 million Venezuelan devaluation charge and the ongoing impact of foreign currency exchange rate fluctuations.

(2)
Based on the results of an internal investigation, we have determined that, beginning in 2012, certain employees of Sky Brasil directed activities which are inconsistent with Sky Brasil's authorized policies for subscriber retention and churn management. These activities had the effect of artificially reducing churn and increasing the Sky Brasil subscriber base during portions of 2012 and 2013. As a result, subscribers who would have previously ceased receiving Sky Brasil service have been terminated as subscribers pursuant to Sky Brasil's authorized policies. We estimate that as of March 31, 2013, our subscriber count would have been approximately 200,000 lower than the number of subscribers previously reported if the identified improper actions had not been taken. See the Current Report on Form 8-K filed with the SEC on June 27, 2013 for further details. Prior year results for subscribers, churn and ARPU have not been adjusted for the findings of this investigation.

(3)
DIRECTV Latin America subscriber data exclude the subscribers of the Sky Mexico platform.

(4)
Gross and net subscriber additions exclude 1,000 subscribers acquired in transactions in Brazil during 2013 and 18,000 subscribers acquired in transactions in Brazil during 2012.

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Sky Brasil Results of Operations

        The following table provides operating results and a summary of key subscriber data for the consolidated Sky Brasil operations:

 
   
   
 
Change
 
 
 
2013
 
2012
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 3,753   $ 3,501   $ 252     7.2 %

Operating profit before depreciation and amortization

    1,252     1,088     164     15.1 %

Operating profit before depreciation and amortization margin

    33.4 %   31.1 %        

Operating profit

  $ 529   $ 555   $ (26 )   (4.7 )%

Operating profit margin

    14.1 %   15.9 %        

Other data:

                         

ARPU

  $ 59.97   $ 65.68   $ (5.71 )   (8.7 )%

Total number of subscribers (in thousands) (1)

    5,371     5,038     333     6.6 %

Total capital expenditures

  $ 961   $ 812   $ 149     18.3 %

(1)
See Note (2) on the table showing consolidated DIRECTV Latin America results of operations above.

        Subscribers.    In 2013, net subscriber additions decreased due to higher average monthly subscriber churn in 2013. Average monthly total subscriber churn increased related to the improper crediting of certain subscriber accounts and associated corrective actions described above, as well as challenging economic and competitive conditions. The higher average monthly subscriber churn was also impacted by the effect of a higher mix of mass market subscribers in 2013.

        Revenues.    Revenues increased in 2013 as compared to 2012 due to subscriber growth partially offset by a decrease in ARPU. The decrease in ARPU was primarily due to unfavorable exchange rates and the effect of increased penetration of lower ARPU mass market subscribers, partially offset by price increases and a higher number of upgrades, including advanced services.

        Operating profit before depreciation and amortization.    Operating profit before depreciation and amortization increased in 2013 as compared to 2012, primarily due to higher revenues and the settlement of the ECAD dispute, partially offset by higher broadcast programming costs related to the larger subscriber base. Also impacting operating profit before depreciation and amortization were higher subscriber service expenses related to the larger subscriber base.

        Operating profit before depreciation and amortization margin increased in 2013 as compared to 2012, driven by the incremental margin generated by higher revenues and lower relative broadcast programming and other costs, primarily related to the settlement of the ECAD dispute.

        Operating profit.    Operating profit and operating profit margin decreased in 2013 as compared to 2012, as the increase in operating profit before depreciation and amortization was offset by an increase in depreciation and amortization expense due to higher total capitalized subscriber leased equipment and installation and higher depreciation expense associated with the higher monthly average total subscriber churn discussed above.

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PanAmericana and Other Results of Operations

        The following table provides operating results and a summary of key subscriber data for the consolidated DIRECTV PanAmericana and Other operations:

 
   
   
 
Change
 
 
 
2013
 
2012
 
$
 
%
 
 
  (Dollars in Millions, Except Per Subscriber Amounts)
 

Revenues

  $ 3,091   $ 2,743   $ 348     12.7 %

Operating profit before depreciation and amortization (1)

    691     774     (83 )   (10.7 )%

Operating profit before depreciation and amortization margin (1)

    22.4 %   28.2 %        

Operating profit (1)

  $ 247   $ 400   $ (153 )   (38.3 )%

Operating profit margin (1)

    8.0 %   14.6 %        

Other data:

                         

ARPU

  $ 44.19   $ 49.24   $ (5.05 )   (10.3 )%

Total number of subscribers (in thousands)

    6,197     5,291     906     17.1 %

Total capital expenditures

  $ 759   $ 786   $ (27 )   (3.4 )%

        (1)   Amounts include the impact of the Venezuelan devaluation charge of $166 million recorded in the first quarter of 2013.

        Subscribers.    In 2013, net subscriber additions decreased primarily due to lower gross subscriber additions combined with higher average monthly subscriber churn in 2013. The decrease in gross subscriber additions was due to certain limitations on importing set-top receivers for new subscribers in Venezuela, as well as lower gross subscriber additions in Argentina associated with a more challenging economic environment. This decrease in gross subscriber additions was partially offset by increased gross subscriber additions in Chile, Colombia and Ecuador primarily due to greater mass market demand. Average monthly total subscriber churn decreased as a result of higher pre-paid reconnection rates, coupled with lower post paid churn in 2013.

        Revenues.    Revenues increased in 2013 as compared to 2012 due to subscriber growth, partially offset by a decrease in ARPU. The decrease in ARPU was primarily due to the devaluation of the Venezuelan bolivar in February 2013 and currency depreciation in Argentina, partially offset by price increases.

        Operating profit before depreciation and amortization.    Operating profit before depreciation and amortization decreased in 2013 as compared to 2012, primarily in Venezuela as a result of the charge resulting from the devaluation of the bolivar in February 2013. The decrease in operating profit before depreciation and amortization in Venezuela was partially offset by an increase in operating profit before depreciation and amortization in Colombia and Argentina, primarily due to higher revenues, partially offset by higher broadcast programming costs and subscriber service expenses related to the larger subscriber base, as well as higher general and administrative expenses related to higher infrastructure costs.

        Operating profit before depreciation and amortization margin decreased in 2013 as compared to 2012, primarily in Venezuela, as the higher revenues were more than offset by the impact of the $166 million charge related to the devaluation of the bolivar in February 2013.

        Operating profit.    Operating profit and operating profit margin decreased in 2013 as compared to 2012, primarily due to the decrease in operating profit before depreciation and amortization and an increase in depreciation and amortization expense due to higher total capitalized subscriber leased equipment and higher depreciation expense due to higher total capitalized subscriber leased equipment and installation costs.

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DIRECTV Consolidated Other Income, Income Taxes and Net Income Attributable to Noncontrolling Interest

        Interest income.    Interest income was $72 million in 2013 and $59 million in 2012 .

        Interest expense.    The decrease in interest expense to $840 million in 2013 from $842 million in 2012 was primarily a result of the settlement of the ECAD dispute, partially offset by the impact of a higher average debt balance. We capitalized interest costs of $41 million in 2013 and $24 million in 2012.

        Other, net.    The significant components of "Other, net" were as follows:

 
 
2013
 
2012
 
Change
 
 
  (Dollars in Millions)
 

Equity in earnings from unconsolidated affiliates (1)

  $ 198   $ 131   $ 67  

DSN Northwest deconsolidation charge

    (59 )       (59 )

Net foreign currency transaction loss

    (52 )   (34 )   (18 )

ECAD settlement gain

    21         21  

Net gains from sale of investments

    8     122     (114 )

Fair-value loss on non-employee stock options

    (7 )   (4 )   (3 )

Other

    (3 )   (11 )   8  

Loss on early extinguishment of debt

        (64 )   64  

Total

  $ 106   $ 140   $ (34 )

(1)
Includes an increase in equity earnings from Sky Mexico of approximately $60 million related to the recognition of certain one-time tax benefits in 2013.

        Income tax expense.    We recognized income tax expense of $1,603 million in 2013 and $1,465 million in 2012. The effective tax rate for 2013 was 35.7% compared to 33.0% for 2012. The higher effective tax rate in 2013 was primarily attributable to the unfavorable tax impacts of the Venezuela currency devaluation and the DSN Northwest Transaction in 2013 and a benefit recorded for the recognition of uncertain tax benefits due to the expiration of the statute of limitations in federal and foreign tax jurisdictions in 2012.

        Net income attributable to noncontrolling interest.    Net income attributable to noncontrolling interest was $26 million in 2013 and $28 million in 2012.

Earnings Per Share

        Common stock earnings per share and weighted shares outstanding were as follows for the years ended December 31:

 
 
2013
 
2012
 

Basic earnings attributable to DIRECTV per common share

  $ 5.22   $ 4.62  

Diluted earnings attributable to DIRECTV per common share

  $ 5.17   $ 4.58  

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

             

Basic

    548     638  

Diluted

    553     644  

        The increases in basic and diluted earnings per share were due to a reduction in weighted average shares outstanding resulting from our share repurchase program, partially offset by lower net income attributable to DIRECTV.

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LIQUIDITY AND CAPITAL RESOURCES

        Our principal sources of liquidity are our cash, cash equivalents and the cash flow that we generate from our operations. We expect that net cash provided by operating activities will grow and believe that our existing cash balances and cash provided by operations will be sufficient to fund our existing business plan. DIRECTV U.S. has the ability to borrow up to $2.5 billion under its revolving credit facilities. As of December 31, 2014, there were no borrowings outstanding under the revolving credit facilities. In addition, DIRECTV U.S. has a commercial paper program backed by its revolving credit facilities, which provides for the issuance of short-term commercial paper in the United States up to a maximum aggregate principal of $2.5 billion. At December 31, 2014, we had no short-term commercial paper outstanding compared with $200 million outstanding at December 31, 2013. Aggregate amounts outstanding under the revolving credit facilities and the commercial paper program are limited to $2.5 billion.

        At December 31, 2014, our cash and cash equivalents totaled $4,635 million compared with $2,180 million at December 31, 2013.

        As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) was 1.27 at December 31, 2014 and 0.91 at December 31, 2013. Working capital increased by $2,437 million to $1,860 million at December 31, 2014 from a deficit of $577 million at December 31, 2013. The increase during the year was primarily due to cash proceeds of $1,200 million from the December 2014 senior notes debt issuance coupled with the suspension of our share repurchase program in May 2014.

Summary Cash Flow Information

 
 
Years Ended December 31,
 
 
 
2014
 
2013
 
2012
 
 
  (Dollars in Millions)
 

Net cash provided by operating activities

  $ 6,369   $ 6,394   $ 5,634  

Net cash used in investing activities

    (3,363 )   (3,753 )   (3,363 )

Net cash used in financing activities

    (168 )   (2,176 )   (1,242 )

Free cash flow:

                   

Net cash provided by operating activities

  $ 6,369   $ 6,394   $ 5,634  

Less: Cash paid for property, equipment and satellites

    (3,225 )   (3,786 )   (3,349 )

Free cash flow

  $ 3,144   $ 2,608   $ 2,285  

Cash Flows Provided By Operating Activities

        Net cash provided by operating activities decreased slightly in 2014 as compared to 2013 mainly due to an increase in cash paid for interest and taxes, partially offset by higher operating profit before depreciation and amortization. Net cash provided by operating activities increased in 2013 as compared to 2012 mainly due to higher operating profit before depreciation and amortization and an increase in cash generated from working capital mostly at DIRECTV U.S. related to timing of vendor payables and a decrease in inventory principally due to increased usage of refurbished set-top boxes, partially offset by increased prepaid expenses and cash paid for interest and taxes.

        Cash paid for income taxes was $1,513 million in 2014, $1,479 million in 2013 and $1,406 million in 2012. The increase in cash paid for taxes in 2014 was primarily due to an increase in income before income taxes in the non foreign jurisdictions. The increase in cash paid for income taxes in 2013 resulted primarily from a tax payment for the settlement of prior year taxes.

        Cash paid for interest was $886 million in 2014, $840 million in 2013 and $781 million in 2012. The increase in cash paid for interest from 2012 to 2014 is due to the increase in our average debt outstanding.

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Cash Flows Used In Investing Activities

        Capital expenditures for subscriber leased set-top receivers at DIRECTV U.S. decreased in 2014 from 2013 as slightly higher gross subscriber additions in 2014 were offset by lower hardware costs and an increase in the use of refurbished set-top receivers. Capital expenditures for subscriber leased set-top receivers at DIRECTV U.S. remained relatively flat from 2012 to 2013, as the decrease in gross subscriber additions has been offset by an increase in advanced set-top receivers provided to subscribers under upgrade and retention initiatives.

        During 2014, 2013 and 2012, DIRECTV U.S. was in the process of constructing two satellites, D14, which was launched in the fourth quarter of 2014, and D15, which we expect to launch in the first half of 2015. Additionally, capital expenditures were higher in 2012 and 2013 as a result of the construction of our new El Segundo campus.

        During 2014, 2013 and 2012, DIRECTV Latin America was in the process of constructing two satellites to be leased for PanAmericana, ISDLA 1, which launched in 2014, and ISDLA 2, which is expected to be launched in 2015. As a part of the lease agreement, we are required to make prepayments prior to the launch and commencement of the lease term. Payments related to the lease agreement totaled $88 million for 2014, $105 million for 2013 and $128 million for 2012 and are included as satellite capital expenditures. In addition, during 2013 DIRECTV Latin America contracted for the construction and launch of a new satellite for Sky Brasil, SKY-Brasil 1, which we expect to launch in the second quarter of 2016. DIRECTV Latin America paid $102 million in 2014 and $59 million in 2013 for the construction of SKY-Brasil 1 during 2014.

        We paid $47 million in 2014, $66 million in 2013 and $16 million in 2012 for investments, net of cash acquired, in various companies. Our cash spending on investment in companies is discretionary and we may fund strategic investment opportunities should they arise in the future. We received cash proceeds of $32 million in 2014, related to the sale of various investments, $257 million in 2013, primarily related to the 2012 sale of an 18% interest in Game Show Network, and $24 million also related to the sale of various investments, as further discussed in Note 8 of the Notes to the Consolidated Financial Statements. In addition, we paid cash of $120 million for broadband spectrum licenses at DIRECTV Latin America in 2014 and $159 million for spectrum at DIRECTV Latin America and new patent licenses in DIRECTV U.S. in 2013.

Cash Flows Used in Financing Activities

        During 2014, we had $2,437 million of net cash proceeds from the issuance of senior notes, $195 million of cash proceeds from BNDES, $18 million of cash proceeds from Desenvolve SP and $200 million of net cash repayments of short-term commercial paper. We also repaid $1,000 million of our senior notes and $66 million of the BNDES financing facility in 2014. During 2013, we had $1,947 million of net cash proceeds from the issuance of senior notes, $152 million of cash proceeds from BNDES and $158 million of net cash repayments of short-term commercial paper. We also repaid $15 million of the BNDES financing facility and borrowed and repaid $10 million under our revolving credit facility in 2013. During 2012, we had $5,190 million of net cash proceeds from the issuance of senior notes and $358 million of net cash proceeds from the issuance of short-term commercial paper. We also repaid $1,500 million of our long-term debt and borrowed and repaid $400 million under our revolving credit facility.

        Under our share repurchase program, we repurchased and retired $1,386 million in 2014, $4,000 million in 2013, and $5,175 million in 2012 of our common shares. The decrease in the cash payments in 2014 was due to the suspension of our share repurchase program in May 2014, as further discussed below.

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. On May 18, 2014, DIRECTV and AT&T entered into a definitive agreement under

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which AT&T will combine with DIRECTV in a stock-and-cash transaction. As a result, we have 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 with and without AT&T's consent.

Debt

        At December 31, 2014, we had $20,812 million in total outstanding borrowings, which consisted of senior notes and borrowings under the BNDES and Desenvolve SP financing facilities at Sky Brasil. Our outstanding borrowings are more fully described in Note 10 of the Notes to the Consolidated Financial Statements in Item 8, Part II of this Annual Report.

        Should the proposed merger transaction with AT&T not proceed, we may borrow in the future in order to maintain a ratio of outstanding long-term debt equal to approximately 2.5 times operating profit before depreciation and amortization of DIRECTV on a consolidated basis. We will continue to evaluate our optimal leverage on an ongoing basis. Regardless of the proposed merger transaction with AT&T, we may purchase our outstanding senior notes in the future from time to time in open market transactions or otherwise as part of liability management initiatives.

        Senior Notes.    At December 31, 2014, DIRECTV U.S.' senior notes had a carrying value of $20,527 million and a weighted-average coupon rate of 4.5%. The principal amount of our senior notes mature as follows: $1,200 million in 2015, $2,250 million in 2016, $1,250 million in 2017, $750 million in 2018, $1,000 million in 2019 and $14,068 million thereafter.

        Commercial Paper.    On November 27, 2012, DIRECTV U.S. established a commercial paper program backed by its revolving credit facilities, which provides for the issuance of short-term commercial paper in the United States up to a maximum aggregate principal of $2.5 billion. As of December 31, 2014, we had no short-term commercial paper outstanding. As of December 31, 2013, we had $200 million of short-term commercial paper outstanding, with a weighted average maturity of 133 days, at a weighted average yield of 0.41%.

Revolving Credit Facilities

        DIRECTV U.S. has a $1.0 billion revolving credit facility, which expires in February 2016, and a $1.5 billion revolving credit facility, which expires in September 2017. We pay a commitment fee of 0.15% per year for the unused commitment under the revolving credit facilities. Borrowings currently bear interest at a rate equal to the London Interbank Offer Rate (LIBOR) plus 1.25%. Both the commitment fee and the annual interest rate may increase or decrease under certain conditions due to changes in DIRECTV U.S.' long-term, unsecured debt ratings. Under certain conditions, DIRECTV U.S. may increase the borrowing capacity of the revolving credit facilities by an aggregate amount of up to $500 million. Aggregate amounts outstanding under the revolving credit facilities and the commercial paper program are limited to $2.5 billion. As of December 31, 2014 and December 31, 2013, there were no borrowings outstanding under the revolving credit facilities.

        Borrowings under the revolving credit facilities are unsecured senior obligations of DIRECTV U.S. and will rank equally in right of payment with all of DIRECTV U.S.' existing and future senior debt and will rank senior in right of payment to all of DIRECTV U.S.' future subordinated debt, if any.

Covenants and Restrictions

        The revolving credit facilities require DIRECTV U.S. to maintain at the end of each fiscal quarter a specified ratio of indebtedness to earnings before interest, taxes and depreciation and amortization. The revolving credit facilities also include covenants that limit DIRECTV U.S.' ability to, among other things, (i) incur additional subsidiary indebtedness, (ii) incur liens, (iii) enter into certain transactions with affiliates, (iv) merge or consolidate with another entity, (v) sell, assign, lease or otherwise dispose of all or substantially all of its assets,

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and (vi) change its lines of business. Additionally, the senior notes contain restrictive covenants that are similar. If DIRECTV U.S. fails to comply with these covenants, all or a portion of its borrowings under the senior notes could become immediately payable and its revolving credit facilities could be terminated. At December 31, 2014, management believes DIRECTV U.S. was in compliance with all such covenants. 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. The revolving credit facilities provide that the borrowings may be required to be prepaid if certain change-in-control events occur.

        DIRECTV Guarantors.    DIRECTV guarantees all of the senior notes then outstanding, jointly and severally with DIRECTV Holdings LLC's material domestic subsidiaries. DIRECTV 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. The revolving credit facilities and the commercial paper program are also similarly fully guaranteed by DIRECTV.

        As a result of the guarantees, holders of the senior notes, the revolving credit debt and the commercial paper have the benefit of DIRECTV'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 revolving credit facilities and the commercial paper program.

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

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 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. As of December 31, 2013, Sky Brasil had borrowings of R$320 million ($137 million) outstanding under the BNDES facility bearing interest at a weighted-average rate of 3.07% 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$2.66 / $1.00 and R$2.34 / $1.00 as of December 31, 2014 and December 31, 2013, respectively.

        Borrowings under the BNDES facility mature as follows: R$338 million ($127 million) in 2015, R$274 million ($103 million) in 2016 and R$98 million ($37 million) in 2017. The financing facility is collateralized by the financed set-top receivers with an original purchase price of approximately R$1,024 million ($385 million) based on the exchange rate of R$2.66 / $1.00 as of December 31, 2014.

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 December 31, 2014, Sky

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Brasil had borrowings of R$48 million ($18 million) under the facility bearing interest of 2.5% per year, with a maturity of 2019. The U.S. dollar amounts reflect the conversion of the Brazilian real denominated amounts into U.S. dollars based on the exchange rate of R$2.66 / $1.00 at December 31, 2014.

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.

        In February 2013, the Venezuelan government announced a devaluation of the Venezuelan bolivar from the official exchange rate of 4.3 Venezuelan bolivars per U.S. dollar to an official rate of 6.3 Venezuelan bolivars per U.S. dollar. As a result of the devaluation, we recorded a pre-tax charge in "Venezuelan currency devaluation charge" in the Consolidated Statements of Operations of $166 million ($136 million after tax) in the first quarter of 2013, related to the remeasurement of the bolivar denominated net monetary assets of our Venezuelan subsidiary as of the date of the devaluation.

        In the first quarter of 2013, the Venezuelan government announced a new currency exchange system, the Sistema Complementario de Administración de Divisas, or SICAD 1, which is intended to function as an auction system for participants to exchange Venezuelan bolivars for U.S. dollars. The volume of amounts exchanged through such SICAD 1 system and the resulting exchange rate are published by the Venezuelan Central Bank. Effective January 24, 2014, the Venezuelan government announced that dividends and royalties would be subject to the SICAD 1 program. The SICAD 1 exchange rate, which was 12.0 Venezuelan bolivars per U.S. dollar as of December 31, 2014, is determined by periodic auctions. In February 2014, the Venezuelan government announced SICAD 2, which is an exchange mechanism that became available on March 24, 2014. The exchange rate for SICAD 2 was 49.99 Venezuelan bolivars per U.S. dollar as of December 31, 2014. Additionally, in February 2015, the Venezuelan government announced that the SICAD 2 exchange mechanism would no longer be available and created SIMADI, a new open market currency exchange system.

        We currently believe the SICAD 1 rate is the most representative rate to use for remeasurement, as the official rate of 6.3 Venezuelan bolivars per U.S. dollar will likely be reserved only for the settlement of U.S. dollar denominated obligations related to purchases of "essential goods and services," and the equity of our Venezuelan subsidiary would be realized, if at all, through permitted dividends paid at the SICAD 1 rate. Therefore, as of December 31, 2014, we are continuing to remeasure our Venezuelan subsidiary's financial statements in U.S. dollars using the exchange rate determined by periodic auctions under SICAD 1, which was 12.0 Venezuelan bolivars per U.S. dollar. Prior to March 31, 2014, we used the official exchange rate of 6.3 Venezuelan bolivars per U.S. dollar. 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 bolivar denominated net monetary assets of our Venezuelan subsidiary on March 31, 2014.

        As of December 31, 2014, our Venezuelan subsidiary had Venezuelan bolivar denominated net monetary assets of $481 million, including cash of $481 million, based on the SICAD 1 exchange rate of 12.0 Venezuelan bolivars per U.S. dollar. In 2014, our Venezuelan subsidiary generated revenues of approximately $900 million and operating profit before depreciation and amortization of approximately $400 million, excluding the impact of the $281 million Venezuelan devaluation charge, as well as the impact of additional exchange rate losses in Venezuela recorded during 2014. 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 1 auctions, which is 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

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periods. The comparability of our results of operations and financial position in Venezuela will also be affected in the event of additional changes to the currency exchange rate system, further devaluations of the Venezuelan bolivar or if we determine in the future that a rate other than the SICAD 1 rate is appropriate for the remeasurement of our Venezuelan bolivar denominated net monetary assets.

        Income taxes.    During 2014, we reached settlement with various state tax jurisdictions resulting in the recognition of uncertain tax benefits. As a result we recorded a benefit of $35 million in "Income tax expense" in the Consolidated Statements of Operations during the year ended December 31, 2014. During 2013, we reached settlement with federal and state tax jurisdictions resulting in the recognition of uncertain tax benefits. As a result we recorded a benefit of $76 million in "Income tax expense" in the Consolidated Statements of Operations during the year ended December 31, 2013. We engage in continuous discussions and negotiations with federal, state, and foreign taxing authorities and reevaluate our uncertain tax positions, and, while it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter or tax position, we believe that it is reasonably possible that our unrecognized tax benefits will not change materially during the next twelve months.

        Other.    Several factors may affect our ability to fund our operations and commitments that we discuss in "Contractual Obligations," "Off-Balance Sheet Arrangements" and "Contingencies" below. In addition, our future cash flows may be reduced if we experience, among other things, significantly higher subscriber additions than planned, increased subscriber churn or upgrade and retention costs, higher than planned capital expenditures for satellites and broadcast equipment, satellite anomalies or signal theft. Additionally, DIRECTV U.S.' ability to borrow under the revolving credit facilities is contingent upon DIRECTV U.S. meeting financial and other covenants associated with its facilities as more fully described above.

CONTRACTUAL OBLIGATIONS

        The following table sets forth our contractual obligations as of December 31, 2014, including the future periods in which payments are expected. Additional details regarding these obligations are provided in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report, as referenced in the table. The contractual obligations below do not include payments that could be made related to our net unrecognized tax benefits liability, which amounted to $516 million as of December 31, 2014. The timing and amount of any such future payments is not reasonably estimable, as such payments are dependent on the completion and resolution of examinations with tax authorities.

 
 
Payments Due By Period
 
Contractual Obligations
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
 
 
  (Dollars in Millions)
 

Long-term debt obligations (Note 10) (a)

  $ 31,899   $ 2,220   $ 5,273   $ 3,289   $ 21,117  

Purchase obligations (Note 21) (b)

    16,330     2,158     3,791     3,576     6,805  

Operating lease obligations (Note 21) (c)

    963     108     200     198     457  

Capital lease obligations (Notes 13 and 21) (d)

    1,331     146     283     254     648  

Total

  $ 50,523   $ 4,632   $ 9,547   $ 7,317   $ 29,027  

(a)
Long-term debt obligations include interest calculated based on the rates in effect at December 31, 2014, however, the obligations do not reflect potential prepayments required under indentures.

(b)
Purchase obligations consist primarily of broadcast programming commitments, regional professional team rights agreements, service contract commitments and satellite construction and launch contracts. Broadcast programming commitments include guaranteed minimum contractual commitments that are typically based on a flat fee or a minimum number of required subscribers subscribing to the related programming. Actual

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(c)
Certain of the operating leases contain variable escalation clauses and renewal or purchase options, which we do not consider in the amounts disclosed.

(d)
Capital lease obligations include prepayments related to a satellite lease contract, which we expect to account for as a capital lease upon commencement. For further discussion, please refer to Note 21 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report.

OFF-BALANCE SHEET ARRANGEMENTS

        As of December 31, 2014, we were contingently liable under standby letters of credit and bonds in the aggregate amount of $316 million primarily related to judicial deposit and payment guarantees in Latin America and insurance deductibles.

CONTINGENCIES

        For a discussion of "Contingencies", see Note 21 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report.

CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS