DIRECTV 2003 Annual Report Download - page 41

THE DIRECTV GROUP, INC.
Operating Costs and Expenses. The following table presents our operating costs and expenses for the
years ended December 31:
Change
Operating Costs and Expenses: 2003 2002 $ %
(Dollars in Millions)
Broadcast programming and other costs ....................... $4,836.6 $4,087.9 $748.7 18.3%
Costofproductssold ..................................... 790.3 818.6 (28.3) (3.5)%
Selling, general and administrative expenses ................... 3,265.7 3,088.1 177.6 5.8%
Depreciation and amortization .............................. 1,082.8 1,020.2 62.6 6.1%
Total Operating Costs and Expenses ..................... $9,975.4 $9,014.8 $960.6 10.7%
Broadcast programming and other costs increased by $748.7 million due to higher costs at DIRECTV U.S.
resulting from higher programming costs associated with the increase in subscribers, annual program supplier
rate increases, the launch of additional local and other channels during 2003, increased costs associated with the
new NFL SUNDAY TICKET contract and an increase in gross subscriber additions through direct customer
acquisition programs. We include costs to acquire new DIRECTV U.S. subscribers through direct customer
acquisition programs, which primarily consist of the cost of hardware and installation subsidies, in “Broadcast
programming and other costs.” However, we include costs to acquire new DIRECTV U.S. subscribers through
third-party customer acquisition programs, which primarily consist of commissions paid to authorized retailers
and dealers, in “Selling, general and administrative expenses.” Broadcast programming and other costs also
increased at the Network Systems segment related to the larger DIRECWAY subscriber base. The increases in
broadcast programming and other costs were partially offset by the $135.0 million cost of the 2002 FIFA World
Cup rights at DLA and lower programming costs due to the rejection and/or renegotiation of certain
programming contracts as a result of the 2003 DLA LLC bankruptcy proceedings.
Selling, general and administrative expenses increased by $177.6 million primarily due to a one-time charge
of approximately $132 million in 2003 related to the completion of the News Corporation transactions, higher
2003 retention, upgrade and other marketing costs at DIRECTV U.S., a $95.0 million net gain recorded in 2002
for the NASA claim, and a $40.1 million net gain recorded in 2002 related to the PAS-7 insurance claim. These
increases were partially offset by lower foreign currency translation losses at DLA in 2003, a $48.0 million loss
recorded for the GECC settlement in 2002 and a $23.0 million loss recorded in connection with the termination
of the AOL alliance in 2002.
The increase in depreciation and amortization was primarily from DIRECTV U.S. due to a $35.9 million
increase in depreciation expense associated with assets placed in service during 2002 and 2003 and a $55.5
million increase in amortization expense that resulted from the reinstatement of amortization expense during the
fourth quarter of 2002 related to certain intangible assets due to the issuance of the Emerging Issues Task Force,
or EITF, Issue No. 02-17, “Recognition of Customer Relationship Assets Acquired in a Business Combination.”
See Note 5: Goodwill and Intangible Assets in the Notes to the Consolidated Financial Statements in Item 8 for
additional information. The increase was partially offset by a $22.9 million decrease at the Satellite Services
segment primarily resulting from a satellite becoming fully depreciated in July 2002, partially offset by an
increase in depreciation expense resulting from satellites placed into service during 2002 and 2003.
Interest Income and Expense. Interest income increased to $42.7 million in 2003 compared to $24.5
million in 2002 due to an increase in average cash balances. Interest expense decreased to $312.5 million in 2003
from $334.5 million in 2002. The decrease in interest expense resulted from the $74.0 million of interest
recorded in connection with the settlement of the GECC dispute in 2002, partially offset by higher average
outstanding borrowings and a higher weighted average interest rate in 2003. Interest expense is net of capitalized
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