DIRECTV 2004 Annual Report Download - page 62

Download and view the complete annual report

Please find page 62 of the 2004 DIRECTV annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 137

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137

THE DIRECTV GROUP, INC.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion and the estimated amounts generated from the sensitivity analyses referred to below include forward-
looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur.
Actual future market conditions may differ materially from such assumptions because the amounts noted below are the result of
analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, you should not consider the
forward-looking statements as projections by us of future events or losses.
General
Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates
and changes in the market value of our equity investments. We manage our exposure to these market risks through internally
established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We
enter into derivative instruments only to the extent considered necessary to meet our risk management objectives, and do not
enter into derivative contracts for speculative purposes.
Foreign Currency Risk
We generally conduct our business in U.S. dollars with some business conducted in a variety of foreign currencies and therefore
are exposed to fluctuations in foreign currency exchange rates. Our objective in managing our exposure to foreign currency
changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, we may
enter into foreign exchange contracts to mitigate risks associated with foreign currency denominated assets, liabilities,
commitments and anticipated foreign currency transactions. The gains and losses on derivative foreign exchange contracts
offset changes in value of the related exposures. As of December 31, 2004, we had no significant foreign currency exchange
contracts outstanding. The impact of a hypothetical 10% adverse change in exchange rates on the fair values of foreign currency
denominated assets and liabilities would be a loss of $11.4 million, net of taxes, at December 31, 2004. Excluding HNS, the loss
associated with the hypothetical 10% adverse change would be $9.1 million, net of taxes.
Investments
We maintain investments in publicly-traded common stock of unaffiliated companies and are therefore subject to equity price
risk. These investments are classified as available-for-sale and, consequently, are reflected in our Consolidated Balance Sheets
at fair value with unrealized gains or losses, net of taxes, recorded as part of other comprehensive income, a separate component
of stockholders’ equity. Declines in market value that are judged to be other-than-temporary are charged to “Other, net” in the
Consolidated Statements of Operations. The fair value of the investments in such common stock was $48.0 million at December
31, 2004 based on closing market prices. A 10% decline in the market price of these investments would cause the fair value of
the investments in common stock to decrease by $4.8 million at December 31, 2004.
Interest Rate Risk
We are subject to fluctuating interest rates, which may adversely impact our consolidated results of operations and cash flows.
We had outstanding debt of $2,429.3 million at December 31, 2004 which consisted primarily of DIRECTV’s fixed rate
borrowings of $1,400.0 million and variable rate borrowings of $1,011.8 million, and various other floating and fixed rate
borrowings. As of December 31, 2004, the hypothetical impact of a one percentage point increase in interest rates related to our
outstanding variable rate debt would be to increase annual interest expense by approximately $10 million.
Credit Risk
We are exposed to credit risk in the event of non-performance by the counterparties to our derivative financial instrument
contracts. While we believe this risk is remote, credit risk is managed through the periodic monitoring and approval of
financially sound counterparties.
* * *
53