Operating profit, before the effects of purchase accounting adjustments related to General Motors' (GM) acquisition of Hughes Aircraft Company in 1985, increased 45.8% in 1997 to $306.4 million compared with $210.1 million in 1996. Full-year operating profit margin on the same basis rose to 6.0% from 5.2% in 1996.

"The solid financial performance reported in our first earnings release demonstrates the tremendous growth opportunities we have in our satellite and wireless communications businesses" said Michael T. Smith, Hughes chairman and chief executive officer. "The full-year revenue and operating profit increases were propelled by strong DIRECTV subscriber growth, including a record-setting fourth quarter for new subscribers. In addition, higher sales of commercial satellites and completion of the PanAmSat merger in May 1997 contributed to the strong financial showing by Hughes."

"Now that the Hughes Defense and Delco Electronics transactions are behind us, it is exciting to focus all of our resources on our dynamic telecommunications and space businesses," Mr. Smith further noted. "We will use our strong balance sheet, experienced management team and exceptional employee base to build on our market leadership, creating significant growth and value opportunities."

Full year 1997 earnings, adjusted to exclude GM purchase accountings adjustments, were $470.7 million compared with $183.5 million in 1996. Earnings per share on the same basis for the full year were $1.18 per share versus $0.46 per share in 1996. Included in 1997 results were a $318.3 million after-tax gain ($0.80 per share) related to the PanAmSat merger, a $62.8 million after-tax gain ($0.16 per share) related to the sale of Hughes- Avicom International and a $20.6 million after-tax extraordinary charge ($0.05 per share) associated with PanAmSat's tender offer to retire its high-yield debt securities. Earnings in 1996 included a $71.6 million after-tax gain ($0.18 per share) recognized from the sale of 2.5% of DIRECTV to AT&T. Excluding these one-time items, full-year earnings were $110.2 million compared with $111.9 million in 1996 and earnings per share were $0.28 in both years. When comparing the years, the strong operating profit improvement in 1997 was offset by nonoperating items such as increased interest expense and losses related to investments in affiliated companies.

Fourth Quarter Financial Review

Revenues for the fourth quarter increased 38.8% to $1,694.6 million compared with revenues of $1,221.2 million for the same period in 1996. The increase was principally due to record DIRECTV subscriber growth, higher sales of commercial satellites, and the PanAmSat merger.

Fourth quarter operating profit (excluding GM purchase accounting adjustments) increased 40.6% to $91.8 million from $65.3 million in last year's fourth quarter. The increase was mostly related to higher commercial satellite sales and the PanAmSat merger, partially offset by higher DIRECTV operating losses. Operating profit margin on the same basis was 5.4% compared with 5.3% in last year's fourth quarter.

Earnings, adjusted to exclude GM purchasing accounting adjustments, were $70.0 million in the period compared with $33.1 million last year. Earnings per share on the same basis in the fourth quarter were $0.18 per share versus $0.08 per share last year. Excluding the one-time items, earnings were $27.8 million versus $33.1 million in last year's fourth quarter. Earnings per share on the same basis were $0.07 in the quarter compared with $0.08 in 1996.

When comparing the quarters, the strong operating profit improvement in the fourth quarter of 1997 was more than offset by nonoperating items such as increased interest expense and losses related to investments in affiliated companies.

Segment Financial Review: Calendar Year and Fourth Quarter

Direct-To-Home Broadcast

For the full year, revenues more than doubled to $1,276.9 million from $621.0 million in 1996. The increase was a result of strong subscriber growth, solid average monthly revenue per subscriber, and continued low subscriber churn rates in the United States and Latin America. Domestic DIRECTV fueled this growth with revenues of $1,103 million, a 78% increase over last year's revenue of $618 million. The Company's Latin American DIRECTV subsidiary, Galaxy Latin America (GLA), had revenues of $70 million compared with $3 million in 1996. Total DIRECTV subscribers as of December 31, 1997 were 3,301,000 in the United States and 300,000 in Latin America. In addition, DIRECTV Japan initiated its service in December 1997.

The operating loss in 1997 was $254.6 million compared with an operating loss of $319.8 million in 1996. The lower operating loss in 1997 was principally due to increased subscriber revenues which more than offset higher marketing expenditures. The full-year 1997 operating loss for domestic DIRECTV was $137 million compared with $192 million in 1996. GLA's operating loss was $116 million in 1997 versus $131 million in 1996.

Revenues for the quarter were $415.9 million, an increase of 79.7% over revenues of $231.4 million for the same period in 1996. The increase was a result of record subscriber growth, continued strong average monthly revenue per subscriber, and low subscriber churn rates in both the United States and Latin America. In the fourth quarter, domestic DIRECTV revenues increased 46.7% to $330 million from $225 million and GLA's revenues increased to $28 million from $3 million in 1996. Domestic DIRECTV attained its best-ever quarterly subscriber growth with the addition of 409,000 net subscribers in the United States and GLA added 67,000 net subscribers in Latin America.

The operating loss in the quarter was $95.9 million compared with a loss of $90.9 million in 1996. The higher loss was primarily due to increased marketing expenses in the United States related to new promotions and increased advertising expenditures which more than offset a lower operating loss in GLA. The operating loss in the domestic DIRECTV business was $62 million compared with $24 million in last year's fourth quarter and GLA's operating loss was $27 million compared with $60 million last year.

Satellite Services

Revenues in 1997 increased 30.5% to $630.0 million from $482.7 million in 1996. Full-year operating profit was $296.2 million, an increase of 22.2% over last year's operating profit of $242.4 million. The revenue and operating profit growth were primarily due to the May 1997 PanAmSat merger and increased operating lease revenues for both video distribution and business communications services. Operating profit margin in the period declined to 47.0% from 50.2% last year principally due to goodwill amortization associated with the PanAmSat merger.

Fourth quarter 1997 revenues were up 74.5% to $197.9 million compared with $113.4 million in the prior year's comparable period. Operating profit in the quarter rose 71.7% to $91.7 million from $53.4 million in 1996. The revenue and operating profit growth were primarily due to the May 1997 PanAmSat merger and increased operating lease revenues for both video distribution and business communications services. Operating profit margin in the period declined to 46.3 from 47.1% last year primarily due to goodwill amortization associated with the PanAmSat merger.

Satellite Manufacturing

For the full year, revenues increased 21.2% to $2,491.9 million from $2,056.4 million last year primarily due to higher commercial satellite sales to customers including ICO Global Communications, Orion Asia Pacific Corporation, Japan Satellite Systems, Inc., PanAmSat Corporation, Telenor, Telecommunicaciones de Mexico and Thuraya Satellite Telecommunications Company.

Operating profit in 1997 was $226.3 million, an increase of 23.5% over $183.3 million in 1996. The increase was primarily due to higher commercial program sales. Operating profit margin for the year was 9.1% compared with 8.9% last year.

Fourth quarter 1997 revenues increased 30.5% to $743.8 million from revenues of $570.0 million in the same period in 1996 principally due to increased commercial satellite sales. Operating profit in the fourth quarter increased 80.5% to $66.6 million from $36.9 million in the prior year's fourth quarter. The increase is principally due to reduced development costs related to the geostationary satellite mobile telephony product line and higher commercial program sales. Consequently, fourth quarter operating profit margin increased to 9.0% compared with 6.5% last year.

Network Systems

Full-year revenues for Hughes Network Systems (HNS) were $1,011.3 million compared with $1,070.0 million in 1996. The decline was primarily due to lower domestic mobile cellular telephone equipment sales which were partially offset by higher satellite-based mobile telephony equipment sales.

HNS operating profit in 1997 was $74.1 million versus $107.7 million in 1996 and operating profit margin declined to 7.3% from 10.1% last year. These decreases were primarily the result of lower domestic mobile cellular telephone equipment sales and higher marketing expenditures associated with the launch of the DirecPC/DirecDuo products.

HNS revenues in the fourth quarter were $402.4 million compared with $412.4 million in the same period last year. Operating profit in the quarter increased 9.4% to $68.5 million from $62.6 million in 1996. The operating profit increase was principally a result of improved margins associated with the sale of international wireless local loop telephone systems which more than offset the higher marketing expenses related to the introduction of the DirecPC/DirecDuo products. As a result, operating profit margin in the quarter increased to 17.0% from 15.2% last year.

Balance Sheet

The 1997 year-end cash balance of $2,783.8 million reflects the $4.0 billion cash injection received at the completion of the Hughes Defense and Delco Electronics transactions, repayment of a $1,725 million loan from GM used to facilitate the 1997 PanAmSat merger, and existing Hughes Electronics cash of approximately $500 million.

Year-end 1997 long-term debt was $637.6 million consisting primarily of PanAmSat's revolving bank debt used to finance a tender offer for high-yield debt securities completed on December 24, 1997. The tender offer and refinancing substantially reduced the restrictive liens and covenants contained in the high-yield debt securities, thereby increasing PanAmSat's financial flexibility and reducing annual interest expense. On January 16, 1998, PanAmSat issued $750 million of privately-placed debt securities with maturities between five and 30 years at interest rates ranging between six and seven percent. The net proceeds from the offering were used to repay bank loans incurred to finance the tender offer and for general corporate purposes.

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