Our foreign operations and investments expose us to risks and restrictions not present in our domestic operations.
| |
• | Complications in complying with restrictions on foreign ownership and investment and limitations on repatriation. We may not be permitted to own our operations in some countries and may have to enter into partnership or joint venture relationships. Many foreign legal regimes and/or our contractual arrangements restrict our repatriation of earnings to the U.S. from our subsidiaries and joint venture entities. Applicable law in such foreign countries may also limit our ability to distribute or access our assets or offer our products and services in certain circumstances. In such event, we will not have access to the cash flow and assets of our subsidiaries and joint ventures.
|
| |
• | Difficulties in following a variety of laws and regulations related to foreign operations. Our international operations are subject to the laws and regulations of many different jurisdictions that may differ significantly from U.S. laws and regulations. For example, local privacy or intellectual property laws may hold us responsible for the data that is transmitted over our network by our customers. In addition, we are subject to the Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions that generally prohibit companies and their intermediaries from making improper payments or giving or promising to give anything of value to foreign officials and other individuals for the purpose of obtaining or retaining business or gaining a competitive advantage. Our policies mandate compliance with these laws. However, we operate in many parts of the world that have experienced corruption to some degree. Compliance with these laws may lead to increased operations costs or loss of business opportunities. Violations of these laws could result in fines or other penalties or sanctions, which could have a material adverse impact on our business, financial condition, results of operations or cash flow.
|
| |
• | Restrictions on space station landing/terrestrial rights. Satellite market access and landing rights and terrestrial wireless rights are dependent on the national regulations established by foreign governments, including, but not limited to obtaining national authorizations or approvals and meeting other regulatory, coordination and registration requirements for satellites. Because regulatory schemes vary by country, we may be subject to laws or regulations in foreign countries of which we may not be aware.
governmental bodies. Non-compliance with these requirements may result in the loss of the authorizations and licenses to conduct business in these countries, as well as fines or other financial and non-financial penalties for non-compliance with regulations. If that were to be the case, we could be subject to sanctions, penalties and/or other actions by a foreign government that could materially and adversely affect our ability to operate in that country. There is 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 wish to operate new satellites, or that applicable restrictions in those jurisdictions will not be unduly burdensome. Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing |
authorizations, and the failure to obtain or comply with the authorizations and regulations governing our international operations could have a material adverse effect on our abilitylicenses to generate revenue and our overall competitive position.
| |
• | Financial and legal constraints and obligations. Operating pursuant to foreign licenses subjects us to certain financial constraints and obligations, including, but not limited to: (a) tax liabilities that may or may not be dependent on revenue; (b) the regulatory requirements associated with maintaining such licenses, which may change over time, are subject to interpretation by foreign courts and regulatory bodies, and may result in additional costs to operate and/or fines, sanctions and penalties being imposed on us or our subsidiaries if found to be violating the terms of such licenses, any or all of which could be material; (c) the burden of creating and maintaining additional entities, branches, facilities and/or staffing in foreign jurisdictions; and (d) legal regulations requiring that we make certain satellite capacity available for “free,” which may impact our revenue. In addition, if we need to pursue legal remedies against our customers or our business partners located outside of the U.S., it may be difficult for us to enforce our rights against them.
|
| |
• | Compliance with applicable export control laws and regulations in the U.S. and other countries. We must comply with all applicable export control and trade sanctions laws and regulations of the U.S. and other countries. U.S. laws and regulations applicable to us include the Arms Export Control Act, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”), and trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). The export of certain hardware, technical data and services relating to satellites is regulated by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) under the EAR. Other items are controlled for export by the U.S. Department of State’s Directorate of Defense Trade Controls under ITAR. We cannot provide equipment or services to certain countries subject to U.S. trade sanctions unless we first obtain the necessary authorizations from OFAC. Violations of these laws or regulations could result in significant sanctions including fines, more onerous compliance requirements, debarments from export privileges, or loss of authorizations needed to conduct aspects of our international business. A violation of ITAR or other export or trade-related regulations could materially adversely affect our business, financial condition and results of operations.
|
| |
• | Changes in exchange rates between foreign currencies and the U.S. dollar. We conduct our business and incur cost in the local currency of a number of the countries in which we operate. Accordingly, our applicable results of operations are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our financial statements. In addition, we sell our products and services and acquire supplies and components from countries that historically have been, and may continue to be, susceptible to recessions, instability or currency devaluation. These fluctuations in currency exchange rates, recessions and currency devaluations have affected, and may in the future affect, revenue, profits and cash earned on international sales.
|
| |
• | Greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation or war. As we conduct operations throughout the world, we could be subject to regional or national economic downturns or instability, acts of terrorism, labor or political disturbances or conflicts of various sizes, including wars. Any of these disruptions could detrimentally affect our sales in the affected region or country or lead to damage to, or expropriation of, our property or danger to our personnel.
|
| |
• | Competition with large or state-owned enterprises and/or regulations that effectively limit our operations and favor local competitors. Many of the countries in which we conduct business have traditionally had state-owned or state-granted monopolies on telecommunications services that favor an incumbent service provider. We face competition from these favored and entrenched companies in countries that have not deregulated. The slower pace of deregulation in these countries, including in Asia, Latin America, Middle East, India, Africa and Eastern Europe, has adversely affected, and is likely to continue to adversely affect, the development and growth of our business in these regions.
|
| |
• | Customer credit risks. Customer credit risks are exacerbated in foreign operations because there is often little information available about the credit histories of customers in certain of the foreign countries in which we operate.
|
We may experience loss from some of our customer contracts.
We provide access to our telecommunications networks to customers that use a variety of platforms such as satellite, wireless 4G, 5G, cable, fiber optic and DSL. These customer contracts may require us to provide services at a fixed
price for the term of the contract. To facilitate the provision of this access, we may enter into contracts with terrestrial platform providers. Our agreements with these subcontractors may allow for prices to be changed during the term of the contracts. We assume greater financial risk on these customer contracts than on other types of contracts because if we do not estimate costs accurately and there is an increase in our subcontractors’ prices, our net profit may be significantly reduced or there may be a loss on the contracts.
We may experience significant financial losses on our existing investments.
We have entered into certain strategic transactions and investments. These investments involve a high degree of risk and could diminish our financial condition or our ability to fund a debt repurchase program or invest capital in our business. The overall sustained economic uncertainty, as well as fines, penalties, or other sanctions.
•Financial and legal constraints and obligations. Operating pursuant to foreign licenses subjects us to certain financial operationalconstraints and obligations, including, but not limited to: (a) tax liabilities that may or may not be dependent on revenue; (b) the regulatory requirements associated with maintaining such licenses, which may be subject to interpretation by foreign courts and regulatory bodies; (c) the burden of creating and maintaining additional entities, branches, facilities and/or staffing in foreign jurisdictions; and (d) regulations requiring that we make certain satellite capacity available for “free” or available at reduced rates.
•Compliance with applicable export control laws and regulations in the U.S. and other difficulties encountered by certain companiescountries. We must comply with all applicable export control and trade sanctions laws and regulations of the U.S. and other countries. A violation any export or trade-related regulations could materially adversely affect our business.
•Changes in exchange rates between foreign currencies and the U.S. dollar. Fluctuations in currency exchange rates, recessions and currency devaluations have affected, and may in the future affect, revenue, profits and cash earned from our international businesses.
•Regulations may favor state-owned enterprises or local service providers. Many of the countries in which we conduct business have invested increases the risktraditionally had state-owned or state-granted monopolies on telecommunications services that the actual amounts realized in the future on our debtfavor an incumbent service provider. We face competition from these favored and equity investments will differ significantly from the fair values currently assigned to them. In addition, theentrenched companies in which we invest or with whom we partner maycountries that have not be able to compete or operate effectively or may experience bankruptcy or other liquidity or other financial stress or there may be insufficient demand for the services and products offered by these companies. These investments could also expose us to significant financial losses and may restrict our ability to make other investments or limit alternative uses of our capital resources. If our investments suffer losses, our financial condition could be materially adversely affected.liberalized.
We may not be able to generate cash to meet our debt service needs or fund our operations.
As of December 31, 2019,2022, our total indebtedness was $2.4$1.5 billion. Our ability to make payments on or to refinance our indebtedness and to fund our operations will depend on our ability to generate cash in the future, which is subject in part to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may need to raise additional capital in order to fund ongoing operations or to capitalize on business opportunities. We may not be able to generate sufficient cash flow from operations and future borrowings or equity may not be available in amounts sufficient to enable us to service or repay our indebtedness or to fund our operations or other liquidity needs.future. If we are unable to generate sufficient cash, we may be forced to take actions such as revising or delaying our strategic plans, reducing or delaying capital expenditures and/or the development, design, acquisition and construction of new satellites, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We may not be able to implement any of these actions on satisfactory terms, or at all. The indentures governing our indebtedness limit our ability to dispose of assets and use the proceeds from such dispositions. Therefore, we may not be able to consummate those dispositions on satisfactory terms, or at all, or to use those proceeds in a manner we may otherwise prefer. The Tax Cuts and Jobs Act of 2017 enacted in December 2017 (the “2017 Tax Act”) limits the deductibility of interest expense for U.S. federal income tax purposes. While the 2017 Tax Act has reduced our federal income tax obligations, if these limitations or other newly enacted provisions become applicable to us, they could minimize such reductions or otherwise require us to pay additional federal income taxes, which in turn could result in additional liquidity needs.
In addition, conditions in the financial markets could make it difficult for us to access equity or debt markets at acceptable terms or at all. Instability or other conditions in the equity markets could make it difficult for us to raise equity financing without incurring substantial dilution to EchoStar’s existing shareholders. In addition, sustained or increased economic weaknesses or pressures or new economic conditions may limit our ability to generate sufficient internal cash to fund investments, capital expenditures, acquisitions and other strategic transactions and/or the development, design, acquisition and construction of new satellites. We cannot predict with any certainty whether or not we will be impacted by economic conditions. As a result, these conditions make it difficult for us to accurately forecast and plan future business activities because we may not have access to funding sources necessary for us to pursue organic and strategic business development opportunities.
Covenants in our indentures restrict our business in many ways.
The indentures governing our 7 5/8% Senior Notes due 2021, 5.250% Senior Secured Notes due August 1, 2026 and 6.625% Senior Unsecured Notes due August 1, 2026 contain various covenants, subject to certain exceptions, that limit our ability and/or certain of our subsidiaries’ ability to, among other things:
| |
•incur additional debt; • | incur additional debt;
|
pay dividends or make distributions on our capital stock or repurchase our capital stock;
| |
• | make certain investments;
|
| |
• | create liens or enter into sale and leaseback transactions;
|
| |
• | enter into transactions with affiliates;
|
| |
• | merge or consolidate with another company;
|
| |
• | transfer and sell assets; and
|
allow to exist certain restrictions on our or theirsuch subsidiaries’ ability to pay dividends, make distributions, make other payments, or transfer assets.assets;
•make certain investments;
•create liens or enter into sale and leaseback transactions;
•enter into transactions with affiliates;
•merge or consolidate with another company; and
•transfer and sell assets.
Failure to comply with these and certain other financial covenants, if not cured or waived, may result in an event of default under the indentures, which could have a material adverse effect on our business, financial condition, results of operations or prospects. If certain events of default occur and are continuing under the respective indenture, the trustee under that indenture or the requisite holders of the notes under that indenture may declare all such notes to be immediately due and payable and, in the case of the indenture governing our secured notes, could proceed against the collateral that secures the secured notes. If certain other events of default occur, the indentures will
become immediately due and payable. We and certain of our subsidiaries have pledged a significant portion of our assets as collateral to secure the 5.250% Senior Secured Notes due August 1, 2026. If we do not have enough cash to service
A natural disaster could diminish our debt or fund other liquidity needs, we may be required to take actions such as requesting a waiver from the holders of the notes, reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of the existing debt, or seeking additional equity capital. We cannot assure you that any of these remedies can be implemented on commercially reasonable terms or at all, which could result in the trustee declaring the notes to be immediately due and payable and/or foreclosing on the collateral.
To the extent we have available satellite capacity in our ESS segment, our results of operations may be materially adversely affected if we are not ableability to provide satellite services on this capacity to third parties.
While we are currently evaluating various opportunities to make profitable use of our available satellite capacity (including, but not limited to, supplying satellite capacity for new domestic and international ventures), there can be no assurance that we can successfully develop these business opportunities. If we are unable to utilize our available satellite capacity for providing satellite services to third parties our margins could be negatively impacted, and we may be required to record impairments relatedservice to our satellites. customers.
Natural disasters could damage or destroy our ground infrastructure and/or our other or our vendors’ infrastructure, equipment and facilities, resulting in a disruption of service to our customers, which may adversely affect our business.
RISKS RELATED TO OUR HUMAN CAPITAL
We rely on key personnel and the loss of their services may negatively affect our businesses.
We believe that our future success depends to a significant extent upon the performance of Mr. Charles W. Ergen, our Chairman, and certain other key executives. The loss of Mr. Ergen or of certain other key executives, the ability to effectively provide for the succession of our senior management, or the ability of Mr. Ergen or such other key executives to devote sufficient time and effort to our business could have a material adverse effect on our business, financial condition and results of operations. Although some of our key executives may have agreements relating to their equity compensation that limit their ability to work for or consult with competitors, under certain circumstances, we generally do not have employment agreements with them. To the extent Mr. Ergen is performing services for both DISH Network Corporation (“DISH”) and its subsidiaries (together with DISH, “DISH Network”) and us, his attention may be diverted away from our business and therefore adversely affect our business.
Our business growth and customer retention strategies rely in part on the work of technically skilled employees.
Our response to technological developments depends, to a significant degree, on the work of technically skilled employees. In addition, we have made and will continue to make significant investments in research, development, and marketing for new products, services, satellites and related technologies, as well as entry into new business areas. Investments in new technologies, satellites and business areas are inherently dependent on these technically skilled employees as well. Competition for the services of such employees has become more intense as demand for these types of employees grows. We compete with other companies for these employees and although we strive to attract and retain these employees, we may not succeed in these respects.Additionally, if we were to lose certain key technically skilled employees, the loss of knowledge and intellectual capital might have an adverse impact on our business.
A natural disasterRestrictions on immigration or increased enforcement of immigration laws could diminishlimit our access to qualified and skilled professionals, increase our cost of doing business or otherwise disrupt our operations.
The success of our business is dependent on our ability to provide service to our customers.
Natural disasters could damage or destroy our ground stations and/or ourrecruit engineers and other or our vendors’ infrastructure, equipment and facilities, resulting in a disruptionprofessionals, including those who are citizens of service to our customers. We currently have backup systems and technology in place to safeguard our antennas and protect our ground stations during natural disasters such as tornadoes, but the possibility still exists that our ground facilities and/or our other and our vendors’ infrastructure, equipment and facilities could be impacted during a major natural disaster. If a future natural disaster impairs or destroys any of our ground facilities and/or our other and our vendors’ infrastructure, equipment and facilities, we may be unable to provide service to our customers in the affected area for a period of time which may adversely affect our business and results of operations.
We may have additional tax liabilities and changes in tax laws or regulations may have a material adverse effect on our business, cash flow, financial condition or results of operations.countries.
We are subject to income taxesImmigration laws in the U.S. and foreign jurisdictions. Significant judgments are required in determining our provisions for income taxes. In the course of preparing our tax provisions and returns, we must make calculations
where the ultimate tax determination may be uncertain. Our tax returns are subject to examination by the Internal Revenue Service (“IRS”), state, and foreign tax authorities. There can be no assurance as to the outcome of these examinations. If the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be adversely affected.
Additionally, new or modified income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. Future tax legislation could have a material impact on the value of our deferred tax assets and could result in increases in our future U.S. tax expense. Furthermore, changes to the taxation of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings. The foregoing items could have a material adverse effect on our business, cash flow, financial condition or results of operations.
We earn a portion of our operating income from outside the U.S., and any repatriation of funds currently held in foreign jurisdictions may result in higher effective tax rates for us. In addition, changes to U.S. tax laws have significantly impacted how U.S. multinational corporations are taxed on foreign earnings. Numerous countries are evaluating their existing tax laws due in part, to recommendations made by the Organization for Economic Co-operation and Development’s Base Erosion and Profit Shifting project. Although we cannot predict whether or in what form any legislation based on such proposals may be adopted by the countries in which we do business, future tax reform basedoperate are subject to legislative and regulatory changes, as well as variations in the standards of application and enforcement due to political forces and economic conditions.It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on such proposalsobtaining or otherwise may increase the amount of taxes we payrenewing work visas for our professionals.If immigration laws are changed or if new and adversely affect our operating results and cash flows.
Developments with respect to trade policies, trade agreements, tariffs and relatedmore restrictive government regulations could continueare enacted or increased, our access to increase our costsqualified and impact the supply of certain products we import, decrease demand for certain of our products and have a material adverse impact on our business, financial condition and results of operations. skilled professionals may be limited.
We source certain parts, components and items used in our products from manufacturers located outside of the U.S. and we sell certain of our products to customers located outside of the U.S. Concerns have been raised about certain countries potentially engaging in unfair trade practices and, as a result, tariffs have been increased on certain goods imported into the U.S. from those countries, including China and other countries from which we import components or raw materials, and there is the possibility of additional tariff increases. The imposition of tariffs on imported products by the U.S. has triggered actions from certain foreign governments, specifically China, resulting in a “trade war”. This trade war has materially increased the cost of certain products we import, impacted the supply of such products, and may require us to change our manufacturers. Although, the U.S. and China have agreed to a temporary trade deal, a potential long-term trade deal remains subject to ongoing trade talks while many of the tariffs remain in place. The outcome of the trade war, and any other governmental action related to tariffs, government regulations, or international trade agreements or policies could exacerbate adverse impacts incurred thus far and/or decrease demand for certain of our products, any or all of which could have a material adverse impact on our business, financial condition and results of operations.
RISKS RELATED TO OUR SATELLITES
Our ability to operate and control our satellites is subject to risks related to DISH Network’s operation and third-parties’ operation of satellite operations centers.
In September 2019, we transferred our satellite operation centers, which are used to monitor and control our satellites, to DISH Network in connection with our 2019 transfer to DISH of our broadband satellite services and
certain related businesses and assets (the “BSS Transaction”). Therefore, we now are subject to the inherent risks of having a related party operate, maintain and manage these satellite operations centers. In addition, certain of our satellites are operated, maintained and managed by third parties.
Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.
Satellites are subject to significant operational risks while in orbit. These risks include malfunctions, commonly referred to as anomalies, which have occurred and may occur in the future in our satellites and the satellites of other operators as a result of various factors, such as satellite design and manufacturing defects, problems with the power systems or control systems of the satellites, general failures resulting from operating satellites in the harsh environment of space and cyber-attacks on our satellites. operators.
Although we work closely with the satellite manufacturers to determine and eliminate the cause of anomalies in new satellites and provide for redundancies of many critical components in the satellites, we may not be able to prevent anomalies or outages from occurring and may experience anomalies and outages in the future, whether of the types described above or arising from the failure of other systems or components. The failure to perform of any of our manufacturers which provide in-orbit anomaly support for our satellites could result in our inability to determine, eliminate or manage anomalies for our satellites. Even if alternate in-orbit anomaly support services are available, we may have
difficulty identifying them in a timely manner or we may incur significant additional expense in changing suppliers. Space Systems/Loral (“SSL”), a subsidiary of Maxar Techonologies Inc. (“Maxar”), provides in-orbit anomaly support for several of our satellites. A decision by Maxar to discontinue, wind down or otherwise significantly modify its geostationary communications satellite business could have a material adverse impact on the operation of several of our satellites, including our ability to remedy any anomalies or outages.
Any single anomaly or outage or series of anomalies or outages could materially and adversely affect our ability to utilize the satellite, our operations, services and revenue as well as our relationships with current customers and our ability to attract new customers. In particular, future anomalies or outages may result in, among other things, the loss of individual transponders/beams and/or functional solar array circuits on a satellite, a group of transponders/beams on that satellite or the entire satellite, depending on the nature of the anomaly or outage. satellite.Anomalies or outages may also reduce the expected capacity, commercial operation and/or useful life of a satellite, thereby reducing the revenue that could be generated by that satellite, or create additional expenses due to the need to provide replacement or back-up satellites or satellite capacity earlier than planned and could have a material adverse effect on our business, financial condition and results of operations. business.
The loss of a satellite or other satellite malfunctions or anomalies or outages could have a material adverse effect on our financial performance, which weWe may not be able to prevent or mitigate by using available capacity on other satellites. There can be no assurance that we can recover critical transmission capacitythe impacts of anomalies in the event one or more of our in-orbitfuture.
Meteoroid events, decommissioned satellites, were to fail. In addition, the loss of a satellite or other satellite malfunctions or anomalies or outages could affect our ability to comply with Federal Communications Commission (“FCC”) and other regulatory obligations and our ability to fund the construction or acquisition of replacement satellites for our in-orbit fleet in a timely fashion, or at all. There can be no assurance that anomalies or outages will not impact the remaining useful life and/or the commercial operation of any of the satellites in our fleet. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.
Meteoroid eventsincreased solar activity also pose a potential threat to all in-orbit satellites. The probability that meteoroids will damage those satellites increases significantly when the Earth passes through the particulate stream left behind by comets. Occasionally, increased solar activity also poses a potential threat to all in-orbit satellites.
Some decommissioned satellites are in uncontrolled orbits, which pass through the geostationary belt at various points and present hazards to operational satellites, including our satellites. We may be required to perform maneuvers to avoid collisions and these maneuvers may prove unsuccessful or could reduce the useful life of the satellite through the expenditure of fuel to perform these maneuvers. The loss, damage or destruction of any of our satellites as a result of an electrostatic storm, collision with space debris, malfunction or other event could have a material adverse effect on our business, financial condition and results of operations.
We generally do not carry in-orbit insurance on our satellites or payloads because we have assessed that the cost of insurance is not economical relative to the risk of failures. If one or more of our in-orbit uninsured satellites or payloads fail, we could be required to record significant impairment charges for the satellite or payload.
Our satellites have minimum design lives of 15 years, but could fail or suffer reduced capacity before then.
Generally, the minimum design life of each of our satellites is 15 years. We can provide no assurance, however, as to the actual operational lives of our satellites, which may be shorter or longer than their design lives. Our ability to earn revenue depends on the continued operation of our satellites, each of which has a limited useful life. Several factors affect the useful lives of the satellites, including, among other things, the quality of their design and construction, the durability of their component parts, the ability to continue to maintain proper orbit and control over the satellite’s functions, the efficiency of the launch vehicle used, and the remaining on-board fuel following orbit insertion. In addition, continued improvements in satellite technology may make obsolete
We generally do not carry in-orbit insurance on our existing satellites or any satellitespayloads because we may acquire inhave assessed that the future, priorcost of insurance is not economical relative to the endrisk of their design lives.failures.If one or more of our in-orbit uninsured satellites or payloads fail, we could be required to record significant impairment charges for the satellite or payload.
In the event of a failure or loss of any of our satellites, we may relocate another satellite and use it as a replacement for the failed or lost satellite, which could have a material adverse effect on our business, financial condition and results of operations. Additionally, such relocation would require governmental approval. We cannot be certain that we could obtain such governmental approval. In addition, we cannot guarantee that another satellite will be available for use as a replacement for a failed or lost satellite, or that such relocation can be accomplished without a substantial utilization of fuel. Any such utilization of fuel would reduce the operational life of the replacement satellite.
Our satellites under construction, including the EchoStar XXIV satellite, are subject to risks related to construction, technology, regulations and launch that could limit our ability to utilize these satellites, increase costs and adversely affect our business and financial condition. business.
Satellite construction and launch are subject to significant risks, including manufacturing and delivery delays, anomalies, launch failure and incorrect orbital placement. The technologies in our satellite designs are very complex and difficulties in constructing our designs could result in delays in the deployment of our satellites or increased or unanticipated costs. For example, we have seen delays in the delivery calendar for EchoStar XXIV. There also can be no assurance that the technologies in our existing satellites or in new satellites that we design, acquire and build will work as we expect, and/or will not become obsolete, that we will realize any or all of the anticipated benefits of our satellite designs or our new satellites, and/or that we will obtain all regulatory approvals required to operate our new or acquired satellites. In addition, certain launch vehicles that may be used by us have either unproven track records or have experienced launch failures in the past. The risks of launch delay, launch anomalies and launch failure are usually greater when the launch vehicle does not have a track record of previous successful flights. Launch anomalies and failures can result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take significant amounts of time, and to obtain other launch opportunities. Such significant delays have and could in the future materially and adversely affect our business, expenses and results of operations, our ability to meet regulatory or contractual required milestones, the availability and our use of other or replacement satellite resources and our ability to provide services to customers as capacity becomes full on existing satellites.customers. In addition, significant delays in a satellite program could give customers who have purchased or reserved capacity on that satellite a right to terminate their service contracts relating to the satellite. We may not be able to accommodate affected customers on other satellites until a replacement satellite is available. A customer’s terminationIn addition, we may not be able to obtain launch or in-orbit insurance on reasonable economic terms or at all. If we do obtain launch or in-orbit insurance, it may not cover the full cost of its service contracts with us asconstructing and launching or replacing a resultsatellite nor fully cover our losses in the event of a launch delayfailure or failure would reduce our contracted backlog and our ability to generate revenue. One of our potential launch services providers is a Russian Federation state-owned company. Certain ongoing political events have created uncertainty as to the stability of U.S. and Russian Federation relations. This could add to risks relative to scheduling uncertainties and timing. If a launch delay, anomaly or failure were to occur, it could result in the revocation of the applicable license to operate the satellite, undermine our ability to implement our business strategy or develop or pursue existing or future business opportunities with applicable licenses and otherwise have a material adverse effect on our business, expenses, assets, revenue, results of operations and ability to fund future satellite procurement and launch opportunities. Historically, we have not always carried launch insurance for the launch of our satellites and the occurrence of launch anomalies and failures, whether on our satellites or those of others, may significantly reduce our ability to place launch insurance for our satellites or make launch insurance uneconomical.significant degradation.
Our use of certain satellites is often dependent on satellite coordination agreements, which may be difficult to obtain.
Satellite transmissions and the use of frequencies oftenoperators are dependent on coordination with other satellite systems and telecommunications providers operated by U.S. or foreign entities, including governments, and it can be difficultrequired to determine the outcome of theseenter into international spectrum coordination agreements with these other entitiesaffected satellite operators and governments. The impact of a coordination agreement may result in the loss of rights to the use of certain frequencies or access to certain markets. The significance of such a loss would vary and it can thereforemust be difficult to determine which portion of our revenue will be impacted.
In the event the international coordination process that is triggeredapproved by the International Telecommunication Union (“ITU”) filings under applicable rules is not successfully completed, or that the requests for modification of the broadcast satellite services plan regarding the allocation of orbital locations and frequencies are not granted by the ITU,relevant governments. If a required agreement cannot be concluded, we willmay have to operate the applicable satellite(s) onin a non-interference basis, which could have an adverse impact on our business operations.manner that does not cause harmful radio frequency interference with the affected satellite. If we cannot do so, we may have to cease operating such satellite(s) at the affected orbital locations, which could have a material adverse effect on our business, results of operations and financial position.
Furthermore, the satellite coordination process is conducted under the guidance of the ITU radio regulations and the national regulations of the satellites involved in the coordination process. These rules and regulations could be amended and could therefore materially adversely affect our business, financial condition and results of operations.locations.
We may face interference from other services sharing satellite spectrum.
The FCCFederal Communications Commission (“FCC”) and other regulators have adopted rules or may adopt rules in the future that allow non-geostationary orbit satellite services and/or fixed and mobile terrestrial systemsrequire us to operateshare spectrum on a co-primary basis in the same frequency band as mobile satellite services (“MSS”) and FSS. In addition, the FCC andwith other regulators may make changes that could affect the use of spectrum for MSS and FSS. Despite regulatory provisions designed to protect MSS and FSS
operations from harmful interference, thereradio services. There can be no assurance that these operations by other satellites or terrestrial communication services in the MSS and FSS bands willwould not interfere with our MSS and FSS operations and adversely affect our business.
Our dependence on outside contractors could result in delays related to the design, manufacture and launch of our new satellites, which could in turn adversely affect our operating results.
There are a limited number of manufacturers that are able to design and build satellites according to the technical specifications and standards of quality we require, including Airbus Defence and Space, Boeing Satellite Systems, Lockheed Martin, SSL and Thales Alenia Space. There are also a limited number of launch service providers that are able to launch such satellites, including International Launch Services, Arianespace, Lockheed Martin Commercial Launch Services and Space Exploration. The failure to perform of any of our manufacturers or launch service providers could increase the cost and result in the delay of the design, construction or launch of our satellites. Even if alternate suppliers for such services are available, we may have difficulty identifying them in a timely manner or we may incur significant additional expense in changing suppliers, and this could result in difficulties or delays in the design, construction or launch of our satellites. For example, if SSL, the manufacturer of our EchoStar XXIV satellite, or any potential successor fails to meet or is delayed in meeting its contractual obligations regarding the timely manufacture and delivery of the satellite for any reason, including if Maxar decides to discontinue, wind down or otherwise significantly modify its geostationary communications satellite business, such failure could have a material adverse effect on completing the manufacture of the EchoStar XXIV satellite and, like any other delays in the design, construction or launch of our other satellites, could have a material adverse impact on our business operations, future revenues, financial position and prospects.
RISKS RELATED TO OUR PRODUCTS AND TECHNOLOGY
If we are unable to properly respond to technological changes, our business could be significantly harmed.
Our business and the markets in which we operate are characterized by rapid technological changes, evolving industry standards and frequent product and service introductions and enhancements. If we or our suppliers are unable to properly respond to or keep pace with technological developments, fail to develop new technologies, or if our competitors obtain or develop proprietary technologies that are perceived by the market as being superior to ours, our existing products and services may become obsolete and demand for our products and services may decline. Even if we keep up with technological innovation, we may not meet the demands of the markets we serve. Furthermore, after we have incurred substantial research and development costs, one or more of the technologies under our development, or under development by one or more of our strategic partners, could become obsolete prior to its introduction. If we are unable to respond to or keep pace with technological advances on a cost-effective and timely basis, or if our products, applications or services are not accepted by the market, then our business, financial condition and results of operations could be adversely affected.
Our response to technological developments depends, to a significant degree, on the work of technically skilled employees. Competition for the services of such employees has become more intense as demand for these types of employees grows. We compete with other companies for these employees and although we strive to attract and retain these employees, we may not succeed in these respects. Additionally, if we were to lose certain key technically skilled employees, the loss of knowledge and intellectual capital might have an adverse impact on business, financial condition and results of operations.
We have made and will continue to make significant investments in research, development, and marketing for new products, services, satellites and related technologies, as well as entry into new business areas. Investments in new technologies, satellites and business areas are inherently speculative and commercial success thereof depends on numerous factors including innovativeness, quality of service and support, and effectiveness of sales and marketing. We may not achieve revenue or profitability from such investments for a number of years, if at all. Moreover, even if such products, services, satellites, technologies and business areas become profitable, their operating margins may be minimal.
Our future growth depends on growing demand for advanced technologies. our services.
Future demand and effective delivery for our products and services will depend significantly on the growing demand for advanced technologies,our services, such as broadband internet connectivity. If the deployment of, or demand for, advanced technologiesour services is not as widespread or as rapid as we or our customers expect, our revenue growth will be negatively impacted.
Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others. The loss of our intellectual property rights or our infringement of the intellectual property rights of others could have a significant adverse impact on our business.
We rely on our patents, copyrights, trademarks, and trade secrets, as well as licenses and other agreements with our vendors and other parties, to use our technologies, conduct our operations and sell our products and services.business. Legal challenges to our intellectual property rights and claims by third parties of intellectual property infringement could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantialresult in significant monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question or from the continuation of our businesses as currently conducted or as we plan to conduct it, which couldand require us to change our business practices or limit our ability to compete effectively or could otherwise have ana material adverse effect on our business, financial condition, results of operations or prospects.business. Even if any such challenges or claims prove to be without merit, they can be time-consuming and costly to defend and may divert management’s attention and resources away from our business.
Moreover, due to the rapid pace of technological change, we rely in part on technologies developed or licensed by third parties, and ifparties. If we are unable to obtain or continue to obtainretain licenses or other required intellectual property rights from these third parties on reasonable terms, our business financial position and results of operations could be adversely affected. Technology licensed from third parties or developed by us may have undetected errors that impair the functionality or prevent the successful integration of our products or services. As a result of any such changes or loss, we may need to incur additional development costs to ensure continued performance of our products or suffer delays until replacement technology, if available, can be obtained and integrated.
In addition, we work with third parties such as vendors, contractors and suppliers for the development and manufacture of components that are integrated into our products and our products may contain technologies provided to us by these third parties.suppliers. We may have little or no ability to determine in advance whether any such technology infringes the intellectual property rights of others, or whether such vendorssuppliers have obtained or continue to obtain the appropriate licenses or other intellectual property rights to use such technology. Our vendors, contractors and suppliers may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages.amount. Legal challenges to these intellectual property rights may impair our ability to use the products and technologies that we need in order to operate our business and may materially and adversely affect our business, financial condition and results of operations.
We are, and may become, party to various lawsuits which, if adversely decided, could have a significantmaterial adverse impacteffect on our business, particularly lawsuits regarding intellectual property.
We are, and may become, subject to various legal proceedings and claims, which arise both in and out of the ordinary course of our business. Many entities, including some of our competitors, have or may in the future obtain patents and other intellectual property rights that cover or affect products or services related to those that we offer. In general, if a court determines that one or more of our products or services infringes valid intellectual property rights held by others, we may be required to cease developing or marketing those products or services, to obtain licenses from the holders of the intellectual property at a material cost, to pay damages or to redesign those products or services in such a way as to avoid infringement. If those intellectual property rights are held by a competitor, we may be unable to license the necessary intellectual property rights at any price, which could adversely affect our competitive position.
We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. In addition, patent applications in the U.S. and foreign countries are confidential until the appropriate patent governing body either publishes the application or issues a patent (whichever arises first) and, accordingly, our products may infringe claims contained in pending patent applications of which we are not aware. Further, the process of determining definitively whether a patent claim is valid and whether a particular product infringes a valid patent claim often involves expensive and protracted litigation, even if we are ultimately successful on the merits.
We cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Those costs, and their impact on our results of operations, could be material. Damages in patent infringement cases can be substantial, and in certain circumstances, can be trebled. To the extent that we are required to pay unanticipated royalties to third parties, these increased costs of doing business could negatively affect our liquidity and operating results. We from time to time
may defend patent infringement actions and may from time to time assert our own actions against parties we suspect of infringing our patents and trademarks. We cannot be certain the courts will conclude these companies do not own the rights they claim, that these rights are not valid, or that our products and services do not infringe on these rights. We also cannot be certain that we will be able to obtain licenses from these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement. The legal costs associated with defending patent suits and pursuing patent claims against others may be borne by us if we are not awarded reimbursement through the legal process. See further discussion under Item 1. Business — Patents and Trademarks and Item 3. - Legal Proceedings of this Form 10-K.
Litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements.consequences.
We are involved in lawsuits, regulatory inquiries, audits, consumer claims and governmental and other legal proceedings arising from of our business, including new products and services that we may offer.proceedings. Some of these proceedings may raise difficult and complicated factual and legal issues and can be subject to uncertainties and complexities. The timing of the final resolutions to lawsuits, regulatory inquiries, audits, and governmental and other legal proceedings is typically uncertain. Additionally, the possible outcomes of, or resolutions to, these proceedings could include adverse judgments, settlements, injunctions or liabilities, any of which could require substantial payments or have other adverse impacts on our revenue, results of operations or cash flow.
If the encryption and related security technology used in our products is compromised, sales of our products may decline.
Our customers use encryption and related security technology obtained from us or our suppliers in the products that they purchase from us to protect their data and products from unauthorized access to the features or functionalities of such products. Such encryption and related security technology has been compromised in the past and may be compromised in the future even though we continue to respond with significant investment in security measures, such as updates in security software, that are intended to make data theft more difficult. It has been our prior experience that security measures may only be effective for short periods of time or not at all. We cannot ensure that we will be successful in reducing or controlling theft of our customers’ data. As a result, sales of our products may decline, our reputation and customer relationship could be damaged and we may incur additional costs or financial liability in the future if security of our customers’ system is compromised.
We may be exposed to financial and reputational damage to our business by cybersecurity incidents.
We and third parties with whom we work face a constantly developing landscape of cybersecurity threats in which hackers and other parties use a complex assortment of techniques and methods to execute cyber-attacks, including but not limited to the use of stolen access credentials, social engineering, malware, ransomware, phishing, insider threats (which may be malicious or erroneous), structured query language injection attacks and distributed denial-of-service attacks. Cybersecurity incidents such as these have increased significantly in quantity and severity and are expected to continue to increase. Additionally, the risk of cyber-attacks and compromises will likely increase as we continue to expand our business into other areas of the world outside of North America, some of which are still developing their cybersecurity infrastructure maturity. Should we be affected by a material cyber-related incident, we may incur substantial costs and suffer other negative consequences, which may include:
| |
• | significant remediation costs, such as liability for stolen assets or information, repairs of system damage and/or incentives to customers or business partners in an effort to maintain relationships after an attack;
|
| |
• | significant increased cybersecurity protection costs, which may include the costs of making organizational changes, deploying additional personnel and protection technologies, training employees and engaging third party experts and consultants;
|
| |
• | material increased liability due to financial or other harm inflicted on our partners;
|
| |
• | loss of material revenues resulting from attacks on our satellites or technology, the unauthorized use of proprietary information or the failure to retain or attract customers following an attack;
|
| |
• | significant litigation and legal risks, including regulatory actions by state, federal and international regulators; and
|
| |
• | loss of or damage to reputation.
|
Our business is subject to varying degrees of regulation that include programs designed to review our protections against cybersecurity threats and risks. If it is determined that our systems do not reasonably protect our partners’
business.
assets and data and/or that we have violated these regulations, we could be subject to enforcement activity and sanctions.
We regularly review and revise our internal cybersecurity policies and procedures, invest in and maintain internal and external cybersecurity teams and systems and software to detect, deter, prevent and/or mitigate cyber-attacks and review, modify and supplement our defenses through the use of various services, programs and outside vendors. It is impossible, however, for us to know when or if any particular cyber-attack may arise or the impact on our business and operations of any such incident. We expect to continue to incur increasing costs in preparing our infrastructure and maintaining it to resist any such attacks. There can be no assurance that we can successfully detect, deter, prevent or mitigate the effects of cyber-attacks, any of which could have a material adverse effect on our business, costs, operations, prospects, results of operation or financial position. Furthermore, the amount and scope of insurance that we maintain against losses resulting from these events may not be sufficient to compensate us adequately for any disruptions to our business or otherwise cover our losses, including reputational harm and negative publicity as well as any litigation liability.
Compliance with data privacy laws may be costly, and non-compliance with such laws may result in significant liability.
The personal information and data that we process and store is increasingly subject to the data security and data privacy laws of many jurisdictions. These laws may conflict with one another, and many of them are subject to frequent modification and differing interpretations. The laws impose a significant compliance burden and complying with them has required us to change our business practices or the functionality of our products and services. Although we have made efforts to design our policies, procedures, and systems to comply with the current requirements of applicable state, federal, and foreign laws, changes to applicable laws and regulations and the implementation of new laws and regulations in this area could subject us to additional regulation and oversight, any of which could significantly increase our operating costs, restrict our business operations and result in changes that are adverse to our customers. In addition, violations of these laws can result in significant fines, penalties, claims by regulators or other third parties, and damage to our brand and business.
If our products contain defects, we could be subject to significant costs to correct such defects and our product and network service contracts could be delayed or cancelled, which could adversely affect our revenue.
The products and the networks we deploy are highly complex, and some may contain defects when first introduced or when new versions or enhancements are released, despite testing and our quality control procedures. For example, our products may contain software “bugs” that can unexpectedly interfere with their operation. Defects may also occur in components and products that we purchase from third parties. In addition, many of our products and network services are designed to interface with our customers’ existing networks, each of which has different specifications and utilizeutilizes multiple protocol standards. Our products and services must interoperate with the other products and services within our customers’ networks, as well as with future products and services that might be added to these networks, to meet our customers’ requirements. There can be no assurance that we will be able to detect and fix all defects in the products and networks we sell. The occurrence of, and failure to remedy, any defects, errors or failures in our products or network services could materially affect our business.
RISKS RELATED TO CYBERSECURITY
The confidentiality, integrity, and availability of our services and products depends on the continuing operation of our information technology and other enabling systems.
Our systems are vulnerable to damage, intrusion, or disruption from criminal and/or terrorist attacks, telecommunications failures, computer viruses, ransomware attacks, digital denial of service attacks, phishing, or other attempts to injure or maliciously access our systems. Some of our systems are not fully redundant, and disaster recovery planning cannot account for all possibilities. In addition, our products and services are highly technical and complex and may contain errors or vulnerabilities, which could result in (i) additional costs to correct such defects; (ii) cancellation of orders and lost revenue; (iii) a reductioninterruptions in revenue backlog; (iv) product returns or recalls; (v) diversionfailure of our resources; (vi)services or systems.
Our international businesses expose us to additional risks that could harm our business.
Our international operations continue to grow. In addition to risks described elsewhere in this segment, the issuancedifferent regions and countries in which we operate our businesses outside of creditsthe U.S. expose us to increased risks due to different privacy and cyber-related laws in each of these locations. The same cyber-related issue could have different consequences depending on the region or country of occurrence, the laws applicable in each case and the different levels of enforcement by regulatory and governmental authorities in each jurisdiction. These risks include but are not limited to the following:
a.Data privacy and security concerns relating to our technology and our practices could damage our reputation, cause us to incur significant liability, and deter current and potential users or customers and other losses to us, our customers or end-users; (vii) liability for harm to persons and property caused by defects in or failures offrom using our products and services.
b.Software bugs or services;defects, security breaches, and (viii) harm toattacks on our reputation if we fail to detect or effectively address such issues through design, testing or warranty repairs. Any of these occurrencessystems could also result in the improper disclosure of our user data which could harm our business reputation.
c.Concerns about our practices about the collection, use, disclosure, or security of personal information or other data-privacy-related matters, even if unsubstantiated, could harm our reputation and financial condition. Our policies and practices may change over time as expectations regarding privacy and data change.
We experience cyber-attacks and other attempts to gain unauthorized access to our systems on a consistent basis.
We have experienced and may experience in the future security issues, whether due to insider error or malfeasance or system errors or vulnerabilities in our or our 3rd parties’ systems, which could result in substantial legal and financial exposure, government inquiries and enforcement actions, litigation, and unfavorable media coverage. We may be unable to anticipate or detect attacks or vulnerabilities or implement adequate preventative measures. Attacks and security issues could also compromise trade secrets and other sensitive information.
Our ongoing investments in security will likely continue to identify new vulnerabilities within our services and products.
In addition to our efforts to mitigate cyber-attacks, we are making significant investments to assure that our products are resistant to compromise. As a result of these efforts, we could discover new vulnerabilities within our products and systems that would be undesirable for our users and customers. We may not discover all such vulnerabilities due to the scale of activities on our platforms, or due to other factors, including but not limited to issues outside of our control such as natural disasters/climate change such as sea level rise, drought, flooding, wildfires, increased storm severity, pandemics like COVID-19 and power loss, and we may be notified of such vulnerabilities via third parties. Any of the foregoing developments may negatively affect user and customer trust, harm our reputation and brands, and adversely affect our business and financial results. Any such developments may also subject us to litigation and regulatory inquiries, which could result in monetary penalties and damages, distract management’s time and attention, and lead to enhanced regulatory oversight.
Compliance with data privacy laws may be costly, and non-compliance with such laws may result in significant liability.
The personal information and data we process and store is increasingly subject to data security and data privacy laws of many jurisdictions. These laws impose a significant compliance burden and complying with them has required us to change our business practices or delay in market acceptancethe functionality of our products and servicesservices. Privacy laws and loss of sales, which would harmregulations are becoming more complex and onerous, and a data privacy breach could have a material adverse effect on our reputation and our business and materially adversely affect our revenue and profitability.business.
RISKS RELATED TO THE REGULATION OF OUR BUSINESS
The risk of non-compliance with laws and regulations, including the risk of changes to laws and regulations, could adversely affect our business.
Our business is regulated by numerous governmental agencies and other regulatory bodies, both domestically and internationally. Also, our international operations are subject to risksthe laws and regulations of adverse government regulation.many different jurisdictions that may differ significantly from U.S. laws and regulations.
OurViolations of these laws and regulations could result in fines or penalties or other sanctions which could have a material adverse impact on our business. Additionally, our ability to operate and grow our business is subject to varying degrees of regulationdepends on laws and regulations that govern the frequency bands and/or orbital locations we operate in or may operate in in the U.S. by the FCC,future.
These laws and other federal, state and local entities, and in foreign countries by similar entities and internationally by the ITU. These regulations are subject to the administrative and political process and do change for political and other reasons, from time to time and may limit or constrain and/or have other adverse effects on and implications for ourtime. Our business and operations. The U.S. and foreign countries in which we currently, or may in the future, operate may not authorize us access to all of the spectrum
that we need to provide service in a particular country. Moreover, the U.S. and a substantial number of foreign countries in which we have, or may in the future make, an investment, regulate, in varying degrees, the ownership of satellites and other telecommunication facilities/networks and foreign investment in telecommunications companies. Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing authorizations. Further material changes in law and regulatory requirements may also occur, and there can be no assurance that our business and the business of our subsidiaries and affiliates will not be adversely affected by future legislation, new regulation or deregulation. The failure to obtain or comply with the authorizations and regulations governing our operations could havesuffer a material adverse effect on our abilityimpact if laws and regulations change and we are not able to generate revenue or pursue our business strategies and our overall competitive position and could result in our suffering serious harmadapt to our reputation.these changes efficiently.
Our business depends on regulatory authorizations issued by the FCC and state and foreign regulators that can expire, be revoked or modified, and applications for licenses and other authorizations that may not be granted.
Generally, all satellite, earth stations and other licenses granted by the FCC and most other countries are subject to expiration unless renewed by the regulatory agency. Our satellite licenses are currently set to expire at various times. In addition, we occasionally receive special temporary authorizations that are granted for limited periods of time (e.g., 180 days or less) and subject to possible renewal. Generally, our licenses and special temporary authorizations have been renewed on a routine basis, but there can be no assurance that this will continue. In addition, we must obtain new licenses from the FCC and other countries’ regulators for the operation of new satellites that we may build and/or acquire. There can be no assurance that the FCC or other regulators will continue granting applications for new licenses or for the renewal of existing ones. If the FCC or other regulators were to cancel, revoke, suspend, or fail to renew any of our licenses or authorizations, fail to grant or impose conditions on our applications for FCC or other licenses, it could have a material adverse effect on our business, financial condition and results of operations. Specifically, loss of a frequency authorization or limitations on our ability to use the frequencies we currently use and/or intend to use in the future would reduce the amount of spectrum available to us, potentially reducing the amount of services we provide to our customers. The significance of such a loss of authorizations would vary based upon, among other things, the orbital location, the frequency band and the availability of replacement spectrum. In addition, the legislative and executive branches of the U.S. government and foreign governments often consider legislation and regulatory requirements that could affect us, as could the actions that the FCC and foreign regulatory bodies take. We cannot predict the outcomes of these legislative or regulatory proceedings or their effect on our business.
In addition, third parties have or may oppose some of our license applications and pending and future requests for extensions, modifications, waivers and approvals of our licenses. Even if we have fully complied with all of the required reporting, filing and other requirements in connection with our authorizations, it is possible a regulator could decline to grant certain of our applications or requests for authority, or could revoke, terminate, condition or decline to modify, extend or renew certain of our authorizations or licenses.
Further, we rely on subcontractors to provide us with certain goods and services that may require their compliance with our licenses and other authorizations. In the event that their provision of these goods and services are not in compliance with such licenses and other authorizations, we may be subject to fines or other penalties and/or the applicable regulator may cancel, revoke, suspend, or fail to renew any of our licenses or authorizations.
We may face difficulties in accurately assessing and collecting contributions towards the USF.
Because our customer contracts often include both telecommunications services, which create obligations to contribute to the USF, and other goods and services, which do not, it can be difficult to determine what portion of our revenue forms the basis for our required contribution to the USF and the amount that we can recover from our customers. If the FCC, which oversees the USF, or a court or other governmental entity were to determine that we computed our USF contribution obligation incorrectly or passed the wrong amount onto our customers, we could become subject to additional assessments, liabilities, or other financial penalties. In addition, the FCC is considering substantial changes to its USF contribution and distribution rules. These changes could impact our future contribution obligations and those of third parties that provide communication services to our business. Any such change to the USF contribution rules could adversely affect our costs of providing service to our customers. In addition, changes to the USF distribution rules could intensify the competition we face by offering subsidies to competing firms and/or technologies.
Restrictions on immigration or increased enforcement of immigration laws could limit our access to qualified and skilled professionals, increase our cost of doing business or otherwise disrupt our operations.
The success of our business is dependent on our ability to recruit engineers and other professionals. Immigration laws in the U.S. and other countries in which we operate are subject to legislative changes, as well as variations in the standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or renewing work visas for our professionals. If immigration laws are changed or if new more restrictive government regulations are enacted or increased, our access to qualified and skilled professionals may be limited, the costs of doing business may increase and our operations may be disrupted.
RISKS RELATINGRELATED TO THE BSS TRANSACTION
Certain of our directors and executive officers have interests in the BSS Transaction.
Certain of our directors and executive officers have interests in the BSS Transaction. Our directors and executive officers who own shares of EchoStar’s common stock participated in the Distribution and the Merger on the same terms as EchoStar’s other stockholders. Additionally, Mr. Ergen, director of both us and DISH, serves as a director and executive officer of BSS Corp. following the consummation of the BSS Transaction. We and the EchoStar parties that approvedIf the BSS Transaction as described below, were aware of and considered these interests, among other things, in deciding to approve the terms of the Master Transaction Agreement and the BSS Transaction.
The BSS Transaction was approved, in accordance with EchoStar’s longstanding related party transaction policy, by (i) EchoStar’s independent management, (ii) EchoStar’s non-interlocking directors (i.e., directors who are not also directors or employees of DISH Network), with EchoStar’s director, Mr. R. Stanton Dodge, recusing himself to avoid the appearance of any potential conflict resulting from his prior employment with DISH Network and EchoStar’s director, Mr. Anthony M. Federico, recusing himself to avoid the appearance of any potential conflict resulting from his service on DISH’s special litigation committee, (iii) EchoStar’s audit committee, with Mr. Federico recusing himself and, after all such approvals were obtained (iv) our and EchoStar’s board of directors, with, our and EchoStar’s chairman, Mr. Ergen, recusing himself. Applicable portions of BSS Transaction were also approved by our board of directors.
If the Distribution and the Merger dodoes not qualify as a tax‑free distribution and merger under the Internal Revenue Code of 1986, as amended (the “Code”), then we and/or EchoStar stockholders may be required to pay substantial U.S. federal income taxes and under certain circumstances we may have indemnification obligations to DISH Network.
The parties to the BSS Transaction received a tax opinion from their respective counsels as to the tax‑free nature of the transactions.transaction. They did not obtain a private letter ruling from the IRS within this respect to the Distribution and the Merger and instead are relying solely on their respective tax opinions for comfort that the Distribution and the Merger qualifytransaction qualifies for tax‑free treatment for U.S. federal
income tax purposes under the Code.
The tax opinions were based on, among other things, certain undertakings made by EchoStar and DISH Network, as well as certain representations and assumptions as to factual matters made by EchoStar, DISH Network, and Mr. and Mrs. Ergen. The failure of any factual representation or assumption to be true, correct and complete, or any undertaking to be fully complied with, could affect the validity of the tax opinions. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the conclusions set forth in the tax opinions. In addition, the tax opinions were based on then-current law, and cannot be relied upon if current law changes with retroactive effect.
If the Distribution does not qualify as a tax‑free distribution under Section 355 of the Code, then EchoStar would recognize a substantial gain on the Distribution, we and EchoStar’s stockholders could incur significant U.S. federal income tax liabilities, and EchoStar could be required to indemnify DISH Network for the tax on such gain if the failure of the Distribution to so qualify is the result of certain actions or misrepresentations by EchoStar, but EchoStar will not be required to indemnify any of its stockholders. In the event EchoStar is required to indemnify DISH Network for taxes incurred in connection with the BSS Transaction, the indemnification obligation could have a material adverse effect on our and EchoStar’s business, financial conditions, results or operations and cash flow.
Even if the Distribution otherwise qualifies as a tax-free distribution, the Distribution would be taxable to us and EchoStar (but not to its stockholders) pursuant to Section 355(e) of the Code if one or more persons acquire a 50% or greater
interest (measured by vote or value) in EchoStar’s or BSS Corp.’s stock, directly or indirectly (including through acquisitions of the BSS Common Stock or DISH Common Stock after the completion of the BSS Transaction), as part of a plan or series of related transactions that includes the Distribution. If there is a change of control of DISH Network or BSS Corp. after the completion of the BSS Transaction or a transfer of stock or assets of DISH Network or BSS Corp. that results in the Distribution being taxable to us and/or EchoStar under Section 355(e) of the Code, DISH Network would be required to indemnify EchoStar (but not its stockholders) for such taxes only if DISH Network took an action or knowingly facilitated, consented to or assisted with an action by a DISH shareholder that caused the Distribution to fail to qualify as a tax-free distribution. In addition, the Merger being taxable could cause the Distribution to fail to qualify as a tax-free distribution.
A putative class action lawsuit relating to the BSS Transaction has been filed against EchoStar, Hughes Satellite Systems Corporation, DISH Network, Mr. Ergen and certain of our and EchoStar’s officers and other lawsuits related to the BSS Transaction may be filed against us, EchoStar, DISH Network and other persons which could result in substantial costs.
On July 2, 2019, a complaint was filed by purported EchoStar stockholders. See Note 17 in our Accompanying Consolidated Financial Statements for more information about litigation related to the BSS Transaction that has been commenced prior to the date of this report. There can be no assurance that additional complaints will not be filed with respect to the BSS Transaction.
Even if this lawsuit and any others that may be filed are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition.
Our ability to operate and control our satellites is subject to risks related to DISH Network’s operation of the BSS Business.
In connection with the BSS Transaction, we transferred our satellite operation centers, which are used to monitor and control our satellites, to DISH Network. DISH Network may not be able to successfully or profitably operate, maintain and manage the BSS Business and its employees, including the operations and employees of the satellite operations centers. DISH Network may not be able to maintain uniform standards, controls, procedures and policies or comply with regulations with respect to the satellite operations centers, and this may lead to operational failures or inefficiencies. A failure or inefficiency at any of the satellite operations centers could cause a significant loss of service for our customers or might cause the transmission of incorrect commands to the affected satellite(s), which could lead to a temporary or permanent degradation in satellite performance or to the loss of one or more of our satellites. Any such failure could have a material adverse impact on our business, financial condition, and results of operations.
We may be more susceptible to adverse events as a result of the BSS Transaction.
We have divested the BSS Business and our business will be subject to increased concentration of risks that affect our retained businesses. We are now a smaller, less diversified and more narrowly focused business, which makes us more vulnerable to changing market and economic conditions. Operating as a smaller entity may reduce or eliminate some of the benefits and synergies which previously existed across our business platforms, including our operating diversity, purchasing and borrowing leverage, available capital, and relationships and opportunities to pursue integrated strategies within our businesses and attract, retain and motivate key employees. In addition, as a smaller company, our ability to absorb costs may be negatively impacted, including the significant cost of the BSS Transaction and/or litigations or other adverse rulings or proceedings, and we may be unable to obtain financing, goods or services at prices or on terms as favorable as those obtained prior to the BSS Transaction. Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows, business prospects and the trading price of our common stock.
We might not be able to engage in certain strategic transactions because EchoStar has agreed to certain restrictions to comply with U.S. federal income tax requirements for a tax‑free spin‑off.
To preserve the intended tax treatment of the Distribution, EchoStar has agreed to comply with certain restrictions under current U.S. federal income tax laws for spin‑offs, including: (i) refraining from engaging in certain transactions that would result in a fifty percent or greater change by vote or by value in its and our ownership; (ii) continuing to own and manage its and our historic business; and (iii) limiting sales or redemptions of its common stock. These restrictions could prevent EchoStar or us from pursuing otherwise attractive business opportunities, result in our or EchoStar’s
inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm its or our business, financial results and operations. If these restrictions, among others, are not followed, the Distribution could be taxable to us and EchoStar and possibly its stockholders.
OTHER RISKS RELATED TO OUR OWNERSHIP
We are a wholly owned subsidiary of EchoStar and do not operate as an independent company.
We rely on EchoStar for a substantial portion of our administrative and management functions and services including human resources-related functions, accounting, tax administration, legal, external reporting, treasury administration, internal audit and insurance functions, information technology and telecommunications services and other support services. We do not have systems and resources in place to perform all of these functions or services. Instead, we generally receive these services pursuant to arrangements between us and EchoStar and its other subsidiaries. EchoStar and its other subsidiaries in turn receive certain of these services from DISH Network pursuant to a professional services agreement entered into between them. If our intercompany arrangements with EchoStar and its other subsidiaries were to terminate, or if EchoStar and its other subsidiaries no longer receive certain services from DISH Network, we would need to obtain agreements with third-party service providers or obtain additional internal resources, neither of which may be available on acceptable terms or at all.
Our parent, EchoStar, is controlled by one principal stockholder who is our Chairman.
Charles W. Ergen, our Chairman, beneficially owns approximately 51%60% of EchoStar’s total equity securities (assuming conversion of only the EchoStar Class B common stock beneficially owned by Mr. Ergen into EchoStar Class A common stock and giving effect to the exercise of options held by Mr. Ergen that are either currently exercisable as of, or may become exercisable within 60 days after, February 10, 2020)6, 2023) and beneficially owns approximately 91%93% of the total voting power of all classes of shares of EchoStar (assuming no conversion of any EchoStar Class B common stock and giving effect to the exercise of options held by Mr. Ergen that are either currently exercisable as of, or may become exercisable within 60 days after, February 10, 2020)6, 2023). Through his beneficial ownership of EchoStar’s equity securities, Mr. Ergen has the ability to elect a majority of EchoStar’s directors and to control all other matters requiring the approval of EchoStar’s stockholders. As a result of Mr. Ergen’s voting power, EchoStar is a “controlled company” as defined in the NASDAQ listing rules and, therefore, isare not subject to NASDAQ requirements that would otherwise require EchoStarus to have (i) a majority of independent directors; (ii) a nominating committee composed solely of independent directors; (iii) compensation of our or EchoStar’s executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors; (iv) a compensation committee charter which provides the compensation committee with the authority and funding to retain compensation consultants and other advisors; and/or (v) director nominees selected, or recommended for the EchoStar board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors.
We have potential conflicts of interest with DISH Network due to EchoStar and DISH Network’s common ownership.
A substantial majority of the voting power of the shares of each of EchoStar and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family. Questions relating to conflicts of interest may arise between DISH Network and us in a number of areas relating to our past and ongoing relationships. Areas in which conflicts of interest between DISH Network and us could arise include, but are not limited to, the following:
| |
• | •Cross directorships and stock ownership. Charles W. Ergen serves as the Chairman of our, EchoStar’s and DISH’s boards of directors, is employed by both EchoStar and DISH and has fiduciary duties to EchoStar’s and DISH’s shareholders.Mr. Ergen may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, there is potential for a conflict of interest when we or DISH Network look at acquisitions and other corporate opportunities that may be suitable for both companies. In addition, our Chairman and certain EchoStar and DISH and has fiduciary duties to EchoStar’s and DISH’s shareholders. Mr. Ergen may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, there is potential for a conflict of interest when we or DISH Network look at acquisitions and other corporate opportunities that may be suitable for both companies. In addition, our Chairman and certain other EchoStar directors and certain of our officers own DISH stock and options to purchase DISH stock, certain of which they acquired or were granted prior to our spin-off from DISH in 2008 (the “Spin-off”). These ownership interests could create actual, apparent or potential conflicts of interest when these individuals are faced with decisions that could have different implications for our company and DISH Network. •Intercompany agreements with DISH Network. We and EchoStar and its other subsidiaries have entered into various agreements with DISH Network. Pursuant to certain agreements, we and EchoStar and its other subsidiaries obtain certain products, services and rights from DISH Network; DISH Network obtains certain of our officers own DISH stock and options to purchase DISH stock, certain of which they acquired or were granted prior to our spin-off from DISH in 2008 (the “Spin-off”). These ownership interests could create actual, apparent or potential conflicts of interest when these individuals are faced with decisions that could have different implications for our company and DISH Network. |
| |
• | Intercompany agreements with DISH Network. We and EchoStar and its other subsidiaries have entered into various agreements with DISH Network. Pursuant to certain agreements, we and EchoStar and its other subsidiaries obtain certain products, services and rights from DISH Network; DISH Network obtains certain
|
products, services and rights from us and EchoStar and its other subsidiaries; and we and EchoStar, its other subsidiaries and DISH Network, as applicable, indemnify each other against certain liabilities arising from our respective businesses. Generally, the amounts paid for products and services provided under the agreements are based on cost plus a fixed margin, which varies depending on the nature of the products and services provided. Certain other intercompany agreements cover matters such as tax sharing and our and EchoStar’s responsibility for certain liabilities previously undertaken by DISH Network for certain of our and EchoStar’s businesses. We and EchoStar and its other subsidiaries have also entered into certain commercial agreements with DISH Network. The terms of certain of these agreements were established while EchoStar was a wholly-owned subsidiary of DISH and were not the result of arm’s length
negotiations. The allocation of assets, liabilities, rights, indemnifications and other obligations between DISH Network, EchoStar and its other subsidiaries and/or us under certain agreements we and/or EchoStar and its other subsidiaries have entered into with DISH Network may not necessarily reflect what two unaffiliated parties might have agreed to. Had these agreements been negotiated with unaffiliated third parties, their terms may have been more or less favorable to us or EchoStar and its other subsidiaries. In addition, DISH Network or its affiliates will likely continue to enter into transactions, including joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, with EchoStar or its subsidiaries, us or other affiliates. Although the terms of any such transactions will be established based upon negotiations between us and DISH Network and, when appropriate, subject to approval by committees of our and EchoStar’s non-interlocking directors or in certain instances non-interlocking management, there can be no assurance that the terms of any such transactions will be as favorable to EchoStar or its subsidiaries, us or our subsidiaries or other affiliates as may otherwise be obtained in negotiations between unaffiliated third parties.
•Competition for business opportunities. DISH Network may have interests in various companies that have subsidiaries or controlled affiliates that own or operate domestic or foreign services that may compete with services offered by our businesses. From time to time we and EchoStar and its other subsidiaries may pursue the same business opportunities as DISH Network, such as when we participate in auctions for spectrum or orbital slots for our satellites or other business opportunities. In certain auctions, we and DISH Network may be prohibited from participating separately, and cooperating with DISH Network may result in a less favorable outcome for us.
| |
• | Competition for business opportunities
. DISH Network may have interests in various companies that have subsidiaries or controlled affiliates that own or operate domestic or foreign services that may compete with services offered by our businesses. DISH Network also has a distribution agreement with ViaSat, a competitor of our Hughes segment, to sell services similar to those offered by our Hughes segment. We and EchoStar and its other subsidiaries may also compete with DISH Network when we participate in auctions for spectrum or orbital slots for our satellites or other business opportunities.
|
We may not be able to resolve any potential conflicts of interest with DISH Network and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.
We do not have any agreements not to compete with DISH Network. However, many of our potential customers who compete with DISH Network have historically perceived us as a competitor due to our affiliation with DISH Network. There can be no assurance that we will be successful in entering into any commercial relationships with potential customers who are competitors of DISH Network (particularly if we continue to be perceived as affiliated with DISH Network as a result of common ownership, certain shared management services and other arrangements with DISH Network).
It may be difficult for a third party to acquire us, even if doing so may be beneficial to EchoStar’s shareholders, because of our and EchoStar’s capital structure and certain provisions of the BSS Transaction.structure.
Certain provisions of EchoStar and our respective articles of incorporation and bylaws, such as a provision that authorizes the issuance of “blank check” preferred stock, which could be issued by our or EchoStar’s board of directors to increase the number of outstanding shares and thwart a takeover attempt and EchoStar’s capital structure with multiple classes of common stock some of which entitle the holders to multiple votes per share, may discourage delay or prevent a change in control of our company that may be considered favorable. Both we and EchoStar also have a significant amount of authorized and unissued stock under our respective articles of incorporation that would allow our respective boards of directors to issue shares to persons friendly to current management, thereby protecting the continuity of management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us. In addition, Charles W. Ergen, our Chairman, has the power to elect all of EchoStar’s directors and control shareholder decisions of EchoStar on matters on which all classes of EchoStar’s common stock vote together, and as our parent, EchoStar in turn holds all of our issued and outstanding equity and has the power to elect all of our directors and control shareholder decision on all matters, all of which may make it impractical for any third party to obtain control of us.
Additionally, in order
RISKS RELATED TO THE COVID-19 PANDEMIC
Our operations, and those of our customers, suppliers, vendors, and other third parties with whom we conduct business, including regulatory agencies, have been, and may continue to preservebe, adversely affected by the intended tax treatmentCOVID‑19 pandemic.
The effects of the Distribution, EchoStar has agreed to comply with certain restrictions under current U.S. federal income tax laws for spin‑offs, including, refraining from engaging in
COVID-19 pandemic have disrupted our and our customers’, suppliers’, vendors’ and other business partners’ and investees’ businesses, and have delayed the manufacture and deployment of our satellites,
specifically our EchoStar XXIV satellite. Additionally, some regulatory bodies may still have reduced activities which may materially delay the review and/or approval of licenses or authorizations we need to operate our business. We cannot currently estimate or determine the final magnitude of these impacts.
certain transactions
Additionally, many of our subscribers continue to work remotely or engage in distance learning. These activities have increased the usage on our HughesNet satellite internet service (“HughesNet service”) so that would result in a fifty percentthere is little or greater change by vote or by valueno capacity remaining for subscriber growth in our and its stock ownership.most popular geographic areas. This restriction could discourage third parties from seeking to acquire us.limitation on capacity has resulted in our subscribers experiencing slower speeds, which, in turn, has resulted in higher churn.
We may face other risks described from time to time in periodic and current reports we file with the SEC.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located at 100 Inverness Terrace East, Englewood, Colorado 80112-5308 and our telephone number is (303) 706-4000. The following table sets forth certain information concerning our principal properties related to our Hughes segment (“Hughes”) and EchoStar Satellite Services segment (“ESS”) and to our other operations and administrative functions (“Corporate and Other”) as of December 31, 2019. We operate various facilities in the United States and abroad. We believe that our facilities are well maintained and are sufficient to meet our current and projected needs.
The following table sets forth certain information concerning our principal properties related to our Hughes segment, our ESS segment, and our Corporate and Other segment as of December 31, 2022. |
| | | | | | | | | | | | | |
Location | | Segment(s) | | Function |
Owned: | | | | |
Owned: | | | | |
Englewood, Colorado | | ESS/Corporate and Other | | Corporate headquarters and engineering officesESS operations |
Germantown, Maryland | | Hughes | | Hughes corporate headquarters, engineering offices, network operations and shared hubs |
Griesheim, Germany | | Hughes/Corporate and Other | | Shared hub, operations, administrative offices and warehouse |
| | | | |
Leased: | | | | |
Gilbert, Arizona | | Hughes | | Gateways |
San Diego, California | | Hughes | | Engineering and sales offices |
Englewood, Colorado | | Hughes | | Gateways and equipment |
Gaithersburg, Maryland | | Hughes | | Manufacturing and testing facilities and logistics offices |
Gaithersburg, Maryland | | Hughes | | Engineering and administrative offices |
Southfield, Michigan | | Hughes | | Shared hub and regional network management center |
Las Vegas, Nevada | | Hughes | | Shared hub, antennae yards, gateway, backup network operation and control center for Hughes corporate headquarters |
Cheyenne, Wyoming | | Hughes/ESS | | Satellite access center, gatewaysGateways, equipment and equipmentESS operations |
Barueri, Brazil | | Hughes/Corporate and OtherHughes | | Shared hub warehouse, operations center and spacecraft operations center |
Sao Paulo, Brazil | | Hughes | | Hughes Brazil corporate headquarters, sales offices and warehouse |
Bangalore, India | | Hughes | | Engineering office and office space |
Gurgaon, India | | Hughes | | Administrative offices, shared hub, operations, warehouse, and development center |
New Delhi, India | | Hughes | | Hughes India corporate headquarters |
Milton Keynes, United Kingdom | | Hughes | | Hughes Europe corporate headquarters and operations |
ITEM 3. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 1719 in our Accompanying Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. As of February 10, 2020,6, 2023, all of our 1,078 issued and outstanding shares of common stock were held by EchoStar. There is currently no established trading market for our common stock. Our Articles of Incorporation authorize the issuance of 1,000,000 shares of preferred stock and as of February 10, 2020,6, 2023, no shares of our preferred stock were issued and outstanding.
DividendsDividends.. We haveOn March 17, 2022, our Board of Directors declared and approved payment of a cash dividend on our outstanding common stock to our shareholder and parent, EchoStar, in the amount of $100.0 million.Payment of this dividend was made in the first quarter of 2022.
While we currently do not paid any cashintend to declare additional dividends on our common stock, in the past two years. we may elect to do so from time to time. Payment of any future dividends will depend upon our earnings, capital requirements, contractual restrictions and other factors the boardBoard of directorsDirectors considers appropriate. We currently intend to retain our earnings, if any, to support operations, future growth and expansion. Our ability to declare dividends is affected by the covenants in our indentures.
ITEM 6. [RESERVED]
ITEMItem 7.MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
The following management’s narrative analysisManagement’s Narrative Analysis of resultsResults of operationsOperations (“Management’s Narrative Analysis”) should be read in conjunction with our Accompanying Consolidated Financial Statements and notes thereto.Statements. This management’snarrativeanalysisManagement’s Narrative Analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this management’snarrativeanalysisManagement’s Narrative Analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. See Disclosure Regarding Forward-Looking Statements inof this Form 10-K for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, see Item 1A. Risk Factors of this Form 10-K. Further, such forward-looking statements speak only as of the date of this Form 10-K and we undertake no obligation to update them.
EXECUTIVE SUMMARY
We are a holding company and a subsidiary of EchoStar. We were formed as a Colorado corporation in March 2011. We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises.Overview
In May 2019, EchoStar and BSS Corp. entered into the Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) we and EchoStar and its other subsidiaries transferred the BSS Business to BSS Corp.; (ii) EchoStar completed the Distribution; and (iii) immediately after the Distribution, (1) BSS Corp. became a wholly-owned subsidiary of DISH such that DISH owns and operates the BSS Business and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Common Stock.
In connection with the BSS Transaction, EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively. Additionally, EchoStar and DISH and certain of our, EchoStar’s and DISH’s subsidiaries, as applicable, have (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services; (ii) terminated certain previously existing agreements; and (iii) amended certain existing agreements and entered into certain new agreements pursuant to which we, EchoStar and certain of our and its other subsidiaries, on the one hand, and DISH Network, on the other hand, will obtain and provide certain products, services and rights from and to each other.
The BSS Transaction was structured in a manner intended to be tax-free to EchoStar and its stockholders for U.S. federal income tax purposes and was accounted for as a spin-off to EchoStar’s stockholders as we and EchoStar did not receive any consideration. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded from continuing operations and segment results for all periods presented in our
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
Accompanying Consolidated Financial Statements. See Note 5 in our Accompanying Consolidated Financial Statements for further discussion of our discontinued operations.
During 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement with DISH and certain of its subsidiaries. EchoStar and certain of its and our subsidiaries received all the shares of the Tracking Stock in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of EchoStar’s former EchoStar Technologies businesses and certain other assets. Following the consummation of the Share Exchange, EchoStar no longer operates its former EchoStar Technologies businesses, the Tracking Stock was retired and is no longer outstanding, and all agreements, arrangements and policy statements with respect to the Tracking Stock terminated.
We currently operate in two business segments: our Hughes segment and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company’s Chief Executive Officer.
ESS segment. Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate and Legal) and other activitiesfunctions that have not been assigned to our operating segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments.segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in our Corporate and Other segment in our segment reporting.
Highlights from our financial resultsAll amounts presented in this Management’s Narrative Analysis are as follows:
expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Consolidated Results of Operations for the Year Ended December 31, 2019
| |
• | Operating income of $151.0 million
|
| |
• | Net loss from continuing operations of $40.9 million
|
| |
• | Net loss attributable to HSS of $29.5 million
|
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $604.8 million (see reconciliation of this non-GAAP measure in Results of Operations)
Consolidated Financial Condition as of December 31, 2019
| |
• | Total assets of $5.6 billion
|
| |
• | Total liabilities of $3.4 billion
|
| |
• | Total shareholders’ equity of $2.1 billion
|
| |
• | Cash, cash equivalents and current marketable investment securities of $1.8 billion
|
Hughes Segment
Our Hughes segment is an industry leader in both networking technologies and services, innovating to deliver the global solutions that power a global provider ofconnected future for people, enterprises and things everywhere. We offer broadband satellite technologies and broadband internet products and services to consumer customers andcustomers. We offer broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to consumergovernment and enterprise customers. The
Our Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through advanced and proprietary methodologies, technologies, software and techniques, we continue to improve the efficiency of our networks. We invest in technologies to enhance our system and network management capabilities, specifically our managed services for enterprises. We also continue to invest in next generation technologies that can be applied to our future products and services.
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
We continuecontinues to focus ourits efforts on growing our consumer revenue by maximizing utilizationoptimizing financial returns of our existing satellites while planning for new satellitessatellite capacity to be launched, leased or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers, inas well as increasing our domesticAverage Revenue Per User/subscriber (“ARPU”). Service and international markets across wholesale and retail channels. The growth of our enterprise businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Serviceacquisition costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth.
Our Hughes segment currently uses capacity from three The growth of our satellites (the SPACEWAY 3 satellite, the EchoStar XVII satelliteenterprise and consumer businesses relies heavily on global economic conditions and the EchoStar XIX satellite), our Al Yah 3 Brazilian payloadcompetitive landscape for pricing relative to competitors and additional satellite capacity acquired from third-party providers to provide services to our customers. Growthalternative technologies. In most areas of our consumer subscriber base continues to be constrained in areas wherethe U.S. we are nearing or have reached maximum capacity. While thesecapacity, which has resulted in our consumer subscriber base becoming increasingly limited. Our Latin America consumer subscriber base in certain areas has also become capacity constrained. These constraints are expected to be resolved when weaddressed by the launch new satellites, we continue to focus on revenue growth in all areas and consumer subscriber growth inof the areas whereEchoStar XXIV satellite.
To date, we have available capacity. not experienced a material adverse impact from the Russia-Ukraine conflict and the associated sanctions.
In May 2019, we entered into an agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat contributed its satellite communications services business in Brazil to us in exchange for a 20% ownership interest in our existing Brazilian subsidiary that conducts our satellite communications services business in Brazil. The combined business provides broadband internet services and enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat’s Al Yah 3 satellite. Under the terms of the agreement, Yahsat may also acquire, for further cash investments, additional minority ownership interests in the business in the future provided certain conditions are met.
In May 2019, we also entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti willagreed to contribute its very small aperture terminal (“VSAT”) telecommunications services and hardware business in India to Hughes Communications India Private Limited (“HCIPL”) and its subsidiaries, our two existingless than wholly owned Indian subsidiaries, that conduct our VSAT services and hardware business. The combined entities will provide broadband satellitebusiness in India. On January 4, 2022, this joint venture was formed (the “India JV”) and hybrid solutions for enterprise networks. Upon consummationsubsequent to the formation of the transaction,India JV, we hold a 67% ownership interest and Bharti will haveholds a 33% ownership interest in HCIPL. The India JV combines the combined business. The completionVSAT businesses of the transaction is subjectboth companies to customary regulatory approvalsoffer flexible and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all.
In August 2018, we entered into an agreement with Yahsat to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-bandscalable enterprise networking solutions using satellite broadband services across Africa, the Middle Eastconnectivity for primary transport, back-up and southwest Asia operating over Yahsat's Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummatedhybrid implementation in December 2018 when we invested $100.0 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS.
India.
In August 2017, a subsidiary of EchoStar entered into a long-term contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite,satellite. In December 2020, we entered into an agreement with a planned 2021 launch.launch provider for the launch of EchoStar XXIV. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (“HughesNet service”) in North, Central and South America as well as enterprise broadband services. IfFollowing delays of over two years, in November 2022 we negotiated an amendment to our contract with the manufacturemanufacturer to provide for additional compensation for past delays and a realignment of remedies. The contract now provides relief to us on certain payments, including approximately $14.0 million in payments through orbit-raising, and $44.5 million, plus 6% interest on such amounts, in deferred in-orbit incentive payments. Additionally, the contract now requires the payment of additional liquidated damages to us in the event of further delay, and provides for our right to terminate beginning January 1, 2024 if the satellite has not yet been delivered. In addition, the Company and the manufacturer will enter into an agreement under which the Company will provide certain products and/or deliveryservices during 2023. The EchoStar XXIV satellite is expected to be launched in the second quarter of 2023. Delay in the availability of the EchoStar XXIV satellite is not met or is delayed, such failure could have a material adverse impact on our business operations, future revenues, financial position and prospects, and our planned expansion of satellite broadband services throughout North, South and Central America. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in EchoStar’sour Corporate and Other segment in itsour segment reporting.
In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”).
Pursuant to the Hughes Broadband MSA, DISH Network, among other things, (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our HughesNet service and related equipment and other telecommunication services; and (ii) installs HughesNet service equipment with respect to activations generated by DISH Network. As a result of the Hughes Broadband MSA, we have not earned, and do not expect to earn in the future, significant equipment revenue from our distribution agreement with DISH Network. We expect churn in the existing wholesale subscribers to continue to reduce Services and other revenue in the future.
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
We continue our efforts to expand our consumer satellite services business outside of the U.S. We have been delivering high-speed consumer satellite broadband services in Brazil since July 2016 and are also providing satellite broadband internet service in several other Central and South American countries. Additionally, in September 2015, we entered into 15-year agreements with affiliates of Telesat Canada for Ka-band capacity on the Telesat T19V satellite located at the 63 degree west longitude orbital location, which was launched in July 2018. Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A satellite and the EchoStar XIX satellite in Central and South America.
Our broadband subscribers include customers that subscribe to our HughesNet services in North, Centralthe U.S. and SouthLatin America through retail, wholesale and small/medium enterprise service channels. Our
The following table presents our approximate subscriber numbers asnumber of December 31, 2019, 2018 and 2017 are as follows:
|
| | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Broadband subscribers | | 1,477,000 |
| | 1,361,000 |
| | 1,208,000 |
|
broadband subscribers:
As
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 | | 2020 |
United States | | 931,000 | | | 1,090,000 | | | 1,189,000 | |
Latin America | | 297,000 | | | 372,000 | | | 375,000 | |
Total broadband subscribers | | 1,228,000 | | | 1,462,000 | | | 1,564,000 | |
The following table presents the approximate number of December 31, 2019, approximately 237,000 of our subscribers were in South and Central America. During the fourth quarter of 2019, we acquired approximately 20,000 new subscribers in connection with the consummation of our joint venture with Yahsat in Brazil (the “Acquired Subscribers”).
The approximatenet subscriber net additions for each quarter in 2019 are2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31 | | September 30 | | June 30 | | March 31 |
United States | | (43,000) | | | (46,000) | | | (35,000) | | | (35,000) | |
Latin America | | (14,000) | | | (15,000) | | | (25,000) | | | (21,000) | |
Total net subscriber additions | | (57,000) | | | (61,000) | | | (60,000) | | | (56,000) | |
Our ability to gain new customers and retain existing customers in the U.S. is being impacted by our capacity limitations as follows:well as competitive pressure from satellite-based competitors and other technologies. For the three months ended December 31, 2022, these factors resulted in lower total subscribers as compared to the three months ended September 30, 2022.
Our ability to gain new customers and retain existing customers in Latin America is also being impacted by adverse economic conditions. In addition, capacity constraints in certain areas limit our ability to add new subscribers. For the three months ended December 31, 2022, the decline in net subscribers was primarily due to more selective customer screening and improved churn as compared to the three months ended September 30, 2022. |
| | | | | | | | | | | | |
| | For the Three Months Ended |
| | December 31 | | September 30 | | June 30 | | March 31 |
| | | | | | | | |
Net additions, excluding Acquired Subscribers | | 20,000 |
| | 22,000 |
| | 26,000 |
| | 28,000 |
|
We continued to execute our strategy of maximizing financial returns by utilizing capacity for higher economic value enterprise and government applications in Latin America. Continued success of this strategy will further reduce the available capacity for consumer subscribers.
During the fourth quarter of 2019, excluding the Acquired Subscribers:
| |
• | our gross subscriber additions were generally flat compared to the third quarter of 2019; and
|
| |
• | our net subscriber additions decreased by approximately 2,000 compared to the third quarter of 2019, reflecting increased churn in the fourth quarter compared to the third quarter.
|
As of December 31, 20192022 and 2018,2021, our Hughes segment had $1.5 billion and $1.4 billion of contracted revenue backlog.backlog, respectively, an increase of 7.1% during that period, primarily due to an increase in contracts from our domestic and international customers. Of the total Hughes segment contracted revenue backlog as of December
31, 2022, we expect to recognize $461.0 million of revenue in 2023. We define Hughes segment contracted revenue backlog as our expected future revenue including lease revenue, under enterprise customer contracts that are non-cancelable, excluding agreements with customersincluding lease revenue.
Goodwill Impairment Assessment
We test goodwill for impairment annually in our consumer market. Ofsecond fiscal quarter, or more frequently if indicators of impairment exist. Goodwill is assessed for impairment at the totalreporting unit level. Reporting units are identified based on how segment management evaluates the results of segment operations and makes resource allocation decisions to such reporting units. All of our goodwill is assigned to our Hughes contracted revenue backlog assegment. We conducted our annual impairment test of goodwill during our second fiscal quarter on a qualitative basis and determined that no adjustment to the carrying value of goodwill was then necessary because the fair value exceeded carrying value for our Hughes reporting unit.
During the quarter ended December 31, 2019,2022, we expectconducted a quantitative interim test of goodwill for all of our reporting units due to recognize $455.6 millionthe decline of our stock price since our interim test in the third quarter of 2022. As a result of this interim test, no goodwill impairment was identified. The fair value of the Hughes reporting unit exceeded the carrying value by more than 20%. We concluded that there were no other indicators of impairment for the quarter ended December 31, 2022. Given the decline in our stock price during the year ended December 31, 2022, we believe it is reasonably possible that a further sustained decline in our stock price and market capitalization would resultin all or a significant portion of our goodwill becoming impaired. The impairment of goodwill has no effect on liquidity or capital resources. However, it would result in a material non-cash charge and would materially adversely affect our financial results in the period recognized.
When estimating the fair value of our Hughes reporting unit, we used a combination of the discounted cash flow and market multiple methodologies. We weighted 50% of the fair value using a discounted cash flow methodology and 50% using a market multiple approach. Although we concluded that recent transactions further supported our estimate of fair value, we gave them no such weight as the discounted cash flow and market multiple methodologies were considered more relevant and more reliable to be used in our fair value estimate.
In our discounted cash flow methodology, we developed and utilized a range of inputs that we believe to be reasonable and appropriately conservative. These inputs included, but were not limited to, revenue growth, EBITDA margins, capital expenditures, a terminal growth rate and a discount rate. In our market multiple approach, we also utilized what we believe to be a reasonable and appropriately conservative range of revenue in 2020.and EBITDA multiples.
ESS Segment
Our ESS segment provides satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the EchoStar IX satellite and the EchoStar 105/SES-11 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.
As of December 31, 20192022 and 2018,2021, our ESS segment had contracted revenue backlog of $11.4$22.3 million and $5.8$10.4 million, respectively.respectively, an increase of 114.4% during that period, primarily due to an increase in satellite service contracts with existing and new customers. Of the total ESS segment contracted revenue backlog as of December 31, 2022, we expect to recognize $16.5 million of revenue in 2023. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue. Of
Corporate and Other Segment
Satellite Anomalies and Impairments
Our satellites may experience anomalies from time to time, some of which may have a significant adverse effect on their remaining useful lives, the total ESS contracted revenue backlog ascommercial operation of the satellites or our operating results or financial position. We are not aware of any anomalies with respect to our owned or leased satellites that have had any such significant
adverse effect during the year ended December 31, 2019, we expect to recognize $7.2 million of revenue in 2020.
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
Other Business Opportunities
Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, LEO networks, MEO systems, balloons and High Altitude Platform Systems are expected to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment and commerce in North America and internationally for consumer and enterprise customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business.
We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally,2022. There can be no assurance, however, that we believe may allow us to increase our existing market share, increase our satellite capacity, expand into new markets and new customers, broaden our portfolio of services, products and intellectual property, make our business more valuable, align us for future growth and expansion, maximize the return on our investments and strengthen our business and relationships with our customers. We may allocate or dispose of significant resources for long-term value that mayanomalies will not have a shortsignificant adverse effect in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or medium-term or any positive impact on our revenue, results of operations, or cash flow.
Cybersecurity
As a global provider of satellite technologies and services, internet services and communications equipment and networks, we may be prone to more targeted and persistent levels of cyber-attacks than other businesses. These risks may be more prevalent as we continue to expand and grow our business into other areas of the world outside of North America, some of which are still developing their cybersecurity infrastructure maturity. Detecting, deterring, preventing and mitigating incidents caused by hackers and other parties may result in significant costs to us and may expose our customers to financial or other harm that have the potential to significantly increase our liability.
We treat cybersecurity risk seriously and are focused on maintaining the security of our and our partners’ systems, networks, technologies and data. We regularly review and revise our relevant policies and procedures, invest in and maintain internal resources, personnel and systems and review, modify and supplement our defenses through the use of various services, programs and outside vendors. EchoStar also maintains agreements with third party vendors and expertssatellites were to assist in our remediation and mitigation efforts if we experience or identify a material incident or threat. In addition, senior management and the Audit Committee of EchoStar’s Board of Directors are regularly briefed on cybersecurity matters.
fail.
Cybersecurity
We are not aware of any cyber-incidents with respect to our owned or leased satellites or other networks, equipment or systems that have had a material adverse effect on our business, costs, operations, prospects, results of operation or financial position during the year ended December 31, 2019.2022 and through February 22, 2023. There can be no assurance, however, that any such incident can be detected or thwarted or will not have such a material adverse effect in the future.
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
RESULTS OF OPERATIONS
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
The following table presents our consolidated results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018:
|
| | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
Statements of Operations Data (1) | | 2019 | | 2018 | | Amount | | % |
| | | | | | | | |
Revenue: | | | | | | | | |
Services and other revenue | | $ | 1,623,458 |
| | $ | 1,561,426 |
| | $ | 62,032 |
| | 4.0 |
|
Equipment revenue | | 266,703 |
| | 205,410 |
| | 61,293 |
| | 29.8 |
|
Total revenue | | 1,890,161 |
| | 1,766,836 |
| | 123,325 |
| | 7.0 |
|
Costs and expenses: | | | | | |
|
| |
|
|
Cost of sales - services and other | | 555,701 |
| | 559,838 |
| | (4,137 | ) | | (0.7 | ) |
% of total services and other revenue | | 34.2 | % | | 35.9 | % | |
|
| |
|
|
Cost of sales - equipment | | 225,103 |
| | 176,600 |
| | 48,503 |
| | 27.5 |
|
% of total equipment revenue | | 84.4 | % | | 86.0 | % | |
|
| |
|
|
Selling, general and administrative expenses | | 467,869 |
| | 397,994 |
| | 69,875 |
| | 17.6 |
|
% of total revenue | | 24.8 | % | | 22.5 | % | |
|
| |
|
|
Research and development expenses | | 25,739 |
| | 27,570 |
| | (1,831 | ) | | (6.6 | ) |
% of total revenue | | 1.4 | % | | 1.6 | % | |
|
| |
|
|
Depreciation and amortization | | 464,797 |
| | 426,852 |
| | 37,945 |
| | 8.9 |
|
Total costs and expenses | | 1,739,209 |
| | 1,588,854 |
| | 150,355 |
| | 9.5 |
|
Operating income (loss) | | 150,952 |
| | 177,982 |
| | (27,030 | ) | | (15.2 | ) |
| | | | | | | | |
Other income (expense): | | | | | |
|
| |
|
|
Interest income | | 57,730 |
| | 59,104 |
| | (1,374 | ) | | (2.3 | ) |
Interest expense, net of amounts capitalized | | (272,218 | ) | | (231,169 | ) | | (41,049 | ) | | 17.8 |
|
Gains (losses) on investments, net | | (8,464 | ) | | 187 |
| | (8,651 | ) | | * |
|
Equity in earnings (losses) of unconsolidated affiliates, net | | (3,333 | ) | | 4,874 |
| | (8,207 | ) | | * |
|
Foreign currency transaction gains (losses), net | | (9,855 | ) | | (12,484 | ) | | 2,629 |
| | (21.1 | ) |
Other, net | | (633 | ) | | 8,041 |
| | (8,674 | ) | | * |
|
Total other income (expense), net | | (236,773 | ) | | (171,447 | ) | | (65,326 | ) | | 38.1 |
|
Income (loss) from continuing operations before income taxes | | (85,821 | ) | | 6,535 |
| | (92,356 | ) | | * |
|
Income tax benefit (provision), net | | (11,595 | ) | | (18,615 | ) | | 7,020 |
| | (37.7 | ) |
Net income (loss) from continuing operations | | (97,416 | ) | | (12,080 | ) | | (85,336 | ) | | * |
|
Net income (loss) from discontinued operations | | 56,539 |
| | 109,423 |
| | (52,884 | ) | | (48.3 | ) |
Net income (loss) | | (40,877 | ) | | 97,343 |
| | (138,220 | ) | | * |
|
Less: Net income (loss) attributable to non-controlling interests | | (11,335 | ) | | 1,842 |
| | (13,177 | ) | | * |
|
Net income (loss) attributable to HSS | | $ | (29,542 | ) | | $ | 95,501 |
| | $ | (125,043 | ) | | * |
|
| | | | | | | | |
Other data: | | | | | |
|
| |
|
|
EBITDA (2) | | $ | 604,799 |
| | $ | 603,610 |
| | $ | 1,189 |
| | 0.2 |
|
Subscribers, end of period | | 1,477,000 |
| | 1,361,000 |
| | 116,000 |
| | 8.5 |
|
* Percentage is not meaningful
| |
(1) | An explanation of our key metrics is includedin Explanation of Key Metrics and Other Items.
|
| |
(2) | A reconciliation of EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in our Accompanying Consolidated Financial Statements, is included in Results of Operations.For further information on our use of EBITDA, see Explanation of Key Metrics and Other Items.
|
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
The following discussion relates to our continuing operations for the years ended December 31, 2019 and 2018 unless otherwise stated.
Services and other revenue. Services and other revenue totaled $1.6 billion for the year ended December 31, 2019, an increase of $62.0 million, or 4.0%, compared to 2018.
| |
• | Services and other revenue from our Hughes segment for the year ended December 31, 2019 increased by $74.9 million, or 5.0%, to $1.6 billion compared to 2018. The increase was primarily attributable to increases in sales of broadband services to our consumer customers of $102.0 million, primarily offset by a decrease in sales of services to our enterprise customers of $30.7 million.
|
| |
• | Services and other revenue from our ESS segment for the year ended December 31, 2019 decreased by $11.0 million, or 40.3%, to $16.3 million compared to 2018. The decrease was due to a decrease of $9.2 million in transponder services provided to third parties and a decrease of $1.6 million in satellite capacity leased to DISH Network on the EchoStar IX satellite.
|
Equipment revenue. Equipment revenue totaled $266.7 million for the year ended December 31, 2019, an increase of $61.3 million, or 29.8%, compared to 2018. The increase was primarily attributable to our Hughes segment due to increases in hardware sales of $45.9 million to our enterprise customers and $15.5 million to our mobile satellite systems customers.
Cost of sales — services and other. Cost of sales — services and other totaled $555.7 million for the year ended December 31, 2019, a decrease of $4.1 million, or 0.7%, compared to 2018. The decrease was primarily attributable to our Hughes segment due to lower costs of services provided to our enterprise customers, partially offset by an increase in costs of services to our consumer customers.
Cost of sales — equipment. Cost of sales — equipment totaled $225.1 million for the year ended December 31, 2019, an increase of $48.5 million, or 27.5%, compared to 2018. The increase was primarily attributable to our Hughes segment due to an increase in hardware sales to our enterprise customers and our mobile satellite systems customers.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $467.9 million for the year ended December 31, 2019, an increase of $69.9 million, or 17.6%, compared to 2018. The increase was primarily attributable to increases in (i) expense of $32.5 million related to certain legal proceedings, (ii) marketing and promotional expenses of $22.5 million from our Hughes segment mainly associated with our consumer business, (iii) bad debt expense of $5.0 million and (iv) other general and administrative expenses of $9.9 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $464.8 million for the year ended December 31, 2019, an increase of $37.9 million, or 8.9%, compared to 2018. The increase was due to our Hughes segment and due to increases in depreciation expense of (i) $20.2 million relating to our customer premises equipment, (ii) $10.4 million relating to machinery and equipment, (iii) $4.8 million relating the Telesat T19V satellite that was placed into service in the fourth quarter of 2018, (iv) $3.1 million relating to the decrease in depreciable life of the SPACEWAY 3 satellite and (v) $2.0 million relating to the depreciation of the assets acquired from Yahsat in Brazil.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $272.2 million for the year ended December 31, 2019, an increase of $41.0 million, or 17.8%, compared to 2018. The increase was primarily due to an increase of $76.3 million in interest expense associated with certain legal proceedings and a net decrease of $5.1 million in capitalized interest relating to the Telesat T19V satellite that was placed into service in the fourth quarter of 2018. The increase was partially offset by a decrease of $39.1 million in interest expense and the amortization of deferred financing cost as a result of the repurchase and maturity of our 6 1/2% Senior Secured Notes due 2019.
Gains (losses) on investments, net. Gains (losses) on investments, net totaled $8.5 million in losses for the year ended December 31, 2019 compared to $0.2 million in gains in 2018. The change was due to losses on a certain investment in 2019.
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled $3.3 million in loss for the year ended December 31, 2019, compared to $4.9 million in earnings for the year ended December 31, 2018, a decrease of $8.2 million, compared to 2018, which was related to an increase in loss from our equity method investments. Additionally, in the fourth quarter of 2019, we changed our accounting policy to record our share of net earnings or losses of investees on a three-month lag.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), nettotaled $9.9 million in losses for the year ended December 31, 2019, a decrease in losses of $2.6 million, or 21.1%, compared to 2018. The decrease in losses was due to the net strengthening of the U.S. dollar against certain foreign currencies in 2019 compared to 2018.
Other, net. Other, net totaled $0.6 million in loss for the year ended December 31, 2019 compared to $8.0 million in income for the year ended December 31, 2018. The decrease in income was due to a net gain of $9.6 million due to the one-time settlement of certain amounts due to and from a third party vendor in 2018.
Income tax benefit (provision), net. Income tax benefit (provision), net was $11.6 million in provision for the year ended December 31, 2019, an increase of $7.0 million or 37.7%, compared to 2018. Our effective income tax rate was (13.5)% for the year ended December 31, 2019, compared to 284.7% for the same period in 2018. The variations in our effective tax rate from the U.S. federal statutory rate for the year ended December 31, 2019 were primarily due to the change in net unrealized losses that are capital in nature, various permanent tax differences, the impact of state and local taxes, and increase in our valuation allowance associated with certain foreign losses. For the year ended December 31, 2018, the variations in our effective tax rate from the U.S. federal statutory rate were primarily due to various permanent tax differences, the impact of state and local taxes, increase in our valuation allowance associated with certain foreign losses, and the change in our valuation allowance associated with net unrealized losses that are capital in nature.
Net income (loss) attributable to HSS. Net income (loss) attributable to HSS was a net loss of $29.5 million for the year ended December 31, 2019, compared to net income of $95.5 million for the year ended December 31, 2018, a decrease of $125.0 million, compared to 2018, as set forth in the following table:
|
| | | | |
| | Amounts |
| | |
Net income (loss) attributable to HSS for the year ended December 31, 2018 | | $ | 95,501 |
|
Decrease (increase) in net income attributable to non-controlling interests | | 13,177 |
|
Decrease (increase) in income tax provision, net | | 7,020 |
|
Decrease (increase) in foreign currency transaction losses, net | | 2,629 |
|
Increase (decrease) in interest income | | (1,374 | ) |
Increase (decrease) in equity in earnings of unconsolidated affiliates, net | | (8,207 | ) |
Increase (decrease) in gains on investments, net | | (8,651 | ) |
Increase (decrease) in other, net | | (8,674 | ) |
Increase (decrease) in operating income, including depreciation and amortization | | (27,030 | ) |
Decrease (increase) in interest expense, net of amounts capitalized | | (41,049 | ) |
Increase (decrease) in net income from discontinued operations | | (52,884 | ) |
Net income (loss) attributable to HSS for the year ended December 31, 2019 | | $ | (29,542 | ) |
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
EBITDA. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in our Accompanying Consolidated Financial Statements:
|
| | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
| | 2019 | | 2018 | | Amount | | % |
| | | | | | | | |
Net income (loss) | | $ | (40,877 | ) | | $ | 97,343 |
| | $ | (138,220 | ) | | * |
|
Interest income | | (57,730 | ) | | (59,104 | ) | | 1,374 |
| | (2.3 | ) |
Interest expense, net of amounts capitalized | | 272,218 |
| | 231,169 |
| | 41,049 |
| | 17.8 |
|
Income tax provision (benefit), net | | 11,595 |
| | 18,615 |
| | (7,020 | ) | | (37.7 | ) |
Depreciation and amortization | | 464,797 |
| | 426,852 |
| | 37,945 |
| | 8.9 |
|
Net (income) loss from discontinued operations | | (56,539 | ) | | (109,423 | ) | | 52,884 |
| | (48.3 | ) |
Net (income) loss attributable to non-controlling interests | | 11,335 |
| | (1,842 | ) | | 13,177 |
| | * |
|
EBITDA | | $ | 604,799 |
| | $ | 603,610 |
| | $ | 1,189 |
| | 0.2 |
|
EBITDA was $604.8 million for the year ended December 31, 2019, an increase of $1.2 million, or 0.2%, compared to 2018, as set forth in the following table:
|
| | | | |
| | Amounts |
| | |
EBITDA for the year ended December 31, 2018 | | $ | 603,610 |
|
Increase (decrease) in depreciation and amortization | | 37,945 |
|
Decrease (increase) in net income attributable to non-controlling interests | | 13,177 |
|
Decrease (increase) in foreign currency transaction losses, net | | 2,629 |
|
Increase (decrease) in equity in earnings of unconsolidated affiliates, net | | (8,207 | ) |
Increase (decrease) in gains on investments, net | | (8,651 | ) |
Increase (decrease) in other, net | | (8,674 | ) |
Increase (decrease) in operating income, including depreciation and amortization | | (27,030 | ) |
EBITDA for the year ended December 31, 2019 | | $ | 604,799 |
|
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
Segment Operating Results and Capital Expenditures
The following tables present our operating results, capital expenditures and EBITDA by segment for the year ended December 31, 2019 compared to the year ended December 31, 2018. Capital expenditures are net of refunds and other receipts related to property and equipment.
|
| | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | |
For the year ended December 31, 2019 | | | | | | | | |
Total revenue | | $ | 1,852,742 |
| | $ | 16,257 |
| | $ | 21,162 |
| | $ | 1,890,161 |
|
Capital expenditures | | 308,781 |
| | — |
| | — |
| | 308,781 |
|
EBITDA | | 625,660 |
| | 6,994 |
| | (27,855 | ) | | 604,799 |
|
| | | | | | | | |
For the year ended December 31, 2018 | | | | | | | | |
Total revenue | | $ | 1,716,528 |
| | $ | 27,231 |
| | $ | 23,077 |
| | $ | 1,766,836 |
|
Capital expenditures | | 390,108 |
| | (76,757 | ) | | 15 |
| | 313,366 |
|
EBITDA | | 601,319 |
| | 17,764 |
| | (15,473 | ) | | 603,610 |
|
Hughes Segment
|
| | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
| | 2019 | | 2018 | | Amount | | % |
| | | | | | | | |
Total revenue | | $ | 1,852,742 |
| | $ | 1,716,528 |
| | $ | 136,214 |
| | 7.9 |
|
Capital expenditures | | 308,781 |
| | 390,108 |
| | (81,327 | ) | | (20.8 | ) |
EBITDA | | 625,660 |
| | 601,319 |
| | 24,341 |
| | 4.0 |
|
Total revenue was $1.9 billion for the year ended December 31, 2019, an increase of $136.2 million, or 7.9%, compared to 2018. The increase was primarily due to an increase of $102.0 million in sales of broadband services to our consumer customers and net increases in hardware sales of $45.9 million to our enterprise customers and $15.5 million to our mobile satellite systems customers. The increase was partially offset by a decrease of $30.7 million in sales of services to our enterprise customers.
Capital expenditures were $308.8 million for the year ended December 31, 2019, a decrease of $81.3 million, or 20.8%, compared to 2018, primarily due to net decreases in capital expenditures associated with the construction and infrastructure of our satellites and in our consumer and enterprise businesses.
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
EBITDA was $625.7 million for the year ended December 31, 2019, an increase of $24.3 million, or 4.0%, compared to 2018, as set forth in the following table:
|
| | | | |
| | Amounts |
| | |
EBITDA for the year ended December 31, 2018 | | $ | 601,319 |
|
Increase (decrease) in depreciation and amortization | | 40,050 |
|
Decrease (increase) in net income attributable to non-controlling interests | | 13,177 |
|
Decrease (increase) in foreign currency transaction losses, net | | 2,613 |
|
Increase (decrease) in other, net | | (197 | ) |
Increase (decrease) in equity in earnings of unconsolidated affiliates, net | | (5,477 | ) |
Increase (decrease) in gains on investments, net | | (8,890 | ) |
Increase (decrease) in operating income, including depreciation and amortization | | (16,935 | ) |
EBITDA for the year ended December 31, 2019 | | $ | 625,660 |
|
ESS Segment
|
| | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
| | 2019 | | 2018 | | Amount | | % |
| | | | | | | | |
Total revenue | | $ | 16,257 |
| | $ | 27,231 |
| | $ | (10,974 | ) | | (40.3 | ) |
Capital expenditures | | — |
| | (76,757 | ) | | 76,757 |
| | (100.0 | ) |
EBITDA | | 6,994 |
| | 17,764 |
| | (10,770 | ) | | (60.6 | ) |
Total revenue was $16.3 million for the year ended December 31, 2019, a decrease of $11.0 million, or 40.3%, compared to 2018. The decrease was attributable to a net decrease of $9.2 million in transponder services provided to third parties and a decrease of $1.6 million in satellite capacity leased to DISH Network on the EchoStar IX satellite.
There were no capital expenditures for the year ended December 31, 2019, as there were no new satellites under construction in our ESS segment during the year. The negative capital expenditure in 2018 for $76.8 million is primarily driven by a reimbursement of $77.5 million related to the EchoStar 105/SES-11 satellite received in the first quarter of 2018.
EBITDA was $7.0 million for the year ended December 31, 2019, a decrease of $10.8 million, or 60.6%, compared to 2018, primarily due to the decrease in overall ESS revenue.
Corporate and Other
|
| | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
| | 2019 | | 2018 | | Amount | | % |
| | | | | | | | |
Total revenue | | $ | 21,162 |
| | $ | 23,077 |
| | $ | (1,915 | ) | | (8.3 | ) |
Capital expenditures | | — |
| | 15 |
| | (15 | ) | | (100.0 | ) |
EBITDA | | (27,855 | ) | | (15,473 | ) | | (12,382 | ) | | 80.0 |
|
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
EBITDA was a loss of $27.9 million for the year ended December 31, 2019, an increase in loss of $12.4 million, or 80.0% compared to 2018, as set forth in the following table:
|
| | | | |
| | Amounts |
| | |
EBITDA for the year ended December 31, 2018 | | $ | (15,473 | ) |
Increase (decrease) in operating income, including depreciation and amortization | | 912 |
|
Increase (decrease) in gains on investments, net | | 239 |
|
Decrease (increase) in foreign currency transaction losses, net | | 16 |
|
Increase (decrease) in depreciation and amortization | | (2,340 | ) |
Increase (decrease) in equity in earnings of unconsolidated affiliates, net | | (2,730 | ) |
Increase (decrease) in other, net | | (8,480 | ) |
EBITDA for the year ended December 31, 2019 | | $ | (27,856 | ) |
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue. Services and other revenue primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service, professional services and facilities rental revenue.
Equipment revenue. Equipment revenue primarily includes broadband equipment and networks sold to customers in our consumer and enterprise markets.
Cost of sales - services and other. Cost of sales - services and other primarily includes the cost of broadband services provided to our consumer and enterprise customers, maintenance and other contracted services, costs associated with satellite and transponder leases and services, professional services and facilities rental.
Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks soldprovided to customers in our consumer and enterprise markets. It also includes certain other costs associated with the deployment of equipment to our customers.
Selling, general and administrative expenses. expenses.Selling, general and administrative expenses primarily includesinclude selling and marketing costs and employee-related costs associated with administrative services (e.g., information systems, human resources and other services), including bad debt expense and stock-based compensation expense. It also includes professional fees (e.g. legal, information systems and accounting services) and other expenses associated with facilities and administrative services.
Research and development expenses. Research and development expenses primarily includesinclude costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.
Impairment of long-lived assets. Impairment of long-lived assets includes our impairment losses related to our property and equipment, goodwill, regulatory authorizations and other intangible assets.
Interest income, net. Interest income, net primarily includes interest earned on our cash, cash equivalents and marketable investment securities, and other investments including premium amortization and discount accretion on debt securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized primarily includes interest expense associated with our debt and finance lease obligations (net of capitalized interest), amortization of debt issuance costs and interest expense related to certain legal proceedings.
Gains (losses) on investments, net. Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities and other investments for which we have elected the fair value option. It may also
Item 7. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
include realized gains and losses on the sale or exchange of our available-for-sale debt securities, other-than-temporary impairment losses on our available-for-sale securities, realized gains and losses on the sale or exchange of equity securities and debt securities without readily determinable fair value and adjustments to the carrying
amount of investments in unconsolidated affiliates and marketable equity securities resulting from impairments and observable price changes.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net include gains and losses resulting from the re-measurement of transactions denominated in foreign currencies.
Other, net. Other, net primarily includes dividends received from our marketable investment securities and other non-operating income and expense items that are not appropriately classified elsewhere in the Consolidated Statements of Operations in our Accompanying Consolidated Financial Statements.
Net income (loss) from discontinued operations
. Net income (loss) from discontinued operations includes the financial results of the BSS Business transferred in the BSS Transaction, except for certain real estate that transferred in the transaction.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as Net income (loss) excluding Interest income and expense, net, Income tax benefit (provision), net, Depreciation and amortization, Net income (loss) from discontinued operations and Net income (loss) attributable to non-controlling interests. EBITDA is not a measure determined in accordance with U.S. GAAP.generally accepted accounting principles (“GAAP”). This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of Operations above.section below. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with U.S. GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.
RESULTS OF OPERATIONS
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table presents our consolidated results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, | | Variance |
Statements of Operations Data (1) | | 2022 | | 2021 | | Amount | | % |
Revenue: | | | | | | | | |
Services and other revenue | | $ | 1,629,194 | | | $ | 1,724,299 | | | $ | (95,105) | | | (5.5) | |
Equipment revenue | | 374,149 | | | 270,427 | | | 103,722 | | | 38.4 | |
Total revenue | | 2,003,343 | | | 1,994,726 | | | 8,617 | | | 0.4 | |
Costs and expenses: | | | | | | | | |
Cost of sales - services and other | | 562,849 | | | 544,915 | | | 17,934 | | | 3.3 | |
% of total services and other revenue | | 34.5 | % | | 31.6 | % | | | | |
Cost of sales - equipment | | 292,290 | | | 231,960 | | | 60,330 | | | 26.0 | |
% of total equipment revenue | | 78.1 | % | | 85.8 | % | | | | |
Selling, general and administrative expenses | | 429,877 | | | 422,235 | | | 7,642 | | | 1.8 | |
% of total revenue | | 21.5 | % | | 21.2 | % | | | | |
Research and development expenses | | 32,810 | | | 31,777 | | | 1,033 | | | 3.3 | |
% of total revenue | | 1.6 | % | | 1.6 | % | | | | |
Depreciation and amortization | | 431,065 | | | 464,146 | | | (33,081) | | | (7.1) | |
Impairment of long-lived assets | | — | | | 210 | | | (210) | | | (100.0) | |
Total costs and expenses | | 1,748,891 | | | 1,695,243 | | | 53,648 | | | 3.2 | |
Operating income (loss) | | 254,452 | | | 299,483 | | | (45,031) | | | (15.0) | |
Other income (expense): | | | | | | | | |
Interest income, net | | 30,812 | | | 8,146 | | | 22,666 | | | * |
Interest expense, net of amounts capitalized | | (92,386) | | | (126,499) | | | 34,113 | | | (27.0) | |
Gains (losses) on investments, net | | 245 | | | 2,103 | | | (1,858) | | | (88.3) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | (5,703) | | | (5,347) | | | (356) | | | 6.7 | |
Foreign currency transaction gains (losses), net | | 6,016 | | | (11,494) | | | 17,510 | | | (152.3) | |
Other, net | | (85) | | | 1,336 | | | (1,421) | | | (106.4) | |
Total other income (expense), net | | (61,101) | | | (131,755) | | | 70,654 | | | (53.6) | |
Income (loss) before income taxes | | 193,351 | | | 167,728 | | | 25,623 | | | 15.3 | |
Income tax benefit (provision), net | | (54,441) | | | (57,111) | | | 2,670 | | | (4.7) | |
Net income (loss) | | 138,910 | | | 110,617 | | | 28,293 | | | 25.6 | |
Less: Net loss (income) attributable to non-controlling interests | | 10,503 | | | 10,154 | | | 349 | | | 3.4 | |
Net income (loss) attributable to HSSC | | $ | 149,413 | | | $ | 120,771 | | | $ | 28,642 | | | 23.7 | |
| | | | | | | | |
Other data: | | | | | | | | |
EBITDA (2) | | $ | 696,493 | | | $ | 760,381 | | | $ | (63,888) | | | (8.4) | |
Subscribers, end of period | | 1,228,000 | | | 1,462,000 | | | (234,000) | | | (16.0) | |
* Percentage is not meaningful.
(1) An explanation of our key metrics is included in Explanation of Key Metrics and Other Items.
(2) A reconciliation of EBITDA to Net income (loss), the most directly comparable GAAP measure in our Consolidated Financial Statements, is included in Results of Operations. For further information on our use of EBITDA, see Explanation of Key Metrics and Other Items.
The following discussion relates to our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021:
Services and other revenue. Services and other revenue totaled $1.6 billion for the year ended December 31, 2022, a decrease of $95.1 million, or 5.5%, as compared to 2021. The decrease was primarily attributable to our Hughes segment related to lower sales of broadband services to our consumer customers of $103.1 million, partially offset by higher sales of broadband services to our enterprise customers of $5.3 million and to our mobile satellite system and other customers of $4.5 million. Our ESS segment increased by $2.9 million. These variances reflect an estimated negative impact of exchange rate fluctuations of $5.9 million, primarily attributable to our enterprise customers.
Equipment revenue. Equipment revenue totaled $374.1 million for the year ended December 31, 2022, an increase of $103.7 million, or 38.4%, as compared to 2021. The increase was primarily attributable to: i) increases in hardware sales to our enterprise customers of $102.6 million mainly associated with a certain customer in North America and to international customers, and ii) increases on our hardware sales to our mobile satellite system customers of $6.6 million, partially offset by decreases in hardware sales of $5.5 million to our consumer customers.
Cost of sales - services and other. Cost of sales - services and other totaled $562.8 million for the year ended December 31, 2022, an increase of $17.9 million, or 3.3%, as compared to 2021. The increase was attributable to a non-recurring decrease in a certain international regulatory fee of $4.5 million in 2021 and increases in cost of services provided to our consumer and enterprise customers, mainly related to service delivery expenses, such as field services and customer care.
Cost of sales - equipment. Cost of sales - equipment totaled $292.3 million for the year ended December 31, 2022, an increase of $60.3 million, or 26.0%, as compared to 2021. The increase was primarily attributable to the corresponding increase in equipment revenue and change in product mix.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $429.9 million for the year ended December 31, 2022, an increase of $7.6 million, or 1.8%, as compared to 2021. The increase was primarily attributable to increases in: i) other general and administrative expenses of $18.3 million, ii) bad debt expense of $7.2 million primarily due to the recovery of bad debt reserves in 2021 and iii) legal expenses of $0.8 million, offset by increases in sales and marketing expenses of $18.7 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $431.1 million for the year ended December 31, 2022, a decrease of $33.1 million, or 7.1%, as compared to 2021. The decrease was primarily attributable to: i) decreases in other property and equipment depreciation expense of $27.7 million, ii) decreases in our satellite depreciation of $8.9 million, mainly related to our SPACEWAY 3 satellite which was fully depreciated at the end of the first quarter of 2021, and iii) decreases in amortization of intangibles of $2.1 million. These decreases were partially offset by increases in amortization of our capitalized software of $5.7 million.
Interest income, net. Interest income, net totaled $30.8 million for the year ended December 31, 2022, an increase of $22.7 million, as compared to 2021, primarily attributable to increases in the yield on our marketable investment securities and an increase in our marketable investment securities average balance.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, totaled $92.4 million for the year ended December 31, 2022, a decrease of $34.1 million, or 27.0%, as compared to 2021. The decrease was primarily attributable to a decrease of $30.8 million in interest expense and the amortization of deferred financing cost as a result of the repurchases and maturity of our 7 5/8% Senior Unsecured Notes due 2021 and an increase of $2.7 million in capitalized interest relating to the EchoStar XXIV satellite program.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), nettotaled $6.0 million in gains for the year ended December 31, 2022, as compared to $11.5 million in losses for the year ended December 31, 2021, a positive change of $17.5 million. The change was due to the net impact of foreign exchange rate fluctuations of certain foreign currencies during the period, primarily related to the Brazilian Real, Indian Rupee, and the European Euro.
Income tax benefit (provision), net. Income tax benefit (provision), net was $(54.4) million for the year ended December 31, 2022, as compared to $(57.1) million for the year ended December 31, 2021. Our effective income tax rate was 28.2% and 34.0% for the year ended December 31, 2022 and 2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the year ended December 31, 2022 were primarily due to excluded foreign losses where the Company carries a full valuation allowance, and the impact of state and local taxes. The variations in our current year effective tax rate from the U.S. federal statutory rate for the year ended December 31, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes.
Net income (loss) attributable to HSSC. The following table reconciles the change in Net income (loss) attributable to HSSC:
| | | | | | | | |
| | Amounts |
Net income (loss) attributable to HSSC for the year ended December 31, 2021 | | $ | 120,771 | |
Decrease (increase) in interest expense, net of amounts capitalized | | 34,113 | |
Increase (decrease) in interest income, net | | 22,666 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 17,510 | |
Decrease (increase) in income tax benefit (provision), net | | 2,670 | |
Decrease (increase) in net income (loss) attributable to non-controlling interests | | 349 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (356) | |
Increase (decrease) in other, net | | (1,421) | |
Increase (decrease) in gains (losses) on investments, net | | (1,858) | |
Increase (decrease) in operating income (loss), including depreciation and amortization | | (45,031) | |
Net income (loss) attributable to HSSC for the year ended December 31, 2022 | | $ | 149,413 | |
EBITDA. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items section. The following table reconciles EBITDA to Net income (loss), the most directly comparable GAAP measure in our Consolidated Financial Statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, | | Variance |
| | 2022 | | 2021 | | Amount | | % |
Net income (loss) | | $ | 138,910 | | | $ | 110,617 | | | $ | 28,293 | | | 25.6 | |
Interest income, net | | (30,812) | | | (8,146) | | | (22,666) | | | * |
Interest expense, net of amounts capitalized | | 92,386 | | | 126,499 | | | (34,113) | | | (27.0) | |
Income tax provision (benefit), net | | 54,441 | | | 57,111 | | | (2,670) | | | (4.7) | |
Depreciation and amortization | | 431,065 | | | 464,146 | | | (33,081) | | | (7.1) | |
Net loss (income) attributable to non-controlling interests | | 10,503 | | | 10,154 | | | 349 | | | 3.4 | |
EBITDA | | $ | 696,493 | | | $ | 760,381 | | | $ | (63,888) | | | (8.4) | |
* Percentage is not meaningful.
The following table reconciles the change in EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the year ended December 31, 2021 | | $ | 760,381 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 17,510 | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | 349 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (356) | |
Increase (decrease) in other, net | | (1,421) | |
Increase (decrease) in gains (losses) on investments, net | | (1,858) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (78,112) | |
EBITDA for the year ended December 31, 2022 | | $ | 696,493 | |
Segment Operating Results and Capital Expenditures
The following tables present our total revenue, capital expenditures and EBITDA by segment for the year ended December 31, 2022, as compared to the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the year ended December 31, 2022 | | | | | | | | |
Total revenue | | $ | 1,966,587 | | | $ | 20,533 | | | $ | 16,223 | | | $ | 2,003,343 | |
Capital expenditures | | 239,403 | | | — | | | — | | | 239,403 | |
EBITDA | | 732,929 | | | 14,416 | | | (50,852) | | | 696,493 | |
| | | | | | | | |
For the year ended December 31, 2021 | | | | | | | | |
Total revenue | | $ | 1,956,226 | | | $ | 17,679 | | | $ | 20,821 | | | $ | 1,994,726 | |
Capital expenditures | | 296,303 | | | — | | | — | | | 296,303 | |
EBITDA | | 781,824 | | | 9,185 | | | (30,628) | | | 760,381 | |
Hughes Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
| | 2022 | | 2021 | | Amount | | | % |
Total revenue | | $ | 1,966,587 | | | $ | 1,956,226 | | | $ | 10,361 | | | | 0.5 | |
Capital expenditures | | 239,403 | | | 296,303 | | | (56,900) | | | | (19.2) | |
EBITDA | | 732,929 | | | 781,824 | | | (48,895) | | | | (6.3) | |
Total revenue was $2.0 billion for the year ended December 31, 2022, an increase of $10.4 million, or 0.5%, as compared to 2021. Services and other revenue decreased primarily due to lower sales of broadband services to our consumer customers of $103.1 million, partially offset by higher sales of broadband services to our enterprise customers of $5.3 million and to our mobile satellite system and other customers of $4.5 million. Equipment revenue increased primarily due to: i) increases in hardware sales to our enterprise customers of $102.6 million mainly associated with a certain customer in North America and to international customers, and ii) increases on our hardware sales to our mobile satellite system customers of $6.6 million, partially offset by decreases in hardware sales of $5.5 million to our consumer customers. These variances reflect an estimated negative impact of exchange rate fluctuations of $6.7 million, primarily attributable to our enterprise customers.
Capital expenditures were $239.4 million for the year ended December 31, 2022, a decrease of $56.9 million, or 19.2%, as compared to 2021, primarily due to decreases in expenditures associated with our consumer business, and decreases in expenditures related to the construction of our satellite-related ground infrastructure.
The following table reconciles the change in the Hughes Segment EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the year ended December 31, 2021 | | $ | 781,824 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 17,437 | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | 349 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | 39 | |
Increase (decrease) in gains (losses) on investments, net | | (1,883) | |
Increase (decrease) in other, net | | (3,341) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (61,496) | |
EBITDA for the year ended December 31, 2022 | | $ | 732,929 | |
ESS Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
| | 2022 | | 2021 | | Amount | | | % |
Total revenue | | $ | 20,533 | | | $ | 17,679 | | | $ | 2,854 | | | | 16.1 | |
EBITDA | | 14,416 | | | 9,185 | | | 5,231 | | | | 57.0 | |
Total revenue was $20.5 million for the year ended December 31, 2022, an increase of $2.9 million, or 16.1%, compared to 2021, primarily due to an increase in transponder services provided to third parties.
EBITDA was $14.4 million for the year ended December 31, 2022, an increase of $5.2 million, or 57.0%, as compared to 2021, primarily due to the increase in overall ESS segment revenue and lower expenses.
Corporate and Other Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | Variance |
| | 2022 | | 2021 | | Amount | | | % |
Total revenue | | $ | 16,223 | | | $ | 20,821 | | | $ | (4,598) | | | | (22.1) | |
| | | | | | | | | |
EBITDA | | (50,852) | | | (30,628) | | | (20,224) | | | | 66.0 | |
The following table reconciles the change in the Corporate and Other Segment EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the year ended December 31, 2021 | | $ | (30,628) | |
Increase (decrease) in other, net | | 1,937 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 74 | |
Increase (decrease) in gains (losses) on investments, net | | 26 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (394) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (21,867) | |
EBITDA for the year ended December 31, 2022 | | $ | (50,852) | |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks Associated with Financial Instruments and Foreign Currency
Our investments and debt are exposed to market risks, discussed below.
Cash, Cash Equivalents and Current Marketable Investment Securities
As of December 31, 2019,2022, our cash, cash equivalents and current marketable investment securities had a fair value of $1.8$1.5 billion. Of this amount, a total of $1.8$1.5 billion was invested in: (a) cash; (b) commercial paper and corporate notes with an overall average maturity of less than one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating organizations; (c) debt instruments of the United States (“U.S.”) government and its agencies; and/or (d) instruments with similar risk, duration and credit quality characteristics to the commercial paper and corporate obligations described above. The primary purpose of these investing activities has been to preserve principal until the cash is required to, among other things, fund operations, make strategic investments and expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is received and used in our business. The value of this portfolio may be negatively impacted by credit losses; however, this risk is mitigated through diversification that limits our exposure to any one issuer.
Interest Rate Risk
A change in interest rates would not affect the fair value of our cash, or materially affect the fair value of our cash equivalents due to their maturities of less than 90 days. A change in interest rates would affect the fair value of our current marketable debt securities portfolio; however, we normally hold these investments to maturity. Based on our cash, cash equivalents and current marketable debt securities investment portfolio of $1.8$1.5 billion as of December 31, 2019,2022, a hypothetical 10% change in average interest rates during 20192022 would not have had a material impact on the fair value of our cash, cash equivalents and debt securities portfolio due to the limited duration of our investments.
Our cash, cash equivalents and current marketable debt securities had an average annual rate of return for the year ended December 31, 20192022 of 2.67%2.15%. A change in interest rates would affect our future annual interest income from this portfolio, since funds would be re-invested at different rates as the instruments mature. A hypothetical 10% decrease in average interest rates during 20192022 would have resulted in a decrease of $5.5$2.6 million in annual interest income.
Other Investments
As of December 31, 2019, we had $7.4 million of other equity investments and other debt investments of privately held companies that we hold for strategic business purposes. The fair value of these investments is not readily determinable. We periodically review these investments and may adjust the carrying amount to their estimated fair value when there are indications of impairment, observable prices changes for the investments or observable transactions of the same investments. A hypothetical adverse change equal to 10% of the carrying amount of these equity instruments during 2019 would have resulted in a decrease of $0.7 million in the value of these investments.
Our ability to realize value from our strategic investments in companies that are privately held depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we sell them, we will not be able to recover our investment.
Foreign Currency Exchange Risk
We generally conduct our business in U.S. dollars. Our international business is conducted in a variety of foreign currencies with our largest exposures being to the Brazilian real, the Indian rupee, European euro and the British pound. This exposes us to fluctuations in foreign currency exchange rates. Transactions in foreign currencies are converted into U.S. dollars using exchange rates in effect on the dates of the transactions. This exposes us 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 currency exchange rate fluctuations, primarily resulting from loans to foreign subsidiaries in U.S. dollars. Accordingly, we may enter into foreign currency forward contracts, or take other measures, to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions.transactions.. As of December 31, 2019,2022, we had foreign currency forward contracts with a notional valueamount of $12.1$8.3 million in place to partially mitigate foreign currency exchange risk. The estimated fair values of the foreign currency contracts were not material as of December 31, 2019.2022. The impact of a hypothetical 10% adverse change
in exchange rates on the carrying amount of the net assets and liabilities of our foreign subsidiaries during 20192022 would have beenresulted in an estimated loss to the cumulative translation adjustment of $44.8$50.0 million as of December 31, 2019.2022.
Derivative Financial Instruments
We generally do not use derivative financial instruments for speculative purposes and we generally do not apply hedge accounting treatment to our derivative financial instruments. We evaluate our derivative financial instruments from time to time but there can be no assurance that we will not enter into additional foreign currency forward contracts, or take other measures, in the future to mitigate our foreign currency exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Accompanying Consolidated Financial Statements are included in Item 15 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))amended) as of the end of the period covered by this Form 10-K. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-K such that the information required to be disclosed in our Securities and Exchange CommissionSEC reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In November 2019, we consummated our joint venture with Yahsat in Brazil. As a result of the transaction, we are reviewing the internal controls of the business we acquired from Yahsat in the transaction and we may make appropriate changes as deemed necessary.
Changes in Internal Control Over Financial Reporting
Except as noted above, thereThere has been no change in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act)Act of 1934, as amended) that occurred during the three months ended December 31, 20192022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We continue to review our internal control over financial reporting and may from time to time make changes aimed at enhancing its effectiveness and to ensure that our systems evolve with our business.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.GAAP.
Our internal control over financial reporting includes those policies and procedures that:
| |
(i) | (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;Table of Contents(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
| |
(ii) | provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
|
| |
(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2019. Management’s assessment of our internal control over financial reporting did not include the internal controls of the business we acquired from Yahsat in Brazil in November 2019. The amount of total assets and revenue acquired that is included in our Accompanying2022.
Consolidated Financial Statements as of and for the year ended December 31, 2019 was $108.6 million and $0.8 million, respectively.
ITEM 9B. OTHER INFORMATION
Financial Results
On February 20, 2020,22, 2023, EchoStar issued a press release (the “Press Release”) announcing its financial results for the quarter and year ended December 31, 2019 and a supplemental investor information presentation (the “Presentation”) providing unaudited pro forma financial information.2022. A copy of the Press Release and Presentation areis furnished herewith as Exhibit 99.1 and Exhibit 99.2, respectively.99.1. The foregoing information, including the exhibit related thereto, is furnished in response to Item 2.02 of Form 8-K and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise, and shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Securities Exchange Act of 1934, as amended, except as otherwise expressly stated in any such filing.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Appointment of Independent Registered Public Accounting Firm
Appointment of Independent Registered Public Accounting Firm for 2020. KPMG LLP served as our independent registered public accounting firm for the fiscal year ended December 31, 2019.2022. EchoStar’s board of directors, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our best interests.
Fees Paid to KPMG LLP
The following table presents fees for professional services rendered by KPMG LLP on behalf of the Company for the years ended December 31, 20192022 and 2018:2021, in full dollar amounts:
| | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2022 | | 2021 |
Audit fees (1) | | $ | 2,133,489 | | | $ | 2,050,883 | |
Audit-related fees (2) | | 38,523 | | | 1,907 | |
Total audit and audited related fees | | 2,172,012 | | | 2,052,790 | |
Tax fees (3) | | 39,010 | | | 8,625 | |
Total fees | | $ | 2,211,022 | | | $ | 2,061,415 | |
|
| | | | | | | | |
| | For the Years Ended December 31, |
| | 2019 | | 2018 |
| | | | |
Audit fees (1) | | $ | 2,147,764 |
| | $ | 1,828,355 |
|
Audit-related fees (2) | | 62,919 |
| | 112,158 |
|
Total audit and audited related fees | | 2,210,683 |
| | 1,940,513 |
|
Tax fees (3) | | — |
| | 78,794 |
|
Total fees | | $ | 2,210,683 |
| | $ | 2,019,307 |
|
(1) Consists of fees for the audit of our Consolidated Financial Statements included in our Annual Report on Form 10-K, review of our unaudited financial statements included in our Quarterly Reports on Form 10-Q and fees in connection with statutory and other audits of our foreign subsidiaries. | |
(1) | Consists of fees for the audit of our consolidated financial statements included in our Annual Report on Form 10-K, review of our unaudited financial statements included in our Quarterly Reports on Form 10-Q and fees in connection with statutory and other audits of our foreign subsidiaries. |
| |
(2) | Consists of fees for assurance and other services that are provided in connection with the issuance of consents, comfort letters, certifications, compliance with XBRL tagging, and professional consultations with respect to accounting issues or matters that are non-recurring in nature. |
| |
(3) | Consists of fees for tax consultation and tax compliance services. |
(2) Consists of fees for assurance and other services that are provided in connection with the issuance of consents, comfort letters, certifications, compliance with XBRL tagging, and professional consultations with respect to accounting issues or matters that are non-recurring in nature.
(3) Consists of fees for tax consultation and tax compliance services.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
EchoStar’s Audit Committee is responsible for appointing, setting compensation, retaining, and overseeing the work of our independent registered public accounting firm. EchoStar’s Audit Committee has established a process regarding pre-approval of all audit and permissible non-audit services provided by the independent registered public accounting firm.
Requests are submitted to EchoStar’s Audit Committee in one of the following ways:
•Request for approval of services at a meeting of EchoStar’s Audit Committee; or
•Request for approval of services by members of EchoStar’s Audit Committee acting by written consent.
The request may be made with respect to either specific services or a type of service for predictable or recurring services. All of the fees paid by us to KPMG LLP for services for 20192022 and 20182021 were pre-approved by EchoStar’s Audit Committee.
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
| | | | | |
| |
| Page |
(1) Consolidated Financial Statements | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
(2) Exhibits | |
|
| | | | | | | |
Exhibit No. | | Description |
| | |
| | |
| | |
| | |
| | |
| | |
| | Indenture relating to the EH Holding Corporation (currently known as Hughes Satellite Systems Corporation) 7 5/8% Senior Unsecured Notes due 2021, dated as of June 1, 2011, by and among EH Holding Corporation, the guarantors listed on the signature page thereto, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to EchoStar Corporation’s Current Report on Form 8-K, filed June 2, 2011, Commission File No. 001-33807). |
| | |
| | Supplemental Indenture relating to the 7 5/8% Senior Unsecured Notes due 2021 of EH Holding Corporation (currently known as Hughes Satellite Systems Corporation), dated as of June 8, 2011, by and among EH Holding Corporation, the guarantors listed on the signature page thereto, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.3 to EchoStar Corporation’s Current Report on Form 8-K, filed June 9, 2011, Commission File No. 001-33807). |
| | |
| | |
| | |
| | |
| | |
| | Second Supplemental Indenture relating to the 7 5/8% Senior Unsecured Notes due 2021 of Hughes Satellite Systems Corporation, dated as of March 28, 2014, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantors listed on the signature pages thereto, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to EchoStar Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed May 9, 2014, Commission File No. 001-33807). |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | | | | |
Exhibit No. | | Description |
| |
|
| | |
| | Joinder Agreement, dated as of August 10, 2017, to the Security Agreement dated as of June 8, 2011, by and between HNS Americas, L.L.C., HNS Americas II, L.L.C. and U.S. Bank National Association, as successor collateral agent (incorporated by reference to Exhibit 4.23 to Hughes Satellite Systems Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, filed February 22, 2018, Commission File No. 333-179121). |
| | |
| | Second Supplemental Indenture relating to Hughes Satellite Systems Corporation’s 5.250% Senior Secured Notes due 2026, dated August 10, 2017, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantor listed on the signature pages thereto, U.S. Bank National Association, as trustee and successor collateral agent (incorporated by reference to Exhibit 4.24 to Hughes Satellite Systems Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, filed February 22, 2018, Commission File No. 333-179121). |
| | |
|
| | |
Exhibit No. | | Description |
| | |
| | |
| | Fourth Supplemental Indenture relating to Hughes Satellite Systems Corporation’s 7⅝% Senior Notes due 2021, dated August 10, 2017, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantor listed on the signature pages thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.27 to Hughes Satellite Systems Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, filed February 22, 2018, Commission File No. 333-179121). |
| | |
| | Joinder Agreement, dated as of June 12, 2019, to the Security Agreement dated as of June 8, 2011, by and between EchoStar BSS Corporation, EchoStar FSS L.L.C. and U.S. Bank National Association, as successor collateral agent (incorporated by reference to Exhibit 4.1 to Hughes Satellite System Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed August 8, 2019, Commission File No. 333-179121). |
| | |
| | Third Supplemental Indenture relating to Hughes Satellite Systems Corporation’s 5.250% Senior Secured Notes due 2026, dated June 12, 2019, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantors listed on the signature pages thereto, U.S. Bank National Association, as trustee and successor collateral agent (incorporated by reference to Exhibit 4.2 to Hughes Satellite System Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed August 8, 2019, Commission File No. 333-179121). |
| | |
| |
|
| | |
| | Fifth Supplemental Indenture relating to Hughes Satellite Systems Corporation’s 7⅝% Senior Notes due 2021, dated June 12, 2019, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantors listed on the signature pages thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.4 to Hughes Satellite Systems Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed August 8, 2019, Commission File No. 333-179121).
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | |
Exhibit No. | | Description |
| | |
| | |
101.INS | | XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | |
101.SCH | | XBRL Taxonomy Extension Schema. |
| | | | | | | | |
Exhibit No. | | Description |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase. |
101.LAB | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase. |
101.PRE | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase. |
| |
* | Incorporated by reference. |
| |
** | Constitutes a management contract or compensatory plan or arrangement. |
| |
*** | Certain portions of the exhibit have been omitted in accordance with the Securities and Exchange Commission’s rules and regulations regarding confidential treatment. |
| |
**** | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. We agree to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request, subject to our right to request confidential treatment of any requested schedule or exhibit. |
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
*** Certain portions of the exhibit have been omitted in accordance with the Securities and Exchange Commission’s rules and regulations regarding confidential treatment.
**** Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. We agree to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request, subject to our right to request confidential treatment of any requested schedule or exhibit.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| HUGHES SATELLITE SYSTEMS CORPORATION |
| | |
| | |
| By: | /s/ Hamid Akhavan |
| | Hamid Akhavan |
| | Chief Executive Officer and President |
| | (Principal Executive Officer and Principal Financial Officer) |
| | |
| | |
| | |
| HUGHES SATELLITE SYSTEMS CORPORATION |
| | |
| | |
| By: | /s/ David J. Rayner
|
| | David J. Rayner |
| | Executive Vice President, |
| | Chief Financial Officer, |
| | Chief Operating Officer, and |
| | Treasurer |
| | |
Date: February 20, 202022, 2023 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
/s/ Hamid Akhavan | | Chief Executive Officer, President and Director | | February 22, 2023 |
Hamid Akhavan | | (Principal Executive Officer and Principal Financial Officer) | | |
| | | | |
/s/ Jeffrey S. Boggs | | Interim Principal Accounting Officer | | February 22, 2023 |
Jeffrey S. Boggs | | | | |
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ Michael T. Dugan
| | Chief Executive Officer, President and Director | | February 20, 2020 |
Michael T. Dugan | | (Principal Executive Officer) | | |
| | | | |
/s/ David J. Rayner
| | Executive Vice President, Chief Financial Officer, | | February 20, 2020 |
David J. Rayner | | Chief Operating Officer and Treasurer | | |
| | (Principal Financial and Accounting Officer) | | |
| | | | |
/s/ Charles W. Ergen | | Chairman | | February 20, 202022, 2023 |
Charles W. Ergen | | | | |
| | | | |
/s/ Dean A. Manson | | Executive Vice President, General Counsel | | February 20, 202022, 2023 |
Dean A. Manson | | Secretary and Director | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
To the ShareholdersShareholder and the Board of Directors
Hughes Satellite Systems Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Hughes Satellite Systems Corporation and subsidiaries (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, and comprehensive income (loss), changes in shareholders’stockholder’s equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2019,2022, and the related notes and financial statement schedule II listed in Item 15 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, in 2019, the Company has changed its method of accounting for leases due to the adoption of Accounting Standards Update No. 2016-02, Leases as of January 1, 2019. In 2018, the Company has changed its method of accounting for revenue recognition due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers and changed its method of accounting for marketable investment securities and fair value measurements due to the adoption of Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence over certain Hughes segment revenue
As discussed in Note 2 and Note 3 to the consolidated financial statements, the Company reported $1,966,587,000 in total revenue for the Hughes segment for the year ended December 31, 2022, of which $1,592,438,000 and $374,149,000 was related to total services and other revenue and certain equipment related revenue, respectively. The Hughes segment provides broadband satellite technologies and broadband internet services to consumer
customers, and broadband network technologies, managed services, equipment, hardware, satellite services, and communications solutions to consumer and enterprise customers.
We identified the evaluation of the sufficiency of audit evidence over certain Hughes segment revenue as a critical audit matter. Specifically, a high degree of auditor judgment was required to evaluate the nature and extent of audit evidence obtained related to the total services and other revenue and certain equipment related revenue of the Hughes segment. IT professionals with specialized skills and knowledge were required to assess the multiple information technology (IT) applications, data interfaces, and procedures used to initiate, process, and record transactions.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed. We evaluated the design and tested the operating effectiveness of internal controls, including controls related to the multiple IT applications, data interfaces, and procedures used to initiate, process, and record transactions. We assessed the recorded amounts by sampling transactions and comparing the amounts recognized for consistency with underlying documentation, including contracts or payment and transaction support. We involved IT professionals with specialized skills and knowledge, who assisted in testing IT applications used by the Company in its revenue recognition process, and configuration and interface controls over the transfer of relevant data between systems used in the revenue recognition processes. We evaluated the sufficiency of audit evidence obtained by assessing the results of the procedures performed, including the appropriateness of the nature and extent of such evidence.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Denver, Colorado
February 20, 202022, 2023
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 653,132 | | | $ | 429,168 | |
Marketable investment securities | | 799,769 | | | 854,502 | |
Trade accounts receivable and contract assets, net | | 236,336 | | | 182,063 | |
Other current assets, net | | 275,202 | | | 276,844 | |
Total current assets | | 1,964,439 | | | 1,742,577 | |
Non-current assets: | | | | |
Property and equipment, net | | 1,376,004 | | | 1,523,447 | |
Operating lease right-of-use assets | | 150,632 | | | 148,221 | |
Goodwill | | 532,491 | | | 511,086 | |
Regulatory authorizations, net | | 408,619 | | | 408,959 | |
Other intangible assets, net | | 15,698 | | | 13,984 | |
Other investments, net | | 83,523 | | | 91,226 | |
Other non-current assets, net | | 285,877 | | | 302,840 | |
Total non-current assets | | 2,852,844 | | | 2,999,763 | |
Total assets | | $ | 4,817,283 | | | $ | 4,742,340 | |
| | | | |
Liabilities and Shareholder's Equity | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 98,229 | | | $ | 105,477 | |
Contract liabilities | | 121,739 | | | 141,343 | |
Accrued expenses and other current liabilities | | 393,899 | | | 308,879 | |
Total current liabilities | | 613,867 | | | 555,699 | |
Non-current liabilities: | | | | |
Long-term debt, net | | 1,496,777 | | | 1,495,994 | |
Deferred tax liabilities, net | | 289,757 | | | 334,406 | |
Operating lease liabilities | | 135,122 | | | 134,001 | |
Other non-current liabilities | | 133,897 | | | 153,251 | |
Total non-current liabilities | | 2,055,553 | | | 2,117,652 | |
Total liabilities | | 2,669,420 | | | 2,673,351 | |
| | | | |
Commitments and contingencies | | | | |
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | | | |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,139,435 |
| | $ | 847,823 |
|
Marketable investment securities | | 652,835 |
| | 1,609,196 |
|
Trade accounts receivable and contract assets, net | | 196,520 |
| | 201,096 |
|
Advances to affiliates | | 131,892 |
| | 103,550 |
|
Other current assets | | 169,760 |
| | 152,666 |
|
Current assets of discontinued operations | | — |
| | 3,483 |
|
Total current assets | | 2,290,442 |
| | 2,917,814 |
|
Non-current assets: | | | | |
Property and equipment, net | | 1,857,581 |
| | 1,921,911 |
|
Operating lease right-of-use assets | | 113,399 |
| | — |
|
Goodwill | | 506,953 |
| | 504,173 |
|
Regulatory authorizations, net | | 412,363 |
| | 400,043 |
|
Other intangible assets, net | | 29,321 |
| | 43,952 |
|
Other investments, net | | 110,040 |
| | 126,369 |
|
Advances to affiliates, net | | 19,759 |
| | — |
|
Other non-current assets, net | | 232,177 |
| | 236,449 |
|
Non-current assets of discontinued operations | | — |
| | 742,461 |
|
Total non-current assets | | 3,281,593 |
| | 3,975,358 |
|
Total assets | | $ | 5,572,035 |
| | $ | 6,893,172 |
|
Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 121,552 |
| | $ | 104,751 |
|
Current portion of long-term debt and finance lease obligations | | 486 |
| | 919,582 |
|
Advances from affiliates, net | | 11,132 |
| | 868 |
|
Contract liabilities | | 101,060 |
| | 72,249 |
|
Accrued expenses and other current liabilities | | 246,799 |
| | 157,654 |
|
Current liabilities of discontinued operations | | — |
| | 49,055 |
|
Total current liabilities | | 481,029 |
| | 1,304,159 |
|
Non-current liabilities: | | | | |
Long-term debt and finance lease obligations, net of current portion | | 2,389,733 |
| | 2,386,202 |
|
Deferred tax liabilities, net | | 380,316 |
| | 355,949 |
|
Operating lease liabilities | | 96,879 |
| | — |
|
Advances from affiliates, net | | 23,980 |
| | 33,438 |
|
Other non-current liabilities | | 65,935 |
| | 71,647 |
|
Non-current liabilities of discontinued operations | | — |
| | 349,282 |
|
Total non-current liabilities | | 2,956,843 |
| | 3,196,518 |
|
Total liabilities | | 3,437,872 |
| | 4,500,677 |
|
| | | | |
Commitments and contingencies | |
|
| |
|
|
| | | | |
Shareholders’ equity: | | | | |
Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and outstanding at both December 31, 2019 and 2018 | | — |
| | — |
|
Common stock, $0.01 par value; 1,000,000 shares authorized, 1,078 shares issued and outstanding at both December 31, 2019 and 2018 | | — |
| | — |
|
Additional paid-in capital | | 1,478,636 |
| | 1,767,037 |
|
Accumulated other comprehensive income (loss) | | (84,636 | ) | | (83,774 | ) |
Accumulated earnings (losses) | | 664,415 |
| | 693,957 |
|
Total HSS shareholders’ equity | | 2,058,415 |
| | 2,377,220 |
|
Non-controlling interests | | 75,748 |
| | 15,275 |
|
Total shareholders’ equity | | 2,134,163 |
| | 2,392,495 |
|
Total liabilities and shareholders’ equity | | $ | 5,572,035 |
| | $ | 6,893,172 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
| | | | | | | | | | | | | | |
Shareholder's equity: | | | | |
Preferred stock, $0.001 par value,1,000,000 shares authorized, none issued and outstanding at both December 31, 2022 and 2021 | | — | | | — | |
Common stock, $0.01 par value, 1,000,000 shares authorized, 1,078 shares issued and outstanding at both December 31, 2022 and 2021 | | — | | | — | |
Additional paid-in capital | | 1,479,857 | | | 1,489,776 | |
Accumulated other comprehensive income (loss) | | (170,184) | | | (173,381) | |
Accumulated earnings (losses) | | 741,754 | | | 692,341 | |
Total Hughes Satellite Systems Corporation shareholder's equity | | 2,051,427 | | | 2,008,736 | |
Non-controlling interests | | 96,436 | | | 60,253 | |
Total shareholder's equity | | 2,147,863 | | | 2,068,989 | |
Total liabilities and shareholder's equity | | $ | 4,817,283 | | | $ | 4,742,340 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the years ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
Revenue: | | | | | | | | | | |
Services and other revenue | | | | | | $ | 1,629,194 | | | $ | 1,724,299 | | | $ | 1,691,757 | |
Equipment revenue | | | | | | 374,149 | | | 270,427 | | | 205,601 | |
Total revenue | | | | | | 2,003,343 | | | 1,994,726 | | | 1,897,358 | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | | | | | 562,849 | | | 544,915 | | | 572,637 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | | | | | 292,290 | | | 231,960 | | | 166,429 | |
Selling, general and administrative expenses | | | | | | 429,877 | | | 422,235 | | | 433,408 | |
Research and development expenses | | | | | | 32,810 | | | 31,777 | | | 29,448 | |
Depreciation and amortization | | | | | | 431,065 | | | 464,146 | | | 498,876 | |
Impairment of long-lived assets | | | | | | — | | | 210 | | | — | |
Total costs and expenses | | | | | | 1,748,891 | | | 1,695,243 | | | 1,700,798 | |
Operating income (loss) | | | | | | 254,452 | | | 299,483 | | | 196,560 | |
Other income (expense): | | | | | | | | | | |
Interest income, net | | | | | | 30,812 | | | 8,146 | | | 18,802 | |
Interest expense, net of amounts capitalized | | | | | | (92,386) | | | (126,499) | | | (172,466) | |
Gains (losses) on investments, net | | | | | | 245 | | | 2,103 | | | (232) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | | | | | (5,703) | | | (5,347) | | | (6,116) | |
Foreign currency transaction gains (losses), net | | | | | | 6,016 | | | (11,494) | | | 3,427 | |
Other, net | | | | | | (85) | | | 1,336 | | | (286) | |
Total other income (expense), net | | | | | | (61,101) | | | (131,755) | | | (156,871) | |
Income (loss) before income taxes | | | | | | 193,351 | | | 167,728 | | | 39,689 | |
Income tax benefit (provision), net | | | | | | (54,441) | | | (57,111) | | | (42,118) | |
Net income (loss) | | | | | | 138,910 | | | 110,617 | | | (2,429) | |
Less: Net loss (income) attributable to non-controlling interests | | | | | | 10,503 | | | 10,154 | | | 11,754 | |
Net income (loss) attributable to HSSC | | | | | | $ | 149,413 | | | $ | 120,771 | | | $ | 9,325 | |
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Revenue: | | | | | | |
Services and other revenue | | $ | 1,623,458 |
| | $ | 1,561,426 |
| | $ | 1,275,553 |
|
Equipment revenue | | 266,703 |
| | 205,410 |
| | 239,489 |
|
Total revenue | | 1,890,161 |
| | 1,766,836 |
| | 1,515,042 |
|
Costs and expenses: | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 555,701 |
| | 559,838 |
| | 497,111 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | 225,103 |
| | 176,600 |
| | 195,439 |
|
Selling, general and administrative expenses | | 467,869 |
| | 397,994 |
| | 337,548 |
|
Research and development expenses | | 25,739 |
| | 27,570 |
| | 31,745 |
|
Depreciation and amortization | | 464,797 |
| | 426,852 |
| | 370,418 |
|
Impairment of long-lived assets | | — |
| | — |
| | 6,000 |
|
Total costs and expenses | | 1,739,209 |
| | 1,588,854 |
| | 1,438,261 |
|
Operating income (loss) | | 150,952 |
| | 177,982 |
| | 76,781 |
|
Other income (expense): | | | | | | |
Interest income | | 57,730 |
| | 59,104 |
| | 31,952 |
|
Interest expense, net of amounts capitalized | | (272,218 | ) | | (231,169 | ) | | (213,166 | ) |
Gains (losses) on investments, net | | (8,464 | ) | | 187 |
| | (1,574 | ) |
Equity in earnings (losses) of unconsolidated affiliates, net | | (3,333 | ) | | 4,874 |
| | 7,027 |
|
Foreign currency transaction gains (losses), net | | (9,855 | ) | | (12,484 | ) | | (1,158 | ) |
Other, net | | (633 | ) | | 8,041 |
| | (1,030 | ) |
Total other income (expense), net | | (236,773 | ) | | (171,447 | ) | | (177,949 | ) |
Income (loss) from continuing operations before income taxes | | (85,821 | ) | | 6,535 |
| | (101,168 | ) |
Income tax benefit (provision), net | | (11,595 | ) | | (18,615 | ) | | 93,766 |
|
Net income (loss) from continuing operations | | (97,416 | ) | | (12,080 | ) | | (7,402 | ) |
Net income (loss) from discontinued operations | | 56,539 |
| | 109,423 |
| | 304,955 |
|
Net income (loss) | | (40,877 | ) | | 97,343 |
| | 297,553 |
|
Less: Net income (loss) attributable to non-controlling interests | | (11,335 | ) | | 1,842 |
| | 1,583 |
|
Net income (loss) attributable to HSS | | $ | (29,542 | ) | | $ | 95,501 |
| | $ | 295,970 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
| | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | | For the years ended December 31, |
| | | | | | | | | | 2022 | | 2021 | | 2020 |
Net income (loss) | | $ | (40,877 | ) | | $ | 97,343 |
| | $ | 297,553 |
| Net income (loss) | | | $ | 138,910 | | | $ | 110,617 | | | $ | (2,429) | |
Other comprehensive income (loss), net of tax: | | |
| | |
| | |
| Other comprehensive income (loss), net of tax: | | | | | | |
Foreign currency translation adjustments | | 1,182 |
| | (31,938 | ) | | 7,196 |
| Foreign currency translation adjustments | | | 5,475 | | | (31,317) | | | (77,646) | |
Unrealized gains (losses) on available-for-sale securities | | 1,817 |
| | (665 | ) | | (2,280 | ) | Unrealized gains (losses) on available-for-sale securities | | | (553) | | | 490 | | | (192) | |
Other | | (114 | ) | | 41 |
| | 92 |
| Other | | | — | | | (98) | | | (4) | |
Amounts reclassified to net income (loss): | | | | | | | Amounts reclassified to net income (loss): | | | |
Realized gains on available-for-sale securities | | (419 | ) | | (212 | ) | | — |
| |
Other-than-temporary impairment loss on available-for-sale securities | | — |
| | — |
| | 3,298 |
| |
Realized losses (gains) on available-for-sale debt securities | | Realized losses (gains) on available-for-sale debt securities | | | (17) | | | (5) | | | (1) | |
Total other comprehensive income (loss), net of tax | | 2,466 |
| | (32,774 | ) | | 8,306 |
| Total other comprehensive income (loss), net of tax | | | 4,905 | | | (30,930) | | | (77,843) | |
Comprehensive income (loss) | | (38,411 | ) | | 64,569 |
| | 305,859 |
| Comprehensive income (loss) | | | 143,815 | | | 79,687 | | | (80,272) | |
Less: Comprehensive income (loss) attributable to non-controlling interests | | (8,007 | ) | | 453 |
| | 1,992 |
| |
Comprehensive income (loss) attributable to HSS | | $ | (30,404 | ) | | $ | 64,116 |
| | $ | 303,867 |
| |
Less: Comprehensive loss (income) attributable to non-controlling interests | | Less: Comprehensive loss (income) attributable to non-controlling interests | | | 8,795 | | | 14,543 | | | 27,392 | |
Comprehensive income (loss) attributable to HSSC | | Comprehensive income (loss) attributable to HSSC | | | $ | 152,610 | | | $ | 94,230 | | | $ | (52,880) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-7
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’SHAREHOLDER’S EQUITY
(Amounts in thousands)
| | | | | | | | | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Non-controlling Interests | | Total |
| | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Non-controlling Interests | | Total | |
| | | | | | | | | | | |
Balance, December 31, 2016 | | $ | 1,516,199 |
| | $ | (60,719 | ) | | $ | 286,713 |
| | $ | 12,830 |
| | $ | 1,755,023 |
| |
Balance, December 31, 2019 | | Balance, December 31, 2019 | | $ | 1,478,636 | | | $ | (84,636) | | | $ | 664,415 | | | $ | 75,748 | | | $ | 2,134,163 | |
Cumulative effect of accounting changes | | Cumulative effect of accounting changes | | — | | | — | | | (2,169) | | | (240) | | | (2,409) | |
Balance, January 1, 2020 | | Balance, January 1, 2020 | | 1,478,636 | | | (84,636) | | | 662,246 | | | 75,508 | | | 2,131,754 | |
Stock-based compensation | | 5,117 |
| | — |
| | — |
| | — |
| | 5,117 |
| Stock-based compensation | | 3,883 | | | — | | | — | | | — | | | 3,883 | |
Transfer of launch service contracts to EchoStar | | (145,114 | ) | | — |
| | — |
| | — |
| | (145,114 | ) | |
Contribution of EchoStar XIX satellite, net of deferred tax | | 349,337 |
| | — |
| | — |
| | — |
| | 349,337 |
| |
Contribution of net assets pursuant to Share Exchange Agreement | | 219,662 |
| | — |
| | — |
| | — |
| | 219,662 |
| |
Exchange of uplinking business net assets for HSS Tracking Stock | | (190,221 | ) | | — |
| | — |
| | — |
| | (190,221 | ) | |
Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | | Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | | 4,338 | | | — | | | — | | | (1,580) | | | 2,758 | |
Contribution by non-controlling interest holder | | Contribution by non-controlling interest holder | | — | | | — | | | — | | | 18,241 | | | 18,241 | |
Other comprehensive income (loss) | | — |
| | 7,805 |
| | — |
| | 409 |
| | 8,214 |
| Other comprehensive income (loss) | | — | | | (62,204) | | | — | | | (15,630) | | | (77,834) | |
Net income (loss) | | — |
| | — |
| | 295,970 |
| | 1,583 |
| | 297,553 |
| Net income (loss) | | — | | | — | | | 9,325 | | | (11,754) | | | (2,429) | |
Other, net | | (419 | ) | | 92 |
| | — |
| | — |
| | (327 | ) | Other, net | | (127) | | | — | | | (1) | | | 131 | | | 3 | |
Balance, December 31, 2017 | | 1,754,561 |
| | (52,822 | ) | | 582,683 |
| | 14,822 |
| | 2,299,244 |
| |
Cumulative effect of accounting changes | | — |
| | 433 |
| | 15,773 |
| | — |
| | 16,206 |
| |
Balance, January 1, 2018 | | 1,754,561 |
| | (52,389 | ) | | 598,456 |
| | 14,822 |
| | 2,315,450 |
| |
Balance, December 31, 2020 | | Balance, December 31, 2020 | | 1,486,730 | | | (146,840) | | | 671,570 | | | 64,916 | | | 2,076,376 | |
Stock-based compensation | | 5,435 |
| | — |
| | — |
| | — |
| | 5,435 |
| Stock-based compensation | | 3,046 | | | — | | | — | | | — | | | 3,046 | |
Capital contribution from EchoStar Corporation | | 7,125 |
| | — |
| | — |
| | — |
| | 7,125 |
| |
Contribution by non-controlling interest holder | | Contribution by non-controlling interest holder | | — | | | — | | | — | | | 9,880 | | | 9,880 | |
Dividend paid to EchoStar | | Dividend paid to EchoStar | | — | | | — | | | (100,000) | | | — | | | (100,000) | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | | — | | | (26,541) | | | — | | | (4,389) | | | (30,930) | |
Net income (loss) | | Net income (loss) | | — | | | — | | | 120,771 | | | (10,154) | | | 110,617 | |
Balance, December 31, 2021 | | Balance, December 31, 2021 | | 1,489,776 | | | (173,381) | | | 692,341 | | | 60,253 | | | 2,068,989 | |
Stock-based compensation | | Stock-based compensation | | 4,318 | | | — | | | — | | | — | | | 4,318 | |
Issuance of equity and contribution of assets pursuant to the India JV formation | | Issuance of equity and contribution of assets pursuant to the India JV formation | | (14,237) | | | — | | | — | | | 44,540 | | | 30,303 | |
Dividend paid to EchoStar | | Dividend paid to EchoStar | | — | | | — | | | (100,000) | | | — | | | (100,000) | |
Other comprehensive income (loss) | | — |
| | (31,385 | ) | | — |
| | (1,389 | ) | | (32,774 | ) | Other comprehensive income (loss) | | — | | | 3,197 | | | — | | | 1,708 | | | 4,905 | |
Net income (loss) | | — |
| | — |
| | 95,501 |
| | 1,842 |
| | 97,343 |
| Net income (loss) | | — | | | — | | | 149,413 | | | (10,503) | | | 138,910 | |
Other, net | | (84 | ) | | — |
| | — |
| | — |
| | (84 | ) | Other, net | | — | | | — | | | — | | | 438 | | | 438 | |
Balance, December 31, 2018 | | 1,767,037 |
| | (83,774 | ) | | 693,957 |
| | 15,275 |
| | 2,392,495 |
| |
Stock-based compensation | | 5,436 |
| | — |
| | — |
| | — |
| | 5,436 |
| |
Capital contribution from EchoStar Corporation | | 9,606 |
| | — |
| | — |
| | — |
| | 9,606 |
| |
Purchase of non-controlling interest | | (833 | ) | | — |
| | — |
| | (6,480 | ) | | (7,313 | ) | |
Net assets distributed pursuant to the BSS Transaction | | (332,699 | ) | | — |
| | — |
| | — |
| | (332,699 | ) | |
Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | | 29,576 |
| | — |
| | — |
| | 73,199 |
| | 102,775 |
| |
Other comprehensive income (loss) | | — |
| | (862 | ) | | — |
| | 3,328 |
| | 2,466 |
| |
Net income (loss) | | — |
| | — |
| | (29,542 | ) | | (11,335 | ) | | (40,877 | ) | |
Other, net | | 513 |
| | — |
| | — |
| | 1,761 |
| | 2,274 |
| |
Balance, December 31, 2019 | | $ | 1,478,636 |
| | $ | (84,636 | ) | | $ | 664,415 |
| | $ | 75,748 |
| | $ | 2,134,163 |
| |
Balance, December 31, 2022 | | Balance, December 31, 2022 | | $ | 1,479,857 | | | $ | (170,184) | | | $ | 741,754 | | | $ | 96,436 | | | $ | 2,147,863 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-8
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 138,910 | | | $ | 110,617 | | | $ | (2,429) | |
Adjustments to reconcile net income (loss) to cash flows provided by (used for) operating activities: | | | | | | |
Depreciation and amortization | | 431,065 | | | 464,146 | | | 498,876 | |
Impairment of long-lived assets | | — | | | 210 | | | — | |
Losses (gains) on investments, net | | (245) | | | (2,103) | | | 232 | |
Equity in losses (earnings) of unconsolidated affiliates, net | | 5,703 | | | 5,347 | | | 6,116 | |
Foreign currency transaction losses (gains), net | | (6,016) | | | 11,494 | | | (3,427) | |
Deferred tax provision (benefit), net | | (48,875) | | | (38,276) | | | (4,261) | |
Stock-based compensation | | 4,318 | | | 3,046 | | | 5,167 | |
Amortization of debt issuance costs | | 783 | | | 2,381 | | | 4,324 | |
Other, net | | 8,015 | | | 21,082 | | | 2,007 | |
Changes in assets and liabilities, net: | | | | | | |
Trade accounts receivable and contract assets, net | | (50,670) | | | (2,342) | | | (2,755) | |
Other current assets, net | | 3,513 | | | 9,446 | | | 6,040 | |
Trade accounts payable | | 511 | | | (13,659) | | | (7,071) | |
Contract liabilities | | (19,604) | | | 36,774 | | | 3,509 | |
Accrued expenses and other current liabilities | | 89,961 | | | (17,383) | | | 73,746 | |
Non-current assets and non-current liabilities, net | | (18,517) | | | 71,531 | | | (51,734) | |
Net cash provided by (used for) operating activities | | 538,852 | | | 662,311 | | | 528,340 | |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Purchases of marketable investment securities | | (986,736) | | | (1,517,849) | | | (2,035,712) | |
Sales and maturities of marketable investment securities | | 1,045,950 | | | 1,864,186 | | | 1,482,704 | |
Expenditures for property and equipment | | (239,403) | | | (296,303) | | | (355,238) | |
Expenditures for externally marketed software | | (23,105) | | | (33,543) | | | (38,655) | |
Sales of other investments | | — | | | 9,451 | | | — | |
India JV formation | | (7,892) | | | — | | | — | |
Dividend received from unconsolidated affiliate | | 2,000 | | | — | | | — | |
Net cash provided by (used for) investing activities | | (209,186) | | | 25,942 | | | (946,901) | |
| | | | | | |
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | |
Repurchase and maturity of the 2021 Senior Unsecured Notes | | — | | | (901,818) | | | — | |
Payment of finance lease obligations | | (120) | | | (670) | | | (811) | |
Payment of in-orbit incentive obligations | | (2,988) | | | (2,214) | | | (1,554) | |
Contribution by non-controlling interest holder | | — | | | 9,880 | | | 18,241 | |
Dividend paid to EchoStar | | (100,000) | | | (100,000) | | | — | |
Other, net | | — | | | (966) | | | 998 | |
Net cash provided by (used for) financing activities | | (103,108) | | | (995,788) | | | 16,874 | |
| | | | | | |
Effect of exchange rates on cash and cash equivalents | | (2,233) | | | (3,614) | | | 2,662 | |
Net increase (decrease) in cash and cash equivalents | | 224,325 | | | (311,149) | | | (399,025) | |
Cash and cash equivalents, including restricted amounts, beginning of period | | 430,148 | | | 741,297 | | | 1,140,322 | |
Cash and cash equivalents, including restricted amounts, end of period | | $ | 654,473 | | | $ | 430,148 | | | $ | 741,297 | |
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Cash flows from operating activities: | | |
| | |
| | |
|
Net income (loss) | | $ | (40,877 | ) | | $ | 97,343 |
| | $ | 297,553 |
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | |
| | |
| | |
|
Depreciation and amortization | | 550,723 |
| | 551,416 |
| | 496,798 |
|
Impairment of long-lived assets | | — |
| | — |
| | 6,000 |
|
Losses (gains) on investments, net | | 8,464 |
| | (184 | ) | | 1,574 |
|
Equity in losses (earnings) of unconsolidated affiliates, net | | 3,333 |
| | (4,791 | ) | | (7,027 | ) |
Foreign currency transaction losses (gains), net | | 9,855 |
| | 12,484 |
| | 1,158 |
|
Deferred tax provision (benefit), net | | 14,703 |
| | 43,698 |
| | (268,071 | ) |
Stock-based compensation | | 5,436 |
| | 5,435 |
| | 5,117 |
|
Amortization of debt issuance costs | | 5,912 |
| | 7,923 |
| | 7,378 |
|
Dividends received from unconsolidated affiliates | | 2,716 |
| | 10,000 |
| | 19,000 |
|
Proceeds from sale of trading securities | | — |
| | — |
| | 8,922 |
|
Changes in current assets and current liabilities, net: | | |
| |
|
| |
|
|
Trade accounts receivable and contract assets, net | | 8,398 |
| | (17,840 | ) | | (12,459 | ) |
Advances to and from affiliates, net | | (36,662 | ) | | 7,276 |
| | 12,176 |
|
Other current assets | | (44,752 | ) | | 13,429 |
| | (51,994 | ) |
Trade accounts payable | | 13,510 |
| | 6,258 |
| | (4,826 | ) |
Contract liabilities | | 26,411 |
| | 7,832 |
| | 5,970 |
|
Accrued expenses and other current liabilities | | 93,117 |
| | 9,007 |
| | 7,731 |
|
Changes in non-current assets and non-current liabilities, net | | 13,557 |
| | (2,680 | ) | | (30,831 | ) |
Other, net | | (240 | ) | | (3,903 | ) | | 2,860 |
|
Net cash flows from operating activities | | 633,604 |
| | 742,703 |
| | 497,029 |
|
Cash flows from investing activities: | | |
| | |
| | |
|
Purchases of marketable investment securities | | (709,350 | ) | | (2,063,042 | ) | | (535,476 | ) |
Sales and maturities of marketable investment securities | | 1,665,269 |
| | 909,996 |
| | 259,263 |
|
Investments in unconsolidated affiliates | | 7,851 |
| | (100,991 | ) | | — |
|
Dividend received from unconsolidated affiliate | | 2,284 |
| | — |
| | — |
|
Expenditures for property and equipment | | (309,291 | ) | | (391,065 | ) | | (401,538 | ) |
Refunds and other receipts related to property and equipment | | — |
| | 77,524 |
| | 4,311 |
|
Expenditures for externally marketed software | | (29,310 | ) | | (31,639 | ) | | (31,331 | ) |
Purchases of regulatory authorizations | | (7,850 | ) | | — |
| | — |
|
Payment for EchoStar XXI launch services | | ��� |
| | (7,125 | ) | | — |
|
Net cash flows from investing activities | | 619,603 |
| | (1,606,342 | ) | | (704,771 | ) |
|
| | | | | | | | | | | | |
Cash flows from financing activities: | | |
| | |
| | |
|
Repurchase and maturity of the 2019 Senior Secured Notes | | (920,923 | ) | | (70,173 | ) | | — |
|
Repayment of other long-term debt and finance lease obligations | | (29,347 | ) | | (41,019 | ) | | (37,063 | ) |
Payment of in-orbit incentive obligations | | (4,430 | ) | | (4,796 | ) | | (5,850 | ) |
Capital contribution from EchoStar | | — |
| | 7,125 |
| | — |
|
Purchase of non-controlling interest | | (7,313 | ) | | — |
| | — |
|
Other, net | | 1,172 |
| | — |
| | 1,036 |
|
Net cash flows from financing activities | | (960,841 | ) | | (108,863 | ) | | (41,877 | ) |
Effect of exchange rates on cash and cash equivalents | | (663 | ) | | (2,233 | ) | | 1,286 |
|
Net increase (decrease) in cash and cash equivalents | | 291,703 |
| | (974,735 | ) | | (248,333 | ) |
Cash and cash equivalents, including restricted amounts, beginning of period | | 848,619 |
| | 1,823,354 |
| | 2,071,687 |
|
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,140,322 |
| | $ | 848,619 |
| | $ | 1,823,354 |
|
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest (including capitalized interest) | | $ | 216,025 |
| | $ | 250,576 |
| | $ | 236,232 |
|
Cash paid for income taxes | | $ | 3,094 |
| | $ | 4,837 |
| | $ | 3,574 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-9
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
Hughes Satellite Systems Corporation (which, together with its subsidiaries, is referred to as “HSS,“HSSC,” the “Company,” “we,” “us” and “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar” and “parent”). We are an industry leader in both networking technologies and services, innovating to deliver the global solutions that power a global provider of broadband satellite technologies, broadbandconnected future for people, enterprises and things everywhere. We provide internet services forto consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovativeand multi-transport technologies and managed network technologies, managed services and communications solutions forto enterprise customers, which includetelecommunications providers, aeronautical service providers and government enterprises.entities, including the U.S. Department of Defense. We operate in the following 2two business segments:
| |
• | •Hughes segment — which provides broadband satellite technologies and broadband internet products and services to consumer customers. We provide broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to government and enterprise customers. We also design, provide and install gateway and terminal equipment to customers for other satellite systems. In addition, we design, develop, construct and provide telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers. •Echostar Satellite Services segment (“ESS segment”) — which provides satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the EchoStar IX satellite and the EchoStar 105/SES-11 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers.
— which provides broadband satellite technologies and broadband internet services to domestic and international consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
|
| |
• | ESS — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use basis to United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.
|
Our operations also include various corporate departmentsfunctions (primarily Executive, Treasury, Strategic Development, Human Resources, IT,Information Technology, Finance, Accounting, Real Estate and Legal) and other activities, that have not been assigned to our operating segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments.investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other. segment in our segment reporting. We also divide our operations by primary geographic market as follows: (i) North America (the U.S. and its territories, Mexico, and Canada); (ii) South and Central America and;and (iii) All otherOther (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 18.20. Segment Reporting for further detail.
In May 2019, EchoStar and one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), entered into a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”). Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred to BSS Corp. certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily relating to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and EchoStar’s joint venture Dish Mexico, S. de R.L. de C.V., (“Dish Mexico”) and its subsidiaries and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of EchoStar’s and our other businesses (collectively, the “BSS Business”); (ii) EchoStar distributed to each holder of shares of EchoStar’s Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of EchoStar’s Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and DISH owns and operates the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
In connection with the BSS Transaction, EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively. Additionally, EchoStar and DISH and certain of our, EchoStar’s and DISH’s subsidiaries, as applicable, have (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services; (ii) terminated certain previously existing
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
agreements; and (iii) amended certain existing agreements and entered into certain new agreements pursuant to which we, EchoStar and certain of our and its other subsidiaries, on the one hand, and DISH Network, on the other hand, will obtain and provide certain products, services and rights from and to each other.
The BSS Transaction was structured in a manner intended to be tax-free to EchoStar and its stockholders for U.S. federal income tax purposes and was accounted for as a spin-off to EchoStar’s stockholders as we and EchoStar did not receive any consideration. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded from continuing operations and segment results for all periods presented in these Consolidated Financial Statements.
During 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries. EchoStar and certain of its and our subsidiaries received all the shares of the Hughes Retail Preferred Tracking Stock previously issued by EchoStar and us (together, the “Tracking Stock”) in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of EchoStar’s former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Following the consummation of the Share Exchange, EchoStar no longer operates its former EchoStar Technologies businesses, the Tracking Stock was retired and is no longer outstanding, and all agreements, arrangements and policy statements with respect to the Tracking Stock terminated.
Refer to Note 5. Discontinued Operations for further detail. Additionally, all amounts in the following footnotes reference results from continuing operations unless otherwise noted.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
These Consolidated Financial Statements and the accompanying notes (collectively, the “Consolidated Financial Statements”) are prepared in conformity with U.S. generally accepted accounting principles in the United States (“U.S. GAAP”). We consolidate all entities in which we have a controlling financial interest. We are deemed to have a controlling financial interest in variable interest entities in which we are the primary beneficiary and in other entities in which we own more than 50% of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a non-controlling interest within shareholders’shareholder’s equity for the portion of the entity’s equity attributed to the non-controlling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.
All amounts presented in these Consolidated Financial Statements and their accompanying notes are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Reclassification
HUGHES SATELLITE SYSTEMS CORPORATION
Certain prior period amounts have been reclassified to conform with the current period presentation.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Use of Estimates
We are required to make certain estimates and assumptions that affect the amounts reported in these Consolidated Financial Statements. The most significant estimates and assumptions are used in determining: (i) inputs used to recognize revenue over time, including amortization periods for deferred contract acquisition costs; (ii) allowances for doubtful accounts; (iii) deferred taxes and related valuation allowances, including uncertain tax positions; (iv) loss contingencies; (v) fair value of financial instruments; (vi) fair value of assets and liabilities acquired in business combinations; and (vii) assetassets and goodwill impairment testing.
We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts and such differences may be material to our financial statements. Additionally, changing economic conditions may increase the inherent uncertainty in the estimates
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
and assumptions indicated above. We review our estimates and assumptions periodically and the effects of revisions thereto are reflected in the period they occur or prospectively if the revised estimate affects future periods.
Fair Value Measurements
We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs. We utilize the highest level of inputs available according to the following hierarchy in determining fair value:
| |
• | •Level 1 - Defined as observable inputs being quoted prices in active markets for identical assets; •Level 2 - Defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and •Level 3 - Defined as unobservable inputs for which little or no market data exists, consistent with characteristics of the asset or liability that would be considered by market participants in a transaction to purchase or sell the asset or liability.
|
| |
• | Level 2 - Defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
|
| |
• | Level 3 - Defined as unobservable inputs for which little or no market data exists, consistent with characteristics of the asset or liability that would be considered by market participants in a transaction to purchase or sell the asset or liability.
|
Fair values of our marketable investment securities are measured on a recurring basis based on a variety of observable market inputs. For our investments in publicly traded equity securities and U.S. government securities, fair value ordinarily is determined based on Level 1 measurements that reflect quoted prices for identical securities in active markets. Fair values of our investments in other marketable debt securities are generally based on Level 2 measurements as the markets for such debt securities are less active. We consider trades of identical debt securities on or near the measurement date as a strong indication of fair value and matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features may also be used to determine fair value of our investments in marketable debt securities. Fair values for our outstanding debt are based on quoted market prices in less active markets and are categorized as Level 2 measurements. Additionally, we use fair value measurements from time to time in connection with other investments, asset impairment testing and the assignment of purchase consideration to assets and liabilities of acquired companies. Those fair value measurements typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.
Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period. There were 0no transfers between levels during the years ended December 31, 20192022 and 2018.2021.
As of December 31, 20192022 and 2018,2021, the carrying amounts of our cash and cash equivalents, trade accounts receivable and contract assets, net, trade accounts payable, and accrued expenses and other current liabilities were equal to or approximated their fair value due to their short-term nature or proximity to current market rates.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Revenue Recognition
Overview
Revenue is recognized upon transfer of control of the promised goods or our performance of the services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts that may include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations.
We also recognize lease revenue which is derived from leases of property and equipment which, for operating leases, is reported in Services and other revenue in the Consolidated Statements of Operations and, for sales-type leases, is reported in Equipment revenue in the Consolidated Statements of Operations. Certain of our customer contracts contain embedded equipment leases, which we separate from non-lease components of the contract based on the relative standalone selling prices of the lease and non-lease components.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Hughes Segment
Our Hughes segment service contracts typically obligate us to provide substantially the same services on a recurring basis in exchange for fixed recurring fees over the term of the contract. We satisfy such performance obligations over time and recognize revenue ratably as services are rendered over the service period. Certain of our contracts with service obligations provide for fees based on usage, capacity or volume. We satisfy these performance obligations and recognize the related revenue at the point in time, or over the period, when the services are rendered. Our Hughes segment also sells and leases communications equipment to its customers. Revenue from equipment sales generally is recognized based upon shipment terms. Our equipment sales contracts typically include standard product warranties, but generally do not provide for returns or refunds. Revenue for extended warranties is recognized ratably over the extended warranty period. For contracts with multiple performance obligations, we typically allocate the contract’s transaction price to each performance obligation based on their relative standalone selling prices. When the standalone selling price is not observable, our primary method used to estimate standalone selling price is the expected cost plus a margin. Our contracts generally require customer payments to be made at or shortly after the time we transfer control of goods or perform the services.
In addition to equipment and service offerings, our Hughes segment also enters into long-term contracts to design, develop, construct and install complex telecommunication networks for mobile system operators and enterprise customers. Revenue from such contracts is generally recognized over time as a measure of progress that depicts the transfer of control of the goods or services to the customer. Depending on the nature of the arrangement, we measure progress toward contract completion using an appropriate input method or output method. Under the input method, we recognize the transaction price as revenue based on the ratio of costs incurred to estimated total costs at completion. Under the output method, revenue and cost of sales are recognized as products are delivered based on the expected profit for the entire agreement. Profit margins on long-term contracts generally are based on estimates of revenue and costs at completion. We review and revise our estimates periodically and recognize related adjustments in the period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified. We generally receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment.
ESS Segment
Generally, our ESS segment service contracts with customers contain a single performance obligation and, therefore, there is no need to allocate the transaction price. We transfer control and recognize revenue for satellite services at the point in time or over the period when the services are rendered.
Lease Revenue
We lease satellite capacity, communications equipment and real estate to certain of our customers. We identify and determine the classification of such leases as operating leases or sales-type leases. A lease is classified as a sales-type lease if it meets the criteria for a finance lease; otherwise it is classified as an operating lease. Some of
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
our leases are embedded in contracts with customers that include non-lease performance obligations. For such contracts, except where we have elected otherwise, we allocate consideration in the contract between lease and non-lease components based on their relative standalone selling prices. We elected an accounting policy to not separate the lease of equipment from related services in our HughesNet satellite internet service (the “HughesNet service”) contracts with customers and account for all revenue from such contracts as non-lease service revenue. Assets subject to operating leases remain in Property and equipment, net and continue to be depreciated. Assets subject to sales-type leases are derecognized from Property and equipment, net at lease commencement and a net investment in the lease asset is recognized in Trade accounts receivable and contract assets, net and Other non-current assets, net.
Operating lease revenue is generally recognized on a straight-line basis over the lease term. Sales-type lease revenue and a corresponding receivable generally are recognized at lease commencement based on the present value of the future lease payments and related interest income on the receivable is recognized over the lease term. Payments under sales-type leases are discounted using the interest rate implicit in the lease or our incremental borrowing rate if the interest rate implicit in the lease cannot be reasonably determined. We report revenue from sales-type leases at the commencement date in Equipment revenue and periodic interest income in Services and other revenue. We report operating lease revenue in Services and other revenue.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other
Sales and Value Added Taxes, Universal Service Fees and other taxes that we collect concurrent with revenue producing activities are excluded from revenue and included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost after control over a product has transferred to the customer and are included in Cost of sales - equipment in the Consolidated Statements of Operations at the time of shipment.
Cost of Sales - Services and Other
Cost of sales - services and other in the Consolidated Statements of Operations primarily consists of costs of satellite capacity and services, hub infrastructure, customer care, wireline and wireless capacity and direct labor costs associated with the services provided and is generally charged to expense as incurred.
Cost of Sales - Equipment
Cost of sales - equipment in the Consolidated Statements of Operations primarily consists of inventory costs, including freight and royalties, and is generally recognized at the point in time control of the equipment is passed to the customer and related revenue is recognized.
Additionally, customer-related research and development costs are incurred in connection with the specific requirements of a customer’s order; in such instances, the amounts for these customer funded development efforts are also included in Cost of sales - equipment in the Consolidated Statements of Operations.
Stock-based Compensation Expense
Stock-based compensation expense is recognized based on the fair value of stock awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense for awards with service conditions only is recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense for awards subject to performance conditions is recognized only when satisfaction of the performance condition is probable.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Advertising Costs
Advertising costs are expensed as incurred and are included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
Research and Development
Research and development costs, not incurred in connection with customer requirements, are generally expensed when incurred.
Debt Issuance Costs
Costs of issuing debt generally are deferred and amortized utilizing the effective interest method, with amortization included in Interest expense, net of amounts capitalized in the Consolidated Statements of Operations. We report unamortized debt issuance costs as a reduction of the related long-term debt in the Consolidated Balance Sheets.
Foreign Currency
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The functional currency for certain of our foreign operations is determined to be the local currency. Accordingly, we translate assets and liabilities of these foreign entities from their local currencies to U.S. dollars using period-end exchange rates and translate income and expense accounts at monthly average rates. The resulting translation adjustments are reported as Foreign currency translation adjustments in the Consolidated Statements of Comprehensive Income (Loss). Except in certain uncommon circumstances, we have not recorded deferred income taxes related to our foreign currency translation adjustments.
Gains and losses resulting from the re-measurement of transactions denominated in foreign currencies are recognized in Foreign currency transaction gains (losses), net in the Consolidated Statements of Operations.
Income Taxes
We are included in the consolidated federal income tax return of EchoStar. We recognize a provision or benefit for income taxes currently payable or receivable and for income tax amounts deferred to future periods based upon a separate return allocation method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity. Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between U.S. GAAP carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are offset by valuation allowances when we determine it is more likely than not that such deferred tax assets will not be realized in the foreseeable future. We determine deferred tax assets and liabilities separately for each taxing jurisdiction and report the net amount for each jurisdiction as a non-current asset or liability in the Consolidated Balance Sheets.
From time to time, we engage in transactions where the income tax consequences are uncertain. We recognize tax benefits when, in management’s judgment, a tax filing position is more likely than not to be sustained if challenged by the tax authorities. For tax positions that meet the more-likely-than-not threshold, we may not recognize a portion of a tax benefit depending on management’s assessment of how the tax position will ultimately be settled. Unrecognized tax benefits generally are netted against the deferred tax assets associated with our net operating loss and tax credit carryforwards. We adjust our estimates periodically based on ongoing examinations by, and settlements with, various taxing authorities, as well as changes in tax laws, regulations and precedent. Estimates of our uncertain tax positions are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, we will record additional income tax provision or benefit in the period in which such resolution occurs. We classify interest and penalties, if any, associated with our unrecognized tax benefits as a component of income tax provision or benefit.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Lessee Accounting
We lease real estate, satellite capacity and equipment inAt the conductinception of our business operations. For contracts entered into on or after January 1, 2019, ata contract, inception, we assess whether the contract is, or contains, a lease. Generally, we determine that a lease exists whenThe assessment is based on (i) whether the contract involves the use of a distinct identified asset, (ii) whether we obtain the right to substantially all the economic benefitsbenefit from the use of the asset throughout the period, and (iii) whether we have the right to direct the use of the asset. Our operating leases consist primarily of leases for office space, data centers and satellite-related ground infrastructure.
A lease is classified as a finance lease when one or more of the following criteria are met: (i) the lease transfers ownership of the asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (iii) the lease term is for a major part of the remaining useful life of the asset, (iv) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (v) the asset is of a specialized nature and there is not expected to be an alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria. Our operating leases consist primarily of leases for office space, data centers and satellite ground facilities. Our finance leases consist primarily of leases for satellite capacity.
At theAll significant lease commencement date, we recognize aarrangements are generally recognized at lease commencement. Operating lease right-of-use (“ROU”) assets and lease liabilities are recognized at commencement. An ROU asset and acorresponding lease liability are not recorded for all leases, except short-term leases with an originalinitial term of 12 months or less. The right-of-use asset representsless (short-term leases), and we recognize lease expense for these leases as incurred over the lease term. ROU assets represent our right to use an underlying asset during the leased asset forreasonably certain lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease term including any renewal options we arewhen it is reasonably certain to exercise. that we will exercise that option.
The lease liability represents the present value of the lease payments under the lease. The right-of-useROU asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the minimum lease payments, discounted using an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The incremental borrowing rates used for the initial measurement of lease liabilities are based on the original lease terms. In determining our incremental borrowing rate, we consider the lease term, secured incremental borrowing rate, and for leases denominated in a currency different than U.S. dollar, the collateralized borrowing rate in the foreign currency using the U.S. dollar and foreign currency swap spread, when available.
We report operating lease right-of-useROU assets in Operating lease right-of-use assets and operating lease liabilities in Accrued expenses and other current liabilities and Operating lease liabilities. We report finance lease right-of-useROU assets in Property and equipment, net and finance lease liabilities in Current portion of long-term debt, and finance lease obligationsnet and Long-term debt, and finance lease obligations, net of current portion.
Other Comprehensive Income (Loss)
Minimum lease payments
The amounts reclassified to net income (loss) related to unrealized gain (loss) on available-for-sale securities are included in the measurement of lease liabilities consist of (i) fixed lease payments for the non-cancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised and (iii) variable lease payments that dependGains (losses) on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. We elected an accounting policy to not account for such payments separately from the related lease payments. Our policy election results in a higher initial measurement of lease liabilities when such non-lease payments are fixed amounts. Certain of our real estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as sales and value-added taxes and our proportionate share of actual property taxes, insurance and utilities, which are recognized in operating expenses as incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments.
Business Combinations
We account for all business combinations that result in our control over another entity by using the acquisition method of accounting, which requires us to allocate the purchase price of the acquired business to the identifiable tangible and intangible assets acquired and liabilities assumed, including contingent consideration, and non-controlling interests, based upon their estimated fair values at the date of acquisition. The difference between the purchase price and the excess of the aggregate estimated fair values of assets acquired and liabilities assumed is recorded as goodwill. In determining the estimated fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods including present value modeling, referenced market values, where available and cost based approaches. Valuations are performed by management or independent valuation specialists under management’s supervision, where appropriate.
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed and contingent consideration, where applicable. While we believe the assumptions and estimates we have made are reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired business and are inherently uncertain and subject to refinement.
We believe that the estimated fair values assigned to the assets we have acquired and liabilities we have assumed are based on reasonable and appropriate assumptions. While we believe our estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets we have acquired and liabilities we have assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the estimated fair values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments would be recordedinvestments, net in the Consolidated Statements of Operations. In addition, results of operations of the acquired company are included in the our results from the date of the acquisition forward and include amortization expense arising from acquired intangible assets. We expense all costs as incurred related to or involved with an acquisition in
Other, net, in the Consolidated Statements of Operations.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cash and Cash Equivalents
We consider all liquid investments purchased with an original maturity of less than 90 days to be cash equivalents. Cash equivalents as of December 31, 20192022 and 20182021 primarily consisted of commercial paper, government bonds, corporate notes and money market funds. The amortized cost of these investments approximates their fair value.
Marketable Investment Securities
Debt Securities
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our commercial paper portfolio includes instruments issued by individual corporations, primarily in the industrial, financial services and utilities industries. Our other debt securities portfolio
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
includes investments in various debt instruments, including U.S. government bonds and mutual funds. We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
We account for our debt securities as available-for-sale or using the fair value option based on our investment strategy for the securities. For available-for-sale debt securities, we recognize periodic changes in the difference between fair value and amortized cost in Unrealized gains (losses) on available-for-sale securities in the Consolidated Statements of Comprehensive Income (Loss). Gains and losses realized upon sales of available-for-sale debt securities are reclassified from other comprehensive income (loss) and recognized on the trade date in Gains (losses) on investments, net in the Consolidated Statements of Operations. We use the first-in, first-out (“FIFO”) method to determine the cost basis on sales of available-for-sale debt securities. Interest income from available-for-sale debt securities is reported in Interest income, net in the Consolidated Statements of Operations.
We periodically evaluate our available-for-sale debt securities portfolio to determine whether any declines in the fair value of these securities are other-than-temporary. Our evaluation considers, among other things, (i) the length of time and extent to which the fair value of such security has been lower than amortized cost, (ii) market and company-specific factors related to the security and (iii) our intent and ability to hold the investment to maturity or when it recovers its value. We generally consider a decline to be other-than-temporary when (i) we intend to sell the security, (ii) it is more likely than not that we will be required to sell the security before maturity or when it recovers its value or (iii) we do not expect to recover the amortized cost of the security at maturity. Declines in the fair value of available-for-sale debt securities that are determined to be other-than-temporary are reclassified from other comprehensive income (loss) and recognized in Net income (loss) in the Consolidated Statements of Operations, thus establishing a new cost basis for the investment.
From time to time we make strategic investments in marketable corporate debt securities. Generally, we elect to account for these debt securities using the fair value option because it results in consistency in accounting for unrealized gains and losses for all securities in our portfolio of strategic investments. When we elect the fair value option for investments in debt securities, we recognize periodic changes in fair value of these securities in Gains (losses) on investments, net in the Consolidated Statements of Operations. Interest income from these securities is reported in Interest income, net in the Consolidated Statements of Operations.
Equity Securities
We account for our equity securities with readily determinable fair values at fair value and recognize periodic changes in the fair value in Gains (losses) on investments, net in the Consolidated Statements of Operations. We recognize dividend income on equity securities on the ex-dividend date and report such income in Other, net in the Consolidated Statements of Operations.
Restricted Marketable Investment Securities
Restricted marketable investment securities that are pledged as collateral for our letters of credit and surety bonds are included in Other non-current assets, net in the Consolidated Balance Sheets. Restricted marketable securities are accounted for in the same manner as marketable securities that are not restricted, but are presented differently in the Consolidated Balance Sheets due to the restrictions.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Trade Accounts Receivable
Trade accounts receivable includes amounts billed and currently due from customers and represents our unconditional rights to consideration arising from our performance under our customer contracts. Trade accounts receivable also includes amounts due from customers under our leasing arrangements. We make ongoing estimates relating to the collectability of our trade accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make the required payments. In determining the amount of the allowance, we consider historical levels of credit losses and make judgments about the creditworthiness of our customers based on ongoing credit evaluations. Past due trade accounts receivable balances are written off when our internal collection efforts have been unsuccessful. Bad debt expense related to our trade accounts receivable and other contract assets is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Contract Assets
Contract assets represent revenue that we have recognized in advance of billing the customer and are included in Trade accounts receivable and contract assets, net or Other non-current assets, net in the Consolidated Balance Sheets based on the expected timing of customer payment. Our contract assets typically relate to our long-term contracts where we recognize revenue using the cost-based input method and the revenue recognized exceeds the amount billed to the customer. Our contract assets also include receivables related to sales-type leases recognized over the lease term as the customer is billed.
Contract Acquisition Costs
Our contract acquisition costs represent incremental direct costs of obtaining a contract and consist primarily of sales incentives paid to employees and third-party representatives. When we determine that our contract acquisition costs are recoverable, we defer and amortize the costs over the contract term, or over the estimated life of the customer relationship if anticipated renewals are expected and the incentives payable upon renewal are not commensurate with the initial incentive. We amortize contract acquisition costs in proportion to the revenue to which the costs relate. We expense sales incentives as incurred if the expected amortization period is one year or less. Unamortized contract acquisition costs are included in Other non-current assets, net in the Consolidated Balance Sheets and related amortization expense is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost of inventory is determined using the FIFO method and consists primarily of materials, direct labor and indirect overhead incurred in the procurement and manufacturing of our products. We use standard costing methodologies in determining the cost of certain of our finished goods and work-in-process inventories. We determine net realizable value using our best estimates of future use or recovery, considering the aging and composition of inventory balances, the effects of technological and/or design changes, forecasted future product demand based on firm or near-firm customer orders and alternative means of disposition of excess or obsolete items. We recognize losses within Cost of sales - equipment in the Consolidated Statements of Operations when we determine that the cost of inventory and commitments to purchase inventory exceed net realizable value.
Property and Equipment
Satellites
Satellites are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over their estimated useful lives. The cost of our satellites includes construction costs, including the present value of in-orbit incentives payable to the satellite manufacturer, launch costs, capitalized interest and related insurance premiums. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We have satellites acquired under finance leases. The recorded costs of those satellites are the present values of all lease payments. We amortize our finance lease right-of-useROU satellites over their respective lease terms.
Our satellites may experience anomalies from time to time, some of which may have a significant adverse effect on their remaining useful lives, the commercial operation of the satellites or our operating results or financial position.
We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Certain anomalies may be considered a significant adverse change in the physical condition of a particular satellite. However, based on redundancies designed within each satellite, certain of these anomalies may not be considered to be significant events requiring a test of recoverability.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We generally do not carry in-orbit insurance on our satellites and payloads because we have assessed that the cost of insurance is not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. However, we may be required to carry insurance on specific satellites and payloads per the terms of certain agreements. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.
Other Property and Equipment
Other property and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over their estimated useful lives. Other property and equipment includes: land; buildings and improvements; furniture, fixtures, equipment and internal-use software; customer premises equipment; and construction in process. Costs related to the procurement and development of software for internal-use are capitalized and amortized using the straight-line method over the estimated useful life of the software, not in excess of five years. Repair and maintenance costs are charged to expense when incurred.
Goodwill
Goodwill representsWe account for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the cost of acquired businessespurchase price over the estimated fair values assigned toof the identifiablenet assets acquired and liabilities assumed. We test goodwill for impairment annually in our second fiscal quarter, or more frequently if indicators of impairment may exist.is recorded as goodwill. All of our goodwill is assigned to our Hughes segment, as it was generated through EchoStar’s acquisition of Hughes Communications, Inc. (“Hughes Communications”) and its subsidiaries in 2011 (the “Hughes Acquisition”), and the agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat contributed its satellite communications services business in Brazil to one of our Brazilian subsidiaries in exchange for a 20% equity ownership interest in that subsidiary (the “Yahsat Brazil JV Transaction”).segment.
We considerevaluate goodwill for impairment on an annual basis in our second fiscal quarter or whenever events and changes in circumstances indicate the carrying amounts may not be recoverable. Impairments may result from, among other things, deterioration in financial and operational performance, declines in stock price, increased attrition, adverse market conditions, adverse changes in applicable laws and/or regulations, deterioration of general macroeconomic conditions, fluctuations in foreign exchange rates, increased competitive markets in which we operate in, declining financial performance over a sustained period, changes in key personnel and/or strategy, and a variety of other factors. Our impairment assessment typically begins with a qualitative factorsassessment to assess ifdetermine whether it is more likely than not that the fair value for goodwillof the reporting unit is below theless than its carrying amount. We may also elect to bypass theThe qualitative assessment and perform a quantitative assessment.includes comparing the overall financial performance against the planned results. In conducting athe performance of the qualitative assessment, we analyze a variety of events or factors that may influence the fair value of the reporting unit, that could include, but are not limited to: macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity-specific events which requires significant judgment. If we determine in the qualitative assessment that it is more likely than not that the fair value is less than its carrying value, then we perform a quantitative assessment to determine the estimated fair value of the indefinite lived asset or reporting unit. We could also choose the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test. In the quantitative assessment, fair value is usually estimated using two valuation approaches: the discounted cash flows method and the market comparable method. In the performance of the quantitative assessment, we use a variety of inputs, some of which may require significant judgment, that influence the fair value of the reporting unit, that could include, but are not limited to: discount rate, revenue growth rate, amount and timing of future cash flows, guideline public company metrics, and comparable market transactions. In addition, we also perform a market capitalization reconciliation to compare the estimated fair value, determined using the discounted cash flows method and the market comparable method, to the Company’s market capitalization as of the date of the test. If the carrying value exceeds the estimated fair value, then an impairment is recognized for the difference.
There has been no impairment to date.
Regulatory Authorizations
Finite Lived
We have regulatory authorizations that are not related to the Federal Communications Commission (“FCC”) and have determined that they have finite lives due to uncertainties about the ability to extend or renew their terms.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Finite lived regulatory authorizations are amortized over their estimated useful lives on a straight-line basis. Renewal costs are usually capitalized when they are incurred.
Indefinite Lived
We also have indefinite lived regulatory authorizations that primarily consist of FCC authorizations and certain other contractual or regulatory rights to use spectrum at specified orbital locations. We have determined that our FCC authorizations generally have indefinite useful lives based on the following:
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| |
• | •FCC authorizations are non-depleting assets; |
| |
• | Renewal satellite applications generally are authorized by the FCC subject to certain conditions, without substantial cost under a stable regulatory, legislative and legal environment;
|
| |
• | Expenditures required to maintain the authorization are not significant; and
|
| |
• | We intend to use these authorizations indefinitely.
|
•Renewal satellite applications generally are authorized by the FCC subject to certain conditions, without substantial cost under a stable regulatory, legislative and legal environment;
•Expenditures required to maintain the authorization are not significant; and
•We intend to use these authorizations indefinitely.
Costs incurred to maintain or renew indefinite-lived regulatory authorizations are expensed as incurred.
Other Intangible Assets
Our other intangible assets consist of customer relationships, patents, trademarks and licenses which are amortized using the straight-line method over their estimated useful lives. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that indicate that the carrying amount of the assets may not be recoverable.
Impairment of Long-lived Assets
We review our long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets held and used in operations, the asset is not recoverable if the carrying amount of the asset exceeds its undiscounted estimated future net cash flows. When an asset is not recoverable, we adjust the carrying amount of such asset to its estimated fair value and recognize the impairment loss in Impairment of long-lived assets in the Consolidated Statements of Operations.
Other Investments
Equity Method Investments
We use the equity method to account for investments when we have the ability to exercise significant influence on the operating decisions of the affiliate. Such investments are initially recorded at cost and subsequently adjusted for our proportionate share of the net earnings or loss of the investee, which is reported in Equity in earnings (losses) of unconsolidated affiliates, net in the Consolidated Statements of Operations. During the fourth quarter of 2019, we changed our accounting policy to record our share of the net earnings or losses of these affiliates on a three-month lag. This change was immaterial to these Consolidated Financial Statements. Additionally, the carrying amount of such investments includes a component of goodwill when the cost of our investment exceeds the fair value of the underlying identifiable assets and liabilities of the affiliate. Lastly, dividends received from these affiliates reduces the carrying amount of our investment.
Other Equity Investments
We generally measure investments in non-publicly traded equity instruments without a readily determinable fair value at cost adjusted for observable price changes in orderly transactions for the identical or similar securities of the same issuer and changes resulting from impairments, if any. Other equity instruments are measured to determine their value based on observable market information. When we adjust the carrying amount of an investment to its estimated fair value, the gain or loss is recorded in Gains (losses) on investments, net in the Consolidated Statements of Operations.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Impairment Considerations
We periodically evaluate all of our other investments to determine whether (i) events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment and (ii) if there has been observable price changes in orderly transactions for identical or similar securities of the same issuer.investment. We consider information if provided to us by our investees such as current financial statements, business plans, investment documentation, capitalization tables, liquidation waterfalls, and board materials; and we may make additional inquiries of investee management.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Indicators of impairment may include, but are not limited to, unprofitable operations, material loss contingencies, changes in business strategy, changes in market trends or market conditions, changes in the investees’ enterprise value and changes in the investees’ investment pricing. When we determine that one of our other investments is impaired we reduce its carrying value to its estimated fair value and recognize the impairment loss in Gains (losses)Other-than-temporary impairment losses on equity method investments net in the Consolidated Statements of Operations. Additionally, when there has been an observable price change to a cost method investment, we adjust the carrying amount of the investment to its then estimated fair value and recognize the investment gain or loss in Gains (losses) on investments, net in the Consolidated Statements of Operations.
Externally Marketed Software
Costs related to the procurement and development of externally marketed software are capitalized and amortized using the straight-line method over the estimated useful life of the software, not in excess of five years. Capitalized costs of externally marketed software are included in Other non-current assets, net in the Consolidated Balance Sheets. Externally marketed software generally is installed in the equipment we sell or lease to customers. We conduct software program reviews for externally marketed capitalized software costs at least annually, or as events and circumstances warrant such a review, to determine if capitalized software development costs are recoverable and to ensure that costs associated with programs that are no longer generating revenue are expensed.
Contract Liabilities
Contract liabilities consist of advance payments and billings in excess of revenue recognized under customer contracts and are included in Contract liabilities or Other non-current liabilities in the Consolidated Balance Sheets based on the timing of when we expect to recognize revenue. We recognize contract liabilities as revenue after all revenue recognition criteria have been met.
Recently Adopted Accounting Pronouncements
Leases
Government Assistance
We adopted ASU No. 2016-02 -
Leases (Topic 842), as amended, codified as Accounting Standard Codification (“ASC 842”), as ofOn January 1, 2019.2022 we adopted Accounting Standards Update (“ASU”) No. 2021-10 - Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities (except for not-for-profit entities and employee benefit plans) to disclose information about certain government assistance they receive. The primary impact of ASC 842 on these Consolidated Financial Statements isTopic 832 disclosure requirements include: (i) the recognition of right-of-use assets and related liabilities in the Consolidated Balance Sheet for leases where we are the lessee. We elected to apply the requirementsnature of the new standard prospectivelytransactions and the related accounting policy used; (ii) the line items on January 1, 2019the balance sheet and did not restate these Consolidated Financial Statements for prior periods. Consequently, certainincome statement that are affected and the amounts reported inapplicable to each financial statement line item; and (iii) significant terms and conditions of the Consolidated Balance Sheet as of December 31, 2019 are not comparable to those reported as of December 31, 2018 or earlier dates.transactions. Our adoption of ASC 842this ASU did not have a material impact on our results of operations or cash flows for the year ended December 31, 2019.Consolidated Financial Statements.
Except for the new requirement to recognize assets and liabilities on the balance sheet for operating leases where we are the lessee, under our ASC 842 transition method, we continue to apply prior accounting standards to leases that commenced prior to 2019. We fully apply ASC 842 requirements only to leases that commenced or were modified on or after January 1, 2019. We elected certain practical expedients under our transition method, including elections to not reassess (i) whether a contract is or contains a lease and (ii) the classification of existing leases. We also elected not to apply hindsight in determining whether optional renewal periods should be included in the lease term, which in some instances may impact the initial measurement of the lease liability and the calculation of straight-line expense over the lease term for operating leases. As a result of our transition elections, there was no change in our recognition of revenue and expense for leases that commenced prior to 2019. In addition, the application of ASC 842 requirements to new and modified leases did not materially affect our recognition of revenue or expenses for the year ended December 31, 2019.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Our adoption of ASC 842 resulted in the following adjustments to the Consolidated Balance Sheet effective January 1, 2019:
|
| | | | | | | | | | | | |
| | Balance December 31, 2018 | | Adoption of ASC 842 Increase (Decrease) | | Balance January 1, 2019 |
| | | | | | |
Other current assets | | $ | 152,666 |
| | $ | (28 | ) | | $ | 152,638 |
|
Operating lease right-of-use assets | | — |
| | 117,006 |
| | 117,006 |
|
Other non-current assets, net | | 236,449 |
| | (7,272 | ) | | 229,177 |
|
Total assets | | 6,893,172 |
| | 109,706 |
| | 7,002,878 |
|
Accrued expenses and other current liabilities | | 157,654 |
| | 14,444 |
| | 172,098 |
|
Operating lease liabilities | | — |
| | 99,133 |
| | 99,133 |
|
Other non-current liabilities | | 71,647 |
| | (3,871 | ) | | 67,776 |
|
Total liabilities | | 4,500,677 |
| | 109,706 |
| | 4,610,383 |
|
Total liabilities and shareholders’ equity | | 6,893,172 |
| | 109,706 |
| | 7,002,878 |
|
Income Taxes
Revenue Recognition and Financial Instruments
On January 1, 2018,2021, we adopted ASU No. 2014-09, Revenue from Contracts with Customers and related amendments (collectively,2019-12 - Income Taxes (Topic 740): Simplifying the “New Revenue Standard”Accounting for Income Taxes (“ASU 2019-12”). The New Revenue Standard established a comprehensive new model for revenue recognition, whichASU 2019-12 is codified in Topic 606 (see Revenue Recognition above),part of the Financial Accounting Standards Board (“FASB”) overall simplification initiative and provided guidance for certain costs associated with customer contracts. We adopted the New Revenue Standard using the modified retrospective method for contracts that were not completed as of January 1, 2018. Accordingly, comparative information for prior periods has not been restated and continuesseeks to be reported undersimplify the accounting standards in effect for those periods. Uponincome taxes by updating certain guidance and removing certain exceptions. Our adoption of the New Revenue Standard, we recognized the cumulative effect of its initial application as a net increase to Accumulated earnings in the Consolidated Balance Sheets of $16 million, net of related income taxes. The adoption of the New Revenue Standard also impacted the timing of recognition of certain fees charged to our customers in our consumer markets; however, the adoption hasthis ASU did not had, and we do not expect it to have a material impact on the overall timing or amount of revenue recognition.our Consolidated Financial Statements.
The primary impacts of the New Revenue Standard on our operating results relate to how we account for sales incentive costs. Historically, we charged sales incentives to expense as incurred, except for incentives related to the consumer business in our Hughes segment, which were initially deferred and subsequently amortized over the related service agreement term. Under the New Revenue Standard, we continue to defer incentives for our consumer business; however, we now amortize those incentives over the estimated customer life, which includes expected contract renewal periods. In addition, we now defer certain sales incentives related to other businesses in our Hughes segment and amortize those incentives over the related service agreement term. As a result of these changes, we have recognized additional contract acquisition costs on the Consolidated Balance Sheets and the costs generally are recognized as expenses over a longer period of time in the Consolidated Statements of Operations. The adoption of the New Revenue Standard by an unconsolidated entity had a similar impact on our investment in the unconsolidated entity, which we account for using the equity method.
Additionally, on January 1, 2018, we prospectively adopted the applicable requirements of the New Investment Standard. The New Investment Standard substantially revises standards for the recognition, measurement and presentation of financial instruments, including requiring all equity investments, except for investments in consolidated subsidiaries and investments accounted for using the equity method, to be measured at fair value with changes in the fair value recognized through earnings. The New Investment Standard permits an entity to elect to measure an equity security without a readily determinable fair value at its cost, adjusted for changes resulting from impairments and observable price changes in orderly transactions for identical or similar securities of the same issuer. It also amends certain disclosure requirements associated with equity investments and the fair value of financial instruments. Upon adoption of the New Investment Standard on January 1, 2018, we recorded a $0.4 million charge to Accumulated earnings to include net unrealized losses on our marketable equity securities then designated as available for sale, which previously were recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets. For
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
our equity investments without a readily determinable fair value that were previously accounted for using the cost method, we have elected to measure such securities at cost, adjusted for impairments and observable price changes. We expect our future net income or loss to be more volatile as a result of these changes in accounting for our investments in equity securities that were previously accounted for as available-for-sale or using the cost method.
Our adoption of these standards impacted the referenced line items on the Statement of Operations and Statements of Comprehensive Income (Loss) as follows:
|
| | | | | | | | | | | | | | | | |
| | For the year ended December 31, 2018 |
| | As Reported | | Adjustments Due to the | | Balances If We Had Not Adopted the New Standards |
| | | New Revenue Standard | | New Investment Standard | |
| | | | | | | | |
Statement of Operations: | | |
Revenue: | | | | | | | | |
Services and other revenue | | $ | 1,561,426 |
| | $ | 2,323 |
| | $ | — |
| | $ | 1,563,749 |
|
Total revenue | | 1,766,836 |
| | 2,323 |
| | — |
| | 1,769,159 |
|
Costs and expenses: | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 559,838 |
| | 2,738 |
| | — |
| | 562,576 |
|
Selling, general and administrative expenses | | 397,994 |
| | 8,520 |
| | — |
| | 406,514 |
|
Total costs and expenses | | 1,588,854 |
| | 11,258 |
| | — |
| | 1,600,112 |
|
Operating income (loss) | | 177,982 |
| | (8,935 | ) | | — |
| | 169,047 |
|
Other income (expense): | | | | | | | | |
Interest expense, net of amounts capitalized | | (231,169 | ) | | 539 |
| | — |
| | (230,630 | ) |
Gains (losses) on investments, net | | 187 |
| | — |
| | (800 | ) | | (613 | ) |
Total other income (expense), net | | (171,447 | ) | | 539 |
| | (800 | ) | | (171,708 | ) |
Income (loss) from continuing operations before income taxes | | 6,535 |
| | (8,396 | ) | | (800 | ) | | (2,661 | ) |
Income tax benefit (provision), net | | (18,615 | ) | | 2,139 |
| | — |
| | (16,476 | ) |
Net income (loss) from continuing operations | | (12,080 | ) | | (6,257 | ) | | (800 | ) | | (19,137 | ) |
Net income (loss) | | 97,343 |
| | (6,257 | ) | | (800 | ) | | 90,286 |
|
Net income (loss) attributable to HSS | | 95,501 |
| | (6,257 | ) | | (800 | ) | | 88,444 |
|
| | | | | | | | |
Statement of Comprehensive Income (Loss): | | | | | | | | |
Net income (loss) | | 97,343 |
| | (6,257 | ) | | (800 | ) | | 90,286 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities | | (665 | ) | | — |
| | (28 | ) | | (693 | ) |
Other-than-temporary impairment loss on available-for-sale securities | | — |
| | — |
| | 828 |
| | 828 |
|
Total other comprehensive income (loss), net of tax | | (32,774 | ) | | — |
| | 800 |
| | (31,974 | ) |
Comprehensive income (loss) | | 64,569 |
| | (6,257 | ) | | — |
| | 58,312 |
|
Comprehensive income (loss) attributable to HSS | | 64,116 |
| | (6,257 | ) | | — |
| | 57,859 |
|
Recently Issued Accounting Pronouncements Not Yet Adopted
Credit Losses
In June 2016, the FASB issuedOn January 1, 2020, we adopted ASU No. 2016-13 - Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, whichas amended, and codified in Accounting Standards Codification Topic 326 (“ASC 326”). ASC 326 introduces a new approach to estimatethe periodic estimation of credit losses onfor certain types of financial instrumentsassets based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets withthat have experienced credit deterioration since their origination. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019original purchase. We have elected to apply the requirements of the new standard prospectively and interim periods within those fiscal years. Earlywe recognized a cumulative effect of adoption is permitted. We are currently assessing the impact of adopting$2.2 million to Accumulated earnings (losses) as of January 1, 2020. Based on this new accounting standard on theseelection, we did not restate our comparative Consolidated Financial Statements and related disclosures. they continue to be reported under the accounting standards in effect for the periods before January 1, 2020.
Financial Impact of Adoption. The following table presents our adoption of this new standard resulting in adjustments to our Consolidated Balance Sheet effective January 1, 2020:
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| | | | | | | | | | | | | | | | | | | | |
| | Balance December 31, 2019 | | Adoption of ASC 326 Increase (Decrease) | | Balance January 1, 2020 |
Trade accounts receivable and contract assets, net | | $ | 196,520 | | | $ | (13,672) | | | $ | 182,848 | |
Other current assets, net | | $ | 301,652 | | | $ | 6,723 | | | $ | 308,375 | |
Other non-current assets, net | | $ | 251,936 | | | $ | 4,050 | | | $ | 255,986 | |
Total assets | | $ | 5,572,035 | | | $ | (2,899) | | | $ | 5,569,136 | |
Deferred tax liabilities, net | | $ | 380,316 | | | $ | (490) | | | $ | 379,826 | |
Accumulated earnings (losses) | | $ | 664,415 | | | $ | (2,169) | | | $ | 662,246 | |
Non-controlling interests | | $ | 75,748 | | | $ | (240) | | | $ | 75,508 | |
Total shareholder's equity | | $ | 2,134,163 | | | $ | (2,409) | | | $ | 2,131,754 | |
Total liabilities and shareholder's equity | | $ | 5,572,035 | | | $ | (2,899) | | | $ | 5,569,136 | |
The application of ASC 326 requirements did not materially affect our Consolidated Statements of Operations for the year ended December 31, 2020.
Recently Issued Accounting Pronouncements Not Yet Adopted
Business Combinations
In October 2021, the FASB issued ASU No. 2021-08 - Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which provides an exception to fair value measurement for contract assets and contract liabilities related to revenue contracts acquired in a business combination. The ASU requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU is effective for the Company for annual and interim periods in fiscal years beginning after December 15, 2022. The ASU is applied to business combinations occurring on or after the effective date.
Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), and all subsequent amendments to the initial guidance, codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2024. We expect to utilize the optional expedients provided by the guidance for contracts amended solely to use an alternative reference rate. We have evaluated the new guidance and we are in the process of implementing this ASU, and all subsequent amendments, and do not expect them to have a material impact on our Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3. REVENUE RECOGNITION
Information About Contract Balances
The following is a summary fortable presents the components of our contract balances:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
Trade accounts receivable and contract assets, net: | | | | |
Sales and services | | $ | 170,466 | | | $ | 154,676 | |
Leasing | | 7,935 | | | 5,668 | |
Total trade accounts receivable | | 178,401 | | | 160,344 | |
Contract assets | | 73,293 | | | 36,307 | |
Allowance for doubtful accounts | | (15,358) | | | (14,588) | |
Total trade accounts receivable and contract assets, net | | $ | 236,336 | | | $ | 182,063 | |
| | | | |
Contract liabilities: | | | | |
Current | | $ | 121,739 | | | $ | 141,343 | |
Non-current | | 8,326 | | | 10,669 | |
Total contract liabilities | | $ | 130,065 | | | $ | 152,012 | |
|
| | | | | | | | |
| | As of |
| | December 31, 2019 | | December 31, 2018 |
| | | | |
Trade accounts receivable and contract assets, net: | | | | |
Sales and services | | $ | 152,632 |
| | $ | 154,415 |
|
Leasing | | 4,016 |
| | 7,990 |
|
Total trade accounts receivable | | 156,648 |
| | 162,405 |
|
Contract assets | | 63,649 |
| | 55,295 |
|
Allowance for doubtful accounts | | (23,777 | ) | | (16,604 | ) |
Total trade accounts receivable and contract assets, net | | $ | 196,520 |
| | $ | 201,096 |
|
| | | | |
Contract liabilities: | | | | |
Current | | $ | 101,060 |
| | $ | 72,249 |
|
Non-current | | 10,572 |
| | 10,133 |
|
Total contract liabilities | | $ | 111,632 |
| | $ | 82,382 |
|
ForThe following table presents the years ended December 31, 2019 and December 31, 2018, werevenue recognized revenuein the Consolidated Statements of $65.4 million and $52.0 million, respectively,Operations that werewas previously included within contract liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the years ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
Revenue | | | | | | $ | 120,867 | | | $ | 82,633 | | | $ | 72,877 | |
The following table presents the activity in the contract liability balances asour allowance for doubtful accounts:
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
Balance at beginning of period | | $ | 14,588 | | | $ | 15,386 | | | $ | 23,777 | |
Credit losses (1) | | 32,910 | | | 22,591 | | | 18,582 | |
Deductions | | (36,011) | | | (23,543) | | | (26,031) | |
Foreign currency translation | | 3,871 | | | 154 | | | (942) | |
Balance at end of period | | $ | 15,358 | | | $ | 14,588 | | | $ | 15,386 | |
(1)The impact of December 31, 2018 and December 31, 2017, respectively.
A summary ofadopting ASC 326 on January 1, 2020 was a net decrease to our allowance for doubtful accounts activity is as follows:largely driven by a $13.4 million reclassification to Other current assets, net and Other non-current assets, net, offset by a $2.9 million adjustment to Accumulated earnings (losses).
|
| | | | | | | | | | | | | | | | |
| | Balance at Beginning of Year | | Bad Debt Expense | | Deductions | | Balance at End of Year |
| | | | | | | | |
For the years ended: | | |
| | |
| | |
| | |
|
December 31, 2019 | | $ | 16,604 |
| | $ | 30,027 |
| | $ | (22,854 | ) | | $ | 23,777 |
|
December 31, 2018 | | 12,027 |
| | 24,984 |
| | (20,407 | ) | | 16,604 |
|
December 31, 2017 | | 12,752 |
| | 9,551 |
| | (10,276 | ) | | 12,027 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Contract Acquisition Costs
UnamortizedThe following table presents the activity in our contract acquisition costs, totaled $113.6 million and $104.0 million as of December 31, 2019 and 2018, respectively, and related amortization expense totaled $96.1 million and $83.0 million for the years ended December 31, 2019 and 2018, respectively.
Transaction Price Allocated to Remaining
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
Balance at beginning of period | | $ | 82,986 | | | $ | 99,837 | | | $ | 113,592 | |
Additions | | 57,627 | | | 72,503 | | | 91,143 | |
Amortization expense | | (76,760) | | | (88,178) | | | (101,278) | |
Foreign currency translation | | 594 | | | (1,176) | | | (3,620) | |
Balance at end of period | | $ | 64,447 | | | $ | 82,986 | | | $ | 99,837 | |
Performance Obligations
As of December 31, 2019,2022, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $857.7 million. We expect$1.1 billion. Performance obligations expected to recognize 47.0% of our remaining performance obligations of these contracts as revenue in the next twelve months.be satisfied within one year and greater than one year are 34.0% and 66.0%, respectively. This amount excludesand percentages exclude agreements with consumer customers in our Hughes segment, our leasing arrangements and agreements with certain customers under which collectibilitycollectability of all amounts due through the term of contracts is uncertain.
Disaggregation of Revenue
Geographic Information
The following tables present our revenue from customer contracts disaggregated by primary geographic market and by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
For the year ended December 31, 2022 | | | | | | | | |
North America | | $ | 1,576,773 | | | $ | 20,533 | | | $ | (1,400) | | | $ | 1,595,906 | |
South and Central America | | 171,318 | | | — | | | — | | | 171,318 | |
Other | | 218,496 | | | — | | | 17,623 | | | 236,119 | |
Total revenue | | $ | 1,966,587 | | | $ | 20,533 | | | $ | 16,223 | | | $ | 2,003,343 | |
| | | | | | | | |
For the year ended December 31, 2021 | | | | | | | | |
North America | | $ | 1,617,229 | | | $ | 17,679 | | | $ | (385) | | | $ | 1,634,523 | |
South and Central America | | 176,515 | | | — | | | — | | | 176,515 | |
Other | | 162,482 | | | — | | | 21,206 | | | 183,688 | |
Total revenue | | $ | 1,956,226 | | | $ | 17,679 | | | $ | 20,821 | | | $ | 1,994,726 | |
| | | | | | | | |
For the year ended December 31, 2020 | | | | | | | | |
North America | | $ | 1,556,961 | | | $ | 17,398 | | | $ | (1,161) | | | $ | 1,573,198 | |
South and Central America | | 151,194 | | | — | | | — | | | 151,194 | |
Other | | 152,679 | | | — | | | 20,287 | | | 172,966 | |
Total revenue | | $ | 1,860,834 | | | $ | 17,398 | | | $ | 19,126 | | | $ | 1,897,358 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DisaggregationNature of Revenue
Geographic Information
Products and Services
The following istables present our revenue from customer contracts disaggregated by primary geographic marketthe nature of products and services and by segment:
|
| | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | |
For the year ended December 31, 2019 | | | | | | | | |
North America | | $ | 1,527,823 |
| | $ | 16,257 |
| | $ | 2,143 |
| | $ | 1,546,223 |
|
South and Central America | | 125,458 |
| | — |
| | — |
| | 125,458 |
|
All other | | 199,461 |
| | — |
| | 19,019 |
| | 218,480 |
|
Total revenue | | $ | 1,852,742 |
| | $ | 16,257 |
| | $ | 21,162 |
| | $ | 1,890,161 |
|
| | | | | | | | |
For the year ended December 31, 2018 | | | | | | | | |
North America | | $ | 1,444,628 |
| | $ | 27,231 |
| | $ | 4,555 |
| | $ | 1,476,414 |
|
South and Central America | | 101,632 |
| | — |
| | — |
| | 101,632 |
|
All other | | 170,268 |
| | — |
| | 18,522 |
| | 188,790 |
|
Total revenue | | $ | 1,716,528 |
| | $ | 27,231 |
| | $ | 23,077 |
| | $ | 1,766,836 |
|
| | | | | | | | |
For the year ended December 31, 2017 | | | | | | | | |
North America | | $ | 1,204,750 |
| | $ | 30,417 |
| | $ | 4,030 |
| | $ | 1,239,197 |
|
South and Central America | | 90,000 |
| | — |
| | — |
| | 90,000 |
|
All other | | 183,168 |
| | — |
| | 2,677 |
| | 185,845 |
|
Total revenue | | $ | 1,477,918 |
| | $ | 30,417 |
| | $ | 6,707 |
| | $ | 1,515,042 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the year ended December 31, 2022 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 1,551,613 | | | $ | 13,206 | | | $ | — | | | $ | 1,564,819 | |
Lease revenue | | 40,825 | | | 7,327 | | | 16,223 | | | 64,375 | |
Total services and other revenue | | 1,592,438 | | | 20,533 | | | 16,223 | | | 1,629,194 | |
Equipment revenue: | | | | | | | | |
Equipment | | 119,107 | | | — | | | — | | | 119,107 | |
Design, development and construction services | | 246,265 | | | — | | | — | | | 246,265 | |
Lease revenue | | 8,777 | | | — | | | — | | | 8,777 | |
Total equipment revenue | | 374,149 | | | — | | | — | | | 374,149 | |
Total revenue | | $ | 1,966,587 | | | $ | 20,533 | | | $ | 16,223 | | | $ | 2,003,343 | |
| | | | | | | | |
For the year ended December 31, 2021 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 1,646,778 | | | $ | 11,961 | | | $ | — | | | $ | 1,658,739 | |
Lease revenue | | 39,021 | | | 5,718 | | | 20,821 | | | 65,560 | |
Total services and other revenue | | 1,685,799 | | | 17,679 | | | 20,821 | | | 1,724,299 | |
Equipment revenue: | | | | | | | | |
Equipment | | 108,767 | | | — | | | — | | | 108,767 | |
Design, development and construction services | | 152,934 | | | — | | | — | | | 152,934 | |
Lease revenue | | 8,726 | | | — | | | — | | | 8,726 | |
Total equipment revenue | | 270,427 | | | — | | | — | | | 270,427 | |
Total revenue | | $ | 1,956,226 | | | $ | 17,679 | | | $ | 20,821 | | | $ | 1,994,726 | |
| | | | | | | | |
For the year ended December 31, 2020 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 1,614,730 | | | $ | 10,785 | | | $ | — | | | $ | 1,625,515 | |
Lease revenue | | 40,503 | | | 6,613 | | | 19,126 | | | 66,242 | |
Total services and other revenue | | 1,655,233 | | | 17,398 | | | 19,126 | | | 1,691,757 | |
Equipment revenue: | | | | | | | | |
Equipment | | 110,108 | | | — | | | — | | | 110,108 | |
Design, development and construction services | | 88,511 | | | — | | | — | | | 88,511 | |
Lease revenue | | 6,982 | | | — | | | — | | | 6,982 | |
Total equipment revenue | | 205,601 | | | — | | | — | | | 205,601 | |
Total revenue | | $ | 1,860,834 | | | $ | 17,398 | | | $ | 19,126 | | | $ | 1,897,358 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Nature of Products and Services
The following is our revenue disaggregated by the nature of products and services and by segment: |
| | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | |
For the year ended December 31, 2019 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 1,535,966 |
| | $ | 10,464 |
| | $ | 878 |
| | $ | 1,547,308 |
|
Lease revenue | | 50,073 |
| | 5,793 |
| | 20,284 |
| | 76,150 |
|
Total services and other revenue | | 1,586,039 |
| | 16,257 |
| | 21,162 |
| | 1,623,458 |
|
Equipment revenue: | |
| |
| |
| |
|
Equipment | | 115,052 |
| | — |
| | — |
| | 115,052 |
|
Design, development and construction services | | 145,646 |
| | — |
| | — |
| | 145,646 |
|
Lease revenue | | 6,005 |
| | — |
| | — |
| | 6,005 |
|
Total equipment revenue | | 266,703 |
| | — |
| | — |
| | 266,703 |
|
Total revenue | | $ | 1,852,742 |
| | $ | 16,257 |
| | $ | 21,162 |
| | $ | 1,890,161 |
|
| | | | | | | | |
For the year ended December 31, 2018 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 1,313,059 |
| | $ | 21,044 |
| | $ | 1,351 |
| | $ | 1,335,454 |
|
Lease revenue | | 198,059 |
| | 6,187 |
| | 21,726 |
| | 225,972 |
|
Total services and other revenue | | 1,511,118 |
| | 27,231 |
| | 23,077 |
| | 1,561,426 |
|
Equipment revenue: | |
|
| |
|
| |
|
| |
|
|
Equipment | | 119,657 |
| | — |
| | — |
| | 119,657 |
|
Design, development and construction services | | 85,753 |
| | — |
| | — |
| | 85,753 |
|
Total equipment revenue | | 205,410 |
| | — |
| | — |
| | 205,410 |
|
Total revenue | | $ | 1,716,528 |
| | $ | 27,231 |
| | $ | 23,077 |
| | $ | 1,766,836 |
|
Lease Revenue
The following istable presents our lease revenue by type of lease:
|
| | | | |
| | For the year ended December 31, 2019 |
| | |
Sales-type lease revenue: | | |
Revenue at lease commencement | | $ | 6,005 |
|
Interest income | | 784 |
|
Total sales-type lease revenue | | 6,789 |
|
Operating lease revenue | | 75,366 |
|
Total lease revenue | | $ | 82,155 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the years ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
Sales-type lease revenue: | | | | | | | | | | |
Revenue at lease commencement | | | | | | $ | 7,557 | | | $ | 7,998 | | | $ | 6,982 | |
Interest income | | | | | | 1,220 | | | 728 | | | 393 | |
Total sales-type lease revenue | | | | | | 8,777 | | | 8,726 | | | 7,375 | |
Operating lease revenue | | | | | | 64,375 | | | 65,560 | | | 65,849 | |
Total lease revenue | | | | | | $ | 73,152 | | | $ | 74,286 | | | $ | 73,224 | |
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $6.5$21.9 million and $17.1 million as of December 31, 2019.2022 and 2021, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents future operating lease payments to be received as of December 31, 2019:2022:
| | | | | | | | |
| | Amounts |
December 31, | | |
2023 | | $ | 37,478 | |
2024 | | 32,856 | |
2025 | | 30,802 | |
2026 | | 28,828 | |
2027 | | 23,860 | |
2028 and beyond | | 46,070 | |
Total lease payments to be received | | $ | 199,894 | |
|
| | | | |
| | Amounts |
| | |
Year ending December 31, | | |
2020 | | $ | 36,560 |
|
2021 | | 33,545 |
|
2022 | | 31,666 |
|
2023 | | 30,551 |
|
2024 | | 28,444 |
|
After 2024 | | 123,844 |
|
Total lease payments | | $ | 284,610 |
|
Property and equipment, net and Depreciation and amortization included theThe following table presents amounts for assets subject to operating leases:leases, which are included in Property and equipment, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| | Cost | | Accumulated Depreciation | | Net | | Cost | | Accumulated Depreciation | | Net |
Customer premises equipment | | $ | 933,669 | | | $ | (703,110) | | | $ | 230,559 | | | $ | 1,860,766 | | | $ | (1,549,508) | | | $ | 311,258 | |
Satellites | | 104,620 | | | (52,284) | | | 52,336 | | | 104,620 | | | (45,309) | | | 59,311 | |
Total | | $ | 1,038,289 | | | $ | (755,394) | | | $ | 282,895 | | | $ | 1,965,386 | | | $ | (1,594,817) | | | $ | 370,569 | |
|
| | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | For the year ended December 31, 2019 |
| | Cost | | Accumulated Depreciation | | Net | | Depreciation Expense |
| | | | | | | | |
Customer premises equipment | | $ | 1,458,298 |
| | $ | (1,074,968 | ) | | $ | 383,330 |
| | $ | 197,870 |
|
Satellites | | 104,620 |
| | (31,360 | ) | | 73,260 |
| | 7,495 |
|
Total | | $ | 1,562,918 |
| | $ | (1,106,328 | ) | | $ | 456,590 |
| | $ | 205,365 |
|
During 2022, the Company identified fully depreciated assets that were no longer in use, mostly related to our customer premises equipment assets. Cost and accumulated depreciation were reduced by $1.1 billion. There was no impact to Other property and equipment, net.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents depreciation expense for assets subject to operating leases, which is included in Depreciation and amortization:
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
Customer premises equipment | | $ | 221,645 | | | $ | 247,072 | | | $ | 246,542 | |
Satellites | | 6,975 | | | 6,975 | | | 6,975 | |
Total | | $ | 228,620 | | | $ | 254,047 | | | $ | 253,517 | |
NOTE 4. LESSEE ACCOUNTING
The Consolidated Balance Sheets includefollowing table presents the following amounts for right-of-useROU assets and lease liabilities as of December 31, 2019:liabilities:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
Right-of-use assets: | | | | |
Operating | | $ | 150,632 | | | $ | 148,221 | |
Finance | | 238,748 | | | 258,498 | |
Total right-of-use assets | | $ | 389,380 | | | $ | 406,719 | |
| | | | |
Lease liabilities: | | | | |
Current: | | | | |
Operating | | $ | 17,766 | | | $ | 16,697 | |
Finance | | — | | | 123 | |
Total current | | 17,766 | | | 16,820 | |
Non-current: | | | | |
Operating | | 135,122 | | | 134,001 | |
Finance | | — | | | — | |
Total non-current | | 135,122 | | | 134,001 | |
Total lease liabilities | | $ | 152,888 | | | $ | 150,821 | |
|
| | | | |
| | Amounts |
| | |
Right-of-use assets: | | |
Operating | | $ | 113,399 |
|
Finance | | 325,826 |
|
Total right-of-use assets | | $ | 439,225 |
|
| | |
Lease liabilities: | | |
Current: | | |
Operating | | $ | 14,112 |
|
Finance | | 486 |
|
Total current | | 14,598 |
|
Non-current: | | |
Operating | | 96,879 |
|
Finance | | 565 |
|
Total non-current | | 97,444 |
|
Total lease liabilities | | $ | 112,042 |
|
As of December 31, 2019,2022, we have prepaid our obligations regarding most of our finance right-of-useROU assets. Finance lease assets are reported net of accumulated amortization of $57.3$121.9 million and $95.7 million as of December 31, 2019.2022 and 2021, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following aretable presents the components of lease cost and weighted averageweighted-average lease terms and discount rates for operating and finance leases:
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
Lease cost: | | | | | | |
Operating lease cost | | $ | 25,219 | | | $ | 23,323 | | | $ | 23,321 | |
Finance lease cost: | | | | | | |
Amortization of right-of-use assets | | 29,906 | | | 29,270 | | | 27,611 | |
Interest on lease liabilities | | 7 | | | 49 | | | 106 | |
Total finance lease cost | | 29,913 | | | 29,319 | | | 27,717 | |
Short-term lease cost | | 258 | | | — | | | 132 | |
Variable lease cost | | 2,246 | | | 1,895 | | | 3,799 | |
Total lease cost | | $ | 57,636 | | | $ | 54,537 | | | $ | 54,969 | |
|
| | | | |
| | For the year ended December 31, 2019 |
| | |
Lease cost: | | |
Operating lease cost | | $ | 21,226 |
|
Finance lease cost: | | |
Amortization of right-of-use assets | | 26,489 |
|
Interest on lease liabilities | | 173 |
|
Total finance lease cost | | 26,662 |
|
Short-term lease cost | | 434 |
|
Variable lease cost | | 9,585 |
|
Total lease cost | | $ | 57,907 |
|
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
Lease term and discount rate: | | | | |
Weighted-average remaining lease term: | | | | |
Finance leases | | 0.0 years | | 0.3 years |
Operating leases | | 8.0 years | | 10.8 years |
| | | | |
Weighted-average discount rate: | | | | |
Finance leases | | — | % | | 12.8 | % |
Operating leases | | 5.9 | % | | 5.6 | % |
|
| | | |
| | As of December 31, 2019 |
| | |
Lease term and discount rate: | | |
Weighted average remaining lease term: | | |
Finance leases | | 2.1 years |
|
Operating leases | | 10.4 years |
|
| | |
Weighted average discount rate: | | |
Finance leases | | 11.9 | % |
Operating leases | | 6.1 | % |
The following table detailspresents the detailed cash flows from operating and finance leases:
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 24,653 | | | $ | 21,808 | | | $ | 21,313 | |
Operating cash flows from finance leases | | 7 | | | 49 | | | 106 | |
Financing cash flows from finance leases | | 124 | | | 430 | | | 499 | |
|
| | | | |
| | For the year ended December 31, 2019 |
| | |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 19,654 |
|
Operating cash flows from finance leases | | 173 |
|
Financing cash flows from finance leases | | 654 |
|
We obtained right-of-useROU assets in exchange for lease liabilities of $8.5$4.3 million, $26.1 million and $22.6 million upon commencement of operating leases during the year ended December 31, 2019.2022, 2021 and 2020, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents future minimum lease payments of our lease liabilities as of December 31, 2019:2022:
| | | | Operating Leases | | Finance Leases | | Total | | | | | | | |
| | | | | | | | Operating Leases |
Year ending December 31, | | | | | | | Year ending December 31, | | |
2020 | | $ | 19,907 |
| | $ | 629 |
| | $ | 20,536 |
| |
2021 | | 17,594 |
| | 487 |
| | 18,081 |
| |
2022 | | 15,379 |
| | 96 |
| | 15,475 |
| |
2023 | | 14,369 |
| | — |
| | 14,369 |
| 2023 | | $ | 24,983 | |
2024 | | 13,286 |
| | — |
| | 13,286 |
| 2024 | | 23,063 | |
After 2024 | | 71,147 |
| | — |
| | 71,147 |
| |
2025 | | 2025 | | 19,470 | |
2026 | | 2026 | | 18,684 | |
2027 | | 2027 | | 17,168 | |
2028 and beyond | | 2028 and beyond | | 97,162 | |
Total future minimum lease payments | | 151,682 |
| | 1,212 |
| | 152,894 |
| Total future minimum lease payments | | 200,530 | |
Less: Interest | | (40,691 | ) | | (161 | ) | | (40,852 | ) | Less: Interest | | (47,642) | |
Total lease liabilities | | $ | 110,991 |
| | $ | 1,051 |
| | $ | 112,042 |
| Total lease liabilities | | $ | 152,888 | |
NOTE 5. DISCONTINUED OPERATIONS
BSS Business
BUSINESS COMBINATIONS
In May 2019, we entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti agreed to contribute its very small aperture terminal (“VSAT”) telecommunications services and hardware business in India to Hughes Communications India Private Limited (“HCIPL”) and its subsidiaries, our less than wholly owned Indian subsidiaries, that conduct our VSAT services and hardware business in India. On January 4, 2022, this joint venture was formed (the “India JV”) and subsequent to the formation of the India JV, we hold a 67% ownership interest and Bharti holds a 33% ownership interest in HCIPL. The following table presentsIndia JV combines the financialVSAT businesses of both companies to offer flexible and scalable enterprise networking solutions using satellite connectivity for primary transport, back-up and hybrid implementation in India. The results of our discontinued operations related to the India JV have been included in these Consolidated Financial Statements from the date of formation. The costs associated with the closing of the BSS Business:India JV were not material and were expensed as incurred.
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Revenue: | | | | | | |
Services and other revenue - DISH Network | | $ | 195,942 |
| | $ | 305,229 |
| | $ | 337,079 |
|
Services and other revenue - other | | 17,714 |
| | 25,598 |
| | 24,748 |
|
Total revenue | | 213,656 |
| | 330,827 |
| | 361,827 |
|
Costs and expenses: | | | | | | |
Cost of services and other | | 28,033 |
| | 40,375 |
| | 62,573 |
|
Selling, general and administrative expenses | | 6,903 |
| | 159 |
| | 43 |
|
Depreciation and amortization | | 85,926 |
| | 124,564 |
| | 126,380 |
|
Total costs and expenses | | 120,862 |
| | 165,098 |
| | 188,996 |
|
Operating income (loss) | | 92,794 |
| | 165,729 |
| | 172,831 |
|
Other income (expense): | | | | | | |
Interest expense | | (17,365 | ) | | (28,552 | ) | | (32,312 | ) |
Total other income (expense), net | | (17,365 | ) | | (28,552 | ) | | (32,312 | ) |
Income (loss) from discontinued operations before income taxes | | 75,429 |
| | 137,177 |
| | 140,519 |
|
Income tax benefit (provision), net | | (18,890 | ) | | (27,754 | ) | | 164,436 |
|
Net income (loss) from discontinued operations | | $ | 56,539 |
| | $ | 109,423 |
| | $ | 304,955 |
|
The fair value of the consideration transferred was $38.2 million. Net cash paid was $7.9 million, inclusive of amounts paid for the acquisition of, or of HCIPL shares from, entities that were shareholders of HCIPL prior to closing the India JV.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents the aggregate carrying amounts of assets and liabilities of our discontinued operations of the BSS Business as of December 31, 2018. No assets or liabilities attributable to our discontinued operations were held by us as of December 31, 2019.
|
| | | | |
| | As of December 31, 2018 |
| | |
Assets | | |
Prepaids and deposits | | $ | 3,483 |
|
Current assets of discontinued operations | | 3,483 |
|
Property and equipment, net | | 660,270 |
|
Regulatory authorizations, net | | 65,615 |
|
Other non-current assets, net | | 16,576 |
|
Non-current assets of discontinued operations | | 742,461 |
|
Total assets of discontinued operations | | $ | 745,944 |
|
| | |
Liabilities: | | |
Current portion of finance lease obligations | | $ | 39,995 |
|
Accrued interest | | 1,572 |
|
Accrued expenses and other current liabilities | | 7,488 |
|
Current liabilities of discontinued operations | | 49,055 |
|
Finance lease obligations | | 187,002 |
|
Deferred tax liabilities, net | | 132,787 |
|
Other non-current liabilities | | 29,493 |
|
Non-current liabilities of discontinued operations | | 349,282 |
|
Total liabilities of discontinued operations | | $ | 398,337 |
|
Significant supplemental cash flow information and adjustments to reconcile net income to net cash flow from operating activities for discontinued operations of the BSS business are below:
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Operating activities: | | | | | | |
Net income (loss) from discontinued operations | | $ | 56,539 |
| | $ | 109,423 |
| | $ | 304,955 |
|
Depreciation and amortization | | 85,926 |
| | 124,564 |
| | 126,380 |
|
| | | | | | |
Investing activities: | | | | | | |
Expenditures for property and equipment | | 510 |
| | 175 |
| | 699 |
|
| | | | | | |
Financing activities: | | | | | | |
Payment of finance lease obligations | | 27,203 |
| | 35,886 |
| | 32,177 |
|
Payment of in-orbit incentive obligations | | 3,887 |
| | 4,329 |
| | 4,727 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Terminated or Transferred Related Party Agreements
Effective September 10, 2019, the following agreements were terminated or transferred to DISH Network as part of the BSS Transaction. We have no further obligations and have neither earned additional revenue nor incurred additional expense, as applicable, under or in connection with these agreements after the consummation of the BSS Transaction.
DBS Transponder Lease. EchoStar leased satellite capacity from us on eight DBS transponders on the QuetzSat-1 satellite through November 2021, after which EchoStar had certain options to renew the agreement on a year-to year basis through the end of life of the QuetzSat-1 satellite.
EchoStar XXIII Launch Facilitation and Operational Control Agreement. As part of applying for the launch license for the EchoStar XXIII satellite through the UK Space Agency, we and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”), entered into an agreement in March 2016 to transfer to us EOC’s launch service contracts for the EchoStar XXIII satellite and to grant us certain rights to control its in-orbit operations. EOC retained ownership of the satellite and agreed to make additional payments to us for amounts that we were required to pay under the launch service contract. In 2016, we recorded additions to Other non-current assets, net and corresponding increases in Additional paid-in capital in our Consolidated Balance Sheet to reflect EOC’s cumulative payments under the launch service contract prior to the transfer date and to reflect EOC’s funding of additional cash payments to the launch service provider. The EchoStar XXIII satellite was successfully launched in March 2017. We recorded decreases in Other non-current assets, net and Additional paid-in capital of $62.0 million, representing the carrying amount of the launch service contract at the time of launch to reflect the consumption of the contract’s economic benefits by EOC.
Satellite Capacity Leased to DISH Network. We entered into certain agreements to lease satellite capacity pursuant to which we provided satellite services to DISH Network on certain satellites, as listed below, owned or leased by us. The fees for the services provided under these agreements depended, among other things, upon the orbital location of the applicable satellite, the number of transponders that provided services on the applicable satellite and the length of the service arrangements.
EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV. In March 2014, we began leasing certain satellite capacity to DISH Network on the EchoStar VII satellite, the EchoStar X satellite, the EchoStar XI satellite and the EchoStar XIV satellite.
EchoStar XII. DISH Network leased satellite capacity from us on the EchoStar XII satellite.
EchoStar XVI. In December 2009, we entered into an agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network leased satellite capacity from us on the EchoStar XVI satellite beginning in January 2013.
Nimiq 5 Agreement. In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”). Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service.
QuetzSat-1 Agreement. In November 2008, we entered into an agreement to lease satellite capacity from SES Latin America, which provided, among other things, for the provision by SES Latin America to us of leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into an agreement pursuant to which DISH Network leased from us satellite capacity on 24 of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location. In February 2013, we and DISH Network entered into an agreement pursuant to which we leased back from DISH Network certain satellite capacity on 5 DBS transponders on the QuetzSat-1 satellite.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
TT&C Agreement. Effective January 2012, we entered into a TT&C agreement pursuant to which we provided TT&C services to DISH Network, which we subsequently amended (the “2012 TT&C Agreement”). The fees for services provided under the 2012 TT&C Agreement were calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which varied depending on the nature of the services provided.
Real Estate Lease. Prior to the Share Exchange, a subsidiary of EchoStar leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection with the Share Exchange, EchoStar transferred ownership of a portion of this property to DISH Network and contributed a portion to us and we and DISH Network amended this agreement to, among other things, provide for a continued lease to DISH Network of the portion of the property we retained (the “Cheyenne Data Center”). The rent on a per square foot basis for the lease was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and DISH Network was responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. In connection with the BSS Transaction, we transferred the Cheyenne Data Center to DISH Network. This lease does not qualify for discontinued operations treatment, and therefore the revenue from it has not been treated as discontinued operations.
NOTE6. BUSINESS COMBINATIONS
In November 2019, we consummated the Yahsat Brazil JV Transaction. The combined business provides broadband internet services and enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat’s Al Yah 3 satellite. The results of operations related to the business we acquired in the Yahsat Brazil JV Transaction have been included in these Consolidated Financial Statements from the date of acquisition. For the year ended December 31, 2019, we incurred $1.6 million of costs associated with the closing of the Yahsat Brazil JV Transaction.
All assets and liabilities acquired from Yahsat in the Yahsat BrazilIndia JV Transactionformation have been recorded at fair value. The following table summarizespresents our allocation of the preliminary allocations of purchase price:
|
| | | | |
| | Amounts |
| | |
Assets: | | |
Cash and cash equivalents | | $ | 7,858 |
|
Other current assets | | 7,106 |
|
Property and equipment | | 88,358 |
|
Regulatory authorization | | 4,498 |
|
Goodwill | | 2,128 |
|
Other long-term assets | | 1,502 |
|
Total assets | | $ | 111,450 |
|
| | |
Liabilities: | | |
Accounts payable and accrued liabilities | | $ | 6,516 |
|
Other current liabilities | | 2,159 |
|
Total liabilities | | $ | 8,675 |
|
| | |
Total purchase price (1) | | $ | 102,775 |
|
| | | | | | | | |
| | Amounts |
Assets: | | |
Trade accounts receivable and contract assets, net | | $ | 6,160 | |
Other current assets | | 2,085 | |
Property and equipment | | 4,669 | |
Goodwill | | 23,086 | |
Other intangible assets | | 4,428 | |
Total assets | | $ | 40,428 | |
| | |
Liabilities: | | |
Trade accounts payable | | $ | 133 | |
Accrued expenses and other current liabilities | | 986 | |
Deferred tax liabilities | | 1,114 | |
Total liabilities | | $ | 2,233 | |
| | |
Total purchase price | | $ | 38,195 | |
(1) Based on the value determined for the equity ownership interest issued by our Brazilian subsidiary as consideration for the business acquired by us in the Yahsat Brazil JV Transaction.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The preliminary valuation of assets we acquired and liabilities we assumed in the Yahsat BrazilIndia JV Transaction were derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation, and resulted in identifiablea customer relationship intangible of $4.4 million with an estimated life of 5 years and is reported in Other intangible assets, as follows:net.
|
| | | | |
| | Amounts |
| | |
Satellite payload | | $ | 50,738 |
|
Regulatory authorization | | 4,498 |
|
Total | | $ | 55,236 |
|
The satellite payload asset and regulatory authorization were valued using an income approach and will be being amortized over seven and 11 years, respectively.
We recognized goodwill in connectionGoodwill associated with the Yahsat BrazilIndia JV Transaction of $2.1 million, including a currency translation adjustment of $0.7 million. The goodwill is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce. This goodwillGoodwill has been allocated entirely to our Hughes segment.
NOTE 7.6. OTHER COMPREHENSIVE INCOME (LOSS) AND RELATED TAX EFFECTS
The following table presents the changes in the balances of Accumulated other comprehensive income (loss) by component were as follows:component:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Foreign Currency Translation Adjustments | | Unrealized Gain (Loss) On Available-For-Sale Securities | | Other | | Accumulated Other Comprehensive Income (Loss) |
Balance, December 31, 2020 | | $ | (146,953) | | | $ | 113 | | | $ | — | | | $ | (146,840) | |
Other comprehensive income (loss) before reclassifications | | (26,928) | | | 490 | | | (98) | | | (26,536) | |
Amounts reclassified to net income (loss) | | — | | | (5) | | | — | | | (5) | |
Other comprehensive income (loss) | | (26,928) | | | 485 | | | (98) | | | (26,541) | |
Balance, December 31, 2021 | | (173,881) | | | 598 | | | (98) | | | (173,381) | |
Other comprehensive income (loss) before reclassifications | | 3,767 | | | (553) | | | — | | | 3,214 | |
Amounts reclassified to net income (loss) | | — | | | (17) | | | — | | | (17) | |
Other comprehensive income (loss) | | 3,767 | | | (570) | | | — | | | 3,197 | |
Balance, December 31, 2022 | | $ | (170,114) | | | $ | 28 | | | $ | (98) | | | $ | (170,184) | |
|
| | | | | | | | | | | | | | | | |
| | Cumulative Foreign Currency Translation Adjustments | | Unrealized Gain (Loss) On Available-For-Sale Securities | | Other | | Accumulated Other Comprehensive Income (Loss) |
| | | | | | | | |
Balance, December 31, 2017 | | $ | (52,251 | ) | | $ | (648 | ) | | $ | 77 |
| | $ | (52,822 | ) |
Cumulative effect of accounting changes | | — |
| | 433 |
| | — |
| | 433 |
|
Balance, January 1, 2018 | | (52,251 | ) | | (215 | ) | | 77 |
| | (52,389 | ) |
Other comprehensive income (loss) before reclassifications | | (30,549 | ) | | (665 | ) | | 41 |
| | (31,173 | ) |
Amounts reclassified to net income (loss) | | — |
| | (212 | ) | | — |
| | (212 | ) |
Other comprehensive income (loss) | | (30,549 | ) | | (877 | ) | | 41 |
| | (31,385 | ) |
Balance, December 31, 2018 | | (82,800 | ) | | (1,092 | ) | | 118 |
| | (83,774 | ) |
Other comprehensive income (loss) before reclassifications | | (2,146 | ) | | 1,817 |
| | (114 | ) | | (443 | ) |
Amounts reclassified to net income (loss) | | — |
| | (419 | ) | | — |
| | (419 | ) |
Other comprehensive income (loss) | | (2,146 | ) | | 1,398 |
| | (114 | ) | | (862 | ) |
Balance, December 31, 2019 | | $ | (84,946 | ) | | $ | 306 |
| | $ | 4 |
| | $ | (84,636 | ) |
The amounts reclassified to net income (loss) related to unrealized gain (loss) on available-for-sale securities in the table above are included in Gains (losses) on investments, net in the Consolidated Statements of Operations.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8.7. MARKETABLE INVESTMENT SECURITIES
Our marketable investment securities portfolio consists of the following debt and equity instruments:
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | | | |
Marketable investment securities: | | | | |
Debt securities: | | | | |
Corporate bonds | | $ | 411,706 |
| | $ | 1,234,017 |
|
Other debt securities | | 240,888 |
| | 374,106 |
|
Total debt securities | | 652,594 |
| | 1,608,123 |
|
Equity securities | | 241 |
| | 1,073 |
|
Total marketable investment securities | | $ | 652,835 |
| | $ | 1,609,196 |
|
The following table presents our Marketable investment securities: | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
Marketable investment securities: | | | | |
Available-for-sale debt securities: | | | | |
Corporate bonds | | $ | 154,580 | | | $ | 284,787 | |
Commercial paper | | 643,526 | | | 491,360 | |
Other debt securities | | 1,663 | | | 78,355 | |
Total available-for-sale debt securities | | 799,769 | | | 854,502 | |
Equity securities | | — | | | — | |
Total marketable investment securities | | $ | 799,769 | | | $ | 854,502 | |
Debt Securities
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our other debt securities portfolio includes investments in various debt instruments, including U.S. government bonds and commercial paper.Available-for-Sale
The following table is a summarypresents the components of our available-for-sale debt securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized | | Unrealized | | Estimated |
| | Cost | | Gains | | Losses | | Fair Value |
As of December 31, 2022 | | | | | | | | |
Corporate bonds | | $ | 154,517 | | | $ | 119 | | | $ | (56) | | | $ | 154,580 | |
Commercial paper | | 643,553 | | | — | | | (27) | | | 643,526 | |
Other debt securities | | 1,663 | | | — | | | — | | | 1,663 | |
Total available-for-sale debt securities | | $ | 799,733 | | | $ | 119 | | | $ | (83) | | | $ | 799,769 | |
As of December 31, 2021 | | | | | | | | |
Corporate bonds | | $ | 285,169 | | | $ | — | | | $ | (382) | | | $ | 284,787 | |
Commercial paper | | 491,360 | | | — | | | — | | | 491,360 | |
Other debt securities | | 78,395 | | | — | | | (40) | | | 78,355 | |
Total available-for-sale debt securities | | $ | 854,924 | | | $ | — | | | $ | (422) | | | $ | 854,502 | |
|
| | | | | | | | | | | | | | | | |
| | Amortized | | Unrealized | | Estimated |
| | Cost | | Gains | | Losses | | Fair Value |
| | | | | | | | |
As of December 31, 2019 | | | | | | | | |
Corporate bonds | | $ | 411,312 |
| | $ | 395 |
| | $ | (1 | ) | | $ | 411,706 |
|
Other debt securities | | 240,887 |
| | 1 |
| | — |
| | 240,888 |
|
Total available-for-sale debt securities | | $ | 652,199 |
| | $ | 396 |
| | $ | (1 | ) | | $ | 652,594 |
|
As of December 31, 2018 | | | | | | | | |
Corporate bonds | | $ | 1,235,110 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,234,017 |
|
Other debt securities | | 374,106 |
| | — |
| | — |
| | 374,106 |
|
Total available-for-sale debt securities | | $ | 1,609,216 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,608,123 |
|
The following table presents the activity on our available-for-sale debt securities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the years ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
Proceeds from sales | | | | | | $ | 37,904 | | | $ | 292,188 | | | $ | 112,497 | |
As of December 31, 2019,2022, we have $652.6$784.4 million of available-for-sale debt securities with contractual maturities of one year or less and 0$15.4 million with contractual maturities greater than one year.
Equity Securities
Our marketable equity securities consist primarily of shares of common stock of public companies. Prior to January 1, 2018, we classified our marketable equity securities as available-for-sale or trading securities, depending on our investment strategy for the securities. As of December 31, 2017, our marketable equity securities consisted of available-for-sale securities with a fair value of $1.1 million, reflecting an adjusted cost basis of $1.5 million and unrealized losses of $0.4 million which were recognized as Unrealized gains (losses) on available-for-sale securities in the Consolidated Statements of Comprehensive Income (Loss). Substantially all unrealized losses on our available-for-sale securities related to securities that were in a continuous loss position for less than 12 months. We recognized a $3.3 million other-than-temporary impairment during the year ended December 31, 2017 on one of our available-for-sale securities which had experienced a decline in market value as a result of adverse developments.
Effective January 1, 2018, we began accounting for investments in equity securities at their fair value and recognizing unrealized gains and losses in Gains (losses) on investments, net in the Consolidated Statements of Operations. Gains
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Equity Securities
(losses) on investments, net
in
The following table presents the Consolidated Statements of Operations related to equity securities that we held were $0.8 million of net loss and de minimis of net loss for the years ended December 31, 2019 and 2018, respectively. The fair valueactivity of our equity securities was $0.2 million and $1.1 million as of December 31, 2019 and 2018, respectively.securities:
Sales of Available-for-Sale Securities
Proceeds from sales of our available-for-sale securities were $311.8 million, $50.0 million and $8.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. We recognized as a result of such sales $0.4 million of gains, $0.2 million of gains and 0 for the years ended December 31, 2019, 2018 and 2017, respectively. | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
Gains (losses) on investments, net | | $ | — | | | $ | (6) | | | $ | (235) | |
Fair Value Measurements
OurThe following table presents our marketable investment securities are summarized incategorized by the table below. Certainfair value hierarchy, certain of our investments in debt and equity instrumentswhich have historically experienced volatility. volatility:
| | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Total |
As of December 31, 2022 | | | | | | |
Cash equivalents (including restricted) | | $ | 496 | | | $ | 548,058 | | | $ | 548,554 | |
Available-for-sale debt securities: | | | | | | |
Corporate bonds | | $ | — | | | $ | 154,580 | | | $ | 154,580 | |
Commercial paper | | — | | | 643,526 | | | 643,526 | |
Other debt securities | | — | | | 1,663 | | | 1,663 | |
Total available-for-sale debt securities | | — | | | 799,769 | | | 799,769 | |
Equity securities | | — | | | — | | | — | |
Total marketable investment securities | | $ | — | | | $ | 799,769 | | | $ | 799,769 | |
| | | | | | |
As of December 31, 2021 | | | | | | |
Cash equivalents (including restricted) | | $ | 4,032 | | | $ | 320,732 | | | $ | 324,764 | |
Available-for-sale debt securities: | | | | | | |
Corporate bonds | | $ | — | | | $ | 284,787 | | | $ | 284,787 | |
Commercial paper | | — | | | 491,360 | | | 491,360 | |
Other debt securities | | — | | | 78,355 | | | 78,355 | |
Total available-for-sale debt securities | | — | | | 854,502 | | | 854,502 | |
Equity securities | | — | | | — | | | — | |
Total marketable investment securities | | $ | — | | | $ | 854,502 | | | $ | 854,502 | |
As of December 31, 20192022 and 2018,December 31, 2021, we did not have any investments that were categorized within Level 3 of the fair value hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | |
Corporate bonds | | $ | — |
| | $ | 411,706 |
| | $ | 411,706 |
| | $ | — |
| | $ | 1,234,017 |
| | $ | 1,234,017 |
|
Other debt securities | | — |
| | 240,888 |
| | 240,888 |
| | — |
| | 374,106 |
| | 374,106 |
|
Total debt securities | | — |
| | 652,594 |
| | 652,594 |
| | — |
| | 1,608,123 |
| | 1,608,123 |
|
Equity securities | | 241 |
| | — |
| | 241 |
| | 1,073 |
| | — |
| | 1,073 |
|
Total marketable investment securities | | $ | 241 |
| | $ | 652,594 |
| | $ | 652,835 |
| | $ | 1,073 |
| | $ | 1,608,123 |
| | $ | 1,609,196 |
|
NOTE 9.INVENTORY
Inventory consists of the following:
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | | | |
Raw materials | | $ | 4,240 |
| | $ | 4,856 |
|
Work-in-process | | 6,979 |
| | 13,901 |
|
Finished goods | | 68,255 |
| | 56,622 |
|
Total inventory | | $ | 79,474 |
| | $ | 75,379 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10.8. PROPERTY AND EQUIPMENT
Our propertyThe following table presents the components of Property and equipment,net consisted:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
Property and equipment, net: | | | | |
Satellites, net | | $ | 754,019 | | | $ | 847,613 | |
Other property and equipment, net | | 621,985 | | | 675,834 | |
Total property and equipment, net | | $ | 1,376,004 | | | $ | 1,523,447 | |
HUGHES SATELLITE SYSTEMS CORPORATION
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | | | |
Property and equipment, net: | | | | |
Satellites, net | | $ | 1,127,521 |
| | $ | 1,209,930 |
|
Other property and equipment, net | | 730,060 |
| | 711,981 |
|
Total property and equipment, net | | $ | 1,857,581 |
| | $ | 1,921,911 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Satellites
As of December 31, 2019,2022, our operating satellite fleet consisted of 8eight geosynchronous (“GEO”) satellites, 5five of which are owned and 3three of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator.
In connection with the BSS Transaction, 6
The following table presents our GEO satellite fleet as of our previously owned satellites and the leases for 2 of our previously leased satellites were transferred to DISH Network (see Note 1. Organization and Business Activities and Note 5. Discontinued Operations).
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
GEO Satellite | | Segment | | Launch Date | | Nominal Degree Orbital Location (Longitude) | | Depreciable Life (In Years) |
Owned: | | | | | | | | |
Owned: | | | | | | | | |
SPACEWAY 3 (1) | | Hughes | | August 2007 | | 95 W | | 10 |
EchoStar XVII | | Hughes | | July 2012 | | 107 W | | 15 |
EchoStar XIX | | Hughes | | December 2016 | | 97.1 W | | 15 |
Al Yah 3 (2) | | Hughes | | January 2018 | | 20 W | | 7 |
EchoStar IX (3) (4) | | ESS | | August 2003 | | 121 W | | 12 |
| | | | | | | | |
Finance leases: | | | | | | | | |
Eutelsat 65 West A | | Hughes | | March 2016 | | 65 W | | 15 |
Telesat T19V | | Hughes | | July 2018 | | 63 W | | 15 |
EchoStar 105/SES-11 | | ESS | | October 2017 | | 105 W | | 15 |
(1) Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed the acquisition of Hughes Acquisition. Communications, Inc. (“Hughes Communications”) and its subsidiaries in 2011 (the “Hughes Acquisition”).
(2) Upon consummation of our joint venture with YahsatAl Yah Satellite Communications Company PrJSC (“Yahsat”) in Brazil in November 2019, we acquired the Brazilian Ka-band payload on this satellite. Depreciable life represents the remaining useful life as of November 2019.
(3) We own the Ka-band and Ku-band payloads on this satellite.
(4) EchoStar IX is approaching its end of station-kept life. The Company placed the satellite in an inclined-orbit in the first quarter of 2023. Inclined-orbit will extend its life to enable further revenue generating opportunities.
The following table presents the components of our satellites, net:
| | | | | | | | | | | | | | | | | | | | |
| | Depreciable Life (In Years) | | As of December 31, |
| | | 2022 | | 2021 |
Satellites, net: | | | | | | |
Satellites - owned | | 7 to 15 | | $ | 1,503,435 | | | $ | 1,500,836 | |
Satellites - acquired under finance leases | | 15 | | 360,642 | | | 354,170 | |
Total satellites | | | | 1,864,077 | | | 1,855,006 | |
Accumulated depreciation: | | | | | | |
Satellites - owned | | | | (988,164) | | | (911,722) | |
Satellites - acquired under finance leases | | | | (121,894) | | | (95,671) | |
Total accumulated depreciation | | | | (1,110,058) | | | (1,007,393) | |
Total satellites, net | | | | $ | 754,019 | | | $ | 847,613 | |
The following table presents the depreciation expense associated with our satellites, net:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the years ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
Depreciation expense: | | | | | | | | | | |
Satellites - owned | | | | | | $ | 75,738 | | | $ | 85,068 | | | $ | 108,273 | |
Satellites - acquired under finance leases | | | | | | 24,127 | | | 23,740 | | | 27,611 | |
Total depreciation expense | | | | | | $ | 99,865 | | | $ | 108,808 | | | $ | 135,884 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Satellites, net consisted of the following:
|
| | | | | | | | | | |
| | Depreciable Life (In Years) | | As of December 31, |
| | | 2019 | | 2018 |
| | | | | | |
Satellites, net: | | | | | | |
Satellites - owned | | 7 to 15 | | $ | 1,516,006 |
| | $ | 1,459,955 |
|
Satellites - acquired under finance leases | | 10 to 15 | | 381,162 |
| | 385,592 |
|
Total satellites | | | | 1,897,168 |
| | 1,845,547 |
|
Accumulated depreciation | | | | (769,647 | ) | | (635,617 | ) |
Total satellites, net | | | | $ | 1,127,521 |
| | $ | 1,209,930 |
|
As of December 31, 2019 and 2018, accumulated depreciation included amounts for satellites acquired under finance leases of $56.4 million and $31.5 million, respectively.
Depreciation and amortization expense and
The following table presents capitalized interest associated with our satellites consisted of the following: and satellite-related ground infrastructure:
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Depreciation and amortization expense: | | | | | | |
Satellites - owned | | $ | 110,685 |
| | $ | 104,967 |
| | $ | 89,728 |
|
Satellites acquired under finance leases | | 25,755 |
| | 20,269 |
| | 9,962 |
|
Total depreciation and amortization expense | | $ | 136,440 |
| | $ | 125,236 |
| | $ | 99,690 |
|
| | | | | | |
Capitalized interest | | $ | 1,019 |
| | $ | 6,179 |
| | $ | 22,828 |
|
We are not aware of any anomalies with respect to our owned or leased satellites or payloads that have had any significant adverse effect on their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position as of and for the year ended December 31, 2019.2022.