PART I — FINANCIAL INFORMATION
ItemITEM 1. FINANCIAL STATEMENTS
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(InAmounts in thousands, except share and per share amounts)
(Unaudited)
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 901,269 | | | $ | 535,894 | |
Marketable investment securities | | 666,904 | | | 1,010,496 | |
Trade accounts receivable and contract assets, net | | 243,683 | | | 182,063 | |
Other current assets, net | | 229,214 | | | 198,444 | |
Total current assets | | 2,041,070 | | | 1,926,897 | |
Non-current assets: | | | | |
Property and equipment, net | | 2,251,258 | | | 2,338,285 | |
Operating lease right-of-use assets | | 147,811 | | | 149,198 | |
Goodwill | | 532,570 | | | 511,086 | |
Regulatory authorizations, net | | 460,084 | | | 469,766 | |
Other intangible assets, net | | 16,323 | | | 13,984 | |
Other investments, net | | 352,778 | | | 297,747 | |
Other non-current assets, net | | 323,411 | | | 338,241 | |
Total non-current assets | | 4,084,235 | | | 4,118,307 | |
Total assets | | $ | 6,125,305 | | | $ | 6,045,204 | |
| | | | |
Liabilities and Stockholders' Equity | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 95,019 | | | $ | 109,338 | |
Contract liabilities | | 127,584 | | | 141,343 | |
Accrued expenses and other current liabilities | | 183,613 | | | 209,442 | |
Total current liabilities | | 406,216 | | | 460,123 | |
Non-current liabilities: | | | | |
Long-term debt, net | | 1,496,578 | | | 1,495,994 | |
Deferred tax liabilities, net | | 434,043 | | | 403,684 | |
Operating lease liabilities | | 133,197 | | | 134,897 | |
Other non-current liabilities | | 119,719 | | | 136,426 | |
Total non-current liabilities | | 2,183,537 | | | 2,171,001 | |
Total liabilities | | 2,589,753 | | | 2,631,124 | |
| | | | |
Commitments and contingencies | | | | |
|
| | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
Assets | | |
| | |
|
Current Assets: | | |
| | |
|
Cash and cash equivalents | | $ | 2,798,359 |
| | $ | 2,570,365 |
|
Marketable investment securities, at fair value | | 485,035 |
| | 522,516 |
|
Trade accounts receivable, net of allowance for doubtful accounts of $13,211 and $12,956, respectively | | 192,387 |
| | 182,527 |
|
Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero | | 52,512 |
| | 19,417 |
|
Inventory | | 91,232 |
| | 62,620 |
|
Prepaids and deposits | | 53,536 |
| | 43,456 |
|
Other current assets | | 12,746 |
| | 10,862 |
|
Current assets of discontinued operations | | 145 |
| | 311,524 |
|
Total current assets | | 3,685,952 |
| | 3,723,287 |
|
Noncurrent Assets: | | |
| | |
|
Restricted cash and marketable investment securities | | 13,736 |
| | 12,926 |
|
Property and equipment, net of accumulated depreciation of $2,551,678 and $2,598,492, respectively | | 3,530,459 |
| | 3,398,195 |
|
Regulatory authorizations, net | | 545,557 |
| | 544,633 |
|
Goodwill | | 504,173 |
| | 504,173 |
|
Other intangible assets, net | | 62,635 |
| | 80,734 |
|
Investments in unconsolidated entities | | 165,290 |
| | 171,016 |
|
Other receivable - DISH Network | | 92,133 |
| | 90,586 |
|
Other noncurrent assets, net | | 207,221 |
| | 166,385 |
|
Noncurrent assets of discontinued operations | | — |
| | 316,924 |
|
Total noncurrent assets | | 5,121,204 |
| | 5,285,572 |
|
Total assets | | $ | 8,807,156 |
| | $ | 9,008,859 |
|
Liabilities and Stockholders’ Equity | | |
| | |
|
Current Liabilities: | | |
| | |
|
Trade accounts payable | | $ | 120,436 |
| | $ | 170,297 |
|
Trade accounts payable - DISH Network | | 6,556 |
| | 1,072 |
|
Current portion of long-term debt and capital lease obligations | | 38,407 |
| | 32,984 |
|
Deferred revenue and prepayments | | 56,285 |
| | 59,989 |
|
Accrued interest | | 57,837 |
| | 46,487 |
|
Accrued compensation | | 37,096 |
| | 53,454 |
|
Accrued expenses and other | | 110,872 |
| | 95,726 |
|
Current liabilities of discontinued operations | | 542 |
| | 71,429 |
|
Total current liabilities | | 428,031 |
| | 531,438 |
|
Noncurrent Liabilities: | | |
| | |
|
Long-term debt and capital lease obligations, net of unamortized debt issuance costs | | 3,605,715 |
| | 3,622,463 |
|
Deferred tax liabilities, net | | 745,965 |
| | 746,667 |
|
Other noncurrent liabilities | | 131,626 |
| | 90,785 |
|
Noncurrent liabilities of discontinued operations | | — |
| | 10,701 |
|
Total noncurrent liabilities | | 4,483,306 |
| | 4,470,616 |
|
Total liabilities | | 4,911,337 |
| | 5,002,054 |
|
Commitments and Contingencies (Note 14) | |
|
| |
|
|
Stockholders’ Equity: | | |
| | |
|
Preferred stock, $.001 par value, 20,000,000 shares authorized: | | |
| | |
|
Hughes Retail Preferred Tracking Stock, $.001 par value, zero authorized, issued and outstanding at September 30, 2017 and 13,000,000 shares authorized and 6,290,499 issued and outstanding at December 31, 2016 | | — |
| | 6 |
|
Common stock, $.001 par value, 4,000,000,000 shares authorized: | | |
| | |
|
Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 53,564,095 shares issued and 48,031,777 shares outstanding at September 30, 2017 and 52,243,465 shares issued and 46,711,147 shares outstanding at December 31, 2016 | | 54 |
| | 52 |
|
Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at each of September 30, 2017 and December 31, 2016 | | 48 |
| | 48 |
|
Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2017 and December 31, 2016 | | — |
| | — |
|
Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2017 and December 31, 2016 | | — |
| | — |
|
Additional paid-in capital | | 3,660,696 |
| | 3,828,677 |
|
Accumulated other comprehensive loss | | (88,732 | ) | | (124,803 | ) |
Accumulated earnings | | 408,079 |
| | 314,247 |
|
Treasury stock, at cost | | (98,162 | ) | | (98,162 | ) |
Total EchoStar stockholders’ equity | | 3,881,983 |
| | 3,920,065 |
|
Noncontrolling interest in HSS Tracking Stock | | — |
| | 73,910 |
|
Other noncontrolling interests | | 13,836 |
| | 12,830 |
|
Total stockholders’ equity | | 3,895,819 |
| | 4,006,805 |
|
Total liabilities and stockholders’ equity | | $ | 8,807,156 |
| | $ | 9,008,859 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.Consolidated Financial Statements.
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS
(InAmounts in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | | |
| | |
| | |
| | |
|
Services and other revenue - DISH Network | | $ | 111,135 |
| | $ | 115,127 |
| | $ | 339,824 |
| | $ | 347,440 |
|
Services and other revenue - other | | 310,973 |
| | 276,280 |
| | 865,817 |
| | 820,149 |
|
Equipment revenue - DISH Network | | 126 |
| | 2,138 |
| | 175 |
| | 7,008 |
|
Equipment revenue - other | | 58,999 |
| | 66,501 |
| | 173,644 |
| | 160,081 |
|
Total revenue | | 481,233 |
| | 460,046 |
| | 1,379,460 |
| | 1,334,678 |
|
Costs and Expenses: | | |
| | |
| | |
| | |
|
Cost of sales - services and other (exclusive of depreciation and amortization) | | 138,641 |
| | 131,594 |
| | 404,448 |
| | 384,942 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | 52,051 |
| | 53,599 |
| | 153,854 |
| | 143,252 |
|
Selling, general and administrative expenses | | 91,003 |
| | 80,672 |
| | 263,820 |
| | 240,454 |
|
Research and development expenses | | 8,302 |
| | 9,030 |
| | 23,444 |
| | 23,524 |
|
Depreciation and amortization | | 134,822 |
| | 108,549 |
| | 379,939 |
| | 324,743 |
|
Total costs and expenses | | 424,819 |
| | 383,444 |
| | 1,225,505 |
| | 1,116,915 |
|
Operating income | | 56,414 |
| | 76,602 |
| | 153,955 |
| | 217,763 |
|
| | | | | | | | |
Other Income (Expense): | | |
| | |
| | |
| | |
|
Interest income | | 12,012 |
| | 6,259 |
| | 30,342 |
| | 13,726 |
|
Interest expense, net of amounts capitalized | | (55,646 | ) | | (37,316 | ) | | (156,498 | ) | | (80,376 | ) |
Gains on investments, net | | 20,090 |
| | 230 |
| | 33,962 |
| | 8,179 |
|
Other-than-temporary impairment loss on available-for-sale securities | | — |
| | — |
| | (3,298 | ) | | — |
|
Equity in earnings of unconsolidated affiliates, net | | 4,381 |
| | 4,166 |
| | 15,620 |
| | 8,984 |
|
Other, net | | 4,686 |
| | 364 |
| | 8,211 |
| | 5,531 |
|
Total other expense, net | | (14,477 | ) | | (26,297 | ) | | (71,661 | ) | | (43,956 | ) |
Income from continuing operations before income taxes | | 41,937 |
| | 50,305 |
| | 82,294 |
| | 173,807 |
|
Income tax provision | | (6,082 | ) | | (17,394 | ) | | (9,073 | ) | | (61,258 | ) |
Net income from continuing operations | | 35,855 |
| | 32,911 |
| | 73,221 |
| | 112,549 |
|
Net income (loss) from discontinued operations | | (654 | ) | | 4,499 |
| | 6,454 |
| | 29,213 |
|
Net income | | 35,201 |
| | 37,410 |
| | 79,675 |
| | 141,762 |
|
Less: Net income (loss) attributable to noncontrolling interest in HSS Tracking Stock | | — |
| | 85 |
| | (655 | ) | | (926 | ) |
Less: Net income attributable to other noncontrolling interests | | 532 |
| | 524 |
| | 1,006 |
| | 946 |
|
Net income attributable to EchoStar | | 34,669 |
| | 36,801 |
| | 79,324 |
| | 141,742 |
|
Less: Net income (loss) attributable to Hughes Retail Preferred Tracking Stock | | — |
| | 157 |
| | (1,209 | ) | | (1,709 | ) |
Net income attributable to EchoStar common stock | | $ | 34,669 |
| | $ | 36,644 |
| | $ | 80,533 |
| | $ | 143,451 |
|
| | | | | | | | |
Amounts attributable to EchoStar common stock: | | | | | | | | |
Net income from continuing operations | | $ | 35,323 |
| | $ | 32,145 |
| | $ | 74,079 |
| | $ | 114,238 |
|
Net income (loss) from discontinued operations | | (654 | ) | | 4,499 |
| | 6,454 |
| | 29,213 |
|
Net income attributable to EchoStar common stock | | $ | 34,669 |
| | $ | 36,644 |
| | $ | 80,533 |
| | $ | 143,451 |
|
| | | | | | | | |
Weighted-average common shares outstanding - Class A and B common stock: | | |
| | |
| | |
| | |
|
Basic | | 95,656 |
| | 93,898 |
| | 95,316 |
| | 93,661 |
|
Diluted | | 96,890 |
| | 94,401 |
| | 96,626 |
| | 94,189 |
|
| | | | | | | | |
Earnings (loss) per share - Class A and B common stock: | | |
| | |
| | |
| | |
|
Basic: | | | | | | | | |
Continuing operations | | $ | 0.37 |
| | $ | 0.34 |
| | $ | 0.78 |
| | $ | 1.22 |
|
Discontinued operations | | (0.01 | ) | | 0.05 |
| | 0.06 |
| | 0.31 |
|
Total basic earnings per share | | $ | 0.36 |
| | $ | 0.39 |
| | $ | 0.84 |
| | $ | 1.53 |
|
Diluted: | | | | | | | | |
Continuing operations | | $ | 0.36 |
| | $ | 0.34 |
| | $ | 0.77 |
| | $ | 1.21 |
|
Discontinued operations | | — |
| | 0.05 |
| | 0.06 |
| | 0.31 |
|
Total diluted earnings per share | | $ | 0.36 |
| | $ | 0.39 |
| | $ | 0.83 |
| | $ | 1.52 |
|
| | | | | | | | | | | | | | |
Stockholders' equity: | | | | |
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued and outstanding at both September 30, 2022 and December 31, 2021 | | — | | | — | |
Common stock, $0.001 par value, 4,000,000,000 shares authorized: | | | | |
Class A common stock, $0.001 par value, 1,600,000,000 shares authorized, 58,604,927 shares issued and 35,291,616 shares outstanding at September 30, 2022 and 58,059,622 shares issued and 38,726,923 shares outstanding at December 31, 2021 | | 59 | | | 58 | |
Class B convertible common stock, $0.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at both September 30, 2022 and December 31, 2021 | | 48 | | | 48 | |
Class C convertible common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both September 30, 2022 and December 31, 2021 | | — | | | — | |
Class D common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both September 30, 2022 and December 31, 2021 | | — | | | — | |
Additional paid-in capital | | 3,361,219 | | | 3,345,878 | |
Accumulated other comprehensive income (loss) | | (180,339) | | | (212,102) | |
Accumulated earnings (losses) | | 784,170 | | | 656,466 | |
Treasury shares, at cost | | (525,824) | | | (436,521) | |
Total EchoStar Corporation stockholders' equity | | 3,439,333 | | | 3,353,827 | |
Non-controlling interests | | 96,219 | | | 60,253 | |
Total stockholders' equity | | 3,535,552 | | | 3,414,080 | |
Total liabilities and stockholders' equity | | $ | 6,125,305 | | | $ | 6,045,204 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.Consolidated Financial Statements.
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
(InAmounts in thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Comprehensive Income: | | |
| | |
| | |
| | |
|
Net income | | $ | 35,201 |
| | $ | 37,410 |
| | $ | 79,675 |
| | $ | 141,762 |
|
Other comprehensive income (loss), net of tax: | | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | | 9,373 |
| | 2,483 |
| | 33,162 |
| | 13,769 |
|
Unrealized gains (losses) on available-for-sale securities and other | | (12,037 | ) | | 10,180 |
| | 2,369 |
| | 9,695 |
|
Recognition of realized gains on available-for-sale securities in net income | | — |
| | (10 | ) | | (2,758 | ) | | (5,584 | ) |
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income | | — |
| | — |
| | 3,298 |
| | — |
|
Total other comprehensive income (loss), net of tax | | (2,664 | ) | | 12,653 |
| | 36,071 |
| | 17,880 |
|
Comprehensive income | | 32,537 |
| | 50,063 |
| | 115,746 |
| | 159,642 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interest in HSS Tracking Stock | | — |
| | 85 |
| | (655 | ) | | (926 | ) |
Less: Comprehensive income attributable to other noncontrolling interests | | 532 |
| | 524 |
| | 1,006 |
| | 760 |
|
Comprehensive income attributable to EchoStar | | $ | 32,005 |
| | $ | 49,454 |
| | $ | 115,395 |
| | $ | 159,808 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | 401,382 | | | $ | 432,739 | | | $ | 1,234,890 | | | $ | 1,294,355 | | | |
Equipment revenue | | 96,005 | | | 71,921 | | | 263,347 | | | 192,721 | | | |
Total revenue | | 497,387 | | | 504,660 | | | 1,498,237 | | | 1,487,076 | | | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 145,189 | | | 138,179 | | | 430,553 | | | 410,515 | | | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 74,329 | | | 62,328 | | | 213,497 | | | 161,982 | | | |
Selling, general and administrative expenses | | 111,421 | | | 112,986 | | | 342,682 | | | 341,143 | | | |
Research and development expenses | | 9,181 | | | 7,974 | | | 25,562 | | | 22,960 | | | |
Depreciation and amortization | | 110,233 | | | 120,596 | | | 347,224 | | | 368,864 | | | |
Impairment of long-lived assets | | — | | | — | | | 711 | | | 245 | | | |
Total costs and expenses | | 450,353 | | | 442,063 | | | 1,360,229 | | | 1,305,709 | | | |
Operating income (loss) | | 47,034 | | | 62,597 | | | 138,008 | | | 181,367 | | | |
Other income (expense): | | | | | | | | | | |
Interest income, net | | 14,183 | | | 5,725 | | | 29,677 | | | 16,914 | | | |
Interest expense, net of amounts capitalized | | (13,845) | | | (16,313) | | | (43,125) | | | (79,848) | | | |
Gains (losses) on investments, net | | (10,077) | | | 3,748 | | | 48,071 | | | 112,981 | | | |
Equity in earnings (losses) of unconsolidated affiliates, net | | (1,426) | | | 74 | | | (4,441) | | | (2,596) | | | |
Foreign currency transaction gains (losses), net | | (2,805) | | | (6,641) | | | (53) | | | (10,045) | | | |
Other, net | | (319) | | | 775 | | | 2,198 | | | (12,922) | | | |
Total other income (expense), net | | (14,289) | | | (12,632) | | | 32,327 | | | 24,484 | | | |
Income (loss) before income taxes | | 32,745 | | | 49,965 | | | 170,335 | | | 205,851 | | | |
Income tax benefit (provision), net | | (13,195) | | | (19,748) | | | (51,367) | | | (63,047) | | | |
Net income (loss) | | 19,550 | | | 30,217 | | | 118,968 | | | 142,804 | | | |
Less: Net loss (income) attributable to non-controlling interests | | 2,853 | | | 3,192 | | | 8,736 | | | 6,419 | | | |
Net income (loss) attributable to EchoStar Corporation common stock | | $ | 22,403 | | | $ | 33,409 | | | $ | 127,704 | | | $ | 149,223 | | | |
| | | | | | | | | | |
Earnings (losses) per share - Class A and B common stock: | | | | | | | | | | |
Basic | | $ | 0.27 | | | $ | 0.38 | | | $ | 1.51 | | | $ | 1.64 | | | |
Diluted | | $ | 0.27 | | | $ | 0.38 | | | $ | 1.51 | | | $ | 1.64 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.Consolidated Financial Statements.
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYCOMPREHENSIVE INCOME (LOSS)
(InAmounts in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A and B Common Stock | | Hughes Retail Preferred Tracking Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings | | Treasury Stock | | Noncontrolling Interest in HSS Tracking Stock | | Other Noncontrolling Interests | | Total |
Balance, December 31, 2015 | | $ | 99 |
| | $ | 6 |
| | $ | 3,776,451 |
| | $ | (117,233 | ) | | $ | 134,317 |
| | $ | (98,162 | ) | | $ | 74,854 |
| | $ | 11,310 |
| | $ | 3,781,642 |
|
Issuances of Class A common stock: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Exercise of stock options | | 1 |
| | — |
| | 4,678 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,679 |
|
Employee benefits | | — |
| | — |
| | 11,126 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,126 |
|
Employee Stock Purchase Plan | | — |
| | — |
| | 11,478 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,478 |
|
Stock-based compensation | | — |
| | — |
| | 11,953 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,953 |
|
R&D tax credits utilized by DISH Network | | — |
| | — |
| | (1,511 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,511 | ) |
Other, net | | — |
| | — |
| | (334 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (334 | ) |
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | 141,742 |
| | — |
| | (926 | ) | | 946 |
| | 141,762 |
|
Foreign currency translation adjustment | | — |
| | — |
| | — |
| | 13,955 |
| | — |
| | — |
| | — |
| | (186 | ) | | 13,769 |
|
Unrealized losses on available-for-sale securities, net and other | | — |
| | — |
| | — |
| | 4,111 |
| | — |
| | — |
| | — |
| | — |
| | 4,111 |
|
Balance, September 30, 2016 | | $ | 100 |
| | $ | 6 |
| | $ | 3,813,841 |
| | $ | (99,167 | ) | | $ | 276,059 |
| | $ | (98,162 | ) | | $ | 73,928 |
| | $ | 12,070 |
| | $ | 3,978,675 |
|
| | | | | | | | | | | | | | | | | | |
Balance, December 31, 2016 | | $ | 100 |
| | $ | 6 |
| | $ | 3,828,677 |
| | $ | (124,803 | ) | | $ | 314,247 |
| | $ | (98,162 | ) | | $ | 73,910 |
| | $ | 12,830 |
| | $ | 4,006,805 |
|
Issuances of Class A common stock: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Exercise of stock options | | 2 |
| | — |
| | 34,104 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 34,106 |
|
Employee benefits | | — |
| | — |
| | 11,200 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,200 |
|
Employee Stock Purchase Plan | | — |
| | — |
| | 6,938 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,938 |
|
Stock-based compensation | | — |
| | — |
| | 7,169 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,169 |
|
Cumulative effect of adoption of ASU 2016-09 as of January 1, 2017 | | — |
| | — |
| | — |
| | — |
| | 14,508 |
| | — |
| | — |
| | — |
| | 14,508 |
|
Reacquisition and retirement of Tracking Stock pursuant to Share Exchange Agreement | | — |
| | (6 | ) | | (226,815 | ) | | — |
| | — |
| | — |
| | (73,255 | ) | | — |
| | (300,076 | ) |
R&D tax credits utilized by DISH Network | | — |
| | — |
| | (577 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (577 | ) |
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | 79,324 |
| | — |
| | (655 | ) | | 1,006 |
| | 79,675 |
|
Foreign currency translation adjustment | | — |
| | — |
| | — |
| | 33,162 |
| | — |
| | — |
| | — |
| | — |
| | 33,162 |
|
Unrealized gains and impairment on available-for-sale securities, net and other | | — |
| | — |
| | — |
| | 2,909 |
| | — |
| | — |
| | — |
| | — |
| | 2,909 |
|
Balance, September 30, 2017 | | $ | 102 |
| | $ | — |
| | $ | 3,660,696 |
| | $ | (88,732 | ) | | $ | 408,079 |
| | $ | (98,162 | ) | | $ | — |
| | $ | 13,836 |
| | $ | 3,895,819 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Net income (loss) | | $ | 19,550 | | | $ | 30,217 | | | $ | 118,968 | | | $ | 142,804 | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | 18,853 | | | (28,692) | | | 29,684 | | | (15,414) | | | |
Unrealized gains (losses) on available-for-sale securities | | 358 | | | (234) | | | (275) | | | (214) | | | |
Other | | 2,660 | | | 119 | | | 2,660 | | | (4,792) | | | |
Amounts reclassified to net income (loss): | | | | | | | | | | |
Realized losses (gains) on available-for-sale debt securities | | — | | | (5) | | | 3 | | | (12) | | | |
Total other comprehensive income (loss), net of tax | | 21,871 | | | (28,812) | | | 32,072 | | | (20,432) | | | |
Comprehensive income (loss) | | 41,421 | | | 1,405 | | | 151,040 | | | 122,372 | | | |
Less: Comprehensive loss (income) attributable to non-controlling interests | | 5,108 | | | 8,760 | | | 8,427 | | | 9,257 | | | |
Comprehensive income (loss) attributable to EchoStar Corporation | | $ | 46,529 | | | $ | 10,165 | | | $ | 159,467 | | | $ | 131,629 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.Consolidated Financial Statements.
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(InAmounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Treasury Shares, at cost | | Non-controlling Interests | | Total |
Balance, June 30, 2021 | | $ | 106 | | | $ | 3,337,190 | | | $ | (182,226) | | | $ | 699,405 | | | $ | (343,869) | | | $ | 74,299 | | | $ | 3,584,905 | |
Issuances of Class A common stock: | | | | | | | | | | | | | | |
Employee Stock Purchase Plan | | — | | 2,473 | | — | | — | | — | | — | | 2,473 | |
Stock-based compensation | | — | | 2,088 | | — | | — | | — | | — | | 2,088 | |
Contribution by non-controlling interest holder | | — | | — | | — | | — | | — | | — | | — | |
Other comprehensive income (loss) | | — | | — | | (23,244) | | — | | — | | (5,568) | | (28,812) | |
Net income (loss) | | — | | — | | — | | 33,409 | | — | | (3,192) | | 30,217 | |
Treasury share repurchase | | — | | — | | — | | — | | (62,426) | | — | | (62,426) | |
Balance, September 30, 2021 | | $ | 106 | | | $ | 3,341,751 | | | $ | (205,470) | | | $ | 732,814 | | | $ | (406,295) | | | $ | 65,539 | | | $ | 3,528,445 | |
| | | | | | | | | | | | | | |
Balance, June 30, 2022 | | $ | 107 | | | $ | 3,355,238 | | | $ | (204,465) | | | $ | 761,767 | | | $ | (514,418) | | | $ | 101,327 | | | $ | 3,499,556 | |
Issuances of Class A common stock: | | | | | | | | | | | | | | |
Employee benefits | | — | | — | | — | | — | | — | | — | | — | |
Employee Stock Purchase Plan | | — | | 2,126 | | — | | — | | — | | — | | 2,126 | |
Stock-based compensation | | — | | 3,355 | | — | | — | | — | | — | | 3,355 | |
| | | | | | | | | | | | | | |
Other comprehensive income (loss) | | — | | — | | 24,126 | | — | | — | | (2,255) | | 21,871 | |
Net income (loss) | | — | | — | | — | | 22,403 | | — | | (2,853) | | 19,550 | |
Treasury share repurchase | | — | | — | | — | | | | (11,406) | | — | | (11,406) | |
| | | | | | | | | | | | | | |
Other | | — | | 500 | | — | | — | | — | | — | | 500 | |
Balance, September 30, 2022 | | $ | 107 | | | $ | 3,361,219 | | | $ | (180,339) | | | $ | 784,170 | | | $ | (525,824) | | | $ | 96,219 | | | $ | 3,535,552 | |
|
| | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash Flows from Operating Activities: | | |
| | |
|
Net income | | $ | 79,675 |
| | $ | 141,762 |
|
Adjustments to reconcile net income to net cash flows from operating activities: | | |
| | |
|
Depreciation and amortization | | 391,598 |
| | 370,872 |
|
Equity in earnings of unconsolidated affiliates, net | | (14,461 | ) | | (11,181 | ) |
Gain and impairment on investments, net | | (30,664 | ) | | (8,179 | ) |
Stock-based compensation | | 7,169 |
| | 11,953 |
|
Deferred tax provision | | 7,924 |
| | 71,422 |
|
Dividends received from unconsolidated entities | | 15,000 |
| | 15,000 |
|
Proceeds from sale of trading securities | | 8,922 |
| | 7,140 |
|
Changes in current assets and current liabilities, net | | 144,677 |
| | (47,013 | ) |
Changes in noncurrent assets and noncurrent liabilities, net | | (23,474 | ) | | 8,097 |
|
Other, net | | 5,570 |
| | 14,836 |
|
Net cash flows from operating activities | | 591,936 |
| | 574,709 |
|
Cash Flows from Investing Activities: | | |
| | |
|
Purchases of marketable investment securities | | (319,912 | ) | | (883,288 | ) |
Sales and maturities of marketable investment securities | | 376,648 |
| | 643,865 |
|
Expenditures for property and equipment | | (422,661 | ) | | (533,669 | ) |
Refunds and other receipts related to capital expenditures | | — |
| | 24,087 |
|
Changes in restricted cash and marketable investment securities | | (810 | ) | | 7,351 |
|
Investments in unconsolidated entities | | — |
| | (1,636 | ) |
Sale of investment in unconsolidated entity | | 17,781 |
| | — |
|
Expenditures for externally marketed software | | (25,447 | ) | | (17,991 | ) |
Other, net | | — |
| | 1,462 |
|
Net cash flows from investing activities | | (374,401 | ) | | (759,819 | ) |
Cash Flows from Financing Activities: | | |
| | |
|
Proceeds from issuance of long-term debt | | — |
| | 1,500,000 |
|
Payments of debt issuance costs | | (414 | ) | | (6,275 | ) |
Repayment of debt and capital lease obligations | | (26,394 | ) | | (30,615 | ) |
Net proceeds from Class A common stock options exercised | | 33,156 |
| | 4,679 |
|
Net proceeds from Class A common stock issued under the Employee Stock Purchase Plan | | 6,938 |
| | 11,478 |
|
Cash exchanged for Tracking Stock | | (651 | ) | | — |
|
Other, net | | (3,968 | ) | | (3,373 | ) |
Net cash flows from financing activities | | 8,667 |
| | 1,475,894 |
|
Effect of exchange rates on cash and cash equivalents | | 1,014 |
| | 684 |
|
Net increase in cash and cash equivalents | | 227,216 |
| | 1,291,468 |
|
Cash and cash equivalents, beginning of period | | 2,571,143 |
| | 924,240 |
|
Cash and cash equivalents, end of period | | $ | 2,798,359 |
| | $ | 2,215,708 |
|
| | | | |
Supplemental Disclosure of Cash Flow Information: | | |
| | |
|
Cash paid for interest (including capitalized interest) | | $ | 183,451 |
| | $ | 97,044 |
|
Capitalized interest | | $ | 45,496 |
| | $ | 70,386 |
|
Cash paid for income taxes | | $ | 10,071 |
| | $ | 9,187 |
|
Employee benefits paid in Class A common stock | | $ | 11,200 |
| | $ | 11,126 |
|
Property and equipment financed under capital lease obligations | | $ | 8,423 |
| | $ | 7,172 |
|
Increase (decrease) in capital expenditures included in accounts payable, net | | $ | (3,494 | ) | | $ | 21,951 |
|
Capitalized in-orbit incentive obligations | | $ | 43,890 |
| | $ | — |
|
Noncash net assets exchanged for Tracking Stock | | $ | 299,425 |
| | $ | — |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.Consolidated Financial Statements.
ECHOSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Treasury Shares, at cost | | Non-controlling Interests | | Total |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Balance, December 31, 2020 | | $ | 105 | | | $ | 3,321,426 | | | $ | (187,876) | | | $ | 583,591 | | | $ | (174,912) | | | $ | 64,916 | | | $ | 3,607,250 | |
Issuances of Class A common stock: | | | | | | | | | | | | | | |
Employee benefits | | 1 | | | 7,124 | | | — | | | — | | | — | | | — | | | 7,125 | |
Employee Stock Purchase Plan | | — | | | 7,288 | | | — | | | — | | | — | | | — | | | 7,288 | |
Stock-based compensation | | — | | | 5,913 | | | — | | | — | | | — | | | — | | | 5,913 | |
Contribution by non-controlling interest holder | | — | | | — | | | — | | | — | | | — | | | 9,880 | | | 9,880 | |
Other comprehensive income (loss) | | — | | | — | | | (17,594) | | | — | | | — | | | (2,838) | | | (20,432) | |
Net income (loss) | | — | | | — | | | — | | | 149,223 | | | — | | | (6,419) | | | 142,804 | |
Treasury share repurchase | | — | | | — | | | — | | | — | | | (231,383) | | | — | | | (231,383) | |
Balance, September 30, 2021 | | $ | 106 | | | $ | 3,341,751 | | | $ | (205,470) | | | $ | 732,814 | | | $ | (406,295) | | | $ | 65,539 | | | $ | 3,528,445 | |
| | | | | | | | | | | | | | |
Balance, December 31, 2021 | | $ | 106 | | | $ | 3,345,878 | | | $ | (212,102) | | | $ | 656,466 | | | $ | (436,521) | | | $ | 60,253 | | | $ | 3,414,080 | |
Issuances of Class A common stock: | | | | | | | | | | | | | | |
Employee benefits | | 1 | | | 7,041 | | | — | | | — | | | — | | | — | | | 7,042 | |
Employee Stock Purchase Plan | | — | | | 7,173 | | | — | | | — | | | — | | | — | | | 7,173 | |
Stock-based compensation | | — | | | 8,401 | | | — | | | — | | | — | | | — | | | 8,401 | |
Issuance of equity and contribution of assets pursuant to the India JV formation | | — | | | (14,090) | | | — | | | — | | | — | | | 44,393 | | | 30,303 | |
Other comprehensive income (loss) | | — | | | — | | | 31,763 | | | — | | | — | | | 309 | | | 32,072 | |
Net income (loss) | | — | | | — | | | — | | | 127,704 | | | — | | | (8,736) | | | 118,968 | |
Treasury share repurchase | | — | | | — | | | — | | | — | | | (89,303) | | | — | | | (89,303) | |
Consideration received from DISH Network for R&D tax credits utilized | | — | | | 6,316 | | | — | | | — | | | — | | | — | | | 6,316 | |
Other | | — | | | 500 | | | — | | | — | | | — | | | — | | | 500 | |
Balance, September 30, 2022 | | $ | 107 | | | $ | 3,361,219 | | | $ | (180,339) | | | $ | 784,170 | | | $ | (525,824) | | | $ | 96,219 | | | $ | 3,535,552 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
ECHOSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2022 | | 2021 | | |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 118,968 | | | $ | 142,804 | | | |
Adjustments to reconcile net income (loss) to cash flows provided by (used for) operating activities: | | | | | | |
Depreciation and amortization | | 347,224 | | | 368,864 | | | |
Impairment of long-lived assets | | 711 | | | 245 | | | |
Losses (gains) on investments, net | | (48,071) | | | (112,981) | | | |
Equity in losses (earnings) of unconsolidated affiliates, net | | 4,441 | | | 2,596 | | | |
Foreign currency transaction losses (gains), net | | 53 | | | 10,045 | | | |
Deferred tax provision (benefit), net | | 28,901 | | | 45,950 | | | |
Stock-based compensation | | 8,401 | | | 5,913 | | | |
Amortization of debt issuance costs | | 583 | | | 2,192 | | | |
Other, net | | 35,609 | | | 16,691 | | | |
Changes in assets and liabilities, net: | | | | | | |
Trade accounts receivable and contract assets, net | | (63,563) | | | (20,894) | | | |
Other current assets, net | | (26,402) | | | (7,841) | | | |
Trade accounts payable | | 657 | | | (15,386) | | | |
Contract liabilities | | (13,759) | | | 30,066 | | | |
Accrued expenses and other current liabilities | | (27,004) | | | (103,457) | | | |
Non-current assets and non-current liabilities, net | | (23,432) | | | 63,055 | | | |
Net cash provided by (used for) operating activities | | 343,317 | | | 427,862 | | | |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Purchases of marketable investment securities | | (540,447) | | | (1,452,982) | | | |
Sales and maturities of marketable investment securities | | 917,077 | | | 2,099,815 | | | |
Expenditures for property and equipment | | (249,374) | | | (352,003) | | | |
Expenditures for externally marketed software | | (16,926) | | | (25,634) | | | |
India JV formation | | (7,892) | | | — | | | |
Dividend received from unconsolidated affiliate | | 2,000 | | | — | | | |
Sale of unconsolidated affiliate | | 7,500 | | | — | | | |
Purchase of other investments | | — | | | (50,000) | | | |
Sales of other investments | | 3,070 | | | 10,951 | | | |
Net cash provided by (used for) investing activities | | 115,008 | | | 230,147 | | | |
| | | | | | |
Cash flows from financing activities: | | | | | | |
Repurchase and maturity of the 2021 Senior Unsecured Notes | | — | | | (901,818) | | | |
Payment of finance lease obligations | | (114) | | | (578) | | | |
Payment of in-orbit incentive obligations | | (2,422) | | | (1,800) | | | |
Proceeds from Class A common stock issued under the Employee Stock Purchase Plan | | 7,173 | | | 7,288 | | | |
Treasury share repurchase | | (89,303) | | | (229,383) | | | |
Contribution by non-controlling interest holder | | — | | | 9,880 | | | |
Other, net | | — | | | (966) | | | |
Net cash provided by (used for) financing activities | | (84,666) | | | (1,117,377) | | | |
| | | | | | |
Effect of exchange rates on cash and cash equivalents | | (3,123) | | | (3,114) | | | |
Net increase (decrease) in cash and cash equivalents | | 370,536 | | | (462,482) | | | |
Cash and cash equivalents, including restricted amounts, beginning of period | | 536,874 | | | 896,812 | | | |
Cash and cash equivalents, including restricted amounts, end of period | | $ | 907,410 | | | $ | 434,330 | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
7
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES
Note 1
. Organization and Business Activities
Principal Business
EchoStar Corporation (which, together with its subsidiaries, is referred to as “EchoStar,” the “Company,” “we,” “us” and/orand “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada. We areNevada and has operated as a global provider of satellite service operations, video delivery solutions, broadband satellite technologies and broadband services for home and small office customers. We deliver innovative network technologies, managed services, and various communications solutions for enterprise and government customers.separately traded public company from DISH Network Corporation (“DISH”) since 2008. Our Class A common stock is publicly traded on the NasdaqNASDAQ Global Select Market (“Nasdaq”NASDAQ”) under the symbol “SATS.”
In February 2014, EchoStar Corporation entered into agreements with certain subsidiaries of DISH Network Corporation (“DISH”) pursuantWe are an industry leader in both networking technologies and services, innovating to deliver the global solutions that power a connected future for people, enterprises and things everywhere. We provide broadband satellite technologies, broadband internet services for consumer customers, which effective March 1, 2014, (i) EchoStar Corporationinclude home and our subsidiary Hughes Satellite Systems Corporation (“HSS”) issued the Tracking Stock (as defined below)small to subsidiaries of DISH in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV), including the assumption of related in-orbit incentive obligations, and $11.4 million in cash and (ii) DISH and certain of its subsidiaries began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”). The Tracking Stock tracked the economic performance of the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group” or “HRG”), and represented an aggregate 80.0% economic interest in HRG (the Hughes Retail Preferred Tracking Stock issued by EchoStar Corporation (the “EchoStar Tracking Stock”) represented a 51.89% economic interest in HRG and the Hughes Retail Preferred Tracking Stock issued by HSS (the “HSS Tracking Stock”, together with the EchoStar Tracking Stock, the “Tracking Stock”) represented a 28.11% economic interest in the Hughes Retail Group). In addition to the remaining 20.0% economic interest in HRG, EchoStar retained all economic interest in the wholesale satellite broadband business and other businesses of EchoStar.
On January 31, 2017, EchoStar Corporation and certain of its subsidiaries entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries. Pursuant to the Share Exchange Agreement, on February 28, 2017, among other things, EchoStar Corporation and certain of its subsidiaries received all of the shares of the Tracking Stock in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologiesmedium-sized businesses, and certain other assets (collectively, the “Share Exchange”). Following consummation of the Share Exchange, we no longer operate the EchoStar Technologies business segmentsatellite services. We also deliver innovative network technologies, managed services and the EchoStar Tracking Stockcommunications solutions for enterprise customers, which include aeronautical and HSS Tracking Stock were retired and are no longer outstanding and all agreements, arrangements and policy statements with respect to such tracking stock terminated and are of no further effect. As a result of the Share Exchange, the condensed consolidated financial statements of the EchoStar Technologies businesses have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 3 for further discussion of our discontinued operations.
government enterprises. We currently operate in the following two business segments:
| |
• | •Hughes segment — 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. •Echostar Satellite Services segment (“ESS segment”) — 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 U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.
Hughes — which provides broadband satellite technologies and broadband services to home and small office customers and network technologies, managed services, equipment, hardware, satellite services and communication solutions to domestic and international consumers and aeronautical, enterprise and government customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment provides satellite ground segment systems and terminals to mobile system operators.
|
| |
• | EchoStar Satellite Services (“ESS”) — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite service operations and video delivery solutions on a full-time and occasional-use basis primarily to DISH Network Corporation and its subsidiaries (“DISH Network”), Dish Mexico, S. de R.L. de C.V., a joint venture we entered into in 2008 (“Dish Mexico”), United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers. We also manage satellite operations for certain satellites owned by DISH Network.
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Our operations also include various corporate departmentsfunctions (primarily Executive, Treasury, Strategic Development, Human Resources, IT,Information Technology, Finance, Accounting, Real Estate and Legal) as well asand other activities, that have not been assigned to our operating segments, includingsuch as costs incurred in certain satellite development programs and other business development activities, our centralized treasury operations, and gains (losses)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 “CorporateCorporate and Other.”
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 (iii) Other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 15. Segment Reporting for further detail.
In 2008, DISH Network completed its distribution to us of its digital set-top box business, certain infrastructure, and other assets and related liabilities, including certain of its satellites, uplink and satellite transmission assets, and real estate (the “Spin-off”). Since the Spin-off, EchoStar and DISH have operated as separate publicly-traded companies. Prior to the consummation of the Share Exchange on February 28, 2017, DISH Network held the Tracking Stock discussed above. 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 trusts established by Mr. Ergen for the benefit of his family.
NoteNOTE 2. Summary of Significant Accounting PoliciesSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
TheThese unaudited Consolidated Financial Statements and the accompanying unaudited condensed consolidated financial statements have beennotes (collectively, the “Consolidated Financial Statements”) are prepared in conformity with U.S. generally accepted accounting principles generally accepted in the (“U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statementsthey do not include all of the information and notes required for complete financial statements prepared in conformity with U.S. GAAP. In our opinion, all adjustments, (consistingconsisting of normal recurring adjustments)adjustments, considered necessary for a fair presentation have been included. OurHowever, our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer
All amounts presented in these Consolidated Financial Statements are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Refer to Note 2. Summary of Significant Accounting Policies to the consolidated financial statements and notes thereto includedConsolidated Financial Statements in our Form 10-K for the year ended December 31, 2016.
Principlesa summary and discussion of Consolidation
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 where we are the primary beneficiary. We are deemed to have a controlling financial interest in other entities when we own more than 50 percent 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 noncontrolling interest within stockholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.our significant accounting policies, except as updated below.
As of December 31, 2016, noncontrolling interests consisted primarily of HSS Tracking Stock previously owned by DISH Network. As a result of the Share Exchange, the noncontrolling interest in HSS Tracking Stock was extinguished as of February 28, 2017. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires usWe are required to make certain estimates and assumptions that affect the amounts reported amounts of assetsin these Consolidated Financial Statements. The most significant estimates and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to our condensed consolidated financial statements. Estimatesassumptions are used in accounting for, among other things,determining: (i) inputs used to recognize revenue over time, including amortization periods for deferred subscribercontract acquisition costs, revenue recognition using the percentage-of-completion method,costs; (ii) allowances for doubtful accounts, allowances for sales returns and rebates, warranty obligations, self-insurance obligations,accounts; (iii) deferred taxes and related valuation allowances, including uncertain tax positions,positions; (iv) loss contingencies,contingencies; (v) fair value of financial instruments, fair value of stock-based compensation awards,instruments; (vi) fair value of assets and liabilities acquired in business combinations, lease classifications, asset impairment testing, useful livescombinations; and methods for depreciation and amortization of long-lived(vii) assets and certain royalty obligations. 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 condensed consolidated financial statements. ChangingAdditionally, changing economic conditions may increase the inherent uncertainty in the estimates 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.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Fair Value Measurements
Goodwill
We determine fair value basedtest goodwill for impairment annually in our second fiscal quarter, or more frequently if indicators of impairment exist. All of our goodwill is assigned to our Hughes segment. We conducted our annual impairment test of goodwill during our second fiscal quarter on the exchange pricea qualitative basis and determined 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 accordingno adjustment to the following hierarchy in determining fair value:
| |
• | Level 1, defined as observable inputs being quoted prices in active markets for identical assets;
|
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• | 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.
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Transfers between levels incarrying value of goodwill was then necessary because the fair value hierarchy are considered to occur atvalues exceeded carrying values. During the beginning of the quarterly accounting period. There were no transfers between levels for each of the nine monthsquarter ended September 30, 2017 or 2016.
As2022, we conducted a quantitative interim test of September 30, 2017 and December 31, 2016, the carrying amountsgoodwill for all of our cash and cash equivalents, trade accounts receivable, net of allowance for doubtful accounts, accounts payable and accrued liabilities were equal to or approximated fair valuereporting units due to their short-term nature or proximity to current market rates.
Fair valuescontinuing decline in our stock price during that period. As a result of our marketable investment securities are 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 a Level 1 measurement that reflects quoted prices for identical securities in active markets. Fair values of our investments in other marketable debt securities generally are based on Level 2 measurements, as the markets for such debt securities are less active. Trades of identical debt securities on or near the measurement date are considered a strong indication of fair value. Matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features also may be used to determineinterim test, no goodwill impairment was identified. The fair value of the Hughes reporting unit exceeded the carrying value by more than 10%. We concluded that there were no other indicators of impairment. Given the decline in our investments in marketable debt securities.
Fair values for HSS’ 6 1/2% Senior Secured Notes due 2019 (the “2019 Senior Secured Notes”), 7 5/8% Senior Unsecured Notes due 2021 (the “2021 Senior Unsecured Notes”), 5.250% Senior Secured Notes due 2026 (the “2026 Senior Secured Notes”) and 6.625% Senior Unsecured Notes due 2026 (the “2026 Senior Unsecured Notes” and together withstock price during the 2026 Senior Secured Notes, the “2026 Notes”) (see Note 11) are based on quoted market prices in less active markets and are categorized as Level 2 measurements. The fair values of our other debt are Level 2 measurements and are estimated to approximate their carrying amounts based on the proximity of their interest rates to current market rates. As ofquarter ended September 30, 20172022, we believe it is reasonably possible that a sustained decline in our stock price and December 31, 2016, the fair values of our in-orbit incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $113.5 million and $74.1 million, respectively. We use fair value measurements from time to timemarket capitalization will result in connection with 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.
Research and Development
Costs incurred in research and development activities generally are expensed as incurred. Aall or a significant portion of our researchgoodwill 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 development costswould materially adversely affect our financial results in the period recognized.
Principles of Consolidation
We consolidate all entities in which we have a controlling financial interest. We are incurreddeemed to have a controlling financial interest in connection withvariable interest entities in which we are the specific requirementsprimary 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 customer’s order. In such instances, the amounts for these customer funded development efforts are included in cost of sales.
Cost of sales includes research and development costs incurred in connection with customers’ orders of approximately $7.0 million and $11.1 millionnon-controlling interest within stockholders’ equity for the three months ended September 30, 2017 and 2016, respectively, and $20.7 million and $17.2 million forportion of the nine months ended September 30, 2017 and 2016, respectively. In addition, we incurred other research and development expenses of approximately $8.3 million and $9.0 million for the three months ended September 30, 2017 and 2016, respectively, and $23.4 million and $23.5 million for the nine months ended September 30, 2017 and 2016, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Capitalized Software Costs
Costs relatedentity’s equity attributed to the procurementnon-controlling ownership interests. All significant intercompany balances and development of software for internal-use and externally marketed software are capitalized and amortized using the straight-line method over the estimated useful life of the software, nottransactions have been eliminated in excess of five years. Capitalized costs of internal-use software are included in “Property and equipment, net” and capitalized costs of externally marketed software are included in “Other noncurrent assets, net” in our condensed consolidated balance sheets. Externally marketed software generally is installed in the equipment we sell 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. As of September 30, 2017 and December 31, 2016, the net carrying amount of externally marketed software was $87.7 million and $76.3 million, respectively, of which $16.7 million and $50.1 million, respectively, was under development and not yet placed in service. We capitalized costs related to the development of externally marketed software of $8.3 million and $6.2 million for the three months ended September 30, 2017 and 2016, respectively, and $25.4 million and $18.5 million for the nine months ended September 30, 2017 and 2016, respectively. We recorded amortization expense relating to the development of externally marketed software of $5.5 million and $2.5 million for the three months ended September 30, 2017 and 2016, respectively, and $14.1 million and $7.2 million for the nine months ended September 30, 2017 and 2016, respectively. The weighted average useful life of our externally marketed software was approximately four years as of September 30, 2017.consolidation.
New
Recently Adopted Accounting Pronouncements
In May 2014,On January 1, 2021, we adopted Accounting Standard Update (“ASU”) No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the Financial Accounting Standards Board (“FASB”) overall simplification initiative and seeks to simplify the accounting for income taxes by updating certain guidance and removing certain exceptions. Our adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
In November 2021, the FASB issued ASU 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 Topic 832 disclosure requirements include: (i) the nature of the transactions and the related accounting policy used; (ii) the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item; and (iii) significant terms and conditions of the transactions. Our adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Standards UpdatePronouncements Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASU”ASC 848”) No. 2014-09, Revenue. 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, 2022. 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 impact of adopting this new guidance and do not expect it to have a material impact on our Consolidated Financial Statements.
In October 2021, the FASB issued ASU 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 2014-09”)requires an entity (acquirer) to recognize and has modifiedmeasure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the standard thereafter. It outlines a single comprehensive model, codifiedacquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 ofas if it had originated the FASB Accounting Standards Codification,contracts. The ASU is effective for entities to use in accountingthe Company for revenue arising from contracts with customersannual and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Public entities are required to adopt the new revenue standardinterim periods in fiscal years beginning after December 15, 2017 and in interim periods within those fiscal years. The standard may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption.2022. Early adoption is permitted, but not before fiscal years beginningpermitted. The ASU is applied to business combinations occurring on or after December 15, 2016. We plan to adopt the new revenue standard as of January 1, 2018 using the “modified retrospective method.” Under this method, we will apply the rules only to contracts that are not substantially completed as of January 1, 2018, recognizing in retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.
Upon initial evaluation, we do not expect the adoption of ASU 2014-09 to have a material impact on the timing or amount of revenue recognition. However, we do believe the new standard will impact our financial statements as it relates to the deferral of sales commissions. We generally expense sales commissions as incurred under the current standard with the exception of the consumer business in our Hughes segment. The requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our consolidated balance sheets and corresponding impact to the consolidated statement of operations and comprehensive income (loss). In addition, we currently amortize our sales acquisition costs related to our consumer business in our Hughes segment over the contract term. We believe, under the new guidance, the amortization period for these contract acquisition costs will be over the estimated customer life which is a longer period of time.
effective date.
We continue to evaluate the impact of the new standard on our consolidated financial statements and related disclosures. We are not able to reasonably estimate the impact of the new standard on our consolidated financial statements at this time.
In January 2016,March 2022, the FASB issued Accounting Standards Update No. 2016-01, RecognitionASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ThisVintage Disclosures. The amendments in this update substantially revises standardseliminate the accounting guidance 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 net income. The update 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 certaintroubled debt restructurings by creditors while enhancing disclosure requirements associated with
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
equity investments and the fair valuecurrent-period gross write-offs by year of financial instruments. ASU 2016-01 isorigination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2017,2023, including interim periods within those fiscal years, with early adoption permitted for certain requirements. We plan to adopt all applicable requirements of this update as of January 1, 2018. Upon adoption, we will adjust accumulated earnings to include unrealized gains or losses on any marketable equity securities then designated as available for sale, which historically have been recorded in accumulated other comprehensive loss except when an other-than-temporary impairment has occurred. Following adoption, all periodic changes in fair value of such securities will be recognized in net income or loss. As of September 30, 2017, we had recognized $13.6 million in net unrealized gains on such securities in accumulated other comprehensive loss. For our equity investments without a readily determinable fair value that we now account for using the cost method, we expect to elect 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 available-for-sale and cost method equity securities. We continue to assess the impact on our consolidated financial statements of certain requirements of ASU 2016-01 related to measurement of fair value of financial instruments, deferred tax assets related to available-for-sale debt securities, and financial statement presentation and disclosure.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). This standard requires lessees to recognize assets and liabilities for all leases with lease terms more than 12 months, including leases classified as operating leases. The standard also modifies the definition of a lease and the criteria for classifying leases as operating leases or financing leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We are assessingevaluating the impact of adopting this new accounting standard on our consolidated financial statementsguidance and related disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvementswe do not expect it to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies the accounting for share-based payment awards. This update requires all excess tax benefits and deficiencies to be recognized as income tax expense or benefit and permits an entity to make an entity-wide policy election to either estimate forfeitures or recognize forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The update specifies requirements for retrospective, modified retrospective or prospective application for the various amendments contained in the update. Upon adoption of this standard as of January 1, 2017, we recorded a $14.5 million deferred tax asset and a corresponding credit to accumulated earnings for excess tax benefits that had not previously been recognized because the related tax deductions had not reduced taxes payable. We did not change our accounting policy to estimate forfeitures in determining compensation cost. We prospectively adopted amendments requiring presentation of excess tax benefits in operating activities in the statement of cash flows and dealing with the treatment of excess tax benefits in the calculation of diluted earnings per share. The inclusion of excess tax benefits in our income tax provision for the three and nine months ended September 30, 2017 resulted in increases in net income from continuing operations of $0.2 million and $1.6 million, respectively and increases in net income of $0.2 million and $4.8 million, respectively.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We early adopted ASU 2016-16 as of January 1, 2017. Our adoption of this update did not have a material impact on our condensed consolidated financial statements and related disclosures.Consolidated Financial Statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). This standard requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and the standard must be applied retrospectively to all periods presented. We expect to adopt ASU 2016-18 as of January 1, 2018. Following our adoption of this standard, the beginning and ending balances of cash and cash equivalents presented in our consolidated statements of cash
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
NOTE 3. REVENUE RECOGNITION
flows will include amounts for restricted cash and cash equivalents, which currently are not included in such balances. Changes in restricted cash and cash equivalents, which we have historically reported in cash flows from investing activities, will not be reported in our consolidated statements of cash flows.
Contract Balances
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and is to be applied on a prospective basis. We early adopted ASU 2017-04 as of January 1, 2017. Our adoption of this update did not have a material impact on our condensed consolidated financial statements and related disclosures, but it may impact the recognition and measurement of a goodwill impairment loss in future periods if we determine that the carrying amount of any reporting units including goodwill exceeds fair value of the reporting unit.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). This update shortens the amortization period of premiums on certain purchased callable debt securities to the earliest call date, effectively reducing interest income on such securities prior to the earliest call date. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
Note 3. Discontinued Operations
On January 31, 2017, EchoStar Corporation and certain of its subsidiaries entered into the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, on February 28, 2017, among other things, EchoStar Corporation and certain of its subsidiaries received all of the shares of the Tracking Stock in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange, we no longer operate the EchoStar Technologies business segment and the EchoStar Tracking Stock and HSS Tracking Stock were retired and are no longer outstanding and all agreements, arrangements and policy statements with respect to such tracking stock terminated and are of no further effect.
As a result of the Share Exchange, the historical financial results of our EchoStar Technologies segment prior to the closing of the Share Exchange are reflected in our condensed consolidated financial statements as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The noncontrolling interest in HSS Tracking Stock, as reflected in our stockholders equity, was extinguished as of February 28, 2017 as a result of the Share Exchange.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The following table presents the operating resultscomponents of our discontinued operations:contract balances:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Trade accounts receivable and contract assets, net: | | | | |
Sales and services | | $ | 187,675 | | | $ | 154,676 | |
Leasing | | 7,684 | | | 5,668 | |
Total trade accounts receivable | | 195,359 | | | 160,344 | |
Contract assets | | 64,558 | | | 36,307 | |
Allowance for doubtful accounts | | (16,234) | | | (14,588) | |
Total trade accounts receivable and contract assets, net | | $ | 243,683 | | | $ | 182,063 | |
| | | | |
Contract liabilities: | | | | |
Current | | $ | 127,584 | | | $ | 141,343 | |
Non-current | | 8,797 | | | 10,669 | |
Total contract liabilities | | $ | 136,381 | | | $ | 152,012 | |
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
Revenue: | | | | | | | | |
Equipment, services and other revenue - DISH Network | | $ | — |
| | $ | 260,829 |
| | $ | 143,063 |
| | $ | 892,333 |
|
Equipment, services and other revenue - other | | (45 | ) | | 21,474 |
| | 10,344 |
| | 89,326 |
|
Total revenue | | (45 | ) | | 282,303 |
| | 153,407 |
| | 981,659 |
|
Costs and Expenses: | | | | | | | | |
Cost of equipment, services and other | | 19 |
| | 229,414 |
| | 121,973 |
| | 800,801 |
|
Selling, general and administrative expenses | | (590 | ) | | 20,869 |
| | 5,502 |
| | 55,923 |
|
Research and development expenses | | — |
| | 11,556 |
| | 4,635 |
| | 38,237 |
|
Depreciation and amortization | | — |
| | 15,085 |
| | 11,659 |
| | 46,129 |
|
Total costs and expenses | | (571 | ) | | 276,924 |
| | 143,769 |
| | 941,090 |
|
Operating income | | 526 |
| | 5,379 |
| | 9,638 |
| | 40,569 |
|
Other Income (Expense): | | | | | | | | |
Interest expense | | — |
| | (41 | ) | | (15 | ) | | (116 | ) |
Equity in earnings (losses) of unconsolidated affiliates, net | | — |
| | 998 |
| | (1,159 | ) | | 2,197 |
|
Other, net | | 2 |
| | 281 |
| | (61 | ) | | 369 |
|
Total income (expense), net | | 2 |
| | 1,238 |
| | (1,235 | ) | | 2,450 |
|
Income from discontinued operations before income taxes | | 528 |
| | 6,617 |
| | 8,403 |
| | 43,019 |
|
Income tax provision | | (1,182 | ) | | (2,118 | ) | | (1,949 | ) | | (13,806 | ) |
Net income (loss) from discontinued operations | | $ | (654 | ) | | $ | 4,499 |
| | $ | 6,454 |
| | $ | 29,213 |
|
The following table presents the revenue recognized in the Consolidated Statements of Operations that was previously included within contract liabilities:
Expenditures for property
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Revenue | | $ | 6,175 | | | $ | 16,521 | | | $ | 115,974 | | | $ | 81,543 | | | |
Contract Acquisition Costs
The following table presents the activity in our contract acquisition costs, net:
| | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2022 | | 2021 | | |
Balance at beginning of period | | $ | 82,986 | | | $ | 99,837 | | | |
Additions | | 45,172 | | | 54,701 | | | |
Amortization expense | | (57,822) | | | (66,815) | | | |
Foreign currency translation | | 156 | | | (828) | | | |
Balance at end of period | | $ | 70,492 | | | $ | 86,895 | | | |
We recognized amortization expenses related to contract acquisition costs of $18.2 million and equipment of our discontinued operations totaled zero and $17.2$21.6 million for the three months ended September 30, 20172022 and 2016, respectively, and $12.5 million and $31.8 million for the nine months ended September 30, 2017 and 2016,2021, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Performance Obligations
As of September 30, 2022, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $1.0 billion. Performance obligations expected to be satisfied within one year and greater than one year are 38.0% and 62.0%, respectively. This amount and percentages exclude agreements with consumer customers in our Hughes segment, our leasing arrangements and agreements with certain customers under which collectability 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 three months ended September 30, 2022 | | | | | | | | |
North America | | $ | 389,181 | | | $ | 4,981 | | | $ | 2,841 | | | $ | 397,003 | |
South and Central America | | 40,290 | | | — | | | — | | | 40,290 | |
Other | | 60,094 | | | — | | | — | | | 60,094 | |
Total revenue | | $ | 489,565 | | | $ | 4,981 | | | $ | 2,841 | | | $ | 497,387 | |
| | | | | | | | |
For the three months ended September 30, 2021 | | | | | | | | |
North America | | $ | 412,805 | | | $ | 4,436 | | | $ | 3,278 | | | $ | 420,519 | |
South and Central America | | 44,898 | | | — | | | — | | | 44,898 | |
Other | | 39,234 | | | — | | | 9 | | | 39,243 | |
Total revenue | | $ | 496,937 | | | $ | 4,436 | | | $ | 3,287 | | | $ | 504,660 | |
| | | | | | | | |
For the nine months ended September 30, 2022 | | | | | | | | |
North America | | $ | 1,187,301 | | | $ | 14,305 | | | $ | 8,413 | | | $ | 1,210,019 | |
South and Central America | | 125,256 | | | — | | | — | | | 125,256 | |
Other | | 162,955 | | | — | | | 7 | | | 162,962 | |
Total revenue | | $ | 1,475,512 | | | $ | 14,305 | | | $ | 8,420 | | | $ | 1,498,237 | |
| | | | | | | | |
For the nine months ended September 30, 2021 | | | | | | | | |
North America | | $ | 1,216,665 | | | $ | 12,808 | | | $ | 9,163 | | | $ | 1,238,636 | |
South and Central America | | 134,924 | | | — | | | — | | | 134,924 | |
Other | | 113,484 | | | — | | | 32 | | | 113,516 | |
Total revenue | | $ | 1,465,073 | | | $ | 12,808 | | | $ | 9,195 | | | $ | 1,487,076 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Nature of Products and Services
The following tables present our revenue disaggregated by the nature of products and services and by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended September 30, 2022 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 383,739 | | | $ | 3,247 | | | $ | 1,606 | | | $ | 388,592 | |
Lease revenue | | 9,822 | | | 1,734 | | | 1,234 | | | 12,790 | |
Total services and other revenue | | 393,561 | | | 4,981 | | | 2,840 | | | 401,382 | |
Equipment revenue: | | | | | | | | |
Equipment | | 33,585 | | | —�� | | | 1 | | | 33,586 | |
Design, development and construction services | | 60,605 | | | — | | | — | | | 60,605 | |
Lease revenue | | 1,814 | | | — | | | — | | | 1,814 | |
Total equipment revenue | | 96,004 | | | — | | | 1 | | | 96,005 | |
Total revenue | | $ | 489,565 | | | $ | 4,981 | | | $ | 2,841 | | | $ | 497,387 | |
| | | | | | | | |
For the three months ended September 30, 2021 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 415,287 | | | $ | 2,976 | | | $ | 1,749 | | | $ | 420,012 | |
Lease revenue | | 9,730 | | | 1,460 | | | 1,537 | | | 12,727 | |
Total services and other revenue | | 425,017 | | | 4,436 | | | 3,286 | | | 432,739 | |
Equipment revenue: | | | | | | | | |
Equipment | | 24,504 | | | — | | | 1 | | | 24,505 | |
Design, development and construction services | | 45,025 | | | — | | | — | | | 45,025 | |
Lease revenue | | 2,391 | | | — | | | — | | | 2,391 | |
Total equipment revenue | | 71,920 | | | — | | | 1 | | | 71,921 | |
Total revenue | | $ | 496,937 | | | $ | 4,436 | | | $ | 3,287 | | | $ | 504,660 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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| | | | | | | | |
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the nine months ended September 30, 2022 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 1,181,461 | | | $ | 9,343 | | | $ | 4,474 | | | $ | 1,195,278 | |
Lease revenue | | 30,711 | | | 4,962 | | | 3,939 | | | 39,612 | |
Total services and other revenue | | 1,212,172 | | | 14,305 | | | 8,413 | | | 1,234,890 | |
Equipment revenue: | | | | | | | | |
Equipment | | 86,878 | | | — | | | 7 | | | 86,885 | |
Design, development and construction services | | 172,821 | | | — | | | — | | | 172,821 | |
Lease revenue | | 3,641 | | | — | | | — | | | 3,641 | |
Total equipment revenue | | 263,340 | | | — | | | 7 | | | 263,347 | |
Total revenue | | $ | 1,475,512 | | | $ | 14,305 | | | $ | 8,420 | | | $ | 1,498,237 | |
| | | | | | | | |
For the nine months ended September 30, 2021 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 1,242,804 | | | $ | 8,550 | | | $ | 4,578 | | | $ | 1,255,932 | |
Lease revenue | | 29,554 | | | 4,258 | | | 4,611 | | | 38,423 | |
Total services and other revenue | | 1,272,358 | | | 12,808 | | | 9,189 | | | 1,294,355 | |
Equipment revenue: | | | | | | | | |
Equipment | | 84,054 | | | — | | | 6 | | | 84,060 | |
Design, development and construction services | | 101,718 | | | — | | | — | | | 101,718 | |
Lease revenue | | 6,943 | | | — | | | — | | | 6,943 | |
Total equipment revenue | | 192,715 | | | — | | | 6 | | | 192,721 | |
Total revenue | | $ | 1,465,073 | | | $ | 12,808 | | | $ | 9,195 | | | $ | 1,487,076 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Lease Revenue
The following table presents our lease revenue by type of lease:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Sales-type lease revenue: | | | | | | | | | | |
Revenue at lease commencement | | $ | 1,514 | | | $ | 2,220 | | | $ | 2,735 | | | $ | 6,597 | | | |
Interest income | | 300 | | | 171 | | | 906 | | | 346 | | | |
Total sales-type lease revenue | | 1,814 | | | 2,391 | | | 3,641 | | | 6,943 | | | |
Operating lease revenue | | 12,790 | | | 12,727 | | | 39,612 | | | 38,423 | | | |
Total lease revenue | | $ | 14,604 | | | $ | 15,118 | | | $ | 43,253 | | | $ | 45,366 | | | |
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE4. 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 aggregate carryingformation of the India JV, we hold a 67% ownership interest and Bharti holds a 33% ownership interest in HCIPL. The India JV combines the VSAT 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 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 India JV were not material and were expensed as incurred.
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.
All assets and liabilities acquired in the India JV formation have been recorded at fair value. The following table presents our preliminary allocation of our discontinued operations:the purchase price:
| | | | | | | | |
| | 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 | |
|
| | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (In thousands) |
Assets: | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 778 |
|
Trade accounts receivable, net | | 5 |
| | 27,261 |
|
Trade accounts receivable - DISH Network | | 140 |
| | 259,198 |
|
Inventory | | — |
| | 9,824 |
|
Prepaids and deposits | | — |
| | 14,463 |
|
Current assets of discontinued operations | | 145 |
| | 311,524 |
|
Property and equipment, net | | — |
| | 271,108 |
|
Goodwill | | — |
| | 6,457 |
|
Other intangible assets, net | | — |
| | 7,720 |
|
Investments in unconsolidated entities | | — |
| | 26,203 |
|
Other noncurrent assets, net | | — |
| | 5,436 |
|
Noncurrent assets of discontinued operations | | — |
| | 316,924 |
|
Total assets of discontinued operations | | $ | 145 |
| | $ | 628,448 |
|
| | | | |
Liabilities: | | | | |
Trade accounts payable | | $ | 278 |
| | $ | 19,518 |
|
Trade accounts payable - DISH Network | | — |
| | 3,960 |
|
Current portion of capital lease obligations | | — |
| | 4,323 |
|
Deferred revenue and prepayments | | — |
| | 2,967 |
|
Accrued compensation | | — |
| | 4,652 |
|
Accrued royalties | | — |
| | 23,199 |
|
Accrued expenses and other | | 264 |
| | 12,810 |
|
Current liabilities of discontinued operations | | 542 |
| | 71,429 |
|
Capital lease obligations | | — |
| | 416 |
|
Deferred tax liabilities, net | | — |
| | 7,353 |
|
Other noncurrent liabilities | | — |
| | 2,932 |
|
Noncurrent liabilities of discontinued operations | | — |
| | 10,701 |
|
Total liabilities of discontinued operations | | $ | 542 |
| | $ | 82,130 |
|
The preliminary valuation of assets acquired and liabilities assumed in the India JV were derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation, and resulted in a customer relationship intangible of $4.4 million with an estimated life of 5 years and is reported in Other intangible assets, net.
Goodwill associated with the India JV is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce. Goodwill has been allocated entirely to our Hughes segment.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Note 4.NOTE 5. EARNINGS PER SHARE
Earnings per Share
We presentThe following table presents the calculation of basic earnings per share (“EPS”) and diluted EPS for our Class A and Class B common stock. Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing “Net income attributable to EchoStar common stock” bystock:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Net income (loss) attributable to EchoStar Corporation common stock | | $ | 22,403 | | | $ | 33,409 | | | $ | 127,704 | | | $ | 149,223 | | | |
| | | | | | | | | | |
Weighted-average common shares outstanding: | | | | | | | | | | |
Basic | | 83,140 | | | 88,457 | | | 84,424 | | | 90,986 | | | |
Dilutive impact of stock awards outstanding | | — | | | 55 | | | 25 | | | 55 | | | |
Diluted | | 83,140 | | | 88,512 | | | 84,449 | | | 91,041 | | | |
| | | | | | | | | | |
Earnings (losses) per share: | | | | | | | | | | |
Basic | | $ | 0.27 | | | $ | 0.38 | | | $ | 1.51 | | | $ | 1.64 | | | |
Diluted | | $ | 0.27 | | | $ | 0.38 | | | $ | 1.51 | | | $ | 1.64 | | | |
The following table presents the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if shares of common stock were issued pursuant to our stock-based compensation awards. The potential dilution from common stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period. The calculation of our diluted weighted-average common shares outstanding excludedanti-dilutive options to purchase shares of our Class A common stock whose effect would be anti-dilutive,which have been excluded from the calculation of 1.0 millionour weighted-average common shares for the three and nine months ended September 30, 2017 and 3.6 million shares for the three and nine months ended September 30, 2016.outstanding:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Number of shares | | 6,443 | | 4,766 | | 6,418 | | 4,766 | | |
NOTE 6. MARKETABLE INVESTMENT SECURITIES
The following table presents our Marketable investment securities:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Marketable investment securities: | | | | |
Available-for-sale debt securities: | | | | |
Corporate bonds | | $ | 227,482 | | | $ | 289,784 | |
Commercial paper | | 289,046 | | | 498,358 | |
Other debt securities | | 12,917 | | | 92,673 | |
Total available-for-sale debt securities | | 529,445 | | | 880,815 | |
Equity securities | | 147,870 | | | 142,943 | |
Total marketable investment securities, including restricted amounts | | 677,315 | | | 1,023,758 | |
Less: Restricted marketable investment securities | | (10,411) | | | (13,262) | |
Total marketable investment securities | | $ | 666,904 | | | $ | 1,010,496 | |
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Debt Securities
Prior to the Share Exchange, the EchoStar Tracking Stock was a participating security that shared in our consolidated earnings and therefore, we applied the two-class method to calculate EPS for periods prior to March 1, 2017. Under the two-class method, we allocated net income or loss attributable to EchoStar between common stock and the EchoStar Tracking Stock considering both dividends declared on each class of stock and the participation rights of each class of stock in undistributed earnings. Based on the 51.89% economic interest in the Hughes Retail Group represented by the EchoStar Tracking Stock, we allocated undistributed earnings to the EchoStar Tracking Stock based on 51.89% of the attributed net income or loss of the Hughes Retail Group. Moreover, because the reported amount of “Net income attributable to EchoStar” in our condensed consolidated statements of operations excluded DISH Network’s 28.11% economic interest (represented by the HSS Tracking Stock) in the net loss of the Hughes Retail Group (reported as a noncontrolling interest), the amount of consolidated net income or loss allocated to holders of Class A and Class B common stock effectively excluded an aggregate 80.0% of the attributed net loss of the Hughes Retail Group.
Available-for-Sale
The following table presents basic and diluted EPS amounts for all periods and the corresponding weighted-average shares outstanding used in the calculations.components of our available-for-sale debt securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized | | Unrealized | | Estimated |
| | Cost | | Gains | | Losses | | Fair Value |
As of September 30, 2022 | | | | | | | | |
Corporate bonds | | $ | 228,094 | | | $ | 48 | | | $ | (660) | | | $ | 227,482 | |
Commercial paper | | 289,046 | | | — | | | — | | | 289,046 | |
Other debt securities | | 13,032 | | | — | | | (115) | | | 12,917 | |
Total available-for-sale debt securities | | $ | 530,172 | | | $ | 48 | | | $ | (775) | | | $ | 529,445 | |
As of December 31, 2021 | | | | | | | | |
Corporate bonds | | $ | 290,169 | | | $ | — | | | $ | (385) | | | $ | 289,784 | |
Commercial paper | | 498,358 | | | — | | | — | | | 498,358 | |
Other debt securities | | 92,742 | | | — | | | (69) | | | 92,673 | |
Total available-for-sale debt securities | | $ | 881,269 | | | $ | — | | | $ | (454) | | | $ | 880,815 | |
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands, except per share amounts) |
Amounts attributable to EchoStar common stock: | | | | | | | | |
Net income attributable to EchoStar | | $ | 34,669 |
| | $ | 36,801 |
| | $ | 79,324 |
| | $ | 141,742 |
|
Less: Net income (loss) attributable to EchoStar Tracking Stock | | — |
| | 157 |
| | (1,209 | ) | | (1,709 | ) |
Net income attributable to EchoStar common stock | | $ | 34,669 |
| | $ | 36,644 |
| | $ | 80,533 |
| | $ | 143,451 |
|
| | | | | | | | |
Net income from continuing operations | | $ | 35,323 |
| | $ | 32,145 |
| | $ | 74,079 |
| | $ | 114,238 |
|
Net income (loss) from discontinued operations | | (654 | ) | | 4,499 |
| | 6,454 |
| | 29,213 |
|
Net income attributable to EchoStar common stock | | $ | 34,669 |
| | $ | 36,644 |
| | $ | 80,533 |
| | $ | 143,451 |
|
| | | | | | | | |
Weighted-average common shares outstanding : | | | | | | | | |
Class A and B common stock: | | | | | | | | |
Basic | | 95,656 |
| | 93,898 |
| | 95,316 |
| | 93,661 |
|
Dilutive impact of stock awards outstanding | | 1,234 |
| | 503 |
| | 1,310 |
| | 528 |
|
Diluted | | 96,890 |
| | 94,401 |
| | 96,626 |
| | 94,189 |
|
| | | | | | | | |
Earnings per share: | | | | | | | | |
Class A and B common stock: | | | | | | | | |
Basic: | | | | | | | | |
Continuing operations | | $ | 0.37 |
| | $ | 0.34 |
| | $ | 0.78 |
| | $ | 1.22 |
|
Discontinued operations | | (0.01 | ) | | 0.05 |
| | 0.06 |
| | 0.31 |
|
Total basic earnings per share | | $ | 0.36 |
| | $ | 0.39 |
| | $ | 0.84 |
| | $ | 1.53 |
|
| | | | | | | | |
Diluted: | | | | | | | | |
Continuing operations | | $ | 0.36 |
| | $ | 0.34 |
| | $ | 0.77 |
| | $ | 1.21 |
|
Discontinued operations | | — |
| | 0.05 |
| | 0.06 |
| | 0.31 |
|
Total diluted earnings per share | | $ | 0.36 |
| | $ | 0.39 |
| | $ | 0.83 |
| | $ | 1.52 |
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 5. Other Comprehensive Income (Loss) and Related Tax Effects
Except in unusual circumstances, we do not recognize tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions. We have not recognized any tax effects on unrealized gains or losses on available-for-sale securities because such gains or losses would affectThe following table presents the amount of unrealized capital losses for which the related deferred tax asset has been fully offset by a valuation allowance.
Accumulated other comprehensive loss includes net cumulative foreign currency translation losses of $102.3 million and $135.4 million as of September 30, 2017 and December 31, 2016, respectively. Other comprehensive income includes deferred tax benefits for foreign currency translation losses related to assets that were transferred from a foreign subsidiary to a domestic subsidiary of zero and $7.3 million for the three and nine months ended September 30, 2017, respectively.
Reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | |
Accumulated Other Comprehensive Loss Components | | Affected Line Item in our Condensed Consolidated Statements of Operations | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | | | (In thousands) |
Recognition of realized gains on available-for-sale securities in net income (1) | | Gains on investments, net | | $ | — |
| | $ | (10 | ) | | $ | (2,758 | ) | | $ | (5,584 | ) |
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income (2) | | Other-than-temporary impairment loss on available-for-sale securities | | — |
| | — |
| | 3,298 |
| | — |
|
Total reclassifications, net of tax and noncontrolling interests | | | | $ | — |
| | $ | (10 | ) | | $ | 540 |
| | $ | (5,584 | ) |
| |
(1) | When available-for-sale securities are sold, the related unrealized gains and losses that were previously recognized in other comprehensive income (loss) are reclassified and recognized as “Gains on investments, net” in our condensed consolidated statements of operations. |
| |
(2) | We recorded an other-than-temporary impairment loss on shares of certain common stock included in our strategic equity securities. |
Note 6. Investment Securities
Our marketable investment securities and restricted cash and cash equivalents consisted of the following:
|
| | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (In thousands) |
Marketable investment securities—current, at fair value: | | | | |
Corporate bonds | | $ | 245,419 |
| | $ | 402,670 |
|
Strategic equity securities | | 139,373 |
| | 94,816 |
|
Other | | 100,243 |
| | 25,030 |
|
Total marketable investment securities—current | | 485,035 |
| | 522,516 |
|
Restricted marketable investment securities (1) | | 12,961 |
| | 12,203 |
|
Total | | $ | 497,996 |
| | $ | 534,719 |
|
| | | | |
Restricted cash and cash equivalents (1) | | $ | 775 |
| | $ | 723 |
|
| |
(1) | Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” in our condensed consolidated balance sheets. |
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Marketable Investment Securities
Our marketable investment securities portfolio consists of various debt and equity instruments, which generally are classified as available-for-sale or trading securities dependingactivity on our investment strategy for those securities. The value of our investment portfolio depends on the value of such securities and other instruments comprising the portfolio.available-for-sale debt securities:
Corporate Bonds
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries.
Strategic Equity Securities
Our strategic investment portfolio consists of investments in shares of common stock of public companies, which are highly speculative and have experienced and continue to experience volatility. We received dividend income of $2.3 million and $5.8 million for the three and nine months ended September 30, 2017, respectively, and de minimis dividend income for the three and nine months ended September 30, 2016. We recognized a $3.3 million other-than-temporary impairment for the nine months ended September 30, 2017 on one of our investments. This investment had been in a continuous loss position for more than 12 months and experienced a decline in market value as a result of adverse developments during the three months ended March 31, 2017.
Prior to September 2017, we had an investment in the preferred stock of a privately-held company which had a carrying amount of $4.1 million and was accounted for using the cost method. In connection with the company’s initial public offering of its Class A common stock in September 2017, our shares of preferred stock were converted into the company’s Class B common stock. We have the right to convert such shares of Class B common stock to shares of Class A common stock and to sell such shares following the expiration of a lock-up period. For periods following the initial public offering, we account for this investment as a trading security at fair value in our strategic equity security portfolio.
For the three months ended September 30, 2017 and 2016, “Gains on investments, net” included gains of $19.9 million and zero, respectively, related to trading securities that we held as of September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, “Gains on investments, net” included gains of $19.9 million and losses of $1.0 million, respectively, related to trading securities that we held as of September 30, 2017 and 2016, respectively. The fair values of our trading securities were $23.9 million and $7.2 million as of September 30, 2017 and December 31, 2016, respectively.
Other
Our other current marketable investment securities portfolio includes investments in various debt instruments, including U.S. government bonds, commercial paper and mutual funds.
Restricted Cash and Marketable Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Proceeds from sales | | $ | — | | | $ | 128,423 | | | $ | 37,904 | | | $ | 390,918 | | | |
As of September 30, 2017 and December 31, 2016, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters2022, we have $518.0 million of credit or surety bonds.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Unrealized Gains (Losses) on Available-for-Sale Securities
The components of our available-for-sale securities are summarized in the table below.
|
| | | | | | | | | | | | | | | | |
| | Amortized | | Unrealized | | Estimated |
| | Cost | | Gains | | Losses | | Fair Value |
| | (In thousands) |
As of September 30, 2017 | | | | | | | | |
Debt securities: | | | | | | | | |
Corporate bonds | | $ | 245,426 |
| | $ | 38 |
| | $ | (45 | ) | | $ | 245,419 |
|
Other (including restricted) | | 107,823 |
| | 1 |
| | (30 | ) | | 107,794 |
|
Equity securities - strategic | | 101,808 |
| | 14,439 |
| | (802 | ) | | 115,445 |
|
Total available-for-sale securities | | $ | 455,057 |
| | $ | 14,478 |
| | $ | (877 | ) | | $ | 468,658 |
|
As of December 31, 2016 | | | | | | | | |
Debt securities: | | | | | | | | |
Corporate bonds | | $ | 402,472 |
| | $ | 285 |
| | $ | (87 | ) | | $ | 402,670 |
|
Other (including restricted) | | 32,488 |
| | 3 |
| | (23 | ) | | 32,468 |
|
Equity securities - strategic | | 77,149 |
| | 13,120 |
| | (2,652 | ) | | 87,617 |
|
Total available-for-sale securities | | $ | 512,109 |
| | $ | 13,408 |
| | $ | (2,762 | ) | | $ | 522,755 |
|
As of September 30, 2017, restricted and non-restricted available-for-sale securities included debt securities of $350.6 million with contractual maturities of one year or less and $2.6$11.5 million with contractual maturities greater than one year. We may realize proceeds from certain investments prior to their contractual maturity as a result of our ability to sell these securities prior to their contractual maturity.
Available-for-SaleEquity Securities in a Loss Position
The following table reflectspresents the lengthactivity of time that our available-for-sale securities have been in an unrealized loss position. We do not intend to sell these securities before they recover or mature, and it is more likely than not that we will hold these securities until they recover or mature. We believe that changes in the estimated fair values of these securities are primarily related to temporary market conditions.equity securities:
|
| | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (In thousands) |
Less than 12 months | | $ | 225,437 |
| | $ | (871 | ) | | $ | 154,826 |
| | $ | (2,760 | ) |
12 months or more | | 23,233 |
| | (6 | ) | | 1,571 |
| | (2 | ) |
Total | | $ | 248,670 |
| | $ | (877 | ) | | $ | 156,397 |
| | $ | (2,762 | ) |
Sales of Available-for-Sale Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Proceeds from sales | | $ | 34,121 | | | $ | 546 | | | $ | 34,374 | | | $ | 776 | | | |
Gains (losses) on investments, net | | $ | 18,273 | | | $ | (1,260) | | | $ | 26,536 | | | $ | 92,841 | | | |
We recognized de minimis gains from the sales of our available-for-sale securities for each of the three months ended September 30, 2017 and 2016. We recognized gains from the sales of our available-for-sale securities of $2.8 million and $5.6 million for the nine months ended September 30, 2017 and 2016, respectively. We recognized de minimis losses from the sales of our available-for-sale securities for each of the three and nine months ended September 30, 2017 and 2016.
Proceeds from sales of our available-for-sale securities totaled zero and $4.0 million for the three months ended September 30, 2017 and 2016, respectively, and $31.0 million and $35.8 million for the nine months ended September 30, 2017 and 2016, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Fair Value Measurements
Our currentThe following table presents our marketable investment securities are measured atcategorized by the fair value on a recurring basis as summarized in the table below. hierarchy, certain of which have historically experienced volatility:
| | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Total |
As of September 30, 2022 | | | | | | |
Cash equivalents (including restricted) | | $ | 5,580 | | | $ | 819,531 | | | $ | 825,111 | |
Available-for-sale debt securities: | | | | | | |
Corporate bonds | | $ | — | | | $ | 227,482 | | | $ | 227,482 | |
Commercial paper | | — | | | 289,046 | | | 289,046 | |
Other debt securities | | 10,411 | | | 2,506 | | | 12,917 | |
Total available-for-sale debt securities | | 10,411 | | | 519,034 | | | 529,445 | |
Equity securities | | 139,000 | | | 8,870 | | | 147,870 | |
Total marketable investment securities, including restricted amounts | | 149,411 | | | 527,904 | | | 677,315 | |
Less: Restricted marketable investment securities | | (10,411) | | | — | | | (10,411) | |
Total marketable investment securities | | $ | 139,000 | | | $ | 527,904 | | | $ | 666,904 | |
| | | | | | |
As of December 31, 2021 | | | | | | |
Cash equivalents (including restricted) | | $ | 7,872 | | | $ | 423,123 | | | $ | 430,995 | |
Available-for-sale debt securities: | | | | | | |
Corporate bonds | | $ | — | | | $ | 289,784 | | | $ | 289,784 | |
Commercial paper | | — | | | 498,358 | | | 498,358 | |
Other debt securities | | 14,274 | | | 78,399 | | | 92,673 | |
Total available-for-sale debt securities | | 14,274 | | | 866,541 | | | 880,815 | |
Equity securities | | 131,413 | | | 11,530 | | | 142,943 | |
Total marketable investment securities, including restricted amounts | | 145,687 | | | 878,071 | | | 1,023,758 | |
Less: Restricted marketable investment securities | | (13,262) | | | — | | | (13,262) | |
Total marketable investment securities | | $ | 132,425 | | | $ | 878,071 | | | $ | 1,010,496 | |
As of September 30, 20172022 and December 31, 2016,2021, we did not have any investments that were categorized within Level 3 of the fair value hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 |
| | (In thousands) |
Cash equivalents (including restricted) | | $ | 2,736,932 |
| | $ | 17,355 |
| | $ | 2,719,577 |
| | $ | 2,490,168 |
| | $ | 62,332 |
| | $ | 2,427,836 |
|
Debt securities: | | | | | | | | | | | | |
Corporate bonds | | $ | 245,419 |
| | $ | — |
| | $ | 245,419 |
| | $ | 402,670 |
| | $ | — |
| | $ | 402,670 |
|
Other (including restricted) | | 113,204 |
| | 13,298 |
| | 99,906 |
| | 37,233 |
| | 13,517 |
| | 23,716 |
|
Equity securities - strategic | | 139,373 |
| | 139,373 |
| | — |
| | 94,816 |
| | 94,816 |
| | — |
|
Total marketable investment securities | | $ | 497,996 |
| | $ | 152,671 |
| | $ | 345,325 |
| | $ | 534,719 |
| | $ | 108,333 |
| | $ | 426,386 |
|
Investments in Unconsolidated Entities — Noncurrent
We have strategic investments in certain non-publicly traded equity securities that are accounted for using either the equity or the cost method of accounting. Our ability to realize value from our strategic investments in companies that are not publicly traded 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 desire to sell them we will not be able to obtain fair value for them.
Our investments in unconsolidated entities consisted of the following:
|
| | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (In thousands) |
Investments in unconsolidated entities—noncurrent: | | | | |
Cost method | | $ | 65,438 |
| | $ | 80,052 |
|
Equity method | | 99,852 |
| | 90,964 |
|
Total investments in unconsolidated entities—noncurrent | | $ | 165,290 |
| | $ | 171,016 |
|
We recorded cash distributions from our investments accounted for using the equity method of $7.5 million and $5.0 million for the three months ended September 30, 2017 and 2016, respectively. For each of the nine months ended September 30, 2017 and 2016, we recorded cash distributions from one of these investments accounted for using the equity method of $15.0 million. These cash distributions were determined to be a return on investment and reported in cash flows from operating activities in our condensed consolidated statements of cash flows.
In January 2017, we sold our investment in Invidi Technologies Corporation to an entity owned in part by DISH Network. Our investment was accounted for using the cost method and had a carrying amount of $10.5 million on the date of sale. We recognized a gain of $8.9 million and received cash proceeds of $17.8 million in connection with this transaction for the nine months ended September 30, 2017. See Note 16 for additional information about this transaction.
In connection with the Share Exchange, our equity interests in NagraStar L.L.C. and SmarDTV SA, which we accounted for using the equity method, and our equity interest in Sling TV Holding L.L.C., which we accounted for using the cost method, were transferred to DISH Network as of February 28, 2017. See Notes 3 and 16 for additional information about the Share Exchange and related party transactions with these companies in which we held equity interests.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 7. Trade Accounts Receivable
Our trade accounts receivable consisted of the following:
|
| | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (In thousands) |
Trade accounts receivable | | $ | 181,555 |
| | $ | 159,313 |
|
Contracts in process, net | | 24,043 |
| | 36,170 |
|
Total trade accounts receivable | | 205,598 |
| | 195,483 |
|
Allowance for doubtful accounts | | (13,211 | ) | | (12,956 | ) |
Trade accounts receivable - DISH Network | | 52,512 |
| | 19,417 |
|
Total trade accounts receivable, net | | $ | 244,899 |
| | $ | 201,944 |
|
As of September 30, 2017 and December 31, 2016, progress billings offset against contracts in process amounted to $17.4 million and $14.6 million, respectively.
Note 8. Inventory
Our inventory consisted of the following:
|
| | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (In thousands) |
Finished goods | | $ | 74,693 |
| | $ | 49,755 |
|
Raw materials | | 6,901 |
| | 6,678 |
|
Work-in-process | | 9,638 |
| | 6,187 |
|
Total inventory | | $ | 91,232 |
| | $ | 62,620 |
|
Note 9. Property and EquipmentNOTE 7. PROPERTY AND EQUIPMENT
The following table presents the components of Property and equipment, consisted of the following:net:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Property and equipment, net: | | | | |
Satellites, net | | $ | 1,575,202 | | | $ | 1,610,623 | |
Other property and equipment, net | | 676,056 | | | 727,662 | |
Total property and equipment, net | | $ | 2,251,258 | | | $ | 2,338,285 | |
|
| | | | | | | | | | |
| | Depreciable Life (In Years) | | As of |
| | | September 30, 2017 | | December 31, 2016 |
| | | | (In thousands) |
Land | | — | | $ | 33,682 |
| | $ | 35,815 |
|
Buildings and improvements | | 1-40 | | 184,511 |
| | 175,593 |
|
Furniture, fixtures, equipment and other | | 1-12 | | 680,428 |
| | 514,056 |
|
Customer rental equipment | | 2-4 | | 859,596 |
| | 689,579 |
|
Satellites - owned | | 2-15 | | 2,764,153 |
| | 2,381,120 |
|
Satellites acquired under capital leases | | 10-15 | | 794,705 |
| | 781,761 |
|
Construction in progress | | — | | 765,062 |
| | 1,418,763 |
|
Total property and equipment | | | | 6,082,137 |
| | 5,996,687 |
|
Accumulated depreciation | | | | (2,551,678 | ) | | (2,598,492 | ) |
Property and equipment, net | | | | $ | 3,530,459 |
| | $ | 3,398,195 |
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Construction in progress consisted of the following:
|
| | | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| | (In thousands) |
Progress amounts for satellite construction, including prepayments under capital leases and launch services costs | | $ | 661,250 |
| | $ | 1,235,577 |
|
Satellite related equipment | | 83,907 |
| | 152,737 |
|
Other | | 19,905 |
| | 30,449 |
|
Construction in progress | | $ | 765,062 |
| | $ | 1,418,763 |
|
Construction in progress included the following owned and leased satellites under construction or undergoing in-orbit testing as of September 30, 2017.
|
| | | | |
Satellites | | Segment | | Expected Launch Date |
EchoStar XXI | | Corporate and Other | | June 2017 (1) |
EchoStar 105/SES-11 | | ESS | | October 2017 (2) |
Telesat T19V (“63 West”) (3) | | Hughes | | Second quarter of 2018 |
EchoStar XXIV | | Corporate and Other | | 2021 |
| |
(1) | This satellite was launched in June 2017 and is expected to be placed in service during the fourth quarter of 2017. |
| |
(2) | This satellite was launched in October 2017 and is expected to be placed in service during the fourth quarter of 2017. |
| |
(3) | We entered into a satellite services agreement for certain capacity on this satellite once launched, but are not party to the construction contract.
|
Depreciation expense associated with our property and equipment consisted of the following:
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
Satellites | | $ | 61,078 |
| | $ | 46,965 |
| | $ | 173,293 |
| | $ | 140,895 |
|
Furniture, fixtures, equipment and other | | 22,423 |
| | 18,443 |
| | 61,178 |
| | 50,198 |
|
Customer rental equipment | | 39,104 |
| | 28,652 |
| | 103,781 |
| | 86,789 |
|
Buildings and improvements | | 1,729 |
| | 1,721 |
| | 5,287 |
| | 5,198 |
|
Total depreciation expense | | $ | 124,334 |
| | $ | 95,781 |
| | $ | 343,539 |
| | $ | 283,080 |
|
Satellites
As of September 30, 2017,2022, our satellite fleet consisted of 18ten geosynchronous (“GEO”) satellites, seven of ourwhich are owned and leased satellitesthree of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator. We haveOur owned S-band low-earth orbit (“LEO”) nano-satellites are not included in the EchoStar XXI and EchoStar 105/SES-11 satellites intable below.
The following table presents our GEO satellite fleet as of September 30, 2017 since they had not been placed into service2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
GEO Satellite | | Segment | | Launch Date | | Nominal Degree Orbital Location (Longitude) | | Depreciable Life (In Years) |
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 |
EUTELSAT 10A (“W2A”) (5) | | Corporate and Other | | April 2009 | | 10 E | | - |
EchoStar XXI | | Corporate and Other | | June 2017 | | 10.25 E | | 15 |
| | | | | | | | |
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 Communications, Inc. (“Hughes Communications”) and its subsidiaries (the “Hughes Acquisition”).
(2) Upon consummation of our joint venture with Al Yah Satellite Communications Company PrJSC (“Yahsat”) in Brazil in November 2019, we acquired the Brazilian Ka-band payload on this date. We depreciate our owned satellites on a straight-line basis oversatellite. Depreciable life represents the estimatedremaining useful life as of eachNovember 2019.
(3) We own the Ka-band and Ku-band payloads on this satellite. As
(4) EchoStar IX is approaching its end of September 30, 2017, threestation-kept life. The Company expects to place the satellite in an inclined-orbit in the fourth quarter of 2022 or first quarter of 2023, but this ability is dependent upon events beyond our control and may not occur on schedule if at all. Inclined-orbit will extend its life but impact revenue generating capabilities.
(5) We acquired the S-band payload on this satellite in December 2013. Prior to acquisition, the S-band payload experienced an anomaly at the time of launch and, as a result, is not fully operational.
The following table presents the components of our satellites, are accounted for as capital leases and are depreciated on a straight-line basis over their respective lease terms. We accounted for one satellite as an operating lease that is not included in property and equipment as of September 30, 2017.net:
Recent Developments
| | | | | | | | | | | | | | | | | | | | |
| | Depreciable Life (In Years) | | As of |
| | | September 30, 2022 | | December 31, 2021 |
Satellites, net: | | | | | | |
Satellites - owned | | 7 to 15 | | $ | 1,807,256 | | | $ | 1,806,664 | |
Satellites - acquired under finance leases | | 15 | | 357,163 | | | 354,170 | |
Construction in progress | | — | | 593,905 | | | 541,422 | |
Total satellites | | | | 2,758,324 | | | 2,702,256 | |
Accumulated depreciation: | | | | | | |
Satellites - owned | | | | (1,068,584) | | | (995,962) | |
Satellites - acquired under finance leases | | | | (114,538) | | | (95,671) | |
Total accumulated depreciation | | | | (1,183,122) | | | (1,091,633) | |
Total satellites, net | | | | $ | 1,575,202 | | | $ | 1,610,623 | |
EchoStar III.
In July 2017, the EchoStar III satellite experienced an anomaly that caused communications with the satellite to be interrupted resulting in a loss of control. We regained communications with and control of the EchoStar III satellite and retired it in August 2017. The EchoStar III satellite was a fully depreciated, non-revenue generating asset.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
The following table presents the depreciation expense associated with our satellites, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Depreciation expense: | | | | | | | | | | |
Satellites - owned | | $ | 24,176 | | | $ | 22,775 | | | $ | 72,654 | | | $ | 77,517 | | | |
Satellites - acquired under finance leases | | 6,003 | | | 7,434 | | | 18,127 | | | 22,031 | | | |
Total depreciation expense | | $ | 30,179 | | | $ | 30,209 | | | $ | 90,781 | | | $ | 99,548 | | | |
EchoStar VIII.
The following table presents capitalized interest associated with our satellites and satellite-related ground infrastructure:
During
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Capitalized interest | | $ | 11,130 | | | $ | 9,183 | | | $ | 32,395 | | | $ | 27,473 | | | |
Construction in Progress
In August 2017, we entered into a contract for the second quarterdesign and construction of 2017, the EchoStar VIIIXXIV satellite, was removed from its orbital location and retired from commercial service. This retirement has not had, and is not expected to have, a material impact on our results of operations or financial position.
EchoStar XIX.new, next-generation, high throughput geostationary satellite. The EchoStar XIXXXIV satellite was launched in December 2016 and was placed into service in March 2017 at the 97.1 degree west longitude orbital location. The EchoStar XIX satellite providesis primarily intended to provide additional capacity for the Hughes broadband services to our customersHughesNet satellite internet service (the “HughesNet service”) in North, America and added capacity in certain Central and South American countriesAmerica as well as enterprise broadband services. Capital expenditures associated with the construction and has added capability for aeronautical, enterprise and international broadband services. We contributedlaunch of the EchoStar XIXXXIV satellite to our Hughesare included in Corporate and Other segment in February 2017.our segment reporting.
Satellite-Related Commitments
EchoStar XXI
. The EchoStar XXI satellite was launched in June 2017
As of September 30, 2022 and is anticipated to be placed into service inDecember 31, 2021 our satellite-related commitments were $257.0 million and $342.2 million, respectively. These include payments pursuant to: i) agreements for the fourth quarterconstruction of 2017 at the 10.25 degree east longitude orbital location. The EchoStar XXI satellite is expected to provide space segment capacity to EchoStar Mobile Limited in Europe.
EchoStar 105/SES-11.The EchoStar 105/SES-11 satellite was launched in October 2017 and is anticipated to be placed into service in the fourth quarter of 2017 at the 105 degree west longitude orbital location. Our Ku-band payload on the EchoStar 105/SES-11XXIV satellite, will replaceii) the EchoStar XXIV launch contract, iii) regulatory authorizations and non-lease costs associated with our current capacityfinance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
In certain circumstances, the dates on the AMC-15 satellite.
which we are obligated to pay our contractual obligations could change.
EchoStar XXIII.
The EchoStar XXIII satellite, a Ku-band broadcast satellite services satellite, was launched in March 2017 and placed into service at the 45 degree west longitude orbital location in the second quarter of 2017.
Satellite Anomalies and Impairments
Our satellites may experience anomalies from time to time, some of which may have a significant adverse impact on their remaining useful lives, the commercial 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 or payloads that have had any such materialsignificant adverse effect duringon their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position as of and for the three and nine months ended September 30, 2017. There can be no assurance, however, that anomalies will not have any such adverse impacts in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more2022.
Fair Value of our in-orbit satellites were to fail.
In-Orbit Incentives
We historically have not carried in-orbit insurance on our satellites because we assessed that the cost
As of insurance was uneconomical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain in-orbit insurance for our SPACEWAY 3, EchoStar XVI,September 30, 2022 and EchoStar XVII satellites. Based on economic analysis of the current insurance market we obtained launch plus one year in-orbit insurance, subject to certain limitations, for the EchoStar XIX, EchoStar XXI and EchoStar XXIII satellites. Additionally, we obtained certain launch and in-orbit insurance for our interest in the EchoStar 105/SES-11 satellite. All other satellites, either in orbit or under construction, are not covered by launch or in-orbit insurance. We will continue to assess circumstances going forward and make insurance decisions on a case by case basis.
Note 10. Goodwill, Regulatory Authorizations and Other Intangible Assets
Goodwill
The excess of the cost of an acquired business overDecember 31, 2021, the fair values of net tangibleour in-orbit incentive obligations approximated their carrying amounts of $50.8 million and identifiable intangible assets at the time of the acquisition is recorded as goodwill. Goodwill is assigned to the reporting units within our operating segments and is subject to impairment testing annually, or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is more likely than not less than its carrying amount.$53.2 million, respectively.
As of September 30, 2017 and December 31, 2016, all goodwill related to our continuing operations was assigned to reporting units of our Hughes segment. We test this goodwill for impairment annually in the second quarter. Based on our qualitative assessment of impairment in the second quarter of 2017, we determined that it was not more likely than not that the fair values of the Hughes segment reporting units were less than the corresponding carrying amounts.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
NOTE 8. REGULATORY AUTHORIZATIONS
Regulatory Authorizations
Regulatory authorizations included amounts with finite and indefinite useful lives, as follows:
|
| | | | | | | | | | | | | | | | |
| | As of December 31, 2016 | | Additions | | Currency Translation Adjustment | | As of September 30, 2017 |
| | (In thousands) |
Finite useful lives: | | | | | | | | |
Cost | | $ | 87,959 |
| | $ | — |
| | $ | 6,086 |
| | $ | 94,045 |
|
Accumulated amortization | | (14,983 | ) | | (3,751 | ) | | (1,411 | ) | | (20,145 | ) |
Net | | 72,976 |
| | (3,751 | ) | | 4,675 |
| | 73,900 |
|
Indefinite lives | | 471,657 |
| | — |
| | — |
| | 471,657 |
|
Total regulatory authorizations, net | | $ | 544,633 |
| | $ | (3,751 | ) | | $ | 4,675 |
| | $ | 545,557 |
|
The following table presents our Regulatory authorizations, with finite lives includenet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Finite lived | | | | |
| | Cost | | Accumulated Amortization | | Total | | Indefinite lived | | Total |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance, December 31, 2020 | | $ | 61,381 | | | $ | (26,639) | | | $ | 34,742 | | | $ | 444,020 | | | $ | 478,762 | |
Amortization expense | | — | | | (3,398) | | | (3,398) | | | — | | | (3,398) | |
Currency translation adjustments | | (3,254) | | | 1,490 | | | (1,764) | | | (2,590) | | | (4,354) | |
Balance, September 30, 2021 | | $ | 58,127 | | | $ | (28,547) | | | $ | 29,580 | | | $ | 441,430 | | | $ | 471,010 | |
| | | | | | | | | | |
Balance, December 31, 2021 | | $ | 57,137 | | | $ | (29,088) | | | $ | 28,049 | | | $ | 441,717 | | | $ | 469,766 | |
Amortization expense | | — | | | (3,129) | | | (3,129) | | | — | | | (3,129) | |
Currency translation adjustments | | (5,582) | | | 3,636 | | | (1,946) | | | (4,607) | | | (6,553) | |
Balance, September 30, 2022 | | $ | 51,555 | | | $ | (28,581) | | | $ | 22,974 | | | $ | 437,110 | | | $ | 460,084 | |
| | | | | | | | | | |
Weighted-average useful life (in years) | | 13 | | | | | | |
NOTE 9. OTHER INVESTMENTS
The following table presents our Brazilian license, which had a carrying amount of $38.4 million and $38.6 million as of September 30, 2017 and December 31, 2016, respectively. We had regulatory obligations to meet certain in-service milestones by the second quarter of 2017 for our Brazilian license at the 45 degree west longitude orbital location for the Ka-, Ku- and S-band frequency bands. We have met our regulatory milestone for the Ku-band. On October 5, 2017, ANATEL, the Brazilian regulatory authority, declined our request to extend our milestone deadlines for the S-band and Ka-band and, as a result, we no longer have the right to use such frequency bands. We may be subject to penalties as a result of our failure to meet these milestones. The loss of our right to use the S- and Ka-bands in October 2017 is an event that may affect the recoverability of the carrying value of our Brazilian license and related assets. Accordingly, we expect to test our Brazilian license and related assets for recoverability inOther investments, net:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Other investments, net: | | | | |
Equity method investments | | $ | 84,785 | | | $ | 91,226 | |
Other equity investments | | 141,307 | | | 91,636 | |
Other debt investments, net | | 126,686 | | | 114,885 | |
Total other investments, net | | $ | 352,778 | | | $ | 297,747 | |
Equity Method Investments
Dish Mexico
During the fourth quarter of 2017. We may be required2021, we concluded that our 49% investment in DISH Mexico, S. de R.L. de C.V. and its subsidiaries (“Dish Mexico”), was not recoverable. Subsequently, in August 2022, we effected our exit from this investment. Therefore, in the third quarter of 2022, in conjunction with our exit, we recognized a net loss of $28.3 million, primarily due to record an impairment loss if we determine that the carrying valuereclassification of such license or its related assets are not recoverable and their fair values are lower than such carrying amounts.
accumulated foreign currency translation adjustment losses from Accumulated Other Intangible Assets
Comprehensive Income (Loss)Our other intangible assets, which are subject to amortization, consistedGains (losses) on investments, net in the Statement of the following:Operations.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted Average Useful Life (in Years) | | As of |
| | | September 30, 2017 | | December 31, 2016 |
| | | Cost | | Accumulated Amortization | | Carrying Amount | | Cost | | Accumulated Amortization | | Carrying Amount |
| | | | (In thousands) |
Customer relationships | | 8 | | $ | 270,300 |
| | $ | (228,355 | ) | | $ | 41,945 |
| | $ | 270,300 |
| | $ | (214,544 | ) | | $ | 55,756 |
|
Technology-based | | 6 | | 61,300 |
| | (60,905 | ) | | 395 |
| | 60,835 |
| | (57,266 | ) | | 3,569 |
|
Trademark portfolio | | 20 | | 29,700 |
| | (9,405 | ) | | 20,295 |
| | 29,700 |
| | (8,291 | ) | | 21,409 |
|
Total other intangible assets | | | | $ | 361,300 |
| | $ | (298,665 | ) | | $ | 62,635 |
| | $ | 360,835 |
| | $ | (280,101 | ) | | $ | 80,734 |
|
Deluxe/EchoStar LLC
Customer relationships are amortized predominantly
We own 50% of Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in relation2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the expected contribution of cash flow to the business over the life of the intangible asset. Other intangible assets are amortized on a straight-line basis over the periods the assets are expected to contribute to our cash flows. Intangible asset amortization expense, including amortization of regulatory authorizations with finite livesU.S. and externally marketed capitalized software, was $10.5 million and $12.8 million for the three months ended September 30, 2017 and 2016, respectively, and $36.4 million and $41.7 million for the nine months ended September 30, 2017 and 2016, respectively.Canada.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Broadband Connectivity Solutions (Restricted) Limited
Note 11
. Debt
We own 20% of Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), a joint venture that we entered into in 2018 to provide commercial Ka-band satellite broadband services across Africa, the Middle East and Capital Lease Obligationssouthwest Asia operating over Yahsat's Al Yah 2 and Al Yah 3 Ka-band satellites.
Financial Information for Our Equity Method Investments
The following table presents revenue recognized:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Deluxe | | $ | 1,243 | | | $ | 1,315 | | | $ | 3,901 | | | $ | 4,175 | | | |
BCS | | $ | 2,600 | | | $ | 1,838 | | | $ | 6,321 | | | $ | 5,952 | | | |
The following table presents trade accounts receivable:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Deluxe | | $ | 2,461 | | | $ | 934 | |
BCS | | $ | 6,231 | | | $ | 5,544 | |
Other Equity Investments
The following table presents the activity on our investments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Gain (loss) on investments, net | | $ | — | | | $ | 5,000 | | | $ | 49,888 | | | $ | 21,256 | | | |
NOTE 10. LONG-TERM DEBT
The following table summarizespresents the carrying amountsamount and fair values of our debt: Long-term debt, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Effective Interest Rate | | As of |
| | | September 30, 2022 | | December 31, 2021 |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Senior Secured Notes: | | | | | | | | | | |
5 1/4% Senior Secured Notes due 2026 | | 5.320% | | $ | 750,000 | | | $ | 694,253 | | | $ | 750,000 | | | $ | 825,555 | |
Senior Unsecured Notes: | | | | | | | | | | |
6 5/8% Senior Unsecured Notes due 2026 | | 6.688% | | 750,000 | | | 688,935 | | | 750,000 | | | 838,740 | |
Less: Unamortized debt issuance costs | | | | (3,422) | | | — | | | (4,006) | | | — | |
Total long-term debt, net | | | | $ | 1,496,578 | | | $ | 1,383,188 | | | $ | 1,495,994 | | | $ | 1,664,295 | |
|
| | | | | | | | | | | | | | | | | | |
| | Effective Interest Rate | | As of |
| | | September 30, 2017 | | December 31, 2016 |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | | (In thousands) |
Senior Secured Notes: | | | | | | | | | | |
6 1/2% Senior Secured Notes due 2019 | | 6.959% | | $ | 990,000 |
| | $ | 1,056,825 |
| | $ | 990,000 |
| | $ | 1,084,050 |
|
5 1/4% Senior Secured Notes due 2026 | | 5.320% | | 750,000 |
| | 783,038 |
| | 750,000 |
| | 739,688 |
|
Senior Unsecured Notes: | | | | | | | | | | |
7 5/8% Senior Unsecured Notes due 2021 | | 8.062% | | 900,000 |
| | 1,023,408 |
| | 900,000 |
| | 990,189 |
|
6 5/8% Senior Unsecured Notes due 2026 | | 6.688% | | 750,000 |
| | 806,910 |
| | 750,000 |
| | 760,245 |
|
Less: Unamortized debt issuance costs | | | | (26,756 | ) | | — |
| | (31,821 | ) | | — |
|
Subtotal | | | | 3,363,244 |
| | $ | 3,670,181 |
| | 3,358,179 |
| | $ | 3,574,172 |
|
Capital lease obligations | | | | 280,878 |
| | | | 297,268 |
| | |
Total debt and capital lease obligations | | | | 3,644,122 |
| | | | 3,655,447 |
| | |
Less: Current portion | | | | (38,407 | ) | | | | (32,984 | ) | | |
Long-term debt and capital lease obligations, net of unamortized debt issuance costs | | | | $ | 3,605,715 |
| | | | $ | 3,622,463 |
| | |
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 11. INCOME TAXES
The fair values of our debt are estimates categorized within Level 2 of the fair value hierarchy.
Pursuant to the terms of a registration rights agreement, HSS registered notes having substantially identical terms as the 2026 Notes with the SEC as part of an offer to exchange registered notes for the 2026 Notes. This exchange offer expired May 11, 2017 with 99.98% of the 2026 Notes being tendered for exchange.
Note 12. Income Taxes
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our quarterlyinterim income tax provision and our quarterlyinterim estimate of our annual effective tax rate is subject to significant volatility due toare influenced by several factors, including incomeforeign losses and capital gains and losses from investments for which we haverelated deferred tax assets are partially offset by a full valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be more or less volatile based onaffected by the amount of pre-tax income.income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income or loss is lower.
IncomeOur income tax expenseprovision was $6.1$13.2 million for the three months ended September 30, 20172022 compared to anour income tax expenseprovision of approximately $17.4$19.7 million for the three months ended September 30, 2016.2021. Our estimated effective income tax rate was 14.5%40.3% and 34.6%39.5% for the three months ended September 30, 20172022 and 2016,2021, respectively. The variations in our current year effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2017 was primarily due to various permanent tax differences, the increase in our valuation allowance associated with unrealized gains that are capital in nature, and a change in the amount of unrecognized tax benefit from uncertain tax positions. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2016 was2022 were primarily due to researchexcluded foreign losses where the Company carries a full valuation allowance and experimentation credits, partially offset bythe impact of state and local taxes.
Income tax expense was approximately $9.1 million for the nine months ended September 30, 2017 compared to an income tax expense of approximately $61.3 million for the nine months ended September 30, 2016. Our estimated effective income tax rate was 11.0% and 35.2% for the nine months ended September 30, 2017 and 2016, respectively. The variations in our
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes.
Our income tax provision was $51.4 million for the nine months ended September 30, 2017 was primarily due2022 compared to the recognitionour income tax provision of a one-time tax benefit$63.0 million for the revaluation of our deferred tax assets and liabilities due to a change in our statenine months ended September 30, 2021. Our estimated effective tax rate as a result of the Share Exchange, the increase in our valuation allowance associated with unrealized gains that are capital in nature, and change in the amount of unrecognized tax benefit from uncertain tax positions. The tax benefit recognized from the change in our effectiveincome tax rate was partially offset by30.2% and 30.6% for the increase in our valuation allowance associated with certain statenine months ended September 30, 2022 and foreign losses.2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 20162022 were primarily due to researchexcluded foreign losses where the Company carries a full valuation allowance and experimentation credits, partially offset bythe impact of state and local taxes.
Note 13. Stock-Based Compensation
We maintain stock incentive plans to attract and retain officers, directors and key employees. Stock awards under these plans include both performance based and non-performance based stock incentives. We granted stock options and other incentive awards to The variations in our employees and nonemployee directors to acquire 62,600 shares and 137,470 shares of our Class A common stock duringeffective tax rate from the three months ended September 30, 2017 and 2016, respectively, and 1,263,350 shares and 722,350 shares of our Class A common stockU.S. federal statutory rate for the nine months ended September 30, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes.
The Tax Cuts and Jobs Act (“TCJA”) was signed into law December 22, 2017 and 2016, respectively. included a significant change in the treatment of Research and Development (“R&D”) Expenditures under Section 174. Previously, the qualified amounts were deductible in the year incurred. Beginning in 2022, the amounts must be capitalized and amortized. EchoStar does not expect a material impact in 2022 and continues to evaluate the legislation.
On April 24, 2017, Mr.August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. Among other provisions, the IRA includes a 15% corporate minimum tax rate applied to certain large corporations and a 1% excise tax on corporate stock repurchases made after December 31, 2022. We do not expect the IRA to have a material impact on our consolidated financial statements.
NOTE 12. RELATED PARTY TRANSACTIONS - DISH NETWORK
Overview
EchoStar Corporation and DISH have operated as separate publicly-traded companies since 2008 (the “Spin-off”). A substantial majority of the voting power of the shares of each of EchoStar Corporation and DISH is owned beneficially by Charles W. Ergen, our Chairman, voluntarily forfeited optionsand by certain entities established for the benefit of his family.
In January 2017, we and certain of our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries pursuant to purchase 600,000which, in February 2017, we received all of the shares of preferred tracking stock previously issued by us and one of our subsidiaries (the “Tracking Stock”), representing an 80% economic interest in the residential retail satellite broadband business of our Hughes segment, in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”).The Tracking Stock was retired in March 2017.
In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we transferred certain real property and the various
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (“DISH Network”) and our former joint venture Dish Mexico, and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of our other businesses (collectively, the “BSS Business”) to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) we distributed to each holder of shares of our 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 our Class A or Class B common stock owned by such 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 with DISH then owning and operating 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, that were grantedpar value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, we and DISH Network entered into certain agreements pursuant to him on April 1, 2017,which we obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us; and we canceledand DISH Network indemnify each other against certain liabilities arising from our respective businesses. Generally, the amounts we or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below), which varies depending on the nature of the products and services provided. We may also enter into additional agreements with DISH Network in the future.
The following is a summary of the transactions and the terms of the underlying principal agreements that have had or may have an impact on our consolidated financial condition and results of operations.
Services and Other Revenue — DISH Network
The following table presents our Services and other revenue - DISH Network:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Services and other revenue - DISH Network | | $ | 7,491 | | | $ | 8,729 | | | $ | 22,940 | | | $ | 26,179 | | | |
The following table presents the related trade accounts receivable:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Trade accounts receivable - DISH Network | | $ | 5,424 | | | $ | 4,244 | |
Satellite Capacity Leased to DISH Network. Effective January 2008, DISH Network began leasing satellite capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue leasing satellite capacity from us on the EchoStar IX satellite on a month-to-month basis.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Telesat Obligation 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. We transferred the Telesat Transponder Agreement to DISH Network in September 2019 as part of the BSS Transaction; however, we retained certain obligations related to DISH Network’s performance under that agreement and we entered into an agreement with DISH Network whereby DISH Network compensates us for retaining such forfeited options.obligations.
Real Estate Leases to DISH Network. We have entered into lease agreements pursuant to which DISH Network leases certain real estate from us. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments. Additionally, DISH Network compensates us for its portion of the taxes, insurance, utilities and/or maintenance of the premises. The terms of each of the leases are set forth below:
Total non-cash, stock-based compensation expense is shown•100 Inverness Occupancy License Agreement— In March 2017, we and DISH Network entered into a license agreement for DISH Network to use certain of our space at 100 Inverness Terrace East, Englewood, Colorado for an initial period ending in December 2020. Effective December 2020, we amended this agreement to extend the license until December 2021. Effective December 2021, we amended this agreement to extend the license until December 2022. This agreement may be terminated by either party upon 180 days’ prior notice. Subsequent to December 2022, this agreement will be converted to a month-to-month lease agreement unless extended by mutual consent or terminated by one of the parties upon 30 days’ notice. In connection with the BSS Transaction, we transferred to DISH Network the Englewood Satellite Operations Center located at 100 Inverness Terrace East, including any and all equipment, hardware licenses, software, processes, software licenses, furniture and technical documentation associated with the satellites transferred in the BSS Transaction.
•Meridian Lease Agreement —The lease for all of 9601 S. Meridian Blvd., Englewood, Colorado was originally for a period ending in December 2016. We and DISH Network have amended this lease over time to, among other things, extend the term through December 2022. After December 2022, this agreement may be converted by mutual consent to a month-to-month lease agreement with either party having the right to terminate upon 30 days’ notice.
TerreStar Agreement. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and our completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment (the “TerreStar Agreements”). In December 2017, we and DISH Network amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DISH Network generally has the right to continue to receive warranty services from us for our products on a month-to-month basis unless terminated by DISH Network upon at least 21 days’ written notice to us. DISH Network generally has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis unless these services are terminated by DISH Network upon at least 90 days’ written notice to us. In addition, DISH Network generally may terminate any and all services for convenience subject to providing us with prior notice and/or payment of termination charges. In March 2020, we entered into an agreement with DISH Network pursuant to which we perform certain work and provide certain credits to amounts owed to us under the TerreStar Agreements in exchange for DISH Network’s granting us rights to use certain satellite capacity under the Amended and Restated Professional Services Agreement (as defined below). As a result, we and DISH Network amended the TerreStar Agreements to suspend our provision of warranty services to DISH Network from April 2020 through December 2020. Following the expiration of this suspension, we have recommenced providing warranty services to DISH Network. In May 2022, we and DISH Network amended the agreement for the provision of hosting services to extend the term until May 2027.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Hughes Broadband Distribution Agreement. Effective October 2012, we and DISH Network entered into a distribution agreement (the “Distribution Agreement”) pursuant to which DISH Network has the right, but not the obligation, to market, sell and distribute our Gen 4 HughesNet service. DISH Network pays us a monthly per subscriber wholesale service fee for our Gen 4 HughesNet service based upon a subscriber’s service level and based upon certain volume subscription thresholds. The Distribution Agreement also provides that DISH Network has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Gen 4 HughesNet service. The Distribution Agreement had an initial term of five years with automatic renewal for successive one-year terms unless terminated by either party with a written notice at least 180 days’ before the expiration of the then-current term. In February 2014, we and DISH Network entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, we and DISH Network will continue to provide our Gen 4 HughesNet service to the then-current DISH Network subscribers pursuant to the terms and conditions of the Distribution Agreement.
DBSD North America Agreement. In March 2012, DISH Network completed its acquisition of all of the equity of DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and our completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and ground-based communications equipment. In December 2017, we and DBSD North America amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DBSD North America has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis, unless terminated by DBSD North America upon at least 120 days’ written notice to us. In February 2019, we further amended these agreements to provide DBSD North America with the right to continue to receive warranty services from us on a month-to-month basis until December 2023, unless terminated by DBSD North America upon at least 21 days’ written notice to us. The provision of hosting services will continue until February 2027 unless terminated by DBSD North America upon at least 180 days’ written notice to us. In addition, DBSD North America generally may terminate any and all such services for convenience, subject to providing us with prior notice and/or payment of termination charges.
Hughes Equipment and Services Agreement. In February 2019, we and DISH Network entered into an agreement pursuant to which we will sell to DISH Network our HughesNet Service and HughesNet equipment that has been modified to meet DISH Network’s internet-of-things specifications for the transfer of data to DISH Network’s network operations centers. This agreement has an initial term of five years expiring February 2024 with automatic renewal for successive one-year terms unless terminated by DISH Network with at least 180 days’ written notice to us or by us with at least 365 days' written notice to DISH Network.
Operating Expenses — DISH Network
The following table presents our operating expenses related to DISH Network:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Operating expenses - DISH Network | | $ | 1,401 | | | $ | 1,522 | | | $ | 4,070 | | | $ | 4,642 | | | |
The following table presents the related trade accounts payable:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Trade accounts payable - DISH Network | | $ | 432 | | | $ | 503 | |
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Amended and Restated Professional Services Agreement. In connection with the Spin-off, we entered into various agreements with DISH Network including a transition services agreement, satellite procurement agreement and services agreement, all of which expired in January 2010 and were replaced by a professional services agreement (the “Professional Services Agreement”). In January 2010, we and DISH Network agreed that we continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under a transition services agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Additionally, we and DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under a satellite procurement agreement), receive logistics, procurement and quality assurance services from us (previously provided under a services agreement) and provide other support services. In connection with the consummation of the Share Exchange, we and DISH amended and restated the Professional Services Agreement (as amended to date, the “Amended and Restated Professional Services Agreement”) to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the Share Exchange, including access to antennas owned by DISH Network for our use in performing TT&C services and maintenance and support services for our antennas (collectively, the “TT&C Antennas”). In September 2019, in connection with the BSS Transaction, we and DISH further amended the Amended and Restated Professional Services Agreement to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the BSS Transaction and to remove our access to and the maintenance and support services for the TT&C Antennas. The term of the Amended and Restated Professional Services Agreement is through January 1, 2023 and renews automatically for successive one-year periods thereafter, unless the agreement is terminated earlier by either party upon at least 60 days’ notice. We or DISH Network may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice, unless the statement of work for particular services states otherwise. Certain services provided under the Amended and Restated Professional Services Agreement may survive the termination of the agreement.
Real Estate Leases from DISH Network. Effective March 2017, we entered into a lease with DISH Network for certain space at 530 EchoStar Drive in Cheyenne, Wyoming for an initial period ending in February 2019. In August 2018, we exercised our option to renew this lease for a one-year period ending in February 2020. In connection with the BSS Transaction, we transferred the Cheyenne Satellite Operations Center, including any equipment, software licenses, and furniture located within, to DISH Network and amended this lease to reduce the space provided to us for the Cheyenne Satellite Access Center for a period ending in September 2021.In March 2021, we exercised our option to renew this lease for a one-year period ending September 2022 and amended the lease to provide us the option to renew this lease for up to three additional years. In November 2021, we exercised our option to renew this lease for a one-year period ending September 2023.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Collocation and Antenna Space Agreements. We and DISH Network entered into an agreement pursuant to which DISH Network provided us with collocation space in El Paso, Texas. This agreement was for an initial period ending in July 2015, and provided us with renewal options for four consecutive three-year terms. We exercised our first renewal option for a period commencing in August 2015 and ending in July 2018, in April 2018 we exercised our second renewal option for a period ending in July 2021, and in May 2021 we exercised our third renewal option for a period ending in July 2024. In connection with the Share Exchange, effective March 2017, we also entered into certain agreements pursuant to which DISH Network provides collocation and antenna space to EchoStar through February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In October 2019, we provided a termination notice for our New Braunfels, Texas agreement effective May 2020. In November 2020, we provided a termination notice for one of our Englewood, Colorado agreements effective May 2021. In November 2021, we exercised our right to renew the collocation agreements at Gilbert, Arizona, Cheyenne, Wyoming, Spokane, Washington, Englewood, Colorado and Monee, Illinois for a period ending in February 2025. In August 2017, we and DISH Network also entered into certain other agreements pursuant to which DISH Network provides additional collocation and antenna space to us in Monee, Illinois and Spokane, Washington through August 2022. In May 2022, we exercised our right to renew such other agreements at Monee, Illinois and Spokane, Washington through August 2025. Generally, we may renew our collocation and antenna space agreements for three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. We may terminate certain of these agreements with 180 days’ prior written notice. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provided us with certain additional collocation space in Cheyenne, Wyoming for a period that ended in September 2020. The fees for the services provided under these agreements depend on the number of racks located at the location.
Also in connection with the BSS Transaction, in September 2019, we entered into an agreement pursuant to which DISH Network provides us with antenna space and power in Cheyenne, Wyoming for a period of five years commencing in August 2020, with four three-year renewal terms, with prior written notice of renewal required no more than 120 days but no less than 90 days prior to the end of the then-current term. In March 2021, we entered into additional agreements pursuant to which DISH Network provides us withantenna space and power in Cheyenne, Wyoming, and the right to use an antenna and certain space in Gilbert, Arizona. Both agreements are for a period of five years with four three-year renewal terms, with prior written notice of renewal required no more than 120 days but no less than 90 days prior to the end of the then-current term.
Hughes Broadband Master Services Agreement. In conjunction with the launch of our EchoStar XIX satellite, in March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our Gen 5 HughesNet service and related equipment and other telecommunication services and (ii) installs Gen 5 HughesNet service equipment with respect to activations generated by DISH Network. Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation services. The current term of the Hughes Broadband MSA is through March 2023 with automatic renewal for successive one-year terms. Either party has the ability to terminate the Hughes Broadband MSA, in whole or in part, for any reason upon at least 90 days’ notice to the other party. Upon expiration or termination of the Hughes Broadband MSA, we will continue to provide our Gen 5 HughesNet service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $1.8 million and $2.1 million for the three months ended September 30, 2022 and 2021, respectively, and $5.4 million and $5.9 million for the nine months ended September 30, 20172022 and 2016 and was assigned2021, respectively.
2019 TT&C Agreement. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provides TT&C services to us for a period ending in September 2021, with the option for us to renew for a one-year period upon written notice at least 90 days prior to the same expense categoriesinitial expiration (the “2019 TT&C Agreement”). In June 2021, we amended the 2019 TT&C Agreement to extend the term until September 2022 and added the option for us to renew the 2019 TT&C Agreement up to an additional three years. In September 2022, we exercised the option to renew the 2019 TT&C Agreement until September 2023. The fees for services provided under the 2019 TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. Any party is able to terminate the 2019 TT&C Agreement for any reason upon 12 months’ notice.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Referral Marketing Agreement. In June 2021, we and DISH Network entered into an agreement pursuant to which we will pre-qualify prospects contacting Hughes call centers and transfer those prospects to DISH Network for introduction to DISH Network’s video services, for prospects that convert Hughes will receive a commission. This agreement has an indefinite term and may be terminated by either party upon 90 days’ prior written notice.
Whidbey Island 5G Network Test Bed Subcontract. In June 2022, we and DISH Wireless entered into a subcontract (“DISH Subcontract”) pursuant to which DISH will provide access and use of a DISH lab, technical support and integration and testing support for the 5G network test bed to be delivered by Hughes to its customer.
Other Receivables - DISH Network
The following table presents our other receivables owed from DISH Network:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Other receivables - DISH Network, current | | $ | — | | | $ | 12,705 | |
Other receivables - DISH Network, noncurrent | | $ | 78,381 | | | $ | 77,920 | |
Tax Sharing Agreement. Effective December 2007, we and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs our and DISH Network’s respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the base compensationSpin-off, are borne by DISH Network and DISH Network indemnifies us for such employees:
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
Research and development expenses | | $ | 297 |
| | $ | 297 |
| | $ | 774 |
| | $ | 827 |
|
Selling, general and administrative expenses | | 2,965 |
| | 2,311 |
| | 7,932 |
| | 7,627 |
|
Total stock-based compensation | | $ | 3,262 |
| | $ | 2,608 |
| | $ | 8,706 |
| | $ | 8,454 |
|
taxes. However, DISH Network is not liable for and does not indemnify us for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended (the “Code”), because of: (i) a direct or indirect acquisition of any of our stock, stock options or assets; (ii) any action that we take or fail to take or (iii) any action that we take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, we will be solely liable for, and will indemnify DISH Network for any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
In light of the Tax Sharing Agreement, among other things, and in connection with our consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, we and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of our consolidated tax returns. Prior to the agreement with DISH Network in 2013, the federal tax benefits were reflected as a deferred tax asset for depreciation and amortization, which was netted in our non-current deferred tax liabilities. Under the agreement with DISH Network from 2013, DISH Network is paying us the federal tax benefit it receives at such time as we would have otherwise been able to realize such tax benefit. We recorded a current receivable from DISH Network in Other receivables - DISH Network, current and a non-current receivable from DISH Network in Other receivables - DISH Network, noncurrent and a corresponding increase in our Deferred tax liabilities, net to reflect the effects of this agreement. In addition, in September 2013, we and DISH Network agreed upon a tax sharing arrangement for filing certain combined state income tax returns and a method of allocating the respective tax liabilities between us and DISH Network for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”).
In August 2018, we and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, to the extent permitted by applicable tax law, DISH Network is entitled to apply the benefit of our 2009 net operating losses (the “SATS 2009 NOLs”) to DISH Network’s federal tax return for the year ended December 31, 2008, in exchange for DISH Network paying us over time the value of the net annual federal income taxes paid by us that would have been otherwise offset by the SATS 2009 NOLs. The Tax Sharing Amendment also requires us and DISH Network to pay the other for the benefits of certain
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
past and future federal research and development tax credits that we or DISH Network receive or received as a result of being part of a controlled group under the Code, and requires DISH Network to compensate us for certain past tax losses utilized by DISH Network and for certain past and future excess California research and development tax credits generated by us and used by DISH Network. In addition, the Tax Sharing Amendment extends the term of the State Tax Arrangement to the earlier of termination of the Tax Sharing Agreement, a change in control of either us or DISH Network or, for any particular state, if we and DISH Network no longer file a combined tax return for such state.
We and DISH Network filed combined income tax returns in certain states from 2008 through 2019. We have earned and recognized tax benefits for certain state income tax credits that we would be unable to fully utilize currently if we had filed separately from DISH Network. We have charged Additional paid-in capital in prior periods when DISH Network has utilized such tax benefits. We expect to increase Additional paid-in capital upon receipt of any consideration that DISH Network pays to us in exchange for these tax credits.
Other Agreements
Master Transaction Agreement. In May 2019, we 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 transferred the BSS Business to BSS Corp.; (ii) we 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. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. The Master Transaction Agreement contained customary representations and warranties by us and DISH Network, including our representations relating to the assets, liabilities and financial condition of the BSS Business, and representations by DISH Network relating to its financial condition and liabilities. We 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.
BSS Transaction Intellectual Property and Technology License Agreement. Effective September 2019, in connection with the BSS Transaction, we and DISH Network entered into an intellectual property and technology license agreement (the “BSS IPTLA”) pursuant to which we and DISH Network license to each other certain intellectual property and technology. The BSS IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the BSS IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the BSS Business acquired pursuant to the BSS Transaction, including a limited license to use the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks during a transition period. EchoStar retains full ownership of the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks. In addition, DISH Network granted a license back to us, among other things, for the continued use of all intellectual property and technology that is used in our retained businesses but the ownership of which was transferred to DISH Network pursuant to the BSS Transaction.
BSS Transaction Tax Matters Agreement. Effective September 2019, in connection with the BSS Transaction, we, BSS Corp. and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, we are responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the BSS Transaction and DISH is responsible for all tax returns and tax liabilities for the BSS Business from and after the BSS Transaction. Both we and DISH made certain tax-related representations and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both we and DISH Network have agreed to indemnify each other for certain losses if there is a breach of any the tax representations or violation of any of the tax covenants in the tax matters agreement and that breach or violation results in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar or its stockholders for U.S. federal income tax purposes. In addition, DISH Network has agreed to indemnify us if the BSS Business is acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons, where either it took an action, or knowingly facilitated, consented to or assisted with an action by its stockholders, that resulted in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar and its stockholders for U.S. federal
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
income tax purposes. This tax matters agreement supplements the Tax Sharing Agreement outlined above and the Share Exchange Tax Matters Agreement outlined below, both of which continue in full force and effect.
BSS Transaction Employee Matters Agreement. Effective September 2019, in connection with the BSS Transaction, we and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the BSS Business. DISH Network assumed employee-related liabilities relating to the BSS Business as part of the BSS Transaction, except that we are responsible for certain pre-BSS Transaction compensation and benefits for employees who transferred to DISH Network in connection with the BSS Transaction.
Share Exchange Agreement. In February 2017 we consummated the Share Exchange, following which we no longer operate the transferred EchoStar Technologies businesses and the Tracking Stock was retired and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. Pursuant to the Share Exchange Agreement, we transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contained customary representations and warranties by the parties, including representations by us related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. We and DISH Network also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by us or DISH causes the transaction to be taxable to the other party after closing.
Share Exchange Intellectual Property and Technology License Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH Network entered into an intellectual property and technology license agreement (“IPTLA”) pursuant to which we and DISH Network license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the businesses acquired pursuant to the Share Exchange, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, DISH Network granted a license back to us, among other things, for the continued use of all intellectual property and technology that is used in our retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.
Share Exchange Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, we are responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the Share Exchange. Both we and DISH Network made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both we and DISH Network have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, DISH Network has agreed to indemnify us if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The tax matters agreement supplements the Tax Sharing Agreement outlined above which continues in full force and effect.
Share Exchange Employee Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the transferred businesses. DISH Network assumed employee-related liabilities relating to the transferred businesses as part of the Share Exchange, except that we are responsible for certain pre-Share Exchange employee related litigation, and compensation and benefits for employees who transferred to DISH Network in connection with the Share Exchange.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 13. RELATED PARTY TRANSACTIONS - OTHER
Hughes Systique Corporation
We contract with Hughes Systique Corporation (“Hughes Systique”) for software development services. In addition to our approximately 42% ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications and a member of our board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, own in the aggregate approximately 25%, on an undiluted basis, of Hughes Systique’s outstanding shares as of September 30, 2022. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest entity and we are considered the primary beneficiary of Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes Systique. As a result, we consolidate Hughes Systique’s financial statements in these Consolidated Financial Statements.
TerreStar Solutions
DISH Network owns more than 15% of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuant to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $0.5 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively, and $1.5 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2017, total unrecognized stock-based compensation cost, net2022 we had $0.5 million of estimated forfeitures, related to our unvested stock awards was $22.8 million.
trade accounts receivable from TSI. Note 14. Commitments and Contingencies
Commitments
NOTE 14. CONTINGENCIES
As of September 30, 2017, our satellite-related obligations were approximately $1.01 billion. Our satellite-related obligations primarily include payments pursuant to agreements for the construction of the EchoStar XXIV satellite; payments pursuant to launch services contracts and regulatory authorizations; executory costs for our capital lease satellites; costs under satellite service agreements; and in-orbit incentives relating to certain satellites; as well as commitments for long-term satellite operating leases and satellite service arrangements.
Contingencies
Patents and Intellectual Property
Many entities, including some of our competitors, have, or may have in the future, obtain patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be trebled.tripled. Further, 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. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these personsparties 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. Further, we cannot be certain that we would be able to obtain licenses
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
from these personsparties 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.
Separation Agreement; Share ExchangeCertain Arrangements with DISH Network
In connection with the Spin-off,our spin-off from DISH in 2008, we entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the terms of the separation agreement, we assumed certain liabilities that relate to our business, including certain designated liabilities for acts or omissions that occurred prior to the Spin-off. Certain specific provisions govern intellectual property related claims under which generally, we will generally only be liable for our acts or omissions following the Spin-off and DISH Network will indemnify us for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off. Additionally, inIn connection with the Share Exchange and BSS Transaction, we entered into the Share Exchange Agreement and the Master Transaction Agreement, respectively, and other agreements which provide, among other things, for the division of certain liabilities, including liabilities relating to taxes, intellectual property and employees and liabilities resulting from litigation and the assumption of certain liabilities that relate to the transferred businesses and assets. These agreements also contain additional indemnification provisions between us and DISH Network for, in the case of the Share Exchange, certain pre-existing liabilities and legal proceedings.proceedings and, in the case of the BSS Transaction, certain losses with respect to breaches of certain representations and covenants and certain liabilities.
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Litigation
We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable, and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending litigationlegal proceedings are charged to expense as incurred.
For certain cases described below,proceedings, management is unable to predict with any degree of certainty the outcome or provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons,reasons: (i) the proceedings are in various stages; (ii) damages have not been sought or specified; (iii) damages are unsupported, indeterminate and/or exaggerated in management’s opinion; (iv) there is uncertainty as to the outcome of pending trials, appeals, motions or motions;other proceedings; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, for these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial condition, operating results or cash flows, though there is no assurance that the resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We intend to vigorously defend the proceedings against us. In the event that a court, tribunal, other body or jury ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers.
Elbit
Shareholder Litigation
On January 23, 2015, Elbit Systems LandJuly 2, 2019, the City of Hallandale Beach Police Officers’ and C4I LTD and Elbit SystemsFirefighters’ Personnel Retirement Trust, purporting to sue on behalf of America Ltd. (together referred to as “Elbit”)a class of EchoStar Corporation’s stockholders, filed a complaint in the District Court of Clark County, Nevada against our directors, Charles W. Ergen, R. Stanton Dodge, Anthony M. Federico, Pradman P. Kaul, C. Michael Schroeder, Jeffrey R. Tarr, William D. Wade, and Michael T. Dugan; our chief financial officer, David J. Rayner; EchoStar Corporation; our subsidiary Hughes NetworkSatellite Systems L.L.C.Corporation (“HNS”HSSC”), as well as against Black Elk Energy Offshore Operations, LLC, Bluetide Communications, Inc.; our former subsidiary BSS Corp.; and Helm Hotels Group, inDISH and its subsidiary Merger Sub. On September 5, 2019, the United States District Court fordefendants filed motions to dismiss. On October 11, 2019, the Eastern District of Texas, alleging infringement of United States Patent Nos. 6,240,073 (the “073 patent”) and 7,245,874 (“874 patent”). The 073 patent is entitled “Reverse Link for a Satellite Communication Network” and the 874 patent is entitled “Infrastructure for Telephony Network.” Elbit alleges that the 073 patent is infringed by broadband satellite systems that practice the Internet Protocol Over Satellite standard. Elbit alleges that the 874 patent is infringed by the manufacture and sale of broadband satellite systems that provide cellular backhaul service via connections to E1 or T1 interfaces at cellular backhaul base stations. On April 2, 2015, Elbitplaintiffs filed an amended complaint removing Helm Hotels GroupMessrs. Dodge, Federico, Kaul, Schroeder, Tarr and Wade as defendants. The amended complaint alleges that Mr. Ergen, as our controlling stockholder, breached fiduciary duties to EchoStar Corporation’s minority stockholders by structuring the BSS Transaction with inadequate consideration and improperly influencing our and HSSC’s boards of directors to approve the BSS Transaction. The amended complaint also alleges that the other defendants aided and abetted such alleged breaches. The plaintiffs seek equitable and monetary relief, including the issuance of additional DISH Common Stock, and other costs and disbursements, including attorneys’ fees on behalf of the purported class. On November 11, 2019, we and the other defendants filed separate motions to dismiss plaintiff’s amended complaint and during a defendant, but making similarhearing on January 13, 2020 the court denied these motions. On February 10, 2020, we and the other defendants filed answers to the amended complaint. The Court certified plaintiff’s class on January 11, 2021. On June 18, 2021, the parties executed a settlement agreement to resolve all claims in this case. On the same day, the parties filed a joint motion for preliminary approval of the settlement agreement. The motion was granted by an order dated July 30, 2021. On December 9, 2021, the Court held a final settlement hearing. On December 10, 2021, the Court issued an Order granting final approval of the settlement agreement. In an order dated October 24, 2022, the Court granted plaintiff’s unopposed motion to approve the class distribution plan.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
License Fee Dispute with Government of India, Department of Telecommunications
allegations against
In 1994, the Government of India promulgated a “National Telecommunications Policy” under which the government liberalized the telecommunications sector and required telecommunications service providers to pay fixed license fees. Pursuant to this policy, our subsidiary Hughes Communications India Private Limited (“HCIPL”), formerly known as Hughes Escorts Communications Limited, obtained a license to operate a data network over satellite using VSAT systems. In 2002, HCIPL’s license was amended pursuant to a new defendant, Country Home Investments, Inc.government policy that was first established in 1999. The new policy eliminated the fixed license fees and instead required each telecommunications service provider to pay license fees based on its adjusted gross revenue (“AGR”). In March 2005, the Indian Department of Telecommunications (“DOT”) notified HCIPL that, based on its review of HCIPL’s audited accounts and AGR statements, HCIPL must pay additional license fees and penalties and interest on such fees and penalties. HCIPL responded that the DOT had improperly calculated its AGR by including revenue from licensed and unlicensed activities. The DOT rejected this explanation and in 2006, HCIPL filed a petition with an administrative tribunal (the “Tribunal”), challenging the DOT’s calculation of its AGR. The DOT also issued license fee assessments to other telecommunications service providers and a number of similar petitions were filed by several other such providers with the Tribunal. These petitions were amended, consolidated, remanded and re-appealed several times. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the Tribunal’s ruling. On October 24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “October 2019 Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties, but without indicating the amount HCIPL is required to pay the DOT, and ordering payment by January 23, 2020. On November 323, 2019, HCIPL and 4, 2015, andother telecommunication service providers filed a petition asking the Supreme Court to reconsider the October 2019 Order. The petition was denied on January 20, 2020. On January 22, 2016,2020, HCIPL and other telecommunication service providers filed an application requesting that the defendants filed petitionsSupreme Court modify the October 2019 Order to permit the DOT to calculate the final amount due and extend HCIPL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court directed HCIPL and the other telecommunication service providers to explain why the Supreme Court should not initiate contempt proceedings for failure to pay the amounts due. During a hearing on March 18, 2020, the Supreme Court ordered that all amounts that were due before the United States PatentOctober 2019 Order must be paid, including interest, penalties and Trademark Office challenginginterest on the validitypenalties. The Supreme Court also ordered that the parties appear for a further hearing addressing, potentially among other things, a proposal by the DOT to allow for extended or deferred payments of amounts due. On June 11, 2020, the Supreme Court ordered HCIPL and the other telecommunication service providers to submit affidavits addressing the proposal made by the DOT to extend the time frame for payment of the patents in suit, whichamounts owed and for HCIPL and the Patent and Trademark Office subsequently declinedother telecommunication providers to institute.provide security for such payments. On April 13, 2016,September 1, 2020, the defendants answered Elbit’s complaint. At Elbit’s request, on June 26, 2017, the court dismissed Elbit’s claims of infringement against all parties other than HNS. Trial commenced on July 31, 2017. On August 7, 2017, the jury returned a verdict that the 073 patent was valid and infringed, and awarded Elbit approximately $21.1 million. As a result of interest, costs and unit sales through the 073 patent’s expiration in November 2017, we estimate the jury verdict could result inSupreme Court issued a judgment permitting a 10-year payment schedule. Under this payment schedule, HCIPL is required to make an annual payment every March 31, through 2031. Following the Supreme Court of approximately $27 million if not overturned or modified by post-trial motions or appeals. India’s October 2019 judgment, HCIPL made payments during the first quarter of 2020, and additional payments on March 31, 2021 and March 31, 2022.
The jury also found that such infringementfollowing table presents the components of the 073 patent was not willful and that the 874 patent was not infringed. HNS intends to vigorously pursue its post-trial rights, including appeals. We cannot predict with certainty the outcomeaccrual:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Additional license fees | | $ | 3,481 | | | $ | 3,812 | |
Penalties | | 3,572 | | | 3,912 | |
Interest and interest on penalties | | 78,294 | | | 81,389 | |
Less: Payments | | (18,072) | | | (8,451) | |
Total accrual | | 67,275 | | | 80,662 | |
Less: Current portion | | 10,355 | | | 11,178 | |
Total long-term accrual | | $ | 56,920 | | | $ | 69,484 | |
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Any eventual payments made with respect to the ultimate outcome of this matter may be different from our accrualsaccrual and such differences could be significant.
Michael Heskiaoff, Marc Langenohl, and Rafael Mann
On July 10, 2015, Messrs. Michael Heskiaoff and Marc Langenohl, purportedly on behalf of themselves and all others similarly situated, filed suit against our now former subsidiary Sling Media, Inc. in the United States District Court for the Southern District of New York. The complaint alleges that Sling Media Inc.’s display of advertising to its customers violates a number of state statutes dealing with consumer deception. On September 25, 2015, the plaintiffs filed an amended complaint, and Mr. Rafael Mann, purportedly on behalf of himself and all others similarly situated, filed an additional complaint alleging similar causes of action. On November 16, 2015, the cases were consolidated. On August 12, 2016, the Court dismissed the consolidated case due to plaintiffs’ failure to state a claim. On September 12, 2016, the plaintiffs moved the Court for leave to file an amended complaint, which the Court denied on March 22, 2017. On April 17, 2017, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Second Circuit.
Realtime Data LLC
On May 8, 2015, Realtime Data LLC (“Realtime”) filed suit against EchoStar Corporation and our subsidiary HNS in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 7,378,992 (the “992 patent”), entitled “Content Independent Data Compression Method and System”; 7,415,530 (the “530 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval”; and 8,643,513 (the “513 patent”), entitled “Data Compression System and Methods.” On September 14, 2015, Realtime amended its complaint, additionally alleging infringement of United States Patent No. 9,116,908 (the “908 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval.” Realtime generally alleges that the asserted patents are infringed by certain HNS data compression products and services. Over April 29, 2016 and May 5, 2016, the defendants filed petitions before the United States Patent and Trademark Office (“USPTO”) challenging the validity of the asserted patents. The USPTO instituted proceedings on each of those petitions. The USPTO invalidated the asserted claims of the 513 patent, but Realtime is still asserting this patent against us and may appeal this ruling. Realtime is no longer asserting the 992 patent against us and additionally the USPTO invalidated the claims of the 992 patent that had been asserted against us. The USPTO is still reviewing the 530 patent; however, two of the four claims asserted against us were invalidated in a separate litigation between Realtime and a third party, which Realtime may appeal. The USPTO did not invalidate the asserted claims of the 908 patent, but a third party has challenged these claims in a separate proceeding before the USPTO. On February 14, 2017, Realtime filed a second suit against EchoStar Corporation and our subsidiary HNS in the same District Court, alleging infringement of four additional United States Patents, Nos. 7,358,867, entitled “Content Independent Data Compression Method and System;” 8,502,707, entitled “Data Compression Systems and Methods;” 8,717,204, entitled “Methods for Encoding and Decoding Data;” and 9,054,728, entitled “Data Compression System and Methods.” On June 6, 2017, Realtime filed an amended complaint, adding claims of infringement against EchoStar Technologies, L.L.C., a wholly-owned subsidiary of DISH, DISH, DISH Network L.L.C., Sling TV L.L.C., Sling Media L.L.C., and Arris Group, Inc., as well as additionally alleging infringement of United States Patent No. 8,553,759 (the “759 patent”), entitled “Bandwidth Sensitive Data Compression and Decompression.” The cases were consolidated and no trial date has been set. On July 20, 2017, the claims against the newly added parties, with the exception of EchoStar Technologies, L.L.C., were severed into a separate case. On September 1, 2017, EchoStar Technologies, L.L.C. was dismissed from the case. On October 10, 2017, Realtime informed us that it is not pursuing the 759 patent against us. Trial is scheduled for January 21, 2019. Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Shareholder Derivative Litigation
On December 5, 2012, Greg Jacobi, purporting to sue derivatively on behalf of EchoStar Corporation, filed suit (the “Jacobi Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Joseph P. Clayton, David K. Moskowitz, and EchoStar Corporation in the United States District Court for the District of Nevada. The complaint alleges that a March 2011 attempted grant of 1.5 million stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.
On December 18, 2012, Chester County Employees’ Retirement Fund, derivatively on behalf of EchoStar Corporation, filed a suit (the “Chester County Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Anthony M. Federico, Pradman P. Kaul, Joseph P. Clayton, and EchoStar Corporation in the United States District Court for the District of Colorado. The complaint similarly alleges that the March 2011 attempted grant of 1.5 million stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.
On February 22, 2013, the Chester County Litigation was transferred to the District of Nevada, and on April 3, 2013, the Chester County Litigation was consolidated into the Jacobi Litigation. Oral argument on a motion to dismiss the Jacobi Litigation was held February 21, 2014. On March 30, 2015, the Court dismissed the Jacobi Litigation, with leave for Jacobi to amend his complaint by April 20, 2015. On April 20, 2015, Jacobi filed an amended complaint, which on June 12, 2015, we moved to dismiss. On March 17, 2016, the Court dismissed the amended complaint. On July 31, 2017, a motion from the Chester County Employee’s Retirement Fund seeking attorneys’ fees and expenses was denied. Jacobi appealed the amended complaint’s dismissal to the United States Court of Appeals for the Ninth Circuit. On October 9, 2017, Jacobi agreed to dismiss its appeal, with each party bearing its own costs. Accordingly, on October 10, 2017 the Court of Appeals granted a stipulated motion to voluntarily dismiss Jacobi’s appeal, and on October 17, 2017, the District Court entered the Court of Appeal’s mandate. The Chester County and Jacobi matters are now concluded.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of our business. As part of our ongoing operations, the Company iswe are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Companywe may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, the Companywe from time to time receivesreceive inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.
In our opinion, the amount of ultimate liability with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
The Company indemnifies itsWe also indemnify our directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for the Company.us. Additionally, in the normal course of its business, the Company enterswe enter into contracts pursuant to which the Companywe may make a variety of representations and warranties and indemnify the counterparty for certain losses. The Company’sOur possible exposure under these arrangements cannot be reasonably estimated as this involves the resolution of claims made, or future claims that may be made, against the Companyus or itsour officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 15. Segment ReportingNOTE 15. SEGMENT REPORTING
OperatingBusiness segments are business components of an enterprise for which separate financial information is available and regularly evaluated by theour chief operating decision maker (“CODM”), who for EchoStar is the Company’sour Chief Executive Officer. Prior to March 2017, we operatedWe operate in three primarytwo business segments, Hughes EchoStar Technologiessegment and ESS. Following consummation of the Share Exchange described in ESS segment.
Note 3 of these condensed consolidated financial statements, we no longer operate the EchoStar Technologies business segment.
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, or EBITDA. Effective in March 2017, we also changed our overhead allocation methodologyand net income (loss) attributable to reflect how the CODM evaluates our segments. Historically, the costs of all corporate functions were included on an allocated basis in each of the business segments’ EBITDA. Under the revised allocation methodology, these costs are now reported and analyzed as part of “Corporate and Other” (previously “All Other and Eliminations”non-controlling interests (“EBITDA”). Our prior period segment EBITDA disclosures have been restated to reflect this change.
As of March 2017, our two primary business segments are Hughes and ESS, as described in Note 1 of these condensed consolidated financial statements.
Our operations also include various corporate departments (primarily Executive, Strategic Development, Human Resources, IT, Finance, Real Estate and Legal) as well as other activities that have not been assigned to our operating segments, including costs incurred in certain satellite development programs and other business development activities, our centralized treasury operations, and gains (losses) from certain of our investments. Costs and income associated with these departments and activities are accounted for in the “Corporate and Other” column in the table below or in the reconciliation of EBITDA below.
Transactions between segments were not significant for the three and nine months ended September 30, 2017 or 2016, respectively. Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
The following table presents total revenue, EBITDA, and capital expenditures and EBITDA for each of our operatingbusiness segments:
|
| | | | | | | | | | | | | | | | |
| | Hughes | | EchoStar Satellite Services | | Corporate and Other | | Consolidated Total |
| | (In thousands) |
For the Three Months Ended September 30, 2017 | | | | | | | | |
External revenue | | $ | 379,702 |
| | $ | 96,743 |
| | $ | 4,788 |
| | $ | 481,233 |
|
Intersegment revenue | | $ | 359 |
| | $ | 350 |
| | $ | (709 | ) | | $ | — |
|
Total revenue | | $ | 380,061 |
| | $ | 97,093 |
| | $ | 4,079 |
| | $ | 481,233 |
|
EBITDA | | $ | 131,817 |
| | $ | 78,345 |
| | $ | 9,699 |
| | $ | 219,861 |
|
Capital expenditures | | $ | 108,428 |
| | $ | 8,203 |
| | $ | 75,500 |
| | $ | 192,131 |
|
| | | | | | | | |
For the Three Months Ended September 30, 2016 | | | | | | | | |
External revenue | | $ | 355,090 |
| | $ | 101,308 |
| | $ | 3,648 |
| | $ | 460,046 |
|
Intersegment revenue | | $ | 786 |
| | $ | 172 |
| | $ | (958 | ) | | $ | — |
|
Total revenue | | $ | 355,876 |
| | $ | 101,480 |
| | $ | 2,690 |
| | $ | 460,046 |
|
EBITDA | | $ | 125,522 |
| | $ | 84,257 |
| | $ | (20,477 | ) | | $ | 189,302 |
|
Capital expenditures | | $ | 75,682 |
| | $ | 15,730 |
| | $ | 48,162 |
| | $ | 139,574 |
|
| | | | | | | | |
For the Nine Months Ended September 30, 2017 | | | | | | | | |
External revenue | | $ | 1,070,715 |
| | $ | 294,839 |
| | $ | 13,906 |
| | $ | 1,379,460 |
|
Intersegment revenue | | $ | 1,428 |
| | $ | 946 |
| | $ | (2,374 | ) | | $ | — |
|
Total revenue | | $ | 1,072,143 |
| | $ | 295,785 |
| | $ | 11,532 |
| | $ | 1,379,460 |
|
EBITDA | | $ | 342,693 |
| | $ | 241,873 |
| | $ | 3,472 |
| | $ | 588,038 |
|
Capital expenditures | | $ | 270,624 |
| | $ | 21,351 |
| | $ | 118,170 |
| | $ | 410,145 |
|
| | | | | | | | |
For the Nine Months Ended September 30, 2016 | | | | | | | | |
External revenue | | $ | 1,019,203 |
| | $ | 305,401 |
| | $ | 10,074 |
| | $ | 1,334,678 |
|
Intersegment revenue | | $ | 2,248 |
| | $ | 518 |
| | $ | (2,766 | ) | | $ | — |
|
Total revenue | | $ | 1,021,451 |
| | $ | 305,919 |
| | $ | 7,308 |
| | $ | 1,334,678 |
|
EBITDA | | $ | 353,505 |
| | $ | 257,181 |
| | $ | (45,506 | ) | | $ | 565,180 |
|
Capital expenditures | | $ | 261,241 |
| | $ | 50,762 |
| | $ | 165,815 |
| | $ | 477,818 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended September 30, 2022 | | | | | | | | |
External revenue | | $ | 489,565 | | | $ | 4,588 | | | $ | 3,234 | | | $ | 497,387 | |
Intersegment revenue | | — | | | 393 | | | (393) | | | — | |
Total revenue | | $ | 489,565 | | | $ | 4,981 | | | $ | 2,841 | | | $ | 497,387 | |
| | | | | | | | |
Capital expenditures | | $ | 50,783 | | | $ | — | | | $ | 10,674 | | | $ | 61,457 | |
EBITDA | | $ | 175,010 | | | $ | 3,446 | | | $ | (32,963) | | | $ | 145,493 | |
| | | | | | | | |
For the three months ended September 30, 2021 | | | | | | | | |
External revenue | | $ | 496,937 | | | $ | 4,347 | | | $ | 3,376 | | | $ | 504,660 | |
Intersegment revenue | | — | | | 89 | | | (89) | | | — | |
Total revenue | | $ | 496,937 | | | $ | 4,436 | | | $ | 3,287 | | | $ | 504,660 | |
| | | | | | | | |
Capital expenditures | | $ | 74,259 | | | $ | — | | | $ | 15,278 | | | $ | 89,537 | |
EBITDA | | $ | 196,970 | | | $ | 2,319 | | | $ | (14,948) | | | $ | 184,341 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the nine months ended September 30, 2022 | | | | | | | | |
External revenue | | $ | 1,475,512 | | | $ | 13,366 | | | $ | 9,359 | | | $ | 1,498,237 | |
Intersegment revenue | | — | | | 939 | | | (939) | | | — | |
Total revenue | | $ | 1,475,512 | | | $ | 14,305 | | | $ | 8,420 | | | $ | 1,498,237 | |
| | | | | | | | |
Capital expenditures | | $ | 176,665 | | | $ | — | | | $ | 72,709 | | | $ | 249,374 | |
EBITDA | | $ | 546,108 | | | $ | 9,658 | | | $ | (16,023) | | | $ | 539,743 | |
| | | | | | | | |
For the nine months ended September 30, 2021 | | | | | | | | |
External revenue | | $ | 1,465,073 | | | $ | 12,543 | | | $ | 9,460 | | | $ | 1,487,076 | |
Intersegment revenue | | — | | | 265 | | | (265) | | | — | |
Total revenue | | $ | 1,465,073 | | | $ | 12,808 | | | $ | 9,195 | | | $ | 1,487,076 | |
| | | | | | | | |
Capital expenditures | | $ | 228,641 | | | $ | — | | | $ | 123,362 | | | $ | 352,003 | |
EBITDA | | $ | 605,742 | | | $ | 6,481 | | | $ | 31,845 | | | $ | 644,068 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The following table reconciles total consolidated EBITDA to reported “Income from continuing operationsIncome (loss) before income taxes”taxes in our condensed consolidated statementsthe Consolidated Statements of operations:Operations to EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
Income (loss) before income taxes | | $ | 32,745 | | | $ | 49,965 | | | $ | 170,335 | | | $ | 205,851 | | | |
Interest income, net | | (14,183) | | | (5,725) | | | (29,677) | | | (16,914) | | | |
Interest expense, net of amounts capitalized | | 13,845 | | | 16,313 | | | 43,125 | | | 79,848 | | | |
Depreciation and amortization | | 110,233 | | | 120,596 | | | 347,224 | | | 368,864 | | | |
Net loss (income) attributable to non-controlling interests | | 2,853 | | | 3,192 | | | 8,736 | | | 6,419 | | | |
EBITDA | | $ | 145,493 | | | $ | 184,341 | | | $ | 539,743 | | | $ | 644,068 | | | |
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
EBITDA | | $ | 219,861 |
| | $ | 189,302 |
| | $ | 588,038 |
| | $ | 565,180 |
|
Interest income and expense, net | | (43,634 | ) | | (31,057 | ) | | (126,156 | ) | | (66,650 | ) |
Depreciation and amortization | | (134,822 | ) | | (108,549 | ) | | (379,939 | ) | | (324,743 | ) |
Net income attributable to noncontrolling interest in HSS Tracking Stock and other noncontrolling interests | | 532 |
| | 609 |
| | 351 |
| | 20 |
|
Income from continuing operations before income taxes | | $ | 41,937 |
| | $ | 50,305 |
| | $ | 82,294 |
| | $ | 173,807 |
|
36
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION
Note 16. Related Party Transactions
DISH Network
Other Current Assets, Net and Other Non-current Assets, Net
Following the Spin-off, we and DISH have operated as separate publicly-traded companies. However, prior to the consummation of the Share Exchange on February 28, 2017, DISH Network owned the Tracking Stock representing an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment. Following the consummation of the Share Exchange, the Tracking Stock was retired. In addition, 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 trusts established by Mr. Ergen for the benefit of his family.
In connection with and following both the Spin-off and the Share Exchange, we and DISH Network entered into certain agreements pursuant to which we obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us; and we and DISH Network indemnify each other against certain liabilities arising from our respective businesses. We also may enter into additional agreements with DISH Network in the future. Generally, the amounts we or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below or in our most recent Annual Report on Form 10-K), which varies depending on the nature of the products and services provided.
The following is a summarytable presents the components of the terms of our principal agreements with DISH Network that may have an impact on our financial conditionOther current assets, net and results of operations.Other non-current assets, net:
Equipment revenue — DISH Network
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Other current assets, net: | | | | |
Inventory | | $ | 115,549 | | | $ | 103,084 | |
Prepaids and deposits | | 71,585 | | | 57,287 | |
Trade accounts receivable - DISH Network | | 5,424 | | | 4,244 | |
Other receivables - DISH Network | | — | | | 12,705 | |
Other, net | | 36,656 | | | 21,124 | |
Total other current assets | | $ | 229,214 | | | $ | 198,444 | |
| | | | |
Other non-current assets, net: | | | | |
Capitalized software, net | | $ | 117,995 | | | $ | 124,701 | |
Contract acquisition costs, net | | 70,492 | | | 82,986 | |
Other receivables - DISH Network | | 78,381 | | | 77,920 | |
Restricted marketable investment securities | | 10,411 | | | 13,262 | |
Deferred tax assets, net | | 6,649 | | | 5,417 | |
Restricted cash | | 6,141 | | | 980 | |
Contract fulfillment costs, net | | 1,859 | | | 1,721 | |
Other, net | | 31,483 | | | 31,254 | |
Total other non-current assets, net | | $ | 323,411 | | | $ | 338,241 | |
Receiver Agreement. Effective January 2012, one of our subsidiaries and DISH Network entered into a receiver agreement (the “2012 Receiver Agreement”), pursuant to which DISH Network had the right, but not the obligation, to purchase digital set-top boxes, related accessories, and other equipment from us for the period from January 2012 through December 2014. The 2012 Receiver Agreement replaced the receiver agreement one of our subsidiaries entered into with DISH Network in connection with the Spin-off. The 2012 Receiver Agreement allowed DISH Network to purchase digital set-top boxes, related accessories, and other equipment from us either: (i) at cost (decreasing as we reduced costs and increasing as costs increased) plus a dollar mark-up which depended upon the cost of the product subject to a collar on our mark-up; or (ii) at cost plus a fixed margin, which depended on the nature of the equipment purchased. Under the 2012 Receiver Agreement, our margins would have increased if we were able to reduce the costs of our digital set-top boxes and our margins would have reduced if these costs increased. One of our subsidiaries provided DISH Network with standard manufacturer warranties for the goods sold under the 2012 Receiver Agreement. Additionally, the 2012 Receiver Agreement included an indemnification provision, whereby the parties agreed to indemnify each other for certain intellectual property matters. In November 2016, one of our subsidiaries and DISH Network amended this agreement to extend its term for one year through December 2017. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Services and other revenue — DISH Network
Broadcast Agreement. Effective January 2012, one of our subsidiaries and DISH Network entered into a broadcast agreement (the “2012 Broadcast Agreement”), pursuant to which we provided certain broadcast services to DISH Network, including teleport services such as transmission and downlinking, channel origination services, and channel management services, for the period from January 2012 through December 2016. In November 2016, one of our subsidiaries and DISH Network amended the 2012 Broadcast Agreement to extend the term for one year through December 2017. The fees for the services provided under the 2012 Broadcast Agreement were calculated at either: (a) our cost of providing the relevant service plus a fixed dollar fee, which was subject to certain adjustments; or (b) our cost of providing the relevant service plus a fixed margin, depending on the nature of the services provided. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Accrued Expenses and Other Current Liabilities and Other Non-Current Liabilities
Broadcast Agreement for Certain Sports Related Programming. In May 2010, one of our subsidiaries and DISH Network entered into a broadcast agreement pursuant to which we provided certain broadcast services to DISH Network in connection with its carriage of certain sports related programming. The term of this agreement was ten years. The fees for the broadcast services provided under this agreement depended, among other things, upon the cost to develop and provide such services. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
The following table presents the components of Accrued expenses and other current liabilities and Other non-current liabilities:
RUS Implementation Agreement
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Accrued expenses and other current liabilities: | | | | |
Accrued compensation | | $ | 59,694 | | | $ | 63,935 | |
Operating lease obligation | | 17,389 | | | 16,781 | |
Accrued interest | | 16,553 | | | 39,395 | |
Accrued taxes | | 11,979 | | | 11,738 | |
Accrual for license fee dispute | | 10,355 | | | 11,178 | |
Trade accounts payable - DISH Network | | 432 | | | 503 | |
Other | | 67,211 | | | 65,912 | |
Total accrued expenses and other current liabilities | | $ | 183,613 | | | $ | 209,442 | |
| | | | |
Other non-current liabilities: | | | | |
Accrual for license fee dispute | | $ | 56,920 | | | $ | 69,484 | |
Contract liabilities | | 8,797 | | | 10,669 | |
Other | | 54,002 | | | 56,273 | |
Total other non-current liabilities | | $ | 119,719 | | | $ | 136,426 | |
. In September 2010, DISH Broadband L.L.C. (“DISH Broadband”), DISH’s indirect, wholly-owned subsidiary, was selected by
Inventory
The following table presents the Rural Utilities Service (“RUS”)components of the United States Department of Agriculture to receive up to approximately $14.1 million in broadband stimulus grant funds (the “Grant Funds”). Effective November 2011, HNS and DISH Broadband entered into a RUS Implementation Agreement (the “RUS Agreement”) pursuant to which HNS provided certain portions of the equipment and broadband service used to implement DISH Broadband’s RUS program. While the RUS Agreement expired in June 2013 when the Grant Funds were exhausted, HNS is required to continue providing services to DISH Broadband’s customers activated prior to the expiration of the RUS Agreement in accordance with the terms and conditions of the RUS Agreement.inventory:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Raw materials | | $ | 31,609 | | | $ | 13,778 | |
Work-in-process | | 13,825 | | | 11,705 | |
Finished goods | | 70,115 | | | 77,601 | |
Total inventory | | $ | 115,549 | | | $ | 103,084 | |
Satellite Services Provided to DISH Network. Since the Spin-off, we have entered into certain satellite service agreements pursuant to which DISH Network receives satellite services on certain satellites owned or leased by us. The fees for the services provided under these satellite service agreements depend, among other things, upon the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite, and the length of the service arrangements. The terms of each service arrangement is set forth below:
EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV. As part of the Satellite and Tracking Stock Transaction, described below, in March 2014, we began providing certain satellite services to DISH Network on the EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites. The term of each satellite services agreement generally terminates upon the earlier of: (i) the end of life of the satellite; (ii) the date the satellite fails; or (iii) a certain date, which depends upon, among other things, the estimated useful life of the satellite. DISH Network generally has the option to renew each satellite service agreement on a year-to-year basis through the end of the respective satellite’s life. There can be no assurance that any options to renew such agreements will be exercised. In December 2016, DISH Network renewed the satellite services agreement relative to the EchoStar VII satellite for one year to June 2018.
EchoStar IX. Effective January 2008, DISH Network began receiving satellite services from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue to receive satellite services from us on the EchoStar IX satellite on a month-to-month basis.
EchoStar XII. DISH Network received satellite services from us on the EchoStar XII satellite. The term of the satellite services agreement terminated at the end of September 2017.
EchoStar XVI. In December 2009, we entered into an initial ten-year transponder service agreement with DISH Network, pursuant to which DISH Network has received satellite services from us on the EchoStar XVI satellite since January 2013. Effective December 2012, we and DISH Network amended the transponder service agreement to, among other things, change the initial term to generally expire upon the earlier of: (i) the end-of-life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided under the agreement fails; or (iv) four years following the actual service commencement date. In July 2016, we and DISH Network further amended the transponder service agreement to, among other things, extend the initial term by one additional year through January 2018 and to reduce the term of the first renewal option by one year. In May 2017, DISH Network renewed the satellite services agreement relative to the EchoStar XVI satellite for five-years to January 2023. DISH Network has the option to renew for an additional five-year period prior to expiration of the term. There can be no assurance that such option to renew this agreement will be exercised. In the event that DISH Network does not exercise its five-year renewal option, DISH Network has the option to purchase the EchoStar XVI satellite for a certain price. If DISH Network does not elect to purchase the EchoStar XVI satellite at that time, we may sell the EchoStar XVI satellite to a third party and DISH Network is required to pay us a certain amount in the event we are not able to sell the EchoStar XVI satellite for more than a certain amount.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Supplemental and Non-cash Investing and Financing Activities
Nimiq 5 Agreement
. In September 2009, we entered into a fifteen-year satellite service agreement with Telesat Canada (“Telesat”) to receive service on all 32 DBS transponders on
The following table presents the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we also entered into a satellite service agreement (the “DISH Nimiq 5 Agreement”) with DISH Network, pursuant to which DISH Network receives satellite services from us on all 32supplemental and non-cash investing and financing activities:
| | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | |
| | 2022 | | 2021 | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 66,943 | | | $ | 96,714 | | | |
Cash paid for income taxes | | $ | 32,577 | | | $ | 21,296 | | | |
| | | | | | |
Non-cash investing and financing activities: | | | | | | |
Employee benefits paid in Class A common stock | | $ | 7,042 | | | $ | 7,124 | | | |
Increase (decrease) in capital expenditures included in accounts payable, net | | $ | (22,146) | | | $ | 2,494 | | | |
Non-cash net assets received as part of the India JV formation | | $ | 36,701 | | | $ | — | | | |
Under the terms of the DISH Nimiq 5 Agreement, DISH Network makes certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service, and continue through the service term. Unless earlier terminated under the terms and conditions of the DISH Nimiq 5 Agreement, the service term will expire in October 2019. Upon expiration of the initial term, DISH Network has the option to renew the DISH Nimiq 5 Agreement on a year-to-year basis through the end of life of the Nimiq 5 satellite. Upon in-orbit failure or end of life of the Nimiq 5 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance that any options to renew the DISH Nimiq 5 Agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.
QuetzSat-1 Agreement. In November 2008, we entered into a ten-year satellite service agreement with SES Latin America, which provides, among other things, for the provision by SES Latin America to us of service on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into a transponder service agreement with DISH Network, pursuant to which DISH Network receives satellite services 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 February 2013, we and DISH Network entered into an agreement pursuant to which we receive certain satellite services from DISH Network on five DBS transponders on the QuetzSat-1 satellite. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location and DISH Network commenced commercial operations at such location in February 2013.
Under the terms of our contractual arrangements with DISH Network, we began to provide service to DISH Network on the QuetzSat-1 satellite in February 2013 and will continue to provide service through the remainder of the service term. Unless extended or earlier terminated under the terms and conditions of our agreement with DISH Network for the QuetzSat-1 satellite, the initial service term will expire in November 2021. Upon expiration of the initial service term, DISH Network has the option to renew the agreement for the QuetzSat-1 satellite on a year-to-year basis through the end of life of the QuetzSat-1 satellite. Upon an in-orbit failure or end of life of the QuetzSat-1 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.
103 Degree Orbital Location/SES-3. In May 2012, we entered into a spectrum development agreement (the “103 Spectrum Development Agreement”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rights at the 103 degree west longitude orbital location (the “103 Spectrum Rights”). In June 2013, we and DISH Network entered into a spectrum development agreement (the “DISH 103 Spectrum Development Agreement”) pursuant to which DISH Network may use and develop the 103 Spectrum Rights. Unless earlier terminated under the terms and conditions of the DISH 103 Spectrum Development Agreement, the term generally will continue for the duration of the 103 Spectrum Rights.
In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a ten-year service agreement with Ciel pursuant to which we receive certain satellite services from Ciel on the SES-3 satellite at the 103 degree orbital location. In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network receives certain satellite services from us on the SES-3 satellite (the “DISH 103 Service Agreement”). Under the terms of the DISH 103 Service Agreement, DISH Network makes certain monthly payments to us through the service term. Unless earlier terminated under the terms and conditions of the DISH 103 Service Agreement, the initial service term will expire on the earlier of: (i) the date the SES-3 satellite fails; (ii) the date the transponder(s) on which service was being provided under the agreement fails; or (iii) June 2023. Upon in-orbit failure or end of life of the SES-3 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance that DISH Network will exercise its option to receive service on a replacement satellite.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
TT&C Agreement. Effective January 2012, we entered into a telemetry, tracking and control (“TT&C”) agreement pursuant to which we provide TT&C services to DISH Network for a period ending in December 2016 (the “2012 TT&C Agreement”). In November 2016, we and DISH Network amended the 2012 TT&C Agreement to extend the term for one year through December 2017. The 2012 TT&C Agreement replaced the TT&C agreement we entered into with DISH Network in connection with the Spin-off. The fees for services provided under the 2012 TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. DISH Network is able to terminate the 2012 TT&C Agreement for any reason upon 60 days’ notice.
In connection with the Satellite and Tracking Stock Transaction, in February 2014, we amended the TT&C Agreement to cease the provision of TT&C services to DISH Network for the EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites. Effective March 2014, we provide TT&C services for the D-1 and EchoStar XV satellites; however, for the period that we received satellite services on the EchoStar XV satellite from DISH Network, we waived the fees for the TT&C services on the EchoStar XV satellite. Effective August 2016, we provide TT&C services to DISH Network for the EchoStar XVIII satellite.
Real Estate Leases to DISH Network. We have entered into lease agreements pursuant to which DISH Network leases certain real estate from us. The rent on a per square foot basis for each of the leases is 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 is responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. The term of each of the leases is set forth below:
100 Inverness Lease Agreement. In connection with the Share Exchange, effective March 2017, DISH Network leases from us certain space at 100 Inverness Circle East, Englewood, Colorado for a period ending in December 2020. This agreement may be terminated by either party upon 180 days’ prior notice. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon 30 days’ notice.
90 Inverness Lease Agreement. The lease for certain space at 90 Inverness Circle East, Englewood, Colorado was for a period ending in December 2016. In February 2016, DISH Network terminated this lease effective in August 2016.
Meridian Lease Agreement. The lease for all of 9601 S. Meridian Blvd., Englewood, Colorado was for a period ending in December 2016. Effective December 2016, we and DISH Network amended this lease to, among other things, extend the term for one year through December 2017. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon 30 days’ notice.
Santa Fe Lease Agreement. The lease for all of 5701 S. Santa Fe Dr., Littleton, Colorado was for a period ending in December 2016. Effective December 2016, we and DISH Network amended this lease to, among other things, extend the term for one year through December 2017. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon 30 days’ notice.
Atlanta Sublease Agreement. The sublease for certain space at 211 Perimeter Center, Atlanta, Georgia terminated in October 2016.
Gilbert Lease Agreement. The lease for certain space at 801 N. DISH Drive, Gilbert, Arizona was for a period ending July 2016. Effective November 2016, we and DISH Network amended this lease to extend the term for one year through July 2017. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Cheyenne Lease Agreement. Prior to the Share Exchange, we leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection with the Share Exchange, we transferred ownership of a portion of this property to DISH Network and we and DISH Network amended this agreement to (i) terminate the lease for the transferred space and (ii) provide for a continued lease to DISH Network of the portion of the property we retained for a period ending in December 2031. This agreement may be extended by mutual consent, in which case this agreement will be converted to
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon 30 days’ notice.
Product Support Agreement. In connection with the Spin-off, one of our subsidiaries entered into a product support agreement pursuant to which DISH Network had the right, but not the obligation, to receive product support from us (including certain engineering and technical support services) for all set-top boxes and related accessories that we had previously sold to DISH Network. The fees for the services provided under the product support agreement were calculated at cost plus a fixed margin, which varied depending on the nature of the services provided. The term of the product support agreement was the economic life of such set-top boxes and related accessories, unless terminated earlier. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
DISHOnline.com Services Agreement. Effective January 2010, DISH Network entered into a two-year agreement with one of our subsidiaries pursuant to which DISH Network received certain services associated with an online video portal. The fees for the services provided under this services agreement depended, among other things, upon the cost to develop and operate such services. In November 2016, one of our subsidiaries and DISH Network amended this agreement to, among other things, extend the term for one year through December 2017. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
DISH Remote Access Services Agreement. Effective February 2010, one of our subsidiaries entered into an agreement with DISH Network pursuant to which DISH Network received, among other things, certain remote digital video recorder (“DVR”) management services. The fees for the services provided under this services agreement depended, among other things, upon the cost to develop and operate such services. This agreement automatically renewed in February 2017 for an additional one-year period until February 2018. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
SlingService Services Agreement. Effective February 2010, one of our subsidiaries entered into an agreement with DISH Network pursuant to which DISH Network received certain services related to placeshifting. The fees for the services provided under this services agreement depended, among other things, upon the cost to develop and operate such services. This agreement automatically renewed in February 2017 for an additional one-year period until February 2018. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
TerreStar Agreement. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and our completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment. TerreStar generally has the right to continue to receive warranty services from us for one of our products on a month-to-month basis. The provision of warranty services for our other product will continue until March 2018 and will automatically renew in March 2018 for an additional one-year period, unless terminated by TerreStar upon at least 60 days’ written notice to us prior to the end of the term. The provision of operations and maintenance services will continue until April 2018 and will automatically renew in April 2018 for an additional one-year period, unless terminated by TerreStar or us upon at least 90 days’ written notice prior to the end of the term. The provision of hosting services will continue until May 2022 and will not renew beyond May 2022 unless the parties enter into a new agreement or amend the existing agreement. In addition, TerreStar generally may terminate such services for convenience subject to providing us with prior notice and/or payment of termination charges.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Hughes Broadband Distribution Agreement. Effective October 2012, HNS and dishNET Satellite Broadband L.L.C. (“dishNET”), a wholly-owned subsidiary of DISH, entered into a distribution agreement (the “Distribution Agreement”) pursuant to which dishNET has the right, but not the obligation, to market, sell and distribute the Hughes satellite internet service (the “Hughes service”). dishNET pays HNS a monthly per subscriber wholesale service fee for the Hughes service based upon a subscriber’s service level, and based upon certain volume subscription thresholds. The Distribution Agreement also provides that dishNET has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Hughes service. The Distribution Agreement had an initial term of five years with automatic renewal for successive one year terms unless terminated by either party with a written notice at least 180 days before the expiration of the then-current term. In February 2014, HNS and dishNET entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, the parties will continue to provide the Hughes service to the then-current dishNET subscribers pursuant to the terms and conditions of the Distribution Agreement.
Set-Top Box Application Development Agreement. In November 2012, one of our subsidiaries and DISH Network entered into a set-top box application development agreement (the “Application Development Agreement”) pursuant to which we provided DISH Network with certain services relating to the development of web-based applications for set-top boxes. The fees for services provided under the Application Development Agreement were calculated at our cost of providing the relevant service plus a fixed margin, which depended on the nature of the services provided. The Application Development Agreement automatically renewed in February 2017 for a one-year period ending in February 2018. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
XiP Encryption Agreement. In July 2012, we entered into an encryption agreement with DISH Network for our whole-home HD DVR line of set-top boxes (the “XiP Encryption Agreement”) pursuant to which we provided certain security measures on our whole-home HD DVR line of set-top boxes to encrypt the content delivered to the set-top box via a smart card and secure the content between set-top boxes. The XiP Encryption Agreement’s term ended on the same day as the 2012 Receiver Agreement and therefore was automatically extended through December 2017 when we and DISH Network extended the 2012 Receiver Agreement. The fees for the services provided under the XiP Encryption Agreement were calculated on a monthly basis based on the number of receivers utilizing such security measures each month. Effective March 2017 in connection with the Share Exchange, we and DISH Network terminated the XiP Encryption Agreement and EchoStar has no further obligations and will earn no additional revenue under these agreements after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
DBSD North America Agreement. In March 2012, DISH Network completed its acquisition of 100% of the equity of reorganized DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and ground-based communications equipment. DBSD North America generally has the right to continue to receive warranty services from us on a month-to-month basis until February 2019. The provision of operations and maintenance services will continue until April 2018 and will automatically renew in April 2018 for an additional one-year period, unless terminated by DBSD North America upon at least 120 days’ written notice to us prior to the end of the term. The provision of hosting services will continue until February 2022 and will automatically renew for an additional five-year period until February 2027 unless terminated by DBSD North America upon at least 180 days’ written notice to us prior to the end of the term. In addition, DBSD North America generally may terminate such services for convenience, subject to providing us with prior notice and/or payment of termination charges.
Sling TV Holding L.L.C. (“Sling TV Holding”). Effective July 2012, we and DISH Network formed Sling TV Holding, which was owned two-thirds by DISH Network and one-third by us. Sling TV Holding was formed to develop and commercialize certain advanced technologies. At that time, we, DISH Network and Sling TV Holding entered into the following agreements with respect to Sling TV Holding: (i) a contribution agreement pursuant to which we and DISH Network contributed certain assets in exchange for our respective ownership interests in Sling TV Holding; (ii) a limited liability company operating agreement (“Operating Agreement”), which provided for the governance of Sling TV Holding; and (iii) a commercial agreement (“Commercial Agreement”) pursuant to which, among other things, Sling TV Holding had: (a) certain rights and corresponding obligations with respect to its business; and (b) the right, but not the obligation, to receive certain services from
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
us and DISH Network, respectively. Additionally, the spouse of Mr. Vivek Khemka, who was the President - EchoStar Technologies L.L.C. during portions of 2016 and through February 2017, was employed during 2016 as Vice President of Business Development and Operations of Sling TV Holding.
Effective August 2014, we and Sling TV Holding entered into an exchange agreement (“Exchange Agreement”) pursuant to which, among other things, Sling TV Holding distributed certain assets to us and we reduced our interest in Sling TV Holding to a 10.0% non-voting interest. As a result, DISH Network had a 90.0% equity interest and a 100% voting interest in Sling TV Holding. In addition, we, DISH Network and Sling TV Holding amended and restated the Operating Agreement, primarily to reflect the changes implemented by the Exchange Agreement. Finally, we, DISH Network and Sling TV Holding amended and restated the Commercial Agreement, pursuant to which, among other things, Sling TV Holding: (1) had certain rights and corresponding obligations with respect to its business; (2) had the right, but not the obligation, to receive certain services from us and DISH Network; and (3) had a license from us to use certain of the assets distributed to us as part of the Exchange Agreement. Effective March 2017 following the consummation of the Share Exchange, we no longer hold our investment in Sling TV Holding. Effective March 2017 in connection with the Share Exchange, we and DISH Network terminated the Exchange Agreement and the Commercial Agreement and EchoStar has no further obligations and will earn no additional revenue under these agreements after February 2017. Historical transactions under these agreements are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Cost of sales — equipment and services and other — DISH Network
Remanufactured Receiver and Services Agreement. In connection with the Spin-off, one of our subsidiaries entered into a remanufactured receiver and services agreement with DISH Network pursuant to which we had the right, but not the obligation, to purchase remanufactured receivers and related components from DISH Network at cost plus a fixed margin, which varied depending on the nature of the equipment purchased. In November 2016, one of our subsidiaries and DISH Network amended this agreement to extend its term for one year through December 2017. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will incur no additional expenses under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
General and administrative expenses — DISH Network
Amended and Restated Professional Services Agreement. In connection with the Spin-off, we entered into various agreements with DISH including the Transition Services Agreement, Satellite Procurement Agreement and Services Agreement, which all expired in January 2010 and were replaced by a Professional Services Agreement. In January 2010, we and DISH agreed that we shall continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under the Transition Services Agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Mr. Vivek Khemka, who remained employed as DISH Network’s Executive Vice President and Chief Technology Officer, provided services to us during portions of 2016 and through February 2017 pursuant to the Professional Services Agreement as President -- EchoStar Technologies L.L.C. Additionally, we and DISH agreed that DISH Network would continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under the Satellite Procurement Agreement), receive logistics, procurement and quality assurance services from us (previously provided under the Services Agreement) and other support services. In connection with the consummation of the Share Exchange, we and DISH amended and restated the Professional Services Agreement to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the Share Exchange. The term of the Amended and Restated Professional Services Agreement is through January 2019 and renews automatically for successive one-year periods thereafter, unless the agreement is terminated earlier by either party upon at least 60 days’ notice. However, either party may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice.
Real Estate Leases from DISH Network. We have entered into lease agreements pursuant to which we lease certain real estate from DISH Network. The rent on a per square foot basis is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases, and for certain properties, we are responsible for our portion of the taxes, insurance, utilities and maintenance of the premises.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
El Paso Lease Agreement. The lease for certain space at 1285 Joe Battle Blvd., El Paso, Texas, was for an initial period ending in August 2015, and provided us with renewal options for four consecutive three-year terms. Effective August 2015, we exercised our first renewal option for a period ending in August 2018.
90 Inverness Lease Agreement. In connection with the Share Exchange, effective March 2017 we lease from DISH Network certain space at 90 Inverness Circle East in Englewood, Colorado for a period ending in December 2022. EchoStar has the option to renew this lease for four three-year periods.
Cheyenne Lease Agreement. In connection with the Share Exchange, effective March 2017 we lease from DISH Network certain space at 530 EchoStar Drive in Cheyenne, Wyoming for a period ending in March 2019. EchoStar has the option to renew this lease for thirteen one-year periods.
Gilbert Lease Agreement. In connection with the Share Exchange, effective March 2017 we lease from DISH Network certain space at 801 N. DISH Dr. in Gilbert, Arizona for a period ending in March 2019. EchoStar has the option to renew this lease for thirteen one-year periods.
American Fork Occupancy License Agreement. In connection with the Share Exchange, effective March 2017, we sublease from DISH Network certain space at 796 East Utah Valley Drive in American Fork, Utah for a period ending in August 2017. We have exercised our option to renew this sublease for a five-year period ending in August 2022.
Employee Matters Agreement. Effective March 2017 in connection with the Share Exchange, we and DISH Network entered into an Employee Matters Agreement that addresses the transfer of employees from EchoStar to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the transferred businesses. DISH Network assumed employee-related liabilities relating to the transferred businesses as part of the Share Exchange, except that we are responsible for certain existing employee related litigation as well as certain pre-Share Exchange compensation and benefits for employees transferring to DISH Network in connection with the Share Exchange.
Collocation and Antenna Space Agreements. In connection with the Share Exchange, effective March 2017, we entered into certain agreements pursuant to which DISH Network will provide collocation and antenna space to EchoStar through March 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In August 2017, we and DISH Network entered into certain other agreements pursuant to which DISH Network will provide additional collocation and antenna space to EchoStar in Monee, Illinois and Spokane, Washington through August 2022. EchoStar may renew each of these agreements for four three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. EchoStar may terminate certain of these agreements with 180 days’ prior written notice. The fees for the services provided under these agreements depend on the number of racks leased at the location.
Other agreements — DISH Network
Satellite and Tracking Stock Transaction. In February 2014, we entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) in March 2014, EchoStar and HSS issued shares of the Tracking Stock to DISH Network in exchange for five satellites owned by DISH Network (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) (including assumption of related in-orbit incentive obligations) and approximately $11.4 million in cash; and (ii) in March 2014, DISH Network began receiving certain satellite services as discussed above on these five satellites from us (collectively, the “Satellite and Tracking Stock Transaction.”) The Tracking Stock was retired in March 2017 and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. See Note 3 for further information.
Share Exchange Agreement. On January 31, 2017, EchoStar Corporation and certain of its subsidiaries entered into the Share Exchange Agreement with DISH and certain of its subsidiaries, pursuant to which on February 28, 2017, EchoStar Corporation and its subsidiaries received all of the shares of the Tracking Stock in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange on February 28, 2017, EchoStar no longer operates the transferred EchoStar Technologies businesses and the Tracking Stock was retired and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. Pursuant to the Share Exchange
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Agreement, EchoStar transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contains customary representations and warranties by the parties, including representations by EchoStar related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. EchoStar and DISH Network have also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by it causes the transaction to be taxable to the other party after closing. See Note 3 for further information.
Hughes Broadband Master Services Agreement. In March 2017, HNS and DISH Network L.L.C. (“DNLLC”), a wholly-owned subsidiary of DISH, entered into a master service agreement (the “MSA”) pursuant to which DNLLC, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for the Hughes service and related equipment and other telecommunication services and (ii) installs Hughes service equipment with respect to activations generated by DNLLC. Under the MSA, HNS and DNLLC will make certain payments to each other relating to sales, upgrades, purchases and installation services. The MSA has an initial term of five years until March 2022 with automatic renewal for successive one-year terms. After the first anniversary, either party has the ability to terminate the MSA, in whole or in part, for any reason upon at least 90 days’ notice to the other party. Upon expiration or termination of the MSA, HNS will continue to provide the Hughes service to subscribers and make certain payments to DNLLC pursuant to the terms and conditions of the MSA.
Intellectual Property Matters Agreement. We entered into an Intellectual Property Matters Agreement with DISH Network in connection with the Spin-off. The Intellectual Property Matters Agreement governed our relationship with DISH Network with respect to patents, trademarks and other intellectual property. Pursuant to the Intellectual Property Matters Agreement, DISH Network irrevocably assigned to us all right, title and interest in certain patents, trademarks and other intellectual property necessary for the operation of our set-top box business. In addition, the agreement permitted us to use, in the operation of our set-top box business, certain other intellectual property currently owned or licensed by DISH Network. In addition, DISH Network was prohibited from using the “EchoStar” name as a trademark, except in certain limited circumstances. Similarly, the Intellectual Property Matters Agreement provided that we would not make any use of the name or trademark “DISH Network” or any other trademark owned by DISH Network, except in certain circumstances. Effective March 2017 in connection with the Share Exchange, we and DISH Network terminated this agreement and EchoStar has no further obligations and will earn no additional revenue nor incur additional expenses under this agreement after February 2017.
Intellectual Property and Technology License Agreement. Effective March 2017 in connection with the Share Exchange, we and DISH Network entered into an Intellectual Property and Technology License Agreement (“IPTLA”) pursuant to which we and DISH and their respective subsidiaries license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the businesses acquired pursuant to the Share Exchange, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, DISH Network granted a license back to us, among other things, for the continued use of all intellectual property and technology that is used in our retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.
Tax Sharing Agreement. Effective December 2007, we and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs our respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network, and DISH Network indemnifies us for such taxes. However, DISH Network is not liable for and does not indemnify us for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended, because of: (i) a direct or indirect acquisition of any of our stock, stock options or assets; (ii) any action that we take or fail to take; or (iii) any action that we take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, we will be solely liable for, and will indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In light of the Tax Sharing Agreement, among other things, and in connection with our consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, we and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of our consolidated tax returns. Prior to the agreement with DISH Network in 2013, the federal tax benefits were reflected as a deferred tax asset for depreciation and amortization, which was netted in our noncurrent deferred tax liabilities. The agreement with DISH Network in 2013 requires DISH Network to pay us the federal tax benefit it receives at such time as we would have otherwise been able to realize such tax benefit. We recorded a noncurrent receivable from DISH Network in “Other receivable — DISH Network” and a corresponding increase in our net noncurrent deferred tax liabilities to reflect the effects of this agreement in September 2013. In addition, in September 2013, we and DISH Network agreed upon a tax sharing arrangement for filing certain combined state income tax returns and a method of allocating the respective tax liabilities between us and DISH Network for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”).
We and DISH Network file combined income tax returns in certain states. In 2016, we earned and recognized a tax benefit for certain state income tax credits that we would be unable to utilize currently if we had filed separately from DISH Network. DISH Network expects to utilize these tax credits to reduce its state income tax payable. We expect to increase additional paid-in capital upon receipt of any consideration paid to us by DISH Network in exchange for these tax credits.
Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, we are responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the Share Exchange. Both we and DISH Network have made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both we and DISH Network have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, DISH Network has agreed to indemnify us if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The tax matters agreement supplements the Tax Sharing Agreement outlined above, which continues in full force and effect.
TiVo. In April 2011, we and DISH Network entered into a settlement agreement with TiVo, Inc. (“TiVo”). The settlement resolved all pending litigation between us and DISH Network, on the one hand, and TiVo, on the other hand, including litigation relating to alleged patent infringement involving certain DISH Network DVRs. Under the settlement agreement, all pending litigation was dismissed with prejudice and all injunctions that permanently restrain, enjoin or compel any action by us or DISH Network were dissolved. We and DISH Network were jointly responsible for making payments to TiVo in the aggregate amount of $500.0 million, including an initial payment of $300.0 million and the remaining $200.0 million in six equal annual installments between 2012 and 2017. Pursuant to the terms and conditions of the agreements entered into in connection with the Spin-off, DISH Network made the initial payment to TiVo in May 2011, except for the contribution from us totaling approximately $10.0 million, representing an allocation of liability relating to our sales of DVR-enabled receivers to an international customer. Subsequent payments were allocated between us and DISH Network based on historical sales of certain licensed products, with EchoStar being responsible for 5% of each annual payment. Effective March 2017, in connection with the Share Exchange, EchoStar has no further obligations and will incur no additional costs under this settlement agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Sling Trademark License Agreement. In December 2014, Sling TV Holding entered into an agreement with Sling Media, Inc., our subsidiary, pursuant to which Sling TV Holding had the right, for a fixed fee, to use certain trademarks, domain names and other intellectual property related to the “Sling” trademark. In December 2016, Sling TV Holding and Sling Media, Inc. amended this agreement to extend the term thereof on a month-to-month basis. This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
gTLD Bidding Agreement. In April 2015, we and DISH Network entered into a gTLD Bidding Agreement whereby, among other things: (i) DISH Network obtained rights from us to participate in a generic top level domain (“gTLD”) auction, assuming all rights and obligations from us related to our application with the Internet Corporation for Assigned Names and Numbers (“ICANN”) for a particular gTLD; (ii) DISH Network agreed to reimburse us for our ICANN application fee and certain out-of-pocket expenses related to the application and the auction; and (iii) we and DISH Network agreed to split equally the net proceeds obtained by DISH Network as the losing bidder in the auction, less such fee reimbursement and out-of-pocket expenses.
Patent Cross-License Agreements. In December 2011, we and DISH Network entered into separate patent cross-license agreements with the same third party whereby: (i) we and such third party licensed our respective patents to each other subject to certain conditions; and (ii) DISH Network and such third party licensed their respective patents to each other subject to certain conditions (each, a “Cross-License Agreement”). Each Cross-License Agreement covers patents acquired by the respective party prior to January 2017 and aggregate payments under both Cross-License Agreements total less than $10.0 million. Each Cross-License Agreement contained an option to extend each Cross-License Agreement to include patents acquired by the respective party prior to January 2022. In December 2016, both we and DISH Network exercised our renewal options, resulting in aggregate additional payments to such third party totaling less than $3.0 million. Since the aggregate payments under both Cross-License Agreements were based on the combined annual revenue of us and DISH Network, we and DISH Network agreed to allocate our respective payments to such third party based on our respective percentage of combined total revenue.
Caltech. On October 1, 2013, Caltech Institute of Technology (“Caltech”) filed complaints against two of our subsidiaries, Hughes Communications, Inc. and HNS, as well as against DISH and certain of its subsidiaries, in the United States District Court for the Central District of California alleging infringement of United States Patent Nos. 7,116,710; 7,421,032; 7,916,781; and 8,284,833, each of which is entitled “Serial Concatenation of Interleaved Convolutional Codes forming Turbo-Like Codes.” Caltech asserted that encoding data as specified by the DVB-S2 standard infringed each of the asserted patents. Caltech claimed that certain of our Hughes segment’s satellite broadband products and services, infringed the asserted patents by implementing the DVB-S2 standard. Pursuant to a settlement agreement among us, DISH and Caltech, in May 2016, Caltech dismissed with prejudice all of its claims in these actions.
Orange, NJ. In October 2016, we and DISH Network sold two parcels of real estate owned separately by us and DISH Network in Orange, NJ to a third party pursuant to a purchase and sale agreement. Pursuant to the agreement, we and DISH Network separately received our respective payments from the buyer.
Invidi. In November 2010 and April 2011, we made investments in Invidi Technologies Corporation (“Invidi”) in exchange for shares of Invidi’s Series D Preferred Stock. In November 2016, DIRECTV, LLC, a wholly owned indirect subsidiary of AT&T Inc., DISH Network and Cavendish Square Holding B.V., an affiliate of WPP plc, entered into a series of agreements to acquire Invidi. As a result of the transaction, we sold our ownership interest in Invidi on the same terms offered to the other shareholders of Invidi. The transaction closed in January 2017.
Other Agreements
Hughes Systique Corporation (“Hughes Systique”)
We contract with Hughes Systique for software development services. In 2008, Hughes Communications, Inc. loaned $1.5 million to Hughes Systique pursuant to a term loan facility. The initial interest rate on the outstanding loans was 6%, payable annually, and the accrued and unpaid interest was added to the principal amount outstanding under the loan facility in certain circumstances. The loans were convertible into shares of Hughes Systique upon non-payment or an event of default. In May 2014, we amended the term loan facility to increase the interest rate from 6% to 8%, payable annually, to reflect then-current market conditions and extend the maturity date of the loans to May 1, 2015, and in April 2015, we extended the maturity date of the loans to May 1, 2016 on the same terms. In 2015, Hughes Systique repaid $1.5 million of the outstanding principal of the loan facility. In 2016, Hughes Systique repaid $0.6 million of the outstanding principal of the loan facility. As of September 30, 2017, the principal amount outstanding of the loan facility was zero. In addition to our 43.7% ownership in Hughes Systique, Mr. Pradman Kaul, the President of Hughes Communications, Inc. and a member of our board of directors, and his brother, who is the CEO and President of Hughes Systique, in the aggregate, own approximately 25.7%, on an undiluted basis, of Hughes Systique’s outstanding shares as of September 30, 2017. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest entity and we are considered the primary beneficiary of
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes Systique. As a result, we consolidate Hughes Systique’s financial statements in our condensed consolidated financial statements.
NagraStar L.L.C.
Prior to March 2017, we owned 50.0% of NagraStar L.L.C. (“NagraStar”), a joint venture that was the primary provider of encryption and related security technology used in the set-top boxes produced by our former EchoStar Technologies segment. We accounted for our investment in NagraStar using the equity method. Following the consummation of the Share Exchange, we no longer hold this investment in NagraStar.
Dish Mexico
We own 49.0% of an entity that provides direct-to-home satellite services in Mexico known as Dish Mexico. We provide certain satellite services to Dish Mexico and prior to the Share Exchange we also provided certain broadcast services and sold hardware such as digital set-top boxes and related equipment to Dish Mexico. We recognized revenue from sales of services we provided to Dish Mexico in continuing operations of approximately $5.8 million for each of the three months ended September 30, 2017 and 2016 and $17.5 million for each of the nine months ended September 30, 2017 and 2016. As of September 30, 2017 and December 31, 2016, we had trade accounts receivable from continuing operations from Dish Mexico of approximately $7.6 million and $10.7 million, respectively.
Deluxe/EchoStar LLC
We own 50.0% of Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada. We account for our investment in Deluxe using the equity method. We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of approximately $1.3 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $3.6 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and December 31, 2016, we had trade accounts receivable from Deluxe of approximately $1.3 million and $0.7 million, respectively.
SmarDTV
In May 2015, we acquired a 22.5% interest in SmarDTV, which we accounted for using the equity method. Pursuant to our agreements with SmarDTV and its subsidiaries, our former EchoStar Technologies segment purchased engineering services from and paid royalties to SmarDTV and its subsidiaries. Following the consummation of the Share Exchange, we no longer own our interest in the equity and subordinated debt of SmarDTV and no longer purchase engineering services from SmarDTV.
AsiaSat
We contract with AsiaSat Telecommunications Inc. (“AsiaSat”) for the use of transponder capacity on one of AsiaSat's satellites. Mr. William David Wade, a member of our board of directors, served as the Chief Executive Officer of AsiaSat in 2016 and as a senior advisor to the CEO of AsiaSat through March 2017. We incurred expenses payable to AsiaSat under this agreement of approximately zero and $0.4 million for the three months ended September 30, 2017 and 2016, respectively, and $0.1 million and $1.1 million for the nine months ended September 30, 2017 and 2016, respectively.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “EchoStar,” the “Company” and “our” refer to EchoStar Corporation and its subsidiaries. References to “$” are to United States dollars. The following management’s discussionManagement’s Discussion and analysisAnalysis of our financial conditionFinancial Condition and resultsResults of operationsOperations (“Management’s Discussion and Analysis”) should be read in conjunction with the condensed consolidated financial statementsour accompanying Consolidated Financial Statements and notes to our financial statements included elsewherethereto (“Consolidated Financial Statements”) in Item 1 of this Quarterly Report on Form 10-Q.10-Q (“Form 10-Q”). This management’s discussionManagement’s Discussion and analysisAnalysis 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’s discussionManagement’s Discussion and analysisAnalysis 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 “DisclosureRefer to the Disclosure Regarding Forward-Looking Statements”Statements in this Quarterly Report on Form 10-Q for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, seerefer to the caption “Risk Factors”Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K for(“Form 10-K”) filed with the year ended December 31, 2016.Securities and Exchange Commission (“SEC”). Further, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to update them.
EXECUTIVE SUMMARY
EchoStar isWe are an industry leader in both networking technologies and services, innovating to deliver the global solutions that power a global provider of satellite service operations, video delivery solutions,connected future for people, enterprises and things everywhere. We provide broadband satellite technologies and broadband internet products and services for consumer customers, which include home and small office customers. We deliver innovative network technologies, managedto medium-sized businesses, and satellite services and various communications solutions for enterprise customers, which include aeronautical and government customers.
enterprises.
Prior to March 2017, we operated in three primary business segments, Hughes, EchoStar Technologies and EchoStar Satellite Services (“ESS”). On January 31, 2017, EchoStar Corporation and certain of its subsidiaries entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with DISH Network Corporation (“DISH”) and certain of its subsidiaries. Pursuant to the Share Exchange Agreement, on February 28, 2017, among other things, EchoStar Corporation and certain of its subsidiaries received all of the shares of the Hughes Retail Preferred Tracking Stock issued by EchoStar Corporation (the “EchoStar Tracking Stock”) and the Hughes Retail Preferred Tracking Stock issued by Hughes Satellite Systems Corporation (“HSS”) (the “HSS Tracking Stock”, together with the EchoStar Tracking Stock, the “Tracking Stock”) in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Following consummation of the Share Exchange, we no longer operate the EchoStar Technologies business segment and the EchoStar Tracking Stock and HSS Tracking Stock were retired and are no longer outstanding and all agreements, arrangements and policy statements with respect to such tracking stock terminated and are of no further effect. As a result of the Share Exchange, the condensed consolidated financial statements of the EchoStar Technologies businesses have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 3 in the notes to condensed consolidated financial statements in Item 1 of this report for further discussion of our discontinued operations.
As a consequence, weWe currently operate in two business segments, which are differentiated primarily by their operational focus:segments: Hughes segment and ESS.EchoStar Satellite Services segment (“ESS segment”). These segments are consistent with the way we make decisions regarding the allocation of resources, are made, as well as how operating results are reviewed by our chief operating decision maker, (“CODM”), who for EchoStar is the Company’s Chief Executive Officer.
In addition, as of March 2017, we also changed our overhead allocation methodology used in our segment disclosures to reflect how the CODM evaluates our segments. Historically, the costs of all corporate functions were included on an allocated basis in each of the business segments’ EBITDA. Under the revised allocation methodology, these costs are now reported and analyzed as part of “Corporate and Other” (previously “All Other and Eliminations”). Our prior period segment EBITDA disclosures have been restated to reflect this change.
Our operations also include various corporate departmentsfunctions (primarily Executive, Treasury, Strategic Development, Human Resources, IT,Information Technology, Finance, Accounting, Real Estate and Legal) as well asand other activities, that have not been assigned to our operating segments, includingsuch as costs incurred in certain satellite development programs and other business development activities, our centralized treasury operations, and gains (losses)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 “Corporateour Corporate and Other.”Other segment in our segment reporting.
All amounts presented in this Management’s Discussion and Analysis, unless otherwise noted, are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Three Months Ended September 30, 2022:
•Revenue of $497.4 million
•Operating income of $47.0 million
•Net income of $19.6 million
•Net income attributable to EchoStar common stock of $22.4 million and basic and diluted earnings per share of common stock of $0.27
•Earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”) of $145.5 million (see reconciliation of this non-GAAP measure in Results of Operations)
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
Highlights from our financial results are as follows:
2017 Third Quarter Consolidated Results of Operations
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• | Revenue of $481.2 million
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• | Operating income of $56.4 million
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• | Net income from continuing operations of $35.9 million
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• | Net income attributable to EchoStar common stock of $34.7 million and basic earnings per share of common stock of $0.36
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EBITDA of $219.9 million (see reconciliation of this non-GAAP measure on page 51)
Consolidated Financial Condition as of September 30, 20172022:
•Total assets of $6.1 billion
•Total liabilities of $2.6 billion
•Total stockholders’ equity of $3.5 billion
•Cash and cash equivalents and marketable investment securities of $1.6 billion
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• | Total assets of $8.81 billion
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• | Total liabilities of $4.91 billion
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• | Total stockholders’ equity of $3.90 billion
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• | Cash, cash equivalents and current marketable investment securities of $3.28 billion
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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 provide broadband satellite technologies and broadband internet products and services for home and small officeto consumer customers. We deliverprovide broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to domesticgovernment and international consumersenterprise customers. We also design, provide and aeronautical, enterprise and government customers. In addition, our Hughes segment designs, provides and installsinstall gateway and terminal equipment to customers for other satellite systemssystems. In addition, we design, develop, construct and providesprovide telecommunication networks comprising satellite ground segment systems and terminals for other satellite systems, includingto mobile system operators.operators and our enterprise customers.
WeOur Hughes segment incorporates 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.
Our Hughes segment continues to focus ourits efforts on growing our Hughes segment consumer revenue by maximizing utilizationoptimizing financial returns of our existing satellites while planning for new satellitessatellite capacity to be launched.launched, leased or acquired. In addition, we are also providing wireline and wireless capacity to utilize in markets that include residential, community WiFi, backhaul, and other enterprise broadband and multi-transport services. Our consumer revenue growth depends on our success in adding new subscribers and driving higher average revenue per subscriber across our wholesale and retail channels.
Our Hughes segment currently uses three satellites, the SPACEWAY 3 satellite, the EchoStar XVII satellite, and the EchoStar XIX satellite, and additional satellite capacity acquired from multiple third-party providers, to provide satellite broadband internet access and communications services to our customers. In December 2016, we launched our EchoStar XIX satellite, a next-generation, high throughput geostationary satellite, which provides significant capacity for continued subscriber growth. The EchoStar XIX satellite employs a multi-spot beam, bent pipe Ka-band architecture and provides additional capacity for the Hughes broadband services to our customers in North America and added capacity in certain Central and South American countries and has added capability for aeronautical, enterprise and international broadband services.
In August 2017, we entered into a contract for the design and construction of a new, next-generation, high throughput geostationary satellite, with a planned 2021 launch, that is primarily intended to provide additional capacity for our HughesNet service in North, Central and South Americaretaining existing subscribers, as well as aeronauticalincreasing our Average Revenue Per User/subscriber (“ARPU”). Service and enterprise services. Capital expenditures associated with the construction and launch of this satellite will be included in “Corporate and Other” in our segment reporting.
Our wholly-owned subsidiary, Hughes Network Systems, L.L.C. and DISH Network L.L.C. (“DNLLC”), a wholly-owned subsidiary of DISH, have entered into a master service agreement (the “MSA”) pursuant to which DNLLC, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for the Hughes satellite internet service and related equipment and other telecommunication services and (ii) will install Hughes service equipment with respect to activations generated by DNLLC. As a result of the MSA we do not expect to earn significant equipment revenue from our Distribution Agreement with dishNET Satellite Broadband L.L.C. (“dishNET”) in the future and we expect our subscriber acquisition costs related to increase in future periods.
In addition to our broadband consumer service offerings, our Hughes segment also provides network technologies, managed services, hardware, equipment and satellite services to large enterprise and government customers globally. Examples of such
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
customers include lottery agencies, gas station operators and companies with multi-branch networks that rely on satellite or terrestrial networks for critical communication across wide geographies. Most of our enterprise customers have contracts with us for the services they purchase.
Developments toward the launch of next-generation satellite systems including low-earth orbit (“LEO”) and geostationary systems could provide additional opportunities to drive the demandongoing support for our network equipmentdirect and services.indirect customers and partners are typically impacted most significantly by our growth. The growth of our enterprise and equipmentconsumer businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. We have an agreement with WorldVu Satellites Limited (“OneWeb”), a global LEO
Our Hughes segment currently uses capacity from our owned and leased satellites, including additional satellite service company,capacity leased from third-party providers to provide certain equipmentservices to our customers. We also use other multi-transport capacity that includes cable, fiber, 5G, and services in connection with the ground network system for OneWeb’s LEO satellites.4G/LTE. In November 2017, we began the production of OneWeb’s ground network system equipment and expect to begin delivering this equipment in mid-2018.
We continue to expand our efforts to grow our consumer satellite services business outsidemost areas of the U.S. In April 2014, we entered into a satellite services agreement pursuant toare nearing or have reached capacity, which Eutelsat do Brasil provides us Ka-bandhas resulted in our consumer subscriber base becoming increasingly limited. Our Latin America consumer subscriber base in certain areas has also become capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term. That satellite was launched in March 2016 and we began delivering high-speed consumer satellite broadband services in Brazil in July 2016. In September 2015, we entered into satellite services agreements pursuant to which affiliates of Telesat Canada (“Telesat”) will provide to us the Ka-band capacity on a satelliteconstrained. These constraints are expected to be located at the 63 degree west longitude orbital location (“63 West”) for a 15-year term. We expect the satellite to be launched in the second quarter of 2018 and to augment the capacity being providedaddressed by the EUTELSAT 65 West A and EchoStar XIX satellites. We launched our consumer satellite broadband service in Colombia in the third quarter of 2017 and we expect to launch similar services in various other Central and South American countries in 2018.
As of September 30, 2017 and December 31, 2016, our Hughes segment had approximately 1,140,000 and 1,036,000 broadband subscribers, respectively. These broadband subscribers include customers that subscribe to our HughesNet broadband services through retail, wholesale and small/medium enterprise service channels. Gross subscriber additions increased by approximately 9,000 in the third quarter of 2017 compared to the second quarter of 2017 primarily due to an increase in new additions in our domestic retail channel as a result of the launch of the EchoStar XIX satellite, which was placed into service in March 2017. The increase was partially offset by a decrease in new subscribers additionsXXIV satellite.
We test goodwill for impairment annually in our international retail channel. Our average monthly subscriber churn percentage for the thirdsecond fiscal quarter, or more frequently if indicators of 2017 decreased comparedimpairment exist. All of our goodwill is assigned to our Hughes segment. We conducted our annual impairment test of goodwill during our second fiscal quarter on a qualitative basis and determined that no adjustment to the second quartercarrying value of 2017. As a result of higher gross subscriber additions and lower churn, total net subscriber additions were approximately 53,000 forgoodwill was then necessary because the fair values exceeded carrying values. During the quarter ended September 30, 2017 compared2022, we conducted a quantitative interim test of goodwill for all of our reporting units due to approximately 41,000 forcontinuing decline in our stock price during that period. As a result of our interim test, no goodwill impairment was identified. The fair value of the secondHughes reporting unit exceeded the carrying value by more than 10%. We concluded that there were no other indicators of impairment. Given the decline in our stock price during the quarter of 2017. Subscriber additions and churn include only subscribers through our retail and wholesale channels.
As ofended September 30, 2017 and December 31, 2016, our Hughes segment had approximately $1.74 billion and $1.52 billion, respectively, of contracted revenue backlog. We define Hughes contracted revenue backlog as our expected future revenue under customer contracts2022, we believe it is reasonably possible that are non-cancelable, excluding agreements with customersa sustained decline in our consumer market.
EchoStar Satellite Services Segment
Our ESS segment is a global provider of satellite service operationsstock price and video delivery solutions. We operate our business using our owned and leased in-orbit satellites and related licenses. Revenue growthmarket capitalization will result in our ESS segment depends largely on our ability to continuously make satellite capacity available for sale. We provide satellite services on a full-time and occasional-use basis primarily to DISH Network Corporation and its subsidiaries (“DISH Network”), Dish Mexico, S. de R.L. de C.V., a joint venture we entered into in 2008 (“Dish Mexico”), United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers. We also manage satellite operations for certain satellites owned by DISH Network.
We depend on DISH Network forall or a significant portion of the revenue for our ESS segment,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 we expect that DISH Network will continue to be the primary source of revenue forwould materially adversely affect our ESS segment. Therefore, thefinancial results of operations of our ESS segment are linked to changes in DISH Network’s satellite capacity requirements. DISH Network’s capacity requirements have been driven by the addition of new channels and migration of programming to high-definition TV and video on demand services. The services that we provide to DISH Network are critical to its nationwide delivery of content to its customers across the U.S. While we expect to continue to provide satellite services to DISH Network, its satellite capacity requirements may change for a variety of reasons, including its ability to construct and launch its own satellites. Any termination or reduction in the services we provide to DISH Network may cause us to have unused capacity on our satellites and require that we aggressively pursue alternative sourcesperiod recognized.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
To date, we have not experienced a material adverse impact from the Russia-Ukraine conflict and the associated sanctions.
WeIn May 2019, we entered into: (i)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 construction67% ownership interest and Bharti holds a 33% ownership interest in HCIPL. The India JV combines the VSAT 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.
In August 2017, we entered into a long-term contract with Airbus Defence and Space SAS for the design and construction of the EchoStar 105/SES-11XXIV satellite, with C-band, Ku-banda new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (the “HughesNet service”) in North, Central and Ka-band payloads; (ii)South America as well as enterprise broadband services. The EchoStar XXIV satellite is expected to be launched in the first half of 2023. Delay in the availability of the EchoStar XXIV satellite 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. In December 2020, we entered into an agreement with SES Satellite Leasing Limiteda launch provider for the procurementlaunch of EchoStar XXIV. Capital expenditures associated with the construction and launch of the related launch services;EchoStar XXIV satellite are included in our Corporate and (iii) an agreement with SES Americom Inc. (“SES”) pursuantOther segment in our segment reporting.
Our broadband subscribers include customers that subscribe to which we will transferour HughesNet services in the titleU.S. and Latin America through retail, wholesale and small/medium enterprise service channels.
The following table presents our approximate number of broadband subscribers:
| | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | June 30, 2022 | | |
United States | | 973,000 | | | 1,019,000 | | | |
Latin America | | 312,000 | | | 327,000 | | | |
Total broadband subscribers | | 1,285,000 | | | 1,346,000 | | | |
The following table presents the approximate number of net subscriber additions:
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | September 30, 2022 | | June 30, 2022 | | | | |
United States | | (46,000) | | | (35,000) | | | | | |
Latin America | | (15,000) | | | (25,000) | | | | | |
Total net subscriber additions | | (61,000) | | | (60,000) | | | | | |
Our ability to gain new customers and retain existing customers in the U.S. is being impacted by our capacity limitations as well as competitive pressure from satellite-based competitors and other technologies. These factors resulted in higher churn and lower total subscribers as compared to the Ku-band payloadthree months ended June 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 September 30, 2022, the reduced decline in net subscribers was primarily due to more selective customer screening and improved churn as compared to the three months ended June 30, 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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.
As of September 30, 2022, our Hughes segment had $1.5 billion of contracted revenue backlog, an increase of 13.1%, as compared to December 31, 2021, primarily due to an affiliate of SES following in-orbit testing ofincrease in contracts from our domestic and international customers. We define Hughes segment contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue.
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 title to the C-band and Ka-band payloads to an affiliate of SES and SES, respectively, by early 2018. SES will provide to us satellite service on the entire Ku-band payload on the EchoStar 105/SES-11 satellite for an initial ten-year term, with an option for us to renew the agreement on a year-to-year basis. The EchoStar 105/SES-11 satellite was launchedand related infrastructure. Revenue in October 2017 and is expected to be placed into service in the fourth quarter of 2017. Our Ku-band payload on the EchoStar 105/SES-11 satellite will replace and augment our current capacity on the AMC-15 satellite, resulting in additional sales capacity. We expect to transfer activities from the AMC-15 satellite to the EchoStar 105/SES-11 satellite in the fourth quarter of 2017, which we expect will result in reduced operating costs associated with the lease of the AMC-15 satellite.
We continue to pursue expanding our business offerings by providing value added services such as telemetry, tracking, and control services to third parties, which leverages the ground monitoring networks and personnel currently within our ESS segment.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.
As of September 30, 2017 and December 31, 2016,2022, our ESS segment had $15.8 million of contracted revenue backlog, attributablean increase of 52.0%, as compared to satellites currentlyDecember 31, 2021, primarily due to an increase in orbit of approximately $1.26 billionsatellite service contracts with new and $1.16 billion, respectively.existing customers. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue.
NewOther Business Opportunities
Our industry is evolvingcontinues to evolve with the increase inincreasing 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, LEOlow-earth orbit (“LEO”) networks, balloons,medium-earth orbit (“MEO”) systems and High Altitude Platform Systems have begunmulti-transport networks using combinations of technologies are expected to continue 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, education, remote-connectivity and commerce across industries and communities globally for consumer and enterprise customers. We are closely tracking the developments in North Americanext-generation satellite businesses, and internationallywe are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for consumers, enterprises and governments.our business.
We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic acquisitions,initiatives and transactions, domestically and internationally, that we believe may allow us to increase our existing market share, increase our satellite capacity, expand into new satellite and other technologies, 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 initiativesvalue that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.
In 2012, we acquired the right to use various frequencies at the 45 degree west longitude orbital location (“Brazilian Authorization”) from ANATEL, the Brazilian communications regulatory agency. The Brazilian Authorization currently provides us the rights to utilize Ku-band spectrum. In April 2014, we entered into an agreement with Space Systems Loral, LLC for the construction of the EchoStar XXIII satellite, a high powered broadcast satellite service satellite. The EchoStar XXIII satellite was launched in March 2017 and placed into service at the 45 degree west longitude orbital location in the second quarter of 2017. We had regulatory obligations to meet certain in-service milestones by the second quarter of 2017 for our Brazilian license at the 45 degree west longitude orbital location for the Ka-, Ku- and S-band frequency bands. We have met our regulatory milestone for the Ku-band. On October 5, 2017, ANATEL declined our request to extend our milestone deadlines for the S- band and Ka- band frequencies and, as a result, we no longer have the right to use such frequency bands. We may be subject to penalties as a result of our failure to meet these milestones.
In December 2013, we acquired 100% of Solaris Mobile, which is based in Dublin, Ireland and licensed by the European Union and its member states (“EU”) to provide mobile satellite services (“MSS”) and complementary ground component (“CGC”) services covering the entire EU using S-band spectrum. Solaris Mobile changed its name to EchoStar Mobile Limited (“EchoStar Mobile”) in the first quarter of 2015. We are in the process of developing commercial services utilizing the operable payload we own on the EUTELSAT 10A satellite, along with our EchoStar XXI S-band satellite. The EchoStar XXI satellite will provide space segment capacity to EchoStar Mobile in the EU. We believe we are in a unique position to deploy a European wide MSS/CGC network and maximize the long-term value of our S-band spectrum in Europe and other regions within the scope of our licenses. The EchoStar XXI satellite launched in June 2017 and is anticipated to be placed in service in the fourth quarter of 2017. We intend to launch commercial service in the fourth quarter of 2017.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
S-Band Strategy
We continue to explore the development and deployment of S-band technologies that we expect will reduce the cost of satellite communications for internet-of-things, machine-to-machine communications, public protection, disaster relief and other end-to-end services worldwide and the integration of our products and services into new global, hybrid networks that leverage multiple satellites and terrestrial technologies. We believe we remain in a unique position to develop a hybrid mobile satellite service (“MSS”) and complementary ground component (“CGC”) network in Europe, including through the use of our EchoStar XXI satellite, which was placed into service in November 2017, and the EUTELSAT 10A payload. In addition, we hold additional S-band MSS and terrestrial licenses in Mexico and Chile.
We have positioned ourselves to continue to develop the S-band spectrum globally by acquiring Sirion Global Pty Ltd., which we have renamed EchoStar Global Australia Pty Ltd (“EchoStar Global”). EchoStar Global has brought into use the International Telecommunication Union (“ITU”) global S-band non-geostationary satellite spectrum rights for MSS. We plan to use the nano-satellite we launched in the second quarter of 2021 to develop and test a wide range of potential S-band applications and services.
Cybersecurity
We and the third parties with whom we do business face a constantly evolving and increasingly complex landscape of systemic cybersecurity risk in which hackers and other parties use a variety of methods to execute cyberattacks and leverage security breaches and vulnerabilities. Our efforts in mitigating these risks through our cybersecurity program cannot eliminate all cybersecurity risk, including the risk of events that cascade through multiple internal networks or systems, or to one or more suppliers or customers. Disturbances in our systems caused by cyberattacks, including attacks on our third-party contractors and suppliers, could materially harm our ability to conduct our operations and may result in losses that could have a material adverse effect on our financial position. This may also create adverse consequences for our suppliers, third-party service providers, customers, and other third parties that we interact with on a regular basis. In addition, these types of security events could be widely publicized and could materially and adversely affect our reputation with our customers, vendors and shareholders and could harm our competitive position. Such incidents could also result in the release of confidential information about our operations, financial position and performance or about our customers or other third parties which could result in legal claims, fines, or liabilities that may not be covered by our insurance policies and could be material. Additionally, a security compromise or ransomware incident could require us to allocate significant management resources to recovery and mitigation and compel us to expend substantial additional resources to upgrade security measures to continue to protect our confidential information against cyberattacks.
In addition to our efforts to mitigate cybersecurity risk within our business, we are making investments to alleviate potential cybersecurity risk to our products. As a result of these efforts, we could discover new vulnerabilities within our products and systems. We may not discover all such vulnerabilities due to the scale of activities on our platforms, or due to other factors, including factors outside our control.
We are tracking closelynot 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 developmentsthree and nine months ended September 30, 2022. 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 next-generation satellite businesses, and we are seeking to utilize our services, technologies and expertise to find new commercial opportunities for our business. In June 2015, we made an equity investment in OneWeb.
Capital expenditures associated with the construction and launch of the EchoStar XXIII, EchoStar XXI and EchoStar XXIV satellites are included in “Corporate and Other” in our segment reporting.
future.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
RESULTS OF OPERATIONS
Three Months Ended September 30, 20172022 Compared to the Three Months Ended September 30, 20162021
The following table presents our consolidated results of operations for the three months ended September 30, 2022 compared to the three months ended September 30, 2021: |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance |
Statements of Operations Data (1) | | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Revenue: | | |
| | |
| | |
| | |
|
Services and other revenue - DISH Network | | $ | 111,135 |
| | $ | 115,127 |
| | $ | (3,992 | ) | | (3.5 | ) |
Services and other revenue - other | | 310,973 |
| | 276,280 |
| | 34,693 |
| | 12.6 |
|
Equipment revenue - DISH Network | | 126 |
| | 2,138 |
| | (2,012 | ) | | (94.1 | ) |
Equipment revenue - other | | 58,999 |
| | 66,501 |
| | (7,502 | ) | | (11.3 | ) |
Total revenue | | 481,233 |
| | 460,046 |
| | 21,187 |
| | 4.6 |
|
Costs and Expenses: | | |
| | |
| | |
| | |
|
Cost of sales - services and other | | 138,641 |
| | 131,594 |
| | 7,047 |
| | 5.4 |
|
% of Total services and other revenue | | 32.8 | % | | 33.6 | % | | |
| | |
|
Cost of sales - equipment | | 52,051 |
| | 53,599 |
| | (1,548 | ) | | (2.9 | ) |
% of Total equipment revenue | | 88.0 | % | | 78.1 | % | | |
| | |
|
Selling, general and administrative expenses | | 91,003 |
| | 80,672 |
| | 10,331 |
| | 12.8 |
|
% of Total revenue | | 18.9 | % | | 17.5 | % | | |
| | |
|
Research and development expenses | | 8,302 |
| | 9,030 |
| | (728 | ) | | (8.1 | ) |
% of Total revenue | | 1.7 | % | | 2.0 | % | | |
| | |
|
Depreciation and amortization | | 134,822 |
| | 108,549 |
| | 26,273 |
| | 24.2 |
|
Total costs and expenses | | 424,819 |
| | 383,444 |
| | 41,375 |
| | 10.8 |
|
Operating income | | 56,414 |
| | 76,602 |
| | (20,188 | ) | | (26.4 | ) |
| | | | | | | | |
Other Income (Expense): | | |
| | |
| | |
| | |
|
Interest income | | 12,012 |
| | 6,259 |
| | 5,753 |
| | 91.9 |
|
Interest expense, net of amounts capitalized | | (55,646 | ) | | (37,316 | ) | | (18,330 | ) | | 49.1 |
|
Gains and impairment on investment, net | | 20,090 |
| | 230 |
| | 19,860 |
| | * |
|
Equity in earnings of unconsolidated affiliates, net | | 4,381 |
| | 4,166 |
| | 215 |
| | 5.2 |
|
Other, net | | 4,686 |
| | 364 |
| | 4,322 |
| | * |
|
Total other expense, net | | (14,477 | ) | | (26,297 | ) | | 11,820 |
| | (44.9 | ) |
Income from continuing operations before income taxes | | 41,937 |
| | 50,305 |
| | (8,368 | ) | | (16.6 | ) |
Income tax provision | | (6,082 | ) | | (17,394 | ) | | 11,312 |
| | (65.0 | ) |
Net income from continuing operations | | 35,855 |
| | 32,911 |
| | 2,944 |
| | 8.9 |
|
Net income (loss) from discontinued operations | | (654 | ) | | 4,499 |
| | (5,153 | ) | | * |
|
Net income | | 35,201 |
| | 37,410 |
| | (2,209 | ) | | (5.9 | ) |
Less: Net income attributable to noncontrolling interest in HSS Tracking Stock | | — |
| | 85 |
| | (85 | ) | | (100.0 | ) |
Less: Net income attributable to other noncontrolling interests | | 532 |
| | 524 |
| | 8 |
| | 1.5 |
|
Net income attributable to EchoStar | | $ | 34,669 |
| | $ | 36,801 |
| | $ | (2,132 | ) | | (5.8 | ) |
| | | | | | | | |
Other Data: | | |
| | |
| | |
| | |
|
EBITDA (2) | | $ | 219,861 |
| | $ | 189,302 |
| | $ | 30,559 |
| | 16.1 |
|
Subscribers, end of period | | 1,140,000 |
| | 1,018,000 |
| | 122,000 |
| | 12.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | Variance |
Statements of Operations Data (1) | | 2022 | | 2021 | | Amount | | % |
Revenue: | | | | | | | | |
Services and other revenue | | $ | 401,382 | | | $ | 432,739 | | | $ | (31,357) | | | (7.2) | |
Equipment revenue | | 96,005 | | | 71,921 | | | 24,084 | | | 33.5 | |
Total revenue | | 497,387 | | | 504,660 | | | (7,273) | | | (1.4) | |
Costs and expenses: | | | | | | | | |
Cost of sales - services and other | | 145,189 | | | 138,179 | | | 7,010 | | | 5.1 | |
% of total services and other revenue | | 36.2 | % | | 31.9 | % | | | | |
Cost of sales - equipment | | 74,329 | | | 62,328 | | | 12,001 | | | 19.3 | |
% of total equipment revenue | | 77.4 | % | | 86.7 | % | | | | |
Selling, general and administrative expenses | | 111,421 | | | 112,986 | | | (1,565) | | | (1.4) | |
% of total revenue | | 22.4 | % | | 22.4 | % | | | | |
Research and development expenses | | 9,181 | | | 7,974 | | | 1,207 | | | 15.1 | |
% of total revenue | | 1.8 | % | | 1.6 | % | | | | |
Depreciation and amortization | | 110,233 | | | 120,596 | | | (10,363) | | | (8.6) | |
Impairment of long-lived assets | | — | | | — | | | — | | | * |
Total costs and expenses | | 450,353 | | | 442,063 | | | 8,290 | | | 1.9 | |
Operating income (loss) | | 47,034 | | | 62,597 | | | (15,563) | | | (24.9) | |
Other income (expense): | | | | | | | | |
Interest income, net | | 14,183 | | | 5,725 | | | 8,458 | | | * |
Interest expense, net of amounts capitalized | | (13,845) | | | (16,313) | | | 2,468 | | | (15.1) | |
Gains (losses) on investments, net | | (10,077) | | | 3,748 | | | (13,825) | | | * |
Equity in earnings (losses) of unconsolidated affiliates, net | | (1,426) | | | 74 | | | (1,500) | | | * |
Foreign currency transaction gains (losses), net | | (2,805) | | | (6,641) | | | 3,836 | | | (57.8) | |
Other, net | | (319) | | | 775 | | | (1,094) | | | * |
Total other income (expense), net | | (14,289) | | | (12,632) | | | (1,657) | | | 13.1 | |
Income (loss) before income taxes | | 32,745 | | | 49,965 | | | (17,220) | | | (34.5) | |
Income tax benefit (provision), net | | (13,195) | | | (19,748) | | | 6,553 | | | (33.2) | |
Net income (loss) | | 19,550 | | | 30,217 | | | (10,667) | | | (35.3) | |
Less: Net loss (income) attributable to non-controlling interests | | 2,853 | | | 3,192 | | | (339) | | | (10.6) | |
Net income (loss) attributable to EchoStar Corporation common stock | | $ | 22,403 | | | $ | 33,409 | | | $ | (11,006) | | | (32.9) | |
| | | | | | | | |
Other data: | | | | | | | | |
EBITDA (2) | | $ | 145,493 | | | $ | 184,341 | | | $ | (38,848) | | | (21.1) | |
Subscribers, end of period | | 1,285,000 | | | 1,510,000 | | | (225,000) | | | (14.9) | |
* Percentage is not meaningful.
(1) An explanation of our key metrics is included on pages 61 and 62 under the heading “Explanationin Explanation of Key Metrics and Other Items.”
(2) A reconciliation of EBITDA to “NetNet income” (loss), the most directly comparable U.S. GAAP measure in the accompanying financial statements,our Consolidated Financial Statements, is included on page 51. in Results of Operations. For further information on our use of EBITDA, see “ExplanationExplanation of Key Metrics and Other Items” on page 62.Items.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
The following discussion relates to our results of operations for the three months ended September 30, 2022 and 2021.
Services and other revenue - DISH Network. “ServicesServices and other revenue - DISH Network” totaled $111.1$401.4 million for the three months ended September 30, 2017,2022, a decrease of $4.0$31.4 million, or 3.5%7.2%, as compared to the same period in 2016 primarily from our Hughes segment.2021. The decrease in revenue was primarily attributable to a decrease in wholesale subscribers.our Hughes segment related to lower sales of broadband services to our consumer customers. These variances reflect an estimated negative impact of exchange rate fluctuations of $3.2 million, primarily attributable to our enterprise customers.
Services and otherEquipment revenue - other. “Services and otherEquipment revenue - other” totaled $311.0$96.0 million for the three months ended September 30, 2017,2022, an increase of $34.7$24.1 million, or 12.6%33.5%, as compared to the same period in 2016.
Services and other revenue - other from our Hughes segment for the three months ended September 30, 2017 increased by $38.2 million, or 14.5%, to $301.1 million compared to the same period in 2016.2021. The increase was primarily attributable to increases in hardware sales of broadband services of $31.5$22.6 million to our domestic and international consumers, $5.8 million to our domestic enterprise customers mainly associated with a certain customer in North America and $1.7 million to our telecom systems customers, partially offset by a decrease of $1.0 million to our international enterprise customers.
Services and other revenue - other from our ESS segment for the three months ended September 30, 2017 decreased by $3.9 million, or 26.8%, to $10.6 million compared to the same period in 2016. The decrease was primarily attributable to a decrease in sales of transponder services due to expired service contracts.
Equipment revenue - DISH Network.
“Equipment revenue - DISH Network” totaled $0.1 million for the three months ended September 30, 2017, a decrease of $2.0 million or 94.1%, compared to the same period in 2016 primarily from our Hughes segment. The decrease in revenue was primarily due to the decrease in unit sales of broadband equipment to dishNET as a result of the MSA. See Note 16 in the notes to condensed consolidated financial statements in Item 1 of this report for additional information about the MSA.
Equipment revenue - other. “Equipment revenue - other” totaled $59.0 million for the three months ended September 30, 2017, a decrease of $7.5 million or 11.3%, compared to the same period in 2016 primarily from our Hughes segment. The decrease was primarily due to a decrease in sales of broadband equipment to telecom systems customers of $6.1 million, our international enterprise customers of $3.3 million, and our government customers of $1.2 million, partially offset by an increase in sales of broadband equipment to our domestic consumers and enterprise customers of $2.8 million.
Cost of sales - services and other. “CostCost of sales - services and other”other totaled $138.6$145.2 million for the three months ended September 30, 2017,2022, an increase of $7.0 million, or 5.4%5.1%, as compared to the same period in 2016 primarily from our Hughes segment.2021. The increase was primarily attributable to an increaseincreases in the costscost of broadband services provided to our domesticconsumer and international consumers and domestic enterprise customers, mainly related to service delivery expenses, such as a result of the increase in sales of broadband services.field services and customer care.
Cost of sales - equipment. equipment“. Cost of sales - equipment”equipment totaled $52.1$74.3 million for the three months ended September 30, 2017, a decrease2022, an increase of $1.5$12.0 million, or 2.9%19.3%, as compared to the same period in 2016 primarily from our Hughes segment.2021. The decreaseincrease was primarily attributable to a decrease of $3.9 millionthe corresponding increase in equipment costs related to the decreaserevenue and change in sales to dishNET, telecom systems customers, and international enterprise customers. The decrease was partially offset by an increase of $2.6 million in equipment costs related to the increase in sales to our domestic consumers and domestic enterprise customers. product mix.
Selling, general and administrative expenses. “Selling, general and administrative expenses”expenses totaled $91.0$111.4 million for the three months ended September 30, 2017, an increase2022, a decrease of $10.3$1.6 million, or 12.8%1.4%, as compared to the same period in 2016.2021. The increasedecrease was primarily due to an increase of $15.2 million in marketing and promotional costs primarily attributable to our domesticdecreases in sales and international consumer broadband sales in our Hughes segment, partiallymarketing expenses of $7.6 million, offset by a decrease of $4.9 millionincreases in other general and administrative expenses.expenses of $3.2 million and bad debt expense of $2.1 million.
ResearchDepreciation and development expenses.amortization “Research. Depreciation and development expenses”amortization expenses totaled $8.3$110.2 million for the three months ended September 30, 2017,2022, a decrease of $0.7$10.4 million, or 8.1%8.6%, as compared to the same period2021. The decrease was primarily attributable to decreases in 2016. Our researchother property and development activities vary based on the activity level and scopeequipment depreciation expense of other engineering and customer related development contracts.$12.0 million, partially offset by increases in amortization of our capitalized software of $1.7 million.
Depreciation and amortization.Interest income, net “Depreciation and amortization” expenses. Interest income, net totaled $134.8$14.2 million for the three months ended September 30, 2017,2022, an increase of $26.3$8.5 million, as compared to 2021, primarily attributable to increases in the yield on our marketable investment securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $13.8 million for the three months ended September 30, 2022, a decrease of $2.5 million, or 24.2%15.1%, as compared to the same period in 2016.2021. The increasedecrease was primarily relatedattributable to an increase of $15.3$1.9 million in depreciation expense of the EchoStar XIX and EchoStar XXIII satellites that were placed into service in the first and second quarters of 2017, respectively, an increase of $10.5 million in depreciation expense of domestic and international customer rental equipment, an increase of $4.0 million in depreciation expense relating to machinery and equipment, and an increase of $2.9 million in amortization expensecapitalized interest relating to the developmentEchoStar XXIV satellite program.
Gains (losses) on investments, net. Gains (losses) on investments, net totaled $10.1 million in losses for the three months ended September 30, 2022, as compared to $3.7 million in gains for the three months ended September 30, 2021, a negative change of externally marketed$13.8 million. The change was related to a net loss of $28.3 million related to the exit of our investment in Dish Mexico in 2022, partially offset by a loss of $14.2 million in other equity securities in 2021.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled $1.4 million in losses for the three months ended September 30, 2022, as compared to $0.1 million in earnings for the three months ended September 30, 2021, a negative change of $1.5 million. The change was related to net increased losses from our investments in our equity method investees.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), nettotaled $2.8 million in losses for the three months ended September 30, 2022, as compared to $6.6 million in losses for the three months ended September 30, 2021, a positive change of $3.8 million. The change was due to the net impact
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
software, partially offset by a decrease of $5.0 million in amortization expense fromforeign exchange rate fluctuations of certain fully amortized other intangible assets in our Hughes segment.
foreign currencies during the quarter, primarily related to the Indian Rupee and Latin American currencies.
Interest income
Income tax benefit (provision), net. “Interest income” totaled $12.0Income tax benefit (provision), net was $(13.2) million for the three months ended September 30, 2017, an increase of $5.8 million or 91.9%,2022, as compared to the same period in 2016. The increase was primarily attributable to the increase in our marketable investments and an increase in yield percentage for the three months ended September 30, 2017 when compared to the same period in 2016.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $55.6$(19.7) million for the three months ended September 30, 2017, an increase of $18.3 million or 49.1%, compared to the same period in 2016. The increase2021. Our effective income tax rate was primarily due to a decrease of $11.6 million in capitalized interest relating to the EchoStar XIX40.3% and EchoStar XXIII satellites that were placed into service in the first and second quarters of 2017, respectively, and an increase of $6.4 million in interest expense relating to the issuance of 5.250% Senior Secured Notes due 2026 (the “2026 Senior Secured Notes”) and 6.625% Senior Unsecured Notes due 2026 (the “2026 Senior Unsecured Notes” and together with 2026 Senior Secured Notes, the “2026 Notes”) in the third quarter of 2016.
Gains and impairment on investments, net. “Gains and impairment on investments, net” totaled $20.1 million in gains39.5% for the three months ended September 30, 2017, an increase of $19.9 million, compared to the same period in 2016. The increase in gains was primarily a result of gains on our trading securities in the third quarter of 2017.
Equity in earnings of unconsolidated affiliates, net. “Equity in earnings of unconsolidated affiliates, net” totaled $4.4 million in earnings for the three months ended September 30, 2017, an increase of $0.2 million or 5.2%, compared to the same period in 2016. The increase was primarily related to an increase in earnings from our investment in Dish Mexico, partially offset by a decrease in earnings from our investment in Deluxe/EchoStar LLC.
Other, net. “Other, net” totaled $4.7 million in income for the three months ended September 30, 2017, an increase of $4.3 million, compared to the same period in 2016. The increase was primarily related to a favorable foreign exchange impact of $2.5 million in the third quarter of 20172022 and dividends of $2.3 million received from certain strategic equity investments in the third quarter of 2017.
Income tax provision. Income tax expense was $6.1 million for the three months ended September 30, 2017, a decrease in expense of $11.3 million or 65.0%, compared to the same period in 2016. Our effective income tax rate was 14.5% and 34.6% for the three months ended September 30, 2017 and 2016,2021, respectively. The variations in our current year effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2017 was primarily due to various permanent tax differences, the increase in our valuation allowance associated with unrealized gains that are capital in nature, and a change in the amount of unrecognized tax benefit from uncertain tax positions. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2016 was2022 were primarily due to researchexcluded foreign losses where the Company carries a full valuation allowance and experimentation credits, partially offset bythe impact of state and local taxes.
Net income attributable to EchoStar. “Net income attributable to EchoStar” was $34.7 million The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2017, a decrease of $2.1 million or 5.8%, compared to the same period in 2016. The decrease was2021 were primarily due to (i)excluded foreign losses where the Company carries a decrease in operating income, including depreciationfull valuation allowance and amortization,the impact of $20.2 million, (ii) an increase of $18.3 million in interest expensestate and (iii)local taxes.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. Among other provisions, the IRA includes a decrease of $5.2 million in net income from discontinuing operations in 2017. The decrease was partially offset by (i) an increase of $19.9 million in gains15% corporate minimum tax rate applied to certain large corporations and a 1% excise tax on corporate stock repurchases made after December 31, 2022. We do not expect the IRA to have a material impact on our trading securities, (ii) a decreaseconsolidated financial statements.
Net income (loss) attributable to EchoStar Corporation common stock. The following table reconciles the change in Net income tax expense of $11.3 million, (iii) an increase of $5.8 million in interest income, and (iv) an increase in other income of $4.3 million.(loss) attributable to EchoStar Corporation common stock:
| | | | | | | | |
| | Amounts |
Net income (loss) attributable to EchoStar Corporation for the three months ended September 30,2021 | | $ | 33,409 | |
Increase (decrease) in interest income, net | | 8,458 | |
Decrease (increase) in income tax benefit (provision), net | | 6,553 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 3,836 | |
Decrease (increase) in interest expense, net of amounts capitalized | | 2,468 | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | (339) | |
Increase (decrease) in other, net | | (1,094) | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (1,500) | |
Increase (decrease) in gains (losses) on investments, net | | (13,825) | |
Increase (decrease) in operating income (loss), including depreciation and amortization | | (15,563) | |
Net income (loss) attributable to EchoStar Corporation for the three months ended September 30, 2022 | | $ | 22,403 | |
Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
EBITDA. EBITDA was $219.9 million for the three months ended September 30, 2017, an increase of $30.6 million or 16.1%, compared to the same period in 2016. The increase was primarily due to (i) an increase of $19.9 million in gains on our trading securities, (ii) an increase in operating income, excluding depreciation and amortization, of $6.1 million and (iii) an increase in other income of $4.3 million. 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 the accompanying financial statements.our Consolidated Financial Statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | Variance |
| | 2022 | | 2021 | | Amounts | | % |
Net income (loss) | | $ | 19,550 | | | $ | 30,217 | | | $ | (10,667) | | | (35.3) | |
Interest income, net | | (14,183) | | | (5,725) | | | (8,458) | | | * |
Interest expense, net of amounts capitalized | | 13,845 | | | 16,313 | | | (2,468) | | | (15.1) | |
Income tax provision (benefit), net | | 13,195 | | | 19,748 | | | (6,553) | | | (33.2) | |
Depreciation and amortization | | 110,233 | | | 120,596 | | | (10,363) | | | (8.6) | |
Net loss (income) attributable to non-controlling interests | | 2,853 | | | 3,192 | | | (339) | | | (10.6) | |
EBITDA | | $ | 145,493 | | | $ | 184,341 | | | $ | (38,848) | | | (21.1) | |
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
The following table reconciles the change in EBITDA:
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance |
| | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Net income | | $ | 35,201 |
| | $ | 37,410 |
| | $ | (2,209 | ) | | (5.9 | ) |
| | | | | | | | |
Interest income and expense, net | | 43,634 |
| | 31,057 |
| | 12,577 |
| | 40.5 |
|
Income tax provision | | 6,082 |
| | 17,394 |
| | (11,312 | ) | | (65.0 | ) |
Depreciation and amortization | | 134,822 |
| | 108,549 |
| | 26,273 |
| | 24.2 |
|
Net (income) loss from discontinued operations | | 654 |
| | (4,499 | ) | | 5,153 |
| | * |
|
Net income attributable to noncontrolling interests | | (532 | ) | | (609 | ) | | 77 |
| | (12.6 | ) |
EBITDA | | $ | 219,861 |
| | $ | 189,302 |
| | $ | 30,559 |
| | 16.1 |
|
| | | | | | | | |
| | Amounts |
EBITDA for the three months ended September 30, 2021 | | $ | 184,341 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 3,836 | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | (339) | |
Increase (decrease) in other, net | | (1,094) | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (1,500) | |
Increase (decrease) in gains (losses) on investments, net | | (13,825) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (25,926) | |
EBITDA for the three months ended September 30, 2022 | | $ | 145,493 | |
* Percentage is not meaningful.
Segment Operating Results and Capital Expenditures
Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016
|
| | | | | | | | | | | | | | | | |
| | Hughes | | EchoStar Satellite Services | | Corporate and Other | | Consolidated Total |
| | (In thousands) |
For the Three Months Ended September 30, 2017 | | |
| | |
| | |
| | |
|
Total revenue | | $ | 380,061 |
| | $ | 97,093 |
| | $ | 4,079 |
| | $ | 481,233 |
|
Capital expenditures | | $ | 108,428 |
| | $ | 8,203 |
| | $ | 75,500 |
| | $ | 192,131 |
|
EBITDA | | $ | 131,817 |
| | $ | 78,345 |
| | $ | 9,699 |
| | $ | 219,861 |
|
| | | | | | | | |
For the Three Months Ended September 30, 2016 | | |
| | |
| | |
| | |
|
Total revenue | | $ | 355,876 |
| | $ | 101,480 |
| | $ | 2,690 |
| | $ | 460,046 |
|
Capital expenditures | | $ | 75,682 |
| | $ | 15,730 |
| | $ | 48,162 |
| | $ | 139,574 |
|
EBITDA | | $ | 125,522 |
| | $ | 84,257 |
| | $ | (20,477 | ) | | $ | 189,302 |
|
Hughes Segment
|
| | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance |
| | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Total revenue | | $ | 380,061 |
| | $ | 355,876 |
| | $ | 24,185 |
| | 6.8 |
Capital expenditures | | $ | 108,428 |
| | $ | 75,682 |
| | $ | 32,746 |
| | 43.3 |
EBITDA | | $ | 131,817 |
| | $ | 125,522 |
| | $ | 6,295 |
| | 5.0 |
Revenue
Hughes segmentThe following tables present our total revenue, capital expenditures and EBITDA by segment for the three months ended September 30, 2017 increased by $24.2 million, or 6.8%,2022, as compared to the same period in 2016. The increasethree months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended September 30, 2022 | | | | | | | | |
Total revenue | | $ | 489,565 | | | $ | 4,981 | | | $ | 2,841 | | | $ | 497,387 | |
Capital expenditures | | 50,783 | | | — | | | 10,674 | | | 61,457 | |
EBITDA | | 175,010 | | | 3,446 | | | (32,963) | | | 145,493 | |
| | | | | | | | |
For the three months ended September 30, 2021 | | | | | | | | |
Total revenue | | $ | 496,937 | | | $ | 4,436 | | | $ | 3,287 | | | $ | 504,660 | |
Capital expenditures | | 74,259 | | | — | | | 15,278 | | | 89,537 | |
EBITDA | | 196,970 | | | 2,319 | | | (14,948) | | | 184,341 | |
Hughes Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | Variance | |
| | 2022 | | 2021 | | Amount | | % | |
Total revenue | | $ | 489,565 | | | $ | 496,937 | | | $ | (7,372) | | | (1.5) | | |
Capital expenditures | | 50,783 | | | 74,259 | | | (23,476) | | | (31.6) | | |
EBITDA | | 175,010 | | | 196,970 | | | (21,960) | | | (11.1) | | |
Total revenue was $489.6 million for the three months ended September 30, 2022, a decrease of $7.4 million, or 1.5%, as compared to 2021. Services and other revenue decreased primarily due to an increase inlower sales of broadband equipment and services to our domestic and international consumers and domestic enterprise customers of $40.5 million. The increase was partially offset by a decreaseconsumer customers. Equipment revenue increased primarily due to increases in hardware sales of broadband equipment and services to DISH Network of $6.5 million, a decrease in sales of broadband equipment to telecom systems customers of $6.1 million, and a decrease in sales of broadband equipment and services of $4.3$22.6 million to our enterprise customers mainly associated with a certain customer in North America and to international customers. These variances reflect an estimated negative impact of exchange rate fluctuations of $3.8 million, primarily attributable to our enterprise customers.
Capital expenditures were $50.8 million for the three months ended September 30, 2022, a decrease of $23.5 million, or 31.6%, as compared to 2021, primarily due to decreases in expenditures related to the construction of our satellite-related ground infrastructure and decreases in expenditures associated with our consumer business.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
The following table reconciles the change in the Hughes Segment EBITDA:
Capital Expenditures | | | | | | | | |
| | Amounts |
EBITDA for the three months ended September 30, 2021 | | $ | 196,970 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 4,263 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (189) | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | (338) | |
Increase (decrease) in other, net | | (1,013) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (24,683) | |
| | |
EBITDA for the three months ended September 30, 2022 | | $ | 175,010 | |
Hughes segment capital expendituresESS Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | Variance |
| | 2022 | | 2021 | | Amounts | | % |
Total revenue | | $ | 4,981 | | | $ | 4,436 | | | $ | 545 | | | 12.3 | |
| | | | | | | | |
EBITDA | | 3,446 | | | 2,319 | | | 1,127 | | | 48.6 | |
Total revenue was $5.0 million for the three months ended September 30, 2017 increased by $32.7 million, or 43.3%, compared to the same period in 2016, primarily as a result of2022, an increase of $56.2$0.5 million, or 12.3%, as compared to 2021, primarily due to an increase in expenditures in our domestic and international businesses. The increase was mainly associated with customer rental equipment for consumertransponder services provided on the EUTELSAT 65 West A and EchoStar XIX satellites that were placed into service in theto third quarter of 2016 and the first quarter of 2017, respectively. The increaseparties.
EBITDA was partially offset by a decrease of $23.5$3.4 million in expenditures on satellites and related ground infrastructure, primarily resulted from the launch of service on EUTELSAT 65 West A and EchoStar XIX satellites.
EBITDA
Hughes segment EBITDA for the three months ended September 30, 2017 was $131.8 million,2022, an increase of $6.3$1.1 million, or 5.0%48.6%, as compared to the same period in 2016. The increase was2021, primarily due to anthe increase of $18.9 million in gross margin which we define as revenue less cost of sales, a favorable foreign exchange impact of $1.9 million in the third quarter 2017 and a decrease of $0.7 million in research and development expenses, partially offset by an increase of $15.2 million in marketing and promotional costs primarily attributable to our domestic and international consumer broadband sales.
EchoStar Satellite Services Segment
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance |
| | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Total revenue | | $ | 97,093 |
| | $ | 101,480 |
| | $ | (4,387 | ) | | (4.3 | ) |
Capital expenditures | | $ | 8,203 |
| | $ | 15,730 |
| | $ | (7,527 | ) | | (47.9 | ) |
EBITDA | | $ | 78,345 |
| | $ | 84,257 |
| | $ | (5,912 | ) | | (7.0 | ) |
Revenue
overall ESS segment total revenue and lower expenses.
Corporate and Other Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | Variance |
| | 2022 | | 2021 | | Amounts | | % |
Total revenue | | $ | 2,841 | | | $ | 3,287 | | | $ | (446) | | | (13.6) | |
Capital expenditures | | 10,674 | | | 15,278 | | | (4,604) | | | (30.1) | |
EBITDA | | (32,963) | | | (14,948) | | | (18,015) | | | * |
* Percentage is not meaningful.
Total revenue was $2.8 million for the three months ended September 30, 2017 decreased by $4.42022, a decrease of $0.4 million, or 4.3%13.6%, as compared to the same period in 2016,2021, which was primarily dueattributable to a decrease in sales of transponderdecreased services due to expired service contracts.and other revenue from DISH Network.
Capital Expenditures
ESS segment capital expenditures were $10.7 million for the three months ended September 30, 2017 decreased by $7.5 million, or 47.9%, compared to the same period in 2016, primarily related to a decrease in expenditures on the EchoStar 105/SES-11 satellite.
EBITDA
ESS segment EBITDA for the three months ended September 30, 2017 was $78.3 million,2022, a decrease of $5.9$4.6 million, or 7.0%30.1%, as compared to the same period in 2016. The decrease in EBITDA for our ESS segment was2021, primarily due to decreases in expenditures related to the decrease of $4.4 million in revenues and an increase of $1.3 million in general and administrative expenses.EchoStar XXIV satellite program.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
Corporate and Other
The following table reconciles the change in the Corporate and Other is comprisedSegment EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the three months ended September 30, 2021 | | $ | (14,948) | |
Increase (decrease) in gains (losses) on investments, net | | (13,826) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (2,371) | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (1,311) | |
Increase (decrease) in foreign currency transaction gains (losses), net | | (333) | |
Increase (decrease) in other, net | | (174) | |
EBITDA for the three months ended September 30, 2022 | | $ | (32,963) | |
|
| | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | Variance |
| | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Total revenue | | $ | 4,079 |
| | $ | 2,690 |
| | $ | 1,389 |
| | 51.6 |
Capital expenditures | | $ | 75,500 |
| | $ | 48,162 |
| | $ | 27,338 |
| | 56.8 |
EBITDA | | $ | 9,699 |
| | $ | (20,477 | ) | | $ | 30,176 |
| | * |
* Percentage is not meaningful.
Capital Expenditures
For the three months ended September 30, 2017, Corporate and Other capital expenditures increased by $27.3 million, or 56.8%, compared to the same period in 2016, primarily related to an increase in satellite expenditures of $61.9 million on the EchoStar XXIV satellite and an increase in satellite expenditures of $6.8 million on the EchoStar XXI satellite, partially offset by a decrease in satellite expenditures of $33.6 million on the EchoStar XIX satellite and a decrease in satellite expenditures of $8.9 million on the EchoStar XXIII satellite. The EchoStar XIX satellite was launched in December 2016 and placed into service in the first quarter of 2017. The EchoStar XXIII satellite was launched in March 2017 and was placed into service in the second quarter of 2017. The EchoStar XXI satellite is intended to be used by EchoStar Mobile in providing mobile satellite services in the EU. It was launched in June 2017 and is anticipated to be placed into service in the fourth quarter of 2017. The EchoStar XXIV satellite is intended to provide additional capacity for the Hughes broadband services in North America and certain Latin American countries.
EBITDA
For the three months ended September 30, 2017, Corporate and Other EBITDA was a gain of $9.7 million compared to a loss of $20.5 million for the three months ended September 30, 2016. The change of $30.2 million was primarily related to (i) an increase of $19.9 million in gains on our trading securities in the third quarter of 2017 , (ii) a decrease of $6.2 million in general and administrative expenses, (iii) dividends of $2.3 million received from certain strategic equity investments in the third quarter of 2017, (iv) an increase of $1.0 million in revenue from DISH Network primarily attributable to rental income relating to our lease agreements pursuant to which DISH Network leases certain real estate from us, and (v) a favorable foreign exchange impact of $0.4 million in 2017.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
Nine Months Ended September 30, 20172022 Compared to the Nine Months Ended September 30, 20162021
The following table presents our consolidated results of operations for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021: |
| | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance |
Statements of Operations Data (1) | | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Revenue: | | |
| | |
| | |
| | |
|
Services and other revenue - DISH Network | | $ | 339,824 |
| | $ | 347,440 |
| | $ | (7,616 | ) | | (2.2 | ) |
Services and other revenue - other | | 865,817 |
| | 820,149 |
| | 45,668 |
| | 5.6 |
|
Equipment revenue - DISH Network | | 175 |
| | 7,008 |
| | (6,833 | ) | | (97.5 | ) |
Equipment revenue - other | | 173,644 |
| | 160,081 |
| | 13,563 |
| | 8.5 |
|
Total revenue | | 1,379,460 |
| | 1,334,678 |
| | 44,782 |
| | 3.4 |
|
Costs and Expenses: | | |
| | |
| | |
| | |
|
Cost of sales - services and other | | 404,448 |
| | 384,942 |
| | 19,506 |
| | 5.1 |
|
% of Total services and other revenue | | 33.5 | % | | 33.0 | % | | |
| |
|
|
Cost of sales - equipment | | 153,854 |
| | 143,252 |
| | 10,602 |
| | 7.4 |
|
% of Total equipment revenue | | 88.5 | % | | 85.7 | % | | |
| | |
Selling, general and administrative expenses | | 263,820 |
| | 240,454 |
| | 23,366 |
| | 9.7 |
|
% of Total revenue | | 19.1 | % | | 18.0 | % | | |
| |
|
|
Research and development expenses | | 23,444 |
| | 23,524 |
| | (80 | ) | | (0.3 | ) |
% of Total revenue | | 1.7 | % | | 1.8 | % | | |
| |
|
|
Depreciation and amortization | | 379,939 |
| | 324,743 |
| | 55,196 |
| | 17.0 |
|
Total costs and expenses | | 1,225,505 |
| | 1,116,915 |
| | 108,590 |
| | 9.7 |
|
Operating income | | 153,955 |
| | 217,763 |
| | (63,808 | ) | | (29.3 | ) |
| | | | | | | | |
Other Income (Expense): | | |
| | |
| | |
| | |
|
Interest income | | 30,342 |
| | 13,726 |
| | 16,616 |
| | * |
|
Interest expense, net of amounts capitalized | | (156,498 | ) | | (80,376 | ) | | (76,122 | ) | | 94.7 |
|
Gains and impairment on investments, net | | 30,664 |
| | 8,179 |
| | 22,485 |
| | * |
|
Equity in earnings of unconsolidated affiliates, net | | 15,620 |
| | 8,984 |
| | 6,636 |
| | 73.9 |
|
Other, net | | 8,211 |
| | 5,531 |
| | 2,680 |
| | 48.5 |
|
Total other expense, net | | (71,661 | ) | | (43,956 | ) | | (27,705 | ) | | 63.0 |
|
Income from continuing operations before income taxes | | 82,294 |
| | 173,807 |
| | (91,513 | ) | | (52.7 | ) |
Income tax provision | | (9,073 | ) | | (61,258 | ) | | 52,185 |
| | (85.2 | ) |
Net income from continuing operations | | 73,221 |
| | 112,549 |
| | (39,328 | ) | | (34.9 | ) |
Net income (loss) from discontinued operations | | 6,454 |
| | 29,213 |
| | (22,759 | ) | | (77.9 | ) |
Net income | | 79,675 |
| | 141,762 |
| | (62,087 | ) | | (43.8 | ) |
Less: Net loss attributable to noncontrolling interest in HSS Tracking Stock | | (655 | ) | | (926 | ) | | 271 |
| | (29.3 | ) |
Less: Net income attributable to other noncontrolling interests | | 1,006 |
| | 946 |
| | 60 |
| | 6.3 |
|
Net income attributable to EchoStar | | $ | 79,324 |
| | $ | 141,742 |
| | $ | (62,418 | ) | | (44.0 | ) |
| | | | | | | | |
Other Data: | | |
| | |
| | |
| | |
|
EBITDA (2) | | $ | 588,038 |
| | $ | 565,180 |
| | $ | 22,858 |
| | 4.0 |
|
Subscribers, end of period | | 1,140,000 |
| | 1,018,000 |
| | 122,000 |
| | 12.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
Statements of Operations Data (1) | | 2022 | | 2021 | | Amount | | % |
Revenue: | | | | | | | | |
Services and other revenue | | $ | 1,234,890 | | | $ | 1,294,355 | | | $ | (59,465) | | | (4.6) | |
Equipment revenue | | 263,347 | | | 192,721 | | | 70,626 | | | 36.6 | |
Total revenue | | 1,498,237 | | | 1,487,076 | | | 11,161 | | | 0.8 | |
Costs and expenses: | | | | | | | | |
Cost of sales - services and other | | 430,553 | | | 410,515 | | | 20,038 | | | 4.9 | |
% of total services and other revenue | | 34.9 | % | | 31.7 | % | | | | |
Cost of sales - equipment | | 213,497 | | | 161,982 | | | 51,515 | | | 31.8 | |
% of total equipment revenue | | 81.1 | % | | 84.0 | % | | | | |
Selling, general and administrative expenses | | 342,682 | | | 341,143 | | | 1,539 | | | 0.5 | |
% of total revenue | | 22.9 | % | | 22.9 | % | | | | |
Research and development expenses | | 25,562 | | | 22,960 | | | 2,602 | | | 11.3 | |
% of total revenue | | 1.7 | % | | 1.5 | % | | | | |
Depreciation and amortization | | 347,224 | | | 368,864 | | | (21,640) | | | (5.9) | |
Impairment of long-lived assets | | 711 | | | 245 | | | 466 | | | * |
Total costs and expenses | | 1,360,229 | | | 1,305,709 | | | 54,520 | | | 4.2 | |
Operating income (loss) | | 138,008 | | | 181,367 | | | (43,359) | | | (23.9) | |
Other income (expense): | | | | | | | | |
Interest income, net | | 29,677 | | | 16,914 | | | 12,763 | | | 75.5 | |
Interest expense, net of amounts capitalized | | (43,125) | | | (79,848) | | | 36,723 | | | (46.0) | |
Gains (losses) on investments, net | | 48,071 | | | 112,981 | | | (64,910) | | | (57.5) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | (4,441) | | | (2,596) | | | (1,845) | | | 71.1 | |
Foreign currency transaction gains (losses), net | | (53) | | | (10,045) | | | 9,992 | | | (99.5) | |
Other, net | | 2,198 | | | (12,922) | | | 15,120 | | | * |
Total other income (expense), net | | 32,327 | | | 24,484 | | | 7,843 | | | 32.0 | |
Income (loss) before income taxes | | 170,335 | | | 205,851 | | | (35,516) | | | (17.3) | |
Income tax benefit (provision), net | | (51,367) | | | (63,047) | | | 11,680 | | | (18.5) | |
Net income (loss) | | 118,968 | | | 142,804 | | | (23,836) | | | (16.7) | |
Less: Net loss (income) attributable to non-controlling interests | | 8,736 | | | 6,419 | | | 2,317 | | | 36.1 | |
Net income (loss) attributable to EchoStar Corporation common stock | | $ | 127,704 | | | $ | 149,223 | | | $ | (21,519) | | | (14.4) | |
| | | | | | | | |
Other data: | | | | | | | | |
EBITDA (2) | | $ | 539,743 | | | $ | 644,068 | | | $ | (104,325) | | | (16.2) | |
Subscribers, end of period | | 1,285,000 | | | 1,510,000 | | | (225,000) | | | (14.9) | |
* Percentage is not meaningful.
(1) An explanation of our key metrics is included on pages 61 and 62 under the heading “Explanationin Explanation of Key Metrics and Other Items.”
(2) A reconciliation of EBITDA to “NetNet income” (loss), the most directly comparable GAAPU.S. generally accepted accounting principles (“U.S. GAAP”) measure in the accompanying financial statements,our Consolidated Financial Statements, is included on page 56. in Results of Operations. For further information on our use of EBITDA, see “ExplanationExplanation of Key Metrics and Other Items” on page 62. Items.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
The following discussion relates to our results of operations for the nine months ended September 30, 2022 and 2021.
Services and other revenue - DISH Network. “ServicesServices and other revenue - DISH Network” totaled $339.8$1.2 billion for the nine months ended September 30, 2022, a decrease of $59.5 million, or 4.6%, 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 $69.6 million due to lower broadband consumer customers, partially offset by higher sales of broadband services to our enterprise customers of $5.9 million and to our mobile satellite system and other customers of $3.5 million. These variances reflect an estimated negative impact of exchange rate fluctuations of $4.5 million, primarily attributable to our enterprise customers.
Equipment revenue. Equipment revenue totaled $263.3 million for the nine months ended September 30, 2017, a decrease2022, an increase of $7.6$70.6 million, or 2.2%36.6%, as compared to the same period2021. The increase was primarily attributable to: i) increases in 2016.hardware sales to our enterprise customers of $68.4 million mainly associated with a certain customer in North America and to international customers and ii) increases in hardware sales to our mobile satellite system customers of $5.1 million, partially offset by decreases in hardware sales of $2.8 million to our consumer customers.
ServicesCost of sales - services and other. Cost of sales - services and other revenue - DISH Network from our Hughes segmenttotaled $430.6 million for the nine months ended September 30, 2017 decreased by $9.22022, an increase of $20.0 million, or 12.4%4.9%, to $65.4 millionas 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 $213.5 million for the same periodnine months ended September 30, 2022, an increase of $51.5 million, or 31.8%, as compared to 2021. The increase was primarily attributable to the corresponding increase in 2016.equipment revenue and change in product mix.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $342.7 million for the nine months ended September 30, 2022, an increase of $1.5 million, or 0.5%, as compared to 2021. The increase was primarily attributable to increases in: i) bad debt expense of $8.4 million primarily due to the recovery of bad debt reserves in 2021 and ii) other general and administrative expenses of $5.9 million, offset by decreases in: i) legal expenses of $4.4 million and ii) sales and marketing expenses of $8.4 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $347.2 million for the nine months ended September 30, 2022, a decrease of $21.6 million, or 5.9%, as compared to 2021. The decrease was primarily attributable to (i) decreases in our satellite depreciation of $9.1 million, mainly related to our SPACEWAY 3 satellite which was fully depreciated at the end of the first quarter of 2021, (ii) decreases in amortization of intangibles of $2.2 million, and (iii) decreases in other property and equipment depreciation expense of $17.9 million. These decreases were partially offset by increases in amortization of our capitalized software of $6.5 million.
Interest income, net. Interest income, net totaled $29.7 million for the nine months ended September 30, 2022, an increase of $12.8 million, or 75.5%, as compared to 2021, primarily attributable to increases in the yield on our marketable investment securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, totaled $43.1 million for the nine months ended September 30, 2022, a decrease of $36.7 million, or 46.0%, as compared to 2021. The decrease was primarily attributable to a decrease of $30.8 million in wholesale subscribers.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 $4.9 million in capitalized interest relating to the EchoStar XXIV satellite program.
Services and other revenue - DISH Network from Corporate and OtherGains (losses) on investments, net. Gains (losses) on investments, net totaled $48.1 million in gains for the nine months ended September 30, 2017 increased by $2.6 million, or 23.5%, to $13.9 million2022, as compared to the same period$113.0 million in 2016. The increase was primarily attributable to an increase in rental income relating to certain lease agreements pursuant to which DISH Network leases certain real estate from us.
Services and other revenue - other. “Services and other revenue - other” totaled $865.8 milliongains for the nine months ended September 30, 2017, an increase2021, a negative change of $45.7 million or 5.6%, compared$64.9 million. The change was related to the same period in 2016.
Servicesnet decreased gains on marketable investment securities and other revenue - other from our Hughes segment for the nine months ended September 30, 2017 increased by $53.9 million, or 6.9%, to $833.1 million compared to the same period in 2016. The increase was primarily attributable to increases in salesequity securities of broadband services of $51.5 million to our domestic and international consumers, $8.2 million to our domestic enterprise customers and $3.8 million to our telecom systems customers, partially offset by a decrease of $9.8 million to our international enterprise customers.
Services and other revenue - other from our ESS segment for the nine months ended September 30, 2017 decreased by $9.1 million, or 20.6%, to $35.2 million compared to the same period in 2016. The decrease was primarily attributable to decreases in sales of transponder services due to expired service contracts.
Equipment revenue - DISH Network. “Equipment revenue - DISH Network” totaled $0.2 million for the nine months ended September 30, 2017, a decrease of $6.8 million or 97.5%, compared to the same period in 2016 primarily from our Hughes segment. The decrease in revenue was primarily due to the decrease in unit sales of broadband equipment to dishNET as a result of the MSA. See Note 16 in the notes to condensed consolidated financial statements in Item 1 of this report for additional information about the MSA.
Equipment revenue - other. “Equipment revenue - other” totaled $173.6 million for the nine months ended September 30, 2017, an increase of $13.6 million or 8.5%, compared to the same period in 2016 primarily from our Hughes segment. The increase was mainly due to an increase of $23.7 million in sales of broadband equipment to our domestic enterprise customers and an increase of $6.1 million to our domestic and international consumers. The increase was partially offset by a decrease in sales of broadband equipment to our telecom systems customers of $11.3 million, our international enterprise customers of $2.9$33.8 million and our government customersa net loss of $2.8 million.
Cost of sales - services and other. “Cost of sales - services and other” totaled $404.4$28.3 million for the nine months ended September 30, 2017, an increase of $19.5 million or 5.1%, compared to the same period in 2016.
Cost of sales - services and other from our Hughes segment for the nine months ended September 30, 2017 increased by $18.5 million, or 5.5%, to $352.9 million compared to the same period in 2016. The increase was primarily attributable to an increase in the costs of broadband services provided to our domestic and international consumers, domestic enterprise customers, and telecom systems customers primarily due to the increase in sales of broadband services.
Cost of sales - services and other from our ESS segment for the nine months ended September 30, 2017 increased by $0.8 million, or 1.7%, to $48.9 million compared to the same period in 2016. The increase was primarily due to rental expenses for the lease of certain real estate and collocation and antenna space from DISH Network in 2017.
Cost of sales - equipment. “Cost of sales - equipment” totaled $153.9 million for the nine months ended September 30, 2017, an increase of $10.6 million or 7.4%, compared to the same period in 2016 primarily from our Hughes segment. The increase was primarily attributable to an increase of $20.8 million in equipment costs related to the increaseexit of our investment in sales to our domestic and international consumers and enterprise customers, partially offset by a decreaseDish Mexico in 2022.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
Selling, general and administrative expenses.Equity in earnings (losses) of unconsolidated affiliates, net “Selling, general and administrative expenses”. Equity in earnings (losses) of unconsolidated affiliates, net totaled $263.8$4.4 million in losses for the nine months ended September 30, 2017, an increase of $23.4 million or 9.7%,2022, as compared to the same period in 2016. The increase was primarily related to an increase of $28.9$2.6 million in marketing and promotional costs primarily attributable to our domestic and international consumer broadband sales in our Hughes segment and an increase of $2.5 million in litigation expense in 2017, partially offset by a decrease of $8.1 million in general and administrative expenses.
Research and development expenses. “Research and development expenses” totaled $23.4 millionlosses for the nine months ended September 30, 2017,2021, a decreasenegative change of $1.8 million. The change was related to net increased losses from our investments in our equity method investees.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), nettotaled $0.1 million or 0.3%, compared to the same period in 2016. Our research and development activities vary based on the activity level and scope of other engineering and customer related development contracts.
Depreciation and amortization. “Depreciation and amortization” expenses totaled $379.9 millionlosses for the nine months ended September 30, 2017, an increase of $55.2 million or 17.0%,2022, as compared to the same period in 2016. The increase was primarily related to an increase of $34.4$10.0 million in depreciation expense of the EUTELSAT 65 West A, EchoStar XIX and EchoStar XXIII satellites that were placed into service in the third quarter of 2016, and the first and second quarters of 2017, respectively, an increase of $17.0 million in depreciation expense relating to domestic and international customer rental equipment, an increase of $11.0 million in depreciation expense relating to machinery and equipment and an increase of $6.9 million in amortization expense relating to the development of externally marketed software, partially offset by a decrease of $11.4 million in amortization expense from certain fully amortized other intangible assets in our Hughes segment and Corporate and Other.
Interest income. “Interest income” totaled $30.3 millionlosses for the nine months ended September 30, 2017, an increase2021, a positive change of $16.6 million compared$10.0 million. The change was due to the samenet impact of foreign exchange rate fluctuations of certain foreign currencies during the period, in 2016. The increase was primarily attributablerelated to the increase in our marketable investmentsIndian Rupee and an increase in yield percentage in 2017 when compared to 2016.Latin American currencies.
Interest expense,Other, net. Other, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $156.5 million for the nine months ended September 30, 2017, an increase of $76.1 million or 94.7%, compared to the same period in 2016. The increase was primarily due to an increase in interest expense of $51.0 million relating to the issuance of 2026 Notes in the third quarter of 2016 and a decrease of $24.9 million in capitalized interest relating to the EchoStar XIX and EchoStar XXIII satellites that were placed into service in the first and second quarters of 2017, respectively.
Gains and impairment on investments, net. “Gains and impairment on investments, net” totaled $30.7$2.2 million in gains for the nine months ended September 30, 2017, an increase of $22.5 million,2022, as compared to the same period in 2016. The increase was primarily due to an increase of $19.9$12.9 million in gains on our trading securities in the third quarter of 2017, a gain of $8.9 million from the sale of our investment in Invidi Technologies Corporation to an entity owned in part by DISH Network in the first quarter of 2017, partially offset by an other than temporary impairment loss of $3.3 million on certain strategic equity securities in our marketable investment securities in 2017 and a decrease of $2.8 million in realized gains on our securities classified as available-for-sale in 2017.
Equity in earnings of unconsolidated affiliates, net. “Equity in earnings of unconsolidated affiliates, net” totaled $15.6 million in earningslosses for the nine months ended September 30, 2017, an increase2021, a positive change of $6.6 million or 73.9%, compared to the same period in 2016.$15.1 million. The increasechange was primarily relatedattributable to an increase in earnings from our investment in Dish Mexico, partially offset by a decrease in earnings from our investment in Deluxe/EchoStar LLC.
Other, net. “Other, net” totaled $8.2litigation expense of $16.8 million in income for the nine months ended September 30, 2017, an increase of $2.7 million or 48.5%, compared to the same period in 2016. The increase was primarily related to dividends of $5.8 million received from certain strategic equity investments in 2017, a favorable foreign exchange impact of $2.0 million in 2017, and $1.5 million in a protective put associated with our trading securities in 2016, partially offset by a $6.8 million for a provision recorded in the first half of 2015 in connection with Federal Communications Commission (“FCC”) regulatory fees, which was reversed in the first quarter of 2016.2021.
Income tax provisionbenefit (provision), net. Income tax expensebenefit (provision), net was $9.1$(51.4) million for the nine months ended September 30, 2017, a decrease in expense of $52.2 million or 85.2%,2022, as compared to the same period in 2016. Our effective income tax rate was 11.0% and 35.2%$(63.0) million for the nine months ended September 30, 20172021. Our effective income tax rate was 30.2% and 2016,30.6% for the nine months ended September 30, 2022 and 2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 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 nine months ended September 30, 20172021 were primarily due to excluded foreign losses where the recognitionCompany carries a full valuation allowance and the impact of state and local taxes.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. Among other provisions, the IRA includes a one-time15% corporate minimum tax benefit forrate applied to certain large corporations and a 1% excise tax on corporate stock repurchases made after December 31, 2022. We do not expect the revaluation ofIRA to have a material impact on our deferred tax assets and liabilities dueconsolidated financial statements.
Net income (loss) attributable to aEchoStar Corporation common stock. The following table reconciles the change in our state effective tax rate as aNet income (loss) attributable to EchoStar Corporation common stock:
| | | | | | | | |
| | Amounts |
Net income (loss) attributable to EchoStar Corporation for the nine months ended September 30, 2021 | | $ | 149,223 | |
Decrease (increase) in interest expense, net of amounts capitalized | | 36,723 | |
Increase (decrease) in other, net | | 15,120 | |
Increase (decrease) in interest income, net | | 12,763 | |
Decrease (increase) in income tax benefit (provision), net | | 11,680 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 9,992 | |
Increase (decrease) in net income (loss) attributable to non-controlling interest | | 2,317 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (1,845) | |
Increase (decrease) in operating income (loss), including depreciation and amortization | | (43,359) | |
Increase (decrease) in gains (losses) on investments, net | | (64,910) | |
Net income (loss) attributable to EchoStar Corporation for the nine months ended September 30, 2022 | | $ | 127,704 | |
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
result of the Share Exchange, the increase in our valuation allowance associated with unrealized gains that are capital in nature, and change in the amount of unrecognized tax benefit from uncertain tax positions. The tax benefit recognized from the change in our effective tax rate was partially offset by the increase in our valuation allowance associated with certain state and foreign losses. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2016 were primarily due to research and experimentation credits, partially offset by state and local taxes.
Net income attributable to EchoStarEBITDA. “Net income attributable to EchoStar” was $79.3 million for the nine months ended September 30, 2017, a decrease of $62.4 million or 44.0%, compared to the same period in 2016. The decrease was primarily due to (i) an increase in interest expense of $76.1 million, (ii) a decrease in operating income, including depreciation and amortization, of $63.8 million and (iii) a decrease of $22.8 million in income from discontinued operations in 2017. The decrease was partially offset by (i) a decrease in income tax expense of $52.2 million, (ii) an increase of $22.5 million in gains on investments, net of losses and impairments, (iii) an increase of $16.6 million in interest income, (iv) an increase of $6.6 million in equity in earnings of unconsolidated affiliates, net, and (v) an increase in other income of $2.7 million.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA was $588.0 million for the nine months ended September 30, 2017, an increase of $22.9 million or 4.0%, compared to the same period in 2016. The increase was primarily due to (i) an increase of $19.3 million in gains on our trading securities, (ii) an increase of $6.6 million in equity in earnings of unconsolidated affiliates, net and (iii) an increase in other income of $2.7 million. The increase was partially offset by a decrease in operating income, excluding depreciation and amortization, of $8.6 million. 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 the accompanying financial statements.our Consolidated Financial Statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2022 | | 2021 | | Amount | | % |
Net income (loss) | | $ | 118,968 | | | $ | 142,804 | | | $ | (23,836) | | | (16.7) | |
Interest income, net | | (29,677) | | | (16,914) | | | (12,763) | | | 75.5 | |
Interest expense, net of amounts capitalized | | 43,125 | | | 79,848 | | | (36,723) | | | (46.0) | |
Income tax provision (benefit), net | | 51,367 | | | 63,047 | | | (11,680) | | | (18.5) | |
Depreciation and amortization | | 347,224 | | | 368,864 | | | (21,640) | | | (5.9) | |
Net loss (income) attributable to non-controlling interests | | 8,736 | | | 6,419 | | | 2,317 | | | 36.1 | |
EBITDA | | $ | 539,743 | | | $ | 644,068 | | | $ | (104,325) | | | (16.2) | |
|
| | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance |
| | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Net income | | $ | 79,675 |
| | $ | 141,762 |
| | $ | (62,087 | ) | | (43.8 | ) |
| | | | | | | | |
Interest income and expense, net | | 126,156 |
| | 66,650 |
| | 59,506 |
| | 89.3 |
|
Income tax provision | | 9,073 |
| | 61,258 |
| | (52,185 | ) | | (85.2 | ) |
Depreciation and amortization | | 379,939 |
| | 324,743 |
| | 55,196 |
| | 17.0 |
|
Net income from discontinued operations | | (6,454 | ) | | (29,213 | ) | | 22,759 |
| | (77.9 | ) |
Net income attributable to noncontrolling interests | | (351 | ) | | (20 | ) | | (331 | ) | | * |
|
EBITDA | | $ | 588,038 |
| | $ | 565,180 |
| | $ | 22,858 |
| | 4.0 |
|
* Percentage is not meaningful.
The following table reconciles the change in EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the nine months ended September 30, 2021 | | $ | 644,068 | |
Increase (decrease) in other, net | | 15,120 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 9,992 | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | 2,317 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (1,845) | |
Increase (decrease) in gains (losses) on investments, net | | (64,910) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (64,999) | |
EBITDA for the nine months ended September 30, 2022 | | $ | 539,743 | |
Segment Operating Results and Capital Expenditures
Nine Months Ended
The following tables present our total revenue, capital expenditures and EBITDA by segment for the nine months ended September 30, 2017 Compared2022, as compared to the Nine Months Endednine months ended September 30, 20162021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the nine months ended September 30, 2022 | | | | | | | | |
Total revenue | | $ | 1,475,512 | | | $ | 14,305 | | | $ | 8,420 | | | $ | 1,498,237 | |
Capital expenditures | | 176,665 | | | — | | | 72,709 | | | 249,374 | |
EBITDA | | 546,108 | | | 9,658 | | | (16,023) | | | 539,743 | |
| | | | | | | | |
For the nine months ended September 30, 2021 | | | | | | | | |
Total revenue | | $ | 1,465,073 | | | $ | 12,808 | | | $ | 9,195 | | | $ | 1,487,076 | |
Capital expenditures | | 228,641 | | | — | | | 123,362 | | | 352,003 | |
EBITDA | | 605,742 | | | 6,481 | | | 31,845 | | | 644,068 | |
|
| | | | | | | | | | | | | | | | |
| | Hughes | | EchoStar Satellite Services | | Corporate and Other | | Consolidated Total |
| | (In thousands) |
For the Nine Months Ended September 30, 2017 | | |
| | |
| | |
| | |
|
Total revenue | | $ | 1,072,143 |
| | $ | 295,785 |
| | $ | 11,532 |
| | $ | 1,379,460 |
|
Capital expenditures | | $ | 270,624 |
| | $ | 21,351 |
| | $ | 118,170 |
| | $ | 410,145 |
|
EBITDA | | $ | 342,693 |
| | $ | 241,873 |
| | $ | 3,472 |
| | $ | 588,038 |
|
| | | | | | | | |
For the Nine Months Ended September 30, 2016 | | |
| | |
| | |
| | |
|
Total revenue | | $ | 1,021,451 |
| | $ | 305,919 |
| | $ | 7,308 |
| | $ | 1,334,678 |
|
Capital expenditures | | $ | 261,241 |
| | $ | 50,762 |
| | $ | 165,815 |
| | $ | 477,818 |
|
EBITDA | | $ | 353,505 |
| | $ | 257,181 |
| | $ | (45,506 | ) | | $ | 565,180 |
|
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
Hughes Segment
| | | | For the Nine Months Ended September 30, | | Variance | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | Amount | | % | | | For the nine months ended September 30, | | Variance |
| | (Dollars in thousands) | | | 2022 | | 2021 | | Amount | | % |
Total revenue | | $ | 1,072,143 |
| | $ | 1,021,451 |
| | $ | 50,692 |
| | 5.0 |
| Total revenue | | $ | 1,475,512 | | | $ | 1,465,073 | | | $ | 10,439 | | | 0.7 | |
Capital expenditures | | $ | 270,624 |
| | $ | 261,241 |
| | $ | 9,383 |
| | 3.6 |
| Capital expenditures | | 176,665 | | | 228,641 | | | (51,976) | | | (22.7) | |
EBITDA | | $ | 342,693 |
| | $ | 353,505 |
| | $ | (10,812 | ) | | (3.1 | ) | EBITDA | | 546,108 | | | 605,742 | | | (59,634) | | | (9.8) | |
Revenue
Hughes segment totalTotal revenue was $1.5 billion for the nine months ended September 30, 2017 increased by $50.72022, an increase of $10.4 million, or 5.0%0.7%, as compared to the same period in 2016. The increase was2021. Services and other revenue decreased primarily due to an increase of $57.6 million inlower sales of broadband equipment and services to our domestic and international consumers, an increaseconsumer customers of $31.9$69.6 million indue to lower broadband consumer customers, partially offset by higher sales of broadband equipment and services to our domestic enterprise customers and an increase of $3.8$5.9 million in sales of servicesand to our telecom systems customers. The increase wasmobile satellite system and other customers of $3.5 million. Equipment revenue increased primarily due to increases in hardware sales to our enterprise customers of $68.4 million mainly associated with a certain customer in North America and to international customers, and increases in hardware sales to our mobile satellite system customers of $5.1 million, partially offset by a decrease of $16.1 milliondecreases in hardware sales of broadband equipment and services to DISH Network, a decrease of $14.1$2.8 million in sales of broadband equipment to our telecom systems customers and government customers, and a decreaseconsumer customers. These variances reflect an estimated negative impact of $12.7 million in salesexchange rate fluctuations of broadband equipment and services to our international enterprise customers.$5.1 million.
Capital Expenditures
Hughes segment capital expenditures were $176.7 million for the nine months ended September 30, 2017 increased by $9.4 million, or 3.6%, compared to the same period in 2016, primarily as a result of an increase of $95.4 million in expenditures in our domestic and international businesses. The increase was mainly associated with customer rental equipment for consumer services provided on the EUTELSAT 65 West A and EchoStar XIX satellites that were placed into service in the third quarter of 2016 and the first quarter of 2017, respectively. The increase was partially offset by2022, a decrease of $84.6$52.0 million, or 22.7%, as compared to 2021, primarily due to decreases in expenditures on other satellitesassociated with our consumer business and decreases in expenditures related to the construction of our satellite-related ground infrastructure, primarily resulted from the launch of service on EUTELSAT 65 West A and EchoStar XIX satellites.infrastructure.
The following table reconciles the change in the Hughes Segment EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the nine months ended September 30, 2021 | | $ | 605,742 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 10,714 | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | 2,317 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | 11 | |
Increase (decrease) in gains (losses) on investments, net | | (1,883) | |
Increase (decrease) in other, net | | (4,303) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (66,490) | |
EBITDA for the nine months ended September 30, 2022 | | $ | 546,108 | |
Hughes segment EBITDAESS Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2022 | | 2021 | | Amount | | % |
Total revenue | | $ | 14,305 | | | $ | 12,808 | | | $ | 1,497 | | | 11.7 | |
| | | | | | | | |
EBITDA | | 9,658 | | | 6,481 | | | 3,177 | | | 49.0 | |
Total revenue was $14.3 million for the nine months ended September 30, 2017 was $342.7 million, a decrease2022, an increase of $10.8$1.5 million, or 3.1%11.7%, compared to the same period in 2016. The decrease was2021, primarily due to an increase of $28.9 million in marketing and promotional costs mainly attributable our domestic and international consumer broadband sales and an other than temporary impairment loss of $3.3 million on certain strategic equity securities in our marketable investment securities in 2017. The decrease was partially offset by an increase of $22.1 million in gross margin.
EchoStar Satellite Services Segment
|
| | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance |
| | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Total revenue | | $ | 295,785 |
| | $ | 305,919 |
| | $ | (10,134 | ) | | (3.3 | ) |
Capital expenditures | | $ | 21,351 |
| | $ | 50,762 |
| | $ | (29,411 | ) | | (57.9 | ) |
EBITDA | | $ | 241,873 |
| | $ | 257,181 |
| | $ | (15,308 | ) | | (6.0 | ) |
transponder services provided to third parties.
Revenue
ESS segment total revenueEBITDA was $9.7 million for the nine months ended September 30, 2017 decreased by $10.12022, an increase of $3.2 million, or 3.3%49.0%, as compared to the same period in 2016,2021, primarily attributable to decreases in sales of transponder services due to expired service contracts.the increase in overall ESS segment revenue and lower expenses.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
Capital Expenditures
ESS segment capital expenditures for the nine months ended September 30, 2017 decreased by $29.4 million, or 57.9%, compared to the same period in 2016, primarily related to a decrease in expenditures on the EchoStar 105/SES-11 satellite.
EBITDA
ESS segment EBITDA for the nine months ended September 30, 2017 was $241.9 million, a decrease of $15.3 million, or 6.0%, compared to the same period in 2016. The decrease in EBITDA for our ESS segment was primarily due to a decrease of $10.9 million in gross margin and a decrease of $3.8 million due to a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016.
Corporate and Other Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2022 | | 2021 | | Amount | | % |
Total revenue | | $ | 8,420 | | | $ | 9,195 | | | $ | (775) | | | (8.4) | |
Capital expenditures | | 72,709 | | | 123,362 | | | (50,653) | | | (41.1) | |
EBITDA | | (16,023) | | | 31,845 | | | (47,868) | | | * |
Corporate and Other is comprised of various corporate departments (primarily Executive, Strategic Development, Human Resources, IT, Finance, Real Estate, and Legal) as well as other activities that have not been assigned to our operating segments, including costs incurred in certain satellite development programs and other business development activities, our centralized treasury activities and gains (losses) from certain of our investments.
|
| | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | Variance |
| | 2017 | | 2016 | | Amount | | % |
| | (Dollars in thousands) |
Total revenue | | $ | 11,532 |
| | $ | 7,308 |
| | $ | 4,224 |
| | 57.8 |
|
Capital expenditures | | $ | 118,170 |
| | $ | 165,815 |
| | $ | (47,645 | ) | | (28.7 | ) |
EBITDA | | $ | 3,472 |
| | $ | (45,506 | ) | | $ | 48,978 |
| | * |
|
* Percentage is not meaningful.
Capital Expenditures
For the nine months ended September 30, 2017, Corporate and Other capital expenditures decreased by $47.6 million, or 28.7%, compared to the same period in 2016, primarily related to a decrease in satellite expenditures of $72.7 million on the EchoStar XIX satellite, a decrease in satellite expenditures of $26.2 million on the EchoStar XXIII satellite, and a decrease in satellite expenditures of $10.3 million on the EchoStar XXI satellite, partially offset by an increase in satellite expenditures of $61.9 million on the EchoStar XXIV satellite. The EchoStar XIX satelliteTotal revenue was launched in December 2016 and placed into service in the first quarter of 2017. The EchoStar XXIII satellite was launched in March 2017 and was placed into service in the second quarter of 2017. The EchoStar XXI satellite is intended to be used by EchoStar Mobile in providing mobile satellite services in the EU. It was launched in June 2017 and is anticipated to be placed into service in the fourth quarter of 2017. The EchoStar XXIV satellite is intended to provide additional capacity for the Hughes broadband services in North America and certain Latin American countries.
EBITDA
For the nine months ended September 30, 2017, Corporate and Other EBITDA was a gain of $3.5 million compared to a loss of $45.5$8.4 million for the nine months ended September 30, 2016. The change of $49.02022, which is primarily flat compared to 2021.
Capital expenditures were $72.7 million was primarily related to (i) an increase of $19.9 million in gains on our trading securities infor the third quarter of 2017, (ii) a gain of $8.9 million from the sale of our investment in Invidi Technologies Corporation to an entity owned in part by DISH Network in the first quarter of 2017, (iii)nine months ended September 30, 2022, a decrease of $7.9$50.7 million, as compared to 2021, primarily due to decreases in general and administrative expenses, (iv) an increase of $6.6 million in equity in earnings of unconsolidated affiliates, net in 2017, (v) dividends of $5.8 million received from certain strategic equity investments in 2017, (vi) an increase of $2.3 million in rental income relatingexpenditures related to certain lease agreements pursuant to which DISH Network leases certain real estate from us, and (vii) a favorable foreign exchange impact of $1.7 million in 2017. the EchoStar XXIV satellite program.
The reduction in loss was partially offset by $3.0 million attributable to a provision recordedfollowing table reconciles the change in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016.Corporate and Other Segment EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the nine months ended September 30, 2021 | | $ | 31,845 | |
Increase (decrease) in other, net | | 19,425 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | (722) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (1,686) | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (1,858) | |
Increase (decrease) in gains (losses) on investments, net | | (63,027) | |
EBITDA for the nine months ended September 30, 2022 | | $ | (16,023) | |
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. See “Quantitative and Qualitative Disclosures about Market Risk” for further discussion regarding our marketable investment securities.
As of September 30, 2017 and December 31, 2016,2022 our cash, cash equivalents and current marketable investment securities totaled $3.28$1.6 billion, and $3.09$0.7 billion respectively.
As of September 30, 2017 and December 31, 2016,which we held $485.0 million and $522.5 million, respectively, ofas marketable investment securities, consisting of various debt and equity instruments including corporate bonds, corporate equity securities, government bonds and mutual funds.
Cash Flow Activities
The following discussion highlightstable summarizes our cash flowflows provided by (used for) operating, investing and financing activities, foras reflected in the nine months ended September 30, 2017.
Consolidated Statement of Cash Flows:
| | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2022 | | 2021 | |
Operating activities | | $ | 343,317 | | | $ | 427,862 | | | $ | (84,545) | |
Investing activities | | 115,008 | | | 230,147 | | | (115,139) | |
Financing activities | | (84,666) | | | (1,117,377) | | | 1,032,711 | |
Effect of exchange rates on cash and cash equivalents | | (3,123) | | | (3,114) | | | (9) | |
Net increase (decrease) in cash and cash equivalents | | $ | 370,536 | | | $ | (462,482) | | | $ | 833,018 | |
Cash flows fromprovided by (used for) operating activities. We typically reinvest the cash flow from operating activities in our business. For the nine months ended September 30, 2017, we reported net cash inflows from operating activities of $591.9 decreased by $84.5 million an increase of $17.2 million, compared to the same period in 2016. The increase in cash inflows was primarily attributable to an increase of $160.1 million resulting from changes in operatingnet income (loss) of $(23.8) million, depreciation and amortization of $(21.6) million, gains (losses) on investments, net of $64.9 million, foreign currency translation losses (gains), net of $(10.0) million, deferred tax provision (benefit), net of $(17.0) million, and other, net of $18.9 million and changes in assets and liabilities, related to timing differences, partially offset by lower net income of $142.9 million adjusted to exclude: (i) “Depreciation and amortization;” (ii) “Equity in earnings of unconsolidated affiliates, net;” (iii) “Gain and impairment on investments, net;” (iv) “Stock-based compensation;” (v) “Deferred tax provision;” (vi) “Other, net;” (vii) “Dividends received from unconsolidated entities;” and (viii) “$(99.0) million.
Proceeds from sale of trading securities”.
Cash flows fromprovided by (used for) investing activities. Our investing activities generally include purchases and sales of marketable investment securities, capital expenditures, acquisitions and strategic investments. For the nine months ended September 30, 2017, we reported net cash outflows from investing activities of $374.4 decreased by $115.1 million a decrease of $385.4 million, comparedprimarily attributable to the same period in 2016. The decrease in cash outflows was primarily related to a decrease of $296.2 million in purchases ofour marketable investment securities net of sales and maturities, andactivity, other investments net activity, a decrease of $86.9 million in capital expenditures, net of related refunds, in 2017 when compared to the same period in 2016 and cash proceeds of $17.8 million from the sale of our investment in Invidi Technologies Corporation to an entity owned in part by DISH Network in the first quarter of 2017. The decrease was partially offset by a decrease of $8.2 million in restricted cash and marketable investment securities and an increase of $7.5 million in expenditures for externally marketed software.property and equipment, and the India JV formation.
Cash flows fromprovided by (used for) financing activities. Our financing activities generally include proceeds related to the issuance of debt and cash used for improved by $1.0 billion primarily attributable the repurchase redemption or paymentand maturity of debtour 7 5/8% Senior Unsecured Notes due 2021 of $901.8 million and capital lease obligations and the proceeds from Class A common stock options exercised and stock issued under our stock incentive plans and employee stock purchase plan. For the nine months ended September 30, 2017, we reported net cash inflows from financing activities of $8.7 million, a decrease in cash inflows of $1.47 billion, compared to the same period in 2016. The decrease in cash inflows was primarily due to proceedsdecreases in treasury share repurchases of $1.5 billion from the issuance of the 2026 Notes in the third quarter of 2016 and a decrease of $4.5 million in net proceeds from Class A common stock issued under our employee stock purchase plan in 2017, partially offset by an increase of $28.5 million in net proceeds from Class A common stock options exercised issued under our stock incentive plans in 2017, a decrease of $6.6 million in capital lease obligation payments relating to our uplink equipment, and a decrease of $5.9 million in payments of debt issuance costs in 2017.$140.1 million.
Obligations and Future Capital Requirements
Contractual Obligations
As of September 30, 2017,2022, our satellite-related obligationscommitments were approximately $1.01 billion. Our satellite-related obligations$257.0 million. These primarily include payments pursuant toto: i) agreements for the construction of the EchoStar XXIV satellite; payments pursuant tosatellite, ii) the EchoStar XXIV launch services contractscontract, iii) regulatory authorizations, and regulatory authorizations; executorynon-lease costs forassociated with our capitalfinance lease satellites; costs under satellite service agreements; andsatellites, in-orbit incentives relating to certain satellites; as well assatellites and commitments for long-term satellite operating leases and satellite service arrangements.
In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Off-Balance Sheet Arrangements
Other than the transactions described below, weWe generally do not engage in off-balance sheet financing activities or use derivative financial instruments for hedge accounting or speculative purposes.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Letters of Credit
The following table presents the components of our letters of credit as of September 30, 2017, we had $35.5 million of letters of credit and insurance bonds. Of this amount, $12.9 million was secured by restricted cash, $0.4 million was related to insurance bonds, and $22.1 million was issued under credit arrangements available to our foreign subsidiaries. 2022:
| | | | | | | | |
| | Amounts |
Restricted cash | | $ | 14,837 | |
Insurance bonds | | 7,305 | |
Credit arrangement available to our foreign subsidiaries | | 26,939 | |
Total letters of credit | | $ | 49,081 | |
Certain letters of credit are secured by assets of our foreign subsidiaries.
Satellites
As our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity. We may also construct, acquire or lease additional satellites or satellite capacity in the future to provide satellite services at additional orbital locations or to improve the quality of September 30, 2017, we had foreign currency forward contracts with a notional value of $6.5 million in place to partially mitigate foreign currency exchange risk. From time to time, 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.our satellite services.
Satellite Insurance
We historically havegenerally do not carriedcarry in-orbit insurance on our satellites or payloads because we have assessed that the cost of insurance was uneconomicalis not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our indebtedness,joint venture agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”), we are required to maintain insurance for the Al Yah 3 Brazilian payload during the commercial in-orbit service of such payload, subject to certain limitations on coverage, to maintain in-orbit insurance for our SPACEWAY 3, EchoStar XVI,coverage. Our satellites and EchoStar XVII satellites. Based on economic analysis of the current insurance market we obtained launch plus one year in-orbit insurance, subject to certain limitations, for the EchoStar XIX, EchoStar XXI and EchoStar XXIII satellites. Additionally, we obtained certain launch and in-orbit insurance for our interest in the EchoStar 105/SES-11 satellite. All other satellites,payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance. We will continue to assess circumstances going forward and make insuranceinsurance-related decisions on a case by casecase-by-case basis.
Future Capital Requirements
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated through our operations, to fund our business. We currently dependRevenue in our ESS segment depends largely on DISH Network for a significant portionour ability to continuously make use of our revenue. The loss of, or a significant reductionavailable satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Consumer revenue in provision of satellite services would significantly reduce our revenueHughes segment depends on our success in adding new and materially adversely impactretaining existing subscribers and driving higher ARPU. Revenue in our results of operations.enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. There can be no assurance that we will have positive cash flows from operations. Furthermore, if we experience negative cash flows, our existing cash and marketable investment securities balances may be reduced.
We have a significant amount of outstanding indebtedness. As of September 30, 2017,2022, our total indebtedness was $3.64 billion, of which $280.9 million related$1.5 billion. Refer to capital lease obligations. See our most recent Form 10-K for a discussion of the terms of our indebtedness.long-term debt. Our liquidity requirements will continue to be significant, primarily due to our remaining debt service requirements. We may from time to time seek to purchase amounts of our outstanding debt in open market purchases, privately negotiated transactions or otherwise, depending on market conditions, our liquidity needs and other factors. The amounts we may repurchase may be material. In addition, ourthe future, we may require material capital expenditures are likely to increase if we make significant acquisitions or additional investments in infrastructure, technologies or joint ventures necessary to support and expand our business, or if we decide to purchase or build oneadditional satellites or more additional satellites. Furthermore, we expect to be a federal cash taxpayer for 2017 which will require additional liquidity.other technologies or assets. Other aspects of our business operations may also require additional capital. We periodically evaluate various strategic initiatives, the pursuit of which could also require usexpect to invest or raise significant additional capital, which may not be available on acceptable terms or at all.owe U.S. Federal income tax for 2022.
We anticipate that our existing cash and marketable investment securities are sufficient to fund the currently anticipated operations of our business through the next twelve months.
Satellites
As our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity. We may also construct or lease additional satellites in the future to provide satellite services at additional orbital locations or to improve the quality of our satellite services.
ItemITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ContinuedCONTINUED
Stock Repurchases
Pursuant to a stock repurchase program approved byOn November 2, 2021, our boardBoard of directors, we areDirectors authorized us to repurchase up to $500.0 million of our outstanding shares of Class A common stock commencing January 1, 2022 through and including December 31, 2018. As2022 (the “2022 Authorization”). In addition, on October 20, 2022, our Board of Directors authorized us to repurchase up to $500.0 million of our Class A common stock commencing January 1, 2023 through and including December 31, 2023. Purchases under our repurchase authorizations may be made through privately negotiated transactions, open market repurchases, one or more trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or otherwise, subject to market conditions and other factors. We may elect not to purchase the maximum amount or any of the shares allowable under these authorizations and we may also enter into additional share repurchase programs authorized by our Board of Directors. During the three and nine months ended September 30, 2022, we repurchased 593,643 and 3,980,612 shares of our Class A common stock for $11.4 million and $89.3 million, respectively under this program. The remaining authorization under the 2022 Authorization was $410.7 million as of September 30, 2017, we have not repurchased any common stock under this program.2022.
CRITICAL ACCOUNTING POLICIES
SeasonalityOur critical accounting policies are described in Note 2. Summary of Significant Accounting Policies in our Consolidated Financial Statements in our Form 10-K. There have been no significant changes in our critical accounting policies from those presented in our Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimates are described in our Form 10-K under the heading Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes in our critical accounting estimates from those presented in our Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies in our Consolidated Financial Statements.
SEASONALITY
For our Hughes segment, service revenue is generally not impacted by seasonal fluctuations other than those associated with fluctuations related to sales and promotional activities. However, like many communications infrastructure equipment vendors, a higher amount of our hardware revenue occurs in the second half of the year due to our customers’ annual procurement and budget cycles. Large enterprises and operators often allocate their capital expenditure budgets at the beginning of their fiscal year (which often coincides with the calendar year). The typical sales cycle for large complex system procurements is six to 12 months, which often results in the customer expenditure occurring towards the end of the year. Customers often seek to expend the budgeted funds prior to the end of the year and the next budget cycle.
Our ESS segment is not generally affected by seasonal impacts.
InflationWe cannot predict with any certainty whether these trends will continue in the near future.
INFLATION AND SUPPLY CHAIN
Inflation has not materially affectedstarted to impact our operations duringin 2021 and we have continued to experience increased costs in certain functional areas including field services and customer care. We are unable to predict the past three years. We believe that ourextent or nature of any future inflationary pressure at this time. Our ability to increase the prices charged for our products and services in future periods will depend primarily on competitive pressures or contractual terms.
The worldwide interruptions and delays in the supply of components, materials and parts, although not materially impacting our operations during the nine months ended September 30, 2022, may impact our ability to timely provide equipment deliveries in the future. These interruptions and delays could also increase the cost of our equipment, which we may not be able to pass onto our customers.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue - DISH Network. “ServicesServices and other revenue - DISH Network” primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, telemetry, tracking and control, professional services, facilities rental revenue and other services provided to DISH Network. “Services and other revenue - DISH Network” also includessatellite uplinking/downlinking, subscriber wholesale service fees for the HughesHughesNet service sold to dishNET.professional services and facilities rental revenue.
Services and other revenue - other
. “Services and other revenue - other” primarily includes the sales of enterprise and consumer broadband services, as well as maintenance and other contracted services. “Services and other revenue - other” also includes revenue associated with satellite and transponder services, satellite uplinking/downlinking and other services provided to customers other than DISH Network.
Equipment revenue - DISH Network. “Equipment revenue - DISH Network” primarily includes sales of satellite broadband equipment and related equipment, related to the Hughes service, to DISH Network.
Equipment revenue - other. “Equipment revenue - other” primarily includes broadband equipment and networks sold to customers in our enterpriseconsumer and consumerenterprise markets.
Cost of sales - services and other. “CostCost of sales - services and other”other primarily includes the cost of broadband services provided to our consumer and enterprise and consumer customers, and to DISH Network, as well as the cost of providing maintenance and other contracted services. “Cost of sales - services, and other” also includes the costs associated with satellite and transponder services, telemetry, trackingleases and control,services, professional services and facilities rental costs, and other services provided to our customers, including DISH Network.rental.
Cost of sales - equipment. “CostCost of sales - equipment”equipment consists primarily of the cost of broadband equipment and networks soldprovided to customers in our consumer and enterprise and consumer markets, andmarkets. It also includes certain other costs associated with the deployment of equipment to DISH Network.our customers.
Selling, general and administrative expensesexpenses. . “Selling,Selling, general and administrative expenses”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 stock-based compensation expense. It also includes professional fees (e.g. legal, information systems and accounting services) and other itemsexpenses associated with facilities and administrative services provided by DISH Network and other third parties.services.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Research and development expenses. “ResearchResearch and development expenses”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”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. “InterestInterest expense, net of amounts capitalized”capitalized primarily includes interest expense associated with our debt and capitalfinance lease obligations (net of capitalized interest), and amortization of debt issuance costs.costs and interest expense related to certain legal proceedings.
Gains and impairment(losses) on investments, net. “Gains and impairmentGains (losses) on investments, net”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 include realized gains net of anyand losses on the sale or exchange of investments,our available-for-sale debt securities, other-than-temporary impairment losses on certainour available-for-sale securities, realized gains and losses on the sale or exchange of our marketable investmentequity securities and unrealized gains on our trading securities.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. “EquityEquity in earnings (losses) of unconsolidated affiliates, net”net includes earnings or losses from our investments accounted for underusing 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”Other, net primarily includes foreign exchange gains and losses, dividends received from our marketable investment securities and other non-operating income orand expense items that are not appropriately classified elsewhere in the Consolidated Statements of Operations in our condensed consolidated statements of operations.Consolidated Financial Statements.
Income (loss) from discontinued operations. “Income (loss) from discontinued operations” includes the condensed consolidated financial statements of the EchoStar Technologies businesses and certain other assets exchanged as a result of the Share Exchange.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Earnings before interest, taxes, depreciation and amortization, and Net income (loss) attributable to non-controlling interests (“EBITDA”). EBITDA is defined as “Net income”Net income (loss) excluding “InterestInterest income and expense, net, of amounts capitalized,” “InterestIncome tax benefit (provision), net, Depreciation and amortization, and Net income” “Income tax provision,” and “Depreciation and amortization.” (loss) attributable to non-controlling interests. EBITDA is not a measure determined in accordance with U.S. GAAP. This non-GAAP measure is reconciled to “Net income”Net income (loss) in our discussion of “ResultsResults of Operations”Operations above. 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.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.
SubscribersSubscribers. . “Subscribers”Subscribers include customers that subscribe to our Hughes segment’s HughesNet broadband services,service, through retail, wholesale and small/medium enterprise service channels.
ItemITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to our Form 10-K, under the heading Part II - Item 7A. Quantitative and Qualitative Disclosures About 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
Risk, for a more complete discussion of our risks. As of September 30, 2017,2022, our cash, cash equivalents and current marketable investment securities had a fair value of $3.28 billion. Of this amount, a total of $3.14 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 U.S. government and its agencies; and/or (d) instruments with similarmarket 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 usednot changed materially from those presented 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 current non-strategic investment portfolio of $3.14 billion as of September 30, 2017, a hypothetical 10% change in average interest rates during 2017 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 nine months ended September 30, 2017 of 1.9%. 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 2017 would have resulted in a decrease of approximately $5.6 million in annual interest income.
Strategic Marketable Investment Securities
As of September 30, 2017, we held current strategic investments in the publicly traded common stock of several companies with a fair value of $139.4 million. These investments, which are held for strategic and financial purposes, are concentrated in a small number of companies, are highly speculative and have experienced and continue to experience volatility. The fair value of these investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. In general, our strategic marketable investment securities portfolio is not significantly impacted by interest rate fluctuations as it currently consists solely of equity securities, the value of which is more closely related to factors specific to the underlying business. A hypothetical 10% adverse change in the market price of our public strategic equity investments would have resulted in a decrease of approximately $13.9 million in the fair value of these investments.
Form 10-K.
Restricted cash and marketable investment securities and investments in unconsolidated entities
Restricted cash and marketable investment securities
As of September 30, 2017, we had $13.7 million of restricted cash and marketable investment securities invested in: (a) cash; (b) debt instruments of the U.S. government and its agencies; (c) 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; (d) mutual funds; and (e) instruments with similar risk, duration and credit quality characteristics to the commercial paper described above. Based on our investment portfolio as of September 30, 2017, a hypothetical 10% increase in average interest rates would not have had a material impact on the fair value of our restricted cash and marketable investment securities.
Investments in unconsolidated entities
As of September 30, 2017, we had $165.3 million of noncurrent equity instruments that we hold for strategic business purposes and account for under the cost or equity methods of accounting. The fair value of these instruments is not readily determinable. We periodically review these investments and estimate fair value when there are indications of impairment. A hypothetical adverse change equal to 10% of the carrying amount of these equity instruments would have resulted in a decrease of approximately $16.5 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 desire to sell them we will not be able to obtain fair value for them.
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, 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.
Our objective in managing our exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, we may enter into foreign currency forward contracts, or take other measures, to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. As of September 30, 2017, we had $16.4 million of net foreign currency denominated receivables and payables outstanding, and foreign currency forward contracts with a notional value of $6.5 million in place to partially mitigate foreign currency exchange risk. The estimated fair values of the foreign exchange contracts were not material as of September 30, 2017. 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 would have been an estimated loss to the cumulative translation adjustment of $27.9 million as of September 30, 2017.
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 exchange risk.
ItemITEM 4. 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 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.Form 10-Q. 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 reportForm 10-Q such that the information required to be disclosed in our SECSecurities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the SECSecurities and Exchange Commission 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.
Changes in Internal Control overOver Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the third quarter of 2017three months ended September 30, 2022 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.
PART II — OTHER INFORMATION
ItemITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, seerefer to Part I, Item 1. Financial Statements —- Note 1414. Contingencies “Commitments and Contingencies — Litigation”- Litigation in this Form 10-Q.
ItemITEM 1A. RISK FACTORS
Item 1A, “RiskRisk Factors,” of our Form 10-K for the year ended December 31, 20162021 includes a detailed discussion of our risk factors. Except as provided below, for the nine months ended September 30, 2017, there were no material changes in our risk factors as previously disclosed.
The failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment could harm our results of operations.
Our Hughes segment has made substantial contractual commitments for satellite capacity based on our existing customer contracts and backlog. If our existing customer contracts were to be terminated prior to their respective expiration dates, we may be committed to maintaining excess satellite capacity for which we will have insufficient revenue to cover our costs, which would have a negative impact on our margins and results of operations. Alternatively, we may not have sufficient satellite capacity to meet demand. We generally only purchase satellite capacity based on existing contracts and bookings. Therefore, capacity for certain types of coverage in the future may not be readily available to us, and we may not be able to satisfy certain needs of our customers, which could result in a loss of possible new business and could negatively impact the margins for those services. Our ability to provide capacity for subscriber growth in our North American consumer market could also be adversely affected by regulations and/or legislation in the U.S. that enable or propose to enable the use of a portion of the frequency bands we currently use or in the future intend to use for satellite services, 5G mobile terrestrial services or other uses. These bands include the Ka-band, where we operate our broadband gateway earth stations, and other bands in which we may operate in the future. Such regulation or legislation could limit our ability to use the Ka-band and/or other bands, limit our flexibility to change the way in which we use the Ka-band and/or adversely impact our ability to use additional bands in the future. Other countries in which we currently, or may in the future, operate are also considering regulations that could similarly limit access to the Ka-band or other frequency bands. In addition, the fixed satellite services (“FSS”) industry has seen consolidation in the past decade, and today, the main FSS providers in North America and a number of smaller regional providers own and operate the current satellites that are available for our capacity needs. The failure of any of these FSS providers to replace existing satellite assets at the end of their useful lives or a downturn in their industry as a whole could reduce or interrupt the satellite capacity available to us. Our business and results of operations could be adversely affected if we are not able to renew our capacity leases at economically viable rates, if capacity is not available due to problems experienced by these FSS providers or if frequencies are not available to us.
Our business is subject to risks of adverse government regulation.
Our business is subject to varying degrees of regulation in the U.S. by the FCC, 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. For example, the FCC recently adopted an order in its “Spectrum Frontiers” proceeding under which a portion of the Ka-band, in which we operate our broadband gateway earth stations, has been enabled for 5G mobile terrestrial services, which could limit our flexibility to change the way in which we use Ka-band in the future and/or limit our access to and ability to use the Ka-band and/or other bands in the future. Other countries in which we currently, or may in the future, operate are also considering regulations that could limit access to the Ka-band or other frequency bands. The FCC has also opened a proceeding on non-geostationary satellites, which may adversely impact our ability to use certain spectrum for user terminals. Moreover, 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 have a material adverse effect on our ability to generate revenue and our overall competitive position and could result in our suffering serious harm to our reputation.
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, or fail to grant 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.
ItemITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were noPursuant to a stock repurchase program approved by our board of directors, we are authorized to repurchase up to $500.0 million of our Class A common stock through December 31, 2022. During the year ended December 31, 2021, we repurchased 10,941,872 shares of our Class A common stock.
The following table provides information regarding repurchases of our Class A common stock forduring the ninethree months ended September 30, 2017.2022:
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Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid Per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Disclosed Plans or Program | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased under the Plans or Program (1) |
July 1 - 31 | | 414,822 | | | $ | 19.15 | | | 414,822 | | | $ | 414,194 | |
August 1 - 31 | | 178,821 | | | 19.34 | | | 178,821 | | | 410,736 | |
September 1 - 30 | | — | | | — | | | — | | | 410,736 | |
Total | | 593,643 | | | $ | 19.20 | | | 593,643 | | | $ | 410,736 | |
(1) On November 2, 2021, our Board of Directors authorized us to repurchase up to $500.0 million of our Class A common stock commencing January 1, 2022 through and including December 31, 2022. All shares repurchased reflected in the table above have been converted to treasury shares.
ItemITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicableapplicable.
ItemITEM 4. MINE SAFETY DISCLOSURES
Not applicableapplicable.
ItemITEM 5. OTHER INFORMATION
Our Board of Directors previously authorized us to repurchase up to $500.0 million of our Class A common stock through December 31, 2017. Financial Results
On November 1, 2017,2, 2022, we issued a press release (the “Press Release”) announcing our Boardfinancial results for the quarter ended September 30, 2022. A copy of Directors extended this authorizationthe Press Release is furnished herewith as Exhibit 99.1. The foregoing information, including the exhibit related thereto, is furnished in response to repurchase up to $500.0 millionItem 2.02 of outstanding sharesForm 8-K and shall not be deemed “filed” for the purposes of our Class A common stock through open market repurchases including, without limitation, one or more trading plans in accordance with Rule 10b5-1 underSection 18 of the Securities Exchange Act of 1934, as amended, throughor otherwise, and including December 31, 2018.
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.
ItemITEM 6. EXHIBITS
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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 | | XBRL Taxonomy Extension Schema. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase. |
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* | Incorporated by reference. |
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** | Constitutes a management contract or compensatory plan or arrangement. |
(H) Filed herewith.
(I) Furnished herewith.
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportForm 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
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| | ECHOSTAR CORPORATION |
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| | ECHOSTAR CORPORATION |
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Date: November 8, 20172, 2022 | By: | /s/ Michael T. DuganHamid Akhavan |
| | Michael T. DuganHamid Akhavan |
| | Chief Executive Officer President and DirectorPresident |
| | (Principal Executive Officer and Principal Financial Officer) |
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Date: November 8, 2017 | By: | /s/ David J. Rayner
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| | David J. Rayner |
| | Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer |
| | (Principal Financial and Accounting Officer) |