UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019MARCH 31, 2020.
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number: 333-179121
Hughes Satellite Systems Corporation
(Exact name of registrant as specified in its charter)
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| | | | |
Colorado | | 45-0897865 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
100 Inverness Terrace East, | Englewood, | Colorado | | 80112-5308 |
(Address of principal executive offices) | | (Zip Code) |
| | |
(303) | 706-4000 |
| | Not Applicable |
(Registrant’s telephone number, including area code) | | (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☐ | Accelerated filer | ☐ | Emerging growth company | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 29, 2019,April 30, 2020, the registrant’s outstanding common stock consisted of 1,078 shares of common stock, $0.01 par value per share.
The registrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
* The registrant currently is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is filing this Quarterly Report on Form 10-Q on a voluntary basis. The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months as if it were subject to such filing requirements during the entirety of such period.
TABLE OF CONTENTS
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk | * |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | * |
Item 3. | Defaults Upon Senior Securities | * |
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* This item has been omitted pursuant to the reduced disclosure format as set forth in General Instructions (H)(2) of Form 10-Q
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* | This item has been omitted pursuant to the reduced disclosure format as set forth in General Instructions (H)(2) of Form 10-Q. |
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about our estimates, expectations, plans, objectives, strategies, and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms. These forward-looking statements are based on information available to us as of the date of this Form 10-Q and represent management’s current views and assumptions. Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:
significant risks related to the construction and operation of our satellites, such as the risk of not being able to timely complete the construction of or material malfunction on one or more of our satellites, changes in the space weather environment that could interfere with the operation of our satellites and our general lack of commercial insurance coverage on our satellites;
our ability and the ability of third parties with whom we engage in order to operate our business, including customers, suppliers, vendors, financing sources, governmental entities and others, to successfully or fully operate as a result of outbreaks of viruses or widespread illness, including existing, continuing and future impacts and consequences of the COVID-19 pandemic caused by the novel coronavirus;
our ability to implement and/or realize benefits of our domestic and/or international investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions including, without limitation, the BSS Transaction (as defined herein);transactions;
lawsuits relating to the BSS Transaction or AGR matter (each as defined herein), which could result in substantial costs;costs and, for the AGR matter, material adverse effects on our business, results of operation, financial condition and prospects in India;
our ability to realize the anticipated benefits of our current satellites and any future satellite we may construct or acquire;
risks related to our foreign operations and other uncertainties associated with doing business internationally, including changes in foreign exchange rates between foreign currencies and the United States (“U.S.”) dollar, economic instability, political disturbances and political disturbances;the consequences of being subject to foreign regulation and foreign legal proceedings, including increased operations costs and potential fines and penalties for violations, which may be substantial;
the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services; and
our ability to bring advanced technologies to market to keep pace with our customers and competitors.
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) as amended by Amendment No. 1 to Form 10-K on Form 10-K/A filed with the SEC (collectively referred to as our “Form 10-K”), those discussed in Management’s Narrative Analysis of Results of Operations in Part I, Item 2 of this Form 10-Q and in Part II, Item 7 of our Form 10-K and those discussed in other documents we file with the SEC.
All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for
the accuracy and completeness of any forward-looking statements. We assume no responsibility for updating forward-looking information contained or incorporated by reference herein or in any documents we file with the SEC, except as required by law.
Should one or more of the risks or uncertainties described herein or in any documents we file with the SEC occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
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| | As of |
| | September 30, 2019 | | December 31, 2018 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,076,271 |
| | $ | 847,823 |
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Marketable investment securities, at fair value | | 695,596 |
| | 1,609,196 |
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Trade accounts receivable and contract assets, net (Note 3) | | 200,779 |
| | 201,096 |
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Trade accounts receivable - DISH Network | | 13,182 |
| | 13,550 |
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Inventory | | 82,677 |
| | 75,379 |
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Prepaids and deposits | | 52,678 |
| | 45,198 |
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Advances to affiliates, net | | 73,836 |
| | 103,550 |
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Other current assets | | 17,379 |
| | 18,539 |
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Current assets of discontinued operations | | 5,866 |
| | 3,483 |
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Total current assets | | 2,218,264 |
| | 2,917,814 |
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Noncurrent assets: | | | | |
Property and equipment, net | | 1,786,236 |
| | 1,921,911 |
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Operating lease right-of-use assets | | 111,011 |
| | — |
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Goodwill | | 504,173 |
| | 504,173 |
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Regulatory authorizations | | 400,000 |
| | 400,043 |
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Other intangible assets, net | | 32,979 |
| | 43,952 |
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Investments in unconsolidated entities | | 118,574 |
| | 126,369 |
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Advances to affiliates | | 19,284 |
| | — |
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Other noncurrent assets, net | | 229,003 |
| | 236,449 |
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Noncurrent assets of discontinued operations | | — |
| | 742,461 |
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Total noncurrent assets | | 3,201,260 |
| | 3,975,358 |
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Total assets | | $ | 5,419,524 |
| | $ | 6,893,172 |
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Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 119,252 |
| | $ | 104,751 |
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Trade accounts payable - DISH Network | | 87 |
| | 752 |
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Current portion of long-term debt and finance lease obligations | | 407 |
| | 919,582 |
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Advances from affiliates, net | | 852 |
| | 868 |
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Contract liabilities | | 109,557 |
| | 72,249 |
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Accrued interest | | 36,849 |
| | 45,131 |
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Accrued compensation | | 35,701 |
| | 42,796 |
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Accrued taxes | | 9,278 |
| | 7,609 |
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Accrued expenses and other | | 119,930 |
| | 61,366 |
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Current liabilities of discontinued operations | | 3,492 |
| | 49,055 |
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Total current liabilities | | 435,405 |
| | 1,304,159 |
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| | As of |
| | March 31, 2020 | | December 31, 2019 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,228,361 |
| | $ | 1,139,435 |
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Marketable investment securities | | 524,941 |
| | 652,835 |
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Trade accounts receivable and contract assets, net | | 187,812 |
| | 196,520 |
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Other current assets, net | | 315,371 |
| | 301,652 |
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Total current assets | | 2,256,485 |
| | 2,290,442 |
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Non-current assets: | | | | |
Property and equipment, net | | 1,750,561 |
| | 1,857,581 |
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Operating lease right-of-use assets | | 119,711 |
| | 113,399 |
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Goodwill | | 509,315 |
| | 506,953 |
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Regulatory authorizations, net | | 411,243 |
| | 412,363 |
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Other intangible assets, net | | 25,663 |
| | 29,321 |
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Other investments, net | | 108,952 |
| | 110,040 |
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Other non-current assets, net | | 256,775 |
| | 251,936 |
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Total non-current assets | | 3,182,220 |
| | 3,281,593 |
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Total assets | | $ | 5,438,705 |
| | $ | 5,572,035 |
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Liabilities and Shareholder's Equity | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 106,339 |
| | $ | 121,552 |
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Contract liabilities | | 99,266 |
| | 101,060 |
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Accrued expenses and other current liabilities | | 231,890 |
| | 258,417 |
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Total current liabilities | | 437,495 |
| | 481,029 |
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Non-current liabilities: | | | | |
Long-term debt | | 2,390,218 |
| | 2,389,168 |
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Deferred tax liabilities, net | | 381,221 |
| | 380,316 |
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Operating lease liabilities | | 105,457 |
| | 96,879 |
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Other non-current liabilities | | 88,596 |
| | 90,480 |
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Total non-current liabilities | | 2,965,492 |
| | 2,956,843 |
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Total liabilities | | 3,402,987 |
| | 3,437,872 |
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Commitments and contingencies | |
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Shareholder's equity: | | | | |
Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and outstanding at both March 31, 2020 and December 31, 2019 | | — |
| | — |
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Common stock, $0.01 par value, 1,000,000 shares authorized, 1,078 shares issued and outstanding at both March 31, 2020 and December 31, 2019 | | — |
| | — |
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Additional paid-in capital | | 1,483,747 |
| | 1,478,636 |
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Accumulated other comprehensive income (loss) | | (154,033 | ) | | (84,636 | ) |
Accumulated earnings (losses) | | 647,775 |
| | 664,415 |
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Total Hughes Satellite Systems Corporation shareholder's equity | | 1,977,489 |
| | 2,058,415 |
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Non-controlling interests | | 58,229 |
| | 75,748 |
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Total shareholder's equity | | 2,035,718 |
| | 2,134,163 |
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Total liabilities and shareholder's equity | | $ | 5,438,705 |
| | $ | 5,572,035 |
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Noncurrent liabilities: | | | | |
Long-term debt and finance lease obligations, net | | 2,388,931 |
| | 2,386,202 |
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Deferred tax liabilities, net | | 341,426 |
| | 355,356 |
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Operating lease liabilities | | 94,232 |
| | — |
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Advances from affiliates, net | | 33,139 |
| | 33,438 |
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Other noncurrent liabilities | | 68,865 |
| | 71,647 |
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Noncurrent liabilities of discontinued operations | | — |
| | 349,875 |
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Total noncurrent liabilities | | 2,926,593 |
| | 3,196,518 |
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Total liabilities | | 3,361,998 |
| | 4,500,677 |
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Commitments and contingencies (Note 14) | |
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Shareholders’ equity: | | | | |
Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and outstanding at both September 30, 2019 and December 31, 2018 | | — |
| | — |
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Common stock, $0.01 par value; 1,000,000 shares authorized, 1,078 shares issued and outstanding at both September 30, 2019 and December 31, 2018 | | — |
| | — |
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Additional paid-in capital | | 1,426,978 |
| | 1,767,037 |
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Accumulated other comprehensive loss | | (95,913 | ) | | (83,774 | ) |
Accumulated earnings | | 717,267 |
| | 693,957 |
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Total HSS shareholders’ equity | | 2,048,332 |
| | 2,377,220 |
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Noncontrolling interests | | 9,194 |
| | 15,275 |
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Total shareholders’ equity | | 2,057,526 |
| | 2,392,495 |
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Total liabilities and shareholders’ equity | | $ | 5,419,524 |
| | $ | 6,893,172 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
Revenue: | | | | | | |
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Services and other revenue - DISH Network | | 9,747 |
| | $ | 13,984 |
| | $ | 32,021 |
| | $ | 48,118 |
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Services and other revenue - other | | 397,649 |
| | 386,820 |
| | 1,182,455 |
| | 1,113,471 |
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Services and other revenue | | | $ | 410,238 |
| | $ | 403,485 |
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Equipment revenue | | 65,725 |
| | 56,846 |
| | 175,084 |
| | 150,134 |
| | 57,309 |
| | 51,714 |
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Total revenue | | 473,121 |
| | 457,650 |
| | 1,389,560 |
| | 1,311,723 |
| | 467,547 |
| | 455,199 |
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Costs and expenses: | | | | | | |
| | |
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Cost of sales - services and other (exclusive of depreciation and amortization) |
| 142,429 |
| | 141,333 |
| | 425,896 |
| | 418,651 |
| | 143,885 |
| | 142,086 |
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Cost of sales - equipment (exclusive of depreciation and amortization) |
| 51,188 |
| | 46,318 |
| | 142,744 |
| | 127,254 |
| | 45,908 |
| | 45,007 |
|
Selling, general and administrative expenses |
| 111,987 |
| | 97,653 |
| | 353,559 |
| | 285,662 |
| | 115,860 |
| | 102,337 |
|
Research and development expenses |
| 6,136 |
| | 6,544 |
| | 19,411 |
| | 20,328 |
| | 6,254 |
| | 6,888 |
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Depreciation and amortization |
| 115,948 |
| | 107,846 |
| | 342,086 |
| | 315,930 |
| | 125,965 |
| | 112,411 |
|
Total costs and expenses |
| 427,688 |
| | 399,694 |
| | 1,283,696 |
| | 1,167,825 |
| | 437,872 |
| | 408,729 |
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Operating income |
| 45,433 |
| | 57,956 |
| | 105,864 |
| | 143,898 |
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Operating income (loss) | | | 29,675 |
| | 46,470 |
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Other income (expense): | | | | | | |
| | |
| | | | |
Interest income | | 12,300 |
| | 15,697 |
| | 47,341 |
| | 41,362 |
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Interest income, net | | | 8,892 |
| | 17,997 |
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Interest expense, net of amounts capitalized | | (55,608 | ) | | (58,067 | ) | | (172,502 | ) | | (171,835 | ) | | (42,192 | ) | | (57,915 | ) |
Gains (losses) on investments, net | | 70 |
| | 145 |
| | (290 | ) | | 262 |
| | (164 | ) | | (346 | ) |
Equity in earnings (losses) of unconsolidated affiliates, net | | (894 | ) | | 992 |
| | (2,882 | ) | | 3,722 |
| | (1,087 | ) | | (1,072 | ) |
Foreign currency transaction gains (losses), net | | | (7,528 | ) | | 211 |
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Other, net | | (13,197 | ) | | (3,618 | ) | | (12,129 | ) | | (3,764 | ) | | (278 | ) | | (165 | ) |
Total other expense, net | | (57,329 | ) | | (44,851 | ) | | (140,462 | ) | | (130,253 | ) | |
Total other income (expense), net | | | (42,357 | ) | | (41,290 | ) |
Income (loss) from continuing operations before income taxes | | (11,896 | ) | | 13,105 |
| | (34,598 | ) | | 13,645 |
| | (12,682 | ) | | 5,180 |
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Income tax provision, net | | (5,176 | ) | | (10,967 | ) | | (1,185 | ) | | (13,756 | ) | |
Income tax benefit (provision), net | | | (5,231 | ) | | (4,872 | ) |
Net income (loss) from continuing operations | | (17,072 | ) | | 2,138 |
| | (35,783 | ) | | (111 | ) | | (17,913 | ) | | 308 |
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Net income from discontinued operations | | 14,382 |
| | 26,782 |
| | 57,734 |
| | 90,105 |
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Net income (loss) from discontinued operations | | | — |
| | 22,724 |
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Net income (loss) | | (2,690 | ) | | 28,920 |
| | 21,951 |
| | 89,994 |
| | (17,913 | ) | | 23,032 |
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Less: Net income (loss) attributable to noncontrolling interests | | (2,797 | ) | | 450 |
| | (1,359 | ) | | 1,292 |
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Net income attributable to HSS | | $ | 107 |
| | $ | 28,470 |
| | $ | 23,310 |
| | $ | 88,702 |
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Less: Net loss (income) attributable to non-controlling interests | | | 3,442 |
| | (806 | ) |
Net income (loss) attributable to Hughes Satellite Systems Corporation | | | $ | (14,471 | ) | | $ | 22,226 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | | | | |
| | 2019 | | 2018 | | 2019 | | 2018 | | For the three months ended March 31, |
| | | | | | | | | | 2020 | | 2019 |
Net income (loss) | | $ | (2,690 | ) | | $ | 28,920 |
| | $ | 21,951 |
| | $ | 89,994 |
| | $ | (17,913 | ) | | $ | 23,032 |
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Other comprehensive income (loss), net of tax: | | | | | | |
| | | | | | |
Foreign currency translation adjustments | | (16,247 | ) | | (9,460 | ) | | (13,927 | ) | | (39,874 | ) | |
Unrealized gains (losses) on available-for-sale securities and other | | (117 | ) | | (117 | ) | | 2,188 |
| | (199 | ) | |
Foreign currency translation | | | (82,836 | ) | | (838 | ) |
Unrealized gains (losses) on available-for-sale debt securities | | | (2,479 | ) | | 2,353 |
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Other | | | (405 | ) | | 33 |
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Amounts reclassified to net income (loss): | | | | | | | | | | | | |
Realized gains on available-for-sale securities | | — |
| | (1 | ) | | (400 | ) | | (4 | ) | |
Realized losses (gains) on available-for-sale debt securities | | | — |
| | (385 | ) |
Total other comprehensive income (loss), net of tax | | (16,364 | ) | | (9,578 | ) | | (12,139 | ) | | (40,077 | ) | | (85,720 | ) | | 1,163 |
|
Comprehensive income (loss) | | (19,054 | ) | | 19,342 |
| | 9,812 |
| | 49,917 |
| | (103,633 | ) | | 24,195 |
|
Less: Comprehensive loss attributable to noncontrolling interests | | (2,797 | ) | | (140 | ) | | (1,359 | ) | | (97 | ) | |
Comprehensive income (loss) attributable to HSS | | $ | (16,257 | ) | | $ | 19,482 |
| | $ | 11,171 |
| | $ | 50,014 |
| |
Less: Comprehensive loss (income) attributable to non-controlling interests | | | 19,765 |
| | (806 | ) |
Comprehensive income (loss) attributable to Hughes Satellite Systems Corporation | | | $ | (83,868 | ) | | $ | 23,389 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’SHAREHOLDER’S EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2020 AND 2019 AND 2018
(Amounts in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
| | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Earnings | | Noncontrolling Interests | | Total |
Balance, June 30, 2018 | | $ | 1,764,131 |
| | $ | (82,089 | ) | | $ | 660,690 |
| | $ | 14,865 |
| | $ | 2,357,597 |
|
Stock-based compensation | | 1,425 |
| | — |
| | — |
| | — |
| | 1,425 |
|
Other comprehensive loss | | — |
| | (8,988 | ) | | — |
| | (590 | ) | | (9,578 | ) |
Net income | | — |
| | — |
| | 28,470 |
| | 450 |
| | 28,920 |
|
Other, net | | (220 | ) | | — |
| | — |
| | — |
| | (220 | ) |
Balance, September 30, 2018 | | $ | 1,765,336 |
| | $ | (91,077 | ) | | $ | 689,160 |
| | $ | 14,725 |
| | $ | 2,378,144 |
|
| | | | | | | | | | |
Balance, June 30, 2019 | | $ | 1,766,642 |
| | $ | (79,549 | ) | | $ | 717,160 |
| | $ | 12,066 |
| | $ | 2,416,319 |
|
Stock-based compensation | | 1,260 |
| | — |
| | — |
| | — |
| | 1,260 |
|
BSS Transaction (Note 5) | | (342,823 | ) | | — |
| | — |
| | — |
| | (342,823 | ) |
Purchase of noncontrolling interest | | 1,833 |
| | — |
| | — |
| | (1,833 | ) | | — |
|
Other comprehensive loss | | — |
| | (16,364 | ) | | — |
| | — |
| | (16,364 | ) |
Net income (loss) | | — |
| | — |
| | 107 |
| | (2,797 | ) | | (2,690 | ) |
Other, net | | 66 |
| | — |
| | — |
| | 1,758 |
| | 1,824 |
|
Balance, September 30, 2019 | | $ | 1,426,978 |
| | $ | (95,913 | ) | | $ | 717,267 |
| | $ | 9,194 |
| | $ | 2,057,526 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Non-controlling Interests | | Total |
Balance, December 31, 2018 | | $ | 1,767,037 |
| | $ | (83,774 | ) | | $ | 693,957 |
| | $ | 15,275 |
| | $ | 2,392,495 |
|
Stock-based compensation | | 1,433 |
| | — |
| | — |
| | — |
| | 1,433 |
|
Purchase of non-controlling interest | | (2,666 | ) | | — |
| | — |
| | (4,647 | ) | | (7,313 | ) |
Other comprehensive income (loss) | | — |
| | 1,163 |
| | — |
| | — |
| | 1,163 |
|
Net income (loss) | | — |
| | — |
| | 22,226 |
| | 806 |
| | 23,032 |
|
Other, net | | (323 | ) | | — |
| | — |
| | — |
| | (323 | ) |
Balance, March 31, 2019 | | $ | 1,765,481 |
| | $ | (82,611 | ) | | $ | 716,183 |
| | $ | 11,434 |
| | $ | 2,410,487 |
|
| | | | | | | | | | |
Balance, December 31, 2019 | | $ | 1,478,636 |
| | $ | (84,636 | ) | | $ | 664,415 |
| | $ | 75,748 |
| | $ | 2,134,163 |
|
Cumulative effect of accounting changes | | — |
| | — |
| | (2,169 | ) | | (240 | ) | | (2,409 | ) |
Balance, January 1, 2020 | | 1,478,636 |
| | (84,636 | ) | | 662,246 |
| | 75,508 |
| | 2,131,754 |
|
Stock-based compensation | | 1,457 |
| | — |
| | — |
| | — |
| | 1,457 |
|
Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | | 4,338 |
| | — |
| | — |
| | (1,514 | ) | | 2,824 |
|
Contribution by non-controlling interest holder | | — |
| | — |
| | — |
| | 4,000 |
| | 4,000 |
|
Other comprehensive income (loss) | | — |
| | (69,397 | ) | | — |
| | (16,323 | ) | | (85,720 | ) |
Net income (loss) | | — |
| | — |
| | (14,471 | ) | | (3,442 | ) | | (17,913 | ) |
Other, net | | (684 | ) | | — |
| | — |
| | — |
| | (684 | ) |
Balance, March 31, 2020 | | $ | 1,483,747 |
| | $ | (154,033 | ) | | $ | 647,775 |
| | $ | 58,229 |
| | $ | 2,035,718 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Amounts in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
| | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Earnings | | Noncontrolling Interests | | Total |
Balance, December 31, 2017 | | $ | 1,754,561 |
| | $ | (52,822 | ) | | $ | 582,683 |
| | $ | 14,822 |
| | $ | 2,299,244 |
|
Cumulative effect of accounting changes as of January 1, 2018 | | — |
| | 433 |
| | 17,775 |
| | — |
| | 18,208 |
|
Balance, January 1, 2018 | | 1,754,561 |
| | (52,389 | ) | | 600,458 |
| | 14,822 |
| | 2,317,452 |
|
Stock-based compensation | | 4,108 |
| | — |
| | — |
| | — |
| | 4,108 |
|
Capital contributions from EchoStar Corporation | | 7,125 |
| | — |
| | — |
| | — |
| | 7,125 |
|
Other comprehensive loss | | — |
| | (38,688 | ) | | — |
| | (1,389 | ) | | (40,077 | ) |
Net income | | — |
| | — |
| | 88,702 |
| | 1,292 |
| | 89,994 |
|
Other, net | | (458 | ) | | — |
| | — |
| | — |
| | (458 | ) |
Balance, September 30, 2018 | | $ | 1,765,336 |
| | $ | (91,077 | ) | | $ | 689,160 |
| | $ | 14,725 |
| | $ | 2,378,144 |
|
| | | | | | | | | | |
Balance, December 31, 2018 | | $ | 1,767,037 |
| | $ | (83,774 | ) | | $ | 693,957 |
| | $ | 15,275 |
| | $ | 2,392,495 |
|
Stock-based compensation | | 4,116 |
| | — |
| | — |
| | — |
| | 4,116 |
|
BSS Transaction (Note 5) | | (342,823 | ) | | — |
| | — |
| | — |
| | (342,823 | ) |
Purchase of noncontrolling interest | | (833 | ) | | — |
| | — |
| | (6,480 | ) | | (7,313 | ) |
Other comprehensive loss | | — |
| | (12,139 | ) | | — |
| | — |
| | (12,139 | ) |
Net income (loss) | | — |
| | — |
| | 23,310 |
| | (1,359 | ) | | 21,951 |
|
Other, net | | (519 | ) | | — |
| | — |
| | 1,758 |
| | 1,239 |
|
Balance, September 30, 2019 | | $ | 1,426,978 |
| | $ | (95,913 | ) | | $ | 717,267 |
| | $ | 9,194 |
| | $ | 2,057,526 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2019 | | 2018 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 21,951 |
| | $ | 89,994 |
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | |
Depreciation and amortization | | 428,012 |
| | 409,377 |
|
Equity in (earnings) losses of unconsolidated affiliates, net | | 2,882 |
| | (3,722 | ) |
Amortization of debt issuance costs | | 4,882 |
| | 5,910 |
|
(Gains) losses on investments, net | | 290 |
| | (259 | ) |
Stock-based compensation | | 4,116 |
| | 4,108 |
|
Deferred tax (benefit) provision | | (34,092 | ) | | 29,345 |
|
Dividend received from unconsolidated entity | | 2,716 |
| | 5,000 |
|
Changes in current assets and current liabilities, net: | | | | |
Trade accounts receivable, net | | (5,435 | ) | | (35,776 | ) |
Advances to and from affiliates, net | | 23,396 |
| | 10,596 |
|
Trade accounts receivable - DISH Network | | (26,486 | ) | | 28,053 |
|
Inventory | | (7,941 | ) | | 10,667 |
|
Other current assets | | (8,036 | ) | | (6,660 | ) |
Trade accounts payable | | 15,857 |
| | 3,669 |
|
Trade accounts payable - DISH Network | | (665 | ) | | (3,313 | ) |
Accrued expenses and other | | 83,843 |
| | 14,979 |
|
Changes in noncurrent assets and noncurrent liabilities, net | | 6,129 |
| | (13,561 | ) |
Other, net | | 9,821 |
| | 7,223 |
|
Net cash flows from operating activities | | 521,240 |
| | 555,630 |
|
Cash flows from investing activities: | | | | |
Purchases of marketable investment securities | | (462,625 | ) | | (1,546,479 | ) |
Sales and maturities of marketable investment securities | | 1,375,242 |
| | 799,250 |
|
Expenditures for property and equipment | | (224,994 | ) | | (286,223 | ) |
Refunds and other receipts related to property and equipment | | — |
| | 77,524 |
|
Expenditures for externally marketed software | | (21,364 | ) | | (24,568 | ) |
Dividend received from unconsolidated entity | | 2,284 |
| | — |
|
Payment for satellite launch services | | — |
| | (7,125 | ) |
Other | | — |
| | (991 | ) |
Net cash flows from investing activities | | 668,543 |
| | (988,612 | ) |
Cash flows from financing activities: | | | | |
Repayment of debt and finance lease obligations | | (29,135 | ) | | (27,764 | ) |
Repurchase and maturity of debt | | (920,923 | ) | | — |
|
Purchase of noncontrolling interest | | (7,313 | ) | | — |
|
Repayment of in-orbit incentive obligations | | (5,269 | ) | | (4,048 | ) |
Capital contribution from EchoStar Corporation | | — |
| | 7,125 |
|
Proceeds from issuance of debt | | 1,172 |
| | — |
|
Net cash flows from financing activities | | (961,468 | ) | | (24,687 | ) |
Effect of exchange rates on cash and cash equivalents | | 310 |
| | (3,350 | ) |
Net increase (decrease) in cash and cash equivalents, including restricted amounts | | 228,625 |
| | (461,019 | ) |
Cash and cash equivalents, including restricted amounts, beginning of period | | 848,619 |
| | 1,823,354 |
|
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,077,244 |
| | $ | 1,362,335 |
|
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 176,919 |
| | $ | 176,228 |
|
Cash paid for income taxes | | $ | 1,919 |
| | $ | 2,998 |
|
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | (17,913 | ) | | $ | 23,032 |
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | |
|
| |
|
|
Depreciation and amortization | | 125,965 |
| | 143,530 |
|
Losses (gains) on investments, net | | 164 |
| | 346 |
|
Equity in losses (earnings) of unconsolidated affiliates, net | | 1,087 |
| | 1,072 |
|
Foreign currency transaction losses (gains), net | | 7,528 |
| | (211 | ) |
Deferred tax provision (benefit), net | | 1,526 |
| | 9,936 |
|
Stock-based compensation | | 1,457 |
| | 1,433 |
|
Amortization of debt issuance costs | | 1,050 |
| | 2,010 |
|
Other, net | | (810 | ) | | 1,370 |
|
Changes in assets and liabilities, net: | |
|
| |
|
|
Trade accounts receivable and contract assets, net | | (8,162 | ) | | (19,228 | ) |
Other current assets, net | | (21,268 | ) | | (11,098 | ) |
Trade accounts payable | | (10,984 | ) | | 8,122 |
|
Contract liabilities | | (3,213 | ) | | 17,931 |
|
Accrued expenses and other current liabilities | | (5,007 | ) | | (13,450 | ) |
Non-current assets and non-current liabilities, net | | (6,196 | ) | | 6,170 |
|
Net cash flows from operating activities | | 65,224 |
| | 170,965 |
|
| | | | |
Cash flows from investing activities: | |
|
| |
|
|
Purchases of marketable investment securities | | (365,877 | ) | | (240,188 | ) |
Sales and maturities of marketable investment securities | | 490,020 |
| | 468,745 |
|
Expenditures for property and equipment | | (91,517 | ) | | (73,929 | ) |
Expenditures for externally marketed software | | (8,638 | ) | | (7,600 | ) |
Net cash flows from investing activities | | 23,988 |
| | 147,028 |
|
| | | | |
Cash flows from financing activities: | |
|
| |
|
|
Repurchase of the 2019 Senior Secured Notes | | — |
| | (8,046 | ) |
Payment of finance lease obligations | | (215 | ) | | (9,882 | ) |
Payment of in-orbit incentive obligations | | (203 | ) | | (1,573 | ) |
Contribution by non-controlling interest holder | | 4,000 |
| | — |
|
Purchase of non-controlling interest | | — |
| | (7,312 | ) |
Other, net | | 979 |
| | — |
|
Net cash flows from financing activities | | 4,561 |
| | (26,813 | ) |
| | | | |
Effect of exchange rates on cash and cash equivalents | | (4,618 | ) | | (117 | ) |
Net increase (decrease) in cash and cash equivalents | | 89,155 |
| | 291,063 |
|
Cash and cash equivalents, including restricted amounts, beginning of period | | 1,140,322 |
| | 848,619 |
|
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,229,477 |
| | $ | 1,139,682 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
Hughes Satellite Systems Corporation (which, together with its subsidiaries, is referred to as “HSS,“HSSC,” the “Company,” “we,” “us” and/orand “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar”). We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized business customers, satellite operationsbusinesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical enterprise and government customers.
enterprises. We primarily operate in the following 2 business segments:
| |
• | Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international home and small to medium-sized businessconsumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers aeronautical,and 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 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 (“ESS”)ESS — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use basis to United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.
|
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate Accounting and Legal) and other activities that have not been assigned to our operatingbusiness segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in. We also divide our segment reporting.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) All other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 13. Segment Reporting for further detail.
In MaySeptember 2019, EchoStar and one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), entered intopursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”). Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019:, (i) EchoStar and its subsidiaries and we and our subsidiaries transferred to BSS Corp. certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily relatingrelated to the former portion of our ESS satellite services businesssegment that manages, marketsmanaged, marketed and providesprovided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and EchoStar’s joint venture Dish Mexico, S. de R.L. de C.V., (“Dish Mexico”) and its subsidiaries, and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of EchoStar’s and our other businesses (collectively, the “BSS Business”); to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) EchoStar distributed to each holder of shares of EchoStarEchoStar’s Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of EchoStarEchoStar’s Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH ownsthen owning and operatesoperating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
The BSS Transaction was structured in a manner intended to be tax-free to EchoStar and its stockholders for U.S. federal income tax purposes. In connection with the BSS Transaction, EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
certain retained and assumed liabilities, respectively. Additionally, EchoStar and DISH and certain of our, EchoStar’s and DISH’s subsidiaries, as applicable, have (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services, (ii) terminated certain previously existing agreements, and (iii) amended certain existing agreements and entered into certain new agreements pursuant to which we and DISH Network will obtain and provide certain products, services and rights from and to each other.
Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS business segment. The BSS Transaction has been accounted for as a spin-off to EchoStar’s stockholders as EchoStar did not receive any consideration. As a result of the operatingBSS Transaction, the financial results of the BSS Business, have beenexcept for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 5 for further discussionthe three months ended March 31, 2019, as presented in these
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
unaudited Condensed Consolidated Financial Statements and the accompanying notes (collectively, the “Condensed Consolidated Financial Statements”).
During 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries. EchoStar, and certain of its and our subsidiaries, received allAll amounts in the shares of the Hughes Retail Preferred Tracking Stock previously issued by EchoStar and us (together, the “Tracking Stock”) in exchangefollowing footnotes reference results from continuing operations unless otherwise noted. Refer to Note 4. Discontinued Operations for 100% of the equity interests of certain of EchoStar’s subsidiaries that held substantially all of EchoStar’s former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Following the consummation of the Share Exchange, EchoStar no longer operates its former EchoStar Technologies businesses, the Tracking Stock was retired and is no longer outstanding, and all agreements, arrangements and policy statements with respect to the Tracking Stock terminated.further detail.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have beenThese Condensed Consolidated Financial Statements are prepared in conformity with accounting principlesU.S. generally accepted in the U.S.accounting principles (“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, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, 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 Condensed Consolidated Financial Statements are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Refer to Note 2. Summary of Significant Accounting Policies to the consolidated financial statements and notes thereto included in our Form 10-K for a summary and discussion of our significant accounting policies, except as updated below.
Use of Estimates
We are required to make certain estimates and assumptions that affect the year ended December 31, 2018.amounts reported in these Condensed Consolidated Financial Statements. The most significant estimates and assumptions are used in determining: (i) inputs used to recognize revenue over time, including amortization periods for deferred contract acquisition costs; (ii) allowances for doubtful accounts; (iii) deferred taxes and related valuation allowances, including uncertain tax positions; (iv) loss contingencies; (v) fair value of financial instruments; (vi) fair value of assets and liabilities acquired in business combinations; and (vii) asset 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 consolidated financial statements. Additionally, changing economic and other 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 estimates or assumptions affect future periods.
Principles 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 wherein which we are the primary beneficiary. We are deemed to have a controlling financial interestbeneficiary and in other entities whenin 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 noncontrollingnon-controlling interest within shareholders’shareholder’s equity for the portion of the entity’s equity attributed to the noncontrollingnon-controlling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified to conform with the current period presentation.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Recently Adopted Accounting Pronouncements
LeasesCredit Losses
WeOn January 1, 2020, we adopted Accounting StandardStandards Update (“ASU”) No. 2016-022016-13 - LeasesFinancial Instruments - Credit Losses (Topic 842)326), as amended, or Accounting Standard Codification (“ASC 842”), as of January 1, 2019. The primary impact of ASC 842 on our consolidated financial statements is the recognition of right-of-use assets and related liabilities on our consolidated balance sheet for operating leases where we are the lessee. We elected to apply the requirements of the new standard on January 1, 2019 and we have not restated our consolidated financial statements for prior periods. Consequently, certain amounts reportedcodified in our Condensed Consolidated Balance Sheet as of September 30, 2019 are not comparable to those reported as of December 31, 2018 or earlier dates. Our adoption of ASC 842 did not have a material impact on the results of our operations or on our cash flows for the three and nine months ended September 30, 2019.
Under ASC 842, leases are classified either as operating leases or finance leases. The lease classification affects the recognition of lease expense by lessees in the statement of operations. Consistent with prior accounting standards, operating lease expense is included in operating expenses, while finance lease expense is split between depreciation expense and interest expense. ASC 842 does not fundamentally change the lessor accounting model, which requires leases to be classified as operating leases or sales-type leases. Operating lease revenue generally is recognized over the lease term, while sales-type lease revenue is recognized primarily upon lease commencement, except for amounts representing interest on related accounts receivable.
Except for the new requirement to recognize assets and liabilities on the balance sheet for operating leases where we are the lessee, under our ASC 842 transition method we continue to apply prior accounting standards to leases that commenced prior to 2019. We fully apply ASC 842 requirements only to leases that commenced or were modified on or after January 1, 2019. We elected certain practical expedients under our transition method, including elections to not reassess (i) whether a contract is or contains a lease and (ii) the classification of existing leases. We also elected not to apply hindsight in determining whether optional renewal periods should be included in the lease term, which in some instances may impact the initial measurement of the lease liability and the calculation of straight-line expense over the lease term for operating leases. As a result of our transition elections, there was no change in our recognition of revenue and expense for leases that commenced prior to 2019. In addition, the application of ASC 842 requirements to new and modified leases did not materially affect our recognition of revenue or expenses for the three and nine months ended September 30, 2019.
Our adoption of ASC 842 resulted in the following adjustments from our continuing operations to our Condensed Consolidated Balance Sheet as of December 31, 2018 (amounts in thousands):
|
| | | | | | | | | | | | |
| | Balance December 31,2018 | | Adoption of ASC 842 Increase (Decrease) | | Balance January 1, 2019 |
| | | | | | |
Prepaids and deposits | | $ | 45,198 |
| | $ | (28 | ) | | $ | 45,170 |
|
Operating lease right-of-use assets | | $ | — |
| | $ | 117,006 |
| | $ | 117,006 |
|
Other noncurrent assets, net | | $ | 236,449 |
| | $ | (7,272 | ) | | $ | 229,177 |
|
Total assets | | $ | 6,893,172 |
| | $ | 109,706 |
| | $ | 7,002,878 |
|
Accrued expenses and other | | $ | 61,366 |
| | $ | 14,444 |
| | $ | 75,810 |
|
Operating lease liabilities | | $ | — |
| | $ | 99,133 |
| | $ | 99,133 |
|
Other noncurrent liabilities | | $ | 71,647 |
| | $ | (3,871 | ) | | $ | 67,776 |
|
Total liabilities | | $ | 4,500,677 |
| | $ | 109,706 |
| | $ | 4,610,383 |
|
Total liabilities and shareholders’ equity | | $ | 6,893,172 |
| | $ | 109,706 |
| | $ | 7,002,878 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our accounting policies under ASC 842 are summarized below. Additional disclosures required by the new standard are included in Note 4.
Lessee Accounting
We lease real estate, satellite capacity and equipment in the conduct of our business operations. For contracts entered into on or after January 1, 2019, we assess at contract inception whether the contract is, or contains, a lease. Generally, we determine that a lease exists when (i) the contract involves the use of a distinct identified asset, (ii) we obtain the right to substantially all economic benefits from use of the asset and (iii) we have the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (i) the lease transfers ownership of the asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (iii) the lease term is for a major part of the remaining useful life of the asset, (iv) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (v) the asset is of a specialized nature and there is not expected to be an alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria.
At the lease commencement date, we recognize a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The incremental borrowing rates used for the initial measurement of lease liabilities as of January 1, 2019 were based on the original lease terms.
Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the noncancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. We have elected an accounting policy, as permitted by ASC 842, not to account for such payments separately from the related lease payments. Our policy election results in a higher initial measurement of lease liabilities when such non-lease payments are fixed amounts. Certain of our real estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as sales and value-added taxes and our proportionate share of actual property taxes, insurance and utilities. Such payments and changes in payments based on a rate or index are recognized in operating expenses when incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments.
Lessor Accounting
We lease satellite capacity, communications equipment and real estate to certain of our customers. We identify and determine the classification of such leases as operating leases or sales-type leases based on the criteria discussed above for lessees. A lease is classified as a sales-type lease if it meets the above criteria for a finance lease; otherwise it is classified as an operating lease. Some of our leases are embedded in contracts with customers that include non-lease performance obligations. For such contracts, except where we have elected otherwise as discussed below, we allocate consideration in the contract between lease and non-lease components based on their relative standalone selling prices. We have elected an accounting policy, as permitted by ASC 842, to not separate the lease of equipment from related services in our HughesNet satellite internet service (the “HughesNet service”) contracts with consumers.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We account for all revenue from such contracts as non-lease service revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).
Our accounting for revenue from operating leases and sales-type leases was not substantially changed by our adoption of ASC 842. However, we anticipate that certain leases that would have been classified as operating leases under prior accounting standards may be classified as sales-type leases under ASC 842. Operating lease revenue generally is recognized on a straight-line basis over the lease term. Sales-type lease revenue and a corresponding receivable generally are recognized at lease commencement based on the present value of the future lease payments and related interest income on the receivable is recognized over the lease term. Payments under sales-type leases generally are discounted at the interest rate implicit in the lease.
Recently Issued Accounting Pronouncements Not Yet Adopted
Credit Losses
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, whichCodification Topic 326 (“ASC 326”). ASC 326 introduces a new approach to estimatethe periodic estimation of credit losses onfor certain types of financial instrumentsassets based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets withthat have experienced credit deterioration since their origination.original purchase. We have elected to apply the requirements of the new standard prospectively and we recognized a cumulative effect of adoption of $2.2 million to Accumulated earnings (losses) as of January 1, 2020. Based on this election, we did not restate our comparative Condensed Consolidated Financial Statements and they continue to be reported under the accounting standards in effect for the periods before January 1, 2020.
The following describes the accounting impacts, by major balance sheet line item, of our adoption of this new standard based on the relevant types of losses that we and our equity method investees may be subject to:
| |
• | Trade Accounts Receivable and Contract Assets, Net —Our trade accounts receivables and contract assets consist of amounts due from both our consumer and enterprise customers. Our receivables and related credit losses for our consumer customers are limited due to policies that require advance payment for services, predominant use of credit card and ACH payment processes, and our ability to promptly terminate service when timely payments are not received. However, for our enterprise customers, we estimate expected credit losses on a collective basis based on our historical loss experience, as adjusted to reflect changes in relevant factors, such as macroeconomic conditions and customer mix, that can significantly impact collectability. |
We apply our collective estimation processes separately to several pools of receivables that share common risk characteristics, generally based on the customers’ geographical location. Customers with significant past-due balances or other atypical characteristics are excluded from our collective analysis and evaluated on a case-by-case basis. Our estimates of expected credit losses for such receivables reflect significant judgments that consider customer-specific matters such as the customer’s financial condition, payment history, and recent developments in the customer’s business and industry. Due to the short-term nature of our trade receivables and contract assets, forecasts about the future have limited relevance to our expected credit loss estimates.
We record our customer related estimated credit losses as a component of our bad debt expense as reported in Selling, general and administrative expenses.
| |
• | Other Current Assets, Net, and Other Non-current Assets, Net —We estimate expected credit losses for receivables with payment terms longer than one year separately by borrower, due to the unique risk characteristics of such receivables. We generally use discounted cash flow techniques to estimate such credit losses. In applying such techniques, we may estimate principal and interest cash flows under probability-weighted scenarios that consider entity-specific matters and forecasted economic conditions. The majority of our other non-current receivables are from entities in the telecommunications industry. The collection of contractual principal and interest on these receivables is highly dependent on the future business operations of those entities. Our estimation of expected credit losses for such receivables requires significant judgment about matters specific to the borrower and their industry. Accordingly, our actual collection experience may differ from the assumptions reflected in our expected credit loss estimates. |
We record our estimated credit losses as a component of our bad debt expense as reported in Selling, general and administrative expenses.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Financial Impact of Adoption. Our adoption of this new standard resulted in the following adjustments to our Condensed Consolidated Balance Sheet:
|
| | | | | | | | | | | | |
| | Balance at December 31, 2019 | | Adoption of ASC 326 Increase (Decrease) | | Balance at January 1, 2020 |
Trade accounts receivable and contract assets, net | | $ | 196,520 |
| | $ | (13,672 | ) | | $ | 182,848 |
|
Other current assets, net | | $ | 301,652 |
| | $ | 6,723 |
| | $ | 308,375 |
|
Other non-current assets, net | | $ | 251,936 |
| | $ | 4,050 |
| | $ | 255,986 |
|
Total assets | | $ | 5,572,035 |
| | $ | (2,899 | ) | | $ | 5,569,136 |
|
Deferred tax liabilities, net | | $ | 380,316 |
| | $ | (490 | ) | | $ | 379,826 |
|
Accumulated earnings (losses) | | $ | 664,415 |
| | $ | (2,169 | ) | | $ | 662,246 |
|
Non-controlling interests | | $ | 75,748 |
| | $ | (240 | ) | | $ | 75,508 |
|
Total shareholder's equity | | $ | 2,134,163 |
| | $ | (2,409 | ) | | $ | 2,131,754 |
|
Total liabilities and shareholder's equity | | $ | 5,572,035 |
| | $ | (2,899 | ) | | $ | 5,569,136 |
|
The application of ASC 326 requirements did not materially affect our Condensed Consolidated Statements of Operations for the three months ended March 31, 2020.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-132019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the FASB’s overall simplification initiative and seeks to simplify the accounting for income taxes by updating certain guidance and removing certain exceptions. The updated guidance is effective for fiscal years beginning after December 15, 20192020 and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact of adopting this new accounting standard on our Consolidated Financial Statements and related disclosures.guidance.
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates (“IBORs”) 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 are currently assessing the impact of adopting this new guidance, but do not expect it to have a material impact on our consolidated financial statements.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 3. REVENUE RECOGNITION
Information About Contract Balances
The following table presents the components of our contract balances:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Trade accounts receivable and contract assets, net: | | | | |
Sales and services | | $ | 147,288 |
| | $ | 152,632 |
|
Leasing | | 4,194 |
| | 4,016 |
|
Total trade accounts receivable | | 151,482 |
| | 156,648 |
|
Contract assets | | 46,938 |
| | 63,649 |
|
Allowance for doubtful accounts | | (10,608 | ) | | (23,777 | ) |
Total trade accounts receivable and contract assets, net | | $ | 187,812 |
| | $ | 196,520 |
|
| | | | |
Contract liabilities: | | | | |
Current | | $ | 99,266 |
| | $ | 101,060 |
|
Non-current | | 9,426 |
| | 10,572 |
|
Total contract liabilities | | $ | 108,692 |
| | $ | 111,632 |
|
For the three months ended March 31, 2020 and 2019, we recognized revenue of $52.2 million and $39.5 million, respectively, that were previously included in the contract liability balances as of December 31, 2019 and 2018, respectively.
The following table provides information aboutpresents the activity in our allowance for doubtful accounts:
|
| | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Credit Losses (1) | | Deductions | | Foreign Currency Translation | | Balance at End of Period |
For the three months ended: | | |
| | |
| | |
| | | | |
|
March 31, 2020 | | $ | 23,777 |
| | $ | (5,754 | ) | | $ | (6,325 | ) | | $ | (1,090 | ) | | $ | 10,608 |
|
March 31, 2019 | | $ | 16,604 |
| | $ | 4,177 |
| | $ | (6,738 | ) | | $ | (15 | ) | | $ | 14,028 |
|
(1)The impact of adopting ASC 326 on January 1, 2020 was a net decrease to our allowance for doubtful accounts largely driven by a $13.4 million reclassification to Other current assets, net and Other non-current assets, net, offset by a $2.9 million adjustment to Accumulated earnings (losses).
Contract Acquisition Costs
The following table presents our unamortized contract acquisition costs:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Unamortized contract acquisition costs | | $ | 110,397 |
| | $ | 113,592 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the amortization of our contract balances from our continuing operations with customers, including amounts for certain embedded leases (amounts in thousands):acquisition costs:
|
| | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | | | |
Trade accounts receivable: | | | | |
Sales and services | | $ | 163,006 |
| | $ | 154,415 |
|
Leasing | | 3,013 |
| | 7,990 |
|
Total | | 166,019 |
| | 162,405 |
|
Contract assets | | 60,012 |
| | 55,295 |
|
Allowance for doubtful accounts | | (25,252 | ) | | (16,604 | ) |
Total trade accounts receivable and contract assets, net | | $ | 200,779 |
| | $ | 201,096 |
|
| | | | |
Trade accounts receivable - DISH Network: | | | | |
Sales and services | | $ | 12,272 |
| | $ | 12,274 |
|
Leasing | | 910 |
| | 1,276 |
|
Total trade accounts receivable - DISH Network, net | | $ | 13,182 |
| | $ | 13,550 |
|
| | | | |
Contract liabilities: | | | | |
Current | | $ | 109,557 |
| | $ | 72,249 |
|
Noncurrent | | 10,730 |
| | 10,133 |
|
Total contract liabilities | | $ | 120,287 |
| | $ | 82,382 |
|
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Amortization expense | | $ | 25,431 |
| | $ | 21,115 |
|
Transaction Price Allocated to Remaining Performance Obligations
As of March 31, 2020, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $736.6 million. We expect to recognize 39.6% of our remaining performance obligations of these contracts as revenue in the next twelve months. This amount excludes 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 table presents 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 March 31, 2020 | | | | | | | | |
North America | | $ | 382,715 |
| | $ | 4,652 |
| | $ | (285 | ) | | $ | 387,082 |
|
South and Central America | | 33,956 |
| | — |
| | — |
| | 33,956 |
|
Other | | 41,811 |
| | — |
| | 4,698 |
| | 46,509 |
|
Total revenue | | $ | 458,482 |
| | $ | 4,652 |
| | $ | 4,413 |
| | $ | 467,547 |
|
| | | | | | | | |
For the three months ended March 31, 2019 | | | | | | | | |
North America | | $ | 367,829 |
| | $ | 4,033 |
| | $ | 1,005 |
| | $ | 372,867 |
|
South and Central America | | 26,863 |
| | — |
| | — |
| | 26,863 |
|
Other | | 50,645 |
| | — |
| | 4,824 |
| | 55,469 |
|
Total revenue | | $ | 445,337 |
| | $ | 4,033 |
| | $ | 5,829 |
| | $ | 455,199 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Nature of Products and Services
The following table presents 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 March 31, 2020 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 390,000 |
| | $ | 2,765 |
| | $ | — |
| | $ | 392,765 |
|
Lease revenue | | 11,173 |
| | 1,887 |
| | 4,413 |
| | 17,473 |
|
Total services and other revenue | | 401,173 |
| | 4,652 |
| | 4,413 |
| | 410,238 |
|
Equipment revenue: | |
|
| |
|
| |
|
| |
|
|
Equipment | | 24,839 |
| | — |
| | — |
| | 24,839 |
|
Design, development and construction services | | 31,557 |
| | — |
| | — |
| | 31,557 |
|
Lease revenue | | 913 |
| | — |
| | — |
| | 913 |
|
Total equipment revenue | | 57,309 |
| | — |
| | — |
| | 57,309 |
|
Total revenue | | $ | 458,482 |
| | $ | 4,652 |
| | $ | 4,413 |
| | $ | 467,547 |
|
| | | | | | | | |
For the three months ended March 31, 2019 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 380,783 |
| | $ | 2,817 |
| | $ | 322 |
| | $ | 383,922 |
|
Lease revenue | | 12,840 |
| | 1,216 |
| | 5,507 |
| | 19,563 |
|
Total services and other revenue | | 393,623 |
| | 4,033 |
| | 5,829 |
| | 403,485 |
|
Equipment revenue: | |
|
| |
|
| |
|
| |
|
|
Equipment | | 25,960 |
| | — |
| | — |
| | 25,960 |
|
Design, development and construction services | | 25,066 |
| | — |
| | — |
| | 25,066 |
|
Lease revenue | | 688 |
| | — |
| | — |
| | 688 |
|
Total equipment revenue | | 51,714 |
| | — |
| | — |
| | 51,714 |
|
Total revenue | | $ | 445,337 |
| | $ | 4,033 |
| | $ | 5,829 |
| | $ | 455,199 |
|
Lease Revenue
The following table presents our lease revenue by type of lease:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Sales-type lease revenue: | | | | |
Revenue at lease commencement | | $ | 913 |
| | $ | 688 |
|
Interest income | | 69 |
| | 252 |
|
Total sales-type lease revenue | | 982 |
| | 940 |
|
Operating lease revenue | | 17,404 |
| | 19,311 |
|
Total lease revenue | | $ | 18,386 |
| | $ | 20,251 |
|
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $6.6 million and $6.5 million as of March 31, 2020 and December 31, 2019, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
For the nine months ended September 30, 2019, we recognized revenue
The following table presents future operating lease payments to be received as of $67.3 million that was previously included in the contract liability balance at DecemberMarch 31, 2018.2020:
|
| | | | |
| | Amounts |
Year ending December 31, | | |
2020 (remainder) | | $ | 27,691 |
|
2021 | | 34,910 |
|
2022 | | 32,052 |
|
2023 | | 30,285 |
|
2024 | | 28,219 |
|
2025 and beyond | | 123,520 |
|
Total lease payments | | $ | 276,677 |
|
Our bad debt expense was $3.2 million and $8.6 million for the three months ended September 30, 2019 and 2018, respectively, and $23.2 million and $16.6 million for the nine months ended September 30, 2019 and 2018, respectively.
Transaction Price Allocated to Remaining Performance Obligations
As of September 30, 2019, the remaining performance obligationsThe following table presents amounts for our customer contracts with original expected durations of more than one year was $1.1 billion. We expectassets subject to recognize approximately 37.8% of our remaining performance obligations of these contracts as revenueoperating leases, which are included in the next twelve months. This amount excludes agreements with consumer customersProperty and equipment, net:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
| | Cost | | Accumulated Depreciation | | Net | | Cost | | Accumulated Depreciation | | Net |
Customer premises equipment | | $ | 1,488,031 |
| | $ | (1,123,861 | ) | | $ | 364,170 |
| | $ | 1,458,298 |
| | $ | (1,074,968 | ) | | $ | 383,330 |
|
Satellites | | 104,620 |
| | (33,104 | ) | | 71,516 |
| | 104,620 |
| | (31,360 | ) | | 73,260 |
|
Total | | $ | 1,592,651 |
| | $ | (1,156,965 | ) | | $ | 435,686 |
| | $ | 1,562,918 |
| | $ | (1,106,328 | ) | | $ | 456,590 |
|
The following table presents depreciation expense for assets subject to operating leases, which is included in our Hughes segment, our leasing arrangementsDepreciation and agreements with certain customers under which collectibility of all amounts due through the term of contracts is uncertain.amortization:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Customer premises equipment | | $ | 49,504 |
| | $ | 49,712 |
|
Satellites | | 1,744 |
| | 1,737 |
|
Real estate | | — |
| | 217 |
|
Total | | $ | 51,248 |
| | $ | 51,666 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Disaggregation of Revenue
In the following tables, revenue from our continuing operations is disaggregated by segment, primary geographic market, nature of the products and services and transactions with major customers. See Note 4 for additional information about revenue associated with leases.
Geographic Information
The following table disaggregates revenue from customer contracts attributed to our North America (the U.S. and its territories, Mexico and Canada), South and Central America and other foreign locations (Asia, Africa, Australia, Europe, and the Middle East) as well as by segment, based on the location where the goods or services are provided (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | |
For the three months ended September 30, 2019 | | | | | | | | |
North America | | $ | 389,264 |
| | $ | 4,098 |
| | $ | 571 |
| | $ | 393,933 |
|
South and Central America | | 31,747 |
| | — |
| | — |
| | 31,747 |
|
All other | | 42,724 |
| | — |
| | 4,717 |
| | 47,441 |
|
Total revenue | | $ | 463,735 |
| | $ | 4,098 |
| | $ | 5,288 |
| | $ | 473,121 |
|
| | | | | | | | |
For the three months ended September 30, 2018 | | | | | | | | |
North America | | $ | 373,460 |
| | $ | 6,802 |
| | $ | 1,187 |
| | $ | 381,449 |
|
South and Central America | | 27,593 |
| | — |
| | — |
| | 27,593 |
|
All other | | 43,709 |
| | — |
| | 4,899 |
| | 48,608 |
|
Total revenue | | $ | 444,762 |
| | $ | 6,802 |
| | $ | 6,086 |
| | $ | 457,650 |
|
| | | | | | | | |
For the nine months ended September 30, 2019 | | | | | | | | |
North America | | $ | 1,129,491 |
| | $ | 11,873 |
| | $ | 2,454 |
| | $ | 1,143,818 |
|
South and Central America | | 89,005 |
| | — |
| | — |
| | 89,005 |
|
All other | | 142,423 |
| | — |
| | 14,314 |
| | 156,737 |
|
Total revenue | | $ | 1,360,919 |
| | $ | 11,873 |
| | $ | 16,768 |
| | $ | 1,389,560 |
|
| | | | | | | | |
For the nine months ended September 30, 2018 | | | | | | | | |
North America | | $ | 1,072,187 |
| | $ | 22,562 |
| | $ | 3,590 |
| | $ | 1,098,339 |
|
South and Central America | | 75,813 |
| | — |
| | — |
| | 75,813 |
|
All other | | 123,886 |
| | — |
| | 13,685 |
| | 137,571 |
|
Total revenue | | $ | 1,271,886 |
| | $ | 22,562 |
| | $ | 17,275 |
| | $ | 1,311,723 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nature of Products and Services
The following table disaggregates revenue based on the nature of products and services and by segment (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | |
For the three months ended September 30, 2019 | | | | | | | | |
Equipment | | $ | 21,106 |
| | $ | — |
| | $ | — |
| | $ | 21,106 |
|
Services | | 385,477 |
| | 2,737 |
| | 234 |
| | 388,448 |
|
Design, development and construction services | | 42,328 |
| | — |
| | — |
| | 42,328 |
|
Revenue from sales and services | | 448,911 |
| | 2,737 |
| | 234 |
| | 451,882 |
|
Lease revenue | | 14,824 |
| | 1,361 |
| | 5,054 |
| | 21,239 |
|
Total revenue | | $ | 463,735 |
| | $ | 4,098 |
| | $ | 5,288 |
| | $ | 473,121 |
|
| | | | | | | | |
For the three months ended September 30, 2018 | | | | | | | | |
Equipment | | $ | 40,222 |
| | $ | — |
| | $ | — |
| | $ | 40,222 |
|
Services | | 337,585 |
| | 5,766 |
| | 322 |
| | 343,673 |
|
Design, development and construction services | | 16,624 |
| | — |
| | — |
| | 16,624 |
|
Revenue from sales and services | | 394,431 |
| | 5,766 |
| | 322 |
| | 400,519 |
|
Lease revenue | | 50,331 |
| | 1,036 |
| | 5,764 |
| | 57,131 |
|
Total revenue | | $ | 444,762 |
| | $ | 6,802 |
| | $ | 6,086 |
| | $ | 457,650 |
|
| | | | | | | | |
For the nine months ended September 30, 2019 | | | | | | | | |
Equipment | | $ | 77,663 |
| | $ | — |
| | $ | — |
| | $ | 77,663 |
|
Services | | 1,147,868 |
| | 7,953 |
| | 878 |
| | 1,156,699 |
|
Design, development and construction services | | 93,254 |
| | — |
| | — |
| | 93,254 |
|
Revenue from sales and services | | 1,318,785 |
| | 7,953 |
| | 878 |
| | 1,327,616 |
|
Lease revenue | | 42,134 |
| | 3,920 |
| | 15,890 |
| | 61,944 |
|
Total revenue | | $ | 1,360,919 |
| | $ | 11,873 |
| | $ | 16,768 |
| | $ | 1,389,560 |
|
| | | | | | | | |
For the nine months ended September 30, 2018 | | | | | | | | |
Equipment | | $ | 103,458 |
| | $ | — |
| | $ | — |
| | $ | 103,458 |
|
Services | | 975,647 |
| | 17,632 |
| | 1,026 |
| | 994,305 |
|
Design, development and construction services | | 46,676 |
| | — |
| | — |
| | 46,676 |
|
Revenue from sales and services | | 1,125,781 |
| | 17,632 |
| | 1,026 |
| | 1,144,439 |
|
Lease revenue | | 146,105 |
| | 4,930 |
| | 16,249 |
| | 167,284 |
|
Total revenue | | $ | 1,271,886 |
| | $ | 22,562 |
| | $ | 17,275 |
| | $ | 1,311,723 |
|
Effective January 1, 2019, we account for and report revenue from leases of Hughes consumer broadband equipment as services revenue under ASC 606 rather than lease revenue due to our election to not separate lease and non-lease components in consumer broadband service contracts in connection with our adoption of ASC 842 (see Note 2).
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE4. LEASES
Lessee Disclosures
Our operating leases consist primarily of leases for office space, data centers and satellite ground facilities. We recognized right-of-use assets and lease liabilities for such leases in connection with our adoption of ASC 842 as of January 1, 2019 (see Note 2). We report operating lease right-of-use assets in Operating lease right-of-use assets and we report the current and noncurrent portions of our operating lease liabilities in Accrued expenses and other and Operating lease liabilities, respectively. Our finance leases consist primarily of leases of satellite capacity. We report finance lease right-of-use assets in Property and equipment, net and we report the current and noncurrent portions of our finance lease liabilities in Current portion of long-term debt and finance lease obligations and Long-term debt and finance lease obligations, net, respectively. Our Condensed Consolidated Balance Sheets includes the following amounts for right-of-use assets and lease liabilities from our continuing operations as of September 30, 2019 (amounts in thousands):
|
| | | | |
| | As of September 30, 2019 |
| | |
Right-of-use assets: | | |
Operating | | $ | 111,011 |
|
Finance | | 328,519 |
|
Total right-of-use assets | | $ | 439,530 |
|
| | |
Lease liabilities: | | |
Current: | | |
Operating | | $ | 14,204 |
|
Finance | | 407 |
|
Noncurrent: | | |
Operating | | 94,232 |
|
Finance | | 793 |
|
Total lease liabilities | | $ | 109,636 |
|
As of September 30, 2019, we have prepaid our obligations regarding most of our finance right-of-use assets. Finance lease assets from our continuing operations that have a corresponding liability are reported net of accumulated amortization of $50.9 million as of September 30, 2019.
The following tables detail components of lease cost and weighted average lease terms and discount rates for operating leases and finance leases from our continuing operations (amounts in thousands):
|
| | | | | | | | |
| | For the three months ended September 30, 2019 | | For the nine months ended September 30, 2019 |
| | | | |
Lease cost: | | | | |
Operating lease cost | | $ | 5,400 |
| | $ | 15,957 |
|
Finance lease cost: | | | | |
Amortization of right-of-use assets | | 6,506 |
| | 19,656 |
|
Interest on lease liabilities | | 46 |
| | 135 |
|
Short-term lease cost | | 105 |
| | 381 |
|
Variable lease cost | | 2,690 |
| | 6,253 |
|
Total lease cost | | $ | 14,747 |
| | $ | 42,382 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | |
| | As of September 30, 2019 |
| | |
Lease term and discount rate: | | |
Weighted average remaining lease term (in years): | | |
Finance leases | | 1.90 |
|
Operating leases | | 10.08 |
|
| | |
Weighted average discount rate: | | |
Finance leases | | 11.47 | % |
Operating leases | | 6.12 | % |
The following table details cash flows for operating leases and finance leases from our continuing operations (amounts in thousands):
|
| | | | | | | | |
| | For the three months ended September 30, 2019 | | For the nine months ended September 30, 2019 |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 5,025 |
| | $ | 14,731 |
|
Operating cash flows from finance leases | | $ | 46 |
| | $ | 135 |
|
Financing cash flows from finance leases | | $ | 168 |
| | $ | 505 |
|
We obtained right-of-use assets in exchange for lease liabilities of $1.1 million and $2.5 million upon commencement of operating leases for the three and nine months ended September 30, 2019, respectively.
The following table presents maturities of our lease liabilities from our continuing operations as of September 30, 2019 (amounts in thousands):
|
| | | | | | | | | | | | |
| | Operating Leases | | Finance Leases | | Total |
| | | | | | |
Year ending December 31, | | | | | | |
2019 (remainder) | | $ | 5,195 |
| | $ | 174 |
| | $ | 5,369 |
|
2020 | | 19,761 |
| | 636 |
| | 20,397 |
|
2021 | | 17,272 |
| | 493 |
| | 17,765 |
|
2022 | | 14,988 |
| | 96 |
| | 15,084 |
|
2023 | | 14,069 |
| | — |
| | 14,069 |
|
After 2023 | | 80,795 |
| | — |
| | 80,795 |
|
Total lease payments | | 152,080 |
| | 1,399 |
| | 153,479 |
|
Less: Interest | | (43,644 | ) | | (199 | ) | | (43,843 | ) |
Present value of lease liabilities | | $ | 108,436 |
| | $ | 1,200 |
| | $ | 109,636 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Lessor Disclosures
We report revenue from sales-type leases at the commencement date in Equipment revenueand we report periodic interest income onsales-type lease receivables in Services and other revenue. We report operating lease revenue in Services and other revenue. The following table details our lease revenue from our continuing operations as follows (amounts in thousands):
|
| | | | | | | | |
| | For the three months ended September 30, 2019 | | For the nine months ended September 30, 2019 |
| | | | |
Sales-type lease revenue: | | | | |
Revenue at lease commencement | | $ | 2,291 |
| | $ | 4,167 |
|
Interest income | | 206 |
| | 716 |
|
| | | | |
Operating lease revenue | | 18,742 |
| | 57,061 |
|
Total lease revenue | | $ | 21,239 |
| | $ | 61,944 |
|
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $5.6 million as of September 30, 2019.
The following table presents maturities of our operating lease payments from our continuing operations as of September 30, 2019 (amounts in thousands):
|
| | | | |
| | Amounts |
| | |
Year ending December 31, | | |
2019 (remainder) | | $ | 9,566 |
|
2020 | | 36,154 |
|
2021 | | 33,352 |
|
2022 | | 31,912 |
|
2023 | | 30,241 |
|
After 2023 | | 151,284 |
|
Total lease payments | | $ | 292,509 |
|
Property and equipment, net as of September 30, 2019 and Depreciation and amortization for the three and nine months then ended included the following amounts for assets subject to operating leases from our continuing operations (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2019 | | For the three months ended September 30, 2019 | | For the nine months ended September 30, 2019 |
| | Cost | | Accumulated Depreciation | | Net | | Depreciation Expense |
| | | | | | | | | | |
Customer premises equipment | | $ | 1,400,325 |
| | $ | (1,026,135 | ) | | $ | 374,190 |
| | $ | 49,314 |
| | $ | 149,724 |
|
Satellites | | 104,620 |
| | (29,616 | ) | | 75,004 |
| | 1,802 |
| | 5,277 |
|
Total | | $ | 1,504,945 |
| | $ | (1,055,751 | ) | | $ | 449,194 |
| | $ | 51,116 |
| | $ | 155,001 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. Discontinued Operations4. DISCONTINUED OPERATIONS
FollowingBSS Business
The following table presents the consummationfinancial results of the BSS Transaction in September 2019, we no longer operateour discontinued operations for the BSS Business which was a substantial portion offor the three months ended March 31, 2019:
|
| | | | |
| | Amounts |
Revenue: | | |
Services and other revenue - DISH Network | | $ | 70,826 |
|
Services and other revenue - other | | 6,400 |
|
Total revenue | | 77,226 |
|
Costs and expenses: | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 10,217 |
|
Selling, general and administrative expenses | | 20 |
|
Depreciation and amortization | | 31,119 |
|
Total costs and expenses | | 41,356 |
|
Operating income (loss) | | 35,870 |
|
Other income (expense): | | |
Interest expense | | (6,498 | ) |
Total other income (expense), net | | (6,498 | ) |
Income (loss) from discontinued operations before income taxes | | 29,372 |
|
Income tax benefit (provision), net | | (6,648 | ) |
Net income (loss) from discontinued operations | | $ | 22,724 |
|
No assets or liabilities attributable to our ESS business segment. The BSS Transaction has been accounted for as a spin-off to EchoStar’s stockholders as EchoStar did not receive any consideration. As a result, the operating resultsdiscontinued operations of the BSS Business have been presentedwere held by us as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.of March 31, 2020 or December 31, 2019.
The following table presents the significant supplemental cash flow information and adjustments to reconcile net income to net cash flow from operating results of ouractivities for discontinued operations (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
Revenue: | | | | | | | | |
Services and other revenue - DISH Network | | $ | 54,297 |
| | $ | 70,805 |
| | $ | 195,942 |
| | $ | 234,425 |
|
Services and other revenue - other | | 4,915 |
| | 6,400 |
| | 17,715 |
| | 19,198 |
|
Total revenue | | 59,212 |
| | 77,205 |
| | 213,657 |
| | 253,623 |
|
Costs and Expenses: | | | | | | | | |
Cost of equipment, services and other | | 7,307 |
| | 9,714 |
| | 28,033 |
| | 30,274 |
|
Selling, general and administrative expenses | | 4,107 |
| | 22 |
| | 6,749 |
| | 38 |
|
Depreciation and amortization | | 23,788 |
| | 31,105 |
| | 85,926 |
| | 93,447 |
|
Total costs and expenses | | 35,202 |
| | 40,841 |
| | 120,708 |
| | 123,759 |
|
Operating income | | 24,010 |
| | 36,364 |
| | 92,949 |
| | 129,864 |
|
Other Income (Expense): | | | | | | | | |
Interest expense | | (4,632 | ) | | (7,023 | ) | | (17,365 | ) | | (21,790 | ) |
Total other income (expense), net | | (4,632 | ) | | (7,023 | ) | | (17,365 | ) | | (21,790 | ) |
Income from discontinued operations before income taxes | | 19,378 |
| | 29,341 |
| | 75,584 |
| | 108,074 |
|
Income tax benefit (provision), net | | (4,996 | ) | | (2,559 | ) | | (17,850 | ) | | (17,969 | ) |
Net income (loss) from discontinued operations | | $ | 14,382 |
| | $ | 26,782 |
| | $ | 57,734 |
| | $ | 90,105 |
|
Expendituresof the BSS Business for property and equipment of our discontinued operations totaled $0.3 million and de minimisthe three months ended September 30, 2019 and 2018, respectively, and $0.5 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively.
March 31, 2019:
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the aggregate carrying amounts of assets and liabilities of our discontinued operations (amounts in thousands):
|
| | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | | | |
Assets | | | | |
Trade accounts receivable and contract assets, net | | $ | 5,866 |
| | $ | — |
|
Prepaids and deposits | | — |
| | 3,483 |
|
Current assets of discontinued operations | | 5,866 |
| | 3,483 |
|
Property and equipment, net | | — |
| | 660,270 |
|
Regulatory authorizations, net | | — |
| | 65,615 |
|
Other noncurrent assets, net | | — |
| | 16,576 |
|
Noncurrent assets of discontinued operations | | — |
| | 742,461 |
|
Total assets of discontinued operations | | $ | 5,866 |
| | $ | 745,944 |
|
| | | | |
Liabilities: | | | | |
Trade accounts payable | | $ | 506 |
| | $ | — |
|
Current portion of finance lease obligations | | — |
| | 39,995 |
|
Accrued interest | | — |
| | 1,572 |
|
Accrued expenses and other | | 2,986 |
| | 7,488 |
|
Current liabilities of discontinued operations | | 3,492 |
| | 49,055 |
|
Finance lease obligations | | — |
| | 187,002 |
|
Deferred tax liabilities, net | | — |
| | 133,380 |
|
Other noncurrent liabilities | | — |
| | 29,493 |
|
Noncurrent liabilities of discontinued operations | | — |
| | 349,875 |
|
Total liabilities of discontinued operations | | $ | 3,492 |
| | $ | 398,930 |
|
|
| | | | |
| | Amounts |
Operating activities: | | |
Net income (loss) from discontinued operations | | $ | 22,724 |
|
Depreciation and amortization | | $ | 31,119 |
|
| | |
Investing activities: | | |
Expenditures for property and equipment | | $ | 108 |
|
| | |
Financing activities: | | |
Payment of finance lease obligations | | $ | 9,597 |
|
Payment of in-orbit incentive obligations | | $ | 1,035 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 6. OTHER COMPREHENSIVE INCOME (LOSS) AND RELATED TAX EFFECTSTerminated or Transferred Related Party Agreements
Effective September 10, 2019, the following agreements were terminated or transferred to DISH Network as part of the BSS Transaction. Unless noted differently below, we have no further obligations and have neither earned additional revenue nor incurred additional expense, as applicable, under or in connection with these agreements after the consummation of the BSS Transaction.
DBS Transponder Lease. EchoStar leased satellite capacity from us on eight direct broadcast satellite (“DBS”) transponders on the QuetzSat-1 satellite through November 2021, after which EchoStar had certain options to renew the agreement on a year-to year basis through the end of life of the QuetzSat-1 satellite.
EchoStar XXIII Launch Facilitation and Operational Control Agreement. As part of applying for the launch license for the EchoStar XXIII satellite through the UK Space Agency, we and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”), entered into an agreement in March 2016 to transfer to us EOC’s launch service contracts for the EchoStar XXIII satellite and to grant us certain rights to control its in-orbit operations. EOC retained ownership of the satellite and agreed to make additional payments to us for amounts that we were required to pay under the launch service contract. In 2016, we recorded additions to Other non-current assets, net and corresponding increases in Additional paid-in capital in the Condensed Consolidated Balance Sheet to reflect EOC’s cumulative payments under the launch service contract prior to the transfer date and to reflect EOC’s funding of additional cash payments to the launch service provider. The EchoStar XXIII satellite was successfully launched in March 2017. We recorded decreases in Other non-current assets, net and Additional paid-in capital of $62.0 million, representing the carrying amount of the launch service contract at the time of launch to reflect the consumption of the contract’s economic benefits by EOC.
Satellite Capacity Leased to DISH Network. We entered into certain agreements to lease satellite capacity pursuant to which we provided satellite services to DISH Network on certain satellites, as listed below, owned or leased by us. The fees for the services provided under these agreements depended, among other things, upon the orbital location of the applicable satellite, the number of transponders that provided services on the applicable satellite and the length of the service arrangements. The terms of each of the agreements are set forth below:
| |
• | EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV — In March 2014, we began leasing certain satellite capacity to DISH Network on the EchoStar VII satellite, the EchoStar X satellite, the EchoStar XI satellite and the EchoStar XIV satellite. |
•EchoStar XII — DISH Network leased satellite capacity from us on the EchoStar XII satellite.
| |
• | EchoStar XVI — In December 2009, we entered into an agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network leased satellite capacity from us on the EchoStar XVI satellite beginning in January 2013. |
| |
• | Nimiq 5 Agreement— In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”). Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service. Following the consummation of the BSS Transaction, we retained certain obligations related to DISH Network’s performance under the Telesat Transponder Agreement. |
| |
• | QuetzSat-1 Agreement — In November 2008, we entered into an agreement to lease satellite capacity from SES Latin America, which provided, among other things, for the provision by SES Latin America to us of leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into an agreement pursuant to which DISH Network leased from us satellite capacity on 24 of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
satellite was moved to the 77 degree west longitude orbital location. In February 2013, we and DISH Network entered into an agreement pursuant to which we leased back from DISH Network certain satellite capacity on 5 DBS transponders on the QuetzSat-1 satellite.
TT&C Agreement. Effective January 2012, we entered into a TT&C agreement pursuant to which we provided TT&C services to DISH Network, which we subsequently amended (the “2012 TT&C Agreement”). The fees for services provided under the 2012 TT&C Agreement were calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which varied depending on the nature of the services provided.
Real Estate Lease. During 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries whereby EchoStar and certain of its and our subsidiaries received all the shares of preferred tracking stock previously issued by EchoStar and Hughes Satellite Systems Corporation (the “Tracking Stock”) in exchange for 100% of the equity interests of certain of EchoStar’s subsidiaries that held substantially all of the former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Prior to the Share Exchange, a subsidiary of EchoStar leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection with the Share Exchange, EchoStar transferred ownership of a portion of this property to DISH Network and contributed a portion to us and we and DISH Network amended this agreement to, among other things, provide for a continued lease to DISH Network of the portion of the property we retained (the “Cheyenne Data Center”). The rent on a per square foot basis for the lease was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease or subsequent amendments, and DISH Network was responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. In connection with the BSS Transaction, we transferred the Cheyenne Data Center to DISH Network. This lease does not qualify for discontinued operations treatment, and therefore the revenue from it has not been treated as discontinued operations.
NOTE5. BUSINESS COMBINATIONS
In May 2019, we entered into an agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat contributed its satellite communications services business in Brazil to one of our Brazilian subsidiaries in exchange for a 20% equity ownership interest in that subsidiary (the “Yahsat Brazil JV Transaction”). The combined business provides broadband internet services and enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat’s Al Yah 3 satellite. The results of operations related to the business we acquired from Yahsat have been included in these Condensed Consolidated Financial Statements from the date of acquisition. Through March 31, 2020, we have incurred $1.6 million of costs associated with the closing of the Yahsat Brazil JV Transaction.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
All assets and liabilities acquired from Yahsat have been recorded at fair value. The following table presents our updated preliminary allocation of the purchase price:
|
| | | | |
| | Amounts |
Assets: | | |
Cash and cash equivalents | | $ | 7,858 |
|
Other current assets, net | | 7,106 |
|
Property and equipment | | 86,983 |
|
Regulatory authorization | | 4,498 |
|
Goodwill | | 6,328 |
|
Other non-current assets, net | | 1,502 |
|
Total assets | | $ | 114,275 |
|
| | |
Liabilities: | | |
Trade accounts payable | | $ | 3,879 |
|
Accrued expenses and other current liabilities | | 4,796 |
|
Total liabilities | | $ | 8,675 |
|
| | |
Total purchase price (1) | | $ | 105,600 |
|
(1) Based on the value determined for the equity ownership interest issued by our Brazilian subsidiary as consideration for the business acquired by us in the Yahsat Brazil JV Transaction.
The changes infollowing preliminary valuation of the balances of acquired assets was derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation:Accumulated other comprehensive loss by component were as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | Cumulative Foreign Currency Translation Losses | | Unrealized Gain (Loss) On Available-For-Sale Securities | | Other | | Accumulated Other Comprehensive Loss |
| | | | | | | | |
Balance, December 31, 2017 | | $ | (52,251 | ) | | $ | (648 | ) | | $ | 77 |
| | $ | (52,822 | ) |
Cumulative effect of accounting changes as of January 1, 2018 | | — |
| | 433 |
| | — |
| | 433 |
|
Balance, January 1, 2018 | | (52,251 | ) | | (215 | ) | | 77 |
| | (52,389 | ) |
Other comprehensive income (loss) before reclassifications | | (38,485 | ) | | (199 | ) | | — |
| | (38,684 | ) |
Amounts reclassified to net income | | — |
| | (4 | ) | | — |
| | (4 | ) |
Other comprehensive income (loss) | | (38,485 | ) | | (203 | ) | | — |
| | (38,688 | ) |
Balance, September 30, 2018 | | $ | (90,736 | ) | | $ | (418 | ) | | $ | 77 |
| | $ | (91,077 | ) |
| | | | | | | | |
Balance, December 31, 2018 | | $ | (82,800 | ) | | $ | (1,092 | ) | | $ | 118 |
| | $ | (83,774 | ) |
Other comprehensive income (loss) before reclassifications | | (13,927 | ) | | 2,333 |
| | (145 | ) | | (11,739 | ) |
Amounts reclassified to net income | | — |
| | (400 | ) | | — |
| | (400 | ) |
Other comprehensive income (loss) | | (13,927 | ) | | 1,933 |
| | (145 | ) | | (12,139 | ) |
Balance, September 30, 2019 | | $ | (96,727 | ) | | $ | 841 |
| | $ | (27 | ) | | $ | (95,913 | ) |
|
| | | | |
| | Amounts |
Satellite payload | | $ | 49,363 |
|
Regulatory authorization | | 4,498 |
|
Total | | $ | 53,861 |
|
The amounts reclassified to netsatellite payload and regulatory authorization were valued using an income related to unrealized gain (loss) on available-for-sale securities in the table aboveapproach and are included in being amortized over seven and 11 years, respectively.
Gains (losses) on investments, netin our Condensed Consolidated StatementsWe recognized goodwill of Operations.
Except in unusual circumstances, we do not recognize tax effects on foreign$6.3 million, including a currency translation adjustments because they are notadjustment of $1.2 million. The goodwill is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce. This goodwill has been allocated entirely to result in future taxable income or deductions. We do not recognize tax effects on unrealized gains or losses on available-for-sale securities until such gains or losses are realized.our Hughes segment.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 7.6. MARKETABLE INVESTMENT SECURITIES
Overview
Our marketableThe following table presents our Marketable investment securities portfolio consists of various debt and equity instruments summarized in the table below(amounts in thousands):
| | | | As of | | | | | |
| | September 30, 2019 | | December 31, 2018 | | As of |
| | | | | | March 31, 2020 | | December 31, 2019 |
Marketable investment securities: | | | | | | | | |
Debt securities: | | | | | | | | |
Available-for-sale: | | | | | |
Corporate bonds | | $ | 540,683 |
| | $ | 1,234,017 |
| | $ | 319,295 |
| | $ | 411,706 |
|
Other debt securities | | 154,566 |
| | 374,106 |
| | 205,569 |
| | 240,888 |
|
Total debt securities | | 695,249 |
| | 1,608,123 |
| |
Total available-for-sale debt securities | | | 524,864 |
| | 652,594 |
|
Equity securities | | 347 |
| | 1,073 |
| | 77 |
| | 241 |
|
Total marketable investment securities | | $ | 695,596 |
| | $ | 1,609,196 |
| | $ | 524,941 |
| | $ | 652,835 |
|
Debt Securities
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our other debt securities portfolio includes investments in various debt instruments, including U.S. government bonds and commercial paper.
Available-for-Sale
A summaryThe following table presents the components of our available-for-sale debt securities is presented insecurities:
|
| | | | | | | | | | | | | | | | |
| | Amortized | | Unrealized | | Estimated |
| | Cost | | Gains | | Losses | | Fair Value |
As of March 31, 2020 | | | | | | | | |
Corporate bonds | | $ | 321,466 |
| | $ | — |
| | $ | (2,171 | ) | | $ | 319,295 |
|
Other debt securities | | 205,569 |
| | — |
| | — |
| | 205,569 |
|
Total available-for-sale debt securities | | $ | 527,035 |
| | $ | — |
| | $ | (2,171 | ) | | $ | 524,864 |
|
| | | | | | | | |
As of December 31, 2019 | | | | | | | | |
Corporate bonds | | $ | 411,312 |
| | $ | 395 |
| | $ | (1 | ) | | $ | 411,706 |
|
Other debt securities | | 240,887 |
| | 1 |
| | — |
| | 240,888 |
|
Total available-for-sale debt securities | | $ | 652,199 |
| | $ | 396 |
| | $ | (1 | ) | | $ | 652,594 |
|
The following table presents the table below (amounts in thousands):activity on our available-for-sale debt securities:
|
| | | | | | | | | | | | | | | | |
| | Amortized | | Unrealized | | Estimated |
| | Cost | | Gains | | Losses | | Fair Value |
| | | | | | | | |
As of September 30, 2019 | | | | | | | | |
Corporate bonds | | $ | 539,844 |
| | $ | 842 |
| | $ | (3 | ) | | $ | 540,683 |
|
Other debt securities | | 154,565 |
| | 1 |
| | — |
| | 154,566 |
|
Total available-for-sale debt securities | | $ | 694,409 |
| | $ | 843 |
| | $ | (3 | ) | | $ | 695,249 |
|
As of December 31, 2018 | | | | | | | | |
Corporate bonds | | $ | 1,235,110 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,234,017 |
|
Other debt securities | | 374,106 |
| | — |
| | — |
| | 374,106 |
|
Total available-for-sale debt securities | | $ | 1,609,216 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,608,123 |
|
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Proceeds from sales | | $ | 10,000 |
| | $ | 311,823 |
|
Gains (losses) on sales, net | | $ | — |
| | $ | 385 |
|
As of September 30, 2019,March 31, 2020, we have $695.2$491.9 million of available-for-sale debt securities with contractual maturities of one year or less and NaN$33.0 million with contractual maturities greater than one year.
Equity Securities
Our marketable equity securities consist primarily of shares of common stock of public companies. Gains (losses) on investments, net related to equity securities that we held each period were net gains of de minimis and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.7 million in net loss and 0.3 million in net gains for the nine months ended September 30, 2019 and 2018, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sales of Available-for-Sale Securities
Proceeds from sales of our available-for-sale securities were NaN and $312.0 million for the three and nine months ended September 30, 2019, respectively. Proceeds from sales of our available-for-sale securities were $50.0 million for both the three and nine months ended September 30, 2018.
Fair Value Measurements
Our marketable investment securities are measured at fair value on a recurring basis as summarized in the table below (amounts in thousands). As of September 30, 2019 and December 31, 2018, we did not have investments that were categorized within Level 3 of the fair value hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | |
Corporate bonds | | $ | — |
| | $ | 540,683 |
| | $ | 540,683 |
| | $ | — |
| | $ | 1,234,017 |
| | $ | 1,234,017 |
|
Other debt securities | | — |
| | 154,566 |
| | 154,566 |
| | — |
| | 374,106 |
| | 374,106 |
|
Total debt securities | | — |
| | 695,249 |
| | 695,249 |
| | — |
| | 1,608,123 |
| | 1,608,123 |
|
Equity securities | | 347 |
| | — |
| | 347 |
| | 1,073 |
| | — |
| | 1,073 |
|
Total marketable investment securities | | $ | 347 |
| | $ | 695,249 |
| | $ | 695,596 |
| | $ | 1,073 |
| | $ | 1,608,123 |
| | $ | 1,609,196 |
|
NOTE 8. INVENTORY
Our inventory consisted of the following (amounts in thousands):
|
| | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
Raw materials | | $ | 5,441 |
| | $ | 4,856 |
|
Work-in-process | | 10,869 |
| | 13,901 |
|
Finished goods | | 66,367 |
| | 56,622 |
|
Total inventory | | $ | 82,677 |
| | $ | 75,379 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Equity Securities
The following table presents the activity of our equity securities:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Gains (losses) on investments, net | | $ | (164 | ) | | $ | (732 | ) |
For the three months ended March 31, 2020 and 2019, we did not have any sales of equity securities.
Fair Value Measurements
The following table presents our marketable investment securities categorized by the fair value hierarchy, certain of which have historically experienced volatility:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
Available-for-sale debt securities: | | | | | | | | | | | | |
Corporate bonds | | $ | — |
| | $ | 319,295 |
| | $ | 319,295 |
| | $ | — |
| | $ | 411,706 |
| | $ | 411,706 |
|
Other debt securities | | — |
| | 205,569 |
| | 205,569 |
| | — |
| | 240,888 |
| | 240,888 |
|
Total available-for-sale debt securities | | — |
| | 524,864 |
| | 524,864 |
| | — |
| | 652,594 |
| | 652,594 |
|
Equity securities | | 77 |
| | — |
| | 77 |
| | 241 |
| | — |
| | 241 |
|
Total marketable investment securities | | $ | 77 |
| | $ | 524,864 |
| | $ | 524,941 |
| | $ | 241 |
| | $ | 652,594 |
| | $ | 652,835 |
|
As of March 31, 2020 and December 31, 2019, we did not have any investments that were categorized within Level 3 of the fair value hierarchy.
NOTE 9.7. PROPERTY AND EQUIPMENT
The following tables presents the components of Property and equipment, from our continuing operations consisted of the following (amounts in thousands)net:
|
| | | | | | | | | | |
| | Depreciable Life In Years | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| | | | | | |
Land | | — | | $ | 13,298 |
| | $ | 13,366 |
|
Buildings and improvements | | 1 to 40 | | 73,387 |
| | 114,153 |
|
Furniture, fixtures, equipment and other | | 1 to 12 | | 736,792 |
| | 725,924 |
|
Customer premises equipment | | 2 to 4 | | 1,322,084 |
| | 1,159,977 |
|
Satellites - owned | | 2 to 15 | | 1,463,472 |
| | 1,459,955 |
|
Satellites - acquired under finance leases | | 10 to 15 | | 376,321 |
| | 385,592 |
|
Construction in progress | | — | | 38,897 |
| | 28,087 |
|
Total property and equipment | | | | 4,024,251 |
| | 3,887,054 |
|
Accumulated depreciation | | | | (2,238,015 | ) | | (1,965,143 | ) |
Property and equipment, net | | | | $ | 1,786,236 |
| | $ | 1,921,911 |
|
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Property and equipment, net: | | | | |
Satellites, net | | $ | 1,059,542 |
| | $ | 1,127,521 |
|
Other property and equipment, net | | 691,019 |
| | 730,060 |
|
Total property and equipment, net | | $ | 1,750,561 |
| | $ | 1,857,581 |
|
Construction in progress consisted of the following (amounts in thousands): |
| | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | | | |
Progress amounts for satellite construction | | $ | — |
| | $ | 246 |
|
Satellite related equipment | | 25,027 |
| | 13,001 |
|
Other | | 13,870 |
| | 14,840 |
|
Construction in progress | | $ | 38,897 |
| | $ | 28,087 |
|
We recorded capitalized interest related to our satellites, satellite payloads and related ground facilities under construction of $0.3 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively, and $0.6 million and $5.8 million for the nine months ended September 30, 2019 and 2018, respectively.
Depreciation expense associated with our property and equipment from our continuing operations consisted of the following (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
Buildings and improvements | | $ | 1,028 |
| | $ | 2,520 |
| | $ | 3,502 |
| | $ | 7,630 |
|
Furniture, fixtures, equipment and other | | 21,240 |
| | 19,750 |
| | 63,666 |
| | 58,697 |
|
Customer premises equipment | | 49,074 |
| | 43,584 |
| | 142,541 |
| | 129,907 |
|
Satellites | | 33,993 |
| | 32,553 |
| | 100,904 |
| | 91,770 |
|
Total depreciation expense | | $ | 105,335 |
| | $ | 98,407 |
| | $ | 310,613 |
| | $ | 288,004 |
|
Satellites depreciation expense includes amortization of satellites under finance lease agreements of $6.4 million and $5.5 million for the three months ended September 30, 2019 and 2018, respectively, and $19.3 million and $13.8 million for the nine months ended September 30, 2019 and 2018, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Satellites
As of September 30, 2019,March 31, 2020, our operating satellite fleet consisted of 78 satellites, 45 of which are owned and 3 of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite. We depreciate our leased satellites on a straight-line basis over their respective lease terms. In connection with the BSS Transaction, 6 of our owned satellites and the leases for 2 of our leased satellites were transferred to DISH Network.
Our operating satellite fleet consists of bothThe following table presents our owned and leased satellites detailed in the table below as of September 30, 2019.satellites:
|
| | | | | | | | |
SatellitesSatellite | | Segment | | Launch Date | | Nominal Degree Orbital Location (Longitude) | | Depreciable Life In Years(In Years) |
Owned: | | | | | | | | |
SPACEWAY 3 (1) | | Hughes | | August 2007 | | 95 W | | 1210 |
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 (2)(3) | | ESS | | August 2003 | | 121 W | | 12 |
| | | | | | | | |
Capital Leases: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 its acquisition of Hughes Communications, Inc. and its subsidiaries (the “Hughes Acquisition”). |
| |
(2) | See Note 16 for discussion of related party transactions with DISH Network. |
| |
(3) | Fully depreciated assets as of December 31, 2015. |
(1) Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed its acquisition of Hughes Communications, Inc. and its subsidiaries (the “Hughes Acquisition”).
(2) Upon consummation of our joint venture with Yahsat in Brazil in November 2019, we acquired the Brazilian Ka-band payload on this satellite. Depreciable life represents the remaining useful life as of November 2019.
(3) We own the Ka-band and Ku-band payloads on this satellite.
The following table presents the components of our satellites, net:
|
| | | | | | | | | | |
| | Depreciable Life (In Years) | | As of |
| | | March 31, 2020 | | December 31, 2019 |
Satellites, net: | | | | | | |
Satellites - owned | | 7 to 15 | | $ | 1,503,580 |
| | $ | 1,516,006 |
|
Satellites - acquired under finance leases | | 15 | | 352,206 |
| | 381,162 |
|
Total satellites | | | | 1,855,786 |
| | 1,897,168 |
|
Accumulated depreciation: | | | | | | |
Satellites - owned | | | | (739,859 | ) | | (713,259 | ) |
Satellites - acquired under finance leases | | | | (56,385 | ) | | (56,388 | ) |
Total accumulated depreciation | | | | (796,244 | ) | | (769,647 | ) |
Total satellites, net | | | | $ | 1,059,542 |
| | $ | 1,127,521 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the depreciation expense and capitalized interest associated with our satellites:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Depreciation expense: | | | | |
Satellites - owned | | $ | 27,068 |
| | $ | 27,010 |
|
Satellites acquired under finance leases | | 6,013 |
| | 6,490 |
|
Total depreciation expense | | $ | 33,081 |
| | $ | 33,500 |
|
| | | | |
Capitalized interest | | $ | 637 |
| | $ | 147 |
|
Satellite Commitments
As of March 31, 2020 and December 31, 2019, our satellite-related obligations were $245.5 million and $256.9 million, respectively. These primarily include payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change.
Satellite Anomalies and Impairments
OurWe are not aware of any anomalies with respect to our owned or leased satellites may experience anomalies from time to time, some of which mayor payloads that have ahad any significant adverse effect on their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position. We are not awareposition as of any anomalies with respect to our owned or leased satellites that have had any such significant adverse effect duringand for the ninethree months ended September 30, 2019. There can be no assurance, however, that anomalies will not have any such adverse effects in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our satellites were to fail.March 31, 2020.
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 is 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,long-term debt and our joint venture agreements with Yahsat, we are required, subject to certain limitations on coverage, to maintain only for ourthe SPACEWAY 3 andsatellite, the EchoStar XVII satellitessatellite and the Al Yah 3 Brazilian payload, insurance or other contractual arrangements during the commercial in-orbit service of such satellite. We were required pursuant to such agreements to maintain similar insurancesatellite or other contractual arrangements for the EchoStar XVI satellite, which we transferred to DISH Network pursuant to the BSS Transaction.payload. Our other satellites and payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance.insurance or other contractual arrangements. We will continue to assess circumstances going forward and make insuranceinsurance-related decisions on a case-by-case basis.
Fair Value of In-Orbit Incentives
As of March 31, 2020 and December 31, 2019, the fair values of our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate thatin-orbit incentive obligations from our continuing operations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amount may not be recoverable. Certainamounts of the anomalies previously disclosed may be considered to represent a significant adverse change in the physical condition of a particular satellite. However, based on the redundancy designed within each satellite, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.$56.2 million and $57.0 million, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 10. GOODWILL,8. REGULATORY AUTHORIZATIONS AND OTHER INTANGIBLE ASSETS
Goodwill
The excessfollowing table presents the components of the cost ofour Regulatory authorizations, net:
|
| | | | | | | | | | | | | | | | | | | | |
| | Finite lived | | | | |
| | Cost | | Accumulated Amortization | | Total | | Indefinite lived | | Total |
Balance, December 31, 2018 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 400,043 |
| | $ | 400,043 |
|
Balance, March 31, 2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 400,043 |
| | $ | 400,043 |
|
| | | | | | | | | | |
Balance, December 31, 2019 | | $ | 12,524 |
| | $ | (161 | ) | | $ | 12,363 |
| | $ | 400,000 |
| | $ | 412,363 |
|
Amortization expense | | — |
| | (100 | ) | | (100 | ) | | — |
| | (100 | ) |
Foreign currency translation | | (1,020 | ) | | — |
| | (1,020 | ) | | — |
| | (1,020 | ) |
Balance, March 31, 2020 | | $ | 11,504 |
| | $ | (261 | ) | | $ | 11,243 |
| | $ | 400,000 |
| | $ | 411,243 |
|
| | | | | | | | | | |
Weighted average useful life | | | | 14 years | | | | | | |
Finite Lived Assets
In November 2019, we were granted an S-Band spectrum license for terrestrial rights in Mexico for $7.9 million. The acquired business over the fair values of net tangible 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 andasset is subject to impairment testing annually, or more frequently when events or changes in circumstances indicate the fair valueamortization over a period of a reporting unit is more likely than not less than its carrying amount.15 years.
In November 2019, we also acquired Ka-band spectrum rights for $4.5 million, upon consummation of the Yahsat Brazil JV Transaction, which are subject to amortization over a period of 11 years.
NOTE 9. OTHER INVESTMENTS
The following table presents the components of Other investments, net:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Other investments, net: | | |
| | |
|
Equity method investments | | $ | 101,601 |
| | $ | 102,689 |
|
Other equity investments | | 7,351 |
| | 7,351 |
|
Total other investments, net | | $ | 108,952 |
| | $ | 110,040 |
|
Equity Method Investments
Deluxe/EchoStar LLC
We own 50% 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 recognized revenue from Deluxe for transponder services and the sale of broadband equipment of $1.3 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively. As of September 30, 2019March 31, 2020 and December 31, 2019, we had trade accounts receivable from Deluxe of $1.0 million and $0.6 million, respectively.
Broadband Connectivity Solutions (Restricted) Limited
In August 2018, allwe entered into an agreement with Yahsat to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat’s Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100.0 million in cash in exchange for a 20%
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
interest in BCS. Under the terms of the agreement, we may also acquire, for impairment annuallyfurther cash investments, additional ownership interests in BCS in the second quarter. Based on our impairment testing infuture provided certain conditions are met. We supply network operations and management services and equipment to BCS. We recognized revenue from BCS for such services and equipment of $1.7 million and $2.3 million for the second quarter ofthree months ended March 31, 2020 and 2019, our goodwill is considered to be not impaired.
Regulatory Authorizations
Regulatory authorizations included amounts with indefinite useful lives.respectively. As of both September 30, 2019March 31, 2020 and December 31, 2018, regulatory authorization balances, net2019, we had trade accounts receivable from BCS of accumulated amortization, from our continuing operations were $400.0 million.
Other Intangible Assets
As of September 30, 2019 and December 31, 2018, accumulated amortization for our other intangible assets was $318.4$4.5 million and $307.4$5.2 million, respectively.
NOTE 11. INVESTMENTS IN UNCONSOLIDATED ENTITIESOther Equity Investments
We have strategic investments in certain non-publicly traded equity securities that do not have a readily determinable fair value.
Our investments in these unconsolidated entities consisted ofDuring the following (amounts in thousands):
|
| | | | | | | | |
| | As of |
| | September 30, 2019 | | December 31, 2018 |
| | | | |
Investments in unconsolidated entities: | | |
| | |
|
Equity method | | $ | 103,136 |
| | $ | 110,931 |
|
Other equity investments without a readily determinable fair value | | 15,438 |
| | 15,438 |
|
Total investments in unconsolidated entities | | $ | 118,574 |
| | $ | 126,369 |
|
We measure our equity securities without a readily determinable fair value, other than those accounted for using the equity method, at cost adjusted for changes resulting from impairments, if any, and observable price changes in orderly transactions for the identical or similar securities of the same issuer. For the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, we did not identify any observable price changes requiring an adjustment to our investments.
See Note 16 for additional information about Deluxe/EchoStar LLC (“Deluxe”) and Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”).
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12.10. LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
The following table summarizespresents the carrying amounts and fair values of our long-termLong-term debt and finance lease obligations from our continuing operations (amounts in thousands):
| | | | Effective Interest Rate | | As of | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 | | Effective interest rates | | As of |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | March 31, 2020 | | December 31, 2019 |
| | | | | | | | | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Senior Secured Notes: | | | | | | | | | | | | | | | | |
6 1/2% Senior Secured Notes due 2019 | | 6.959% | | $ | — |
| | $ | — |
| | $ | 920,836 |
| | $ | 932,696 |
| |
5 1/4% Senior Secured Notes due 2026 | | 5.320% | | 750,000 |
| | 806,295 |
| | 750,000 |
| | 695,865 |
| | 5.320% | | $ | 750,000 |
| | $ | 748,133 |
| | $ | 750,000 |
| | $ | 825,308 |
|
Senior Unsecured Notes: | | | | | | | | | | | | | | | | |
7 5/8% Senior Unsecured Notes due 2021 | | 8.062% | | 900,000 |
| | 973,908 |
| | 900,000 |
| | 934,902 |
| | 8.062% | | 900,000 |
| | 922,527 |
| | 900,000 |
| | 963,783 |
|
6 5/8% Senior Unsecured Notes due 2026 | | 6.688% | | 750,000 |
| | 815,273 |
| | 750,000 |
| | 696,353 |
| | 6.688% | | 750,000 |
| | 770,715 |
| | 750,000 |
| | 833,903 |
|
Less: Unamortized debt issuance costs | | (11,862 | ) | | — |
| | (16,757 | ) | | — |
| | (9,782 | ) | |
|
| | (10,832 | ) | |
|
|
Subtotal | | 2,388,138 |
| | $ | 2,595,476 |
| | 3,304,079 |
| | $ | 3,259,816 |
| |
Finance lease obligations | | 1,200 |
| | | | 1,705 |
| | | |
Total debt and finance lease obligations | | 2,389,338 |
| | | | 3,305,784 |
| | | |
Less: Current portion | | (407 | ) | | | | (919,582 | ) | | | |
Long-term debt and finance lease obligations, net | | $ | 2,388,931 |
| | | | $ | 2,386,202 |
| | | |
Total long-term debt | | | $ | 2,390,218 |
| | $ | 2,441,375 |
| | $ | 2,389,168 |
| | $ | 2,622,994 |
|
DuringNo amounts on our long-term debt are due during the three and nine months ended September 30, 2019, we repurchased NaN and $11.5 million, respectively, of our 6 1/2% Senior Secured Notes due 2019 in open market trades. The outstanding balance of the 6 1/2% Senior Secured Notes due 2019 matured in June 2019.next twelve months.
NOTE 13.11. INCOME TAXES
Provision For 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 interim income tax provision and our interim estimate of our annual effective tax rate are influenced by several factors, including foreign losses and capital gains and losses for which related deferred tax assets are partially offset by a valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be affected by the amount of pre-tax 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.
Our income tax provision from our continuing operations was $5.2 million for the three months ended September 30, 2019March 31, 2020 compared to an income tax provision of $11.0$4.9 million for the three months ended September 30, 2018.March 31, 2019. Our estimated effective income tax rate was (43.5)(41.2)% and 83.7%94.1% for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2019March 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses.losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature, permanent book tax differences and research and experimentation credits. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2018March 31, 2019 were primarily due to the changeincrease in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature.nature and research and experimentation credits.
Our incomeThe Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act features significant tax provision from our continuing operations was $1.2 million forprovisions and other measures to assist individuals and businesses impacted by the nine months ended September 30, 2019 compared to an income tax provision of $13.8 million for the nine months ended September 30, 2018. Our
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
estimated effectiveeconomic effects of the COVID-19 pandemic, including a five-year carryback of net operating losses, relaxation of Section 163(j) interest deduction limitations, acceleration of Alternative Minimum Tax refunds, relief for payroll tax and tax credits for employers who retain employees. These provisions did not affect our income tax rate was (3.4)% and 100.8%provision for the ninethree months ended September 30, 2019 and 2018, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2019 were primarily due to the change in net unrealized gains that are capital in nature, various permanent tax differences, the impact of state and local taxes, and increase in our valuation allowance associated with certain foreign losses. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2018 were primarily due to various permanent tax differences, the impact of state and local taxes, the increase in our valuation allowance associated with certain foreign losses and the change in our valuation allowance associated with net unrealized losses that are capital in nature.March 31, 2020.
NOTE 14. COMMITMENTS AND12. CONTINGENCIES
Commitments
As of September 30, 2019 and December 31, 2018, our satellite-related obligations from our continuing operations were $263.7 million and $298.9 million, respectively. Our satellite-related obligations primarily include payments pursuant to regulatory authorizations; non-lease costs associated with our finance lease satellites; and in-orbit incentives relating to certain satellites; as well as commitments for satellite service arrangements.
Contingencies
Patents and Intellectual Property
Many entities, including some of our competitors, have or may have in the future 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 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 parties 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 from these parties 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 Exchange and BSS Transaction
Certain Arrangements with DISH Network
In connection with EchoStar’s spin-off from DISH in 2008 (the “Spin-off”), EchoStar 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, EchoStar assumed certain liabilities that relate to its and 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, EchoStar will generally only be liable for its and its subsidiaries’ acts or omissions following the Spin-off and DISH Network will indemnify EchoStar 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 the BSS Transaction, EchoStar and certain of its and our subsidiaries 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 EchoStar and us and DISH Network for, in the case of the Share Exchange, certain pre-existing liabilities and legal proceedings and, in the case of the BSS Transaction, certain losses with respect to breaches of certain representations and covenants and certain liabilities.
Litigation
We are involved in a number of legal proceedings against us 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
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable 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 legal proceedings are charged to expense as incurred.
For certain cases,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
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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, 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
On January 23, 2015, Elbit Systems Land and C4I LTD and Elbit Systems of America Ltd. (together referred to as “Elbit”) filed a complaint against our subsidiary Hughes Network Systems, L.L.C. (“HNS”), as well as against Black Elk Energy Offshore Operations, LLC, Bluetide Communications, Inc. and Helm Hotels Group, in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. 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, Elbit filed an amended complaint removing Helm Hotels Group as a defendant, but making similar allegations against a new defendant, Country Home Investments, Inc. On November 3 and 4, 2015 and January 22, 2016, the defendants filed petitions before the United States Patent and Trademark Office (“USPTO”) challenging the validity of the patents in suit, which the USPTO subsequently declined to institute. On April 13, 2016, 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 $21.1 million. The jury also found that such infringement of the 073 patent was not willful and that the 874 patent was not infringed. On March 30, 2018, the court ruled on post-trial motions, upholding the jury’s findings and awarding Elbit attorneys’ fees in an amount that has not yet been specified. Elbit initially requested an award of approximately $13.9 million of attorneys’ fees. On April 27, 2018, HNS filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. Oral argument was held on May 8, 2019. On June 25, 2019, the Federal Circuit issued an Opinion and Order affirming the court’s judgment and holding that it did not yet have jurisdiction to review the court’s decision to award attorney’s fees. On August 8, 2019, HNS filed a combined petition for panel rehearing or rehearing en banc with the Federal Circuit, which was denied on September 10, 2019. In an order dated September 18, 2019, the District Court questioned the attorneys’ fees calculations proposed by both parties and asked for further briefing, which the parties submitted on October 25, 2019.As a result of the Federal Circuit’s rulings, as of September 30, 2019, we have recorded an accrual of $33.7 million, reflecting the $21.1 million jury verdict and $12.6 million of pre- and post-judgment interest, costs, attorney’s fees, pre-verdict supplemental damages and post-verdict damages through the 073 patent’s expiration. As of December 31, 2018, we recorded an accrual of $3.2 million with respect to this liability. Any eventual payments
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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made with respect to the ultimate outcome of this matter may be different from our accruals and such differences could be significant.
Realtime Data LLC
On May 8, 2015, Realtime Data LLC (“Realtime”) filed suit against EchoStar Corporation and our subsidiary HNS in the U.S. District Court for the Eastern District of Texas alleging infringement of U.S. 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 U.S. Patent No. 9,116,908 (the “908 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval.” 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 U.S. Patents, Nos. 7,358,867 (the “867 patent”), entitled “Content Independent Data Compression Method and System;” 8,502,707 (the “707 patent”), entitled “Data Compression Systems and Methods;” 8,717,204 (the “204 patent”), entitled “Methods for Encoding and Decoding Data;” and 9,054,728 (the “728 patent”), entitled “Data Compression System and Methods.” On February 13, 2018, we filed petitions before the USPTO challenging the validity of all claims asserted against us from the 707 patent, as well as one of the asserted claims of the 728 patent. On September 5, 2018, the USPTO declined to institute proceedings for the petition that we had filed against the 728 patent. On September 12, 2018, the USPTO instituted proceedings to review the validity of the asserted claims of the 707 patent. In a stipulation filed on October 24, 2018, Realtime voluntarily elected not to pursue any previously asserted claims from the 992, 530, 513, 908, 867 and 204 patents. Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein. In February 2019, we entered into a comprehensive settlement agreement with RealtimeElbit pursuant to which we paid a total of $33.0 million in satisfaction of all amounts relating to these matters and the case wasall open proceedings, including appeals, were dismissed with prejudice.
Shareholder Litigation
On July 2, 2019, the City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust, purporting to sue on behalf of a class of EchoStar’s stockholders, filed a complaint in the District Court of Clark County, Nevada against EchoStar’s 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 and EchoStar’s officer, David J. Rayner; EchoStar,EchoStar; Hughes Satellite Systems Corporation andCorporation; our former subsidiary BSS Corp.; and DISH and its subsidiary Merger Sub. On September 5, 2019, the defendants filed motions to dismiss. On October 11, 2019, the plaintiffs filed an amended complaint removing Messrs. Dodge, Federico, Kaul, Schroeder, Tarr and Wade as defendants. The amended complaint alleges that Mr. Ergen, as EchoStar’s controlling stockholder, breached fiduciary duties to EchoStar’s minority stockholders by structuring the BSS Transaction with inadequate consideration and improperly influencing EchoStar’s boardand Hughes Satellite Systems Corporation’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 hearing on January 13, 2020 the court denied these motions. On February 10, 2020, we and the other defendants filed answers to the amended complaint. We intend to vigorously defend this case. We cannot predict its outcome with any degree of certainty.certainty.
License Fee Dispute with Government of India, Department of Telecommunications
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 1999, HCIPL’s license was amended pursuant to a new government policy that 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, interest on such fees and penalties and interest on the 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,
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
petitions were filed by several other such providers with the Tribunal. These petitions were amended, consolidated, remanded and re-appealed several times over the following twelve years.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. As of March 31, 2018, the DOT had assessed HCIPL $4.2 million for additional license fees and $17.8 million for interest, penalties and interest on penalties. On October 24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties. We expectpenalties, but without indicating the amount HCPIL is required to pay the DOT, will issueand ordering payment by January 23, 2020. On November 23, 2019, HCIPL and other telecommunication service providers filed a petition asking the Supreme Court to reconsider its decision. The petition was denied on January 20, 2020. On January 22, 2020, HCIPL and other telecommunication service providers filed an updated assessmentapplication requesting that could possibly have additionalthe Supreme Court modify the Order to permit the DOT to calculate the final amount due and extend HCPIL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court denied this application and directed us 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 Supreme Court in October 2019 must be paid, including interest, penalties and interest on the penalties. 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. This hearing was postponed due to the COVID-19 pandemic and not yet rescheduled. To date, the DOT has issued HCIPL written assessments totaling $28.4 million, comprised of $4.0 million for additional license fees, $4.1 million for penalties in lightand $20.3 million for interest and interest on penalties. In the first quarter of 2020, HCIPL paid the DOT $2.9 million with respect to this matter. As a result of the Supreme Court’s recent decision. Asorders in this matter, HCIPL’s payments to date and the impact of September 30, 2019foreign exchange rates, and December 31, 2018,using the DOT’s methodology as reflected in the assessments HCIPL has received as of the date of the Order, we have recorded an accrual of $22.0$77.1 million as of March 31, 2020, comprised of $3.8 million for additional license fees, $3.9 million for penalties and $1.3$69.4 million respectively. Thefor interest and interest on penalties. We had recorded an accrual of $80.2 million as of December 31, 2019. 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.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of business. As part of our ongoing operations, we 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 we 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, we from time to time receive 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.
We also indemnify our directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for us. Additionally, in the normal course of its business, we enter into contracts pursuant to which we may make a variety of representations and warranties and indemnify the counterparty for certain losses. Our 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 us or our officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 1513. SEGMENT REPORTING
OperatingBusiness segments are business components of an enterprise for which separate financial information is available and regularly evaluated by our chief operating decision maker (“CODM”), who is our Chief Executive Officer.We primarily operate in 2business segments, Hughes and ESS, as described inNote 1. Following the consummation of the BSS Transaction, we no longer operate the BSS Organization and Business which was a substantial portion of our ESS business segment.Activities.
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, net income (loss) from discontinued operations and net income (loss) attributable to noncontrollingnon-controlling interests or EBITDA. Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate, Accounting and Legal) and other activities that have not been assigned to our operating segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in the tables below or in the reconciliation of EBITDA below.(“EBITDA”).
Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
The following table presents revenue, EBITDA and capital expenditures for each of our business segments. Capital expenditures are net of refunds and other receipts related to our property and equipment.
|
| | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended March 31, 2020 | | | | | | | | |
External revenue | | $ | 458,482 |
| | $ | 4,367 |
| | $ | 4,698 |
| | $ | 467,547 |
|
Intersegment revenue | | — |
| | 285 |
| | (285 | ) | | — |
|
Total revenue | | $ | 458,482 |
| | $ | 4,652 |
| | $ | 4,413 |
| | $ | 467,547 |
|
| | | | | | | | |
EBITDA | | $ | 154,641 |
| | $ | 2,030 |
| | $ | (6,646 | ) | | $ | 150,025 |
|
Capital expenditures | | $ | 91,517 |
| | $ | — |
| | $ | — |
| | $ | 91,517 |
|
| | | | | | | | |
For the three months ended March 31, 2019 | | | | | | | | |
External revenue | | $ | 445,337 |
| | $ | 3,852 |
| | $ | 6,010 |
| | $ | 455,199 |
|
Intersegment revenue | | — |
| | 181 |
| | (181 | ) | | — |
|
Total revenue | | $ | 445,337 |
| | $ | 4,033 |
| | $ | 5,829 |
| | $ | 455,199 |
|
| | | | | | | | |
EBITDA | | $ | 161,132 |
| | $ | 1,729 |
| | $ | (6,158 | ) | | $ | 156,703 |
|
Capital expenditures | | $ | 73,821 |
| | $ | — |
| | $ | — |
| | $ | 73,821 |
|
The following table reconciles Income (loss) from continuing operations before income taxes in the Condensed Consolidated Statements of Operations to EBITDA:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Income (loss) from continuing operations before income taxes | | $ | (12,682 | ) | | $ | 5,180 |
|
Interest income, net | | (8,892 | ) | | (17,997 | ) |
Interest expense, net of amounts capitalized | | 42,192 |
| | 57,915 |
|
Depreciation and amortization | | 125,965 |
| | 112,411 |
|
Net loss (income) attributable to non-controlling interests | | 3,442 |
| | (806 | ) |
EBITDA | | $ | 150,025 |
| | $ | 156,703 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 14. RELATED PARTY TRANSACTIONS - ECHOSTAR
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 - EchoStar
The following table presents our Services and other revenue from EchoStar:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Services and other revenue - EchoStar | | $ | 4,699 |
| | $ | 4,474 |
|
The following table presents the corresponding related party receivables:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Related party receivables - EchoStar - current | | $ | 131,948 |
| | $ | 131,892 |
|
Related party receivables - EchoStar - non-current | | 19,412 |
| | 19,759 |
|
Total related party receivables - EchoStar | | $ | 151,360 |
| | $ | 151,651 |
|
Receivables. EchoStar and its other subsidiaries reimburse us from time to time for amounts paid by us for costs and expenses attributable to EchoStar and its other subsidiaries. We report receivables under these arrangements within Related party receivables - EchoStar - current. No repayment schedule for these receivables has been determined.
EchoStar Mobile Limited Service Agreements. We provide services and lease equipment to support the business of EchoStar Mobile Limited, a subsidiary of EchoStar that is licensed by the European Union and its member states (“EU”) to provide mobile satellite services and complementary ground component services covering the entire EU using S-band spectrum. Generally, the amounts EchoStar’s other subsidiaries pay for these services are based on cost plus a fixed margin. We recorded the revenue EBITDA and capital expenditures for each of our operating segments from our continuing operations (amounts in thousands). Capital expenditures are net of refundsrelated to these services within Services and other receipts related to property and equipment and exclude capital expenditures from discontinued operationsrevenue - EchoStar of $0.3$4.7 million and de minimis$5.0 million for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $0.5 million and $0.1 millionrespectively. Additionally, we have converted the receivables for the nine months ended September 30, 2019 and 2018, respectively.
|
| | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | |
For the three months ended September 30, 2019 | | | | | | | | |
External revenue | | $ | 463,735 |
| | $ | 3,772 |
| | $ | 5,614 |
| | $ | 473,121 |
|
Intersegment revenue | | — |
| | 326 |
| | (326 | ) | | — |
|
Total revenue | | $ | 463,735 |
| | $ | 4,098 |
| | $ | 5,288 |
| | $ | 473,121 |
|
EBITDA | | $ | 155,940 |
| | $ | 1,791 |
| | $ | (7,574 | ) | | $ | 150,157 |
|
Capital expenditures | | $ | 76,572 |
| | $ | — |
| | $ | — |
| | $ | 76,572 |
|
| | | | | | | | |
For the three months ended September 30, 2018 | | | | | | | | |
External revenue | | $ | 444,762 |
| | $ | 6,802 |
| | $ | 6,086 |
| | $ | 457,650 |
|
Intersegment revenue | | — |
| | — |
| | — |
| | — |
|
Total revenue | | $ | 444,762 |
| | $ | 6,802 |
| | $ | 6,086 |
| | $ | 457,650 |
|
EBITDA | | $ | 164,135 |
| | $ | 4,687 |
| | $ | (5,951 | ) | | $ | 162,871 |
|
Capital expenditures | | $ | 110,550 |
| | $ | 18 |
| | $ | — |
| | $ | 110,568 |
|
| | | | | | | | |
For the nine months ended September 30, 2019 | | | | | | | | |
External revenue | | $ | 1,360,919 |
| | $ | 11,058 |
| | $ | 17,583 |
| | $ | 1,389,560 |
|
Intersegment revenue | | — |
| | 815 |
| | (815 | ) | | — |
|
Total revenue | | $ | 1,360,919 |
| | $ | 11,873 |
| | $ | 16,768 |
| | $ | 1,389,560 |
|
EBITDA | | $ | 448,837 |
| | $ | 5,006 |
| | $ | (19,835 | ) | | $ | 434,008 |
|
Capital expenditures | | $ | 224,483 |
| | $ | — |
| | $ | — |
| | $ | 224,483 |
|
| | | | | | | | |
For the nine months ended September 30, 2018 | | | | | | | | |
External revenue | | $ | 1,271,527 |
| | $ | 22,562 |
| | $ | 17,634 |
| | $ | 1,311,723 |
|
Intersegment revenue | | 359 |
| | — |
| | (359 | ) | | — |
|
Total revenue | | $ | 1,271,886 |
| | $ | 22,562 |
| | $ | 17,275 |
| | $ | 1,311,723 |
|
EBITDA | | $ | 452,982 |
| | $ | 15,478 |
| | $ | (9,704 | ) | | $ | 458,756 |
|
Capital expenditures | | $ | 285,352 |
| | $ | (76,757 | ) | | $ | — |
| | $ | 208,595 |
|
certain of these services into loans, bearing an annual interest rate of 5%, that mature in 2023. We report these loans within
Related party receivables - EchoStar - non-current.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Operating Expenses - EchoStar
The following table reconciles total consolidated EBITDApresents our operating expenses related to reported Income (loss) from continuing operations before income taxes in our Condensed Consolidated Statements of Operations (amounts in thousands):EchoStar:
|
| | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
EBITDA | | $ | 150,157 |
| | $ | 162,871 |
| | $ | 434,008 |
| | $ | 458,756 |
|
Interest income and expense, net | | (43,308 | ) | | (42,370 | ) | | (125,161 | ) | | (130,473 | ) |
Depreciation and amortization | | (115,948 | ) | | (107,846 | ) | | (342,086 | ) | | (315,930 | ) |
Net income attributable to noncontrolling interests | | (2,797 | ) | | 450 |
| | (1,359 | ) | | 1,292 |
|
Income (loss) from continuing operations before income taxes | | $ | (11,896 | ) | | $ | 13,105 |
| | $ | (34,598 | ) | | $ | 13,645 |
|
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Operating expenses - EchoStar | | $ | 12,642 |
| | $ | 13,306 |
|
The following table presents the corresponding related party payables:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Related party payables - EchoStar - current | | $ | 13,793 |
| | $ | 11,132 |
|
Related party payables - EchoStar - non-current | | 23,748 |
| | 23,980 |
|
Total related party payables - EchoStar | | $ | 37,541 |
| | $ | 35,112 |
|
NOTE 16Payables. RELATED PARTY TRANSACTIONSWe reimburse EchoStar and its other subsidiaries from time to time for amounts paid by EchoStar and its other subsidiaries for costs and expenses attributable to us. We report payables under these arrangements within Related party payables - EchoStar - current. No repayment schedule for these payables has been determined.
EchoStar
Shared Corporate Services. We and EchoStar, including EchoStar’s other subsidiaries, have agreed that we shall each have the right, but not the obligation, to receive from the other certain shared corporate services, including among other things: treasury, tax, accounting and reporting, risk management, cybersecurity, legal, internal audit, human resources, and information technology. These shared corporate services are generally provided at cost. Effective March 2017, and as a result of the Share Exchange, we implemented a new methodology for determining the cost of these shared corporate services. We and EchoStar, including EchoStar’s other subsidiaries, may each terminate a particular shared corporate service for any reason upon at least 30 days’ notice. We recorded netthese expenses within Operating expenses - EchoStar for shared corporate services received from EchoStar and its other subsidiaries of $1.2$4.4 million and $4.5$2.8 million for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $6.1 million and $14.1 million for the nine months ended September 30, 2019 and 2018, respectively.
We also reimburse EchoStar and its other subsidiaries from time to time for amounts paid by EchoStar and its other subsidiaries for costs and expenses attributable to us, and EchoStar and its other subsidiaries similarly reimburse us from time to time for amounts paid by us for costs and expenses attributable to EchoStar and its other subsidiaries. We report net payments under these arrangements in Real EstateAdvances to affiliates, net. within current assets and we report net receipts under these arrangements in Advances from affiliates, net within current liabilities in our Condensed Consolidated Balance Sheets. No repayment schedule for these net advances has been determined.
In addition, weWe occupy certain office space in buildings owned or leased by EchoStar and its other subsidiaries and pay a portion of the taxes, insurance, utilities and maintenance of the premises in accordance with the percentage of the space we occupy.
Cash Advances. EchoStar and certain of its other subsidiaries have also provided cash advances to certain of our foreign subsidiaries to fund certain expenditures pursuant to loan agreements that mature in 2021 and 2022. Advances under these agreements bear interest at annual rates ranging from 1one to 3three percent, subject to periodic adjustment based on the one-year U.S. LIBOR rate. We report amounts payable under these agreements in within Related party payables - EchoStar - non-current.
Construction Management Services for EchoStar XXIV SatelliteAdvances from affiliates, net within noncurrent liabilities in. In August 2017, a subsidiary of EchoStar entered into a contract with Space Systems Loral, LLC for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. We provide construction management services to EchoStar’s subsidiary for the construction of the EchoStar XXIV satellite. We charged EchoStar’s subsidiary and reduced our Condensed Consolidated Balance Sheets.operating expenses by the costs of such services of $0.3 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Other Agreements
BSS Transaction. Pursuant to the pre-closing restructuring contemplated by the Master Transaction Agreement, and as part of the BSS Transaction, we and our subsidiaries transferred certain of the BSS Business to BSS Corp., and we distributed all of the shares of BSS Corp. to EchoStar as a dividend. See Note 11. Organization and Business Activities for further information.
Contribution of EchoStar XIX Satellite. On February 1, 2017, EchoStar contributed the EchoStar XIX satellite and assigned the related construction contract with the satellite manufacturer to us. We recorded a $349.3 million increase in Additional paid-in capital, reflecting EchoStar’s $514.4 million carrying amount of the satellite, including capitalized
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interest that was previously charged to expense in our consolidated financial statements, less related deferred taxes of $165.1 million.
EchoStar XXI and EchoStar XXIII Launch Facilitation and Operational Control Agreements. As part of applying for launch licenses for the EchoStar XXI and XXIII satellites through the UK Space Agency, we and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”), entered into agreements in June 2015 and March 2016 to transfer to us EOC’s launch service contracts for the EchoStar XXI and EchoStar XXIII satellites, respectively, and to grant us certain rights to control the in-orbit operations of these satellites. EOC retained ownership of the satellites and agreed to make additional payments to us for amounts that we are required to pay under both launch service contracts. In 2016, we recorded additions to Other noncurrent assets, net and corresponding increases in Additional paid-in capital in our Condensed Consolidated Balance Sheet to reflect EOC’s cumulative payments under the launch service contracts prior to the transfer dates and to reflect EOC’s funding of additional cash payments to the launch service provider. The EchoStar XXIII and the EchoStar XXI satellites were successfully launched in March 2017 and June 2017, respectively. We recorded decreases in Other noncurrent assets, net and Additional paid-in capital of $61.8 million and $83.3 million, respectively, representing the carrying amounts of the launch service contracts at the time of launch to reflect the consumption of the contracts’ economic benefits by EOC, the owner of the satellites. In connection with the BSS Transaction, the agreement relating to the EchoStar XXIII satellite was transferred to DISH Network.
Share Exchange Agreement.Agreement. Prior to consummation of the Share Exchange, EchoStar was required to complete steps necessary for the transferring of certain assets and liabilities to DISH and certain of its subsidiaries. As part of these steps, subsidiaries of EchoStar that, prior to the consummation of the Share Exchange, owned EchoStar’s business of providing online video delivery and satellite video delivery for broadcasters and pay-TV operators, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management and other services and related assets and liabilities were contributed to one of our subsidiaries in consideration for additional shares of HSS’HSSC’s common stock that were then issued to a subsidiary of EchoStar.
EchoStar Mobile Limited Service Agreements. We provide services and lease equipment to support the business of EchoStar Mobile Limited, a subsidiary of EchoStar that is licensed by the European Union and its member states (“EU”) to provide mobile satellite services and complementary ground component services covering the entire EU using S-band spectrum. Generally, the amounts EchoStar’s other subsidiaries pay for these services are based on cost plus a fixed margin. We have converted the receivables for certain of these services into loans, bearing an annual interest rate of 5%, that mature in 2023. We recorded revenue in Services and other revenue - other of $4.9 million for each of the three months ended September 30, 2019 and 2018, and $14.8 million and $13.7 million for the nine months ended September 30, 2019 and 2018, respectively, related to these services.
Construction Management Services for EchoStar XXIV satelliteNOTE 15. In August 2017, a subsidiary of EchoStar entered into a contract with Space Systems Loral, LLC for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite, with a planned 2021 launch. We provide construction management services to EchoStar’s subsidiary for the construction of the EchoStar XXIV satellite. We charged EchoStar’s subsidiary and reduced our operating expenses by the costs of such services of $0.3 million for each of the three months ended September 30, 2019 and 2018, and $1.1 million and $0.8 million for each of the nine months ended September 30, 2019 and 2018, respectively.RELATED PARTY TRANSACTIONS - DISH NETWORK
DISH NetworkOverview
EchoStar and DISH have operated as separate publicly-traded companies since 2008. In addition, prior to the consummation of the Share Exchange in February 2017, DISH Network owned the Tracking Stock, which represented 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. A substantial majority of the voting power of the shares of each of EchoStar and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established by Mr. Ergen for the benefit of his family. In addition, prior to March 2017, DISH Network owned the Tracking Stock, which in the aggregate represented an 80% economic interest in the residential retail satellite broadband business of our Hughes segment. The Tracking Stock was retired in March 2017.
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, EchoStar, we and certain other of EchoStar’s subsidiaries and DISH Network entered into certain agreements pursuant to which we, and EchoStar and certain of its other subsidiaries, on the one hand, obtain certain products, services and rights from DISH Network;Network, on the other hand; DISH Network, on the one hand, obtains certain products, services and rights from us, and EchoStar and certain of its other subsidiaries;subsidiaries, on the other hand; and such entities indemnify each other
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
against certain liabilities arising from thetheir respective businesses. Generally, the amounts we and/or EchoStar and its other subsidiaries 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 and/or EchoStar and its other subsidiaries may also may enter into additional agreements with DISH Network in the future.
The following is a summary of the transactions and the terms of ourthe underlying principal agreements with DISH Network 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 from DISH Network:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Services and other revenue - DISH Network | | $ | 7,587 |
| | $ | 11,545 |
|
The following table presents the related trade accounts receivable:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Trade accounts receivable - DISH Network | | $ | 9,955 |
| | $ | 8,876 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Satellite Capacity Leased to DISH Network. We have entered into certain agreementsan agreement and have previously entered into a now terminated agreement to lease satellite capacity pursuant to which we providehave provided satellite services to DISH Network on certain satellites owned or leased by us. The fees for the services provided under these agreements depend upon, 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 isthese agreements are set forth below:
| |
• | EchoStar IX— . 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. |
103 Degree Orbital Location/SES-3. | |
• | 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. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Spectrum Development Agreement and we exercised our right to terminate the 103 Spectrum Development Agreement. |
In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a ten-year agreement with Ciel pursuant to which we leased certain satellite capacity from Ciel on the SES-3 satellite at the 103 degree west longitude orbital location (the “Ciel 103 Agreement”). In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network leased certain satellite capacity from us on the SES-3 satellite (the “DISH 103 Agreement”). Under the terms of the DISH 103 Agreement, DISH Network made certain monthly payments to us through the service term. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Agreement and we exercised our right to terminate the Ciel 103 Agreement.
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”). We transferred the Telesat Transponder Agreement to DISH Network as part of the BSS Transaction; however, we retained certain obligations related to DISH Network’s performance under that agreement. In September 2019, we and DISH Network entered into an agreement whereby DISH Network compensates us for retaining such obligations.
TerreStar AgreementAgreement. . 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 EchoStar’s completion of the acquisition of Hughes Communications, Inc. and its subsidiaries (the “Hughes Acquisition”),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.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 operations and
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
maintenance services are terminated by DISH Network upon at least 90 days’ written notice to us. The provision of hosting services will continue until May 2022. 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).
Hughes Broadband Distribution AgreementAgreement. . 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 HughesNet service. DISH Network pays us a monthly per subscriber wholesale service fee for the 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 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 daysdays’ 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
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Distribution Agreement, we and DISH Network will continue to provide our HughesNet service to the then-current DISH Network subscribers pursuant to the terms and conditions of the Distribution Agreement.
DBSD North America AgreementAgreement. . In March 2012, DISH Network completed its acquisition of all of the equity of reorganized DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and EchoStar’s 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 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. 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.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’days‘ written notice to us or by us with at least 365 days’ written notice to DISH Network.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General and AdministrativeOperating Expenses — DISH Network
The following table presents our operating expenses related to DISH Network:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Operating expenses - DISH Network | | $ | 1,137 |
| | $ | 714 |
|
The following table presents the related trade accounts payable:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Trade accounts payable - DISH Network | | $ | 610 |
| | $ | 502 |
|
Amended and Restated Professional Services Agreement.Agreement. In connection with the Spin-off, EchoStar entered into various agreements with DISH Network including a transition services agreement, satellite procurement agreement and services agreement, all of which all expired in January 2010 and were replaced by a professional services agreement (the “Professional Services Agreement”). In January 2010, EchoStar and DISH Network agreed that EchoStar and its subsidiaries 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 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, EchoStar and DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage EchoStar and its subsidiaries 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 EchoStar and its subsidiaries (previously provided under a services agreement) and provide other support services. In connection with the consummation of the Share Exchange, EchoStar and DISH amended and restated the Professional Services Agreement (the “Amended(as amended to date, the
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
“Amended and Restated Professional Services Agreement”) to provide that EchoStar and its subsidiaries and DISH Network shall have the right to receive additional services that either EchoStar and its subsidiaries 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, EchoStar and DISH further amended the Amended and Restated Professional Services Agreement to provide that EchoStar and its subsidiaries and DISH Network shall have the right to receive additional services that either EchoStar and its subsidiaries 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. A portion of these costs and expenses have been allocated to us in the manner described above under the caption “EchoStar.” in Note 14. Related Party Transactions - EchoStar. The term of the Amended and Restated Professional Services Agreement is through January 20202021 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, unless the statement of work for particular services states otherwise. Certain services being provided for under the Amended and Restated Professional Services Agreement may survive the termination of the agreement.
Real Estate Lease from DISH Network.Network. Effective March 2017, we subleased fromentered into an agreement with DISH Network for certain space at 796 East Utah Valley Drive in American Fork, Utah for a period ending in August 2017. We exercised our option to renew this subleaseagreement for a five-year period ending in August 2022. We and DISH Network amended this subleaseagreement to, among other things, terminate this subleaseagreement in March 2019. The rent on a per square foot basis for the lease was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and we were responsible for our portion of the taxes, insurance, utilities and maintenance of the premises.
Collocation and Antenna Space Agreements. We and DISH Network have entered into an agreement pursuant to which DISH Network provides us with collocation space in El Paso, Texas. This agreement was for an initial period ending in August 2015, and provides us with renewal options for four consecutive years. Effective August 2015, we exercised our first renewal option for a period ending in August 2018 and in April 2018 we exercised our second renewal option for a period ending in August 2021. 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 to be effective May 2020. 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 EchoStarus in Monee, Illinois and Spokane, Washington through August 2022. We generallyGenerally, 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. The fees for the services provided under these agreements depend on the number of racks leasedlocated at the location.
In connection with the BSS Transaction, in September 2019, we entered into an agreement pursuant to which DISH Network will provide us with antenna space and power in Cheyenne, Wyoming for a period of five years commencing
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
no later than October 2020, with 4four three-year renewal terms, with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term.
Other Agreements — DISH Network
Master Transaction Agreement. In May 2019, EchoStar and BSS Corp. entered into the Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred the BSS Business to BSS Corp.; (ii) EchoStar completed the Distribution; and (iii) immediately after the Distribution, (1) BSS Corp. became a wholly-owned subsidiary of DISH such that DISH owns and operates the BSS Business and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Common Stock. 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 the parties, including EchoStar’s 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. EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively. See Note 1 for further information.
Satellite and Tracking Stock Transaction. In February 2014, we and EchoStar entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) in March 2014, EchoStar and Hughes Satellite Systems Corporation issued the Tracking Stock to DISH Network in exchange for 5 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 $11.4 million in cash; and (ii) in March 2014, DISH Network began receiving certain satellite services from us as discussed above on these 5 satellites (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.
Share Exchange Agreement. On January 31, 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries, pursuant to which, on February 28, 2017, EchoStar and certain of its and our subsidiaries received all of the shares of the Tracking Stock in exchange for 100% of the equity interests of certain of EchoStar’s subsidiaries that held substantially all of EchoStar’s EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange, 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 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 contained 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 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 EchoStar or DISH causes the transaction to be taxable to the other party after closing. See Note 1 for further information.
Hughes Broadband Master Services Agreement. 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 HughesNet service and related equipment and other telecommunication services and (ii) installs 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 Hughes Broadband MSA has an initial term of five years untilthrough March 2022 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 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
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $3.7$4.6 million and $6.4$4.8 million for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $13.2 million and $26.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Share Exchange Intellectual Property and Technology License Agreement.2019 TT&C Agreement Effective March 2017. In September 2019, in connection with the Share Exchange,BSS Transaction, we and a subsidiary of EchoStar entered into an agreement pursuant to which DISH Network provides TT&C services to us and EchoStar and one of its other subsidiaries for a period ending in September 2021, with the option for a subsidiary of EchoStar to renew for a one-year period upon written notice at least 90 days prior to the initial expiration (the “2019 TT&C Agreement”). 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.
Other Receivables - DISH Network
Tax Sharing Agreement.Effective December 2007, EchoStar and DISH Network entered into an intellectual propertya tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs EchoStar and technology license agreement (“IPTLA”) pursuantDISH and their respective subsidiaries’ respective rights, responsibilities and obligations after the Spin-off with respect to which we,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 EchoStar and its subsidiaries for such taxes. However, DISH Network is not liable for and does not indemnify EchoStar or its subsidiaries 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 Code, because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar or its subsidiaries take or fail to take or (iii) any action that EchoStar or its subsidiaries 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, EchoStar and its subsidiaries 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 subsidiariesthings, and in connection with EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, EchoStar and DISH Network licenseagreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of EchoStar’s consolidated tax returns. As a result, DISH Network agreed to each otherpay EchoStar an amount of that includes the federal tax benefit DISH received as a result of our operations.
In August 2018, EchoStar and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, DISH Network is required to compensate EchoStar for certain intellectual propertypast and technology. The IPTLA will continue in perpetuity, unless mutually terminatedfuture excess California research and development tax credits generated by EchoStar and its subsidiaries and used by DISH Network.
Other Agreements
Master Transaction Agreement.In May 2019, EchoStar and BSS Corp. entered into the parties.Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the IPTLA, we,terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its other subsidiaries grantedand we and our subsidiaries 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 Networksuch 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 licensesubstantial portion of our ESS segment. The Master Transaction Agreement contained customary representations and warranties by the parties, including EchoStar’s representations relating to ourthe assets, liabilities and their intellectual propertyfinancial condition of the BSS Business, and technology for userepresentations by DISH Network among other things, in connection withrelating to 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.financial condition and liabilities. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition,and DISH Network granted a license backhave agreed to us, EchoStarindemnify each other against certain losses with respect to breaches of certain representations and its other subsidiaries, among other things, for the continued use of all intellectual propertycovenants and technology that is used in our, EchoStarcertain retained and its other subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.assumed liabilities, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
BSS Transaction Intellectual Property and Technology License AgreementAgreement.. Effective September 2019, in connection with the BSS Transaction, we, EchoStar and DISH Network entered into an intellectual property and technology license agreement (the “BSS IPTLA”) pursuant to which we, EchoStar and its other subsidiaries 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, EchoStar and its other subsidiaries granted to DISH Network a license to our and their 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, EchoStar and its other subsidiaries, among other things, for the continued use of all intellectual property and technology that is used in our, EchoStar and its other subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the BSS Transaction.
TT&C AgreementBSS Transaction Tax Matters Agreement.. In Effective September 2019, in connection with the BSS Transaction, weEchoStar, BSS Corp. and DISH entered into a subsidiarytax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, EchoStar is 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 EchoStar and DISH made certain tax-related representations and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both EchoStar 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 EchoStar 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 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, EchoStar 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 EchoStar is 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 January 2017, EchoStar and certain of its and our subsidiaries entered into the Share Exchange Agreement with DISH and certain of its subsidiaries pursuant to which, in February 2017, EchoStar and certain of its and our 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 EchoStar’s EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange, 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 Agreement, EchoStar transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network provides TT&C servicesassumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contained 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 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 EchoStar or DISH causes the transaction to be taxable to the other party after closing.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Share Exchange Intellectual Property and Technology License Agreement. Effective March 2017, in connection with the Share Exchange, EchoStar and one of its other subsidiaries and DISH Network entered into an intellectual property and technology license agreement (“IPTLA”) pursuant to which we, EchoStar and one of its other subsidiaries 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, EchoStar and one of its other subsidiaries granted to DISH Network a license to our and their 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, EchoStar and one of its other subsidiaries, among other things, for a period endingthe continued use of all intellectual property and technology that is used in September 2021, withour, EchoStar and one of its other subsidiaries’ retained businesses but the option for EchoStarownership of which was transferred to renew for a one-year period upon written notice at least 90 days priorDISH Network pursuant to the initial expiration (the “TT&C Agreement”). The fees for services provided under the 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 TT&C Agreement for any reason upon 12 months’ notice.Share Exchange.
Share Exchange Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, EchoStar and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, EchoStar is 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 EchoStar and DISH Network made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both EchoStar 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 EchoStar 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 below,above, which continues in full force and effect.
BSS Transaction Tax Matters Agreement. Effective September 2019, in connection with the BSS Transaction, EchoStar, BSS Corp. and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, EchoStar is 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
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16. RELATED PARTY TRANSACTIONS - OTHER
BSS Business from and after the BSS Transaction. Both EchoStar and DISH made certain tax-related representations and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both EchoStar 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 EchoStar 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 income tax purposes. The tax matters agreement supplements the Share Exchange Tax Matters Agreement outlined above and the Tax Sharing Agreement outlined below, which continue in full force and effect.
Tax Sharing Agreement. Effective December 2007, EchoStar and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs EchoStar and DISH and their respective subsidiaries’ 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 EchoStar and its subsidiaries for such taxes. However, DISH Network is not liable for and does not indemnify EchoStar or its subsidiaries 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 (the “Code”), because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar or its subsidiaries take or fail to take; or (iii) any action that EchoStar or its subsidiaries 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, EchoStar and its subsidiaries 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 EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, EchoStar 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 EchoStar’s consolidated tax returns. As a result, DISH Network agreed to pay EchoStar an amount of that includes the federal tax benefit DISH received as a result of our operations.
In August 2018, EchoStar and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, DISH Network is required to compensate EchoStar for certain past and future excess California research and development tax credits generated by EchoStar and its subsidiaries and used by DISH Network.
Other Agreements
Hughes Systique Corporation (“Hughes Systique”)
We contract with Hughes Systique Corporation (“Hughes Systique”) for software development services. In addition to our approximately 43.3%43% ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications, Inc. and a member of EchoStar’s board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, in the aggregate, own approximately 25.4%25%, on an undiluted basis, of Hughes Systique’s outstanding shares as of September 30, 2019.March 31, 2020. 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 our accompanyingthese Condensed Consolidated Financial Statements.
TerreStar Solutions, Inc.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We own 50.0% of Deluxe, a joint venture thatTerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into in 2010an equipment and services agreement pursuant to build an advanced digital cinema satellite distributionwhich we design, manufacture and install upgraded ground communications network targeting delivery to digitally equipped theaters in the U.S.equipment for TSI’s network and Canada. We account for our investment in Deluxe using the equity method.provide, among other things, warranty and support services. We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of $0.9$2.2 million and $1.1$5.1 million for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $2.6 million and $3.3 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, we had trade accounts receivable from DeluxeTSI of $0.6$2.3 million and $0.8$2.7 million, respectively. See Note 11 for additional information about our investments in unconsolidated entities.
Broadband Connectivity Solutions
In August 2018, we entered into an agreement with Yahsat to establish a new entity, BCS, to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat’s Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100.0 million in cash in exchange for a 20.0% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS. We recognized revenue from BCS for such services and equipment of $1.7 million and $6.2 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019 and December 31, 2018, we had trade accounts receivable from BCS of $2.4 million and $3.4 million, respectively. See Note 11 for additional information about our investments in unconsolidated entities.
AsiaSat
We contract with AsiaSat Telecommunications Inc. (“AsiaSat”) for the use of transponder capacity on one of AsiaSat’s satellites. Mr. William David Wade, who joined EchoStar’s board of directors in February 2017, served as the Chief Executive Officer of AsiaSat in 2016 and as a senior advisor to the Chief Executive Officer of AsiaSat through March 2017. We incurred expenses payable to AsiaSat under this agreement of NaN for both the three and nine months ended September 30, 2019 and 2018, respectively.
Global-IP Cayman
In May 2017, we entered into an agreement with Global-IP Cayman (“Global IP”) providing for the sale of certain equipment and services to Global IP. Mr. William David Wade, a member of EchoStar’s board of directors, served as a member of the board of directors of Global IP from September 2017 until April 2019 and continues to serve as an executive advisor to the Chief Executive Officer of Global IP.IP from September 2017 until April 2019 and from September 2017 until December 2019, respectively. In August 2018,
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
we and Global IP amended the agreement toto: (i) change certain of the equipment and services to be provided to Global IP;IP, (ii) modify certain payment terms;terms, (iii) provide Global IP an option to use one of our test lab facilities;facilities and (iv) effectuate the assignment of the agreement from Global IP to one of its wholly-owned subsidiaries. In February 2019, we terminated the agreement as a result of Global IP’s defaults resulting from its failure to make payments to us as required under the terms of the agreement and we reserved our rights and remedies against Global IP under the agreement. We recognized revenue under this agreement of NaN0 for botheach of the three and nine months ended September 30, 2019, respectively,March 31, 2020 and $5.9 million and $6.5 million for the three and nine months ended September 30, 2018, respectively.2019. As of both September 30, 2019March 31, 2020 and December 31, 2018,2019, we arewere owed $7.5 million from Global IP.
TerreStar Solutions
DISH Network owns more than 15.0% 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 $2.0 million and $2.7 million for the three months ended September 30, 2019 and 2018, respectively, and $10.2 million and $3.0 million for the nine months ended September 30, 2019 and 2018, respectively. As of both September 30, 2019 and December 31, 2018, we had trade accounts receivable from TSI of $2.3 million.
Maxar Technologies Inc.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Mr. Jeffrey Tarr, who joined EchoStar’s board of directors in March 2019, served as a consultant and advisor to Maxar Technologies Inc. and its subsidiaries (“Maxar Tech”) through May 2019. We previously entered into agreements with Maxar Tech for the manufacture of our EchoStar IX, EchoStar XI, EchoStar XIV, EchoStar XVI, EchoStar XVII, EchoStar XIX, EchoStar XXI and EchoStar XXIII satellites and for the timely manufacture and delivery and certain other services forof the EchoStar IX satellite, the EchoStar XVII satellite, the EchoStar XIX satellite and the EchoStar XXI satellite and our former EchoStar XXIVXI satellite, with an expected launch date in 2021.EchoStar XIV satellite, EchoStar XVI satellite and EchoStar XXIII satellite. Maxar Tech provides us with anomaly support for these satellites once launched pursuant to the terms of the agreements. Maxar Tech also provides a warranty on one of these satellites and may be required to pay us certain amounts should the satellite not operate according to certain performance specifications. Our obligations to pay Maxar Tech under these agreements during the design life of the applicable satellites may be reduced if the applicable satellites do not operate according to certain performance specifications. We incurred aggregate costs payable to Maxar Tech under these agreements of $12.1$3.5 million and $78.9$4.9 million for the three and nine months ended March 31, 2020 and 2019, respectively. At both March 31, 2020 and December 31, 2019, we had 0 trade accounts payable to Maxar Tech.
NOTE 17. SUPPLEMENTAL FINANCIAL INFORMATION
Research and Development
The following table presents the research and development costs incurred in connection with customers’ orders:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Cost of sales - equipment (exclusive of depreciation and amortization) | | $ | 6,692 |
| | $ | 5,395 |
|
Research and development expenses | | $ | 6,254 |
| | $ | 6,888 |
|
September 30, 2019, respectively.
Discontinued Operations
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Cash and Cash Equivalents and Restricted Cash
The following agreements were terminated or transferredtable reconciles Cash and cash equivalents and restricted cash, as presented in the Condensed Consolidated Balance Sheets, to DISH Network as partthe total of the BSS Transaction and we, EchoStar and its other subsidiaries have no further obligations and have earned no additional revenue or incurred no additional expense,same as applicable, under these agreements or investments afterpresented in the consummation of the BSS Transaction on September 10, 2019. Historical transactions under this agreement are reported in Net income from discontinued operations in our Condensed Consolidated Statements of Operations (see Note 5).Cash Flows:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Cash and cash equivalents, including restricted amounts, beginning of period: | | | | |
Cash and cash equivalents | | $ | 1,139,435 |
| | $ | 847,823 |
|
Restricted cash | | 887 |
| | 796 |
|
Total cash and cash equivalents, included restricted amounts, beginning of period | | $ | 1,140,322 |
| | $ | 848,619 |
|
| | | | |
Cash and cash equivalents, including restricted amounts, end of period: | | | | |
Cash and cash equivalents | | $ | 1,228,361 |
| | $ | 1,138,711 |
|
Restricted cash | | 1,116 |
| | 971 |
|
Total cash and cash equivalents, included restricted amounts, end of period | | $ | 1,229,477 |
| | $ | 1,139,682 |
|
DBS Transponder Lease. EchoStar leased satellite capacity from us on 8 DBS transponders on the QuetzSat-1 satellite through November 2021, after which EchoStar had certain options to renew the agreement on a year-to year basis through the end of life of the QuetzSat-1 satellite. We transferred this agreement to DISH Network in connection with the BSS Transaction,Other Current Assets, Net and as a result we no longer provide and EchoStar no longer receives these services.Other Non-Current Assets, Net
Satellite Capacity Leased to DISH Network.The following table presents the components of We entered into certain agreements to lease satellite capacity pursuant to which we provided satellite services to DISH Network on certain satellites owned or leased by us. The fees for the services provided under these agreements depended, among other things, upon the orbital location of the applicable satellite, the number of transponders that provided services on the applicable satelliteOther current assets, net, and the length of the service arrangements.Other non-current assets, net:
|
| | | | | | | | |
|
| As of |
|
| March 31, 2020 |
| December 31, 2019 |
Other current assets, net: |
|
|
|
|
Trade accounts receivable - DISH Network |
| $ | 9,955 |
|
| $ | 8,876 |
|
Inventory |
| 88,302 |
|
| 79,474 |
|
Prepaids and deposits |
| 47,055 |
|
| 42,324 |
|
Contract acquisition costs, net | | 14,290 |
| | 16,869 |
|
Related party receivables - EchoStar |
| 131,948 |
|
| 131,892 |
|
Other, net |
| 23,821 |
|
| 22,217 |
|
Total other current assets, net |
| $ | 315,371 |
|
| $ | 301,652 |
|
|
|
|
|
|
Other non-current assets, net: |
|
|
|
|
Restricted cash |
| $ | 1,116 |
|
| $ | 887 |
|
Deferred tax assets, net |
| 7,098 |
|
| 7,215 |
|
Capitalized software, net |
| 104,401 |
|
| 101,786 |
|
Contract acquisition costs, net |
| 96,107 |
|
| 96,723 |
|
Contract fulfillment costs, net |
| 2,782 |
|
| 3,010 |
|
Related party receivables - EchoStar |
| 19,412 |
|
| 19,759 |
|
Other, net |
| 25,859 |
|
| 22,556 |
|
Total other non-current assets, net |
| $ | 256,775 |
|
| $ | 251,936 |
|
EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV. In March 2014, we began leasing certain satellite capacity to DISH Network on the EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites.
EchoStar XII. DISH Network leased satellite capacity from us on the EchoStar XII satellite.
EchoStar XVI. In December 2009, we entered into an agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network leased satellite capacity from us on the EchoStar XVI satellite since January 2013.
Nimiq 5 Agreement. In addition to the Telesat Transponder Agreement, in September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”). Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service.
QuetzSat-1 Agreement. In November 2008, we entered into an agreement to lease satellite capacity from SES Latin America, which provided, among other things, for the provision by SES Latin America to us of leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into an agreement pursuant to which DISH Network leased from us satellite capacity on 24 of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location. In February 2013, we and DISH Network entered into an agreement pursuant to which we leased back from DISH Network certain satellite capacity on five DBS transponders on the QuetzSat-1 satellite.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
TT&C AgreementThe following table presents the activity in our allowance for doubtful accounts, which is included within Other, net in each of Other current assets, net and Other non-current assets, net in the table above:
|
| | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Credit Losses (1) | | Deductions | | Foreign Currency Translation | | Balance at End of Period |
For the three months ended March 31, 2020 | | | | | | | | | | |
Other current assets, net | | $ | — |
| | $ | 1,595 |
| | $ | — |
| | $ | — |
| | $ | 1,595 |
|
Other non-current assets, net | | $ | — |
| | $ | 13,379 |
| | $ | — |
| | $ | (358 | ) | | $ | 13,021 |
|
(1) The impact of adopting ASC 326 on January 1, 2020 was a net increase to our allowance for doubtful accounts largely driven by a $13.4 million reclassification from Trade accounts receivables and contracts assets, net. Effective January 2012, we entered into a TT&C agreement pursuant to which we provided TT&C services to DISH Network, which we subsequently amended (the “TT&C Agreement”). The fees for services provided under the TT&C Agreement were calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which varied depending on the nature of the services provided.
Accrued Expenses and Other Current Liabilities and Other Non-Current Liabilities
Real Estate Lease.The following table presents the components of Accrued expenses and other current liabilities Prior toand Other non-current liabilities:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Accrued expenses and other current liabilities: | | | | |
Trade accounts payable - DISH Network | | $ | 610 |
| | $ | 502 |
|
Accrued interest | | 35,905 |
| | 32,184 |
|
Accrued compensation | | 31,707 |
| | 42,846 |
|
Accrued taxes | | 7,534 |
| | 18,493 |
|
Operating lease obligation | | 13,393 |
| | 14,112 |
|
Related party payables - EchoStar | | 13,793 |
| | 11,132 |
|
Other | | 128,948 |
| | 139,148 |
|
Total accrued expenses and other current liabilities | | $ | 231,890 |
| | $ | 258,417 |
|
| | | | |
Other non-current liabilities: | | | | |
Related party payables - EchoStar | | $ | 23,748 |
| | $ | 23,980 |
|
Other | | 64,848 |
| | 66,500 |
|
Total other non-current liabilities | | $ | 88,596 |
| | $ | 90,480 |
|
Inventory
The following table presents the Share Exchange, a subsidiarycomponents of EchoStar leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection withinventory:
|
| | | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Raw materials | | $ | 8,399 |
| | $ | 4,240 |
|
Work-in-process | | 9,421 |
| | 6,979 |
|
Finished goods | | 70,482 |
| | 68,255 |
|
Total inventory | | $ | 88,302 |
| | $ | 79,474 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Supplemental and Non-cash Investing and Financing Activities
The following table presents the Share Exchange, EchoStar transferred ownership of a portion of this property to DISH Networksupplemental and contributed a portion to usnon-cash investing and we and DISH Network amended this agreement to, among other things, provide for a continued lease to DISH Network of the portion of the property we retained (the “Cheyenne Data Center”). The rent on a per square foot basis for the lease was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and DISH Network was responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. In connection with the BSS Transaction, we transferred the Cheyenne Data Center to DISH Network.financing activities:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 49,563 |
| | $ | 54,277 |
|
Cash paid for income taxes | | $ | 716 |
| | $ | 652 |
|
| | | | |
Non-cash investing and financing activities: | | | | |
Increase (decrease) in capital expenditures included in accounts payable, net | | $ | (5,359 | ) | | $ | (2,163 | ) |
NOTE 17.18. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
Certain of our wholly-owned subsidiaries (together, the “Guarantor Subsidiaries”) have fully and unconditionally guaranteed, on a joint and several basis, the obligations of our 5 1/4% Senior Secured Notes due August 1, 2026, , 7 5/8% Senior Unsecured Notes due 2021 and 6 5/8% Senior Unsecured Notes due August 1, 2026 (collectively, the “Notes”).
In lieu of separate financial statements of the Guarantor Subsidiaries, accompanying condensed consolidating financial information prepared in accordance with Rule 3-10(f) of Regulation S-X is presented below, including the accompanying condensed balance sheet information, the accompanying condensed statement of operations and comprehensive income (loss) information and the accompanying condensed statement of cash flows information of HSS, the Guarantor Subsidiaries on a combined basis and the non-guarantor subsidiaries of HSS on a combined basis and the eliminations necessary to arrive at the corresponding information of HSS on a consolidated basis.
The indentures governing the Notes contain restrictive covenants that, among other things, impose limitations on our ability and the ability of certain of our subsidiaries to pay dividends or make distributions, incur additional debt, make certain investments, create liens or enter into sale and leaseback transactions, merge or consolidate with another company, transfer and sell assets, enter into transactions with affiliates or allow to exist certain restrictions on the ability of certain of our subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to us.
TheIn lieu of separate financial statements of the Guarantor Subsidiaries, we have prepared the accompanying condensed consolidating financial information presented belowin accordance with Rule 3-10(f) of Regulation S-X. This includes:
the accompanying condensed balance sheet;
the accompanying condensed statement of operations and comprehensive income (loss); and
the accompanying condensed statement of cash flows.
This also includes consolidating financial information as follows:
the Guarantor Subsidiaries on a combined basis;
the non-guarantor subsidiaries of HSSC on a combined basis; and
the eliminations necessary to arrive at the corresponding information of HSSC on a consolidated basis.
This accompanying condensed consolidating financial information should be read in conjunction with our accompanying condensed consolidated financial statementsthese Condensed Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Balance Sheet as of March 31, 2020
|
| | | | | | | | | | | | | | | | | | | | |
| | HSSC | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,174,650 |
| | $ | 19,878 |
| | $ | 33,833 |
| | $ | — |
| | $ | 1,228,361 |
|
Marketable investment securities | | 524,864 |
| | 77 |
| | — |
| | — |
| | 524,941 |
|
Trade accounts receivable and contract assets, net | | — |
| | 131,579 |
| | 56,233 |
| | — |
| | 187,812 |
|
Other current assets | | 93,526 |
| | 655,191 |
| | 109,288 |
| | (542,634 | ) | | 315,371 |
|
Total current assets | | 1,793,040 |
| | 806,725 |
| | 199,354 |
| | (542,634 | ) | | 2,256,485 |
|
Non-current assets: | |
|
| |
|
| |
|
| |
|
| |
|
|
Property and equipment, net | | — |
| | 1,425,670 |
| | 324,891 |
| | — |
| | 1,750,561 |
|
Operating lease right-of-use assets | | — |
| | 96,944 |
| | 22,767 |
| | — |
| | 119,711 |
|
Goodwill | | — |
| | 504,173 |
| | 5,142 |
| | — |
| | 509,315 |
|
Regulatory authorizations, net | | — |
| | 400,000 |
| | 11,243 |
| | — |
| | 411,243 |
|
Other intangible assets, net | | — |
| | 25,663 |
| | — |
| | — |
| | 25,663 |
|
Other investments, net | | — |
| | 108,952 |
| | — |
| | — |
| | 108,952 |
|
Investment in subsidiaries | | 2,823,219 |
| | 207,664 |
| | — |
| | (3,030,883 | ) | | — |
|
Other non-current assets, net | | 18,179 |
| | 288,132 |
| | 43,055 |
| | (92,591 | ) | | 256,775 |
|
Total non-current assets | | 2,841,398 |
| | 3,057,198 |
| | 407,098 |
| | (3,123,474 | ) | | 3,182,220 |
|
Total assets | | $ | 4,634,438 |
| | $ | 3,863,923 |
| | $ | 606,452 |
| | $ | (3,666,108 | ) | | $ | 5,438,705 |
|
Liabilities and Shareholder's Equity | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Trade accounts payable | | $ | — |
| | $ | 87,132 |
| | $ | 19,207 |
| | $ | — |
| | $ | 106,339 |
|
Contract liabilities | | — |
| | 93,741 |
| | 5,525 |
| | — |
| | 99,266 |
|
Accrued expenses and other current liabilities | | 266,731 |
| | 311,723 |
| | 196,070 |
| | (542,634 | ) | | 231,890 |
|
Total current liabilities | | 266,731 |
| | 492,596 |
| | 220,802 |
| | (542,634 | ) | | 437,495 |
|
Non-current liabilities: | | | | | | | | | | |
Long-term debt | | 2,390,218 |
| | — |
| | — |
| | — |
| | 2,390,218 |
|
Deferred tax liabilities, net | | — |
| | 398,786 |
| | — |
| | (17,565 | ) | | 381,221 |
|
Operating lease liabilities | | — |
| | 86,603 |
| | 18,854 |
| | — |
| | 105,457 |
|
Other non-current liabilities | | — |
| | 63,401 |
| | 100,221 |
| | (75,026 | ) | | 88,596 |
|
Total non-current liabilities | | 2,390,218 |
| | 548,790 |
| | 119,075 |
| | (92,591 | ) | | 2,965,492 |
|
Total liabilities | | 2,656,949 |
| | 1,041,386 |
| | 339,877 |
| | (635,225 | ) | | 3,402,987 |
|
Shareholder's equity: | | | | | | | | | | |
Total Hughes Satellite Systems Corporation shareholder's equity | | 1,977,489 |
| | 2,822,537 |
| | 208,346 |
| | (3,030,883 | ) | | 1,977,489 |
|
Non-controlling interests | | — |
| | — |
| | 58,229 |
| | — |
| | 58,229 |
|
Total shareholder's equity | | 1,977,489 |
| | 2,822,537 |
| | 266,575 |
| | (3,030,883 | ) | | 2,035,718 |
|
Total liabilities and shareholder's equity | | $ | 4,634,438 |
| | $ | 3,863,923 |
| | $ | 606,452 |
| | $ | (3,666,108 | ) | | $ | 5,438,705 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Balance Sheet as of December 31, 2019
|
| | | | | | | | | | | | | | | | | | | | |
| | HSSC | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,057,903 |
| | $ | 32,338 |
| | $ | 49,194 |
| | $ | — |
| | $ | 1,139,435 |
|
Marketable investment securities | | 652,594 |
| | 241 |
| | — |
| | — |
| | 652,835 |
|
Trade accounts receivable and contract assets, net | | — |
| | 129,722 |
| | 66,798 |
| | — |
| | 196,520 |
|
Other current assets | | 93,536 |
| | 602,337 |
| | 107,959 |
| | (502,180 | ) | | 301,652 |
|
Total current assets | | 1,804,033 |
| | 764,638 |
| | 223,951 |
| | (502,180 | ) | | 2,290,442 |
|
Non-current assets: | |
|
| |
|
| |
|
| |
|
| |
|
|
Property and equipment, net | | — |
| | 1,459,151 |
| | 398,430 |
| | — |
| | 1,857,581 |
|
Operating lease right-of-use assets | | — |
| | 89,106 |
| | 24,293 |
| | — |
| | 113,399 |
|
Goodwill | | — |
| | 504,173 |
| | 2,780 |
| | — |
| | 506,953 |
|
Regulatory authorizations, net | | — |
| | 400,000 |
| | 12,363 |
| | — |
| | 412,363 |
|
Other intangible assets, net | | — |
| | 29,321 |
| | — |
| | — |
| | 29,321 |
|
Other investments, net | | — |
| | 110,040 |
| | — |
| | — |
| | 110,040 |
|
Investment in subsidiaries | | 2,876,572 |
| | 282,163 |
| | — |
| | (3,158,735 | ) | | — |
|
Other non-current assets, net | | 10,672 |
| | 772,193 |
| | 42,557 |
| | (573,486 | ) | | 251,936 |
|
Total non-current assets | | 2,887,244 |
| | 3,646,147 |
| | 480,423 |
| | (3,732,221 | ) | | 3,281,593 |
|
Total assets | | $ | 4,691,277 |
| | $ | 4,410,785 |
| | $ | 704,374 |
| | $ | (4,234,401 | ) | | $ | 5,572,035 |
|
Liabilities and Shareholder's Equity | |
|
| |
|
| |
|
| |
|
| |
|
|
Current liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Trade accounts payable | | $ | — |
| | $ | 102,744 |
| | $ | 18,808 |
| | $ | — |
| | $ | 121,552 |
|
Contract liabilities | | — |
| | 96,485 |
| | 4,575 |
| | — |
| | 101,060 |
|
Accrued expenses and other current liabilities | | 243,694 |
| | 314,583 |
| | 202,320 |
| | (502,180 | ) | | 258,417 |
|
Total current liabilities | | 243,694 |
| | 513,812 |
| | 225,703 |
| | (502,180 | ) | | 481,029 |
|
Non-current liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Long-term debt | | 2,389,168 |
| | — |
| | — |
| | — |
| | 2,389,168 |
|
Deferred tax liabilities, net | | — |
| | 390,288 |
| | — |
| | (9,972 | ) | | 380,316 |
|
Operating lease liabilities | | — |
| | 77,366 |
| | 19,513 |
| | — |
| | 96,879 |
|
Other non-current liabilities | | — |
| | 553,518 |
| | 100,476 |
| | (563,514 | ) | | 90,480 |
|
Total non-current liabilities | | 2,389,168 |
| | 1,021,172 |
| | 119,989 |
| | (573,486 | ) | | 2,956,843 |
|
Total liabilities | | 2,632,862 |
| | 1,534,984 |
| | 345,692 |
| | (1,075,666 | ) | | 3,437,872 |
|
Shareholder's equity: | |
|
| |
|
| |
|
| |
|
| |
|
|
Total Hughes Satellite Systems Corporation shareholder's equity | | 2,058,415 |
| | 2,875,801 |
| | 282,934 |
| | (3,158,735 | ) | | 2,058,415 |
|
Non-controlling interests | | — |
| | — |
| | 75,748 |
| | — |
| | 75,748 |
|
Total shareholder's equity | | 2,058,415 |
| | 2,875,801 |
| | 358,682 |
| | (3,158,735 | ) | | 2,134,163 |
|
Total liabilities and shareholder's equity | | $ | 4,691,277 |
| | $ | 4,410,785 |
| | $ | 704,374 |
| | $ | (4,234,401 | ) | | $ | 5,572,035 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Statement of Operations and notes thereto included herein. This financial information reflectsComprehensive Income (Loss)
For the addition of a new Guarantor Subsidiary and the transfer of several former Guarantor Subsidiaries to DISH Network in connection with the BSS Transaction.Three Months Ended March 31, 2020
|
| | | | | | | | | | | | | | | | | | | | |
| | HSSC | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | — |
| | $ | 354,399 |
| | $ | 64,928 |
| | $ | (9,089 | ) | | $ | 410,238 |
|
Equipment revenue | | — |
| | 65,586 |
| | 5,410 |
| | (13,687 | ) | | 57,309 |
|
Total revenue | | — |
| | 419,985 |
| | 70,338 |
| | (22,776 | ) | | 467,547 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 110,471 |
| | 42,063 |
| | (8,649 | ) | | 143,885 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 55,374 |
| | 4,221 |
| | (13,687 | ) | | 45,908 |
|
Selling, general and administrative expenses | | — |
| | 95,818 |
| | 20,482 |
| | (440 | ) | | 115,860 |
|
Research and development expenses | | — |
| | 6,109 |
| | 145 |
| | — |
| | 6,254 |
|
Depreciation and amortization | | — |
| | 99,359 |
| | 26,606 |
| | — |
| | 125,965 |
|
Total costs and expenses | | — |
| | 367,131 |
| | 93,517 |
| | (22,776 | ) | | 437,872 |
|
Operating income (loss) | | — |
| | 52,854 |
| | (23,179 | ) | | — |
| | 29,675 |
|
Other income (expense): | | | | | | | | | | |
Interest income | | 7,953 |
| | 971 |
| | 891 |
| | (923 | ) | | 8,892 |
|
Interest expense, net of amounts capitalized | | (40,472 | ) | | (613 | ) | | (2,030 | ) | | 923 |
| | (42,192 | ) |
Gains (losses) on investments, net | | — |
| | (164 | ) | | — |
| | — |
| | (164 | ) |
Equity in earnings (losses) of unconsolidated affiliates, net | | — |
| | (1,087 | ) | | — |
| | — |
| | (1,087 | ) |
Equity in earnings (losses) of subsidiaries, net | | 10,630 |
| | (29,167 | ) | | — |
| | 18,537 |
| | — |
|
Foreign currency transaction gains (losses), net | | — |
| | (2 | ) | | (7,526 | ) | | — |
| | (7,528 | ) |
Other, net | | — |
| | (275 | ) | | (3 | ) | | — |
| | (278 | ) |
Total other income (expense), net | | (21,889 | ) | | (30,337 | ) | | (8,668 | ) | | 18,537 |
| | (42,357 | ) |
Income (loss) from continuing operations before income taxes | | (21,889 | ) | | 22,517 |
| | (31,847 | ) | | 18,537 |
| | (12,682 | ) |
Income tax benefit (provision), net | | 7,418 |
| | (11,804 | ) | | (845 | ) | | — |
| | (5,231 | ) |
Net income (loss) | | (14,471 | ) | | 10,713 |
| | (32,692 | ) | | 18,537 |
| | (17,913 | ) |
Less: Net loss (income) attributable to non-controlling interests | | — |
| | — |
| | 3,442 |
| | — |
| | 3,442 |
|
Net income (loss) attributable to Hughes Satellite Systems Corporation | | $ | (14,471 | ) | | $ | 10,713 |
| | $ | (29,250 | ) | | $ | 18,537 |
| | $ | (14,471 | ) |
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | | $ | (14,471 | ) | | $ | 10,713 |
| | $ | (32,692 | ) | | $ | 18,537 |
| | $ | (17,913 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | — |
| | — |
| | (82,836 | ) | | — |
| | (82,836 | ) |
Unrealized gains (losses) on available-for-sale securities | | (2,479 | ) | | — |
| | — |
| | — |
| | (2,479 | ) |
Other | | — |
| | — |
| | (405 | ) | | — |
| | (405 | ) |
Equity in other comprehensive income (loss) of subsidiaries, net | | (66,918 | ) | | (66,918 | ) | | — |
| | 133,836 |
| | — |
|
Total other comprehensive income (loss), net of tax | | (69,397 | ) | | (66,918 | ) | | (83,241 | ) | | 133,836 |
| | (85,720 | ) |
Comprehensive income (loss) | | (83,868 | ) | | (56,205 | ) | | (115,933 | ) | | 152,373 |
| | (103,633 | ) |
Less: Comprehensive loss (income) attributable to non-controlling interests | | — |
| | — |
| | 19,765 |
| | — |
| | 19,765 |
|
Comprehensive income (loss) attributable to Hughes Satellite Systems Corporation | | $ | (83,868 | ) | | $ | (56,205 | ) | | $ | (96,168 | ) | | $ | 152,373 |
| | $ | (83,868 | ) |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Balance Sheet asStatement of September 30,Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2019
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,013,313 |
| | $ | 35,837 |
| | $ | 27,121 |
| | $ | — |
| | $ | 1,076,271 |
|
Marketable investment securities, at fair value | | 695,249 |
| | 347 |
| | — |
| | — |
| | 695,596 |
|
Trade accounts receivable and contract assets | | — |
| | 132,556 |
| | 68,223 |
| | — |
| | 200,779 |
|
Trade accounts receivable - DISH Network | | — |
| | 12,516 |
| | 666 |
| | — |
| | 13,182 |
|
Inventory | | — |
| | 57,852 |
| | 24,825 |
| | — |
| | 82,677 |
|
Advances to affiliates, net | | 202,074 |
| | 614,875 |
| | 12,769 |
| | (755,882 | ) | | 73,836 |
|
Other current assets | | 79 |
| | 20,635 |
| | 49,343 |
| | — |
| | 70,057 |
|
Current assets of discontinued operations | | — |
| | 5,866 |
| | — |
| | — |
| | 5,866 |
|
Total current assets | | 1,910,715 |
| | 880,484 |
| | 182,947 |
| | (755,882 | ) | | 2,218,264 |
|
Property and equipment, net | | — |
| | 1,490,723 |
| | 295,513 |
| | — |
| | 1,786,236 |
|
Operating lease right-of-use assets | | — |
| | 86,249 |
| | 24,762 |
| | — |
| | 111,011 |
|
Goodwill | | — |
| | 504,173 |
| | — |
| | — |
| | 504,173 |
|
Regulatory authorizations | | — |
| | 400,000 |
| | — |
| | — |
| | 400,000 |
|
Other intangible assets, net | | — |
| | 32,979 |
| | — |
| | — |
| | 32,979 |
|
Investments in unconsolidated entities | | — |
| | 118,574 |
| | — |
| | — |
| | 118,574 |
|
Investment in subsidiaries | | 2,854,009 |
| | 152,078 |
| | — |
| | (3,006,087 | ) | | — |
|
Advances to affiliates | | 700 |
| | 570,842 |
| | 16,686 |
| | (568,944 | ) | | 19,284 |
|
Deferred tax asset | | 79,228 |
| | — |
| | 5,425 |
| | (79,228 | ) | | 5,425 |
|
Other noncurrent assets, net | | — |
| | 207,340 |
| | 16,238 |
| | — |
| | 223,578 |
|
Total assets | | $ | 4,844,652 |
| | $ | 4,443,442 |
| | $ | 541,571 |
| | $ | (4,410,141 | ) | | $ | 5,419,524 |
|
Liabilities and Shareholders’ Equity | | | | | | | | | | |
Trade accounts payable | | $ | — |
| | $ | 104,251 |
| | $ | 15,001 |
| | $ | — |
| | $ | 119,252 |
|
Trade accounts payable - DISH Network | | — |
| | 87 |
| | — |
| | — |
| | 87 |
|
Current portion of long-term debt and finance lease obligations | | — |
| | — |
| | 407 |
| | — |
| | 407 |
|
Advances from affiliates, net | | 369,651 |
| | 228,368 |
| | 158,715 |
| | (755,882 | ) | | 852 |
|
Accrued expenses and other | | 38,531 |
| | 200,019 |
| | 72,765 |
| | — |
| | 311,315 |
|
Current liabilities of discontinued operations | | — |
| | 3,492 |
| | — |
| | — |
| | 3,492 |
|
Total current liabilities | | 408,182 |
| | 536,217 |
| | 246,888 |
| | (755,882 | ) | | 435,405 |
|
Long-term debt and finance lease obligations, net | | 2,388,138 |
| | — |
| | 793 |
| | — |
| | 2,388,931 |
|
Deferred tax liabilities, net | | — |
| | 420,545 |
| | 109 |
| | (79,228 | ) | | 341,426 |
|
Operating lease liabilities | | — |
| | 74,564 |
| | 19,668 |
| | — |
| | 94,232 |
|
Advances from affiliates, net | | — |
| | 493,918 |
| | 108,165 |
| | (568,944 | ) | | 33,139 |
|
Other noncurrent liabilities | | — |
| | 65,058 |
| | 3,807 |
| | — |
| | 68,865 |
|
Total HSS shareholders’ equity | | 2,048,332 |
| | 2,853,140 |
| | 152,947 |
| | (3,006,087 | ) | | 2,048,332 |
|
Noncontrolling interests | | — |
| | — |
| | 9,194 |
| | — |
| | 9,194 |
|
Total liabilities and shareholders’ equity | | $ | 4,844,652 |
| | $ | 4,443,442 |
| | $ | 541,571 |
| | $ | (4,410,141 | ) | | $ | 5,419,524 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | HSSC | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | — |
| | $ | 352,591 |
| | $ | 59,696 |
| | $ | (8,802 | ) | | $ | 403,485 |
|
Equipment revenue | | — |
| | 52,649 |
| | 9,415 |
| | (10,350 | ) | | 51,714 |
|
Total revenue | | — |
| | 405,240 |
| | 69,111 |
| | (19,152 | ) | | 455,199 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 110,862 |
| | 39,333 |
| | (8,109 | ) | | 142,086 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 48,499 |
| | 6,858 |
| | (10,350 | ) | | 45,007 |
|
Selling, general and administrative expenses | | — |
| | 86,465 |
| | 16,565 |
| | (693 | ) | | 102,337 |
|
Research and development expenses | | — |
| | 6,743 |
| | 145 |
| | — |
| | 6,888 |
|
Depreciation and amortization | | — |
| | 96,704 |
| | 15,707 |
| | — |
| | 112,411 |
|
Total costs and expenses | | — |
| | 349,273 |
| | 78,608 |
| | (19,152 | ) | | 408,729 |
|
Operating income (loss) | | — |
| | 55,967 |
| | (9,497 | ) | | — |
| | 46,470 |
|
Other income (expense): | | | | | | | | | | |
Interest income | | 17,409 |
| | 926 |
| | 559 |
| | (897 | ) | | 17,997 |
|
Interest expense, net of amounts capitalized | | (56,361 | ) | | (1,134 | ) | | (1,317 | ) | | 897 |
| | (57,915 | ) |
Gains (losses) on investments, net | | — |
| | (346 | ) | | — |
| | — |
| | (346 | ) |
Equity in earnings (losses) of unconsolidated affiliates, net | | — |
| | (1,072 | ) | | — |
| | — |
| | (1,072 | ) |
Equity in earnings (losses) of subsidiaries, net | | 52,199 |
| | (8,788 | ) | | — |
| | (43,411 | ) | | — |
|
Foreign currency transaction gains (losses), net | | — |
| | (19 | ) | | 230 |
| | — |
| | 211 |
|
Other, net | | 309 |
| | (398 | ) | | (76 | ) | | — |
| | (165 | ) |
Total other income (expense), net | | 13,556 |
| | (10,831 | ) | | (604 | ) | | (43,411 | ) | | (41,290 | ) |
Income (loss) from continuing operations before income taxes | | 13,556 |
| | 45,136 |
| | (10,101 | ) | | (43,411 | ) | | 5,180 |
|
Income tax benefit (provision), net | | 8,670 |
| | (15,568 | ) | | 2,026 |
| | — |
| | (4,872 | ) |
Net income (loss) from continuing operations | | 22,226 |
| | 29,568 |
| | (8,075 | ) | | (43,411 | ) | | 308 |
|
Net income (loss) from discontinued operations | | — |
| | 22,724 |
| | — |
| | — |
| | 22,724 |
|
Net income (loss) | | 22,226 |
| | 52,292 |
| | (8,075 | ) | | (43,411 | ) | | 23,032 |
|
Less: Net loss (income) attributable to non-controlling interests | | — |
| | — |
| | (806 | ) | | — |
| | (806 | ) |
Net income (loss) attributable to Hughes Satellite Systems Corporation | | $ | 22,226 |
| | $ | 52,292 |
| | $ | (8,881 | ) | | $ | (43,411 | ) | | $ | 22,226 |
|
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | | $ | 22,226 |
| | $ | 52,292 |
| | $ | (8,075 | ) | | $ | (43,411 | ) | | $ | 23,032 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | — |
| | — |
| | (838 | ) | | — |
| | (838 | ) |
Unrealized gains (losses) on available-for-sale securities | | 2,353 |
| | — |
| | — |
| | — |
| | 2,353 |
|
Other | | — |
| | — |
| | 33 |
| | — |
| | 33 |
|
Equity in other comprehensive income (loss) of subsidiaries, net | | (805 | ) | | (805 | ) | | — |
| | 1,610 |
| | — |
|
Amounts reclassified to net income (loss): | | | | | | | | | | |
Realized losses (gains) on available-for-sale securities | | (385 | ) | | — |
| | — |
| | — |
| | (385 | ) |
Total other comprehensive income (loss), net of tax | | 1,163 |
| | (805 | ) | | (805 | ) | | 1,610 |
| | 1,163 |
|
Comprehensive income (loss) | | 23,389 |
| | 51,487 |
| | (8,880 | ) | | (41,801 | ) | | 24,195 |
|
Less: Comprehensive loss (income) attributable to non-controlling interests | | — |
| | — |
| | (806 | ) | | — |
| | (806 | ) |
Comprehensive income (loss) attributable to Hughes Satellite Systems Corporation | | $ | 23,389 |
| | $ | 51,487 |
| | $ | (9,686 | ) | | $ | (41,801 | ) | | $ | 23,389 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Balance Sheet asStatement of DecemberCash Flows
For the Three Months Ended March 31, 20182020
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 771,718 |
| | $ | 46,353 |
| | $ | 29,752 |
| | $ | — |
| | $ | 847,823 |
|
Marketable investment securities, at fair value | | 1,608,123 |
| | 1,073 |
| | — |
| | — |
| | 1,609,196 |
|
Trade accounts receivable and contract assets | | — |
| | 128,831 |
| | 72,265 |
| | — |
| | 201,096 |
|
Trade accounts receivable - DISH Network | | — |
| | 13,240 |
| | 310 |
| | — |
| | 13,550 |
|
Inventory | | — |
| | 58,607 |
| | 16,772 |
| | — |
| | 75,379 |
|
Advances to affiliates, net | | 109,433 |
| | 536,600 |
| | 27,174 |
| | (569,657 | ) | | 103,550 |
|
Other current assets | | 72 |
| | 22,848 |
| | 41,378 |
| | (561 | ) | | 63,737 |
|
Current assets of discontinued operations | | — |
| | 3,483 |
| | — |
| | — |
| | 3,483 |
|
Total current assets | | 2,489,346 |
| | 811,035 |
| | 187,651 |
| | (570,218 | ) | | 2,917,814 |
|
Property and equipment, net | | — |
| | 1,620,534 |
| | 301,377 |
| | — |
| | 1,921,911 |
|
Goodwill | | — |
| | 504,173 |
| | — |
| | — |
| | 504,173 |
|
Regulatory authorizations | | — |
| | 400,043 |
| | — |
| | — |
| | 400,043 |
|
Other intangible assets, net | | — |
| | 43,952 |
| | — |
| | — |
| | 43,952 |
|
Investments in unconsolidated entities | | — |
| | 126,369 |
| | — |
| | — |
| | 126,369 |
|
Investment in subsidiaries | | 3,362,589 |
| | 192,370 |
| | — |
| | (3,554,959 | ) | | — |
|
Advances to affiliates | | 700 |
| | 86,280 |
| | — |
| | (86,980 | ) | | — |
|
Deferred tax asset | | 54,001 |
| | — |
| | 3,581 |
| | (54,001 | ) | | 3,581 |
|
Other noncurrent assets, net | | — |
| | 220,099 |
| | 12,769 |
| | — |
| | 232,868 |
|
Noncurrent assets of discontinued operations | | — |
| | 742,461 |
| | — |
| | — |
| | 742,461 |
|
Total assets | | $ | 5,906,636 |
| | $ | 4,747,316 |
| | $ | 505,378 |
| | $ | (4,266,158 | ) | | $ | 6,893,172 |
|
Liabilities and Shareholders’ Equity | | | | | | | | | | |
Trade accounts payable | | $ | — |
| | $ | 88,342 |
| | $ | 16,409 |
| | $ | — |
| | $ | 104,751 |
|
Trade accounts payable - DISH Network | | — |
| | 752 |
| | — |
| | — |
| | 752 |
|
Current portion of long-term debt and finance lease obligations | | 918,916 |
| | — |
| | 666 |
| | — |
| | 919,582 |
|
Advances from affiliates, net | | 181,926 |
| | 282,268 |
| | 106,331 |
| | (569,657 | ) | | 868 |
|
Accrued expenses and other | | 43,410 |
| | 137,995 |
| | 48,307 |
| | (561 | ) | | 229,151 |
|
Current liabilities of discontinued operations | | — |
| | 49,055 |
| | — |
| | — |
| | 49,055 |
|
Total current liabilities | | 1,144,252 |
| | 558,412 |
| | 171,713 |
| | (570,218 | ) | | 1,304,159 |
|
Long-term debt and finance lease obligations, net | | 2,385,164 |
| | — |
| | 1,038 |
| | — |
| | 2,386,202 |
|
Deferred tax liabilities, net | | — |
| | 408,523 |
| | 834 |
| | (54,001 | ) | | 355,356 |
|
Advances from affiliates, net | | — |
| | — |
| | 120,418 |
| | (86,980 | ) | | 33,438 |
|
Other noncurrent liabilities | | — |
| | 69,168 |
| | 2,479 |
| | — |
| | 71,647 |
|
Noncurrent liabilities of discontinued operations | | — |
| | 349,875 |
| | — |
| | — |
| | 349,875 |
|
Total HSS shareholders’ equity | | 2,377,220 |
| | 3,361,338 |
| | 193,621 |
| | (3,554,959 | ) | | 2,377,220 |
|
Noncontrolling interests | | — |
| | — |
| | 15,275 |
| | — |
| | 15,275 |
|
Total liabilities and shareholders’ equity | | $ | 5,906,636 |
| | $ | 4,747,316 |
| | $ | 505,378 |
| | $ | (4,266,158 | ) | | $ | 6,893,172 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | HSSC | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | (14,471 | ) | | $ | 10,713 |
| | $ | (32,692 | ) | | $ | 18,537 |
| | $ | (17,913 | ) |
Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (22,215 | ) | | 95,031 |
| | 28,858 |
| | (18,537 | ) | | 83,137 |
|
Net cash flows from operating activities | | (36,686 | ) | | 105,744 |
| | (3,834 | ) | | — |
| | 65,224 |
|
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Purchases of marketable investment securities | | (365,877 | ) | | — |
| | — |
| | — |
| | (365,877 | ) |
Sales and maturities of marketable investment securities | | 490,020 |
| | — |
| | — |
| | — |
| | 490,020 |
|
Expenditures for property and equipment | | — |
| | (61,134 | ) | | (30,383 | ) | | — |
| | (91,517 | ) |
Expenditures for externally marketed software | | — |
| | (8,638 | ) | | — |
| | — |
| | (8,638 | ) |
Distributions (contributions) and advances from (to) subsidiaries, net | | 29,290 |
| | (18,939 | ) | | — |
| | (10,351 | ) | | — |
|
Net cash flows from investing activities | | 153,433 |
| | (88,711 | ) | | (30,383 | ) | | (10,351 | ) | | 23,988 |
|
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Payment of finance lease obligations | | — |
| | — |
| | (215 | ) | | — |
| | (215 | ) |
Payment of in-orbit incentive obligations | | — |
| | (203 | ) | | — |
| | — |
| | (203 | ) |
Contribution by non-controlling interest holder | | — |
| | — |
| | 4,000 |
| | — |
| | 4,000 |
|
Other, net | | — |
| | — |
| | 979 |
| | — |
| | 979 |
|
Contributions (distributions) and advances (to) from parent, net | | — |
| | (29,290 | ) | | 18,939 |
| | 10,351 |
| | — |
|
Net cash flows from financing activities | | — |
| | (29,493 | ) | | 23,703 |
| | 10,351 |
| | 4,561 |
|
| | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | (4,618 | ) | | — |
| | (4,618 | ) |
Net increase (decrease) in cash and cash equivalents | | 116,747 |
| | (12,460 | ) | | (15,132 | ) | | — |
| | 89,155 |
|
Cash and cash equivalents, including restricted amounts, beginning of period | | 1,057,903 |
| | 32,338 |
| | 50,081 |
| | — |
| | 1,140,322 |
|
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,174,650 |
| | $ | 19,878 |
| | $ | 34,949 |
| | $ | — |
| | $ | 1,229,477 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended September 30, 2019
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue - DISH Network | | $ | — |
| | $ | 9,057 |
| | $ | 690 |
| | $ | — |
| | $ | 9,747 |
|
Services and other revenue - other | | — |
| | 347,625 |
| | 58,879 |
| | (8,855 | ) | | 397,649 |
|
Equipment revenue | | — |
| | 76,905 |
| | 4,246 |
| | (15,426 | ) | | 65,725 |
|
Total revenue | | — |
| | 433,587 |
| | 63,815 |
| | (24,281 | ) | | 473,121 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 110,388 |
| | 40,428 |
| | (8,387 | ) | | 142,429 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 63,437 |
| | 3,177 |
| | (15,426 | ) | | 51,188 |
|
Selling, general and administrative expenses | | — |
| | 88,853 |
| | 23,602 |
| | (468 | ) | | 111,987 |
|
Research and development expenses | | — |
| | 5,953 |
| | 183 |
| | — |
| | 6,136 |
|
Depreciation and amortization | | — |
| | 99,099 |
| | 16,849 |
| | — |
| | 115,948 |
|
Total costs and expenses | | — |
| | 367,730 |
| | 84,239 |
| | (24,281 | ) | | 427,688 |
|
Operating income (loss) | | — |
| | 65,857 |
| | (20,424 | ) | | — |
| | 45,433 |
|
Other income (expense): | | | | | | | | | | |
Interest income | | 10,968 |
| | 1,466 |
| | 1,106 |
| | (1,240 | ) | | 12,300 |
|
Interest expense, net of amounts capitalized | | (40,433 | ) | | (1,016 | ) | | (15,399 | ) | | 1,240 |
| | (55,608 | ) |
Gains (losses) on investments, net | | 37 |
| | 33 |
| | — |
| | — |
| | 70 |
|
Equity in earnings (losses) of unconsolidated affiliates, net | | — |
| | (894 | ) | | — |
| | — |
| | (894 | ) |
Equity in earnings (losses) of subsidiaries, net | | 26,054 |
| | (44,409 | ) | | — |
| | 18,355 |
| | — |
|
Other, net | | — |
| | (9 | ) | | (13,188 | ) | | — |
| | (13,197 | ) |
Total other income (expense), net | | (3,374 | ) | | (44,829 | ) | | (27,481 | ) | | 18,355 |
| | (57,329 | ) |
Income (loss) from continuing operations before income taxes | | (3,374 | ) | | 21,028 |
| | (47,905 | ) | | 18,355 |
| | (11,896 | ) |
Income tax benefit (provision) | | 7,590 |
| | (13,375 | ) | | 609 |
| | — |
| | (5,176 | ) |
Net income (loss) from continuing operations | | 4,216 |
| | 7,653 |
| | (47,296 | ) | | 18,355 |
| | (17,072 | ) |
Net income (loss) from discontinued operations | | (4,109 | ) | | 18,491 |
| | — |
| | — |
| | 14,382 |
|
Net income (loss) | | 107 |
| | 26,144 |
| | (47,296 | ) | | 18,355 |
| | (2,690 | ) |
Less: Net loss attributable to noncontrolling interests | | — |
| | — |
| | (2,797 | ) | | — |
| | (2,797 | ) |
Net income (loss) attributable to HSS | | $ | 107 |
| | $ | 26,144 |
| | $ | (44,499 | ) | | $ | 18,355 |
| | $ | 107 |
|
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | | $ | 107 |
| | $ | 26,144 |
| | $ | (47,296 | ) | | $ | 18,355 |
| | $ | (2,690 | ) |
Other comprehensive income (loss), net of tax: | | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | | — |
| | — |
| | (16,247 | ) | | — |
| | (16,247 | ) |
Unrealized gains (losses) on available-for-sale securities and other | | 15 |
| | — |
| | (132 | ) | | — |
| | (117 | ) |
Equity in other comprehensive income (loss) of subsidiaries, net | | (16,379 | ) | | (16,379 | ) | | — |
| | 32,758 |
| | — |
|
Total other comprehensive income (loss), net of tax | | (16,364 | ) | | (16,379 | ) | | (16,379 | ) | | 32,758 |
| | (16,364 | ) |
Comprehensive income (loss) | | (16,257 | ) | | 9,765 |
| | (63,675 | ) | | 51,113 |
| | (19,054 | ) |
Less: Comprehensive loss attributable to noncontrolling interests | | — |
| | — |
| | (2,797 | ) | | — |
| | (2,797 | ) |
Comprehensive income (loss) attributable to HSS | | $ | (16,257 | ) | | $ | 9,765 |
| | $ | (60,878 | ) | | $ | 51,113 |
| | $ | (16,257 | ) |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended September 30, 2018
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue - DISH Network |
| $ | — |
| | $ | 13,493 |
| | $ | 491 |
| | $ | — |
| | $ | 13,984 |
|
Services and other revenue - other |
| — |
| | 339,066 |
| | 57,312 |
| | (9,558 | ) | | 386,820 |
|
Equipment revenue | | — |
| | 57,138 |
| | 7,625 |
| | (7,917 | ) | | 56,846 |
|
Total revenue | | — |
| | 409,697 |
| | 65,428 |
| | (17,475 | ) | | 457,650 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 113,982 |
| | 36,206 |
| | (8,855 | ) | | 141,333 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 47,736 |
| | 6,499 |
| | (7,917 | ) | | 46,318 |
|
Selling, general and administrative expenses | | — |
| | 85,200 |
| | 13,156 |
| | (703 | ) | | 97,653 |
|
Research and development expenses | | — |
| | 6,544 |
| | — |
| | — |
| | 6,544 |
|
Depreciation and amortization | | — |
| | 94,643 |
| | 13,203 |
| | — |
| | 107,846 |
|
Total costs and expenses | | — |
| | 348,105 |
| | 69,064 |
| | (17,475 | ) | | 399,694 |
|
Operating income (loss) | | — |
| | 61,592 |
| | (3,636 | ) | | — |
| | 57,956 |
|
Other income (expense): | | | | | | | | | | |
Interest income | | 15,019 |
| | 930 |
| | 670 |
| | (922 | ) | | 15,697 |
|
Interest expense, net of amounts capitalized | | (57,514 | ) | | (254 | ) | | (1,221 | ) | | 922 |
| | (58,067 | ) |
Gains (losses) on investments, net | | — |
| | 145 |
| | — |
| | — |
| | 145 |
|
Equity in earnings of unconsolidated affiliates, net | | — |
| | 992 |
| | — |
| | — |
| | 992 |
|
Equity in earnings (losses) of subsidiaries, net | | 61,476 |
| | (6,701 | ) | | — |
| | (54,775 | ) | | — |
|
Other, net | | 1 |
| | (15 | ) | | (3,604 | ) | | — |
| | (3,618 | ) |
Total other income (expense), net | | 18,982 |
| | (4,903 | ) | | (4,155 | ) | | (54,775 | ) | | (44,851 | ) |
Income (loss) from continuing operations before income taxes | | 18,982 |
| | 56,689 |
| | (7,791 | ) | | (54,775 | ) | | 13,105 |
|
Income tax benefit (provision) | | 9,488 |
| | (21,904 | ) | | 1,449 |
| | — |
| | (10,967 | ) |
Net income (loss) from continuing operations | | 28,470 |
| | 34,785 |
| | (6,342 | ) | | (54,775 | ) | | 2,138 |
|
Net income from discontinued operations | | — |
| | 26,782 |
| | — |
| | — |
| | 26,782 |
|
Net income (loss) | | 28,470 |
| | 61,567 |
| | (6,342 | ) | | (54,775 | ) | | 28,920 |
|
Less: Net income (loss) attributable to noncontrolling interests | | — |
| | — |
| | 450 |
| | — |
| | 450 |
|
Net income (loss) attributable to HSS | | $ | 28,470 |
| | $ | 61,567 |
| | $ | (6,792 | ) | | $ | (54,775 | ) | | $ | 28,470 |
|
Comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
|
Net income (loss) | | $ | 28,470 |
| | $ | 61,567 |
| | $ | (6,342 | ) | | $ | (54,775 | ) | | $ | 28,920 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | — |
| | — |
| | (9,460 | ) | | — |
| | (9,460 | ) |
Unrealized gains (losses) on available-for-sale securities and other | | 27 |
| | — |
| | (144 | ) | | — |
| | (117 | ) |
Equity in other comprehensive income (loss) of subsidiaries, net | | (9,014 | ) | | (9,014 | ) | | — |
| | 18,028 |
| | — |
|
Amounts reclassified to net income (loss): | | | | | | | | | | |
Realized gains on available-for-sale securities | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Total other comprehensive income (loss), net of tax | | (8,988 | ) | | (9,014 | ) | | (9,604 | ) | | 18,028 |
| | (9,578 | ) |
Comprehensive income (loss) | | 19,482 |
| | 52,553 |
| | (15,946 | ) | | (36,747 | ) | | 19,342 |
|
Less: Comprehensive loss attributable to noncontrolling interests | | — |
| | — |
| | (140 | ) | | — |
| | (140 | ) |
Comprehensive income (loss) attributable to HSS | | $ | 19,482 |
| | $ | 52,553 |
| | $ | (15,806 | ) | | $ | (36,747 | ) | | $ | 19,482 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2019
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue - DISH Network |
| $ | — |
| | $ | 30,213 |
| | $ | 1,808 |
| | $ | — |
| | $ | 32,021 |
|
Services and other revenue - other |
| — |
| | 1,032,361 |
| | 176,717 |
| | (26,623 | ) | | 1,182,455 |
|
Equipment revenue | | — |
| | 190,394 |
| | 21,961 |
| | (37,271 | ) | | 175,084 |
|
Total revenue | | — |
| | 1,252,968 |
| | 200,486 |
| | (63,894 | ) | | 1,389,560 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 330,634 |
| | 120,061 |
| | (24,799 | ) | | 425,896 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 164,027 |
| | 15,988 |
| | (37,271 | ) | | 142,744 |
|
Selling, general and administrative expenses | | 88 |
| | 290,556 |
| | 64,739 |
| | (1,824 | ) | | 353,559 |
|
Research and development expenses | | — |
| | 18,893 |
| | 518 |
| | — |
| | 19,411 |
|
Depreciation and amortization | | — |
| | 293,519 |
| | 48,567 |
| | — |
| | 342,086 |
|
Total costs and expenses | | 88 |
| | 1,097,629 |
| | 249,873 |
| | (63,894 | ) | | 1,283,696 |
|
Operating income (loss) | | (88 | ) | | 155,339 |
| | (49,387 | ) | | — |
| | 105,864 |
|
Other income (expense): | | | | | | | | | | |
Interest income | | 44,693 |
| | 3,403 |
| | 2,198 |
| | (2,953 | ) | | 47,341 |
|
Interest expense, net of amounts capitalized | | (150,234 | ) | | (7,302 | ) | | (17,919 | ) | | 2,953 |
| | (172,502 | ) |
Gains (losses) on investments, net | | 437 |
| | (727 | ) | | — |
| | — |
| | (290 | ) |
Equity in earnings (losses) of unconsolidated affiliates, net | | — |
| | (2,882 | ) | | — |
| | — |
| | (2,882 | ) |
Equity in earnings (losses) of subsidiaries, net | | 110,118 |
| | (77,204 | ) | | — |
| | (32,914 | ) | | — |
|
Other, net | | (100 | ) | | (57 | ) | | (11,972 | ) | | — |
| | (12,129 | ) |
Total other income (expense), net | | 4,914 |
| | (84,769 | ) | | (27,693 | ) | | (32,914 | ) | | (140,462 | ) |
Income (loss) from continuing operations before income taxes | | 4,826 |
| | 70,570 |
| | (77,080 | ) | | (32,914 | ) | | (34,598 | ) |
Income tax benefit (provision) | | 25,193 |
| | (24,656 | ) | | (1,722 | ) | | — |
| | (1,185 | ) |
Net income (loss) from continuing operations | | 30,019 |
| | 45,914 |
| | (78,802 | ) | | (32,914 | ) | | (35,783 | ) |
Net income (loss) from discontinued operations | | (6,709 | ) | | 64,443 |
| | — |
| | — |
| | 57,734 |
|
Net income (loss) | | 23,310 |
|
| 110,357 |
|
| (78,802 | ) |
| (32,914 | ) | | 21,951 |
|
Less: Net loss attributable to noncontrolling interests | | — |
| | — |
| | (1,359 | ) | | — |
| | (1,359 | ) |
Net income (loss) attributable to HSS | | $ | 23,310 |
| | $ | 110,357 |
| | $ | (77,443 | ) | | $ | (32,914 | ) | | $ | 23,310 |
|
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | | $ | 23,310 |
| | $ | 110,357 |
| | $ | (78,802 | ) | | $ | (32,914 | ) | | $ | 21,951 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | — |
| | — |
| | (13,927 | ) | | — |
| | (13,927 | ) |
Unrealized gains (losses) on available-for-sale securities and other | | 2,333 |
| | — |
| | (145 | ) | | — |
| | 2,188 |
|
Equity in other comprehensive income (loss) of subsidiaries, net | | (14,072 | ) | | (14,072 | ) | | — |
| | 28,144 |
| | — |
|
Amounts reclassified to net income (loss): | | | | | | | | | | |
Realized gains on available-for-sale securities | | (400 | ) | | — |
| | — |
| | — |
| | (400 | ) |
Total other comprehensive income (loss), net of tax | | (12,139 | ) | | (14,072 | ) | | (14,072 | ) | | 28,144 |
| | (12,139 | ) |
Comprehensive income (loss) | | 11,171 |
| | 96,285 |
| | (92,874 | ) | | (4,770 | ) | | 9,812 |
|
Less: Comprehensive loss attributable to noncontrolling interests | | — |
| | — |
| | (1,359 | ) | | — |
| | (1,359 | ) |
Comprehensive income (loss) attributable to HSS | | $ | 11,171 |
| | $ | 96,285 |
| | $ | (91,515 | ) | | $ | (4,770 | ) | | $ | 11,171 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2018
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue - DISH Network | | $ | — |
| | $ | 46,613 |
| | $ | 1,505 |
| | $ | — |
| | $ | 48,118 |
|
Services and other revenue - other | | — |
| | 970,251 |
| | 171,767 |
| | (28,547 | ) | | 1,113,471 |
|
Equipment revenue | | — |
| | 157,190 |
| | 16,789 |
| | (23,845 | ) | | 150,134 |
|
Total revenue | | — |
| | 1,174,054 |
| | 190,061 |
| | (52,392 | ) | | 1,311,723 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 335,007 |
| | 110,441 |
| | (26,797 | ) | | 418,651 |
|
Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 137,596 |
| | 13,503 |
| | (23,845 | ) | | 127,254 |
|
Selling, general and administrative expenses | | — |
| | 251,053 |
| | 36,359 |
| | (1,750 | ) | | 285,662 |
|
Research and development expenses | | — |
| | 20,328 |
| | — |
| | — |
| | 20,328 |
|
Depreciation and amortization | | — |
| | 277,889 |
| | 38,041 |
| | — |
| | 315,930 |
|
Total costs and expenses | | — |
| | 1,021,873 |
| | 198,344 |
| | (52,392 | ) | | 1,167,825 |
|
Operating income (loss) | | — |
| | 152,181 |
| | (8,283 | ) | | — |
| | 143,898 |
|
Other income (expense): | | | | | | | | | | |
Interest income | | 39,548 |
| | 2,855 |
| | 1,679 |
| | (2,720 | ) | | 41,362 |
|
Interest expense, net of amounts capitalized | | (172,438 | ) | | 983 |
| | (3,100 | ) | | 2,720 |
| | (171,835 | ) |
Gains (losses) on investments, net | | — |
| | 262 |
| | — |
| | — |
| | 262 |
|
Equity in earnings of unconsolidated affiliates, net | | — |
| | 3,722 |
| | — |
| | — |
| | 3,722 |
|
Equity in earnings (losses) of subsidiaries, net | | 191,915 |
| | (18,559 | ) | | — |
| | (173,356 | ) | | — |
|
Other, net | | 7 |
| | 9,377 |
| | (13,148 | ) | | — |
| | (3,764 | ) |
Total other income (expense), net | | 59,032 |
| | (1,360 | ) | | (14,569 | ) | | (173,356 | ) | | (130,253 | ) |
Income (loss) from continuing operations before income taxes | | 59,032 |
| | 150,821 |
| | (22,852 | ) | | (173,356 | ) | | 13,645 |
|
Income tax benefit (provision) | | 29,670 |
| | (48,681 | ) | | 5,255 |
| | — |
| | (13,756 | ) |
Net income (loss) from continuing operations | | 88,702 |
| | 102,140 |
| | (17,597 | ) | | (173,356 | ) | | (111 | ) |
Net income from discontinued operations | | — |
| | 90,105 |
| | — |
| | — |
| | 90,105 |
|
Net income (loss) | | 88,702 |
| | 192,245 |
| | (17,597 | ) | | (173,356 | ) | | 89,994 |
|
Less: Net income (loss) attributable to noncontrolling interests | | — |
| | — |
| | 1,292 |
| | — |
| | 1,292 |
|
Net income (loss) attributable to HSS | | $ | 88,702 |
| | $ | 192,245 |
| | $ | (18,889 | ) | | $ | (173,356 | ) | | $ | 88,702 |
|
Comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
|
Net income (loss) | | $ | 88,702 |
| | $ | 192,245 |
| | $ | (17,597 | ) | | $ | (173,356 | ) | | $ | 89,994 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | — |
| | — |
| | (39,874 | ) | | — |
| | (39,874 | ) |
Unrealized gains (losses) on available-for-sale securities and other | | 186 |
| | — |
| | (385 | ) | | — |
| | (199 | ) |
Equity in other comprehensive income (loss) of subsidiaries, net | | (38,870 | ) | | (38,870 | ) | | — |
| | 77,740 |
| | — |
|
Amounts reclassified to net income (loss): | | | | | | | | | | |
Realized gains on available-for-sale securities | | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) |
Total other comprehensive income (loss), net of tax | | (38,688 | ) | | (38,870 | ) | | (40,259 | ) | | 77,740 |
| | (40,077 | ) |
Comprehensive income (loss) | | 50,014 |
| | 153,375 |
| | (57,856 | ) | | (95,616 | ) | | 49,917 |
|
Less: Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | (97 | ) | | — |
| | (97 | ) |
Comprehensive income (loss) attributable to HSS | | $ | 50,014 |
| | $ | 153,375 |
| | $ | (57,759 | ) | | $ | (95,616 | ) | | $ | 50,014 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the NineThree Months Ended September 30,March 31, 2019
(Amounts in thousands)
| | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | HSSC | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 23,310 |
| | $ | 110,357 |
| | $ | (78,802 | ) | | $ | (32,914 | ) | | $ | 21,951 |
| | $ | 22,226 |
| | $ | 52,292 |
| | $ | (8,075 | ) | | $ | (43,411 | ) | | $ | 23,032 |
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (132,557 | ) | | 493,418 |
| | 105,514 |
| | 32,914 |
| | 499,289 |
| | (48,467 | ) | | 163,032 |
| | (10,043 | ) | | 43,411 |
| | 147,933 |
|
Net cash flows from operating activities | | (109,247 | ) | | 603,775 |
| | 26,712 |
| | — |
| | 521,240 |
| | (26,241 | ) | | 215,324 |
| | (18,118 | ) | | — |
| | 170,965 |
|
| | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Purchases of marketable investment securities | | (462,625 | ) | | — |
| | — |
| | — |
| | (462,625 | ) | | (240,188 | ) | | — |
| | — |
| | — |
| | (240,188 | ) |
Sales and maturities of marketable investment securities | | 1,375,245 |
| | (3 | ) | | — |
| | — |
| | 1,375,242 |
| | 468,748 |
| | (3 | ) | | — |
| | — |
| | 468,745 |
|
Expenditures for property and equipment | | — |
| | (162,643 | ) | | (62,351 | ) | | — |
| | (224,994 | ) | | — |
| | (54,207 | ) | | (19,722 | ) | | — |
| | (73,929 | ) |
Expenditures for externally marketed software | | — |
| | (21,364 | ) | | — |
| | — |
| | (21,364 | ) | | — |
| | (7,600 | ) | | — |
| | — |
| | (7,600 | ) |
Dividend received from unconsolidated entity | | — |
| | 2,284 |
| | — |
| | — |
| | 2,284 |
| |
Distributions (contributions) and advances from (to) subsidiaries, net | | 359,145 |
| | (38,282 | ) | | — |
| | (320,863 | ) | | — |
| | 111,020 |
| | (32,949 | ) | | — |
| | (78,071 | ) | | — |
|
Net cash flows from investing activities | | 1,271,765 |
| | (220,008 | ) | | (62,351 | ) | | (320,863 | ) | | 668,543 |
| | 339,580 |
| | (94,759 | ) | | (19,722 | ) | | (78,071 | ) | | 147,028 |
|
| | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Repayment of debt and finance lease obligations | | — |
| | (27,203 | ) | | (1,932 | ) | | — |
| | (29,135 | ) | |
Repurchase and maturity of debt | | (920,923 | ) | | — |
| | — |
| | — |
| | (920,923 | ) | |
Purchase of noncontrolling interest | | — |
| | (2,666 | ) | | (4,647 | ) | | — |
| | (7,313 | ) | |
Repayment of in-orbit incentive obligations | | — |
| | (5,269 | ) | | — |
| | — |
| | (5,269 | ) | |
Repurchase of the 2019 Senior Secured Notes | | | (8,046 | ) | | — |
| | — |
| | — |
| | (8,046 | ) |
Payment of finance lease obligations | | | — |
| | (9,597 | ) | | (285 | ) | | — |
| | (9,882 | ) |
Payment of in-orbit incentive obligations | | | — |
| | (1,573 | ) | | — |
| | — |
| | (1,573 | ) |
Purchase of non-controlling interest | | | (7,312 | ) | | — |
| | — |
| | — |
| | (7,312 | ) |
Contributions (distributions) and advances (to) from parent, net | | — |
| | (359,145 | ) | | 38,282 |
| | 320,863 |
| | — |
| | — |
| | (111,020 | ) | | 32,949 |
| | 78,071 |
| | — |
|
Proceeds from issuance of debt | | — |
| | — |
| | 1,172 |
| | — |
| | 1,172 |
| |
Net cash flows from financing activities | | (920,923 | ) | | (394,283 | ) | | 32,875 |
| | 320,863 |
| | (961,468 | ) | | (15,358 | ) | | (122,190 | ) | | 32,664 |
| | 78,071 |
| | (26,813 | ) |
| | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | 310 |
| | — |
| | 310 |
| | — |
| | — |
| | (117 | ) | | — |
| | (117 | ) |
Net increase (decrease) in cash and cash equivalents, including restricted amounts | | 241,595 |
| | (10,516 | ) | | (2,454 | ) | | — |
| | 228,625 |
| |
Net increase (decrease) in cash and cash equivalents | | | 297,981 |
| | (1,625 | ) | | (5,293 | ) | | — |
| | 291,063 |
|
Cash and cash equivalents, including restricted amounts, beginning of period | | 771,718 |
| | 46,353 |
| | 30,548 |
| | — |
| | 848,619 |
| | 771,718 |
| | 46,353 |
| | 30,548 |
| | — |
| | 848,619 |
|
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,013,313 |
| | $ | 35,837 |
| | $ | 28,094 |
| | $ | — |
| | $ | 1,077,244 |
| | $ | 1,069,699 |
| | $ | 44,728 |
| | $ | 25,255 |
| | $ | — |
| | $ | 1,139,682 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2018
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | 88,702 |
| | $ | 192,245 |
| | $ | (17,597 | ) | | $ | (173,356 | ) | | $ | 89,994 |
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (201,774 | ) | | 438,805 |
| | 55,249 |
| | 173,356 |
| | 465,636 |
|
Net cash flows from operating activities | | (113,072 | ) | | 631,050 |
| | 37,652 |
| | — |
| | 555,630 |
|
Cash flows from investing activities: | | | | | | | | | | |
Purchases of marketable investment securities | | (1,546,479 | ) | | — |
| | — |
| | — |
| | (1,546,479 | ) |
Sales and maturities of marketable investment securities | | 799,250 |
| | | | — |
| | — |
| | 799,250 |
|
Expenditures for property and equipment | | — |
| | (223,484 | ) | | (62,739 | ) | | — |
| | (286,223 | ) |
Refunds and other receipts related to property and equipment | | — |
| | 77,524 |
| | — |
| | — |
| | 77,524 |
|
Expenditures for externally marketed software | | — |
| | (24,568 | ) | | — |
| | — |
| | (24,568 | ) |
Payment for satellite launch services | | — |
| | — |
| | (7,125 | ) | | — |
| | (7,125 | ) |
Distributions (contributions) and advances from (to) subsidiaries, net | | 397,631 |
| | (32,985 | ) | | — |
| | (364,646 | ) | | — |
|
Other | | — |
| | (991 | ) | | — |
| | — |
| | (991 | ) |
Net cash flows from investing activities | | (349,598 | ) | | (204,504 | ) | | (69,864 | ) | | (364,646 | ) | | (988,612 | ) |
Cash flows from financing activities: | | | | | | | | | | |
Repayment of debt and finance lease obligations | | — |
| | (26,545 | ) | | (1,219 | ) | | — |
| | (27,764 | ) |
Repayment of in-orbit incentive obligations | | — |
| | (4,048 | ) | | — |
| | — |
| | (4,048 | ) |
Capital contribution from EchoStar Corporation | | 7,125 |
| | — |
| | — |
| | — |
| | 7,125 |
|
Contributions (distributions) and advances (to) from parent, net | | — |
| | (397,631 | ) | | 32,985 |
| | 364,646 |
| | — |
|
Net cash flows from financing activities | | 7,125 |
| | (428,224 | ) | | 31,766 |
| | 364,646 |
| | (24,687 | ) |
Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | (3,350 | ) | | — |
| | (3,350 | ) |
Net increase (decrease) in cash and cash equivalents, including restricted amounts | | (455,545 | ) | | (1,678 | ) | | (3,796 | ) | | — |
| | (461,019 | ) |
Cash and cash equivalents, including restricted amounts, beginning of period | | 1,746,878 |
| | 42,373 |
| | 34,103 |
| | — |
| | 1,823,354 |
|
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,291,333 |
| | $ | 40,695 |
| | $ | 30,307 |
| | $ | — |
| | $ | 1,362,335 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 18. SUPPLEMENTAL FINANCIAL INFORMATION
Noncash Investing and Financing Activities
The following table presents the noncash investing and financing activities (amounts in thousands):
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2019 | | 2018 |
| | | | |
Increase (decrease) in capital expenditures included in accounts payable, net | | $ | (1,883 | ) | | $ | 24,408 |
|
Noncash net assets exchanged for BSS Transaction (Note 5) | | $ | 342,823 |
| | $ | — |
|
Restricted Cash and Cash Equivalents
The beginning and ending balances of cash and cash equivalents presented in our Condensed Consolidated Statements of Cash Flows included restricted cash and cash equivalents of $0.8 million and $1.0 million, respectively, for the nine months ended September 30, 2019 and $0.8 million each for the nine months ended September 30, 2018. These amounts are included in Other noncurrent assets, net in our Condensed Consolidated Balance Sheets.
Fair Value of In-Orbit Incentives
As of September 30, 2019 and December 31, 2018, the fair values of our in-orbit incentive obligations from our continuing operations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $57.1 million and $57.9 million, respectively.
Contract Acquisition and Fulfillment Costs
Unamortized contract acquisition costs totaled $112.5 million and $103.6 million as of September 30, 2019 and December 31, 2018, respectively, and related amortization expense totaled $23.8 million and $22.0 million for the three months ended September 30, 2019 and 2018, respectively, and $70.4 million and $64.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Unamortized contract fulfillment costs were $3.0 million as of each of September 30, 2019 and December 31, 2018 and related amortization expense was de minimis for the three and nine months ended September 30, 2019 and 2018, respectively.
Research and Development
The table below summarizes the research and development costs incurred in connection with customers’ orders included in cost of sales and other expenses we incurred for research and development (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
Cost of sales | | $ | 6,564 |
| | $ | 5,555 |
| | $ | 18,275 |
| | $ | 18,443 |
|
Research and development | | $ | 6,136 |
| | $ | 6,544 |
| | $ | 19,411 |
| | $ | 20,328 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capitalized Software Costs
As of September 30, 2019 and December 31, 2018, the net carrying amount of externally marketed software was $99.7 million and $96.8 million, respectively, of which $33.1 million and $28.8 million, respectively, is under development and not yet placed in service. We capitalized costs related to the development of externally marketed software of $6.0 million and $9.6 million for the three months ended September 30, 2019 and 2018, respectively, and $21.4 million and $24.6 million for the nine months ended September 30, 2019 and 2018, respectively. We recorded amortization expense relating to the development of externally marketed software of $6.2 million and $5.8 million for the three months ended September 30, 2019 and 2018, respectively, and $18.4 million and $16.9 million for the nine months ended September 30, 2019 and 2018, respectively. The weighted average useful life of our externally marketed software was three years as of September 30, 2019.
Supplemental Cash Flows from Discontinued Operations
Significant supplemental cash flow information and adjustments to reconcile net income to net cash flow from operating activities for discontinued operations for the nine months ended September 30, 2019 and 2018 are as below:
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2019 | | 2018 |
| | | | |
Operating Activities | | | | |
Net income from discontinued operations | | $ | 57,734 |
| | $ | 90,105 |
|
Depreciation and amortization | | $ | 85,926 |
| | $ | 93,447 |
|
| | | | |
Investing Activities | | | | |
Expenditures for property and equipment | | $ | (510 | ) | | $ | (104 | ) |
| | | | |
Financing Activities | | | | |
Repayment of lease obligations | | $ | 29,588 |
| | $ | 26,545 |
|
Repayment of in-orbit incentive obligations | | $ | 2,853 |
| | $ | 1,953 |
|
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “HSS,“HSSC,” the “Company” and “our” refer to Hughes Satellite Systems Corporation and its subsidiaries. References to “$” are to United States (“U.S.”) dollars. The following management’s narrative analysisManagement’s Narrative Analysis of resultsResults of operationsOperations (“Management’s Narrative Analysis”) should be read in conjunction with our accompanying condensed consolidated financial statementsCondensed Consolidated Financial Statements and notes thereto included elsewhere(“Accompanying Condensed Consolidated Financial Statements”) in Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”). This management’snarrative analysisManagement’s Narrative Analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this management’s narrative analysisManagement’s Narrative Analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. SeeRefer to the Disclosure Regarding Forward-Looking Statements in this 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 in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K for the year ended December 31, 2018(“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) as amended by Amendment No. 1 to Form 10-K on Form 10-K/A filed with the SEC (collectively referred to as our “Form 10-K”). Further, such forward-looking statements speak only as of the date of this Form 10-Q and we undertake no obligation to update them.
EXECUTIVE SUMMARY
We are a holding company and a subsidiary of EchoStar Corporation (“EchoStar”). We were formed as a Colorado corporation in March 2011. We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized business customers, satellite operationsbusinesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical enterprise and government customers.enterprises.
In MaySeptember 2019, EchoStar and one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), entered intopursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”). Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019:, (i) EchoStar and its subsidiaries and we and our subsidiaries transferred to BSS Corp. certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily relatingrelated to the former portion of our ESS satellite services businesssegment that manages, marketsmanaged, marketed and providesprovided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and EchoStar’s joint venture Dish Mexico, S. de R.L. de C.V., (“Dish Mexico”) and its subsidiaries, and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of EchoStar’s and our other businesses (collectively, the “BSS Business”); to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) EchoStar distributed to each holder of shares of EchoStarEchoStar’s Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of EchoStarEchoStar’s Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH ownsthen owning and operatesoperating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS business segment. The BSS Transaction has been accounted for as a spin-off to EchoStar’s stockholders as EchoStar did not receive any consideration. As a result of the operatingBSS Transaction, the financial results of the BSS Business, have beenexcept for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.
The BSS Transaction was structuredthe three months ended March 31, 2019 in a manner intendedour Accompanying Condensed Consolidated Financial Statements. Refer to be tax-free to EchoStar and its stockholders for U.S. federal income tax purposes. In connection with the BSS Transaction, EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breachesNote 4. Discontinued Operations in our Accompanying Condensed Consolidated Financial Statements in Item 1 of certain representations and covenants and certain retained and assumed liabilities, respectively. Additionally, EchoStar and DISH and certain of our, EchoStar’s and DISH’s subsidiaries, as applicable, have (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services, (ii) terminated certain previously existing agreements, and (iii) amended certain existing agreements and entered into certain new
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
agreements pursuant to which we and DISH Network will obtain and provide certain products, services and rights from and to each other.
During 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement with DISH and certain of its subsidiaries. EchoStar, and certain of its and our subsidiaries, received all the shares of the Hughes Retail Preferred Tracking Stock previously issued by EchoStar and us (together, the “Tracking Stock”) in exchange for 100% of the equity interests of certain of EchoStar’s subsidiaries that held substantially all of EchoStar’s former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Following the consummation of the Share Exchange, EchoStar no longer operates its former EchoStar Technologies businesses, the Tracking Stock was retired and is no longer outstanding, and all agreements, arrangements and policy statements with respect to the Tracking Stock terminated.this Form 10-Q.
We currently operate in two business segments: Hughes and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company’s Chief Executive Officer.
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate Accounting and Legal) and other activities that have not been assigned to our operatingbusiness segments such as costs incurred in certain satellite development programs and other business
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other.
All amounts presented in our segment reporting.this Management’s Discussion and Analysis reference results from continuing operations unless otherwise noted and are expressed in thousands of United States (“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 nine months ended September 30, 2019Three Months Ended March 31, 2020:
| |
• | Revenue of $1.4 billion$467.5 million |
Operating income of $105.9 | |
• | Operating income (loss) of $29.7 million |
| |
• | Net income (loss) from continuing operations of $22.0$17.9 million |
Net income attributable to HSS of $23.3 | |
• | Net income (loss) attributable to HSSC of $14.5 million |
| |
• | Earnings before interest, taxes, depreciationdepreciation and amortization, net income (loss) from discontinued operations and net income (loss) attributable to non-controlling interests (“EBITDA”) of$434.0 $150.0 million (see(refer to the reconciliation of this non-GAAP measure on page62)in Results of Operations) |
Consolidated Financial Condition as of September 30, 2019March 31, 2020:
| |
• | Total assets of $5.3$5.4 billion |
Total liabilities of $3.4 billion
| |
• | Total shareholders’liabilities of $3.4 billion |
| |
• | Total shareholder’s equity of $2.1$2.0 billion |
| |
• | Cash, cash equivalents and current marketable investment securities of $1.8 billion |
Hughes Segment
Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services to home and small to medium-sized businessconsumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to service providers, aeronautical,consumer and 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 designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through advanced and proprietary methodologies, technologies, software and techniques, we continue to improve the efficiency of our networks. We invest in technologies to enhance our system and network management
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
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.
We continue to focus our efforts on growing our consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers in our domestic and international markets across wholesale and retail channels. The growth of our enterprise businesses, including aeronautical, relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Service costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth. The growth of our enterprise businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. As a result of the COVID-19 pandemic, in accordance with orders received from our enterprise customers, we have deferred or canceled the delivery of some products or services and we, thus, may not be able to recognize revenue for such products or services.
Our Hughes segment currently uses capacity from three of our satellites (the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite), our Al Yah 3 Brazilian payload and additional satellite capacity acquired
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
from third-party providers to provide services to our customers. Growth of our consumer subscriber base continues to be constrained in areas where we are nearing or have reached maximum capacity. While these constraints are expected to be resolved when we launch new satellites, we continue to focus on revenue growth in all areas and consumer subscriber growth in the areas where we have available capacity.
In May 2019, we entered into an agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat will contributecontributed its current satellite communications services business in Brazil to us in exchange for a 20% ownership interest in our existing Brazilian subsidiary that conducts our current satellite communications services business in Brazil.Brazil (the “Yahsat Brazil JV Transaction”). The combined business will provideprovides broadband internet services and enterprise solutions in Brazil using the Telesat T19V andsatellite, the Eutelsat 65W satellitessatellite and Yahsat’s Al Yah 3 satellite. Under the terms of the agreement, Yahsat may also acquire, for further cash investments, additional minority ownership interests in the business in the future provided certain conditions are met. The completion of the transaction is subject to customary regulatory approvals and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all.
In May 2019, we also entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti will contribute its very small aperture terminal (“VSAT”) telecommunications services and hardware business in India to our two existing Indian subsidiaries that conduct our VSAT services and hardware business. The combined entities will provide broadband satellite and hybrid solutions for enterprise and government networks. Upon consummation of the transaction, Bharti will have a 33% ownership interest in the combined business. The completion of the transaction is subject to customary regulatory approvals and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all.
In August 2018, we entered into an agreement with Yahsat to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat’s Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100$100.0 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS.
In August 2017, a subsidiary of EchoStar entered into a contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite, with a planned 2021 launch.satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (“HughesNet service”) in North, Central and South America as well as aeronautical and enterprise broadband services. In the first quarter of 2019, Maxar Technologies Inc. (“Maxar”), the parent company of2020, Space Systems/Loral, LLC (“SSL”SS/L”), the manufacturer of our EchoStar XXIV satellite, announced that, although it will continueinvoked the “force majeure” clause of our contract and notified us of a possible delay in completion of the satellite due to operate“shelter-in-place” orders affecting personnel at SS/L and its geostationary communications satellite business, it intends to adjust its organization to better align costs with revenue. SSL has indicated to us that it intends to meet its contractual obligations regardingsubcontractors, and other potential impacts of the timely manufacture and delivery ofCOVID-19 pandemic. We currently expect the EchoStar XXIV satellite. However, if SSL failssatellite to meetbe launched no earlier than the second half of 2021. This or is delayed inother delays or impediments to SS/L’s meeting theseits obligations for any reason, including if Maxar decides to significantly modify its geostationary communications satellite business, such failureas a result of the COVID-19 pandemic and various economic and other consequences or otherwise could have a material adverse impact on our business operations, future revenues, financial position and prospects, the completion of the manufacture of the EchoStar XXIV satellite and our planned expansion of satellite broadband services
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
throughout North, South and Central America. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in EchoStar’s Corporate and Other in its segment reporting.
In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”). Pursuant to the Hughes Broadband MSA, DISH’s subsidiary,DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our HughesNet service and related equipment and other telecommunication servicesservices; and (ii) installs HughesNet service equipment with respect to activations generated by the DISH subsidiary.Network. As a result of the Hughes Broadband MSA, we have not earned, and do not expect to earn in the future, significant equipment revenue from our distribution agreement with another wholly-owned subsidiary of DISH. We expect churn in the existing wholesale subscribers to continue to reduce Services and other revenue - DISH Network in the future.Network.
Developments toward the launch of next-generation satellite systems including low-earth orbit (“LEO”), medium-earth orbit (“MEO”) and geostationary systems could provide additional opportunities to drive the demand for our equipment, hardware, technology and services. In June 2015, a subsidiary of EchoStar made an equity investment in OneWeb Global Limited (the successor in interest to WorldVue Satellite Limited) (“OneWeb”), a global LEO satellite service company. In addition, we have an agreement with OneWeb to provide certain equipment and services in connection with the ground network system for OneWeb’s LEO satellites. We expect to continue delivering additional equipment and services to OneWeb.
We continue our efforts to expand our consumer satellite services business outside of the U.S. In April 2014, we entered into a 15-year agreement with Eutelsat do Brasil for Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite. We beganhave been delivering high-speed consumer satellite broadband services in Brazil since July 2016 and are also providing satellite broadband internet service in July 2016.several other Latin American countries. Additionally, in September 2015, we entered into 15-year agreements with affiliates of Telesat Canada for Ka-band capacity on the Telesat T19V satellite located at the 63 degree west longitude orbital location, which was launched in July 2018. Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A and EchoStar XIX satellites in Central and South America. We currently provide satellite broadband internet service in several Central and South American countries, and expect to launch similar services in other Central and South American countries.
Our subscriber numbers as of September 30, 2019, June 30, 2019 and December 31, 2018 are approximately as follows:
|
| | | | | | | | | |
| | As of |
| | September 30, 2019 | | June 30, 2019 | | December 31, 2018 |
| | | | | | |
Broadband subscribers | | 1,437,000 |
| | 1,415,000 |
| | 1,361,000 |
|
|
| | | | | | |
| | For the three months ended |
| | September 30, 2019 | | June 30, 2019 |
| | | | |
Net additions | | 22,000 |
| | 26,000 |
|
Our broadband subscribers include customers that subscribe to our HughesNet services in North, Central and South America through retail, wholesale and small/medium enterprise service channels. During the third quarter of 2019, we had net additions of approximately 22,000 new subscribers. Our gross subscriber additions increased by approximately 10,000 compared to the second quarter of 2019. Our net subscriber additions for the quarter ended September 30, 2019 decreased by 4,000 compared to the quarter ended June 30, 2019 reflecting higher churn in the third quarter compared to the second quarter of 2019.
As of both September 30, 2019 and December 31, 2018, our Hughes segment had $1.4 billion, respectively, of contracted revenue backlog. We define Hughes contracted revenue backlog as our expected future revenue, including lease revenue, under customer contracts that are non-cancelable, excluding agreements with customers in our consumer market.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - ContinuedCONTINUED
quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A satellite and the EchoStar XIX satellite in South America.
Our broadband subscribers include customers that subscribe to our HughesNet service in North and Latin America through retail, wholesale and small/medium enterprise service channels. In connection with the COVID-19 pandemic, in March 2020, we voluntarily signed on to the Federal Communications Commissions’ (“FCC”) Keep Americans Connected Pledge (the “Pledge”), promising not to terminate HughesNet service for certain consumer customers for 60 days even if they are unable to pay. We have removed from our subscriber numbers as of March 31, 2020 any subscribers whose HughesNet service would have ordinarily been terminated in the absence of the Pledge. In April 2020, we voluntarily agreed with the FCC’s request to extend the Pledge through June 30, 2020. As a result, we may be required to provide HughesNet service to consumers who do not have the ability to pay for such services.
The following table presents our approximate subscriber numbers:
|
| | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Broadband subscribers | | 1,516,000 |
| | 1,477,000 |
|
As of March 31, 2020 and December 31, 2019, approximately 267,000 and 238,000 of our subscribers, respectively, were in Latin America.
The following table presents our approximate subscriber net additions:
|
| | | | | | |
| | For the three months ended |
| | March 31, 2020 | | December 31, 2019 |
Net additions | | 39,000 |
| | 20,000 |
|
During the first quarter of 2020, our net subscriber additions increased by approximately 19,000 compared to the fourth quarter of 2019, reflecting increased gross subscriber additions compared to the fourth quarter of 2019.
As of March 31, 2020 and December 31, 2019, our Hughes segment had $1.2 billion and $1.4 billion of contracted revenue backlog, respectively. We define Hughes contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue. Our contracted revenue backlog as of March 31, 2020 decreased primarily due to the bankruptcy of a certain customer and the effects of the COVID-19 pandemic, including lengthened or delayed sales cycles with some of our enterprise customers.
ESS Segment
Our ESS segment provides satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the EchoStar IX satellite and the EchoStar 105/SES-11 satellitessatellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, our ESS segment had contracted revenue backlog of $12.2$9.5 million and $5.8$11.4 million respectively. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Other Business Opportunities
Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. The current COVID-19 pandemic has made even more evident the worldwide need and demand for connectivity and communications to facilitate an ever-increasing virtual global community and workplace. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, LEOlow-earth orbit (“LEO”) networks, MEOmedium-earth orbit (“MEO”) systems, balloons and High Altitude Platform Systems 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 many industries and communities in North America and internationally for consumers, as well as aeronautical,consumer and enterprise and government customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business.
We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally, 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 value that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.
Cybersecurity
As a global provider of satellite technologies and services, internet services and communications equipment and networks, we may be prone to more targeted and persistent levels of cyber-attacks than other businesses. These risks may be more prevalent as we continue to expand and grow our business into other areas of the world outside of North America, some of which are still developing their cybersecurity infrastructure maturity. Detecting, deterring, preventing and mitigating incidents caused by hackers and other parties may result in significant costs to us and may expose our customers to financial or other harm that have the potential to significantly increase our liability.
Due to the COVID-19 pandemic, a large portion of our workforce has been working remotely and is likely to continue to do so for some time. While we have cybersecurity risk management tools to help protect our technology, information and networks that our employees access remotely, we cannot guarantee the security of the network that they will be using, the security status of the other non-company managed devices that might be on the network to which they are connected or the devices or networks used by third parties with whom our employees conduct business, such as customers, suppliers, vendors and other persons. Additionally, there has been a major global increase in COVID-19 related cyber-fraud and phishing attacks that continue to target our employees, vendors, suppliers, customers and others. Accordingly, we have increased our efforts and resources relating to cybersecurity as a result of the COVID-19 pandemic
We treat cybersecurity risk seriously and are focused on maintaining the security of our and our partners’ systems, networks, technologies and data. We regularly review and revise our relevant policies and procedures, invest in and maintain internal resources, personnel and systems and review, modify and supplement our defenses through the use of various services, programs and outside vendors. Additionally, we provide resources to assist employees in better securing their home networks and remote connections. EchoStar also maintains agreements with third party vendors and experts to assist in our remediation and mitigation efforts if we experience or identify a material incident or threat. In addition, senior management and the Audit Committee of EchoStar’s Board of Directors are regularly briefed on cybersecurity matters.
We are not aware of any cyber-incidents with respect to our owned or leased satellites or other networks, equipment or systems that have had a material adverse effect on our business, costs, operations, prospects, results of operation or financial position during the three and nine months ended September 30, 2019.March 31, 2020 and through May 6, 2020. There can be no
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
assurance, however, that any such incident can be detected or thwarted or will not have such a material adverse effect in the future.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
RESULTS OF OPERATIONS
NineThree Months Ended September 30, 2019March 31, 2020 Compared to the NineThree Months Ended September 30, 2018March 31, 2019
The following table presents our consolidated results of operations for the ninethree months ended September 30, 2019March 31, 2020 compared to the ninethree months ended September 30, 2018 (amounts in thousands):March 31, 2019:
| | | | For the nine months ended September 30, | | Variance | | For the three months ended March 31, | | Variance |
Statements of Operations Data (1) | | 2019 | | 2018 | | Amount | | % | |
| | | | | | | | | |
Statements of Operations Data | | | 2020 | | 2019 | | Amounts | | % |
Revenue: | | | | | | | | | | | | | | | | |
Services and other revenue - DISH Network | | $ | 32,021 |
| | $ | 48,118 |
| | $ | (16,097 | ) | | (33.5 | ) | |
Services and other revenue - other | | 1,182,455 |
| | 1,113,471 |
| | 68,984 |
| | 6.2 |
| |
Services and other revenue | | | $ | 410,238 |
| | $ | 403,485 |
| | $ | 6,753 |
| | 1.7 |
|
Equipment revenue | | 175,084 |
| | 150,134 |
| | 24,950 |
| | 16.6 |
| | 57,309 |
| | 51,714 |
| | 5,595 |
| | 10.8 |
|
Total revenue | | 1,389,560 |
| | 1,311,723 |
| | 77,837 |
| | 5.9 |
| | 467,547 |
| | 455,199 |
| | 12,348 |
| | 2.7 |
|
Costs and expenses: | | | | | | | | | | | | | | | | |
Cost of sales - services and other | | 425,896 |
| | 418,651 |
| | 7,245 |
| | 1.7 |
| | 143,885 |
| | 142,086 |
| | 1,799 |
| | 1.3 |
|
% of total services and other revenue | | 35.1 | % | | 36.0 | % | | | | | | 35.1 | % | | 35.2 | % | | | | |
Cost of sales - equipment | | 142,744 |
| | 127,254 |
| | 15,490 |
| | 12.2 |
| | 45,908 |
| | 45,007 |
| | 901 |
| | 2.0 |
|
% of total equipment revenue | | 81.5 | % | | 84.8 | % | | | | | | 80.1 | % | | 87.0 | % | | | | |
Selling, general and administrative expenses | | 353,559 |
| | 285,662 |
| | 67,897 |
| | 23.8 |
| | 115,860 |
| | 102,337 |
| | 13,523 |
| | 13.2 |
|
% of total revenue | | 25.4 | % | | 21.8 | % | | | | | | 24.8 | % | | 22.5 | % | | | | |
Research and development expenses | | 19,411 |
| | 20,328 |
| | (917 | ) | | (4.5 | ) | | 6,254 |
| | 6,888 |
| | (634 | ) | | (9.2 | ) |
% of total revenue | | 1.4 | % | | 1.5 | % | | | | | | 1.3 | % | | 1.5 | % | | | | |
Depreciation and amortization | | 342,086 |
| | 315,930 |
| | 26,156 |
| | 8.3 |
| | 125,965 |
| | 112,411 |
| | 13,554 |
| | 12.1 |
|
Total costs and expenses | | 1,283,696 |
| | 1,167,825 |
| | 115,871 |
| | 9.9 |
| | 437,872 |
| | 408,729 |
| | 29,143 |
| | 7.1 |
|
Operating income | | 105,864 |
|
| 143,898 |
|
| (38,034 | ) |
| (26.4 | ) | |
| | | | | | | | | |
Operating income (loss) | | | 29,675 |
|
| 46,470 |
|
| (16,795 | ) |
| (36.1 | ) |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest income |
| 47,341 |
|
| 41,362 |
|
| 5,979 |
|
| 14.5 |
| |
Interest income, net | |
| 8,892 |
|
| 17,997 |
|
| (9,105 | ) |
| (50.6 | ) |
Interest expense, net of amounts capitalized |
| (172,502 | ) |
| (171,835 | ) |
| 667 |
|
| 0.4 |
|
| (42,192 | ) |
| (57,915 | ) |
| 15,723 |
|
| 27.1 |
|
Gains (losses) on investments, net |
| (290 | ) | | 262 |
|
| (552 | ) |
| * |
|
| (164 | ) | | (346 | ) |
| 182 |
|
| (52.6 | ) |
Equity in earnings (losses) of unconsolidated affiliates, net | | (2,882 | ) | | 3,722 |
| | (6,604 | ) | | * |
| | (1,087 | ) | | (1,072 | ) | | (15 | ) | | 1.4 |
|
Foreign currency transaction gains (losses), net | | | (7,528 | ) | | 211 |
| | (7,739 | ) | | * |
|
Other, net |
| (12,129 | ) |
| (3,764 | ) |
| (8,365 | ) |
| * |
|
| (278 | ) |
| (165 | ) |
| (113 | ) |
| 68.5 |
|
Total other expense, net |
| (140,462 | ) |
| (130,253 | ) |
| (10,209 | ) |
| 7.8 |
| |
Total other income (expense), net | |
| (42,357 | ) |
| (41,290 | ) |
| (1,067 | ) |
| 2.6 |
|
Income (loss) from continuing operations before income taxes |
| (34,598 | ) |
| 13,645 |
|
| (48,243 | ) |
| * |
|
| (12,682 | ) |
| 5,180 |
|
| (17,862 | ) |
| * |
|
Income tax provision, net |
| (1,185 | ) |
| (13,756 | ) |
| 12,571 |
|
| (91.4 | ) | |
Income tax benefit (provision), net | |
| (5,231 | ) |
| (4,872 | ) |
| (359 | ) |
| 7.4 |
|
Net income (loss) from continuing operations | | (35,783 | ) | | (111 | ) | | (35,672 | ) | | * |
| | (17,913 | ) | | 308 |
| | (18,221 | ) | | * |
|
Net income from discontinued operations | | 57,734 |
| | 90,105 |
| | (32,371 | ) | | (35.9 | ) | |
Net income (loss) from discontinued operations | | | — |
| | 22,724 |
| | (22,724 | ) | | (100.0 | ) |
Net income (loss) |
| 21,951 |
| | 89,994 |
|
| (68,043 | ) |
| (75.6 | ) |
| (17,913 | ) | | 23,032 |
|
| (40,945 | ) |
| * |
|
Less: Net income (loss) attributable to noncontrolling interests | | (1,359 | ) | | 1,292 |
| | (2,651 | ) | | * |
| |
Net income attributable to HSS | | $ | 23,310 |
| | $ | 88,702 |
| | $ | (65,392 | ) | | (73.7 | ) | |
Less: Net loss (income) attributable to non-controlling interests | | | 3,442 |
| | (806 | ) | | 4,248 |
| | * |
|
Net income (loss) attributable to Hughes Satellite Systems Corporation | | | $ | (14,471 | ) | | $ | 22,226 |
| | $ | (36,697 | ) | | * |
|
| | | | | | | | | | | | | | | | |
Other data: | | | | | | | | | | | | | | | | |
EBITDA (2) | | $ | 434,008 |
| | $ | 458,756 |
| | $ | (24,748 | ) | | (5.4 | ) | |
EBITDA (1) | | | $ | 150,025 |
| | $ | 156,703 |
| | $ | (6,678 | ) | | (4.3 | ) |
Subscribers, end of period | | 1,437,000 |
| | 1,332,000 |
| | 105,000 |
| | 7.9 |
| | 1,516,000 |
| | 1,332,000 |
| | 184,000 |
| | 13.8 |
|
* Percentage is not meaningful.
| |
(1) | An explanationA reconciliation of EBITDA to Net income (loss), the most directly comparable generally accepted accounting principles in the U.S. (“U.S. GAAP”) measure in our key metricsAccompanying Condensed Consolidated Financial Statements, is included in Results of Operations. For further information on pages 64 and 65 underour use of EBITDA, refer to the heading Explanation of Key Metrics and Other Items. |
| |
(2) | A reconciliation of EBITDA to Net income, the most directly comparable generally accepted accounting principles (“U.S. GAAP”) measure in the accompanying financial statements, is included on page 62. For further information on our use of EBITDA, see Explanation of Key Metrics and Other Items on page 65. |
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - ContinuedCONTINUED
The following discussion relates to our continuing operations for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 unless otherwise stated.
Services and other revenue - DISH Network. Services and other revenue - DISH Networktotaled $32.0$410.2 million for the ninethree months ended September 30, 2019, a decreaseMarch 31, 2020, an increase of $16.1$6.8 million, or 33.5%1.7%, compared to the same period in 2018.
Services and other revenue - DISH Network2019. The increase was from our Hughes segment for the nine months ended September 30, 2019 decreased by $13.7 million, or 34.9%, to $25.6 million compared to the same period in 2018. The decrease was primarily attributable to a continued decrease in our residential wholesale broadband services.
Services and other revenue - DISH Network from our ESS segment for the nine months ended September 30, 2019 decreased by $1.6 million, or 41.4%, to $2.2 million compared to the same period in 2018. The decrease was primarily due to a decrease of $1.6 million in satellite capacity leased to DISH Network on the EchoStar IX satellite.
Services and other revenue - other. Services and other revenue - other totaled $1.2 billion for the nine months ended September 30, 2019, an increase of $69.0 million or 6.2%, compared to the same period in 2018.
Services and other revenue - other from our Hughes segment for the nine months ended September 30, 2019 increased by $77.8 million, or 7.2%, to $1.2 billion compared to the same period in 2018. The increase was primarily attributable to increases in sales of broadband services to our consumer customers of $95.4$19.5 million, partially offset by a decrease in sales of broadband services to our enterprise customers of $20.5$12.6 million.
Services and other revenue - other from our ESS segment forBoth of these variances include the nine months ended September 30, 2019 decreased by $9.7 million, or 48.5%, to $9.7 million compared to the same period in 2018. The decrease was due to a net decrease in transponder services provided to third parties.negative impact of exchange rate fluctuations.
Equipment revenue.revenue. Equipment revenue totaled $175.1$57.3 million for the ninethree months ended September 30, 2019,March 31, 2020, an increase of $25.0$5.6 million, or 16.6%10.8%, compared to the same period in 2018.2019. The increase was fromprimarily attributable to our Hughes segment and mainly due to increases in hardware sales of $15.0 million to our international enterprise customers and $11.9 million to our mobile satellite systems customers. The increase was partially offset by a decrease in hardware sales of $2.6 million to our domestic consumer and enterprise customers.
Cost of sales - services and other. Cost of sales - services and other totaled $425.9$143.9 million for the ninethree months ended September 30, 2019,March 31, 2020, an increase of $7.2$1.8 million, or 1.7%1.3%, compared to the same period in 2018.2019. The increase was fromprimarily attributable to our Hughes segment primarily attributabledue to an increase in the costs of broadband services provided to our consumer customers supporting the increase in number of subscribers and revenue in both the domestic and international markets, partially offset by a decrease in the costs of broadband services provided to our enterprise customers.
Cost of sales - equipment. Cost of sales - equipment totaled $142.7$45.9 million for the ninethree months ended September 30, 2019,March 31, 2020, an increase of $15.5$0.9 million, or 12.2%2.0%, compared to the same period in 2018.2019. The increase was fromprimarily attributable to our Hughes segment and primarily attributabledue to an increase in hardware sales to our international enterprise customers and our mobile satellite systems customers. The increase was partially offset by a decrease in hardware sales to our domestic consumer and enterprise customers.
Selling, general and administrative expenses.expenses. Selling, general and administrative expenses totaled $353.6$115.9 million for the ninethree months ended September 30, 2019,March 31, 2020, an increase of $67.9$13.5 million, or 23.8%13.2%, compared to the same period in 2018.2019. The increase was primarily attributable to (i) increases in (i) expense of $32.9 million related to certain legal proceedings, (ii) marketing and promotional expenses of $18.4$8.3 million from our Hughes segment mainly associated with our consumer business (iii)in Latin America, (ii) increases in bad debt expense of $6.6$1.9 million and (iv)(iii) increases in other general and administrative expenses of $10.0$3.0 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $126.0 million for the three months ended March 31, 2020, an increase of $13.6 million, or 12.1%, compared to 2019. The increase was primarily from our Hughes segment and due to increases in depreciation expense of $6.4 million relating to our customer premises equipment and $6.1 million relating to the depreciation of assets acquired in the Yahsat Brazil JV Transaction.
Interest income, net. Interest income, net totaled $8.9 million for the three months ended March 31, 2020, a decrease of $9.1 million, or 50.6%, compared to 2019 primarily attributable to the decrease in our marketable investment securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $42.2 million for the three months ended March 31, 2020, a decrease of $15.7 million, or 27.1%, compared to 2019. The decrease was primarily due to a decrease of $16.0 million in interest expense and in amortization of deferred financing cost as a result of the repurchase and maturity of our 6 1/2% Senior Secured Notes due 2019.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), nettotaled $7.5 million in losses for the three months ended March 31, 2020 compared to $0.2 million in gains for the three months ended March 31, 2019. The change was due to the net strengthening of the U.S. dollar against certain foreign currencies in 2020 compared to 2019.
60
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
Depreciation and amortization.Depreciation and amortization expenses totaled $342.1 million for the nine months ended September 30, 2019, an increase of $26.2 million or 8.3%, compared to the same period in 2018. The increase was primarily due to increases in depreciation expense of (i) $12.6 million relating to our customer premises equipment, (ii) $5.0 million relating to our machinery and equipment, (iii) $4.8 million relating the Telesat T19V satellite that was placed into service in the fourth quarter of 2018 and (iv) $3.1 million relating to the decrease in depreciable life of the SPACEWAY 3 satellite.
Interest income. Interest income totaled $47.3 million for the nine months ended September 30, 2019, an increase of $6.0 million or 14.5%, compared to the same period in 2018 primarily attributable to an increase in yield percentage in 2019 compared to 2018, partially offset by a decrease in interest income as a result of the decrease in cash and cash equivalents and current marketable investment securities in 2019.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $172.5 million for the nine months ended September 30, 2019, an increase of $0.7 million or 0.4%, compared to the same period in 2018. The decrease was primarily due to a decrease of $22.4 million in interest expense and the amortization of deferred financing cost as a result of the repurchase and maturity of the 6 1/2% Senior Secured Notes due 2019 and a net increase of $5.2 million in capitalized interest relating to the construction of the EchoStar XXIV satellite. The decrease was partially offset by an increase of $18.2 million in interest expense associated with certain legal proceedings.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled $2.9 million for the nine months ended September 30, 2019, an increase in loss of $6.6 million compared to the same period in 2018.
Other, net.Other, net totaled $12.1 million in loss for the nine months ended September 30, 2019, an increase in loss of $8.4 million compared to the same period in 2018. For the nine months ended September 30, 2019, the $12.1 million in loss was primarily related to an unfavorable foreign exchange impact. For the nine months ended September 30, 2018, the $3.8 million in loss was related to an unfavorable foreign exchange impact of $13.0 million and a net gain of $9.6 million due to the settlement of certain amounts due to and from a third party vendor.
Income tax provision. Income tax provision was $1.2 million for the nine months ended September 30, 2019 compared to an income tax provision of $13.8 million for the nine months ended September 30, 2018. Our effective income tax rate was (3.4)% and 100.8% for the nine months ended September 30, 2019 and 2018, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2019 were primarily due to the change in net unrealized gains that are capital in nature, various permanent tax differences, the impact of state and local taxes, and increase in our valuation allowance associated with certain foreign losses. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2018 were primarily due to various permanent tax differences, the impact of state and local taxes, the increase in our valuation allowance associated with certain foreign losses and the change in our valuation allowance associated with net unrealized losses that are capital in nature.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - ContinuedCONTINUED
Net income (loss) attributable to HSS.Hughes Satellite Services Corporation. Net loss attributable to Hughes Satellite Services Corporation totaled $14.5 million for the three months ended March 31, 2020, compared to net income attributable to HSS was $23.3Hughes Satellite Services Corporation of $22.2 million for the ninethree months ended September 30,March 31, 2019, a decrease of $65.4$36.7 million, or 73.7%, compared to the same period in 2018 as set forth in the following table (amounts in thousands):table:
|
| | | | |
| | Amounts |
| | |
Net income attributable to HSS for the nine months ended September 30, 2018 | | $ | 88,702 |
|
Decrease in operating income, including depreciation and amortization | | (38,034 | ) |
Increase in interest income | | 5,979 |
|
Increase in interest expense, net of amounts capitalized | | (667 | ) |
Decrease in gains on investments, net | | (552 | ) |
Decrease in equity in earnings of unconsolidated affiliates, net | | (6,604 | ) |
Decrease in other income | | (8,365 | ) |
Decrease in income tax provision | | 12,571 |
|
Decrease in net income from discontinued operations | | (32,371 | ) |
Decrease in net income attributable to noncontrolling interests | | 2,651 |
|
Net income attributable to HSS for the nine months ended September 30, 2019 | | $ | 23,310 |
|
|
| | | | |
| | Amounts |
Net income (loss) attributable to Hughes Satellite Services Corporation for the three months ended March 31, 2019 | | $ | 22,226 |
|
Decrease (increase) in interest expense, net of amounts capitalized | | 15,723 |
|
Decrease (increase) in net income attributable to non-controlling interests | | 4,248 |
|
Increase (decrease) in gains on investments, net | | 182 |
|
Decrease (increase) in equity in losses of unconsolidated affiliates, net | | (15 | ) |
Increase (decrease) in other, net | | (113 | ) |
Decrease (increase) in income tax provision, net | | (359 | ) |
Increase (decrease) in foreign currency transaction gains, net | | (7,739 | ) |
Increase (decrease) in interest income, net | | (9,105 | ) |
Increase (decrease) in operating income, including depreciation and amortization | | (16,795 | ) |
Increase (decrease) in net income from discontinued operations | | (22,724 | ) |
Net income (loss) attributable to Hughes Satellite Services Corporation for the three months ended March 31, 2020 | | $ | (14,471 | ) |
EBITDA. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in the accompanying condensed consolidating financial statements (amounts in thousands):our Accompanying Condensed Consolidated Financial Statements, to EBITDA:
|
| | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2019 | | 2018 | | Amount | | % |
| | | | | | | | |
Net income (loss) | | $ | 21,951 |
| | $ | 89,994 |
| | $ | (68,043 | ) | | (75.6 | ) |
Interest income and expense, net | | 125,161 |
| | 130,473 |
| | (5,312 | ) | | (4.1 | ) |
Income tax provision, net | | 1,185 |
| | 13,756 |
| | (12,571 | ) | | (91.4 | ) |
Depreciation and amortization | | 342,086 |
| | 315,930 |
| | 26,156 |
| | 8.3 |
|
Net income from discontinued operations | | (57,734 | ) | | (90,105 | ) | | 32,371 |
| | (35.9 | ) |
Net (income) loss attributable to noncontrolling interests | | 1,359 |
| | (1,292 | ) |
| 2,651 |
|
| * |
|
EBITDA | | $ | 434,008 |
| | $ | 458,756 |
| | $ | (24,748 | ) | | (5.4 | ) |
|
| | | | | | | | | | | | | | | |
| | For the three months ended March 31, | | Variance |
| | 2020 | | 2019 | | Amounts | | % |
Net income (loss) | | $ | (17,913 | ) | | $ | 23,032 |
| | $ | (40,945 | ) | | * |
|
Interest income, net | | (8,892 | ) | | (17,997 | ) | | 9,105 |
| | (50.6 | ) |
Interest expense, net of amounts capitalized | | 42,192 |
| | 57,915 |
| | (15,723 | ) | | (27.1 | ) |
Income tax provision (benefit), net | | 5,231 |
| | 4,872 |
| | 359 |
| | 7.4 |
|
Depreciation and amortization | | 125,965 |
| | 112,411 |
| | 13,554 |
| | 12.1 |
|
Net loss (income) from discontinued operations | | — |
| | (22,724 | ) | | 22,724 |
| | (100.0 | ) |
Net loss (income) attributable to non-controlling interests | | 3,442 |
| | (806 | ) |
| 4,248 |
|
| * |
|
EBITDA | | $ | 150,025 |
| | $ | 156,703 |
| | $ | (6,678 | ) | | (4.3 | ) |
EBITDA was $434.0 million for the nine months ended September 30, 2019, a decrease of $24.7 million or 5.4%, compared to the same period in 2018. The decrease was primarily due to decreases of (i) $11.9 million in operating income, excluding depreciation and amortization, (ii) $8.4 million in other income and (iii) $6.6 million in equity in earnings of unconsolidated affiliates.* Percentage is not meaningful.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - ContinuedCONTINUED
EBITDA was $150.0 million for the three months ended March 31, 2020, a decrease of $6.7 million, or 4.3%, compared to 2019 as set forth in the following table:
|
| | | | |
| | Amounts |
EBITDA for the three months ended March 31, 2019 | | $ | 156,703 |
|
Decrease (increase) in net income attributable to non-controlling interests | | 4,248 |
|
Increase (decrease) in gains on investments, net | | 182 |
|
Decrease (increase) in equity in losses of unconsolidated affiliates, net | | (15 | ) |
Increase (decrease) in other, net | | (113 | ) |
Increase (decrease) in operating income, excluding depreciation and amortization | | (3,241 | ) |
Increase (decrease) in foreign currency transaction gains, net | | (7,739 | ) |
EBITDA for the three months ended March 31, 2020 | | $ | 150,025 |
|
Segment Operating Results and Capital Expenditures
The following tables present our operating results, capital expenditures and EBITDA by segment for the ninethree months ended September 30, 2019March 31, 2020 compared to the ninethree months ended September 30, 2018 (amountsMarch 31, 2019. Capital expenditures in thousands). Capital expendituresthe table below are net of refunds and other receipts related to our property and equipment and exclude capital expenditures from discontinued operations of $0.5 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively.equipment.
| | | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
| | | | | | | | | |
For the nine months ended September 30, 2019 | | | | | | | | | |
For the three months ended March 31, 2020 | | | | | | | | | |
Total revenue | | $ | 1,360,919 |
| | $ | 11,873 |
| | $ | 16,768 |
| | $ | 1,389,560 |
| | $ | 458,482 |
| | $ | 4,652 |
| | $ | 4,413 |
| | $ | 467,547 |
|
Capital expenditures | | $ | 224,483 |
| | $ | — |
| | $ | — |
| | $ | 224,483 |
| | 91,517 |
| | — |
| | — |
| | 91,517 |
|
EBITDA | | $ | 448,837 |
| | $ | 5,006 |
| | $ | (19,835 | ) | | $ | 434,008 |
| | 154,641 |
| | 2,030 |
| | (6,646 | ) | | 150,025 |
|
| | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2018 | | | | | | | | | |
For the three months ended March 31, 2019 | | | | | | | | | |
Total revenue | | $ | 1,271,886 |
| | $ | 22,562 |
| | $ | 17,275 |
| | $ | 1,311,723 |
| | $ | 445,337 |
| | $ | 4,033 |
| | $ | 5,829 |
| | $ | 455,199 |
|
Capital expenditures | | $ | 285,352 |
| | $ | (76,757 | ) | | $ | — |
| | $ | 208,595 |
| | 73,821 |
| | — |
| | — |
| | 73,821 |
|
EBITDA | | $ | 452,982 |
| | $ | 15,478 |
| | $ | (9,704 | ) | | $ | 458,756 |
| | 161,132 |
| | 1,729 |
| | (6,158 | ) | | 156,703 |
|
Hughes Segment
| | | | For the nine months ended September 30, | | Variance | | | | | | | | | |
| | 2019 | | 2018 | | Amount | | % | | For the three months ended March 31, | | Variance |
| | | | | | | | | | 2020 | | 2019 | | Amounts | | % |
Total revenue | | $ | 1,360,919 |
| | $ | 1,271,886 |
| | $ | 89,033 |
| | 7.0 |
| | $ | 458,482 |
| | $ | 445,337 |
| | $ | 13,145 |
| | 3.0 |
|
Capital expenditures | | $ | 224,483 |
| | $ | 285,352 |
| | $ | (60,869 | ) | | (21.3 | ) | | 91,517 |
| | 73,821 |
| | 17,696 |
| | 24.0 |
|
EBITDA | | $ | 448,837 |
| | $ | 452,982 |
| | $ | (4,145 | ) | | (0.9 | ) | | 154,641 |
| | 161,132 |
| | (6,491 | ) | | (4.0 | ) |
Total revenue was $458.5 million for the ninethree months ended September 30, 2019 increased by $89.0March 31, 2020, an increase of $13.1 million, or 7.0%3.0%, compared to the same period in 2018.2019. The increase was primarily due to an increasenet increases of $81.4$19.5 million in sales of broadband services to our consumer customers and net increases$5.6 million in hardware sales of $13.2 million to our enterprise customers, and $11.9 million to our mobile satellite systems customers. The increase was partially offset by a decrease of $20.5 million in sales of broadband services to our enterprise customers.customers of $12.6 million. Both of these variances include the negative impact of exchange rate fluctuations.
Capital expenditures were $91.5 million for the ninethree months ended September 30, 2019 decreased by $60.9March 31, 2020, an increase of $17.7 million, or 21.3%24.0%, compared to the same period in 2018,2019, primarily due to net decreases in capital expenditures associated with the construction and infrastructure of our satellites and in our consumer and enterprise businesses.
EBITDA for the nine months ended September 30, 2019 was $448.8 million, a decrease of $4.1 million, or 0.9%, compared to the same period in 2018. The change in EBITDA was primarily attributable to an increase of $65.3 million in gross margin, which was offset by increases in (i) expense of $32.9 million related to certain legal proceedings, (ii) marketing and promotional expenses of $18.4 million mainlyexpenditures associated with our consumer business, (iii) bad debt expense of $6.6 million, (iv) a loss of $4.8 million from certain investments in our unconsolidated entities, and (v) other general and administrative expenses.business.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - ContinuedCONTINUED
EBITDA was $154.6 million for the three months ended March 31, 2020, a decrease of $6.5 million, or 4.0%, compared to 2019 as set forth in the following table:
|
| | | | |
| | Amounts |
EBITDA for the three months ended March 31, 2019 | | $ | 161,132 |
|
Decrease (increase) in net income attributable to non-controlling interests | | 4,248 |
|
Increase (decrease) in gains on investments, net | | 568 |
|
Increase (decrease) in other, net | | (191 | ) |
Decrease (increase) in equity in losses of unconsolidated affiliates, net | | (373 | ) |
Increase (decrease) in operating income, excluding depreciation and amortization | | (2,997 | ) |
Increase (decrease) in foreign currency transaction gains, net | | (7,746 | ) |
EBITDA for the three months ended March 31, 2020 | | $ | 154,641 |
|
ESS Segment
|
| | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2019 | | 2018 | | Amount | | % |
| | | | | | | | |
Total revenue | | $ | 11,873 |
| | $ | 22,562 |
| | $ | (10,689 | ) | | (47.4 | ) |
Capital expenditures | | $ | — |
| | $ | (76,757 | ) | | $ | 76,757 |
| | (100.0 | ) |
EBITDA | | $ | 5,006 |
| | $ | 15,478 |
| | $ | (10,472 | ) | | (67.7 | ) |
* Percentage is not meaningful. |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, | | Variance |
| | 2020 | | 2019 | | Amounts | | % |
Total revenue | | $ | 4,652 |
| | $ | 4,033 |
| | $ | 619 |
| | 15.3 |
EBITDA | | 2,030 |
| | 1,729 |
| | 301 |
| | 17.4 |
Total revenue was $4.7 million for the ninethree months ended September 30, 2019 decreased by $10.7March 31, 2020, an increase of $0.6 million or 47.4%15.3%, compared to the same period in 2018. The decrease was attributable2019, due to a net decrease of $9.7 millionincrease in transponder services provided to third parties and a decrease of $1.6 million in satellite capacity leased to DISH Network on the EchoStar IX satellite.
Capital expenditures for the nine months ended September 30, 2019 increased by $76.8 million compared to the same period in 2018, primarily due to a reimbursement of $77 million related to the EchoStar 105/SES-11 satellite received in the first quarter of 2018.parties.
EBITDA was $2.0 million for the ninethree months ended September 30, 2019 was $5.0 million, a decreaseMarch 31, 2020, an increase of $10.5$0.3 million, or 67.7%17.4%, compared to the same period in 2018,2019, primarily due to the decreaseincrease in ESS revenue.
Corporate and Other
| | | | For the nine months ended September 30, | | Variance | | | | | | | | | |
| | 2019 | | 2018 | | Amount | | % | | For the three months ended March 31, | | Variance |
| | | | | | | | | | 2020 | | 2019 | | Amounts | | % |
Total revenue | | $ | 16,768 |
| | $ | 17,275 |
| | $ | (507 | ) | | (2.9 | ) | | $ | 4,413 |
| | $ | 5,829 |
| | $ | (1,416 | ) | | (24.3 | ) |
EBITDA | | $ | (19,835 | ) | | $ | (9,704 | ) | | $ | (10,131 | ) | | * |
| | (6,646 | ) | | (6,158 | ) | | (488 | ) | | 7.9 |
|
* Percentage is not meaningful.
Total revenue was $4.4 million for the three months ended March 31, 2020, a decrease of $1.4 million, or 24.3%, compared to 2019 primarily attributable to a decrease in income from certain real estate previously leased to DISH Network and transferred as part of the BSS Transaction.
EBITDA for the ninethree months ended September 30, 2019March 31, 2020 was a loss of $19.8$6.6 million, an increase in loss of $10.1$0.5 million, or 7.9% compared to 2019 as set forth in the same period in 2018, primarily attributable to a net gain of $9.6 million due to the settlement of certain amounts due to and from a third party vendor in 2018.following table:
|
| | | | |
| | Amounts |
EBITDA for the three months ended March 31, 2019 | | $ | (6,158 | ) |
Decrease (increase) in equity in losses of unconsolidated affiliates, net | | 357 |
|
Increase (decrease) in other, net | | 81 |
|
Increase (decrease) in foreign currency transaction gains, net | | 7 |
|
Increase (decrease) in gains on investments, net | | (385 | ) |
Increase (decrease) in operating income, excluding depreciation and amortization | | (548 | ) |
EBITDA for the three months ended March 31, 2020 | | $ | (6,646 | ) |
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue - DISH Network. Services and other revenue - DISH Network primarily includes revenue associated with satellite and transponder leases and services, TT&C, professional services, facilities rental revenue and other services provided to DISH Network. Services and other revenue - DISH Network also includes subscriber wholesale service fees for the HughesNet service sold to DISH Network.
Services and other revenue - other. Services and other revenue - other primarily includes the sales of enterpriseconsumer and consumerenterprise broadband services, as well as maintenance and other contracted services. Services and other revenue - other also includesservices, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service professional services and other services provided to customers other than DISH Network.facilities rental revenue.
Equipment revenue. Equipment revenue primarily includes broadband equipment and networks sold to customers in our consumer and enterprise and consumer markets and sales of satellite broadband equipment and related equipment, related to the HughesNet service, to DISH Network.markets.
Cost of sales - services and other. Cost of sales - services and other primarily includes the cost of broadband services provided to our consumer and enterprise 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
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
satellite and transponder leases and services, TT&C, professional services and facilities rental costs and other services provided to our customers, including DISH Network.rental.
Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks sold to customers in our consumer and enterprise and consumer markets and to DISH Network. Cost of sales - equipmentmarkets. It also includes certain other costs associated with the deployment of equipment to our customers.
Selling, general and administrative expenses. Selling, general and administrative expenses primarily includes selling and marketing costs and employee-related costs associated with administrative services (e.g., information systems, human resources and other services), includingservices and stock-based compensation expense.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 EchoStar and its other subsidiaries, DISH Networkcredit losses, which include customer related estimated credit losses and other third parties.estimated credit losses on non-current receivables.
Research and development expenses. Research and development expenses primarily includes costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.
Interest income, net. Interest income, net primarily includes interest earned on our cash, cash equivalents and marketable investment securities, and other investments including premium amortization and discount accretion on debt securities.securities, offset by estimated credit losses on our other debt investments.
Interest expense, net of amounts capitalized. Interest expense, net of amounts 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 (losses) on investments, net. Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities and other investments for which we have elected the fair value option.securities. It may also include realized gains and losses on the sale or exchange of our available-for-sale debt securities, other-than-temporary impairment losses on our available-for-sale debt securities, realized gains and losses on the sale or exchange of ourother equity investments in unconsolidated entities and other debt investments without readily determinable fair value, adjustments to the carrying amount of investments in unconsolidated entitiesaffiliates and marketable equity securities resulting from impairments and observable price changes.changes and estimated credit losses.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net include gains and losses resulting from the re-measurement of transactions denominated in foreign currencies.
Other, net. Other, net primarily includes 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 ourthe Condensed Consolidated Statements of Operations.Operations in our Accompanying Condensed Consolidated Financial Statements.
Net income (loss) from discontinued operations. Net income (loss) from discontinued operations includes the condensed consolidated financial statementsresults of the BSS Business transferred in the BSS Transaction.Transaction, except for certain real estate that transferred in the transaction.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Earnings before interest, taxes, depreciation and amortization (“EBITDA”)EBITDA. EBITDA is defined as Net income (loss) excluding Interest income, andnet, Interest expense, net of amounts capitalized, Income tax benefit (provision), net, Depreciation and amortization, Net income (loss) from discontinued operations and Net income (loss) attributable to noncontrollingnon-controlling interests. EBITDA is not a measure determined in accordance with U.S. GAAP. This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of 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 and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.
ITEM 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 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) 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 Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities 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.
In November 2019, we consummated the Yahsat Brazil JV Transaction. As a result, we are reviewing the internal controls of the business we acquired from Yahsat in the Yahsat Brazil JV Transaction and we may make appropriate changes as deemed necessary.
Changes in Internal Control Over Financial Reporting
ThereExcept as noted above, there has been no change in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2019March 31, 2020 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
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, seerefer to Part I, Item 1. Financial Statements — Note 12. Contingencies14 Commitments and Contingencies — Litigation in this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
The following information updates, and should be read in conjunction with, the information in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K/A for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on February 27, 2019.10-K.
RISKS RELATINGRELATED TO THE BSS TRANSACTIONCOVID‑19 PANDEMIC
Certain of our directorsThe COVID‑19 pandemic, its economic impacts and executive officers have interests in the BSS Transaction.
Certain of our directorsrelated government and executive officers have interests in the BSS Transaction. Our directors and executive officers who own shares of EchoStar’s common stock participated in the Distribution and the Merger on the same terms as EchoStar’s other stockholders. Additionally, Mr. Ergen, director of both us and DISH, serves as a director and executive officer of BSS Corp. following the consummation of the BSS Transaction. We and the EchoStar parties that approved the BSS Transaction, as described below, were aware of and considered these interests, among other things, in deciding to approve the terms of the Master Transaction Agreement and the BSS Transaction.
The BSS Transaction was approved, in accordance with our and EchoStar’s longstanding related party transaction policy, by (i) independent management, (ii) EchoStar’s non-interlocking directors (i.e., directors who are not also directors or employees of DISH Network), with EchoStar’s director, Mr. R. Stanton Dodge, recusing himself to avoid the appearance of any potential conflict resulting from his prior employment with DISH Network and EchoStar’s director, Mr. Anthony M. Federico, recusing himself to avoid the appearance of any potential conflict resulting from his service on DISH’s special litigation committee, (iii) EchoStar’s audit committee, with Mr. Federico similarly recusing himself and, after all such approvals were obtained, (iv) our and EchoStar’s boards of directors, with, our and EchoStar’s chairman, Mr. Ergen, recusing himself.
If the Distribution and the Merger do not qualify as a tax‑free distribution and merger under the Code, then we and/or EchoStar may be required to pay substantial U.S. federal income taxes and under certain circumstances EchoStar may have indemnification obligations to DISH Network.
The parties’ received a tax opinion from their respective counsels as to the tax‑free nature of the transactions. They did not obtain a private letter ruling from the IRS with respect to the Distribution and the Merger and instead are relying solely on their respective tax opinions for comfort that the Distribution and the Merger qualify for tax‑free treatment for U.S. federal income tax purposes under the Code.
The tax opinions were based on, among other things, certain undertakings made by EchoStar and DISH Network, as well as certain representations and assumptions as to factual matters made by EchoStar, DISH Network, and Mr. and Mrs. Ergen. The failure of any factual representation or assumption to be true, correct and complete, or any undertaking to be fully complied with, could affect the validity of the tax opinions. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the conclusions set forth in the tax opinions. In addition, the tax opinions will be based on current law, and cannot be relied upon if current law changes with retroactive effect.
If the Distribution does not qualify as a tax‑free distribution under Section 355 of the Code, then EchoStar would recognize a substantial gain on the Distribution, we and EchoStar could incur significant U.S. federal income tax liabilities, and EchoStar could be required to indemnify DISH Network for the tax on such gain if the failure of the Distribution to so qualify is the result of certain of itssector responsive actions or misrepresentations, but EchoStar will not be required to indemnify any of its stockholders. In the event EchoStar is required to indemnify DISH Network for taxes incurred
in connection with the BSS Transaction, the indemnification obligation could have a material adverse effect on our business financial conditions, results or operationsoperations. As a result of the COVID-19 pandemic, many countries, including the U.S., and cash flow.other governmental authorities have imposed restrictions on travel, as well as general movement and gathering restrictions, business closures and other measures imposed to slow the spread of COVID‑19.
Even ifWe have set forth below key risks from the Distribution otherwise qualifies as a tax-free distribution,COVID‑19 pandemic that we have identified to date. The situation continues to develop, however, and it is impossible to predict the Distribution would be taxable to us and/or EchoStar (but not to its stockholders) pursuant to Section 355(e)effect and ultimate impact of the Code if one or more persons acquire a 50% or greater interest (measured by vote or value) in our, EchoStar’s or BSS Corp.’s stock, directly or indirectly (including through acquisitions of the BSS Common Stock or DISH Common Stock after the completion of the BSS Transaction), as part of a plan or series of related transactions that includes the Distribution. If there is a change of control of DISH Network or BSS Corp. after the completion of the BSS Transaction or a transfer of stock or assets of DISH Network or BSS Corp. that results in the Distribution being taxable to us and/or EchoStar under Section 355(e) of the Code, DISH Network would be required to indemnify EchoStar (but not its stockholders) for such taxes only if DISH Network took an action or knowingly facilitated, consented to or assisted with an action by a DISH shareholder that caused the Distribution to fail to qualify as a tax-free distribution. In addition, the Merger being taxable could cause the Distribution to fail to qualify as a tax-free distribution.
A putative class action lawsuit relating to the BSS Transaction has been filed against EchoStar, Hughes Satellite Systems Corporation, DISH Network, Mr. Ergen and certain of our and EchoStar’s officers and other lawsuits related to the BSS Transaction may be filed against us, EchoStar, DISH Network and other persons which could result in substantial costs.
As of November 7, 2019, one complaint has been filed by a purported EchoStar stockholder. See Note 14 in the notes to our accompanying Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for more information about litigation related to the BSS Transaction that has been commenced prior to the date of this report. There can be no assurance that additional complaints will not be filed with respect to the BSS Transaction.
Even if this lawsuit and any others that may be filed are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition.
Our ability to operate and control our satellites is subject to risks related to DISH Network’s integration of the BSS Business.
In connection with the BSS Transaction, we transferred our satellite operation centers, which are used to monitor and control our satellites, to DISH Network. DISH Network may not be able to successfully or profitably integrate, operate, maintain and manage the BSS Business and its employees, including the operations and employees of the satellite operations centers. DISH Network may not be able to maintain uniform standards, controls, procedures and policies with respect to the satellite operations centers, and this may lead to operational inefficiencies. A failure or inefficiency at any of the satellite operations centers could cause a significant loss of service for our customers and might lead to a breakdown in the ability to communicate with one or more of our satellites or cause the transmission of incorrect commands to the affected satellite(s), which could lead to a temporary or permanent degradation in satellite performance or to the loss of one or more of our satellites. Any such failure could have a material adverse impactCOVID‑19 pandemic on our business, financial condition andor results of operations.
RISKS RELATED TO OUR BUSINESS
We may be more susceptible to adverse events as a resultcannot estimate or determine the duration of the BSS Transaction.
We have divestedquarantine, social distancing and other regulatory measures instituted or recommended in response to the BSS Business and our businessCOVID‑19 pandemic, whether they will be subject to concentrationrecur or the duration or degree of the risksbusiness disruptions, and related financial impact. The COVID‑19 pandemic has evolved into a worldwide health crisis that affect our retained businesses. We are nowhas adversely affected economies and financial markets throughout the world, resulting in a smaller, less diversifiedsignificant economic downturn and more narrowly focused business, which makes us more vulnerable to changing market andchanges in global economic conditions. Operating as a smaller entity may reduce or eliminate some of the benefits and synergies which previously existed across our business platforms, including our operating diversity, purchasing and borrowing leverage, available capital, and relationships and opportunities to pursue integrated strategies within our businesses and attract, retain and motivate key employees. In addition, as a smaller company, our ability to absorb costs may be negatively impacted, including the significant cost of the BSS Transaction, and we may be unable to obtain financing, goods or services at prices or on terms as favorable as those obtained prior to the BSS Transaction. Any of these factorspolicy that could have a material adverse effect on our business, financial condition or results of operations.
Our operations cash flows,and those of our customers and other third parties with whom we conduct business prospectsare located in areas impacted by the COVID‑19 pandemic, and those operations have been, and may continue to be, adversely affected by the COVID‑19 pandemic.
We conduct our product development, manufacturing, installation and customer support and services in areas where, in order to attempt to mitigate the COVID-19 pandemic, (a) states of emergency related to the spread of COVID‑19 have been declared and (b) various levels of “shelter-in-place” orders have been issued, which (i) direct individuals living in those locations to shelter at their places of residence (subject to limited exceptions), (ii) direct businesses and governmental agencies to cease non-essential operations at physical locations, (iii) prohibit non-essential gatherings of various number of individuals, and (iv) order cessation of non-essential travel. The effects of the COVID-19 pandemic and the trading priceactions from applicable governmental authorities has negatively impacted productivity, increased cybersecurity risks as a large portion of our common stock. By separatingworkforce has been working remotely, disrupted our and our customers’, suppliers’, vendors’ and other business partners’ and investees’ businesses and finances, delayed regulatory and other timelines, and delayed the BSS Business,manufacture and deployment of our satellites. Additionally, some regulatory bodies have furloughed employees, reduced activities and temporarily closed their offices. Such measures may materially delay the review and/or approval of licenses or authorizations we need to operate our business. The magnitude of these impacts will depend, in part, on the length and severity of the pandemic, associated restrictions and resulting economic and financial consequences and other limitations and impediments on the conduct of business in the ordinary course.
Extended periods of interruption to our corporate, development or manufacturing facilities due to the COVID‑19 pandemic could cause us to lose revenue, which would depress our financial performance and could be difficult to recapture. Our business may also be harmed if travel continues to be restricted or inadvisable or if members of management and other employees are unable to work because they contract COVID‑19, they elect not to come to work due to the illness affecting others in our office or other facilities, or they are subject to quarantines or other governmentally imposed restrictions. Additionally, many of our subscribers are working remotely or engaging in distance learning. These activities have increased the usage on our HughesNet service so that there is little or no capacity remaining for subscriber growth in our most popular geographic areas. In addition, the limitation on capacity may result in our subscribers experiencing slower speeds. This, in turn, could result in higher churn and may negatively affect our financial results.
A portion of the expected sales of our products or services have been, and additional sales may be, more susceptible to market fluctuations and other adverse events. If we fail to achieve somedelayed or all of the benefits that we expect to achievecanceled as a result of effects of the BSS Transaction,COVID‑19 pandemic on the operations of our customers.
Our customers’ business operations have been, and are continuing to be, subject to business interruptions arising from the COVID‑19 pandemic. Due to the downturn in financial markets arising from the COVID-19 pandemic, a number of our current enterprise customers are facing uncertain futures. In the event any of these enterprise customers fail or doseek reorganization under the bankruptcy laws, we may be obliged to pay for satellite capacity for which we are not achieve thembeing paid. Further, the COVID-19 pandemic has resulted in increased unemployment, which could result in reduced demand and increased inability to pay from our consumer customers. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our subscriber numbers, business, financial condition, results of operations, and cash flows. We are diligently working to ensure that we can operate with minimal disruption and address potential business interruptions on ourselves and our customers. However, the full extent to which the COVID-19 pandemic could affect the global economy and our business will depend on future developments and factors that cannot be predicted and there can be no assurance that the COVID‑19 pandemic will not result in further delays, or possibly reductions, in our recognition of revenue.
Our supply chain may be materially adversely impacted due to the COVID‑19 pandemic.
We rely upon the facilities of our domestic and foreign suppliers to support our business. The COVID-19 pandemic has resulted in significant governmental measures in many countries being implemented to control the spread of COVID‑19, including restrictions on manufacturing and the movement of employees. As a result, our suppliers may not have the materials, capacity, or capability to supply our components according to our schedule and specifications. Further, there may be logistics issues, including our ability and our supply chain’s ability to quickly ramp up production, and transportation demands that may cause further delays. If our suppliers’ operations are curtailed, we may need to seek alternate sources of supply, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. The duration of the disruptions and restrictions on the ability to travel, quarantines and temporary closures of the facilities of our suppliers, as well as general limitations on movement in the region, are unknown and they may recur and the duration of the production and supply chain disruption, and related financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time we expect,or recur, the impact on our supply chain could have a material adverse effect on our results of operations and financial conditioncash flows. Business disruptions could also negatively affect the sources and availability of components and materials that are essential to the operation of our business.
The COVID‑19 pandemic could negatively impact our planned or potential strategic initiatives.
Our strategy includes a number of plans to support the growth of our core businesses, including continuing to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally. The extent to which the COVID-19 pandemic impacts these potential strategic initiatives will depend on future developments that are highly uncertain. If the disruptions posed by the COVID‑19 pandemic and related government measures, economic downturns or other matters of global concern continue for an extensive period of time or recur, our ability to pursue and consummate planned or potential strategic initiatives could be materially adversely affected.
We might not be able to engage in certain strategic transactions because EchoStar has agreed to certain restrictions to comply with U.S. federal income tax requirements for a tax‑free spin‑off.
To preserve the intended tax treatment of the Distribution, EchoStar will undertake to comply with certain restrictions under current U.S. federal income tax laws for spin‑offs, including (i) refraining from engaging in certain transactions that would result in a fifty percent or greater change by vote or by value in its and our ownership, (ii) continuing to own and manage its and our historic business, and (iii) limiting sales or redemptions of its common stock. These restrictions could prevent EchoStar or us from pursuing otherwise attractive business opportunities, result in our or EchoStar’s inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm its or our business, financial results and operations. If these restrictions, among others, are not followed, the Distribution could be taxable to us and EchoStar and possibly its stockholders.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
Financial Results
On NovemberMay 7, 2019,2020, EchoStar issued a press release (the “Press Release”) announcing its financial results for the quarter ended September 30, 2019 and a supplemental investor information presentation (the “Presentation”) providing preliminary unaudited pro forma financial information.March 31, 2020. A copy of the Press Release and Presentation areis furnished herewith as Exhibit 99.1 and Exhibit 99.2, respectively.99.1. The foregoing information, including the exhibits related thereto, are furnished in response to Item 2.02 of Form 8-K and shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise, and shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in any such filing.
ITEM 6. EXHIBITS
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Exhibit No. | | Description |
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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. |
_________________________________________________________
(H) Filed herewith.
(I) Furnished herewith.
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* | Incorporated by reference. |
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** | Constitutes a management contract or compensatory plan or arrangement. |
*** Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We agree to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request, subject to our right to request confidential treatment of any requested schedule or exhibit.
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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| | HUGHES SATELLITE SYSTEMS CORPORATION |
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Date: November 8, 2019May 7, 2020 | By: | /s/ Michael T. Dugan |
| | Michael T. Dugan |
| | Chief Executive Officer, President and Director |
| | (Principal Executive Officer) |
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Date: November 8, 2019May 7, 2020 | By: | /s/ David J. Rayner |
| | David J. Rayner |
| | Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer |
| | (Principal Financial and Accounting Officer) |