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, 2020.
MARCH 31, 2021.
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)
| | | | | | | | | | | | | | |
Colorado | | 45-0897865 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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100 Inverness Terrace East, | Englewood, | Colorado | | 80112-5308 |
(Address of principal executive offices) | | (Zip Code) |
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(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 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 OctoberApril 29, 2020,2021, the registrant’s outstanding common stock consisted of 1,078 shares of common stock, $0.01 par value per share.
The registrantRegistrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Quarterly Report on Form 10-Q with the reduced disclosure format.
* The registrantRegistrant 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 registrantRegistrant 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 SeniorMajor 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.
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, future developments, plans, objectives, strategies, 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,” ”project,” “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.assumptions based on past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties, including the impact of the coronavirus pandemic (COVID-19), and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition.condition both the near- and long-term. 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 constructionour ability to operate and operation ofcontrol our satellites, such as the risk of not being ableoperational and environmental risks related to timely complete the construction, or a material malfunction on one or more, ofour owned and leased satellites, and risks related to our satellites and our general lack of commercial insurance coverage on our satellites;under construction;
•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;including regulatory and competitive considerations;
•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;initiatives;
•legal proceedings relating to the BSS Transaction or AGR (each as defined herein) matter, whichother matters that could result in substantial costs and material adverse effects onto our business, results of operations, financial condition and prospects;
•our ability to realize the anticipated benefits of our current satellites and any future satellite we may construct or acquire;business;
•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 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;internationally;
•the failure ofrisks related to our dependency upon third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services;providers; and
•risks related to our ability to bring advanced technologies to market to keep pace with our customers and competitors.human capital resources.
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”), 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)
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 443,727 | | | $ | 1,139,435 | |
Marketable investment securities | | 1,418,436 | | | 652,835 | |
Trade accounts receivable and contract assets, net | | 190,902 | | | 196,520 | |
Other current assets, net | | 293,379 | | | 301,652 | |
Total current assets | | 2,346,444 | | | 2,290,442 | |
Non-current assets: | | | | |
Property and equipment, net | | 1,688,324 | | | 1,857,581 | |
Operating lease right-of-use assets | | 129,021 | | | 113,399 | |
Goodwill | | 508,660 | | | 506,953 | |
Regulatory authorizations, net | | 410,558 | | | 412,363 | |
Other intangible assets, net | | 20,433 | | | 29,321 | |
Other investments, net | | 105,161 | | | 110,040 | |
Other non-current assets, net | | 296,633 | | | 251,936 | |
Total non-current assets | | 3,158,790 | | | 3,281,593 | |
Total assets | | $ | 5,505,234 | | | $ | 5,572,035 | |
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Liabilities and Shareholder's Equity | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 108,918 | | | $ | 121,552 | |
Current portion of long-term debt, net | | 897,303 | | | 0 | |
Contract liabilities | | 89,622 | | | 101,060 | |
Accrued expenses and other current liabilities | | 267,805 | | | 258,417 | |
Total current liabilities | | 1,363,648 | | | 481,029 | |
Non-current liabilities: | | | | |
Long-term debt, net | | 1,495,078 | | | 2,389,168 | |
Deferred tax liabilities, net | | 398,579 | | | 380,316 | |
Operating lease liabilities | | 115,366 | | | 96,879 | |
Other non-current liabilities | | 90,704 | | | 90,480 | |
Total non-current liabilities | | 2,099,727 | | | 2,956,843 | |
Total liabilities | | 3,463,375 | | | 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, NaN issued and outstanding at both September 30, 2020 and December 31, 2019 | | 0 | | | 0 | |
Common stock, $0.01 par value, 1,000,000 shares authorized, 1,078 shares issued and outstanding at both September 30, 2020 and December 31, 2019 | | 0 | | | 0 | |
Additional paid-in capital | | 1,485,225 | | | 1,478,636 | |
Accumulated other comprehensive income (loss) | | (167,169) | | | (84,636) | |
Accumulated earnings (losses) | | 665,229 | | | 664,415 | |
Total Hughes Satellite Systems Corporation shareholder's equity | | 1,983,285 | | | 2,058,415 | |
Non-controlling interests | | 58,574 | | | 75,748 | |
Total shareholder's equity | | 2,041,859 | | | 2,134,163 | |
Total liabilities and shareholder's equity | | $ | 5,505,234 | | | $ | 5,572,035 | |
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| | As of |
| | March 31, 2021 | | December 31, 2020 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,403,926 | | | $ | 740,490 | |
Marketable investment securities | | 515,306 | | | 1,203,296 | |
Trade accounts receivable and contract assets, net | | 187,272 | | | 183,988 | |
Other current assets, net | | 286,689 | | | 291,815 | |
Total current assets | | 2,393,193 | | | 2,419,589 | |
Non-current assets: | | | | |
Property and equipment, net | | 1,631,221 | | | 1,691,523 | |
Operating lease right-of-use assets | | 131,452 | | | 128,266 | |
Goodwill | | 510,945 | | | 511,597 | |
Regulatory authorizations, net | | 409,960 | | | 410,451 | |
Other intangible assets, net | | 16,246 | | | 18,340 | |
Other investments, net | | 102,163 | | | 103,924 | |
Other non-current assets, net | | 302,416 | | | 307,677 | |
Total non-current assets | | 3,104,403 | | | 3,171,778 | |
Total assets | | $ | 5,497,596 | | | $ | 5,591,367 | |
Liabilities and Shareholder's Equity | | | | |
Current liabilities: | | | | |
Trade accounts payable | | $ | 104,683 | | | $ | 118,568 | |
Current portion of long-term debt, net | | 808,758 | | | 898,237 | |
Contract liabilities | | 112,507 | | | 104,569 | |
Accrued expenses and other current liabilities | | 328,316 | | | 325,587 | |
Total current liabilities | | 1,354,264 | | | 1,446,961 | |
Non-current liabilities: | | | | |
Long-term debt, net | | 1,495,436 | | | 1,495,256 | |
Deferred tax liabilities, net | | 376,366 | | | 369,940 | |
Operating lease liabilities | | 118,452 | | | 114,877 | |
Other non-current liabilities | | 86,642 | | | 87,957 | |
Total non-current liabilities | | 2,076,896 | | | 2,068,030 | |
Total liabilities | | 3,431,160 | | | 3,514,991 | |
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Commitments and contingencies | | 0 | | 0 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
21
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS
(Amounts in thousands)thousands, except share and per share amounts)
(Unaudited)
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| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Revenue: | | | | | | | | |
Services and other revenue | | $ | 428,890 | | | $ | 407,396 | | | $ | 1,258,350 | | | $ | 1,214,476 | |
Equipment revenue | | 46,970 | | | 65,725 | | | 146,702 | | | 175,084 | |
Total revenue | | 475,860 | | | 473,121 | | | 1,405,052 | | | 1,389,560 | |
Costs and expenses: | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 145,408 | | | 142,429 | | | 429,246 | | | 425,896 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 37,074 | | | 51,188 | | | 115,524 | | | 142,744 | |
Selling, general and administrative expenses | | 105,309 | | | 111,987 | | | 324,400 | | | 353,559 | |
Research and development expenses | | 7,676 | | | 6,136 | | | 21,378 | | | 19,411 | |
Depreciation and amortization | | 123,145 | | | 115,948 | | | 372,588 | | | 342,086 | |
Total costs and expenses | | 418,612 | | | 427,688 | | | 1,263,136 | | | 1,283,696 | |
Operating income (loss) | | 57,248 | | | 45,433 | | | 141,916 | | | 105,864 | |
Other income (expense): | | | | | | | | |
Interest income, net | | 2,839 | | | 12,300 | | | 16,935 | | | 47,341 | |
Interest expense, net of amounts capitalized | | (44,177) | | | (55,608) | | | (130,644) | | | (172,502) | |
Gains (losses) on investments, net | | (74) | | | 70 | | | (222) | | | (290) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | (2,422) | | | (894) | | | (4,878) | | | (2,882) | |
Foreign currency transaction gains (losses), net | | 3,072 | | | (11,638) | | | (4,596) | | | (10,349) | |
Other, net | | 195 | | | (1,559) | | | (470) | | | (1,780) | |
Total other income (expense), net | | (40,567) | | | (57,329) | | | (123,875) | | | (140,462) | |
Income (loss) from continuing operations before income taxes | | 16,681 | | | (11,896) | | | 18,041 | | | (34,598) | |
Income tax benefit (provision), net | | (5,199) | | | (5,176) | | | (24,098) | | | (1,185) | |
Net income (loss) from continuing operations | | 11,482 | | | (17,072) | | | (6,057) | | | (35,783) | |
Net income (loss) from discontinued operations | | 0 | | | 14,382 | | | 0 | | | 57,734 | |
Net income (loss) | | 11,482 | | | (2,690) | | | (6,057) | | | 21,951 | |
Less: Net loss (income) attributable to non-controlling interests | | 2,167 | | | 2,797 | | | 9,040 | | | 1,359 | |
Net income (loss) attributable to HSSC | | $ | 13,649 | | | $ | 107 | | | $ | 2,983 | | | $ | 23,310 | |
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Shareholder's equity: | | | | |
Preferred stock, $0.001 par value,1,000,000 shares authorized, NaN issued and outstanding at both March 31, 2021 and December 31, 2020 | | 0 | | | 0 | |
Common stock, $0.01 par value, 1,000,000 shares authorized, 1,078 shares issued and outstanding at both March 31, 2021 and December 31, 2020 | | 0 | | | 0 | |
Additional paid-in capital | | 1,487,590 | | | 1,486,730 | |
Accumulated other comprehensive income (loss) | | (175,060) | | | (146,840) | |
Accumulated earnings (losses) | | 690,147 | | | 671,570 | |
Total Hughes Satellite Systems Corporation shareholder's equity | | 2,002,677 | | | 2,011,460 | |
Non-controlling interests | | 63,759 | | | 64,916 | |
Total shareholder's equity | | 2,066,436 | | | 2,076,376 | |
Total liabilities and shareholder's equity | | $ | 5,497,596 | | | $ | 5,591,367 | |
The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.
2
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Revenue: | | | | |
Services and other revenue | | $ | 432,991 | | | $ | 410,238 | |
Equipment revenue | | 52,239 | | | 57,309 | |
Total revenue | | 485,230 | | | 467,547 | |
Costs and expenses: | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 131,412 | | | 143,885 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 45,140 | | | 45,908 | |
Selling, general and administrative expenses | | 104,370 | | | 115,860 | |
Research and development expenses | | 7,545 | | | 6,254 | |
Depreciation and amortization | | 122,664 | | | 125,965 | |
Impairment of long-lived assets | | 210 | | | 0 | |
Total costs and expenses | | 411,341 | | | 437,872 | |
Operating income (loss) | | 73,889 | | | 29,675 | |
Other income (expense): | | | | |
Interest income | | 2,394 | | | 8,892 | |
Interest expense, net of amounts capitalized | | (41,922) | | | (42,192) | |
Gains (losses) on investments, net | | 0 | | | (164) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | (1,761) | | | (1,087) | |
Foreign currency transaction gains (losses), net | | (3,360) | | | (7,528) | |
Other, net | | (973) | | | (278) | |
Total other income (expense), net | | (45,622) | | | (42,357) | |
Income (loss) before income taxes | | 28,267 | | | (12,682) | |
Income tax benefit (provision), net | | (10,637) | | | (5,231) | |
Net income (loss) | | 17,630 | | | (17,913) | |
Less: Net loss (income) attributable to non-controlling interests | | 947 | | | 3,442 | |
Net income (loss) attributable to HSSC | | $ | 18,577 | | | $ | (14,471) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
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, | | For the three months ended March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
Net income (loss) | Net income (loss) | | $ | 11,482 | | | $ | (2,690) | | | $ | (6,057) | | | $ | 21,951 | | Net income (loss) | | $ | 17,630 | | | $ | (17,913) | |
Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | | | | |
Foreign currency translation | | (10,170) | | | (16,247) | | | (103,351) | | | (13,927) | | |
Unrealized gains (losses) on available-for-sale debt securities | | 20 | | | (130) | | | (189) | | | 2,188 | | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | | (33,742) | | | (82,836) | |
Unrealized gains (losses) on available-for-sale securities | | Unrealized gains (losses) on available-for-sale securities | | (88) | | | (2,479) | |
Other | Other | | 500 | | | 13 | | | 380 | | | 0 | | Other | | 0 | | | (405) | |
Amounts reclassified to net income (loss): | | |
Realized losses (gains) on available-for-sale debt securities | | 0 | | | 0 | | | 0 | | | (400) | | |
| Total other comprehensive income (loss), net of tax | Total other comprehensive income (loss), net of tax | | (9,650) | | | (16,364) | | | (103,160) | | | (12,139) | | Total other comprehensive income (loss), net of tax | | (33,830) | | | (85,720) | |
Comprehensive income (loss) | Comprehensive income (loss) | | 1,832 | | | (19,054) | | | (109,217) | | | 9,812 | | Comprehensive income (loss) | | (16,200) | | | (103,633) | |
Less: Comprehensive loss (income) attributable to non-controlling interests | Less: Comprehensive loss (income) attributable to non-controlling interests | | 4,098 | | | 2,797 | | | 29,667 | | | 1,359 | | Less: Comprehensive loss (income) attributable to non-controlling interests | | 6,557 | | | 19,765 | |
Comprehensive income (loss) attributable to HSSC | Comprehensive income (loss) attributable to HSSC | | $ | 5,930 | | | $ | (16,257) | | | $ | (79,550) | | | $ | 11,171 | | Comprehensive income (loss) attributable to HSSC | | $ | (9,643) | | | $ | (83,868) | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Amounts in thousands)
(Unaudited)
| | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Non-controlling Interests | | Total | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Non-controlling Interests | | Total |
Balance, June 30, 2019 | | $ | 1,766,642 | | | $ | (79,549) | | | $ | 717,160 | | | $ | 12,066 | | | $ | 2,416,319 | | |
Balance, December 31, 2019 | | Balance, December 31, 2019 | | $ | 1,478,636 | | | $ | (84,636) | | | $ | 664,415 | | | $ | 75,748 | | | $ | 2,134,163 | |
Cumulative effect of accounting changes | | Cumulative effect of accounting changes | | — | | | — | | | (2,169) | | | (240) | | | (2,409) | |
Balance, January 1, 2020 | | Balance, January 1, 2020 | | 1,478,636 | | | (84,636) | | | 662,246 | | | 75,508 | | | 2,131,754 | |
Stock-based compensation | Stock-based compensation | | 1,260 | | | — | | | — | | | — | | | 1,260 | | Stock-based compensation | | 1,457 | | | — | | | — | | | — | | | 1,457 | |
BSS Transaction (Note 5) | | (342,823) | | | (342,823) | | |
Purchase of non-controlling interest | | 1,833 | | | — | | | — | | | (1,833) | | | 0 | | |
Other comprehensive income (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 | | |
| Balance, June 30, 2020 | | 1,484,359 | | | (159,450) | | | 651,580 | | | 58,425 | | | 2,034,914 | | |
Stock-based compensation | | 983 | | | — | | | — | | | — | | | 983 | | |
| Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | | Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | | 4,338 | | | — | | | — | | | (1,514) | | | 2,824 | |
Contribution by non-controlling interest holder | Contribution by non-controlling interest holder | | — | | | — | | | — | | | 4,268 | | | 4,268 | | Contribution by non-controlling interest holder | | — | | | — | | | — | | | 4,000 | | | 4,000 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | — | | | (7,719) | | | — | | | (1,931) | | | (9,650) | | Other comprehensive income (loss) | | — | | | (69,397) | | | — | | | (16,323) | | | (85,720) | |
Net income (loss) | Net income (loss) | | — | | | — | | | 13,649 | | | (2,167) | | | 11,482 | | Net income (loss) | | — | | | — | | | (14,471) | | | (3,442) | | | (17,913) | |
Other, net | Other, net | | (117) | | | — | | | — | | | (21) | | | (138) | | Other, net | | (684) | | | — | | | — | | | — | | | (684) | |
Balance, September 30, 2020 | | $ | 1,485,225 | | | $ | (167,169) | | | $ | 665,229 | | | $ | 58,574 | | | $ | 2,041,859 | | |
Balance, March 31, 2020 | | Balance, March 31, 2020 | | $ | 1,483,747 | | | $ | (154,033) | | | $ | 647,775 | | | $ | 58,229 | | | $ | 2,035,718 | |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | | $ | 1,486,730 | | | $ | (146,840) | | | $ | 671,570 | | | $ | 64,916 | | | $ | 2,076,376 | |
Stock-based compensation | | Stock-based compensation | | 860 | | | — | | | — | | | — | | | 860 | |
Contribution by non-controlling interest holder | | Contribution by non-controlling interest holder | | — | | | — | | | — | | | 5,400 | | | 5,400 | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | | — | | | (28,220) | | | — | | | (5,610) | | | (33,830) | |
Net income (loss) | | Net income (loss) | | — | | | — | | | 18,577 | | | (947) | | | 17,630 | |
Balance, March 31, 2021 | | Balance, March 31, 2021 | | $ | 1,487,590 | | | $ | (175,060) | | | $ | 690,147 | | | $ | 63,759 | | | $ | 2,066,436 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019CASH FLOWS
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | 4,116 | | | — | | | — | | | — | | | 4,116 | |
BSS Transaction (Note 5) | | (342,823) | | | | | | | | | (342,823) | |
Purchase of non-controlling interest | | (833) | | | — | | | — | | | (6,480) | | | (7,313) | |
Other comprehensive income (loss) | | — | | | (12,139) | | | — | | | 0 | | | (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 | |
| | | | | | | | | | |
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 | | 2,919 | | | — | | | — | | | — | | | 2,919 | |
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 | | | | — | | | — | | | 14,268 | | | 14,268 | |
Other comprehensive income (loss) | | — | | | (82,533) | | | — | | | (20,627) | | | (103,160) | |
Net income (loss) | | — | | | — | | | 2,983 | | | (9,040) | | | (6,057) | |
Other, net | | (668) | | | — | | | — | | | (21) | | | (689) | |
Balance, September 30, 2020 | | $ | 1,485,225 | | | $ | (167,169) | | | $ | 665,229 | | | $ | 58,574 | | | $ | 2,041,859 | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 17,630 | | | $ | (17,913) | |
Adjustments to reconcile net income (loss) to cash flows provided by (used for) operating activities: | | | | |
Depreciation and amortization | | 122,664 | | | 125,965 | |
Impairment of long-lived assets | | 210 | | | 0 | |
Losses (gains) on investments, net | | 0 | | | 164 | |
Equity in losses (earnings) of unconsolidated affiliates, net | | 1,761 | | | 1,087 | |
Foreign currency transaction losses (gains), net | | 3,360 | | | 7,528 | |
Deferred tax provision (benefit), net | | 6,584 | | | 1,526 | |
Stock-based compensation | | 860 | | | 1,457 | |
Amortization of debt issuance costs | | 1,118 | | | 1,050 | |
Other, net | | 10,981 | | | (810) | |
Changes in assets and liabilities, net: | | | | |
Trade accounts receivable and contract assets, net | | (6,078) | | | (8,162) | |
Other current assets, net | | 1,826 | | | (21,268) | |
Trade accounts payable | | (15,484) | | | (10,984) | |
Contract liabilities | | 7,938 | | | (3,213) | |
Accrued expenses and other current liabilities | | (33,091) | | | (5,007) | |
Non-current assets and non-current liabilities, net | | 1,170 | | | (6,196) | |
Net cash provided by (used for) operating activities | | 121,449 | | | 65,224 | |
| | | | |
Cash flows from investing activities: | | | | |
Purchases of marketable investment securities | | (310,528) | | | (365,877) | |
Sales and maturities of marketable investment securities | | 1,003,198 | | | 490,020 | |
Expenditures for property and equipment | | (82,196) | | | (91,517) | |
Expenditures for externally marketed software | | (7,846) | | | (8,638) | |
Net cash provided by (used for) investing activities | | 602,628 | | | 23,988 | |
| | | | |
Cash flows from financing activities: | | | | |
Repurchase of the 2021 Senior Unsecured Notes | | (62,588) | | | 0 | |
Payment of finance lease obligations | | (329) | | | (215) | |
Payment of in-orbit incentive obligations | | (1,104) | | | (203) | |
Contribution by non-controlling interest holder | | 5,400 | | | 4,000 | |
Other, net | | (292) | | | 979 | |
Net cash provided by (used for) financing activities | | (58,913) | | | 4,561 | |
| | | | |
Effect of exchange rates on cash and cash equivalents | | (1,700) | | | (4,618) | |
Net increase (decrease) in cash and cash equivalents | | 663,464 | | | 89,155 | |
Cash and cash equivalents, including restricted amounts, beginning of period | | 741,297 | | | 1,140,322 | |
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,404,761 | | | $ | 1,229,477 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | (6,057) | | | $ | 21,951 | |
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | |
Depreciation and amortization | | 372,588 | | | 428,012 | |
Losses (gains) on investments, net | | 222 | | | 290 | |
Equity in losses (earnings) of unconsolidated affiliates, net | | 4,878 | | | 2,882 | |
Foreign currency transaction losses (gains), net | | 4,596 | | | 10,349 | |
Deferred tax provision (benefit), net | | 16,608 | | | (34,092) | |
Stock-based compensation | | 4,203 | | | 4,116 | |
Amortization of debt issuance costs | | 3,212 | | | 4,882 | |
Other, net | | 376 | | | 2,188 | |
Changes in assets and liabilities, net: | | | | |
Trade accounts receivable and contract assets, net | | (14,097) | | | (5,435) | |
Other current assets, net | | (363) | | | (19,067) | |
Trade accounts payable | | (11,557) | | | 15,192 | |
Contract liabilities | | (11,438) | | | 37,308 | |
Accrued expenses and other current liabilities | | 25,300 | | | 46,535 | |
Non-current assets and non-current liabilities, net | | (33,652) | | | 6,129 | |
Net cash flows from operating activities | | 354,819 | | | 521,240 | |
| | | | |
Cash flows from investing activities: | | | | |
Purchases of marketable investment securities | | (1,611,870) | | | (462,625) | |
Sales and maturities of marketable investment securities | | 843,294 | | | 1,375,242 | |
Expenditures for property and equipment | | (263,884) | | | (224,994) | |
Expenditures for externally marketed software | | (27,824) | | | (21,364) | |
Dividend received from unconsolidated affiliate | | 0 | | | 2,284 | |
Net cash flows from investing activities | | (1,060,284) | | | 668,543 | |
| | | | |
Cash flows from financing activities: | | | | |
Repurchase and maturity of the 2019 Senior Secured Notes | | 0 | | | (920,923) | |
Payment of finance lease obligations | | (606) | | | (29,135) | |
Payment of in-orbit incentive obligations | | (1,268) | | | (5,269) | |
Contribution by non-controlling interest holder | | 14,268 | | | 0 | |
Purchase of non-controlling interest | | 0 | | | (7,313) | |
Other, net | | 998 | | | 1,172 | |
Net cash flows from financing activities | | 13,392 | | | (961,468) | |
| | | | |
Effect of exchange rates on cash and cash equivalents | | (3,727) | | | 310 | |
Net increase (decrease) in cash and cash equivalents | | (695,800) | | | 228,625 | |
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 | | $ | 444,522 | | | $ | 1,077,244 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
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 “HSSC,” the “Company,” “we,” “us” and “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 businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises. We operate in the following 2 business segments:
•Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
•ESS — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use basis to United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT,Information Technology, Finance, Accounting, Real Estate and Legal) and other activities, such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other. in our segment reporting. We also divide our operations by primary geographic market as follows: (i) North America (the U.S. and its territories, Mexico, and Canada); (ii) South and Central America;America and (iii) Other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to to Note 13.14. Segment Reporting for further detail.
In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we and EchoStar and its other subsidiaries transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (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 EchoStar’s Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to 1 share of BSS Common Stock for each share of EchoStar’s Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, 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 segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded from continuing operations and segment results for the three and nine months ended September 30, 2019, as presented in these unaudited Condensed Consolidated Financial Statements and the accompanying notes (collectively, the “Condensed Consolidated Financial Statements”).
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
All amounts in the following footnotes reference results from continuing operations unless otherwise noted. Refer to Note 4. Discontinued Operations for further detail.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These Condensedunaudited Consolidated Financial Statements and the accompanying notes (collectively, the “Consolidated Financial Statements”) are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they 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.
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 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 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
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 affectestimate affects 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 in which we are the primary beneficiary and in other entities in which we own more than 50% of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a non-controlling interest within shareholder’s equity for the portion of the entity’s equity attributed to the non-controlling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.
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
Credit Losses
On January 1, 2020,2021, we adopted Accounting StandardsStandard Update (“ASU”) No. 2016-13 - Financial Instruments - Credit Losses (Topic 326), as amended, and codified in Accounting Standards Codification Topic 326 (“ASC 326”). ASC 326 introduces a new approach to the periodic estimation of credit losses for certain financial assets 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 that have experienced credit deterioration since their 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 and nine months ended September 30, 2020.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the FASB’sFinancial Accounting Standards Board (“FASB”) 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, 2020 and interim periods within those fiscal years. EarlyOur adoption is permitted. We have assessed the impact of adopting this new guidance and doASU did not expect it to have a material impact on our consolidated financial statements.Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
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 to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. We expect to utilize the optional expedients provided by the guidance for contracts amended solely to use an alternative reference rate. We have evaluated the impact of adopting this new guidance and do not expect it to have a material impact on our consolidated financial statements.Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 3. REVENUE RECOGNITION
Contract Balances
The following table presents the components of our contract balances:
| | | | As of | | | As of |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
Trade accounts receivable and contract assets, net: | Trade accounts receivable and contract assets, net: | | | | | Trade accounts receivable and contract assets, net: | | | | |
Sales and services | Sales and services | | $ | 162,390 | | | $ | 152,632 | | Sales and services | | $ | 150,021 | | | $ | 149,513 | |
Leasing | Leasing | | 4,017 | | | 4,016 | | Leasing | | 4,648 | | | 4,553 | |
Total trade accounts receivable | Total trade accounts receivable | | 166,407 | | | 156,648 | | Total trade accounts receivable | | 154,669 | | | 154,066 | |
Contract assets | Contract assets | | 43,896 | | | 63,649 | | Contract assets | | 46,267 | | | 45,308 | |
Allowance for doubtful accounts | Allowance for doubtful accounts | | (19,401) | | | (23,777) | | Allowance for doubtful accounts | | (13,664) | | | (15,386) | |
Total trade accounts receivable and contract assets, net | Total trade accounts receivable and contract assets, net | | $ | 190,902 | | | $ | 196,520 | | Total trade accounts receivable and contract assets, net | | $ | 187,272 | | | $ | 183,988 | |
| Contract liabilities: | Contract liabilities: | | Contract liabilities: | |
Current | Current | | $ | 89,622 | | | $ | 101,060 | | Current | | $ | 112,507 | | | $ | 104,569 | |
Non-current | Non-current | | 11,663 | | | 10,572 | | Non-current | | 10,357 | | | 10,519 | |
Total contract liabilities | Total contract liabilities | | $ | 101,285 | | | $ | 111,632 | | Total contract liabilities | | $ | 122,864 | | | $ | 115,088 | |
The following table presents the revenue recognized in the Condensed Consolidated StatementsStatement of Operations that was previously included within contract liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | | $ | 3,794 | | | $ | 19,490 | | | $ | 63,581 | | | $ | 67,263 | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Revenue | | $ | 63,081 | | | $ | 52,172 | |
The following table presents the activity in our allowance for doubtful accounts:
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2020 | | 2019 |
Balance at beginning of period | | $ | 23,777 | | | $ | 16,604 | |
Credit losses (1) | | 12,253 | | | 22,031 | |
Deductions | | (15,367) | | | (13,979) | |
Foreign currency translation | | (1,262) | | | 596 | |
Balance at end of period | | $ | 19,401 | | | $ | 25,252 | |
(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).
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Contract Acquisition Costs
The following table presents the activity in our contract acquisition costs, net:
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2020 | | 2019 |
Balance at beginning of period | | $ | 113,592 | | | $ | 114,306 | |
Additions | | 68,589 | | | 71,651 | |
Amortization expense | | (75,429) | | | (72,412) | |
Foreign currency translation | | (2,984) | | | (1,012) | |
Balance at end of period | | $ | 103,768 | | | $ | 112,533 | |
We recognized amortization expenses related to contract acquisition costs of $25.7 million and $24.7 million for the three months ended September 30, 2020 and 2019, respectively. | | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Balance at beginning of period | | $ | 99,837 | | | $ | 113,592 | |
Additions | | 18,400 | | | 26,474 | |
Amortization expense | | (22,769) | | | (25,675) | |
Foreign currency translation | | (875) | | | (3,994) | |
Balance at end of period | | $ | 94,593 | | | $ | 110,397 | |
Transaction Price Allocated to Remaining Performance Obligations
As of September 30, 2020,March 31, 2021, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $677.9$939.7 million. We expectPerformance obligations expected to recognize 38.9% of our remaining performance obligations of these contracts as revenue in the next twelve months.be satisfied within one year and greater than one year are 37% and 63%, respectively. This amount excludesand percentages exclude agreements with consumer customers in our Hughes segment, our leasing arrangements and agreements with certain customers under which collectability of all amounts due through the term of contracts is uncertain.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 | | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended September 30, 2020 | | | | | | | | | |
For the three months ended March 31, 2021 | | For the three months ended March 31, 2021 | | | | | | | | |
North America | North America | | $ | 392,950 | | | $ | 4,402 | | | $ | (281) | | | $ | 397,071 | | North America | | $ | 398,759 | | | $ | 4,089 | | | $ | (88) | | | $ | 402,760 | |
South and Central America | South and Central America | | 38,578 | | | 0 | | | 0 | | | 38,578 | | South and Central America | | 43,030 | | | 0 | | | 0 | | | 43,030 | |
Other | Other | | 35,234 | | | 0 | | | 4,977 | | | 40,211 | | Other | | 34,070 | | | 0 | | | 5,370 | | | 39,440 | |
Total revenue | Total revenue | | $ | 466,762 | | | $ | 4,402 | | | $ | 4,696 | | | $ | 475,860 | | Total revenue | | $ | 475,859 | | | $ | 4,089 | | | $ | 5,282 | | | $ | 485,230 | |
| For the three months ended September 30, 2019 | | |
For the three months ended March 31, 2020 | | For the three months ended March 31, 2020 | |
North America | North America | | $ | 389,264 | | | $ | 4,098 | | | $ | 571 | | | $ | 393,933 | | North America | | $ | 382,715 | | | $ | 4,652 | | | $ | (285) | | | $ | 387,082 | |
South and Central America | South and Central America | | 31,747 | | | 0 | | | 0 | | | 31,747 | | South and Central America | | 33,956 | | | 0 | | | 0 | | | 33,956 | |
Other | Other | | 42,724 | | | 0 | | | 4,717 | | | 47,441 | | Other | | 41,811 | | | 0 | | | 4,698 | | | 46,509 | |
Total revenue | Total revenue | | $ | 463,735 | | | $ | 4,098 | | | $ | 5,288 | | | $ | 473,121 | | Total revenue | | $ | 458,482 | | | $ | 4,652 | | | $ | 4,413 | | | $ | 467,547 | |
| For the nine months ended September 30, 2020 | | |
North America | | $ | 1,160,288 | | | $ | 13,233 | | | $ | (959) | | | $ | 1,172,562 | | |
South and Central America | | 106,495 | | | 0 | | | 0 | | | 106,495 | | |
Other | | 111,633 | | | 0 | | | 14,362 | | | 125,995 | | |
Total revenue | | $ | 1,378,416 | | | $ | 13,233 | | | $ | 13,403 | | | $ | 1,405,052 | | |
| 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 | | | 0 | | | 0 | | | 89,005 | | |
Other | | 142,423 | | | 0 | | | 14,314 | | | 156,737 | | |
Total revenue | | $ | 1,360,919 | | | $ | 11,873 | | | $ | 16,768 | | | $ | 1,389,560 | | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Nature of Products and Services
The following tablestable presents our revenue disaggregated by the nature of products and services and by segment for the three and nine months ended September 30, 2020 and 2019:segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended September 30, 2020 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 409,119 | | | $ | 2,804 | | | $ | 0 | | | $ | 411,923 | |
Lease revenue | | 10,673 | | | 1,598 | | | 4,696 | | | 16,967 | |
Total services and other revenue | | 419,792 | | | 4,402 | | | 4,696 | | | 428,890 | |
Equipment revenue: | | | | | | | | |
Equipment | | 29,387 | | | 0 | | | 0 | | | 29,387 | |
Design, development and construction services | | 16,375 | | | 0 | | | 0 | | | 16,375 | |
Lease revenue | | 1,208 | | | 0 | | | 0 | | | 1,208 | |
Total equipment revenue | | 46,970 | | | 0 | | | 0 | | | 46,970 | |
Total revenue | | $ | 466,762 | | | $ | 4,402 | | | $ | 4,696 | | | $ | 475,860 | |
| | | | | | | | |
For the three months ended September 30, 2019 | | | | | | | | |
Services and other revenue: | | | | | | | | |
Services | | $ | 385,477 | | | $ | 2,736 | | | $ | 233 | | | $ | 388,446 | |
Lease revenue | | 12,533 | | | 1,362 | | | 5,055 | | | 18,950 | |
Total services and other revenue | | 398,010 | | | 4,098 | | | 5,288 | | | 407,396 | |
Equipment revenue: | | | | | | | | |
Equipment | | 21,106 | | | 0 | | | 0 | | | 21,106 | |
Design, development and construction services | | 42,328 | | | 0 | | | 0 | | | 42,328 | |
Lease revenue | | 2,291 | | | 0 | | | 0 | | | 2,291 | |
Total equipment revenue | | 65,725 | | | 0 | | | 0 | | | 65,725 | |
Total revenue | | $ | 463,735 | | | $ | 4,098 | | | $ | 5,288 | | | $ | 473,121 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
| | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the nine months ended September 30, 2020 | | | | | | | | | |
For the three months ended March 31, 2021 | | For the three months ended March 31, 2021 | | | | | | | | |
Services and other revenue: | Services and other revenue: | | Services and other revenue: | |
Services | Services | | $ | 1,198,816 | | | $ | 8,133 | | | $ | 0 | | | $ | 1,206,949 | | Services | | $ | 413,519 | | | $ | 2,690 | | | $ | 0 | | | $ | 416,209 | |
Lease revenue | Lease revenue | | 32,898 | | | 5,100 | | | 13,403 | | | 51,401 | | Lease revenue | | 10,101 | | | 1,399 | | | 5,282 | | | 16,782 | |
Total services and other revenue | Total services and other revenue | | 1,231,714 | | | 13,233 | | | 13,403 | | | 1,258,350 | | Total services and other revenue | | 423,620 | | | 4,089 | | | 5,282 | | | 432,991 | |
Equipment revenue: | Equipment revenue: | | | | | | | | | Equipment revenue: | | | | | | | | |
Equipment | Equipment | | 72,744 | | | 0 | | | 0 | | | 72,744 | | Equipment | | 28,521 | | | 0 | | | 0 | | | 28,521 | |
Design, development and construction services | Design, development and construction services | | 70,600 | | | 0 | | | 0 | | | 70,600 | | Design, development and construction services | | 21,636 | | | 0 | | | 0 | | | 21,636 | |
Lease revenue | Lease revenue | | 3,358 | | | 0 | | | 0 | | | 3,358 | | Lease revenue | | 2,082 | | | 0 | | | 0 | | | 2,082 | |
Total equipment revenue | Total equipment revenue | | 146,702 | | | 0 | | | 0 | | | 146,702 | | Total equipment revenue | | 52,239 | | | 0 | | | 0 | | | 52,239 | |
Total revenue | Total revenue | | $ | 1,378,416 | | | $ | 13,233 | | | $ | 13,403 | | | $ | 1,405,052 | | Total revenue | | $ | 475,859 | | | $ | 4,089 | | | $ | 5,282 | | | $ | 485,230 | |
| | | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2019 | | |
For the three months ended March 31, 2020 | | For the three months ended March 31, 2020 | |
Services and other revenue: | Services and other revenue: | | Services and other revenue: | |
Services | Services | | $ | 1,147,868 | | | $ | 7,953 | | | $ | 878 | | | $ | 1,156,699 | | Services | | $ | 390,000 | | | $ | 2,765 | | | $ | 0 | | | $ | 392,765 | |
Lease revenue | Lease revenue | | 37,967 | | | 3,920 | | | 15,890 | | | 57,777 | | Lease revenue | | 11,173 | | | 1,887 | | | 4,413 | | | 17,473 | |
Total services and other revenue | Total services and other revenue | | 1,185,835 | | | 11,873 | | | 16,768 | | | 1,214,476 | | Total services and other revenue | | 401,173 | | | 4,652 | | | 4,413 | | | 410,238 | |
Equipment revenue: | Equipment revenue: | | | | | | | | | Equipment revenue: | | | | | | | | |
Equipment | Equipment | | 77,663 | | | 0 | | | 0 | | | 77,663 | | Equipment | | 24,839 | | | 0 | | | 0 | | | 24,839 | |
Design, development and construction services | Design, development and construction services | | 93,254 | | | 0 | | | 0 | | | 93,254 | | Design, development and construction services | | 31,557 | | | 0 | | | 0 | | | 31,557 | |
Lease revenue | Lease revenue | | 4,167 | | | 0 | | | 0 | | | 4,167 | | Lease revenue | | 913 | | | 0 | | | 0 | | | 913 | |
Total equipment revenue | Total equipment revenue | | 175,084 | | | 0 | | | 0 | | | 175,084 | | Total equipment revenue | | 57,309 | | | 0 | | | 0 | | | 57,309 | |
Total revenue | Total revenue | | $ | 1,360,919 | | | $ | 11,873 | | | $ | 16,768 | | | $ | 1,389,560 | | Total revenue | | $ | 458,482 | | | $ | 4,652 | | | $ | 4,413 | | | $ | 467,547 | |
Lease Revenue
The following table presents our lease revenue by type of lease:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Sales-type lease revenue: | | | | | | | | |
Revenue at lease commencement | | $ | 1,208 | | | $ | 2,291 | | | $ | 3,358 | | | $ | 4,167 | |
Interest income | | 14 | | | 206 | | | 178 | | | 716 | |
Total sales-type lease revenue | | 1,222 | | | 2,497 | | | 3,536 | | | 4,883 | |
Operating lease revenue | | 16,953 | | | 18,744 | | | 51,223 | | | 57,061 | |
Total lease revenue | | $ | 18,175 | | | $ | 21,241 | | | $ | 54,759 | | | $ | 61,944 | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Sales-type lease revenue: | | | | |
Revenue at lease commencement | | $ | 2,082 | | | $ | 913 | |
Interest income | | 73 | | | 69 | |
Total sales-type lease revenue | | 2,155 | | | 982 | |
Operating lease revenue | | 16,709 | | | 17,404 | |
Total lease revenue | | $ | 18,864 | | | $ | 18,386 | |
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $10.6$13.4 million and $6.5$13.0 million as of September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents future operating lease payments to be received as of September 30, 2020:March 31, 2021:
| | | Amounts | | Amounts |
Year ending December 31, | Year ending December 31, | | | Year ending December 31, | | |
2020 (remainder) | | $ | 10,067 | | |
2021 | | 37,729 | | |
2021 (remainder) | | 2021 (remainder) | | $ | 30,433 | |
2022 | 2022 | | 34,207 | | 2022 | | 34,082 | |
2023 | 2023 | | 32,100 | | 2023 | | 32,000 | |
2024 | 2024 | | 29,771 | | 2024 | | 29,740 | |
2025 and beyond | | 127,485 | | |
2025 | | 2025 | | 28,482 | |
2026 and beyond | | 2026 and beyond | | 47,562 | |
Total lease payments | Total lease payments | | $ | 271,359 | | Total lease payments | | $ | 202,299 | |
The following table presents amounts for assets subject to operating leases, which are included in Property and equipment, net:net:
| | | As of | | | As of |
| | September 30, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | Cost | | Accumulated Depreciation | | Net | | Cost | | Accumulated Depreciation | | Net | | | Cost | | Accumulated Depreciation | | Net | | Cost | | Accumulated Depreciation | | Net |
Customer premises equipment | Customer premises equipment | | $ | 1,622,142 | | | $ | (1,243,586) | | | $ | 378,556 | | | $ | 1,458,298 | | | $ | (1,074,968) | | | $ | 383,330 | | | Customer premises equipment | | $ | 1,737,049 | | | $ | (1,370,538) | | | $ | 366,511 | | | $ | 1,706,328 | | | $ | (1,317,210) | | | $ | 389,118 | |
Satellites | Satellites | | 104,620 | | | (36,591) | | | 68,029 | | | 104,620 | | | (31,360) | | | 73,260 | | | Satellites | | 104,620 | | | (40,078) | | | 64,542 | | | 104,620 | | | (38,335) | | | 66,285 | |
Total | Total | | $ | 1,726,762 | | | $ | (1,280,177) | | | $ | 446,585 | | | $ | 1,562,918 | | | $ | (1,106,328) | | | $ | 456,590 | | | Total | | $ | 1,841,669 | | | $ | (1,410,616) | | | $ | 431,053 | | | $ | 1,810,948 | | | $ | (1,355,545) | | | $ | 455,403 | |
The following table presents depreciation expense for assets subject to operating leases, which is included in Depreciation and amortization:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Customer premises equipment | | $ | 58,332 | | | $ | 49,314 | | | $ | 165,953 | | | $ | 149,724 | |
Satellites | | 1,744 | | | 1,802 | | | 5,231 | | | 5,277 | |
Real estate | | 0 | | | 0 | | | 0 | | | 0 | |
Total | | $ | 60,076 | | | $ | 51,116 | | | $ | 171,184 | | | $ | 155,001 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 4. DISCONTINUED OPERATIONS
BSS Business
The following table presents the financial results of our discontinued operations for the BSS Business:
| | | | | | | | | | | | | | |
| | For the three months ended September 30, 2019 | | For the nine months ended September 30, 2019 |
Revenue: | | | | |
Services and other revenue - DISH Network | | $ | 54,297 | | | $ | 195,942 | |
Services and other revenue - other | | 4,915 | | | 17,715 | |
Total revenue | | 59,212 | | | 213,657 | |
Costs and expenses: | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 7,307 | | | 28,033 | |
Selling, general and administrative expenses | | 4,107 | | | 6,749 | |
Depreciation and amortization | | 23,788 | | | 85,926 | |
Total costs and expenses | | 35,202 | | | 120,708 | |
Operating income (loss) | | 24,010 | | | 92,949 | |
Other income (expense): | | | | |
Interest expense | | (4,632) | | | (17,365) | |
Total other income (expense), net | | (4,632) | | | (17,365) | |
Income (loss) from discontinued operations before income taxes | | 19,378 | | | 75,584 | |
Income tax benefit (provision), net | | (4,996) | | | (17,850) | |
Net income (loss) from discontinued operations | | $ | 14,382 | | | $ | 57,734 | |
No assets or liabilities attributable to our discontinued operations of the BSS Business were held by us as of September 30, 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 activities for discontinued operations of the BSS Business for the nine months ended September 30, 2019:
| | | | | | | | |
| | Amounts |
Operating activities: | | |
Net income (loss) from discontinued operations | | $ | 14,382 | |
Depreciation and amortization | | $ | 23,788 | |
| | |
Investing activities: | | |
Expenditures for property and equipment | | $ | 510 | |
| | |
Financing activities: | | |
Payment of finance lease obligations | | $ | 27,203 | |
Payment of in-orbit incentive obligations | | $ | 3,887 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Terminated or Transferred Related Party Agreements
Effective September 10, 2019, the following agreements were terminated or transferred to DISH Network as part of the BSS Transaction. 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 8 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 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
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location. In February 2013, we and DISH Network entered into an agreement pursuant to which we leased back from DISH Network certain satellite capacity on 5 DBS transponders on the QuetzSat-1 satellite.
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. | | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Customer premises equipment | | $ | 60,967 | | | $ | 49,504 | |
Satellites | | 1,744 | | | 1,744 | |
Total | | $ | 62,711 | | | $ | 51,248 | |
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 September 30, 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 | | $ | 8,110 | |
Other current assets, net | | 7,106 | |
Property and equipment | | 86,983 | |
Regulatory authorization | | 4,498 | |
Goodwill | | 6,076 | |
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 following preliminary valuation of the acquired assets was derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation:
| | | | | | | | |
| | Amounts |
Satellite payload | | $ | 49,363 | |
Regulatory authorization | | 4,498 | |
Total | | $ | 53,861 | |
The satellite payload and regulatory authorization were valued using an income approach and are being amortized over seven and 11 years, respectively.
The goodwill we recognized was allocated entirely to our Hughes segment and attributed to expected synergies, projected long-term business growth in current and new markets and an assembled workforce.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 6.4. MARKETABLE INVESTMENT SECURITIES
The following table presents our Marketable investment securities:
| | | As of | | As of |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
Marketable investment securities: | Marketable investment securities: | | | | | Marketable investment securities: | | | | |
Debt securities: | | |
Available-for-sale: | | |
Available-for-sale debt securities: | | Available-for-sale debt securities: | |
Corporate bonds | Corporate bonds | | $ | 212,990 | | | $ | 411,706 | | Corporate bonds | | $ | 109,598 | | | $ | 276,361 | |
Commercial paper | Commercial paper | | 1,007,650 | | | 236,874 | | Commercial paper | | 327,648 | | | 823,173 | |
Other debt securities | Other debt securities | | 197,779 | | | 4,014 | | Other debt securities | | 78,054 | | | 103,756 | |
Total available-for-sale debt securities | Total available-for-sale debt securities | | 1,418,419 | | | 652,594 | | Total available-for-sale debt securities | | 515,300 | | | 1,203,290 | |
Equity securities | Equity securities | | 17 | | | 241 | | Equity securities | | 6 | | | 6 | |
Total marketable investment securities | Total marketable investment securities | | $ | 1,418,436 | | | $ | 652,835 | | Total marketable investment securities | | $ | 515,306 | | | $ | 1,203,296 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Debt Securities
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our commercial paper portfolio includes instruments issued by individual corporations, primarily in the industrial, financial services and utilities industries. Our other debt securities portfolio includes investments in various debt instruments, including U.S. government bonds and mutual funds. We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
Available-for-Sale
The following table presents the components of our available-for-sale debt securities:
| | | Amortized | | Unrealized | | Estimated | | Amortized | | Unrealized | | Estimated |
| | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
As of September 30, 2020 | | | | | | | | | |
As of March 31, 2021 | | As of March 31, 2021 | | | | | | | | |
Corporate bonds | Corporate bonds | | $ | 212,880 | | | $ | 113 | | | $ | (3) | | | $ | 212,990 | | Corporate bonds | | $ | 109,600 | | | $ | 10 | | | $ | (12) | | | $ | 109,598 | |
Commercial paper | Commercial paper | | 1,007,650 | | | 0 | | | 0 | | | 1,007,650 | | Commercial paper | | 327,648 | | | 0 | | | 0 | | | 327,648 | |
Other debt securities | Other debt securities | | 197,771 | | | 8 | | | 0 | | | 197,779 | | Other debt securities | | 78,108 | | | 2 | | | (56) | | | 78,054 | |
Total available-for-sale debt securities | Total available-for-sale debt securities | | $ | 1,418,301 | | | $ | 121 | | | $ | (3) | | | $ | 1,418,419 | | Total available-for-sale debt securities | | $ | 515,356 | | | $ | 12 | | | $ | (68) | | | $ | 515,300 | |
| As of December 31, 2019 | | |
As of December 31, 2020 | | As of December 31, 2020 | | | | | | | | |
Corporate bonds | Corporate bonds | | $ | 411,312 | | | $ | 395 | | | $ | (1) | | | $ | 411,706 | | Corporate bonds | | $ | 276,327 | | | $ | 59 | | | $ | (25) | | | $ | 276,361 | |
Commercial paper | Commercial paper | | 236,873 | | | 1 | | | 0 | | | 236,874 | | Commercial paper | | 823,173 | | | 0 | | | 0 | | | 823,173 | |
Other debt securities | Other debt securities | | 4,014 | | | 0 | | | 0 | | | 4,014 | | Other debt securities | | 103,758 | | | 3 | | | (5) | | | 103,756 | |
Total available-for-sale debt securities | Total available-for-sale debt securities | | $ | 652,199 | | | $ | 396 | | | $ | (1) | | | $ | 652,594 | | Total available-for-sale debt securities | | $ | 1,203,258 | | | $ | 62 | | | $ | (30) | | | $ | 1,203,290 | |
The following table presents the activity on our available-for-sale debt securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Proceeds from sales | | $ | 0 | | | $ | 0 | | | $ | 10,000 | | | $ | 311,822 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Gains (losses) on sales, net | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 385 | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Proceeds from sales | | $ | 95,765 | | | $ | 10,000 | |
As of March 31, 2021, we have $491.2 million of available-for-sale debt securities with contractual maturities of one year or less and $24.1 million with contractual maturities greater than one year.
Equity Securities
The following table presents the activity of our equity securities:
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Gains (losses) on investments, net | | $ | 0 | | | $ | (164) | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
As of September 30, 2020, all $1.4 billion of our available-for-sale debt securities had contractual maturities of one year or less.
Equity Securities
The following table presents the activity of our equity securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
Gains (losses) on investments, net | | $ | (75) | | | $ | 0 | | | $ | (224) | | | $ | (700) | |
For the three and nine months ended September 30, 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 | | Level 1 | | Level 2 | | Total |
| September 30, 2020 | | December 31, 2019 | |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | |
As of March 31, 2021 | | As of March 31, 2021 | | | | | | |
Cash equivalents (including restricted) | Cash equivalents (including restricted) | | $ | 17,752 | | | $ | 350,040 | | | $ | 367,792 | | | $ | 6,682 | | | $ | 1,056,518 | | | $ | 1,063,200 | | Cash equivalents (including restricted) | | $ | 508 | | | $ | 1,317,529 | | | $ | 1,318,037 | |
Debt securities: | | | | | | | | | | | | | |
Available-for-sale: | | |
Available-for-sale debt securities: | | Available-for-sale debt securities: | | | | | | |
Corporate bonds | Corporate bonds | | $ | 0 | | | $ | 212,990 | | | $ | 212,990 | | | $ | 0 | | | $ | 411,706 | | | $ | 411,706 | | Corporate bonds | | $ | 0 | | | $ | 109,598 | | | $ | 109,598 | |
Commercial paper | Commercial paper | | 0 | | | 1,007,650 | | | 1,007,650 | | | 0 | | | 236,874 | | | 236,874 | | Commercial paper | | 0 | | | 327,648 | | | 327,648 | |
Other debt securities | Other debt securities | | 197,081 | | | 698 | | | 197,779 | | | 0 | | | 4,014 | | | 4,014 | | Other debt securities | | 32,498 | | | 45,556 | | | 78,054 | |
Total available-for-sale debt securities | Total available-for-sale debt securities | | 197,081 | | | 1,221,338 | | | 1,418,419 | | | 0 | | | 652,594 | | | 652,594 | | Total available-for-sale debt securities | | 32,498 | | | 482,802 | | | 515,300 | |
Equity securities | Equity securities | | 17 | | | 0 | | | 17 | | | 241 | | | 0 | | | 241 | | Equity securities | | 6 | | | 0 | | | 6 | |
Total marketable investment securities | Total marketable investment securities | | $ | 197,098 | | | $ | 1,221,338 | | | $ | 1,418,436 | | | $ | 241 | | | $ | 652,594 | | | $ | 652,835 | | Total marketable investment securities | | $ | 32,504 | | | $ | 482,802 | | | $ | 515,306 | |
| As of December 31, 2020 | | As of December 31, 2020 | |
Cash equivalents (including restricted) | | Cash equivalents (including restricted) | | $ | 128 | | | $ | 654,853 | | | $ | 654,981 | |
Available-for-sale debt securities: | | Available-for-sale debt securities: | | | | | | |
Corporate bonds | | Corporate bonds | | $ | 0 | | | $ | 276,361 | | | $ | 276,361 | |
Commercial paper | | Commercial paper | | 0 | | | 823,173 | | | 823,173 | |
Other debt securities | | Other debt securities | | 95,497 | | | 8,259 | | | 103,756 | |
Total available-for-sale debt securities | | Total available-for-sale debt securities | | 95,497 | | | 1,107,793 | | | 1,203,290 | |
Equity securities | | Equity securities | | 6 | | | 0 | | | 6 | |
Total marketable investment securities | | Total marketable investment securities | | $ | 95,503 | | | $ | 1,107,793 | | | $ | 1,203,296 | |
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, we did not have any investments that were categorized within Level 3 of the fair value hierarchy.
NOTE 7. 5.PROPERTY AND EQUIPMENT
The following tablestable presents the components of Property and equipment, net:
| | | As of | | As of |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
Property and equipment, net: | Property and equipment, net: | | | | | Property and equipment, net: | | | | |
Satellites, net | Satellites, net | | $ | 980,270 | | | $ | 1,127,521 | | Satellites, net | | $ | 919,813 | | | $ | 954,559 | |
Other property and equipment, net | Other property and equipment, net | | 708,054 | | | 730,060 | | Other property and equipment, net | | 711,408 | | | 736,964 | |
Total property and equipment, net | Total property and equipment, net | | $ | 1,688,324 | | | $ | 1,857,581 | | Total property and equipment, net | | $ | 1,631,221 | | | $ | 1,691,523 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Satellites
As of September 30, 2020,March 31, 2021, our operating satellite fleet consisted of 8 satellites, 5 of which are owned and 3 of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents our operating satellite fleet as of September 30, 2020March 31, 2021 which consists of both owned and leased satellites:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Satellite | | Segment | | Launch Date | | Nominal Degree Orbital Location (Longitude) | | Depreciable Life (In Years) |
Owned: | | | | | | | | |
SPACEWAY 3 (1) | | Hughes | | August 2007 | | 95 W | | 10 |
EchoStar XVII | | Hughes | | July 2012 | | 107 W | | 15 |
EchoStar XIX | | Hughes | | December 2016 | | 97.1 W | | 15 |
Al Yah 3 (2) | | Hughes | | January 2018 | | 20 W | | 7 |
EchoStar IX (3) | | ESS | | August 2003 | | 121 W | | 12 |
| | | | | | | | |
Finance leases: | | | | | | | | |
Eutelsat 65 West A | | Hughes | | March 2016 | | 65 W | | 15 |
Telesat T19V | | Hughes | | July 2018 | | 63 W | | 15 |
EchoStar 105/SES-11 | | ESS | | October 2017 | | 105 W | | 15 |
(1) Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed 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 | | | Depreciable Life (In Years) | | As of |
| | | September 30, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
Satellites, net: | Satellites, net: | | | | | | | Satellites, net: | | | | | | |
Satellites - owned | Satellites - owned | | 7 to 15 | | $ | 1,500,438 | | | $ | 1,516,006 | | Satellites - owned | | 7 to 15 | | $ | 1,500,070 | | | $ | 1,503,596 | |
Satellites - acquired under finance leases | Satellites - acquired under finance leases | | 15 | | 344,376 | | | 381,162 | | Satellites - acquired under finance leases | | 15 | | 352,261 | | | 352,245 | |
Total satellites | Total satellites | | 1,844,814 | | | 1,897,168 | | Total satellites | | | | 1,852,331 | | | 1,855,841 | |
Accumulated depreciation: | Accumulated depreciation: | | Accumulated depreciation: | |
Satellites - owned | Satellites - owned | | (798,397) | | | (713,259) | | Satellites - owned | | (855,104) | | | (827,274) | |
Satellites - acquired under finance leases | Satellites - acquired under finance leases | | (66,147) | | | (56,388) | | Satellites - acquired under finance leases | | (77,414) | | | (74,008) | |
Total accumulated depreciation | Total accumulated depreciation | | (864,544) | | | (769,647) | | Total accumulated depreciation | | | | (932,518) | | | (901,282) | |
Total satellites, net | Total satellites, net | | $ | 980,270 | | | $ | 1,127,521 | | Total satellites, net | | | | $ | 919,813 | | | $ | 954,559 | |
The following table presents the depreciation expense associated with our satellites, net:
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Depreciation expense: | | | | |
Satellites - owned | | $ | 27,068 | | | $ | 27,068 | |
Satellites - acquired under finance leases | | 7,201 | | | 6,013 | |
Total depreciation expense | | $ | 34,269 | | | $ | 33,081 | |
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 net:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Depreciation expense: | | | | | | | | |
Satellites - owned | | $ | 27,068 | | | $ | 27,616 | | | $ | 81,205 | | | $ | 81,635 | |
Satellites acquired under finance leases | | 7,203 | | | 6,377 | | | 20,421 | | | 19,269 | |
Total depreciation expense | | $ | 34,271 | | | $ | 33,993 | | | $ | 101,626 | | | $ | 100,904 | |
| | | | | | | | |
Capitalized interest | | $ | 977 | | | $ | 283 | | | $ | 2,401 | | | $ | 625 | |
and satellite-related ground infrastructure:
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Capitalized interest | | $ | 1,246 | | | $ | 637 | |
Satellite
Satellite-Related Commitments
As of September 30, 2020March 31, 2021 and December 31, 2019,2020 our satellite-related obligationscommitments were $233.7$215.1 million and $256.9$224.4 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
We are not aware of any anomalies with respect to our owned or leased satellites or payloads that have had any significant adverse effect on their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position as of and for the three and nine months ended September 30, 2020.
Satellite Insurance
We generally do not carry in-orbit insurance on our satellites or payloads because we have assessed that the cost of insurance is not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our long-term debt and our joint venture agreements with Yahsat, we are required, subject to certain limitations on coverage, to maintain only for the SPACEWAY 3 satellite, the EchoStar XVII satellite and the Al Yah 3 Brazilian payload, insurance or other contractual arrangements during the commercial in-orbit service of such satellite or payload. Our other satellites and payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance or other contractual arrangements. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.March 31, 2021.
Fair Value of In-Orbit Incentives
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the fair values of our in-orbit incentive obligations from our continuing operations approximated their carrying amounts of $55.7$54.3 million and $57.0$55.4 million, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 8.6. REGULATORY AUTHORIZATIONS
The following table presents the components of our Regulatory authorizations, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Finite lived | | | | |
| | Cost | | Accumulated Amortization | | Total | | Indefinite lived | | Total |
Balance, December 31, 2018 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 400,043 | | | $ | 400,043 | |
Disposals | | — | | | — | | | — | | | (43) | | | (43) | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance, September 30, 2019 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 400,000 | | | $ | 400,000 | |
| | | | | | | | | | |
Balance, December 31, 2019 | | $ | 12,524 | | | $ | (161) | | | $ | 12,363 | | | $ | 400,000 | | | $ | 412,363 | |
| | | | | | | | | | |
Amortization expense | | — | | | (536) | | | (536) | | | — | | | (536) | |
Foreign currency translation | | (1,303) | | | 34 | | | (1,269) | | | — | | | (1,269) | |
Balance, September 30, 2020 | | $ | 11,221 | | | $ | (663) | | | $ | 10,558 | | | $ | 400,000 | | | $ | 410,558 | |
| | | | | | | | | | |
Weighted average useful life (in years) | | 14 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Finite lived | | | | |
| | Cost | | Accumulated Amortization | | Total | | Indefinite lived | | Total |
Balance, December 31, 2019 | | $ | 12,524 | | | $ | (161) | | | $ | 12,363 | | | $ | 400,000 | | | $ | 412,363 | |
Amortization expense | | — | | | (100) | | | (100) | | | — | | | (100) | |
Currency translation adjustments | | (1,020) | | | 0 | | | (1,020) | | | 0 | | | (1,020) | |
Balance, March 31, 2020 | | $ | 11,504 | | | $ | (261) | | | $ | 11,243 | | | $ | 400,000 | | | $ | 411,243 | |
| | | | | | | | | | |
Balance, December 31, 2020 | | $ | 11,505 | | | $ | (1,054) | | | $ | 10,451 | | | $ | 400,000 | | | $ | 410,451 | |
Amortization expense | | — | | | (208) | | | (208) | | | — | | | (208) | |
Currency translation adjustments | | (321) | | | 38 | | | (283) | | | 0 | | | (283) | |
Balance, March 31, 2021 | | $ | 11,184 | | | $ | (1,224) | | | $ | 9,960 | | | $ | 400,000 | | | $ | 409,960 | |
| | | | | | | | | | |
Weighted-average useful life (in years) | | | | 14 | | | | | | |
Finite Lived Assets
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
In November 2019, we were granted an S-Band spectrum license for terrestrial rights in Mexico for $7.9 million. The acquired asset is subject to amortization over a period of 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 9.7. OTHER INVESTMENTS
The following table presents the components ofour Other investments, net:
| | | As of | | As of |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
Other investments, net: | Other investments, net: | | | | | Other investments, net: | | | | |
Equity method investments | Equity method investments | | $ | 97,810 | | | $ | 102,689 | | Equity method investments | | $ | 94,812 | | | $ | 96,573 | |
Other equity investments | Other equity investments | | 7,351 | | | 7,351 | | Other equity investments | | 7,351 | | | 7,351 | |
Total other investments, net | Total other investments, net | | $ | 105,161 | | | $ | 110,040 | | Total other investments, net | | $ | 102,163 | | | $ | 103,924 | |
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.
Broadband Connectivity Solutions (Restricted) Limited
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’sYahsat'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% interest in BCS. Under the terms of the agreement, we may also acquire, for further
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
Financial Information for Our Equity Method Investments
The following table presents revenue recognized:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Deluxe | | $ | 1,067 | | | $ | 878 | | | $ | 3,340 | | | $ | 2,632 | |
BCS | | $ | 2,190 | | | $ | 1,690 | | | $ | 6,643 | | | $ | 6,236 | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Deluxe | | $ | 1,631 | | | $ | 1,255 | |
BCS | | $ | 1,348 | | | $ | 1,669 | |
The following table presents trade accounts receivable:
| | | As of | | As of |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
Deluxe | Deluxe | | $ | 750 | | | $ | 631 | | Deluxe | | $ | 1,318 | | | $ | 716 | |
BCS | BCS | | $ | 6,981 | | | $ | 5,171 | | BCS | | $ | 5,043 | | | $ | 9,347 | |
Other Equity Investments
During the three and nine months ended September 30,March 31, 2021 and 2020, and 2019, we did 0tnot identify any observable price changes requiring an adjustment to our investments.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 10.8. LONG-TERM DEBT
The following table presents the carrying amountsamount and fair values of our Current portion of long-term debt, net and Long-term debt, net:net:
| | | Effective interest rates | | As of | | Effective Interest Rate | | As of |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Senior Secured Notes: | Senior Secured Notes: | | | | | | | | | | | Senior Secured Notes: | | | | | | | | | | |
5 1/4% Senior Secured Notes due 2026 | 5 1/4% Senior Secured Notes due 2026 | | 5.320% | | $ | 750,000 | | | $ | 799,905 | | | $ | 750,000 | | | $ | 825,308 | | 5 1/4% Senior Secured Notes due 2026 | | 5.320% | | $ | 750,000 | | | $ | 830,933 | | | $ | 750,000 | | | $ | 834,045 | |
Senior Unsecured Notes: | Senior Unsecured Notes: | | Senior Unsecured Notes: | |
7 5/8% Senior Unsecured Notes due 2021 | 7 5/8% Senior Unsecured Notes due 2021 | | 8.062% | | 900,000 | | | 935,343 | | | 900,000 | | | 963,783 | | 7 5/8% Senior Unsecured Notes due 2021 | | 8.062% | | 809,486 | | | 821,555 | | | 900,000 | | | 924,003 | |
6 5/8% Senior Unsecured Notes due 2026 | 6 5/8% Senior Unsecured Notes due 2026 | | 6.688% | | 750,000 | | | 815,025 | | | 750,000 | | | 833,903 | | 6 5/8% Senior Unsecured Notes due 2026 | | 6.688% | | 750,000 | | | 834,383 | | | 750,000 | | | 852,810 | |
Less: Unamortized debt issuance costs | Less: Unamortized debt issuance costs | | (7,619) | | | — | | | (10,832) | | | — | | Less: Unamortized debt issuance costs | | (5,292) | | | — | | | (6,507) | | | — | |
Total long-term debt | Total long-term debt | | 2,392,381 | | | 2,550,273 | | | 2,389,168 | | | 2,622,994 | | Total long-term debt | | 2,304,194 | | | 2,486,871 | | | 2,393,493 | | | 2,610,858 | |
Less: Current portion, net | Less: Current portion, net | | (897,303) | | | (935,343) | | | 0 | | | 0 | | Less: Current portion, net | | (808,758) | | | (821,555) | | | (898,237) | | | (924,003) | |
Long-term debt, net | Long-term debt, net | | $ | 1,495,078 | | | $ | 1,614,930 | | | $ | 2,389,168 | | | $ | 2,622,994 | | Long-term debt, net | | $ | 1,495,436 | | | $ | 1,665,316 | | | $ | 1,495,256 | | | $ | 1,686,855 | |
As of March 31, 2021, we have repurchased a total of $90.5 million in principal of the 2021 Senior Unsecured Notes in open market trades.
NOTE 11.9. 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,
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 was $10.6 million for the three months ended March 31, 2021 compared to $5.2 million for the three months ended September 30, 2020 as compared to $5.2 million of income tax benefit for the three months ended September 30, 2019.March 31, 2020. Our estimated effective income tax rate was 31.2%37.6% and (43.5)(41.2)% for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30,March 31, 2021 were primarily due to excluded foreign losses where the company carries a full valuation allowance. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by 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, 2019 were primarily due to the change in net unrealized gainslosses 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.
Our income tax provision was $24.1 million for the nine months ended September 30, 2020 compared to $1.2 million of income tax benefit for the nine months ended September 30, 2019. Our estimated effective income tax rate was 133.6% and (3.4)% for the nine months ended September 30, 2020 and 2019, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses, permanent book tax differences and the impact of state and local taxes, partially offset by the research and experimentation credits. 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 Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act features significant tax provisions and other measures to assist individuals and businesses impacted by the economic 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 provision for the three and nine months ended September 30, 2020.
NOTE 12. 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.
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 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. In connection with the
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 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 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: (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 other proceedings; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, 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”). In December 2019, we entered into a comprehensive settlement agreement with Elbit pursuant to which we paid a total of $33.0 million in satisfaction of all amounts relating to these matters and all 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; Hughes Satellite Systems Corporation; our former subsidiary BSS Corp.; and DISH and
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 and 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.
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, remanded and re-appealed several times. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the Tribunal’s ruling. On October 24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “October 2019 Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties, but without indicating the amount HCPIL is required to pay the DOT, and 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 the October 2019 Order. The petition was denied on January 20, 2020. On January 22, 2020, HCIPL and other telecommunication service providers filed an application requesting that the Supreme Court modify the October 2019 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 directed HCIPL and the other telecommunication service providers to explain why the Supreme Court should not initiate contempt proceedings for failure to pay the amounts due. During a hearing on March 18, 2020, the Supreme Court ordered that all amounts that were due before the October 2019 Order 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. On June 11, 2020, the Supreme Court ordered HCIPL and the other telecommunication service providers to submit affidavits addressing the proposal made by the DOT to extend the time frame for payment of the amounts owed and for HCIPL and the other telecommunication providers to provide security for such payments. On September 1, 2020, the Supreme Court issued a judgment permitting a 10-year payment schedule. Under the payment schedule, HCIPL is required to make a payment of 10% of the legally payable dues by March 31, 2021, and thereafter make payments in yearly installments through 2031. To date, HCIPL has paid the DOT $2.9 million with respect to this matter. As a result of the Supreme Court’s orders, HCIPL’s payments to date and the impact of foreign exchange rates, we have recorded an accrual of $81.6 million as of September 30, 2020, comprised of $3.9 million for additional license fees, $4.0 million for penalties and $73.8 million for 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 accrual and such differences could be significant.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Other
In addition to
NOTE 10. RELATED PARTY TRANSACTIONS - ECHOSTAR
The following is a summary of the above actions, we are subject to varioustransactions 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 legal proceedingsrevenue from EchoStar:
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Services and other revenue - EchoStar | | $ | 5,371 | | | $ | 4,699 | |
The following table presents the corresponding related party receivables:
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Related party receivables - EchoStar - current | | $ | 114,225 | | | $ | 116,220 | |
Related party receivables - EchoStar - non-current | | 54,970 | | | 57,136 | |
Total related party receivables - EchoStar | | $ | 169,195 | | | $ | 173,356 | |
Receivables. EchoStar 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, weits other subsidiaries reimburse us from time to time receive inquiries from federal, statefor amounts paid by us for costs and foreign agencies regarding compliance with various lawsexpenses attributable to EchoStar and regulations.
In our opinion, the amount of ultimate liability with respect to any of theseits 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.
subsidiaries. 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 exposurereport receivables under these arrangements cannot be reasonably estimated as this involveswithin 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 resolutionbusiness of claims made, or future claimsEchoStar Mobile Limited, a subsidiary of EchoStar that may be made, against us or our officers, directors or employees,is licensed by the outcomes 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 revenue in Services and other revenue of which are unknown$5.4 million and not currently predictable or estimable.$4.7 million for the three months ended March 31, 2021 and 2020, respectively, related to these services. Additionally, we have converted the receivables for 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.
NOTE 13. SEGMENT REPORTING
Business segments are 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 operate in 2 business segments, Hughes and ESS, as described in Note 1. Organization and Business Activities.Operating Expenses — EchoStar
The primary measure of segment profitability that is reported regularly tofollowing table presents our CODM is earnings before interest, taxes, depreciation and amortization, net income (loss) operating expensesfrom discontinued operations and net income (loss) attributable to non-controlling interests (“EBITDA”).
EchoStar:
Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis. | | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Operating expenses - EchoStar | | $ | 15,387 | | | $ | 12,642 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents revenue, EBITDA and capital expenditures for each of our business segments. Capital expenditures are net of refunds and other receiptsthe corresponding related to our property and equipment.party payables:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended September 30, 2020 | | | | | | | | |
External revenue | | $ | 466,762 | | | $ | 4,121 | | | $ | 4,977 | | | $ | 475,860 | |
Intersegment revenue | | 0 | | | 281 | | | (281) | | | — | |
Total revenue | | $ | 466,762 | | | $ | 4,402 | | | $ | 4,696 | | | $ | 475,860 | |
| | | | | | | | |
EBITDA | | $ | 190,016 | | | $ | 2,274 | | | $ | (8,959) | | | $ | 183,331 | |
Capital expenditures | | $ | 88,848 | | | $ | 41 | | | $ | 0 | | | $ | 88,889 | |
| | | | | | | | |
For the three months ended September 30, 2019 | | | | | | | | |
External revenue | | $ | 463,735 | | | $ | 3,772 | | | $ | 5,614 | | | $ | 473,121 | |
Intersegment revenue | | 0 | | | 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 | | | $ | 0 | | | $ | 0 | | | $ | 76,572 | |
| | | | | | | | |
For the nine months ended September 30, 2020 | | | | | | | | |
External revenue | | $ | 1,378,416 | | | $ | 12,274 | | | $ | 14,362 | | | $ | 1,405,052 | |
Intersegment revenue | | 0 | | | 959 | | | (959) | | | — | |
Total revenue | | $ | 1,378,416 | | | $ | 13,233 | | | $ | 13,403 | | | $ | 1,405,052 | |
| | | | | | | | |
EBITDA | | $ | 531,276 | | | $ | 5,847 | | | $ | (23,745) | | | $ | 513,378 | |
Capital expenditures | | $ | 263,844 | | | $ | 41 | | | $ | 0 | | | $ | 263,885 | |
| | | | | | | | |
For the nine months ended September 30, 2019 | | | | | | | | |
External revenue | | $ | 1,360,919 | | | $ | 11,058 | | | $ | 17,583 | | | $ | 1,389,560 | |
Intersegment revenue | | 0 | | | 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 | | | $ | 0 | | | $ | 0 | | | $ | 224,483 | |
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Related party payables - EchoStar - current | | $ | 51,396 | | | $ | 51,420 | |
Related party payables - EchoStar - non-current | | 24,533 | | | 25,114 | |
Total related party payables - EchoStar | | $ | 75,929 | | | $ | 76,534 | |
Payables. We 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.
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 (as defined below), 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 these expenses within Operating expenses - EchoStar for shared corporate services received from EchoStar and its other subsidiaries of $0.4 million and $4.4 million for the three months ended March 31, 2021 and 2020, respectively.
Real Estate. We 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 1 to 3 percent, subject to periodic adjustment based on the one-year U.S. LIBOR rate. We report amounts payable under these agreements within Related party payables - EchoStar - non-current.
Construction Management Services for EchoStar XXIV satellite. In August 2017, a subsidiary of EchoStar entered into a contract with Maxar Space, LLC (formerly Space Systems/Loral, LLC), for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite, with an expected launch in the second half of 2022. 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 and $0.3 million for the three months ended March 31, 2021 and 2020, respectively.
Other Agreements
BSS Transaction. Pursuant to the pre-closing restructuring contemplated by the Master Transaction Agreement (as defined below), and as part of the BSS Transaction (as defined below), we and our subsidiaries transferred certain of the BSS Business (as defined below) to BSS Corp. (as defined below), and we distributed all of the shares of BSS Corp. to EchoStar as a dividend. See Note 1. Organization and Business Activities for further information.
Share Exchange 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 and conditional access
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table reconciles
Income (loss) from continuing operations before income taxes
management, and other services and related assets and liabilities were contributed to one of our subsidiaries in the Condensed Consolidated Statementsconsideration for additional shares of OperationsHSSC’s common stock that were then issued to EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Income (loss) from continuing operations before income taxes | | $ | 16,681 | | | $ | (11,896) | | | $ | 18,041 | | | $ | (34,598) | |
Interest income, net | | (2,839) | | | (12,300) | | | (16,935) | | | (47,341) | |
Interest expense, net of amounts capitalized | | 44,177 | | | 55,608 | | | 130,644 | | | 172,502 | |
Depreciation and amortization | | 123,145 | | | 115,948 | | | 372,588 | | | 342,086 | |
Net loss (income) attributable to non-controlling interests | | 2,167 | | | 2,797 | | | 9,040 | | | 1,359 | |
EBITDA | | $ | 183,331 | | | $ | 150,157 | | | $ | 513,378 | | | $ | 434,008 | |
a subsidiary of EchoStar.
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 September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Services and other revenue - EchoStar | | $ | 4,974 | | | $ | 4,448 | | | $ | 14,361 | | | $ | 13,345 | |
The following table presents the corresponding related party receivables:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Related party receivables - EchoStar - current | | $ | 109,543 | | | $ | 131,892 | |
Related party receivables - EchoStar - non-current | | 54,865 | | | 19,759 | |
Total related party receivables - EchoStar | | $ | 164,408 | | | $ | 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 related to these services within Services and other revenue - EchoStar of $5.0 million and $4.7 million for the three months ended September 30, 2020 and 2019, respectively, and $14.4 million and $14.3 million for the nine months ended September 30, 2020 and 2019, respectively. Additionally, we have converted the receivables for certain of these services into loans payable on demand and bearing an annual interest rate of 5%. 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 presents our operating expenses related to EchoStar:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Operating expenses - EchoStar | | $ | 15,163 | | | $ | 14,506 | | | $ | 41,665 | | | $ | 42,235 | |
The following table presents the corresponding related party payables:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Related party payables - EchoStar - current | | $ | 14,029 | | | $ | 11,132 | |
Related party payables - EchoStar - non-current | | 24,529 | | | 23,980 | |
Total related party payables - EchoStar | | $ | 38,558 | | | $ | 35,112 | |
Payables. We 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.
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 these expenses within Operating expenses - EchoStar for shared corporate services received from EchoStar and its other subsidiaries of $0.9 million and $1.2 million for the three months ended September 30, 2020 and 2019, respectively, and $7.6 million and $6.1 million for the nine months ended September 30, 2020 and 2019, respectively.
Real Estate. We 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 1 to 3 percent, subject to periodic adjustment based on the one-year U.S. LIBOR rate. We report amounts payable under these agreements within Related party payables - EchoStar - non-current.
Construction Management Services for EchoStar XXIV Satellite. 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 operating expenses by the costs of such services of $0.4 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively, and $1.2 million and $1.1 million for the nine months ended September 30, 2020 and 2019, respectively.
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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 1. Organization and Business Activities for further information.
Share Exchange 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 HSSC’s common stock that were then issued to a subsidiary of EchoStar.
NOTE 15.11. RELATED PARTY TRANSACTIONS - DISH NETWORK
Overview
EchoStar Corporation and DISH have operated as separate publicly-traded companies since 2008.2008 (the “Spin-off”). A substantial majority of the voting power of the shares of each of EchoStar Corporation and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family.
In addition, priorJanuary 2017, EchoStar and certain of its subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries pursuant to March 2017, DISH Network owned the Tracking Stock, which, in February 2017, we received all of the aggregate representedshares of preferred tracking stock previously issued by us and one of our subsidiaries (the “Tracking Stock”), representing an 80% economic interest in the residential retail satellite broadband business of our Hughes segment. segment, in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”).The Tracking Stock was retired in March 2017.
In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (“DISH Network”) and our joint venture Dish Mexico, and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of our other businesses (collectively, the “BSS Business”) to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to 1 share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, EchoStar, we EchoStar and certain other of its otherEchoStar’s subsidiaries and DISH Network entered into certain agreements pursuant to which we, EchoStar and certain of its other subsidiaries, on the one hand, obtain certain products, services and rights from DISH Network, on the other hand; DISH Network, on the one hand, obtains certain products, services and rights from us, EchoStar and certain of its other subsidiaries, on the other hand; and such entities indemnify each other against certain liabilities arising from their 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 enter into additional agreements with DISH Network in the future.
The following is a summary of the transactions and the terms of the underlying principal agreements that have had or may have an impact on our consolidated financial condition and results of operations.
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Services and Other Revenue — DISH Network
The following table presents our Services and other revenue - DISH Network from DISH Network::
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Services and other revenue - DISH Network | | $ | 6,115 | | | $ | 9,747 | | | $ | 20,322 | | | $ | 32,021 | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Services and other revenue - DISH Network | | $ | 5,727 | | | $ | 7,587 | |
The following table presents the related trade accounts receivable:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Trade accounts receivable - DISH Network | | $ | 6,553 | | | $ | 8,876 | |
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Trade accounts receivable - DISH Network | | $ | 4,449 | | | $ | 4,706 | |
| | | | |
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Satellite Capacity Leased to DISH Network. We have entered into an agreement and have previously entered into a now terminated agreement to lease satellite capacity pursuant to which we have provided satellite services to DISH Network on certain satellites owned or leased by us. The fees for the services provided under these agreements may depend upon, among other things, the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite, the length of the service arrangements and any third-party costs associated with the satellite capacity. The terms of these 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.
•Telesat Obligation Agreement. 103 Degree Orbital Location/SES-3 — In May 2012,September 2009, we entered into a spectrum developmentan agreement (the “103 Spectrum Development Agreement”with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rightstransponders on the Nimiq 5 satellite at the 10372.7 degree west longitude orbital location (the “103 Spectrum Rights”“Telesat Transponder Agreement”). 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,September 2009, 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 with DISH Network, pursuant to which DISH Network leased certain satellite capacity from us on all 32 of the SES-3 satelliteDBS transponders covered by the Telesat Transponder Agreement (the “DISH 103Nimiq 5 Agreement”).Under the terms of the DISH 103Nimiq 5 Agreement, DISH Network made certain monthly payments to us throughthat commenced in September 2009, when the service term. Effective in March 2018,Nimiq 5 satellite was placed into service. We transferred the Telesat Transponder Agreement to DISH Network exercised its rightin September 2019 as part of the BSS Transaction; however, we retained certain obligations related to terminate the DISH 103 AgreementNetwork’s performance under that agreement and we exercised our right to terminate the Ciel 103 Agreement.entered into an agreement with DISH Network whereby DISH Network compensates us for retaining such obligations.
TerreStar Agreement. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and EchoStar’s completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment (the “TerreStar Agreements”). In December 2017, we and DISH Network amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DISH Network generally has the right to continue to receive warranty services from us for our products on a month-to-month basis unless terminated by DISH Network upon at least 21 days’ written notice to us. DISH Network generally has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis unless operations and maintenancethese 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). As a result, we and DISH Network amended the TerreStar Agreements to suspend our provision of warranty services to DISH Network from April 2020 through December 2020. Following the expiration of this suspension, we will continue to providehave recommenced providing warranty services to DISH Network.
Hughes Broadband Distribution Agreement. Effective October 2012, we and DISH Network entered into a distribution agreement (the “Distribution Agreement”) pursuant to which DISH Network has the right, but not the obligation, to market, sell and distribute our Gen 4 HughesNet service. DISH Network pays us a monthly per subscriber wholesale service fee for our Gen 4 HughesNet service based upon a subscriber’s service level and
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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 ourthe Gen 4 HughesNet service. The Distribution Agreement had an initial term of five years with automatic renewal for
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successive one yearone-year terms unless terminated by either party with a written notice at least 180 days’ before the expiration of the then-current term. In February 2014, we and DISH Network entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, we and DISH Network will continue to provide our Gen 4 HughesNet service to the then-current DISH Network subscribers pursuant to the terms and conditions of the Distribution Agreement.
DBSD North America Agreement. In March 2012, DISH Network completed its acquisition of all of the equity of 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-yearfive-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. 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.
Operating Expenses — DISH Network
The following table presents our operating expenses related to DISH Network:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Operating expenses - DISH Network | | $ | 1,172 | | | $ | 701 | | | $ | 3,532 | | | $ | 2,467 | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Operating expenses - DISH Network | | $ | 1,099 | | | $ | 1,137 | |
The following table presents the related trade accounts payable:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Trade accounts payable - DISH Network | | $ | 818 | | | $ | 502 | |
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Trade accounts payable - DISH Network | | $ | 417 | | | $ | 477 | |
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Amended and Restated Professional Services 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 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,
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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 (as amended to date, 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 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 AmendedProfessional Services Agreement (the “Amended and Restated Professional Services AgreementAgreement”) 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 inNote 14.10. Related Party Transactions - EchoStar. EchoStar. The term of the Amended and Restated Professional Services Agreement is through January 20211, 2022 and renews automatically for successive one-yearone-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. Effective March 2017, we entered 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 agreement for a five-year period ending in August 2022. We and DISH Network amended this agreement to, among other things, terminate this agreement 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 providesprovided us with collocation space in El Paso, Texas. This agreement was for an initial period ending in August 2015, and providesprovided us with renewal options for four2 consecutive years.three-year terms. 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 us in Monee, Illinois and Spokane, Washington through August 2022. Generally, we may renew our collocation and antenna space agreements for three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. We may terminate certain of these agreements with 180 days’ prior written notice. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provided us with certain additional collocation space in Cheyenne, Wyoming for a period that ended in September 2020. The fees for the services provided under these agreements depend on the number of racks located at the location.
Also in connection with the BSS Transaction, in September 2019, we entered into an agreement pursuant to which DISH Network will provideprovides us with antenna space and power in Cheyenne, Wyoming for a period of five years commencing no later than Octoberin August 2020, with 4 three-year renewal terms, with prior written notice of renewal required no more than 120 days but no less than 90 days prior to the end of the then-current term. In March 2021, we entered into additional agreements pursuant to which DISH Network provides us with a gateway, including antenna space in Cheyenne, Wyoming and Gilbert, Arizona. Both agreements are for a period of five years with 4 three-year
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renewal terms, with prior written notice of renewal required no more than 120 days but no less than 90 days prior to the end of the then-current term.
Hughes Broadband Master Services Agreement. In conjunction with the launch of our EchoStar XIX satellite, in March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which DISH Network, among other things: (i) has the right, but not the obligation, to market, promote
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and solicit orders and upgrades for our Gen 5 HughesNet service and related equipment and other telecommunication services and (ii) installs Gen 5 HughesNet service equipment with respect to activations generated by DISH Network. Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation services. The Hughes Broadband MSA has an initial term of five years through 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 Gen 5 HughesNet service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $5.2$1.9 million and $3.7$4.6 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $14.2 million and $13.2 million for the nine months ended September 30, 2020 and 2019, respectively.
2019 TT&C Agreement. In September 2019, in connection with the 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 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 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 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.
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Other Agreements
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
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Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred the BSS Business to BSS Corp.; (ii) weEchoStar 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.
BSS Transaction Intellectual Property and Technology License Agreement.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.
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 subsidiariessubsidiaries’ 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 of 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 AgreementAgreement. . 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
HUGHES SATELLITE SYSTEMS CORPORATION
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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.Agreement. In JanuaryFebruary 2017 EchoStar consummated the Share Exchange, following which 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
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businesses and certain other assets. Following consummation of the Share Exchange, EchoStar no longer operatesoperate 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 and certain of its and our subsidiaries 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.
Share Exchange Intellectual Property and Technology License Agreement.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 the continued use of all intellectual property and technology that is used in our, EchoStar and one of its other subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.
Share Exchange Tax Matters Agreement.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 above which continues in full force and effect.
NOTE 12. RELATED PARTY TRANSACTIONS - OTHER
Hughes Systique Corporation
We contract with Hughes Systique Corporation (“Hughes Systique”) for software development services. In addition to our approximately 43% ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications, Inc. and a member of our board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, own in the aggregate approximately 25%, on an undiluted basis, of Hughes Systique’s outstanding shares as of March 31, 2021. 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
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statements in these Consolidated Financial Statements.
TerreStar Solutions
DISH Network owns more than 15% of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuant to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $0.4 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, we had $1.5 million and $0.4 million trade accounts receivable from TSI.
NOTE 13. 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.
Certain Arrangements with DISH Network
In connection with EchoStar’s spin-off from DISH in 2008, 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 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. In connection with the Share Exchange and 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 concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable 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
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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 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: (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 other proceedings; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, 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.
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 Corporation’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 chief financial officer, David J. Rayner; EchoStar ; HSSC; 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 our controlling stockholder, breached fiduciary duties to EchoStar’s minority stockholders by structuring the BSS Transaction with inadequate consideration and improperly influencing our and EchoStar’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. The Court certified plaintiff’s class on January 11, 2021. We intend to vigorously defend this case. We cannot predict its outcome with any degree of 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 2002, HCIPL’s license was amended pursuant to a new government policy that was first established in 1999. The new policy eliminated the fixed license fees and instead required each telecommunications service provider to pay license fees based on its adjusted gross revenue (“AGR”). In March 2005, the Indian Department of Telecommunications (“DOT”) notified HCIPL that, based on its review of HCIPL’s audited accounts and AGR statements, HCIPL must pay additional license fees and penalties and interest on such fees and penalties. HCIPL responded that the DOT had improperly calculated its AGR by including revenue from licensed and unlicensed activities. The DOT rejected this explanation and in 2006, HCIPL filed a petition with an administrative tribunal (the “Tribunal”), challenging the DOT’s calculation of its AGR. The DOT also issued license fee assessments to other telecommunications service providers and a number of similar petitions were filed by several
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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other such providers with the Tribunal. These petitions were amended, consolidated, remanded and re-appealed several times. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the Tribunal’s ruling. On October 24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “October 2019 Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties, but without indicating the amount HCIPL is required to pay the DOT, and ordering payment by January 23, 2020. On November 23, 2019, HCIPL and other telecommunication service providers filed a petition asking the Supreme Court to reconsider the October 2019 Order. The petition was denied on January 20, 2020. On January 22, 2020, HCIPL and other telecommunication service providers filed an application requesting that the Supreme Court modify the October 2019 Order to permit the DOT to calculate the final amount due and extend HCIPL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court directed HCIPL and the other telecommunication service providers to explain why the Supreme Court should not initiate contempt proceedings for failure to pay the amounts due. During a hearing on March 18, 2020, the Supreme Court ordered that all amounts that were due before the October 2019 Order 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. On June 11, 2020, the Supreme Court ordered HCIPL and the other telecommunication service providers to submit affidavits addressing the proposal made by the DOT to extend the time frame for payment of the amounts owed and for HCIPL and the other telecommunication providers to provide security for such payments. On September 1, 2020, the Supreme Court issued a judgment permitting a 10-year payment schedule. Under this payment schedule, HCIPL is required to make an annual payment every March 31, through 2031. Following the Supreme Court of India’s October 2019 judgment, HCIPL made payments during the first quarter of 2020, and an additional payment on March 31, 2021.
The following table presents the components of the accrual:
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Additional license fees | | $ | 3,867 | | | $ | 3,890 | |
Penalties | | 3,969 | | | 3,992 | |
Interest and interest on penalties | | 77,774 | | | 76,871 | |
Less: Payments | | (8,574) | | | (2,975) | |
Total accrual | | $ | 77,036 | | | $ | 81,778 | |
Any eventual payments made with respect to the ultimate outcome of this matter may be different from our accrual 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.
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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.
NOTE 16. RELATED PARTY TRANSACTIONS - OTHER14.SEGMENT REPORTING
Business segments are 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 operate in 2 business segments, Hughes and ESS, as described in Note 1. Organization and Business Activities.
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”).
Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
Hughes Systique Corporation
We contract with Hughes Systique Corporation (“Hughes Systique”)The following table presents revenue, EBITDA and capital expenditures for software development services. In addition to our approximately 43% ownership in Hughes Systique, Mr. Pradman Kaul, the Presidenteach 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%, on an undiluted basis, of Hughes Systique’s outstanding shares as of September 30, 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 these Condensed Consolidated Financial Statements.business segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the three months ended March 31, 2021 | | | | | | | | |
External revenue | | $ | 475,859 | | | $ | 4,001 | | | $ | 5,370 | | | $ | 485,230 | |
Intersegment revenue | | 0 | | | 88 | | | (88) | | | — | |
Total revenue | | $ | 475,859 | | | $ | 4,089 | | | $ | 5,282 | | | $ | 485,230 | |
| | | | | | | | |
EBITDA | | $ | 198,578 | | | $ | 1,919 | | | $ | (9,091) | | | $ | 191,406 | |
Capital expenditures | | $ | 82,196 | | | $ | 0 | | | $ | 0 | | | $ | 82,196 | |
| | | | | | | | |
For the three months ended March 31, 2020 | | | | | | | | |
External revenue | | $ | 458,482 | | | $ | 4,367 | | | $ | 4,698 | | | $ | 467,547 | |
Intersegment revenue | | 0 | | | 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 | | | $ | 0 | | | $ | 0 | | | $ | 91,517 | |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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TerreStar Solutions, Inc.
DISH Network owns more than 15%
The following table reconciles Net income (loss) in the Consolidated Statements of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuantOperations to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $0.7 million and $2.0 million for the three months ended September 30, 2020 and 2019, respectively, and $3.8 million and $10.2 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and December 31, 2019, we had trade accounts receivable from TSI of $0.0 million and $2.7 million, respectively.EBITDA:
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Net income (loss) | | $ | 17,630 | | | $ | (17,913) | |
Interest income, net | | (2,394) | | | (8,892) | |
Interest expense, net of amounts capitalized | | 41,922 | | | 42,192 | |
Income tax benefit (provision), net | | 10,637 | | | 5,231 | |
Depreciation and amortization | | 122,664 | | | 125,965 | |
Net loss (income) attributable to non-controlling interests | | 947 | | | 3,442 | |
EBITDA | | $ | 191,406 | | | $ | 150,025 | |
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 and as an executive advisor to the Chief Executive Officer of Global IP from September 2017 until April 2019 and from September 2017 until December 2019, respectively. In August 2018, we and Global IP amended the agreement to: (i) change certain of the equipment and services to be provided to Global IP, (ii) modify certain payment terms, (iii) provide Global IP an option to use one of our test lab facilities and (iv) effectuate the assignment of the agreement from Global IP to one of its wholly-owned subsidiaries. In February 2019, we terminated this agreement as a result of Global IP’s defaults resulting from its failure to make payments to us as required under the terms of this agreement. We have reserved our rights and remedies against Global IP under this agreement. We have not recognized any revenue since the termination of this agreement. As of September 30, 2020, we were owed $7.5 million from Global IP.
Maxar Technologies Inc.
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 and certain other services of the EchoStar IX satellite, the EchoStar XVII satellite, the EchoStar XIX satellite and the EchoStar XXI satellite and our former EchoStar XI satellite, 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 $0.9 million and $12.1 million for the three months ended September 30, 2020 and 2019, respectively, and $5.3 million and $78.9 million for the nine months ended September 30, 2020 and 2019, respectively. At both September 30, 2020 and December 31, 2019, we had 0 trade accounts payable to Maxar Tech.
NOTE 17.15. SUPPLEMENTAL FINANCIAL INFORMATION
ResearchOther Current Assets, Net and DevelopmentOther Non-current Assets, Net
The following table presents the researchcomponents of Other current assets, net, and development costs incurred in connection with customers’ orders:Other non-current assets, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Cost of sales - equipment (exclusive of depreciation and amortization) | | $ | 4,158 | | | $ | 6,564 | | | $ | 14,762 | | | $ | 18,275 | |
Research and development expenses | | $ | 7,676 | | | $ | 6,136 | | | $ | 21,378 | | | $ | 19,411 | |
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Other current assets, net: | | | | |
Trade accounts receivable - DISH Network | | $ | 4,449 | | | $ | 4,706 | |
Inventory | | 95,439 | | | 97,831 | |
Prepaids and deposits | | 43,812 | | | 42,243 | |
Related party receivables - EchoStar | | 114,225 | | | 116,220 | |
Other, net | | 28,764 | | | 30,815 | |
Total other current assets | | $ | 286,689 | | | $ | 291,815 | |
| | | | |
Other non-current assets, net: | | | | |
Restricted cash | | $ | 835 | | | $ | 807 | |
Deferred tax assets, net | | 1,520 | | | 1,679 | |
Capitalized software, net | | 118,953 | | | 116,661 | |
Contract acquisition costs, net | | 94,593 | | | 99,837 | |
Contract fulfillment costs, net | | 1,916 | | | 2,580 | |
Related party receivables - EchoStar | | 54,970 | | | 57,136 | |
Other, net | | 29,629 | | | 28,977 | |
Total other non-current assets, net | | $ | 302,416 | | | $ | 307,677 | |
HUGHES SATELLITE SYSTEMS CORPORATION
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(Unaudited)
Cash and Cash Equivalents and Restricted Cash
The following table reconciles Cash and cash equivalents and restricted cash, as presented in the Condensed Consolidated Balance Sheets, to the total of the same as presented in the Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 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 | | $ | 443,727 | | | $ | 1,076,271 | |
Restricted cash | | 795 | | | 973 | |
Total cash and cash equivalents, included restricted amounts, end of period | | $ | 444,522 | | | $ | 1,077,244 | |
Other Current Assets, Net and Other Non-Current Assets, Net
The following table presents the components of Other current assets, net, and Other non-current assets, net:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Other current assets, net: | | | | |
Trade accounts receivable - DISH Network | | $ | 6,553 | | | $ | 8,876 | |
Inventory | | 93,597 | | | 79,474 | |
Prepaids and deposits | | 43,758 | | | 42,324 | |
Contract acquisition costs, net | | 12,578 | | | 16,869 | |
Related party receivables - EchoStar | | 109,543 | | | 131,892 | |
Other, net | | 27,350 | | | 22,217 | |
Total other current assets, net | | $ | 293,379 | | | $ | 301,652 | |
| | | | |
Other non-current assets, net: | | | | |
Restricted cash | | $ | 795 | | | $ | 887 | |
Deferred tax assets, net | | 9,449 | | | 7,215 | |
Capitalized software, net | | 111,912 | | | 101,786 | |
Contract acquisition costs, net | | 91,190 | | | 96,723 | |
Contract fulfillment costs, net | | 2,625 | | | 3,010 | |
Related party receivables - EchoStar | | 54,865 | | | 19,759 | |
Other, net | | 25,797 | | | 22,556 | |
Total other non-current assets, net | | $ | 296,633 | | | $ | 251,936 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The 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:
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, 2020 |
| | Other current assets, net | | Other non-current assets, net |
Balance at beginning of period | | $ | 0 | | | $ | 0 | |
Credit losses (1) | | 1,595 | | | 13,378 | |
| | | | |
Foreign currency translation | | 152 | | | (606) | |
Balance at end of period | | $ | 1,747 | | | $ | 12,772 | |
(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.
Accrued Expenses and Other Current Liabilities and Other Non-Current Liabilities
The following table presents the components of Accrued expenses and other current liabilities and Other non-current liabilities:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Accrued expenses and other current liabilities: | | | | |
Trade accounts payable - DISH Network | | $ | 818 | | | $ | 502 | |
Accrued interest | | 36,813 | | | 32,184 | |
Accrued compensation | | 47,999 | | | 42,846 | |
Accrued taxes | | 11,652 | | | 18,493 | |
Operating lease obligation | | 14,466 | | | 14,112 | |
Related party payables - EchoStar | | 14,029 | | | 11,132 | |
Other | | 142,028 | | | 139,148 | |
Total accrued expenses and other current liabilities | | $ | 267,805 | | | $ | 258,417 | |
| | | | |
Other non-current liabilities: | | | | |
Related party payables - EchoStar | | $ | 24,529 | | | $ | 23,980 | |
Other | | 66,175 | | | 66,500 | |
Total other non-current liabilities | | $ | 90,704 | | | $ | 90,480 | |
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Accrued expenses and other current liabilities: | | | | |
Related party payables - EchoStar | | $ | 51,396 | | | $ | 51,421 | |
Trade accounts payable - DISH Network | | 417 | | | 477 | |
Accrued interest | | 34,514 | | | 42,388 | |
Accrued compensation | | 44,489 | | | 52,231 | |
Accrued taxes | | 11,937 | | | 11,780 | |
Operating lease obligation | | 14,986 | | | 14,670 | |
Other | | 170,577 | | | 152,620 | |
Total accrued expenses and other current liabilities | | $ | 328,316 | | | $ | 325,587 | |
| | | | |
Other non-current liabilities: | | | | |
Related party payables - EchoStar | | $ | 24,533 | | | $ | 25,114 | |
Other | | 62,109 | | | 62,843 | |
Total other non-current liabilities | | $ | 86,642 | | | $ | 87,957 | |
Inventory
The following table presents the components of inventory:
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Raw materials | | $ | 6,357 | | | $ | 4,240 | |
Work-in-process | | 9,197 | | | 6,979 | |
Finished goods | | 78,043 | | | 68,255 | |
Total inventory | | $ | 93,597 | | | $ | 79,474 | |
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
Raw materials | | $ | 5,308 | | | $ | 4,564 | |
Work-in-process | | 7,054 | | | 8,280 | |
Finished goods | | 83,077 | | | 84,987 | |
Total inventory | | $ | 95,439 | | | $ | 97,831 | |
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 supplemental and non-cash investing and financing activities:
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2020 | | 2019 |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 128,399 | | | $ | 176,919 | |
Cash paid for income taxes | | $ | 3,550 | | | $ | 1,919 | |
| | | | |
Non-cash investing and financing activities: | | | | |
Increase (decrease) in capital expenditures included in accounts payable, net | | $ | (1,418) | | | $ | (1,883) | |
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2021 | | 2020 |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 45,329 | | | $ | 49,563 | |
Cash paid for income taxes | | $ | 276 | | | $ | 716 | |
| | | | |
Non-cash investing and financing activities: | | | | |
Increase (decrease) in capital expenditures included in accounts payable, net | | $ | (973) | | | $ | (5,359) | |
NOTE 18. 16.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”).
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.
In lieu of separate financial statements of the Guarantor Subsidiaries, we have prepared the accompanying condensed consolidating financial information in 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 these Condensed Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed
Consolidating Balance Sheet as of September 30,March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,313,882 | | | $ | 36,207 | | | $ | 53,837 | | | $ | 0 | | | $ | 1,403,926 | |
Marketable investment securities | | 515,306 | | | 0 | | | 0 | | | 0 | | | 515,306 | |
Trade accounts receivable and contract assets, net | | 0 | | | 130,895 | | | 56,377 | | | 0 | | | 187,272 | |
Other current assets, net | | 148,125 | | | 922,870 | | | 93,812 | | | (878,118) | | | 286,689 | |
Total current assets | | 1,977,313 | | | 1,089,972 | | | 204,026 | | | (878,118) | | | 2,393,193 | |
Non-current assets: | | | | | | | | | | |
Property and equipment, net | | 0 | | | 1,277,785 | | | 353,436 | | | 0 | | | 1,631,221 | |
Operating lease right-of-use assets | | 0 | | | 104,304 | | | 27,148 | | | 0 | | | 131,452 | |
Goodwill | | 0 | | | 504,173 | | | 6,772 | | | 0 | | | 510,945 | |
Regulatory authorizations, net | | 0 | | | 400,000 | | | 9,960 | | | 0 | | | 409,960 | |
Other intangible assets, net | | 0 | | | 16,246 | | | 0 | | | 0 | | | 16,246 | |
Other investments, net | | 0 | | | 15,455 | | | 86,708 | | | 0 | | | 102,163 | |
Investment in subsidiaries | | 2,965,049 | | | 322,434 | | | 0 | | | (3,287,483) | | | 0 | |
Other non-current assets, net | | 700 | | | 304,863 | | | 91,659 | | | (94,806) | | | 302,416 | |
Total non-current assets | | 2,965,749 | | | 2,945,260 | | | 575,683 | | | (3,382,289) | | | 3,104,403 | |
Total assets | | $ | 4,943,062 | | | $ | 4,035,232 | | | $ | 779,709 | | | $ | (4,260,407) | | | $ | 5,497,596 | |
Liabilities and Shareholder's Equity | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Trade accounts payable | | $ | 0 | | | $ | 89,812 | | | $ | 14,871 | | | $ | 0 | | | $ | 104,683 | |
Current portion of long-term debt, net | | 808,758 | | | 0 | | | 0 | | | 0 | | | 808,758 | |
Contract liabilities | | 0 | | | 107,467 | | | 5,040 | | | 0 | | | 112,507 | |
Accrued expenses and other current liabilities | | 635,846 | | | 341,850 | | | 228,738 | | | (878,118) | | | 328,316 | |
Total current liabilities | | 1,444,604 | | | 539,129 | | | 248,649 | | | (878,118) | | | 1,354,264 | |
Non-current liabilities: | | | | | | | | | | |
Long-term debt, net | | 1,495,436 | | | 0 | | | 0 | | | 0 | | | 1,495,436 | |
Deferred tax liabilities, net | | 345 | | | 373,485 | | | 2,536 | | | 0 | | | 376,366 | |
Operating lease liabilities | | 0 | | | 96,042 | | | 22,410 | | | 0 | | | 118,452 | |
Other non-current liabilities | | 0 | | | 62,089 | | | 119,359 | | | (94,806) | | | 86,642 | |
Total non-current liabilities | | 1,495,781 | | | 531,616 | | | 144,305 | | | (94,806) | | | 2,076,896 | |
Total liabilities | | 2,940,385 | | | 1,070,745 | | | 392,954 | | | (972,924) | | | 3,431,160 | |
Shareholder's equity: | | | | | | | | | | |
Total Hughes Satellite Systems Corporation shareholder's equity | | 2,002,677 | | | 2,964,487 | | | 322,996 | | | (3,287,483) | | | 2,002,677 | |
Non-controlling interests | | 0 | | | 0 | | | 63,759 | | | 0 | | | 63,759 | |
Total shareholder's equity | | 2,002,677 | | | 2,964,487 | | | 386,755 | | | (3,287,483) | | | 2,066,436 | |
Total liabilities and shareholder's equity | | $ | 4,943,062 | | | $ | 4,035,232 | | | $ | 779,709 | | | $ | (4,260,407) | | | $ | 5,497,596 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Consolidating Balance Sheet as of December 31, 2020
| | | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Assets | Assets | | | | | | | | | | | Assets | | | | | | | | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 363,227 | | | $ | 40,947 | | | $ | 39,553 | | | $ | 0 | | | $ | 443,727 | | Cash and cash equivalents | | $ | 649,851 | | | $ | 46,055 | | | $ | 44,584 | | | $ | 0 | | | $ | 740,490 | |
Marketable investment securities | Marketable investment securities | | 1,418,436 | | | 0 | | | 0 | | | 0 | | | 1,418,436 | | Marketable investment securities | | 1,203,296 | | | 0 | | | 0 | | | 0 | | | 1,203,296 | |
Trade accounts receivable and contract assets, net | Trade accounts receivable and contract assets, net | | 0 | | | 135,355 | | | 55,547 | | | 0 | | | 190,902 | | Trade accounts receivable and contract assets, net | | 0 | | | 129,572 | | | 54,416 | | | 0 | | | 183,988 | |
| Other current assets | | 93,564 | | | 823,948 | | | 97,272 | | | (721,405) | | | 293,379 | | |
Other current assets, net | | Other current assets, net | | 148,158 | | | 830,912 | | | 171,676 | | | (858,931) | | | 291,815 | |
Total current assets | Total current assets | | 1,875,227 | | | 1,000,250 | | | 192,372 | | | (721,405) | | | 2,346,444 | | Total current assets | | 2,001,305 | | | 1,006,539 | | | 270,676 | | | (858,931) | | | 2,419,589 | |
Non-current assets: | Non-current assets: | | | | | | | | | | | Non-current assets: | | | | | | | | | | |
Property and equipment, net | Property and equipment, net | | 0 | | | 1,344,094 | | | 344,230 | | | 0 | | | 1,688,324 | | Property and equipment, net | | 0 | | | 1,312,673 | | | 378,850 | | | 0 | | | 1,691,523 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 0 | | | 100,742 | | | 28,279 | | | 0 | | | 129,021 | | Operating lease right-of-use assets | | 0 | | | 99,578 | | | 28,688 | | | 0 | | | 128,266 | |
Goodwill | Goodwill | | 0 | | | 504,173 | | | 4,487 | | | 0 | | | 508,660 | | Goodwill | | 0 | | | 504,173 | | | 7,424 | | | 0 | | | 511,597 | |
Regulatory authorizations, net | Regulatory authorizations, net | | 0 | | | 400,000 | | | 10,558 | | | 0 | | | 410,558 | | Regulatory authorizations, net | | 0 | | | 400,000 | | | 10,451 | | | 0 | | | 410,451 | |
Other intangible assets, net | Other intangible assets, net | | 0 | | | 20,433 | | | 0 | | | 0 | | | 20,433 | | Other intangible assets, net | | 0 | | | 18,340 | | | 0 | | | 0 | | | 18,340 | |
Other investments, net | Other investments, net | | 0 | | | 105,161 | | | 0 | | | 0 | | | 105,161 | | Other investments, net | | 0 | | | 103,924 | | | 0 | | | 0 | | | 103,924 | |
Investment in subsidiaries | Investment in subsidiaries | | 2,884,940 | | | 216,617 | | | 0 | | | (3,101,557) | | | 0 | | Investment in subsidiaries | | 2,942,178 | | | 251,394 | | | 0 | | | (3,193,572) | | | 0 | |
| Other non-current assets, net | Other non-current assets, net | | 35,403 | | | 288,962 | | | 82,081 | | | (109,813) | | | 296,633 | | Other non-current assets, net | | 700 | | | 307,661 | | | 94,031 | | | (94,715) | | | 307,677 | |
Total non-current assets | Total non-current assets | | 2,920,343 | | | 2,980,182 | | | 469,635 | | | (3,211,370) | | | 3,158,790 | | Total non-current assets | | 2,942,878 | | | 2,997,743 | | | 519,444 | | | (3,288,287) | | | 3,171,778 | |
Total assets | Total assets | | $ | 4,795,570 | | | $ | 3,980,432 | | | $ | 662,007 | | | $ | (3,932,775) | | | $ | 5,505,234 | | Total assets | | $ | 4,944,183 | | | $ | 4,004,282 | | | $ | 790,120 | | | $ | (4,147,218) | | | $ | 5,591,367 | |
Liabilities and Shareholder's Equity | Liabilities and Shareholder's Equity | | | | | | | | | | | Liabilities and Shareholder's Equity | | | | | | | | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Trade accounts payable | Trade accounts payable | | $ | 0 | | | $ | 89,227 | | | $ | 19,691 | | | $ | 0 | | | $ | 108,918 | | Trade accounts payable | | $ | 0 | | | $ | 98,914 | | | $ | 19,654 | | | $ | 0 | | | $ | 118,568 | |
Current portion of long-term debt, net | Current portion of long-term debt, net | | 897,303 | | | 0 | | | 0 | | | 0 | | | 897,303 | | Current portion of long-term debt, net | | 898,237 | | | 0 | | | 0 | | | 0 | | | 898,237 | |
Contract liabilities | Contract liabilities | | 0 | | | 85,029 | | | 4,593 | | | 0 | | | 89,622 | | Contract liabilities | | 0 | | | 99,838 | | | 4,731 | | | 0 | | | 104,569 | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | | 419,904 | | | 331,061 | | | 238,245 | | | (721,405) | | | 267,805 | | Accrued expenses and other current liabilities | | 529,661 | | | 352,121 | | | 302,736 | | | (858,931) | | | 325,587 | |
Total current liabilities | Total current liabilities | | 1,317,207 | | | 505,317 | | | 262,529 | | | (721,405) | | | 1,363,648 | | Total current liabilities | | 1,427,898 | | | 550,873 | | | 327,121 | | | (858,931) | | | 1,446,961 | |
Non-current liabilities: | Non-current liabilities: | | | | | | | | | | | Non-current liabilities: | | | | | | | | | | |
Long-term debt, net | Long-term debt, net | | 1,495,078 | | | 0 | | | 0 | | | 0 | | | 1,495,078 | | Long-term debt, net | | 1,495,256 | | | 0 | | | 0 | | | 0 | | | 1,495,256 | |
Deferred tax liabilities, net | Deferred tax liabilities, net | | 0 | | | 433,366 | | | 0 | | | (34,787) | | | 398,579 | | Deferred tax liabilities, net | | 9,569 | | | 357,835 | | | 2,536 | | | 0 | | | 369,940 | |
Operating lease liabilities | Operating lease liabilities | | 0 | | | 92,101 | | | 23,265 | | | 0 | | | 115,366 | | Operating lease liabilities | | 0 | | | 91,241 | | | 23,636 | | | 0 | | | 114,877 | |
| Other non-current liabilities | Other non-current liabilities | | 0 | | | 65,271 | | | 100,459 | | | (75,026) | | | 90,704 | | Other non-current liabilities | | 0 | | | 62,717 | | | 119,955 | | | (94,715) | | | 87,957 | |
Total non-current liabilities | Total non-current liabilities | | 1,495,078 | | | 590,738 | | | 123,724 | | | (109,813) | | | 2,099,727 | | Total non-current liabilities | | 1,504,825 | | | 511,793 | | | 146,127 | | | (94,715) | | | 2,068,030 | |
Total liabilities | Total liabilities | | 2,812,285 | | | 1,096,055 | | | 386,253 | | | (831,218) | | | 3,463,375 | | Total liabilities | | 2,932,723 | | | 1,062,666 | | | 473,248 | | | (953,646) | | | 3,514,991 | |
Shareholder's equity: | Shareholder's equity: | | | | | | | | | | | Shareholder's equity: | | | | | | | | | | |
Total Hughes Satellite Systems Corporation shareholder's equity | Total Hughes Satellite Systems Corporation shareholder's equity | | 1,983,285 | | | 2,884,377 | | | 217,180 | | | (3,101,557) | | | 1,983,285 | | Total Hughes Satellite Systems Corporation shareholder's equity | | 2,011,460 | | | 2,941,616 | | | 251,956 | | | (3,193,572) | | | 2,011,460 | |
Non-controlling interests | Non-controlling interests | | 0 | | | 0 | | | 58,574 | | | 0 | | | 58,574 | | Non-controlling interests | | 0 | | | 0 | | | 64,916 | | | 0 | | | 64,916 | |
Total shareholder's equity | Total shareholder's equity | | 1,983,285 | | | 2,884,377 | | | 275,754 | | | (3,101,557) | | | 2,041,859 | | Total shareholder's equity | | 2,011,460 | | | 2,941,616 | | | 316,872 | | | (3,193,572) | | | 2,076,376 | |
Total liabilities and shareholder's equity | Total liabilities and shareholder's equity | | $ | 4,795,570 | | | $ | 3,980,432 | | | $ | 662,007 | | | $ | (3,932,775) | | | $ | 5,505,234 | | Total liabilities and shareholder's equity | | $ | 4,944,183 | | | $ | 4,004,282 | | | $ | 790,120 | | | $ | (4,147,218) | | | $ | 5,591,367 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed
Consolidating Balance Sheet asStatement of DecemberOperations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 20192021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,057,903 | | | $ | 32,338 | | | $ | 49,194 | | | $ | 0 | | | $ | 1,139,435 | |
Marketable investment securities | | 652,594 | | | 241 | | | 0 | | | 0 | | | 652,835 | |
Trade accounts receivable and contract assets, net | | 0 | | | 129,722 | | | 66,798 | | | 0 | | | 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 | | 0 | | | 1,459,151 | | | 398,430 | | | 0 | | | 1,857,581 | |
Operating lease right-of-use assets | | 0 | | | 89,106 | | | 24,293 | | | 0 | | | 113,399 | |
Goodwill | | 0 | | | 504,173 | | | 2,780 | | | 0 | | | 506,953 | |
Regulatory authorizations, net | | 0 | | | 400,000 | | | 12,363 | | | 0 | | | 412,363 | |
Other intangible assets, net | | 0 | | | 29,321 | | | 0 | | | 0 | | | 29,321 | |
Other investments, net | | 0 | | | 110,040 | | | 0 | | | 0 | | | 110,040 | |
Investment in subsidiaries | | 2,876,572 | | | 282,163 | | | 0 | | | (3,158,735) | | | 0 | |
| | | | | | | | | | |
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 | | $ | 0 | | | $ | 102,744 | | | $ | 18,808 | | | $ | 0 | | | $ | 121,552 | |
| | | | | | | | | | |
Contract liabilities | | 0 | | | 96,485 | | | 4,575 | | | 0 | | | 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, net | | 2,389,168 | | | 0 | | | 0 | | | 0 | | | 2,389,168 | |
Deferred tax liabilities, net | | 0 | | | 390,288 | | | 0 | | | (9,972) | | | 380,316 | |
Operating lease liabilities | | 0 | | | 77,366 | | | 19,513 | | | 0 | | | 96,879 | |
| | | | | | | | | | |
Other non-current liabilities | | 0 | | | 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 | | 0 | | | 0 | | | 75,748 | | | 0 | | | 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 | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | 0 | | | $ | 363,697 | | | $ | 77,703 | | | $ | (8,409) | | | $ | 432,991 | |
Equipment revenue | | 0 | | | 61,037 | | | 8,046 | | | (16,844) | | | 52,239 | |
Total revenue | | 0 | | | 424,734 | | | 85,749 | | | (25,253) | | | 485,230 | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 0 | | | 103,207 | | | 36,229 | | | (8,024) | | | 131,412 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 0 | | | 56,430 | | | 5,369 | | | (16,659) | | | 45,140 | |
Selling, general and administrative expenses | | 0 | | | 83,543 | | | 21,397 | | | (570) | | | 104,370 | |
Research and development expenses | | 0 | | | 7,358 | | | 187 | | | 0 | | | 7,545 | |
Depreciation and amortization | | 0 | | | 94,252 | | | 28,412 | | | 0 | | | 122,664 | |
Impairment of long-lived assets | | 0 | | | 210 | | | 0 | | | 0 | | | 210 | |
Total costs and expenses | | 0 | | | 345,000 | | | 91,594 | | | (25,253) | | | 411,341 | |
Operating income (loss) | | 0 | | | 79,734 | | | (5,845) | | | 0 | | | 73,889 | |
Other income (expense): | | | | | | | | | | |
Interest income | | 1,036 | | | 1,287 | | | 1,281 | | | (1,210) | | | 2,394 | |
Interest expense, net of amounts capitalized | | (40,244) | | | 45 | | | (2,933) | | | 1,210 | | | (41,922) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | 0 | | | 219 | | | (1,980) | | | 0 | | | (1,761) | |
Equity in earnings (losses) of subsidiaries, net | | 50,143 | | | (12,617) | | | 0 | | | (37,526) | | | 0 | |
Foreign currency transaction gains (losses), net | | 0 | | | (3) | | | (3,357) | | | 0 | | | (3,360) | |
Other, net | | (1,582) | | | 744 | | | (135) | | | 0 | | | (973) | |
Total other income (expense), net | | 9,353 | | | (10,325) | | | (7,124) | | | (37,526) | | | (45,622) | |
Income (loss) before income taxes | | 9,353 | | | 69,409 | | | (12,969) | | | (37,526) | | | 28,267 | |
Income tax benefit (provision), net | | 9,224 | | | (19,266) | | | (595) | | | 0 | | | (10,637) | |
Net income (loss) | | 18,577 | | | 50,143 | | | (13,564) | | | (37,526) | | | 17,630 | |
Less: Net loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 947 | | | 0 | | | 947 | |
Net income (loss) attributable to HSSC | | $ | 18,577 | | | $ | 50,143 | | | $ | (12,617) | | | $ | (37,526) | | | $ | 18,577 | |
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | | $ | 18,577 | | | $ | 50,143 | | | $ | (13,564) | | | $ | (37,526) | | | $ | 17,630 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | 0 | | | 0 | | | (33,742) | | | 0 | | | (33,742) | |
Unrealized gains (losses) on available-for-sale securities | | (88) | | | 0 | | | 0 | | | 0 | | | (88) | |
Amounts reclassified to net income (loss): | | | | | | | | | | |
Equity in other comprehensive income (loss) of subsidiaries, net | | (28,132) | | | (28,132) | | | 0 | | | 56,264 | | | 0 | |
Total other comprehensive income (loss), net of tax | | (28,220) | | | (28,132) | | | (33,742) | | | 56,264 | | | (33,830) | |
Comprehensive income (loss) | | (9,643) | | | 22,011 | | | (47,306) | | | 18,738 | | | (16,200) | |
Less: Comprehensive loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 6,557 | | | 0 | | | 6,557 | |
Comprehensive income (loss) attributable to HSSC | | $ | (9,643) | | | $ | 22,011 | | | $ | (40,749) | | | $ | 18,738 | | | $ | (9,643) | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | 0 | | | $ | 354,399 | | | $ | 64,928 | | | $ | (9,089) | | | $ | 410,238 | |
Equipment revenue | | 0 | | | 65,586 | | | 5,410 | | | (13,687) | | | 57,309 | |
Total revenue | | 0 | | | 419,985 | | | 70,338 | | | (22,776) | | | 467,547 | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 0 | | | 110,471 | | | 42,063 | | | (8,649) | | | 143,885 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 0 | | | 55,374 | | | 4,221 | | | (13,687) | | | 45,908 | |
Selling, general and administrative expenses | | 0 | | | 95,818 | | | 20,482 | | | (440) | | | 115,860 | |
Research and development expenses | | 0 | | | 6,109 | | | 145 | | | 0 | | | 6,254 | |
Depreciation and amortization | | 0 | | | 99,359 | | | 26,606 | | | 0 | | | 125,965 | |
Total costs and expenses | | 0 | | | 367,131 | | | 93,517 | | | (22,776) | | | 437,872 | |
Operating income (loss) | | 0 | | | 52,854 | | | (23,179) | | | 0 | | | 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 | | 0 | | | (164) | | | 0 | | | 0 | | | (164) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | 0 | | | (1,087) | | | 0 | | | 0 | | | (1,087) | |
Equity in earnings (losses) of subsidiaries, net | | 10,630 | | | (29,167) | | | 0 | | | 18,537 | | | 0 | |
Foreign currency transaction gains (losses), net | | 0 | | | (2) | | | (7,526) | | | 0 | | | (7,528) | |
Other, net | | 0 | | | (275) | | | (3) | | | 0 | | | (278) | |
Total other income (expense), net | | (21,889) | | | (30,337) | | | (8,668) | | | 18,537 | | | (42,357) | |
Income (loss) before income taxes | | (21,889) | | | 22,517 | | | (31,847) | | | 18,537 | | | (12,682) | |
Income tax benefit (provision), net | | 7,418 | | | (11,804) | | | (845) | | | 0 | | | (5,231) | |
Net income (loss) | | (14,471) | | | 10,713 | | | (32,692) | | | 18,537 | | | (17,913) | |
Less: Net loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 3,442 | | | 0 | | | 3,442 | |
Net income (loss) attributable to HSSC | | $ | (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 | | 0 | | | 0 | | | (82,836) | | | 0 | | | (82,836) | |
Unrealized gains (losses) on available-for-sale securities | | (2,479) | | | 0 | | | 0 | | | 0 | | | (2,479) | |
Other | | 0 | | | 0 | | | (405) | | | 0 | | | (405) | |
Equity in other comprehensive income (loss) of subsidiaries, net | | (66,918) | | | (66,918) | | | 0 | | | 133,836 | | | 0 | |
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 | | 0 | | | 0 | | | 19,765 | | | 0 | | | 19,765 | |
Comprehensive income (loss) attributable to HSSC | | $ | (83,868) | | | $ | (56,205) | | | $ | (96,168) | | | $ | 152,373 | | | $ | (83,868) | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed
Consolidating Statement of Operations and Comprehensive Income (Loss)Cash Flows
For the Three Months Ended September 30, 2020March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | 0 | | | $ | 367,007 | | | $ | 70,686 | | | $ | (8,803) | | | $ | 428,890 | |
Equipment revenue | | 0 | | | 62,643 | | | 4,887 | | | (20,560) | | | 46,970 | |
Total revenue | | 0 | | | 429,650 | | | 75,573 | | | (29,363) | | | 475,860 | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 0 | | | 112,074 | | | 41,988 | | | (8,654) | | | 145,408 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 0 | | | 56,311 | | | 1,323 | | | (20,560) | | | 37,074 | |
Selling, general and administrative expenses | | 0 | | | 90,020 | | | 15,438 | | | (149) | | | 105,309 | |
Research and development expenses | | 0 | | | 7,509 | | | 167 | | | 0 | | | 7,676 | |
Depreciation and amortization | | 0 | | | 97,213 | | | 25,932 | | | 0 | | | 123,145 | |
Total costs and expenses | | 0 | | | 363,127 | | | 84,848 | | | (29,363) | | | 418,612 | |
Operating income (loss) | | 0 | | | 66,523 | | | (9,275) | | | 0 | | | 57,248 | |
Other income (expense): | | | | | | | | | | |
Interest income | | 1,398 | | | 1,025 | | | 1,375 | | | (959) | | | 2,839 | |
Interest expense, net of amounts capitalized | | (40,512) | | | (286) | | | (4,338) | | | 959 | | | (44,177) | |
Gains (losses) on investments, net | | (75) | | | 1 | | | 0 | | | 0 | | | (74) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | 0 | | | (2,422) | | | 0 | | | 0 | | | (2,422) | |
Equity in earnings (losses) of subsidiaries, net | | 43,893 | | | (7,079) | | | 0 | | | (36,814) | | | 0 | |
Foreign currency transaction gains (losses), net | | 0 | | | 5 | | | 3,067 | | | 0 | | | 3,072 | |
Other, net | | 0 | | | (82) | | | 277 | | | 0 | | | 195 | |
Total other income (expense), net | | 4,704 | | | (8,838) | | | 381 | | | (36,814) | | | (40,567) | |
Income (loss) from continuing operations before income taxes | | 4,704 | | | 57,685 | | | (8,894) | | | (36,814) | | | 16,681 | |
Income tax benefit (provision), net | | 8,945 | | | (13,760) | | | (384) | | | 0 | | | (5,199) | |
Net income (loss) | | 13,649 | | | 43,925 | | | (9,278) | | | (36,814) | | | 11,482 | |
Less: Net loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 2,167 | | | 0 | | | 2,167 | |
Net income (loss) attributable to HSSC | | $ | 13,649 | | | $ | 43,925 | | | $ | (7,111) | | | $ | (36,814) | | | $ | 13,649 | |
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | | $ | 13,649 | | | $ | 43,925 | | | $ | (9,278) | | | $ | (36,814) | | | $ | 11,482 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | 0 | | | 0 | | | (10,170) | | | 0 | | | (10,170) | |
Unrealized gains (losses) on available-for-sale securities | | 20 | | | 0 | | | 0 | | | 0 | | | 20 | |
Other | | 0 | | | 0 | | | 500 | | | 0 | | | 500 | |
Equity in other comprehensive income (loss) of subsidiaries, net | | (7,739) | | | (7,739) | | | 0 | | | 15,478 | | | 0 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total other comprehensive income (loss), net of tax | | (7,719) | | | (7,739) | | | (9,670) | | | 15,478 | | | (9,650) | |
Comprehensive income (loss) | | 5,930 | | | 36,186 | | | (18,948) | | | (21,336) | | | 1,832 | |
Less: Comprehensive loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 4,098 | | | 0 | | | 4,098 | |
Comprehensive income (loss) attributable to HSSC | | $ | 5,930 | | | $ | 36,186 | | | $ | (14,850) | | | $ | (21,336) | | | $ | 5,930 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | 18,577 | | | $ | 50,143 | | | $ | (13,564) | | | $ | (37,526) | | | $ | 17,630 | |
Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (61,725) | | | 102,402 | | | 25,616 | | | 37,526 | | | 103,819 | |
Net cash provided by (used for) operating activities | | (43,148) | | | 152,545 | | | 12,052 | | | 0 | | | 121,449 | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Purchases of marketable investment securities | | (310,528) | | | 0 | | | 0 | | | 0 | | | (310,528) | |
Sales and maturities of marketable investment securities | | 1,003,198 | | | 0 | | | 0 | | | 0 | | | 1,003,198 | |
| | | | | | | | | | |
| | | | | | | | | | |
Expenditures for property and equipment | | 0 | | | (52,246) | | | (29,950) | | | 0 | | | (82,196) | |
| | | | | | | | | | |
Expenditures for externally marketed software | | 0 | | | (7,846) | | | 0 | | | 0 | | | (7,846) | |
| | | | | | | | | | |
| | | | | | | | | | |
Distributions (contributions) and advances from (to) subsidiaries, net | | 77,097 | | | (24,100) | | | 0 | | | (52,997) | | | 0 | |
Net cash provided by (used for) investing activities | | 769,767 | | | (84,192) | | | (29,950) | | | (52,997) | | | 602,628 | |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Repurchase of the 2021 Senior Unsecured Notes | | (62,588) | | | 0 | | | 0 | | | 0 | | | (62,588) | |
Payment of finance lease obligations | | 0 | | | 0 | | | (329) | | | 0 | | | (329) | |
Payment of in-orbit incentive obligations | | 0 | | | (1,104) | | | 0 | | | 0 | | | (1,104) | |
Contribution by non-controlling interest holder | | 0 | | | 0 | | | 5,400 | | | 0 | | | 5,400 | |
Other, net | | 0 | | | 0 | | | (292) | | | 0 | | | (292) | |
Contribution (distributions) and advances (to) from parent, net | | 0 | | | (77,097) | | | 24,100 | | | 52,997 | | | 0 | |
Net cash provided by (used for) financing activities | | (62,588) | | | (78,201) | | | 28,879 | | | 52,997 | | | (58,913) | |
| | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | 0 | | | 0 | | | (1,700) | | | 0 | | | (1,700) | |
Net increase (decrease) in cash and cash equivalents | | 664,031 | | | (9,848) | | | 9,281 | | | 0 | | | 663,464 | |
Cash and cash equivalents, including restricted amounts, beginning of period | | 649,851 | | | 46,055 | | | 45,391 | | | 0 | | | 741,297 | |
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,313,882 | | | $ | 36,207 | | | $ | 54,672 | | | $ | 0 | | | $ | 1,404,761 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | 0 | | | $ | 356,682 | | | $ | 59,569 | | | $ | (8,855) | | | $ | 407,396 | |
Equipment revenue | | 0 | | | 76,905 | | | 4,246 | | | (15,426) | | | 65,725 | |
Total revenue | | 0 | | | 433,587 | | | 63,815 | | | (24,281) | | | 473,121 | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 0 | | | 110,388 | | | 40,428 | | | (8,387) | | | 142,429 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 0 | | | 63,437 | | | 3,177 | | | (15,426) | | | 51,188 | |
Selling, general and administrative expenses | | 0 | | | 88,853 | | | 23,602 | | | (468) | | | 111,987 | |
Research and development expenses | | 0 | | | 5,953 | | | 183 | | | 0 | | | 6,136 | |
Depreciation and amortization | | 0 | | | 99,099 | | | 16,849 | | | 0 | | | 115,948 | |
Total costs and expenses | | 0 | | | 367,730 | | | 84,239 | | | (24,281) | | | 427,688 | |
Operating income (loss) | | 0 | | | 65,857 | | | (20,424) | | | 0 | | | 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 | | | 0 | | | 0 | | | 70 | |
Equity in earnings (losses) of unconsolidated affiliates, net | | 0 | | | (894) | | | 0 | | | 0 | | | (894) | |
Equity in earnings (losses) of subsidiaries, net | | 26,054 | | | (44,409) | | | 0 | | | 18,355 | | | 0 | |
Foreign currency transaction gains (losses), net | | 0 | | | (3) | | | (11,635) | | | 0 | | | (11,638) | |
Other, net | | 0 | | | (6) | | | (1,553) | | | 0 | | | (1,559) | |
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), net | | 7,590 | | | (13,375) | | | 609 | | | 0 | | | (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 | | | 0 | | | 0 | | | 14,382 | |
Net income (loss) | | 107 | | | 26,144 | | | (47,296) | | | 18,355 | | | (2,690) | |
Less: Net loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 2,797 | | | 0 | | | 2,797 | |
Net income (loss) attributable to HSSC | | $ | 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 | | 0 | | | 0 | | | (16,247) | | | 0 | | | (16,247) | |
Unrealized gains (losses) on available-for-sale securities | | 15 | | | 0 | | | (145) | | | 0 | | | (130) | |
Other | | 0 | | | 0 | | | 13 | | | 0 | | | 13 | |
Equity in other comprehensive income (loss) of subsidiaries, net | | (16,379) | | | (16,379) | | | 0 | | | 32,758 | | | 0 | |
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 (income) attributable to non-controlling interests | | 0 | | | 0 | | | 2,797 | | | 0 | | | 2,797 | |
Comprehensive income (loss) attributable to HSSC | | $ | (16,257) | | | $ | 9,765 | | | $ | (60,878) | | | $ | 51,113 | | | $ | (16,257) | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | 0 | | | $ | 1,087,252 | | | $ | 197,827 | | | $ | (26,729) | | | $ | 1,258,350 | |
Equipment revenue | | 0 | | | 186,814 | | | 16,563 | | | (56,675) | | | 146,702 | |
Total revenue | | 0 | | | 1,274,066 | | | 214,390 | | | (83,404) | | | 1,405,052 | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 0 | | | 333,195 | | | 121,582 | | | (25,531) | | | 429,246 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 0 | | | 158,800 | | | 13,399 | | | (56,675) | | | 115,524 | |
Selling, general and administrative expenses | | 0 | | | 269,090 | | | 56,508 | | | (1,198) | | | 324,400 | |
Research and development expenses | | 0 | | | 20,924 | | | 454 | | | 0 | | | 21,378 | |
Depreciation and amortization | | 0 | | | 295,236 | | | 77,352 | | | 0 | | | 372,588 | |
Total costs and expenses | | 0 | | | 1,077,245 | | | 269,295 | | | (83,404) | | | 1,263,136 | |
Operating income (loss) | | 0 | | | 196,821 | | | (54,905) | | | 0 | | | 141,916 | |
Other income (expense): | | | | | | | | | | |
Interest income | | 13,603 | | | 2,999 | | | 3,163 | | | (2,830) | | | 16,935 | |
Interest expense, net of amounts capitalized | | (121,477) | | | (1,367) | | | (10,630) | | | 2,830 | | | (130,644) | |
Gains (losses) on investments, net | | (73) | | | (149) | | | 0 | | | 0 | | | (222) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | 0 | | | (4,878) | | | 0 | | | 0 | | | (4,878) | |
Equity in earnings (losses) of subsidiaries, net | | 86,290 | | | (59,399) | | | 0 | | | (26,891) | | | 0 | |
Foreign currency transaction gains (losses), net | | 0 | | | (241) | | | (4,355) | | | 0 | | | (4,596) | |
Other, net | | 0 | | | (632) | | | 162 | | | 0 | | | (470) | |
Total other income (expense), net | | (21,657) | | | (63,667) | | | (11,660) | | | (26,891) | | | (123,875) | |
Income (loss) from continuing operations before income taxes | | (21,657) | | | 133,154 | | | (66,565) | | | (26,891) | | | 18,041 | |
Income tax benefit (provision), net | | 24,640 | | | (46,660) | | | (2,078) | | | 0 | | | (24,098) | |
| | | | | | | | | | |
| | | | | | | | | | |
Net income (loss) | | 2,983 | | | 86,494 | | | (68,643) | | | (26,891) | | | (6,057) | |
Less: Net loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 9,040 | | | 0 | | | 9,040 | |
Net income (loss) attributable to HSSC | | $ | 2,983 | | | $ | 86,494 | | | $ | (59,603) | | | $ | (26,891) | | | $ | 2,983 | |
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | | $ | 2,983 | | | $ | 86,494 | | | $ | (68,643) | | | $ | (26,891) | | | $ | (6,057) | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | 0 | | | 0 | | | (103,351) | | | 0 | | | (103,351) | |
Unrealized gains (losses) on available-for-sale securities | | (189) | | | 0 | | | 0 | | | 0 | | | (189) | |
Other | | 0 | | | 0 | | | 380 | | | 0 | | | 380 | |
Equity in other comprehensive income (loss) of subsidiaries, net | | (82,344) | | | (82,344) | | | 0 | | | 164,688 | | | 0 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total other comprehensive income (loss), net of tax | | (82,533) | | | (82,344) | | | (102,971) | | | 164,688 | | | (103,160) | |
Comprehensive income (loss) | | (79,550) | | | 4,150 | | | (171,614) | | | 137,797 | | | (109,217) | |
Less: Comprehensive loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 29,667 | | | 0 | | | 29,667 | |
Comprehensive income (loss) attributable to HSSC | | $ | (79,550) | | | $ | 4,150 | | | $ | (141,947) | | | $ | 137,797 | | | $ | (79,550) | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Revenue: | | | | | | | | | | |
Services and other revenue | | $ | 0 | | | $ | 1,062,574 | | | $ | 178,525 | | | $ | (26,623) | | | $ | 1,214,476 | |
Equipment revenue | | 0 | | | 190,394 | | | 21,961 | | | (37,271) | | | 175,084 | |
Total revenue | | 0 | | | 1,252,968 | | | 200,486 | | | (63,894) | | | 1,389,560 | |
Costs and expenses: | | | | | | | | | | |
Cost of sales - services and other (exclusive of depreciation and amortization) | | 0 | | | 330,634 | | | 120,061 | | | (24,799) | | | 425,896 | |
Cost of sales - equipment (exclusive of depreciation and amortization) | | 0 | | | 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 | | 0 | | | 18,893 | | | 518 | | | 0 | | | 19,411 | |
Depreciation and amortization | | 0 | | | 293,519 | | | 48,567 | | | 0 | | | 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) | | | 0 | | | 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) | | | 0 | | | 0 | | | (290) | |
Equity in earnings (losses) of unconsolidated affiliates, net | | 0 | | | (2,882) | | | 0 | | | 0 | | | (2,882) | |
Equity in earnings (losses) of subsidiaries, net | | 110,118 | | | (77,204) | | | 0 | | | (32,914) | | | 0 | |
Foreign currency transaction gains (losses), net | | 0 | | | (19) | | | (10,330) | | | 0 | | | (10,349) | |
Other, net | | (100) | | | (38) | | | (1,642) | | | 0 | | | (1,780) | |
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), net | | 25,193 | | | (24,656) | | | (1,722) | | | 0 | | | (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 | | | 0 | | | 0 | | | 57,734 | |
Net income (loss) | | 23,310 | | | 110,357 | | | (78,802) | | | (32,914) | | | 21,951 | |
Less: Net loss (income) attributable to non-controlling interests | | 0 | | | 0 | | | 1,359 | | | 0 | | | 1,359 | |
Net income (loss) attributable to HSSC | | $ | 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 | | 0 | | | 0 | | | (13,927) | | | 0 | | | (13,927) | |
Unrealized gains (losses) on available-for-sale securities | | 2,333 | | | 0 | | | (145) | | | 0 | | | 2,188 | |
Other | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Equity in other comprehensive income (loss) of subsidiaries, net | | (14,072) | | | (14,072) | | | 0 | | | 28,144 | | | 0 | |
Amounts reclassified to net income (loss): | | | | | | | | | | |
Realized losses (gains) on available-for-sale securities | | (400) | | | 0 | | | 0 | | | 0 | | | (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 (income) attributable to non-controlling interests | | 0 | | | 0 | | | 1,359 | | | 0 | | | 1,359 | |
Comprehensive income (loss) attributable to HSSC | | $ | 11,171 | | | $ | 96,285 | | | $ | (91,515) | | | $ | (4,770) | | | $ | 11,171 | |
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, 2020
| | | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | Hughes Satellite Systems Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | Net income (loss) | | $ | 2,983 | | | $ | 86,494 | | | $ | (68,643) | | | $ | (26,891) | | | $ | (6,057) | | 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 | Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (37,046) | | | 261,104 | | | 109,927 | | | 26,891 | | | 360,876 | | 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 | | (34,063) | | | 347,598 | | | 41,284 | | | 0 | | | 354,819 | | |
Net cash provided by (used for) operating activities | | Net cash provided by (used for) operating activities | | (36,686) | | | 105,744 | | | (3,834) | | | 0 | | | 65,224 | |
| Cash flows from investing activities: | Cash flows from investing activities: | | Cash flows from investing activities: | |
Purchases of marketable investment securities | Purchases of marketable investment securities | | (1,611,870) | | | 0 | | | 0 | | | 0 | | | (1,611,870) | | Purchases of marketable investment securities | | (365,877) | | | 0 | | | 0 | | | 0 | | | (365,877) | |
Sales and maturities of marketable investment securities | Sales and maturities of marketable investment securities | | 843,294 | | | 0 | | | 0 | | | 0 | | | 843,294 | | Sales and maturities of marketable investment securities | | 490,020 | | | 0 | | | 0 | | | 0 | | | 490,020 | |
Dividend received from unconsolidated affiliate | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
Expenditures for property and equipment | Expenditures for property and equipment | | 0 | | | (152,660) | | | (111,224) | | | 0 | | | (263,884) | | Expenditures for property and equipment | | 0 | | | (61,134) | | | (30,383) | | | 0 | | | (91,517) | |
Expenditures for externally marketed software | Expenditures for externally marketed software | | 0 | | | (27,824) | | | 0 | | | 0 | | | (27,824) | | Expenditures for externally marketed software | | 0 | | | (8,638) | | | 0 | | | 0 | | | (8,638) | |
Distributions (contributions) and advances from (to) subsidiaries, net | Distributions (contributions) and advances from (to) subsidiaries, net | | 107,963 | | | (49,274) | | | 0 | | | (58,689) | | | 0 | | Distributions (contributions) and advances from (to) subsidiaries, net | | 29,290 | | | (18,939) | | | 0 | | | (10,351) | | | 0 | |
Net cash flows from investing activities | | (660,613) | | | (229,758) | | | (111,224) | | | (58,689) | | | (1,060,284) | | |
Net cash provided by (used for) investing activities | | Net cash provided by (used for) investing activities | | 153,433 | | | (88,711) | | | (30,383) | | | (10,351) | | | 23,988 | |
| Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Payment of finance lease obligations | Payment of finance lease obligations | | 0 | | | 0 | | | (606) | | | 0 | | | (606) | | Payment of finance lease obligations | | 0 | | | 0 | | | (215) | | | 0 | | | (215) | |
Payment of in-orbit incentive obligations | Payment of in-orbit incentive obligations | | 0 | | | (1,268) | | | 0 | | | 0 | | | (1,268) | | Payment of in-orbit incentive obligations | | 0 | | | (203) | | | 0 | | | 0 | | | (203) | |
Contribution by non-controlling interest holder | Contribution by non-controlling interest holder | | 0 | | | 0 | | | 14,268 | | | 0 | | | 14,268 | | Contribution by non-controlling interest holder | | 0 | | | 0 | | | 4,000 | | | 0 | | | 4,000 | |
Other, net | Other, net | | 0 | | | 0 | | | 998 | | | 0 | | | 998 | | Other, net | | 0 | | | 0 | | | 979 | | | 0 | | | 979 | |
Contributions (distributions) and advances (to) from parent, net | | 0 | | | (107,963) | | | 49,274 | | | 58,689 | | | 0 | | |
Net cash flows from financing activities | | 0 | | | (109,231) | | | 63,934 | | | 58,689 | | | 13,392 | | |
Contribution (distributions) and advances (to) from parent, net | | Contribution (distributions) and advances (to) from parent, net | | 0 | | | (29,290) | | | 18,939 | | | 10,351 | | | 0 | |
Net cash provided by (used for) financing activities | | Net cash provided by (used for) financing activities | | 0 | | | (29,493) | | | 23,703 | | | 10,351 | | | 4,561 | |
| Effect of exchange rates on cash and cash equivalents | Effect of exchange rates on cash and cash equivalents | | 0 | | | 0 | | | (3,727) | | | 0 | | | (3,727) | | Effect of exchange rates on cash and cash equivalents | | 0 | | | 0 | | | (4,618) | | | 0 | | | (4,618) | |
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | | (694,676) | | | 8,609 | | | (9,733) | | | 0 | | | (695,800) | | Net increase (decrease) in cash and cash equivalents | | 116,747 | | | (12,460) | | | (15,132) | | | 0 | | | 89,155 | |
Cash and cash equivalents, including restricted amounts, beginning of period | Cash and cash equivalents, including restricted amounts, beginning of period | | 1,057,903 | | | 32,338 | | | 50,081 | | | 0 | | | 1,140,322 | | Cash and cash equivalents, including restricted amounts, beginning of period | | 1,057,903 | | | 32,338 | | | 50,081 | | | 0 | | | 1,140,322 | |
Cash and cash equivalents, including restricted amounts, end of period | Cash and cash equivalents, including restricted amounts, end of period | | $ | 363,227 | | | $ | 40,947 | | | $ | 40,348 | | | $ | 0 | | | $ | 444,522 | | Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,174,650 | | | $ | 19,878 | | | $ | 34,949 | | | $ | 0 | | | $ | 1,229,477 | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hughes Satellite Systems Corporation | | 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 | |
Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (132,557) | | | 493,418 | | | 105,514 | | | 32,914 | | | 499,289 | |
Net cash flows from operating activities | | (109,247) | | | 603,775 | | | 26,712 | | | 0 | | | 521,240 | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Purchases of marketable investment securities | | (462,625) | | | 0 | | | 0 | | | 0 | | | (462,625) | |
Sales and maturities of marketable investment securities | | 1,375,245 | | | (3) | | | 0 | | | 0 | | | 1,375,242 | |
Dividend received from unconsolidated affiliate | | 0 | | | 2,284 | | | 0 | | | 0 | | | 2,284 | |
Expenditures for property and equipment | | 0 | | | (162,643) | | | (62,351) | | | 0 | | | (224,994) | |
Expenditures for externally marketed software | | 0 | | | (21,364) | | | 0 | | | 0 | | | (21,364) | |
Distributions (contributions) and advances from (to) subsidiaries, net | | 359,145 | | | (38,282) | | | 0 | | | (320,863) | | | 0 | |
Net cash flows from investing activities | | 1,271,765 | | | (220,008) | | | (62,351) | | | (320,863) | | | 668,543 | |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Repurchase and maturity of the 2019 Senior Secured Notes | | (920,923) | | | 0 | | | 0 | | | 0 | | | (920,923) | |
Payment of finance lease obligations | | 0 | | | (27,203) | | | (1,932) | | | 0 | | | (29,135) | |
Payment of in-orbit incentive obligations | | 0 | | | (5,269) | | | 0 | | | 0 | | | (5,269) | |
Purchase of non-controlling interest | | 0 | | | (2,666) | | | (4,647) | | | 0 | | | (7,313) | |
Other, net | | 0 | | | 0 | | | 1,172 | | | 0 | | | 1,172 | |
Contributions (distributions) and advances (to) from parent, net | | 0 | | | (359,145) | | | 38,282 | | | 320,863 | | | 0 | |
Net cash flows from financing activities | | (920,923) | | | (394,283) | | | 32,875 | | | 320,863 | | | (961,468) | |
| | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | 0 | | | 0 | | | 310 | | | 0 | | | 310 | |
Net increase (decrease) in cash and cash equivalents | | 241,595 | | | (10,516) | | | (2,454) | | | 0 | | | 228,625 | |
Cash and cash equivalents, including restricted amounts, beginning of period | | 771,718 | | | 46,353 | | | 30,548 | | | 0 | | | 848,619 | |
Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,013,313 | | | $ | 35,837 | | | $ | 28,094 | | | $ | 0 | | | $ | 1,077,244 | |
ITEM 2.MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Unless the context indicates otherwise, the terms “we,” “us,” “HSSC,” the “Company” and “our” refer to Hughes Satellite Systems Corporation and its subsidiaries. The following Management’s Narrative Analysis of Results of Operations (“Management’s Narrative Analysis”) should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and notes thereto (“Accompanying Condensed Consolidated Financial Statements”) in Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”). This Management’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 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. Refer 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, refer to the 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”). 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”).EchoStar. We were formed as a Colorado corporation in March 2011. We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises.
In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we, EchoStar and its other subsidiaries transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (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 EchoStar’s Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of EchoStar’s Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, 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 segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded from continuing operations and segment results for the three and nine months ended September 30, 2019 in our Accompanying Condensed Consolidated Financial Statements. Refer to Note 4. Discontinued Operations in our Accompanying Condensed Consolidated Financial Statements in Item 1 of 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,Information Technology, Finance, Accounting, Real Estate and Legal) and other activities, such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in our segment reporting.
All amounts presented in this Management’s Narrative Analysis, unless otherwise noted, 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 Three Months Ended March 31, 2021:
•Revenue of $485.2 million
•Operating income (loss) of $73.9 million
•Net income (loss) of $17.6 million
•Net income (loss) attributable to HSSC of $18.6 million
•Earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”) of $191.4 million (see reconciliation of this non-GAAP measure in Results of Operations)
Consolidated Financial Condition as of March 31, 2021:
•Total assets of $5.5 billion
•Total liabilities of $3.4 billion
•Total shareholder’s equity of $2.1 billion
ITEMItem 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
of our investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other.
All amounts presented in 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, 2020:
•Revenue of $1.4 billion
•Operating income (loss) of $141.9 million
•Net income (loss) from continuing operations of $6.1 million
•Net income (loss) attributable to HSSC of $3.0 million
•Earnings before interest, taxes, depreciation and amortization, net income (loss) from discontinued operations and net income (loss) attributable to non-controlling interests (“EBITDA”) of $513.4 (refer to the reconciliation of this non-GAAP measure in Results of Operations)
Consolidated Financial Condition as of September 30, 2020:
•Total assets of $5.5 billion
•Total liabilities of $3.5 billion
•Total shareholder’s equity of $2.0 billion
•Cash and cash equivalents and marketable investment securities of $1.9 billion
Hughes Segment
Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services to consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to consumer and enterprise customers. 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 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.channels, as well as increasing our Average Revenue Per User/subscriber (“ARPU”). 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 instructions received from some of our enterprise customers, we have deferred or canceled the delivery of some products or services. In the third quarter of 2020, we have recognized revenue for services that have been provided and are no longer deferred. In addition, weWe have seen a limited number of our enterprise customers file for bankruptcy protection. We have reserved an amount related to pre-petition receivables and are working closely with these customers on providing post-petition services and products.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 from third-party providers to provide services to our customers.Growth of our consumer subscriber base in certain areas in the U.S. continues to be constrained where we are nearing or have reached maximum capacity.capacity in most areas. While these constraints are not expected to be resolved until 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 contributed its satellite communications services business in Brazil to us in exchange for a 20% ownership interest in our existing Brazilian subsidiary that conducts our satellite communications services business in Brazil (the “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. Under the terms of the agreement, Yahsat may also acquire, for further cash investments, additional minority ownership interests in the business in the future provided certain conditions are met.
In May 2019, we also entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti 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 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 $100.0 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 long-term contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary 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 enterprise broadband services. Space Systems/Loral, LLC (“SS/L”), the manufacturer of our EchoStar XXIV satellite has notified us of a delay in completion of the satellite. The EchoStar XXIV satellite is expected to be launched no earlier thanin the first quartersecond half of 2022. This or otherFurther delays or impediments to SS/L’s meeting its obligations could have a material adverse impact on our business operations, future revenues, financial position and prospects, the completion of manufacture of the EchoStar XXIV satellite and our planned expansion of satellite broadband services throughout North, South and Central America. In December 2020, we entered into an agreement with a launch provider for the launch of EchoStar XXIV. 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 Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our HughesNet service and related equipment and other telecommunication services; and (ii) installs HughesNet service equipment with respect to activations generated by DISH Network. As a result of the Hughes Broadband MSA, we have not earned, and do not expect to earn in the future, significant equipment revenue from our distribution agreement with DISH Network.Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
We continue our efforts to expand our consumer satellite services business outside of the U.S. We have been delivering high-speed consumer satellite broadband services in Brazil since July 2016 and are also providing satellite broadband internet service in several other Latin American countries. Additionally, inIn September 2015, we entered into 15-year agreements with affiliates of Telesat Canada for Ka-band capacity on the Telesat T19V satellite
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
located at the 63 degree west longitude orbital location, which was launched in July 2018. Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A satellite and the EchoStar XIX satellite in South America. In March 2021, we entered into an agreement for additional capacity on the Telesat T19V satellite over Puerto Rico.
Our broadband subscribers include customers that subscribe to our HughesNet serviceservices in Norththe U.S. and Latin America through retail, wholesale and small/medium enterprise service channels. In connection with the COVID-19 pandemic, we voluntarily signed on to the Federal Communications Commissions’ (“FCC”) Keep Americans Connected Pledge (the “Pledge”), promising not to terminate residential or small business customers because of their inability to pay their bills due to the disruptions caused by the COVID-19 pandemic. As a result, we have provided HughesNet service to consumers who may not have the ability to pay for such services, but have excluded any subscribers whose HughesNet service would have ordinarily been terminated in the absence of the Pledge from our subscriber numbers as of June 30, 2020.
The following table presents our approximate number of broadband subscribers:
| | | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | June 30, 2020 | | |
Broadband subscribers in the United States | | 1,216,000 | | | 1,221,000 | | | |
Broadband subscribers in Latin America | | 364,000 | | | 321,000 | | | |
Total broadband subscribers | | 1,580,000 | | | 1,542,000 | | | |
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2021 | | December 31, 2020 |
United States | | 1,164,000 | | | 1,189,000 | |
Latin America | | 389,000 | | | 375,000 | |
Total broadband subscribers | | 1,553,000 | | | 1,564,000 | |
During
The following table presents the thirdapproximate number of net subscriber additions:
| | | | | | | | | | | | | | |
| | For the three months ended |
| | March 31, 2021 | | December 31, 2020 |
United States | | (25,000) | | | (27,000) | |
Latin America | | 14,000 | | | 11,000 | |
Total net subscriber additions | | (11,000) | | | (16,000) | |
Our U.S. consumer subscriber base in certain areas continues to be capacity constrained and we are managing the available capacity to maintain service quality to our existing subscribers. While the balancing of total subscribers relative to capacity utilization in the first quarter resulted in lower total subscribers, ARPU increased.
In Latin America, we continued to see growth in our subscriber base and net subscriber additions compared to the fourth quarter of 2020, ourmainly due to higher gross subscriber additions increased by approximately 9,000 as compared to the second quarter of 2020. Our net subscriber additions for the third quarter increased by approximately 12,000 as compared to the second quarter of 2020, reflecting lower churn in the third quarter as compared to the second quarter of 2020, driven primarily by the retention of HughesNet subscribers previously reported as having churned under the Pledge.additions.
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, our Hughes segment had $1.1$1.4 billion and $1.4$1.3 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 September 30, 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 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.
Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, our ESS segment had contracted revenue backlog of $7.8$9.2 million and $11.4$6.7 million, respectively. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue.
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, technologies such as geostationary high throughput satellites, low-earth orbit (“LEO”) networks, medium-earth orbit (“MEO”) systems, balloons and High
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 internationallyglobally for consumer and enterprise customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business.
We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally, 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 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 we expect certain portions of our workforce to continue to do so from time to 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 continues to be a significant amount of COVID-19 related cyber-fraud and phishing attacks that continue to target our employees, vendors, suppliers, customers and others. Accordingly, we increased our cybersecurity efforts and resources as a result of the COVID-19 pandemic.
On December 8, 2020, the cyber security company FireEye announced that they detected a sophisticated nation state level cyber campaign that targeted FireEye, other public and private companies, and government organizations. FireEye reported that the attack against them was facilitated through the Orion IT management software owned by a company called SolarWinds. Based on information from FireEye, we reviewed all instances of SolarWinds software in use at the Company and have determined that the version we are using is not susceptible to the malware within the version that is compromised.
The SolarWinds hack continues to evolve. Specifically, there have been many reports of intrusions into Microsoft Exchange on-premise systems possibly due to the SolarWinds issue and other unrelated matters. While we are customers of Microsoft, to date, our investigations into the announced issues indicate that we were not detrimentally affected by the vulnerabilities due to our security controls and other proactive measures which include security patching. We treat cybersecurity risk seriouslycontinue to receive information about these breaches from the U.S. government and are focused on maintaining theprivate security offirms, and we use this data to update 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 anddefense systems and review, modify and supplementto investigate our defenses through the use of various services, programs and outside vendors. Additionally, we provide resourcesown networks for compromise. We will continue to assist employeesupdate our systems as more information comes to light in better securing their home networks and remote connections. EchoStar also maintains agreements with third party vendors and expertsreference 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.these issues.
We are not aware of any additional 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, 2020March 31, 2021 and through November 5, 2020.May 6, 2021. There can be no assurance, however, that any such incident can be detected or thwarted or will not have such a material adverse effect in the future.
ITEMItem 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
Nine
Three Months Ended September 30, 2020March 31, 2021 Compared to the NineThree Months Ended September 30, 2019March 31, 2020
The following table presents our consolidated results of operations for the ninethree months ended September 30, 2020March 31, 2021 compared to the ninethree months ended September 30, 2019:March 31, 2020:
| | | For the nine months ended September 30, | Variance | | For the three months ended March 31, | | Variance |
Statements of Operations Data | Statements of Operations Data | | 2020 | | 2019 | | Amounts | | % | Statements of Operations Data | | 2021 | | 2020 | | Amount | | | % |
Revenue: | Revenue: | | | | | | | | | Revenue: | | | | | | | | | |
Services and other revenue | Services and other revenue | | $ | 1,258,350 | | | $ | 1,214,476 | | | $ | 43,874 | | | 3.6 | | Services and other revenue | | $ | 432,991 | | | $ | 410,238 | | | $ | 22,753 | | | | 5.5 | |
Equipment revenue | Equipment revenue | | 146,702 | | | 175,084 | | | (28,382) | | | (16.2) | | Equipment revenue | | 52,239 | | | 57,309 | | | (5,070) | | | | (8.8) | |
Total revenue | Total revenue | | 1,405,052 | | | 1,389,560 | | | 15,492 | | | 1.1 | | Total revenue | | 485,230 | | | 467,547 | | | 17,683 | | | | 3.8 | |
Costs and expenses: | Costs and expenses: | | | | | | | | Costs and expenses: | | | | | | | | |
Cost of sales - services and other | Cost of sales - services and other | | 429,246 | | | 425,896 | | | 3,350 | | | 0.8 | | Cost of sales - services and other | | 131,412 | | | 143,885 | | | (12,473) | | | | (8.7) | |
% of total services and other revenue | % of total services and other revenue | | 34.1 | % | | 35.1 | % | | % of total services and other revenue | | 30.3 | % | | 35.1 | % | | | |
Cost of sales - equipment | Cost of sales - equipment | | 115,524 | | | 142,744 | | | (27,220) | | | (19.1) | | Cost of sales - equipment | | 45,140 | | | 45,908 | | | (768) | | | | (1.7) | |
% of total equipment revenue | % of total equipment revenue | | 78.7 | % | | 81.5 | % | | % of total equipment revenue | | 86.4 | % | | 80.1 | % | | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 324,400 | | | 353,559 | | | (29,159) | | | (8.2) | | Selling, general and administrative expenses | | 104,370 | | | 115,860 | | | (11,490) | | | | (9.9) | |
% of total revenue | % of total revenue | | 23.1 | % | | 25.4 | % | | % of total revenue | | 21.5 | % | | 24.8 | % | | | |
Research and development expenses | Research and development expenses | | 21,378 | | | 19,411 | | | 1,967 | | | 10.1 | | Research and development expenses | | 7,545 | | | 6,254 | | | 1,291 | | | | 20.6 | |
% of total revenue | % of total revenue | | 1.5 | % | | 1.4 | % | | % of total revenue | | 1.6 | % | | 1.3 | % | | | |
Depreciation and amortization | Depreciation and amortization | | 372,588 | | | 342,086 | | | 30,502 | | | 8.9 | | Depreciation and amortization | | 122,664 | | | 125,965 | | | (3,301) | | | | (2.6) | |
Impairment of long-lived assets | | Impairment of long-lived assets | | 210 | | | — | | | 210 | | | | * |
Total costs and expenses | Total costs and expenses | | 1,263,136 | | | 1,283,696 | | | (20,560) | | | (1.6) | | Total costs and expenses | | 411,341 | | | 437,872 | | | (26,531) | | | | (6.1) | |
Operating income (loss) | Operating income (loss) | | 141,916 | | | 105,864 | | | 36,052 | | | 34.1 | | Operating income (loss) | | 73,889 | | | 29,675 | | | 44,214 | | | | * |
Other income (expense): | Other income (expense): | | | | | | | | Other income (expense): | | | | | | | | |
Interest income, net | Interest income, net | | 16,935 | | | 47,341 | | | (30,406) | | | (64.2) | | Interest income, net | | 2,394 | | | 8,892 | | | (6,498) | | | | (73.1) | |
Interest expense, net of amounts capitalized | Interest expense, net of amounts capitalized | | (130,644) | | | (172,502) | | | 41,858 | | | (24.3) | | Interest expense, net of amounts capitalized | | (41,922) | | | (42,192) | | | 270 | | | | (0.6) | |
Gains (losses) on investments, net | Gains (losses) on investments, net | | (222) | | | (290) | | | 68 | | | (23.4) | | Gains (losses) on investments, net | | — | | | (164) | | | 164 | | | | (100.0) | |
Equity in earnings (losses) of unconsolidated affiliates, net | Equity in earnings (losses) of unconsolidated affiliates, net | | (4,878) | | | (2,882) | | | (1,996) | | | 69.3 | | Equity in earnings (losses) of unconsolidated affiliates, net | | (1,761) | | | (1,087) | | | (674) | | | | 62.0 | |
Foreign currency transaction gains (losses), net | Foreign currency transaction gains (losses), net | | (4,596) | | | (10,349) | | | 5,753 | | | (55.6) | | Foreign currency transaction gains (losses), net | | (3,360) | | | (7,528) | | | 4,168 | | | | (55.4) | |
Other, net | Other, net | | (470) | | | (1,780) | | | 1,310 | | | (73.6) | | Other, net | | (973) | | | (278) | | | (695) | | | | * |
Total other income (expense), net | Total other income (expense), net | | (123,875) | | | (140,462) | | | 16,587 | | | (11.8) | | Total other income (expense), net | | (45,622) | | | (42,357) | | | (3,265) | | | | 7.7 | |
Income (loss) from continuing operations before income taxes | | 18,041 | | | (34,598) | | | 52,639 | | | * | |
Income (loss) before income taxes | | Income (loss) before income taxes | | 28,267 | | | (12,682) | | | 40,949 | | | | * |
Income tax benefit (provision), net | Income tax benefit (provision), net | | (24,098) | | | (1,185) | | | (22,913) | | | * | Income tax benefit (provision), net | | (10,637) | | | (5,231) | | | (5,406) | | | | * |
Net income (loss) from continuing operations | | (6,057) | | | (35,783) | | | 29,726 | | | (83.1) | | |
Net income (loss) from discontinued operations | | — | | | 57,734 | | | (57,734) | | | (100.0) | | |
Net income (loss) | Net income (loss) | | (6,057) | | | 21,951 | | | (28,008) | | | * | Net income (loss) | | 17,630 | | | (17,913) | | | 35,543 | | | | * |
Less: Net loss (income) attributable to non-controlling interests | | 9,040 | | | 1,359 | | | 7,681 | | | * | |
Less: Net income (loss) attributable to non-controlling interests | | Less: Net income (loss) attributable to non-controlling interests | | 947 | | | 3,442 | | | (2,495) | | | | (72.5) | |
Net income (loss) attributable to HSSC | Net income (loss) attributable to HSSC | | $ | 2,983 | | | $ | 23,310 | | | $ | (20,327) | | | (87.2) | | Net income (loss) attributable to HSSC | | $ | 18,577 | | | $ | (14,471) | | | $ | 33,048 | | | | * |
| Other data: | Other data: | | Other data: | | | |
EBITDA (1) | EBITDA (1) | | $ | 513,378 | | | $ | 434,008 | | | $ | 79,370 | | | 18.3 | | EBITDA (1) | | $ | 191,406 | | | $ | 150,025 | | | $ | 41,381 | | | | 27.6 | |
Subscribers, end of period | Subscribers, end of period | | 1,580,000 | | | 1,437,000 | | | 143,000 | | | 10.0 | | Subscribers, end of period | | 1,553,000 | | | 1,516,000 | | | 37,000 | | | | 2.4 | |
* Percentage is not meaningful.meaningful
(1) A reconciliation of EBITDA to Net income (loss), the most directly comparable generally accepted accounting principles in the U.S. (“U.S. GAAP”)GAAP measure in our Accompanying Condensed Consolidated Financial Statements, is included in Results of Operations. For further information on our use of EBITDA, refer to thesee Explanation of Key Metrics and Other Items.
ITEMItem 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
The following discussion relates to our continuingresults of operations for the ninethree months ended September 30, 2020March 31, 2021 and 2019 unless otherwise stated.2020.
Services and other revenue. Services and other revenue totaled $1.3 billion$433.0 million for the ninethree months ended September 30, 2020,March 31, 2021, an increase of $43.9$22.8 million, or 3.6%5.5%, as compared to 2019.2020. The increase was primarily attributable to increases in sales of broadband services to our consumer customers of $77.0$27.0 million, partially offset by a decrease in sales of broadband services to our enterprise customers of $28.6$3.1 million. Both of theseThese variances reflect the negative impact of exchange rate fluctuations.fluctuations of $5.4 million, primarily attributable to our consumer customers.
Equipment revenue. Equipment revenue totaled $146.7$52.2 million for the ninethree months ended September 30, 2020,March 31, 2021, a decrease of $28.4$5.1 million, or 16.2%8.8%, as compared to 2019.2020. The decrease was primarily attributable to: (i) $17.4to decreases in hardware sales of $4.8 million related to the bankruptcy of a certain customer and (ii) $9.3 million decreased sales to our enterprisemobile satellite systems customers.
Cost of sales - services and other. Cost of sales - services and other totaled $429.2$131.4 million for the ninethree months ended September 30, 2020, an increaseMarch 31, 2021, a decrease of $3.4$12.5 million, or 0.8%8.7%, as compared to 2019.2020. The increasedecrease was primarily attributable to our Hughes segment due to an increase in saleslower costs of broadband services provided to our consumer and enterprise customers partially offset byprimarily associated with field services and leased satellite capacity as well as a non-recurring decrease in salesa certain international regulatory fee of broadband services to our enterprise customers.$4.5 million.
Cost of sales - equipmentequipment. . Cost of sales - equipment totaled $115.5$45.1 million for the ninethree months ended September 30, 2020,March 31, 2021, a decrease of $27.2$0.8 million, or 19.1%1.7%, as compared to 2019.2020.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $104.4 million for the three months ended March 31, 2021, a decrease of $11.5 million, or 9.9%, as compared to 2020. The decrease was primarily attributable to the corresponding reduction in equipment revenue.
Selling, generaldecreased sales and administrative expenses. Selling, general and administrative expenses totaled $324.4 million for the nine months ended September 30, 2020, a decrease of $29.2 million, or 8.2%, compared to 2019. The decrease was primarily attributable to expenses related to the license fee dispute in India of $7.2 million in 2019 and a certain legal proceeding of $26.3 million in 2019, partially offset by increased general and administrativemarketing expenses of $1.3$9.6 million attributable to the Yahsat Brazil JV.from our Hughes segment mainly associated with our consumer customers and decreases in bad debt expense of $2.4 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $372.6$122.7 million for the ninethree months ended September 30, 2020, an increaseMarch 31, 2021, a decrease of $30.5$3.3 million, or 8.9%2.6%, as compared to 2019.2020. The increasedecrease was primarily dueattributable to increasesdecreases in other property and equipment depreciation expense of $16.4$2.0 million relating to our customer premises equipment and $14.4 million relating to the depreciationdecreases in amortization of assets acquired in the Yahsat Brazil JV Transaction.intangibles of $1.5 million.
Interest income, net. Interest income, net totaled $16.9$2.4 million for the ninethree months ended September 30, 2020,March 31, 2021, a decrease of $30.4$6.5 million, or 64.2%73.1%, as compared to 2019,2020, primarily attributable to decreases in the yield on our marketable investment securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $130.6 million for the nine months ended September 30, 2020, a decrease of $41.9 million, or 24.3%, compared to 2019. The decrease was primarily due to a decrease of $29.0 million in interest expense and in amortization of deferred financing cost as a result of the repurchase and maturity in June 2019 of our 6 1/2% Senior Secured Notes due 2019, a decrease of $6.9 million of interest expense related to the license fee dispute in India, a decrease of $4.2 million related to a certain legal proceeding in 2019 and an increase of $4.4 million in capitalized interest in 2020 relating to the construction of the EchoStar XXIV satellite and its related infrastructure.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled $4.6$3.4 million in losses for the ninethree months ended September 30, 2020,March 31, 2021, as compared to $10.3$7.5 million in losses for the ninethree months ended September 30, 2019.March 31, 2020, a positive change of $4.2 million. The change was due to the net weakeningimpact of the U.S. dollar againstforeign exchange rate fluctuations of certain foreign currencies in 2020 compared to 2019.during the quarter.
Income tax benefit (provision), net. Income tax benefit (provision), net was $(24.1)$(10.6) million in provision for the three months ended March 31, 2021, as compared to $(5.2) million for the ninethree months ended September 30, 2020 compared to $1.2 million for the nine months ended September 30, 2019.March 31, 2020. Our effective income tax rate was 133.6% and (3.4)37.6% for the three months ended March 31, 2021, compared to (41.2)% for the nine months ended September 30, 2020 and 2019, respectively.same period in 2020. The variations in our effective tax rate from the U.S. federal statutory rate for the ninethree months ended September 30, 2020March 31, 2021 were primarily due to the increase in our valuation allowance associated with certainexcluded foreign losses permanent book tax differences andwhere the impact of state and local taxes, partially offset bycompany carries a full valuation allowance. For the research and experimentation credits. Thethree months ended March 31, 2020, the variations in our effective tax rate from the U.S. federal statutory rate for the nine
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
months ended September 30, 2019 were primarily due to the change in net unrealized gainslosses 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.
Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Net income (loss) attributable to HSSC.HSSC. The following table reconciles the change in Net income (loss) attributable to HSSC totaled $3.0 million for the nine months ended September 30, 2020, compared to net income attributable to HSSC of $23.3 million for the nine months ended September 30, 2019, a decrease in net income of $20.3 million, as set forth in the following table:HSSC:
| | | | | | | | |
| | Amounts |
Net income (loss) attributable to HSSC for the ninethree months ended September 30, 2019March 31, 2020 | | $ | 23,310 (14,471) | |
Increase (decrease) in interest income, net | | (6,498) | |
Decrease (increase) in income tax benefit (provision), net | | (5,406) | |
Decrease (increase) in net income (loss) attributable to non-controlling interests | | (2,495) | |
Increase (decrease) in other, net | | (695) | |
Increase (decrease) in gains (losses) on investments, net | | 164 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (674) | |
Decrease (increase) in interest expense, net of amounts capitalized | | 41,858 | |
Increase (decrease) in operating income, including depreciation and amortization | | 36,052 | |
Decrease (increase) in net income attributable to non-controlling interests | | 7,681270 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 5,7534,168 | |
Increase (decrease) in other, netoperating income (loss), including depreciation and amortization | | 1,310 | |
Increase (decrease) in gains on investments, net | | 68 | |
Decrease (increase) in equity in losses of unconsolidated affiliates, net | | (1,996) | |
Decrease (increase) in income tax provision, net | | (22,913) | |
Increase (decrease) in interest income, net | | (30,406) | |
Increase (decrease) in net income from discontinued operations | | (57,734)44,214 | |
Net income (loss) attributable to HSSC for the ninethree months ended September 30, 2020March 31, 2021 | | $ | 2,98318,577 | |
EBITDA. EBITDA. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in our Accompanying Condensed Consolidated Financial Statements, to EBITDA:Statements:
| | | For the nine months ended September 30, | | Variance | | For the three months ended March 31, | | Variance |
| | 2020 | | 2019 | | Amounts | | % | | 2021 | | 2020 | | Amount | | % |
Net income (loss) | Net income (loss) | | $ | (6,057) | | | $ | 21,951 | | | $ | (28,008) | | | * | Net income (loss) | | $ | 17,630 | | | $ | (17,913) | | | $ | 35,543 | | | * |
Interest income, net | Interest income, net | | (16,935) | | | (47,341) | | | 30,406 | | | (64.2) | | Interest income, net | | (2,394) | | | (8,892) | | | 6,498 | | | (73.1) | |
Interest expense, net of amounts capitalized | Interest expense, net of amounts capitalized | | 130,644 | | | 172,502 | | | (41,858) | | | (24.3) | | Interest expense, net of amounts capitalized | | 41,922 | | | 42,192 | | | (270) | | | (0.6) | |
Income tax provision (benefit), net | Income tax provision (benefit), net | | 24,098 | | | 1,185 | | | 22,913 | | | * | Income tax provision (benefit), net | | 10,637 | | | 5,231 | | | 5,406 | | | * |
Depreciation and amortization | Depreciation and amortization | | 372,588 | | | 342,086 | | | 30,502 | | | 8.9 | | Depreciation and amortization | | 122,664 | | | 125,965 | | | (3,301) | | | (2.6) | |
Net loss (income) from discontinued operations | | — | | | (57,734) | | | 57,734 | | | (100.0) | | |
Net loss (income) attributable to non-controlling interests | Net loss (income) attributable to non-controlling interests | | 9,040 | | | 1,359 | | | 7,681 | | | * | Net loss (income) attributable to non-controlling interests | | 947 | | | 3,442 | | | (2,495) | | | (72.5) | |
EBITDA | EBITDA | | $ | 513,378 | | | $ | 434,008 | | | $ | 79,370 | | | 18.3 | | EBITDA | | $ | 191,406 | | | $ | 150,025 | | | $ | 41,381 | | | 27.6 | |
* Percentage is not meaningful.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
EBITDA was $513.4 million forThe following table reconciles the nine months ended September 30, 2020, an increase of $79.4 million, or 18.3%, compared to 2019 as set forthchange in the following table:EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the ninethree months ended September 30, 2019March 31, 2020 | | $ | 434,008150,025 | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | 66,554 | |
Decrease (increase) in net income attributable to non-controlling interests | | 7,68140,913 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 5,753 4,168 | |
Increase (decrease) in gains (losses) on investments, net | | 164 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (674) | |
Increase (decrease) in other, net | | 1,310 | |
Increase (decrease) in gains on investments, net | | 68 (695) | |
Decrease (increase) in equity in losses of unconsolidated affiliates, net loss (income) attributable to non-controlling interests | | (1,996)(2,495) | |
EBITDA for the ninethree months ended September 30, 2020March 31, 2021 | | $ | 513,378191,406 | |
Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Segment Operating Results and Capital Expenditures
The following tables present our operating results, capital expenditures and EBITDA by segment for the ninethree months ended September 30, 2020March 31, 2021, as compared to the ninethree months ended September 30, 2019. Capital expenditures in the table below are net of refunds and other receipts related to our property and equipment.March 31, 2020:
| | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | Hughes | | ESS | | Corporate and Other | | Consolidated Total |
For the nine months ended September 30, 2020 | | | | | | | | | |
For the three months ended March 31, 2021 | | For the three months ended March 31, 2021 | | | | | | | | |
Total revenue | Total revenue | | $ | 1,378,416 | | | $ | 13,233 | | | $ | 13,403 | | | $ | 1,405,052 | | Total revenue | | $ | 475,859 | | | $ | 4,089 | | | $ | 5,282 | | | $ | 485,230 | |
Capital expenditures | Capital expenditures | | 263,844 | | | 41 | | | — | | | 263,885 | | Capital expenditures | | 82,196 | | | — | | | — | | | 82,196 | |
EBITDA | EBITDA | | 531,276 | | | 5,847 | | | (23,745) | | | 513,378 | | EBITDA | | 198,578 | | | 1,919 | | | (9,091) | | | 191,406 | |
| For the nine months ended September 30, 2019 | | |
For the three months ended March 31, 2020 | | For the three months ended March 31, 2020 | |
Total revenue | Total revenue | | $ | 1,360,919 | | | $ | 11,873 | | | $ | 16,768 | | | $ | 1,389,560 | | Total revenue | | $ | 458,482 | | | $ | 4,652 | | | $ | 4,413 | | | $ | 467,547 | |
Capital expenditures | Capital expenditures | | 224,483 | | | — | | | — | | | 224,483 | | Capital expenditures | | 91,517 | | | — | | | — | | | 91,517 | |
EBITDA | EBITDA | | 448,837 | | | 5,006 | | | (19,835) | | | 434,008 | | EBITDA | | 154,641 | | | 2,030 | | | (6,646) | | | 150,025 | |
Hughes Segment
| | | For the nine months ended September 30, | | Variance | | For the three months ended March 31, | | Variance |
| | 2020 | | 2019 | | Amounts | | % | | 2021 | | 2020 | | Amount | | | % |
Total revenue | Total revenue | | $ | 1,378,416 | | | $ | 1,360,919 | | | $ | 17,497 | | | 1.3 | | Total revenue | | $ | 475,859 | | | $ | 458,482 | | | $ | 17,377 | | | | 3.8 | |
Capital expenditures | Capital expenditures | | 263,844 | | | 224,483 | | | 39,361 | | | 17.5 | | Capital expenditures | | 82,196 | | | 91,517 | | | (9,321) | | | | (10.2) | |
EBITDA | EBITDA | | 531,276 | | | 448,837 | | | 82,439 | | | 18.4 | | EBITDA | | 198,578 | | | 154,641 | | | 43,937 | | | | 28.4 | |
Total revenue was $1.4 billion$475.9 million for the ninethree months ended September 30, 2020March 31, 2021, an increase of $17.5$17.4 million, or 1.3%3.8%, as compared to 2019. The increase was2020. Services and other revenue increased primarily due to increases of $77.0 million in sales of broadband services to our consumer customers of $27.0 million, partially offset by decreased hardwarea decrease in sales of $28.4 million and decreased sales of broadband services to our enterprise customers of $28.6$3.1 million. Equipment revenue decreased primarily due to decreases in hardware sales of $4.8 million to our mobile satellite systems customers. These variances reflect the negative impact of exchange rate fluctuations.fluctuations of $5.9 million.
Capital expenditures were $263.8$82.2 million for the ninethree months ended September 30, 2020, an increaseMarch 31, 2021, a decrease of $39.4$9.3 million, or 17.5%10.2%, as compared to 2019,2020, primarily due to net increasesdecreases in expenditures associated with our consumer business.business, partially offset by increased expenditures related to construction of our satellite-related ground infrastructure.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
EBITDA was $531.3 million forThe following table reconciles the nine months ended September 30, 2020, an increase of $82.4 million, or 18.4%, as compared to 2019 as set forthchange in the following table:
| | | | | | | | |
| | Amounts |
EBITDA for the nine months ended September 30, 2019 | | $ | 448,837 | |
Increase (decrease) in operating income, excluding depreciation and amortization | | 67,620 | |
Decrease (increase) in net income attributable to non-controlling interests | | 7,681 | |
Increase (decrease) in foreign currency transaction gains, net | | 5,748 | |
Increase (decrease) in other, net | | 1,210 | |
Increase (decrease) in gains on investments, net | | 578 | |
Decrease (increase) in equity in losses of unconsolidated affiliates, net | | (398) | |
EBITDA for the nine months ended September 30, 2020 | | $ | 531,276 | |
ESSHughes Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2020 | | 2019 | | Amounts | | % |
Total revenue | | $ | 13,233 | | | $ | 11,873 | | | $ | 1,360 | | | 11.5 | |
| | | | | | | | |
EBITDA | | 5,847 | | | 5,006 | | | 841 | | | 16.8 | |
Total revenue was $13.2 million for the nine months ended September 30, 2020, an increase of $1.4 million, or 11.5%, as compared to 2019, primarily due to an increase in transponder services provided to third parties.
EBITDA was $5.8 million for the nine months ended September 30, 2020, an increase of $0.8 million, or 16.8%, as compared to 2019, primarily due to the increase in revenue.
Corporate and Other
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Variance |
| | 2020 | | 2019 | | Amounts | | | % |
Total revenue | | $ | 13,403 | | | $ | 16,768 | | | $ | (3,365) | | | | (20.1) | |
EBITDA | | (23,745) | | | (19,835) | | | (3,910) | | | | 19.7 | |
Total revenue was $13.4 million for the nine months ended September 30, 2020, a decrease of $3.4 million, or 20.1%, as compared to 2019 which was primarily attributable to a decrease in revenue from certain real estate previously leased to DISH Network and transferred as part of the BSS Transaction.
EBITDA for the nine months ended September 30, 2020 was a loss of $23.7 million, an increase in loss of $3.9 million, or 19.7%, as compared to 2019 as set forth in the following table: EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the three months ended September 30, 2019March 31, 2020 | | $ | (19,835)154,641 | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | 41,297 | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 4,165 | |
Increase (decrease) in other, net | | 103 887 | |
Increase (decrease) in gains (losses) on investments, net | | 164 | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (81) | |
Decrease (increase) in net loss (income) attributable to non-controlling interests | | (2,495) | |
EBITDA for the three months ended March 31, 2021 | | $ | 198,578 | |
Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
ESS Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, | | Variance |
| | 2021 | | 2020 | | Amount | | | % |
Total revenue | | $ | 4,089 | | | $ | 4,652 | | | $ | (563) | | | | (12.1) | |
EBITDA | | 1,919 | | | 2,030 | | | (111) | | | | (5.5) | |
Total revenue was $4.1 million for the three months ended March 31, 2021, a decrease of $0.6 million, or 12.1%, as compared to 2020, primarily due to a decrease in transponder services provided to third parties.
EBITDA was $1.9 million for the three months ended March 31, 2021, a decrease of $0.1 million, or 5.5%, as compared to 2020, primarily due to the decrease in overall ESS revenue.
Corporate and Other
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, | | Variance |
| | 2021 | | 2020 | | Amount | | | % |
Total revenue | | $ | 5,282 | | | $ | 4,413 | | | $ | 869 | | | | 19.7 | |
| | | | | | | | | |
EBITDA | | (9,091) | | | (6,646) | | | (2,445) | | | | 36.8 | |
The following table reconciles the change in the Corporate and Other Segment EBITDA:
| | | | | | | | |
| | Amounts |
EBITDA for the three months ended March 31, 2020 | | $ | (6,646) | |
Increase (decrease) in other, net | | (1,583) | |
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | | (592) | |
Increase (decrease) in operating income (loss), excluding depreciation and amortization | | (273) | |
Increase (decrease) in foreign currency transaction gains (losses), net | | 4 | |
Increase (decrease) in gains on investments, net | | (510) | |
Decrease (increase) in equity in losses of unconsolidated affiliates, net | | (1,600) | |
Increase (decrease) in operating income, excluding depreciation and amortization | | (1,907)3 | |
EBITDA for the three months ended September 30, 2020March 31, 2021 | | $ | (23,745)(9,091) | |
ITEMItem 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue. Services and other revenue primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service professional services and facilities rental revenue.
Equipment revenue. Equipment revenue primarily includes broadband equipment and networks sold to customers in our consumer and enterprise markets.
Cost of sales - services and other. Cost of sales - services and other primarily includes the cost of broadband services provided to our consumer and enterprise customers, maintenance and other contracted services, costs associated with satellite and transponder leases and services, professional services and facilities rental.
Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks sold to customers in our consumer and enterprise markets. It also includes certain other costs associated with the deployment of equipment to our customers.
Selling, general and administrative expenses.Selling, general and administrative expenses primarily includesinclude selling and marketing costs and employee-related costs associated with administrative services (e.g., information systems, human resources and other services andservices), including stock-based compensation expense).expense. It also includes professional fees (e.g. legal, information systems and accounting services), and other expenses associated with facilities and administrative services and credit losses, which include customer related estimated credit losses and estimated credit losses on non-current receivables.services.
Research and development expenses. Research and development expenses primarily includesinclude costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.
Impairment of long-lived assets. Impairment of long-lived assets includes our impairment losses related to our property and equipment, goodwill, regulatory authorizations and other intangible assets.
Interest income, net. Interest income, net primarily includes interest earned on our cash, cash equivalents and marketable investment securities, and other investments including premium amortization and discount accretion on debt securities, offset by estimated credit losses on our other debt investments.securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized primarily includes interest expense associated with our debt and finance lease obligations (net of capitalized interest), amortization of debt issuance costs and interest expense related to certain legal proceedings.
Gains (losses) on investments, net. Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities.securities and other investments for which we have elected the fair value option. 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 other equity investmentssecurities and other debt investmentssecurities without readily determinable fair value and adjustments to the carrying amount of investments in unconsolidated affiliates and marketable equity securities resulting from impairments and observable price changes and estimated credit losses.changes.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net include gains and losses resulting from the re-measurement of transactions denominated in foreign currencies.
Other, net. Other, net primarily includes dividends received from our marketable investment securities and other non-operating income and expense items that are not appropriately classified elsewhere in the Condensed Consolidated Statements of Operations in our Accompanying Condensed Consolidated Financial Statements.
ITEMItem 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Net income (loss) from discontinued operations
. Net income (loss) from discontinued operations includes the financial results of the BSS Business transferred in the BSS Transaction, except for certain real estate that transferred in the transaction.
EBITDAEarnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as Net income (loss) excluding Interest income net, Interestand 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 non-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.
SubscribersSubscribers. . 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 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 Form 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
Except as noted above, thereThere has been no change in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during the ninethree months ended September 30, 2020March 31, 2021 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, refer to Part I, Item 1. Financial Statements —- Note 12.13. Contingencies —- Litigation in this 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 Form 10-K.
RISKS RELATED TO THE COVID-19 PANDEMIC
The COVID-19 pandemic, its economic impacts and related government and private sector responsive actions could have a material adverse effect our business operations. As a result of the COVID-19 pandemic, many countries, including the U.S., and 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.
We have set forth below key risks from the COVID-19 pandemic that we have identified to date. The situation continues to develop, however, and it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on our business, financial condition or results of operations. We cannot estimate or determine the duration of the quarantine, social distancing and other regulatory measures instituted or recommended in response to the COVID-19 pandemic, whether they will recur or the duration or degree of the business disruptions, and related financial impact. The COVID-19 pandemic has evolved into a worldwide health crisis that may continue for an extended period of time and that has adversely affected economies and financial markets throughout the world, resulting in a significant economic downturn and changes in global economic policy that is expected to continue10-K for the foreseeable future and could haveyear ended December 31, 2020 includes a material adverse effect on our business, financial condition or results of operations.
Our operations and thosedetailed discussion of our customers and other third parties with whom we conduct business are 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” or “safer-at-home” 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 or limit non-essential operations at physical locations, (iii) limit the number of employees that may be present in a particular location; (iv) prohibit or limit non-essential gatherings of various number of individuals, and (v) order cessation of non-essential travel. The effects of the COVID-19 pandemic and the actions from applicable governmental authorities has negatively impacted productivity, increased cybersecurity risks as a large portion of our workforce 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 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, delayed or canceled as a result of effects of the 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 and certain of these customers have filed for bankruptcy protection, which has negatively impacted our revenue and cash flow. When enterprise customers fail or seek reorganization under the bankruptcy laws, we may be obliged to provide satellite capacity for which we are not being 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 or recur, the impact on our supply chain could have a material adverse effect on our results of operations and cash 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.risk factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicableapplicable.
ITEM 5. OTHER INFORMATION
Financial Results
On November 5, 2020,May 6, 2021, EchoStar issued a press release (the “Press Release”) announcing its financial results for the quarter ended September 30, 2020.March 31, 2021. A copy of the Press Release is furnished herewith as Exhibit 99.1. The foregoing information, including the exhibitsexhibit related thereto, areis furnished in response to Item 2.02 of Form 8-K and shall not be deemed filed“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.
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(H) | Filed(I) Furnished herewith. |
(I) | Furnished herewith |
* | Incorporated by reference. |
** | 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 Form 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 5, 2020May 6, 2021 | By: | /s/ Michael T. Dugan |
| | Michael T. Dugan |
| | Chief Executive Officer, President and Director |
| | (Principal Executive Officer) |
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Date: November 5, 2020May 6, 2021 | By: | /s/ David J. Rayner |
| | David J. Rayner |
| | Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer |
| | (Principal Financial and Accounting Officer) |