UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019 .
OR
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number: 333-179121
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
(Address of principal executive offices) | (Zip Code) | |||
Not Applicable | ||||
(Registrant’s telephone number, including area code) | (Former name, former address and former fiscal year, if changed since last report) | |||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | Emerging growth company | |
☒ | Smaller reporting company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 29, 2019, the registrant’s outstanding common stock consisted of 1,078 shares of common stock, $0.01 par value per share.
The registrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
* The registrant currently is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is filing this Quarterly Report on Form 10-Q on a voluntary basis. The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months as if it were subject to such filing requirements during the entirety of such period.
TABLE OF CONTENTS
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | * |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | * |
Item 3. | Defaults Upon Senior Securities | * |
* This item has been omitted pursuant to the reduced disclosure format as set forth in General Instructions (H)(2) of Form 10-Q
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about our estimates, expectations, plans, objectives, strategies, and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms. These forward-looking statements are based on information available to us as of the date of this Form 10-Q and represent management’s current views and assumptions. Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:
• | significant risks related to the construction and operation of our satellites, such as the risk of not being able to timely complete the construction of or material malfunction on one or more of our satellites, changes in the space weather environment that could interfere with the operation of our satellites and our general lack of commercial insurance coverage on our satellites; |
• | our ability to implement and/or realize benefits of our domestic and/or international investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions including, without limitation, the BSS Transaction (as defined herein); |
• | lawsuits relating to the BSS Transaction could result in substantial costs; |
• | our ability to realize the anticipated benefits of our current satellites and any future satellite we may construct or acquire; |
• | risks related to our foreign operations and other uncertainties associated with doing business internationally, including changes in foreign exchange rates between foreign currencies and the United States dollar, economic instability and political disturbances; |
• | the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services; and |
• | our ability to bring advanced technologies to market to keep pace with our customers and competitors. |
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) as amended by Amendment No. 1 to Form 10-K on Form 10-K/A filed with the SEC (collectively referred to as our “Form 10-K”), those discussed in Management’s Narrative Analysis of Results of Operations in Part I, Item 2 of this Form 10-Q and in Part II, Item 7 of our Form 10-K and those discussed in other documents we file with the SEC.
All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of any forward-looking statements. We assume no responsibility for updating forward-looking information contained or incorporated by reference herein or in any documents we file with the SEC, except as required by law.
Should one or more of the risks or uncertainties described herein or in any documents we file with the SEC occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts)
(Unaudited)
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Marketable investment securities, at fair value | ||||||||
Trade accounts receivable and contract assets, net (Note 3) | ||||||||
Trade accounts receivable - DISH Network | ||||||||
Inventory | ||||||||
Prepaids and deposits | ||||||||
Advances to affiliates, net | ||||||||
Other current assets | ||||||||
Current assets of discontinued operations | ||||||||
Total current assets | ||||||||
Noncurrent assets: | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | — | |||||||
Goodwill | ||||||||
Regulatory authorizations | ||||||||
Other intangible assets, net | ||||||||
Investments in unconsolidated entities | ||||||||
Advances to affiliates | ||||||||
Other noncurrent assets, net | ||||||||
Noncurrent assets of discontinued operations | ||||||||
Total noncurrent assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | $ | ||||||
Trade accounts payable - DISH Network | ||||||||
Current portion of long-term debt and finance lease obligations | ||||||||
Advances from affiliates, net | ||||||||
Contract liabilities | ||||||||
Accrued interest | ||||||||
Accrued compensation | ||||||||
Accrued taxes | ||||||||
Accrued expenses and other | ||||||||
Current liabilities of discontinued operations | ||||||||
Total current liabilities | ||||||||
1
Noncurrent liabilities: | ||||||||
Long-term debt and finance lease obligations, net | ||||||||
Deferred tax liabilities, net | ||||||||
Operating lease liabilities | — | |||||||
Advances from affiliates, net | ||||||||
Other noncurrent liabilities | ||||||||
Noncurrent liabilities of discontinued operations | ||||||||
Total noncurrent liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 14) | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and outstanding at both September 30, 2019 and December 31, 2018 | ||||||||
Common stock, $0.01 par value; 1,000,000 shares authorized, 1,078 shares issued and outstanding at both September 30, 2019 and December 31, 2018 | ||||||||
Additional paid-in capital | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Accumulated earnings | ||||||||
Total HSS shareholders’ equity | ||||||||
Noncontrolling interests | ||||||||
Total shareholders’ equity | ||||||||
Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
(Unaudited)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue: | ||||||||||||||||
Services and other revenue - DISH Network | $ | $ | $ | |||||||||||||
Services and other revenue - other | ||||||||||||||||
Equipment revenue | ||||||||||||||||
Total revenue | ||||||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of sales - services and other (exclusive of depreciation and amortization) | ||||||||||||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | ||||||||||||||||
Selling, general and administrative expenses | ||||||||||||||||
Research and development expenses | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Total costs and expenses | ||||||||||||||||
Operating income | ||||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | ||||||||||||||||
Interest expense, net of amounts capitalized | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Gains (losses) on investments, net | ( | ) | ||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates, net | ( | ) | ( | ) | ||||||||||||
Other, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ||||||||||||
Income tax provision, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income (loss) from continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
Net income from discontinued operations | ||||||||||||||||
Net income (loss) | ( | ) | ||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||
Net income attributable to HSS | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed 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, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | $ | ||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Unrealized gains (losses) on available-for-sale securities and other | ( | ) | ( | ) | ( | ) | ||||||||||
Amounts reclassified to net income (loss): | ||||||||||||||||
Realized gains on available-for-sale securities | ( | ) | ( | ) | ( | ) | ||||||||||
Total other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Comprehensive income (loss) | ( | ) | ||||||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Comprehensive income (loss) attributable to HSS | $ | ( | ) | $ | $ | $ | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Amounts in thousands)
(Unaudited)
Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Earnings | Noncontrolling Interests | Total | ||||||||||||||||
Balance, June 30, 2018 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||
Other comprehensive loss | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||
Net income | — | — | ||||||||||||||||||
Other, net | ( | ) | — | — | — | ( | ) | |||||||||||||
Balance, September 30, 2018 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Balance, June 30, 2019 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||
BSS Transaction (Note 5) | ( | ) | — | — | — | ( | ) | |||||||||||||
Purchase of noncontrolling interest | — | — | ( | ) | ||||||||||||||||
Other comprehensive loss | — | ( | ) | — | — | ( | ) | |||||||||||||
Net income (loss) | — | — | ( | ) | ( | ) | ||||||||||||||
Other, net | — | — | ||||||||||||||||||
Balance, September 30, 2019 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Amounts in thousands)
(Unaudited)
Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Earnings | Noncontrolling Interests | Total | ||||||||||||||||
Balance, December 31, 2017 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Cumulative effect of accounting changes as of January 1, 2018 | — | — | ||||||||||||||||||
Balance, January 1, 2018 | ( | ) | ||||||||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||
Capital contributions from EchoStar Corporation | — | — | — | |||||||||||||||||
Other comprehensive loss | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||
Net income | — | — | ||||||||||||||||||
Other, net | ( | ) | — | — | — | ( | ) | |||||||||||||
Balance, September 30, 2018 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Balance, December 31, 2018 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||
BSS Transaction (Note 5) | ( | ) | — | — | — | ( | ) | |||||||||||||
Purchase of noncontrolling interest | ( | ) | — | — | ( | ) | ( | ) | ||||||||||||
Other comprehensive loss | — | ( | ) | — | — | ( | ) | |||||||||||||
Net income (loss) | — | — | ( | ) | ||||||||||||||||
Other, net | ( | ) | — | — | ||||||||||||||||
Balance, September 30, 2019 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
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, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | $ | ||||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
Depreciation and amortization | ||||||||
Equity in (earnings) losses of unconsolidated affiliates, net | ( | ) | ||||||
Amortization of debt issuance costs | ||||||||
(Gains) losses on investments, net | ( | ) | ||||||
Stock-based compensation | ||||||||
Deferred tax (benefit) provision | ( | ) | ||||||
Dividend received from unconsolidated entity | ||||||||
Changes in current assets and current liabilities, net: | ||||||||
Trade accounts receivable, net | ( | ) | ( | ) | ||||
Advances to and from affiliates, net | ||||||||
Trade accounts receivable - DISH Network | ( | ) | ||||||
Inventory | ( | ) | ||||||
Other current assets | ( | ) | ( | ) | ||||
Trade accounts payable | ||||||||
Trade accounts payable - DISH Network | ( | ) | ( | ) | ||||
Accrued expenses and other | ||||||||
Changes in noncurrent assets and noncurrent liabilities, net | ( | ) | ||||||
Other, net | ||||||||
Net cash flows from operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Purchases of marketable investment securities | ( | ) | ( | ) | ||||
Sales and maturities of marketable investment securities | ||||||||
Expenditures for property and equipment | ( | ) | ( | ) | ||||
Refunds and other receipts related to property and equipment | ||||||||
Expenditures for externally marketed software | ( | ) | ( | ) | ||||
Dividend received from unconsolidated entity | ||||||||
Payment for satellite launch services | ( | ) | ||||||
Other | ( | ) | ||||||
Net cash flows from investing activities | ( | ) | ||||||
Cash flows from financing activities: | ||||||||
Repayment of debt and finance lease obligations | ( | ) | ( | ) | ||||
Repurchase and maturity of debt | ( | ) | ||||||
Purchase of noncontrolling interest | ( | ) | ||||||
Repayment of in-orbit incentive obligations | ( | ) | ( | ) | ||||
Capital contribution from EchoStar Corporation | ||||||||
Proceeds from issuance of debt | ||||||||
Net cash flows from financing activities | ( | ) | ( | ) | ||||
Effect of exchange rates on cash and cash equivalents | ( | ) | ||||||
Net increase (decrease) in cash and cash equivalents, including restricted amounts | ( | ) | ||||||
Cash and cash equivalents, including restricted amounts, beginning of period | ||||||||
Cash and cash equivalents, including restricted amounts, end of period | $ | $ | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest, net of amounts capitalized | $ | $ | ||||||
Cash paid for income taxes | $ | $ | ||||||
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 “HSS,” the “Company,” “we,” “us” and/or “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 home and small to medium-sized business customers, satellite operations and satellite services. We also deliver innovative network technologies, managed services and communications solutions for aeronautical, enterprise and government customers.
We primarily operate in the following two business segments:
• | Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international home and small to medium-sized business customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers, aeronautical, enterprise and government customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers. |
• | EchoStar Satellite Services (“ESS”) — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use basis to United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. |
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate, Accounting and Legal) and other activities that have not been assigned to our operating segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in our segment reporting.
In May 2019, EchoStar and one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), entered into a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”). Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred to BSS Corp. certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily relating to the portion of our ESS satellite services business that manages, markets and provides (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and EchoStar’s joint venture Dish Mexico, S. de R.L. de C.V., (“Dish Mexico”) and its subsidiaries and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of EchoStar’s and our other businesses (collectively, the “BSS Business”); (ii) EchoStar distributed to each holder of shares of EchoStar 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 Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and DISH owns and operates the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
The BSS Transaction was structured in a manner intended to be tax-free to EchoStar and its stockholders for U.S. federal income tax purposes. In connection with the BSS Transaction, EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and
8
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
certain retained and assumed liabilities, respectively. Additionally, EchoStar and DISH and certain of our, EchoStar’s and DISH’s subsidiaries, as applicable, have (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services, (ii) terminated certain previously existing agreements, and (iii) amended certain existing agreements and entered into certain new agreements pursuant to which we and DISH Network will obtain and provide certain products, services and rights from and to each other.
Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS business segment. The BSS Transaction has been accounted for as a spin-off to EchoStar’s stockholders as EchoStar did not receive any consideration. As a result, the operating results of the BSS Business have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 5 for further discussion of our discontinued operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information and notes required for complete financial statements prepared in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2018.
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 where we are the primary beneficiary. We are deemed to have a controlling financial interest in other entities when 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 noncontrolling interest within shareholders’ equity for the portion of the entity’s equity attributed to the noncontrolling 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.
9
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Adopted Accounting Pronouncements
Leases
We adopted Accounting Standard Update (“ASU”) No. 2016-02 - Leases (Topic 842), as amended, or Accounting Standard Codification (“ASC 842”), as of January 1, 2019. The primary impact of ASC 842 on our consolidated financial statements is the recognition of right-of-use assets and related liabilities on our consolidated balance sheet for operating leases where we are the lessee. We elected to apply the requirements of the new standard on January 1, 2019 and we have not restated our consolidated financial statements for prior periods. Consequently, certain amounts reported in our Condensed Consolidated Balance Sheet as of September 30, 2019 are not comparable to those reported as of December 31, 2018 or earlier dates. Our adoption of ASC 842 did not have a material impact on the results of our operations or on our cash flows for the three and nine months ended September 30, 2019.
Under ASC 842, leases are classified either as operating leases or finance leases. The lease classification affects the recognition of lease expense by lessees in the statement of operations. Consistent with prior accounting standards, operating lease expense is included in operating expenses, while finance lease expense is split between depreciation expense and interest expense. ASC 842 does not fundamentally change the lessor accounting model, which requires leases to be classified as operating leases or sales-type leases. Operating lease revenue generally is recognized over the lease term, while sales-type lease revenue is recognized primarily upon lease commencement, except for amounts representing interest on related accounts receivable.
Except for the new requirement to recognize assets and liabilities on the balance sheet for operating leases where we are the lessee, under our ASC 842 transition method we continue to apply prior accounting standards to leases that commenced prior to 2019. We fully apply ASC 842 requirements only to leases that commenced or were modified on or after January 1, 2019. We elected certain practical expedients under our transition method, including elections to not reassess (i) whether a contract is or contains a lease and (ii) the classification of existing leases. We also elected not to apply hindsight in determining whether optional renewal periods should be included in the lease term, which in some instances may impact the initial measurement of the lease liability and the calculation of straight-line expense over the lease term for operating leases. As a result of our transition elections, there was no change in our recognition of revenue and expense for leases that commenced prior to 2019. In addition, the application of ASC 842 requirements to new and modified leases did not materially affect our recognition of revenue or expenses for the three and nine months ended September 30, 2019.
Our adoption of ASC 842 resulted in the following adjustments from our continuing operations to our Condensed Consolidated Balance Sheet as of December 31, 2018 (amounts in thousands):
Balance December 31,2018 | Adoption of ASC 842 Increase (Decrease) | Balance January 1, 2019 | ||||||||||
Prepaids and deposits | $ | $ | ( | ) | $ | |||||||
Operating lease right-of-use assets | $ | — | $ | $ | ||||||||
Other noncurrent assets, net | $ | $ | ( | ) | $ | |||||||
Total assets | $ | $ | $ | |||||||||
Accrued expenses and other | $ | $ | $ | |||||||||
Operating lease liabilities | $ | — | $ | $ | ||||||||
Other noncurrent liabilities | $ | $ | ( | ) | $ | |||||||
Total liabilities | $ | $ | $ | |||||||||
Total liabilities and shareholders’ equity | $ | $ | $ | |||||||||
10
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our accounting policies under ASC 842 are summarized below. Additional disclosures required by the new standard are included in Note 4.
Lessee Accounting
We lease real estate, satellite capacity and equipment in the conduct of our business operations. For contracts entered into on or after January 1, 2019, we assess at contract inception whether the contract is, or contains, a lease. Generally, we determine that a lease exists when (i) the contract involves the use of a distinct identified asset, (ii) we obtain the right to substantially all economic benefits from use of the asset and (iii) we have the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (i) the lease transfers ownership of the asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (iii) the lease term is for a major part of the remaining useful life of the asset, (iv) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (v) the asset is of a specialized nature and there is not expected to be an alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria.
At the lease commencement date, we recognize a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The incremental borrowing rates used for the initial measurement of lease liabilities as of January 1, 2019 were based on the original lease terms.
Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the noncancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. We have elected an accounting policy, as permitted by ASC 842, not to account for such payments separately from the related lease payments. Our policy election results in a higher initial measurement of lease liabilities when such non-lease payments are fixed amounts. Certain of our real estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as sales and value-added taxes and our proportionate share of actual property taxes, insurance and utilities. Such payments and changes in payments based on a rate or index are recognized in operating expenses when incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments.
Lessor Accounting
We lease satellite capacity, communications equipment and real estate to certain of our customers. We identify and determine the classification of such leases as operating leases or sales-type leases based on the criteria discussed above for lessees. A lease is classified as a sales-type lease if it meets the above criteria for a finance lease; otherwise it is classified as an operating lease. Some of our leases are embedded in contracts with customers that include non-lease performance obligations. For such contracts, except where we have elected otherwise as discussed below, we allocate consideration in the contract between lease and non-lease components based on their relative standalone selling prices. We have elected an accounting policy, as permitted by ASC 842, to not separate the lease of equipment from related services in our HughesNet satellite internet service (the “HughesNet service”) contracts with consumers.
11
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We account for all revenue from such contracts as non-lease service revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).
Our accounting for revenue from operating leases and sales-type leases was not substantially changed by our adoption of ASC 842. However, we anticipate that certain leases that would have been classified as operating leases under prior accounting standards may be classified as sales-type leases under ASC 842. Operating lease revenue generally is recognized on a straight-line basis over the lease term. Sales-type lease revenue and a corresponding receivable generally are recognized at lease commencement based on the present value of the future lease payments and related interest income on the receivable is recognized over the lease term. Payments under sales-type leases generally are discounted at the interest rate implicit in the lease.
Recently Issued Accounting Pronouncements Not Yet Adopted
Credit Losses
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new approach to estimate credit losses on certain types of financial instruments 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 with credit deterioration since their origination. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact of adopting this new accounting standard on our Consolidated Financial Statements and related disclosures.
NOTE 3. REVENUE RECOGNITION
Information About Contract Balances
The following table provides information about our contract balances from our continuing operations with customers, including amounts for certain embedded leases (amounts in thousands):
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Trade accounts receivable: | ||||||||
Sales and services | $ | $ | ||||||
Leasing | ||||||||
Total | ||||||||
Contract assets | ||||||||
Allowance for doubtful accounts | ( | ) | ( | ) | ||||
Total trade accounts receivable and contract assets, net | $ | $ | ||||||
Trade accounts receivable - DISH Network: | ||||||||
Sales and services | $ | $ | ||||||
Leasing | ||||||||
Total trade accounts receivable - DISH Network, net | $ | $ | ||||||
Contract liabilities: | ||||||||
Current | $ | $ | ||||||
Noncurrent | ||||||||
Total contract liabilities | $ | $ | ||||||
12
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended September 30, 2019, we recognized revenue of $67.3 million that was previously included in the contract liability balance at December 31, 2018.
Our bad debt expense was $3.2 million and $8.6 million for the three months ended September 30, 2019 and 2018, respectively, and $23.2 million and $16.6 million for the nine months ended September 30, 2019 and 2018, respectively.
Transaction Price Allocated to Remaining Performance Obligations
As of September 30, 2019, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $1.1 billion. We expect to recognize approximately 37.8 % of our remaining performance obligations of these contracts as revenue in the next twelve months. This amount excludes agreements with consumer customers in our Hughes segment, our leasing arrangements and agreements with certain customers under which collectibility of all amounts due through the term of contracts is uncertain.
13
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Disaggregation of Revenue
In the following tables, revenue from our continuing operations is disaggregated by segment, primary geographic market, nature of the products and services and transactions with major customers. See Note 4 for additional information about revenue associated with leases.
Geographic Information
The following table disaggregates revenue from customer contracts attributed to our North America (the U.S. and its territories, Mexico and Canada), South and Central America and other foreign locations (Asia, Africa, Australia, Europe, and the Middle East) as well as by segment, based on the location where the goods or services are provided (amounts in thousands):
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the three months ended September 30, 2019 | ||||||||||||||||
North America | $ | $ | $ | $ | ||||||||||||
South and Central America | ||||||||||||||||
All other | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the three months ended September 30, 2018 | ||||||||||||||||
North America | $ | $ | $ | $ | ||||||||||||
South and Central America | ||||||||||||||||
All other | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the nine months ended September 30, 2019 | ||||||||||||||||
North America | $ | $ | $ | $ | ||||||||||||
South and Central America | ||||||||||||||||
All other | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the nine months ended September 30, 2018 | ||||||||||||||||
North America | $ | $ | $ | $ | ||||||||||||
South and Central America | ||||||||||||||||
All other | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
14
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nature of Products and Services
The following table disaggregates revenue based on the nature of products and services and by segment (amounts in thousands):
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the three months ended September 30, 2019 | ||||||||||||||||
Equipment | $ | $ | $ | $ | ||||||||||||
Services | ||||||||||||||||
Design, development and construction services | ||||||||||||||||
Revenue from sales and services | ||||||||||||||||
Lease revenue | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the three months ended September 30, 2018 | ||||||||||||||||
Equipment | $ | $ | $ | $ | ||||||||||||
Services | ||||||||||||||||
Design, development and construction services | ||||||||||||||||
Revenue from sales and services | ||||||||||||||||
Lease revenue | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the nine months ended September 30, 2019 | ||||||||||||||||
Equipment | $ | $ | $ | $ | ||||||||||||
Services | ||||||||||||||||
Design, development and construction services | ||||||||||||||||
Revenue from sales and services | ||||||||||||||||
Lease revenue | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the nine months ended September 30, 2018 | ||||||||||||||||
Equipment | $ | $ | $ | $ | ||||||||||||
Services | ||||||||||||||||
Design, development and construction services | ||||||||||||||||
Revenue from sales and services | ||||||||||||||||
Lease revenue | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
15
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. LEASES
Lessee Disclosures
Our operating leases consist primarily of leases for office space, data centers and satellite ground facilities. We recognized right-of-use assets and lease liabilities for such leases in connection with our adoption of ASC 842 as of January 1, 2019 (see Note 2). We report operating lease right-of-use assets in Operating lease right-of-use assets and we report the current and noncurrent portions of our operating lease liabilities in Accrued expenses and other and Operating lease liabilities, respectively. Our finance leases consist primarily of leases of satellite capacity. We report finance lease right-of-use assets in Property and equipment, net and we report the current and noncurrent portions of our finance lease liabilities in Current portion of long-term debt and finance lease obligations and Long-term debt and finance lease obligations, net, respectively. Our Condensed Consolidated Balance Sheets includes the following amounts for right-of-use assets and lease liabilities from our continuing operations as of September 30, 2019 (amounts in thousands):
As of September 30, 2019 | ||||
Right-of-use assets: | ||||
Operating | $ | |||
Finance | ||||
Total right-of-use assets | $ | |||
Lease liabilities: | ||||
Current: | ||||
Operating | $ | |||
Finance | ||||
Noncurrent: | ||||
Operating | ||||
Finance | ||||
Total lease liabilities | $ | |||
As of September 30, 2019, we have prepaid our obligations regarding most of our finance right-of-use assets. Finance lease assets from our continuing operations that have a corresponding liability are reported net of accumulated amortization of $50.9 million as of September 30, 2019.
The following tables detail components of lease cost and weighted average lease terms and discount rates for operating leases and finance leases from our continuing operations (amounts in thousands):
For the three months ended September 30, 2019 | For the nine months ended September 30, 2019 | |||||||
Lease cost: | ||||||||
Operating lease cost | $ | $ | ||||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | ||||||||
Interest on lease liabilities | ||||||||
Short-term lease cost | ||||||||
Variable lease cost | ||||||||
Total lease cost | $ | $ | ||||||
16
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2019 | |||
Lease term and discount rate: | |||
Weighted average remaining lease term (in years): | |||
Finance leases | |||
Operating leases | |||
Weighted average discount rate: | |||
Finance leases | % | ||
Operating leases | % | ||
The following table details cash flows for operating leases and finance leases from our continuing operations (amounts in thousands):
For the three months ended September 30, 2019 | For the nine months ended September 30, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | $ | ||||||
Operating cash flows from finance leases | $ | $ | ||||||
Financing cash flows from finance leases | $ | $ | ||||||
We obtained right-of-use assets in exchange for lease liabilities of $1.1 million and $2.5 million upon commencement of operating leases for the three and nine months ended September 30, 2019, respectively.
The following table presents maturities of our lease liabilities from our continuing operations as of September 30, 2019 (amounts in thousands):
Operating Leases | Finance Leases | Total | ||||||||||
Year ending December 31, | ||||||||||||
2019 (remainder) | $ | $ | $ | |||||||||
2020 | ||||||||||||
2021 | ||||||||||||
2022 | ||||||||||||
2023 | ||||||||||||
After 2023 | ||||||||||||
Total lease payments | ||||||||||||
Less: Interest | ( | ) | ( | ) | ( | ) | ||||||
Present value of lease liabilities | $ | $ | $ | |||||||||
17
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Lessor Disclosures
We report revenue from sales-type leases at the commencement date in Equipment revenue and we report periodic interest income on sales-type lease receivables in Services and other revenue. We report operating lease revenue in Services and other revenue. The following table details our lease revenue from our continuing operations as follows (amounts in thousands):
For the three months ended September 30, 2019 | For the nine months ended September 30, 2019 | |||||||
Sales-type lease revenue: | ||||||||
Revenue at lease commencement | $ | $ | ||||||
Interest income | ||||||||
Operating lease revenue | ||||||||
Total lease revenue | $ | $ | ||||||
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $5.6 million as of September 30, 2019.
The following table presents maturities of our operating lease payments from our continuing operations as of September 30, 2019 (amounts in thousands):
Amounts | ||||
Year ending December 31, | ||||
2019 (remainder) | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
After 2023 | ||||
Total lease payments | $ | |||
Property and equipment, net as of September 30, 2019 and Depreciation and amortization for the three and nine months then ended included the following amounts for assets subject to operating leases from our continuing operations (amounts in thousands):
As of September 30, 2019 | For the three months ended September 30, 2019 | For the nine months ended September 30, 2019 | ||||||||||||||||||
Cost | Accumulated Depreciation | Net | Depreciation Expense | |||||||||||||||||
Customer premises equipment | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Satellites | ( | ) | ||||||||||||||||||
Total | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
18
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. Discontinued Operations
Following the consummation of the BSS Transaction in September 2019, we no longer operate the BSS Business, which was a substantial portion of our ESS business segment. The BSS Transaction has been accounted for as a spin-off to EchoStar’s stockholders as EchoStar did not receive any consideration. As a result, the operating results of the BSS Business have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.
The following table presents the operating results of our discontinued operations (amounts in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue: | ||||||||||||||||
Services and other revenue - DISH Network | $ | $ | $ | $ | ||||||||||||
Services and other revenue - other | ||||||||||||||||
Total revenue | ||||||||||||||||
Costs and Expenses: | ||||||||||||||||
Cost of equipment, services and other | ||||||||||||||||
Selling, general and administrative expenses | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Total costs and expenses | ||||||||||||||||
Operating income | ||||||||||||||||
Other Income (Expense): | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income from discontinued operations before income taxes | ||||||||||||||||
Income tax benefit (provision), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income (loss) from discontinued operations | $ | $ | $ | $ | ||||||||||||
Expenditures for property and equipment of our discontinued operations totaled $0.3 million and de minimis three months ended September 30, 2019 and 2018, respectively, and $0.5 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively.
19
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the aggregate carrying amounts of assets and liabilities of our discontinued operations (amounts in thousands):
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Trade accounts receivable and contract assets, net | $ | $ | ||||||
Prepaids and deposits | ||||||||
Current assets of discontinued operations | ||||||||
Property and equipment, net | ||||||||
Regulatory authorizations, net | ||||||||
Other noncurrent assets, net | ||||||||
Noncurrent assets of discontinued operations | ||||||||
Total assets of discontinued operations | $ | $ | ||||||
Liabilities: | ||||||||
Trade accounts payable | $ | $ | ||||||
Current portion of finance lease obligations | ||||||||
Accrued interest | ||||||||
Accrued expenses and other | ||||||||
Current liabilities of discontinued operations | ||||||||
Finance lease obligations | ||||||||
Deferred tax liabilities, net | ||||||||
Other noncurrent liabilities | ||||||||
Noncurrent liabilities of discontinued operations | ||||||||
Total liabilities of discontinued operations | $ | $ | ||||||
20
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. OTHER COMPREHENSIVE INCOME (LOSS) AND RELATED TAX EFFECTS
The changes in the balances of Accumulated other comprehensive loss by component were as follows (amounts in thousands):
Cumulative Foreign Currency Translation Losses | Unrealized Gain (Loss) On Available-For-Sale Securities | Other | Accumulated Other Comprehensive Loss | |||||||||||||
Balance, December 31, 2017 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Cumulative effect of accounting changes as of January 1, 2018 | ||||||||||||||||
Balance, January 1, 2018 | ( | ) | ( | ) | ( | ) | ||||||||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | ( | ) | ||||||||||
Amounts reclassified to net income | ( | ) | ( | ) | ||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
Balance, September 30, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Balance, December 31, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | ( | ) | ||||||||||
Amounts reclassified to net income | ( | ) | ( | ) | ||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
Balance, September 30, 2019 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
The amounts reclassified to net income related to unrealized gain (loss) on available-for-sale securities in the table above are included in Gains (losses) on investments, net in our Condensed Consolidated Statements of Operations.
Except in unusual circumstances, we do not recognize tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions. We do not recognize tax effects on unrealized gains or losses on available-for-sale securities until such gains or losses are realized.
21
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. MARKETABLE INVESTMENT SECURITIES
Overview
Our marketable investment securities portfolio consists of various debt and equity instruments summarized in the table below(amounts in thousands):
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Marketable investment securities: | ||||||||
Debt securities: | ||||||||
Corporate bonds | $ | $ | ||||||
Other debt securities | ||||||||
Total debt securities | ||||||||
Equity securities | ||||||||
Total marketable investment securities | $ | $ | ||||||
Debt Securities
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our other debt securities portfolio includes investments in various debt instruments, including U.S. government bonds and commercial paper.
A summary of our available-for-sale debt securities is presented in the table below (amounts in thousands):
Amortized | Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
As of September 30, 2019 | ||||||||||||||||
Corporate bonds | $ | $ | $ | ( | ) | $ | ||||||||||
Other debt securities | ||||||||||||||||
Total available-for-sale debt securities | $ | $ | $ | ( | ) | $ | ||||||||||
As of December 31, 2018 | ||||||||||||||||
Corporate bonds | $ | $ | $ | ( | ) | $ | ||||||||||
Other debt securities | ||||||||||||||||
Total available-for-sale debt securities | $ | $ | $ | ( | ) | $ | ||||||||||
As of September 30, 2019, we have $695.2 million of available-for-sale debt securities with contractual maturities of one year or less and nil with contractual maturities greater than one year.
Equity Securities
Our marketable equity securities consist primarily of shares of common stock of public companies. Gains (losses) on investments, net related to equity securities that we held each period were net gains of de minimis and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.7 million in net loss and 0.3 million in net gains for the nine months ended September 30, 2019 and 2018, respectively.
22
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sales of Available-for-Sale Securities
Proceeds from sales of our available-for-sale securities were nil and $312.0 million for the three and nine months ended September 30, 2019, respectively. Proceeds from sales of our available-for-sale securities were $50.0 million for both the three and nine months ended September 30, 2018.
Fair Value Measurements
Our marketable investment securities are measured at fair value on a recurring basis as summarized in the table below (amounts in thousands). As of September 30, 2019 and December 31, 2018, we did not have investments that were categorized within Level 3 of the fair value hierarchy.
As of | ||||||||||||||||||||||||
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
Corporate bonds | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Other debt securities | ||||||||||||||||||||||||
Total debt securities | ||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||
Total marketable investment securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NOTE 8. INVENTORY
Our inventory consisted of the following (amounts in thousands):
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Raw materials | $ | $ | ||||||
Work-in-process | ||||||||
Finished goods | ||||||||
Total inventory | $ | $ | ||||||
23
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. PROPERTY AND EQUIPMENT
Property and equipment from our continuing operations consisted of the following (amounts in thousands):
Depreciable Life In Years | As of | |||||||||
September 30, 2019 | December 31, 2018 | |||||||||
Land | — | $ | $ | |||||||
Buildings and improvements | 1 to 40 | |||||||||
Furniture, fixtures, equipment and other | 1 to 12 | |||||||||
Customer premises equipment | 2 to 4 | |||||||||
Satellites - owned | 2 to 15 | |||||||||
Satellites - acquired under finance leases | 10 to 15 | |||||||||
Construction in progress | — | |||||||||
Total property and equipment | ||||||||||
Accumulated depreciation | ( | ) | ( | ) | ||||||
Property and equipment, net | $ | $ | ||||||||
Construction in progress consisted of the following (amounts in thousands):
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Progress amounts for satellite construction | $ | $ | ||||||
Satellite related equipment | ||||||||
Other | ||||||||
Construction in progress | $ | $ | ||||||
We recorded capitalized interest related to our satellites, satellite payloads and related ground facilities under construction of $0.3 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively, and $0.6 million and $5.8 million for the nine months ended September 30, 2019 and 2018, respectively.
Depreciation expense associated with our property and equipment from our continuing operations consisted of the following (amounts in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Buildings and improvements | $ | $ | $ | $ | ||||||||||||
Furniture, fixtures, equipment and other | ||||||||||||||||
Customer premises equipment | ||||||||||||||||
Satellites | ||||||||||||||||
Total depreciation expense | $ | $ | $ | $ | ||||||||||||
Satellites depreciation expense includes amortization of satellites under finance lease agreements of $6.4 million and $5.5 million for the three months ended September 30, 2019 and 2018, respectively, and $19.3 million and $13.8 million for the nine months ended September 30, 2019 and 2018, respectively.
24
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Satellites
As of September 30, 2019, our satellite fleet consisted of seven satellites, four of which are owned and three of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite. We depreciate our leased satellites on a straight-line basis over their respective lease terms. In connection with the BSS Transaction, six of our owned satellites and the leases for two of our leased satellites were transferred to DISH Network.
Our operating satellite fleet consists of both owned and leased satellites detailed in the table below as of September 30, 2019.
Satellites | Segment | Launch Date | Nominal Degree Orbital Location (Longitude) | Depreciable Life In Years | ||||
Owned: | ||||||||
SPACEWAY 3 (1) | Hughes | August 2007 | 95 W | |||||
EchoStar XVII | Hughes | July 2012 | 107 W | |||||
EchoStar XIX | Hughes | December 2016 | 97.1 W | |||||
EchoStar IX (2)(3) | ESS | August 2003 | 121 W | |||||
Capital Leases: | ||||||||
Eutelsat 65 West A | Hughes | March 2016 | 65 W | |||||
Telesat T19V | Hughes | July 2018 | 63 W | |||||
EchoStar 105/SES-11 | ESS | October 2017 | 105 W | |||||
(1) | Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed its acquisition of Hughes Communications, Inc. and its subsidiaries (the “Hughes Acquisition”). |
(2) | See Note 16 for discussion of related party transactions with DISH Network. |
(3) | Fully depreciated assets as of December 31, 2015. |
Satellite Anomalies and Impairments
Our satellites may experience anomalies from time to time, some of which may have a significant adverse effect on their remaining useful lives, the commercial operation of the satellites or our operating results or financial position. We are not aware of any anomalies with respect to our owned or leased satellites that have had any such significant adverse effect during the nine months ended September 30, 2019. There can be no assurance, however, that anomalies will not have any such adverse effects in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our satellites were to fail.
We historically have not carried in-orbit insurance on our satellites because we have assessed that the cost of insurance is not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain only for our SPACEWAY 3 and EchoStar XVII satellites insurance or other contractual arrangements during the commercial in-orbit service of such satellite. We were required pursuant to such agreements to maintain similar insurance or other contractual arrangements for the EchoStar XVI satellite, which we transferred to DISH Network pursuant to the BSS Transaction. Our other satellites, either in orbit or under construction, are not covered by launch or in-orbit insurance. We will continue to assess circumstances going forward and make insurance decisions on a case-by-case basis.
We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Certain of the anomalies previously disclosed may be considered to represent a significant adverse change in the physical condition of a particular satellite. However, based on the redundancy designed within each satellite, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. GOODWILL, REGULATORY AUTHORIZATIONS AND OTHER INTANGIBLE ASSETS
Goodwill
The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill. Goodwill is assigned to the reporting units within our operating segments and is subject to impairment testing annually, or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is more likely than not less than its carrying amount.
As of September 30, 2019 and December 31, 2018, all of our goodwill related to our continuing operations was assigned to reporting units. We test this goodwill for impairment annually in the second quarter. Based on our impairment testing in the second quarter of 2019, our goodwill is considered to be not impaired.
Regulatory Authorizations
Regulatory authorizations included amounts with indefinite useful lives. As of both September 30, 2019 and December 31, 2018, regulatory authorization balances, net of accumulated amortization, from our continuing operations were $400.0 million.
Other Intangible Assets
As of September 30, 2019 and December 31, 2018, accumulated amortization for our other intangible assets was $318.4 million and $307.4 million, respectively.
NOTE 11. INVESTMENTS IN UNCONSOLIDATED ENTITIES
We have strategic investments in certain non-publicly traded equity securities that do not have a readily determinable fair value.
Our investments in these unconsolidated entities consisted of the following (amounts in thousands):
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Investments in unconsolidated entities: | ||||||||
Equity method | $ | $ | ||||||
Other equity investments without a readily determinable fair value | ||||||||
Total investments in unconsolidated entities | $ | $ | ||||||
We measure our equity securities without a readily determinable fair value, other than those accounted for using the equity method, at cost adjusted for changes resulting from impairments, if any, and observable price changes in orderly transactions for the identical or similar securities of the same issuer. For the nine months ended September 30, 2019 and 2018, we did not identify any observable price changes requiring an adjustment to our investments.
26
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
The following table summarizes the carrying amounts and fair values of our long-term debt and finance lease obligations from our continuing operations (amounts in thousands):
Effective Interest Rate | As of | |||||||||||||||||
September 30, 2019 | December 31, 2018 | |||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
Senior Secured Notes: | ||||||||||||||||||
6 1/2% Senior Secured Notes due 2019 | $ | $ | $ | $ | ||||||||||||||
5 1/4% Senior Secured Notes due 2026 | ||||||||||||||||||
Senior Unsecured Notes: | ||||||||||||||||||
7 5/8% Senior Unsecured Notes due 2021 | ||||||||||||||||||
6 5/8% Senior Unsecured Notes due 2026 | ||||||||||||||||||
Less: Unamortized debt issuance costs | ( | ) | — | ( | ) | — | ||||||||||||
Subtotal | $ | $ | ||||||||||||||||
Finance lease obligations | ||||||||||||||||||
Total debt and finance lease obligations | ||||||||||||||||||
Less: Current portion | ( | ) | ( | ) | ||||||||||||||
Long-term debt and finance lease obligations, net | $ | $ | ||||||||||||||||
During the three and nine months ended September 30, 2019, we repurchased nil and $11.5 million, respectively, of our 6 1/2% Senior Secured Notes due 2019 in open market trades. The outstanding balance of the 6 1/2% Senior Secured Notes due 2019 matured in June 2019.
NOTE 13. INCOME TAXES
Provision For Income Taxes
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our interim income tax provision and our interim estimate of our annual effective tax rate are influenced by several factors, including foreign losses and capital gains and losses for which related deferred tax assets are offset by a valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be affected by the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income or loss is lower.
Our income tax provision from our continuing operations was $5.2 million for the three months ended September 30, 2019 compared to an income tax provision of $11.0 million for the three months ended September 30, 2018. Our estimated effective income tax rate was (43.5 )% and 83.7 % for the three months ended September 30, 2019 and 2018, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2019 were primarily due to the increase in our valuation allowance associated with certain foreign losses. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2018 were primarily due to the change in our valuation allowance associated with net unrealized losses that are capital in nature.
Our income tax provision from our continuing operations was $1.2 million for the nine months ended September 30, 2019 compared to an income tax provision of $13.8 million for the nine months ended September 30, 2018. Our
27
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14. COMMITMENTS AND CONTINGENCIES
Commitments
As of September 30, 2019 and December 31, 2018, our satellite-related obligations from our continuing operations were $263.7 million and $298.9 million, respectively. Our satellite-related obligations primarily include payments pursuant to regulatory authorizations; non-lease costs associated with our finance lease satellites; and in-orbit incentives relating to certain satellites; as well as commitments for satellite service arrangements.
Contingencies
Patents and Intellectual Property
Many entities, including some of our competitors, have or may have in the future patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be tripled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these parties do not own the rights they claim, that these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses from these parties on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.
Separation Agreement, Share Exchange and BSS Transaction
In connection with EchoStar’s spin-off from DISH in 2008 (the “Spin-off”), EchoStar entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the terms of the separation agreement, EchoStar assumed certain liabilities that relate to its and our business, including certain designated liabilities for acts or omissions that occurred prior to the Spin-off. Certain specific provisions govern intellectual property related claims under which, generally, EchoStar will only be liable for its acts or omissions following the Spin-off and DISH Network will indemnify EchoStar for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off, as well as DISH Network’s acts or omissions following the Spin-off. Additionally, in connection with the Share Exchange and BSS Transaction, EchoStar 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
28
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending legal proceedings are charged to expense as incurred.
For certain cases, 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 or motions; (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 or jury ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers.
Elbit
On January 23, 2015, Elbit Systems Land and C4I LTD and Elbit Systems of America Ltd. (together referred to as “Elbit”) filed a complaint against our subsidiary Hughes Network Systems, L.L.C. (“HNS”), as well as against Black Elk Energy Offshore Operations, LLC, Bluetide Communications, Inc. and Helm Hotels Group, in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patent Nos. 6,240,073 (the “073 patent”) and 7,245,874 (“874 patent”). The 073 patent is entitled “Reverse Link for a Satellite Communication Network” and the 874 patent is entitled “Infrastructure for Telephony Network.” Elbit alleges that the 073 patent is infringed by broadband satellite systems that practice the Internet Protocol Over Satellite standard. Elbit alleges that the 874 patent is infringed by the manufacture and sale of broadband satellite systems that provide cellular backhaul service via connections to E1 or T1 interfaces at cellular backhaul base stations. On April 2, 2015, Elbit filed an amended complaint removing Helm Hotels Group as a defendant, but making similar allegations against a new defendant, Country Home Investments, Inc. On November 3 and 4, 2015 and January 22, 2016, the defendants filed petitions before the United States Patent and Trademark Office (“USPTO”) challenging the validity of the patents in suit, which the USPTO subsequently declined to institute. On April 13, 2016, the defendants answered Elbit’s complaint. At Elbit’s request, on June 26, 2017, the court dismissed Elbit’s claims of infringement against all parties other than HNS. Trial commenced on July 31, 2017. On August 7, 2017, the jury returned a verdict that the 073 patent was valid and infringed, and awarded Elbit $21.1 million. The jury also found that such infringement of the 073 patent was not willful and that the 874 patent was not infringed. On March 30, 2018, the court ruled on post-trial motions, upholding the jury’s findings and awarding Elbit attorneys’ fees in an amount that has not yet been specified. Elbit initially requested an award of approximately $13.9 million of attorneys’ fees. On April 27, 2018, HNS filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. Oral argument was held on May 8, 2019. On June 25, 2019, the Federal Circuit issued an Opinion and Order affirming the court’s judgment and holding that it did not yet have jurisdiction to review the court’s decision to award attorney’s fees. On August 8, 2019, HNS filed a combined petition for panel rehearing or rehearing en banc with the Federal Circuit, which was denied on September 10, 2019. In an order dated September 18, 2019, the District Court questioned the attorneys’ fees calculations proposed by both parties and asked for further briefing, which the parties submitted on October 25, 2019. As a result of the Federal Circuit’s rulings, as of September 30, 2019, we have recorded an accrual of $33.7 million, reflecting the $21.1 million jury verdict and $12.6 million of pre- and post-judgment interest, costs, attorney’s fees, pre-verdict supplemental damages and post-verdict damages through the 073 patent’s expiration. As of December 31, 2018, we recorded an accrual of $3.2 million with respect to this liability. Any eventual payments
29
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
made with respect to the ultimate outcome of this matter may be different from our accruals and such differences could be significant.
Realtime Data LLC
On May 8, 2015, Realtime Data LLC (“Realtime”) filed suit against EchoStar Corporation and our subsidiary HNS in the U.S. District Court for the Eastern District of Texas alleging infringement of U.S. Patent Nos. 7,378,992 (the “992 patent”), entitled “Content Independent Data Compression Method and System;” 7,415,530 (the “530 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval,” and 8,643,513 (the “513 patent”), entitled “Data Compression System and Methods.” On September 14, 2015, Realtime amended its complaint, additionally alleging infringement of U.S. Patent No. 9,116,908 (the “908 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval.” On February 14, 2017, Realtime filed a second suit against EchoStar Corporation and our subsidiary HNS in the same District Court, alleging infringement of four additional U.S. Patents, Nos. 7,358,867 (the “867 patent”), entitled “Content Independent Data Compression Method and System;” 8,502,707 (the “707 patent”), entitled “Data Compression Systems and Methods;” 8,717,204 (the “204 patent”), entitled “Methods for Encoding and Decoding Data;” and 9,054,728 (the “728 patent”), entitled “Data Compression System and Methods.” On February 13, 2018, we filed petitions before the USPTO challenging the validity of all claims asserted against us from the 707 patent, as well as one of the asserted claims of the 728 patent. On September 5, 2018, the USPTO declined to institute proceedings for the petition that we had filed against the 728 patent. On September 12, 2018, the USPTO instituted proceedings to review the validity of the asserted claims of the 707 patent. In a stipulation filed on October 24, 2018, Realtime voluntarily elected not to pursue any previously asserted claims from the 992, 530, 513, 908, 867 and 204 patents. Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein. In February 2019, we entered into a settlement agreement with Realtime and the case was 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; EchoStar’s officer, David J. Rayner; EchoStar, Hughes Satellite Systems Corporation and our former subsidiary BSS Corp.; and DISH and its subsidiary Merger Sub. On September 5, 2019, the defendants filed motions to dismiss. On October 11, 2019, the plaintiffs filed an amended complaint removing Messrs. Dodge, Federico, Kaul, Schroeder, Tarr and Wade as defendants. The amended complaint alleges that Mr. Ergen, as EchoStar’s controlling stockholder, breached fiduciary duties to EchoStar’s minority stockholders by structuring the BSS Transaction with inadequate consideration and improperly influencing EchoStar’s board 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. 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,
30
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
remanded and re-appealed several times over the following twelve years. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the Tribunal’s ruling. As of March 31, 2018, the DOT had assessed HCIPL $4.2 million for additional license fees and $17.8 million for interest, penalties and interest on penalties. On October 24, 2019, the Supreme Court of India issued an order affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties. We expect the DOT will issue an updated assessment that could possibly have additional interest, penalties and interest on penalties in light of the Supreme Court’s recent decision. As of September 30, 2019 and December 31, 2018, we have recorded an accrual of $22.0 million and $1.3 million, respectively. The eventual payments made with respect to the ultimate outcome of this matter may be different from our accruals and such differences could be significant.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of business. As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which we may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, we from time to time receive inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.
In our opinion, the amount of ultimate liability with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We also indemnify our directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for us. Additionally, in the normal course of its business, we enter into contracts pursuant to which we may make a variety of representations and warranties and indemnify the counterparty for certain losses. Our possible exposure under these arrangements cannot be reasonably estimated as this involves the resolution of claims made, or future claims that may be made, against us or our officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
NOTE 15. SEGMENT REPORTING
Operating segments are business components of an enterprise for which separate financial information is available and regularly evaluated by our chief operating decision maker (“CODM”), who is our Chief Executive Officer. We primarily operate in two business segments, Hughes and ESS, as described in Note 1. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS business segment.
The 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 noncontrolling interests, or EBITDA. Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate, Accounting and Legal) and other activities that have not been assigned to our operating segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in the tables below or in the reconciliation of EBITDA below.
Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents revenue, EBITDA and capital expenditures for each of our operating segments from our continuing operations (amounts in thousands). Capital expenditures are net of refunds and other receipts related to property and equipment and exclude capital expenditures from discontinued operations of $0.3 million and de minimis three months ended September 30, 2019 and 2018, respectively, and $0.5 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively.
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the three months ended September 30, 2019 | ||||||||||||||||
External revenue | $ | $ | $ | $ | ||||||||||||
Intersegment revenue | ( | ) | — | |||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
EBITDA | $ | $ | $ | ( | ) | $ | ||||||||||
Capital expenditures | $ | $ | $ | $ | ||||||||||||
For the three months ended September 30, 2018 | ||||||||||||||||
External revenue | $ | $ | $ | $ | ||||||||||||
Intersegment revenue | — | |||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
EBITDA | $ | $ | $ | ( | ) | $ | ||||||||||
Capital expenditures | $ | $ | $ | $ | ||||||||||||
For the nine months ended September 30, 2019 | ||||||||||||||||
External revenue | $ | $ | $ | $ | ||||||||||||
Intersegment revenue | ( | ) | — | |||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
EBITDA | $ | $ | $ | ( | ) | $ | ||||||||||
Capital expenditures | $ | $ | $ | $ | ||||||||||||
For the nine months ended September 30, 2018 | ||||||||||||||||
External revenue | $ | $ | $ | $ | ||||||||||||
Intersegment revenue | ( | ) | — | |||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
EBITDA | $ | $ | $ | ( | ) | $ | ||||||||||
Capital expenditures | $ | $ | ( | ) | $ | $ | ||||||||||
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table reconciles total consolidated EBITDA to reported Income (loss) from continuing operations before income taxes in our Condensed Consolidated Statements of Operations (amounts in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
EBITDA | $ | $ | $ | $ | ||||||||||||
Interest income and expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
NOTE 16. RELATED PARTY TRANSACTIONS
EchoStar
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 net expenses for shared corporate services received from EchoStar and its other subsidiaries of $1.2 million and $4.5 million for the three months ended September 30, 2019 and 2018, respectively, and $6.1 million and $14.1 million for the nine months ended September 30, 2019 and 2018, respectively.
We also reimburse EchoStar and its other subsidiaries from time to time for amounts paid by EchoStar and its other subsidiaries for costs and expenses attributable to us, and EchoStar and its other subsidiaries similarly reimburse us from time to time for amounts paid by us for costs and expenses attributable to EchoStar and its other subsidiaries. We report net payments under these arrangements in Advances to affiliates, net within current assets and we report net receipts under these arrangements in Advances from affiliates, net within current liabilities in our Condensed Consolidated Balance Sheets. No repayment schedule for these net advances has been determined.
In addition, 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.
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 one to three percent, subject to periodic adjustment based on the one-year U.S. LIBOR rate. We report amounts payable under these agreements in Advances from affiliates, net within noncurrent liabilities in our Condensed Consolidated Balance Sheets.
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 for further information.
Contribution of EchoStar XIX Satellite. On February 1, 2017, EchoStar contributed the EchoStar XIX satellite and assigned the related construction contract with the satellite manufacturer to us. We recorded a $349.3 million increase in Additional paid-in capital, reflecting EchoStar’s $514.4 million carrying amount of the satellite, including capitalized
33
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interest that was previously charged to expense in our consolidated financial statements, less related deferred taxes of $165.1 million.
EchoStar XXI and EchoStar XXIII Launch Facilitation and Operational Control Agreements. As part of applying for launch licenses for the EchoStar XXI and XXIII satellites through the UK Space Agency, we and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”), entered into agreements in June 2015 and March 2016 to transfer to us EOC’s launch service contracts for the EchoStar XXI and EchoStar XXIII satellites, respectively, and to grant us certain rights to control the in-orbit operations of these satellites. EOC retained ownership of the satellites and agreed to make additional payments to us for amounts that we are required to pay under both launch service contracts. In 2016, we recorded additions to Other noncurrent assets, net and corresponding increases in Additional paid-in capital in our Condensed Consolidated Balance Sheet to reflect EOC’s cumulative payments under the launch service contracts prior to the transfer dates and to reflect EOC’s funding of additional cash payments to the launch service provider. The EchoStar XXIII and the EchoStar XXI satellites were successfully launched in March 2017 and June 2017, respectively. We recorded decreases in Other noncurrent assets, net and Additional paid-in capital of $61.8 million and $83.3 million, respectively, representing the carrying amounts of the launch service contracts at the time of launch to reflect the consumption of the contracts’ economic benefits by EOC, the owner of the satellites. In connection with the BSS Transaction, the agreement relating to the EchoStar XXIII satellite was transferred to DISH Network.
Share Exchange Agreement. Prior to consummation of the Share Exchange, EchoStar was required to complete steps necessary for the transferring of certain assets and liabilities to DISH and certain of its subsidiaries. As part of these steps, subsidiaries of EchoStar that, prior to the consummation of the Share Exchange, owned EchoStar’s business of providing online video delivery and satellite video delivery for broadcasters and pay-TV operators, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management and other services and related assets and liabilities were contributed to one of our subsidiaries in consideration for additional shares of HSS’ common stock that were then issued to a subsidiary of EchoStar.
EchoStar Mobile Limited Service Agreements. We provide services and lease equipment to support the business of EchoStar Mobile Limited, a subsidiary of EchoStar that is licensed by the European Union and its member states (“EU”) to provide mobile satellite services and complementary ground component services covering the entire EU using S-band spectrum. Generally, the amounts EchoStar’s other subsidiaries pay for these services are based on cost plus a fixed margin. We have converted the receivables for certain of these services into loans, bearing an annual interest rate of 5 %, that mature in 2023. We recorded revenue in Services and other revenue - other of $4.9 million for each of the three months ended September 30, 2019 and 2018, and $14.8 million and $13.7 million for the nine months ended September 30, 2019 and 2018, respectively, related to these services.
Construction Management Services for EchoStar XXIV 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, with a planned 2021 launch. We provide construction management services to EchoStar’s subsidiary for the construction of the EchoStar XXIV satellite. We charged EchoStar’s subsidiary and reduced our operating expenses by the costs of such services of $0.3 million for each of the three months ended September 30, 2019 and 2018, and $1.1 million and $0.8 million for each of the nine months ended September 30, 2019 and 2018, respectively.
DISH Network
EchoStar and DISH have operated as separate publicly-traded companies since 2008. In addition, prior to the consummation of the Share Exchange in February 2017, DISH Network owned the Tracking Stock, which represented an aggregate 80.0 % economic interest in the residential retail satellite broadband business of our Hughes segment. Following the consummation of the Share Exchange, the Tracking Stock was retired. A substantial majority of the voting power of the shares of each of EchoStar and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established by Mr. Ergen for the benefit of his family.
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, EchoStar, we and certain other of EchoStar’s subsidiaries and DISH Network entered into certain agreements pursuant to which we and EchoStar and its other subsidiaries obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us and EchoStar and its other subsidiaries; and such entities indemnify each other
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
against certain liabilities arising from the 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 also may enter into additional agreements with DISH Network in the future.
The following is a summary of the terms of our principal agreements with DISH Network that may have an impact on our financial condition and results of operations.
Services and Other Revenue — DISH Network
Satellite Capacity Leased to DISH Network. We have entered into certain agreements to lease satellite capacity pursuant to which we provide satellite services to DISH Network on certain satellites owned or leased by us. The fees for the services provided under these agreements depend, among other things, upon the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite and the length of the service arrangements. The terms of each service arrangement is set forth below:
EchoStar IX. Effective January 2008, DISH Network began leasing satellite capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue leasing satellite capacity from us on the EchoStar IX satellite on a month-to-month basis.
103 Degree Orbital Location/SES-3. In May 2012, we entered into a spectrum development agreement (the “103 Spectrum Development Agreement”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rights at the 103 degree west longitude orbital location (the “103 Spectrum Rights”). In June 2013, we and DISH Network entered into a spectrum development agreement (the “DISH 103 Spectrum Development Agreement”) pursuant to which DISH Network may use and develop the 103 Spectrum Rights. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Spectrum Development Agreement and we exercised our right to terminate the 103 Spectrum Development Agreement.
In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a ten-year agreement with Ciel pursuant to which we leased certain satellite capacity from Ciel on the SES-3 satellite at the 103 degree west longitude orbital location (the “Ciel 103 Agreement”). In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network leased certain satellite capacity from us on the SES-3 satellite (the “DISH 103 Agreement”). Under the terms of the DISH 103 Agreement, DISH Network made certain monthly payments to us through the service term. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Agreement and we exercised our right to terminate the Ciel 103 Agreement.
Telesat Obligation Agreement. In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). We transferred the Telesat Transponder Agreement to DISH Network as part of the BSS Transaction; however, we retained certain obligations related to DISH Network’s performance under that agreement. In September 2019, we and DISH Network entered into an agreement whereby DISH Network compensates us for retaining such obligations.
TerreStar 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 acquisition of Hughes Communications, Inc. and its subsidiaries (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. 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
maintenance services are terminated by DISH Network upon at least 90 days’ written notice to us. The provision of hosting services will continue until May 2022. In addition, DISH Network generally may terminate any and all services for convenience subject to providing us with prior notice and/or payment of termination charges.
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 HughesNet service. DISH Network pays us a monthly per subscriber wholesale service fee for the HughesNet service based upon a subscriber’s service level and based upon certain volume subscription thresholds. The Distribution Agreement also provides that DISH Network has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the HughesNet service. The Distribution Agreement had an initial term of five years with automatic renewal for successive one year terms unless terminated by either party with a written notice at least 180 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 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-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’ written notice to us or by us with at least 365 days’ written notice to DISH Network.
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General and Administrative Expenses — DISH Network
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, which all expired in January 2010 and were replaced by a professional services agreement (the “Professional Services Agreement”). In January 2010, EchoStar and DISH Network agreed that EchoStar and its subsidiaries shall continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under a transition services agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Additionally, EchoStar and DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage EchoStar and its subsidiaries to manage the process of procuring new satellite capacity for DISH Network (previously provided under a satellite procurement agreement), receive logistics, procurement and quality assurance services from EchoStar and its subsidiaries (previously provided under a services agreement) and provide other support services. In connection with the consummation of the Share Exchange, EchoStar and DISH amended and restated the Professional Services Agreement (the “Amended 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 amended the Amended and Restated Professional Services Agreement to provide that EchoStar and its subsidiaries and DISH Network shall have the right to receive additional services that either EchoStar and its subsidiaries or DISH Network may require as a result of the BSS Transaction and to remove our access to and the maintenance and support services for the TT&C Antennas. A portion of these costs and expenses have been allocated to us in the manner described above under the caption “EchoStar.” The term of the Amended and Restated Professional Services Agreement is through January 2020 and renews automatically for successive one-year periods thereafter, unless the agreement is terminated earlier by either party upon at least 60 days’ notice. However, either party may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice, unless the statement of work for particular services states otherwise. Certain services being provided for under the Amended and Restated Professional Services Agreement may survive the termination of the agreement.
Real Estate Lease from DISH Network. Effective March 2017, we subleased from DISH Network 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 sublease for a five-year period ending in August 2022. We and DISH Network amended this sublease to, among other things, terminate this sublease in March 2019. The rent on a per square foot basis for the lease was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and we were responsible for our portion of the taxes, insurance, utilities and maintenance of the premises.
Collocation and Antenna Space Agreements. We and DISH Network have entered into an agreement pursuant to which DISH Network provides us with collocation space in El Paso, Texas. This agreement was for an initial period ending in August 2015, and provides us with renewal options for four consecutive years. Effective August 2015, we exercised our first renewal option for a period ending in August 2018 and in April 2018 we exercised our second renewal option for a period ending in August 2021. In connection with the Share Exchange, effective March 2017, we also entered into certain agreements pursuant to which DISH Network provides collocation and antenna space to EchoStar through February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In October 2019, we provided a termination notice for our New Braunfels, Texas agreement to be effective May 2020. In August 2017, we and DISH Network also entered into certain other agreements pursuant to which DISH Network provides additional collocation and antenna space to EchoStar in Monee, Illinois and Spokane, Washington through August 2022. We generally may renew our collocation and antenna space agreements for three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. We may terminate certain of these agreements with 180 days’ prior written notice. The fees for the services provided under these agreements depend on the number of racks leased at the location.
In connection with the BSS Transaction, in September 2019, we entered into an agreement pursuant to which DISH Network will provide us with antenna space and power in Cheyenne, Wyoming for a period of five years commencing
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
no later than October 2020, with four three-year renewal terms, with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term.
Other Agreements — DISH Network
Master Transaction Agreement. In May 2019, EchoStar and BSS Corp. entered into the Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred the BSS Business to BSS Corp.; (ii) EchoStar completed the Distribution; and (iii) immediately after the Distribution, (1) BSS Corp. became a wholly-owned subsidiary of DISH such that DISH owns and operates the BSS Business and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Common Stock. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. The Master Transaction Agreement contained customary representations and warranties by the parties, including EchoStar’s representations relating to the assets, liabilities and financial condition of the BSS Business, and representations by DISH Network relating to its financial condition and liabilities. EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively. See Note 1 for further information.
Satellite and Tracking Stock Transaction. In February 2014, we and EchoStar entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) in March 2014, EchoStar and Hughes Satellite Systems Corporation issued the Tracking Stock to DISH Network in exchange for five satellites owned by DISH Network (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) (including assumption of related in-orbit incentive obligations) and $11.4 million in cash; and (ii) in March 2014, DISH Network began receiving certain satellite services from us as discussed above on these five satellites (collectively, the “Satellite and Tracking Stock Transaction.”) The Tracking Stock was retired in March 2017 and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect.
Share Exchange Agreement. On January 31, 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries, pursuant to which, on February 28, 2017, EchoStar and certain of its and our subsidiaries received all of the shares of the Tracking Stock in exchange for 100 % of the equity interests of certain of EchoStar’s subsidiaries that held substantially all of EchoStar’s EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange, EchoStar no longer operates the transferred EchoStar Technologies businesses and the Tracking Stock was retired and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. Pursuant to the Share Exchange Agreement, EchoStar transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contained customary representations and warranties by the parties, including representations by EchoStar related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. EchoStar and DISH Network also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by EchoStar or DISH causes the transaction to be taxable to the other party after closing. See Note 1 for further information.
Hughes Broadband Master Services Agreement. In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our HughesNet service and related equipment and other telecommunication services and (ii) installs HughesNet service equipment with respect to activations generated by DISH Network. Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation services. The Hughes Broadband MSA has an initial term of five years until March 2022 with automatic renewal for successive one-year terms. Either party has the ability to terminate the Hughes Broadband MSA, in whole or in part, for any reason upon at least 90 days’ notice to the other party. Upon expiration or termination of the Hughes Broadband MSA, we will continue to provide our HughesNet service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
totaling $3.7 million and $6.4 million for the three months ended September 30, 2019 and 2018, respectively, and $13.2 million and $26.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Share Exchange Intellectual Property and Technology License Agreement. 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 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 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 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 Share Exchange.
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.
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, EchoStar and its other subsidiaries for a period ending in September 2021, with the option for EchoStar to renew for a one-year period upon written notice at least 90 days prior to the initial expiration (the “TT&C Agreement”). The fees for services provided under the TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. Any party is able to terminate the TT&C Agreement for any reason upon 12 months’ notice.
Share Exchange Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, EchoStar and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, EchoStar is responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the Share Exchange. Both EchoStar and DISH Network made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both EchoStar and DISH Network have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, DISH Network has agreed to indemnify EchoStar if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The tax matters agreement supplements the Tax Sharing Agreement outlined below, which continues in full force and effect.
BSS Transaction Tax Matters Agreement. Effective September 2019, in connection with the BSS Transaction, EchoStar, BSS Corp. and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, EchoStar is responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the BSS Transaction and DISH is responsible for all tax returns and tax liabilities for the
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BSS Business from and after the BSS Transaction. Both EchoStar and DISH made certain tax-related representations and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both EchoStar and DISH Network have agreed to indemnify each other for certain losses if there is a breach of any the tax representations or violation of any of the tax covenants in the tax matters agreement and that breach or violation results in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar or its stockholders for U.S. federal income tax purposes. In addition, DISH Network has agreed to indemnify EchoStar if the BSS Business is acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons, where either it took an action, or knowingly facilitated, consented to or assisted with an action by its stockholders, that resulted in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar and its stockholders for U.S. federal income tax purposes. The tax matters agreement supplements the Share Exchange Tax Matters Agreement outlined above and the Tax Sharing Agreement outlined below, which continue in full force and effect.
Tax Sharing Agreement. Effective December 2007, EchoStar and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs EchoStar and DISH and their respective subsidiaries’ respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network, and DISH Network indemnifies EchoStar and its subsidiaries for such taxes. However, DISH Network is not liable for and does not indemnify EchoStar or its subsidiaries for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code (the “Code”), because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar or its subsidiaries take or fail to take; or (iii) any action that EchoStar or its subsidiaries take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, EchoStar and its subsidiaries will be solely liable for, and will indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
In light of the Tax Sharing Agreement, among other things, and in connection with EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, EchoStar and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of EchoStar’s consolidated tax returns. As a result, DISH Network agreed to pay EchoStar an amount of that includes the federal tax benefit DISH received as a result of our operations.
In August 2018, EchoStar and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, DISH Network is required to compensate EchoStar for certain past and future excess California research and development tax credits generated by EchoStar and its subsidiaries and used by DISH Network.
Other Agreements
Hughes Systique Corporation (“Hughes Systique”)
We contract with Hughes Systique for software development services. In addition to our approximately 43.3 % ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications, Inc. and a member of EchoStar’s board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, in the aggregate, own approximately 25.4 %, on an undiluted basis, of Hughes Systique’s outstanding shares as of September 30, 2019. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest entity and we are considered the primary beneficiary of Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes Systique. As a result, we consolidate Hughes Systique’s financial statements in our accompanying Condensed Consolidated Financial Statements.
Deluxe/EchoStar LLC
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We own 50.0 % of Deluxe, a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada. We account for our investment in Deluxe using the equity method. We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of $0.9 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and $2.6 million and $3.3 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 and December 31, 2018, we had trade accounts receivable from Deluxe of $0.6 million and $0.8 million, respectively. See Note 11 for additional information about our investments in unconsolidated entities.
Broadband Connectivity Solutions
In August 2018, we entered into an agreement with Yahsat to establish a new entity, BCS, to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat’s Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100.0 million in cash in exchange for a 20.0 % interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS. We recognized revenue from BCS for such services and equipment of $1.7 million and $6.2 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019 and December 31, 2018, we had trade accounts receivable from BCS of $2.4 million and $3.4 million, respectively. See Note 11 for additional information about our investments in unconsolidated entities.
AsiaSat
We contract with AsiaSat Telecommunications Inc. (“AsiaSat”) for the use of transponder capacity on one of AsiaSat’s satellites. Mr. William David Wade, who joined EchoStar’s board of directors in February 2017, served as the Chief Executive Officer of AsiaSat in 2016 and as a senior advisor to the Chief Executive Officer of AsiaSat through March 2017. We incurred expenses payable to AsiaSat under this agreement of nil for both the three and nine months ended September 30, 2019 and 2018, respectively.
Global IP
In May 2017, we entered into an agreement with Global-IP Cayman (“Global IP”) providing for the sale of certain equipment and services to Global IP. Mr. William David Wade, a member of EchoStar’s board of directors, served as a member of the board of directors of Global IP from September 2017 until April 2019 and continues to serve as an executive advisor to the Chief Executive Officer of Global IP. 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 the agreement as a result of Global IP’s defaults resulting from its failure to make payments to us as required under the terms of the agreement and we reserved our rights and remedies against Global IP under the agreement. We recognized revenue under this agreement of nil for both the three and nine months ended September 30, 2019, respectively, and $5.9 million and $6.5 million for the three and nine months ended September 30, 2018, respectively. As of both September 30, 2019 and December 31, 2018, we are owed $7.5 million from Global IP.
TerreStar Solutions
DISH Network owns more than 15.0 % of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuant to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $2.0 million and $2.7 million for the three months ended September 30, 2019 and 2018, respectively, and $10.2 million and $3.0 million for the nine months ended September 30, 2019 and 2018, respectively. As of both September 30, 2019 and December 31, 2018, we had trade accounts receivable from TSI of $2.3 million.
Maxar Technologies Inc.
41
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Mr. Jeffrey Tarr, who joined EchoStar’s board of directors in March 2019, served as a consultant and advisor to Maxar and its subsidiaries (“Maxar Tech”) through May 2019. We previously entered into agreements with Maxar Tech for the manufacture of our EchoStar IX, EchoStar XI, EchoStar XIV, EchoStar XVI, EchoStar XVII, EchoStar XIX, EchoStar XXI and EchoStar XXIII satellites and for the timely manufacture and delivery and certain other services for our EchoStar XXIV satellite with an expected launch date in 2021. Maxar Tech provides us with anomaly support for these satellites once launched pursuant to the terms of the agreements. Maxar Tech also provides a warranty on one of these satellites and may be required to pay us certain amounts should the satellite not operate according to certain performance specifications. Our obligations to pay Maxar Tech under these agreements during the design life of the applicable satellites may be reduced if the applicable satellites do not operate according to certain performance specifications. We incurred aggregate costs payable to Maxar Tech under these agreements of $12.1 million and $78.9 million for the three and nine months ended September 30, 2019 , respectively.
Discontinued Operations
The following agreements were terminated or transferred to DISH Network as part of the BSS Transaction and we, EchoStar and its other subsidiaries have no further obligations and have earned no additional revenue or incurred no additional expense, as applicable, under these agreements or investments after the consummation of the BSS Transaction on September 10, 2019. Historical transactions under this agreement are reported in Net income from discontinued operations in our Condensed Consolidated Statements of Operations (see Note 5).
DBS Transponder Lease. EchoStar leased satellite capacity from us on eight DBS transponders on the QuetzSat-1 satellite through November 2021, after which EchoStar had certain options to renew the agreement on a year-to year basis through the end of life of the QuetzSat-1 satellite. We transferred this agreement to DISH Network in connection with the BSS Transaction, and as a result we no longer provide and EchoStar no longer receives these services.
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 owned or leased by us. The fees for the services provided under these agreements depended, among other things, upon the orbital location of the applicable satellite, the number of transponders that provided services on the applicable satellite and the length of the service arrangements.
EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV. In March 2014, we began leasing certain satellite capacity to DISH Network on the EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites.
EchoStar XII. DISH Network leased satellite capacity from us on the EchoStar XII satellite.
EchoStar XVI. In December 2009, we entered into an agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network leased satellite capacity from us on the EchoStar XVI satellite since January 2013.
Nimiq 5 Agreement. In addition to the Telesat Transponder Agreement, in September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”). Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service.
QuetzSat-1 Agreement. In November 2008, we entered into an agreement to lease satellite capacity from SES Latin America, which provided, among other things, for the provision by SES Latin America to us of leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into an agreement pursuant to which DISH Network leased from us satellite capacity on 24 of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location. In February 2013, we and DISH Network entered into an agreement pursuant to which we leased back from DISH Network certain satellite capacity on five DBS transponders on the QuetzSat-1 satellite.
42
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 “TT&C Agreement”). The fees for services provided under the TT&C Agreement were calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which varied depending on the nature of the services provided.
NOTE 17. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
Certain of our wholly-owned subsidiaries (together, the “Guarantor Subsidiaries”) have fully and unconditionally guaranteed, on a joint and several basis, the obligations of our 5 1/4% Senior Secured Notes due August 1, 2026 , 7 5/8% Senior Unsecured Notes due 2021 and 6 5/8% Senior Unsecured Notes due August 1, 2026 (collectively, the “Notes”).
In lieu of separate financial statements of the Guarantor Subsidiaries, accompanying condensed consolidating financial information prepared in accordance with Rule 3-10(f) of Regulation S-X is presented below, including the accompanying condensed balance sheet information, the accompanying condensed statement of operations and comprehensive income (loss) information and the accompanying condensed statement of cash flows information of HSS, the Guarantor Subsidiaries on a combined basis and the non-guarantor subsidiaries of HSS on a combined basis and the eliminations necessary to arrive at the corresponding information of HSS on a consolidated basis.
The indentures governing the Notes contain restrictive covenants that, among other things, impose limitations on our ability and the ability of certain of our subsidiaries to pay dividends or make distributions, incur additional debt, make certain investments, create liens or enter into sale and leaseback transactions, merge or consolidate with another company, transfer and sell assets, enter into transactions with affiliates or allow to exist certain restrictions on the ability of certain of our subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to us.
The accompanying condensed consolidating financial information presented below should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto included herein. This financial information reflects the addition of a new Guarantor Subsidiary and the transfer of several former Guarantor Subsidiaries to DISH Network in connection with the BSS Transaction.
43
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of September 30, 2019
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
Marketable investment securities, at fair value | ||||||||||||||||||||
Trade accounts receivable and contract assets | ||||||||||||||||||||
Trade accounts receivable - DISH Network | ||||||||||||||||||||
Inventory | ||||||||||||||||||||
Advances to affiliates, net | ( | ) | ||||||||||||||||||
Other current assets | ||||||||||||||||||||
Current assets of discontinued operations | ||||||||||||||||||||
Total current assets | ( | ) | ||||||||||||||||||
Property and equipment, net | ||||||||||||||||||||
Operating lease right-of-use assets | ||||||||||||||||||||
Goodwill | ||||||||||||||||||||
Regulatory authorizations | ||||||||||||||||||||
Other intangible assets, net | ||||||||||||||||||||
Investments in unconsolidated entities | ||||||||||||||||||||
Investment in subsidiaries | ( | ) | ||||||||||||||||||
Advances to affiliates | ( | ) | ||||||||||||||||||
Deferred tax asset | ( | ) | ||||||||||||||||||
Other noncurrent assets, net | ||||||||||||||||||||
Total assets | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Trade accounts payable | $ | $ | $ | $ | $ | |||||||||||||||
Trade accounts payable - DISH Network | ||||||||||||||||||||
Current portion of long-term debt and finance lease obligations | ||||||||||||||||||||
Advances from affiliates, net | ( | ) | ||||||||||||||||||
Accrued expenses and other | ||||||||||||||||||||
Current liabilities of discontinued operations | ||||||||||||||||||||
Total current liabilities | ( | ) | ||||||||||||||||||
Long-term debt and finance lease obligations, net | ||||||||||||||||||||
Deferred tax liabilities, net | ( | ) | ||||||||||||||||||
Operating lease liabilities | ||||||||||||||||||||
Advances from affiliates, net | ( | ) | ||||||||||||||||||
Other noncurrent liabilities | ||||||||||||||||||||
Total HSS shareholders’ equity | ( | ) | ||||||||||||||||||
Noncontrolling interests | ||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
44
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of December 31, 2018
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
Marketable investment securities, at fair value | ||||||||||||||||||||
Trade accounts receivable and contract assets | ||||||||||||||||||||
Trade accounts receivable - DISH Network | ||||||||||||||||||||
Inventory | ||||||||||||||||||||
Advances to affiliates, net | ( | ) | ||||||||||||||||||
Other current assets | ( | ) | ||||||||||||||||||
Current assets of discontinued operations | ||||||||||||||||||||
Total current assets | ( | ) | ||||||||||||||||||
Property and equipment, net | ||||||||||||||||||||
Goodwill | ||||||||||||||||||||
Regulatory authorizations | ||||||||||||||||||||
Other intangible assets, net | ||||||||||||||||||||
Investments in unconsolidated entities | ||||||||||||||||||||
Investment in subsidiaries | ( | ) | ||||||||||||||||||
Advances to affiliates | ( | ) | ||||||||||||||||||
Deferred tax asset | ( | ) | ||||||||||||||||||
Other noncurrent assets, net | ||||||||||||||||||||
Noncurrent assets of discontinued operations | ||||||||||||||||||||
Total assets | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Trade accounts payable | $ | $ | $ | $ | $ | |||||||||||||||
Trade accounts payable - DISH Network | ||||||||||||||||||||
Current portion of long-term debt and finance lease obligations | ||||||||||||||||||||
Advances from affiliates, net | ( | ) | ||||||||||||||||||
Accrued expenses and other | ( | ) | ||||||||||||||||||
Current liabilities of discontinued operations | ||||||||||||||||||||
Total current liabilities | ( | ) | ||||||||||||||||||
Long-term debt and finance lease obligations, net | ||||||||||||||||||||
Deferred tax liabilities, net | ( | ) | ||||||||||||||||||
Advances from affiliates, net | ( | ) | ||||||||||||||||||
Other noncurrent liabilities | ||||||||||||||||||||
Noncurrent liabilities of discontinued operations | ||||||||||||||||||||
Total HSS shareholders’ equity | ( | ) | ||||||||||||||||||
Noncontrolling interests | ||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
45
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended September 30, 2019
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Revenue: | ||||||||||||||||||||
Services and other revenue - DISH Network | $ | $ | $ | $ | $ | |||||||||||||||
Services and other revenue - other | ( | ) | ||||||||||||||||||
Equipment revenue | ( | ) | ||||||||||||||||||
Total revenue | ( | ) | ||||||||||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales - services and other (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Selling, general and administrative expenses | ( | ) | ||||||||||||||||||
Research and development expenses | ||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Total costs and expenses | ( | ) | ||||||||||||||||||
Operating income (loss) | ( | ) | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | ( | ) | ||||||||||||||||||
Interest expense, net of amounts capitalized | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Gains (losses) on investments, net | ||||||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates, net | ( | ) | ( | ) | ||||||||||||||||
Equity in earnings (losses) of subsidiaries, net | ( | ) | ||||||||||||||||||
Other, net | ( | ) | ( | ) | ( | ) | ||||||||||||||
Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||
Income tax benefit (provision) | ( | ) | ( | ) | ||||||||||||||||
Net income (loss) from continuing operations | ( | ) | ( | ) | ||||||||||||||||
Net income (loss) from discontinued operations | ( | ) | ||||||||||||||||||
Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
Less: Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Net income (loss) attributable to HSS | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income (loss) | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||
Unrealized gains (losses) on available-for-sale securities and other | ( | ) | ( | ) | ||||||||||||||||
Equity in other comprehensive income (loss) of subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Total other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Comprehensive income (loss) attributable to HSS | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
46
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended September 30, 2018
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Revenue: | ||||||||||||||||||||
Services and other revenue - DISH Network | $ | $ | $ | $ | $ | |||||||||||||||
Services and other revenue - other | ( | ) | ||||||||||||||||||
Equipment revenue | ( | ) | ||||||||||||||||||
Total revenue | ( | ) | ||||||||||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales - services and other (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Selling, general and administrative expenses | ( | ) | ||||||||||||||||||
Research and development expenses | ||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Total costs and expenses | ( | ) | ||||||||||||||||||
Operating income (loss) | ( | ) | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | ( | ) | ||||||||||||||||||
Interest expense, net of amounts capitalized | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Gains (losses) on investments, net | ||||||||||||||||||||
Equity in earnings of unconsolidated affiliates, net | ||||||||||||||||||||
Equity in earnings (losses) of subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Other, net | ( | ) | ( | ) | ( | ) | ||||||||||||||
Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ||||||||||||||||
Income tax benefit (provision) | ( | ) | ( | ) | ||||||||||||||||
Net income (loss) from continuing operations | ( | ) | ( | ) | ||||||||||||||||
Net income from discontinued operations | ||||||||||||||||||||
Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | ||||||||||||||||||||
Net income (loss) attributable to HSS | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||
Unrealized gains (losses) on available-for-sale securities and other | ( | ) | ( | ) | ||||||||||||||||
Equity in other comprehensive income (loss) of subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Amounts reclassified to net income (loss): | ||||||||||||||||||||
Realized gains on available-for-sale securities | ( | ) | ( | ) | ||||||||||||||||
Total other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Comprehensive income (loss) attributable to HSS | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
47
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2019
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Revenue: | ||||||||||||||||||||
Services and other revenue - DISH Network | $ | $ | $ | $ | $ | |||||||||||||||
Services and other revenue - other | ( | ) | ||||||||||||||||||
Equipment revenue | ( | ) | ||||||||||||||||||
Total revenue | ( | ) | ||||||||||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales - services and other (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Selling, general and administrative expenses | ( | ) | ||||||||||||||||||
Research and development expenses | ||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Total costs and expenses | ( | ) | ||||||||||||||||||
Operating income (loss) | ( | ) | ( | ) | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | ( | ) | ||||||||||||||||||
Interest expense, net of amounts capitalized | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Gains (losses) on investments, net | ( | ) | ( | ) | ||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates, net | ( | ) | ( | ) | ||||||||||||||||
Equity in earnings (losses) of subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Other, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||
Income tax benefit (provision) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Net income (loss) from continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
Net income (loss) from discontinued operations | ( | ) | ||||||||||||||||||
Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
Less: Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Net income (loss) attributable to HSS | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||
Unrealized gains (losses) on available-for-sale securities and other | ( | ) | ||||||||||||||||||
Equity in other comprehensive income (loss) of subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Amounts reclassified to net income (loss): | ||||||||||||||||||||
Realized gains on available-for-sale securities | ( | ) | ( | ) | ||||||||||||||||
Total other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Comprehensive income (loss) attributable to HSS | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
48
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2018
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Revenue: | ||||||||||||||||||||
Services and other revenue - DISH Network | $ | $ | $ | $ | $ | |||||||||||||||
Services and other revenue - other | ( | ) | ||||||||||||||||||
Equipment revenue | ( | ) | ||||||||||||||||||
Total revenue | ( | ) | ||||||||||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales - services and other (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | ( | ) | ||||||||||||||||||
Selling, general and administrative expenses | ( | ) | ||||||||||||||||||
Research and development expenses | ||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Total costs and expenses | ( | ) | ||||||||||||||||||
Operating income (loss) | ( | ) | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | ( | ) | ||||||||||||||||||
Interest expense, net of amounts capitalized | ( | ) | ( | ) | ( | ) | ||||||||||||||
Gains (losses) on investments, net | ||||||||||||||||||||
Equity in earnings of unconsolidated affiliates, net | ||||||||||||||||||||
Equity in earnings (losses) of subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Other, net | ( | ) | ( | ) | ||||||||||||||||
Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ||||||||||||||||
Income tax benefit (provision) | ( | ) | ( | ) | ||||||||||||||||
Net income (loss) from continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
Net income from discontinued operations | ||||||||||||||||||||
Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | ||||||||||||||||||||
Net income (loss) attributable to HSS | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||
Unrealized gains (losses) on available-for-sale securities and other | ( | ) | ( | ) | ||||||||||||||||
Equity in other comprehensive income (loss) of subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Amounts reclassified to net income (loss): | ||||||||||||||||||||
Realized gains on available-for-sale securities | ( | ) | ( | ) | ||||||||||||||||
Total other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Comprehensive income (loss) attributable to HSS | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
49
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2019
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities | ( | ) | ||||||||||||||||||
Net cash flows from operating activities | ( | ) | ||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of marketable investment securities | ( | ) | ( | ) | ||||||||||||||||
Sales and maturities of marketable investment securities | ( | ) | ||||||||||||||||||
Expenditures for property and equipment | ( | ) | ( | ) | ( | ) | ||||||||||||||
Expenditures for externally marketed software | ( | ) | ( | ) | ||||||||||||||||
Dividend received from unconsolidated entity | ||||||||||||||||||||
Distributions (contributions) and advances from (to) subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Net cash flows from investing activities | ( | ) | ( | ) | ( | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Repayment of debt and finance lease obligations | ( | ) | ( | ) | ( | ) | ||||||||||||||
Repurchase and maturity of debt | ( | ) | ( | ) | ||||||||||||||||
Purchase of noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||||||
Repayment of in-orbit incentive obligations | ( | ) | ( | ) | ||||||||||||||||
Contributions (distributions) and advances (to) from parent, net | ( | ) | ||||||||||||||||||
Proceeds from issuance of debt | ||||||||||||||||||||
Net cash flows from financing activities | ( | ) | ( | ) | ( | ) | ||||||||||||||
Effect of exchange rates on cash and cash equivalents | ||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents, including restricted amounts | ( | ) | ( | ) | ||||||||||||||||
Cash and cash equivalents, including restricted amounts, beginning of period | ||||||||||||||||||||
Cash and cash equivalents, including restricted amounts, end of period | $ | $ | $ | $ | $ | |||||||||||||||
50
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2018
(Amounts in thousands)
HSS | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities | ( | ) | ||||||||||||||||||
Net cash flows from operating activities | ( | ) | ||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of marketable investment securities | ( | ) | ( | ) | ||||||||||||||||
Sales and maturities of marketable investment securities | ||||||||||||||||||||
Expenditures for property and equipment | ( | ) | ( | ) | ( | ) | ||||||||||||||
Refunds and other receipts related to property and equipment | ||||||||||||||||||||
Expenditures for externally marketed software | ( | ) | ( | ) | ||||||||||||||||
Payment for satellite launch services | ( | ) | ( | ) | ||||||||||||||||
Distributions (contributions) and advances from (to) subsidiaries, net | ( | ) | ( | ) | ||||||||||||||||
Other | ( | ) | ( | ) | ||||||||||||||||
Net cash flows from investing activities | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Repayment of debt and finance lease obligations | ( | ) | ( | ) | ( | ) | ||||||||||||||
Repayment of in-orbit incentive obligations | ( | ) | ( | ) | ||||||||||||||||
Capital contribution from EchoStar Corporation | ||||||||||||||||||||
Contributions (distributions) and advances (to) from parent, net | ( | ) | ||||||||||||||||||
Net cash flows from financing activities | ( | ) | ( | ) | ||||||||||||||||
Effect of exchange rates on cash and cash equivalents | ( | ) | ( | ) | ||||||||||||||||
Net increase (decrease) in cash and cash equivalents, including restricted amounts | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Cash and cash equivalents, including restricted amounts, beginning of period | ||||||||||||||||||||
Cash and cash equivalents, including restricted amounts, end of period | $ | $ | $ | $ | $ | |||||||||||||||
51
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 18. SUPPLEMENTAL FINANCIAL INFORMATION
Noncash Investing and Financing Activities
The following table presents the noncash investing and financing activities (amounts in thousands):
For the nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
Increase (decrease) in capital expenditures included in accounts payable, net | $ | ( | ) | $ | ||||
Noncash net assets exchanged for BSS Transaction (Note 5) | $ | $ | ||||||
Restricted Cash and Cash Equivalents
The beginning and ending balances of cash and cash equivalents presented in our Condensed Consolidated Statements of Cash Flows included restricted cash and cash equivalents of $0.8 million and $1.0 million, respectively, for the nine months ended September 30, 2019 and $0.8 million each for the nine months ended September 30, 2018. These amounts are included in Other noncurrent assets, net in our Condensed Consolidated Balance Sheets.
Fair Value of In-Orbit Incentives
As of September 30, 2019 and December 31, 2018, the fair values of our in-orbit incentive obligations from our continuing operations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $57.1 million and $57.9 million, respectively.
Contract Acquisition and Fulfillment Costs
Unamortized contract acquisition costs totaled $112.5 million and $103.6 million as of September 30, 2019 and December 31, 2018, respectively, and related amortization expense totaled $23.8 million and $22.0 million for the three months ended September 30, 2019 and 2018, respectively, and $70.4 million and $64.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Unamortized contract fulfillment costs were $3.0 million as of each of September 30, 2019 and December 31, 2018 and related amortization expense was de minimis for the three and nine months ended September 30, 2019 and 2018, respectively.
Research and Development
The table below summarizes the research and development costs incurred in connection with customers’ orders included in cost of sales and other expenses we incurred for research and development (amounts in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cost of sales | $ | $ | $ | $ | ||||||||||||
Research and development | $ | $ | $ | $ | ||||||||||||
52
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capitalized Software Costs
As of September 30, 2019 and December 31, 2018, the net carrying amount of externally marketed software was $99.7 million and $96.8 million, respectively, of which $33.1 million and $28.8 million, respectively, is under development and not yet placed in service. We capitalized costs related to the development of externally marketed software of $6.0 million and $9.6 million for the three months ended September 30, 2019 and 2018, respectively, and $21.4 million and $24.6 million for the nine months ended September 30, 2019 and 2018, respectively. We recorded amortization expense relating to the development of externally marketed software of $6.2 million and $5.8 million for the three months ended September 30, 2019 and 2018, respectively, and $18.4 million and $16.9 million for the nine months ended September 30, 2019 and 2018, respectively. The weighted average useful life of our externally marketed software was three years as of September 30, 2019.
Supplemental Cash Flows from Discontinued Operations
Significant supplemental cash flow information and adjustments to reconcile net income to net cash flow from operating activities for discontinued operations for the nine months ended September 30, 2019 and 2018 are as below:
For the nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
Operating Activities | ||||||||
Net income from discontinued operations | $ | $ | ||||||
Depreciation and amortization | $ | $ | ||||||
Investing Activities | ||||||||
Expenditures for property and equipment | $ | ( | ) | $ | ( | ) | ||
Financing Activities | ||||||||
Repayment of lease obligations | $ | $ | ||||||
Repayment of in-orbit incentive obligations | $ | $ | ||||||
53
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “HSS,” the “Company” and “our” refer to Hughes Satellite Systems Corporation and its subsidiaries. References to “$” are to United States (“U.S.”) dollars. The following management’s narrative analysis of results of operations should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto included elsewhere in 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. See 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, see the caption Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”) as amended by Amendment No. 1 to Form 10-K on Form 10-K/A filed with the SEC (collectively referred to as our “Form 10-K”). Further, such forward-looking statements speak only as of the date of this Form 10-Q and we undertake no obligation to update them.
EXECUTIVE SUMMARY
We are a holding company and a subsidiary of EchoStar Corporation (“EchoStar”). We were formed as a Colorado corporation in March 2011. We are a global provider of broadband satellite technologies, broadband internet services for home and small to medium-sized business customers, satellite operations and satellite services. We also deliver innovative network technologies, managed services and communications solutions for aeronautical, enterprise and government customers.
In May 2019, EchoStar and one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), entered into a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”). Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred to BSS Corp. certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily relating to the portion of our ESS satellite services business that manages, markets and provides (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and EchoStar’s joint venture Dish Mexico, S. de R.L. de C.V., (“Dish Mexico”) and its subsidiaries and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of EchoStar’s and our other businesses (collectively, the “BSS Business”); (ii) EchoStar distributed to each holder of shares of EchoStar 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 Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and DISH owns and operates the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”). Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS business segment. The BSS Transaction has been accounted for as a spin-off to EchoStar’s stockholders as EchoStar did not receive any consideration. As a result, the operating results of the BSS Business have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.
The BSS Transaction was structured in a manner intended to be tax-free to EchoStar and its stockholders for U.S. federal income tax purposes. In connection with the BSS Transaction, EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively. Additionally, EchoStar and DISH and certain of our, EchoStar’s and DISH’s subsidiaries, as applicable, have (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services, (ii) terminated certain previously existing agreements, and (iii) amended certain existing agreements and entered into certain new
54
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
agreements pursuant to which we and DISH Network will obtain and provide certain products, services and rights from and to each other.
During 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement with DISH and certain of its subsidiaries. EchoStar, and certain of its and our subsidiaries, received all the shares of the Hughes Retail Preferred Tracking Stock previously issued by EchoStar and us (together, the “Tracking Stock”) in exchange for 100% of the equity interests of certain of EchoStar’s subsidiaries that held substantially all of EchoStar’s former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Following the consummation of the Share Exchange, EchoStar no longer operates its former EchoStar Technologies businesses, the Tracking Stock was retired and is no longer outstanding, and all agreements, arrangements and policy statements with respect to the Tracking Stock terminated.
We currently operate in two business segments: Hughes and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company’s Chief Executive Officer.
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate, Accounting and Legal) and other activities that have not been assigned to our operating segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in our segment reporting.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the nine months ended September 30, 2019
• | Revenue of $1.4 billion |
• | Operating income of $105.9 million |
• | Net income from continuing operations of $22.0 million |
• | Net income attributable to HSS of $23.3 million |
• | Earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $434.0 million (see reconciliation of this non-GAAP measure on page 62) |
Consolidated Financial Condition as of September 30, 2019
• | Total assets of $5.3 billion |
• | Total liabilities of $3.4 billion |
• | Total shareholders’ equity of $2.1 billion |
• | Cash, cash equivalents and current marketable investment securities of $1.8 billion |
Hughes Segment
Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services to home and small to medium-sized business customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to service providers, aeronautical, enterprise and government customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment 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
55
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
capabilities, specifically our managed services for enterprises. We also continue to invest in next generation technologies that can be applied to our future products and services.
We continue to focus our efforts on growing our consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers in our domestic and international markets across wholesale and retail channels. The growth of our enterprise businesses, including aeronautical, relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Service costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth.
Our Hughes segment currently uses capacity from three of our satellites (the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite) and additional satellite capacity acquired from third-party providers to provide services to our customers. Growth of our subscriber base continues to be constrained in areas where we are nearing or have reached maximum capacity. While these constraints are expected to be resolved when we launch new satellites, we continue to focus on 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 Yahsat will contribute its current satellite communications services business in Brazil to us in exchange for a 20% ownership interest in our existing Brazilian subsidiary that conducts our current satellite communications services business in Brazil. The combined business will provide broadband internet services and enterprise solutions in Brazil using the Telesat T19V and Eutelsat 65W satellites and Yahsat’s Al Yah 3 satellite. Under the terms of the agreement, Yahsat may also acquire, for further cash investments, additional minority ownership interests in the business in the future provided certain conditions are met. The completion of the transaction is subject to customary regulatory approvals and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all.
In May 2019, we entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti will contribute its very small aperture terminal (“VSAT”) telecommunications services and hardware business in India to our two existing Indian subsidiaries that conduct our VSAT services and hardware business. The combined entities will provide broadband satellite and hybrid solutions for enterprise and government networks. Upon consummation of the transaction, Bharti will have a 33% ownership interest in the combined business. The completion of the transaction is subject to customary regulatory approvals and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all.
In August 2018, we entered into an agreement with Yahsat to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat’s Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS.
In August 2017, a subsidiary of EchoStar entered into a contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite, with a planned 2021 launch. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (“HughesNet service”) in North, Central and South America as well as aeronautical and enterprise broadband services. In the first quarter of 2019, Maxar Technologies Inc. (“Maxar”), the parent company of Space Systems/Loral, LLC (“SSL”), the manufacturer of our EchoStar XXIV satellite, announced that, although it will continue to operate its geostationary communications satellite business, it intends to adjust its organization to better align costs with revenue. SSL has indicated to us that it intends to meet its contractual obligations regarding the timely manufacture and delivery of the EchoStar XXIV satellite. However, if SSL fails to meet or is delayed in meeting these obligations for any reason, including if Maxar decides to significantly modify its geostationary communications satellite business, such failure could have a material adverse impact on our business operations, future revenues, financial position and prospects, the completion of the manufacture of the EchoStar XXIV satellite and our planned expansion of satellite broadband services
56
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
throughout North, South and Central America. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in EchoStar’s Corporate and Other in its segment reporting.
In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”). Pursuant to the Hughes Broadband MSA, DISH’s subsidiary, 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 the DISH subsidiary. As a result of the Hughes Broadband MSA, we have not earned and do not expect to earn in the future, significant equipment revenue from our distribution agreement with another wholly-owned subsidiary of DISH. We expect churn in the existing wholesale subscribers to continue to reduce Services and other revenue - DISH Network in the future.
Developments toward the launch of next-generation satellite systems including low-earth orbit (“LEO”), medium-earth orbit (“MEO”) and geostationary systems could provide additional opportunities to drive the demand for our equipment, hardware, technology and services. In June 2015, a subsidiary of EchoStar made an equity investment in OneWeb Global Limited (the successor in interest to WorldVue Satellite Limited) (“OneWeb”), a global LEO satellite service company. In addition, we have an agreement with OneWeb to provide certain equipment and services in connection with the ground network system for OneWeb’s LEO satellites. We expect to continue delivering additional equipment and services to OneWeb.
We continue our efforts to expand our consumer satellite services business outside of the U.S. In April 2014, we entered into a 15-year agreement with Eutelsat do Brasil for Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite. We began delivering high-speed consumer satellite broadband services in Brazil in July 2016. Additionally, in September 2015, we entered into 15-year agreements with affiliates of Telesat Canada for Ka-band capacity on the Telesat T19V satellite located at the 63 degree west longitude orbital location, which was launched in July 2018. Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A and EchoStar XIX satellites in Central and South America. We currently provide satellite broadband internet service in several Central and South American countries, and expect to launch similar services in other Central and South American countries.
Our subscriber numbers as of September 30, 2019, June 30, 2019 and December 31, 2018 are approximately as follows:
As of | |||||||||
September 30, 2019 | June 30, 2019 | December 31, 2018 | |||||||
Broadband subscribers | 1,437,000 | 1,415,000 | 1,361,000 | ||||||
For the three months ended | ||||||
September 30, 2019 | June 30, 2019 | |||||
Net additions | 22,000 | 26,000 | ||||
Our broadband subscribers include customers that subscribe to our HughesNet services in North, Central and South America through retail, wholesale and small/medium enterprise service channels. During the third quarter of 2019, we had net additions of approximately 22,000 new subscribers. Our gross subscriber additions increased by approximately 10,000 compared to the second quarter of 2019. Our net subscriber additions for the quarter ended September 30, 2019 decreased by 4,000 compared to the quarter ended June 30, 2019 reflecting higher churn in the third quarter compared to the second quarter of 2019.
As of both September 30, 2019 and December 31, 2018, our Hughes segment had $1.4 billion, respectively, of contracted revenue backlog. We define Hughes contracted revenue backlog as our expected future revenue, including lease revenue, under customer contracts that are non-cancelable, excluding agreements with customers in our consumer market.
57
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
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 and EchoStar 105/SES-11 satellites and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.
As of September 30, 2019 and December 31, 2018, our ESS segment had contracted revenue backlog of $12.2 million and $5.8 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. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, LEO networks, MEO systems, balloons and High Altitude Platform Systems are expected to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment and commerce in North America and internationally for consumers, as well as aeronautical, enterprise and government customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies 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 markets and new customers, broaden our portfolio of services, products and intellectual property, make our business more valuable, align us for future growth and expansion, maximize the return on our investments, and strengthen our business and relationships with our customers. We may allocate or dispose of significant resources for long-term value that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.
Cybersecurity
As a global provider of satellite technologies and services, internet services and communications equipment and networks, we may be prone to more targeted and persistent levels of cyber-attacks than other businesses. These risks may be more prevalent as we continue to expand and grow our business into other areas of the world outside of North America, some of which are still developing their cybersecurity infrastructure maturity. Detecting, deterring, preventing and mitigating incidents caused by hackers and other parties may result in significant costs to us and may expose our customers to financial or other harm that have the potential to significantly increase our liability.
We treat cybersecurity risk seriously and are focused on maintaining the security of our and our partners’ systems, networks, technologies and data. We regularly review and revise our relevant policies and procedures, invest in and maintain internal resources, personnel and systems and review, modify and supplement our defenses through the use of various services, programs and outside vendors. EchoStar also maintains agreements with third party vendors and experts to assist in our remediation and mitigation efforts if we experience or identify a material incident or threat. In addition, senior management and the Audit Committee of EchoStar’s Board of Directors are regularly briefed on cybersecurity matters.
We are not aware of any cyber-incidents with respect to our owned or leased satellites or other networks, equipment or systems that have had a material adverse effect on our business, costs, operations, prospects, results of operation or financial position during the three and nine months ended September 30, 2019. 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.
58
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
The following table presents our consolidated results of operations for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 (amounts in thousands):
For the nine months ended September 30, | Variance | ||||||||||||||
Statements of Operations Data (1) | 2019 | 2018 | Amount | % | |||||||||||
Revenue: | |||||||||||||||
Services and other revenue - DISH Network | $ | 32,021 | $ | 48,118 | $ | (16,097 | ) | (33.5 | ) | ||||||
Services and other revenue - other | 1,182,455 | 1,113,471 | 68,984 | 6.2 | |||||||||||
Equipment revenue | 175,084 | 150,134 | 24,950 | 16.6 | |||||||||||
Total revenue | 1,389,560 | 1,311,723 | 77,837 | 5.9 | |||||||||||
Costs and expenses: | |||||||||||||||
Cost of sales - services and other | 425,896 | 418,651 | 7,245 | 1.7 | |||||||||||
% of total services and other revenue | 35.1 | % | 36.0 | % | |||||||||||
Cost of sales - equipment | 142,744 | 127,254 | 15,490 | 12.2 | |||||||||||
% of total equipment revenue | 81.5 | % | 84.8 | % | |||||||||||
Selling, general and administrative expenses | 353,559 | 285,662 | 67,897 | 23.8 | |||||||||||
% of total revenue | 25.4 | % | 21.8 | % | |||||||||||
Research and development expenses | 19,411 | 20,328 | (917 | ) | (4.5 | ) | |||||||||
% of total revenue | 1.4 | % | 1.5 | % | |||||||||||
Depreciation and amortization | 342,086 | 315,930 | 26,156 | 8.3 | |||||||||||
Total costs and expenses | 1,283,696 | 1,167,825 | 115,871 | 9.9 | |||||||||||
Operating income | 105,864 | 143,898 | (38,034 | ) | (26.4 | ) | |||||||||
Other income (expense): | |||||||||||||||
Interest income | 47,341 | 41,362 | 5,979 | 14.5 | |||||||||||
Interest expense, net of amounts capitalized | (172,502 | ) | (171,835 | ) | 667 | 0.4 | |||||||||
Gains (losses) on investments, net | (290 | ) | 262 | (552 | ) | * | |||||||||
Equity in earnings (losses) of unconsolidated affiliates, net | (2,882 | ) | 3,722 | (6,604 | ) | * | |||||||||
Other, net | (12,129 | ) | (3,764 | ) | (8,365 | ) | * | ||||||||
Total other expense, net | (140,462 | ) | (130,253 | ) | (10,209 | ) | 7.8 | ||||||||
Income (loss) from continuing operations before income taxes | (34,598 | ) | 13,645 | (48,243 | ) | * | |||||||||
Income tax provision, net | (1,185 | ) | (13,756 | ) | 12,571 | (91.4 | ) | ||||||||
Net income (loss) from continuing operations | (35,783 | ) | (111 | ) | (35,672 | ) | * | ||||||||
Net income from discontinued operations | 57,734 | 90,105 | (32,371 | ) | (35.9 | ) | |||||||||
Net income (loss) | 21,951 | 89,994 | (68,043 | ) | (75.6 | ) | |||||||||
Less: Net income (loss) attributable to noncontrolling interests | (1,359 | ) | 1,292 | (2,651 | ) | * | |||||||||
Net income attributable to HSS | $ | 23,310 | $ | 88,702 | $ | (65,392 | ) | (73.7 | ) | ||||||
Other data: | |||||||||||||||
EBITDA (2) | $ | 434,008 | $ | 458,756 | $ | (24,748 | ) | (5.4 | ) | ||||||
Subscribers, end of period | 1,437,000 | 1,332,000 | 105,000 | 7.9 | |||||||||||
* Percentage is not meaningful.
(1) | An explanation of our key metrics is included on pages 64 and 65 under the heading Explanation of Key Metrics and Other Items. |
(2) | A reconciliation of EBITDA to Net income, the most directly comparable generally accepted accounting principles (“U.S. GAAP”) measure in the accompanying financial statements, is included on page 62. For further information on our use of EBITDA, see Explanation of Key Metrics and Other Items on page 65. |
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ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
The following discussion relates to our continuing operations for the nine months ended September 30, 2019 and 2018 unless otherwise stated.
Services and other revenue - DISH Network. Services and other revenue - DISH Network totaled $32.0 million for the nine months ended September 30, 2019, a decrease of $16.1 million or 33.5%, compared to the same period in 2018.
Services and other revenue - DISH Network from our Hughes segment for the nine months ended September 30, 2019 decreased by $13.7 million, or 34.9%, to $25.6 million compared to the same period in 2018. The decrease was primarily attributable to a continued decrease in our residential wholesale broadband services.
Services and other revenue - DISH Network from our ESS segment for the nine months ended September 30, 2019 decreased by $1.6 million, or 41.4%, to $2.2 million compared to the same period in 2018. The decrease was primarily due to a decrease of $1.6 million in satellite capacity leased to DISH Network on the EchoStar IX satellite.
Services and other revenue - other. Services and other revenue - other totaled $1.2 billion for the nine months ended September 30, 2019, an increase of $69.0 million or 6.2%, compared to the same period in 2018.
Services and other revenue - other from our Hughes segment for the nine months ended September 30, 2019 increased by $77.8 million, or 7.2%, to $1.2 billion compared to the same period in 2018. The increase was primarily attributable to increases in sales of broadband services to our consumer customers of $95.4 million, partially offset by a decrease in sales of broadband services to our enterprise customers of $20.5 million.
Services and other revenue - other from our ESS segment for the nine months ended September 30, 2019 decreased by $9.7 million, or 48.5%, to $9.7 million compared to the same period in 2018. The decrease was due to a net decrease in transponder services provided to third parties.
Equipment revenue. Equipment revenue totaled $175.1 million for the nine months ended September 30, 2019, an increase of $25.0 million or 16.6%, compared to the same period in 2018. The increase was from our Hughes segment and mainly due to increases in hardware sales of $15.0 million to our international enterprise customers and $11.9 million to our mobile satellite systems customers. The increase was partially offset by a decrease in hardware sales of $2.6 million to our domestic consumer and enterprise customers.
Cost of sales - services and other. Cost of sales - services and other totaled $425.9 million for the nine months ended September 30, 2019, an increase of $7.2 million or 1.7%, compared to the same period in 2018. The increase was from our Hughes segment primarily attributable to an increase in the costs of broadband services provided to our consumer customers supporting the increase in number of subscribers and revenue in both the domestic and international markets, partially offset by a decrease in the costs of broadband services provided to our enterprise customers.
Cost of sales - equipment. Cost of sales - equipment totaled $142.7 million for the nine months ended September 30, 2019, an increase of $15.5 million or 12.2%, compared to the same period in 2018. The increase was from our Hughes segment and primarily attributable to an increase in hardware sales to our international enterprise customers and our mobile satellite systems customers. The increase was partially offset by a decrease in hardware sales to our domestic consumer and enterprise customers.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $353.6 million for the nine months ended September 30, 2019, an increase of $67.9 million or 23.8%, compared to the same period in 2018. The increase was primarily attributable to increases in (i) expense of $32.9 million related to certain legal proceedings, (ii) marketing and promotional expenses of $18.4 million from our Hughes segment mainly associated with our consumer business, (iii) bad debt expense of $6.6 million, and (iv) other general and administrative expenses of $10.0 million.
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ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
Depreciation and amortization. Depreciation and amortization expenses totaled $342.1 million for the nine months ended September 30, 2019, an increase of $26.2 million or 8.3%, compared to the same period in 2018. The increase was primarily due to increases in depreciation expense of (i) $12.6 million relating to our customer premises equipment, (ii) $5.0 million relating to our machinery and equipment, (iii) $4.8 million relating the Telesat T19V satellite that was placed into service in the fourth quarter of 2018 and (iv) $3.1 million relating to the decrease in depreciable life of the SPACEWAY 3 satellite.
Interest income. Interest income totaled $47.3 million for the nine months ended September 30, 2019, an increase of $6.0 million or 14.5%, compared to the same period in 2018 primarily attributable to an increase in yield percentage in 2019 compared to 2018, partially offset by a decrease in interest income as a result of the decrease in cash and cash equivalents and current marketable investment securities in 2019.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $172.5 million for the nine months ended September 30, 2019, an increase of $0.7 million or 0.4%, compared to the same period in 2018. The decrease was primarily due to a decrease of $22.4 million in interest expense and the amortization of deferred financing cost as a result of the repurchase and maturity of the 6 1/2% Senior Secured Notes due 2019 and a net increase of $5.2 million in capitalized interest relating to the construction of the EchoStar XXIV satellite. The decrease was partially offset by an increase of $18.2 million in interest expense associated with certain legal proceedings.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled $2.9 million for the nine months ended September 30, 2019, an increase in loss of $6.6 million compared to the same period in 2018.
Other, net. Other, net totaled $12.1 million in loss for the nine months ended September 30, 2019, an increase in loss of $8.4 million compared to the same period in 2018. For the nine months ended September 30, 2019, the $12.1 million in loss was primarily related to an unfavorable foreign exchange impact. For the nine months ended September 30, 2018, the $3.8 million in loss was related to an unfavorable foreign exchange impact of $13.0 million and a net gain of $9.6 million due to the settlement of certain amounts due to and from a third party vendor.
Income tax provision. Income tax provision was $1.2 million for the nine months ended September 30, 2019 compared to an income tax provision of $13.8 million for the nine months ended September 30, 2018. Our effective income tax rate was (3.4)% and 100.8% for the nine months ended September 30, 2019 and 2018, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2019 were primarily due to the change in net unrealized gains that are capital in nature, various permanent tax differences, the impact of state and local taxes, and increase in our valuation allowance associated with certain foreign losses. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2018 were primarily due to various permanent tax differences, the impact of state and local taxes, the increase in our valuation allowance associated with certain foreign losses and the change in our valuation allowance associated with net unrealized losses that are capital in nature.
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ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
Net income attributable to HSS. Net income attributable to HSS was $23.3 million for the nine months ended September 30, 2019, a decrease of $65.4 million or 73.7%, compared to the same period in 2018 as set forth in the following table (amounts in thousands):
Amounts | ||||
Net income attributable to HSS for the nine months ended September 30, 2018 | $ | 88,702 | ||
Decrease in operating income, including depreciation and amortization | (38,034 | ) | ||
Increase in interest income | 5,979 | |||
Increase in interest expense, net of amounts capitalized | (667 | ) | ||
Decrease in gains on investments, net | (552 | ) | ||
Decrease in equity in earnings of unconsolidated affiliates, net | (6,604 | ) | ||
Decrease in other income | (8,365 | ) | ||
Decrease in income tax provision | 12,571 | |||
Decrease in net income from discontinued operations | (32,371 | ) | ||
Decrease in net income attributable to noncontrolling interests | 2,651 | |||
Net income attributable to HSS for the nine months ended September 30, 2019 | $ | 23,310 | ||
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, the most directly comparable U.S. GAAP measure in the accompanying condensed consolidating financial statements (amounts in thousands):
For the nine months ended September 30, | Variance | ||||||||||||||
2019 | 2018 | Amount | % | ||||||||||||
Net income (loss) | $ | 21,951 | $ | 89,994 | $ | (68,043 | ) | (75.6 | ) | ||||||
Interest income and expense, net | 125,161 | 130,473 | (5,312 | ) | (4.1 | ) | |||||||||
Income tax provision, net | 1,185 | 13,756 | (12,571 | ) | (91.4 | ) | |||||||||
Depreciation and amortization | 342,086 | 315,930 | 26,156 | 8.3 | |||||||||||
Net income from discontinued operations | (57,734 | ) | (90,105 | ) | 32,371 | (35.9 | ) | ||||||||
Net (income) loss attributable to noncontrolling interests | 1,359 | (1,292 | ) | 2,651 | * | ||||||||||
EBITDA | $ | 434,008 | $ | 458,756 | $ | (24,748 | ) | (5.4 | ) | ||||||
EBITDA was $434.0 million for the nine months ended September 30, 2019, a decrease of $24.7 million or 5.4%, compared to the same period in 2018. The decrease was primarily due to decreases of (i) $11.9 million in operating income, excluding depreciation and amortization, (ii) $8.4 million in other income and (iii) $6.6 million in equity in earnings of unconsolidated affiliates.
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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 nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 (amounts in thousands). Capital expenditures are net of refunds and other receipts related to property and equipment and exclude capital expenditures from discontinued operations of $0.5 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively.
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the nine months ended September 30, 2019 | ||||||||||||||||
Total revenue | $ | 1,360,919 | $ | 11,873 | $ | 16,768 | $ | 1,389,560 | ||||||||
Capital expenditures | $ | 224,483 | $ | — | $ | — | $ | 224,483 | ||||||||
EBITDA | $ | 448,837 | $ | 5,006 | $ | (19,835 | ) | $ | 434,008 | |||||||
For the nine months ended September 30, 2018 | ||||||||||||||||
Total revenue | $ | 1,271,886 | $ | 22,562 | $ | 17,275 | $ | 1,311,723 | ||||||||
Capital expenditures | $ | 285,352 | $ | (76,757 | ) | $ | — | $ | 208,595 | |||||||
EBITDA | $ | 452,982 | $ | 15,478 | $ | (9,704 | ) | $ | 458,756 | |||||||
Hughes Segment
For the nine months ended September 30, | Variance | ||||||||||||||
2019 | 2018 | Amount | % | ||||||||||||
Total revenue | $ | 1,360,919 | $ | 1,271,886 | $ | 89,033 | 7.0 | ||||||||
Capital expenditures | $ | 224,483 | $ | 285,352 | $ | (60,869 | ) | (21.3 | ) | ||||||
EBITDA | $ | 448,837 | $ | 452,982 | $ | (4,145 | ) | (0.9 | ) | ||||||
Total revenue for the nine months ended September 30, 2019 increased by $89.0 million, or 7.0%, compared to the same period in 2018. The increase was primarily due to an increase of $81.4 million in sales of broadband services to our consumer customers and net increases in hardware sales of $13.2 million to our enterprise customers and $11.9 million to our mobile satellite systems customers. The increase was partially offset by a decrease of $20.5 million in sales of broadband services to our enterprise customers.
Capital expenditures for the nine months ended September 30, 2019 decreased by $60.9 million, or 21.3%, compared to the same period in 2018, primarily due to net decreases in capital expenditures associated with the construction and infrastructure of our satellites and in our consumer and enterprise businesses.
EBITDA for the nine months ended September 30, 2019 was $448.8 million, a decrease of $4.1 million, or 0.9%, compared to the same period in 2018. The change in EBITDA was primarily attributable to an increase of $65.3 million in gross margin, which was offset by increases in (i) expense of $32.9 million related to certain legal proceedings, (ii) marketing and promotional expenses of $18.4 million mainly associated with our consumer business, (iii) bad debt expense of $6.6 million, (iv) a loss of $4.8 million from certain investments in our unconsolidated entities, and (v) other general and administrative expenses.
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ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
ESS Segment
For the nine months ended September 30, | Variance | ||||||||||||||
2019 | 2018 | Amount | % | ||||||||||||
Total revenue | $ | 11,873 | $ | 22,562 | $ | (10,689 | ) | (47.4 | ) | ||||||
Capital expenditures | $ | — | $ | (76,757 | ) | $ | 76,757 | (100.0 | ) | ||||||
EBITDA | $ | 5,006 | $ | 15,478 | $ | (10,472 | ) | (67.7 | ) | ||||||
* Percentage is not meaningful.
Total revenue for the nine months ended September 30, 2019 decreased by $10.7 million, or 47.4%, compared to the same period in 2018. The decrease was attributable to a net decrease of $9.7 million in transponder services provided to third parties and a decrease of $1.6 million in satellite capacity leased to DISH Network on the EchoStar IX satellite.
Capital expenditures for the nine months ended September 30, 2019 increased by $76.8 million compared to the same period in 2018, primarily due to a reimbursement of $77 million related to the EchoStar 105/SES-11 satellite received in the first quarter of 2018.
EBITDA for the nine months ended September 30, 2019 was $5.0 million, a decrease of $10.5 million, or 67.7%, compared to the same period in 2018, primarily due to the decrease in ESS revenue.
Corporate and Other
For the nine months ended September 30, | Variance | ||||||||||||||
2019 | 2018 | Amount | % | ||||||||||||
Total revenue | $ | 16,768 | $ | 17,275 | $ | (507 | ) | (2.9 | ) | ||||||
EBITDA | $ | (19,835 | ) | $ | (9,704 | ) | $ | (10,131 | ) | * | |||||
* Percentage is not meaningful.
EBITDA for the nine months ended September 30, 2019 was a loss of $19.8 million, an increase in loss of $10.1 million compared to the same period in 2018, primarily attributable to a net gain of $9.6 million due to the settlement of certain amounts due to and from a third party vendor in 2018.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue - DISH Network. Services and other revenue - DISH Network primarily includes revenue associated with satellite and transponder leases and services, TT&C, professional services, facilities rental revenue and other services provided to DISH Network. Services and other revenue - DISH Network also includes subscriber wholesale service fees for the HughesNet service sold to DISH Network.
Services and other revenue - other. Services and other revenue - other primarily includes the sales of enterprise and consumer broadband services, as well as maintenance and other contracted services. Services and other revenue - other also includes revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking and other services provided to customers other than DISH Network.
Equipment revenue. Equipment revenue primarily includes broadband equipment and networks sold to customers in our enterprise and consumer markets and sales of satellite broadband equipment and related equipment, related to the HughesNet service, to DISH Network.
Cost of sales - services and other. Cost of sales - services and other primarily includes the cost of broadband services provided to our enterprise and consumer customers, and to DISH Network, as well as the cost of providing maintenance and other contracted services. Cost of sales - services and other also includes the costs associated with
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ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued
satellite and transponder leases and services, TT&C, professional services, facilities rental costs and other services provided to our customers, including DISH Network.
Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks sold to customers in our enterprise and consumer markets and to DISH Network. Cost of sales - equipment also includes certain other costs associated with the deployment of equipment to our customers.
Selling, general and administrative expenses. Selling, general and administrative expenses primarily includes selling and marketing costs and employee-related costs associated with administrative services (e.g., information systems, human resources and other services), including stock-based compensation expense. It also includes professional fees (e.g. legal, information systems and accounting services) and other items associated with facilities and administrative services provided by EchoStar and its other subsidiaries, DISH Network and other third parties.
Research and development expenses. Research and development expenses primarily includes costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.
Interest income. Interest income primarily includes interest earned on our cash, cash equivalents and marketable investment securities, including premium amortization and discount accretion on debt securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized primarily includes interest expense associated with our debt and capital lease obligations (net of capitalized interest) and amortization of debt issuance costs.
Gains (losses) on investments, net. Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities and other investments for which we have elected the fair value option. It may also include realized gains and losses on the sale or exchange of our available-for-sale debt securities, other-than-temporary impairment losses on our available-for-sale securities, realized gains and losses on the sale or exchange of our investments in unconsolidated entities and adjustments to the carrying amount of investments in unconsolidated entities and marketable equity securities resulting from impairments and observable price changes.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.
Other, net. Other, net primarily includes foreign exchange gains and losses, dividends received from our marketable investment securities and other non-operating income or expense items that are not appropriately classified elsewhere in our Condensed Consolidated Statements of Operations.
Net income from discontinued operations. Net income from discontinued operations includes the condensed consolidated financial statements of the BSS Business transferred in the BSS Transaction.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as Net income (loss) excluding Interest income and expense, net, Income tax benefit (provision), net, Depreciation and amortization, Net income (loss) from discontinued operations and Net income (loss) attributable to noncontrolling interests. EBITDA is not a measure determined in accordance with U.S. GAAP. This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of Operations above. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with U.S. GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. 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 report 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.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2019 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.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Part I, Item 1. Financial Statements — Note 14 Commitments and Contingencies — Litigation in this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
The following information updates, and should be read in conjunction with, the information in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K/A for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on February 27, 2019.
RISKS RELATING TO THE BSS TRANSACTION
Certain of our directors and executive officers have interests in the BSS Transaction.
Certain of our directors and executive officers have interests in the BSS Transaction. Our directors and executive officers who own shares of EchoStar’s common stock participated in the Distribution and the Merger on the same terms as EchoStar’s other stockholders. Additionally, Mr. Ergen, director of both us and DISH, serves as a director and executive officer of BSS Corp. following the consummation of the BSS Transaction. We and the EchoStar parties that approved the BSS Transaction, as described below, were aware of and considered these interests, among other things, in deciding to approve the terms of the Master Transaction Agreement and the BSS Transaction.
The BSS Transaction was approved, in accordance with our and EchoStar’s longstanding related party transaction policy, by (i) independent management, (ii) EchoStar’s non-interlocking directors (i.e., directors who are not also directors or employees of DISH Network), with EchoStar’s director, Mr. R. Stanton Dodge, recusing himself to avoid the appearance of any potential conflict resulting from his prior employment with DISH Network and EchoStar’s director, Mr. Anthony M. Federico, recusing himself to avoid the appearance of any potential conflict resulting from his service on DISH’s special litigation committee, (iii) EchoStar’s audit committee, with Mr. Federico similarly recusing himself and, after all such approvals were obtained, (iv) our and EchoStar’s boards of directors, with, our and EchoStar’s chairman, Mr. Ergen, recusing himself.
If the Distribution and the Merger do not qualify as a tax‑free distribution and merger under the Code, then we and/or EchoStar may be required to pay substantial U.S. federal income taxes and under certain circumstances EchoStar may have indemnification obligations to DISH Network.
The parties’ received a tax opinion from their respective counsels as to the tax‑free nature of the transactions. They did not obtain a private letter ruling from the IRS with respect to the Distribution and the Merger and instead are relying solely on their respective tax opinions for comfort that the Distribution and the Merger qualify for tax‑free treatment for U.S. federal income tax purposes under the Code.
The tax opinions were based on, among other things, certain undertakings made by EchoStar and DISH Network, as well as certain representations and assumptions as to factual matters made by EchoStar, DISH Network, and Mr. and Mrs. Ergen. The failure of any factual representation or assumption to be true, correct and complete, or any undertaking to be fully complied with, could affect the validity of the tax opinions. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the conclusions set forth in the tax opinions. In addition, the tax opinions will be based on current law, and cannot be relied upon if current law changes with retroactive effect.
If the Distribution does not qualify as a tax‑free distribution under Section 355 of the Code, then EchoStar would recognize a substantial gain on the Distribution, we and EchoStar could incur significant U.S. federal income tax liabilities, and EchoStar could be required to indemnify DISH Network for the tax on such gain if the failure of the Distribution to so qualify is the result of certain of its actions or misrepresentations, but EchoStar will not be required to indemnify any of its stockholders. In the event EchoStar is required to indemnify DISH Network for taxes incurred
67
in connection with the BSS Transaction, the indemnification obligation could have a material adverse effect on our business, financial conditions, results or operations and cash flow.
Even if the Distribution otherwise qualifies as a tax-free distribution, the Distribution would be taxable to us and/or EchoStar (but not to its stockholders) pursuant to Section 355(e) of the Code if one or more persons acquire a 50% or greater interest (measured by vote or value) in our, EchoStar’s or BSS Corp.’s stock, directly or indirectly (including through acquisitions of the BSS Common Stock or DISH Common Stock after the completion of the BSS Transaction), as part of a plan or series of related transactions that includes the Distribution. If there is a change of control of DISH Network or BSS Corp. after the completion of the BSS Transaction or a transfer of stock or assets of DISH Network or BSS Corp. that results in the Distribution being taxable to us and/or EchoStar under Section 355(e) of the Code, DISH Network would be required to indemnify EchoStar (but not its stockholders) for such taxes only if DISH Network took an action or knowingly facilitated, consented to or assisted with an action by a DISH shareholder that caused the Distribution to fail to qualify as a tax-free distribution. In addition, the Merger being taxable could cause the Distribution to fail to qualify as a tax-free distribution.
A putative class action lawsuit relating to the BSS Transaction has been filed against EchoStar, Hughes Satellite Systems Corporation, DISH Network, Mr. Ergen and certain of our and EchoStar’s officers and other lawsuits related to the BSS Transaction may be filed against us, EchoStar, DISH Network and other persons which could result in substantial costs.
As of November 7, 2019, one complaint has been filed by a purported EchoStar stockholder. See Note 14 in the notes to our accompanying Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for more information about litigation related to the BSS Transaction that has been commenced prior to the date of this report. There can be no assurance that additional complaints will not be filed with respect to the BSS Transaction.
Even if this lawsuit and any others that may be filed are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition.
Our ability to operate and control our satellites is subject to risks related to DISH Network’s integration of the BSS Business.
In connection with the BSS Transaction, we transferred our satellite operation centers, which are used to monitor and control our satellites, to DISH Network. DISH Network may not be able to successfully or profitably integrate, operate, maintain and manage the BSS Business and its employees, including the operations and employees of the satellite operations centers. DISH Network may not be able to maintain uniform standards, controls, procedures and policies with respect to the satellite operations centers, and this may lead to operational inefficiencies. A failure or inefficiency at any of the satellite operations centers could cause a significant loss of service for our customers and might lead to a breakdown in the ability to communicate with one or more of our satellites or cause the transmission of incorrect commands to the affected satellite(s), which could lead to a temporary or permanent degradation in satellite performance or to the loss of one or more of our satellites. Any such failure could have a material adverse impact on our business, financial condition, and results of operations.
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RISKS RELATED TO OUR BUSINESS
We may be more susceptible to adverse events as a result of the BSS Transaction.
We have divested the BSS Business and our business will be subject to concentration of the risks that affect our retained businesses. We are now a smaller, less diversified and more narrowly focused business, which makes us more vulnerable to changing market and economic conditions. Operating as a smaller entity may reduce or eliminate some of the benefits and synergies which previously existed across our business platforms, including our operating diversity, purchasing and borrowing leverage, available capital, and relationships and opportunities to pursue integrated strategies within our businesses and attract, retain and motivate key employees. In addition, as a smaller company, our ability to absorb costs may be negatively impacted, including the significant cost of the BSS Transaction, and we may be unable to obtain financing, goods or services at prices or on terms as favorable as those obtained prior to the BSS Transaction. Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows, business prospects and the trading price of our common stock. By separating the BSS Business, we also may be more susceptible to market fluctuations and other adverse events. If we fail to achieve some or all of the benefits that we expect to achieve as a result of the BSS Transaction, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.
We might not be able to engage in certain strategic transactions because EchoStar has agreed to certain restrictions to comply with U.S. federal income tax requirements for a tax‑free spin‑off.
To preserve the intended tax treatment of the Distribution, EchoStar will undertake to comply with certain restrictions under current U.S. federal income tax laws for spin‑offs, including (i) refraining from engaging in certain transactions that would result in a fifty percent or greater change by vote or by value in its and our ownership, (ii) continuing to own and manage its and our historic business, and (iii) limiting sales or redemptions of its common stock. These restrictions could prevent EchoStar or us from pursuing otherwise attractive business opportunities, result in our or EchoStar’s inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm its or our business, financial results and operations. If these restrictions, among others, are not followed, the Distribution could be taxable to us and EchoStar and possibly its stockholders.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
69
ITEM 5. OTHER INFORMATION
Financial Results
On November 7, 2019, EchoStar issued a press release (the “Press Release”) announcing its financial results for the quarter ended September 30, 2019 and a supplemental investor information presentation (the “Presentation”) providing preliminary unaudited pro forma financial information. A copy of the Press Release and Presentation are furnished herewith as Exhibit 99.1 and Exhibit 99.2, respectively. The foregoing information, including the exhibits related thereto, are furnished in response to Item 2.02 of Form 8-K and shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise, and shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in any such filing.
ITEM 6. EXHIBITS
Exhibit No. | Description | |
101.INS | XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
_________________________________________________________
(H) Filed herewith.
(I) Furnished herewith.
* | 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.
70
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HUGHES SATELLITE SYSTEMS CORPORATION | ||
Date: November 8, 2019 | By: | /s/ Michael T. Dugan |
Michael T. Dugan | ||
Chief Executive Officer, President and Director | ||
(Principal Executive Officer) | ||
Date: November 8, 2019 | By: | /s/ David J. Rayner |
David J. Rayner | ||
Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer | ||
(Principal Financial and Accounting Officer) | ||
71
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, Michael T. Dugan, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Hughes Satellite Systems Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 8, 2019 | ||
By: | /s/ Michael T. Dugan | |
Name: | Michael T. Dugan | |
Title: | Chief Executive Officer, President and Director | |
(Principal Executive Officer) | ||
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, David J. Rayner, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Hughes Satellite Systems Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 8, 2019 | ||
By: | /s/ David J. Rayner | |
Name: | David J. Rayner | |
Title: | Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer | |
(Principal Financial and Accounting Officer) | ||
EXHIBIT 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Section 906 Certifications
In connection with the quarterly report for the quarter ended September 30, 2019 on Form 10-Q (the “Quarterly Report”) of Hughes Satellite Systems Corporation (the “Company”) as filed with the Securities and Exchange Commission on the date hereof, we, Michael T. Dugan and David J. Rayner, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(i) | the Quarterly Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934; and |
(ii) | the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 8, 2019 | ||
By: | /s/ Michael T. Dugan | |
Name: | Michael T. Dugan | |
Title: | Chief Executive Officer, President and Director | |
(Principal Executive Officer) | ||
By: | /s/ David J. Rayner | |
Name: | David J. Rayner | |
Title: | Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer | |
(Principal Financial and Accounting Officer) | ||
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
Exhibit 99.1
EchoStar Announces Financial Results for Three and Nine Months Ended September 30, 2019
Englewood, CO, November 7, 2019—EchoStar Corporation (NASDAQ: SATS) today announced its financial results for the three and nine months ended September 30, 2019.
Three Months Ended September 30, 2019 Financial Highlights:
• | Consolidated revenues of $472.3 million. |
• | Consolidated net loss of $21.1 million, consolidated net loss attributable to EchoStar common stock of $18.3 million, and diluted loss per share of $0.19. |
• | Consolidated Adjusted EBITDA of $148.3 million (see discussion and the reconciliation of GAAP to this non-GAAP measure below). |
Nine Months Ended September 30, 2019 Financial Highlights:
• | Consolidated revenues of $1.4 billion. |
• | Consolidated net loss of $11.2 million, consolidated net loss attributable to EchoStar common stock of $9.8 million, and diluted loss per share of $0.10. |
• | Consolidated Adjusted EBITDA of $422.7 million (see discussion and the reconciliation of GAAP to this non-GAAP measure below). |
“I am pleased with our performance in the third quarter of 2019” commented Michael Dugan, CEO and President of EchoStar. “On September 10th, we completed the spin-off to DISH of the BSS business and ancillary assets and liabilities in exchange for DISH shares that were distributed to EchoStar shareholders. As a result, the BSS business has been presented as discontinued operations in our current financial results. We can now focus on the growing broadband market, additional satellite opportunities, and strategic investments. We grew our consumer subscriber base by approximately 22,000 driven by our international markets and launched a consumer service in Mexico on October 1st. Our North American capacity is relatively full with the EchoStar 24/J3 satellite scheduled for launch in 2021. We continue to work to complete our previously announced JV’s with Yahsat in Brazil and Bharti Airtel in India and also announced the acquisition of Helios Wire Corporation on October 25th. The Helios acquisition lays the foundation for the creation of world-wide S-band capabilities.”
Three Months Ended September 30, 2019 - Additional Information:
• | Consolidated revenue increased 4% or $16.0 million year over year. |
• | An accrual of $20.7 million was booked during the quarter related to a license fee dispute with the Government of India. This impacted SG&A expenses by $7.1 million and Interest expense, net of amounts capitalized, by $13.6 million. Net income (loss) attributable to noncontrolling interests had a corresponding offset of $3.2 million. This fee dispute dates back over a decade and has affected the entire Indian Telecom industry. |
• | Adjusted EBITDA decreased 4% or $6.0 million year over year. |
◦ | Hughes segment Adjusted EBITDA increased by $1.9 million which includes the impact of the industry wide fee dispute with the Government of India. |
◦ | ESS segment Adjusted EBITDA decreased by $2.9 million primarily due to lower revenue. |
◦ | Corporate and Other segment Adjusted EBITDA decreased by $5.0 million driven primarily by transaction related legal costs and increased losses on equity in earnings of unconsolidated affiliates. |
• | Net loss from continuing operations was $23.2 million, the loss increasing by $20.0 million from last year. The decline was primarily due to higher unrealized losses on foreign currency of $11.0 million, |
1
higher depreciation and amortization expense of $7.0 million, increased equity losses of unconsolidated affiliates of $3.6 million, partially offset by higher gains of investments of $5.4 million.
• | Hughes broadband subscribers are approximately 1,437,000 as of September 30, 2019 including approximately 192,000 subscribers in Central and South America. |
• | Cash, cash equivalents and current marketable investment securities of $2.5 billion as of September 30, 2019. |
Set forth below is a table highlighting certain of EchoStar’s segment results for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | ||||||||||||||||
Hughes | $ | 463,735 | $ | 444,762 | $ | 1,360,919 | $ | 1,271,886 | ||||||||
EchoStar Satellite Services | 4,098 | 6,802 | 11,873 | 22,562 | ||||||||||||
Corporate and Other | 4,429 | 4,710 | 14,283 | 14,207 | ||||||||||||
Total revenue | $ | 472,262 | $ | 456,274 | $ | 1,387,075 | $ | 1,308,655 | ||||||||
Adjusted EBITDA | ||||||||||||||||
Hughes | $ | 169,358 | $ | 167,492 | $ | 486,212 | $ | 465,724 | ||||||||
EchoStar Satellite Services | 1,791 | 4,687 | 5,006 | 15,478 | ||||||||||||
Corporate & Other: | ||||||||||||||||
Corporate overhead, operating and other | (21,028 | ) | (18,231 | ) | (58,968 | ) | (54,489 | ) | ||||||||
Equity in earnings (losses) of unconsolidated affiliates, net | (1,782 | ) | 416 | (9,507 | ) | (2,651 | ) | |||||||||
Total Corporate & Other | (22,810 | ) | (17,815 | ) | (68,476 | ) | (57,141 | ) | ||||||||
Total Adjusted EBITDA | $ | 148,339 | $ | 154,364 | $ | 422,742 | $ | 424,061 | ||||||||
Net income (loss) from continuing operations | $ | (23,161 | ) | $ | (3,195 | ) | $ | (57,581 | ) | $ | (3,828 | ) | ||||
Expenditures for property and equipment | $ | 95,155 | $ | 167,144 | $ | 314,351 | $ | 337,625 | ||||||||
2
Reconciliation of GAAP to Non-GAAP Measurement (amounts in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | (21,106 | ) | $ | 16,502 | $ | (11,158 | ) | $ | 73,015 | ||||||
Interest income and expense, net | 32,690 | 33,529 | 91,996 | 107,801 | ||||||||||||
Income tax provision, net | 5,016 | 7,963 | 12,607 | 8,275 | ||||||||||||
Depreciation and amortization | 122,374 | 115,325 | 361,619 | 338,737 | ||||||||||||
Net (income) loss from discontinued operations | (2,055 | ) | (19,697 | ) | (46,423 | ) | (76,843 | ) | ||||||||
Net (income) loss attributable to noncontrolling interests | 2,797 | (450 | ) | 1,359 | (1,292 | ) | ||||||||||
EBITDA | 139,716 | 153,172 | 410,000 | 449,693 | ||||||||||||
(Gains) losses on investments, net | (8,295 | ) | (2,873 | ) | (28,087 | ) | (31,606 | ) | ||||||||
Litigation expense (1) | 1,824 | — | 26,328 | — | ||||||||||||
Vendor settlement | — | — | — | (9,571 | ) | |||||||||||
Unrealized (gains) losses on foreign currency | 15,094 | 4,065 | 14,501 | 15,545 | ||||||||||||
Adjusted EBITDA | $ | 148,339 | $ | 154,364 | $ | 422,742 | $ | 424,061 | ||||||||
(1) Does not include license fee dispute with the Government of India.
Note on Use of Non-GAAP Financial Measures
EBITDA is defined as “Net income (loss)” excluding “Interest income and expense, net,” “Income tax provision (benefit), net,” “Depreciation and amortization,” “Net income (loss) from discontinued operations,” and “Net income (loss) attributable to noncontrolling interests.”
Adjusted EBITDA is defined as EBITDA excluding “Gains and losses on investments, net,” unrealized gains (losses) on foreign currency, and other non-recurring or non-operational items. EBITDA and Adjusted EBITDA are not measures determined in accordance with US GAAP. EBITDA and Adjusted EBITDA are reconciled to “Net income (loss)” in the table above and should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with US GAAP. Our management uses EBITDA and Adjusted EBITDA as measures of our operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes that these non-GAAP measures provide meaningful supplemental information regarding the underlying operating performance of our business and are appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA and Adjusted EBITDA are useful to investors because they are frequently used by securities analysts, investors, and other interested parties to evaluate the performance of companies in our industry.
The consolidated financial statements of EchoStar for the periods ended September 30, 2019 and 2018 are attached to this press release. Detailed financial data and other information are available in EchoStar’s Quarterly Report on Form 10-Q for the period ended September 30, 2019 filed today with the Securities and Exchange Commission.
EchoStar will host its earnings conference call on Thursday, November 7, 2019 at 11:00 a.m. Eastern Time. The call-in numbers are (877) 815-1625 (toll-free) and (716) 247-5178 (international), Conference ID 3877704.
3
About EchoStar Corporation
EchoStar Corporation (NASDAQ: SATS) is a premier global provider of satellite communications solutions. Headquartered in Englewood, Colo., and conducting business around the globe, EchoStar is a pioneer in secure communications technologies through its Hughes Network Systems and EchoStar Satellite Services business segments.
Safe Harbor Statement under the US Private Securities Litigation Reform Act of 1995
This press release may contain statements that are forward looking, as that term is defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this release, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “plans,” and similar expressions and the use of future dates are intended to identify forward‑looking statements. Although management believes that the expectations reflected in these forward‑looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. We assume no responsibility for the accuracy of forward-looking statements or information or for updating forward-looking information or statements. These statements are subject to certain risks, uncertainties, and assumptions. See “Risk Factors” in EchoStar’s Annual Report on Form 10-K for the period ended December 31, 2018 and Quarterly Report on Form 10-Q for the period ended September 30, 2019, as filed with the Securities and Exchange Commission and in the other documents EchoStar files with the Securities and Exchange Commission from time to time.
###
Contact Information
EchoStar Investor Relations | EchoStar Media Relations |
Terry Brown Phone: +1 303-728-5179 Email: terry.brown@echostar.com | Sharyn Nerenberg Phone: +1 301-428-7124 Email: sharyn.nerenberg@echostar.com |
4
ECHOSTAR CORPORATION
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
As of | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,547,162 | $ | 928,306 | ||||
Marketable investment securities, at fair value | 1,000,165 | 2,282,152 | ||||||
Trade accounts receivable and contract assets, net (Note 3) | 200,779 | 201,096 | ||||||
Trade accounts receivable - DISH Network | 16,125 | 14,200 | ||||||
Inventory | 83,397 | 75,379 | ||||||
Prepaids and deposits | 63,210 | 57,691 | ||||||
Other current assets | 17,382 | 18,539 | ||||||
Current assets of discontinued operations | 5,866 | 3,486 | ||||||
Total current assets | 2,934,086 | 3,580,849 | ||||||
Noncurrent assets: | ||||||||
Property and equipment, net | 2,444,157 | 2,534,666 | ||||||
Operating lease right-of-use assets | 112,263 | — | ||||||
Goodwill | 504,173 | 504,173 | ||||||
Regulatory authorizations, net | 426,189 | 430,039 | ||||||
Other intangible assets, net | 33,188 | 44,231 | ||||||
Investments in unconsolidated entities | 225,908 | 262,473 | ||||||
Other receivables - DISH Network | 93,321 | 95,114 | ||||||
Other noncurrent assets, net | 264,465 | 247,316 | ||||||
Noncurrent assets of discontinued operations | — | 962,433 | ||||||
Total noncurrent assets | 4,103,664 | 5,080,445 | ||||||
Total assets | $ | 7,037,750 | $ | 8,661,294 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 122,319 | $ | 121,437 | ||||
Trade accounts payable - DISH Network | 714 | 1,698 | ||||||
Current portion of long-term debt and finance lease obligations | 407 | 919,582 | ||||||
Contract liabilities | 109,557 | 72,284 | ||||||
Accrued interest | 37,039 | 45,350 | ||||||
Accrued compensation | 42,810 | 54,242 | ||||||
Accrued taxes | 17,465 | 16,013 | ||||||
Accrued expenses and other | 126,865 | 64,395 | ||||||
Current liabilities of discontinued operations | 4,565 | 50,136 | ||||||
Total current liabilities | 461,741 | 1,345,137 | ||||||
Noncurrent liabilities: | ||||||||
Long-term debt and finance lease obligations, net | 2,388,931 | 2,386,202 | ||||||
Deferred tax liabilities, net | 331,498 | 287,420 | ||||||
Operating lease liabilities | 94,332 | — | ||||||
Other noncurrent liabilities | 77,333 | 80,304 | ||||||
Noncurrent liabilities of discontinued operations | — | 406,757 | ||||||
Total noncurrent liabilities | 2,892,094 | 3,160,683 | ||||||
Total liabilities | 3,353,835 | 4,505,820 | ||||||
Commitments and contingencies (Note 16) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued and outstanding at both September 30, 2019 and December 31, 2018 | — | — | ||||||
Common stock, $0.001 par value, 4,000,000,000 shares authorized: | ||||||||
Class A common stock, $0.001 par value, 1,600,000,000 shares authorized, 56,383,893 shares issued and 49,898,972 shares outstanding at September 30, 2019 and 54,142,566 shares issued and 47,657,645 shares outstanding at December 31, 2018 | 56 | 54 | ||||||
Class B convertible common stock, $0.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at both September 30, 2019 and December 31, 2018 | 48 | 48 | ||||||
Class C convertible common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both of September 30, 2019 and December 31, 2018 | — | — | ||||||
Class D common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both September 30, 2019 and December 31, 2018 | — | — | ||||||
Additional paid-in capital | 3,251,808 | 3,702,522 | ||||||
Accumulated other comprehensive loss | (131,664 | ) | (125,100 | ) | ||||
Accumulated earnings | 685,927 | 694,129 | ||||||
Treasury stock, at cost | (131,454 | ) | (131,454 | ) | ||||
Total EchoStar Corporation stockholders’ equity | 3,674,721 | 4,140,199 | ||||||
Noncontrolling interests | 9,194 | 15,275 | ||||||
Total stockholders’ equity | 3,683,915 | 4,155,474 | ||||||
Total liabilities and stockholders’ equity | $ | 7,037,750 | $ | 8,661,294 | ||||
5
ECHOSTAR CORPORATION
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue: | ||||||||||||||||
Services and other revenue - DISH Network | $ | 13,232 | $ | 17,054 | $ | 42,532 | $ | 57,410 | ||||||||
Services and other revenue - other | 393,305 | 382,374 | 1,169,459 | 1,101,111 | ||||||||||||
Equipment revenue | 65,725 | 56,846 | 175,084 | 150,134 | ||||||||||||
Total revenue | 472,262 | 456,274 | 1,387,075 | 1,308,655 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of sales - services and other (exclusive of depreciation and amortization) | 143,842 | 142,290 | 429,869 | 421,622 | ||||||||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | 51,188 | 46,318 | 142,744 | 127,254 | ||||||||||||
Selling, general and administrative expenses | 122,676 | 107,540 | 384,152 | 314,040 | ||||||||||||
Research and development expenses | 6,136 | 6,544 | 19,411 | 20,328 | ||||||||||||
Depreciation and amortization | 122,374 | 115,325 | 361,619 | 338,737 | ||||||||||||
Total costs and expenses | 446,216 | 418,017 | 1,337,795 | 1,221,981 | ||||||||||||
Operating income | 26,046 | 38,257 | 49,280 | 86,674 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 17,175 | 21,349 | 64,817 | 56,237 | ||||||||||||
Interest expense, net of amounts capitalized | (49,865 | ) | (54,878 | ) | (156,813 | ) | (164,038 | ) | ||||||||
Gains (losses) on investments, net | 8,295 | 2,873 | 28,087 | 31,606 | ||||||||||||
Equity in earnings (losses) of unconsolidated affiliates, net | (3,209 | ) | 416 | (14,317 | ) | (2,651 | ) | |||||||||
Other, net | (16,587 | ) | (3,249 | ) | (16,028 | ) | (3,381 | ) | ||||||||
Total other income (expense), net | (44,191 | ) | (33,489 | ) | (94,254 | ) | (82,227 | ) | ||||||||
Income (loss) from continuing operations before income taxes | (18,145 | ) | 4,768 | (44,974 | ) | 4,447 | ||||||||||
Income tax benefit (provision), net | (5,016 | ) | (7,963 | ) | (12,607 | ) | (8,275 | ) | ||||||||
Net loss from continuing operations | (23,161 | ) | (3,195 | ) | (57,581 | ) | (3,828 | ) | ||||||||
Net income from discontinued operations | 2,055 | 19,697 | 46,423 | 76,843 | ||||||||||||
Net income (loss) | (21,106 | ) | 16,502 | (11,158 | ) | 73,015 | ||||||||||
Less: Net income (loss) attributable to noncontrolling interests | (2,797 | ) | 450 | (1,359 | ) | 1,292 | ||||||||||
Net income (loss) attributable to EchoStar Corporation common stock | $ | (18,309 | ) | $ | 16,052 | $ | (9,799 | ) | $ | 71,723 | ||||||
Earnings per share - Class A and B common stock: | ||||||||||||||||
Basic loss from continuing operations per share | $ | (0.21 | ) | $ | (0.04 | ) | $ | (0.58 | ) | $ | (0.05 | ) | ||||
Total basic earnings (loss) per share | $ | (0.19 | ) | $ | 0.17 | $ | (0.10 | ) | $ | 0.75 | ||||||
Diluted loss from continuing operations per share | $ | (0.21 | ) | $ | (0.04 | ) | $ | (0.58 | ) | $ | (0.05 | ) | ||||
Total diluted earnings (loss) per share | $ | (0.19 | ) | $ | 0.17 | $ | (0.10 | ) | $ | 0.75 | ||||||
6
ECHOSTAR CORPORATION
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands, except per share amounts)
For the nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (11,158 | ) | $ | 73,015 | |||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
Depreciation and amortization | 459,054 | 444,558 | ||||||
Equity in losses of unconsolidated affiliates, net | 14,317 | 2,651 | ||||||
Amortization of debt issuance costs | 4,882 | 5,910 | ||||||
(Gains) losses on investments, net | (28,087 | ) | (33,524 | ) | ||||
Stock-based compensation | 7,120 | 7,771 | ||||||
Deferred tax provision | 22,949 | 22,357 | ||||||
Dividend received from unconsolidated entity | 2,716 | 5,000 | ||||||
Changes in current assets and current liabilities, net: | ||||||||
Trade accounts receivable, net | (5,439 | ) | (35,811 | ) | ||||
Trade accounts receivable - DISH Network | (28,779 | ) | 32,323 | |||||
Inventory | (8,661 | ) | 10,667 | |||||
Other current assets | (3,716 | ) | (5,569 | ) | ||||
Trade accounts payable | 18,180 | 2,536 | ||||||
Trade accounts payable - DISH Network | (984 | ) | (3,342 | ) | ||||
Accrued expenses and other | 65,245 | 19,450 | ||||||
Changes in noncurrent assets and noncurrent liabilities, net | 1,303 | (16,123 | ) | |||||
Other, net | 24,118 | 12,043 | ||||||
Net cash flows from operating activities | 533,060 | 543,912 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of marketable investment securities | (655,265 | ) | (2,323,090 | ) | ||||
Sales and maturities of marketable investment securities | 1,988,078 | 1,331,225 | ||||||
Expenditures for property and equipment | (314,861 | ) | (415,253 | ) | ||||
Refunds and other receipts related to property and equipment | — | 77,524 | ||||||
Expenditures for externally marketed software | (21,364 | ) | (24,568 | ) | ||||
Investment in unconsolidated entities | (7,503 | ) | (991 | ) | ||||
Dividend received from unconsolidated entity | 2,284 | — | ||||||
Sale of investment in unconsolidated entity | — | 1,558 | ||||||
Net cash flows from investing activities | 991,369 | (1,353,595 | ) | |||||
Cash flows from financing activities: | ||||||||
Repayment of debt and finance lease obligations | (29,135 | ) | (27,764 | ) | ||||
Repurchase and maturity of debt | (920,923 | ) | — | |||||
Purchase of noncontrolling interest | (7,313 | ) | — | |||||
Repayment of in-orbit incentive obligations | (5,269 | ) | (4,601 | ) | ||||
Net proceeds from Class A common stock options exercised | 64,143 | 4,424 | ||||||
Net proceeds from Class A common stock issued under the Employee Stock Purchase Plan | 7,724 | 7,428 | ||||||
Other, net | 758 | (530 | ) | |||||
Net cash flows from financing activities | (890,015 | ) | (21,043 | ) | ||||
Effect of exchange rates on cash and cash equivalents | (411 | ) | (3,449 | ) | ||||
Net increase (decrease) in cash and cash equivalents, including restricted amounts | 634,003 | (834,175 | ) | |||||
Cash and cash equivalents, including restricted amounts, beginning of period | 929,495 | 2,432,249 | ||||||
Cash and cash equivalents, including restricted amounts, end of period | $ | 1,563,498 | $ | 1,598,074 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest, net of amounts capitalized | $ | 161,766 | $ | 170,303 | ||||
Cash paid for income taxes | $ | 2,119 | $ | 3,369 | ||||
7
client logo here Supplemental Investor Information November 7th, 2019 0
Note Regarding Financial Information On September 10, 2019, EchoStar Corporation (“EchoStar”) transferred to DISH Network Corporation (“DISH”) the portion of its business that manages, markets and provides (i) broadcast satellite services primarily to DISH and its subsidiaries (“DISH Network”), and Dish Mexico, S. de R.L. de C.V. and its subsidiaries and (ii) telemetry, tracking and control services to satellites owned by DISH Network and a portion of EchoStar’s other businesses, and certain related assets and business operations (the “BSS Transaction”). The BSS Transaction was structured in a manner intended to be tax-free to EchoStar and its shareholders for U.S. federal income tax purposes. Following consummation of the BSS Transaction, EchoStar no longer operates its former BSS business and, as a result, beginning in the third quarter of 2019, the operating results of EchoStar’s former BSS business will be presented as discontinued operations in EchoStar’s condensed consolidated financial statements. The following preliminary unaudited financial information for EchoStar for the quarters ending March 31, June 30, September 30 and December 31, 2018 and March 31, June 30 and September 30, 2019 reflect these changes for the periods presented. The preliminary unaudited financial information is presented based on information currently available and is intended for information purposes only. In addition, the unaudited financial information is not necessarily indicative of EchoStar’s future financial condition or results of operations. The preliminary unaudited financial information should be read in conjunction with the audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in EchoStar’s Annual Report on Form 10-K/A for the year ended December 31, 2018 and the unaudited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in EchoStar’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. The pro forma adjustments are based on available information and assumptions that EchoStar’s management believes are reasonable, factually supportable, reflect the impacts of events directly attributable to the BSS Transaction and for purposes of the statements of operations, are expected to have a continuing impact on EchoStar. The pro forma adjustments do not reflect future events that may occur after the BSS Transaction. 1
Post BSS Transaction – Continuing Ops ($000) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Revenue: Services and other revenue - Dish Network $ 21,719 $ 18,637 $ 17,054 $ 16,055 $ 15,062 $ 14,238 $ 13,232 Services and other revenue - other 349,167 369,570 382,374 382,653 387,606 388,548 393,305 Equipment revenue 42,946 50,342 56,846 55,275 51,714 57,645 65,725 Total revenue 413,832 438,549 456,274 453,983 454,382 460,431 472,262 Costs and expenses: Cost of sales - services and other 138,490 140,842 142,290 142,285 143,347 142,680 143,842 Cost of sales - equipment 39,071 41,865 46,318 49,345 45,007 46,549 51,188 Selling, general and administrative expenses 103,333 103,167 107,540 122,372 112,186 149,290 122,676 Research and development expenses 7,138 6,646 6,544 7,242 6,887 6,388 6,136 Deprecation and amortization 110,269 113,143 115,325 118,379 118,978 120,267 122,374 Impairments - - - 65,220 - - - Total costs and expenses 398,301 405,663 418,017 504,843 426,405 465,174 446,216 Operating Income 15,531 32,886 38,257 (50,860) 27,977 (4,743) 26,046 Other income (expense): Interest income 15,635 19,253 21,349 24,038 24,429 23,213 17,175 Interest expense, net of amounts capitalized (55,055) (54,105) (54,878) (55,250) (53,199) (53,749) (49,865) Gains (losses) on investments, net (36,663) 65,396 2,873 (44,227) 6,937 12,855 8,295 Equity in earnings (losses) of unconsolidated affiliates, net (1,009) (2,058) 416 (3,303) (6,354) (4,754) (3,209) Other, net 204 (336) (3,249) (954) (1,201) 1,760 (16,587) Total other income (expense), net (76,888) 28,150 (33,489) (79,696) (29,388) (20,675) (44,191) Income (loss) from continuing operations before income taxes (61,357) 61,036 4,768 (130,556) (1,411) (25,418) (18,145) Income tax provision, net 4,574 (4,886) (7,963) (5,438) (2,899) (4,692) (5,016) Net income (loss) from continuing operations (56,783) 56,150 (3,195) (135,994) (4,310) (30,110) (23,161) Net income (loss) from discontinued operations 35,612 21,534 19,697 12,282 19,319 25,049 2,055 Net income (loss) (21,171) 77,684 16,502 (123,712) 15,009 (5,061) (21,106) Less: Net income attributable to noncontrolling interests 380 462 450 550 806 632 (2,797) Net income (loss) attributable to EchoStar Corporate common stock $ (21,551) $ 77,222 $ 16,052 $ (124,262) $ 14,203 $ (5,693) $ (18,309) EBITDA $ 87,952 $ 208,569 $ 153,172 $ 18,485 $ 145,531 $ 124,753 $ 139,716 Adjusted EBITDA $ 124,406 $ 145,291 $ 154,364 $ 127,970 $ 139,754 $ 134,649 $ 148,339 2
Post BSS Transaction – Continuing Ops ($000) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Segment Operating Results: Revenue Hughes $ 400,818 $ 426,306 $ 444,762 $ 444,642 $ 445,336 $ 451,847 $ 463,735 ESS 8,264 7,496 6,802 4,669 4,033 3,742 4,098 Corporate and Other 4,750 4,747 4,710 4,672 5,013 4,842 4,429 Total $ 413,832 $ 438,549 $ 456,274 $ 453,983 $ 454,382 $ 460,431 $ 472,262 Adjusted EBITDA Hughes $ 137,564 $ 160,668 $ 167,492 $ 148,059 $ 161,642 $ 155,212 $ 169,358 ESS 5,933 4,858 4,687 2,287 1,729 1,486 1,791 Corporate and Other (19,091) (20,235) (17,815) (22,376) (23,617) (22,049) (22,810) Total $ 124,406 $ 145,291 $ 154,364 $ 127,970 $ 139,754 $ 134,649 $ 148,339 Reconciliation of GAAP to Non-GAAP Measurement: Net income (loss) (21,171) 77,684 16,502 (123,712) 15,009 (5,061) (21,106) Interest income and expense, net 39,420 34,852 33,529 31,212 28,770 30,536 32,690 Income tax provision, net (4,574) 4,886 7,963 5,438 2,899 4,692 5,016 Deprecation and amortization 110,269 113,143 115,325 118,379 118,978 120,267 122,374 Net income (loss) from discontinued operations (35,612) (21,534) (19,697) (12,282) (19,319) (25,049) (2,055) Net income attributable to noncontrolling interests (380) (462) (450) (550) (806) (632) 2,797 EBITDA $ 87,952 $ 208,569 $ 153,172 $ 18,485 $ 145,531 $ 124,753 $ 139,716 (Gains) losses on investments, net 36,663 (65,396) (2,873) 44,227 (6,937) (12,855) (8,295) Impairment of long-lived assets - - - 65,220 - - - Legal Settlement Accrual - - - - - 24,504 1,824 Unrealized (gains) losses on foreign currency (209) 11,689 4,065 38 1,160 (1,753) 15,094 Third Party Vendor Settlement - (9,571) - - - - - Adjusted EBITDA $ 124,406 $ 145,291 $ 154,364 $ 127,970 $ 139,754 $ 134,649 $ 148,339 3
Note on Use of Non-GAAP Financial Measures EBITDA is defined as “Net income (loss)” excluding “Interest income and expense, net”, “Income tax provision, net”, “Depreciation and amortization,” “Net income (loss) from discontinued operations,” and “Net income (loss) attributable to noncontrolling interests.” Adjusted EBITDA is defined as EBITDA excluding “Gains and losses on investments, net,” unrealized gains (losses) on foreign currency, and other non-recurring or non-operational items. EBITDA and Adjusted EBITDA are not measures determined in accordance with US GAAP. EBITDA and Adjusted EBITDA are reconciled to “Net income (loss)” in the table above and should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with US GAAP. Our management uses EBITDA and Adjusted EBITDA as measures of our operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes that these non-GAAP measures provide meaningful supplemental information regarding the underlying operating performance of our business and are appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA and Adjusted EBITDA are useful to investors because they are frequently used by securities analysts, investors, and other interested parties to evaluate the performance of companies in our industry. 4