UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020.
OR
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-33807
(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) | |||
Securities registered pursuant to Section 12(b) of the Act: | ||||
$0.001 par value | ||||
(Title of each class) | (Name of each exchange on which registered) | |||
(Ticker symbol) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
☒ | Accelerated filer | ☐ | Emerging growth company | ||
Non-accelerated filer | ☐ | Smaller reporting company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2020, the registrant’s outstanding common stock consisted of 50,187,977 shares of Class A common stock and 47,687,039 shares of Class B common stock, each $0.001 par value.
TABLE OF CONTENTS
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, financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms. These forward-looking statements are based on information available to us as of the date of this Form 10-Q and represent management’s current views and assumptions. Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:
• | significant risks related to the construction and operation of our satellites, such as the risk of not being able to timely complete the construction of or material malfunction on one or more of our satellites, changes in the space weather environment that could interfere with the operation of our satellites and our general lack of commercial insurance coverage on our satellites; |
• | our ability and the ability of third parties with whom we engage in order to operate our business, including customers, suppliers, vendors, financing sources, governmental entities and others, to successfully or fully operate as a result of outbreaks of viruses or widespread illness, including existing, continuing and future impacts and consequences of the COVID-19 pandemic caused by the novel coronavirus; |
• | our ability to implement and/or realize benefits of our domestic and/or international investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions; |
• | lawsuits relating to the BSS Transaction or AGR matter (each as defined herein), which could result in substantial costs and, for the AGR matter, material adverse effects on our business, results of operation, financial condition and prospects in India; |
• | our ability to realize the anticipated benefits of our current satellites and any future satellite we may construct or acquire; |
• | risks related to our foreign operations and other uncertainties associated with doing business internationally, including changes in foreign exchange rates between foreign currencies and the United States (“U.S.”) dollar, economic instability, political disturbances and the consequences of being subject to foreign regulation and foreign legal proceedings, including increased operations costs and potential fines and penalties for violations, which may be substantial; |
• | the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services; and |
• | our ability to bring advanced technologies to market to keep pace with our customers and competitors. |
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”), those discussed in Management’s Discussion and Analysis of Financial Condition and 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
i
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.
ii
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Marketable investment securities | ||||||||
Trade accounts receivable and contract assets, net | ||||||||
Other current assets, net | ||||||||
Total current assets | ||||||||
Non-current assets: | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Goodwill | ||||||||
Regulatory authorizations, net | ||||||||
Other intangible assets, net | ||||||||
Other investments, net | ||||||||
Other non-current assets, net | ||||||||
Total non-current assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | $ | ||||||
Contract liabilities | ||||||||
Accrued expenses and other current liabilities | ||||||||
Total current liabilities | ||||||||
Non-current liabilities: | ||||||||
Long-term debt | ||||||||
Deferred tax liabilities, net | ||||||||
Operating lease liabilities | ||||||||
Other non-current liabilities | ||||||||
Total non-current liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued and outstanding at both March 31, 2020 and December 31, 2019 | ||||||||
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, 56,760,433 shares issued and 50,078,513 shares outstanding at March 31, 2020 and 56,592,251 shares issued and 50,107,330 shares outstanding at December 31, 2019 | ||||||||
Class B convertible common stock, $0.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at both March 31, 2020 and December 31, 2019 | ||||||||
Class C convertible common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both March 31, 2020 and December 31, 2019 | ||||||||
Class D common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both March 31, 2020 and December 31, 2019 | ||||||||
Additional paid-in capital | ||||||||
Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
Accumulated earnings (losses) | ||||||||
Treasury stock, at cost | ( | ) | ( | ) | ||||
Total EchoStar Corporation stockholders’ equity | ||||||||
Non-controlling interests | ||||||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
1
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenue: | ||||||||
Services and other revenue | $ | $ | ||||||
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, net | ||||||||
Interest expense, net of amounts capitalized | ( | ) | ( | ) | ||||
Gains (losses) on investments, net | ( | ) | ||||||
Equity in earnings (losses) of unconsolidated affiliates, net | ( | ) | ||||||
Foreign currency transaction gains (losses), net | ( | ) | ( | ) | ||||
Other, net | ( | ) | ( | ) | ||||
Total other income (expense), net | ( | ) | ( | ) | ||||
Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ||||
Income tax benefit (provision), net | ( | ) | ||||||
Net income (loss) from continuing operations | ( | ) | ( | ) | ||||
Net income (loss) from discontinued operations | ||||||||
Net income (loss) | ( | ) | ||||||
Less: Net loss (income) attributable to non-controlling interests | ( | ) | ||||||
Net income (loss) attributable to EchoStar Corporation common stock | $ | ( | ) | $ | ||||
Earnings (losses) per share - Class A and B common stock: | ||||||||
Basic and diluted earnings (losses) from continuing operations per share | $ | ( | ) | $ | ( | ) | ||
Total basic and diluted earnings (losses) per share | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Net income (loss) | $ | ( | ) | $ | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Foreign currency translation | ( | ) | ||||||
Unrealized gains (losses) on available-for-sale debt securities | ( | ) | ||||||
Other | ( | ) | ( | ) | ||||
Amounts reclassified to net income (loss): | ||||||||
Realized losses (gains) on available-for-sale debt securities | ( | ) | ||||||
Total other comprehensive income (loss), net of tax | ( | ) | ||||||
Comprehensive income (loss) | ( | ) | ||||||
Less: Comprehensive loss (income) attributable to non-controlling interests | ( | ) | ||||||
Comprehensive income (loss) attributable to EchoStar Corporation | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Amounts in thousands)
(Unaudited)
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Earnings (Losses) | Treasury Stock, at cost | Non-controlling Interests | Total | ||||||||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Issuances of Class A common stock: | ||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | |||||||||||||||||||||||
Employee benefits | — | — | — | — | — | |||||||||||||||||||||||
Employee Stock Purchase Plan | — | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||
Purchase of non-controlling interest | — | ( | ) | — | — | — | ( | ) | ( | ) | ||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | ||||||||||||||||||||||||
Net income (loss) | — | — | — | — | ||||||||||||||||||||||||
Other, net | — | ( | ) | — | — | — | ||||||||||||||||||||||
Balance, March 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Cumulative effect of accounting changes | — | — | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||
Balance, January 1, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||
Issuances of Class A common stock: | ||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | |||||||||||||||||||||||
Employee benefits | — | — | — | — | — | |||||||||||||||||||||||
Employee Stock Purchase Plan | — | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||
Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | — | — | — | — | ( | ) | ||||||||||||||||||||||
Contribution by non-controlling interest holder | — | — | — | — | — | |||||||||||||||||||||||
Other comprehensive income (loss) | — | — | ( | ) | — | — | ( | ) | ( | ) | ||||||||||||||||||
Net income (loss) | — | — | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||
Treasury share repurchase | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||
Other, net | — | — | — | |||||||||||||||||||||||||
Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | ( | ) | $ | ||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
Depreciation and amortization | ||||||||
Losses (gains) on investments, net | ( | ) | ||||||
Equity in losses (earnings) of unconsolidated affiliates, net | ( | ) | ||||||
Foreign currency transaction losses (gains), net | ||||||||
Deferred tax provision (benefit), net | ( | ) | ||||||
Stock-based compensation | ||||||||
Amortization of debt issuance costs | ||||||||
Other, net | ( | ) | ||||||
Changes in assets and liabilities, net: | ||||||||
Trade accounts receivable and contract assets, net | ( | ) | ( | ) | ||||
Other current assets, net | ( | ) | ( | ) | ||||
Trade accounts payable | ( | ) | ||||||
Contract liabilities | ( | ) | ||||||
Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
Non-current assets and non-current liabilities, net | ( | ) | ||||||
Net cash flows from operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Purchases of marketable investment securities | ( | ) | ( | ) | ||||
Sales and maturities of marketable investment securities | ||||||||
Purchase of other investments | ( | ) | ||||||
Expenditures for property and equipment | ( | ) | ( | ) | ||||
Expenditures for externally marketed software | ( | ) | ( | ) | ||||
Net cash flows from investing activities | ||||||||
Cash flows from financing activities: | ||||||||
Repurchase of the 2019 Senior Secured Notes | ( | ) | ||||||
Payment of finance lease obligations | ( | ) | ( | ) | ||||
Payment of in-orbit incentive obligations | ( | ) | ( | ) | ||||
Net proceeds from Class A common stock options exercised | ||||||||
Net proceeds from Class A common stock issued under the Employee Stock Purchase Plan | ||||||||
Treasury share purchase | ( | ) | ||||||
Contribution by non-controlling interest holder | ||||||||
Purchase of non-controlling interest | ( | ) | ||||||
Other, net | ( | ) | ||||||
Net cash flows from financing activities | ( | ) | ||||||
Effect of exchange rates on cash and cash equivalents | ( | ) | ( | ) | ||||
Net increase (decrease) in cash and cash equivalents | ||||||||
Cash and cash equivalents, including restricted amounts, beginning of period | ||||||||
Cash and cash equivalents, including restricted amounts, end of period | $ | $ | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
EchoStar Corporation (which, together with its subsidiaries, is referred to as “EchoStar,” the “Company,” “we,” “us” and “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada and has operated as a separately traded public company from DISH Network Corporation (“DISH”) since 2008. Our Class A common stock is publicly traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “SATS.”
We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises. We operate in the following two business segments:
• | Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers. |
• | ESS — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. |
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate and Legal) and other activities that have not been assigned to our business 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. We also divide our operations by primary geographic market as follows: (i) North America (the U.S. and its territories, Mexico, and Canada); (ii) South and Central America and; (iii) All other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 14. Segment Reporting for further detail.
In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and our 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 our other businesses (collectively, the “BSS Business”) to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded
6
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
from continuing operations and segment results for the three months ended March 31, 2019, as presented in these unaudited Condensed Consolidated Financial Statements and the accompanying notes (collectively, the “Condensed Consolidated Financial Statements”).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required for complete financial statements prepared in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.
All amounts presented in these Condensed Consolidated Financial Statements are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Use of Estimates
We are required to make certain estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements. The most significant estimates and assumptions are used in determining: (i) inputs used to recognize revenue over time, including amortization periods for deferred contract acquisition costs; (ii) allowances for doubtful accounts; (iii) deferred taxes and related valuation allowances, including uncertain tax positions; (iv) loss contingencies; (v) fair value of financial instruments; (vi) fair value of assets and liabilities acquired in business combinations; and (vii) asset impairment testing.
Principles of Consolidation
Reclassification
7
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Recently Adopted Accounting Pronouncements
Credit Losses
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13 - Financial Instruments - Credit Losses (Topic 326), as amended, and codified in Accounting Standards Codification Topic 326 (“ASC 326”). ASC 326 introduces a new approach to the periodic estimation of credit losses for certain financial assets based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets that have experienced credit deterioration since their original purchase. We have elected to apply the requirements of the new standard prospectively and we recognized a cumulative effect of adoption of $9.1 million to Accumulated earnings (losses) as of January 1, 2020. Based on this election, we did not restate our comparative Condensed Consolidated Financial Statements and they continue to be reported under the accounting standards in effect for the periods before January 1, 2020.
The following describes the accounting impacts, by major balance sheet line item, of our adoption of this new standard based on the relevant types of losses that we and our equity method investees may be subject to:
• | Trade Accounts Receivable and Contract Assets, Net — Our trade accounts receivables and contract assets consist of amounts due from both our consumer and enterprise customers. Our receivables and related credit losses for our consumer customers are limited due to policies that require advance payment for services, predominant use of credit card and ACH payment processes, and our ability to promptly terminate service when timely payments are not received. However, for our enterprise customers, we estimate expected credit losses on a collective basis based on our historical loss experience, as adjusted to reflect changes in relevant factors, such as macroeconomic conditions and customer mix, that can significantly impact collectability. |
We apply our collective estimation processes separately to several pools of receivables that share common risk characteristics, generally based on the customers’ geographical location. Customers with significant past-due balances or other atypical characteristics are excluded from our collective analysis and evaluated on a case-by-case basis. Our estimates of expected credit losses for such receivables reflect significant judgments that consider customer-specific matters such as the customer’s financial condition, payment history, and recent developments in the customer’s business and industry. Due to the short-term nature of our trade receivables and contract assets, forecasts about the future have limited relevance to our expected credit loss estimates.
We record our customer related estimated credit losses as a component of our bad debt expense as reported in Selling, general and administrative expenses.
• | Other Current Assets, Net, and Other Non-current Assets, Net — We estimate expected credit losses for receivables with payment terms longer than one year separately by borrower, due to the unique risk characteristics of such receivables. We generally use discounted cash flow techniques to estimate such credit losses. In applying such techniques, we may estimate principal and interest cash flows under probability-weighted scenarios that consider entity-specific matters and forecasted economic conditions. The majority of our other non-current receivables are from entities in the telecommunications industry. The collection of contractual principal and interest on these receivables is highly dependent on the future business operations of those entities. Our estimation of expected credit losses for such receivables requires significant judgment about matters specific to the borrower and their industry. Accordingly, our actual collection experience may differ from the assumptions reflected in our expected credit loss estimates. |
We record our estimated credit losses as a component of our bad debt expense as reported in Selling, general and administrative expenses.
• | Other Investments, Net — We estimate expected credit losses on our other debt investments with payment terms longer than one year separately by debtor, due to the unique risk characteristics of such debt investments. We generally use discounted cash flow techniques to estimate such credit losses. In applying such techniques, we may estimate principal and interest cash flows under probability-weighted scenarios that consider entity-specific matters and forecasted economic conditions. The majority of our other debt investments are with entities in the telecommunications industry. The collection of contractual principal and interest on these debt |
8
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
investments are highly dependent on the future business operations of those entities. Our estimation of expected credit losses for such debt investments require significant judgment about matters specific to the debtor and their industry. Accordingly, our actual collection experience may differ from the assumptions reflected in our expected credit loss estimates.
We record our other debt investments related estimated credit losses as a reduction of Interest income, net.
Financial Impact of Adoption. Our adoption of this new standard resulted in the following adjustments to our Condensed Consolidated Balance Sheet:
Balance at December 31, 2019 | Adoption of ASC 326 Increase (Decrease) | Balance at January 1, 2020 | ||||||||||
Trade accounts receivable and contract assets, net | $ | $ | ( | ) | $ | |||||||
Other current assets, net | $ | $ | $ | |||||||||
Other investments, net | $ | $ | ( | ) | $ | |||||||
Other non-current assets, net | $ | $ | $ | |||||||||
Total assets | $ | $ | ( | ) | $ | |||||||
Deferred tax liabilities, net | $ | $ | ( | ) | $ | |||||||
Accumulated earnings (losses) | $ | $ | ( | ) | $ | |||||||
Non-controlling interests | $ | $ | ( | ) | $ | |||||||
Total stockholders’ equity | $ | $ | ( | ) | $ | |||||||
Total liabilities and stockholders’ equity | $ | $ | ( | ) | $ | |||||||
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the FASB’s overall simplification initiative and seeks to simplify the accounting for income taxes by updating certain guidance and removing certain exceptions. The updated guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact of adopting this new guidance.
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates (“IBORs”) to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. We are currently assessing the impact of adopting this new guidance, but do not expect it to have a material impact on our consolidated financial statements.
9
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 3. REVENUE RECOGNITION
Contract Balances
The following table presents the components of our contract balances:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Trade accounts receivable and contract assets, net: | ||||||||
Sales and services | $ | $ | ||||||
Leasing | ||||||||
Total trade accounts receivable | ||||||||
Contract assets | ||||||||
Allowance for doubtful accounts | ( | ) | ( | ) | ||||
Total trade accounts receivable and contract assets, net | $ | $ | ||||||
Contract liabilities: | ||||||||
Current | $ | $ | ||||||
Non-current | ||||||||
Total contract liabilities | $ | $ | ||||||
For the three months ended March 31, 2020 and 2019, we recognized revenue of $52.2 million and $39.5 million, respectively, that were previously included in the contract liability balances as of December 31, 2019 and 2018, respectively.
The following table presents the activity in our allowance for doubtful accounts:
Balance at Beginning of Period | Credit Losses (1) | Deductions | Foreign Currency Translation | Balance at End of Period | ||||||||||||||||
For the three months ended: | ||||||||||||||||||||
March 31, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||
March 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Contract Acquisition Costs
The following table presents our unamortized contract acquisition costs:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Unamortized contract acquisition costs | $ | $ | ||||||
10
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the amortization of our contract acquisition costs:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Amortization expense | $ | $ | ||||||
Transaction Price Allocated to Remaining Performance Obligations
Disaggregation of Revenue
Geographic Information
The following table presents our revenue from customer contracts disaggregated by primary geographic market and by segment:
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the three months ended March 31, 2020 | ||||||||||||||||
North America | $ | $ | $ | $ | ||||||||||||
South and Central America | ||||||||||||||||
Other | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the three months ended March 31, 2019 | ||||||||||||||||
North America | $ | $ | $ | $ | ||||||||||||
South and Central America | ||||||||||||||||
Other | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
11
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Nature of Products and Services
The following table presents our revenue disaggregated by the nature of products and services and by segment:
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the three months ended March 31, 2020 | ||||||||||||||||
Services and other revenue: | ||||||||||||||||
Services | $ | $ | $ | $ | ||||||||||||
Lease revenue | ||||||||||||||||
Total services and other revenue | ||||||||||||||||
Equipment revenue: | ||||||||||||||||
Equipment | ||||||||||||||||
Design, development and construction services | ||||||||||||||||
Lease revenue | ||||||||||||||||
Total equipment revenue | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
For the three months ended March 31, 2019 | ||||||||||||||||
Services and other revenue: | ||||||||||||||||
Services | $ | $ | $ | $ | ||||||||||||
Lease revenue | ||||||||||||||||
Total services and other revenue | ||||||||||||||||
Equipment revenue: | ||||||||||||||||
Equipment | ||||||||||||||||
Design, development and construction services | ||||||||||||||||
Lease revenue | ||||||||||||||||
Total equipment revenue | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
Lease Revenue
The following table presents our lease revenue by type of lease:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Sales-type lease revenue: | ||||||||
Revenue at lease commencement | $ | $ | ||||||
Interest income | ||||||||
Total sales-type lease revenue | ||||||||
Operating lease revenue | ||||||||
Total lease revenue | $ | $ | ||||||
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $6.6 million and $6.5 million as of March 31, 2020 and December 31, 2019, respectively.
12
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents future operating lease payments to be received as of March 31, 2020:
Amounts | ||||
Year ending December 31, | ||||
2020 (remainder) | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
2025 and beyond | ||||
Total lease payments | $ | |||
The following table presents amounts for assets subject to operating leases, which are included in Property and equipment, net:
As of | ||||||||||||||||||||||||
March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
Cost | Accumulated Depreciation | Net | Cost | Accumulated Depreciation | Net | |||||||||||||||||||
Customer premises equipment | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Satellites | ( | ) | ( | ) | ||||||||||||||||||||
Real estate | ( | ) | ( | ) | ||||||||||||||||||||
Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
The following table presents depreciation expense for assets subject to operating leases, which is included in Depreciation and amortization:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Customer premises equipment | $ | $ | ||||||
Satellites | ||||||||
Real estate | ||||||||
Total | $ | $ | ||||||
13
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 4. DISCONTINUED OPERATIONS
BSS Business
The following table presents the financial results of our discontinued operations for the BSS Business for the three months ended March 31, 2019:
Amounts | ||||
Revenue: | ||||
Services and other revenue - DISH Network | $ | |||
Services and other revenue - other | ||||
Total revenue | ||||
Costs and expenses: | ||||
Cost of sales - services and other (exclusive of depreciation and amortization) | ||||
Selling, general and administrative expenses | ||||
Depreciation and amortization | ||||
Total costs and expenses | ||||
Operating income (loss) | ||||
Other income (expense): | ||||
Interest expense | ( | ) | ||
Total other income (expense), net | ( | ) | ||
Income (loss) from discontinued operations before income taxes | ||||
Income tax benefit (provision), net | ( | ) | ||
Net income (loss) from discontinued operations | $ | |||
No assets or liabilities attributable to our discontinued operations of the BSS Business were held by us as of March 31, 2020 or December 31, 2019.
The following table presents the significant supplemental cash flow information and adjustments to reconcile net income to net cash flow from operating activities for discontinued operations of the BSS Business for the three months ended March 31, 2019:
Amounts | ||||
Operating activities: | ||||
Net income (loss) from discontinued operations | $ | |||
Depreciation and amortization | $ | |||
Investing activities: | ||||
Expenditures for property and equipment | $ | |||
Financing activities: | ||||
Payment of finance lease obligations | $ | |||
Payment of in-orbit incentive obligations | $ | |||
14
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Terminated or Transferred Related Party Agreements
Effective September 10, 2019, the following agreements were terminated or transferred to DISH Network as part of the BSS Transaction. Unless noted differently below, we have no further obligations and have neither earned additional revenue nor incurred additional expense, as applicable, under or in connection with these agreements after the consummation of the BSS Transaction.
Satellite Capacity Leased to DISH Network. We entered into certain agreements to lease satellite capacity pursuant to which we provided satellite services to DISH Network on certain satellites, as listed below, owned or leased by us. The fees for the services provided under these agreements depended, among other things, upon the orbital location of the applicable satellite, the number of transponders that provided services on the applicable satellite and the length of the service arrangements. The terms of each of the agreements are set forth below:
• | EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV — In March 2014, we began leasing certain satellite capacity to DISH Network on the EchoStar VII satellite, the EchoStar X satellite, the EchoStar XI satellite and the EchoStar XIV satellite. |
•EchoStar XII — DISH Network leased satellite capacity from us on the EchoStar XII satellite.
• | EchoStar XVI — In December 2009, we entered into an agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network leased satellite capacity from us on the EchoStar XVI satellite beginning in January 2013. |
• | Nimiq 5 Agreement — In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all |
• | 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 |
TT&C Agreement. Effective January 2012, we entered into a TT&C agreement pursuant to which we provided TT&C services to DISH Network, which we subsequently amended (the “2012 TT&C Agreement”). The fees for services provided under the 2012 TT&C Agreement were calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which varied depending on the nature of the services provided.
Real Estate Leases to DISH Network. We entered into lease agreements pursuant to which DISH Network leased certain real estate from us. The rent on a per square foot basis each of the leases or subsequent amendments was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments and DISH Network was responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. These components of the BSS Transaction do not qualify for discontinued operations treatment, and therefore the revenue from these lease agreements has not been treated as discontinued operations. The terms of each of the leases are set forth below:
15
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
• | Santa Fe Lease Agreement — DISH Network leased from us all of 5701 S. Santa Fe Dr., Littleton, Colorado. In connection with the BSS Transaction, we transferred this property to DISH Network. |
• | Cheyenne Lease Agreement — During 2017, we and certain of our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries whereby we and certain of our subsidiaries received all the shares of preferred tracking stock previously issued by us and one of our subsidiaries (the “Tracking Stock”) in exchange for |
NOTE 5. BUSINESS COMBINATIONS
In May 2019, we entered into an agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat contributed its satellite communications services business in Brazil to one of our Brazilian subsidiaries in exchange for a 20 % equity ownership interest in that subsidiary (the “Yahsat Brazil JV Transaction”). The combined business provides broadband internet services and enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat’s Al Yah 3 satellite. The results of operations related to the business we acquired from Yahsat have been included in these Condensed Consolidated Financial Statements from the date of acquisition. Through March 31, 2020, we have incurred $1.6 million of costs associated with the closing of the Yahsat Brazil JV Transaction.
16
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
All assets and liabilities acquired from Yahsat have been recorded at fair value. The following table presents our updated preliminary allocation of the purchase price:
Amounts | ||||
Assets: | ||||
Cash and cash equivalents | $ | |||
Other current assets, net | ||||
Property and equipment | ||||
Regulatory authorization | ||||
Goodwill | ||||
Other non-current assets, net | ||||
Total assets | $ | |||
Liabilities: | ||||
Trade accounts payable | $ | |||
Accrued expenses and other current liabilities | ||||
Total liabilities | $ | |||
Total purchase price (1) | $ | |||
(1) Based on the value determined for the equity ownership interest issued by our Brazilian subsidiary as consideration for the business acquired by us in the Yahsat Brazil JV Transaction.
The following preliminary valuation of the acquired assets was derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation:
Amounts | ||||
Satellite payload | $ | |||
Regulatory authorization | ||||
Total | $ | |||
The satellite payload and regulatory authorization were valued using an income approach and are being amortized over seven and 11 years, respectively.
NOTE 6. EARNINGS PER SHARE
We present basic and diluted earnings or losses per share (“EPS”) for our Class A and Class B common stock. Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing Net income (loss) attributable to EchoStar Corporation common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if shares of common stock were issued pursuant to our stock-based compensation awards. The potential dilution from common stock awards is computed using the treasury stock method based on the average market value of our Class A common stock during the period. The calculation of our diluted weighted-average common shares outstanding excluded options to purchase shares of our Class A common stock, the effect of which would be anti-dilutive, of 4.8 million and 4.9 million shares for the three months ended March 31, 2020 and 2019, respectively.
17
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the calculation of basic and diluted EPS:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Net income (loss) attributable to EchoStar Corporation common stock: | ||||||||
Net income (loss) from continuing operations | $ | ( | ) | $ | ( | ) | ||
Net income (loss) from discontinued operations | ||||||||
Net income (loss) attributable to EchoStar Corporation common stock | $ | ( | ) | $ | ||||
Weighted-average common shares outstanding: | ||||||||
Class A and B common stock: | ||||||||
Basic and diluted | ||||||||
Earnings (losses) per share: | ||||||||
Class A and B common stock: | ||||||||
Basic and diluted: | ||||||||
Continuing operations | $ | ( | ) | $ | ( | ) | ||
Discontinued operations | ||||||||
Total basic and diluted earnings (losses) per share | $ | ( | ) | $ | ||||
NOTE 7. MARKETABLE INVESTMENT SECURITIES
The following table presents our Marketable investment securities:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Marketable investment securities: | ||||||||
Debt securities: | ||||||||
Available-for-sale: | ||||||||
Corporate bonds | $ | $ | ||||||
Other debt securities | ||||||||
Total available-for-sale debt securities | ||||||||
Fair value option - corporate bonds | ||||||||
Total debt securities | ||||||||
Equity securities | ||||||||
Total marketable investment securities, including restricted amounts | ||||||||
Less: Restricted marketable investment 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, commercial paper and mutual funds.
18
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Available-for-Sale
The following table presents the components of our available-for-sale debt securities:
Amortized | Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
As of March 31, 2020 | ||||||||||||||||
Corporate bonds | $ | $ | $ | ( | ) | $ | ||||||||||
Other debt securities | ||||||||||||||||
Total available-for-sale debt securities | $ | $ | $ | ( | ) | $ | ||||||||||
As of December 31, 2019 | ||||||||||||||||
Corporate bonds | $ | $ | $ | ( | ) | $ | ||||||||||
Other debt securities | ||||||||||||||||
Total available-for-sale debt securities | $ | $ | $ | ( | ) | $ | ||||||||||
The following table presents the activity on our available-for-sale debt securities:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Proceeds from sales | $ | $ | ||||||
Gains (losses) on sales, net | $ | $ | ||||||
As of March 31, 2020, we have $705.7 million of available-for-sale debt securities with contractual maturities of one year or less and $44.5 million with contractual maturities greater than one year.
Fair Value Option
The following table presents the activity on our fair value option corporate bonds:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Gains (losses) on investments, net | $ | ( | ) | $ | ||||
For the three months ended March 31, 2020 and 2019, we did not have any sales of fair value option corporate bonds.
Equity Securities
The following table presents the activity of our equity securities:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Proceeds from sales | $ | $ | ||||||
Gains (losses) on investments, net | $ | ( | ) | $ | ||||
19
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Fair Value Measurements
The following table presents our marketable investment securities categorized by the fair value hierarchy, certain of which have historically experienced volatility:
As of | ||||||||||||||||||||||||
March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
Corporate bonds | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Other debt securities | ||||||||||||||||||||||||
Total available-for-sale debt securities | ||||||||||||||||||||||||
Fair value option - corporate bonds | ||||||||||||||||||||||||
Total debt securities | ||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||
Total marketable investment securities, including restricted amounts | ||||||||||||||||||||||||
Less: Restricted marketable investment securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Total marketable investment securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NOTE 8. PROPERTY AND EQUIPMENT
The following tables presents the components of Property and equipment, net:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Property and equipment, net: | ||||||||
Satellites, net | $ | $ | ||||||
Other property and equipment, net | ||||||||
Total property and equipment, net | $ | $ | ||||||
Satellites
As of March 31, 2020, our operating satellite fleet consisted of 10 satellites, seven of which are owned and three of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator.
20
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents our owned and leased satellites:
Satellite | Segment | Launch Date | Nominal Degree Orbital Location (Longitude) | Depreciable Life (In Years) | ||||
Owned: | ||||||||
SPACEWAY 3 (1) | Hughes | August 2007 | 95 W | |||||
EchoStar XVII | Hughes | July 2012 | 107 W | |||||
EchoStar XIX | Hughes | December 2016 | 97.1 W | |||||
Al Yah 3 (2) | Hughes | January 2018 | 20 W | |||||
EchoStar IX (3) | ESS | August 2003 | 121 W | |||||
EUTELSAT 10A (4) | Corporate and Other | April 2009 | 10 E | - | ||||
EchoStar XXI | Corporate and Other | June 2017 | 10.25 E | |||||
Finance 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) Upon consummation of our joint venture with Yahsat in Brazil in November 2019, we acquired the Brazilian Ka-band payload on this satellite. Depreciable life represents the remaining useful life as of November 2019.
(3) We own the Ka-band and Ku-band payloads on this satellite.
The following table presents the components of our satellites, net:
Depreciable Life (In Years) | As of | |||||||||
March 31, 2020 | December 31, 2019 | |||||||||
Satellites, net: | ||||||||||
Satellites - owned | 7 to 15 | $ | $ | |||||||
Satellites - acquired under finance leases | 15 | |||||||||
Construction in progress | — | |||||||||
Total satellites | ||||||||||
Accumulated depreciation: | ||||||||||
Satellites - owned | ( | ) | ( | ) | ||||||
Satellites - acquired under finance leases | ( | ) | ( | ) | ||||||
Total accumulated depreciation | ( | ) | ( | ) | ||||||
Total satellites, net | $ | $ | ||||||||
21
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the depreciation expense and capitalized interest associated with our satellites:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Depreciation expense: | ||||||||
Satellites - owned | $ | $ | ||||||
Satellites acquired under finance leases | ||||||||
Total depreciation expense | $ | $ | ||||||
Capitalized interest | $ | $ | ||||||
Construction in Progress
In August 2017, we entered into a contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (“HughesNet service”) in North, Central and South America as well as enterprise broadband services. In the first quarter of 2020, Space Systems/Loral, LLC (“SS/L”), the manufacturer of our EchoStar XXIV satellite, invoked the “force majeure” clause of our contract and notified us of a possible delay in completion of the satellite due to “shelter-in-place” orders affecting personnel at SS/L and its subcontractors, and other potential impacts of the COVID-19 pandemic. We currently expect the EchoStar XXIV satellite to be launched no earlier than the second half of 2021. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in Corporate and Other in our segment reporting.
Satellite Commitments
As of March 31, 2020 and December 31, 2019, our satellite-related obligations were $402.7 million and $419.0 million, respectively. These primarily include payments pursuant to agreements for the construction of the EchoStar XXIV satellite, payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
Satellite Anomalies and Impairments
We are not aware of any anomalies with respect to our owned or leased satellites or payloads that have had any significant adverse effect on their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position as of and for the three months ended March 31, 2020.
Satellite Insurance
22
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Fair Value of In-Orbit Incentives
NOTE 9. REGULATORY AUTHORIZATIONS
The following table presents the components of our Regulatory authorizations, net:
Finite lived | ||||||||||||||||||||
Cost | Accumulated Amortization | Total | Indefinite lived | Total | ||||||||||||||||
Balance, December 31, 2018 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Amortization expense | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||
Foreign currency translation | ( | ) | ( | ) | ( | ) | ||||||||||||||
Balance, March 31, 2019 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Balance, December 31, 2019 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Amortization expense | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||
Foreign currency translation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Balance, March 31, 2020 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
Weighted average useful life | ||||||||||||||||||||
Finite Lived Assets
In November 2019, we were granted an S-Band spectrum license for terrestrial rights in Mexico for $7.9 million. The acquired asset is subject to amortization over a period of 15 years.
In November 2019, we also acquired Ka-band spectrum rights for $4.5 million, upon consummation of the Yahsat Brazil JV Transaction, which are subject to amortization over a period of 11 years.
NOTE 10. OTHER INVESTMENTS
The following table presents the components of Other investments, net:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Other investments, net: | ||||||||
Equity method investments | $ | $ | ||||||
Other equity investments | ||||||||
Other debt investments, net | ||||||||
Total other investments, net | $ | $ | ||||||
23
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Equity Method Investments
Dish Mexico
We own 49 % of Dish Mexico and its subsidiaries, a joint venture that we entered into in 2008 to provide direct-to-home satellite services in Mexico. Historically, we provided certain satellite services to Dish Mexico. However, following the consummation of the BSS Transaction, we no longer provide these services.
Deluxe/EchoStar LLC
We own 50 % of Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada. We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of $1.3 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, we had trade accounts receivable from Deluxe of $1.0 million and $0.6 million, respectively.
Broadband Connectivity Solutions (Restricted) Limited
Other Equity Investments
During the three months ended March 31, 2020 and 2019, we recorded a $21.3 million and a $28.7 million, respectively, reduction to the carrying amount of our investments based on circumstances that indicated the fair value of the investment was less than its carrying amount.
Other Debt Investments, Net
The following table presents our other debt investments, net:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Other debt investments, net: | ||||||||
Cost basis | $ | $ | ||||||
Discount | ( | ) | ( | ) | ||||
Allowance for credit losses | ( | ) | ||||||
Total other debt investments, net | $ | $ | ||||||
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the activity in our allowance for credit losses:
Balance at Beginning of Period | Credit Losses(1) | Deductions | Balance at End of Period | |||||||||||||
For the three months ended: | ||||||||||||||||
March 31, 2020 | $ | $ | $ | $ | ||||||||||||
(1) The impact of adopting ASC 326 on January 1, 2020 was a $2.1 million adjustment to Accumulated earnings (losses).
During the three months ended March 31, 2020 and 2019, we recorded interest income related to these debt instruments of $3.3 million and zero , respectively.
NOTE 11. LONG-TERM DEBT
The following table presents the carrying amounts and fair values of our Long-term debt:
Effective interest rates | As of | |||||||||||||||||
March 31, 2020 | December 31, 2019 | |||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
Senior Secured Notes: | ||||||||||||||||||
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 | ( | ) | ( | ) | ||||||||||||||
Total long-term debt | $ | $ | $ | $ | ||||||||||||||
NOTE 12. INCOME TAXES
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our interim income tax provision and our interim estimate of our annual effective tax rate are influenced by several factors, including foreign losses and capital gains and losses for which related deferred tax assets are partially offset by a valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be affected by the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income or loss is lower.
Our income tax benefit was $7.5 million for the three months ended March 31, 2020 compared to $2.9 million of income tax provision for the three months ended March 31, 2019. Our estimated effective income tax rate was 11.5 % and (216.1 )% for the three months ended March 31, 2020 and 2019, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature, permanent book tax differences and research and experimentation credits. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2019 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature and research and experimentation credits.
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act features significant tax provisions and other measures to assist individuals and businesses impacted by the economic effects of the COVID-19 pandemic, including a five-year carryback of net operating losses, relaxation of Section 163(j) interest deduction limitations, acceleration of Alternative Minimum Tax refunds, relief for payroll tax and tax credits for employers who retain employees. These provisions did not affect our income tax provision for the three months ended March 31, 2020.
NOTE 13. CONTINGENCIES
Patents and Intellectual Property
Many entities, including some of our competitors, have or may have in the future patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be tripled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these parties do not own the rights they claim, that these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses from these parties on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.
Certain Arrangements with DISH Network
Litigation
We are involved in a number of legal proceedings against us concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending legal proceedings are charged to expense as incurred.
For certain proceedings, management is unable to predict with any degree of certainty the outcome or provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons: (i) the proceedings are in various stages; (ii) damages have not been sought or specified; (iii) damages are unsupported, indeterminate and/or exaggerated in management’s opinion; (iv) there is uncertainty as to the outcome of pending trials, appeals,
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
motions or other proceedings; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial condition, operating results or cash flows, though there is no assurance that the resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
Elbit
Shareholder Litigation
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
27
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Other
In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of business. As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which we may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, we from time to time receive inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.
In our opinion, the amount of ultimate liability with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 14. SEGMENT REPORTING
Business segments are components of an enterprise for which separate financial information is available and regularly evaluated by our chief operating decision maker (“CODM”), who is our Chief Executive Officer. We operate in two business segments, Hughes and ESS, as described in Note 1. Organization and Business Activities.
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, net income (loss) from discontinued operations and net income (loss) attributable to non-controlling interests (“EBITDA”).
The following table presents revenue, EBITDA and capital expenditures for each of our business segments. Capital expenditures are net of refunds and other receipts related to our property and equipment.
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the three months ended March 31, 2020 | ||||||||||||||||
External revenue | $ | $ | $ | $ | ||||||||||||
Intersegment revenue | ( | ) | — | |||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
EBITDA | $ | $ | $ | ( | ) | $ | ||||||||||
Capital expenditures | $ | $ | $ | $ | ||||||||||||
For the three months ended March 31, 2019 | ||||||||||||||||
External revenue | $ | $ | $ | $ | ||||||||||||
Intersegment revenue | ( | ) | — | |||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
EBITDA | $ | $ | $ | ( | ) | $ | ||||||||||
Capital expenditures | $ | $ | $ | $ | ||||||||||||
The following table reconciles Income (loss) from continuing operations before income taxes in the Condensed Consolidated Statements of Operations to EBITDA:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Income (loss) from continuing operations before income taxes | $ | ( | ) | $ | ( | ) | ||
Interest income, net | ( | ) | ( | ) | ||||
Interest expense, net of amounts capitalized | ||||||||
Depreciation and amortization | ||||||||
Net loss (income) attributable to non-controlling interests | ( | ) | ||||||
EBITDA | $ | $ | ||||||
29
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 15. RELATED PARTY TRANSACTIONS - DISH NETWORK
Overview
EchoStar Corporation and DISH have operated as separate publicly-traded companies since 2008. A substantial majority of the voting power of the shares of each of EchoStar Corporation and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family. In addition, prior to March 2017, DISH Network owned the Tracking Stock, which in the aggregate represented an 80% economic interest in the residential retail satellite broadband business of our Hughes segment. The Tracking Stock was retired in March 2017.
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, we and DISH Network entered into certain agreements pursuant to which we obtain certain products, services and rights from DISH Network, DISH Network obtains certain products, services and rights from us; and we and DISH Network indemnify each other against certain liabilities arising from our respective businesses. Generally, the amounts we or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below), which varies depending on the nature of the products and services provided. We may also enter into additional agreements with DISH Network in the future.
Services and Other Revenue — DISH Network
The following table presents our Services and other revenue from DISH Network:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Services and other revenue - DISH Network | $ | $ | ||||||
The following table presents the related trade accounts receivable:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Trade accounts receivable - DISH Network | $ | $ | ||||||
Satellite Capacity Leased to DISH Network. We have entered into an agreement and have previously entered into a now terminated agreement to lease satellite capacity pursuant to which we have provided satellite services to DISH Network on certain satellites owned or leased by us. The fees for the services provided under these agreements depend upon, among other things, 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 these agreements are set forth below:
• | EchoStar IX — Effective January 2008, DISH Network began leasing satellite capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue leasing satellite capacity from us on the EchoStar IX satellite on a month-to-month basis. |
• | 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. |
30
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Real Estate Leases to DISH Network. We have entered into lease agreements pursuant to which DISH Network leases certain real estate from us. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments and includes DISH Network’s portion of the taxes, insurance, utilities and/or maintenance of the premises. The terms of each of the leases are set forth below:
• | 100 Inverness Occupancy License Agreement — Effective March 2017, DISH Network is licensed to use certain of our space at 100 Inverness Terrace East, Englewood, Colorado for a period ending in December 2020. This agreement may be terminated by either party upon |
• |
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Operating Expenses — DISH Network
The following table presents our operating expenses related to DISH Network:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating expenses - DISH Network | $ | $ | ||||||
The following table presents the related trade accounts payable:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Trade accounts payable - DISH Network | $ | $ | ||||||
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Real Estate Leases from DISH Network. We have entered into lease agreements pursuant to which we lease certain real estate from DISH Network. The rent on a per square foot basis is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments and, includes our portion of the taxes, insurance, utilities and/or maintenance of the premises. The terms of each of the leases are set forth below:
• | Cheyenne Lease Agreement — Effective March 2017, we entered into a lease with DISH Network for certain space at 530 EchoStar Drive in Cheyenne, Wyoming for a period ending in February 2019. In August 2018, we exercised our option to renew this lease for a |
• |
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
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
certain other agreements pursuant to which DISH Network provides additional collocation and antenna space to us in Monee, Illinois and Spokane, Washington through August 2022. Generally, we may renew our collocation and antenna space agreements for three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. We may terminate certain of these agreements with 180 days’ prior written notice. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provides us with certain additional collocation space in Cheyenne, Wyoming for a period ending in September 2020, with the option for us to renew for a one-year period, with prior written notice no more than 120 days but no less than 90 days prior to the end of the term. The fees for the services provided under these agreements depend on the number of racks located at the location.
2019 TT&C Agreement. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provides TT&C services to us for a period ending in September 2021, with the option for us to renew for a one-year period upon written notice at least 90 days prior to the initial expiration (the “2019 TT&C Agreement”). The fees for services provided under the 2019 TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. Any party is able to terminate the 2019 TT&C Agreement for any reason upon 12 months’ notice.
Other Receivables - DISH Network
The following table presents our other receivables owed from DISH Network:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Other receivables - DISH Network | $ | $ | ||||||
Tax Sharing Agreement. Effective December 2007, we and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs our and DISH Network’s respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network and DISH Network indemnifies us for such taxes. However, DISH Network is not liable for and does not indemnify us for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Code, because of: (i) a direct or indirect acquisition of any of our stock, stock options or assets; (ii) any action that we take or fail to take or (iii) any action that we take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, we will be solely liable for, and will indemnify DISH Network for any resulting taxes, as well as any losses, claims and
34
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
In light of the Tax Sharing Agreement, among other things, and in connection with our consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, we and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of our consolidated tax returns. Prior to the agreement with DISH Network in 2013, the federal tax benefits were reflected as a deferred tax asset for depreciation and amortization, which was netted in our non-current deferred tax liabilities. The agreement with DISH Network in 2013 requires DISH Network to pay us the federal tax benefit it receives at such time as we would have otherwise been able to realize such tax benefit. We recorded a non-current receivable from DISH Network in Other receivables - DISH Network and a corresponding increase in our Deferred tax liabilities, net to reflect the effects of this agreement in September 2013. In addition, in September 2013, we and DISH Network agreed upon a tax sharing arrangement for filing certain combined state income tax returns and a method of allocating the respective tax liabilities between us and DISH Network for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”).
In August 2018, we and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, to the extent permitted by applicable tax law, DISH Network is entitled to apply the benefit of our 2009 net operating losses (the “SATS 2009 NOLs”) to DISH Network’s federal tax return for the year ended December 31, 2008, in exchange for DISH Network paying us over time the value of the net annual federal income taxes paid by us that would have been otherwise offset by the SATS 2009 NOLs. The Tax Sharing Amendment also requires us and DISH Network to pay the other for the benefits of certain past and future federal research and development tax credits that we or DISH Network receive or received as a result of being part of a controlled group under the Code, and requires DISH Network to compensate us for certain past tax losses utilized by DISH Network and for certain past and future excess California research and development tax credits generated by us and used by DISH Network. In addition, the Tax Sharing Amendment extends the term of the State Tax Arrangement to the earlier to occur of termination of the Tax Sharing Agreement, a change in control of either us or DISH Network or, for any particular state, if we and DISH Network no longer file a combined tax return for such state.
Other Agreements
BSS Transaction Intellectual Property and Technology License Agreement. Effective September 2019, in connection with the BSS Transaction, we and DISH Network entered into an intellectual property and technology license agreement (the “BSS IPTLA”) pursuant to which we and DISH Network license to each other certain intellectual property and technology. The BSS IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the BSS IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the BSS Business acquired pursuant to the
35
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Share Exchange Employee Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the transferred businesses. DISH Network assumed employee-related liabilities relating to the transferred businesses as part of the Share Exchange, except that we are responsible for certain existing employee related litigation as well as certain pre-Share Exchange compensation and benefits for employees who transferred to DISH Network in connection with the Share Exchange.
NOTE 16. RELATED PARTY TRANSACTIONS - OTHER
Hughes Systique Corporation
TerreStar Solutions, Inc.
DISH Network owns more than 15 % of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuant to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $2.2 million and $5.1 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, we had trade accounts receivable from TSI of $2.3 million and $2.7 million, respectively.
Global-IP Cayman
In May 2017, we entered into an agreement with Global-IP Cayman (“Global IP”) providing for the sale of certain equipment and services to Global IP. Mr. William David Wade, a member of our board of directors, served as a member of the board of directors of Global IP and as an executive advisor to the Chief Executive Officer of Global IP from September 2017 until April 2019 and from September 2017 until December 2019, respectively. In August 2018, we and Global IP amended the agreement to: (i) change certain of the equipment and services to be provided to Global IP, (ii) modify certain payment terms, (iii) provide Global IP an option to use one of our test lab facilities and (iv) effectuate the assignment of the agreement from Global IP to one of its wholly-owned subsidiaries. In February 2019, we terminated the agreement as a result of Global IP’s defaults resulting from its failure to make payments to us as required
37
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Maxar Technologies Inc.
Mr. Jeffrey Tarr, who joined our board of directors in March 2019, served as a consultant and advisor to Maxar Technologies Inc. and its subsidiaries (“Maxar Tech”) through May 2019. We previously entered into agreements with Maxar Tech for the manufacture and certain other services of the EchoStar IX satellite, the EchoStar XVII satellite, the EchoStar XIX satellite, the EchoStar XXI satellite and the EchoStar XXIV satellite and our former EchoStar XI satellite, EchoStar XIV satellite, EchoStar XVI satellite and EchoStar XXIII satellite. Maxar Tech provides us with anomaly support for these satellites once launched pursuant to the terms of the agreements. Maxar Tech also provides a warranty on one of these satellites and may be required to pay us certain amounts should the satellite not operate according to certain performance specifications. Our obligations to pay Maxar Tech under these agreements during the design life of the applicable satellites may be reduced if the applicable satellites do not operate according to certain performance specifications. We incurred aggregate costs payable to Maxar Tech under these agreements of $7.9 million and $35.7 million for the three months ended March 31, 2020 and 2019, respectively. At both March 31, 2020 and December 31, 2019, we had no trade accounts payable to Maxar Tech.
NOTE 17. SUPPLEMENTAL FINANCIAL INFORMATION
Research and Development
The following table presents the research and development costs incurred in connection with customers’ orders:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | $ | $ | ||||||
Research and development expenses | $ | $ | ||||||
Cash and Cash Equivalents and Restricted Cash
The following table reconciles Cash and cash equivalents and restricted cash, as presented in the Condensed Consolidated Balance Sheets, to the total of the same as presented in the Condensed Consolidated Statements of Cash Flows:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash and cash equivalents, including restricted amounts, beginning of period: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
Total cash and cash equivalents, included restricted amounts, beginning of period | $ | $ | ||||||
Cash and cash equivalents, including restricted amounts, end of period: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
Total cash and cash equivalents, included restricted amounts, end of period | $ | $ | ||||||
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Other Current Assets, Net and Other Non-Current Assets, Net
The following table presents the components of Other current assets, net and Other non-current assets, net:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Other current assets, net: | ||||||||
Trade accounts receivable - DISH Network | $ | $ | ||||||
Inventory | ||||||||
Prepaids and deposits | ||||||||
Contract acquisition costs, net | ||||||||
Other, net | ||||||||
Total other current assets, net | $ | $ | ||||||
Other non-current assets, net: | ||||||||
Other receivables - DISH Network | $ | $ | ||||||
Restricted marketable investment securities | ||||||||
Restricted cash | ||||||||
Deferred tax assets, net | ||||||||
Capitalized software, net | ||||||||
Contract acquisition costs, net | ||||||||
Contract fulfillment costs, net | ||||||||
Other, net | ||||||||
Total other non-current assets, net | $ | $ | ||||||
The following table presents the activity in our allowance for doubtful accounts, which is included within Other, net in each of Other current assets, net and Other non-current assets, net in the table above:
Balance at Beginning of Period | Credit Losses (1) | Deductions | Foreign Currency Translation | Balance at End of Period | ||||||||||||||||
For the three months ended March 31, 2020 | ||||||||||||||||||||
Other current assets, net | $ | $ | $ | $ | $ | |||||||||||||||
Other non-current assets, net | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
(1) The impact of adopting ASC 326 on January 1, 2020 was a net increase to our allowance for doubtful accounts largely driven by a $13.4 million reclassification from Trade accounts receivables and contracts assets, net.
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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Accrued Expenses and Other Current Liabilities
The following table presents the components of Accrued expenses and other current liabilities:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Accrued expenses and other current liabilities: | ||||||||
Trade accounts payable - DISH Network | $ | $ | ||||||
Accrued interest | ||||||||
Accrued compensation | ||||||||
Accrued taxes | ||||||||
Operating lease obligation | ||||||||
Other | ||||||||
Total accrued expenses and other current liabilities | $ | $ | ||||||
Inventory
The following table presents the components of inventory:
As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Raw materials | $ | $ | ||||||
Work-in-process | ||||||||
Finished goods | ||||||||
Total inventory | $ | $ | ||||||
Supplemental and Non-cash Investing and Financing Activities
The following table presents the supplemental and non-cash investing and financing activities:
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest, net of amounts capitalized | $ | $ | ||||||
Cash paid for income taxes | $ | $ | ||||||
Non-cash investing and financing activities: | ||||||||
Employee benefits paid in Class A common stock | $ | $ | ||||||
Increase (decrease) in capital expenditures included in accounts payable, net | $ | ( | ) | $ | ( | ) | ||
Non-cash net assets received in exchange for a 20% ownership interest in our existing Brazilian subsidiary | $ | $ | ||||||
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Unless the context indicates otherwise, the terms “we,” “us,” “EchoStar,” the “Company” and “our” refer to EchoStar Corporation and its subsidiaries. The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations (“Management’s Discussion and Analysis”) should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and notes thereto (“Accompanying Condensed Consolidated Financial Statements”) in Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”). This Management’s Discussion and 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 Discussion and Analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Refer to the Disclosure Regarding Forward-Looking Statements in this Form 10-Q for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, refer to the Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”). Further, such forward-looking statements speak only as of the date of this Form 10-Q and we undertake no obligation to update them.
EXECUTIVE SUMMARY
EchoStar is a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises.
In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, “DISH Network”) and our 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 our other businesses (collectively, the “BSS Business”) to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded from continuing operations and segment results for the three months ended March 31, 2019 in our Accompanying Condensed Consolidated Financial Statements. Refer to Note 4. Discontinued Operations in our Accompanying Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
We currently operate in two business segments: Hughes and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company’s Chief Executive Officer.
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate and Legal) and other activities that have not been assigned to our business 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.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
All amounts presented in this Management’s Discussion and Analysis reference results from continuing operations unless otherwise noted and are expressed in thousands of United States (“U.S.”) dollars, except share and per share amounts and unless otherwise noted.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Three Months Ended March 31, 2020:
• | Revenue of $465.7 million |
• | Operating income (loss) of $10.6 million |
• | Net income (loss) from continuing operations of $(57.7) million |
• | Net income (loss) attributable to EchoStar common stock of $(54.3) million and basic earnings (loss) per share of common stock of $(0.56) |
• | Earnings before interest, taxes, depreciation and amortization, net income (loss) from discontinued operations and net income (loss) attributable to non-controlling interests (“EBITDA”) of $91.2 million (refer to the reconciliation of this non-GAAP measure in Results of Operations) |
Consolidated Financial Condition as of March 31, 2020:
• | Total assets of $7.0 billion |
• | Total liabilities of $3.4 billion |
• | Total stockholders’ equity of $3.6 billion |
• | Cash, cash equivalents and current marketable investment securities of $2.4 billion |
Hughes Segment
Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services to consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to consumer and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through advanced and proprietary methodologies, technologies, software and techniques, we continue to improve the efficiency of our networks. We invest in technologies to enhance our system and network management capabilities, specifically our managed services for enterprises. We also continue to invest in next generation technologies that can be applied to our future products and services.
We continue to focus our efforts on growing our consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers in our domestic and international markets across wholesale and retail channels. Service costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth. The growth of our enterprise businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. As a result of the COVID-19 pandemic, in accordance with orders received from our enterprise customers, we have deferred or canceled the delivery of some products or services and we, thus, may not be able to recognize revenue for such products or services.
Our Hughes segment currently uses capacity from three of our satellites (the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite), our Al Yah 3 Brazilian payload and additional satellite capacity acquired from third-party providers to provide services to our customers. Growth of our consumer subscriber base continues
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
to be constrained in areas where we are nearing or have reached maximum capacity. While these constraints are expected to be resolved when we launch new satellites, we continue to focus on revenue growth in all areas and consumer subscriber growth in the areas where we have available capacity.
In May 2019, we entered into an agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat contributed its satellite communications services business in Brazil to us in exchange for a 20% ownership interest in our existing Brazilian subsidiary that conducts our satellite communications services business in Brazil (the “Yahsat Brazil JV Transaction”). The combined business provides broadband internet services and enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat’s Al Yah 3 satellite. Under the terms of the agreement, Yahsat may also acquire, for further cash investments, additional minority ownership interests in the business in the future provided certain conditions are met.
In May 2019, we also entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti will contribute its very small aperture terminal (“VSAT”) telecommunications services and hardware business in India to our two existing Indian subsidiaries that conduct our VSAT services and hardware business. The combined entities will provide broadband satellite and hybrid solutions for enterprise networks. Upon consummation of the transaction, Bharti will have a 33% ownership interest in the combined business. The completion of the transaction is subject to customary regulatory approvals and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all.
In August 2018, we entered into an agreement with Yahsat to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat’s Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100.0 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS.
In August 2017, we entered into a contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (“HughesNet service”) in North, Central and South America as well as enterprise broadband services. In the first quarter of 2020, Space Systems/Loral, LLC (“SS/L”), the manufacturer of our EchoStar XXIV satellite, invoked the “force majeure” clause of our contract and notified us of a possible delay in completion of the satellite due to “shelter-in-place” orders affecting personnel at SS/L and its subcontractors, and other potential impacts of the COVID-19 pandemic. We currently expect the EchoStar XXIV satellite to be launched no earlier than the second half of 2021. This or other delays or impediments to SS/L’s meeting its obligations as a result of the COVID-19 pandemic and various economic and other consequences or otherwise could have a material adverse impact on our business operations, future revenues, financial position and prospects, the completion of manufacture of the EchoStar XXIV satellite and our planned expansion of satellite broadband services throughout North, South and Central America. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in Corporate and Other in our segment reporting.
In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”). Pursuant to the Hughes Broadband MSA, DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our HughesNet service and related equipment and other telecommunication services; and (ii) installs HughesNet service equipment with respect to activations generated by DISH Network. As a result of the Hughes Broadband MSA, we have not earned, and do not expect to earn in the future, significant equipment revenue from our distribution agreement with DISH Network.
We continue our efforts to expand our consumer satellite services business outside of the U.S. We have been delivering high-speed consumer satellite broadband services in Brazil since July 2016 and are also providing satellite broadband internet service in several other Latin American countries. Additionally, in September 2015, we entered into 15-year agreements with affiliates of Telesat Canada for Ka-band capacity on the Telesat T19V satellite located at the 63 degree west longitude orbital location, which was launched in July 2018. Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A satellite and the EchoStar XIX satellite in South America.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
Our broadband subscribers include customers that subscribe to our HughesNet service in North and Latin America through retail, wholesale and small/medium enterprise service channels. In connection with the COVID-19 pandemic, in March 2020, we voluntarily signed on to the Federal Communications Commissions’ (“FCC”) Keep Americans Connected Pledge (the “Pledge”), promising not to terminate HughesNet service for certain consumer customers for 60 days even if they are unable to pay. We have removed from our subscriber numbers as of March 31, 2020 any subscribers whose HughesNet service would have ordinarily been terminated in the absence of the Pledge. In April 2020, we voluntarily agreed with the FCC’s request to extend the Pledge through June 30, 2020. As a result, we may be required to provide HughesNet service to consumers who do not have the ability to pay for such services.
The following table presents our approximate subscriber numbers:
As of | ||||||
March 31, 2020 | December 31, 2019 | |||||
Broadband subscribers | 1,516,000 | 1,477,000 | ||||
As of March 31, 2020 and December 31, 2019, approximately 267,000 and 238,000 of our subscribers, respectively, were in Latin America.
The following table presents our approximate subscriber net additions:
For the three months ended | ||||||
March 31, 2020 | December 31, 2019 | |||||
Net additions | 39,000 | 20,000 | ||||
During the first quarter of 2020, our net subscriber additions increased by approximately 19,000 compared to the fourth quarter of 2019, reflecting increased gross subscriber additions compared to the fourth quarter of 2019.
As of March 31, 2020 and December 31, 2019, our Hughes segment had $1.2 billion and $1.4 billion of contracted revenue backlog, respectively. We define Hughes contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue. Our contracted revenue backlog as of March 31, 2020 decreased primarily due to the bankruptcy of a certain customer and the effects of the COVID-19 pandemic, including lengthened or delayed sales cycles with some of our enterprise customers.
ESS Segment
Our ESS segment provides satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the EchoStar IX satellite and the EchoStar 105/SES-11 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.
As of March 31, 2020 and December 31, 2019, our ESS segment had contracted revenue backlog of $9.5 million and $11.4 million respectively. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
Other Business Opportunities
Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. The current COVID-19 pandemic has made even more evident the worldwide need and demand for connectivity and communications to facilitate an ever-increasing virtual global community and workplace. In addition to fiber and wireless systems, technologies such as geostationary high throughput satellites, low-earth orbit (“LEO”) networks, medium-earth orbit (“MEO”) systems, balloons and High Altitude Platform Systems are expected to continue to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment, education, remote-connectivity and commerce across many industries and communities in North America and internationally for consumer and enterprise customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business.
We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally, that we believe may allow us to increase our existing market share, increase our satellite capacity, expand into new satellite and other technologies, markets and customers, broaden our portfolio of services, products and intellectual property, make our business more valuable, align us for future growth and expansion, maximize the return on our investments and strengthen our business and relationships with our customers. We may allocate or dispose of significant resources for long-term value that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.
S-Band Strategy
We continue to explore the development and deployment of S-band technologies and believe that our products and services will be integrated into new global, hybrid networks that leverage multiple satellites and terrestrial technologies. The current COVID-19 pandemic has made even more evident the worldwide need and demand for such networks. In December 2013, we acquired EchoStar Mobile Limited (“EML”), an entity based in Dublin, Ireland, which is licensed to provide mobile satellite service (“MSS”) and complementary ground component (“CGC”) services covering the European Union and its member states (“EU”) using the S-band spectrum. EML’s services in the EU are supported by the EchoStar XXI satellite and the EUTELSAT 10A payload. In October 2019, we acquired Sirion Global Pty Ltd., which we have renamed EchoStar Global Australia Pty Ltd (“EchoStar Global”), which holds global S-band non-geostationary satellite spectrum rights for MSS. Additionally, we have entered into a contract with Tyvak Nano-Satellite Systems, Inc. for the design and construction of S-band nano-satellites. The contracted launches for these satellites have been postponed as a result of the COVID-19 pandemic and we are awaiting notice from the launch providers regarding when they will be rescheduled, which we expect will be during 2020. We expect our nano-satellites to facilitate our continued growth in the global S-band market and enable us to leverage our acquisition of EchoStar Global. In addition, in November 2019, we were granted an S-band spectrum license for terrestrial rights in Mexico. As of March 31, 2020, we have no material future commitments in connection with these acquisitions.
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.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
Due to the COVID-19 pandemic, a large portion of our workforce has been working remotely and is likely to continue to do so for some time. While we have cybersecurity risk management tools to help protect our technology, information and networks that our employees access remotely, we cannot guarantee the security of the network that they will be using, the security status of the other non-company managed devices that might be on the network to which they are connected or the devices or networks used by third parties with whom our employees conduct business, such as customers, suppliers, vendors and other persons. Additionally, there has been a major global increase in COVID-19 related cyber-fraud and phishing attacks that continue to target our employees, vendors, suppliers, customers and others. Accordingly, we have increased our efforts and resources relating to cybersecurity as a result of the COVID-19 pandemic.
We treat cybersecurity risk seriously and are focused on maintaining the security of our and our partners’ systems, networks, technologies and data. We regularly review and revise our relevant policies and procedures, invest in and maintain internal resources, personnel and systems and review, modify and supplement our defenses through the use of various services, programs and outside vendors. Additionally, we provide resources to assist employees in better securing their home networks and remote connections. We also maintain 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 our 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 months ended March 31, 2020 and through May 6, 2020. 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.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
RESULTS OF OPERATIONS
Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019
The following table presents our consolidated results of operations for the three months ended March 31, 2020 compared to the three months ended March 31, 2019:
For the three months ended March 31, | Variance | ||||||||||||||
Statements of Operations Data | 2020 | 2019 | Amounts | % | |||||||||||
Revenue: | |||||||||||||||
Services and other revenue | $ | 408,357 | $ | 402,668 | $ | 5,689 | 1.4 | ||||||||
Equipment revenue | 57,309 | 51,714 | 5,595 | 10.8 | |||||||||||
Total revenue | 465,666 | 454,382 | 11,284 | 2.5 | |||||||||||
Costs and expenses: | |||||||||||||||
Cost of sales - services and other | 145,252 | 143,347 | 1,905 | 1.3 | |||||||||||
% of total services and other revenue | 35.6 | % | 35.6 | % | |||||||||||
Cost of sales - equipment | 45,908 | 45,007 | 901 | 2.0 | |||||||||||
% of total equipment revenue | 80.1 | % | 87.0 | % | |||||||||||
Selling, general and administrative expenses | 125,281 | 112,114 | 13,167 | 11.7 | |||||||||||
% of total revenue | 26.9 | % | 24.7 | % | |||||||||||
Research and development expenses | 6,254 | 6,888 | (634 | ) | (9.2 | ) | |||||||||
% of total revenue | 1.3 | % | 1.5 | % | |||||||||||
Depreciation and amortization | 132,368 | 118,978 | 13,390 | 11.3 | |||||||||||
Total costs and expenses | 455,063 | 426,334 | 28,729 | 6.7 | |||||||||||
Operating income (loss) | 10,603 | 28,048 | (17,445 | ) | (62.2 | ) | |||||||||
Other income (expense): | |||||||||||||||
Interest income, net | 15,583 | 24,429 | (8,846 | ) | (36.2 | ) | |||||||||
Interest expense, net of amounts capitalized | (36,233 | ) | (53,199 | ) | 16,966 | 31.9 | |||||||||
Gains (losses) on investments, net | (46,672 | ) | 6,936 | (53,608 | ) | * | |||||||||
Equity in earnings (losses) of unconsolidated affiliates, net | 2,613 | (6,353 | ) | 8,966 | * | ||||||||||
Foreign currency transaction gains (losses), net | (10,844 | ) | (1,160 | ) | (9,684 | ) | * | ||||||||
Other, net | (279 | ) | (42 | ) | (237 | ) | * | ||||||||
Total other income (expense), net | (75,832 | ) | (29,389 | ) | (46,443 | ) | * | ||||||||
Income (loss) from continuing operations before income taxes | (65,229 | ) | (1,341 | ) | (63,888 | ) | * | ||||||||
Income tax benefit (provision), net | 7,492 | (2,898 | ) | (10,390 | ) | * | |||||||||
Net income (loss) from continuing operations | (57,737 | ) | (4,239 | ) | (53,498 | ) | * | ||||||||
Net income (loss) from discontinued operations | — | 19,247 | (19,247 | ) | (100.0 | ) | |||||||||
Net income (loss) | (57,737 | ) | 15,008 | (72,745 | ) | * | |||||||||
Less: Net loss (income) attributable to non-controlling interests | 3,442 | (806 | ) | 4,248 | * | ||||||||||
Net income (loss) attributable to EchoStar Corporation common stock | $ | (54,295 | ) | $ | 14,202 | $ | (68,497 | ) | * | ||||||
Other data: | |||||||||||||||
EBITDA (1) | $ | 91,231 | $ | 145,601 | $ | (54,370 | ) | (37.3 | ) | ||||||
Subscribers, end of period | 1,516,000 | 1,388,000 | 128,000 | 9.2 | |||||||||||
* Percentage is not meaningful.
(1) | A reconciliation of EBITDA to Net income (loss), the most directly comparable generally accepted accounting principles in the U.S. (“U.S. GAAP”) measure in our Accompanying Condensed Consolidated Financial Statements, is included in Results of Operations. For further information on our use of EBITDA, refer to the Explanation of Key Metrics and Other Items. |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following discussion relates to our continuing operations for the three months ended March 31, 2020 and 2019 unless otherwise stated.
Services and other revenue. Services and other revenue totaled $408.4 million for the three months ended March 31, 2020, an increase of $5.7 million, or 1.4%, compared to 2019.
• | Services and other revenue from our Hughes segment for the three months ended March 31, 2020 increased by $7.5 million, or 1.9%, to $401.2 million compared to 2019. The increase was primarily attributable to increases in sales of broadband services to our consumer customers of $19.5 million, partially offset by a decrease in sales of broadband services to our enterprise customers of $12.6 million. Both of these variances include the negative impact of exchange rate fluctuations. |
• | Services and other revenue from Corporate and Other for the three months ended March 31, 2020 decreased by $2.5 million, or 49.5%, to $2.5 million compared to 2019 primarily attributable to a decrease in income from certain real estate previously leased to DISH Network and transferred as part of the BSS Transaction. |
Equipment revenue. Equipment revenue totaled $57.3 million for the three months ended March 31, 2020, an increase of $5.6 million, or 10.8%, compared to 2019. The increase was primarily attributable to our Hughes segment due to increases in hardware sales to our enterprise customers.
Cost of sales - services and other. Cost of sales - services and other totaled $145.3 million for the three months ended March 31, 2020, an increase of $1.9 million, or 1.3%, compared to 2019. The increase was primarily attributable to our Hughes segment due 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 $45.9 million for the three months ended March 31, 2020, an increase of $0.9 million, or 2.0%, compared to 2019. The increase was primarily attributable to our Hughes segment due to an increase in hardware sales to our enterprise customers.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $125.3 million for the three months ended March 31, 2020, an increase of $13.2 million, or 11.7%, compared to 2019. The increase was primarily attributable to (i) increases in marketing and promotional expenses of $8.3 million from our Hughes segment mainly associated with our consumer business in Latin America, (ii) increases in bad debt expense of $1.9 million and (iii) increases in other general and administrative expenses of $3.0 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $132.4 million for the three months ended March 31, 2020, an increase of $13.4 million, or 11.3%, compared to 2019. The increase was primarily from our Hughes segment and due to increases in depreciation expense of $6.4 million relating to our customer premises equipment and $6.1 million relating to the depreciation of assets acquired in the Yahsat Brazil JV Transaction.
Interest income, net. Interest income, net totaled $15.6 million for the three months ended March 31, 2020, a decrease of $8.8 million, or 36.2%, compared to 2019 primarily attributable to the decrease in our marketable investment securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $36.2 million for the three months ended March 31, 2020, a decrease of $17.0 million, or 31.9%, compared to 2019. The decrease was primarily due to a decrease of $16.0 million in interest expense and in amortization of deferred financing cost as a result of the repurchase and maturity of our 6 1/2% Senior Secured Notes due 2019 and an increase of $1.8 million in capitalized interest relating to the construction of the EchoStar XXIV satellite.
Gains (losses) on investments, net. Gains (losses) on investments, net totaled $46.7 million of net losses for the three months ended March 31, 2020, a negative change of $53.6 million compared to 2019. The change was primarily attributable to $50.3 million of net negative variances on marketable investment securities compared to 2019.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled $2.6 million in earnings for the three months ended March 31, 2020 compared to $6.4 million in losses for the three months ended March 31, 2019. The increase was related to increased earnings from our investments in our equity method investees.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled $10.8 million in losses for the three months ended March 31, 2020, an increase in losses of $9.7 million compared to 2019. The change was due to the net strengthening of the U.S. dollar against certain foreign currencies in 2020 compared to 2019.
Income tax benefit (provision), net. Income tax benefit (provision), net was $7.5 million in benefit for the three months ended March 31, 2020 compared to $2.9 million in provision for the three months ended March 31, 2019. Our effective income tax rate was 11.5% and (216.1)% for the three months ended March 31, 2020 and 2019, respectively. The variations in our current year effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature, permanent book tax differences and research and experimentation credits. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2019 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature and research and experimentation credits.
Net income (loss) attributable to EchoStar Corporation common stock. Net loss attributable to EchoStar Corporation common stock totaled $54.3 million for the three months ended March 31, 2020, compared to net income attributable to EchoStar Corporation common stock of $14.2 million for the three months ended March 31, 2019, a decrease of $68.5 million as set forth in the following table:
Amounts | ||||
Net income (loss) attributable to EchoStar Corporation for the three months ended March 31, 2019 | $ | 14,202 | ||
Decrease (increase) in interest expense, net of amounts capitalized | 16,966 | |||
Decrease (increase) in income tax provision, net | 10,390 | |||
Decrease (increase) in equity in losses of unconsolidated affiliates, net | 8,966 | |||
Decrease (increase) in net income attributable to non-controlling interests | 4,248 | |||
Increase (decrease) in other, net | (237 | ) | ||
Increase (decrease) in interest income, net | (8,846 | ) | ||
Increase (decrease) in foreign currency transaction gains, net | (9,684 | ) | ||
Increase (decrease) in operating income, including depreciation and amortization | (17,445 | ) | ||
Increase (decrease) in net income from discontinued operations | (19,247 | ) | ||
Increase (decrease) in gains on investments, net | (53,608 | ) | ||
Net income (loss) attributable to EchoStar Corporation for the three months ended March 31, 2020 | $ | (54,295 | ) | |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
EBITDA. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles Net income (loss), the most directly comparable U.S. GAAP measure in our Accompanying Condensed Consolidated Financial Statements, to EBITDA:
For the three months ended March 31, | Variance | ||||||||||||||
2020 | 2019 | Amounts | % | ||||||||||||
Net income (loss) | $ | (57,737 | ) | $ | 15,008 | $ | (72,745 | ) | * | ||||||
Interest income, net | (15,583 | ) | (24,429 | ) | 8,846 | (36.2 | ) | ||||||||
Interest expense, net of amounts capitalized | 36,233 | 53,199 | (16,966 | ) | (31.9 | ) | |||||||||
Income tax provision (benefit), net | (7,492 | ) | 2,898 | (10,390 | ) | * | |||||||||
Depreciation and amortization | 132,368 | 118,978 | 13,390 | 11.3 | |||||||||||
Net loss (income) from discontinued operations | — | (19,247 | ) | (19,247 | ) | 100.0 | |||||||||
Net loss (income) attributable to non-controlling interests | 3,442 | (806 | ) | 4,248 | * | ||||||||||
EBITDA | $ | 91,231 | $ | 145,601 | $ | (54,370 | ) | (37.3 | ) | ||||||
* Percentage is not meaningful.
EBITDA was $91.2 million for the three months ended March 31, 2020, a decrease of $54.4 million, or 37.3%, compared to 2019 as set forth in the following table:
Amounts | ||||
EBITDA for the three months ended March 31, 2019 | $ | 145,601 | ||
Decrease (increase) in equity in losses of unconsolidated affiliates, net | 8,966 | |||
Decrease (increase) in net income attributable to non-controlling interests | 4,248 | |||
Increase (decrease) in other, net | (237 | ) | ||
Increase (decrease) in operating income, excluding depreciation and amortization | (4,055 | ) | ||
Increase (decrease) in foreign currency transaction gains, net | (9,684 | ) | ||
Increase (decrease) in gains on investments, net | (53,608 | ) | ||
EBITDA for the three months ended March 31, 2020 | $ | 91,231 | ||
Segment Operating Results and Capital Expenditures
The following tables present our operating results, capital expenditures and EBITDA by segment for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Capital expenditures in the table below are net of refunds and other receipts related to our property and equipment.
Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||
For the three months ended March 31, 2020 | ||||||||||||||||
Total revenue | $ | 458,482 | $ | 4,652 | $ | 2,532 | $ | 465,666 | ||||||||
Capital expenditures | 91,517 | — | 13,087 | 104,604 | ||||||||||||
EBITDA | 154,641 | 2,030 | (65,440 | ) | 91,231 | |||||||||||
For the three months ended March 31, 2019 | ||||||||||||||||
Total revenue | $ | 445,337 | $ | 4,033 | $ | 5,012 | $ | 454,382 | ||||||||
Capital expenditures | 73,821 | — | 38,033 | 111,854 | ||||||||||||
EBITDA | 161,132 | 1,729 | (17,260 | ) | 145,601 | |||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Hughes Segment
For the three months ended March 31, | Variance | ||||||||||||||
2020 | 2019 | Amounts | % | ||||||||||||
Total revenue | $ | 458,482 | $ | 445,337 | $ | 13,145 | 3.0 | ||||||||
Capital expenditures | 91,517 | 73,821 | 17,696 | 24.0 | |||||||||||
EBITDA | 154,641 | 161,132 | (6,491 | ) | (4.0 | ) | |||||||||
Total revenue was $458.5 million for the three months ended March 31, 2020, an increase of $13.1 million, or 3.0%, compared to 2019. The increase was primarily due to net increases of $19.5 million in sales of broadband services to our consumer customers and $5.6 million in hardware sales to our enterprise customers, partially offset by a decrease in sales of broadband services to our enterprise customers of $12.6 million. Both of these variances include the negative impact of exchange rate fluctuations.
Capital expenditures were $91.5 million for the three months ended March 31, 2020, an increase of $17.7 million, or 24.0%, compared to 2019, primarily due to net increases in expenditures associated with our consumer business.
EBITDA was $154.6 million for the three months ended March 31, 2020, a decrease of $6.5 million, or 4.0%, compared to 2019 as set forth in the following table:
Amounts | ||||
EBITDA for the three months ended March 31, 2019 | $ | 161,132 | ||
Decrease (increase) in net income attributable to non-controlling interests | 4,248 | |||
Increase (decrease) in gains on investments, net | 568 | |||
Increase (decrease) in other, net | (191 | ) | ||
Decrease (increase) in equity in losses of unconsolidated affiliates, net | (373 | ) | ||
Increase (decrease) in operating income, excluding depreciation and amortization | (2,997 | ) | ||
Increase (decrease) in foreign currency transaction gains, net | (7,746 | ) | ||
EBITDA for the three months ended March 31, 2020 | $ | 154,641 | ||
ESS Segment
For the three months ended March 31, | Variance | |||||||||||||
2020 | 2019 | Amounts | % | |||||||||||
Total revenue | $ | 4,652 | $ | 4,033 | $ | 619 | 15.3 | |||||||
EBITDA | 2,030 | 1,729 | 301 | 17.4 | ||||||||||
Total revenue was $4.7 million for the three months ended March 31, 2020, an increase of $0.6 million, or 15.3%, compared to 2019, due to a net increase in transponder services provided to third parties.
EBITDA was $2.0 million for the three months ended March 31, 2020, an increase of $0.3 million, or 17.4%, compared to 2019, primarily due to the increase in revenue.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Corporate and Other
For the three months ended March 31, | Variance | ||||||||||||||
2020 | 2019 | Amounts | % | ||||||||||||
Total revenue | $ | 2,532 | $ | 5,012 | $ | (2,480 | ) | (49.5 | ) | ||||||
Capital expenditures | 13,087 | 38,033 | (24,946 | ) | (65.6 | ) | |||||||||
EBITDA | (65,440 | ) | (17,260 | ) | (48,180 | ) | * | ||||||||
* Percentage is not meaningful
Total revenue was $2.5 million for the three months ended March 31, 2020, a decrease of $2.5 million, or 49.5%, compared to 2019 primarily attributable to a decrease in income from certain real estate previously leased to DISH Network and transferred as part of the BSS Transaction.
Capital expenditures for the three months ended March 31, 2020 decreased by $24.9 million, or 65.6%, compared to 2019, primarily due to a decrease in expenditures on the EchoStar XXIV satellite.
EBITDA for the three months ended March 31, 2020 was a loss of $65.4 million, an increase in loss of $48.2 million compared to 2019 as set forth in the following table:
Amounts | ||||
EBITDA for the three months ended March 31, 2019 | $ | (17,260 | ) | |
Decrease (increase) in equity in losses of unconsolidated affiliates, net | 9,338 | |||
Increase (decrease) in other, net | (47 | ) | ||
Increase (decrease) in operating income, excluding depreciation and amortization | (1,357 | ) | ||
Increase (decrease) in foreign currency transaction gains, net | (1,937 | ) | ||
Increase (decrease) in gains on investments, net | (54,177 | ) | ||
EBITDA for the three months ended March 31, 2020 | $ | (65,440 | ) | |
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Marketable Investment Securities
We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
As of March 31, 2020 and December 31, 2019, our cash, cash equivalents and marketable investment securities totaled $2.4 billion and $2.5 billion, respectively.
As of March 31, 2020 and December 31, 2019, we held $790.4 million and $940.6 million, respectively, of marketable investment securities, consisting of various debt and equity instruments including corporate bonds, corporate equity securities, government bonds and mutual funds.
Cash Flow Activities
The following discussion highlights our cash flow activities, which include results from continuing and discontinued operations, for the three months ended March 31, 2020.
Cash Flows from Operating Activities
We typically reinvest the cash flow from operating activities in our business. For the three months ended March 31, 2020, we reported net cash inflows from operating activities of $71.3 million, a decrease of $104.7 million, compared to 2019. The decrease in cash inflows was primarily attributable to lower net income of $65.2 million adjusted to exclude: (i) Depreciation and amortization; (ii) Losses (gains) on investments, net, (iii) Equity in losses (earnings) of
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
unconsolidated affiliates, net; (iv) Foreign currency transaction losses (gains), net; (v) Deferred tax provision (benefit), net; (vi) Stock-based compensation; (vii) Amortization of debt issuance costs; and (viii) Other, net. The decrease in cash inflows was also attributable to decreases of $39.5 million resulting from timing differences in operating assets and liabilities.
Cash Flows from Investing Activities
Our investing activities generally include purchases and sales of marketable investment securities, capital expenditures, acquisitions and strategic investments. For the three months ended March 31, 2020, we reported net cash inflows from investing activities of $17.9 million, a decrease in cash inflows of $249.6 million compared to 2019.
For the three months ended March 31, 2020, we had net sales and maturities of marketable securities of $687.6 million, partially offset by net purchases of marketable securities of $550.9 million and expenditures for property and equipment of $104.6 million.
For the three months ended March 31, 2019, we had net sales and maturities of marketable securities of $712.7 million, partially offset by net purchases of marketable securities of $325.6 million and expenditures for property and equipment of $112.0 million.
Cash Flows from Financing Activities
Our financing activities generally include proceeds related to the issuance of debt and cash used for the repurchase, redemption or payment of debt and finance lease obligations, payments relating to stock and debt repurchases and the proceeds from Class A common stock options exercised and stock issued under our stock incentive plans and employee stock purchase plan. For the three months ended March 31, 2020, we reported net cash outflows from financing activities of $1.0 million compared to net cash outflows of $22.1 million for the three months ended March 31, 2019. Net cash outflows for the three months ended March 31, 2020 included our repurchase of $5.9 million of shares of our Class A common stock, partially offset by $4.0 million for the contribution by non-controlling interest holder and $0.2 million in net proceeds received from Class A common stock options exercised. Net cash outflows for the three months ended March 31, 2019 included $9.9 million for the payment of finance lease obligations, $8.0 million for the repurchasing and maturity of debt and $7.3 million for the purchase of non-controlling shareholder interests in a subsidiary of ours that were held by an unaffiliated third party, partially offset by $2.0 million in net proceeds received from Class A common stock options exercised.
Obligations and Future Capital Requirements
Contractual Obligations
As of March 31, 2020, our satellite-related obligations were $402.7 million. These primarily include payments pursuant to agreements for the construction of the EchoStar XXIV satellite, payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
Off-Balance Sheet Arrangements
We generally do not engage in off-balance sheet financing activities or use derivative financial instruments for hedge accounting or speculative purposes.
Letters of Credit
As of March 31, 2020, we had $41.0 million of letters of credit and insurance bonds. Of this amount, $9.0 million was secured by restricted cash, $3.8 million was related to insurance bonds and $28.2 million was issued under credit arrangements available to our foreign subsidiaries. Certain letters of credit are secured by assets of our foreign subsidiaries.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
Satellites
As our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity. We may also construct, acquire or lease additional satellites in the future to provide satellite services at additional orbital locations or to improve the quality of our satellite services.
Satellite Insurance
We generally do not carry in-orbit insurance on our satellites or payloads because we have assessed that the cost of insurance is not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our long-term debt and our joint venture agreements with Yahsat, we are required, subject to certain limitations on coverage, to maintain only for the SPACEWAY 3 satellite, the EchoStar XVII satellite and the Al Yah 3 Brazilian payload, insurance or other contractual arrangements during the commercial in-orbit service of such satellite or payload. Our other satellites and payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance or other contractual arrangements. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.
Future Capital Requirements
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated through our operations to fund our business. 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. Consumer revenue in our Hughes segment depends on our success in adding new and retaining existing subscribers and driving higher average revenue per subscriber across our wholesale and retail channels. Revenue in our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Service costs related to ongoing support of our direct and indirect customers and partners are typically impacted most significantly by our growth. There can be no assurance that we will have positive cash flows from operations. As a result of the COVID-19 pandemic, in accordance with orders received from our enterprise customers, we have deferred or canceled the delivery of some products or services and we, thus, may not be able to realize the cash flow from such products or services. Furthermore, if we experience negative cash flows, our existing cash and marketable investment securities balances may be reduced.
We have a significant amount of outstanding indebtedness. As of March 31, 2020, our total long-term debt was $2.4 billion. Refer to our Form 10-K for a discussion of the terms of our long-term debt. Our liquidity requirements will be continue to be significant, primarily due to our remaining debt service requirements and the design and construction of our new EchoStar XXIV satellite. We may from time to time seek to purchase amounts of our outstanding debt in open market purchases, privately negotiated transactions or otherwise, depending on market conditions, our liquidity needs and other factors. The amounts we may repurchase may be material. In addition, our future capital expenditures are likely to increase if we make acquisitions or additional investments in infrastructure, technologies or joint ventures to support and expand our business, or if we decide to purchase or build additional satellites or other technologies or assets. Other aspects of our business operations may also require additional capital. We also expect to owe U.S. Federal income tax for 2020.
We anticipate that our existing cash and marketable investment securities are sufficient to fund the currently anticipated operations of our business through the next twelve months.
Stock Repurchases
Pursuant to a stock repurchase program approved by our Board of Directors on October 29, 2019, we are authorized to repurchase up to $500.0 million of our Class A common stock through December 31, 2020. During the three months ended March 31, 2020, we repurchased 196,999 shares of our common stock at an average price per share of $29.90 for a total purchase price of $5.9 million. During the three months ended March 31, 2019, we did not repurchase any common stock.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies are those that involve a high degree of estimation, judgment and complexity. Our critical accounting policies are those related to (i) contingent liabilities, (ii) revenue recognition and (iii) impairment of assets.
Our critical accounting policies are described in our Form 10-K under the heading Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes in our critical accounting policies from those presented in our Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new and recently issued accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies in our Accompanying Condensed Consolidated Financial Statements.
SEASONALITY
For our Hughes segment, service revenue is generally not impacted by seasonal fluctuations other than those associated with fluctuations related to sales and promotional activities. However, like many communications infrastructure equipment vendors, a higher amount of our hardware revenue occurs in the second half of the year due to our customers’ annual procurement and budget cycles. Large enterprises and operators often allocate their capital expenditure budgets at the beginning of their fiscal year (which often coincides with the calendar year). The typical sales cycle for large complex system procurements is six to 12 months, which often results in the customer expenditure occurring towards the end of the year. Customers often seek to expend the budgeted funds prior to the end of the year and the next budget cycle.
Our ESS segment is generally not affected by seasonal impacts.
While the above-described trends have been observed consistently in recent years, we cannot predict with any certainty whether they will continue in the near future as the economy and our customers react to the COVID-19 pandemic and experience associated disruptions and dislocations.
INFLATION
Inflation has not materially affected our operations during the past three years but we are unable to predict the extent or nature of any future inflationary pressure at this time. We believe that our ability to increase the prices charged for our products and services in future periods will depend primarily on competitive pressures or contractual terms. However, we may not be able to maintain pricing levels consistent with inflationary pressure on expenses.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue. Services and other revenue primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service professional services and facilities rental revenue.
Equipment revenue. Equipment revenue primarily includes broadband equipment and networks sold to customers in our consumer and enterprise markets.
Cost of sales - services and other. Cost of sales - services and other primarily includes the cost of broadband services provided to our consumer and enterprise customers, maintenance and other contracted services, costs associated with satellite and transponder leases and services, professional services and facilities rental.
Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks sold to customers in our consumer and enterprise markets. It also includes certain other costs associated with the deployment of equipment to our customers.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED |
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., human resources and other services and stock-based compensation expense). It also includes professional fees (e.g. legal, information systems and accounting services), other expenses associated with facilities and administrative services and credit losses, which include customer related estimated credit losses and estimated credit losses on non-current receivables.
Research and development expenses. Research and development expenses primarily includes costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.
Interest income, net. Interest income, net primarily includes interest earned on our cash, cash equivalents and marketable investment securities, and other investments including premium amortization and discount accretion on debt securities, offset by estimated credit losses on our other debt investments.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized primarily includes interest expense associated with our debt and finance lease obligations (net of capitalized interest), amortization of debt issuance costs and interest expense related to certain legal proceedings.
Gains (losses) on investments, net. Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities and other investments for which we have elected the fair value option. It may also include realized gains and losses on the sale or exchange of our available-for-sale debt securities, other-than-temporary impairment losses on our available-for-sale debt securities, realized gains and losses on the sale or exchange of other equity investments and other debt investments without readily determinable fair value, adjustments to the carrying amount of investments in unconsolidated affiliates and marketable equity securities resulting from impairments and observable price changes and estimated credit losses.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net include gains and losses resulting from the re-measurement of transactions denominated in foreign currencies.
Other, net. Other, net primarily includes dividends received from our marketable investment securities and other non-operating income and expense items that are not appropriately classified elsewhere in the Condensed Consolidated Statements of Operations in our Accompanying Condensed Consolidated Financial Statements.
Net income (loss) from discontinued operations. Net income (loss) from discontinued operations includes the financial results of the BSS Business transferred in the BSS Transaction, except for certain real estate that transferred in the transaction.
EBITDA. EBITDA is defined as Net income (loss) excluding Interest income, net, Interest expense, net of amounts capitalized, Income tax benefit (provision), net, Depreciation and amortization, Net income (loss) from discontinued operations and Net income (loss) attributable to non-controlling interests. EBITDA is not a measure determined in accordance with U.S. GAAP. This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of Operations above. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with U.S. GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to our Form 10-K, under the heading Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk, for a more complete discussion of our risks. As of March 31, 2020, other than as explained below, our market risk has not changed materially from those presented in our Form 10-K.
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 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In November 2019, we consummated the Yahsat Brazil JV Transaction. As a result, we are reviewing the internal controls of the business we acquired from Yahsat in the Yahsat Brazil JV Transaction and we may make appropriate changes as deemed necessary.
Changes in Internal Control Over Financial Reporting
Except as noted above, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We continue to review our internal control over financial reporting and may from time to time make changes aimed at enhancing its effectiveness and to ensure that our systems evolve with our business.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, refer to Part I, Item 1. Financial Statements — Note 13. Contingencies — Litigation in this Form 10-Q.
ITEM 1A. RISK FACTORS
The following information updates, and should be read in conjunction with, the information in Part I, Item 1A, Risk Factors, of our Form 10-K.
RISKS RELATED TO THE COVID‑19 PANDEMIC
The COVID‑19 pandemic, its economic impacts and related government and private sector responsive actions could have a material adverse effect our business operations. As a result of the COVID-19 pandemic, many countries, including the U.S., and other governmental authorities have imposed restrictions on travel, as well as general movement and gathering restrictions, business closures and other measures imposed to slow the spread of COVID‑19.
We have set forth below key risks from the COVID‑19 pandemic that we have identified to date. The situation continues to develop, however, and it is impossible to predict the effect and ultimate impact of the COVID‑19 pandemic on our business, financial condition or results of operations. We cannot estimate or determine the duration of the quarantine, social distancing and other regulatory measures instituted or recommended in response to the COVID‑19 pandemic, whether they will recur or the duration or degree of the business disruptions, and related financial impact. The COVID‑19 pandemic has evolved into a worldwide health crisis that has adversely affected economies and financial markets throughout the world, resulting in a significant economic downturn and changes in global economic policy that could have a material adverse effect on our business, financial condition or results of operations.
Our operations and those of our customers and other third parties with whom we conduct business are located in areas impacted by the COVID‑19 pandemic, and those operations have been, and may continue to be, adversely affected by the COVID‑19 pandemic.
We conduct our product development, manufacturing, installation and customer support and services in areas where, in order to attempt to mitigate the COVID-19 pandemic, (a) states of emergency related to the spread of COVID‑19 have been declared and (b) various levels of “shelter-in-place” orders have been issued, which (i) direct individuals living in those locations to shelter at their places of residence (subject to limited exceptions), (ii) direct businesses and governmental agencies to cease non-essential operations at physical locations, (iii) prohibit non-essential gatherings of various number of individuals, and (iv) order cessation of non-essential travel. The effects of the COVID-19 pandemic and the actions from applicable governmental authorities has negatively impacted productivity, increased cybersecurity risks as a large portion of our workforce has been working remotely, disrupted our and our customers’, suppliers’, vendors’ and other business partners’ and investees’ businesses and finances, delayed regulatory and other timelines, and delayed the manufacture and deployment of our satellites. Additionally, some regulatory bodies have furloughed employees, reduced activities and temporarily closed their offices. Such measures may materially delay the review and/or approval of licenses or authorizations we need to operate our business. The magnitude of these impacts will depend, in part, on the length and severity of the pandemic, associated restrictions and resulting economic and financial consequences and other limitations and impediments on the conduct of business in the ordinary course.
Extended periods of interruption to our corporate, development or manufacturing facilities due to the COVID‑19 pandemic could cause us to lose revenue, which would depress our financial performance and could be difficult to recapture. Our business may also be harmed if travel continues to be restricted or inadvisable or if members of management and other employees are unable to work because they contract COVID‑19, they elect not to come to work due to the illness affecting others in our office or other facilities, or they are subject to quarantines or other governmentally imposed restrictions. Additionally, many of our subscribers are working remotely or engaging in distance learning. These activities have increased the usage on our HughesNet service so that there is little or no capacity remaining for subscriber growth in our most popular geographic areas. In addition, the limitation on capacity may result in our subscribers experiencing slower speeds. This, in turn, could result in higher churn and may negatively affect our financial results.
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A portion of the expected sales of our products or services have been, and additional sales may be, delayed or canceled as a result of effects of the COVID‑19 pandemic on the operations of our customers.
Our customers’ business operations have been, and are continuing to be, subject to business interruptions arising from the COVID‑19 pandemic. Due to the downturn in financial markets arising from the COVID-19 pandemic, a number of our current enterprise customers are facing uncertain futures. In the event any of these enterprise customers fail or seek reorganization under the bankruptcy laws, we may be obliged to pay for satellite capacity for which we are not being paid. Further, the COVID-19 pandemic has resulted in increased unemployment, which could result in reduced demand and increased inability to pay from our consumer customers. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our subscriber numbers, business, financial condition, results of operations, and cash flows. We are diligently working to ensure that we can operate with minimal disruption and address potential business interruptions on ourselves and our customers. However, the full extent to which the COVID-19 pandemic could affect the global economy and our business will depend on future developments and factors that cannot be predicted and there can be no assurance that the COVID‑19 pandemic will not result in further delays, or possibly reductions, in our recognition of revenue.
Our supply chain may be materially adversely impacted due to the COVID‑19 pandemic.
We rely upon the facilities of our domestic and foreign suppliers to support our business. The COVID-19 pandemic has resulted in significant governmental measures in many countries being implemented to control the spread of COVID‑19, including restrictions on manufacturing and the movement of employees. As a result, our suppliers may not have the materials, capacity, or capability to supply our components according to our schedule and specifications. Further, there may be logistics issues, including our ability and our supply chain’s ability to quickly ramp up production, and transportation demands that may cause further delays. If our suppliers’ operations are curtailed, we may need to seek alternate sources of supply, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. The duration of the disruptions and restrictions on the ability to travel, quarantines and temporary closures of the facilities of our suppliers, as well as general limitations on movement in the region, are unknown and they may recur and the duration of the production and supply chain disruption, and related financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time or recur, the impact on our supply chain could have a material adverse effect on our results of operations and cash flows. Business disruptions could also negatively affect the sources and availability of components and materials that are essential to the operation of our business.
The COVID‑19 pandemic could negatively impact our planned or potential strategic initiatives.
Our strategy includes a number of plans to support the growth of our core businesses, including continuing to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally. The extent to which the COVID-19 pandemic impacts these potential strategic initiatives will depend on future developments that are highly uncertain. If the disruptions posed by the COVID‑19 pandemic and related government measures, economic downturns or other matters of global concern continue for an extensive period of time or recur, our ability to pursue and consummate planned or potential strategic initiatives could be materially adversely affected.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Pursuant to a stock repurchase program approved by our board of directors, we are authorized to repurchase up to $500.0 million of our Class A common stock through December 31, 2020. During the year ended December 31, 2019, we did not repurchase any common stock.
The following table provides information regarding repurchases of our Class A common stock during the three months ended March 31, 2020:
Period | Total Number of Shares (Or Units) Purchased | Average Price Paid Per Share (or Unit) | Total Number of Shares (or Units) Purchased As Part of Publicly Announced Plans or Program | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Program (1) | ||||||||||
January 1 - 31 | — | $ | — | — | $ | 500,000 | ||||||||
February 1 - 29 | — | — | — | 500,000 | ||||||||||
March 1 - 31 | 196,999 | 29.90 | 196,999 | 494,109 | ||||||||||
Total | 196,999 | $ | 29.90 | 196,999 | $ | 494,109 | ||||||||
(1) On October 29, 2019, our Board of Directors authorized us to repurchase up to $500 million of our Class A common stock through and including December 31, 2020. Purchases under our repurchase authorization may be made through privately negotiated transactions, open market repurchases, one or more trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or otherwise, subject to market conditions and other factors. We may elect to purchase some or all, or not to purchase the maximum amount or any of, the remaining shares allowable under this program and we may also enter into additional share repurchase programs authorized by our Board of Directors. All shares repurchased reflected in the table above have been converted to treasury shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
Financial Results
On May 7, 2020, we issued a press release (the “Press Release”) announcing our financial results for the quarter ended March 31, 2020. A copy of the Press Release is furnished herewith as Exhibit 99.1. The foregoing information, including the exhibits related thereto, are furnished in response to Item 2.02 of Form 8-K and shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise, and shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in any such filing.
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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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
ECHOSTAR CORPORATION | ||
Date: May 7, 2020 | By: | /s/ Michael T. Dugan |
Michael T. Dugan | ||
Chief Executive Officer, President and Director | ||
(Principal Executive Officer) | ||
Date: May 7, 2020 | By: | /s/ David J. Rayner |
David J. Rayner | ||
Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer | ||
(Principal Financial and Accounting Officer) | ||
62
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 EchoStar 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: May 7, 2020 | ||
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 EchoStar 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: May 7, 2020 | ||
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 March 31, 2020 on Form 10-Q (the “Quarterly Report”) of EchoStar 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: May 7, 2020 | ||
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 Months Ended March 31, 2020
Englewood, CO, May 7, 2020—EchoStar Corporation (NASDAQ: SATS) today announced its financial results for the three months ended March 31, 2020.
Three Months Ended March 31, 2020 Financial Highlights:
• | Consolidated revenues of $465.7 million. |
• | Net loss from continuing operations of $57.7 million, consolidated net loss attributable to EchoStar common stock of $54.3 million, and diluted loss per share of $0.56. |
• | Consolidated Adjusted EBITDA of $148.6 million (see discussion and the reconciliation of GAAP to this non-GAAP measure below). |
“As businesses and families everywhere contend with the impact of COVID-19, EchoStar has focused on keeping our customers connected,” commented Michael Dugan, CEO and President of EchoStar. “The pandemic has demonstrated that staying connected is a necessity, not a luxury, and our solid performance in the first quarter of 2020, despite the global crisis, reflects this reality. We grew our revenue and Adjusted EBITDA from the same period in 2019. Operationally, we increased our consumer subscriber base by approximately 39,000 in the first quarter, driven by both our domestic and international markets, bringing our broadband subscriber total to approximately 1.516 million. We continuously evaluate the changing economic conditions and associated effect on our customers and vendors and are managing the business appropriately. Although these are extremely challenging times, the pandemic has made even more evident the worldwide demand for connectivity.”
Three Months Ended March 31, 2020 - Additional Information:
• | Consolidated revenue increased 2% or $11.3 million year over year despite negative foreign exchange impact. |
• | Adjusted EBITDA increased 6% or $8.8 million year over year. |
◦ | Hughes segment Adjusted EBITDA was up $0.6 million year over year. The margin driven by the higher revenue was offset by increased sales, marketing, and operating expense associated primarily with our growing Latin American consumer markets. |
◦ | ESS segment Adjusted EBITDA was higher by $0.3 million year over year. |
◦ | Corporate and Other segment Adjusted EBITDA increased by $7.9 million. The segment had equity earnings in unconsolidated affiliates during the quarter of $4.5 million compared to equity losses of $4.8 million in the same period a year ago. This increase was partially offset by the loss of the revenue and EBITDA associated with the transfer of certain real estate assets to DISH Network Corporation as part of the BSS transaction that were not treated as discontinued operations. |
• | Net loss from continuing operations was $57.7 million, an increase of loss by $53.5 million from last year. The increased loss was primarily due to higher unrealized and realized losses on investments of $53.6 million which included the write-off of a strategic investment, higher depreciation and amortization of $13.4 million, and higher unrealized losses on foreign currency of $9.7 million. This was partially offset by lower net income tax expense of $10.4 million, higher equity in earnings of $8.9 million, and lower net interest expense of $8.1 million. |
• | Hughes broadband subscribers are approximately 1,516,000 as of March 31, 2020 including approximately 267,000 subscribers in Latin America. To help support people working and studying from home, we signed the FCC’s Keeping America Connected Pledge, and our subscriber numbers exclude those whose service would have ordinarily been terminated in the absence of the Pledge. |
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• | For the three months ended March 31,2020, approximately 66% of Hughes segment revenue was attributable to our consumer customers with approximately 34% attributable to our enterprise customers. |
• | Cash, cash equivalents and current marketable investment securities were $2.4 billion as of March 31, 2020. |
• | We purchased 196,999 shares of our Class A common stock in the open market. |
Set forth below is a table highlighting certain of EchoStar’s segment results three months ended March 31, 2020 and 2019 (amounts in thousands) from continuing operations (all US GAAP amounts reference results from continuing operations):
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenue | ||||||||
Hughes | $ | 458,482 | $ | 445,337 | ||||
EchoStar Satellite Services | 4,652 | 4,033 | ||||||
Corporate and Other | 2,532 | 5,012 | ||||||
Total revenue | $ | 465,666 | $ | 454,382 | ||||
Adjusted EBITDA | ||||||||
Hughes | $ | 162,219 | $ | 161,642 | ||||
EchoStar Satellite Services | 2,030 | 1,729 | ||||||
Corporate & Other: | ||||||||
Corporate overhead, operating and other | (20,124 | ) | (18,719 | ) | ||||
Equity in earnings (losses) of unconsolidated affiliates, net | 4,512 | (4,827 | ) | |||||
Total Corporate & Other | (15,612 | ) | (23,546 | ) | ||||
Total Adjusted EBITDA | $ | 148,637 | $ | 139,825 | ||||
Net income (loss) from continuing operations | $ | (57,737 | ) | $ | (4,239 | ) | ||
Expenditures for property and equipment | $ | 104,604 | $ | 111,854 | ||||
2
Reconciliation of GAAP to Non-GAAP Measurement (amounts in thousands):
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Net income (loss) | $ | (57,737 | ) | $ | 15,008 | |||
Interest income, net | (15,583 | ) | (24,429 | ) | ||||
Interest expense, net of amounts capitalized | 36,233 | 53,199 | ||||||
Income tax provision (benefit), net | (7,492 | ) | 2,898 | |||||
Depreciation and amortization | 132,368 | 118,978 | ||||||
Net loss (income) from discontinued operations | — | (19,247 | ) | |||||
Net loss (income) attributable to non-controlling interests | 3,442 | (806 | ) | |||||
EBITDA | 91,231 | 145,601 | ||||||
(Gains) losses on investments, net | 46,672 | (6,936 | ) | |||||
License fee dispute - India, net of non-controlling interests | (110 | ) | — | |||||
Foreign currency transaction (gains) losses, net | 10,844 | 1,160 | ||||||
Adjusted EBITDA | $ | 148,637 | $ | 139,825 | ||||
Note on Use of Non-GAAP Financial Measures
EBITDA is defined as “Net income (loss)” excluding “Interest income, net,” Interest expense, net of amounts capitalized,” “Income tax benefit (provision), net,” “Depreciation and amortization,” “Net income (loss) from discontinued operations,” and “Net income (loss) attributable to noncontrolling interests.”
Adjusted EBITDA is defined as EBITDA excluding “Gains and losses on investments, net,” “Foreign currency transaction gains (losses), net,” 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 March 31, 2020 and 2019 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 March 31, 2020 filed today with the Securities and Exchange Commission.
EchoStar will host its earnings conference call on Thursday, May 7, 2020 at 11:00 a.m. Eastern Time. The call-in numbers are (877) 815-1625 (toll-free) and (716) 247-5178 (international), Conference ID 9193376.
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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, 2019 and Quarterly Report on Form 10-Q for the period ended March 31, 2020 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 | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,599,025 | $ | 1,519,431 | ||||
Marketable investment securities | 790,361 | 940,623 | ||||||
Trade accounts receivable and contract assets, net | 187,919 | 196,629 | ||||||
Other current assets, net | 189,887 | 179,531 | ||||||
Total current assets | 2,767,192 | 2,836,214 | ||||||
Non-current assets: | ||||||||
Property and equipment, net | 2,428,543 | 2,528,738 | ||||||
Operating lease right-of-use assets | 119,794 | 114,042 | ||||||
Goodwill | 509,315 | 506,953 | ||||||
Regulatory authorizations, net | 471,164 | 478,598 | ||||||
Other intangible assets, net | 25,826 | 29,507 | ||||||
Other investments, net | 298,147 | 325,405 | ||||||
Other non-current assets, net | 339,640 | 334,841 | ||||||
Total non-current assets | 4,192,429 | 4,318,084 | ||||||
Total assets | $ | 6,959,621 | $ | 7,154,298 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 107,245 | $ | 124,080 | ||||
Contract liabilities | 99,266 | 101,060 | ||||||
Accrued expenses and other current liabilities | 239,706 | 270,879 | ||||||
Total current liabilities | 446,217 | 496,019 | ||||||
Non-current liabilities: | ||||||||
Long-term debt | 2,390,218 | 2,389,168 | ||||||
Deferred tax liabilities, net | 339,006 | 351,692 | ||||||
Operating lease liabilities | 105,482 | 96,941 | ||||||
Other non-current liabilities | 73,123 | 74,925 | ||||||
Total non-current liabilities | 2,907,829 | 2,912,726 | ||||||
Total liabilities | 3,354,046 | 3,408,745 | ||||||
Commitments and contingencies | ||||||||
5
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued and outstanding at both March 31, 2020 and December 31, 2019 | — | — | ||||||
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, 56,760,433 shares issued and 50,078,513 shares outstanding at March 31, 2020 and 56,592,251 shares issued and 50,107,330 shares outstanding at December 31, 2019 | 57 | 57 | ||||||
Class B convertible common stock, $0.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at both March 31, 2020 and December 31, 2019 | 48 | 48 | ||||||
Class C convertible common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both March 31, 2020 and December 31, 2019 | — | — | ||||||
Class D common stock, $0.001 par value, 800,000,000 shares authorized, none issued and outstanding at both March 31, 2020 and December 31, 2019 | — | — | ||||||
Additional paid-in capital | 3,307,360 | 3,290,483 | ||||||
Accumulated other comprehensive income (loss) | (192,218 | ) | (122,138 | ) | ||||
Accumulated earnings (losses) | 569,446 | 632,809 | ||||||
Treasury stock, at cost | (137,347 | ) | (131,454 | ) | ||||
Total EchoStar Corporation stockholders’ equity | 3,547,346 | 3,669,805 | ||||||
Non-controlling interests | 58,229 | 75,748 | ||||||
Total stockholders’ equity | 3,605,575 | 3,745,553 | ||||||
Total liabilities and stockholders’ equity | $ | 6,959,621 | $ | 7,154,298 | ||||
6
ECHOSTAR CORPORATION
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenue: | ||||||||
Services and other revenue | $ | 408,357 | $ | 402,668 | ||||
Equipment revenue | 57,309 | 51,714 | ||||||
Total revenue | 465,666 | 454,382 | ||||||
Costs and expenses: | ||||||||
Cost of sales - services and other (exclusive of depreciation and amortization) | 145,252 | 143,347 | ||||||
Cost of sales - equipment (exclusive of depreciation and amortization) | 45,908 | 45,007 | ||||||
Selling, general and administrative expenses | 125,281 | 112,114 | ||||||
Research and development expenses | 6,254 | 6,888 | ||||||
Depreciation and amortization | 132,368 | 118,978 | ||||||
Total costs and expenses | 455,063 | 426,334 | ||||||
Operating income (loss) | 10,603 | 28,048 | ||||||
Other income (expense): | ||||||||
Interest income, net | 15,583 | 24,429 | ||||||
Interest expense, net of amounts capitalized | (36,233 | ) | (53,199 | ) | ||||
Gains (losses) on investments, net | (46,672 | ) | 6,936 | |||||
Equity in earnings (losses) of unconsolidated affiliates, net | 2,613 | (6,353 | ) | |||||
Foreign currency transaction gains (losses), net | (10,844 | ) | (1,160 | ) | ||||
Other, net | (279 | ) | (42 | ) | ||||
Total other income (expense), net | (75,832 | ) | (29,389 | ) | ||||
Income (loss) from continuing operations before income taxes | (65,229 | ) | (1,341 | ) | ||||
Income tax benefit (provision), net | 7,492 | (2,898 | ) | |||||
Net income (loss) from continuing operations | (57,737 | ) | (4,239 | ) | ||||
Net income (loss) from discontinued operations | — | 19,247 | ||||||
Net income (loss) | (57,737 | ) | 15,008 | |||||
Less: Net loss (income) attributable to non-controlling interests | 3,442 | (806 | ) | |||||
Net income (loss) attributable to EchoStar Corporation common stock | $ | (54,295 | ) | $ | 14,202 | |||
Earnings (losses) per share - Class A and B common stock: | ||||||||
Basic and diluted earnings (losses) from continuing operations per share | $ | (0.56 | ) | $ | (0.05 | ) | ||
Total basic and diluted earnings (losses) per share | $ | (0.56 | ) | $ | 0.15 | |||
7
ECHOSTAR CORPORATION
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands, except per share amounts)
For the three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (57,737 | ) | $ | 15,008 | |||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
Depreciation and amortization | 132,368 | 154,221 | ||||||
Losses (gains) on investments, net | 46,672 | (6,418 | ) | |||||
Equity in losses (earnings) of unconsolidated affiliates, net | (2,613 | ) | 6,353 | |||||
Foreign currency transaction losses (gains), net | 10,844 | 1,160 | ||||||
Deferred tax provision (benefit), net | (10,064 | ) | 6,455 | |||||
Stock-based compensation | 2,384 | 2,628 | ||||||
Amortization of debt issuance costs | 1,050 | 2,010 | ||||||
Other, net | (4,899 | ) | 1,754 | |||||
Changes in assets and liabilities, net: | ||||||||
Trade accounts receivable and contract assets, net | (7,664 | ) | (19,231 | ) | ||||
Other current assets, net | (16,127 | ) | (10,370 | ) | ||||
Trade accounts payable | (9,559 | ) | 8,831 | |||||
Contract liabilities | (3,212 | ) | 17,896 | |||||
Accrued expenses and other current liabilities | (4,922 | ) | (9,914 | ) | ||||
Non-current assets and non-current liabilities, net | (5,226 | ) | 5,563 | |||||
Net cash flows from operating activities | 71,295 | 175,946 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of marketable investment securities | (550,891 | ) | (325,557 | ) | ||||
Sales and maturities of marketable investment securities | 687,579 | 712,666 | ||||||
Purchase of other investments | (5,500 | ) | — | |||||
Expenditures for property and equipment | (104,604 | ) | (111,962 | ) | ||||
Expenditures for externally marketed software | (8,638 | ) | (7,600 | ) | ||||
Net cash flows from investing activities | 17,946 | 267,547 | ||||||
Cash flows from financing activities: | ||||||||
Repurchase of the 2019 Senior Secured Notes | — | (8,046 | ) | |||||
Payment of finance lease obligations | (215 | ) | (9,882 | ) | ||||
Payment of in-orbit incentive obligations | (801 | ) | (1,573 | ) | ||||
Net proceeds from Class A common stock options exercised | 150 | 2,047 | ||||||
Net proceeds from Class A common stock issued under the Employee Stock Purchase Plan | 2,924 | 2,749 | ||||||
Treasury share purchase | (5,893 | ) | — | |||||
Contribution by non-controlling interest holder | 4,000 | — | ||||||
Purchase of non-controlling interest | — | (7,313 | ) | |||||
Other, net | 817 | (131 | ) | |||||
Net cash flows from financing activities | 982 | (22,149 | ) | |||||
Effect of exchange rates on cash and cash equivalents | (4,809 | ) | (133 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 85,414 | 421,211 | ||||||
Cash and cash equivalents, including restricted amounts, beginning of period | 1,521,889 | 929,495 | ||||||
Cash and cash equivalents, including restricted amounts, end of period | $ | 1,607,303 | $ | 1,350,706 | ||||
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