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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
OR
Commission File Number: 001-33807
(Exact name of registrant as specified in its charter)
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| 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) | |||||||||||||
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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).
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 ☒
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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
As of June 30, 2022, the aggregate market value of Class A common stock held by non-affiliates of the registrant was $646.8 million based upon the closing price of the Class A common stock as reported on the NASDAQ Global Select Market as of the close of business on that date.
As of February 6, 2023, the registrant’s outstanding common stock consisted of 35,594,333 shares of Class A common stock and 47,687,039 shares of Class B common stock, each $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Form 10-K”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about our estimates, expectations, future developments, plans, objectives, strategies, financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “project,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms. These forward-looking statements are based on information available to us as of the date of this Form 10-K and represent management’s current views and assumptions based on past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties, including the impact of the coronavirus pandemic (COVID-19), and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition both the near- and long-term. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:
•significant risks related to our ability to operate and control our satellites, operational and environmental risks related to our owned and leased satellites, and risks related to our satellites under construction;
•our ability and the ability of third parties with whom we engage to operate our business as a result of the COVID-19 pandemic, including regulatory and competitive considerations;
•our ability to implement and/or realize benefits of our investments and other strategic initiatives;
•legal proceedings relating to the BSS Transaction or other matters that could result in substantial costs and material adverse effects to our business;
•risks related to our foreign operations and other uncertainties associated with doing business internationally;
•risks related to our dependency upon third-party providers, including supply chain disruptions and inflation;
•risks related to cybersecurity incidents; and
•risks related to our human capital resources.
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”).
All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of any forward-looking statements. We assume no responsibility for updating forward-looking information contained or incorporated by reference herein or in any documents we file with the SEC, except as required by law.
Should one or more of the risks or uncertainties described herein or in any documents we file with the SEC occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
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PART I
ITEM 1. BUSINESS
OVERVIEW
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. A substantial majority of the voting power of the shares of EchoStar is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family. Our Class A common stock is publicly traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “SATS.” During 2022, Hamid Akhavan joined the Company as its Chief Executive Officer and President.
We are an industry leader in both networking technologies and services, innovating to deliver the global solutions that power a connected future for people, enterprises and things everywhere. We provide internet services to consumer customers, which include home and small to medium-sized businesses, and satellite and multi-transport technologies and managed network services to enterprise customers, telecommunications providers, aeronautical service providers and government entities, including the U.S. Department of Defense.
Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, technologies such as geostationary high throughput satellites, low-earth orbit (“LEO”) networks, medium-earth orbit (“MEO”) systems and multi-transport networks using combinations of technologies are expected to continue to play significant roles in enabling global connectivity, 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 managed services for information, the internet-of-things, entertainment, education, remote-connectivity and commerce across industries and communities globally for consumer and enterprise customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business.
All amounts presented in this Form 10-K are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
BUSINESS SEGMENTS
We currently operate in two business segments: our Hughes segment and our EchoStar Satellite Services segment (“ESS segment”). These business 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 (“CODM”), who is the Company’s Chief Executive Officer.
Our operations also include various corporate functions (primarily Executive, Treasury, Strategic Development, Human Resources, Information Technology, Finance, Accounting, Real Estate and Legal) and other activities, such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in our Corporate and Other segment in our segment reporting.
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HUGHES SEGMENT
Our Products and Services
Our Hughes segment provides broadband satellite technologies and broadband internet products and services to consumer customers. We provide broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to government and enterprise customers. We also design, provide and install gateway and terminal equipment to customers for other satellite systems. In addition, we design, develop, construct and provide telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
Our Hughes segment incorporates advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through advanced and proprietary methodologies, technologies, software and techniques, we continue to improve the efficiency of our networks. We invest in technologies to enhance our system and network management capabilities, specifically our managed services for enterprises. We also continue to invest in next generation technologies that can be applied to our future products and services. In addition, we are also providing wireline and wireless capacity to utilize in markets that include residential, community WiFi, backhaul, and other enterprise broadband and multi-transport services.
Our Hughes segment currently uses capacity from our owned and leased satellites, including additional satellite capacity leased from third-party providers to provide services to our customers. We also use other multi-transport capacity that includes cable, fiber, 5G, and 4G/LTE. In most areas of the U.S. we are nearing or have reached capacity, which has resulted in our consumer subscriber base becoming increasingly limited. Our Latin America consumer subscriber base in certain areas has also become capacity constrained. These constraints are expected to be addressed by the launch of the EchoStar XXIV satellite.
In May 2019, we entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti agreed to contribute its very small aperture terminal (“VSAT”) telecommunications services and hardware business in India to Hughes Communications India Private Limited (“HCIPL”) and its subsidiaries, our less than wholly owned Indian subsidiaries, that conduct our VSAT services and hardware business in India. On January 4, 2022, this joint venture was formed (the “India JV”) and subsequent to the formation of the India JV, we hold a 67% ownership interest and Bharti holds a 33% ownership interest in HCIPL. The India JV combines the VSAT businesses of both companies to offer flexible and scalable enterprise networking solutions using satellite connectivity for primary transport, back-up and hybrid implementation in India. The results of operations related to the India JV have been included in these Consolidated Financial Statements and the accompanying notes (collectively, the “Consolidated Financial Statements”) from the date of formation. The costs associated with the closing of the India JV were not material and were expensed as incurred.
In August 2017, we entered into a long-term contract for the design and construction of the EchoStar XXIV satellite, a next-generation, high throughput geostationary satellite. In December 2020, we entered into an agreement with a launch provider for the launch of EchoStar XXIV. 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. Following delays of over two years, in November 2022 we negotiated an amendment to our contract with the manufacturer to provide for additional compensation for past delays and a realignment of remedies. The contract now provides relief to us on certain payments, including approximately $14.0 million in payments through orbit-raising, and $44.5 million, plus 6% interest on such amounts, in deferred in-orbit incentive payments. Additionally, the contract now requires the payment of additional liquidated damages to us in the event of further delay, and provides for our right to terminate beginning January 1, 2024 if the satellite has not yet been delivered. In addition, the Company and the manufacturer will enter into an agreement under which the Company will provide certain products and/or services during 2023. The EchoStar XXIV satellite is expected to be launched in the second quarter of 2023. Delay in the availability of the EchoStar XXIV satellite could have a material adverse impact on our business operations, future revenues, financial position and prospects, and our planned expansion of satellite broadband services throughout North, South and Central America. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in our Corporate and Other segment in our segment reporting.
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Our Customers
Our enterprise customers include, but are not limited to, lottery agencies, gas station operators, aircraft connectivity providers and companies with multi-branch networks that rely on satellite or terrestrial networks for critical communication across wide geographies. Most of our enterprise customers have contracts with us for the services they purchase. Our Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems and provides satellite ground segment systems and terminals for other satellite systems, including mobile system operators. Developments toward the launch of next-generation satellite systems, including LEO, MEO and geostationary systems, as well as other multi-transport technologies, could provide additional opportunities to drive the demand for our equipment, hardware, technology and services.
Our Competition
Our industry is highly competitive. As a global provider of network technologies, products and services, our Hughes segment competes with a large number of telecommunications service providers, which puts pressure on prices and margins. To compete effectively, we emphasize our network quality, customization capability, offering of networks as a turnkey managed service, position as a single point of contact for products and services and competitive prices.
In our consumer broadband satellite technologies and internet services markets, we compete against traditional telecommunications and wireless carriers, other satellite internet providers, as well as fiber, cable, and wireless internet service providers offering competitive services in the markets we seek to serve. Cost, speed and accessibility are key determining factors in the selection of a service provider by the consumer. In addition, government subsidies, such as the Federal Communication Commission’s (“FCC”) Rural Development Opportunity Fund can have the effect of subsidizing the growth of our wired, wireless and satellite competitors. Our primary satellite competitors in our North American consumer market are ViaSat Communications, Inc., which is owned by ViaSat, Inc. (“ViaSat”), and Space Exploration Technologies Corp. (“SpaceX”). Both ViaSat and SpaceX have also entered the South and Central American consumer markets. We seek to differentiate ourselves based on the ubiquitous availability of our service, quality, proprietary technology, and distribution channels.
In our enterprise markets, we compete against providers of satellite-based and terrestrial-based networks, including fiber, cable, wireless internet service, multiprotocol label switching and internet protocol-based virtual private networks.
Our principal competitors for the supply of VSAT satellite networks are Gilat Satellite Networks Ltd, ViaSat, and ST Engineering iDirect, Inc. To differentiate ourselves from our competitors, we emphasize particular technological features of our products and services, our ability to customize networks and perform desired development work and the quality of our customer service. We also face competition from resellers and numerous local companies who purchase equipment and sell services to local customers, including domestic and international telecommunications operators, cable companies and other major carriers.
Our Manufacturing
Certain products in our Hughes segment are assembled at our facilities in Maryland and we outsource a portion of the manufacturing of our products to third parties. We believe that the manufacturing facilities used by our Hughes segment have sufficient capacity to handle current demand. We adjust our capacity based on our production requirements. We also work with third-party vendors for the development and manufacture of components that are integrated into our products. We develop dual sourcing capabilities for critical parts when practical and we evaluate outsourced subcontract vendors on a periodic basis. Our operations group, together with our engineering group, works with our vendors and subcontractors to reduce development costs, to increase production efficiency, and to obtain components at lower prices.
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ESS SEGMENT
Our Services
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 Customers
Our satellite capacity is currently used by our customers for a variety of applications, including:
•Fixed Satellite Services (“FSS”). We provide satellite services to broadcast news organizations, internet service providers and content providers who use our satellites to deliver programming and internet. Our satellites are also used for the transmission of live sporting events, internet access, disaster recovery and satellite news gathering services.
•Government Services. We provide satellite and technical services to U.S. government service providers.
•Network Services. We provide satellite services to companies for private networks that allow delivery of video and data services for corporate communications. Our satellites can be used for point-to-point or point to multi-point communications.
Our Competition
Our ESS segment competes against larger, well-established satellite service companies, such as Intelsat S.A., SES S.A., Telesat and Eutelsat Communications S.A., in an industry that is characterized by long-term contracts and high costs for customers to change service providers. Several of our competitors maintain key North American and other international orbital slots that may further limit our ability to compete and offer competitive pricing.
BUSINESS STRATEGIES
•Focus on optimization of operations and product offerings. Currently and until the launch of our EchoStar XXIV satellite, our main focus is on optimizing the use of existing assets and services with primary attention on capacity yield. During this period efforts are directed towards the most scalable and profitable regions. The introduction of HughesNet Fusion was announced in September 2022 and is a low-latency satellite internet offering which connects mobile and landline technologies with satellites. The introduction of HughesNet Fusion is a growth opportunity that allows us to expand our service delivery options. Also, we are looking for additional opportunities for cross-functional collaboration within our organization, leading to simplification and centralization of structure to achieve greater efficiencies.
•Monetize our EchoStar XXIV satellite. Following the launch of our EchoStar XXIV satellite, which will provide additional capacity and ability to offer higher speed service plans, our focus will be on monetizing it. We are planning not only for the launch itself but for the introduction of our related services with new higher speed plans, including a new higher speed HughesNet Fusion offering. We believe that the kind of services we will be offering are in demand, and we expect to be able to effectively market a highly competitive set of services once EchoStar XXIV enters service.
•Strong focus on our enterprise business. We also have a strong focus on growing our global enterprise business by leveraging our business connectivity, managed service portfolio, hybrid business solutions, and our own manufactured products. Increased participation in this vast market segment is a key element of our diversification strategy. During this period, we will also focus on improving operational scale with potential small acquisitions.
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•Continue development of S-band and other hybrid spectrum resources. We hold S-band mobile satellite service (“MSS”) and terrestrial authorizations in Europe, Mexico and Chile, and are in the process of applying for and receiving additional authorizations. We have positioned ourselves to continue to develop the S-band spectrum globally by acquiring Sirion Global Pty Ltd., which we have renamed EchoStar Global Australia Pty Ltd (“EchoStar Global”). EchoStar Global has brought into use the International Telecommunication Union (“ITU”) global S-band non-geostationary satellite spectrum rights for MSS. In February of 2023, we announced an agreement with Astro Digital US, Inc. (“Astro Digital”), a designer, manufacturer and operator of small satellite systems, for the construction of a global S-band MSS network. Under the agreement, Astro Digital will manufacture the satellites for the constellation, which will deliver global Internet of Things, machine-to-machine and other data services beginning in 2024. EchoStar Global will operate this constellation. In addition, we believe we remain in a unique position to develop a stand-alone as well as a hybrid MSS and complementary ground component network service.
•Continue to diversify our business by selectively exploring new domestic and international strategic initiatives. 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, expand into new markets, and acquire new customers through the use of multi-transport technologies, increase our satellite capacity, broaden our portfolio of services, products and intellectual property and strengthen our relationships with our customers.
•Develop improved and new technologies. We believe that our engineering capabilities provide us with the opportunity to develop and deploy cutting edge technologies, license our technologies to others and maintain a leading technological position in the industries in which we are active.
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OUR SATELLITE FLEET
As of December 31, 2022, our satellite fleet consisted of ten geosynchronous (“GEO”) 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. Our owned S-band LEO nano-satellites are not included in the table below.
The following table presents our GEO satellite fleet as of December 31, 2022:
| GEO Satellite | Segment | Launch Date | Nominal Degree Orbital Location (Longitude) | Depreciable Life (In Years) | ||||||||||||||||||||||
Owned: | ||||||||||||||||||||||||||
SPACEWAY 3 (1) | Hughes | August 2007 | 95 W | 10 | ||||||||||||||||||||||
| EchoStar XVII | Hughes | July 2012 | 107 W | 15 | ||||||||||||||||||||||
| EchoStar XIX | Hughes | December 2016 | 97.1 W | 15 | ||||||||||||||||||||||
Al Yah 3 (2) | Hughes | January 2018 | 20 W | 7 | ||||||||||||||||||||||
EchoStar IX (3) (4) | ESS | August 2003 | 121 W | 12 | ||||||||||||||||||||||
EUTELSAT 10A (“W2A”) (5) | Corporate and Other | April 2009 | 10 E | - | ||||||||||||||||||||||
| EchoStar XXI | Corporate and Other | June 2017 | 10.25 E | 15 | ||||||||||||||||||||||
Finance leases: | ||||||||||||||||||||||||||
| Eutelsat 65 West A | Hughes | March 2016 | 65 W | 15 | ||||||||||||||||||||||
| Telesat T19V | Hughes | July 2018 | 63 W | 15 | ||||||||||||||||||||||
| EchoStar 105/SES-11 | ESS | October 2017 | 105 W | 15 | ||||||||||||||||||||||
(1) Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed its acquisition of Hughes Communications, Inc. (“Hughes Communications”) and its subsidiaries (the “Hughes Acquisition”).
(2) Upon consummation of our joint venture with Al Yah Satellite Communications Company PrJSC (“Yahsat”) in Brazil in November 2019, we acquired the Brazilian Ka-band payload on this 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.
(4) EchoStar IX is approaching its end of station-kept life. The Company placed the satellite in an inclined-orbit in the first quarter of 2023. Inclined-orbit will extend its life to enable further revenue generating opportunities.
(5) We acquired the S-band payload on this satellite in December 2013. Prior to acquisition, the S-band payload experienced an anomaly at the time of launch and, as a result, is not fully operational.
Our EchoStar XXIV satellite is included in construction in progress as of December 31, 2022. The satellite is expected to be launched in the second quarter of 2023.
Satellite Anomalies and Impairments
Our satellites may experience anomalies from time to time, some of which may have a significant adverse effect on their remaining useful lives, the commercial operation of the satellites or our operating results or financial position. We are not aware of any anomalies with respect to our owned or leased satellites that have had any such significant adverse effect during the year ended December 31, 2022. During the first quarter of 2023, we lost contact with our third nano-satellite (“EG-3”), which was launched in the second quarter of 2021 and brought into use our Sirion-1 ITU filing in the third quarter of 2021. We are continuing attempts to reestablish contact with EG-3, and in the event we are unable to do so, we will have three years to place a new S-band spacecraft at the altitude prescribed in our Australian ITU filing. We expect the first group of S-band satellites recently ordered from Astro Digital to be launched well in advance of the three year replacement timeline. We are not aware of any other anomalies with respect to our owned or leased satellites as of the date of these Consolidated Financial Statements. There can be no assurance, however, that anomalies will not have a significant adverse effect in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our satellites were to fail.
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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 our joint venture agreement with Yahsat, we are required to maintain insurance for the Al Yah 3 Brazilian payload during the commercial in-orbit service of such payload, subject to certain limitations on coverage. We have obtained certain insurance for our EchoStar XXIV satellite covering launch plus the first year of operations. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.
We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Certain of the anomalies previously disclosed may be considered to represent a significant adverse change in the physical condition of a particular satellite. However, based on the redundancy designed within each satellite, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.
GOVERNMENT REGULATIONS
We are subject to telecommunications regulation by a number of regulatory bodies including the FCC, other U.S. federal and state regulators and government agencies, the ITU and regulators and governments in other countries and regions where we hold licenses including the E.U., the U.K., India, Australia and several Latin American countries. In addition, we are also subject to the export control laws and regulations and trade sanctions laws and regulations of the U.S. and other countries with respect to the export of telecommunications equipment and services. In addition, in the U.S. and some other countries we are subject to country specific approvals of our products. Depending upon the circumstances, non-compliance with applicable legislation or regulations could result in suspension or revocation of our licenses or authorizations, the termination or loss of contracts or the imposition of contractual damages, civil fines or criminal penalties.
The following summary of regulations and legislation is not intended to describe all present and proposed government regulation and legislation affecting our business. Government regulations that are currently the subject of judicial or administrative proceedings, draft legislation or administrative proposals could impact us and our industries to varying degrees. The FCC and other regulators from time to time initiate proceedings that could adversely impact our satellite operations, including spectrum usage. We cannot predict either the outcome of these proceedings or proposals or any potential impact they might have on the industry or on our operations.
FCC Regulations Applicable to Our Operations
FCC Jurisdiction over Satellite Operations. Non-governmental bodies, including commercial entities, that use radio frequencies to provide communications services to, from or within the U.S. are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). The Communications Act gives the FCC regulatory jurisdiction over many areas relating to communications operations, including:
•the assignment of satellite radio frequencies and orbital locations to specific services and companies, the licensing of satellites and earth stations and the granting of related authorizations;
•approval for the relocation of satellites to different orbital locations, the replacement of a satellite with another new or existing satellite and the authorization of specific earth stations to communicate with such newly relocated satellites;
•ensuring compliance with the terms and conditions of assignments, licenses, authorizations and approvals;
•avoiding harmful interference with other radio frequency emitters; and
•ensuring compliance with other applicable provisions of the Communications Act and FCC rules and regulations.
All satellite licenses issued by the FCC are subject to expiration unless extended by the FCC. Our U.S. FSS licenses generally have 15 year terms. We hold licenses and authorizations for satellite and earth stations as well as other services. To obtain and operate under such FCC licenses and authorizations, we must satisfy legal, technical qualification requirements and other conditions including, among other things, satisfaction of certain
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technical and ongoing due diligence obligations, maintaining bonds, payment of annual regulatory fees and various reporting requirements.
Telecommunications Regulation. Many of the services we provide are also subject to FCC regulation as telecommunications services. For certain services in the U.S., we are required to contribute fees, computed as a percentage of our revenue from telecommunications services to the Universal Service Fund (“USF”) to support mechanisms that subsidize the provision of services to low-income consumers, high-cost areas, schools, libraries and rural health care providers. Current FCC rules permit us to pass this USF contribution through to our customers. The FCC also requires broadband internet access and internet telephony service providers to comply with the requirements of the Federal Communications Assistance for Law Enforcement Act, which generally requires telecommunications carriers to ensure that law enforcement agencies are able to conduct lawfully-authorized surveillance of users of their services. In addition, as a provider of interconnected voice over internet protocol services, we are required to abide by a number of rules related to telephony service, including rules dealing with the protection of customer information and the processing of emergency calls.
State and Local Regulation
We are also regulated by state and local authorities. While the FCC has preempted many state and local regulations that would impair the installation and use of VSAT and other consumer satellite dishes, our businesses nonetheless are subject to state and local regulation, including, among others, obtaining regulatory authorizations and zoning regulations that affect the ability to install these consumer satellite earth station antennas. In addition, in order to obtain universal service funding, we are subject to being an eligible telecommunications carrier in certain states.
International Regulation
Foreign Administrations’ Jurisdiction Over Satellite and Terrestrial Operations. Some of our satellites and earth stations are licensed in foreign jurisdictions. We also have terrestrial authorizations in foreign jurisdictions. In order to provide service to a foreign location from our U.S. satellites, we are required to obtain approvals from the FCC and foreign administrative agencies. The laws and regulations addressing access to satellite and terrestrial systems vary from country to country. In most countries, a license is required to provide our services and to operate satellite systems and earth stations. Such licenses may impose certain conditions, including implementation and operation of the satellite system in a manner consistent with certain milestones (such as for contracting, satellite design, construction, launch and implementation of service), that the satellite or its launch be procured through a national entity, that the satellite control center be located in national territory, that a license be obtained prior to launching or operating the satellite, or that a license be obtained before interconnecting with the local switched telephone network and we may be subject to penalties or fines for failing to meet such conditions. Additionally, some countries may have restrictions on the services we provide and how we provide them and/or may limit the rates that can be charged for the services we provide or impose other service terms or restrictions. Furthermore, foreign countries in which we currently, or may in the future, operate may not authorize us access to all of the spectrum that we need to provide service in a particular country.
The ITU Frequency and Orbital Location Registration. The orbital location and frequencies for our satellites are subject to the frequency registration and coordination process of the ITU. The ITU Radio Regulations define the international rules, regulations and rights for a satellite and associated earth stations to use specific radio frequencies at a specific orbital location. These rules, which include deadlines for the bringing of satellite networks into use, differ depending on the type of service to be provided and the frequencies to be used by the satellite. On our behalf, various countries have made and may in the future make, additional filings for the frequency assignments at particular orbital locations that are used or to be used by our current satellite networks and potential future satellite networks we may build or acquire. In the event the international coordination process that is triggered by ITU filings under applicable rules is not successfully completed, or that the requests for modification of the broadcast satellite services plan regarding the allocation of orbital locations and frequencies are not granted by the ITU, we will have to operate the applicable satellite(s) on a non-interference basis, which could have an adverse impact on our business operations. If we cannot do so, we may have to cease operating such satellite(s) at the affected orbital locations. We cannot be sure of the successful outcome of these ITU coordination processes. We make commercially reasonable efforts to cooperate with the filing nation in the preparation of ITU filings,
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coordination of our operations in accordance with the relevant ITU Radio Regulations and responses to relevant ITU inquiries.
Registration in the United Nations (“UN”) Registry of Space Objects. The U.S. and other jurisdictions in which we license satellites are generally parties to the UN Convention on the Registration of Objects Launched into Outer Space, which requires a satellite’s launching state to register the satellite as a space object. The act of registration carries liability for the registering country in the event that the satellite causes third party damage. Administrations may place certain requirements on satellite licensees in order to procure the necessary launch or operational authorizations that accompany registration of the satellite. In some jurisdictions, these authorizations are separate and distinct, with unique requirements, from the authorization to use a set of frequencies to provide satellite services.
Telecommunications Regulation. Many of the services we provide are also subject to the regulation of other countries as telecommunications services. For certain services, we may be required to contribute fees to a universal service or other fund to support mechanisms that subsidize the provision of services to designated groups. Many countries also impose requirements on telecommunications carriers to ensure that law enforcement agencies are able to conduct lawfully-authorized surveillance of users of their services. In addition, we are subject to a number of other rules, including rules related to telephony service such as the protection of customer information and processing of emergency calls.
Export Control Regulation
In the operation of our business, we must comply with all applicable export control and trade sanctions laws and regulations of the U.S. and other countries. Applicable U.S. laws and regulations include the Arms Export Control Act, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).
The export of certain hardware, technical data, and services relating to satellites and the supply of certain ground control equipment, technical data and services to non-U.S. persons or to destinations outside the U.S. is regulated by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) under the EAR. In addition, BIS regulates our export of satellite communications network equipment to non-U.S. persons or to destinations outside of the U.S. The export of other items is regulated by the U.S. Department of State’s Directorate of Defense Trade Controls under the ITAR and are subject to strict export control and prior approval requirements. In addition, we cannot provide certain equipment or services to certain countries subject to U.S. trade sanctions unless we first obtain the necessary authorizations from OFAC. We are also subject to the Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions that generally prohibit companies and their intermediaries from making improper payments or giving or promising to give anything of value to foreign government officials and other individuals for the purpose of obtaining or retaining business or gaining a competitive advantage.
Environmental Regulation
We are subject to the requirements of federal, state, local and foreign environmental and occupational safety and health laws and regulations. These include laws regulating air emissions, waste-water discharge and waste management, most significantly the Resource Conservation and Recovery Act and the Emergency Planning and Community Right-to-Know Act (“EPCRA”). Under the Resource Conservation and Recovery Act, our Hughes segment is considered a small quantity generator.
As required by the EPCRA, we file annual reports with regulatory agencies covering four areas: Emergency Planning, Emergency Release, Hazardous Chemical Storage and Toxic Chemical Release Inventory. We maintain small quantities of hazardous materials on our premises and, therefore, have relatively modest reporting requirements under the EPCRA. We are also subject to the requirements of other environmental and occupational safety and health laws and regulations. Additionally, we review the Superfund Amendments and Reauthorization Act Title III regulatory requirements and annually report quantities of onsite material storage using Tier II, state DEQ (Department of Environmental Quality) reporting systems.
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Our environmental compliance costs, capital and other expenditures to date have not been material, and we do not expect them to be material in 2023. However, environmental requirements are complex, change frequently and have become more stringent over time. Accordingly, we cannot provide assurance that these requirements will not change or become more stringent in the future in a manner that could have a material adverse effect on our business and/or environmental compliance costs, capital or other expenditures.
PATENTS AND TRADEMARKS
We currently rely on a combination of patent, trade secret, copyright and trademark law, together with licenses, non-disclosure and confidentiality agreements and technical measures, to establish and protect proprietary rights in our products. We hold U.S. and foreign patents covering various aspects of our products and services. The duration of each of our U.S. patents is generally 20 years from the earliest filing date to which the patent has priority. We have granted licenses to use our trademarks and service-marks to affiliates and resellers worldwide, and we typically retain the right to monitor the use of those marks and impose significant restrictions on their use in efforts to ensure a consistent brand identity. We protect our proprietary rights in our software through software licenses that, among other things, require that the software source code be maintained as confidential information and that prohibit any reverse-engineering of that code.
We believe that our patents are important to our business. We also believe that, in some areas, the improvement of existing products and the development of new products, as well as reliance upon trade secrets and unpatented proprietary know-how, are important in establishing and maintaining a competitive advantage. We believe, to a certain extent, that the value of our products and services are dependent upon our proprietary software, hardware and other technology remaining trade secrets and/or subject to copyright protection. Generally, we enter into non-disclosure and invention assignment agreements with our employees, subcontractors and certain customers and other business partners. Please see Item 3. Legal Proceedings of this Form 10-K for more information.
RESEARCH AND DEVELOPMENT AND ENGINEERING
We have a skilled and multi-disciplined engineering organization that develops our products and services. Our in-house technological capability includes a wide range of skills required to develop systems, hardware, software and firmware used in our products and services.
With respect to hardware development, we have skill sets that include complex digital designs, radio frequency and intermediate frequency analog designs, advanced application-specific integrated circuit designs and sophisticated consumer and system level packaging designs. We also have extensive experience in developing products for high-volume, low-cost manufacturing for the consumer industry, including dual mode satellite and wireless handsets.
As a complement to our hardware development, we have extensive experience in designing reliable, real time, embedded software systems as part of our communication systems and services offerings. For example, our broadband product line for the enterprise market supports an extensive range of protocols for data communications. Our engineers have also developed many large turnkey systems for our customers by designing the overall solution, implementing the various subsystems, deploying the entire network and user terminals, integrating and verifying the operational system and ultimately training the customers’ technicians and operators.
Costs incurred in research and development activities are generally expensed as incurred. A significant portion of our research and development costs are incurred in connection with the specific requirements of a customer’s order. In such instances, the amounts for these customer funded development efforts are included in Cost of sales - equipment in the Consolidated Statements of Operations in our Consolidated Financial Statements.
GEOGRAPHIC AREA DATA AND TRANSACTIONS WITH MAJOR CUSTOMERS
For principal geographic area data and transactions with major customers for 2022, 2021 and 2020, see Note 22 in our Consolidated Financial Statements. See Item 1A. Risk Factors for information regarding risks related to our foreign operations.
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HUMAN CAPITAL RESOURCES
Our Human Capital
As of December 31, 2022, we had approximately 2,300 employees globally; of which approximately 1,700 were located in the U.S. and 600 internationally. We generally consider relations with our employees to be good. Other than approximately 200 of our employees located in Italy and Brazil, none are represented by a union. Our mission is to be a global connectivity provider for people, enterprises and things.
Employee Training and Development
We have a robust ongoing training and development program to enable employees to further refine and develop their skills. These training and development programs include technical programs meant to keep our employees abreast of the latest developments in our industry as well as courses to assist employees in developing their business communications and management skills.
Worker Health and Safety
Our commitment is to provide a safe, healthy and reliable workplace. We provide access to a variety of innovative, flexible, and convenient health and wellness programs. Due to the COVID-19 pandemic, we have taken a number of steps to prioritize health and safety of our employees including enabling employees to work from home as required or appropriate. We also implemented precautions at various sites around the world in compliance with local government requirements and Centers for Disease Control and Prevention guidelines.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and accordingly file an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. Our public filings are maintained on the SEC’s internet site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
WEBSITE ACCESS
Our Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, may also be accessed free of charge through our website at http://www.echostar.com as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the SEC.
We have adopted a written code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, in accordance with the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder. Our code of ethics is available on our corporate website at http://www.echostar.com. In the event that we make changes in, or provide waivers of, the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these events on our website.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Furnished in accordance with Item 401(b) of Regulation S-K, pursuant to General Instruction G(3) of Form 10-K.
The following table and information below sets forth the name, age and position with EchoStar of each of our executive officers, the period during which each executive officer has served as such and each executive officer’s business experience during at least the past five years:
| Name | Age | Position | ||||||||||||
| Charles W. Ergen | 69 | Chairman | ||||||||||||
| Hamid Akhavan | 61 | Chief Executive Officer, and President | ||||||||||||
| Paul Gaske | 69 | Chief Operating Officer | ||||||||||||
| Dean A. Manson | 56 | Chief Legal Officer and Secretary | ||||||||||||
| Adrian Morris | 68 | Chief Technology Officer | ||||||||||||
| Michelle Pearre | 54 | Chief Human Resources Officer | ||||||||||||
| Ramesh Ramaswamy | 63 | Executive Vice President - International | ||||||||||||
Charles W. Ergen. Mr. Ergen has served as our executive Chairman since November 2009 and Chairman of the Board of Directors since our formation in 2007. Mr. Ergen served as our Chief Executive Officer from our formation in 2007 until November 2009. Mr. Ergen serves as executive Chairman and has been Chairman of the Board of Directors of DISH Network Corporation (“DISH”) since its formation and, during the past five years, has held executive officer and director positions with DISH and its subsidiaries (together with DISH, “Dish Network”) most recently serving as the Chief Executive Officer of DISH from March 2015 to December 2017.
Hamid Akhavan. Mr. Akhavan has served as our Chief Executive Officer and President since April 2022. Prior to joining EchoStar, Mr. Akhavan has accumulated extensive leadership experience at major telecommunications and technology companies, including Chief Executive Officer of Unify, Inc, and Chief Executive Officer of T-Mobile International, where he also served as a member of the Board of Management of Deutsche Telekom. In recent years, Akhavan has been active in private equity and investing serving on the board of directors of several public and private companies.
Paul Gaske. Mr. Gaske became Chief Operating Officer effective January 1, 2023, reporting to the Company’s Chief Executive Officer. Prior to becoming the Chief Operating Officer, Mr. Gaske was the Executive President and General Manager of the North American Division of Hughes Network Systems, LLC since 1999. Mr. Gaske also oversees Hughes manufacturing.
Dean A. Manson. Mr. Manson has served as our Chief Legal Officer and Secretary since November 2011 and is responsible for all our legal, government affairs and corporate information security. Mr. Manson joined our subsidiary Hughes Network Systems, LLC in 2000 and was appointed its General Counsel in 2004. He was previously with the law firm of Milbank, Tweed, Hadley & McCloy LLP, where he focused on international project finance and corporate transactions.
Adrian Morris. Mr. Morris has served as our Chief Technology Officer since January 2023 leading our engineering team at EchoStar and its subsidiaries. Mr. Morris’ career began at our subsidiary, Hughes Network Systems, in 1982 as an engineer and he served as an Executive Vice President, Engineering, of Hughes Network Systems since 2006.
Michelle Pearre. Ms. Pearre has served as our Chief Human Resources Officer since 2017. She has responsibility for Human Resources, Administration, Facilities, Real Estate and Physical Security. Since joining Hughes Network Systems in 1998, Ms. Pearre has held various positions of increasing responsibility in human resources.
Ramesh Ramaswamy. Mr. Ramaswamy has served as our Executive Vice President, International since 2021 and was our Senior Vice President, International since 2017. He oversees our international, mobile satellite and
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EchoStar Global businesses. Mr. Ramaswamy joined Hughes Network Systems in 1985 as a software engineer and has held positions of increasing responsibility in engineering, operations, marketing and sales.
There are no arrangements or understandings between any executive officer and any other person pursuant to which any executive officer was selected as such. Pursuant to the Bylaws of EchoStar, executive officers serve at the discretion of the Board of Directors.
ITEM 1A. RISK FACTORS
The risks and uncertainties described below are not the only ones facing us. If any of the following events occur or evolve in a way different than expected, our business, financial condition, results of operation, prospects or ability to fund a share or debt repurchase program, invest capital in or otherwise run our business, execute on our strategic plans or return capital to our shareholders could be materially and adversely affected.
RISKS RELATED TO OUR BUSINESS OPERATIONS
We may pursue acquisitions, dispositions, capital expenditures, the development, acquisition and launch of new satellites and other strategic initiatives to complement or expand our business, which may not be successful and we may lose a portion or all of our investment.
Our success may depend on the existence of, and our ability to capitalize on, opportunities to acquire or develop other businesses or technologies or partner with other companies that could complement, enhance or expand our current business, services or products or that may otherwise offer us growth opportunities. We may pursue a number of strategic initiatives to complement or expand our business. Any such strategic initiatives may involve a high degree of risk, including, but not limited to, the following:
•the risks associated with developing and constructing new satellites;
•the diversion of our management’s attention away from our existing business onto a strategic initiative;
•possible adverse effects on our and our targets’ and partners’ business, financial condition or operating results during the integration process;
•exposure to significant financial losses if the strategic initiatives are not successful;
•the inability to obtain regulatory approvals in the anticipated time frame, or at all;
•the risks associated with complying with regulations applicable to the acquired or developed business or technologies which may cause us to incur substantial expenses;
•the disruption of relationships with employees, vendors or customers; and
•the risks associated with foreign and international operations and/or investments or dispositions.
New strategic initiatives may require the commitment of significant capital that would otherwise have been directed to investments in our existing businesses or distributed to shareholders.
We may not be able to successfully develop and execute our S-band business strategy which could materially adversely affect our ability to grow our revenue and our business.
Our future revenue and business growth partially depends on the successful development and execution of our S-band strategy. We may not be able to maintain or further develop our existing S-band spectrum rights. Additionally, in order to successfully develop and execute our S-band strategy, we will likely need to reach collaborative agreements with other relevant players in the S-band eco-system. We may not be able to reach such agreements with some of the relevant players, or at all, or may not be able to agree on economic terms that would provide the desired economic benefits to the Company. In addition, there can be no assurance that, even if we are able to successfully develop our S-band strategy, we will be able to attract and retain a customer base sufficiently large to be profitable. If we do not execute our S-band business strategy as planned, our business and operating results could be materially adversely affected.
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We are facing increasing competition which could impact demand for, and result in increasing pricing pressures with respect to, our products and services.
Our business operates in an intensely competitive, consumer- and enterprise-driven and rapidly changing environment and competes with a growing number of companies that provide similar products and services to consumer and enterprise customers. There can be no assurance that we will be able to effectively compete against our competitors due to their significant resources and operating history. Material competitive risks to our business include, but are not limited to, the following:
•Competition from new or different technology compared to our offerings;
•Competition from existing or new competitors entering the same markets we serve;
•Government funding for competing products and services, reducing demand for our products and services; and
•Competitive pressures to provide enhanced functionality for the same or lower price with each new generation of technology.
Our business will be negatively impacted if we fail to adequately anticipate our satellite capacity needs or are unable to obtain satellite capacity.
We have made substantial contractual commitments for satellite capacity based on our existing customer contracts and backlog. If our existing customer contracts were to be terminated prior to their respective expiration dates, we may have insufficient revenue to cover our satellite capacity costs. On the other hand, we may not have sufficient satellite capacity available to meet increases in demand and we may not be able to quickly or easily adjust our capacity to such changes in demand. At present, until the launch and operation of additional satellites that our systems can utilize, there is limited additional capacity in North America and in certain areas of Latin America, including within our own fleet of satellites, which could materially and adversely affect our ability to provide services to customers and grow our revenue and business. Our business could be adversely affected if we are not able to renew our capacity leases at economically viable rates, or if sufficient capacity is not available to us.
We are dependent upon third-party providers for components, manufacturing, installation services and customer support services, and our results of operations may be materially adversely affected if any of these third-party providers fail to appropriately deliver the contracted goods or services.
Our dependence upon third-party providers causes certain risks to our business, including the following:
•Components. A limited number of suppliers manufacture, and in some cases a single supplier manufactures, some of the key components required to build our products. We do not generally maintain long-term agreements with our suppliers or subcontractors for our products. If we change or lose suppliers, we could experience a delay in manufacturing our products. In addition, if either our current suppliers or any new suppliers increase prices beyond what we currently pay, we may be unable to produce our products at competitive prices and we may be unable to satisfy demand from our customers.
•Commodity Price Risk. Fluctuations in pricing of raw materials can affect our product costs and we may not be able to pass on the increased costs to our customers. Additionally, we are seeing increasing inflationary price pressure and where we have fixed-price customer contracts, we may have to absorb the increased costs.
•Manufacturing. While we develop and manufacture prototypes for certain of our products, we use contract manufacturers to produce a portion of our hardware. If these contract manufacturers fail to provide products that meet our specifications in a timely manner or at all, our business could be adversely impacted.
•Installation, customer support, and other services. Some of our products and services utilize a network of third-party service providers. The costs incurred for these services may increase due to a shortage of experienced workers and higher salaries required to recruit and retain a skilled third-party workforce. A decline in levels of service or attention to the needs of our customers could adversely affect our reputation,
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renewal rates and ability to win and retain customers. In addition, if the agreements for the provision of these services are terminated or not renewed, we could face difficulties replacing these service providers.
Our foreign operations and investments expose us to risks and restrictions not present in our domestic operations.
Our sales outside the U.S. accounted for 23.7%, 21.4% and 19.6% of our revenue for the years ended December 31, 2022, 2021 and 2020, respectively. We expect our foreign operations to represent a significant and growing portion of our business. Our foreign operations involve varying degrees of risk and uncertainties inherent in doing business abroad. Such risks include:
•Complications in complying with restrictions on foreign ownership and investment and limitations on repatriation of earnings. We may not be permitted to be the sole owner of our operations in some countries and may have to enter into partnership or joint venture relationships. Many foreign legal regimes and/or our contractual arrangements restrict our repatriation of earnings to the U.S. from our subsidiaries and joint venture entities. Applicable law in such foreign countries may also limit our ability to distribute or access our assets or offer our products and services in certain circumstances. In such event, we will not have unrestricted access to the cash flow and assets of our subsidiaries and joint ventures.
•Regulatory restrictions. Satellite market access, landing rights and terrestrial wireless rights are dependent on the national regulations established by foreign governments and international non-governmental bodies. Non-compliance with these requirements may result in the loss of the authorizations and licenses to conduct business in these countries, as well as fines, penalties, or other sanctions.
•Financial and legal constraints and obligations. Operating pursuant to foreign licenses subjects us to certain financial constraints and obligations, including, but not limited to: (a) tax liabilities that may or may not be dependent on revenue; (b) the regulatory requirements associated with maintaining such licenses, which may be subject to interpretation by foreign courts and regulatory bodies; (c) the burden of creating and maintaining additional entities, branches, facilities and/or staffing in foreign jurisdictions; and (d) regulations requiring that we make certain satellite capacity available for “free” or available at reduced rates.
•Compliance with applicable export control laws and regulations in the U.S. and other countries. We must comply with all applicable export control and trade sanctions laws and regulations of the U.S. and other countries. A violation any export or trade-related regulations could materially adversely affect our business.
•Changes in exchange rates between foreign currencies and the U.S. dollar. Fluctuations in currency exchange rates, recessions and currency devaluations have affected, and may in the future affect, revenue, profits and cash earned from our international businesses.
•Regulations may favor state-owned enterprises or local service providers. Many of the countries in which we conduct business have traditionally had state-owned or state-granted monopolies on telecommunications services that favor an incumbent service provider. We face competition from these favored and entrenched companies in countries that have not liberalized.
We may not be able to generate cash to meet our debt service needs or fund our operations.
As of December 31, 2022, our total indebtedness was $1.5 billion. Our ability to make payments on or to refinance our indebtedness and to fund our operations will depend on our ability to generate cash in the future. If we are unable to generate sufficient cash, we may be forced to take actions such as revising or delaying our strategic plans, reducing or delaying capital expenditures and/or the development, design, acquisition and construction of new satellites, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We may not be able to implement any of these actions on satisfactory terms, or at all.
Covenants in our indentures restrict our business in many ways.
The indentures governing the Hughes Satellite Systems Corporation (“HSSC”) 5.250% Senior Secured Notes due August 1, 2026 and 6.625% Senior Unsecured Notes due August 1, 2026 contain various covenants, subject to certain exceptions, that limit HSSC’s ability and/or certain of its subsidiaries’ ability to, among other things:
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•incur additional debt;
•pay dividends or make distributions on HSSC’s capital stock or repurchase HSSC’s capital stock;
•allow to exist certain restrictions on such subsidiaries’ ability to pay dividends, make distributions, make other payments, or transfer assets;
•make certain investments;
•create liens or enter into sale and leaseback transactions;
•enter into transactions with affiliates;
•merge or consolidate with another company; and
•transfer and sell assets.
Failure to comply with these and certain other financial covenants, if not cured or waived, may result in an event of default under the indentures, which could have a material adverse effect on our business, financial condition, results of operations or prospects. If certain events of default occur and are continuing under the respective indenture, the trustee under that indenture or the requisite holders of the notes under that indenture may declare all such notes to be immediately due and payable and, in the case of the indenture governing our secured notes, could proceed against the collateral that secures the secured notes. If certain other events of default occur, the indentures will become immediately due and payable. Certain of our subsidiaries have pledged a significant portion of our assets as collateral to secure the 5.250% Senior Secured Notes due August 1, 2026.
A natural disaster could diminish our ability to provide service to our customers.
Natural disasters could damage or destroy our ground infrastructure and/or our other or our vendors’ infrastructure, equipment and facilities, resulting in a disruption of service to our customers, which may adversely affect our business.
RISKS RELATED TO OUR HUMAN CAPITAL
We rely on key personnel and the loss of their services may negatively affect our businesses.
We believe that our future success depends to a significant extent upon the performance of Mr. Charles W. Ergen, our Chairman, and certain other key executives. The loss of Mr. Ergen or certain other key executives, the ability to effectively provide for the succession of our senior management, or the ability of Mr. Ergen or such other key executives to devote sufficient time and effort to our business could have a material adverse effect on our business, financial condition and results of operations. Although some of our key executives may have agreements relating to their equity compensation that limit their ability to work for or consult with competitors, we generally do not have employment agreements with them. To the extent Mr. Ergen is performing services for both DISH Network and us, his attention may be diverted away from our business and therefore adversely affect our business.
Our business growth and customer retention strategies rely in part on the work of technically skilled employees.
Our response to technological developments depends, to a significant degree, on the work of technically skilled employees. In addition, we have made and will continue to make significant investments in research, development, and marketing for new products, services, satellites and related technologies, as well as entry into new business areas. Investments in new technologies, satellites and business areas are inherently dependent on these technically skilled employees as well. Competition for the services of such employees has become more intense as demand for these types of employees grows. We compete with other companies for these employees and although we strive to attract and retain these employees, we may not succeed in these respects. Additionally, if we were to lose certain key technically skilled employees, the loss of knowledge and intellectual capital might have an adverse impact on our business.
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Restrictions on immigration or increased enforcement of immigration laws could limit our access to qualified and skilled professionals, increase our cost of doing business or otherwise disrupt our operations.
The success of our business is dependent on our ability to recruit engineers and other professionals, including those who are citizens of other countries. Immigration laws in the U.S. and other countries in which we operate are subject to legislative and regulatory changes, as well as variations in the standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or renewing work visas for our professionals. If immigration laws are changed or if new and more restrictive government regulations are enacted or increased, our access to qualified and skilled professionals may be limited.
RISKS RELATED TO OUR SATELLITES
Our ability to operate and control our satellites is subject to risks related to DISH Network’s operation and third-parties’ operation of satellite operations centers.
In September 2019, we transferred our satellite operation centers, which are used to monitor and control our satellites, to DISH Network in connection with our 2019 transfer to DISH of our broadband satellite services and certain related businesses and assets (the “BSS Transaction”). Therefore, we now are subject to the inherent risks of having a related party operate, maintain and manage these satellite operations centers. In addition, certain of our satellites are operated, maintained and managed by third parties.
Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.
Satellites are subject to significant operational risks while in orbit. These risks include malfunctions, commonly referred to as anomalies, which have occurred and may occur in the future in our satellites and the satellites of other operators. Any single anomaly could materially and adversely affect our ability to utilize the satellite. Anomalies may also reduce the expected capacity, commercial operation and/or useful life of a satellite, thereby reducing the revenue that could be generated by that satellite, or create additional expenses due to the need to provide replacement or back-up satellites or satellite capacity earlier than planned and could have a material adverse effect on our business. We may not be able to prevent or mitigate the impacts of anomalies in the future.
Meteoroid events, decommissioned satellites, and increased solar activity also pose a potential threat to all in-orbit satellites. We may be required to perform maneuvers to avoid collisions and these maneuvers may prove unsuccessful or could reduce the useful life of the satellite through the expenditure of fuel to perform these maneuvers.
Generally, the minimum design life of each of our satellites is 15 years. We can provide no assurance, however, as to the actual operational lives of our satellites, which may be shorter or longer than their design lives. Our ability to earn revenue depends on the continued operation of our satellites, each of which has a limited useful life.
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. If one or more of our in-orbit uninsured satellites or payloads fail, we could be required to record significant impairment charges for the satellite or payload.
Our satellites under construction, including the EchoStar XXIV satellite, are subject to risks related to construction, technology, regulations and launch that could limit our ability to utilize these satellites, increase costs and adversely affect our business.
Satellite construction and launch are subject to significant risks, including manufacturing and delivery delays, anomalies, launch failure and incorrect orbital placement. The technologies in our satellite designs are very complex and difficulties in constructing our designs could result in delays in the deployment of our satellites or
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increased or unanticipated costs. For example, we have seen delays in the delivery calendar for EchoStar XXIV. There can be no assurance that the technologies in our existing satellites or in new satellites that we design, acquire and build will work as we expect, will not become obsolete, that we will realize any or all of the anticipated benefits of our satellite designs or our new satellites, and/or that we will obtain all regulatory approvals required to operate our new or acquired satellites. Launch anomalies and failures can result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take significant amounts of time, and to obtain other launch opportunities. Such significant delays have and could in the future materially affect our business, our ability to meet regulatory or contractual required milestones, the availability and our use of other or replacement satellite resources and our ability to provide services to customers. In addition, significant delays in a satellite program could give customers who have purchased or reserved capacity on that satellite a right to terminate their service contracts relating to the satellite. We may not be able to accommodate affected customers on other satellites until a replacement satellite is available. In addition, we may not be able to obtain launch or in-orbit insurance on reasonable economic terms or at all. If we do obtain launch or in-orbit insurance, it may not cover the full cost of constructing and launching or replacing a satellite nor fully cover our losses in the event of a launch failure or significant degradation.
Our use of certain satellites is often dependent on satellite coordination agreements, which may be difficult to obtain.
Satellite operators are required to enter into international spectrum coordination agreements with other affected satellite operators and must be approved by the relevant governments. If a required agreement cannot be concluded, we may have to operate the applicable satellite(s) in a manner that does not cause harmful radio frequency interference with the affected satellite. If we cannot do so, we may have to cease operating such satellite(s) at the affected orbital locations.
We may face interference from other services sharing satellite spectrum.
The FCC and other regulators have adopted rules or may adopt rules in the future that require us to share spectrum on a basis with other radio services. There can be no assurance that these operations would not interfere with our operations and adversely affect our business.
RISKS RELATED TO OUR PRODUCTS AND TECHNOLOGY
Our future growth depends on growing demand for our services.
Future demand and effective delivery for our products and services will depend significantly on the growing demand for our services, such as broadband internet connectivity. If the deployment of, or demand for, our services is not as widespread or as rapid as we or our customers expect, our revenue growth will be negatively impacted.
Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others.
We rely on our patents, copyrights, trademarks, trade secrets, licenses and other agreements to conduct our business. Legal challenges to our intellectual property rights and claims of intellectual property infringement could result in significant monetary liability and require us to change our business practices or limit our ability to compete effectively or could otherwise have a material adverse effect on our business. Even if any such challenges or claims prove to be without merit, they can be time-consuming and costly to defend and may divert management’s attention and resources away from our business.
Moreover, we rely in part on technologies developed or licensed by third parties. If we are unable to obtain or retain licenses or other required intellectual property rights from these third parties on reasonable terms, our business could be adversely affected. In addition, we work with suppliers for the development and manufacture of components that are integrated into our products and our products may contain technologies provided to us by these suppliers. We may have little or no ability to determine in advance whether any such technology infringes the intellectual property rights of others, or whether such suppliers have obtained or continue to obtain the appropriate licenses or other intellectual property rights to use such technology. Our suppliers may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up
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to a maximum amount. Legal challenges to these intellectual property rights may impair our ability to use the products and technologies that we need in order to operate our business and may have a material adverse effect on our business. See further discussion under Item 1. Business — Patents and Trademarks and Item 3. Legal Proceedings of this Form 10-K.
Litigation or governmental proceedings could result in material adverse consequences.
We are involved in lawsuits, regulatory inquiries, audits, consumer claims and governmental and other legal proceedings. Some of these proceedings may raise difficult and complicated factual and legal issues and can be subject to uncertainties and complexities. The timing of the final resolutions is typically uncertain. Additionally, the possible outcomes of, or resolutions to, these proceedings could include adverse judgments, settlements, injunctions or liabilities, any of which could require substantial payments or have other adverse impacts on our business.
If our products contain defects, we could be subject to significant costs to correct such defects and our product and network service contracts could be delayed or cancelled, which could adversely affect our revenue.
The products and the networks we deploy are highly complex, and some may contain defects when first introduced or when new versions or enhancements are released, despite testing and our quality control procedures. Defects may also occur in components and products that we purchase from third parties. In addition, many of our products and network services are designed to interface with our customers’ existing networks, each of which has different specifications and utilizes multiple protocol standards. Our products and services must interoperate with the other products and services within our customers’ networks, as well as with future products and services that might be added to these networks, to meet our customers’ requirements. There can be no assurance that we will be able to detect and fix all defects in the products and networks we sell. The occurrence of, and failure to remedy, any defects, errors or failures in our products or network services could materially affect our business.
RISKS RELATED TO CYBERSECURITY
The confidentiality, integrity, and availability of our services and products depends on the continuing operation of our information technology and other enabling systems.
Our systems are vulnerable to damage, intrusion, or disruption from criminal and/or terrorist attacks, telecommunications failures, computer viruses, ransomware attacks, digital denial of service attacks, phishing, or other attempts to injure or maliciously access our systems. Some of our systems are not fully redundant, and disaster recovery planning cannot account for all possibilities. In addition, our products and services are highly technical and complex and may contain errors or vulnerabilities, which could result in interruptions in or failure of our services or systems.
Our international businesses expose us to additional risks that could harm our business.
Our international operations continue to grow. In addition to risks described elsewhere in this segment, the different regions and countries in which we operate our businesses outside of the U.S. expose us to increased risks due to different privacy and cyber-related laws in each of these locations. The same cyber-related issue could have different consequences depending on the region or country of occurrence, the laws applicable in each case and the different levels of enforcement by regulatory and governmental authorities in each jurisdiction. These risks include but are not limited to the following:
a.Data privacy and security concerns relating to our technology and our practices could damage our reputation, cause us to incur significant liability, and deter current and potential users or customers from using our products and services.
b.Software bugs or defects, security breaches, and attacks on our systems could result in the improper disclosure of our user data which could harm our business reputation.
c.Concerns about our practices about the collection, use, disclosure, or security of personal information or other data-privacy-related matters, even if unsubstantiated, could harm our reputation and financial condition. Our policies and practices may change over time as expectations regarding privacy and data change.
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We experience cyber-attacks and other attempts to gain unauthorized access to our systems on a consistent basis.
We have experienced and may experience in the future security issues, whether due to insider error or malfeasance or system errors or vulnerabilities in our or our 3rd parties’ systems, which could result in substantial legal and financial exposure, government inquiries and enforcement actions, litigation, and unfavorable media coverage. We may be unable to anticipate or detect attacks or vulnerabilities or implement adequate preventative measures. Attacks and security issues could also compromise trade secrets and other sensitive information.
Our ongoing investments in security will likely continue to identify new vulnerabilities within our services and products.
In addition to our efforts to mitigate cyber-attacks, we are making significant investments to assure that our products are resistant to compromise. As a result of these efforts, we could discover new vulnerabilities within our products and systems that would be undesirable for our users and customers. We may not discover all such vulnerabilities due to the scale of activities on our platforms, or due to other factors, including but not limited to issues outside of our control such as natural disasters/climate change such as sea level rise, drought, flooding, wildfires, increased storm severity, pandemics like COVID-19 and power loss, and we may be notified of such vulnerabilities via third parties. Any of the foregoing developments may negatively affect user and customer trust, harm our reputation and brands, and adversely affect our business and financial results. Any such developments may also subject us to litigation and regulatory inquiries, which could result in monetary penalties and damages, distract management’s time and attention, and lead to enhanced regulatory oversight.
Compliance with data privacy laws may be costly, and non-compliance with such laws may result in significant liability.
The personal information and data we process and store is increasingly subject to data security and data privacy laws of many jurisdictions. These laws impose a significant compliance burden and complying with them has required us to change our business practices or the functionality of our products and services. Privacy laws and regulations are becoming more complex and onerous, and a data privacy breach could have a material adverse effect on our business.
RISKS RELATED TO THE REGULATION OF OUR BUSINESS
The risk of non-compliance with laws and regulations, including the risk of changes to laws and regulations, could adversely affect our business.
Our business is regulated by numerous governmental agencies and other regulatory bodies, both domestically and internationally. Also, our international operations are subject to the laws and regulations of many different jurisdictions that may differ significantly from U.S. laws and regulations. Violations of these laws and regulations could result in fines or penalties or other sanctions which could have a material adverse impact on our business. Additionally, our ability to operate and grow our business depends on laws and regulations that govern the frequency bands and/or orbital locations we operate in or may operate in in the future.
These laws and regulations are subject to the administrative and political process and do change from time to time. Our business could suffer a material adverse impact if laws and regulations change and we are not able to adapt to these changes efficiently.
Our business depends on regulatory authorizations issued by the FCC and state and foreign regulators that can expire, be revoked or modified, and applications for licenses and other authorizations that may not be granted.
Generally, all licenses granted by the FCC and most other countries are subject to expiration unless renewed by the regulatory agency. Our satellite licenses are currently set to expire at various times. In addition, we occasionally receive special temporary authorizations that are granted for limited periods of time (e.g., 180 days or less) and
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subject to possible renewal. Generally, our licenses and special temporary authorizations have been renewed on a routine basis, but there can be no assurance that this will continue.
RISKS RELATED TO THE BSS TRANSACTION
If the BSS Transaction does not qualify as a tax‑free distribution and merger under the Internal Revenue Code of 1986, as amended (the “Code”), then we and/or our stockholders may be required to pay substantial U.S. federal income taxes and under certain circumstances we may have indemnification obligations to DISH Network.
The parties to the BSS Transaction received a tax opinion from their respective counsels as to the tax‑free nature of the transaction. They did not obtain a private letter ruling from the IRS in this respect and instead are relying solely on their respective tax opinions for comfort that the transaction qualifies for tax‑free treatment for U.S. federal income tax purposes under the Code. The failure of any factual representation or assumption to be true, correct and complete, or any undertaking to be fully complied with, could affect the validity of the tax opinions and result in tax liabilities for our shareholders and/or us.
RISKS RELATED TO OUR OWNERSHIP
We are controlled by one principal stockholder who is our Chairman.
Charles W. Ergen, our Chairman, beneficially owns approximately 60% of our total equity securities (assuming conversion of the Class B common stock beneficially owned by Mr. Ergen into Class A common stock and giving effect to the exercise of options held by Mr. Ergen that are either currently exercisable as of, or may become exercisable within 60 days after, February 6, 2023) and beneficially owns approximately 93% of the total voting power of all classes of shares (assuming no conversion of any Class B common stock and giving effect to the exercise of options held by Mr. Ergen that are either currently exercisable as of, or may become exercisable within 60 days after, February 6, 2023). Through his beneficial ownership of our equity securities, Mr. Ergen has the ability to elect a majority of our directors and to control all other matters requiring the approval of our stockholders. As a result of Mr. Ergen’s voting power, we are a “controlled company” as defined in the NASDAQ listing rules and, therefore, are not subject to NASDAQ requirements that would otherwise require us to have (i) a majority of independent directors; (ii) a nominating committee composed solely of independent directors; (iii) compensation of our executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors; (iv) a compensation committee charter which provides the compensation committee with the authority and funding to retain compensation consultants and other advisors; and/or (v) director nominees selected, or recommended for the Board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors.
We have potential conflicts of interest with DISH Network due to our common ownership.
A substantial majority of the voting power of the shares of each of EchoStar and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family. Questions relating to conflicts of interest may arise between DISH Network and us in a number of areas relating to our past and ongoing relationships. Areas in which conflicts of interest between DISH Network and us could arise include, but are not limited to, the following:
•Cross directorships and stock ownership. Charles W. Ergen serves as the Chairman of our and DISH’s board of directors, is employed by both companies and has fiduciary duties to our and DISH’s shareholders. Mr. Ergen may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, there is potential for a conflict of interest when we or DISH Network look at acquisitions and other corporate opportunities that may be suitable for both companies. In addition, some of our directors and officers, including Mr. Ergen, own DISH stock and options to purchase DISH stock. These ownership interests could create actual, apparent or potential conflicts of interest when these individuals are faced with decisions that could have different implications for our company and DISH Network.
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•Intercompany agreements with DISH Network. We have entered into various agreements with DISH Network. Pursuant to certain agreements, 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 paid for products and services provided under the agreements are based on cost plus a fixed margin, which varies depending on the nature of the products and services provided. Certain other intercompany agreements cover matters such as tax sharing and our responsibility for certain liabilities previously undertaken by DISH Network for certain of our businesses. We have also entered into certain commercial agreements with DISH Network. The terms of certain of these agreements were established while we were a wholly-owned subsidiary of DISH and were not the result of arm’s length negotiations. The allocation of assets, liabilities, rights, indemnifications and other obligations between DISH Network and us under certain agreements with DISH Network may not necessarily reflect what two unaffiliated parties might have agreed to. Had these agreements been negotiated with unaffiliated third parties, their terms may have been more or less favorable to us. In addition, DISH Network or its affiliates will likely continue to enter into transactions, including joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, with us or other affiliates. Although the terms of any such transactions will be established based upon negotiations between us and DISH Network and, when appropriate, subject to approval by a committee of non-interlocking directors or in certain instances non-interlocking management, there can be no assurance that the terms of any such transactions will be as favorable to us or our subsidiaries or affiliates as may otherwise be obtained in negotiations between unaffiliated third parties.
•Competition for business opportunities. DISH Network may have interests in various companies that have subsidiaries or controlled affiliates that own or operate domestic or foreign services that may compete with services offered by our businesses. From time to time we may pursue the same business opportunities as DISH Network, such as when we participate in auctions for spectrum or orbital slots for our satellites or other business opportunities. In certain auctions, we and DISH Network may be prohibited from participating separately, and cooperating with DISH Network may result in a less favorable outcome for us.
We may not be able to resolve any potential conflicts of interest with DISH Network and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.
We do not have any agreements not to compete with DISH Network. However, many of our potential customers who compete with DISH Network have historically perceived us as a competitor due to our affiliation with DISH Network. There can be no assurance that we will be successful in entering into any commercial relationships with potential customers who are competitors of DISH Network (particularly if we continue to be perceived as affiliated with DISH Network as a result of common ownership, certain shared management services and other arrangements with DISH Network).
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders, because of our capital structure.
Certain provisions of our articles of incorporation and bylaws may discourage, delay or prevent a change in control of our company that a shareholder may consider favorable. These provisions include the following:
•a capital structure with multiple classes of common stock: a Class A that entitles the holders to one vote per share; a Class B that entitles the holders to ten votes per share; a Class C that entitles the holders to one vote per share, except upon a change in control of our company in which case the holders of Class C are entitled to ten votes per share; and a non-voting Class D;
•a provision that authorizes the issuance of “blank check” preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
•a provision limiting who may call special meetings of shareholders; and
•a provision establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings.
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As discussed above, Mr. Ergen beneficially owns approximately 60% of our total equity securities and approximately 93% of the total voting power of all classes of shares and such ownership may make it impractical for any third party to obtain control of us.
In addition, pursuant to our articles of incorporation we have a significant amount of authorized and unissued stock that would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us.
RISKS RELATED TO THE COVID-19 PANDEMIC
Our operations, and those of our customers, suppliers, vendors, and other third parties with whom we conduct business, including regulatory agencies, have been, and may continue to be, adversely affected by the COVID‑19 pandemic.
The effects of the COVID-19 pandemic have disrupted our and our customers’, suppliers’, vendors’ and other business partners’ and investees’ businesses, and have delayed the manufacture and deployment of our satellites, specifically our EchoStar XXIV satellite. Additionally, some regulatory bodies may still have reduced activities which may materially delay the review and/or approval of licenses or authorizations we need to operate our business. We cannot currently estimate or determine the final magnitude of these impacts.
Additionally, many of our subscribers continue to work remotely or engage 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. This limitation on capacity has resulted in our subscribers experiencing slower speeds, which, in turn, has resulted in higher churn.
GENERAL RISKS
Our articles of incorporation designate the Eighth Judicial District Court of Clark County of the State of Nevada as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our articles of incorporation. This choice of forum provision may limit our stockholders’ ability to bring certain claims, including claims against our directors, officers or employees, in a judicial forum that the stockholder finds favorable and therefore the choice of forum provision may discourage lawsuits or increase costs with respect to such claims.
We may face other risks described from time to time in periodic and current reports we file with the SEC.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our principal executive offices are located at 100 Inverness Terrace East, Englewood, Colorado 80112-5308 and our telephone number is (303) 706-4000. We operate various facilities in the United States and abroad. We believe that our facilities are well maintained and are sufficient to meet our current and projected needs. The following table sets forth certain information concerning our principal properties related to our Hughes segment, our ESS segment, and our Corporate and Other segment as of December 31, 2022.
Location | Segment(s) | Function | ||||||||||||
Owned: | ||||||||||||||
| Englewood, Colorado | ESS/Corporate and Other | Corporate headquarters and ESS operations | ||||||||||||
| Germantown, Maryland | Hughes | Hughes corporate headquarters, engineering offices, network operations and shared hubs | ||||||||||||
| Griesheim, Germany | Hughes/Corporate and Other | Shared hub, operations, administrative offices and warehouse | ||||||||||||
Leased: | ||||||||||||||
| Gilbert, Arizona | Hughes | Gateways | ||||||||||||
| San Diego, California | Hughes | Engineering and sales offices | ||||||||||||
| Englewood, Colorado | Hughes | Gateways and equipment | ||||||||||||
| Gaithersburg, Maryland | Hughes | Manufacturing and testing facilities and logistics offices | ||||||||||||
| Gaithersburg, Maryland | Hughes | Engineering and administrative offices | ||||||||||||
| Southfield, Michigan | Hughes | Shared hub and regional network management center | ||||||||||||
| Las Vegas, Nevada | Hughes | Shared hub, antennae yards, gateway, backup network operation and control center for Hughes corporate headquarters | ||||||||||||
| Cheyenne, Wyoming | Hughes/ESS | Gateways, equipment and ESS operations | ||||||||||||
| Barueri, Brazil | Hughes | Shared hub | ||||||||||||
| Sao Paulo, Brazil | Hughes | Hughes Brazil corporate headquarters, sales offices and warehouse | ||||||||||||
| Bangalore, India | Hughes | Engineering office and office space | ||||||||||||
| Gurgaon, India | Hughes | Administrative offices, shared hub, operations, warehouse, and development center | ||||||||||||
| New Delhi, India | Hughes | Hughes India corporate headquarters | ||||||||||||
| Milton Keynes, United Kingdom | Hughes | Hughes Europe corporate headquarters and operations | ||||||||||||
ITEM 3. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 21 in our Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters
Market Information. Our Class A common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SATS.”
Holders. As of February 6, 2023, there were 35,594,333 shares of our Class A common stock outstanding held by 7,316 holders of record of our Class A common stock, not including stockholders who beneficially own Class A common stock held in nominee or street name. As of February 6, 2023, there were 47,687,039 shares of our Class B common stock outstanding, of which 25,066 shares were held by Charles W. Ergen, our Chairman and 47,661,973 shares were held in trusts and entities established for the benefit of Mr. Ergen’s family. There is currently no established trading market for our Class B common stock.
Dividends. We have not paid any cash dividends on our common stock in the past two years. We currently do not intend to declare dividends on our common stock. Payment of any future dividends will depend upon our earnings, capital requirements, contractual restrictions and other factors the board of directors considers appropriate. We currently intend to retain our earnings, if any, to support operations, future growth and expansion, although we have repurchased and may, in the future, repurchase shares of our common stock from time to time. Our ability to declare dividends is affected by the covenants in our subsidiary HSSC’s indentures. See further discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources of this Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Form 10-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 2, 2021, our Board of Directors authorized us to repurchase up to $500.0 million of our Class A common stock commencing January 1, 2022 through and including December 31, 2022. In addition, on October 20, 2022, our Board of Directors authorized us to repurchase up to $500.0 million of our Class A common stock commencing January 1, 2023 through and including December 31, 2023. Purchases under our repurchase authorizations may be made through privately negotiated transactions, open market repurchases, one or more trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or otherwise, subject to market conditions and other factors. We may elect not to purchase the maximum amount or any of the shares allowable under these authorizations and we may also enter into additional share repurchase programs authorized by our Board of Directors. During the year ended December 31, 2022, we repurchased 3,980,612 shares of our Class A common stock.
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The following table provides information regarding repurchases of our Class A common stock during the three months ended December 31, 2022:
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid Per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Disclosed Plans or Program | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased under the Plans or Program (1) | ||||||||||||||||||||||
| October 1 - 31 | — | $ | — | — | $ | 410,736 | ||||||||||||||||||||
| November 1 - 30 | — | — | — | 410,736 | ||||||||||||||||||||||
| December 1 - 31 | — | — | — | 410,736 | ||||||||||||||||||||||
| Total | — | $ | — | — | $ | 410,736 | ||||||||||||||||||||
(1) On November 2, 2021, our Board of Directors authorized us to repurchase up to $500.0 million of our Class A common stock commencing January 1, 2022 through and including December 31, 2022. In addition, on October 20, 2022, our Board of Directors authorized us to repurchase up to $500.0 million of our Class A common stock commencing January 1, 2023 through and including December 31, 2023. All shares repurchased have been converted to treasury shares.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Consolidated Financial Statements. 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. See Disclosure Regarding Forward-Looking Statements of this Form 10-K for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, see Item 1A. Risk Factors of this Form 10-K. Further, such forward-looking statements speak only as of the date of this Form 10-K and we undertake no obligation to update them.
EXECUTIVE SUMMARY
Overview
We currently operate in two business segments: our Hughes segment and our ESS segment. Our operations include various corporate functions that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in our Corporate and Other segment in our segment reporting.
All amounts presented in this Management’s Discussion and Analysis are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Hughes Segment
Our Hughes segment is an industry leader in both networking technologies and services, innovating to deliver the global solutions that power a connected future for people, enterprises and things everywhere. We offer broadband satellite technologies and broadband internet products and services to consumer customers. We offer broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to government and enterprise customers.
Our Hughes segment continues to focus its efforts on optimizing financial returns of our existing satellites while planning for new satellite capacity to be launched, leased or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers, as well as increasing our Average Revenue Per User/subscriber (“ARPU”). Service and acquisition 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 and consumer businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. In most areas of the U.S. we are nearing or have reached capacity, which has resulted in our consumer subscriber base becoming increasingly limited. Our Latin America consumer subscriber base in certain areas has also become capacity constrained. These constraints are expected to be addressed by the launch of the EchoStar XXIV satellite.
To date, we have not experienced a material adverse impact from the Russia-Ukraine conflict and the associated sanctions.
On January 4, 2022, our India JV was formed, which allows us to offer flexible and scalable enterprise networking solutions using satellite connectivity for primary transport, back-up and hybrid implementation in India.
We expect to launch the EchoStar XXIV satellite in the second quarter of 2023. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet service in North, Central and South America as well as enterprise broadband services. Following delays of over two years, in November 2022 we negotiated an amendment to our contract with the manufacturer to provide for additional compensation for past delays and a realignment of remedies. See Item 1 Business – Hughes Segment of this Form 10-K for further information. Delay in the availability of the EchoStar XXIV satellite could have a material adverse impact on our business operations, future revenues, financial position and prospects, and our planned expansion of satellite broadband services
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
throughout North, South and Central America. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in our Corporate and Other segment in our segment reporting.
Our broadband subscribers include customers that subscribe to our HughesNet services in the U.S. and Latin America through retail, wholesale and small/medium enterprise service channels.
The following table presents our approximate number of broadband subscribers:
| As of December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| United States | 931,000 | 1,090,000 | 1,189,000 | |||||||||||||||||
| Latin America | 297,000 | 372,000 | 375,000 | |||||||||||||||||
| Total broadband subscribers | 1,228,000 | 1,462,000 | 1,564,000 | |||||||||||||||||
The following table presents the approximate number of net subscriber additions for each quarter in 2022:
| For the Three Months Ended | ||||||||||||||||||||||||||
| December 31 | September 30 | June 30 | March 31 | |||||||||||||||||||||||
| United States | (43,000) | (46,000) | (35,000) | (35,000) | ||||||||||||||||||||||
| Latin America | (14,000) | (15,000) | (25,000) | (21,000) | ||||||||||||||||||||||
| Total net subscriber additions | (57,000) | (61,000) | (60,000) | (56,000) | ||||||||||||||||||||||
Our ability to gain new customers and retain existing customers in the U.S. is being impacted by our capacity limitations as well as competitive pressure from satellite-based competitors and other technologies. For the three months ended December 31, 2022, these factors resulted in lower total subscribers as compared to the three months ended September 30, 2022.
Our ability to gain new customers and retain existing customers in Latin America is also being impacted by adverse economic conditions. In addition, capacity constraints in certain areas limit our ability to add new subscribers. For the three months ended December 31, 2022, the decline in net subscribers was primarily due to more selective customer screening and improved churn as compared to the three months ended September 30, 2022.
We continued to execute our strategy of maximizing financial returns by utilizing capacity for higher economic value enterprise and government applications in Latin America. Continued success of this strategy will further reduce the available capacity for consumer subscribers.
As of December 31, 2022 and 2021, our Hughes segment had $1.5 billion and $1.4 billion of contracted revenue backlog, respectively, an increase of 7.1% during that period, primarily due to an increase in contracts from our domestic and international customers. Of the total Hughes segment contracted revenue backlog as of December 31, 2022, we expect to recognize $461.0 million of revenue in 2023. We define Hughes segment contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue.
Goodwill Impairment Assessment
We test goodwill for impairment annually in our second fiscal quarter, or more frequently if indicators of impairment exist. Goodwill is assessed for impairment at the reporting unit level. Reporting units are identified based on how segment management evaluates the results of segment operations and makes resource allocation decisions to such reporting units. All of our goodwill is assigned to our Hughes segment. We conducted our annual impairment test of goodwill during our second fiscal quarter on a qualitative basis and determined that no adjustment to the carrying value of goodwill was then necessary because the fair value exceeded carrying value for our Hughes reporting unit.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
During the quarter ended December 31, 2022, we conducted a quantitative interim test of goodwill for all of our reporting units due to the decline of our stock price since our interim test in the third quarter of 2022. As a result of this interim test, no goodwill impairment was identified. The fair value of the Hughes reporting unit exceeded the carrying value by more than 20%. We concluded that there were no other indicators of impairment for the quarter ended December 31, 2022. Given the decline in our stock price during the year ended December 31, 2022, we believe it is reasonably possible that a further sustained decline in our stock price and market capitalization would result in all or a significant portion of our goodwill becoming impaired. The impairment of goodwill has no effect on liquidity or capital resources. However, it would result in a material non-cash charge and would materially adversely affect our financial results in the period recognized.
When estimating the fair value of our Hughes reporting unit, we used a combination of the discounted cash flow and market multiple methodologies. We weighted 50% of the fair value using a discounted cash flow methodology and 50% using a market multiple approach. Although we concluded that recent transactions further supported our estimate of fair value, we gave them no such weight as the discounted cash flow and market multiple methodologies were considered more relevant and more reliable to be used in our fair value estimate.
In our discounted cash flow methodology, we developed and utilized a range of inputs that we believe to be reasonable and appropriately conservative. These inputs included, but were not limited to, revenue growth, EBITDA margins, capital expenditures, a terminal growth rate and a discount rate. In our market multiple approach, we also utilized what we believe to be a reasonable and appropriately conservative range of revenue and EBITDA multiples.
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.
As of December 31, 2022 and 2021, our ESS segment had contracted revenue backlog of $22.3 million and $10.4 million, respectively, an increase of 114.4% during that period, primarily due to an increase in satellite service contracts with existing and new customers. Of the total ESS segment contracted revenue backlog as of December 31, 2022, we expect to recognize $16.5 million of revenue in 2023. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue.
Corporate and Other Segment
Satellite Anomalies and Impairments
During the first quarter of 2023, we lost contact with our third nano-satellite (“EG-3”), which was launched in the second quarter of 2021 and brought into use our Sirion-1 ITU filing in the third quarter of 2021. We are continuing attempts to reestablish contact with EG-3, and in the event we are unable to do so, we will have three years to place a new S-band spacecraft at the altitude prescribed in our Australian ITU filing. We expect the first group of S-band satellites recently ordered from Astro Digital to be launched well in advance of the three year replacement timeline. We are not aware of any other anomalies with respect to our owned or leased satellites as of the date of these Consolidated Financial Statements. There can be no assurance, however, that anomalies will not have a significant adverse effect in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our satellites were to fail.
Cybersecurity
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 year ended December 31, 2022 and through February 22, 2023. There
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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.
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 provided to customers in our consumer and enterprise markets. It also includes certain other costs associated with the deployment of equipment to our customers.
Selling, general and administrative expenses. Selling, general and administrative expenses primarily include selling and marketing costs and employee-related costs associated with administrative services (e.g., information systems, human resources and other services), including bad debt expense and stock-based compensation expense. It also includes professional fees (e.g. legal, information systems and accounting services) and other expenses associated with facilities and administrative services.
Research and development expenses. Research and development expenses primarily include costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.
Impairment of long-lived assets. Impairment of long-lived assets includes our impairment losses related to our property and equipment, goodwill, regulatory authorizations and other intangible assets.
Interest income, net. Interest income, net primarily includes interest earned on our cash, cash equivalents and marketable investment securities, and other investments including premium amortization and discount accretion on debt securities.
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 securities, realized gains and losses on the sale or exchange of equity securities and debt securities without readily determinable fair value and adjustments to the carrying amount of investments in unconsolidated affiliates and marketable equity securities resulting from impairments and observable price changes.
Equity in earnings (losses) of unconsolidated affiliates, net. 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.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 Consolidated Statements of Operations in our Consolidated Financial Statements.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as Net income (loss) excluding Interest income and expense, net, Income tax benefit (provision), net, Depreciation and amortization, and Net income (loss) attributable to non-controlling interests. EBITDA is not a measure determined in accordance with U.S. generally accepted accounting principles (“GAAP”). This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of Operations section below. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with 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.
Highlights from our Financial Results
Consolidated Results of Operations for the Year Ended December 31, 2022:
• Revenue of $2.0 billion
•Operating income of $189.6 million
•Net income of $166.5 million
•Net income attributable to EchoStar common stock of $177.1 million and basic and diluted earnings per share of common stock of $2.10
•EBITDA of $707.6 million (see reconciliation of this non-GAAP measure in Results of Operations)
Consolidated Financial Condition as of December 31, 2022:
•Total assets of $6.2 billion
•Total liabilities of $2.6 billion
•Total stockholders’ equity of $3.6 billion
•Cash and cash equivalents and marketable investment securities of $1.7 billion
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table presents our consolidated results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021:
| For the year ended December 31, | Variance | |||||||||||||||||||||||||
Statements of Operations Data (1) | 2022 | 2021 | Amount | % | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Services and other revenue | $ | 1,623,931 | $ | 1,715,287 | $ | (91,356) | (5.3) | |||||||||||||||||||
| Equipment revenue | 374,162 | 270,433 | 103,729 | 38.4 | ||||||||||||||||||||||
| Total revenue | 1,998,093 | 1,985,720 | 12,373 | 0.6 | ||||||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||
| Cost of sales - services and other | 569,755 | 551,679 | 18,076 | 3.3 | ||||||||||||||||||||||
| % of total services and other revenue | 35.1 | % | 32.2 | % | ||||||||||||||||||||||
| Cost of sales - equipment | 292,318 | 231,975 | 60,343 | 26.0 | ||||||||||||||||||||||
| % of total equipment revenue | 78.1 | % | 85.8 | % | ||||||||||||||||||||||
| Selling, general and administrative expenses | 455,234 | 461,705 | (6,471) | (1.4) | ||||||||||||||||||||||
| % of total revenue | 22.8 | % | 23.3 | % | ||||||||||||||||||||||
| Research and development expenses | 32,810 | 31,777 | 1,033 | 3.3 | ||||||||||||||||||||||
| % of total revenue | 1.6 | % | 1.6 | % | ||||||||||||||||||||||
| Depreciation and amortization | 457,621 | 491,329 | (33,708) | (6.9) | ||||||||||||||||||||||
| Impairment of long-lived assets | 711 | 245 | 466 | 190.2 | ||||||||||||||||||||||
| Total costs and expenses | 1,808,449 | 1,768,710 | 39,739 | 2.2 | ||||||||||||||||||||||
| Operating income (loss) | 189,644 | 217,010 | (27,366) | (12.6) | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest income, net | 50,900 | 22,801 | 28,099 | 123.2 | ||||||||||||||||||||||
| Interest expense, net of amounts capitalized | (57,170) | (95,512) | 38,342 | (40.1) | ||||||||||||||||||||||
| Gains (losses) on investments, net | 47,107 | 69,531 | (22,424) | (32.3) | ||||||||||||||||||||||
| Equity in earnings (losses) of unconsolidated affiliates, net | (5,703) | (5,170) | (533) | 10.3 | ||||||||||||||||||||||
| Foreign currency transaction gains (losses), net | 5,235 | (12,613) | 17,848 | (141.5) | ||||||||||||||||||||||
| Other-than-temporary impairment losses on equity method investments | — | (55,266) | 55,266 | (100.0) | ||||||||||||||||||||||
| Other, net | 3,210 | (12,434) | 15,644 | (125.8) | ||||||||||||||||||||||
| Total other income (expense), net | 43,579 | (88,663) | 132,242 | (149.2) | ||||||||||||||||||||||
| Income (loss) before income taxes | 233,223 | 128,347 | 104,876 | 81.7 | ||||||||||||||||||||||
| Income tax benefit (provision), net | (66,675) | (65,626) | (1,049) | 1.6 | ||||||||||||||||||||||
| Net income (loss) | 166,548 | 62,721 | 103,827 | 165.5 | ||||||||||||||||||||||
| Less: Net loss (income) attributable to non-controlling interests | 10,503 | 10,154 | 349 | 3.4 | ||||||||||||||||||||||
| Net income (loss) attributable to EchoStar Corporation common stock | $ | 177,051 | $ | 72,875 | $ | 104,176 | 143.0 | |||||||||||||||||||
| Other data: | ||||||||||||||||||||||||||
EBITDA (2) | $ | 707,617 | $ | 702,541 | $ | 5,076 | 0.7 | |||||||||||||||||||
| Subscribers, end of period | 1,228,000 | 1,462,000 | (234,000) | (16.0) | ||||||||||||||||||||||
(1) An explanation of our key metrics is included in Explanation of Key Metrics and Other Items.
(2) A reconciliation of EBITDA to Net income (loss), the most directly comparable GAAP measure in our Consolidated Financial Statements, is included in Results of Operations. For further information on our use of EBITDA, see Explanation of Key Metrics and Other Items.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following discussion relates to our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021:
Services and other revenue. Services and other revenue totaled $1.6 billion for the year ended December 31, 2022, a decrease of $91.4 million, or 5.3%, as compared to 2021. The decrease was primarily attributable to our Hughes segment related to lower sales of broadband services to our consumer customers of $103.1 million, partially offset by higher sales of broadband services to our enterprise customers of $5.3 million and to our mobile satellite system and other customers of $4.5 million. Our ESS segment increased by $2.9 million. These variances reflect an estimated negative impact of exchange rate fluctuations of $5.9 million, primarily attributable to our enterprise customers.
Equipment revenue. Equipment revenue totaled $374.2 million for the year ended December 31, 2022, an increase of $103.7 million, or 38.4%, as compared to 2021. The increase was primarily attributable to: i) increases in hardware sales to our enterprise customers of $102.6 million mainly associated with a certain customer in North America and to international customers, and ii) increases on our hardware sales to our mobile satellite system customers of $6.6 million, partially offset by decreases in hardware sales of $5.5 million to our consumer customers.
Cost of sales - services and other. Cost of sales - services and other totaled $569.8 million for the year ended December 31, 2022, an increase of $18.1 million, or 3.3%, as compared to 2021. The increase was attributable to a non-recurring decrease in a certain international regulatory fee of $4.5 million in 2021 and increases in cost of services provided to our consumer and enterprise customers, mainly related to service delivery expenses, such as field services and customer care.
Cost of sales - equipment. Cost of sales - equipment totaled $292.3 million for the year ended December 31, 2022, an increase of $60.3 million, or 26.0%, as compared to 2021. The increase was primarily attributable to the corresponding increase in equipment revenue and change in product mix.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $455.2 million for the year ended December 31, 2022, a decrease of $6.5 million, or 1.4%, as compared to 2021. The decrease was primarily attributable to decreases in: i) sales and marketing expenses of $18.5 million and ii) legal expenses of $2.3 million, offset by increases in: i) bad debt expense of $7.4 million primarily due to the recovery of bad debt reserves in 2021 and ii) other general and administrative expenses of $6.9 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $457.6 million for the year ended December 31, 2022, a decrease of $33.7 million, or 6.9%, as compared to 2021. The decrease was primarily attributable to: i) decreases in other property and equipment depreciation expense of $27.7 million, ii) decreases in our satellite depreciation of $8.9 million, mainly related to our SPACEWAY 3 satellite which was fully depreciated at the end of the first quarter of 2021, and iii) decreases in amortization of intangibles of $2.1 million. These decreases were partially offset by increases in amortization of our capitalized software of $5.7 million.
Interest income, net. Interest income, net totaled $50.9 million for the year ended December 31, 2022, an increase of $28.1 million, or 123.2%, as compared to 2021, primarily attributable to increases in the yield on our marketable investment securities and an increase in our marketable investment securities average balance.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, totaled $57.2 million for the year ended December 31, 2022, a decrease of $38.3 million, or 40.1%, as compared to 2021. The decrease was primarily attributable to a decrease of $30.8 million in interest expense and the amortization of deferred financing cost as a result of the repurchases and maturity of our 7 5/8% Senior Unsecured Notes due 2021 and an increase of $6.8 million in capitalized interest relating to the EchoStar XXIV satellite program.
Gains (losses) on investments, net. Gains (losses) on investments, net totaled $47.1 million in gains for the year ended December 31, 2022, as compared to $69.5 million in gains for the year ended December 31, 2021, a negative change of $22.4 million. The change was primarily attributable to a net loss of $28.3 million related to the exit of our investment in Dish Mexico in 2022.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled $5.2 million in gains for the year ended December 31, 2022, as compared to $12.6 million in losses for the year ended
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
December 31, 2021, a positive change of $17.8 million. The change was due to the net impact of foreign exchange rate fluctuations of certain foreign currencies during the period, primarily related to the Brazilian Real, Indian Rupee, and the European Euro.
Other-than-temporary impairment losses on equity method investments. Other-than-temporary impairment losses on equity method investments was $55.3 million for the year ended December 31, 2021, related to the impairment of our investment in Dish Mexico. Given changing market trends, conditions, and company-specific events, we concluded that our investment in Dish Mexico was not recoverable.
Other, net. Other, net totaled $3.2 million in gains for the year ended December 31, 2022, as compared to $12.4 million in losses for the year ended December 31, 2021, a positive change of $15.6 million. The change was primarily attributable to a litigation expense of $16.8 million in 2021.
Income tax benefit (provision), net. Income tax benefit (provision), net was $(66.7) million for the year ended December 31, 2022, as compared to $(65.6) million for the year ended December 31, 2021. Our effective income tax rate was 28.6% and 51.1% for the year ended December 31, 2022 and 2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the year ended December 31, 2022 were primarily due to excluded foreign losses where the Company carries a full valuation allowance, and the impact of state and local taxes. The variations in our current year effective tax rate from the U.S. federal statutory rate for the year ended December 31, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. Among other provisions, the IRA includes a 15% corporate minimum tax rate applied to certain large corporations and a 1% excise tax on corporate stock repurchases made after December 31, 2022. We do not expect the IRA to have a material impact on our Consolidated Financial Statements.
Net income (loss) attributable to EchoStar Corporation common stock. The following table reconciles the change in Net income (loss) attributable to EchoStar Corporation common stock:
Amounts | ||||||||
| Net income (loss) attributable to EchoStar Corporation for the year ended December 31, 2021 | $ | 72,875 | ||||||
| Decrease (increase) in other-than-temporary impairment losses on equity method investments | 55,266 | |||||||
| Decrease (increase) in interest expense, net of amounts capitalized | 38,342 | |||||||
| Increase (decrease) in interest income, net | 28,099 | |||||||
| Increase (decrease) in foreign currency transaction gains (losses), net | 17,848 | |||||||
| Increase (decrease) in other, net | 15,644 | |||||||
| Increase (decrease) in net income (loss) attributable to non-controlling interest | 349 | |||||||
| Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | (533) | |||||||
| Decrease (increase) in income tax benefit (provision), net | (1,049) | |||||||
| Increase (decrease) in gains (losses) on investments, net | (22,424) | |||||||
| Increase (decrease) in operating income (loss), including depreciation and amortization | (27,366) | |||||||
| Net income (loss) attributable to EchoStar Corporation for the year ended December 31, 2022 | $ | 177,051 | ||||||
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ITEM 7. 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 section. The following table reconciles EBITDA to Net income (loss), the most directly comparable GAAP measure in our Consolidated Financial Statements:
| For the year ended December 31, | Variance | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | % | |||||||||||||||||||||||
| Net income (loss) | $ | 166,548 | $ | 62,721 | $ | 103,827 | 165.5 | |||||||||||||||||||
| Interest income, net | (50,900) | (22,801) | (28,099) | 123.2 | ||||||||||||||||||||||
| Interest expense, net of amounts capitalized | 57,170 | 95,512 | (38,342) | (40.1) | ||||||||||||||||||||||
| Income tax provision (benefit), net | 66,675 | 65,626 | 1,049 | 1.6 | ||||||||||||||||||||||
| Depreciation and amortization | 457,621 | 491,329 | (33,708) | (6.9) | ||||||||||||||||||||||
| Net loss (income) attributable to non-controlling interests | 10,503 | 10,154 | 349 | 3.4 | ||||||||||||||||||||||
| EBITDA | $ | 707,617 | $ | 702,541 | $ | 5,076 | 0.7 | |||||||||||||||||||
The following table reconciles the change in EBITDA:
Amounts | ||||||||
| EBITDA for the year ended December 31, 2021 | $ | 702,541 | ||||||
| Decrease (increase) in other-than-temporary impairment losses on equity method investments | 55,266 | |||||||
| Increase (decrease) in foreign currency transaction gains (losses), net | 17,848 | |||||||
| Increase (decrease) in other, net | 15,644 | |||||||
| Decrease (increase) in net loss (income) attributable to non-controlling interests | 349 | |||||||
| Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | (533) | |||||||
| Increase (decrease) in gains (losses) on investments, net | (22,424) | |||||||
| Increase (decrease) in operating income (loss), excluding depreciation and amortization | (61,074) | |||||||
| EBITDA for the year ended December 31, 2022 | $ | 707,617 | ||||||
Segment Operating Results and Capital Expenditures
The following tables present our total revenue, capital expenditures and EBITDA by segment for the year ended December 31, 2022, as compared to the year ended December 31, 2021:
| Hughes | ESS | Corporate and Other | Consolidated Total | |||||||||||||||||||||||
For the year ended December 31, 2022 | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| EBITDA | ( | |||||||||||||||||||||||||
For the year ended December 31, 2021 | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| EBITDA | ( | |||||||||||||||||||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Hughes Segment
| For the year ended December 31, | Variance | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | % | |||||||||||||||||||||||
| Total revenue | $ | 1,966,587 | $ | 1,956,226 | $ | 10,361 | 0.5 | |||||||||||||||||||
| Capital expenditures | 239,403 | 296,303 | (56,900) | (19.2) | ||||||||||||||||||||||
| EBITDA | 732,929 | 781,824 | (48,895) | (6.3) | ||||||||||||||||||||||
Total revenue was $2.0 billion for the year ended December 31, 2022, an increase of $10.4 million, or 0.5%, as compared to 2021. Services and other revenue decreased primarily due to lower sales of broadband services to our consumer customers of $103.1 million, partially offset by higher sales of broadband services to our enterprise customers of $5.3 million and to our mobile satellite system and other customers of $4.5 million. Equipment revenue increased primarily due to: i) increases in hardware sales to our enterprise customers of $102.6 million mainly associated with a certain customer in North America and to international customers, and ii) increases on our hardware sales to our mobile satellite system customers of $6.6 million, partially offset by decreases in hardware sales of $5.5 million to our consumer customers. These variances reflect an estimated negative impact of exchange rate fluctuations of $6.7 million, primarily attributable to our enterprise customers.
Capital expenditures were $239.4 million for the year ended December 31, 2022, a decrease of $56.9 million, or 19.2%, as compared to 2021, primarily due to decreases in expenditures associated with our consumer business, and decreases in expenditures related to the construction of our satellite-related ground infrastructure.
The following table reconciles the change in the Hughes Segment EBITDA:
| Amounts | ||||||||
| EBITDA for the year ended December 31, 2021 | $ | 781,824 | ||||||
| Increase (decrease) in foreign currency transaction gains (losses), net | 17,438 | |||||||
| Decrease (increase) in net loss (income) attributable to non-controlling interests | 349 | |||||||
| Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | 39 | |||||||
| Increase (decrease) in gains (losses) on investments, net | (1,883) | |||||||
| Increase (decrease) in other, net | (3,344) | |||||||
| Increase (decrease) in operating income (loss), excluding depreciation and amortization | (61,494) | |||||||
| EBITDA for the year ended December 31, 2022 | $ | 732,929 | ||||||
ESS Segment
| For the year ended December 31, | Variance | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | % | |||||||||||||||||||||||
| Total revenue | $ | 20,533 | $ | 17,679 | $ | 2,854 | 16.1 | |||||||||||||||||||
| EBITDA | 14,416 | 9,185 | 5,231 | 57.0 | ||||||||||||||||||||||
Total revenue was $20.5 million for the year ended December 31, 2022, an increase of $2.9 million, or 16.1%, compared to 2021, primarily due to an increase in transponder services provided to third parties.
EBITDA was $14.4 million for the year ended December 31, 2022, an increase of $5.2 million, or 57.0%, as compared to 2021, primarily due to the increase in overall ESS segment revenue and lower expenses.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Corporate and Other Segment
| For the year ended December 31, | Variance | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | % | |||||||||||||||||||||||
| Total revenue | $ | 10,973 | $ | 11,815 | $ | (842) | (7.1) | |||||||||||||||||||
| Capital expenditures | 86,488 | 142,127 | (55,639) | (39.1) | ||||||||||||||||||||||
| EBITDA | (39,728) | (88,468) | 48,740 | (55.1) | ||||||||||||||||||||||
Total revenue was $11.0 million for the year ended December 31, 2022, which is primarily flat compared to 2021.
Capital expenditures were $86.5 million for the year ended December 31, 2022, a decrease of $55.6 million, as compared to 2021, primarily due to decreases in expenditures related to the EchoStar XXIV satellite program.
The following table reconciles the change in the Corporate and Other Segment EBITDA:
Amounts | ||||||||
| EBITDA for the year ended December 31, 2021 | $ | (88,468) | ||||||
| Increase (decrease) in gains (losses) on investments, net | (20,541) | |||||||
| Increase (decrease) in operating income (loss), excluding depreciation and amortization | (4,827) | |||||||
| Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net | (572) | |||||||
| Increase (decrease) in foreign currency transaction gains (losses), net | 411 | |||||||
| Increase (decrease) in other, net | 74,269 | |||||||
| EBITDA for the year ended December 31, 2022 | $ | (39,728) | ||||||
37
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The following table presents our consolidated results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020:
| For the years ended December 31, | Variance | |||||||||||||||||||||||||
Statements of Operations Data (1) | 2021 | 2020 | Amount | % | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Services and other revenue | $ | 1,715,287 | $ | 1,682,304 | $ | 32,983 | 2.0 | |||||||||||||||||||
| Equipment revenue | 270,433 | 205,603 | 64,830 | 31.5 | ||||||||||||||||||||||
| Total revenue | 1,985,720 | 1,887,907 | 97,813 | 5.2 | ||||||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||
| Cost of sales - services and other | 551,679 | 577,943 | (26,264) | (4.5) | ||||||||||||||||||||||
| % of total services and other revenue | 32.2 | % | 34.4 | % | ||||||||||||||||||||||
| Cost of sales - equipment | 231,975 | 166,435 | 65,540 | 39.4 | ||||||||||||||||||||||
| % of total equipment revenue | 85.8 | % | 80.9 | % | ||||||||||||||||||||||
| Selling, general and administrative expenses | 461,705 | 474,912 | (13,207) | (2.8) | ||||||||||||||||||||||
| % of total revenue | 23.3 | % | 25.2 | % | ||||||||||||||||||||||
| Research and development expenses | 31,777 | 29,448 | 2,329 | 7.9 | ||||||||||||||||||||||
| % of total revenue | 1.6 | % | 1.6 | % | ||||||||||||||||||||||
| Depreciation and amortization | 491,329 | 525,011 | (33,682) | (6.4) | ||||||||||||||||||||||
| Impairment of long-lived assets | 245 | 1,685 | (1,440) | (85.5) | ||||||||||||||||||||||
| Total costs and expenses | 1,768,710 | 1,775,434 | (6,724) | (0.4) | ||||||||||||||||||||||
| Operating income (loss) | 217,010 | 112,473 | 104,537 | 92.9 | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest income, net | 22,801 | 39,982 | (17,181) | (43.0) | ||||||||||||||||||||||
| Interest expense, net of amounts capitalized | (95,512) | (147,927) | 52,415 | (35.4) | ||||||||||||||||||||||
| Gains (losses) on investments, net | 69,531 | (31,306) | 100,837 | * | ||||||||||||||||||||||
| Equity in earnings (losses) of unconsolidated affiliates, net | (5,170) | (7,267) | 2,097 | (28.9) | ||||||||||||||||||||||
| Foreign currency transaction gains (losses), net | (12,613) | 6,015 | (18,628) | * | ||||||||||||||||||||||
| Other-than-temporary impairment losses on equity method investments | (55,266) | — | (55,266) | * | ||||||||||||||||||||||
| Other, net | (12,434) | 195 | (12,629) | * | ||||||||||||||||||||||
| Total other income (expense), net | (88,663) | (140,308) | 51,645 | (36.8) | ||||||||||||||||||||||
| Income (loss) before income taxes | 128,347 | (27,835) | 156,182 | * | ||||||||||||||||||||||
| Income tax benefit (provision), net | (65,626) | (24,069) | (41,557) | * | ||||||||||||||||||||||
| Net income (loss) | 62,721 | (51,904) | 114,625 | * | ||||||||||||||||||||||
| Less: Net loss (income) attributable to non-controlling interests | 10,154 | 11,754 | (1,600) | (13.6) | ||||||||||||||||||||||
| Net income (loss) attributable to EchoStar Corporation common stock | $ | 72,875 | $ | (40,150) | $ | 113,025 | * | |||||||||||||||||||
| Other data: | ||||||||||||||||||||||||||