Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.71M
5: EX-99.1 Miscellaneous Exhibit HTML 226K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 34K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 33K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 32K
11: R1 Cover Page HTML 86K
12: R2 Consolidated Balance Sheets HTML 179K
13: R3 Consolidated Balance Sheets (Parenthetical) HTML 57K
14: R4 Consolidated Statements of Operations HTML 124K
15: R5 Consolidated Statements of Comprehensive Income HTML 74K
(Loss)
16: R6 Consolidated Statements of Changes in HTML 88K
Stockholders' Equity
17: R7 Condensed Consolidated Statements of Cash Flows HTML 132K
18: R8 Organization and Business Activities HTML 36K
19: R9 Summary of Significant Accounting Policies HTML 41K
20: R10 Revenue Recognition HTML 212K
21: R11 Business Combinations HTML 44K
22: R12 Earnings Per Share HTML 56K
23: R13 Marketable Investment Securities HTML 116K
24: R14 Property and Equipment HTML 97K
25: R15 Regulatory Authorizations HTML 59K
26: R16 Other Investments HTML 61K
27: R17 Long-Term Debt HTML 47K
28: R18 Income Taxes HTML 35K
29: R19 Related Party Transactions HTML 105K
30: R20 Related Party Transactions - Other HTML 105K
31: R21 Contingencies HTML 57K
32: R22 Segment Reporting HTML 121K
33: R23 Supplemental Financial Information HTML 89K
34: R24 Summary of Significant Accounting Policies HTML 49K
(Policies)
35: R25 Revenue Recognition (Tables) HTML 231K
36: R26 Business Combinations (Tables) HTML 41K
37: R27 Earnings Per Share (Tables) HTML 58K
38: R28 Marketable Investment Securities (Tables) HTML 122K
39: R29 Property and Equipment (Tables) HTML 94K
40: R30 Regulatory Authorizations (Tables) HTML 60K
41: R31 Other Investments (Tables) HTML 58K
42: R32 Long-Term Debt (Tables) HTML 47K
43: R33 Related Party Transactions - Dish Network (Tables) HTML 55K
44: R34 Contingencies (Tables) HTML 39K
45: R35 Segment Reporting (Tables) HTML 118K
46: R36 Supplemental Financial Information (Tables) HTML 94K
47: R37 Organization and Business Activities (Details) HTML 31K
48: R38 Revenue Recognition - Schedule of Components of HTML 58K
Contract Balances (Details)
49: R39 Revenue Recognition - Activity in Contract HTML 37K
Acquisition Costs (Details)
50: R40 Revenue Recognition - Contract Cost Narrative HTML 31K
(Details)
51: R41 Revenue Recognition - Narrative (Details) HTML 42K
52: R42 Revenue Recognition - Schedule of Disaggregation HTML 107K
of Revenue (Details)
53: R43 Revenue Recognition - Lease Income By Lease Type HTML 41K
(Details)
54: R44 Business Combinations - Narrative (Details) HTML 50K
55: R45 Business Combinations - Schedule of Recognized HTML 61K
Identified Assets and Liabilities Assumed
(Details)
56: R46 Earnings Per Share - Schedule of Basic and Diluted HTML 59K
Earnings Per Share (Details)
57: R47 Earnings Per Share - Antidilutive Securities HTML 33K
(Details)
58: R48 Marketable Investment Securities - Schedule of HTML 46K
Investments (Details)
59: R49 Marketable Investment Securities - Schedule of HTML 48K
Unrealized Gains (Losses) on Available-for-Sale
Securities (Details)
60: R50 Marketable Investment Securities - Activity on HTML 32K
Available for Sale Securities (Details)
61: R51 Marketable Investment Securities - Narrative HTML 39K
(Details)
62: R52 Marketable Investment Securities - Equity HTML 31K
Securities (Details)
63: R53 Marketable Investment Securities - Schedule of HTML 66K
Fair Value Measurements (Details)
64: R54 Property and Equipment - Major Asset Class HTML 36K
(Details)
65: R55 Property and Equipment - Narrative (Details) HTML 48K
66: R56 Property and Equipment - Schedule of Satellites HTML 48K
(Details)
67: R57 Property and Equipment - Schedule of Property HTML 61K
Plant and Equipment (Details)
68: R58 Property and Equipment - Schedule of Depreciation HTML 45K
and Capitalized Interest (Details)
69: R59 Regulatory Authorizations - Schedule of Regulatory HTML 65K
Authorizations (Details)
70: R60 Other Investments - Schedule of Other Investments, HTML 39K
Net (Details)
71: R61 Other Investments - Narrative (Details) HTML 37K
72: R62 Other Investments - Schedule of Revenue Recognized HTML 38K
(Details)
73: R63 Other Investments - Schedule of Trade Accounts HTML 36K
Receivable (Details)
74: R64 Other Investments - Other Equity Investments HTML 31K
(Details)
75: R65 Long-Term Debt - Schedule of Debt (Details) HTML 53K
76: R66 Income Taxes - Narrative (Details) HTML 35K
77: R67 Related Party Transactions - DISH Network - HTML 66K
Overview (Details)
78: R68 Related Party Transactions - Dish Network - DISH HTML 38K
Network - Services and Other Revenue - DISH
Network (Details)
79: R69 Related Party Transactions - Dish Network - Real HTML 39K
Estate Leases to DISH Network (Details)
80: R70 Related Party Transactions - Dish Network - HTML 35K
TerreStar Agreement (Details)
81: R71 Related Party Transactions - Dish Network - Hughes HTML 35K
Broadband Distribution Agreement (Details)
82: R72 Related Party Transactions - Dish Network - DBSD HTML 37K
North America Agreement (Details)
83: R73 Related Party Transactions - Dish Network - Hughes HTML 38K
Equipment and Services Agreement (Details)
84: R74 Related Party Transactions - Dish Network - HTML 36K
Operating Expenses - DISH Network (Details)
85: R75 Related Party Transactions - Dish Network - HTML 37K
Amended and Restated Professional Services
Agreement (Details)
86: R76 Related Party Transactions - Dish Network - Real HTML 39K
Estate Leases From DISH Network (Details)
87: R77 Related Party Transactions - Dish Network - HTML 56K
Collocation and Antenna Space Agreements (Details)
88: R78 Related Party Transactions - Dish Network - Hughes HTML 38K
Broadband Master Services Agreement (Details)
89: R79 Related Party Transactions - Dish Network - 2019 HTML 37K
TT&C Agreement (Details)
90: R80 Related Party Disclosures - DISH Network - HTML 33K
Referral Marketing Agreement (Details)
91: R81 Related Party Transactions - Dish Network - Other HTML 35K
Receivables - DISH Network (Details)
92: R82 Related Party Transactions - Dish Network - Other HTML 33K
Agreements (Details)
93: R83 Related Party Transactions - Other (Details) HTML 47K
94: R84 Contingencies - Narrative (Details) HTML 32K
95: R85 Contingencies - Accrual For License Fee Dispute HTML 42K
(Details)
96: R86 Segment Reporting - Narrative (Details) HTML 30K
97: R87 Segment Reporting - Revenue, Capital Expenditures, HTML 75K
and EBITDA (Details)
98: R88 Supplemental Financial Information - Other Current HTML 65K
Assets, Net and Other Non-current Assets, Net
(Details)
99: R89 Supplemental Financial Information - Accrued HTML 58K
Expenses and Other Current Liabilities and Other
Non-Current Liabilities (Details)
100: R90 Supplemental Financial Information - Inventory HTML 39K
(Details)
101: R91 Supplemental Financial Information - Schedule of HTML 45K
Noncash Investing and Financing Activities
(Details)
104: XML IDEA XML File -- Filing Summary XML 197K
102: XML XBRL Instance -- sats-20220630_htm XML 3.41M
103: EXCEL IDEA Workbook of Financial Reports XLSX 192K
7: EX-101.CAL XBRL Calculations -- sats-20220630_cal XML 273K
8: EX-101.DEF XBRL Definitions -- sats-20220630_def XML 961K
9: EX-101.LAB XBRL Labels -- sats-20220630_lab XML 1.79M
10: EX-101.PRE XBRL Presentations -- sats-20220630_pre XML 1.25M
6: EX-101.SCH XBRL Schema -- sats-20220630 XSD 229K
105: JSON XBRL Instance as JSON Data -- MetaLinks 463± 708K
106: ZIP XBRL Zipped Folder -- 0001415404-22-000070-xbrl Zip 752K
(Exact name of registrant as specified in its charter)
iNevada
i26-1232727
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i100 Inverness Terrace East,iEnglewood,iColorado
i80112-5308
(Address of principal executive offices)
(Zip
Code)
i(303)i706-4000
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:
iClass A common stock
$0.001 par value
iThe
NASDAQ Stock Market LLC
(Title of each class)
(Name of each exchange on which registered)
iSATS
(Ticker symbol)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. iYes☒ 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). iYes☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☒
Accelerated filer
☐
Emerging growth company
i☐
Non-accelerated filer
☐
Smaller reporting company
i☐
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 i☐ No ☒
As
of July 28, 2022, the registrant’s outstanding common stock consisted of i35,485,315 shares of Class A common stock and i47,687,039 shares
of Class B common stock, each $0.001 par value.
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about our estimates, expectations, future developments, plans, objectives, strategies, financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words
such as “anticipate,”“intend,”“plan,”“goal,”“seek,”“believe,”“estimate,”“expect,”“predict,”“project,”“continue,”“future,”“will,”“would,”“could,”“can,”“may” and similar terms. These forward-looking statements are based on information available to us as of the date of this Form 10-Q and represent management’s current views and assumptions 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; 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 under the caption Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission
(“SEC”), those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Form 10-Q and in Part II, Item 7 of our Form 10-K and those discussed in other documents we file with the SEC.
All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Although we believe
that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of any forward-looking statements. We assume no responsibility for updating 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.
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Stockholders'
equity:
Preferred stock, $ii0.001/
par value, ii20,000,000/ shares
authorized, iiiinone///
issued and outstanding at both June 30, 2022 and December 31, 2021
i—
i—
Common
stock, $ii0.001/ par value, ii4,000,000,000/
shares authorized:
Class A common stock, $ii0.001/
par value, ii1,600,000,000/ shares authorized,
i58,604,747 shares issued and i35,885,079 shares outstanding at June 30, 2022 and i58,059,622
shares issued and i38,726,923 shares outstanding at December 31, 2021
i59
i58
Class B
convertible common stock, $ii0.001/ par value, ii800,000,000/
shares authorized, iiii47,687,039///
shares issued and outstanding at both June 30, 2022 and December 31, 2021
i48
i48
Class C
convertible common stock, $ii0.001/ par value, ii800,000,000/
shares authorized, iiiinone///
issued and outstanding at both June 30, 2022 and December 31, 2021
i—
i—
Class D
common stock, $ii0.001/ par value, ii800,000,000/
shares authorized, iiiinone///
issued and outstanding at both June 30, 2022 and December 31, 2021
i—
i—
Additional
paid-in capital
i3,355,238
i3,345,878
Accumulated
other comprehensive income (loss)
(i204,465)
(i212,102)
Accumulated
earnings (losses)
i761,767
i656,466
Treasury
shares, at cost
(i514,418)
(i436,521)
Total
EchoStar Corporation stockholders' equity
i3,398,229
i3,353,827
Non-controlling
interests
i101,327
i60,253
Total
stockholders' equity
i3,499,556
i3,414,080
Total
liabilities and stockholders' equity
$
i6,118,523
$
i6,045,204
The
accompanying notes are an integral part of these Consolidated Financial Statements.
EchoStar Corporation (which, together with its subsidiaries, is referred to as “EchoStar,” the “Company,”“we,”“us” and “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada and has operated as a separately traded public company from DISH Network Corporation (“DISH”) since 2008. Our Class A common stock is publicly traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “SATS.”
We are 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 broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises. We operate in the following itwo business segments:
•Hughes
segment — which provides broadband satellite technologies and broadband internet services to domestic and international consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
•Echostar Satellite Services segment (“ESS segment”) — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use
basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.
Our operations also include various corporate 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 Corporate and Other segment in our segment reporting. We also divide our operations by primary geographic market as follows: (i) North America (the U.S. and its territories, Mexico, and Canada); (ii)
South and Central America and (iii) Other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 15. Segment Reporting for further detail.
NOTE 2. iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis
of Presentation
These unaudited Consolidated Financial Statements and the accompanying notes (collectively, the “Consolidated Financial Statements”) are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required for complete financial statements prepared in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.
All
amounts presented in these Consolidated Financial Statements are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Refer to Note 2. Summary of Significant Accounting Policies to the Consolidated Financial Statements in our Form 10-K for a summary and discussion of our significant accounting policies, except as updated
below.
i
Use of Estimates
We are required to make certain estimates and assumptions that affect the amounts reported in these Consolidated Financial Statements. The most significant estimates and assumptions are used in determining: (i) inputs used to recognize revenue over time, including amortization periods for deferred contract
acquisition costs; (ii) allowances for doubtful accounts; (iii) deferred taxes and related valuation allowances, including uncertain tax positions; (iv) loss contingencies; (v) fair value of financial instruments; (vi) fair value of assets and liabilities acquired in business combinations; and (vii) asset impairment testing.
We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts and such differences may be material to our financial statements. Additionally, changing economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. We review our estimates and assumptions periodically and the effects
of revisions thereto are reflected in the period they occur or prospectively if the revised estimate affects future periods.
i
Principles of Consolidation
We consolidate all entities in which we have a controlling financial interest. We are deemed to have a controlling financial interest in variable interest entities in which we are the primary beneficiary and in other entities in which
we own more than 50% of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a non-controlling interest within stockholders’ equity for the portion of the entity’s equity attributed to the non-controlling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.
i
Recently
Adopted Accounting Pronouncements
On January 1, 2021, we adopted Accounting Standard Update (“ASU”) No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the Financial Accounting Standards Board (“FASB”) overall simplification initiative and seeks to simplify the accounting for income taxes by updating certain guidance and removing certain exceptions. Our adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities
(except for not-for-profit entities and employee benefit plans) to disclose information about certain government assistance they receive. The Topic 832 disclosure requirements include: (i) the nature of the transactions and the related accounting policy used; (ii) the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item; and (iii) significant terms and conditions of the transactions. Our adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because
of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. We expect to utilize the optional expedients provided by the guidance for contracts amended solely to use an alternative reference rate. We have evaluated the impact of adopting this new guidance and do not expect it to have a material impact on our Consolidated Financial Statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, which provides an exception to fair value measurement for contract assets and contract liabilities related to revenue contracts acquired in a business combination. The ASU requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related
revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU is effective for the Company for annual and interim periods in fiscal years beginning after December 15, 2022. Early adoption is permitted. The ASU is applied to business combinations occurring on or after the effective date.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance
for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact of adopting this new guidance and we do not expect it to have a material impact on our Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table presents the revenue recognized in the Consolidated Statements of Operations that was previously included within contract liabilities:
We
recognized amortization expenses related to contract acquisition costs of $i19.5 million and $i22.4
million for the three months ended June 30, 2022 and 2021, respectively.
/
Performance Obligations
As of June 30, 2022, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $i1.1
billion. Performance obligations expected to be satisfied within ione year and greater than one year are i40.0% and i60.0%,
respectively. This amount and percentages exclude agreements with consumer customers in our Hughes segment, our leasing arrangements and agreements with certain customers under which collectability of all amounts due through the term of contracts is uncertain.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE4. iBUSINESS COMBINATIONS
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 i67%
ownership interest and Bharti holds a i33% 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 from the date of formation. The costs associated with the closing of the India JV were not material and were expensed as incurred.
The
fair value of the consideration transferred was $i38.2 million. Net cash paid was $i7.9
million, inclusive of amounts paid for the acquisition of, or of HCIPL shares from, entities that were shareholders of HCIPL prior to closing the India JV.
All assets and liabilities acquired in the India JV formation have been recorded at fair value. iThe following table presents our preliminary allocation of the purchase price:
Amounts
Assets:
Trade
accounts receivable and contract assets, net
$
i6,160
Other current assets
i2,085
Property
and equipment
i4,669
Goodwill
i23,086
Other
intangible assets
i4,428
Total assets
$
i40,428
Liabilities:
Trade
accounts payable
$
i133
Accrued expenses and other current liabilities
i986
Deferred
tax liabilities
i1,114
Total liabilities
$
i2,233
Total
purchase price
$
i38,195
The preliminary valuation of assets acquired and liabilities assumed in the India JV were derived using primarily unobservable Level 3 inputs, which require significant management judgment
and estimation, and resulted in a customer relationship intangible of $i4.4 million with an estimated life of i5
years and is reported in Other intangible assets, net.
Goodwill associated with the India JV is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce. Goodwill has been allocated entirely to our Hughes segment.
Net income (loss) attributable to EchoStar Corporation common stock
$
i13,868
$
i37,295
$
i105,301
$
i115,814
Weighted-average
common shares outstanding:
Basic
i84,317
i90,689
i85,077
i92,271
Dilutive
impact of stock awards outstanding
i—
i25
i—
i25
Diluted
i84,317
i90,714
i85,077
i92,296
Earnings
(losses) per share:
Basic
$
i0.16
$
i0.41
$
i1.24
$
i1.26
Diluted
$
i0.16
$
i0.41
$
i1.24
$
i1.25
/
i
The
following table presents the number of anti-dilutive options to purchase shares of our Class A common stock which have been excluded from the calculation of our weighted-average common shares outstanding:
As
of June 30, 2022, we have $i379.8 million of available-for-sale debt securities with contractual maturities of one year or less and izero
with contractual maturities greater than one year.
Equity Securities
i
The following table presents the activity of our equity securities:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Fair Value Measurements
i
The following table presents our marketable investment securities categorized by the fair value hierarchy, certain of which have historically experienced volatility:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Satellites
As of June 30, 2022, our satellite fleet consisted of iten
geosynchronous (“GEO”) satellites, iseven of which are owned and ithree
of which are leased. They are all in geosynchronous orbit, approximately i22,300 miles above the equator. Our owned S-band low-earth orbit (“LEO”) nano-satellites are not included in the table below.
iThe
following table presents our GEO satellite fleet as of June 30, 2022:
GEO Satellite
Segment
Launch
Date
Nominal Degree Orbital Location (Longitude)
Depreciable Life (In Years)
Owned:
SPACEWAY 3 (1)
Hughes
August 2007
95
W
i10
EchoStar XVII
Hughes
July 2012
107 W
i15
EchoStar
XIX
Hughes
December 2016
97.1 W
i15
Al Yah 3 (2)
Hughes
January
2018
20 W
i7
EchoStar IX (3) (4)
ESS
August 2003
121 W
i12
EUTELSAT
10A (“W2A”) (5)
Corporate and Other
April 2009
10 E
-
EchoStar XXI
Corporate and Other
June 2017
10.25 E
i15
Finance
leases:
Eutelsat 65 West A
Hughes
March 2016
65 W
i15
Telesat
T19V
Hughes
July 2018
63 W
i15
EchoStar 105/SES-11
ESS
October 2017
105
W
i15
(1) Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed the 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 expects to place the satellite in an inclined-orbit in the fourth quarter of 2022 or first quarter of 2023, but this ability is dependent upon events beyond our control and may not occur on schedule if at all. Inclined-orbit will extend its life but impact revenue generating capabilities.
(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.
The following table presents the components of our satellites, net:
In August 2017, we entered into a contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (the “HughesNet service”) in North, Central and South America as well as enterprise broadband services. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in Corporate and Other segment in our segment reporting.
Satellite-Related Commitments
As of June 30,
2022 and December 31, 2021 our satellite-related commitments were $i276.2 million and $i342.2 million, respectively. These include payments pursuant to: i)
agreements for the construction of the EchoStar XXIV satellite, ii) the EchoStar XXIV launch contract, iii) regulatory authorizations and non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change.
Satellite Anomalies and Impairments
We are not aware of any anomalies with respect to our owned or leased satellites or payloads that have had any significant adverse effect on their remaining useful lives, the commercial
operation of the satellites or payloads or our operating results or financial position as of and for the three and six months ended June 30, 2022.
Fair Value of In-Orbit Incentives
As of June 30, 2022 and December 31, 2021, the fair values of our in-orbit incentive obligations approximated their carrying amounts of $i51.3
million and $i53.2 million, respectively.
We own i49% of DISH Mexico, S. de R.L. de C.V. and its subsidiaries (“Dish Mexico”), a joint venture with an unrelated Mexican entity that we entered into in 2008 to provide direct-to-home satellite services in Mexico. During the fourth quarter of 2021, we concluded that our investment in Dish Mexico was not
recoverable.
Deluxe/EchoStar LLC
We own i50% of Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada.
We
own i20% of Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), a joint venture that we entered into in 2018 to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat's Al Yah 2 and Al Yah 3 Ka-band satellites.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 11. iINCOME TAXES
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, in the relevant period. Each quarter we update our estimate of
the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our interim income tax provision and our interim estimate of our annual effective tax rate are influenced by several factors, including foreign losses and capital gains and losses for which related deferred tax assets are partially offset by a valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be affected by the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income or loss is lower.
Our income
tax provision was $i5.4 million for the three months ended June 30, 2022 compared to our income tax provision of $i21.2 million for the three months ended June
30, 2021. Our estimated effective income tax rate was i34.0% and i37.7% for the three months ended June 30, 2022
and 2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended June 30, 2022 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of filing a U.S. Federal amended return. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended June 30, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes.
Our
income tax provision was $i38.2 million for the six months ended June 30, 2022 compared to our income tax provision of $i43.3 million for the six months ended June
30, 2021. Our estimated effective income tax rate was i27.7% and i27.8% for the six months ended June 30, 2022
and 2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the six months ended June 30, 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 effective tax rate from the U.S. federal statutory rate for the six months ended June 30, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes.
NOTE
12. iRELATED PARTY TRANSACTIONS - DISH NETWORK
Overview
EchoStar Corporation and DISH have operated as separate publicly-traded companies since 2008 (the “Spin-off”). A substantial majority of the voting power of the shares of each of EchoStar Corporation and DISH
is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family.
In January 2017, we and certain of our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries pursuant to which, in February 2017, we received all of the shares of preferred tracking stock previously issued by us and one of our subsidiaries (the “Tracking Stock”), representing an i80%
economic interest in the residential retail satellite broadband business of our Hughes segment, in exchange for i100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”).The Tracking Stock was retired in March 2017.
In
September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (“DISH Network”) and our joint venture Dish Mexico, and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of our other businesses (collectively, the “BSS Business”) to one of our former subsidiaries, EchoStar BSS
Corporation (“BSS Corp.”), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $i0.001 per share (“BSS Common Stock”), equal to ione
share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar
stockholders was converted into the right to receive i0.23523769 shares of DISH Class A common stock, par value $i0.001
per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, we and DISH Network entered into certain agreements pursuant to which we obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us; and we and DISH Network indemnify each other against certain liabilities arising from our respective businesses. Generally, the amounts we or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below), which varies depending on the nature of the products and services provided. We may also enter into additional agreements with DISH Network in the future.
The
following is a summary of the transactions and the terms of the underlying principal agreements that have had or may have an impact on our consolidated financial condition and results of operations.
Services and Other Revenue — DISH Network
i
The following table presents
our Services and other revenue - DISH Network:
Satellite
Capacity Leased to DISH Network. Effective January 2008, DISH Network began leasing satellite capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue leasing satellite capacity from us on the EchoStar IX satellite on a month-to-month basis.
Telesat Obligation Agreement. In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all ii32/
direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”).In September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all ii32/
of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”).Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service. We transferred the Telesat Transponder Agreement to DISH Network in September 2019 as part of the BSS Transaction; however, we retained certain obligations related to DISH Network’s performance under that agreement and we entered into an agreement with DISH Network whereby DISH Network compensates us for retaining such obligations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Real Estate Leases to DISH Network. We have entered into lease agreements pursuant to which DISH Network leases certain real estate from us. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases or subsequent amendments. Additionally, DISH Network compensates us for its portion of the taxes, insurance, utilities and/or maintenance of the premises. The terms of each of the leases are set forth below:
•100 Inverness Occupancy
License Agreement— In March 2017, we and DISH Network entered into a license agreement for DISH Network to use certain of our space at 100 Inverness Terrace East, Englewood, Colorado for an initial period ending in December 2020. Effective December 2020, we amended this agreement to extend the license until December 2021. Effective December 2021, we amended this agreement to extend the license until December 2022. This agreement may be terminated by either party upon i180 days’ prior
notice. Subsequent to December 2022, this agreement will be converted to a month-to-month lease agreement unless extended by mutual consent or terminated by one of the parties upon i30 days’ notice. In connection with the BSS Transaction, we transferred to DISH Network the Englewood Satellite Operations Center located at 100 Inverness Terrace East, including any and all equipment, hardware licenses, software, processes, software licenses, furniture and technical documentation associated with
the satellites transferred in the BSS Transaction.
•Meridian Lease Agreement —The lease for all of 9601 S. Meridian Blvd., Englewood, Colorado was originally for a period ending in December 2016. We and DISH Network have amended this lease over time to, among other things, extend the term through December 2022. After December 2022, this agreement may be converted by mutual consent to a month-to-month lease agreement with either party having the right to terminate upon i30
days’ notice.
TerreStar Agreement. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and our completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment (the “TerreStar Agreements”). In December 2017, we and DISH Network amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December
31, 2023 and to modify certain termination provisions. DISH Network generally has the right to continue to receive warranty services from us for our products on a month-to-month basis unless terminated by DISH Network upon at least i21 days’ written notice to us. DISH Network generally has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis unless these services are terminated by DISH Network upon at least i90
days’ written notice to us. In addition, DISH Network generally may terminate any and all services for convenience subject to providing us with prior notice and/or payment of termination charges. In March 2020, we entered into an agreement with DISH Network pursuant to which we perform certain work and provide certain credits to amounts owed to us under the TerreStar Agreements in exchange for DISH Network’s granting us rights to use certain satellite capacity under the Amended and Restated Professional Services Agreement (as defined below). As a result, we and DISH Network amended the TerreStar Agreements to suspend our provision of warranty services to DISH Network from April 2020 through December 2020. Following the expiration of this suspension, we have recommenced providing warranty services to DISH Network. In May 2022, we and DISH Network amended the agreement for the provision of hosting services to extend the term until May 2027.
Hughes
Broadband Distribution Agreement. Effective October 2012, we and DISH Network entered into a distribution agreement (the “Distribution Agreement”) pursuant to which DISH Network has the right, but not the obligation, to market, sell and distribute our Gen 4 HughesNet service. DISH Network pays us a monthly per subscriber wholesale service fee for our Gen 4 HughesNet service based upon a subscriber’s service level and based upon certain volume subscription thresholds. The Distribution Agreement also provides that DISH Network has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Gen 4 HughesNet service. The Distribution Agreement had an initial term of ifive
years with automatic renewal for successive ione-year terms unless terminated by either party with a written notice at least i180 days’
before the expiration of the then-current term. In February 2014, we and DISH Network entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, we and DISH Network will continue to provide our Gen 4 HughesNet service to the then-current DISH Network subscribers pursuant to the terms and conditions of the Distribution Agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
DBSD
North America Agreement. In March 2012, DISH Network completed its acquisition of all of the equity of DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and our completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and ground-based communications equipment. In December 2017, we and DBSD North America amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DBSD North America has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis, unless terminated
by DBSD North America upon at least i120 days’ written notice to us. In February 2019, we further amended these agreements to provide DBSD North America with the right to continue to receive warranty services from us on a month-to-month basis until December 2023, unless terminated by DBSD North America upon at least i21
days’ written notice to us. The provision of hosting services will continue until February 2027 unless terminated by DBSD North America upon at least i180 days’ written notice to us. In addition, DBSD North America generally may terminate any and all such services for convenience, subject to providing us with prior notice and/or payment of termination charges.
Hughes
Equipment and Services Agreement. In February 2019, we and DISH Network entered into an agreement pursuant to which we will sell to DISH Network our HughesNet Service and HughesNet equipment that has been modified to meet DISH Network’s internet-of-things specifications for the transfer of data to DISH Network’s network operations centers. This agreement has an initial term of ifive years expiring February 2024 with automatic renewal for successive ione-year
terms unless terminated by DISH Network with at least i180 days’ written notice to us or by us with at least i365
days' written notice to DISH Network.
Operating Expenses — DISH Network
The following table presents our operating expenses related to DISH Network:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Amended and Restated Professional Services Agreement. In connection with the Spin-off, we entered into various agreements with DISH Network including a transition services agreement, satellite procurement agreement and services agreement, all of which expired in January 2010 and were replaced by a professional services agreement (the “Professional Services Agreement”). In January 2010, we and DISH Network agreed that we continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under a transition services agreement: information technology, travel and event
coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Additionally, we and DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under a satellite procurement agreement), receive logistics, procurement and quality assurance services from us (previously provided under a services agreement) and provide other support services. In connection with the consummation of the Share Exchange, we and DISH amended and restated the Professional Services Agreement (as amended to date, the “Amended and Restated Professional Services Agreement”) to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the Share Exchange, including access to antennas owned
by DISH Network for our use in performing TT&C services and maintenance and support services for our antennas (collectively, the “TT&C Antennas”). In September 2019, in connection with the BSS Transaction, we and DISH further amended the Amended and Restated Professional Services Agreement to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the BSS Transaction and to remove our access to and the maintenance and support services for the TT&C Antennas. The term of the Amended and Restated Professional Services Agreement is through January 1, 2023 and renews automatically for successive ione-year
periods thereafter, unless the agreement is terminated earlier by either party upon at least i60 days’ notice. We or DISH Network may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least i30
days’ notice, unless the statement of work for particular services states otherwise. Certain services provided under the Amended and Restated Professional Services Agreement may survive the termination of the agreement.
Real Estate Leases from DISH Network. Effective March 2017, we entered into a lease with DISH Network for certain space at 530 EchoStar Drive in Cheyenne, Wyoming for an initial period ending in February 2019. In August 2018, we exercised our option to renew this lease for a ione-year
period ending in February 2020. In connection with the BSS Transaction, we transferred the Cheyenne Satellite Operations Center, including any equipment, software licenses, and furniture located within, to DISH Network and amended this lease to reduce the space provided to us for the Cheyenne Satellite Access Center for a period ending in September 2021.In March 2021, we exercised our option to renew this lease for a ione-year period ending September 2022 and amended the lease to provide us the option to renew this lease for up to three additional years. In
November 2021, we exercised our option to renew this lease for a ione-year period ending September 2023.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Collocation and Antenna Space Agreements. We and DISH Network entered into an agreement pursuant to which DISH Network provided us with collocation space in El Paso, Texas. This agreement was for an initial period ending in July 2015, and provided us with renewal options for ifour consecutive ithree-year
terms. We exercised our first renewal option for a period commencing in August 2015 and ending in July 2018, in April 2018 we exercised our second renewal option for a period ending in July 2021, and in May 2021 we exercised our third renewal option for a period ending in July 2024. In connection with the Share Exchange, effective March 2017, we also entered into certain agreements pursuant to which DISH Network provides collocation and antenna space to EchoStar through February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In October 2019, we provided a termination notice for our New Braunfels, Texas agreement effective May 2020. In November 2020, we provided a termination notice for one of our Englewood, Colorado agreements effective May 2021. In November 2021, we exercised our right to renew the collocation agreements at Gilbert, Arizona, Cheyenne, Wyoming,
Spokane, Washington, Englewood, Colorado and Monee, Illinois for a period ending in February 2025. In August 2017, we and DISH Network also entered into certain other agreements pursuant to which DISH Network provides additional collocation and antenna space to us in Monee, Illinois and Spokane, Washington through August 2022. In May 2022, we exercised our right to renew such other agreements at Monee, Illinois and Spokane, Washington through August 2025. Generally, we may renew our collocation and antenna space agreements for ithree-year periods by providing DISH Network with prior written
notice no more than i120 days but no less than i90 days prior to the end of the then-current term. We may terminate certain
of these agreements with i180 days’ prior written notice. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provided us with certain additional collocation space in Cheyenne, Wyoming for a period that ended in September 2020. The fees for the services provided under these agreements depend on the number of racks located at the location.
Also in connection with the BSS Transaction, in
September 2019, we entered into an agreement pursuant to which DISH Network provides us with antenna space and power in Cheyenne, Wyoming for a period of ifive years commencing in August 2020, with ifourithree-year renewal terms, with prior written notice of renewal required no more than i120 days but no less than i90
days prior to the end of the then-current term. In March 2021, we entered into additional agreements pursuant to which DISH Network provides us withantenna space and power in Cheyenne, Wyoming, and the right to use an antenna and certain space in Gilbert, Arizona. Both agreements are for a period of ifive years with ifourithree-year renewal terms, with prior written notice of renewal required no more than i120 days but no less than i90
days prior to the end of the then-current term.
Hughes Broadband Master Services Agreement. In conjunction with the launch of our EchoStar XIX satellite, in March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our Gen 5 HughesNet service and related equipment and other telecommunication services and (ii) installs Gen 5 HughesNet service equipment with respect to activations generated by DISH Network. Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation
services. The current term of the Hughes Broadband MSA is through March 2023 with automatic renewal for successive ione-year terms. Either party has the ability to terminate the Hughes Broadband MSA, in whole or in part, for any reason upon at least i90
days’ notice to the other party. Upon expiration or termination of the Hughes Broadband MSA, we will continue to provide our Gen 5 HughesNet service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $i1.9 million and $i1.9
million for the three months ended June 30, 2022 and 2021, respectively, and $i3.6 million and $i3.8
million for the six months ended June 30, 2022 and 2021, respectively.
2019 TT&C Agreement. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provides TT&C services to us for a period ending in September 2021, with the option for us to renew for a ione-year
period upon written notice at least i90 days prior to the initial expiration (the “2019 TT&C Agreement”). In June 2021, we amended the 2019 TT&C Agreement to extend the term until September 2022 and added the option for us to renew the 2019 TT&C Agreement up to an additional ithree
years. The fees for services provided under the 2019 TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. Any party is able to terminate the 2019 TT&C Agreement for any reason upon i12 months’ notice.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Referral Marketing Agreement. In June 2021, we and DISH Network entered into an agreement pursuant to which we will pre-qualify prospects contacting Hughes call centers and transfer those prospects to DISH Network for introduction to DISH Network’s video services, for prospects that convert Hughes will receive a commission. This agreement has an indefinite term and may be terminated by either party upon i90
days’ prior written notice.
Whidbey Island 5G Network Test Bed Subcontract. In June 2022, we and DISH Wireless entered into a subcontract (“DISH Subcontract”) pursuant to which DISH will provide access and use of a DISH lab, technical support and integration and testing support for the 5G network test bed to be delivered by Hughes to its customer.
Other Receivables - DISH Network
The following table presents our other receivables owed from DISH Network:
Tax
Sharing Agreement. Effective December 2007, we and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs our and DISH Network’s respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network and DISH Network indemnifies us for such taxes. However, DISH Network is not liable for and does not indemnify us for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended (the “Code”), because of: (i) a direct or indirect acquisition
of any of our stock, stock options or assets; (ii) any action that we take or fail to take or (iii) any action that we take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, we will be solely liable for, and will indemnify DISH Network for any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
In light of the Tax Sharing Agreement, among other things, and in connection with our consolidated federal income tax returns for
certain tax years prior to and for the year of the Spin-off, in September 2013, we and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of our consolidated tax returns. Prior to the agreement with DISH Network in 2013, the federal tax benefits were reflected as a deferred tax asset for depreciation and amortization, which was netted in our non-current deferred tax liabilities. Under the agreement with DISH Network from 2013, DISH Network is paying us the federal tax benefit it receives at such time as we would have otherwise been able to realize such tax benefit. We recorded a current receivable from DISH Network in Other receivables - DISH Network, current and a non-current receivable from DISH Network in Other receivables - DISH Network, noncurrent and a corresponding increase in our Deferred tax liabilities, net to
reflect the effects of this agreement. In addition, in September 2013, we and DISH Network agreed upon a tax sharing arrangement for filing certain combined state income tax returns and a method of allocating the respective tax liabilities between us and DISH Network for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”).
In August 2018, we and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, to the extent permitted by applicable tax law, DISH Network is entitled to apply the benefit of our 2009 net operating losses (the “SATS 2009 NOLs”) to DISH Network’s federal tax return for the year ended December 31, 2008, in exchange
for DISH Network paying us over time the value of the net annual federal income taxes paid by us that would have been otherwise offset by the SATS 2009 NOLs. The Tax Sharing Amendment also requires us and DISH Network to pay the other for the benefits of certain
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
past and future federal research and development tax credits that we or DISH Network receive or received as a result of being part of a controlled group under the Code, and requires DISH
Network to compensate us for certain past tax losses utilized by DISH Network and for certain past and future excess California research and development tax credits generated by us and used by DISH Network. In addition, the Tax Sharing Amendment extends the term of the State Tax Arrangement to the earlier of termination of the Tax Sharing Agreement, a change in control of either us or DISH Network or, for any particular state, if we and DISH Network no longer file a combined tax return for such state.
We and DISH Network filed combined income tax returns in certain states from 2008 through 2019. We have earned and recognized tax benefits for certain state income tax credits that we would be unable to fully utilize currently if we had filed separately from DISH Network. We have charged Additional paid-in capital in prior periods when DISH
Network has utilized such tax benefits. We expect to increase Additional paid-in capital upon receipt of any consideration that DISH Network pays to us in exchange for these tax credits.
Other Agreements
Master Transaction Agreement. In May 2019, we and BSS Corp. entered into the Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) we
transferred the BSS Business to BSS Corp.; (ii) we completed the Distribution; and (iii) immediately after the Distribution, (1) BSS Corp. became a wholly-owned subsidiary of DISH such that DISH owns and operates the BSS Business and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive i0.23523769 shares of DISH Common Stock. Following the consummation
of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. The Master Transaction Agreement contained customary representations and warranties by us and DISH Network, including our representations relating to the assets, liabilities and financial condition of the BSS Business, and representations by DISH Network relating to its financial condition and liabilities. We and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively.
BSS Transaction Intellectual Property and Technology License Agreement. Effective September 2019, in connection with the BSS
Transaction, we and DISH Network entered into an intellectual property and technology license agreement (the “BSS IPTLA”) pursuant to which we and DISH Network license to each other certain intellectual property and technology. The BSS IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the BSS IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the BSS Business acquired pursuant to the BSS Transaction, including a limited license to use the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks during a transition period. EchoStar retains full ownership of the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks. In addition, DISH Network granted a license back to us, among other things, for the continued use of all intellectual property and technology that is used in our
retained businesses but the ownership of which was transferred to DISH Network pursuant to the BSS Transaction.
BSS Transaction Tax Matters Agreement. Effective September 2019, in connection with the BSS Transaction, we, BSS Corp. and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, we are responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the BSS Transaction and DISH is responsible for all tax returns and tax liabilities for the BSS Business from and after the BSS Transaction. Both we and DISH made certain tax-related representations
and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both we and DISH Network have agreed to indemnify each other for certain losses if there is a breach of any the tax representations or violation of any of the tax covenants in the tax matters agreement and that breach or violation results in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar or its stockholders for U.S. federal income tax purposes. In addition, DISH Network has agreed to indemnify us if the BSS Business is acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons, where either it took an action, or knowingly facilitated, consented to or assisted with an action by its stockholders, that resulted in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar and its stockholders for U.S. federal
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
income tax purposes. This tax matters agreement supplements the Tax Sharing Agreement outlined above and the Share Exchange Tax Matters Agreement outlined below, both of which continue in full force and effect.
BSS Transaction Employee Matters Agreement. Effective September 2019, in connection with the BSS Transaction, we and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, including certain
benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the BSS Business. DISH Network assumed employee-related liabilities relating to the BSS Business as part of the BSS Transaction, except that we are responsible for certain pre-BSS Transaction compensation and benefits for employees who transferred to DISH Network in connection with the BSS Transaction.
Share Exchange Agreement. In February 2017 we consummated the Share Exchange, following which we no longer operate the transferred EchoStar Technologies businesses and the Tracking Stock was retired and is no longer outstanding and all agreements, arrangements and policy statements with respect to such
Tracking Stock terminated and are of no further effect. Pursuant to the Share Exchange Agreement, we transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contained customary representations and warranties by the parties, including representations by us related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. We and DISH Network also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by us or DISH causes the transaction to be taxable to the other party after closing.
Share
Exchange Intellectual Property and Technology License Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH Network entered into an intellectual property and technology license agreement (“IPTLA”) pursuant to which we and DISH Network license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the businesses acquired pursuant to the Share Exchange, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, DISH Network granted a license back to us, among other things, for the continued use of all intellectual
property and technology that is used in our retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.
Share Exchange Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, we are responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the
Share Exchange. Both we and DISH Network made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both we and DISH Network have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, DISH Network has agreed to indemnify us if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The tax matters agreement supplements the Tax Sharing Agreement outlined above which continues in full force and effect.
Share
Exchange Employee Matters Agreement. Effective March 2017, in connection with the Share Exchange, we and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the transferred businesses. DISH Network assumed employee-related liabilities relating to the transferred businesses as part of the Share Exchange, except that we are responsible for certain pre-Share Exchange employee related litigation, and compensation and benefits for employees who transferred to DISH Network in connection with the Share Exchange.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 13. RELATED PARTY TRANSACTIONS - OTHER
Hughes Systique Corporation
We contract with Hughes Systique Corporation (“Hughes Systique”) for software development services. In addition to our approximately i42%
ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications and a member of our board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, own in the aggregate approximately i25%, on an undiluted basis, of Hughes Systique’s outstanding shares as of June 30, 2022. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest
entity and we are considered the primary beneficiary of Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes Systique. As a result, we consolidate Hughes Systique’s financial statements in these Consolidated Financial Statements.
TerreStar Solutions
DISH Network owns more than i15%
of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuant to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $i0.5 million and $i0.5
million for the three months ended June 30, 2022 and 2021, respectively, and $i1.0 million and $i0.9
million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022 we had $i0.5 million of trade accounts receivable from TSI.
NOTE 14. iCONTINGENCIES
Patents
and Intellectual Property
Many entities, including some of our competitors, have, or may have in the future, patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be tripled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these parties do not own the rights they claim, that
these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses from these parties on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.
Certain Arrangements with DISH Network
In connection with our spin-off from DISH in 2008, we entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the terms of the separation agreement, we assumed certain liabilities
that relate to our business, including certain designated liabilities for acts or omissions that occurred prior to the Spin-off. Certain specific provisions govern intellectual property related claims under which we will generally only be liable for our acts or omissions following the Spin-off and DISH Network will indemnify us for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off. In connection with the Share Exchange and BSS Transaction, we entered into the Share Exchange Agreement and the Master Transaction Agreement, respectively, and other agreements which provide, among other things, for the division of certain liabilities, including liabilities relating to taxes, intellectual property and employees and liabilities resulting from litigation and the assumption of certain liabilities that relate to the transferred businesses and assets. These
agreements also contain additional indemnification provisions between us and DISH Network for, in the case of the Share Exchange, certain pre-existing liabilities and legal proceedings and, in the case of the BSS Transaction, certain losses with respect to breaches of certain representations and covenants and certain liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Litigation
We
are involved in a number of legal proceedings concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable, and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending legal proceedings are charged to expense as incurred.
For
certain proceedings, management is unable to predict with any degree of certainty the outcome or provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons: (i) the proceedings are in various stages; (ii) damages have not been sought or specified; (iii) damages are unsupported, indeterminate and/or exaggerated in management’s opinion; (iv) there is uncertainty as to the outcome of pending trials, appeals, motions or other proceedings; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial condition, operating results or cash flows, though there is no assurance that the
resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We intend to vigorously defend the proceedings against us. In the event that a court, tribunal, other body or jury ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers.
Shareholder
Litigation
On July 2, 2019, the City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust, purporting to sue on behalf of a class of EchoStar Corporation’s stockholders, filed a complaint in the District Court of Clark County, Nevada against our directors, Charles W. Ergen, R. Stanton Dodge, Anthony M. Federico, Pradman P. Kaul, C. Michael Schroeder, Jeffrey R. Tarr, William D. Wade, and Michael T. Dugan; our chief financial officer, David J. Rayner; EchoStar Corporation; our subsidiary Hughes Satellite Systems Corporation (“HSSC”); our former subsidiary BSS Corp.; and DISH and its subsidiary Merger Sub. On September 5, 2019, the defendants filed motions to dismiss. On October
11, 2019, the plaintiffs filed an amended complaint removing Messrs. Dodge, Federico, Kaul, Schroeder, Tarr and Wade as defendants. The amended complaint alleges that Mr. Ergen, as our controlling stockholder, breached fiduciary duties to EchoStar Corporation’s minority stockholders by structuring the BSS Transaction with inadequate consideration and improperly influencing our and HSSC’s boards of directors to approve the BSS Transaction. The amended complaint also alleges that the other defendants aided and abetted such alleged breaches. The plaintiffs seek equitable and monetary relief, including the issuance of additional DISH Common Stock, and other costs and disbursements, including attorneys’ fees on behalf of the purported class. On November 11, 2019, we and the other defendants filed separate motions to dismiss plaintiff’s amended complaint and during a hearing on January
13, 2020 the court denied these motions. On February 10, 2020, we and the other defendants filed answers to the amended complaint. The Court certified plaintiff’s class on January 11, 2021. On June 18, 2021, the parties executed a settlement agreement to resolve all claims in this case. On the same day, the parties filed a joint motion for preliminary approval of the settlement agreement. The motion was granted by an order dated July 30, 2021. On December 9, 2021, the Court held a final settlement hearing. On December 10, 2021, the Court issued an Order granting final approval of the settlement agreement. The case is expected to be dismissed once the Court approves
a class distribution order.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
License Fee Dispute with Government of India, Department of Telecommunications
In 1994, the Government of India promulgated a “National Telecommunications Policy” under
which the government liberalized the telecommunications sector and required telecommunications service providers to pay fixed license fees. Pursuant to this policy, our subsidiary Hughes Communications India Private Limited (“HCIPL”), formerly known as Hughes Escorts Communications Limited, obtained a license to operate a data network over satellite using VSAT systems. In 2002, HCIPL’s license was amended pursuant to a new government policy that was first established in 1999. The new policy eliminated the fixed license fees and instead required each telecommunications service provider to pay license fees based on its adjusted gross revenue (“AGR”). In March 2005, the Indian Department of Telecommunications (“DOT”) notified HCIPL that, based on its review of HCIPL’s audited accounts and AGR statements, HCIPL must pay additional license fees and penalties and interest on such fees and penalties. HCIPL responded that the DOT had improperly calculated
its AGR by including revenue from licensed and unlicensed activities. The DOT rejected this explanation and in 2006, HCIPL filed a petition with an administrative tribunal (the “Tribunal”), challenging the DOT’s calculation of its AGR. The DOT also issued license fee assessments to other telecommunications service providers and a number of similar petitions were filed by several other such providers with the Tribunal. These petitions were amended, consolidated, remanded and re-appealed several times. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the Tribunal’s ruling. On October
24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “October 2019 Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties, but without indicating the amount HCIPL is required to pay the DOT, and ordering payment by January 23, 2020. On November 23, 2019, HCIPL and other telecommunication service providers filed a petition asking the Supreme Court to reconsider the October 2019 Order. The petition was denied on January 20, 2020. On January 22, 2020, HCIPL and other telecommunication service providers filed an application requesting that the Supreme Court modify the October 2019 Order to permit the DOT to calculate the final amount due and extend
HCIPL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court directed HCIPL and the other telecommunication service providers to explain why the Supreme Court should not initiate contempt proceedings for failure to pay the amounts due. During a hearing on March 18, 2020, the Supreme Court ordered that all amounts that were due before the October 2019 Order must be paid, including interest, penalties and interest on the penalties. The Supreme Court also ordered that the parties appear for a further hearing addressing, potentially among other things, a proposal by the DOT to allow for extended or deferred payments of amounts due. On June 11, 2020, the Supreme Court ordered HCIPL and the other telecommunication service providers to submit affidavits addressing the
proposal made by the DOT to extend the time frame for payment of the amounts owed and for HCIPL and the other telecommunication providers to provide security for such payments. On September 1, 2020, the Supreme Court issued a judgment permitting a i10-year payment schedule. Under this payment schedule, HCIPL is required to make an annual payment every March 31, through 2031. Following the Supreme Court of India’s October 2019 judgment, HCIPL made payments during the first quarter of 2020, and additional payments on March 31, 2021
and March 31, 2022.
i
The following table presents the components of the accrual:
Any
eventual payments made with respect to the ultimate outcome of this matter may be different from our accrual and such differences could be significant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Other
In addition to the above actions, we are subject
to various other legal proceedings and claims, which arise in the ordinary course of business. As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which we may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, we from time to time receive inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.
In our opinion, the amount of ultimate liability
with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We also indemnify our directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for us. Additionally, in the normal course of its business, we enter into contracts pursuant to which we may make a variety of representations and warranties and indemnify the counterparty for certain losses. Our possible exposure under these arrangements cannot be reasonably estimated
as this involves the resolution of claims made, or future claims that may be made, against us or our officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
NOTE 15. iSEGMENT REPORTING
Business segments are components of an enterprise
for which separate financial information is available and regularly evaluated by our chief operating decision maker (“CODM”), who is our Chief Executive Officer. We operate in itwo business segments, Hughes segment and ESS segment.
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”).
Total
assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise, the terms “we,”“us,”“EchoStar,” the “Company” and “our” refer to EchoStar Corporation and its subsidiaries. The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations (“Management’s Discussion and Analysis”) should be read in conjunction with our accompanying Consolidated Financial Statements and notes thereto (“Consolidated Financial Statements”) in Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”). This Management’s Discussion and Analysis is intended to help provide an
understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this Management’s Discussion and Analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Refer to the Disclosure Regarding Forward-Looking Statements in this Form 10-Q for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, refer to the Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”). Further, such forward-looking statements speak only as of the date of this
Form 10-Q and we undertake no obligation to update them.
EXECUTIVE SUMMARY
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 broadband satellite technologies and broadband internet products and services for consumer customers, which include home and small to medium-sized businesses, satellite services and solutions for enterprise customers, which include aeronautical and government enterprises.
We currently operate in two business segments: Hughes segment
and EchoStar Satellite Services segment (“ESS segment”). These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company’s Chief Executive Officer.
Our operations 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.
All amounts presented in this Management’s Discussion and Analysis, unless otherwise noted, are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Three Months Ended June 30, 2022:
•Revenue of $499.3 million
•Operating income of $45.9 million
•Net
income of $10.5 million
•Net income attributable to EchoStar common stock of $13.9 million and basic and diluted earnings per share of common stock of $0.16
•Earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”) of $141.0 million (see reconciliation of this non-GAAP measure in Results of Operations)
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Consolidated Financial Condition as of June 30, 2022:
•Total assets of $6.1 billion
•Total liabilities of $2.6 billion
•Total stockholders’ equity of $3.5 billion
•Cash and cash equivalents and marketable investment securities of $1.5 billion
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 provide 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.
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. 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 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.
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.
To date, we have not experienced a material adverse impact from the Russia-Ukraine conflict and the associated sanctions.
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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
In August 2017, we entered into a long-term contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (the “HughesNet service”) in North, Central and South America as well as enterprise broadband services. The EchoStar XXIV satellite is expected to be launched in the first half of 2023. Further delays or impediments 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. In December 2020, we entered into an agreement with a launch provider for the launch of EchoStar XXIV. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in 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:
Our current capacity limitations have resulted in constraints in adding new subscribers in certain areas. Our ability to retain existing customers is being impacted by our capacity limitations as well as competitive pressure from competitors and other technologies. Challenges in meeting demand for the three months ended June 30, 2022, resulted in higher churn and lower total subscribers despite higher new subscriber additions as compared to the three months ended
March 31, 2022.
Our Latin America consumer subscriber base in certain areas, similar to the U.S., continues to be capacity constrained. Our ability to retain existing customers is being impacted by adverse economic conditions in many areas of Latin America and capacity constraints limit our ability to add new subscribers. For the three months ended June 30, 2022, the lower net subscribers were due to lower gross additions primarily from more selective customer screening and continued high churn as compared to the three months ended March 31, 2022.
We continued to execute our strategy of maximizing financial returns by utilizing capacity for applications
other than consumer subscribers, such as community WiFi, and for other enterprise and government opportunities in Latin America. Continued success of this strategy will further reduce the available capacity for consumer subscribers.
As of June 30, 2022, our Hughes segment had $1.6 billion of contracted revenue backlog, an increase of 15.3%, as compared to December 31, 2021, primarily due to an increase in contracts from our domestic and international customers. We define Hughes segment contracted revenue backlog as our expected future revenue under enterprise customer contracts
that are non-cancelable, including lease revenue.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
ESS Segment
Our ESS segment provides satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the
EchoStar IX 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 June 30, 2022, our ESS segment had $16.8 million of contracted revenue backlog, an increase of 61.7%, as compared to December 31, 2021, primarily due to an increase in satellite service contracts with new and existing customers. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue.
Other
Business Opportunities
Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, 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 broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment, education, remote-connectivity and commerce across 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.
We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally, that we believe may allow us to increase our existing market share, increase our satellite capacity, expand into new satellite and other technologies, markets and customers, broaden our portfolio of services, products and intellectual property, make our business more valuable, align us for future growth and expansion, maximize the return on our investments and strengthen our business and relationships with
our customers. We may allocate or dispose of significant resources for long-term value that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
S-Band Strategy
We continue to explore the development and deployment of S-band technologies that we expect will reduce the cost of satellite
communications for internet-of-things, machine-to-machine communications, public protection, disaster relief and other end-to-end services worldwide and the integration of our products and services into new global, hybrid networks that leverage multiple satellites and terrestrial technologies. We believe we remain in a unique position to develop a hybrid mobile satellite service (“MSS”) and complementary ground component (“CGC”) network in Europe, including through the use of our EchoStar XXI satellite, which was placed into service in November 2017, and the EUTELSAT 10A payload. In addition, we hold additional S-band MSS and terrestrial licenses in Mexico and Chile.
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”) which
holds global S-band non-geostationary satellite spectrum rights for MSS. We have completed the process of fulfilling the remaining requirements under the International Telecommunication Union (“ITU”) Radio Regulations of bringing the Australian filing into use. The nano-satellite we launched in the second quarter of 2021 is now being used to develop and test a wide range of potential S-band applications and services.
Cybersecurity
We and the third parties with whom we do business face a constantly evolving and increasingly complex landscape of systemic cybersecurity risk in which hackers and other parties use multifaceted tactics, techniques, and procedures to execute cyberattacks and leverage security breaches and vulnerabilities. Our efforts in mitigating these risks through our cybersecurity program cannot eliminate
all cybersecurity risk, including the risk of events that cascade through multiple internal networks or systems, or to one or more suppliers or customers. Disturbances in our systems caused by cyberattacks, including attacks on our third-party contractors and suppliers, could materially harm our ability to conduct our operations and may result in losses that could have a material adverse effect on our financial position. This may also create adverse consequences for our suppliers, third-party service providers, customers, and other third parties that we interact with on a regular basis. In addition, these types of security events could be widely publicized and could materially and adversely affect our reputation with our customers, vendors and shareholders and could harm our competitive position. Such incidents could also result in the release of confidential information about our operations, financial position and performance or about our customers or other third
parties which could result in legal claims, fines, or liabilities that may not be covered by our insurance policies and could be material. Additionally, a security compromise or ransomware incident could require us to allocate significant management resources to recovery and mitigation and compel us to expend substantial additional resources to upgrade security measures to continue to protect our confidential information against cyberattacks.
In addition to our efforts to mitigate cybersecurity risk within our business, we are making investments to alleviate potential cybersecurity risk to our products. As a result of these efforts, we could discover new vulnerabilities within our products and systems. We may not discover all such vulnerabilities due to the scale of activities on our platforms, or due to other factors, including factors outside our control.
We
are not aware of any cyber-incidents with respect to our owned or leased satellites or other networks, equipment or systems that have had a material adverse effect on our business, costs, operations, prospects, results of operation or financial position during the three and six months ended June 30, 2022. There can be no assurance, however, that any such incident can be detected or thwarted or will not have such a material adverse effect in the future.
The following table presents our consolidated results of operations for the three months ended June 30, 2022 compared to the three months ended June 30, 2021:
For
the three months ended June 30,
Variance
Statements of Operations Data (1)
2022
2021
Amount
%
Revenue:
Services
and other revenue
$
414,697
$
431,279
$
(16,582)
(3.8)
Equipment revenue
84,619
68,555
16,064
23.4
Total
revenue
499,316
499,834
(518)
(0.1)
Costs and expenses:
Cost of sales - services and other
144,235
139,547
4,688
3.4
%
of total services and other revenue
34.8
%
32.4
%
Cost of sales - equipment
70,054
54,503
15,551
28.5
%
of total equipment revenue
82.8
%
79.5
%
Selling, general and administrative expenses
113,091
114,038
(947)
(0.8)
%
of total revenue
22.6
%
22.8
%
Research and development expenses
8,764
7,441
1,323
17.8
%
of total revenue
1.8
%
1.5
%
Depreciation and amortization
116,555
118,982
(2,427)
(2.0)
Impairment
of long-lived assets
711
15
696
*
Total costs and expenses
453,410
434,526
18,884
4.3
Operating
income (loss)
45,906
65,308
(19,402)
(29.7)
Other income (expense):
Interest income, net
9,072
5,240
3,832
73.1
Interest
expense, net of amounts capitalized
(14,307)
(28,868)
14,561
(50.4)
Gains (losses) on investments, net
(22,538)
30,633
(53,171)
*
Equity
in earnings (losses) of unconsolidated affiliates, net
(1,301)
(4,044)
2,743
(67.8)
Foreign currency transaction gains (losses), net
(3,642)
665
(4,307)
*
Other,
net
2,673
(12,767)
15,440
*
Total other income (expense), net
(30,043)
(9,141)
(20,902)
*
Income
(loss) before income taxes
15,863
56,167
(40,304)
(71.8)
Income tax benefit (provision), net
(5,390)
(21,152)
15,762
(74.5)
Net
income (loss)
10,473
35,015
(24,542)
(70.1)
Less: Net loss (income) attributable to non-controlling interests
3,395
2,280
1,115
48.9
Net
income (loss) attributable to EchoStar Corporation common stock
$
13,868
$
37,295
$
(23,427)
(62.8)
Other data:
EBITDA
(2)
$
141,048
$
201,057
$
(60,009)
(29.8)
Subscribers, end of period
1,346,000
1,542,000
(196,000)
(12.7)
* Percentage
is not meaningful.
(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 U.S. 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The following discussion relates to our results of operations for the three months ended June 30, 2022 and 2021.
Services and other revenue. Services and other revenue totaled $414.7 million for the three months ended June 30, 2022, a decrease of $16.6 million, or 3.8%, 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 $21.1 million due to lower broadband consumer customers, partially offset by higher sales of broadband services to our enterprise customers of $3.7 million and to our mobile satellite system and other customers of $0.9 million. These
variances reflect the negative impact of exchange rate fluctuations of $0.4 million, primarily attributable to our enterprise customers, partially offset by our consumer customers.
Equipment revenue. Equipment revenue totaled $84.6 million for the three months ended June 30, 2022, an increase of $16.1 million, or 23.4%, as compared to 2021. The increase was primarily attributable to increases in hardware sales of $18.8 million to our enterprise customers mainly associated with a certain customer in North America and to international customers, partially offset by decreases in hardware sales of $2.6 million to our consumer customers.
Cost of sales - services and other.Cost of sales - services and other totaled $144.2 million for the three months ended June 30, 2022, an increase of $4.7 million, or 3.4%, as compared to 2021. The increase was primarily attributable to increases in costs provided to our consumer and enterprise customers, mainly related to service delivery expenses.
Cost of sales - equipment. Cost of sales - equipment totaled $70.1 million for the three months ended June 30, 2022, an increase of $15.6 million, or 28.5%, as compared to 2021. The increase was primarily attributable to the corresponding increase in equipment revenue, an increase in hardware and installation support costs and change in product mix.
Selling,
general and administrative expenses. Selling, general and administrative expenses totaled $113.1 million for the three months ended June 30, 2022, a decrease of $0.9 million, or 0.8%, as compared to 2021. The decrease was primarily attributable to decreases in: i) sales and marketing expenses of $2.1 million and ii) legal expenses of $2.1 million, offset by increases in: i) bad debt expense of $2.4 million and ii) other general and administrative expenses of $1.0 million.
Depreciation and amortization. Depreciation and amortization expenses totaled $116.6 million for the three months ended June 30, 2022, a decrease of $2.4 million, or 2.0%, as compared to 2021. The decrease was primarily attributable to decreases in other property and equipment
depreciation expense of $4.3 million and decreases in amortization of intangibles of $0.6 million, partially offset by increases in amortization of our capitalized software of $1.6 million.
Interest income, net. Interest income, net totaled $9.1 million for the three months ended June 30, 2022, an increase of $3.8 million, or 73.1%, as compared to 2021, primarily attributable to increases in the yield on our marketable investment securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled $14.3 million for the three months ended June 30, 2022, a decrease of $14.6 million, or 50.4%, as compared to 2021. The
decrease was primarily attributable to a decrease of $13.0 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 $1.2 million in capitalized interest relating to the EchoStar XXIV satellite program.
Gains (losses) on investments, net. Gains (losses) on investments, net totaled $22.5 million in losses for the three months ended June 30, 2022, as compared to $30.6 million in gains for the three months ended June 30, 2021, a negative change of $53.2 million. The change was related to net increased losses on marketable investment securities and other equity securities of $50.8 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled $1.3 million in losses for the three months ended June 30, 2022, as compared to $4.0 million in losses for the three months ended June 30, 2021, a positive change of $2.7 million. The change was related to net decreased losses from our investments in our equity method investees.
Foreign currency transaction gains (losses), net. Foreign currency
transaction gains (losses), nettotaled $3.6 million in losses for the three months ended June 30, 2022, as compared to $0.7 million in gains for the three months ended June 30, 2021, a negative change of $4.3 million. The change was due to the net impact of foreign exchange rate fluctuations of certain foreign currencies during the quarter, primarily related to Latin American currencies and the Indian Rupee.
Other, net. Other, net totaled $2.7 million in gains for the three months ended June 30, 2022, as compared to $12.8 million in losses for the three months ended June 30, 2021, a positive change of $15.4 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 $(5.4) million for the three months ended June 30, 2022, as compared to $(21.2) million for the three months ended June 30, 2021. Our effective income tax rate was 34.0% and 37.7% for the three months ended June 30, 2022 and 2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended June 30, 2022 were primarily due to excluded foreign losses where the
Company carries a full valuation allowance and the impact of filing a U.S. Federal amended return. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended June 30, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes.
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 three months ended June 30,2021
$
37,295
Decrease (increase) in income tax benefit (provision), net
15,762
Increase (decrease) in other, net
15,440
Decrease (increase) in interest expense, net of amounts capitalized
14,561
Increase (decrease)
in interest income, net
3,832
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net
2,743
Decrease (increase) in net loss (income) attributable to non-controlling interests
1,115
Increase (decrease) in foreign currency transaction gains (losses), net
(4,307)
Increase (decrease) in operating income
(loss), including depreciation and amortization
(19,402)
Increase (decrease) in gains (losses) on investments, net
(53,171)
Net income (loss) attributable to EchoStar Corporation for the three months ended June 30, 2022
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
EBITDA. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in our Consolidated Financial Statements:
For
the three months ended June 30,
Variance
2022
2021
Amounts
%
Net income (loss)
$
10,473
$
35,015
$
(24,542)
(70.1)
Interest
income, net
(9,072)
(5,240)
(3,832)
73.1
Interest expense, net of amounts capitalized
14,307
28,868
(14,561)
(50.4)
Income
tax provision (benefit), net
5,390
21,152
(15,762)
(74.5)
Depreciation and amortization
116,555
118,982
(2,427)
(2.0)
Net
loss (income) attributable to non-controlling interests
3,395
2,280
1,115
48.9
EBITDA
$
141,048
$
201,057
$
(60,009)
(29.8)
The
following table reconciles the change in EBITDA:
Segment Operating Results and Capital Expenditures
The following tables present our total revenue, capital expenditures and EBITDA by segment for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Hughes Segment
For
the three months ended June 30,
Variance
2022
2021
Amount
%
Total revenue
$
491,841
$
492,276
$
(435)
(0.1)
Capital
expenditures
64,861
72,187
(7,326)
(10.1)
EBITDA
179,928
210,194
(30,266)
(14.4)
Total
revenue was $491.8 million for the three months ended June 30, 2022, a decrease of $0.4 million, or 0.1%, as compared to 2021. Services and other revenue decreased primarily due to lower sales of broadband services to our consumer customers of $21.1 million due to lower broadband consumer customers, partially offset by higher sales of broadband services to our enterprise customers of $3.7 million and to our mobile satellite system and other customers of $0.9 million. Equipment revenue increased primarily due to increases in hardware sales of $18.8 million to our enterprise customers mainly associated with a certain customer in North America and to international customers, partially offset by decreases in hardware sales of $2.6 million to our consumer customers. These variances reflect the negative impact of exchange rate fluctuations of $0.5 million, primarily attributable to our enterprise customers.
Capital
expenditures were $64.9 million for the three months ended June 30, 2022, a decrease of $7.3 million, or 10.1%, as compared to 2021, primarily due to decreases in expenditures associated with our consumer business, partially offset by increased expenditures related to the construction of our satellite-related ground infrastructure.
The following table reconciles the change in the Hughes Segment EBITDA:
Total
revenue was $4.9 million for the three months ended June 30, 2022, an increase of $0.6 million, or 13.2%, as compared to 2021, primarily due to an increase in transponder services provided to third parties.
EBITDA was $3.5 million for the three months ended June 30, 2022, an increase of $1.3 million, or 57.0%, as compared to 2021, primarily due to the increase in overall ESS segment revenue and lower expenses.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Corporate and Other Segment
For the three months ended June 30,
Variance
2022
2021
Amounts
%
Total
revenue
$
2,625
$
3,275
$
(650)
(19.8)
Capital expenditures
10,918
11,045
(127)
(1.1)
EBITDA
(42,401)
(11,380)
(31,021)
*
* Percentage
is not meaningful.
Total revenue was $2.6 million for the three months ended June 30, 2022, a decrease of $0.7 million, or 19.8%, as compared to 2021, which was primarily attributable to decreased services and other revenue from DISH Network.
Capital expenditures were $10.9 million for the three months ended June 30, 2022, which is primarily flat compared to 2021.
The following table reconciles the change in the Corporate and Other Segment EBITDA:
The following table presents our consolidated results of operations for the six months ended June 30, 2022 compared to the six months ended June 30, 2021:
For
the six months ended June 30,
Variance
Statements of Operations Data (1)
2022
2021
Amount
%
Revenue:
Services
and other revenue
$
833,508
$
861,616
$
(28,108)
(3.3)
Equipment revenue
167,342
120,800
46,542
38.5
Total
revenue
1,000,850
982,416
18,434
1.9
Costs and expenses:
Cost of sales - services and other
285,364
272,336
13,028
4.8
%
of total services and other revenue
34.2
%
31.6
%
Cost of sales - equipment
139,168
99,654
39,514
39.7
%
of total equipment revenue
83.2
%
82.5
%
Selling, general and administrative expenses
231,261
228,157
3,104
1.4
%
of total revenue
23.1
%
23.2
%
Research and development expenses
16,381
14,986
1,395
9.3
%
of total revenue
1.6
%
1.5
%
Depreciation and amortization
236,991
248,268
(11,277)
(4.5)
Impairment
of long-lived assets
711
245
466
*
Total costs and expenses
909,876
863,646
46,230
5.4
Operating
income (loss)
90,974
118,770
(27,796)
(23.4)
Other income (expense):
Interest income, net
15,494
11,189
4,305
38.5
Interest
expense, net of amounts capitalized
(29,280)
(63,535)
34,255
(53.9)
Gains (losses) on investments, net
58,148
109,233
(51,085)
(46.8)
Equity
in earnings (losses) of unconsolidated affiliates, net
(3,015)
(2,670)
(345)
12.9
Foreign currency transaction gains (losses), net
2,752
(3,404)
6,156
*
Other,
net
2,517
(13,697)
16,214
*
Total other income (expense), net
46,616
37,116
9,500
25.6
Income
(loss) before income taxes
137,590
155,886
(18,296)
(11.7)
Income tax benefit (provision), net
(38,172)
(43,299)
5,127
(11.8)
Net
income (loss)
99,418
112,587
(13,169)
(11.7)
Less: Net loss (income) attributable to non-controlling interests
5,883
3,227
2,656
82.3
Net
income (loss) attributable to EchoStar Corporation common stock
$
105,301
$
115,814
$
(10,513)
(9.1)
Other data:
EBITDA
(2)
$
394,250
$
459,727
$
(65,477)
(14.2)
Subscribers, end of period
1,346,000
1,542,000
(196,000)
(12.7)
* Percentage
is not meaningful.
(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 U.S. generally accepted accounting principles (“U.S. 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following discussion relates to our results of operations for the six months ended June 30, 2022 and 2021.
Services and other revenue. Services and other revenue totaled $833.5 million for the six months ended June 30, 2022, a decrease of $28.1 million, or 3.3%, 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 $38.1 million due to lower broadband consumer
customers, partially offset by higher sales of broadband services to our enterprise customers of $7.0 million and to our mobile satellite system and other customers of $2.4 million. These variances reflect the negative impact of exchange rate fluctuations of $1.3 million, primarily attributable to our enterprise customers, partially offset by our consumer customers.
Equipment revenue. Equipment revenue totaled $167.3 million for the six months ended June 30, 2022, an increase of $46.5 million, or 38.5%, as compared to 2021. The increase was primarily attributable to increases in hardware sales to our enterprise customers of $47.0 million mainly associated with a certain customer in North America and to international customers, partially offset by decreases in hardware sales of $3.1 million to our
consumer customers.
Cost of sales - services and other. Cost of sales - services and other totaled $285.4 million for the six months ended June 30, 2022, an increase of $13.0 million, or 4.8%, 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 costs provided to our consumer and enterprise customers, mainly related to service delivery expenses.
Cost of sales - equipment. Cost of sales - equipment totaled $139.2 million for the six months ended June 30, 2022, an increase of $39.5 million, or 39.7%, as compared to 2021. The increase
was primarily attributable to the corresponding increase in equipment revenue, an increase in hardware and installation support costs and change in product mix.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $231.3 million for the six months ended June 30, 2022, an increase of $3.1 million, or 1.4%, as compared to 2021. The increase was primarily attributable to increases in: i) bad debt expense of $6.3 million primarily due to the recovery of bad debt reserves in 2021 and ii) other general and administrative expenses of $2.1 million, offset by decreases in: i) legal expenses of $4.4 million and ii) sales and marketing expenses of $0.9 million.
Depreciation and amortization.
Depreciation and amortization expenses totaled $237.0 million for the six months ended June 30, 2022, a decrease of $11.3 million, or 4.5%, as compared to 2021. The decrease was primarily attributable to (i) decreases in our satellite depreciation of $9.1 million, mainly related to our SPACEWAY 3 satellite which was fully depreciated at the end of the first quarter of 2021, (ii) decreases in amortization of intangibles of $2.1 million, and (iii) decreases in other property and equipment depreciation expense of $5.9 million. These decreases were partially offset by increases in amortization of our capitalized software of $4.8 million.
Interest income, net. Interest income, net totaled $15.5 million for the six months ended June 30, 2022, an increase of $4.3 million,
or 38.5%, as compared to 2021, primarily attributable to increases in the yield on our marketable investment securities.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, totaled $29.3 million for the six months ended June 30, 2022, a decrease of $34.3 million, or 53.9%, 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 $3.0 million in capitalized interest relating to the EchoStar XXIV satellite program.
Gains (losses) on investments, net. Gains (losses)
on investments, net totaled $58.1 million in gains for the six months ended June 30, 2022, as compared to $109.2 million in gains for the six months ended June 30, 2021, a negative change of $51.1 million. The change was related to net decreased gains on marketable investment securities and other equity securities of $47.5 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Equity
in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled $3.0 million in losses for the six months ended June 30, 2022, as compared to $2.7 million in losses for the six months ended June 30, 2021, a negative change of $0.3 million. The change was related to net increased losses from our investments in our equity method investees.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), nettotaled $2.8 million in gains for the six months ended June 30, 2022, as compared to $3.4 million in losses for the six months ended June
30, 2021, a positive change of $6.2 million. The change was due to the net impact of foreign exchange rate fluctuations of certain foreign currencies during the period, primarily related the Indian Rupee and Latin American currencies.
Other, net. Other, net totaled $2.5 million in gains for the six months ended June 30, 2022, as compared to $13.7 million in losses for the six months ended June 30, 2021, a positive change of $16.2 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 $(38.2) million for the six months ended June
30, 2022, as compared to $(43.3) million for the six months ended June 30, 2021. Our effective income tax rate was 27.7% and 27.8% for the six months ended June 30, 2022 and 2021, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the six months ended June 30, 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 six months ended June 30, 2021 were primarily due to excluded foreign losses where the
Company carries a full valuation allowance and the impact of state and local taxes.
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 six months ended June 30, 2021
$
115,814
Decrease
(increase) in interest expense, net of amounts capitalized
34,255
Increase (decrease) in other, net
16,214
Increase (decrease) in foreign currency transaction gains (losses), net
6,156
Decrease (increase) in income tax benefit (provision), net
5,127
Increase (decrease) in interest income, net
4,305
Increase
(decrease) in net income (loss) attributable to non-controlling interest
2,656
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net
(345)
Increase (decrease) in operating income (loss), including depreciation and amortization
(27,796)
Increase (decrease) in gains (losses) on investments, net
(51,085)
Net
income (loss) attributable to EchoStar Corporation for the six months ended June 30, 2022
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
EBITDA. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other
Items below. The following table reconciles EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in our Consolidated Financial Statements:
For the six months ended June 30,
Variance
2022
2021
Amount
%
Net
income (loss)
$
99,418
$
112,587
$
(13,169)
(11.7)
Interest income, net
(15,494)
(11,189)
(4,305)
38.5
Interest
expense, net of amounts capitalized
29,280
63,535
(34,255)
(53.9)
Income tax provision (benefit), net
38,172
43,299
(5,127)
(11.8)
Depreciation
and amortization
236,991
248,268
(11,277)
(4.5)
Net loss (income) attributable to non-controlling interests
5,883
3,227
2,656
82.3
EBITDA
$
394,250
$
459,727
$
(65,477)
(14.2)
The
following table reconciles the change in EBITDA:
Segment Operating Results and Capital Expenditures
The following tables present our total revenue, capital expenditures and EBITDA by segment for the six months ended June 30, 2022, as compared to the six months ended June 30,
2021:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Hughes Segment
For
the six months ended June 30,
Variance
2022
2021
Amount
%
Total revenue
$
985,947
$
968,136
$
17,811
1.8
Capital
expenditures
125,882
154,382
(28,500)
(18.5)
EBITDA
371,098
408,772
(37,674)
(9.2)
Total
revenue was $985.9 million for the six months ended June 30, 2022, an increase of $17.8 million, or 1.8%, as compared to 2021. Services and other revenue decreased primarily due to lower sales of broadband services to our consumer customers of $38.1 million due to lower broadband consumer customers, partially offset by higher sales of broadband services to our enterprise customers of $7.0 million and to our mobile satellite system and other customers of $2.4 million. Equipment revenue increased primarily due to increases in hardware sales to our enterprise customers of $47.0 million mainly associated with a certain customer in North America and to international customers, partially offset by decreases in hardware sales of $3.1 million to our consumer customers. These variances reflect the negative impact of exchange rate fluctuations of $1.4 million, primarily attributable to our enterprise customers.
Capital
expenditures were $125.9 million for the six months ended June 30, 2022, a decrease of $28.5 million, or 18.5%, as compared to 2021, primarily due to decreases in expenditures associated with our consumer business, partially offset by increased expenditures related to the construction of our satellite-related ground infrastructure.
The following table reconciles the change in the Hughes Segment EBITDA:
Total
revenue was $9.3 million for the six months ended June 30, 2022, an increase of $1.0 million, or 11.4%, compared to 2021, primarily due to an increase in transponder services provided to third parties.
EBITDA was $6.2 million for the six months ended June 30, 2022, an increase of $2.1 million, or 49.3%, as compared to 2021, primarily due to the increase in overall ESS segment revenue and lower expenses.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Corporate and Other Segment
For the six months ended June 30,
Variance
2022
2021
Amount
%
Total
revenue
$
5,579
$
5,908
$
(329)
(5.6)
Capital expenditures
62,035
108,084
(46,049)
(42.6)
EBITDA
16,940
46,793
(29,853)
(63.8)
Total
revenue was $5.6 million for the six months ended June 30, 2022, which is primarily flat compared to 2021.
Capital expenditures were $62.0 million for the six months ended June 30, 2022, a decrease of $46.0 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:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Marketable Investment Securities
We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
As of June 30, 2022 our cash, cash equivalents and marketable investment securities totaled $1.5 billion, $0.5 billion of which we held as marketable investment securities, consisting of various debt and equity instruments
including corporate bonds, corporate equity securities, government bonds and mutual funds.
Cash Flow Activities
The following table summarizes our cash flows provided by (used for) operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows:
For
the six months ended June 30,
Variance
2022
2021
Operating activities
$
251,632
$
308,640
$
(57,008)
Investing activities
280,295
566,292
(285,997)
Financing
activities
(74,071)
(1,053,818)
979,747
Effect of exchange rates on cash and cash equivalents
(728)
(443)
(285)
Net increase (decrease) in cash and cash equivalents
$
457,128
$
(179,329)
$
636,457
Cash
flows provided by (used for) operating activities decreased by $57.0 million primarily attributable to changes in net income (loss) of $(13.2) million, depreciation and amortization of $(11.3) million, gains (losses) on investments, net of $51.1 million, foreign currency translation losses (gains), net of $(6.2) million, deferred tax provision (benefit), net of $(9.6) million, and other, net of $21.2 million and changes in assets and liabilities, net of $(89.5) million.
Cash flows provided by (used for) investing activities decreased by $286.0 million primarily attributable to our marketable investment securities net activity, other investments net activity, a decrease in expenditures for property and equipment, and the India JV formation.
Cash flows provided by (used for) financing activities improved by
$979.7 million primarily attributable to decreases in treasury share repurchases of $86.7 million and the repurchase and maturity of our 7 5/8% Senior Unsecured Notes due 2021 of $901.8 million.
Obligations and Future Capital Requirements
Contractual Obligations
As of June 30, 2022, our satellite-related commitments were $276.2 million. These primarily include payments pursuant to: i) agreements for the construction of the EchoStar XXIV satellite, ii) the EchoStar XXIV launch contract, iii) regulatory authorizations, and non-lease costs associated with our finance lease satellites, in-orbit incentives
relating to certain satellites and commitments for satellite service arrangements.
In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change.
Off-Balance Sheet Arrangements
We generally do not engage in off-balance sheet financing activities or use derivative financial instruments for hedge accounting or speculative purposes.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Letters of Credit
The following table presents the components of our letters of credit as of June 30, 2022:
Amounts
Restricted cash
$
13,752
Insurance
bonds
7,091
Credit arrangement available to our foreign subsidiaries
30,192
Total letters of credit
$
51,035
Certain letters of credit are secured by assets of our foreign subsidiaries.
Satellites
As
our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity. We may also construct, acquire or lease additional satellites or satellite capacity in the future to provide satellite services at additional orbital locations or to improve the quality of our satellite services.
Satellite Insurance
We generally do not carry in-orbit insurance on our satellites or payloads because we have assessed that the cost of insurance is not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of our joint venture agreement with Al Yah Satellite Communications Company PrJSC (“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. Our satellites and other payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.
Future Capital Requirements
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated through our operations, to fund our business. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial
relationships with new customers. Consumer revenue in our Hughes segment depends on our success in adding new and retaining existing subscribers and driving higher ARPU. Revenue in our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Service costs related to ongoing support of our direct and indirect customers and partners are typically impacted most significantly by our growth. There can be no assurance that we will have positive cash flows from operations. Furthermore, if we experience negative cash flows, our existing cash and marketable investment securities balances may be reduced.
We have a significant amount of outstanding indebtedness. As of June 30, 2022, our total indebtedness was $1.5 billion. Refer
to our Form 10-K for a discussion of the terms of our long-term debt. Our liquidity requirements will continue to be significant, primarily due to our remaining debt service requirements and the design and construction and launch of our new EchoStar XXIV satellite. We may from time to time seek to purchase amounts of our outstanding debt in open market purchases, privately negotiated transactions or otherwise, depending on market conditions, our liquidity needs and other factors. The amounts we may repurchase may be material. In addition, our future capital expenditures are likely to increase if we make acquisitions or additional investments in infrastructure, technologies or joint ventures to support and expand our business, or if we decide to purchase or build additional satellites or other technologies or assets. Other aspects of our business operations may also require additional capital. We also expect to owe U.S. Federal income tax for 2022.
We anticipate that our existing cash and marketable investment securities are sufficient to fund the currently anticipated operations of our business through the next twelve months.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Stock Repurchases
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. 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 three and six months ended June 30, 2022, we repurchased 1,924,875 and 3,386,969 shares of our Class A common stock for $42.8 million
and $77.9 million, respectively under this program. The remaining authorization under this program was $422.1 million as of June 30, 2022.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are described in Note 2. Summary of Significant Accounting Policies in our Consolidated Financial Statements in our Form 10-K. There have been no significant changes in our critical accounting policies from those presented in our Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
Our
critical accounting estimates are described in our Form 10-K under the heading Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes in our critical accounting estimates from those presented in our Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies in our Consolidated Financial Statements.
SEASONALITY
For our Hughes segment, service revenue is generally not impacted by seasonal fluctuations other than those associated
with fluctuations related to sales and promotional activities.
Our ESS segment is not generally affected by seasonal impacts.
We cannot predict with any certainty whether these trends will continue in the near future as the economy and our customers react to the COVID-19 pandemic and experience associated disruptions and dislocations.
INFLATION AND SUPPLY CHAIN
Inflation started to impact our operations in 2021 and we have continued to experience increased costs in certain functional areas including field services and customer care. We are unable to predict the extent or nature of any future inflationary pressure at this time. Our ability
to increase the prices charged for our products and services in future periods will depend primarily on competitive pressures or contractual terms.
The worldwide interruptions and delays in the supply of components, materials and parts, although not materially impacting our operations during the first half of 2022, may impact our ability to timely provide equipment deliveries in the future. These interruptions and delays could also increase the cost of our equipment which we may not be able to pass onto our customers.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue. Services and other revenue primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service professional services and facilities rental revenue.
Equipment revenue. Equipment revenue primarily includes broadband equipment
and networks sold to customers in our consumer and enterprise markets.
Cost of sales - services and other. Cost of sales - services and other primarily includes the cost of broadband services provided to our consumer and enterprise customers, maintenance and other contracted services, costs associated with satellite and transponder leases and services, professional services and facilities rental.
Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks 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 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.
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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Earnings before interest, taxes, depreciation and amortization, and Net income (loss) attributable to non-controlling interests (“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. GAAP. This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of Operations above. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other
measure determined in accordance with U.S. GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to our Form 10-K, under the heading Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk, for a more complete discussion of our risks. As of June 30, 2022, our market risk has not changed materially from those presented in our Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We continue to review our internal control over financial reporting and may from time to time make changes aimed at enhancing its effectiveness and to ensure that our systems evolve with our business.
For a discussion of legal proceedings, refer to Part I, Item 1. Financial Statements - Note 14. Contingencies - Litigation in this Form 10-Q.
ITEM 1A. RISK FACTORS
Item 1A, Risk Factors, of our Form 10-K for the year ended
December 31, 2021 includes a detailed discussion of our risk factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Pursuant to a stock repurchase program approved by our board of directors, we are authorized to repurchase up to $500.0 million of our Class A common stock through December 31, 2022. During the year ended December 31, 2021, we repurchased 10,941,872 shares of our
Class A common stock.
The following table provides information regarding repurchases of our Class A common stock during the three months ended June 30, 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)
April 1 - 30
455,303
$
24.34
455,303
$
453,870
May
1 - 31
1,141,754
21.92
1,141,754
428,845
June 1 - 30
327,818
20.47
327,818
422,136
Total
1,924,875
$
22.24
1,924,875
$
422,136
(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. All shares repurchased reflected in the table above have been converted to treasury shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Financial Results
On August 3, 2022, we issued a press release (the “Press Release”) announcing our financial results for the quarter ended June 30, 2022. A copy of the Press
Release is furnished herewith as Exhibit 99.1. The foregoing information, including the exhibit related thereto, is furnished in response to Item 2.02 of Form 8-K and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise, and shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Securities Exchange Act of 1934, as amended, except as otherwise expressly stated in any such filing.
XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
