Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014.

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM            TO           .

 

Commission File Number:  001-33807

 

EchoStar Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

26-1232727

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

100 Inverness Terrace East, Englewood, Colorado

 

80112-5308

(Address of Principal Executive Offices)

 

(Zip Code)

 

(303) 706-4000

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer T

 

Accelerated filer £

 

 

 

Non-accelerated filer £
(Do not check if a smaller reporting company)

 

Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

As of August 1, 2014, the Registrant’s outstanding common stock consisted of 43,601,705 shares of Class A common stock and 47,687,039 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Disclosure Regarding Forward-Looking Statements

 

i

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013

 

2

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)

 

3

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

 

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

39

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

62

Item 4.

Controls and Procedures

 

64

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

65

Item 1A.

Risk Factors

 

65

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

Item 3.

Defaults upon Senior Securities

 

66

Item 4.

Mine Safety Disclosures

 

66

Item 5.

Other Information

 

66

Item 6.

Exhibits

 

67

 

Signatures

 

68

 



Table of Contents

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our estimates, expectations, plans, objectives, strategies, results of operations and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms.  These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions.  Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:

 

·                  our reliance on our primary customer, DISH Network Corporation (“DISH Network”), for a significant portion of our revenue;

 

·                  the impact of variable demand and the adverse pricing environment for digital set-top boxes;

 

·                  dependence on our ability to successfully manufacture and sell our digital set-top boxes in increasing volumes on a cost-effective basis and with acceptable quality;

 

·                  our ability to bring advanced technologies to market to keep pace with our competitors;

 

·                  significant risks related to the construction, launch and operation of our satellites, such as the risk of material malfunction on one or more of our satellites, changes in the space weather environment that could interfere with the operation of our satellites, and our general lack of commercial insurance coverage on our satellites;

 

·                  uncertainty in global economic conditions, which may, among other things, cause consumers and enterprise customers to defer purchases;

 

·                  the failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment; and

 

·                  the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services.

 

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 Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“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” herein and in the 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 to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by federal securities laws.

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   FINANCIAL STATEMENTS

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

708,257

 

$

634,119

 

Marketable investment securities

 

980,303

 

986,533

 

Trade accounts receivable, net of allowance for doubtful accounts of $14,766 and $13,237, respectively

 

173,813

 

159,292

 

Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero

 

318,351

 

355,135

 

Inventory

 

63,958

 

66,084

 

Prepaid expenses

 

57,506

 

55,400

 

Deferred tax assets

 

69,603

 

69,633

 

Other current assets

 

11,255

 

29,930

 

Total current assets

 

2,383,046

 

2,356,126

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

19,179

 

16,137

 

Property and equipment, net of accumulated depreciation of $2,703,563 and $2,499,889, respectively

 

3,027,697

 

2,546,377

 

Regulatory authorizations, net

 

584,168

 

583,900

 

Goodwill

 

504,173

 

504,173

 

Other intangible assets, net

 

218,819

 

262,039

 

Other investments

 

159,600

 

169,771

 

Other receivable - DISH Network

 

90,356

 

89,811

 

Other noncurrent assets, net

 

185,100

 

173,629

 

Total noncurrent assets

 

4,789,092

 

4,345,837

 

Total assets

 

$

7,172,138

 

$

6,701,963

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable

 

$

211,334

 

$

201,416

 

Trade accounts payable - DISH Network

 

19,789

 

55,743

 

Current portion of long-term debt and capital lease obligations

 

51,080

 

69,791

 

Deferred revenue and prepayments

 

67,189

 

57,592

 

Accrued compensation

 

31,601

 

30,940

 

Accrued royalties

 

28,290

 

24,010

 

Accrued expenses and other

 

113,892

 

118,953

 

Total current liabilities

 

523,175

 

558,445

 

Noncurrent Liabilities:

 

 

 

 

 

Long-term debt and capital lease obligations, net of current portion

 

2,339,338

 

2,352,597

 

Deferred tax liabilities

 

640,851

 

488,206

 

Other noncurrent liabilities

 

110,111

 

76,484

 

Total noncurrent liabilities

 

3,090,300

 

2,917,287

 

Total liabilities

 

3,613,475

 

3,475,732

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred Stock, $.001 par value, 20,000,000 shares authorized:

 

 

 

 

 

Hughes Retail Preferred Tracking Stock, $.001 par value, 13,000,000 shares authorized, 6,290,499 issued and outstanding and zero shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

6

 

 

Common Stock, $.001 par value, 4,000,000,000 shares authorized:

 

 

 

 

 

Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 49,094,677 and 48,370,956 shares issued, and 43,562,359 and 42,838,638 shares outstanding at June 30, 2014 and December 31, 2013, respectively

 

49

 

48

 

Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at June 30, 2104 and December 31, 2013, respectively

 

48

 

48

 

Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding

 

 

 

Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding

 

 

 

Additional paid-in capital

 

3,700,437

 

3,502,005

 

Accumulated other comprehensive loss

 

(9,726

)

(14,655

)

Accumulated deficit

 

(129,055

)

(171,914

)

Treasury stock, at cost

 

(98,162

)

(98,162

)

Total EchoStar stockholders’ equity

 

3,463,597

 

3,217,370

 

Noncontrolling interest in HSS Tracking Stock

 

85,228

 

 

Other noncontrolling interests

 

9,838

 

8,861

 

Total stockholders’ equity

 

3,558,663

 

3,226,231

 

Total liabilities and stockholders’ equity

 

$

7,172,138

 

$

6,701,963

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



Table of Contents

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Equipment revenue - DISH Network

 

$

302,734

 

$

333,993

 

$

608,416

 

$

642,868

 

Equipment revenue - other

 

95,033

 

90,875

 

163,963

 

192,965

 

Services and other revenue - DISH Network

 

209,053

 

154,063

 

393,617

 

293,988

 

Services and other revenue - other

 

273,008

 

251,072

 

539,855

 

495,636

 

Total revenue

 

879,828

 

830,003

 

1,705,851

 

1,625,457

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

Cost of sales - equipment (exclusive of depreciation and amortization)

 

337,376

 

365,037

 

658,046

 

718,892

 

Cost of sales - services and other (exclusive of depreciation and amortization)

 

204,269

 

189,330

 

414,362

 

368,624

 

Selling, general and administrative expenses

 

90,492

 

90,386

 

178,124

 

184,562

 

Research and development expenses

 

14,574

 

16,354

 

29,156

 

33,848

 

Depreciation and amortization

 

140,647

 

128,144

 

273,873

 

254,843

 

Impairment of long-lived asset

 

 

34,664

 

 

34,664

 

Total costs and expenses

 

787,358

 

823,915

 

1,553,561

 

1,595,433

 

Operating income

 

92,470

 

6,088

 

152,290

 

30,024

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

2,147

 

1,982

 

4,745

 

3,959

 

Interest expense, net of amounts capitalized

 

(44,687

)

(48,672

)

(90,731

)

(97,772

)

Realized gains on marketable investment securities and other investments (includes reclassification of realized gains on available-for-sale (“AFS”) securities out of accumulated other comprehensive loss of $6, $17,968, $34 and $34,498, respectively), net

 

6

 

17,967

 

34

 

37,430

 

Equity in losses of unconsolidated affiliates, net

 

(1,210

)

(2,477

)

(3,061

)

(6,382

)

Other, net

 

(201

)

(353

)

435

 

5,128

 

Total other expense, net

 

(43,945

)

(31,553

)

(88,578

)

(57,637

)

Income (loss) before income taxes

 

48,525

 

(25,465

)

63,712

 

(27,613

)

Income tax benefit (provision), net

 

(18,911

)

15,882

 

(22,068

)

21,528

 

Net income (loss)

 

29,614

 

(9,583

)

41,644

 

(6,085

)

Less: Net loss attributable to noncontrolling interest in HSS Tracking Stock

 

(1,619

)

 

(1,943

)

 

Less: Net income attributable to other noncontrolling interests

 

428

 

176

 

728

 

216

 

Net income (loss) attributable to EchoStar

 

30,805

 

(9,759

)

42,859

 

(6,301

)

Less: Net loss attributable to Hughes Retail Preferred Tracking Stock (Note 2)

 

(2,989

)

 

(3,587

)

 

Net income (loss) attributable to EchoStar common stock

 

$

33,794

 

$

(9,759

)

$

46,446

 

$

(6,301

)

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

91,097

 

88,179

 

90,894

 

88,681

 

Diluted

 

92,714

 

88,179

 

92,546

 

88,681

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

$

(0.11

)

$

0.51

 

$

(0.07

)

Diluted

 

$

0.36

 

$

(0.11

)

$

0.50

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

29,614

 

$

(9,583

)

$

41,644

 

$

(6,085

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

3,208

 

(13,259

)

7,715

 

(11,309

)

Unrealized gains on AFS securities and other

 

(3,252

)

7,135

 

(2,503

)

14,664

 

Recognition of previously unrealized gains on AFS securities in net income (loss)

 

(6

)

(17,968

)

(34

)

(34,498

)

Total other comprehensive income (loss), net of tax

 

(50

)

(24,092

)

5,178

 

(31,143

)

Comprehensive income (loss)

 

29,564

 

(33,675

)

46,822

 

(37,228

)

Less: Comprehensive loss attributable to noncontrolling interest in HSS Tracking Stock

 

(1,619

)

 

(1,943

)

 

Less: Comprehensive income (loss) attributable to other noncontrolling interests

 

442

 

(470

)

976

 

(408

)

Comprehensive income (loss) attributable to EchoStar

 

$

30,741

 

$

(33,205

)

$

47,789

 

$

(36,820

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Hughes Retail

 

Class

 

 

 

Accumulated

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

Preferred

 

A and B

 

Additional

 

Other

 

 

 

 

 

interest in

 

Other

 

 

 

 

 

Tracking

 

Common

 

Paid-In

 

Comprehensive

 

Accumulated

 

Treasury

 

HSS Tracking

 

Noncontrolling

 

 

 

 

 

Stock

 

Stock

 

Capital

 

Income (Loss)

 

Deficit

 

Stock

 

Stock

 

Interests

 

Total

 

Balance, December 31, 2012

 

$

 

$

93

 

$

3,394,646

 

$

18,752

 

$

(174,439

)

$

(98,162

)

$

 

$

9,337

 

$

3,150,227

 

Issuances of Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

2

 

41,254

 

 

 

 

 

 

41,256

 

Employee benefits

 

 

 

4,761

 

 

 

 

 

 

4,761

 

Employee Stock Purchase Plan

 

 

 

4,465

 

 

 

 

 

 

4,465

 

Stock-based compensation

 

 

 

10,052

 

 

 

 

 

 

10,052

 

Other, net

 

 

 

2,025

 

 

 

 

 

(467

)

1,558

 

Net income (loss)

 

 

 

 

 

(6,301

)

 

 

216

 

(6,085

)

Unrealized losses on AFS securities, net and other

 

 

 

 

(19,834

)

 

 

 

 

(19,834

)

Foreign currency translation adjustment

 

 

 

 

(10,685

)

 

 

 

(624

)

(11,309

)

Balance, June 30, 2013

 

$

 

$

95

 

$

3,457,203

 

$

(11,767

)

$

(180,740

)

$

(98,162

)

$

 

$

8,462

 

$

3,175,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

 

$

96

 

$

3,502,005

 

$

(14,655

)

$

(171,914

)

$

(98,162

)

$

 

$

8,861

 

$

3,226,231

 

Issuances of Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

1

 

8,264

 

 

 

 

 

 

8,265

 

Employee benefits

 

 

 

10,310

 

 

 

 

 

 

10,310

 

Employee Stock Purchase Plan

 

 

 

6,149

 

 

 

 

 

 

6,149

 

Stock-based compensation

 

 

 

7,178

 

 

 

 

 

 

7,178

 

Issuance of Hughes Retail Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tracking Stock (Note 2)

 

6

 

 

163,510

 

 

 

 

87,171

 

 

250,687

 

Other, net

 

 

 

3,021

 

 

 

 

 

 

3,021

 

Net income (loss)

 

 

 

 

 

42,859

 

 

(1,943

)

728

 

41,644

 

Unrealized gains on AFS securities, net and other

 

 

 

 

(2,537

)

 

 

 

 

(2,537

)

Foreign currency translation adjustment

 

 

 

 

7,466

 

 

 

 

249

 

7,715

 

Balance, June 30, 2014

 

$

6

 

$

97

 

$

3,700,437

 

$

(9,726

)

$

(129,055

)

$

(98,162

)

$

85,228

 

$

9,838

 

$

3,558,663

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Six Months

 

 

 

Ended June 30,

 

 

 

2014

 

2013

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

41,644

 

$

(6,085

)

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

273,873

 

254,843

 

Equity in losses of unconsolidated affiliates, net

 

3,061

 

6,382

 

Realized gains on marketable investment securities and other investments, net

 

(34

)

(37,430

)

Impairment of long-lived asset

 

 

34,664

 

Stock-based compensation

 

7,178

 

10,052

 

Deferred tax provision (benefit)

 

10,512

 

(26,865

)

Changes in current assets and current liabilities, net

 

22,947

 

(43,155

)

Changes in noncurrent assets and noncurrent liabilities, net

 

(9,075

)

(6,023

)

Other, net

 

21,868

 

6,892

 

Net cash flows from operating activities

 

371,974

 

193,275

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(599,677

)

(557,165

)

Sales and maturities of marketable investment securities

 

594,306

 

486,891

 

Purchases of property and equipment

 

(269,717

)

(158,272

)

Changes in restricted cash and marketable investment securities

 

(3,042

)

7,962

 

Purchase of strategic investments

 

(27

)

(7,295

)

Other, net

 

(10,376

)

(3,911

)

Net cash flows from investing activities

 

(288,533

)

(231,790

)

Cash Flows from Financing Activities:

 

 

 

 

 

Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan

 

14,414

 

45,721

 

Repayment of long-term debt and capital lease obligations

 

(36,359

)

(38,707

)

Net proceeds from issuance of Tracking Stock (Note 2)

 

10,104

 

 

Other

 

1,082

 

816

 

Net cash flows from financing activities

 

(10,759

)

7,830

 

Effect of exchange rates on cash and cash equivalents

 

1,456

 

(795

)

Net increase in cash and cash equivalents

 

74,138

 

(31,480

)

Cash and cash equivalents, beginning of period

 

634,119

 

731,614

 

Cash and cash equivalents, end of period

 

$

708,257

 

$

700,134

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

94,195

 

$

98,425

 

Capitalized interest

 

$

7,689

 

$

711

 

Cash paid for income taxes

 

$

8,711

 

$

5,676

 

Employee benefits paid in Class A common stock

 

$

10,310

 

$

4,761

 

Satellites and other assets financed under capital lease obligations

 

$

2,138

 

$

1,812

 

Capitalized in-orbit incentive obligations

 

$

 

$

18,000

 

Transfer of regulatory authorization to DISH Network included in accounts receivable

 

$

 

$

23,000

 

Reduction of capital lease obligation for AMC-16

 

$

 

$

6,694

 

Increase (decrease) in capital expenditures included in accounts payable

 

$

4,981

 

$

(12,576

)

Net assets transferred from DISH Network in exchange for Tracking Stock (Note 2)

 

$

398,095

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                     Organization and Business Activities

 

Principal Business

 

EchoStar Corporation (together with its subsidiaries is referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada.  We are a global provider of satellite operations, video delivery solutions, digital set-top boxes, and broadband satellite technologies and services for home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments.  Our Class A common stock is publicly traded on the Nasdaq Global Select Market under the symbol “SATS.”

 

We currently operate in three business segments.

 

·                  EchoStar Technologies (“ETC”) — which designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers, telecommunication companies and international cable companies.  Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network Corporation and its subsidiaries (“DISH Network”).  In addition, we provide our Slingboxes directly to consumers via retail outlets and online.

 

·                  Hughes — which provides satellite broadband internet access to North American consumers and broadband network services and equipment to domestic and international enterprise markets.  The Hughes segment also provides managed services to large enterprises and solutions to customers for mobile satellite systems.

 

·                  EchoStar Satellite Services (“ESS”) — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and occasional-use basis primarily to DISH Network and also to Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture that we entered into in 2008, as well as to United States (“U.S.”) government service providers, state agencies, internet service providers, broadcast news organizations, programmers, and private enterprise customers.

 

In 2008, DISH Network completed its distribution to us of its digital set-top box business and certain infrastructure and other assets, including certain of their satellites, uplink and satellite transmission assets, real estate, and other assets and related liabilities (the “Spin-off”).  Since the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies.  However, as a result of the Satellite and Tracking Stock Transaction, described in Note 2 below, DISH Network owns preferred tracking stock representing an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment.  In addition, a substantial majority of the voting power of the shares of DISH Network and EchoStar is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.

 

Note 2.                     Hughes Retail Preferred Tracking Stock

 

Satellite and Tracking Stock Transaction

 

On February 20, 2014, EchoStar entered into agreements with certain subsidiaries of DISH Network pursuant to which effective March 1, 2014, (i) EchoStar issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “EchoStar Tracking Stock”) and Hughes Satellite Systems Corporation (“HSS”), a subsidiary of EchoStar, also issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “HSS Tracking Stock” and together with the EchoStar Tracking Stock, the “Tracking Stock”) to DISH Network in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV) (including the assumption of related in-orbit incentive obligations) and $11.4 million in cash and (ii) DISH Network began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”).  The Tracking

 

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Stock tracks the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group” or “HRG”).

 

EchoStar and HSS have adopted policy statements (the “Policy Statements”) setting forth management and allocation policies for purposes of attributing all of the business and operations of EchoStar to either the Hughes Retail Group or the “EchoStar Group,” which is defined as all other operations of EchoStar, including all existing and future businesses, other than the Hughes Retail Group.  Among other things, the Policy Statements govern how assets, liabilities, revenue and expenses are attributed or allocated between HRG and the EchoStar Group.  Such attributions and allocations generally do not affect the amounts reported in our consolidated financial statements, except for the attribution of stockholders’ equity and net income or loss between the holders of Tracking Stock and common stock.  The Policy Statements also do not significantly affect the way that management assesses operating performance and allocates resources within our Hughes segment.

 

See Note 9 for information about the five satellites received from DISH Network, Note 14 for information about the assumed in-orbit incentive obligations, and Note 16 for information regarding the related satellite services agreements with DISH Network.  We provide unaudited attributed financial information for HRG and the EchoStar Group in an exhibit to our periodic reports on Form 10-Q and Form 10-K.  Set forth below is information about certain terms of the Tracking Stock and the initial recording of the Satellite and Tracking Stock Transaction in our consolidated financial statements.

 

Description of the Tracking Stock

 

Tracking stock is a type of capital stock that the issuing company intends to reflect or “track” the economic performance of a particular business component within the company, rather than reflect the economic performance of the company as a whole.  The Tracking Stock is intended to track the economic performance of the Hughes Retail Group.  The shares of the Tracking Stock issued to DISH Network represent an aggregate 80.0% economic interest in the Hughes Retail Group (51.89% issued as EchoStar Tracking Stock and 28.11% issued as HSS Tracking Stock).  In addition to the remaining 20.0% economic interest in the Hughes Retail Group, EchoStar retains all economic interest in the wholesale satellite broadband business and other businesses of EchoStar.  The Hughes Retail Group is not a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements.  Holders of the Tracking Stock have no direct claim to the assets of the Hughes Retail Group; rather, holders of the Tracking Stock are stockholders of its respective issuer (EchoStar or HSS) and are subject to all risks and liabilities of the issuer.  Holders of shares of the Tracking Stock vote with holders of the outstanding shares of common stock of its respective issuer, as a single class, with respect to any and all matters presented to stockholders for their action or consideration.  Each share of the Tracking Stock is entitled to one-tenth (1/10th) of one vote.  The EchoStar Tracking Stock is a series of preferred stock consisting of 13,000,000 authorized shares with a par value of $0.001 per share, of which 6,290,499 shares were issued to DISH Network on March 1, 2014.  The HSS Tracking Stock is a series of HSS preferred stock consisting of 300 authorized shares with a par value of $0.001 per share, of which 81.128 shares were issued to DISH Network on March 1, 2014.  Following the issuance of the shares of the EchoStar Tracking Stock and the HSS Tracking Stock, DISH Network held 6.5% and 7.5% of the aggregate number of outstanding shares of EchoStar and HSS capital stock, respectively.

 

Investor Rights Agreement

 

In connection with the Satellite and Tracking Stock Transaction, EchoStar, HSS and DISH Network entered into an agreement (the “Investor Rights Agreement”) setting forth certain rights and obligations of the parties with respect to the Tracking Stock.  Among other provisions, the Investor Rights Agreement provides: (i) certain information and consultation rights for DISH Network; (ii) certain transfer restrictions on the Tracking Stock and certain rights and obligations to offer and sell under certain circumstances (including a prohibition on transfer of the Tracking Stock until March 1, 2015), with continuing transfer restrictions (including a right of first offer in favor of EchoStar) thereafter, an obligation to sell the Tracking Stock to us in connection with a change of control of DISH Network and a right to require us to repurchase the Tracking Stock in connection with a change of control of EchoStar, in each case subject to certain terms and conditions; and (iii) certain protective covenants afforded to holders of the Tracking Stock.

 

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In addition, the Investor Rights Agreement provides that DISH Network may, on or after September 1, 2016, require EchoStar to use its commercially reasonable efforts to register some or all of the outstanding shares of the Tracking Stock under the Securities Act of 1933, subject to certain terms and conditions (including our right, upon the receipt of a demand for registration, to offer to repurchase all of the Tracking Stock).  In connection with any demand for registration, DISH Network may require any outstanding shares of the HSS Tracking Stock to be exchanged for shares of the EchoStar Tracking Stock with an equivalent economic interest in the Hughes Retail Group.  In the event that a registration of shares of Tracking Stock is effected, EchoStar is required to use its reasonable best efforts to amend the terms of the Tracking Stock so that the Tracking Stock will be convertible or exchangeable for shares of EchoStar Class A Common Stock with equivalent market value.

 

Initial Recording of the Satellite and Tracking Stock Transaction

 

EchoStar and DISH Network are entities under common control.  In accordance with accounting principles that apply to transfers of assets between entities under common control, EchoStar and HSS recorded the net assets received from DISH Network in the Satellite and Tracking Stock Transaction at their historical carrying amounts as reflected in DISH Network’s consolidated financial statements as of February 28, 2014, the day prior to the effective date of the Satellite and Tracking Stock Transaction.  DISH Network transferred the EchoStar I, EchoStar VII, and EchoStar X satellites to HSS and transferred the EchoStar XI and EchoStar XIV satellites to EchoStar.  The historical carrying amounts of net assets transferred to EchoStar and HSS were as follows:

 

 

 

EchoStar(1)

 

HSS

 

Total

 

 

 

(In thousands)

 

Cash

 

$

 

$

11,404

 

$

11,404

 

Property and equipment, net

 

349,243

 

82,837

 

432,080

 

Current liabilities

 

(3,479

)

(3,076

)

(6,555

)

Noncurrent liabilities

 

(30,121

)

(8,713

)

(38,834

)

Transferred net assets

 

$

315,643

 

$

82,452

 

$

398,095

 

 


(1)         All of the net assets received by EchoStar as part of the Satellite and Tracking Stock Transaction were immediately transferred to HSS and are being used by our EchoStar Satellite Services segment.

 

The transferred net assets increased EchoStar stockholders’ equity and HSS stockholders’ equity by amounts that reflect the carrying amounts of net assets that would be distributed to holders of the Tracking Stock and common stock in a hypothetical liquidation, which would be in proportion to the relative market values (as defined in applicable agreements) of each class of stock.  The amounts credited to equity were reduced by direct costs of the Tracking Stock issuance and deferred income tax liabilities arising from differences between the financial reporting carrying amounts and the tax bases of the transferred satellites.

 

The net amounts credited to EchoStar stockholders’ equity for the EchoStar Tracking Stock (primarily additional paid-in capital) and the noncontrolling interest in the HSS Tracking Stock were as follows:

 

 

 

EchoStar

 

Noncontrolling

 

 

 

 

 

Stockholders

 

Interest

 

Total

 

 

 

(In thousands)

 

Transferred net assets

 

$

315,643

 

$

82,452

 

$

398,095

 

Offering costs, net of tax

 

(2,302

)

(610

)

(2,912

)

Deferred income taxes

 

(114,525

)

(29,971

)

(144,496

)

Reallocation based on relative liquidation values

 

(35,300

)

35,300

 

 

Net increase in stockholders’ equity

 

$

163,516

 

$

87,171

 

$

250,687

 

 

Note 3.                    Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do not

 

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include all of the information and notes required for complete financial statements prepared in accordance with GAAP.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling interest and variable interest entities where we are the primary beneficiary.  For entities we control but do not wholly-own, we record a noncontrolling interest within stockholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.  For the noncontrolling interest in the HSS Tracking Stock, we periodically attribute a portion of HSS net income or loss to the noncontrolling interest in HSS Tracking Stock with such portion equal to the economic interest (currently 28.11%) in the Hughes Retail Group represented by the HSS Tracking Stock, as determined in accordance with the Policy Statements and other documents governing the Tracking Stock. We use the equity method to account for investments in entities that we do not control but have the ability to significantly influence the operating decisions of the investee.  When we do not have the ability to significantly influence the operating decisions of the investee, the cost method is used.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to the Condensed Consolidated Financial Statements.  Estimates are used in accounting for, among other things, amortization periods of deferred revenue and deferred subscriber acquisition costs, percentage-of-completion related to revenue recognition, allowances for doubtful accounts, allowances for sales returns and rebates, warranty obligations, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, lease classifications, asset impairments, useful lives and amortization methods of property, equipment and intangible assets, goodwill impairment testing, royalty obligations, and allocations to HRG that affect the periodic determination of net income or loss attributable to the noncontrolling interest in the HSS Tracking Stock.  We base our estimates and assumptions on historical experience and on various other factors that we believe to be relevant under the circumstances.  Weakened economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. 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 Condensed Consolidated Financial Statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they occur or prospectively if the revised estimate affects future periods.

 

Fair Value Measurements

 

We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs.  We utilize the highest level of inputs available according to the following hierarchy in determining fair value:

 

·                  Level 1, defined as observable inputs being quoted prices in active markets for identical assets;

 

·                  Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

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·                  Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants, therefore requiring assumptions based on the best information available.

 

Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period.  There were no transfers between levels for the six months ended June 30, 2014 or 2013.

 

As of June 30, 2014 and December 31, 2013, the carrying amount of our cash and cash equivalents, trade accounts receivable, net of allowance for doubtful accounts, accounts payable and accrued liabilities were equal to or approximated fair value due to their short-term nature or proximity to current market rates.

 

Fair values of our current marketable investment securities are based on a variety of observable market inputs.  For our investments in publicly traded equity securities, fair value ordinarily is determined based on a Level 1 measurement that reflects quoted prices for identical securities in active markets.  Fair values of our investments in marketable debt securities generally are based on Level 2 measurements, as the markets for debt securities are less active.  Trades of identical debt securities on or near the measurement date are considered a strong indication of fair value.  Matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features also may be used to determine fair value of our investments in marketable debt securities.

 

Fair values for our publicly traded long-term debt are based on quoted market prices in less active markets and are categorized as Level 2 measurements.  The fair values of our privately held debt are Level 2 measurements and are estimated to approximate their carrying amounts based on the proximity of their interest rates to current market rates.  See Note 11 for the fair value of our long-term debt.  As of June 30, 2014 and December 31, 2013, the fair values of our orbital incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $89.0 million and $48.4 million, respectively.  We use fair value measurements from time-to-time in connection with impairment testing and the assignment of purchase consideration to assets and liabilities of acquired companies that typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”  ASU 2014-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods and may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption.  Early adoption is not permitted.  Management has not selected a transition method and is assessing the impact of adopting this new accounting standard on our financial statements and related disclosures.

 

Note 4.                     Earnings per Share

 

We present basic earnings per share (“EPS”) and diluted EPS for our Class A and Class B common stock.  The EchoStar Tracking Stock is a participating security that shares in our consolidated earnings and therefore, effective March 1, 2014, the issuance date of the EchoStar Tracking Stock, we apply the two-class method to calculate EPS.  Under the two-class method, we allocate net income or loss attributable to EchoStar between common stock and the EchoStar Tracking Stock considering both dividends declared on each class of stock and the participation rights of each class of stock in undistributed earnings.  Based on the 51.89% economic interest in the Hughes Retail Group currently outstanding as the EchoStar Tracking Stock, we allocate undistributed earnings to the EchoStar Tracking Stock based on 51.89% of the attributed net income or loss of the Hughes Retail Group.  For the three and six months ended June 30, 2014, we allocated a net loss of $3.0 million and $3.6 million to the EchoStar Tracking Stock, respectively, reflecting DISH Network’s 51.89% economic interest (represented by the EchoStar Tracking Stock) in the net loss of the Hughes Retail Group for the period from the issuance of the EchoStar Tracking Stock on March 1, 2014 to June 30, 2014.  Moreover, because the reported amount of “Net

 

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income (loss) attributable to EchoStar” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) excludes DISH Network’s 28.11% economic interest (represented by the HSS Tracking Stock) in the net loss of the Hughes Retail Group (reported as a noncontrolling interest), the amount of consolidated net income or loss allocated to holders of Class A and Class B common stock effectively excludes an aggregate 80.0% interest in the attributed net loss of the Hughes Retail Group.

 

Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing “Net income (loss) attributable to EchoStar” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if our common stock awards were exercised.  The potential dilution from common stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period.  The calculation of our diluted weighted-average common shares outstanding excluded (i) underlying options to purchase shares of our Class A common stock, as their effect is anti-dilutive, of 0.7 million and 1.6 million shares for the three months ended June 30, 2014 and 2013, respectively, and 0.7 million and 1.4 million shares for the six months ended June 30, 2014 and 2013, respectively, and (ii) shares of our Class A common stock that are contingently issuable pursuant to our performance based stock incentive plan based upon meeting a company-specific performance measure by March 31, 2015, which was not probable of being achieved as of June 30, 2014 of 0.7 million and 0.7 million shares for the three and six months ended June 30, 2014 and 2013, respectively.

 

The following table presents basic and diluted EPS amounts for all periods and the corresponding weighted-average shares outstanding used in the calculations.

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) attributable to EchoStar

 

$

30,805

 

$

(9,759

)

$

42,859

 

$

(6,301

)

Net income (loss) attributable to EchoStar Tracking Stock

 

(2,989

)

 

(3,587

)

 

Net income (loss) attributable to EchoStar common stock

 

$

33,794

 

$

(9,759

)

$

46,446

 

$

(6,301

)

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding :

 

 

 

 

 

 

 

 

 

Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

91,097

 

88,179

 

90,894

 

88,681

 

Dilutive impact of stock awards outstanding

 

1,617

 

 

1,652

 

 

Diluted

 

92,714

 

88,179

 

92,546

 

88,681

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

$

(0.11

)

$

0.51

 

$

(0.07

)

Diluted

 

$

0.36

 

$

(0.11

)

$

0.50

 

$

(0.07

)

 

Note 5.                    Other Comprehensive Income (Loss) and Related Tax Effects

 

We have not recognized any tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions.  We have not recognized any tax effects on unrealized gains or losses on available-for-sale securities because such gains or losses would affect the amount of existing capital loss carryforwards for which the related deferred tax asset has been fully offset by a valuation allowance.

 

Accumulated other comprehensive loss includes cumulative foreign currency translation losses of $24.6 million and $32.1 million as of June 30, 2014 and December 31, 2013, respectively.

 

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Note 6.                     Investment Securities

 

Our marketable investment securities, restricted cash and cash equivalents, and other investments consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Marketable investment securities—current:

 

 

 

 

 

Corporate bonds

 

$

858,451

 

$

833,791

 

VRDNs

 

31,095

 

34,705

 

Strategic equity securities

 

32,715

 

33,613

 

Other

 

58,042

 

84,424

 

Total marketable investment securities—current

 

980,303

 

986,533

 

Restricted marketable investment securities (1)

 

10,560

 

7,965

 

Total

 

990,863

 

994,498

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

8,619

 

8,172

 

 

 

 

 

 

 

Other investments—noncurrent:

 

 

 

 

 

Cost method

 

25,977

 

25,977

 

Equity method

 

133,623

 

143,794

 

Total other investments—noncurrent

 

159,600

 

169,771

 

Total marketable investment securities, restricted cash and cash equivalents, and other investments

 

$

1,159,082

 

$

1,172,441

 

 


(1)         Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” in our Condensed Consolidated Balance Sheets.

 

Marketable Investment Securities

 

Our marketable investment securities portfolio consists of various debt and equity instruments, all of which are classified as available-for-sale.

 

Corporate Bonds

 

Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries.

 

Variable Rate Demand Notes (“VRDNs”)

 

VRDNs are long-term floating rate bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.  All of the put options are secured by a pledged liquidity source.  Our VRDN portfolio is comprised of investments in municipalities and corporations, which are backed by financial institutions or other highly rated companies that serve as the pledged liquidity source.  While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.

 

Strategic Equity Securities

 

Our strategic investment portfolio consists of investments in shares of common stock of public companies, which are highly speculative and have experienced and continue to experience volatility.  The value of our investment portfolio depends on the value of such shares of common stock.

 

Other

 

Our other current marketable investment securities portfolio includes investments in various debt instruments, including government bonds.

 

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Restricted Cash and Marketable Investment Securities

 

As of June 30, 2014 and December 31, 2013, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.

 

Other Investments - Noncurrent

 

We have several strategic investments in certain equity securities that are accounted for using either the equity or the cost method of accounting.  Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans.  Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

The components of our available-for-sale investments are summarized in the table below.

 

 

 

Amortized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

As of June 30, 2014

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

858,406

 

$

304

 

$

(259

)

$

858,451

 

VRDNs

 

31,095

 

 

 

31,095

 

Other (including restricted)

 

68,583

 

20

 

(1

)

68,602

 

Equity securities - strategic

 

17,904

 

14,811

 

 

32,715

 

Total marketable investment securities

 

$

975,988

 

$

15,135

 

$

(260

)

$

990,863

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

833,888

 

$

227

 

$

(324

)

$

833,791

 

VRDNs

 

34,705

 

 

 

34,705

 

Other (including restricted)

 

92,876

 

14

 

(501

)

92,389

 

Equity securities - strategic

 

15,272

 

18,341

 

 

33,613

 

Total marketable investment securities

 

$

976,741

 

$

18,582

 

$

(825

)

$

994,498

 

 

As of June 30, 2014, restricted and non-restricted marketable investment securities included debt securities of $756.5 million with contractual maturities of one year or less and $201.6 million with contractual maturities greater than one year.  We may realize proceeds from certain investments prior to their contractual maturity as a result of our ability to sell these securities prior to their contractual maturity.

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that our available-for-sale securities have been in an unrealized loss position.  We do not intend to sell these securities before they recover or mature, and it is more likely than not that we will hold these securities until they recover or mature.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these securities are primarily related to temporary market fluctuations.

 

 

 

As of

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

(In thousands)

 

Less than 12 months

 

$

477,201

 

$

(256

)

$

571,592

 

$

(825

)

12 months or more

 

12,041

 

(4

)

 

 

Total

 

$

489,242

 

$

(260

)

$

571,592

 

$

(825

)

 

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Realized Gains (Losses) on Marketable Investment Securities

 

We recognized minimal gains from the sales of our available-for-sale marketable investment securities for the three and six months ended June 30, 2014.  For the three and six months ended June 30, 2013, we recognized gains from the sales of our available-for-sale marketable investment securities of $18.0 million and $37.4 million, respectively.  We recognized minimal losses from the sales of our available-for-sale marketable investment securities for the three and six months ended June 30, 2014 and 2013.

 

Proceeds from sales of our available-for-sale marketable investment securities totaled $4.8 million and $5.4 million  for the three and six months ended June 30, 2014, respectively, and $53.9 million and $95.3 million for the three and six months ended June 30, 2013, respectively.

 

Fair Value Measurements

 

Our current marketable investment securities are measured at fair value on a recurring basis as summarized in the table below.  As of June 30, 2014 and December 31, 2013, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

 

 

 

As of

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Total

 

Level 1

 

Level 2

 

 

 

(In thousands)

 

Cash equivalents (including restricted)

 

$

593,659

 

$

7,864

 

$

585,795

 

$

548,714

 

$

49,338

 

$

499,376

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

858,451

 

$

 

$

858,451

 

$

833,791

 

$

 

$

833,791

 

VRDNs

 

31,095

 

 

31,095

 

34,705

 

 

34,705

 

Other (including restricted)

 

68,602

 

 

68,602

 

92,389

 

 

92,389

 

Equity securities - strategic

 

32,715

 

32,715

 

 

33,613

 

33,613

 

 

Total marketable investment securities

 

$

990,863

 

$

32,715

 

$

958,148

 

$

994,498

 

$

33,613

 

$

960,885

 

 

Note 7.                     Trade Accounts Receivable

 

Our trade accounts receivable consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Trade accounts receivable

 

$

179,025

 

$

164,900

 

Contracts in process, net

 

9,554

 

7,629

 

Total trade accounts receivable

 

188,579

 

172,529

 

Allowance for doubtful accounts

 

(14,766

)

(13,237

)

Trade accounts receivable - DISH Network

 

318,351

 

355,135

 

Total trade accounts receivable, net

 

$

492,164

 

$

514,427

 

 

As of June 30, 2014 and December 31, 2013, progress billings offset against contracts in process amounted to $13.0 million and $2.6 million, respectively.

 

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Note 8.                     Inventory

 

Our inventory consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Finished goods

 

$

49,246

 

$

50,357

 

Raw materials

 

6,203

 

8,658

 

Work-in-process

 

8,509

 

7,069

 

Total inventory

 

$

63,958

 

$

66,084

 

 

Note 9.                     Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

Depreciable

 

As of

 

 

 

Life

 

June 30,

 

December 31,

 

 

 

(In Years)

 

2014

 

2013

 

 

 

 

 

(In thousands)

 

Land

 

 

$

42,574

 

$

42,850

 

Buildings and improvements

 

3-40

 

 

380,758

 

377,208

 

Furniture, fixtures, equipment and other

 

1-12

 

 

1,192,990

 

1,157,325

 

Customer rental equipment

 

2-4

 

 

436,998

 

374,688

 

Satellites - owned

 

2-15

 

2,381,120

 

1,949,040

 

Satellites acquired under capital leases

 

10-15

 

 

935,104

 

935,104

 

Construction in progress

 

 

361,716

 

210,051

 

Total property and equipment

 

 

 

5,731,260

 

5,046,266

 

Accumulated depreciation

 

 

 

(2,703,563

)

(2,499,889

)

Property and equipment, net

 

 

 

$

3,027,697

 

$

2,546,377

 

 

As of June 30, 2014, our owned satellites included $432.1 million for the five satellites we received from DISH Network as part of the Satellite and Tracking Stock Transaction discussed in Note 2.  This amount represents the net carrying amount of those satellites in DISH Network’s consolidated financial statements as of February 28, 2014, the day prior to the effective date of the Satellite and Tracking Stock Transaction.  Accumulated depreciation for those satellites as of June 30, 2014 was $15.9 million, representing depreciation expense recognized in our consolidated financial statements for the period subsequent to the effective date of the Satellite and Tracking Stock Transaction.

 

Construction in progress consisted of the following:

 

 

 

 

 

As of

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Segment

 

2014

 

2013

 

 

 

 

 

(In thousands)

 

Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:

 

 

 

 

 

 

 

EchoStar XIX

 

Other

 

$

223,981

 

$

122,070

 

TerreStar-2/EchoStar XXI

 

Other

 

55,354

 

16,433

 

EchoStar XXIII

 

Other

 

22,981

 

19,210

 

EUTELSAT 65W A

 

Hughes

 

10,337

 

 

Other

 

Other/ESS

 

4,440

 

4,950

 

Uplinking equipment

 

ETC/Hughes

 

24,245

 

20,793

 

Other

 

ETC/Hughes/ESS

 

20,378

 

26,595

 

Construction in progress

 

 

 

$

361,716

 

$

210,051

 

 

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Depreciation expense associated with our property and equipment consisted of the following:

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

Satellites

 

$

55,576

 

$

46,529

 

$

103,139

 

$

93,073

 

Furniture, fixtures, equipment and other

 

29,161

 

32,805

 

 

59,052

 

64,771

 

Customer rental equipment

 

29,016

 

23,793

 

56,908

 

47,080

 

Buildings and improvements

 

3,413

 

3,366

 

 

6,943

 

6,681

 

Total depreciation expense

 

$

117,166

 

$

106,493

 

$

226,042

 

$

211,605

 

 

Satellites

 

As of June 30, 2014, we utilized 18 of our owned and leased satellites in geosynchronous orbit, approximately 22,300 miles above the equator.  Four of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over the terms of the satellite service agreements.  We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.

 

Information for our satellite fleet is presented below.

 

 

 

 

 

 

 

Nominal Degree

 

Depreciable

 

 

 

 

 

Launch

 

Orbital Location

 

Life

 

Satellites 

 

Segment

 

Date

 

(Longitude)

 

(In Years)

 

Owned:

 

 

 

 

 

 

 

 

 

SPACEWAY 3 (5)

 

Hughes

 

August 2007

 

95 W

 

12

 

EchoStar XVII

 

Hughes

 

July 2012

 

107 W

 

15

 

EchoStar I (1)(2)(3)

 

ESS

 

December 1995

 

77 W

 

 

EchoStar III (3)

 

ESS

 

October 1997

 

61.5 W

 

12

 

EchoStar VI (3)

 

ESS

 

July 2000

 

96.2 W

 

12

 

EchoStar VII (1)(2)

 

ESS

 

February 2002

 

119 W

 

3

 

EchoStar VIII (1)

 

ESS

 

August 2002

 

77 W

 

12

 

EchoStar XII (1)(6)

 

ESS

 

July 2003

 

61.5 W

 

2

 

EchoStar IX (1)

 

ESS

 

August 2003

 

121 W

 

12

 

EchoStar X (1)(2)

 

ESS

 

February 2006

 

110 W

 

7

 

EchoStar XI (1)(2)

 

ESS

 

July 2008

 

110 W

 

9

 

EchoStar XIV (1)(2)

 

ESS

 

March 2010

 

119 W

 

11

 

EchoStar XVI (1)

 

ESS

 

November 2012

 

61.5 W

 

15

 

EUTELSAT 10A (“W2A”) (7)

 

Other

 

April 2009

 

10 E

 

 

 

 

 

 

 

 

 

 

 

 

Leased from Third Parties (4):

 

 

 

 

 

 

 

 

 

AMC-15

 

ESS

 

October 2004

 

105 W

 

10

 

AMC-16

 

ESS

 

December 2004

 

85 W

 

10

 

Nimiq 5 (1)

 

ESS

 

September 2009

 

72.7 W

 

15

 

QuetzSat-1 (1)

 

ESS

 

September 2011

 

77 W

 

10

 

 


(1)         See Note 16 for further discussion of our transactions with DISH Network.

(2)         Depreciable life represents the remaining useful life as of March 1, 2014, the effective date of our receipt of the satellites from DISH Network as part of the Satellite and Tracking Stock Transaction (See Note 2).

(3)         Fully depreciated assets.

(4)         These satellites are accounted for as capital leases and their launch dates represent dates that the satellites were placed into service.

(5)         Depreciable life represents the remaining useful life as of the date of the Hughes Acquisition (as defined below).

(6)         Depreciable life represents the remaining useful life as of June 30, 2013, the date EchoStar XII was impaired.

(7)         The Company acquired the S-band payload on this satellite, which prior to the acquisition in December 2013, experienced an anomaly at the time of the launch.  As a result, the S-band payload is not fully operational.

 

Recent Developments

 

CMBStar and EchoStar XXIII.  In 2008, we suspended construction of the CMBStar satellite.  In April 2014, we entered into an agreement with Space Systems Loral, LLC (“SSL”) for the construction of the EchoStar XXIII

 

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Table of Contents

 

satellite, as a high powered Broadcast Satellite Service (“BSS”) satellite which will use some of the components from the CMBStar satellite.  This agreement superseded and replaced the CMBStar construction contract.  EchoStar XXIII is expected to launch in 2016.

 

EUTELSAT 65 West A.  In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil will provide to Hughes Telecomunicaҫões do Brasil Ltda, our indirect wholly-owned subsidiary, the fixed broadband service on the entire Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term.  The satellite is scheduled to be placed into service in the second quarter of 2016.

 

EchoStar XIX.  In February 2012 and September 2013, ViaSat and its subsidiary ViaSat Communications filed lawsuits in the U.S. District Court for the Southern District of California against SSL, the manufacturer of EchoStar XVII and EchoStar XIX.  In the first-filed case, ViaSat alleged, among other things, that SSL infringed three patents and breached its contractual obligations through the use of such patented technology to manufacture EchoStar XVII.  A jury trial was held in that case in March and April 2014, and the jury found that in connection with EchoStar XVII, SSL directly infringed the asserted patents and that SSL breached certain agreements with ViaSat.  While we are not a party to this matter, the adverse decision against SSL may have an impact on our ability to make use of EchoStar XIX or other satellites from SSL and may adversely affect our business operations and results of operations.  Until there are further developments in the case, including rulings on post-trial motions and appeals, we cannot determine whether there will be an adverse impact and, if so, the extent of any such impact.

 

EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV.  As discussed in Note 2, we received five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) from DISH Network as part of the Satellite and Tracking Stock Transaction.  These satellites are BSS communications satellites operating in Ku-band frequencies and DISH Network began receiving certain services from us on these satellites effective March 1, 2014.

 

EchoStar VIII.  In May 2013, DISH Network began receiving satellite services from us on EchoStar VIII as an in-orbit spare.  Effective March 1, 2014, this service arrangement was converted to a month-to-month service agreement.  Both parties have the right to terminate this agreement upon 30 days’ notice.

 

EchoStar XV.  In May 2013, we began receiving satellite services from DISH Network on EchoStar XV (classified as an operating lease) and relocated the satellite to the 45 degree west longitude orbital location.  Effective March 1, 2014, this service arrangement was converted to a month-to-month service agreement.  Both parties have the right to terminate this agreement upon 30 days’ notice.  Although we are not required to maintain in-orbit insurance pursuant to our service arrangement with DISH Network for EchoStar XV, we are liable for any damage caused by our use of the satellite and therefore we carry insurance on EchoStar XV.

 

Satellite Anomalies

 

Certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful lives and/or the commercial operation of the satellites.  There can be no assurance that existing and future anomalies will not further impact the remaining useful life and/or the commercial operation of any of the satellites in our fleet.  In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We generally do not carry in-orbit insurance on our satellites; therefore, we generally bear the risk of any uninsured in-orbit failures.  Pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain launch and in-orbit insurance for SPACEWAY 3, EchoStar XVI, and EchoStar XVII.

 

We have previously disclosed in our financial statements as of and for the year ended December 31, 2013, anomalies in prior years that affect our in-service owned and leased satellites, including EchoStar III, EchoStar VI, EchoStar VIII, EchoStar XII, and AMC-16.  We are not aware of any additional anomalies that have occurred on any of our owned or leased satellites in 2014 as of the date of this report that affected the commercial operation of these satellites.  EchoStar III and EchoStar VI are fully depreciated and EchoStar III is being used as an in-orbit spare; accordingly, the prior anomalies affecting these satellites have not had a significant effect on our operating results and cash flows.  EchoStar XII has experienced several anomalies, which have resulted in a loss of electrical power.  Those anomalies have not had a significant adverse impact on service under the related satellite services agreement with DISH Network for EchoStar XII; however, the anomalies have increased the risk of future

 

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Table of Contents

 

transponder failures that could result in reductions in our revenue and require recognition of a satellite impairment loss. See Satellite Impairments below.

 

The five satellites received from DISH Network pursuant to the Satellite and Tracking Stock Transaction have experienced certain anomalies prior to March 1, 2014, the effective date of the Satellite and Tracking Stock Transaction as described below.

 

EchoStar I.  During the first quarter of 2012, DISH Network determined that EchoStar I experienced a communications receiver anomaly.  The communications receivers process signals sent from the uplink center for transmission by the satellite to customers.  While this anomaly did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not impact its future commercial operation.  EchoStar I is fully depreciated.

 

EchoStar VII.  Prior to 2012, EchoStar VII experienced certain thruster failures.  During the fourth quarter of 2012, DISH Network determined that EchoStar VII experienced an additional thruster failure.  Thrusters control the satellite’s location and orientation.  While this anomaly did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar X.  During the second and third quarters of 2010, EchoStar X experienced anomalies which affected seven solar array circuits reducing the number of functional solar array circuits to 17. While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar XI.  During the first quarter of 2012, DISH Network determined that EchoStar XI experienced solar array anomalies that reduced the total power available for use by the satellite.  While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar XIV.  During the third quarter of 2011 and the first quarter of 2012, DISH Network determined that EchoStar XIV experienced solar array anomalies that reduced the total power available for use by the satellite.  While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

Satellite Impairments

 

We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  Certain of the anomalies discussed above, and previously disclosed, may be considered to represent a significant adverse change in the physical condition of a particular satellite.  However, based on the redundancy designed within each satellite, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.  There have been no satellite impairments in 2014 as of the date of this report.

 

EchoStar XII.  Prior to 2010, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays.  In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced the electrical power available to operate EchoStar XII.  An engineering analysis completed in the second quarter of 2013 indicated further loss of available electrical power and resulting capacity loss was likely.  As a result, we recognized a $34.7 million impairment loss in the second quarter of 2013.  Additional solar array anomalies are likely, and if they occur, they will continue to degrade the operational capability of EchoStar XII and could lead to additional impairment charges in the future.  EchoStar XII has experienced no additional electrical power loss or solar array anomalies in 2014 as of the date of this report.

 

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Table of Contents

 

Note 10.              Goodwill and Other Intangible Assets

 

Goodwill

 

The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill.  Goodwill is assigned to our reporting units of our operating segments and is subject to our annual impairment testing, or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is more likely than not less than its carrying amount.

 

As of June 30, 2014, all of our goodwill was assigned to reporting units of the Hughes segment.  Based on our qualitative assessment of impairment of such goodwill in the second quarter of 2014, we determined that no further testing of goodwill for impairment as of that date was necessary as it was not more likely than not that the fair values of the Hughes segment reporting units were less than the corresponding carrying amounts.

 

Regulatory Authorizations

 

Regulatory authorizations with finite and indefinite useful lives are as follows:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Finite useful lives:

 

 

 

 

 

Cost

 

$

117,238

 

$

113,764

 

Accumulated amortization

 

(4,727

)

(1,521

)

Net

 

112,511

 

112,243

 

Indefinite lives

 

471,657

 

471,657

 

Total regulatory authorizations, net

 

$

584,168

 

$

583,900

 

 

Amortization expense for the regulatory authorizations with finite useful lives was $1.6 million and zero for the three months ended June 30, 2014 and 2013, respectively, and $3.1 million and zero for the six months ended June 30, 2014 and 2013, respectively.

 

Other Intangible Assets

 

Our other intangible assets, which are subject to amortization, consisted of the following:

 

 

 

Weighted

 

As of

 

 

 

Average

 

June 30, 2014

 

December 31, 2013

 

 

 

Useful life

 

 

 

Accumulated

 

Carrying

 

 

 

Accumulated

 

Carrying

 

 

 

(in Years)

 

Cost

 

Amortization

 

Amount

 

Cost

 

Amortization

 

Amount

 

 

 

 

 

(In thousands)

 

Customer relationships

 

8

 

$

293,932

 

$

(169,020

)

$

124,912

 

$

293,932

 

$

(152,647

)

$

141,285

 

Contract-based

 

10

 

255,366

 

(221,674

)

33,692

 

255,366

 

(204,835

)

50,531

 

Technology-based

 

7

 

126,272

 

(92,257