ECHOSTAR CORPORATION Unless the context indicates otherwise, the terms "we," "us," "EchoStar ," the "Company" and "our" refer toEchoStar Corporation and its subsidiaries. The following Management's Discussion and Analysis of our Financial Condition and Results of Operations ("Management's Discussion and Analysis") should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and notes thereto ("Accompanying Condensed Consolidated Financial Statements") in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"). This Management's Discussion and Analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this Management's Discussion and Analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Refer to the Disclosure Regarding Forward-Looking Statements in this Form 10-Q for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, refer to the Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K ("Form 10-K") filed with theSecurities 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
InSeptember 2019 , pursuant to a master transaction agreement (the "Master Transaction Agreement") with DISH and a wholly-owned subsidiary of DISH ("Merger Sub"), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, "DISH Network") and our joint venture Dish Mexico,S. de R.L. de C.V. ("Dish Mexico") and its subsidiaries, and (2) telemetry, tracking and control ("TT&C") services for satellites owned by DISH Network and a portion of our other businesses (collectively, the "BSS Business") to one of our former subsidiaries,EchoStar BSS Corporation ("BSS Corp. "), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock ofBSS Corp. , par value$0.001 per share ("BSS Common Stock"), equal to one share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the "Distribution"); and (iii) immediately after the Distribution, (1) Merger Sub merged with and intoBSS Corp. (the "Merger"), such thatBSS 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 byEchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value$0.001 per share ("DISH Common Stock") ((i) - (iii) collectively, the "BSS Transaction"). Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded from continuing operations and segment results for the three months endedMarch 31, 2019 in our Accompanying Condensed Consolidated Financial Statements. Refer to Note 4. Discontinued Operations in our Accompanying Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q. We currently operate in two business segments: Hughes and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company's Chief Executive Officer. Our operations also include various corporate departments (primarily Executive,Treasury , Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate and Legal) and other activities that have not been assigned to our business segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other. 41
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
All amounts presented in this Management's Discussion and Analysis reference
results from continuing operations unless otherwise noted and are expressed in
thousands of United States ("U.S.") dollars, except share and per share amounts
and unless otherwise noted.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Three Months Ended
• Revenue of
• Operating income (loss) of
• Net income (loss) from continuing operations of
• Net income (loss) attributable to
and basic earnings (loss) per share of common stock of
• Earnings before interest, taxes, depreciation and amortization, net income
(loss) from discontinued operations and net income (loss) attributable to
non-controlling interests ("EBITDA") of $91.2 million (refer to the
reconciliation of this non-GAAP measure in Results of Operations)
Consolidated Financial Condition as of
• Total assets of
• Total liabilities of
• Total stockholders' equity of
• Cash, cash equivalents and current marketable investment securities of
$2.4 billion Hughes Segment Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services to consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to consumer and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers. We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through advanced and proprietary methodologies, technologies, software and techniques, we continue to improve the efficiency of our networks. We invest in technologies to enhance our system and network management capabilities, specifically our managed services for enterprises. We also continue to invest in next generation technologies that can be applied to our future products and services. We continue to focus our efforts on growing our consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers in our domestic and international markets across wholesale and retail channels. Service costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth. The growth of our enterprise businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. As a result of the COVID-19 pandemic, in accordance with orders received from our enterprise customers, we have deferred or canceled the delivery of some products or services and we, thus, may not be able to recognize revenue for such products or services. Our Hughes segment currently uses capacity from three of our satellites (the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite), ourAl Yah 3 Brazilian payload and additional satellite capacity acquired from third-party providers to provide services to our customers. Growth of our consumer subscriber base continues 42
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to be constrained in areas where we are nearing or have reached maximum
capacity. While these constraints are expected to be resolved when we launch
new satellites, we continue to focus on revenue growth in all areas and consumer
subscriber growth in the areas where we have available capacity.
In May 2019 , we entered into an agreement with Al Yah Satellite Communications
Company PrJSC ("Yahsat") pursuant to which, in November 2019 , Yahsat contributed
its satellite communications services business in Brazil to us in exchange for a
20% ownership interest in our existing Brazilian subsidiary that conducts our
satellite communications services business in Brazil (the "Yahsat Brazil JV
Transaction"). The combined business provides broadband internet services and
enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat
65W satellite and Yahsat's Al Yah 3 satellite. Under the terms of the
agreement, Yahsat may also acquire, for further cash investments, additional
minority ownership interests in the business in the future provided certain
conditions are met.
In May 2019 , we also entered into an agreement with Bharti Airtel Limited
("BAL") and its subsidiary, Bharti Airtel Services Limited (together with BAL,
"Bharti"), pursuant to which Bharti will contribute its very small aperture
terminal ("VSAT") telecommunications services and hardware business in India to
our two existing Indian subsidiaries that conduct our VSAT services and hardware
business. The combined entities will provide broadband satellite and hybrid
solutions for enterprise networks. Upon consummation of the transaction, Bharti
will have a 33% ownership interest in the combined business. The completion of
the transaction is subject to customary regulatory approvals and closing
conditions. No assurance can be given that the transaction will be consummated
on the terms agreed to or at all.
In August 2018 , we entered into an agreement with Yahsat to establish a new
entity, Broadband Connectivity Solutions (Restricted) Limited (together with its
subsidiaries, "BCS"), to provide commercial Ka-band satellite broadband services
across Africa , the Middle East and southwest Asia operating over Yahsat's Al
Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in
December 2018 when we invested $100.0 million in cash in exchange for a 20%
interest in BCS. Under the terms of the agreement, we may also acquire, for
further cash investments, additional ownership interests in BCS in the future
provided certain conditions are met. We supply network operations and management
services and equipment to BCS.
In August 2017 , we entered into a contract for the design and construction
of the EchoStar XXIV satellite, a new, next-generation, high throughput
geostationary satellite. The EchoStar XXIV satellite is primarily intended to
provide additional capacity for our HughesNet satellite internet service
("HughesNet service") in North, Central and South America as well as enterprise
broadband services. In the first quarter of 2020, Space Systems/Loral, LLC
("SS/L"), the manufacturer of our EchoStar XXIV satellite, invoked the "force
majeure" clause of our contract and notified us of a possible delay in
completion of the satellite due to "shelter-in-place" orders affecting personnel
at SS/L and its subcontractors, and other potential impacts of the COVID-19
pandemic. We currently expect the EchoStar XXIV satellite to be launched no
earlier than the second half of 2021. This or other delays or impediments to
SS/L's meeting its obligations as a result of the COVID-19 pandemic and various
economic and other consequences or otherwise could have a material adverse
impact on our business operations, future revenues, financial position and
prospects, the completion of manufacture of the EchoStar XXIV satellite and our
planned expansion of satellite broadband services throughout North, South and
Central America . Capital expenditures associated with the construction and
launch of the EchoStar XXIV satellite are included in Corporate and Other in our
segment reporting.
In March 2017 , we and DISH Network entered into a master service agreement (the
"Hughes Broadband MSA"). Pursuant to the Hughes Broadband MSA, DISH Network,
among other things: (i) has the right, but not the obligation, to market,
promote and solicit orders and upgrades for our HughesNet service and related
equipment and other telecommunication services; and (ii) installs HughesNet
service equipment with respect to activations generated by DISH Network. As a
result of the Hughes Broadband MSA, we have not earned, and do not expect to
earn in the future, significant equipment revenue from our distribution
agreement with DISH Network.
We continue our efforts to expand our consumer satellite services business
outside of the U.S. We have been delivering high-speed consumer satellite
broadband services in Brazil since July 2016 and are also providing satellite
broadband internet service in several other Latin American countries.
Additionally, in September 2015 , we entered into 15-year agreements with
affiliates of Telesat Canada for Ka-band capacity on the Telesat T19V satellite
located at the 63 degree west longitude orbital location, which was launched in
July 2018 . Telesat T19V was placed in service during the fourth quarter of 2018
and augmented the capacity being provided by the EUTELSAT 65 West A satellite
and the EchoStar XIX satellite in South America .
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OF OPERATIONS - CONTINUED
Our broadband subscribers include customers that subscribe to our HughesNet
service in North and Latin America through retail, wholesale and small/medium
enterprise service channels. In connection with the COVID-19 pandemic, in March
2020 , we voluntarily signed on to the Federal Communications Commissions'
("FCC ") Keep Americans Connected Pledge (the "Pledge"), promising not to
terminate HughesNet service for certain consumer customers for 60 days even if
they are unable to pay. We have removed from our subscriber numbers as of March
31, 2020 any subscribers whose HughesNet service would have ordinarily been
terminated in the absence of the Pledge. In April 2020 , we voluntarily agreed
with the FCC 's request to extend the Pledge through June 30, 2020 . As a result,
we may be required to provide HughesNet service to consumers who do not have the
ability to pay for such services.
The following table presents our approximate subscriber numbers:
As of
March 31, 2020 December 31, 2019
Broadband subscribers 1,516,000 1,477,000
As of
The following table presents our approximate subscriber net additions:
For the three months ended
March 31, 2020 December 31, 2019
Net additions 39,000 20,000
During the first quarter of 2020, our net subscriber additions increased by approximately 19,000 compared to the fourth quarter of 2019, reflecting increased gross subscriber additions compared to the fourth quarter of 2019.
As ofMarch 31, 2020 andDecember 31, 2019 , our Hughes segment had$1.2 billion and$1.4 billion of contracted revenue backlog, respectively. We define Hughes contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue. Our contracted revenue backlog as ofMarch 31, 2020 decreased primarily due to the bankruptcy of a certain customer and the effects of the COVID-19 pandemic, including lengthened or delayed sales cycles with some of our enterprise customers.
ESS Segment
Our ESS segment provides satellite services on a full-time and/or occasional-use basis toU.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 theEchoStar 105/SES-11 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.
As of
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OF OPERATIONS - CONTINUED
Other Business Opportunities
Our industry continues to evolve with the increasing worldwide demand for
broadband internet access for information, entertainment and commerce. The
current COVID-19 pandemic has made even more evident the worldwide need and
demand for connectivity and communications to facilitate an ever-increasing
virtual global community and workplace. In addition to fiber and wireless
systems, technologies such as geostationary high throughput satellites,
low-earth orbit ("LEO") networks, medium-earth orbit ("MEO") systems, balloons
and High Altitude Platform Systems are expected to continue to play significant
roles in enabling global broadband access, networks and services. We intend to
use our expertise, technologies, capital, investments, global presence,
relationships and other capabilities to continue to provide broadband internet
systems, equipment, networks and services for information, the
internet-of-things, entertainment, education, remote-connectivity and commerce
across many industries and communities in North America and internationally for
consumer and enterprise customers. We are closely tracking the developments in
next-generation satellite businesses, and we are seeking to utilize our
services, technologies, licenses and expertise to find new commercial
opportunities for our business.
We intend to continue to selectively explore opportunities to pursue
investments, commercial alliances, partnerships, joint ventures, acquisitions,
dispositions and other strategic initiatives and transactions, domestically and
internationally, that we believe may allow us to increase our existing market
share, increase our satellite capacity, expand into new satellite and other
technologies, markets and customers, broaden our portfolio of services, products
and intellectual property, make our business more valuable, align us for future
growth and expansion, maximize the return on our investments and strengthen our
business and relationships with our customers. We may allocate or dispose of
significant resources for long-term value that may not have a short or
medium-term or any positive impact on our revenue, results of operations, or
cash flow.
S-Band Strategy
We continue to explore the development and deployment of S-band technologies and
believe that our products and services will be integrated into new global,
hybrid networks that leverage multiple satellites and terrestrial technologies.
The current COVID-19 pandemic has made even more evident the worldwide need and
demand for such networks. In December 2013 , we acquired EchoStar Mobile Limited
("EML"), an entity based in Dublin, Ireland , which is licensed to provide mobile
satellite service ("MSS") and complementary ground component ("CGC") services
covering the European Union and its member states ("EU") using the S-band
spectrum. EML's services in the EU are supported by the EchoStar XXI satellite
and the EUTELSAT 10A payload. In October 2019 , we acquired Sirion Global Pty
Ltd. , which we have renamed EchoStar Global Australia Pty Ltd ("EchoStar
Global"), which holds global S-band non-geostationary satellite spectrum rights
for MSS. Additionally, we have entered into a contract with Tyvak Nano-Satellite
Systems, Inc. for the design and construction of S-band nano-satellites. The
contracted launches for these satellites have been postponed as a result of the
COVID-19 pandemic and we are awaiting notice from the launch providers regarding
when they will be rescheduled, which we expect will be during 2020. We expect
our nano-satellites to facilitate our continued growth in the global S-band
market and enable us to leverage our acquisition of EchoStar Global. In
addition, in November 2019 , we were granted an S-band spectrum license for
terrestrial rights in Mexico . As of March 31, 2020 , we have no material future
commitments in connection with these acquisitions.
Cybersecurity
As a global provider of satellite technologies and services, internet services and communications equipment and networks, we may be prone to more targeted and persistent levels of cyber-attacks than other businesses. These risks may be more prevalent as we continue to expand and grow our business into other areas of the world outside ofNorth America , some of which are still developing their cybersecurity infrastructure maturity. Detecting, deterring, preventing and mitigating incidents caused by hackers and other parties may result in significant costs to us and may expose our customers to financial or other harm that have the potential to significantly increase our liability. 45
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OF OPERATIONS - CONTINUED
Due to the COVID-19 pandemic, a large portion of our workforce has been working
remotely and is likely to continue to do so for some time. While we have
cybersecurity risk management tools to help protect our technology, information
and networks that our employees access remotely, we cannot guarantee the
security of the network that they will be using, the security status of the
other non-company managed devices that might be on the network to which they are
connected or the devices or networks used by third parties with whom our
employees conduct business, such as customers, suppliers, vendors and other
persons. Additionally, there has been a major global increase in COVID-19
related cyber-fraud and phishing attacks that continue to target our employees,
vendors, suppliers, customers and others. Accordingly, we have increased our
efforts and resources relating to cybersecurity as a result of the COVID-19
pandemic.
We treat cybersecurity risk seriously and are focused on maintaining the
security of our and our partners' systems, networks, technologies and data. We
regularly review and revise our relevant policies and procedures, invest in and
maintain internal resources, personnel and systems and review, modify and
supplement our defenses through the use of various services, programs and
outside vendors. Additionally, we provide resources to assist employees in
better securing their home networks and remote connections. We also maintain
agreements with third party vendors and experts to assist in our remediation and
mitigation efforts if we experience or identify a material incident or threat.
In addition, senior management and the Audit Committee of our Board of Directors
are regularly briefed on cybersecurity matters.
We are not aware of any cyber-incidents with respect to our owned or leased
satellites or other networks, equipment or systems that have had a material
adverse effect on our business, costs, operations, prospects, results of
operation or financial position during the three months ended March 31, 2020 and
through May 6, 2020 . There can be no assurance, however, that any such incident
can be detected or thwarted or will not have such a material adverse effect in
the future.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
Three Months Ended
The following table presents our consolidated results of operations for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 : For the three months ended March 31, Variance Statements of Operations Data 2020 2019 Amounts % Revenue: Services and other revenue$ 408,357 $ 402,668 $ 5,689 1.4 Equipment revenue 57,309 51,714 5,595 10.8 Total revenue 465,666 454,382 11,284 2.5 Costs and expenses: Cost of sales - services and other 145,252 143,347 1,905 1.3 % of total services and other revenue 35.6 % 35.6 % Cost of sales - equipment 45,908 45,007 901 2.0 % of total equipment revenue 80.1 % 87.0 % Selling, general and administrative expenses 125,281 112,114 13,167 11.7 % of total revenue 26.9 % 24.7 % Research and development expenses 6,254 6,888 (634 ) (9.2 ) % of total revenue 1.3 % 1.5 % Depreciation and amortization 132,368 118,978 13,390 11.3 Total costs and expenses 455,063 426,334 28,729 6.7 Operating income (loss) 10,603 28,048 (17,445 ) (62.2 ) Other income (expense): Interest income, net 15,583 24,429 (8,846 ) (36.2 ) Interest expense, net of amounts capitalized (36,233 ) (53,199 ) 16,966 31.9 Gains (losses) on investments, net (46,672 ) 6,936 (53,608 ) * Equity in earnings (losses) of unconsolidated affiliates, net 2,613 (6,353 ) 8,966 * Foreign currency transaction gains (losses), net (10,844 ) (1,160 ) (9,684 ) * Other, net (279 ) (42 ) (237 ) * Total other income (expense), net (75,832 ) (29,389 ) (46,443 ) * Income (loss) from continuing operations before income taxes (65,229 ) (1,341 ) (63,888 ) * Income tax benefit (provision), net 7,492 (2,898 ) (10,390 ) * Net income (loss) from continuing operations (57,737 ) (4,239 ) (53,498 ) * Net income (loss) from discontinued operations - 19,247 (19,247 ) (100.0 ) Net income (loss) (57,737 ) 15,008 (72,745 ) * Less: Net loss (income) attributable to non-controlling interests 3,442 (806 ) 4,248 * Net income (loss) attributable to EchoStar Corporation common stock$ (54,295 ) $ 14,202 $ (68,497 ) * Other data: EBITDA (1)$ 91,231 $ 145,601 $ (54,370 ) (37.3 ) Subscribers, end of period 1,516,000 1,388,000 128,000 9.2
* Percentage is not meaningful. (1) A reconciliation of EBITDA to Net income (loss), the most directly comparable
generally accepted accounting principles in the
our Accompanying Condensed Consolidated Financial Statements, is included in
Results of Operations. For further information on our use of EBITDA, refer to
the Explanation of Key Metrics and Other Items.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following discussion relates to our continuing operations for the three
months ended
Services and other revenue. Services and other revenue totaled$408.4 million for the three months endedMarch 31, 2020 , an increase of$5.7 million , or 1.4%, compared to 2019.
• Services and other revenue from our Hughes segment for the three months
ended
compared to 2019. The increase was primarily attributable to increases in
sales of broadband services to our consumer customers of
partially offset by a decrease in sales of broadband services to our
enterprise customers of
negative impact of exchange rate fluctuations.
• Services and other revenue from Corporate and Other for the three months
ended
compared to 2019 primarily attributable to a decrease in income from
certain real estate previously leased to DISH Network and transferred as
part of the BSS Transaction.
Equipment revenue. Equipment revenue totaled$57.3 million for the three months endedMarch 31, 2020 , an increase of$5.6 million , or 10.8%, compared to 2019. The increase was primarily attributable to our Hughes segment due to increases in hardware sales to our enterprise customers. Cost of sales - services and other. Cost of sales - services and other totaled$145.3 million for the three months endedMarch 31, 2020 , an increase of$1.9 million , or 1.3%, compared to 2019. The increase was primarily attributable to our Hughes segment due to an increase in the costs of broadband services provided to our consumer customers supporting the increase in number of subscribers and revenue in both the domestic and international markets, partially offset by a decrease in the costs of broadband services provided to our enterprise customers. Cost of sales - equipment. Cost of sales - equipment totaled$45.9 million for the three months endedMarch 31, 2020 , an increase of$0.9 million , or 2.0%, compared to 2019. The increase was primarily attributable to our Hughes segment due to an increase in hardware sales to our enterprise customers. Selling, general and administrative expenses. Selling, general and administrative expenses totaled$125.3 million for the three months endedMarch 31, 2020 , an increase of$13.2 million , or 11.7%, compared to 2019. The increase was primarily attributable to (i) increases in marketing and promotional expenses of$8.3 million from our Hughes segment mainly associated with our consumer business inLatin America , (ii) increases in bad debt expense of$1.9 million and (iii) increases in other general and administrative expenses of$3.0 million . Depreciation and amortization. Depreciation and amortization expenses totaled$132.4 million for the three months endedMarch 31, 2020 , an increase of$13.4 million , or 11.3%, compared to 2019. The increase was primarily from our Hughes segment and due to increases in depreciation expense of$6.4 million relating to our customer premises equipment and$6.1 million relating to the depreciation of assets acquired in the Yahsat Brazil JV Transaction. Interest income, net. Interest income, net totaled$15.6 million for the three months endedMarch 31, 2020 , a decrease of$8.8 million , or 36.2%, compared to 2019 primarily attributable to the decrease in our marketable investment securities. Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled$36.2 million for the three months endedMarch 31, 2020 , a decrease of$17.0 million , or 31.9%, compared to 2019. The decrease was primarily due to a decrease of$16.0 million in interest expense and in amortization of deferred financing cost as a result of the repurchase and maturity of our 6 1/2% Senior Secured Notes due 2019 and an increase of$1.8 million in capitalized interest relating to the construction of the EchoStar XXIV satellite. Gains (losses) on investments, net. Gains (losses) on investments, net totaled$46.7 million of net losses for the three months endedMarch 31, 2020 , a negative change of$53.6 million compared to 2019. The change was primarily attributable to$50.3 million of net negative variances on marketable investment securities compared to 2019. 48
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled$2.6 million in earnings for the three months endedMarch 31, 2020 compared to$6.4 million in losses for the three months endedMarch 31, 2019 . The increase was related to increased earnings from our investments in our equity method investees. Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled$10.8 million in losses for the three months endedMarch 31, 2020 , an increase in losses of$9.7 million compared to 2019. The change was due to the net strengthening of theU.S. dollar against certain foreign currencies in 2020 compared to 2019. Income tax benefit (provision), net. Income tax benefit (provision), net was$7.5 million in benefit for the three months endedMarch 31, 2020 compared to$2.9 million in provision for the three months endedMarch 31, 2019 . Our effective income tax rate was 11.5% and (216.1)% for the three months endedMarch 31, 2020 and 2019, respectively. The variations in our current year effective tax rate from theU.S. federal statutory rate for the three months endedMarch 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature, permanent book tax differences and research and experimentation credits. The variations in our effective tax rate from theU.S. federal statutory rate for the three months endedMarch 31, 2019 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature and research and experimentation credits. Net income (loss) attributable toEchoStar Corporation common stock. Net loss attributable toEchoStar Corporation common stock totaled$54.3 million for the three months endedMarch 31, 2020 , compared to net income attributable toEchoStar Corporation common stock of$14.2 million for the three months endedMarch 31, 2019 , a decrease of$68.5 million as set forth in the following table:
Amounts
Net income (loss) attributable to
$ 14,202
Decrease (increase) in interest expense, net of amounts capitalized
16,966
Decrease (increase) in income tax provision, net
10,390
Decrease (increase) in equity in losses of unconsolidated affiliates, net
8,966
Decrease (increase) in net income attributable to non-controlling interests
4,248
Increase (decrease) in other, net (237 ) Increase (decrease) in interest income, net (8,846 ) Increase (decrease) in foreign currency transaction gains, net
(9,684 ) Increase (decrease) in operating income, including depreciation and amortization
(17,445 )
Increase (decrease) in net income from discontinued operations (19,247 )
Increase (decrease) in gains on investments, net
(53,608 )
Net income (loss) attributable to
$ (54,295 ) 49
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
EBITDA. EBITDA is a non-GAAP financial measure and is described under
Explanation of Key Metrics and Other Items below. The following table
reconciles Net income (loss), the most directly comparable
For the three months
ended March 31, Variance
2020 2019 Amounts %
Net income (loss) $ (57,737 ) $ 15,008 $ (72,745 ) *
Interest income, net (15,583 ) (24,429 ) 8,846 (36.2 )
Interest expense, net of amounts
capitalized 36,233 53,199 (16,966 ) (31.9 )
Income tax provision (benefit),
net (7,492 ) 2,898 (10,390 ) *
Depreciation and amortization 132,368 118,978 13,390 11.3
Net loss (income) from
discontinued operations - (19,247 ) (19,247 ) 100.0
Net loss (income) attributable
to non-controlling interests 3,442 (806 ) 4,248 *
EBITDA $ 91,231 $ 145,601 $ (54,370 ) (37.3 )
* Percentage is not meaningful.
EBITDA was
Amounts
EBITDA for the three months endedMarch 31, 2019 $
145,601
Decrease (increase) in equity in losses of unconsolidated affiliates, net
8,966
Decrease (increase) in net income attributable to non-controlling interests
4,248
Increase (decrease) in other, net
(237 ) Increase (decrease) in operating income, excluding depreciation and amortization
(4,055 )
Increase (decrease) in foreign currency transaction gains, net (9,684 )
Increase (decrease) in gains on investments, net (53,608 )
EBITDA for the three months ended March 31, 2020 $ 91,231
Segment Operating Results and Capital Expenditures
The following tables present our operating results, capital expenditures and EBITDA by segment for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Capital expenditures in the table below are net of refunds and other receipts related to our property and equipment. Consolidated Hughes ESS Corporate and Other Total For the three months ended March 31, 2020 Total revenue$ 458,482 $ 4,652 $ 2,532$ 465,666 Capital expenditures 91,517 - 13,087 104,604 EBITDA 154,641 2,030 (65,440 ) 91,231 For the three months ended March 31, 2019 Total revenue$ 445,337 $ 4,033 $ 5,012$ 454,382 Capital expenditures 73,821 - 38,033 111,854 EBITDA 161,132 1,729 (17,260 ) 145,601 50
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Hughes Segment
For the three months
ended March 31, Variance
2020 2019 Amounts %
Total revenue $ 458,482 $ 445,337 $ 13,145 3.0
Capital expenditures 91,517 73,821 17,696 24.0
EBITDA 154,641 161,132 (6,491 ) (4.0 )
Total revenue was $458.5 million for the three months ended March 31, 2020 , an
increase of $13.1 million , or 3.0%, compared to 2019. The increase was
primarily due to net increases of $19.5 million in sales of broadband services
to our consumer customers and $5.6 million in hardware sales to our enterprise
customers, partially offset by a decrease in sales of broadband services to our
enterprise customers of $12.6 million . Both of these variances include the
negative impact of exchange rate fluctuations.
Capital expenditures were $91.5 million for the three months ended March 31,
2020 , an increase of $17.7 million , or 24.0%, compared to 2019, primarily due to
net increases in expenditures associated with our consumer business.
EBITDA was
Amounts
EBITDA for the three months endedMarch 31, 2019 $
161,132
Decrease (increase) in net income attributable to non-controlling interests
4,248
Increase (decrease) in gains on investments, net
568
Increase (decrease) in other, net
(191 ) Decrease (increase) in equity in losses of unconsolidated affiliates, net
(373 ) Increase (decrease) in operating income, excluding depreciation and amortization
(2,997 )
Increase (decrease) in foreign currency transaction gains, net (7,746 )
EBITDA for the three months ended March 31, 2020 $ 154,641
ESS Segment
For the three months
ended March 31, Variance
2020 2019 Amounts %
Total revenue $ 4,652 $ 4,033 $ 619 15.3
EBITDA 2,030 1,729 301 17.4
Total revenue was $4.7 million for the three months ended March 31, 2020 , an
increase of $0.6 million , or 15.3%, compared to 2019, due to a net increase in
transponder services provided to third parties.
EBITDA was $2.0 million for the three months ended March 31, 2020 , an increase
of $0.3 million , or 17.4%, compared to 2019, primarily due to the increase in
revenue.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Corporate and Other
For the three months
ended March 31, Variance
2020 2019 Amounts %
Total revenue $ 2,532 $ 5,012 $ (2,480 ) (49.5 )
Capital expenditures 13,087 38,033 (24,946 ) (65.6 )
EBITDA (65,440 ) (17,260 ) (48,180 ) *
* Percentage is not meaningful
Total revenue was$2.5 million for the three months endedMarch 31, 2020 , a decrease of$2.5 million , or 49.5%, compared to 2019 primarily attributable to a decrease in income from certain real estate previously leased to DISH Network and transferred as part of the BSS Transaction.
Capital expenditures for the three months ended
EBITDA for the three months endedMarch 31, 2020 was a loss of$65.4 million , an increase in loss of$48.2 million compared to 2019 as set forth in the following table:
Amounts
EBITDA for the three months endedMarch 31, 2019 $
(17,260 ) Decrease (increase) in equity in losses of unconsolidated affiliates, net
9,338
Increase (decrease) in other, net
(47 ) Increase (decrease) in operating income, excluding depreciation and amortization
(1,357 )
Increase (decrease) in foreign currency transaction gains, net (1,937 )
Increase (decrease) in gains on investments, net (54,177 )
EBITDA for the three months ended March 31, 2020 $ (65,440 )
LIQUIDITY AND CAPITAL RESOURCES
Cash,
We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
As of
As ofMarch 31, 2020 andDecember 31, 2019 , we held$790.4 million and$940.6 million , respectively, of marketable investment securities, consisting of various debt and equity instruments including corporate bonds, corporate equity securities, government bonds and mutual funds.
Cash Flow Activities
The following discussion highlights our cash flow activities, which include
results from continuing and discontinued operations, for the three months ended
Cash Flows from Operating Activities
We typically reinvest the cash flow from operating activities in our business. For the three months endedMarch 31, 2020 , we reported net cash inflows from operating activities of$71.3 million , a decrease of$104.7 million , compared to 2019. The decrease in cash inflows was primarily attributable to lower net income of$65.2 million adjusted to exclude: (i) Depreciation and amortization; (ii) Losses (gains) on investments, net, (iii) Equity in losses (earnings) of 52
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unconsolidated affiliates, net; (iv) Foreign currency transaction losses
(gains), net; (v) Deferred tax provision (benefit), net; (vi) Stock-based
compensation; (vii) Amortization of debt issuance costs; and (viii) Other, net.
The decrease in cash inflows was also attributable to decreases of $39.5 million
resulting from timing differences in operating assets and liabilities.
Cash Flows from Investing Activities
Our investing activities generally include purchases and sales of marketable investment securities, capital expenditures, acquisitions and strategic investments. For the three months endedMarch 31, 2020 , we reported net cash inflows from investing activities of$17.9 million , a decrease in cash inflows of$249.6 million compared to 2019. For the three months endedMarch 31, 2020 , we had net sales and maturities of marketable securities of$687.6 million , partially offset by net purchases of marketable securities of$550.9 million and expenditures for property and equipment of$104.6 million . For the three months endedMarch 31, 2019 , we had net sales and maturities of marketable securities of$712.7 million , partially offset by net purchases of marketable securities of$325.6 million and expenditures for property and equipment of$112.0 million .
Cash Flows from Financing Activities
Our financing activities generally include proceeds related to the issuance of debt and cash used for the repurchase, redemption or payment of debt and finance lease obligations, payments relating to stock and debt repurchases and the proceeds from Class A common stock options exercised and stock issued under our stock incentive plans and employee stock purchase plan. For the three months endedMarch 31, 2020 , we reported net cash outflows from financing activities of$1.0 million compared to net cash outflows of$22.1 million for the three months endedMarch 31, 2019 . Net cash outflows for the three months endedMarch 31, 2020 included our repurchase of$5.9 million of shares of our Class A common stock, partially offset by$4.0 million for the contribution by non-controlling interest holder and$0.2 million in net proceeds received from Class A common stock options exercised. Net cash outflows for the three months endedMarch 31, 2019 included$9.9 million for the payment of finance lease obligations,$8.0 million for the repurchasing and maturity of debt and$7.3 million for the purchase of non-controlling shareholder interests in a subsidiary of ours that were held by an unaffiliated third party, partially offset by$2.0 million in net proceeds received from Class A common stock options exercised.
Obligations and Future Capital Requirements
Contractual Obligations
As ofMarch 31, 2020 , our satellite-related obligations were$402.7 million . These primarily include payments pursuant to agreements for the construction of the EchoStar XXIV satellite, payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
Off-Balance Sheet Arrangements
We generally do not engage in off-balance sheet financing activities or use derivative financial instruments for hedge accounting or speculative purposes.
Letters of Credit
As ofMarch 31, 2020 , we had$41.0 million of letters of credit and insurance bonds. Of this amount,$9.0 million was secured by restricted cash,$3.8 million was related to insurance bonds and$28.2 million was issued under credit arrangements available to our foreign subsidiaries. Certain letters of credit are secured by assets of our foreign subsidiaries. 53
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Satellites
As our satellite fleet ages, we will be required to evaluate replacement
alternatives such as acquiring, leasing or constructing additional satellites,
with or without customer commitments for capacity. We may also construct,
acquire or lease additional satellites in the future to provide satellite
services at additional orbital locations or to improve the quality of our
satellite services.
Satellite Insurance
We generally do not carry in-orbit insurance on our satellites or payloads
because we have assessed that the cost of insurance is not economical relative
to the risk of failures. Therefore, we generally bear the risk of any in-orbit
failures. Pursuant to the terms of the agreements governing certain portions of
our long-term debt and our joint venture agreements with Yahsat, we are
required, subject to certain limitations on coverage, to maintain only for the
SPACEWAY 3 satellite, the EchoStar XVII satellite and the Al Yah 3 Brazilian
payload, insurance or other contractual arrangements during the commercial
in-orbit service of such satellite or payload. Our other satellites and
payloads, either in orbit or under construction, are not covered by launch or
in-orbit insurance or other contractual arrangements. We will continue to assess
circumstances going forward and make insurance-related decisions on a
case-by-case basis.
Future Capital Requirements
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated through our operations to fund our business. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Consumer revenue in our Hughes segment depends on our success in adding new and retaining existing subscribers and driving higher average revenue per subscriber across our wholesale and retail channels. Revenue in our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Service costs related to ongoing support of our direct and indirect customers and partners are typically impacted most significantly by our growth. There can be no assurance that we will have positive cash flows from operations. As a result of the COVID-19 pandemic, in accordance with orders received from our enterprise customers, we have deferred or canceled the delivery of some products or services and we, thus, may not be able to realize the cash flow from such products or services. Furthermore, if we experience negative cash flows, our existing cash and marketable investment securities balances may be reduced. We have a significant amount of outstanding indebtedness. As ofMarch 31, 2020 , our total long-term debt was$2.4 billion . Refer to our Form 10-K for a discussion of the terms of our long-term debt. Our liquidity requirements will be continue to be significant, primarily due to our remaining debt service requirements and the design and construction of our new EchoStar XXIV satellite. We may from time to time seek to purchase amounts of our outstanding debt in open market purchases, privately negotiated transactions or otherwise, depending on market conditions, our liquidity needs and other factors. The amounts we may repurchase may be material. In addition, our future capital expenditures are likely to increase if we make acquisitions or additional investments in infrastructure, technologies or joint ventures to support and expand our business, or if we decide to purchase or build additional satellites or other technologies or assets. Other aspects of our business operations may also require additional capital. We also expect to oweU.S. Federal income tax for 2020. We anticipate that our existing cash and marketable investment securities are sufficient to fund the currently anticipated operations of our business through the next twelve months. Stock Repurchases Pursuant to a stock repurchase program approved by our Board of Directors onOctober 29, 2019 , we are authorized to repurchase up to$500.0 million of our Class A common stock throughDecember 31, 2020 . During the three months endedMarch 31, 2020 , we repurchased 196,999 shares of our common stock at an average price per share of$29.90 for a total purchase price of$5.9 million . During the three months endedMarch 31, 2019 , we did not repurchase any common stock. 54
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies are those that involve a high degree of estimation, judgment and complexity. Our critical accounting policies are those related to (i) contingent liabilities, (ii) revenue recognition and (iii) impairment of assets.
Our critical accounting policies are described in our Form 10-K under the heading Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes in our critical accounting policies from those presented in our Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new and recently issued accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies in our Accompanying Condensed Consolidated Financial Statements.
SEASONALITY
For our Hughes segment, service revenue is generally not impacted by seasonal fluctuations other than those associated with fluctuations related to sales and promotional activities. However, like many communications infrastructure equipment vendors, a higher amount of our hardware revenue occurs in the second half of the year due to our customers' annual procurement and budget cycles. Large enterprises and operators often allocate their capital expenditure budgets at the beginning of their fiscal year (which often coincides with the calendar year). The typical sales cycle for large complex system procurements is six to 12 months, which often results in the customer expenditure occurring towards the end of the year. Customers often seek to expend the budgeted funds prior to the end of the year and the next budget cycle.
Our ESS segment is generally not affected by seasonal impacts.
While the above-described trends have been observed consistently in recent years, we cannot predict with any certainty whether they will continue in the near future as the economy and our customers react to the COVID-19 pandemic and experience associated disruptions and dislocations.
INFLATION
Inflation has not materially affected our operations during the past three years but we are unable to predict the extent or nature of any future inflationary pressure at this time. We believe that our ability to increase the prices charged for our products and services in future periods will depend primarily on competitive pressures or contractual terms. However, we may not be able to maintain pricing levels consistent with inflationary pressure on expenses.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue. Services and other revenue primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service professional services and facilities rental revenue.
Equipment revenue. Equipment revenue primarily includes broadband equipment and networks sold to customers in our consumer and enterprise markets.
Cost of sales - services and other. Cost of sales - services and other primarily
includes the cost of broadband services provided to our consumer and enterprise
customers, maintenance and other contracted services, costs associated with
satellite and transponder leases and services, professional services and
facilities rental.
Cost of sales - equipment. Cost of sales - equipment consists primarily of the
cost of broadband equipment and networks sold to customers in our consumer and
enterprise markets. It also includes certain other costs associated with the
deployment of equipment to our customers.
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Selling, general and administrative expenses. Selling, general and
administrative expenses primarily includes selling and marketing costs and
employee-related costs associated with administrative services (e.g., human
resources and other services and stock-based compensation expense). It also
includes professional fees (e.g. legal, information systems and accounting
services), other expenses associated with facilities and administrative services
and credit losses, which include customer related estimated credit losses and
estimated credit losses on non-current receivables.
Research and development expenses. Research and development expenses primarily
includes costs associated with the design and development of products to support
future growth and provide new technology and innovation to our customers.
Interest income, net. Interest income, net primarily includes interest earned on our cash, cash equivalents and marketable investment securities, and other investments including premium amortization and discount accretion on debt securities, offset by estimated credit losses on our other debt investments.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized primarily includes interest expense associated with our debt and finance lease obligations (net of capitalized interest), amortization of debt issuance costs and interest expense related to certain legal proceedings. Gains (losses) on investments, net. Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities and other investments for which we have elected the fair value option. It may also include realized gains and losses on the sale or exchange of our available-for-sale debt securities, other-than-temporary impairment losses on our available-for-sale debt securities, realized gains and losses on the sale or exchange of other equity investments and other debt investments without readily determinable fair value, adjustments to the carrying amount of investments in unconsolidated affiliates and marketable equity securities resulting from impairments and observable price changes and estimated credit losses.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net include gains and losses resulting from the re-measurement of transactions denominated in foreign currencies. Other, net. Other, net primarily includes dividends received from our marketable investment securities and other non-operating income and expense items that are not appropriately classified elsewhere in the Condensed Consolidated Statements of Operations in our Accompanying Condensed Consolidated Financial Statements.
Net income (loss) from discontinued operations. Net income (loss) from discontinued operations includes the financial results of the BSS Business transferred in the BSS Transaction, except for certain real estate that transferred in the transaction.
EBITDA. EBITDA is defined as Net income (loss) excluding Interest income, net, Interest expense, net of amounts capitalized, Income tax benefit (provision), net, Depreciation and amortization, Net income (loss) from discontinued operations and Net income (loss) attributable to non-controlling interests. EBITDA is not a measure determined in accordance withU.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 withU.S. GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.
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