EchoStar CORP - Quarter Report: 2013 March (Form 10-Q)

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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 MARCH 31, 2013.

 

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)

 

 

(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):

 

 

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 April 30, 2013, the registrant’s outstanding common stock consisted of 40,921,903 shares of Class A common stock and 47,687,039 shares of Class B common stock.

 

 

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TABLE OF CONTENTS

 

Disclosure Regarding Forward-Looking Statements		i
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	44
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults upon Senior Securities	None
Item 4.	Mine Safety Disclosures	None
Item 5.	Other Information	None
Item 6.	Exhibits	50
Signatures		51

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

We make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 throughout this report.  Whenever you read a statement that is not simply a statement of historical fact (such as when we describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or “anticipate” will occur and other similar statements), you must remember that our expectations may not be achieved, even though we believe they are reasonable.  We do not guarantee that any future transactions or events described herein will happen as described or that they will happen at all.  You should read this report completely and with the understanding that actual future results may be materially different from what we expect.  Whether actual events or results will conform with our expectations and predictions is subject to a number of risks and uncertainties.

 

The risks and uncertainties include, but are not limited to, the following:

 

General Risks Affecting Our Business

 

·                  We currently derive a significant portion of our revenue from our primary customer, DISH Network Corporation (“DISH Network”).  The loss of, or a significant reduction in, orders from, or a decrease in selling prices of digital set-top boxes, transponder leasing, provision of digital broadcast services, and/or other products or services to DISH Network would significantly reduce our revenue and adversely impact our results of operations.

 

·                  Economic weakness, including high unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.

 

·                  Our future financial performance depends in part on our ability to penetrate new international markets for digital set-top boxes.

 

·                  The digital set-top box industry is extremely competitive.  We expect to continue to face competition from new market entrants.

 

·                  We currently face competition from established competitors in the satellite service business and may face competition from others in the future.

 

·                  The network communications market is highly competitive.  We may be unsuccessful in competing effectively against other terrestrial and satellite broadband and network providers.

 

·                  The average selling price and gross margins of our digital set-top boxes have been decreasing and may decrease even further, which could negatively impact our financial position and results of operations.

 

·                  If significant numbers of television viewers are unwilling to pay for pay-TV services that utilize digital set-top boxes, we may not be able to sustain our current revenue level.

 

·                  We may have unused satellite capacity in our EchoStar Satellite Services segment, and our results of operations may be materially adversely affected if we are not able to lease this capacity to third parties.

 

·                  The failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment could harm our results of operations.

 

·                  We are dependent upon third-party providers for components, manufacturing, installation services, and customer support services, and our results of operations may be materially adversely affected if any of these third-party providers fail to appropriately deliver the contracted goods or services.

 

·                  Our foreign operations expose us to regulatory risks and restrictions not present in our domestic operations.

 

·                  We may experience significant financial losses on our existing investments.

 

·                  We may pursue acquisitions and other strategic transactions to complement or expand our business, which may not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.

 

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·                  We may not be able to generate cash to meet our debt service needs or fund our operations.

 

·                  Covenants in HSS’ indentures restrict its business in many ways.

 

·                  We rely on key personnel and the loss of their services may negatively affect our businesses.

 

Risks Related to Our Satellites

 

·                  Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.

 

·                  Our satellites have minimum design lives ranging from 12 to 15 years, but could fail or suffer reduced capacity before then.

 

·                  Our satellites under construction are subject to risks related to construction and launch that could limit our ability to utilize these satellites.

 

·                  We generally do not have commercial insurance coverage on the satellites we use and could face significant impairment charges if one of our uninsured satellites fails.

 

·                  Our use of certain satellites is often dependent on satellite coordination agreements, which may be difficult to obtain.

 

·                  Our dependence on outside contractors could result in delays related to the design, manufacture and launch of our new satellites, which could in turn adversely affect our operating results.

 

Risks Related to Our Products and Technology

 

·                  If we are unable to properly respond to technological changes, our business could be significantly harmed.

 

·                  Our future growth depends on growing demand for advanced technologies.

 

·                  Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others.  The loss of our intellectual property rights or our infringement of the intellectual property rights of others could have a significant adverse impact on our business.

 

·                  We are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property.

 

·                  If the encryption and related security technology used in our digital set-top boxes is compromised, sales of our digital set-top boxes may decline.

 

·                  We rely on network and information systems and other technologies and a disruption, cyber attack, failure or destruction of such networks, systems or technologies may disrupt or harm our business.

 

·                  If our products contain defects, we could be subject to significant costs to correct such defects and our product and network service contracts could be delayed or cancelled, which could adversely affect our revenues.

 

Risks Related to the Regulation of Our Business

 

·                  Our business is subject to risks of adverse government regulation.

 

·                  Our business depends on Federal Communications Commission (“FCC”) and other licenses that can expire or be revoked or modified and applications for FCC and other licenses that may not be granted.

 

·                  Our ability to sell our digital set-top boxes to other operators depends on our ability to obtain licenses to use the conditional access systems utilized by these other operators.

 

·                  We may not be aware of certain foreign government laws or regulations or changes to them which could have a significant adverse impact on our business.

 

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·                  Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.

 

·                  We may face difficulties in accurately assessing and collecting contributions towards the Universal Service Fund.

 

Other Risks

 

·                  We are controlled by one principal stockholder who is our Chairman.

 

·                  We have potential conflicts of interest with DISH Network due to our common ownership and management.

 

·                  It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders, because of our capital structure.

 

·                  We cannot assure you that there will not be deficiencies leading to material weaknesses in our internal control over financial reporting.

 

·                  We have not been an independent company for a significant amount of time and we may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company.

 

·                  Although we expect that the acquisition of Hughes Communications, Inc. and its subsidiaries will benefit us, those expected benefits may not occur because of the complexity of integration and other challenges.

 

·                  We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission (“SEC”).

 

All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear.  Investors should consider the risks described herein and should not place undue reliance on any forward-looking statements.  We assume no responsibility for updating forward-looking information contained or incorporated by reference herein or in other reports we file with the SEC.

 

In this report, the words “EchoStar,” the “Company,” “we,” “our” and “us” refer to EchoStar Corporation and its subsidiaries, unless the context otherwise requires.  “DISH Network” refers to DISH Network Corporation and its subsidiaries, unless the context otherwise requires.

 

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PART I — FINANCIAL INFORMATION

 

Item 1.         FINANCIAL STATEMENTS

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

		As of
		March 31,			December 31,
		2013			2012
Assets
Current Assets:
Cash and cash equivalents		$	737,410		$	731,614
Marketable investment securities		789,564			815,951
Trade accounts receivable, net of allowance for doubtful accounts of $16,051 and $16,894, respectively		197,932			211,373
Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero		309,927			281,845
Inventory		87,554			84,348
Deferred tax assets		25,824			23,317
Other current assets		71,822			66,201
Total current assets		2,220,033			2,214,649
Noncurrent Assets:
Restricted cash and marketable investment securities		21,468			29,045
Property and equipment, net of accumulated depreciation of $2,361,258 and $2,261,699, respectively		2,586,173			2,612,284
Regulatory authorizations		563,760			562,712
Goodwill		507,924			507,924
Other intangible assets, net		326,132			347,496
Other investment securities		179,571			183,211
Other noncurrent assets, net		144,891			142,912
Total noncurrent assets		4,329,919			4,385,584
Total assets		$	6,549,952		$	6,600,233
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable		$	219,055		$	284,728
Trade accounts payable - DISH Network		9,784			26,960
Current portion of long-term debt and capital lease obligations		65,136			67,706
Deferred revenue and other		48,473			47,652
Accrued interest		42,138			6,775
Accrued royalties		17,231			18,034
Accrued expenses and other		118,676			135,470
Total current liabilities		520,493			587,325
Noncurrent Liabilities:
Long-term debt and capital lease obligations, net of current portion		2,397,542			2,420,793
Deferred tax liabilities		366,815			373,447
Long-term deferred revenue and other long-term liabilities		89,042			68,441
Total noncurrent liabilities		2,853,399			2,862,681
Total liabilities		3,373,892			3,450,006
Commitments and Contingencies (Note 12)
Stockholders’ Equity:
Preferred Stock, $.001 par value, 20,000,000 shares authorized, none issued and outstanding		—			—
Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 46,348,988 and 45,449,362 shares issued, and 40,816,670 and 39,917,044 shares outstanding, respectively		46			45
Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding		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		3,424,498			3,394,646
Accumulated other comprehensive income (“AOCI”)		11,679			18,752
Accumulated deficit		(170,981		)	(174,439		)
Treasury stock, at cost		(98,162		)	(98,162		)
Total EchoStar stockholders’ equity		3,167,128			3,140,890
Noncontrolling interests		8,932			9,337
Total stockholders’ equity		3,176,060			3,150,227
Total liabilities and stockholders’ equity		$	6,549,952		$	6,600,233

 

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

 

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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

		For the Three Months
		Ended March 31,
		2013			2012
Revenue:
Equipment revenue - DISH Network		$	308,875		$	237,365
Equipment revenue - other		102,090			157,347
Services and other revenue - DISH Network		139,925			126,658
Services and other revenue - other		244,564			243,410
Total revenue		795,454			764,780
Costs and Expenses:
Cost of sales - equipment		353,855			337,166
Cost of sales - services and other		179,294			167,830
Selling, general and administrative expenses		93,908			96,979
General and administrative expenses - DISH Network		268			1,955
Research and development expenses		17,494			17,350
Depreciation and amortization		126,699			114,090
Total costs and expenses		771,518			735,370
Operating income		23,936			29,410
Other Income (Expense):
Interest income		1,977			2,879
Interest expense, net of amounts capitalized		(49,100		)	(38,621		)
Realized gains on marketable investment securities and other investments (includes reclassification of realized gains on available-for-sale (“AFS”) securities out of AOCI of $16,530 and $127,995, respectively		19,463			127,995
Equity in earnings (losses) of unconsolidated affiliates, net		(3,905		)	4,185
Other, net		5,481			348
Total other income (expense), net		(26,084		)	96,786
Income (loss) before income taxes		(2,148		)	126,196
Income tax benefit, net		5,646			305
Net income		3,498			126,501
Less: Net income (loss) attributable to noncontrolling interests		40			(87		)
Net income attributable to EchoStar		$	3,458		$	126,588
Weighted-average common shares outstanding - Class A and B common stock:
Basic		88,178			86,684
Diluted		89,600			87,326
Earnings per share - Class A and B common stock:
Basic		$	0.04		$	1.46
Diluted		$	0.04		$	1.45
Comprehensive Income (Loss)
Net income		$	3,498		$	126,501
Other comprehensive loss, net of tax:
Foreign currency translation adjustments		1,950			5,092
Unrealized holding gains on AFS securities and other		7,529			43,429
Recognition of previously unrealized gains on AFS securities in net income		(16,530		)	(127,995		)
Total other comprehensive loss, net of tax		(7,051		)	(79,474		)
Comprehensive income (loss)		(3,553		)	47,027
Less: Comprehensive income attributable to noncontrolling interests		62			171
Comprehensive income (loss) attributable to EchoStar		$	(3,615	)	$	46,856

 

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

 

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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		For the Three Months
		Ended March 31,
		2013			2012
Cash Flows from Operating Activities:
Net income		$	3,498		$	126,501
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		126,699			114,090
Realized gains on marketable investment securities and other investments		(19,463		)	(127,995		)
Equity in losses (earnings) of unconsolidated affiliates, net		3,905			(4,185		)
Stock-based compensation		4,984			6,918
Deferred tax benefit		(9,189		)	(4,766		)
Changes in current assets and current liabilities, net		(64,000		)	(34,183		)
Change in noncurrent assets and noncurrent liabilities, net		3,999			(3,681		)
Other, net		(249		)	6,511
Net cash flows from operating activities		50,184			79,210
Cash Flows from Investing Activities:
Purchases of marketable investment securities		(181,709		)	(278,902		)
Sales of marketable investment securities		213,577			348,754
Purchases of property and equipment		(72,620		)	(114,007		)
Change in restricted cash and marketable investment securities		7,577			299
Purchase of strategic investments included in marketable and other investment securities		(7,156		)	(374		)
Other, net		(2,889		)	(4,554		)
Net cash flows from investing activities		(43,220		)	(48,784		)
Cash Flows from Financing Activities:
Net proceeds from Class A common stock options exercised and issued under the Employee Stock Purchase Plan		19,934			1,297
Repayment of long-term debt and capital lease obligations		(21,450		)	(17,477		)
Other		292			59
Net cash flows from financing activities		(1,224		)	(16,121		)
Effect of exchange rates on cash and cash equivalents		56			754
Net increase in cash and cash equivalents		5,796			15,059
Cash and cash equivalents, beginning of period		731,614			614,035
Cash and cash equivalents, end of period		$	737,410		$	629,094
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest (including capitalized interest)		$	14,912		$	13,737
Capitalized interest		$	200		$	11,598
Cash received for interest		$	5,692		$	4,993
Cash paid for income taxes		$	2,286		$	1,648
Employee benefits paid in Class A common stock		$	4,756		$	—
Satellites and other assets financed under capital lease obligations		$	1,848		$	28,455
In-orbit incentive obligation for Echostar XVI		$	18,000		$	—
Reduction of capital lease obligation for AMC-16		$	6,694		$	—
Capital expenditures included in accounts payable		$	5,812		$	7,652

 

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.  In 2008, DISH Network Corporation and its subsidiaries (“DISH Network”) contributed their digital set-top box business and certain infrastructure and other assets, including certain of its satellites, uplink and satellite transmission assets, real estate, and other assets and related liabilities to us (the “Spin-off”).  Since the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies, and neither entity has any ownership interest in the other.  However, a substantial majority of the voting power of the shares of both companies is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.  Our Class A common stock is publicly traded on the Nasdaq Global Select Market under the symbol “SATS.”  We are a global provider of satellite operations, video delivery solutions, and broadband satellite technologies and services for home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments.

 

We currently operate in three business segments.

 

·                  EchoStar Technologies — which designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers, telecommunication and international cable companies and, with respect to Slingboxes, directly to consumers via retail outlets.  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.

 

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

 

·                  EchoStar Satellite Services — which uses certain of our owned and leased in-orbit satellites and related licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network Corporation and its subsidiaries (“DISH Network”), and secondarily to Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture we entered into in 2008, United States government service providers, state agencies, Internet service providers, broadcast news organizations, programmers, and private enterprise customers.

 

Note 2.                     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 United States (“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 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, 2012.  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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.  Non-majority owned investments are accounted for using the equity method when we 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 estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period.  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/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, 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, and royalty obligations.  Weakened economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above.  We base our estimates and assumptions on historical experience and on various other factors that we believe to be relevant under the circumstances.  Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts, and such differences may be material to our Condensed Consolidated Financial Statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.

 

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 apply 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

 

·                  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 during the first quarter of 2013 or 2012.

 

As of March 31, 2013 and December 31, 2012, the carrying amount of our cash and cash equivalents, trade accounts receivable, net of allowance for doubtful accounts, and accrued liabilities were equal to or approximated fair value due to their short-term nature or proximity to current market rates.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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.  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 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 10 for the fair value of our long-term debt.  As of March 31, 2013 and December 31, 2012, 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 $48 million and $30 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.  Those fair value measurements typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.

 

New Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2013-02 to improve the reporting of reclassifications out of accumulated other comprehensive income (loss).  ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income (loss) on the respective line items either on the face of the statements of operations or in the notes to the financial statements.  ASU 2013-02 is effective for all reporting periods including interim periods beginning after December 15, 2012, with early adoption permitted.  We have applied the requirements of ASU 2013-02 in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the quarter ended March 31, 2013.

 

Note 3.                     Earnings per Share

 

We present both basic earnings per share (“EPS”) and diluted EPS.  Basic EPS excludes potential dilution and is computed by dividing “Net income 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 stock awards were exercised.  The potential dilution from stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period.  As of March 31, 2013 and 2012, the calculation of our diluted weighted-average common shares outstanding excluded (i) 2.1 million and 4.4 million shares, respectively, underlying options to purchase shares of our Class A common stock as their effect is anti-dilutive and (ii) 0.7 million and 0.7 million shares, respectively, of our Class A common stock that are contingently issuable based upon meeting a company-specific goal, which was not achieved as of March 31, 2013, by March 31, 2015 pursuant to our performance-based stock incentive plan.

 

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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

		For the Three Months Ended March 31,
		2013			2012
		(In thousands, except per share amounts)
Net income attributable to EchoStar		$	3,458		$	126,588
Weighted-average common shares outstanding - Class A and B common stock:
Basic		88,178			86,684
Dilutive impact of stock awards outstanding		1,422			642
Diluted		89,600			87,326
Earnings per share - Class A and B common stock:
Basic		$	0.04		$	1.46
Diluted		$	0.04		$	1.45

 

Note 4.                     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.

 

Note 5.                     Investment Securities

 

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

 

		As of
		March 31,			December 31,
		2013			2012
		(In thousands)
Marketable investment securities—current:
Corporate bonds		$	642,309		$	654,096
VRDNs		65,010			66,145
Strategic		46,231			56,288
Other		36,014			39,422
Total marketable investment securities—current		789,564			815,951
Restricted marketable investment securities (1)		9,253			7,529
Total		798,817			823,480
Restricted cash and cash equivalents (1)		12,215			21,516
Other investment securities—noncurrent:
Cost method		26,073			27,711
Equity method		153,498			155,500
Total other investment securities—noncurrent		179,571			183,211
Total marketable investment securities, restricted cash and cash equivalents, and other investment securities		$	990,603		$	1,028,207

 

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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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 municipal 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

 

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.

 

Restricted Cash and Marketable Investment Securities

 

As of March 31, 2013 and December 31, 2012, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.

 

Other Investment Securities - 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.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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 March 31, 2013
Debt securities:
Corporate bonds		$	641,886		$	530		$	(107	)	$	642,309
VRDNs		65,010			—			—			65,010
Other (including restricted)		45,263			5			(1		)	45,267
Equity securities - strategic		20,314			26,033			(116		)	46,231
Total marketable investment securities		$	772,473		$	26,568		$	(224	)	$	798,817
As of December 31, 2012
Debt securities:
Corporate bonds		$	653,812		$	591		$	(307	)	$	654,096
VRDNs		66,145			—			—			66,145
Other (including restricted)		46,946			5			—			46,951
Equity securities - strategic		21,214			35,074			—			56,288
Total marketable investment securities		$	788,117		$	35,670		$	(307	)	$	823,480

 

As of March 31, 2013, our restricted and non-restricted marketable investment securities included debt securities of $663 million with contractual maturities of one year or less and $90 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
		March 31, 2013						December 31, 2012
		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
		(In thousands)
Less than 12 months		$	225,002		$	(186	)	$	275,587		$	(288	)
12 months or more		52,829			(38		)	12,963			(19		)
Total		$	277,831		$	(224	)	$	288,550		$	(307	)

 

Realized Gains on Marketable Investment Securities and Other Investments

 

For the three months ended March 31, 2013 and 2012, we recognized $19 million and $128 million, respectively, of gains from the sales of our marketable investment securities and other investments.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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 March 31, 2013 and December 31, 2012, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

 

		As of
		March 31, 2013									December 31, 2012
		Total			Level 1			Level 2			Total			Level 1			Level 2
		(In thousands)
Cash equivalents (including restricted)		$	446,361		$	9,730		$	436,631		$	533,943		$	23,621		$	510,322
Debt securities:
Corporate bonds		$	642,309		$	—		$	642,309		$	654,096		$	—		$	654,096
VRDNs		65,010			—			65,010			66,145			—			66,145
Other (including restricted)		45,267			—			45,267			46,951			—			46,951
Equity securities - strategic		46,231			46,231			—			56,288			56,288			—
Total marketable investment securities		$	798,817		$	46,231		$	752,586		$	823,480		$	56,288		$	767,192

 

Investments in TerreStar

 

In February 2008, we completed several transactions under a Master Investment Agreement between us, TerreStar Corporation and TerreStar Networks Inc. (“TerreStar”).  Under the Master Investment Agreement, we acquired, among other things, $50 million in aggregate principal amount of TerreStar’s 6 1/2% Senior Exchangeable Paid-in-Kind Notes due June 15, 2014 (“Exchangeable Notes”).  TerreStar and certain of its affiliates filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on October 19, 2010.  The United States Bankruptcy Court for the Southern District of New York confirmed TerreStar’s Chapter 11 plan of reorganization (the “TerreStar Plan”) on February 15, 2012.  Effective March 29, 2012, the Exchangeable Notes were cancelled pursuant to the TerreStar Plan.  As of March 31, 2013, we had no investment in TerreStar.

 

Note 6.                     Trade Accounts Receivable

 

Our trade accounts receivable consisted of the following:

 

		As of
		March 31,			December 31,
		2013			2012
		(In thousands)
Trade accounts receivable		$	180,111		$	188,463
Contracts in process		33,872			39,804
Total trade accounts receivable		213,983			228,267
Allowance for doubtful accounts		(16,051		)	(16,894		)
Total trade accounts receivable, net		$	197,932		$	211,373

 

As of each of March 31, 2013 and December 31, 2012, progress billings offset against contracts in process amounted to $5 million.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Note 7.                     Inventory

 

Our inventory consisted of the following:

 

		As of
		March 31,			December 31,
		2013			2012
		(In thousands)
Finished goods		$	61,555		$	57,540
Raw materials		13,353			19,041
Work-in-process		12,646			7,767
Total inventory		$	87,554		$	84,348

 

Note 8.                     Property and Equipment

 

Property and equipment consisted of the following:

 

		Depreciable		As of
		Life		March 31,			December 31,
		(In Years)		2013			2012
				(In thousands)
Land		—		$	42,579		$	42,312
Buildings and improvements		1-40		365,548			363,338
Furniture, fixtures, equipment and other		1-12		1,088,092			1,064,071
Customer rental equipment		1-5		278,461			251,708
Satellites - owned (1)		10-15		2,127,826			1,762,264
Satellites acquired under capital leases		10-15		935,104			935,104
Construction in progress		—		109,821			455,186
Total property and equipment				4,947,431			4,873,983
Accumulated depreciation (1)				(2,361,258		)	(2,261,699		)
Property and equipment, net				$	2,586,173		$	2,612,284

 

(1)     Balances reclassified for reduction of a satellite previously retired from commercial service.

 

“Construction in progress” consisted of the following:

 

		As of
		March 31,			December 31,
		2013			2012
		(In thousands)
Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:
EchoStar XIX		$	11,886		$	9,325
EchoStar XVI		—			345,090
Other		37,353			25,710
Uplinking equipment		35,046			37,264
Other		25,536			37,797
Construction in progress		$	109,821		$	455,186

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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

 

		For the Three Months
		Ended March 31,
		2013			2012
		(In thousands)
Satellites		$	46,544		$	37,059
Furniture, fixtures, equipment and other		31,965			31,808
Customer rental equipment		23,287			18,765
Buildings and improvements		3,316			3,195
Total depreciation expense		$	105,112		$	90,827

 

Satellites

 

As of March 31, 2013, we utilized 12 of our owned and leased satellites in geostationary 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.

 

Recent Developments

 

EchoStar VI and VIII.  DISH Network leases satellite capacity from us on certain of our satellites.  Beginning in the first quarter of 2013, the leases for the EchoStar VI and VIII satellites expired in accordance with their terms and DISH Network no longer leases capacity from us on these satellites.

 

EchoStar XVI.  In November 2012, we launched our EchoStar XVI satellite, a direct broadcast satellite (“DBS”).  EchoStar XVI is fully leased to DISH Network for the delivery of direct-to-home (“DTH”) broadcast services to DISH Network customers in the United States.  We began to lease capacity on EchoStar XVI to DISH Network in January 2013.

 

EchoStar XIX.  In March 2013, we entered into a contract for the design and construction of EchoStar XIX, which is expected to be launched in mid-2016.  EchoStar XIX is our next-generation, high throughput geostationary satellite that will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for our HughesNet service to the consumer market in North America.

 

Satellite Anomalies

 

Certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful life and/or commercial operation.  There can be no assurance that future anomalies will not further impact the remaining useful life and 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.  The recent satellite anomalies that affected certain of our satellites are discussed below.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Owned Satellites

 

EchoStar III.  EchoStar III was originally designed to operate a maximum of 32 DBS transponders in a mode that provides service to the entire continental United States (“CONUS”).  As a result of traveling wave tube amplifiers (“TWTAs”) failures in previous years, including the most recent failures in February 2013 and April 2013, only six transponders are currently available for use.  It is likely that additional TWTA failures will occur from time to time in the future and such failures could further impact commercial operation of the satellite.  EchoStar III was fully depreciated in 2009.

 

EchoStar XII.  EchoStar XII was designed to operate using 13 Ku Band broadcasting satellite service frequencies.  Prior to 2010, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays, which reduced the number of transponders that could be operated.  In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced electrical power available.  It is likely that EchoStar XII will experience additional solar array anomalies and there can be no assurance that the existing anomalies or any future anomalies will not further impact operational capability of EchoStar XII.  The satellite is currently leased to DISH Network.

 

Leased Satellites

 

Pursuant to our satellite lease agreements, we are entitled to a reduction in our monthly recurring lease payments in the event of a partial loss of satellite capacity, which ordinarily results in a corresponding reduction in the related capital lease obligation and the carrying amount of the respective satellite.

 

AMC-16.  As a result of prior period depreciation and adjustments associated with satellite anomalies, the net carrying amount of AMC-16 was reduced to zero as of December 31, 2010.  Therefore, subsequent reductions in our recurring lease payments are recognized as gains in “Other, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  In November 2012, AMC-16 experienced a solar-power anomaly, which caused a partial loss of the satellite capacity.  Accordingly, we reduced our capital lease obligation and recognized a corresponding gain of $7 million for the three months ended March 31, 2013.  There can be no assurance that the existing anomalies or any future anomalies will not reduce AMC-16’s useful life or further impact its commercial operations.

 

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, these anomalies are not necessarily considered to be significant events that would require a test of recoverability.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Note 9.                     Other Intangible Assets

 

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

 

		Weighted		As of
		Average		March 31, 2013									December 31, 2012
		Useful life					Accumulated			Carrying						Accumulated			Carrying
		(in Years)		Cost			Amortization			Amount			Cost			Amortization			Amount
		(In thousands)
Customer relationships		8		$	293,932		$	(123,590	)	$	170,342		$	293,932		$	(113,906	)	$	180,026
Contract-based		10		255,366			(184,813		)	70,553			255,366			(178,138		)	77,228
Technology-based		7		126,272			(70,562		)	55,710			126,387			(66,338		)	60,049
Trademark portfolio		20		29,700			(2,723		)	26,977			29,700			(2,351		)	27,349
Favorable leases		4		4,707			(2,157		)	2,550			4,707			(1,863		)	2,844
Total other intangible assets				$	709,977		$	(383,845	)	$	326,132		$	710,092		$	(362,596	)	$	347,496

 

Customer relationships are amortized predominantly in relation to the estimated cash flows over the life of the intangible asset.  Other intangible assets are amortized on a straight-line basis over the periods the assets are expected to contribute to our cash flows.  For the three months ended March 31, 2013 and 2012, our total amortization expense was $22 million and $23 million, respectively.

 

Note 10.              Debt

 

The following table summarizes the carrying amounts and fair values of our debt:

 

		As of
		March 31, 2013						December 31, 2012
		Carrying			Fair			Carrying			Fair
		Amount			Value			Amount			Value
		(In thousands)
6 1/2% Senior Secured Notes due 2019		$	1,100,000		$	1,205,050		$	1,100,000		$	1,210,000
7 5/8% Senior Notes due 2021		900,000			1,028,430			900,000			1,026,450
Other		1,467			1,467			2,041			2,041
Subtotal		2,001,467			$	2,234,947		2,002,041			$	2,238,491
Capital lease obligations (1)		461,211						486,458
Total debt and capital lease obligations		2,462,678						2,488,499
Less: Current portion		(65,136		)				(67,706		)
Long-term portion of debt and capital lease obligations		$	2,397,542					$	2,420,793

 

(1) Disclosure regarding the fair value of capital lease obligations is not required.

 

We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).

 

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