EchoStar CORP - Quarter Report: 2015 September (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 SEPTEMBER 30, 2015.

 

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):

 

Large accelerated filer T	Accelerated filer  o	Non-accelerated filer o	Smaller reporting
		(Do not check if a smaller	company o
		reporting company)

 

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

 

As of October 28, 2015, the registrant’s outstanding common stock consisted of 44,906,535 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	1
	Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	66
Item 4.	Controls and Procedures	68
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71
	Signatures	72

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about our estimates, expectations, plans, objectives, strategies, and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond.  All statements, other than statements of historical facts, may be forward-looking statements.  Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms.  These forward-looking statements are based on information available to us as of the date of this Form 10-Q and represent management’s current views and assumptions.  Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”), those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in our Form 10-K, and those discussed in other documents we file with the SEC.

 

All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear.  Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements.  We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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PART I — FINANCIAL INFORMATION

Item 1.                     FINANCIAL STATEMENTS

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

		As of
		September 30,			December 31,
		2015			2014
		(Unaudited)			(Audited)
Assets
Current Assets:
Cash and cash equivalents		$	779,105		$	549,053
Marketable investment securities, at fair value		807,662			1,139,103
Trade accounts receivable, net of allowance for doubtful accounts of $13,543 and $14,188, respectively		177,553			163,232
Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero		247,453			251,669
Inventory		73,956			62,963
Prepaid expenses		63,776			67,164
Deferred tax assets		95,525			87,208
Other current assets		12,623			7,699
Total current assets		2,257,653			2,328,091
Noncurrent Assets:
Restricted cash and marketable investment securities		19,258			18,945
Property and equipment, net of accumulated depreciation of $2,910,823 and $2,899,353, respectively		3,320,222			3,194,793
Regulatory authorizations, net		544,343			568,378
Goodwill		510,630			510,630
Other intangible assets, net		147,535			195,662
Investments in unconsolidated entities		214,431			159,962
Other receivable - DISH Network		90,793			90,241
Other noncurrent assets, net		184,278			187,296
Total noncurrent assets		5,031,490			4,925,907
Total assets		$	7,289,143		$	7,253,998
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable		$	211,905		$	188,282
Trade accounts payable - DISH Network		23,247			32,474
Current portion of long-term debt and capital lease obligations		32,228			41,912
Deferred revenue and prepayments		69,239			71,708
Accrued compensation		31,658			32,117
Accrued royalties		22,306			27,590
Accrued interest		41,790			8,905
Accrued expenses and other		110,492			114,745
Total current liabilities		542,865			517,733
Noncurrent Liabilities:
Long-term debt and capital lease obligations, net of current portion		2,195,985			2,325,775
Deferred tax liabilities		745,959			679,524
Other noncurrent liabilities		100,767			107,328
Total noncurrent liabilities		3,042,711			3,112,627
Total liabilities		3,585,576			3,630,360
Commitments and Contingencies (Note 14)
Stockholders’ Equity:
Preferred Stock, $.001 par value, 20,000,000 shares authorized:
Hughes Retail Preferred Tracking Stock, $.001 par value, 13,000,000 shares authorized, 6,290,499 issued and outstanding at each of September 30, 2015 and December 31, 2014		6			6
Common stock, $.001 par value, 4,000,000,000 shares authorized:
Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 50,432,666 shares issued and 44,900,348 shares outstanding at September 30, 2015 and 49,576,247 shares issued and 44,043,929 shares outstanding at December 31, 2014		50			50
Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at each of September 30, 2015 and December 31, 2014		48			48
Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2015 and December 31, 2014		—			—
Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2015 and December 31, 2014		—			—
Additional paid-in capital		3,755,547			3,706,122
Accumulated other comprehensive loss		(112,001		)	(55,856		)
Accumulated earnings (deficit)		70,943			(19,040		)
Treasury stock, at cost		(98,162		)	(98,162		)
Total EchoStar stockholders’ equity		3,616,431			3,533,168
Noncontrolling interest in HSS Tracking Stock		76,437			80,457
Other noncontrolling interests		10,699			10,013
Total stockholders’ equity		3,703,567			3,623,638
Total liabilities and stockholders’ equity		$	7,289,143		$	7,253,998

 

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						For the Nine Months
		Ended September 30,						Ended September 30,
		2015			2014			2015			2014
Revenue:
Equipment revenue - DISH Network		$	157,184		$	299,050		$	577,277		$	907,466
Equipment revenue - other		89,454			101,927			256,362			265,890
Services and other revenue - DISH Network		236,601			215,935			695,358			609,552
Services and other revenue - other		277,640			278,928			824,130			818,783
Total revenue		760,879			895,840			2,353,127			2,601,691
Costs and Expenses:
Cost of sales - equipment (exclusive of depreciation and amortization)		207,989			340,159			706,835			998,205
Cost of sales - services and other (exclusive of depreciation and amortization)		219,686			212,298			645,691			626,660
Selling, general and administrative expenses		91,830			93,127			280,462			271,251
Research and development expenses		19,875			15,685			57,432			44,841
Depreciation and amortization		132,892			142,294			398,547			416,167
Total costs and expenses		672,272			803,563			2,088,967			2,357,124
Operating income		88,607			92,277			264,160			244,567
Other Income (Expense):
Interest income		2,562			2,270			7,896			7,015
Interest expense, net of amounts capitalized		(28,870		)	(41,688		)	(96,136		)	(132,419		)
Loss from partial redemption of debt		—			—			(5,044		)	—
Gains (losses) on marketable investment securities, net		(3,912		)	(27		)	(5,516		)	7
Other-than-temporary impairment loss on available-for-sale securities		(1,243		)	—			(5,892		)	—
Equity in earnings (losses) of unconsolidated affiliates, net		(2,324		)	13,198			(2,580		)	10,137
Other, net		2,115			(1,485		)	(4,078		)	(1,050		)
Total other expense, net		(31,672		)	(27,732		)	(111,350		)	(116,310		)
Income before income taxes		56,935			64,545			152,810			128,257
Income tax provision, net		(28,577		)	(6,108		)	(65,841		)	(28,176		)
Net income		28,358			58,437			86,969			100,081
Less: Net loss attributable to noncontrolling interest in HSS Tracking Stock		(686		)	(2,106		)	(4,020		)	(4,049		)
Less: Net income attributable to other noncontrolling interests		209			375			1,006			1,103
Net income attributable to EchoStar		28,835			60,168			89,983			103,027
Less: Net loss attributable to Hughes Retail Preferred Tracking Stock (Note 2)		(1,267		)	(3,887		)	(7,421		)	(7,474		)
Net income attributable to EchoStar common stock		$	30,102		$	64,055		$	97,404		$	110,501
Weighted-average common shares outstanding - Class A and B common stock:
Basic		92,500			91,358			92,253			91,050
Diluted		93,493			92,971			93,480			92,723
Earnings per share - Class A and B common stock:
Basic		$	0.33		$	0.70		$	1.06		$	1.21
Diluted		$	0.32		$	0.69		$	1.04		$	1.19
Comprehensive Income (Loss)
Net income		$	28,358		$	58,437		$	86,969		$	100,081
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(32,603		)	(18,783		)	(56,009		)	(11,068		)
Recognition of foreign currency translation loss in net income		—			—			1,889			—
Unrealized losses on available-for-sale securities and other		(7,373		)	(6,981		)	(8,208		)	(9,484		)
Recognition of other-than-temporary loss on available-for-sale securities in net income		1,243			—			5,892			—
Recognition of realized (gains) losses on available-for-sale securities in net income		(9		)	27			(29		)	(7		)
Total other comprehensive loss, net of tax		(38,742		)	(25,737		)	(56,465		)	(20,559		)
Comprehensive income (loss)		(10,384		)	32,700			30,504			79,522
Less: Comprehensive loss attributable to noncontrolling interest in HSS Tracking Stock		(686		)	(2,106		)	(4,020		)	(4,049		)
Less: Comprehensive income (loss) attributable to other noncontrolling interests		(111		)	171			686			1,147
Comprehensive income (loss) attributable to EchoStar		$	(9,587	)	$	34,635		$	33,838		$	82,424

 

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 Nine Months
		Ended September 30,
		2015			2014
Cash Flows from Operating Activities:
Net income		$	86,969		$	100,081
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		398,547			416,167
Equity in losses (earnings) of unconsolidated affiliates, net		2,580			(10,137		)
Loss from partial redemption of debt		5,044			—
Losses (gains) and other-than-temporary impairment on marketable investment securities, net		11,408			(7		)
Stock-based compensation		16,204			10,648
Deferred tax provision		63,421			18,773
Changes in current assets and current liabilities, net		(274		)	110,671
Changes in noncurrent assets and noncurrent liabilities, net		3,457			(10,170		)
Other, net		20,567			26,408
Net cash flows from operating activities		607,923			662,434
Cash Flows from Investing Activities:
Purchases of marketable investment securities		(345,391		)	(920,672		)
Sales and maturities of marketable investment securities		669,393			891,917
Purchases of property and equipment		(585,902		)	(434,428		)
Refunds and other receipts related to capital expenditures		105,750			—
Changes in restricted cash and marketable investment securities		(313		)	(2,958		)
Investments in unconsolidated entities		(64,655		)	—
Acquisition of regulatory authorization		(3,428		)	—
Capital contribution to Sling TV Holding		—			(18,569		)
Expenditures for externally marketed software		(16,905		)	(17,401		)
Other, net		(50		)	1,981
Net cash flows from investing activities		(241,501		)	(500,130		)
Cash Flows from Financing Activities:
Repayment of 6 1/2% Senior Notes Due 2019 and related premium		(113,300		)	—
Repayment of other long-term debt and capital lease obligations		(35,303		)	(52,763		)
Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan		19,893			20,678
Net proceeds from issuance of Tracking Stock (Note 2)		—			7,526
Other, net		1,525			(9,752		)
Net cash flows from financing activities		(127,185		)	(34,311		)
Effect of exchange rates on cash and cash equivalents		(9,185		)	(1,721		)
Net increase (decrease) in cash and cash equivalents		230,052			126,272
Cash and cash equivalents, beginning of period		549,053			634,119
Cash and cash equivalents, end of period		$	779,105		$	760,391
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest (including capitalized interest)		$	102,335		$	106,268
Capitalized interest		$	44,335		$	14,670
Cash paid for income taxes		$	5,185		$	11,610
Employee benefits paid in Class A common stock		$	10,711		$	10,310
Satellites and other assets financed under capital lease obligations		$	5,551		$	2,947
Increase in capital expenditures included in accounts payable, net		$	10,297		$	3,805
Net noncash assets transferred from DISH Network in exchange for Tracking Stock (Note 2)		$	—		$	398,095
Assets received from Sling TV Holding (Note 6)		$	—		$	34,075
Reduction of capital lease obligation for AMC-15 and AMC-16 satellites		$	4,500		$	—

 

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

 

We currently operate in the following three business segments:

 

·                  EchoStar Technologies (“ETC”) — which designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunication companies.  Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network.  In addition, we provide our TVEverywhere technology through Slingboxes directly to consumers via retail outlets and online, as well as to the pay-TV operator market.  Beginning in 2015, this segment also includes Move Network, our live linear over-the-top platform business, which includes assets acquired from Sling TV Holding L.L.C. (formerly DISH Digital Holding L.L.C.), and primarily provides support services to DISH Network’s Sling TV operations.

 

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

 

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

 

Our operations also include real estate and other activities that have not been assigned to our operating segments, including, costs incurred in certain satellite development programs and other business development activities, expenses of various corporate departments, and our centralized treasury operations, including, income from our investment portfolio and interest expense on our debt.  These activities are accounted for in the “All Other and Eliminations” column in Note 15.

 

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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Note 2.                     Hughes Retail Preferred Tracking Stock

 

Satellite and Tracking Stock Transaction

 

On February 20, 2014, EchoStar entered into agreements with certain subsidiaries of DISH Network pursuant to which, effective March 1, 2014, (i) EchoStar issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “EchoStar Tracking Stock”) and Hughes Satellite Systems Corporation (“HSS”), a subsidiary of EchoStar, also issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “HSS Tracking Stock” and together with the EchoStar Tracking Stock, the “Tracking Stock”) to DISH Network in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV), including the assumption of related in-orbit incentive obligations, and $11.4 million in cash and (ii) DISH Network began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”). The Tracking Stock tracks the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group” or “HRG”).  The Satellite and Tracking Stock Transaction is consistent with the long-term strategy of the Company to increase the scale of its satellite services business, which provides high-margin revenues, while continuing to benefit from the growth of the satellite broadband business.  As a result of the additional satellites received in the Satellite and Tracking Stock Transaction, EchoStar has been able to increase short-term cash flow that it believes will better position it to achieve its strategic objectives.

 

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

 

We provide unaudited attributed financial information for HRG and the EchoStar Group in an exhibit to our periodic reports on Form 10-Q and Form 10-K.  Set forth below is information about certain terms of the Tracking Stock and the initial recording of the Satellite and Tracking Stock Transaction in our consolidated financial statements.

 

Description of the Tracking Stock

 

Tracking stock is a type of capital stock that the issuing company intends to reflect or “track” the economic performance of a particular business component within the company, rather than reflect the economic performance of the company as a whole.  The Tracking Stock is intended to track the economic performance of the Hughes Retail Group. The shares of the Tracking Stock issued to DISH Network represent an aggregate 80.0% economic interest in the Hughes Retail Group (the shares issued as EchoStar Tracking Stock represent a 51.89% economic interest in the Hughes Retail Group and the shares issued as HSS Tracking Stock represent a 28.11% economic interest in the Hughes Retail Group).  In addition to the remaining 20.0% economic interest in the Hughes Retail Group, EchoStar retains all economic interest in the wholesale satellite broadband business and other businesses of EchoStar.  The 80.0% economic interest was determined at the time of issuance based on the estimated fair value of the consideration received from DISH Network in exchange for the Tracking Stock, consisting of the five satellites and $11.4 million in cash, relative to the estimated fair value of the Hughes Retail Group.  The allocation of economic interest represented by the Tracking Stock of 51.89% issued as EchoStar Tracking Stock and 28.11% issued as HSS Tracking Stock reflected the relative assignment to HSS Tracking Stock and EchoStar Tracking Stock of the aggregate increase in equity resulting from DISH Network’s contribution of the satellites and cash.  The tracking stock structure and the allocation of the tracking stock economic interest between EchoStar and HSS was advantageous to EchoStar from an economic and tax perspective by allowing the Company to increase cash flow by using the value of the Hughes Retail Group to purchase the satellites from DISH Network.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

While DISH Network, as the holder of the Tracking Stock, holds an aggregate 80.0% economic interest in the Hughes Retail Group, the Hughes Retail Group is not a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements.  Holders of the Tracking Stock have no direct claim to the assets of the Hughes Retail Group; rather, holders of the Tracking Stock are stockholders of its respective issuer (EchoStar or HSS) and are subject to all risks and liabilities of the issuer.

 

The EchoStar Tracking Stock is a series of preferred stock consisting of 13,000,000 authorized shares with a par value of $0.001 per share, of which 6,290,499 shares were issued to DISH Network on March 1, 2014. The HSS Tracking Stock is a series of HSS preferred stock consisting of 300 authorized shares with a par value of $0.001 per share, of which 81.128 shares were issued to DISH Network on March 1, 2014.  Following the issuance of the shares of the EchoStar Tracking Stock and the HSS Tracking Stock, DISH Network held 6.5% and 7.5% of the aggregate number of outstanding shares of EchoStar and HSS capital stock, respectively.

 

Holders of shares of the Tracking Stock vote with holders of the outstanding shares of common stock of its respective issuer, as a single class, with respect to any and all matters presented to stockholders for their action or consideration. Each share of the Tracking Stock is entitled to one-tenth (1/10th) of one vote, which resulted in a relative loss of voting power for our Class A and Class B common stockholders.  In the event of a liquidation of EchoStar, holders of shares of EchoStar Class A common stock, EchoStar Class B common stock and the EchoStar Tracking Stock are entitled to receive their respective proportionate interests in the net assets of EchoStar, if any, remaining for distribution upon liquidation, pro rata based upon the aggregate market value of outstanding shares of the EchoStar Tracking Stock (determined by an independent appraisal to the extent such shares are not then listed or quoted on any U.S. national or regional securities exchange or quotation system) as compared to the aggregate market value of outstanding shares of EchoStar Class A common stock and EchoStar Class B common stock.  Similarly, in the event of a liquidation of HSS, holders of shares of HSS common stock and HSS Tracking Stock are entitled to receive their respective proportionate interests in the net assets of HSS, if any, remaining for distribution upon liquidation, pro rata based upon the aggregate market value of outstanding shares of HSS Tracking Stock as compared to the aggregate market value of outstanding shares of HSS common stock.  Market values of HSS Tracking Stock and HSS common stock are to be determined by an independent appraisal to the extent such shares are not then listed or quoted on any U.S. national or regional securities exchange or quotation system.

 

Should our board of directors, or the board of directors of HSS, make a future determination to pay a dividend on any shares of capital stock, the respective board of directors may, in its sole discretion, declare dividends only on shares of common stock, only on shares of the Tracking Stock or on shares of both the common stock and the Tracking Stock of the respective company.  No dividend or other distribution may be paid on any shares of EchoStar Tracking Stock unless a dividend or distribution in an equivalent amount is paid on shares of HSS Tracking Stock and no dividend or other distribution may be paid on any shares of HSS Tracking Stock unless a dividend or distribution in an equivalent amount is paid on shares of EchoStar Tracking Stock.

 

EchoStar and HSS may each, at its option, redeem all of the outstanding shares of its Tracking Stock in exchange for shares of common stock in an HRG Holding Company (as defined below), which EchoStar is required to establish pursuant to the Investor Rights Agreement discussed below.

 

Investor Rights Agreement

 

In connection with the Satellite and Tracking Stock Transaction, EchoStar, HSS and DISH Network entered into an agreement (the “Investor Rights Agreement”) setting forth certain rights and obligations of the parties with respect to the Tracking Stock. Among other provisions, the Investor Rights Agreement provides: (i) certain information and consultation rights for DISH Network; (ii) certain transfer restrictions on the Tracking Stock and certain rights and obligations to offer and sell under certain circumstances (including a prohibition on transfer of the Tracking Stock until March 1, 2015), with continuing transfer restrictions (including a right of first offer in favor of EchoStar) thereafter, an obligation to sell the Tracking Stock to us in connection with a change of control of DISH Network and a right to require us to repurchase the Tracking Stock in connection with a change of control of EchoStar, in each case subject to certain terms and conditions; (iii) certain protective covenants afforded to holders of the Tracking Stock; and (iv) a requirement for EchoStar to establish a holding company subsidiary (an “HRG Holding Company”) that is directly or indirectly wholly-owned by EchoStar and that will hold the Hughes Retail Group.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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

 

Note 3.                     Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do not 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 Form 10-K for the year ended December 31, 2014.

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling interest and variable interest entities where we are the primary beneficiary.  For entities we control but do not wholly own, we record a noncontrolling interest within stockholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.  For the noncontrolling interest in the HSS Tracking Stock (see Note 2), we attribute a portion of HSS net income or loss to the noncontrolling interest in HSS Tracking Stock with such portion equal to 28.11% (the HSS portion of the 80.0% economic interest) of the Hughes Retail Group attributed net income or loss represented by the HSS Tracking Stock, as determined in accordance with the Policy Statements and other documents governing the Tracking Stock.  We use the equity method to account for investments in entities that we do not control but have the ability to significantly influence the operating decisions of the investee.  We use the cost method when we do not have the ability to significantly influence the operating decisions of the investee.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to our condensed consolidated financial statements.  Estimates are used in accounting for, among other things, amortization periods for deferred revenue and deferred subscriber acquisition costs, revenue recognition using the percentage-of-completion method, allowances for doubtful accounts, allowances for sales returns and rebates, warranty obligations, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of awards granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, lease classifications, asset impairments, useful lives and methods for depreciation and amortization of long-lived assets, goodwill impairment testing, royalty obligations, and allocations that affect the net income or loss attributable to the Tracking Stock.  We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances.  Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements.  Weakened economic conditions may increase the inherent uncertainty in the

 

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(Unaudited)

 

estimates and assumptions indicated above.  We review our estimates and assumptions periodically and the effects of revisions are reflected in the period they occur or prospectively if the revised estimate affects future periods.

 

Fair Value Measurements

 

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

 

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

 

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

 

·                  Level 3, defined as unobservable inputs for which little or no market data exists, consistent with characteristics of the asset or liability that would be considered by market participants in a transaction to purchase or sell the asset or liability.

 

Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period.  There were no transfers between levels for each of the nine months ended September 30, 2015 or 2014.

 

As of September 30, 2015 and December 31, 2014, the carrying amounts of our cash and cash equivalents, trade accounts receivable, net of allowance for doubtful accounts, accounts payable and accrued liabilities were equal to or approximated fair value due to their short-term nature or proximity to current market rates.

 

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

 

Fair values for our publicly traded long-term debt are based on quoted market prices in less active markets and are categorized as Level 2 measurements.  The fair values of our privately held debt are Level 2 measurements and are estimated to approximate their carrying amounts based on the proximity of their interest rates to current market rates.  As of September 30, 2015 and December 31, 2014, the fair values of our in-orbit incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $80.3 million and $85.8 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.

 

Research and Development

 

In addition to research and development expenses reported in our condensed consolidated statements of operations and comprehensive income (loss), our cost of sales includes research and development costs funded by customers of approximately $15.2 million and $18.0 million for the three months ended September 30, 2015 and 2014, respectively, and $45.7 million and $52.4 million for the nine months ended September 30, 2015 and 2014, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Capitalized Software Costs

 

Development costs related to software for internal-use and externally marketed software are capitalized and amortized using the straight-line method over the estimated useful life of the software, not in excess of five years.  Capitalized costs of internal-use software are included in “Property and equipment, net” and capitalized costs of externally marketed software are included in “Other noncurrent assets, net” in our condensed consolidated balance sheets.  Externally marketed software is generally installed in the equipment we sell to customers.  We conduct software program reviews for externally marketed capitalized software costs at least annually, or as events and circumstances warrant such a review, to determine if capitalized software development costs are recoverable and to ensure that costs associated with programs that are no longer generating revenue are expensed.  As of September 30, 2015 and December 31, 2014, the net carrying amount of externally marketed software was $59.7 million and $48.9 million, respectively.  We capitalized costs of $5.3 million and $5.1 million for the three months ended September 30, 2015 and 2014, respectively, and costs of $17.0 million and $17.6 million for the nine months ended September 30, 2015 and 2014, respectively, related to the development of externally marketed software.  We recorded amortization expense relating to the development of externally marketed software of $2.2 million and $1.9 million for the three months ended September 30, 2015 and 2014, respectively, and $6.1 million and $3.6 million for the nine months ended September 30, 2015 and 2014, respectively.  The weighted average useful life of our externally marketed software was approximately four years as of September 30, 2015.

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”  In August 2015, the FASB issued Accounting Standards Update No. 2015-14, which deferred by one year the mandatory effective date of ASU 2014-09.  As a result, public entities are required to adopt the new revenue standard in annual periods beginning after December 15, 2017 and in interim periods within those annual periods.  The standard may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption.  Early adoption is permitted, but not before annual periods beginning after December 15, 2016.  We have not determined when we will adopt the new revenue standard or selected the transition method that we will apply upon adoption.  We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

 

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”).  This standard amends the consolidation guidance for variable interest entities (“VIEs”) and general partners’ investments in limited partnerships and similar entities.  ASU 2015-02 is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and requires either a retrospective or a modified retrospective approach as of the beginning of the fiscal year of adoption.  Early adoption is permitted.  We do not expect the adoption of this standard to have a material impact on our consolidated financial statements or related disclosures.  We do not expect to adopt this standard prior to the effective date.

 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”).  This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums.  ASU 2015-03 is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and requires a retrospective approach to adoption.  Early adoption is permitted.  Based on our preliminary assessment, upon adoption of this standard, we expect to present unamortized deferred costs in other noncurrent assets with a carrying amount of $32.8 million and $39.1 million as of September 30, 2015 and December 31, 2014, respectively, as a reduction of our long-term debt balances.  We do not expect to adopt this standard prior to the effective date.

 

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(Unaudited)

 

Note 4.                     Earnings per Share

 

We present basic earnings per share (“EPS”) and diluted EPS for our Class A and Class B common stock.  The EchoStar Tracking Stock is a participating security that shares in our consolidated earnings and therefore, effective March 1, 2014, the issuance date of the EchoStar Tracking Stock, we apply the two-class method to calculate EPS.  Under the two-class method, we allocate net income or loss attributable to EchoStar between common stock and the EchoStar Tracking Stock considering both dividends declared on each class of stock and the participation rights of each class of stock in undistributed earnings.  Based on the 51.89% economic interest in the Hughes Retail Group outstanding as the EchoStar Tracking Stock, we allocate undistributed earnings to the EchoStar Tracking Stock based on 51.89% of the attributed net income or loss of the Hughes Retail Group.  We allocated a net loss of $1.3 million and $3.9 million for the three months ended September 30, 2015 and 2014, respectively, and a net loss of $7.4 million and $7.5 million for the nine months ended September 30, 2015 and 2014, respectively, to the EchoStar Tracking Stock reflecting DISH Network’s 51.89% economic interest (represented by the EchoStar Tracking Stock) in the net loss of the Hughes Retail Group.  Moreover, because the reported amount of “Net income attributable to EchoStar” in our condensed consolidated statements of operations and comprehensive income (loss) excludes DISH Network’s 28.11% economic interest (represented by the HSS Tracking Stock) in the net loss of the Hughes Retail Group (reported as a noncontrolling interest), the amount of consolidated net income or loss allocated to holders of Class A and Class B common stock effectively excludes an aggregate 80.0% of the attributed net loss of the Hughes Retail Group.

 

Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing “Net income attributable to EchoStar common stock” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if our common stock awards were exercised.  The potential dilution from common stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period.  The calculation of our diluted weighted-average common shares outstanding excluded options to purchase shares of our Class A common stock, whose effect would be anti-dilutive, of 3.1 million shares and 2.0 million shares for the three and nine months ended September 30, 2015, respectively, and 0.8 million shares for each of the three and nine months ended September 30, 2014, respectively.  For the three and nine months ended September 30, 2014, the calculation also excluded 0.7 million shares of our Class A common stock that were issuable pursuant to our performance based stock incentive plan contingent upon meeting a company-specific performance measure by March 31, 2015, that was not achieved and which resulted in the expiration of such shares as of March 31, 2015.

 

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(Unaudited)

 

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

 

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2015			2014			2015			2014
		(In thousands, except per share amounts)
Net income attributable to EchoStar		$	28,835		$	60,168		$	89,983		$	103,027
Less: Net loss attributable to EchoStar Tracking Stock		(1,267		)	(3,887		)	(7,421		)	(7,474		)
Net income attributable to EchoStar common stock		$	30,102		$	64,055		$	97,404		$	110,501
Weighted-average common shares outstanding :
Class A and B common stock:
Basic		92,500			91,358			92,253			91,050
Dilutive impact of stock awards outstanding		993			1,613			1,227			1,673
Diluted		93,493			92,971			93,480			92,723
Earnings per share:
Class A and B common stock:
Basic		$	0.33		$	0.70		$	1.06		$	1.21
Diluted		$	0.32		$	0.69		$	1.04		$	1.19

 

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

 

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

 

Accumulated other comprehensive loss includes cumulative foreign currency translation losses of $117.6 million and $63.8 million as of September 30, 2015 and December 31, 2014, respectively.

 

Reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

		Affected Line Item in our		For the Three Months						For the Nine Months
		Condensed Consolidated		Ended September 30,						Ended September 30,
Accumulated Other Comprehensive Loss Components		Statement of Operations		2015			2014			2015			2014
				(In thousands)
Recognition of realized (gains) losses on available-for-sale securities in net income (1)		Gains (losses) on marketable investment securities, net		$	(9	)	$	27		$	(29	)	$	(7	)
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income (2)		Other-than-temporary impairment loss on available-for sale securities		1,243			—			5,892			—
Recognition of foreign currency translation losses in net income (3)		Other, net		—			—			1,889			—
Total reclassifications, net of tax and noncontrolling interests				$	1,234		$	27		$	7,752		$	(7	)

 

(1)         When available-for-sale securities are sold, the related unrealized gains and losses that were previously recognized in other comprehensive income (loss) are reclassified and recognized as realized gains (losses) on available-for-sale securities on the condensed consolidated statement of operations and comprehensive income (loss).

(2)         In June 2015 and September 2015, we recorded other-than-temporary impairment losses on shares of certain common stock included in our strategic equity securities.  See Note 6 for further discussion.

(3)         As a result of the deconsolidation of several of our European subsidiaries in connection with our investment in SmarDTV SA in May 2015, the related cumulative translation adjustments that were previously recognized in other comprehensive income (loss) were reclassified and recognized as a loss within “Other income (expense)” in our condensed consolidated statement of operations and comprehensive income (loss).  See Note 6 for further discussion.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Note 6.                     Investment Securities

 

Our marketable investment securities, restricted cash and cash equivalents, and investments in unconsolidated entities consisted of the following:

 

		As of
		September 30,			December 31,
		2015			2014
		(In thousands)
Marketable investment securities—current:
Corporate bonds		$	731,893		$	1,049,139
Strategic equity securities		43,501			41,705
Other		32,268			48,259
Total marketable investment securities—current		807,662			1,139,103
Restricted marketable investment securities (1)		11,806			11,712
Total		819,468			1,150,815
Restricted cash and cash equivalents (1)		7,452			7,233
Investments in unconsolidated entities—noncurrent:
Cost method		81,174			31,174
Equity method		133,257			128,788
Total investments in unconsolidated entities—noncurrent		214,431			159,962
Total marketable investment securities, restricted cash and cash equivalents, and investments in unconsolidated entities		$	1,041,351		$	1,318,010

 

(1)         Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” in our condensed consolidated balance sheets.

 

Marketable Investment Securities

 

Our marketable investment securities portfolio consists of various debt and equity instruments, which generally are classified as available-for-sale.  As of September 30, 2015, certain of our equity securities were classified as trading securities in order to reflect our investment strategy for those securities.  The value of our investment portfolio depends on the value of such securities and other instruments comprising the portfolio.

 

Corporate Bonds

 

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

 

Strategic Equity Securities

 

Our strategic investment portfolio consists of investments in shares of common stock of public companies, which are highly speculative and have experienced and continue to experience volatility.

 

As of September 30, 2015 and December 31, 2014, our strategic equity securities included shares of common stock of one of our customers that we received in satisfaction of certain milestone payments that were required to be paid to us under an existing long-term contract.  For the three and nine months ended September 30, 2015, “Other-than-temporary impairment loss on available-for-sale securities” included a $1.2 million and $5.9 million other-than-temporary impairment of such common stock in our available-for-sale portfolio, respectively.  For the three and nine months ended September 30, 2015, “Gains (losses) on marketable investment securities, net” includes $3.9 million and $5.5 million in losses on such common stock in our trading securities portfolio, respectively, which had a fair value of $11.3 million as of September 30, 2015.

 

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(Unaudited)

 

Other

 

Our other current marketable investment securities portfolio includes investments in various debt instruments, including U.S. government bonds and variable rate demand notes.

 

Restricted Cash and Marketable Investment Securities

 

As of September 30, 2015 and December 31, 2014, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.

 

Investments in unconsolidated entities - Noncurrent

 

We have several strategic investments in certain non-publicly traded 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.

 

In June 2015, we purchased a noncontrolling equity investment in WorldVu Satellites Limited (“WorldVu”), a low-earth orbit satellite company.  WorldVu plans to develop and operate a global network of low-earth orbit Ku-band satellites to provide internet access to fixed and mobile terminals.  We do not exercise significant influence over the management of WorldVu; accordingly, we account for the investment using the cost method.  Our Hughes segment entered into an agreement to sell certain equipment and services to WorldVu for the ground systems for WorldVu’s low-earth orbit satellites in connection with our investment based on then existing market terms.

 

In May 2015, we acquired a 22.5% interest in the equity and subordinated debt of SmarDTV SA (“SmarDTV”), a Swiss subsidiary of Kudelski SA that offers set-top boxes and conditional access modules, in exchange for cash of $13.9 million and the contribution of several of our European subsidiaries to SmarDTV.  We recorded our initial investment in SmarDTV at $20.0 million, representing our estimate of the investment’s fair value using discounted cash flow techniques.  Our estimate included significant unobservable inputs related to SmarDTV’s future operations and is categorized within Level 3 of the fair value hierarchy.  As of the acquisition date, we deconsolidated the contributed entities and recognized a $2.6 million loss within “Other income (expense)” in our condensed consolidated statement of operations and comprehensive income (loss), consisting of: (i) a $0.7 million loss resulting from our initial investment (at fair value) being less than our $13.9 million cash payment and the carrying amount of the net assets of the deconsolidated entities and (ii) the reclassification from accumulated other comprehensive loss of $1.9 million in foreign currency translation adjustments related to the deconsolidated entities.  The net assets of the deconsolidated entities included net property and equipment of $6.7 million and cash of $0.8 million.  We have the ability to exercise significant influence over SmarDTV and therefore account for our investment using the equity method.  We and SmarDTV also entered into a services agreement pursuant to which our EchoStar Technologies segment purchases certain engineering services from SmarDTV.  See Note 16 for information about our related party transactions with SmarDTV subsequent to the date of our initial investment.

 

On August 8, 2014, an option providing for an unrelated party to acquire a 51.0% equity interest in Dish Mexico was terminated.  Although we have owned 49.0% of the equity of Dish Mexico since its inception in 2008, we accounted for our investment as a 24.0% equity interest using the equity method based on assumed dilution that would occur upon the exercise of the option.  Upon termination of the option, we recorded a $10.3 million adjustment to increase “Equity in earnings (losses) of unconsolidated affiliates” to reflect an increase from 24.0% to 49.0% in our interest in Dish Mexico’s inception-to-date net income.  For periods subsequent to the date of the termination of the option, we account for our investment in Dish Mexico as a 49.0% equity interest using the equity method.

 

Effective August 1, 2014, we and DISH Digital Holding, L.L.C. (now known as Sling TV Holding L.L.C., “Sling TV Holding”) entered into an exchange agreement (the “Exchange Agreement”) pursuant to which we exchanged our one-third voting interest in Sling TV Holding, which we accounted for using the equity method, for a 10.0%

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

non-voting interest in Sling TV Holding, which we account for using the cost method.  As part of this transaction, we received a distribution of certain noncurrent assets associated with an internet protocol television technology business, including property and equipment, technology-related intangible assets and goodwill.  Because we and Sling TV Holding are entities under common control, we recorded the distributed assets at their carrying amounts in Sling TV Holding’s accounts, which totaled $34.1 million at the date of distribution, and we recorded our non-voting interest at $1.1 million, which represents 10.0% of the carrying amount of the remaining equity in Sling TV Holding.  These amounts exceeded the carrying amount of our existing equity method investment by $8.8 million, which was credited to additional paid-in capital because gain recognition generally is precluded by GAAP in exchanges between entities under common control.  In connection with our obligations associated with our interest prior to the Exchange Agreement, we contributed $18.6 million in cash to Sling TV Holding during the third quarter of 2014.  We have no obligation to contribute additional capital to Sling TV Holding.  See Note 16 for more information regarding the Exchange Agreement with Sling TV Holding.

 

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 September 30, 2015
Debt securities:
Corporate bonds		$	732,354		$	36		$	(497	)	$	731,893
Other (including restricted)		44,069			8			(3		)	44,074
Equity securities - strategic		26,188			9,373			(3,336		)	32,225
Total marketable investment securities		$	802,611		$	9,417		$	(3,836	)	$	808,192
As of December 31, 2014
Debt securities:
Corporate bonds		$	1,050,803		$	33		$	(1,697	)	$	1,049,139
Other (including restricted)		59,977			1			(7		)	59,971
Equity securities - strategic		32,081			12,849			(3,225		)	41,705
Total marketable investment securities		$	1,142,861		$	12,883		$	(4,929	)	$	1,150,815

 

As of September 30, 2015, restricted and non-restricted marketable investment securities included debt securities of $754.2 million with contractual maturities of one year or less and $21.8 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.  We believe that changes in the estimated fair values of these securities are primarily related to temporary market conditions as of September 30, 2015.

 

		As of
		September 30, 2015						December 31, 2014
		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
		(In thousands)
Less than 12 months		$	485,186		$	(3,751	)	$	968,941		$	(4,929	)
12 months or more		135,389			(85		)	—			—
Total		$	620,575		$	(3,836	)	$	968,941		$	(4,929	)

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Sales of Marketable Investment Securities

 

We recognized minimal gains and losses from the sales of our available-for-sale marketable investment securities for each of the three and nine months ended September 30, 2015 and 2014.

 

Proceeds from sales of our available-for-sale marketable investment securities totaled $4.0 million and $36.9 million for the three months ended September 30, 2015 and 2014, respectively, and $94.2 million and $42.3 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Fair Value Measurements

 

Our current marketable investment securities are measured at fair value on a recurring basis as summarized in the table below.  As of September 30, 2015 and December 31, 2014, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

 

		As of
		September 30, 2015									December 31, 2014
		Total			Level 1			Level 2			Total			Level 1			Level 2
		(In thousands)
Cash equivalents (including restricted)		$	701,706		$	10,540		$	691,166		$	437,886		$	58,108		$	379,778
Debt securities:
Corporate bonds		$	731,893		$	—		$	731,893		$	1,049,139		$	—		$	1,049,139
Other (including restricted)		44,074			4,523			39,551			59,971			5,630			54,341
Equity securities - strategic		43,501			43,501			—			41,705			41,705			—
Total marketable investment securities		$	819,468		$	48,024		$	771,444		$	1,150,815		$	47,335		$	1,103,480

 

Note 7.                     Trade Accounts Receivable

 

Our trade accounts receivable consisted of the following:

 

		As of
		September 30,			December 31,
		2015			2014
		(In thousands)
Trade accounts receivable		$	156,645		$	160,886
Contracts in process, net		34,451			16,534
Total trade accounts receivable		191,096			177,420
Allowance for doubtful accounts		(13,543		)	(14,188		)
Trade accounts receivable - DISH Network		247,453			251,669
Total trade accounts receivable, net		$	425,006		$	414,901

 

As of September 30, 2015 and December 31, 2014, progress billings offset against contracts in process amounted to $0.8 million and $2.5 million, respectively.

 

15