Unless the context indicates otherwise, the terms "we," "us," "EchoStar ," the "Company" and "our" refer toEchoStar Corporation and its subsidiaries. The following Management's Discussion and Analysis of our Financial Condition and Results of Operations ("Management's Discussion and Analysis") should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and notes thereto ("Accompanying Condensed Consolidated Financial Statements") in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"). This Management's Discussion and Analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this Management's Discussion and Analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Refer to the Disclosure Regarding Forward-Looking Statements in this Form 10-Q for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, refer to the Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K ("Form 10-K") filed with theSecurities and Exchange Commission ("SEC"). Further, such forward-looking statements speak only as of the date of this Form 10-Q and we undertake no obligation to update them.
EXECUTIVE SUMMARY
InSeptember 2019 , pursuant to a master transaction agreement (the "Master Transaction Agreement") with DISH and a wholly-owned subsidiary of DISH ("Merger Sub"), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (together with DISH, "DISH Network") and our joint venture Dish Mexico,S. de R.L. de C.V. ("Dish Mexico") and its subsidiaries, and (2) telemetry, tracking and control ("TT&C") services for satellites owned by DISH Network and a portion of our other businesses (collectively, the "BSS Business") to one of our former subsidiaries,EchoStar BSS Corporation ("BSS Corp. "), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock ofBSS Corp. , par value$0.001 per share ("BSS Common Stock"), equal to one share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the "Distribution"); and (iii) immediately after the Distribution, (1) Merger Sub merged with and intoBSS Corp. (the "Merger"), such thatBSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned byEchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value$0.001 per share ("DISH Common Stock") ((i) - (iii) collectively, the "BSS Transaction"). Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. As a result of the BSS Transaction, the financial results of the BSS Business, except for certain real estate that transferred in the transaction, are presented as discontinued operations and, as such, excluded from continuing operations and segment results for the three months endedMarch 31, 2019 in our Accompanying Condensed Consolidated Financial Statements. Refer to Note 4. Discontinued Operations in our Accompanying Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q. We currently operate in two business segments: Hughes and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company's Chief Executive Officer. Our operations also include various corporate departments (primarily Executive,Treasury , Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate and Legal) and other activities that have not been assigned to our business segments such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other. 41
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED All amounts presented in this Management's Discussion and Analysis reference results from continuing operations unless otherwise noted and are expressed in thousands ofUnited States ("U.S.") dollars, except share and per share amounts and unless otherwise noted.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Three Months Ended
• Revenue of
• Operating income (loss) of
• Net income (loss) from continuing operations of
• Net income (loss) attributable to
and basic earnings (loss) per share of common stock of
• Earnings before interest, taxes, depreciation and amortization, net income
(loss) from discontinued operations and net income (loss) attributable to
non-controlling interests ("EBITDA") of$91.2 million (refer to the reconciliation of this non-GAAP measure in Results of Operations)
Consolidated Financial Condition as of
• Total assets of
• Total liabilities of
• Total stockholders' equity of
• Cash, cash equivalents and current marketable investment securities of
$2.4 billion Hughes Segment Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services to consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to consumer and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers. We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through advanced and proprietary methodologies, technologies, software and techniques, we continue to improve the efficiency of our networks. We invest in technologies to enhance our system and network management capabilities, specifically our managed services for enterprises. We also continue to invest in next generation technologies that can be applied to our future products and services. We continue to focus our efforts on growing our consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers in our domestic and international markets across wholesale and retail channels. Service costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth. The growth of our enterprise businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. As a result of the COVID-19 pandemic, in accordance with orders received from our enterprise customers, we have deferred or canceled the delivery of some products or services and we, thus, may not be able to recognize revenue for such products or services. Our Hughes segment currently uses capacity from three of our satellites (the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite), ourAl Yah 3 Brazilian payload and additional satellite capacity acquired from third-party providers to provide services to our customers. Growth of our consumer subscriber base continues 42
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED to be constrained in areas where we are nearing or have reached maximum capacity. While these constraints are expected to be resolved when we launch new satellites, we continue to focus on revenue growth in all areas and consumer subscriber growth in the areas where we have available capacity. InMay 2019 , we entered into an agreement with Al Yah Satellite Communications Company PrJSC ("Yahsat") pursuant to which, inNovember 2019 , Yahsat contributed its satellite communications services business inBrazil to us in exchange for a 20% ownership interest in our existing Brazilian subsidiary that conducts our satellite communications services business inBrazil (the "Yahsat Brazil JV Transaction"). The combined business provides broadband internet services and enterprise solutions inBrazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat'sAl Yah 3 satellite. Under the terms of the agreement, Yahsat may also acquire, for further cash investments, additional minority ownership interests in the business in the future provided certain conditions are met. InMay 2019 , we also entered into an agreement with Bharti Airtel Limited ("BAL") and its subsidiary,Bharti Airtel Services Limited (together with BAL, "Bharti"), pursuant to which Bharti will contribute its very small aperture terminal ("VSAT") telecommunications services and hardware business inIndia to our two existing Indian subsidiaries that conduct our VSAT services and hardware business. The combined entities will provide broadband satellite and hybrid solutions for enterprise networks. Upon consummation of the transaction, Bharti will have a 33% ownership interest in the combined business. The completion of the transaction is subject to customary regulatory approvals and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all. InAugust 2018 , we entered into an agreement with Yahsat to establish a new entity,Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, "BCS"), to provide commercial Ka-band satellite broadband services acrossAfrica , theMiddle East and southwestAsia operating over Yahsat'sAl Yah 2 andAl Yah 3 Ka-band satellites. The transaction was consummated inDecember 2018 when we invested$100.0 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS. InAugust 2017 , we entered into a contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service ("HughesNet service") in North, Central andSouth America as well as enterprise broadband services. In the first quarter of 2020,Space Systems/Loral, LLC ("SS/L"), the manufacturer of our EchoStar XXIV satellite, invoked the "force majeure" clause of our contract and notified us of a possible delay in completion of the satellite due to "shelter-in-place" orders affecting personnel at SS/L and its subcontractors, and other potential impacts of the COVID-19 pandemic. We currently expect the EchoStar XXIV satellite to be launched no earlier than the second half of 2021. This or other delays or impediments to SS/L's meeting its obligations as a result of the COVID-19 pandemic and various economic and other consequences or otherwise could have a material adverse impact on our business operations, future revenues, financial position and prospects, the completion of manufacture of the EchoStar XXIV satellite and our planned expansion of satellite broadband services throughout North, South andCentral America . Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in Corporate and Other in our segment reporting. InMarch 2017 , we and DISH Network entered into a master service agreement (the "Hughes Broadband MSA"). Pursuant to the Hughes Broadband MSA, DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our HughesNet service and related equipment and other telecommunication services; and (ii) installs HughesNet service equipment with respect to activations generated by DISH Network. As a result of the Hughes Broadband MSA, we have not earned, and do not expect to earn in the future, significant equipment revenue from our distribution agreement with DISH Network. We continue our efforts to expand our consumer satellite services business outside of theU.S. We have been delivering high-speed consumer satellite broadband services inBrazil sinceJuly 2016 and are also providing satellite broadband internet service in several other Latin American countries. Additionally, inSeptember 2015 , we entered into 15-year agreements with affiliates ofTelesat Canada for Ka-band capacity on the Telesat T19V satellite located at the 63 degree west longitude orbital location, which was launched inJuly 2018 . Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A satellite and the EchoStar XIX satellite inSouth America . 43
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Our broadband subscribers include customers that subscribe to our HughesNet service inNorth and Latin America through retail, wholesale and small/medium enterprise service channels. In connection with the COVID-19 pandemic, inMarch 2020 , we voluntarily signed on to the Federal Communications Commissions' ("FCC ") Keep Americans Connected Pledge (the "Pledge"), promising not to terminate HughesNet service for certain consumer customers for 60 days even if they are unable to pay. We have removed from our subscriber numbers as ofMarch 31, 2020 any subscribers whose HughesNet service would have ordinarily been terminated in the absence of the Pledge. InApril 2020 , we voluntarily agreed with theFCC 's request to extend the Pledge throughJune 30, 2020 . As a result, we may be required to provide HughesNet service to consumers who do not have the ability to pay for such services.
The following table presents our approximate subscriber numbers:
As of March 31, 2020 December 31, 2019 Broadband subscribers 1,516,000 1,477,000
As of
The following table presents our approximate subscriber net additions:
For the three months ended March 31, 2020 December 31, 2019 Net additions 39,000 20,000
During the first quarter of 2020, our net subscriber additions increased by approximately 19,000 compared to the fourth quarter of 2019, reflecting increased gross subscriber additions compared to the fourth quarter of 2019.
As ofMarch 31, 2020 andDecember 31, 2019 , our Hughes segment had$1.2 billion and$1.4 billion of contracted revenue backlog, respectively. We define Hughes contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue. Our contracted revenue backlog as ofMarch 31, 2020 decreased primarily due to the bankruptcy of a certain customer and the effects of the COVID-19 pandemic, including lengthened or delayed sales cycles with some of our enterprise customers.
ESS Segment
Our ESS segment provides satellite services on a full-time and/or occasional-use basis toU.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the EchoStar IX satellite and theEchoStar 105/SES-11 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.
As of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Other Business Opportunities Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. The current COVID-19 pandemic has made even more evident the worldwide need and demand for connectivity and communications to facilitate an ever-increasing virtual global community and workplace. In addition to fiber and wireless systems, technologies such as geostationary high throughput satellites, low-earth orbit ("LEO") networks, medium-earth orbit ("MEO") systems, balloons and High Altitude Platform Systems are expected to continue to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment, education, remote-connectivity and commerce across many industries and communities inNorth America and internationally for consumer and enterprise customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business. We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally, that we believe may allow us to increase our existing market share, increase our satellite capacity, expand into new satellite and other technologies, markets and customers, broaden our portfolio of services, products and intellectual property, make our business more valuable, align us for future growth and expansion, maximize the return on our investments and strengthen our business and relationships with our customers. We may allocate or dispose of significant resources for long-term value that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow. S-Band Strategy We continue to explore the development and deployment of S-band technologies and believe that our products and services will be integrated into new global, hybrid networks that leverage multiple satellites and terrestrial technologies. The current COVID-19 pandemic has made even more evident the worldwide need and demand for such networks. InDecember 2013 , we acquiredEchoStar Mobile Limited ("EML"), an entity based inDublin, Ireland , which is licensed to provide mobile satellite service ("MSS") and complementary ground component ("CGC") services covering theEuropean Union and its member states ("EU") using the S-band spectrum. EML's services in the EU are supported by the EchoStar XXI satellite and the EUTELSAT 10A payload. InOctober 2019 , we acquiredSirion Global Pty Ltd. , which we have renamedEchoStar Global Australia Pty Ltd ("EchoStar Global"), which holds global S-band non-geostationary satellite spectrum rights for MSS. Additionally, we have entered into a contract withTyvak Nano-Satellite Systems, Inc. for the design and construction of S-band nano-satellites. The contracted launches for these satellites have been postponed as a result of the COVID-19 pandemic and we are awaiting notice from the launch providers regarding when they will be rescheduled, which we expect will be during 2020. We expect our nano-satellites to facilitate our continued growth in the global S-band market and enable us to leverage our acquisition of EchoStar Global. In addition, inNovember 2019 , we were granted an S-band spectrum license for terrestrial rights inMexico . As ofMarch 31, 2020 , we have no material future commitments in connection with these acquisitions.
Cybersecurity
As a global provider of satellite technologies and services, internet services and communications equipment and networks, we may be prone to more targeted and persistent levels of cyber-attacks than other businesses. These risks may be more prevalent as we continue to expand and grow our business into other areas of the world outside ofNorth America , some of which are still developing their cybersecurity infrastructure maturity. Detecting, deterring, preventing and mitigating incidents caused by hackers and other parties may result in significant costs to us and may expose our customers to financial or other harm that have the potential to significantly increase our liability. 45
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Due to the COVID-19 pandemic, a large portion of our workforce has been working remotely and is likely to continue to do so for some time. While we have cybersecurity risk management tools to help protect our technology, information and networks that our employees access remotely, we cannot guarantee the security of the network that they will be using, the security status of the other non-company managed devices that might be on the network to which they are connected or the devices or networks used by third parties with whom our employees conduct business, such as customers, suppliers, vendors and other persons. Additionally, there has been a major global increase in COVID-19 related cyber-fraud and phishing attacks that continue to target our employees, vendors, suppliers, customers and others. Accordingly, we have increased our efforts and resources relating to cybersecurity as a result of the COVID-19 pandemic. We treat cybersecurity risk seriously and are focused on maintaining the security of our and our partners' systems, networks, technologies and data. We regularly review and revise our relevant policies and procedures, invest in and maintain internal resources, personnel and systems and review, modify and supplement our defenses through the use of various services, programs and outside vendors. Additionally, we provide resources to assist employees in better securing their home networks and remote connections. We also maintain agreements with third party vendors and experts to assist in our remediation and mitigation efforts if we experience or identify a material incident or threat. In addition, senior management and the Audit Committee of our Board of Directors are regularly briefed on cybersecurity matters. We are not aware of any cyber-incidents with respect to our owned or leased satellites or other networks, equipment or systems that have had a material adverse effect on our business, costs, operations, prospects, results of operation or financial position during the three months endedMarch 31, 2020 and throughMay 6, 2020 . There can be no assurance, however, that any such incident can be detected or thwarted or will not have such a material adverse effect in the future. 46
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED RESULTS OF OPERATIONS
Three Months Ended
The following table presents our consolidated results of operations for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 : For the three months ended March 31, Variance Statements of Operations Data 2020 2019 Amounts % Revenue: Services and other revenue$ 408,357 $ 402,668 $ 5,689 1.4 Equipment revenue 57,309 51,714 5,595 10.8 Total revenue 465,666 454,382 11,284 2.5 Costs and expenses: Cost of sales - services and other 145,252 143,347 1,905 1.3 % of total services and other revenue 35.6 % 35.6 % Cost of sales - equipment 45,908 45,007 901 2.0 % of total equipment revenue 80.1 % 87.0 % Selling, general and administrative expenses 125,281 112,114 13,167 11.7 % of total revenue 26.9 % 24.7 % Research and development expenses 6,254 6,888 (634 ) (9.2 ) % of total revenue 1.3 % 1.5 % Depreciation and amortization 132,368 118,978 13,390 11.3 Total costs and expenses 455,063 426,334 28,729 6.7 Operating income (loss) 10,603 28,048 (17,445 ) (62.2 ) Other income (expense): Interest income, net 15,583 24,429 (8,846 ) (36.2 ) Interest expense, net of amounts capitalized (36,233 ) (53,199 ) 16,966 31.9 Gains (losses) on investments, net (46,672 ) 6,936 (53,608 ) * Equity in earnings (losses) of unconsolidated affiliates, net 2,613 (6,353 ) 8,966 * Foreign currency transaction gains (losses), net (10,844 ) (1,160 ) (9,684 ) * Other, net (279 ) (42 ) (237 ) * Total other income (expense), net (75,832 ) (29,389 ) (46,443 ) * Income (loss) from continuing operations before income taxes (65,229 ) (1,341 ) (63,888 ) * Income tax benefit (provision), net 7,492 (2,898 ) (10,390 ) * Net income (loss) from continuing operations (57,737 ) (4,239 ) (53,498 ) * Net income (loss) from discontinued operations - 19,247 (19,247 ) (100.0 ) Net income (loss) (57,737 ) 15,008 (72,745 ) * Less: Net loss (income) attributable to non-controlling interests 3,442 (806 ) 4,248 * Net income (loss) attributable to EchoStar Corporation common stock$ (54,295 ) $ 14,202 $ (68,497 ) * Other data: EBITDA (1)$ 91,231 $ 145,601 $ (54,370 ) (37.3 ) Subscribers, end of period 1,516,000 1,388,000 128,000 9.2
* Percentage is not meaningful. (1) A reconciliation of EBITDA to Net income (loss), the most directly comparable
generally accepted accounting principles in the
our Accompanying Condensed Consolidated Financial Statements, is included in
Results of Operations. For further information on our use of EBITDA, refer to
the Explanation of Key Metrics and Other Items. 47
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following discussion relates to our continuing operations for the three
months ended
Services and other revenue. Services and other revenue totaled$408.4 million for the three months endedMarch 31, 2020 , an increase of$5.7 million , or 1.4%, compared to 2019.
• Services and other revenue from our Hughes segment for the three months
ended
compared to 2019. The increase was primarily attributable to increases in
sales of broadband services to our consumer customers of
partially offset by a decrease in sales of broadband services to our
enterprise customers of
negative impact of exchange rate fluctuations.
• Services and other revenue from Corporate and Other for the three months
ended
compared to 2019 primarily attributable to a decrease in income from
certain real estate previously leased to DISH Network and transferred as
part of the BSS Transaction.
Equipment revenue. Equipment revenue totaled$57.3 million for the three months endedMarch 31, 2020 , an increase of$5.6 million , or 10.8%, compared to 2019. The increase was primarily attributable to our Hughes segment due to increases in hardware sales to our enterprise customers. Cost of sales - services and other. Cost of sales - services and other totaled$145.3 million for the three months endedMarch 31, 2020 , an increase of$1.9 million , or 1.3%, compared to 2019. The increase was primarily attributable to our Hughes segment due to an increase in the costs of broadband services provided to our consumer customers supporting the increase in number of subscribers and revenue in both the domestic and international markets, partially offset by a decrease in the costs of broadband services provided to our enterprise customers. Cost of sales - equipment. Cost of sales - equipment totaled$45.9 million for the three months endedMarch 31, 2020 , an increase of$0.9 million , or 2.0%, compared to 2019. The increase was primarily attributable to our Hughes segment due to an increase in hardware sales to our enterprise customers. Selling, general and administrative expenses. Selling, general and administrative expenses totaled$125.3 million for the three months endedMarch 31, 2020 , an increase of$13.2 million , or 11.7%, compared to 2019. The increase was primarily attributable to (i) increases in marketing and promotional expenses of$8.3 million from our Hughes segment mainly associated with our consumer business inLatin America , (ii) increases in bad debt expense of$1.9 million and (iii) increases in other general and administrative expenses of$3.0 million . Depreciation and amortization. Depreciation and amortization expenses totaled$132.4 million for the three months endedMarch 31, 2020 , an increase of$13.4 million , or 11.3%, compared to 2019. The increase was primarily from our Hughes segment and due to increases in depreciation expense of$6.4 million relating to our customer premises equipment and$6.1 million relating to the depreciation of assets acquired in the Yahsat Brazil JV Transaction. Interest income, net. Interest income, net totaled$15.6 million for the three months endedMarch 31, 2020 , a decrease of$8.8 million , or 36.2%, compared to 2019 primarily attributable to the decrease in our marketable investment securities. Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized totaled$36.2 million for the three months endedMarch 31, 2020 , a decrease of$17.0 million , or 31.9%, compared to 2019. The decrease was primarily due to a decrease of$16.0 million in interest expense and in amortization of deferred financing cost as a result of the repurchase and maturity of our 6 1/2% Senior Secured Notes due 2019 and an increase of$1.8 million in capitalized interest relating to the construction of the EchoStar XXIV satellite. Gains (losses) on investments, net. Gains (losses) on investments, net totaled$46.7 million of net losses for the three months endedMarch 31, 2020 , a negative change of$53.6 million compared to 2019. The change was primarily attributable to$50.3 million of net negative variances on marketable investment securities compared to 2019. 48
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled$2.6 million in earnings for the three months endedMarch 31, 2020 compared to$6.4 million in losses for the three months endedMarch 31, 2019 . The increase was related to increased earnings from our investments in our equity method investees. Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled$10.8 million in losses for the three months endedMarch 31, 2020 , an increase in losses of$9.7 million compared to 2019. The change was due to the net strengthening of theU.S. dollar against certain foreign currencies in 2020 compared to 2019. Income tax benefit (provision), net. Income tax benefit (provision), net was$7.5 million in benefit for the three months endedMarch 31, 2020 compared to$2.9 million in provision for the three months endedMarch 31, 2019 . Our effective income tax rate was 11.5% and (216.1)% for the three months endedMarch 31, 2020 and 2019, respectively. The variations in our current year effective tax rate from theU.S. federal statutory rate for the three months endedMarch 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature, permanent book tax differences and research and experimentation credits. The variations in our effective tax rate from theU.S. federal statutory rate for the three months endedMarch 31, 2019 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature and research and experimentation credits. Net income (loss) attributable toEchoStar Corporation common stock. Net loss attributable toEchoStar Corporation common stock totaled$54.3 million for the three months endedMarch 31, 2020 , compared to net income attributable toEchoStar Corporation common stock of$14.2 million for the three months endedMarch 31, 2019 , a decrease of$68.5 million as set forth in the following table:
Amounts
Net income (loss) attributable to
$
14,202
Decrease (increase) in interest expense, net of amounts capitalized
16,966
Decrease (increase) in income tax provision, net
10,390
Decrease (increase) in equity in losses of unconsolidated affiliates, net
8,966
Decrease (increase) in net income attributable to non-controlling interests
4,248
Increase (decrease) in other, net (237 ) Increase (decrease) in interest income, net (8,846 ) Increase (decrease) in foreign currency transaction gains, net
(9,684 ) Increase (decrease) in operating income, including depreciation and amortization
(17,445 ) Increase (decrease) in net income from discontinued operations (19,247 ) Increase (decrease) in gains on investments, net
(53,608 )
Net income (loss) attributable to
$ (54,295 ) 49
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
EBITDA. EBITDA is a non-GAAP financial measure and is described under
Explanation of Key Metrics and Other Items below. The following table
reconciles Net income (loss), the most directly comparable
For the three months ended March 31, Variance 2020 2019 Amounts % Net income (loss)$ (57,737 ) $ 15,008 $ (72,745 ) * Interest income, net (15,583 ) (24,429 ) 8,846 (36.2 ) Interest expense, net of amounts capitalized 36,233 53,199 (16,966 ) (31.9 ) Income tax provision (benefit), net (7,492 ) 2,898 (10,390 ) * Depreciation and amortization 132,368 118,978 13,390 11.3 Net loss (income) from discontinued operations - (19,247 ) (19,247 ) 100.0 Net loss (income) attributable to non-controlling interests 3,442 (806 ) 4,248 * EBITDA$ 91,231 $ 145,601 $ (54,370 ) (37.3 )
* Percentage is not meaningful.
EBITDA was
Amounts
EBITDA for the three months endedMarch 31, 2019 $
145,601
Decrease (increase) in equity in losses of unconsolidated affiliates, net
8,966
Decrease (increase) in net income attributable to non-controlling interests
4,248
Increase (decrease) in other, net
(237 ) Increase (decrease) in operating income, excluding depreciation and amortization
(4,055 ) Increase (decrease) in foreign currency transaction gains, net (9,684 ) Increase (decrease) in gains on investments, net (53,608 ) EBITDA for the three months endedMarch 31, 2020 $
91,231
Segment Operating Results and Capital Expenditures
The following tables present our operating results, capital expenditures and EBITDA by segment for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Capital expenditures in the table below are net of refunds and other receipts related to our property and equipment. Consolidated Hughes ESS Corporate and Other Total For the three months ended March 31, 2020 Total revenue$ 458,482 $ 4,652 $ 2,532$ 465,666 Capital expenditures 91,517 - 13,087 104,604 EBITDA 154,641 2,030 (65,440 ) 91,231 For the three months ended March 31, 2019 Total revenue$ 445,337 $ 4,033 $ 5,012$ 454,382 Capital expenditures 73,821 - 38,033 111,854 EBITDA 161,132 1,729 (17,260 ) 145,601 50
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Hughes Segment For the three months ended March 31, Variance 2020 2019 Amounts % Total revenue$ 458,482 $ 445,337 $ 13,145 3.0 Capital expenditures 91,517 73,821 17,696 24.0 EBITDA 154,641 161,132 (6,491 ) (4.0 ) Total revenue was$458.5 million for the three months endedMarch 31, 2020 , an increase of$13.1 million , or 3.0%, compared to 2019. The increase was primarily due to net increases of$19.5 million in sales of broadband services to our consumer customers and$5.6 million in hardware sales to our enterprise customers, partially offset by a decrease in sales of broadband services to our enterprise customers of$12.6 million . Both of these variances include the negative impact of exchange rate fluctuations. Capital expenditures were$91.5 million for the three months endedMarch 31, 2020 , an increase of$17.7 million , or 24.0%, compared to 2019, primarily due to net increases in expenditures associated with our consumer business.
EBITDA was
Amounts
EBITDA for the three months endedMarch 31, 2019 $
161,132
Decrease (increase) in net income attributable to non-controlling interests
4,248
Increase (decrease) in gains on investments, net
568
Increase (decrease) in other, net
(191 ) Decrease (increase) in equity in losses of unconsolidated affiliates, net
(373 ) Increase (decrease) in operating income, excluding depreciation and amortization
(2,997 ) Increase (decrease) in foreign currency transaction gains, net (7,746 ) EBITDA for the three months ended March 31, 2020$ 154,641 ESS Segment For the three months ended March 31, Variance 2020 2019 Amounts % Total revenue$ 4,652 $ 4,033 $ 619 15.3 EBITDA 2,030 1,729 301 17.4 Total revenue was$4.7 million for the three months endedMarch 31, 2020 , an increase of$0.6 million , or 15.3%, compared to 2019, due to a net increase in transponder services provided to third parties. EBITDA was$2.0 million for the three months endedMarch 31, 2020 , an increase of$0.3 million , or 17.4%, compared to 2019, primarily due to the increase in revenue. 51
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Corporate and Other For the three months ended March 31, Variance 2020 2019 Amounts % Total revenue$ 2,532 $ 5,012 $ (2,480 ) (49.5 ) Capital expenditures 13,087 38,033 (24,946 ) (65.6 ) EBITDA (65,440 ) (17,260 ) (48,180 ) *
* Percentage is not meaningful
Total revenue was$2.5 million for the three months endedMarch 31, 2020 , a decrease of$2.5 million , or 49.5%, compared to 2019 primarily attributable to a decrease in income from certain real estate previously leased to DISH Network and transferred as part of the BSS Transaction.
Capital expenditures for the three months ended
EBITDA for the three months endedMarch 31, 2020 was a loss of$65.4 million , an increase in loss of$48.2 million compared to 2019 as set forth in the following table:
Amounts
EBITDA for the three months endedMarch 31, 2019 $
(17,260 ) Decrease (increase) in equity in losses of unconsolidated affiliates, net
9,338
Increase (decrease) in other, net
(47 ) Increase (decrease) in operating income, excluding depreciation and amortization
(1,357 ) Increase (decrease) in foreign currency transaction gains, net (1,937 ) Increase (decrease) in gains on investments, net (54,177 ) EBITDA for the three months endedMarch 31, 2020 $
(65,440 )
LIQUIDITY AND CAPITAL RESOURCES
Cash,
We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
As of
As ofMarch 31, 2020 andDecember 31, 2019 , we held$790.4 million and$940.6 million , respectively, of marketable investment securities, consisting of various debt and equity instruments including corporate bonds, corporate equity securities, government bonds and mutual funds.
Cash Flow Activities
The following discussion highlights our cash flow activities, which include
results from continuing and discontinued operations, for the three months ended
Cash Flows from Operating Activities
We typically reinvest the cash flow from operating activities in our business. For the three months endedMarch 31, 2020 , we reported net cash inflows from operating activities of$71.3 million , a decrease of$104.7 million , compared to 2019. The decrease in cash inflows was primarily attributable to lower net income of$65.2 million adjusted to exclude: (i) Depreciation and amortization; (ii) Losses (gains) on investments, net, (iii) Equity in losses (earnings) of 52
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED unconsolidated affiliates, net; (iv) Foreign currency transaction losses (gains), net; (v) Deferred tax provision (benefit), net; (vi) Stock-based compensation; (vii) Amortization of debt issuance costs; and (viii) Other, net. The decrease in cash inflows was also attributable to decreases of$39.5 million resulting from timing differences in operating assets and liabilities.
Cash Flows from Investing Activities
Our investing activities generally include purchases and sales of marketable investment securities, capital expenditures, acquisitions and strategic investments. For the three months endedMarch 31, 2020 , we reported net cash inflows from investing activities of$17.9 million , a decrease in cash inflows of$249.6 million compared to 2019. For the three months endedMarch 31, 2020 , we had net sales and maturities of marketable securities of$687.6 million , partially offset by net purchases of marketable securities of$550.9 million and expenditures for property and equipment of$104.6 million . For the three months endedMarch 31, 2019 , we had net sales and maturities of marketable securities of$712.7 million , partially offset by net purchases of marketable securities of$325.6 million and expenditures for property and equipment of$112.0 million .
Cash Flows from Financing Activities
Our financing activities generally include proceeds related to the issuance of debt and cash used for the repurchase, redemption or payment of debt and finance lease obligations, payments relating to stock and debt repurchases and the proceeds from Class A common stock options exercised and stock issued under our stock incentive plans and employee stock purchase plan. For the three months endedMarch 31, 2020 , we reported net cash outflows from financing activities of$1.0 million compared to net cash outflows of$22.1 million for the three months endedMarch 31, 2019 . Net cash outflows for the three months endedMarch 31, 2020 included our repurchase of$5.9 million of shares of our Class A common stock, partially offset by$4.0 million for the contribution by non-controlling interest holder and$0.2 million in net proceeds received from Class A common stock options exercised. Net cash outflows for the three months endedMarch 31, 2019 included$9.9 million for the payment of finance lease obligations,$8.0 million for the repurchasing and maturity of debt and$7.3 million for the purchase of non-controlling shareholder interests in a subsidiary of ours that were held by an unaffiliated third party, partially offset by$2.0 million in net proceeds received from Class A common stock options exercised.
Obligations and Future Capital Requirements
Contractual Obligations
As ofMarch 31, 2020 , our satellite-related obligations were$402.7 million . These primarily include payments pursuant to agreements for the construction of the EchoStar XXIV satellite, payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.
Off-Balance Sheet Arrangements
We generally do not engage in off-balance sheet financing activities or use derivative financial instruments for hedge accounting or speculative purposes.
Letters of Credit
As ofMarch 31, 2020 , we had$41.0 million of letters of credit and insurance bonds. Of this amount,$9.0 million was secured by restricted cash,$3.8 million was related to insurance bonds and$28.2 million was issued under credit arrangements available to our foreign subsidiaries. Certain letters of credit are secured by assets of our foreign subsidiaries. 53
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Satellites As our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity. We may also construct, acquire or lease additional satellites in the future to provide satellite services at additional orbital locations or to improve the quality of our satellite services.Satellite Insurance We generally do not carry in-orbit insurance on our satellites or payloads because we have assessed that the cost of insurance is not economical relative to the risk of failures. Therefore, we generally bear the risk of any in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our long-term debt and our joint venture agreements with Yahsat, we are required, subject to certain limitations on coverage, to maintain only for the SPACEWAY 3 satellite, the EchoStar XVII satellite and the Al Yah 3 Brazilian payload, insurance or other contractual arrangements during the commercial in-orbit service of such satellite or payload. Our other satellites and payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance or other contractual arrangements. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.
Future Capital Requirements
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated through our operations to fund our business. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Consumer revenue in our Hughes segment depends on our success in adding new and retaining existing subscribers and driving higher average revenue per subscriber across our wholesale and retail channels. Revenue in our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Service costs related to ongoing support of our direct and indirect customers and partners are typically impacted most significantly by our growth. There can be no assurance that we will have positive cash flows from operations. As a result of the COVID-19 pandemic, in accordance with orders received from our enterprise customers, we have deferred or canceled the delivery of some products or services and we, thus, may not be able to realize the cash flow from such products or services. Furthermore, if we experience negative cash flows, our existing cash and marketable investment securities balances may be reduced. We have a significant amount of outstanding indebtedness. As ofMarch 31, 2020 , our total long-term debt was$2.4 billion . Refer to our Form 10-K for a discussion of the terms of our long-term debt. Our liquidity requirements will be continue to be significant, primarily due to our remaining debt service requirements and the design and construction of our new EchoStar XXIV satellite. We may from time to time seek to purchase amounts of our outstanding debt in open market purchases, privately negotiated transactions or otherwise, depending on market conditions, our liquidity needs and other factors. The amounts we may repurchase may be material. In addition, our future capital expenditures are likely to increase if we make acquisitions or additional investments in infrastructure, technologies or joint ventures to support and expand our business, or if we decide to purchase or build additional satellites or other technologies or assets. Other aspects of our business operations may also require additional capital. We also expect to oweU.S. Federal income tax for 2020. We anticipate that our existing cash and marketable investment securities are sufficient to fund the currently anticipated operations of our business through the next twelve months. Stock Repurchases Pursuant to a stock repurchase program approved by our Board of Directors onOctober 29, 2019 , we are authorized to repurchase up to$500.0 million of our Class A common stock throughDecember 31, 2020 . During the three months endedMarch 31, 2020 , we repurchased 196,999 shares of our common stock at an average price per share of$29.90 for a total purchase price of$5.9 million . During the three months endedMarch 31, 2019 , we did not repurchase any common stock. 54
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies are those that involve a high degree of estimation, judgment and complexity. Our critical accounting policies are those related to (i) contingent liabilities, (ii) revenue recognition and (iii) impairment of assets.
Our critical accounting policies are described in our Form 10-K under the heading Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes in our critical accounting policies from those presented in our Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new and recently issued accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies in our Accompanying Condensed Consolidated Financial Statements.
SEASONALITY
For our Hughes segment, service revenue is generally not impacted by seasonal fluctuations other than those associated with fluctuations related to sales and promotional activities. However, like many communications infrastructure equipment vendors, a higher amount of our hardware revenue occurs in the second half of the year due to our customers' annual procurement and budget cycles. Large enterprises and operators often allocate their capital expenditure budgets at the beginning of their fiscal year (which often coincides with the calendar year). The typical sales cycle for large complex system procurements is six to 12 months, which often results in the customer expenditure occurring towards the end of the year. Customers often seek to expend the budgeted funds prior to the end of the year and the next budget cycle.
Our ESS segment is generally not affected by seasonal impacts.
While the above-described trends have been observed consistently in recent years, we cannot predict with any certainty whether they will continue in the near future as the economy and our customers react to the COVID-19 pandemic and experience associated disruptions and dislocations.
INFLATION
Inflation has not materially affected our operations during the past three years but we are unable to predict the extent or nature of any future inflationary pressure at this time. We believe that our ability to increase the prices charged for our products and services in future periods will depend primarily on competitive pressures or contractual terms. However, we may not be able to maintain pricing levels consistent with inflationary pressure on expenses.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Services and other revenue. Services and other revenue primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service professional services and facilities rental revenue.
Equipment revenue. Equipment revenue primarily includes broadband equipment and networks sold to customers in our consumer and enterprise markets.
Cost of sales - services and other. Cost of sales - services and other primarily includes the cost of broadband services provided to our consumer and enterprise customers, maintenance and other contracted services, costs associated with satellite and transponder leases and services, professional services and facilities rental. Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks sold to customers in our consumer and enterprise markets. It also includes certain other costs associated with the deployment of equipment to our customers. 55
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED Selling, general and administrative expenses. Selling, general and administrative expenses primarily includes selling and marketing costs and employee-related costs associated with administrative services (e.g., human resources and other services and stock-based compensation expense). It also includes professional fees (e.g. legal, information systems and accounting services), other expenses associated with facilities and administrative services and credit losses, which include customer related estimated credit losses and estimated credit losses on non-current receivables. Research and development expenses. Research and development expenses primarily includes costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.
Interest income, net. Interest income, net primarily includes interest earned on our cash, cash equivalents and marketable investment securities, and other investments including premium amortization and discount accretion on debt securities, offset by estimated credit losses on our other debt investments.
Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized primarily includes interest expense associated with our debt and finance lease obligations (net of capitalized interest), amortization of debt issuance costs and interest expense related to certain legal proceedings. Gains (losses) on investments, net. Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities and other investments for which we have elected the fair value option. It may also include realized gains and losses on the sale or exchange of our available-for-sale debt securities, other-than-temporary impairment losses on our available-for-sale debt securities, realized gains and losses on the sale or exchange of other equity investments and other debt investments without readily determinable fair value, adjustments to the carrying amount of investments in unconsolidated affiliates and marketable equity securities resulting from impairments and observable price changes and estimated credit losses.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.
Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net include gains and losses resulting from the re-measurement of transactions denominated in foreign currencies. Other, net. Other, net primarily includes dividends received from our marketable investment securities and other non-operating income and expense items that are not appropriately classified elsewhere in the Condensed Consolidated Statements of Operations in our Accompanying Condensed Consolidated Financial Statements.
Net income (loss) from discontinued operations. Net income (loss) from discontinued operations includes the financial results of the BSS Business transferred in the BSS Transaction, except for certain real estate that transferred in the transaction.
EBITDA. EBITDA is defined as Net income (loss) excluding Interest income, net, Interest expense, net of amounts capitalized, Income tax benefit (provision), net, Depreciation and amortization, Net income (loss) from discontinued operations and Net income (loss) attributable to non-controlling interests. EBITDA is not a measure determined in accordance withU.S. GAAP. This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of Operations above. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance withU.S. GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.
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