| | Fifth Supplemental Indenture relating to Hughes Satellite Systems Corporation’s 7⅝% Senior Notes due 2021, dated June 12, 2019, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantors listed on the signature pages thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.4 to Hughes Satellite Systems Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed August 8, 2019, Commission File No. 333-179121).
| | | | Exhibit No. | | Description | | | | | | | 101.INS | | XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | 101.SCH | | XBRL Taxonomy Extension Schema. | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase. | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase. |
| | | | Exhibit No. | | Description | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase. | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase. |
| | * | Incorporated by reference. |
| | ** | Constitutes a management contract or compensatory plan or arrangement. |
| | *** | Certain portions of the exhibit have been omitted and separately filedin accordance with the Securities and Exchange Commission with a request forCommission’s rules and regulations regarding confidential treatment. |
| | **** | Schedules and exhibits have been omitted pursuant to Item 601(b)(2)601(a)(5) of Regulation S-K. We agree to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request, subject to our right to request confidential treatment of any requested schedule or exhibit. |
ItemITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | HUGHES SATELLITE SYSTEMS CORPORATION | | | | | | | | By: | /s/ David J. Rayner | | | David J. Rayner | | | Executive Vice President, | | | Chief Financial Officer, | | | Chief Operating Officer, and | | | Treasurer | | | | Date: February 21, 201920, 2020 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | | Signature | | Title | | Date | | | | | | /s/ Michael T. Dugan | | Chief Executive Officer, President and Director | | February 21, 201920, 2020 | Michael T. Dugan | | (Principal Executive Officer) | | | | | | | | /s/ David J. Rayner | | Executive Vice President, Chief Financial Officer, | | February 21, 201920, 2020 | David J. Rayner | | Chief Operating Officer and Treasurer | | | | | (Principal Financial and Accounting Officer) | | | | | | | | /s/ Charles W. Ergen | | Chairman | | February 21, 201920, 2020 | Charles W. Ergen | | | | | | | | | | /s/ Dean A. Manson | | Executive Vice President, General Counsel | | February 21, 201920, 2020 | Dean A. Manson | | Secretary and Director | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
To the stockholdersShareholders and boardBoard of directorsDirectors Hughes Satellite Systems Corporation:
Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Hughes Satellite Systems Corporation and subsidiaries (the “Company”)Company) as of December 31, 20182019 and 2017,2018, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018,2019, and the related notes and financial statement schedule II listed in Item 15 (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018,2019, in conformity with U.S. generally accepted accounting principles. Changes in Accounting Principles As discussed in Note 2 to the consolidated financial statements, in 2019, the Company has changed its method of accounting for leases due to the adoption of Accounting Standards Update No. 2016-02, Leases as of January 1, 2019. In 2018, the Company has changed its method of accounting for revenue recognition in 2018 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers and changed its method of accounting for marketable investment securities and fair value measurements due to the adoption of Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2011.
Denver, Colorado February 21, 201920, 2020
HUGHES SATELLITE SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS (DollarsAmounts in thousands, except per share amounts) | | | | | | | | | | | | As of December 31, | | | 2018 | | 2017 | Assets | | | | | Current assets: | | | | | Cash and cash equivalents | | $ | 847,823 |
| | $ | 1,822,561 |
| Marketable investment securities, at fair value | | 1,609,196 |
| | 455,602 |
| Trade accounts receivable and contract assets, net (Note 3) | | 201,096 |
| | 196,840 |
| Trade accounts receivable - DISH Network | | 13,550 |
| | 38,641 |
| Inventory | | 75,379 |
| | 83,595 |
| Prepaids and deposits | | 48,681 |
| | 38,797 |
| Advances to affiliates, net | | 103,550 |
| | 114,858 |
| Other current assets | | 18,539 |
| | 91,544 |
| Total current assets | | 2,917,814 |
| | 2,842,438 |
| Noncurrent assets: | | | | | Property and equipment, net | | 2,582,181 |
| | 2,753,098 |
| Regulatory authorizations | | 465,658 |
| | 465,658 |
| Goodwill | | 504,173 |
| | 504,173 |
| Other intangible assets, net | | 43,952 |
| | 58,582 |
| Investments in unconsolidated entities | | 126,369 |
| | 30,587 |
| Other noncurrent assets, net | | 253,025 |
| | 202,814 |
| Total noncurrent assets | | 3,975,358 |
| | 4,014,912 |
| Total assets | | $ | 6,893,172 |
| | $ | 6,857,350 |
| Liabilities and Shareholders’ Equity | | | | | Current liabilities: | | | | | Trade accounts payable | | $ | 104,751 |
| | $ | 102,816 |
| Trade accounts payable - DISH Network | | 752 |
| | 3,769 |
| Current portion of long-term debt and capital lease obligations | | 959,577 |
| | 40,631 |
| Advances from affiliates, net | | 868 |
| | 477 |
| Contract liabilities | | 72,249 |
| | 65,959 |
| Accrued interest | | 46,703 |
| | 46,834 |
| Accrued compensation | | 42,796 |
| | 36,924 |
| Accrued taxes | | 7,609 |
| | 8,198 |
| Accrued expenses and other | | 68,854 |
| | 77,312 |
| Total current liabilities | | 1,304,159 |
| | 382,920 |
| Noncurrent liabilities: | | | | | Long-term debt and capital lease obligations, net | | 2,573,204 |
| | 3,594,213 |
| Deferred tax liabilities, net | | 488,736 |
| | 439,631 |
| Advances from affiliates | | 33,438 |
| | 33,715 |
| Other noncurrent liabilities | | 101,140 |
| | 107,627 |
| Total noncurrent liabilities | | 3,196,518 |
| | 4,175,186 |
| Total liabilities | | 4,500,677 |
| | 4,558,106 |
| Commitments and contingencies (Note 13) | | | | | Shareholders’ equity: | | | | | Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and outstanding at each of December 31, 2018 and 2017 | | — |
| | — |
| Common stock, $0.01 par value; 1,000,000 shares authorized, 1,078 shares issued and outstanding at each of December 31, 2018 and 2017 | | — |
| | — |
| Additional paid-in capital | | 1,767,037 |
| | 1,754,561 |
| Accumulated other comprehensive loss | | (83,774 | ) | | (52,822 | ) | Accumulated earnings | | 693,957 |
| | 582,683 |
| Total HSS shareholders’ equity | | 2,377,220 |
| | 2,284,422 |
| Noncontrolling interests | | 15,275 |
| | 14,822 |
| Total shareholders’ equity | | 2,392,495 |
| | 2,299,244 |
| Total liabilities and shareholders’ equity | | $ | 6,893,172 |
| | $ | 6,857,350 |
|
The accompanying notes are an integral part of these consolidated financial statements. | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | | | | Assets | | | | | Current assets: | | | | | Cash and cash equivalents | | $ | 1,139,435 |
| | $ | 847,823 |
| Marketable investment securities | | 652,835 |
| | 1,609,196 |
| Trade accounts receivable and contract assets, net | | 196,520 |
| | 201,096 |
| Advances to affiliates | | 131,892 |
| | 103,550 |
| Other current assets | | 169,760 |
| | 152,666 |
| Current assets of discontinued operations | | — |
| | 3,483 |
| Total current assets | | 2,290,442 |
| | 2,917,814 |
| Non-current assets: | | | | | Property and equipment, net | | 1,857,581 |
| | 1,921,911 |
| Operating lease right-of-use assets | | 113,399 |
| | — |
| Goodwill | | 506,953 |
| | 504,173 |
| Regulatory authorizations, net | | 412,363 |
| | 400,043 |
| Other intangible assets, net | | 29,321 |
| | 43,952 |
| Other investments, net | | 110,040 |
| | 126,369 |
| Advances to affiliates, net | | 19,759 |
| | — |
| Other non-current assets, net | | 232,177 |
| | 236,449 |
| Non-current assets of discontinued operations | | — |
| | 742,461 |
| Total non-current assets | | 3,281,593 |
| | 3,975,358 |
| Total assets | | $ | 5,572,035 |
| | $ | 6,893,172 |
| Liabilities and Shareholders’ Equity | | | | | Current liabilities: | | | | | Trade accounts payable | | $ | 121,552 |
| | $ | 104,751 |
| Current portion of long-term debt and finance lease obligations | | 486 |
| | 919,582 |
| Advances from affiliates, net | | 11,132 |
| | 868 |
| Contract liabilities | | 101,060 |
| | 72,249 |
| Accrued expenses and other current liabilities | | 246,799 |
| | 157,654 |
| Current liabilities of discontinued operations | | — |
| | 49,055 |
| Total current liabilities | | 481,029 |
| | 1,304,159 |
| Non-current liabilities: | | | | | Long-term debt and finance lease obligations, net of current portion | | 2,389,733 |
| | 2,386,202 |
| Deferred tax liabilities, net | | 380,316 |
| | 355,949 |
| Operating lease liabilities | | 96,879 |
| | — |
| Advances from affiliates, net | | 23,980 |
| | 33,438 |
| Other non-current liabilities | | 65,935 |
| | 71,647 |
| Non-current liabilities of discontinued operations | | — |
| | 349,282 |
| Total non-current liabilities | | 2,956,843 |
| | 3,196,518 |
| Total liabilities | | 3,437,872 |
| | 4,500,677 |
| | | | | | Commitments and contingencies | |
|
| |
|
| | | | | | Shareholders’ equity: | | | | | Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued and outstanding at both December 31, 2019 and 2018 | | — |
| | — |
| Common stock, $0.01 par value; 1,000,000 shares authorized, 1,078 shares issued and outstanding at both December 31, 2019 and 2018 | | — |
| | — |
| Additional paid-in capital | | 1,478,636 |
| | 1,767,037 |
| Accumulated other comprehensive income (loss) | | (84,636 | ) | | (83,774 | ) | Accumulated earnings (losses) | | 664,415 |
| | 693,957 |
| Total HSS shareholders’ equity | | 2,058,415 |
| | 2,377,220 |
| Non-controlling interests | | 75,748 |
| | 15,275 |
| Total shareholders’ equity | | 2,134,163 |
| | 2,392,495 |
| Total liabilities and shareholders’ equity | | $ | 5,572,035 |
| | $ | 6,893,172 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2018 | | 2017 | | 2016 | Revenue: | | | | | | | Services and other revenue - DISH Network | | $ | 366,155 |
| | $ | 433,829 |
| | $ | 449,547 |
| Services and other revenue - other | | 1,526,098 |
| | 1,203,551 |
| | 1,103,127 |
| Equipment revenue | | 205,410 |
| | 239,489 |
| | 247,119 |
| Total revenue | | 2,097,663 |
| | 1,876,869 |
| | 1,799,793 |
| Costs and expenses: | | | | | | | Cost of sales - services and other (exclusive of depreciation and amortization) | | 600,213 |
| | 559,684 |
| | 533,305 |
| Cost of sales - equipment (exclusive of depreciation and amortization) | | 176,600 |
| | 195,439 |
| | 189,405 |
| Selling, general and administrative expenses | | 398,153 |
| | 337,591 |
| | 281,048 |
| Research and development expenses | | 27,570 |
| | 31,745 |
| | 31,170 |
| Depreciation and amortization | | 551,416 |
| | 496,798 |
| | 414,133 |
| Impairment of long-lived asset | | — |
| | 6,000 |
| | — |
| Total costs and expenses | | 1,753,952 |
| | 1,627,257 |
| | 1,449,061 |
| Operating income | | 343,711 |
| | 249,612 |
| | 350,732 |
| Other income (expense): | | | | | | | Interest income | | 59,104 |
| | 31,952 |
| | 12,598 |
| Interest expense, net of amounts capitalized | | (259,721 | ) | | (245,478 | ) | | (187,198 | ) | Gains (losses) on investments, net | | 187 |
| | (1,574 | ) | | 6,995 |
| Equity in earnings of unconsolidated affiliate | | 4,874 |
| | 7,027 |
| | 9,444 |
| Other, net | | (4,443 | ) | | (2,188 | ) | | 2,909 |
| Total other expense, net | | (199,999 | ) | | (210,261 | ) | | (155,252 | ) | Income before income taxes | | 143,712 |
| | 39,351 |
| | 195,480 |
| Income tax benefit (provision), net | | (46,369 | ) | | 258,202 |
| | (73,759 | ) | Net income | | 97,343 |
| | 297,553 |
| | 121,721 |
| Less: Net income attributable to noncontrolling interests | | 1,842 |
| | 1,583 |
| | 1,706 |
| Net income attributable to HSS | | $ | 95,501 |
| | $ | 295,970 |
| | $ | 120,015 |
| | | | | | | | Comprehensive Income: | | | | | | | Net income | | $ | 97,343 |
| | $ | 297,553 |
| | $ | 121,721 |
| Other comprehensive income (loss), net of tax: | | | | | | | Foreign currency translation adjustments | | (31,938 | ) | | 7,196 |
| | (5,377 | ) | Unrealized gains (losses) on available-for-sale securities and other | | (624 | ) | | (2,188 | ) | | 1,584 |
| Amounts reclassified to net income: | | | | | | | Other-than-temporary impairment loss on available-for-sale securities | | — |
| | 3,298 |
| | — |
| Recognition of realized gains on available-for-sale securities in net income | | (212 | ) | | — |
| | (2,996 | ) | Total other comprehensive gain (loss), net of tax | | (32,774 | ) | | 8,306 |
| | (6,789 | ) | Comprehensive income | | 64,569 |
| | 305,859 |
| | 114,932 |
| Less: Comprehensive income attributable to noncontrolling interests | | 453 |
| | 1,992 |
| | 1,520 |
| Comprehensive income attributable to HSS | | $ | 64,116 |
| | $ | 303,867 |
| | $ | 113,412 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Earnings | | Noncontrolling Interests | | Total | Balance, January 1, 2016 | | $ | 1,417,748 |
| | $ | (54,116 | ) | | $ | 166,698 |
| | $ | 11,310 |
| | $ | 1,541,640 |
| Stock-based compensation | | 4,822 |
| | — |
| | — |
| | — |
| | 4,822 |
| Transfer of EchoStar XXIII launch service contract from EchoStar to HNS | | 70,300 |
| | — |
| | — |
| | — |
| | 70,300 |
| Contributions to fund EchoStar XXI launch service contract from EchoStar to HNS | | 23,750 |
| | — |
| | — |
| | — |
| | 23,750 |
| Other comprehensive loss | | — |
| | (6,539 | ) | | — |
| | (186 | ) | | (6,725 | ) | Net income | | — |
| | — |
| | 120,015 |
| | 1,706 |
| | 121,721 |
| Other, net | | (421 | ) | | (64 | ) | | — |
| | — |
| | (485 | ) | Balance, December 31, 2016 | | 1,516,199 |
| | (60,719 | ) | | 286,713 |
| | 12,830 |
| | 1,755,023 |
| Stock-based compensation | | 5,117 |
| | — |
| | — |
| | — |
| | 5,117 |
| Transfer of launch service contracts to EchoStar | | (145,114 | ) | | — |
| | — |
| | — |
| | (145,114 | ) | Contribution of EchoStar XIX satellite, net of deferred tax | | 349,337 |
| | — |
| | — |
| | — |
| | 349,337 |
| Contribution of net assets pursuant to Share Exchange Agreement | | 219,662 |
| | — |
| | — |
| | — |
| | 219,662 |
| Exchange of uplinking business net assets for HSS Tracking Stock | | (190,221 | ) | |
|
| |
|
| |
|
| | (190,221 | ) | Other comprehensive income | | — |
| | 7,805 |
| |
|
| | 409 |
| | 8,214 |
| Net income | | — |
| | — |
| | 295,970 |
| | 1,583 |
| | 297,553 |
| Other | | (419 | ) | | 92 |
| | — |
| | — |
| | (327 | ) | Balance, December 31, 2017 | | 1,754,561 |
| | (52,822 | ) | | 582,683 |
| | 14,822 |
| | 2,299,244 |
| Cumulative effect of adoption of ASU 2014-09 and ASU 2016-01 as of January 1, 2018 | |
|
| | 433 |
| | 15,773 |
| |
|
| | 16,206 |
| Balance, January 1, 2018 | | 1,754,561 |
| | (52,389 | ) | | 598,456 |
| | 14,822 |
| | 2,315,450 |
| Stock-based compensation | | 5,435 |
| | — |
| | — |
| | — |
| | 5,435 |
| Capital contribution from EchoStar Corporation | | 7,125 |
| | — |
| | — |
| | — |
| | 7,125 |
| Other comprehensive income | | — |
| | (31,385 | ) | | — |
| | (1,389 | ) | | (32,774 | ) | Net Income | | — |
| | — |
| | 95,501 |
| | 1,842 |
| | 97,343 |
| Other | | (84 | ) | | — |
| | — |
| |
|
| | (84 | ) | Balance, December 31, 2018 | | $ | 1,767,037 |
| | $ | (83,774 | ) | | $ | 693,957 |
| | $ | 15,275 |
| | $ | 2,392,495 |
|
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands) | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Revenue: | | | | | | | Services and other revenue | | $ | 1,623,458 |
| | $ | 1,561,426 |
| | $ | 1,275,553 |
| Equipment revenue | | 266,703 |
| | 205,410 |
| | 239,489 |
| Total revenue | | 1,890,161 |
| | 1,766,836 |
| | 1,515,042 |
| Costs and expenses: | | | | | | | Cost of sales - services and other (exclusive of depreciation and amortization) | | 555,701 |
| | 559,838 |
| | 497,111 |
| Cost of sales - equipment (exclusive of depreciation and amortization) | | 225,103 |
| | 176,600 |
| | 195,439 |
| Selling, general and administrative expenses | | 467,869 |
| | 397,994 |
| | 337,548 |
| Research and development expenses | | 25,739 |
| | 27,570 |
| | 31,745 |
| Depreciation and amortization | | 464,797 |
| | 426,852 |
| | 370,418 |
| Impairment of long-lived assets | | — |
| | — |
| | 6,000 |
| Total costs and expenses | | 1,739,209 |
| | 1,588,854 |
| | 1,438,261 |
| Operating income (loss) | | 150,952 |
| | 177,982 |
| | 76,781 |
| Other income (expense): | | | | | | | Interest income | | 57,730 |
| | 59,104 |
| | 31,952 |
| Interest expense, net of amounts capitalized | | (272,218 | ) | | (231,169 | ) | | (213,166 | ) | Gains (losses) on investments, net | | (8,464 | ) | | 187 |
| | (1,574 | ) | Equity in earnings (losses) of unconsolidated affiliates, net | | (3,333 | ) | | 4,874 |
| | 7,027 |
| Foreign currency transaction gains (losses), net | | (9,855 | ) | | (12,484 | ) | | (1,158 | ) | Other, net | | (633 | ) | | 8,041 |
| | (1,030 | ) | Total other income (expense), net | | (236,773 | ) | | (171,447 | ) | | (177,949 | ) | Income (loss) from continuing operations before income taxes | | (85,821 | ) | | 6,535 |
| | (101,168 | ) | Income tax benefit (provision), net | | (11,595 | ) | | (18,615 | ) | | 93,766 |
| Net income (loss) from continuing operations | | (97,416 | ) | | (12,080 | ) | | (7,402 | ) | Net income (loss) from discontinued operations | | 56,539 |
| | 109,423 |
| | 304,955 |
| Net income (loss) | | (40,877 | ) | | 97,343 |
| | 297,553 |
| Less: Net income (loss) attributable to non-controlling interests | | (11,335 | ) | | 1,842 |
| | 1,583 |
| Net income (loss) attributable to HSS | | $ | (29,542 | ) | | $ | 95,501 |
| | $ | 295,970 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Amounts in thousands) | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Net income (loss) | | $ | (40,877 | ) | | $ | 97,343 |
| | $ | 297,553 |
| Other comprehensive income (loss), net of tax: | | |
| | |
| | |
| Foreign currency translation adjustments | | 1,182 |
| | (31,938 | ) | | 7,196 |
| Unrealized gains (losses) on available-for-sale securities | | 1,817 |
| | (665 | ) | | (2,280 | ) | Other | | (114 | ) | | 41 |
| | 92 |
| Amounts reclassified to net income (loss): | | | | | | | Realized gains on available-for-sale securities | | (419 | ) | | (212 | ) | | — |
| Other-than-temporary impairment loss on available-for-sale securities | | — |
| | — |
| | 3,298 |
| Total other comprehensive income (loss), net of tax | | 2,466 |
| | (32,774 | ) | | 8,306 |
| Comprehensive income (loss) | | (38,411 | ) | | 64,569 |
| | 305,859 |
| Less: Comprehensive income (loss) attributable to non-controlling interests | | (8,007 | ) | | 453 |
| | 1,992 |
| Comprehensive income (loss) attributable to HSS | | $ | (30,404 | ) | | $ | 64,116 |
| | $ | 303,867 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN SHAREHOLDERS’ EQUITY (DollarsAmounts in thousands) | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2018 | | 2017 | | 2016 | Cash flows from operating activities: | | | | | | | Net income | | $ | 97,343 |
| | $ | 297,553 |
| | $ | 121,721 |
| Adjustments to reconcile net income to net cash flows from operating activities: | | | | | | | Depreciation and amortization | | 551,416 |
| | 496,798 |
| | 414,133 |
| Amortization of debt issuance costs | | 7,923 |
| | 7,378 |
| | 6,551 |
| Losses (gains) and impairment on marketable investment securities, net | | (184 | ) | | 1,574 |
| | (6,995 | ) | Impairment of long-lived asset | | — |
| | 6,000 |
| | — |
| Equity in earnings of unconsolidated affiliate | | (4,791 | ) | | (7,027 | ) | | (9,444 | ) | Stock-based compensation | | 5,435 |
| | 5,117 |
| | 4,822 |
| Deferred tax (benefit) provision | | 43,698 |
| | (268,071 | ) | | 70,901 |
| Dividends received from unconsolidated entity | | 10,000 |
| | 19,000 |
| | 10,000 |
| Proceeds from sale of trading securities | | — |
| | 8,922 |
| | 7,140 |
| Changes in current assets and current liabilities, net: | | | | | | | Trade accounts receivable, net | | (17,840 | ) | | (12,459 | ) | | (39,092 | ) | Advances to and from affiliates, net | | 7,276 |
| | 12,176 |
| | (67,579 | ) | Trade accounts receivable - DISH Network | | 25,091 |
| | (19,318 | ) | | 1,935 |
| Inventory | | 5,650 |
| | (23,373 | ) | | (13,221 | ) | Other current assets | | (17,312 | ) | | (9,303 | ) | | 298 |
| Trade accounts payable | | 6,258 |
| | (4,826 | ) | | 9,429 |
| Accrued expenses and other | | 16,839 |
| | 13,701 |
| | 30,603 |
| Changes in noncurrent assets and noncurrent liabilities, net | | (2,680 | ) | | (30,831 | ) | | 14,233 |
| Other, net | | 8,581 |
| | 4,018 |
| | 10,436 |
| Net cash flows from operating activities | | 742,703 |
| | 497,029 |
| | 565,871 |
| Cash flows from investing activities: | | | | | | | Purchases of marketable investment securities | | (2,063,042 | ) | | (535,476 | ) | | (396,730 | ) | Sales and maturities of marketable investment securities | | 909,996 |
| | 259,263 |
| | 460,834 |
| Expenditures for property and equipment | | (391,065 | ) | | (401,538 | ) | | (381,287 | ) | Refunds and other receipts related to property and equipment | | 77,524 |
| | 4,311 |
| | — |
| Investment in unconsolidated entity | | (100,991 | ) | | — |
| | — |
| Payment for EchoStar XXI launch services | | (7,125 | ) | | — |
| | (23,750 | ) | Expenditures for externally marketed software | | (31,639 | ) | | (31,331 | ) | | (23,252 | ) | Other, net | | — |
| | — |
| | (1,636 | ) | Net cash flows from investing activities | | (1,606,342 | ) | | (704,771 | ) | | (365,821 | ) | Cash flows from financing activities: | | | | | | | Proceeds from issuance of long-term debt | | — |
| | — |
| | 1,500,000 |
| Payments of debt issuance costs | | — |
| | (414 | ) | | (7,097 | ) | Repurchase of the 2019 Senior Secured Notes | | (70,173 | ) | | — |
| | — |
| Repayment of debt and capital lease obligations | | (41,019 | ) | | (37,063 | ) | | (31,669 | ) | Advances from (to) affiliates | | — |
| | (36 | ) | | 6,982 |
| Capital contribution from EchoStar | | 7,125 |
| | — |
| | 23,750 |
| Repayment of in-orbit incentive obligations | | (4,796 | ) | | (5,850 | ) | | (5,499 | ) | Other, net | | — |
| | 1,486 |
| | 1,342 |
| Net cash flows from financing activities | | (108,863 | ) | | (41,877 | ) | | 1,487,809 |
| Effect of exchange rates on cash and cash equivalents | | (2,233 | ) | | 1,286 |
| | 183 |
| Net increase (decrease) in cash and cash equivalents, including restricted amounts | | (974,735 | ) | | (248,333 | ) | | 1,688,042 |
| Cash and cash equivalents, including restricted amounts, beginning of period | | 1,823,354 |
| | 2,071,687 |
| | 383,645 |
| Cash and cash equivalents, including restricted amounts, end of period | | $ | 848,619 |
| | $ | 1,823,354 |
| | $ | 2,071,687 |
| | | | | | | | Supplemental disclosure of cash flow Information: | | | | | | | Cash paid for interest, net of amounts capitalized | | $ | 250,576 |
| | $ | 236,232 |
| | $ | 141,827 |
| Cash paid for income taxes | | $ | 4,837 |
| | $ | 3,574 |
| | $ | 4,796 |
|
| | | | | | | | | | | | | | | | | | | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Earnings (Losses) | | Non-controlling Interests | | Total | | | | | | | | | | | | Balance, December 31, 2016 | | $ | 1,516,199 |
| | $ | (60,719 | ) | | $ | 286,713 |
| | $ | 12,830 |
| | $ | 1,755,023 |
| Stock-based compensation | | 5,117 |
| | — |
| | — |
| | — |
| | 5,117 |
| Transfer of launch service contracts to EchoStar | | (145,114 | ) | | — |
| | — |
| | — |
| | (145,114 | ) | Contribution of EchoStar XIX satellite, net of deferred tax | | 349,337 |
| | — |
| | — |
| | — |
| | 349,337 |
| Contribution of net assets pursuant to Share Exchange Agreement | | 219,662 |
| | — |
| | — |
| | — |
| | 219,662 |
| Exchange of uplinking business net assets for HSS Tracking Stock | | (190,221 | ) | | — |
| | — |
| | — |
| | (190,221 | ) | Other comprehensive income (loss) | | — |
| | 7,805 |
| | — |
| | 409 |
| | 8,214 |
| Net income (loss) | | — |
| | — |
| | 295,970 |
| | 1,583 |
| | 297,553 |
| Other, net | | (419 | ) | | 92 |
| | — |
| | — |
| | (327 | ) | Balance, December 31, 2017 | | 1,754,561 |
| | (52,822 | ) | | 582,683 |
| | 14,822 |
| | 2,299,244 |
| Cumulative effect of accounting changes | | — |
| | 433 |
| | 15,773 |
| | — |
| | 16,206 |
| Balance, January 1, 2018 | | 1,754,561 |
| | (52,389 | ) | | 598,456 |
| | 14,822 |
| | 2,315,450 |
| Stock-based compensation | | 5,435 |
| | — |
| | — |
| | — |
| | 5,435 |
| Capital contribution from EchoStar Corporation | | 7,125 |
| | — |
| | — |
| | — |
| | 7,125 |
| Other comprehensive income (loss) | | — |
| | (31,385 | ) | | — |
| | (1,389 | ) | | (32,774 | ) | Net income (loss) | | — |
| | — |
| | 95,501 |
| | 1,842 |
| | 97,343 |
| Other, net | | (84 | ) | | — |
| | — |
| | — |
| | (84 | ) | Balance, December 31, 2018 | | 1,767,037 |
| | (83,774 | ) | | 693,957 |
| | 15,275 |
| | 2,392,495 |
| Stock-based compensation | | 5,436 |
| | — |
| | — |
| | — |
| | 5,436 |
| Capital contribution from EchoStar Corporation | | 9,606 |
| | — |
| | — |
| | — |
| | 9,606 |
| Purchase of non-controlling interest | | (833 | ) | | — |
| | — |
| | (6,480 | ) | | (7,313 | ) | Net assets distributed pursuant to the BSS Transaction | | (332,699 | ) | | — |
| | — |
| | — |
| | (332,699 | ) | Issuance of equity and contribution of assets pursuant to the Yahsat JV formation | | 29,576 |
| | — |
| | — |
| | 73,199 |
| | 102,775 |
| Other comprehensive income (loss) | | — |
| | (862 | ) | | — |
| | 3,328 |
| | 2,466 |
| Net income (loss) | | — |
| | — |
| | (29,542 | ) | | (11,335 | ) | | (40,877 | ) | Other, net | | 513 |
| | — |
| | — |
| | 1,761 |
| | 2,274 |
| Balance, December 31, 2019 | | $ | 1,478,636 |
| | $ | (84,636 | ) | | $ | 664,415 |
| | $ | 75,748 |
| | $ | 2,134,163 |
|
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Cash flows from operating activities: | | |
| | |
| | |
| Net income (loss) | | $ | (40,877 | ) | | $ | 97,343 |
| | $ | 297,553 |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | |
| | |
| | |
| Depreciation and amortization | | 550,723 |
| | 551,416 |
| | 496,798 |
| Impairment of long-lived assets | | — |
| | — |
| | 6,000 |
| Losses (gains) on investments, net | | 8,464 |
| | (184 | ) | | 1,574 |
| Equity in losses (earnings) of unconsolidated affiliates, net | | 3,333 |
| | (4,791 | ) | | (7,027 | ) | Foreign currency transaction losses (gains), net | | 9,855 |
| | 12,484 |
| | 1,158 |
| Deferred tax provision (benefit), net | | 14,703 |
| | 43,698 |
| | (268,071 | ) | Stock-based compensation | | 5,436 |
| | 5,435 |
| | 5,117 |
| Amortization of debt issuance costs | | 5,912 |
| | 7,923 |
| | 7,378 |
| Dividends received from unconsolidated affiliates | | 2,716 |
| | 10,000 |
| | 19,000 |
| Proceeds from sale of trading securities | | — |
| | — |
| | 8,922 |
| Changes in current assets and current liabilities, net: | | |
| |
|
| |
|
| Trade accounts receivable and contract assets, net | | 8,398 |
| | (17,840 | ) | | (12,459 | ) | Advances to and from affiliates, net | | (36,662 | ) | | 7,276 |
| | 12,176 |
| Other current assets | | (44,752 | ) | | 13,429 |
| | (51,994 | ) | Trade accounts payable | | 13,510 |
| | 6,258 |
| | (4,826 | ) | Contract liabilities | | 26,411 |
| | 7,832 |
| | 5,970 |
| Accrued expenses and other current liabilities | | 93,117 |
| | 9,007 |
| | 7,731 |
| Changes in non-current assets and non-current liabilities, net | | 13,557 |
| | (2,680 | ) | | (30,831 | ) | Other, net | | (240 | ) | | (3,903 | ) | | 2,860 |
| Net cash flows from operating activities | | 633,604 |
| | 742,703 |
| | 497,029 |
| Cash flows from investing activities: | | |
| | |
| | |
| Purchases of marketable investment securities | | (709,350 | ) | | (2,063,042 | ) | | (535,476 | ) | Sales and maturities of marketable investment securities | | 1,665,269 |
| | 909,996 |
| | 259,263 |
| Investments in unconsolidated affiliates | | 7,851 |
| | (100,991 | ) | | — |
| Dividend received from unconsolidated affiliate | | 2,284 |
| | — |
| | — |
| Expenditures for property and equipment | | (309,291 | ) | | (391,065 | ) | | (401,538 | ) | Refunds and other receipts related to property and equipment | | — |
| | 77,524 |
| | 4,311 |
| Expenditures for externally marketed software | | (29,310 | ) | | (31,639 | ) | | (31,331 | ) | Purchases of regulatory authorizations | | (7,850 | ) | | — |
| | — |
| Payment for EchoStar XXI launch services | | ��� |
| | (7,125 | ) | | — |
| Net cash flows from investing activities | | 619,603 |
| | (1,606,342 | ) | | (704,771 | ) |
| | | | | | | | | | | | | | Cash flows from financing activities: | | |
| | |
| | |
| Repurchase and maturity of the 2019 Senior Secured Notes | | (920,923 | ) | | (70,173 | ) | | — |
| Repayment of other long-term debt and finance lease obligations | | (29,347 | ) | | (41,019 | ) | | (37,063 | ) | Payment of in-orbit incentive obligations | | (4,430 | ) | | (4,796 | ) | | (5,850 | ) | Capital contribution from EchoStar | | — |
| | 7,125 |
| | — |
| Purchase of non-controlling interest | | (7,313 | ) | | — |
| | — |
| Other, net | | 1,172 |
| | — |
| | 1,036 |
| Net cash flows from financing activities | | (960,841 | ) | | (108,863 | ) | | (41,877 | ) | Effect of exchange rates on cash and cash equivalents | | (663 | ) | | (2,233 | ) | | 1,286 |
| Net increase (decrease) in cash and cash equivalents | | 291,703 |
| | (974,735 | ) | | (248,333 | ) | Cash and cash equivalents, including restricted amounts, beginning of period | | 848,619 |
| | 1,823,354 |
| | 2,071,687 |
| Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,140,322 |
| | $ | 848,619 |
| | $ | 1,823,354 |
| | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | Cash paid for interest (including capitalized interest) | | $ | 216,025 |
| | $ | 250,576 |
| | $ | 236,232 |
| Cash paid for income taxes | | $ | 3,094 |
| | $ | 4,837 |
| | $ | 3,574 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES Principal Business Hughes Satellite Systems Corporation (which, together with its subsidiaries, is referred to as “HSS,” the “Company,” “we,” “us” and/orand “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar”). We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small office customers, satellite operationsto medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and various communications solutions for enterprise customers, which include aeronautical enterprise and government customers.
enterprises. We primarily operate in the following two2 business segments: | | • | Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international home and small officeconsumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to domesticservice providers and international consumers and aeronautical, enterprise and government 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. |
| | • | EchoStar Satellite Services (“ESS”)ESS — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite operations and satellite services on a full-time and/or occasional-use basis primarily to DISH Network Corporation and its subsidiaries (“DISH Network”), Dish Mexico, S. de R.L. de C.V., a joint venture that EchoStar entered into in 2008 (“Dish Mexico”), United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.
|
Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Accounting, Real Estate Accounting and Legal) and other activities that have not been assigned to our operating 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 in. We also divide our segment reporting.operations by primary geographic market as follows: (i) North America (the U.S. and its territories, Mexico, and Canada); (ii) South and Central America and; (iii) All other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 18. Segment Reporting for further detail. In May 2019, EchoStar and one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), entered into a master transaction agreement (the “Master Transaction Agreement”) with DISH Network Corporation (“DISH”) and a wholly-owned subsidiary of DISH (“Merger Sub”). Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred to BSS Corp. certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily relating 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 EchoStar’s 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 EchoStar’s and our other businesses (collectively, the “BSS Business”); (ii) EchoStar distributed to each holder of shares of EchoStar’s Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to one share of BSS Common Stock for each share of EchoStar’s Class A or Class B common stock owned by such EchoStar stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and DISH owns and operates the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar 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”).
In connection with the BSS Transaction, EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively. Additionally, EchoStar and DISH and certain of our, EchoStar’s and DISH’s subsidiaries, as applicable, have (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services; (ii) terminated certain previously existing
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
agreements; and (iii) amended certain existing agreements and entered into certain new agreements pursuant to which we, EchoStar and certain of our and its other subsidiaries, on the one hand, and DISH Network, on the other hand, will obtain and provide certain products, services and rights from and to each other.
The BSS Transaction was structured in a manner intended to be tax-free to EchoStar and its stockholders for U.S. federal income tax purposes and was accounted for as a spin-off to EchoStar’s stockholders as we and EchoStar did not receive any consideration. 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 all periods presented in these Consolidated Financial Statements.
During 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries. EchoStar and certain of its and our subsidiaries received all of the shares of the Hughes Retail Preferred Tracking Stock previously issued by EchoStar and us (together, the “Tracking Stock”) in exchange for 100% of the equity interests of certain of EchoStar subsidiaries that held substantially all of EchoStar’s former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). Following the consummation of the Share Exchange, EchoStar no longer operateoperates its former EchoStar Technologies businesses, the Tracking Stock was retired and is no longer outstanding, and all agreements, arrangements and policy statements with respect to the Tracking Stock terminated. Refer to Note 5. Discontinued Operations for further detail. Additionally, all amounts in the following footnotes reference results from continuing operations unless otherwise noted.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation These Consolidated Financial Statements and the accompanying notes are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). We consolidate all entities in which we have a controlling financial interest. We are deemed to have a controlling financial interest in variable interest entities wherein which we are the primary beneficiary. We are deemed to have a controlling financial interestbeneficiary and in other entities whenin which we own more than 50% of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a noncontrollingnon-controlling interest within shareholders’ equity for the portion of the entity’s equity attributed to the noncontrollingnon-controlling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.
ReclassificationAll amounts presented in these Consolidated Financial Statements and their accompanying notes are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Reclassification
Certain prior period amounts have been reclassified to conform with the current period presentation.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. (“GAAP”) requires usWe are required to make certain estimates and assumptions that affect the amounts reported amounts of assetsin these Consolidated Financial Statements. The most significant estimates 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 financial statements. Estimatesassumptions are used in accounting for, among other things,determining: (i) amortization periods for deferred contract acquisition costs, (ii) inputs used to recognize revenue over time, (iii)including amortization periods for deferred contract acquisition costs; (ii) allowances for doubtful accounts, (iv) warranty obligations, (v) self-insurance obligations, (vi)accounts; (iii) deferred taxes and related valuation allowances, (vii)including uncertain tax positions, (viii)positions; (iv) loss contingencies, (ix)contingencies; (v) fair value of financial instruments, (x) fair value of EchoStar’s stock-based compensation awards, (xi)instruments; (vi) fair value of assets and liabilities acquired in business combinations, (xii) lease classifications, (xiii)combinations; and (vii) asset impairment testing and (xiv) useful lives and methods for depreciation and amortization of long-lived assets.testing.
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 financial statements. Additionally, changing economic conditions may increase the inherent uncertainty in the estimates
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
and assumptions indicated above. We review our estimates and assumptions periodically and the effects of revisions thereto 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 valuevalue: 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 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. |
Fair values of our marketable investment securities are measured on a recurring basis 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 Level 1 measurements that reflect quoted prices for identical securities in active markets. Fair values of our investments in other marketable debt securities are generally based on Level 2 measurements as the markets for such debt securities are less active. We consider trades of identical debt securities on or near the measurement date as a strong indication of fair value and matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features may also be used to determine fair value of our investments in marketable debt securities. Fair values for our outstanding debt (see Note 10) are based on quoted market prices in less active markets and are categorized as Level 2 measurements. Additionally, we use fair value measurements from time to time in connection with other investments, asset 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. Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period. There were no0 transfers between levels for each ofduring the years ended December 31, 20182019 and 2017.2018.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of December 31, 20182019 and 2017,2018, the carrying amounts of our cash and cash equivalents, trade accounts receivable and other receivables,contract assets, net, of allowance for doubtful accounts,trade accounts payable, and accrued expenses and other current liabilities were equal to or approximated their fair value due to their short-term nature or proximity to current market rates.
Revenue Recognition
Overview
We account for our sales and services revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”), which we adopted on January 1, 2018, using the modified retrospective approach to contracts not completed as of the adoption date. Topic 606 provides a five-step revenue recognition model that we apply to our customer contracts. Under this model we (i) identify the contract with the customer, (ii) identify our performance obligations in the contract, (iii) determine the transaction price for the contract, (iv) allocate the transaction price to our performance obligations and (v) recognize revenue when or as we satisfy our performance obligations.
Revenue is recognized upon transfer of control of the promised goods or our performance of the services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts that may include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations.
Additionally, a significant portion of ourWe also recognize lease revenue which is derived from leases of property and equipment thatwhich, for operating leases, is reported in Services and other revenue - other and Services and other revenue - DISH Networkin ourthe Consolidated Statements of Operations and, Comprehensive Income (Loss).for sales-type leases, is reported in Equipment revenue in the Consolidated Statements of Operations. Certain of our customer contracts contain embedded equipment leases, which we separate from non-lease components of the contract based on the relative standalone selling prices of the lease and non-lease components.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Hughes Segment
Our Hughes segment provides various communication and networking services to consumer and enterprise customers in both domestic and international markets. Our service contracts typically obligate us to provide substantially the same services on a recurring basis in exchange for fixed recurring fees over the term of the contract. We satisfy such performance obligations over time and recognize revenue ratably as services are rendered over the service period. Certain of our contracts with service obligations provide for fees based on usage, capacity or volume. We satisfy these performance obligations and recognize the related revenue at the point in time, or over the period, when the services are rendered. Our Hughes segment also sells and leases communications equipment to its customers. Revenue from equipment sales generally is recognized based upon shipment of the equipment.terms. Our equipment sales contracts typically include standard product warranties, but generally do not provide for returns or refunds. Revenue for extended warranties is recognized ratably over the extended warranty period. For contracts with multiple performance obligations, we typically allocate the contract’s transaction price to each performance obligation based on their relative standalone selling prices. When the standalone selling price is not observable, our primary method used to estimate standalone selling price is the expected cost plus a margin. Our contracts generally require customer payments to be made at or shortly after the time we transfer control of goods or perform the services.
In addition to equipment and service offerings, our Hughes segment also enters into long-term contracts to design, develop, construct and install complex telecommunication networks to customers in itsfor mobile system operators and enterprise and mobile satellite systems markets.customers. Revenue from such contracts is generally recognized over time atas a measure of progress that depicts the transfer of control of the goods or services to the customer. Depending on the nature of the arrangement, we measure progress toward contract completion using an appropriate input method or output method. Under the input method, we recognize the transaction price as revenue based on the ratio of costs incurred to estimated total costs at completion. Under the output method, revenue and cost of sales are recognized as products are delivered based on the expected profit for the entire agreement. Profit margins on long-term contracts generally are based on estimates of revenue and costs at completion. We review and revise our estimates periodically and recognize related adjustments in the period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified. We generally receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment.
ESS Segment
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ESS
OurGenerally, our ESS segment provides satellite operations through leasing arrangements and satellite services on a full-time and/or occasional-use basis to DISH Network and Dish Mexico, as well as government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. Our ESS segment also provides telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and technical consulting services that are billed by the hour. Generally, our service contracts with customers contain a single performance obligation and, therefore, there is no need to allocate the transaction price. We transfer control and recognize revenue for satellite services at the point in time or over the period when the services are rendered.
Lease Revenue
We lease satellite capacity, communications equipment and real estate to certain of our customers. We identify and determine the classification of such leases as operating leases or sales-type leases. A lease is classified as a sales-type lease if it meets the criteria for a finance lease; otherwise it is classified as an operating lease. Some of our leases are embedded in contracts with customers that include non-lease performance obligations. For such contracts, except where we have elected otherwise, we allocate consideration in the contract between lease and non-lease components based on their relative standalone selling prices. We elected an accounting policy to not separate the lease of equipment from related services in our HughesNet satellite internet service (the “HughesNet service”) contracts with customers and account for all revenue from such contracts as non-lease service revenue. Assets subject to operating leases remain in Property and equipment, net and continue to be depreciated. Assets subject to sales-type leases are derecognized from Property and equipment, net at lease commencement and a net investment in the lease asset is recognized in Trade accounts receivable and contract assets, net and Other non-current assets, net.
Operating lease revenue is generally recognized on a straight-line basis over the lease term. Sales-type lease revenue and a corresponding receivable generally are recognized at lease commencement based on the present value of the future lease payments and related interest income on the receivable is recognized over the lease term. Payments under sales-type leases are discounted using the interest rate implicit in the lease or our incremental borrowing rate if the interest rate implicit in the lease cannot be reasonably determined. We report revenue from sales-type leases at the commencement date in Equipment revenue and periodic interest income in Services and other revenue. We report operating lease revenue in Services and other revenue.
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Other
Sales and Value Added Taxes, Universal Service Fees and other taxes that we collect concurrent with revenue producing activities are excluded from revenue.revenue, and included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost after control over a product has transferred to the customer and are included in Cost of sales - equipment in ourthe Consolidated Statements of Operations and Comprehensive Income (Loss) at the time of shipment.
Cost of Sales - Services and Other Cost of sales - services and other in the Consolidated Statements of Operations primarily consists of costs of satellite capacity and services, hub infrastructure, customer care, wireline and wireless capacity and direct labor costs associated with the services provided and is generally charged to expense as incurred.
Trade Accounts ReceivableCost of Sales - Equipment Cost of sales - equipment in the Consolidated Statements of Operations primarily consists of inventory costs, including freight and royalties, and is generally recognized at the point in time control of the equipment is passed to the customer and related revenue is recognized.
Trade accounts receivable includesAdditionally, customer-related research and development costs are incurred in connection with the specific requirements of a customer’s order; in such instances, the amounts billedfor these customer funded development efforts are also included in Cost of sales - equipment in the Consolidated Statements of Operations.
Stock-based Compensation Expense Stock-based compensation expense is recognized based on the fair value of stock awards ultimately expected to vest. Forfeitures are estimated at the time of grant and currently duerevised, if necessary, in subsequent periods if actual forfeitures differ from customers and represents our unconditional rightsthose estimates. Compensation expense for awards with service conditions only is recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense for awards subject to consideration arising from our performance under our customer contracts. Trade accounts receivable also includes amounts due from customers under our leasing arrangements. We make ongoing estimates relating to the collectibility of our trade accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make the required payments. In determining the amountconditions is recognized only when satisfaction of the allowance, we consider historical levels of credit lossesperformance condition is probable.
Advertising Costs Advertising costs are expensed as incurred and make judgments about the creditworthiness of our customers based on ongoing credit evaluations. Past due trade accounts receivable balances are written off when our internal collection efforts have been unsuccessful. Bad debt expense related to our trade accounts receivable and other contract assets is included in Selling, general and administrative expenses in ourthe Consolidated Statements of Operations and Comprehensive Income (Loss).Operations.
Research and Contract LiabilitiesDevelopment
Contract assets represent revenue that we have recognizedResearch and development costs, not incurred in advance of billing theconnection with customer andrequirements, are included in Trade accounts receivable and contract assets, net or Other noncurrent assets, net in our Consolidated Balance Sheets based on the expected timing of customer payment. Our contract assets include amounts that we referred to as Contracts in Process in prior periods. Our contract assets typically relate to our long-term contracts where we recognize revenue using the cost-based input method and the revenue recognized exceeds the amount billed to the customer.generally expensed when incurred.
Debt Issuance Costs Contract liabilities consistCosts of advance paymentsissuing debt generally are deferred and billings in excess of revenue recognized under customer contracts and areamortized utilizing the effective interest method, with amortization included in Contract liabilities or Other noncurrent liabilitiesInterest expense, net of amounts capitalized in ourthe Consolidated Statements of Operations. We report unamortized debt issuance costs as a reduction of the related long-term debt in the Consolidated Balance Sheets based on the timing of when we expect to recognize revenue. Contract liabilities include amounts that we referred to as deferred revenue in prior periods. We recognize contract liabilities as revenue after all revenue recognition criteria have been met.Sheets.
Foreign Currency
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Contract Acquisition and Fulfillment Costs
Contract Acquisition Costs
Our contract acquisition costs represent incremental direct costs of obtaining a contract and consist primarily of sales incentives paid to employees and third-party representatives. When we determine that our contract acquisition costs are recoverable, we defer and amortize the costs over the contract term, or over the estimated life of the customer relationship if anticipated renewals are expected and the incentives payable upon renewal are not commensurate with the initial incentive. We amortize contract acquisition costs in proportion to the revenue to which the costs relate. We expense sales incentives as incurred if the expected amortization period is one year or less. Unamortized contract acquisition costs are included in Other noncurrent assets, net in our Consolidated Balance Sheets and related amortization expense is included in Selling, general and administrative expenses in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Contract Fulfillment Costs
We recognize costs to fulfill a contract as an asset when the costs relate directly to a specific contract, the costs generate or enhance our resources that will be used in satisfying future performance obligations and the costs are expected to be recovered. We may incur such costs on certain contracts that require initial setup activities in advance of the transfer of goods or services to the customer. We amortize these costs in proportion to the revenue to which the costs relate. Unamortized contract fulfillment costs are included in Other noncurrent assets, net in our Consolidated Balance Sheets and related amortization expense is included in Cost of sales - services and other in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Foreign Currency
The functional currency for certain of our foreign operations is determined to be the local currency. Accordingly, we translate assets and liabilities of these foreign entities from their local currencies to U.S. dollars using period-end exchange rates and translate income and expense accounts at monthly average rates. The resulting translation adjustments are reported in other comprehensive income (loss) as Foreign currency translation adjustments in ourthe Consolidated Statements of Operations and Comprehensive Income (Loss). Except in certain uncommon circumstances, we have not recorded deferred income taxes related to our foreign currency translation adjustments.
Gains and losses resulting from the re-measurement of monetary assets and liabilitiestransactions denominated in foreign currencies into the functional currency are recognized in Other,Foreign currency transaction gains (losses), net in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Cash and Cash Equivalents
We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash equivalents as of December 31, 2018 and 2017 primarily consisted of commercial paper, government bonds, corporate notes, and money market funds. The amortized cost of these investments approximates their fair value.
Inventory
Inventory is stated at the lower of cost, determined using the first-in, first-out (“FIFO”) method, or net realizable value. Cost of inventory consists primarily of materials, direct labor and indirect overhead incurred in the procurement and manufacturing of our products. We use standard costing methodologies in determining the cost of certain of our finished goods and work-in-process inventories. We determine net realizable value using our best estimates of future use or recovery, considering the aging and composition of inventory balances, the effects of technological and/or design changes, forecasted future product demand based on firm or near-firm customer orders, and alternative means of disposition of excess or obsolete items. We recognize losses within operating income when we determine that the cost of inventory and commitments to purchase inventory exceed net realizable value.
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Capitalized Software Costs
Internal-Use Software
Costs related to the procurement and development of software for internal-use 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 in our Consolidated Balance Sheets.
Externally Marketed Software
Costs related to the procurement and development of software for 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 externally marketed software are included in Other noncurrent assets, net in our Consolidated Balance Sheets. Externally marketed software generally is installed in the equipment we sell or lease 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.
Marketable Investment Securities
Our marketable investment securities portfolio consists of investments in debt and equity instruments with readily determinable fair values.
Debt Securities
We classify all of our debt securities as available for sale based on our investment strategy for the securities. Generally, we recognize periodic changes in the difference between fair value and amortized cost in Unrealized gains on available-for-sale securities and other in our Consolidated Statements of Operations and Comprehensive Income (Loss). Realized gains and losses upon sales of debt securities are reclassified from other comprehensive income (loss) and recognized on the trade date in Gains and losses on investments, net in our Consolidated Statements of Operations and Comprehensive Income (Loss). We use the FIFO method to determine the cost basis on sales of debt securities. Interest income from debt securities is reported in Interest income in our Consolidated Statements of Operations and Comprehensive Income (Loss). We could realize proceeds from certain investments prior to their contractual maturity if we sell these securities before such maturity.
We evaluate our available-for-sale debt securities portfolio periodically to determine whether declines in the fair value of these securities are other-than-temporary. Our evaluation considers, among other things, the length of time and the extent to which the fair value of such security has been lower than amortized cost, market and company-specific factors related to the security and our intent and ability to hold the investment to maturity or when it recovers its value. We generally consider a decline to be other-than-temporary when: (i) we intend to sell the security, (ii) it is more likely than not that we will be required to sell the security before maturity or when it recovers its value, or (iii) we do not expect to recover the amortized cost of the security at maturity. Declines in the fair value of available-for-sale debt securities that are determined to be other-than-temporary are reclassified from other comprehensive income (loss) and recognized in Net income, in our Consolidated Statements of Operations and Comprehensive Income (Loss), thus establishing a new cost basis for the investment.
Additionally, from time to time we make strategic investments in corporate debt securities. We may elect to account for these investments using the fair value option when it reduces accounting complexity. When we have made this election, we recognize periodic changes in fair value of these investments in Gains (losses) on investments, net in our Consolidated Statements of Operations and Comprehensive Income (Loss). Interest income from these securities is reported in Interest income in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Equity Securities
Prior to January 1, 2018, we classified our marketable equity securities as available-for-sale or trading securities, depending on our investment strategy for the securities. For available-for-sale securities, we recognized periodic
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
changes in the difference between fair value and cost in Unrealized gains (losses) on available-for-sale securities and other in our Consolidated Statements of Operations and Comprehensive Income (Loss). Realized gains and losses upon sale of available-for-sale securities were reclassified from other comprehensive income (loss) and recognized on the trade date in Gains (losses) on investments, net in our Consolidated Statements of Operations and Comprehensive Income (Loss). We used the FIFO method to determine the cost basis on sales of available-for-sale securities. For trading securities, we recognized periodic changes in the fair value of the securities in Gains and losses on investments, net in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments (the “New Investment Standard”), which established new requirements for investments in equity securities in ASC Topic 321, Investments - Equity Securities. Accordingly, beginning in 2018, we recognize periodic changes in the fair value of all of our equity securities with a readily determinable fair value that are not accounted for using the equity method in Gains and losses on investments, net in our Consolidated Statements of Operations and Comprehensive Income (Loss). We recognize dividend income on equity securities on the ex-dividend date and report such income in Other, net in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Investments in Unconsolidated Entities
Our investments in unconsolidated entities consist of investments in equity securities that are not publicly traded and do not have readily determinable fair values.
Equity Method
We use the equity method to account for investments when we have the ability to exercise significant influence on the operating decisions of the investee. Such investments in unconsolidated entities are initially recorded at cost and subsequently adjusted for our proportionate share of the net earnings or loss of the investee, which is reported in Equity in earnings of unconsolidated affiliate in our Consolidated Statements of Operations and Comprehensive Income (Loss). The carrying amount of such investments may include a component of goodwill if the cost of our investment exceeds the fair value of the underlying identifiable assets and liabilities of the investee. Dividends received from equity method investees reduce the carrying amount of the investment.
We defer, to the extent of our ownership interest in the investee, recognition of intra-entity profits on sales of equipment to the investee until the investee has charged the cost of the equipment to expense in a subsequent sale to a third party or through depreciation. In these circumstances, we report the gross amounts of revenue and cost of sales in the Consolidated Statements of Operations and Comprehensive Income (Loss) and include the intra-entity profit eliminations within Equity in earnings of unconsolidated affiliate.Operations.
Other Investments
Prior to January 1, 2018, we accounted for other investments without a readily determinable fair value using the cost method. In connection with our adoption of the New Investment Standard as of January 1, 2018, we have elected to measure such investments at cost, adjusted for changes resulting from impairments and observable price changes in orderly transactions for identical or similar securities of the same issuer. We consider information in periodic financial statements and other documentation provided by our investees and we may make inquiries of investee management to determine whether observable price changes have occurred.
Impairment Considerations
We evaluate all of our investments in unconsolidated entities periodically to determine whether events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment. As part of our evaluation, we review available information such as business plans and current financial statements of these companies for factors that may indicate an impairment of our investments. Such factors may include, but are not limited to, unprofitable operations, negative cash flow, material litigation, violations of debt covenants, bankruptcy and changes in business strategy. When we determine that an investment is impaired, we adjust the carrying amount of the investment to its estimated fair value and recognize the impairment loss in Gains and losses on investments, net in our Consolidated Statements of Operations and Comprehensive Income (Loss).
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Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over lives ranging from one to 40 years. The cost of our satellites includes construction costs, including the present value of in-orbit incentives payable to the satellite manufacturer, launch costs, capitalized interest, and related insurance premiums. Repair and maintenance costs are charged to expense when incurred. Costs of renewals and betterments are capitalized.
Impairment of Long-lived Assets
We review our long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets held and used in operations, the asset is not recoverable if the carrying amount of the asset exceeds its undiscounted estimated future net cash flows. When an asset is not recoverable, we adjust the carrying amount of such asset to its estimated fair value and recognize the impairment loss in Net Income in our Consolidated Statements of Operations. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the estimated fair value assigned to the identifiable assets acquired and liabilities assumed. We do not amortize goodwill, but test goodwill for impairment annually, or more frequently if circumstances indicate impairment may exist. Our goodwill as of December 31, 2018 and 2017 is assigned to reporting units of our Hughes segment. We test such goodwill for impairment in the second fiscal quarter. The goodwill impairment test involves a comparison of the fair value of a reporting unit with its carrying amount, including goodwill. We typically estimate fair value of reporting units using discounted cash flow techniques, which includes significant assumptions about prospective financial information, terminal value and discount rates (Level 3 inputs). If the reporting unit’s carrying amount exceeds its estimated fair value, we recognize an impairment loss equal to such excess, not to exceed the carrying amount of goodwill. We may bypass the quantitative goodwill impairment test if we determine, based on a qualitative assessment, that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount including goodwill.
Regulatory Authorizations and Other Intangible Assets
At acquisition and periodically thereafter, we evaluate our intangible assets to determine whether their useful lives are finite or indefinite. We consider our intangible assets to have indefinite lives when no significant legal, regulatory, contractual, competitive, economic, or other factors limit their useful lives.
Intangible assets that have finite lives are amortized over their estimated useful lives, ranging from approximately one to 20 years. When we expect to incur significant costs to renew or extend finite-lived intangible assets, we amortize the total initial and estimated renewal costs over the combined initial and expected renewal terms. In such instances, actual renewal costs are capitalized when they are incurred. We test intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable (see Impairment of Long-lived Assets above).
We do not amortize our indefinite-lived intangible assets, but test those assets for impairment annually or more frequently if circumstances indicate that it is more likely than not that the asset may be impaired. Costs incurred to maintain or renew indefinite-lived intangible assets are expensed as incurred.
Our indefinite-lived intangible assets include Federal Communications Commission (“FCC”) authorizations and certain other contractual or regulatory rights to use spectrum at specified orbital locations (collectively “Regulatory Authorizations”). We have determined that our FCC authorizations generally have indefinite useful lives due to the following:
FCC authorizations are non-depleting assets;
renewal satellite applications generally are authorized by the FCC subject to certain conditions, without substantial cost under a stable regulatory, legislative, and legal environment;
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expenditures required to maintain the authorization are not significant; and
we intend to use these authorizations indefinitely.
Debt Issuance Costs
Costs of issuing debt generally are deferred and amortized utilizing the effective interest method with amortization included in Interest expense, net of amounts capitalized in our Consolidated Statements of Operations and Comprehensive Income (Loss). We report unamortized debt issuance costs as a reduction of the related long-term debt in our Consolidated Balance Sheets.
Income Taxes We are included in the consolidated federal income tax return of EchoStar. We recognize a provision or benefit for income taxes currently payable or receivable and for income tax amounts deferred to future periods based upon a separate return allocation method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity. Deferred tax assets and liabilities are recorded based on enactedreflect the effects of tax laws forlosses, credits, and the estimated future income tax effects of temporary differences that exist between the financial reportingU.S. GAAP carrying amount and tax basisamounts of existing assets and liabilities.liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are offset by valuation allowances when we determine it is more likely than not that such deferred tax assets will not be realized in the foreseeable future. We determine deferred tax assets and liabilities separately for each taxing jurisdiction and report the net amount for each jurisdiction as a noncurrentnon-current asset or liability in ourthe Consolidated Balance Sheets. From time to time, we engage in transactions where the income tax consequences are uncertain. We recognize tax benefits when, in management’s judgment, a tax filing position is more likely than not to be sustained if challenged by the tax authorities. For tax positions that meet the more-likely-than-not threshold, we may not recognize a portion of a tax benefit depending on management’s assessment of how the tax position will ultimately be settled. Unrecognized tax benefits generally are netted against the deferred tax assets associated with our net operating loss carryforwards. We adjust our estimates periodically based on ongoing examinations by, and settlements with, various taxing authorities, as well as changes in tax laws, regulations and precedent. Estimates of our uncertain tax positions are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, we will record additional income tax provision or benefit in the period in which such resolution occurs. We classify interest and penalties, if any, associated with our unrecognized tax benefits as a component of income tax provision or benefit.
Cost of Sales - Services and EquipmentLessee Accounting
Cost of sales - services and other in our Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists of costs ofWe lease real estate, satellite capacity and services, hub infrastructure, customer care, wirelineequipment in the conduct of our business operations. For contracts entered into on or after January 1, 2019, at contract inception, we assess whether the contract is, or contains, a lease. Generally, we determine that a lease exists when (i) the contract involves the use of a distinct identified asset, (ii) we obtain the right to substantially all economic benefits from use of the asset and wireless capacity,(iii) we have the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (i) the lease transfers ownership of the asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (iii) the lease term is for a major part of the remaining useful life of the asset, (iv) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (v) the asset is of a specialized nature and direct labor costs associated withthere is not expected to be an alternative use to the services provided.lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria. Our operating leases consist primarily of leases for office space, data centers and satellite ground facilities. Our finance leases consist primarily of leases for satellite capacity. Cost of sales - services and other generally are charged to expense as incurred. Cost of sales - equipment in our Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists of inventory costs, including freight and royalties. Cost of sales - equipment generally is recognized as products are delivered to customers and related revenue is recognized.
ResearchAt the lease commencement date, we recognize a right-of-use asset and Development
Costs incurred in researcha lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term including any renewal options we are reasonably certain to exercise. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and development activitiesinitial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are generally expensed as incurred. A significant portion of our research and development costs are incurred in connection with the specific requirements of a customer’s order. In such instances, the amounts for these customer funded development efforts are included in Cost of sales-equipment in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Advertising Costs
Advertising costs are expensed as incurred and are included in Selling, general and administrative expenses in Consolidated Statements of Operations and Comprehensive Income (Loss).
periodically
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reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the minimum lease payments, discounted using an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The incremental borrowing rates used for the initial measurement of lease liabilities are based on the original lease terms.
We report operating lease right-of-use assets in Operating lease right-of-use assets and operating lease liabilities in Accrued expenses and other current liabilities and Operating lease liabilities. We report finance lease right-of-use assets in Property and equipment, net and finance lease liabilities in Current portion of long-term debt and finance lease obligations and Long-term debt and finance lease obligations, net of current portion.
Minimum lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the non-cancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. We elected an accounting policy to not account for such payments separately from the related lease payments. Our policy election results in a higher initial measurement of lease liabilities when such non-lease payments are fixed amounts. Certain of our real estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as sales and value-added taxes and our proportionate share of actual property taxes, insurance and utilities, which are recognized in operating expenses as incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments.
Business Combinations
We account for all business combinations that result in our control over another entity by using the acquisition method of accounting, which requires us to allocate the purchase price of the acquired business to the identifiable tangible and intangible assets acquired and liabilities assumed, including contingent consideration, and non-controlling interests, based upon their estimated fair values at the date of acquisition. The difference between the purchase price and the excess of the aggregate estimated fair values of assets acquired and liabilities assumed is recorded as goodwill. In determining the estimated fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods including present value modeling, referenced market values, where available and cost based approaches. Valuations are performed by management or independent valuation specialists under management’s supervision, where appropriate. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed and contingent consideration, where applicable. While we believe the assumptions and estimates we have made are reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired business and are inherently uncertain and subject to refinement. We believe that the estimated fair values assigned to the assets we have acquired and liabilities we have assumed are based on reasonable and appropriate assumptions. While we believe our estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets we have acquired and liabilities we have assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the estimated fair values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments would be recorded in the Consolidated Statements of Operations. In addition, results of operations of the acquired company are included in the our results from the date of the acquisition forward and include amortization expense arising from acquired intangible assets. We expense all costs as incurred related to or involved with an acquisition in Other, net, in the Consolidated Statements of Operations.
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Cash and Cash Equivalents We consider all liquid investments purchased with an original maturity of less than 90 days to be cash equivalents. Cash equivalents as of December 31, 2019 and 2018 primarily consisted of commercial paper, government bonds, corporate notes and money market funds. The amortized cost of these investments approximates their fair value.
Marketable Investment Securities
Debt Securities
We account for our debt securities as available-for-sale or using the fair value option based on our investment strategy for the securities. For available-for-sale debt securities, we recognize periodic changes in the difference between fair value and amortized cost in Unrealized gains (losses) on available-for-sale securities in the Consolidated Statements of Comprehensive Income (Loss). Gains and losses realized upon sales of available-for-sale debt securities are reclassified from other comprehensive income (loss) and recognized on the trade date in Gains (losses) on investments, net in the Consolidated Statements of Operations. We use the first-in, first-out (“FIFO”) method to determine the cost basis on sales of available-for-sale debt securities. Interest income from available-for-sale debt securities is reported in Interest income in the Consolidated Statements of Operations.
We periodically evaluate our available-for-sale debt securities portfolio to determine whether any declines in the fair value of these securities are other-than-temporary. Our evaluation considers, among other things, (i) the length of time and extent to which the fair value of such security has been lower than amortized cost, (ii) market and company-specific factors related to the security and (iii) our intent and ability to hold the investment to maturity or when it recovers its value. We generally consider a decline to be other-than-temporary when (i) we intend to sell the security, (ii) it is more likely than not that we will be required to sell the security before maturity or when it recovers its value or (iii) we do not expect to recover the amortized cost of the security at maturity. Declines in the fair value of available-for-sale debt securities that are determined to be other-than-temporary are reclassified from other comprehensive income (loss) and recognized in Net income (loss) in the Consolidated Statements of Operations, thus establishing a new cost basis for the investment.
From time to time we make strategic investments in marketable corporate debt securities. Generally, we elect to account for these debt securities using the fair value option because it results in consistency in accounting for unrealized gains and losses for all securities in our portfolio of strategic investments. When we elect the fair value option for investments in debt securities, we recognize periodic changes in fair value of these securities in Gains (losses) on investments, net in the Consolidated Statements of Operations. Interest income from these securities is reported in Interest income in the Consolidated Statements of Operations.
Equity Securities
We account for our equity securities with readily determinable fair values at fair value and recognize periodic changes in the fair value in Gains (losses) on investments, net in the Consolidated Statements of Operations. We recognize dividend income on equity securities on the ex-dividend date and report such income in Other, net in the Consolidated Statements of Operations.
Restricted Marketable Investment Securities
Restricted marketable investment securities that are pledged as collateral for our letters of credit and surety bonds are included in Other non-current assets, net in the Consolidated Balance Sheets. Restricted marketable securities are accounted for in the same manner as marketable securities that are not restricted, but are presented differently in the Consolidated Balance Sheets due to the restrictions.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Trade Accounts Receivable
Trade accounts receivable includes amounts billed and currently due from customers and represents our unconditional rights to consideration arising from our performance under our customer contracts. Trade accounts receivable also includes amounts due from customers under our leasing arrangements. We make ongoing estimates relating to the collectability of our trade accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make the required payments. In determining the amount of the allowance, we consider historical levels of credit losses and make judgments about the creditworthiness of our customers based on ongoing credit evaluations. Past due trade accounts receivable balances are written off when our internal collection efforts have been unsuccessful. Bad debt expense related to our trade accounts receivable and other contract assets is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
Contract Assets
Contract assets represent revenue that we have recognized in advance of billing the customer and are included in Trade accounts receivable and contract assets, net or Other non-current assets, net in the Consolidated Balance Sheets based on the expected timing of customer payment. Our contract assets typically relate to our long-term contracts where we recognize revenue using the cost-based input method and the revenue recognized exceeds the amount billed to the customer.
Contract Acquisition Costs
Our contract acquisition costs represent incremental direct costs of obtaining a contract and consist primarily of sales incentives paid to employees and third-party representatives. When we determine that our contract acquisition costs are recoverable, we defer and amortize the costs over the contract term, or over the estimated life of the customer relationship if anticipated renewals are expected and the incentives payable upon renewal are not commensurate with the initial incentive. We amortize contract acquisition costs in proportion to the revenue to which the costs relate. We expense sales incentives as incurred if the expected amortization period is one year or less. Unamortized contract acquisition costs are included in Other non-current assets, net in the Consolidated Balance Sheets and related amortization expense is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost of inventory is determined using the FIFO method and consists primarily of materials, direct labor and indirect overhead incurred in the procurement and manufacturing of our products. We use standard costing methodologies in determining the cost of certain of our finished goods and work-in-process inventories. We determine net realizable value using our best estimates of future use or recovery, considering the aging and composition of inventory balances, the effects of technological and/or design changes, forecasted future product demand based on firm or near-firm customer orders and alternative means of disposition of excess or obsolete items. We recognize losses within Cost of sales - equipment in the Consolidated Statements of Operations when we determine that the cost of inventory and commitments to purchase inventory exceed net realizable value.
Property and Equipment
Satellites
Satellites are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over their estimated useful lives. The cost of our satellites includes construction costs, including the present value of in-orbit incentives payable to the satellite manufacturer, launch costs, capitalized interest and related insurance premiums. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We have satellites acquired under finance leases. The recorded costs of those satellites are the present values of all lease payments. We amortize our finance lease right-of-use satellites over their respective lease terms.
Our satellites may experience anomalies from time to time, some of which may have a significant adverse effect on their remaining useful lives, the commercial operation of the satellites or our operating results or financial position.
We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Certain anomalies may be considered a significant adverse change in the physical condition of a particular satellite. However, based on redundancies designed within each satellite, certain of these anomalies may not be considered to be significant events requiring a test of recoverability.
We generally do not carry in-orbit insurance on our satellites and 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. However, we may be required to carry insurance on specific satellites and payloads per the terms of certain agreements. We will continue to assess circumstances going forward and make insurance-related decisions on a case-by-case basis.
Other Property and Equipment Other property and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over their estimated useful lives. Other property and equipment includes: land; buildings and improvements; furniture, fixtures, equipment and internal-use software; customer premises equipment; and construction in process. Costs related to the procurement and development of software for internal-use are capitalized and amortized using the straight-line method over the estimated useful life of the software, not in excess of five years. Repair and maintenance costs are charged to expense when incurred. Goodwill
Goodwill represents the excess of the cost of acquired businesses over the estimated fair values assigned to the identifiable assets acquired and liabilities assumed. We test goodwill for impairment annually in our second fiscal quarter, or more frequently if indicators of impairment may exist. All of our goodwill is assigned to our Hughes segment, as it was generated through EchoStar’s acquisition of Hughes Communications, Inc. (“Hughes Communications”) and its subsidiaries in 2011 (the “Hughes Acquisition”), and the agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) pursuant to which, in November 2019, Yahsat contributed its satellite communications services business in Brazil to one of our Brazilian subsidiaries in exchange for a 20% equity ownership interest in that subsidiary (the “Yahsat Brazil JV Transaction”).
We consider qualitative factors to assess if it is more likely than not that the fair value for goodwill is below the carrying amount. We may also elect to bypass the qualitative assessment and perform a quantitative assessment. In conducting a qualitative assessment, we analyze a variety of events or factors that may influence the fair value of the reporting unit. There has been no impairment to date.
Regulatory Authorizations
Finite Lived
We have regulatory authorizations that are not related to the Federal Communications Commission (“FCC”) and have determined that they have finite lives due to uncertainties about the ability to extend or renew their terms. Finite lived regulatory authorizations are amortized over their estimated useful lives on a straight-line basis. Renewal costs are usually capitalized when they are incurred.
Indefinite Lived
We also have indefinite lived regulatory authorizations that primarily consist of FCC authorizations and certain other contractual or regulatory rights to use spectrum at specified orbital locations. We have determined that our FCC authorizations generally have indefinite useful lives based on the following:
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| | • | FCC authorizations are non-depleting assets; |
| | • | Renewal satellite applications generally are authorized by the FCC subject to certain conditions, without substantial cost under a stable regulatory, legislative and legal environment; |
| | • | Expenditures required to maintain the authorization are not significant; and |
| | • | We intend to use these authorizations indefinitely. |
Costs incurred to maintain or renew indefinite-lived regulatory authorizations are expensed as incurred.
Other Intangible Assets Our other intangible assets consist of customer relationships, patents, trademarks and licenses which are amortized using the straight-line method over their estimated useful lives. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that indicate that the carrying amount of the assets may not be recoverable.
Impairment of Long-lived Assets We review our long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets held and used in operations, the asset is not recoverable if the carrying amount of the asset exceeds its undiscounted estimated future net cash flows. When an asset is not recoverable, we adjust the carrying amount of such asset to its estimated fair value and recognize the impairment loss in Impairment of long-lived assets in the Consolidated Statements of Operations.
Other Investments Equity Method Investments
We use the equity method to account for investments when we have the ability to exercise significant influence on the operating decisions of the affiliate. Such investments are initially recorded at cost and subsequently adjusted for our proportionate share of the net earnings or loss of the investee, which is reported in Equity in earnings (losses) of unconsolidated affiliates, net in the Consolidated Statements of Operations. During the fourth quarter of 2019, we changed our accounting policy to record our share of the net earnings or losses of these affiliates on a three-month lag. This change was immaterial to these Consolidated Financial Statements. Additionally, the carrying amount of such investments includes a component of goodwill when the cost of our investment exceeds the fair value of the underlying identifiable assets and liabilities of the affiliate. Lastly, dividends received from these affiliates reduces the carrying amount of our investment.
Other Equity Investments
We generally measure investments in non-publicly traded equity instruments without a readily determinable fair value at cost adjusted for observable price changes in orderly transactions for the identical or similar securities of the same issuer and changes resulting from impairments, if any. Other equity instruments are measured to determine their value based on observable market information.
Impairment Considerations
We periodically evaluate all of our other investments to determine whether (i) events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment and (ii) if there has been observable price changes in orderly transactions for identical or similar securities of the same issuer. We consider information if provided to us by our investees such as current financial statements, business plans, investment documentation, capitalization tables, liquidation waterfalls, and board materials; and we may make additional inquiries of investee management.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Indicators of impairment may include, but are not limited to, unprofitable operations, material loss contingencies, changes in business strategy, changes in the investees’ enterprise value and changes in the investees’ investment pricing. When we determine that one of our other investments is impaired we reduce its carrying value to its estimated fair value and recognize the impairment loss in Gains (losses) on investments, net in the Consolidated Statements of Operations. Additionally, when there has been an observable price change to a cost method investment, we adjust the carrying amount of the investment to its then estimated fair value and recognize the investment gain or loss in Gains (losses) on investments, net in the Consolidated Statements of Operations.
Externally Marketed Software
Costs related to the procurement and development of 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 externally marketed software are included in Other non-current assets, net in the Consolidated Balance Sheets. Externally marketed software generally is installed in the equipment we sell or lease 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.
Contract Liabilities
Contract liabilities consist of advance payments and billings in excess of revenue recognized under customer contracts and are included in Contract liabilities or Other non-current liabilities in the Consolidated Balance Sheets based on the timing of when we expect to recognize revenue. We recognize contract liabilities as revenue after all revenue recognition criteria have been met.
Recently Adopted Accounting Pronouncements
Leases
We adopted ASU No. 2016-02 - Leases (Topic 842), as amended, codified as Accounting Standard Codification (“ASC 842”), as of January 1, 2019. The primary impact of ASC 842 on these Consolidated Financial Statements is the recognition of right-of-use assets and related liabilities in the Consolidated Balance Sheet for leases where we are the lessee. We elected to apply the requirements of the new standard prospectively on January 1, 2019 and did not restate these Consolidated Financial Statements for prior periods. Consequently, certain amounts reported in the Consolidated Balance Sheet as of December 31, 2019 are not comparable to those reported as of December 31, 2018 or earlier dates. Our adoption of ASC 842 did not have a material impact on our results of operations or cash flows for the year ended December 31, 2019.
Except for the new requirement to recognize assets and liabilities on the balance sheet for operating leases where we are the lessee, under our ASC 842 transition method, we continue to apply prior accounting standards to leases that commenced prior to 2019. We fully apply ASC 842 requirements only to leases that commenced or were modified on or after January 1, 2019. We elected certain practical expedients under our transition method, including elections to not reassess (i) whether a contract is or contains a lease and (ii) the classification of existing leases. We also elected not to apply hindsight in determining whether optional renewal periods should be included in the lease term, which in some instances may impact the initial measurement of the lease liability and the calculation of straight-line expense over the lease term for operating leases. As a result of our transition elections, there was no change in our recognition of revenue and expense for leases that commenced prior to 2019. In addition, the application of ASC 842 requirements to new and modified leases did not materially affect our recognition of revenue or expenses for the year ended December 31, 2019.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Our adoption of ASC 842 resulted in the following adjustments to the Consolidated Balance Sheet effective January 1, 2019: | | | | | | | | | | | | | | | | Balance December 31, 2018 | | Adoption of ASC 842 Increase (Decrease) | | Balance January 1, 2019 | | | | | | | | Other current assets | | $ | 152,666 |
| | $ | (28 | ) | | $ | 152,638 |
| Operating lease right-of-use assets | | — |
| | 117,006 |
| | 117,006 |
| Other non-current assets, net | | 236,449 |
| | (7,272 | ) | | 229,177 |
| Total assets | | 6,893,172 |
| | 109,706 |
| | 7,002,878 |
| Accrued expenses and other current liabilities | | 157,654 |
| | 14,444 |
| | 172,098 |
| Operating lease liabilities | | — |
| | 99,133 |
| | 99,133 |
| Other non-current liabilities | | 71,647 |
| | (3,871 | ) | | 67,776 |
| Total liabilities | | 4,500,677 |
| | 109,706 |
| | 4,610,383 |
| Total liabilities and shareholders’ equity | | 6,893,172 |
| | 109,706 |
| | 7,002,878 |
|
Revenue Recognition and Financial Instruments
On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers and related amendments (collectively, the “New Revenue Standard”). The New Revenue Standard established a comprehensive new model for revenue recognition, which is codified in Topic 606 (see Revenue Recognition above), and provided guidance for certain costs associated with customer contracts. We adopted the New Revenue Standard using the modified retrospective method for contracts that were not completed as of January 1, 2018. Accordingly, comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. Upon adoption of the New Revenue Standard, we recognized the cumulative effect of its initial application as a net increase to Accumulated earnings in ourthe Consolidated Balance Sheets of $16 million, net of related income taxes. The adoption of the New Revenue Standard also impacted the timing of recognition of certain fees charged to our customers in our consumer markets; however, the adoption has not had, and we do not expect it to have, a material impact on the overall timing or amount of revenue recognition.
The primary impacts of the New Revenue Standard on our operating results relate to how we account for sales incentive costs. Historically, we charged sales incentives to expense as incurred, except for incentives related to the consumer business in our Hughes segment, which were initially deferred and subsequently amortized over the related service agreement term. Under the New Revenue Standard, we continue to defer incentives for our consumer business; however, we now amortize those incentives over the estimated customer life, which includes expected contract renewal periods. In addition, we now defer certain sales incentives related to other businesses in our Hughes segment and amortize those incentives over the related service agreement term. As a result of these changes, we have recognized additional contract acquisition costs on ourthe Consolidated Balance Sheets and the costs generally are recognized as expenses over a longer period of time in ourthe Consolidated Statements of Operations and Comprehensive Income (Loss).Operations. The adoption of the New Revenue Standard by an unconsolidated entity had a similar impact on our investment in the unconsolidated entity, which we account for using the equity method.
Additionally, on January 1, 2018, we prospectively adopted the applicable requirements of the New Investment Standard. The New Investment Standard substantially revises standards for the recognition, measurement and presentation of financial instruments, including requiring all equity investments, except for investments in consolidated subsidiaries and investments accounted for using the equity method, to be measured at fair value with changes in the fair value recognized through earnings. The New Investment Standard permits an entity to elect to measure an equity security without a readily determinable fair value at its cost, adjusted for changes resulting from impairments and observable price changes in orderly transactions for identical or similar securities of the same issuer. It also amends certain disclosure requirements associated with equity investments and the fair value of financial instruments. Upon adoption of the New Investment Standard on January 1, 2018, we recorded a $0.4 million charge to Accumulated earnings to include net unrealized losses on our marketable equity securities then designated as available for sale, which previously were recorded in Accumulated other comprehensive loss in ourthe Consolidated Balance Sheets. For
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
our equity investments without a readily determinable fair value that were previously accounted for using the cost method, we have elected to measure such securities at cost, adjusted for impairments and observable price changes. We expect our future net income or loss to be more volatile as a result of these changes in accounting for our investments in equity securities that were previously accounted for as available-for-sale or using the cost method.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The cumulative effects of changes to the impacted line items on our Consolidated Balance Sheets as of January 1, 2018 for the adoption of these standards were as follows:
| | | | | | | | | | | | | | | | | | | | Balance at December 31, 2017 | | Adjustments Due to the | | Balance at January 1, 2018 | | | | New Revenue Standard | | New Investment Standard | | | | (In thousands) | Assets: | | | | | | | | | Trade accounts receivable and contract assets, net | | $ | 196,840 |
| | $ | (7,103 | ) | | $ | — |
| | $ | 189,737 |
| Other current assets | | $ | 91,544 |
| | $ | 533 |
| | $ | — |
| | $ | 92,077 |
| Other noncurrent assets, net | | $ | 202,814 |
| | $ | 22,545 |
| | $ | — |
| | $ | 225,359 |
| Total assets | | $ | 6,857,350 |
| | $ | 15,975 |
| | $ | — |
| | $ | 6,873,325 |
| Liabilities: | | | | |
| | | | |
| Contract liabilities | | $ | 65,959 |
| | $ | (1,542 | ) | | $ | — |
| | $ | 64,417 |
| Accrued expenses and other | | $ | 77,312 |
| | $ | 255 |
| | $ | — |
| | $ | 77,567 |
| Deferred tax liabilities, net | | $ | 439,631 |
| | $ | 5,124 |
| | $ | — |
| | $ | 444,755 |
| Other noncurrent liabilities | | $ | 107,627 |
| | $ | (4,068 | ) | | $ | — |
| | $ | 103,559 |
| Total liabilities | | $ | 4,558,106 |
| | $ | (231 | ) | | $ | — |
| | $ | 4,557,875 |
| Shareholders’ Equity: | | | | | | | | | Accumulated other comprehensive loss | | $ | (52,822 | ) | | $ | — |
| | $ | 433 |
| | $ | (52,389 | ) | Accumulated earnings (losses) | | $ | 582,683 |
| | $ | 16,206 |
| | $ | (433 | ) | | $ | 598,456 |
| Total shareholders’ equity | | $ | 2,299,244 |
| | $ | 16,206 |
| | $ | — |
| | $ | 2,315,450 |
| Total liabilities and shareholders’ equity | | $ | 6,857,350 |
| | $ | 15,975 |
| | $ | — |
| | $ | 6,873,325 |
|
Our adoption of these standards impacted the referenced line items on our Consolidated Balance Sheets,the Statement of Operations and Statements of Comprehensive Income (Loss) as follows:
| | | | | | | | | | | | | | | | | | | | As of December 31, 2018 | | | As Reported | | Adjustments Due to the | | Balances If We Had Not Adopted the New Standards | Balance Sheet | | | New Revenue Standard | | New Investment Standard | | | | (In thousands) | Assets: | | | | | | | | | Trade accounts receivable and contract assets, net | | $ | 201,096 |
| | $ | 8,379 |
| | $ | — |
| | $ | 209,475 |
| Other current assets | | $ | 18,539 |
| | $ | (533 | ) | | $ | — |
| | $ | 18,006 |
| Other noncurrent assets, net | | $ | 253,025 |
| | $ | (35,314 | ) | | $ | — |
| | $ | 217,711 |
| Total assets | | $ | 6,893,172 |
| | $ | (27,468 | ) | | $ | — |
| | $ | 6,865,704 |
| Liabilities: | | | | | | | | |
| Contract liabilities | | $ | 72,249 |
| | $ | 878 |
| | $ | — |
| | $ | 73,127 |
| Accrued expenses and other | | $ | 68,854 |
| | $ | (255 | ) | | $ | — |
| | $ | 68,599 |
| Deferred tax liabilities, net | | $ | 488,736 |
| | $ | (7,263 | ) | | $ | — |
| | $ | 481,473 |
| Other noncurrent liabilities | | $ | 101,140 |
| | $ | 1,635 |
| | $ | — |
| | $ | 102,775 |
| Total liabilities | | $ | 4,500,677 |
| | $ | (5,005 | ) | | $ | — |
| | $ | 4,495,672 |
| Shareholders’ Equity: | | | | | | | | | Accumulated other comprehensive loss | | $ | (83,774 | ) | | $ | — |
| | $ | 366 |
| | $ | (83,408 | ) | Accumulated earnings | | $ | 693,957 |
| | $ | (22,463 | ) | | $ | (366 | ) | | $ | 671,128 |
| Total shareholders’ equity | | $ | 2,392,495 |
| | $ | (22,463 | ) | | $ | — |
| | $ | 2,370,032 |
| Total liabilities and shareholders’ equity | | $ | 6,893,172 |
| | $ | (27,468 | ) | | $ | — |
| | $ | 6,865,704 |
|
| | | | | | | | | | | | | | | | | | | | For the year ended December 31, 2018 | | | As Reported | | Adjustments Due to the | | Balances If We Had Not Adopted the New Standards | | | | New Revenue Standard | | New Investment Standard | | | | | | | | | | | Statement of Operations: | | | Revenue: | | | | | | | | | Services and other revenue | | $ | 1,561,426 |
| | $ | 2,323 |
| | $ | — |
| | $ | 1,563,749 |
| Total revenue | | 1,766,836 |
| | 2,323 |
| | — |
| | 1,769,159 |
| Costs and expenses: | | | | | | | | | Cost of sales - services and other (exclusive of depreciation and amortization) | | 559,838 |
| | 2,738 |
| | — |
| | 562,576 |
| Selling, general and administrative expenses | | 397,994 |
| | 8,520 |
| | — |
| | 406,514 |
| Total costs and expenses | | 1,588,854 |
| | 11,258 |
| | — |
| | 1,600,112 |
| Operating income (loss) | | 177,982 |
| | (8,935 | ) | | — |
| | 169,047 |
| Other income (expense): | | | | | | | | | Interest expense, net of amounts capitalized | | (231,169 | ) | | 539 |
| | — |
| | (230,630 | ) | Gains (losses) on investments, net | | 187 |
| | — |
| | (800 | ) | | (613 | ) | Total other income (expense), net | | (171,447 | ) | | 539 |
| | (800 | ) | | (171,708 | ) | Income (loss) from continuing operations before income taxes | | 6,535 |
| | (8,396 | ) | | (800 | ) | | (2,661 | ) | Income tax benefit (provision), net | | (18,615 | ) | | 2,139 |
| | — |
| | (16,476 | ) | Net income (loss) from continuing operations | | (12,080 | ) | | (6,257 | ) | | (800 | ) | | (19,137 | ) | Net income (loss) | | 97,343 |
| | (6,257 | ) | | (800 | ) | | 90,286 |
| Net income (loss) attributable to HSS | | 95,501 |
| | (6,257 | ) | | (800 | ) | | 88,444 |
| | | | | | | | | | Statement of Comprehensive Income (Loss): | | | | | | | | | Net income (loss) | | 97,343 |
| | (6,257 | ) | | (800 | ) | | 90,286 |
| Other comprehensive income (loss), net of tax: | | | | | | | | | Unrealized gains (losses) on available-for-sale securities | | (665 | ) | | — |
| | (28 | ) | | (693 | ) | Other-than-temporary impairment loss on available-for-sale securities | | — |
| | — |
| | 828 |
| | 828 |
| Total other comprehensive income (loss), net of tax | | (32,774 | ) | | — |
| | 800 |
| | (31,974 | ) | Comprehensive income (loss) | | 64,569 |
| | (6,257 | ) | | — |
| | 58,312 |
| Comprehensive income (loss) attributable to HSS | | 64,116 |
| | (6,257 | ) | | — |
| | 57,859 |
|
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
| | | | | | | | | | | | | | | | | | | | For the year ended December 31, 2018 | | | As Reported | | Adjustments Due to the | | Balances If We Had Not Adopted the New Standards | Statement of Operations and Comprehensive Income | | | New Revenue Standard | | New Investment Standard | | | | (In thousands) | Revenue: | | | | | | | | | Services and other revenue - other | | $ | 1,526,098 |
| | $ | 2,323 |
| | $ | — |
| | $ | 1,528,421 |
| Total revenue | | $ | 2,097,663 |
| | $ | 2,323 |
| | $ | — |
| | $ | 2,099,986 |
| Costs and expenses: | | | | | | | | | Cost of sales - services and other (exclusive of depreciation and amortization) | | $ | 600,213 |
| | $ | 2,738 |
| | $ | — |
| | $ | 602,951 |
| Selling, general and administrative expenses | | $ | 398,153 |
| | $ | 8,520 |
| | $ | — |
| | $ | 406,673 |
| Total costs and expenses | | $ | 1,753,952 |
| | $ | 11,258 |
| | $ | — |
| | $ | 1,765,210 |
| Operating income | | $ | 343,711 |
| | $ | (8,935 | ) | | $ | — |
| | $ | 334,776 |
| Other income (expense): | | | | | | | | | Interest expense, net of amounts capitalized | | $ | (259,721 | ) | | $ | 539 |
| | $ | — |
| | $ | (259,182 | ) | Gains (losses) on investments, net | | $ | 187 |
| | $ | — |
| | $ | (800 | ) | | $ | (613 | ) | Total other income (expense), net | | $ | (199,999 | ) | | $ | 539 |
| | $ | (800 | ) | | $ | (200,260 | ) | Income (loss) before income taxes | | $ | 143,712 |
| | $ | (8,396 | ) | | $ | (800 | ) | | $ | 134,516 |
| Income tax benefit (provision) | | $ | (46,369 | ) | | $ | 2,139 |
| | $ | — |
| | $ | (44,230 | ) | Net income | | $ | 97,343 |
| | $ | (6,257 | ) | | $ | (800 | ) | | $ | 90,286 |
| Net income attributable to HSS | | $ | 95,501 |
| | $ | (6,257 | ) | | $ | (800 | ) | | $ | 88,444 |
| Comprehensive income | | | | | | | | | Net income (loss) | | $ | 97,343 |
| | $ | (6,257 | ) | | $ | (800 | ) | | $ | 90,286 |
| Other comprehensive income (loss), net of tax: | | | | | | | | | Unrealized gains (losses) on available-for-sale securities and other | | $ | (624 | ) | | $ | — |
| | $ | (28 | ) | | $ | (652 | ) | Other-than-temporary impairment loss on available-for-sale securities | | $ | — |
| | $ | — |
| | $ | 828 |
| | $ | 828 |
| Total other comprehensive gain (loss), net of tax | | $ | (32,774 | ) | | $ | — |
| | $ | 800 |
| | $ | (31,974 | ) | Comprehensive income (loss) | | $ | 64,569 |
| | $ | (6,257 | ) | | $ | — |
| | $ | 58,312 |
| Comprehensive income (loss) attributable to HSS | | $ | 64,116 |
| | $ | (6,257 | ) | | $ | — |
| | $ | 57,859 |
|
Restricted Cash and Cash Equivalents
ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents in our Statement of Cash Flows. We adopted ASU No. 2016-18 as of January 1, 2018. As a result, the beginning and ending balances of cash and cash equivalents presented in our Consolidated Statements of Cash Flows include amounts for restricted cash and cash equivalents, which historically were not included in such balances, and receipts and payments of restricted cash and cash equivalents, exclusive of transfers to and from unrestricted accounts, are reported in our Consolidated Statements of Cash Flows. The adoption of this accounting standard did not have a material impact on our Statements of Cash Flows and related disclosures.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to recognize assets and liabilities for all leases with lease terms greater than 12 months, including leases classified as operating leases. The standard also modifies the definition of a lease and the criteria for classifying leases as operating, finance or sales-type leases and requires certain additional disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The new standard, as amended in July 2018, may be applied either on a modified retrospective basis or prospectively as of the adoption date without restating prior periods, with certain practical expedients available. We adopted the new standard prospectively as of January 1, 2019 and elected certain practical expedients permitted under the new standard’s transition guidance. This allows us to carry forward the historical lease classification and to not reassess the lease term for leases in existence as of the adoption date and to carry forward our historical accounting treatment for land easements on agreements existing on the adoption date. We also made policy elections for certain classes of underlying assets to not separate lease and non-lease components in a contract as permitted under the new standard.
We currently lease real estate and equipment from third parties under operating leases and we lease certain satellites from third parties under capital leases. We also lease satellites, real estate and equipment to some of our customers. Upon adoption of the new standard, we recognized right-of-use assets and liabilities related to substantially all operating leases where we are the lessee. While our work is not finalized, we expect that the aggregate increase in our operating lease assets and liabilities will be approximately 1% of total assets as of January 1, 2019.
Our accounting for capital leases was not significantly impacted on the adoption date. Based on our transition method, practical expedients and policy elections, our leases existing as of the adoption date will continue to be reported in our Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with current accounting standards throughout their remaining terms unless the leases are modified. However, all leases entered into or modified after the adoption date will be accounted for in accordance with the new standard. The classification of those leases as operating, finance or sales type may be impacted by the new standard and affect our future operating results and the classification of our cash flows.
Recently Issued Accounting Pronouncements Not Yet Adopted
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new approach to estimate credit losses on certain types of financial instruments based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact of adopting this new accounting standard on ourthese Consolidated Financial Statements and related disclosures.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3. REVENUE RECOGNITION
Information About Contract Balances
The following table provides information aboutis a summary for our contract balances with customers, including amounts for certain embedded leases.balances: | | | | As of | | As of | | | December 31, 2018 | | January 1, 2018 | | December 31, 2019 | | December 31, 2018 | | | (In thousands) | | | | | Trade accounts receivable: | | | | | | Trade accounts receivable and contract assets, net: | | | | | | Sales and services | | $ | 154,415 |
| | $ | 156,794 |
| | $ | 152,632 |
| | $ | 154,415 |
| Leasing | | 7,990 |
| | 10,355 |
| | 4,016 |
| | 7,990 |
| Total | | 162,405 |
| | 167,149 |
| | Total trade accounts receivable | | | 156,648 |
| | 162,405 |
| Contract assets | | 55,295 |
| | 34,615 |
| | 63,649 |
| | 55,295 |
| Allowance for doubtful accounts | | (16,604 | ) | | (12,027 | ) | | (23,777 | ) | | (16,604 | ) | Total trade accounts receivable and contract assets, net | | $ | 201,096 |
| | $ | 189,737 |
| | $ | 196,520 |
| | $ | 201,096 |
| | | | | | | | | | Trade accounts receivable - DISH Network: | | | | | | Sales and services | | $ | 12,274 |
| | $ | 16,118 |
| | Leasing | | 1,276 |
| | 22,523 |
| | Total trade accounts receivable - DISH Network, net | | $ | 13,550 |
| | $ | 38,641 |
| | | | | | | | Contract liabilities: | | | | | | | | | Current | | $ | 72,249 |
| | $ | 64,417 |
| | $ | 101,060 |
| | $ | 72,249 |
| Noncurrent | | 10,133 |
| | 13,036 |
| | Non-current | | | 10,572 |
| | 10,133 |
| Total contract liabilities | | $ | 82,382 |
| | $ | 77,453 |
| | $ | 111,632 |
| | $ | 82,382 |
|
For the yearyears ended December 31, 2019 and December 31, 2018, we recognized revenue of $52$65.4 million and $52.0 million, respectively, that waswere previously included in the contract liability balance at January 1, 2018.balances as of December 31, 2018 and December 31, 2017, respectively.
Our bad debt expense was $25 million, $10A summary of our allowance for doubtful accounts activity is as follows:
| | | | | | | | | | | | | | | | | | | | Balance at Beginning of Year | | Bad Debt Expense | | Deductions | | Balance at End of Year | | | | | | | | | | For the years ended: | | |
| | |
| | |
| | |
| December 31, 2019 | | $ | 16,604 |
| | $ | 30,027 |
| | $ | (22,854 | ) | | $ | 23,777 |
| December 31, 2018 | | 12,027 |
| | 24,984 |
| | (20,407 | ) | | 16,604 |
| December 31, 2017 | | 12,752 |
| | 9,551 |
| | (10,276 | ) | | 12,027 |
|
Contract Acquisition Costs
Unamortized contract acquisition costs totaled $113.6 million and $14$104.0 million as of December 31, 2019 and 2018, respectively, and related amortization expense totaled $96.1 million and $83.0 million for the years ended December 31, 2018, 20172019 and 2016,2018, respectively.
Transaction Price Allocated to Remaining Performance Obligations
As of December 31, 2018,2019, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $939$857.7 million. We expect to recognize approximately 35.7%47.0% of our remaining performance obligations of these contracts as revenue in the next twelve months. This amount excludes agreements with consumer customers in our Hughes segment, and our leasing arrangements.
Disaggregationarrangements and agreements with certain customers under which collectibility of Revenue
Inall amounts due through the following tables, revenueterm of contracts is disaggregated by segment, primary geographic market, nature of the products and services and transactions with major customers. uncertain.
Geographic Information
The following table disaggregates revenue from customer contracts attributed to our North America (the U.S and its territories, Mexico and Canada), South and Central America and other foreign locations as well as by segment, based on the location where the goods or services are provided. All other revenue includes transactions with customers in Asia, Africa, Australia, Europe, and the Middle East.
| | | | | | | | | | | | | | | | | | | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | | (In thousands) | For the year ended December 31, 2018 | | | | | | | | | | | | | | | | | | North America | | $ | 1,444,628 |
| | $ | 357,357 |
| | $ | 4,555 |
| | $ | 1,806,540 |
| South and Central America | | 101,632 |
| | — |
| | — |
| | 101,632 |
| All other | | 170,268 |
| | 701 |
| | 18,522 |
| | 189,491 |
| Total revenue | | $ | 1,716,528 |
| | $ | 358,058 |
| | $ | 23,077 |
| | $ | 2,097,663 |
| | | | | | | | | |
Nature of Products and Services
The following table disaggregates revenue based on the nature of products and services and by segment.
| | | | | | | | | | | | | | | | | | | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | | (In thousands) | For the year ended December 31, 2018 | | | | | | | | | Equipment | | $ | 119,657 |
| | $ | — |
| | $ | — |
| | $ | 119,657 |
| Services | | 1,313,059 |
| | 24,113 |
| | 1,128 |
| | 1,338,300 |
| Design, development and construction services | | 85,753 |
| | — |
| | — |
| | 85,753 |
| Revenue from sales and services | | 1,518,469 |
| | 24,113 |
| | 1,128 |
| | 1,543,710 |
| Leasing income | | 198,059 |
| | 333,945 |
| | 21,949 |
| | 553,953 |
| Total revenue | | $ | 1,716,528 |
| | $ | 358,058 |
| | $ | 23,077 |
| | $ | 2,097,663 |
| | | | | | | | | |
During the fourth quarter of 2018, we reclassified our revenue among the categories above applicable for the full year.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Disaggregation of Revenue
Geographic Information
The following is our revenue from customer contracts disaggregated by primary geographic market and by segment: | | | | | | | | | | | | | | | | | | | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | | | | | | | | | For the year ended December 31, 2019 | | | | | | | | | North America | | $ | 1,527,823 |
| | $ | 16,257 |
| | $ | 2,143 |
| | $ | 1,546,223 |
| South and Central America | | 125,458 |
| | — |
| | — |
| | 125,458 |
| All other | | 199,461 |
| | — |
| | 19,019 |
| | 218,480 |
| Total revenue | | $ | 1,852,742 |
| | $ | 16,257 |
| | $ | 21,162 |
| | $ | 1,890,161 |
| | | | | | | | | | For the year ended December 31, 2018 | | | | | | | | | North America | | $ | 1,444,628 |
| | $ | 27,231 |
| | $ | 4,555 |
| | $ | 1,476,414 |
| South and Central America | | 101,632 |
| | — |
| | — |
| | 101,632 |
| All other | | 170,268 |
| | — |
| | 18,522 |
| | 188,790 |
| Total revenue | | $ | 1,716,528 |
| | $ | 27,231 |
| | $ | 23,077 |
| | $ | 1,766,836 |
| | | | | | | | | | For the year ended December 31, 2017 | | | | | | | | | North America | | $ | 1,204,750 |
| | $ | 30,417 |
| | $ | 4,030 |
| | $ | 1,239,197 |
| South and Central America | | 90,000 |
| | — |
| | — |
| | 90,000 |
| All other | | 183,168 |
| | — |
| | 2,677 |
| | 185,845 |
| Total revenue | | $ | 1,477,918 |
| | $ | 30,417 |
| | $ | 6,707 |
| | $ | 1,515,042 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Nature of Products and Services
The following is our revenue disaggregated by the nature of products and services and by segment: | | | | | | | | | | | | | | | | | | | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | | | | | | | | | For the year ended December 31, 2019 | | | | | | | | | Services and other revenue: | | | | | | | | | Services | | $ | 1,535,966 |
| | $ | 10,464 |
| | $ | 878 |
| | $ | 1,547,308 |
| Lease revenue | | 50,073 |
| | 5,793 |
| | 20,284 |
| | 76,150 |
| Total services and other revenue | | 1,586,039 |
| | 16,257 |
| | 21,162 |
| | 1,623,458 |
| Equipment revenue: | |
| |
| |
| |
| Equipment | | 115,052 |
| | — |
| | — |
| | 115,052 |
| Design, development and construction services | | 145,646 |
| | — |
| | — |
| | 145,646 |
| Lease revenue | | 6,005 |
| | — |
| | — |
| | 6,005 |
| Total equipment revenue | | 266,703 |
| | — |
| | — |
| | 266,703 |
| Total revenue | | $ | 1,852,742 |
| | $ | 16,257 |
| | $ | 21,162 |
| | $ | 1,890,161 |
| | | | | | | | | | For the year ended December 31, 2018 | | | | | | | | | Services and other revenue: | | | | | | | | | Services | | $ | 1,313,059 |
| | $ | 21,044 |
| | $ | 1,351 |
| | $ | 1,335,454 |
| Lease revenue | | 198,059 |
| | 6,187 |
| | 21,726 |
| | 225,972 |
| Total services and other revenue | | 1,511,118 |
| | 27,231 |
| | 23,077 |
| | 1,561,426 |
| Equipment revenue: | |
|
| |
|
| |
|
| |
|
| Equipment | | 119,657 |
| | — |
| | — |
| | 119,657 |
| Design, development and construction services | | 85,753 |
| | — |
| | — |
| | 85,753 |
| Total equipment revenue | | 205,410 |
| | — |
| | — |
| | 205,410 |
| Total revenue | | $ | 1,716,528 |
| | $ | 27,231 |
| | $ | 23,077 |
| | $ | 1,766,836 |
|
Lease Revenue
The following is our lease revenue by type of lease: | | | | | | | | For the year ended December 31, 2019 | | | | Sales-type lease revenue: | | | Revenue at lease commencement | | $ | 6,005 |
| Interest income | | 784 |
| Total sales-type lease revenue | | 6,789 |
| Operating lease revenue | | 75,366 |
| Total lease revenue | | $ | 82,155 |
|
Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $6.5 million as of December 31, 2019.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents future operating lease payments to be received as of December 31, 2019: | | | | | | | | Amounts | | | | Year ending December 31, | | | 2020 | | $ | 36,560 |
| 2021 | | 33,545 |
| 2022 | | 31,666 |
| 2023 | | 30,551 |
| 2024 | | 28,444 |
| After 2024 | | 123,844 |
| Total lease payments | | $ | 284,610 |
|
Property and equipment, net and Depreciation and amortization included the following amounts for assets subject to operating leases: | | | | | | | | | | | | | | | | | | | | As of December 31, 2019 | | For the year ended December 31, 2019 | | | Cost | | Accumulated Depreciation | | Net | | Depreciation Expense | | | | | | | | | | Customer premises equipment | | $ | 1,458,298 |
| | $ | (1,074,968 | ) | | $ | 383,330 |
| | $ | 197,870 |
| Satellites | | 104,620 |
| | (31,360 | ) | | 73,260 |
| | 7,495 |
| Total | | $ | 1,562,918 |
| | $ | (1,106,328 | ) | | $ | 456,590 |
| | $ | 205,365 |
|
NOTE 4. LESSEE ACCOUNTING
The Consolidated Balance Sheets include the following amounts for right-of-use assets and lease liabilities as of December 31, 2019: | | | | | | | | Amounts | | | | Right-of-use assets: | | | Operating | | $ | 113,399 |
| Finance | | 325,826 |
| Total right-of-use assets | | $ | 439,225 |
| | | | Lease liabilities: | | | Current: | | | Operating | | $ | 14,112 |
| Finance | | 486 |
| Total current | | 14,598 |
| Non-current: | | | Operating | | 96,879 |
| Finance | | 565 |
| Total non-current | | 97,444 |
| Total lease liabilities | | $ | 112,042 |
|
As of December 31, 2019, we have prepaid our obligations regarding most of our finance right-of-use assets. Finance lease assets are reported net of accumulated amortization of $57.3 million as of December 31, 2019.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following are the components of lease cost and weighted average lease terms and discount rates for operating and finance leases: | | | | | | | | For the year ended December 31, 2019 | | | | Lease cost: | | | Operating lease cost | | $ | 21,226 |
| Finance lease cost: | | | Amortization of right-of-use assets | | 26,489 |
| Interest on lease liabilities | | 173 |
| Total finance lease cost | | 26,662 |
| Short-term lease cost | | 434 |
| Variable lease cost | | 9,585 |
| Total lease cost | | $ | 57,907 |
|
| | | | | | | As of December 31, 2019 | | | | Lease term and discount rate: | | | Weighted average remaining lease term: | | | Finance leases | | 2.1 years |
| Operating leases | | 10.4 years |
| | | | Weighted average discount rate: | | | Finance leases | | 11.9 | % | Operating leases | | 6.1 | % |
The following table details cash flows from operating and finance leases: | | | | | | | | For the year ended December 31, 2019 | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | Operating cash flows from operating leases | | $ | 19,654 |
| Operating cash flows from finance leases | | 173 |
| Financing cash flows from finance leases | | 654 |
|
We obtained right-of-use assets in exchange for lease liabilities of $8.5 million upon commencement of operating leases during the year ended December 31, 2019.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents future minimum lease payments of our lease liabilities as of December 31, 2019: | | | | | | | | | | | | | | | | Operating Leases | | Finance Leases | | Total | | | | | | | | Year ending December 31, | | | | | | | 2020 | | $ | 19,907 |
| | $ | 629 |
| | $ | 20,536 |
| 2021 | | 17,594 |
| | 487 |
| | 18,081 |
| 2022 | | 15,379 |
| | 96 |
| | 15,475 |
| 2023 | | 14,369 |
| | — |
| | 14,369 |
| 2024 | | 13,286 |
| | — |
| | 13,286 |
| After 2024 | | 71,147 |
| | — |
| | 71,147 |
| Total future minimum lease payments | | 151,682 |
| | 1,212 |
| | 152,894 |
| Less: Interest | | (40,691 | ) | | (161 | ) | | (40,852 | ) | Total lease liabilities | | $ | 110,991 |
| | $ | 1,051 |
| | $ | 112,042 |
|
NOTE 4.5. DISCONTINUED OPERATIONS
BSS Business
The following table presents the financial results of our discontinued operations of the BSS Business:
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Revenue: | | | | | | | Services and other revenue - DISH Network | | $ | 195,942 |
| | $ | 305,229 |
| | $ | 337,079 |
| Services and other revenue - other | | 17,714 |
| | 25,598 |
| | 24,748 |
| Total revenue | | 213,656 |
| | 330,827 |
| | 361,827 |
| Costs and expenses: | | | | | | | Cost of services and other | | 28,033 |
| | 40,375 |
| | 62,573 |
| Selling, general and administrative expenses | | 6,903 |
| | 159 |
| | 43 |
| Depreciation and amortization | | 85,926 |
| | 124,564 |
| | 126,380 |
| Total costs and expenses | | 120,862 |
| | 165,098 |
| | 188,996 |
| Operating income (loss) | | 92,794 |
| | 165,729 |
| | 172,831 |
| Other income (expense): | | | | | | | Interest expense | | (17,365 | ) | | (28,552 | ) | | (32,312 | ) | Total other income (expense), net | | (17,365 | ) | | (28,552 | ) | | (32,312 | ) | Income (loss) from discontinued operations before income taxes | | 75,429 |
| | 137,177 |
| | 140,519 |
| Income tax benefit (provision), net | | (18,890 | ) | | (27,754 | ) | | 164,436 |
| Net income (loss) from discontinued operations | | $ | 56,539 |
| | $ | 109,423 |
| | $ | 304,955 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents the aggregate carrying amounts of assets and liabilities of our discontinued operations of the BSS Business as of December 31, 2018. No assets or liabilities attributable to our discontinued operations were held by us as of December 31, 2019. | | | | | | | | As of December 31, 2018 | | | | Assets | | | Prepaids and deposits | | $ | 3,483 |
| Current assets of discontinued operations | | 3,483 |
| Property and equipment, net | | 660,270 |
| Regulatory authorizations, net | | 65,615 |
| Other non-current assets, net | | 16,576 |
| Non-current assets of discontinued operations | | 742,461 |
| Total assets of discontinued operations | | $ | 745,944 |
| | | | Liabilities: | | | Current portion of finance lease obligations | | $ | 39,995 |
| Accrued interest | | 1,572 |
| Accrued expenses and other current liabilities | | 7,488 |
| Current liabilities of discontinued operations | | 49,055 |
| Finance lease obligations | | 187,002 |
| Deferred tax liabilities, net | | 132,787 |
| Other non-current liabilities | | 29,493 |
| Non-current liabilities of discontinued operations | | 349,282 |
| Total liabilities of discontinued operations | | $ | 398,337 |
|
Significant supplemental cash flow information and adjustments to reconcile net income to net cash flow from operating activities for discontinued operations of the BSS business are below: | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Operating activities: | | | | | | | Net income (loss) from discontinued operations | | $ | 56,539 |
| | $ | 109,423 |
| | $ | 304,955 |
| Depreciation and amortization | | 85,926 |
| | 124,564 |
| | 126,380 |
| | | | | | | | Investing activities: | | | | | | | Expenditures for property and equipment | | 510 |
| | 175 |
| | 699 |
| | | | | | | | Financing activities: | | | | | | | Payment of finance lease obligations | | 27,203 |
| | 35,886 |
| | 32,177 |
| Payment of in-orbit incentive obligations | | 3,887 |
| | 4,329 |
| | 4,727 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Terminated or Transferred Related Party Agreements
Effective September 10, 2019, the following agreements were terminated or transferred to DISH Network as part of the BSS Transaction. We have no further obligations and have neither earned additional revenue nor incurred additional expense, as applicable, under or in connection with these agreements after the consummation of the BSS Transaction.
DBS Transponder Lease. EchoStar leased satellite capacity from us on eight DBS transponders on the QuetzSat-1 satellite through November 2021, after which EchoStar had certain options to renew the agreement on a year-to year basis through the end of life of the QuetzSat-1 satellite.
EchoStar XXIII Launch Facilitation and Operational Control Agreement. As part of applying for the launch license for the EchoStar XXIII satellite through the UK Space Agency, we and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”), entered into an agreement in March 2016 to transfer to us EOC’s launch service contracts for the EchoStar XXIII satellite and to grant us certain rights to control its in-orbit operations. EOC retained ownership of the satellite and agreed to make additional payments to us for amounts that we were required to pay under the launch service contract. In 2016, we recorded additions to Other non-current assets, net and corresponding increases in Additional paid-in capital in our Consolidated Balance Sheet to reflect EOC’s cumulative payments under the launch service contract prior to the transfer date and to reflect EOC’s funding of additional cash payments to the launch service provider. The EchoStar XXIII satellite was successfully launched in March 2017. We recorded decreases in Other non-current assets, net and Additional paid-in capital of $62.0 million, representing the carrying amount of the launch service contract at the time of launch to reflect the consumption of the contract’s economic benefits by EOC.
Satellite Capacity Leased to DISH Network. We entered into certain agreements to lease satellite capacity pursuant to which we provided satellite services to DISH Network on certain satellites, as listed below, owned or leased by us. The fees for the services provided under these agreements depended, among other things, upon the orbital location of the applicable satellite, the number of transponders that provided services on the applicable satellite and the length of the service arrangements.
EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV. In March 2014, we began leasing certain satellite capacity to DISH Network on the EchoStar VII satellite, the EchoStar X satellite, the EchoStar XI satellite and the EchoStar XIV satellite.
EchoStar XII. DISH Network leased satellite capacity from us on the EchoStar XII satellite.
EchoStar XVI. In December 2009, we entered into an agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network leased satellite capacity from us on the EchoStar XVI satellite beginning in January 2013.
Nimiq 5 Agreement. In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”). Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service.
QuetzSat-1 Agreement. In November 2008, we entered into an agreement to lease satellite capacity from SES Latin America, which provided, among other things, for the provision by SES Latin America to us of leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into an agreement pursuant to which DISH Network leased from us satellite capacity on 24 of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location. In February 2013, we and DISH Network entered into an agreement pursuant to which we leased back from DISH Network certain satellite capacity on 5 DBS transponders on the QuetzSat-1 satellite.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
TT&C Agreement. Effective January 2012, we entered into a TT&C agreement pursuant to which we provided TT&C services to DISH Network, which we subsequently amended (the “2012 TT&C Agreement”). The fees for services provided under the 2012 TT&C Agreement were calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which varied depending on the nature of the services provided.
Real Estate Lease. Prior to the Share Exchange, a subsidiary of EchoStar leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection with the Share Exchange, EchoStar transferred ownership of a portion of this property to DISH Network and contributed a portion to us and we and DISH Network amended this agreement to, among other things, provide for a continued lease to DISH Network of the portion of the property we retained (the “Cheyenne Data Center”). The rent on a per square foot basis for the lease was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and DISH Network was responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. In connection with the BSS Transaction, we transferred the Cheyenne Data Center to DISH Network. This lease does not qualify for discontinued operations treatment, and therefore the revenue from it has not been treated as discontinued operations.
NOTE6. BUSINESS COMBINATIONS
In November 2019, we consummated the Yahsat Brazil JV Transaction. The combined business provides broadband internet services and enterprise solutions in Brazil using the Telesat T19V satellite, the Eutelsat 65W satellite and Yahsat’s Al Yah 3 satellite. The results of operations related to the business we acquired in the Yahsat Brazil JV Transaction have been included in these Consolidated Financial Statements from the date of acquisition. For the year ended December 31, 2019, we incurred $1.6 million of costs associated with the closing of the Yahsat Brazil JV Transaction.
All assets and liabilities acquired from Yahsat in the Yahsat Brazil JV Transaction have been recorded at fair value. The following table summarizes the preliminary allocations of purchase price: | | | | | | | | Amounts | | | | Assets: | | | Cash and cash equivalents | | $ | 7,858 |
| Other current assets | | 7,106 |
| Property and equipment | | 88,358 |
| Regulatory authorization | | 4,498 |
| Goodwill | | 2,128 |
| Other long-term assets | | 1,502 |
| Total assets | | $ | 111,450 |
| | | | Liabilities: | | | Accounts payable and accrued liabilities | | $ | 6,516 |
| Other current liabilities | | 2,159 |
| Total liabilities | | $ | 8,675 |
| | | | Total purchase price (1) | | $ | 102,775 |
|
(1) Based on the value determined for the equity ownership interest issued by our Brazilian subsidiary as consideration for the business acquired by us in the Yahsat Brazil JV Transaction.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The preliminary valuation of assets we acquired and liabilities we assumed in the Yahsat Brazil JV Transaction were derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation, and resulted in identifiable assets as follows: | | | | | | | | Amounts | | | | Satellite payload | | $ | 50,738 |
| Regulatory authorization | | 4,498 |
| Total | | $ | 55,236 |
|
The satellite payload asset and regulatory authorization were valued using an income approach and will be being amortized over seven and 11 years, respectively. We recognized goodwill in connection with the Yahsat Brazil JV Transaction of $2.1 million, including a currency translation adjustment of $0.7 million. The goodwill is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce. This goodwill has been allocated entirely to our Hughes segment.
NOTE 7. OTHER COMPREHENSIVE INCOME (LOSS) AND RELATED TAX EFFECTS
The changes in the balances of Accumulated other comprehensive lossincome (loss) by component were as follows: | | | | | | | | | | | | | | | | | | | | Cumulative Foreign Currency Translation Losses | | Unrealized Gain (Loss) On Available-For-Sale Securities | | Other | | Accumulated Other Comprehensive Loss | | | (In thousands) | Balance, December 31, 2016 | | $ | (59,038 | ) | | $ | (1,666 | ) | | $ | (15 | ) | | $ | (60,719 | ) | Other comprehensive income (loss) before reclassifications | | 6,787 |
| | (2,280 | ) | | 92 |
| | 4,599 |
| Amounts reclassified to net income | | — |
| | 3,298 |
| | | | 3,298 |
| Other comprehensive income | | 6,787 |
| | 1,018 |
| | 92 |
| | 7,897 |
| Balance, December 31, 2017 | | $ | (52,251 | ) | | $ | (648 | ) | | $ | 77 |
| | $ | (52,822 | ) | Cumulative effect of adoption of the New Investment Standard | | | | 433 |
| | | | 433 |
| Balance, January 1, 2018 | | (52,251 | ) | | (215 | ) | | 77 |
| | (52,389 | ) | Other comprehensive loss before reclassifications | | (30,549 | ) | | (665 | ) | | 41 |
| | (31,173 | ) | Amounts reclassified to net income | | — |
| | (212 | ) | | | | (212 | ) | Other comprehensive loss | | (30,549 | ) | | (877 | ) | | 41 |
| | (31,385 | ) | Balance, December 31, 2018 | | $ | (82,800 | ) | | $ | (1,092 | ) | | $ | 118 |
| | $ | (83,774 | ) |
| | | | | | | | | | | | | | | | | | | | Cumulative Foreign Currency Translation Adjustments | | Unrealized Gain (Loss) On Available-For-Sale Securities | | Other | | Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | Balance, December 31, 2017 | | $ | (52,251 | ) | | $ | (648 | ) | | $ | 77 |
| | $ | (52,822 | ) | Cumulative effect of accounting changes | | — |
| | 433 |
| | — |
| | 433 |
| Balance, January 1, 2018 | | (52,251 | ) | | (215 | ) | | 77 |
| | (52,389 | ) | Other comprehensive income (loss) before reclassifications | | (30,549 | ) | | (665 | ) | | 41 |
| | (31,173 | ) | Amounts reclassified to net income (loss) | | — |
| | (212 | ) | | — |
| | (212 | ) | Other comprehensive income (loss) | | (30,549 | ) | | (877 | ) | | 41 |
| | (31,385 | ) | Balance, December 31, 2018 | | (82,800 | ) | | (1,092 | ) | | 118 |
| | (83,774 | ) | Other comprehensive income (loss) before reclassifications | | (2,146 | ) | | 1,817 |
| | (114 | ) | | (443 | ) | Amounts reclassified to net income (loss) | | — |
| | (419 | ) | | — |
| | (419 | ) | Other comprehensive income (loss) | | (2,146 | ) | | 1,398 |
| | (114 | ) | | (862 | ) | Balance, December 31, 2019 | | $ | (84,946 | ) | | $ | 306 |
| | $ | 4 |
| | $ | (84,636 | ) |
The amounts reclassified to net income (loss) related to unrealized gain (loss) on available-for-sale securities in the table above are included in Gains and losses(losses) on investments, netin ourthe Consolidated Statements of Operations and Other Comprehensive Income (Loss).Operations.
Except in unusual circumstances, we do not recognize tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5.8. MARKETABLE INVESTMENT SECURITIES
Overview
Our marketable investment securities portfolio consists of variousthe following debt and equity instruments as follows:
instruments:
| | | | As of December 31, | | As of December 31, | | | 2018 | | 2017 | | 2019 | | 2018 | | | (In thousands) | | | | | Marketable investment securities: | | | | | | | | | Debt securities: | | | | | | | | | Corporate bonds | | $ | 1,234,017 |
| | $ | 368,083 |
| | $ | 411,706 |
| | $ | 1,234,017 |
| Other debt securities | | 374,106 |
| | 86,417 |
| | 240,888 |
| | 374,106 |
| Total debt securities | | 1,608,123 |
| | 454,500 |
| | 652,594 |
| | 1,608,123 |
| Equity securities | | 1,073 |
| | 1,102 |
| | 241 |
| | 1,073 |
| Total marketable investment securities | | $ | 1,609,196 |
| | $ | 455,602 |
| | $ | 652,835 |
| | $ | 1,609,196 |
|
Debt Securities Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our other debt securities portfolio includes investments in various debt instruments, including U.S. government bonds and commercial paper.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
AThe following table is a summary of our available-for-sale debt securities is presented in the table below.securities:
| | | | Amortized | | Unrealized | | Estimated | | Amortized | | Unrealized | | Estimated | | | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value | | | (In thousands) | | | | | | | | | As of December 31, 2019 | | | | | | | | | | Corporate bonds | | | $ | 411,312 |
| | $ | 395 |
| | $ | (1 | ) | | $ | 411,706 |
| Other debt securities | | | 240,887 |
| | 1 |
| | — |
| | 240,888 |
| Total available-for-sale debt securities | | | $ | 652,199 |
| | $ | 396 |
| | $ | (1 | ) | | $ | 652,594 |
| As of December 31, 2018 | | | | | | | | | | | | | | | | | Corporate bonds | | $ | 1,235,110 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,234,017 |
| | $ | 1,235,110 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,234,017 |
| Other debt securities | | 374,106 |
| | — |
| | — |
| | 374,106 |
| | 374,106 |
| | — |
| | — |
| | 374,106 |
| Total available-for-sale debt securities | | $ | 1,609,216 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,608,123 |
| | $ | 1,609,216 |
| | $ | 230 |
| | $ | (1,323 | ) | | $ | 1,608,123 |
| As of December 31, 2017 | | | | | | | | | | Corporate bonds | | $ | 368,291 |
| | $ | — |
| | $ | (208 | ) | | $ | 368,083 |
| | Other debt securities | | 86,425 |
| | — |
| | (8 | ) | | 86,417 |
| | Total available-for-sale debt securities | | $ | 454,716 |
| | $ | — |
| | $ | (216 | ) | | $ | 454,500 |
| |
As of December 31, 2018,2019, we have $1.3 billion$652.6 million of available-for-sale debt securities with contractual maturities of one year or less and $351 million0 with contractual maturities greater than one year.
Equity Securities
Our marketable equity securities consist primarily of shares of common stock of public companies. Prior to January 1, 2018, we classified our marketable equity securities as available-for-sale or trading securities, depending on our investment strategy for the securities. As of December 31, 2017, our marketable equity securities consisted of available-for-sale securities with a fair value of $1.1 million, reflecting an adjusted cost basis of $1.5 million and unrealized losses of $0.4 million.million which were recognized as Unrealized gains (losses) on available-for-sale securities in the Consolidated Statements of Comprehensive Income (Loss). Substantially all unrealized losses on our available-for-sale securities related to securities that were in a continuous loss position for less than 12 months. We recognized a $3$3.3 million other-than-temporary impairment forduring the year ended December 31, 2017 on one of our available-for-sale securities which had experienced a decline in market value as a result of adverse developments during the year ended December 31, 2017.developments.
Upon adoption of the New Investment Standard as ofEffective January 1, 2018, (see Note 2), we accountbegan accounting for investments in equity securities at their fair value and we recognizerecognizing unrealized gains and losses in Gains and losses(losses) on investments, netin ourthe Consolidated StatementStatements of Operations and Comprehensive Income (Loss). For the year ended December 31, 2018,Operations. Gains and losses on investments, net included de minimis loss related to equity securities that we held as of December 31, 2018.
Sales of Available-for-Sale Securities
Proceeds from sales of our available-for-sale securities were $50 million, $9 million and $20 million for the years ended December 31, 2018, 2017 and 2016, respectively. We recognized nil, de minimis and $3 million gains for the years ended December 31, 2018, 2017 and 2016, respectively, We recognized nil losses for the years ended December 31, 2018 and 2017 and de minimis losses for 2016.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(losses) on investments, net in the Consolidated Statements of Operations related to equity securities that we held were $0.8 million of net loss and de minimis of net loss for the years ended December 31, 2019 and 2018, respectively. The fair value of our equity securities was $0.2 million and $1.1 million as of December 31, 2019 and 2018, respectively.
Sales of Available-for-Sale Securities
Proceeds from sales of our available-for-sale securities were $311.8 million, $50.0 million and $8.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. We recognized as a result of such sales $0.4 million of gains, $0.2 million of gains and 0 for the years ended December 31, 2019, 2018 and 2017, respectively. Fair Value Measurements Our marketable investment securities are measured at fair value on a recurring basis as summarized in the table below. Certain of our investments in debt and equity instruments have historically experienced volatility. As of December 31, 20182019 and 2017,2018, we did not have any investments that were categorized within Level 3 of the fair value hierarchy. | | | | As of December 31, | | As of December 31, | | | 2018 | | 2017 | | 2019 | | 2018 | | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | | | (In thousands) | | | | | | | | | | | | | Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | Corporate bonds | | $ | — |
| | $ | 1,234,017 |
| | $ | 1,234,017 |
| | $ | — |
|
| $ | 368,083 |
| | $ | 368,083 |
| | $ | — |
| | $ | 411,706 |
| | $ | 411,706 |
| | $ | — |
| | $ | 1,234,017 |
| | $ | 1,234,017 |
| Other debt securities | | — |
| | 374,106 |
| | 374,106 |
| | — |
|
| 86,417 |
| | 86,417 |
| | — |
| | 240,888 |
| | 240,888 |
| | — |
| | 374,106 |
| | 374,106 |
| Total debt securities | | — |
| | 1,608,123 |
| | 1,608,123 |
| | — |
| | 454,500 |
| | 454,500 |
| | — |
| | 652,594 |
| | 652,594 |
| | — |
| | 1,608,123 |
| | 1,608,123 |
| Equity securities | | 1,073 |
| | — |
| | 1,073 |
| | 1,102 |
| | $ | — |
| | 1,102 |
| | 241 |
| | — |
| | 241 |
| | 1,073 |
| | — |
| | 1,073 |
| Total marketable investment securities | | $ | 1,073 |
| | $ | 1,608,123 |
| | $ | 1,609,196 |
| | $ | 1,102 |
| | $ | 454,500 |
| | $ | 455,602 |
| | $ | 241 |
| | $ | 652,594 |
| | $ | 652,835 |
| | $ | 1,073 |
| | $ | 1,608,123 |
| | $ | 1,609,196 |
|
NOTE 6.9. INVENTORY
Our inventory consistedInventory consists of the following:
| | | | As of December 31, | | As of December 31, | | | 2018 | | 2017 | | 2019 | | 2018 | | | (In thousands) | | | | | Raw materials | | $ | 4,856 |
| | $ | 5,484 |
| | $ | 4,240 |
| | $ | 4,856 |
| Work-in-process | | 13,901 |
| | 7,442 |
| | 6,979 |
| | 13,901 |
| Finished goods | | 56,622 |
| | 70,669 |
| | 68,255 |
| | 56,622 |
| Total inventory | | $ | 75,379 |
| | $ | 83,595 |
| | $ | 79,474 |
| | $ | 75,379 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7.10. PROPERTY AND EQUIPMENT Our property and equipment,net consisted of the following: | | | | | | | | | | | | | | Depreciable Life (In Years) | | As of December 31, | | | | 2018 | | 2017 | | | | | (In thousands) | Land | | — | | $ | 13,401 |
| | $ | 13,475 |
| Buildings and improvements | | 1 to 40 | | 117,564 |
| | 128,292 |
| Furniture, fixtures, equipment and other | | 1 to 12 | | 741,429 |
| | 650,385 |
| Customer rental equipment | | 2 to 4 | | 1,159,977 |
| | 929,775 |
| Satellites - owned | | 2 to 15 | | 2,268,862 |
| | 2,516,685 |
| Satellites acquired under capital leases | | 10 to 15 | | 1,051,110 |
| | 916,820 |
| Construction in progress | | — | | 28,087 |
| | 149,570 |
| Total property and equipment | | | | 5,380,430 |
| | 5,305,002 |
| Accumulated depreciation | | | | (2,798,249 | ) | | (2,551,904 | ) | Property and equipment, net | | | | $ | 2,582,181 |
| | $ | 2,753,098 |
|
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | | | | Property and equipment, net: | | | | | Satellites, net | | $ | 1,127,521 |
| | $ | 1,209,930 |
| Other property and equipment, net | | 730,060 |
| | 711,981 |
| Total property and equipment, net | | $ | 1,857,581 |
| | $ | 1,921,911 |
|
Satellites As of December 31, 20182019, our operating satellite fleet consisted of 8 satellites, 5 of which are owned and 2017, accumulated depreciation included amounts3 of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator. In connection with the BSS Transaction, 6 of our previously owned satellites and the leases for 2 of our previously leased satellites were transferred to DISH Network (see Note 1. Organization and Business Activities and Note 5. Discontinued Operations).
| | | | | | | | | | Satellite | | Segment | | Launch Date | | Nominal Degree Orbital Location (Longitude) | | Depreciable Life (In Years) | | | | | | | | | | Owned: | | | | | | | | | SPACEWAY 3 (1) | | Hughes | | August 2007 | | 95 W | | 10 | EchoStar XVII | | Hughes | | July 2012 | | 107 W | | 15 | EchoStar XIX | | Hughes | | December 2016 | | 97.1 W | | 15 | Al Yah 3 (2) | | Hughes | | January 2018 | | 20 W | | 7 | EchoStar IX (3) | | ESS | | August 2003 | | 121 W | | 12 | | | | | | | | | | Finance leases: | | | | | | | | | Eutelsat 65 West A | | Hughes | | March 2016 | | 65 W | | 15 | Telesat T19V | | Hughes | | July 2018 | | 63 W | | 15 | EchoStar 105/SES-11 | | ESS | | October 2017 | | 105 W | | 15 |
(1) Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed the Hughes Acquisition. (2) Upon consummation of our joint venture with Yahsat in Brazil in November 2019, we acquired under capital leasesthe Brazilian Ka-band payload on this satellite. Depreciable life represents the remaining useful life as of $468 millionNovember 2019. (3) We own the Ka-band and $394 million, respectively. Ku-band payloads on this satellite.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Construction in progressSatellites, net consisted of the following:
| | | | | | | | | | | | As of December 31, | | | 2018 | | 2017 | | | (In thousands) | Progress amounts for satellite construction, including prepayments under capital leases and launch services costs | | $ | 246 |
| | $ | 101,733 |
| Satellite related equipment | | 13,001 |
| | 28,358 |
| Other | | 14,840 |
| | 19,479 |
| Construction in progress | | $ | 28,087 |
| | $ | 149,570 |
|
| | | | | | | | | | | | | | Depreciable Life (In Years) | | As of December 31, | | | | 2019 | | 2018 | | | | | | | | Satellites, net: | | | | | | | Satellites - owned | | 7 to 15 | | $ | 1,516,006 |
| | $ | 1,459,955 |
| Satellites - acquired under finance leases | | 10 to 15 | | 381,162 |
| | 385,592 |
| Total satellites | | | | 1,897,168 |
| | 1,845,547 |
| Accumulated depreciation | | | | (769,647 | ) | | (635,617 | ) | Total satellites, net | | | | $ | 1,127,521 |
| | $ | 1,209,930 |
|
We recorded capitalized interest related to our satellites, satellite payloads and related ground facilities under construction of $6 million, $23 million and $30 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Depreciation expense associated with our property and equipment consisted of the following:
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2018 | | 2017 | | 2016 | | | (In thousands) | Buildings and improvements | | $ | 10,026 |
| | $ | 15,559 |
| | $ | 4,777 |
| Furniture, fixtures, equipment and other | | 80,301 |
| | 68,184 |
| | 57,952 |
| Customer rental equipment | | 174,749 |
| | 146,562 |
| | 114,568 |
| Satellites | | 248,688 |
| | 224,738 |
| | 191,729 |
| Total depreciation expense | | $ | 513,764 |
| | $ | 455,043 |
| | $ | 369,026 |
|
Satellites depreciation expense includes amortization of satellites under capital lease agreements of $76 million, $66 million and $56 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Satellites
As of December 31, 2019 and 2018, accumulated depreciation included amounts for satellites acquired under finance leases of $56.4 million and $31.5 million, respectively.
Depreciation and amortization expense and capitalized interest associated with our satellite fleetsatellites consisted of 15 satellites, 10 of which are owned and five of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite. We depreciate our leased satellites on a straight-line basis over their respective lease terms.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Our operating satellite fleet consists of both owned and leased satellites detailed in the table below as of December 31, 2018.
| | | | | | | | | | Satellites | | Segment | | Launch Date | | Nominal Degree Orbital Locations (West Longitude) | | Depreciable Life (In Years) | Owned: | | | | | | | | | SPACEWAY 3 (1) | | Hughes | | August 2007 | | 95 | | 12 | EchoStar XVII | | Hughes | | July 2012 | | 107 | | 15 | EchoStar XIX (6) | | Hughes | | December 2016 | | 97.1 | | 15 | EchoStar VII (2)(3)(4) | | ESS | | February 2002 | | 119 | | 3 | EchoStar IX (2)(4) | | ESS | | August 2003 | | 121 | | 12 | EchoStar X (2)(3) | | ESS | | February 2006 | | 110 | | 7 | EchoStar XI (2)(3) | | ESS | | July 2008 | | 110 | | 9 | EchoStar XII (2)(4)(5) | | ESS | | July 2003 | | 86.4 | | 2 | EchoStar XIV (2)(3) | | ESS | | March 2010 | | 119 | | 11 | EchoStar XVI (2) | | ESS | | November 2012 | | 61.5 | | 15 | | | | | | | | | | Capital Leases: | | | | | | | | | Eutelsat 65 West A | | Hughes | | March 2016 | | 65 | | 15 | Telesat T19V | | Hughes | | July 2018 | | 63 | | 15 | Nimiq 5 (2) | | ESS | | September 2009 | | 72.7 | | 15 | QuetzSat-1 (2) | | ESS | | September 2011 | | 77 | | 10 | EchoStar 105/SES-11 | | ESS | | October 2017 | | 105 | | 15 |
| | (1) | Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed its acquisition of Hughes Communications, Inc. and its subsidiaries (the “Hughes Acquisition”). |
| | (2) | See Note 16 for discussion of related party transactions with DISH Network. |
| | (3) | Depreciable life represents the remaining useful life as of March 1, 2014, the effective date of our receipt of the satellites from DISH Network as part of the Satellite and Tracking Stock Transaction (See Note 16). |
| | (4) | Fully depreciated assets as of December 31, 2018. |
| | (5) | Depreciable life represents the remaining useful life as of June 30, 2013, the date the EchoStar XII satellite was impaired. |
| | (6) | EchoStar contributed the EchoStar XIX satellite to us in February 2017. |
Recent Developments
EchoStar I and EchoStar VI.following: The EchoStar I and EchoStar VI satellites were removed from their orbital locations and retired from commercial service in January 2018 and May 2018, respectively. The retirement of these satellites has not had, and is not expected to have, a material impact on our results of operations or financial position. | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Depreciation and amortization expense: | | | | | | | Satellites - owned | | $ | 110,685 |
| | $ | 104,967 |
| | $ | 89,728 |
| Satellites acquired under finance leases | | 25,755 |
| | 20,269 |
| | 9,962 |
| Total depreciation and amortization expense | | $ | 136,440 |
| | $ | 125,236 |
| | $ | 99,690 |
| | | | | | | | Capitalized interest | | $ | 1,019 |
| | $ | 6,179 |
| | $ | 22,828 |
|
EchoStar 105/SES-11.The EchoStar 105/SES-11 satellite was launched in October 2017 and was placed into service in November 2017 at the 105 degree west longitude orbital location. Pursuant to agreements that we entered into in August 2014, we funded substantially all construction, launch and other costs associated with the EchoStar 105/SES-11 satellite and transferred the C-, Ku- and Ka-band payloads to two affiliates of SES Americom, Inc. (“SES”) after the launch date, while retaining the right to use the entire Ku-band payload on the satellite for an initial ten-year term, with an option for us to renew the agreement on a year-to-year basis. In October 2017, we recorded a $77 million receivable from SES in Other current assets in the Consolidated Balance Sheets, representing capitalized costs allocable to certain satellite payloads controlled by SES, and we reduced our carrying amount of the satellite by such amount. In January 2018, we received payment from SES for the receivable plus accrued interest. Our leased Ku-band payload on the EchoStar 105/SES-11 satellite has replaced the capacity we had on the AMC-15 satellite.
Telesat T19V. In September 2015, we entered into agreements pursuant to which affiliates of Telesat Canada will provide to us Ka-band capacity on the Telesat T19V satellite at the 63 degree west longitude orbital location for a 15-year term. The Telesat T19V satellite was launched in July 2018 and placed into service in October 2018. This satellite augments the capacity being provided by the EUTELSAT 65 West A and EchoStar XIX satellites in Central and South America.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Satellite Anomalies and Impairments
OurWe are not aware of any anomalies with respect to our owned or leased satellites may experience anomalies from time to time, some of which mayor payloads that have ahad any significant adverse effect on their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position. We are not awareposition as of any anomalies with respect to our owned or leased satellites that have had any such significant adverse effect during the year ended December 31, 2018. There can be no assurance, however, that anomalies will not have any such adverse effects in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our satellites were to fail.
The EchoStar X satellite experienced anomalies in the past which affected seven solar array circuits. In December 2017, the satellite experienced anomalies which affected one additional solar array circuit reducing the number of functional solar array circuits to 16. As a result of these anomalies, we had a reduction in revenue of $4 millionand for the year ended December 31, 20182019.
Satellite Insurance
We historically havegenerally do not carriedcarry 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 indebtedness and our joint venture agreements with Yahsat, we are required, subject to certain limitations on coverage, to maintain in-orbit insuranceonly for ourthe 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. We were previously required to maintain similar insurance or other contractual arrangements for the EchoStar XVI and EchoStar XVII satellites.satellite, which we transferred to DISH Network pursuant to the BSS Transaction. Our other satellites and payloads, either in orbit or under construction, are not covered by launch or in-orbit insurance.insurance or other contractual arrangements. We will continue to assess circumstances going forward and make insuranceinsurance-related decisions on a case-by-case basis. We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Certain of the anomalies previously disclosed may be considered to represent a significant adverse change in the physical condition of a particular satellite. However, based on the redundancy designed within each satellite, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETSFair Value of In-Orbit Incentives
Goodwill
The excessAs of the cost of an acquired business overDecember 31, 2019 and 2018, the fair values of net tangible and identifiable intangible assets at the timeour in-orbit incentive obligations from our continuing operations, based on measurements categorized within Level 2 of the acquisition is recorded as goodwill. Goodwill is assigned tofair value hierarchy, approximated their carrying amounts of $57.0 million and $57.9 million, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other Property and Equipment, Net
Other property and equipment, net consisted of the reporting units withinfollowing: | | | | | | | | | | | | | | Depreciable Life (In Years) | | As of December 31, | | | | 2019 | | 2018 | | | | | | | | Other property and equipment, net: | | | | | | | Land | | — | | $ | 13,328 |
| | $ | 13,366 |
| Buildings and improvements | | 1 to 40 | | 73,692 |
| | 114,153 |
| Furniture, fixtures, equipment and other | | 1 to 12 | | 783,727 |
| | 725,924 |
| Customer premises equipment | | 2 to 4 | | 1,377,914 |
| | 1,159,977 |
| Construction in progress | | | | 50,864 |
| | 28,087 |
| Total other property and equipment | | | | 2,299,525 |
| | 2,041,507 |
| Accumulated depreciation | | | | (1,569,465 | ) | | (1,329,526 | ) | Other property and equipment, net | | | | $ | 730,060 |
| | $ | 711,981 |
|
Depreciation expense associated with our operating segmentsother property and equipment consisted of the following: | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Other property and equipment depreciation expense: | | | | | | | Buildings and improvements | | $ | 4,409 |
| | $ | 9,715 |
| | $ | 15,249 |
| Furniture, fixtures, equipment and other | | 89,868 |
| | 79,500 |
| | 67,162 |
| Customer premises equipment | | 194,906 |
| | 174,749 |
| | 146,562 |
| Total depreciation expense | | $ | 289,183 |
| | $ | 263,964 |
| | $ | 228,973 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11. REGULATORY AUTHORIZATIONS
Our regulatory authorizations consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | Finite lived | | | | | | | Cost | | Accumulated Amortization | | Total | | Indefinite lived | | Total | | | | | | | | | | | | As of December 31, 2016 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 406,043 |
| | $ | 406,043 |
| Impairment | | — |
| | — |
| | — |
| | (6,000 | ) | | (6,000 | ) | As of December 31, 2017 | | — |
| | — |
| | — |
| | 400,043 |
| | 400,043 |
| As of December 31, 2018 | | — |
| | — |
| | — |
| | 400,043 |
| | 400,043 |
| Additions | | 12,833 |
| | — |
| | 12,833 |
| | (43 | ) | | 12,790 |
| Amortization expense | | — |
| | (161 | ) | | (161 | ) | | — |
| | (161 | ) | Currency translation adjustment | | (309 | ) | | — |
| | (309 | ) | | — |
| | (309 | ) | As of December 31, 2019 | | $ | 12,524 |
| | $ | (161 | ) | | $ | 12,363 |
| | $ | 400,000 |
| | $ | 412,363 |
| | | | | | | | | | | | Weighted average useful life | | | | 14 years | | | | | | |
Finite Lived Assets
In November 2019, we were granted an S-band spectrum license for terrestrial rights in Mexico for $7.9 million. The acquired asset is subject to impairment testing annually, or more frequently when events or changesamortization over a period of 15 years.
Upon consummation of our joint venture with Yahsat in circumstances indicate the fair valueBrazil in November 2019, we acquired Ka-band spectrum rights for $4.5 million, which are subject to amortization over a period of a reporting unit is more likely than not less than its carrying amount.11 years.
Future Amortization As of December 31, 2019, our estimated future amortization of our regulatory authorizations with finite lives was as follows: | | | | | | Amount | | | For the years ending December 31, | |
| 2020 | $ | 942 |
| 2021 | 942 |
| 2022 | 942 |
| 2023 | 942 |
| 2024 | 942 |
| Thereafter | 7,653 |
| Total | $ | 12,363 |
|
Indefinite Lived Assets
As of December 31, 2016, our regulatory authorizations with indefinite lives included $6.0 million for contractual rights to utilize certain frequencies, in addition to those specified in the Brazilian license, at the 45 degree west longitude orbital location acquired in 2012. In 2017, we determined that certain actions required to utilize the frequencies had become impractical with the passage of time and, as a result of these circumstances, we determined that the fair value of those contractual rights was de minimis and we recognized a $6.0 million impairment loss.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12. OTHER INTANGIBLE ASSETS
Our other intangible assets consisted of the following: | | | | | | | | | | | | | | | | | | | | Customer Relationships | | Patents | | Trademarks and Licenses | | Total | | | | | | | | | | Cost: | | | | | | | | | As of December 31, 2016 | | $ | 270,300 |
| | $ | 51,417 |
| | $ | 29,700 |
| | $ | 351,417 |
| As of December 31, 2017 | | 270,300 |
| | 51,417 |
| | 29,700 |
| | 351,417 |
| Write-off | | — |
| | (17 | ) | | — |
| | (17 | ) | As of December 31, 2018 | | 270,300 |
| | 51,400 |
| | 29,700 |
| | 351,400 |
| As of December 31, 2019 | | $ | 270,300 |
| | $ | 51,400 |
| | $ | 29,700 |
| | $ | 351,400 |
| Accumulated amortization: | |
| |
| |
| |
| As of December 31, 2016 | | $ | (214,544 | ) | | $ | (47,848 | ) | | $ | (8,291 | ) | | $ | (270,683 | ) | Amortization expense | | (17,098 | ) | | (3,569 | ) | | (1,485 | ) | | $ | (22,152 | ) | As of December 31, 2017 | | (231,642 | ) | | (51,417 | ) | | (9,776 | ) | | (292,835 | ) | Amortization expense | | (13,145 | ) | | — |
| | (1,485 | ) | | (14,630 | ) | Write-off | | — |
| | 17 |
| | — |
| | 17 |
| As of December 31, 2018 | | (244,787 | ) | | (51,400 | ) | | (11,261 | ) | | (307,448 | ) | Amortization expense | | (13,146 | ) | | — |
| | (1,485 | ) | | (14,631 | ) | As of December 31, 2019 | | $ | (257,933 | ) | | $ | (51,400 | ) | | $ | (12,746 | ) | | $ | (322,079 | ) | Carrying amount: | |
| |
| |
| |
| As of December 31, 2016 | | $ | 55,756 |
| | $ | 3,569 |
| | $ | 21,409 |
| | $ | 80,734 |
| As of December 31, 2017 | | $ | 38,658 |
| | $ | — |
| | $ | 19,924 |
| | $ | 58,582 |
| As of December 31, 2018 | | $ | 25,513 |
| | $ | — |
| | $ | 18,439 |
| | $ | 43,952 |
| As of December 31, 2019 | | $ | 12,367 |
| | $ | — |
| | $ | 16,954 |
| | $ | 29,321 |
| | | | | | | | | | Weighted average useful life | | 8 years | | 6 years | | 20 years | | |
Future Amortization As of December 31, 2019, our estimated future amortization of other intangible assets was as follows: | | | | | | Amount | For the years ending December 31, | |
| 2020 | $ | 10,981 |
| 2021 | 4,356 |
| 2022 | 1,485 |
| 2023 | 1,485 |
| 2024 | 1,485 |
| Thereafter | 9,529 |
| Total | $ | 29,321 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13. OTHER INVESTMENTS
Our Other investments, net consisted of the following:
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | |
| | |
| Other investments, net: | | | | | Equity method investments | | $ | 102,689 |
| | $ | 110,931 |
| Other equity investments | | 7,351 |
| | 15,438 |
| Total other investments, net | | $ | 110,040 |
| | $ | 126,369 |
|
Equity Method Investments
Deluxe/EchoStar LLC
We own 50% of Deluxe, a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada. We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of $4.4 million, $4.4 million and $4.9 million for the years ended December 31, 2019, 2018 and 2017, allrespectively. As of December 31, 2019 and 2018, we had trade accounts receivable from Deluxe of $0.6 million and $0.8 million, respectively.
Broadband Connectivity Solutions
In August 2018, we entered into an agreement with Yahsat to establish a new entity, BCS, to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat's Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100.0 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS. We recognized revenue from BCS for such services and equipment of $9.0 million and $0.7 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, we had $5.2 million and $3.4 million, respectively, of trade accounts receivable from BCS.
During the fourth quarter ended December 31, 2019, we began recognizing equity in earnings of certain of our equity method investments on a three-month lag so for the year ended December 31, 2019, we have nine months of activity recorded in these Consolidated Financial Statements. The impact of the change was immaterial to these Consolidated Financial Statements.
As of December 31, 2019, our aggregate investment in our equity method investees exceeded our proportionate share of the net assets of the investees by $19.0 million. This difference is attributable to goodwill recorded at acquisition.
We recorded cash distributions from our investments of $2.7 million, $10.0 million and $19.0 million, respectively, for the years ended December 31, 2019, 2018 and 2017. These cash distributions were determined to be a return on investment and reported in Net cash flows from operating activities in the Consolidated Statements of Cash Flows. Additionally, we recorded an additional dividend from our investments of $2.3 million for the year ended December 31, 2019 that was assignedconsidered a return of investment and reported in Net cash flows from investing activities in the Consolidated Statements of Cash Flows. There were no returns of investment during the years ended December 31, 2018 and 2017.
Other Equity Investments
During the year ended December 31, 2019, we recorded a $8.1 million reduction to reporting unitsthe carrying amount of one of our Hughes segment. We test this goodwillinvestments based on circumstances that indicated the fair value of the investment was less than its carrying amount. There were 0 similar reductions for impairment annually in the second quarter. Based on our impairment testing in the second quarter ofyears ended December 31, 2018 our goodwill is considered to be not impaired. or 2017.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Other Intangible Assets
Our other intangible assets, which are subject to amortization, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted Average Useful Life (in Years) | | As of December 31, | | | | 2018 | | 2017 | | | | Cost | | Accumulated Amortization | | Carrying Amount | | Cost | | Accumulated Amortization | | Carrying Amount | | | | | (In thousands) | Customer relationships | | 8 | | $ | 270,300 |
| | $ | (244,787 | ) | | $ | 25,513 |
| | $ | 270,300 |
| | $ | (231,642 | ) | | $ | 38,658 |
| Technology-based | | 6 | | 51,400 |
| | (51,400 | ) | | — |
| | 51,417 |
| | (51,417 | ) | | — |
| Trademark portfolio | | 20 | | 29,700 |
| | (11,261 | ) | | 18,439 |
| | 29,700 |
| | (9,776 | ) | | 19,924 |
| Total other intangible assets | | | | $ | 351,400 |
| | $ | (307,448 | ) | | $ | 43,952 |
| | $ | 351,417 |
| | $ | (292,835 | ) | | $ | 58,582 |
|
Customer relationships are amortized predominantly in relation to the expected contribution of cash flow to the business over the life of the intangible asset. Other intangible assets are amortized on a straight-line basis over the periods the assets are expected to contribute to our cash flows. Intangible asset amortization expense, including amortization of externally marketed capitalized software, was $38 million, $42 million and $45 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Future Amortization
As of December 31, 2018, our estimated future amortization of intangible assets was as follows:
| | | | | | Amount | | (In thousands) | For the years ending December 31, | |
| 2019 | $ | 14,631 |
| 2020 | 10,981 |
| 2021 | 4,356 |
| 2022 | 1,485 |
| 2023 | 1,485 |
| Thereafter | 11,014 |
| Total | $ | 43,952 |
|
NOTE 9. INVESTMENTS IN UNCONSOLIDATED ENTITIES
We have strategic investments in certain non-publicly traded equity securities that do not have a readily determinable fair value. We account for most of these investments using the equity method. We accounted for other investments in such equity securities using the cost method of accounting prior to January 1, 2018. In connection with our adoption of the New Investment Standard effective January 1, 2018 (see Note 2), we elected to measure our equity securities without a readily determinable fair value, other than those accounted for using the equity method, at cost adjusted for changes resulting from impairments, if any, and observable price changes in orderly transactions for the identical or similar securities of the same issuer. For the year ended December 31, 2018, we did not identify any observable price changes requiring an adjustment to our investments.
Our investments in unconsolidated entities consisted of the following:
| | | | | | | | | | | | As of December 31, | | | 2018 | | 2017 | | | (In thousands) | Investments in unconsolidated entities: | | |
| | |
| Equity method | | $ | 110,931 |
| | $ | 15,149 |
| Other equity investments without a readily determinable fair value | | 15,438 |
| | 15,438 |
| Total investments in unconsolidated entities | | $ | 126,369 |
| | $ | 30,587 |
|
We recorded cash distributions from our investments accounted for using the equity method of $10 million, $19 million and $10 million for the years ended December 31, 2018, 2017 and 2016, respectively. These cash distributions were determined to be a return on investment and reported in cash flows from operating activities in our consolidated statements of cash flows.
NOTE 10.14. LONG-TERM DEBT AND CAPITALFINANCE LEASE OBLIGATIONS
As of December 31, 2018, our debt primarily consisted of the 2019 Senior Secured Notes, the 2021 Senior Unsecured Notes, the 2026 Senior Secured Notes and the 2026 Senior Unsecured Notes, each as defined below, and our capital lease obligations.
The following table summarizes the carrying amounts and fair values of our long-term debt and capitalfinance lease obligations: | | | | Effective Interest Rate | | As of December 31, | | Effective Interest Rate | | As of December 31, | | | 2018 | | 2017 | | 2019 | | 2018 | | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | | (In thousands) | | | | | | | | | Senior Secured Notes: | | | | | | | | | | | | | | | | | 6 1/2% Senior Secured Notes due 2019 | | 6.959% | | $ | 920,836 |
| | $ | 932,696 |
| | $ | 990,000 |
| | $ | 1,042,609 |
| | 6.959% | | $ | — |
| | $ | — |
| | $ | 920,836 |
| | $ | 932,696 |
| 5 1/4% Senior Secured Notes due 2026 | | 5.320% | | 750,000 |
| | 695,865 |
| | 750,000 |
| | 769,305 |
| | 5.320% | | 750,000 |
| | 825,308 |
| | 750,000 |
| | 695,865 |
| Senior Unsecured Notes: | | | | | | | | | | | | | | | | | 7 5/8% Senior Unsecured Notes due 2021 | | 8.062% | | 900,000 |
| | 934,902 |
| | 900,000 |
| | 992,745 |
| | 8.062% | | 900,000 |
| | 963,783 |
| | 900,000 |
| | 934,902 |
| 6 5/8% Senior Unsecured Notes due 2026 | | 6.688% | | 750,000 |
| | 696,353 |
| | 750,000 |
| | 791,865 |
| | 6.688% | | 750,000 |
| | 833,903 |
| | 750,000 |
| | 696,353 |
| Less: Unamortized debt issuance costs | | (16,757 | ) | | — |
| | (24,857 | ) | | — |
| | (10,832 | ) | | — |
| | (16,757 | ) | | — |
| Subtotal | | 3,304,079 |
| | $ | 3,259,816 |
| | 3,365,143 |
| | $ | 3,596,524 |
| | 2,389,168 |
| | $ | 2,622,994 |
| | 3,304,079 |
| | $ | 3,259,816 |
| Capital lease obligations | | 228,702 |
| | | | 269,701 |
| | | | Total debt and capital lease obligations | | 3,532,781 |
| | | | 3,634,844 |
| | | | Finance lease obligations | | | 1,051 |
| | | | 1,705 |
| | | Total debt and finance lease obligations | | | 2,390,219 |
| | | | 3,305,784 |
| | | Less: Current portion | | (959,577 | ) | | | | (40,631 | ) | | | | (486 | ) | | | | (919,582 | ) | | | Long-term debt and capital lease obligations, net | | $ | 2,573,204 |
| | | | $ | 3,594,213 |
| | | | Long-term debt and finance lease obligations, net of current portion | | | $ | 2,389,733 |
| | | | $ | 2,386,202 |
| | |
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2019 Senior Secured Notes and 2021 Senior Unsecured Notes On June 1, 2011, we issued $1.1 billion aggregate principal amount of 6 1/2% Senior Secured Notes due 2019 (the “2019 Senior Secured Notes”) at an issue price of 100.0%, pursuant to a Secured Indenture dated June 1, 2011, (as amended2011. During the “2011years ended December 31, 2019 and 2018, we repurchased $11.5 million and $69.2 million, respectively, of the 2019 Senior Secured Indenture”).Notes in the open market and recorded losses on the repurchase of $0.1 million and $1.0 million, respectively. The 2019 Senior Secured Notes maturematured on June 15, 2019. Interest accrues at an annual rate of 6 1/2% and is payable semi-annually in cash, in arrears on June 15 and December 15 of each year. As of December 31, 2018 and 2017, the outstanding principal balance on the 2019 Senior Secured Notes was $921 million and$990 million , respectively. The decrease in the principal outstanding was due to our repurchase of $69 million in the open market during 2018. We recorded a loss on the repurchase of $1 million. On June 1, 2011, we also issued $900$900.0 million aggregate principal amount of 7 5/8% Senior Unsecured Notes due 2021 (the “2021 Senior Unsecured Notes,”) at an issue price of 100.0%, pursuant to an Unsecured Indenture dated June 1, 2011 (together with the(the “2011 Secured Indenture”, the “2011 Indentures”). The 2021 Senior Unsecured Notes mature on June 15, 2021. Interest accrues at an annual rate of 7 5/8% and is payable semi-annually in cash, in arrears on June 15 and December 15 of each year. As of December 31, 2018 and 2017, the outstanding principal balance on the 2021 Senior Unsecured Notes was $900 million.
2026 Senior Secured Notes and 2026 Senior Unsecured Notes
On July 27, 2016, we issued $750$750.0 million aggregate principal amount of 5 1/4% Senior Secured Notes due 2026 (the “2026 Senior Secured Notes” and, together with the 2019 Senior Secured Notes, the “Secured Notes”) at an issue price of 100.0%, pursuant to an indenture dated July 27, 2016 (the “2016 Secured Indenture”) and $750$750.0 million aggregate principal amount of 6 5/8% Senior Unsecured Notes due 2026 (the “2026 Senior Unsecured Notes” and, together with the 2021 Senior Unsecured Notes, the “Unsecured Notes”) at an issue price of 100.0%, pursuant to an indenture dated July 27, 2016 (together with the 2011 IndenturesIndenture and the 2016 Secured Indenture, the “Indentures”). The 2019 Senior Secured Notes, the 2021 Senior Unsecured Notes, the 2026 Senior Secured Notes and the 2026 Senior Unsecured Notes are referred to collectively as the “Notes” and individually as a series of the Notes. The 2026 Senior Secured Notes and the 2026 Senior Unsecured Notes (collectively, the “2026 Notes”) mature on August 1, 2026. Interest on the 2026 Senior Secured Notes accruesaccrue at an annual rate of 5 1/4% and interest on the 2026 Senior Unsecured Notes accrues at an annual rate of 6 5/8%. Interest on the 2026 Senior Secured Notes is payable semi-annually in cash, in arrears, on February 1 and August 1 of each year commencing February 1, 2017. At eachyear.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Additional Information Relating to the Notes
Each series of the Notes is redeemable, in whole or in part, at any time at a redemption price equal to 100.0% of the principal amount thereof plus a “make-whole” premium, as defined in the applicable Indenture, together with accrued and unpaid interest, if any, to the date of redemption. We may also redeem up to 10%10.0% of the outstanding 2026 Senior Secured Notes per year prior to August 1, 2020 at a redemption price equal to 103%103.0% of the principal amount thereof plus accrued and unpaid interest toas of the date of redemption. In addition, we may, at any time prior to August 1, 2019, with the net cash proceeds from certain equity offerings or capital contributions, redeem up to 35% of the
The 2026 Senior Secured Notes at 105.250% of the principal amount, and up to 35% of the 2026 Senior Unsecured Notes, at a redemption price equal to 106.625% of the principal amount plus, in each case, accrued and unpaid interest on the 2026 Notes being redeemed to the date of redemption.are:
The Secured Notes are:
our secured obligations; | | • | secured by security interests in substantially all of our and certain of our subsidiaries’ existing and future tangible and intangible assets of on a first priority basis, subject to certain exceptions; |
| | • | ranked equally and ratably as between the 2019 Senior Secured Notes and the 2026 Senior Secured Notes;
|
effectively junior to our obligations that are secured by assets that are not part of the collateral that secures the respective2026 Senior Secured Notes, in each case, to the extent of the value of the collateral securing such obligations;
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
effectively senior to our existing and future unsecured obligations to the extent of the value of the collateral securing the respective2026 Senior Secured Notes, after giving effect to permitted liens as provided in the Indenture governing the respective2016 Secured Notes;Indenture; senior in right of payment to all of our existing and future obligations that are expressly subordinated to the respective2026 Senior Secured Notes; | | • | structurally junior to any existing and future obligations of any of our subsidiaries that do not guarantee the respectivestructurally junior to any existing and future obligations of any of our subsidiaries that do not guarantee the 2026 Senior Secured Notes; and |
unconditionally guaranteed, jointly and severally, on a general senior secured basis by certain of our subsidiaries, which guarantees rank equally with all of the guarantors’ existing and future unsubordinated indebtedness and effectively senior to such guarantors’ existing and future obligations to the extent of the value of the assets securing the respective2026 Senior Secured Notes.
The Unsecured Notes are:
our unsecured senior obligations; | | • | ranked equally with all existing and future unsubordinated indebtedness (including as between the 2021 Senior Unsecured Notes and the 2026 Senior Unsecured Notes) and effectively junior to any secured indebtedness up to the value of the assets securing such indebtedness; |
effectively junior to our obligations that are secured to the extent of the value of the collateral securing such obligations; senior in right of payment to all of our existing and future obligations that are expressly subordinated to the respective Unsecured Notes;
structurally junior to any existing and future obligations of any of our subsidiaries that do not guarantee the respective Unsecured Notes; and
unconditionally guaranteed, jointly and severally, on a general senior secured basis by certain of our subsidiaries, which guarantees rank equally with all of the guarantors’ existing and future unsubordinated indebtedness, and effectively junior to any secured indebtedness of the guarantors up to the value of the assets securing such indebtedness. | | • | senior in right of payment to all our existing and future obligations that are expressly subordinated to the respective Unsecured Notes; |
| | • | structurally junior to any existing and future obligations of any of our subsidiaries that do not guarantee the respective Unsecured Notes; and |
| | • | unconditionally guaranteed, jointly and severally, on a general senior secured basis by certain of our subsidiaries, which guarantees rank equally with all of the guarantors’ existing and future unsubordinated indebtedness, and effectively junior to any secured indebtedness of the guarantors up to the value of the assets securing such indebtedness. |
Subject to certain exceptions, the Indentures contain restrictive covenants that, among other things, impose limitations on our ability and, in certain instances, the ability of certain of our subsidiaries to:
pay dividends or make distributions on our capital stock or repurchase our capital stock;
make certain investments; | | • | pay dividends or make distributions on our or their capital stock or repurchase our or their capital stock; |
| | • | make certain investments; |
| | • | create liens or enter into sale and leaseback transactions; |
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| | • | enter into transactions with affiliates; |
| | • | merge or consolidate with another company; |
| | • | transfer and sell assets; and |
allow to exist certain restrictions on the ability of certain of our subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to us or our subsidiaries. | | • | allow to exist certain restrictions on our or their ability to pay dividends, make distributions, make other payments, or transfer assets. |
In the event of a Change of Control, as defined in the respective Indentures, we would be required to make an offer to repurchase all or any part of a holder’s Notes at a purchase price equal to 101.0% of the aggregate principal amount thereof, together with accrued and unpaid interest to the date of repurchase.
The Indentures provide for customary events of default for each series of the Notes, including, among other things, nonpayment,non-payment, breach of the covenants in the applicable Indentures, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If any event of default occurs and is continuing with respect to any series of the Notes, the trustee or the holders of at
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
least 25%25.0% in principal amount of the then outstanding Notes of such series may declare all the Notes of such series to be due and payable immediately, together with any accrued and unpaid interest.
Pursuant to the terms of a registration rights agreement, we registered notes having substantially identical terms as the 2026 Notes with the Securities and Exchange Commission as part of an offer to exchange registered notes for the 2026 Notes. This exchange offer expired May 11, 2017 with 99.98% of the 2026 Notes being tendered for exchange.
Debt Issuance Costs In connection with the issuance of the 2026 Notes, we incurred $8 million of debt issuance costs. For the years ended December 31, 2019, 2018 2017 and 2016,2017, we amortized $8$5.9 million, $7$7.9 million and $7$7.4 million respectively, of debt issuance costs incurred for all debt issuances, respectively, which are included in “InterestInterest expense, net of amounts capitalized”capitalized in ourthe Consolidated Statements of Operations.
NOTE 15. INCOME TAXES
The components of Income (loss) from continuing operations before income taxes in the Consolidated Statements of Operations and Comprehensive Income (Loss). Capital Lease Obligations
Our capital lease obligations reflect the present value of future minimum lease payments under noncancelable lease agreements, primarily for certain of our satellites (see Note 7). These agreements require monthly recurring payments, which generally include principal, interest, an amount for use of the orbital location and estimated executory costs, such as insurance and maintenance. The monthly recurring payments generally are subject to reduction in the event of failures that reduce the satellite transponder capacity. Certain of these agreements provide for extension of the initial lease term at our option. The effective interest rates for our satellite capital lease obligations range from 9.1% to 11.2%, with a weighted average of 10.7% as of December 31, 2018.
Our capital lease obligations consist primarily of our payment obligations under agreements for the Nimiq 5 and QuetzSat-1 satellites, which have remaining noncancelable terms ending in September 2024 and November 2021, respectively. As discussed in Note 16, we have subleased transponders on these satellites to DISH Network.
Future minimum lease payments under our capital lease obligations, together with the present value of the net minimum lease payments as of December 31, 2018, are as follows:
| | | | | | Amount | | (In thousands) | For the Years Ending December 31, | |
| 2019 | $ | 88,615 |
| 2020 | 88,395 |
| 2021 | 84,248 |
| 2022 | 63,484 |
| 2023 | 63,360 |
| Thereafter | 47,520 |
| Total minimum lease payments | 435,622 |
| Less: Amount representing use of the orbital location and estimated executory costs including profit thereon, included in total minimum lease payments | (136,799 | ) | Net minimum lease payments | 298,823 |
| Less: Amount representing interest | (70,121 | ) | Present value of net minimum lease payments | 228,702 |
| Less: Current portion | (40,662 | ) | Long-term portion of capital lease obligations | $ | 188,040 |
|
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Domestic | | $ | 68,574 |
| | $ | 40,385 |
| | $ | (73,572 | ) | Foreign | | (154,395 | ) | | (33,850 | ) | | (27,596 | ) | Income (loss) from continuing operations before income taxes | | $ | (85,821 | ) | | $ | 6,535 |
| | $ | (101,168 | ) |
We received rental income from the sublease of our capital lease satellites of approximately $132 million for each of the years ended December 31, 2018, 2017 and 2016. As of December 31, 2018, our future minimum sublease rental income was $216 million relating to such satellites. The subleases have a remaining weighted average term of two years.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
NOTE 11.INCOME TAXES
The components of income before income taxesIncome tax benefit (provision), net, in ourthe Consolidated Statements of Operations and Comprehensive Income (Loss) are as follows: | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2018 | | 2017 | | 2016 | | | (In thousands) | Domestic | | $ | 177,563 |
| | $ | 66,947 |
| | $ | 202,905 |
| Foreign | | (33,851 | ) | | (27,596 | ) | | (7,425 | ) | Income before income taxes | | $ | 143,712 |
| | $ | 39,351 |
| | $ | 195,480 |
|
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Current benefit (provision), net: | | | | | | | Federal | | $ | (4,525 | ) | | $ | (914 | ) | | $ | (638 | ) | State | | 2,584 |
| | 5,081 |
| | (2,753 | ) | Foreign | | (1,415 | ) | | (1,894 | ) | | (2,020 | ) | Total current benefit (provision), net | | (3,356 | ) | | 2,273 |
| | (5,411 | ) | | | | | | | | Deferred benefit (provision), net: | | | | | | | Federal | | (1,292 | ) | | (3,460 | ) | | 108,144 |
| State | | (10,370 | ) | | (17,656 | ) | | (3,699 | ) | Foreign | | 3,423 |
| | 228 |
| | (5,268 | ) | Total deferred benefit (provision), net | | (8,239 | ) | | (20,888 | ) | | 99,177 |
| Total income tax benefit (provision), net | | $ | (11,595 | ) | | $ | (18,615 | ) | | $ | 93,766 |
|
The components of the provision for income taxes in our Consolidated Statements of Operations and Comprehensive Income (Loss) are as follows: | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2018 | | 2017 | | 2016 | | | (In thousands) | Current benefit (provision): | | | | | | | Federal | | $ | (914 | ) | | $ | (638 | ) | | $ | (223 | ) | State | | 138 |
| | (7,211 | ) | | (62 | ) | Foreign | | (1,895 | ) | | (2,020 | ) | | (2,573 | ) | Total current provision | | (2,671 | ) | | (9,869 | ) | | (2,858 | ) | | | | | | | | Deferred benefit (provision): | | | | | | | Federal | | (32,301 | ) | | 275,957 |
| | (67,035 | ) | State | | (11,625 | ) | | (2,618 | ) | | (8,693 | ) | Foreign | | 228 |
| | (5,268 | ) | | 4,827 |
| Total deferred benefit (provision) | | (43,698 | ) | | 268,071 |
| | (70,901 | ) | Total income tax benefit (provision), net | | $ | (46,369 | ) | | $ | 258,202 |
| | $ | (73,759 | ) |
TheOur actual tax provisions for the years ended December 31, 2018, 2017 and 2016 reconcile to the amounts computed by applying the statutory federal tax rate to incomeIncome (loss) from continuing operations before income taxes in ourthe Consolidated Statements of Operations and Comprehensive Income (Loss) as shown below: follows:
| | | | | | | | | | | For the years ended December 31, | | | For the years ended December 31, | | 2019 | | 2018 | | 2017 | | | 2018 | | 2017 | | 2016 | | | | | | | Statutory rate | | 21.0 | % | | 35.0 | % | | 35.0 | % | | $ | 18,023 |
| | $ | (1,372 | ) | | $ | 35,409 |
| State income taxes, net of Federal effect | | 8.0 | % | | (6.0 | )% | | 4.5 | % | | State income taxes, net of federal provision (benefit) | | | (4,148 | ) | | (13,642 | ) | | (3,788 | ) | Permanent differences | | 0.7 | % | | (2.6 | )% | | 0.6 | % | | (5,888 | ) | | (976 | ) | | 911 |
| Tax credits | | (2.7 | )% | | (8.2 | )% | | (1.5 | )% | | 5,137 |
| | 4,935 |
| | 3,239 |
| Rates Different than Statutory | | (2.8 | )% | | — | % | | — | % | | Valuation allowance | | 8.1 | % | | 44.0 | % | | (1.1 | )% | | (35,974 | ) | | (11,583 | ) | | (17,325 | ) | Enactment of Tax Cuts and Job Act of 2017 | | — | % | | (719.2 | )% | | — | % | | — |
| | — |
| | 75,617 |
| Rates different than statutory | | | 11,182 |
| | 4,051 |
| | (358 | ) | Other | | — | % | | 0.8 | % | | 0.2 | % | | 73 |
| | (28 | ) | | 61 |
| Total effective tax rate | | 32.3 | % | | (656.2 | )% | | 37.7 | % | | Total income tax benefit (provision), net | | | $ | (11,595 | ) | | $ | (18,615 | ) | | $ | 93,766 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
The components of our deferred tax assets and liabilities are as follows: | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | | | | Deferred tax assets: | | | | | Net operating losses, credit and other carryforwards | | $ | 92,304 |
| | $ | 103,230 |
| Unrealized losses on investments, net | | 931 |
| | 6,997 |
| Accrued expenses | | 20,079 |
| | 21,622 |
| Stock-based compensation | | 5,096 |
| | 1,613 |
| Other assets | | 25,952 |
| | 7,707 |
| Total deferred tax assets | | 144,362 |
| | 141,169 |
| Valuation allowance | | (102,201 | ) | | (49,183 | ) | Deferred tax assets after valuation allowance | | 42,161 |
| | 91,986 |
| | | | | | Deferred tax liabilities: | | | | | Depreciation and amortization | | (414,046 | ) | | (443,063 | ) | Other liabilities | | (1,216 | ) | | (1,290 | ) | Total deferred tax liabilities | | (415,262 | ) | | (444,353 | ) | Total net deferred tax liabilities | | $ | (373,101 | ) | | $ | (352,367 | ) | | | | | | Net deferred tax asset foreign jurisdiction | | $ | 7,215 |
| | $ | 3,581 |
| Net deferred tax liability domestic | | (380,316 | ) | | (355,948 | ) | Total net deferred tax liabilities | | $ | (373,101 | ) | | $ | (352,367 | ) |
| | | | | | | | | | | | As of December 31, | | | 2018 | | 2017 | | | (In thousands) | Deferred tax assets: | | | | | Net operating losses, credit and other carryforwards | | $ | 103,230 |
| | $ | 155,450 |
| Unrealized losses on investments, net | | 6,998 |
| | 6,597 |
| Accrued expenses | | 21,646 |
| | 22,683 |
| Stock-based compensation | | 1,613 |
| | 1,285 |
| Other assets | | 7,707 |
| | 7,179 |
| Total deferred tax assets | | 141,194 |
| | 193,194 |
| Valuation allowance | | (49,183 | ) | | (39,511 | ) | Deferred tax assets after valuation allowance | | 92,011 |
| | 153,683 |
| | | | | | Deferred tax liabilities: | | | | | Depreciation and amortization | | (575,875 | ) | | (588,105 | ) | Other liabilities | | (1,290 | ) | | (1,509 | ) | Total deferred tax liabilities | | (577,165 | ) | | (589,614 | ) | Total net deferred tax liabilities | | $ | (485,154 | ) | | $ | (435,931 | ) |
Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the accompanying Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
We evaluate our deferred tax assets for realization and record a valuation allowance when we determine that it is more likely than not that the amounts will not be realized. Overall, our net deferred tax assets were offset by a valuation allowance of $49$102.2 million and $40$49.2 million as of December 31, 20182019 and 2017,2018, respectively. The change in the valuation allowance primarily relates to a decrease in realized and unrealized gains that are capital in nature, and an increase in the net operating loss carryforwards of certain foreign subsidiaries.subsidiaries and a decrease associated with unrealized gains that are capital in nature.
Tax benefits of net operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. As of December 31, 2018,2019, we had foreign net operating loss carryforwards of $193 million, including $119 million of foreign net operating loss carryforwards. A substantial portion of these net operating loss carryforwards will begin to expire in 2029.$228.1 million. As of December 31, 2018,2019, we have tax credit carryforwards of $40$8.4 million and $2$2.3 million for federal and state income tax purposes, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 20262024 and the state tax credit carryforwards will begin to expire in 2018.2020.
As of December 31, 2018,2019, we had undistributed earnings attributable to foreign subsidiaries for which no provision for U.S. income taxes or foreign withholding taxes has been made because it is expected that such earnings will be reinvested outside the U.S. indefinitely. It is not practicable to determine the amount of the unrecognized deferred tax liability at this time. However, due to the one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings, the majority of previously unremitted earnings have now been subjected to U.S. federal income tax. As of December 31, 2019 and 2018, we had net deferred tax assets related to our foreign subsidiaries of $7.2 million and $3.6 million , respectively, which were recorded in Other non-current assets, net in the Consolidated Balance Sheets.
Accounting for the U.S. Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted in December 2017 and has significantly impacted our effective tax rate and the tax benefit calculated for the year ended December 31, 2017. For the year ended December 31, 2017, we recorded a benefit of $283$75.6 million to reflect the change in the value of our deferred tax assets and liabilities resulting from the change in the federal corporate tax rate from 35% to 21%. For the year ended December 31, 2018, we recorded an additional benefit of $0.8 million upon completion of our analysis. This amount included an estimate of zero related to valuation allowances on foreign tax credit carryovers. We account for the effects, if any, of
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
31, 2018, we recorded an additional tax benefit of $0.8 million and did not record any valuation allowances on foreign tax credit carryforwards. We account for the effects, if any, of the global intangible low-taxed income provisions (“GILTI”) of the 2017 Tax Act as incurred. We also recordeddid not record a tax provision of nil related to the tax on deemed mandatory repatriation of our unrepatriated foreign earnings.earnings for the year ended December 31, 2017.
Accounting for Uncertainty in Income Taxes In addition to filing U.S. federal income tax returns with EchoStar, we file income tax returns in all states that impose an income tax. As of December 31, 2019, we are not currently under a U.S. federal income tax examination. However, the IRS could perform tax examinations on years as early as tax year 2008. We are also subject to frequent state income tax audits and have open state examinations on years as early as 2008. We also file income tax returns in the United Kingdom, Brazil, India and a number of other foreign jurisdictions. We generally are open to income tax examination in these foreign jurisdictions for taxable years beginning in 2003. As of December 31, 2018,2019, we are currently being audited by the Indian tax authorities for fiscal years 2003 through 2012. We have no other on-going significant income tax examinations in process in our foreign jurisdictions. AThe reconciliation of the beginning and ending amount of unrecognized income tax benefits is as follows:
| | | | For the Years Ended December 31, | | For the years ended December 31, | Unrecognized tax benefit | | 2018 | | 2017 | | 2016 | | | | (In thousands) | | 2019 | | 2018 | | 2017 | Balance as of beginning of period | | $ | 7,950 |
| | $ | 7,057 |
| | $ | 3,508 |
| | | | | | | | | | Unrecognized tax benefit balance as of beginning of period: | | | $ | 7,866 |
| | $ | 7,950 |
| | $ | 7,057 |
| Additions based on tax positions related to the current year | | 572 |
| | 656 |
| | 388 |
| | — |
| | 572 |
| | 656 |
| Additions based on tax positions related to prior years | | — |
| | 237 |
| | 3,161 |
| | — |
| | — |
| | 237 |
| Reductions based on tax positions related to prior years | | (656 | ) | | — |
| | — |
| | — |
| | (656 | ) | | — |
| Balance as of end of period | | $ | 7,866 |
| | $ | 7,950 |
| | $ | 7,057 |
| | $ | 7,866 |
| | $ | 7,866 |
| | $ | 7,950 |
|
As of December 31, 2019 and 2018, we had $8$7.9 million of unrecognized income tax benefits, all of which, if recognized, would affect our effective tax rate. As of December 31, 2017, we had $8and $7.9 million, respectively, of unrecognized income tax benefits, all of which, if recognized, would affect our effective tax rate. We do not believe that the total amount of unrecognized income tax benefits will significantly increase or decrease within the next twelve months due to the lapse of statute of limitations or settlement with tax authorities.
For the years ended December 31, 2019, 2018 2017 and 2016,2017, our income tax provision included an insignificant amount of interest and penalties. Estimates of our uncertain tax positions are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, we will record additional income tax provision or benefit in the period in which such resolution occurs.
NOTE 12.16. EMPLOYEE BENEFIT PLANS Employee Stock Purchase Plan
EchoStar has an employee stock purchase plan (the “ESPP”), under which it is authorized to issue 5.0 million shares of EchoStarEchoStar’s Class A common stock. As of December 31, 2018,2019, EchoStar had approximately 2.52.2 million shares of Class A common stock which remain available for issuance under the ESPP. Generally, all full-time employees who have been employed by EchoStar or its subsidiaries for at least one calendar quarter are eligible to participate in the ESPP. Employee stock purchases are made through payroll deductions. Under the terms of the ESPP, each employee’s deductions are limited so that the maximum they may purchase under the ESPP is $25,000 in fair value of Class A common stock per year. Stock purchases are made on the last business day of each calendar quarter at 85.0% of the closing price of EchoStar’s Class A common stock on that date. For the years ended December 31, 2019, 2018 2017 and 2016,2017, employee purchases of EchoStarEchoStar’s Class A common stock through the ESPP totaled approximately 280,000 shares, 235,000 shares and 169,000 shares, and 209,000 shares, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
401(k) Employee Savings Plans
Under the EchoStar 401(k) Plan (“the Plan”), eligible employees are entitled to contribute up to 75.0% of their eligible compensation, on a pre-tax and/or after-tax basis, subject to the maximum contribution limit provided by the Internal Revenue Code of 1986, as amended (the “Code”). Eligible employees have the option to contribute up to 75% of their eligible compensation on a pre-tax
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
and/or after-tax basis subject to the Code limits. All employee contributions to the Plan are immediately vested. EchoStar matches 50 cents on the dollar for the first 6.0% of each employee’s salary contributions to the Plan for a total of 3.0% match on a pre-tax basis up to a maximum of $7,500 annually. EchoStar’s match is calculated each pay period there is an employee contribution. In addition, EchoStar may make an annual discretionary contribution to the Plan to be made in cash or EchoStar’s stock. EchoStar’s contributions under the Plan vest at 20.0% per year and are 100.0% vested after an eligible employee has completed five years of employment. Forfeitures of unvested participant balances may be used to fund matching and discretionary contributions.
During the years ended December 31, 2019, 2018 2017 and 2016,2017, we recognized matching contributions, net of forfeitures, of $5$5.1 million, $5$5.0 million and $4$5.1 million, respectively, and EchoStar made discretionary contributions to our employees of shares of its Class A common stock, net of forfeitures, with a fair value of $8$6.7 million, $7$7.6 million and $6$6.7 million, respectively, to the Plan.respectively.
NOTE 1317. COMMITMENTS AND CONTINGENCIES
Commitments
The following table summarizes our contractual obligations atfrom our continuing operations as of December 31, 2018: 2019: | | | | Payments Due in the Year Ending December 31, | | Payments Due in the Year Ending December 31, | | | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | | (In thousands) | | | | | | | | | | | | | | | Long-term debt | | $ | 3,320,836 |
| | $ | 920,836 |
| | $ | — |
| | $ | 900,000 |
| | $ | — |
| | $ | — |
| | $ | 1,500,000 |
| | $ | 2,400,000 |
| | $ | — |
| | $ | 900,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,500,000 |
| Capital lease obligations | | 228,702 |
| | 40,662 |
| | 45,031 |
| | 46,353 |
| | 31,857 |
| | 35,476 |
| | 29,323 |
| | Interest on long-term debt and capital lease obligations | | 983,824 |
| | 209,989 |
| | 175,808 |
| | 136,662 |
| | 98,265 |
| | 94,529 |
| | 268,571 |
| | Finance lease obligations | | | 1,212 |
| | 629 |
| | 487 |
| | 96 |
| | — |
| | — |
| | — |
| Interest on long-term debt | | | 726,377 |
| | 157,688 |
| | 123,375 |
| | 89,063 |
| | 89,063 |
| | 89,063 |
| | 178,125 |
| Satellite-related obligations | | 482,010 |
| | 115,514 |
| | 118,688 |
| | 52,515 |
| | 39,451 |
| | 39,771 |
| | 116,071 |
| | 256,869 |
| | 124,334 |
| | 24,078 |
| | 11,365 |
| | 11,241 |
| | 11,969 |
| | 73,882 |
| Operating lease obligations | | 87,987 |
| | 17,587 |
| | 16,957 |
| | 13,400 |
| | 9,730 |
| | 8,427 |
| | 21,886 |
| | 151,682 |
| | 19,907 |
| | 17,594 |
| | 15,379 |
| | 14,369 |
| | 13,286 |
| | 71,147 |
| Total | | $ | 5,103,359 |
| | $ | 1,304,588 |
| | $ | 356,484 |
| | $ | 1,148,930 |
| | $ | 179,303 |
| | $ | 178,203 |
| | $ | 1,935,851 |
| | $ | 3,536,140 |
| | $ | 302,558 |
| | $ | 1,065,534 |
| | $ | 115,903 |
| | $ | 114,673 |
| | $ | 114,318 |
| | $ | 1,823,154 |
|
Our satellite-related obligations primarily include payments pursuant to regulatory authorizations; executory costs for our capital lease satellites; costs under agreements to lease satellite capacity; and in-orbit incentives relating to certain satellites; as well as commitments for long-term satellite operating leases and satellite service arrangements. We incurred satellite-related expenses of $101 million, $140 million and $144 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The table above does not include amounts related to deferred tax liabilities, unrecognized tax positions and certain other amounts recorded in our noncurrentnon-current liabilities as the timing of any payments is uncertain. The table also excludes long-term deferred revenue and other long-term liabilities that do not require future cash payments. Additionally, our satellite-related obligations primarily include payments pursuant to agreements for 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. We incurred satellite-related expenses of $53.2 million, $74.8 million and $91.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change. Rent Expense
For the years ended December 31, 2018, 2017 and 2016, we recorded $26 million, $28 million and $19 million, respectively, of operating lease expense relating to the leases of office space, equipment, and other facilities.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Contingencies
Patents and Intellectual Property Many entities, including some of our competitors, have, or may have in the future, patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be tripled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these parties do not own the rights they claim, that these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses from these parties on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.
Separation Agreement, and Share Exchange and BSS Transaction
In connection with EchoStar’s spin-off from DISH in 2008 (the “Spin-off”), EchoStar entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the terms of the separation agreement, EchoStar assumed certain liabilities that relate to its and our business, including certain designated liabilities for acts or omissions that occurred prior to the Spin-off. Certain specific provisions govern intellectual property related claims under which generally, EchoStar will generally only be liable for its and its subsidiaries’ acts or omissions following the Spin-off and DISH Network will indemnify EchoStar for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off. Additionally, in connection with the Share Exchange and BSS Transaction, EchoStar and certain of its and our subsidiaries entered into a share exchange agreementthe Share Exchange Agreement and the Master Transaction Agreement, respectively, and other agreements which provide, among other things, for the division of certain liabilities, including liabilities relating to taxes, intellectual property and employees and liabilities resulting from litigation and the assumption of certain liabilities that relate to the transferred businesses and assets. These agreements also contain additional indemnification provisions between EchoStar and us and DISH Network for, in the case of the Share Exchange, certain pre-existing liabilities and legal proceedings.proceedings and, in the case of the BSS Transaction, certain losses with respect to breaches of certain representations and covenants and certain liabilities.
Litigation We are involved in a number of legal proceedings concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending litigationlegal proceedings are charged to expense as incurred.
For certain cases,proceedings, management is unable to predict with any degree of certainty the outcome or provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons,reasons: (i) the proceedings are in various stages; (ii) damages have not been sought or specified; (iii) damages are unsupported, indeterminate and/or exaggerated in management’s opinion; (iv) there is uncertainty as to the outcome of pending trials, appeals, motions or motions;other proceedings; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial condition, operating results or cash flows, though there is no assurance that the resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
We intend to vigorously defend the proceedings against us. In the event that a court, tribunal, other body or jury ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers.
Elbit. On January 23, 2015, Elbit Systems Land and C4I LTD and Elbit Systems of America Ltd. (together referred to as “Elbit”) filed a complaint against our subsidiary Hughes Network Systems, L.L.C. (“HNS”), as well as against Black Elk Energy Offshore Operations, LLC, Bluetide Communications, Inc. and Helm Hotels Group, in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patent Nos. 6,240,073 (the “073 patent”) and 7,245,874 (“874 patent”). The 073 patent is entitled “Reverse Link for a Satellite Communication Network” and the 874 patent is entitled “Infrastructure for Telephony Network.” Elbit alleges that the 073 patent is infringed by broadband satellite systems that practice the Internet Protocol Over Satellite standard. Elbit alleges that the 874 patent is infringed by the manufacture and sale of broadband satellite systems that provide cellular backhaul service via connections to E1 or T1 interfaces at cellular backhaul base stations. On April 2, 2015, Elbit filed an amended complaint removing Helm Hotels Group as a defendant, but making similar allegations against a new defendant, Country Home Investments, Inc. On November 3 and 4, 2015 and January 22, 2016, the defendants filed petitions before the United States Patent and Trademark Office (“USPTO”) challenging the validity of the patents in suit, which the USPTO subsequently declined to institute. On April 13, 2016, the defendants answered Elbit’s complaint. At Elbit’s request, on June 26, 2017, the court dismissed Elbit’s claims of infringement against all parties other than HNS. Trial commenced on July 31, 2017. On August 7, 2017, the jury returned a verdict that the 073 patent was valid and infringed, and awarded Elbit approximately $21$21.1 million. The jury also found that such infringement of the 073 patent was not willful and that the 874 patent was not infringed. On March 30, 2018, the court ruled on post-trial motions, upholding the jury’s findings and awarding Elbit attorneys’ fees in an amount that has not yet been specified. As a result of pre-judgment interest, costs and unit sales through the 073 patent’s expiration in November 2017, the jury verdict would result in a payment of approximately $29 million plus post-judgment interest if not overturned or modified on appeal. Elbit hasinitially requested an award of approximately $14$13.9 million of attorneys’ fees. HNS is contesting Elbit’s claims as inappropriate and unreasonable in light of the court’s decision and prevailing law. On April 27, 2018, HNS filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. Oral argument was held on May 8, 2019. On June 25, 2019, the Federal Circuit issued an Opinion and Order affirming the court’s judgment and holding that it did not yet have jurisdiction to review the court’s decision to award attorney’s fees. On August 8, 2019, HNS filed a combined petition for panel rehearing or rehearing en banc with the Federal Circuit, which was denied on September 10, 2019. In an order dated September 18, 2019, the District Court questioned the attorneys’ fees calculations proposed by both parties and asked for further briefing, which the parties submitted on October 25, 2019. As a result of the Federal Circuit’s rulings, as of September 30, 2019, we recorded an accrual of $33.7 million. In December 2019, we entered into a comprehensive settlement agreement with Elbit pursuant to which we paid a total of $33.0 million in satisfaction of all amounts relating to these matters and all open proceedings, including appeals, were dismissed with prejudice.
Shareholder Litigation. On July 2, 2019, the City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust, purporting to sue on behalf of a class of EchoStar’s stockholders, filed a complaint in the District Court of Clark County, Nevada against EchoStar’s directors, Charles W. Ergen, R. Stanton Dodge, Anthony M. Federico, Pradman P. Kaul, C. Michael Schroeder, Jeffrey R. Tarr, William D. Wade, and Michael T. Dugan; our officer, David J. Rayner; EchoStar ; HSS; our former subsidiary BSS Corp.; and DISH and its subsidiary Merger Sub. On September 5, 2019, the defendants filed motions to dismiss. On October 11, 2019, the plaintiffs filed an amended complaint removing Messrs. Dodge, Federico, Kaul, Schroeder, Tarr and Wade as defendants. The parties have briefedamended complaint alleges that Mr. Ergen, as our controlling stockholder, breached fiduciary duties to EchoStar’s minority stockholders by structuring the appealBSS Transaction with inadequate consideration and are awaitingimproperly influencing our and EchoStar’s boards of directors to approve the BSS Transaction. The amended complaint also alleges that the other defendants aided and abetted such alleged breaches. The plaintiffs seek equitable and monetary relief, including the issuance of additional DISH Common Stock, and other costs and disbursements, including attorneys’ fees on behalf of the purported class. On November 11, 2019, we and the other defendants filed separate motions to dismiss plaintiff’s amended complaint and during a date for oral arguments.hearing on January 13, 2020 the court denied these motions. On February 10, 2020, we and the other defendants filed answers to the amended complaint. We intend to vigorously defend this case. We cannot predict its outcome with any degree of certainty.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
License Fee Dispute with Government of India, Department of Telecommunications. In 1994, the outcomeGovernment of India promulgated a “National Telecommunications Policy” under which the government liberalized the telecommunications sector and required telecommunications service providers to pay fixed license fees. Pursuant to this policy, our subsidiary Hughes Communications India Private Limited (“HCIPL”), formerly known as Hughes Escorts Communications Limited, obtained a license to operate a data network over satellite using VSAT systems. In 1999, HCIPL’s license was amended pursuant to a new government policy that eliminated the fixed license fees and instead required each telecommunications service provider to pay license fees based on its adjusted gross revenue (“AGR”). In March 2005, the Indian Department of Telecommunications (“DOT”) notified HCIPL that, based on its review of HCIPL’s audited accounts and AGR statements, HCIPL must pay additional license fees, interest on such fees and penalties and interest on the penalties. HCIPL responded that the DOT had improperly calculated its AGR by including revenue from licensed and unlicensed activities. The DOT rejected this explanation and in 2006, HCIPL filed a petition with an administrative tribunal (the “Tribunal”), challenging the DOT’s calculation of its AGR. The DOT also issued license fee assessments to other telecommunications service providers and a number of similar petitions were filed by several other such providers with the Tribunal. These petitions were amended, consolidated, remanded and re-appealed several times. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the appeal.Tribunal’s ruling. On October 24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties, but without indicating the amount HCPIL is required to pay the DOT, and ordering payment by January 23, 2020. On November 23, 2019, we and other telecommunication service providers filed a petition asking the Supreme Court to reconsider its decision. The petition was denied on January 20, 2020. On January 22, 2020, we and other telecommunication service providers filed an application requesting that the Supreme Court modify the Order to permit the DOT to calculate the final amount due and extend HCPIL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court denied this application and directed us and the other telecommunication service providers to explain why the Supreme Court should not initiate contempt proceedings for failure to pay the amounts due. The Supreme Court further ordered the parties to appear on March 17, 2020. To date, the DOT has issued HCIPL written assessments totaling $28.4 million, comprised of $4.0 million for additional license fees, $4.1 million for penalties and $20.3 million for interest and interest on penalties. It is possible that the DOT’s assessments may be modified depending on the methodology it uses to calculate interest over the period in question. As a result of December 31, 2018the Order and 2017,the Supreme Court’s February 14th decision and using the DOT’s current methodology as reflected in the assessments we have received, we have recorded an accrual of approximately $3$80.2 million as of December 31, 2019, comprised of $4.0 million for additional license fees, $4.1 million for penalties and $3$72.1 million respectively, with respect to this liability.for interest and interest on penalties. We had recorded an accrual of $1.3 million as of December 31, 2018. Any eventual payments made with respect to the ultimate outcome of this matter may be different from our accrualsaccrual and such differences could be significant.
Realtime Data LLC
On May 8, 2015, Realtime Data LLC (“Realtime”) filed suit against EchoStar Corporation and our subsidiary HNS in the U.S. District Court for the Eastern District of Texas alleging infringement of U.S. Patent Nos. 7,378,992 (the “992 patent”), entitled “Content Independent Data Compression Method and System;” 7,415,530 (the “530 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval,” and 8,643,513 (the “513 patent”), entitled “Data Compression System and Methods.” On September 14, 2015, Realtime amended its complaint, additionally alleging infringement of U.S. Patent No. 9,116,908 (the “908 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval.” On February 14, 2017, Realtime filed a second suit against EchoStar Corporation and our subsidiary HNS in the same District Court, alleging infringement of four additional U.S. Patents, Nos. 7,358,867 (the “867 patent”), entitled “Content Independent Data Compression Method and System;” 8,502,707 (the “707 patent”), entitled “Data Compression Systems and Methods;” 8,717,204 (the “204 patent”), entitled “Methods for Encoding and Decoding Data;” and 9,054,728 (the “728 patent”), entitled “Data Compression System and Methods.” On February 13, 2018, we filed petitions before the USPTO challenging the validity of all claims asserted against us from the 707 patent, as well as one of the asserted claims of the 728 patent. On September 5, 2018, the USPTO declined to institute proceedings for the petition that we had filed against the 728 patent. On September 12, 2018, the USPTO instituted proceedings to review the validity of the asserted claims of the 707 patent. In a stipulation filed on October 24, 2018, Realtime voluntarily elected not to pursue any previously asserted claims from the 992, 530, 513, 908, 867 and 204 patents. Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein. In February 2019, we entered into a settlement agreement with Realtime and the case was dismissed with prejudice.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Other . In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of business. As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which we may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, we from time to time receive inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.
In our opinion, the amount of ultimate liability with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We also indemnify our directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for us. Additionally, in the normal course of its business, we enter into contracts pursuant to which we may make a variety of representations and warranties and indemnify the counterparty for certain losses. Our possible exposure under these arrangements cannot be reasonably estimated as this involves the resolution of claims made, or future claims that may be made, against us or our officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 14.18. SEGMENT REPORTING
Operating segments are business components of an enterprise for which separate financial information is available and regularly evaluated by our chief operating decision maker (“CODM”), who is our Chief Executive Officer. We primarily operate in two 2 business segments, Hughes and ESS, as described in Note 1 1. Organization and Business Activities. The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization and net income (loss) attributable to non-controlling interests, or EBITDA. Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate, Accounting and Legal) and other activities that have not been assigned to our operating 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 in the tables below or in the reconciliation of EBITDA below.
Transactions between segments were not significant for the years ended December 31, 2018, 2017 and 2016. Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table presents revenue, EBITDA and capital expenditures for each of our operating segments: segments. Capital expenditures are net of refunds and other receipts related to property and equipment. | | | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | Hughes | | ESS | | Corporate and Other | | Consolidated Total | | | | | | | | | | | For the year ended December 31, 2019 | | | | | | | | | | External revenue | | | $ | 1,852,742 |
| | $ | 15,131 |
| | $ | 22,288 |
| | $ | 1,890,161 |
| Intersegment revenue | | | — |
| | 1,126 |
| | (1,126 | ) | | — |
| Total revenue | | | $ | 1,852,742 |
| | $ | 16,257 |
| | $ | 21,162 |
| | $ | 1,890,161 |
| EBITDA | | | $ | 625,660 |
| | $ | 6,994 |
| | $ | (27,855 | ) | | $ | 604,799 |
| Capital expenditures | | | $ | 308,781 |
| | $ | — |
| | $ | — |
| | $ | 308,781 |
| | | (In thousands) | | | | | | | | | For the year ended December 31, 2018 | | | | | | | | | | | | | | | | | External revenue | | $ | 1,716,169 |
| | $ | 355,734 |
| | $ | 25,760 |
| | $ | 2,097,663 |
| | $ | 1,716,169 |
| | $ | 27,009 |
| | $ | 23,658 |
| | $ | 1,766,836 |
| Intersegment revenue | | $ | 359 |
| | $ | 2,324 |
| | $ | (2,683 | ) | | $ | — |
| | 359 |
| | 222 |
| | (581 | ) | | — |
| Total revenue | | $ | 1,716,528 |
| | $ | 358,058 |
| | $ | 23,077 |
| | $ | 2,097,663 |
| | $ | 1,716,528 |
| | $ | 27,231 |
| | $ | 23,077 |
| | $ | 1,766,836 |
| EBITDA | | $ | 601,319 |
| | $ | 308,058 |
| | $ | (15,474 | ) | | $ | 893,903 |
| | $ | 601,319 |
| | $ | 17,764 |
| | $ | (15,473 | ) | | $ | 603,610 |
| Capital expenditures | | $ | 390,108 |
| | $ | (76,582 | ) | | $ | 15 |
| | $ | 313,541 |
| | $ | 390,108 |
| | $ | (76,757 | ) | | $ | 15 |
| | $ | 313,366 |
| | | | | | | | | | | For the year ended December 31, 2017 | | | | | | | | | | | | | | | | | External revenue | | $ | 1,476,131 |
| | $ | 390,831 |
| | $ | 9,907 |
| | $ | 1,876,869 |
| | $ | 1,476,131 |
| | $ | 30,405 |
| | $ | 8,506 |
| | $ | 1,515,042 |
| Intersegment revenue | | $ | 1,787 |
| | $ | 1,413 |
| | $ | (3,200 | ) | | $ | — |
| | 1,787 |
| | 12 |
| | (1,799 | ) | | — |
| Total revenue | | $ | 1,477,918 |
| | $ | 392,244 |
| | $ | 6,707 |
| | $ | 1,876,869 |
| | $ | 1,477,918 |
| | $ | 30,417 |
| | $ | 6,707 |
| | $ | 1,515,042 |
| EBITDA | | $ | 475,222 |
| | $ | 315,285 |
| | $ | (42,415 | ) | | $ | 748,092 |
| | $ | 475,222 |
| | $ | 16,074 |
| | $ | (42,415 | ) | | $ | 448,881 |
| Capital expenditures | | $ | 376,502 |
| | $ | 20,725 |
| | $ | — |
| | $ | 397,227 |
| | $ | 376,502 |
| | $ | 20,026 |
| | $ | — |
| | $ | 396,528 |
| For the year ended December 31, 2016 | | | | | | | | | | External revenue | | $ | 1,389,152 |
| | $ | 406,970 |
| | $ | 3,671 |
| | $ | 1,799,793 |
| | Intersegment revenue | | $ | 3,209 |
| | $ | 690 |
| | $ | (3,899 | ) | | $ | — |
| | Total revenue | | $ | 1,392,361 |
| | $ | 407,660 |
| | $ | (228 | ) | | $ | 1,799,793 |
| | EBITDA | | $ | 477,165 |
| | $ | 341,516 |
| | $ | (36,174 | ) | | $ | 782,507 |
| | Capital expenditures | | $ | 322,362 |
| | $ | 58,925 |
| | $ | — |
| | $ | 381,287 |
| |
The following table reconciles total consolidated EBITDA to reported “Income before income taxes” in our consolidated statements of operations and comprehensive income (loss):
| | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2018 | | 2017 | | 2016 | | | (In thousands) | EBITDA | | $ | 893,903 |
| | $ | 748,092 |
| | $ | 782,507 |
| Interest income and expense, net | | (200,617 | ) | | (213,526 | ) | | (174,600 | ) | Depreciation and amortization | | (551,416 | ) | | (496,798 | ) | | (414,133 | ) | Net income attributable to noncontrolling interests | | 1,842 |
| | 1,583 |
| | 1,706 |
| Income before income taxes | | $ | 143,712 |
| | $ | 39,351 |
| | $ | 195,480 |
|
Geographic Information and Transactions with Major Customers
Geographic Information. Revenue is attributed to geographic regions based upon the location where the goods and services are provided. North America revenue includes transactions with customers in the U.S. and its territories, Mexico and Canada. Central and South America revenue includes transactions with customers in Brazil, Colombia, Peru, Ecuador and other countries in this region. All other revenue includes transactions with customers in Asia, Africa, Australia, Europe, and the Middle East. The following table summarizes total long-lived assets and revenue attributed to the North America, South and Central America and other foreign locations.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
| | | | | | | | | | | | As of December 31, | Long-lived assets: | | 2018 | | 2017 | | | (In thousands) | | | | | | North America | | $ | 3,311,208 |
| | $ | 3,482,462 |
| Central and South America | | 192,860 |
| | 28,360 |
| All other | | 91,798 |
| | 270,689 |
| Total long-lived assets | | $ | 3,595,866 |
| | $ | 3,781,511 |
|
| | | | | | | | | | | | | | | | For the Years Ended December 31, | Revenue: | | 2018 | | 2017 | | 2016 | | | (In thousands) | | | | | | | | North America | | $ | 1,806,540 |
| | $ | 1,511,096 |
| | $ | 1,469,666 |
| Central and South America | | 101,632 |
| | 89,928 |
| | 86,236 |
| All other | | 189,491 |
| | 275,845 |
| | 243,891 |
| Total revenue | | $ | 2,097,663 |
| | $ | 1,876,869 |
| | $ | 1,799,793 |
|
Transactions with Major Customers. For the years ended December 31, 2018, 2017 and 2016, our revenue included sales to one major customer. The following table summarizes sales to this customer and its percentage of total revenue.
| | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2018 | | 2017 | | 2016 | | | (In thousands) | Total revenue: | | | | | | | DISH Network: | | | | | | | Hughes segment | | $ | 50,275 |
| | $ | 82,625 |
| | $ | 107,300 |
| EchoStar Satellite Services segment | | 309,815 |
| | 344,841 |
| | 349,549 |
| Corporate and Other | | 6,537 |
| | 6,653 |
| | 1,538 |
| Total DISH Network | | 366,627 |
| | 434,119 |
| | 458,387 |
| All other | | 1,731,036 |
| | 1,442,750 |
| | 1,341,406 |
| Total revenue | | $ | 2,097,663 |
| | $ | 1,876,869 |
| | $ | 1,799,793 |
| | | | | | | | Percentage of total revenue: | | | | | | | DISH Network | | 17.5 | % | | 23.1 | % | | 25.5 | % | All other | | 82.5 | % | | 76.9 | % | | 74.5 | % |
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
The following table reconciles total consolidated EBITDA to reported Income (loss) from continuing operations before income taxes in the Consolidated Statements of Operations: | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | EBITDA | | $ | 604,799 |
| | $ | 603,610 |
| | $ | 448,881 |
| Interest income | | 57,730 |
| | 59,104 |
| | 31,952 |
| Interest expense, net of amounts capitalized | | (272,218 | ) | | (231,169 | ) | | (213,166 | ) | Depreciation and amortization | | (464,797 | ) | | (426,852 | ) | | (370,418 | ) | Net income (loss) attributable to non-controlling interests | | (11,335 | ) | | 1,842 |
| | 1,583 |
| Income (loss) from continuing operations before income taxes | | $ | (85,821 | ) | | $ | 6,535 |
| | $ | (101,168 | ) |
Geographic Information
The following table summarizes total long-lived assets attributed to the North America, South and Central America and other foreign locations: | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | | | | Long-lived assets: | | | | | North America | | $ | 2,419,750 |
| | $ | 2,585,421 |
| South and Central America | | 310,172 |
| | 192,860 |
| All other | | 76,296 |
| | 91,798 |
| Total long-lived assets | | $ | 2,806,218 |
| | $ | 2,870,079 |
|
NOTE 15.19. QUARTERLY FINANCIAL DATA (UNAUDITED) Our quarterly results of operations are summarized as follows: | | | | | | | | | | | | | | | | | | | | For the Three Months Ended | | | March 31 | | June 30 | | September 30 | | December 31 (1) | | | (In thousands) | Year Ended December 31, 2018 | | | | | | | | | Total revenue | | $ | 502,895 |
| | $ | 527,596 |
| | $ | 534,855 |
| | $ | 532,317 |
| Operating income | | $ | 80,664 |
| | $ | 98,778 |
| | $ | 94,320 |
| | $ | 69,949 |
| Net income | | $ | 20,381 |
| | $ | 40,693 |
| | $ | 28,920 |
| | $ | 7,349 |
| Net income attributable to HSS | | $ | 20,001 |
| | $ | 40,231 |
| | $ | 28,470 |
| | $ | 6,799 |
| | | | | | | | | | Year Ended December 31, 2017 | | | | | | | | | Total revenue | | $ | 430,118 |
| | $ | 462,265 |
| | $ | 478,362 |
| | $ | 506,124 |
| Operating income | | $ | 60,690 |
| | $ | 53,034 |
| | $ | 68,919 |
| | $ | 66,969 |
| Net income | | $ | 9,427 |
| | $ | 302 |
| | $ | 11,483 |
| | $ | 276,341 |
| Net income attributable to HSS | | $ | 9,135 |
| | $ | 120 |
| | $ | 10,951 |
| | $ | 275,764 |
|
| | | | | | | | | | | | | | | | | | | | For the Three Months Ended | | | December 31 | | September 30 | | June 30 | | March 31 | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | Total revenue | | $ | 500,600 |
| | 473,121 |
| | $ | 461,241 |
| | $ | 455,199 |
| Operating income (loss) | | 45,088 |
| | 45,433 |
| | 13,962 |
| | 46,469 |
| Net income (loss) | | (62,828 | ) | | (2,690 | ) | | 1,609 |
| | 23,032 |
| Net income (loss) from continuing operations attributable to HSS | | (51,658 | ) | | (14,275 | ) | | (19,650 | ) | | (498 | ) | Net income (loss) attributable to HSS | | (52,852 | ) | | 107 |
| | 977 |
| | 22,226 |
| | | | | | | | | | Year Ended December 31, 2018 | | | | | | | | | Total revenue | | $ | 455,113 |
| | $ | 457,650 |
| | $ | 439,667 |
| | $ | 414,406 |
| Operating income (loss) | | 34,089 |
| | 57,956 |
| | 52,331 |
| | 33,606 |
| Net income (loss) | | 7,349 |
| | 28,920 |
| | 40,693 |
| | 20,381 |
| Net income (loss) from continuing operations attributable to HSS | | (12,513 | ) | | 1,688 |
| | 7,697 |
| | (10,794 | ) | Net income (loss) attributable to HSS | | 6,799 |
| | 28,470 |
| | 40,231 |
| | 20,001 |
|
| | (1) | Net income for the three months ended December 31, 2017 include a discrete income tax benefit of $283 million related to the enactment of federal tax legislation in December 2017 and an impairment loss of $6 million relating to our regulatory authorizations with indefinite lives. See Note 11 for additional information relating to the income tax benefit. |
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As the result of an immaterial adjustment recorded in the third quarter of 2019, amounts may not be comparable to amounts previously reported.
NOTE 16.20. RELATED PARTY TRANSACTIONS EchoStar - ECHOSTAR
We and EchoStar, including EchoStar’s other subsidiaries, have agreed that we shall each have the right, but not the obligation, to receive from the other certain shared corporate services, including among other things: treasury, tax, accounting and reporting, risk management, cybersecurity, legal, internal audit, human resources, and information technology. These shared corporate services are generally provided at cost. Effective March 2017, and as a result of the Share Exchange, we implemented a new methodology for determining the cost of these shared corporate services. We and EchoStar, including EchoStar’s other subsidiaries, may each terminate a particular shared corporate service for any reason upon at least 30 days’ notice. We recorded net expenses for shared corporate services received from EchoStar and it other subsidiaries of $16$2.1 million, $22$16.2 million and $17$22.2 million for the years ended December 31, 2019, 2018 2017 and 2016,2017, respectively.
We also reimburse EchoStar and its other subsidiaries from time to time for amounts paid by EchoStar and its other subsidiaries for costs and expenses attributable to us, and EchoStar and its other subsidiaries similarly reimburse us from time to time for amounts paid by us for costs and expenses attributable to EchoStar and its other subsidiaries. We report net payments under these arrangements in Advances tofrom affiliates, net within current assets and we report net receipts under these arrangements in Advances from affiliates, net within current liabilities in our Consolidated Balance Sheets. No repayment schedule for these net advances has been determined. In addition, we occupy certain office space in buildings owned or leased by EchoStar and its other subsidiaries and pay a portion of the taxes, insurance, utilities and maintenance of the premises in accordance with the percentage of the space we occupy.
EchoStar and certain of its other subsidiaries have also provided cash advances to certain of our foreign subsidiaries to fund certain expenditures pursuant to loan agreements that mature in 2021 and 2022. Advances under these agreements bear interest at annual rates ranging from one1 to three3 percent, subject to periodic adjustment based on the one-year U.S. LIBOR rate. We report amounts payable under these agreements in Advances from affiliates, net within noncurrent liabilities in our Consolidated Balance Sheets.
BSS Transaction. Pursuant to the pre-closing restructuring contemplated by the Master Transaction Agreement, and as part of the BSS Transaction, we and our subsidiaries transferred certain of the BSS Business to BSS Corp., and we distributed all of the shares of BSS Corp. to EchoStar as a dividend. See Note 1. Organization and Business Activities for further information.
Contribution of EchoStar XIX Satellite. On February 1, 2017, EchoStar contributed the EchoStar XIX satellite and assigned the related construction contract with the satellite manufacturer to us. We recorded a $349$349.0 million increase in Additional paid-in capital, reflecting EchoStar’s $514$514.0 million carrying amount of the satellite, including capitalized
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
interest that was previously charged to expense in our consolidated financial statements, less related deferred taxes of $165$165.0 million.
EchoStar XXI and EchoStar XXIII Launch Facilitation and Operational Control Agreements.Agreement. As part of applying for the launch licenseslicense for the EchoStar XXI and XXIII satellitessatellite through the UK Space Agency, we and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”),EOC, entered into agreementsan agreement in June 2015 and March 2016 to transfer to us EOC’s launch service contractscontract for the EchoStar XXI and EchoStar XXIII satellites, respectively,satellite and to grant us certain rights to control theits in-orbit operations of these satellites.operations. EOC retained ownership of the satellitessatellite and agreed to make additional payments to us.us for amounts that we are required to pay under boththe launch service contracts.contract. In 2016, we recorded additions to Other noncurrentnon-current assets, net and corresponding increases in Additional paid-in capital in our Consolidated Balance Sheet to reflect EOC’s cumulative payments under the launch service contractscontract prior to the transfer datesdate and to reflect EOC’s funding of additional cash payments to the launch service provider. The EchoStar XXIII and the EchoStar XXI satellites weresatellite was successfully launched in March 2017 and June 2017, respectively.2017. We recorded decreases in Other noncurrentnon-current assets, net and Additional paid-in capital of $62$83.0 million, and $83 million, respectively, representing the carrying amountsamount of the launch service contractscontract at the time of launch to reflect the consumption of the contracts’contract’s economic benefits by EOC, the ownerEOC.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Share Exchange.Exchange Agreement. Prior to consummation of the Share Exchange, EchoStar was required to complete steps necessary for the transferring of certain assets and liabilities to DISH and certain of its subsidiaries. As part of these steps, subsidiaries of EchoStar that, prior to the consummation of the Share Exchange, owned EchoStar’s business of providing online video delivery and satellite video delivery for broadcasters and pay-TV operators, including satellite uplinking/downlinking, transmission services, signal processing and conditional access management, and other services and related assets and liabilities were contributed to one of our subsidiaries in consideration for additional shares of HSS’ common stock that were then issued to a subsidiary of EchoStar. Certain data center assets that were included in the contribution of certain assets and liabilities to one of our subsidiaries were not included in the Share Exchange and continue to be owned by us and are pledged as collateral to support our obligations under the indentures relating to our Secured Notes.
EchoStar Mobile Limited Service Agreements. We provide services and lease equipment to support the business of EchoStar Mobile Limited, a subsidiary of EchoStar that is licensed by the European Union and its member states (“EU”) to provide mobile satellite services and complementary ground component services covering the entire EU using S-band spectrum. Generally, the amounts EchoStar’s other subsidiaries pay for these services are based on cost plus a fixed margin. We have converted the receivables for certain of these services into loans, bearing an annual interest rate of 5%5.0%, that mature in 2023. We recorded revenue in Services and other revenue - otherof $19$19.5 million, $19.2 million and $3$2.7 million for the yearyears ended December 31, 2019, 2018 and 2017, respectively, related to these services.
DBS Transponder Lease.EchoStar leases satellite capacity from us on eight DBS transponders on the QuetzSat-1 satellite through November 2021, after which EchoStar has certain options to renew the agreement on a year-to year basis through the end of life of the QuetzSat-1 satellite. We recorded revenue in connection with this agreement of approximately $23 million for each of the years ended December 31, 2018, 2017 and 2016. As of December 31, 2018 and 2017, we had related trade accounts receivable of approximately $6 million and $8 million, respectively.
Construction Management Services for EchoStar XXIV satellite. In August 2017, a subsidiary of EchoStar entered into a contract with Space Systems Loral, LLC for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite, with a planned 2021 launch. We provide construction management services to EchoStar’s subsidiary for the construction of the EchoStar XXIV satellite. We charged EchoStarEchoStar’s subsidiary and reduced our operating expenses by the costs of such services of $1$1.5 million, $1.1 million and $0.4 million for the years ended December 31, 2019, 2018 and 2017, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 21. RELATED PARTY TRANSACTIONS - Continued
DISH NETWORK
DISH NetworkOverview
Following the Spin-off, EchoStar and DISH have operated as separate publicly-traded companies. In addition, prior to the consummation of the Share Exchange in February 2017, DISH Network owned the Tracking Stock, which represented an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment. Following the consummation of the Share Exchange, the Tracking Stock was retired.companies since 2008. A substantial majority of the voting power of the shares of each of EchoStar and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established by Mr. Ergen for the benefit of his family. In addition, prior to the consummation of the Share Exchange in February 2017, DISH Network owned the Tracking Stock, which represented an aggregate 80% economic interest in the residential retail satellite broadband business of our Hughes segment. Following the consummation of the Share Exchange, the Tracking Stock was retired.
In connection with and following both the Spin-off, and the Share Exchange and the BSS Transaction, EchoStar, we and certain other of EchoStar’s subsidiaries and DISH and certain of its subsidiariesNetwork entered into certain agreements pursuant to which we, and EchoStar and certain of its other subsidiaries, on the one hand, obtain certain products, services and rights from DISH Network;Network, on the other hand; DISH Network, on the one hand, obtains certain products, services and rights from us, and EchoStar and certain of its other subsidiaries, on the other hand; and such entities indemnify each other against certain liabilities arising from thetheir respective businesses. We and/or EchoStar also may enter into additional agreements with DISH Network in the future. Generally, the amounts we and/or EchoStar and its other subsidiaries or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below), which varies depending on the nature of the products and services provided.
We and/or EchoStar and its other subsidiaries may also enter into additional agreements with DISH Network in the future.
The following is a summary of the transactions and the terms of ourthe underlying principal agreements with DISH Network that have had or may have an impact on our consolidated financial condition and results of operations.
Services and Other Revenue — DISH Network
A summary of our Services and other revenue - DISH Network follows:
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Services and other revenue - DISH Network | | $ | 40,014 |
| | $ | 60,926 |
| | $ | 96,750 |
|
A summary of the related trade accounts receivable follows: | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | | | | Trade accounts receivable - DISH Network | | $ | 8,876 |
| | $ | 13,550 |
|
Satellite Capacity Leased to DISH Network. We have entered into certain agreementsan agreement and have previously entered into a now terminated agreement to lease satellite capacity pursuant to which we providehave provided satellite services to DISH Network on certain satellites owned or leased by us. The fees for the services provided under these agreements depend upon, among other things, upon the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite and the length of the service arrangements. The terms of each service arrangement isthese agreements are set forth below: EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV. In March 2014, as part of the Satellite and Tracking Stock Transaction, described below in Other Agreements - DISH Network, we began leasing certain satellite capacity to DISH Network on the EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites. These agreements to lease satellite capacity generally terminate upon the earlier of: (i) the end of life of the satellite; (ii) the date the satellite fails; or (iii) a certain date, which depends upon, among other things, the estimated useful life of the satellite. DISH Network generally has the option to renew each agreement to lease satellite capacity on a year-to-year basis through the end of the respective satellite’s life. There can be no assurance that any options to renew such agreements will be exercised. The agreement to lease satellite capacity on the EchoStar VII satellite expired at the end of June 2018.
EchoStar IX. Effective January 2008, DISH Network began leasing satellite capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue leasing satellite capacity from us on the EchoStar IX satellite on a month-to-month basis. EchoStar XII. DISH Network leased satellite capacity from us on the EchoStar XII satellite. The agreement to lease satellite capacity expired at the end of September 2017.
EchoStar XVI. In December 2009, we entered into an initial ten-year agreement to lease satellite capacity to DISH Network, pursuant to which DISH Network has leased satellite capacity from us on the EchoStar XVI satellite since January 2013. Effective December 2012, we and DISH Network amended the agreement to, among other things, change the initial term to generally expire upon the earlier of: (i) the end-of-life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided under the agreement fails; or (iv) four years following the actual service commencement date. In July 2016, we and DISH Network further amended the agreement to, among other things, extend the initial term by one additional year through January 2018 and to reduce the term of the first renewal option by one year. In May 2017, DISH Network renewed the agreement through January 2023. DISH Network has the option to renew for an additional five-year period prior to expiration of the current term. There can be no assurance that such option to renew this agreement will be exercised. In the event that DISH Network does not exercise its five-year renewal option, DISH Network has
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
the option to purchase the EchoStar XVI satellite for a certain price. If DISH Network does not elect to purchase the EchoStar XVI satellite at that time, we may sell the EchoStar XVI satellite to a third party and DISH Network is required to pay us a certain amount in the event we are not able to sell the EchoStar XVI satellite for more than a certain amount. We and DISH Network have amended the agreement to allow DISH Network to place and use certain satellites at the 61.5 degree west longitude orbital location.
Nimiq 5 Agreement.In September 2009, we entered into a fifteen-year agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we also entered into an agreement with DISH Network, pursuant to which DISH Network leases satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”).
Under the terms of the DISH Nimiq 5 Agreement, DISH Network makes certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service, and continue through the service term. Unless earlier terminated under the terms and conditions of the DISH Nimiq 5 Agreement, the service term will expire in October 2019. Upon expiration of the initial term, DISH Network has the option to renew the DISH Nimiq 5 Agreement on a year-to-year basis through the end of life of the Nimiq 5 satellite. Upon in-orbit failure or end of life of the Nimiq 5 satellite, and in certain other circumstances, DISH Network has certain rights to lease satellite capacity from us on a replacement satellite. There can be no assurance that any options to renew the DISH Nimiq 5 Agreement will be exercised or that DISH Network will exercise its option to lease satellite capacity on a replacement satellite.
QuetzSat-1 Agreement.In November 2008, we entered into a ten-year agreement to lease satellite capacity from SES Latin America, which provides, among other things, for the provision by SES Latin America to us of leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into an agreement pursuant to which DISH Network leases from us satellite capacity on 24 of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location. In February 2013, EchoStar and DISH Network entered into an agreement pursuant to which EchoStar leases back from DISH Network certain satellite capacity on five DBS transponders on the QuetzSat-1 satellite through November 2021, unless extended or earlier terminated under the terms and conditions of our agreement.
Under the terms of our contractual arrangements with DISH Network, we began leasing satellite capacity to DISH Network on the QuetzSat-1 satellite in February 2013 and will continue leasing such capacity through November 2021, unless extended or earlier terminated under the terms and conditions of our agreement with DISH Network for the QuetzSat-1 satellite. Upon expiration of the initial service term, DISH Network has the option to renew the agreement for the QuetzSat-1 satellite on a year-to-year basis through the end of life of the QuetzSat-1 satellite. Upon an in-orbit failure or end of life of the QuetzSat-1 satellite, and in certain other circumstances, DISH Network has certain rights to lease satellite capacity from us on a replacement satellite. There can be no assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to lease satellite capacity on a replacement satellite.
103 Degree Orbital Location/SES-3. In May 2012, we entered into a spectrum development agreement (the “103 Spectrum Development Agreement”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rights at the 103 degree west longitude orbital location (the “103 Spectrum Rights”). In June 2013, we and DISH Network entered into a spectrum development agreement (the “DISH 103 Spectrum Development Agreement”) pursuant to which DISH Network may use and develop the 103 Spectrum Rights. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Spectrum Development Agreement and we exercised our right to terminate the 103 Spectrum Development Agreement.
In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a ten-year agreement with Ciel pursuant to which we leased certain satellite capacity from Ciel on the SES-3 satellite at the 103 degree west longitude orbital location (the “Ciel 103 Agreement”). In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network leased certain satellite capacity from us on the SES-3 satellite (the “DISH 103 Agreement”). Under the terms of the DISH 103 Agreement, DISH Network made certain monthly
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
payments to us through the service term. Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Agreement and we exercised our right to terminate the Ciel 103 Agreement.
TT&CTelesat Obligation Agreement. Effective January 2012, we entered into a TT&C agreement pursuant to which we provided TT&C servicesWe transferred the Telesat Transponder Agreement to DISH Network for a period ending in December 2016 (the “TT&C Agreement”). Weas part of the BSS Transaction; however, we retained certain obligations related to DISH Network’s performance under that agreement. In September 2019, we and DISH Network have amended the TT&C Agreement over time to, among other things, extend the term through February 2023. The fees for services provided under the TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided.entered into an agreement whereby DISH Network is able to terminate the TT&C Agreement for any reason upon 12 months’ notice.
Effective March 2014, we provide TT&C services for the D-1 and EchoStar XV satellites; however, for the period that we received satellite services on the EchoStar XV satellite from DISH Network, we waived the fees for the TT&C services on the EchoStar XV satellite. Effective August 2016, we provide TT&C services to DISH Network for the EchoStar XVIII satellite.
Real Estate Lease. Prior to the Share Exchange, EchoStar leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection with the Share Exchange, EchoStar transferred ownership of a portion of this property to DISH Network and contributed a portion to us and we amended the agreement to (i) terminate the lease for the transferred space and (ii) provide for a continued lease to DISH Network of the portion of the property contributed tocompensates us for a period ending in December 2031. The rent on a per square foot basis for the lease is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and DISH Network is responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. After December 2031, this agreement may be converted by mutual consent to a month-to-month lease agreement with either party having the right to terminate upon 30 days’ notice.retaining such obligations.
TerreStar Agreement. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and ourEchoStar’s completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment. In December 2017, we and DISH Network amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DISH Network generally has the right to continue to receive warranty services from us for our products on a month-to-month basis unless terminated by DISH Network upon at least 21 days’days ’ written notice to us. DISH Network generally has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis unless operations and maintenance services are terminated by DISH Network upon at least 90 days’
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
written notice to us. The provision of hosting services will continue until May 2022. In addition, DISH Network generally may terminate any and all services for convenience subject to providing us with prior notice and/or payment of termination charges.
Hughes Broadband Distribution Agreement. Effective October 2012, we and DISH Network, entered into a distribution agreement (the “Distribution Agreement”) pursuant to which DISH Network has the right, but not the obligation, to market, sell and distribute our HughesNet satellite internet service (the “HughesNet service”).service. DISH Network pays us a monthly per subscriber wholesale service fee for the HughesNet service based upon a subscriber’s service level and based upon certain volume subscription thresholds. The Distribution Agreement also provides that DISH Network has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the HughesNet service. The Distribution Agreement had an initial term offive years with automatic renewal for successive one year terms unless terminated by either party with a written notice at least 180 daysdays’ before the expiration of the then-current term. In February 2014, we and DISH Network entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, we and DISH Network will continue to provide our HughesNet service to the then-current DISH Network subscribers pursuant to the terms and conditions of the Distribution Agreement.
DBSD North America Agreement. 100%In March 2012, DISH Network completed its acquisition of all of the equity of reorganized DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and ourEchoStar’s completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and ground-based communicatIn March 2012, DISH Network completed its acquisition of 100% of the equity of reorganized DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and our completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway an
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
ions equipment. In December 2017, we and DBSD North America amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DBSD North America has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis, unless terminated by DBSD North America upon at least 120 days’ written notice to us. In February 2019, we further amended these agreements to provide DBSD North America with the right to continue to receive warranty services from us on a month-to-month basis until December 2023, unless terminated by DBSD North America upon at least 21 days’ written notice to us. The provision of hosting services will continue until February 2022 and will automatically renew for an additional five-year period until February 2027 unless terminated by DBSD North America upon at least 180 days’ written notice to us. In addition, DBSD North America generally may terminate any and all such services for convenience, subject to providing us with prior notice and/or payment of termination charges.d ground-based communications equipment. In December 2017, we and DBSD North America amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DBSD North America has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis, unless terminated by DBSD North America upon at least 120 days’ written notice to us. In February 2019, we further amended these agreements to provide DBSD North America with the right to continue to receive warranty services from us on a month-to-month basis until December 2023, unless terminated by DBSD North America upon at least 21 days’ written notice to us. The provision of hosting services will continue until February 2022 and will automatically renew for an additional five-year period until February 2027 unless terminated by DBSD North America upon at least 180 days’ written notice to us. In addition, DBSD North America generally may terminate any and all such services for convenience, subject to providing us with prior notice and/or payment of termination charges.
RUS Implementation Agreement. In September 2010, DISH Network was selected by the Rural Utilities Service (“RUS”) of the U.S. Department of Agriculture to receive up to approximately $14 million in broadband stimulus grant funds. Effective November 2011, we and DISH Network entered into a RUS Implementation Agreement (the “RUS Agreement”) pursuant to which we provided certain portions of the equipment and broadband service used to implement DISH Network’s RUS program. While the RUS Agreement expired in June 2013 when the broadband stimulus grant funds were exhausted, we are required to continue providing services to DISH Network’s customers activated prior to the expiration of the RUS Agreement in accordance with the terms and conditions of the RUS Agreement.
Hughes Equipment and Services Agreement. In February 2019, we and DISH Network entered into an agreement pursuant to which we will sell to DISH Network our HughesNet Service and HughesNet equipment that has been modified to meet DISH Network’s internet-of-things specifications for the transfer of data to DISH Network’s network operations centers. This agreement has an initial term of five years expiring February 2024 with automatic renewal for successive one-year terms unless terminated by DISH Network with at least 180 days’days‘ written notice to us or by us with at least 365 days’ written notice to DISH Network.
General and AdministrativeOperating Expenses — DISH Network
A summary of our operating expenses - DISH Network follows: | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Operating expenses - DISH Network | | $ | 3,684 |
| | $ | 3,602 |
| | $ | 3,485 |
|
A summary of the related trade accounts payable follows:
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | | | | Trade accounts payable - DISH Network | | $ | 502 |
| | $ | 752 |
|
Amended and Restated Professional Services Agreement.Agreement. In connection with the Spin-off, EchoStar entered into various agreements with DISH Network including a transition services agreement, satellite procurement agreement and services agreement, all of which all expired in January 2010 and were replaced by a professional services agreement (the “Professional Services Agreement”). In January 2010, EchoStar and DISH Network agreed that EchoStar and its subsidiaries shall continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under a transition services agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Additionally, EchoStar and DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage EchoStar and its subsidiaries to manage the process of procuring new satellite capacity for DISH Network (previously provided under a satellite procurement agreement), receive logistics, procurement and quality assurance services from EchoStar and its subsidiaries (previously provided under a services agreement) and provide other support services. In connection with the consummation of the Share Exchange, EchoStar and DISH amended and restated the Professional Services Agreement (the “Amended and Restated Professional Services Agreement”) to provide that EchoStar and its subsidiaries and DISH Network shall have the right to receive additional services that either EchoStar and its subsidiaries or DISH Network may require as a result of the Share Exchange, including access to antennas owned by DISH Network for our use in performing TT&C services and maintenance and support services for our antennas.antennas (collectively, the “TT&C Antennas”). In September 2019, in connection with the BSS Transaction, EchoStar and DISH further amended the Professional Services Agreement (the “Amended and Restated Professional Services Agreement”) to provide that EchoStar and its subsidiaries and DISH Network shall have the right to receive additional services that either EchoStar and its subsidiaries or DISH Network may require as a result of the BSS Transaction and to remove our access to and the maintenance and support services for the TT&C Antennas. A portion of these costs and expenses have been allocated to us in the manner described above under the caption “EchoStar.”in Note 20. Related Party Transactions - EchoStar. The term of the Amended and Restated Professional Services Agreement is through January 20202021 and renews automatically for successive one-year periods thereafter, unless the agreement is terminated earlier by either party upon at least 60 days’ notice. However, either party may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice, unless the statement of work for particular services states otherwise. Certain services being provided for under the Amended and Restated Professional Services Agreement may survive the termination of the agreement.
Real Estate Lease from DISH Network. Effective March 2017, we sublease fromentered into an agreement with DISH Network for certain space at 796 East Utah Valley Drive in American Fork, Utah for a period ending in August 2017. We exercised our option to renew this subleaseagreement for a five-year period ending in August 2022. We and DISH Network amended this agreement to, among other things, terminate this agreement in March 2019. The rent on a per square foot basis for the lease is
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
was comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and we arewere responsible for our portion of the taxes, insurance, utilities and maintenance of the premises.
Collocation and Antenna Space Agreements. We and DISH Network have entered into an agreement pursuant to which DISH Network provides us with collocation space in El Paso, Texas. This agreement was for an initial period ending in August 2015, and provides us with renewal options for four consecutive years. Effective August 2015, we exercised our first renewal option for a period ending in August 2018 and in April 2018 we exercised our second renewal option for a period ending in August 2021. In connection with the Share Exchange, effective March 2017, we also entered into certain agreements pursuant to which DISH Network provides collocation and antenna space to EchoStar through February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In October 2019, we provided a termination notice for our New Braunfels, Texas agreement to be effective May 2020. In August 2017, we and DISH Network also entered into certain other agreements pursuant to which DISH Network provides additional collocation and antenna space to EchoStarus in Monee, Illinois and Spokane, Washington through August 2022. We generallyGenerally, we may renew our collocation and antenna space agreements for three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. We may terminate certain of these agreements with
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
180 days’ prior written notice. The fees for the services provided under these agreements depend on the number of racks leasedlocated at the location.
In connection with the BSS Transaction, in September 2019, we entered into an agreement pursuant to which DISH Network will provide us with antenna space and power in Cheyenne, Wyoming for a period of five years commencing no later than October 2020, with four three-year renewal terms, with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term.
Hughes Broadband Master Services Agreement. In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which 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. Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation services. The Hughes Broadband MSA has an initial term of five years through March 2022 with automatic renewal for successive one-year terms. Either party has the ability to terminate the Hughes Broadband MSA, in whole or in part, for any reason upon at least 90 days’ notice to the other party. Upon expiration or termination of the Hughes Broadband MSA, we will continue to provide our HughesNet service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $17.1 million, $33.2 million and $29.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
2019 TT&C Agreement. In September 2019, in connection with the BSS Transaction, we and a subsidiary of EchoStar entered into an agreement pursuant to which DISH Network provides TT&C services to us and EchoStar and its other subsidiaries for a period ending in September 2021, with the option for a subsidiary of EchoStar to renew for a one-year period upon written notice at least 90 days prior to the initial expiration (the “2019 TT&C Agreement”). The fees for services provided under the 2019 TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. Any party is able to terminate the 2019 TT&C Agreement for any reason upon 12 months’ notice.
Other Agreements —Receivables - DISH Network
SatelliteTax Sharing Agreement. Effective December 2007, EchoStar and Tracking StockDISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs EchoStar and DISH and their respective subsidiaries’ respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network and DISH Network indemnifies EchoStar and its subsidiaries for such taxes. However, DISH Network is not liable for and does not indemnify EchoStar or its subsidiaries for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Code, because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar or its subsidiaries take or fail to take or (iii) any action that EchoStar or its subsidiaries take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, EchoStar and its subsidiaries will be solely liable for, and will indemnify DISH Network for any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
In light of the Tax Sharing Agreement, among other things, and in connection with EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, EchoStar and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of EchoStar’s consolidated tax returns. As a result, DISH Network agreed to pay EchoStar an amount of that includes the federal tax benefit DISH received as a result of our operations.
In August 2018, EchoStar and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, DISH Network is required to compensate EchoStar
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
for certain past and future excess California research and development tax credits generated by EchoStar and its subsidiaries and used by DISH Network.
Other Agreements
Master Transaction Agreement. . In February 2014,May 2019, EchoStar and BSS Corp. entered into the Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred the BSS Business to BSS Corp.; (ii) EchoStar completed the Distribution; and (iii) immediately after the Distribution, (1) BSS Corp. became a wholly-owned subsidiary of DISH such that DISH owns and operates the BSS Business and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Common Stock. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. The Master Transaction Agreement contained customary representations and warranties by the parties, including EchoStar’s representations relating to the assets, liabilities and financial condition of the BSS Business, and representations by DISH Network relating to its financial condition and liabilities. EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively.
BSS Transaction Intellectual Property and Technology License Agreement. Effective September 2019, in connection with the BSS Transaction, we, EchoStar and DISH Network entered into agreements with DISH Network to implement a transactionan intellectual property and technology license agreement (the “BSS IPTLA”) pursuant to which we, EchoStar and its other subsidiaries and DISH Network license to each other certain intellectual property and technology. The BSS IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the BSS IPTLA, we, EchoStar and its other subsidiaries granted to DISH Network a license to our and their intellectual property and technology for use by DISH Network, among other things: (i)things, in March 2014,connection with its continued operation of the BSS Business acquired pursuant to the BSS Transaction, including a limited license to use the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks during a transition period. EchoStar retains full ownership of the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks. In addition, DISH Network granted a license back to us, EchoStar and HSS issuedits other subsidiaries, among other things, for the Tracking Stockcontinued use of all intellectual property and technology that is used in our, EchoStar and its other subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the BSS Transaction.
BSS Transaction Tax Matters Agreement. Effective September 2019, in connection with the BSS Transaction, EchoStar, BSS Corp. and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries’ with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, EchoStar is responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the BSS Transaction and DISH is responsible for all tax returns and tax liabilities for the BSS Business from and after the BSS Transaction.
Both EchoStar and DISH made certain tax-related representations and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both EchoStar and DISH Network have agreed to indemnify each other for certain losses if there is a breach of any the tax representations or violation of any of the tax covenants in the tax matters agreement and that breach or violation results in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar or its stockholders for U.S. federal income tax purposes. In addition, DISH Network has agreed to indemnify EchoStar if the BSS Business is acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons, where either it took an action, or knowingly facilitated, consented to or assisted with an action by its stockholders, that resulted in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar and its stockholders for U.S. federal income tax purposes. This tax matters agreement supplements the Tax Sharing Agreement outlined above and the Share Exchange Tax Matters Agreement outlined below, both of which continue in full force and effect.
BSS Transaction Employee Matters Agreement. Effective September 2019, in connection with the BSS Transaction, EchoStar and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the BSS Business. DISH Network assumed employee-related liabilities relating to the BSS Business as part of the BSS Transaction, except that EchoStar is
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
responsible for certain pre-BSS Transaction compensation and benefits for employees who transferred to DISH Network in exchange for five satellites owned by DISH Network (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) (including assumption of related in-orbit incentive obligations) and approximately $11 million in cash; and (ii) in March 2014, DISH Network began receiving certain satellite services from us as discussed above on these five satellites (collectively,connection with the “Satellite and Tracking StockBSS Transaction.”) The Tracking Stock was retired in March 2017 and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect.
Share Exchange Agreement. OnIn January 31, 2017, EchoStar and certain of its and our subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries pursuant to which, onin February 28, 2017, EchoStar and certain of its and our subsidiaries received all of the shares of the Tracking Stock in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of EchoStar’s EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange, on February 28, 2017, EchoStar no longer operates the transferred EchoStar Technologies businesses and the Tracking Stock was retired and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. Pursuant to the Share Exchange Agreement, EchoStar transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contained customary representations and warranties by the parties, including representations by EchoStar related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. EchoStar and DISH Network have also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by EchoStar or DISH causes the transaction to be taxable to the other party after closing. See Note 1 for further information.
Hughes Broadband Master Services Agreement. In March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our Hughes service and related equipment and other telecommunication services and (ii) installs Hughes service equipment with respect to activations generated by DISH Network. Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation services. The Hughes Broadband MSA has an initial term of five years until March 2022 with automatic renewal for successive one-year terms. Upon expiration or termination of the Hughes Broadband MSA, we will continue to provide our Hughes service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $33 million and $29 million for the year ended December 31, 2018 and 2017, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Share Exchange Intellectual Property and Technology License Agreement. Effective March 2017, in connection with the Share Exchange, EchoStar and one of its other subsidiaries and DISH Network entered into an Intellectual Propertyintellectual property and Technology License Agreementtechnology license agreement (“IPTLA”) pursuant to which we, EchoStar and its other subsidiaries and DISH Network license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, we, EchoStar and its other subsidiaries granted to DISH Network a license to our and their intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the businesses acquired pursuant to the Share Exchange, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, DISH Network granted a license back to us, EchoStar and its other subsidiaries, among other things, for the continued use of all intellectual property and technology that is used in our, EchoStar and its other subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.
Share Exchange Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, EchoStar and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, EchoStar is responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the Share Exchange. Both EchoStar and DISH Network made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both EchoStar and DISH Network have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, DISH Network has agreed to indemnify EchoStar if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The tax matters agreement supplements the Tax Sharing Agreement outlined below,above which continues in full force and effect.
Tax Sharing Agreement. Effective December 2007, EchoStar and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs EchoStar and DISH and their respective subsidiaries’ respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network, and DISH Network indemnifies EchoStar and its subsidiaries for such taxes. However, DISH Network is not liable for and does not indemnify EchoStar or its subsidiaries for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended, because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar or its subsidiaries take or fail to take; or (iii) any action that EchoStar or its subsidiaries take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, EchoStar and its subsidiaries will be solely liable for, and will indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
In light of the Tax Sharing Agreement, among other things, and in connection with EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, EchoStar and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of EchoStar’s consolidated tax returns. As a result, DISH Network agreed to pay EchoStar an amount of that includes the federal tax benefit DISH received as a result of our operations.
In August 2018, EchoStar and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, DISH Network is required to compensate EchoStar for certain past and future excess California research and development tax credits generated by EchoStar and its subsidiaries and used by DISH Network.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Caltech.On October 1, 2013, Caltech Institute of Technology (“Caltech”) filed complaints against us and DISH Network, in the U.S. District Court for the Central District of California alleging infringement of U.S. Patent Nos. 7,116,710; 7,421,032; 7,916,781; and 8,284,833, each of which is entitled “Serial Concatenation of Interleaved Convolutional Codes forming Turbo-Like Codes.” Caltech asserted that encoding data as specified by the DVB-S2 standard infringed each of the asserted patents. Caltech claimed that certain of our satellite broadband products and services, infringed the asserted patents by implementing the DVB-S2 standard. Pursuant to a settlement agreement among us, DISH Network and Caltech, Caltech dismissed with prejudice all of its claims in these actions in May 2016.
NOTE 22. RELATED PARTY TRANSACTIONS - OTHER
Hughes Systique Corporation (“Hughes Systique”)
We contract with Hughes Systique for software development services. In addition to our approximately 43.4%43% ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications, Inc.Inc.. and a member of EchoStar’s board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, in the aggregate, own approximately 25.5%25%, on an undiluted basis, of Hughes Systique’s outstanding shares as of December 31, 2018.2019. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest entity and we are considered the primary beneficiary of Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Systique. As a result, we consolidate Hughes Systique’s financial statements in our accompanyingthese Consolidated Financial Statements.
TerreStar Solutions We own 50.0%
DISH Network owns more than 15% of Deluxe/EchoStar LLCTerreStar Solutions, Inc. (“Deluxe”TSI”), a joint venture that. In May 2018, we and TSI entered into in 2010an equipment and services agreement pursuant to build an advanced digital cinema satellite distributionwhich we design, manufacture and install upgraded ground communications network targeting delivery to digitally equipped theaters in the U.S.equipment for TSI’s network and Canada. We account for our investment in Deluxe using the equity method.provide, among other things, warranty and support services. We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of approximately $4 million, $5$12.5 million and $3$6.0 million for the years ended December 31, 2018, 20172019 and 2016, respectively.2018. As of December 31, 20182019 and 2017,2018, we had $2.7 million and $2.3 million trade accounts receivable from Deluxe of approximately $1 million and $1 million, respectively.TSI.
AsiaSat
We contract with AsiaSat Telecommunications Inc. (“AsiaSat”) for the use of transponder capacity on one of AsiaSat's satellites. Mr. William David Wade, who joined our board of directors in February 2017, served as the Chief Executive Officer of AsiaSat in 2016 and as a senior advisor to the Chief Executive Officer of AsiaSat through March 2017. We incurred expenses payable to AsiaSat under this agreement of approximately $0.1 million for the year ended December 31, 2017.
Global IP
In May 2017, we entered into an agreement with Global-IP Cayman (“Global IP”) providing for the sale of certain equipment and services to Global IP. Mr. William David Wade, a member of EchoStar’s board of directors, servesserved as a member of the board of directors of Global IP and as an executive advisor to the Chief Executive Officer of Global IP.IP from September 2017 until April 2019 and from September 2017 until December 2019, respectively. In August 2018, we and Global IP amended the agreement toto: (i) change certain of the equipment and services to be provided to Global IP;IP, (ii) modify certain payment terms;terms, (iii) provide Global IP an option to use one of our test lab facilities;facilities and (iv) effectuate the assignment of the agreement from Global IP to one of its wholly-owned subsidiaries. In February 2019, we terminated the agreement as a result of Global IP’s defaults resulting from its failure to make payments to us as required under the terms of the agreement and we reserved our rights and remedies against Global IP under the agreement. We recognized revenue under this agreement of approximately $90, $9.0 million and $0.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019 and 2018, and 2017, we had trade accounts receivablewere owed $7.5 million from Global IP of approximately $7.5 million and nil, respectively.IP.
Maxar Technologies Inc
DISH Network owns more than 15%Mr. Jeffrey Tarr, who joined EchoStar’s board of TerreStar Solutions,directors in March 2019, served as a consultant and advisor to Maxar Technologies Inc. and its subsidiaries (“TSI”Maxar Tech”). In through May 2018, we and TSI2019. We previously entered into an equipmentagreements with Maxar Tech for the manufacture and certain other services agreementof the EchoStar IX satellite, the EchoStar XVII satellite, the EchoStar XIX satellite, the EchoStar XXI satellite and the EchoStar XXIV satellite and our former EchoStar XI satellite, EchoStar XIV satellite, EchoStar XVI satellite and EchoStar XXIII satellite. Maxar Tech provides us with anomaly support for these satellites once launched pursuant to which wethe terms of the agreements. Maxar Tech also provides a warranty on one of these satellites and may be required to pay us certain amounts should the satellite not operate according to certain performance specifications. Our obligations to pay Maxar Tech under these agreements during the design manufacture and install upgraded ground communications network equipment for TSI’s network and provides, among other things, warranty and support services.
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
the applicable satellites may be reduced if the applicable satellites do not operate according to certain performance specifications. We recognized revenueincurred aggregate costs payable to Maxar Tech under these agreements of approximately $6$13.2 million for the year ended December 31, 2018. As of December 31, 2018, we had $2 million trade accounts receivable from TSI.2019.
Broadband Connectivity SolutionsAsiaSat
In August 2018,2017, we entered into anhad a contract with AsiaSat Telecommunications Inc. (“AsiaSat”) for the use of transponder capacity on one of AsiaSat's satellites. Mr. William David Wade, who joined EchoStar’s board of directors in February 2017, served as the Chief Executive Officer of AsiaSat in 2016 and as a senior advisor to the Chief Executive Officer of AsiaSat through March 2017. We incurred expenses payable to AsiaSat under this agreement with Al Yah Satellite Communications Company PrJSC (“Yahsat”) to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat's Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100 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. We recognized revenue from BCS for such services and equipment of approximately $0.7$0.1 million for the year ended December 31, 2018. As of December 31, 2018, we had $3 million trade accounts receivable from BCS.2017.
Note 17.NOTE 23. Supplemental Guarantor and Non-Guarantor Financial Information
Certain of our wholly-owned subsidiaries (together, the “Guarantor Subsidiaries”) have fully and unconditionally guaranteed, on a joint and several basis, the obligations of our Notes. See Note 1014. Long-term Debt and Finance Lease Obligations for further information on our Notes.
In lieu of separate financial statements of the Guarantor Subsidiaries, accompanying condensed consolidating financial information prepared in accordance with Rule 3-10(f) of Regulation S-X is presented below, including the accompanying condensed balance sheet information, the accompanying condensed statement of operations and comprehensive
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
income (loss) information and the accompanying condensed statement of cash flows information of HSS, the Guarantor Subsidiaries on a combined basis and the non-guarantor subsidiaries of HSS on a combined basis and the eliminations necessary to arrive at the corresponding information of HSS on a consolidated basis. The indentures governing our Notes contain restrictive covenants that, among other things, impose limitations on our ability and the ability of certain of our subsidiaries to pay dividends or make distributions, incur additional debt, make certain investments, create liens or enter into sale and leaseback transactions, merge or consolidate with another company, transfer and sell assets, enter into transactions with affiliates or allow to exist certain restrictions on the ability of certain of our subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to us.assets.
The accompanying condensed consolidating financial information (amounts in thousands) presented below should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto included herein.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Consolidating Balance Sheet as of December 31, 20182019 (In thousands)
| | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Assets | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 771,718 |
| | $ | 46,353 |
| | $ | 29,752 |
| | $ | — |
| | $ | 847,823 |
| | $ | 1,057,903 |
| | $ | 32,338 |
| | $ | 49,194 |
| | $ | — |
| | $ | 1,139,435 |
| Marketable investment securities, at fair value | | 1,608,123 |
| | 1,073 |
| | — |
| | — |
| | 1,609,196 |
| | Marketable investment securities | | | 652,594 |
| | 241 |
| | — |
| | — |
| | 652,835 |
| Trade accounts receivable and contract assets, net | | — |
| | 128,831 |
| | 72,265 |
| | — |
| | 201,096 |
| | — |
| | 129,722 |
| | 66,798 |
| | — |
| | 196,520 |
| Trade accounts receivable - DISH Network, net | | — |
| | 13,240 |
| | 310 |
| | — |
| | 13,550 |
| | Inventory | | — |
| | 58,607 |
| | 16,772 |
| | — |
| | 75,379 |
| | Advances to affiliates, net | | 109,433 |
| | 536,600 |
| | 27,174 |
| | (569,657 | ) | | 103,550 |
| | Advances to affiliates | | | 93,493 |
| | 523,116 |
| | 17,501 |
| | (502,218 | ) | | 131,892 |
| Other current assets | | 72 |
| | 26,331 |
| | 41,378 |
| | (561 | ) | | 67,220 |
| | 43 |
| | 79,221 |
| | 90,458 |
| | 38 |
| | 169,760 |
| Total current assets | | 2,489,346 |
| | 811,035 |
| | 187,651 |
| | (570,218 | ) | | 2,917,814 |
| | 1,804,033 |
| | 764,638 |
| | 223,951 |
| | (502,180 | ) | | 2,290,442 |
| Property and equipment, net | | — |
| | 2,280,804 |
| | 301,377 |
| | — |
| | 2,582,181 |
| | — |
| | 1,459,151 |
| | 398,430 |
| | — |
| | 1,857,581 |
| Regulatory authorizations | | — |
| | 465,658 |
| | — |
| | — |
| | 465,658 |
| | Operating lease right-of-use assets | | | — |
| | 89,106 |
| | 24,293 |
| | — |
| | 113,399 |
| Goodwill | | — |
| | 504,173 |
| | — |
| | — |
| | 504,173 |
| | — |
| | 504,173 |
| | 2,780 |
| | — |
| | 506,953 |
| Regulatory authorizations, net | | | — |
| | 400,000 |
| | 12,363 |
| | — |
| | 412,363 |
| Other intangible assets, net | | — |
| | 43,952 |
| | — |
| | — |
| | 43,952 |
| | — |
| | 29,321 |
| | — |
| | — |
| | 29,321 |
| Investments in unconsolidated entities | | — |
| | 126,369 |
| | — |
| | — |
| | 126,369 |
| | Other investments, net | | | — |
| | 110,040 |
| | — |
| | — |
| | 110,040 |
| Investment in subsidiaries | | 3,362,589 |
| | 192,370 |
| | — |
| | (3,554,959 | ) | | — |
| | 2,876,572 |
| | 282,163 |
| | — |
| | (3,158,735 | ) | | — |
| Advances to affiliates | | 700 |
| | 86,280 |
| | — |
| | (86,980 | ) | | — |
| | Deferred tax asset | | 54,001 |
| | — |
| | 3,581 |
| | (54,001 | ) | | 3,581 |
| | Other noncurrent assets, net | | — |
| | 236,675 |
| | 12,769 |
| | — |
| | 249,444 |
| | Advances to affiliates, net | | | 700 |
| | 565,412 |
| | 17,161 |
| | (563,514 | ) | | 19,759 |
| Other non-current assets, net | | | 9,972 |
| | 206,781 |
| | 25,396 |
| | (9,972 | ) | | 232,177 |
| Total assets | | $ | 5,906,636 |
| | $ | 4,747,316 |
| | $ | 505,378 |
| | $ | (4,266,158 | ) | | $ | 6,893,172 |
| | $ | 4,691,277 |
| | $ | 4,410,785 |
| | $ | 704,374 |
| | $ | (4,234,401 | ) | | $ | 5,572,035 |
| Liabilities and Shareholders’ Equity | | |
| | |
| | |
| | |
| | |
| | | | | | | | | | | Trade accounts payable | | $ | — |
| | $ | 88,342 |
| | $ | 16,409 |
| | $ | — |
| | $ | 104,751 |
| | $ | — |
| | $ | 102,744 |
| | $ | 18,808 |
| | $ | — |
| | $ | 121,552 |
| Trade accounts payable - DISH Network | | — |
| | 752 |
| | — |
| | — |
| | 752 |
| | Current portion of long-term debt and capital lease obligations | | 918,916 |
| | 39,995 |
| | 666 |
| | — |
| | 959,577 |
| | Current portion of long-term debt and finance lease obligations | | | — |
| | — |
| | 486 |
| | — |
| | 486 |
| Advances from affiliates, net | | 181,926 |
| | 282,268 |
| | 106,331 |
| | (569,657 | ) | | 868 |
| | 202,994 |
| | 240,887 |
| | 69,469 |
| | (502,218 | ) | | 11,132 |
| Accrued expenses and other | | 43,410 |
| | 147,055 |
| | 48,307 |
| | (561 | ) | | 238,211 |
| | Contract liabilities | | | — |
| | 96,485 |
| | 4,575 |
| | — |
| | 101,060 |
| Accrued expenses and other current liabilities | | | 40,700 |
| | 73,696 |
| | 132,365 |
| | 38 |
| | 246,799 |
| Total current liabilities | | 1,144,252 |
| | 558,412 |
| | 171,713 |
| | (570,218 | ) | | 1,304,159 |
| | 243,694 |
| | 513,812 |
| | 225,703 |
| | (502,180 | ) | | 481,029 |
| Long-term debt and capital lease obligations, net | | 2,385,164 |
| | 187,002 |
| | 1,038 |
| | — |
| | 2,573,204 |
| | Long-term debt and finance lease obligations, net of current portion | | | 2,389,168 |
| | — |
| | 565 |
| | — |
| | 2,389,733 |
| Deferred tax liabilities, net | | — |
| | 541,903 |
| | 834 |
| | (54,001 | ) | | 488,736 |
| | — |
| | 390,288 |
| | — |
| | (9,972 | ) | | 380,316 |
| Advances from affiliates | | — |
| | — |
| | 120,418 |
| | (86,980 | ) | | 33,438 |
| | Other noncurrent liabilities | | — |
| | 98,661 |
| | 2,479 |
| | — |
| | 101,140 |
| | Operating lease liabilities | | | — |
| | 77,366 |
| | 19,513 |
| | — |
| | 96,879 |
| Advances from affiliates, net | | | — |
| | 488,488 |
| | 99,006 |
| | (563,514 | ) | | 23,980 |
| Other non-current liabilities | | | — |
| | 65,030 |
| | 905 |
| | — |
| | 65,935 |
| Total HSS shareholders’ equity | | 2,377,220 |
| | 3,361,338 |
| | 193,621 |
| | (3,554,959 | ) | | 2,377,220 |
| | 2,058,415 |
| | 2,875,801 |
| | 282,934 |
| | (3,158,735 | ) | | 2,058,415 |
| Noncontrolling interests | | — |
| | — |
| | 15,275 |
| | — |
| | 15,275 |
| | Non-controlling interests | | | — |
| | — |
| | 75,748 |
| | — |
| | 75,748 |
| Total liabilities and shareholders’ equity | | $ | 5,906,636 |
| | $ | 4,747,316 |
| | $ | 505,378 |
| | $ | (4,266,158 | ) | | $ | 6,893,172 |
| | $ | 4,691,277 |
| | $ | 4,410,785 |
| | $ | 704,374 |
| | $ | (4,234,401 | ) | | $ | 5,572,035 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Consolidating Balance Sheet as of December 31, 2017 (In thousands) 2018
| | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Assets | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 1,746,878 |
| | $ | 42,373 |
| | $ | 33,310 |
| | $ | — |
| | $ | 1,822,561 |
| | $ | 771,718 |
| | $ | 46,353 |
| | $ | 29,752 |
| | $ | — |
| | $ | 847,823 |
| Marketable investment securities, at fair value | | 454,500 |
| | 1,102 |
| | — |
| | — |
| | 455,602 |
| | Marketable investment securities | | | 1,608,123 |
| | 1,073 |
| | — |
| | — |
| | 1,609,196 |
| Trade accounts receivable and contract assets, net | | — |
| | 133,735 |
| | 63,105 |
| | — |
| | 196,840 |
| | — |
| | 128,831 |
| | 72,265 |
| | — |
| | 201,096 |
| Trade accounts receivable - DISH Network | | — |
| | 38,286 |
| | 355 |
| | — |
| | 38,641 |
| | Inventory | | — |
| | 59,711 |
| | 23,884 |
| | — |
| | 83,595 |
| | Advances to affiliates, net | | 119,605 |
| | 229,488 |
| | 7,313 |
| | (241,548 | ) | | 114,858 |
| | Advances to affiliates | | | 109,433 |
| | 536,600 |
| | 27,174 |
| | (569,657 | ) | | 103,550 |
| Other current assets | | 64 |
| | 98,890 |
| | 31,788 |
| | (401 | ) | | 130,341 |
| | 72 |
| | 94,695 |
| | 58,460 |
| | (561 | ) | | 152,666 |
| Current assets of discontinued operations | | | — |
| | 3,483 |
| | — |
| | — |
| | 3,483 |
| Total current assets | | 2,321,047 |
| | 603,585 |
| | 159,755 |
| | (241,949 | ) | | 2,842,438 |
| | 2,489,346 |
| | 811,035 |
| | 187,651 |
| | (570,218 | ) | | 2,917,814 |
| Property and equipment, net | | — |
| | 2,459,703 |
| | 293,395 |
| | — |
| | 2,753,098 |
| | — |
| | 1,620,534 |
| | 301,377 |
| | — |
| | 1,921,911 |
| Regulatory authorizations | | — |
| | 465,658 |
| | — |
| | — |
| | 465,658 |
| | Goodwill | | — |
| | 504,173 |
| | — |
| | — |
| | 504,173 |
| | — |
| | 504,173 |
| | — |
| | — |
| | 504,173 |
| Regulatory authorizations, net | | | — |
| | 400,043 |
| | — |
| | — |
| | 400,043 |
| Other intangible assets, net | | — |
| | 58,582 |
| | — |
| | — |
| | 58,582 |
| | — |
| | 43,952 |
| | — |
| | — |
| | 43,952 |
| Investments in unconsolidated entities | | — |
| | 30,587 |
| | — |
| | — |
| | 30,587 |
| | Other investments, net | | | — |
| | 126,369 |
| | — |
| | — |
| | 126,369 |
| Investment in subsidiaries | | 3,260,790 |
| | 204,208 |
| | — |
| | (3,464,998 | ) | | — |
| | 3,362,589 |
| | 192,370 |
| | — |
| | (3,554,959 | ) | | — |
| Advances to affiliates | | 700 |
| | 80,744 |
| | — |
| | (81,444 | ) | | — |
| | Advances to affiliates, net | | | 700 |
| | 86,280 |
| | — |
| | (86,980 | ) | | — |
| Deferred tax asset | | 110,546 |
| | — |
| | 3,700 |
| | (110,546 | ) | | 3,700 |
| | 54,001 |
| | — |
| | 3,581 |
| | (54,001 | ) | | 3,581 |
| Other noncurrent assets, net | | — |
| | 185,839 |
| | 13,275 |
| | — |
| | 199,114 |
| | Other non-current assets, net | | | — |
| | 220,099 |
| | 12,769 |
| | — |
| | 232,868 |
| Non-current assets of discontinued operations | | | — |
| | 742,461 |
| | — |
| | — |
| | 742,461 |
| Total assets | | $ | 5,693,083 |
| | $ | 4,593,079 |
| | $ | 470,125 |
| | $ | (3,898,937 | ) | | $ | 6,857,350 |
| | $ | 5,906,636 |
| | $ | 4,747,316 |
| | $ | 505,378 |
| | $ | (4,266,158 | ) | | $ | 6,893,172 |
| Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | Trade accounts payable | | $ | — |
| | $ | 82,300 |
| | $ | 20,516 |
| | $ | — |
| | $ | 102,816 |
| | $ | — |
| | $ | 88,342 |
| | $ | 16,409 |
| | $ | — |
| | $ | 104,751 |
| Trade accounts payable - DISH Network | | — |
| | 3,769 |
| | — |
| | — |
| | 3,769 |
| | Current portion of long-term debt and capital lease obligations | | — |
| | 35,886 |
| | 4,745 |
| | — |
| | 40,631 |
| | Current portion of long-term debt and finance lease obligations | | | 918,916 |
| | — |
| | 666 |
| | — |
| | 919,582 |
| Advances from affiliates, net | | — |
| | 185,161 |
| | 56,864 |
| | (241,548 | ) | | 477 |
| | 181,926 |
| | 282,268 |
| | 106,331 |
| | (569,657 | ) | | 868 |
| Accrued expenses and other | | 43,518 |
| | 145,362 |
| | 46,748 |
| | (401 | ) | | 235,227 |
| | Contract liabilities | | | — |
| | 67,636 |
| | 4,613 |
| | — |
| | 72,249 |
| Accrued expenses and other current liabilities | | | 43,410 |
| | 71,111 |
| | 43,694 |
| | (561 | ) | | 157,654 |
| Current liabilities of discontinued operations | | | — |
| | 49,055 |
| | — |
| | — |
| | 49,055 |
| Total current liabilities | | 43,518 |
| | 452,478 |
| | 128,873 |
| | (241,949 | ) | | 382,920 |
| | 1,144,252 |
| | 558,412 |
| | 171,713 |
| | (570,218 | ) | | 1,304,159 |
| Long-term debt and capital lease obligations, net | | 3,365,143 |
| | 226,997 |
| | 2,073 |
| | — |
| | 3,594,213 |
| | Long-term debt and finance lease obligations, net of current portion | | | 2,385,164 |
| | — |
| | 1,038 |
| | — |
| | 2,386,202 |
| Deferred tax liabilities, net | | — |
| | 549,217 |
| | 960 |
| | (110,546 | ) | | 439,631 |
| | — |
| | 409,116 |
| | 834 |
| | (54,001 | ) | | 355,949 |
| Advances from affiliates | | — |
| | — |
| | 115,159 |
| | (81,444 | ) | | 33,715 |
| | Other noncurrent liabilities | | — |
| | 104,249 |
| | 3,378 |
| | — |
| | 107,627 |
| | Advances from affiliates, net | | | — |
| | — |
| | 120,418 |
| | (86,980 | ) | | 33,438 |
| Other non-current liabilities | | | — |
| | 69,168 |
| | 2,479 |
| | — |
| | 71,647 |
| Non-current liabilities of discontinued operations | | | — |
| | 349,282 |
| | — |
| | — |
| | 349,282 |
| Total HSS shareholders’ equity | | 2,284,422 |
| | 3,260,138 |
| | 204,860 |
| | (3,464,998 | ) | | 2,284,422 |
| | 2,377,220 |
| | 3,361,338 |
| | 193,621 |
| | (3,554,959 | ) | | 2,377,220 |
| Noncontrolling interests | | — |
| | — |
| | 14,822 |
| | — |
| | 14,822 |
| | Non-controlling interests | | | — |
| | — |
| | 15,275 |
| | — |
| | 15,275 |
| Total liabilities and shareholders’ equity | | $ | 5,693,083 |
| | $ | 4,593,079 |
| | $ | 470,125 |
| | $ | (3,898,937 | ) | | $ | 6,857,350 |
| | $ | 5,906,636 |
| | $ | 4,747,316 |
| | $ | 505,378 |
| | $ | (4,266,158 | ) | | $ | 6,893,172 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Consolidating Statement of Operations and Comprehensive Income (Loss) For the Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Revenue: | | | | | | | | | | | Services and other revenue | | $ | — |
| | $ | 1,417,659 |
| | $ | 242,257 |
| | $ | (36,458 | ) | | $ | 1,623,458 |
| Equipment revenue | | — |
| | 283,792 |
| | 32,864 |
| | (49,953 | ) | | 266,703 |
| Total revenue | | — |
| | 1,701,451 |
| | 275,121 |
| | (86,411 | ) | | 1,890,161 |
| Costs and expenses: | | | | | | | | | | | Cost of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 438,214 |
| | 151,493 |
| | (34,006 | ) | | 555,701 |
| Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 250,700 |
| | 24,357 |
| | (49,954 | ) | | 225,103 |
| Selling, general and administrative expenses | | 6,720 |
| | 375,309 |
| | 88,291 |
| | (2,451 | ) | | 467,869 |
| Research and development expenses | | — |
| | 25,082 |
| | 657 |
| | — |
| | 25,739 |
| Depreciation and amortization | | — |
| | 391,464 |
| | 73,333 |
| | — |
| | 464,797 |
| Total costs and expenses | | 6,720 |
| | 1,480,769 |
| | 338,131 |
| | (86,411 | ) | | 1,739,209 |
| Operating income (loss) | | (6,720 | ) | | 220,682 |
| | (63,010 | ) | | — |
| | 150,952 |
| Other income (expense): | | | | | | | | | | | Interest income | | 54,341 |
| | 4,441 |
| | 2,798 |
| | (3,850 | ) | | 57,730 |
| Interest expense, net of amounts capitalized | | (190,685 | ) | | (7,832 | ) | | (77,551 | ) | | 3,850 |
| | (272,218 | ) | Gains (losses) on investments, net | | 455 |
| | (8,919 | ) | | — |
| | — |
| | (8,464 | ) | Equity in earnings (losses) of unconsolidated affiliates, net | | — |
| | (3,333 | ) | | — |
| | — |
| | (3,333 | ) | Equity in earnings (losses) of subsidiaries, net | | 75,047 |
| | (135,258 | ) | | — |
| | 60,211 |
| | — |
| Foreign currency transaction gains (losses), net | | — |
| | (344 | ) | | (9,511 | ) | | — |
| | (9,855 | ) | Other, net | | (100 | ) | | (351 | ) | | (182 | ) | | — |
| | (633 | ) | Total other income (expense), net | | (60,942 | ) | | (151,596 | ) | | (84,446 | ) | | 60,211 |
| | (236,773 | ) | Income (loss) from continuing operations before income taxes | | (67,662 | ) | | 69,086 |
| | (147,456 | ) | | 60,211 |
| | (85,821 | ) | Income tax benefit (provision), net | | 38,120 |
| | (50,242 | ) | | 527 |
| | — |
| | (11,595 | ) | Net income (loss) from continuing operations | | (29,542 | ) | | 18,844 |
| | (146,929 | ) | | 60,211 |
| | (97,416 | ) | Net income (loss) from discontinued operations | | — |
| | 56,539 |
| | — |
| | — |
| | 56,539 |
| Net income (loss) | | (29,542 | ) | | 75,383 |
| | (146,929 | ) | | 60,211 |
| | (40,877 | ) | Less: Net income (loss) attributable to non-controlling interests | | — |
| | — |
| | (11,335 | ) | | — |
| | (11,335 | ) | Net income (loss) attributable to HSS | | $ | (29,542 | ) | | $ | 75,383 |
| | $ | (135,594 | ) | | $ | 60,211 |
| | $ | (29,542 | ) | Comprehensive income (loss): | | | | | | | | | | | Net income (loss) | | $ | (29,542 | ) | | $ | 75,383 |
| | $ | (146,929 | ) | | $ | 60,211 |
| | $ | (40,877 | ) | Other comprehensive income (loss), net of tax: | | | | | | | | | | | Foreign currency translation adjustments | | — |
| | — |
| | 1,182 |
| | — |
| | 1,182 |
| Unrealized gains (losses) on available-for-sale securities | | 1,817 |
| | — |
| | — |
| | — |
| | 1,817 |
| Other | | — |
| | — |
| | (114 | ) | | — |
| | (114 | ) | Amounts reclassified to net income (loss): | | | | | | | | | | | Realized gains on available-for-sale securities | | (419 | ) | | — |
| | — |
| | — |
| | (419 | ) | Equity in other comprehensive income (loss) of subsidiaries, net | | (2,260 | ) | | (2,260 | ) | | — |
| | 4,520 |
| | — |
| Total other comprehensive income (loss), net of tax | | (862 | ) | | (2,260 | ) | | 1,068 |
| | 4,520 |
| | 2,466 |
| Comprehensive income (loss) | | (30,404 | ) | | 73,123 |
| | (145,861 | ) | | 64,731 |
| | (38,411 | ) | Less: Comprehensive income (loss) attributable to non-controlling interests | | — |
| | — |
| | (8,007 | ) | | — |
| | (8,007 | ) | Comprehensive income (loss) attributable to EchoStar Corporation | | $ | (30,404 | ) | | $ | 73,123 |
| | $ | (137,854 | ) | | $ | 64,731 |
| | $ | (30,404 | ) |
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Consolidating Statement of Operations and Comprehensive Income (Loss) For the Year Ended December 31, 2018 (In thousands)
| | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Revenue: | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| Services and other revenue - DISH Network | | $ | — |
| | $ | 364,182 |
| | $ | 1,973 |
| | $ | — |
| | $ | 366,155 |
| | Services and other revenue - other | | — |
| | 1,333,104 |
| | 230,900 |
| | (37,906 | ) | | 1,526,098 |
| | Services and other revenue | | | $ | — |
| | $ | 1,366,459 |
| | $ | 232,873 |
| | $ | (37,906 | ) | | $ | 1,561,426 |
| Equipment revenue | | — |
| | 221,996 |
| | 29,137 |
| | (45,723 | ) | | 205,410 |
| | — |
| | 221,996 |
| | 29,137 |
| | (45,723 | ) | | 205,410 |
| Total revenue | | — |
| | 1,919,282 |
| | 262,010 |
| | (83,629 | ) | | 2,097,663 |
| | — |
| | 1,588,455 |
| | 262,010 |
| | (83,629 | ) | | 1,766,836 |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | Costs of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 487,997 |
| | 147,952 |
| | (35,736 | ) | | 600,213 |
| | Cost of sales - services and other (exclusive of depreciation and amortization) | | | — |
| | 447,622 |
| | 147,952 |
| | (35,736 | ) | | 559,838 |
| Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 200,620 |
| | 21,703 |
| | (45,723 | ) | | 176,600 |
| | — |
| | 200,620 |
| | 21,703 |
| | (45,723 | ) | | 176,600 |
| Selling, general and administrative expenses | | — |
| | 345,380 |
| | 54,943 |
| | (2,170 | ) | | 398,153 |
| | — |
| | 345,221 |
| | 54,943 |
| | (2,170 | ) | | 397,994 |
| Research and development expenses | | — |
| | 27,570 |
| | — |
| | — |
| | 27,570 |
| | — |
| | 27,570 |
| | — |
| | — |
| | 27,570 |
| Depreciation and amortization | | — |
| | 498,861 |
| | 52,555 |
| | — |
| | 551,416 |
| | — |
| | 374,297 |
| | 52,555 |
| | — |
| | 426,852 |
| Impairment of assets | | — |
| | — |
| | — |
| | — |
| | — |
| | Total costs and expenses | | — |
| | 1,560,428 |
| | 277,153 |
| | (83,629 | ) | | 1,753,952 |
| | — |
| | 1,395,330 |
| | 277,153 |
| | (83,629 | ) | | 1,588,854 |
| Operating income | | — |
| | 358,854 |
| | (15,143 | ) | | — |
| | 343,711 |
| | Operating income (loss) | | | — |
| | 193,125 |
| | (15,143 | ) | | — |
| | 177,982 |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | Interest income | | 56,487 |
| | 3,806 |
| | 2,472 |
| | (3,661 | ) | | 59,104 |
| | 56,487 |
| | 3,806 |
| | 2,472 |
| | (3,661 | ) | | 59,104 |
| Interest expense, net of amounts capitalized | | (229,481 | ) | | (29,418 | ) | | (4,483 | ) | | 3,661 |
| | (259,721 | ) | | (229,481 | ) | | (866 | ) | | (4,483 | ) | | 3,661 |
| | (231,169 | ) | Other-than-temporary impairment loss on available-for-sale securities | | — |
| | — |
| | — |
| | — |
| | — |
| | Gains (losses) on investments, net | | — |
| | 187 |
| | — |
| | — |
| | 187 |
| | — |
| | 187 |
| | — |
| | — |
| | 187 |
| Equity in earnings of unconsolidated affiliate | | — |
| | 4,874 |
| | — |
| | — |
| | 4,874 |
| | Equity in earnings (losses) of unconsolidated affiliates, net | | | — |
| | 4,874 |
| | — |
| | — |
| | 4,874 |
| Equity in earnings (losses) of subsidiaries, net | | 224,405 |
| | (33,525 | ) | | — |
| | (190,880 | ) | | — |
| | 224,405 |
| | (33,525 | ) | | — |
| | (190,880 | ) | | — |
| Foreign currency transaction gains (losses), net | | | — |
| | (104 | ) | | (12,380 | ) | | — |
| | (12,484 | ) | Other, net | | (970 | ) | | 9,155 |
| | (12,628 | ) | | — |
| | (4,443 | ) | | (970 | ) | | 9,259 |
| | (248 | ) | | — |
| | 8,041 |
| Total other income (expense), net | | 50,441 |
| | (44,921 | ) | | (14,639 | ) | | (190,880 | ) | | (199,999 | ) | | 50,441 |
| | (16,369 | ) | | (14,639 | ) | | (190,880 | ) | | (171,447 | ) | Income (loss) before income taxes | | 50,441 |
| | 313,933 |
| | (29,782 | ) | | (190,880 | ) | | 143,712 |
| | Income (loss) from continuing operations before income taxes | | | 50,441 |
| | 176,756 |
| | (29,782 | ) | | (190,880 | ) | | 6,535 |
| Income tax benefit (provision), net | | 45,060 |
| | (89,984 | ) | | (1,445 | ) | | — |
| | (46,369 | ) | | 45,060 |
| | (62,230 | ) | | (1,445 | ) | | — |
| | (18,615 | ) | Net income (loss) from continuing operations | | | 95,501 |
| | 114,526 |
| | (31,227 | ) | | (190,880 | ) | | (12,080 | ) | Net income (loss) from discontinued operations | | | — |
| | 109,423 |
| | — |
| | — |
| | 109,423 |
| Net income (loss) | | 95,501 |
| | 223,949 |
| | (31,227 | ) | | (190,880 | ) | | 97,343 |
| | 95,501 |
| | 223,949 |
| | (31,227 | ) | | (190,880 | ) | | 97,343 |
| Less: Net income attributable to noncontrolling interests | | — |
| | — |
| | 1,842 |
| | — |
| | 1,842 |
| | Less: Net income (loss) attributable to non-controlling interests | | | — |
| | — |
| | 1,842 |
| | — |
| | 1,842 |
| Net income (loss) attributable to HSS | | $ | 95,501 |
| | $ | 223,949 |
| | $ | (33,069 | ) | | $ | (190,880 | ) | | $ | 95,501 |
| | $ | 95,501 |
| | $ | 223,949 |
| | $ | (33,069 | ) | | $ | (190,880 | ) | | $ | 95,501 |
| Comprehensive income (loss): | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| Net income (loss) | | $ | 95,501 |
| | $ | 223,949 |
| | $ | (31,227 | ) | | $ | (190,880 | ) | | $ | 97,343 |
| | $ | 95,501 |
| | $ | 223,949 |
| | $ | (31,227 | ) | | $ | (190,880 | ) | | $ | 97,343 |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | — |
| | — |
| | (31,938 | ) | | — |
| | (31,938 | ) | | — |
| | — |
| | (31,938 | ) | | — |
| | (31,938 | ) | Unrealized gains (losses) on available-for-sale securities and other | | (665 | ) | | — |
| | 41 |
| | — |
| | (624 | ) | | Unrealized gains (losses) on available-for-sale securities | | | (665 | ) | | — |
| | — |
| | — |
| | (665 | ) | Other | | | — |
| | — |
| | 41 |
| | — |
| | 41 |
| Amounts reclassified to net income (loss): | | | | | | | | | | | | Realized gains on available-for-sale securities | | (212 | ) | | — |
| | — |
| | — |
| | (212 | ) | | (212 | ) | | — |
| | — |
| | — |
| | (212 | ) | Equity in other comprehensive income (loss) of subsidiaries, net | | (30,508 | ) | | (30,508 | ) | | — |
| | 61,016 |
| | — |
| | (30,508 | ) | | (30,508 | ) | | — |
| | 61,016 |
| | — |
| Total other comprehensive income (loss), net of tax | | (31,385 | ) | | (30,508 | ) | | (31,897 | ) | | 61,016 |
| | (32,774 | ) | | (31,385 | ) | | (30,508 | ) | | (31,897 | ) | | 61,016 |
| | (32,774 | ) | Comprehensive income (loss) | | 64,116 |
| | 193,441 |
| | (63,124 | ) | | (129,864 | ) | | 64,569 |
| | 64,116 |
| | 193,441 |
| | (63,124 | ) | | (129,864 | ) | | 64,569 |
| Less: Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | 453 |
| | — |
| | 453 |
| | Comprehensive income (loss) attributable to HSS | | $ | 64,116 |
| | $ | 193,441 |
| | $ | (63,577 | ) | | $ | (129,864 | ) | | $ | 64,116 |
| | Less: Comprehensive income (loss) attributable to non-controlling interests | | | — |
| | — |
| | 453 |
| | — |
| | 453 |
| Comprehensive income (loss) attributable to EchoStar Corporation | | | $ | 64,116 |
| | $ | 193,441 |
| | $ | (63,577 | ) | | $ | (129,864 | ) | | $ | 64,116 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Consolidating Statement of Operations and Comprehensive Income (Loss) For the Year Ended December 31, 2017 (In thousands) | | | | | | | | | | | | | | | | | | | | | | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Revenue: | | |
| | |
| | |
| | |
| | |
| Services and other revenue - DISH Network | | $ | — |
| | $ | 432,090 |
| | $ | 1,739 |
| | $ | — |
| | $ | 433,829 |
| Services and other revenue - other | | — |
| | 1,056,914 |
| | 178,857 |
| | (32,220 | ) | | 1,203,551 |
| Equipment revenue | | — |
| | 255,610 |
| | 27,205 |
| | (43,326 | ) | | 239,489 |
| Total revenue | | — |
| | 1,744,614 |
| | 207,801 |
| | (75,546 | ) | | 1,876,869 |
| Costs and expenses: | | |
| | |
| | |
| | |
| | |
| Costs of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 458,139 |
| | 131,177 |
| | (29,632 | ) | | 559,684 |
| Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 218,299 |
| | 20,318 |
| | (43,178 | ) | | 195,439 |
| Selling, general and administrative expenses | | — |
| | 293,810 |
| | 46,517 |
| | (2,736 | ) | | 337,591 |
| Research and development expenses | | — |
| | 31,745 |
| | — |
| | — |
| | 31,745 |
| Depreciation and amortization | | — |
| | 458,483 |
| | 38,315 |
| | — |
| | 496,798 |
| Impairment of assets | | — |
| | 6,000 |
| | — |
| | — |
| | 6,000 |
| Total costs and expenses | | — |
| | 1,466,476 |
| | 236,327 |
| | (75,546 | ) | | 1,627,257 |
| Operating income | | — |
| | 278,138 |
| | (28,526 | ) | | — |
| | 249,612 |
| Other income (expense): | | |
| | |
| | |
| | |
| | |
| Interest income | | 28,146 |
| | 96,992 |
| | 1,986 |
| | (95,172 | ) | | 31,952 |
| Interest expense, net of amounts capitalized | | (229,415 | ) | | (112,855 | ) | | 1,620 |
| | 95,172 |
| | (245,478 | ) | Gains (losses) on marketable investment securities, net | | — |
| | (1,574 | ) | | — |
| | — |
| | (1,574 | ) | Equity in earnings of unconsolidated affiliate | | — |
| | 7,027 |
| | — |
| | — |
| | 7,027 |
| Equity in earnings (losses) of subsidiaries, net | | 471,602 |
| | (35,142 | ) | | — |
| | (436,460 | ) | | — |
| Other, net | | — |
| | (956 | ) | | (1,232 | ) | | — |
| | (2,188 | ) | Total other income (expense), net | | 270,333 |
| | (46,508 | ) | | 2,374 |
| | (436,460 | ) | | (210,261 | ) | Income (loss) before income taxes | | 270,333 |
| | 231,630 |
| | (26,152 | ) | | (436,460 | ) | | 39,351 |
| Income tax benefit (provision), net | | 25,637 |
| | 240,392 |
| | (7,827 | ) | | — |
| | 258,202 |
| Net income (loss) | | 295,970 |
| | 472,022 |
| | (33,979 | ) | | (436,460 | ) | | 297,553 |
| Less: Net income attributable to noncontrolling interests | | — |
| | — |
| | 1,583 |
| | — |
| | 1,583 |
| Net income (loss) attributable to HSS | | $ | 295,970 |
| | $ | 472,022 |
| | $ | (35,562 | ) | | $ | (436,460 | ) | | $ | 295,970 |
| Comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
| Net income (loss) | | $ | 295,970 |
| | $ | 472,022 |
| | $ | (33,979 | ) | | $ | (436,460 | ) | | $ | 297,553 |
| Other comprehensive income (loss), net of tax: | | |
| | |
| | |
| | |
| | |
| Foreign currency translation adjustments | | — |
| | — |
| | 7,196 |
| | — |
| | 7,196 |
| Unrealized gains (losses) on available-for-sale securities and other | | (273 | ) | | (2,007 | ) | | 92 |
| | — |
| | (2,188 | ) | Recognition of other-than-temporary loss on available-for-sale securities in net income (loss) | | — |
| | 3,298 |
| | — |
| | — |
| | 3,298 |
| Equity in other comprehensive income (loss) of subsidiaries, net | | 8,170 |
| | 6,879 |
| | — |
| | (15,049 | ) | | — |
| Total other comprehensive income (loss), net of tax | | 7,897 |
| | 8,170 |
| | 7,288 |
| | (15,049 | ) | | 8,306 |
| Comprehensive income (loss) | | 303,867 |
| | 480,192 |
| | (26,691 | ) | | (451,509 | ) | | 305,859 |
| Less: Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | 1,992 |
| | — |
| | 1,992 |
| Comprehensive income (loss) attributable to HSS | | $ | 303,867 |
| | $ | 480,192 |
| | $ | (28,683 | ) | | $ | (451,509 | ) | | $ | 303,867 |
|
Consolidating Statement of Operations and Comprehensive Income (Loss) For the Year Ended December 31, 2016
(In thousands)
| | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Revenue: | | | | | | | | | | | | | | | | | | | | | Services and other revenue - DISH Network | | $ | — |
| | $ | 449,547 |
| | $ | — |
| | $ | — |
| | $ | 449,547 |
| | Services and other revenue - other | | — |
| | 992,480 |
| | 133,508 |
| | (22,861 | ) | | 1,103,127 |
| | Services and other revenue | | | $ | — |
| | $ | 1,127,177 |
| | $ | 180,596 |
| | $ | (32,220 | ) | | $ | 1,275,553 |
| Equipment revenue | | — |
| | 265,201 |
| | 24,859 |
| | (42,941 | ) | | 247,119 |
| | — |
| | 255,610 |
| | 27,205 |
| | (43,326 | ) | | 239,489 |
| Total revenue | | — |
| | 1,707,228 |
| | 158,367 |
| | (65,802 | ) | | 1,799,793 |
| | — |
| | 1,382,787 |
| | 207,801 |
| | (75,546 | ) | | 1,515,042 |
| Costs and expenses: | | |
| | |
| | |
| | |
| | |
| | | | | | | | | | | Costs of sales - services and other (exclusive of depreciation and amortization) | | — |
| | 454,185 |
| | 101,288 |
| | (22,168 | ) | | 533,305 |
| | Cost of sales - services and other (exclusive of depreciation and amortization) | | | — |
| | 395,566 |
| | 131,177 |
| | (29,632 | ) | | 497,111 |
| Cost of sales - equipment (exclusive of depreciation and amortization) | | — |
| | 210,439 |
| | 19,512 |
| | (40,546 | ) | | 189,405 |
| | — |
| | 218,299 |
| | 20,318 |
| | (43,178 | ) | | 195,439 |
| Selling, general and administrative expenses | | — |
| | 246,399 |
| | 37,737 |
| | (3,088 | ) | | 281,048 |
| | — |
| | 293,767 |
| | 46,517 |
| | (2,736 | ) | | 337,548 |
| Research and development expenses | | — |
| | 31,170 |
| | — |
| | — |
| | 31,170 |
| | — |
| | 31,745 |
| | — |
| | — |
| | 31,745 |
| Depreciation and amortization | | — |
| | 401,688 |
| | 12,445 |
| | — |
| | 414,133 |
| | — |
| | 332,103 |
| | 38,315 |
| | — |
| | 370,418 |
| Impairment of long-lived assets | | | — |
| | 6,000 |
| | — |
| | — |
| | 6,000 |
| Total costs and expenses | | — |
| | 1,343,881 |
| | 170,982 |
| | (65,802 | ) | | 1,449,061 |
| | — |
| | 1,277,480 |
| | 236,327 |
| | (75,546 | ) | | 1,438,261 |
| Operating income | | — |
| | 363,347 |
| | (12,615 | ) | | — |
| | 350,732 |
| | Operating income (loss) | | | — |
| | 105,307 |
| | (28,526 | ) | | — |
| | 76,781 |
| Other income (expense): | | |
| | |
| | |
| | |
| | |
| | | | | | | | | | | Interest income | | 10,826 |
| | 199 |
| | 1,649 |
| | (76 | ) | | 12,598 |
| | 28,146 |
| | 96,992 |
| | 1,986 |
| | (95,172 | ) | | 31,952 |
| Interest expense, net of amounts capitalized | | (177,625 | ) | | (14,538 | ) | | 4,889 |
| | 76 |
| | (187,198 | ) | | (229,415 | ) | | (80,543 | ) | | 1,620 |
| | 95,172 |
| | (213,166 | ) | Gains (losses) on investments, net | | — |
| | 6,995 |
| | — |
| | — |
| | 6,995 |
| | — |
| | (1,574 | ) | | — |
| | — |
| | (1,574 | ) | Equity in earnings of unconsolidated affiliate | | — |
| | 9,444 |
| | — |
| | — |
| | 9,444 |
| | Equity in earnings (losses) of unconsolidated affiliates, net | | | — |
| | 7,027 |
| | — |
| | — |
| | 7,027 |
| Equity in earnings (losses) of subsidiaries, net | | 218,125 |
| | (4,906 | ) | | — |
| | (213,219 | ) | | — |
| | 471,602 |
| | (35,142 | ) | | — |
| | (436,460 | ) | | — |
| Foreign currency transaction gains (losses), net | | | — |
| | (85 | ) | | (1,073 | ) | | — |
| | (1,158 | ) | Other, net | | 9,749 |
| | (6,956 | ) | | 116 |
| | — |
| | 2,909 |
| | — |
| | (871 | ) | | (159 | ) | | — |
| | (1,030 | ) | Total other income (expense), net | | 61,075 |
| | (9,762 | ) | | 6,654 |
| | (213,219 | ) | | (155,252 | ) | | 270,333 |
| | (14,196 | ) | | 2,374 |
| | (436,460 | ) | | (177,949 | ) | Income (loss) before income taxes | | 61,075 |
| | 353,585 |
| | (5,961 | ) | | (213,219 | ) | | 195,480 |
| | Income (loss) from continuing operations before income taxes | | | 270,333 |
| | 91,111 |
| | (26,152 | ) | | (436,460 | ) | | (101,168 | ) | Income tax benefit (provision), net | | 58,940 |
| | (135,081 | ) | | 2,382 |
| | — |
| | (73,759 | ) | | 25,637 |
| | 75,956 |
| | (7,827 | ) | | — |
| | 93,766 |
| Net income (loss) from continuing operations | | | 295,970 |
| | 167,067 |
| | (33,979 | ) | | (436,460 | ) | | (7,402 | ) | Net income (loss) from discontinued operations | | | — |
| | 304,955 |
| | — |
| | — |
| | 304,955 |
| Net income (loss) | | 120,015 |
| | 218,504 |
| | (3,579 | ) | | (213,219 | ) | | 121,721 |
| | 295,970 |
| | 472,022 |
| | (33,979 | ) | | (436,460 | ) | | 297,553 |
| Less: Net income attributable to noncontrolling interests | | — |
| | — |
| | 1,706 |
| | — |
| | 1,706 |
| | Less: Net income (loss) attributable to non-controlling interests | | | — |
| | — |
| | 1,583 |
| | — |
| | 1,583 |
| Net income (loss) attributable to HSS | | $ | 120,015 |
| | $ | 218,504 |
| | $ | (5,285 | ) | | $ | (213,219 | ) | | $ | 120,015 |
| | $ | 295,970 |
| | $ | 472,022 |
| | $ | (35,562 | ) | | $ | (436,460 | ) | | $ | 295,970 |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | 120,015 |
| | $ | 218,504 |
| | $ | (3,579 | ) | | $ | (213,219 | ) | | $ | 121,721 |
| | $ | 295,970 |
| | $ | 472,022 |
| | $ | (33,979 | ) | | $ | (436,460 | ) | | $ | 297,553 |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | — |
| | — |
| | (5,377 | ) | | — |
| | (5,377 | ) | | — |
| | — |
| | 7,196 |
| | — |
| | 7,196 |
| Unrealized gains (losses) on available-for-sale securities and other | | 3,290 |
| | (1,642 | ) | | (64 | ) | | — |
| | 1,584 |
| | Recognition of realized loss on available-for-sale securities included in net income (loss) | | (2,996 | ) | | — |
| | — |
| | — |
| | (2,996 | ) | | Unrealized gains (losses) on available-for-sale securities | | | (273 | ) | | (2,007 | ) | | — |
| | — |
| | (2,280 | ) | Other | | | — |
| | — |
| | 92 |
| | — |
| | 92 |
| Amounts reclassified to net income (loss): | | | | | | | | | | | | Other-than-temporary impairment loss on available-for-sale securities | | | — |
| | 3,298 |
| | — |
| | — |
| | 3,298 |
| Equity in other comprehensive income (loss) of subsidiaries, net | | (6,897 | ) | | (5,255 | ) | | — |
| | 12,152 |
| | — |
| | 8,170 |
| | 6,879 |
| | — |
| | (15,049 | ) | | — |
| Total other comprehensive income (loss), net of tax | | (6,603 | ) | | (6,897 | ) | | (5,441 | ) | | 12,152 |
| | (6,789 | ) | | 7,897 |
| | 8,170 |
| | 7,288 |
| | (15,049 | ) | | 8,306 |
| Comprehensive income (loss) | | 113,412 |
| | 211,607 |
| | (9,020 | ) | | (201,067 | ) | | 114,932 |
| | 303,867 |
| | 480,192 |
| | (26,691 | ) | | (451,509 | ) | | 305,859 |
| Less: Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | 1,520 |
| | — |
| | 1,520 |
| | Comprehensive income (loss) attributable to HSS | | $ | 113,412 |
| | $ | 211,607 |
| | $ | (10,540 | ) | | $ | (201,067 | ) | | $ | 113,412 |
| | Less: Comprehensive income (loss) attributable to non-controlling interests | | | — |
| | — |
| | 1,992 |
| | — |
| | 1,992 |
| Comprehensive income (loss) attributable to EchoStar Corporation | | | $ | 303,867 |
| | $ | 480,192 |
| | $ | (28,683 | ) | | $ | (451,509 | ) | | $ | 303,867 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Consolidating Statement of Cash Flows for the Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | Net income (loss) | | $ | (29,542 | ) | | $ | 75,383 |
| | $ | (146,929 | ) | | $ | 60,211 |
| | $ | (40,877 | ) | Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (26,693 | ) | | 569,444 |
| | 191,941 |
| | (60,211 | ) | | 674,481 |
| Net cash flows from operating activities | | (56,235 | ) | | 644,827 |
| | 45,012 |
| | — |
| | 633,604 |
| Cash flows from investing activities: | | | | | | | | | | | Purchases of marketable investment securities | | (709,350 | ) | | — |
| | — |
| | — |
| | (709,350 | ) | Sales and maturities of marketable investment securities | | 1,665,269 |
| | — |
| | — |
| | — |
| | 1,665,269 |
| Investments in unconsolidated affiliates | | — |
| | (7 | ) | | 7,858 |
| | — |
| | 7,851 |
| Dividend received from unconsolidated affiliate | | — |
| | 2,284 |
| | — |
| | — |
| | 2,284 |
| Expenditures for property and equipment | | — |
| | (215,000 | ) | | (94,291 | ) | | — |
| | (309,291 | ) | Expenditures for externally marketed software | | — |
| | (29,310 | ) | | — |
| | — |
| | (29,310 | ) | Purchases of regulatory authorizations | | — |
| | — |
| | (7,850 | ) | | — |
| | (7,850 | ) | Investment in subsidiaries | | 307,424 |
| | (75,086 | ) | | — |
| | (232,338 | ) | | — |
| Net cash flows from investing activities | | 1,263,343 |
| | (317,119 | ) | | (94,283 | ) | | (232,338 | ) | | 619,603 |
| Cash flows from financing activities: | | | | | | | | | | | Repurchase and maturity of the 2019 Senior Secured Notes | | (920,923 | ) | | — |
| | — |
| | — |
| | (920,923 | ) | Repayment of other long-term debt and finance lease obligations | | — |
| | (27,203 | ) | | (2,144 | ) | | — |
| | (29,347 | ) | Payment of in-orbit incentive obligations | | — |
| | (4,430 | ) | | — |
| | — |
| | (4,430 | ) | Purchase of non-controlling interest | | — |
| | (2,666 | ) | | (4,647 | ) | | — |
| | (7,313 | ) | Other, net | | — |
| | — |
| | 1,172 |
| | — |
| | 1,172 |
| Contribution (distributions) and advances (to) from parent, net | | — |
| | (307,424 | ) | | 75,086 |
| | 232,338 |
| | — |
| Net cash flows from financing activities | | (920,923 | ) | | (341,723 | ) | | 69,467 |
| | 232,338 |
| | (960,841 | ) | Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | (663 | ) | | — |
| | (663 | ) | Net increase (decrease) in cash and cash equivalents | | 286,185 |
| | (14,015 | ) | | 19,533 |
| | — |
| | 291,703 |
| Cash and cash equivalents, including restricted amounts, beginning of period | | 771,718 |
| | 46,353 |
| | 30,548 |
| | — |
| | 848,619 |
| Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,057,903 |
| | $ | 32,338 |
| | $ | 50,081 |
| | $ | — |
| | $ | 1,140,322 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Consolidating Statement of Cash Flows for the Year Ended December 31, 2018 (In thousands)
| | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | 95,501 |
| | $ | 223,949 |
| | $ | (31,227 | ) | | $ | (190,880 | ) | | $ | 97,343 |
| | $ | 95,501 |
| | $ | 223,949 |
| | $ | (31,227 | ) | | $ | (190,880 | ) | | $ | 97,343 |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (160,236 | ) | | 536,404 |
| | 78,312 |
| | 190,880 |
| | 645,360 |
| | (160,236 | ) | | 536,404 |
| | 78,312 |
| | 190,880 |
| | 645,360 |
| Net cash flows from operating activities | | (64,735 | ) | | 760,353 |
| | 47,085 |
| | — |
| | 742,703 |
| | (64,735 | ) | | 760,353 |
| | 47,085 |
| | — |
| | 742,703 |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | Purchases of marketable investment securities | | (2,063,042 | ) | | — |
| | — |
| | — |
| | (2,063,042 | ) | | (2,063,042 | ) | | — |
| | — |
| | — |
| | (2,063,042 | ) | Sales and maturities of marketable investment securities | | 909,996 |
| | — |
| | — |
| | — |
| | 909,996 |
| | 909,996 |
| | — |
| | — |
| | — |
| | 909,996 |
| Investments in unconsolidated affiliates | | | — |
| | (100,991 | ) | | — |
| | — |
| | (100,991 | ) | Expenditures for property and equipment | | — |
| | (304,376 | ) | | (86,689 | ) | | — |
| | (391,065 | ) | | — |
| | (304,376 | ) | | (86,689 | ) | | — |
| | (391,065 | ) | Refund and other receipts related to capital expenditures | | — |
| | 77,524 |
| | — |
| | — |
| | 77,524 |
| | Investment in subsidiary | | 305,669 |
| | (50,540 | ) | | — |
| | (255,129 | ) | | — |
| | Payment for satellite launch services | | — |
| | — |
| | (7,125 | ) | | — |
| | (7,125 | ) | | Refunds and other receipts related to property and equipment | | | — |
| | 77,524 |
| | — |
| | — |
| | 77,524 |
| Expenditures for externally marketed software | | — |
| | (31,639 | ) | | — |
| | — |
| | (31,639 | ) | | — |
| | (31,639 | ) | | — |
| | — |
| | (31,639 | ) | Investment in unconsolidated entity | | — |
| | (100,991 | ) | | — |
| | — |
| | (100,991 | ) | | Payment for EchoStar XXI launch services | | | — |
| | — |
| | (7,125 | ) | | — |
| | (7,125 | ) | Investment in subsidiaries | | | 305,669 |
| | (50,540 | ) | | — |
| | (255,129 | ) | | — |
| Net cash flows from investing activities | | (847,377 | ) | | (410,022 | ) | | (93,814 | ) | | (255,129 | ) | | (1,606,342 | ) | | (847,377 | ) | | (410,022 | ) | | (93,814 | ) | | (255,129 | ) | | (1,606,342 | ) | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | Repurchase and maturity of the 2019 Senior Secured Notes | | | (70,173 | ) | | — |
| | — |
| | — |
| | (70,173 | ) | Repayment of other long-term debt and finance lease obligations | | | — |
| | (35,886 | ) | | (5,133 | ) | | — |
| | (41,019 | ) | Payment of in-orbit incentive obligations | | | — |
| | (4,796 | ) | | — |
| | — |
| | (4,796 | ) | Capital contribution from EchoStar | | | 7,125 |
| | — |
| | — |
| | — |
| | 7,125 |
| Contribution (distributions) and advances (to) from parent, net | | — |
| | (305,669 | ) | | 50,540 |
| | 255,129 |
| | — |
| | — |
| | (305,669 | ) | | 50,540 |
| | 255,129 |
| | — |
| Capital contribution from EchoStar | | 7,125 |
| | — |
| | — |
| | — |
| | 7,125 |
| | Repayment of Senior Secured Notes and related premium | | (70,173 | ) | | — |
| | — |
| | — |
| | (70,173 | ) | | Repayment of debt and capital lease obligations | | — |
| | (35,886 | ) | | (5,133 | ) | | — |
| | (41,019 | ) | | Repayment of in-orbit incentive obligations | |
|
| | (4,796 | ) | |
|
| |
|
| | (4,796 | ) | | Net cash flows from financing activities | | (63,048 | ) | | (346,351 | ) | | 45,407 |
| | 255,129 |
| | (108,863 | ) | | (63,048 | ) | | (346,351 | ) | | 45,407 |
| | 255,129 |
| | (108,863 | ) | Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | (2,233 | ) | | — |
| | (2,233 | ) | | — |
| | — |
| | (2,233 | ) | | — |
| | (2,233 | ) | Net increase (decrease) in cash and cash equivalents, including restricted amounts | | (975,160 | ) | | 3,980 |
| | (3,555 | ) | | — |
| | (974,735 | ) | | Cash and cash equivalents, including restricted amounts, at beginning of year | | 1,746,878 |
| | 42,373 |
| | 34,103 |
| | — |
| | 1,823,354 |
| | Cash and cash equivalents, including restricted amounts, at end of year | | $ | 771,718 |
| | $ | 46,353 |
| | $ | 30,548 |
| | $ | — |
| | $ | 848,619 |
| | Net increase (decrease) in cash and cash equivalents | | | (975,160 | ) | | 3,980 |
| | (3,555 | ) | | — |
| | (974,735 | ) | Cash and cash equivalents, including restricted amounts, beginning of period | | | 1,746,878 |
| | 42,373 |
| | 34,103 |
| | — |
| | 1,823,354 |
| Cash and cash equivalents, including restricted amounts, end of period | | | $ | 771,718 |
| | $ | 46,353 |
| | $ | 30,548 |
| | $ | — |
| | $ | 848,619 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Consolidating Statement of Cash Flows for the Year Ended December 31, 2017 (In thousands) | | | | | | | | | | | | | | | | | | | | | | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Cash flows from operating activities: | | | | | | | | | | | Net income (loss) | | $ | 295,970 |
| | $ | 472,022 |
| | $ | (33,979 | ) | | $ | (436,460 | ) | | $ | 297,553 |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (206,014 | ) | | (74,310 | ) | | 43,340 |
| | 436,460 |
| | 199,476 |
| Net cash flows from operating activities | | 89,956 |
| | 397,712 |
| | 9,361 |
| | — |
| | 497,029 |
| Cash flows from investing activities: | | | | | | | | | | | Purchases of marketable investment securities | | (535,476 | ) | | — |
| | — |
| | — |
| | (535,476 | ) | Sales and maturities of marketable investment securities | | 259,263 |
| | — |
| | — |
| | — |
| | 259,263 |
| Expenditures for property and equipment | | — |
| | (340,197 | ) | | (61,341 | ) | | — |
| | (401,538 | ) | Refunds and other receipts related to property and equipment | | — |
| | 4,311 |
| | — |
| | — |
| | 4,311 |
| Expenditures for externally marketed software | | — |
| | (31,331 | ) | | — |
| | — |
| | (31,331 | ) | Investment in subsidiaries | | (59,000 | ) | | (63,000 | ) | | — |
| | 122,000 |
| | — |
| Net cash flows from investing activities | | (335,213 | ) | | (430,217 | ) | | (61,341 | ) | | 122,000 |
| | (704,771 | ) | Cash flows from financing activities: | | | | | | | | | | | Repayment of other long-term debt and finance lease obligations | | — |
| | (32,177 | ) | | (4,886 | ) | | — |
| | (37,063 | ) | Payment of in-orbit incentive obligations | | — |
| | (5,850 | ) | | — |
| | — |
| | (5,850 | ) | Other, net | | 186 |
| | — |
| | 850 |
| | — |
| | 1,036 |
| Contribution (distributions) and advances (to) from parent, net | | — |
| | 59,000 |
| | 63,000 |
| | (122,000 | ) | | — |
| Net cash flows from financing activities | | 186 |
| | 20,973 |
| | 58,964 |
| | (122,000 | ) | | (41,877 | ) | Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | 1,286 |
| | — |
| | 1,286 |
| Net increase (decrease) in cash and cash equivalents | | (245,071 | ) | | (11,532 | ) | | 8,270 |
| | — |
| | (248,333 | ) | Cash and cash equivalents, including restricted amounts, beginning of period | | 1,991,949 |
| | 53,905 |
| | 25,833 |
| | — |
| | 2,071,687 |
| Cash and cash equivalents, including restricted amounts, end of period | | $ | 1,746,878 |
| | $ | 42,373 |
| | $ | 34,103 |
| | $ | — |
| | $ | 1,823,354 |
|
| | | | | | | | | | | | | | | | | | | | | | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Cash flows from operating activities: | | | | | | | | | | | Net income (loss) | | $ | 295,970 |
| | $ | 472,022 |
| | $ | (33,979 | ) | | $ | (436,460 | ) | | $ | 297,553 |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities | | (206,014 | ) | | (74,310 | ) | | 43,340 |
| | 436,460 |
| | 199,476 |
| Net cash flows from operating activities | | 89,956 |
| | 397,712 |
| | 9,361 |
| | — |
| | 497,029 |
| Cash flows from investing activities: | | | | | | | | | | | Purchases of marketable investment securities | | (535,476 | ) | | — |
| | — |
| | — |
| | (535,476 | ) | Sales and maturities of marketable investment securities | | 259,263 |
| | — |
| | — |
| | — |
| | 259,263 |
| Expenditures for property and equipment | | — |
| | (340,197 | ) | | (61,341 | ) | | — |
| | (401,538 | ) | Refund and other receipts related to capital expenditures | | — |
| | 4,311 |
| | — |
| | — |
| | 4,311 |
| Investment in subsidiary | | (59,000 | ) | | (63,000 | ) | | — |
| | 122,000 |
| | — |
| Expenditures for externally marketed software | | — |
| | (31,331 | ) | | — |
| | — |
| | (31,331 | ) | Net cash flows from investing activities | | (335,213 | ) | | (430,217 | ) | | (61,341 | ) | | 122,000 |
| | (704,771 | ) | Cash flows from financing activities: | | | | | | | | | | | Payments of debt issuance costs | | (414 | ) | | — |
| | — |
| | — |
| | (414 | ) | Proceeds from capital contribution from parent | | — |
| | 59,000 |
| | 63,000 |
| | (122,000 | ) | | — |
| Repayment of debt and capital lease obligations | | — |
| | (32,177 | ) | | (4,886 | ) | | — |
| | (37,063 | ) | Advances from affiliates | | — |
| |
|
| | (36 | ) | | — |
| | (36 | ) | Repayment of in-orbit incentive obligations | |
|
| | (5,850 | ) | | — |
| |
|
| | (5,850 | ) | Other, net | | 600 |
| | — |
| | 886 |
| | — |
| | 1,486 |
| Net cash flows from financing activities | | 186 |
| | 20,973 |
| | 58,964 |
| | (122,000 | ) | | (41,877 | ) | Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | 1,286 |
| | — |
| | 1,286 |
| Net increase (decrease) in cash and cash equivalents, including restricted amounts | | (245,071 | ) | | (11,532 | ) | | 8,270 |
| | — |
| | (248,333 | ) | Cash and cash equivalents, including restricted amounts, at beginning of year | | 1,991,949 |
| | 53,905 |
| | 25,833 |
| | — |
| | 2,071,687 |
| Cash and cash equivalents, including restricted amounts, at end of year | | $ | 1,746,878 |
| | $ | 42,373 |
| | $ | 34,103 |
| | $ | — |
| | $ | 1,823,354 |
|
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
Consolidating Statement of Cash Flows for the Year Ended December 31, 2016
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | HSS | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total | Cash Flows from Operating Activities: | | | | | | | | | | | Net income (loss) | | $ | 120,015 |
| | $ | 218,504 |
| | $ | (3,579 | ) | | $ | (213,219 | ) | | $ | 121,721 |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities | | 78,875 |
| | 127,462 |
| | 24,594 |
| | 213,219 |
| | 444,150 |
| Net cash flows from operating activities | | 198,890 |
| | 345,966 |
| | 21,015 |
| | — |
| | 565,871 |
| Cash Flows from Investing Activities: | | | | | | | | | | | Purchases of marketable investment securities | | (396,730 | ) | | — |
| | — |
| | — |
| | (396,730 | ) | Sales and maturities of marketable investment securities | | 453,334 |
| | 7,500 |
| | — |
| | — |
| | 460,834 |
| Expenditures of property and equipment | | — |
| | (292,427 | ) | | (88,860 | ) | | — |
| | (381,287 | ) | Changes in restricted cash and cash equivalents | | — |
| | — |
| | — |
| | — |
| | — |
| Investment in subsidiary | | (80,846 | ) | | (84,871 | ) | | — |
| | 165,717 |
| | — |
| Payment for EchoStar XXI launch services | | — |
| | — |
| | (23,750 | ) | | — |
| | (23,750 | ) | Expenditures for externally marketed software | | — |
| | (23,252 | ) | | — |
| | — |
| | (23,252 | ) | Other, net | | — |
| | (1,296 | ) | | — |
| | (340 | ) | | (1,636 | ) | Net cash flows from investing activities | | (24,242 | ) | | (394,346 | ) | | (112,610 | ) | | 165,377 |
| | (365,821 | ) | Cash Flows from Financing Activities: | | | | | | | | | | | Proceeds from issuance of long-term debt | | 1,500,000 |
| | — |
| | — |
| | — |
| | 1,500,000 |
| Payments of debt issuance costs | | (7,097 | ) | | — |
| | — |
| | — |
| | (7,097 | ) | Proceeds from capital contribution from parent | | — |
| | 80,846 |
| | 84,871 |
| | (165,717 | ) | | — |
| Capital contribution from EchoStar | | 23,750 |
| | — |
| | — |
| | — |
| | 23,750 |
| Repayment debt and capital lease obligations | | — |
| | (28,829 | ) | | (2,840 | ) | | — |
| | (31,669 | ) | Advances from affiliates | | — |
| |
|
| | 6,982 |
| | — |
| | 6,982 |
| Repayment of in-orbit incentive obligations | |
|
| | (5,499 | ) | |
|
| |
|
| | (5,499 | ) | Other, net | | 14 |
| | — |
| | 988 |
| | 340 |
| | 1,342 |
| Net cash flows from financing activities | | 1,516,667 |
| | 46,518 |
| | 90,001 |
| | (165,377 | ) | | 1,487,809 |
| Effect of exchange rates on cash and cash equivalents | | — |
| | — |
| | 183 |
| | — |
| | 183 |
| Net increase (decrease) in cash and cash equivalents, including restricted amounts | | 1,691,315 |
| | (1,862 | ) | | (1,411 | ) | | — |
| | 1,688,042 |
| Cash and cash equivalents, including restricted amounts, at beginning of year | | 300,634 |
| | 55,767 |
| | 27,244 |
| | — |
| | 383,645 |
| Cash and cash equivalents, including restricted amounts, at end of year | | $ | 1,991,949 |
| | $ | 53,905 |
| | $ | 25,833 |
| | $ | — |
| | $ | 2,071,687 |
|
NOTE 18.24. SUPPLEMENTAL FINANCIAL INFORMATION
Noncash Investing and Financing Activities
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2018 | | 2017 | | 2016 | | | (In thousands) | Property and equipment financed under capital lease obligations | | $ | 364 |
| | $ | 8,484 |
| | $ | 1,130 |
| Increase (decrease) in capital expenditures included in accounts payable, net | | $ | 1,566 |
| | $ | (2,522 | ) | | $ | 1,175 |
| Transfer of launch service contracts from (to) EchoStar | | $ | — |
| | $ | (145,114 | ) | | $ | 70,300 |
| Contribution of noncash net assets pursuant to Share Exchange Agreement (Note 1) | | $ | — |
| | $ | 219,662 |
| | $ | — |
| Noncash net assets exchanged for HSS Tracking Stock (Note 1) | | $ | — |
| | $ | (190,221 | ) | | $ | — |
| Capitalized in-orbit incentive obligations | | $ | — |
| | $ | 31,000 |
| | $ | — |
| Contribution of EchoStar XIX satellite | | $ | — |
| | $ | 514,448 |
| | $ | — |
|
Restricted Cash and Cash Equivalents
The beginning and ending balances of cash and cash equivalents presented in our Consolidated Statements of Cash Flows included restricted cash and cash equivalents of $1 million and $1 million, respectively, for the year ended December 31, 2018 and $1 million and $1 million, respectively, for the year ended December 31, 2017. These amounts are included in Other noncurrent assets, net in our Consolidated Balance Sheets.
Foreign Currency
We recognized net foreign currency transaction losses of $12 million and $1 million and de minimus gains for the years ended December 31, 2018, 2017 and 2016, respectively.
Fair Value of In-Orbit Incentives
As of December 31, 2018 and 2017,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 $95 million and $99 million, respectively.
Contract Acquisition and Fulfillment Costs
Unamortized contract acquisition costs totaled $104 million as of December 31, 2018 and related amortization expense totaled $83 million for the year ended December 31, 2018, respectively.
Unamortized contract fulfillment costs totaled $3 million as of December 31, 2018 and related amortization expense was de minimis for the year ended December 31, 2018.
Research and Development
The table below summarizes the research and development costs incurred in connection with customers’ orders included in cost of sales and other expenses we incurred for research and development.expenses: | | | | | | | | | | | | | | For the years ended December 31, | | 2018 | | 2017 | | 2016 | | (In thousands) | Cost of sales | $ | 23,422 |
| | $ | 27,899 |
| | $ | 23,663 |
| Research and development | $ | 27,570 |
| | $ | 31,745 |
| | $ | 31,170 |
|
| | | | | | | | | | | | | | For the years ended December 31, | | 2019 | | 2018 | | 2017 | | | | | | | Cost of sales - equipment | $ | 24,495 |
| | $ | 23,422 |
| | $ | 27,899 |
| Research and development expenses | 25,739 |
| | 27,570 |
| | 31,745 |
|
Advertising Costs
We incurred advertising expense of $88.2 million, $75.8 million and $64.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.
HUGHES SATELLITE SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other Current Assets, Other Non-Current Assets, Net and Accrued Expenses and Other Current Liabilities
Other current assets, Other non-current assets, net and Accrued expenses and other current liabilities consist of the following: | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | | | | Other current assets: | | | | | Trade accounts receivable - DISH Network | | $ | 8,876 |
| | $ | 13,550 |
| Inventory | | 79,474 |
| | 75,379 |
| Prepaids and deposits | | 59,193 |
| | 45,198 |
| Other | | 22,217 |
| | 18,539 |
| Total other current assets | | $ | 169,760 |
| | $ | 152,666 |
| | | | | | Other non-current assets, net: | | | | | Restricted cash | | $ | 887 |
| | $ | 796 |
| Deferred tax assets, net | | 7,215 |
| | 3,581 |
| Capitalized software, net | | 101,786 |
| | 96,760 |
| Contract acquisition costs, net | | 96,723 |
| | 104,013 |
| Contract fulfillment costs, net | | 3,010 |
| | 3,240 |
| Other | | 22,556 |
| | 28,059 |
| Total other non-current assets, net | | $ | 232,177 |
| | $ | 236,449 |
| | | | | | Accrued expenses and other current liabilities: | | | | | Trade accounts payable - DISH Network | | $ | 502 |
| | $ | 752 |
| Accrued interest | | 32,184 |
| | 45,131 |
| Accrued compensation | | 42,846 |
| | 42,796 |
| Accrued taxes | | 18,493 |
| | 7,609 |
| Operating lease obligation | | 14,112 |
| | — |
| Other | | 138,662 |
| | 61,366 |
| Total accrued expenses and other current liabilities | | $ | 246,799 |
| | $ | 157,654 |
|
Capitalized Software Costs
As of December 31, 20182019 and 2017,2018, the net carrying amount of externally marketed software was $97$101.8 million and $88$96.8 million, respectively, of which $29$38.8 million and $20$28.8 million, respectively, iswas under development and not yet placed in service. We capitalized costs related to the development of externally marketed software of $32$29.3 million, $31$31.6 million and $23$31.3 million and recorded related amortization expense of $24.3 million, $23.0 million and $19.5 million for the years ended December 31, 2019, 2018 2017 and 2016, respectively. We recorded amortization expense relating to the development of externally marketed software of $23 million, $20 million and $10 million for the years ended December 31, 2018, 2017, and 2016, respectively. The weighted average useful life of our externally marketed software was approximately three years as of December 31, 2018.2019.
Advertising Costs
We incurred advertising expenseF-71
HUGHES SATELLITE SYSTEMS CORPORATION SCHEDULE IINOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
VALUATION AND QUALIFYING ACCOUNTS
Our valuationCash and qualifying accountsCash Equivalents and Restricted Cash
The following table reconciles cash and cash equivalents and restricted cash, as presented in the Consolidated Balance Sheets to the total of December 31, 2018, 2017 and 2016 werethe same as follows: presented in the Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Deductions | | Balance at End of Year | | | (In thousands) | For the years ended: | | | | | | | | | December 31, 2018 | | $ | 12,027 |
| | $ | 22,184 |
| | $ | (17,607 | ) | | $ | 16,604 |
| December 31, 2017 | | $ | 12,752 |
| | $ | 9,551 |
| | $ | (10,276 | ) | | $ | 12,027 |
| December 31, 2016 | | $ | 11,447 |
| | $ | 14,384 |
| | $ | (13,079 | ) | | $ | 12,752 |
|
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Cash and cash equivalents, including restricted amounts, beginning of period: | | | | | | | Cash and cash equivalents | | $ | 847,823 |
| | $ | 1,822,561 |
| | $ | 2,070,964 |
| Restricted cash | | 796 |
| | 793 |
| | 723 |
| Total cash and cash equivalents, included restricted amounts, beginning of period | | $ | 848,619 |
| | $ | 1,823,354 |
| | $ | 2,071,687 |
| | | | | | | | Cash and cash equivalents, including restricted amounts, end of period: | | | | | | | Cash and cash equivalents | | $ | 1,139,435 |
| | $ | 847,823 |
| | $ | 1,822,561 |
| Restricted cash | | 887 |
| | 796 |
| | 793 |
| Total cash and cash equivalents, included restricted amounts, end of period | | $ | 1,140,322 |
| | $ | 848,619 |
| | $ | 1,823,354 |
|
Non-cash Investing and Financing Activities
The following table presents the non-cash investing and financing activities:
| | | | | | | | | | | | | | | | For the years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | Property and equipment financed under finance lease obligations | | $ | 349 |
| | $ | 364 |
| | $ | 8,484 |
| Increase (decrease) in capital expenditures included in accounts payable, net | | 1,625 |
| | 1,566 |
| | (2,522 | ) | Capitalized in-orbit incentive obligations | | — |
| | — |
| | 31,000 |
| Non-cash net assets exchanged for HSS Tracking Stock (Note 5) | | — |
| | — |
| | 190,221 |
| Non-cash net assets exchanged for BSS Transaction (Note 5) | | 332,699 |
| | — |
| | — |
| Non-cash net assets received in exchange for a 20% ownership interest in our existing Brazilian subsidiary | | 94,918 |
| | — |
| | — |
| Contribution from EchoStar in our existing Brazilian subsidiary | | 9,606 |
| | — |
| | — |
| Transfer of launch service contracts from (to) EchoStar | | — |
| | — |
| | (145,114 | ) | Contribution of non-cash net assets pursuant to Share Exchange Agreement (Note 1) | | — |
| | — |
| | 219,662 |
| Contribution of EchoStar XIX satellite | | — |
| | — |
| | 514,448 |
|
|