UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2017.~~MARCH 31, 2018.



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

Commission File Number: 333-179121

Hughes Satellite Systems Corporation

(Exact ~~Name~~name of ~~Registrant~~registrant as ~~Specified~~specified in ~~Its Charter)~~its charter)



Colorado		45-0897865
(State or ~~Other Jurisdiction~~other jurisdiction of ~~Incorporation~~incorporation or ~~Organization)~~organization)		(I.R.S. Employer Identification No.)



100 Inverness Terrace East, Englewood, Colorado		80112-5308
(Address of ~~Principal Executive Offices)~~principal executive offices)		(Zip Code)

(303) 706-4000

(Registrant’s ~~Telephone Number, Including Area Code)~~telephone number, including area code)

Not Applicable

(Former ~~Name, Former Address~~name, former address and ~~Former Fiscal Year,~~former fiscal year, if ~~Changed Since Last Report)~~changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No ý*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o		Accelerated filer o
Non-accelerated filer ý	(Do not check isif a smaller reporting company)	Smaller reporting company o
		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of ~~October 31, 2017,~~April 30, 2018, the registrant’s outstanding common stock consisted of 1,078 shares of common stock, $0.01 par value per share.

The registrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

* The registrant currently is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is filing this Quarterly Report on Form 10-Q on a voluntary basis. The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months as if it were subject to such filing requirements during the entirety of such period.

TABLE OF CONTENTS



Disclosure Regarding Forward-Looking Statements		i

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of ~~September 30, 2017 (Unaudited)~~March 31, 2018 (unaudited) and December 31, ~~2016~~2017 (audited)	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the ~~Three~~three months ended March 31, 2018 and ~~Nine Months Ended September 30,~~ 2017 ~~and 2016 (Unaudited)~~(unaudited)	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine Months Ended September 30,~~three months ended March 31, 2018 and 2017 ~~and 2016 (Unaudited)~~(unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the ~~Nine Months Ended September 30,~~three months ended March 31, 2018 and 2017 ~~and 2016 (Unaudited)~~(unaudited)	4
	Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~(unaudited)	5
Item 2.	Management’s Narrative Analysis of Results of Operations	3943
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	*
Item 4.	Controls and Procedures	5054

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	5155
Item 1A.	Risk Factors	5155
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	*
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Mine Safety Disclosures	5256
Item 5.	Other Information	5256
Item 6.	Exhibits	5256
	Signatures	5357

* This item has been omitted pursuant to the reduced disclosure format as set forth in General Instructions (H)(2) of Form 10-Q

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

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

significant risks related to the construction, launch and operation of our satellites, such as the risk of material malfunction on one or more of our satellites, risks resulting from delays or failures of launches of our satellites and potentially missing our regulatory milestones, changes in the space weather environment that could interfere with the operation of our satellites, and our general lack of commercial insurance coverage on our satellites;

our ability to realize the anticipated benefits of our current satellites and any future satellite we may construct or acquire;

our ability to implement and realize benefits of our domestic and/or international investments, commercial alliances, partnerships, joint ventures, acquisitions and other strategic initiatives;

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

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

risk related to our foreign operations and other uncertainties associated with doing business internationally, including changes in foreign exchange rates between foreign currencies and the United States dollar, economic instability and political disturbances.

Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”), those discussed in “Management’s Narrative Analysis of Results of Operations” ~~herein~~in Part I, Item 2 of this Form 10-Q and in Part II, Item 7 of our Form 10-K and those discussed in other documents we file with the SEC.

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

Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of any forward‑looking statements. We assume no responsibility for updating forward‑looking information contained or incorporated by reference herein or in any documents we file with the SEC, except as required by law.

Should one or more of the risks or uncertainties described herein or in any documents we file with the SEC occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

As of
September 30, 2017 December 31, 2016
Assets (Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 2,075,908
$ 2,070,964
Marketable investment securities, at fair value 195,906
187,923
Trade accounts receivable, net of allowance for doubtful accounts of $13,211 and $12,752, respectively 192,387
182,512
Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero 45,968
19,323
Inventory 91,232
62,638
Prepaids and deposits 36,156
34,505
Advances to affiliates, net 102,574
110,452
Other current assets 12,730
11,809
Total current assets 2,752,861
2,680,126
Noncurrent Assets:
Restricted cash and cash equivalents 13,154
11,820
Property and equipment, net of accumulated depreciation of $2,433,297 and $2,503,187, respectively 2,853,791
2,294,726
Regulatory authorizations, net 471,658
471,658
Goodwill 504,173
504,173
Other intangible assets, net 62,240
80,734
Investments in unconsolidated entities 32,858
42,560
Other noncurrent assets, net 204,687
295,737
Total noncurrent assets 4,142,561
3,701,408
Total assets $ 6,895,422
$ 6,381,534
Liabilities and Shareholders’ Equity
Current Liabilities:
Trade accounts payable $ 117,615
$ 106,410
Trade accounts payable - DISH Network 5,470
6
Current portion of long-term debt and capital lease obligations 38,407
32,984
Advances from affiliates, net 327
598
Deferred revenue and prepayments 56,285
59,989
Accrued interest 57,246
46,255
Accrued compensation 28,298
33,457
Accrued expenses and other 99,624
80,612
Total current liabilities 403,272
360,311
Noncurrent Liabilities:
Long-term debt and capital lease obligations, net of unamortized debt issuance costs 3,605,715
3,622,463
Deferred tax liabilities, net 693,055
528,462
Advances from affiliates 33,475
31,968
Other noncurrent liabilities 110,873
83,307
Total noncurrent liabilities 4,443,118
4,266,200
Total liabilities 4,846,390
4,626,511
Commitments and Contingencies (Note 11)

Shareholders’ Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized:
Hughes Retail Preferred Tracking Stock, $.001 par value, zero authorized, issued and outstanding at September 30, 2017 and 300 shares authorized, 81.128 issued and outstanding at December 31, 2016 —
—
Common stock, $0.01 par value; 1,000,000 shares authorized, 1,078 shares issued and outstanding at September 30, 2017 and 1,000 shares issued and outstanding December 31, 2016 —
—
Additional paid-in capital 1,773,319
1,516,199
Accumulated other comprehensive loss (45,042 ) (60,719 )
Accumulated earnings 306,919
286,713
Total HSS shareholders’ equity 2,035,196
1,742,193
Noncontrolling interests 13,836
12,830
Total shareholders’ equity 2,049,032
1,755,023
Total liabilities and shareholders’ equity $ 6,895,422
$ 6,381,534



	As of
	March 31, 2018			December 31, 2017
Assets	(unaudited)			(audited)
Current Assets:
Cash and cash equivalents	$	1,775,829		$	1,822,561
Marketable investment securities, at fair value	623,547			455,602
Trade accounts receivable and contract assets, net (Note 3)	166,182			196,840
Trade accounts receivable - DISH Network, net	53,598			38,641
Inventory	85,995			83,595
Prepaids and deposits	45,767			38,797
Advances to affiliates, net	108,713			114,858
Other current assets	13,162			91,544
Total current assets	2,872,793			2,842,438
Noncurrent Assets:
Property and equipment, net	2,726,624			2,753,098
Regulatory authorizations	465,658			465,658
Goodwill	504,173			504,173
Other intangible assets, net	54,924			58,582
Investments in unconsolidated entities	32,079			30,587
Other noncurrent assets, net	244,429			202,814
Total noncurrent assets	4,027,887			4,014,912
Total assets	$	6,900,680		$	6,857,350
Liabilities and Shareholders’ Equity
Current Liabilities:
Trade accounts payable	$	102,477		$	102,816
Trade accounts payable - DISH Network	2,826			3,769
Current portion of long-term debt and capital lease obligations	41,424			40,631
Advances from affiliates, net	623			477
Contract liabilities	65,333			65,959
Accrued interest	56,314			46,834
Accrued compensation	24,550			36,924
Accrued expenses and other	82,524			85,510
Total current liabilities	376,071			382,920
Noncurrent Liabilities:
Long-term debt and capital lease obligations, net	3,585,972			3,594,213
Deferred tax liabilities, net	450,413			439,631
Advances from affiliates	34,146			33,715
Other noncurrent liabilities	106,390			107,627
Total noncurrent liabilities	4,176,921			4,175,186
Total liabilities	4,552,992			4,558,106
Commitments and contingencies (Note 12)

Shareholders’ Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding at each of March 31, 2018 and December 31, 2017	—			—
Common stock, $0.01 par value; 1,000,000 shares authorized, 1,078 shares issued and outstanding at March 31, 2018 and 1,000 shares issued and outstanding December 31, 2017	—			—
Additional paid-in capital	1,762,927			1,754,561
Accumulated other comprehensive loss	(50,686		)	(52,822		)
Accumulated earnings	620,459			582,683
Total HSS shareholders’ equity	2,332,700			2,284,422
Noncontrolling interests	14,988			14,822
Total shareholders’ equity	2,347,688			2,299,244
Total liabilities and shareholders’ equity	$	6,900,680		$	6,857,350

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

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Revenue:

Services and other revenue - DISH Network $ 108,264
$ 111,750
$ 330,675
$ 337,353
Services and other revenue - other 310,973
276,877
866,251
821,863
Equipment revenue - DISH Network 126
2,138
175
7,008
Equipment revenue - other 58,999
66,501
173,644
160,886
Total revenue 478,362
457,266
1,370,745
1,327,110
Costs and Expenses:

Cost of sales - services and other (exclusive of depreciation and amortization) 137,663
130,587
401,633
381,964
Cost of sales - equipment (exclusive of depreciation and amortization) 52,051
53,601
154,142
144,029
Selling, general and administrative expenses 83,512
67,874
244,005
207,974
Research and development expenses 8,302
9,030
23,444
23,524
Depreciation and amortization 127,915
104,774
364,878
309,448
Total costs and expenses 409,443
365,866
1,188,102
1,066,939
Operating income 68,919
91,400
182,643
260,171

Other Income (Expense):

Interest income 8,321
4,006
21,248
7,427
Interest expense, net of amounts capitalized (60,783 ) (53,536 ) (181,996 ) (127,626 )
Gains on marketable investment securities, net —
5
1,723
5,300
Other-than-temporary impairment loss on available-for-sale securities —
—
(3,298 ) —
Equity in earnings of unconsolidated affiliate 1,948
2,654
5,298
6,758
Other, net 1,804
(24 ) 229
5,365
Total other expense, net (48,710 ) (46,895 ) (156,796 ) (102,776 )
Income before income taxes 20,209
44,505
25,847
157,395
Income tax provision (8,726 ) (16,416 ) (4,635 ) (57,277 )
Net income 11,483
28,089
21,212
100,118
Less: Net income attributable to noncontrolling interests 532
524
1,006
946
Net income attributable to HSS $ 10,951
$ 27,565
$ 20,206
$ 99,172

Comprehensive Income (Loss):

Net income $ 11,483
$ 28,089
$ 21,212
$ 100,118
Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments 8,571
1,255
13,956
10,607
Unrealized gains (losses) on available-for-sale securities and other (66 ) 750
(1,577 ) 2,543
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income —
—
3,298
—
Recognition of realized gains on available-for-sale securities in net income —
(4 ) —
(2,989 )
Total other comprehensive income (loss), net of tax 8,505
2,001
15,677
10,161
Comprehensive income (loss) 19,988
30,090
36,889
110,279
Less: Comprehensive income attributable to noncontrolling interests 532
524
1,006
760
Comprehensive income (loss) attributable to HSS $ 19,456
$ 29,566
$ 35,883
$ 109,519



	For the three months ended March 31,
	2018			2017
Revenue:
Services and other revenue - DISH Network	$	100,614		$	111,490
Services and other revenue - other	359,334			270,223
Equipment revenue	42,947			48,405
Total revenue	502,895			430,118
Costs and expenses:
Cost of sales - services and other (exclusive of depreciation and amortization)	142,703			130,899
Cost of sales - equipment (exclusive of depreciation and amortization)	44,023			44,226
Selling, general and administrative expenses	94,650			74,378
Research and development expenses	7,137			7,705
Depreciation and amortization	133,718			112,220
Total costs and expenses	422,231			369,428
Operating income	80,664			60,690

Other income (expense):
Interest income	11,379			5,841
Interest expense, net of amounts capitalized	(64,413		)	(59,837		)
Gains (losses) on investments, net	(392		)	91
Other-than-temporary impairment loss on available-for-sale securities	—			(3,298		)
Equity in earnings of unconsolidated affiliate	1,492			1,711
Other, net	(613		)	647
Total other expense, net	(52,547		)	(54,845		)
Income before income taxes	28,117			5,845
Income tax benefit (provision)	(7,736		)	3,582
Net income	20,381			9,427
Less: Net income attributable to noncontrolling interests	380			292
Net income attributable to HSS	$	20,001		$	9,135

Comprehensive income:
Net income	$	20,381		$	9,427
Other comprehensive income, net of tax:
Foreign currency translation adjustments	1,900			12,121
Unrealized losses on available-for-sale securities and other	(411		)	(1,500		)
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income	—			3,298
Total other comprehensive income, net of tax	1,489			13,919
Comprehensive income	21,870			23,346
Less: Comprehensive income attributable to noncontrolling interests	166			292
Comprehensive income attributable to HSS	$	21,704		$	23,054

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

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

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 3,696
—
—
—
3,696
Transfer of EchoStar XXIII launch service contract from EchoStar 70,300
—
—
—
70,300
Contribution to fund launch service contract payment 11,875
—
—
—
11,875
Other (396 ) —
—
—
(396 )
Comprehensive income (loss):
    Net income —
—
99,172
946
100,118
    Foreign currency translation adjustment (1 ) 10,794
—
(186 ) 10,607
    Unrealized losses on available-for-sale securities, net and other —
(446 ) —
—
(446 )
Balance, September 30, 2016 $ 1,503,222
$ (43,768 ) $ 265,870
$ 12,070
$ 1,737,394

Balance, January 1, 2017 $ 1,516,199
$ (60,719 ) $ 286,713
$ 12,830
$ 1,755,023
Stock-based compensation 3,839
—
—
—
3,839
Transfer of launch service contracts to EchoStar (145,114 ) —
—
—
(145,114 )
Contribution of EchoStar XIX satellite, net of deferred tax 369,263
—
—
—
369,263
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 (309 ) —
—
—
(309 )
Comprehensive income (loss):
Net income —
—
20,206
1,006
21,212
Foreign currency translation adjustment —
13,956
—
—
13,956
Unrealized gains and other-than-temporary impairment loss on marketable investment securities, net and other —
1,721
—
—
1,721
Balance, September 30, 2017 $ 1,773,319
$ (45,042 ) $ 306,919
$ 13,836
$ 2,049,032



	Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Earnings		Noncontrolling Interests			Total
Balance, January 1, 2017	$	1,516,199		$	(60,719	)	$	286,713	$	12,830		$	1,755,023
Stock-based compensation	1,221			—			—		—			1,221
Transfer of satellite launch service contract to EchoStar Corporation	(61,842		)	—			—		—			(61,842		)
Contribution of EchoStar XIX satellite, net of deferred tax	369,263			—			—		—			369,263
Contribution of non-cash net assets pursuant to Share Exchange Agreement (Note 1)	219,662			—			—		—			219,662
Exchange of non-cash net assets for HSS Tracking Stock (Note 1)	(190,221		)	—			—		—			(190,221		)
Other	67			101			—		—			168
Net Income	—			—			9,135		292			9,427
Foreign currency translation adjustment	—			12,121								12,121
Unrealized gains and other-than-temporary impairment loss on available-for-sale securities, net	—			1,697			—		—			1,697
Balance, March 31, 2017	$	1,854,349		$	(46,800	)	$	295,848	$	13,122		$	2,116,519

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 (Note 2)	—			433			17,775		—			18,208
Balance, January 1, 2018	1,754,561			(52,389		)	600,458		14,822			2,317,452
Stock-based compensation	1,299			—			—		—			1,299
Capital contribution from EchoStar Corporation	7,125			—			—		—			7,125
Other	(58		)	(100		)	—		—			(158		)
Net income	—			—			20,001		380			20,381
Foreign currency translation adjustment	—			2,114			—		(214		)	1,900
Unrealized losses on available-for-sale securities, net	—			(311		)	—		—			(311		)
Balance, March 31, 2018	$	1,762,927		$	(50,686	)	$	620,459	$	14,988		$	2,347,688

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

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

For the Nine Months Ended September 30,
2017 2016
Cash Flows from Operating Activities:
Net income $ 21,212
$ 100,118
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 364,878
309,448
Equity in earnings of unconsolidated affiliate (5,298 ) (6,758 )
Amortization of debt issuance costs 5,479
4,793
Losses (gains) and impairment on marketable investment securities, net 1,575
(5,300 )
Stock-based compensation 3,839
3,696
Deferred tax provision 2,202
54,731
Dividends received from unconsolidated entity 15,000
10,000
Proceeds from sale of trading securities 8,922
7,140
Changes in current assets and current liabilities, net (30,168 ) (43,377 )
Changes in noncurrent assets and noncurrent liabilities, net (18,747 ) 7,600
Other, net 952
4,725
Net cash flows from operating activities 369,846
446,816
Cash Flows from Investing Activities:
Purchases of marketable investment securities (170,158 ) (396,730 )
Sales and maturities of marketable investment securities 152,423
265,680
Expenditures for property and equipment (291,975 ) (312,003 )
Expenditures for externally marketed software (25,447 ) (17,991 )
Changes in restricted cash and cash equivalents (1,334 ) 7,614
Investment in unconsolidated entity —
(1,636 )
Payment for EchoStar XXI launch services —
(11,875 )
Net cash flows from investing activities (336,491 ) (466,941 )
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt —
1,500,000
Payments of debt issuance costs (414 ) (6,275 )
Repayment of debt and capital lease obligations (25,787 ) (24,052 )
Advances from (to) affiliates, net (36 ) 5,481
Capital contribution from EchoStar —
11,875
Other, net (3,097 ) (2,967 )
Net cash flows from financing activities (29,334 ) 1,484,062
Effect of exchange rates on cash and cash equivalents 923
660
Net increase in cash and cash equivalents 4,944
1,464,597
Cash and cash equivalents, beginning of period 2,070,964
382,990
Cash and cash equivalents, end of period $ 2,075,908
$ 1,847,587

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest (including capitalized interest) $ 183,073
$ 96,418
Capitalized interest $ 19,412
$ 22,811
Cash paid for income taxes $ 2,814
$ 3,856
Property and equipment financed under capital lease obligations $ 8,423
$ 650
Decrease in capital expenditures included in accounts payable, net $ (2,257 ) $ (8,587 )
Transfer of launch service contracts from (to) EchoStar $ (145,114 ) $ 70,300
Contribution of net assets pursuant to Share Exchange Agreement $ 219,662
$ —
Exchange of uplinking business net assets for HSS Tracking Stock $ (190,221 ) $ —
Capitalized in-orbit incentive obligations $ 31,000
$ —
Contribution of EchoStar XIX satellite $ 514,448
$ —



	For the three months ended March 31,
	2018			2017
Cash flows from operating activities:
Net income	$	20,381		$	9,427
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	133,718			112,220
Equity in earnings of unconsolidated affiliate	(1,492		)	(1,711		)
Amortization of debt issuance costs	1,936			1,790
Losses and impairment on investments, net	395			3,207
Stock-based compensation	1,299			1,221
Deferred tax (benefit) provision	6,813			(4,409		)
Dividend received from unconsolidated affiliate	—			7,500
Changes in current assets and current liabilities, net	(10,251		)	(32,955		)
Changes in noncurrent assets and noncurrent liabilities, net	(13,348		)	(4,081		)
Other, net	2,952			(132		)
Net cash flows from operating activities	142,403			92,077
Cash flows from investing activities:
Purchases of marketable investment securities	(358,543		)	—
Sales and maturities of marketable investment securities	197,686			91,747
Expenditures for property and equipment	(87,777		)	(74,175		)
Refunds and other receipts related to capital expenditures	77,524			—
Expenditures for externally marketed software	(7,148		)	(10,832		)
Payment for satellite launch services	(7,125		)	—
Net cash flows from investing activities	(185,383		)	6,740
Cash flows from financing activities:
Repayment of debt and capital lease obligations	(9,368		)	(8,129		)
Capital contribution from EchoStar Corporation	7,125			—
Other, net	(1,265		)	(1,171		)
Net cash flows from financing activities	(3,508		)	(9,300		)
Effect of exchange rates on cash and cash equivalents	(249		)	689
Net increase (decrease) in cash and cash equivalents, including restricted amounts	(46,737		)	90,206
Cash and cash equivalents, including restricted amounts, beginning of period	1,823,354			2,071,687
Cash and cash equivalents, including restricted amounts, end of period	$	1,776,617		$	2,161,893

Supplemental disclosure of cash flow information:
Cash paid for interest (including capitalized interest)	$	54,743		$	54,021
Capitalized interest	$	2,120		$	7,325
Cash paid for income taxes	$	839		$	1,012
Property and equipment financed under capital lease obligations	$	38		$	7,485
Increase (decrease) in capital expenditures included in accounts payable, net	$	7,883		$	(6,531	)
Transfer of satellite launch service contract to EchoStar Corporation	$	—		$	(61,842	)
Contribution of non-cash net assets pursuant to Share Exchange Agreement (Note 1)	$	—		$	219,662
Non-cash 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

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

HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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/or “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar”). We are a global provider of satellite service operations, video delivery ~~solutions,~~services, broadband satellite technologies and broadband internet services for home and small office customers. We also deliver innovative network technologies, managed services, and various communications solutions for aeronautical, enterprise and government customers.

We primarily operate in the following two business segments:

•

Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international home and small office customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to domestic 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”) — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite service operations and video delivery services on a full-time and occasional-use basis primarily to 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, programmers, and private enterprise customers. ESS also manages satellite operations for certain satellites owned by DISH Network.

Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate 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 our segment reporting.

We were formed as a Colorado corporation in March 2011 to facilitate the acquisition by EchoStar (the “Hughes Acquisition”) of Hughes Communications, Inc. and its subsidiaries and related financing transactions. In ~~February 2014, HSS~~connection with our formation, EchoStar contributed the assets and liabilities of its satellite services business to us, including the principal operating subsidiary of its satellite services business, EchoStar ~~entered into agreements with certain subsidiaries~~Satellite Services L.L.C. A substantial majority of the voting power of the shares of each of EchoStar and DISH Network Corporation (“DISH”) ~~pursuant to which, effective March 1, 2014, (i) EchoStar~~is owned beneficially by Charles W. Ergen, our Chairman, and ~~HSS issued Tracking Stock (as defined below) to subsidiaries~~by certain trusts established by Mr. Ergen for the benefit of DISH in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV), including the assumption of related in-orbit incentive obligations, and $11.4 million in cash and (ii) DISH and certain of its subsidiaries began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”). The Tracking Stock tracked the economic performance of the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group” or “HRG”), and represented an aggregate 80.0% economic interest in HRG (the Hughes Retail Tracking Stock issued by us (the “HSS Tracking Stock”) represented a 28.11% economic interest in HRG and the Hughes Retail Tracking Stock issued by EchoStar (the “EchoStar Tracking Stock”, together with the HSS Tracking Stock, the “Tracking Stock) represented a 51.89% economic interest in HRG). In addition to the remaining 20.0% economic interest in HRG, HSS retained all economic interest in the wholesale satellite broadband business and other businesses of HSS. his family.

On 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 the Share Exchange Agreement, on February 28, 2017, among other things, EchoStar and certain of its and our subsidiaries received all of the shares of the Hughes Retail Preferred Tracking Stock issued by EchoStar (the “EchoStar Tracking Stock”) and the Hughes Retail Preferred Tracking Stock issued by us (the “HSS Tracking Stock”, together with the EchoStar Tracking Stock, the “Tracking Stock”) in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of EchoStar’s former EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). ~~Following consummation~~The EchoStar Technologies businesses designed, developed and distributed secure end-to-end video technology solutions including digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunication companies, and provided digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services. The Tracking Stock tracked the economic performance of the Share Exchange, EchoStar no longer operates the EchoStar Technologies business segment and the EchoStar Tracking Stock and HSS Tracking Stock were retired and are no longer outstanding and all agreements, arrangements and policy statements with respect to such tracking stock terminated and are of no further effect.

~~We currently operate in the following two business segments:~~

•

~~Hughes~~ ~~— which provides broadband~~residential retail satellite technologies and broadband services to home and small office customers and network technologies, managed services, equipment, hardware, satellite services and communication solutions to domestic 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 provides satellite ground segment systems and terminals to mobile system operators.

•

~~EchoStar Satellite Services (“ESS”)~~ — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite service operations and video delivery solutions on a full-time and 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, programmers, and private enterprise customers. We also manage satellite operations for certain satellites owned by DISH Network.

Our operations also include various corporate departments (primarily Executive, Strategic Development, Human Resources, IT, Finance, Real Estate and Legal) as well as other activities that have not been assigned to our operating segments, including costs incurred in certain satellite development programs and other business development activities, our centralized treasury operations, and gains (losses) from certain of our investments. These activities, costs and income are accounted for in “Corporate and Other.”

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~We were formed as a Colorado corporation in March 2011 to facilitate the acquisition by EchoStar (the “Hughes Acquisition”)~~broadband business of our Hughes ~~Communications, Inc. and its subsidiaries (“Hughes Communications”) and related financing transactions. In connection with our formation, EchoStar contributed the~~segment, including certain operations, assets and liabilities ~~of its satellite services~~attributed to such business ~~to us, including~~(collectively, the ~~principal operating subsidiary of its satellite services business, EchoStar Satellite Services L.L.C. A substantial majority~~“Hughes Retail Group”), and represented an aggregate 80.0% economic interest in the Hughes Retail Group. Following the consummation of the ~~voting power of~~Share Exchange, EchoStar no longer operates the ~~shares of each of~~ EchoStar Technologies businesses, the Tracking Stock was retired and ~~DISH~~ is ~~owned beneficially by Charles W. Ergen, our Chairman,~~no longer outstanding, and ~~by certain trusts established by Mr. Ergen for~~all agreements, arrangements and policy statements with respect to the ~~benefit of his family.~~Tracking Stock terminated.

Note 2.2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information and notes required for complete financial statements prepared in conformity with GAAP. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, ~~2016.~~2017.

Principles of Consolidation

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 where we are the primary beneficiary. We are deemed to have a controlling financial interest in other entities when we own more than 50 percent 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 noncontrolling interest within shareholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassification

Certain prior period amounts have been reclassified to conform with the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to our ~~condensed consolidated~~ financial statements. Estimates are used in accounting for, among other things, (i) amortization periods for deferred ~~subscriber~~contract acquisition costs, (ii) inputs used to recognize revenue ~~recognition using the percentage-of-completion method,~~over time, (iii) allowances for doubtful accounts, ~~allowances for sales returns and rebates,~~(iv) warranty obligations, (v) self-insurance obligations, (vi) deferred taxes and related valuation allowances, (vii) uncertain tax positions, (viii) loss contingencies, (ix) fair value of financial instruments, (x) fair value of EchoStar’s stock-based compensation awards, (xi) fair value of assets and liabilities acquired in business combinations, (xii) lease classifications, (xiii) asset impairment testing, and (xiv) useful lives and methods for depreciation and amortization of long-lived ~~assets, and certain royalty obligations.~~assets. We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts, and such differences may be material to our ~~condensed consolidated~~ financial statements. Changing economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. We review our estimates and assumptions periodically and the effects of revisions are reflected in the period they occur or prospectively if the revised estimate affects future periods.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Fair Value Measurements

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

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

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

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

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

Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period. There were no transfers between levels for each of the ~~nine~~three months ended ~~September 30, 2017 or 2016.~~March 31, 2018 and 2017.

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the carrying amounts of our cash and cash equivalents, trade ~~accounts receivable,~~and other receivables, net of allowance for doubtful accounts, accounts payable and accrued liabilities were equal to or approximated their fair value due to their short-term nature or proximity to current market rates.

Fair values of our marketable investment securities are based on a variety of observable market inputs. For our investments in publicly traded equity securities and U.S. government securities, fair value ordinarily is determined based on a Level 1 measurement that reflects quoted prices for identical securities in active markets. Fair values of our investments in other marketable debt securities generally are based on Level 2 measurements, as the markets for such debt securities are less active. Trades of identical debt securities on or near the measurement date are considered a strong indication of fair value. Matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features also may be used to determine fair value of our investments in marketable debt securities.

Fair values for our 6 1/2% Senior Secured Notes due 2019 (the “2019 Senior Secured Notes”), 7 5/8% Senior Unsecured Notes due 2021 (the “2021 Senior Unsecured Notes”), 5.250% Senior Secured Notes due 2026 (the “2026 Senior Secured Notes”) and 6.625% Senior Unsecured Notes due 2026 (the “2026 Senior Unsecured Notes” and together with the 2026 Senior Secured Notes, the “2026 Notes”)outstanding debt (see Note 910) are based on quoted market prices in less active markets and are categorized as Level 2 measurements. The fair values of our other debt are Level 2 measurements and are estimated to approximate their carrying amounts based on the proximity of their interest rates to current market rates. As of September 30, 2017 and December 31, 2016, 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 $100.6 million and $74.1 million, respectively. We use fair value measurements from time to time in connection with 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.

As of March 31, 2018 and December 31, 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 $98.0 million and $99.3 million, respectively.

Revenue Recognition

Overview

We account for our sales and services revenue in accordance with Accounting Standard 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 contracts with customers. 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.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Additionally, a significant portion of our revenue is derived from leases of property and equipment that is reported in “Services and other revenue - other” and “Services and other revenue - DISH Network” in our accompanying condensed consolidated statement of operations and comprehensive income (loss). Certain of our contracts with customers 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

Our Hughes segment provides various communication and networking services to consumer and enterprise customers in domestic and international markets. Our services 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 generally 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 generally 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 upon shipment of the equipment. Our equipment sales contracts typically include standard product warranties, but generally do not provide for returns or refunds. Revenue for extended warranties is generally 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 its enterprise and mobile satellite systems markets. Revenue from such contracts is generally recognized over time at 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 our input method, we recognize the transaction price as revenue based on the ratio of costs incurred to estimated total costs at completion. Under our 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

Our ESS segment primarily provides satellite service operations through leasing arrangements and video delivery services on a full-time and occasional-use basis to DISH Network and Dish Mexico, as well as government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers. We also provide telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network. Our ESS segment also provides 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.

Other

Sales and value added taxes, Universal Service Fees and other taxes that we collect concurrent with revenue producing activities are excluded from revenue.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales at the time of shipment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Contract Balances

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 contracts with customers. Trade accounts receivable also includes amounts due from customers under our leasing arrangements. We make ongoing estimates relating to the collectibility of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make 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.

Contract Assets and Contract Liabilities

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 noncurrent assets, net” in our 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.

Contract liabilities consist of advance payments and billings in excess of revenue recognized under contracts with customers and is included in “Contract liabilities” or “Other noncurrent liabilities” in our balance sheets based on the timing of when we expect to recognize revenue. We recognize deferred revenue as revenue after we have transferred control of the goods or services to the customer and all revenue recognition criteria have been met.

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 accompanying condensed consolidated balance sheets and related amortization expense is included in “Selling, general and administrative expenses” in our accompanying condensed consolidated statements of operations and comprehensive income (loss). Unamortized contract acquisition costs totaled $103.6 million as of March 31, 2018 and related amortization expense totaled $20.0 million for the three months ended March 31, 2018.

Contract Fulfillment Costs

We recognize costs to fulfill a contract as an asset when the costs relate directly to a 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 accompanying condensed consolidated balance sheets and related amortization expense is included in “Cost of sales - services and other” in our accompanying condensed consolidated statements of operations and comprehensive income (loss). Unamortized contract fulfillment costs totaled $1.8 million as of March 31, 2018 and related amortization expense was de minimis for the three months ended March 31, 2018.

Research and Development

Costs incurred in research and development activities generally are 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Cost of sales includes research and development costs incurred in connection with customers’ orders of approximately ~~$7.0~~$6.6 million and ~~$11.1~~$6.9 million for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $20.7 million and $17.2 million for the nine months ended September 30, 2017 and 2016,~~ respectively. In addition, we incurred other research and development expenses of approximately ~~$8.3~~$7.1 million and ~~$9.0~~$7.7 million for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $23.4 million and $23.5 million for the nine months ended September 30, 2017 and 2016,~~ respectively.

Capitalized Software Costs

Costs related to the procurement and development of software for internal-use and externally marketed software are capitalized and amortized using the straight-line method over the estimated useful life of the software, not in excess of five years. Capitalized costs of internal-use software are included in “Property and equipment, net” and capitalized costs of externally marketed software are included in “Other noncurrent assets, net” in our accompanying condensed consolidated balance sheets. Externally marketed software generally is installed in the equipment we sell to customers. We conduct software program reviews for externally marketed capitalized software costs at least annually, or as events and circumstances warrant such a review, to determine if capitalized software development costs are recoverable and to ensure that costs associated with programs that are no longer generating revenue are expensed. As of March 31, 2018 and December 31, 2017, the net carrying amount of externally marketed software was $89.7 million and $88.1 million, respectively, of which $22.3 million and $19.6 million, respectively, is under development and not yet placed in service. We capitalized costs related to the development of externally marketed software of $7.1 million and $10.8 million for the three months ended March 31, 2018 and 2017, respectively. We recorded amortization expense relating to the development of externally marketed software of $5.5 million and $3.4 million for the three months ended March 31, 2018 and 2017, respectively. The weighted average useful life of our externally marketed software was approximately four years as of March 31, 2018.

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 debt securities as available-for-sale based on our investment strategy for the securities, except for securities that we have elected to account for using the fair value option. We recognize periodic changes in the difference between fair value and amortized cost in “Unrealized losses on available-for-sale securities and other” in our accompanying condensed consolidated statements of operations and comprehensive income (loss). Realized gains and losses upon sale of debt securities are reclassified from other comprehensive income (loss) and recognized on the trade date in “Gains (losses) on investments, net” in our accompanying condensed consolidated statements of operations and comprehensive income (loss). We use the first-in, first-out (“FIFO”) method to determine the cost basis on sales of debt securities. Interest income from debt securities is reported in “Interest income” in our accompanying condensed consolidated statements of operations and comprehensive income (loss).

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 recovery. 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 recovery, 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, thus establishing a new cost basis for the investment.

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 changes in the difference between fair value and cost in “Unrealized losses on available-for-sale securities and other” in our accompanying condensed 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~no longer generating revenue are expensed. As~~investments, net” in our accompanying condensed consolidated statements of ~~September 30, 2017~~operations and ~~December 31, 2016,~~comprehensive income (loss). We used the ~~net carrying amount~~FIFO method to determine the cost basis on sales of ~~externally marketed software was $87.7 million and $76.3 million, respectively, of which $16.7 million and $50.1 million, respectively, was under development and not yet placed~~available-for-sale securities. For trading securities, we recognized periodic changes in ~~service. We capitalized costs related to~~ the development of externally marketed software of $8.3 million and $6.2 million for the three months ended September 30, 2017 and 2016, respectively, and $25.4 million and $18.5 million for the nine months ended September 30, 2017 and 2016, respectively. We recorded amortization expense relating to the development of externally marketed software of $5.5 million and $2.5 million for the three months ended September 30, 2017 and 2016, respectively, and $14.1 million and $7.2 million for the nine months ended September 30, 2017 and 2016, respectively. The weighted average useful life of our externally marketed software was approximately four years as of September 30, 2017.

~~New Accounting Pronouncements~~

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and has modified the standard thereafter. It outlines a single comprehensive model, codified in Topic 606fair value of the ~~FASB Accounting Standards Codification, for entities to use~~securities in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Public entities are required to adopt the new revenue standard in fiscal years beginning after December 15, 2017 and in interim periods within those fiscal years. The standard may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted, but not before fiscal years beginning after December 15, 2016. We plan to adopt the new revenue standard as of January 1, 2018 using the “modified retrospective method.” Under this method, we will apply the rules only to contracts that are not substantially completed as of January 1, 2018, recognizing in retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.

~~Upon initial evaluation, we do not expect the adoption of ASU 2014-09 to have a material impact~~“Gains (losses) on the timing or amount of revenue recognition. However, we do believe the new standard will impact our financial statements as it relates to the deferral of sales commissions. We generally expense sales commissions as incurred under the current standard with the exception of the consumer businessinvestments, net” in our Hughes segment. The requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our consolidated balance sheets and corresponding impact to theaccompanying condensed consolidated statement 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 (losses) on investments, net” in our accompanying condensed 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 accompanying condensed 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. We use the equity method to account for such investments when we have the ability to significantly influence the operating decisions of the investee. Prior to January 1, 2018, we accounted for other investments without a readily determinable fair value using the cost method. In ~~addition,~~connection with our adoption of the New Investment Standard as of January 1, 2018, we ~~currently amortize~~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.

Our investments in unconsolidated entities that are accounted for using the equity method 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 accompanying condensed 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 ~~acquisition~~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 statement of operations and include the intra-entity profit eliminations within “Equity in earnings of unconsolidated affiliate.”

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 earnings.

Other Significant Accounting Policies

See Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2017 for a summary of our other significant accounting policies.

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Recently Adopted Accounting Pronouncements

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 contracts with customers. 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 of $18.2 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 (See Contract Acquisition and Fulfillment Costs above). Historically, we charged sales incentives to expense as incurred, except for incentives related to ~~our~~the consumer business in our Hughes segment, which were initially deferred and subsequently amortized over the ~~contract~~related service agreement term. ~~We believe, under~~Under the ~~new guidance, the amortization period~~New Revenue Standard, we continue to defer incentives for ~~these contract acquisition costs will be~~our consumer business; however, we now amortize those incentives over the estimated customer life, which isincludes 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 deferred costs on our accompanying condensed consolidated balance sheet and the costs generally are recognized as expenses over a longer period of ~~time.~~ time in our accompanying condensed consolidated statements of operations and comprehensive income (loss). The adoption of the New Revenue Standard by one of our unconsolidated entities had a similar impact on our investment in the unconsolidated entity, which we account for using the equity method.

~~We continue to evaluate~~Additionally, on January 1, 2018, we prospectively adopted the ~~impact~~applicable requirements of the new standard on our consolidated financial statements and related disclosures. We are not able to reasonably estimate the impact of the new standard on our consolidated financial statements at this time.

~~In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This update~~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 ~~net income.~~earnings. The ~~update~~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. ~~ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early~~Upon adoption ~~permitted for certain requirements. We plan to adopt all applicable requirements~~ of ~~this update as of~~the New Investment Standard on January 1, ~~2018. Upon adoption,~~2018, we ~~will adjust~~recorded a $0.4 million charge to accumulated earnings to include net unrealized ~~gains or~~ losses on ~~any~~our marketable equity securities then designated as available for sale, which ~~historically have been~~previously were recorded in ~~accumulated~~“Accumulated other comprehensive ~~loss except when an other-than-temporary impairment has occurred. Following adoption, all periodic changes~~loss” in fair value of such securities will be recognized in net income or loss. As of September 30, 2017, we had recognized $0.1 million in net unrealized gains on such securities in accumulated other comprehensive loss.our accompanying condensed consolidated balance sheet. For our equity investments without a readily determinable fair value that ~~we now account~~were previously accounted for using the cost method, we ~~expect to elect~~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.

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~~available-for-sale~~The cumulative effects of changes to our accompanying condensed consolidated balance sheet as of January 1, 2018 for the adoption of the New Revenue Standard and ~~cost method equity securities.~~the New Investment Standard were as follows:



	Balance at December 31, 2017			Adjustments Due to the						Balance at January 1, 2018
	Balance at December 31, 2017			New Revenue Standard			New Investment Standard			Balance at January 1, 2018
	(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	$	85,510		$	255		$	—		$	85,765
Deferred tax liabilities, net	$	439,631		$	3,122		$	—		$	442,753
Other noncurrent liabilities	$	107,627		$	(4,068	)	$	—		$	103,559
Total liabilities	$	4,558,106		$	(2,233	)	$	—		$	4,555,873
Shareholders’ Equity:
Accumulated other comprehensive income (loss)	$	(52,822	)	$	—		$	433		$	(52,389	)
Accumulated earnings (losses)	$	582,683		$	18,208		$	(433	)	$	600,458
Total shareholders’ equity	$	2,299,244		$	18,208		$	—		$	2,317,452
Total liabilities and shareholders’ equity	$	6,857,350		$	15,975		$	—		$	6,873,325

Our adoption of the New Revenue Standard and the New Investment Standard impacted our accompanying condensed consolidated balance sheet and statements of operations and comprehensive income (loss) as follows:



	As of March 31, 2018
	As Reported			Adjustments Due to the					Balances If We Had Not Adopted the New Standards
Balance Sheet	As Reported			New Revenue Standard			New Investment Standard		Balances If We Had Not Adopted the New Standards
	(In thousands)
Assets:
Trade accounts receivable and contract assets, net	$	166,182		$	7,122		$	—	$	173,304
Other current assets	$	13,162		$	(533	)	$	—	$	12,629
Other noncurrent assets, net	$	244,429		$	(25,895	)	$	—	$	218,534
Total assets	$	6,900,680		$	(19,306	)	$	—	$	6,881,374
Liabilities:
Contract liabilities	$	65,333		$	1,134		$	—	$	66,467
Accrued expenses and other	$	82,524		$	(255	)	$	—	$	82,269
Deferred tax liabilities, net	$	450,413		$	(3,654	)	$	—	$	446,759
Other noncurrent liabilities	$	106,390		$	3,185		$	—	$	109,575
Total liabilities	$	4,552,992		$	410		$	—	$	4,553,402
Shareholders’ Equity:
Accumulated other comprehensive loss	$	(50,686	)	$	—		$	—	$	(50,686	)
Accumulated earnings	$	620,459		$	(19,716	)	$	—	$	600,743
Total shareholders’ equity	$	2,347,688		$	(19,716	)	$	—	$	2,327,972
Total liabilities and shareholders’ equity	$	6,900,680		$	(19,306	)	$	—	$	6,881,374

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	For the three months ended March 31, 2018
	As Reported			Adjustments Due to the						Balances If We Had Not Adopted the New Standards
Statement of Operations and Comprehensive Income	As Reported			New Revenue Standard			New Investment Standard			Balances If We Had Not Adopted the New Standards
	(In thousands)
Revenue:
Services and other revenue - other	$	359,334		$	1,218		$	—		$	360,552
Total revenue	$	502,895		$	1,218		$	—		$	504,113
Costs and expenses:
Cost of sales - services and other (exclusive of depreciation and amortization)	$	142,703		$	929		$	—		$	143,632
Selling, general and administrative expenses	$	94,650		$	2,421		$	—		$	97,071
Total costs and expenses	$	422,231		$	3,350		$	—		$	425,581
Operating income	$	80,664		$	(2,132	)	$	—		$	78,532
Other income (expense):
Interest expense, net of amounts capitalized	$	(64,413	)	$	92		$	—		$	(64,321	)
Gains (losses) on investments, net	$	(392	)	$	—		$	395		$	3
Other-than-temporary impairment loss on available-for-sale securities	$	—		$	—		$	(828	)	$	(828	)
Total other expense, net	$	(52,547	)	$	92		$	(433	)	$	(52,888	)
Income before income taxes	$	28,117		$	(2,040	)	$	(433	)	$	25,644
Income tax provision	$	(7,736	)	$	532		$	—		$	(7,204	)
Net income	$	20,381		$	(1,508	)	$	(433	)	$	18,440
Net income attributable to HSS	$	20,001		$	(1,508	)	$	(433	)	$	18,060
Comprehensive income
Net income	$	20,381		$	(1,508	)	$	(433	)	$	18,440
Other comprehensive income (loss), net of tax:
Unrealized losses on available-for-sale securities and other	$	(411	)	$	—		$	(395	)	$	(806	)
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income	$	—		$	—		$	828		$	828
Total other comprehensive income, net of tax	$	1,489		$	—		$	433		$	1,922
Comprehensive income	$	21,870		$	(1,508	)	$	—		$	20,362
Comprehensive income attributable to HSS	$	21,704		$	(1,508	)	$	—		$	20,196

Restricted Cash and Cash Equivalents

ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents in the statement of cash flows. We ~~continue~~adopted ASU 2016-18 as of January 1, 2018. As a result, the beginning and ending balances of cash and cash equivalents presented in our accompanying condensed 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 ~~assess the~~and from unrestricted accounts, are reported in our accompanying condensed consolidated statements of cash flows. The adoption of this accounting standard did not have a material impact on our ~~consolidated financial~~ statements of ~~certain requirements~~cash flows and related disclosures.

The beginning and ending balances of ~~ASU 2016-01 related to measurement~~cash and cash equivalents presented in our accompanying condensed consolidated statements of ~~fair value~~cash flows included restricted cash and cash equivalents of ~~financial instruments, deferred tax~~$0.8 million and $0.8 million, respectively, for the three months ended March 31, 2018 and $0.7 million and $0.8 million, respectively, for the three months ended March 31, 2017. These amounts are included in “Other noncurrent assets, ~~related to available-for-sale debt securities, and financial statement presentation and disclosure.~~net” in our accompanying condensed consolidated balance sheets.

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Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the ~~FASB issued~~Financial Accounting Standards ~~Update~~Board (“FASB”) issued ASU No. 2016-02, Leases (“ASU 2016-02”). This standard requires lessees to recognize assets and liabilities for all leases with lease terms more 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 leases or financing leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We ~~are assessing~~plan to adopt the new standard as of January 1, 2019. ASU 2016-02 requires the new standard to be applied on a modified retrospective basis to the earliest period presented in our consolidated financial statements. However, the FASB has recently proposed amendments that would permit adoption of the standard as of the effective date without restating prior periods. ASU 2016-02 provides certain practical expedients that we may elect to apply on the adoption date. We continue to evaluate the impact of ~~adopting this~~the new ~~accounting~~ standard and available adoption methods on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ~~Accounting Standards Update~~ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 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 assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We early adopted ASU 2016-16 as of January 1, 2017. Our adoption of this update did not have a material impact on our condensed consolidated financial statements and related disclosures.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). This standard requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and the standard must be applied retrospectively to all periods presented. We expect to adopt ASU 2016-18 as of January 1, 2018. Following our adoption of this standard, the beginning and ending balances of cash and cash equivalents presented in our consolidated statements of cash flows will include amounts for restricted cash and cash equivalents, which currently are not included in such balances. Changes in restricted cash and cash equivalents, which we have historically reported in cash flows from investing activities, will not be reported in our consolidated statements of cash flows.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and is to be applied on a prospective basis. We early adopted ASU 2017-04 as of January 1, 2017. Our adoption of this update did not have a material impact on our condensed consolidated financial statements and related disclosures, but it may impact the recognition and measurement of a goodwill impairment loss in future periods if we determine that the carrying amount of any reporting units including goodwill exceeds fair value of the reporting unit.

In March 2017, the FASB issued ~~Accounting Standards Update~~ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). This update shortens the amortization period of premiums on certain purchased callable debt securities to the earliest call date, effectively reducing interest income on such securities prior to the earliest call date. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

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Note 3. Revenue Recognition

Information About Contract Balances

The following table provides information about our trade accounts receivable, contract assets and contract liabilities from contracts with customers, including amounts for certain embedded leases.



	As of
	March 31, 2018			January 1, 2018
	(In thousands)
Trade accounts receivable:
Sales and services	$	135,972		$	156,794
Leasing	9,085			10,355
Total	145,057			167,149
Contract assets	33,298			34,615
Allowance for doubtful accounts	(12,173		)	(12,027		)
Total trade accounts receivable and contract assets, net	$	166,182		$	189,737

Trade accounts receivable - DISH Network:
Sales and services	$	27,782		$	16,118
Leasing	25,816			22,523
Total trade accounts receivable - DISH Network, net	$	53,598		$	38,641

Noncurrent contract assets	$	36		$	37

Contract liabilities:
Current	$	65,333		$	64,417
Noncurrent	11,765			13,036
Total contract liabilities	$	77,098		$	77,453

For the three months ended March 31, 2018, revenue recognized that was included in the contract liability balance at the beginning of the period was $49.0 million.

Bad debt expense related to our trade accounts receivable and contract assets is included in “Selling, general and administrative expenses” in our accompanying condensed consolidated statements of operations. For the three months ended March 31, 2018 and 2017, our bad debt expense was $4.7 million and $2.4 million, respectively.

Transaction Price Allocated to Remaining Performance Obligations

As of March 31, 2018, the remaining performance obligations for our contracts with customers with original expected durations of more than one year was $1.27 billion. We expect to recognize approximately 25% of our remaining performance obligations of these contracts as revenue by December 31, 2018. Agreements with customers in our Hughes segment consumer market that have expected durations of one year or less and our leasing arrangements are not included in this amount.

Note 3.4. Other Comprehensive Income (Loss) and Related Tax Effects

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. We have not recognized any tax effects on unrealized gains or losses on available-for-sale securities because such gains or losses would affect the amount of unrealized capital losses for which the related deferred tax asset has been fully offset by a valuation allowance.

~~Accumulated other comprehensive loss includes net cumulative foreign currency translation losses of $45.1 million and $59.0 million as of September 30, 2017 and December 31, 2016, respectively.~~

~~Reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 were as follows:~~

Accumulated Other Comprehensive Loss Components Affected Line Item in our Condensed Consolidated Statements of Operations For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)
Recognition of realized gains on available-for-sale securities in net income (1) Gains on marketable investment securities $ —
$ (4 ) $ —
$ (2,989 )
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income (2) Other-than-temporary impairment loss on available-for-sale securities —
—
3,298
—
Total reclassifications, net of tax and noncontrolling interests $ —
$ (4 ) $ 3,298
$ (2,989 )


~~(1)~~	When available-for-sale securities are sold, the related unrealized gains and losses that were previously recognized in other comprehensive income (loss) are reclassified and recognized as “Gains on marketable investment securities, net” in our condensed consolidated statements of operations and comprehensive income (loss).


~~(2)~~	~~We recorded an other-than-temporary impairment loss on shares of certain common stock included in our strategic equity securities.~~

~~Note 4.Investment Securities~~

~~Marketable Investment Securities~~

~~Our marketable investment securities consisted of the following:~~

As of
September 30, 2017 December 31, 2016
(In thousands)
Marketable investment securities—current, at fair value:
Corporate bonds $ 132,986
$ 164,619
Strategic equity securities 1,646
10,309
Other 61,274
12,995
Total marketable investment securities—current $ 195,906
$ 187,923

Our marketable investment securities portfolio consists of various debt and equity instruments, which generally are classified as available-for-sale or trading securities depending on our investment strategy for those securities. The value of our investment portfolio depends on the value of such securities and other instruments comprising the portfolio.

~~Corporate Bonds~~

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

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~~Strategic Equity Securities~~

~~Our strategic investment portfolio consists~~Accumulated other comprehensive loss includes net cumulative foreign currency translation losses of ~~investments in shares~~$50.1 million and $52.3 million as of ~~common stock of public companies, which are highly speculative~~March 31, 2018 and ~~have experienced and continue to experience volatility. We did not receive any dividend income for the three and nine months ended September 30,~~December 31, 2017, or 2016. We recognized a $3.3 million other-than-temporary impairment for the nine months ended September 30, 2017 on one of our investments. This investment had been in a continuous loss position for more than 12 months and experienced a decline in market value as a result of adverse developments duringrespectively. For the three months ended March 31, ~~2017.~~2017, “Other-than-temporary impairment loss on available-for sale securities” consisted of $3.3 million reclassified from other comprehensive income.

For each of the three months ended September 30, 2017 and 2016, we did not recognize any gain and loss related to trading securities that we held as of September 30, 2017 and 2016. For the nine months ended September 30, 2017 and 2016, “Gains on

Note 5.Marketable Investment Securities

Overview

Our marketable investment securities ~~net” included gains~~portfolio consists of ~~zero~~various debt and ~~losses of $1.0 million, respectively, related to trading securities that we held~~equity instruments as ~~of September 30, 2017 and 2016, respectively. The fair values of our trading securities were zero and $7.2 million as of September 30, 2017 and December 31, 2016, respectively.~~follows:



	As of
	March 31, 2018		December 31, 2017
	(In thousands)
Marketable investment securities, at fair value:
Debt securities:
Corporate bonds	$	594,866	$	368,083
Other debt securities	27,973		86,417
Total debt securities	622,839		454,500
Equity securities	708		1,102
Total marketable investment securities	$	623,547	$	455,602

~~Other~~

Debt Securities

Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries. Our other ~~current marketable investment~~debt securities portfolio includes investments in various debt instruments, including U.S. government bonds and commercial paper. Generally, we classify our debt securities as available-for-sale based on our investment strategy for the securities.

~~Unrealized Gains (Losses) on Available-for-Sale Securities~~

~~The components of our~~Our available-for-sale debt securities ~~are~~reflect amortized cost and unrealized gains and losses as summarized in the table below.

Amortized Unrealized Estimated
Cost Gains Losses Fair Value
(In thousands)
As of September 30, 2017
Debt securities:
Corporate bonds $ 132,994
$ 19
$ (27 ) $ 132,986
Other 61,276
—
(2 ) 61,274
Equity securities - strategic 1,536
110
—
1,646
Total available-for-sale securities $ 195,806
$ 129
$ (29 ) $ 195,906
As of December 31, 2016
Debt securities:
Corporate bonds $ 164,563
$ 94
$ (38 ) $ 164,619
Other 12,994
1
—
12,995
Equity securities - strategic 4,834
—
(1,724 ) 3,110
Total available-for-sale securities $ 182,391
$ 95
$ (1,762 ) $ 180,724



	Amortized		Unrealized					Estimated
	Cost		Gains		Losses			Fair Value
	(In thousands)
As of March 31, 2018
Corporate bonds	$	595,390	$	4	$	(528	)	$	594,866
Other debt securities	27,975		—		(2		)	27,973
Total available-for-sale debt securities	$	623,365	$	4	$	(530	)	$	622,839
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 ~~September 30, 2017, restricted and non-restricted~~March 31, 2018, our available-for-sale debt securities included ~~debt securities of $194.3~~$523.8 million with contractual maturities of one year or less and ~~zero~~$99.0 million with contractual maturities greater than one year. We may realize proceeds from certain investments prior to their contractual maturity as a result of our ability to sell these securities.

Equity Securities

Our marketable equity securities ~~prior~~consist primarily of shares of common stock of public companies, which have experienced and may continue to ~~their contractual maturity.~~experience volatility.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~Available-for-Sale Securities in~~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 ~~Loss Position~~

~~The following table reflects the length~~fair value of ~~time that~~$1.1 million, reflecting an adjusted cost basis of $1.5 million and unrealized losses of $0.4 million. Substantially all unrealized losses on our available-for-sale securities have been in an unrealized loss position. We do not intend to sell these securities before they recover or mature, and it is more likely than not that we will hold these securities until they recover or mature. We believe that changes in the estimated fair values of these securities are primarily related to ~~temporary market conditions~~

As of
September 30, 2017 December 31, 2016

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
(In thousands)
Less than 12 months $ 112,110
$ (27 ) $ 62,473
$ (1,760 )
12 months or more 9,399
(2 ) 1,571
(2 )
Total $ 121,509
$ (29 ) $ 64,044
$ (1,762 )

~~Sales of Available-for-Sale Securities~~

securities that were in a continuous loss position for less than 12 months. We recognized ~~zero gains and losses from~~a $3.3 million other-than-temporary impairment for the ~~sales~~three months ended March 31, 2017 on one of our available-for-sale securities ~~for each~~which had experienced a decline in market value as a result of the three and nine months ended September 30, 2017. We recognized gains from the sales of our available-for-sale securities of de minimis and $3.0 million for the three and nine months ended September 30, 2016, respectively. We recognized de minimis losses from the sales of our available-for-sale securities for each of the three and nine months ended September 30, 2016.

~~Proceeds from sales of our available-for-sale securities totaled zero for each of~~adverse developments during the three months ended ~~September 30, 2017~~March 31, 2017.

Upon adoption of the New Investment Standard as of January 1, 2018 (see Note 2), we account for investments in equity securities at their fair value and ~~2016, respectively,~~we recognize unrealized gains and ~~$8.9 million~~losses in “Gains (losses) on investments, net” in our accompanying condensed consolidated statement of operations and ~~$17.6 million for~~comprehensive income (loss). For the ~~nine~~three months ended ~~September 30, 2017 and 2016, respectively.~~March 31, 2018, “Gains (losses) on investments, net” included net losses of $0.4 million related to equity securities that we held as of March 31, 2018.

Fair Value Measurements

Our ~~current~~ marketable investment securities are measured at fair value on a recurring basis as summarized in the table below. As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

As of
September 30, 2017 December 31, 2016
Total Level 1 Level 2 Total Level 1 Level 2
(In thousands)
Cash equivalents $ 2,016,027
$ 12,821
$ 2,003,206
$ 1,991,949
$ 14,011
$ 1,977,938
Debt securities:
Corporate bonds $ 132,986
$ —
$ 132,986
$ 164,619
$ —
$ 164,619
Other 61,274
—
61,274
12,995
—
12,995
Equity securities - strategic 1,646
1,646
—
10,309
10,309
—
Total marketable investment securities $ 195,906
$ 1,646
$ 194,260
$ 187,923
$ 10,309
$ 177,614

~~Investments in Unconsolidated Entities~~ —~~Noncurrent~~

We have strategic investments in certain non-publicly traded equity securities that are accounted for using either the equity or the cost method of accounting. Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

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~~HUGHES SATELLITE SYSTEMS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~Our investments in unconsolidated entities consisted of the following:~~

As of
September 30, 2017 December 31, 2016
(In thousands)
Investments in unconsolidated entities—noncurrent:

Cost method $ 15,438
$ 15,438
Equity method 17,420
27,122
Total investments in unconsolidated entities—noncurrent $ 32,858
$ 42,560



	As of
	March 31, 2018						December 31, 2017
	Total		Level 1		Level 2		Total		Level 1		Level 2
	(In thousands)
Debt securities:
Corporate bonds	$	594,866	$	—	$	594,866	$	368,083	$	—	$	368,083
Other	27,973		—		27,973		86,417		—		86,417
Total debt securities	622,839		—		622,839		454,500		—		454,500
Equity securities	708		708		—		1,102		1,102		—
Total marketable investment securities	$	623,547	$	708	$	622,839	$	455,602	$	1,102	$	454,500

We recorded cash distributions from our investments accounted for using the equity method of $7.5 million and zero for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, we recorded cash distributions from one of these investments accounted for using the equity method of $15.0 million and $10.0 million, respectively. These cash distributions were determined to be a return on investment and reported in cash flows from operating activities in our condensed consolidated statements of cash flows.

~~Note 5.Trade Accounts Receivable~~

~~Our trade accounts receivable consisted of the following:~~

As of
September 30, 2017 December 31, 2016
(In thousands)
Trade accounts receivable $ 181,555
$ 159,094
Contracts in process, net 24,043
36,170
Total trade accounts receivable 205,598
195,264
Allowance for doubtful accounts (13,211 ) (12,752 )
Trade accounts receivable - DISH Network 45,968
19,323
Total trade accounts receivable, net $ 238,355
$ 201,835

~~As of September 30, 2017 and December 31, 2016, progress billings offset against contracts in process amounted to $17.4 million and $14.6 million, respectively.~~

Note 6. Inventory

Our inventory consisted of the following:


	As of				As of
	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
	(In thousands)				(In thousands)
Finished goods	$	74,693	$	49,773	$	72,027	$	70,669
Raw materials	6,901		6,678		6,265		5,484
Work-in-process	9,638		6,187		7,703		7,442
Total inventory	$	91,232	$	62,638	$	85,995	$	83,595

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Note 7.7. Property and Equipment

Property and equipment consisted of the following:


	Depreciable Life (In Years)		As of							Depreciable Life In Years		As of
		September 30, 2017				December 31, 2016				Depreciable Life In Years	March 31, 2018				December 31, 2017
			(In thousands)									(In thousands)
Land	Depreciable Life (In Years)	—		$	13,443			$	13,273		—		$	13,504			$	13,475
Buildings and improvements	1 - 30		127,652				79,765			1 to 40		128,512				128,292
Furniture, fixtures, equipment and other	1 - 12		576,423				430,078			1 to 12		661,708				650,385
Customer rental equipment	2 - 4		859,596				689,579			2 to 4		992,893				929,775
Satellites - owned	2 - 15		2,516,684				2,381,120			2 to 15		2,516,685				2,516,685
Satellites acquired under capital leases	10 - 15		794,705				781,761
Satellites - acquired under capital leases										10 to 15		917,561				916,820
Construction in progress	—		398,585				422,337			—		170,186				149,570
Total property and equipment			5,287,088				4,797,913					5,401,049				5,305,002
Accumulated depreciation			(2,433,297		)		(2,503,187		)			(2,674,425		)		(2,551,904		)
Property and equipment, net			$	2,853,791			$	2,294,726				$	2,726,624			$	2,753,098

Construction in progress consisted of the following:


	As of				As of
	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
	(In thousands)				(In thousands)
Progress amounts for satellite construction, including prepayments under capital leases and launch services costs	$	296,358	$	244,234	$	114,467	$	101,733
Satellite related equipment	83,907		152,683		34,485		28,358
Other	18,320		25,420		21,234		19,479
Construction in progress	$	398,585	$	422,337	$	170,186	$	149,570

Construction in progress ~~included the following owned and leased satellites under construction or undergoing in-orbit testing~~ as of ~~September 30, 2017.~~March 31, 2018 included payments related to our payload on Telesat T19V satellite, which we expect will launch in the second quarter of 2018. We entered into an agreement for certain capacity on this satellite once launched, but are not party to the construction contract.



~~Satellites~~	~~Segment~~	~~Expected Launch Date~~
~~EchoStar 105/SES-11~~	~~ESS~~	~~October 2017 (1)~~
~~Telesat T19V (“63 West”) (2)~~	~~Hughes~~	~~Second quarter of 2018~~


~~(1)~~	~~This satellite was launched in October 2017 and is expected to be placed in service during the fourth quarter of 2017.~~


~~(2)~~	~~We entered into a satellite services agreement for certain capacity on this satellite once launched, but are not party to the construction contract.~~

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the three months ended March 31,
	2017		2016		2017		2016		2018		2017
	(In thousands)								(In thousands)
Satellites	$	56,953	$	46,965	$	166,419	$	140,895	$	59,033	$	52,143
Furniture, fixtures, equipment and other	21,428		16,739		58,078		44,883		20,774		16,682
Customer rental equipment	39,104		28,652		103,781		86,789		43,448		30,596
Buildings and improvements	1,306		1,042		3,972		3,151		1,298		1,257
Total depreciation expense	$	118,791	$	93,398	$	332,250	$	275,718	$	124,553	$	100,678

Satellites

As of March 31, 2018, our satellite fleet consisted of 15 of our owned and leased satellites 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. As of March 31, 2018, four of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over their respective lease terms.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~Satellites~~

As of September 30, 2017, our satellite fleet consisted of 16 of our owned and leased satellites in geosynchronous orbit, approximately 22,300 miles above the equator. We have not included the EchoStar 105/SES-11 satellite in our satellite fleet as of September 30, 2017 since it had not been placed into service as of this date. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite. As of September 30, 2017, three of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over their respective lease terms. We accounted for one satellite as an operating lease that is not included in property and equipment as of September 30, 2017.

Recent Developments

EchoStar ~~III.~~ IIn July 2017, the EchoStar III satellite experienced an anomaly that caused communications with the satellite to be interrupted resulting in a loss of control. We regained communications with and control of the EchoStar III satellite and retired it in August 2017.. The EchoStar ~~III satellite was a fully depreciated, non-revenue generating asset.~~

~~EchoStar VIII.~~ ~~During the second quarter of 2017, the EchoStar VIII~~I satellite was removed from its orbital location and retired from commercial ~~service.~~service in January 2018. This retirement ~~has~~is not ~~had,~~expected to have a material impact on our results of operations or financial position.

EchoStar VI. We expect to remove the EchoStar VI satellite from its orbital location and retire it from commercial service in the second quarter of 2018. This retirement is not expected to have a material impact on our results of operations or financial position.

EchoStar ~~XIX~~. The EchoStar XIX satellite was launched in December 2016 and was placed into service in March 2017 at the 97.1 degree west longitude orbital location. The EchoStar XIX satellite provides additional capacity for the Hughes broadband services to our customers in North America and added capacity in certain Central and South American countries and has added capability for aeronautical, enterprise and international broadband services. ~~EchoStar contributed the EchoStar XIX satellite to us in February 2017.~~

~~EchoStar~~ 105/SES-11. The EchoStar 105/SES-11 satellite was launched in October 2017 and ~~is anticipated to be~~was placed into service in ~~the fourth quarter of~~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 $77.5 million receivable from SES in “Other current assets,” 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 ~~will replace our current~~has replaced the capacity we had on the AMC-15 satellite.

Satellite Anomalies and Impairments

Our satellites may experience anomalies from time to time, some of which may have a significant adverse ~~impact~~effect on their remaining useful lives, the commercial operation of the satellites or our operating results or financial position. We are not aware of any anomalies with respect to our owned or leased satellites that have had any such ~~material~~significant adverse effect during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. There can be no assurance, however, that anomalies will not have any such adverse ~~impacts~~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 in-orbit 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 $1.2 million for the three months ended March 31, 2018 as compared to the same period in 2017.

We historically have not carried in-orbit insurance on our satellites because we have assessed that the cost of insurance ~~was uneconomical~~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, we are required, subject to certain limitations on coverage, to maintain in-orbit insurance for our SPACEWAY 3, EchoStar XVI, and EchoStar XVII satellites. Based on economic analysis of the current insurance market we obtained launch plus one year in-orbit insurance, subject to certain limitations, for the EchoStar XIX satellite. Additionally, we obtained certain launch and in-orbit insurance for our interest in the EchoStar 105/SES-11 satellite. AllOur other satellites, either in orbit or under construction, are not covered by launch or in-orbit insurance. We will continue to assess circumstances going forward and make insurance decisions on a ~~case by case~~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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Note 8. Goodwill and Other Intangible Assets

Goodwill

The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill. Goodwill is assigned to the reporting units within our operating segments and is subject to impairment testing annually, or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is more likely than not less than its carrying amount.

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, all of our goodwill was assigned to reporting units of our Hughes segment. We test this goodwill for impairment annually in the second quarter. Based on our qualitative assessment of impairment in the second quarter of 2017, we determined that it was not more likely than not that the fair values of the Hughes segment reporting units were less than the corresponding carrying amounts.

Other Intangible Assets

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


	Weighted Average Useful Life (in Years)		As of																							Weighted Average Useful Life (in Years)		As of
		September 30, 2017												December 31, 2016													March 31, 2018												December 31, 2017
		Cost				Accumulated Amortization				Carrying Amount				Cost				Accumulated Amortization				Carrying Amount					Cost				Accumulated Amortization				Carrying Amount				Cost				Accumulated Amortization				Carrying Amount
			(In thousands)																									(In thousands)
Customer relationships		8		$	270,300			$	(228,355	)		$	41,945			$	270,300			$	(214,544	)		$	55,756		8		$	270,300			$	(234,928	)		$	35,372			$	270,300			$	(231,642	)		$	38,658
Technology-based		6		51,417				(51,417		)		—				51,417				(47,848		)		3,569			6		51,417				(51,417		)		—				51,417				(51,417		)		—
Trademark portfolio	20		29,700				(9,405		)		20,295				29,700				(8,291		)		21,409			20		29,700				(10,148		)		19,552				29,700				(9,776		)		19,924
Total other intangible assets			$	351,417			$	(289,177	)		$	62,240			$	351,417			$	(270,683	)		$	80,734				$	351,417			$	(296,493	)		$	54,924			$	351,417			$	(292,835	)		$	58,582

~~Customer relationships are amortized predominantly in relation to~~Amortization expense for the ~~expected contribution of cash flow to the business over the life of the intangible asset. Other~~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 ~~$9.1~~$3.7 million and ~~$11.4~~$8.2 million for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $32.6 million and $33.7 million for the nine months ended September 30, 2017 and 2016,~~ respectively.

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 certain 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 three months ended March 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
	March 31, 2018		December 31, 2017
	(In thousands)
Investments in unconsolidated entities:
Equity method	$	16,641	$	15,149
Other equity investments without a readily determinable fair value	15,438		15,438
Total investments in unconsolidated entities	$	32,079	$	30,587

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Note 910. Debt and Capital Lease Obligations

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


	Effective Interest Rate		As of															Effective Interest Rate		As of
		September 30, 2017								December 31, 2016									March 31, 2018								December 31, 2017
		Carrying Amount				Fair Value				Carrying Amount				Fair Value					Carrying Amount				Fair Value				Carrying Amount				Fair Value
			(In thousands)																	(In thousands)
Senior Secured Notes:
6 1/2% Senior Secured Notes due 2019		6.959%		$	990,000			$	1,056,825			$	990,000			$	1,084,050		6.959%		$	990,000			$	1,024,947			$	990,000			$	1,042,609
5 1/4% Senior Secured Notes due 2026		5.320%		750,000				783,038				750,000				739,688			5.320%		750,000				743,198				750,000				769,305
Senior Unsecured Notes:
7 5/8% Senior Unsecured Notes due 2021	8.062%		900,000				1,023,408				900,000				990,189			8.062%		900,000				966,060				900,000				992,745
6 5/8% Senior Unsecured Notes due 2026	6.688%		750,000				806,910				750,000				760,245			6.688%		750,000				755,063				750,000				791,865
Less: Unamortized debt issuance costs			(26,756		)		—				(31,821		)		—					(22,922		)		—				(24,857		)		—
Subtotal			3,363,244				$	3,670,181			3,358,179				$	3,574,172				3,367,078				$	3,489,268			3,365,143				$	3,596,524
Capital lease obligations			280,878								297,268									260,318								269,701
Total debt and capital lease obligations			3,644,122								3,655,447									3,627,396								3,634,844
Less: Current portion			(38,407		)						(32,984		)							(41,424		)						(40,631		)
Long-term debt and capital lease obligations, net of unamortized debt issuance costs			$	3,605,715							$	3,622,463
Long-term debt and capital lease obligations, net																				$	3,585,972							$	3,594,213

~~The fair values of our debt are estimates categorized within Level 2 of the fair value hierarchy.~~

Pursuant to the terms of a registration rights agreement, we registered notes having substantially identical terms as the 2026 Notes with the SEC 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.

Note ~~10.~~11. Income Taxes

Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

Our ~~quarterly~~interim income tax provision and our ~~quarterly~~interim estimate of our annual effective tax rate isare subject to significant volatility due to several factors, including ~~income~~foreign losses and capital gains and losses ~~from investments~~ for which ~~we have~~related deferred tax assets are offset by a ~~full~~ valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax ~~income.~~income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income or loss is lower.

Income tax expense was ~~$8.7~~approximately $7.7 million for the three months ended ~~September 30, 2017~~March 31, 2018 compared to an income tax ~~expense~~benefit of approximately ~~$16.4~~$3.6 million for the three months ended ~~September 30, 2016.~~March 31, 2017. Our estimated effective income tax rate was ~~43.2%~~27.5% and ~~36.9%~~(61.3)% for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. ~~The variations in our current year effective tax rate from the U.S. federal statutory rate for the three months ended September 30, 2017 was primarily due to various permanent tax differences.~~ The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended ~~September 30, 2016 was~~March 31, 2018 were primarily due to ~~research and experimentation credits, partially offset by~~various permanent tax differences, the impact of state and local ~~taxes.~~

~~Income tax expense was approximately $4.6 million for~~taxes, and the ~~nine~~increase in our valuation allowance associated with certain foreign losses. For the three months ended ~~September 30,~~March 31, 2017, ~~compared to an income tax expense of approximately $57.3 million for~~ the ~~nine months ended September 30, 2016. Our estimated effective income tax rate was 17.9% and 36.4% for the nine months ended September 30, 2017 and 2016, respectively. The~~ variations in our effective tax rate from the U.S. federal statutory rate ~~for the nine months ended September 30, 2017 was~~were primarily due to the

~~Table of Contents~~

~~HUGHES SATELLITE SYSTEMS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

recognition of a one-time tax benefit for the revaluation of our deferred tax assets and liabilities due to a change in our state effective tax rate as a result of the Share Exchange. ~~For~~

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Due to the ~~nine months~~timing of the enactment and the complexity involved in applying the provisions of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), we made reasonable estimates of the effects and recorded provisional amounts in our accompanying condensed consolidated financial statements. See Note 10, “Income Taxes” to our consolidated financial statements included in our Form 10-K for the year ended ~~September 30, 2016,~~December 31, 2017 for a summary of the ~~variation~~benefit that we have provisionally recorded to reflect the change in the value of our deferred tax assets and liabilities resulting from the 2017 Tax Act. The tax effects of the 2017 Tax Act that we recorded in our financial statements for the year ended December 31, 2017 remain provisional and we have not made any adjustments to such provisional amounts in the quarter ended March 31, 2018. As we collect and prepare necessary data, and interpret the 2017 Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”) or other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustment may materially impact the provision for income taxes and the effective tax rate ~~from~~in the ~~U.S. federal statutory rate was primarily due to~~period in which the ~~impact of state and local taxes.~~adjustments are made.

Note 1112. Commitments and Contingencies

Commitments

As of ~~September 30, 2017,~~March 31, 2018, our satellite-related obligations were approximately ~~$581.3~~$507.2 million. Our satellite-related obligations primarily include payments pursuant to ~~launch services contracts and~~ regulatory authorizations; executory costs for our capital lease satellites; costs under agreements to lease satellite ~~service agreements;~~capacity; and in-orbit incentives relating to certain satellites; as well as commitments for long-term satellite operating leases and satellite service arrangements.

Contingencies

Patents and Intellectual Property

Many entities, including some of our competitors, have or may have in the future ~~obtain~~ 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 trebled. 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 persons 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 persons 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;~~Agreement and Share Exchange

In connection with DISH Network’s distribution to EchoStar in 2008 ~~DISH Network contributed~~of its digital set-top box business, ~~and~~ certain infrastructure, and other assets and related liabilities, including certain ~~of its~~ satellites, uplink and satellite transmission assets and real estate ~~and other assets and related liabilities to EchoStar~~ (the “Spin-off”)~~. In connection with 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 and its subsidiaries will only be liable for ~~its~~their acts or omissions following the Spin-off and DISH Network will indemnify EchoStar and its subsidiaries 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, EchoStar and certain of its subsidiaries entered into the Share Exchange Agreement 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 certain pre-existing liabilities and legal proceedings.

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Litigation

We are involved in a number of legal proceedings ~~(including those described below)~~ 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 or there is a reasonable possibility that a loss or an additional loss may have been incurred 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 litigation are charged to expense as incurred.

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For certain cases, ~~described below,~~ 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, (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 or motions; (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, ~~for these cases,~~ 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.

We intend to vigorously defend the proceedings against us. In the event that a court 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 ~~United States~~U.S. District Court for the Eastern District of Texas, alleging infringement of ~~United States~~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 ~~Patent and Trademark Office~~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 $21.1 million. As a result of interest, costs and unit sales through the 073 patent’s expiration in November 2017, we estimate the jury verdict could result in a judgment of approximately $27 million if not overturned or modified by post-trial motions or appeals. 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 $28.5 million plus post-judgment interest if not overturned or modified on appeal. Elbit has requested an award of $13.9 million of attorneys’ fees. HNS ~~intends~~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 ~~vigorously pursue its post-trial rights, including appeals.~~the U.S. Court of Appeals for the Federal Circuit. We cannot predict with certainty the outcome of ~~any post-trial motions or appeals. For~~ the ~~nine months ended September 30, 2017,~~appeal. As of March 31, 2018, we have recorded ~~a charge~~an accrual of ~~$2.5~~approximately $2.8 million with respect to this ~~matter.~~liability. Any eventual payments made with respect to the ultimate outcome of this matter may be different from our accruals and such differences could be significant.

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Realtime Data LLC

On May 8, 2015, Realtime Data LLC (“Realtime”) filed suit against EchoStar Corporation and our subsidiary HNS in the ~~United States~~U.S. District Court for the Eastern District of Texas alleging infringement of ~~United States~~U.S. Patent Nos. 7,378,992 (the “992 patent”), entitled “Content Independent Data Compression Method and ~~System”;~~System;” 7,415,530 (the “530 patent”), entitled “System and Methods for Accelerated Data Storage and ~~Retrieval”;~~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 ~~United States~~U.S. Patent No. 9,116,908 (the “908 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval.” Realtime generally alleges that the asserted patents are infringed by certain HNS data compression products and services. Realtime is no longer asserting the 992 patent against us. Over April 29, 2016 and May 5, 2016, the defendants filed petitions before the ~~United States Patent and Trademark Office (“USPTO”)~~USPTO challenging the validity of the asserted patents. The USPTO instituted proceedings on each of those petitions. The USPTO invalidated the asserted claims of the 513 patent, but Realtime is still asserting this patent against us and may appeal this ruling. ~~Realtime is no longer asserting the 992 patent against us and additionally the USPTO invalidated the claims of the 992 patent that had been asserted against us.~~ The USPTO is still reviewing the 530 patent; however, two of the four claims from that patent asserted against us were invalidated in a separate litigation between Realtime and a third party,

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which Realtime may appeal. The USPTO did not invalidate the asserted claims of the 908 ~~patent, but a third party has challenged these claims in a separate proceeding before the USPTO.~~patent. 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 ~~United States~~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 June 6, 2017, Realtime~~In response to petitions filed ~~an amended complaint, adding~~by third parties, the USPTO has instituted proceedings regarding the validity of all but one asserted claim of the 867 patent, all but one asserted claim of the 728 patent, and all asserted claims of ~~infringement~~the 204 patent. Additional third party petitions challenging the validity of all claims asserted in the 204 and 728 patents are awaiting institution decisions. On February 13, 2018 we filed petitions before the USPTO challenging the validity of all claims asserted against ~~EchoStar Technologies, L.L.C., a wholly-owned subsidiary of DISH, DISH, DISH Network L.L.C., Sling TV L.L.C., Sling Media L.L.C.,~~us from the 707 and ~~Arris Group, Inc.,~~204 patents, as well as ~~additionally alleging infringement~~the one asserted claim of ~~United States Patent No. 8,553,759 (the “759 patent”), entitled “Bandwidth Sensitive Data Compression and Decompression.” The cases were consolidated and no trial date~~the 728 patent for which the USPTO has ~~been set. On July 20, 2017,~~not yet instituted a proceeding. These petitions are also awaiting institution decisions at the claims against the newly added parties, with the exception of EchoStar Technologies, L.L.C., were severed into a separate case. On September 1, 2017, EchoStar Technologies, L.L.C. was dismissed from the case. On October 10, 2017, Realtime informed us that it is not pursuing the 759 patent against us.USPTO. Trial is scheduled for January 21, 2019. Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

Other

In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of ~~our~~ business. As part of our ongoing operations, the Company is 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 the Company 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, the Company from time to time receives 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.

The Company also indemnifies its directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for the Company. Additionally, in the normal course of its business, the Company enters into contracts pursuant to which the Company may make a variety of representations and warranties and indemnify the counterparty for certain losses. The Company’s 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 the Company or its officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.

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Note ~~12.~~13. Segment Reporting

Operating segments are business components of an enterprise for which separate financial information is available and regularly evaluated by ~~the~~our chief operating decision maker (“CODM”), who ~~for HSS,~~ is ~~the Company’s~~our Chief Executive Officer. We primarily operate in two ~~primary~~ business segments, Hughes and ESS, as described in Note 1 ~~of these condensed consolidated financial statements.~~1.

The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, or EBITDA. Effective in March 2017, we also changed our overhead allocation methodology to reflect how the CODM evaluates our segments. Historically, the costs of all corporate functions were included on an allocated basis in each of the business segments’ EBITDA. Under the revised allocation methodology, these costs are now reported and analyzed as part of “Corporate and Other” (previously “All Other and Eliminations”). Our prior period segment EBITDA disclosures have been restated to reflect this change.

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Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate and Legal) ~~as well as~~and other activities that have not been assigned to our operating segments ~~including~~such as costs incurred in certain satellite development programs and other business development activities, ~~our centralized treasury operations,~~ and gains ~~(losses)~~or losses from certain of our investments. Costs and income associated with these departments and activities are accounted for in the “Corporate and Other” column in the ~~table~~tables below or in the reconciliation of EBITDA below.

Transactions between segments were not significant for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 or ~~2016, respectively.~~2017. Eliminations of intersegment transactions are included in the “Corporate and Other” column in the tables below. Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.

The following table presents revenue, EBITDA, and capital expenditures for each of our operating segments:


	Hughes		EchoStar Satellite Services		Corporate and Other			Consolidated Total		Hughes		ESS			Corporate and Other			Consolidated Total
	(In thousands)									(In thousands)
For the Three Months Ended September 30, 2017
For the three months ended March 31, 2018
External revenue	$	379,702	$	96,743	$	1,917		$	478,362	$	400,459	$	96,223		$	6,213		$	502,895
Intersegment revenue	$	359	$	350	$	(709	)	$	—	$	359	$	530		$	(889	)	$	—
Total revenue	$	380,061	$	97,093	$	1,208		$	478,362	$	400,818	$	96,753		$	5,324		$	502,895
EBITDA	$	131,817	$	78,345	$	(10,108	)	$	200,054	$	136,713	$	84,150		$	(6,374	)	$	214,489
Capital expenditures	$	108,428	$	8,203	$	—		$	116,631
For the Three Months Ended September 30, 2016
Capital expenditures (1)										$	87,291	$	(77,038	)	$	—		$	10,253
For the three months ended March 31, 2017
External revenue	$	355,090	$	101,308	$	868		$	457,266	$	328,610	$	100,151		$	1,357		$	430,118
Intersegment revenue	$	786	$	172	$	(958	)	$	—	$	710	$	175		$	(885	)	$	—
Total revenue	$	355,876	$	101,480	$	(90	)	$	457,266	$	329,320	$	100,326		$	472		$	430,118
EBITDA	$	125,522	$	84,257	$	(11,494	)	$	198,285	$	100,852	$	83,063		$	(12,146	)	$	171,769
Capital expenditures	$	75,682	$	15,730	$	—		$	91,412
For the Nine Months Ended September 30, 2017
External revenue	$	1,070,715	$	294,839	$	5,191		$	1,370,745
Intersegment revenue	$	1,428	$	946	$	(2,374	)	$	—
Total revenue	$	1,072,143	$	295,785	$	2,817		$	1,370,745
EBITDA	$	342,693	$	241,873	$	(34,099	)	$	550,467
Capital expenditures	$	270,624	$	21,351	$	—		$	291,975
For the Nine Months Ended September 30, 2016
External revenue	$	1,019,203	$	305,401	$	2,506		$	1,327,110
Intersegment revenue	$	2,248	$	518	$	(2,766	)	$	—
Total revenue	$	1,021,451	$	305,919	$	(260	)	$	1,327,110
EBITDA	$	353,505	$	257,181	$	(24,590	)	$	586,096
Capital expenditures	$	261,241	$	50,762	$	—		$	312,003
Capital expenditures (1)										$	65,667	$	8,508		$	—		$	74,175


(1)	Capital expenditures are net of refunds and other receipts related to capital expenditures.

The following table reconciles total consolidated EBITDA to reported “Income before income taxes” in our accompanying condensed consolidated statements of operations and comprehensive income (loss):



	For the three months ended March 31,
	2018			2017
	(In thousands)
EBITDA	$	214,489		$	171,769
Interest income and expense, net	(53,034		)	(53,996		)
Depreciation and amortization	(133,718		)	(112,220		)
Net income attributable to noncontrolling interests	380			292
Income before income taxes	$	28,117		$	5,845

2126

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Disaggregation of Revenue

In the following tables, revenue is disaggregated by segment, primary geographic market and nature of products and services.

Geographic Information

The following table ~~reconciles total consolidated EBITDA~~disaggregates revenue from contracts with customers attributed to ~~reported “Income before income taxes” in our condensed consolidated statements~~North America and other foreign locations as well as by segment, based on the location where the goods or services are provided.



	Hughes		ESS		Corporate and Other		Consolidated Total
	(In thousands)
For the three months ended March 31, 2018
North America:
U.S.	$	320,438	$	90,741	$	1,206	$	412,385
Canada and Mexico	15,582		5,837		—		21,419
All other (1)	64,798		175		4,118		69,091
Total revenue	$	400,818	$	96,753	$	5,324	$	502,895


(1)	All other revenue includes transactions with customers in Asia, Africa, Australia, Europe, South America, and the Middle East.

Nature of ~~operations~~Products and ~~comprehensive income (loss):~~Services

The following table disaggregates revenue based on the nature of products and services and by segment.

For the Three Months
Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)
EBITDA $ 200,054
$ 198,285
$ 550,467
$ 586,096
Interest income and expense, net (52,462 ) (49,530 ) (160,748 ) (120,199 )
Depreciation and amortization (127,915 ) (104,774 ) (364,878 ) (309,448 )
Net income attributable to noncontrolling interests 532
524
1,006
946
Income before income taxes $ 20,209
$ 44,505
$ 25,847
$ 157,395



	Hughes		ESS		Corporate and Other		Consolidated Total
	(In thousands)
For the three months ended March 31, 2018
Equipment	$	42,947	$	—	$	—	$	42,947
Services	297,785		7,403		375		305,563
Design, development and construction services	16,176		—		—		16,176
Revenue from sales and services	356,908		7,403		375		364,686
Leasing income	43,910		89,350		4,949		138,209
Total revenue	$	400,818	$	96,753	$	5,324	$	502,895

Note 1314. Related Party Transactions

EchoStar

We and EchoStar have agreed that we shall have the right, but not the obligation, to receive from EchoStar certain corporate services, including among other things: treasury, tax, accounting and reporting, risk management, legal, internal audit, human resources, and information technology. These services are intended to be provided at cost. Effective March 2017, and as a result of the Share Exchange Agreement, we implemented a new methodology for determining the cost of these services. We may terminate a particular service we receive from EchoStar for any reason upon at least 30 days’ notice. We recorded expenses for services received from EchoStar of ~~$5.7~~$4.4 million and ~~$5.2~~$5.0 million for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $17.2 million and $10.8 million for the nine months ended September 30, 2017 and 2016,~~ respectively. In addition, we occupy certain office space in buildings owned or leased by EchoStar and pay a portion of the taxes, insurance, utilities and maintenance of the premises in accordance with the percentage of the space we occupy.

We participate in certain of EchoStar’s shared services arrangements for its subsidiaries in the ordinary course of business, including arrangements for payroll, accounts payable and cash management. From time to time in connection with the processing of transactions under these arrangements, we may pay or receive amounts attributable to other domestic subsidiaries of EchoStar. We report net payments on behalf of other subsidiaries in “Advances to affiliates, net” within current assets and we report net receipts on behalf of other subsidiaries in “Advances from affiliates, net” within current liabilities in our

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accompanying condensed consolidated balance sheets. No repayment schedule for these net advances has been determined.

EchoStar and certain of its subsidiaries have 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 one to three 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” within noncurrent liabilities in our accompanying condensed consolidated balance sheets.

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 ~~$369.3~~$349.3 million increase in “Additional paid-in capital,” reflecting EchoStar’s $514.4 million carrying amount of the satellite, including capitalized interest that was previously charged to expense in our consolidated financial statements, less related deferred taxes of ~~$145.1~~$165.1 million. ~~See Note 7 for additional information about the EchoStar XIX satellite.~~

EchoStar XXI and EchoStar XXIII Launch Facilitation and Operational Control Agreements. As part of applying for launch licenses for the EchoStar XXI and XXIII satellites through the UK Space Agency, our subsidiary, Hughes Network Systems, Ltd. (“HNS Ltd.”) and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”), entered into agreements in June 2015 and March 2016 to transfer to HNS Ltd. EOC’s launch service contracts for the EchoStar XXI and EchoStar XXIII satellites, respectively, and to grant HNS Ltd. certain rights to control the in-orbit operations of these satellites. EOC retained ownership of the satellites and agreed to make additional payments to HNS Ltd. for amounts that HNS Ltd. is required to pay under both launch service contracts. In 2015 and 2016, we recorded additions to “Other noncurrent assets, net” and corresponding increases in “Additional paid-in capital” in our accompanying condensed consolidated balance sheet to reflect EOC’s

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cumulative payments under the launch service contracts prior to the transfer dates and to reflect EOC’s funding of additional cash payments to the launch service provider. The EchoStar XXIII and the EchoStar XXI satellites were successfully launched in March 2017 and June 2017, respectively. We recorded decreases in “Other noncurrent assets, net” and “Additional paid-in capital” of $61.8 million and $83.3 million, respectively, representing the carrying amounts of the launch service contracts at the time of launch to reflect the consumption of the contracts’ economic benefits by EOC, the owner of the satellites. ~~HNS Ltd.’s future payment obligations under the launch service contracts are included in our disclosure of satellite-related obligations in~~ ~~Note 11~~.

Share 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, 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 one of our subsidiaries and ~~have been~~are pledged as collateral to support our obligations under the indentures relating to ~~the 2019~~our 6 1/2% Senior Secured Notes ~~and the 2026~~due 2019 (the “2019 Senior Secured ~~Notes.~~Note”) and our 5.250% Senior Secured Notes due 2026 (the “2026 Senior Secured Notes).

EchoStar Mobile Limited Service Agreements. Certain of our subsidiaries provide services to subsidiaries of EchoStar 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 subsidiaries pay for these services are based on cost plus a fixed margin. We recorded revenue in “Services and other revenue - other” of $4.1 million and zero for the three months ended March 31, 2018 and 2017, respectively, related to these services.

DISH Network

Following the Spin-off, EchoStar and DISH have operated as separate publicly-traded companies. However, prior to the consummation of the Share Exchange on February 28, 2017, DISH Network owned the Tracking Stock, ~~representing~~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. In addition, 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 trusts established by Mr. Ergen for the benefit of his family.

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In connection with and following both the Spin-off and the Share Exchange, EchoStar, we and certain other of ~~its~~EchoStar’s subsidiaries and DISH and certain of its subsidiaries ~~have~~ entered into certain agreements pursuant to which we and EchoStar obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us and EchoStar; and we and DISH Network indemnify each other against certain liabilities arising from our respective businesses. We and/or EchoStar also may enter into additional agreements with DISH Network in the future. Generally, the amounts we or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below or in our most recent ~~Annual Report on~~ Form 10-K), which varies depending on the nature of the products and services provided.

The following is a summary of the terms of our principal agreements with DISH Network that may have an impact on our financial condition and results of operations.

“Services and other revenue — DISH ~~Network”~~Network

Satellite ~~Services Provided~~Capacity Leased to DISH Network. Since the Spin-off, we have entered into certain agreements to lease satellite ~~service agreements~~capacity pursuant to which we provide satellite services to DISH Network ~~receives satellite services~~ on certain satellites owned or leased by us. The fees for the services provided under these ~~satellite service~~ agreements depend, 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 is set forth below:

EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV. As part of the Satellite and Tracking Stock Transaction, described below in “Other agreements - DISH Network,” in March 2014, we began ~~providing~~leasing certain satellite ~~services~~capacity to DISH Network on the EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites. The term of each agreement to lease satellite ~~services agreement~~capacity generally terminates 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 ~~service agreement~~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. In December 2016, DISH Network renewed the agreement to lease satellite ~~services agreement~~capacity relative to the EchoStar VII satellite for one year to June 2018. DISH Network has not renewed the agreement relative to the EchoStar VII satellite past such date.

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EchoStar IX. Effective January 2008, DISH Network began ~~receiving~~leasing satellite ~~services~~capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue ~~to receive~~leasing satellite ~~services~~capacity from us on the EchoStar IX satellite on a month-to-month basis.

EchoStar XII. DISH Network ~~received~~leases satellite ~~services~~capacity from us on the EchoStar XII satellite. The term of the agreement to lease satellite ~~services agreement terminated~~capacity expired at the end of September 2017.

EchoStar XVI. In December 2009, we entered into an initial ten-year ~~transponder service~~ agreement ~~with~~to lease satellite capacity to DISH Network, pursuant to which DISH Network has ~~received~~leased satellite ~~services~~capacity from us on the EchoStar XVI satellite since January 2013. Effective December 2012, we and DISH Network amended the ~~transponder service~~ 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 ~~transponder service~~ 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 ~~satellite services~~ agreement ~~relative to the EchoStar XVI satellite~~ for five-years to 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 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.

Nimiq 5 Agreement. In September 2009, we entered into a fifteen-year ~~satellite service~~ agreement with Telesat Canada (“Telesat”) to ~~receive service~~lease satellite capacity from Telesat on all 32 ~~DBS~~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 ~~a satellite service~~ an

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agreement ~~(the “DISH Nimiq 5 Agreement”)~~ with DISH Network, pursuant to which DISH Network ~~receives~~leases satellite ~~services~~capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder ~~Agreement.~~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 ~~receive service~~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 ~~receive service~~lease satellite capacity on a replacement satellite.

QuetzSat-1 Agreement. In November 2008, we entered into a ten-year agreement to lease satellite ~~service agreement with~~capacity from SES Latin America, which provides, among other things, for the provision by SES Latin America to us of ~~service~~leased satellite capacity on 32 DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into ~~a transponder service~~an agreement to lease satellite capacity with DISH Network, pursuant to which DISH Network ~~receives~~leases satellite ~~services~~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 February 2013, we and DISH Network entered into an agreement pursuant to which we ~~receive~~lease certain satellite ~~services~~capacity from DISH Network on five DBS transponders on the QuetzSat-1 satellite. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location and DISH Network commenced commercial operations at such location in February 2013.

Under the terms of our contractual arrangements with DISH Network, we began ~~to provide service~~leasing satellite capacity to DISH Network on the QuetzSat-1 satellite in February 2013 and will continue ~~to provide service~~leasing such capacity through the remainder of the service term. Unless extended or earlier terminated under the terms and conditions of our agreement with DISH Network for the QuetzSat-1 satellite, the initial service term will expire in November 2021. 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 ~~receive service~~lease satellite capacity from us on a replacement satellite. There can be no

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assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to ~~receive service~~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. ~~Unless earlier terminated under the terms and conditions of~~Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 Spectrum Development Agreement ~~the term generally will continue for the duration of~~and we exercised our right to terminate the 103 Spectrum ~~Rights.~~Development Agreement.

In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a ten-year ~~service~~ agreement with Ciel pursuant to which we ~~receive~~leased certain satellite ~~services~~capacity from Ciel on the SES-3 satellite at the 103 degree west longitude orbital ~~location.~~location (the “Ciel 103 Agreement”). In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network ~~receives~~leased certain satellite ~~services~~capacity from us on the SES-3 satellite (the “DISH 103 ~~Service~~ Agreement”). Under the terms of the DISH 103 ~~Service~~ Agreement, DISH Network ~~makes~~made certain monthly payments to us through the service term. ~~Unless earlier terminated under the terms and conditions of~~Effective in March 2018, DISH Network exercised its right to terminate the DISH 103 ~~Service~~ Agreement and we exercised our right to terminate the initial service term will expire on the earlier of: (i) the date the SES-3 satellite fails; (ii) the date the transponder(s) on which service was being provided under the agreement fails; or (iii) June 2023. Upon in-orbit failure or end of life of the SES-3 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance that DISH Network will exercise its option to receive service on a replacement satellite.Ciel 103 Agreement.

TT&C Agreement. Effective January 2012, we entered into a ~~telemetry, tracking and control (“~~TT~~&C”)~~&C agreement pursuant to which we ~~provide~~provided TT&C services to DISH Network for a period ending in December 2016 (the ~~“2012 TT~~“TT&C Agreement”). In November 2016, we and DISH Network amended the ~~2012~~ TT&C Agreement to extend the term for one year through December 2017. ~~The 2012~~In December 2017, we and DISH Network amended the TT&C Agreement ~~replaced~~to extend the term for one month through January 2018. In February 2018, we and DISH Network amended the TT&C ~~agreement we entered into with DISH Network in connection with~~Agreement to, among other things, extend the ~~Spin-off.~~term through February 2023. The fees for services provided under the ~~2012~~ 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. DISH Network is able to terminate the ~~2012~~ TT&C Agreement for any reason upon ~~60 days’~~12 months’ notice.

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In connection with the Satellite and Tracking Stock Transaction, described below in “Other agreements - DISH Network,” in February 2014, we amended the TT&C Agreement to cease the provision of TT&C services to DISH Network for the EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites. 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 to 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. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon 30 days’ notice.

TerreStar Agreement one-year period, unless terminated by TerreStar upon at least 60 days’ written notice to us prior to the end of the term. The provision of operations and maintenance services will continue until April 2018 and will automatically renew in April 2018 for an additional one-year period, unless terminated by TerreStar or us upon at least 90 days’ written notice prior to the end of the term. The provision of hosting services will continue until May 2022 and will not renew beyond May 2022 unless the parties enter into a new agreement or amend the existing agreement. In addition, TerreStar generally may terminate such services for convenience subject to providing us with prior notice and/or payment of termination charges. . 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 ~~our~~the completion of the acquisition of all of the outstanding equity of Hughes ~~Acquisition,~~Communications, Inc. (the “Hughes Acquisition”) on June 8, 2011, TerreStar and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment. ~~TerreStar~~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 ~~one of~~ our products on a month-to-month ~~basis. The provision of warranty services for our other product will continue until March 2018 and will automatically renew in March 2018 for an additional~~ ~~one-year period,~~basis unless terminated by ~~TerreStar~~DISH Network upon at least 6021 days’ written notice to ~~us prior~~us. DISH Network generally has the right to ~~the end of the term. The provision of~~continue to receive operations and maintenance services ~~will continue until April 2018~~from us on a quarter-to-quarter basis unless operations and ~~will automatically renew in April 2018 for an additional one-year period, unless~~maintenance services are terminated by ~~TerreStar or us~~DISH Network upon at least 90 da

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~~ys’~~days’ written notice ~~prior~~ to ~~the end of the term.~~us. The provision of hosting services will continue until May 2022 and will not renew beyond May 2022 unless the parties enter into a new agreement or amend the existing agreement. In addition, ~~TerreStar~~DISH Network generally may terminate ~~such~~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, HNS and dishNET Satellite Broadband L.L.C. (“dishNET”), a wholly-owned subsidiary of DISH, entered into a distribution agreement (the “Distribution Agreement”) pursuant to which dishNET has the right, but not the obligation, to market, sell and distribute the Hughes satellite internet service (the “Hughes service”). dishNET pays HNS a monthly per subscriber wholesale service fee for the Hughes service based upon a subscriber’s service level and based upon certain volume subscription thresholds. The Distribution Agreement also provides that dishNET has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Hughes service. The Distribution Agreement had an initial term of five years with automatic renewal for successive one year terms unless terminated by either party with a written notice at least 180 days before the expiration of the then-current term. In February 2014, HNS and dishNET 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, the parties will continue to provide the Hughes service to the then-current dishNET subscribers pursuant to the terms and conditions of the Distribution Agreement.

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DBSD North America Agreement. In 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 our Hughes segment provides, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and 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 generally has the right to continue to receive warranty services from us on a month-to-month basis until February ~~2019. The provision of~~2019, unless terminated by DBSD North America upon at least 21 days’ written notice to us, and the right to continue to receive operations and maintenance services ~~will continue until April 2018 and will automatically renew in April 2018 for an additional one-year period,~~from us on a quarter-to-quarter basis, unless terminated by DBSD North America upon at least 120 days’ written notice to ~~us prior to the end of the term.~~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 prior to the end of the term.~~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 Broadband L.L.C. (“DISH Broadband”), DISH’s indirect, wholly-owned subsidiary, was selected by the Rural Utilities Service (“RUS”) of the ~~United States~~U.S. Department of Agriculture to receive up to approximately $14.1 million in broadband stimulus grant funds (the “Grant Funds”). Effective November 2011, HNS and DISH Broadband entered into a RUS Implementation Agreement (the “RUS Agreement”) pursuant to which HNS provided certain portions of the equipment and broadband service used to implement DISH Broadband’s RUS program. While the RUS Agreement expired in June 2013 when the Grant Funds were exhausted, HNS is required to continue providing services to DISH Broadband’s customers activated prior to the expiration of the RUS Agreement in accordance with the terms and conditions of the RUS Agreement.

General and administrative expenses — DISH Network

Amended and Restated Professional Services Agreement. In connection with the Spin-off, EchoStar entered into various agreements with DISH Network including ~~the Transition Services Agreement, Satellite Procurement Agreement~~a transition services agreement, satellite procurement agreement and ~~Services Agreement,~~services agreement, which all expired in January 2010 and were replaced by a ~~Professional~~professional services agreement (the “Professional Services ~~Agreement.~~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 ~~the Transition Services Agreement:~~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 agreed that DISH Network would continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under ~~the Satellite Procurement Agreement)~~a satellite procurement agreement), receive logistics, procurement and quality assurance services from EchoStar and its subsidiaries (previously provided under ~~the Services Agreement)~~a services agreement) and other support services. In connection with the consummation of the Share Exchange, EchoStar and DISH amended and restated the Professional Services Agreement to(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.~~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. A portion of these costs and expenses have been allocated to us in the manner described above under the caption “EchoStar.” The

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term of the Amended and Restated Professional Services Agreement is through January 2019 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.~~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. In connection with the Share Exchange, effective March 2017, we sublease from DISH Network certain space at 796 East Utah Valley Drive in American Fork, Utah for a period ending in August 2017. We have exercised our option to renew this sublease for a five-year period ending in August 2022. 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 we are responsible for our portion of the taxes, insurance, utilities and maintenance of the premises.

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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 ~~will provide~~provides collocation and antenna space to EchoStar through ~~March~~February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In August 2017, we and DISH Network also entered into certain other agreements pursuant to which DISH Network ~~will provide~~provides additional collocation and antenna space to EchoStar in Monee, Illinois and Spokane, Washington through August 2022. ~~EchoStar~~We generally may renew ~~each of~~ these collocation and antenna space agreements for ~~four~~ 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 180 days’ prior written notice. The fees for the services provided under these agreements depend on the number of racks leased at the location.

Other agreements — DISH Network

Satellite and Tracking Stock Transaction. In February 2014, we and EchoStar entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) in March 2014, EchoStar and HSS issued ~~shares of~~ the Tracking Stock 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 $11.4 million in cash; and (ii) in March 2014, DISH Network began receiving certain satellite services from us as discussed above on these five satellites ~~from us~~ (collectively, the “Satellite and Tracking Stock 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. ~~See Note 3 for further information.~~

Share Exchange Agreement. On January 31, 2017, EchoStar and certain of its subsidiaries entered into the Share Exchange Agreement with DISH and certain of its subsidiaries, pursuant to which, on February 28, 2017, EchoStar and its 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 contains 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 itEchoStar or DISH causes the transaction to be taxable to the other party after closing.

Hughes Broadband Master Services Agreement five years until March 2022 with automatic renewal for successive one-year terms. After the first anniversary, either party has the ability to terminate the 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 MSA, HNS will continue to provide the Hughes service to subscribers and make certain payments to DNLLC pursuant to the terms and conditions of the MSA. . In March 2017, HNS and DISH Network L.L.C. (“DNLLC”), a wholly-owned subsidiary of DISH, entered into a master service agreement (the “MSA”) pursuant to which DNLLC, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for the Hughes service and related equipment and other telecommunication services, and (ii) installs Hughes service equipment with respect to activations generated by DNLLC. Under the MSA, HNS and DNLLC ~~will~~ make certain payments to each other relating to sales, upgrades, purchases and installation services. The MSA has an initial term of five years until March 2022 with automatic renewal for successive one-year terms. After the first anniversary, either party has the ability to terminate the 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 MSA, HNS will continue to provide the Hughes service to subscribers

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and make certain payments to DNLLC pursuant to the terms and conditions of the MSA. We incurred sales incentives and other costs under the MSA totaling $8.7 million and zero for the three months ended March 31, 2018 and 2017, respectively.

Intellectual Property and Technology License Agreement. Effective March 2017 in connection with the Share Exchange, EchoStar and DISH Network entered into an Intellectual Property and Technology License Agreement (“IPTLA”) pursuant to which EchoStar and DISH and their respective subsidiaries 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, EchoStar granted to

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DISH Network a license to EchoStar and its subsidiaries’ 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 EchoStar and its subsidiaries, among other things, for the continued use of all intellectual property and technology that is used in EchoStar and its subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the 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 ~~DISH and their respective~~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 have 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, 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 ~~will~~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 ~~takes~~and its subsidiaries take or ~~fails~~fail to take; or (iii) any action that EchoStar ~~takes~~and 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 ~~only~~ 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 ~~aggregate~~ amount ~~of $93.1 million~~ that includes the federal tax benefit ~~they~~DISH received as a result of our operations.

Caltech. On October 1, 2013, Caltech Institute of Technology (“Caltech”) filed complaints against two of our subsidiaries, Hughes Communications, Inc. and HNS, as well as against DISH and certain of its subsidiaries, in the ~~United States~~U.S. District Court for the Central District of California alleging infringement of ~~United States~~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 Hughes segment’s satellite broadband products and services, infringed the asserted patents by implementing the DVB-S2 standard. Pursuant to a settlement agreement among us, DISH and Caltech, in May 2016, Caltech dismissed with prejudice all of its claims in these actions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Other Agreements

Hughes Systique Corporation (“Hughes Systique”)

We contract with Hughes Systique for software development services. In 2008, Hughes Communications loaned $1.5 million to Hughes Systique pursuant to a term loan facility. The initial interest rate on the outstanding loans was 6%, payable annually, and the accrued and unpaid interest was added to the principal amount outstanding under the loan facility in certain circumstances. The loans were convertible into shares of Hughes Systique upon non-payment or an event of default. In May 2014, we amended the term loan facility to increase the interest rate from 6% to 8%, payable annually, to reflect then-current market conditions and extend the maturity date of the loans to May 1, 2015, and in April 2015, we extended the maturity date of the loans to May 1, 2016 on the same terms. In 2015, Hughes Systique repaid $1.5 million of the outstanding principal of the loan facility. In 2016, Hughes Systique repaid $0.6 million of the outstanding principal of the loan facility. As of September 30, 2017, the principal amount outstanding of the loan facility was zero. In addition to our 43.7% ownership in Hughes Systique, Mr. Pradman Kaul, the President of Hughes Communications, Inc. and a member of EchoStar’s board of directors, and his brother, who is the ~~CEO~~Chief Executive Officer and President of Hughes Systique, in the aggregate, own approximately ~~25.7%~~25.6%, on an undiluted basis, of Hughes Systique’s outstanding shares as of ~~September 30, 2017.~~March 31, 2018. 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 Systique. As a result, we consolidate Hughes Systique’s financial statements in our accompanying condensed consolidated financial statements.

Dish Mexico

EchoStar owns 49.0% of an entity that provides direct-to-home satellite services in Mexico known as Dish Mexico, and we provide certain satellite services to Dish Mexico. We recognized revenue from sales of services we provided to Dish Mexico of approximately $5.8 million and $3.9 million for ~~each of~~ the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016 and $17.5 million for each of the nine months ended September 30, 2017 and 2016.~~respectively. As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we had trade accounts receivable from Dish Mexico of approximately ~~$7.6~~$6.6 million and ~~$10.7~~$7.6 million, respectively.

Deluxe/EchoStar LLC

We own 50.0% of Deluxe/EchoStar LLC (“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 account for our investment in Deluxe using the equity method. ~~Summarized income statement information for Deluxe for the nine months ended September 30, 2017 and 2016 are as follows:~~

For the Nine Months Ended September 30,
2017 2016
(In thousands)
Revenue $ 28,752
$ 32,018
Gross profit $ 12,920
$ 15,872
Income before income taxes $ 10,596
$ 13,516
Net income attributable to EchoStar $ 5,298
$ 6,758

We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of approximately ~~$1.3~~$1.1 million and ~~$0.7~~$1.2 million for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $3.6 million and $2.1 million for the nine months ended September 30, 2017 and 2016,~~ respectively. As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we had trade accounts receivable from Deluxe of approximately ~~$1.3~~$1.0 million and ~~$0.7~~$1.1 million, respectively.

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~~HUGHES SATELLITE SYSTEMS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

AsiaSat

We contract with AsiaSat Telecommunications Inc. (“AsiaSat”) for the use of transponder capacity on one of AsiaSat's satellites. Mr. William David Wade, ~~a member of EchoStar’s~~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 ~~CEO~~Chief Executive Officer of AsiaSat through March 2017. We incurred expenses payable to AsiaSat under this agreement of approximately zero ~~and $0.4 million~~ for the three months ended ~~September 30,~~March 31, 2017.

Global IP

In May 2017, one of our subsidiaries entered into an agreement with Global-IP Cayman (“Global IP”) providing for the sale of certain equipment and ~~2016, respectively,~~services to Global IP. Mr. William David Wade, a member of our board of directors, serves as a member of the board of directors of Global IP and ~~$0.1~~as an executive advisor to the Chief Executive Officer of Global IP. We recognized revenue of approximately $0.4 million and ~~$1.1 million~~zero from Global IP under this agreement for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively.

Note ~~14.~~15. 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 2019 Senior Secured Notes and ~~2021~~7 5/8% Senior Unsecured Notes due 2021 (the “2021 Senior Unsecured Notes”), which were issued on June 1, 2011, and our 2026 Senior Secured Notes and 6.625% Senior Unsecured Notes due 2016, which were issued on July 27, ~~2016.~~2016 (the “2026 Senior Unsecured Notes” and together with the 2026 Senior Secured Notes, the “2026 Notes”). See Note 910 for further information on the 2019 Senior Secured Notes, the 2021 Senior Unsecured Notes and the 2026 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

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

condensed balance sheet information, the accompanying condensed statement of operations and comprehensive 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 the 2019 Senior Secured Notes, the 2021 Senior Unsecured Notes and the 2026 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.

The accompanying condensed consolidating financial information presented below should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto included herein.

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HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Condensed Consolidating Balance Sheet as of ~~September 30, 2017~~March 31, 2018

(In thousands)


	HSS		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total		HSS		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
Assets
Cash and cash equivalents	$	2,016,026	$	32,178	$	27,704	$	—		$	2,075,908	$	1,700,804	$	46,731	$	28,294	$	—		$	1,775,829
Marketable investment securities, at fair value	194,260		1,646		—		—			195,906		622,839		708		—		—			623,547
Trade accounts receivable, net	—		138,268		54,119		—			192,387
Trade accounts receivable and contract assets, net												—		101,951		64,231		—			166,182
Trade accounts receivable - DISH Network, net	—		45,626		342		—			45,968		—		53,055		543		—			53,598
Inventory	—		66,569		24,663		—			91,232		—		57,145		28,850		—			85,995
Advances to affiliates, net	102,149		45,927		4,907		(50,409		)	102,574		109,787		237,240		10,645		(248,959		)	108,713
Other current assets	103		17,652		31,177		(46		)	48,886		25		22,463		36,550		(109		)	58,929
Total current assets	2,312,538		347,866		142,912		(50,455		)	2,752,861		2,433,455		519,293		169,113		(249,068		)	2,872,793
Restricted cash and cash equivalents	12,379		—		775		—			13,154
Property and equipment, net	—		2,559,974		293,817		—			2,853,791		—		2,432,825		293,799		—			2,726,624
Regulatory authorizations, net	—		471,658		—		—			471,658
Regulatory authorizations												—		465,658		—		—			465,658
Goodwill	—		504,173		—		—			504,173		—		504,173		—		—			504,173
Other intangible assets, net	—		62,240		—		—			62,240		—		54,924		—		—			54,924
Investments in unconsolidated entities	—		32,858		—		—			32,858		—		32,079		—		—			32,079
Investment in subsidiaries	2,980,162		217,543		—		(3,197,705		)	—		3,203,354		222,567		—		(3,425,921		)	—
Advances to affiliates	700		74,701		—		(75,401		)	—		700		80,744		—		(81,444		)	—
Deferred tax asset	147,283		—		18,716		(147,283		)	18,716		120,969		—		4,452		(120,969		)	4,452
Other noncurrent assets, net	—		173,262		12,709		—			185,971		—		225,343		14,634		—			239,977
Total assets	$	5,453,062	$	4,444,275	$	468,929	$	(3,470,844	)	$	6,895,422	$	5,758,478	$	4,537,606	$	481,998	$	(3,877,402	)	$	6,900,680
Liabilities and Shareholders’ Equity (Deficit)
Trade accounts payable	$	—	$	95,446	$	22,169	$	—		$	117,615	$	—	$	88,294	$	14,183	$	—		$	102,477
Trade accounts payable - DISH Network	—		5,470		—		—			5,470		—		2,826		—		—			2,826
Current portion of long-term debt and capital lease obligations	—		34,923		3,484		—			38,407		—		36,874		4,550		—			41,424
Advances from affiliates, net	—		4,532		46,204		(50,409		)	327		—		187,138		62,444		(248,959		)	623
Accrued expenses and other	54,622		140,345		46,532		(46		)	241,453		58,700		128,551		41,579		(109		)	228,721
Total current liabilities	54,622		280,716		118,389		(50,455		)	403,272		58,700		443,683		122,756		(249,068		)	376,071
Long-term debt and capital lease obligations, net of unamortized debt issuance costs	3,363,244		236,337		6,134		—			3,605,715
Long-term debt and capital lease obligations, net												3,367,078		217,401		1,493		—			3,585,972
Deferred tax liabilities, net	—		840,194		144		(147,283		)	693,055		—		570,403		979		(120,969		)	450,413
Advances from affiliates	—		—		108,876		(75,401		)	33,475		—		—		115,590		(81,444		)	34,146
Other non-current liabilities	—		107,608		3,265		—			110,873		—		103,327		3,063		—			106,390
Total HSS shareholders’ equity (deficit)	2,035,196		2,979,420		218,285		(3,197,705		)	2,035,196		2,332,700		3,202,792		223,129		(3,425,921		)	2,332,700
Noncontrolling interests	—		—		13,836		—			13,836		—		—		14,988		—			14,988
Total liabilities and shareholders’ equity (deficit)	$	5,453,062	$	4,444,275	$	468,929	$	(3,470,844	)	$	6,895,422	$	5,758,478	$	4,537,606	$	481,998	$	(3,877,402	)	$	6,900,680

3137

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Condensed Consolidating Balance Sheet as of December 31, ~~2016~~2017

(In thousands)


	HSS		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total		HSS		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
Assets
Cash and cash equivalents	$	1,991,949	$	53,905	$	25,110	$	—		$	2,070,964	$	1,746,878	$	42,373	$	33,310	$	—		$	1,822,561
Marketable investment securities, at fair value	177,614		10,309		—		—			187,923		454,500		1,102		—		—			455,602
Trade accounts receivable, net	—		138,861		43,651		—			182,512
Trade accounts receivable and contract assets, net												—		133,735		63,105		—			196,840
Trade accounts receivable - DISH Network, net	—		19,323		—		—			19,323		—		38,286		355		—			38,641
Inventory	—		45,623		17,015		—			62,638		—		59,711		23,884		—			83,595
Advances to affiliates, net	10		999,340		4,968		(893,866		)	110,452		119,605		229,488		7,313		(241,548		)	114,858
Other current assets	48		19,183		27,083		—			46,314		64		98,890		31,788		(401		)	130,341
Total current assets	2,169,621		1,286,544		117,827		(893,866		)	2,680,126		2,321,047		603,585		159,755		(241,949		)	2,842,438
Restricted cash and cash equivalents	11,097		—		723		—			11,820
Property and equipment, net	—		2,061,831		232,895		—			2,294,726		—		2,459,703		293,395		—			2,753,098
Regulatory authorizations, net	—		471,658		—		—			471,658
Regulatory authorizations												—		465,658		—		—			465,658
Goodwill	—		504,173		—		—			504,173		—		504,173		—		—			504,173
Other intangible assets, net	—		80,734		—		—			80,734		—		58,582		—		—			58,582
Investments in unconsolidated entities	—		42,560		—		—			42,560		—		30,587		—		—			30,587
Investment in subsidiaries	3,721,688		314,643		—		(4,036,331		)	—		3,260,790		204,208		—		(3,464,998		)	—
Advances to affiliates	700		60,761		—		(61,461		)	—		700		80,744		—		(81,444		)	—
Deferred tax asset	92,727		—		9,150		(92,727		)	9,150		110,546		—		3,700		(110,546		)	3,700
Other noncurrent assets, net	—		142,091		144,496		—			286,587		—		185,839		13,275		—			199,114
Total assets	$	5,995,833	$	4,964,995	$	505,091	$	(5,084,385	)	$	6,381,534	$	5,693,083	$	4,593,079	$	470,125	$	(3,898,937	)	$	6,857,350
Liabilities and Shareholders’ Equity (Deficit)
Trade accounts payable	$	—	$	94,089	$	12,321	$	—		$	106,410	$	—	$	82,300	$	20,516	$	—		$	102,816
Trade accounts payable - DISH Network	—		6		—		—			6		—		3,769		—		—			3,769
Current portion of long-term debt and capital lease obligations	—		32,177		807		—			32,984		—		35,886		4,745		—			40,631
Advances from affiliates, net	850,807		12,228		31,429		(893,866		)	598		—		185,161		56,864		(241,548		)	477
Accrued expenses and other	44,654		136,921		38,738		—			220,313		43,518		145,362		46,748		(401		)	235,227
Total current liabilities	895,461		275,421		83,295		(893,866		)	360,311		43,518		452,478		128,873		(241,949		)	382,920
Long-term debt and capital lease obligations, net of unamortized debt issuance costs	3,358,179		262,883		1,401		—			3,622,463
Long-term debt and capital lease obligations, net												3,365,143		226,997		2,073		—			3,594,213
Deferred tax liabilities, net	—		621,061		128		(92,727		)	528,462		—		549,217		960		(110,546		)	439,631
Advances from affiliates	—		—		93,429		(61,461		)	31,968		—		—		115,159		(81,444		)	33,715
Other non-current liabilities	—		80,532		2,775		—			83,307		—		104,249		3,378		—			107,627
Total HSS shareholders’ equity (deficit)	1,742,193		3,725,098		311,233		(4,036,331		)	1,742,193		2,284,422		3,260,138		204,860		(3,464,998		)	2,284,422
Noncontrolling interests	—		—		12,830		—			12,830		—		—		14,822		—			14,822
Total liabilities and shareholders’ equity (deficit)	$	5,995,833	$	4,964,995	$	505,091	$	(5,084,385	)	$	6,381,534	$	5,693,083	$	4,593,079	$	470,125	$	(3,898,937	)	$	6,857,350

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For the ~~Three Months Ended September 30, 2017~~three months ended March 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	$	—		$	107,765		$	499		$	—		$	108,264		$	—		$	100,087		$	527		$	—		$	100,614
Services and other revenue - other	—			273,821			47,333			(10,181		)	310,973			—			312,108			57,076			(9,850		)	359,334
Equipment revenue - DISH Network	—			126			—			—			126
Equipment revenue - other	—			59,519			6,242			(6,762		)	58,999			—			46,409			4,607			(8,069		)	42,947
Total revenue	—			441,231			54,074			(16,943		)	478,362			—			458,604			62,210			(17,919		)	502,895
Costs and Expenses:
Costs and expenses:
Costs of sales - services and other (exclusive of depreciation and amortization)	—			111,662			35,625			(9,624		)	137,663			—			114,374			37,726			(9,397		)	142,703
Cost of sales - equipment (exclusive of depreciation and amortization)	—			54,137			4,623			(6,709		)	52,051			—			48,595			3,465			(8,037		)	44,023
Selling, general and administrative expenses	—			72,492			11,630			(610		)	83,512			—			83,392			11,743			(485		)	94,650
Research and development expenses	—			8,302			—			—			8,302			—			7,137			—			—			7,137
Depreciation and amortization	—			117,702			10,213			—			127,915			—			121,339			12,379			—			133,718
Total costs and expenses	—			364,295			62,091			(16,943		)	409,443			—			374,837			65,313			(17,919		)	422,231
Operating income	—			76,936			(8,017		)	—			68,919			—			83,767			(3,103		)	—			80,664
Other Income (Expense):
Other income (expense):
Interest income	7,667			200			653			(199		)	8,321			10,761			316			501			(199		)	11,379
Interest expense, net of amounts capitalized	(57,372		)	(4,282		)	672			199			(60,783		)	(57,445		)	(6,956		)	(211		)	199			(64,413		)
Gains (losses) on investments, net																—			(392		)	—			—			(392		)
Equity in earnings of unconsolidated affiliate	—			1,948			—			—			1,948			—			1,492			—			—			1,492
Equity in earnings (losses) of subsidiaries, net	42,830			(2,705		)	—			(40,125		)	—			56,259			(3,697		)	—			(52,562		)	—
Other, net	—			(85		)	1,889			—			1,804			3			(97		)	(519		)	—			(613		)
Total other income (expense), net	(6,875		)	(4,924		)	3,214			(40,125		)	(48,710		)	9,578			(9,334		)	(229		)	(52,562		)	(52,547		)
Income (loss) before income taxes	(6,875		)	72,012			(4,803		)	(40,125		)	20,209			9,578			74,433			(3,332		)	(52,562		)	28,117
Income tax benefit (provision)	17,826			(29,092		)	2,540			—			(8,726		)	10,423			(18,084		)	(75		)	—			(7,736		)
Net income (loss)	10,951			42,920			(2,263		)	(40,125		)	11,483			20,001			56,349			(3,407		)	(52,562		)	20,381
Less: Net income attributable to noncontrolling interests	—			—			532			—			532			—			—			380			—			380
Net income (loss) attributable to HSS	$	10,951		$	42,920		$	(2,795	)	$	(40,125	)	$	10,951		$	20,001		$	56,349		$	(3,787	)	$	(52,562	)	$	20,001
Comprehensive Income (Loss):
Comprehensive income (loss):
Net income (loss)	$	10,951		$	42,920		$	(2,263	)	$	(40,125	)	$	11,483		$	20,001		$	56,349		$	(3,407	)	$	(52,562	)	$	20,381
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	—			—			8,571			—			8,571			—			—			1,900			—			1,900
Unrealized gains (losses) on available-for-sale securities and other	(20		)	24			(70		)	—			(66		)
Unrealized losses on available-for-sale securities and other																(311		)	—			(100		)	—			(411		)
Equity in other comprehensive income (loss) of subsidiaries, net	8,525			8,501			—			(17,026		)	—			2,014			2,014			—			(4,028		)	—
Total other comprehensive income (loss), net of tax	8,505			8,525			8,501			(17,026		)	8,505			1,703			2,014			1,800			(4,028		)	1,489
Comprehensive income (loss)	19,456			51,445			6,238			(57,151		)	19,988			21,704			58,363			(1,607		)	(56,590		)	21,870
Less: Comprehensive income attributable to noncontrolling interests	—			—			532			—			532			—			—			166			—			166
Comprehensive income (loss) attributable to HSS	$	19,456		$	51,445		$	5,706		$	(57,151	)	$	19,456		$	21,704		$	58,363		$	(1,773	)	$	(56,590	)	$	21,704

3339

Table of Contents

HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For the ~~Three Months Ended September 30, 2016~~

~~(In thousands)~~

HSS
Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries
Eliminations Total
Revenue:
Services and other revenue - DISH Network $ —
$ 111,750
$ —
$ —
$ 111,750
Services and other revenue - other —
249,571
32,945
(5,639 ) 276,877
Equipment revenue - DISH Network —
2,138
—
—
2,138
Equipment revenue - other —
83,843
5,471
(22,813 ) 66,501
Total revenue —
447,302
38,416
(28,452 ) 457,266
Costs and Expenses:
Costs of sales - services and other (exclusive of depreciation and amortization) —
111,241
24,832
(5,486 ) 130,587
Cost of sales - equipment (exclusive of depreciation and amortization) —
71,728
4,039
(22,166 ) 53,601
Selling, general and administrative expenses —
59,574
9,100
(800 ) 67,874
Research and development expenses —
9,030
—
—
9,030
Depreciation and amortization —
100,375
4,399
—
104,774
Total costs and expenses —
351,948
42,370
(28,452 ) 365,866
Operating income —
95,354
(3,954 ) —
91,400
Other Income (Expense):
Interest income 3,502
9
495
—
4,006
Interest expense, net of amounts capitalized (50,766 ) (3,491 ) 721
—
(53,536 )
Gains on marketable investment securities, net 5
—
—
—
5
Equity in earnings of unconsolidated affiliate —
2,654
—
—
2,654
Equity in earnings (losses) of subsidiaries, net 57,324
(1,801 ) —
(55,523 ) —
Other, net (1 ) (40 ) 17
—
(24 )
Total other income (expense), net 10,064
(2,669 ) 1,233
(55,523 ) (46,895 )
Income (loss) before income taxes 10,064
92,685
(2,721 ) (55,523 ) 44,505
Income tax benefit (provision) 17,501
(35,257 ) 1,340
—
(16,416 )
Net income (loss) 27,565
57,428
(1,381 ) (55,523 ) 28,089
Less: Net income attributable to noncontrolling interests —
—
524
—
524
Net income (loss) attributable to HSS $ 27,565
$ 57,428
$ (1,905 ) $ (55,523 ) $ 27,565
Comprehensive Income (Loss):

Net income (loss) $ 27,565
$ 57,428
$ (1,381 ) $ (55,523 ) $ 28,089
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments —
—
1,255
—
1,255
Unrealized gains (losses) on available-for-sale securities and other (38 ) 804
(16 ) —
750
Recognition of realized gains on available-for-sale securities in net income (loss) (4 ) —
—
—
(4 )
Equity in other comprehensive income (loss) of subsidiaries, net 2,043
1,239
—
(3,282 ) —
Total other comprehensive income (loss), net of tax 2,001
2,043
1,239
(3,282 ) 2,001
Comprehensive income (loss) 29,566
59,471
(142 ) (58,805 ) 30,090
Less: Comprehensive income attributable to noncontrolling interests —
—
524
—
524
Comprehensive income (loss) attributable to HSS $ 29,566
$ 59,471
$ (666 ) $ (58,805 ) $ 29,566

~~Table of Contents~~

~~HUGHES SATELLITE SYSTEMS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)~~

~~For the Nine Months Ended September 30,~~three months ended March 31, 2017

(In thousands)

HSS
Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries
Eliminations Total
Revenue:
Services and other revenue - DISH Network $ —
$ 329,457
$ 1,218
$ —
$ 330,675
Services and other revenue - other —
763,554
125,307
(22,610 ) 866,251
Equipment revenue - DISH Network —
175
—
—
175
Equipment revenue - other —
192,536
15,952
(34,844 ) 173,644
Total revenue —
1,285,722
142,477
(57,454 ) 1,370,745
Costs and Expenses:
Costs of sales - services and other (exclusive of depreciation and amortization) —
326,992
95,276
(20,635 ) 401,633
Cost of sales - equipment (exclusive of depreciation and amortization) —
176,449
12,429
(34,736 ) 154,142
Selling, general and administrative expenses —
213,212
32,876
(2,083 ) 244,005
Research and development expenses —
23,444
—
—
23,444
Depreciation and amortization —
339,342
25,536
—
364,878
Total costs and expenses —
1,079,439
166,117
(57,454 ) 1,188,102
Operating income —
206,283
(23,640 ) —
182,643
Other Income (Expense):
Interest income 19,890
633
1,322
(597 ) 21,248
Interest expense, net of amounts capitalized (172,007 ) (12,301 ) 1,715
597
(181,996 )
Gains (losses) on marketable investment securities, net —
1,723
—
—
1,723
Other-than-temporary impairment loss on available-for-sale securities —
(3,298 ) —
—
(3,298 )
Equity in earnings of unconsolidated affiliate —
5,298
—
—
5,298
Equity in earnings (losses) of subsidiaries, net 117,767
(13,344 ) —
(104,423 ) —
Other, net —
(925 ) 1,154
—
229
Total other income (expense), net (34,350 ) (22,214 ) 4,191
(104,423 ) (156,796 )
Income (loss) before income taxes (34,350 ) 184,069
(19,449 ) (104,423 ) 25,847
Income tax benefit (provision) 54,556
(65,974 ) 6,783
—
(4,635 )
Net income (loss) 20,206

118,095

(12,666 )
(104,423 ) 21,212
Less: Net income attributable to noncontrolling interests —
—
1,006
—
1,006
Net income (loss) attributable to HSS $ 20,206
$ 118,095
$ (13,672 ) $ (104,423 ) $ 20,206
Comprehensive Income (Loss):
Net income (loss) $ 20,206
$ 118,095
$ (12,666 ) $ (104,423 ) $ 21,212
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments —
—
13,956
—
13,956
Unrealized gains (losses) on available-for-sale securities and other (68 ) (1,464 ) (45 ) —
(1,577 )
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 15,745
13,911
—
(29,656 ) —
Total other comprehensive income (loss), net of tax 15,677
15,745
13,911
(29,656 ) 15,677
Comprehensive income (loss) 35,883
133,840
1,245
(134,079 ) 36,889
Less: Comprehensive income attributable to noncontrolling interests —
—
1,006
—
1,006
Comprehensive income (loss) attributable to HSS $ 35,883
$ 133,840
$ 239
$ (134,079 ) $ 35,883

~~Table of Contents~~

~~HUGHES SATELLITE SYSTEMS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)~~

~~For the Nine Months Ended September 30, 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	$	—		$	337,353		$	—		$	—		$	337,353		$	—		$	111,304		$	186		$	—		$	111,490
Services and other revenue - other	—			743,654			94,962			(16,753		)	821,863			—			241,372			34,363			(5,512		)	270,223
Equipment revenue - DISH Network	—			7,008			—			—			7,008
Equipment revenue - other	—			178,376			12,296			(29,786		)	160,886			—			51,235			4,677			(7,507		)	48,405
Total revenue	—			1,266,391			107,258			(46,539		)	1,327,110			—			403,911			39,226			(13,019		)	430,118
Costs and Expenses:
Costs and expenses:
Costs of sales - services and other (exclusive of depreciation and amortization)	—			328,113			70,064			(16,213		)	381,964			—			106,544			29,710			(5,355		)	130,899
Cost of sales - equipment (exclusive of depreciation and amortization)	—			162,644			9,649			(28,264		)	144,029			—			47,812			3,274			(6,860		)	44,226
Selling, general and administrative expenses	—			182,110			27,926			(2,062		)	207,974			—			65,685			9,497			(804		)	74,378
Research and development expenses	—			23,524			—			—			23,524			—			7,705			—			—			7,705
Depreciation and amortization	—			301,896			7,552			—			309,448			—			105,447			6,773			—			112,220
Total costs and expenses	—			998,287			115,191			(46,539		)	1,066,939			—			333,193			49,254			(13,019		)	369,428
Operating income	—			268,104			(7,933		)	—			260,171			—			70,718			(10,028		)	—			60,690
Other Income (Expense):
Other income (expense):
Interest income	6,135			88			1,214			(10		)	7,427			5,490			202			348			(199		)	5,841
Interest expense, net of amounts capitalized	(120,357		)	(11,589		)	4,310			10			(127,626		)	(57,299		)	(3,222		)	485			199			(59,837		)
Gains on marketable investment securities, net	2,989			2,311			—			—			5,300
Gains on investments, net																—			91			—			—			91
Other-than-temporary impairment loss on available-for-sale securities																—			(3,298		)	—			—			(3,298		)
Equity in earnings of unconsolidated affiliate	—			6,758			—			—			6,758			—			1,711			—			—			1,711
Equity in earnings (losses) of subsidiaries, net	164,592			(1,627		)	—			(162,965		)	—			41,859			(6,201		)	—			(35,658		)	—
Other, net	6,750			(2,317		)	932			—			5,365			—			(138		)	785			—			647
Total other income (expense), net	60,109			(6,376		)	6,456			(162,965		)	(102,776		)	(9,950		)	(10,855		)	1,618			(35,658		)	(54,845		)
Income (loss) before income taxes	60,109			261,728			(1,477		)	(162,965		)	157,395			(9,950		)	59,863			(8,410		)	(35,658		)	5,845
Income tax benefit (provision)	39,063			(96,854		)	514			—			(57,277		)	19,085			(17,856		)	2,353			—			3,582
Net income (loss)	99,172			164,874			(963		)	(162,965		)	100,118			9,135			42,007			(6,057		)	(35,658		)	9,427
Less: Net income attributable to noncontrolling interests	—			—			946			—			946			—			—			292			—			292
Net income (loss) attributable to HSS	$	99,172		$	164,874		$	(1,909	)	$	(162,965	)	$	99,172		$	9,135		$	42,007		$	(6,349	)	$	(35,658	)	$	9,135
Comprehensive Income (Loss):
Comprehensive income (loss):
Net income (loss)	$	99,172		$	164,874		$	(963	)	$	(162,965	)	$	100,118		$	9,135		$	42,007		$	(6,057	)	$	(35,658	)	$	9,427
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	—			—			10,607			—			10,607			—			—			12,121			—			12,121
Unrealized gains (losses) on available-for-sale securities and other	3,322			(751		)	(28		)	—			2,543			(27		)	(1,574		)	101			—			(1,500		)
Recognition of realized gains on available-for-sale securities in net income (loss)	(2,989		)	—			—			—			(2,989		)
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	10,014			10,765			—			(20,779		)	—			13,946			12,222			—			(26,168		)	—
Total other comprehensive income (loss), net of tax	10,347			10,014			10,579			(20,779		)	10,161			13,919			13,946			12,222			(26,168		)	13,919
Comprehensive income (loss)	109,519			174,888			9,616			(183,744		)	110,279			23,054			55,953			6,165			(61,826		)	23,346
Less: Comprehensive income attributable to noncontrolling interests	—			—			760			—			760			—			—			292			—			292
Comprehensive income (loss) attributable to HSS	$	109,519		$	174,888		$	8,856		$	(183,744	)	$	109,519		$	23,054		$	55,953		$	5,873		$	(61,826	)	$	23,054

3640

Table of Contents

HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the ~~Nine Months Ended September 30, 2017~~three months ended March 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:
Cash flows from operating activities:
Net income (loss)	$	20,206		$	118,095		$	(12,666	)	$	(104,423	)	$	21,212		$	20,001		$	56,349		$	(3,407	)	$	(52,562	)	$	20,381
Adjustments to reconcile net income (loss) to net cash flows from operating activities	66,702			160,917			16,592			104,423			348,634			(57,327		)	127,889			(1,102		)	52,562			122,022
Net cash flows from operating activities	86,908			279,012			3,926			—			369,846			(37,326		)	184,238			(4,509		)	—			142,403
Cash Flows from Investing Activities:
Cash flows from investing activities:
Purchases of marketable investment securities	(170,158		)	—			—			—			(170,158		)	(358,543		)	—			—			—			(358,543		)
Sales and maturities of marketable investment securities	152,423			—			—			—			152,423			197,686			—			—			—			197,686
Expenditures for property and equipment	—			(243,409		)	(48,566		)	—			(291,975		)	—			(76,974		)	(10,803		)	—			(87,777		)
Changes in restricted cash and cash equivalents	(1,282		)	—			(52		)	—			(1,334		)
Investment in subsidiary	(44,000		)	(47,500		)	—			91,500			—
Refunds and other receipts related to capital expenditures																—			77,524			—			—			77,524
Expenditures for externally marketed software	—			(25,447		)	—			—			(25,447		)	—			(7,148		)	—			—			(7,148		)
Payment for satellite launch services																—			—			(7,125		)	—			(7,125		)
Distributions (contributions) and advances from (to) subsidiaries, net																144,984			(18,425		)	—			(126,559		)	—
Net cash flows from investing activities	(63,017		)	(316,356		)	(48,618		)	91,500			(336,491		)	(15,873		)	(25,023		)	(17,928		)	(126,559		)	(185,383		)
Cash Flows from Financing Activities:
Payments of debt issuance costs	(414		)	—			—			—			(414		)
Proceeds from capital contribution from parent	—			44,000			47,500			(91,500		)	—
Cash flows from financing activities:
Contributions (distributions) and advances (to) from parent, net																—			(144,984		)	18,425			126,559			—
Repayment of debt and capital lease obligations	—			(23,800		)	(1,987		)	—			(25,787		)	—			(8,608		)	(760		)	—			(9,368		)
Advances from affiliates	—			—			(36		)	—			(36		)
Capital contribution from EchoStar																7,125			—			—			—			7,125
Other, net	600			(4,583		)	886			—			(3,097		)	—			(1,265		)	—			—			(1,265		)
Net cash flows from financing activities	186			15,617			46,363			(91,500		)	(29,334		)	7,125			(154,857		)	17,665			126,559			(3,508		)
Effect of exchange rates on cash and cash equivalents	—			—			923			—			923			—			—			(249		)	—			(249		)
Net increase (decrease) in cash and cash equivalents	24,077			(21,727		)	2,594			—			4,944
Cash and cash equivalents, at beginning of period	1,991,949			53,905			25,110			—			2,070,964
Cash and cash equivalents, at end of period	$	2,016,026		$	32,178		$	27,704		$	—		$	2,075,908
Net increase (decrease) in cash and cash equivalents, including restricted amounts																(46,074		)	4,358			(5,021		)	—			(46,737		)
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																$	1,700,804		$	46,731		$	29,082		$	—		$	1,776,617

3741

Table of Contents

HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the ~~Nine Months Ended September 30, 2016~~three months ended March 31, 2017

(In thousands)


	HSS			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total			HSS			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Cash Flows from Operating Activities:
Cash flows from operating activities:
Net income (loss)	$	99,172		$	164,874		$	(963	)	$	(162,965	)	$	100,118		$	9,135		$	42,007		$	(6,057	)	$	(35,658	)	$	9,427
Adjustments to reconcile net income (loss) to net cash flows from operating activities	63,754			96,870			23,109			162,965			346,698			11,863			27,173			7,956			35,658			82,650
Net cash flows from operating activities	162,926			261,744			22,146			—			446,816			20,998			69,180			1,899			—			92,077
Cash Flows from Investing Activities:
Purchases of marketable investment securities	(396,730		)	—			—			—			(396,730		)
Cash flows from investing activities:
Sales and maturities of marketable investment securities	265,680			—			—			—			265,680			91,747			—			—			—			91,747
Expenditures for property and equipment	—			(235,462		)	(76,541		)	—			(312,003		)	—			(53,634		)	(20,541		)	—			(74,175		)
Expenditures for externally marketed software	—			(17,991		)	—			—			(17,991		)	—			(10,832		)	—			—			(10,832		)
Changes in restricted cash and cash equivalents	203			7,500			(89		)	—			7,614
Investment in unconsolidated entity	—			(1,636		)	—			—			(1,636		)
Investment in subsidiary	(58,647		)	(58,672		)	—			117,319			—			(24,500		)	(27,500		)	—			52,000			—
Payment for EchoStar XXI launch services	—			—			(11,875		)	—			(11,875		)
Other, net	—			340			—			(340		)	—
Net cash flows from investing activities	(189,494		)	(305,921		)	(88,505		)	116,979			(466,941		)	67,247			(91,966		)	(20,541		)	52,000			6,740
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	1,500,000			—			—			—			1,500,000
Payments of debt issuance costs	(6,275		)	—			—			—			(6,275		)
Cash flows from financing activities:
Proceeds from capital contributions from parent	—			58,647			58,672			(117,319		)	—			—			24,500			27,500			(52,000		)	—
Capital contribution from EchoStar	11,875			—			—			—			11,875
Repayment of debt and capital lease obligations	—			(21,321		)	(2,731		)	—			(24,052		)	—			(7,717		)	(412		)	—			(8,129		)
Advances from affiliates	—			—			5,481			—			5,481
Other, net	9			(4,304		)	988			340			(2,967		)	600			(1,853		)	82			—			(1,171		)
Net cash flows from financing activities	1,505,609			33,022			62,410			(116,979		)	1,484,062			600			14,930			27,170			(52,000		)	(9,300		)
Effect of exchange rates on cash and cash equivalents	—			—			660			—			660			—			—			689			—			689
Net increase (decrease) in cash and cash equivalents	1,479,041			(11,155		)	(3,289		)	—			1,464,597
Cash and cash equivalents, at beginning of period	300,634			55,767			26,589			—			382,990
Cash and cash equivalents, at end of period	$	1,779,675		$	44,612		$	23,300		$	—		$	1,847,587
Net increase (decrease) in cash and cash equivalents, including restricted amounts																88,845			(7,856		)	9,217			—			90,206
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																$	2,080,794		$	46,049		$	35,050		$	—		$	2,161,893

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “HSS,” the “Company” and “our” refer to Hughes Satellite Systems Corporation and its subsidiaries. References to “$” are to United States (“U.S.”) dollars. The following management’s narrative analysis of results of operations should be read in conjunction with ~~the~~our accompanying condensed consolidated financial statements and notes ~~to our financial statements~~thereto included elsewhere in this Quarterly Report on Form ~~10-Q.~~10-Q (“Form 10-Q”). This management’s narrative analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this management’s narrative analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. See “Disclosure Regarding Forward-Looking Statements” in this ~~Quarterly Report on~~ Form 10-Q for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, see the caption “Risk Factors” in Part II, Item 1A of this ~~Quarterly Report on~~ Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K (“Form 10-K) for the year ended December 31, ~~2016.~~2017. Further, such forward-looking statements speak only as of the date of this ~~Quarterly Report on~~ Form 10-Q and we undertake no obligation to update them.

EXECUTIVE SUMMARY

We are a holding company and a subsidiary of EchoStar Corporation (“EchoStar”). We were formed as a Colorado corporation in March 2011. We are a global provider of satellite service operations, video delivery ~~solutions,~~services, broadband satellite technologies and broadband internet services for home and small office customers. We also deliver innovative network technologies, managed services, and various communications solutions for aeronautical, enterprise and government customers. We ~~currently~~primarily operate in two business segments, which are differentiated primarily by their operational focus: Hughes and EchoStar Satellite Services (“ESS”). These segments are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by our chief operating decision maker, ~~(“CODM”),~~ who ~~for HSS,~~ is the Company’s Chief Executive Officer.

On January 31, 2017, EchoStar and certain of its and our subsidiaries, entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with DISH Network Corporation (“DISH”) and certain of its subsidiaries. Pursuant to the Share Exchange Agreement, on February 28, 2017, among other things, EchoStar and certain of its and our subsidiaries received all of the shares of the Hughes Retail Preferred Tracking Stock issued by EchoStar Corporation (the “EchoStar Tracking Stock”) and the Hughes Retail Preferred Tracking Stock issued by us (the “HSS Tracking Stock”, together with the EchoStar Tracking Stock, 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 (collectively, the “Share Exchange”). EchoStar’s former EchoStar Technologies businesses designed, developed, distributed secure end-to-end video technology solutions (including digital set-top boxes and related products and technology), primarily for satellite television (“TV”) service providers and telecommunication companies, and provided digital broadcast operations (including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services). The Tracking Stock tracked the economic performance of the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group”), and represented an aggregate 80.0% economic interest in the Hughes Retail Group. Following the consummation of the Share Exchange, EchoStar no longer operates the EchoStar Technologies ~~business segment and~~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 and are of no further effect.~~terminated.

Effective in March of 2017, we changed our overhead allocation methodology used in our segment disclosures to reflect how the CODM evaluates our segments. Historically, the costs of all corporate functions were included on an allocated basis in each of the business segments’ EBITDA. Under the revised allocation methodology, these costs are now reported and analyzed as part of “Corporate and Other” (previously “All Other and Eliminations”). Our prior period segment EBITDA disclosures have been restated to reflect this change.

Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate and Legal) ~~as well as~~and other activities that have not been assigned to our operating segments ~~including~~such as costs incurred in certain satellite development programs and other business development activities, ~~our centralized treasury operations,~~ and gains ~~(losses)~~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.”~~

~~Highlights from~~Other” in our ~~financial results are as follows:~~segment reporting.

~~Consolidated Results of Operations for the Nine Months Ended September 30, 2017~~


•	~~Revenue of $1.37 billion~~

~~Operating income of $182.6 million~~


•	~~Net income of $21.2 million~~


•	~~Net income attributable to HSS of $20.2 million~~

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Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

~~EBITDA~~Highlights from our financial results are as follows:

Consolidated Results of ~~$550.5~~Operations for the three months ended March 31, 2018


•	Revenue of $502.9 million

Operating income of $80.7 million


•	Net income of $20.4 million


•	Net income attributable to HSS of $20.0 million

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $214.5 million (see reconciliation of this non-GAAP measure on ~~pages 46)~~page 49)

Consolidated Financial Condition as of ~~September 30, 2017~~March 31, 2018


•	Total assets of $6.90 billion

Total liabilities of ~~$4.85~~$4.55 billion


•	Total shareholders’ equity of ~~$2.05~~$2.35 billion


•	Cash, cash equivalents and current marketable investment securities of ~~$2.27~~$2.40 billion

Hughes Segment

Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services ~~for~~to home and small office ~~customers. We deliver~~customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to ~~domestic and international~~ consumers, ~~and~~ aeronautical, enterprise and government customers. ~~In addition, our~~The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite ~~systems~~systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals ~~for other satellite systems, including~~to mobile system ~~operators.~~operators and our enterprise customers.

We continue to focus our efforts on growing our ~~Hughes segment~~ consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers in our domestic and ~~driving higher average revenue per subscriber~~international markets across ~~our~~ wholesale and retail channels. The growth of our enterprise businesses, including aeronautical, relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. Service costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth.

~~Our~~The Hughes segment currently uses capacity from our three satellites ~~the~~(the SPACEWAY 3 satellite, the EchoStar XVII satellite, and the EchoStar XIX ~~satellite,~~satellite) and additional satellite capacity acquired from multiple third-party providers to provide ~~satellite broadband internet access and communications~~ services to our customers. In December 2016, EchoStar launched the EchoStar XIX satellite, a ~~next-generation,~~ high throughput geostationary satellite ~~which provides significant capacity for continued subscriber growth. The EchoStar XIX satellite employs~~employing a multi-spot beam, bent pipe Ka-band ~~architecture and~~architecture. The EchoStar XIX satellite provides ~~additional~~ capacity ~~for~~for: (i) consumer subscriber growth; (ii) the Hughes broadband services to our customers in North ~~America and added capacity in~~America; (iii) certain Central and South American ~~countries~~countries; and ~~has added capability~~(iv) aeronautical and enterprise broadband services. While new satellite launches are expected to provide additional capacity for ~~aeronautical, enterprise and international broadband services.~~subscriber growth, we also manage subscriber growth across our existing satellite platform. EchoStar contributed the EchoStar XIX satellite to us in February 2017.

In August 2017, a subsidiary of EchoStar entered into a contract for the design and construction of EchoStar XXIV, a new, next-generation, high throughput geostationary satellite, with a planned 2021 ~~launch, that~~launch. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet service in North, Central and South America as well as aeronautical and enterprise broadband services. In March 2018, the Federal Communications Commission granted us authorization to construct, deploy, and operate the EchoStar XXIV satellite to provide fixed satellite services throughout North, South, and Central America. Capital expenditures associated with the construction and launch of this satellite ~~will be~~are included in “Corporate and Other” in EchoStar’s segment reporting.

~~Our~~In March 2017, our wholly-owned subsidiary, Hughes Network Systems, L.L.C., and DISH Network L.L.C. (“DNLLC”), a wholly-owned subsidiary of DISH, ~~have~~ entered into a master service agreement (the “MSA”) ~~pursuant~~. Pursuant to ~~which~~the MSA, DNLLC, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for the Hughes satellite internet service and related equipment and other telecommunication services and (ii) will install Hughes service equipment with respect to activations generated by DNLLC. As a result of the MSA we do not expect to earn significant equipment revenue from ~~our Distribution Agreement with dishNET Satellite Broadband L.L.C. (“dishNET”)~~ ~~in the future and we expect our subscriber acquisition costs to increase in future periods.~~

In addition to our broadband consumer service offerings, our Hughes segment also provides network technologies, managed services, hardware, equipment and satellite services to large enterprise and government customers globally. Examples of such customers include lottery agencies, gas station operators and companies with multi-branch networks that rely on satellite or terrestrial networks for critical communication across wide geographies. Most of our enterprise customers have contracts with us for the services they purchase.

Developments toward the launch of next-generation satellite systems including low-earth orbit (“LEO”) and geostationary systems could provide additional opportunities to drive the demand for our network equipment and services. The growth of our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies.

4044

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

satellite internet service (“Hughes service”) and related equipment and other telecommunication services, and (ii) install Hughes service equipment with respect to activations generated by DNLLC. As a result of the MSA, we have not earned and do not expect to earn significant equipment revenue from our distribution agreement with dishNET Satellite Broadband L.L.C. (“dishNET”), a wholly-owned subsidiary of DISH, in the future. We expect churn in the existing wholesale subscribers to continue to expand our efforts to grow our consumer satellite services business outside of the U.S. In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil provides us Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term. That satellite was launched in March 2016reduce “Services and we began delivering high-speed consumer satellite broadband services in Brazil in July 2016. In September 2015, we entered into satellite services agreements pursuant to which affiliates of Telesat Canada (“Telesat”) will provide to us the Ka-band capacity on a satellite to be located at the 63 degree west longitude orbital location (“63 West”) for a 15-year term. We expect the satellite to be launchedother revenue – DISH Network” in the ~~second quarter of 2018 and to augment the capacity being provided by the EUTELSAT 65 West A and EchoStar XIX satellites.~~ ~~We launched our consumer satellite broadband service in Colombia in the third quarter of 2017 and we expect to launch similar services in various other Central and South American countries in 2018.~~future.

~~We are tracking closely~~Developments toward the ~~developments in~~launch of next-generation satellite ~~businesses,~~systems including low-earth orbit (“LEO”), medium-earth orbit (“MEO”) and ~~we are seeking~~geostationary systems could provide additional opportunities to ~~utilize our services, technologies and expertise to find new commercial opportunities~~drive the demand for our ~~business.~~equipment, hardware, technology and services. In June 2015, a subsidiary of EchoStar made an equity investment in WorldVu Satellites Limited (“OneWeb”), a global LEO satellite service company. WeIn addition, we have an agreement with OneWeb to provide certain equipment and services in connection with the ground network system for OneWeb’s LEO satellites. In November 2017, we began the production of OneWeb’s ground network system equipment and delivered an initial operational gateway in the first quarter of 2018. We expect to ~~begin~~deliver additional equipment to OneWeb in the second half of 2018 and thereafter.

We continue our efforts to expand our consumer satellite services business outside of the U.S. In April 2014, we entered into a 15-year agreement with Eutelsat do Brasil for Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite, which was launched in March 2016. We began delivering ~~this equipment~~high-speed consumer satellite broadband services in ~~mid-2018.~~Brazil in July 2016. Additionally, in September 2015, we entered into 15-year agreements pursuant to which affiliates of Telesat Canada (“Telesat”) will provide to us the Ka-band capacity on a satellite to be located at the 63 degree west longitude orbital location. We expect the satellite to be launched in the second quarter of 2018 and to augment the capacity being provided by the EUTELSAT 65 West A and EchoStar XIX satellites in Central and South America. During the third quarter of 2017, we began to provide consumer satellite broadband service in Colombia and we expect to launch similar services in various other Central and South American countries in 2018.

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, our Hughes segment had approximately ~~1,140,000~~1,267,000 and ~~1,036,000~~1,208,000 broadband subscribers, respectively. These broadband subscribers include customers that subscribe to our HughesNet broadband services in North and South America through retail, wholesale and small/medium enterprise service channels. ~~Gross~~Our gross subscriber additions ~~increased~~for the first quarter of 2018 decreased by approximately ~~9,000 in the third quarter of 2017~~6,700 compared to the ~~second~~fourth quarter of ~~2017 primarily due to an increase in new additions in our domestic retail channel as a result of the launch of the EchoStar XIX satellite, which was placed into service in March~~ 2017. ~~The increase was partially offset by a decrease in new subscribers additions in our international retail channel.~~ Our average monthly subscriber churn percentage for the ~~third~~first quarter of ~~2017~~2018 decreased compared to the ~~second~~fourth quarter of 2017. ~~As a result of higher gross subscriber additions and lower churn,~~The total net subscriber additions were approximately ~~53,000~~59,000 for the quarter ended ~~September 30, 2017~~March 31, 2018 compared to approximately ~~41,000~~68,000 for the ~~second~~quarter ended December 31, 2017. The decrease in the net subscriber additions was primarily due to lower gross subscriber additions during the first quarter of 2018 compared to the fourth quarter of 2017. ~~Subscriber additions and churn include only subscribers through our retail and wholesale channels.~~

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, our Hughes segment had approximately ~~$1.74~~$1.59 billion and ~~$1.52~~$1.62 billion, respectively, of contracted revenue backlog. We define Hughes contracted revenue backlog as our expected future revenue, including lease revenue, under customer contracts that are non-cancelable, excluding agreements with customers in our consumer market.

~~EchoStar Satellite Services~~ESS Segment

Our ESS segment is a global provider of satellite service operations and video delivery ~~solutions.~~services. We operate our business using our owned and leased in-orbit satellites and related licenses. Revenue growth in our ESS segment depends largely on our ability to continuously make satellite capacity available for sale. We provide satellite service operations and video delivery services on a full-time and 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, programmers, and private enterprise customers. WeESS also ~~manage~~manages satellite operations for certain satellites owned by DISH Network.

We depend on DISH Network for a significant portion of the revenue for our ESS segment, and we expect that DISH Network will continue to be the primary source of revenue for our ESS segment. Therefore, the results of operations of our ESS segment are linked to changes in DISH Network’s satellite capacity requirements. DISH Network’s capacity requirements have been driven by the addition of new channels and migration of programming to high-definition TV and video on demand services. The services that we provide to DISH Network are critical to its nationwide delivery of content to its customers across the U.S. While we expect to continue to provide satellite services to DISH Network, its satellite capacity requirements may change for a variety of reasons, including its ability to construct and launch its own satellites. Any termination or reduction in the services we provide to DISH Network may cause us to have unused capacity on our satellites and require that we aggressively pursue alternative sources of revenue for this business. The agreement with DISH Network for satellite services relative to the

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

EchoStar VII satellite expires in June 2018. DISH Network has not renewed the agreement past such date which may have a significant impact on our operating results in the future.

In August 2014, we entered into: (i) a ~~construction~~ contract with Airbus Defence and Space SAS for the construction of the EchoStar 105/SES-11 satellite with ~~C-band, Ku-band~~C-, Ku- and Ka-band payloads; (ii) an agreement with SES Satellite Leasing Limited for the procurement of the related launch services; and (iii) an agreement with SES Americom Inc. (“SES”) pursuant to which we ~~will transfer~~transferred the title to the ~~Ku-band payload to an affiliate of SES following in-orbit testing of the satellite and the title to the C-band and Ka-band~~ payloads to ~~an affiliate~~two affiliates of ~~SES and SES, respectively, by early 2018. SES will provide~~SES. We retained the right to ~~us satellite service~~

~~Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued~~

onuse the entire Ku-band payload on the ~~EchoStar 105/SES-11~~ satellite for an initial ten-year term, with an option for us to renew the agreement on a year-to-year basis. The EchoStar 105/SES-11 satellite was launched in October 2017 and ~~is expected to be~~ placed into service in November 2017 at the ~~fourth quarter of 2017.~~105 degree west longitude orbital location. Our Ku-band payload on the EchoStar 105/SES-11 satellite ~~will replace~~replaced and ~~augment our current~~augments the capacity we had on the AMC-15 satellite, resulting in additional sales capacity. We ~~expect to transfer~~transferred activities from the AMC-15 satellite to the EchoStar 105/SES-11 satellite in the fourth quarter of 2017 ~~which we expect will result in reduced operating costs associated with the lease of~~and our agreement for satellite services on certain transponders on the AMC-15 ~~satellite.~~satellite terminated according to its terms in December 2017.

We ~~continue to pursue~~are pursuing expanding our business offerings by providing value added services such as telemetry, tracking, and control (“TT&C”) services to third parties, which ~~leverages~~leverage the ground monitoring networks and personnel currently within our ESS segment.

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, our ESS segment had contracted revenue backlog, including lease revenue attributable to satellites currently in orbit of approximately ~~$1.26~~$1.07 billion and $1.16 billion, respectively.

New Business Opportunities

Our industry ~~is evolving~~continues to evolve with the ~~increase in~~increasing worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, LEO networks, MEO systems, balloons, and High Altitude Platform Systems ~~have begun to play~~are playing significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment and commerce in North America and internationally for consumers, ~~enterprises~~as well as aeronautical, enterprise and ~~governments.~~government customers. We are tracking closely the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies and expertise to find new commercial opportunities for our business.

We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions and other strategic ~~acquisitions,~~initiatives, domestically and internationally, that we believe may allow us to increase our existing market share, expand into new markets and new customers, broaden our portfolio of services, products and intellectual property, and strengthen our relationships with our customers. We may allocate significant resources for long-term initiatives that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.

Cybersecurity

As a global provider of satellite technologies and services, internet services and communications equipment and networks, we may be prone to more targeted and persistent levels of cyber-attacks than other businesses. These risks may be more prevalent as we expand our business into other areas of the world outside of North America, some of which are still developing mature cybersecurity infrastructures. Detecting, deterring, preventing and mitigating incidents caused by hackers and other parties may result in significant costs to us and may expose our customers to financial or other harm, potentially significantly increasing our liability.

We treat cybersecurity risk seriously and are focused on maintaining the security of our and our partners’ systems, networks, technologies and data. We regularly review and revise our relevant policies and procedures, invest in and maintain internal resources, personnel and systems and review, modify and supplement our defenses through the use of various services, programs and outside vendors. EchoStar also maintains agreements with third party vendors and experts to assist in our remediation and mitigation efforts if we experience or identify a material incident or threat. In addition, senior management and the Audit Committee of EchoStar’s Board of Directors are regularly briefed on cybersecurity matters.

We are not aware of any cyber-attacks with respect to our owned or leased satellites or other networks, equipment or systems that have had a material adverse effect on our business, costs, operations, prospects, results of operation or financial position

4246

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

during the three months ended March 31, 2018. There can be no assurance, however, that any such incident can be detected or thwarted or will not have such a material adverse effect in the future.

RESULTS OF OPERATIONS

~~Nine Months Ended September 30, 2017 Compared~~Three months ended March 31, 2018 compared to the ~~Nine Months Ended September 30, 2016~~three months ended March 31, 2017


	For the Nine Months Ended September 30,						Variance					For the three months ended March 31,						Variance
Statements of Operations Data (1)	2017			2016			Amount			%		2018			2017			Amount			%
	(Dollars in thousands)											(Dollars in thousands)
Revenue:
Services and other revenue - DISH Network	$	330,675		$	337,353		$	(6,678	)	(2.0	)	$	100,614		$	111,490		$	(10,876	)	(9.8	)
Services and other revenue - other	866,251			821,863			44,388			5.4		359,334			270,223			89,111			33.0
Equipment revenue - DISH Network	175			7,008			(6,833		)	(97.5	)
Equipment revenue - other	173,644			160,886			12,758			7.9
Equipment revenue												42,947			48,405			(5,458		)	(11.3	)
Total revenue	1,370,745			1,327,110			43,635			3.3		502,895			430,118			72,777			16.9
Costs and Expenses:
Costs and expenses:
Cost of sales - services and other	401,633			381,964			19,669			5.1		142,703			130,899			11,804			9.0
% of Total services and other revenue	33.6		%	33.0		%
% of total services and other revenue												31.0		%	34.3		%
Cost of sales - equipment	154,142			144,029			10,113			7.0		44,023			44,226			(203		)	(0.5	)
% of Total equipment revenue	88.7		%	85.8		%
% of total equipment revenue												102.5		%	91.4		%
Selling, general and administrative expenses	244,005			207,974			36,031			17.3		94,650			74,378			20,272			27.3
% of Total revenue	17.8		%	15.7		%
% of total revenue												18.8		%	17.3		%
Research and development expenses	23,444			23,524			(80		)	(0.3	)	7,137			7,705			(568		)	(7.4	)
% of Total revenue	1.7		%	1.8		%
% of total revenue												1.4		%	1.8		%
Depreciation and amortization	364,878			309,448			55,430			17.9		133,718			112,220			21,498			19.2
Total costs and expenses	1,188,102			1,066,939			121,163			11.4		422,231			369,428			52,803			14.3
Operating income	182,643			260,171			(77,528		)	(29.8	)	80,664			60,690			19,974			32.9

Other Income (Expense):
Other income (expense):
Interest income	21,248			7,427			13,821			*		11,379			5,841			5,538			94.8
Interest expense, net of amounts capitalized	(181,996		)	(127,626		)	(54,370		)	42.6		(64,413		)	(59,837		)	(4,576		)	7.6
Gains (losses) and impairment on marketable investment securities, net	(1,575		)	5,300			(6,875		)	*
Losses and impairment on investments, net												(392		)	(3,207		)	2,815			(87.8	)
Other, net	5,527			12,123			(6,596		)	(54.4	)	879			2,358			(1,479		)	(62.7	)
Total other expense, net	(156,796		)	(102,776		)	(54,020		)	52.6		(52,547		)	(54,845		)	2,298			(4.2	)
Income before income taxes	25,847			157,395			(131,548		)	(83.6	)	28,117			5,845			22,272			*
Income tax provision	(4,635		)	(57,277		)	52,642			(91.9	)
Income tax benefit (provision)												(7,736		)	3,582			(11,318		)	*
Net income	21,212			100,118			(78,906		)	(78.8	)	20,381			9,427			10,954			*
Less: Net income attributable to noncontrolling interests	1,006			946			60			6.3		380			292			88			30.1
Net income attributable to HSS	$	20,206		$	99,172		$	(78,966	)	(79.6	)	$	20,001		$	9,135		$	10,866		*

Other Data:
Other data:
EBITDA (2)	$	550,467		$	586,096		$	(35,629	)	(6.1	)	$	214,489		$	171,769		$	42,720		24.9
Subscribers, end of period	1,140,000			1,018,000			122,000			12.0		1,267,000			1,043,000			224,000			21.5
___________________________

* Percentage is not meaningful.


(1)	An explanation of our key metrics is included on pages 4852 and 4953 under the heading “Explanation of Key Metrics and Other Items.”


(2)	A reconciliation of EBITDA to “Net income,” the most directly comparable ~~GAAP~~generally accepted accounting principles (“GAAP”) measure in the accompanying financial statements, is included on page ~~46.~~49. For further information on our use of EBITDA see “Explanation of Key Metrics and Other Items” on page ~~49.~~52.

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

Services and other revenue — DISH Network. “Services and other revenue — DISH Network” totaled ~~$330.7~~$100.6 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, a decrease of ~~$6.7~~$10.9 million or ~~2.0%~~9.8%, compared to the same period in ~~2016.~~2017.

Services and other revenue - DISH Network from our Hughes segment for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 decreased by ~~$9.2~~$8.7 million, or ~~12.4%~~37.1%, to ~~$65.4~~$14.7 million compared to the same period in ~~2016.~~2017. The decrease was primarily attributable to a decrease in wholesale consumer broadband subscribers.

~~Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued~~

Services and other revenue - DISH Network from ~~Corporate and Other~~our ESS segment for the ~~nine~~three months ended ~~September 30, 2017 increased~~March 31, 2018 decreased by ~~$3.6~~$3.2 million, or 3.7%, to ~~$4.7~~$84.0 million compared to the same period in ~~2016.~~2017. The ~~increase~~decrease was ~~primarily attributable~~due to ~~an increase~~revenue reduction of (i) $2.7 million resulting from DISH Network’s termination of its agreement to lease satellite capacity from us on the EchoStar XII satellite at the end of September 2017 and (ii) $1.2 million as a result of the satellite anomaly experienced by the EchoStar X satellite in ~~rental income relating~~December 2017 which reduced the satellite capacity leased to ~~certain lease agreements pursuant to which~~ DISH Network ~~leases certain real estate from us.~~

Services and other revenue — other. “Services and other revenue — other” totaled ~~$866.3~~$359.3 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, an increase of ~~$44.4~~$$89.1 million, or ~~5.4%~~33.0%, compared to the same period in ~~2016.~~2017.

Services and other revenue - other from our Hughes segment for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 increased by ~~$53.9~~$85.5 million, or ~~6.9%~~33.2%, to ~~$833.1~~$343.2 million compared to the same period in ~~2016.~~2017. The increase was primarily attributable to increases in sales of broadband services of ~~$51.5~~$68.3 million to our ~~domestic~~consumer customers and ~~international consumers, $8.2~~$15.5 million to our ~~domestic enterprise customers and $3.8 million to our telecom systems customers, partially offset by a decrease of $9.8 million to our international~~ enterprise customers.

Services and other revenue - other from our ESS segment for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 decreased by ~~$9.1~~$0.4 million, or ~~20.6%~~2.8%, to ~~$35.2~~$12.8 million compared to the same period in ~~2016.~~2017. The decrease was ~~primarily attributable~~due to ~~decreases~~a net decrease in ~~sales of~~ transponder services ~~due to expired service contracts.~~provided.

Equipment ~~revenue - DISH Network.~~revenue. “Equipment ~~revenue — DISH Network”~~revenue” totaled ~~$0.2~~$42.9 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, a decrease of ~~$6.8~~$5.5 million or ~~97.5%~~11.3%, compared to the same period in ~~2016~~2017 primarily from our Hughes segment. The decrease in revenue was primarily due to the decrease in unit sales of broadband equipment to dishNET as a result of the MSA. See Note 13 in the notes to condensed consolidated financial statements in Item 1 of this report for additional information about the MSA.

~~Equipment revenue — other.~~ “Equipment revenue — other” totaled $173.6 million for the nine months ended September 30, 2017, an increase of $12.8 million or 7.9%, compared to the same period in 2016 primarily from our Hughes segment. The increase was mainly due to ~~an increase~~a decrease of ~~$23.7~~$5.0 million in hardware sales ~~of broadband equipment~~ to our ~~domestic~~ enterprise customers and an increase of $6.1 million to our domestic and international consumers. The increase was partially offset by a decrease in sales of broadband equipment to our telecom systems customers of $11.3 million, our international enterprise customers of $2.9 million, and our government customers of $2.8 million.customers.

Cost of sales — services and other. “Cost of sales — services and other” totaled ~~$401.6~~$142.7 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, an increase of ~~$19.7~~$11.8 million or ~~5.1%~~9.0%, compared to the same period in ~~2016.~~2017.

Cost of sales - services and other from our Hughes segment for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 increased by ~~$18.5~~$16.1 million, or ~~5.5%~~14.0%, to ~~$352.9~~$131.1 million compared to the same period in ~~2016.~~2017. The increase was primarily attributable to an increase in the costs of broadband services provided to our ~~domestic~~consumer and ~~international consumers, domestic~~ enterprise ~~customers, and telecom systems customers primarily due to the increase in sales of broadband services.~~customers.

Cost of sales - services and other from our ESS segment for the ~~nine~~three months ended ~~September 30, 2017 increased~~March 31, 2018 decreased by ~~$0.8~~$4.8 million, or ~~1.7%~~30.2%, to ~~$48.9~~$11.1 million compared to the same period in ~~2016.~~2017. The ~~increase was primarily due to rental expenses for the lease of certain real estate and collocation and antenna space from DISH Network in 2017.~~

~~Cost of sales — equipment.~~ “Cost of sales — equipment” totaled $154.1 million for the nine months ended September 30, 2017, an increase of $10.1 million or 7.0%, compared to the same period in 2016 primarily from our Hughes segment. The increasedecrease was primarily attributable to ~~an increase~~the termination of ~~$20.8 million~~our agreement for satellite capacity on the AMC-15 satellite in equipment costs related to the increase in sales to our domestic and international consumers and enterprise customers, partially offset by a decrease of $10.7 million in equipment costs related to the decrease in sales to dishNET and our telecom systems customers.December 2017.

Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled ~~$244.0~~$94.7 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, an increase of ~~$36.0~~$20.3 million or ~~17.3%~~27.3%, compared to the same period in ~~2016.~~2017. The increase was primarily ~~related~~due to ~~an increase of $28.9 million in~~higher marketing and promotional costs ~~primarily attributable to our domestic and international consumer broadband sales in~~from our Hughes segment ~~an increase~~ of ~~$8.5~~$19.6 million ~~as a result of~~mainly associated with our ~~revised corporate structure, and an increase of $2.5 million in litigation expense in 2017, partially offset by a decrease of $3.9 million in general and administrative expenses.~~consumer business.

~~Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued~~

~~Research and development expenses~~. “Research and development expenses” totaled $23.4 million for the nine months ended September 30, 2017, a decrease of $0.1 million or 0.3%, compared to the same period in 2016. Our research and development activities vary based on the activity level and scope of other engineering and customer related development contracts.

Depreciation and amortization. “Depreciation and amortization” expenses totaled ~~$364.9~~$133.7 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, an increase of ~~$55.4~~$21.5 million or ~~17.9%~~19.2%, compared to the same period in ~~2016.~~2017. The increase was primarily ~~related~~due to an increase ~~of $27.5 million~~ in depreciation expense ofof: (i) $12.9 million relating to our customer rental equipment, (ii) $8.1 million relating to the ~~EUTELSAT 65 West A satellite~~EchoStar XIX and EchoStar 105/SES-11 satellites that ~~was~~were placed into service in the ~~third quarter~~first and fourth quarters of ~~2016 and the contribution of the EchoStar XIX satellite from EchoStar to us in February~~ 2017, ~~an increase of $17.0~~(iii) $4.1 million ~~in depreciation expense relating to domestic and international customer rental equipment, an increase of $13.2 million in depreciation expense~~ relating to machinery and equipment and (iv) an increase of ~~$6.9~~2.1 million in amortization expense relating to the development of externally marketed ~~software,~~software. The increases were partially offset by a decrease of ~~$7.5~~$4.5 million in amortization expense from certain fully amortized other intangible assets in our Hughes segment.

Interest income. “Interest income” totaled ~~$21.2~~$11.4 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, an increase of ~~$13.8~~$5.5 million or 94.8%, compared to the same period in ~~2016. The increase was~~2017 primarily attributable to ~~the increase in our marketable investments and~~ an increase in yield percentage in ~~2017 when~~2018 compared to ~~2016.~~2017.

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled ~~$182.0~~$64.4 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, an increase of ~~$54.4~~$4.6 million or ~~42.6%~~7.6%, compared to the same period in ~~2016.~~2017. The increase was primarily due to an increase in interest expense of $51.0 million relating to the issuance of 5.250% Senior Secured Notes due 2026 (the “2026 Senior Secured Notes”) and 6.625% Senior Unsecured Notes due 2026 (the “2026 Senior Unsecured Notes” and together with 2026 Senior Secured Notes, the “2026 Notes”) in the third quarter of 2016 and a decrease of ~~$3.4~~$5.2 million in capitalized interest relating to the EchoStar XIX ~~satellite~~and EchoStar 105/SES-11 satellites that ~~was~~were placed into service in the first ~~quarter~~and fourth quarters of ~~2017.~~2017, respectively.

~~Gains (losses)~~Losses and ~~impairment~~impairments on ~~marketable investment securities,~~investments, net. “~~Gains (losses)~~Losses and ~~impairment~~impairments on ~~marketable investment securities,~~investments, net” totaled ~~$1.6~~$0.4 million in losses for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018, a decrease of $2.8 million or 87.8%, compared to ~~$5.3 million in gains for~~ the same period in ~~2016.~~2017. The ~~change of $6.9 million~~decrease in losses was primarily due to an ~~other than temporary~~other-than-temporary impairment loss of $3.3 million on ~~certain strategic equity securities in~~one of our ~~marketable investment~~available-for-sale securities in 2017, ~~and $3.0~~compared to a $0.4 million unrealized loss on an equity security in ~~realized gains on our securities classified as available-for-sale in 2016 .~~2018.

Other, net. “Other, net” totaled ~~$5.5~~$0.9 million in income for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, a decrease of ~~$6.6~~$1.5 million or ~~54.4%~~62.7%, compared to the same period in ~~2016.~~2017. The decrease was primarily related to ~~$6.8 million for a provision recorded in the first half of 2015 in connection with Federal Communications Commission (“FCC”) regulatory fees, which was reversed~~an unfavorable foreign exchange impact in the first quarter of ~~2016 and $1.5 million decrease~~2018 compared to the same period in ~~equity in earnings of our unconsolidated affiliates, partially offset by $1.5 million in a protective put associated with our trading securities in 2016.~~2017.

Income tax benefit (provision). Income tax expense was ~~$4.6~~$7.7 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 compared to an income tax ~~expense~~benefit of ~~$57.3~~$3.6 million for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017. Our effective income tax rate was ~~17.9%~~27.5% and ~~36.4%~~(61.3)% for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. The variations in our current year effective tax rate from the U.S. federal statutory rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 were primarily due to various permanent tax differences, the impact of state and local taxes, and the increase in our valuation allowance associated with certain foreign losses. For the three months ended March 31, 2017, the variations in our effective tax rate from the U.S. federal statutory rate were primarily due to the recognition of a one-time tax benefit for the revaluation of our deferred tax assets and liabilities due to a change in our state effective tax rate as a result of the Share Exchange. ~~For the nine months ended September 30, 2016, the variation in our effective tax rate from the U.S. federal statutory rate was primarily due to the impact of state and local taxes.~~

Net income attributable to HSS. “Net income attributable to HSS” was ~~$20.2~~$20.0 million for the ~~nine~~three months ended ~~September 30, 2017, a decrease~~March 31, 2018, an increase of ~~$79.0~~$10.9 million, ~~or 79.6%,~~ compared to the same period in ~~2016.~~2017. The ~~decrease~~increase was primarily due to ~~(i) a decrease~~an increase in operating income, including depreciation and amortization, of ~~$77.5~~$20.0 million ~~(ii)~~and an increase ~~of $54.4 million~~ in interest ~~expense, net of amounts capitalized, (iii) a decrease in gains on investments of $6.9 million and (iv) a decrease in other~~ income of ~~$6.6~~$5.5 million. These ~~decreases~~increases were partially offset by ~~a decrease~~an increase of ~~$52.6~~$11.3 million in income tax expense and an increase of ~~13.8~~$4.6 million in interest ~~income.~~expense, net of amounts capitalized.

~~Earnings before interest, taxes, depreciation and amortization (~~“EBITDA”). EBITDA was ~~$550.5~~$214.5 million for the ~~nine~~three months ended ~~September 30, 2017, a decrease~~March 31, 2018, an increase of ~~$35.6~~$42.7 million or ~~6.1%~~24.9%, compared to the same period in ~~2016.~~2017. The ~~decrease~~increase was primarily due to ~~(i) a decrease~~an increase in operating income, excluding depreciation and amortization, of ~~$22.1 million, (ii) a decrease in gains on investments of $6.9 million and (iii) a decrease in other income of $6.6~~$41.5 million. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below.

~~Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued~~

The following table reconciles EBITDA to Net income, the most directly comparable GAAP measure in the accompanying financial statements.


	For the Nine Months Ended September 30,						Variance					For the three months ended March 31,						Variance
	2017			2016			Amount			%		2018			2017			Amount			%
	(Dollars in thousands)											(Dollars in thousands)
Net income	$	21,212		$	100,118		$	(78,906	)	(78.8	)	$	20,381		$	9,427		$	10,954		*

Interest income and expense, net	160,748			120,199			40,549			33.7		53,034			53,996			(962		)	(1.8	)
Income tax provision	4,635			57,277			(52,642		)	(91.9	)
Income tax provision (benefit)												7,736			(3,582		)	11,318			*
Depreciation and amortization	364,878			309,448			55,430			17.9		133,718			112,220			21,498			19.2
Net income attributable to noncontrolling interests	(1,006		)	(946		)	(60		)	6.3		(380		)	(292		)	(88		)	30.1
EBITDA	$	550,467		$	586,096		$	(35,629	)	(6.1	)	$	214,489		$	171,769		$	42,720		24.9

* Percentage is not meaningful.

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

Segment Operating Results and Capital Expenditures

~~Nine Months Ended September 30, 2017 Compared~~Three months ended March 31, 2018 compared to the ~~Nine Months Ended September 30, 2016~~three months ended March 31, 2017


	Hughes		EchoStar Satellite Services		Corporate and Other			Consolidated Total		Hughes		ESS			Corporate and Other			Consolidated Total
	(In thousands)									(In thousands)
For the Nine Months Ended September 30, 2017
For the three months ended March 31, 2018
Total revenue										$	400,818	$	96,753		$	5,324		$	502,895
Capital expenditures (1)										$	87,291	$	(77,038	)	$	—		$	10,253
EBITDA										$	136,713	$	84,150		$	(6,374	)	$	214,489
For the three months ended March 31, 2017
Total revenue	$	1,072,143	$	295,785	$	2,817		$	1,370,745	$	329,320	$	100,326		$	472		$	430,118
Capital expenditures	$	270,624	$	21,351	$	—		$	291,975	$	65,667	$	8,508		$	—		$	74,175
EBITDA	$	342,693	$	241,873	$	(34,099	)	$	550,467	$	100,852	$	83,063		$	(12,146	)	$	171,769
For the Nine Months Ended September 30, 2016
Total revenue	$	1,021,451	$	305,919	$	(260	)	$	1,327,110
Capital expenditures	$	261,241	$	50,762	$	—		$	312,003
EBITDA	$	353,505	$	257,181	$	(24,590	)	$	586,096


(1)	Capital expenditures are net of refunds and other receipts related to capital expenditures.

Hughes Segment


	For the Nine Months Ended September 30,				Variance					For the three months ended March 31,				Variance
	2017		2016		Amount			%		2018		2017		Amount		%
	(Dollars in thousands)									(Dollars in thousands)
Total revenue	$	1,072,143	$	1,021,451	$	50,692		5.0		$	400,818	$	329,320	$	71,498	21.7
Capital expenditures	$	270,624	$	261,241	$	9,383		3.6		$	87,291	$	65,667	$	21,624	32.9
EBITDA	$	342,693	$	353,505	$	(10,812	)	(3.1	)	$	136,713	$	100,852	$	35,861	35.6

Revenue

Hughes segment total revenue for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 increased by ~~$50.7~~$71.5 million, or ~~5.0%~~21.7%, compared to the same period in ~~2016.~~2017. The increase was primarily due to an increase in sales of broadband services of: (i) $68.3 million to our consumer customers and (ii) $15.5 million to our enterprise customers. The increase was partially offset by a decrease of: (i) $8.7 million in sales of broadband services to DISH Network and (ii) $5.0 million in sales of broadband equipment to our enterprise customers.

Capital Expenditures

Hughes segment capital expenditures for the three months ended March 31, 2018 increased by $21.6 million, or 32.9%, compared to the same period in 2017, primarily due to increases in capital expenditures relating to our consumer business of $32.0 million and our enterprise business of $4.3 million. The increases were partially offset by a decrease of $15.2 million in capital expenditures associated with our EUTELSAT 65W, Telesat T19V, EchoStar XIX, and EchoStar XXI satellites.

EBITDA

Hughes segment EBITDA for the three months ended March 31, 2018 was $136.7 million, an increase of $35.9 million, or 35.6%, compared to the same period in 2017. The increase was primarily due to an increase of ~~$57.6~~$55.4 million in ~~sales of broadband equipment and services to our domestic and international consumers, an increase of $31.9 million in sales of broadband equipment and services to our domestic enterprise customers,~~gross margin and an ~~increase~~other-than-temporary impairment loss of ~~$3.8~~$3.3 million on one of our available-for-sale securities in ~~sales~~the first quarter of ~~services to our telecom systems customers.~~2017. The increase was partially offset by ~~a decrease~~higher marketing and promotional costs of ~~$16.1~~$19.6 million mainly associated with our consumer business and an unfavorable foreign exchange impact of $1.3 million in ~~sales~~the first quarter of ~~broadband equipment and services~~2018 compared to ~~DISH Network, a decrease of $14.1 million~~the same period in sales of broadband equipment to our telecom systems customers and government customers, and a decrease of $12.7 million in sales of broadband equipment and services to our international enterprise customers.2017.

4650

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

~~Capital Expenditures~~

Hughes segment capital expenditures for the nine months ended September 30, 2017 increased by $9.4 million, or 3.6%, compared to the same period in 2016, primarily as a result of an increase of $95.4 million in expenditures in our domestic and international businesses. The increase was mainly associated with customer rental equipment for consumer services provided on the EUTELSAT 65 West A and EchoStar XIX satellites that were placed into service in the third quarter of 2016 and the first quarter of 2017, respectively. The increase was partially offset by a decrease of $84.6 million in expenditures on other satellites and related ground infrastructure, primarily resulted from the launch of service on EUTELSAT 65 West A and EchoStar XIX satellites.

~~EBITDA~~

Hughes segment EBITDA for the nine months ended September 30, 2017 was $342.7 million, a decrease of $10.8 million, or 3.1%, compared to the same period in 2016. The decrease was primarily due to an increase of $28.9 million in marketing and promotional costs mainly attributable our domestic and international consumer broadband sales and an other than temporary impairment loss of $3.3 million on certain strategic equity securities in our marketable investment securities in 2017. The decrease was partially offset by an increase of $22.1 million in gross margin which we define as revenue less cost of sales.

~~EchoStar Satellite Services~~ESS Segment


	For the Nine Months Ended September 30,				Variance					For the three months ended March 31,					Variance
	2017		2016		Amount			%		2018			2017		Amount			%
	(Dollars in thousands)									(Dollars in thousands)
Total revenue	$	295,785	$	305,919	$	(10,134	)	(3.3	)	$	96,753		$	100,326	$	(3,573	)	(3.6	)
Capital expenditures(1)	$	21,351	$	50,762	$	(29,411	)	(57.9	)	$	(77,038	)	$	8,508	$	(85,546	)	*
EBITDA	$	241,873	$	257,181	$	(15,308	)	(6.0	)	$	84,150		$	83,063	$	1,087		1.3

* Percentage is not meaningful.


(1)	Capital expenditures are net of refunds and other receipts related to capital expenditures.

Revenue

ESS segment total revenue for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 decreased by ~~$10.1~~$3.6 million, or ~~3.3%~~3.6%, compared to the same period in ~~2016, primarily~~2017. The decrease was attributable to ~~decreases~~revenue reduction of (i) $2.7 million resulting from DISH Network’s termination of its agreement to lease satellite capacity from us on the EchoStar XII satellite at the end of September 2017 and (ii) $1.2 million as a result of the satellite anomaly experienced by the EchoStar X satellite in ~~sales of transponder services due~~December 2017 which reduced the satellite capacity leased to ~~expired service contracts.~~DISH Network.

Capital Expenditures

ESS segment capital expenditures for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 decreased by ~~$29.4~~$85.5 million ~~or 57.9%,~~ compared to the same period in ~~2016,~~2017, primarily reflect a reimbursement of $77.5 million related to ~~a decrease in expenditures on~~ the EchoStar 105/SES-11 satellite.

EBITDA

ESS segment EBITDA for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 was ~~$241.9~~$84.2 million, ~~a decrease~~an increase of ~~$15.3~~$1.1 million, or ~~6.0%~~1.3%, compared to the same period in ~~2016.~~2017. The ~~decrease in EBITDA for our ESS segment~~increase was primarily due to a decrease in satellite services costs of ~~$10.9~~$4.8 million mainly associated with the termination of our agreement for satellite capacity on the AMC-15 satellite in ~~gross margin and a~~December 2017. The increase in EBITDA was partially offset by the decrease in ESS segment total revenue of ~~$3.8~~$3.6 million ~~due to a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed~~ in the first quarter of ~~2016.~~

~~Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued~~

2018 compared to the same period in 2017.

Corporate and Other

Corporate and Other is comprised of various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, IT, Finance, Real Estate and Legal) as well as other activities that have not been assigned to our operating segments ~~including~~such as costs incurred in certain satellite development programs and other business development activities ~~our centralized treasury activities~~ and gains ~~(losses)~~or losses from certain of our investments. This also includes all intercompany eliminations.


	For the Nine Months Ended September 30,						Variance				For the three months ended March 31,						Variance
	2017			2016			Amount			%	2018			2017			Amount		%
	(Dollars in thousands)										(Dollars in thousands)
Total revenue	$	2,817		$	(260	)	$	3,077		*	$	5,324		$	472		$	4,852	*
Capital expenditures	$	—		$	—		$	—		*	$	—		$	—		$	—	*
EBITDA	$	(34,099	)	$	(24,590	)	$	(9,509	)	38.7	$	(6,374	)	$	(12,146	)	$	5,772	(47.5	)

* Percentage is not meaningful.

EBITDA

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, Corporate and Other EBITDA was a loss of ~~$34.1~~$6.4 million, an increase ~~in losses~~ of ~~$9.5~~$5.8 million, or ~~38.7%~~47.5%, compared to the same period in ~~2016.~~2017. The change in EBITDA was primarily ~~related~~due to an increase in operating income, excluding depreciation and amortization, of $4.8 million in general and administrative expense, $3.0 million attributable to a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016, $3.0 million in realized gains on our securities classified as available-for-sale in 2016 and a decrease of $1.5 million in equity in earnings of unconsolidated affiliate. The decrease was partially offset by an increase of $2.7 million in gross margin.$6.0 million.

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

EXPLANATION OF KEY METRICS AND OTHER ITEMS

Services and other revenue — DISH Network. “Services and other revenue — DISH Network” primarily includes revenue associated with satellite and transponder leases and services, ~~telemetry, tracking and control,~~TT&C, professional services, facilities rental revenue and other services provided to DISH Network. “Services and other revenue — DISH Network” also includes subscriber wholesale service fees for the Hughes service sold to dishNET.

Services and other revenue — other. “Services and other revenue— other” primarily includes the sales of enterprise and consumer broadband services, as well as maintenance and other contracted services. “Services and other revenue — other” also includes revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking and other services provided to customers other than DISH Network.

Equipment revenue ~~— DISH Network~~. “Equipment ~~revenue — DISH Network”~~revenue” primarily includes broadband equipment and networks sold to customers in our enterprise and consumer markets and sales of satellite broadband equipment and related equipment, related to the Hughes service, to DISH Network.

~~Equipment revenue — other. “Equipment revenue — other” primarily includes broadband equipment and networks sold to customers in our enterprise and consumer markets.~~

Cost of sales — services and other. “Cost of sales — services and other” primarily includes the cost of broadband services provided to our enterprise and consumer customers, and to DISH Network, as well as the cost of providing maintenance and other contracted services. “Cost of sales — services and other” also includes the costs associated with satellite and transponder leases and services, ~~telemetry, tracking and control,~~TT&C, professional services, facilities rental costs, and other services provided to our customers, including DISH Network.

Cost of sales — equipment. “Cost of sales — equipment” consists primarily of the cost of broadband equipment and networks sold to customers in our enterprise and consumer markets, and to DISH Network. “Cost of sales - equipment” also includes certain other costs associated with the deployment of equipment to our customers.

Selling, general and administrative expenses. “Selling, general and administrative expenses” primarily includes selling and marketing costs and employee-related costs associated with administrative services (e.g., information systems, human resources and other services), including stock-based compensation expense. It also includes professional fees (e.g. legal, information

~~Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued~~

systems and accounting services) and other items associated with facilities and administrative services provided by EchoStar, DISH Network and other third parties.

Research and development expenses. “Research and development expenses” primarily includes costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.

Interest income. “Interest income” primarily includes interest earned on our cash, cash equivalents and marketable investment securities, including premium amortization and discount accretion on debt securities.

Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” primarily includes interest expense associated with our debt and capital lease obligations (net of capitalized interest), and amortization of debt issuance costs.

~~Gains (losses)~~Losses and impairment on ~~marketable investment securities,~~investments, net. “~~Gains (losses)~~Losses and impairment on ~~marketable investment securities,~~investments, net” primarily includes changes in fair value of our marketable equity securities and may also include realized gains ~~net of any~~and losses on the sale or exchange of ~~investments,~~our available-for-sale debt securities, other-than-temporary impairment losses on ~~certain of~~ our ~~marketable investment~~available-for-sale securities, and ~~unrealized gains on our trading securities.~~adjustments to the carrying amount of investments in unconsolidated entities resulting from impairments and observable price changes.

Other, net. “Other, net” primarily includes foreign exchange gains and losses, dividends received from our marketable investment securities, equity in earnings of unconsolidated ~~affiliate,~~affiliates, and other non-operating income or expense items that are not appropriately classified elsewhere in our accompanying condensed consolidated statements of operations and comprehensive income (loss).

~~Earnings before interest, taxes, depreciation and amortization (“EBITDA”).~~EBITDA. EBITDA is defined as “Net ~~income”~~income (loss)” excluding “Interest income and expense, net, ~~of amounts capitalized,” “Interest income,~~” “Income tax provision (benefit), net,” “Depreciation and amortization,” and ~~“Depreciation and amortization.~~“Net income (loss) attributable to noncontrolling interests.” EBITDA is not a measure determined in accordance with GAAP. This non-GAAP measure is reconciled to “Net ~~income”~~income (loss)” in our discussion of “Results of Operations” above. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with GAAP. EBITDA is used by our management as a

Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - Continued

measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our ~~business.~~business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties to evaluate the performance of companies in our industry.

Subscribers. “Subscribers” include customers that subscribe to our Hughes segment’s HughesNet broadband services, through retail, wholesale and small/medium enterprise service channels.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as ~~amended)~~amended (the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report such that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 15d-15(f) under the ~~Securities~~ Exchange ~~Act of 1934, as amended)~~Act) that occurred during the ~~third~~first quarter of ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We continue to review our internal control over financial reporting, and may from time to time make changes aimed at enhancing its effectiveness and to ensure that our systems evolve with our business.

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

For a discussion of legal proceedings, see Part I, Item 1. Financial Statements — Note 1112 “Commitments and Contingencies — Litigation” in this Quarterly Report on Form 10-Q.

Item 1A. RISK FACTORS

Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 includes a detailed discussion of our risk factors. Except as provided below, for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, there were no material changes in our risk factors as previously ~~disclosed.~~

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

~~Our Hughes segment has made substantial contractual commitments for satellite capacity based on our existing customer contracts~~New tariffs and/or other developments with respect to trade policies, trade agreements, tariffs and backlog. If our existing customer contracts were to be terminated prior to their respective expiration dates, we may be committed to maintaining excess satellite capacity for which we will have insufficient revenue to cover our costs, which wouldgovernment regulations could have a ~~negative~~material adverse impact on our ~~margins~~business, financial condition and results of operations. ~~Alternatively, we may not have sufficient satellite capacity to meet demand.~~

We ~~generally only purchase satellite capacity based on existing contracts and bookings. Therefore, capacity for~~source certain ~~types of coverage in the future may not be readily available to us, and we may not be able to satisfy certain needs~~ of our ~~customers,~~products from manufacturers located outside of the United States, including China. Developments with respect to trade policies, trade agreements, tariffs and government regulations, including without limitation the imposition of new tariffs on imports by the U.S. government and/or retaliatory tariffs imposed on American products by foreign countries, could materially increase the cost of certain products that we source from foreign manufacturers, impact or limit the availability of such products from manufacturers and/or require us to change our manufacturers for such products, which could ~~result in~~have a ~~loss of possible new~~material adverse impact on our business, and could negatively impact the margins for those services. Our ability to provide capacity for subscriber growth in our North American consumer market could also be adversely affected by regulations and/or legislation in the U.S. that enable or propose to enable the use of a portion of the frequency bands we currently use or in the future intend to use for satellite services, 5G mobile terrestrial services or other uses. These bands include the Ka-band, where we operate our broadband gateway earth stations, and other bands in which we may operate in the future. Such regulation or legislation could limit our ability to use the Ka-band and/or other bands, limit our flexibility to change the way in which we use the Ka-band and/or adversely impact our ability to use additional bands in the future. Other countries in which we currently, or may in the future, operate are also considering regulations that could similarly limit access to the Ka-band or other frequency bands. In addition, the fixed satellite services (“FSS”) industry has seen consolidation in the past decade, and today, the main FSS providers in North America and a number of smaller regional providers own and operate the current satellites that are available for our capacity needs. The failure of any of these FSS providers to replace existing satellite assets at the end of their useful lives or a downturn in their industry as a whole could reduce or interrupt the satellite capacity available to us. Our businessfinancial condition and results of operations could be adversely affected if we are not able to renew our capacity leases at economically viable rates, if capacity is not available due to problems experienced by these FSS providers or if frequencies are not available to us.operations.

~~Our~~We may be exposed to financial and reputational damage to our business ~~is subject to risks of adverse government regulation.~~by cybersecurity incidents.

We and third parties with whom we work face a constantly developing landscape of cybersecurity threats in which hackers and other parties use a complex assortment of techniques and methods to execute cyber-attacks, including but not limited to the use of stolen access credentials, social engineering, malware, ransomware, phishing, insider threats, structured query language injection attacks and distributed denial-of-service attacks. Cybersecurity incidents such as these have increased significantly in quantity and severity and are expected to continue to increase. Additionally, the risk of cyber-attacks and compromises may increase as we expand our business into other areas of the world outside of North America, some of which are still developing mature cybersecurity infrastructures. Should we be affected by such an incident, we may incur substantial costs and suffer other negative consequences, which may include:

remediation costs, such as liability for stolen assets or information, repairs of system damage, and/or incentives to customers or business partners in an effort to maintain relationships after an attack;

increased cybersecurity protection costs, which may include the costs of making organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants;

increased liability due to financial or other harm inflicted on our partners;

lost revenues resulting from attacks on our satellites or technology, the unauthorized use of proprietary information or the failure to retain or attract customers following an attack;

litigation and legal risks, including regulatory actions by state, federal and international regulators; and

loss of reputation.

Our business is subject to varying degrees of regulation ~~in the U.S. by the FCC,~~that include programs designed to review our protections against cybersecurity incidents. If is it determined that our systems do not reasonably protect our partners’ assets and ~~other federal, state and local entities, and in foreign countries by similar entities, and internationally by the ITU. These~~data and/or that we have violated these regulations, ~~are~~we could be subject to ~~the administrative~~enforcement activity and ~~political process~~sanctions.

We regularly review and ~~do change, for political~~revise our internal cybersecurity policies and ~~other reasons, from time~~procedures, invest in and maintain an internal cybersecurity team and systems and software to time. For example, the FCC recently adopted an order in its “Spectrum Frontiers” proceeding under which a portion of the Ka-band, in which we operate our broadband gateway earth stations, has been enabled for 5G mobile terrestrial services, which could limit our flexibility to change the way in which we use Ka-band in the futuredetect, deter, prevent and/or ~~limit~~mitigate cyber-attacks and review, modify and supplement our ~~access~~defenses through the use of various services, programs and outside vendors. It is impossible, however, for us to know when or if any particular cyber-attack may arise or the impact on our business and ~~ability~~operations of any such incident. We expect to ~~use the Ka-band and/or other bands~~continue to incur increasing costs in ~~the future. Other countries in which we currently, or may in the future, operate are also considering regulations that could limit access~~preparing our infrastructure and maintaining it to the Ka-band or other frequency bands. The FCC has also opened a proceeding on non-geostationary satellites, which may adversely impact our ability to use certain spectrum for user terminals. Moreover, a substantial number of foreign countries in which we have, or may in the future make, an investment, regulate, in varying degrees, the ownership of satellites and other telecommunication facilities/networks and foreign investment in telecommunications companies. Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing authorizations. Further material changes in law and regulatory requirements may also occur, and there resist any such attacks. There

can be no assurance that ~~our business and~~we can successfully detect, deter, prevent or mitigate the ~~business~~effects of our subsidiaries and affiliates will not be adversely affected by future legislation, new regulation or deregulation. The failure to obtain or comply with the authorizations and regulations governing our operations could have a material adverse effect on our ability to generate revenue and our overall competitive position and could result in our suffering serious harm to our reputation.

Our business depends on regulatory authorizations issued by the FCC and state and foreign regulators that can expire, be revoked or modified, and applications for licenses and other authorizations that may not be granted.

Generally all satellite, earth stations and other licenses granted by the FCC and most other countries are subject to expiration unless renewed by the regulatory agency. Our satellite licenses are currently set to expire at various times. In addition, we occasionally receive special temporary authorizations that are granted for limited periods of time (e.g., 180 days or less) and subject to possible renewal. Generally, our licenses and special temporary authorizations have been renewed on a routine basis, but there can be no assurance that this will continue. In addition, we must obtain new licenses from the FCC and other countries’ regulators for the operation of new satellites that we may build and/or acquire. There can be no assurance that the FCC or other regulators will continue granting applications for new licenses or for the renewal of existing ones. If the FCC or other regulators were to cancel, revoke, suspend, or fail to renewcyber-attacks, any of ~~our licenses or authorizations, or fail to grant our applications for FCC or other licenses, it~~which could have a material adverse effect on our business, ~~financial condition and~~costs, operations, prospects, results of ~~operations. Specifically, loss of a frequency authorization~~operation or limitations on our ability to use the frequencies we currently use and/or intend to use in the future would reduce the amount of spectrum available to us, potentially reducing the amount of services we provide to our customers. The significance of such a loss of authorizations would vary based upon, among other things, the orbital location, the frequency band and the availability of replacement spectrum. In addition, the legislative and executive branches of the U.S. government and foreign governments often consider legislation and regulatory requirements that could affect us, as could the actions that the FCC and foreign regulatory bodies take. We cannot predict the outcomes of these legislative or regulatory proceedings or their effect on our business.financial position.

In addition, third parties have or may oppose some of our license applications and pending and future requests for extensions, modifications, waivers and approvals of our licenses. Even if we have fully complied with all of the required reporting, filing and other requirements in connection with our authorizations, it is possible a regulator could decline to grant certain of our applications or requests for authority, or could revoke, terminate, condition or decline to modify, extend or renew certain of our authorizations or licenses.

Item 4. MINE SAFETY DISCLOSURES

Not applicable

Item 5. OTHER INFORMATION

~~None~~On May 10, 2018, EchoStar issued a press release (the “Press Release”) announcing its financial results for the quarter ended March 31, 2018. A copy of the Press Release is furnished herewith as Exhibit 99.1. The foregoing information, including the exhibit related thereto, is furnished in response to Item 2.02 of Form 8-K and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise, and shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in any such filing.

Item 6. EXHIBITS



Exhibit No.		Description
31.1(H)		Section 302 Certification of Chief Executive Officer.
31.2(H)		Section 302 Certification of Chief Financial Officer.
32.1(I)		Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.
99.1(I)		Press release dated May 10, 2018 issued by EchoStar Corporation regarding financial results for the quarter ended March 31, 2018.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.
101.DEF		XBRL Taxonomy Extension Definition Linkbase.
101.LAB		XBRL Taxonomy Extension Label Linkbase.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

_________________________________________________________

(H) Filed herewith.

(I) Furnished herewith.


*	Incorporated by reference.


**	Constitutes a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements 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


Date: ~~November 8, 2017~~May 10, 2018	By:	/s/ Michael T. Dugan
		Michael T. Dugan
		Chief Executive Officer, President and Director
		(Principal Executive Officer)


Date: ~~November 8, 2017~~May 10, 2018	By:	/s/ David J. Rayner
		David J. Rayner
		Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer
		(Principal Financial and Accounting Officer)

5357



Accumulated Other Comprehensive Loss Components	Affected Line Item in our Condensed Consolidated Statements of Operations	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
Accumulated Other Comprehensive Loss Components		2017		2016			2017		2016
		(In thousands)
Recognition of realized gains on available-for-sale securities in net income (1)	Gains on marketable investment securities	$	—	$	(4	)	$	—	$	(2,989	)
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income (2)	Other-than-temporary impairment loss on available-for-sale securities	—		—			3,298		—
Total reclassifications, net of tax and noncontrolling interests		$	—	$	(4	)	$	3,298	$	(2,989	)