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:  

Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors”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”) as amended by Amendment No. 1 to Form 10-K on Form 10-K/A filed with the SEC (collectively referred to as our “Form 10-K”), those discussed in “Management’sManagement’s Narrative Analysis of Results of Operations”Operations 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.

 

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‑lookingforward-looking statements. We assume no responsibility for updating forward‑lookingforward-looking information contained or incorporated by reference herein or in any documents we file with the SEC, except as required by law.

 

 

 

 

 

 

We primarily operate in the following two business segments:

 

 

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

 

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“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 U.S. GAAP. In our opinion, all adjustments, (consistingconsisting of normal recurring adjustments)adjustments, considered necessary for a fair presentation have been

included. OurHowever, 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, 2017.2018.

 

 

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 percent50% 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.

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

Under ASC 842, leases are classified either as operating leases or finance leases. The lease classification affects the recognition of lease expense by lessees in the statement of operations. Consistent with GAAPprior accounting standards, operating lease expense is included in operating expenses, while finance lease expense is split between depreciation expense and interest expense. ASC 842 does not fundamentally change the lessor accounting model, which requires usleases to make certain estimates and assumptions that affectbe classified as operating leases or sales-type leases. Operating lease revenue generally is recognized over the reportedlease term, while sales-type lease revenue is recognized primarily upon lease commencement, except for amounts ofrepresenting interest on related accounts receivable.

Except for the new requirement to recognize assets and liabilities aton the datebalance sheet for operating leases where we are the lessee, under our ASC 842 transition method we continue to apply prior accounting standards to leases that commenced prior to 2019. We fully apply ASC 842 requirements only to leases that commenced or were modified on or after January 1, 2019. We elected certain practical expedients under our transition method, including elections to not reassess (i) whether a contract is or contains a lease and (ii) the classification of existing leases. We also elected not to apply hindsight in determining whether optional renewal periods should be included in the lease term, which in some instances may impact the initial measurement of the balance sheets,lease liability and the reported amountscalculation of straight-line expense over the lease term for operating leases. As a result of our transition elections, there was no change in our recognition of revenue and expense for each reporting period,leases that commenced prior to 2019. In addition, the application of ASC 842 requirements to new and certain information disclosed inmodified leases did not materially affect our recognition of revenue or expenses for the notes to our financial statements. Estimates are used in accounting for, among other things, (i) amortization periods for deferred contract acquisition costs, (ii) inputs used to recognize revenue over time, (iii) allowances for doubtful accounts, (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. We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts, and such differences may be material to our financial statements. 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.three months ended March 31, 2019.

We lease real estate, satellite capacity and equipment in the conduct of our business operations. For contracts entered into on or after January 1, 2019, we assess at contract inception whether the contract is, or contains a lease. Generally, we determine that a lease exists when (i) the contract involves the use of a distinct identified asset, (ii) we obtain the right to substantially all economic benefits from use of the asset and (iii) we have the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (i) the lease transfers ownership of the asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (iii) the lease term is for a major part of the remaining useful life of the asset, (iv) the present value of the lease payments equals or exceeds substantially all of the fair value 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:

At the lease commencement date, we recognize a right-of-use asset and a lease liability for eachall leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the three months ended March 31, 2018 and 2017.

Lease payments included in the contract, (iii) determine the transaction pricemeasurement of lease liabilities consist of (i) fixed lease payments for the contract, (iv) allocatenoncancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the transaction pricerenewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. We have elected an accounting policy, as permitted by ASC 842, not to account for such payments separately from the related lease payments. Our policy election results in a higher initial measurement of lease liabilities when such non-lease payments are fixed amounts. Certain of our performance obligations and (v) recognize revenue whenreal estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as we satisfy our performance obligations.

Additionally,Lease expense for operating leases consists of the fixed lease payments recognized on a significant portionstraight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments.

We lease satellite capacity, communications equipment and real estate to certain of our revenuecustomers, including DISH Network. We identify and determine the classification of such leases as operating leases or sales-type leases based on the criteria discussed above for lessees. A lease is derived fromclassified as a sales-type lease if it meets the above criteria for a finance lease; otherwise it is classified as an operating lease. Some of our leases of property and equipment that is reportedare embedded 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, whichthat include non-lease performance obligations. For such contracts, except where we separate from non-lease components ofhave elected otherwise as discussed below, we allocate consideration in the contract based on the relative standalone selling prices of thebetween lease and non-lease components.

Our accounting for revenue recognition, which is codified in Topic 606 (see Revenue Recognition above),from operating leases and provided guidance forsales-type leases was not substantially changed by our adoption of ASC 842. However, we anticipate that certain costs associated with contracts with customers. We adopted the New Revenue Standard using the modified retrospective method for contractsleases that were not completedwould have been classified as of January 1, 2018. Accordingly, comparative information foroperating leases under 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, wemay be classified as sales-type leases under ASC 842. Operating lease revenue generally is recognized the cumulative effect of its initial application ason 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 following table provides information about our trade accounts receivable, contract assets and contract liabilities from contractsbalances with customers, including amounts for certain embedded leases.

For the three months ended March 31, 2018,2019, we recognized revenue recognizedof $39 million that was previously included in the contract liability balance at the beginning of the period was $49.0 million.December 31, 2018.

BadOur bad debt expense related to our trade accounts receivablewas $4 million and contract assets is included in “Selling, general and administrative expenses” in our accompanying condensed consolidated statements of operations. For$5 million for the three months ended March 31, 20182019 and 2017, our bad debt expense was $4.7 million and $2.4 million,2018, respectively.

As of March 31, 2018,2019, the remaining performance obligations for our customer contracts with customers with original expected durations of more than one year was $1.27$1.1 billion. We expect to recognize approximately 25%36% of our remaining performance obligations of these contracts as revenue by December 31, 2018. Agreementsin the next twelve months. This amount excludes agreements with consumer customers in our Hughes segment consumer market that have expected durations of one year or less and our leasing arrangementsarrangements.

The following table disaggregates revenue from customer contracts attributed to our North America (the U.S and its territories, Mexico and Canada), South and Central America and other foreign locations as well as by segment, based on the location where the goods or services are provided. All other revenue includes transactions with customers in Asia, Africa, Australia, Europe, and the Middle East.

Effective January 1, 2019, we report revenue from leases of Hughes consumer broadband equipment as services revenue due to our election to not separate lease and non-lease components in consumer broadband service contracts in connection with our adoption of ASC 842 (see Note 2).