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Hughes Satellite Systems

Filed: 5 May 21, 8:00pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549 
FORM 10-Q
(Mark One) 
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021.

OR

    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
hssc-20210331_g1.jpg
 Hughes Satellite Systems Corporation
(Exact name of registrant as specified in its charter) 
Colorado 45-0897865
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
100 Inverness Terrace East,Englewood,Colorado 80112-5308
(Address of principal executive offices) (Zip Code)
(303)706-4000Not Applicable
(Registrant’s telephone number, including area code)(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No  
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 filerAccelerated filer Emerging growth company
Non-accelerated filerSmaller reporting company
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No  
As of April 29, 2021, 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 Quarterly Report on 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 such period. 


TABLE OF CONTENTS
 
 
*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, future developments, plans, objectives, strategies, 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,” ”project,” “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 based on past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties, including the impact of the coronavirus pandemic (COVID-19), and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition both the near- and long-term. 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:

significant risks related to our ability to operate and control our satellites, operational and environmental risks related to our owned and leased satellites, and risks related to our satellites under construction;
our ability and the ability of third parties with whom we engage to operate our business as a result of the COVID-19 pandemic, including regulatory and competitive considerations;
our ability to implement and/or realize benefits of our investments and other strategic initiatives;
legal proceedings relating to the BSS Transaction or other matters that could result in substantial costs and material adverse effects to our business;
risks related to our foreign operations and other uncertainties associated with doing business internationally;
risks related to our dependency upon third-party providers; and
risks related to our human capital resources.

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 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.

i

PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
As of
March 31, 2021December 31, 2020
Assets
Current assets:
Cash and cash equivalents$1,403,926 $740,490 
Marketable investment securities515,306 1,203,296 
Trade accounts receivable and contract assets, net187,272 183,988 
Other current assets, net286,689 291,815 
Total current assets2,393,193 2,419,589 
Non-current assets:
Property and equipment, net1,631,221 1,691,523 
Operating lease right-of-use assets131,452 128,266 
Goodwill510,945 511,597 
Regulatory authorizations, net409,960 410,451 
Other intangible assets, net16,246 18,340 
Other investments, net102,163 103,924 
Other non-current assets, net302,416 307,677 
Total non-current assets3,104,403 3,171,778 
Total assets$5,497,596 $5,591,367 
Liabilities and Shareholder's Equity
Current liabilities:
Trade accounts payable$104,683 $118,568 
Current portion of long-term debt, net808,758 898,237 
Contract liabilities112,507 104,569 
Accrued expenses and other current liabilities328,316 325,587 
Total current liabilities1,354,264 1,446,961 
Non-current liabilities:
Long-term debt, net1,495,436 1,495,256 
Deferred tax liabilities, net376,366 369,940 
Operating lease liabilities118,452 114,877 
Other non-current liabilities86,642 87,957 
Total non-current liabilities2,076,896 2,068,030 
Total liabilities3,431,160 3,514,991 
Commitments and contingencies00

The accompanying notes are an integral part of these Consolidated Financial Statements.
1

HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(Unaudited)

Shareholder's equity:
Preferred stock, $0.001 par value,1,000,000 shares authorized, NaN issued and outstanding at both March 31, 2021 and December 31, 2020
Common stock, $0.01 par value, 1,000,000 shares authorized, 1,078 shares issued and outstanding at both March 31, 2021 and December 31, 2020
Additional paid-in capital1,487,590 1,486,730 
Accumulated other comprehensive income (loss)(175,060)(146,840)
Accumulated earnings (losses)690,147 671,570 
Total Hughes Satellite Systems Corporation shareholder's equity2,002,677 2,011,460 
Non-controlling interests63,759 64,916 
Total shareholder's equity2,066,436 2,076,376 
Total liabilities and shareholder's equity$5,497,596 $5,591,367 







































The accompanying notes are an integral part of these Consolidated Financial Statements.
2



HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
(Unaudited)
For the three months ended March 31,
20212020
Revenue:
Services and other revenue$432,991 $410,238 
Equipment revenue52,239 57,309 
Total revenue485,230 467,547 
Costs and expenses:
Cost of sales - services and other (exclusive of depreciation and amortization)131,412 143,885 
Cost of sales - equipment (exclusive of depreciation and amortization)45,140 45,908 
Selling, general and administrative expenses104,370 115,860 
Research and development expenses7,545 6,254 
Depreciation and amortization122,664 125,965 
Impairment of long-lived assets210 
Total costs and expenses411,341 437,872 
Operating income (loss)73,889 29,675 
Other income (expense):
Interest income2,394 8,892 
Interest expense, net of amounts capitalized(41,922)(42,192)
Gains (losses) on investments, net(164)
Equity in earnings (losses) of unconsolidated affiliates, net(1,761)(1,087)
Foreign currency transaction gains (losses), net(3,360)(7,528)
Other, net(973)(278)
Total other income (expense), net(45,622)(42,357)
Income (loss) before income taxes28,267 (12,682)
Income tax benefit (provision), net(10,637)(5,231)
Net income (loss)17,630 (17,913)
Less: Net loss (income) attributable to non-controlling interests947 3,442 
Net income (loss) attributable to HSSC$18,577 $(14,471)








The accompanying notes are an integral part of these Consolidated Financial Statements.
3

HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
For the three months ended March 31,
 20212020
Net income (loss)$17,630 $(17,913)
Other comprehensive income (loss), net of tax:  
Foreign currency translation adjustments(33,742)(82,836)
Unrealized gains (losses) on available-for-sale securities(88)(2,479)
Other(405)
Total other comprehensive income (loss), net of tax(33,830)(85,720)
Comprehensive income (loss)(16,200)(103,633)
Less: Comprehensive loss (income) attributable to non-controlling interests6,557 19,765 
Comprehensive income (loss) attributable to HSSC$(9,643)$(83,868)































The accompanying notes are an integral part of these Consolidated Financial Statements.
4

HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY
(Amounts in thousands) 
(Unaudited)
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Earnings (Losses)
Non-controlling
Interests
Total
Balance, December 31, 2019$1,478,636 $(84,636)$664,415 $75,748 $2,134,163 
Cumulative effect of accounting changes— — (2,169)(240)(2,409)
Balance, January 1, 20201,478,636 (84,636)662,246 75,508 2,131,754 
Stock-based compensation1,457 — — — 1,457 
Issuance of equity and contribution of assets pursuant to the Yahsat JV formation4,338 — — (1,514)2,824 
Contribution by non-controlling interest holder— — — 4,000 4,000 
Other comprehensive income (loss)— (69,397)— (16,323)(85,720)
Net income (loss)— — (14,471)(3,442)(17,913)
Other, net(684)— — — (684)
Balance, March 31, 2020$1,483,747 $(154,033)$647,775 $58,229 $2,035,718 
Balance, December 31, 2020$1,486,730 $(146,840)$671,570 $64,916 $2,076,376 
Stock-based compensation860 — — — 860 
Contribution by non-controlling interest holder— — — 5,400 5,400 
Other comprehensive income (loss)— (28,220)— (5,610)(33,830)
Net income (loss)— — 18,577 (947)17,630 
Balance, March 31, 2021$1,487,590 $(175,060)$690,147 $63,759 $2,066,436 
 













The accompanying notes are an integral part of these Consolidated Financial Statements.
5

HUGHES SATELLITE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the three months ended March 31,
20212020
Cash flows from operating activities:  
Net income (loss)$17,630 $(17,913)
Adjustments to reconcile net income (loss) to cash flows provided by (used for) operating activities:  
Depreciation and amortization122,664 125,965 
Impairment of long-lived assets210 
Losses (gains) on investments, net164 
Equity in losses (earnings) of unconsolidated affiliates, net1,761 1,087 
Foreign currency transaction losses (gains), net3,360 7,528 
Deferred tax provision (benefit), net6,584 1,526 
Stock-based compensation860 1,457 
Amortization of debt issuance costs1,118 1,050 
Other, net10,981 (810)
Changes in assets and liabilities, net:
Trade accounts receivable and contract assets, net(6,078)(8,162)
Other current assets, net1,826 (21,268)
Trade accounts payable(15,484)(10,984)
Contract liabilities7,938 (3,213)
Accrued expenses and other current liabilities(33,091)(5,007)
Non-current assets and non-current liabilities, net1,170 (6,196)
Net cash provided by (used for) operating activities121,449 65,224 
Cash flows from investing activities:  
Purchases of marketable investment securities(310,528)(365,877)
Sales and maturities of marketable investment securities1,003,198 490,020 
Expenditures for property and equipment(82,196)(91,517)
Expenditures for externally marketed software(7,846)(8,638)
Net cash provided by (used for) investing activities602,628 23,988 
Cash flows from financing activities:
Repurchase of the 2021 Senior Unsecured Notes(62,588)
Payment of finance lease obligations(329)(215)
Payment of in-orbit incentive obligations(1,104)(203)
Contribution by non-controlling interest holder5,400 4,000 
Other, net(292)979 
Net cash provided by (used for) financing activities(58,913)4,561 
Effect of exchange rates on cash and cash equivalents(1,700)(4,618)
Net increase (decrease) in cash and cash equivalents663,464 89,155 
Cash and cash equivalents, including restricted amounts, beginning of period741,297 1,140,322 
Cash and cash equivalents, including restricted amounts, end of period$1,404,761 $1,229,477 

The accompanying notes are an integral part of these Consolidated Financial Statements.
6

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO 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 “HSSC,” the “Company,” “we,” “us” and “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar”). We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises. We operate in the following 2 business segments:
 
Hughes — which provides broadband satellite technologies and broadband internet services to domestic and international consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.
ESS — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and/or occasional-use basis to United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers.

Our operations also include various corporate departments (primarily Executive, Treasury, Strategic Development, Human Resources, Information Technology, Finance, Accounting, Real Estate and Legal) and other activities, such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in our segment reporting. We also divide our operations by primary geographic market as follows: (i) North America (the U.S. and its territories, Mexico, and Canada); (ii) South and Central America and (iii) Other (Asia, Africa, Australia, Europe, India, and the Middle East). Refer to Note 14. Segment Reporting for further detail.

NOTE 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
These unaudited Consolidated Financial Statements and the accompanying notes (collectively, the “Consolidated Financial Statements”) are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they 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, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.

All amounts presented in these Consolidated Financial Statements are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.

Refer to Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in our Form 10-K for a summary and discussion of our significant accounting policies, except as updated below.

Use of Estimates
 
We are required to make certain estimates and assumptions that affect the amounts reported in these Consolidated Financial Statements. The most significant estimates and assumptions are used in determining: (i) inputs used to recognize revenue over time, including amortization periods for deferred contract acquisition costs; (ii) allowances
7

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



for doubtful accounts; (iii) deferred taxes and related valuation allowances, including uncertain tax positions; (iv) loss contingencies; (v) fair value of financial instruments; (vi) fair value of assets and liabilities acquired in business combinations; and (vii) asset impairment testing.

We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts and such differences may be material to our financial statements. Additionally, changing economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. We review our estimates and assumptions periodically and the effects of revisions thereto are reflected in the period they occur or prospectively if the revised estimate affects future periods.

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 in which we are the primary beneficiary and in other entities in which we own more than 50% of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a non-controlling interest within shareholder’s equity for the portion of the entity’s equity attributed to the non-controlling ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation.

Recently Adopted Accounting Pronouncements

On January 1, 2021, we adopted Accounting Standard Update (“ASU”) No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the Financial Accounting Standards Board (“FASB”) overall simplification initiative and seeks to simplify the accounting for income taxes by updating certain guidance and removing certain exceptions. Our adoption of this ASU did not have a material impact on our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. We expect to utilize the optional expedients provided by the guidance for contracts amended solely to use an alternative reference rate. We have evaluated the impact of adopting this new guidance and do not expect it to have a material impact on our Consolidated Financial Statements.

8

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



NOTE 3.     REVENUE RECOGNITION

Contract Balances

The following table presents the components of our contract balances:
 As of
March 31, 2021December 31, 2020
Trade accounts receivable and contract assets, net:
Sales and services$150,021 $149,513 
Leasing4,648 4,553 
Total trade accounts receivable154,669 154,066 
Contract assets46,267 45,308 
Allowance for doubtful accounts(13,664)(15,386)
Total trade accounts receivable and contract assets, net$187,272 $183,988 
Contract liabilities:
Current$112,507 $104,569 
Non-current10,357 10,519 
Total contract liabilities$122,864 $115,088 

The following table presents the revenue recognized in the Consolidated Statement of Operations that was previously included within contract liabilities:

For the three months ended March 31,
20212020
Revenue$63,081 $52,172 

Contract Acquisition Costs

The following table presents the activity in our contract acquisition costs, net:

For the three months ended March 31,
20212020
Balance at beginning of period$99,837 $113,592 
Additions18,400 26,474 
Amortization expense(22,769)(25,675)
Foreign currency translation(875)(3,994)
Balance at end of period$94,593 $110,397 

Performance Obligations

As of March 31, 2021, the remaining performance obligations for our customer contracts with original expected durations of more than one year was $939.7 million. Performance obligations expected to be satisfied within one year and greater than one year are 37% and 63%, respectively. This amount and percentages exclude agreements with consumer customers in our Hughes segment, our leasing arrangements and agreements with certain customers under which collectability of all amounts due through the term of contracts is uncertain.
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)




Disaggregation of Revenue

Geographic Information

The following table presents our revenue from customer contracts disaggregated by primary geographic market and by segment:
HughesESSCorporate and OtherConsolidated
Total
For the three months ended March 31, 2021
North America$398,759 $4,089 $(88)$402,760 
South and Central America43,030 43,030 
Other34,070 5,370 39,440 
Total revenue$475,859 $4,089 $5,282 $485,230 
For the three months ended March 31, 2020
North America$382,715 $4,652 $(285)$387,082 
South and Central America33,956 33,956 
Other41,811 4,698 46,509 
Total revenue$458,482 $4,652 $4,413 $467,547 

10

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Nature of Products and Services

The following table presents our revenue disaggregated by the nature of products and services and by segment:
HughesESSCorporate and OtherConsolidated
Total
For the three months ended March 31, 2021
Services and other revenue:
Services$413,519 $2,690 $$416,209 
Lease revenue10,101 1,399 5,282 16,782 
Total services and other revenue423,620 4,089 5,282 432,991 
Equipment revenue:
Equipment28,521 28,521 
Design, development and construction services21,636 21,636 
Lease revenue2,082 2,082 
Total equipment revenue52,239 52,239 
Total revenue$475,859 $4,089 $5,282 $485,230 
 
For the three months ended March 31, 2020
Services and other revenue:
Services$390,000 $2,765 $$392,765 
Lease revenue11,173 1,887 4,413 17,473 
Total services and other revenue401,173 4,652 4,413 410,238 
Equipment revenue:
Equipment24,839 24,839 
Design, development and construction services31,557 31,557 
Lease revenue913 913 
Total equipment revenue57,309 57,309 
Total revenue$458,482 $4,652 $4,413 $467,547 

Lease Revenue

The following table presents our lease revenue by type of lease:

For the three months ended March 31,
20212020
Sales-type lease revenue:
Revenue at lease commencement$2,082 $913 
Interest income73 69 
Total sales-type lease revenue2,155 982 
Operating lease revenue16,709 17,404 
Total lease revenue$18,864 $18,386 

Substantially all of our net investment in sales-type leases consisted of lease receivables totaling $13.4 million and $13.0 million as of March 31, 2021 and December 31, 2020, respectively.
11

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)




The following table presents future operating lease payments to be received as of March 31, 2021:
Amounts
Year ending December 31,
2021 (remainder)$30,433 
202234,082 
202332,000 
202429,740 
202528,482 
2026 and beyond47,562 
Total lease payments$202,299 

The following table presents amounts for assets subject to operating leases, which are included in Property and equipment, net:
As of
March 31, 2021December 31, 2020
CostAccumulated DepreciationNetCostAccumulated DepreciationNet
Customer premises equipment$1,737,049 $(1,370,538)$366,511 $1,706,328 $(1,317,210)$389,118 
Satellites104,620 (40,078)64,542 104,620 (38,335)66,285 
Total$1,841,669 $(1,410,616)$431,053 $1,810,948 $(1,355,545)$455,403 

The following table presents depreciation expense for assets subject to operating leases, which is included in Depreciation and amortization:

For the three months ended March 31,
20212020
Customer premises equipment$60,967 $49,504 
Satellites1,744 1,744 
Total$62,711 $51,248 

NOTE 4.    MARKETABLE INVESTMENT SECURITIES

The following table presents our Marketable investment securities:
As of
March 31, 2021December 31, 2020
Marketable investment securities:
Available-for-sale debt securities:
Corporate bonds$109,598 $276,361 
Commercial paper327,648 823,173 
Other debt securities78,054 103,756 
Total available-for-sale debt securities515,300 1,203,290 
Equity securities
Total marketable investment securities$515,306 $1,203,296 
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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)





Debt Securities

Available-for-Sale

The following table presents the components of our available-for-sale debt securities:
AmortizedUnrealizedEstimated
CostGainsLossesFair Value
As of March 31, 2021
Corporate bonds$109,600 $10 $(12)$109,598 
Commercial paper327,648 327,648 
Other debt securities78,108 (56)78,054 
Total available-for-sale debt securities$515,356 $12 $(68)$515,300 
As of December 31, 2020
Corporate bonds$276,327 $59 $(25)$276,361 
Commercial paper823,173 823,173 
Other debt securities103,758 (5)103,756 
Total available-for-sale debt securities$1,203,258 $62 $(30)$1,203,290 

The following table presents the activity on our available-for-sale debt securities:

For the three months ended March 31,
20212020
Proceeds from sales$95,765 $10,000 

As of March 31, 2021, we have $491.2 million of available-for-sale debt securities with contractual maturities of one year or less and $24.1 million with contractual maturities greater than one year. 

Equity Securities

The following table presents the activity of our equity securities:

For the three months ended March 31,
20212020
Gains (losses) on investments, net$$(164)
 
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Fair Value Measurements
 
The following table presents our marketable investment securities categorized by the fair value hierarchy, certain of which have historically experienced volatility:
Level 1Level 2Total
As of March 31, 2021
Cash equivalents (including restricted)$508 $1,317,529 $1,318,037 
Available-for-sale debt securities:
Corporate bonds$$109,598 $109,598 
Commercial paper327,648 327,648 
Other debt securities32,498 45,556 78,054 
Total available-for-sale debt securities32,498 482,802 515,300 
Equity securities
Total marketable investment securities$32,504 $482,802 $515,306 
As of December 31, 2020
Cash equivalents (including restricted)$128 $654,853 $654,981 
Available-for-sale debt securities:
Corporate bonds$$276,361 $276,361 
Commercial paper823,173 823,173 
Other debt securities95,497 8,259 103,756 
Total available-for-sale debt securities95,497 1,107,793 1,203,290 
Equity securities
Total marketable investment securities$95,503 $1,107,793 $1,203,296 

As of March 31, 2021 and December 31, 2020, we did not have any investments that were categorized within Level 3 of the fair value hierarchy.

NOTE 5.    PROPERTY AND EQUIPMENT
 
The following table presents the components of Property and equipment, net:
As of
March 31, 2021December 31, 2020
Property and equipment, net:
Satellites, net$919,813 $954,559 
Other property and equipment, net711,408 736,964 
Total property and equipment, net$1,631,221 $1,691,523 

Satellites
 
As of March 31, 2021, our operating satellite fleet consisted of 8 satellites, 5 of which are owned and 3 of which are leased. They are all in geosynchronous orbit, approximately 22,300 miles above the equator.

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The following table presents our operating satellite fleet as of March 31, 2021 which consists of both owned and leased satellites:
SatelliteSegmentLaunch DateNominal Degree Orbital Location (Longitude)Depreciable Life (In Years)
Owned:    
SPACEWAY 3 (1)
HughesAugust 200795 W10
EchoStar XVIIHughesJuly 2012107 W15
EchoStar XIXHughesDecember 201697.1 W15
Al Yah 3 (2)
HughesJanuary 201820 W7
EchoStar IX (3)
ESSAugust 2003121 W12
     
Finance leases:    
Eutelsat 65 West AHughesMarch 201665 W15
Telesat T19VHughesJuly 201863 W15
EchoStar 105/SES-11ESSOctober 2017105 W15
(1)    Depreciable life represents the remaining useful life as of June 8, 2011, the date EchoStar completed its acquisition of Hughes Communications, Inc. and its subsidiaries (the “Hughes Acquisition”).
(2) Upon consummation of our joint venture with Yahsat in Brazil in November 2019, we acquired the Brazilian Ka-band payload on this satellite. Depreciable life represents the remaining useful life as of November 2019.
(3)    We own the Ka-band and Ku-band payloads on this satellite.

The following table presents the components of our satellites, net:
 Depreciable Life (In Years)As of
 March 31, 2021December 31, 2020
Satellites, net: 
Satellites - owned7 to 15$1,500,070 $1,503,596 
Satellites - acquired under finance leases15352,261 352,245 
Total satellites 1,852,331 1,855,841 
Accumulated depreciation:
Satellites - owned(855,104)(827,274)
Satellites - acquired under finance leases(77,414)(74,008)
Total accumulated depreciation (932,518)(901,282)
Total satellites, net $919,813 $954,559 

The following table presents the depreciation expense associated with our satellites, net:
 For the three months ended March 31,
 20212020
Depreciation expense:
Satellites - owned$27,068 $27,068 
Satellites - acquired under finance leases7,201 6,013 
Total depreciation expense$34,269 $33,081 



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The following table presents capitalized interest associated with our satellites and satellite-related ground infrastructure:

For the three months ended March 31,
20212020
Capitalized interest$1,246 $637 

Satellite-Related Commitments
 
As of March 31, 2021 and December 31, 2020 our satellite-related commitments were $215.1 million and $224.4 million, respectively. These primarily include payments pursuant to regulatory authorizations, non-lease costs associated with our finance lease satellites, in-orbit incentives relating to certain satellites and commitments for satellite service arrangements.

In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change.

Satellite Anomalies and Impairments
 
We are not aware of any anomalies with respect to our owned or leased satellites or payloads that have had any significant adverse effect on their remaining useful lives, the commercial operation of the satellites or payloads or our operating results or financial position as of and for the three months ended March 31, 2021.

Fair Value of In-Orbit Incentives

As of March 31, 2021 and December 31, 2020, the fair values of our in-orbit incentive obligations approximated their carrying amounts of $54.3 million and $55.4 million, respectively.

NOTE 6.    REGULATORY AUTHORIZATIONS

The following table presents our Regulatory authorizations, net:
Finite lived
CostAccumulated AmortizationTotalIndefinite livedTotal
Balance, December 31, 2019$12,524 $(161)$12,363 $400,000 $412,363 
Amortization expense— (100)(100)— (100)
Currency translation adjustments(1,020)(1,020)(1,020)
Balance, March 31, 2020$11,504 $(261)$11,243 $400,000 $411,243 
Balance, December 31, 2020$11,505 $(1,054)$10,451 $400,000 $410,451 
Amortization expense— (208)(208)— (208)
Currency translation adjustments(321)38 (283)(283)
Balance, March 31, 2021$11,184 $(1,224)$9,960 $400,000 $409,960 
Weighted-average useful life (in years)14

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NOTE 7.    OTHER INVESTMENTS

The following table presents our Other investments, net:
As of
March 31, 2021December 31, 2020
Other investments, net:
Equity method investments$94,812 $96,573 
Other equity investments7,351 7,351 
Total other investments, net$102,163 $103,924 

Equity Method Investments

Deluxe/EchoStar LLC

We own 50% 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.

Broadband Connectivity Solutions (Restricted) Limited

In August 2018, we entered into an agreement with Yahsat to establish a new entity, Broadband Connectivity Solutions (Restricted) Limited (together with its subsidiaries, “BCS”), to provide commercial Ka-band satellite broadband services across Africa, the Middle East and southwest Asia operating over Yahsat's Al Yah 2 and Al Yah 3 Ka-band satellites. The transaction was consummated in December 2018 when we invested $100.0 million in cash in exchange for a 20% interest in BCS. Under the terms of the agreement, we may also acquire, for further cash investments, additional ownership interests in BCS in the future provided certain conditions are met. We supply network operations and management services and equipment to BCS.

Financial Information for Our Equity Method Investments

The following table presents revenue recognized:

For the three months ended March 31,
20212020
Deluxe$1,631 $1,255 
BCS$1,348 $1,669 


The following table presents trade accounts receivable:
As of
March 31, 2021December 31, 2020
Deluxe$1,318 $716 
BCS$5,043 $9,347 

Other Equity Investments

During the three months ended March 31, 2021 and 2020, we did not identify any observable price changes requiring an adjustment to our investments.

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NOTE 8.    LONG-TERM DEBT

The following table presents the carrying amount and fair values of our Current portion of long-term debt, net and Long-term debt, net:
Effective Interest RateAs of
March 31, 2021December 31, 2020
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Senior Secured Notes:
5 1/4% Senior Secured Notes due 20265.320%$750,000 $830,933 $750,000 $834,045 
Senior Unsecured Notes:
7 5/8% Senior Unsecured Notes due 20218.062%809,486 821,555 900,000 924,003 
6 5/8% Senior Unsecured Notes due 20266.688%750,000 834,383 750,000 852,810 
Less: Unamortized debt issuance costs(5,292)— (6,507)— 
Total long-term debt2,304,194 2,486,871 2,393,493 2,610,858 
Less: Current portion, net(808,758)(821,555)(898,237)(924,003)
Long-term debt, net$1,495,436 $1,665,316 $1,495,256 $1,686,855 

As of March 31, 2021, we have repurchased a total of $90.5 million in principal of the 2021 Senior Unsecured Notes in open market trades.

NOTE 9.    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, 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 interim income tax provision and our interim estimate of our annual effective tax rate are influenced by several factors, including foreign losses and capital gains and losses for which related deferred tax assets are partially offset by a valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be affected by the amount of pre-tax 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.

Our income tax provision was $10.6 million for the three months ended March 31, 2021 compared to $5.2 million for the three months ended March 31, 2020. Our estimated effective income tax rate was 37.6% and (41.2)% for the three months ended March 31, 2021 and 2020, respectively. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2021 were primarily due to excluded foreign losses where the company carries a full valuation allowance. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and the impact of state and local taxes, partially offset by the change in net unrealized losses that are capital in nature and research and experimentation credits.

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NOTE 10.    RELATED PARTY TRANSACTIONS - ECHOSTAR

The following is a summary of the transactions and the terms of the underlying principal agreements that have had or may have an impact on our consolidated financial condition and results of operations.

Services and Other Revenue — EchoStar

The following table presents our Services and other revenue from EchoStar:
For the three months ended March 31,
20212020
Services and other revenue - EchoStar$5,371 $4,699 

The following table presents the corresponding related party receivables:
As of
March 31, 2021December 31, 2020
Related party receivables - EchoStar - current$114,225 $116,220 
Related party receivables - EchoStar - non-current54,970 57,136 
Total related party receivables - EchoStar$169,195 $173,356 

Receivables. EchoStar and its other subsidiaries reimburse us from time to time for amounts paid by us for costs and expenses attributable to EchoStar and its other subsidiaries. We report receivables under these arrangements within Related party receivables - EchoStar - current. No repayment schedule for these receivables has been determined.
EchoStar Mobile Limited Service Agreements. We provide services and lease equipment to support the business of EchoStar Mobile Limited, a subsidiary of EchoStar that is licensed by the European Union and its member states (“EU”) to provide mobile satellite services and complementary ground component services covering the entire EU using S-band spectrum. Generally, the amounts EchoStar’s other subsidiaries pay for these services are based on cost plus a fixed margin. We recorded revenue in Services and other revenue of $5.4 million and $4.7 million for the three months ended March 31, 2021 and 2020, respectively, related to these services. Additionally, we have converted the receivables for certain of these services into loans, bearing an annual interest rate of 5%, that mature in 2023. We report these loans within Related party receivables - EchoStar - non-current.

Operating Expenses — EchoStar

The following table presents our operating expenses from EchoStar:
For the three months ended March 31,
20212020
Operating expenses - EchoStar$15,387 $12,642 

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The following table presents the corresponding related party payables:
As of
March 31, 2021December 31, 2020
Related party payables - EchoStar - current$51,396 $51,420 
Related party payables - EchoStar - non-current24,533 25,114 
Total related party payables - EchoStar$75,929 $76,534 

Payables. We reimburse EchoStar and its other subsidiaries from time to time for amounts paid by EchoStar and its other subsidiaries for costs and expenses attributable to us. We report payables under these arrangements within Related party payables - EchoStar - current. No repayment schedule for these payables has been determined.

Shared Corporate Services. We and EchoStar, including EchoStar’s other subsidiaries, have agreed that we shall
each have the right, but not the obligation, to receive from the other certain shared corporate services, including among other things: treasury, tax, accounting and reporting, risk management, cybersecurity, legal, internal audit, human resources, and information technology. These shared corporate services are generally provided at cost. Effective March 2017, and as a result of the Share Exchange (as defined below), we implemented a new methodology for determining the cost of these shared corporate services. We and EchoStar, including EchoStar’s other subsidiaries, may each terminate a particular shared corporate service for any reason upon at least 30 days’ notice. We recorded these expenses within Operating expenses - EchoStar for shared corporate services received from EchoStar and its other subsidiaries of $0.4 million and $4.4 million for the three months ended March 31, 2021 and 2020, respectively.

Real Estate. We occupy certain office space in buildings owned or leased by EchoStar and its other subsidiaries and pay a portion of the taxes, insurance, utilities and maintenance of the premises in accordance with the percentage of the space we occupy.

Cash Advances. EchoStar and certain of its other subsidiaries have also provided cash advances to certain of our
foreign subsidiaries to fund certain expenditures pursuant to loan agreements that mature in 2021 and 2022. Advances under these agreements bear interest at annual rates ranging from 1 to 3 percent, subject to periodic adjustment based on the one-year U.S. LIBOR rate. We report amounts payable under these agreements within Related party payables - EchoStar - non-current.

Construction Management Services for EchoStar XXIV satellite. In August 2017, a subsidiary of EchoStar entered into a contract with Maxar Space, LLC (formerly Space Systems/Loral, LLC), for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite, with an expected launch in the second half of 2022. We provide construction management services to EchoStar’s subsidiary for the construction of the EchoStar XXIV satellite. We charged EchoStar’s subsidiary and reduced our operating expenses by the costs of such services of $0.3 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively.

Other Agreements

BSS Transaction. Pursuant to the pre-closing restructuring contemplated by the Master Transaction Agreement (as defined below), and as part of the BSS Transaction (as defined below), we and our subsidiaries transferred certain of the BSS Business (as defined below) to BSS Corp. (as defined below), and we distributed all of the shares of BSS Corp. to EchoStar as a dividend. See Note 1. Organization and Business Activities for further information.

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 and conditional access
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management, and other services and related assets and liabilities were contributed to one of our subsidiaries in consideration for additional shares of HSSC’s common stock that were then issued to a subsidiary of EchoStar.

NOTE 11.    RELATED PARTY TRANSACTIONS - DISH NETWORK

Overview

EchoStar Corporation and DISH have operated as separate publicly-traded companies since 2008 (the “Spin-off”). A substantial majority of the voting power of the shares of each of EchoStar Corporation and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established for the benefit of his family.

In January 2017, EchoStar and certain of its subsidiaries entered into a share exchange agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries pursuant to which, in February 2017, we received all of the shares of preferred tracking stock previously issued by us and one of our subsidiaries (the “Tracking Stock”), representing an 80% economic interest in the residential retail satellite broadband business of our Hughes segment, in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets (collectively, the “Share Exchange”). The Tracking Stock was retired in March 2017.

In September 2019, pursuant to a master transaction agreement (the “Master Transaction Agreement”) with DISH and a wholly-owned subsidiary of DISH (“Merger Sub”), (i) we transferred certain real property and the various businesses, products, licenses, technology, revenues, billings, operating activities, assets and liabilities primarily related to the former portion of our ESS segment that managed, marketed and provided (1) broadcast satellite services primarily to DISH and its subsidiaries (“DISH Network”) and our joint venture Dish Mexico, and (2) telemetry, tracking and control (“TT&C”) services for satellites owned by DISH Network and a portion of our other businesses (collectively, the “BSS Business”) to one of our former subsidiaries, EchoStar BSS Corporation (“BSS Corp.”), (ii) we distributed to each holder of shares of our Class A or Class B common stock entitled to receive consideration in the transaction an amount of shares of common stock of BSS Corp., par value $0.001 per share (“BSS Common Stock”), equal to 1 share of BSS Common Stock for each share of our Class A or Class B common stock owned by such stockholder (the “Distribution”); and (iii) immediately after the Distribution, (1) Merger Sub merged with and into BSS Corp. (the “Merger”), such that BSS Corp. became a wholly-owned subsidiary of DISH and with DISH then owning and operating the BSS Business, and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Class A common stock, par value $0.001 per share (“DISH Common Stock”) ((i) - (iii) collectively, the “BSS Transaction”).
 
In connection with and following the Spin-off, the Share Exchange and the BSS Transaction, EchoStar, we and certain other of EchoStar’s subsidiaries and DISH Network entered into certain agreements pursuant to which we, EchoStar and certain of its other subsidiaries, on the one hand, obtain certain products, services and rights from DISH Network, on the other hand; DISH Network, on the one hand, obtains certain products, services and rights from us, EchoStar and certain of its other subsidiaries, on the other hand; and such entities indemnify each other against certain liabilities arising from their respective businesses. Generally, the amounts we and/or EchoStar and its other subsidiaries or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below), which varies depending on the nature of the products and services provided. We and/or EchoStar and its other subsidiaries may also enter into additional agreements with DISH Network in the future.

The following is a summary of the transactions and the terms of the underlying principal agreements that have had or may have an impact on our consolidated financial condition and results of operations.

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Services and Other Revenue — DISH Network

The following table presents our Services and other revenue - DISH Network:
For the three months ended March 31,
20212020
Services and other revenue - DISH Network$5,727 $7,587 

The following table presents the related trade accounts receivable:
As of
March 31, 2021December 31, 2020
Trade accounts receivable - DISH Network$4,449 $4,706 
Satellite Capacity Leased to DISH Network. Effective January 2008, DISH Network began leasing satellite capacity from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue leasing satellite capacity from us on the EchoStar IX satellite on a month-to-month basis.

Telesat Obligation Agreement. In September 2009, we entered into an agreement with Telesat Canada to lease satellite capacity from Telesat Canada on all 32 direct broadcast satellite (“DBS”) transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we entered into an agreement with DISH Network, pursuant to which DISH Network leased satellite capacity from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement (the “DISH Nimiq 5 Agreement”). Under the terms of the DISH Nimiq 5 Agreement, DISH Network made certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service. We transferred the Telesat Transponder Agreement to DISH Network in September 2019 as part of the BSS Transaction; however, we retained certain obligations related to DISH Network’s performance under that agreement and we entered into an agreement with DISH Network whereby DISH Network compensates us for retaining such obligations.

TerreStar Agreement. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and EchoStar’s completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment (the “TerreStar Agreements”). In December 2017, we and DISH Network amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DISH Network generally has the right to continue to receive warranty services from us for our products on a month-to-month basis unless terminated by DISH Network upon at least 21 days’ written notice to us. DISH Network generally has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis unless these services are terminated by DISH Network upon at least 90 days’ written notice to us. The provision of hosting services will continue until May 2022. In addition, DISH Network generally may terminate any and all services for convenience subject to providing us with prior notice and/or payment of termination charges. In March 2020, we entered into an agreement with DISH Network pursuant to which we perform certain work and provide certain credits to amounts owed to us under the TerreStar Agreements in exchange for DISH Network’s granting us rights to use certain satellite capacity under the Amended and Restated Professional Services Agreement (as defined below). As a result, we and DISH Network amended the TerreStar Agreements to suspend our provision of warranty services to DISH Network from April 2020 through December 2020. Following the expiration of this suspension, we have recommenced providing warranty services to DISH Network.

Hughes Broadband Distribution Agreement. Effective October 2012, we and DISH Network entered into a distribution agreement (the “Distribution Agreement”) pursuant to which DISH Network has the right, but not the obligation, to market, sell and distribute our Gen 4 HughesNet service. DISH Network pays us a monthly per subscriber wholesale service fee for our Gen 4 HughesNet service based upon a subscriber’s service level and
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based upon certain volume subscription thresholds. The Distribution Agreement also provides that DISH Network has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Gen 4 HughesNet 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, we and DISH Network entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, we and DISH Network will continue to provide our Gen 4 HughesNet service to the then-current DISH Network subscribers pursuant to the terms and conditions of the Distribution Agreement.

DBSD North America Agreement. In March 2012, DISH Network completed its acquisition of all of the equity of DBSD North America, Inc. (“DBSD North America”). Prior to DISH Network’s acquisition of DBSD North America and EchoStar’s completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which we provide, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and ground-based communications equipment. In December 2017, we and DBSD North America amended these agreements, effective as of January 1, 2018, to reduce certain pricing terms through December 31, 2023 and to modify certain termination provisions. DBSD North America has the right to continue to receive operations and maintenance services from us on a quarter-to-quarter basis, unless terminated by DBSD North America upon at least 120 days’ written notice to us. In February 2019, we further amended these agreements to provide DBSD North America with the right to continue to receive warranty services from us on a month-to-month basis until December 2023, unless terminated by DBSD North America upon at least 21 days’ written notice to us. The provision of hosting services will continue until February 2022 and will automatically renew for an additional five-year period until February 2027 unless terminated by DBSD North America upon at least 180 days’ written notice to us. In addition, DBSD North America generally may terminate any and all such services for convenience, subject to providing us with prior notice and/or payment of termination charges.

Hughes Equipment and Services Agreement. In February 2019, we and DISH Network entered into an agreement pursuant to which we will sell to DISH Network our HughesNet Service and HughesNet equipment that has been modified to meet DISH Network’s internet-of-things specifications for the transfer of data to DISH Network’s network operations centers. This agreement has an initial term of five years expiring February 2024 with automatic renewal for successive one-year terms unless terminated by DISH Network with at least 180 days‘ written notice to us or by us with at least 365 days’ written notice to DISH Network.

Operating Expenses — DISH Network

The following table presents our operating expenses related to DISH Network:
For the three months ended March 31,
20212020
Operating expenses - DISH Network$1,099 $1,137 

The following table presents the related trade accounts payable:
As of
March 31, 2021December 31, 2020
Trade accounts payable - DISH Network$417 $477 

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Amended and Restated Professional Services Agreement.   In connection with the Spin-off, EchoStar entered
into various agreements with DISH Network including a transition services agreement, satellite procurement agreement and services agreement, all of which expired in January 2010 and were replaced by a professional services agreement (the “Professional Services Agreement”).  In January 2010, EchoStar and DISH Network agreed that EchoStar and its subsidiaries shall continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under a transition services agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services.  Additionally, EchoStar and DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage EchoStar and its subsidiaries to manage the process of procuring new satellite capacity for DISH Network (previously provided under a satellite procurement agreement), receive logistics, procurement and quality assurance services from EchoStar and its subsidiaries (previously provided under a services agreement) and provide other support services. In connection with the consummation of the Share Exchange, EchoStar and DISH amended and restated the Professional Services Agreement to provide that EchoStar and its subsidiaries and DISH Network shall have the right to receive additional services that either EchoStar and its subsidiaries or DISH Network may require as a result of the Share Exchange, including access to antennas owned by DISH Network for our use in performing TT&C services and maintenance and support services for our antennas (collectively, the “TT&C Antennas”). In September 2019, in connection with the BSS Transaction, EchoStar and DISH further amended the Professional Services Agreement (the “Amended and Restated Professional Services Agreement”) to provide that EchoStar and its subsidiaries and DISH Network shall have the right to receive additional services that either EchoStar and its subsidiaries or DISH Network may require as a result of the BSS Transaction and to remove our access to and the maintenance and support services for the TT&C Antennas. A portion of these costs and expenses have been allocated to us in the manner described in Note 10. Related Party Transactions - EchoStar. The term of the Amended and Restated Professional Services Agreement is through January 1, 2022 and renews automatically for successive one-year periods thereafter, unless the agreement is terminated earlier by either party upon at least 60 days’ notice.  However, either party may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice, unless the statement of work for particular services states otherwise. Certain services provided under the Amended and Restated Professional Services Agreement may survive the termination of the agreement.

Collocation and Antenna Space Agreements. We and DISH Network have entered into an agreement pursuant to which DISH Network provided us with collocation space in El Paso, Texas. This agreement was for an initial period ending in August 2015, and provided us with renewal options for 2 consecutive three-year terms. Effective August 2015, we exercised our first renewal option for a period ending in August 2018 and in April 2018 we exercised our second renewal option for a period ending in August 2021. In connection with the Share Exchange, effective March 2017, we also entered into certain agreements pursuant to which DISH Network provides collocation and antenna space to EchoStar through February 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In October 2019, we provided a termination notice for our New Braunfels, Texas agreement to be effective May 2020. In August 2017, we and DISH Network also entered into certain other agreements pursuant to which DISH Network provides additional collocation and antenna space to us in Monee, Illinois and Spokane, Washington through August 2022. Generally, we may renew our collocation and antenna space agreements for three-year periods by providing DISH Network with prior written notice no more than 120 days but no less than 90 days prior to the end of the then-current term. We may terminate certain of these agreements with 180 days’ prior written notice. In September 2019, in connection with the BSS Transaction, we entered into an agreement pursuant to which DISH Network provided us with certain additional collocation space in Cheyenne, Wyoming for a period that ended in September 2020. The fees for the services provided under these agreements depend on the number of racks located at the location.

Also in connection with the BSS Transaction, in September 2019, we entered into an agreement pursuant to which DISH Network provides us with antenna space and power in Cheyenne, Wyoming for a period of five years commencing in August 2020, with 4 three-year renewal terms, with prior written notice of renewal required no more than 120 days but no less than 90 days prior to the end of the then-current term. In March 2021, we entered into additional agreements pursuant to which DISH Network provides us with a gateway, including antenna space in Cheyenne, Wyoming and Gilbert, Arizona. Both agreements are for a period of five years with 4 three-year
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renewal terms, with prior written notice of renewal required no more than 120 days but no less than 90 days prior to the end of the then-current term.

Hughes Broadband Master Services Agreement.  In conjunction with the launch of our EchoStar XIX satellite, in March 2017, we and DISH Network entered into a master service agreement (the “Hughes Broadband MSA”) pursuant to which DISH Network, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for our Gen 5 HughesNet service and related equipment and other telecommunication services and (ii) installs Gen 5 HughesNet service equipment with respect to activations generated by DISH Network.  Under the Hughes Broadband MSA, we and DISH Network make certain payments to each other relating to sales, upgrades, purchases and installation services. The Hughes Broadband MSA has an initial term of five years through March 2022 with automatic renewal for successive one-year terms. Either party has the ability to terminate the Hughes Broadband MSA, in whole or in part, for any reason upon at least 90 days’ notice to the other party. Upon expiration or termination of the Hughes Broadband MSA, we will continue to provide our Gen 5 HughesNet service to subscribers and make certain payments to DISH Network pursuant to the terms and conditions of the Hughes Broadband MSA. We incurred sales incentives and other costs under the Hughes Broadband MSA totaling $1.9 million and $4.6 million for the three months ended March 31, 2021 and 2020, respectively.

2019 TT&C Agreement.  In September 2019, in connection with the BSS Transaction, we and a subsidiary of EchoStar entered into an agreement pursuant to which DISH Network provides TT&C services to us and EchoStar and its other subsidiaries for a period ending in September 2021, with the option for a subsidiary of EchoStar to renew for a one-year period upon written notice at least 90 days prior to the initial expiration (the “2019 TT&C Agreement”). The fees for services provided under the 2019 TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided.  Any party is able to terminate the 2019 TT&C Agreement for any reason upon 12 months’ notice.

Other Receivables - DISH Network

Tax Sharing Agreement. Effective December 2007, EchoStar and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs EchoStar and DISH and their respective subsidiaries’ respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off.  Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network and DISH Network indemnifies EchoStar and its subsidiaries for such taxes. However, DISH Network is not liable for and does not indemnify EchoStar or its subsidiaries for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Code, because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar or its subsidiaries take or fail to take or (iii) any action that EchoStar or its subsidiaries take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, EchoStar and its subsidiaries will be solely liable for, and will indemnify DISH Network for any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.

In light of the Tax Sharing Agreement, among other things, and in connection with EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, EchoStar and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of EchoStar’s consolidated tax returns. As a result, DISH Network agreed to pay EchoStar an amount of that includes the federal tax benefit DISH received as a result of our operations.

In August 2018, EchoStar and DISH Network amended the Tax Sharing Agreement and the 2013 agreements (the “Tax Sharing Amendment”). Under the Tax Sharing Amendment, DISH Network is required to compensate EchoStar for certain past and future excess California research and development tax credits generated by EchoStar and its subsidiaries and used by DISH Network.
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Other Agreements

Master Transaction Agreement. In May 2019, EchoStar and BSS Corp. entered into the Master Transaction Agreement with DISH and Merger Sub with respect to the BSS Transaction. Pursuant to the terms of the Master Transaction Agreement, on September 10, 2019: (i) EchoStar and its subsidiaries and we and our subsidiaries transferred the BSS Business to BSS Corp.; (ii) EchoStar completed the Distribution; and (iii) immediately after the Distribution, (1) BSS Corp. became a wholly-owned subsidiary of DISH such that DISH owns and operates the BSS Business and (2) each issued and outstanding share of BSS Common Stock owned by EchoStar stockholders was converted into the right to receive 0.23523769 shares of DISH Common Stock. Following the consummation of the BSS Transaction, we no longer operate the BSS Business, which was a substantial portion of our ESS segment. The Master Transaction Agreement contained customary representations and warranties by the parties, including EchoStar’s representations relating to the assets, liabilities and financial condition of the BSS Business, and representations by DISH Network relating to its financial condition and liabilities.  EchoStar and DISH Network have agreed to indemnify each other against certain losses with respect to breaches of certain representations and covenants and certain retained and assumed liabilities, respectively.

BSS Transaction Intellectual Property and Technology License Agreement. Effective September 2019, in connection with the BSS Transaction, we, EchoStar and DISH Network entered into an intellectual property and technology license agreement (the “BSS IPTLA”) pursuant to which we, EchoStar and its other subsidiaries and DISH Network license to each other certain intellectual property and technology. The BSS IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the BSS IPTLA, we, EchoStar and its other subsidiaries granted to DISH Network a license to our and their intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the BSS Business acquired pursuant to the BSS Transaction, including a limited license to use the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks during a transition period.  EchoStar retains full ownership of the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks. In addition, DISH Network granted a license back to us, EchoStar and its other subsidiaries, among other things, for the continued use of all intellectual property and technology that is used in our, EchoStar and its other subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the BSS Transaction.

BSS Transaction Tax Matters Agreement. Effective September 2019, in connection with the BSS Transaction, EchoStar, BSS Corp. and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries’ with respect to taxes of the BSS Business transferred pursuant to the BSS Transaction. Generally, EchoStar is responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the BSS Transaction and DISH is responsible for all tax returns and tax liabilities for the BSS Business from and after the BSS Transaction.

Both EchoStar and DISH made certain tax-related representations and are subject to various tax-related covenants after the consummation of the BSS Transaction. Both EchoStar and DISH Network have agreed to indemnify each other for certain losses if there is a breach of any the tax representations or violation of any of the tax covenants in the tax matters agreement and that breach or violation results in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar or its stockholders for U.S. federal income tax purposes. In addition, DISH Network has agreed to indemnify EchoStar if the BSS Business is acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons, where either it took an action, or knowingly facilitated, consented to or assisted with an action by its stockholders, that resulted in the failure of the BSS Transaction being treated as a transaction that is tax-free for EchoStar and its stockholders for U.S. federal income tax purposes. This tax matters agreement supplements the Tax Sharing Agreement outlined above and the Share Exchange Tax Matters Agreement outlined below, both of which continue in full force and effect.

BSS Transaction Employee Matters Agreement. Effective September 2019, in connection with the BSS Transaction, EchoStar and DISH Network entered into an employee matters agreement that addressed the transfer of employees from us to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the BSS Business. DISH Network assumed employee-related liabilities relating to the BSS Business as part of the BSS Transaction, except
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that EchoStar is responsible for certain pre-BSS Transaction compensation and benefits for employees who transferred to DISH Network in connection with the BSS Transaction.

Share Exchange Agreement. In February 2017 EchoStar consummated the Share Exchange, following which EchoStar and certain of its and our subsidiaries no longer operate 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 and certain of its and our subsidiaries transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contained customary representations and warranties by the parties, including representations by EchoStar related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. EchoStar and DISH Network also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by EchoStar or DISH causes the transaction to be taxable to the other party after closing.

Share Exchange Intellectual Property and Technology License Agreement. Effective March 2017, in connection with the Share Exchange, EchoStar and one of its other subsidiaries and DISH Network entered into an intellectual property and technology license agreement (“IPTLA”) pursuant to which we, EchoStar and its other subsidiaries and DISH Network license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, we, EchoStar and its other subsidiaries granted to DISH Network a license to our and their intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the businesses acquired pursuant to the Share Exchange, including a limited license to use the “ECHOSTAR” trademark during a transition period.  EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, DISH Network granted a license back to us, EchoStar and its other subsidiaries, among other things, for the continued use of all intellectual property and technology that is used in our, EchoStar and its other subsidiaries’ retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.

Share Exchange Tax Matters Agreement. Effective March 2017, in connection with the Share Exchange, EchoStar and DISH entered into a tax matters agreement. This agreement governs certain rights, responsibilities and obligations of EchoStar and its subsidiaries with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, EchoStar is responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the Share Exchange. Both EchoStar and DISH Network made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both EchoStar and DISH Network have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, DISH Network has agreed to indemnify EchoStar if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The tax matters agreement supplements the Tax Sharing Agreement outlined above which continues in full force and effect.

NOTE 12.    RELATED PARTY TRANSACTIONS - OTHER

Hughes Systique Corporation

We contract with Hughes Systique Corporation (“Hughes Systique”) for software development services. In addition to our approximately 43% ownership in Hughes Systique, Mr. Pradman Kaul, the President of our subsidiary Hughes Communications, Inc. and a member of our board of directors, and his brother, who is the Chief Executive Officer and President of Hughes Systique, own in the aggregate approximately 25%, on an undiluted basis, of Hughes Systique’s outstanding shares as of March 31, 2021. 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
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statements in these Consolidated Financial Statements.

TerreStar Solutions

DISH Network owns more than 15% of TerreStar Solutions, Inc. (“TSI”). In May 2018, we and TSI entered into an equipment and services agreement pursuant to which we design, manufacture and install upgraded ground communications network equipment for TSI’s network and provide, among other things, warranty and support services. We recognized revenue of $0.4 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, we had $1.5 million and $0.4 million trade accounts receivable from TSI.

NOTE 13.    CONTINGENCIES

Patents and Intellectual Property
 
Many entities, including some of our competitors, have, or may have in the future, patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be tripled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these parties do not own the rights they claim, that these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses from these parties on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.

Certain Arrangements with DISH Network

In connection with EchoStar’s spin-off from DISH in 2008, 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 EchoStar will generally only be liable for its and its subsidiaries’ acts or omissions following the Spin-off and DISH Network will indemnify EchoStar for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off. In connection with the Share Exchange and BSS Transaction, EchoStar and certain of its and our subsidiaries entered into the Share Exchange Agreement and the Master Transaction Agreement, respectively, and other agreements which provide, among other things, for the division of certain liabilities, including liabilities relating to taxes, intellectual property and employees and liabilities resulting from litigation and the assumption of certain liabilities that relate to the transferred businesses and assets. These agreements also contain additional indemnification provisions between EchoStar and us and DISH Network for, in the case of the Share Exchange, certain pre-existing liabilities and legal proceedings and, in the case of the BSS Transaction, certain losses with respect to breaches of certain representations and covenants and certain liabilities.

Litigation
 
We are involved in a number of legal proceedings concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable, and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in
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amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending legal proceedings are charged to expense as incurred.

For certain proceedings, management is unable to predict with any degree of certainty the outcome or provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons: (i) the proceedings are in various stages; (ii) damages have not been sought or specified; (iii) damages are unsupported, indeterminate and/or exaggerated in management’s opinion; (iv) there is uncertainty as to the outcome of pending trials, appeals, motions or other proceedings; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial condition, operating results or cash flows, though there is no assurance that the resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
 
We intend to vigorously defend the proceedings against us. In the event that a court, tribunal, other body or jury ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers.

Shareholder Litigation

On July 2, 2019, the City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust, purporting to sue on behalf of a class of EchoStar Corporation’s stockholders, filed a complaint in the District Court of Clark County, Nevada against EchoStar’s directors, Charles W. Ergen, R. Stanton Dodge, Anthony M. Federico, Pradman P. Kaul, C. Michael Schroeder, Jeffrey R. Tarr, William D. Wade, and Michael T. Dugan; our chief financial officer, David J. Rayner; EchoStar ; HSSC; our former subsidiary BSS Corp.; and DISH and its subsidiary Merger Sub. On September 5, 2019, the defendants filed motions to dismiss. On October 11, 2019, the plaintiffs filed an amended complaint removing Messrs. Dodge, Federico, Kaul, Schroeder, Tarr and Wade as defendants. The amended complaint alleges that Mr. Ergen, as our controlling stockholder, breached fiduciary duties to EchoStar’s minority stockholders by structuring the BSS Transaction with inadequate consideration and improperly influencing our and EchoStar’s boards of directors to approve the BSS Transaction. The amended complaint also alleges that the other defendants aided and abetted such alleged breaches. The plaintiffs seek equitable and monetary relief, including the issuance of additional DISH Common Stock, and other costs and disbursements, including attorneys’ fees on behalf of the purported class. On November 11, 2019, we and the other defendants filed separate motions to dismiss plaintiff’s amended complaint and during a hearing on January 13, 2020 the court denied these motions. On February 10, 2020, we and the other defendants filed answers to the amended complaint. The Court certified plaintiff’s class on January 11, 2021. We intend to vigorously defend this case. We cannot predict its outcome with any degree of certainty.

License Fee Dispute with Government of India, Department of Telecommunications

In 1994, the Government of India promulgated a “National Telecommunications Policy” under which the government liberalized the telecommunications sector and required telecommunications service providers to pay fixed license fees. Pursuant to this policy, our subsidiary Hughes Communications India Private Limited (“HCIPL”), formerly known as Hughes Escorts Communications Limited, obtained a license to operate a data network over satellite using VSAT systems. In 2002, HCIPL’s license was amended pursuant to a new government policy that was first established in 1999. The new policy eliminated the fixed license fees and instead required each telecommunications service provider to pay license fees based on its adjusted gross revenue (“AGR”). In March 2005, the Indian Department of Telecommunications (“DOT”) notified HCIPL that, based on its review of HCIPL’s audited accounts and AGR statements, HCIPL must pay additional license fees and penalties and interest on such fees and penalties. HCIPL responded that the DOT had improperly calculated its AGR by including revenue from licensed and unlicensed activities. The DOT rejected this explanation and in 2006, HCIPL filed a petition with an administrative tribunal (the “Tribunal”), challenging the DOT’s calculation of its AGR. The DOT also issued license fee assessments to other telecommunications service providers and a number of similar petitions were filed by several
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other such providers with the Tribunal. These petitions were amended, consolidated, remanded and re-appealed several times. On April 23, 2015, the Tribunal issued a judgment affirming the DOT’s calculation of AGR for the telecommunications service providers but reversing the DOT’s imposition of interest, penalties and interest on such penalties as excessive. Over subsequent years, the DOT and HCIPL and other telecommunications service providers, respectively, filed several appeals of the Tribunal’s ruling. On October 24, 2019, the Supreme Court of India (“Supreme Court”) issued an order (the “October 2019 Order”) affirming the license fee assessments imposed by the DOT, including its imposition of interest, penalties and interest on the penalties, but without indicating the amount HCIPL is required to pay the DOT, and ordering payment by January 23, 2020. On November 23, 2019, HCIPL and other telecommunication service providers filed a petition asking the Supreme Court to reconsider the October 2019 Order. The petition was denied on January 20, 2020. On January 22, 2020, HCIPL and other telecommunication service providers filed an application requesting that the Supreme Court modify the October 2019 Order to permit the DOT to calculate the final amount due and extend HCIPL’s and the other telecommunication service providers’ payment deadline. On February 14, 2020, the Supreme Court directed HCIPL and the other telecommunication service providers to explain why the Supreme Court should not initiate contempt proceedings for failure to pay the amounts due. During a hearing on March 18, 2020, the Supreme Court ordered that all amounts that were due before the October 2019 Order must be paid, including interest, penalties and interest on the penalties. The Supreme Court also ordered that the parties appear for a further hearing addressing, potentially among other things, a proposal by the DOT to allow for extended or deferred payments of amounts due. On June 11, 2020, the Supreme Court ordered HCIPL and the other telecommunication service providers to submit affidavits addressing the proposal made by the DOT to extend the time frame for payment of the amounts owed and for HCIPL and the other telecommunication providers to provide security for such payments. On September 1, 2020, the Supreme Court issued a judgment permitting a 10-year payment schedule. Under this payment schedule, HCIPL is required to make an annual payment every March 31, through 2031. Following the Supreme Court of India’s October 2019 judgment, HCIPL made payments during the first quarter of 2020, and an additional payment on March 31, 2021.

The following table presents the components of the accrual:
As of
March 31, 2021December 31, 2020
Additional license fees$3,867 $3,890 
Penalties3,969 3,992 
Interest and interest on penalties77,774 76,871 
Less: Payments(8,574)(2,975)
Total accrual$77,036 $81,778 


Any eventual payments made with respect to the ultimate outcome of this matter may be different from our accrual and such differences could be significant.

Other

In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of business. As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which we may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, we from time to time receive inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.

In our opinion, the amount of ultimate liability with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
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We also indemnify our directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for us. Additionally, in the normal course of its business, we enter into contracts pursuant to which we may make a variety of representations and warranties and indemnify the counterparty for certain losses. Our possible exposure under these arrangements cannot be reasonably estimated as this involves the resolution of claims made, or future claims that may be made, against us or our officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.

NOTE 14.    SEGMENT REPORTING

Business segments are components of an enterprise for which separate financial information is available and regularly evaluated by our chief operating decision maker (“CODM”), who is our Chief Executive Officer. We operate in 2 business segments, Hughes and ESS, as described in Note 1. Organization and Business Activities.
 
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”).

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 business segments:
HughesESS
Corporate
and Other
Consolidated
Total
For the three months ended March 31, 2021
External revenue$475,859 $4,001 $5,370 $485,230 
Intersegment revenue88 (88)— 
Total revenue$475,859 $4,089 $5,282 $485,230 
EBITDA$198,578 $1,919 $(9,091)$191,406 
Capital expenditures$82,196 $$$82,196 
For the three months ended March 31, 2020
External revenue$458,482 $4,367 $4,698 $467,547 
Intersegment revenue285 (285)— 
Total revenue$458,482 $4,652 $4,413 $467,547 
EBITDA$154,641 $2,030 $(6,646)$150,025 
Capital expenditures$91,517 $$$91,517 

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The following table reconciles Net income (loss) in the Consolidated Statements of Operations to EBITDA:
For the three months ended March 31,
20212020
Net income (loss)$17,630 $(17,913)
Interest income, net(2,394)(8,892)
Interest expense, net of amounts capitalized41,922 42,192 
Income tax benefit (provision), net10,637 5,231 
Depreciation and amortization122,664 125,965 
Net loss (income) attributable to non-controlling interests947 3,442 
EBITDA$191,406 $150,025 

NOTE 15.    SUPPLEMENTAL FINANCIAL INFORMATION

Other Current Assets, Net and Other Non-current Assets, Net

The following table presents the components of Other current assets, net, and Other non-current assets, net:
As of
March 31, 2021December 31, 2020
Other current assets, net:
Trade accounts receivable - DISH Network$4,449 $4,706 
Inventory95,439 97,831 
Prepaids and deposits43,812 42,243 
Related party receivables - EchoStar114,225 116,220 
Other, net28,764 30,815 
Total other current assets$286,689 $291,815 
Other non-current assets, net:
Restricted cash$835 $807 
Deferred tax assets, net1,520 1,679 
Capitalized software, net118,953 116,661 
Contract acquisition costs, net94,593 99,837 
Contract fulfillment costs, net1,916 2,580 
Related party receivables - EchoStar54,970 57,136 
Other, net29,629 28,977 
Total other non-current assets, net$302,416 $307,677 
32

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)




Accrued Expenses and Other Current Liabilities and Other Non-Current Liabilities

The following table presents the components of Accrued expenses and other current liabilities and Other non-current liabilities:

As of
March 31, 2021December 31, 2020
Accrued expenses and other current liabilities:
Related party payables - EchoStar$51,396 $51,421 
Trade accounts payable - DISH Network417 477 
Accrued interest34,514 42,388 
Accrued compensation44,489 52,231 
Accrued taxes11,937 11,780 
Operating lease obligation14,986 14,670 
Other170,577 152,620 
Total accrued expenses and other current liabilities$328,316 $325,587 
Other non-current liabilities:
Related party payables - EchoStar$24,533 $25,114 
Other62,109 62,843 
Total other non-current liabilities$86,642 $87,957 

Inventory

The following table presents the components of inventory:

As of
March 31, 2021December 31, 2020
Raw materials$5,308 $4,564 
Work-in-process7,054 8,280 
Finished goods83,077 84,987 
Total inventory$95,439 $97,831 

33

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Supplemental and Non-cash Investing and Financing Activities

The following table presents the supplemental and non-cash investing and financing activities:

For the three months ended March 31,
 20212020
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized$45,329 $49,563 
Cash paid for income taxes$276 $716 
Non-cash investing and financing activities:
Increase (decrease) in capital expenditures included in accounts payable, net$(973)$(5,359)

NOTE 16.    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 5 1/4% Senior Secured Notes due August 1, 2026, 7 5/8% Senior Unsecured Notes due 2021 and 6 5/8% Senior Unsecured Notes due August 1, 2026 (collectively, the “Notes”).

The indentures governing the 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.

In lieu of separate financial statements of the Guarantor Subsidiaries, we have prepared the accompanying consolidating financial information in accordance with Rule 3-10(f) of Regulation S-X. This includes:

the accompanying balance sheet;
the accompanying statement of operations and comprehensive income (loss); and
the accompanying statement of cash flows.

This also includes consolidating financial information as follows:

the Guarantor Subsidiaries on a combined basis;
the non-guarantor subsidiaries of HSSC on a combined basis; and
the eliminations necessary to arrive at the corresponding information of HSSC on a consolidated basis.

This accompanying consolidating financial information should be read in conjunction with these Consolidated Financial Statements.
34

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Consolidating Balance Sheet as of March 31, 2021
Hughes Satellite Systems CorporationGuarantor
Subsidiaries
Non-Guarantor
Subsidiaries
EliminationsTotal
Assets
Current assets:
Cash and cash equivalents$1,313,882 $36,207 $53,837 $$1,403,926 
Marketable investment securities515,306 515,306 
Trade accounts receivable and contract assets, net130,895 56,377 187,272 
Other current assets, net148,125 922,870 93,812 (878,118)286,689 
Total current assets1,977,313 1,089,972 204,026 (878,118)2,393,193 
Non-current assets:
Property and equipment, net1,277,785 353,436 1,631,221 
Operating lease right-of-use assets104,304 27,148 131,452 
Goodwill504,173 6,772 510,945 
Regulatory authorizations, net400,000 9,960 409,960 
Other intangible assets, net16,246 16,246 
Other investments, net15,455 86,708 102,163 
Investment in subsidiaries2,965,049 322,434 (3,287,483)
Other non-current assets, net700 304,863 91,659 (94,806)302,416 
Total non-current assets2,965,749 2,945,260 575,683 (3,382,289)3,104,403 
Total assets$4,943,062 $4,035,232 $779,709 $(4,260,407)$5,497,596 
Liabilities and Shareholder's Equity
Current liabilities:
Trade accounts payable$$89,812 $14,871 $$104,683 
Current portion of long-term debt, net808,758 808,758 
Contract liabilities107,467 5,040 112,507 
Accrued expenses and other current liabilities635,846 341,850 228,738 (878,118)328,316 
Total current liabilities1,444,604 539,129 248,649 (878,118)1,354,264 
Non-current liabilities:
Long-term debt, net1,495,436 1,495,436 
Deferred tax liabilities, net345 373,485 2,536 376,366 
Operating lease liabilities96,042 22,410 118,452 
Other non-current liabilities62,089 119,359 (94,806)86,642 
Total non-current liabilities1,495,781 531,616 144,305 (94,806)2,076,896 
Total liabilities2,940,385 1,070,745 392,954 (972,924)3,431,160 
Shareholder's equity:
Total Hughes Satellite Systems Corporation shareholder's equity2,002,677 2,964,487 322,996 (3,287,483)2,002,677 
Non-controlling interests63,759 63,759 
Total shareholder's equity2,002,677 2,964,487 386,755 (3,287,483)2,066,436 
Total liabilities and shareholder's equity$4,943,062 $4,035,232 $779,709 $(4,260,407)$5,497,596 
 
35

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Consolidating Balance Sheet as of December 31, 2020
Hughes Satellite Systems CorporationGuarantor
Subsidiaries
Non-Guarantor
Subsidiaries
EliminationsTotal
Assets
Current assets:
Cash and cash equivalents$649,851 $46,055 $44,584 $$740,490 
Marketable investment securities1,203,296 1,203,296 
Trade accounts receivable and contract assets, net129,572 54,416 183,988 
Other current assets, net148,158 830,912 171,676 (858,931)291,815 
Total current assets2,001,305 1,006,539 270,676 (858,931)2,419,589 
Non-current assets:
Property and equipment, net1,312,673 378,850 1,691,523 
Operating lease right-of-use assets99,578 28,688 128,266 
Goodwill504,173 7,424 511,597 
Regulatory authorizations, net400,000 10,451 410,451 
Other intangible assets, net18,340 18,340 
Other investments, net103,924 103,924 
Investment in subsidiaries2,942,178 251,394 (3,193,572)
Other non-current assets, net700 307,661 94,031 (94,715)307,677 
Total non-current assets2,942,878 2,997,743 519,444 (3,288,287)3,171,778 
Total assets$4,944,183 $4,004,282 $790,120 $(4,147,218)$5,591,367 
Liabilities and Shareholder's Equity
Current liabilities:
Trade accounts payable$$98,914 $19,654 $$118,568 
Current portion of long-term debt, net898,237 898,237 
Contract liabilities99,838 4,731 104,569 
Accrued expenses and other current liabilities529,661 352,121 302,736 (858,931)325,587 
Total current liabilities1,427,898 550,873 327,121 (858,931)1,446,961 
Non-current liabilities:
Long-term debt, net1,495,256 1,495,256 
Deferred tax liabilities, net9,569 357,835 2,536 369,940 
Operating lease liabilities91,241 23,636 114,877 
Other non-current liabilities62,717 119,955 (94,715)87,957 
Total non-current liabilities1,504,825 511,793 146,127 (94,715)2,068,030 
Total liabilities2,932,723 1,062,666 473,248 (953,646)3,514,991 
Shareholder's equity:
Total Hughes Satellite Systems Corporation shareholder's equity2,011,460 2,941,616 251,956 (3,193,572)2,011,460 
Non-controlling interests64,916 64,916 
Total shareholder's equity2,011,460 2,941,616 316,872 (3,193,572)2,076,376 
Total liabilities and shareholder's equity$4,944,183 $4,004,282 $790,120 $(4,147,218)$5,591,367 

 
36

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2021
Hughes Satellite Systems Corporation
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
EliminationsTotal
Revenue:
Services and other revenue$$363,697 $77,703 $(8,409)$432,991 
Equipment revenue61,037 8,046 (16,844)52,239 
Total revenue424,734 85,749 (25,253)485,230 
Costs and expenses:
Cost of sales - services and other (exclusive of depreciation and amortization)103,207 36,229 (8,024)131,412 
Cost of sales - equipment (exclusive of depreciation and amortization)56,430 5,369 (16,659)45,140 
Selling, general and administrative expenses83,543 21,397 (570)104,370 
Research and development expenses7,358 187 7,545 
Depreciation and amortization94,252 28,412 122,664 
Impairment of long-lived assets210 210 
Total costs and expenses345,000 91,594 (25,253)411,341 
Operating income (loss)79,734 (5,845)73,889 
Other income (expense):
Interest income1,036 1,287 1,281 (1,210)2,394 
Interest expense, net of amounts capitalized(40,244)45 (2,933)1,210 (41,922)
Equity in earnings (losses) of unconsolidated affiliates, net219 (1,980)(1,761)
Equity in earnings (losses) of subsidiaries, net50,143 (12,617)(37,526)
Foreign currency transaction gains (losses), net(3)(3,357)(3,360)
Other, net(1,582)744 (135)(973)
Total other income (expense), net9,353 (10,325)(7,124)(37,526)(45,622)
Income (loss) before income taxes9,353 69,409 (12,969)(37,526)28,267 
Income tax benefit (provision), net9,224 (19,266)(595)(10,637)
Net income (loss)18,577 50,143 (13,564)(37,526)17,630 
Less: Net loss (income) attributable to non-controlling interests947 947 
Net income (loss) attributable to HSSC$18,577 $50,143 $(12,617)$(37,526)$18,577 
Comprehensive income (loss):
Net income (loss)$18,577 $50,143 $(13,564)$(37,526)$17,630 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(33,742)(33,742)
Unrealized gains (losses) on available-for-sale securities(88)(88)
Amounts reclassified to net income (loss):
Equity in other comprehensive income (loss) of subsidiaries, net(28,132)(28,132)56,264 
Total other comprehensive income (loss), net of tax(28,220)(28,132)(33,742)56,264 (33,830)
Comprehensive income (loss)(9,643)22,011 (47,306)18,738 (16,200)
Less: Comprehensive loss (income) attributable to non-controlling interests6,557 6,557 
Comprehensive income (loss) attributable to HSSC$(9,643)$22,011 $(40,749)$18,738 $(9,643)
37

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2020
Hughes Satellite Systems Corporation
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
EliminationsTotal
Revenue:     
Services and other revenue$$354,399 $64,928 $(9,089)$410,238 
Equipment revenue65,586 5,410 (13,687)57,309 
Total revenue419,985 70,338 (22,776)467,547 
Costs and expenses:
Cost of sales - services and other (exclusive of depreciation and amortization)110,471 42,063 (8,649)143,885 
Cost of sales - equipment (exclusive of depreciation and amortization)55,374 4,221 (13,687)45,908 
Selling, general and administrative expenses95,818 20,482 (440)115,860 
Research and development expenses6,109 145 6,254 
Depreciation and amortization99,359 26,606 125,965 
Total costs and expenses367,131 93,517 (22,776)437,872 
Operating income (loss)52,854 (23,179)29,675 
Other income (expense):
Interest income7,953 971 891 (923)8,892 
Interest expense, net of amounts capitalized(40,472)(613)(2,030)923 (42,192)
Gains (losses) on investments, net(164)(164)
Equity in earnings (losses) of unconsolidated affiliates, net(1,087)(1,087)
Equity in earnings (losses) of subsidiaries, net10,630 (29,167)18,537 
Foreign currency transaction gains (losses), net(2)(7,526)(7,528)
Other, net(275)(3)(278)
Total other income (expense), net(21,889)(30,337)(8,668)18,537 (42,357)
Income (loss) before income taxes(21,889)22,517 (31,847)18,537 (12,682)
Income tax benefit (provision), net7,418 (11,804)(845)(5,231)
Net income (loss)(14,471)10,713 (32,692)18,537 (17,913)
Less: Net loss (income) attributable to non-controlling interests3,442 3,442 
Net income (loss) attributable to HSSC$(14,471)$10,713 $(29,250)$18,537 $(14,471)
Comprehensive income (loss):     
Net income (loss)$(14,471)$10,713 $(32,692)$18,537 $(17,913)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(82,836)(82,836)
Unrealized gains (losses) on available-for-sale securities(2,479)(2,479)
Other(405)(405)
Equity in other comprehensive income (loss) of subsidiaries, net(66,918)(66,918)133,836 
Total other comprehensive income (loss), net of tax(69,397)(66,918)(83,241)133,836 (85,720)
Comprehensive income (loss)(83,868)(56,205)(115,933)152,373 (103,633)
Less: Comprehensive loss (income) attributable to non-controlling interests19,765 19,765 
Comprehensive income (loss) attributable to HSSC$(83,868)$(56,205)$(96,168)$152,373 $(83,868)

38

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2021
Hughes Satellite Systems CorporationGuarantor
Subsidiaries
Non-Guarantor
Subsidiaries
EliminationsTotal
Cash flows from operating activities:
Net income (loss)$18,577 $50,143 $(13,564)$(37,526)$17,630 
Adjustments to reconcile net income (loss) to net cash flows from operating activities(61,725)102,402 25,616 37,526 103,819 
Net cash provided by (used for) operating activities(43,148)152,545 12,052 121,449 
Cash flows from investing activities:
Purchases of marketable investment securities(310,528)(310,528)
Sales and maturities of marketable investment securities1,003,198 1,003,198 
Expenditures for property and equipment(52,246)(29,950)(82,196)
Expenditures for externally marketed software(7,846)(7,846)
Distributions (contributions) and advances from (to) subsidiaries, net77,097 (24,100)(52,997)
Net cash provided by (used for) investing activities769,767 (84,192)(29,950)(52,997)602,628 
Cash flows from financing activities:
Repurchase of the 2021 Senior Unsecured Notes(62,588)(62,588)
Payment of finance lease obligations(329)(329)
Payment of in-orbit incentive obligations(1,104)(1,104)
Contribution by non-controlling interest holder5,400 5,400 
Other, net(292)(292)
Contribution (distributions) and advances (to) from parent, net(77,097)24,100 52,997 
Net cash provided by (used for) financing activities(62,588)(78,201)28,879 52,997 (58,913)
Effect of exchange rates on cash and cash equivalents(1,700)(1,700)
Net increase (decrease) in cash and cash equivalents664,031 (9,848)9,281 663,464 
Cash and cash equivalents, including restricted amounts, beginning of period649,851 46,055 45,391 741,297 
Cash and cash equivalents, including restricted amounts, end of period$1,313,882 $36,207 $54,672 $$1,404,761 

 
39

HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2020
Hughes Satellite Systems Corporation
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
EliminationsTotal
Cash flows from operating activities:
Net income (loss)$(14,471)$10,713 $(32,692)$18,537 $(17,913)
Adjustments to reconcile net income (loss) to net cash flows from operating activities(22,215)95,031 28,858 (18,537)83,137 
Net cash provided by (used for) operating activities(36,686)105,744 (3,834)65,224 
Cash flows from investing activities:
Purchases of marketable investment securities(365,877)(365,877)
Sales and maturities of marketable investment securities490,020 490,020 
Expenditures for property and equipment(61,134)(30,383)(91,517)
Expenditures for externally marketed software(8,638)(8,638)
Distributions (contributions) and advances from (to) subsidiaries, net29,290 (18,939)(10,351)
Net cash provided by (used for) investing activities153,433 (88,711)(30,383)(10,351)23,988 
Cash flows from financing activities:
Payment of finance lease obligations(215)(215)
Payment of in-orbit incentive obligations(203)(203)
Contribution by non-controlling interest holder4,000 4,000 
Other, net979 979 
Contribution (distributions) and advances (to) from parent, net(29,290)18,939 10,351 
Net cash provided by (used for) financing activities(29,493)23,703 10,351 4,561 
Effect of exchange rates on cash and cash equivalents(4,618)(4,618)
Net increase (decrease) in cash and cash equivalents116,747 (12,460)(15,132)89,155 
Cash and cash equivalents, including restricted amounts, beginning of period1,057,903 32,338 50,081 1,140,322 
Cash and cash equivalents, including restricted amounts, end of period$1,174,650 $19,878 $34,949 $$1,229,477 

 
40


ITEM 2.    MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Unless the context indicates otherwise, the terms “we,” “us,” “HSSC,” the “Company” and “our” refer to Hughes Satellite Systems Corporation and its subsidiaries. The following Management’s Narrative Analysis of Results of Operations (“Management’s Narrative Analysis”) should be read in conjunction with our accompanying Consolidated Financial Statements and notes thereto (“Accompanying Consolidated Financial Statements”) in Item 1 of this Quarterly Report on Form 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.  Refer to the Disclosure Regarding Forward-Looking Statements in this Form 10-Q for further discussion.  For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, refer to the Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”).  Further, such forward-looking statements speak only as of the date of this Form 10-Q and we undertake no obligation to update them.

EXECUTIVE SUMMARY
 
We are a holding company and a subsidiary of EchoStar.  We were formed as a Colorado corporation in March 2011.  We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises.

We currently operate in two business segments:  Hughes and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company’s Chief Executive Officer.

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

All amounts presented in this Management’s Narrative Analysis, unless otherwise noted, are expressed in thousands of United States (“U.S.”) dollars, except share and per share amounts and unless otherwise noted.

Highlights from our financial results are as follows:
 
Consolidated Results of Operations for the Three Months Ended March 31, 2021:

Revenue of $485.2 million
Operating income (loss) of $73.9 million
Net income (loss) of $17.6 million
Net income (loss) attributable to HSSC of $18.6 million
Earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests (“EBITDA”) of $191.4 million (see reconciliation of this non-GAAP measure in Results of Operations)

Consolidated Financial Condition as of March 31, 2021:

Total assets of $5.5 billion
Total liabilities of $3.4 billion
Total shareholder’s equity of $2.1 billion
41


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

Cash and cash equivalents and marketable investment securities of $1.9 billion
 
Hughes Segment
 
Our Hughes segment is a global provider of broadband satellite technologies and broadband internet services to consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communications solutions to consumer and enterprise customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment designs, develops, constructs and provides telecommunication networks comprising satellite ground segment systems and terminals to mobile system operators and our enterprise customers.

We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services.  Through advanced and proprietary methodologies, technologies, software and techniques, we continue to improve the efficiency of our networks.  We invest in technologies to enhance our system and network management capabilities, specifically our managed services for enterprises.  We also continue to invest in next generation technologies that can be applied to our future products and services.
 
We continue to focus our efforts on growing our consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched or acquired. Our consumer revenue growth depends on our success in adding new and retaining existing subscribers across wholesale and retail channels, as well as increasing our Average Revenue Per User/subscriber (“ARPU”). Service costs related to ongoing support for our direct and indirect customers and partners are typically impacted most significantly by our growth. The growth of our enterprise businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. We have seen a limited number of our enterprise customers file for bankruptcy protection. We have reserved an amount related to pre-petition receivables and are working closely with these customers on providing post-petition services and products, as well as working with the customer regarding collection of pre-petition amounts.

Our Hughes segment currently uses capacity from three of our satellites (the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite), our Al Yah 3 Brazilian payload and additional satellite capacity acquired from third-party providers to provide services to our customers. Growth of our consumer subscriber base in the U.S. continues to be constrained where we are nearing or have reached maximum capacity in most areas. While these constraints are not expected to be resolved until we launch new satellites, we continue to focus on revenue growth in all areas and consumer subscriber growth in the areas where we have available capacity.

In May 2019, we entered into an agreement with Bharti Airtel Limited (“BAL”) and its subsidiary, Bharti Airtel Services Limited (together with BAL, “Bharti”), pursuant to which Bharti will contribute its very small aperture terminal (“VSAT”) telecommunications services and hardware business in India to our two existing Indian subsidiaries that conduct our VSAT services and hardware business. The combined entities will provide broadband satellite and hybrid solutions for enterprise networks. Upon consummation of the transaction, Bharti will have a 33% ownership interest in the combined business. The completion of the transaction is subject to customary regulatory approvals and closing conditions. No assurance can be given that the transaction will be consummated on the terms agreed to or at all.

In August 2017, a subsidiary of EchoStar entered into a long-term contract for the design and construction of the EchoStar XXIV satellite, a new, next-generation, high throughput geostationary satellite. The EchoStar XXIV satellite is primarily intended to provide additional capacity for our HughesNet satellite internet service (“HughesNet service”) in North, Central and South America as well as enterprise broadband services. The EchoStar XXIV satellite is expected to be launched in the second half of 2022. Further delays or impediments could have a material adverse impact on our business operations, future revenues, financial position and prospects, the completion of manufacture of the EchoStar XXIV satellite and our planned expansion of satellite broadband services throughout North, South and Central America. In December 2020, we entered into an agreement with a launch provider for the launch of EchoStar XXIV. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in EchoStar’s Corporate and Other in its segment reporting.
42


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

We continue our efforts to expand our consumer satellite services business outside of the U.S. We have been delivering high-speed consumer satellite broadband services in Brazil since July 2016 and are also providing satellite broadband internet service in several other Latin American countries. In September 2015, we entered into 15-year agreements with affiliates of Telesat Canada for Ka-band capacity on the Telesat T19V satellite located at the 63 degree west longitude orbital location, which was launched in July 2018. Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A satellite and the EchoStar XIX satellite in South America. In March 2021, we entered into an agreement for additional capacity on the Telesat T19V satellite over Puerto Rico.

Our broadband subscribers include customers that subscribe to our HughesNet services in the U.S. and Latin America through retail, wholesale and small/medium enterprise service channels.

The following table presents our approximate number of broadband subscribers:
As of
March 31, 2021December 31, 2020
United States1,164,000 1,189,000 
Latin America389,000 375,000 
Total broadband subscribers1,553,000 1,564,000 


The following table presents the approximate number of net subscriber additions:

For the three months ended
March 31, 2021December 31, 2020
United States(25,000)(27,000)
Latin America14,000 11,000 
Total net subscriber additions(11,000)(16,000)

Our U.S. consumer subscriber base in certain areas continues to be capacity constrained and we are managing the available capacity to maintain service quality to our existing subscribers. While the balancing of total subscribers relative to capacity utilization in the first quarter resulted in lower total subscribers, ARPU increased.

In Latin America, we continued to see growth in our subscriber base and net subscriber additions compared to the fourth quarter of 2020, mainly due to higher gross subscriber additions.

As of March 31, 2021 and December 31, 2020, our Hughes segment had $1.4 billion and $1.3 billion of contracted revenue backlog, respectively. We define Hughes contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue.

ESS Segment

Our ESS segment provides satellite services on a full-time and/or occasional-use basis to U.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the EchoStar IX satellite and the EchoStar 105/SES-11 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand.

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

As of March 31, 2021 and December 31, 2020, our ESS segment had contracted revenue backlog of $9.2 million and $6.7 million, respectively. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue.

Other Business Opportunities

Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. The current COVID-19 pandemic has made even more evident the worldwide need and demand for connectivity and communications to facilitate an ever-increasing virtual global community and workplace. In addition to fiber and wireless systems, technologies such as geostationary high throughput satellites, low-earth orbit (“LEO”) networks, medium-earth orbit (“MEO”) systems, balloons and High Altitude Platform Systems are expected to continue to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment, education, remote-connectivity and commerce across industries and communities globally for consumer and enterprise customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business.

We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally, that we believe may allow us to increase our existing market share, increase our satellite capacity, expand into new satellite and other technologies, markets and customers, broaden our portfolio of services, products and intellectual property, make our business more valuable, align us for future growth and expansion, maximize the return on our investments and strengthen our business and relationships with our customers. We may allocate or dispose of significant resources for long-term value that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.

Cybersecurity

On December 8, 2020, the cyber security company FireEye announced that they detected a sophisticated nation state level cyber campaign that targeted FireEye, other public and private companies, and government organizations. FireEye reported that the attack against them was facilitated through the Orion IT management software owned by a company called SolarWinds. Based on information from FireEye, we reviewed all instances of SolarWinds software in use at the Company and have determined that the version we are using is not susceptible to the malware within the version that is compromised.

The SolarWinds hack continues to evolve. Specifically, there have been many reports of intrusions into Microsoft Exchange on-premise systems possibly due to the SolarWinds issue and other unrelated matters. While we are customers of Microsoft, to date, our investigations into the announced issues indicate that we were not detrimentally affected by the vulnerabilities due to our security controls and other proactive measures which include security patching. We continue to receive information about these breaches from the U.S. government and private security firms, and we use this data to update our defense systems and to investigate our own networks for compromise. We will continue to update our systems as more information comes to light in reference to these issues.

We are not aware of any additional cyber-incidents with respect to our owned or leased satellites or other networks, equipment or systems that have had a material adverse effect on our business, costs, operations, prospects, results of operation or financial position during the three months ended March 31, 2021 and through May 6, 2021. 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.


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

RESULTS OF OPERATIONS
 
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

The following table presents our consolidated results of operations for the three months ended March 31, 2021 compared to the three months ended March 31, 2020:
For the three months ended March 31,Variance
Statements of Operations Data20212020Amount%
Revenue:
Services and other revenue$432,991 $410,238 $22,753 5.5 
Equipment revenue52,239 57,309 (5,070)(8.8)
Total revenue485,230 467,547 17,683 3.8 
Costs and expenses:
Cost of sales - services and other131,412 143,885 (12,473)(8.7)
% of total services and other revenue30.3 %35.1 %
Cost of sales - equipment45,140 45,908 (768)(1.7)
% of total equipment revenue86.4 %80.1 %
Selling, general and administrative expenses104,370 115,860 (11,490)(9.9)
% of total revenue21.5 %24.8 %
Research and development expenses7,545 6,254 1,291 20.6 
% of total revenue1.6 %1.3 %
Depreciation and amortization122,664 125,965 (3,301)(2.6)
Impairment of long-lived assets210 — 210 *
Total costs and expenses411,341 437,872 (26,531)(6.1)
Operating income (loss)73,889 29,675 44,214 *
Other income (expense):
Interest income, net2,394 8,892 (6,498)(73.1)
Interest expense, net of amounts capitalized(41,922)(42,192)270 (0.6)
Gains (losses) on investments, net— (164)164 (100.0)
Equity in earnings (losses) of unconsolidated affiliates, net(1,761)(1,087)(674)62.0 
Foreign currency transaction gains (losses), net(3,360)(7,528)4,168 (55.4)
Other, net(973)(278)(695)*
Total other income (expense), net(45,622)(42,357)(3,265)7.7 
Income (loss) before income taxes28,267 (12,682)40,949 *
Income tax benefit (provision), net(10,637)(5,231)(5,406)*
Net income (loss)17,630 (17,913)35,543 *
Less: Net income (loss) attributable to non-controlling interests947 3,442 (2,495)(72.5)
Net income (loss) attributable to HSSC$18,577 $(14,471)$33,048 *
Other data:
EBITDA (1)
$191,406 $150,025 $41,381 27.6 
Subscribers, end of period1,553,000 1,516,000 37,000 2.4 
*    Percentage is not meaningful
(1)    A reconciliation of EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in our Accompanying Consolidated Financial Statements, is included in Results of Operations.  For further information on our use of EBITDA, see Explanation of Key Metrics and Other Items.

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

The following discussion relates to our results of operations for the three months ended March 31, 2021 and 2020.

Services and other revenue.  Services and other revenue totaled $433.0 million for the three months ended March 31, 2021, an increase of $22.8 million, or 5.5%, as compared to 2020. The increase was primarily attributable to increases in sales of broadband services to our consumer customers of $27.0 million, partially offset by a decrease in sales of services to our enterprise customers of $3.1 million. These variances reflect the negative impact of exchange rate fluctuations of $5.4 million, primarily attributable to our consumer customers.

Equipment revenue. Equipment revenue totaled $52.2 million for the three months ended March 31, 2021, a decrease of $5.1 million, or 8.8%, as compared to 2020. The decrease was primarily attributable to decreases in hardware sales of $4.8 million to our mobile satellite systems customers.

Cost of sales - services and other.  Cost of sales - services and other totaled $131.4 million for the three months ended March 31, 2021, a decrease of $12.5 million, or 8.7%, as compared to 2020. The decrease was attributable to lower costs of services provided to our consumer and enterprise customers primarily associated with field services and leased satellite capacity as well as a non-recurring decrease in a certain international regulatory fee of $4.5 million.

Cost of sales - equipment. Cost of sales - equipment totaled $45.1 million for the three months ended March 31, 2021, a decrease of $0.8 million, or 1.7%, as compared to 2020. 
 
Selling, general and administrative expenses.  Selling, general and administrative expenses totaled $104.4 million for the three months ended March 31, 2021, a decrease of $11.5 million, or 9.9%, as compared to 2020. The decrease was primarily attributable to decreased sales and marketing expenses of $9.6 million from our Hughes segment mainly associated with our consumer customers and decreases in bad debt expense of $2.4 million.
 
Depreciation and amortization.  Depreciation and amortization expenses totaled $122.7 million for the three months ended March 31, 2021, a decrease of $3.3 million, or 2.6%, as compared to 2020.  The decrease was primarily attributable to decreases in other property and equipment depreciation expense of $2.0 million and decreases in amortization of intangibles of $1.5 million.

Interest income, net.  Interest income, net totaled $2.4 million for the three months ended March 31, 2021, a decrease of $6.5 million, or 73.1%, as compared to 2020, primarily attributable to decreases in the yield on our marketable investment securities.

Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled $3.4 million in losses for the three months ended March 31, 2021, as compared to $7.5 million in losses for the three months ended March 31, 2020, a positive change of $4.2 million. The change was due to the net impact of foreign exchange rate fluctuations of certain foreign currencies during the quarter.

Income tax benefit (provision), net.  Income tax benefit (provision), net was $(10.6) million in provision for the three months ended March 31, 2021, as compared to $(5.2) million for the three months ended March 31, 2020. Our effective income tax rate was 37.6% for the three months ended March 31, 2021, compared to (41.2)% for the same period in 2020.  The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended March 31, 2021 were primarily due to excluded foreign losses where the company carries a full valuation allowance. For the three months ended March 31, 2020, the variations in our effective tax rate from the U.S. federal statutory rate were primarily due to the change in net unrealized losses that are capital in nature, various permanent tax differences, the impact of state and local taxes, and increase in our valuation allowance associated with certain foreign losses.






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

Net income (loss) attributable to HSSC.  The following table reconciles the change in Net income (loss) attributable to HSSC:
Amounts
Net income (loss) attributable to HSSC for the three months ended March 31, 2020$(14,471)
Increase (decrease) in interest income, net(6,498)
Decrease (increase) in income tax benefit (provision), net(5,406)
Decrease (increase) in net income (loss) attributable to non-controlling interests(2,495)
Increase (decrease) in other, net(695)
Increase (decrease) in gains (losses) on investments, net164 
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net(674)
Decrease (increase) in interest expense, net of amounts capitalized270 
Increase (decrease) in foreign currency transaction gains (losses), net4,168 
Increase (decrease) in operating income (loss), including depreciation and amortization44,214 
Net income (loss) attributable to HSSC for the three months ended March 31, 2021$18,577 

EBITDA.  EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below.  The following table reconciles EBITDA to Net income (loss), the most directly comparable U.S. GAAP measure in our Accompanying Consolidated Financial Statements:
For the three months ended March 31,Variance
20212020Amount%
Net income (loss)$17,630 $(17,913)$35,543 *
Interest income, net(2,394)(8,892)6,498 (73.1)
Interest expense, net of amounts capitalized41,922 42,192 (270)(0.6)
Income tax provision (benefit), net10,637 5,231 5,406 *
Depreciation and amortization122,664 125,965 (3,301)(2.6)
Net loss (income) attributable to non-controlling interests947 3,442 (2,495)(72.5)
EBITDA$191,406 $150,025 $41,381 27.6 
* Percentage is not meaningful.
The following table reconciles the change in EBITDA: 
Amounts
EBITDA for the three months ended March 31, 2020$150,025 
Increase (decrease) in operating income (loss), excluding depreciation and amortization40,913 
Increase (decrease) in foreign currency transaction gains (losses), net4,168 
Increase (decrease) in gains (losses) on investments, net164 
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net(674)
Increase (decrease) in other, net(695)
Decrease (increase) in net loss (income) attributable to non-controlling interests(2,495)
EBITDA for the three months ended March 31, 2021$191,406 

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

Segment Operating Results and Capital Expenditures

The following tables present our operating results, capital expenditures and EBITDA by segment for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020:
HughesESSCorporate and OtherConsolidated Total
For the three months ended March 31, 2021
Total revenue$475,859 $4,089 $5,282 $485,230 
Capital expenditures82,196 — — 82,196 
EBITDA198,578 1,919 (9,091)191,406 
For the three months ended March 31, 2020
Total revenue$458,482 $4,652 $4,413 $467,547 
Capital expenditures91,517 — — 91,517 
EBITDA154,641 2,030 (6,646)150,025 
 
Hughes Segment
For the three months ended March 31,Variance
20212020Amount%
Total revenue$475,859 $458,482 $17,377 3.8 
Capital expenditures82,196 91,517 (9,321)(10.2)
EBITDA198,578 154,641 43,937 28.4 
 
Total revenue was $475.9 million for the three months ended March 31, 2021, an increase of $17.4 million, or 3.8%, as compared to 2020.  Services and other revenue increased primarily due to increases in sales of broadband services to our consumer customers of $27.0 million, partially offset by a decrease in sales of services to our enterprise customers of $3.1 million. Equipment revenue decreased primarily due to decreases in hardware sales of $4.8 million to our mobile satellite systems customers. These variances reflect the negative impact of exchange rate fluctuations of $5.9 million.

Capital expenditures were $82.2 million for the three months ended March 31, 2021, a decrease of $9.3 million, or 10.2%, as compared to 2020, primarily due to decreases in expenditures associated with our consumer business, partially offset by increased expenditures related to construction of our satellite-related ground infrastructure.
 
The following table reconciles the change in the Hughes Segment EBITDA: 
Amounts
EBITDA for the three months ended March 31, 2020$154,641 
Increase (decrease) in operating income (loss), excluding depreciation and amortization41,297 
Increase (decrease) in foreign currency transaction gains (losses), net4,165 
Increase (decrease) in other, net887 
Increase (decrease) in gains (losses) on investments, net164 
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net(81)
Decrease (increase) in net loss (income) attributable to non-controlling interests(2,495)
EBITDA for the three months ended March 31, 2021$198,578 

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

ESS Segment
For the three months ended March 31,Variance
20212020Amount%
Total revenue$4,089 $4,652 $(563)(12.1)
EBITDA1,919 2,030 (111)(5.5)

Total revenue was $4.1 million for the three months ended March 31, 2021, a decrease of $0.6 million, or 12.1%, as compared to 2020, primarily due to a decrease in transponder services provided to third parties.
 
EBITDA was $1.9 million for the three months ended March 31, 2021, a decrease of $0.1 million, or 5.5%, as compared to 2020, primarily due to the decrease in overall ESS revenue.

Corporate and Other
For the three months ended March 31,Variance
20212020Amount%
Total revenue$5,282 $4,413 $869 19.7 
EBITDA(9,091)(6,646)(2,445)36.8 

The following table reconciles the change in the Corporate and Other Segment EBITDA:  
Amounts
EBITDA for the three months ended March 31, 2020$(6,646)
Increase (decrease) in other, net(1,583)
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net(592)
Increase (decrease) in operating income (loss), excluding depreciation and amortization(273)
Increase (decrease) in foreign currency transaction gains (losses), net
EBITDA for the three months ended March 31, 2021$(9,091)

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

EXPLANATION OF KEY METRICS AND OTHER ITEMS
 
Services and other revenue.  Services and other revenue primarily includes the sales of consumer and enterprise broadband services, maintenance and other contracted services, revenue associated with satellite and transponder leases and services, satellite uplinking/downlinking, subscriber wholesale service fees for the HughesNet service professional services and facilities rental revenue.

Equipment revenue.  Equipment revenue primarily includes broadband equipment and networks sold to customers in our consumer and enterprise markets.

Cost of sales - services and otherCost of sales - services and other primarily includes the cost of broadband services provided to our consumer and enterprise customers, maintenance and other contracted services, costs associated with satellite and transponder leases and services, professional services and facilities rental.

Cost of sales - equipment. Cost of sales - equipment consists primarily of the cost of broadband equipment and networks sold to customers in our consumer and enterprise markets. It also includes certain other costs associated with the deployment of equipment to our customers.
 
Selling, general and administrative expenses. Selling, general and administrative expenses primarily include 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 systems and accounting services) and other expenses associated with facilities and administrative services.
 
Research and development expenses.  Research and development expenses primarily include costs associated with the design and development of products to support future growth and provide new technology and innovation to our customers.

Impairment of long-lived assets. Impairment of long-lived assets includes our impairment losses related to our property and equipment, goodwill, regulatory authorizations and other intangible assets.

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

Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized primarily includes interest expense associated with our debt and finance lease obligations (net of capitalized interest), amortization of debt issuance costs and interest expense related to certain legal proceedings.

Gains (losses) on investments, net.  Gains (losses) on investments, net primarily includes changes in fair value of our marketable equity securities and other investments for which we have elected the fair value option. It may also include realized gains and losses on the sale or exchange of our available-for-sale debt securities, other-than-temporary impairment losses on our available-for-sale securities, realized gains and losses on the sale or exchange of equity securities and debt securities without readily determinable fair value and adjustments to the carrying amount of investments in unconsolidated affiliates and marketable equity securities resulting from impairments and observable price changes.

Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net includes earnings or losses from our investments accounted for using the equity method.

Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net include gains and losses resulting from the re-measurement of transactions denominated in foreign currencies.

Other, net.  Other, net primarily includes dividends received from our marketable investment securities and other non-operating income and expense items that are not appropriately classified elsewhere in the Consolidated Statements of Operations in our Accompanying Consolidated Financial Statements.
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Item 2. MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED


Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as Net income (loss) excluding Interest income and expense, net, Income tax benefit (provision), net, Depreciation and amortization, and Net income (loss) attributable to non-controlling interests.  EBITDA is not a measure determined in accordance with U.S. GAAP. This non-GAAP measure is reconciled to Net income (loss) in our discussion of Results of Operations above. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with U.S. GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business and is appropriate to enhance an overall understanding of our financial performance. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry.

Subscribers. Subscribers include customers that subscribe to our HughesNet service, through retail, wholesale and small/medium enterprise service channels.


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 (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q. 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 Form 10-Q such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission 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 Exchange Act) that occurred during the three months ended March 31, 2021 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.

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PART II — OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS
 
For a discussion of legal proceedings, refer to Part I, Item 1. Financial Statements - Note 13. Contingencies - Litigation in this Form 10-Q.

ITEM 1A.    RISK FACTORS

Item 1A, Risk Factors, of our Form 10-K for the year ended December 31, 2020 includes a detailed discussion of our risk factors.

ITEM 4.    MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5.    OTHER INFORMATION
 
Financial Results

On May 6, 2021, EchoStar issued a press release (the “Press Release”) announcing its financial results for the quarter ended March 31, 2021. 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 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
101.INSXBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema.
101.CALXBRL Taxonomy Extension Calculation Linkbase.
101.DEFXBRL Taxonomy Extension Definition Linkbase.
101.LABXBRL Taxonomy Extension Label Linkbase.
101.PREXBRL Taxonomy Extension Presentation Linkbase.
(H)    Filed herewith.
(I)    Furnished herewith.
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 
  HUGHES SATELLITE SYSTEMS CORPORATION
Date: May 6, 2021By:
/s/ Michael T. Dugan
  Michael T. Dugan
  Chief Executive Officer, President and Director
  (Principal Executive Officer)
Date: May 6, 2021By:
/s/ David J. Rayner
  David J. Rayner
  Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer
  (Principal Financial and Accounting Officer)
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