# EchoStar CORP: Form 10-Q for the period ended Jun 30, 2011 - Company: [EchoStar CORP](/companies/echo.md) (CIK 1415404) - Form: 10-Q - Filed: 2011-08-09 - Accepted by EDGAR: Aug 9, 2011, 06:02 ET - Period: 2011-06-30 - Accession: 0001104659-11-045063 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1415404/000110465911045063/a11-14170_110q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1415404/000110465911045063/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2011-06-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2011-04-01 to 2011-06-30 | $584.2m | us-gaap:SalesRevenueNet | | Revenue | 6 months, 2011-01-01 to 2011-06-30 | $1.06bn | us-gaap:SalesRevenueNet | | Cost of revenue | 3 months, 2011-04-01 to 2011-06-30 | $317.3m | us-gaap:CostOfGoodsSold | | Cost of revenue | 6 months, 2011-01-01 to 2011-06-30 | $610.7m | us-gaap:CostOfGoodsSold | | Research and development | 3 months, 2011-04-01 to 2011-06-30 | $11.1m | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 6 months, 2011-01-01 to 2011-06-30 | $19.9m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 3 months, 2011-04-01 to 2011-06-30 | $42.9m | us-gaap:SellingGeneralAndAdministrativeExpense | | Selling, general and administrative | 6 months, 2011-01-01 to 2011-06-30 | $87.7m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2011-04-01 to 2011-06-30 | $45.8m | us-gaap:OperatingIncomeLoss | | Operating income | 6 months, 2011-01-01 to 2011-06-30 | $56.7m | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2011-04-01 to 2011-06-30 | $9.6m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2011-01-01 to 2011-06-30 | $17.4m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2011-04-01 to 2011-06-30 | $18.5m | us-gaap:NetIncomeLoss | | Net income | 6 months, 2011-01-01 to 2011-06-30 | $35.6m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.21 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2011-01-01 to 2011-06-30 | $0.41 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.21 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2011-01-01 to 2011-06-30 | $0.42 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2011-04-01 to 2011-06-30 | 87,697,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2011-01-01 to 2011-06-30 | 87,176,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2011-01-01 to 2011-06-30 | $128.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 6 months, 2011-01-01 to 2011-06-30 | $122.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2011-06-30 | $330.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2011-06-30 | $1.71bn | us-gaap:AssetsCurrent | | Total assets | at 2011-06-30 | $6.52bn | us-gaap:Assets | | Current liabilities | at 2011-06-30 | $668.1m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2011-06-30 | $3.40bn | us-gaap:Liabilities | | Shareholders' equity | at 2011-06-30 | $3.11bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 4,914 characters. ***Equipment revenue. “***Equipment revenue” totaled $108 million during the three months ended June 30, 2011, an increase of $21 million or 24.0% compared to the same period in 2010. This increase was primarily driven by the Hughes Acquisition, which contributed revenue from the sale of broadband equipment and networks to customers in our enterprise and consumer markets. This increase was partially offset by a decrease in sales to Dish Mexico which resulted from a decline in the number of units sold compared to the same period in 2010. ***Equipment revenue — DISH Network. “***Equipment revenue — DISH Network” totaled $271 million during the three months ended June 30, 2011, a decrease of $112 million or 29.3% compared to the same period in 2010. This change related primarily to a decrease in unit sales of set-top boxes, partially offset by an increase in the average revenue per unit due to a change in sales mix. Pursuant to the receiver agreement, set-top boxes are sold to DISH Network at cost plus a fixed margin, resulting in a decline in revenue per unit when lower set-top box costs are incurred. Currently, we expect DISH Network to remain the primary customer of our EchoStar Technologies business and the source of a significant portion of our total revenue. Pursuant to the commercial agreements we entered into with DISH Network, we are obligated to sell digital set-top boxes to DISH Network until January 1, 2012, although DISH Network has no obligation to purchase digital set-top boxes from us during or after this period. As a result of DISH Network’s previously disclosed higher than normal inventory levels, during the three months ended June 30, 2011, DISH Network purchased fewer digital set-top boxes and related components from us. It is possible that DISH Network will continue to purchase fewer digital set-top boxes and related components from us in 2011 than it purchased during 2010. This decrease could have a material adverse effect on our results of operations. In addition, to the extent that DISH Network’s gross subscriber additions decrease or DISH Network experiences a net loss of subscribers, sales of our digital set-top boxes and related components to DISH Network may further decline, which in turn could have a further material adverse effect on our financial position and results of operations. ***Services and other revenue. “***Services and other revenue” totaled $78 million during the three months ended June 30, 2011, an increase of $63 million compared to the same period in 2010. This increase was primarily driven by the Hughes Acquisition, which contributed revenue from the sale of broadband services to customers in our enterprise and consumer markets and from maintenance and other contracted services. ***Cost of sales — equipment. “***Cost of sales — equipment” totaled $317 million during the three months ended June 30, 2011, a decrease of $87 million or 21.5% compared to the same period in 2010. This change primarily resulted from a decrease in sales of digital set-top boxes and related components to DISH Network and Dish Mexico, partially offset by an increase in costs as a result of the Hughes Acquisition, including the cost of broadband equipment and networks sold to customers in our enterprise and consumer markets. “Cost of sales — equipment” represented 83.9% and 86.0% of total equipment sales for the three months ended June 30, 2011 and 2010, respectively. ***Cost of sales — services and other. “***Cost of sales — services and other” totaled $93 million during the three months ended June 30, 2011, an increase of $32 million or 53.6% compared to the same period in 2010. This change primarily resulted from an increase in costs as a result of the Hughes Acquisition, including the cost of broadband services sold to customers in our enterprise and consumer markets and from maintenance and other contracted services. “Cost of sales — services and other” represented 45.1% and 45.3% of total services and other revenue for the three months ended June 30, 2011 and 2010, respectively. ***Selling, general and administrative expenses. “***Selling, general and administrative expenses” totaled $46 million during the three months ended June 30, 2011, an increase of $8 million or 21.9% compared to the same period in 2010. This change primarily resulted from an increase in marketing and advertising expenses and other ongoing general and administrative expenses primarily associated with the Hughes Acquisition. ***Depreciation and amortization. “***Depreciation and amortization” expense totaled $71 million during the three months ended June 30, 2011, a $14 million or 24.6% increase compared to the same period in 2010. The change in “Depreciation and amortization” expense was related to an increase in depreciation expense on equipment, satellites and intangibles primarily associated with the Hughes Acquisition. ## Market risk As filed, 4,375 characters. ### Restricted Cash and Marketable Investment Securities and Noncurrent Marketable and Other Investment Securities #### Restricted Cash and Marketable Investment Securities As of June 30, 2011, we had $23 million of restricted cash and marketable investment securities invested in: (a) cash; (b) VRDNs convertible into cash at par value plus accrued interest generally in five business days or less; (c) debt instruments of the United States Government and its agencies; (d) commercial paper and corporate notes with an overall average maturity of less than one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating organizations; and/or (e) instruments with similar risk, duration and credit quality characteristics to the commercial paper described above. Based on our June 30, 2011 investment portfolio, a hypothetical 10% increase in average interest rates would not have a material impact in the fair value of our restricted cash and marketable investment securities. #### Other Investment Securities As of June 30, 2011, we had $831 million of public and nonpublic debt and equity instruments that we hold for strategic business purposes and account for under the cost, equity and/or fair value methods of accounting. Of this amount, $675 million relates to our investments in TerreStar Networks and TerreStar Corporation which are accounted for under the fair value method. TerreStar Networks and TerreStar Corporation filed for bankruptcy protection under the U.S. Bankruptcy Code on October 19, 2010 and February 16, 2011, respectively. See Note 4 in the Notes to the Condensed Consolidated Financial Statements for further discussion. A hypothetical 10% adverse change in the price of these debt and equity instruments would result in a decrease of approximately $68 million in the fair value of these investments. The remaining amount of our other investment securities portfolio of $156 million is accounted for under the cost and/or equity methods of accounting. A hypothetical 10% adverse change in the price of these debt and equity instruments would result in a decrease of approximately $16 million in the fair value of these investments. Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them. ### Foreign Currency Risk We generally conduct our business in U.S. dollars. Our international business is conducted in a variety of foreign currencies, including U.S. dollars, and it is therefore exposed to fluctuations in foreign currency exchange rates. Our objective in managing our exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, we may enter into foreign exchange contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. As of June 30, 2011, we had an estimated $23 million of foreign currency denominated receivables and payables outstanding, and $6 million of hedge contracts in place to partially mitigate foreign currency risk. The differences between the face amount of the foreign exchange contracts and their estimated fair values were not material as of June 30, 2011. The impact of a hypothetical 10% adverse change in exchange rates on the fair value of foreign currency denominated net assets and liabilities of our foreign subsidiaries would be an estimated loss of $11 million as of June 30, 2011. ### Long-Term Debt As of June 30, 2011, we had long-term debt of $2.013 billion on our Condensed Consolidated Balance Sheets. We estimated the fair value of this debt to be approximately $2.046 billion using quoted market prices for our publicly traded debt, which constitutes approximately 99% of our debt. Our debt has fixed interest rates, however the fair value of our debt is affected by fluctuations in interest rates. A hypothetical 10% decrease in assumed interest rates ## Controls and procedures As filed, 1,274 characters. ### Conclusions regarding 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 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. ### Changes in internal control over financial reporting On June 8, 2011, we completed the Hughes Acquisition. We are currently integrating policies, processes, people, technology and operations for the combined company. Management will continue to evaluate our internal control over financial reporting as we execute integration activities. Except as discussed above, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ## Risk factors As filed, 28,601 characters. Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2010 includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Annual Report on Form 10-K for 2010. ### General Risks Affecting Our Business ***Economic weakness, including high unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.*** A substantial majority of our revenue comes from providers of pay-TV services that in turn derive a substantial majority of their revenue from residential customers whose spending is affected by economic uncertainty. Our business also depends on the economic health and willingness of its customers and potential customers to make and adhere to capital and financial commitments to purchase its products and services. Economic weakness and uncertainty persisted during 2010. Our ability to grow or maintain our business may be adversely affected by sustained economic weakness, including the effect of wavering consumer confidence, high unemployment and other factors that may adversely affect our EchoStar Technologies business and providers of pay-TV services and the telecommunications industry. In particular, the weak economic conditions may result in the following: - ***Decreased Demand and Increased Pricing Pressure.*** Subscribers to pay-TV services may delay purchasing decisions or reduce or reallocate their discretionary spending, which may in turn decrease demand for programming packages from pay-TV providers that include set-top box equipment manufactured by us. Increased pricing pressures, which may result in reduced margins for pay-TV providers, including DISH Network, Bell TV and Dish Mexico, our primary customers, may reduce demand for high-end digital set top boxes on which we earn higher gross margins. Furthermore, pay-TV providers may increasingly look to make purchases from foreign set-top box suppliers primarily located in Asia with lower-priced products as their customers become more cost-sensitive in making purchase decisions as a result of weak economic conditions. In addition, the telecommunications industry has been facing significant challenges resulting from excess capacity, new technologies and intense price competition. If the conditions in the U.S. and world economic markets continue to be volatile or deteriorate further or if the telecommunications industry experiences future weaknesses, we could experience reduced demand for, and pricing pressure on, our products and services. - ***Excess Inventories and Satellite Capacity.*** There is an increased risk of excess and obsolete inventories as a result of possible lower demand for pay-TV services and the resultant lower demand for digital set-top boxes from pay-TV providers. We may also have excess satellite capacity resulting from possible decreased demand for pay-TV services and other services utilizing satellite transmission. - ***Increased Impairment Charges.*** Sustained economic weakness could result in substantial future impairment charges relating to, among other things, satellites, FCC authorizations, and our debt and equity investments. ### Risks Affecting Our EchoStar Satellite Services and Hughes Businesses ***We may not be able to compensate for any failure of our Hughes segment’s satellites.*** There is no assurance that the SPACEWAY 3 and Jupiter satellites will not suffer anomalies. If the enhanced features of the SPACEWAY 3 or Jupiter satellite designs do not function to their specifications, we may not be able to offer the functionality or throughput of service that we expect for these satellites. Any failure on our Hughes segment’s part to perform our VSAT service contracts or provide satellite broadband access as a result of satellite failures could result in: (i) a loss of revenue despite continued obligations under our leasing arrangements; (ii) possible cancellation of our long-term contracts; (iii) inability to continue with our subscription- based customers; (iv) incurring additional expenses to reposition customer antennas to alternative satellites; and (v) damaging our reputation, which could negatively affect our ability to retain existing customers or to gain new business. The cancellation of long-term contracts due to service disruptions is an exception to the generally non-cancelable nature of our contracts, and such cancellation would reduce our revenue backlog. ***Our satellites under construction are subject to risks related to construction and launch that could limit our ability to utilize these satellites.*** Satellite construction and launch are subject to significant risks, including delays, launch failure and incorrect orbital placement. Certain launch vehicles that may be used by us have either unproven track records or have experienced launch failures in the past. Only certain launch vehicles can lift and place into orbit spacecraft in the mass range of the Jupiter satellite, which further limits the launch opportunities for the Jupiter satellite. The risks of launch delay and failure are usually greater when the launch vehicle does not have a track record of previous successful flights. Launch failures result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take more than three years, and to obtain other launch opportunities. Construction and launch delays could materially and adversely affect our ability to generate revenues. If we decide not to procure launch insurance on future satellites, or we decide to procure launch insurance but we are unable to do so or are unable to obtain launch insurance at rates we deem commercially reasonable, and a significant launch failure were to occur, it could have a material adverse effect on our ability to generate revenues and fund future satellite procurement and launch opportunities. In addition, the occurrence of launch failures whether on our satellites or those of others may significantly reduce the availability of launch insurance on our satellites or make launch insurance premiums uneconomical. ***We generally do not have commercial insurance coverage on the satellites we use and could face significant impairment charges if one of our satellites fails.*** Generally, we do not carry launch or in-orbit insurance on the satellites we use, other than for SPACEWAY 3. We currently do not carry in-orbit insurance on any of our satellites, other than for SPACEWAY 3, and often do not use commercial insurance to mitigate the potential financial impact of launch or in-orbit failures because we believe that the cost of insurance premiums is uneconomical relative to the risk of such failures. If one or more of our in-orbit satellites fail, we could be required to record significant impairment charges. ***The enterprise network communications industry is highly competitive. We may be unsuccessful in competing effectively against other terrestrial and satellite-based network providers in our enterprise groups.*** We operate in a highly competitive enterprise network communications industry in the sale and lease of our products and services. This industry is characterized by competitive pressures to provide enhanced functionality for the same or lower price with each new generation of technology. As the prices of our products decrease, we will need to sell more products and/or reduce the per-unit costs to improve or maintain our results of operations. We face competition from providers of terrestrial-based networks, such as Digital Subscriber Line (“DSL”), cable modem service, Multiprotocol Label Switching and Internet protocol-based virtual private networks, which may have advantages over satellite networks for certain customer applications. Terrestrial-based networks are offered by telecommunications carriers and other large companies, many of which have substantially greater financial resources and greater name recognition than us. The costs of a satellite network may exceed those of a terrestrial-based network, especially in areas that have experienced significant DSL and cable Internet build-out. It may become more difficult for us to compete with terrestrial providers as the number of these areas increases and the cost of their network and hardware services declines. We also compete for enterprise clients with other satellite network providers, satellite providers that are targeting small and medium businesses and smaller independent systems integrators on procurement projects. ***The consumer network communications market is highly competitive. We may be unsuccessful in competing effectively against DSL and cable service providers and other satellite broadband providers in the consumer market. Following the launch of ViaSat-1 by WildBlue and prior to the launch of Jupiter, we may not remain competitive with WildBlue.*** We face competition in our consumer group primarily from DSL and cable Internet service providers. Also, other satellite and wireless broadband companies have launched or are planning the launch of consumer satellite Internet access services in competition with ours in North America. Some of these competitors offer consumer services and hardware at lower prices than ours. In addition, terrestrial alternatives do not require our external dish which may limit customer acceptance of our products. Our primary competitor for consumer satellite Internet access services is WildBlue Communications, Inc. (“WildBlue”), which is owned by Viasat, Inc. (“ViaSat”). Currently, we believe that we have available capacity for expansion in all of our markets and expect this to be an advantage over WildBlue until the second half of 2011, when ViaSat has publicly stated that it expects to launch ViaSat-1, a new next-generation satellite for use by WildBlue. However, following the launch of ViaSat-1 by WildBlue and prior to the launch of Jupiter, WildBlue may be in a better position economically to offer faster connection speeds than us, and there can therefore be no assurance that our product offerings will remain competitive with those of WildBlue prior to the launch of Jupiter. As discussed above, there can be no assurance that the expected launch of Jupiter in the first half of 2012 will not be delayed or will not fail. ***If we are unable to develop, introduce and market new products, applications and services on a cost-effective and timely basis, or if we are unable to sell our new products and services to existing and new customers, our business could be adversely affected.*** The network communications market is characterized by rapid technological changes, frequent new product introductions and evolving industry standards. If we fail to develop new technology or keep pace with significant industry technological changes, our existing products and technology could be rendered obsolete. Even if we keep up with technological innovation, it may not meet the demands of the network communications market. For example, our large enterprise customers may only choose to renew services with us at substantially lower prices or for a decreased level of service. Many of our large enterprise customers have existing networks available to them and may opt to find alternatives to our VSAT services or may renew with us solely as a backup network. If we are unable to respond to technological advances on a cost-effective and timely basis, or if our products or applications are not accepted by the market, then our business, financial condition and results of operations would be adversely affected. ***Our networks and those of our third-party service providers may be vulnerable to security risks.*** We expect the secure transmission of confidential information over public networks to continue to be a critical element of our operations. Our networks and those of our third-party service providers and our customers may be vulnerable to unauthorized access, computer viruses and other security problems. Persons who circumvent security measures could wrongfully obtain or use information on the network or cause interruptions, delays or malfunctions in our operations, any of which could have a material adverse effect on our business, financial condition and results of operations. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although we have implemented and intend to continue to implement industry-standard security measures, these measures may prove to be inadequate and result in system failures and delays that could lower network operations center availability and have a material adverse effect on our business, financial condition and results of operations. ***We are dependent upon suppliers of components, manufacturing outsourcing, installation, and customer service, and our results of operations may be materially affected if any of these third-party providers fail to appropriately deliver the contracted goods or services.*** We are dependent upon third-party services and products provided to us, including the following: - *Components.* A limited number of suppliers manufacture some of the key components required to build our VSATs. These key components may not be continually available and we may not be able to forecast our component requirements sufficiently in advance, which may have a detrimental effect on supply. If we are required to change suppliers for any reason, we would experience a delay in manufacturing our products if another supplier is not able to meet our requirements on a timely basis. In addition, if we are unable to obtain the necessary volumes of components on favorable terms or prices on a timely basis, we may be unable to produce our products at competitive prices and we may be unable to satisfy demand from our customers. - *Commodity Price Risk.* All of our products contain components whose base raw materials have undergone dramatic cost fluctuations in the last 24 months. Fluctuations in pricing of raw materials have the ability to affect our product costs. Although we have been successful in offsetting or mitigating our exposure to these fluctuations, such changes could have an adverse impact on our product costs. - *Manufacturing outsourcing.* While we develop and manufacture prototypes for our products, we use contract manufacturers to produce a significant portion of our hardware. If these contract manufacturers fail to provide products that meet our specifications in a timely manner, then our customer relationships may be harmed. - *Installation and customer support service.* Each of our North American and international operations utilizes a network of third-party installers to deploy our hardware. In addition, a portion of our customer support and management is provided by offshore call centers. Since we provide customized services for our customers that are essential to their operations, a decline in levels of service or attention to the needs of our customers could adversely affect our reputation, renewal rates and ability to win new business. ***The failure to adequately anticipate the need for transponder capacity or the inability to obtain transponder capacity could harm our results of operations.*** We have made substantial contractual commitments for transponder capacity based on our existing customer contracts and backlog, as well as anticipated future business, to the extent our existing customers are not expected to utilize our SPACEWAY 3 satellite. If future demand does not meet our expectations, we will be committed to maintaining excess transponder capacity for which we will have no or insufficient revenues to cover our costs, which would have a negative impact on our margins and results of operations. Our transponder leases are generally for two to five years, and different leases cover satellites with coverage of different geographical areas or support different applications and features, so we may not be able to quickly or easily adjust our capacity to changes in demand. If we only purchase transponder capacity based on existing contracts and bookings, capacity for certain types of coverage in the future that cannot be readily served by SPACEWAY 3 may be unavailable to us, and we may not be able to satisfy certain needs of our customers, which could result in a loss of possible new business and could negatively impact the margins earned for those services. At present, until the launch and operation of additional satellites, there is limited availability of capacity on the Ku-band frequencies in North America. In addition, the FSS industry has seen consolidation in the past decade, and today, the three main FSS providers in North America and a number of smaller regional providers own and operate the current satellites that are available for our capacity needs. The failure of any of these FSS providers or a downturn in their industry as a whole could reduce or interrupt the Ku-band capacity available to us. If we are not able to renew our capacity leases at economically viable rates, or if capacity is not available due to any problems of the FSS providers, our business and results of operations could be adversely affected, to the extent SPACEWAY 3 and Jupiter are unable to satisfy the associated demand. ***If our products contain defects, we could be subject to significant costs to correct such defects and our product and network service contracts could be delayed or cancelled, which could adversely affect our revenues.*** The products and the networks we deploy are highly complex, and some may contain defects when first introduced or when new versions or enhancements are released, despite extensive testing and our quality control procedures. In addition, many of our products and network services are designed to interface with our customers’ existing networks, each of which has different specifications and utilizes multiple protocol standards. Our products and services must interoperate with the other products and services within our customers’ networks, as well as with future products and services that might be added to these networks, to meet our customers’ requirements. The occurrence of any defects, errors or failures in our products or network services could result in: (i) additional costs to correct such defects; (ii) cancellation of orders; (iii) a reduction in revenue backlog; (iv) product returns or recalls; (v) diversion of our resources; and (vi) the issuance of credits to customers and other losses to us, our customers or end users. Any of these occurrences could also result in the loss of or delay in market acceptance of our products and services and loss of sales, which would harm our reputation and our business and adversely affect our revenues and profitability. ***We may face difficulties in accurately assessing and collecting contributions towards the Universal Service Fund.*** As a provider of telecommunications in the United States, we are presently required to contribute a percentage of our revenues from telecommunications services to the Universal Service Fund to support mechanisms that subsidize the provision of services to low-income consumers, high-cost areas, schools, libraries and rural health care providers. This percentage is set each calendar quarter by the FCC. Current FCC rules permit us to pass this Universal Service Fund contribution onto our customers. Because our customer contracts often include both telecommunications services, which create such support obligations, and other goods and services, which do not, it can be difficult to determine which portion of our revenues forms the basis for this contribution and the amount that we can recover from our customers. If the FCC, which oversees the support mechanisms, or a court or other governmental entity were to determine that we computed our contribution obligation incorrectly or passed the wrong amount onto our customers, we could become subject to additional assessments, liabilities, or other financial penalties. In addition, the FCC is considering substantial changes to its Universal Service Fund contribution and distribution rules. These changes could impact our future contribution obligations and those of third parties that provide communication services to our business. Any such change to the Universal Service Fund contribution rules could adversely affect our costs of providing service to our customers. In addition, changes to the Universal Service Fund distribution rules could intensify the competition we face by offering subsidies to competing firms and/or technologies. ***Our foreign operations expose us to regulatory risks and restrictions not present in our domestic operations.*** Our operations outside the United States accounted for approximately 17.6% and 15.9% of our revenues for the three and six months ended June 30, 2011, respectively, and 13.9% and 16.0% during the three and six months ended June 30, 2010, respectively. We expect our foreign operations to continue to represent a significant portion of our business. We have operations in Brazil, Germany, India, Indonesia, Italy, Mexico, the Russian Federation, South Africa, the United Arab Emirates, the United Kingdom and China, among other nations. Over the last 20 years, we have sold products in over 100 countries. Our foreign operations involve varying degrees of risks and uncertainties inherent in doing business abroad. Such risks include: - *Complications in complying with restrictions on foreign ownership and investment and limitations on repatriation.* We may not be permitted to own our operations in some countries and may have to enter into partnership or joint venture relationships. Many foreign legal regimes restrict our repatriation of earnings to the United States from our subsidiaries and joint venture entities. We may also be limited in our ability to distribute or access our assets by the governing documents pertaining to such entities. In such event, we will not have access to the cash flow and assets of our joint ventures. - *Difficulties in following a variety of foreign laws and regulations, such as those relating to data content retention, privacy and employee welfare.* Our international operations are subject to the laws of many different jurisdictions that may differ significantly from United States law. For example, local political or intellectual property law may hold us responsible for the data that is transmitted over our network by our customers. Also, other nations have more stringent employee welfare laws that guarantee perquisites that we must offer. Compliance with these laws may lead to increased operations costs, loss of business opportunities or violations that result in fines or other penalties. - *We face significant competition in our international markets.* Outside North America, we have traditionally competed for VSAT hardware and services sales primarily in Europe, Brazil and India and focused only on hardware revenues in other regions. In Europe, we face intense competition which is not expected to abate in the near future. - *Changes in exchange rates between foreign currencies and the United States dollar.* We conduct our business and incur cost in the local currency of a number of the countries in which we operate. Accordingly, our results of operations are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our financial statements. These fluctuations in currency exchange rates have affected, and may in the future affect, revenue, profits and cash earned on international sales. In addition, we sell our products and services and acquires supplies and components from countries that historically have been, and may continue to be, susceptible to recessions or currency devaluation. - *Greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation or war.* As we conduct operations throughout the world, we could be subject to regional or national economic downturns or instability, labor or political disturbances or conflicts of various sizes. Any of these disruptions could detrimentally affect our sales in the affected region or country or lead to damage to, or expropriation of, our property or danger to our personnel. - *Competition with large or state-owned enterprises and/or regulations that effectively limit our operations and favor local competitors.* Many of the countries in which we conduct business have traditionally had state owned or state granted monopolies on telecommunications services that favor an incumbent service provider. We face competition from these favored and entrenched companies in countries that have not deregulated. The slower pace of deregulation in these countries, particularly in Asia and Latin America, has adversely affected the growth of our business in these regions. - *Customer credit risks.* Customer credit risks are exacerbated in foreign operations because there is often little information available about the credit histories of customers in the foreign countries in which we operate. ***The pro forma financial information presented in this Form 10-Q and our Form 8-K/A filed on August 5, 2011 is for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations in the future.*** The pro forma financial information contained in this Form 10-Q is presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the acquisition for several reasons. For example, the pro forma financial information has been derived from the historical financial statements of EchoStar and Hughes Communications and certain adjustments and assumptions have been made regarding the combined company after giving effect to the acquisition and related financing transactions. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy. Moreover, the pro forma financial information does not reflect all costs that are expected to be incurred by the combined company in connection with the transaction. For example, the impact of any incremental costs incurred in integrating the two companies is not reflected in the pro forma financial information. As a result, the actual financial condition and results of operations of the combined company following the transaction may not be consistent with, or evident from, this pro forma financial information. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the transaction. Any potential deterioration in the combined company’s financial condition or results of operations may cause investments in the combined company to decline in value. ### We have substantial debt outstanding and may incur additional debt. As of June 30, 2011, our total debt, including the debt of our subsidiaries, was $2.406 billion. Our debt levels could have significant consequences, including: - making it more difficult to satisfy our obligations; - having a dilutive effect on our outstanding equity capital or future earnings; - increasing our vulnerability to general adverse economic conditions, including changes in interest rates; - limiting our ability to obtain additional financing; - requiring us to devote a substantial portion of our available cash and cash flow to make interest and principal payments on our debt, thereby reducing the amount of available cash for other purposes; - limiting our financial and operating flexibility in responding to changing economic and competitive conditions; and - placing us at a disadvantage compared to our competitors that have relatively less debt. In addition, we may incur substantial additional debt in the future. The terms of the indentures relating to our senior notes permit us to incur additional debt. If new debt is added to our current debt levels, the risks we now face could intensify. Filed Aug 9, 2011. Source: SEC EDGAR, the filing index for accession 0001104659-11-045063. Last ingested by Listed: Nov 3, 2026, 08:39 ET. No prices; not investment advice.