# EchoStar CORP: Form 10-Q for the period ended Sep 30, 2014

- Company: [EchoStar CORP](/companies/echo.md) (CIK 1415404)
- Form: 10-Q
- Filed: 2014-11-06
- Accepted by EDGAR: Nov 5, 2014, 19:20 ET
- Period: 2014-09-30
- Accession: 0001104659-14-077192
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1415404/000110465914077192/a14-19673_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1415404/000110465914077192/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $895.8m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2014-01-01 to 2014-09-30 | $2.60bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $340.2m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2014-01-01 to 2014-09-30 | $998.2m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2014-07-01 to 2014-09-30 | $15.7m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2014-01-01 to 2014-09-30 | $44.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2014-07-01 to 2014-09-30 | $93.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2014-01-01 to 2014-09-30 | $271.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | $92.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-01-01 to 2014-09-30 | $244.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-07-01 to 2014-09-30 | $41.7m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2014-01-01 to 2014-09-30 | $132.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | $6.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-01-01 to 2014-09-30 | $28.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | $60.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-01-01 to 2014-09-30 | $103.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.69 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-01-01 to 2014-09-30 | $1.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.70 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-01-01 to 2014-09-30 | $1.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 92,971,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-01-01 to 2014-09-30 | 92,723,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-01-01 to 2014-09-30 | $662.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2014-07-01 to 2014-09-30 | $164.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2014-01-01 to 2014-09-30 | $434.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-09-30 | $760.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $2.47bn | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $7.31bn | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $616.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $3.71bn | us-gaap:Liabilities |
| Shareholders' equity | at 2014-09-30 | $3.51bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 4,866 characters.

***Selling, general and administrative expenses. “***Selling, general and administrative expenses” totaled $271.3 million for the nine months ended September 30, 2014, an increase of $2.4 million, or 0.9%, compared to the same period in 2013. The increase was mainly due to a $11.3 million increase in marketing expenses primarily in our Hughes segment offset partially by a $8.9 million decrease in personnel and other employee-related expenses.

***Research and development. “***Research and development” expenses totaled $44.8 million for the nine months ended September 30, 2014, a decrease of $6.0 million or 11.9%, compared to the same period in 2013. The decrease was primarily due to reductions of research and development related activities in our EchoStar Technologies and Hughes segments of $3.9 million and $2.1 million, respectively. The Company’s research and development activities vary based on the activity level and scope of other engineering and customer related development contracts. Research and development expenses within our EchoStar Technologies segment decreased primarily due to an increased amount of customer funded projects, which is included in cost of sales. Additionally, the decrease in research and development expenses in our Hughes segment was primarily due to a $5.3 million increase in capitalized software projects for products and features to be marketed or sold to customers, that otherwise would have been included in research and development costs.

***Depreciation and amortization. “***Depreciation and amortization” expense totaled $416.2 million for the nine months ended September 30, 2014, an increase of $36.6 million or 9.6%, compared to the same period in 2013. The increase was primarily related to an increase in depreciation of $27.8 million from our EchoStar Satellite Services segment, primarily due to the depreciation of the additional five satellites we received from DISH Network as part of the Satellite and Tracking Stock Transaction, an increase in depreciation of $15.1 million associated with customer rental equipment from our Hughes segment, and an increase of $4.6 million in amortization expense for the regulatory authorizations with finite useful lives. The increase in depreciation and amortization was partially offset by a decrease in depreciation of $6.2 million relating to the retirement of certain machinery and equipment as well as a decrease in depreciation of $5.7 million due to the impairment of the EchoStar XII satellite’s carrying amount that occurred in the second quarter of 2013.

***Impairment of long-lived asset. “***Impairment of long-lived asset” totaled zero for the nine months ended September 30, 2014, a decrease of $34.7 million, compared to the same period in 2013 due to the impairment of our EchoStar XII satellite of $34.7 million in June 2013. See Note 9 in the notes to our condensed consolidated financial statements for further discussion of the impairment in the second quarter of 2013.

***Interest expense, net of amounts capitalized. “***Interest expense, net of amounts capitalized” totaled $132.4 million for the nine months ended September 30, 2014, a decrease of $13.1 million, or 9.0%, compared to the same period in 2013. The decrease was due to higher capitalized interest of $12.9 million associated with the construction of our EchoStar XIX, TerreStar-2/EchoStar XXI, EchoStar XXIII, and EUTELSAT 65 West A satellites in the nine months ended September 30, 2014 compared to the same period in 2013.

***Realized gains on marketable investment securities and other investments, net. “***Realized gains on marketable investment securities and other investments, net” totaled $7.0 thousand for the nine months ended September 30, 2014, a decrease of $39.2 million, compared to the same period in 2013. The decrease was primarily related to a gain of $35.9 million recognized from the sale of a strategic investment in a public company in 2013 and a gain of $2.6 million that resulted from the conversion of one of our investments into a marketable investment security in 2013.

***Other, net. “***Other, net” totaled $9.1 million for the nine months ended September 30, 2014, an increase of $9.3 million, compared to the same period in 2013. The increase was primarily related to a decrease of $15.8 million in equity from losses of unconsolidated affiliates, net, primarily related to a $10.3 million non-recurring adjustment to increase our equity in earnings (losses) of unconsolidated affiliates to reflect an increase from 24.0% to 49.0% in our interest in Dish Mexico’s inception-to-date net income. See Note 6 for more information regarding our investment in Dish Mexico. This increase was partially offset by a non-recurring gain of $6.7 million in 2013 resulting from a reduction of the capital lease obligation for the AMC-16 satellite.

## Market risk

As filed, 3,927 characters.

### Market Risks Associated with Financial Instruments and Foreign Currency

Our investments and debt are exposed to market risks, discussed below.

### Cash, Cash Equivalents and Current Marketable Investment Securities

As of September 30, 2014, our cash, cash equivalents and current marketable investment securities had a fair value of $1.78 billion. Of this amount, a total of $1.74 billion was invested in: (a) cash; (b) 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; (c) VRDNs convertible into cash at par value plus accrued interest generally in five business days or less; (d) debt instruments of the U.S. government and its agencies; and/or (e) instruments with similar risk, duration and credit quality characteristics to the commercial paper and corporate obligations described above. The primary purpose of these investing activities has been to preserve principal until the cash is required to, among other things, fund operations, make strategic investments and expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is received and used in our business. The value of this portfolio may be negatively impacted by credit losses; however, this risk is mitigated through diversification that limits our exposure to any one issuer.

### Interest Rate Risk

A change in interest rates would not affect the fair value of our cash, or materially affect the fair value of our cash equivalents due to their maturities of less than 90 days. A change in interest rates would affect the fair value of our current marketable debt securities portfolio; however, we normally hold these investments to maturity. Based on our current non-strategic investment portfolio of $1.74 billion as of September 30, 2014, a hypothetical 10% change in average interest rates during 2014 would not have a material impact on the fair value of our cash, cash equivalents and debt securities portfolio due to the limited duration of our investments.

Our cash, cash equivalents and current marketable debt securities had an average annual rate of return for the nine months ended September 30, 2014 of 0.6%. A change in interest rates would affect our future annual interest income from this portfolio, since funds would be re-invested at different rates as the instruments mature. A hypothetical 10% decrease in average interest rates during 2014 would have resulted in a decrease of approximately $0.9 million in annual interest income.

### Strategic Marketable Investment Securities

As of September 30, 2014, we held current strategic investments in the publicly traded common stock of several public companies with a fair value of $35.6 million. These investments, which are held for strategic and financial purposes, are concentrated in a small number of companies, are highly speculative and have experienced and continue to experience volatility. The fair value of these investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. In general, the debt instruments held in our strategic marketable investment securities portfolio are not significantly impacted by interest rate fluctuations as their value is more closely related to factors specific to the underlying business. A hypothetical 10% adverse change in the market price of our public strategic equity investments would result in a decrease of approximately $3.6 million in the fair value of these investments.

## Controls and procedures

As filed, 1,151 characters.

### 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

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) that occurred during the third quarter of 2014 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.

## Risk factors

As filed, 5,185 characters.

Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2013 includes a detailed discussion of our risk factors. Except as provided below, for the nine months ended September 30, 2014, there have been no material changes in our risk factors as previously disclosed.

***Our capital structure may create conflicts of interest for our board of directors and management, and our board of directors may make decisions that could adversely affect only one group of holders.***

Our preferred tracking stock capital structure could give rise to occasions when the interests of holders of stock of one group might diverge or appear to diverge from the interests of holders of stock of the other group and our board of directors or officers could make decisions that could adversely affect only one group of holders. Nevada law requires that our board of directors and officers act in good faith and with a view to the interest of the company and are not required to consider, as a dominant factor, the effect of a proposed corporate action upon any particular group of stockholders. Decisions deemed to be in the interest of our company may not always align with the best interest of a particular group of our stockholders when considered independently. Examples include:

- decisions as to the terms of any business relationships that may be created between the EchoStar Group and the Hughes Retail Group and the terms of any reattributions of assets between the groups;
- decisions as to the allocation of corporate opportunities between the groups, especially where the opportunities might meet the strategic business objectives of both groups;
- decisions as to operational and financial matters that could be considered detrimental to one group but beneficial to the other;
- decisions as to the internal or external financing attributable to businesses or assets attributed to either of our groups; and
- decisions as to the disposition of assets of either of our groups.

In addition, as the Tracking Stock is currently held by DISH Network, questions relating to conflicts of interest may also arise between DISH Network and us due to our common ownership and management.

Provisions of Nevada law and our articles of incorporation may protect decisions of our board of directors and officers that have a disparate impact on one group of holders. Our stockholders may have limited or no legal remedies under Nevada law with respect to such decisions even if the actions of our directors or officers adversely affect the market value of our common stock.

***Our board of directors has the ability to change our attribution policies at any time without a vote of our common stockholders.***

Our board of directors has adopted a policy statement (the “Policy Statement”) regarding the relationships between the EchoStar Group and the Hughes Retail Group with respect to matters such as the attribution and allocation of costs, tax liabilities and benefits, attribution of assets, corporate opportunities and similar items. Our board of directors may at any time change or make exceptions to the Policy Statement with only the consent of holders of a majority of the outstanding shares of the EchoStar Tracking Stock. Because these policies relate to matters concerning the day-to-day management of our company as opposed to significant corporate actions, such as a merger involving the Company or a sale of substantially all of our assets, no approval from the holders of our Class A common stock is required with respect to the changes or exceptions to these policies. A decision to change, or make exceptions to the Policy Statement or adopt additional policies could disadvantage one group while advantaging the other.

***We could be required to use assets attributed to one group to pay liabilities attributed to the other group.***

Even though we attribute, for financial reporting purposes, all of our consolidated assets, liabilities, revenue, expenses and cash flows to either the EchoStar Group or the Hughes Retail Group and prepare separate attributed financial information for the Hughes Retail Group, we retain legal title to all of our assets and our capitalization will not limit our legal responsibility, or that of our subsidiaries, for the liabilities included in our financial statements and such attributed financial information. As such, the assets attributed to one group are potentially subject to the liabilities attributed to the other group, even if those liabilities arise from lawsuits, contracts or indebtedness that are attributed to such other group. Although the Policy Statement generally requires that all changes in the attribution of assets from one group to the other group will be made on a fair value basis as determined in accordance with certain guiding principles, these policies and our articles of incorporation generally do not prevent us from satisfying liabilities of one group with assets of the other group, and our creditors are not limited by our tracking stock capitalization from proceeding against any assets they could have proceeded against if we did not have a tracking stock capitalization.

Filed Nov 6, 2014.
Source: SEC EDGAR, the filing index for accession 0001104659-14-077192. Last ingested by Listed: Nov 3, 2026, 08:39 ET. No prices; not investment advice.