# EchoStar CORP: Form 10-Q for the period ended Sep 30, 2017 - Company: [EchoStar CORP](/companies/echo.md) (CIK 1415404) - Form: 10-Q - Filed: 2017-11-08 - Accepted by EDGAR: Nov 7, 2017, 19:54 ET - Period: 2017-09-30 - Accession: 0001415404-17-000050 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1415404/000141540417000050/sats09301710qdocument.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1415404/000141540417000050/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2017-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $52.1m | us-gaap:CostOfGoodsSold | | Cost of revenue | 9 months, 2017-01-01 to 2017-09-30 | $153.9m | us-gaap:CostOfGoodsSold | | Research and development | 3 months, 2017-07-01 to 2017-09-30 | $8.3m | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 9 months, 2017-01-01 to 2017-09-30 | $23.4m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 3 months, 2017-07-01 to 2017-09-30 | $91.0m | us-gaap:SellingGeneralAndAdministrativeExpense | | Selling, general and administrative | 9 months, 2017-01-01 to 2017-09-30 | $263.8m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2017-07-01 to 2017-09-30 | $56.4m | us-gaap:OperatingIncomeLoss | | Operating income | 9 months, 2017-01-01 to 2017-09-30 | $154.0m | us-gaap:OperatingIncomeLoss | | Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $55.6m | us-gaap:InterestExpense | | Interest expense | 9 months, 2017-01-01 to 2017-09-30 | $156.5m | us-gaap:InterestExpense | | Income tax | 3 months, 2017-07-01 to 2017-09-30 | $6.1m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 9 months, 2017-01-01 to 2017-09-30 | $9.1m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2017-07-01 to 2017-09-30 | $34.7m | us-gaap:NetIncomeLoss | | Net income | 9 months, 2017-01-01 to 2017-09-30 | $79.3m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.36 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.83 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.36 | us-gaap:EarningsPerShareBasic | | Basic EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.84 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 96,890,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 9 months, 2017-01-01 to 2017-09-30 | 96,626,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 9 months, 2017-01-01 to 2017-09-30 | $591.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $422.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2017-09-30 | $2.80bn | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2017-09-30 | $3.69bn | us-gaap:AssetsCurrent | | Total assets | at 2017-09-30 | $8.81bn | us-gaap:Assets | | Current liabilities | at 2017-09-30 | $428.0m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2017-09-30 | $4.91bn | us-gaap:Liabilities | | Long-term debt | at 2017-09-30 | $3.36bn | us-gaap:LongTermDebt | | Shareholders' equity | at 2017-09-30 | $3.88bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 5,576 characters. customers include lottery agencies, gas station operators and companies with multi-branch networks that rely on satellite or terrestrial networks for critical communication across wide geographies. Most of our enterprise customers have contracts with us for the services they purchase. Developments toward the launch of next-generation satellite systems including low-earth orbit (“LEO”) and geostationary systems could provide additional opportunities to drive the demand for our network equipment and services. The growth of our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies. We have an agreement with WorldVu Satellites Limited (“OneWeb”), a global LEO satellite service company, to provide certain equipment and services in connection with the ground network system for OneWeb’s LEO satellites. In November 2017, we began the production of OneWeb’s ground network system equipment and expect to begin delivering this equipment in mid-2018. We continue to expand our efforts to grow our consumer satellite services business outside of the U.S. In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil provides us Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term. That satellite was launched in March 2016 and we began delivering high-speed consumer satellite broadband services in Brazil in July 2016. In September 2015, we entered into satellite services agreements pursuant to which affiliates of Telesat Canada (“Telesat”) will provide to us the Ka-band capacity on a satellite to be located at the 63 degree west longitude orbital location (“63 West”) for a 15-year term. We expect the satellite to be launched in the second quarter of 2018 and to augment the capacity being provided by the EUTELSAT 65 West A and EchoStar XIX satellites. We launched our consumer satellite broadband service in Colombia in the third quarter of 2017 and we expect to launch similar services in various other Central and South American countries in 2018. As of September 30, 2017 and December 31, 2016, our Hughes segment had approximately 1,140,000 and 1,036,000 broadband subscribers, respectively. These broadband subscribers include customers that subscribe to our HughesNet broadband services through retail, wholesale and small/medium enterprise service channels. Gross subscriber additions increased by approximately 9,000 in the third quarter of 2017 compared to the second quarter of 2017 primarily due to an increase in new additions in our domestic retail channel as a result of the launch of the EchoStar XIX satellite, which was placed into service in March 2017. The increase was partially offset by a decrease in new subscribers additions in our international retail channel. Our average monthly subscriber churn percentage for the third quarter of 2017 decreased compared to the second quarter of 2017. As a result of higher gross subscriber additions and lower churn, total net subscriber additions were approximately 53,000 for the quarter ended September 30, 2017 compared to approximately 41,000 for the second quarter of 2017. Subscriber additions and churn include only subscribers through our retail and wholesale channels. As of September 30, 2017 and December 31, 2016, our Hughes segment had approximately $1.74 billion and $1.52 billion, respectively, of contracted revenue backlog. We define Hughes contracted revenue backlog as our expected future revenue under customer contracts that are non-cancelable, excluding agreements with customers in our consumer market. ### EchoStar Satellite Services Segment Our ESS segment is a global provider of satellite service operations and video delivery solutions. We operate our business using our owned and leased in-orbit satellites and related licenses. Revenue growth in our ESS segment depends largely on our ability to continuously make satellite capacity available for sale. We provide satellite services on a full-time and occasional-use basis primarily to DISH Network Corporation and its subsidiaries (“DISH Network”), Dish Mexico, S. de R.L. de C.V., a joint venture we entered into in 2008 (“Dish Mexico”), United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers. We also manage satellite operations for certain satellites owned by DISH Network. We depend on DISH Network for a significant portion of the revenue for our ESS segment, and we expect that DISH Network will continue to be the primary source of revenue for our ESS segment. Therefore, the results of operations of our ESS segment are linked to changes in DISH Network’s satellite capacity requirements. DISH Network’s capacity requirements have been driven by the addition of new channels and migration of programming to high-definition TV and video on demand services. The services that we provide to DISH Network are critical to its nationwide delivery of content to its customers across the U.S. While we expect to continue to provide satellite services to DISH Network, its satellite capacity requirements may change for a variety of reasons, including its ability to construct and launch its own satellites. Any termination or reduction in the services we provide to DISH Network may cause us to have unused capacity on our satellites and require that we aggressively pursue alternative sources of revenue for this business. ## Market risk As filed, 7,811 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, 2017, our cash, cash equivalents and current marketable investment securities had a fair value of $3.28 billion. Of this amount, a total of $3.14 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) debt instruments of the U.S. government and its agencies; and/or (d) 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 $3.14 billion as of September 30, 2017, a hypothetical 10% change in average interest rates during 2017 would not have had 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, 2017 of 1.9%. 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 2017 would have resulted in a decrease of approximately $5.6 million in annual interest income. ### Strategic Marketable Investment Securities As of September 30, 2017, we held current strategic investments in the publicly traded common stock of several companies with a fair value of $139.4 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, our strategic marketable investment securities portfolio is not significantly impacted by interest rate fluctuations as it currently consists solely of equity securities, the value of which 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 have resulted in a decrease of approximately $13.9 million in the fair value of these investments. ### Restricted cash and marketable investment securities and investments in unconsolidated entities ### Restricted cash and marketable investment securities As of September 30, 2017, we had $13.7 million of restricted cash and marketable investment securities invested in: (a) cash; (b) debt instruments of the U.S. government and its agencies; (c) 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; (d) mutual funds; and (e) instruments with similar risk, duration and credit quality characteristics to the commercial paper described above. Based on our investment portfolio as of September 30, 2017, a hypothetical 10% increase in average interest rates would not have had a material impact on the fair value of our restricted cash and marketable investment securities. ### Investments in unconsolidated entities As of September 30, 2017, we had $165.3 million of noncurrent equity instruments that we hold for strategic business purposes and account for under the cost or equity methods of accounting. The fair value of these instruments is not readily determinable. We periodically review these investments and estimate fair value when there are indications of impairment. A hypothetical adverse change equal to 10% of the carrying amount of these equity instruments would have resulted in a decrease of approximately $16.5 million in the value of these investments. Our ability to realize value from our strategic investments in companies that are privately held 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 Exchange Risk We generally conduct our business in U.S. dollars. Our international business is conducted in a variety of foreign currencies with our largest exposures being to the Brazilian real, the Indian rupee, and the British pound. This exposes us to fluctuations in foreign currency exchange rates. Transactions in foreign currencies are converted into U.S. dollars using exchange rates in effect on the dates of the transactions. 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 currency forward contracts, or take other measures, to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. As of September 30, 2017, we had $16.4 million of net foreign currency denominated receivables and payables outstanding, and foreign currency forward contracts with a notional value of $6.5 million in place to partially mitigate foreign currency exchange risk. The estimated fair values of the foreign exchange contracts were not material as of September 30, 2017. The impact of a hypothetical 10% adverse change in exchange rates on the carrying amount of the net assets and liabilities of our foreign subsidiaries would have been an estimated loss to the cumulative translation adjustment of $27.9 million as of September 30, 2017. ### Derivative Financial Instruments We generally do not use derivative financial instruments for speculative purposes and we generally do not apply hedge accounting treatment to our derivative financial instruments. We evaluate our derivative financial instruments from time to time but there can be no assurance that we will not enter into additional foreign currency forward contracts, or take other measures, in the future to mitigate our foreign exchange risk. ## Controls and procedures As filed, 1,587 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) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report such that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. ### Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the third quarter of 2017 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, 7,949 characters. Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2016 includes a detailed discussion of our risk factors. Except as provided below, for the nine months ended September 30, 2017, there were no material changes in our risk factors as previously disclosed. **The failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment could harm our results of operations.** Our Hughes segment has made substantial contractual commitments for satellite capacity based on our existing customer contracts and backlog. If our existing customer contracts were to be terminated prior to their respective expiration dates, we may be committed to maintaining excess satellite capacity for which we will have insufficient revenue to cover our costs, which would have a negative impact on our margins and results of operations. Alternatively, we may not have sufficient satellite capacity to meet demand. We generally only purchase satellite capacity based on existing contracts and bookings. Therefore, capacity for certain types of coverage in the future may not be readily available to us, and we may not be able to satisfy certain needs of our customers, which could result in a loss of possible new business and could negatively impact the margins for those services. Our ability to provide capacity for subscriber growth in our North American consumer market could also be adversely affected by regulations and/or legislation in the U.S. that enable or propose to enable the use of a portion of the frequency bands we currently use or in the future intend to use for satellite services, 5G mobile terrestrial services or other uses. These bands include the Ka-band, where we operate our broadband gateway earth stations, and other bands in which we may operate in the future. Such regulation or legislation could limit our ability to use the Ka-band and/or other bands, limit our flexibility to change the way in which we use the Ka-band and/or adversely impact our ability to use additional bands in the future. Other countries in which we currently, or may in the future, operate are also considering regulations that could similarly limit access to the Ka-band or other frequency bands. In addition, the fixed satellite services (“FSS”) industry has seen consolidation in the past decade, and today, the main FSS providers in North America and a number of smaller regional providers own and operate the current satellites that are available for our capacity needs. The failure of any of these FSS providers to replace existing satellite assets at the end of their useful lives or a downturn in their industry as a whole could reduce or interrupt the satellite capacity available to us. Our business and results of operations could be adversely affected if we are not able to renew our capacity leases at economically viable rates, if capacity is not available due to problems experienced by these FSS providers or if frequencies are not available to us. ### Our business is subject to risks of adverse government regulation. Our business is subject to varying degrees of regulation in the U.S. by the FCC, and other federal, state and local entities, and in foreign countries by similar entities, and internationally by the ITU. These regulations are subject to the administrative and political process and do change, for political and other reasons, from time to time. For example, the FCC recently adopted an order in its “Spectrum Frontiers” proceeding under which a portion of the Ka-band, in which we operate our broadband gateway earth stations, has been enabled for 5G mobile terrestrial services, which could limit our flexibility to change the way in which we use Ka-band in the future and/or limit our access to and ability to use the Ka-band and/or other bands in the future. Other countries in which we currently, or may in the future, operate are also considering regulations that could limit access to the Ka-band or other frequency bands. The FCC has also opened a proceeding on non-geostationary satellites, which may adversely impact our ability to use certain spectrum for user terminals. Moreover, a substantial number of foreign countries in which we have, or may in the future make, an investment, regulate, in varying degrees, the ownership of satellites and other telecommunication facilities/networks and foreign investment in telecommunications companies. Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing authorizations. Further material changes in law and regulatory requirements may also occur, and there can be no assurance that our business and the business of our subsidiaries and affiliates will not be adversely affected by future legislation, new regulation or deregulation. The failure to obtain or comply with the authorizations and regulations governing our operations could have a material adverse effect on our ability to generate revenue and our overall competitive position and could result in our suffering serious harm to our reputation. **Our business depends on regulatory authorizations issued by the FCC and state and foreign regulators that can expire, be revoked or modified, and applications for licenses and other authorizations that may not be granted.** Generally all satellite, earth stations and other licenses granted by the FCC and most other countries are subject to expiration unless renewed by the regulatory agency. Our satellite licenses are currently set to expire at various times. In addition, we occasionally receive special temporary authorizations that are granted for limited periods of time (e.g., 180 days or less) and subject to possible renewal. Generally, our licenses and special temporary authorizations have been renewed on a routine basis, but there can be no assurance that this will continue. In addition, we must obtain new licenses from the FCC and other countries’ regulators for the operation of new satellites that we may build and/or acquire. There can be no assurance that the FCC or other regulators will continue granting applications for new licenses or for the renewal of existing ones. If the FCC or other regulators were to cancel, revoke, suspend, or fail to renew any of our licenses or authorizations, or fail to grant our applications for FCC or other licenses, it could have a material adverse effect on our business, financial condition and results of operations. Specifically, loss of a frequency authorization or limitations on our ability to use the frequencies we currently use and/or intend to use in the future would reduce the amount of spectrum available to us, potentially reducing the amount of services we provide to our customers. The significance of such a loss of authorizations would vary based upon, among other things, the orbital location, the frequency band and the availability of replacement spectrum. In addition, the legislative and executive branches of the U.S. government and foreign governments often consider legislation and regulatory requirements that could affect us, as could the actions that the FCC and foreign regulatory bodies take. We cannot predict the outcomes of these legislative or regulatory proceedings or their effect on our business. In addition, third parties have or may oppose some of our license applications and pending and future requests for extensions, modifications, waivers and approvals of our licenses. Even if we have fully complied with all of the required reporting, filing and other requirements in connection with our authorizations, it is possible a regulator could decline to grant certain of our applications or requests for authority, or could revoke, terminate, condition or decline to modify, extend or renew certain of our authorizations or licenses. Filed Nov 8, 2017. Source: SEC EDGAR, the filing index for accession 0001415404-17-000050. Last ingested by Listed: Nov 3, 2026, 08:39 ET. No prices; not investment advice.