filings.toolsItem 6. SELECTED FINANCIAL DATA
80K characters. Original on sec.gov · Markdown
Item 6. SELECTED FINANCIAL DATA
The accompanying consolidated financial statements for 2011 have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Certain prior period amounts have been reclassified to conform to the current period presentation.
On January 1, 2008, the Spin-off was completed. Within this report, we have included both “combined” financial statements prior to the Spin-off and “consolidated” financial statements following the Spin-off, as discussed below. Throughout the remainder of this report, we refer to both as “consolidated.” On June 8, 2011, Hughes became a new segment as a result of the Hughes Acquisition and the results of operations of Hughes Communications are included in this report after the acquisition date. See Note 13 in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further discussion of the Hughes Acquisition.
Principles of Consolidation. We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we are the primary beneficiary. Non-majority owned investments are accounted for using the equity method when we have the ability to significantly influence the operating decisions of the investee. When we do not have the ability to significantly influence the operating decisions of an investee, the cost method is used. All significant intercompany accounts and transactions have been eliminated in consolidation.
Prior to Spin-off - Principles of Combination. The selected financial data in this Annual Report on Form 10-K for 2007 are presented on a combined basis and principally represent the EchoStar Technologies segment business and certain other net assets. The assets and liabilities presented have been reflected on a historical basis, as prior to the Spin-off such assets and liabilities were 100% owned by DISH Network. Our historical selected financial data does not include the satellites, digital broadcast operations assets, certain real estate and other assets and related liabilities that were contributed to us by DISH Network in the Spin-off. Also, the selected financial data for 2007 does not include all of the actual expenses that would have been incurred had we been a stand-alone entity during the periods presented and do not reflect our combined results of operations, financial position and cash flows had we been a stand-alone company during that year. All significant intercompany transactions and accounts have been eliminated.
This data should be read in conjunction with our Consolidated Financial Statements and related Notes thereto for the three years ended December 31, 2011, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.
The following tables present selected information relating to our consolidated financial condition and results of operations for the past five years.
| For the Years Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statements of Operations Data: | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Revenue | $ | 2,761,431 | $ | 2,350,369 | $ | 1,903,559 | $ | 2,150,520 | $ | 1,544,065 | ||||||
| Total costs and expenses | 2,680,593 | 2,208,044 | 1,898,667 | 2,791,114 | 1,630,444 | |||||||||||
| Operating income (loss) | $ | 80,838 | $ | 142,325 | $ | 4,892 | $ | (640,594 | ) | $ | (86,379 | ) | ||||
| Net income (loss) attributable to EchoStar | $ | 3,639 | $ | 204,358 | $ | 364,704 | $ | (958,188 | ) | $ | (85,300 | ) | ||||
| Basic and diluted net income (loss) attributable to EchoStar | $ | 3,639 | $ | 204,358 | $ | 364,704 | $ | (958,188 | ) | $ | (85,300 | ) | ||||
| Basic weighted-average common shares outstanding | 86,223 | 85,084 | 85,765 | 89,324 | 89,712 | (1) | ||||||||||
| Diluted weighted-average common shares outstanding | 87,089 | 85,203 | 86,059 | 89,324 | 89,712 | (1) | ||||||||||
| Basic net income (loss) per share attributable to EchoStar | $ | 0.04 | $ | 2.40 | $ | 4.25 | $ | (10.73 | ) | $ | (0.95 | ) | ||||
| Diluted net income (loss) per share attributable to EchoStar | $ | 0.04 | $ | 2.40 | $ | 4.24 | $ | (10.73 | ) | $ | (0.95 | ) |
(1) For the year ended December 31, 2007, basic and diluted earnings per share are computed using our shares outstanding as of January 1, 2008.
| As of December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance Sheet Data: | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||
| (In thousands) | ||||||||||||||||
| Cash, cash equivalents and current marketable securities | $ | 1,696,442 | $ | 1,130,900 | $ | 829,162 | $ | 828,661 | $ | 532,267 | ||||||
| Total assets | $ | 6,543,737 | $ | 3,842,020 | $ | 3,468,068 | $ | 2,889,799 | $ | 1,260,910 | ||||||
| Total debt and capital lease obligations | $ | 2,534,262 | $ | 412,885 | $ | 446,369 | $ | 346,439 | $ | 3,709 | ||||||
| Total stockholders’ equity (deficit) | $ | 3,051,626 | $ | 3,013,190 | $ | 2,664,850 | $ | 2,211,586 | $ | 1,207,518 |
| For the Years Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flow Data: | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||
| (In thousands) | ||||||||||||||||
| Net cash flows from: | ||||||||||||||||
| Operating activities | $ | 447,018 | $ | 404,015 | $ | 196,276 | $ | 118,048 | $ | (88,109 | ) | |||||
| Investing activities | $ | (1,888,045 | ) | $ | (238,558 | ) | $ | (114,278 | ) | $ | (569,742 | ) | $ | (500,767 | ) | |
| Financing activities | $ | 1,913,547 | $ | (46,973 | ) | $ | (83,135 | ) | $ | 435,079 | $ | 600,337 |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the audited consolidated financial statements and notes to our financial statements included elsewhere in this annual report. This management’s discussion and analysis is intended to help provide an understanding of our financial condition, changes in financial condition and results of our operations and contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in this report, including under the caption “Item 1A. Risk Factors” in this Annual Report on Form 10-K.
EXECUTIVE SUMMARY
EchoStar Corporation is a holding company, whose subsidiaries operate three primary segments: the EchoStar Technologies segment, the EchoStar Satellite Services segment, and the Hughes segment.
EchoStar Technologies Segment
Our EchoStar Technologies segment designs, develops and distributes digital set-top boxes and related products and technology, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers, telecommunication and cable companies and, with respect to Slingboxes, directly to consumers via retail outlets. Slingbox “placeshifting” technology allows consumers to watch and control their home digital video and audio content via a broadband Internet connection. Most of our digital set-top boxes are sold to DISH Network, but we also sell a significant number of digital set-top boxes to Bell TV in Canada, Dish Mexico in Mexico and other international customers.
Our EchoStar Technologies segment also provides digital broadcast operations including satellite uplinking/downlinking, transmission services, signal processing, conditional access management and other services that are provided primarily to DISH Network.
We believe opportunities exist to expand our business by selling equipment and services in both the U.S. and international markets. As a result of our extensive experience with digital set-top boxes and digital broadcast operations, we are able to provide end-to-end pay-TV delivery systems incorporating our satellite and terrestrial backhaul capacity, customized digital set-top boxes and related components, and network design and management.
Dependence on DISH Network. We depend on DISH Network for a substantial portion of the revenue for our EchoStar Technologies segment and we expect that for the foreseeable future DISH Network will continue to be the primary source of revenue for our EchoStar Technologies segment. Therefore, our results of operations are, and will for the foreseeable future be, closely linked to the performance of DISH Network’s pay-TV service. Effective January 1, 2012, we entered into a new receiver agreement with DISH Network pursuant to which we are obligated to sell digital set-top boxes and related products to DISH Network until December 31, 2014. However, DISH Network is under no obligation to purchase our digital set-top boxes or related products before or after this date. The receiver agreement allows DISH Network to purchase digital set-top boxes, related accessories and other equipment from us either: (i) at a cost (decreasing as we reduce cost and increasing as costs increase) plus a dollar mark-up which will depend upon the cost of the product subject to a collar on our mark-up; or (ii) at cost plus a fixed margin, which will depend on the nature of the equipment purchased. Under the receiver agreement, our margins will be increased if we are able to reduce the costs of our digital set-top boxes and our margins will be impaired if these costs increase. In addition, while we expect to sell equipment to other customers, the number of potential new customers for our EchoStar Technologies segment is small and may be limited by our common ownership and related management with DISH Network, and our current customer concentration is likely to continue for the foreseeable future.
During the year ended December 31, 2011, DISH Network purchased fewer digital set-top boxes and related components from us. 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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
The impact to us of any decreases in DISH Network subscriber growth may be offset in the near term by an increase in sales to DISH Network resulting from the upgrade of DISH Network subscribers to advanced products such as HD receivers and HD DVRs, including our recently introduced whole-home HD DVR, as well as by the upgrade of DISH Network digital set-top boxes to new technologies such as MPEG-4 digital compression technology. However, there can be no assurance that any of these factors will mitigate any decreases in sales to DISH Network. In addition, although we expect DISH Network to continue to purchase products and services from us, there can be no assurance that these purchases will continue in the future.
We may experience significant pressure on margins we earn on the sale of digital set-top boxes and other equipment, including on sales to DISH Network. This pressure may be due to economic conditions, advancements in the technology and functionality of digital set-top boxes and other equipment. The margins we earn on sales are determined largely through periodic negotiations that could result in pricing reflecting, among other things, the digital set-top boxes and other equipment that best meet our customers’ current sales and marketing priorities, the product and service alternatives available from other equipment suppliers, and our ability to respond to customer requirements and to differentiate ourselves from other equipment suppliers on bases other than pricing.
Our future success may also depend on the extent to which prospective customers that have been competitors of DISH Network are willing to purchase products and services from us. Many of these customers may continue to view us as a competitor as a result of common ownership and related management with DISH Network. If we do not develop relationships with new customers, we may not be able to expand our customer base and our ability to increase or maintain our revenue will be impacted.
Additional Challenges for our EchoStar Technologies Segment. We believe that our best opportunities for developing potential new customers for our EchoStar Technologies segment over the near term lie in international markets, and we therefore expect our performance in international markets to be a significant factor in determining whether we will be able to generate revenue and income growth in future periods. However, there can be no assurance that we will be able to sustain or grow our international business. In particular, we have noticed an increase in new market entrants that offer low cost set-top boxes, including set-top boxes that are modeled after our products or products of our principal competitors. The entry of these new competitors may result in pricing pressure in international markets that we hope to enter. If market prices in international markets are substantially reduced by such new entrants, it may be difficult for us to make profitable sales in international markets.
Furthermore, if we do not continue to distinguish our products through distinctive, technologically advanced features and design, as well as continue to build and strengthen our brand recognition, our business could be harmed as we may not be able to effectively compete on price alone in both domestic and international markets against low cost competitors. Our ability to compete in the digital set-top box industry will also depend heavily on our ability to successfully bring advanced technologies, including Internet delivery of video content, to market to keep pace with our competitors. If we do not otherwise compete effectively, demand for our products could decline, our gross margins could decrease, we could lose market share, our revenues and earnings may decline and our growth prospects would be diminished.
Sustained economic weakness and volatile credit markets may cause certain suppliers that we rely on to cease operations, which, in turn, may cause us to suffer disruptions to our supply chain or incur higher production costs. Our ability to sustain or increase profitability will also depend in large part on our ability to control or reduce our costs of producing digital set-top boxes. The market for our digital set-top boxes, like other electronic products, has been characterized by regular reductions in selling prices and production costs. Therefore, we will likely be required to reduce production costs to maintain the margins we earn on digital set-top boxes and the profitability of our EchoStar Technologies segment. However, our ability to reduce production costs may be limited by, among other things, economic conditions and a shortage of available parts and may lead to inflated pricing.
EchoStar Satellite Services Segment
Our EchoStar Satellite Services segment uses ten of our owned and leased in-orbit satellites and related FCC licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, U.S. government service providers, state agencies, Internet service providers, broadcast news
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
organizations, programmers and private enterprise customers. Furthermore, we continue to pursue expanding our business offerings by providing value added services such as telemetry, tracking and control services to third parties. However, there can be no assurance that we will be able to effectively compete against our competitors due to their significant resources and operating history.
As of December 31, 2011 and 2010, our EchoStar Satellite Services segment had contracted revenue backlog attributable to satellites currently in orbit of approximately $1.285 billion and $1.054 billion, respectively, and contracted backlog attributable to satellites under construction of $621 million and $1.1 billion, respectively. Of these amounts, we expect approximately $230 million to be recognized in 2012.
Dependence on DISH Network. We depend on DISH Network for a substantial portion of the revenue for our EchoStar Satellite Services segment. Therefore, our results of operations are and will for the foreseeable future be closely linked to the performance of DISH Network’s pay-TV service.
While we expect to continue to provide satellite services to DISH Network for the foreseeable future, its satellite capacity requirements may change for a variety of reasons, including the launch of its own additional satellites. Any termination or reduction in the services we provide to DISH Network would increase excess capacity on our satellites and require that we aggressively pursue alternative sources of revenue for this segment. Possible adverse effects on the EchoStar Technologies segment from DISH Network’s possible decline in gross subscriber additions are not expected to materially impact the revenue generated within the EchoStar Satellite Services segment in the near term.
In addition, because the number of potential new customers for our EchoStar Satellite Services segment is small, our current customer concentration is likely to continue for the foreseeable future. Our future success may also depend on the extent to which prospective customers that have been competitors of DISH Network are willing to purchase services from us. Many of these customers may continue to view us as a competitor given the common ownership and management team we continue to share with DISH Network.
Additional Challenges for our EchoStar Satellite Services Segment. Our ability to expand revenues in the EchoStar Satellite Services segment will likely require that we displace incumbent suppliers that generally have well established business models and often benefit from long-term contracts with their customers. As a result, to grow our EchoStar Satellite Services segment we may need to develop or otherwise acquire access to new satellite-delivered services so that we may offer differentiated services to prospective customers. However, there can be no assurance that we would be able to develop or otherwise acquire access to such differentiated services or develop the sales and marketing expertise necessary to sell such services profitably.
In addition, as our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity, which may require us to seek additional financing. However, there can be no assurance that such financing will be available to fund any such replacement alternatives on terms that would be attractive to us or at all.
Hughes Segment
On June 8, 2011, we completed the Hughes Acquisition, pursuant to the Hughes Agreement by and between us, certain of our subsidiaries, including EchoStar Satellite Services L.L.C., and Hughes Communications, Inc.. Pursuant to the Hughes Agreement, each issued and outstanding share of common stock and vested stock option of Hughes Communications, Inc. was converted into the right to receive $60.70 (minus any applicable exercise price) in cash and substantially all of the outstanding debt of Hughes Communications, Inc. was repaid. In addition, each share of unvested restricted stock and unvested stock option of Hughes Communications, Inc. was converted into the right to receive $60.70 (minus any applicable exercise price) in cash on the vesting date of the stock award. The funding of the Hughes Acquisition was supported by the issuance by HSS of $1.1 billion of 6 1/2% senior secured notes due 2019 and $900 million of 7 5/8% senior notes due 2021 (the “Notes”). See Note 13 in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further discussion. In addition to the debt securities issued, we contributed cash and marketable investment securities to, and forgave certain net intercompany accounts payable of, HSS, totaling $609 million. For information about the risks related to the Hughes Acquisition, please see Item 1A. “Risk Factors.”
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Our Hughes segment provides satellite broadband Internet access to North American consumers, which we refer to as the consumer market, and broadband network services and systems to the domestic and international enterprise markets. Our Hughes segment also provides managed services to large enterprises and networking systems solutions to customers for mobile satellite and wireless backhaul systems. We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through the usage of advanced spectrally efficient modulation and coding methodologies, such as DVB-S2 and proprietary software web acceleration and compression techniques, we continue to improve the efficiency of our networks. In addition, 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.
In June 2009, Hughes Communications, Inc. entered into a contract for construction of EchoStar XVII/Jupiter, our next-generation, geostationary high throughput satellite. EchoStar XVII/Jupiter will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the HughesNet consumer broadband Internet service in North America. We anticipate launching EchoStar XVII/Jupiter in the summer of 2012.
As of December 31, 2011, we had approximately 626,000 customers that subscribe to our Hughes segment’s consumer and small/medium enterprise service. In addition, as of December 31, 2011, our Hughes segment had total revenue backlog, which we define as our expected future revenue under customer contracts that are non-cancelable and excluding agreements with our customers in our consumer market, of approximately $1.036 billion. Of this amount, we expect approximately $370 million to be recognized in 2012.
Additional Challenges for our Hughes Segment. Our ability to continue to grow our consumer revenue will depend on our success in adding new subscribers on our satellite network and successful launch and deployment of our EchoStar XVII/Jupiter satellite as planned. We may need to adjust our service offerings in response to the offerings of our competitors, including ViaSat Communications, following its commencement of service on the ViaSat-1 satellite which launched in October 2011. In addition, following the commencement of service on ViaSat-1 and prior to the commencement of service on EchoStar XVII/Jupiter, ViaSat Communications may be in a better position to offer faster connection speeds more economically than us, which could adversely impact our ability to add new subscribers and our consumer revenues.
An additional focus in this business is our ability to grow our revenue in the enterprise business, both domestically and internationally. The growth of the enterprise business is also impacted by global economic conditions.
International DTH Platforms
During 2008, we entered into a joint venture with Dish Mexico. Pursuant to these arrangements, we provide certain broadcast services and satellite capacity and sell hardware such as digital set-top boxes and related equipment to Dish Mexico. We sold $63 million, $81 million and $36 million of digital set-top boxes and related components and $9 million, $9 million and $8 million of satellite services to Dish Mexico during the years ended December 31, 2011, 2010 and 2009, respectively. We also sold $8 million and less than $1 million of uplink services to Dish Mexico during the years ended December 31, 2011 and 2010. We did not have any uplink sales to Dish Mexico during the year ended December 31, 2009.
New Business Opportunities
We are exploring opportunities to selectively pursue partnerships, joint ventures and strategic acquisition opportunities that we believe may allow us to increase our existing market share, expand into new markets, broaden our portfolio of products and intellectual property, and strengthen our relationships with our customers.
Move Networks Acquisition
On December 31, 2010, we acquired certain assets of Move Networks, Inc. for $45 million. These assets include patented technology that enables the adaptive delivery of video content via the Internet which will allow us to
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
expand our portfolio of advanced technologies serving cable, satellite, telecommunications companies and IPTV video providers.
Adverse Economic Conditions
Our ability to grow or maintain our business may be adversely affected by weak global and domestic economic conditions, including wavering consumer confidence and constraints on discretionary purchasing, unemployment, tight credit markets, declines in global and domestic stock markets, falling home prices and other factors that may adversely affect the markets in which we operate. Our ability to increase our income or to generate additional revenues will depend in part on our ability to organically grow our businesses, identify and successfully exploit opportunities to acquire other businesses or technologies, and enter into strategic partnerships. These activities may require significant additional capital that may not be available on terms that would be attractive to us or at all. In particular, volatile credit markets, which have significantly impacted the availability and cost of financing, specifically in the leveraged finance markets, may significantly constrain our ability to obtain financing to support our growth initiatives. These developments in the credit markets may increase our cost of financing and impair our liquidity position. In addition, these developments may cause us to defer or abandon business strategies and transactions that we would otherwise pursue if financing were available on acceptable terms.
Furthermore, unfavorable events in the economy, including deterioration in the credit and equity markets could cause consumer demand for pay-TV services and consequently sales of our digital set-top boxes to DISH Network, Bell TV, Dish Mexico and other international customers to decline materially because consumers may delay purchasing decisions or reduce or reallocate their discretionary spending, which would also have an adverse effect on our Hughes segment.
Basis of Presentation
The following discussion and analysis of our consolidated results of operations, financial condition and liquidity are presented on a historical basis. Our results of operations for the year ended December 31, 2011 also include those of Hughes Communications after June 8, 2011, the date of completion of the Hughes Acquisition. Therefore, our results of operations for the year ended December 31, 2011 are not comparable to our results of operations for the years ended December 31, 2010 and 2009.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Equipment revenue — DISH Network. “Equipment revenue — DISH Network” primarily includes sales of digital set-top boxes and related components to DISH Network, including Slingboxes and related hardware products.
Equipment revenue - other. “Equipment revenue - other” primarily includes sales of digital set-top boxes and related components to Bell TV, Dish Mexico and other domestic and international customers, including sales of Slingboxes and related hardware products. “Equipment revenue - other” also includes the sale of broadband equipment and networks to customers in our enterprise and consumer markets.
Services and other revenue — DISH Network****. “Services and other revenue — DISH Network” primarily includes revenue associated with satellite and transponder leasing, satellite uplinking/downlinking, signal processing, conditional access management, telemetry, tracking and control, professional services, facilities rental revenue and other services provided to DISH Network.
Services and other revenue - other. “Services and other revenue - other” primarily includes the sale of enterprise and consumer broadband services, as well as maintenance and other contracted services. “Services and other revenue - other” also includes revenue associated with satellite and transponder leasing, satellite uplinking/downlinking and other services provided to customers other than DISH Network.
Cost of sales — equipment. “Cost of sales — equipment” principally includes costs associated with digital set-top boxes and related components sold to DISH Network, Bell TV, Dish Mexico and other domestic and international customers, including costs associated with Slingboxes and related hardware products. “Cost of sales — equipment”
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
also includes the cost of broadband equipment and networks sold to customers in our enterprise and consumer markets.
Cost of sales - services and other. “Cost of sales — services and other” primarily includes the cost of broadband services provided to our enterprise and consumer customers, as well the cost of providing maintenance and other contracted services. “Cost of sales — services and other” also includes costs associated with satellite and transponder leasing, satellite uplinking/downlinking, signal processing, conditional access management, telemetry, tracking and control, professional services, facilities rental revenue and other services.
Research and development expenses. “Research and development expenses” consist primarily of costs associated with the design and development of products to support future growth by reducing costs and providing new technology and innovations to our customers.
Selling, general and administrative expenses. “Selling, general and administrative expenses” primarily includes selling and marketing costs and employee-related costs associated with administrative services (i.e., information systems, human resources and other services), including non-cash, stock-based compensation expense. It also includes professional fees (i.e., legal, information systems and accounting services) and other items associated with facilities and administrative services provided by DISH Network and other third parties.
Impairment of long-lived asset. “Impairment of long-lived asset” consists of an impairment of our CMBStar satellite. See Note 6 in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
Interest income. “Interest income” primarily includes interest earned on our cash, cash equivalents and marketable investment securities, including 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 capital lease obligations (net of capitalized interest), and amortization of debt issuance costs.
Unrealized and realized gains (losses) on marketable investment securities and other investments. “Unrealized and realized gains (losses) on marketable investment securities and other investments” consists primarily of gains and losses realized on the sale or exchange of investments and “other-than-temporary” impairments of marketable and other investment securities.
Unrealized gains (losses) on investments accounted for at fair value, net. “Unrealized gains (losses) on investments accounted for at fair value, net” consists of unrealized gains and losses from changes in fair value of marketable and other strategic investments accounted for at fair value.
Other, net. The primary components of “Other, net” are transaction costs related to acquisitions and equity in earnings and losses of our affiliates.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as “Net income (loss) attributable to EchoStar” plus “Interest expense, net of amounts capitalized” net of “Interest income,” “Income taxes” and “Depreciation and amortization.” EBITDA is not a measure determined in accordance with GAAP. This “non-GAAP measure” is reconciled to “Net income (loss) attributable to EchoStar” in our discussion of “Results of Operations” below. EBITDA should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP. Conceptually, EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with 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 liquidity and the underlying operating performance of our business. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industries.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
RESULTS OF OPERATIONS
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010.
| For the Years Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | Variance | |||||||||||
| Statements of Operations Data | 2011 | 2010 | Amount | % | ||||||||
| (In thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Equipment revenue - DISH Network | $ | 1,158,293 | $ | 1,470,173 | $ | (311,880 | ) | (21.2 | ) | |||
| Equipment revenue - other | 513,504 | 347,765 | 165,739 | 47.7 | ||||||||
| Services and other revenue - DISH Network | 496,636 | 468,399 | 28,237 | 6.0 | ||||||||
| Services and other revenue - other | 592,998 | 64,032 | 528,966 | * | ||||||||
| Total revenue | 2,761,431 | 2,350,369 | 411,062 | 17.5 | ||||||||
| Costs and Expenses: | ||||||||||||
| Cost of sales - equipment | 1,414,791 | 1,553,129 | (138,338 | ) | (8.9 | ) | ||||||
| % of Total equipment revenue | 84.6 | % | 85.4 | % | ||||||||
| Cost of sales - services and other | 492,702 | 236,356 | 256,346 | * | ||||||||
| % of Total services and other revenue | 45.2 | % | 44.4 | % | ||||||||
| Research and development expenses | 50,966 | 46,093 | 4,873 | 10.6 | ||||||||
| % of Total revenue | 1.8 | % | 2.0 | % | ||||||||
| Selling, general and administrative expenses | 303,276 | 143,555 | 159,721 | * | ||||||||
| % of Total revenue | 11.0 | % | 6.1 | % | ||||||||
| Depreciation and amortization | 385,894 | 228,911 | 156,983 | 68.6 | ||||||||
| Impairment of long-lived asset | 32,964 | — | 32,964 | * | ||||||||
| Total costs and expenses | 2,680,593 | 2,208,044 | 472,549 | 21.4 | ||||||||
| Operating income (loss) | 80,838 | 142,325 | (61,487 | ) | (43.2 | ) | ||||||
| Other Income (Expense): | ||||||||||||
| Interest income | 10,821 | 14,472 | (3,651 | ) | (25.2 | ) | ||||||
| Interest expense, net of amounts capitalized | (82,593 | ) | (14,560 | ) | (68,033 | ) | * | |||||
| Unrealized and realized gains (losses) on marketable investment securities and other investments | 13,666 | 2,923 | 10,743 | * | ||||||||
| Unrealized gains (losses) on investments accounted for at fair value, net | 15,871 | 144,473 | (128,602 | ) | (89.0 | ) | ||||||
| Other, net | (12,828 | ) | (860 | ) | (11,968 | ) | * | |||||
| Total other income (expense) | (55,063 | ) | 146,448 | (201,511 | ) | * | ||||||
| Income (loss) before income taxes | 25,775 | 288,773 | (262,998 | ) | (91.1 | ) | ||||||
| Income tax (provision) benefit, net | (21,501 | ) | (84,415 | ) | 62,914 | 74.5 | ||||||
| Effective tax rate | 83.4 | % | 29.2 | % | ||||||||
| Net income (loss) | 4,274 | 204,358 | (200,084 | ) | (97.9 | ) | ||||||
| Less: Net income (loss) attributable to noncontrolling interests | 635 | — | 635 | * | ||||||||
| Net income (loss) attributable to EchoStar | $ | 3,639 | $ | 204,358 | $ | (200,719 | ) | (98.2 | ) | |||
| Other Data: | ||||||||||||
| EBITDA | $ | 482,806 | $ | 517,772 | $ | (34,966 | ) | (6.8 | ) |
- Percentage is not meaningful.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Equipment revenue — DISH Network. “Equipment revenue — DISH Network” totaled $1.158 billion during the year ended December 31, 2011, a decrease of $312 million or 21.2% 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 towards higher end models like HD DVRs. Pursuant to the receiver agreement in effect during 2011, 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.
Effective January 1, 2012, we entered into a new receiver agreement with DISH Network pursuant to which we are obligated to sell digital set-top boxes and related products to DISH Network until December 31, 2014 (the “2012 Receiver Agreement”). However, DISH Network is under no obligation to purchase our digital set-top boxes or related products before or after this date. The 2012 Receiver Agreement allows DISH Network to purchase digital set-top boxes, related accessories and other equipment from us either: (i) at a cost (decreasing as we reduce cost and increasing as costs increase) plus a dollar mark-up which will depend upon the cost of the product subject to a collar on our mark-up; or (ii) at cost plus a fixed margin, which will depend on the nature of the equipment purchased. Under the 2012 Receiver Agreement our margins will be increased if we are able to reduce the costs of our digital set-top boxes and our margins will be impaired if these costs increase. At the commencement of the 2012 Receiver Agreement, the aggregate pricing for the digital set-top boxes, related accessories, and other equipment sold under the 2012 Receiver Agreement was substantially the same as the aggregate pricing for the products and equipment sold under the prior receiver agreement at the time of its expiration. There can be no assurance that, over the long term, aggregate pricing under the 2012 Receiver Agreement will be substantially the same as it was under the prior receiver agreement.
Equipment revenue - other. “Equipment revenue - other” totaled $514 million during the year ended December 31, 2011, an increase of $166 million or 47.7% compared to the same period in 2010. This increase was primarily related to revenue of $161 million contributed by our Hughes segment from the sale of broadband equipment and networks to customers in our enterprise and consumer markets.
Services and other revenue - other. “Services and other revenue - other” totaled $593 million during the year ended December 31, 2011, an increase of $529 million compared to the same period in 2010. This increase was primarily related to services revenue of $513 million contributed by our Hughes segment from the sale of broadband services to customers in our enterprise and consumer markets, and customers’ maintenance and other contracted services.
Cost of sales — equipment****. “Cost of sales — equipment” totaled $1.415 billion during the year ended December 31, 2011, a decrease of $138 million or 8.9% 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, partially offset by a $128 million increase in costs associated with the sale of broadband equipment and networks sold to customers in our enterprise and consumer markets from our Hughes segment. “Cost of sales — equipment” represented 84.6% and 85.4% of total equipment revenue for the year ended December 31, 2011 and 2010, respectively. The improvement in the expense to revenue ratio principally resulted from the decrease in sales of set-top boxes and related components to DISH Network which have lower margins as sales are at cost plus a fixed margin.
Cost of sales — services and other****. “Cost of sales — services and other” totaled $493 million during the year ended December 31, 2011, an increase of $256 million compared to the same period in 2010. This change primarily related to costs of $236 million associated with the sale of broadband services provided to customers in our enterprise and consumer markets, and customers’ maintenance and other contracted services from our Hughes segment. “Cost of sales — services and other” represented 45.2% and 44.4% of total services and other revenue for the year ended December 31, 2011 and 2010, respectively. The increase in the expense to revenue ratio principally resulted from an increase in revenue and expenses from our Hughes segment.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $303 million during the year ended December 31, 2011, an increase of $160 million compared to the same period in 2010. This change primarily resulted from an increase in marketing and advertising expenses and other general and administrative expenses, of which $132 million was associated with our Hughes segment. “Selling, general and administrative expenses” represented 11.0% and 6.1% of total revenue for the year ended December 31, 2011 and 2010, respectively. The increase in the expense to revenue ratio principally resulted from an increase in revenue and expenses from our Hughes segment as well as a decrease in equipment revenue from DISH Network.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Depreciation and amortization. “Depreciation and amortization” expense totaled $386 million during the year ended December 31, 2011, an increase of $157 million or 68.6% compared to the same period in 2010. The increase was primarily attributable to additional amortization and depreciation expense of $166 million from our Hughes segment.
Impairment of long-lived asset. “Impairment of long-lived asset” of $33 million during the year ended December 31, 2011 resulted from impairment of our CMBStar satellite. See Note 6 in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further discussion.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $83 million during the year ended December 31, 2011, an increase of $68 million compared to the same period in 2010. This change primarily resulted from an increase in interest expense related to the issuance of the Notes during the second quarter of 2011, partially offset by an increase in capitalized interest associated with the construction of our satellites.
Unrealized gains (losses) on investments accounted for at fair value, net. “Unrealized gains (losses) on investments accounted for at fair value, net” for the year ended December 31, 2011 was a net gain of $16 million, a $129 million decrease compared to the same period in 2010. This decrease was attributable to investments accounted for under the fair value method. See Note 4 under “Investments in TerreStar” in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further discussion.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $483 million during the year ended December 31, 2011, a decrease of $35 million or 6.8% compared to the same period in 2010. The following table reconciles EBITDA to the accompanying financial statements.
| For the Years Ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31, | |||||||
| 2011 | 2010 | ||||||
| (In thousands) | |||||||
| EBITDA | $ | 482,806 | $ | 517,772 | |||
| Interest income (expense), net | (71,772 | ) | (88 | ) | |||
| Income tax (provision) benefit, net | (21,501 | ) | (84,415 | ) | |||
| Depreciation and amortization | (385,894 | ) | (228,911 | ) | |||
| Net income (loss) attributable to EchoStar | $ | 3,639 | $ | 204,358 |
Income tax (provision) benefit, net. The income tax provision totaled $22 million during the year ended December 31, 2011, a decrease of $63 million compared to the same period in 2010. This change resulted from a decrease in “Income (loss) before income taxes” offset by an increase in our effective tax rate. Our effective tax rate for the year ended December 31, 2011 was impacted by the changes in our valuation allowance for deferred taxes that are capital in nature.
Net income (loss) attributable to EchoStar. Our net income attributable to EchoStar was $4 million during the year ended December 31, 2011, a decrease of $201 million compared to the same period in 2010. This change was primarily attributable to the changes in revenue and expenses discussed above.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009.
| For the Years Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | Variance | |||||||||||
| Statements of Operations Data | 2010 | 2009 | Amount | % | ||||||||
| (In thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Equipment revenue - DISH Network | $ | 1,470,173 | $ | 1,174,763 | $ | 295,410 | 25.1 | |||||
| Equipment revenue - other | 347,765 | 302,787 | 44,978 | 14.9 | ||||||||
| Services and other revenue - DISH Network | 468,399 | 373,226 | 95,173 | 25.5 | ||||||||
| Services and other revenue - other | 64,032 | 52,783 | 11,249 | 21.3 | ||||||||
| Total revenue | 2,350,369 | 1,903,559 | 446,810 | 23.5 | ||||||||
| Costs and Expenses: | ||||||||||||
| Cost of sales - equipment | 1,553,129 | 1,267,172 | 285,957 | 22.6 | ||||||||
| % of Total equipment revenue | 85.4 | % | 85.8 | % | ||||||||
| Cost of sales - services and other | 236,356 | 203,123 | 33,233 | 16.4 | ||||||||
| % of Total services and other revenue | 44.4 | % | 47.7 | % | ||||||||
| Research and development expenses | 46,093 | 44,009 | 2,084 | 4.7 | ||||||||
| % of Total revenue | 2.0 | % | 2.3 | % | ||||||||
| Selling, general and administrative expenses | 143,555 | 140,234 | 3,321 | 2.4 | ||||||||
| % of Total revenue | 6.1 | % | 7.4 | % | ||||||||
| Depreciation and amortization | 228,911 | 244,129 | (15,218 | ) | (6.2 | ) | ||||||
| Total costs and expenses | 2,208,044 | 1,898,667 | 309,377 | 16.3 | ||||||||
| Operating income (loss) | 142,325 | 4,892 | 137,433 | * | ||||||||
| Other Income (Expense): | ||||||||||||
| Interest income | 14,472 | 26,441 | (11,969 | ) | (45.3 | ) | ||||||
| Interest expense, net of amounts capitalized | (14,560 | ) | (32,315 | ) | 17,755 | 54.9 | ||||||
| Unrealized and realized gains (losses) on marketable investment securities and other investments | 2,923 | 119,461 | (116,538 | ) | (97.6 | ) | ||||||
| Unrealized gains (losses) on investments accounted for at fair value, net | 144,473 | 313,000 | (168,527 | ) | (53.8 | ) | ||||||
| Other, net | (860 | ) | (6,120 | ) | 5,260 | 85.9 | ||||||
| Total other income (expense) | 146,448 | 420,467 | (274,019 | ) | (65.2 | ) | ||||||
| Income (loss) before income taxes | 288,773 | 425,359 | (136,586 | ) | (32.1 | ) | ||||||
| Income tax (provision) benefit, net | (84,415 | ) | (60,655 | ) | (23,760 | ) | (39.2 | ) | ||||
| Effective tax rate | 29.2 | % | 14.3 | % | ||||||||
| Net income (loss) | 204,358 | 364,704 | (160,346 | ) | (44.0 | ) | ||||||
| Less: Net income (loss) attributable to noncontrolling interests | — | — | — | * | ||||||||
| Net income (loss) attributable to EchoStar | $ | 204,358 | $ | 364,704 | $ | (160,346 | ) | (44.0 | ) | |||
| Other Data: | ||||||||||||
| EBITDA | $ | 517,772 | $ | 675,362 | $ | (157,590 | ) | (23.3 | ) |
- Percentage is not meaningful.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Equipment revenue — DISH Network****. “Equipment revenue — DISH Network” totaled $1.470 billion during the year ended December 31, 2010, an increase of $295 million or 25.1% compared to the same period in 2009. This change related primarily to an increase in unit sales of set-top boxes, partially offset by a decline in average revenue per unit. The decline in average revenue per unit was driven by continued manufacturing efficiencies and a change to one of our component vendor contracts, which reduced our set-top box costs. Pursuant to the receiver agreement in effect during 2010, set-top boxes were sold to DISH Network at cost plus a fixed margin resulting in a decline in revenue per unit when lower set-top box costs were incurred.
Equipment revenue - other. “Equipment revenue - other” totaled $348 million during the year ended December 31, 2010, an increase of $45 million or 14.9% compared to the same period in 2009. This change resulted primarily from an increase in sales to Dish Mexico, which was in addition to the original contribution commitment associated with our investment in Dish Mexico.
Services and other revenue — DISH Network. “Services and other revenue — DISH Network” totaled $468 million during the year ended December 31, 2010, an increase of $95 million or 25.5% compared to the same period in 2009. The change was driven by an increase in transponder leasing primarily related to the Nimiq 5 satellite, which was placed into service in October 2009, the increase in monthly lease rates per transponder on certain satellites based on the terms of our amended lease agreements and an increase in uplink services. This increase in uplink services was primarily attributable to the launch of additional local channels and additional satellites being placed into service. See Note 17 in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further discussion.
Cost of sales — equipment****. “Cost of sales — equipment” totaled $1.553 billion during the year ended December 31, 2010, an increase of $286 million or 22.6% compared to the same period in 2009. This change primarily resulted from an increase in sales of digital set-top boxes and related components to DISH Network and Dish Mexico. “Cost of sales — equipment” represented 85.4% and 85.8% of total equipment sales during the year ended December 31, 2010 and 2009, respectively.
Cost of sales — services and other****. “Cost of sales — services and other” totaled $236 million during the year ended December 31, 2010, an increase of $33 million or 16.4% compared to the same period in 2009. This change primarily resulted from an increase in costs related to the EchoStar I satellite, which we began leasing from DISH Network during the first quarter 2010, and costs related to the Nimiq 5 satellite, which was placed into service in October 2009. “Cost of sales - services and other” represented 44.4% and 47.7% of total services and other revenue during the year ended December 31, 2010 and 2009, respectively. The improvement in this expense to revenue ratio was primarily driven by an increase in transponder leasing revenue, discussed above. The majority of our costs associated with transponder leasing are related to satellites which are included in “Depreciation and amortization” expense.
Depreciation and amortization. “Depreciation and amortization” expense totaled $229 million during the year ended December 31, 2010, a $15 million or 6.2% decrease compared to the same period in 2009. The change in “Depreciation and amortization” expense was primarily related to declines in depreciation expense related to satellites that became fully depreciated in 2010, partially offset by depreciation expense associated with Nimiq 5, which was placed into service in October 2009.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $15 million during the year ended December 31, 2010, a decrease of $18 million or 54.9% compared to the same period in 2009. This change primarily resulted from $26 million of interest which was capitalized into construction in progress during 2010, including $7 million that related to interest expense that should have been capitalized in 2009. This decrease was partially offset by an increase in interest expense related to our capital leases obligations.
Unrealized and realized gains (losses) on marketable investment securities and other investments. “Unrealized and realized gains (losses) on marketable investment securities and other investments” totaled a net gain of $3 million during the year ended December 31, 2010, a $117 million decrease compared to the same period in 2009. This change primarily resulted from an $87 million decrease in net gains on the sale of marketable investment securities during 2010 compared to 2009 and an increase in impairment charges on our marketable and other investment securities during 2010 compared to the same period in 2009.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Unrealized gains (losses) on investments accounted for at fair value, net. “Unrealized gains (losses) on investments accounted for at fair value, net” totaled a net gain of $144 million during the year ended December 31, 2010, a $169 million decrease compared to the same period in 2009. This change is attributable to a decline in gains related to investments accounted for under the fair value method. See Note 4 under “Investments in TerreStar” in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further discussion.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $518 million during the year ended December 31, 2010, a decrease of $158 million compared to the same period in 2009. EBITDA for the year ended December 31, 2010 was negatively impacted by a decrease in “Unrealized and realized gains (losses) on marketable investment securities and other investments” and “Unrealized gains (losses) on investments accounted for at fair value, net,” partially offset by an increase in “Operating income (loss).” The following table reconciles EBITDA to the accompanying financial statements.
| For the Years Ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31, | |||||||
| 2010 | 2009 | ||||||
| (In thousands) | |||||||
| EBITDA | $ | 517,772 | $ | 675,362 | |||
| Interest income (expense), net | (88 | ) | (5,874 | ) | |||
| Income tax (provision) benefit, net | (84,415 | ) | (60,655 | ) | |||
| Depreciation and amortization | (228,911 | ) | (244,129 | ) | |||
| Net income (loss) attributable to EchoStar | $ | 204,358 | $ | 364,704 |
Income tax (provision) benefit, net. The income tax provision totaled $84 million during the year ended December 31, 2010, an increase of $24 million compared to the same period in 2009. This increase resulted primarily from an increase in the effective tax rate, offset by the decrease in “Income (loss) before income taxes.” The effective tax rate for 2009 was positively impacted by the change in our valuation allowances against certain deferred tax assets that are capital in nature.
Net income (loss) attributable to EchoStar. Our net income attributable to EchoStar was $204 million during the year ended December 31, 2010, a decrease of $160 million compared to the same period in 2009. This decrease was primarily attributable to the changes in revenue and expenses discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased within 90 days of their maturity to be cash equivalents. See “Item 7A. — Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K for further discussion regarding our marketable investment securities. As of December 31, 2011, our cash, cash equivalents and current marketable investment securities totaled $1.696 billion compared to $1.131 billion as of December 31, 2010, an increase of $565 million. This increase in cash, cash equivalents and current marketable investment securities was primarily driven by net proceeds of $1.942 billion related to issuance of the Notes, cash receipts of $697 million related to our investment in TerreStar and cash generated from operations of $447 million, partially offset by the Hughes Acquisition of $2.076 billion, net of cash received, capital expenditures of $377 million and $70 million in net purchases of marketable investment securities.
We have investments in various debt and equity instruments including corporate bonds, corporate equity securities, government bonds, and variable rate demand notes (“VRDNs”). VRDNs are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. Our VRDN portfolio is comprised of investments in many municipalities, which are backed by financial institutions or other highly rated companies that serve as the pledged liquidity source. While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis. As of December 31, 2011 and 2010,
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
we held VRDNs, within our current marketable investment securities portfolio, with fair values of $219 million and $396 million, respectively.
The following discussion highlights our cash flow activities during the years ended December 31, 2011, 2010, and 2009.
Cash flows from operating activities. We typically reinvest the cash flow from operating activities in our business. For the year ended December 31, 2011, 2010 and 2009 we reported net cash inflows from operating activities of $447 million, $404 million and $196 million, respectively.
The $43 million improvement in net cash inflows from operating activities during the year ended December 31, 2011 compared to the same period in 2010 was primarily attributable to cash generated of $54 million from changes in operating assets and liabilities related to timing differences between book expense and cash payments, partially offset by a $4 million decrease in net income adjusted to exclude non-cash changes in: (i) “Unrealized gains (losses) on investments accounted for at fair value, net,” (ii) **“**Unrealized and realized gains (losses) on marketable investment securities and other investments,” (iii)“Depreciation and amortization,” (iv) “Deferred tax expense (benefit)” and (v) the impairment of our CMBStar satellite.
The $208 million improvement in net cash inflows from operating activities during the year ended December 31, 2010 compared to the same period in 2009 was primarily attributable to an increase of $183 million in net income adjusted to exclude non-cash changes in: (i) “Unrealized gains (losses) on investments accounted for at fair value, net,” (ii) **“**Unrealized and realized gains (losses) on marketable investment securities and other investments” and (iii) “Deferred tax expense (benefit).”
Cash flows from investing activities. Our investing activities generally include purchases and sales of marketable investment securities, capital expenditures, acquistions and strategic investments. For the years ended December 31, 2011, 2010 and 2009, we reported net cash outflows from investing activities of $1.888 billion, $239 million and $114 million, respectively.
The increase in net cash outflows from investing activities from 2010 to 2011 of $1.649 billion primarily related to the Hughes Acquisition of $2.076 billion, net of cash received, and an increase in capital expenditures of $180 million, partially offset by cash receipts of $697 million related to our investment in TerreStar. In addition, 2010 benefited from cash inflows of $103 million related to the assignment of rights under a launch service contract to DISH Network.
The increase in net cash outflows from investing activities from 2009 to 2010 of $125 million primarily resulted from net purchases of marketable investment securities of $47 million in 2010 and net sales of marketable investment securities of $223 million in 2009 for a net change of $270 million, partially offset by cash inflows of $103 million related to the assignment of rights under a launch contract to DISH Network, cash inflows related to a decline in the capital expenditures of $17 million compared to 2009 and proceeds from the sale of strategic investments of $16 million.
Cash flows from financing activities. Our financing activities generally include net proceeds related to the issuance of long-term debt, cash used for the repurchase, redemption or payment of long-term debt and capital lease obligations, and repurchases of our Class A common stock. For the year ended December 31, 2011, we reported net cash inflows from financing activities of $1.914 billion. For the years ended December 31, 2010 and 2009, we reported net cash outflows from financing activities of $47 million and $83 million, respectively.
The increase in net cash inflows from financing activities from 2010 to 2011 of $1.961 billion principally resulted from proceeds received of $1.942 billion from the issuance of the Notes, net of deferred financing costs.
The decline in net cash outflows from financing activities from 2009 to 2010 of $36 million principally resulted from a decrease in repurchases of Class A common stock during 2010 compared to 2009.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Obligations and Future Capital Requirements
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2011 future maturities of our contractual obligations are summarized as follows:
| Payments due by period | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| Long-term debt obligations | $ | 2,006,644 | $ | 1,171 | $ | 1,049 | $ | 1,112 | $ | 1,139 | $ | 1,049 | $ | 2,001,124 | ||||||||
| Capital lease obligations | 527,618 | 64,068 | 66,502 | 70,177 | 25,440 | 27,731 | 273,700 | |||||||||||||||
| Interest expense on long-term debt and capital lease obligations | 1,496,237 | 190,396 | 184,137 | 177,829 | 173,174 | 170,435 | 600,266 | |||||||||||||||
| Satellite-related obligations | 845,107 | 325,508 | 104,703 | 72,759 | 50,214 | 42,686 | 249,237 | |||||||||||||||
| Operating lease obligations | 73,695 | 21,941 | 15,985 | 12,539 | 8,708 | 6,593 | 7,929 | |||||||||||||||
| Purchase and other obligations | 418,215 | 408,257 | 2,837 | 2,120 | 1,667 | 1,667 | 1,667 | |||||||||||||||
| Payments in connection with acquisition | 14,034 | 5,437 | 5,137 | 3,460 | — | — | — | |||||||||||||||
| Total | $ | 5,381,550 | $ | 1,016,778 | $ | 380,350 | $ | 339,996 | $ | 260,342 | $ | 250,161 | $ | 3,133,923 |
“Satellite-related obligations” includes, among other things, our transponder agreements and two launch contracts for satellites that are currently under construction, as described below.
· EchoStar XVI. During November 2009, we entered into a contract for the construction of EchoStar XVI, a DBS satellite, which is expected to be launched during the second half of 2012 and will operate at the 61.5 degree west longitude orbital location. DISH Network has agreed to lease all of the capacity on this satellite from us for a portion of its useful life. As of December 31, 2011, the remaining obligation related to EchoStar XVI of $65 million, including the launch contract, is included in the table above.
· EchoStar XVII/Jupiter. During June 2009, Hughes Communications entered into a contract for the construction of EchoStar XVII/Jupiter, which is expected to launch in the summer of 2012. Barrett Xplore Inc. has agreed to lease the user beams designed to operate in Canada, which represents a portion of the capacity available on EchoStar XVII/Jupiter. As of December 31, 2011, the remaining obligation related to EchoStar XVII/Jupiter of $108 million, including the launch contract, is included in the table above. During the first quarter 2012, we secured launch insurance and one year in-orbit insurance for a total of $34 million which is not included in the table above.
Our “Purchase and other obligations” primarily consist of binding purchase orders for digital set-top boxes and related components, digital broadcast operations and professional services agreement. Our purchase obligations can fluctuate significantly from period to period due to, among other things, management’s control of inventory levels, and can materially impact our future operating asset and liability balances, and our future working capital requirements. These purchase obligations will be paid from 2011 through 2017.
The table above does not include $30 million of liabilities associated with unrecognized tax benefits that were accrued as of December 31, 2011 and are included on our Consolidated Balance Sheets included in Item 15 of this Annual Report on Form 10-K. We do not expect any portion of this amount to be paid or settled within the next 12 months.
In certain circumstances, the dates on which we are obligated to make these payments could be delayed. These amounts will increase to the extent we procure insurance for our satellites or contract for the construction, launch or lease of additional satellites.
Acquisition of Brazilian Orbital Slot. On August 30, 2011, we were declared the winner of the right to select an orbital slot in an auction conducted by ANATEL, the Brazilian communications regulatory authority. We selected the 45 degree west longitude orbital location for a bid of approximately $77 million using an exchange rate of $1 to 1.8758 Brazilian Real as of December 30, 2011. This amount is not included in the table above. We must comply with certain post-auction regulatory and payment requirements before we will receive the orbital slot. Once we receive the orbital slot, the slot will be used to expand our video and data capabilities in South America.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
O****ff-Balance Sheet Arrangements
Aside from the transactions below, we generally do not engage in off-balance sheet financing activities or use derivative financial instruments for hedge accounting or speculative purposes.
As of December 31, 2011, we had $23 million of contractual obligations to customers and other statutory/governmental agencies, which were secured by letters of credit and insurance bonds. Of this amount, $4 million was secured by restricted cash; $1 million related to insurance bonds; and $18 million was issued under credit arrangements available to our foreign subsidiaries. Certain letters of credit issued by our foreign subsidiaries are secured by their assets.
As of December 31, 2011, we had $9 million of foreign currency forward contracts in place to partially mitigate foreign exchange risk. 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.
Satellite Insurance
We generally do not carry insurance for any of the in-orbit satellites that we use because we believe that the premium costs are uneconomical relative to the risk of satellite failure. However, pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to obtain launch insurance for EchoStar XVII/Jupiter and EchoStar XVI and to maintain in-orbit insurance for EchoStar XVII/Jupiter, EchoStar XVI and SPACEWAY 3. The loss of a satellite or other satellite malfunctions or anomalies could have a material adverse effect on our financial performance which we may not be able to mitigate by using available capacity on other satellites. There can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail. In addition, the loss of a satellite or other satellite malfunctions or anomalies could affect our ability to comply with FCC regulatory obligations and our ability to fund the construction or acquisition of replacement satellites for our in-orbit fleet in a timely fashion, or at all.
Future Capital Requirements
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated through our operations to fund our investment needs. Since we currently depend on DISH Network for a substantial portion of our revenue, our cash flow from operations depends heavily on its needs for equipment and services. During the year ended December 31, 2011, DISH Network purchased fewer digital set-top boxes and related components from us. 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. In addition, we currently have two satellites under construction, EchoStar XVI and EchoStar XVII/Jupiter. The expected future payments related to these satellites are $173 million. As a result, there can be no assurance that we will have positive cash flows from operations. Furthermore, if we experience negative cash flows, our existing cash and marketable investment securities balances may be reduced.
We have a significant amount of outstanding indebtedness. As of December 31, 2011, our total indebtedness was $2.534 billion. Our liquidity requirements will be significant, primarily due to our debt service requirements. In addition, our future capital expenditures are likely to increase if we make additional investments in infrastructure necessary to support and expand our business, or if we decide to purchase one or more additional satellites. Other aspects of our business operations may also require additional capital. We periodically evaluate various strategic initiatives, the pursuit of which also could require us to raise significant additional capital.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued
Satellites
As our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity. We also may construct or lease additional satellites in the future to provide satellite services at additional orbital locations or to improve the quality of our satellite services.
Stock Repurchases
Pursuant to a stock repurchase plan approved by our Board of Directors, we are authorized to repurchase up to $500 million of our outstanding shares of Class A common stock through and including December 31, 2011. During the year ended December 31, 2011, we did not repurchase any common stock. During the year ended December 31, 2010, we repurchased 34,000 shares of our Class A common stock for $605,000. On November 2, 2011, our Board of Directors extended the plan, such that we are authorized to make such repurchases through and including December 31, 2012.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect amounts reported therein. Management bases its estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from previously estimated amounts, and such differences may be material to the Consolidated Financial Statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur. The following represent what we believe are the critical accounting policies that may involve a high degree of estimation, judgment and complexity. For a summary of our significant accounting policies, including those discussed below, see Note 2 in the Notes to our Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
· Accounting for investments in private and publicly-traded securities. We hold debt and equity interests in companies, some of which are publicly traded and have highly volatile prices. We record an investment impairment charge in “Unrealized and realized gains (losses) on marketable investment securities and other investments” within “Other Income (Expense)” on our Consolidated Statements of Operations and Comprehensive Income (Loss) when we believe an investment has experienced a decline in value that is judged to be other-than-temporary. We monitor our investments for impairment by considering current factors including economic environment, market conditions and the operational performance and other specific factors relating to the business underlying the investment. Future adverse changes in these factors could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
· Fair value of financial instruments. Fair value estimates of our financial instruments are made at a point in time, based on relevant market data as well as the best information available about the financial instrument. Weak economic conditions have resulted in inactive markets for certain of our financial instruments, including “Marketable and other investment securities” on our Consolidated Balance Sheets. For certain of these instruments, there is no or limited observable market data. Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience, bankruptcy and other factors. These estimates involve significant uncertainties and judgments and may be a less precise measurement of fair value as compared to financial instruments where observable market data is available. We make certain assumptions related to expected maturity date, credit and interest rate risk based upon market conditions and prior experience. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique, including liquidity risks, and estimate of future cash flows, could significantly affect these fair value estimates, which could have a material adverse impact on our financial position and results of operations.
Previous: Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES · Next: Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Continued