filings.toolsEchoStar 2014 10-K Annual Report
ECHO · CIK 1415404 · Form 10-K · Fiscal year ended December 31, 2014 · Filed February 20, 2015
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PART IV INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
**UNITED STATES SECURITIES AND EXCHANGE COMMISSION **Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 | ||
| OR | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE TRANSITION PERIOD FROM TO . |
Commission file number: 001-33807
**EchoStar Corporation **(Exact name of registrant as specified in its charter)
| Nevada (State or Other Jurisdiction of Incorporation or Organization) | 26-1232727 (I.R.S. Employer Identification No.) | |
| 100 Inverness Terrace East, Englewood, Colorado (Address of Principal Executive Offices) | 80112-5308 (Zip Code) |
Registrant's telephone number, including area code: (303) 706-4000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Class A common stock, $0.001 par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of June 30, 2014, the aggregate market value of Class A common stock held by non-affiliates of the registrant was $2.29 billion based upon the closing price of the Class A common stock as reported on the Nasdaq Global Select Market as of the close of business on that date.
As of February 13, 2015, the registrant's outstanding common stock consisted of 44,109,045 shares of Class A common stock and 47,687,039 shares of Class B common stock, each $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the registrant's definitive Proxy Statement to be filed in connection with its 2015 Annual Meeting of Shareholders are incorporated by reference in Part III.
**TABLE OF CONTENTS **
**DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS **
This Annual Report on Form 10-K ("Form 10-K") contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements about our estimates, expectations, plans, objectives, strategies, and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "estimate," "expect," "predict," "continue," "future," "will," "would," "could," "can," "may" and similar terms. These forward-looking statements are based on information available to us as of the date of this Form 10-K and represent management's current views and assumptions. Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:
our reliance on our primary customer, DISH Network Corporation ("DISH Network"), for a significant portion of our revenue;
the impact of variable demand and the adverse pricing environment for digital set-top boxes;
dependence on our ability to successfully manufacture and sell our digital set-top boxes in increasing volumes on a cost-effective basis and with acceptable quality;
our ability to bring advanced technologies to market to keep pace with our competitors;
significant risks related to the construction, launch and operation of our satellites, such as the risk of material malfunction on one or more of our satellites, changes in the space weather environment that could interfere with the operation of our satellites, and our general lack of commercial insurance coverage on our satellites;
the failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment; and
the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services.
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K and those discussed in other documents we file with the SEC.
All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by federal securities laws.
i
**PART I **
Item 1. BUSINESS
**
**OVERVIEW **
EchoStar Corporation (which, together with its subsidiaries, is referred to as "EchoStar," the "Company," "we," "us" and/or "our") is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada. We are a global provider of satellite operations, video delivery solutions, digital set-top boxes, and broadband satellite technologies and services for home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments. Our Class A common stock is publicly traded on the Nasdaq Global Select Market ("Nasdaq") under the symbol "SATS."
We currently operate in three business segments.
EchoStar Technologies ("ETC")—which designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers, telecommunication companies and international cable companies. Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network Corporation and its subsidiaries ("DISH Network"). In addition, we provide our Slingboxes directly to consumers via retail outlets and online, as well as the payTV operator market via our partnership with Arris Group, Inc. ("Arris").
Hughes—which provides satellite broadband internet access to North American consumers and broadband network services and equipment to domestic and international enterprise markets. The Hughes segment also provides managed services to large enterprises and solutions to customers for mobile satellite systems.
EchoStar Satellite Services ("ESS")—which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and occasional-use basis primarily to DISH Network, Dish Mexico, S. de R.L. de C.V. ("Dish Mexico"), a joint venture we entered into in 2008, United States ("U.S.") government service providers, state agencies, internet service providers, broadcast news organizations, programmers, and private enterprise customers.
Our operations also include real estate and other activities that have not been assigned to our operating segments, costs incurred in certain satellite development programs and other business development activities, expenses of various corporate departments, and our centralized treasury operations, including income from our investment portfolio and interest expense on our debt.
In 2008, DISH Network completed its distribution to us of its digital set-top box business, certain infrastructure, and other assets and related liabilities, including certain of their satellites, uplink and satellite transmission assets, and real estate (the "Spin-off"). Since the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies. However, as a result of the Satellite and Tracking Stock Transaction, described in Note 2 in the notes to consolidated financial statements in Item 15 of this report, DISH Network owns shares of our and our subsidiary's preferred tracking stock representing an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment. In addition, a substantial majority of the voting power of the shares of DISH Network and EchoStar is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.
In 2011, we completed the acquisition of Hughes Communications, Inc. and its subsidiaries and related financing transactions ("Hughes Acquisition").
**BUSINESS STRATEGIES **
Capitalize on demand for broadband services. We intend to capitalize on the demand for satellite-delivered broadband services and enterprise solutions by utilizing, among other things, our industry expertise, technology leadership, satellite capacity, access to spectrum resources, and high-quality, reliable service to continue growth in consumer subscribers and the enterprise market.
Expand satellite capacity and related infrastructure. Our expertise in the identification, acquisition and development of satellite spectrum and orbital rights and satellite operations, together with existing or acquired infrastructure will provide opportunities to cross sell services, bundle satellite broadband and video services, and explore opportunities in new markets. We believe market opportunities exist that will facilitate the acquisition or leasing of satellite capacity which will enable us to provide services to a broader customer base, including providers of pay-TV services, satellite-delivered broadband, corporate communications, and government services. We believe we are in a unique position to deploy a European wide mobile satellite service ("MSS")/complementary ground component ("CGC") network and maximize the long term value of our S-band spectrum, in Europe and other regions within the scope of our licenses.
Exploit international opportunities. We believe that direct-to-home ("DTH") satellite and satellite broadband services are particularly well-suited for countries without extensive telecommunications and cable infrastructure. We intend to selectively pursue partnerships, joint ventures and strategic acquisition opportunities that allow us to capitalize on our extensive experience in delivering end-to-end satellite broadband and pay-TV consumer services.
Expand our set-top box and customer premise equipment sales. With our extensive experience in designing, developing, manufacturing and distributing digital set-top boxes and related products, we believe we can leverage the broader adoption of advanced technologies such as whole home digital video recorder ("DVR"), placeshifting functionality, hybrid internet offerings and other in-home solutions to create opportunities for us. Therefore, we continue to explore opportunities, including partnerships, joint ventures and strategic acquisitions, to expand our existing markets or enter new markets. In addition, we intend to seek opportunities to license our technology to other original equipment manufacturers and pay-TV providers.
Develop improved technologies. The engineering capabilities of our combined business units provides us with the opportunity to develop and deploy cutting edge technologies, license our technologies to others, and maintain a leading technological position in the industries in which we are active.
**BUSINESS SEGMENTS **
ECHOSTAR TECHNOLOGIES SEGMENT
**Our Products **
Digital Set-Top Boxes. Our EchoStar Technologies segment offers a wide range of digital set-top boxes that allow consumers to watch and control their television programming and contain a variety of other capabilities and functionality. Our current digital set-top boxes include:
High-definition ("HD") digital set-top boxes. These devices allow consumers who subscribe to television services from multi-channel video distributors to access the enhanced picture quality and sound of high-definition content, in addition to the standard-definition ("SD") functionality of our SD digital set-top boxes.
SD digital set-top boxes. These devices allow consumers who subscribe to television service from multi-channel video distributors to access encrypted digital video and audio content.
Certain models of our HD digital set-top boxes and SD digital set-top boxes also contain certain of the following advanced capabilities and functionalities:
Interactive Applications. Include an on-screen program guide, pay-per-view offerings, video content/meta-data enhancing user applications, social media, games, and shopping.
Digital Video Recorder ("DVR"). Enables subscribers to pause, stop, reverse, fast forward, record, and replay digital television content usin
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Item 1A. RISK FACTORS
**
The risks and uncertainties described below are not the only ones facing us. If any of the following events occur, our business, financial condition or results of operation could be materially and adversely affected.
**GENERAL RISKS AFFECTING OUR BUSINESS **
We currently derive a significant portion of our revenue from our primary customer, DISH Network. The loss of, or a significant reduction in, orders from, or a decrease in selling prices of digital set-top boxes, broadband equipment and services, provision of satellite services and digital broadcast services, and/or other products or services to DISH Network would significantly reduce our revenue and adversely impact our results of operations.
DISH Network accounted for 57.3%, 58.8% and 49.5% of our total revenue for the years ended December 31, 2014, 2013 and 2012, respectively. DISH Network is currently our primary customer of digital set-top boxes, digital broadcast operation services and our satellite services. These products and services are provided pursuant to contracts that expire on December 31, 2015 and December 31, 2016, respectively. DISH Network is also a wholesale distributor of the Hughes satellite internet service, and in connection with such wholesale distribution, purchases certain broadband equipment from us to support the sale of the Hughes service. In addition, DISH Network has no obligations to continue to purchase our products and only certain obligations to continue to purchase certain of our services. Therefore, our relationship with DISH Network could be terminated or substantially curtailed with little or no advance notice. Any material reduction in or termination of our sales to DISH Network or reduction in the prices it pays for the products and services it purchases from us could have a significant adverse effect on our business, results of operations, and financial position.
As previously disclosed by DISH Network, in May 2012, Fox Broadcasting Company, Twentieth Century Fox Film Corp. and Fox Television Holdings, Inc. filed a lawsuit against DISH Network Corporation and its wholly owned subsidiary, DISH Network, L.L.C., in the U.S. District Court for the Central District of California, alleging that certain services provided by DISH Network, including Slingbox placeshifting functionality infringe their copyrights and breach their carriage contracts. An adverse decision against DISH Network could decrease the number of Sling Media technology enabled set-top boxes we sell to DISH Network which could have an adverse impact on the business operations of our EchoStar Technologies segment.
In addition, because a significant portion of our revenue is derived from DISH Network, our success also depends to a significant degree on the continued success of DISH Network in attracting new subscribers and marketing programming packages, and other services and features to subscribers that will result in the purchase of new digital set-top boxes, and in particular, new digital set-top boxes at the high-end of our product range that incorporate high-definition, multiple tuners, and other advanced technology.
In addition, the timing of orders for digital set-top boxes from DISH Network could vary significantly depending on equipment promotions offered to its subscribers, changes in technology, and its use of remanufactured digital set-top boxes, which may cause our revenue to vary significantly quarter over quarter and could expose us to the risks of inventory shortages or excess inventory. These inventory risks are particularly acute during product end-of-life transitions in which a new generation of digital set-top boxes is being deployed and inventory of older generation digital set-top boxes is at a higher risk of obsolescence. This in turn could cause our operating results to fluctuate significantly.
There are a relatively small number of potential new customers for our digital set-top boxes, and digital broadcast operations, and we expect this customer concentration to continue for the foreseeable future. If we lose DISH Network as a customer, it may be difficult for us to replace, in whole or in part, our historical revenue from DISH Network as we have had limited success in attracting such potential new customers in the past. Furthermore, because of the maturing and competitive nature of the digital set-top box business, the limited number of potential new customers, and the short-term nature of our purchase orders with DISH Network, we could in the future experience downward pricing pressure on our digital set-top boxes sold to DISH Network, which in turn would adversely affect our gross margins and profitability. If we do not develop relationships with new customers, we may not be able to expand our customer base or maintain or increase our revenue.
We could face decreased demand and increased pricing pressure to our products and services due to competition.
The digital set-top box market is intensely competitive, and market leadership changes frequently as a result of new products, designs and pricing. We currently face competition from well-established companies, from new, rapidly growing companies, and from digital video providers who have developed their own digital set-top boxes, and in the future we may face competition from new and existing companies that do not currently compete in the market for set-top boxes. If we do not distinguish our products, particularly our retail products, through distinctive, technologically advanced features and design, as well as build and strengthen our brand recognition, our business could be harmed as we may not be able to effectively compete on price alone against new low cost market entrants. Increased pricing pressure may also make it particularly difficult for us to make profitable sales in international markets where new competitors are present and in which we have not previously made sales of set-top boxes. In addition, it can be difficult to acquire additional market share in the digital set-top box market because gaining additional market share would require displacing well-established companies who have had long term contracts with major cable operators in the U.S., which results in relatively high costs for cable operators to change set-top box providers making it more difficult for us to displace potential customers from their current relationships with our competitors. Any of these competitive threats, alone or in combination with others, could harm our business, operating results and financial condition.
Our satellite services business competes against larger, well-established satellite service companies, such as Intelsat, SES, Telesat, and Eutelsat. Because the satellite services industry is relatively mature, our growth strategy depends largely on our ability to displace current incumbent providers, which often have the benefit of long-term contracts with customers. These long-term contracts and other factors result in relatively high costs for customers to change service providers, making it more difficult for us to displace customers from their current relationships with our competitors. In addition, the supply of satellite capacity available in the market has increased in recent years, which makes it more difficult for us to sell our services in certain markets and to price our capacity at acceptable levels. Competition may cause downward pressure on prices and further reduce the utilization of our capacity, both of which could have an adverse effect on our financial performance. Our satellite services business also competes with fiber optic cable and other terrestrial delivery systems, which may have a cost advantage, particularly in point-to-point applications where such delivery systems have been installed.
In our consumer market, we face competition primarily from DSL and cable internet service providers. Also, other telecommunications, satellite and wireless broadband c
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Item 1B. UNRESOLVED STAFF COMMENTS
**
None.
Item 2. PROPERTIES
**
Our principal executive offices are located at 100 Inverness Terrace East, Englewood, Colorado 80112-5308 and our telephone number is (303) 706-4000. The following table sets forth certain information concerning our principal properties related to our EchoStar Technologies segment ("ETC"), Hughes segment ("Hughes"), EchoStar Satellite Services segment ("ESS") and to our other operations and administrative functions ("Other"). We operate various facilities in the U.S. and abroad. We believe that our facilities are well maintained and are sufficient to meet our current and projected needs.
| Location(3)(4) | Segment(s) | Leased/Owned | Function | |||
| Foster City, California | ETC | Leased | Engineering and data center | |||
| Superior, Colorado | ETC | Leased | Engineering offices | |||
| Atlanta, Georgia | ETC | Leased | Engineering offices | |||
| Bangalore, India | ETC | Leased | Engineering office | |||
| Kharkov, Ukraine | ETC | Leased | Engineering office | |||
| Steeton, England | ETC | Owned | Engineering office | |||
| San Diego, California | Hughes | Leased | Engineering and sales offices | |||
| Gaithersburg, Maryland | Hughes | Leased | Manufacturing and testing facilities, engineering and administrative offices | |||
| Southfield, Michigan(1) | Hughes | Leased | Shared hub | |||
| Las Vegas, Nevada(1) | Hughes | Leased | Shared hub, antennae yards, gateway, backup network operation and control center for Hughes corporate headquarters | |||
| Barueri, Brazil(1) | Hughes | Leased | Shared hub | |||
| Sao Paulo, Brazil | Hughes | Leased | Hughes Brazil corporate headquarters, sales offices, and warehouse | |||
| Griesheim, Germany(1) | Hughes | Leased | Shared hub, operations, administrative offices and warehouse | |||
| Gurgaon, India(1)(2) | Hughes | Leased | Administrative offices, shared hub, operations, warehouse, and development center | |||
| New Delhi, India | Hughes | Leased | Hughes India corporate headquarters | |||
| Milton Keynes, United Kingdom | Hughes | Leased | Hughes Europe corporate headquarters and operations | |||
| American Fork, Utah | Hughes/Other | Leased | Office space, engineering and operations | |||
| Germantown, Maryland(1) | Hughes | Owned | Hughes corporate headquarters, engineering offices, network operations and shared hubs | |||
| Gilbert, Arizona(1) | ETC/ESS | Owned | Digital broadcast operations center | |||
| Kankakee, Illinois(1) | ETC/ESS | Owned | Regional digital broadcast operations center | |||
| Monee, Illinois(1) | ETC/ESS | Owned | Regional digital broadcast operations center | |||
| Orange, New Jersey(1) | ETC/ESS | Owned | Regional digital broadcast operations center | |||
| New Braunfels, Texas(1) | ETC/ESS | Owned | Regional digital broadcast operations center | |||
| Mustang Ridge, Texas(1) | ETC/ESS | Owned | Micro digital broadcast operations center | |||
| Mt. Jackson, Virginia(1) | ETC/ESS | Owned | Regional digital broadcast operations center | |||
| Winchester, Virginia(1) | ETC/ESS | Owned | Regional digital broadcast operations center | |||
| Spokane, Washington(1) | ETC/ESS | Owned | Regional digital broadcast operations center | |||
| Cheyenne, Wyoming(1) | ETC/ESS | Owned | Digital broadcast operations center | |||
| Black Hawk, South Dakota(1) | Hughes/ESS | Owned | Spacecraft autotrack operations center | |||
| Englewood, Colorado | Hughes/ETC/ ESS/Other | Owned | Corporate headquarters, engineering offices, gateways |
(1)
We perform network services and customer support functions 24 hours a day, 365 days a year at these locations.
(2)
These properties are used by subsidiaries that are less than wholly-owned by the Company.
(3)
In addition to the above properties, we have multiple gateways throughout the Western part of the U.S. that support the SPACEWAY 3, EchoStar XVII, and EchoStar XIX satellites.
(4)
In addition to the above properties, we lease rack and roof top space in 210 designated market areas throughout the U.S. as well as San Juan, Puerto Rico to collect and broadcast local channels that are used by the ETC segment.
Item 3. LEGAL PROCEEDINGS
**
For a discussion of legal proceedings, see Note 16 in the notes to consolidated financial statements in Item 15 of this report.
Item 4. MINE SAFETY DISCLOSURES
**
Not applicable.
**PART II **
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
**
**Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters **
Market Information. Our Class A common stock is quoted on the Nasdaq Global Select Market ("Nasdaq") under the symbol "SATS." The high and low closing sale prices of our Class A common stock during 2014 and 2013 on Nasdaq (as reported by Nasdaq) are set forth below.
| 2014 | High | Low | |||||
| First Quarter | $ | 51.90 | $ | 43.41 | |||
| Second Quarter | $ | 53.73 | $ | 44.26 | |||
| Third Quarter | $ | 53.42 | $ | 47.96 | |||
| Fourth Quarter | $ | 54.18 | $ | 43.00 |
| 2013 | High | Low | |||||
| First Quarter | $ | 39.99 | $ | 32.55 | |||
| Second Quarter | $ | 40.98 | $ | 36.92 | |||
| Third Quarter | $ | 45.50 | $ | 37.22 | |||
| Fourth Quarter | $ | 51.60 | $ | 44.17 |
Holders. As of February 13, 2015, there were approximately 9,696 holders of record of our Class A common stock, not including stockholders who beneficially own Class A common stock held in nominee or street name. As of February 13, 2015, 32,498,594 of the 47,687,039 outstanding shares of our Class B common stock were held by Charles W. Ergen, our Chairman, and the remaining 15,188,445 were held in trusts established for the benefit of Mr. Ergen's family. There is currently no established trading market for our Class B common stock.
Dividends. We have not paid any cash dividends on our common stock in the past two years. We currently do not intend to declare dividends on our common stock. Payment of any future dividends will depend upon our earnings, capital requirements, and other factors the Board of Directors considers appropriate. We currently intend to retain our earnings, if any, to support future growth and expansion although we expect to repurchase shares of our common stock from time to time. See further discussion under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources in this Annual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in this Annual Report on Form 10-K.
**Purchases of Equity Securities by the Issuer and Affiliated Purchasers **
Pursuant to a stock repurchase plan approved by our Board of Directors, we are authorized to repurchase up to $500.0 million of our outstanding shares of Class A common stock through December 31, 2015. For the years ended December 31, 2014, 2013 and 2012, we did not repurchase any common stock under this plan.
Item 6. SELECTED FINANCIAL DATA
**
The accompanying consolidated financial statements for 2014 have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") included in our Consolidated
Financial Statements in Item 15 of this report. Certain prior period amounts have been reclassified to conform to the current period presentation.
On June 8, 2011, we completed the acquisition of Hughes Communications, Inc. and its subsidiaries ("the Hughes Acquisition"). As a result, Hughes became a new segment and our historical financial statements on and after June 9, 2011 give effect to the Hughes Acquisition. Therefore, our financial position as of December 31, 2014, 2013, 2012, and 2011 is not comparable to our financial position as of December 31, 2010, and our results of operations for the years ended December 31, 2014, 2013 and 2012 are not comparable to our results of operations for the years ended December 31, 2011 and 2010.
The following tables present selected information relating to our consolidated financial condition and results of operations for the past five years. The selected financial data should be read in conjunction with our Consolidated Financial Statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
| For the Years Ended December 31, | ||||||||||||||||
| Statements of Operations Data: | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Revenue | $ | 3,445,578 | $ | 3,282,452 | $ | 3,121,704 | $ | 2,761,431 | $ | 2,350,369 | ||||||
| Total costs and expenses | 3,117,488 | 3,178,865 | 3,021,818 | 2,680,593 | 2,208,044 | |||||||||||
| | | | | | | | | | | | | | | | | |
| Operating income | $ | 328,090 | $ | 103,587 | $ | 99,886 | $ | 80,838 | $ | 142,325 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income attributable to EchoStar common stock | $ | 165,268 | $ | 2,525 | $ | 211,048 | $ | 3,639 | $ | 204,358 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Basic weighted-average common shares outstanding | 91,190 | 89,405 | 87,150 | 86,223 | 85,084 | |||||||||||
| Diluted weighted-average common shares outstanding | 92,616 | 90,952 | 87,959 | 87,089 | 85,203 | |||||||||||
| Basic earnings per share | $ | 1.81 | $ | 0.03 | $ | 2.42 | $ | 0.04 | $ | 2.40 | ||||||
| Diluted earnings per share | $ | 1.78 | $ | 0.03 | $ | 2.40 | $ | 0.04 | $ | 2.40 |
| As of December 31, | ||||||||||||||||
| Balance Sheet Data: | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||
| (In thousands) | ||||||||||||||||
| Cash, cash equivalents and current marketable securities | $ | 1,688,156 | $ | 1,620,652 | $ | 1,547,565 | $ | 1,696,442 | $ | 1,130,900 | ||||||
| Total assets | $ | 7,253,998 | $ | 6,701,963 | $ | 6,600,233 | $ | 6,543,737 | $ | 3,842,020 | ||||||
| Total debt and capital lease obligations | $ | 2,367,687 | $ | 2,422,388 | $ | 2,488,499 | $ | 2,528,654 | $ | 406,570 | ||||||
| Total stockholders' equity | $ | 3,623,638 | $ | 3,226,231 | $ | 3,150,227 | $ | 3,051,626 | $ | 3,013,190 |
| For the Years Ended December 31, | ||||||||||||||||
| Cash Flow Data: | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||
| (In thousands) | ||||||||||||||||
| Net cash flows from: | ||||||||||||||||
| Operating activities | $ | 840,131 | $ | 450,507 | $ | 505,149 | $ | 447,018 | $ | 404,015 | ||||||
| Investing activities | $ | (887,590 | ) | $ | (570,289 | ) | $ | (346,781 | ) | $ | (1,888,045 | ) | $ | (238,558 | ) | |
| Financing activities | $ | (35,096 | ) | $ | 18,326 | $ | (43,976 | ) | $ | 1,913,547 | $ | (46,973 | ) |
**Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS **
Unless the context indicates otherwise, as used herein, the terms "we," "us," "EchoStar," the "Company" and "our" refer to EchoStar Corporation and its subsidiaries. References to "$" are to United States dollars. The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to our financial statements included elsewhere in this Annual Report on Form 10-K. This management's discussion and analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this management's discussion and analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. See "Disclosure Regarding Forward-Looking Statements" in this Annual Report on Form 10-K for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, see the caption "Risk Factors" in Item 1A of this Annual Report on Form 10-K. Further, such forward-looking statements speak only as of the date of this Annual Report on Form 10-K and we undertake no obligation to update them.
**EXECUTIVE SUMMARY **
EchoStar is a global provider of satellite operations, video delivery solutions, and broadband satellite technologies and services for the home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments. We currently operate in three business segments, which are differentiated primarily by their operational focus: EchoStar Technologies, Hughes, and EchoStar Satellite Services. These segments are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by our chief operating decision maker ("CODM"), who for EchoStar is the Company's Chief Executive Officer.
Our segment operating results do not include real estate and other activities, costs incurred in certain satellite development programs and other business development activities, expenses of various corporate departments, and our centralized treasury operations, including income from our investment portfolio and interest expense on our debt. These activities are accounted for in "All Other and Eliminations."
Highlights from our financial results are as follows:
**2014 Consolidated Results of Operations for the Year Ended December 31, 2014 **
Revenue of $3.45 billion
Operating income of $328.1 million
Net income attributable to EchoStar of $152.9 million
Net income attributable to EchoStar common stock of $165.3 million and basic earnings per share of common stock of $1.81
EBITDA of $902.6 million (See non-GAAP reconciliation in Note 17 in the notes to consolidated financial statements in Item 15 of this report.)
**Consolidated Financial Condition as of December 31, 2014 **
Total assets of $7.25 billion
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued
Total liabilities of $3.11 billion
Total stockholders' equity of $3.62 billion
Cash, cash equivalents and current marketable investment securities of $1.69 billion
**EchoStar Technologies Segment **
Our EchoStar Technologies segment designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers, telecommunication companies and international cable companies. The primary customer for our digital set-top boxes is DISH Network Corporation and its subsidiaries ("DISH Network"), and we also sell digital set-top boxes to a DTH satellite service provider in Canada ("Bell TV"), Dish Mexico, S. de R.L. de C.V. ("Dish Mexico"), a joint venture that we entered into in 2008, and other international customers. We depend on DISH Network for a substantial portion of our EchoStar Technologies segment revenue and we expect that DISH Network will continue to be the primary source of revenue for our EchoStar Technologies segment. In addition, our equipment revenue from DISH Network depends on the timing of orders for set-top boxes and accessories from DISH Network based on its actual and projected subscriber growth. Therefore, the results of operations of our EchoStar Technologies segment are, and are likely to continue to be, closely linked to the performance of DISH Network's pay-TV service.
Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network. In addition, we provide our Slingboxes directly to consumers via retail outlets and online, as well as the payTV operator market via our partnership with Arris. Sling Media "placeshifting" technology gives consumers the ability, at their option, to watch and control their home digital video and audio content via a broadband internet connection.
We continue to focus on building and strengthening our brand recognition by providing unique and technologically advanced features and products. Products containing new technologies and features typically have higher initial selling prices, margins and volumes. The market for our digital set-top boxes, like other electronic products has also been characterized by regular reductions in selling prices and production costs. Our ability to sustain or increase profitability also depends in large part on our ability to control or reduce our costs of producing digital set-top boxes. Based on our experience, we expect our cost of manufacturing a specific set-top box model to decline over time as our contract manufacturers generate efficiencies with scale of production and engineering cost reductions. Overall, our success depends heavily on our ability to bring advanced technologies to market to keep pace with our competitors.
The number of potential new customers for our EchoStar Technologies segment is small and may be limited as prospective customers that have been competitors of DISH Network may continue to view us as a competitor due to our common ownership with DISH Network. We believe that our best opportunities for developing potential new customers for our EchoStar Technologies segment over the near term lie in international markets, including through joint ventures. We have extended our exclusive equipment partnership with Bell TV through the end of 2015. Additionally, our joint venture with Dish Mexico continues to see growth. We are continuing to work with Dish Mexico on enhanced features and services that will help it respond to competitive pressures in Mexico. We are also exploring the development of other in-home products and applications.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued
**Hughes Segment **
Our Hughes segment is a global provider of broadband satellite technologies and services for the home and office, delivering innovative network technologies, managed services, and solutions for consumers, enterprises and governments.
We continue our efforts in growing our consumer revenue, which depends on our success in adding new subscribers on our Hughes segment's satellite networks. The addition of new subscribers and the performance of our consumer service offering, primarily drive the revenue growth in our consumer business. Service costs related to ongoing support of our direct and indirect customers and partners are typically impacted most significantly by our growth. Long term trends continue to be influenced primarily by the subscriber growth in our consumer business. Additional capacity provided in this business by new satellite launches provides impetus for initial subscriber growth while we manage subscriber growth across our satellite platform. In March 2013, we entered into a contract for the design and construction of the EchoStar XIX satellite, which is expected to be launched in the second quarter of 2016. EchoStar XIX is a next-generation, high throughput geostationary satellite that will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the Hughes broadband services to the consumer market in North America. The costs associated with the construction and launch of EchoStar XIX are included in "All Other and Eliminations" in our segment reporting.
Our Hughes segment also provides managed services, hardware, and satellite services to large enterprises. In addition, we provide gateway and terminal equipment to customers for mobile satellite systems. The fixed pricing nature of our long term enterprise contracts minimizes significant quarter to quarter fluctuations. We continue to monitor the competitive landscape for pricing in relation to our competitors and alternative technologies. However, the growth of our enterprise businesses relies heavily on global economic conditions.
In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil will provide to Hughes Telecomunicações do Brasil Ltda., our subsidiary, fixed broadband service using the Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term. The satellite service agreement requires us to make prepayments during the construction period. The satellite is scheduled to be placed into service in the second quarter of 2016 and will deliver consumer satellite broadband services in Brazil and creates a platform to potentially allow for further development of our spectrum in Brazil.
As of December 31, 2014, 2013 and 2012, our Hughes segment had approximately 977,000, 860,000 and 636,000 broadband subscribers, respectively. These subscribers include subscriptions with HughesNet services, through retail, wholesale and small/medium enterprise service channels. Gross subscriber additions decreased in 2014 compared to the same period in 2013 due primarily to satellite beams servicing certain areas reaching capacity. Our average monthly subscriber churn in 2014 remained at the same level as compared to the same period in 2013, however, total disconnects increased due to the increased number of subscribers. As a result, for the year ended December 31, 2014, net subscriber additions of 117,000 were lower than the same period last year primarily reflecting the decrease in gross subscriber additions and churn on the increasing base of subscribers.
As of December 31, 2014 and 2013, our Hughes segment had approximately $1.26 billion and $1.15 billion, respectively, of contracted revenue backlog. We define Hughes revenue backlog as our expected future revenue under customer contracts that are non-cancelable, excluding agreements with
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued
customers in our consumer market. Of the total contracted revenue backlog as of December 31, 2014, we expect to recognize approximately $407.9 million of revenue in 2015.
**EchoStar Satellite Services Segment **
Our EchoStar Satellite Services segment operates its business using its 16 owned and leased in-orbit satellites. We provide satellite services on a full-time and occasional-use basis primarily to DISH Network, Dish Mexico, U.S. government service providers, state agencies, internet service providers, broadcast news organizations, programmers and private enterprise customers.
We depend on DISH Network for a significant portion of the revenue for our EchoStar Satellite Services segment and we expect that DISH Network will continue to be the primary source of revenue for our EchoStar Satellite Services segment. Therefore, the results of operations of our EchoStar Satellite Services segment are linked to long-term changes in DISH Network's satellite capacity requirements. We continue to pursue expanding our business offerings by providing value added services such as telemetry, tracking and control services to third parties. Revenue growth in our EchoStar Satellite Services segment is a function of available satellite capacity to sell. The satellite we currently have under construction is expected to ultimately produce revenue once launched and placed into operation, and therefore, factors that interfere with our construction and launch schedules will impact our expected revenue growth. In addition, any disruption in planned renewals of our service arrangements could impact customer commitments and have an impact on our revenue and financial performance. Technical issues, regulatory and licensing issues, manufacturer performance/stability and availability of capital to continue to fund our programs also are factors in achieving our business plans for this segment.
In August 2014, we entered into: (i) a construction contract with Airbus Defence and Space SAS for the construction of the EchoStar 105/SES-11 satellite with C-band, Ku-band and Ka-band payloads; (ii) an agreement with SES Satellite Leasing Limited for the procurement of the related launch services; and (iii) an agreement with SES Americom Inc. ("SES") pursuant to which we will transfer the title to the C-band and Ka-band payloads to SES Satellite Leasing Limited at launch and transfer the title to the Ku-band payload to SES following in-orbit testing of the satellite. Additionally, SES will provide to us satellite service on the entire Ku-band payload on EchoStar 105/SES-11 for an initial ten-year term, with an option for us to renew the agreement on a year-to-year basis.
As of December 31, 2014 and 2013, our EchoStar Satellite Services segment had contracted revenue backlog attributable to satellites currently in orbit of approximately $1.71 billion and $1.14 billion, respectively. The increase in backlog is primarily the result of additional satellite services on EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV provided to DISH Network beginning March 1, 2014, as part of the Satellite and Tracking Stock Transaction. Of the total contracted revenue backlog as of December 31, 2014, we expect to recognize approximately $398.1 million of revenue in 2015.
**New Business Opportunities **
We are selectively exploring opportunities to pursue partnerships, joint ventures and strategic acquisition opportunities, domestically and internationally, 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.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued
In 2012, we acquired the right to use various frequencies at the 45 degree west longitude orbital location ("Brazilian Authorization") from ANATEL, the Brazilian communications regulatory agency. The Brazilian Authorization provides us the rights to utilize Ku-band spectrum for broadcast satellite service ("BSS"), Ka-band spectrum and S-band spectrum. With regards to the Ku-band BSS spectrum, we continue to pursue various opportunities to support a Brazilian service and remain focused on delivering a pay-TV service to Brazil via a high-powered BSS satellite. We are exploring options for the Ka-band and S-band spectrums. In April 2014, we entered into an agreement with Space Systems Loral, LLC ("SS/L") for the construction of the EchoStar XXIII satellite, a high powered BSS satellite, which will use some of the components from CMBStar, a satellite that we suspended construction of in 2008. EchoStar XXIII is expected to launch in the second half of 2016 and will be initially deployed at 45 degree west longitude orbital location.
In December 2013, we acquired 100.0% of Solaris Mobile, which is based in Dublin, Ireland and licensed by the European Union ("EU") and individual EU Member States to provide mobile satellite services ("MSS") and complementary ground component ("CGC") services covering the entire EU using S-band spectrum. We are in the process of developing commercial services, expected to begin in the first half of 2016, utilizing our existing EUTELSAT 10A (also known as "W2A") satellite, along with our EchoStar XXI S-band satellite. We are currently constructing, and have contracted to launch, EchoStar XXI to provide space segment capacity to Solaris Mobile in the first half of 2016. We believe we are in a unique position to deploy an European wide MSS/CGC network and maximize the long term value of our S-band spectrum in Europe and other regions within the scope of our licenses.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued
**RESULTS OF OPERATIONS **
**Basis of Presentation **
The following discussion and analysis of our consolidated results of operations is presented on a historical basis.
**Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013 **
| For the Years Ended December 31, | Variance | ||||||||||||
| Statements of Operations Data(1) | 2014 | 2013 | Amount | % | |||||||||
| (Dollars in thousands) | |||||||||||||
| Revenue: | |||||||||||||
| Equipment revenue—DISH Network | $ | 1,145,979 | $ | 1,311,446 | $ | (165,467 | ) | (12.6 | ) | ||||
| Equipment revenue—other | 374,049 | 347,910 | 26,139 | 7.5 | |||||||||
| Services and other revenue—DISH Network | 828,612 | 620,189 | 208,423 | 33.6 | |||||||||
| Services and other revenue—other | 1,096,938 | 1,002,907 | 94,031 | 9.4 | |||||||||
| | | | | | | | | | | | | | |
| Total revenue | 3,445,578 | 3,282,452 | 163,126 | 5.0 | |||||||||
| | | | | | | | | | | | | | |
| Costs and Expenses: | |||||||||||||
| Cost of sales—equipment | 1,288,998 | 1,430,777 | (141,779 | ) | (9.9 | ) | |||||||
| % of Total equipment revenue | 84.8 | % | 86.2 | % | |||||||||
| Cost of sales—services and other | 838,918 | 776,121 | 62,797 | 8.1 | |||||||||
| % of Total services and other revenue | 43.6 | % | 47.8 | % | |||||||||
| Selling, general and administrative expenses | 372,010 | 358,499 | 13,511 | 3.8 | |||||||||
| % of Total revenue | 10.8 | % | 10.9 | % | |||||||||
| Research and development expenses | 60,886 | 67,942 | (7,056 | ) | (10.4 | ) | |||||||
| % of Total revenue | 1.8 | % | 2.1 | % | |||||||||
| Depreciation and amortization | 556,676 | 507,111 | 49,565 | 9.8 | |||||||||
| Impairment of long-lived asset | — | 38,415 | (38,415 | ) | (100.0 | ) | |||||||
| | | | | | | | | | | | | | |
| Total costs and expenses | 3,117,488 | 3,178,865 | (61,377 | ) | (1.9 | ) | |||||||
| | | | | | | | | | | | | | |
| Operating income | 328,090 | 103,587 | 224,503 | * | |||||||||
| | | | | | | | | | | | | | |
| Other Income (Expense): | |||||||||||||
| Interest income | 9,102 | 14,656 | (5,554 | ) | (37.9 | ) | |||||||
| Interest expense, net of amounts capitalized | (171,349 | ) | (192,554 | ) | 21,205 | (11.0 | ) | ||||||
| Realized gains on marketable investment securities and other investments, net | 41 | 38,341 | (38,300 | ) | (99.9 | ) | |||||||
| Equity in earnings (losses) of unconsolidated affiliates, net | 8,198 | (5,024 | ) | 13,222 | * | ||||||||
| Other, net | 4,251 | 6,958 | (2,707 | ) | (38.9 | ) | |||||||
| | | | | | | | | | | | | | |
| Total other expense, net | (149,757 | ) | (137,623 | ) | (12,134 | ) | 8.8 | ||||||
| | | | | | | | | | | | | | |
| Income (loss) before income taxes | 178,333 | (34,036 | ) | 212,369 | * | ||||||||
| Income tax benefit (provision), net | (30,784 | ) | 37,437 | (68,221 | ) | * | |||||||
| | | | | | | | | | | | | | |
| Net income | 147,549 | 3,401 | 144,148 | * | |||||||||
| Less: Net loss attributable to noncontrolling interest in | |||||||||||||
| HSS Tracking Stock | (6,714 | ) | — | (6,714 | ) | * | |||||||
| Less: Net income attributable to other noncontrolling interests | 1,389 | 876 | 513 | 58.6 | |||||||||
| | | | | | | | | | | | | | |
| Net income attributable to EchoStar | $ | 152,874 | $ | 2,525 | $ | 150,349 | * | ||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Other Data: | |||||||||||||
| EBITDA | $ | 902,581 | $ | 650,097 | $ | 252,484 | 38.8 | ||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Subscribers, end of period | 977,000 | 860,000 | 117,000 | 13.6 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Percentage is not meaningful.
(1)
An explanation of our key metrics is included on pages 74 and 75.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued
Equipment revenue—DISH Network. "Equipment revenue—DISH Network" totaled $1.15 billion for the year ended December 31, 2014, a decrease of $165.5 million, or 12.6%, compared to the same period in 2013.
Equipment revenue—DISH Network from our EchoStar Technologies segment for the year ended December 31, 2014 decreased by $128.3 million, or 10.3%, to $1.11 billion compared to the same period in 2013. Our EchoStar Technologies segment offers multiple set-top boxes with different price points depending on their capabilities and functionalities. The revenue and associated margins we earn on sales are determined largely through our Receiver Agreement with DISH Network which could result in prices reflecting, among other things, the set-top boxes and other equipment that meet DISH Network's current sales and marketing priorities, the product and service alternatives available from other equipment suppliers, our ability to respond to DISH Network's requirements, and our ability to differentiate ourselves from other equipment suppliers on bases other than pricing. In addition, products containing new technologies and features typically have higher initial prices, which reduce over time as a result of manufacturing efficiencies, demand decreases or as DISH Network's demand changes for new or refurbished units. The decrease in revenue for the year ended December 31, 2014 was primarily due to both the sale of set-top boxes and related accessories. In set-top boxes, the decrease was due to a 15.0% decrease in the weighted average price offset by a 4.3% increase in the unit sales. In related accessories, the decrease was due to a 13.5% decrease in unit sales partially offset by a 5.4% increase in the weighted average price.
Equipment revenue—DISH Network from our Hughes segment for the year ended December 31, 2014 decreased $37.2 million, or 53.8%, to $31.9 million compared to the same period in 2013. The decrease was primarily due to the decrease in the unit sales of broadband equipment to dishNET.
Equipment revenue—other. "Equipment revenue—other" totaled $374.0 million for the year ended December 31, 2014, an increase of $26.1 million or 7.5%, compared to the same period in 2013.
Equipment revenue—other from our EchoStar Technologies segment for the year ended December 31, 2014 increased $10.0 million, or 6.5%, to $163.1 million compared to the same period in 2013. The increase was attributable to an increase of 64.1% in unit sales of set-top boxes and an increase of 74.3% in sales of related accessories to our international customers. The increase was partially offset by a 41.9% decrease in the weighted avera
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
**
**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 December 31, 2014, our cash, cash equivalents and current marketable investment securities had a fair value of $1.69 billion. Of this amount, a total of $1.65 billion was invested in: (a) cash; (b) commercial paper and corporate notes with an overall average maturity of less than one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating organizations; (c) VRDNs convertible into cash at par value plus accrued interest generally in five business days or less; (d) debt instruments of the U.S. government and its agencies; and/or (e) instruments with similar risk, duration and credit quality characteristics to the commercial paper and corporate obligations described above. The primary purpose of these investing activities has been to preserve principal until the cash is required to, among other things, fund operations, make strategic investments and expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is received and used in our business. The value of this portfolio may be negatively impacted by credit losses; however, this risk is mitigated through diversification that limits our exposure to any one issuer.
**Interest Rate Risk **
A change in interest rates would not affect the fair value of our cash, or materially affect the fair value of our cash equivalents due to their maturities of less than 90 days. A change in interest rates would affect the fair value of our current marketable debt securities portfolio; however, we normally hold these investments to maturity. Based on our current non-strategic investment portfolio of $1.65 billion as of December 31, 2014, a hypothetical 10% change in average interest rates during 2014 would not have a material impact on the fair value of our cash, cash equivalents and debt securities portfolio due to the limited duration of our investments.
Our cash, cash equivalents and current marketable debt securities had an average annual rate of return for the year ended December 31, 2014 of 0.6%. A change in interest rates would affect our future annual interest income from this portfolio, since funds would be re-invested at different rates as the instruments mature. A hypothetical 10% decrease in average interest rates during 2014 would have resulted in a decrease of approximately $0.9 million in annual interest income.
**Strategic Marketable Investment Securities **
As of December 31, 2014, we held current strategic investments in the publicly traded common stock of several companies with a fair value of $41.7 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 result in a decrease of approximately $4.2 million in the fair value of these investments.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK—Continued
**Restricted Cash and Marketable Investment Securities and Other Investments **
Restricted Cash and Marketable Investment Securities
As of December 31, 2014, we had $18.9 million of restricted cash and marketable investment securities invested in: (a) cash; (b) VRDNs convertible into cash at par value plus accrued interest generally in five business days or less; (c) debt instruments of the U.S. government and its agencies; (d) commercial paper and corporate notes with an overall average maturity of less than one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating organizations; and (e) instruments with similar risk, duration and credit quality characteristics to the commercial paper described above. Based on our investment portfolio as of December 31, 2014, a hypothetical 10% increase in average interest rates would not have a material impact on the fair value of our restricted cash and marketable investment securities.
Other Investments
As of December 31, 2014, we had $160.0 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 10% adverse change in the value of these debt and equity instruments would result in a decrease of approximately $16.0 million in the value of these investments.
Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies' businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.
**Foreign Currency Exchange Risk **
We generally conduct our business in U.S. dollars. Our international business is conducted in a variety of foreign currencies and it is therefore exposed to fluctuations in foreign currency exchange rates. Our objective in managing our exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, we may enter into foreign exchange contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. As of December 31, 2014, we had $16.8 million of foreign currency denominated receivables and payables outstanding, and foreign currency forward contracts with a notional value of $5.0 million in place to partially mitigate foreign currency exchange risk. The estimated fair values of the foreign exchange contracts were not material as of December 31, 2014. 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 be an estimated loss of $20.1 million as of December 31, 2014.
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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
**
Our Consolidated Financial Statements are included in Item 15 of this report beginning on page F-4.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
**
None.
Item 9A. CONTROLS AND PROCEDURES
**
**Disclosure Controls and Procedures **
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
**Changes in Internal Control over Financial Reporting **
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during our most recent fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We continue to review our internal control over financial reporting, and may from time to time make changes aimed at enhancing its effectiveness and to ensure that our systems evolve with our business.
**Management's Annual Report on Internal Control over Financial Reporting **
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Our internal control over financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
(ii)
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Item 9A. CONTROLS AND PROCEDURES—Continued
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.
The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K.
Item 9B. OTHER INFORMATION
**
None.
**PART III **
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
**
The information required by this Item with respect to the identity and business experience of our directors and corporate governance will be set forth in our Proxy Statement for the 2015 Annual Meeting of Shareholders, which will be filed no later than 120 days after December 31, 2014, under the caption "Election of Directors," which information is hereby incorporated herein by reference.
The information required by this Item with respect to the identity and business experience of our executive officers is set forth on pages 16-18 of this report under the caption "Executive Officers of the Registrant."
Item 11. EXECUTIVE COMPENSATION
**
The information required by this Item will be set forth in our Proxy Statement for the 2015 Annual Meeting of Shareholders, which will be filed no later than 120 days after December 31, 2014, under the caption "Executive Compensation and Other Information," which information is hereby incorporated herein by reference.
The information required by this Item with respect to our code of ethics is contained in Part I of this Form 10-K under the caption "Item 1: Business—Website Access."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
**
The information required by this Item will be set forth in our Proxy Statement for the 2015 Annual Meeting of Shareholders, which will be filed no later than 120 days after December 31, 2014, under the captions "Election of Directors," "Equity Security Ownership" and "Equity Compensation Plan Information," which information is hereby incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
**
The information required by this Item will be set forth in our Proxy Statement for the 2015 Annual Meeting of Shareholders, which will be filed no later than 120 days after December 31, 2014, under the caption "Certain Relationships and Related Party Transactions," which information is hereby incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
**
The information required by this Item will be set forth in our Proxy Statement for the 2015 Annual Meeting of Shareholders, which will be filed no later than 120 days after December 31, 2014, under the caption "Principal Accountant Fees and Services," which information is hereby incorporated herein by reference.
**PART IV **
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
**
(a)
The following documents are filed as part of this report:
(1)
Consolidated Financial Statements
(2)
Financial Statement Schedules
| Schedule I—Condensed Financial Information of Registrant (Parent Company Information Only): | ||||
| Condensed Balance Sheets | F-74 | |||
| Condensed Statements of Operations | F-75 | |||
| Condensed Statements of Cash Flows | F-76 | |||
| Schedule II—Valuation and Qualifying Accounts | F-77 |
(3)
Exhibits
| 2.1 | * | Form of Separation Agreement between EchoStar Corporation and DISH Network Corporation (incorporated by reference to Exhibit 2.1 to Amendment No. 3 of EchoStar Corporation's Form 10 dated December 28, 2007, Commission File No. 001-33807). | |
| 2.2 | * | Agreement and Plan of Merger between EchoStar Corporation, EchoStar Satellite Services L.L.C., Broadband Acquisition Corporation and Hughes Communications, Inc. dated as of February 13, 2011 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Hughes Communications, Inc. filed February 15, 2011, Commission File No. 1-33040).**** | |
| 3.1 | * | Articles of Incorporation of EchoStar Corporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 of EchoStar Corporation's Form 10 dated December 12, 2007, Commission File No. 001-33807), as amended by the Amendment to the Articles of Incorporation of EchoStar Corporation (incorporated by reference to Exhibit 3.1 to EchoStar Corporation's Current Report on Form 8-K filed January 25, 2008, Commission File No. 001-33807). | |
| 3.2 | * | Bylaws of EchoStar Corporation (incorporated by reference to Exhibit 3.2 to Amendment No. 1 of EchoStar Corporation's Form 10 dated December 12, 2007, Commission File No. 001-33807). | |
| 3.3 | * | EchoStar Corporation Certificate of Designation Establishing the Voting Powers, Designations, Preferences, Limitations, Restrictions, and Relative Rights of the Hughes Retail Preferred Tracking Stock (incorporated by reference to Exhibit 3.1 to EchoStar Corporation's Current Report on Form 8-K filed March 3, 2014, Commission File No. 001-33807) | |
| 4.1 | * | Specimen Class A Common Stock Certificate of EchoStar Corporation (incorporated by reference to Exhibit 3.2 to Amendment No. 3 of EchoStar Corporation's Form 10 dated December 28, 2007, Commission File No. 001-33807). | |
| 4.2 | * | Indenture relating to the EH Holding Corporation (currently known as Hughes Satellite Systems Corporation) 61/2% Senior Secured Notes due 2019, dated as of June 1, 2011, by and among EH Holding Corporation, the guarantors listed on the signature page thereto, and Wells Fargo Bank, National Association, as collateral agent and trustee (incorporated by reference to Exhibit 4.1 to EchoStar Corporation's Current Report on Form 8-K filed June 2, 2011, Commission File No. 001-33807). | |
| 4.3 | * | Indenture relating to the EH Holding Corporation (currently known as Hughes Satellite Systems Corporation) 75/8% Senior Notes due 2021, dated as of June 1, 2011, by and among EH Holding Corporation, the guarantors listed on the signature page thereto, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to EchoStar Corporation's Current Report on Form 8-K filed June 2, 2011, Commission File No. 001-33807). | |
| 4.4 | * | Supplemental Indenture relating to the 61/2% Senior Secured Notes due 2019 of EH Holding Corporation (currently known as Hughes Satellite Systems Corporation), dated as of June 8, 2011, by and among EH Holding Corporation, the guarantors listed on the signature page thereto, and Wells Fargo Bank, National Association, as collateral agent and trustee (incorporated by reference to Exhibit 4.2 to EchoStar Corporation's Current Report on Form 8-K filed June 9, 2011, Commission File No. 001-33807). | |
| 4.5 | * | Supplemental Indenture relating to the 75/8% Senior Notes due 2021 of EH Holding Corporation (currently known as Hughes Satellite Systems Corporation), dated as of June 8, 2011, by and among EH Holding Corporation, the guarantors listed on the signature page thereto, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.3 to EchoStar Corporation's Current Report on Form 8-K filed June 9, 2011, Commission File No. 001-33807). | |
| 4.6 | * | Registration Rights Agreement, dated as of June 1, 2011, among EH Holding Corporation (currently known as Hughes Satellite Systems Corporation), the guarantors listed on the signature page thereto and Deutsche Bank Securities Inc. (incorporated by reference to Exhibit 4.3 to EchoStar Corporation's Current Report on Form 8-K filed June 2, 2011, Commission File No. 001-33807). | |
| 4.7 | * | Security Agreement, dated as of June 8, 2011, among EH Holding Corporation (currently known as Hughes Satellite Systems Corporation), the guarantors listed on the signature pages thereto, and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 4.1 to EchoStar Corporation's Current Report on Form 8-K filed June 9, 2011, Commission File No. 001-33807). | |
| 4.8 | * | Second Supplemental Indenture, dated as of March 28, 2014, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantors listed on the signature pages thereto, and Wells Fargo Bank, National Association, as collateral agent and trustee (incorporated by reference to Exhibit 4.1 to EchoStar Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, Commission File No. 001-33807).. |
| 4.9 | * | Second Supplemental Indenture, dated as of March 28, 2014, by and among Hughes Satellite Systems Corporation, the guarantors and the supplemental guarantors listed on the signature pages thereto, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to EchoStar Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, Commission File No. 001-33807). | |
| 4.10 | * | Joinder Agreement, dated as of March 28, 2014, to the Security Agreement dated as of June 8, 2011, by and among EchoStar XI Holding L.L.C., EchoStar XIV Holding L.L.C., and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of EchoStar Corporation filed May 9, 2014, Commission File No. 001-33807). | |
| 10.1 | * | Form of Tax Sharing Agreement between EchoStar Corporation and DISH Network Corporation (incorporated by reference to Exhibit 10.2 to Amendment No. 3 of EchoStar Corporation's Form 10 d |
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