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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
EchoStar Technologies Segment
Our EchoStar Technologies segment designs, develops and distributes secure end-to-end video technology solutions including digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunication companies. The primary customer for our digital set-top boxes is DISH Network Corporation and its subsidiaries (“DISH Network”), and we also our sell digital set-top boxes to Bell TV, a direct-to-home satellite service provider in Canada, 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 related 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 and Dish Mexico. In addition, we provide our TV Anywhere technology through Slingbox units directly to consumers via retail outlets and online, as well as to the pay-TV operator market.
Prior to 2015, Move Networks, our over-the-top (“OTT”), Streaming Video on Demand (“SVOD”) platform business, including certain assets that were distributed to us in August 2014 in connection with the Exchange Agreement with DISH Digital Holding L.L.C. (“Sling TV Holding”), (see Notes 6, 10 and 19 in our notes to consolidated financial statements in Item 15 of this report), was managed separately from our operating segments and was reported within “All Other and Eliminations.” In the first quarter of 2015, we assigned management responsibility for our Move Networks business to our EchoStar Technologies segment. We have retrospectively adjusted our segment reporting to reflect our Move Networks business as part of the EchoStar Technologies segment in prior periods (see Note 17 in our notes to the consolidated financial statements in Item 15 of this report).
During the second quarter of 2015, our EchoStar Technologies segment contributed several of its European subsidiaries to SmarDTV SA (“SmarDTV”), a Swiss subsidiary of Kudelski SA that offers set-top boxes and conditional access modules, in exchange for a 22.5% interest in the equity and subordinated debt of SmarDTV. We and SmarDTV also entered into a services agreement pursuant to which our EchoStar Technologies segment purchases certain engineering services from SmarDTV.
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. As products mature and new products are in the late stages of development, volumes typically decrease as our customers, primarily DISH Network, increase deployment of refurbished set-top boxes as opposed to purchasing new units from us. 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 continue to be a market leader and innovator.
The number of potential new customers for our set-top box business in 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. Our customers face emerging competition from other providers of digital media and potential government action preventing them from using security systems in connection with set-top boxes. In particular, programming offered over the internet has become more prevalent as the speed and quality of broadband networks have improved. As a result, we expect that demand for our satellite television digital set-top boxes from DISH Network and other customers could decline and we may not be able to sustain our current revenue levels.
With our expertise in connectivity, security, and video, we are developing new consumer product and service offerings, including a security and home automation solution, along with other products intended to grow our EchoStar Technologies segment revenue over time.
EchoStar Satellite Services Segment
Our EchoStar Satellite Services segment operates its business using its 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, 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
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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.
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. Simultaneously, SES will provide to us satellite service on the entire Ku-band payload on the EchoStar 105/SES-11 satellite for an initial ten-year term, with an option for us to renew the agreement on a year-to-year basis.
Revenue growth in our EchoStar Satellite Services segment is a function of available satellite capacity to sell. Our EchoStar 105/SES-11 satellite is currently under construction and will replace the capacity currently leased on the AMC-15 satellite. Once launched, which is expected in the fourth quarter of 2016, and placed into operation, we expect revenue from the satellite to exceed the revenue currently serviced by the AMC-15 satellite. Any factors that interfere with the construction and launch schedule of the EchoStar 105/SES-11 satellite could impact our expected revenue. 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.
As of December 31, 2015 and 2014, our EchoStar Satellite Services segment had contracted revenue backlog attributable to satellites currently in orbit of approximately $1.41 billion and $1.71 billion, respectively. The decrease is primarily driven by the fixed-term nature of the satellite services agreements with DISH Network. Of the total contracted revenue backlog as of December 31, 2015, we expect to recognize approximately $373.2 million of revenue in 2016.
New Business Opportunities
Our industry is evolving with the increase in worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, low-earth orbit networks, balloons, and High Altitude Platform Systems (“HAPS”) will likely play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, networks and services for information, entertainment and commerce in North America and internationally for consumers, enterprises and governments.
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. We may allocate significant resources for long-term initiatives that may not have a short or medium term or any positive impact on our revenue, results of operations, or cash flow.
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. We are also 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. The EchoStar XXIII satellite is expected to launch in the third quarter of 2016 and will be deployed at the 45 degree west longitude orbital location.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In December 2013, we acquired 100% of Solaris Mobile, which is based in Dublin, Ireland and licensed by the European Union and its member states (“EU”) to provide mobile satellite services (“MSS”) and complementary ground component (“CGC”) services covering the entire EU using S-band spectrum. Solaris Mobile changed its name to EchoStar Mobile Limited (“EchoStar Mobile”) in the first quarter of 2015. We are in the process of developing commercial services, expected to begin in the second half of 2016, utilizing the operable transponders we own on the EUTELSAT 10A (also known as “W2A”) satellite, along with our EchoStar XXI S-band satellite. We are currently constructing, and expect to launch, the EchoStar XXI satellite in the second quarter of 2016 to provide space segment capacity to EchoStar Mobile. We believe we are in a unique position to deploy a 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.
In June 2015, we purchased an equity investment in WorldVu Satellites Limited (“OneWeb”), a low-earth orbit satellite company. In addition, our Hughes segment entered into an agreement with OneWeb to provide certain equipment and services in connection with the ground system for OneWeb’s low-earth orbit satellites.
Capital expenditures associated with the construction and launch of the EchoStar XXIII and EchoStar XXI satellites are included in “All Other and Eliminations” in our segment reporting.
RESULTS OF OPERATIONS
Basis of Presentation
The following discussion and analysis of our consolidated results of operations is presented on a historical basis.
Prior to 2015, our Move Networks business, including certain assets distributed to us in August 2014 in connection with the Exchange Agreement with Sling TV Holding (see Notes 6, 10 and 19 to the consolidated financial statements in Item 15 of this report), was managed separately from our existing operating segments and was reported within “All Other and Eliminations.” In the first quarter of 2015, we assigned management responsibility for our Move Networks business to our EchoStar Technologies segment, where it continues to be managed and reported as a separate reporting unit. All prior period amounts have been retrospectively adjusted to present operations of our Move Networks business in our EchoStar Technologies segment.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
| For the Years | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ended December 31, | Variance | |||||||||||
| Statements of Operations Data (1) | 2015 | 2014 | Amount | % | ||||||||
| (Dollars in thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Equipment revenue - DISH Network | $ | 763,184 | $ | 1,145,979 | $ | (382,795 | ) | (33.4 | ) | |||
| Equipment revenue - other | 358,301 | 374,049 | (15,748 | ) | (4.2 | ) | ||||||
| Services and other revenue - DISH Network | 918,301 | 828,612 | 89,689 | 10.8 | ||||||||
| Services and other revenue - other | 1,103,928 | 1,096,938 | 6,990 | 0.6 | ||||||||
| Total revenue | 3,143,714 | 3,445,578 | (301,864 | ) | (8.8 | ) | ||||||
| Costs and Expenses: | ||||||||||||
| Cost of sales - equipment | 948,655 | 1,288,998 | (340,343 | ) | (26.4 | ) | ||||||
| % of Total equipment revenue | 84.6 | % | 84.8 | % | ||||||||
| Cost of sales - services and other | 856,065 | 838,918 | 17,147 | 2.0 | ||||||||
| % of Total services and other revenue | 42.3 | % | 43.6 | % | ||||||||
| Selling, general and administrative expenses | 374,116 | 372,010 | 2,106 | 0.6 | ||||||||
| % of Total revenue | 11.9 | % | 10.8 | % | ||||||||
| Research and development expenses | 78,287 | 60,886 | 17,401 | 28.6 | ||||||||
| % of Total revenue | 2.5 | % | 1.8 | % | ||||||||
| Depreciation and amortization | 528,158 | 556,676 | (28,518 | ) | (5.1 | ) | ||||||
| Impairment of long-lived asset | 2,400 | — | 2,400 | * | ||||||||
| Total costs and expenses | 2,787,681 | 3,117,488 | (329,807 | ) | (10.6 | ) | ||||||
| Operating income | 356,033 | 328,090 | 27,943 | 8.5 | ||||||||
| Other Income (Expense): | ||||||||||||
| Interest income | 10,429 | 9,102 | 1,327 | 14.6 | ||||||||
| Interest expense, net of amounts capitalized | (122,066 | ) | (171,349 | ) | 49,283 | (28.8 | ) | |||||
| Loss from partial redemption of debt | (5,044 | ) | — | (5,044 | ) | * | ||||||
| Gains (losses) and impairment on marketable investment securities, net | (17,669 | ) | 41 | (17,710 | ) | * | ||||||
| Equity in earnings of unconsolidated affiliates, net | 1,895 | 8,198 | (6,303 | ) | (76.9 | ) | ||||||
| Other, net | (2,006 | ) | 4,251 | (6,257 | ) | * | ||||||
| Total other expense, net | (134,461 | ) | (149,757 | ) | 15,296 | (10.2 | ) | |||||
| Income (loss) before income taxes | 221,572 | 178,333 | 43,239 | 24.2 | ||||||||
| Income tax provision, net | (72,201 | ) | (30,784 | ) | (41,417 | ) | * | |||||
| Net income | 149,371 | 147,549 | 1,822 | 1.2 | ||||||||
| Less: Net loss attributable to noncontrolling interest in HSS Tracking Stock | (5,603 | ) | (6,714 | ) | 1,111 | (16.5 | ) | |||||
| Less: Net income attributable to other noncontrolling interests | 1,617 | 1,389 | 228 | 16.4 | ||||||||
| Net income attributable to EchoStar | $ | 153,357 | $ | 152,874 | $ | 483 | 0.3 | |||||
| Other Data: | ||||||||||||
| EBITDA | $ | 865,353 | $ | 902,581 | $ | (37,228 | ) | (4.1 | ) | |||
| Subscribers, end of period | 1,035,000 | 977,000 | 58,000 | 5.9 |
- Percentage is not meaningful.
(1) An explanation of our key metrics is included on pages 67 and 68 under the heading “Explanation of Key Metrics and Other Items.”
Equipment revenue — DISH Network. “Equipment revenue — DISH Network” totaled $763.2 million for the year ended December 31, 2015, a decrease of $382.8 million, or 33.4%, compared to the same period in 2014.
Equipment revenue — DISH Network from our Hughes segment for the year ended December 31, 2015 decreased by $21.2 million, or 66.3%, to $10.8 million compared to the same period in 2014. The decrease was primarily due to the decrease in the volume of unit sales of broadband equipment to dishNET Satellite Broadband L.L.C. (“dishNET”). Sales of broadband equipment to dishNET have been decreasing as a
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
result of a decrease in the unit sales of broadband equipment to dishNET.
Equipment revenue — DISH Network from our EchoStar Technologies segment for the year ended December 31, 2015 decreased by $361.6 million, or 32.5%, to $752.4 million compared to the same period in 2014. 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 a receiver agreement we entered into 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. Volume of unit sales could reduce over time as a result of demand decreases or as DISH Network increases the deployment of refurbished units as opposed to new units purchased from us. The decrease in revenue for the year ended December 31, 2015 was primarily due to a decrease in the sales of set-top boxes and related accessories. The decrease in revenue of set-top boxes was due to a 41.8% decrease in the volume of unit sales and a 2.1% decrease in the weighted average price of the set-top boxes sold. The decrease in revenue of related accessories was due to a 10.1% decrease in the volume of unit sales and an 8.6% decrease in the weighted average price of related accessories sold.
Equipment revenue — other. “Equipment revenue — other” totaled $358.3 million for the year ended December 31, 2015, a decrease of $15.7 million or 4.2%, compared to the same period in 2014.
Equipment revenue — other from our Hughes segment for the year ended December 31, 2015 increased by $0.9 million, or 0.4%, to $211.7 million compared to the same period in 2014. The increase was mainly due to an increase of $5.8 million in sales of broadband equipment to our international customers and domestic enterprise market, partially offset by a decrease of $5.5 million in sales of broadband equipment to our domestic consumer market and government projects.
Equipment revenue — other from our EchoStar Technologies segment for the year ended December 31, 2015 decreased by $16.5 million, or 10.1%, to $146.6 million compared to the same period in 2014. The decrease was attributable to an 11.4% decrease in the volume of unit sales of related accessories, a 7.5% decrease in the weighted average price of set-top boxes sold primarily to our international customers and a 6.7% decrease in the weighted average price of related accessories.
Services and other revenue — DISH Network. “Services and other revenue — DISH Network” totaled $918.3 million for the year ended December 31, 2015, an increase of $89.7 million or 10.8%, compared to the same period in 2014.
Services and other revenue — DISH Network from our Hughes segment for the year ended December 31, 2015 increased by $13.7 million, or 16.9%, to $94.4 million compared to the same period in 2014. The increase was primarily attributable to an increase in wholesale subscribers receiving services pursuant to our Distribution Agreement with dishNET.
Services and other revenue — DISH Network from our EchoStar Technologies segment for the year ended December 31, 2015 increased by $59.6 million, or 18.1%, to $389.0 million compared to the same period in 2014. The increase was primarily due to an increase of $57.0 million in revenue earned for engineering services related to Sling TV Holding and other projects and satellite uplink/downlink services.
Services and other revenue — DISH Network from our EchoStar Satellite Services segment for the year ended December 31, 2015 increased by $16.2 million, or 4.0%, to $423.5 million compared to the same period in 2014. The increase was mainly due to an increase of $26.9 million in revenue recognized from certain satellite services provided to DISH Network for the five satellites transferred to us from DISH Network as part of the Satellite and Tracking Stock Transaction. See Note 4 in the notes to consolidated financial statements in Item 15 of this report for further discussion related to the Satellite and Tracking
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Stock Transaction. The increase was partially offset by a decrease of $9.0 million in services provided to DISH Network on the EchoStar VIII and EchoStar XII satellites.
Services and other revenue — other. “Services and other revenue — other” totaled $1.10 billion for the year ended December 31, 2015, an increase of $7.0 million, or 0.6%, compared to the same period in 2014.
Services and other revenue — other from our Hughes segment for the year ended December 31, 2015 increased by $26.2 million, or 2.6%, to $1.03 billion compared to the same period in 2014. The increase was primarily attributable to an increase of $54.2 million in sales of broadband services to our domestic consumer markets, partially offset by a decrease of $24.7 million of broadband services to our international customers, primarily due to weakening foreign exchange rates in certain markets.
Services and other revenue — other from our EchoStar Technologies segment for the year ended December 31, 2015 decreased by $10.6 million, or 51.1%, to $10.2 million compared to the same period in 2014. The decrease was primarily attributable to a decrease of $6.1 million in revenue from system integration services and $4.7 million in revenue from certain non-recurring engineering projects and services.
Services and other revenue — other from our EchoStar Satellite Services segment for the year ended December 31, 2015 decreased by $10.0 million, or 13.0%, to $67.1 million compared to the same period in 2014. The decrease was primarily attributable to a decrease in sales of transponder services in 2015 compared to the same period in 2014 due to a decrease in transponders available for sale.
Cost of sales — equipment. “Cost of sales — equipment” totaled $948.7 million for the year ended December 31, 2015, a decrease of $340.3 million, or 26.4%, compared to the same period in 2014.
Cost of sales — equipment from our Hughes segment for the year ended December 31, 2015 decreased by $13.9 million, or 6.6%, to $195.1 million compared to the same period in 2014. The decrease was primarily attributable to a decrease in equipment costs related to the decrease in sales volume of broadband equipment to DISH Network related to our Distribution Agreement with dishNET, partially offset by an increase in the cost of sales of broadband equipment to our domestic enterprise market.
Cost of sales — equipment from our EchoStar Technologies segment for the year ended December 31, 2015 decreased by $326.4 million, or 30.2%, to $753.5 million compared to the same period in 2014. The decrease was primarily attributable to a decrease in equipment costs related to the decrease in the volume of sales of set-top boxes and related accessories sold to DISH Network and a decrease in the volume of sales of set-top boxes and related accessories to our international customers.
Cost of sales — services and other. “Cost of sales — services and other” totaled $856.1 million for the year ended December 31, 2015, an increase of $17.1 million, or 2.0%, compared to the same period in 2014.
Cost of sales — services and other from our Hughes segment for the year ended December 31, 2015 decreased by $26.7 million, or 5.5%, to $456.7 million compared to the same period in 2014. The decrease was primarily attributable to a decrease of $19.2 million in service costs of our broadband services provided to our international customers primarily due to lower in-country costs denominated in local currency and a decrease of $3.7 million in the cost of sales related to our domestic broadband services due to the decrease of third party space segment costs as customers either terminated services or migrated to our platform.
Cost of sales — services and other from our EchoStar Technologies segment for the year ended December 31, 2015 increased by $35.8 million, or 14.5%, to $282.2 million compared to the same period in 2014. The increase was primarily due to an increase in support costs related to engineering and uplink services provided in 2015 compared to the same period in 2014.
Cost of sales — services and other from our EchoStar Satellite Services segment for the year ended December 31, 2015 increased by $13.5 million, or 23.8%, to $70.2 million compared to the same period in
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
- The increase was primarily due to an increase in cost of sales related to the commencement of the AMC-15 and AMC-16 satellite operating leases in the fourth quarter of 2014 and the first quarter of 2015, respectively.
Research and development expenses. “Research and development expenses” totaled $78.3 million for the year ended December 31, 2015, an increase of $17.4 million, or 28.6%, compared to the same period in 2014. The increase was primarily related to an increase in research and development expense of $6.2 million and $11.2 million in our Hughes segment and EchoStar Technologies segment, respectively. The Company’s research and development activities vary based on the activity level and scope of other engineering and customer related development contracts.
Depreciation and amortization. “Depreciation and amortization” expenses totaled $528.2 million for the year ended December 31, 2015, a decrease of $28.5 million, or 5.1%, compared to the same period in 2014. The decrease was primarily attributable to a decrease of $15.0 million in amortization expense from certain of our fully amortized other intangible assets, a decrease in depreciation expense of $18.5 million relating to the fully depreciated EchoStar VIII and EchoStar XII satellites and a decrease in depreciation expense of $3.5 million relating to the expiration of the capital lease for the AMC-15 satellite in December 2014. The decreases were partially offset by increases in depreciation of $7.9 million from our EchoStar Satellite Services segment, primarily due to the depreciation of the five satellites we received from DISH Network as part of the Satellite and Tracking Stock Transaction.
Impairment of long-lived assets. “Impairment of long-lived assets” totaled $2.4 million for the year ended December 31, 2015, an increase of $2.4 million compared to the same period in 2014, due to the impairment of certain building and equipment in our EchoStar Technologies segment.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $122.1 million for the year ended December 31, 2015, a decrease of $49.3 million, or 28.8%, compared to the same period in 2014. The decrease was primarily due to higher capitalized interest of $40.0 million related to the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII, EchoStar 105/SES-11 and EUTELSAT 65 West A satellites, and a decrease in interest expense of $7.7 million relating to the partial redemption of $110.0 million of the principal amount of HSS’ 6 1/2% Senior Secured Notes due 2019 (the “Senior Secured Notes”) in the second quarter of 2015, the expiration of capital leases for the AMC-15 and AMC-16 satellites, and interest expense relating to two of our satellites that are accounted for as capital leases.
Loss from partial redemption of debt. “Loss from partial redemption of debt” totaled $5.0 million for the year ended December 31, 2015, which was due to the loss recorded on the partial redemption of the Senior Secured Notes in the second quarter of 2015. The $5.0 million loss from the partial redemption of the Senior Secured Notes included a $3.3 million redemption premium and a $1.7 million write off of related unamortized financing costs.
Gains (losses) and impairment on marketable investment securities, net. “Gains (losses) and impairment on marketable investment securities, net” totaled $17.7 million in losses for the year ended December 31, 2015, an increase in loss of $17.7 million compared to the same period in 2014. The increase in loss was primarily due to other than temporary impairment losses of $11.2 million on certain strategic equity securities in our marketable investment securities and an increase of $6.5 million in losses on our trading securities.
Equity in earnings of unconsolidated affiliates, net. “Equity in earnings of unconsolidated affiliates, net” totaled $1.9 million in earnings for the year ended December 31, 2015, a decrease of $6.3 million, or 76.9%, compared to the same period in 2014. The decrease in earnings is primarily due to a $10.3 million non-recurring adjustment to increase our equity in earnings of unconsolidated affiliates to reflect an increase from 24.0% to 49.0% in our interest in Dish Mexico’s inception-to-date net income in 2014 and a net decrease of $6.2 million in our equity of earnings of certain unconsolidated affiliates in 2015. The decreases were partially offset by a $10.2 million equity in the net loss of Sling TV Holding in 2014. See Note 6 in the notes to consolidated financial statement in Item 15 of this report for further discussion of the agreement.
Other, net. “Other, net” totaled $2.0 million in expenses for the year ended December 31, 2015 compared to $4.3 million in income for the same period in 2014. The decrease of $6.3 million was primarily related to a loss of
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
$6.8 million attributable to Federal Communications Commission (“FCC”) regulatory fees, a gain of $5.8 million in 2014 related to our investment in TerreStar Networks Inc. (“TerreStar”), an increase of $4.7 million in foreign exchange losses and a loss of $2.6 million related to the deconsolidation of certain of our European subsidiaries in connection with our investment in SmarDTV. The decrease was partially offset by a $4.8 million gain on an instrument related to our trading securities, a $4.5 million reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites in the first quarter of 2015 and a gain of $1.7 million on the exchange of accounts receivable for certain trading securities in the second quarter of 2015.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA was $865.4 million for the year ended December 31, 2015, a decrease of $37.2 million, or 4.1%, compared to the same period in 2014. Gross margin, which we define as total revenue less total cost of sales, increased by $21.3 million. There was also a $4.8 million gain on an instrument related to our trading securities, as well as a $4.5 million reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites in the first quarter of 2015. These increases in EBITDA were more than offset by increases in R&D expenses of $17.4 million, $16.1 million of non-recurring gains from 2014, an other-than-temporary impairment loss of $11.2 million on certain strategic equity securities, a loss of $6.8 million attributable to FCC regulatory fees, an increase of $4.7 million in foreign exchange losses, and a loss of $5.0 million from the partial redemption of the Senior Secured Notes. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles EBITDA to Income before income taxes, the most directly comparable GAAP measure in the accompanying financial statements.
| For the Years | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ended December 31, | Variance | |||||||||||
| 2015 | 2014 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| EBITDA | $ | 865,353 | $ | 902,581 | $ | (37,228 | ) | (4.1 | ) | |||
| Interest income and expense, net | (111,637 | ) | (162,247 | ) | 50,610 | (31.2 | ) | |||||
| Depreciation and amortization | (528,158 | ) | (556,676 | ) | 28,518 | (5.1 | ) | |||||
| Net loss attributable to noncontrolling interest in HSS | ||||||||||||
| Tracking Stock and other noncontrolling interests | (3,986 | ) | (5,325 | ) | 1,339 | (25.1 | ) | |||||
| Income before income taxes | $ | 221,572 | $ | 178,333 | $ | 43,239 | 24.2 |
Income tax provision, net. Income tax expense was $72.2 million for the year ended December 31, 2015, compared to $30.8 million for the same period in 2014. Our effective income tax rate was 32.6% for the year ended December 31, 2015 compared to 17.3% for the same period in 2014. The variation in our current year effective tax rate from the U.S. federal statutory rate was primarily due to research and experimentation tax credits. For the same period in 2014, the variation in our effective tax rate from the U.S. federal statutory rate was primarily due to research and experimentation tax credits and a lower state effective tax rate.
Net income attributable to EchoStar. Net income attributable to EchoStar was $153.4 million for the year ended December 31, 2015, an increase of $0.5 million, or 0.3%, compared to the same period in 2014. The increase was primarily due to a decrease in interest expense of $49.3 million related to capitalization of interest expense associated with the construction of certain of our satellites, the partial redemption of the Senior Secured Notes, the expiration of capital leases for the AMC-15 and AMC-16 satellites, and interest expense relating to two of our satellites that are accounted for as capital leases, and an increase in operating income, including depreciation and amortization, of $27.9 million. The increases were partially offset by an increase of $41.4 million in income tax expense, an other-than-temporary impairment loss of $11.2 million on certain strategic equity securities in our marketable investment securities, offset partially by a $4.8 million gain on an instrument related to our trading securities, a $10.3 million non-recurring adjustment to increase our equity in earnings of unconsolidated affiliates to reflect an increase from 24.0% to 49.0% in our interest in Dish Mexico’s inception-to-date net income in 2014, a loss of $6.8 million attributable to FCC regulatory fees, a gain of $5.8 million in 2014 related to our investment in TerreStar and a loss of $5.0 million from the partial redemption of the Senior Secured Notes.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Segment Operating Results and Capital Expenditures
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
| EchoStar | All | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EchoStar | Satellite | Other and | Consolidated | |||||||||||||
| Hughes | Technologies | Services | Eliminations | Total | ||||||||||||
| (In thousands) | ||||||||||||||||
| For the Year Ended December 31, 2015 | ||||||||||||||||
| Total revenue | $ | 1,347,340 | $ | 1,298,198 | $ | 490,591 | $ | 7,585 | $ | 3,143,714 | ||||||
| Capital expenditures | $ | 285,499 | $ | 50,593 | $ | 101,215 | $ | 266,213 | $ | 703,520 | ||||||
| EBITDA | $ | 396,684 | $ | 106,745 | $ | 412,607 | $ | (50,683 | ) | $ | 865,353 | |||||
| For the Year Ended December 31, 2014 | ||||||||||||||||
| Total revenue | $ | 1,327,718 | $ | 1,627,366 | $ | 484,455 | $ | 6,039 | $ | 3,445,578 | ||||||
| Capital expenditures | $ | 218,607 | $ | 48,616 | $ | 28,734 | $ | 384,069 | $ | 680,026 | ||||||
| EBITDA | $ | 356,871 | $ | 154,786 | $ | 419,442 | $ | (28,518 | ) | $ | 902,581 |
Hughes Segment
| For the Years Ended December 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| Total revenue | $ | 1,347,340 | $ | 1,327,718 | $ | 19,622 | 1.5 | |||||
| Capital expenditures | $ | 285,499 | $ | 218,607 | $ | 66,892 | 30.6 | |||||
| EBITDA | $ | 396,684 | $ | 356,871 | $ | 39,813 | 11.2 |
Revenue
Hughes segment total revenue for the year ended December 31, 2015 increased by $19.6 million, or 1.5%, compared to the same period in 2014. The increase was primarily due to an increase of $70.5 million in revenue related to sales of broadband services to our consumer markets and dishNET. These increases were partially offset by a decrease of $24.7 million of broadband services to our international customers primarily due to weakening foreign exchange rates in certain markets and a decrease of $21.2 million in sales of broadband equipment to dishNET.
Capital Expenditures
Hughes segment capital expenditures for the year ended December 31, 2015 increased by $66.9 million, or 30.6%, compared to the same period in 2014, primarily as a result of an increase in expenditures on satellite ground infrastructures and the EUTELSAT 65 West A satellite.
EBITDA
Hughes segment EBITDA for the year ended December 31, 2015 was $396.7 million, an increase of $39.8 million, or 11.2%, compared to the same period in 2014. The increase was primarily driven by an increase of $66.6 million in gross margin primarily related to an increase in sales of broadband services to our consumer market and dishNET, offset partially by a decrease in broadband services to our international market, $11.3 million increase in selling, general and administrative expenses, and a $6.2 million increase in research and development expenses.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
EchoStar Technologies Segment
| For the Years Ended December 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| Total revenue | $ | 1,298,198 | $ | 1,627,366 | $ | (329,168 | ) | (20.2 | ) | |||
| Capital expenditures | $ | 50,593 | $ | 48,616 | $ | 1,977 | 4.1 | |||||
| EBITDA | $ | 106,745 | $ | 154,786 | $ | (48,041 | ) | (31.0 | ) |
Revenue
EchoStar Technologies segment total revenue for the year ended December 31, 2015 decreased by $329.2 million, or 20.2%, compared to the same period in 2014, primarily resulting from a decrease of $361.6 million in equipment revenue from DISH Network, a decrease of $16.5 million in equipment revenue - other and a decrease of $10.6 million in service revenue — other, partially offset by an increase of $59.6 million in service revenue from DISH Network.
Capital Expenditures
EchoStar Technologies segment capital expenditures for the year ended December 31, 2015 increased by $2.0 million, or 4.1%, compared to the same period in 2014, primarily due to increased expenditures related to the support of our Move Networks business of $5.3 million and engineering services of $0.7 million, partially offset by a decrease in expenditures related to our digital broadcast centers of $5.0 million.
EBITDA
EchoStar Technologies segment EBITDA for the year ended December 31, 2015 was $106.7 million, a decrease of $48.0 million, or 31.0%, compared to the same period in 2014. The decrease in EBITDA for our EchoStar Technologies segment was primarily driven by a decrease of $38.6 million in gross margin primarily as a result of the decrease in sales of set-top boxes and related accessories to DISH Network. The decrease in EBITDA was also the result of an increase of $11.2 million in research and development expense, a loss of $2.6 million related to the deconsolidation of certain of our European subsidiaries in connection with our investment in SmarDTV and an impairment loss of $2.4 million on certain building and equipment. The decreases were partially offset by a $9.4 million decrease in selling, general and administrative expenses.
EchoStar Satellite Services Segment
| For the Years Ended December 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| Total revenue | $ | 490,591 | $ | 484,455 | $ | 6,136 | 1.3 | |||||
| Capital expenditures | $ | 101,215 | $ | 28,734 | $ | 72,481 | * | |||||
| EBITDA | $ | 412,607 | $ | 419,442 | $ | (6,835 | ) | (1.6 | ) |
Revenue
EchoStar Satellite Services segment total revenue for the year ended December 31, 2015 increased by $6.1 million, or 1.3%, compared to the same period in 2014, primarily due to an increase of $16.2 million in service revenue primarily related to satellite services provided to DISH Network on the five satellites we received as part of the Satellite and Tracking Stock Transaction, partially offset by a decrease of $10.0 million in service revenue — other attributable to a decrease in sales of transponder services due to a decrease in transponders available for sale.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Capital Expenditures
EchoStar Satellite Services segment capital expenditures for the year ended December 31, 2015 increased by $72.5 million, compared to the same period in 2014, primarily related to the increase in expenditures on the EchoStar 105/SES-11 satellite.
EBITDA
EchoStar Satellite Services segment EBITDA for the year ended December 31, 2015 was $412.6 million, a decrease of $6.8 million, or 1.6%, compared to the same period in 2014. The decrease in EBITDA for our EchoStar Satellite Services segment was primarily due to an increase in cost of sales — services of $13.5 million primarily related to the commencement of the AMC-15 and AMC-16 satellite operating leases in the fourth quarter of 2014 and the first quarter of 2015, respectively, partially offset by an increase in service revenue.
All Other and Eliminations
All Other and Eliminations accounts for certain items and activities in our consolidated financial statements that have not been assigned to our operating segments. These include without limitation real estate and other activities, costs incurred in satellite development programs and other business development activities, expenses of various corporate departments, and our centralized treasury activities, including without limitation income from our investment portfolio and interest expense on our debt.
| For the Years Ended December 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| Total revenue | $ | 7,585 | $ | 6,039 | $ | 1,546 | 25.6 | |||||
| Capital expenditures | $ | 266,213 | $ | 384,069 | $ | (117,856 | ) | (30.7 | ) | |||
| EBITDA | $ | (50,683 | ) | $ | (28,518 | ) | $ | (22,165 | ) | 77.7 |
Capital Expenditures
For the year ended December 31, 2015, All Other and Eliminations capital expenditures decreased by $117.9 million, or 30.7%, compared to the same period in 2014, primarily related to a $105.8 million refund relating to the cancellation of an existing launch services agreement and a decrease in satellite expenditures on the EchoStar XIX satellite of $149.0 million and the EchoStar XXI satellite of $43.5 million, partially offset by the increase in satellite expenditures on the EchoStar XXIII satellite of $73.5 million. The EchoStar XIX satellite is expected to be used in the operations of our Hughes segment in providing satellite broadband services, the EchoStar XXI satellite is intended to be used by EchoStar Mobile in providing MSS in the EU, and the EchoStar XXIII satellite will be deployed at the 45 degree west longitude orbital location providing services in Brazil.
EBITDA
For the year ended December 31, 2015, All Other and Eliminations EBITDA was a loss of $50.7 million, compared a loss of $28.5 million for the same period in 2014. The $22.2 million decrease in EBITDA was primarily related to $16.1 million of non-recurring gains from 2014, an other-than-temporary impairment loss of $11.2 million on certain strategic equity securities in our marketable investment securities, offset partially by a $4.8 million gain on an instrument related to our trading securities, and a loss of $5.0 million from the partial redemption of the Senior Secured Notes. The decreases were partially offset by a decrease of $6.9 million in cost of sales relating to termination of satellite services on the EchoStar XV satellite from DISH Network in November 2015.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 assets | — | 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 | ) | |||||
| Gains on marketable investment securities, 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 67 and 68 under the heading “Explanation of Key Metrics and Other Items.”
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 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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 a receiver agreement we entered into 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 — 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 Hughes segment for the year ended December 31, 2014 increased by $16.1 million, or 8.3%, to $210.8 million compared to the same period in 2013. The increase was mainly due to a $27.2 million increase in sales of telecom systems equipment and a $4.8 million increase in sales to international enterprise customers, partially offset by a decrease in sales of broadband equipment of $15.5 million primarily due to lower sales to our consumer and domestic enterprise markets.
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 average price of set-top boxes and a 20.1% decrease in the weighted average price of related accessories. The decrease in the average price per unit was due to the high volume of remanufactured products and the mix of product models purchased by our international customers and the renewal of certain customer contracts at lower contract prices with volume commitments.
Services and other revenue — DISH Network. “Services and other revenue — DISH Network” totaled $828.6 million for the year ended December 31, 2014, an increase of $208.4 million or 33.6%, compared to the same period in 2013.
Services and other revenue — DISH Network from our Hughes segment for the year ended December 31, 2014 increased by $36.0 million, or 80.4%, to $80.8 million compared to the same period in 2013. The increase was primarily attributable to an increase in wholesale subscribers receiving services pursuant to our Distribution Agreement with dishNET.
Services and other revenue — DISH Network from our EchoStar Technologies segment for the year ended December 31, 2014 increased by $10.8 million, or 3.4%, to $329.4 million compared to the same period in 2013. The increase was primarily due to an increase of $9.9 million related to application development for set-top boxes sold to DISH Network.
Services and other revenue — DISH Network from our EchoStar Satellite Services segment for the year ended December 31, 2014 increased by $160.1 million, or 64.8%, to $407.2 million compared to the same period in 2013. The increase was mainly due to an increase of $147.9 million in revenue recognized from certain satellite services provided to DISH Network from the five satellites transferred to us from DISH Network as part of the Satellite and Tracking Stock Transaction and an increase of $15.7 million from the renewal of our satellite services agreement related to services provided by the EchoStar VIII satellite to DISH Network that expired in the first quarter of 2013 and was renewed in the second quarter of 2013.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The increases were offset partially by a decrease of $3.5 million attributable to the amended telemetry, tracking and control (“TT&C”) agreement where we no longer provide TT&C services to DISH Network on the five satellites transferred to us from DISH Network as part of the Satellite and Tracking Stock Transaction.
Services and other revenue — other. “Services and other revenue — other” totaled $1.10 billion for the year ended December 31, 2014, an increase of $94.0 million or 9.4%, compared to the same period in 2013.
Services and other revenue — other from our Hughes segment for the year ended December 31, 2014 increased by $94.6 million, or 10.4%, to $1.00 billion compared to the same period in 2013. The increase was primarily attributable to an increase in sales of broadband services to our consumer and international customers.
Services and other revenue — other from our EchoStar Technologies segment for the year ended December 31, 2014 increased by $4.0 million, or 23.7%, to $20.8 million compared to the same period in 2013. The increase was primarily attributable to an increase of $5.4 million for system integration solutions, offset partially by a decrease of $1.8 million attributable to nonrecurring engineering projects and licenses.
Services and other revenue— other from our EchoStar Satellite Services segment for the year ended December 31, 2014, decreased by $5.8 million, or 7.0%, to $77.1 million compared to the same period in 2013. The decrease was mainly due to a decrease of $5.4 million in sales of uplink services in 2014 compared to the same period in 2013.
Cost of sales — equipment. “Cost of sales — equipment” totaled $1.29 billion for the year ended December 31, 2014, a decrease of $141.8 million, or 9.9%, compared to the same period in 2013.
Cost of sales — equipment from our Hughes segment for the year ended December 31, 2014 decreased by $28.1 million, or 11.8%, to $209.0 million compared to the same period in 2013. The decrease was primarily attributable to reductions in (i) equipment costs of $28.6 million resulting from lower sales of broadband equipment to dishNET and (ii) equipment development costs of $6.0 million for DISH Network as compared to the same period in 2013. These decreases were partially offset by higher equipment costs associated with the increase in sales of broadband equipment to our international enterprise customers and telecom systems equipment.
Cost of sales — equipment from our EchoStar Technologies segment for the year ended December 31, 2014 decreased by $113.8 million, or 9.5%, to $1.08 billion compared to the same period in 2013. The decrease was primarily attributable to a decrease in equipment costs of $120.5 million related to the decrease in sales of set-top boxes and related accessories to DISH Network, offset partially by an increase of $7.8 million in cost of sales related to the increase in sales of set-top boxes and related accessories to our international customers.
Cost of sales — services and other. “Cost of sales — services and other” totaled $838.9 million for the year ended December 31, 2014, an increase of $62.8 million, or 8.1%, compared to the same period in 2013.
Cost of sales — services and other from our Hughes segment for the year ended December 31, 2014 increased by $33.2 million, or 7.4%, to $483.4 million compared to the same period in 2013. The increase was primarily attributable to an increase in sales of broadband services to our consumer and international customers.
Cost of sales — services and other from our EchoStar Technologies segment for the year ended December 31, 2014 increased by $12.3 million, or 5.2%, to $246.4 million compared to the same period in 2013. The increase was primarily due to an increase in support costs of $17.9 million related to engineering and uplink services provided in 2014 compared to the same period in 2013, offset partially by a decrease in system integration solutions costs of $5.3 million.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Cost of sales — services and other related to our other operations and satellite development activities for the year ended December 31, 2014 increased by $18.0 million, or 36.6%, to $67.3 million compared to the same period in 2013. The increase was primarily due to our acquisition of satellite services on the EchoStar XV satellite from DISH Network in May 2013.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $372.0 million for the year ended December 31, 2014, an increase of $13.5 million, or 3.8%, compared to the same period in 2013. The increase was mainly due to a $16.4 million increase in marketing expenses primarily in our Hughes segment and an increase of $1.8 million in professional fees, offset partially by a $4.0 million decrease in personnel and other employee-related expenses.
Research and development expenses****. “Research and development expenses” totaled $60.9 million for the year ended December 31, 2014, a decrease of $7.1 million or 10.4%, compared to the same period in 2013. The decrease was primarily due to reductions of research and development related activities in our Hughes segment and EchoStar Technologies segment of $1.7 million and $5.4 million, respectively. The Company’s research and development activities vary based on the activity level and scope of other engineering and customer related development contracts. Additionally, the decrease in research and development expenses in our Hughes segment was primarily due to a $6.1 million increase in the development of software projects for products and features to be marketed or sold to customers that were eligible to be capitalized. Research and development expenses within our EchoStar Technologies segment decreased primarily due to an increased amount of customer funded projects, which is included in cost of sales.
Depreciation and amortization. “Depreciation and amortization” expense totaled $556.7 million for the year ended December 31, 2014, an increase of $49.6 million or 9.8%, compared to the same period in 2013. The increase was primarily related to an increase in depreciation of $39.7 million from our EchoStar Satellite Services segment, primarily due to the depreciation of the five satellites we received from DISH Network as part of the Satellite and Tracking Stock Transaction, an increase in depreciation of $18.6 million associated with customer rental equipment from our Hughes segment, and an increase of $4.5 million in amortization expense for the regulatory authorizations with finite useful lives. The increase in depreciation and amortization was partially offset by a decrease in depreciation of $5.7 million due to the impairment of the EchoStar XII satellite’s carrying amount that occurred in the second quarter of 2013, a decrease in depreciation of $3.7 million attributable to the EchoStar VIII satellite as it was fully depreciated as of September 2014 and a decrease in depreciation of $3.3 million relating to the retirement of certain machinery and equipment.
Impairment of long-lived assets. “Impairment of long-lived assets” totaled zero for the year ended December 31, 2014, a decrease of $38.4 million, compared to the same period in 2013, due to the impairment of our EchoStar XII satellite of $34.7 million in June 2013 and a $3.8 million impairment of goodwill of our EchoStar Technologies segment in December 2013. See Note 10 in the notes to consolidated financial statements for further discussion of the impairment in the second quarter of 2013.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $171.3 million for the year ended December 31, 2014, a decrease of $21.2 million, or 11.0%, compared to the same period in 2013. The decrease was due to higher capitalized interest of $19.8 million associated with the construction of our EchoStar XIX, EchoStar XXI, EchoStar XXIII and EUTELSAT 65 West A satellites in the year ended December 31, 2014 compared to the same period in 2013.
Gains on marketable investment securities, net. “Gains on marketable investment securities, net” totaled $41.3 thousand for the year ended December 31, 2014, a decrease of $38.3 million, compared to the same period in 2013. The decrease was primarily related to a gain of $35.9 million recognized from the sale of a strategic investment in a public company in 2013 and a gain of $2.6 million that resulted from the conversion of one of our investments into a marketable investment security in 2013.
Equity in earnings (losses) of unconsolidated affiliates, net. “Equity in earnings (losses) of unconsolidated affiliates, net” totaled $8.2 million for the year ended December 31, 2014, an increase of $13.2 million, compared to the same period in 2013. The increase was primarily related to a $10.3 million non-recurring adjustment to increase our equity in earnings of Dish Mexico to reflect an increase from 24.0% to 49.0% in our interest in Dish Mexico’s
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
inception-to-date net income, offset partially by a $5.6 million increase in equity in losses in Dish Mexico when compared to the same period in 2013. In addition, the increase was also attributable to the decrease in equity in losses of $6.4 million from our investment in Sling TV Holding, due to our exchange of our one-third voting interest in Sling TV Holding which we accounted for using the equity method, for a 10.0% non-voting interest in Sling TV Holding, which we account for using the cost method beginning in August 2014. See Note 6 in the notes to consolidated financial statements for more information regarding our investment in Dish Mexico and Sling TV Holding.
Other, net. “Other, net” totaled $4.3 million for the year ended December 31, 2014, a decrease of $2.7 million, or 38.9%, compared to the same period in 2013. The decrease was primarily attributable to a non-recurring gain of $6.7 million in 2013 resulting from a reduction of the capital lease obligation for the AMC-16 satellite and a gain of $2.6 million in connection with the settlement of certain accounts receivables in 2013. This decrease was partially offset by a gain of $5.8 million in 2014 related to our investment in TerreStar. See Note 6 in the notes to consolidated financial statements for further discussion of our investment in TerreStar.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $902.6 million for the year ended December 31, 2014, an increase of $252.5 million, or 38.8%, compared to the same period in 2013. The increase was primarily due to an increase in operating income, excluding depreciation and amortization and the net loss attributable to noncontrolling interests, of $280.3 million, an increase of $13.2 million in equity from earnings of unconsolidated affiliates, net and a gain of $5.8 million related to our investment in TerreStar for the year ended December 31, 2014. The increase was partially offset by a gain of $35.9 million recognized from the sale of a strategic investment in a public company in 2013, a non-recurring gain of $6.7 million recognized in 2013 resulting from a reduction of the capital lease obligation for the AMC-16 satellite, a gain of $2.6 million that resulted from the conversion of one of our investments into a marketable investment security in 2013 and a gain of $2.6 million in connection with the settlement of certain accounts receivables in 2013. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles EBITDA to Income (loss) before income taxes, the most directly comparable GAAP measure in the accompanying financial statements.
| For the Years | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ended December 31, | Variance | |||||||||||
| 2014 | 2013 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| EBITDA | $ | 902,581 | $ | 650,097 | $ | 252,484 | 38.8 | |||||
| Interest income and expense, net | (162,247 | ) | (177,898 | ) | 15,651 | (8.8 | ) | |||||
| Depreciation and amortization | (556,676 | ) | (507,111 | ) | (49,565 | ) | 9.8 | |||||
| Net loss attributable to noncontrolling interest in HSS | ||||||||||||
| Tracking Stock and other noncontrolling interests | (5,325 | ) | 876 | (6,201 | ) | * | ||||||
| Income (loss) before income taxes | $ | 178,333 | $ | (34,036 | ) | $ | 212,369 | * |
*Percentage is not meaningful.
Income tax benefit (provision), net. Income tax expense was $30.8 million for the year ended December 31, 2014, compared to an income tax benefit of $37.4 million for the same period in 2013. Our effective income tax rate was 17.3% for the year ended December 31, 2014 compared to 110.0% for the same period in 2013. The variation in our current year effective tax rate from a U.S. federal statutory rate for the current period was primarily due to changes of our valuation allowance associated with realized and unrealized losses that are capital in nature, research and experimentation tax credits, and a lower state effective tax rate. For the same period in 2013, the variation in our effective tax rate from a U.S. federal statutory rate was primarily due to the decrease of our valuation allowance associated with realized and unrealized losses that are capital in nature, current year research and experimentation tax credits, and reinstatement of the research and experimentation tax credit for 2012, as provided by the American Taxpayer Relief Act enacted on January 2, 2013.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Net income (loss) attributable to EchoStar. Net income attributable to EchoStar was $152.9 million for the year ended December 31, 2014, an increase of $150.3 million, compared to the same period in 2013. The increase was primarily due to higher operating income, including depreciation and amortization, of $224.5 million, an increase in capitalized interest of $19.8 million associated with the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII and EUTELSAT 65 West A satellites, an increase of $13.2 million in equity in earnings of unconsolidated affiliates, net, and an increase of $6.7 million in the net loss attributable to noncontrolling interest in HSS Tracking Stock. The increase in “Net income attributable to EchoStar” was partially offset by a decrease of $68.2 million in income tax benefit, a gain of $35.9 million recognized from the sale of a strategic investment in a public company in 2013, a non-recurring gain of $6.7 million resulting from a reduction of the capital lease obligation for the AMC-16 satellite in 2013, and a decrease of $5.6 million in interest income due to lower market interest rates.
Segment Operating Results and Capital Expenditures
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
| EchoStar | All | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EchoStar | Satellite | Other and | Consolidated | |||||||||||||
| Hughes | Technologies | Services | Eliminations | Total | ||||||||||||
| (In thousands) | ||||||||||||||||
| For the Year Ended December 31, 2014 | ||||||||||||||||
| Total revenue | $ | 1,327,718 | $ | 1,627,366 | $ | 484,455 | $ | 6,039 | $ | 3,445,578 | ||||||
| Capital expenditures | $ | 218,607 | $ | 48,616 | $ | 28,734 | $ | 384,069 | $ | 680,026 | ||||||
| EBITDA | $ | 356,871 | $ | 154,786 | $ | 419,442 | $ | (28,518 | ) | $ | 902,581 | |||||
| For the Year Ended December 31, 2013 | ||||||||||||||||
| Total revenue | $ | 1,218,126 | $ | 1,730,845 | $ | 330,177 | $ | 3,304 | $ | 3,282,452 | ||||||
| Capital expenditures | $ | 186,561 | $ | 56,935 | $ | 12,700 | $ | 135,677 | $ | 391,873 | ||||||
| EBITDA | $ | 281,513 | $ | 136,537 | $ | 235,993 | $ | (3,946 | ) | $ | 650,097 |
Hughes Segment
| For the Years Ended December 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| Total revenue | $ | 1,327,718 | $ | 1,218,126 | $ | 109,592 | 9.0 | |||||
| Capital expenditures | $ | 218,607 | $ | 186,561 | $ | 32,046 | 17.2 | |||||
| EBITDA | $ | 356,871 | $ | 281,513 | $ | 75,358 | 26.8 |
Revenue
Hughes segment total revenue for the year ended December 31, 2014 increased by $109.6 million, or 9.0%, compared to the same period in 2013, primarily due to an increase in service revenue of $94.6 million mainly attributable to an increase in sales of broadband services to our consumer and international customers, an increase of $36.0 million in service revenue from DISH Network as a result of the increase in wholesale subscribers on dishNET and an increase in other equipment revenue of $16.1 million. The increase in revenue was partially offset by a decrease in equipment revenue from DISH Network of $37.2 million.
Capital Expenditures
Hughes segment capital expenditures for the year ended December 31, 2014 increased by $32.0 million, or 17.2%, compared to the same period in 2013, primarily due to an increase in expenditures related to EUTELSAT 65 West A and satellite ground infrastructure. Capital expenditures for the construction and launch of the EchoStar XIX satellite are reported in “All Other and Eliminations” in our segment reporting.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
EBITDA
Hughes segment EBITDA for the year ended December 31, 2014 was $356.9 million, an increase of $75.4 million or 26.8%, compared to the same period in 2013. The increase was primarily attributable to a $104.6 million increase in gross margin, partially offset by a $26.0 million increase in selling, general and administrative expenses and a gain of $2.6 million in connection with the settlement of certain accounts receivables in 2013.
EchoStar Technologies Segment
| For the Years Ended December 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| Total revenue | $ | 1,627,366 | $ | 1,730,845 | $ | (103,479 | ) | (6.0 | ) | |||
| Capital expenditures | $ | 48,616 | $ | 56,935 | $ | (8,319 | ) | (14.6 | ) | |||
| EBITDA | $ | 154,786 | $ | 136,537 | $ | 18,249 | 13.4 |
Revenue
EchoStar Technologies segment total revenue for the year ended December 31, 2014 decreased by $103.5 million, or 6.0%, compared to the same period in 2013, primarily resulting from a decrease of $128.3 million in equipment revenue earned from DISH Network, offset partially by a $10.8 million increase in service revenue from DISH Network, an increase of $10.0 million in other equipment revenue and a $4.0 million increase in other service revenue.
Capital Expenditures
EchoStar Technologies segment capital expenditures for the year ended December 31, 2014 decreased by $8.3 million, or 14.6%, compared to the same period in 2013, primarily due to a decrease of $7.5 million in expenditures related to our digital broadcast center.
EBITDA
EchoStar Technologies segment EBITDA for the year ended December 31, 2014 was $154.8 million, an increase of $18.2 million or 13.4%, compared to the same period in 2013. The increase in EBITDA for our EchoStar Technologies segment was primarily driven by a decrease of $14.1 million in selling, general and administrative expenses, a decrease of $5.4 million in research and development, and a decrease of $3.8 million in impairment of goodwill, partially offset by a $2.0 million decrease in gross margin and an increase of $2.6 million in foreign exchange losses.
EchoStar Satellite Services Segment
| For the Years Ended December 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | Amount | % | |||||||||
| (Dollars in thousands) | ||||||||||||
| Total revenue | $ | 484,455 | $ | 330,177 | $ | 154,278 | 46.7 | |||||
| Capital expenditures | $ | 28,734 | $ | 12,700 | $ | 16,034 | * | |||||
| EBITDA | $ | 419,442 | $ | 235,993 | $ | 183,449 | 77.7 |
Revenue
EchoStar Satellite Services segment total revenue for the year ended December 31, 2014 increased by $154.3 million, or 46.7%, compared to the same period in 2013, due to a $154.3 million increase in service revenue, primarily related to satellite services provided to DISH Network on the satellites received as part of the Satellite and Tracking Stock Transaction.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Capital Expenditures
EchoStar Satellite Services segment capital expenditures for the year ended December 31, 2014 increased by $16.0 million, compared to the same period in 2013, primarily due to an increase in the satellite expenditures related to the EchoStar 105/SES-11 satellite of $28.5 million in 2014, partially offset by a decrease in satellite expenditures related to the EchoStar XVI satellite of $12.3 million in 2013. Capital expenditures for our EchoStar XXI and EchoStar XXIII satellite programs are reported in our corporate and other activities.
EBITDA
EchoStar Satellite Services segment EBITDA for the year ended December 31, 2014 was $419.4 million, an increase of $183.4 million or 77.7%, compared to the same period in 2013. The increase in EBITDA for our EchoStar Satellite Services segment was primarily attributable to an increase of $154.4 million in gross margin and a $34.7 million decrease in loss on impairments due to the impairment of our EchoStar XII satellite in June 2013. The increase was partially offset by a non-recurring gain of $6.7 million in 2013 resulting from a reduction of the capital lease obligation for the AMC-16 satellite.
All Other and Eliminations
Capital Expenditures
For the year ended December 31, 2014, All Other and Eliminations capital expenditures increased by $248.4 million compared to the same period in 2013, primarily related to the increase in satellite expenditures on the EchoStar XXI satellite of $103.4 million, the EchoStar XIX satellite of $102.7 million, and the EchoStar XXIII satellite of $48.1 million. The increases in satellite expenditures were partially offset by a $4.8 million expenditure related to a launch contract in 2013. The EchoStar XIX satellite is expected to be used in the operations of our Hughes segment and the EchoStar XXI satellite is intended to be used by Solaris Mobile in providing MSS in the EU. The EchoStar XXIII satellite is expected to launch in the third quarter of 2016 and will be deployed at 45 degree west longitude orbital location.
EBITDA
For the year ended December 31, 2014, All Other and Eliminations EBITDA was a loss of $28.5 million, compared to a loss of $3.9 million for the same period in 2013. The $24.6 million decrease in EBITDA was primarily due to a gain of $35.9 million recognized from the sale of a strategic investment in a public company in 2013 and an increase of $15.7 million in cost of sales relating to our acquisition of satellite services on the EchoStar XV satellite from DISH Network in May 2013, which has not been assigned to any of our segments, offset partially by an increase of $13.2 million in equity in earnings of unconsolidated affiliates, net, an increase of $6.7 million in the net loss attributable to noncontrolling interest in HSS Tracking Stock and a gain of $5.8 million related to our investment in TerreStar.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased with an original maturity of 90 days or less 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, 2015, our cash, cash equivalents and current marketable investment securities totaled $1.54 billion compared to $1.69 billion as of December 31, 2014, a decrease of $151.6 million.
As of December 31, 2015 and 2014, we held $612.3 million and $1.14 billion, respectively, of various debt and equity instruments including corporate bonds, corporate equity securities, and government bonds.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The following discussion highlights our cash flow activities for the years ended December 31, 2015, 2014 and 2013.
Cash flows from operating activities. We typically reinvest the cash flow from operating activities in our business. For the years ended December 31, 2015, 2014 and 2013, we reported net cash inflows from operating activities of $776.5 million, $840.1 million and $450.5 million, respectively.
Net cash inflows from operating activities for the year ended December 31, 2015 decreased by $63.7 million compared to the same period in 2014. The decrease was primarily attributable to a decrease of $98.8 million resulting from changes in operating assets and liabilities related to timing differences between the incurrence of expense and cash payments, partially offset by higher net income of $35.1 million adjusted to exclude: (i) “Depreciation and amortization;” (ii) “Equity in losses (earnings) of unconsolidated affiliates, net;” (iii) “Loss from partial redemption of debt,” (iv) “Losses (gains) and other-than-temporary impairment on marketable investment securities, net;” (v) “Impairment of long-lived assets,” (vi) “Stock-based compensation;” (vii) “Deferred tax provision;” and (viii) “Other, net.”
Net cash inflows from operating activities for the year ended December 31, 2014 increased by $389.6 million compared to the same period in 2013. The increase was primarily attributable to higher net income of $252.9 million adjusted to exclude: (i) “Depreciation and amortization;” (ii) “Equity in losses of unconsolidated affiliates, net;” (iii) “Gains on marketable investment securities, net;” (iv) “Impairment of long-lived asset,” (v) “Stock-based compensation;” (vi) “Deferred tax benefit (provision);” and (vii) “Other, net.” In addition, net cash inflows were increased by $136.7 million resulting from changes in operating assets and liabilities related to timing differences between the incurrence of expense and cash payments.
Cash flows from investing activities. Our investing activities generally include purchases and sales of marketable investment securities, capital expenditures, acquisitions, and strategic investments. For the years ended December 31, 2015, 2014 and 2013, we reported net cash outflows from investing activities of $275.3 million, $887.6 million and $570.3 million, respectively.
Net cash outflows from investing activities for the year ended December 31, 2015 decreased by $612.3 million compared to the same period in 2014. The decrease in cash outflows primarily related to a decrease of $691.0 million in purchases of marketable investment securities, net of sales and maturities, a cash receipt of $105.8 million refund relating to the cancellation of an existing launch services agreement and capital contributions of $18.6 million to certain investees in 2014, partially offset by an increase in cash outflows primarily related to a $129.2 million increase in capital expenditures in 2015 when compared to the same period in 2014, a $64.7 million increase in investments in OneWeb and SmarDTV, and the acquisition of a regulatory authorization in the first half of 2015 of $3.4 million.
Net cash outflows from investing activities for the year ended December 31, 2014 increased by $317.3 million compared to the same period in 2013. The increase in cash outflows primarily related to a $288.2 million increase in capital expenditures in 2014 when compared to the same period in 2013, a decrease of $15.7 million in restricted cash and marketable investment securities, and an increase of $11.6 million in capital contributions to certain investees.
Cash flows from financing activities. Our financing activities generally include proceeds related to the issuance of long-term debt and cash used for the repurchase, redemption or payment of long-term debt and capital lease obligations, and the proceeds from Class A common stock options exercised and stock issued under our stock incentive plans and employee stock purchase plan. For the years ended December 31, 2015, 2014 and 2013, we reported net cash outflows from financing activities of $120.3 million, net cash outflows from financing activities of $35.1 million and net cash inflows from financing activities of $18.3 million, respectively.
Net cash outflows from financing activities increased by $85.2 million for the year ended December 31, 2015 compared to the same period in 2014. The increase in cash outflows was primarily due to the partial redemption of the Senior Secured Notes of $110.0 million and related premium of $3.3 million, and proceeds of $11.4 million, net of offering costs of $3.9 million from the issuance of our preferred tracking stock received in 2014, partially offset by a decrease of $22.7 million in capital lease obligation payments relating to the expiration of capital leases for the
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
AMC-15 and AMC-16 satellites, effective December 2014 and February 2015, respectively, and an increase of $11.2 million in excess tax benefits recognized on the exercise of stock options.
Net cash outflows from financing activities increased by $53.4 million for the year ended December 31, 2014 compared to the same period in 2013. The increase in cash outflows was primarily due to lower proceeds of $42.4 million received from Class A common stock option exercises and stock issued under our stock incentive plans and employee stock purchase plan, respectively, a decrease of $19.9 million in excess tax benefits from stock option exercises, and an increase of $5.7 million for in-orbit incentive obligation payments, which was partially offset by proceeds of $11.4 million, net of offering costs of $3.9 million from the issuance of Hughes Retail preferred tracking stock and a decrease of $5.5 million in capital lease obligation payments.
Obligations and Future Capital Requirements
Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes our contractual obligations at December 31, 2015:
| Payments Due in the Year Ending December 31, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| Long-term debt | $ | 1,890,803 | $ | 803 | $ | — | $ | — | $ | 990,000 | $ | — | $ | 900,000 | ||||||||
| Capital lease obligations | 332,838 | 34,895 | 34,502 | 36,287 | 40,143 | 44,558 | 142,453 | |||||||||||||||
| Interest on long-term debt and capital lease obligations | 761,689 | 166,086 | 162,805 | 159,265 | 123,191 | 86,697 | 63,645 | |||||||||||||||
| Satellite-related obligations | 1,134,217 | 534,871 | 165,992 | 119,976 | 55,654 | 53,662 | 204,062 | |||||||||||||||
| Operating lease obligations | 100,274 | 26,324 | 19,469 | 11,919 | 9,800 | 8,543 | 24,219 | |||||||||||||||
| Purchase and other obligations | 227,028 | 225,361 | 1,667 | — | — | — | — | |||||||||||||||
| Total | $ | 4,446,849 | $ | 988,340 | $ | 384,435 | $ | 327,447 | $ | 1,218,788 | $ | 193,460 | $ | 1,334,379 |
“Satellite-related obligations” primarily include payments pursuant to agreements for the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII, and EchoStar 105/SES-11 satellites, payments pursuant to launch services contracts and regulatory authorizations, executory costs for our capital lease satellites, costs under satellite service agreements and in-orbit incentives relating to certain satellites, as well as commitments for long-term satellite operating leases and satellite service arrangements.
Our “Purchase and other obligations” primarily consists of binding purchase orders for digital set-top boxes and related components. 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.
The table above does not include amounts related to deferred tax liabilities, unrecognized tax positions and certain other amounts recorded in our noncurrent liabilities as the timing of any payments is uncertain. The table also excludes long-term deferred revenue and other long-term liabilities that do not require future cash payments.
In certain circumstances, the dates on which we are obligated to pay our contractual obligations could change.
Off-Balance Sheet Arrangements
Other than 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, 2015, we had $45.0 million of letters of credit and insurance bonds. Of this amount, $20.0 million was secured by restricted cash, $10.0 million was related to insurance bonds, and $15.0 million was issued under credit arrangements available to our foreign subsidiaries. Certain letters of credit are secured by assets of our foreign subsidiaries.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
As of December 31, 2015, we had foreign currency forward contracts with a notional value of $2.6 million in place to partially mitigate foreign currency exchange risk. From time to time, we may enter into foreign currency forward contracts, or take other measures, to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions.
Satellite Insurance
We generally do not carry in-orbit insurance on our satellites or use commercial insurance to mitigate the potential financial impact of launch or in-orbit failures because we believe that the cost of insurance is uneconomical relative to the risk of such failures. Therefore, we generally bear the risk of any uninsured launch or in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain launch and in-orbit insurance for our SPACEWAY 3, EchoStar XVI, and EchoStar XVII satellites. In addition, although we were not required to maintain in-orbit insurance pursuant to our service agreement with DISH Network for the EchoStar XV satellite, we would have been liable for any damage caused by our use of the satellite and therefore we carried third-party insurance on the EchoStar XV satellite until the termination of our service agreement with DISH Network for the EchoStar XV satellite in November 2015.
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 business. Since we currently depend on DISH Network for a substantial portion of our revenue, our cash flow from operations depends heavily on DISH Network’s needs for equipment and services. To the extent that DISH Network’s gross new subscriber activations decrease or DISH Network experiences a net loss of subscribers, sales of our digital set-top boxes and related components as well as broadband services provided to DISH Network may decline, which in turn could have a material adverse effect on our financial position and results of operations. 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, 2015, our total indebtedness was $2.22 billion, of which $332.8 million related to capital lease obligations. 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 could also require us to raise significant additional capital, which may not be available on acceptable terms or at all.
We anticipate that our existing cash and marketable investment securities are sufficient to fund the currently anticipated operations of our business through the next twelve months.
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 may also 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 program 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, 2016. As of December 31, 2015, 2014, and 2013, we have not repurchased any common stock under this program.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expenses for each reporting period, and certain information disclosed in the notes to consolidated financial statements in Item 15 of this report. We base our estimates, judgments, and assumptions on historical experience and on various other factors that we believe to be relevant under the circumstances. Actual results may differ from previously estimated amounts, and such differences may be material to our consolidated financial statements. We review our estimates and assumptions periodically, and the effects of revisions are reflected in the period they occur or prospectively if the revised estimate affects future periods. 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 consolidated financial statements in Item 15 of this report.
Marketable Securities and Other Investments
We hold investments in debt and equity securities of various companies, including marketable investments in publicly traded securities and non-marketable investments in securities of privately held companies. Our marketable investment securities ordinarily are accounted for as available-for-sale; accordingly, we report those securities at fair value on a recurring basis and generally recognize unrealized gains and losses in other comprehensive income (loss). Except in unusual circumstances, the estimated fair values of our marketable investment securities are determined by reference to quoted prices for identical securities or based primarily on other observable market inputs. Our investments in non-marketable securities typically are strategic investments in privately held companies and may be highly speculative. We account for such investments using the equity method when we exercise significant influence over the investee; otherwise, we account for such investments using the cost method.
All of our investments are subject to quarterly evaluations to determine whether an other-than-temporary impairment has occurred, in which case we record an impairment loss in determining net income. For our marketable investment securities, our impairment evaluation considers factors such as the length of time the security has been in a continuous unrealized loss position, the magnitude of the unrealized loss, current market conditions, company-specific information, and whether we have the intent and ability to hold the investment in the foreseeable future. Generally, it is not practicable to estimate fair value of our cost method and equity method investments on a recurring basis. Our impairment evaluation for such investments considers whether events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment. As part of our evaluation, we review available information such as recent company financial statements, business plans and current economic conditions for factors that may indicate an impairment of our investments. When we determine that an investment is impaired and the impairment is other than temporary, we adjust the carrying amount of the investment to its estimated fair value and recognize an impairment loss in earnings. In these circumstances, our fair value estimates may reflect significant unobservable inputs.
Our periodic investment impairment evaluations require us to make significant estimates, judgments and assumptions about uncertain future events. In some cases, there may be limited or no observable market data to support significant assumptions in our estimates. As a result of weakening economic conditions, or other future events and changes in circumstances affecting our investments, we may subsequently determine that an investment is impaired or that an existing impairment is other than temporary. Such events and changes in circumstances could result in our recognition of material investment impairment losses in the future.
Impairment of Long-lived Assets
We evaluate our long-lived assets other than goodwill and intangible assets with indefinite lives for impairment whenever events and changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of a long-lived asset or asset group is considered to not be recoverable when the estimated future undiscounted cash flows from such asset or asset group is less than its carrying amount. In that event, an impairment loss is recorded in the determination of operating income based on the amount by which the carrying amount exceeds the estimated fair value of the long-lived asset or asset group. Fair value is determined primarily using discounted cash flow techniques reflecting the estimated cash flows and discount rate that would be assumed
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
by a market participant for the asset or asset group under review. Our discounted cash flow estimates typically include assumptions based on unobservable inputs and may reflect probability-weighting of alternative scenarios. Estimated losses on long-lived assets to be disposed of by sale may be determined in a similar manner, except that fair value estimates are reduced for estimated selling costs. Changes in estimates of future cash flows, discount rates and other assumptions could result in recognition of additional impairment losses in future periods.
Impairment of Goodwill and Indefinite-lived Intangible Assets
We test our goodwill for impairment annually and more frequently when events or changes in circumstances indicate that an impairment may have occurred. There are two steps to the goodwill impairment test. Step one compares the fair value of a reporting unit with its carrying amount, including goodwill. If the reporting unit’s carrying amount exceeds its estimated fair value, it is necessary to perform the second step of the impairment test, which compares the implied fair value of reporting unit goodwill with the carrying amount of such goodwill to determine the amount of impairment loss. We may bypass the two-step quantitative impairment test when we determine based on a qualitative assessment that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount including goodwill.
As of December 31, 2015, our goodwill consisted primarily of goodwill assigned to reporting units of the Hughes segment. We test such goodwill annually in our second fiscal quarter. Based on our qualitative assessment of impairment of the goodwill assigned to the Hughes segment in the second quarter of each of 2015 and 2014, we determined that no further testing of goodwill for impairment was necessary as it was more likely than not that the fair values of the Hughes segment reporting units exceeded their corresponding carrying amounts. Depending on our assessment of future events and changes in circumstances, we may be required to perform the two-step quantitative impairment test in the future. We may determine that some or all of our goodwill is impaired in connection with future impairment tests.
Our indefinite-lived intangible assets consist primarily of regulatory authorizations for the use of spectrum in specified orbital locations. We test these intangible assets annually in our fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that an impairment may have occurred. We recognize an impairment loss in the determination of operating income when we determine that the carrying amount of an intangible asset exceeds its estimated fair value. Fair value is determined primarily using discounted cash flow techniques reflecting the estimated cash flows and discount rate that we believe would be assumed by market participants. Our cash flow projections typically include significant assumptions based on unobservable inputs. Changes in economic conditions, laws and regulations, technology, competition and other factors could affect the assumptions reflected in our fair value estimates and may result in future intangible asset impairments.
Revenue Recognition
Our Hughes segment enters into contracts to design, develop, and deliver telecommunication networks to customers in our enterprise and mobile satellite systems markets. Those contracts require significant effort to develop and construct the network over an extended time period. Revenue from such contracts is recognized using the percentage-of-completion method. Depending on the nature of the arrangement, we measure progress toward completion using the cost-to-cost method or the units-of-delivery method. Under the cost-to-cost method, revenue reflects the ratio of costs incurred to estimated total costs at completion. Under the units-of-delivery method, revenue and related costs are recognized as products are delivered based on the expected profit for the entire agreement. Profit margins on long-term contracts are based on estimates of total revenue and costs at completion. We review and revise our estimates periodically and recognize related adjustments in the period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified. Changes in our periodic estimates for these contracts could result in significant adjustments to our revenue or costs, which could be material to our consolidated results of operations.
Income Taxes
We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and their corresponding carrying amounts reported in our consolidated balance sheets, as well as for operating loss and tax credit carryforwards. Determining necessary valuation allowances for
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
deferred tax assets requires us to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities. We periodically evaluate the need for valuation allowances based on both historical evidence, including trends, and future expectations. Our future operating results and other events and circumstances could have a significant effect on the realization of tax benefits. Those future events and circumstances could require significant adjustments to our valuation allowances in future periods, which could be material to our consolidated results of operations.
Management evaluates the recognition and measurement of uncertain tax positions based on applicable tax law, regulations, case law, administrative rulings and pronouncements, and the facts and circumstances surrounding the tax position. Changes in our estimates related to the recognition and measurement of the amount recorded for uncertain tax positions could result in significant adjustments to our income tax provision or benefit in future periods, which could be material to our consolidated results of operations.
Contingent Liabilities
We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. Legal fees and other costs of defending litigation are charged to expense as incurred. A significant amount of management judgment is required in determining whether an accrual should be recorded for a loss contingency and the amount of such accrual. Estimates generally are developed in consultation with legal counsel and are based on an analysis of potential outcomes. Due to the inherent uncertainty in determining the likelihood of potential outcomes and the potential financial statement impact of such outcomes, it is possible that upon further development or resolution of a contingent matter, charges related to existing loss contingencies could be recorded in future periods, which could be material to our consolidated results of operations and financial position.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2 in the notes to consolidated financial statements in Item 15 of this report. We are assessing the impact of adopting the recently issued accounting pronouncements on our consolidated financial statements and related disclosures.
Seasonality
For our Hughes segment, service revenue is generally not impacted by seasonal fluctuations other than those associated with fluctuations related to sales and promotional activities. However, like many communications infrastructure equipment vendors, a higher amount of our hardware revenue occurs in the second half of the year due to our customers’ annual procurement and budget cycles. Large enterprises and operators often allocate their capital expenditure budgets at the beginning of their fiscal year (which often coincides with the calendar year). The typical sales cycle for large complex system procurements is six to 12 months, which often results in the customer expenditure occurring towards the end of the year. Customers often seek to expend the budgeted funds prior to the end of the year and the next budget cycle.
For our EchoStar Technologies segment, we are affected by seasonality to the extent it impacts our customers as a result of their sales and promotion activities, which can vary from year to year. Although the seasonal impacts have not been significant, historically, the first half of the year generally produces fewer new subscribers for the pay-TV industry than the second half of the year. However, we cannot provide assurance that this trend will continue in the future.
Our EchoStar Satellite Services segment is not generally affected by seasonal impacts.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Inflation
Inflation has not materially affected our operations during the past three years. We believe that our ability to increase the prices charged for our products and services in future periods will depend primarily on competitive pressures or contractual terms.
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, including Slingbox products and related hardware products, and sales of satellite broadband equipment and related equipment, primarily related to the Hughes service, to DISH Network.
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 Slingbox products and related hardware products, and sales 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 services, satellite uplinking/downlinking, signal processing, conditional access management, telemetry, tracking and control, development of web-based applications for set-top boxes, professional services, facilities rental revenue and other services provided to DISH Network. “Services and other revenue — DISH Network” also includes subscriber wholesale service fees for the Hughes service sold to dishNET.
Services and other revenue — other. “Services and other revenue — other” primarily includes the sales 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 services, 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 Slingbox products and related hardware products. “Cost of sales — equipment” also includes the cost of broadband equipment and networks sold to customers in our enterprise and consumer markets, and to DISH Network.
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, and to DISH Network, as well as the cost of providing maintenance and other contracted services. “Cost of sales — services and other” also includes the costs associated with satellite and transponder services, satellite uplinking/downlinking, signal processing, conditional access management, telemetry, tracking and control, product support and development of applications for set-top boxes, professional services, facilities rental costs, and other services provided to our customers, including DISH Network.
Research and development expenses. “Research and development expenses” primarily includes costs associated with the design and development of products to support future growth and provide new technology and innovation 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 (e.g., information systems, human resources and other services), including stock-based compensation expense. It also includes professional fees (e.g. 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 assets. “Impairment of long-lived assets” includes our impairment losses related to our property and equipment, goodwill and other intangible assets.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Interest income. “Interest income” primarily includes interest earned on our cash, cash equivalents and marketable investment securities, including premium amortization and discount accretion on debt securities.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” primarily includes interest expense associated with our long-term debt and capital lease obligations (net of capitalized interest), and amortization of debt issuance costs.
Loss from partial redemption of debt. “Loss from partial redemption of debt” primarily includes the loss from the partial redemption of the Senior Secured Notes representing the redemption premium that the Company paid to the holders of its Senior Secured Notes and the write-off of related unamortized debt issuance costs.
Gains (losses) and impairment on marketable investment securities, net. “Gains (losses) and impairment on marketable investment securities, net” primarily includes gains, net of any losses, on the sale or exchange of investments and other-than-temporary impairment on certain of our marketable investment securities.
Equity in earnings (losses) of unconsolidated affiliates, net. “Equity in earnings (losses) of unconsolidated affiliates, net” includes earnings or losses from our investments accounted for under the equity method.
Other, net. “Other, net” primarily includes foreign exchange gains and losses, dividends received from our marketable investment securities, and other non-operating income or expense items that are not appropriately classified elsewhere in our consolidated statements of operations and comprehensive income (loss).
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as “Net income (loss) attributable to EchoStar” excluding “Interest expense, net of amounts capitalized,” “Interest income,” “Income tax benefit (provision), net,” and “Depreciation and amortization.” EBITDA is not a measure determined in accordance with GAAP. This non-GAAP measure is reconciled to “Income (loss) before income taxes” in our discussion of “Results of Operations” above. EBITDA should not be considered in isolation or as 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 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 the performance of companies in our industry.
Subscribers. Subscribers include customers that subscribe to our Hughes segment’s HughesNet broadband services, through retail, wholesale and small/medium enterprise service channels.
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, 2015, our cash, cash equivalents and current marketable investment securities had a fair value of $1.54 billion. Of this amount, a total of $1.50 billion was invested in: (a) cash; (b) commercial paper and corporate notes with an overall average maturity of less than one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating organizations; (c) debt instruments of the U.S. government and its agencies; and/or (d) instruments with similar risk, duration and credit quality characteristics to the commercial paper and corporate obligations described above. The primary purpose of these investing activities has been to preserve principal until the cash is required to, among other things, fund operations, make strategic investments and expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is received and used in our business. The value of this portfolio may be negatively impacted by credit losses; however, this risk is mitigated through diversification that limits our exposure to any one issuer.
Interest Rate Risk
A change in interest rates would not affect the fair value of our cash, or materially affect the fair value of our cash equivalents due to their maturities of less than 90 days. A change in interest rates would affect the fair value of our current marketable debt securities portfolio; however, we normally hold these investments to maturity. Based on our current non-strategic investment portfolio of $1.50 billion as of December 31, 2015, a hypothetical 10% change in average interest rates during 2015 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, 2015 of 0.8%. 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 2015 would have resulted in a decrease of approximately $1.0 million in annual interest income.
Strategic Marketable Investment Securities
As of December 31, 2015, we held current strategic investments in the publicly traded common stock of several companies with a fair value of $38.9 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 $3.9 million in the fair value of these investments.
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