filings.toolsItem 6. SELECTED FINANCIAL DATA
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Item 6. SELECTED FINANCIAL DATA
The accompanying consolidated financial statements for 2016 have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) included in our consolidated financial statements in Item 15 of this report. Certain prior period amounts have been reclassified to conform to the current period presentation.
The following tables present selected information relating to our consolidated financial condition and results of operations for the past five years. The selected financial data should be read in conjunction with our consolidated financial statements and related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. Historical financial data presented below may not be indicative of future financial condition. See Note 20 in the notes to consolidated financial statements in Item 15 of this report for further discussion of the Share Exchange transaction.
| For the Years Ended December 31, | ||||||||||||||||||||
| Statements of Operations Data: | 2016 | 2015 | 2014 (1) | 2013 | 2012 | |||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
| Total revenue | $ | 3,056,730 | $ | 3,143,714 | $ | 3,445,578 | $ | 3,282,452 | $ | 3,121,704 | ||||||||||
| Total costs and expenses | 2,692,332 | 2,787,681 | 3,117,488 | 3,178,865 | 3,021,818 | |||||||||||||||
| Operating income | $ | 364,398 | $ | 356,033 | $ | 328,090 | $ | 103,587 | $ | 99,886 | ||||||||||
| Net income attributable to EchoStar common stock | $ | 181,673 | $ | 163,700 | $ | 165,268 | $ | 2,525 | $ | 211,048 | ||||||||||
| Basic weighted-average common shares outstanding | 93,795 | 92,397 | 91,190 | 89,405 | 87,150 | |||||||||||||||
| Diluted weighted-average common shares outstanding | 94,410 | 93,466 | 92,616 | 90,952 | 87,959 | |||||||||||||||
| Basic earnings per share | $ | 1.94 | $ | 1.77 | $ | 1.81 | $ | 0.03 | $ | 2.42 | ||||||||||
| Diluted earnings per share | $ | 1.92 | $ | 1.75 | $ | 1.78 | $ | 0.03 | $ | 2.40 |
| As of December 31, | ||||||||||||||||||||
| Balance Sheet Data: | 2016 | 2015 | 2014 (1) | 2013 | 2012 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Cash, cash equivalents and current marketable securities | $ | 3,093,659 | $ | 1,536,578 | $ | 1,688,156 | $ | 1,620,652 | $ | 1,547,565 | ||||||||||
| Total assets (2) (3) | $ | 9,008,859 | $ | 7,209,486 | $ | 7,214,936 | $ | 6,657,088 | $ | 6,549,957 | ||||||||||
| Total debt and capital lease obligations (3) | $ | 3,660,186 | $ | 2,192,365 | $ | 2,328,625 | $ | 2,377,513 | $ | 2,438,223 | ||||||||||
| Total stockholders’ equity | $ | 4,006,805 | $ | 3,781,642 | $ | 3,623,638 | $ | 3,226,231 | $ | 3,150,227 |
| For the Years Ended December 31, | ||||||||||||||||||||
| Cash Flow Data: | 2016 | 2015 | 2014 (1) | 2013 | 2012 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net cash flows from: | ||||||||||||||||||||
| Operating activities | $ | 803,343 | $ | 776,451 | $ | 840,131 | $ | 450,507 | $ | 505,149 | ||||||||||
| Investing activities | $ | (632,267 | ) | $ | (275,311 | ) | $ | (887,590 | ) | $ | (570,289 | ) | $ | (346,781 | ) | |||||
| Financing activities | $ | 1,475,689 | $ | (120,257 | ) | $ | (35,096 | ) | $ | 18,326 | $ | (43,976 | ) |
| (1) | In March 2014, we issued preferred tracking stock to DISH Network in exchange for five satellites and $11.4 million in cash. Please see Note 4 in the notes to consolidated financial statements in Item 15 of this report. As a result, our results of operations for the years ended December 31, 2016, 2015 and 2014 are not comparable to our results of operations for the years ended December 31, 2013 and 2012. |
| (2) | In 2015, we prospectively adopted Accounting Standard Update No. 2015-17, Balance Sheet Classification of Deferred Taxes. As a result, our total assets as of December 31, 2016 and 2015 is not comparable to our total assets as reported in prior years. |
| (3) | In March 2016, we retrospectively adopted Accounting Standard Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. As a result, our total assets and total debt and capital lease obligations for all dates presented reflect the application of this Update. |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “EchoStar,” the “Company” and “our” refer to EchoStar Corporation and its subsidiaries. References to “$” are to United States dollars. The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to our financial statements included elsewhere in this Annual Report on Form 10-K. This management’s discussion and analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this management’s discussion and analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. See “Disclosure Regarding Forward-Looking Statements” in this Annual Report on Form 10-K for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, see the caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K. Further, such forward-looking statements speak only as of the date of this Annual Report on Form 10-K and we undertake no obligation to update them.
EXECUTIVE SUMMARY
EchoStar is a global provider of satellite service operations, video delivery solutions, digital set-top boxes, broadband satellite technologies and broadband services for home and small office customers. We deliver innovative network technologies, managed services, and various communications solutions for enterprise and government customers. We currently operate in three business segments, which are differentiated primarily by their operational focus: Hughes, EchoStar Technologies, and EchoStar Satellite Services (“ESS”). These segments are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by our chief operating decision maker (“CODM”), who for EchoStar is the Company’s Chief Executive Officer.
Our segment operating results do not include real estate and other activities, costs incurred in certain satellite development programs and other business development activities, expenses of various corporate departments, and our centralized treasury operations, including income from our investment portfolio and interest expense on our debt. These activities are accounted for in “All Other and Eliminations.”
On January 31, 2017, we entered into the Share Exchange Agreement. The Share Exchange Agreement provides that EchoStar and its subsidiaries will receive all of the shares of the EchoStar Tracking Stock and Hughes Retail Preferred Track in exchange for 100% of the equity interests of certain EchoStar subsidiaries that will hold our EchoStar Technologies businesses. Following consummation of the Share Exchange, EchoStar will no longer operate the EchoStar Technologies business segment and the EchoStar Tracking Stock and HSS Tracking Stock will be retired and all agreements, arrangements and policy statements with respect to, and terms of, such tracking stock will terminate and be of no further effect. See “Pending Share Exchange” in Item 1. Business and “Risks Related to the Pending Share Exchange” in Item 1A. Risk Factors of this Annual Report on Form 10-K.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Year Ended December 31, 2016
| • | Revenue of $3.06 billion |
| • | Operating income of $364.4 million |
| • | Net income of $180.7 million |
| • | Net income attributable to EchoStar common stock of $181.7 million and basic earnings per share of common stock of $1.94 |
| • | EBITDA of $883.5 million (see reconciliation of this non-GAAP measure on page 52) |
Consolidated Financial Condition as of December 31, 2016
| • | Total assets of $9.01 billion |
| • | Total liabilities of $5.00 billion |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
| • | Total stockholders’ equity of $4.01 billion |
| • | Cash, cash equivalents and current marketable investment securities of $3.09 billion |
Hughes Segment
Our Hughes segment is a global provider of broadband satellite technologies and broadband services for home and small office customers. We deliver network technologies, managed services, equipment, and communications solutions for domestic and international consumers and enterprise and government customers. In addition, our Hughes segment provides and installs gateway and terminal equipment and provides satellite ground segment systems and terminals for other satellite systems, including mobile system operators.
We continue to focus our efforts on growing our Hughes segment consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched. Our consumer revenue growth depends on our success in adding new subscribers and driving higher average revenue per subscriber across our wholesale and retail channels.
Our Hughes segment currently uses its two owned satellites, the SPACEWAY 3 satellite and the EchoStar XVII satellite, and additional satellite capacity acquired from multiple third-party providers, to provide satellite broadband internet access and communications services to our customers. We currently provide HughesNet Gen4 satellite broadband internet services to our consumer market customers in North America on the EchoStar XVII satellite. In December 2016, we launched our EchoStar XIX satellite, a next-generation, high throughput geostationary satellite, which will provide significant capacity for continued subscriber growth. The EchoStar XIX satellite employs a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the Hughes broadband services to our customers in North America and added capacity in Mexico and certain Latin American countries and is expected to add capability for aeronautical, enterprise and international broadband services. Capital expenditures associated with the construction and launch of the EchoStar XIX satellite are included in “All Other and Eliminations” in our segment reporting. EchoStar contributed the EchoStar XIX satellite to its Hughes segment in February 2017.
In addition to our broadband consumer service offerings, our Hughes segment also provides network technologies, managed services, hardware, equipment and satellite services to large enterprise and government customers globally. Examples of such customers include lottery agencies, gas station operators and companies with multi-branch networks that rely on satellite or terrestrial networks for critical communication across wide geographies. Most of our enterprise customers have contracts with us for the services they purchase.
Developments toward the launch of next-generation satellite systems including low-earth orbit (“LEO”) and geostationary systems could provide additional opportunities to drive the demand for our network equipment and services. The growth of our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies.
We continue our efforts to grow our consumer satellite services business outside of the U.S. In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil provides us Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term. That satellite was launched in March 2016 and we began delivering high-speed consumer satellite broadband services in Brazil in July 2016. In September 2015, we entered into satellite services agreements pursuant to which affiliates of Telesat Canada (“Telesat”) will provide to us the Ka-band capacity on a satellite to be located at the 63 degree west longitude orbital location for a 15-year term. We expect the satellite to be launched in the second quarter of 2018 and plan to provide service in additional markets across South America once that capacity is available for commercial use.
As of December 31, 2016, 2015 and 2014, our Hughes segment had approximately 1,036,000, 1,035,000 and 977,000 broadband subscribers, respectively. These broadband subscribers include customers that subscribe to our HughesNet broadband services through retail, wholesale and small/medium enterprise service channels. Gross subscriber additions increased by approximately 19,000 in the fourth quarter of 2016 when compared to the third quarter of 2016 primarily due to an increase in additions in our retail channel due to the launch of our broadband service in Brazil in the second quarter of 2016 offset partially by a decrease in additions in our wholesale channel due to our lack of free capacity due to satellite beams servicing certain areas reaching capacity. Our average monthly subscriber churn percentage for the fourth quarter of 2016 decreased as compared to the third quarter of 2016. As a result of higher gross subscriber additions and a decrease in churn, net subscribers for the quarter ended December 31, 2016 increased by approximately 30,000 when compared to the third quarter of
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
2016 with increases in retail and decreases in wholesale subscribers. Subscriber additions and churn include only subscribers through our retail and wholesale channels.
As of December 31, 2016 and 2015, our Hughes segment had approximately $1.52 billion and $1.44 billion, respectively, of contracted revenue backlog. We define Hughes contracted revenue backlog as our expected future revenue under customer contracts that are non-cancelable, excluding agreements with customers in our consumer market. The increase in contracted revenue backlog is primarily due to an increase in customer contracts from our international markets as a result of future commitments to provide satellite services and gateway and network management services on the EchoStar XIX satellite. Of the total contracted revenue backlog as of December 31, 2016, we expect to recognize approximately $436.5 million of revenue in 2017.
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 sell our digital set-top boxes to Bell TV, a direct-to-home satellite service provider in Canada, and Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture that we entered into in 2008.
We have depended on DISH Network for a substantial portion of our EchoStar Technologies segment revenue and if the Share Exchange is not consummated 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, if the Share Exchange is not consummated, are likely to continue to be, closely linked to the performance of DISH Network’s pay-TV service. 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 the receiver agreement, effective January 2012, between us and DISH Network (the “2012 Receiver Agreement”) 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. , If the Share Exchange is not consummated, volume of unit sales could continue to reduce over time as a result of continued demand decreases or as DISH Network increases the deployment of refurbished units as opposed to new units purchased from us.
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. Our EchoStar Technologies segment also includes our over-the-top (“OTT”), Streaming Video on Demand (“SVOD”) platform business, which licenses technology and provides services to DISH Network’s Sling TV service (“Sling TV”) (see Note 19 in the notes to 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. Following consummation of the Share Exchange, EchoStar will no longer own its interest in the equity and subordinated debt of SmarDTV and will no longer purchase engineering services from SmarDTV.
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,
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
programming offered over the internet has become more prevalent as the speed and quality of broadband networks have improved.
In July 2016 we made the decision not to proceed with our direct to consumer security and home automation solution product offering and associated services which we had introduced earlier in the year. We have completed the process of shutting down all activities, services and operations related to this product offering.
EchoStar Satellite Services Segment
Our ESS segment is a global provider of satellite service operations and video delivery solutions. We operate our business using our owned and leased in-orbit satellites. We provide satellite services on a full-time and occasional-use basis primarily to DISH Network (our largest customer), 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 ESS segment, and we expect that DISH Network will continue to be the primary source of revenue for our ESS segment. Therefore, the results of operations of our ESS segment are linked to changes in DISH Network’s satellite capacity requirements. DISH Network’s capacity requirements have been driven by the addition of new channels and migration of programming to high-definition TV and video on demand services. The services that we provide to DISH Network are critical to its nationwide delivery of content to its customers across the U.S. While we expect to continue to provide satellite services to DISH Network, its satellite capacity requirements may change for a variety of reasons, including its ability to construct and launch its own satellites. Any termination or reduction in the services we provide to DISH Network may cause us to have unused capacity on our satellites and require that we aggressively pursue alternative sources of revenue for this business.
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. Due to anomalies experienced by our launch provider, the expected launch date of the EchoStar 105/SES-11 satellite has been delayed. We currently expect to launch the EchoStar 105/SES-11 satellite in the second quarter of 2017. Our Ku-band payload on the EchoStar 105/SES-11 satellite will replace and augment our current capacity on the AMC-15 satellite. As a result of this launch delay, we have incurred and expect to incur additional costs related to the lease of the AMC-15 satellite.
Revenue growth in our ESS segment depends largely on our ability to continuously make additional satellite capacity available for sale. Once the EchoStar 105/SES-11 satellite is launched and placed into operation, we expect periodic revenue from the satellite to exceed the amount currently generated by the AMC-15 satellite. As a result of the launch delay, we expect a delay in revenue generated from the EchoStar 105/SES-11 satellite.
We continue to pursue expanding our business offerings by providing value added services such as telemetry, tracking, and control services to third parties, which leverages the ground monitoring networks and personnel currently within our ESS segment.
As of December 31, 2016 and 2015, our ESS segment had contracted revenue backlog attributable to satellites currently in orbit of approximately $1.16 billion and $1.41 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, 2016, we expect to recognize approximately $365.1 million of revenue in 2017.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 (“LEO”) networks, balloons, and High Altitude Platform Systems have begun to 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, equipment, networks and services for information, entertainment and commerce in North America and internationally for consumers, enterprises and governments.
We continue to selectively explore opportunities to pursue partnerships, joint ventures and strategic acquisitions, domestically and internationally, that we believe may allow us to increase our existing market share, expand into new markets and new customers, broaden our portfolio of services, 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, Ka-band spectrum and S-band spectrum. We are exploring options for the Ka-band and S-band spectrums. In April 2014, we entered into an agreement with Space Systems Loral, LLC (“SS/L”) for the construction of the EchoStar XXIII satellite, a high powered broadcast satellite service (“BSS”) satellite. The EchoStar XXIII satellite will be deployed at the 45 degree west longitude orbital location. Due to anomalies experienced by our launch provider, the expected launch date of our EchoStar XXIII satellite was delayed and we currently expect to launch the EchoStar XXIII satellite in the first quarter of 2017. We have regulatory obligations to meet certain in-service milestones by the second quarter of 2017 for our Brazilian license at 45 west longitude for the Ka-, Ku- and S-band frequency bands. We currently expect to meet our regulatory milestone for the Ku-band. We have sought an extension of the S- and Ka-band milestones, which may or may not be granted, and, if granted, may be subject to penalties, additional conditions or other requirements.
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 utilizing the operable payload we own on the EUTELSAT 10A satellite, along with our EchoStar XXI S-band satellite. The EchoStar XXI satellite will 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. Due to anomalies experienced by our launch provider, the expected launch of our EchoStar XXI satellite was delayed and we currently expect to launch the EchoStar XXI satellite in the second or third quarter of 2017. We had regulatory obligations to meet certain milestones by the fourth quarter of 2016 regarding the operations of the EchoStar XXI satellite across the EU. We have notified the regulators in the EU of our delay and we intend to seek extensions of certain of these requirements to the extent we determine necessary. Although we anticipate being able to receive them, any such necessary extensions may be subject to additional conditions, penalties or other requirements.
We are tracking closely the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies and expertise to find new commercial opportunities for our business. In June 2015, we made an equity investment in WorldVu Satellites Limited (“OneWeb”), a global LEO satellite service company. In addition, our Hughes segment entered into an agreement with OneWeb to provide certain equipment and services in connection with the ground systems for OneWeb’s LEO 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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
RESULTS OF OPERATIONS
Basis of Presentation
The following discussion and analysis of our consolidated results of operations is presented on a historical basis.
Prior to 2015, our OTT, SVOD platform business, including certain assets distributed to us in August 2014 in connection with the Exchange Agreement with Sling TV Holding (see Notes 6 and 19 in the notes to 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 OTT, SVOD platform 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 OTT, SVOD platform 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, 2016 Compared to the Year Ended December 31, 2015
| For the Years Ended December 31, | Variance | ||||||||||||||
| Statements of Operations Data (1) | 2016 | 2015 | Amount | % | |||||||||||
| (Dollars in thousands) | |||||||||||||||
| Revenue: | |||||||||||||||
| Services and other revenue - DISH Network | $ | 888,603 | $ | 918,301 | $ | (29,698 | ) | (3.2 | ) | ||||||
| Services and other revenue - other | 1,109,597 | 1,103,928 | 5,669 | 0.5 | |||||||||||
| Equipment revenue - DISH Network | 711,289 | 763,184 | (51,895 | ) | (6.8 | ) | |||||||||
| Equipment revenue - other | 347,241 | 358,301 | (11,060 | ) | (3.1 | ) | |||||||||
| Total revenue | 3,056,730 | 3,143,714 | (86,984 | ) | (2.8 | ) | |||||||||
| Costs and Expenses: | |||||||||||||||
| Cost of sales - services and other | 844,498 | 856,065 | (11,567 | ) | (1.4 | ) | |||||||||
| % of Total services and other revenue | 42.3 | % | 42.3 | % | |||||||||||
| Cost of sales - equipment | 891,108 | 948,655 | (57,547 | ) | (6.1 | ) | |||||||||
| % of Total equipment revenue | 84.2 | % | 84.6 | % | |||||||||||
| Selling, general and administrative expenses | 385,634 | 374,116 | 11,518 | 3.1 | |||||||||||
| % of Total revenue | 12.6 | % | 11.9 | % | |||||||||||
| Research and development expenses | 76,024 | 78,287 | (2,263 | ) | (2.9 | ) | |||||||||
| % of Total revenue | 2.5 | % | 2.5 | % | |||||||||||
| Depreciation and amortization | 495,068 | 528,158 | (33,090 | ) | (6.3 | ) | |||||||||
| Impairment of long-lived assets | — | 2,400 | (2,400 | ) | (100.0 | ) | |||||||||
| Total costs and expenses | 2,692,332 | 2,787,681 | (95,349 | ) | (3.4 | ) | |||||||||
| Operating income | 364,398 | 356,033 | 8,365 | 2.3 | |||||||||||
| Other Income (Expense): | |||||||||||||||
| Interest income | 21,249 | 10,429 | 10,820 | * | |||||||||||
| Interest expense, net of amounts capitalized | (123,630 | ) | (122,066 | ) | (1,564 | ) | 1.3 | ||||||||
| Loss from partial redemption of debt | — | (5,044 | ) | 5,044 | (100.0 | ) | |||||||||
| Gains (losses) and impairment on marketable investment securities, net | 9,767 | (17,669 | ) | 27,436 | * | ||||||||||
| Equity in earnings of unconsolidated affiliates, net | 13,310 | 1,895 | 11,415 | * | |||||||||||
| Other, net | 1,750 | (2,006 | ) | 3,756 | * | ||||||||||
| Total other expense, net | (77,554 | ) | (134,461 | ) | 56,907 | (42.3 | ) | ||||||||
| Income before income taxes | 286,844 | 221,572 | 65,272 | 29.5 | |||||||||||
| Income tax provision, net | (106,152 | ) | (72,201 | ) | (33,951 | ) | 47.0 | ||||||||
| Net income | 180,692 | 149,371 | 31,321 | 21.0 | |||||||||||
| Less: Net loss attributable to noncontrolling interest in HSS Tracking Stock | (944 | ) | (5,603 | ) | 4,659 | (83.2 | ) | ||||||||
| Less: Net income attributable to other noncontrolling interests | 1,706 | 1,617 | 89 | 5.5 | |||||||||||
| Net income attributable to EchoStar | $ | 179,930 | $ | 153,357 | $ | 26,573 | 17.3 | ||||||||
| Other Data: | |||||||||||||||
| EBITDA (2) | $ | 883,531 | $ | 865,353 | $ | 18,178 | 2.1 | ||||||||
| Subscribers, end of period | 1,036,000 | 1,035,000 | 1,000 | 0.1 |
- Percentage is not meaningful.
(1) An explanation of our key metrics is included on pages 70 and 71 under the heading “Explanation of Key Metrics and Other Items.”
(2) A reconciliation of EBITDA to “Net income,” the most directly comparable GAAP measure in the accompanying financial statements, is included on page 52. For further information on our use of EBITDA, see “Explanation of Key Metrics and Other Items” on page 71.
Services and other revenue — DISH Network. “Services and other revenue — DISH Network” totaled $888.6 million for the year ended December 31, 2016, a decrease of $29.7 million, or 3.2%, compared to the same period in 2015.
Services and other revenue — DISH Network from our Hughes segment for the year ended December 31, 2016 increased by $4.0 million, or 4.3%, to $98.5 million compared to the same period in 2015. The increase was primarily
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
attributable to an increase in the average revenue per subscriber as a result of an increase in wholesale subscribers receiving higher end service plans pursuant to our Distribution Agreement with dishNET Satellite Broadband L.L.C. (“dishNET”), partially offset by a decrease in wholesale subscribers.
Services and other revenue — DISH Network from our EchoStar Technologies segment for the year ended December 31, 2016 increased by $39.5 million, or 10.2%, to $428.5 million compared to the same period in 2015. The increase was primarily due to an increase of $48.2 million in revenue earned for engineering support services related to Sling TV and other projects. The increase was partially offset by a decrease of $9.0 million in revenue earned for support services related to receiver developments in 2015.
Services and other revenue — DISH Network from our ESS segment for the year ended December 31, 2016 decreased by $73.9 million, or 17.5%, to $349.6 million compared to the same period in 2015. The decrease was mainly due to a decrease of $74.1 million in revenue as a result of the termination of the satellite services provided to DISH Network from the EchoStar I and EchoStar VIII satellites effective in November 2015.
Services and other revenue — other. “Services and other revenue — other” totaled $1.11 billion for the year ended December 31, 2016, an increase of $5.7 million, or 0.5%, compared to the same period in 2015.
Services and other revenue — other from our Hughes segment for the year ended December 31, 2016 increased by $16.7 million, or 1.6%, to $1.05 billion compared to the same period in 2015. The increase was primarily attributable to an increase of $28.6 million in sales of broadband services to our domestic consumer customers as a result of an increase in retail subscribers and the average revenue per subscriber. This increase was partially offset by a decrease of $10.8 million of broadband services to our international enterprise customers attributable to an unfavorable foreign exchange impact and non-renewal of certain service contracts.
Services and other revenue — other from our EchoStar Technologies segment for the year ended December 31, 2016 decreased by $1.4 million, or 14.0%, to $8.8 million compared to the same period in 2015. The decrease was primarily attributable to a decrease in the sales volume of our paid Sling mobile applications due to our offering of a free mobile application in 2016.
Services and other revenue — other from our ESS segment for the year ended December 31, 2016 decreased by $9.0 million, or 13.4%, to $58.1 million compared to the same period in 2015. The decrease was primarily attributable to a decrease in sales of transponder services due to a decrease in the number of transponders available for use in providing service as our lease of the AMC-16 satellite ended in February 2016.
Equipment revenue — DISH Network**.** “Equipment revenue — DISH Network” totaled $711.3 million for the year ended December 31, 2016, a decrease of $51.9 million, or 6.8%, compared to the same period in 2015.
Equipment revenue — DISH Network from our Hughes segment for the year ended December 31, 2016 decreased by $1.9 million, or 17.8%, to $8.8 million compared to the same period in 2015. The decrease in revenue was primarily due to the 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, 2016 decreased by $50.0 million, or 6.6%, to $702.4 million compared to the same period in 2015. The decrease in revenue was primarily due to a decrease in revenue of set-top boxes and related accessories. The decrease in revenue of set-top boxes was primarily due to an 8.8% decrease in the volume of unit sales, partially offset by a 3.3% increase in the weighted average price of the set-top boxes sold. The decrease in revenue of related accessories was primarily due to a 6.6% decrease in the volume of unit sales and a 0.9% decrease in the weighted average price of related accessories.
Equipment revenue — other**.** “Equipment revenue — other” totaled $347.2 million for the year ended December 31, 2016, a decrease of $11.1 million, or 3.1%, compared to the same period in 2015.
Equipment revenue — other from our Hughes segment for the year ended December 31, 2016 increased by $26.2 million, or 12.4%, to $237.9 million compared to the same period in 2015. The increase was mainly due to an
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
increase of $40.7 million in sales of broadband equipment to our domestic enterprise and government customers, partially offset by a decrease of $14.7 million in revenue from our international and telecom systems customers.
Equipment revenue — other from our EchoStar Technologies segment for the year ended December 31, 2016 decreased by $37.1 million, or 25.3%, to $109.4 million compared to the same period in 2015. The decrease was attributable to a decrease in the weighted average price of set-top boxes and related accessories of 19.7% and 8.1%, respectively, sold primarily to our international customers and a decrease in the volume of unit sales of set-top boxes and related accessories of 10.0% and 12.9%, respectively, sold primarily to our international customers.
Cost of sales — services and other. “Cost of sales — services and other” totaled $844.5 million for the year ended December 31, 2016, a decrease of $11.6 million, or 1.4%, compared to the same period in 2015.
Cost of sales — services and other from our Hughes segment for the year ended December 31, 2016 decreased by $2.2 million, or 0.5%, to $454.5 million compared to the same period in 2015. The decrease was primarily attributable to the decrease of Ku-band space segment costs as customers either terminated services or migrated to the Ka-band platform offset by the increase in service costs as a result of the increase in sales of broadband services to our domestic consumer customers.
Cost of sales — services and other from our EchoStar Technologies segment for the year ended December 31, 2016 increased by $41.6 million, or 14.7%, to $323.9 million compared to the same period in 2015. The increase was primarily due to an increase in engineering support costs related to Sling TV and other projects.
Cost of sales — services and other from our ESS segment for the year ended December 31, 2016 decreased by $6.0 million, or 8.6%, to $64.2 million compared to the same period in 2015. The decrease was primarily due to a decrease in cost of sales of transponder services as a result of a decrease in the number of leased transponders available for use in providing service as our lease of the AMC-16 satellite ended in February 2016.
Cost of sales — services and other from All Other and Eliminations for the year ended December 31, 2016 decreased by $45.0 million, or 95.7%, to $2.0 million compared to the same period in 2015. The decrease was primarily due to a decrease in cost of sales relating to the EchoStar XV satellite for services provided from DISH Network as a result of the termination of the satellite service agreement effective in November 2015.
Cost of sales — equipment**.** “Cost of sales — equipment” totaled $891.1 million for the year ended December 31, 2016, a decrease of $57.5 million, or 6.1%, compared to the same period in 2015.
Cost of sales — equipment from our Hughes segment for the year ended December 31, 2016 increased by $9.3 million, or 4.8%, to $204.4 million compared to the same period in 2015. The increase was primarily attributable to an increase of $20.3 million in equipment costs related to the increase in sales volume of broadband equipment to our domestic enterprise and government customers, partially offset by a decrease of $12.3 million in equipment costs related to the decrease in sales to our international and telecom systems customers.
Cost of sales — equipment from our EchoStar Technologies segment for the year ended December 31, 2016 decreased by $66.8 million, or 8.9%, to $686.7 million compared to the same period in 2015. The decrease was primarily attributable to a decrease in equipment costs as a result of the decrease in the volume of unit sales of set-top boxes and related accessories sold to DISH Network. The decrease was also attributable to decreases in the volume of unit sales and the weighted average cost of set-top boxes and related accessories sold to our international customers.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $385.6 million for the year ended December 31, 2016, an increase of $11.5 million, or 3.1%, compared to the same period in 2015. The increase was primarily due to $14.1 million in restructuring charges as a result of our decision not to proceed with our direct-to-consumer security and home automation solution product offering and associated services within our EchoStar Technologies segment and an increase of $6.7 million and $3.8 million in marketing and promotional costs from our EchoStar Technologies segment and Hughes segment, respectively, offset partially by a decrease of $8.0 million due to litigation settlements recorded in 2015 and a decrease of $6.6 million of stock-based compensation cost.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Research and development expenses. “Research and development expenses” totaled $76.0 million for the year ended December 31, 2016, a decrease of $2.3 million, or 2.9%, compared to the same period in 2015. The decrease was primarily related to a decrease in research and development expense of $7.1 million in our EchoStar Technologies segment, partially offset by an increase in research and development expense of $4.8 million in our Hughes segment. Our 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 $495.1 million for the year ended December 31, 2016, a decrease of $33.1 million, or 6.3%, compared to the same period in 2015. The decrease was primarily related to certain of our fully amortized other intangible assets in our Hughes segment and All Other & Eliminations and the fully depreciated EchoStar IX satellite as of October 2015 in our ESS segment. The decrease was also attributable to a decrease in depreciation expense in our EchoStar Technologies segment as a result of our fully depreciated machinery and equipment in 2016.
Impairment of long-lived assets. “Impairment of long-lived assets” totaled zero for the year ended December 31, 2016. In 2015, the $2.4 million loss was attributable to the impairment of certain building and equipment in our EchoStar Technologies segment.
Interest income. “Interest income” totaled $21.2 million for the year ended December 31, 2016, an increase of $10.8 million compared to the same period in 2015. The increase was primarily attributable to the increase in our short term investments from proceeds from the issuance of long-term debt in the third quarter of 2016 and an increase in yield percentage.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $123.6 million for the year ended December 31, 2016, an increase of $1.6 million or 1.3%, compared to the same period in 2015. The increase was mainly attributable to an increase of $38.1 million related to the issuance of 5.250% Senior Secured Notes due August 1, 2026 (the “2026 Senior Secured Notes”) and 6.625% Senior Unsecured Notes due August 1, 2026 (the “2026 Senior Unsecured Notes” and together with the 2026 Senior Secured Notes, the “2026 Notes”) in the third quarter of 2016. The increase was partially offset by an increase in capitalized interest of $30.6 million related to the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII, and EchoStar 105/SES-11 satellites, and payments for satellite services on the EUTELSAT 65 West A and 63 West satellites, a decrease of $3.2 million relating to the partial redemption of the outstanding principal amount of HSS’ 6 1/2 Senior Secured Notes due 2019 (the “2019 Senior Secured Notes”) in the second quarter of 2015, and a decrease of $2.8 million relating to the accounting impact of two of our satellites that are treated as capital leases.
Loss from partial redemption of debt. “Loss from partial redemption of debt” totaled zero for the year ended December 31, 2016. In 2015, the $5.0 million loss was related to the partial redemption of the 2019 Senior Secured Notes in the second quarter of 2015 which 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 $9.8 million in gains for the year ended December 31, 2016 compared to $17.7 million in losses for the same period in 2015. The change of $27.4 million was primarily due to an other than temporary impairment loss of $11.2 million on certain strategic equity securities in 2015, an increase of $10.5 million in gains on our trading securities in 2016, and an increase of $5.6 million in realized gains on our securities classified as available-for-sale in 2016.
Equity in earnings of unconsolidated affiliates, net. “Equity in earnings of unconsolidated affiliates, net” totaled $13.3 million for the year ended December 31, 2016, an increase of $11.4 million compared to the same period in 2015. The increase was primarily related to an increase in earnings from our investment in Dish Mexico.
Other, net. “Other, net” totaled $1.8 million in income for the year ended December 31, 2016 compared to $2.0 million of expense for the year ended December 31, 2015. The change of $3.8 million was primarily related to (i) $13.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016, (ii) an unfavorable foreign exchange impact of $7.7 million in 2015, (iii) a decrease of $8.8 million related to a protective put associated with our trading securities in 2016 when compared to the same period in 2015, (iv) a $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015 as a result of anomalies that previously affected the operation of these satellites, (v) a gain of $1.7 million on the exchange of accounts
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
receivable for certain trading securities in the second quarter of 2015, and (vi) proceeds of $1.3 million from a domain name auction in 2015.
Income tax provision, net. Income tax expense was $106.2 million for the year ended December 31, 2016, an increase of $34.0 million or 47.0%, compared to the same period in 2015. Our effective income tax rate was 37.0% and 32.6% for the year ended December 31, 2016 and 2015, respectively. The variations in our current year effective tax rate from the U.S. federal statutory rate for the year ended December 31, 2016 were primarily due to state income taxes and various permanent tax differences, partially offset by research and experimentation credits. The variations in our effective tax rate from the U.S. federal statutory rate for the year ended December 31, 2015 were primarily due to research and experimentation tax credits.
Net income attributable to EchoStar. “Net income attributable to EchoStar” was $179.9 million for the year ended December 31, 2016, an increase of $26.6 million or 17.3%, compared to the same period in 2015. The increase was primarily due to (i) an increase in capitalized interest of $30.6 million related to the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII, and EchoStar 105/SES-11 satellites, and payments for satellite services on the EUTELSAT 65 West A and 63 West satellites, (ii) an increase of $27.4 million in gains on marketable investments, net of losses and impairments, (iii) $13.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016, (iv) an increase of $11.4 million in equity in earnings of unconsolidated affiliates, net, (v) an increase of $10.8 million in interest income primarily attributable to the increase in our short term investments from proceeds from the issuance of long-term debt in the third quarter of 2016 and an increase in yield percentage, (vi) an unfavorable foreign exchange impact of $7.7 million in 2015, (vii) a $5.0 million loss related to the partial redemption of the 2019 Senior Secured Notes in the second quarter of 2015, (viii) a decrease in interest expense of $3.2 million relating to the partial redemption of the outstanding principal amount of the 2019 Senior Secured Notes in the second quarter of 2015 and (ix) a decrease of $2.8 million in interest expense relating to the accounting impact of two of our satellites that are treated as capital leases. The increase was partially offset by (i) an increase of $38.1 million in interest expense related to the 2026 Notes in the third quarter of 2016, (ii) an increase of $34.0 million in income tax expense in 2016, (iii) a decrease of $8.8 million related to a protective put associated with our trading securities in 2016, and (iv) a $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015 as a result of anomalies that previously affected the operation of these satellites.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA was $883.5 million for the year ended December 31, 2016, an increase of $18.2 million, or 2.1%, compared to the same period in 2015. The increase was primarily due to (i) an increase of $27.4 million in gains on marketable investments, net of losses and impairments, (ii) $13.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016, (iii) an increase of $11.4 million in equity in earnings of unconsolidated affiliates, net, (iv) an unfavorable foreign exchange impact of $7.7 million in 2015, and (v) a $5.0 million loss related to the partial redemption of the 2019 Senior Secured Notes in the second quarter of 2015. The increases were partially offset by (i) a decrease in operating income, excluding depreciation and amortization, of $24.7 million for the year ended December 31, 2016, (ii) a decrease of $8.8 million related to a protective put associated with our trading securities in 2016, (iii) an increase of $4.7 million in net income attributable to the noncontrolling interest in HSS Tracking Stock and other noncontrolling interests in 2016 when compared to the same period in 2015, (iv) $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015 as a result of anomalies that previously affected the operation of these satellites, and (v) a gain of $1.7 million on the exchange of accounts receivable for certain trading securities in the second quarter of 2015. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The following table reconciles EBITDA to Net income, the most directly comparable GAAP measure in the accompanying financial statements.
| For the Years Ended December 31, | Variance | ||||||||||||||
| 2016 | 2015 | Amount | % | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Net income | $ | 180,692 | $ | 149,371 | $ | 31,321 | 21.0 | ||||||||
| Interest income and expense, net | 102,381 | 111,637 | (9,256 | ) | (8.3 | ) | |||||||||
| Income tax provision, net | 106,152 | 72,201 | 33,951 | 47.0 | |||||||||||
| Depreciation and amortization | 495,068 | 528,158 | (33,090 | ) | (6.3 | ) | |||||||||
| Net (income) loss attributable to noncontrolling interest in HSS Tracking Stock and other noncontrolling interests | (762 | ) | 3,986 | (4,748 | ) | * | |||||||||
| EBITDA | $ | 883,531 | $ | 865,353 | $ | 18,178 | 2.1 |
- Percentage is not meaningful.
Segment Operating Results and Capital Expenditures
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
| Hughes | EchoStar Technologies | EchoStar Satellite Services | All Other and Eliminations | Consolidated Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| For the Year Ended December 31, 2016 | ||||||||||||||||||||
| Total revenue | $ | 1,392,361 | $ | 1,249,197 | $ | 407,660 | $ | 7,512 | $ | 3,056,730 | ||||||||||
| Capital expenditures | $ | 322,362 | $ | 69,744 | $ | 58,925 | $ | 247,223 | $ | 698,254 | ||||||||||
| EBITDA | $ | 427,802 | $ | 89,549 | $ | 339,496 | $ | 26,684 | $ | 883,531 | ||||||||||
| 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 |
Hughes Segment
| For the Years Ended December 31, | Variance | |||||||||||||
| 2016 | 2015 | Amount | % | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Total revenue | $ | 1,392,361 | $ | 1,347,340 | $ | 45,021 | 3.3 | |||||||
| Capital expenditures | $ | 322,362 | $ | 285,499 | $ | 36,863 | 12.9 | |||||||
| EBITDA | $ | 427,802 | $ | 396,684 | $ | 31,118 | 7.8 |
Revenue
Hughes segment total revenue for the year ended December 31, 2016 increased by $45.0 million, or 3.3%, compared to the same period in 2015. The increase was primarily due to an increase of $40.7 million in sales of broadband equipment to our domestic enterprise and government customers and an increase of $28.6 million in sales of broadband services to our domestic consumer customers. These increases were partially offset by a decrease of $25.5 million in revenue of broadband equipment and services to our international and telecom systems customers.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Capital Expenditures
Hughes segment capital expenditures for the year ended December 31, 2016 increased by $36.9 million, or 12.9%, compared to the same period in 2015, primarily due to an increase in expenditures on the 63 West satellite. The increase was partially offset by a decrease in capital expenditures on satellite ground infrastructures related to the EchoStar XIX and EchoStar XXI satellites. Capital expenditures associated with the construction and launch of the EchoStar XIX satellite are included in “All Other and Eliminations” in our segment reporting.
EBITDA
Hughes segment EBITDA for the year ended December 31, 2016 was $427.8 million, an increase of $31.1 million, or 7.8%, compared to the same period in 2015. The increase was primarily attributable to a $37.9 million increase in total gross margin and an unfavorable foreign exchange impact of $3.6 million in 2015. These increases were partially offset by an increase of $4.8 million in research and development expenses and an increase of $3.8 million in marketing and promotional costs.
EchoStar Technologies Segment
| For the Years Ended December 31, | Variance | ||||||||||||||
| 2016 | 2015 | Amount | % | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Total revenue | $ | 1,249,197 | $ | 1,298,198 | $ | (49,001 | ) | (3.8 | ) | ||||||
| Capital expenditures | $ | 69,744 | $ | 50,593 | $ | 19,151 | 37.9 | ||||||||
| EBITDA | $ | 89,549 | $ | 106,745 | $ | (17,196 | ) | (16.1 | ) |
Revenue
EchoStar Technologies segment total revenue for the year ended December 31, 2016 decreased by $49.0 million, or 3.8%, compared to the same period in 2015, primarily resulting from a decrease of $50.0 million in equipment revenue from DISH Network, a decrease of $37.1 million in equipment revenue - other and a decrease of $1.4 million in service revenue - other, partially offset by an increase of $39.5 million in service revenue from DISH Network.
Capital Expenditures
EchoStar Technologies segment capital expenditures for the year ended December 31, 2016 increased by $19.2 million, or 37.9%, compared to the same period in 2015, primarily due to an increase of $36.2 million in expenditures related to the support of our OTT, SVOD platform business, partially offset by a decrease of $15.5 million in expenditures related to our digital broadcast centers.
EBITDA
EchoStar Technologies segment EBITDA for the year ended December 31, 2016 was $89.5 million, a decrease of $17.2 million, or 16.1%, compared to the same period in 2015. The decrease in EBITDA for our EchoStar Technologies segment was primarily driven by a decrease of $23.8 million in gross margin, an increase of $14.1 million in restructuring charges as a result of our decision not to proceed with our direct-to-consumer security and home automation solution product offering and associated services in the third quarter of 2016, and an increase in losses of $1.7 million in equity of a certain unconsolidated affiliate. These decreases were offset partially by a decrease of $7.1 million in research and development expenses in 2016, a decrease of $5.0 million in a litigation settlement recorded in 2015, a decrease of $4.8 million in selling, general and administrative expenses in 2016 and an unfavorable foreign exchange impact of $4.3 million in 2015.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
EchoStar Satellite Services Segment
| For the Years Ended December 31, | Variance | ||||||||||||||
| 2016 | 2015 | Amount | % | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Total revenue | $ | 407,660 | $ | 490,591 | $ | (82,931 | ) | (16.9 | ) | ||||||
| Capital expenditures | $ | 58,925 | $ | 101,215 | $ | (42,290 | ) | (41.8 | ) | ||||||
| EBITDA | $ | 339,496 | $ | 412,607 | $ | (73,111 | ) | (17.7 | ) |
Revenue
ESS segment total revenue for the year ended December 31, 2016 decreased by $82.9 million, or 16.9%, compared to the same period in 2015, primarily due to a decrease of $74.1 million in revenue as a result of the termination of the satellite services provided to DISH Network from the EchoStar I and EchoStar VIII satellites effective in November 2015 and a decrease of $9.0 million primarily attributable to a decrease in sales of transponder services.
Capital Expenditures
ESS segment capital expenditures for the year ended December 31, 2016 decreased by $42.3 million, or 41.8%, compared to the same period in 2015, primarily related to a decrease in expenditures on the EchoStar 105/SES-11 satellite.
EBITDA
ESS segment EBITDA for the year ended December 31, 2016 was $339.5 million, a decrease of $73.1 million, or 17.7%, compared to the same period in 2015. The decrease in EBITDA for our ESS segment was primarily due to a decrease of $76.9 million in gross margin and $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015 as a result of anomalies that previously affected the operation of these satellites. The decrease in EBITDA was partially offset by $7.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016.
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 | ||||||||||||||
| 2016 | 2015 | Amount | % | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Total revenue | $ | 7,512 | $ | 7,585 | $ | (73 | ) | (1.0 | ) | ||||||
| Capital expenditures | $ | 247,223 | $ | 266,213 | $ | (18,990 | ) | (7.1 | ) | ||||||
| EBITDA | $ | 26,684 | $ | (50,683 | ) | $ | 77,367 | * |
- Percentage is not meaningful.
Capital Expenditures
For the year ended December 31, 2016, All Other and Eliminations capital expenditures decreased by $19.0 million, or 7.1%, compared to the same period in 2015, primarily related to a decrease of $71.9 million in satellite expenditures on the EchoStar XXIII satellite, partially offset by an increase of $55.3 million in satellite expenditures on the EchoStar XIX satellite. The EchoStar XIX satellite will be used to provide additional capacity for the Hughes broadband services in North America and certain Latin American countries and was contributed to the Hughes segment in the first quarter of 2017. The EchoStar XXI
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
satellite is intended to be used by EchoStar Mobile in providing mobile satellite services in the European Union 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, 2016, All Other and Eliminations EBITDA was $26.7 million in income compared to $50.7 million in loss for the same period in 2015. The change of $77.4 million in EBITDA was primarily related to (i) a decrease of $44.2 million in cost of sales relating to the EchoStar XV satellite for services provided from DISH Network as a result of the termination of the satellite service agreement effective in November 2015, (ii) an increase of $13.2 million in equity in earnings of unconsolidated affiliates, net in 2016 when compared to the same period in 2015, (iii) an other than temporary impairment loss of $11.2 million on certain strategic equity securities in 2015, (iv) $6.0 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016, and (v) an increase of $5.6 million in realized gains on our securities classified as available-for-sale in 2016. The increases were partially offset by an increase of $4.6 million in net loss attributable to the noncontrolling interest in HSS Tracking Stock.
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: | |||||||||||||||
| 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 | |||||||||||
| Equipment revenue - DISH Network | 763,184 | 1,145,979 | (382,795 | ) | (33.4 | ) | |||||||||
| Equipment revenue - other | 358,301 | 374,049 | (15,748 | ) | (4.2 | ) | |||||||||
| Total revenue | 3,143,714 | 3,445,578 | (301,864 | ) | (8.8 | ) | |||||||||
| Costs and Expenses: | |||||||||||||||
| Cost of sales - services and other | 856,065 | 838,918 | 17,147 | 2.0 | |||||||||||
| % of Total services and other revenue | 42.3 | % | 43.6 | % | |||||||||||
| Cost of sales - equipment | 948,655 | 1,288,998 | (340,343 | ) | (26.4 | ) | |||||||||
| % of Total equipment revenue | 84.6 | % | 84.8 | % | |||||||||||
| 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 assets | 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 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 (2) | $ | 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 70 and 71 under the heading “Explanation of Key Metrics and Other Items.”
(2) A reconciliation of EBITDA to “Net income,” the most directly comparable GAAP measure in the accompanying financial statements, is included on page 60. For further information on our use of EBITDA, see “Explanation of Key Metrics and Other Items” on page 71.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 ESS 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 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 customers, 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 ESS 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.
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. Sales of broadband equipment to dishNET have been decreasing as a 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. The decrease in revenue 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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 customers, partially offset by a decrease of $5.5 million in sales of broadband equipment to our domestic consumer customers 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.
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 ESS 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 2014. 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.
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 customers.
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.
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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 ESS 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 2019 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. In 2015, the $5.0 million loss was related to the partial redemption of the 2019 Senior Secured Notes in the second quarter of 2015 which 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 available-for-sale securities portfolio 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 statements 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 $6.8 million attributable to 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.
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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 2019 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 2019 Senior Secured Notes.
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 research and development 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 2019 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 Net income, the most directly comparable GAAP measure in the accompanying financial statements.
| For the Years Ended December 31, | Variance | ||||||||||||||
| 2015 | 2014 | Amount | % | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Net income | $ | 149,371 | $ | 147,549 | $ | 1,822 | 1.2 | ||||||||
| Interest income and expense, net | 111,637 | 162,247 | (50,610 | ) | (31.2 | ) | |||||||||
| Income tax provision, net | 72,201 | 30,784 | 41,417 | * | |||||||||||
| Depreciation and amortization | 528,158 | 556,676 | (28,518 | ) | (5.1 | ) | |||||||||
| Net (income) loss attributable to noncontrolling interest in HSS Tracking Stock and other noncontrolling interests | 3,986 | 5,325 | (1,339 | ) | (25.1 | ) | |||||||||
| EBITDA | $ | 865,353 | $ | 902,581 | $ | (37,228 | ) | (4.1 | ) |
- Percentage is not meaningful.
Segment Operating Results and Capital Expenditures
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
| Hughes | EchoStar Technologies | EchoStar Satellite Services | All Other and Eliminations | Consolidated 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 |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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.
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 OTT, SVOD platform 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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 | ) |
- Percentage is not meaningful.
Revenue
ESS 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.
Capital Expenditures
ESS 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
ESS 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 ESS 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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 2019 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.
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, 2016, our cash, cash equivalents and current marketable investment securities totaled $3.09 billion compared to $1.54 billion as of December 31, 2015, an increase of $1.56 billion.
As of December 31, 2016 and 2015, we held $522.5 million and $612.3 million, respectively, of various debt and equity instruments including corporate bonds, corporate equity securities, government bonds and mutual funds.
The following discussion highlights our cash flow activities for the years ended December 31, 2016, 2015 and 2014.
Cash flows from operating activities. We typically reinvest the cash flow from operating activities in our business. For the years ended December 31, 2016, 2015 and 2014, we reported net cash inflows from operating activities of $803.3 million, $776.5 million and $840.1 million, respectively.
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