Attached files
| file | filename |
|---|---|
| 10-Q - 10-Q - Hughes Satellite Systems Corp | hssc_93016x10qdocument.htm |
| EX-32.1 - EXHIBIT 32.1 - Hughes Satellite Systems Corp | hssc_93016xex-321.htm |
| EX-31.2 - EXHIBIT 31.2 - Hughes Satellite Systems Corp | hssc_93016xex-312.htm |
| EX-31.1 - EXHIBIT 31.1 - Hughes Satellite Systems Corp | hssc_93016xex-311.htm |
EXHIBIT 99.1
Unaudited Condensed Attributed Financial Information for Hughes Retail Group
On March 1, 2014, EchoStar Corporation (“EchoStar”) issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “EchoStar Tracking Stock”) and Hughes Satellite Systems Corporation (“HSS”), a subsidiary of EchoStar, also issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “HSS Tracking Stock” and together with the EchoStar Tracking Stock, the “Tracking Stock”) to certain subsidiaries of DISH Network Corporation.
The Tracking Stock is intended to reflect the separate performance of the Hughes Retail Group, which is comprised primarily of our business of providing satellite broadband internet services to residential retail subscribers, including the assets and liabilities primarily associated with the operation of the business; and the business operations, revenue, billings, operating and other direct and indirect support activities to provide services to the business and Hughes retail subscribers. The Hughes Retail Group also includes any proceeds associated with a sale or transfer of the Hughes Retail Group or any assets of the Hughes Retail Group, and any other assets acquired by or for the account of the Hughes Retail Group or otherwise attributed, contributed, allocated or transferred to the Hughes Retail Group from time to time. The HSSC Group is comprised of all existing and future businesses of Hughes Satellite Systems Corporation and its subsidiaries, excluding the Hughes Retail Group.
Holders of the Tracking Stock are holders of capital stock of the issuer (EchoStar or HSS) and are subject to risks associated with an investment in the issuer and all of its businesses, assets and liabilities. The issuance of the Tracking Stock does not affect the rights of our creditors or the creditors of our subsidiaries.
Notwithstanding the following attribution of assets, liabilities, revenue, expenses and cash flows to the Hughes Retail Group and the HSSC Group, our tracking stock structure does not affect the ownership of or the legal title to our assets or responsibility for our liabilities.
The accompanying condensed attributed financial information as of, and for, the three and nine months ended September 30, 2016 and 2015 and the year ended December 31, 2015 are unaudited. The Company’s management is solely responsible for this financial information and believes that it has been prepared in conformity with accounting principles generally accepted in the United States.
The following tables present our consolidated assets and liabilities as of September 30, 2016 and December 31, 2015 and our consolidated revenue, expenses and cash flows for the three and nine months ended September 30, 2016 and 2015. The tables further present our assets, liabilities, revenue, expenses and cash flows that are attributed to the Hughes Retail Group as if that business and its assets had been attributed to that group at the beginning of each period. The financial information in this Exhibit should be read in conjunction with our unaudited condensed consolidated financial statements for the period ended September 30, 2016 included in our Quarterly Report on Form 10-Q.
1
CONDENSED ATTRIBUTED BALANCE SHEETS
(In thousands)
(Unaudited)
Attributed As of September 30, 2016 | Attributed As of December 31, 2015 | |||||||||||||||||||||||||||||||
Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||||||||||||
Cash, cash equivalents and marketable investment securities | $ | — | $ | 2,224,612 | $ | — | $ | 2,224,612 | $ | — | $ | 636,333 | $ | — | $ | 636,333 | ||||||||||||||||
Trade accounts receivable, net | 26,942 | 134,726 | — | 161,668 | 27,094 | 112,416 | — | 139,510 | ||||||||||||||||||||||||
Trade accounts receivable - DISH Network, net | — | 24,526 | — | 24,526 | — | 21,258 | — | 21,258 | ||||||||||||||||||||||||
Inventory | 5,688 | 59,256 | (1,333 | ) | 63,611 | 6,699 | 43,665 | (1,567 | ) | 48,797 | ||||||||||||||||||||||
Prepaids and deposits | 543 | 35,252 | — | 35,795 | 990 | 37,232 | — | 38,222 | ||||||||||||||||||||||||
Inter-group advances | 1,711 | — | (1,711 | ) | — | — | 30,398 | (30,398 | ) | — | ||||||||||||||||||||||
Other current assets | — | 109,804 | — | 109,804 | — | 60,660 | — | 60,660 | ||||||||||||||||||||||||
Total current assets | 34,884 | 2,588,176 | (3,044 | ) | 2,620,016 | 34,783 | 941,962 | (31,965 | ) | 944,780 | ||||||||||||||||||||||
Noncurrent Assets: | ||||||||||||||||||||||||||||||||
Restricted cash and cash equivalents | — | 12,526 | — | 12,526 | — | 20,140 | — | 20,140 | ||||||||||||||||||||||||
Property and equipment, net | 148,298 | 2,184,460 | (17,409 | ) | 2,315,349 | 162,497 | 2,118,727 | (15,822 | ) | 2,265,402 | ||||||||||||||||||||||
Regulatory authorizations | — | 471,658 | — | 471,658 | — | 471,658 | — | 471,658 | ||||||||||||||||||||||||
Goodwill | 260,000 | 244,173 | — | 504,173 | 260,000 | 244,173 | — | 504,173 | ||||||||||||||||||||||||
Other intangible assets, net | 19,423 | 69,983 | — | 89,406 | 31,488 | 83,932 | — | 115,420 | ||||||||||||||||||||||||
Economic interest in Hughes Retail Group | — | 318,044 | (318,044 | ) | — | — | 320,412 | (320,412 | ) | — | ||||||||||||||||||||||
Investments in unconsolidated entities | — | 39,874 | — | 39,874 | — | 41,481 | — | 41,481 | ||||||||||||||||||||||||
Deferred tax asset | 33,927 | 6,767 | (33,927 | ) | 6,767 | 19,685 | 3,816 | (19,685 | ) | 3,816 | ||||||||||||||||||||||
Other noncurrent assets, net | 31,513 | 264,182 | (558 | ) | 295,137 | 35,277 | 169,799 | (667 | ) | 204,409 | ||||||||||||||||||||||
Total noncurrent assets | 493,161 | 3,611,667 | (369,938 | ) | 3,734,890 | 508,947 | 3,474,138 | (356,586 | ) | 3,626,499 | ||||||||||||||||||||||
Total assets | $ | 528,045 | $ | 6,199,843 | $ | (372,982 | ) | $ | 6,354,906 | $ | 543,730 | $ | 4,416,100 | $ | (388,551 | ) | $ | 4,571,279 | ||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||||||||||||
Trade accounts payable | $ | 12,559 | $ | 102,987 | $ | — | $ | 115,546 | $ | 12,023 | 85,644 | $ | — | $ | 97,667 | |||||||||||||||||
Current portion of long-term debt and capital lease obligations | — | 31,894 | — | 31,894 | — | 30,284 | — | 30,284 | ||||||||||||||||||||||||
Deferred revenue and prepayments | 28,198 | 30,049 | — | 58,247 | 26,636 | 30,857 | — | 57,493 | ||||||||||||||||||||||||
Accrued compensation | — | 17,296 | — | 17,296 | — | 18,932 | — | 18,932 | ||||||||||||||||||||||||
Advances from affiliates, net | — | 4,461 | — | 4,461 | — | 3,773 | — | 3,773 | ||||||||||||||||||||||||
Inter-group advances | — | 1,711 | (1,711 | ) | — | 30,398 | — | (30,398 | ) | — | ||||||||||||||||||||||
Accrued interest | — | 56,869 | — | 56,869 | — | 8,310 | — | 8,310 | ||||||||||||||||||||||||
Accrued expenses and other | 39,580 | 38,837 | — | 78,417 | 26,399 | 70,102 | — | 96,501 | ||||||||||||||||||||||||
Total current liabilities | 80,337 | 284,104 | (1,711 | ) | 362,730 | 95,456 | 247,902 | (30,398 | ) | 312,960 | ||||||||||||||||||||||
Noncurrent Liabilities: | ||||||||||||||||||||||||||||||||
Long-term debt and capital lease obligations, net of unamortized debt issuance costs | — | 3,628,924 | — | 3,628,924 | — | 2,154,988 | — | 2,154,988 | ||||||||||||||||||||||||
Deferred tax liabilities | — | 544,000 | (33,927 | ) | 510,073 | — | 472,035 | (19,685 | ) | 452,350 | ||||||||||||||||||||||
Advances from affiliates | — | 31,089 | — | 31,089 | — | 25,283 | — | 25,283 | ||||||||||||||||||||||||
Other noncurrent liabilities | 5,305 | 79,391 | — | 84,696 | 2,576 | 81,482 | — | 84,058 | ||||||||||||||||||||||||
Total noncurrent liabilities | 5,305 | 4,283,404 | (33,927 | ) | 4,254,782 | 2,576 | 2,733,788 | (19,685 | ) | 2,716,679 | ||||||||||||||||||||||
Total liabilities | 85,642 | 4,567,508 | (35,638 | ) | 4,617,512 | 98,032 | 2,981,690 | (50,083 | ) | 3,029,639 | ||||||||||||||||||||||
Shareholders’ Equity: | ||||||||||||||||||||||||||||||||
Equity/Attributed net assets | 442,403 | 1,620,265 | (337,344 | ) | 1,725,324 | 445,698 | 1,423,100 | (338,468 | ) | 1,530,330 | ||||||||||||||||||||||
Noncontrolling interests | — | 12,070 | — | 12,070 | — | 11,310 | — | 11,310 | ||||||||||||||||||||||||
Total shareholders’ equity | 442,403 | 1,632,335 | (337,344 | ) | 1,737,394 | 445,698 | 1,434,410 | (338,468 | ) | 1,541,640 | ||||||||||||||||||||||
Total liabilities and equity/attributed net assets | $ | 528,045 | $ | 6,199,843 | $ | (372,982 | ) | $ | 6,354,906 | $ | 543,730 | $ | 4,416,100 | $ | (388,551 | ) | $ | 4,571,279 | ||||||||||||||
2
CONDENSED ATTRIBUTED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Attributed For the Three Months Ended September 30, 2016 | Attributed For the Three Months Ended September 30, 2015 | |||||||||||||||||||||||||||||||
Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | |||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Services and equipment revenue - DISH Network | $ | — | $ | 113,888 | $ | — | 113,888 | $ | — | $ | 135,119 | $ | — | $ | 135,119 | |||||||||||||||||
Services and equipment revenue - other | 162,257 | 262,513 | (81,392 | ) | 343,378 | 157,706 | 254,202 | (82,996 | ) | 328,912 | ||||||||||||||||||||||
Total revenue | 162,257 | 376,401 | (81,392 | ) | 457,266 | 157,706 | 389,321 | (82,996 | ) | 464,031 | ||||||||||||||||||||||
Costs and Expenses: | ||||||||||||||||||||||||||||||||
Cost of sales (exclusive of depreciation and amortization) | 94,730 | 168,868 | (79,410 | ) | 184,188 | 91,530 | 168,501 | (79,627 | ) | 180,404 | ||||||||||||||||||||||
Selling, general and administrative expenses | 33,954 | 33,920 | — | 67,874 | 34,822 | 33,481 | — | 68,303 | ||||||||||||||||||||||||
Research and development expenses | — | 9,030 | — | 9,030 | — | 6,809 | — | 6,809 | ||||||||||||||||||||||||
Depreciation and amortization | 33,073 | 73,849 | (2,148 | ) | 104,774 | 35,365 | 75,292 | (1,499 | ) | 109,158 | ||||||||||||||||||||||
Total costs and expenses | 161,757 | 285,667 | (81,558 | ) | 365,866 | 161,717 | 284,083 | (81,126 | ) | 364,674 | ||||||||||||||||||||||
Operating income (loss) | 500 | 90,734 | 166 | 91,400 | (4,011 | ) | 105,238 | (1,870 | ) | 99,357 | ||||||||||||||||||||||
Other Income (Expense): | ||||||||||||||||||||||||||||||||
Interest income | — | 4,009 | (3 | ) | 4,006 | — | 1,174 | (39 | ) | 1,135 | ||||||||||||||||||||||
Interest expense, net of amounts capitalized | (3 | ) | (53,536 | ) | 3 | (53,536 | ) | (39 | ) | (40,907 | ) | 39 | (40,907 | ) | ||||||||||||||||||
Loss from partial redemption of debt | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Gains (losses) and impairment on marketable investment securities, net | — | 5 | — | 5 | — | (5,122 | ) | — | (5,122 | ) | ||||||||||||||||||||||
Equity in earnings of unconsolidated affiliate | — | 2,654 | — | 2,654 | — | 2,305 | — | 2,305 | ||||||||||||||||||||||||
Retained interest in earnings (loss) of Hughes Retail Group | — | 215 | (215 | ) | — | — | (1,754 | ) | 1,754 | — | ||||||||||||||||||||||
Other, net | — | (24 | ) | — | (24 | ) | — | 2,631 | — | 2,631 | ||||||||||||||||||||||
Total other income (expense), net | (3 | ) | (46,677 | ) | (215 | ) | (46,895 | ) | (39 | ) | (41,673 | ) | 1,754 | (39,958 | ) | |||||||||||||||||
Income (loss) before income taxes | 497 | 44,057 | (49 | ) | 44,505 | (4,050 | ) | 63,565 | (116 | ) | 59,399 | |||||||||||||||||||||
Income tax benefit (provision) | (197 | ) | (16,219 | ) | — | (16,416 | ) | 1,610 | (23,777 | ) | — | (22,167 | ) | |||||||||||||||||||
Net income (loss) | 300 | 27,838 | (49 | ) | 28,089 | (2,440 | ) | 39,788 | (116 | ) | 37,232 | |||||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | — | 524 | — | 524 | — | 209 | — | 209 | ||||||||||||||||||||||||
Net income (loss) attributable to HSS | $ | 300 | $ | 27,314 | $ | (49 | ) | $ | 27,565 | $ | (2,440 | ) | $ | 39,579 | $ | (116 | ) | $ | 37,023 | |||||||||||||
3
CONDENSED ATTRIBUTED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Attributed For the Nine Months Ended September 30, 2016 | Attributed For the Nine Months Ended September 30, 2015 | |||||||||||||||||||||||||||||||
Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | |||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Services and equipment revenue - DISH Network | $ | — | $ | 344,361 | $ | — | $ | 344,361 | $ | — | $ | 401,929 | $ | — | $ | 401,929 | ||||||||||||||||
Services and equipment revenue - other | 480,747 | 748,346 | (246,344 | ) | 982,749 | 455,692 | 761,914 | (245,794 | ) | 971,812 | ||||||||||||||||||||||
Total revenue | 480,747 | 1,092,707 | (246,344 | ) | 1,327,110 | 455,692 | 1,163,843 | (245,794 | ) | 1,373,741 | ||||||||||||||||||||||
Costs and Expenses: | ||||||||||||||||||||||||||||||||
Cost of sales (exclusive of depreciation and amortization) | 278,859 | 486,198 | (239,064 | ) | 525,993 | 267,737 | 505,024 | (235,897 | ) | 536,864 | ||||||||||||||||||||||
Selling, general and administrative expenses | 107,436 | 100,538 | — | 207,974 | 107,038 | 96,833 | — | 203,871 | ||||||||||||||||||||||||
Research and development expenses | — | 23,524 | — | 23,524 | — | 18,876 | — | 18,876 | ||||||||||||||||||||||||
Depreciation and amortization | 99,857 | 215,626 | (6,035 | ) | 309,448 | 104,477 | 224,078 | (3,758 | ) | 324,797 | ||||||||||||||||||||||
Total costs and expenses | 486,152 | 825,886 | (245,099 | ) | 1,066,939 | 479,252 | 844,811 | (239,655 | ) | 1,084,408 | ||||||||||||||||||||||
Operating income (loss) | (5,405 | ) | 266,821 | (1,245 | ) | 260,171 | (23,560 | ) | 319,032 | (6,139 | ) | 289,333 | ||||||||||||||||||||
Other Income (Expense): | ||||||||||||||||||||||||||||||||
Interest income | — | 7,474 | (47 | ) | 7,427 | — | 3,507 | (116 | ) | 3,391 | ||||||||||||||||||||||
Interest expense, net of amounts capitalized | (47 | ) | (127,626 | ) | 47 | (127,626 | ) | (116 | ) | (129,559 | ) | 116 | (129,559 | ) | ||||||||||||||||||
Loss from partial redemption of debt | — | — | — | — | — | (5,044 | ) | — | (5,044 | ) | ||||||||||||||||||||||
Gains (losses) and impairment on marketable investment securities, net | — | 5,300 | — | 5,300 | — | (11,384 | ) | — | (11,384 | ) | ||||||||||||||||||||||
Equity in earnings of unconsolidated affiliate | — | 6,758 | — | 6,758 | — | 4,943 | — | 4,943 | ||||||||||||||||||||||||
Retained interest in earnings (loss) of Hughes Retail Group | — | (2,369 | ) | 2,369 | — | — | (10,280 | ) | 10,280 | — | ||||||||||||||||||||||
Other, net | — | 5,365 | — | 5,365 | — | 921 | — | 921 | ||||||||||||||||||||||||
Total other income (expense), net | (47 | ) | (105,098 | ) | 2,369 | (102,776 | ) | (116 | ) | (146,896 | ) | 10,280 | (136,732 | ) | ||||||||||||||||||
Income (loss) before income taxes | (5,452 | ) | 161,723 | 1,124 | 157,395 | (23,676 | ) | 172,136 | 4,141 | 152,601 | ||||||||||||||||||||||
Income tax benefit (provision) | 2,157 | (59,434 | ) | — | (57,277 | ) | 9,376 | (67,896 | ) | — | (58,520 | ) | ||||||||||||||||||||
Net income (loss) | (3,295 | ) | 102,289 | 1,124 | 100,118 | (14,300 | ) | 104,240 | 4,141 | 94,081 | ||||||||||||||||||||||
Less: Net income attributable to noncontrolling interests | — | 946 | — | 946 | — | 1,006 | — | 1,006 | ||||||||||||||||||||||||
Net income (loss) attributable to HSS | $ | (3,295 | ) | $ | 101,343 | $ | 1,124 | $ | 99,172 | $ | (14,300 | ) | $ | 103,234 | $ | 4,141 | $ | 93,075 | ||||||||||||||
4
CONDENSED ATTRIBUTED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Attributed For the Nine Months Ended September 30, 2016 | Attributed For the Nine Months Ended September 30, 2015 | |||||||||||||||||||||||||||||||
Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | Hughes Retail Group | HSSC Group | Inter-Group Eliminations | HSS Consolidated | |||||||||||||||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | (3,295 | ) | $ | 102,289 | $ | 1,124 | $ | 100,118 | $ | (14,300 | ) | $ | 104,240 | $ | 4,141 | $ | 94,081 | ||||||||||||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 99,857 | 215,626 | (6,035 | ) | 309,448 | 104,477 | 224,078 | (3,758 | ) | 324,797 | ||||||||||||||||||||||
Equity in earnings of unconsolidated affiliate | — | (6,758 | ) | — | (6,758 | ) | — | (4,943 | ) | — | (4,943 | ) | ||||||||||||||||||||
Retained interest in loss (earnings) of Hughes Retail Group | — | 2,369 | (2,369 | ) | — | — | 10,280 | (10,280 | ) | — | ||||||||||||||||||||||
Amortization of debt issuance costs | — | 4,793 | — | 4,793 | — | 4,533 | — | 4,533 | ||||||||||||||||||||||||
Loss from partial redemption of debt | — | — | — | — | — | 5,044 | — | 5,044 | ||||||||||||||||||||||||
Losses (gains) on marketable investment securities | — | (5,300 | ) | — | (5,300 | ) | — | 11,384 | — | 11,384 | ||||||||||||||||||||||
Stock-based compensation | — | 3,696 | — | 3,696 | — | 3,893 | — | 3,893 | ||||||||||||||||||||||||
Deferred tax provision (benefit) | (14,242 | ) | 68,973 | — | 54,731 | (19,463 | ) | 75,060 | — | 55,597 | ||||||||||||||||||||||
Dividends received from unconsolidated entity | — | 10,000 | — | 10,000 | — | — | — | — | ||||||||||||||||||||||||
Proceeds from sale of trading securities | — | 7,140 | — | 7,140 | — | 380 | — | 380 | ||||||||||||||||||||||||
Changes in current assets and current liabilities, net | 16,889 | (60,032 | ) | (234 | ) | (43,377 | ) | 8,974 | (57,856 | ) | (169 | ) | (49,051 | ) | ||||||||||||||||||
Changes in noncurrent assets and noncurrent liabilities, net | 6,493 | 1,216 | (109 | ) | 7,600 | 2,222 | 2,357 | 44 | 4,623 | |||||||||||||||||||||||
Other, net | — | 4,725 | — | 4,725 | — | (3,530 | ) | — | (3,530 | ) | ||||||||||||||||||||||
Net cash flows from operating activities | 105,702 | 348,737 | (7,623 | ) | 446,816 | 81,910 | 374,920 | (10,022 | ) | 446,808 | ||||||||||||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||||||||||||||||||
Purchases of marketable investment securities | — | (396,730 | ) | — | (396,730 | ) | — | (132,741 | ) | — | (132,741 | ) | ||||||||||||||||||||
Sales and maturities of marketable investment securities | — | 265,680 | — | 265,680 | — | 197,899 | — | 197,899 | ||||||||||||||||||||||||
Purchases of property and equipment | (73,593 | ) | (246,033 | ) | 7,623 | (312,003 | ) | (92,949 | ) | (209,420 | ) | 10,022 | (292,347 | ) | ||||||||||||||||||
Expenditures for externally marketed software | — | (17,991 | ) | — | (17,991 | ) | — | (16,905 | ) | — | (16,905 | ) | ||||||||||||||||||||
Investment in unconsolidated entity | — | (1,636 | ) | — | (1,636 | ) | — | — | — | — | ||||||||||||||||||||||
Change in restricted cash and cash equivalents | — | 7,614 | — | 7,614 | — | (313 | ) | — | (313 | ) | ||||||||||||||||||||||
Payment for EchoStar XXI launch services | — | (11,875 | ) | — | (11,875 | ) | — | — | — | — | ||||||||||||||||||||||
Inter-group advances | (1,711 | ) | 30,398 | (28,687 | ) | — | — | (11,039 | ) | 11,039 | — | |||||||||||||||||||||
Other, net | — | — | — | — | — | (9 | ) | — | (9 | ) | ||||||||||||||||||||||
Net cash flows from investing activities | (75,304 | ) | (370,573 | ) | (21,064 | ) | (466,941 | ) | (92,949 | ) | (172,528 | ) | 21,061 | (244,416 | ) | |||||||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||||||||||||||||||
Proceeds from issuance of long-term debt | — | 1,500,000 | — | 1,500,000 | — | — | — | — | ||||||||||||||||||||||||
Payments of debt issuance costs | — | (6,275 | ) | — | (6,275 | ) | — | — | — | — | ||||||||||||||||||||||
Repayment of 6 1/2% Senior Secured Notes Due 2019 and related premium | — | — | — | — | — | (113,300 | ) | — | (113,300 | ) | ||||||||||||||||||||||
Repayment of other debt and capital lease obligations | — | (24,052 | ) | — | (24,052 | ) | — | (31,578 | ) | — | (31,578 | ) | ||||||||||||||||||||
Advances from affiliates | — | 5,481 | — | 5,481 | — | 3,699 | — | 3,699 | ||||||||||||||||||||||||
Inter-group advances | (30,398 | ) | 1,711 | 28,687 | — | 11,039 | — | (11,039 | ) | — | ||||||||||||||||||||||
Capital contributions from EchoStar | — | 11,875 | — | 11,875 | — | — | — | — | ||||||||||||||||||||||||
Other, net | — | (2,967 | ) | — | (2,967 | ) | — | (1,688 | ) | — | (1,688 | ) | ||||||||||||||||||||
Net cash flows from financing activities | (30,398 | ) | 1,485,773 | 28,687 | 1,484,062 | 11,039 | (142,867 | ) | (11,039 | ) | (142,867 | ) | ||||||||||||||||||||
Effect of exchange rates on cash and cash equivalents | — | 660 | — | 660 | — | (6,980 | ) | — | (6,980 | ) | ||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | — | 1,464,597 | — | 1,464,597 | — | 52,545 | — | 52,545 | ||||||||||||||||||||||||
Cash and cash equivalents, beginning of period | — | 382,990 | — | 382,990 | — | 225,557 | — | 225,557 | ||||||||||||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 1,847,587 | $ | — | $ | 1,847,587 | $ | — | $ | 278,102 | $ | — | $ | 278,102 | ||||||||||||||||
5
NOTES TO CONDENSED ATTRIBUTED FINANCIAL INFORMATION
(Unaudited)
Note 1. Business Description
The Hughes Retail Group is generally comprised of our business of providing satellite broadband internet services to residential retail subscribers in the United States, including the assets and liabilities primarily associated with the operation of the business; and the business operations, revenue, billings, operating and other direct and indirect support activities to provide services to the business and Hughes retail subscribers. The Hughes Retail Group also includes any proceeds associated with a sale or transfer of the Hughes Retail Group or any assets of the Hughes Retail Group, and any other assets acquired by or for the account of the Hughes Retail Group or otherwise attributed, contributed, allocated or transferred to the Hughes Retail Group from time to time. The HSSC Group consists of all other operations of HSS, including all existing and future businesses other than the Hughes Retail Group. HSS has adopted a policy statement (the “Policy Statement”) as described in Note 2 below, which sets forth management and allocation policies for purposes of attributing all of the business and operations of HSS to either the Hughes Retail Group or the HSSC Group (each as fully defined in the Policy Statement and collectively, the “Groups”).
Note 2. Basis of Presentation
The overall objective of the attributed financial information is to present HSS’ attributed amounts reported in its condensed consolidated financial statements to the Hughes Retail Group and the HSSC Group. The Policy Statement contains specific provisions that determine how certain assets, liabilities, revenue and expenses are attributed to the Groups. The Policy Statement does not explicitly address the attribution of all amounts reported in our condensed consolidated financial statements; accordingly, management applies judgment in attributing certain amounts based on its assessment of the activities of the Groups and the guiding principles set forth in the Policy Statement.
Set forth below is an overview of the Policy Statement and additional discussion about how we have attributed amounts in our condensed consolidated financial statements to the Groups.
Policy Statement
In accordance with the Policy Statement, all existing and future retail subscribers in the United States, including related customer contracts, are attributed to the Hughes Retail Group. Assets and liabilities that are directly related to the Hughes Retail Group are attributed to the Hughes Retail Group, including certain accounts receivable, inventory, property and equipment, deferred subscriber acquisition costs, intangible assets and tax related assets and liabilities. To the extent practicable, costs and expenses are attributed without markup to the Hughes Retail Group or the HSSC Group based on specific identification. Common or shared costs, including corporate overhead, are allocated between the Hughes Retail Group and the HSSC Group using objective methods and criteria that reflect the relative usage of the corresponding functions or services. Where resources are shared by the Groups and determinations based on use alone are not practicable, we use other methods and criteria that we believe are fair and result in a reasonable estimate of the costs associated with operation, utilization, and maintenance of such resources to each Group. Such methods and criteria may include allocations based on revenue, operating costs, square footage, headcount or management estimates. Under the documents governing the Tracking Stock, any change in our management’s allocation methodologies requires the consent of the holders of a majority of the outstanding shares of the Tracking Stock, but does not require the consent of our common shareholders.
The Hughes Retail Group utilizes broadband satellite capacity that is operated and maintained by the HSSC Group. The Policy Statement provides for a monthly charge to the Hughes Retail Group for its utilization of such capacity based on the number of retail subscribers and revenue per month. In addition, the Policy Statement establishes pricing for the Hughes Retail Group purchases of customer rental equipment from the HSSC Group based on cost plus a fixed margin percentage. Income taxes incurred by HSS and its subsidiaries that include operations of the Hughes Retail Group are allocated between the HSSC Group and the Hughes Retail Group based primarily on the relative amounts of earnings or loss attributable to each Group.
The various attributions, allocations and inter-group charges provided for in the Policy Statement generally do not affect the amounts reported in HSS’ condensed consolidated financial statements, except for effects on the attribution of equity and net income or loss between the holders of Tracking Stock and HSS’ common shareholders. The Policy Statement also does not significantly affect the way that the Hughes segment management assesses operating performance and allocates resources. In addition, our chief operating decision maker reviews the Hughes Retail Group financial information only to the extent such information is included in our periodic filings with the SEC. Therefore we do not consider the Hughes Retail Group to be a separate operating segment.
6
NOTES TO CONDENSED ATTRIBUTED FINANCIAL INFORMATION
(Unaudited)
Balance Sheet Attributions
Assets attributed to the Hughes Retail Group based on specific identification consist primarily of trade accounts receivable from retail broadband subscribers, property and equipment (primarily customer rental equipment) used solely in the retail business, and deferred subscriber acquisition costs included in other noncurrent assets. Goodwill and other intangible assets (primarily customer relationships, developed technology and trademarks), which were recognized in connection with our acquisition of Hughes Communications, Inc. in June 2011, were attributed to the Hughes Retail Group based on an analysis of information for the retail business that was available at the acquisition date.
No attribution to the Hughes Retail Group has been made for certain significant assets that it shares with the HSSC Group, including regulatory authorizations and property and equipment (such as satellites and related terrestrial facilities), because those assets are operated and maintained by the HSSC Group and it is not practicable to allocate the asset carrying amounts between the Groups. However, the Hughes Retail Group has the right to use such assets and is charged for its use of such assets in accordance with the Policy Statement.
Liabilities attributed to the Hughes Retail Group based on specific identification consist primarily of customer prepayments and deferred revenue related to retail subscribers and deferred tax liabilities related to assets and liabilities that have been attributed to the Hughes Retail Group. Except to a limited extent, it is not practicable to attribute accounts payable and accrued liabilities to the Hughes Retail Group because those amounts arise from centralized processes managed by the HSSC Group. The Hughes Retail Group generally incurs inter-group payables to all other operations in connection with such centralized processes. As provided in the Policy Statement, none of our long-term debt is attributed to the Hughes Retail Group; however, interest is charged on all inter-group payables.
Revenue and Expense Attributions
The Hughes Retail Group revenue relates to services and equipment provided to retail broadband subscribers and is readily identifiable based on specific identification.
Expenses attributed to the Hughes Retail Group based on specific identification include depreciation of property and equipment and amortization of intangible assets that are attributed to the Hughes Retail Group. Certain other operating expenses, such as compensation of employees that work exclusively in the retail business, are also attributed to the Hughes Retail Group based on specific identification. A substantial portion of the Hughes Retail Group cost of sales is based on the specific inter-group pricing provisions of the Policy Statement, including a monthly charge per retail subscriber and charges for customer rental equipment at cost plus a fixed margin percentage. The Hughes Retail Group operating expenses also reflect allocations of corporate overhead and other expenses incurred by HSS.
Cash Flow Attributions
The Hughes Retail Group participates in HSS’ centralized cash management system and does not maintain separate cash accounts. Under the centralized cash management system, net advances of cash to or from the Hughes Retail Group are reflected in an inter-group receivable or payable account, which bears interest at the same rate earned by HSS on its cash and marketable investment securities portfolio. There is no allocation of HSS’ long-term debt or related interest costs to the Hughes Retail Group.
Cash receipts from retail broadband subscribers and payments of certain expenses attributed to the Hughes Retail Group on a specific identification basis generally are reflected in the attributed statements of cash flows in the period the cash is received or paid. It is not practicable to determine the timing of related cash disbursements under the centralized cash management system for other costs and expenses attributed to the Hughes Retail Group. The accompanying statements of cash flows generally presents cash flows related to such transactions when they are recognized on an accrual basis in an inter-group receivable or payable account. Periodic changes in inter-group receivables or payables generally are indicative of amounts received or paid by the HSSC Group on behalf of the Hughes Retail Group and are reported in the accompanying attributed statements of cash flows as investing activity for the Group with a net receivable balance or as financing activity for the Group with a net payable balance.
7
NOTES TO CONDENSED ATTRIBUTED FINANCIAL INFORMATION
(Unaudited)
Note 3. Property and Equipment
Property and equipment for the Hughes Retail Group consisted of the following:
Depreciable Life (In Years) | As of | |||||||||
September 30, 2016 | December 31, 2015 | |||||||||
(In thousands) | ||||||||||
Customer rental equipment | 2-4 | $ | 657,680 | $ | 584,086 | |||||
Accumulated depreciation | (509,382 | ) | (421,589 | ) | ||||||
Property and equipment, net | $ | 148,298 | $ | 162,497 | ||||||
Depreciation expense associated with the Hughes Retail Group property and equipment, net of retirements, was $29.1 million and $30.5 million for the three months ended September 30, 2016 and 2015, respectively, and $87.8 million and $89.8 million for the nine months ended September 30, 2016 and 2015, respectively.
Note 4. Goodwill and Other Intangible Assets
Goodwill
Goodwill is assigned to reporting units of our operating segments. A portion of the Hughes segment goodwill was attributed to the Hughes Retail Group as if the Hughes Retail Group had been a separate reporting unit at June 8, 2011, the date EchoStar completed the acquisition of Hughes Communications, Inc. Approximately $260.0 million of the $504.2 million Hughes segment goodwill was attributed to the Hughes Retail Group.
Other Intangible Assets
Other intangible assets for the Hughes Retail Group consisted of the following:
As of | ||||||||||||||||||||||||
September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
Cost | Accumulated Amortization | Carrying Amount | Cost | Accumulated Amortization | Carrying Amount | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Customer relationships | $ | 145,100 | $ | (138,276 | ) | $ | 6,824 | $ | 145,100 | $ | (129,660 | ) | $ | 15,440 | ||||||||||
Technology-based | 23,500 | (20,889 | ) | 2,611 | 23,500 | (17,951 | ) | 5,549 | ||||||||||||||||
Trademark portfolio | 13,620 | (3,632 | ) | 9,988 | 13,620 | (3,121 | ) | 10,499 | ||||||||||||||||
Total other intangible assets | $ | 182,220 | $ | (162,797 | ) | $ | 19,423 | $ | 182,220 | $ | (150,732 | ) | $ | 31,488 | ||||||||||
Customer relationships are amortized predominantly in relation to the expected contribution of cash flow to the business over the life of the intangible asset. Other intangible assets are amortized on a straight-line basis over the periods the assets are expected to contribute to our cash flows. Amortization expense was $4.1 million and $4.9 million for the three months ended September 30, 2016 and 2015, respectively, and $12.1 million and $14.7 million for the nine months ended September 30, 2016 and 2015, respectively.
Note 5. Income Taxes
We establish a provision for income taxes currently payable or receivable and for income tax amounts deferred to future periods based upon a separate return allocation method which results in income tax expense that approximates the expense that would result if the Hughes Retail Group was a stand-alone entity. Deferred tax assets and liabilities are recorded for the estimated future tax effects of differences that exist between the financial reporting carrying amount and tax bases of assets and liabilities. Deferred tax assets are offset by valuation allowances when we determine it is more likely than not that such deferred tax assets will not be realized in the foreseeable future.
8
NOTES TO CONDENSED ATTRIBUTED FINANCIAL INFORMATION
(Unaudited)
Note 6. Equity/ Attributed Net Assets
The reported amounts of equity/attributed net assets for the Hughes Retail Group and the HSSC Group represent the excess of attributed assets over attributed liabilities for the respective Groups. The HSSC Group equity reflects EchoStar’s aggregate 71.89% economic interest in the net assets of the Hughes Retail Group, which comprises DISH Network’s 51.89% economic interest in the Hughes Retail Group represented by EchoStar Tracking Stock and EchoStar’s 20.0% retained interest in the Hughes Retail Group.
The Hughes Retail Group equity/attributed net assets consisted of attributed paid-in capital and accumulated earnings as follows:
As of | ||||||||
September 30, 2016 | December 31, 2015 | |||||||
(In thousands) | ||||||||
Attributed paid-in-capital | $ | 456,122 | $ | 456,122 | ||||
Attributed accumulated earnings (deficit): | ||||||||
Periods prior to March 1, 2014 | 33,395 | 33,395 | ||||||
Periods beginning March 1, 2014 | (47,114 | ) | (43,819 | ) | ||||
Total | (13,719 | ) | (10,424 | ) | ||||
Total equity/ attributed net assets | $ | 442,403 | $ | 445,698 | ||||
9