Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

Form 10-Q

 

(Mark One)

 

T         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014.

 

OR

 

£         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                    TO                     .

 

Commission File Number:  0-26176

 

DISH Network Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

88-0336997

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

9601 South Meridian Boulevard

 

 

Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip code)

 

(303) 723-1000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes T   No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes T   No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer T

 

Accelerated filer £

 

 

 

Non-accelerated filer £

 

Smaller reporting company £

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £   No T

 

As of October 29, 2014, the registrant’s outstanding common stock consisted of 222,480,089 shares of Class A common stock and 238,435,208 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Disclosure Regarding Forward-Looking Statements

i

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets —
September 30, 2014 and December 31, 2013 (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2014 and 2013 (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

48

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

67

 

 

 

Item 4.

Controls and Procedures

67

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

67

 

 

 

Item 1A.

Risk Factors

67

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

Mine Safety Disclosures

None

 

 

 

Item 5.

Other Information

None

 

 

 

Item 6.

Exhibits

68

 

 

 

 

Signatures

69

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our plans, objectives and strategies, growth opportunities in our industries and businesses, our expectations regarding future results, financial condition, liquidity and capital requirements, our estimates regarding the impact of regulatory developments and legal proceedings, and other trends and projections.  Forward-looking statements are not historical facts and may be identified by words such as “future,” “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “will,” “would,” “could,” “can,” “may,” and similar terms.  These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions.  Forward-looking statements are not guarantees of future performance, events or results and involve known and unknown risks, uncertainties and other factors, which may be beyond our control.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors, including, but not limited to, the following:

 

Competition and Economic Risks Affecting our Business

 

·                  We face intense and increasing competition from satellite television providers, cable companies and telecommunications companies, especially as the pay-TV industry has matured, which may require us to increase subscriber acquisition and retention spending or accept lower subscriber activations and higher subscriber churn.

 

·                  Competition from digital media companies that provide or facilitate the delivery of video content via the Internet may reduce our gross new subscriber activations and may cause our subscribers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us.

 

·                  Sustained economic weakness, including continued high unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.

 

·                  Our competitors may be able to leverage their relationships with programmers to reduce their programming costs and offer exclusive content that will place them at a competitive advantage to us.

 

·                  We face increasing competition from other distributors of unique programming services such as foreign language and sports programming that may limit our ability to maintain subscribers that desire these unique programming services.

 

Operational and Service Delivery Risks Affecting our Business

 

·                  If we do not continue improving our operational performance and customer satisfaction, our gross new subscriber activations may decrease and our subscriber churn may increase.

 

·                  If our gross new subscriber activations decrease, or if our subscriber churn, subscriber acquisition costs or retention costs increase, our financial performance will be adversely affected.

 

·                  Programming expenses are increasing and could adversely affect our future financial condition and results of operations.

 

·                  We depend on others to provide the programming that we offer to our subscribers and, if we lose access to this programming, our gross new subscriber activations may decline and our subscriber churn may increase.

 

·                  We may not be able to obtain necessary retransmission consent agreements at acceptable rates, or at all, from local network stations.

 

·                  We may be required to make substantial additional investments to maintain competitive programming offerings.

 

·                  Any failure or inadequacy of our information technology infrastructure could disrupt or harm our business.

 

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·                  We currently depend on EchoStar Corporation and its subsidiaries, or EchoStar, to design, develop and manufacture substantially all of our new set-top boxes and certain related components, to provide a majority of our transponder capacity, and to provide digital broadcast operations and other services to us.  Our business would be adversely affected if EchoStar ceases to provide these products and services to us and we are unable to obtain suitable replacement products and services from third parties.

 

·                  We operate in an extremely competitive environment and our success may depend in part on our timely introduction and implementation of, and effective investment in, new competitive products and services, the failure of which could negatively impact our business.

 

·                  Technology in our industry changes rapidly and our inability to offer new subscribers and upgrade existing subscribers with more advanced equipment could cause our products and services to become obsolete.

 

·                  We rely on a single vendor or a limited number of vendors to provide certain key products or services to us such as information technology support, billing systems, and security access devices, and the inability of these key vendors to meet our needs could have a material adverse effect on our business.

 

·                  Our primary supplier of new set-top boxes, EchoStar, relies on a few suppliers and in some cases a single supplier, for many components of our new set-top boxes, and any reduction or interruption in supplies or significant increase in the price of supplies could have a negative impact on our business.

 

·                  Our programming signals are subject to theft, and we are vulnerable to other forms of fraud that could require us to make significant expenditures to remedy.

 

·                  We depend on third parties to solicit orders for our services that represent a significant percentage of our total gross new subscriber activations.

 

·                  We have limited satellite capacity and failures or reduced capacity could adversely affect our business.

 

·                  Our satellites are subject to construction, launch, operational and environmental risks that could limit our ability to utilize these satellites.

 

·                  We generally do not carry commercial insurance for any of the in-orbit satellites that we use, other than certain satellites leased from third parties, and could face significant impairment charges if one of our satellites fails.

 

·                  We may have potential conflicts of interest with EchoStar due to our common ownership and management.

 

·                  We rely on key personnel and the loss of their services may negatively affect our businesses.

 

Acquisition and Capital Structure Risks Affecting our Business

 

·                  We made substantial investments to acquire certain 700 MHz, AWS-4 and H Block wireless spectrum licenses and other related assets.  We may from time to time seek to acquire additional wireless spectrum licenses and related assets.  We will need to make significant additional investments or partner with others to commercialize our licenses and related assets, and if we decide to acquire additional licenses and related assets.

 

·                  To the extent that we commercialize our wireless spectrum licenses, we will face certain risks entering and competing in the wireless services industry and operating a wireless services business.

 

·                  We may pursue acquisitions and other strategic transactions to complement or expand our businesses that may not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.

 

·                  We may need additional capital, which may not be available on acceptable terms or at all, to continue investing in our businesses and to finance acquisitions and other strategic transactions.

 

·                  A portion of our investment portfolio is invested in securities that have experienced limited or no liquidity and may not be immediately accessible to support our financing needs, including investments in public companies that are highly speculative and have experienced and continue to experience volatility.

 

·                  We have substantial debt outstanding and may incur additional debt.

 

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·                  It may be difficult for a third-party to acquire us, even if doing so may be beneficial to our shareholders, because of our ownership structure.

 

·                  We are controlled by one principal stockholder who is also our Chairman.

 

Legal and Regulatory Risks Affecting our Business

 

·                  Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others.

 

·                  We are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property.

 

·                  Our ability to distribute video content via the Internet involves regulatory risk.

 

·                  Changes in the Cable Act of 1992 (“Cable Act”), and/or the rules of the Federal Communications Commission (“FCC”) that implement the Cable Act, may limit our ability to access programming from cable-affiliated programmers at non-discriminatory rates.

 

·                  The injunction against our retransmission of distant networks, which is currently waived, may be reinstated.

 

·                  We are subject to significant regulatory oversight, and changes in applicable regulatory requirements, including any adoption or modification of laws or regulations relating to the Internet, could adversely affect our business.

 

·                  Our business depends on FCC licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted.

 

·                  We are subject to digital high-definition (“HD”) “carry-one, carry-all” requirements that cause capacity constraints.

 

·                  There can be no assurance that there will not be deficiencies leading to material weaknesses in our internal control over financial reporting.

 

·                  We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission, or SEC.

 

Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended March 31, 2014, and in Part I, Item 1A of our most recent Annual Report on Form 10-K (the “10-K”) filed with the SEC, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the 10-K and those discussed in other documents we file with the SEC.  All cautionary statements made or referred to herein should be read as being applicable to all forward-looking statements wherever they appear.  Investors should consider the risks and uncertainties described or referred to herein and should not place undue reliance on any forward-looking statements.  The forward-looking statements speak only as of the date made, and we expressly disclaim any obligation to update these forward-looking statements.

 

Unless otherwise required by the context, in this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network Corporation and its subsidiaries, “EchoStar” refers to EchoStar Corporation and its subsidiaries, and “DISH DBS” refers to DISH DBS Corporation and its subsidiaries, a wholly-owned, indirect subsidiary of DISH Network.

 

iii



Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,750,556

 

$

4,700,022

 

Marketable investment securities

 

4,521,549

 

5,039,382

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $20,178 and $15,981, respectively

 

979,657

 

902,416

 

Trade accounts receivable - EchoStar, net of allowance for doubtful accounts of zero

 

48,136

 

55,102

 

Inventory

 

528,011

 

512,707

 

Deferred tax assets

 

136,239

 

129,864

 

Prepaid income taxes

 

53,876

 

118,021

 

Current assets - discontinued operations (Note 2)

 

 

68,239

 

Derivative financial instruments

 

251,030

 

292,507

 

Other current assets

 

144,733

 

495,186

 

Total current assets

 

11,413,787

 

12,313,446

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

92,774

 

94,861

 

Property and equipment, net (Note 8)

 

3,802,802

 

4,097,711

 

FCC authorizations (Note 8)

 

4,968,171

 

3,296,665

 

Marketable and other investment securities (Note 6)

 

465,158

 

151,273

 

Noncurrent assets - discontinued operations (Note 2)

 

 

9,965

 

Other noncurrent assets, net

 

380,739

 

392,509

 

Total noncurrent assets

 

9,709,644

 

8,042,984

 

Total assets

 

$

21,123,431

 

$

20,356,430

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

241,853

 

$

281,932

 

Trade accounts payable - EchoStar

 

303,623

 

355,023

 

Deferred revenue and other

 

898,691

 

843,386

 

Accrued programming

 

1,499,216

 

1,242,129

 

Accrued interest

 

203,960

 

232,734

 

Other accrued expenses

 

738,003

 

512,081

 

Current liabilities - discontinued operations (Note 2)

 

 

49,471

 

Current portion of long-term debt and capital lease obligations

 

1,581,401

 

1,034,893

 

Total current liabilities

 

5,466,747

 

4,551,649

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

Long-term debt and capital lease obligations, net of current portion

 

11,789,609

 

12,596,793

 

Deferred tax liabilities

 

1,976,738

 

1,945,690

 

Long-term liabilities - discontinued operations (Note 2)

 

 

19,804

 

Long-term deferred revenue, distribution and carriage payments and other long-term liabilities

 

324,032

 

245,489

 

Total long-term obligations, net of current portion

 

14,090,379

 

14,807,776

 

Total liabilities

 

19,557,126

 

19,359,425

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest (Note 2)

 

21,408

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 278,535,403 and 275,950,537 shares issued, 222,417,143 and 219,832,277 shares outstanding, respectively

 

2,785

 

2,760

 

Class B common stock, $.01 par value, 800,000,000 shares authorized, 238,435,208 shares issued and outstanding

 

2,384

 

2,384

 

Additional paid-in capital

 

2,627,099

 

2,588,224

 

Accumulated other comprehensive income (loss)

 

166,832

 

173,872

 

Accumulated earnings (deficit)

 

314,062

 

(220,701

)

Treasury stock, at cost

 

(1,569,459

)

(1,569,459

)

Total DISH Network stockholders’ equity (deficit)

 

1,543,703

 

977,080

 

Noncontrolling interest

 

1,194

 

19,925

 

Total stockholders’ equity (deficit)

 

1,544,897

 

997,005

 

Total liabilities and stockholders’ equity (deficit)

 

$

21,123,431

 

$

20,356,430

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscriber-related revenue

 

$

3,647,850

 

$

3,463,753

 

$

10,849,138

 

$

10,264,684

 

Equipment sales and other revenue

 

16,268

 

25,200

 

64,786

 

74,447

 

Equipment sales, services and other revenue - EchoStar

 

15,233

 

16,068

 

47,744

 

27,194

 

Total revenue

 

3,679,351

 

3,505,021

 

10,961,668

 

10,366,325

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses (exclusive of depreciation shown separately below - Note 8):

 

 

 

 

 

 

 

 

 

Subscriber-related expenses

 

2,132,583

 

1,976,712

 

6,305,951

 

5,812,325

 

Satellite and transmission expenses

 

181,230

 

141,440

 

511,683

 

400,517

 

Cost of sales - equipment, services and other

 

24,240

 

25,694

 

82,198

 

69,188

 

Subscriber acquisition costs:

 

 

 

 

 

 

 

 

 

Cost of sales - subscriber promotion subsidies

 

58,608

 

69,579

 

189,793

 

214,811

 

Other subscriber acquisition costs

 

264,200

 

313,217

 

770,487

 

822,752

 

Subscriber acquisition advertising

 

163,715

 

113,522

 

431,851

 

357,191

 

Total subscriber acquisition costs

 

486,523

 

496,318

 

1,392,131

 

1,394,754

 

General and administrative expenses

 

196,376

 

191,427

 

589,149

 

566,896

 

Depreciation and amortization (Note 8)

 

269,890

 

253,036

 

791,005

 

787,848

 

Impairment of long-lived assets (Note 11)

 

 

 

 

437,575

 

Total costs and expenses

 

3,290,842

 

3,084,627

 

9,672,117

 

9,469,103

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

388,509

 

420,394

 

1,289,551

 

897,222

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

14,109

 

39,957

 

46,485

 

120,904

 

Interest expense, net of amounts capitalized

 

(143,405

)

(189,384

)

(472,168

)

(565,681

)

Other, net

 

(56,089

)

110,497

 

(52,444

)

218,595

 

Total other income (expense)

 

(185,385

)

(38,930

)

(478,127

)

(226,182

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

203,124

 

381,464

 

811,424

 

671,040

 

Income tax (provision) benefit, net

 

(60,089

)

(38,140

)

(290,443

)

(124,202

)

Income (loss) from continuing operations

 

143,035

 

343,324

 

520,981

 

546,838

 

Income (loss) from discontinued operations, net of tax

 

 

(32,334

)

 

(40,246

)

Net income (loss)

 

143,035

 

310,990

 

520,981

 

506,592

 

Less: Net income (loss) attributable to noncontrolling interest, net of tax

 

(2,484

)

(3,918

)

(13,782

)

(12,862

)

Net income (loss) attributable to DISH Network

 

$

145,519

 

$

314,908

 

$

534,763

 

$

519,454

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

460,754

 

457,377

 

459,688

 

455,372

 

Diluted

 

463,202

 

460,715

 

462,537

 

458,396

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share from continuing operations attributable to DISH Network

 

$

0.32

 

$

0.76

 

$

1.16

 

$

1.23

 

Basic net income (loss) per share from discontinued operations

 

 

(0.07

)

 

(0.09

)

Basic net income (loss) per share attributable to DISH Network

 

$

0.32

 

$

0.69

 

$

1.16

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per share from continuing operations attributable to DISH Network

 

$

0.31

 

$

0.75

 

$

1.16

 

$

1.22

 

Diluted net income (loss) per share from discontinued operations

 

 

(0.07

)

 

(0.09

)

Diluted net income (loss) per share attributable to DISH Network

 

$

0.31

 

$

0.68

 

$

1.16

 

$

1.13

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

143,035

 

$

310,990

 

$

520,981

 

$

506,592

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(4,570

)

3,878

 

1,029

 

Unrealized holding gains (losses) on available-for-sale securities

 

(38,502

)

40,692

 

(18,933

)

77,760

 

Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)

 

1,784

 

(49,221

)

1,722

 

(54,565

)

Deferred income tax (expense) benefit, net

 

13,421

 

3,647

 

6,293

 

(7,946

)

Total other comprehensive income (loss), net of tax

 

(23,297

)

(9,452

)

(7,040

)

16,278

 

Comprehensive income (loss)

 

119,738

 

301,538

 

513,941

 

522,870

 

Less: Comprehensive income (loss) attributable to noncontrolling interest, net of tax

 

(2,484

)

(3,918

)

(13,782

)

(12,862

)

Comprehensive income (loss) attributable to DISH Network

 

$

122,222

 

$

305,456

 

$

527,723

 

$

535,732

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2014

 

2013

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

520,981

 

$

506,592

 

Less: Income (loss) from discontinued operations, net of tax

 

 

(40,246

)

Income (loss) from continuing operations

 

$

520,981

 

$

546,838

 

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

791,005

 

787,848

 

Impairment of long-lived assets

 

 

437,575

 

Realized and unrealized losses (gains) on investments

 

45,498

 

(207,592

)

Non-cash, stock-based compensation

 

24,958

 

25,297

 

Deferred tax expense (benefit)

 

68,050

 

(4,887

)

Other, net

 

142,067

 

47,355

 

Changes in current assets and current liabilities, net

 

194,121

 

36,846

 

Net cash flows from operating activities from continuing operations

 

1,786,680

 

1,669,280

 

Net cash flows from operating activities from discontinued operations, net

 

(30,007

)

(36,964

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(3,796,993

)

(5,009,859

)

Sales and maturities of marketable investment securities

 

4,430,261

 

3,207,640

 

Purchases of derivative financial instruments

 

 

(702,833

)

Settlement of derivative financial instruments

 

 

718,847

 

Purchases of property and equipment

 

(917,456

)

(911,122

)

Change in restricted cash and marketable investment securities

 

2,087

 

38,769

 

Purchases of FCC authorizations - H Block wireless spectrum licenses (Note 10)

 

(1,343,372

)

 

Other, net

 

41,762

 

(94,621

)

Net cash flows from investing activities from continuing operations

 

(1,583,711

)

(2,753,179

)

Net cash flows from investing activities from discontinued operations, net, including $0 and $1,782 of purchases of property and equipment, respectively

 

20,847

 

10,286

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

2,300,000

 

Proceeds from issuance of restricted debt

 

 

2,600,000

 

Redemption of restricted debt

 

 

(2,600,000

)

Funding of restricted debt escrow

 

 

(2,596,750

)

Release of restricted debt escrow

 

 

2,596,771

 

Repurchases of long-term debt

 

(199,999

)

(48,552

)

Repayment of long-term debt and capital lease obligations

 

(23,500

)

(29,399

)

Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan

 

37,352

 

66,598

 

Other

 

33,712

 

9,395

 

Net cash flows from financing activities from continuing operations

 

(152,435

)

2,298,063

 

Net cash flows from financing activities from discontinued operations, net

 

 

(186

)

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents from discontinued operations

 

 

13

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents from continuing operations

 

50,534

 

1,214,164

 

Cash and cash equivalents, beginning of period from continuing operations

 

4,700,022

 

3,573,742

 

Cash and cash equivalents, end of period from continuing operations

 

$

4,750,556

 

$

4,787,906

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents from discontinued operations

 

(9,160

)

(26,851

)

Cash and cash equivalents, beginning of period from discontinued operations

 

9,160

 

32,398

 

Cash and cash equivalents, end of period from discontinued operations

 

$

 

$

5,547

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Organization and Business Activities

 

Principal Business

 

DISH Network Corporation is a holding company.  Its subsidiaries (which together with DISH Network Corporation are referred to as “DISH Network,” the “Company,” “we,” “us” and/or “our,” unless otherwise required by the context) operate two primary business segments.

 

·            DISH.  The DISH® branded pay-TV service (“DISH”) had 14.041 million subscribers in the United States as of September 30, 2014.  The DISH branded pay-TV service consists of, among other things, Federal Communications Commission (“FCC”) licenses authorizing us to use direct broadcast satellite (“DBS”) and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a leased fiber network, in-home service and call center operations, and certain other assets utilized in our operations.  In addition, we market broadband services under the dishNET™ brand, which had 0.553 million subscribers in the United States as of September 30, 2014.  This service utilizes advanced technology and high-powered satellites launched by Hughes Communications, Inc. (“Hughes”) and ViaSat, Inc. (“ViaSat”) to provide broadband coverage nationwide.  This service primarily targets approximately 15 million rural residents that are underserved, or unserved, by wireline broadband.  In addition to the dishNET branded satellite broadband service, we also offer wireline voice and broadband services under the dishNET brand as a competitive local exchange carrier to consumers living in a 14-state region in the western United States.  We primarily bundle our dishNET branded services with our DISH branded pay-TV service.

 

·            Wireless.  In 2008, we paid $712 million to acquire certain 700 MHz E Block (“700 MHz”) wireless spectrum licenses, which were granted to us by the FCC in February 2009.  On March 9, 2012, we completed the acquisitions of 100% of the equity of reorganized DBSD North America, Inc. (“DBSD North America”) and substantially all of the assets of TerreStar Networks, Inc. (“TerreStar”), pursuant to which we acquired, among other things, certain satellite assets and 40 MHz of spectrum licenses held by DBSD North America (the “DBSD Transaction”) and TerreStar (the “TerreStar Transaction”), which licenses the FCC modified in March 2013 to add AWS-4 authority (“AWS-4”).  The total consideration to acquire the DBSD North America and TerreStar assets was approximately $2.860 billion.  In addition, we paid $1.672 billion to acquire all 176 H Block wireless spectrum licenses (“H Block”) in the H Block auction, which were granted to us by the FCC on April 29, 2014.  These wireless spectrum licenses are subject to certain interim and final build-out requirements.  As we review our options for the commercialization of our wireless spectrum, we may incur significant additional expenses and may have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure, as well as the acquisition of additional wireless spectrum.  See Note 10 for further discussion.

 

2.                                      Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

4



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary.  Minority interests are recorded as noncontrolling interest or redeemable non-controlling interest.  See below for further discussion.  Non-majority owned investments are accounted for using the equity method when we have the ability to significantly influence the operating decisions of the investee.  When we do not have the ability to significantly influence the operating decisions of an investee, the cost method is used.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Redeemable Noncontrolling Interests.  DISH Digital Holding L.L.C. (“DISH Digital”) has been consolidated into our financial statements since July 1, 2012.  Effective August 1, 2014, EchoStar Corporation (“EchoStar”) and DISH Digital entered into an exchange agreement (the “Exchange Agreement”) pursuant to which, among other things, DISH Digital distributed certain assets to EchoStar and EchoStar reduced its interest in DISH Digital to a ten percent non-voting interest.  EchoStar’s ten percent non-voting interest is redeemable, subject to certain conditions, at fair value within sixty days following the fifth anniversary of the Exchange Agreement.  This interest is considered temporary equity and is recorded as “Redeemable noncontrolling interest” in the mezzanine section of our Condensed Consolidated Balance Sheets.  Since any redemption of EchoStar’s ten percent non-voting interest would occur at fair value, the “Redeemable noncontrolling interest” was initially accounted for at fair value, which established a minimum threshold value for this interest.  Redemption of the interest is contingent on a certain performance goal being achieved by DISH Digital, which is not yet probable of being achieved.  At such time that we determine the performance goal to be probable, the value of the “Redeemable noncontrolling interest” will be adjusted for any change in redemption value above the minimum threshold, with the offset recorded in “Additional paid-in capital” on our Condensed Consolidated Balance Sheets.  In addition, the operating results of DISH Digital attributable to EchoStar are recorded as “Redeemable noncontrolling interest” in our Condensed Consolidated Balance Sheets effective August 1, 2014.  See Note 12 for further discussion on DISH Digital and the Exchange Agreement.

 

Discontinued Operations

 

As of December 31, 2013, Blockbuster had ceased material operations.  Accordingly, our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and Condensed Consolidated Statements of Cash Flows have been recast to present the operations of Blockbuster as discontinued for all periods presented and the amounts presented in the Notes to our Condensed Consolidated Financial Statements relate only to our continuing operations, unless otherwise noted.  On January 14, 2014, we completed the sale of our Blockbuster operations in Mexico.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period.  Estimates are used in accounting for, among other things, allowances for doubtful accounts, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, fair value of multi-element arrangements, capital leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, retailer incentives, programming expenses, subscriber lives and royalty obligations.  Sustained economic weakness has increased the inherent uncertainty in the estimates and assumptions indicated above.  Actual results may differ from previously estimated amounts, and such differences may be material to our Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.

 

Fair Value Measurements

 

We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs.  We apply the following hierarchy in determining fair value:

 

·                  Level 1, defined as observable inputs being quoted prices in active markets for identical assets, including U.S. treasury notes;

 

·                  Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and derivative financial instruments indexed to marketable investment securities; and

 

·                  Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants therefore requiring assumptions based on the best information available.

 

As of September 30, 2014 and December 31, 2013, the carrying value for cash and cash equivalents, trade accounts receivable (net of allowance for doubtful accounts) and current liabilities (excluding the “Current portion of long-term debt and capital lease obligations”) is equal to or approximates fair value due to their short-term nature or proximity to current market rates.  See Note 6 for the fair value of our marketable investment securities and see below for the fair value of our derivative financial instruments.

 

Fair values for our publicly traded debt securities are based on quoted market prices, when available.  The fair values of private debt are estimated based on an analysis in which we evaluate market conditions, related securities, various public and private offerings, and other publicly available information.  In performing this analysis, we make various assumptions regarding, among other things, credit spreads, and the impact of these factors on the value of the debt securities.  See Note 9 for the fair value of our long-term debt.

 

Derivative Financial Instruments

 

We may purchase and hold derivative financial instruments for, among other reasons, strategic or speculative purposes.  We record all derivative financial instruments on our Condensed Consolidated Balance Sheets at fair value as either assets or liabilities.  Changes in the fair values of derivative financial instruments are recognized in our results of operations and included in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  We currently have not designated any derivative financial instrument for hedge accounting.

 

As of September 30, 2014 and December 31, 2013, we held derivative financial instruments indexed to the trading price of common equity securities with a fair value of $251 million and $293 million, respectively.  The fair value of the derivative financial instruments is dependent on the trading price of the indexed common equity securities, which may be volatile and vary depending on, among other things, the issuer’s financial and operational performance and market conditions.

 

6



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

New Accounting Pronouncements

 

Revenue from Contracts with Customers.  On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers.  This converged standard on revenue recognition was issued jointly with the International Accounting Standards Board (“IASB”) to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards (“IFRS”).  ASU 2014-09 provides a framework for revenue recognition that replaces most existing GAAP revenue recognition guidance when it becomes effective.  ASU 2014-09 will become effective for us on January 1, 2017.  We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.  We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

7



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

3.                                      Basic and Diluted Net Income (Loss) Per Share

 

We present both basic earnings per share (“EPS”) and diluted EPS.  Basic EPS excludes potential dilution and is computed by dividing “Net income (loss) attributable to DISH Network” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if stock awards were exercised.  The potential dilution from stock awards was computed using the treasury stock method based on the average market value of our Class A common stock.  The following table presents EPS amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands, except per share amounts)

 

Income (loss) from continuing operations

 

$

143,035

 

$

343,324

 

$

520,981

 

$

546,838

 

Less: Net income (loss) attributable to noncontrolling interest

 

(2,484

)

(3,918

)

(13,782

)

(12,862

)

Income (loss) from continuing operations attributable to DISH Network

 

145,519

 

347,242

 

534,763

 

559,700

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

 

(32,334

)

 

(40,246

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to DISH Network

 

$

145,519

 

$

314,908

 

$

534,763

 

$

519,454

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

460,754

 

457,377

 

459,688

 

455,372

 

Dilutive impact of stock awards outstanding

 

2,448

 

3,338

 

2,849

 

3,024

 

Diluted

 

463,202

 

460,715

 

462,537

 

458,396

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share from continuing operations attributable to DISH Network

 

$

0.32

 

$

0.76

 

$

1.16

 

$

1.23

 

Basic net income (loss) per share from discontinued operations

 

 

(0.07

)

 

(0.09

)

Basic net income (loss) per share attributable to DISH Network

 

$

0.32

 

$

0.69

 

$

1.16

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per share from continuing operations attributable to DISH Network

 

$

0.31

 

$

0.75

 

$

1.16

 

$

1.22

 

Diluted net income (loss) per share from discontinued operations

 

 

(0.07

)

 

(0.09

)

Diluted net income (loss) per share attributable to DISH Network

 

$

0.31

 

$

0.68

 

$

1.16

 

$

1.13

 

 

As of September 30, 2014 and 2013, there were stock awards to purchase 0.4 million and 0.8 million shares, respectively, of Class A common stock outstanding, not included in the weighted-average common shares outstanding above, as their effect was anti-dilutive.

 

8



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Vesting of options and rights to acquire shares of our Class A common stock granted pursuant to our performance-based stock incentive plans (“Restricted Performance Units”) is contingent upon meeting certain goals, some of which are not yet probable of being achieved. As a consequence, the following are also not included in the diluted EPS calculation.

 

 

 

As of September 30,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Performance based options

 

7,322

 

7,806

 

Restricted Performance Units

 

1,843

 

1,969

 

Total

 

9,165

 

9,775

 

 

4.                                      Supplemental Data — Statements of Cash Flows

 

The following table presents our supplemental cash flow and other non-cash data.

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Cash paid for interest (including capitalized interest)

 

$

652,793

 

$

666,873

 

Cash received for interest

 

108,471

 

120,400

 

Cash paid for income taxes

 

161,279

 

235,917

 

Capitalized interest

 

158,582

 

101,265

 

Employee benefits paid in Class A common stock

 

25,781

 

24,230

 

Satellites and other assets financed under capital lease obligations

 

3,462

 

904

 

Unsettled purchases of marketable investment securities

 

203,088

 

8,962

 

Satellite and Tracking Stock Transaction with EchoStar:

 

 

 

 

 

Transfer of property and equipment, net

 

432,080

 

 

Investment in EchoStar and HSSC preferred tracking stock - cost method

 

316,204

 

 

Transfer of liabilities and other

 

44,540

 

 

Capital distribution to EchoStar, net of deferred taxes of $31,274

 

51,466

 

 

DISH Digital Exchange Transaction with EchoStar:

 

 

 

 

 

Transfer of property and equipment, net

 

8,978

 

 

Transfer of investments and intangibles, net

 

25,097

 

 

Capital distribution to EchoStar, net of deferred taxes of $3,542

 

5,845

 

 

Deemed distribution to EchoStar- initial fair value of redeemable noncontrolling interest, net of deferred taxes of $8,491

 

14,009

 

 

 

9



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

5.                                      Other Comprehensive Income (Loss)

 

The following tables present the tax effect on each component of “Other comprehensive income (loss).”

 

 

 

For the Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Before

 

Tax

 

Net

 

Before

 

Tax

 

Net

 

 

 

Tax

 

(Expense)

 

of Tax

 

Tax

 

(Expense)

 

of Tax

 

 

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

 

 

 

(In thousands)

 

Foreign currency translation adjustments

 

$

 

$

 

$

 

$

(4,570

)

$

 

$

(4,570

)

Unrealized holding gains (losses) on available-for-sale securities

 

(38,502

)

14,074

 

(24,428

)

40,692

 

(14,343

)

26,349

 

Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)

 

1,784

 

(653

)

1,131

 

(49,221

)

17,990

 

(31,231

)

Other comprehensive income (loss)

 

$

(36,718

)

$

13,421

 

$

(23,297

)

$

(13,099

)

$

3,647

 

$

(9,452

)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Before

 

Tax

 

Net

 

Before

 

Tax

 

Net

 

 

 

Tax

 

(Expense)

 

of Tax

 

Tax

 

(Expense)

 

of Tax

 

 

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

 

 

 

(In thousands)

 

Foreign currency translation adjustments

 

$

3,878

 

$

 

$

3,878

 

$

1,029

 

$

 

$

1,029

 

Unrealized holding gains (losses) on available-for-sale securities

 

(18,933

)

6,923

 

(12,010

)

77,760

 

(27,887

)

49,873

 

Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)

 

1,722

 

(630

)

1,092

 

(54,565

)

19,941

 

(34,624

)

Other comprehensive income (loss)

 

$

(13,333

)

$

6,293

 

$

(7,040

)

$

24,224

 

$

(7,946

)

$

16,278

 

 

The “Accumulated other comprehensive income (loss)” is detailed in the following table, net of tax.

 

 

 

Foreign

 

Unrealized/

 

 

 

 

 

Currency

 

Recognized

 

 

 

 

 

Translation

 

Gains

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

Adjustment

 

(Losses)

 

Total

 

 

 

(In thousands)

 

Balance as of December 31, 2013

 

$

(3,878

)

$

177,750

 

$

173,872

 

Other comprehensive income (loss) before reclassification

 

 

(12,010

)

(12,010

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

3,878

 

1,092

 

4,970

 

Balance as of September 30, 2014

 

$

 

$

166,832

 

$

166,832

 

 

10



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

6.                                      Marketable Investment Securities, Restricted Cash and Cash Equivalents, and Other Investment Securities

 

Our marketable investment securities, restricted cash and cash equivalents, and other investment securities consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

21,870

 

$

116,570

 

Current marketable investment securities - strategic

 

575,063

 

534,449

 

Current marketable investment securities - other

 

3,924,616

 

4,388,363

 

Total current marketable investment securities

 

4,521,549

 

5,039,382

 

Restricted marketable investment securities (1)

 

79,100

 

81,371

 

Noncurrent marketable investment securities - ARS and other (2)

 

135,408

 

133,652

 

Total marketable investment securities

 

4,736,057

 

5,254,405

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

13,674

 

13,490

 

 

 

 

 

 

 

Other investment securities:

 

 

 

 

 

Investment in EchoStar preferred tracking stock - cost method (2)

 

228,795

 

 

Investment in HSSC preferred tracking stock - cost method (2)

 

87,409

 

 

Other investment securities - cost method (2)

 

13,546

 

17,621

 

Total other investment securities

 

329,750

 

17,621

 

 

 

 

 

 

 

Total marketable investment securities, restricted cash and cash equivalents, and other investment securities

 

$

5,079,481

 

$

5,285,516

 

 


(1)         Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” on our Condensed Consolidated Balance Sheets.

(2)         Noncurrent marketable investment securities — auction rate securities (“ARS”) and other investment securities are included in “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets.

 

Marketable Investment Securities

 

Our marketable investment securities portfolio consists of various debt and equity instruments, all of which are classified as available-for-sale, except as specified below.

 

Current Marketable Investment Securities - VRDNs

 

Variable rate demand notes (“VRDNs”) are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.  All of the put options are secured by a pledged liquidity source.  Our VRDN portfolio is comprised mainly of investments in municipalities, which are backed by financial institutions or other highly rated obligors that serve as the pledged liquidity source.  While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.

 

11



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Current Marketable Investment Securities - Strategic

 

Our current strategic marketable investment securities include strategic and financial debt and equity investments in public companies that are highly speculative and have experienced and continue to experience volatility.  As of September 30, 2014, our strategic investment portfolio consisted of securities of a small number of issuers, and as a result the value of that portfolio depends, among other things, on the performance of those issuers.  The fair value of certain of the debt and equity securities in our investment portfolio can be adversely impacted by, among other things, the issuers’ respective performance and ability to obtain any necessary additional financing on acceptable terms, or at all.

 

Current Marketable Investment Securities - Other

 

Our current marketable investment securities portfolio includes investments in various debt instruments including corporate and government bonds.

 

Restricted Cash and Marketable Investment Securities

 

As of September 30, 2014 and December 31, 2013, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit.

 

Noncurrent Marketable Investment Securities — ARS and Other Investment Securities

 

We have investments in ARS and other investment securities which are classified as available-for-sale securities.  We generally recognize the changes in fair value of these securities as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  However, for certain of these investment securities, primarily ARS, we have elected to recognize the changes in fair value through “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (the “Fair Value Option”).  Previous events in the credit markets reduced or eliminated current liquidity for certain of our ARS and other investment securities.  As a result, we classify these investments as noncurrent assets, as we intend to hold these investments until they recover or mature.

 

The valuation of our ARS and other investment securities investments portfolio is subject to uncertainties that are difficult to estimate.  Due to the lack of observable market quotes for identical assets, we utilize analyses that rely on Level 2 and/or Level 3 inputs, as defined in “Fair Value Measurements.”  These inputs include, among other things, observed prices on similar assets as well as our assumptions and estimates related to the counterparty credit quality, default risk underlying the security and overall capital market liquidity.  These securities were also compared, when possible, to other observable market data for financial instruments with similar characteristics.

 

Fair Value Option.  As of September 30, 2014, our ARS and other noncurrent marketable investment securities portfolio of $135 million included $94 million of securities accounted for under the Fair Value Option.

 

Other Investment Securities

 

We have strategic investments in certain debt and equity securities that are included in noncurrent “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets and accounted for using the cost, equity and/or available-for-sale methods of accounting.

 

Our ability to realize value from our strategic investments in securities that are not publicly traded depends on the success of the issuers’ businesses and their ability to obtain sufficient capital, on acceptable terms or at all, and to execute their business plans.  Because private markets are not as liquid as public markets, there is also increased risk

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

 

Investment in Tracking Stock

 

To improve our position in the growing consumer satellite broadband market, among other reasons, on February 20, 2014, we entered into agreements with EchoStar to implement a transaction pursuant to which, among other things:  (i) on March 1, 2014, we transferred to EchoStar and Hughes Satellite Systems Corporation (“HSSC”), a subsidiary of EchoStar, five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV (collectively the “Transferred Satellites”), including related in-orbit incentive obligations and cash interest payments of approximately $59 million), and approximately $11 million in cash in exchange for an aggregate of 6,290,499 shares of a series of preferred tracking stock issued by EchoStar and an aggregate of 81.128 shares of a series of preferred tracking stock issued by HSSC (collectively, the “Tracking Stock”); and (ii) beginning on March 1, 2014, we lease back certain satellite capacity on the Transferred Satellites (collectively, the “Satellite and Tracking Stock Transaction”).  The Tracking Stock generally tracks the residential retail satellite broadband business of Hughes Network Systems, LLC (“HNS”), a wholly-owned subsidiary of HSSC, including without limitation the operations, assets and liabilities attributed to the Hughes residential retail satellite broadband business (collectively, the “Hughes Retail Group”).  The shares of the Tracking Stock issued to us represent an aggregate 80% economic interest in the Hughes Retail Group.

 

Since the Satellite and Tracking Stock Transaction is among entities under common control, we recorded the Tracking Stock at EchoStar and HSSC’s historical cost basis for these instruments of $229 million and $87 million, respectively.  The difference between the historical cost basis of the Tracking Stock received and the net carrying value of the Transferred Satellites of $356 million (including debt obligations, net of deferred taxes), plus the $11 million in cash, resulted in a $51 million capital transaction recorded in “Additional paid-in capital” on our Condensed Consolidated Balance Sheet.  Although our investment in the Tracking Stock represents an aggregate 80% economic interest in the Hughes Retail Group, we have no operational control or significant influence over the Hughes Retail Group business, and currently there is no public market for the Tracking Stock.  As such, the Tracking Stock is accounted for under the cost method of accounting.

 

On February 20, 2014, DISH Operating L.L.C. (“DOLLC”) and DISH Network L.L.C. (“DNLLC”), each indirect wholly-owned subsidiaries of us, entered into an Investor Rights Agreement with EchoStar and HSSC with respect to the Tracking Stock (the “Investor Rights Agreement”).  The Investor Rights Agreement provides, among other things, certain information and consultation rights for us; certain transfer restrictions on the Tracking Stock and certain rights and obligations to offer and sell under certain circumstances (including a prohibition on transfers of the Tracking Stock for one year, with continuing transfer restrictions (including a right of first offer in favor of EchoStar) thereafter, an obligation to sell the Tracking Stock to EchoStar in connection with a change of control of us and a right to require EchoStar to repurchase the Tracking Stock in connection with a change of control of EchoStar, in each case subject to certain terms and conditions); certain registration rights; certain obligations to provide conversion and exchange rights of the Tracking Stock under certain circumstances; and certain protective covenants afforded to holders of the Tracking Stock.  The Investor Rights Agreement generally will terminate with respect to our interest should we no longer hold any shares of the HSSC-issued Tracking Stock and any registrable securities under the Investor Rights Agreement.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

As of September 30, 2014 and December 31, 2013, we had accumulated net unrealized gains of $164 million and $181 million, respectively. These amounts, net of related tax effect, were $167 million and $178 million, respectively. All of these amounts are included in “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).” The components of our available-for-sale investments are summarized in the table below.

 

 

 

As of September 30, 2014

 

As of December 31, 2013

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

21,870

 

$

 

$

 

$

 

$

116,570

 

$

 

$

 

$

 

ARS and other

 

41,828

 

1,617

 

(3,201

)

(1,584

)

45,030

 

1,188

 

(5,138

)

(3,950

)

ARS Fair Value Option

 

93,580

 

 

 

 

88,622

 

 

 

 

Other (including restricted)

 

4,190,657

 

78,374

 

(1,344

)

77,030

 

4,668,532

 

83,363

 

(4,741

)

78,622

 

Equity securities

 

388,122

 

93,360

 

(4,659

)

88,701

 

335,651

 

106,684

 

 

106,684

 

Total

 

$

4,736,057

 

$

173,351

 

$

(9,204

)

$

164,147

 

$

5,254,405

 

$

191,235

 

$

(9,879

)

$

181,356

 

 

As of September 30, 2014, restricted and non-restricted marketable investment securities included debt securities of $2.778 billion with contractual maturities within one year, $1.358 billion with contractual maturities extending longer than one year through and including five years, $1 million with contractual maturities extending longer than five years through and including ten years and $211 million with contractual maturities longer than ten years.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have been in an unrealized loss position, aggregated by investment category. As of September 30, 2014, the unrealized losses on our investments in equity securities represented investments in broad-based indices and in the telecommunications industry. We are not aware of any factors that indicate the unrealized losses in these investments are due to factors other than temporary market fluctuations. As of September 30, 2014, the unrealized losses related to our investments in debt securities primarily represented investments in ARS and other corporate bonds. We have the ability to hold and do not intend to sell our investments in these debt securities before they recover or mature, and it is more likely than not that we will hold these investments until that time. In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity. Therefore, we believe that these changes in the estimated fair values of these marketable investment securities are related to temporary market fluctuations.

 

 

 

As of

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

Debt Securities:

 

 

 

 

 

 

 

 

 

Less than 12 months

 

$

1,979,006

 

$

(1,322

)

$

2,208,930

 

$

(3,106

)

12 months or more

 

219,053

 

(3,223

)

84,915

 

(6,773

)

Equity Securities:

 

 

 

 

 

 

 

 

 

Less than 12 months

 

56,365

 

(4,659

)

 

 

12 months or more

 

 

 

 

 

Total

 

$

2,254,424

 

$

(9,204

)

$

2,293,845

 

$

(9,879

)

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Fair Value Measurements

 

Our investments measured at fair value on a recurring basis were as follows:

 

 

 

As of

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Cash equivalents (including restricted)

 

$

4,539,145

 

$

73,936

 

$

4,465,209

 

$

 

$

4,387,252

 

$

323,638

 

$

4,063,614

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

21,870

 

$

 

$

21,870

 

$

 

$

116,570

 

$

 

$

116,570

 

$

 

ARS and other

 

135,408

 

 

218

 

135,190

 

133,652

 

 

678

 

132,974

 

Other (including restricted)

 

4,190,657

 

39,834

 

4,144,970

 

5,853

 

4,668,532

 

11,015

 

4,644,471

 

13,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

388,122

 

388,122

 

 

 

335,651

 

335,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

4,736,057

 

427,956

 

4,167,058

 

141,043

 

5,254,405

 

346,666

 

4,761,719

 

146,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

251,030

 

 

251,030

 

 

292,507

 

 

292,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,987,087

 

$

427,956

 

$

4,418,088

 

$

141,043

 

$

5,546,912

 

$

346,666

 

$

5,054,226

 

$

146,020

 

 

As of September 30, 2014 and December 31, 2013, our Level 3 investments consisted predominately of ARS and other investment securities.  On a quarterly basis we evaluate the reasonableness of significant unobservable inputs used in those measurements.  The valuation models used for some of our ARS investments require an evaluation of the underlying instruments held by the trusts that issue these securities.  For our other ARS and other investment securities, our evaluation uses, among other things, the terms of the underlying instruments, the credit ratings of the issuers, current market conditions, and other relevant factors.  Based on these factors, we assess the risk of realizing expected cash flows and we apply an observable discount rate that reflects this risk.  We may also reduce our valuations to reflect a liquidity discount based on the lack of an active market for these securities.

 

Changes in Level 3 instruments were as follows:

 

 

 

Level 3
Investment
Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2013

 

$

146,020

 

Net realized and unrealized gains (losses) included in earnings

 

(3,068

)

Net realized and unrealized gains (losses) included in other comprehensive income (loss)

 

3,465

 

Purchases

 

 

Settlements

 

(5,374

)

Issuances

 

 

Transfers into or out of Level 3

 

 

Balance as of September 30, 2014

 

$

141,043

 

 

During the nine months ended September 30, 2014, we had no transfers in or out of Level 1 and Level 2 fair value measurements.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Gains and Losses on Sales and Changes in Carrying Values of Investments

 

“Other, net” within “Other Income (Expense)” included on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Other Income (Expense):

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

Marketable investment securities - gains (losses) on sales/exchanges

 

$

168

 

$

49,223

 

$

6,358

 

$

63,405

 

Marketable investment securities - unrealized gains (losses) on investments accounted for using the Fair Value Option

 

(2,060

)

8,689

 

4,958

 

19,175

 

Derivative financial instruments - net realized and/or unrealized gains (losses)

 

(41,302

)

52,505

 

(41,476

)

137,703

 

Marketable investment securities - other-than-temporary impairments

 

(1,951

)

 

(8,081

)

(1,919

)

Costs related to early redemption of debt (Note 9)

 

(7,257

)

 

(7,257

)

 

 

Other

 

(3,687

)

80

 

(6,946

)

231

 

Total

 

$

(56,089

)

$

110,497

 

$

(52,444

)

$

218,595

 

 

7.                                      Inventory

 

Inventory consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Finished goods

 

$

280,485

 

$

299,975

 

Raw materials

 

159,210

 

102,563

 

Work-in-process

 

88,316

 

110,169

 

Total

 

$

528,011

 

$

512,707

 

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

8.                                      Property and Equipment and FCC Authorizations

 

Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

Depreciable

 

As of

 

 

 

Life

 

September 30,

 

December 31,

 

 

 

(In Years)

 

2014

 

2013

 

 

 

 

 

(In thousands)

 

Equipment leased to customers

 

2-5

 

$

3,640,723

 

$

3,596,310

 

EchoStar I (1)

 

12

 

 

201,607

 

EchoStar VII (1)

 

15

 

 

177,000

 

EchoStar X (1)

 

15

 

 

177,192

 

EchoStar XI (1)

 

15

 

 

200,198

 

EchoStar XIV (1)

 

15

 

 

316,541

 

EchoStar XV

 

15

 

277,658

 

277,658

 

D1

 

15

 

150,000

 

150,000

 

T1

 

15

 

401,721

 

401,721

 

Satellites acquired under capital lease agreements

 

10-15

 

499,819

 

499,819

 

Furniture, fixtures, equipment and other

 

1-10

 

752,035

 

720,570

 

Buildings and improvements

 

1-40

 

84,638

 

83,531

 

Land

 

 

5,504

 

5,692

 

Construction in progress

 

 

745,128

 

515,447

 

Total property and equipment

 

 

 

6,557,226

 

7,323,286

 

Accumulated depreciation (1)

 

 

 

(2,754,424

)

(3,225,575

)

Property and equipment, net

 

 

 

$

3,802,802

 

$

4,097,711

 

 


(1)         Property and equipment and accumulated depreciation decreased $1.073 billion and $633 million, respectively, as a result of the Satellite and Tracking Stock Transaction.  See Note 6 and Note 12 for further discussion.

 

Construction in progress consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Wireless ground equipment and build-out, including capitalized interest

 

$

449,387

 

$

289,732

 

Pay-TV Satellites, including capitalized interest

 

236,688

 

143,839

 

T2 satellite

 

40,000

 

40,000

 

Other

 

19,053

 

41,876

 

Construction in progress

 

$

745,128

 

$

515,447

 

 

As we prepare for commercialization of our AWS-4 and H Block wireless spectrum licenses, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets, interest expense related to their carrying value is being capitalized within “Property and equipment, net” on our Condensed Consolidated Balance Sheets based on our weighted-average borrowing rate for our debt.  We began capitalizing interest on the H Block licenses in April 2014 concurrent with the FCC order granting our application to acquire these licenses.  See Note 10 for further discussion.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Depreciation and amortization expense consisted of the following:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

Equipment leased to customers

 

$

219,978

 

$

195,843

 

$

639,662

 

$

555,653

 

Satellites

 

21,956

 

33,866

 

73,809

 

101,598

 

Buildings, furniture, fixtures, equipment and other (1)

 

27,956

 

23,327

 

77,534

 

130,597

 

Total depreciation and amortization

 

$

269,890

 

$

253,036

 

$

791,005

 

$

787,848

 

 


(1)         During the second quarter 2013, we ceased operations of our TerreStar Mobile Satellite Service (“MSS”) business.  As a result, we accelerated the depreciable lives of certain assets designed to support this business and the remaining net book value of $53 million was fully depreciated in the second quarter 2013.

 

Cost of sales and operating expense categories included in our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) do not include depreciation expense related to satellites or equipment leased to customers.

 

Pay-TV Satellites.  We currently utilize 14 owned and leased satellites in geostationary orbit approximately 22,300 miles above the equator, one of which we own and depreciate over the useful life of the satellite.  We currently utilize capacity on 11 satellites that we lease from EchoStar, which are accounted for as operating leases.  We also lease two satellites from third parties, which are accounted for as capital leases and are depreciated over the shorter of the economic life of the satellite or the term of the satellite agreement.

 

As of September 30, 2014, our pay-TV satellite fleet consisted of the following:

 

 

 

 

 

Degree

 

Estimated

 

 

 

Launch

 

Orbital

 

Useful Life

 

Satellites

 

Date

 

Location

 

(Years)

 

Owned:

 

 

 

 

 

 

 

EchoStar XV (1)

 

July 2010

 

45

 

15