Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 28, 2012.

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 (000-21767)

 

 

ViaSat, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   33-0174996

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

6155 El Camino Real

Carlsbad, California 92009

(760) 476-2200

(Address of principal executive offices and telephone number)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  x

The number of shares outstanding of the registrant’s common stock, $0.0001 par value, as of October 26, 2012 was 44,013,836.

 

 

 


Table of Contents

VIASAT, INC.

TABLE OF CONTENTS

 

     Page  
PART I. FINANCIAL INFORMATION   

Item 1. Financial Statements (Unaudited)

     3   

Condensed Consolidated Balance Sheets

     3   

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

     4   

Condensed Consolidated Statements of Cash Flows

     5   

Condensed Consolidated Statement of Equity

     6   

Notes to the Condensed Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     54   

Item 4. Controls and Procedures

     55   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     55   

Item 1A. Risk Factors

     55   

Item 6. Exhibits

     55   

Signatures

     56   


Table of Contents

PART I — FINANCIAL INFORMATION

Item  1. Financial Statements (Unaudited)

VIASAT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

     As of
September 28, 2012
    As of
March 30, 2012
 
     (In thousands)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 136,118      $ 172,583   

Accounts receivable, net

     231,606        211,690   

Inventories

     132,890        127,646   

Deferred income taxes

     20,291        20,316   

Prepaid expenses and other current assets

     34,718        30,917   
  

 

 

   

 

 

 

Total current assets

     555,623        563,152   
    

Satellites, net

     560,521        585,731   

Property and equipment, net

     326,045        294,973   

Other acquired intangible assets, net

     55,059        63,041   

Goodwill

     83,537        83,461   

Other assets

     162,584        136,795   
  

 

 

   

 

 

 

Total assets

   $ 1,743,369      $ 1,727,153   
  

 

 

   

 

 

 
    
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 80,646      $ 75,040   

Accrued liabilities

     154,406        159,762   

Current portion of other long-term debt

     1,270        1,240   
  

 

 

   

 

 

 

Total current liabilities

     236,322        236,042   
    

Senior Notes, net

     548,039        547,791   

Other long-term debt

     131        774   

Other liabilities

     57,060        50,353   
  

 

 

   

 

 

 

Total liabilities

     841,552        834,960   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Equity:

    

ViaSat, Inc. stockholders’ equity

    

Common stock

     4        4   

Paid-in capital

     683,401        649,672   

Retained earnings

     239,891        262,218   

Common stock held in treasury

     (27,500     (25,358

Accumulated other comprehensive income

     1,766        1,439   
  

 

 

   

 

 

 

Total ViaSat, Inc. stockholders’ equity

     897,562        887,975   

Noncontrolling interest in subsidiary

     4,255        4,218   
  

 

 

   

 

 

 

Total equity

     901,817        892,193   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,743,369      $ 1,727,153   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


Table of Contents

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

     Three Months Ended     Six Months Ended  
     September 28, 2012     September 30, 2011     September 28, 2012     September 30, 2011  
     (In thousands, except per share data)  

Revenues:

        

Product revenues

   $ 168,475      $ 146,611      $ 316,204      $ 269,157   

Service revenues

     114,347        76,413        208,381        148,968   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     282,822        223,024        524,585        418,125   

Operating expenses:

        

Cost of product revenues

     121,421        107,909        230,470        200,194   

Cost of service revenues

     95,382        54,204        173,951        103,520   

Selling, general and administrative

     54,079        44,379        110,580        86,112   

Independent research and development

     8,758        6,809        16,127        12,503   

Amortization of acquired intangible assets

     4,041        4,767        8,105        9,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (859     4,956        (14,648     6,257   

Other income (expense):

        

Interest income

     45        13        105        39   

Interest expense

     (11,553     (211     (23,099     (211
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (12,367     4,758        (37,642     6,085   

Benefit from income taxes

     (4,510     (3,411     (15,352     (3,678
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (7,857     8,169        (22,290     9,763   

Less: Net income attributable to the noncontrolling interest, net of tax

     50        194        37        29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to ViaSat, Inc.

   $ (7,907   $ 7,975      $ (22,327   $ 9,734   
  

 

 

   

 

 

   

 

 

   

 

 

 
        
        

Basic net (loss) income per share attributable to ViaSat, Inc. common stockholders

   $ (0.18   $ 0.19      $ (0.51   $ 0.23   

Diluted net (loss) income per share attributable to ViaSat, Inc. common stockholders

   $ (0.18   $ 0.18      $ (0.51   $ 0.22   
        

Shares used in computing basic net (loss) income per share

     43,615        42,142        43,399        41,972   

Shares used in computing diluted net (loss) income per share

     43,615        43,894        43,399        43,860   
        

Comprehensive income (loss):

        

Net (loss) income

   $ (7,857   $ 8,169      $ (22,290   $ 9,763   

Other comprehensive income (loss), net of tax:

        

Unrealized gain (loss) on hedging, net of tax of $82, $0, $26 and $0 respectively

     129        (593     40        (721

Foreign currency translation adjustments, net of tax of $73, $0, $(40) and $0 respectively

     899        (1,002     287        (694
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     1,028        (1,595     327        (1,415

Comprehensive (loss) income

     (6,829     6,574        (21,963     8,348   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: comprehensive income attributable to the noncontrolling interest, net of tax

     50        194        37        29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to ViaSat, Inc.

   $ (6,879   $ 6,380      $ (22,000   $ 8,319   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six Months Ended  
     September 28, 2012     September 30, 2011  
     (In thousands)  

Cash flows from operating activities:

  

Net (loss) income

   $ (22,290   $ 9,763   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation

     64,359        48,000   

Amortization of intangible assets

     12,034        11,907   

Deferred income taxes

     (15,407     (3,388

Stock-based compensation expense

     12,424        8,979   

Loss on disposition of fixed assets

     4,535        2,913   

Other non-cash adjustments

     2,370        782   

Increase (decrease) in cash resulting from changes in operating assets and liabilities:

    

Accounts receivable

     (20,515     (7,416

Inventories

     (5,184     (20,582

Other assets

     (5,080     (13,902

Accounts payable

     5,404        (6,270

Accrued liabilities

     2,041        (7,117

Other liabilities

     7,396        117   
  

 

 

   

 

 

 

Net cash provided by operating activities

     42,087        23,786   
    

Cash flows from investing activities:

    

Purchase of property, equipment and satellites, net

     (74,652     (133,313

Cash paid for patents, licenses and other assets

     (12,351     (8,295
  

 

 

   

 

 

 

Net cash used in investing activities

     (87,003     (141,608
    

Cash flows from financing activities:

    

Proceeds from issuance of common stock under equity plans

     14,055        6,167   

Payment of debt issuance costs

     (2,215     —     

Purchase of common stock in treasury

     (2,142     (2,250

Payments on capital lease

     (613     (465 )

Payments of satellite performance incentives obligation

     (640     —     

Proceeds from line of credit borrowings

     —          130,000  

Payments on line of credit

     —          (20,000
  

 

 

   

 

 

 

Net cash provided by financing activities

     8,445        113,452   

Effect of exchange rate changes on cash

     6        (113
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (36,465     (4,483

Cash and cash equivalents at beginning of period

     172,583        40,490   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 136,118      $ 36,007   
  

 

 

   

 

 

 
    

Non-cash investing and financing activities:

    

Issuance of common stock in satisfaction of certain accrued employee compensation liabilities

   $ 7,060      $ 6,340   

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

 

    ViaSat, Inc. Stockholders           Total  
    Common Stock                 Common Stock Held
in Treasury
    Accumulated
Other
Comprehensive
Income (Loss)
     
    Number of
Shares
Issued
    Amount     Paid-in
Capital
    Retained
Earnings
        Noncontrolling
Interest in
Subsidiary
   
            Number of
Shares
    Amount        
    (In thousands, except share data)        

Balance at March 30, 2012

    43,776,202      $ 4      $ 649,672      $ 262,218        (727,674   $ (25,358   $ 1,439      $ 4,218      $ 892,193   

Exercise of stock options

    487,779        —          11,568        —          —          —          —          —          11,568   

Issuance of stock under Employee Stock Purchase Plan

    77,474        —          2,487        —          —          —          —          —          2,487   

Stock-based compensation

    —          —          12,614        —          —          —          —          —          12,614   

Shares issued in settlement of certain accrued employee compensation liabilities

    197,149        —          7,060        —          —          —          —          —          7,060   

RSU awards vesting

    137,979        —          —          —          —          —          —          —          —     

Purchase of treasury shares pursuant to vesting of certain RSU agreements

    —          —          —          —          (50,983     (2,142     —          —          (2,142

Net (loss) income

    —          —          —          (22,327     —          —          —          37        (22,290

Other comprehensive income, net of tax

    —          —          —          —          —          —          327        —          327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 28, 2012

    44,676,583      $ 4      $ 683,401      $ 239,891        (778,657   $ (27,500   $ 1,766      $ 4,255      $ 901,817   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 — Basis of Presentation

The accompanying condensed consolidated balance sheet at September 28, 2012, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended September 28, 2012 and September 30, 2011, the condensed consolidated statements of cash flows for the six months ended September 28, 2012 and September 30, 2011 and the condensed consolidated statement of equity for the six months ended September 28, 2012 have been prepared by the management of ViaSat, Inc. (also referred to hereafter as the Company or ViaSat), and have not been audited. These financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended March 30, 2012 and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s results for the periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended March 30, 2012 included in the Company’s Annual Report on Form 10-K. Interim operating results are not necessarily indicative of operating results for the full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).

The Company’s condensed consolidated financial statements include the assets, liabilities and results of operations of ViaSat, its wholly owned subsidiaries and TrellisWare Technologies, Inc. (TrellisWare), a majority-owned subsidiary. All significant intercompany amounts have been eliminated.

The Company’s fiscal year is the 52 or 53 weeks ending on the Friday closest to March 31 of the specified year. For example, references to fiscal year 2013 refer to the fiscal year ending on March 29, 2013. The Company’s quarters for fiscal year 2013 end on June 29, 2012, September 28, 2012, December 28, 2012 and March 29, 2013. This results in a 53 week fiscal year approximately every four to five years. Fiscal years 2013 and 2012 are both 52-week years.

The preparation of financial statements in conformity with GAAP requires management 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 reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates. Significant estimates made by management include revenue recognition, stock-based compensation, self-insurance reserves, allowance for doubtful accounts, warranty accruals, valuation of goodwill and other intangible assets, patents, orbital slots and other licenses, software development, property, equipment and satellites, long-lived assets, derivatives, contingencies and income taxes including the valuation allowance on deferred tax assets.

Revenue recognition

A substantial portion of the Company’s revenues is derived from long-term contracts requiring development and delivery of complex equipment built to customer specifications. Sales related to long-term contracts are accounted for under the authoritative guidance for the percentage-of-completion method of accounting (Accounting Standards Codification (ASC) 605-35). Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract, or as products are shipped under the units-of-delivery method. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. Changes in estimates of profit or loss on contracts are included in earnings on a cumulative basis in the period the estimate is changed. During the three months ended September 28, 2012 and September 30, 2011, the Company recorded losses of approximately $1.1 million and $0.4 million, respectively, related to loss contracts. During the six months ended September 28, 2012 and September 30, 2011, the Company recorded losses of approximately $2.4 million and $0.7 million, respectively, related to loss contracts.

The Company also derives a substantial portion of its revenues from contracts and purchase orders where revenue is recorded on delivery of products or performance of services in accordance with the authoritative guidance for revenue recognition (ASC 605). Under this standard, the Company recognizes revenue when an arrangement exists, prices are determinable, collectability is reasonably assured and the goods or services have been delivered.

The Company also enters into certain leasing arrangements with customers and evaluates the contracts in accordance with the authoritative guidance for leases (ASC 840). The Company’s accounting for equipment leases involves specific determinations under the authoritative guidance for leases, which often involve complex provisions and significant judgments. In accordance with the authoritative guidance for leases, the Company classifies the transactions as sales type or operating leases based on (1) review for transfers of ownership of the equipment to the lessee by the end of the lease term, (2) review of the lease terms to determine if it

 

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Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

contains an option to purchase the leased equipment for a price which is sufficiently lower than the expected fair value of the equipment at the date of the option, (3) review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment, and (4) review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. Additionally, the Company considers the cancelability of the contract and any related uncertainty of collections or risk in recoverability of the lease investment at lease inception. Revenue from sales type leases is recognized at the inception of the lease or when the equipment has been delivered and installed at the customer site, if installation is required. Revenues from equipment rentals under operating leases are recognized as earned over the lease term, which is generally on a straight-line basis.

In accordance with the authoritative guidance for revenue recognition for multiple element arrangements, the Accounting Standards Update (ASU) 2009-13 (ASU 2009-13), Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements, which updates ASC 605-25, Revenue Recognition-Multiple element arrangements, of the Financial Accounting Standards Board (FASB) codification, for substantially all of the arrangements with multiple deliverables, the Company allocates revenue to each element based on a selling price hierarchy at the arrangement inception. The selling price for each element is based upon the following selling price hierarchy: vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE are available (a description as to how the Company determines VSOE, TPE and ESP is provided below). If a tangible hardware systems product includes software, the Company determines whether the tangible hardware systems product and the software work together to deliver the product’s essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. Revenue for each separate unit of accounting is recognized when the applicable revenue recognition criteria for each element have been met.

To determine the selling price in multiple-element arrangements, the Company establishes VSOE of the selling price using the price charged for a deliverable when sold separately and for software license updates, product support and hardware systems support, based on the renewal rates offered to customers. For nonsoftware multiple-element arrangements, TPE is established by evaluating similar and/or interchangeable competitor products or services in standalone arrangements with similarly situated customers and/or agreements. If the Company is unable to determine the selling price because VSOE or TPE doesn’t exist, the Company determines ESP for the purposes of allocating the arrangement by reviewing historical transactions, including transactions whereby the deliverable was sold on a standalone basis and considers several other external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, competition, the geographies in which the Company offers its products and services, the type of customer (i.e., distributor, value added reseller, government agency or direct end user, among others) and the stage of the product lifecycle. The determination of ESP considers the Company’s pricing model and go-to-market strategy. As the Company, or its competitors’, pricing and go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to its determination of VSOE, TPE and ESP. As a result, the Company’s future revenue recognition for multiple-element arrangements could differ materially from those in the current period.

In accordance with the authoritative guidance for shipping and handling fees and costs (ASC 605-45), the Company records shipping and handling costs billed to customers as a component of revenues, and shipping and handling costs incurred by the Company for inbound and outbound freight are recorded as a component of cost of revenues.

Collections in excess of revenues and deferred revenues represent cash collected from customers in advance of revenue recognition and are recorded in accrued liabilities for obligations within the next twelve months. Amounts for obligations extending beyond twelve months are recorded within other liabilities in the condensed consolidated financial statements.

Contract costs on U.S. government contracts are subject to audit and review by the Defense Contracting Management Agency (DCMA), the Defense Contract Audit Agency (DCAA), and other U.S. government agencies, as well as negotiations with U.S. government representatives. The Company’s incurred cost audits by the DCAA have not been completed for fiscal year 2004 and subsequent fiscal years. Although the Company has recorded contract revenues subsequent to fiscal year 2003 based upon an estimate of costs that the Company believes will be approved upon final audit or review, the Company does not know the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed the Company’s estimates, its profitability would be adversely affected. As of September 28, 2012 and March 30, 2012, the Company had $6.7 million in contract-related reserves for its estimate of potential refunds to customers for potential cost adjustments on several multi-year U.S. government cost reimbursable contracts (see Note 8).

Advertising costs

In accordance with the authoritative guidance for advertising costs (ASC 720-35), advertising costs are expensed as incurred and included in selling, general and administrative expenses (SG&A). Advertising expenses for the three months ended September 28, 2012 and September 30, 2011 were $6.0 million and $0.7 million, respectively, and for the six months ended September 28, 2012 and September 30, 2011 were $11.5 million and $1.5 million, respectively.

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Property, equipment and satellites

Satellites and other property and equipment are recorded at cost or, in the case of certain satellites and other property acquired, the fair value at the date of acquisition, net of accumulated depreciation. Capitalized satellite costs consist primarily of the costs of satellite construction and launch, including launch insurance and insurance during the period of in-orbit testing, the net present value of performance incentives expected to be payable to satellite manufacturers (dependent on the continued satisfactory performance of the satellites), costs directly associated with the monitoring and support of satellite construction, and interest costs incurred during the period of satellite construction. The Company also constructs gateway facilities, network operations systems and other assets to support its satellites, and those construction costs, including interest, are capitalized as incurred. At the time satellites are placed in service, the Company estimates the useful life of its satellites for depreciation purposes based upon an analysis of each satellite’s performance against the original manufacturer’s orbital design life, estimated fuel levels and related consumption rates, as well as historical satellite operating trends. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets ranging from two to twenty-four years. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of the lease term or the life of the improvement. Costs incurred for additions to property, equipment and satellites, together with major renewals and betterments, are capitalized and depreciated over the remaining life of the underlying asset. Costs incurred for maintenance, repairs and minor renewals and betterments are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in operations.

Interest expense is capitalized on the carrying value of assets under construction, in accordance with the authoritative guidance for the capitalization of interest (ASC 835-20). During the three and six months ended September 28, 2012, with respect to assets under construction, the Company capitalized $0.8 million and $1.6 million of interest expense, respectively. With respect to ViaSat-1, related gateway and networking equipment and other assets, the Company capitalized $7.7 million and $15.3 million of interest expense during the three and six months ended September 30, 2011, respectively.

The Company owns two satellites: its new high-capacity Ka-band spot-beam satellite, ViaSat-1 (which was successfully launched into orbit in October 2011 and commenced commercial operation in January 2012) and WildBlue-1 (which was placed into service in March 2007). In addition, the Company has an exclusive prepaid lifetime capital lease of Ka-band capacity over the continental United States on Telesat Canada’s Anik F2 satellite (which was placed into service in April 2005) and owns related gateway and networking equipment for all of its satellites. The Company periodically reviews the remaining estimated useful life of its satellites to determine if revisions to estimated lives are necessary. The Company’s property and equipment also includes the indoor and outdoor customer premise equipment (CPE) units leased to subscribers under a retail leasing program as part of the Company’s satellite services segment. The Company depreciates the satellites, gateway and networking equipment, CPE units and related installation costs over their estimated useful lives. The total cost and accumulated depreciation of CPE units included in property and equipment, net, as of September 28, 2012 were $118.8 million and $40.2 million, respectively. The total cost and accumulated depreciation of CPE units included in property and equipment, net, as of March 30, 2012 were $85.3 million and $33.1 million, respectively.

Occasionally, the Company may enter into capital lease arrangements for various machinery, equipment, computer-related equipment, software, furniture or fixtures. As of September 28, 2012 and March 30, 2012, assets under capital leases totaled approximately $3.1 million. Accumulated amortization related to such capital leases was $1.0 million and $0.8 million as of September 28, 2012 and March 30, 2012, respectively. The Company records amortization of assets leased under capital lease arrangements within depreciation expense.

Patents, orbital slots and other licenses

The Company capitalizes the costs of obtaining or acquiring patents, orbital slots and other licenses. Amortization of intangible assets that have finite lives is provided for by the straight-line method over the shorter of the legal or estimated economic life. As of September 28, 2012 and March 30, 2012, the Company had $3.2 million of capitalized costs related to patents included in other assets. As of September 28, 2012 and March 30, 2012, the Company had $8.6 million and $8.4 million, respectively, of capitalized costs related to acquiring and obtaining orbital slots and other licenses included in other assets. Accumulated amortization related to these assets was approximately $0.5 million and $0.4 million as of September 28, 2012 and March 30, 2012, respectively. Amortization expense related to these assets was an insignificant amount for the three and six months ended September 28, 2012 and September 30, 2011. If a patent, orbital slot or orbital license is rejected, abandoned or otherwise invalidated, the unamortized cost is expensed in that period. During the three months and six ended September 28, 2012 and September 30, 2011, the Company did not write off any significant costs due to abandonment or impairment.

Debt issuance costs

Debt issuance costs are amortized and recognized as interest expense on a straight-line basis over the expected term of the related debt, which is not materially different from an effective interest rate basis. During the three months ended September 28, 2012, the Company did not pay or capitalize any debt issuance costs and during the six months ended September 28, 2012, the Company    

 

9


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

paid and capitalized approximately $2.2 million in debt issuance costs. During the three and six months ended September 30, 2011, the Company did not pay or capitalize any debt issuance costs. Unamortized debt issuance costs are recorded in prepaid expenses and other current assets and in other long-term assets in the consolidated balance sheets, depending on the amounts expected to be amortized to interest expense within the next twelve months.

Software development

Costs of developing software for sale are charged to research and development expense when incurred, until technological feasibility has been established. Software development costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of unamortized cost or net realizable value. Once the product is available for general release, the software development costs are amortized based on the ratio of current to future revenue for each product with an annual minimum equal to straight-line amortization over the remaining estimated economic life of the product, generally within five years. Capitalized costs, net, of $50.7 million and $42.0 million related to software developed for resale were included in other assets as of September 28, 2012 and March 30, 2012, respectively. The Company capitalized $6.1 million and $12.5 million of costs related to software developed for resale for the three and six months ended September 28, 2012, respectively. The Company capitalized $4.1 million and $9.4 million of costs related to software developed for resale for the three and six months ended September 30, 2011, respectively. Amortization expense for software development costs was $2.3 million and $3.8 million for the three and six months ended September 28, 2012, respectively, and $1.1 million and $2.3 million for the three and six months ended September 30, 2011, respectively.

Self-insurance liabilities

The Company has self-insurance plans to retain a portion of the exposure for losses related to employee medical benefits and workers’ compensation. The self-insurance plans include policies which provide for both specific and aggregate stop-loss limits. The Company utilizes internal actuarial methods as well as other historical information for the purpose of estimating ultimate costs for a particular plan year. Based on these actuarial methods, along with currently available information and insurance industry statistics, the Company’s self-insurance liability for the plans was $1.9 million and $1.7 million as of September 28, 2012 and March 30, 2012, respectively. The Company’s estimate, which is subject to inherent variability, is based on average claims experience in the Company’s industry and its own experience in terms of frequency and severity of claims, including asserted and unasserted claims incurred but not reported, with no explicit provision for adverse fluctuation from year to year. This variability may lead to ultimate payments being either greater or less than the amounts presented above. Self-insurance liabilities have been classified as a current liability in accrued liabilities in accordance with the estimated timing of the projected payments.

Indemnification provisions

In the ordinary course of business, the Company includes indemnification provisions in certain of its contracts, generally relating to parties with which the Company has commercial relations. Pursuant to these agreements, the Company will indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, including but not limited to losses relating to third-party intellectual property claims. To date, there have not been any material costs incurred in connection with such indemnification clauses. The Company’s insurance policies do not necessarily cover the cost of defending indemnification claims or providing indemnification, so if a claim was filed against the Company by any party that the Company has agreed to indemnify, the Company could incur substantial legal costs and damages. A claim would be accrued when a loss is considered probable and the amount can be reasonably estimated. At September 28, 2012 and March 30, 2012, no such amounts were accrued related to the aforementioned provisions.

Noncontrolling interest

A noncontrolling interest represents the equity interest in a subsidiary that is not attributable, either directly or indirectly, to the Company and is reported as equity of the Company, separately from the Company’s controlling interest. Revenues, expenses, gains, losses, net income (loss) and other comprehensive income (loss) are reported in the condensed consolidated financial statements at the consolidated amounts, which include the amounts attributable to both the controlling and noncontrolling interest.

Common stock held in treasury

During the first six months of fiscal years 2013 and 2012, the Company issued 137,979 and 145,695 shares of common stock, respectively, based on the vesting terms of certain restricted stock unit agreements. In order for employees to satisfy minimum statutory employee tax withholding requirements related to the issuance of common stock underlying these restricted stock unit agreements, the Company repurchased 50,983 and 51,403 shares of common stock with a total value of $2.1 million and $2.3 million during the first six months of fiscal years 2013 and 2012, respectively. Repurchased shares of common stock of 778,657 and 727,674 were held in treasury as of September 28, 2012 and March 30, 2012, respectively.

 

10


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Derivatives

The Company enters into foreign currency forward and option contracts from time to time to hedge certain forecasted foreign currency transactions. Gains and losses arising from foreign currency forward and option contracts not designated as hedging instruments are recorded in other income (expense) as gains (losses) on derivative instruments. Gains and losses arising from the effective portion of foreign currency forward and option contracts which are designated as cash-flow hedging instruments are recorded in accumulated other comprehensive income (loss) as unrealized gains (losses) on derivative instruments until the underlying transaction affects the Company’s earnings, at which time they are then recorded in the same income statement line as the underlying transaction.

The fair values of the Company’s outstanding foreign currency forward contracts as of September 28, 2012 and March 30, 2012 were as follows:

 

     September 28, 2012      March 30, 2012  

Derivatives designated as hedging instruments

   Other current
assets
     Accrued liabilities      Other current
assets
     Accrued liabilities  
     (In thousands)  

Foreign currency forward contracts

   $ —         $ 377       $ —         $ 443   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

   $ —         $ 377       $ —         $ 443   
  

 

 

    

 

 

    

 

 

    

 

 

 

The notional value of foreign currency forward contracts outstanding as of September 28, 2012 and March 30, 2012 was $7.5 million and $9.6 million, respectively.

The effects of foreign currency forward contracts in cash flow hedging relationships during the three months ended September 28, 2012 were as follows:

 

Derivatives in Cash Flow Hedging Relationships

   Amount
of Gain or
(Loss)
Recognized
in Accumulated
OCI
on
Derivatives
(Effective
Portion)
    Location of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
     Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
    Location of Gain
or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount Excluded
from Effectiveness
Testing)
     Amount of
Gain or
(Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 
     (In thousands)  

Foreign currency forward contracts

   $ (243     Cost of product revenues       $ (454     Not applicable       $ —     
  

 

 

      

 

 

      

 

 

 

Total

   $ (243      $ (454      $ —     
  

 

 

      

 

 

      

 

 

 

The effects of foreign currency forward contracts in cash flow hedging relationships during the six months ended September 28, 2012 were as follows:

 

Derivatives in Cash Flow Hedging Relationships

   Amount
of Gain or
(Loss)
Recognized
in Accumulated
OCI
on
Derivatives
(Effective
Portion)
    Location of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
     Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
    Location of Gain
or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount Excluded
from Effectiveness
Testing)
     Amount of
Gain or
(Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 
     (In thousands)  

Foreign currency forward contracts

   $ (520     Cost of product revenues       $ (586     Not applicable       $ —     
  

 

 

      

 

 

      

 

 

 

Total

   $ (520      $ (586      $ —     
  

 

 

      

 

 

      

 

 

 

 

11


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The effects of foreign currency forward contracts in cash flow hedging relationships during the three months ended September 30, 2011 were as follows:

 

Derivatives in Cash Flow Hedging Relationships

   Amount
of Gain or
(Loss)
Recognized
in Accumulated
OCI
on
Derivatives
(Effective
Portion)
    Location of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
     Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
    Location of Gain
or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount Excluded
from Effectiveness
Testing)
     Amount of
Gain or
(Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 
     (In thousands)  

Foreign currency forward contracts

   $ (670     Cost of product revenues       $ (77     Not applicable       $ —     
  

 

 

      

 

 

      

 

 

 

Total

   $ (670      $ (77      $ —     
  

 

 

      

 

 

      

 

 

 

The effects of foreign currency forward contracts in cash flow hedging relationships during the six months ended September 30, 2011 were as follows:

 

Derivatives in Cash Flow Hedging Relationships

   Amount
of Gain or
(Loss)
Recognized
in Accumulated
OCI
on
Derivatives
(Effective
Portion)
    Location of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
     Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
     Location of Gain
or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount Excluded
from Effectiveness
Testing)
     Amount of
Gain or
(Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 
     (In thousands)  

Foreign currency forward contracts

   $ (638     Cost of product revenues       $ 83         Not applicable       $ —     
  

 

 

      

 

 

       

 

 

 

Total

   $ (638      $ 83          $ —     
  

 

 

      

 

 

       

 

 

 

At September 28, 2012, the estimated net amount of unrealized gains or losses related to foreign currency forward contracts that was expected to be reclassified to earnings within the next twelve months was approximately $0.3 million. The Company’s foreign currency forward contracts outstanding as of September 28, 2012 will mature within nine to twenty three months from their inception. There were no gains or losses from ineffectiveness of these derivative instruments recorded for the three and six months ended September 28, 2012 and September 30, 2011.

Stock-based compensation

In accordance with the authoritative guidance for share-based payments (ASC 718), the Company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award, and recognizes expense on a straight-line basis over the employee’s requisite service period. Stock-based compensation expense is recognized in the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended September 28, 2012 and September 30, 2011 only for those awards ultimately expected to vest, with forfeitures estimated at the date of grant. The authoritative guidance for share-based payments requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognized $5.8 million and $12.4 million of stock-based compensation expense for the three and six months ended September 28, 2012, respectively, and $4.8 million and $9.0 million of stock-based compensation expense for the three and six months ended September 30, 2011, respectively.

For the six months ended September 28, 2012 and September 30, 2011, the Company recorded no incremental tax benefits from stock options exercised and restricted stock unit award vesting as the excess tax benefit from stock options exercised and restricted stock unit award vesting increased the Company’s net operating loss carryforward.

 

12


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Income taxes

Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance for accounting for uncertainty in income taxes also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.

Current income tax expense is the amount of income taxes expected to be payable for the current fiscal year. A deferred income tax asset or liability is established for the expected future tax consequences resulting from differences in the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credit and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred income tax expense (benefit) is the net change during the year in the deferred income tax asset or liability.

Recent authoritative guidance

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (ASC 220): Presentation of Comprehensive Income. The new authoritative guidance requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB further amended its guidance to defer changes related to the presentation of reclassification adjustments indefinitely as a result of concerns raised by stakeholders that the new presentation requirements would be difficult for preparers and add unnecessary complexity to financial statements. The authoritative guidance (other than the portion regarding the presentation of reclassification adjustments which, as noted above, has been deferred indefinitely) became effective for the Company beginning in the first quarter of fiscal year 2013. In the first quarter of fiscal year 2013, the Company retrospectively adopted the new accounting standard for the presentation of comprehensive income in financial statements which resulted in the presentation of a total for comprehensive income (loss), and the components of net income (loss) and other comprehensive income (loss) in one statement. The adoption of this standard only changed how the Company presents comprehensive income (loss) and did not impact the Company’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (ASC 350): Testing Goodwill for Impairment. The new authoritative guidance simplifies how an entity tests goodwill for impairment. The new authoritative guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The two-step quantitative impairment test is required only if, based on its qualitative assessment, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This authoritative guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted if an entity’s financial statements for the more recent interim and annual period have not yet been issued. The Company early adopted this authoritative guidance in the fourth quarter of fiscal year 2012. Adoption of this authoritative guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (ASC 210): Disclosures about offsetting Assets and Liabilities. The new authoritative guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this authoritative guidance. This authoritative guidance will be effective for the Company beginning in the first quarter of fiscal year 2014 and should be applied retrospectively for all comparative periods presented. The Company is currently evaluating the impact that this authoritative guidance may have on its consolidated financial statements and disclosures.

 

13


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2 — Composition of Certain Balance Sheet Captions

 

     As of
September 28, 2012
    As of
March 30, 2012
 
     (In thousands)  

Accounts receivable, net:

    

Billed

   $ 113,160      $ 108,758   

Unbilled

     119,584        103,929   

Allowance for doubtful accounts

     (1,138     (997
  

 

 

   

 

 

 
   $ 231,606      $ 211,690   
  

 

 

   

 

 

 

Inventories:

    

Raw materials

   $ 43,440      $ 46,208   

Work in process

     23,814        23,932   

Finished goods

     65,636        57,506   
  

 

 

   

 

 

 
   $ 132,890      $ 127,646   
  

 

 

   

 

 

 

Prepaid expenses and other current assets:

    

Prepaid expenses

   $ 31,881      $ 25,103   

Other

     2,837        5,814   
  

 

 

   

 

 

 
   $ 34,718      $ 30,917   
  

 

 

   

 

 

 

Satellites, net:

    

Satellite — WildBlue-1 (estimated useful life of 10 years)

   $ 195,890      $ 195,890   

Capital lease of satellite capacity — Anik F2 (estimated useful life of 10 years)

     99,090        99,090   

Satellite — ViaSat-1 (estimated useful life of 17 years)

     363,204        362,977   
  

 

 

   

 

 

 
     658,184        657,957   

Less accumulated depreciation and amortization

     (97,663     (72,226
  

 

 

   

 

 

 
   $ 560,521      $ 585,731   
  

 

 

   

 

 

 

Property and equipment, net:

    

Machinery and equipment (estimated useful life of 2-5 years)

   $ 219,660      $ 195,975   

Computer equipment and software (estimated useful life of 2-7 years)

     132,032        127,596   

CPE leased equipment (estimated useful life of 3-5 years)

     118,755        85,271   

Furniture and fixtures (estimated useful life of 7 years)

     14,086        14,093   

Leasehold improvements (estimated useful life of 2-17 years)

     51,373        51,205   

Building (estimated useful life of 24 years)

     8,923        8,923   

Land

     4,384        4,384   

Construction in progress

     19,186        16,570   
  

 

 

   

 

 

 
     568,399        504,017   

Less accumulated depreciation and amortization

     (242,354     (209,044
  

 

 

   

 

 

 
   $ 326,045      $ 294,973   
  

 

 

   

 

 

 

Other acquired intangible assets, net:

    

Technology (weighted average useful life of 6 years)

   $ 54,358      $ 54,240   

Contracts and customer relationships (weighted average useful life of 7 years)

     88,790        88,758   

Satellite co-location rights (weighted average useful life of 9 years)

     8,600        8,600   

Trade name (weighted average useful life of 3 years)

     5,680        5,680   

Other (weighted average useful life of 6 years)

     6,304        6,307   
  

 

 

   

 

 

 
     163,732        163,585   

Less accumulated amortization

     (108,673     (100,544
  

 

 

   

 

 

 
   $ 55,059      $ 63,041   
  

 

 

   

 

 

 

 

14


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     As of
September 28, 2012
     As of
March 30, 2012
 
     (In thousands)  

Other assets:

     

Capitalized software costs, net

   $ 50,679       $ 41,992   

Patents, orbital slots and other licenses, net

     11,255         11,194   

Deferred income taxes

     68,768         53,602   

Other

     31,882         30,007   
  

 

 

    

 

 

 
   $ 162,584       $ 136,795   
  

 

 

    

 

 

 

Accrued liabilities:

     

Collections in excess of revenues and deferred revenues

   $ 81,187       $ 88,114   

Accrued vacation

     17,765         17,573   

Warranty reserve, current portion

     7,288         6,238   

Accrued employee compensation

     14,110         21,384   

Other

     34,056         26,453   
  

 

 

    

 

 

 
   $ 154,406       $ 159,762   
  

 

 

    

 

 

 

Other liabilities:

     

Deferred revenue, long-term portion

   $ 16,433       $ 11,414   

Deferred rent, long-term portion

     9,169         8,237   

Warranty reserve, long-term portion

     6,114         5,413   

Deferred income taxes, long-term portion

     2,797         3,073   

Unrecognized tax position liabilities

     1,306         1,306   

Satellite performance incentives obligation, long-term portion

     21,241         20,910   
  

 

 

    

 

 

 
   $ 57,060       $ 50,353   
  

 

 

    

 

 

 

Note 3 — Fair Value Measurements

In accordance with the authoritative guidance for financial assets and liabilities measured at fair value on a recurring basis (ASC 820), the Company prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions:

 

   

Level 1 — Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

   

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

Level 3 — Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation.

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 28, 2012 and March 30, 2012:

 

     Fair Value as of
September 28, 2012
     Level 1      Level 2      Level 3  
     (In thousands)  

Assets

           

Cash equivalents

   $ 56,432       $ 56,432       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ 56,432       $ 56,432       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Foreign currency forward contracts

   $ 377       $ —         $ 377       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ 377       $ —         $ 377       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     Fair Value as of
March 30, 2012
     Level 1      Level 2      Level 3  
     (In thousands)  

Assets

           

Cash equivalents

   $ 70,379       $ 70,379       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ 70,379       $ 70,379       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Foreign currency forward contracts

   $ 443       $ —         $ 443       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ 443       $ —         $ 443       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following section describes the valuation methodologies the Company uses to measure financial instruments at fair value:

Cash equivalents — The Company’s cash equivalents consist of money market funds. Money market funds are valued using quoted prices for identical assets in an active market with sufficient volume and frequency of transactions (Level 1).

Foreign currency forward contracts — The Company uses derivative financial instruments to manage foreign currency risk relating to foreign exchange rates. The Company does not use these instruments for speculative or trading purposes. The Company’s objective is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates. Derivative instruments are recognized as either assets or liabilities in the accompanying condensed consolidated financial statements and are measured at fair value. Gains and losses resulting from changes in the fair values of those derivative instruments are recorded to earnings or other comprehensive income (loss) depending on the use of the derivative instrument and whether it qualifies for hedge accounting. The Company’s foreign currency forward contracts are valued using quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data (Level 2).

Long-term debt — The Company’s long-term debt consists of borrowings under (1) capital lease obligations reported at the present value of future minimum lease payments with current accrued interest, and (2) the Company’s 8.875% Senior Notes due 2016 (the 2016 Notes) and 6.875% Senior Notes due 2020 (the 2020 Notes, and collectively with the 2016 Notes, the Senior Notes) reported at amortized cost. However, for disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. The fair value of the Company’s outstanding long-term debt related to the 2020 Notes was determined using quoted prices in active markets (Level 1) and was approximately $283.3 million as of September 28, 2012. As of March 30, 2012, the fair value of the Company’s outstanding long-term debt related to the 2020 Notes had been determined using recent market transactions for similar notes (Level 2) and was approximately $280.2 million. The 2020 Notes were exchanged in August 2012 for substantially identical 2020 Notes that had been registered with the Securities and Exchange Commission (SEC), which resulted in a change of the inputs used to measure the fair value of the 2020 Notes from March 30, 2012 (Level 2) to September 28, 2012 (Level 1). The fair value of the Company’s outstanding long-term debt related to the 2016 Notes is determined using quoted prices in active markets (Level 1) and was approximately $294.9 million and $298.4 million as of September 28, 2012 and March 30, 2012, respectively. The fair value of the Company’s capital lease obligations is estimated at their carrying value based on current rates (Level 2).

Satellite performance incentives obligation — The Company’s contract with the manufacturer of ViaSat-1 requires the Company to make monthly in-orbit satellite performance incentive payments, including interest at 7.0%, over a fifteen-year period from December 2011 to December 2026, subject to the continued satisfactory performance of the satellite. The Company recorded the net present value of these expected future payments as a liability and as a component of the cost of the satellite. However, for disclosure purposes, the Company is required to measure the fair value of outstanding satellite performance incentives on a recurring basis. The fair value of the Company’s outstanding satellite performance incentives are estimated at their carrying value based on current rates (Level 2).

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 4 — Shares Used In Computing Diluted Net Income Per Share

 

     Three Months Ended      Six Months Ended  
     September 28, 2012      September 30, 2011      September 28, 2012      September 30, 2011  
     (In thousands)  

Weighted average:

           

Common shares outstanding used in calculating basic net income (loss) per share attributable to ViaSat, Inc. common stockholders

     43,615         42,142         43,399         41,972   

Options to purchase common stock as determined by application of the treasury stock method

     —           1,311         —           1,375   

Restricted stock units to acquire common stock as determined by application of the treasury stock method

     —           348         —           377   

Potentially issuable shares in connection with certain terms of the amended ViaSat 401(k) Profit Sharing Plan and Employee Stock Purchase Plan equivalents

     —           93         —           136   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in computing diluted net income (loss) per share attributable to ViaSat, Inc. common stockholders

     43,615         43,894         43,399         43,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average number of shares used to calculate basic and diluted net income (loss) per share attributable to ViaSat, Inc. common stockholders is the same for both the three and six months ended September 28, 2012, as the Company’s financial information resulted in a net loss for the three and six months ended September 28, 2012 and inclusion of common share equivalents would be antidilutive. Common share equivalents excluded from the calculation for the three months ended September 28, 2012 were 1,566,615 shares relating to stock options, 367,833 shares relating to restricted stock units and 97,738 shares relating to certain terms of the amended ViaSat 401(k) Profit Sharing Plan and Employee Stock Purchase Plan. Common share equivalents excluded from the calculation for the six months ended September 28, 2012 were 1,628,482 shares relating to stock options, 357,005 shares relating to restricted stock units and 170,920 shares relating to certain terms of the amended ViaSat 401(k) Profit Sharing Plan and Employee Stock Purchase Plan. Antidilutive shares relating to stock options excluded from the calculation for the three and six months ended September 30, 2011 were 281,250 and 246,387 shares, respectively. Antidilutive shares relating to restricted stock units excluded from the calculation for the three and six months ended September 30, 2011 were 13,356 and 9,090 shares, respectively.

Note 5 — Goodwill and Acquired Intangible Assets

During the first six months of fiscal year 2013, the Company’s goodwill increased by approximately $0.1 million related to the effects of foreign currency translation recorded within the Company’s government systems and commercial networks segments. Other acquired intangible assets are amortized using the straight-line method over their estimated useful lives of three to ten years. Amortization expense related to other acquired intangible assets was $4.0 million and $4.8 million for the three months ended September 28, 2012 and September 30, 2011, respectively, and $8.1 million and $9.5 million for the six months ended September 28, 2012 and September 30, 2011, respectively.

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The expected amortization expense of amortizable acquired intangible assets may change due to the effects of foreign currency fluctuations as a result of international businesses acquired. Current and expected amortization expense for acquired intangible assets for each of the following periods is as follows:

 

     Amortization  
     (In thousands)  

For the six months ended September 28, 2012

   $ 8,105   

Expected for the remainder of fiscal year 2013

   $ 7,502   

Expected for fiscal year 2014

     13,888   

Expected for fiscal year 2015

     13,812   

Expected for fiscal year 2016

     10,206   

Expected for fiscal year 2017

     4,630   

Thereafter

     5,021   
  

 

 

 
   $ 55,059   
  

 

 

 

Note 6 — Senior Notes and Other Long-Term Debt

Total long-term debt consisted of the following as of September 28, 2012 and March 30, 2012:

 

     As of
September 28, 2012
    As of
March 30, 2012
 
     (In thousands)  

Senior Notes

    

2016 Notes (1)

   $ 275,000      $ 275,000   

Unamortized discount on the 2016 Notes

     (1,961     (2,209

2020 Notes (1)

     275,000        275,000   
  

 

 

   

 

 

 

Total Senior Notes, net of discount

     548,039        547,791   

Less: current portion of the Senior Notes

     —          —     
  

 

 

   

 

 

 

Total Senior Notes long-term, net

     548,039        547,791   

Other Long-Term Debt

    

Revolving credit facility

     —          —     

Capital lease obligations

     1,401        2,014   
  

 

 

   

 

 

 

Total other long-term debt

     1,401        2,014   

Less: current portion of other long-term debt

     1,270        1,240   
  

 

 

   

 

 

 

Other long-term debt, net

     131        774   

Total debt

     549,440        549,805   

Less: current portion

     1,270        1,240   
  

 

 

   

 

 

 

Long-term debt, net

   $ 548,170      $ 548,565   
  

 

 

   

 

 

 

 

(1)

Subsequent to the quarter end, the Company issued an additional $300.0 million in aggregate principal amount of 2020 Notes, repurchased approximately $262.1 million in aggregate principal amount of its 2016 Notes and issued a notice of redemption to redeem the remaining 2016 Notes outstanding.

Credit Facility

As of September 28, 2012, the Company’s revolving credit facility (the Credit Facility), as amended, provided a revolving line of credit of $325.0 million (including up to $50.0 million of letters of credit), with a maturity date of May 9, 2017. Borrowings under the Credit Facility bear interest, at the Company’s option, at either (1) the highest of the Federal Funds rate plus 0.50%, the Eurodollar rate plus 1.00% or the administrative agent’s prime rate as announced from time to time, or (2) the Eurodollar rate plus, in the case of each of (1) and (2), an applicable margin that is based on the Company’s total leverage ratio. The Company has capitalized certain amounts of interest expense on the Credit Facility in connection with the construction of various assets during the construction period. The Credit Facility is guaranteed by certain of the Company’s domestic subsidiaries and secured by substantially all of the Company’s and such subsidiaries’ assets.

The Credit Facility contains financial covenants regarding a maximum total leverage ratio and a minimum interest coverage ratio. In addition, the Credit Facility contains covenants that restrict, among other things, the Company’s ability to sell assets, make investments and acquisitions, make capital expenditures, grant liens, pay dividends and make certain other restricted payments. The

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Credit Facility was amended on September 26, 2012 to, among other things, increase the Company’s permitted total leverage ratio for the second, third and fourth quarters of fiscal year 2013 and authorize the offering of up to $300.0 million in additional indebtedness to refinance 2016 Notes.

The Company was in compliance with its financial covenants under the Credit Facility as of September 28, 2012. At September 28, 2012, the Company had no outstanding borrowings under the Credit Facility and $38.5 million outstanding under standby letters of credit, leaving borrowing availability under the Credit Facility as of September 28, 2012 of $286.5 million.

Senior Notes due 2016

In October 2009, the Company issued $275.0 million in principal amount of 2016 Notes in a private placement to institutional buyers, which 2016 Notes were exchanged in May 2010 for substantially identical 2016 Notes that had been registered with the SEC. The 2016 Notes bear interest at the rate of 8.875% per year, payable semi-annually in cash in arrears, which interest payments commenced in March 2010. The 2016 Notes were issued with an original issue discount of 1.24%, or $3.4 million. The 2016 Notes are recorded as long-term debt, net of original issue discount, in the Company’s condensed consolidated financial statements. The original issue discount and deferred financing cost associated with the issuance of the 2016 Notes is amortized to interest expense on a straight-line basis over the term of the 2016 Notes, which is not materially different from an effective interest rate basis.

The 2016 Notes are guaranteed on an unsecured senior basis by each of the Company’s existing and future subsidiaries that guarantees the Credit Facility (the Guarantor Subsidiaries). The 2016 Notes and the guarantees are the Company’s and the Guarantor Subsidiaries’ general senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future unsecured unsubordinated debt. The 2016 Notes and the guarantees are effectively junior in right of payment to their existing and future secured debt, including under the Credit Facility (to the extent of the value of the assets securing such debt), are structurally subordinated to all existing and future liabilities (including trade payables) of the Company’s subsidiaries that are not guarantors of the 2016 Notes, and are senior in right of payment to all of their existing and future subordinated indebtedness.

The indenture governing the 2016 Notes limits, among other things, the Company’s and its restricted subsidiaries’ ability to: incur, assume or guarantee additional debt; issue redeemable stock and preferred stock; pay dividends, make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase subordinated debt; make loans and investments; grant or incur liens; restrict dividends, loans or asset transfers from restricted subsidiaries; sell or otherwise dispose of assets; enter into transactions with affiliates; reduce the Company’s satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person.

The 2016 Notes may be redeemed, in whole or in part, at any time during the twelve months beginning on September 15, 2012 at a redemption price of 106.656%, during the twelve months beginning on September 15, 2013 at a redemption price of 104.438%, during the twelve months beginning on September 15, 2014 at a redemption price of 102.219%, and at any time on or after September 15, 2015 at a redemption price of 100%, in each case plus accrued and unpaid interest, if any, thereon to the redemption date.

In the event a change of control occurs (as defined in the indenture), each holder will have the right to require the Company to repurchase all or any part of such holder’s 2016 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2016 Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

Senior Notes due 2020

In February 2012, the Company issued $275.0 million in principal amount of 2020 Notes in a private placement to institutional buyers, which 2020 Notes were exchanged in August 2012 for substantially identical 2020 Notes that had been registered with the SEC. The 2020 Notes bear interest at the rate of 6.875% per year, payable semi-annually in cash in arrears, which interest payments commenced in June 2012. The 2020 Notes were issued at the face value and are recorded as long-term debt in the Company’s condensed consolidated financial statements. Deferred financing cost associated with the issuance of the 2020 Notes is amortized to interest expense on a straight-line basis over the term of the 2020 Notes, which is not materially different from an effective interest rate basis.

The 2020 Notes are guaranteed on an unsecured senior basis by each of the Guarantor Subsidiaries. The 2020 Notes and the guarantees are the Company’s and the Guarantor Subsidiaries’ general senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future unsecured unsubordinated debt. The 2020 Notes and the guarantees are effectively junior in right of payment to their existing and future secured debt, including under the Credit Facility (to the extent of the value of the assets securing such debt), are structurally subordinated to all existing and future liabilities (including trade payables) of the Company’s subsidiaries that are not guarantors of the 2020 Notes, and are senior in right of payment to all of their existing and future subordinated indebtedness.

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The indenture governing the 2020 Notes limits, among other things, the Company’s and its restricted subsidiaries’ ability to: incur, assume or guarantee additional debt; issue redeemable stock and preferred stock; pay dividends, make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase subordinated debt; make loans and investments; grant or incur liens; restrict dividends, loans or asset transfers from restricted subsidiaries; sell or otherwise dispose of assets; enter into transactions with affiliates; reduce the Company’s satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person.

Prior to June 15, 2015, the Company may redeem up to 35% of the 2020 Notes at a redemption price of 106.875% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, from the net cash proceeds of specified equity offerings. The Company may also redeem the 2020 Notes prior to June 15, 2016, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and any accrued and unpaid interest, if any, thereon to the redemption date. The applicable premium is calculated as the greater of: (i) 1.0% of the principal amount of such 2020 Notes and (ii) the excess, if any, of (a) the present value at such date of redemption of (1) the redemption price of such 2020 Notes on June 15, 2016 plus (2) all required interest payments due on such 2020 Notes through June 15, 2016 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the treasury rate (as defined under the indenture) plus 50 basis points, over (b) the then-outstanding principal amount of such 2020 Notes. The 2020 Notes may be redeemed, in whole or in part, at any time during the twelve months beginning on June 15, 2016 at a redemption price of 103.438%, during the twelve months beginning on June 15, 2017 at a redemption price of 101.719%, and at any time on or after June 15, 2018 at a redemption price of 100%, in each case plus accrued and unpaid interest, if any, thereon to the redemption date.

In the event a change of control occurs (as defined in the indenture), each holder will have the right to require the Company to repurchase all or any part of such holder’s 2020 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2020 Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

Capital leases

Occasionally the Company may enter into capital lease agreements for various machinery, equipment, computer-related equipment, software, furniture or fixtures. As of September 28, 2012 and March 30, 2012, the Company had approximately $1.4 million and $2.0 million, respectively, outstanding under capital leases payable over a weighted average period of 36 months, due fiscal year 2014. These lease agreements bear interest at a weighted average rate of 4.61% and can be extended on a month-to-month basis after the original term.

Subsequent event — issuance of additional 2020 Notes and repurchase of 2016 Notes

On October 12, 2012, subsequent to the quarter end, the Company issued an additional $300.0 million in aggregate principal amount of its 2020 Notes in a private placement to institutional buyers at an issue price of 103.50% of the principal amount. The $10.5 million premium the Company received in connection with the issuance of the additional 2020 Notes will be recorded in long-term debt in the condensed consolidated financial statements and will be amortized as a reduction to interest expense on a straight-line basis over the term of the 2020 Notes, which is not materially different from an effective interest rate basis.

On September 27, 2012, the Company launched a tender offer to purchase, for cash, any and all of its $275.0 million in aggregate principal amount of outstanding 2016 Notes. In conjunction with the tender offer, the Company also solicited consents from the holders of the 2016 Notes to eliminate certain covenants in and amend certain provisions of the indenture governing the 2016 Notes. In connection with the Company’s issuance of the additional 2020 Notes, on October 12, 2012, the Company purchased approximately $262.1 million in aggregate principal amount of the 2016 Notes pursuant to the tender offer. The purchase price for the 2016 Notes was $1,071.56 per $1,000 principal amount of 2016 Notes tendered, which included a $10.00 consent payment per $1,000 principal amount of notes tendered. The total cash payment to purchase the tendered 2016 Notes, including accrued and unpaid interest up to, but excluding, October 12, 2012, was approximately $282.5 million. The tender offer expired on October 25, 2012. On October 15, 2012, the Company issued a notice to redeem the remaining $12.9 million in aggregate principal amount of 2016 Notes in accordance with the indenture governing the 2016 Notes. The remaining 2016 Notes will be redeemed on November 14, 2012 at a redemption price of 106.656%, plus accrued and unpaid interest up to, but excluding, the redemption date. The Company estimates that it will incur a loss on extinguishment of debt of approximately $27.0 million, which will be recorded in the third quarter of fiscal year 2013.

Note 7 — Product Warranty

The Company provides limited warranties on its products for periods of up to five years. The Company records a liability for its warranty obligations when products are shipped or they are included in long-term construction contracts based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as a current liability. For mature products, the warranty cost estimates are based on historical experience with the particular product. For newer products that do not

 

20


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

have a history of warranty cost, the Company bases its estimates on its experience with the technology involved and the type of failures that may occur. It is possible that the Company’s underlying assumptions will not reflect the actual experience and in that case, future adjustments will be made to the recorded warranty obligation. The following table reflects the change in the Company’s warranty accrual during the six months ended September 28, 2012 and September 30, 2011:

 

     Six Months Ended  
     September 28, 2012     September 30, 2011  
     (In thousands)  

Balance, beginning of period

   $ 11,651      $ 12,942   

Change in liability for warranties issued in period

     4,383        2,922   

Settlements made (in cash or in kind) during the period

     (2,632     (3,472
  

 

 

   

 

 

 

Balance, end of period

   $ 13,402      $ 12,392   
  

 

 

   

 

 

 

Note 8 — Commitments and Contingencies

In February 2012, the Company filed a complaint against Space Systems/Loral, Inc. (SS/L) and its parent company Loral Space & Communications, Inc. (Loral) in the United States District Court for the Southern District of California for patent infringement and breach of contract relating to the manufacture of ViaSat-1. The Company alleges, among other things, that SS/L and Loral infringed U.S. Patent Nos. 8,107,875, 8,010,043, 8,068,827 and 7,773,942 by making, using, offering to sell and/or selling other high-capacity broadband satellites, and has requested monetary damages, injunctive relief and other remedies. On June 15, 2012, SS/L filed counterclaims against the Company for patent infringement and declaratory relief. Specifically, SS/L seeks a judicial declaration that SS/L did not breach the parties’ contract for the manufacture of ViaSat-1, that SS/L does not infringe the Company’s patents described above, and that those patents are invalid and/or unenforceable. SS/L also alleges that the Company infringed U.S. Patent Nos. 6,879,808, 6,400,696 and 7,219,132 by providing broadband internet service by means of the Anik F2 satellite using ViaSat satellite gateways and satellite user terminals and has induced others to infringe by selling certain ground equipment and user terminals.

The Company is involved in a variety of claims, suits, investigations and proceedings arising in the ordinary course of business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, the Company believes that the resolution of its current pending matters will not have a material adverse effect on its business, financial condition, results of operations or liquidity.

The Company has contracts with various U.S. government agencies. Accordingly, the Company is routinely subject to audit and review by the DCMA, the DCAA and other U.S. government agencies of its performance on government contracts, indirect rates and pricing practices, accounting and management internal control business systems, and compliance with applicable contracting and procurement laws, regulations and standards. An adverse outcome to a review or audit or other failure to comply with applicable contracting and procurement laws, regulations and standards could result in material civil and criminal penalties and administrative sanctions being imposed on the Company, which may include termination of contracts, forfeiture of profits, triggering of price reduction clauses, suspension of payments, significant customer refunds, fines and suspension, or a prohibition on doing business with U.S. government agencies. In addition, if the Company fails to obtain an “adequate” determination of its various accounting and management internal control business systems from applicable U.S. government agencies or if allegations of impropriety are made against it, the Company could suffer serious harm to its business or its reputation, including its ability to bid on new contracts or receive contract renewals and its competitive position in the bidding process. The Company’s incurred cost audits by the DCAA have not been completed for fiscal year 2004 and subsequent fiscal years. Although the Company has recorded contract revenues subsequent to fiscal year 2003 based upon an estimate of costs that the Company believes will be approved upon final audit or review, the Company does not know the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed the Company’s estimates, its profitability would be adversely affected. As of September 28, 2012 and March 30, 2012, the Company had $6.7 million in contract-related reserves for its estimate of potential refunds to customers for potential cost adjustments on several multi-year U.S. government cost reimbursable contracts. This reserve is classified as either an element of accrued liabilities or as a reduction of unbilled accounts receivable based on status of the related contracts.

Note 9 — Income Taxes

The Company currently estimates its annual effective income tax rate to be approximately 40.5% for fiscal year 2013. The estimated annual effective income tax rate reflects the December 31, 2011 expiration of the federal research and development tax credit. If the federal research and development tax credit is reinstated, the Company may have a lower annual effective tax rate for fiscal year 2013, and the amount of any such tax rate reduction will depend on the effective date of any such reinstatement, the terms of the reinstatement, as well as the amount of eligible research and development expenses in the reinstated period. The estimated annual effective tax rate is different from the expected statutory rate primarily due to state research and development tax credits.

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

For the three and six months ended September 28, 2012, the Company’s gross unrecognized tax benefits decreased by $1.3 million and increased by $0.9 million, respectively. In the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will decrease by up to approximately $2.4 million as a result of the expiration of the statute of limitations or settlements with tax authorities for previously filed tax returns.

Note 10 — Comprehensive Income (Loss)

The changes in the components of accumulated other comprehensive income (loss), net of taxes, were as follows:

 

     Three Months Ended
September 28, 2012
 
     Net Change
in Foreign
Currency
Translation
Adjustments
    Net Change in
Derivatives
    Accumulated
Other
Comprehensive
Income (Loss)
 
     (In thousands)  

Beginning balance

   $ 1,097      $ (359   $ 738   

Current period other comprehensive income (loss), net of tax

     899        129        1,028   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,996      $ (230   $ 1,766   
  

 

 

   

 

 

   

 

 

 

 

     Six Months Ended
September 28, 2012
 
     Net Change
in Foreign
Currency
Translation
Adjustments
    Net Change in
Derivatives
    Accumulated
Other
Comprehensive
Income (Loss)
 
     (In thousands)  

Beginning balance

   $ 1,709      $ (270   $ 1,439   

Current period other comprehensive income (loss), net of tax

     287        40        327   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,996      $ (230   $ 1,766   
  

 

 

   

 

 

   

 

 

 

 

     Three Months Ended
September 30, 2011
 
     Net Change
in Foreign
Currency
Translation
Adjustments
    Net Change in
Derivatives
    Accumulated
Other
Comprehensive
Income (Loss)
 
           (In thousands)        

Beginning balance

   $ 2,403      $ 54      $ 2,457   

Current period other comprehensive income (loss), net of tax

     (1,002     (593     (1,595
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,401      $ (539   $ 862   
  

 

 

   

 

 

   

 

 

 

 

     Six Months Ended
September 30, 2011
 
     Net Change
in Foreign
Currency
Translation
Adjustments
    Net Change in
Derivatives
    Accumulated
Other
Comprehensive
Income (Loss)
 
     (In thousands)  

Beginning balance

   $ 2,095      $ 182      $ 2,277   

Current period other comprehensive income (loss), net of tax

     (694     (721     (1,415
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,401      $ (539   $ 862   
  

 

 

   

 

 

   

 

 

 

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 11 — Segment Information

The Company’s reporting segments, comprised of the satellite services, commercial networks and government systems segment, are primarily distinguished by the type of customer and the related contractual requirements. The Company’s satellite services segment provides retail and wholesale satellite-based broadband internet services for its consumer, enterprise and mobile broadband customers in the United States, as well as managed network services for the satellite communication systems of the Company’s consumer, enterprise and mobile broadband customers worldwide. The Company’s commercial networks segment develops and produces a variety of advanced end-to-end satellite and other wireless communication systems and ground networking equipment and products, some of which are ultimately used by the Company’s satellite services segment. The Company’s government systems segment develops and produces network-centric, internet protocol (IP)-based secure government communications systems, products, services and solutions. The more regulated government environment is subject to unique contractual requirements and possesses economic characteristics which differ from the satellite services and commercial networks segments. The Company’s segments are determined consistent with the way management currently organizes and evaluates financial information internally for making operating decisions and assessing performance.

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Segment revenues and operating profits (losses) for the three and six months ended September 28, 2012 and September 30, 2011 were as follows:

 

     Three Months Ended     Six Months Ended  
     September 28, 2012     September 30, 2011     September 28, 2012     September 30, 2011  
     (In thousands)  

Revenues

        

Satellite Services

        

Product

   $ 2,975      $ 927      $ 3,506      $ 1,578   

Service

     64,332        54,488        123,120        110,700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     67,307        55,415        126,626        112,278   

Commercial Networks

        

Product

     81,113        59,063        151,875        106,359   

Service

     5,424        5,136        10,797        9,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     86,537        64,199        162,672        116,268   

Government Systems

        

Product

     84,387        86,621        160,823        161,220   

Service

     44,591        16,789        74,464        28,359   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     128,978        103,410        235,287        189,579   

Elimination of intersegment revenues

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 282,822      $ 223,024      $ 524,585      $ 418,125   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Operating (losses) profits

        

Satellite Services

   $ (19,373   $ (1,739   $ (41,889   $ 194   

Commercial Networks

     (1,836     (2,871     (3,905     (6,111

Government Systems

     24,391        14,333        39,251        21,713   

Elimination of intersegment operating profits

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating profit (loss) before corporate and amortization of acquired intangible assets

     3,182        9,723        (6,543     15,796   

Corporate

     —          —          —          —     

Amortization of acquired intangible assets

     (4,041     (4,767     (8,105     (9,539
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

   $ (859   $ 4,956      $ (14,648   $ 6,257   
  

 

 

   

 

 

   

 

 

   

 

 

 

Assets identifiable to segments include: accounts receivable, unbilled accounts receivable, inventory, acquired intangible assets and goodwill. The Company’s property, plant and equipment, including its satellites, gateways and other networking equipment, are assigned to corporate assets as they are available for use by the various segments throughout their estimated useful lives. Segment assets as of September 28, 2012 and March 30, 2012 were as follows:

 

     As of
September  28,

2012
     As of
March 30,
2012
 
     (In thousands)  

Segment assets

     

Satellite Services

   $ 98,269       $ 95,671   

Commercial Networks

     182,458         170,553   

Government Systems

     222,497         219,199   
  

 

 

    

 

 

 

Total segment assets

     503,224         485,423   

Corporate assets

     1,240,145         1,241,730   
  

 

 

    

 

 

 

Total assets

   $ 1,743,369       $ 1,727,153   
  

 

 

    

 

 

 

 

24


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Other acquired intangible assets, net and goodwill included in segment assets as of September 28, 2012 and March 30, 2012 were as follows:

 

     Other Acquired Intangible
Assets, Net
     Goodwill  
     As of
September 28, 2012
     As of
March 30, 2012
     As of
September 28, 2012
     As of
March 30, 2012
 
     (In thousands)  

Satellite Services

   $ 45,914       $ 52,390       $ 9,809       $ 9,809   

Commercial Networks

     1,825         2,186         43,670         43,739   

Government Systems

     7,320         8,465         30,058         29,913   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,059       $ 63,041       $ 83,537       $ 83,461   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amortization of acquired intangible assets by segment for the three and six months ended September 28, 2012 and September 30, 2011 was as follows:

 

     Three Months Ended      Six Months Ended  
     September 28, 2012      September 30, 2011      September 28, 2012      September 30, 2011  
     (In thousands)  

Satellite Services

   $ 3,238       $ 3,238       $ 6,476       $ 6,476   

Commercial Networks

     177         884         361         1,767   

Government Systems

     626         645         1,268         1,296   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total amortization of acquired intangible assets

   $ 4,041       $ 4,767       $ 8,105       $ 9,539   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue information by geographic area for the three and six months ended September 28, 2012 and September 30, 2011 was as follows:

 

     Three Months Ended      Six Months Ended  
     September 28, 2012      September 30, 2011      September 28, 2012      September 30, 2011  
     (In thousands)  

United States

   $ 206,490       $ 175,760       $ 385,224       $ 329,961   

Europe, Middle East and Africa

     54,330         30,336         86,545         57,240   

Asia, Pacific

     12,461         4,819         20,892         11,997   

North America other than United States

     6,900         5,489         24,287         9,713   

Central and Latin America

     2,641         6,620         7,637         9,214   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 282,822       $ 223,024       $ 524,585       $ 418,125   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company distinguishes revenues from external customers by geographic area based on customer location.

The net book value of long-lived assets located outside the United States was $18.9 million and $18.7 million at September 28, 2012 and March 30, 2012, respectively.

Note 12 — Certain Relationships and Related-Party Transactions

Michael Targoff, who served as a director of the Company from February 2003 to February 2012, currently serves as the Chief Executive Officer and the Vice Chairman of the board of directors of Loral, the parent of SS/L, and is also a director of Telesat Holdings Inc., a joint venture company formed by Loral and the Public Sector Pension Investment Board to acquire Telesat Canada in October 2007. John Stenbit, a director of the Company since August 2004, also currently serves on the board of directors of Loral.

The Company’s satellite construction contract with SS/L for ViaSat-1 requires the Company to make monthly satellite performance incentive payments, including interest, over a fifteen-year period from December 2011 to December 2026, subject to the continued satisfactory performance of the satellite. As of September 28, 2012 and March 30, 2012, the Company’s estimated satellite performance incentives obligation and accrued interest were $22.9 million and $22.5 million, respectively. Based on estimates as of September 28, 2012, the remaining amount of satellite performance incentives and related interest that the Company may be required to pay under this satellite construction contract during the period until December 2026 is approximately $38.5 million. Material amounts related to the satellite construction contract with SS/L are disclosed in the tables below.

 

25


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In addition, from time to time, the Company enters into various contracts in the ordinary course of business with SS/L and Telesat Canada. Material amounts related to these contracts are disclosed in the tables below.

Current payables included in accrued liabilities and long-term payables included in other liabilities as of September 28, 2012 and March 30, 2012 were as follows:

 

     As of
September 28,  2012
     As of
March 30,  2012
 
     (In thousands)  

Payables, current

     

Loral – satellite construction contract (estimated satellite performance incentives)

   $ 1,656       $ 1,599   

Payables, long-term

     

Loral – satellite construction contract (estimated satellite performance incentives)

     21,241         20,910   

Revenue and expense for the three and six months ended September 28, 2012 and September 30, 2011 were as follows:

 

     Three Months Ended     Six Months Ended  
     September 28, 2012      September 30, 2011     September 28, 2012     September 30, 2011  
    

(In thousands)

 

Revenue

       

Loral – ordinary course of business

   $ —         $   *    $   *    $ 1,517   

Expense

         

Telesat Canada – ordinary course of business

     1,496         *        1,986        1,278   

 

* 

Amounts were not meaningful.

Cash received and paid during the six months ended September 28, 2012 and September 30, 2011 were as follows:

 

     Six Months Ended  
     September 28, 2012     September 30, 2011  
     (In thousands)  

Cash received

    

Telesat Canada – ordinary course of business

   $   *    $ 1,946   

Cash paid

    

Loral – satellite construction contract (including satellite performance incentives)

     *        1,283   

Telesat Canada – ordinary course of business

     3,675        4,834   

 

* 

Amounts were not meaningful.

Note 13 — Financial Statements of Parent and Subsidiary Guarantors

As of September 28, 2012, the $550.0 million in aggregate principal amount of Senior Notes issued by the Company was comprised of $275.0 million in principal amount of 2016 Notes and $275.0 million in principal amount of 2020 Notes. The Senior Notes are jointly and severally guaranteed on a full and unconditional basis by each of the Guarantor Subsidiaries, subject to certain customary release provisions, including the sale, transfer or other disposition of the capital stock or all or substantially all of the assets of a Guarantor Subsidiary, the designation of a Guarantor Subsidiary as an unrestricted subsidiary, the release or discharge of the Guarantor Subsidiary’s guarantee of the Credit Facility or the exercise of the legal defeasance option or covenant defeasance option. All of the Guarantor Subsidiaries are direct or indirect 100% owned subsidiaries of the Company. The indentures governing the Senior Notes limit, among other things, the Company’s and its restricted subsidiaries’ ability to: incur, assume or guarantee additional debt; issue redeemable stock and preferred stock; pay dividends, make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase subordinated debt; make loans and investments; grant or incur liens; restrict dividends, loans or asset transfers from restricted subsidiaries; sell or otherwise dispose of assets; enter into transactions with affiliates; reduce the Company’s satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person.

 

26


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following supplemental financial information sets forth, on a condensed consolidating basis, the balance sheets, statements of operations and comprehensive income (loss), and statements of cash flows for the Company (as “Issuing Parent Company”), the Guarantor Subsidiaries, the non-guarantor subsidiaries and total consolidated Company and subsidiaries as of September 28, 2012 and March 30, 2012 and for the three and six months ended September 28, 2012 and September 30, 2011.

Condensed Consolidated Balance Sheet as of September 28, 2012

 

     Issuing Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Consolidation and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 119,292       $ 6,911       $ 9,915       $ —        $ 136,118   

Accounts receivable, net

     215,026         9,701         6,879         —          231,606   

Inventories

     99,509         27,744         5,637         —          132,890   

Deferred income taxes

     18,457         1,526         308         —          20,291   

Prepaid expenses and other current assets

     28,444         5,660         614         —          34,718   

Current portion of intercompany receivables

     65,443         —           —           (65,443     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     546,171         51,542         23,353         (65,443     555,623   
             

Satellites, net

     348,119         212,402         —           —          560,521   

Property and equipment, net

     183,723         136,170         6,152         —          326,045   

Other acquired intangible assets, net

     2,084         45,913         7,062         —          55,059   

Goodwill

     63,939         9,687         9,911         —          83,537   

Investments in subsidiaries and intercompany receivables

     404,693         2,813         1,642         (409,148     —     

Other assets

     126,172         35,755         657         —          162,584   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,674,901       $ 494,282       $ 48,777       $ (474,591   $ 1,743,369   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
             
LIABILITIES AND EQUITY              

Current liabilities:

             

Accounts payable

   $ 65,254       $ 14,280       $ 1,112       $ —        $ 80,646   

Accrued liabilities

     123,524         26,265         4,617         —          154,406   

Current portion of other long-term debt

     133         1,137         —           —          1,270   

Current portion of intercompany payables

     —           65,443         —           (65,443     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     188,911         107,125         5,729         (65,443     236,322   
             

Senior Notes, net

     548,039         —           —           —          548,039   

Other long-term debt

     7         124         —           —          131   

Intercompany payables

     1,650         —           9,666         (11,316     —     

Other liabilities

     38,732         15,796         2,532         —          57,060   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     777,339         123,045         17,927         (76,759     841,552   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Equity:

             

ViaSat, Inc. stockholders’ equity

             

Total ViaSat, Inc. stockholders’ equity

     897,562         371,237         30,850         (402,087     897,562   

Noncontrolling interest in subsidiary

     —           —           —           4,255        4,255   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     897,562         371,237         30,850         (397,832     901,817   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,674,901       $ 494,282       $ 48,777       $ (474,591   $ 1,743,369   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

27


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Condensed Consolidated Balance Sheet as of March 30, 2012

 

     Issuing  Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Consolidation  and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 162,426       $ 439       $ 9,718       $ —        $ 172,583   

Accounts receivable, net

     192,313         12,411         6,966         —          211,690   

Inventories

     106,151         16,474         5,021         —          127,646   

Deferred income taxes

     18,482         1,526         308         —          20,316   

Prepaid expenses and other current assets

     27,128         2,923         866         —          30,917   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     506,500         33,773         22,879         —          563,152   
             

Satellites, net

     358,580         227,151         —           —          585,731   

Property and equipment, net

     178,611         110,137         6,225         —          294,973   

Other acquired intangible assets, net

     2,633         52,389         8,019         —          63,041   

Goodwill

     63,939         9,687         9,835         —          83,461   

Investments in subsidiaries and intercompany receivables

     437,631         2,501         1,428         (441,560     —     

Other assets

     117,300         18,886         609         —          136,795   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,665,194       $ 454,524       $ 48,995       $ (441,560   $ 1,727,153   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
             
LIABILITIES AND EQUITY              

Current liabilities:

             

Accounts payable

   $ 62,085       $ 12,192       $ 763       $ —        $ 75,040   

Accrued liabilities

     128,327         27,477         3,958         —          159,762   

Current portion of other long-term debt

     129         1,111         —           —          1,240   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     190,541         40,780         4,721         —          236,042   
             

Senior Notes, net

     547,791         —           —           —          547,791   

Other long-term debt

     74         700         —           —          774   

Intercompany payables

     1,428         4,462         9,429         (15,319     —     

Other liabilities

     37,385         10,269         2,699         —          50,353   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     777,219         56,211         16,849         (15,319     834,960   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Equity:

             

ViaSat, Inc. stockholders’ equity

             

Total ViaSat, Inc. stockholders’ equity

     887,975         398,313         32,146         (430,459     887,975   

Noncontrolling interest in subsidiary

     —           —           —           4,218        4,218   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     887,975         398,313         32,146         (426,241     892,193   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,665,194       $ 454,524       $ 48,995       $ (441,560   $ 1,727,153   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

28


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the Three Months Ended September 28, 2012

 

     Issuing  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation  and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  

Revenues:

          

Product revenues

   $ 161,137      $ 2,975      $ 4,481      $ (118   $ 168,475   

Service revenues

     51,668        59,803        3,261        (385     114,347   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     212,805        62,778        7,742        (503     282,822   

Operating expenses:

          

Cost of product revenues

     116,382        2,028        3,121        (110     121,421   

Cost of service revenues

     37, 012        56,556        2,199        (385     95,382   

Selling, general and administrative

     30,600        20,747        2,732        —          54,079   

Independent research and development

     8,272        360        134        (8     8,758   

Amortization of acquired intangible assets

     274        3,238        529        —          4,041   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     20,265        (20,151     (973     —          (859

Other income (expense):

          

Interest income

     44        —          1        —          45   

Interest expense

     (11,537     (16     —          —          (11,553
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     8,772        (20,167     (972     —          (12,367

Provision for (benefit from) income taxes

     3,522        (7,978     (54     —          (4,510

Equity in net income (loss) of consolidated subsidiaries

     (13,157     —          —          13,157        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (7,907     (12,189     (918     13,157        (7,857

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

     —          —          —          50        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ViaSat, Inc.

   $ (7,907   $ (12,189   $ (918   $ 13,107      $ (7,907
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ViaSat, Inc.

   $ (6,879   $ (12,189   $ 54      $ 12,135      $ (6,879
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the Six Months Ended September 28, 2012

 

     Issuing  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation  and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  

Revenues:

          

Product revenues

   $ 304,311      $ 3,506      $ 8,609      $ (222   $ 316,204   

Service revenues

     89,028        114,387        5,739        (773     208,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     393,339        117,893        14,348        (995     524,585   

Operating expenses:

          

Cost of product revenues

     222,707        2,110        5,843        (190     230,470   

Cost of service revenues

     61,366        109,481        3,877        (773     173,951   

Selling, general and administrative

     61,743        43,722        5,115        —          110,580   

Independent research and development

     15,363        510        286        (32     16,127   

Amortization of acquired intangible assets

     549        6,476        1,080        —          8,105   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     31,611        (44,406     (1,853     —          (14,648

Other income (expense):

          

Interest income

     102        —          3        —          105   

Interest expense

     (23,058     (36     (5     —          (23,099
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     8,655        (44,442     (1,855     —          (37,642

Provision for (benefit from) income taxes

     2,202        (17,367     (187     —          (15,352

Equity in net income (loss) of consolidated subsidiaries

     (28,780     —          —          28,780        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (22,327     (27,075     (1,668     28,780        (22,290

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

     —          —          —          37        37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ViaSat, Inc.

   $ (22,327   $ (27,075   $ (1,668   $ 28,743      $ (22,327
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ViaSat, Inc.

   $ (22,000   $ (27,075   $ (1,421   $ 28,496      $ (22,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the Three Months Ended September 30, 2011

 

     Issuing  Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidation  and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  

Revenues:

          

Product revenues

   $ 135,843      $ 926      $ 9,917      $ (75   $ 146,611   

Service revenues

     21,988        51,638        3,187        (400     76,413   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     157,831        52,564        13,104        (475     223,024   

Operating expenses:

          

Cost of product revenues

     100,366        785        7,892        (1,134     107,909   

Cost of service revenues

     14,580        38,321        1,701        (398     54,204   

Selling, general and administrative

     29,919        11,983        2,477        —          44,379   

Independent research and development

     6,592        —          234        (17     6,809   

Amortization of acquired intangible assets

     970        3,239        558        —          4,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     5,404        (1,764     242        1,074        4,956   

Other income (expense):

          

Interest income

     112        —          2        (101     13   

Interest expense

     (152     (59     (101     101        (211
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     5,364        (1,823     143        1,074        4,758   

Provision for (benefit from) income taxes

     (3,443     (732     272        492        (3,411

Equity in net income (loss) of consolidated subsidiaries

     (1,414     —          —          1,414        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     7,393        (1,091     (129     1,996        8,169   

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

     —          —          —          194        194   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ViaSat, Inc.

   $ 7,393      $ (1,091   $ (129   $ 1,802      $ 7,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ViaSat, Inc.

   $ 5,798      $ (1,091   $ (1,131   $ 2,804      $ 6,380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the Six Months Ended September 30, 2011

 

     Issuing  Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidation  and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  

Revenues:

          

Product revenues

   $ 254,756      $ 1,578      $ 13,167      $ (344   $ 269,157   

Service revenues

     39,685        104,989        5,413        (1,119     148,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     294,441        106,567        18,580        (1,463     418,125   

Operating expenses:

          

Cost of product revenues

     189,930        1,542        10,465        (1,743     200,194   

Cost of service revenues

     25,472        75,457        3,659        (1,068     103,520   

Selling, general and administrative

     56,534        25,060        4,521        (3     86,112   

Independent research and development

     11,957        —          572        (26     12,503   

Amortization of acquired intangible assets

     1,940        6,477        1,122        —          9,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     8,608        (1,969     (1,759     1,377        6,257   

Other income (expense):

          

Interest income

     245        —          4        (210     39   

Interest expense

     (152     (59     (210     210        (211
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     8,701        (2,028     (1,965     1,377        6,085   

Provision for (benefit from) income taxes

     (3,463     (822     115        492        (3,678

Equity in net income (loss) of consolidated subsidiaries

     (3,315     —          —          3,315        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     8,849        (1,206     (2,080     4,200        9,763   

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

     —          —          —          29        29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ViaSat, Inc.

   $ 8,849      $ (1,206   $ (2,080   $ 4,171      $ 9,734   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ViaSat, Inc.

   $ 7,434      $ (1,206   $ (2,639   $ 4,730      $ 8,319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Condensed Consolidated Statement of Cash Flows for the Six Months Ended September 28, 2012

 

     Issuing  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation  and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  

Cash flows from operating activities:

          

Net cash provided by (used in) operating activities

   $ (15,490   $ 57,710      $ (133   $ —        $ 42,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Purchase of property, equipment and satellites, net

     (23,287     (50,689     (676     —          (74,652

Cash paid for patents, licenses and other assets

     (12,299     —          (52     —          (12,351

Long-term intercompany notes and investments

     (1,052     —          —          1,052        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (36,638     (50,689     (728     1,052        (87,003

Cash flows from financing activities:

          

Proceeds from issuance of common stock under equity plans

     14,055        —          —          —          14,055   

Payment of debt issuance costs

     (2,215     —          —          —          (2,215

Purchase of common stock in treasury

     (2,142     —          —          —          (2,142

Payments on capital lease

     (64     (549     —          —          (613

Payments of satellite performance incentives obligation

     (640     —          —          —          (640

Long-term intercompany financing

     —          —          1,052        (1,052     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     8,994        (549     1,052        (1,052     8,445   

Effect of exchange rate changes on cash

     —          —          6        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (43,134     6,472        197        —          (36,465

Cash and cash equivalents at beginning of period

     162,426        439        9,718        —          172,583   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 119,292      $ 6,911      $ 9,915      $ —        $ 136,118   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Condensed Consolidated Statement of Cash Flows for the Six Months Ended September 30, 2011

 

     Issuing  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation  and
Elimination
Adjustments
    Consolidated  
     (Unaudited, in thousands)  

Cash flows from operating activities:

          

Net cash provided by (used in) operating activities

   $ (12,993   $ 30,987      $ 7,704      $ (1,912   $ 23,786   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Purchase of property, equipment and satellites, net

     (116,927     (16,129     (2,169     1,912        (133,313

Cash paid for patents, licenses and other assets

     (8,277     —          (18     —          (8,295

Long-term intercompany notes and investments

     3,346        —          —          (3,346     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (121,858     (16,129     (2,187     (1,434     (141,608

Cash flows from financing activities:

          

Proceeds from issuance of common stock under equity plans

     6,167        —          —          —          6,167   

Purchase of common stock in treasury

     (2,250     —          —          —          (2,250

Payments on capital lease

     (54     (411     —          —          (465

Proceeds from line of credit borrowings

     130,000        —          —          —          130,000   

Payments on line of credit

     (20,000     —          —          —          (20,000

Long-term intercompany financing

     20,686        (20,686     (3,346     3,346        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     134,549        (21,097     (3,346     3,346        113,452   

Effect of exchange rate changes on cash

     —          —          (113     —          (113
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (302     (6,239     2,058        —          (4,483

Cash and cash equivalents at beginning of period

     24,347        7,600        8,543        —          40,490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 24,045      $ 1,361      $ 10,601      $ —        $ 36,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; anticipated satellite construction activities; future economic conditions and performance; anticipated performance of products or services; anticipated subscriber growth; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ include: our ability to successfully implement our business plan for our broadband satellite services on our anticipated timeline or at all; negative audits by the U.S. government; continued turmoil in global business environment and economic conditions; delays in approving U.S. government budgets and cuts in government defense expenditures; our reliance on U.S. government contracts, and on a small number of contracts which account for a significant percentage of our revenues; our ability to successfully develop, introduce and sell new technologies, products and services; reduced demand for products and services as a result of continued constraints on capital spending by customers; changes in relationships with, or the financial condition of, key customers or suppliers; our reliance on a limited number of third parties to manufacture and supply our products; increased competition and other factors affecting the communications and defense industries generally; the effect of adverse regulatory changes on our ability to sell products and services; our level of indebtedness and ability to comply with applicable debt covenants; our involvement in litigation, including intellectual property claims and litigation to protect our proprietary technology; our dependence on a limited number of key employees; and other factors identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 30, 2012, elsewhere in this report and our other filings with the Securities and Exchange Commission (SEC). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

Company Overview

We are a leading provider of high-speed fixed and mobile broadband services, advanced satellite and other wireless networks and secure networking systems, products and services. We have leveraged our success developing complex satellite communication systems and equipment for the U.S. government and select commercial customers to develop next-generation satellite broadband technologies and services for both fixed and mobile users. Our product, systems and broadband service offerings are often linked through common underlying technologies, customer applications and market relationships. We believe that our portfolio of products and services, combined with our ability to effectively cross-deploy technologies between government and commercial segments and across different geographic markets, provides us with a strong foundation to sustain and enhance our leadership in advanced communications and networking technologies. ViaSat, Inc. was incorporated in California in 1986, and reincorporated as a Delaware corporation in 1996.

We conduct our business through three segments: satellite services, commercial networks and government systems.

 

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Table of Contents

Satellite Services

Our satellite services segment provides retail and wholesale satellite-based broadband internet services for our consumer, enterprise and mobile broadband customers in the United States. Our satellite services business also provides a platform for the provision of network management services to domestic and international satellite service providers.

The primary services offered by our satellite services segment are comprised of:

 

   

Retail and wholesale broadband satellite services offered under the ExedeSM and WildBlue® brands, which provide two-way satellite-based broadband internet access to consumers and small businesses in the United States. We offer a range of service plans to both retail and wholesale customers, with pricing based on data speeds and volume limits. We offer wholesale broadband services to our national and regional distribution partners, including direct-to-home satellite video providers, retail service providers and communications companies. As of September 28, 2012, we provided broadband satellite services to approximately 429,000 subscribers.

 

   

Our Yonder® mobile broadband services, which provide global network management and high-speed internet connectivity services for customers using airborne, maritime and ground-mobile satellite systems.

Commercial Networks

Our commercial networks segment develops and produces a variety of advanced end-to-end satellite and other wireless communication systems and ground networking equipment and products that address five key market segments: consumer, enterprise, in-flight, maritime and ground mobile applications. These communication systems, networking equipment and products are generally developed through a combination of customer and discretionary internal research and development funding, and are either sold to our commercial networks customers or utilized to provide services through our satellite services segment.

Our satellite communication systems, ground networking equipment and products cater to a wide range of domestic and international commercial customers and include:

 

   

Fixed satellite networks, including next-generation satellite network infrastructure and ground terminals to access high-capacity satellites.

 

   

Mobile broadband satellite communication systems, designed for use in aircraft, high-speed trains and seagoing vessels.

 

   

Antenna systems for terrestrial and satellite applications, specializing in geospatial imagery, mobile satellite communication, Ka-band gateways and other multi-band antennas.

 

   

Satellite networking development programs, including specialized design and technology services covering all aspects of satellite communication system architecture and technology.

 

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Table of Contents

Government Systems

Our government systems segment develops and produces network-centric internet protocol (IP)-based secure government communications systems, products, services and solutions, which are designed to enable the collection and dissemination of secure real-time digital information between command centers, communications nodes and air defense systems. Customers of our government systems segment include the U.S. Department of Defense (DoD), armed forces, public safety first-responders and remote government employees.

The primary products and services of our government systems segment include:

 

   

Government satellite communication systems, including an array of portable, mobile and fixed broadband modems, terminals, network access control systems and antenna systems using a range of satellite frequency bands for line-of-sight and beyond-line-of-sight Intelligence, Surveillance, and Reconnaissance (ISR) and Command and Control (C2) missions and satellite networking services, as well as products designed for manpacks, aircraft, unmanned aerial vehicles (UAVs), seagoing vessels, ground mobile vehicles and fixed applications.

 

   

Information assurance products and secure networking solutions, which provide advanced, high-speed IP-based “Type 1,” High Assurance Internet Protocol Encryption (HAIPE®)-compliant, and other advanced encryption solutions that enable military, government and other users to communicate information securely over networks, and that secure data stored on computers and storage devices.

 

   

Tactical data links, including Multifunctional Information Distribution System (MIDS) terminals for military fighter jets and their successor, MIDS Joint Tactical Radio System (MIDS JTRS) terminals, “disposable” weapon data links and portable small tactical terminals.

Sources of Revenues

Our satellite services segment revenues are primarily derived from our domestic satellite broadband services business and from our worldwide managed network services. Our domestic satellite broadband services business comprised approximately 13% and 15% of total revenues during the three months ended September 28, 2012 and September 30, 2011, respectively, and 14% and 16% of total revenues during the six months ended September 28, 2012 and September 30, 2011, respectively.

With respect to our commercial networks and government systems segments, to date, our ability to grow and maintain our revenues has depended on our ability to identify and target markets where the customer places a high priority on the technology solution, and our ability to obtain additional sizable contract awards. Due to the nature of this process, it is difficult to predict the probability and timing of obtaining awards in these markets. Our products in these segments are provided primarily through three types of contracts: fixed-price, time-and-materials and cost-reimbursement contracts. Fixed-price contracts, which require us to provide products and services under a contract at a specified price, comprised approximately 95% and 94% of our total revenues for these segments for the three months ended September 28, 2012 and September 30, 2011, respectively, and 94% and 93% of our total revenues for these segments for the six months ended September 28, 2012 and September 30, 2011, respectively. The remainder of our revenue in these segments for such periods was derived from cost-reimbursement contracts (under which we are reimbursed for all actual costs incurred in performing the contract to the extent such costs are within the contract ceiling and allowable under the terms of the contract, plus a fee or profit) and from time-and-materials contracts (which reimburse us for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials utilized in providing such products or services).

Historically, a significant portion of our revenues has been derived from customer contracts that include the research and development of products. The research and development efforts are conducted in direct response to the customer’s specific requirements and, accordingly, expenditures related to such efforts are included in cost of sales when incurred and the related funding (which includes a profit component) is included in revenues. Revenues for our funded research and development from our customer contracts were approximately $51.3 million or 18% and $53.4 million or 24% of our total revenues in the three months ended September 28, 2012 and September 30, 2011, respectively. Revenues for our funded research and development from our customer contracts were approximately $104.1 million or 20% and $107.8 million or 26% of our total revenues in the six months ended September 28, 2012 and September 30, 2011, respectively.

We also incur independent research and development (IR&D) expenses, which are not directly funded by a third party. IR&D expenses consist primarily of salaries and other personnel-related expenses, supplies, prototype materials, testing and certification related to research and development projects. IR&D expenses were approximately 3% of total revenues during each of the three and six months ended September 28, 2012 and September 30, 2011. As a government contractor, we are able to recover a portion of our IR&D expenses pursuant to our government contracts.

 

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Table of Contents

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We describe the specific risks for these critical accounting policies in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates routinely require adjustment.

Revenue recognition

A substantial portion of our revenues is derived from long-term contracts requiring development and delivery of complex equipment built to customer specifications. Sales related to these contracts are accounted for under the authoritative guidance for the percentage-of-completion method of accounting (Accounting Standards Codification (ASC) 605-35). Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract, or as products are shipped under the units-of-delivery method.

The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. For contract claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. During the three months ended September 28, 2012 and September 30, 2011, we recorded losses of approximately $1.1 million and $0.4 million, respectively, related to loss contracts. During the six months ended September 28, 2012 and September 30, 2011, we recorded losses of approximately $2.4 million and $0.7 million, respectively, related to loss contracts.

Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and future cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. We believe we have established appropriate systems and processes to enable us to reasonably estimate future costs on our programs through regular evaluations of contract costs, scheduling and technical matters by business unit personnel and management. Historically, in the aggregate, we have not experienced significant deviations in actual costs from estimated program costs, and when deviations that result in significant adjustments arise, we disclose the related impact in Management’s Discussion and Analysis of Financial Condition and Results of Operations. However, these estimates require significant management judgment and a significant change in future cost estimates on one or more programs could have a material effect on our results of operations. A one percent variance in our future cost estimates on open fixed-price contracts as of September 28, 2012 would change our loss before income taxes by approximately $0.5 million.

We also derive a substantial portion of our revenues from contracts and purchase orders where revenue is recorded on delivery of products or performance of services in accordance with the authoritative guidance for revenue recognition (ASC 605). Under this standard, we recognize revenue when an arrangement exists, prices are determinable, collectability is reasonably assured and the goods or services have been delivered.

We also enter into certain leasing arrangements with customers and evaluate the contracts in accordance with the authoritative guidance for leases (ASC 840). Our accounting for equipment leases involves specific determinations under the authoritative guidance for leases, which often involve complex provisions and significant judgments. In accordance with the authoritative guidance for leases, we classify the transactions as sales type or operating leases based on (1) review for transfers of ownership of the equipment to the lessee by the end of the lease term, (2) review of the lease terms to determine if it contains an option to purchase the leased equipment for a price which is sufficiently lower than the expected fair value of the equipment at the date of the option, (3) review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment, and (4) review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment

 

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at the inception of the lease. Additionally, we consider the cancelability of the contract and any related uncertainty of collections or risk in recoverability of the lease investment at lease inception. Revenue from sales type leases is recognized at the inception of the lease or when the equipment has been delivered and installed at the customer site, if installation is required. Revenues from equipment rentals under operating leases are recognized as earned over the lease term, which is generally on a straight-line basis.

In accordance with the authoritative guidance for revenue recognition for multiple element arrangements, the Accounting Standards Update (ASU) 2009-13 (ASU 2009-13), Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements, which updates ASC 605-25, Revenue Recognition-Multiple element arrangements, of the Financial Accounting Standards Board (FASB) codification, for substantially all of the arrangements with multiple deliverables, we allocate revenue to each element based on a selling price hierarchy at the arrangement inception. The selling price for each element is based upon the following selling price hierarchy: vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE are available (a description as to how we determine VSOE, TPE and ESP is provided below). If a tangible hardware systems product includes software, we determine whether the tangible hardware systems product and the software work together to deliver the product’s essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. Revenue for each separate unit of accounting is recognized when the applicable revenue recognition criteria for each element have been met.

To determine the selling price in multiple-element arrangements, we establish VSOE of the selling price using the price charged for a deliverable when sold separately and for software license updates, product support and hardware systems support, based on the renewal rates offered to customers. For nonsoftware multiple-element arrangements, TPE is established by evaluating similar and/or interchangeable competitor products or services in standalone arrangements with similarly situated customers and/or agreements. If we are unable to determine the selling price because VSOE or TPE doesn’t exist, we determine ESP for the purposes of allocating the arrangement by reviewing historical transactions, including transactions whereby the deliverable was sold on a standalone basis and considering several other external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, competition, the geographies in which we offer our products and services, the type of customer (i.e. distributor, value added reseller, government agency or direct end user, among others) and the stage of the product lifecycle. The determination of ESP considers our pricing model and go-to-market strategy. As our, or our competitors’, pricing and go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to our determination of VSOE, TPE and ESP. As a result, our future revenue recognition for multiple-element arrangements could differ materially from those in the current period.

Collections in excess of revenues and deferred revenues represent cash collected from customers in advance of revenue recognition and are recorded in accrued liabilities for obligations within the next twelve months. Amounts for obligations extending beyond the twelve months are recorded within other liabilities in the condensed consolidated financial statements.

Warranty reserves

We provide limited warranties on our products for periods of up to five years. We record a liability for our warranty obligations when we ship the products or they are included in long-term construction contracts based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as a current liability. For mature products, we estimate the warranty costs based on historical experience with the particular product. For newer products that do not have a history of warranty costs, we base our estimates on our experience with the technology involved and the types of failures that may occur. It is possible that our underlying assumptions will not reflect the actual experience, and in that case, we will make future adjustments to the recorded warranty obligation.

Property, equipment and satellites

Satellites and other property and equipment are recorded at cost or in the case of certain satellites and other property acquired, the fair value at the date of acquisition, net of accumulated depreciation. Capitalized satellite costs consist primarily of the costs of satellite construction and launch, including launch insurance and insurance during the period of in-orbit testing, the net present value of performance incentives expected to be payable to the satellite manufacturers (dependent on the continued satisfactory performance of the satellites), costs directly associated with the monitoring and support of satellite construction, and interest costs incurred during the period of satellite construction. We also construct gateway facilities, network operations systems and other assets to support our satellites, and those construction costs, including interest, are capitalized as incurred. At the time satellites are placed in service, we estimate the useful life of our satellites for depreciation purposes based upon an analysis of each satellite’s performance against the original manufacturer’s orbital design life, estimated fuel levels and related consumption rates, as well as historical satellite operating trends.

We own two satellites: our new high-capacity Ka-band spot-beam satellite, ViaSat-1 (which was successfully launched into orbit in October 2011 and commenced commercial operation in January 2012) and WildBlue-1 (which was placed into service in March 2007). In addition, we have an exclusive prepaid lifetime capital lease of Ka-band capacity over the continental United States on Telesat Canada’s Anik F2 satellite (which was placed into service in April 2005) and own related gateway and networking equipment on all of our satellites. Our property and equipment also includes the indoor and outdoor customer premise equipment (CPE) units leased to subscribers under a retail leasing program as part of our satellite services segment.

 

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Occasionally, we may enter into capital lease arrangements for various machinery, equipment, computer-related equipment, software, furniture or fixtures. As of September 28, 2012 and March 30, 2012, assets under capital lease totaled approximately $3.1 million. We record amortization of assets leased under capital lease arrangements within depreciation expense.

Impairment of long-lived and other long-term assets (property, equipment and satellites, and other assets, including goodwill)

In accordance with the authoritative guidance for impairment or disposal of long-lived assets (ASC 360), we assess potential impairments to our long-lived assets, including property, equipment and satellites and other assets, when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. We periodically review the remaining estimated useful life of the satellite to determine if revisions to the estimated life are necessary. We recognize an impairment loss when the undiscounted cash flows expected to be generated by an asset (or group of assets) are less than the asset’s carrying value. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations. No material impairments were recorded by us for the three and six months ended September 28, 2012 and September 30, 2011.

We account for our goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350). We early adopted the provisions of ASU 2011-08, Testing Goodwill for Impairment, during the fourth quarter of fiscal year 2012, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two step goodwill impairment test. If, after completing our qualitative assessment we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to our carrying value (including goodwill). If the estimated fair value is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value, resulting in goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist.

The qualitative analysis performed during the fourth quarter of fiscal year 2012 included assessing the impact of changes in certain factors including (1) changes in forecasted operating results and comparing actual results to projections, (2) changes in our weighted average cost of capital, (3) changes in the industry or our competitive environment since the acquisition date, (4) changes in the overall economy, our market share and market interest rates since the acquisition date, (5) trends in the stock price and related market capitalization and enterprise values, (6) trends in peer companies total enterprise value metrics, and (7) additional factors such as management turnover, changes in regulation and changes in litigation matters.

Income taxes and valuation allowance on deferred tax assets

Management evaluates the realizability of our deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. In accordance with the authoritative guidance for income taxes (ASC 740), net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Our valuation allowance against deferred tax assets increased from $14.7 million at March 30, 2012 to $16.2 million at September 28, 2012. The valuation allowance primarily relates to state net operating loss carryforwards and research credit carryforwards available to reduce state income taxes.

Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). Under the authoritative guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance addresses the derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.

We are subject to income taxes in the United States and numerous foreign jurisdictions. In the ordinary course of business, there are calculations and transactions where the ultimate tax determination is uncertain. In addition, changes in tax laws and regulations as well as adverse judicial rulings could adversely affect the income tax provision. We believe we have adequately provided for income tax issues not yet resolved with federal, state and foreign tax authorities. However, if these provided amounts prove to be more than what is necessary, the reversal of the reserves would result in tax benefits being recognized in the period in which we determine that provision for the liabilities is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense would result.

 

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Results of Operations

The following table presents, as a percentage of total revenues, income statement data for the periods indicated:

 

     Three Months Ended     Six Months Ended  
     September 28,
2012
    September 30,
2011
    September 28,
2012
    September 30,
2011
 

Revenues:

     100.0     100.0     100.0     100.0

Product revenues

     59.6        65.7        60.3        64.4   

Service revenues

     40.4        34.3        39.7        35.6   

Operating expenses:

        

Cost of product revenues

     42.9        48.4        43.9        47.9   

Cost of service revenues

     33.7        24.3        33.2        24.8   

Selling, general and administrative

     19.1        19.9        21.1        20.6   

Independent research and development

     3.2        3.1        3.1        3.0   

Amortization of acquired intangible assets

     1.4        2.1        1.5        2.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (0.3     2.2        (2.8     1.5   

(Loss) income before income taxes

     (4.4     2.1        (7.2     1.5   

Net (loss) income

     (2.8     3.7        (4.2     2.3   

Net (loss) income attributable to ViaSat, Inc.

     (2.8     3.6        (4.3     2.3   

Three Months Ended September 28, 2012 vs. Three Months Ended September 30, 2011

Revenues

 

     Three Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Product revenues

   $ 168.5       $ 146.6       $ 21.9         14.9

Service revenues

     114.3         76.4         37.9         49.6
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 282.8       $ 223.0       $ 59.8         26.8

Our total revenues increased approximately $59.8 million during the second quarter of fiscal year 2013 when compared to the same period last fiscal year due to an increase in service revenues of approximately $37.9 million, coupled with an increase in product revenues of approximately $21.9 million. The increase in service revenues was driven primarily by service revenue increases in our government systems segment of approximately $27.8 million and in our satellite services segment of approximately $9.8 million. The increase in product revenues resulted from product revenue increases in our commercial networks segment of approximately $22.1 million and in our satellite services segment of approximately $2.0 million, offset by a decrease of approximately $2.2 million in our government systems segment.

Cost of revenues

 

     Three Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Cost of product revenues

   $ 121.4       $ 107.9       $ 13.5         12.5

Cost of service revenues

     95.4         54.2         41.2         76.0
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 216.8       $ 162.1       $ 54.7         33.7

Total cost of revenues increased $54.7 million during the second quarter of fiscal year 2013 compared to the second quarter of fiscal year 2012 due to a cost of service revenues increase of approximately $41.2 million and a cost of product revenues increase of approximately $13.5 million. Cost of service revenues increased from $54.2 million to $95.4 million during the second quarter of fiscal year 2013 when compared to the second quarter of fiscal year 2012 primarily due to increased service revenues, which caused an increase of approximately $26.9 million in cost of service revenues on a constant margin basis mainly related to our government systems segment. Additionally, in the second quarter of fiscal year 2013 we experienced an increase of approximately $16.8 million in cost of service revenues associated with our new ViaSat-1 satellite and associated infrastructure costs, and with our satellite services operations support in connection with our Exede broadband services, which commenced commercial operation in January 2012. Cost of product revenues increased from $107.9 million to $121.4 million during the second quarter of fiscal year 2013 when compared to

 

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the second quarter of fiscal year 2012 primarily due to increased product revenues, which caused an increase of approximately $16.1 million in cost of product revenues on a constant margin basis mainly related to consumer broadband products in our commercial networks segment. This increase in cost of product revenues was offset by improved margins mainly related to consumer broadband products.

Selling, general and administrative expenses

 

     Three Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Selling, general and administrative

   $ 54.1       $ 44.4       $ 9.7         21.9

The increase in selling, general and administrative (SG&A) expenses of $9.7 million in the second quarter of fiscal year 2013 compared to the second quarter of fiscal year 2012 was primarily attributable to higher selling costs of approximately $ 9.2 million. Of the higher selling costs, $8.5 million related to our satellite services segment due to increases of $6.9 million in advertising and marketing expenses, and $1.9 million in commission costs in connection with our Exede broadband services, which commenced commercial operation in January 2012. SG&A expenses consisted primarily of personnel costs, business development expenses, marketing and sales, bids and proposals, facilities, finance, contract administration and general management.

Independent research and development

 

     Three Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Independent research and development

   $ 8.8       $ 6.8       $ 1.9         28.6

IR&D expenses increased $1.9 million in the second quarter of fiscal year 2013 compared to the second quarter of fiscal year 2012, driven primarily by increased IR&D efforts in our commercial networks segment of $1.4 million principally related to next-generation satellite communications systems and next-generation consumer broadband.

Amortization of acquired intangible assets

We amortize our acquired intangible assets from prior acquisitions over their estimated useful lives ranging from three to ten years. The decrease in amortization of acquired intangible assets of approximately $0.7 million in the second quarter of fiscal year 2013 compared to the same period last fiscal year was a result of certain acquired technology intangibles in our commercial networks segment becoming fully amortized over the preceding twelve months. Current and expected amortization expense for acquired intangible assets for each of the following periods is as follows:

 

     Amortization  
     (In thousands)  

For the six months ended September 28, 2012

   $ 8,105   

Expected for the remainder of fiscal year 2013

   $ 7,502   

Expected for fiscal year 2014

     13,888   

Expected for fiscal year 2015

     13,812   

Expected for fiscal year 2016

     10,206   

Expected for fiscal year 2017

     4,630   

Thereafter

     5,021   
  

 

 

 
   $ 55,059   
  

 

 

 

Interest income

Interest income in the three months ended September 28, 2012 compared to the three months ended September 30, 2011 increased slightly as we experienced similar average interest rates on our investments but higher average invested cash balances during the second quarter of fiscal year 2013 compared to the same period last fiscal year.

Interest expense

The $11.3 million increase in interest expense from the second quarter of fiscal year 2012 to the second quarter of fiscal year 2013 was due to lower capitalized interest and additional interest incurred on our 6.875% Senior Notes due 2020 (the 2020 Notes), which were issued in the fourth quarter of fiscal year 2012. In the second quarter of fiscal year 2013, we capitalized approximately

 

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$0.8 million of interest associated with other assets currently under construction, compared to approximately $7.7 million in the second quarter of fiscal year 2012 associated with our ViaSat-1 satellite, related gateways and networking equipment, which were placed into service during the fourth quarter of fiscal year 2012. Interest expense incurred during the three months ended September 28, 2012 related to the 2020 Notes, our 8.875% Senior Notes due 2016 (the 2016 Notes, and collectively with the 2020 Notes, the Senior Notes) and our revolving credit facility (the Credit Facility). Interest expense incurred during the three months ended September 30, 2011 related to the 2016 Notes and the Credit Facility.

(Benefit from) provision for income taxes

We currently estimate our annual effective income tax rate to be approximately 40.5% for fiscal year 2013. The estimated annual effective income tax rate reflects the December 31, 2011 expiration of the federal research and development tax credit. If the federal research and development tax credit is reinstated, we may have a change in the effective tax rate for fiscal year 2013, and the amount of any such tax rate change will depend on the effective date of any such reinstatement, the terms of the reinstatement, as well as the amount of eligible research and development expenses in the reinstated period. The estimated annual effective tax rate is different from the expected statutory rate primarily due to state research and development tax credits.

Segment Results for the Three Months Ended September 28, 2012 vs. Three Months Ended September 30, 2011

Satellite services segment

Revenues

 

     Three Months Ended      Dollar
Increase

(Decrease)
     Percentage
Increase

(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Segment product revenues

   $ 3.0       $ 0.9       $ 2.0         220.9

Segment service revenues

     64.3         54.5         9.8         18.1
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 67.3       $ 55.4       $ 11.9         21.5

The increase of approximately $11.9 million in our satellite services segment revenue in the second quarter of fiscal year 2013 compared to the second quarter of fiscal year 2012 was from increased service revenues of approximately $9.8 million and product revenues of approximately $2.0 million. The increase in service revenues was comprised of $8.2 million relating to our Exede and WildBlue broadband services and $1.6 million relating to our mobile broadband services. The revenue increase relating to our Exede and WildBlue broadband services was a result of a 7% increase in the number of subscribers in the second quarter of fiscal year 2013 compared to the second quarter of fiscal year 2012, as well as a change in the mix of retail and wholesale subscribers and related higher average revenue per subscriber.

Segment operating loss

 

     Three Months Ended     Dollar
(Increase)

Decrease
    Percentage
(Increase)

Decrease
 

(In millions, except percentages)

   September 28,
2012
    September 30,
2011
     

Segment operating loss

   $ (19.4   $ (1.7   $ (17.6     (1,014.0 )% 

Percentage of segment revenues

     (28.8 )%      (3.1 )%     

Our satellite services segment generated a $17.6 million higher operating loss in the second quarter of fiscal year 2013 compared to the same period last fiscal year due to higher operating expenses in the current fiscal year period associated with our ViaSat-1 satellite and related infrastructure and the commencement of commercial operation of our Exede broadband internet services in January 2012, and included additional depreciation of $10.7 million, additional satellite services operations support costs of $6.2 million, higher advertising and marketing costs of $6.9 million and higher commission costs of $1.9 million as we expanded the subscriber base of our Exede broadband services.

 

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Commercial networks segment

Revenues

 

     Three Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Segment product revenues

   $ 81.1       $ 59.1       $ 22.1         37.3

Segment service revenues

     5.4         5.1         0.3         5.6
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 86.5       $ 64.2       $ 22.3         34.8

Commercial networks segment revenue increased approximately $22.3 million in the second quarter of fiscal year 2013 compared to the second quarter of fiscal year 2012, primarily due to an increase in product revenues of approximately $22.1 million. The increase in product revenues resulted primarily from a revenue increase of $30.9 million in consumer broadband products and $1.6 million in satellite payload technology development programs, offset by a revenue decrease of $4.8 million in enterprise VSAT networks and products, $3.7 million in antenna systems products and $2.2 million in mobile broadband satellite communication systems.

Segment operating loss

 

     Three Months Ended     Dollar
(Increase)

Decrease
     Percentage
(Increase)

Decrease
 

(In millions, except percentages)

   September 28,
2012
    September 30,
2011
      

Segment operating loss

   $ (1.8   $ (2.9   $ 1.0         36.1

Percentage of segment revenues

     (2.1 )%      (4.5 )%      

The decrease in our commercial networks segment operating loss in the second quarter of fiscal year 2013 compared to the same period last fiscal year was primarily due to higher earnings contributions of approximately $2.5 million from increased revenues and improved margins in our consumer broadband products, offset by higher IR&D costs of $1.4 million.

Government systems segment

Revenues

 

     Three Months Ended      Dollar
Increase
(Decrease)
    Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
      

Segment product revenues

   $ 84.4       $ 86.6       $ (2.2     (2.6 )% 

Segment service revenues

     44.6         16.8         27.8        165.6
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 129.0       $ 103.4       $ 25.6        24.7

Total revenues in our government systems segment increased approximately $25.6 million in the second quarter of fiscal year 2013 compared to the same period last fiscal year due to an increase in service revenues of $27.8 million, offset by a decrease in product revenues of $2.2 million. The increase in service revenues was primarily due to a revenue increase of $28.8 million in government satellite communication systems services (mainly attributable to broadband networking services revenues for military customers). The decrease in product revenues was primarily due to a revenue decrease of $5.8 million in information assurance products, offset by a revenue increase of $3.1 million in tactical data link products.

Segment operating profit

 

     Three Months Ended     Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
    September 30,
2011
      

Segment operating profit

   $ 24.4      $ 14.3      $ 10.1         70.2

Percentage of segment revenues

     18.9     13.9     

The increase in our government systems segment operating profit of $10.1 million during the second quarter of fiscal year 2013 compared to the second quarter of fiscal year 2012 was primarily due to higher earnings contributions of approximately $10.0 million mainly in our government satellite communication systems.

 

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Six Months Ended September 28, 2012 vs. Six Months Ended September 30, 2011

Revenues

 

     Six Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Product revenues

   $ 316.2       $ 269.2       $ 47.0         17.5

Service revenues

     208.4         149.0         59.4         39.9
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 524.6       $ 418.1       $ 106.5         25.5

Our total revenues increased approximately $106.5 million during the first six months of fiscal year 2013 when compared to the same period last fiscal year due to an increase in service revenues of approximately $59.4 million, coupled with an increase in product revenues of approximately $47.0 million. The increase in service revenues was driven primarily by service revenue increases in our government systems segment of approximately $46.1 million and in our satellite services segment of approximately $12.4 million. The increase in product revenues resulted primarily from product revenue increases in our commercial networks segment of approximately $45.5 million and in our satellite services segment of approximately $1.9 million.

Cost of revenues

 

     Six Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Cost of product revenues

   $ 230.5       $ 200.2       $ 30.3         15.1

Cost of service revenues

     174.0         103.5         70.4         68.0
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 404.4       $ 303.7       $ 100.7         33.2

Total cost of revenues increased $100.7 million during the first six months of fiscal year 2013 compared to the same period in fiscal year 2012 due to a cost of service revenues increase of approximately $70.4 million and a cost of product revenues increase of approximately $30.3 million. Cost of service revenues increased from $103.5 million to $174.0 million during the first six months of fiscal year 2013 when compared to the first six months of fiscal year 2012 primarily due to increased service revenues, which caused an increase of approximately $41.3 million in cost of service revenues on a constant margin basis mainly related to our government systems segment. Additionally, in the first six months of fiscal year 2013 we experienced an increase of approximately $31.6 million in cost of service revenues associated with our new ViaSat-1 satellite and associated infrastructure costs, and with our satellite services operations support in connection with our Exede broadband services, which commenced commercial operation in January 2012. Cost of product revenues increased from $200.2 million to $230.5 million during the first six months of fiscal year 2013 when compared to the first six months of fiscal year 2012 primarily due to increased product revenues, which caused an increase of approximately $35.0 million in cost of product revenues on a constant margin basis related to consumer broadband products. This increase in cost of product revenues was slightly offset by improved margins in our commercial networks segment mainly related to consumer broadband products.

Selling, general and administrative expenses

 

     Six Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Selling, general and administrative

   $ 110.6       $ 86.1       $ 24.5         28.4

The increase in SG&A expenses of $24.5 million in the first six months of fiscal year 2013 compared to the first six months of fiscal year 2012 was primarily attributable to higher selling costs of approximately $19.7 million, higher support costs of approximately $3.2 million and higher new business proposal costs for new contract awards of approximately $1.6 million. Of the higher selling costs, $17.8 million related to our satellite services segment, of which $12.7 million related to an increase in advertising and marketing expenses, and $5.5 million related to an increase in commission costs in connection with our Exede broadband services, which commenced commercial operation in January 2012. Of the higher support costs, $2.4 million related to our satellite services segment and $0.6 million related to our commercial networks segment. Our commercial networks segment contributed to an increase of approximately $1.1 million in higher new business proposal costs for new contract awards. SG&A expenses consisted primarily of personnel costs, business development expenses, marketing and sales, bids and proposals, facilities, finance, contract administration and general management.

 

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Independent research and development

 

     Six Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Independent research and development

   $ 16.1       $ 12.5       $ 3.6         29.0

IR&D expenses increased $3.6 million in the first six months of fiscal year 2013 compared to the first six months of fiscal year 2012, driven primarily by increased IR&D efforts in our commercial networks segment of $2.9 million principally related to next-generation satellite communications systems and next-generation consumer broadband.

Amortization of acquired intangible assets

We amortize our acquired intangible assets from prior acquisitions over their estimated useful lives ranging from three to ten years. The decrease in amortization of acquired intangible assets of approximately $1.4 million in the first six months of fiscal year 2013 compared to the same period last fiscal year was a result of certain acquired technology intangibles in our commercial networks segment becoming fully amortized over the preceding twelve months. Current and expected amortization expense for acquired intangible assets for each of the following periods is as follows:

 

     Amortization  
     (In thousands)  

For the six months ended September 28, 2012

   $ 8,105   

Expected for the remainder of fiscal year 2013

   $ 7,502   

Expected for fiscal year 2014

     13,888   

Expected for fiscal year 2015

     13,812   

Expected for fiscal year 2016

     10,206   

Expected for fiscal year 2017

     4,630   

Thereafter

     5,021   
  

 

 

 
   $ 55,059   
  

 

 

 

Interest income

Interest income for the six months ended September 28, 2012 compared to the six months ended September 30, 2011 increased slightly as we experienced similar average interest rates on our investments but higher average invested cash balances during the six months ended September 28, 2012 compared to the same period last fiscal year.

Interest expense

The $22.9 million increase in interest expense from the first six months of fiscal year 2012 to the first six months of fiscal year 2013 was due to lower capitalized interest and additional interest incurred on our 2020 Notes, which were issued in the fourth quarter of fiscal year 2012. In the first six months of fiscal year 2013, we capitalized approximately $1.6 million of interest associated with other assets currently under construction, compared to approximately $15.3 million in the first six months of fiscal year 2012 associated with our ViaSat-1 satellite, related gateways and networking equipment, which were placed into service during the fourth quarter of fiscal year 2012. Interest expense incurred during the six months ended September 28, 2012 related to the 2020 Notes, the 2016 Notes and the Credit Facility. Interest expense incurred during the six months ended September 30, 2011 related to the 2016 Notes and the Credit Facility.

(Benefit from) provision for income taxes

We currently estimate our annual effective income tax rate to be approximately 40.5% for fiscal year 2013. The estimated annual effective income tax rate reflects the December 31, 2011 expiration of the federal research and development tax credit. If the federal research and development tax credit is reinstated, we may have a change in the effective tax rate for fiscal year 2013, and the amount of any such tax rate change will depend on the effective date of any such reinstatement, the terms of the reinstatement, as well as the amount of eligible research and development expenses in the reinstated period. The estimated annual effective tax rate is different from the expected statutory rate primarily due to state research and development tax credits.

 

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Segment Results for the Six Months Ended September 28, 2012 vs. Six Months Ended September 30, 2011

Satellite services segment

Revenues

 

     Six Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Segment product revenues

   $ 3.5       $ 1.6       $ 1.9         122.2

Segment service revenues

     123.1         110.7         12.4         11.2
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 126.6       $ 112.3       $ 14.3         12.8

The increase of approximately $14.3 million in our satellite services segment revenue in the first six months of fiscal year 2013 compared to the first six months of fiscal year 2012 was mainly from increased service revenues of approximately $12.4 million. This increase in service revenues was comprised of $9.5 million relating to our Exede and WildBlue broadband services and $2.9 million relating to our mobile broadband services. The revenue increase relating to our Exede and WildBlue broadband services was a result of a 2% increase in the number of subscribers in the first six months of fiscal year 2013 compared to the first six months of fiscal year 2012, as well as a change in the mix of retail and wholesale subscribers and related higher average revenue per subscriber.

Segment operating (loss) profit

 

     Six Months Ended     Dollar
Increase
(Decrease)
    Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
    September 30,
2011
     

Segment operating (loss) profit

   $ (41.9   $ 0.2      $ (42.1     (21,692.3 )% 

Percentage of segment revenues

     (33.1 )%      0.2    

Our satellite services segment generated an operating loss in the first six months of fiscal year 2013 compared to an operating profit in the first six months of fiscal year 2012. This change was primarily driven by higher operating expenses in the current fiscal year period associated with our ViaSat-1 satellite and related infrastructure and the commencement of commercial operation of our Exede broadband internet services in January 2012, and included additional depreciation of $18.8 million, additional satellite services operations support costs of $12.7 million, higher advertising and marketing costs of $12.7 million and higher commission costs of $5.5 million as we expanded the subscriber base of our Exede broadband services.

 

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Commercial networks segment

Revenues

 

     Six Months Ended      Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
       

Segment product revenues

   $ 151.9       $ 106.4       $ 45.5         42.8

Segment service revenues

     10.8         9.9         0.9         9.0
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 162.7       $ 116.3       $ 46.4         39.9

Commercial networks segment revenue increased approximately $46.4 million in the first six months of fiscal year 2013 compared to the first six months of fiscal year 2012, primarily due to an increase in product revenues of approximately $45.5 million, comprised of a $50.9 million increase in consumer broadband products, a $3.1 million increase in satellite payload technology development programs and a $2.1 million increase in satellite networking development programs. This increase in product revenues was offset by decreases of $5.4 million in enterprise VSAT networks and products and $3.2 million in antenna systems products.

Segment operating loss

 

     Six Months Ended     Dollar
(Increase) 

Decrease
     Percentage
(Increase)

Decrease
 

(In millions, except percentages)

   September 28,
2012
    September 30,
2011
      

Segment operating loss

   $ (3.9   $ (6.1   $ 2.2         36.1

Percentage of segment revenues

     (2.4 )%      (5.3 )%      

The decrease in our commercial networks segment operating loss in the first six months of fiscal year 2013 compared to the same period last fiscal year was primarily due to higher earnings contributions of approximately $8.1 million from increased revenues and improved margins in our consumer broadband products, offset by an increase in selling, support and new business proposal costs of $3.0 million and higher IR&D costs of $2.9 million.

Government systems segment

Revenues

 

     Six Months Ended      Dollar
Increase
(Decrease)
    Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
     September 30,
2011
      

Segment product revenues

   $ 160.8       $ 161.2       $ (0.4     (0.2 )% 

Segment service revenues

     74.5         28.4         46.1        162.6
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 235.3       $ 189.6       $ 45.7        24.1

Total revenues in our government systems segment increased approximately $45.7 million in the first six months of fiscal year 2013 compared to the same period last fiscal year due to an increase in service revenues of $46.1 million. The increase in service revenues was primarily due to a revenue increase of $46.2 million in government satellite communication systems services (mainly attributable to broadband networking services revenues for military customers).

Segment operating profit

 

     Six Months Ended     Dollar
Increase
(Decrease)
     Percentage
Increase
(Decrease)
 

(In millions, except percentages)

   September 28,
2012
    September 30,
2011
      

Segment operating profit

   $ 39.3      $ 21.7      $ 17.5         80.8

Percentage of segment revenues

     16.7     11.5     

The increase in our government systems segment operating profit of $17.5 million during the first six months of fiscal year 2013 compared to the first six months of fiscal year 2012 was primarily due to higher earnings contributions of approximately $18.9 million mainly in our government satellite communication systems, offset by higher selling, support and new business proposal costs of approximately $1.5 million.

 

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Backlog

As reflected in the table below, both firm and funded backlog increased in each of our segments during the first six months of fiscal year 2013 due to certain large contract awards in our commercial networks segment, which we were pursuing in fiscal year 2012 and the first six months of fiscal year 2013, as well as growth in contract awards across the other two segments.

 

     As of
September 28, 2012
     As of
March 30, 2012
 
     (In millions)  

Firm backlog

     

Satellite Services segment

   $ 25.3       $ 10.9   

Commercial Networks segment

     528.9         323.0   

Government Systems segment

     411.6         284.6   
  

 

 

    

 

 

 

Total

   $ 965.8       $ 618.5   
  

 

 

    

 

 

 

Funded backlog

     

Satellite Services segment

   $ 25.3       $ 10.9   

Commercial Networks segment

     528.9         323.0   

Government Systems segment

     397.6         266.6   
  

 

 

    

 

 

 

Total

   $ 951.8       $ 600.5   
  

 

 

    

 

 

 

The firm backlog does not include contract options. Of the $965.8 million in firm backlog, approximately $346.8 million is expected to be delivered during the remaining six months of fiscal year 2013, and the balance is expected to be delivered in fiscal year 2014 and thereafter. We include in our backlog only those orders for which we have accepted purchase orders.

Our total new awards were $548.0 million and $880.6 million in the three and six months ended September 28, 2012, respectively, compared to $245.7 million and $499.3 million for the three and six months ended September 30, 2011, respectively.

Backlog is not necessarily indicative of future sales. A majority of our contracts can be terminated at the convenience of the customer. Orders are often made substantially in advance of delivery, and our contracts typically provide that orders may be terminated with limited or no penalties. In addition, purchase orders may present product specifications that would require us to complete additional product development. A failure to develop products meeting such specifications could lead to a termination of the related contract.

Firm backlog amounts as presented are comprised of funded and unfunded components. Funded backlog represents the sum of contract amounts for which funds have been specifically obligated by customers to contracts. Unfunded backlog represents future amounts that customers may obligate over the specified contract performance periods. Our customers allocate funds for expenditures on long-term contracts on a periodic basis. Our ability to realize revenues from contracts in backlog is dependent upon adequate funding for such contracts. Although we do not control the funding of our contracts, our experience indicates that actual contract fundings have ultimately been approximately equal to the aggregate amounts of the contracts.

Liquidity and Capital Resources

Overview

We have financed our operations to date primarily with cash flows from operations, bank line of credit financing, debt financing and equity financing. At September 28, 2012, we had $136.1 million in cash and cash equivalents, $319.3 million in working capital and no outstanding borrowings under our Credit Facility. At March 30, 2012, we had $172.6 million in cash and cash equivalents, $327.1 million in working capital and no outstanding borrowings under our Credit Facility. We invest our cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities.

The general cash needs of our satellite services, commercial networks and government systems segments can vary significantly. The cash needs of our satellite services segment tend to be driven primarily by the timing of payment of capital expenditures (e.g., payments under satellite construction and launch contracts) and of network expansion activities, as well as the quality of customer, type of contract and payment terms. In our commercial networks segment, cash needs tend to be driven primarily by the type and mix of contracts in backlog, the nature and quality of customers, the level of investments in IR&D activities and the payment terms of customers (including whether advance payments are made or customer financing is required). In our government systems segment, the primary factors determining cash needs tend to be the type and mix of contracts in backlog (i.e., product or service, development or production) and timing of payments (including restrictions on the timing of cash payments under U.S. government procurement regulations). Other factors affecting the cash needs of our commercial networks and government systems segments include contract duration and program performance. For example, if a program is performing well and meeting its contractual requirements, then its cash flow requirements are usually lower.

 

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To further enhance our liquidity position, we may obtain additional financing, which could consist of debt, convertible debt or equity financing from public and/or private capital markets. In March 2010, we filed a universal shelf registration statement with the SEC for the future sale of an unlimited amount of debt securities, common stock, preferred stock, depositary shares, warrants and rights. The securities may be offered from time to time, separately or together, directly by us, by selling security holders, or through underwriters, dealers or agents at amounts, prices, interest rates and other terms to be determined at the time of the offering.

Our future capital requirements will depend upon many factors, including the timing and amount of cash required for future broadband satellite projects we may engage in, expansion of our research and development and marketing efforts, and the nature and timing of orders. Additionally, we will continue to evaluate possible acquisitions of, or investments in complementary businesses, products and technologies which may require the use of cash or additional financing. We believe that our current cash balances and net cash expected to be provided by operating activities along with availability under our Credit Facility will be sufficient to meet our anticipated operating requirements for at least the next twelve months.

Cash flows

Cash provided by operating activities for the first six months of fiscal year 2013 was $42.1 million compared to cash provided by operating activities of $23.8 million for the first six months of fiscal year 2012. This $18.3 million increase was primarily driven by a $39.2 million year-over-year decrease in cash used to fund net operating assets needs. The decrease in net operating assets was mainly due to an increase of approximately $11.7 million in our accounts payable due to timing of payments, as well as investment in inventory at the lower rate, of approximately $15.4 million, during first six months of fiscal year 2013 compared to the same period last year.

Cash used in investing activities for the first six months of fiscal year 2013 was $87.0 million compared to cash used in investing activities for the first six months in fiscal year 2012 of $141.6 million. The decrease in cash used in investing activities resulted primarily from a decrease of $62.4 million and $23.6 million in cash used during the first six month of fiscal year 2013 compared to the same period last year for the construction of our ViaSat-1 satellite and for expenditures for the construction of gateway facilities and network operating systems related to ViaSast-1, respectively, offset by $27.3 million in higher capital expenditures for new CPE units and other general purpose equipment.

Cash provided by financing activities for the first six months of fiscal year 2013 was $8.4 million compared to cash provided by financing activities of $113.5 million for the first six months of fiscal year 2012. This $105.0 million decrease in cash provided by financing activities was primarily due to the absence of borrowings under our Credit Facility during the first six months of fiscal year 2013 compared to $110.0 million in borrowings, net of repayments, under our Credit Facility during the first six months of fiscal year 2012. Cash provided by financing activities for both periods included cash received from stock option exercises and employee stock purchase plan purchases, and cash used for the repurchase of common stock related to net share settlement of certain employee tax liabilities in connection with the vesting of restricted stock unit awards.

Satellite service-related activities

Beginning in the fourth quarter of fiscal year 2011, we have incurred higher operating costs in connection with the launch and roll out of our ViaSat-1 satellite and related ground infrastructure and, beginning in January 2012, the launch of our Exede broadband internet services. These higher operating costs have included costs associated with depreciation, connectivity to the ViaSat-1 gateways, advertising and marketing, commissions, logistics, customer care and various support systems. These higher operating costs have negatively impacted income from operations during the past seven quarters as the costs incurred were higher than incremental revenue generated by our satellite services segment. In the second quarter of fiscal year 2013, the total number of subscribers of our Exede broadband services increased and we expect that this trend will continue. Accordingly, we expect that the resultant incremental service revenues in our satellite services segment will improve income (loss) from operations for that segment over time. However, there can be no assurance that this will occur.

In addition, since the fourth quarter of fiscal year 2012, we have experienced higher interest expense as we no longer capitalize the interest expense relating to the debt incurred to build ViaSat-1 and the related gateway and networking equipment now that ViaSat-1 is in service. We also expect our capital expenditures to increase during the remainder of fiscal year 2013 as a result of increased subscriber acquisition costs relating to the expected increase in the number of subscribers of our Exede broadband internet services. We expect our capital expenditures also to increase in connection with our expected commencement of construction of one or more additional high-capacity satellites.

 

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We are involved in a variety of claims, suits, investigations and proceedings arising in the ordinary course of business, including actions with respect to intellectual property claims and other matters. See “Legal Proceedings” in Part II, Item 1 for a discussion of certain patent infringement litigation involving Space Systems/Loral, Inc. (SS/L) and its parent company Loral Space & Communications, Inc. (Loral), a related party. Regardless of the outcome, litigation can have an adverse impact on us because we expect to incur costs, which may vary based on interim rulings, discovery and other related activities. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect our business, financial condition, results of operations or liquidity in a particular period.

Credit Facility

As of September 28, 2012, the Credit Facility provided a revolving line of credit of $325.0 million (including up to $50.0 million of letters of credit) with a maturity date of May 9, 2017. Borrowings under the Credit Facility bear interest, at our option, at either (1) the highest of the Federal Funds rate plus 0.50%, the Eurodollar rate plus 1.00% or the administrative agent’s prime rate as announced from time to time, or (2) the Eurodollar rate plus, in the case of each of (1) and (2), an applicable margin that is based on our total leverage ratio. The Credit Facility is guaranteed by certain of our domestic subsidiaries and secured by substantially all of our respective assets. The Credit Facility contains financial covenants regarding a maximum total leverage ratio and a minimum interest coverage ratio. In addition, the Credit Facility contains covenants that restrict, among other things, our ability to sell assets, make investments and acquisitions, make capital expenditures, grant liens, pay dividends and make certain other restricted payments. The Credit Facility was amended on September 26, 2012 to, among other things, increase our permitted total leverage ratio for the second, third and fourth quarters of fiscal year 2013 and authorize the offering of up to $300.0 million in additional indebtedness to refinance 2016 Notes.

At September 28, 2012, we had no outstanding borrowings under the Credit Facility and $38.5 million outstanding under standby letters of credit, leaving borrowing availability under the Credit Facility as of September 28, 2012 of $286.5 million.

Senior Notes due 2016

In October 2009, we issued $275.0 million in principal amount of 2016 Notes in a private placement to institutional buyers. The 2016 Notes were exchanged in May 2010 for substantially identical 2016 Notes that had been registered with the SEC. The 2016 Notes bear interest at the rate of 8.875% per year, payable semi-annually in cash in arrears, which interest payments commenced in March 2010. The 2016 Notes were issued with an original issue discount of 1.24%, or $3.4 million. The 2016 Notes are recorded as long-term debt, net of original issue discount, in our consolidated financial statements. The original issue discount and deferred financing cost associated with the issuance of the 2016 Notes are amortized to interest expense on a straight-line basis over the term of the 2016 Notes, which is not materially different from an effective interest rate basis.

The 2016 Notes are guaranteed on an unsecured senior basis by each of our existing and future subsidiaries that guarantees the Credit Facility (the Guarantor Subsidiaries). The 2016 Notes and the guarantees are our and the Guarantor Subsidiaries’ general senior unsecured obligations and rank equally in right of payment with all of their existing and future unsecured unsubordinated debt. The 2016 Notes and the guarantees are effectively junior in right of payment to their existing and future secured debt, including under the Credit Facility (to the extent of the value of the assets securing such debt), are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that are not guarantors of the 2016 Notes, and are senior in right of payment to all of their existing and future subordinated indebtedness.

The indenture governing the 2016 Notes limits, among other things, our and our restricted subsidiaries’ ability to: incur, assume or guarantee additional debt; issue redeemable stock and preferred stock; pay dividends, make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase subordinated debt; make loans and investments; grant or incur liens; restrict dividends, loans or asset transfers from restricted subsidiaries; sell or otherwise dispose of assets; enter into transactions with affiliates; reduce our satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person.

The 2016 Notes may be redeemed, in whole or in part, at any time during the twelve months beginning on September 15, 2012 at a redemption price of 106.656%, during the twelve months beginning on September 15, 2013 at a redemption price of 104.438%, during the twelve months beginning on September 15, 2014 at a redemption price of 102.219%, and at any time on or after September 15, 2015 at a redemption price of 100%, in each case plus accrued and unpaid interest, if any, thereon to the redemption date.

In the event a change of control occurs (as defined under the indenture), each holder will have the right to require us to repurchase all or any part (equal to $2,000 or larger integral multiples of $1,000) of such holder’s 2016 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2016 Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

 

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Senior Notes due 2020

In February 2012, we issued $275.0 million in principal amount of 2020 Notes in a private placement to institutional buyers, which 2020 Notes were exchanged in August 2012 for substantially identical 2020 Notes that had been registered with the SEC. The 2020 Notes bear interest at the rate of 6.875% per year, payable semi-annually in cash in arrears, which interest payments commenced in June 2012. The 2020 Notes were issued at the face value and are recorded as long-term debt in our condensed consolidated financial statements. Deferred financing cost associated with the issuance of the 2020 Notes is amortized to interest expense on a straight-line basis over the term of the 2020 Notes, which is not materially different from an effective interest rate basis.

The 2020 Notes are guaranteed on an unsecured senior basis by each of the Guarantor Subsidiaries. The 2020 Notes and the guarantees are our and the Guarantor Subsidiaries’ general senior unsecured obligations and rank equally in right of payment with all of their existing and future unsecured unsubordinated debt. The 2020 Notes and the guarantees are effectively junior in right of payment to their existing and future secured debt, including under the Credit Facility (to the extent of the value of the assets securing such debt), are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that are not guarantors of the 2020 Notes, and are senior in right of payment to all of their existing and future subordinated indebtedness.

The indenture governing the 2020 Notes limits, among other things, our and our restricted subsidiaries’ ability to: incur, assume or guarantee additional debt; issue redeemable stock and preferred stock; pay dividends, make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase subordinated debt; make loans and investments; grant or incur liens; restrict dividends, loans or asset transfers from restricted subsidiaries; sell or otherwise dispose of assets; enter into transactions with affiliates; reduce our satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person.

Prior to June 15, 2015, we may redeem up to 35% of the 2020 Notes at a redemption price of 106.875% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, from the net cash proceeds of specified equity offerings. We may also redeem the 2020 Notes prior to June 15, 2016, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and any accrued and unpaid interest, if any, thereon to the redemption date. The applicable premium is calculated as the greater of: (i) 1.0% of the principal amount of such 2020 Notes and (ii) the excess, if any, of (a) the present value at such date of redemption of (1) the redemption price of such 2020 Notes on June 15, 2016 plus (2) all required interest payments due on such 2020 Notes through June 15, 2016 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the treasury rate (as defined under the indenture) plus 50 basis points, over (b) the then-outstanding principal amount of such 2020 Notes. The 2020 Notes may be redeemed, in whole or in part, at any time during the twelve months beginning on June 15, 2016 at a redemption price of 103.438%, during the twelve months beginning on June 15, 2017 at a redemption price of 101.719%, and at any time on or after June 15, 2018 at a redemption price of 100%, in each case plus accrued and unpaid interest, if any, thereon to the redemption date.

In the event a change of control occurs (as defined under the indenture), each holder will have the right to require us to repurchase all or any part (equal to $2,000 or larger integral multiples of $1,000) of such holder’s 2020 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2020 Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

Subsequent event – issuance of additional 2020 Notes and repurchase of 2016 Notes

On October 12, 2012, subsequent to the quarter end, we issued an additional $300.0 million in aggregate principal amount of our 2020 Notes in a private placement to institutional buyers at an issue price of 103.50% of the principal amount. The $10.5 million premium we received in connection with the issuance of the additional 2020 Notes will be recorded in long-term debt in the condensed consolidated financial statements and will be amortized as a reduction to interest expense on a straight-line basis over the term of the 2020 Notes, which is not materially different from an effective interest rate basis.

On September 27, 2012, we launched a tender offer to purchase, for cash, any and all of the $275.0 million in aggregate principal amount of outstanding 2016 Notes. In conjunction with the tender offer, we also solicited consents from the holders of the 2016 Notes to eliminate certain covenants in and amend certain provisions of the indenture governing the 2016 Notes. In connection with our issuance of the additional 2020 Notes, on October 12, 2012, we purchased approximately $262.1 million in aggregate principal amount of the 2016 Notes pursuant to the tender offer. The purchase price for the 2016 Notes was $1,071.56 per $1,000 principal amount of 2016 Notes tendered, which included a $10.00 consent payment per $1,000 principal amount of notes tendered. The total cash payment to purchase the tendered 2016 Notes, including accrued and unpaid interest up to, but excluding, October 12, 2012, was approximately $282.5 million. The tender offer expired on October 25, 2012. On October 15, 2012, we issued a notice to redeem the remaining $12.9 million in aggregate principal amount of 2016 Notes in accordance with the indenture governing the 2016 Notes. The remaining 2016 Notes will be redeemed on November 14, 2012 at a redemption price of 106.656%, plus accrued and unpaid interest up to, but excluding, the redemption date. We estimate that we will incur a loss on extinguishment of debt of approximately $27.0 million, which will be recorded in the third quarter of fiscal year 2013.

 

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Contractual Obligations

The following table sets forth a summary of our obligations at September 28, 2012:

 

            For the
Remainder of
Fiscal Year
     For the Fiscal Years Ending  

(In thousands, including interest where applicable)

   Total      2013      2014-2015      2016-2017      Thereafter  

Operating leases and satellite capacity agreements

   $ 204,392       $ 44,225       $ 81,832       $ 35,462       $ 42,873   

Capital lease

     1,440         654         786         —           —     

Senior Notes (1)

     792,344         21,656         86,625         348,405         335,658   

Line of credit

     —           —           —           —           —     

Standby letters of credit

     38,550         6,781         31,520         249         —     

Satellite performance incentives

     38,499         821         3,596         4,140         29,942   

Purchase commitments including satellite-related agreements

     380,403         124,639         147,720         62,726         45,318   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,455,628       $ 198,776       $ 352,079       $ 450,982       $ 453,791   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes the 2016 Notes and 2020 Notes. Subsequent to the quarter end, we issued an additional $300.0 million in aggregate principal amount of 2020 Notes, repurchased approximately $262.1 million in aggregate principal amount of our 2016 Notes and issued a notice of redemption to redeem the remaining 2016 Notes outstanding.

We purchase components from a variety of suppliers and use several subcontractors and contract manufacturers to provide design and manufacturing services for our products. During the normal course of business, we enter into agreements with subcontractors, contract manufacturers and suppliers that either allow them to procure inventory based upon criteria defined by us or that establish the parameters defining our requirements. In certain instances, these agreements allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to firm orders being placed. Consequently, only a portion of our reported purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments.

Under our satellite construction contract with SS/L for ViaSat-1, based on estimates as of September 28, 2012, the remaining amount of satellite performance incentives and related interest that we may be required to pay during the period until December 2026 is approximately $38.5 million. We have also entered into an agreement with a supplier for an additional satellite launch which can be used for a future satellite.

Our condensed consolidated balance sheets included $57.1 million and $50.4 million of “other liabilities” as of September 28, 2012 and March 30, 2012, respectively, which primarily consisted of our long-term portion of satellite performance incentives obligation, long-term warranty obligations, long-term portion of deferred rent, long-term portion of deferred revenue, long-term deferred income taxes and long-term unrecognized tax position liabilities. With the exception of our long-term portion of our satellite performance incentives obligation, these remaining liabilities have been excluded from the above table as the timing and/or the amount of any cash payment is uncertain. See Note 9 to our condensed consolidated financial statements for additional information regarding our income taxes and related tax positions, and Note 7 to our condensed consolidated financial statements for a discussion of our product warranties.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at September 28, 2012 as defined in Regulation S-K Item 303(a)(4) other than as discussed under Contractual Obligations above or disclosed in the notes to our consolidated financial statements included in this Quarterly Report or in our Annual Report on Form 10-K for the year ended March 30, 2012.

Recent Authoritative Guidance

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (ASC 220): Presentation of Comprehensive Income. The new authoritative guidance requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB further amended its guidance to defer changes related to the presentation of reclassification adjustments indefinitely as a result of concerns raised by stakeholders that the new presentation requirements would be difficult for preparers and add unnecessary complexity to financial statements. The authoritative guidance (other than the portion regarding the presentation of reclassification adjustments which, as noted above, has been deferred indefinitely) became effective for us beginning in the first quarter of fiscal year 2013. In the first quarter of fiscal year 2013, we retrospectively adopted the new accounting standard for the presentation of comprehensive income in financial statements which resulted in the presentation of a total for comprehensive income (loss), and the components of net income (loss) and other comprehensive income (loss) in one statement. The adoption of this standard only changed how we present comprehensive income (loss) and did not impact our consolidated financial position, results of operations or cash flows.

 

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In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (ASC 350): Testing Goodwill for Impairment. The new authoritative guidance simplifies how an entity tests goodwill for impairment. The new authoritative guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The two-step quantitative impairment test is required only if, based on its qualitative assessment, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This authoritative guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted if an entity’s financial statements for the more recent interim and annual period have not yet been issued. We early adopted this authoritative guidance in the fourth quarter of fiscal year 2012. Adoption of this authoritative guidance did not have a material impact on our consolidated financial statements and disclosures.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (ASC 210): Disclosures about offsetting Assets and Liabilities. The new authoritative guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this authoritative guidance. This authoritative guidance will be effective for us beginning in the first quarter of fiscal year 2014 and should be applied retrospectively for all comparative periods presented. We are currently evaluating the impact that this authoritative guidance may have on its consolidated financial statements and disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk

Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, and short-term and long-term obligations, including the Credit Facility and the Senior Notes. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. As of September 28, 2012, we had no outstanding borrowings under our Credit Facility and $550.0 million in aggregate principal amount outstanding of the Senior Notes, and we held no short-term investments. Our Senior Notes bear interest at a fixed rate and therefore our exposure to market risk for changes in interest rates relates primarily to borrowings under our Credit Facility, cash equivalents, short-term investments and short-term obligations.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. To minimize this risk, we maintain a significant portion of our cash balance in money market funds. In general, money market funds are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate. Our cash and cash equivalents earn interest at variable rates. Given recent declines in interest rates, our interest income has been and may continue to be negatively impacted. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. If the underlying weighted average interest rate on our cash and cash equivalents, assuming balances remain constant over a year, changed by 50 basis points, interest income would have increased or decreased by approximately $0.3 million and $0.1 million for the three months ended September 28, 2012 and September 30, 2011, respectively. Because our investment policy restricts us to invest in conservative, interest-bearing investments and because our business strategy does not rely on generating material returns from our investment portfolio, we do not expect our market risk exposure on our investment portfolio to be material.

Our primary interest rate under the Credit Facility is the Eurodollar rate plus an applicable margin that is based on our total leverage ratio. As of September 28, 2012, the weighted average effective interest rate that would have been applied to any new borrowings under the Credit Facility was approximately 2.96%. As of September 28, 2012, we had no outstanding borrowings under our Credit Facility. Accordingly, assuming the outstanding balance remained constant over a year, changes in interest rates applicable to our Credit Facility would have no effect on our interest incurred and cash flow.

Foreign exchange risk

We generally conduct our business in U.S. dollars. However, as our international business is conducted in a variety of foreign currencies, we are exposed to fluctuations in foreign currency exchange rates. Our objective in managing our exposure to foreign currency risk is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, from time to time, we may enter into foreign currency forward contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions.

As of September 28, 2012, we had a number of foreign currency forward contracts outstanding which are intended to reduce the foreign currency risk for amounts payable to vendors in Euros. The foreign currency forward contracts with a notional amount of $7.5 million had a fair value of approximately $0.4 million and were recorded in accrued liabilities as of September 28, 2012. If the foreign currency forward rate for the Euro to the U.S. dollar on these foreign currency forward contracts had changed by 10%, the fair value of these foreign currency forward contracts as of September 28, 2012 would have changed by approximately $0.7 million.

 

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the requirements of the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 28, 2012, the end of the period covered by this Quarterly Report. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 28, 2012.

During the period covered by this Quarterly Report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

In February 2012, we filed a complaint against SS/L and its parent company Loral in the United States District Court for the Southern District of California for patent infringement and breach of contract relating to the manufacture of ViaSat-1. We allege, among other things, that SS/L and Loral infringed U.S. Patent Nos. 8,107,875, 8,010,043, 8,068,827 and 7,773,942 by making, using, offering to sell and/or selling other high-capacity broadband satellites, and have requested monetary damages, injunctive relief and other remedies. On June 15, 2012, SS/L filed counterclaims against ViaSat for patent infringement and declaratory relief. Specifically, SS/L seeks a judicial declaration that SS/L did not breach the parties’ contract for the manufacture of ViaSat-1, that SS/L does not infringe the ViaSat patents described above, and that those patents are invalid and/or unenforceable. SS/L also alleges that ViaSat infringed U.S. Patent Nos. 6,879,808, 6,400,696 and 7,219,132 by providing broadband internet service by means of the Anik F2 satellite using ViaSat satellite gateways and satellite user terminals and has induced others to infringe by selling certain ground equipment and user terminals.

From time to time, we are involved in a variety of claims, suits, investigations and proceedings arising in the ordinary course of business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending matters will not have a material adverse effect on our business, financial condition, results of operations or liquidity. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect our business, financial condition, results of operations or liquidity in a particular period.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 30, 2012, which could materially affect our business, financial condition, liquidity or future results. The risks described in our reports on Forms 10-K and 10-Q are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, liquidity or future results.

Item 6. Exhibits

The Exhibit Index on page 57 is incorporated herein by reference as the list of exhibits required as part of this Quarterly Report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      VIASAT, INC.
November 7, 2012       /s/ MARK DANKBERG
      Mark Dankberg
      Chairman of the Board and Chief Executive Officer
      (Principal Executive Officer)
      /s/ SHAWN DUFFY
      Shawn Duffy
      Vice President, Corporate Controller,
Chief Accounting Officer, and Chief Financial Officer
      (Principal Financial and Chief Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit

Number

        Form      Incorporated by Reference      Filed
Herewith
 
  

Exhibit Description

      File No.      Exhibit      Filing Date     
4.1    Registration Rights Agreement, dated as of October 12, 2012, among ViaSat, Inc., ViaSat Holding, Inc., ViaSat Communications, Inc., WB Holdings 1 LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, for and on behalf of itself and JP Morgan Securities LLC, Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, Wells Fargo Securities, LLC, Stephens Inc. and B. Riley & Co., LLC      8-K         000-21767         4.1         October 12, 2012     
4.2    Second Supplemental Indenture, dated as of October 12, 2012, among ViaSat, Inc., ViaSat Holding, Inc., ViaSat Communications, Inc., WB Holdings 1 LLC and Wilmington Trust, National Association, as trustee      8-K         000-21767         4.2         October 12, 2012      
10.1    First Amendment to Fifth Amended and Restated Revolving Loan Agreement, dated as of September 26, 2012, by and among ViaSat, Inc., Union Bank, N.A. (as administrative agent and collateral agent) and the lenders party thereto      8-K         000-21767         10.1         September 27, 2012      
10.2*    1996 Equity Participation Plan of ViaSat, Inc. (As Amended and Restated Effective September 20, 2012)      8-K         000-21767        10.1         September 20, 2012      
10.3*    Separation Agreement, dated as of August 22, 2012, between ViaSat, Inc. and Ronald Wangerin      8-K         000-21767         10.1         August 23, 2012      
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  X   
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  X   
32.1    Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  X   
101.INS    XBRL Instance Document                  X   
101.SCH    XBRL Taxonomy Extension Schema                  X   
101.CAL    XBRL Taxonomy Extension Calculation Linkbase                  X   

 

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Exhibit

Number

        Form    Incorporated by Reference    Filed
Herewith
 
  

Exhibit Description

      File No.    Exhibit    Filing Date   
101.LAB    XBRL Taxonomy Extension Labels Linkbase                  X   
101.PRE    XBRL Taxonomy Extension Presentation Linkbase                  X   
101.DEF    XBRL Taxonomy Extension Definition Linkbase                  X   

 

* Indicates management contract, compensatory plan or arrangement.

 

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