UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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 (
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class) |
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(Trading Symbol) |
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(Name of Each Exchange on which Registered) |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of shares outstanding of the registrant’s common stock, $0.0001 par value, as of October 21, 2022 was
VIASAT, INC.
TABLE OF CONTENTS
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
VIASAT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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As of |
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As of |
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(In thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Current assets of discontinued operations |
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Total current assets |
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Property, equipment and satellites, net |
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Operating lease right-of-use assets |
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Other acquired intangible assets, net |
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Goodwill |
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Other assets |
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Non-current assets of discontinued operations |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued and other liabilities |
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Current portion of long-term debt |
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Current liabilities of discontinued operations |
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Total current liabilities |
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Senior notes |
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Other long-term debt |
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Non-current operating lease liabilities |
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Other liabilities |
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Non-current liabilities of discontinued operations |
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Total liabilities |
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(Note 10) |
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Equity: |
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Viasat, Inc. stockholders’ equity |
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Common stock |
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Paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
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Total Viasat, Inc. stockholders’ equity |
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Noncontrolling interest in subsidiary |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements.
3
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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September 30, 2022 |
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September 30, 2021 |
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September 30, 2022 |
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September 30, 2021 |
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(In thousands, except per share data) |
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Revenues: |
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Product revenues |
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$ |
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$ |
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$ |
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$ |
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Service revenues |
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Total revenues |
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Operating expenses: |
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Cost of product revenues |
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Cost of service revenues |
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Selling, general and administrative |
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Independent research and development |
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Amortization of acquired intangible assets |
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Income (loss) from operations |
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Other income (expense): |
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Interest income |
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Interest expense |
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Other income, net |
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— |
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Income (loss) from continuing operations before income taxes |
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( |
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(Provision for) benefit from income taxes from continuing operations |
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( |
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Equity in income (loss) of unconsolidated affiliate, net |
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( |
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— |
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( |
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Net income (loss) from continuing operations |
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( |
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( |
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( |
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Net income (loss) from discontinued operations, net of tax |
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Net income (loss) |
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Less: net income (loss) attributable to |
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Net income (loss) attributable to Viasat, Inc. |
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$ |
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$ |
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$ |
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$ |
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Income (loss) per share attributable |
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Continuing operations |
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$ |
( |
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$ |
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$ |
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$ |
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Discontinued operations |
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Income (loss) |
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$ |
( |
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$ |
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$ |
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$ |
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Income (loss) per share attributable |
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Continuing operations |
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$ |
( |
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$ |
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$ |
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$ |
( |
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Discontinued operations |
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Income (loss) |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Shares used in computing basic net |
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Shares used in computing diluted net |
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Comprehensive income (loss): |
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Net income (loss) |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments, net |
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( |
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( |
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( |
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( |
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Other comprehensive income (loss), net of tax |
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( |
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( |
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( |
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( |
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Comprehensive income (loss) |
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( |
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( |
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( |
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Less: comprehensive income (loss) attributable |
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Comprehensive income (loss) attributable to |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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See accompanying notes to the condensed consolidated financial statements.
4
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended |
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September 30, 2022 |
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September 30, 2021 |
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Cash Flows from Continuing and Discontinued Operations |
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(In thousands) |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
( |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation |
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Amortization of intangible assets |
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Stock-based compensation expense |
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Loss on disposition of fixed assets |
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Deferred income taxes and other non-cash adjustments |
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( |
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Increase (decrease) in cash resulting from changes in operating |
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Accounts receivable |
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( |
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( |
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Inventories |
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( |
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( |
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Other assets |
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Accounts payable |
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Accrued liabilities |
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( |
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Other liabilities |
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( |
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( |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Purchase of property, equipment and satellites |
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( |
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( |
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Cash paid for patents, licenses and other assets |
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( |
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( |
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Payments related to acquisition of businesses, net of cash acquired |
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( |
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Net cash provided by (used in) investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Proceeds from debt borrowings |
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Payments on debt borrowings |
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( |
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( |
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Payments of debt issuance costs |
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( |
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Repurchase of shares by majority-owned subsidiary |
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( |
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Proceeds from issuance of common stock under equity plans |
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Purchase of common stock in treasury (immediately retired) related |
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( |
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( |
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Other financing activities |
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( |
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( |
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Net cash provided by (used in) financing activities |
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Effect of exchange rate changes on cash |
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( |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Non-cash investing and financing activities: |
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Right-of-use assets obtained in exchange for operating lease liabilities |
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$ |
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$ |
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Issuance of common stock in satisfaction of certain accrued compensation liabilities |
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$ |
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$ |
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Capital expenditures not paid for during the period |
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$ |
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$ |
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Issuance of common stock in connection with acquisition |
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$ |
— |
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$ |
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See accompanying notes to the condensed consolidated financial statements.
5
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
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Viasat, Inc. Stockholders |
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Common Stock |
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Number of |
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Amount |
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Paid-in |
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Retained |
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Accumulated |
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Noncontrolling |
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Total |
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(In thousands, except share data) |
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For the Three Months Ended September 30, 2022 |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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RSU awards vesting, net of shares withheld for taxes |
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— |
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( |
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— |
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— |
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— |
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( |
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Other noncontrolling interest activity |
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— |
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— |
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( |
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— |
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— |
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( |
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( |
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Net income (loss) |
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— |
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— |
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— |
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( |
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— |
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( |
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Other comprehensive income (loss), net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Balance at September 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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For the Three Months Ended September 30, 2021 |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Exercise of stock options |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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RSU awards vesting, net of shares withheld for taxes |
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— |
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( |
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— |
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— |
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— |
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( |
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Other |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net income (loss) |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss), net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance at September 30, 2021 |
|
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$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements.
6
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
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Viasat, Inc. Stockholders |
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Common Stock |
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Number of |
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Amount |
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Paid-in |
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Retained |
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Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
|||||||
|
|
(In thousands, except share data) |
|
|||||||||||||||||||||||||
For the Six Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balance at March 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||||
Issuance of stock under Employee Stock Purchase |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Shares issued in settlement of certain accrued |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
RSU awards vesting, net of shares withheld for taxes |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Other noncontrolling interest activity |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
( |
) |
|
Other comprehensive income (loss), net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance at September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
For the Six Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balance at March 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Exercise of stock options |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Issuance of stock under Employee Stock Purchase |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Shares issued in settlement of certain accrued |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
RSU awards vesting, net of shares withheld for taxes |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Shares issued in connection with acquisition of business |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Other comprehensive income (loss), net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance at September 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||||
See accompanying notes to the condensed consolidated financial statements.
7
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Basis of Presentation
The accompanying condensed consolidated balance sheet at September 30, 2022, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended September 30, 2022 and 2021, the condensed consolidated statements of cash flows for the six months ended September 30, 2022 and 2021 and the condensed consolidated statements of equity for the three and six months ended September 30, 2022 and 2021 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 31, 2022 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 31, 2022 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 its majority-owned subsidiary, TrellisWare Technologies, Inc. (TrellisWare). During the first quarter of fiscal year 2022, the Company completed the acquisitions of the remaining
All significant intercompany amounts have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investment in unconsolidated affiliate in other assets (long-term) on the condensed consolidated balance sheets.
On October 1, 2022, the Company entered into an Asset Purchase Agreement to sell certain assets and assign certain liabilities comprising its Link-16 Tactical Data Links business (the Link-16 TDL Business) to L3Harris Technologies, Inc. in exchange for approximately $
On July 8, 2022, Cisco Systems, Inc., which previously acquired Acacia Communications, Inc. (Acacia), paid the Company approximately $
On November 8, 2021, the Company entered into a Share Purchase Agreement to combine with Connect Topco Limited, a private company limited by shares and incorporated in Guernsey (Inmarsat), with the shareholders of Inmarsat and certain management and employees who hold options and shares of a subsidiary of Inmarsat whose options and shares will be exchanged for shares of Inmarsat prior to closing (collectively, the Sellers). Pursuant to the Share Purchase Agreement, the Company will purchase all of the issued and outstanding shares of Inmarsat from the Sellers upon the terms and subject to the conditions set forth therein (the Inmarsat Transaction). See Note 5 – Acquisitions for more information.
8
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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, allowance for doubtful accounts, valuation of goodwill and other intangible assets, patents, orbital slots and other licenses, software development, property, equipment and satellites, long-lived assets, contingencies and income taxes including the valuation allowance on deferred tax assets.
Revenue recognition
In accordance with the authoritative guidance for revenue from contracts with customers (ASC 606), the Company applies the five-step model to its contracts with its customers. Under this model the Company (1) identifies the contract with the customer, (2) identifies its performance obligations in the contract, (3) determines the transaction price for the contract, (4) allocates the transaction price to its performance obligations and (5) recognizes revenue when or as it satisfies its performance obligations. These performance obligations generally include the purchase of services (including broadband capacity and the leasing of broadband equipment), the purchase of products, and the development and delivery of complex equipment built to customer specifications under long-term contracts.
Performance obligations
The timing of satisfaction of performance obligations may require judgment. The Company derives a substantial portion of its revenues from contracts with customers for services, primarily consisting of connectivity services. These contracts typically require advance or recurring monthly payments by the customer. The Company’s obligation to provide connectivity services is satisfied over time as the customer simultaneously receives and consumes the benefits provided. The measure of progress over time is based upon either a period of time (e.g., over the estimated contractual term) or usage (e.g., bandwidth used/bytes of data processed). The Company evaluates whether broadband equipment provided to its customers as part of the delivery of connectivity services represents a lease in accordance with the authoritative guidance for leases (ASC 842). As discussed further below under “Leases - Lessor accounting”, for broadband equipment leased to consumer broadband customers in conjunction with the delivery of connectivity services, the Company accounts for the lease and non-lease components of connectivity service arrangements as a single performance obligation as the connectivity services represent the predominant component.
The Company also derives a portion of its revenues from contracts with customers to provide products. Performance obligations to provide products are satisfied at the point in time when control is transferred to the customer. These contracts typically require payment by the customer upon passage of control and determining the point at which control is transferred may require judgment. To identify the point at which control is transferred to the customer, the Company considers indicators that include, but are not limited to, whether (1) the Company has the present right to payment for the asset, (2) the customer has legal title to the asset, (3) physical possession of the asset has been transferred to the customer, (4) the customer has the significant risks and rewards of ownership of the asset, and (5) the customer has accepted the asset. For product revenues, control generally passes to the customer upon delivery of goods to the customer.
The vast majority of the Company’s revenues from long-term contracts to develop and deliver complex equipment built to customer specifications are derived from contracts with the U.S. Government (including foreign military sales contracted through the U.S. Government). The Company’s contracts with the U.S. Government typically are subject to the Federal Acquisition Regulation (FAR) and are priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. Government contracts. The pricing for non-U.S. Government contracts is based on the specific negotiations with each customer. Under the typical payment terms of the Company’s U.S. Government fixed-price contracts, the customer pays the Company either performance-based payments (PBPs) or progress payments. PBPs are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments based on a percentage of the costs incurred as the work progresses. Because the customer can often retain a portion of the contract price until completion of the contract, the Company’s U.S. Government fixed-price contracts generally result in revenue recognized in excess of billings which the Company presents as unbilled accounts receivable on the balance sheet. Amounts billed and due from the Company’s customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until
9
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
final contract settlement is not considered a significant financing component because the intent is to protect the customer. For the Company’s U.S. Government cost-type contracts, the customer generally pays the Company for its actual costs incurred within a short period of time. For non-U.S. Government contracts, the Company typically receives interim payments as work progresses, although for some contracts, the Company may be entitled to receive an advance payment. The Company recognizes a liability for these advance payments in excess of revenue recognized and presents it as collections in excess of revenues and deferred revenues on the balance sheet. An advance payment is not typically considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect the Company from the other party failing to adequately complete some or all of its obligations under the contract.
Performance obligations related to developing and delivering complex equipment built to customer specifications under long-term contracts are recognized over time as these performance obligations do not create assets with an alternative use to the Company and the Company has an enforceable right to payment for performance to date. To measure the transfer of control, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the cost-to-cost measure of progress for its contracts because that best depicts the transfer of control to the customer which occurs as the Company incurs costs on its contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Estimating the total costs at completion of a performance obligation requires management to make estimates related to items such as subcontractor performance, material costs and availability, labor costs and productivity and the costs of overhead. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recognized in the period the loss is determined.
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 audit by the DCAA has not been concluded for fiscal years 2021 or 2022. As of September 30, 2022, the DCAA had completed its incurred cost audit for fiscal years 2004, 2016, 2019 and 2020 and approved the Company’s incurred costs for those fiscal years, as well as approved the Company’s incurred costs for fiscal years 2005 through 2015, 2017 and 2018 without further audit based on the determination of low risk. Although the Company has recorded contract revenues subsequent to fiscal year 2020 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 both September 30, 2022 and March 31, 2022, the Company had $
10
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Evaluation of transaction price
The evaluation of transaction price, including the amounts allocated to performance obligations, may require significant judgments. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue, and, where applicable, the cost at completion, is complex, subject to many variables and requires significant judgment. The Company’s contracts may contain award fees, incentive fees, or other provisions, including the potential for significant financing components, that can either increase or decrease the transaction price. These amounts, which are sometimes variable, can be dictated by performance metrics, program milestones or cost targets, the timing of payments, and customer discretion. The Company estimates variable consideration at the amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company. In the event an agreement includes embedded financing components, the Company recognizes interest expense or interest income on the embedded financing components using the effective interest method. This methodology uses an implied interest rate which reflects the incremental borrowing rate which would be expected to be obtained in a separate financing transaction.
If a contract is separated into more than one performance obligation, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Estimating standalone selling prices may require judgment. When available, the Company utilizes the observable price of a good or service when the Company sells that good or service separately in similar circumstances and to similar customers. If a standalone selling price is not directly observable, the Company estimates the standalone selling price by considering all information (including market conditions, specific factors, and information about the customer or class of customer) that is reasonably available.
Transaction price allocated to remaining performance obligations
The Company’s remaining performance obligations represent the transaction price of firm contracts and orders for which work has not been performed. The Company includes in its remaining performance obligations only those contracts and orders for which it has accepted purchase orders. Remaining performance obligations associated with the Company’s subscribers for fixed consumer and business broadband services in its satellite services segment exclude month-to-month service contracts in accordance with a practical expedient and are estimated using a portfolio approach in which the Company reviews all relevant promotional activities and calculates the remaining performance obligation using the average service component for the portfolio and the average time remaining under the contract. The Company’s future recurring in-flight connectivity service contracts in its satellite services segment do not have minimum service purchase requirements and therefore are not included in the Company’s remaining performance obligations. As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $
Disaggregation of revenue
The Company operates and manages its business in
11
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following sets forth disaggregated reported revenue by segment and product and services for the three and six months ended September 30, 2022 and 2021 (as noted above, revenue information excludes revenues from the Link-16 TDL Business, which have been classified as discontinued operations):
|
|
Three Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Satellite |
|
|
Commercial |
|
|
Government |
|
|
Total |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Product revenues |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Service revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Six Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Satellite |
|
|
Commercial |
|
|
Government |
|
|
Total |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Product revenues |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Service revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Three Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Satellite |
|
|
Commercial |
|
|
Government |
|
|
Total |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Product revenues |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Service revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Six Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Satellite |
|
|
Commercial |
|
|
Government |
|
|
Total |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Product revenues |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Service revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues from the U.S. Government as an individual customer comprised approximately
The Company’s satellite services segment revenues are primarily derived from the Company’s fixed broadband services, in-flight services and energy services (acquired through the RigNet acquisition).
12
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Revenues in the Company’s commercial networks and government systems segments are primarily derived from three types of contracts: fixed-price, cost-reimbursement and time-and-materials contracts. Fixed-price contracts (which require the Company to provide products and services under a contract at a specified price) comprised approximately
Historically, a significant portion of the Company’s revenues in its commercial networks and government systems segments has been derived from customer contracts that include the development of products. The 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 the Company’s funded development from its customer contracts were approximately
Contract balances
Contract balances consist of contract assets and contract liabilities. A contract asset, or with respect to the Company, an unbilled accounts receivable, is recorded when revenue is recognized in advance of the Company’s right to bill and receive consideration, typically resulting from sales under long-term contracts. Unbilled accounts receivable are generally expected to be billed and collected within one year. The unbilled accounts receivable will decrease as provided services or delivered products are billed. The Company receives payments from customers based on a billing schedule established in the Company’s contracts.
When consideration is received in advance of the delivery of goods or services, a contract liability, or with respect to the Company, collections in excess of revenues or deferred revenues, is recorded. Reductions in the collections in excess of revenues or deferred revenues will be recorded as the Company satisfies the performance obligations.
The following table presents contract assets and liabilities as of September 30, 2022 and March 31, 2022:
|
|
As of |
|
|
As of |
|
||
|
|
(In thousands) |
|
|||||
Unbilled accounts receivable |
|
$ |
|
|
$ |
|
||
Collections in excess of revenues and deferred revenues |
|
|
|
|
|
|
||
Deferred revenues, long-term portion |
|
|
|
|
|
|
||
Unbilled accounts receivable decreased $
Collections in excess of revenues and deferred revenues increased $
During the three and six months ended September 30, 2022, the Company recognized revenue of $
Property, equipment and satellites
Satellites and other property and equipment, including internally developed software, 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
13
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 earth stations, 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 periodically reviews the remaining estimated useful life of its satellites to determine if revisions to estimated useful lives are necessary. 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, which for the periods presented, primarily related to losses incurred for unreturned customer premise equipment (CPE). The Company computes depreciation using the straight-line method over the estimated useful lives of the assets ranging from to
Costs related to internally developed software for internal uses are capitalized after the preliminary project stage is complete and are amortized over the estimated useful lives of the assets, which are approximately to
The Company owns four satellites in service — three over North America (ViaSat-2, ViaSat-1 and WildBlue-1) and the KA-SAT satellite over Europe, Middle East, and Africa (EMEA). In addition, the Company has lifetime leases of Ka-band capacity on two satellites. The Company is also planning to launch a global constellation of three third-generation ViaSat-3 class satellites under construction. In addition, the Company owns related earth stations and networking equipment for all of its satellites. The Company procures indoor and outdoor CPE units leased to subscribers under a retail leasing program as part of the Company’s satellite services segment, which are reflected in investing activities and property, equipment and satellites, net in the accompanying condensed consolidated financial statements. The Company depreciates the satellites, earth stations 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, equipment and satellites, net, as of September 30, 2022 were $
14
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Occasionally, the Company may enter into finance lease arrangements for various machinery, equipment, computer-related equipment, software, furniture, fixtures, or satellites. The Company records amortization of assets leased under finance lease arrangements within depreciation expense. The Company’s finance leases consist primarily of satellite lifetime Ka-band capacity leases and have remaining terms from less than
Leases
Lessee accounting
In accordance with ASC 842, the Company assesses at contract inception whether the contract is, or contains, a lease. Generally, the Company determines that a lease exists when (1) the contract involves the use of a distinct identified asset, (2) the Company obtains the right to substantially all economic benefits from use of the asset, and (3) the Company has the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset, (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (5) the asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria.
At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of the Company’s incremental borrowing rate for a collateralized loan with the same term as the underlying leases.
Lease payments included in the measurement of lease liabilities consist of (1) fixed lease payments for the noncancelable lease term, (2) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (3) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of the Company’s real estate lease agreements require variable lease payments that do not depend on an underlying index or rate established at lease commencement. Such payments and changes in payments based on a rate or index are recognized in operating expenses when incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the depreciation of assets obtained under finance leases on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense.
The Company’s operating leases consist primarily of leases for office space, data centers and satellite ground facilities and have remaining terms from less than
Lessor accounting
For broadband equipment leased to fixed broadband customers in conjunction with the delivery of connectivity services, the Company has made an accounting policy election not to separate the broadband equipment from the related connectivity services. The connectivity services are the predominant component of these arrangements. The connectivity
15
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
services are accounted for in accordance with ASC 606. The Company is also a lessor for certain insignificant communications equipment. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
Business combinations
The authoritative guidance for business combinations (ASC 805) requires that all business combinations be accounted for using the purchase method. The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, and assumed liabilities, where applicable. The Company recognizes technology, contracts and customer relationships, satellite co-location rights, trade names and other as identifiable intangible assets, which are recorded at fair value as of the transaction date. Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities. Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date. Contingent consideration is recorded at fair value at the acquisition date.
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. Total capitalized costs related to patents of $
Debt issuance costs
Debt issuance costs are amortized and recognized as interest expense using the effective interest rate method, or, when the results are not materially different, on a straight-line basis over the expected term of the related debt. During both the six months ended September 30, 2022 and 2021,
Software development
Costs of developing software for sale are charged to independent 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
16
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
capitalized software development costs was $
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 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 has recorded self-insurance liability for its plans of $
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 30, 2022 and March 31, 2022,
Noncontrolling interests
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, separate 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.
On August 15, 2022, TrellisWare, a majority-owned subsidiary of the Company, completed the repurchase of its common stock from participating stockholders for a total purchase price of approximately $
The following table summarizes the effect of the change in the Company's percentage ownership interest in TrellisWare on the Company's equity for the three and six months ended September 30, 2022 and 2021:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Net income (loss) attributable to Viasat, Inc. |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Transfers to noncontrolling interest |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Change from net income (loss) attributable to Viasat, Inc. and transfers from (to) noncontrolling interest |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
17
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Investments in unconsolidated affiliate — equity method
Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investment in unconsolidated affiliate in other assets (long-term) on the condensed consolidated balance sheets. The Company records its share of the results of such entities within equity in income (loss) of unconsolidated affiliate, net on the condensed consolidated statements of operations and comprehensive income (loss). The Company monitors such investments for other-than-temporary impairment by considering factors including the current economic and market conditions and the operating performance of the entities and records reductions in carrying values when necessary. The fair value of privately held investments is estimated using the best available information as of the valuation date, including current earnings trends, undiscounted cash flows, quoted stock prices of comparable public companies, and other company specific information, including recent financing rounds.
Common stock held in treasury
As of September 30, 2022 and March 31, 2022, the Company had
During the three months ended September 30, 2022 and 2021, the Company issued
18
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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. Expense for restricted stock units and stock options is recognized on a straight-line basis over the employee’s requisite service period. Expense for total shareholder return (TSR) performance stock options that vest is recognized regardless of the actual TSR outcome achieved and is recognized on a graded-vesting basis. The Company accounts for forfeitures as they occur. The Company recognized $
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 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.
Ordinarily, the Company calculates its provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.
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.
Recent authoritative guidance
19
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
this guidance effective fiscal year-end 2023. The Company is currently evaluating the impact of this standard on its annual disclosures.
20
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 2 — Composition of Certain Balance Sheet Captions
|
|
As of |
|
|
As of |
|
||
|
|
(In thousands) |
|
|||||
Accounts receivable, net: |
|
|
|
|
|
|
||
Billed |
|
$ |
|
|
$ |
|
||
Unbilled |
|
|
|
|
|
|
||
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Inventories: |
|
|
|
|
|
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Prepaid expenses and other current assets: |
|
|
|
|
|
|
||
Prepaid expenses |
|
$ |
|
|
$ |
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Property, equipment and satellites, net: |
|
|
|
|
|
|
||
Equipment and software (estimated useful life of |
|
$ |
|
|
$ |
|
||
CPE leased equipment (estimated useful life of |
|
|
|
|
|
|
||
Furniture and fixtures (estimated useful life of |
|
|
|
|
|
|
||
Leasehold improvements (estimated useful life of |
|
|
|
|
|
|
||
Buildings (estimated useful life of |
|
|
|
|
|
|
||
Land |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Satellites (estimated useful life of |
|
|
|
|
|
|
||
Satellite Ka-band capacity obtained under finance leases (estimated useful life of |
|
|
|
|
|
|
||
Satellites under construction |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Other acquired intangible assets, net: |
|
|
|
|
|
|
||
Technology (weighted average useful life of |
|
$ |
|
|
$ |
|
||
Contracts and customer relationships (weighted average useful life of |
|
|
|
|
|
|
||
Satellite co-location rights (weighted average useful life of |
|
|
|
|
|
|
||
Trade name (weighted average useful life of |
|
|
|
|
|
|
||
Other (weighted average useful life of |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Other assets: |
|
|
|
|
|
|
||
Deferred income taxes |
|
$ |
|
|
$ |
|
||
Capitalized software costs, net |
|
|
|
|
|
|
||
Patents, orbital slots and other licenses, net |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Accrued and other liabilities: |
|
|
|
|
|
|
||
Collections in excess of revenues and deferred revenues |
|
$ |
|
|
$ |
|
||
Accrued employee compensation |
|
|
|
|
|
|
||
Accrued vacation |
|
|
|
|
|
|
||
Warranty reserve, current portion |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Other liabilities: |
|
|
|
|
|
|
||
Deferred revenues, long-term portion |
|
$ |
|
|
$ |
|
||
Warranty reserve, long-term portion |
|
|
|
|
|
|
||
Satellite performance incentive obligations, long-term portion |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
21
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 determines fair value based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants, and 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 instrument’s valuation.
The Company had $
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).
Contingencies — In connection with the acquisition of the remaining
Long-term debt — The Company’s long-term debt consists of borrowings under its Term Loan Facility, Revolving Credit Facility and Ex-Im Credit Facility (collectively, the Credit Facilities), $
Satellite performance incentive obligations — The Company’s contracts with satellite manufacturers require the Company to make monthly in-orbit satellite performance incentive payments with respect to certain satellites in service, including interest, through fiscal year
22
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The Company records the net present value of these expected future payments as a liability and as a component of the cost of the satellites. However, for disclosure purposes, the Company is required to measure the fair value of outstanding satellite performance incentive obligations on a recurring basis. The fair value of the Company’s outstanding satellite performance incentive obligations is estimated to approximate their carrying value based on current rates (Level 2). As of September 30, 2022 and March 31, 2022, the Company’s estimated satellite performance incentive obligations relating to certain satellites in service, including accrued interest, were $
Note 4 — Discontinued Operations
On October 1, 2022, the Company entered into an Asset Purchase Agreement to sell certain assets and assign certain liabilities comprising the Link-16 TDL Business (part of the Company's government systems segment) to L3Harris Technologies, Inc. in exchange for approximately $
The Company expects the Link-16 TDL Sale to substantially reduce both debt and net leverage, and to allow closer alignment in investment synergies between the Company's government systems segment and its other business segments. The Link-16 TDL Sale is expected to close in the first half of calendar year 2023 and is subject to the satisfaction or waiver of customary closing conditions, including the expiration or termination of any required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
In connection with the closing of the Link-16 TDL Sale, the Company and L3Harris Technologies, Inc. will enter into certain ancillary commercial agreements, including an intellectual property license agreement for the cross-licensing by each party of certain intellectual property rights relating to the Link-16 TDL Business and the Company’s retained businesses, certain supply agreements with respect to the supply of certain Link-16 and related products following the closing, and a transition services agreement for the provision of certain services to support the transition of the Link-16 TDL Business following the closing, in each case subject to the terms and conditions set forth therein.
The following table presents key components of assets and liabilities that are classified as discontinued operations on the condensed consolidated balance sheets as of September 30, 2022 and March 31, 2022:
|
|
As of |
|
|
As of |
|
||
|
|
(In thousands) |
|
|||||
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
Inventories |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Property, equipment, and satellites, net |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets of discontinued operations |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued and other liabilities |
|
|
|
|
|
|
||
Non-current operating lease liabilities |
|
|
|
|
|
|
||
Other liabilities |
|
|
|
|
|
|
||
Total liabilities of discontinued operations |
|
$ |
|
|
$ |
|
||
The operating results of the discontinued operations only reflect revenues and expenses that are directly attributable to the Link-16 TDL Business that will be eliminated from continuing operations. The following table presents key components of “Net income (loss) from discontinued operations, net of tax” for the three and six months ended September 30, 2022 and 2021:
23
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) from discontinued operations before income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(Provision for) benefit from income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income (loss) from discontinued operations, net of tax |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The cash flows related to discontinued operations have not been segregated and are included in the condensed consolidated statements of cash flows. The following table presents key cash flow and non-cash information related to discontinued operations for the six months ended September 30, 2022 and 2021:
|
|
Six Months Ended |
|
|||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||
|
|
(In thousands) |
|
|||||
Depreciation |
|
$ |
|
|
$ |
|
||
Amortization of intangible assets |
|
|
|
|
|
|
||
Capital expenditures |
|
|
|
|
|
|
||
Note 5 — Acquisitions
Inmarsat Transaction
On November 8, 2021, the Company entered into a Share Purchase Agreement with the Sellers to combine Viasat with Inmarsat. Pursuant to the Share Purchase Agreement, the Company will purchase all of the issued and outstanding shares of Inmarsat from the Sellers upon the terms and subject to the conditions set forth therein. The total consideration payable by the Company under the Share Purchase Agreement consists of $
The Company's stockholders approved the issuance of shares in the transaction and an amendment to the Company’s certificate of incorporation to increase the number of shares of common stock authorized for issuance at a special meeting held on June 21, 2022.
The closing of the Inmarsat Transaction is subject to customary closing conditions, including receipt of regulatory approvals and clearances. The Share Purchase Agreement contains certain termination rights for both the Company and certain of the Sellers and further provides that, upon termination of the Share Purchase Agreement under certain circumstances, the Company may be obligated to pay a termination fee of up to $
The Company has obtained financing commitments for an additional $
Euro Broadband Infrastructure Sàrl
On April 30, 2021, the Company acquired the remaining
24
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
over EMEA and related ground infrastructure. Goodwill recognized in the transaction was recorded within the Company's satellite services segment. The goodwill recognized was not deductible for U.S. and foreign income tax purposes.
Prior to the acquisition date, the Company owned a
The purchase price of $
The purchase price allocation of the acquired assets and assumed liabilities based on the estimated fair values as of April 30, 2021, slightly adjusted since the close of the acquisition, primarily between goodwill, identifiable intangible assets and property, equipment and satellites, is as follows:
|
|
(In thousands) |
|
|
Current assets |
|
$ |
|
|
Property, equipment and satellites |
|
|
|
|
Identifiable intangible assets |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
$ |
|
|
Total liabilities assumed |
|
$ |
( |
) |
Goodwill |
|
|
|
|
Total consideration transferred |
|
$ |
|
|
Amounts assigned to identifiable intangible assets are being amortized on a straight-line basis over their determined useful lives (which approximates the economic pattern of benefit) and are as follows as of April 30, 2021:
|
|
|
|
|
Weighted |
|
||
|
|
Fair Value |
|
|
Average Useful Life |
|
||
|
|
(In thousands) |
|
|
(In years) |
|
||
Customer relationships |
|
$ |
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Trade name |
|
|
|
|
|
|
||
Total identifiable intangible assets |
|
$ |
|
|
|
|
||
At the closing of the acquisition, EBI became a wholly owned subsidiary of the Company and EBI’s operations have been included in the Company’s condensed consolidated financial statements in the Company’s satellite services segment (with an insignificant amount included in the Company's commercial networks segment) commencing on the acquisition date.
As EBI’s results of operations are not material to the Company’s consolidated results of operations, pro forma results of operations for this acquisition have not been presented.
25
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
RigNet, Inc.
On April 30, 2021, the Company completed the acquisition of all outstanding shares of RigNet, a publicly held leading provider of ultra-secure, intelligent networking solutions and specialized applications. Goodwill recognized in the transaction was recorded within the Company's satellite services segment. The goodwill recognized was not deductible for U.S. and foreign income tax purposes.
The consideration transferred of approximately $
The purchase price allocation of the acquired assets and assumed liabilities based on the estimated fair values as of April 30, 2021 is as follows:
|
|
(In thousands) |
|
|
Current assets |
|
$ |
|
|
Property, equipment and satellites |
|
|
|
|
Identifiable intangible assets |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
$ |
|
|
Current liabilities |
|
|
( |
) |
Other long-term liabilities |
|
|
( |
) |
Total liabilities assumed |
|
$ |
( |
) |
Goodwill |
|
|
|
|
Total consideration transferred |
|
$ |
|
|
Amounts assigned to identifiable intangible assets are being amortized on a straight-line basis over their determined useful lives (which approximates the economic pattern of benefit) and are as follows as of April 30, 2021:
|
|
|
|
|
Weighted |
|
||
|
|
Fair Value |
|
|
Average Useful Life |
|
||
|
|
(In thousands) |
|
|
(In years) |
|
||
Technology |
|
$ |
|
|
|
|
||
Customer relationships |
|
|
|
|
|
|
||
Trade name |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total identifiable intangible assets |
|
$ |
|
|
|
|
||
Management determined the fair value of acquired customer relationships intangible asset by applying the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to forecasted revenue growth rate, gross margin, contributory asset charges, customer attrition rate and discount rate. In connection with the acquisition, the Company assumed a contingent liability associated with a RigNet predecessor subsidiary of approximately $
The condensed consolidated financial statements include the operating results of RigNet from the date of acquisition. Since the acquisition date, the Company recorded approximately $
26
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Unaudited Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of operations for the Company and RigNet on a pro forma basis, as though the companies had been combined as of the beginning of fiscal year 2021, April 1, 2020. The pro forma information is presented for informational purposes only and may not be indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the related fiscal periods.
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
September 30, 2021 |
|
|
September 30, 2021 |
|
||
|
|
(In thousands) |
|
|||||
Total revenues |
|
$ |
|
|
$ |
|
||
Net income (loss) attributable |
|
$ |
|
|
$ |
|
||
Note 6 — Shares Used In Computing Diluted Net Income (Loss) Per Share
The weighted average number of shares used to calculate basic and diluted net loss per share attributable to Viasat, Inc. common stockholders is the same for the three and six months ended September 30, 2022 and for the three and six months ended September 30, 2021, as the Company incurred a net loss from continuing operations (excluding income (loss) from continuing operations attributable to the noncontrolling interest) for such periods and inclusion of potentially dilutive weighted average shares of common stock would be antidilutive. Potentially dilutive weighted average shares excluded from the calculation for the three months ended September 30, 2022 consisted of
Potentially dilutive weighted average shares excluded from the calculation for the six months ended September 30, 2022 consisted of
Note 7 — Goodwill and Acquired Intangible Assets
During the six months ended September 30, 2022, the decrease in the Company’s goodwill relating to its continuing operations primarily related to a foreign currency translation effect recorded within all three of the Company's segments. As of September 30, 2022 and March 31, 2022, approximately $
27
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
intangible assets was $
Note 8 — Senior Notes and Other Long-Term Debt
Total long-term debt consisted of the following as of September 30, 2022 and March 31, 2022:
|
|
As of |
|
|
As of |
|
||
|
|
(In thousands) |
|
|||||
2028 Notes |
|
$ |
|
|
$ |
|
||
2027 Notes |
|
|
|
|
|
|
||
2025 Notes |
|
|
|
|
|
|
||
Term Loan Facility |
|
|
|
|
|
|
||
Revolving Credit Facility |
|
|
|
|
|
— |
|
|
Ex-Im Credit Facility |
|
|
|
|
|
|
||
(see Note 1) |
|
|
|
|
|
|
||
Total debt |
|
|
|
|
|
|
||
Unamortized discount and debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Less: current portion of long-term debt |
|
|
|
|
|
|
||
Total long-term debt |
|
$ |
|
|
$ |
|
||
Term Loan Facility
In March 2022, the Company entered into a $
Borrowings under the Term Loan Facility are required to be repaid in quarterly installments of $
Borrowings under the Term Loan Facility are recorded as current portion of long-term debt and as other long-term debt, net of unamortized discount and debt issuance costs, in the Company’s condensed consolidated financial statements. The Term Loan Facility was issued with an original issue discount of
28
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Revolving Credit Facility
As of September 30, 2022, the Revolving Credit Facility provided a $
Ex-Im Credit Facility
The Ex-Im Credit Facility originally provided a $
Borrowings under the Ex-Im Credit Facility bear interest at a fixed rate of
Borrowings under the Ex-Im Credit Facility are recorded as current portion of long-term debt and as other long-term debt, net of unamortized discount and debt issuance costs, in the Company’s condensed consolidated financial statements. The discount of $
In August 2022, the Company amended the Ex-Im Credit Facility to provide additional covenant flexibility. Certain of the amendments will become effective at and are conditional upon the closing of the Inmarsat Transaction.
29
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Senior Notes
Senior Notes due 2028
In June 2020, the Company issued $
The 2028 Notes are required to be guaranteed on an unsecured senior basis by each of the Company’s existing and future subsidiaries that guarantees the Revolving Credit Facility. As of September 30, 2022, none of the Company’s subsidiaries guaranteed the 2028 Notes. The 2028 Notes are the Company’s general senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future unsecured unsubordinated debt. The 2028 Notes are effectively junior in right of payment to the Company’s existing and future secured debt, including under the Credit Facilities and the 2027 Notes (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 do not guarantee the 2028 Notes, and are senior in right of payment to all of the Company’s existing and future subordinated indebtedness.
The indenture governing the 2028 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.
Senior Secured Notes due 2027
In March 2019, the Company issued $
The 2027 Notes are required to be guaranteed on a senior secured basis by each of the Company’s existing and future subsidiaries that guarantees the Revolving Credit Facility. As of September 30, 2022, none of the Company’s
30
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
subsidiaries guaranteed the 2027 Notes. The 2027 Notes are secured, equally and ratably with the Revolving Credit Facility and any future parity lien debt, by liens on substantially all of the Company’s assets.
The 2027 Notes are the Company’s general senior secured obligations and rank equally in right of payment with all of its existing and future unsubordinated debt. The 2027 Notes are effectively senior to all of the Company’s existing and future unsecured debt (including the 2025 Notes and the 2028 Notes) as well as to all of any permitted junior lien debt that may be incurred in the future, in each case to the extent of the value of the assets securing the 2027 Notes. The 2027 Notes are effectively subordinated to any obligations that are secured by liens on assets that do not constitute a part of the collateral securing the 2027 Notes, are structurally subordinated to all existing and future liabilities (including trade payables) of the Company’s subsidiaries that do not guarantee the 2027 Notes, and are senior in right of payment to all of the Company’s existing and future subordinated indebtedness.
The indenture governing the 2027 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 2027 Notes may be redeemed,
Senior Notes due 2025
In September 2017, the Company issued $
The 2025 Notes are required to be guaranteed on an unsecured senior basis by each of the Company’s existing and future subsidiaries that guarantees the Revolving Credit Facility. As of September 30, 2022, none of the Company’s subsidiaries guaranteed the 2025 Notes. The 2025 Notes are the Company’s general senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future unsecured unsubordinated debt. The 2025 Notes are effectively junior in right of payment to the Company’s existing and future secured debt, including under the Credit Facilities and the 2027 Notes (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 do not guarantee the 2025 Notes, and are senior in right of payment to all of the Company’s existing and future subordinated indebtedness.
The indenture governing the 2025 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.
31
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The 2025 Notes may be redeemed,
Note 9 — Product Warranty
|
|
Six Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
(In thousands) |
|
|||||
Balance, beginning of period |
|
$ |
|
|
$ |
|
||
Change in liability for warranties |
|
|
|
|
|
|
||
Settlements made (in cash or in kind) |
|
|
( |
) |
|
|
( |
) |
Balance, end of period |
|
$ |
|
|
$ |
|
||
Note 10 — Commitments and Contingencies
From time to time, the Company enters into satellite construction agreements as well as various other satellite-related purchase commitments, including with respect to the provision of launch services, operation of its satellites and satellite insurance. See Note 12 – Commitments to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022 for information regarding the Company’s future minimum payments under its satellite construction contracts and other satellite-related purchase commitments.
Periodically, the Company is involved in a variety of claims, suits, investigations and proceedings arising in the ordinary course of business, including government investigations and claims, and other claims and proceedings with respect to intellectual property, breach of contract, labor and employment, tax and other matters. Such matters could result in fines; penalties, compensatory, treble or other damages; or non-monetary relief. A violation of government contract laws and regulations could also result in the termination of its government contracts or debarment from bidding on future government contracts. 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
32
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 audit by the DCAA has not been concluded for fiscal years 2021 or 2022. As of September 30, 2022, the DCAA had completed its incurred cost audit for fiscal years 2004, 2016, 2019 and 2020 and approved the Company’s incurred costs for those fiscal years, as well as approved the Company’s incurred costs for fiscal years 2005 through 2015, 2017 and 2018 without further audit based on the determination of low risk. Although the Company has recorded contract revenues subsequent to fiscal year 2020 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 both September 30, 2022 and March 31, 2022, the Company had $
Note 11 — Income Taxes
Ordinarily, under GAAP, the Company calculates its provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.
In evaluating the Company's ability to realize the deferred tax asset for California Research and Development (R&D) tax credits, the Company considered all available positive and negative evidence, including operating results and forecasted ranges of future taxable income, and determined it is more likely than not that a majority of its California R&D tax credits will not be realized due to reduced taxable income apportioned to California in connection with the Link-16 TDL Sale. As a result, the Company has recorded a valuation allowance of $
For the three and six months ended September 30, 2022, the Company recorded an income tax provision of $
For the three and six months ended September 30, 2021, the Company recorded an income tax benefit of $
Future realization of existing deferred tax assets ultimately depends on future profitability and the existence of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under tax law. In the event that the Company’s estimate of taxable income is less than that required to utilize the full amount of any deferred tax asset, a valuation allowance is established, which would cause a decrease to income in the period such determination is made.
For the three and six months ended September 30, 2022, the Company’s gross unrecognized tax benefits increased by $
Note 12 — Segment Information
The Company’s reporting segments, comprised of the satellite services, commercial networks and government systems segments, are primarily distinguished by the type of customer and the related contractual requirements. The Company’s satellite services segment provides satellite-based broadband and related services to residential customers, Prepaid Internet hotspot users, enterprises, commercial airlines and other mobile broadband customers. The Company’s
33
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
commercial networks segment develops and offers advanced satellite and wireless broadband platforms, ground networking equipment, radio frequency and advanced microwave solutions, Application-Specific Integrated Circuit chip design, satellite payload development and space-to-earth connectivity systems, some of which are ultimately used by the Company’s satellite services segment. The Company’s government systems segment provides global mobile broadband services to military and government users and develops and offers network-centric, internet protocol-based fixed and mobile secure communications products 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.
As described in Note 1 — Basis of Presentation and Note 4 — Discontinued Operations, on October 1, 2022, the Company entered into an Asset Purchase Agreement to sell certain assets and assign certain liabilities comprising the Link-16 TDL Business to L3Harris Technologies, Inc. In accordance with ASC 205-20, the Company determined that the Link-16 TDL Business met held-for-sale and discontinued operations accounting criteria at the end of the second quarter of fiscal year 2023. Accordingly, the segment information for the periods prior to the measurement date of a discontinued operation that is part of a reportable segment is required to be restated to reflect the discontinued operation classification. Therefore, the discontinued operations have been excluded from segment results for all periods presented. Further, in accordance with the authoritative guidance for segment reporting (ASC 280-10), if the discontinued operation is part of a reportable segment but not the entire reportable segment, the restatement should include a reasonable reallocation of costs previously allocated to a discontinued operation to the remaining operating segments. Therefore, certain corporate and other indirect costs previously allocated to the Link-16 TDL Business have been allocated across all three segments for the periods presented.
34
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Segment revenues and operating profits (losses) for the three and six months ended September 30, 2022 and 2021 were as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Satellite services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Service |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial networks |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Service |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Government systems |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Service |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Elimination of intersegment revenues |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating profits (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Satellite services |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Commercial networks |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Government systems |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Elimination of intersegment operating |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Segment operating profit (loss) before corporate |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of acquired intangible |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income (loss) from operations |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Assets identifiable to segments include: accounts receivable, unbilled accounts receivable, inventory, acquired intangible assets and goodwill. The Company’s property and equipment, including its satellites, earth stations and other networking equipment, are assigned to corporate assets as they are available for use by the various segments throughout their estimated useful lives.
|
|
As of |
|
|
As of |
|
||
|
|
(In thousands) |
|
|||||
Segment assets: |
|
|
|
|
|
|
||
Satellite services |
|
$ |
|
|
$ |
|
||
Commercial networks |
|
|
|
|
|
|
||
Government systems |
|
|
|
|
|
|
||
Total segment assets |
|
|
|
|
|
|
||
Corporate assets |
|
|
|
|
|
|
||
Assets of discontinued operations |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
35
VIASAT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Other acquired intangible assets, net and goodwill included in segment assets as of September 30, 2022 and March 31, 2022 were as follows:
|
|
Other Acquired Intangible |
|
|
Goodwill |
|
||||||||||
|
|
As of |
|
|
As of |
|
|
As of |
|
|
As of |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Satellite services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Commercial networks |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Government systems |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amortization of acquired intangible assets by segment for the three and six months ended September 30, 2022 and 2021 was as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Satellite services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Commercial networks |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Government systems |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total amortization of acquired |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by geographic area for the three and six months ended September 30, 2022 and 2021 were as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
September 30, 2022 |
|
|
September 30, 2022 |
|
||
|
|
(In thousands) |
|
|||||
U.S. customers |
|
$ |
|
|
$ |
|
||
Non-U.S. customers (each country individually insignificant) |
|
|
|
|
|
|
||
Total revenues |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
September 30, 2021 |
|
|
September 30, 2021 |
|
||
|
|
(In thousands) |
|
|||||
U.S. customers |
|
$ |
|
|
$ |
|
||
Non-U.S. customers (each country individually insignificant) |
|
|
|
|
|
|
||
Total revenues |
|
$ |
|
|
$ |
|
||
The Company distinguishes revenues from external customers by geographic area based on customer location.
36
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 the proposed Inmarsat Transaction (as defined below) and any statements regarding the expected timing, benefits, synergies, growth opportunities and other financial and operating benefits thereof, the closing of the Inmarsat Transaction and timing or satisfaction of regulatory and other closing conditions; the proposed Link-16 TDL Sale (as defined below and together with the Inmarsat Transaction, the Transactions) and any statements regarding the expected timing, costs and benefits thereof; our anticipated operations, financial position, liquidity, performance, prospects or growth and scale opportunities following the closing of the Transactions; the impact of the novel coronavirus (COVID-19) pandemic on our business; our expectations regarding an end to the pandemic and a lessening of its effects on our business, including expectations for increased airline passenger traffic and in-flight connectivity (IFC) growth; projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future economic conditions and performance; the development, customer acceptance and anticipated performance of technologies, products or services; satellite construction and launch activities; the performance and anticipated benefits of our ViaSat-3 class satellites and any future satellite we may construct or acquire; the expected completion, capacity, service, coverage, service speeds and other features of our satellites, and the timing, cost, economics and other benefits associated therewith; anticipated subscriber growth; plans, objectives and strategies for future operations; international growth opportunities; the number of additional aircraft under existing contracts with commercial airlines anticipated to be put into service with our IFC systems; 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 materially include: risks and uncertainties related to the Transactions, including the failure to obtain, or delays in obtaining, required regulatory approvals or clearances; the risk that any such approval may result in the imposition of conditions that could adversely affect us or the expected benefits of the Transactions; the failure to satisfy any of the closing conditions to the Transactions on a timely basis or at all; any adverse impact on our business as a result of uncertainty surrounding the Transactions or on the business of Inmarsat as a result of uncertainty surrounding the Inmarsat Transaction; the nature, cost and outcome of any legal proceedings related to either Transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the definitive agreement for either Transaction, including in circumstances requiring Viasat to pay a termination fee with respect to the Inmarsat Transaction; the risk that Viasat’s stock price may decline significantly if either Transaction is not consummated; the failure to obtain the necessary debt financing arrangements set forth in the commitment letters received in connection with the Inmarsat Transaction; risks that either Transaction disrupts current plans and operations or diverts management’s attention from its ongoing business; the effect of the announcement of the either Transaction on our ability to retain and hire key personnel and maintain relationships with our customers, suppliers and others with whom we do business; our ability to successfully integrate Inmarsat operations, technologies and employees; the ability to realize anticipated benefits and synergies of the Inmarsat Transaction and our other acquisitions, including the expectation of enhancements to Viasat’s products and services, greater revenue or growth opportunities, operating efficiencies and cost savings; the ability to ensure continued performance and market growth of our business following the closing of the Transactions; our ability to realize the anticipated benefits of the ViaSat-3 class satellites and any future satellite we may construct or acquire; unexpected expenses related to our satellite projects; our ability to successfully implement our business plan for our broadband services on our anticipated timeline or at all; capacity constraints in our business in the lead-up to the launch of services on our ViaSat-3 satellites; risks associated with the construction, launch and operation of satellites, including the effect of any anomaly, operational failure or degradation in satellite performance; the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees or the overall economy; our ability to successfully develop, introduce and sell new technologies, products and services; audits by the U.S. Government; changes in the 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; 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; introduction of new technologies and other factors affecting the communications and defense industries generally; the effect of adverse regulatory changes (including changes affecting spectrum availability or permitted uses) on our ability to sell or deploy our products and services;
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changes in the way others use spectrum; our inability to access additional spectrum, use spectrum for additional purposes, and/or operate satellites at additional orbital locations; competing uses of the same spectrum or orbital locations that we utilize or seek to utilize; the effect of recent changes to U.S. tax laws; 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 31, 2022, under the heading “Risk Factors” in Part II, Item 1A of this report, elsewhere in this report and our other filings with the Securities and Exchange Commission (the 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 an innovator in communications technologies and services, focused on making connectivity accessible, available and secure for all. Our end-to-end platform of high-capacity Ka-band satellites, ground infrastructure and user terminals enables us to provide cost-effective, high-speed, high-quality broadband solutions to enterprises, consumers, military and government users around the globe, whether on the ground, in the air or at sea. In addition, our government business includes a market-leading portfolio of military tactical data link systems, satellite communication products and services, and cybersecurity and information assurance products and services. We believe that our diversification strategy— anchored in a broad portfolio of products and services—our vertical integration approach and our ability to effectively cross-deploy technologies between government and commercial applications and segments as well as across different geographic markets, provide 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.
Sale of Link-16 TDL Business
On October 1, 2022, we entered into an Asset Purchase Agreement to sell certain assets and assign certain liabilities comprising our Link-16 Tactical Data Links business (the Link-16 TDL Business), part of our government systems segment, to L3Harris Technologies, Inc., in exchange for approximately $1.96 billion in cash (subject to certain adjustments), on and subject to the terms and conditions set forth therein (the Link-16 TDL Sale). In accordance with authoritative guidance for discontinued operations (Accounting Standards Codification (ASC) 205-20), we determined that the Link-16 TDL Business met held-for-sale and discontinued operations accounting criteria at the end of the second quarter of fiscal year 2023. Accordingly, we classified the results of the Link-16 TDL Business as discontinued operations in our condensed consolidated statements of operations for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale and discontinued operations in the condensed consolidated balance sheets for all periods presented. The cash flows related to discontinued operations have not been segregated and are included in the condensed consolidated statements of cash flows. Unless otherwise noted, discussion throughout this Quarterly Report on Form 10-Q relates to continuing operations only and excludes the Link-16 TDL Business. See Note 4 — Discontinued Operations to our condensed consolidated financial statements for additional information.
Inmarsat Acquisition
On November 8, 2021, we entered into a Share Purchase Agreement (the Purchase Agreement) to combine with Connect Topco Limited, a private company limited by shares and incorporated in Guernsey (Inmarsat), with the shareholders of Inmarsat and certain management and employees who hold options and shares of a subsidiary of Inmarsat whose options and shares will be exchanged for shares of Inmarsat prior to closing (collectively, the Sellers). Pursuant to the Purchase Agreement, we will purchase all of the issued and outstanding shares of Inmarsat from the Sellers upon the terms and subject to the conditions set forth therein (the Inmarsat Transaction). The total consideration payable by us under the Purchase Agreement consists of $850.0 million in cash, subject to adjustments (such as the dividend paid by Inmarsat in April 2022, see below), and approximately 46.36 million unregistered shares of our common stock. On April 6, 2022, Inmarsat paid a dividend of $299.3 million to the Sellers, resulting in a $299.3 million reduction in the cash consideration payable by us at the closing of the Inmarsat Transaction. Our board of directors has unanimously approved the Purchase Agreement and the proposed Inmarsat Transaction. Our stockholders approved the issuance of
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shares in the transaction and an amendment to the Company's certificate of incorporation to increase the number of shares of common stock authorized for issuance at a special meeting held on June 21, 2022.
The closing of the Inmarsat Transaction is subject to customary closing conditions, including receipt of regulatory approvals and clearances. The Purchase Agreement contains certain termination rights for both us and certain of the Sellers and further provides that, upon termination of the Purchase Agreement under certain circumstances, we may be obligated to pay a termination fee of up to $200.0 million or to reimburse certain out-of-pocket expenses of certain Sellers up to $40.0 million.
We have obtained financing commitments for an additional $1.6 billion of new debt facilities in connection with the Inmarsat Transaction (which may be secured and/or unsecured). However, we expect that the actual amount of indebtedness incurred under these commitments will be lower in light of the $299.3 million reduction in the cash purchase price payable in the Inmarsat Transaction. We also plan to assume $2.1 billion in principal amount of Inmarsat senior secured bonds and the outstanding indebtedness under Inmarsat’s $2.4 billion senior secured credit facilities.
Other Acquisitions
On April 30, 2021, we completed our acquisition of the remaining 51% interest in Euro Broadband Infrastructure Sàrl (EBI), a satellite broadband internet service provider in Europe, Middle East and Africa (EMEA), from Eutelsat. We paid approximately $167.0 million in cash, net of what is currently estimated to be an immaterial amount of estimated purchase price consideration (net of approximately $121.7 million of EBI's cash on hand, resulting in a cash outlay of approximately $51.0 million).
On April 30, 2021, we completed our acquisition of RigNet, Inc. (RigNet), a leading provider of ultra-secure, intelligent networking solutions and specialized applications. In connection with the acquisition, we issued approximately 4.0 million shares of our common stock to RigNet former shareholders, paid down $107.3 million of outstanding borrowings of RigNet’s revolving credit facility, and retained approximately $20.6 million of RigNet’s cash on hand.
The assets and results of operations of EBI and RigNet are primarily included in our satellite services segment, with insignificant amounts included in our commercial networks segment.
COVID-19
Although our financial results for the three and six months ended September 30, 2022 continued to be impacted by the COVID-19 pandemic, the impact was not material to our financial position, results of operations or cash flows in such periods. We continue to expect our diversified businesses to provide resiliency in fiscal year 2023.
The extent of the impact of the COVID-19 pandemic on our business in the remainder of fiscal year 2023 and beyond will depend on many factors, including the duration and scope of the public health emergency, the extent, duration and effectiveness of containment actions taken, the extent of disruption to important global, regional and local supply chains and economic markets, and the impact of the pandemic on overall supply and demand, global air travel, consumer confidence, discretionary spending levels and levels of economic activity.
Satellite Services
Our satellite services segment uses our proprietary technology platform to provide satellite-based high-speed broadband services around the globe for use in commercial applications. Our proprietary Ka-band satellites are at the core of our technology platform. The primary services offered by our satellite services segment are comprised of:
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The assets and results of operations of our recent acquisitions, EBI and RigNet, are primarily included in our satellite services segment (with insignificant amounts included in our commercial networks segment).
Commercial Networks
Our commercial networks segment develops and sells a wide array of advanced satellite and wireless products, antenna systems and terminal solutions that support or enable the provision of high-speed fixed and mobile broadband services. We design, develop and produce space system solutions for multiple orbital regimes, including geostationary, medium earth orbit and low earth orbit. The primary products, systems, solutions and services offered by our commercial networks segment are comprised of:
Government Systems
Our government systems segment offers a broad array of products and services designed to enable the collection and transmission of secure real-time digital information and communications between fixed and mobile command centers, intelligence and defense platforms and individuals in the field. The primary products and services of our government systems segment include:
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Factors and Trends Affecting our Results of Operations
For a summary of factors and trends affecting our results of operations, see Part II, Item 7, "Factors and Trends Affecting our Results of Operations" in our Annual Report on Form 10-K for the year ended March 31, 2022.
Sources of Revenues
Our satellite services segment revenues are primarily derived from our fixed broadband services, in-flight services and energy services (acquired through the RigNet acquisition).
Revenues in our commercial networks and government systems segments are primarily derived from three types of contracts: fixed-price contracts (which require us to provide products and services under a contract at a specified price), 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 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 in our commercial networks and government systems segments has been derived from customer contracts that include the development of products. The 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. See Note 1 — Basis of Presentation to our condensed consolidated financial statements for additional information.
To date, our ability to grow and maintain our revenues in our commercial networks and government systems segments 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.
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
We apply the five-step revenue recognition model under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly referred to as ASC 606) to our contracts with our customers. Under this model, we (1) identify the contract with the customer, (2) identify our performance obligations in the contract, (3) determine the transaction price for the contract, (4) allocate the transaction price to our performance obligations and (5) recognize revenue when or as we satisfy our performance obligations. These performance obligations generally include the purchase of services (including broadband capacity and the leasing of broadband equipment), the purchase of products, and the development and delivery of complex equipment built to customer specifications under long-term contracts.
The timing of satisfaction of performance obligations may require judgment. We derive a substantial portion of our revenues from contracts with customers for services, primarily consisting of connectivity services. These contracts typically require advance or recurring monthly payments by the customer. Our obligation to provide connectivity services is satisfied over time as the customer simultaneously receives and consumes the benefits provided. The measure of
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progress over time is based upon either a period of time (e.g., over the estimated contractual term) or usage (e.g., bandwidth used/bytes of data processed). We evaluate whether broadband equipment provided to our customer as part of the delivery of connectivity services represents a lease in accordance with the authoritative guidance for leases (ASC 842). As discussed in Note 1 – Basis of Presentation – Leases to our condensed consolidated financial statements, for broadband equipment leased to fixed broadband customers in conjunction with the delivery of connectivity services, we account for the lease and non-lease components of connectivity services arrangement as a single performance obligation as the connectivity services represent the predominant component.
We also derive a portion of our revenues from contracts with customers to provide products. Performance obligations to provide products are satisfied at the point in time when control is transferred to the customer. These contracts typically require payment by the customer upon passage of control and determining the point at which control is transferred may require judgment. To identify the point at which control is transferred to the customer, we consider indicators that include, but are not limited to, whether (1) we have the present right to payment for the asset, (2) the customer has legal title to the asset, (3) physical possession of the asset has been transferred to the customer, (4) the customer has the significant risks and rewards of ownership of the asset, and (5) the customer has accepted the asset. For product revenues, control generally passes to the customer upon delivery of goods to the customer.
The vast majority of our revenues from long-term contracts to develop and deliver complex equipment built to customer specifications are derived from contracts with the U.S. Government (including foreign military sales contracted through the U.S. Government). Our contracts with the U.S. Government typically are subject to the Federal Acquisition Regulation (FAR) and are priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. Government contracts. The pricing for non-U.S. Government contracts is based on the specific negotiations with each customer. Under the typical payment terms of our U.S. Government fixed-price contracts, the customer pays us either performance-based payments (PBPs) or progress payments. PBPs are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments based on a percentage of the costs incurred as the work progresses. Because the customer can often retain a portion of the contract price until completion of the contract, our U.S. Government fixed-price contracts generally result in revenue recognized in excess of billings which we present as unbilled accounts receivable on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For our U.S. Government cost-type contracts, the customer generally pays us for our actual costs incurred within a short period of time. For non-U.S. Government contracts, we typically receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. We recognize a liability for these advance payments in excess of revenue recognized and present it as collections in excess of revenues and deferred revenues on the balance sheet. An advance payment is not typically considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.
Performance obligations related to developing and delivering complex equipment built to customer specifications under long-term contracts are recognized over time as these performance obligations do not create assets with an alternative use to us and we have an enforceable right to payment for performance to date. To measure the transfer of control, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because that best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Estimating the total costs at completion of a performance obligation requires management to make estimates related to items such as subcontractor performance, material costs and availability, labor costs and productivity and the costs of overhead. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recognized in the period the loss is determined. A one percent variance in our future cost estimates on open fixed-price contracts as of September 30, 2022 would change our income (loss) before income taxes by an insignificant amount.
The evaluation of transaction price, including the amounts allocated to performance obligations, may require significant judgments. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue, and where applicable the cost at completion, is complex, subject to many variables and requires significant judgment. Our contracts may contain award fees, incentive fees, or other provisions, including the potential for significant financing components, that can either increase or decrease the transaction price. These amounts,
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which are sometimes variable, can be dictated by performance metrics, program milestones or cost targets, the timing of payments, and customer discretion. We estimate variable consideration at the amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. In the event an agreement includes embedded financing components, we recognize interest expense or interest income on the embedded financing components using the effective interest method. This methodology uses an implied interest rate which reflects the incremental borrowing rate which would be expected to be obtained in a separate financing transaction. We have elected the practical expedient not to adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
If a contract is separated into more than one performance obligation, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Estimating standalone selling prices may require judgment. When available, we utilize the observable price of a good or service when we sell that good or service separately in similar circumstances and to similar customers. If a standalone selling price is not directly observable, we estimate the standalone selling price by considering all information (including market conditions, specific factors, and information about the customer or class of customer) that is reasonably available.
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 12 months are classified as accrued liabilities and amounts expected to be incurred beyond 12 months are classified as other liabilities in the condensed consolidated financial statements. 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
Property, equipment and satellites, net includes our owned and leased satellites and the associated earth stations and networking equipment, as well as the customer premise equipment units which are leased to subscribers under a retail leasing program as part of our satellite services segment.
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 incentive payments 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 earth stations, 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 periodically review the remaining estimated useful life of our satellites to determine if revisions to the estimated useful lives are necessary.
Leases
In accordance with ASC 842, we assess at contract inception whether the contract is, or contains, a lease. Generally, we determine that a lease exists when (1) the contract involves the use of a distinct identified asset, (2) we obtain the right to substantially all economic benefits from use of the asset, and (3) we have the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset, (4) the
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present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (5) the asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria.
At the lease commencement date, we recognize a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying leases.
Lease payments included in the measurement of lease liabilities consist of (1) fixed lease payments for the noncancelable lease term, (2) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (3) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require variable lease payments that do not depend on an underlying index or rate established at lease commencement. Such payments and changes in payments based on a rate or index are recognized in operating expenses when incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the depreciation of assets obtained under finance leases on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense.
For broadband equipment leased to fixed broadband customers in conjunction with the delivery of connectivity services, we have made an accounting policy election not to separate the broadband equipment from the related connectivity services. The connectivity services are the predominant component of these arrangements. The connectivity services are accounted for in accordance ASC 606. We are also a lessor for certain insignificant communications equipment. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
Business combinations
The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, and assumed liabilities, where applicable. Additionally, we recognize technology, contracts and customer relationships, satellite co-location rights, trade names and other as identifiable intangible assets, which are recorded at fair value as of the transaction date. Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities. Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date. Contingent consideration is recorded at fair value at the acquisition date.
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 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 30, 2022 and 2021.
We account for our goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and the provisions of ASU 2017-04, Simplifying the Test for Goodwill Impairment, which we early adopted in fiscal year 2020. Current authoritative guidance allows us to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If, after completing the qualitative assessment, we determine that it is more likely than not that the estimated fair value is greater than the carrying value, we conclude that no impairment exists. Alternatively, if we determine in the qualitative assessment that it is more likely than not that the fair value is less than its carrying value, then we perform a quantitative goodwill impairment test to identify both the existence of an impairment and
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the amount of impairment loss, by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit is less than the carrying value, then a goodwill impairment charge will be recognized in the amount by which the carrying amount exceeds the fair value, limited to the total amount of goodwill allocated to that reporting unit. 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.
In accordance with ASC 350, we assess qualitative factors to determine whether goodwill is impaired. The qualitative analysis includes assessing the impact of changes in certain factors including: (1) changes in forecasted operating results and comparing actual results to projections, (2) changes in the industry or our competitive environment since the acquisition date, (3) changes in the overall economy, our market share and market interest rates since the acquisition date, (4) trends in the stock price and related market capitalization and enterprise values, (5) trends in peer companies’ total enterprise value metrics, and (6) additional factors such as management turnover, changes in regulation and changes in litigation matters.
Based on our qualitative assessment performed during the fourth quarter of fiscal year 2022, we concluded that it was more likely than not that the estimated fair value of our reporting units exceeded their carrying value as of March 31, 2022, and therefore, determined it was not necessary to perform a quantitative goodwill impairment test.
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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 to determine if the weight of available evidence suggests that an additional valuation allowance is needed. 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. In the event that our estimate of taxable income is less than that required to utilize the full amount of any deferred tax asset, a valuation allowance is established, which would cause a decrease to income in the period such determination is made. Our valuation allowance against deferred tax assets increased from $78.1 million at March 31, 2022 to $143.6 million at September 30, 2022. The valuation allowance relates to state and foreign net operating loss carryforwards, state R&D tax credit carryforwards and foreign tax credit carryforwards.
Our analysis of the need for a valuation allowance on deferred tax assets considered historical as well as forecasted future operating results. In addition, our evaluation considered other factors, including our contractual backlog, our history of positive earnings, current earnings trends assuming our satellite services segment continues to grow, taxable income adjusted for certain items, and forecasted income by jurisdiction. We also considered the period over which these net deferred tax assets can be realized and our history of not having federal tax loss carryforwards expire unused.
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 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.
46
Results of Operations
The following table presents, as a percentage of total revenues, income statement data of our continuing operations for the periods indicated:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
Revenues: |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Product revenues |
|
|
39 |
|
|
|
36 |
|
|
|
35 |
|
|
|
36 |
|
Service revenues |
|
|
61 |
|
|
|
64 |
|
|
|
65 |
|
|
|
64 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of product revenues |
|
|
26 |
|
|
|
30 |
|
|
|
26 |
|
|
|
29 |
|
Cost of service revenues |
|
|
41 |
|
|
|
41 |
|
|
|
44 |
|
|
|
41 |
|
Selling, general and administrative |
|
|
27 |
|
|
|
25 |
|
|
|
28 |
|
|
|
26 |
|
Independent research and development |
|
|
5 |
|
|
|
7 |
|
|
|
5 |
|
|
|
6 |
|
Amortization of acquired intangible assets |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Income (loss) from continuing operations |
|
|
— |
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
Interest (expense) income, net |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Income (loss) from continuing operations before income taxes |
|
|
1 |
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
(Provision for) benefit from income taxes from continuing operations |
|
|
(12 |
) |
|
|
1 |
|
|
|
(4 |
) |
|
|
2 |
|
Net income (loss) from continuing operations |
|
|
(11 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(2 |
) |
Net income (loss) from discontinued operations, net of tax |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Net income (loss) attributable to Viasat, Inc. |
|
|
(7 |
) |
|
|
1 |
|
|
|
(6 |
) |
|
|
2 |
|
Three Months Ended September 30, 2022 vs. Three Months Ended September 30, 2021
Revenues
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Product revenues |
|
$ |
254.9 |
|
|
$ |
221.1 |
|
|
$ |
33.8 |
|
|
|
15 |
% |
Service revenues |
|
|
401.8 |
|
|
|
388.1 |
|
|
|
13.7 |
|
|
|
4 |
% |
Total revenues |
|
$ |
656.7 |
|
|
$ |
609.2 |
|
|
$ |
47.5 |
|
|
|
8 |
% |
Our total revenues increased by $47.5 million as a result of a $33.8 million increase in product revenues and a $13.7 million increase in service revenues. The product revenue increase was driven primarily by a $40.9 million increase in our commercial networks segment, primarily the result of the Cisco Systems, Inc. (Cisco) settlement. Cisco, which previously acquired Acacia Communications, Inc. (Acacia), paid us $62.2 million during the three months ended September 30, 2022 in order to fully satisfy the July 2019 judgment previously entered against Acacia (the Cisco Settlement), of which we recorded $55.8 million as product revenue in our commercial networks segment (see Note 1 — Basis of Presentation to our condensed consolidated financial statements for more information), partially offset by a $7.1 million decrease in our government systems segment. The service revenue increase was primarily driven by increases of $9.0 million in our government systems segment and $4.3 million in our commercial networks segment.
Cost of revenues
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Cost of product revenues |
|
$ |
171.1 |
|
|
$ |
183.9 |
|
|
$ |
(12.8 |
) |
|
|
(7 |
)% |
Cost of service revenues |
|
|
267.4 |
|
|
|
249.9 |
|
|
|
17.5 |
|
|
|
7 |
% |
Total cost of revenues |
|
$ |
438.6 |
|
|
$ |
433.8 |
|
|
$ |
4.7 |
|
|
|
1 |
% |
Cost of revenues increased $4.7 million due to an increase of $17.5 million in cost of service revenues, partially offset by a $12.8 million decrease in cost of product revenues. The cost of service revenue increase was primarily due to increased service revenues, mainly from our government systems segment, causing an $8.8 million increase in cost of
47
service revenues on a constant margin basis. The increase in cost of service revenues was further driven by lower margins, primarily from our satellite services segment. The decrease in cost of product revenues was mainly driven by higher margins from our commercial networks segment, primarily the result of the Cisco Settlement described above.
Selling, general and administrative expenses
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Selling, general and administrative |
|
$ |
177.2 |
|
|
$ |
152.7 |
|
|
$ |
24.5 |
|
|
|
16 |
% |
The $24.5 million increase in selling, general and administrative (SG&A) expenses reflected an increase in support costs of $23.4 million, driven primarily by acquisition related expenses of approximately $9.5 million (mainly related to the Inmarsat Transaction). SG&A expenses consisted primarily of personnel costs and expenses for business development, marketing and sales, bid and proposal, acquisition and transaction related expenses, facilities, finance, contract administration and general management.
Independent research and development
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Independent research and development |
|
$ |
32.4 |
|
|
$ |
39.6 |
|
|
$ |
(7.2 |
) |
|
|
(18 |
)% |
The $7.2 million decrease in independent research and development (IR&D) expenses was primarily the result of a $5.8 million decrease in our commercial networks segment (primarily related to next-generation satellite payload technologies).
Amortization of acquired intangible assets
We amortize our acquired intangible assets from prior acquisitions over their estimated useful lives, which range from two to 20 years. The amortization of acquired intangible assets in the second quarter of fiscal year 2023 was relatively flat compared to the prior year period.
Interest income
The $6.7 million increase in interest income for the three months ended September 30, 2022 compared to the prior year period was primarily the result of the Cisco Settlement, described above, of which we recorded $6.4 million as interest income. Please refer to Note 1 — Basis of Presentation to our condensed consolidated financial statements for more information.
Interest expense
The $1.5 million decrease in interest expense for the three months ended September 30, 2022 compared to the prior year period was primarily the result of an increase in the amount of interest capitalized during the second quarter of fiscal year 2023 compared to the prior year period, partially offset by an increase in interest expense related to our senior secured term loan facility (the Term Loan Facility), which was entered into during the fourth quarter of fiscal year 2022.
48
Income taxes
For the three months ended September 30, 2022, we recorded an income tax provision of $76.1 million, resulting in an effective tax rate of 2,236%. The effective tax rate for the period differed from the U.S statutory rate due primarily to the establishment of a valuation allowance on the deferred tax asset for California R&D tax credits that was partially offset by the benefit of federal R&D tax credits. For the three months ended September 30, 2021, we recorded an income tax benefit of $9.1 million, resulting in an effective tax rate of 30%. The effective tax rates for such periods differed from the U.S. statutory rate primarily due to the benefit of federal R&D tax credits.
Segment Results for the Three Months Ended September 30, 2022 vs. Three Months Ended September 30, 2021
Satellite services segment
Revenues
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment product revenues |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
% |
Segment service revenues |
|
|
300.5 |
|
|
|
300.1 |
|
|
|
0.4 |
|
|
|
— |
% |
Total segment revenues |
|
$ |
300.5 |
|
|
$ |
300.1 |
|
|
$ |
0.4 |
|
|
|
— |
% |
The slight increase in our satellite services segment revenues for the three months ended September 30, 2022 compared to the prior year period was primarily due to an increase in our in-flight services business, largely offset by a decline in U.S. fixed broadband revenue due to fewer residential subscribers as we manage our bandwidth capacity in support of our growing mobility services ahead of the ViaSat-3 launch. Our in-flight services business service revenue increased as the number of commercial aircraft receiving our in-flight services through our IFC systems increased, passenger air traffic continued to increase and aircraft that were previously inactive as a result of the COVID-19 pandemic continued to return to service.
Segment operating profit (loss)
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment operating profit (loss) |
|
$ |
(6.1 |
) |
|
$ |
14.3 |
|
|
$ |
(20.4 |
) |
|
|
(142 |
)% |
Percentage of segment revenues |
|
|
(2 |
)% |
|
|
5 |
% |
|
|
|
|
|
|
||
The change in our satellite services segment operating profit to an operating loss was driven primarily by lower earnings contributions of $10.9 million due to lower contribution from our fixed broadband services business, higher SG&A costs of $9.6 million mainly attributable to acquisition expenses related to the Inmarsat Transaction, growing expenses associated with activating more of the ViaSat-3 ground network and international activities, and increased expenses as a result of supply chain shortages.
Commercial networks segment
Revenues
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment product revenues |
|
$ |
159.8 |
|
|
$ |
118.9 |
|
|
$ |
40.9 |
|
|
|
34 |
% |
Segment service revenues |
|
|
20.2 |
|
|
|
15.9 |
|
|
|
4.3 |
|
|
|
27 |
% |
Total segment revenues |
|
$ |
180.0 |
|
|
$ |
134.8 |
|
|
$ |
45.2 |
|
|
|
34 |
% |
49
Our commercial networks segment revenues increased by $45.2 million, due to a $40.9 million increase in product revenues and a $4.3 million increase in service revenues. The increase in product revenues was primarily the result of the Cisco Settlement described above, of which we recorded $55.8 million as product revenue in our commercial networks segment (see Note 1 — Basis of Presentation to our condensed consolidated financial statements for more information), partially offset by a decrease of $14.3 million in mobile broadband satellite communication systems products, related to lower IFC terminal shipments resulting mainly from delayed aircraft deliveries to our commercial airline customers. The increase in service revenues was primarily driven by an increase in mobile broadband satellite communication systems services.
Segment operating profit (loss)
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
(Increase) |
|
|
(Increase) |
|
||||
Segment operating profit (loss) |
|
$ |
(0.8 |
) |
|
$ |
(52.0 |
) |
|
$ |
51.2 |
|
|
|
98 |
% |
Percentage of segment revenues |
|
|
— |
% |
|
|
(39 |
)% |
|
|
|
|
|
|
||
The decrease in our commercial networks segment operating loss was primarily driven by higher earnings contributions of $53.6 million, due to an increase in revenues, as discussed above. Additionally, the decrease in our commercial networks segment operating loss was further driven by a decrease of $5.8 million in IR&D expenses (primarily related to next-generation satellite payload technologies). The decrease in commercial networks segment operating loss was partially offset by higher SG&A costs of $8.3 million, which includes legal and other expenses related to the Cisco Settlement, described above.
Government systems segment
Revenues
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment product revenues |
|
$ |
95.0 |
|
|
$ |
102.1 |
|
|
$ |
(7.1 |
) |
|
|
(7 |
)% |
Segment service revenues |
|
|
81.1 |
|
|
|
72.1 |
|
|
|
9.0 |
|
|
|
12 |
% |
Total segment revenues |
|
$ |
176.1 |
|
|
$ |
174.2 |
|
|
$ |
1.9 |
|
|
|
1 |
% |
Our government systems segment revenues increased by $1.9 million due to a $9.0 million increase in service revenues, partially offset by a $7.1 million decrease in product revenues. The service revenue increase was primarily due to a $9.2 million increase in government satellite communication systems services. The decrease in product revenues was mainly due to a $7.4 million decrease in government satellite communication systems, and a $2.6 million decrease in tactical satcom radio products, partially offset by a $3.5 million increase in cybersecurity and information assurance products. Our government systems segment continued to show some impacts from the COVID-19 pandemic, due to continuing certification delays and supply chain component shortages, but government systems segment awards remained strong through the end of the second quarter of fiscal year 2023. As noted above, all government systems segment results reported herein exclude the Link-16 TDL Business, which are reported as discontinued operations in our condensed consolidated statements of operations for all periods presented.
Segment operating profit (loss)
|
|
Three Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment operating profit (loss) |
|
$ |
15.4 |
|
|
$ |
20.7 |
|
|
$ |
(5.3 |
) |
|
|
(26 |
)% |
Percentage of segment revenues |
|
|
9 |
% |
|
|
12 |
% |
|
|
|
|
|
|
||
The $5.3 million decrease in our government systems segment operating profit was primarily driven by a $6.7 million increase in SG&A costs (primarily related to acquisition expenses related to the Inmarsat Transaction). The decrease in operating profit was partially offset by lower IR&D expenses of $1.3 million.
50
Six Months Ended September 30, 2022 vs. Six Months Ended September 30, 2021
Revenues
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Product revenues |
|
$ |
424.1 |
|
|
$ |
426.7 |
|
|
$ |
(2.6 |
) |
|
|
(1 |
)% |
Service revenues |
|
|
804.0 |
|
|
|
753.2 |
|
|
|
50.8 |
|
|
|
7 |
% |
Total revenues |
|
$ |
1,228.1 |
|
|
$ |
1,179.9 |
|
|
$ |
48.2 |
|
|
|
4 |
% |
Our total revenues grew by $48.2 million as a result of a $50.8 million increase in service revenues, partially offset by a $2.6 million decrease in product revenues. The service revenue increase was due to increases of $38.4 million in our satellite services segment, $6.5 million in our commercial networks segment, and $5.9 million in our government systems segment. The decrease in product revenues was driven primarily by a $35.5 million decrease in our government systems segment, partially offset by a $32.9 million increase in our commercial networks segment, primarily the result of the Cisco Settlement described above, of which we recorded $55.8 million as product revenue in our commercial networks segment (see Note 1 — Basis of Presentation to our condensed consolidated financial statements for more information).
Cost of revenues
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Cost of product revenues |
|
$ |
318.6 |
|
|
$ |
347.9 |
|
|
$ |
(29.3 |
) |
|
|
(8 |
)% |
Cost of service revenues |
|
|
536.0 |
|
|
|
480.8 |
|
|
|
55.2 |
|
|
|
11 |
% |
Total cost of revenues |
|
$ |
854.6 |
|
|
$ |
828.7 |
|
|
$ |
25.9 |
|
|
|
3 |
% |
Cost of revenues increased by $25.9 million due to an increase of $55.2 million in cost of service revenues, partially offset by a $29.3 million decrease in cost of product revenues. The cost of service revenue increase was primarily due to increased service revenues, mainly from our satellite services segment, causing a $32.4 million increase in cost of service revenues on a constant margin basis. The increase in cost of service revenues was also driven by lower margins, also from our satellite services segment. The decrease in cost of product revenues was mostly driven by higher margins, primarily from our commercial networks segment, primarily the result of the Cisco Settlement described above.
Selling, general and administrative expenses
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Selling, general and administrative |
|
$ |
348.8 |
|
|
$ |
303.4 |
|
|
$ |
45.4 |
|
|
|
15 |
% |
The $45.4 million increase in SG&A expenses reflected an increase in support costs of $37.4 million, driven primarily by acquisition-related expenses of $15.6 million (mainly related to the Inmarsat Transaction). The increase in SG&A expenses was also driven by higher selling costs of $5.3 million, reflected primarily in our commercial networks and satellite services segments, and higher bid and proposal costs of $2.7 million. SG&A expenses consisted primarily of personnel costs and expenses for business development, marketing and sales, bid and proposal, acquisition and transaction related expenses, facilities, finance, contract administration and general management.
Independent research and development
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Independent research and development |
|
$ |
67.2 |
|
|
$ |
73.2 |
|
|
$ |
(6.0 |
) |
|
|
(8 |
)% |
The $6.0 million decrease in IR&D expenses was mainly the result of a decrease of $6.2 million in IR&D efforts in our commercial networks segment (primarily related to next-generation satellite payload technologies).
51
Amortization of acquired intangible assets
We amortize our acquired intangible assets from prior acquisitions over their estimated useful lives, which range from two to 20 years. The $1.6 million increase in amortization of acquired intangible assets in the first six months of fiscal year 2023 compared to the prior year period was primarily related to the amortization of new intangibles acquired as a result of recent acquisitions.
Interest income
The $6.8 million increase in interest income for the six months ended September 30, 2022 compared to the prior year period was primarily the result of the Cisco Settlement described above, of which we recorded $6.4 million as interest income. Please refer to Note 1 — Basis of Presentation to our condensed consolidated financial statements for more information.
Interest expense
The $1.9 million decrease in interest expense in the six months ended September 30, 2022 compared to the prior year period was primarily due to an increase in the amount of interest capitalized during the first six months of fiscal year 2023 compared to the prior year period, partially offset by an increase in interest expense related to our Term Loan Facility, which was entered into during the fourth quarter of fiscal year 2022.
Income taxes
For the six months ended September 30, 2022, we recorded an income tax provision of $52.5 million, resulting in an effective tax rate of negative 88%. The effective tax rate for the period differed from the U.S. statutory rate due primarily to the establishment of a valuation allowance on the deferred tax asset for California R&D tax credits that was partially offset by the benefit of federal R&D tax credits. For the six months ended September 30, 2021, we recorded an income tax benefit of $19.5 million, resulting in an effective tax rate of 42%. The effective tax rate for the period differed from the U.S. statutory rate due primarily to the benefit of federal R&D tax credits and the reversal of a deferred tax liability recorded for EBI's outside basis difference upon assertion made during the first quarter of fiscal year 2022 to indefinitely reinvest future earnings.
Segment Results for the Six Months Ended September 30, 2022 vs. Six Months Ended September 30, 2021
Satellite services segment
Revenues
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment product revenues |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
% |
Segment service revenues |
|
|
612.6 |
|
|
|
574.2 |
|
|
|
38.4 |
|
|
|
7 |
% |
Total segment revenues |
|
$ |
612.6 |
|
|
$ |
574.2 |
|
|
$ |
38.4 |
|
|
|
7 |
% |
Our satellite services segment revenues increased by $38.4 million for the six months ended September 30, 2022 compared to the prior year period due to an increase in service revenues. The increase in service revenues was primarily attributable to an increase in our in-flight services business. The increase in in-flight service revenue was driven primarily by an increase in the number of commercial aircraft receiving our in-flight services through our IFC systems, an increase in passenger air traffic and the continued return to service of aircraft that were previously inactive as a result of the COVID-19 pandemic.
Segment operating profit (loss)
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment operating profit (loss) |
|
$ |
(4.7 |
) |
|
$ |
24.3 |
|
|
$ |
(29.0 |
) |
|
|
(119 |
)% |
Percentage of segment revenues |
|
|
(1 |
)% |
|
|
4 |
% |
|
|
|
|
|
|
||
52
The change in our satellite services segment operating profit to an operating loss was primarily driven by higher SG&A costs of $21.6 million (mainly attributable to acquisition expenses related to the Inmarsat Transaction) as well as growing expenses associated with activating more of the ViaSat-3 ground network and international activities, as well as increased expenses as a result of supply chain shortages. The increase in our satellite services segment operating loss was further driven by lower earnings contributions of $7.0 million from our fixed broadband services business.
Commercial networks segment
Revenues
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment product revenues |
|
$ |
253.4 |
|
|
$ |
220.5 |
|
|
$ |
32.9 |
|
|
|
15 |
% |
Segment service revenues |
|
|
39.4 |
|
|
|
32.9 |
|
|
|
6.5 |
|
|
|
20 |
% |
Total segment revenues |
|
$ |
292.8 |
|
|
$ |
253.4 |
|
|
$ |
39.4 |
|
|
|
16 |
% |
Our commercial networks segment revenues increased by $39.4 million, due to a $32.9 million increase in product revenues and a $6.5 million increase in service revenues. The increase in product revenues was primarily the result of the Cisco Settlement described above, of which we recorded $55.8 million as product revenue in our commercial networks segment. Please refer to Note 1 — Basis of Presentation to our condensed consolidated financial statements for more information. The increase in product revenues was partially offset by a decrease of $24.4 million in mobile broadband satellite communication systems products due to lower IFC terminal shipments resulting mainly from delayed aircraft deliveries to our commercial airline customers. The increase in service revenues was primarily driven by an increase in mobile broadband satellite communication systems services.
Segment operating profit (loss)
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
(Increase) |
|
|
(Increase) |
|
||||
Segment operating profit (loss) |
|
$ |
(50.2 |
) |
|
$ |
(96.1 |
) |
|
$ |
45.9 |
|
|
|
48 |
% |
Percentage of segment revenues |
|
|
(17 |
)% |
|
|
(38 |
)% |
|
|
|
|
|
|
||
The $45.9 million reduction in our commercial networks operating loss was driven primarily by higher earnings contributions of $49.5 million, primarily due to higher revenues as described above. The reduction in operating loss was also due to a $6.2 million decrease in IR&D expenses (primarily related to next-generation satellite payload technologies). The decrease in operating loss was partially offset by higher SG&A costs of $9.7 million, which includes legal and other expenses related to the Cisco Settlement described above.
Government systems segment
Revenues
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment product revenues |
|
$ |
170.7 |
|
|
$ |
206.2 |
|
|
$ |
(35.5 |
) |
|
|
(17 |
)% |
Segment service revenues |
|
|
152.0 |
|
|
|
146.1 |
|
|
|
5.9 |
|
|
|
4 |
% |
Total segment revenues |
|
$ |
322.7 |
|
|
$ |
352.3 |
|
|
$ |
(29.6 |
) |
|
|
(8 |
)% |
53
Our government systems segment revenues decreased by $29.6 million due to a $35.5 million decrease in product revenues, partially offset by a $5.9 million increase in service revenues. The product revenue decrease was primarily driven by a $16.5 million decrease in government satellite communication systems products, a $10.9 million decrease in government mobile broadband products, and a $3.7 million decrease in tactical satcom radio products. Our government systems segment continued to show some impacts from the COVID-19 pandemic, due to continuing certification delays and supply chain component shortages, but government systems segment awards remained strong in the first six months of the fiscal year. The service revenue increase was primarily due to an $11.8 million increase in government satellite communication systems services, partially offset by a $5.6 million decrease in government mobile broadband services. As noted above, all government systems segment results reported herein exclude the Link-16 TDL Business, which are reported as discontinued operations in our condensed consolidated statements of operations for all periods presented.
Segment operating profit (loss)
|
|
Six Months Ended |
|
|
Dollar |
|
|
Percentage |
|
|||||||
(In millions, except percentages) |
|
September 30, |
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
||||
Segment operating profit (loss) |
|
$ |
12.4 |
|
|
$ |
46.5 |
|
|
$ |
(34.1 |
) |
|
|
(73 |
)% |
Percentage of segment revenues |
|
|
4 |
% |
|
|
13 |
% |
|
|
|
|
|
|
||
The $34.1 million decrease in our government systems segment operating profit was driven by lower earnings contributions of $20.2 million, primarily due to a decrease in revenue from our government mobile broadband business. The decrease in operating profit was also driven by a $14.1 million increase in SG&A costs (primarily related to acquisition expenses related to the Inmarsat Transaction).
Backlog
As reflected in the table below, our overall firm and funded backlog (including discontinued operations) increased during the first six months of fiscal year 2023.
|
|
As of |
|
|
As of |
|
||
|
|
(In millions) |
|
|||||
Firm backlog (including discontinued operations) |
|
|
|
|
|
|
||
Satellite services segment |
|
$ |
466.4 |
|
|
$ |
554.5 |
|
Commercial networks segment |
|
|
715.5 |
|
|
|
632.2 |
|
Government systems segment |
|
|
1,188.4 |
|
|
|
846.0 |
|
Total |
|
$ |
2,370.3 |
|
|
$ |
2,032.7 |
|
Funded backlog (including discontinued operations) |
|
|
|
|
|
|
||
Satellite services segment |
|
$ |
466.4 |
|
|
$ |
554.5 |
|
Commercial networks segment |
|
|
643.0 |
|
|
|
583.1 |
|
Government systems segment |
|
|
1,089.8 |
|
|
|
803.4 |
|
Total |
|
$ |
2,199.2 |
|
|
$ |
1,941.0 |
|
The firm backlog does not include contract options. As of September 30, 2022, of the $2.4 billion in firm backlog (including approximately $599.7 million attributable to discontinued operations), a little over half is expected to be delivered during the next 12 months, with the balance delivered thereafter. We include in our backlog only those orders for which we have accepted purchase orders, and not anticipated purchase orders and requests. In our satellite services segment, our backlog includes fixed broadband service revenues under our subscriber agreements, but does not include future recurring IFC service revenues under our agreements with commercial airlines. As of September 30, 2022, our IFC systems were installed and in service on approximately 1,970 commercial aircraft, of which, due to impacts of the COVID-19 pandemic, approximately 20 were inactive at quarter end. While domestic airline traffic continued to increase during fiscal year 2023 (with increased planes in service and higher passenger volumes), global airline traffic has not yet recovered to pre-pandemic levels. We expect to continue to see some negative impacts on revenues and operating cash flows from our IFC businesses in fiscal year 2023 and potentially beyond but for the effects to continue to lessen over time with increases in passenger air traffic and the return to service of additional currently inactive aircraft. We anticipate that approximately 1,270 additional commercial aircraft under existing customer agreements with commercial airlines will be put into service with our IFC systems. However, the timing of installation and entry into service of IFC systems on additional aircraft under existing customer agreements may be delayed as a result of the impact of the COVID-19
54
pandemic on the global airline industry. Accordingly, there can be no assurance that all anticipated purchase orders and requests will be placed or that anticipated IFC services will be activated.
Our total new awards (including discontinued operations, but excluding future revenue under recurring consumer commitment arrangements) were approximately $1.1 billion and $1.9 billion for the three and six months ended September 30, 2022, respectively, compared to approximately $831.7 million and $1.4 billion for the three and six months ended September 30, 2021, 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 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 funding has 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, export credit agency financing and equity financing. In addition, we expect a portion of the net cash proceeds from the Link-16 TDL Sale to be used to finance our continuing operations and reduce debt, whether existing or committed as part of the Inmarsat Transaction. At September 30, 2022, we had $149.2 million in cash and cash equivalents, $343.5 million in working capital, and $210.0 million in principal amount of outstanding borrowings and borrowing availability of $429.2 million under our Revolving Credit Facility. At March 31, 2022, we had $310.5 million in cash and cash equivalents, $389.1 million in working capital, and no outstanding borrowings and borrowing availability of $637.0 million under our Revolving Credit Facility. We invest our cash in excess of current operating requirements in short-term, highly liquid bank money market accounts.
We have obtained financing commitments for an additional $1.6 billion of new debt facilities in connection with the Inmarsat Transaction (which may be secured and/or unsecured). However, we expect that the actual amount of indebtedness incurred under these commitments will be lower in light of the $299.3 million reduction in the cash purchase price payable in the Inmarsat Transaction. We also plan to assume $2.1 billion in principal amount of Inmarsat senior secured bonds and the outstanding indebtedness under Inmarsat’s $2.4 billion senior secured credit facilities.
The general cash needs of our satellite services, commercial networks and government systems segments can vary significantly and our future capital requirements will depend upon many factors, including the timing and amount of cash required to consummate the Inmarsat Transaction (including the cash portion of the purchase price, transaction-related costs and integration-related costs, see the discussion above under "Inmarsat Acquisition"), the timing and amount of net cash proceeds received from the Link-16 TDL Sale (see discussion above under "Sale of Link-16 TDL Business"), cash required for our satellite projects and any future broadband satellite projects we may engage in, expansion of our IR&D and marketing efforts, and the nature and timing of orders. In particular:
55
Additionally, we will continue to evaluate other possible acquisitions of, or investments in complementary businesses, products and technologies which may require the use of cash or additional financing. Although a significant portion of transaction-related costs relating to the Inmarsat Transaction is contingent upon the closing of the Inmarsat Transaction occurring, some have been and will be incurred regardless of whether the Inmarsat Transaction is consummated.
To further enhance our liquidity position or to finance the construction and launch of any future satellites, acquisitions, strategic partnering arrangements, joint ventures or other business investment initiatives, we may obtain additional financing, which could consist of debt, convertible debt or equity financing from public and/or private credit and capital markets. From time to time, we file universal shelf registration statements with the SEC for the future sale of an unlimited amount of common stock, preferred stock, debt securities, depositary shares, warrants and rights, which 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.
Although we can give no assurances concerning our future liquidity, we believe that we have adequate sources of funding to meet our anticipated operating requirements for the next 12 months, as well as to fund the consummation of the Inmarsat Transaction, which include, but are not limited to, cash on hand, borrowing capacity, cash expected to be provided by operating activities, expected net proceeds of the Link-16 TDL Sale, and financing commitments obtained in connection with the Inmarsat Transaction.
Cash flows
Cash provided by operating activities for the first six months of fiscal year 2023 was $228.1 million compared to $227.8 million in the prior year period. This insignificant increase was primarily driven by a $6.0 million year-over-year decrease in cash used to fund net operating assets, largely offset by our operating results (net income (loss) adjusted for depreciation, amortization and other non-cash charges) which resulted in $5.7 million of lower cash provided by operating activities year-over-year. The decrease in cash used to fund net operating assets during the first six months of fiscal year 2023 when compared to the prior year period was primarily due to an increase in cash inflows year-over-year from our collections in excess of revenues and deferred revenues included in accrued liabilities primarily due to the timing of milestone billings for certain larger development projects in our commercial networks segment, partially offset by a higher increase in cash used for IFC terminal inventory in our commercial networks segment in expectation of related revenue ramp up over the remainder of fiscal year 2023 for both existing and new commercial airline customers.
Cash used in investing activities for the first six months of fiscal year 2023 was $554.8 million compared to $613.6 million in the prior year period. This $58.8 million decrease in cash used in investing activities year-over-year reflects $138.7 million in cash used for the RigNet and EBI acquisitions in the first quarter of fiscal year 2022, partially offset by an increase of $59.7 million in capital expenditures used for property and other general purpose equipment year-over-year. Cash used in investing activities related to our discontinued operations was slightly higher year-over-year related to an insignificant increase in capital expenditures used for property and other general purpose equipment.
Cash provided by financing activities for the first six months of fiscal year 2023 was $168.4 million compared to $310.3 million for the prior year period. This $141.9 million decrease in cash provided by financing activities year-over-year was mainly due to an increase in payments of debt borrowings of $67.1 million year-over-year, a decrease in proceeds from debt borrowings of $45.0 million year-over-year and a payment of $30.0 million by our majority-owned subsidiary, TrellisWare Technologies, Inc., to repurchase shares of its common stock from its stockholders (see Note 1 — Basis of Presentation – Noncontrolling interest to our condensed consolidated financial statements for further information).
Satellite-related activities
We expect to continue to invest in IR&D as we continue our focus on leadership and innovation in satellite and space technologies, including for the development of any new generation satellite designs and next-generation satellite network solutions. The level of our investment in a given fiscal year will depend on a variety of factors, including the stage of development of our satellite projects, new market opportunities and our overall operating performance.
As we continue to build and expand our global network and satellite fleet, from time to time we enter into satellite construction agreements for the construction and purchase of additional satellites and (depending on the satellite design)
56
the integration of our payload and technologies into the satellites. See Note 12 — Commitments to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022 for information regarding our future minimum payments under our satellite construction contracts and other satellite-related purchase commitments (including satellite performance incentive obligations relating to the ViaSat-1 and ViaSat-2 satellites) for the next five fiscal years and thereafter. The total project cost to bring a new satellite into service will depend, among other things, on the scope and timing of the earth station infrastructure roll-out and the method used to procure fiber or other access to the earth station infrastructure. Our total cash funding of a satellite project may be reduced through third-party agreements, such as potential joint service offerings and other strategic partnering arrangements.
In connection with the launch of any new satellite and the commencement of commercial service on the satellite, we expect to incur additional operating costs that negatively impact our financial results. For example, when ViaSat-2 was placed in service in the fourth quarter of fiscal year 2018, this resulted in additional operating costs in our satellite services segment during the ramp-up period prior to service launch and in the fiscal year following service launch. These increased operating costs included depreciation, amortization of capitalized software development, earth station connectivity, marketing and advertising costs, logistics, customer care and various support systems. In addition, interest expense increased during fiscal year 2019 as we no longer capitalized the interest expense relating to the debt incurred for the construction of ViaSat-2 and the related gateway and networking equipment once the satellite was in service. As services using the new satellite scaled, however, our revenue base for broadband services expanded and we gained operating cost efficiencies, which together yielded incremental segment earnings contributions. In addition, we may experience bandwidth supply constraints in the lead-up to the commencement of commercial service on new satellites. We anticipate that we will incur a similar cycle of increased operating costs and constrained bandwidth supply as we prepare for and launch commercial services on future satellites, including our ViaSat-3 constellation, followed by increases in revenue base and in scale. However, there can be no assurance that we will be successful in significantly increasing revenues or achieving or maintaining operating profit in our satellite services segment, and any such gains may also be offset by investments in our global business.
Long-term debt
As of September 30, 2022, the aggregate principal amount of our total outstanding indebtedness was $2.7 billion, which was comprised of $700.0 million in principal amount of 2025 Notes, $600.0 million in principal amount of 2027 Notes, $400.0 million in principal amount of 2028 Notes (together with the 2025 Notes and 2027 Notes, the Notes), $698.3 million in principal amount of outstanding borrowings under our Term Loan Facility, $210.0 million in principal amount of outstanding borrowings under our $700.0 million Revolving Credit Facility, $68.8 million in principal amount of outstanding borrowings under our direct loan facility with the Export-Import Bank of the United States (the Ex-Im Credit Facility) and $42.8 million of finance lease obligations. For information regarding our Term Loan Facility, Revolving Credit Facility and Ex-Im Facility (collectively, the Credit Facilities) and Notes, refer to Note 8 – Senior Notes and Other Long-Term Debt to our condensed consolidated financial statements.
Capital Expenditures and IR&D Investments
For a discussion of our capital expenditures and IR&D investments, see Part II, Item 7, “Liquidity and Capital Resources – Capital Expenditures and IR&D Investments” in our Annual Report on Form 10-K for the year ended March 31, 2022.
Contractual Obligations
The following table sets forth a summary of certain material cash requirements for known contractual obligations and commitments (including in respect of our discontinued operations) at September 30, 2022:
(In thousands, including interest where applicable) |
|
Next 12 months |
|
|
Thereafter |
|
||
Operating leases (1) |
|
$ |
80,974 |
|
|
$ |
397,492 |
|
Senior Notes and Other Long-Term Debt (2) |
|
|
200,675 |
|
|
|
3,315,590 |
|
Purchase commitments including satellite-related |
|
|
1,510,703 |
|
|
|
1,036,825 |
|
Total |
|
$ |
1,792,352 |
|
|
$ |
4,749,907 |
|
57
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. We also enter into agreements and purchase commitments with suppliers for the construction, launch, and operation of our satellites. 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.
Our condensed consolidated balance sheets included $141.7 million and $153.2 million of “other liabilities” as of September 30, 2022 and March 31, 2022, respectively, which primarily consisted of the long-term portion of deferred revenues, the long-term portion of our satellite performance incentive obligations relating to the ViaSat-1 and ViaSat-2 satellites, deferred income taxes and our long-term warranty obligations. With the exception of the long-term portion of our satellite performance incentive obligations relating to the ViaSat-1 and ViaSat-2 satellites (which is included under “Purchase commitments including satellite-related agreements”), 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 12 — Commitments to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022 for additional information regarding satellite performance incentive obligations relating to the ViaSat-1 and ViaSat-2 satellites. See Note 9 — Product Warranty to our condensed consolidated financial statements for a discussion of our product warranties. Also excluded from the above table are amounts payable to the Sellers under the Purchase Agreement in the Inmarsat Transaction.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements at September 30, 2022 as defined in Regulation S-K Item 303(b) other than as discussed under “Contractual Obligations” above or disclosed in the notes to our condensed consolidated financial statements included in this report or in our Annual Report on Form 10-K for the year ended March 31, 2022.
Recent Authoritative Guidance
For information regarding recently adopted and issued accounting pronouncements, see Note 1 — Basis of Presentation to our condensed consolidated financial statements.
58
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and short-term and long-term obligations (including the Credit Facilities and the Notes). We consider investments in highly liquid instruments purchased with a remaining maturity of three months or less at the date of purchase to be cash equivalents. As of September 30, 2022, we had $698.3 million in principal amount of outstanding borrowings under our Term Loan Facility, $210.0 million in principal amount of outstanding borrowings under our Revolving Credit Facility, $68.8 million in principal amount of outstanding borrowings under our Ex-Im Credit Facility, $700.0 million in aggregate principal amount outstanding of the 2025 Notes, $600.0 million in aggregate principal amount outstanding of the 2027 Notes and $400.0 million in aggregate principal amount outstanding of the 2028 Notes, and we held no short-term investments. The Notes and borrowings under our Ex-Im Credit Facility bear interest at a fixed rate and therefore our exposure to market risk for changes in interest rates relates primarily to borrowings under our Term Loan Facility and Revolving 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 amount of our cash balance in money market accounts. In general, money market accounts 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. Our interest income has been and may continue to be negatively impacted by low market interest rates. 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 an insignificant amount for both the three and six months ended September 30, 2022 and 2021. 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 Term Loan Facility is the SOFR rate plus 4.50%. As of September 30, 2022, the effective interest rate on our outstanding borrowings under the Term Loan Facility was 8.21%. Our primary interest rate under the Revolving Credit Facility is the Eurodollar rate plus an applicable margin that is based on our total leverage ratio. As of September 30, 2022, the weighted average effective interest rate on our outstanding borrowings under the Revolving Credit Facility was 4.85%. Accordingly, assuming both the outstanding balances under the Term Loan Facility and the Revolving Credit Facility remained constant over a year, a 50 basis point increase in the interest rates would increase interest incurred, prior to effects of capitalized interest, by approximately $4.6 million over a 12-month period.
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. A five percent variance in foreign currencies in which our international business is conducted would change our income (loss) before income taxes by $1.0 million and an insignificant amount for the three and six months ended September 30, 2022, respectively, and by an insignificant amount for both the three and six months ended September 30, 2021. 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 30, 2022 and March 31, 2022, we had no foreign currency forward contracts outstanding.
59
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 30, 2022, the end of the period covered by this 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 30, 2022.
During the period covered by this 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
From time to time, we are involved in a variety of claims, suits, investigations and proceedings arising in the ordinary course of business, including government investigations and claims, and other claims and proceedings with respect to intellectual property, breach of contract, labor and employment, tax and other matters. Such matters could result in fines; penalties, compensatory, treble or other damages; or non-monetary relief. A violation of government contract laws and regulations could also result in the termination of our government contracts or debarment from bidding on future government contracts. 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. For further information on the risks we face from existing and future claims, suits, investigations and proceedings, see “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
Item 1A. Risk Factors
In addition to the other information set forth in this 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 31, 2022, as updated below, which factors could materially affect our business, financial condition, liquidity or future results. Except as set forth below, there have been no material changes to the risk factors described in the "Risk Factors" section in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022. 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.
Inability to Complete the Link-16 TDL Sale Could Negatively Affect Our Business, Financial Condition and Results of Operations
The closing of the Link-16 TDL Sale is subject to the satisfaction or waiver of certain closing conditions and there can be no assurance that these conditions will be satisfied on the timeline we expect or at all. The Link-16 TDL Sale may also be terminated in certain specified circumstances, including if the sale is not completed by October 1, 2023 (subject to certain extensions under certain circumstances). While the Link-16 TDL Sale is pending or if the sale is not completed, we may be subject to several risks including:
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Any of these risks could have a material adverse effect on our business, financial condition and results of operations.
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Item 6. Exhibits
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Incorporated by Reference |
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Exhibit Number |
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Exhibit Description |
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Form |
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File No. |
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Exhibit |
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Filing Date |
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Filed or Furnished Herewith |
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2.1* |
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8-K |
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000-21767 |
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2.1 |
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10/03/2022 |
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10.1 |
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10-Q |
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000-21767 |
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10.2 |
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08/09/2022 |
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10.2** |
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1996 Equity Participation Plan of Viasat, Inc. (As Amended and Restated Effective September 1, 2022) |
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8-K |
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000-21767 |
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10.1 |
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09/02/2022 |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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X |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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X |
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32.1*** |
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X |
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101.INS |
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Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document. |
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X |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema |
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X |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
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X |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase |
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X |
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101.LAB |
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Inline XBRL Taxonomy Extension Labels Linkbase |
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X |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase |
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X |
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104 |
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Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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X |
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* Certain schedules to this Exhibit have been omitted pursuant to Regulation S-K Item 601(b)(2) or 601(a)(5) (as applicable). Viasat agrees to furnish a supplemental copy of any omitted schedule to the SEC upon request; provided, however, that Viasat may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934 for any document so furnished.
** Indicates management contract, compensatory plan or arrangement.
*** The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the SEC and are not to be incorporated by reference into any filing of Viasat under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
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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.
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VIASAT, INC. |
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November 9, 2022 |
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/s/ MARK DANKBERG |
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Mark Dankberg |
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Chairman of the Board and Chief Executive Officer |
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(Principal Executive Officer) |
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/s/ SHAWN DUFFY |
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Shawn Duffy |
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Senior Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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