e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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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 December 30, 2005.
OR
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o |
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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 (0-21767)
ViaSat, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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33-0174996
(I.R.S. Employer
Identification No.) |
6155 El Camino Real, Carlsbad, California 92009
(760) 476-2200
(Address, including zip code, and telephone number, including area code, of principal executive
offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ
No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants Common Stock, $.0001 par value, as of
February 2, 2006 was 27,431,387.
PART I Financial Information
Item 1. Financial Statements
VIASAT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
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December 30, |
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April 1, |
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2005 |
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2005 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
22,075 |
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$ |
14,579 |
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Short-term investments |
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163 |
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162 |
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Accounts receivable, net |
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157,498 |
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141,298 |
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Inventories |
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40,086 |
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36,612 |
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Deferred income taxes |
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6,986 |
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7,027 |
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Prepaid expenses and other current assets |
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6,905 |
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10,114 |
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Total current assets |
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233,713 |
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209,792 |
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Goodwill |
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28,133 |
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19,492 |
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Other intangible assets, net |
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26,068 |
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20,990 |
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Property and equipment, net |
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39,207 |
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33,278 |
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Other assets |
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17,965 |
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18,273 |
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Total assets |
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$ |
345,086 |
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$ |
301,825 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
44,454 |
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$ |
38,523 |
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Accrued liabilities |
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40,909 |
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32,410 |
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Total current liabilities |
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85,363 |
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70,933 |
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Other liabilities |
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7,250 |
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3,911 |
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Total liabilities |
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92,613 |
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74,844 |
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Commitments and contingencies (Note 8) |
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Minority interest in consolidated subsidiary |
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696 |
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698 |
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Stockholders equity: |
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Common stock |
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3 |
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3 |
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Paid in capital |
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172,233 |
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163,819 |
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Retained earnings |
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80,045 |
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62,288 |
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Deferred compensation |
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(250 |
) |
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Accumulated other comprehensive (loss) income |
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(254 |
) |
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173 |
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Total stockholders equity |
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251,777 |
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226,283 |
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Total liabilities and stockholders equity |
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$ |
345,086 |
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$ |
301,825 |
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See accompanying notes to condensed consolidated financial statements.
3
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
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Three months ended |
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Nine months ended |
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December 30, 2005 |
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December 31, 2004 |
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December 30, 2005 |
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December 31, 2004 |
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Revenues |
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$ |
111,608 |
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$ |
88,187 |
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$ |
315,697 |
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$ |
255,000 |
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Cost of revenues |
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83,685 |
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68,472 |
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237,560 |
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194,056 |
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Gross profit |
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27,923 |
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19,715 |
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78,137 |
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60,944 |
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Operating expenses: |
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Selling, general and administrative |
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14,724 |
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11,395 |
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40,897 |
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34,440 |
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Independent research and development |
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3,528 |
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1,941 |
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10,389 |
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5,360 |
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Amortization of intangible assets |
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1,694 |
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1,512 |
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4,718 |
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5,130 |
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Income from operations |
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7,977 |
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4,867 |
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22,133 |
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16,014 |
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Other income (expense): |
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Interest income |
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161 |
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168 |
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22 |
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Interest expense |
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(56 |
) |
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(32 |
) |
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(238 |
) |
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(91 |
) |
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Income before income taxes |
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8,082 |
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4,835 |
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22,063 |
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15,945 |
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Provision (benefit) for income taxes |
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1,442 |
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(408 |
) |
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4,337 |
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3,305 |
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Minority interest in net earnings (loss) of
subsidiary, net of tax |
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12 |
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2 |
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(31 |
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91 |
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Net income |
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$ |
6,628 |
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$ |
5,241 |
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$ |
17,757 |
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$ |
12,549 |
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Basic net income per share |
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$ |
.24 |
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$ |
.20 |
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$ |
.66 |
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$ |
.47 |
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Diluted net income per share |
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$ |
.23 |
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$ |
.19 |
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$ |
.62 |
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$ |
.45 |
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Shares used in basic net income per share computation |
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27,170 |
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26,775 |
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27,019 |
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26,719 |
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Shares used in diluted net income per share
computation |
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29,177 |
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28,104 |
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28,641 |
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28,138 |
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See accompanying notes to condensed consolidated financial statements.
4
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Nine months ended |
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December 30, 2005 |
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December 31, 2004 |
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Cash flows from operating activities: |
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Net income |
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$ |
17,757 |
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$ |
12,549 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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8,359 |
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|
7,569 |
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Amortization of intangible assets and software |
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7,262 |
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7,746 |
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Deferred income taxes |
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(1,405 |
) |
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(171 |
) |
Loss on disposal of fixed assets |
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274 |
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Minority interest in consolidated subsidiary |
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(2 |
) |
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|
98 |
|
Non-cash stock-based compensation |
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41 |
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Increase (decrease) in cash resulting from changes in operating assets and
liabilities, net of effects of the acquisition: |
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Accounts receivable, net |
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(15,255 |
) |
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|
(27,571 |
) |
Inventories |
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|
(3,013 |
) |
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|
(5,468 |
) |
Other assets |
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|
4,051 |
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|
(3,355 |
) |
Accounts payable |
|
|
3,458 |
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|
7,506 |
|
Accrued liabilities |
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|
6,124 |
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|
(4,220 |
) |
Other liabilities |
|
|
2,311 |
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|
914 |
|
|
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|
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|
Net cash provided by (used in) operating activities |
|
|
29,962 |
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(4,403 |
) |
Cash flows from investing activities: |
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Acquisition of a business, net of cash acquired |
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(15,994 |
) |
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Purchases of short-term investments |
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(1 |
) |
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|
(1 |
) |
Purchases of property and equipment |
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|
(12,612 |
) |
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|
(8,851 |
) |
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|
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|
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|
Net cash (used in) investing activities |
|
|
(28,607 |
) |
|
|
(8,852 |
) |
Cash flows from financing activities: |
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|
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|
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|
Proceeds from line of credit |
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|
3,000 |
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|
9,000 |
|
Payments on line of credit |
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|
(3,000 |
) |
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|
(9,000 |
) |
Proceeds from issuance of common stock, net of issuance costs |
|
|
6,289 |
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|
|
3,494 |
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Net cash provided by financing activities |
|
|
6,289 |
|
|
|
3,494 |
|
Effect of exchange rate changes on cash |
|
|
(148 |
) |
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|
106 |
|
|
|
|
|
|
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|
Net increase (decrease) in cash and cash equivalents |
|
|
7,496 |
|
|
|
(9,655 |
) |
Cash and cash equivalents at beginning of period |
|
|
14,579 |
|
|
|
18,510 |
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
22,075 |
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|
$ |
8,855 |
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|
|
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|
|
|
|
|
|
|
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Non-cash investing and financing activities: |
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Issuance of stock options in connection with acquisition |
|
$ |
525 |
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|
$ |
|
|
See accompanying notes to condensed consolidated financial statements.
5
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
(In thousands, except share data)
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Accumulated |
|
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Common Stock |
|
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Other |
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Number of |
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Paid in |
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Retained |
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Deferred |
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Comprehensive |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
|
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Compensation |
|
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Income (Loss) |
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Total |
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|
Income |
|
Balance at April 1, 2005 |
|
|
26,861,900 |
|
|
$ |
3 |
|
|
$ |
163,819 |
|
|
$ |
62,288 |
|
|
$ |
|
|
|
$ |
173 |
|
|
$ |
226,283 |
|
|
|
|
|
Exercise of stock options |
|
|
372,736 |
|
|
|
|
|
|
|
4,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,380 |
|
|
|
|
|
Tax benefit from exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600 |
|
|
|
|
|
Issuance of stock under |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Plan |
|
|
110,269 |
|
|
|
|
|
|
|
1,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,909 |
|
|
|
|
|
Issuance of stock options
in connection with
acquisition of a business |
|
|
|
|
|
|
|
|
|
|
525 |
|
|
|
|
|
|
|
(291 |
) |
|
|
|
|
|
|
234 |
|
|
|
|
|
Amortization of deferred
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,757 |
|
|
|
|
|
|
|
|
|
|
|
17,757 |
|
|
$ |
17,757 |
|
Hedging Transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286 |
) |
|
|
(286 |
) |
|
|
(286 |
) |
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141 |
) |
|
|
(141 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2005 |
|
|
27,344,905 |
|
|
$ |
3 |
|
|
$ |
172,233 |
|
|
$ |
80,045 |
|
|
$ |
(250 |
) |
|
$ |
(254 |
) |
|
$ |
251,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 Basis of Presentation
The accompanying condensed consolidated balance sheet at December 30, 2005, the condensed
consolidated statements of operations for the three and nine months ended December 30, 2005 and
December 31, 2004, the condensed consolidated statements of cash flows for the nine months ended
December 30, 2005 and December 31, 2004, and the condensed consolidated statement of stockholders
equity for the nine months ended December 30, 2005 have been prepared by the management of ViaSat,
Inc., and have not been audited. These financial statements have been prepared on the same basis as
the audited consolidated financial statements for the year ended April 1, 2005 and, in the opinion
of management, include all adjustments (consisting only of normal recurring adjustments) necessary
for a fair statement of the financial position, results of operations and cash flows for all
periods presented. These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended April 1, 2005 included in our 2005 Annual Report on
Form 10-K. Interim operating results are not necessarily indicative of operating results for the
full year.
Our consolidated financial statements include the assets, liabilities and results of
operations of TrellisWare Technologies, Inc., a majority owned
subsidiary of ViaSat (the Company). All
significant intercompany amounts have been eliminated.
Our fiscal year is the 52 or 53 weeks ending on the Friday closest to March 31 of the
specified year. For example, references to fiscal year 2006 refer to the fiscal year ending on
March 31, 2006. Our quarters for fiscal year 2006 end on July 1, 2005, September 30, 2005, December
30, 2005 and March 31, 2006.
Certain prior period amounts have been reclassified to conform to the current period
presentation.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America 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, capitalized software, allowance for doubtful
accounts, warranty accrual, valuation of goodwill and other intangible assets, and valuation
allowance on deferred tax assets.
Derivatives
We enter into foreign currency forward and option contracts to hedge certain forecasted
foreign currency transactions. Gains and losses arising from foreign currency forward and option
contracts not designated as hedging instruments are recorded in interest income (expense) as gains
(losses) on derivative instruments. Gains and losses arising from the effective portion of foreign
currency forward and option contracts that are designated as cash-flow hedging instruments are
recorded in accumulated other comprehensive income (loss) as gains (losses) on derivative
instruments until the underlying transaction affects our earnings at which time they are then
recorded in the same income statement line as the underlying transaction.
Deferred Rent
Rent expense on noncancellable leases containing known future scheduled rent increases are
recorded on a straight-line basis over the term of the respective leases beginning when we receive
possession of the leased property for construction purposes. The difference between rent expense
and rent paid is accounted for as deferred rent. Landlord improvement allowances and other such
lease incentives are recorded as deferred lease credits and are amortized on a straight-line basis
over life of lease as a reduction to rent expense.
7
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock-based Compensation
At December 30, 2005, we had stock-based compensation plans from which incentive stock options
may be granted to our key employees and non-qualified stock options may be granted to key
employees, directors, officers, independent contractors, and consultants. Approximately 79% of
grants outstanding at December 30, 2005 were incentive stock options. We measure compensation
expense for options issued to employees, directors and officers under those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. Generally, no stock-based employee compensation cost is
reflected in net income, as all options granted under those plans have an exercise price equal to
the market value of the underlying common stock on the date of grant.
Under Financial Accounting Standards Board (FASB) Statement No. 123 (SFAS 123) the
estimated fair value of options is amortized to expense over the vesting period. We elect to use
the disclosure only provisions of SFAS 123. Had compensation expense for employees, directors and
officers stock options been determined based on the fair value of the options on the date of grant,
net income and net income per share would have resulted in the pro forma information presented
below for the three and nine months ended December 30, 2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
December 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
|
(In thousands, except per share data) |
|
Net income as reported |
|
$ |
6,628 |
|
|
$ |
5,241 |
|
|
$ |
17,757 |
|
|
$ |
12,549 |
|
Stock based compensation included in net
income, net of tax |
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
Stock based employee compensation
expense under fair value based method,
net of tax |
|
|
(2,197 |
) |
|
|
(2,491 |
) |
|
|
(6,995 |
) |
|
|
(6,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
4,472 |
|
|
$ |
2,750 |
|
|
$ |
10,803 |
|
|
$ |
6,190 |
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.66 |
|
|
$ |
0.47 |
|
Pro forma |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.40 |
|
|
$ |
0.23 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
$ |
0.62 |
|
|
$ |
0.45 |
|
Pro forma |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.38 |
|
|
$ |
0.22 |
|
These pro forma amounts may not be representative of future costs since the estimated fair
value of stock options is amortized to expense over the vesting period and additional options may
be granted in future years.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) revised Statement No. 123
(SFAS 123R), Share-Based Payment, which requires companies to expense the estimated fair value of
employee stock options and similar awards. On April 14, 2005, the Securities and Exchange
Commission adopted a new rule amending the compliance dates for SFAS 123R. In accordance with the
new rule, the accounting provisions of SFAS 123R will be effective for the Company in the first
quarter of fiscal 2007. The Company will adopt the provisions of SFAS 123R and plan to use the modified
prospective transition method.
Under the modified prospective transition method, SFAS 123R, which provides certain changes to
the method for valuing stock-based compensation among other changes, will apply to new awards and
to awards that are outstanding on the effective date and are subsequently modified or cancelled.
Compensation expense for outstanding awards for which the requisite service had not been rendered
as of the effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under SFAS 123 (See Stock-based
Compensation in this note). As permitted by SFAS 123, the Company currently accounts for
stock-based compensation using APB 25s intrinsic value method and, as such, generally recognizes
no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R will likely
have a material impact on the Companys results of operations. However, the ultimate impact of
adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future.
8
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 Revenue Recognition
A substantial portion of the Companys revenues are derived from long-term contracts requiring
development and delivery of products over time and often contain fixed-price purchase options for
additional products. Sales related to long-term contracts are accounted for under the
percentage-of-completion method of accounting under the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Sales and earnings under these contracts
are recorded either based on the ratio of actual costs incurred to total estimated costs expected
to be incurred related to the contract or under the cost-to-cost method or as products are shipped
under the units-of-delivery method. Anticipated losses on contracts are recognized in full in the
period in which losses become probable and estimable. Changes in estimates of profit or loss on
contracts are included in earnings on a cumulative basis in the period the estimate is changed.
During the three and nine months ended December 30, 2005, we recorded charges of approximately $1.7
million and $5.0 million, respectively, related to loss contracts. During the three and nine months
ended December 31, 2004, we recorded charges of approximately $4.8 million for both periods,
related to loss contracts.
The Company also has contracts and purchase orders where revenue is recorded on delivery of
products in accordance with SAB 104, Staff Accounting Bulletin No. 104: Revenue Recognition. In
this situation, contracts and customer purchase orders are used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are used to verify
delivery. The Company assesses whether the sales price is fixed or determinable based on the
payment terms associated with the transaction and whether the sales price is subject to refund or
adjustment, and assesses collectibility based primarily on the creditworthiness of the customer as
determined by credit checks and analysis, as well as the customers payment history.
When a sale involves multiple elements, such as sales of products that include services, the
entire fee from the arrangement is allocated to each respective element based on its relative fair
value in accordance with Emerging Issues Task Force (EITF) 00-21, Accounting for Multiple
Element Revenue Arrangements and recognized when the applicable revenue recognition criteria for
each element are met. The amount of product and service revenue recognized is impacted by our
judgments as to whether an arrangement includes multiple elements and, if so, whether
vendor-specific objective evidence of fair value exists for those elements. Changes to the elements
in an arrangement and our ability to establish vendor-specific objective evidence for those
elements could affect the timing of the revenue recognition.
Collections in excess of revenues represent cash collected from customers in advance of
revenue recognition and are recorded as an accrued liability.
Contract costs on U.S. government contracts, including indirect costs, are subject to audit
and negotiations with U.S. government representatives. These audits have been completed and agreed
upon through fiscal year 2001. Contract revenues and accounts receivable are stated at amounts
which are expected to be realized upon final settlement.
Note 3 Earnings Per Share
Potential common stock of 2,007,423 and 1,329,354 shares for the three months ended December
30, 2005 and December 31, 2004, respectively, and 1,621,809 and 1,418,543 shares for the nine
months ended December 30, 2005 and December 31, 2004, respectively, were included in the
calculation of diluted earnings per share. Antidilutive shares excluded from the calculation were
199,270 and 1,780,205 shares for the three months ended December 30, 2005 and December 31, 2004,
respectively, and 328,449 and 1,518,872 shares for the nine months ended December 30, 2005 and
December 31, 2004, respectively. Potential common stock is primarily comprised of options granted
under our stock option plans.
9
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 Composition of Certain Balance Sheet Captions (In thousands)
|
|
|
|
|
|
|
|
|
|
|
December 30, 2005 |
|
|
April 1, 2005 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Billed |
|
$ |
75,180 |
|
|
$ |
49,737 |
|
Unbilled |
|
|
82,473 |
|
|
|
91,724 |
|
Allowance for doubtful accounts |
|
|
(155 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
$ |
157,498 |
|
|
$ |
141,298 |
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
24,148 |
|
|
$ |
16,706 |
|
Work in process |
|
|
7,660 |
|
|
|
9,347 |
|
Finished goods |
|
|
8,278 |
|
|
|
10,559 |
|
|
|
|
|
|
|
|
|
|
$ |
40,086 |
|
|
$ |
36,612 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
Income taxes receivable |
|
$ |
2,219 |
|
|
$ |
2,639 |
|
Prepaid expenses |
|
|
4,304 |
|
|
|
6,187 |
|
Other |
|
|
382 |
|
|
|
1,288 |
|
|
|
|
|
|
|
|
|
|
$ |
6,905 |
|
|
$ |
10,114 |
|
|
|
|
|
|
|
|
Other intangible assets, net: |
|
|
|
|
|
|
|
|
Technology |
|
$ |
29,670 |
|
|
$ |
26,770 |
|
Contracts and relationships |
|
|
15,436 |
|
|
|
9,736 |
|
Non-compete agreement |
|
|
7,950 |
|
|
|
7,950 |
|
Other intangibles |
|
|
8,075 |
|
|
|
6,875 |
|
|
|
|
|
|
|
|
|
|
|
61,131 |
|
|
|
51,331 |
|
Less accumulated amortization |
|
|
(35,063 |
) |
|
|
(30,341 |
) |
|
|
|
|
|
|
|
|
|
$ |
26,068 |
|
|
$ |
20,990 |
|
|
|
|
|
|
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Machinery and equipment |
|
$ |
50,965 |
|
|
$ |
43,966 |
|
Computer equipment and software |
|
|
31,725 |
|
|
|
29,866 |
|
Furniture and fixtures |
|
|
3,780 |
|
|
|
3,523 |
|
Construction in progress |
|
|
8,384 |
|
|
|
3,876 |
|
|
|
|
|
|
|
|
|
|
|
94,854 |
|
|
|
81,231 |
|
Less accumulated depreciation |
|
|
(55,647 |
) |
|
|
(47,953 |
) |
|
|
|
|
|
|
|
|
|
$ |
39,207 |
|
|
$ |
33,278 |
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Capitalized software costs, net |
|
$ |
7,817 |
|
|
$ |
10,341 |
|
Deferred income taxes |
|
|
7,779 |
|
|
|
6,333 |
|
Other |
|
|
2,369 |
|
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
$ |
17,965 |
|
|
$ |
18,273 |
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Current portion of warranty reserve |
|
$ |
4,174 |
|
|
$ |
3,268 |
|
Accrued vacation |
|
|
5,441 |
|
|
|
5,120 |
|
Accrued bonus/401(k) matching contributions |
|
|
5,811 |
|
|
|
6,239 |
|
Collections in excess of revenues |
|
|
17,252 |
|
|
|
13,767 |
|
Other |
|
|
8,231 |
|
|
|
4,016 |
|
|
|
|
|
|
|
|
|
|
$ |
40,909 |
|
|
$ |
32,410 |
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
Accrued warranty |
|
$ |
4,180 |
|
|
$ |
3,911 |
|
Long term portion of deferred rent |
|
|
2,217 |
|
|
|
|
|
Other long term liabilities |
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,250 |
|
|
$ |
3,911 |
|
|
|
|
|
|
|
|
10
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5 Accounting for Goodwill and Intangible Assets
We account for our goodwill under SFAS No. 142. The SFAS No. 142 goodwill impairment model is
a two-step process. First, it requires a comparison of the book value of net assets to the fair
value of the business units that have goodwill assigned to them. The only reporting units which
have goodwill assigned to them are the businesses which were acquired and have been included in our
commercial segment. We estimate the fair values of the business units using discounted cash flows.
The cash flow forecasts are adjusted by an appropriate discount rate. If the fair value is
determined to be less than book value, a second step is performed to compute the amount of the
impairment. In this process, a fair value for goodwill is estimated, based in part on the fair
value of the operations used in the first step, and is compared to its carrying value. The
shortfall of the fair value below carrying value represents the amount of goodwill impairment.
We make assessments of impairment on an annual basis in the fourth quarter of our fiscal year
or more frequently if specific events occur. In assessing the value of goodwill, we make
assumptions regarding estimated future cash flows and other factors to determine the fair value of
the reporting units. If these estimates or their related assumptions change in the future, we may
be required to record impairment charges that would negatively impact operating results.
The intangible assets are amortized using the straight-line method over their estimated useful
lives of one to ten years. The technology intangible asset has several components with estimated
useful lives of five to nine years, contracts and relationships intangible asset has several
components with estimated useful lives of three to ten years, non-compete agreements have useful
lives of three to five years and other amortizable assets have several components with estimated
useful lives of one to ten years.
The current and expected amortization expense for each of the following periods is as follows
(in thousands):
|
|
|
|
|
|
|
Amortization |
|
For the nine months ended December 30, 2005 |
|
$ |
4,718 |
|
|
Expected for the remainder of fiscal year 2006 |
|
|
2,088 |
|
Expected for fiscal year 2007 |
|
|
7,254 |
|
Expected for fiscal year 2008 |
|
|
5,584 |
|
Expected for fiscal year 2009 |
|
|
4,836 |
|
Expected for fiscal year 2010 |
|
|
1,612 |
|
Thereafter |
|
|
4,694 |
|
|
|
|
|
|
|
$ |
26,068 |
|
Note 6 Notes Payable and Line of Credit
On January 31, 2005, we entered into a three-year, $60 million revolving credit facility (the
Facility) in the form of a Second Amended and Restated Revolving Loan Agreement with Union Bank
of California, Comerica Bank and Silicon Valley Bank.
Borrowings under the Facility are permitted up to a maximum amount of $60 million, including
up to $15 million of letters of credit. Borrowings under the Facility bear interest, at the
Companys option, at either the lenders prime rate or at LIBOR (London Interbank Offered Rate)
plus, in each case, an applicable margin based on the ratio of the Companys total funded debt to
EBITDA (income from operations plus depreciation and amortization). The Facility is collateralized
by substantially all of the Companys personal property assets. At December 30, 2005, the Company
had approximately $5.8 million outstanding under standby letters of credit leaving borrowing
availability under our line of credit of $54.2 million.
The Facility contains financial covenants that set a minimum EBITDA limit for the twelve-month
period ending on the last day of any fiscal quarter at $30 million, a minimum tangible net worth as
of the last day of any fiscal quarter at $135 million and a minimum quick ratio (sum of cash and
cash equivalents, accounts receivable and marketable securities, divided by current liabilities) as
of the last day of any fiscal quarter at 1.50 to 1.00. We were in compliance with our loan
covenants at December 30, 2005.
11
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7 Product Warranty
We provide limited warranties on most of our products for periods of up to five years. We
record a liability for our warranty obligations when products are shipped based upon an estimate of
expected warranty costs. Amounts expected to be incurred within twelve months are classified as a
current liability. For mature products, the warranty costs estimates are 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
failure that may occur. It is possible that our underlying assumptions will not reflect the actual
experience and in that case, future adjustments will be made to the recorded warranty obligation.
The following table reflects the change in our warranty accrual during the nine months ended
December 30, 2005 and December 31, 2004 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
December 30, 2005 |
|
|
December 31, 2004 |
|
Balance, beginning of period |
|
$ |
7,179 |
|
|
$ |
4,451 |
|
Change in liability for
warranties issued in period |
|
|
3,610 |
|
|
|
4,281 |
|
Settlements made during the period |
|
|
(2,435 |
) |
|
|
(2,044 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
8,354 |
|
|
$ |
6,688 |
|
|
|
|
|
|
|
|
Note 8 Commitments and Contingencies
We are currently a party to various government and commercial contracts which require us to
meet performance covenants and project milestones. Under the terms of these contracts, failure by
us to meet such performance covenants and milestones permit the other party to terminate the
contract and, under certain circumstances, recover liquidated damages or other penalties. We are
currently not in compliance (or in the past were not in compliance) with the performance or
milestone requirements of certain of these contracts. Historically,
most of our customers have not elected
to terminate such contracts and we do not currently believe that our existing customers will do so. In the
past, we have incurred liquidated damages under our customer contracts. There can be no assurance
that our customers will not elect to terminate such contracts or seek additional liquidated damages
or penalties from us in the future.
On May 21, 2003, we filed a complaint against Xetron Corporation alleging Xetron failed to
deliver conforming radio frequency amplifiers (RFAs) for integration into our MIDS terminals.
Xetron filed a counter-claim against us alleging we failed to make proper payments. On April 11,
2005, we reached an agreement with Xetron to settle all claims whereby we received $4.8 million as
a result of the settlement. Accordingly, in the first quarter of fiscal year 2006, the Company
recognized a net reduction of cost of revenues of $2.7 million after recovery of approximately $2.1
million in related subcontractor prepayments.
We are also party to various claims and legal actions arising in the normal course of
business. Although the ultimate outcome of such matters is not presently determinable, we believe
that the resolution of all such matters, net of amounts accrued, will not have a material adverse
effect on our financial position or liquidity; however, there can be no assurance that the ultimate
resolution of these matters will not have a material impact on our results of operations in any
period.
Note 9 Derivatives
During the three months ended December 30, 2005, the Company settled two foreign exchange
contracts recognizing a loss of $44,600 recorded as cost of revenues based on the underlying
transaction. For the nine months ended December 30, 2005, the Company settled certain foreign
exchange contracts recognizing a loss of $279,200 recorded also as cost of revenues based on the
underlying transactions. The Company also entered into a new foreign currency exchange contract
intended to reduce the foreign currency risk for amounts payable to vendors in Euros which has a
maturity of less than six months. The fair value of the outstanding foreign currency contract was
$340,000 and is recorded as a liability as of December 30, 2005. We had $5.9 million of notional
value of foreign currency forward contracts outstanding at December 30, 2005. We did not record any
gains or losses on foreign currency forward contracts for the three and nine months ended December
31, 2004.
12
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 10 Income Taxes
The effective income tax rate for the three months ended December 30, 2005 was 17.8%. The
effective income tax rate for the nine months ended December 30, 2005 was 19.7%. The estimated
annual effective tax rate for the fiscal year ending March 31,
2006, is 22.7%. The estimated tax
rate is different from the expected statutory rate due primarily to research and development tax
credits and the tax benefit for export sales.
Our
estimated effective tax rate of 22.7% for fiscal year 2006 reflects the expiration of the
federal research and development tax credit at December 31, 2005. If the federal research and
development tax credit is reinstated, we will have a lower effective tax rate. In the event the
federal tax research and development tax credit is reinstated, the amount of the reduction in our
tax rate will depend on the effective date and terms of the reinstatement, as well as the amount of
eligible research and development expenses in our fourth quarter of
fiscal year 2006. A valuation allowance of $758,000 had been provided
on deferred tax assets at April 1, 2005, related to California
research credit carry forward realization. Based on projected future
income and usage of California research credits we have reduced the
valuation allowance by $758,000 in the third quarter of
fiscal year 2006.
Note 11 Segment Information
Our commercial and government segments are primarily distinguished by the type of customer and
the related contractual requirements. The more regulated government environment is subject to
unique contractual requirements and distinctive economic characteristics which differ from the
commercial segment. Therefore, we are organized primarily on the basis of products with commercial
and government (defense) communication applications. Based on the Companys commercial business
strategy to provide end-to-end capability with satellite communication equipment solutions, the
Company implemented certain management changes during the year ended April 1, 2005 which led to the
delineation of the commercial segment into two product lines: Satellite Networks and Antenna
Systems. These product lines are distinguished from one another based upon their underlying
technologies. Prior segment results have been reclassified to conform to our current organizational
structure. Reporting segments are determined consistent with the way that management organizes and
evaluates financial information internally for making operating decisions and assessing
performance. The following table summarizes revenues and operating profits by reporting segment for
the three and nine months ended December 30, 2005 and December 31, 2004. Certain corporate general
and administrative costs, amortization of intangible assets and charges of acquired in-process
research and development are not allocated to either segment and accordingly, are shown as
reconciling items from segment operating profit and consolidated operating profit. Certain assets
are not tracked by reporting segment. Depreciation expense is allocated to reporting segments as an
overhead charge based on direct labor dollars within the reporting segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
(in thousands) |
|
December 30, 2005 |
|
|
December 31, 2004 |
|
|
December 30, 2005 |
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
$ |
53,225 |
|
|
$ |
48,599 |
|
|
$ |
156,200 |
|
|
$ |
127,704 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks |
|
|
49,203 |
|
|
|
31,511 |
|
|
|
130,979 |
|
|
|
101,982 |
|
Antenna Systems |
|
|
11,032 |
|
|
|
9,543 |
|
|
|
33,691 |
|
|
|
29,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,235 |
|
|
|
41,054 |
|
|
|
164,670 |
|
|
|
131,414 |
|
Elimination of intersegment revenues |
|
|
(1,852 |
) |
|
|
(1,466 |
) |
|
|
(5,173 |
) |
|
|
(4,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
111,608 |
|
|
|
88,187 |
|
|
|
315,697 |
|
|
|
255,000 |
|
Operating profits (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
12,036 |
|
|
|
6,984 |
|
|
|
31,716 |
|
|
|
20,915 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks |
|
|
(1,957 |
) |
|
|
(805 |
) |
|
|
(5,300 |
) |
|
|
(266 |
) |
Antenna Systems |
|
|
449 |
|
|
|
883 |
|
|
|
2,899 |
|
|
|
2,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,508 |
) |
|
|
78 |
|
|
|
(2,401 |
) |
|
|
2,293 |
|
Elimination of intersegment operating profits |
|
|
(798 |
) |
|
|
(170 |
) |
|
|
(2,636 |
) |
|
|
(473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit before corporate and
amortization |
|
|
9,730 |
|
|
|
6,892 |
|
|
|
26,679 |
|
|
|
22,735 |
|
Corporate |
|
|
(59 |
) |
|
|
(513 |
) |
|
|
172 |
|
|
|
(1,591 |
) |
Amortization of intangible assets (1) |
|
|
(1,694 |
) |
|
|
(1,512 |
) |
|
|
(4,718 |
) |
|
|
(5,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
7,977 |
|
|
$ |
4,867 |
|
|
$ |
22,133 |
|
|
$ |
16,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortization of intangibles relate to the commercial segment. |
13
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
(in thousands) |
|
December 30, 2005 |
|
|
April 1, 2005 |
|
|
|
|
|
|
|
|
Segment assets (2) |
|
|
|
|
|
|
|
|
Government |
|
$ |
85,980 |
|
|
$ |
81,645 |
|
Commercial |
|
|
|
|
|
|
|
|
Satellite Networks |
|
|
137,618 |
|
|
|
114,020 |
|
Antenna Systems |
|
|
26,185 |
|
|
|
24,075 |
|
|
|
|
|
|
|
|
|
|
|
163,803 |
|
|
|
138,095 |
|
Corporate assets |
|
|
95,303 |
|
|
|
82,085 |
|
|
|
|
|
|
|
|
Total |
|
$ |
345,086 |
|
|
$ |
301,825 |
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Assets identifiable to segments include: accounts receivable, unbilled accounts receivable,
inventory, intangible assets and goodwill. At December 30, 2005 and April 1, 2005, all the
Companys goodwill and intangible assets related to the Companys commercial segment. At
December 30, 2005 Satellite Networks had $24.5 million of goodwill and $23.9 million in net
intangible assets, and Antenna Systems had $3.6 million of goodwill and $2.2 million in net
intangible assets. On April 1, 2005, Satellite Networks had $15.9 million of goodwill and
$18.3 million in net intangible assets, and Antenna Systems had $3.6 million of goodwill and
$2.7 million in net intangible assets. |
Revenue information by geographic area for the three and nine month periods ended December 30,
2005 and December 31, 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
(in thousands) |
|
December 30, 2005 |
|
|
December 31, 2004 |
|
|
December 30, 2005 |
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
90,005 |
|
|
$ |
68,533 |
|
|
$ |
256,554 |
|
|
$ |
202,683 |
|
Asia Pacific |
|
|
7,575 |
|
|
|
2,798 |
|
|
|
22,211 |
|
|
|
15,911 |
|
Europe/Africa |
|
|
9,141 |
|
|
|
11,134 |
|
|
|
20,082 |
|
|
|
24,811 |
|
North America other than United States |
|
|
4,336 |
|
|
|
5,625 |
|
|
|
11,702 |
|
|
|
10,305 |
|
Latin America |
|
|
551 |
|
|
|
97 |
|
|
|
5,148 |
|
|
|
1,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
111,608 |
|
|
$ |
88,187 |
|
|
$ |
315,697 |
|
|
$ |
255,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We distinguish revenues from external customers by geographic areas based on customer
location.
The net book value of long-lived assets located outside the United States was $292,000 at
December 30, 2005 and $48,000 at April 1, 2005.
Note 12 Acquisition
On December 1, 2005, the Company completed the acquisition of all of the outstanding capital
stock of Efficient Channel Coding, Inc. (ECC), a privately-held
designer and supplier of broadband communication
integrated circuits and satellite communication systems. The initial purchase price of
approximately $16.6 million was comprised primarily of
$15.8 million in cash consideration, $227,200 in direct
acquisition costs and $525,000 related to the fair value of options exchanged
at the closing date. The $16.1 million of cash consideration less cash acquired of approximately
$70,000 resulted in a net cash outlay of approximately $16.0 million. An additional $9.0 million
in consideration is payable in cash and/or stock at the
Companys option on or prior to the eighteenth (18) month
anniversary of the closing date based on ECC meeting certain
financial performance targets. The additional consideration, if
earned, will be recorded as additional purchase price.
14
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The preliminary allocation of purchase price of the acquired assets and assumed liabilities
based on the estimated fair values was as follows:
|
|
|
|
|
(in thousands) |
|
December 1, 2005 |
|
|
|
|
|
Current
assets |
|
$ |
1,513 |
|
Property, plant and equipment |
|
|
179 |
|
Identifiable intangible assets |
|
|
9,800 |
|
Goodwill |
|
|
8,641 |
|
Other assets |
|
|
34 |
|
|
|
|
|
Total assets acquired |
|
|
20,167 |
|
|
Current
liabilities |
|
|
(3,016 |
) |
Other long term liabilities |
|
|
(853 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(3,869 |
) |
Deferred stock-based compensation |
|
|
291 |
|
|
|
|
|
Total purchase price |
|
$ |
16,589 |
|
|
|
|
|
The
Company issued 23,424 in unvested incentive stock options under the Efficient Channel Coding,
Inc. 2000 Long Term Incentive Plan assumed under the terms of the acquisition agreement. In
accordance with SFAS No. 141 (SFAS 141), Business Combinations, the Company recorded $291,000 in
deferred stock-based compensation which will be amortized to compensation expense over the
remaining service period.
Amounts assigned to other intangible assets are being amortized on a straight-line basis over
their estimated useful lives ranging from one to ten years and are as follows:
|
|
|
|
|
(in thousands) |
|
|
|
Customer relationships (10 year weighted average life) |
|
$ |
5,700 |
|
Acquired developed technology (6 year weighted average
life) |
|
|
2,900 |
|
Backlog (1 year weighted average life) |
|
|
1,200 |
|
|
|
|
|
Total identifiable intangible assets |
|
$ |
9,800 |
|
The
acquisition of ECC is very complementary to ViaSat because we will
benefit from their technology, namely DVB-S2 and ASIC design
capabilities, customers and highly skilled workforce. The potential
opportunities these benefits provide to ViaSats Satellite
Networks product group in our commercial segment were among the
factors that contributed to a purchase price resulting in the
recognition of goodwill. The intangible assets and goodwill
recognized will be deductible for federal income tax purposes.
The consolidated financial statements include the operating results of ECC from the date of
acquisition in the Companys Satellite Networks product line in the commercial segment. Pro forma
results of operations have not been presented because the effect of the acquisition was
insignificant to the financial statements for all periods presented.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the condensed consolidated
financial statements and the notes thereto included in Item 1 of this Quarterly Report and the
audited consolidated financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations included in ViaSats Annual Report on
Form 10-K for the year ended April 1, 2005, filed with the Securities and Exchange Commission.
Except for the historical information contained herein, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual results may differ
substantially from those referred to herein due to a number of factors, including but not limited
to risks described in the section entitled Factors That May Affect Future Performance and
elsewhere in this Quarterly Report.
General
We are a leading provider of advanced digital satellite communications and other wireless
networking and signal processing equipment and services to the government and commercial markets.
Based on our history and extensive experience in complex communications systems, we believe
we have developed the capability to design and implement innovative communications solutions which
enhance bandwidth utilization by applying our sophisticated networking and digital signal
processing techniques. Our goal is to leverage our advanced technology and capabilities to capture
a considerable share of the global satellite communications equipment and services segment for both government and commercial customers. ViaSat was
incorporated in 1986 and completed its initial public offering in 1996.
Our internal growth to date has historically been driven largely by our success in meeting the
need for advanced communications products for the U.S. government and commercial customers. By
developing cost-effective communications products incorporating our advanced technologies, we have
continued to grow the markets for our products and services.
Our company is organized principally in two segments: government and commercial. Our
government business encompasses specialized products and systems solutions principally serving
government, aerospace and defense customers, which includes:
|
|
|
Tactical data links, including multifunction information distribution system (MIDS)
products and Joint Tactical Radio Systems (JTRS) development variant, |
|
|
|
|
Information security and assurance products and services, which enable military and
government users to communicate secure information over secure and non-secure networks, |
|
|
|
|
Government satellite communication products and services, which provide innovative
solutions to government customers to increase available bandwidth using existing satellite
capacity, |
|
|
|
|
UHF DAMA satellite communications products consisting of modems, terminals and network
control systems, and |
|
|
|
|
Simulation and test equipment, which allows the testing of sophisticated airborne radio
equipment without expensive flight exercises. |
Serving government customers with cost-effective products and solutions continues to be a
critical and core element of our overall business strategy.
We have been increasing our focus in recent years on offering satellite based communications
products and systems solutions to address commercial market needs. In pursuing this strategy, we
have acquired four strategic satellite communication equipment providers: (1) the satellite
networks business of Scientific-Atlanta in fiscal year 2001; (2) Comsat Laboratories products
business from Lockheed Martin in fiscal year 2002; (3) US Monolithics, LLC in fiscal year 2002; and
(4) Efficient Channel Coding, Inc. in fiscal year 2006. Our commercial business accounted for
approximately 54% and 47% of our revenues in the three months ended December 30, 2005 and December
31, 2004, respectively, 52% of our revenues in the nine months ended December 30, 2005 and
December 31, 2004, and 51% of our revenues in fiscal year 2005 and 55% of our
revenues in fiscal year 2004. To date, our principal commercial offerings include Very Small
Aperture Terminals (VSATs), broadband internet equipment over satellite, network control systems,
network integration services, network operation services, gateway infrastructure, antenna systems and other satellite ground stations. In addition, based on our advanced satellite technology
and systems integration experience, we have won several important projects in the three key
broadband markets: enterprise, consumer and in-flight mobile applications.
16
Our commercial business offers an end-to-end capability to provide customers with a broad
range of satellite communication and other wireless communications equipment solutions including:
|
|
|
Consumer broadband products and solutions to customers using DOCSIS-based or DVB-RCS-based technology, |
|
|
|
|
Mobile broadband products and systems for in-flight, maritime and ground mobile broadband applications, |
|
|
|
|
Enterprise VSAT networks products and services, |
|
|
|
|
Antenna systems for commercial and defense applications and customers, |
|
|
|
|
Satellite networking systems design and technology development, and |
|
|
|
|
MMIC design and development, with an emphasis in systems engineering of packaged
components, specializing in high-frequency communication technology design and development. |
With expertise in commercial satellite network engineering, gateway construction, and remote
terminal manufacturing for all types of interactive communications services, we believe we have the
ability to take overall responsibility for designing, building, initially operating, and
then handing over a fully operational, customized satellite network serving a variety of markets
and applications.
There
are a number of large new business opportunities we are pursuing in fiscal
year 2006. In the government segment, the opportunities include domestic and international MIDS
orders, new joint tactical radio system contracts, additional funding for current information
assurance projects, new information assurance contracts using our HAIPIS technology, and orders for
our new KG-250 product. In our commercial segment, the opportunities include new production orders
for consumer and mobile broadband systems, further penetration in the North American consumer and
enterprise VSAT market and new antenna systems programs. The timing of these orders is not entirely
predictable, so our new business awards and revenue outlook will vary somewhat from
quarter-to-quarter or even year-to-year.
To date, our ability to grow and maintain our revenues has depended on our ability to identify
and target high technology satellite communication and other communication markets where the
customer places a high priority on the solution, and obtaining additional sizable contract awards.
Due to the nature of this process, it is difficult to predict the probability and timing of
obtaining these awards.
For the current quarter, our income from operations, excluding the income statement line
Amortization of intangible assets, is approximately nine percent of revenues. To the extent we
are not generating sufficient gross profit from revenues, we strive to adjust other operating
expenses to increase this percentage. Due to the need to increase our new contracts awards, to
expand our product portfolio, the high level of customer funded research and development and our
operating performance, we have slowly improved this percentage over the last few fiscal years.
As fiscal year 2006 progresses and we look ahead to fiscal year 2007, we expect to see improvement
and achieve a higher quarterly profit percentage.
Our increased capital needs for fiscal year 2006 as compared to fiscal year 2005 will continue
as we expand our facilities, production test equipment, lab development equipment and VSAT network
operations to meet customer program requirements and growth forecasts. Our facility needs have
normally been met with long-term lease agreements, but we do anticipate additional tenant
improvements over the next two fiscal years associated with our expansion. Additionally, as our
employee base increases, the need for additional computers and other equipment will also increase.
On December 1, 2005, the Company completed the acquisition of all of the outstanding capital
stock of Efficient Channel Coding, Inc. (ECC), a privately-held
designer and supplier of broadband communication
integrated circuits and satellite communication systems. The initial purchase price of
approximately $16.6 million was comprised primarily of
$15.8 million in cash consideration, $227,000 in direct
acquisition costs and $525,000 related to the fair value of options exchanged
at the closing date. The $16.1 million of cash consideration less cash acquired of approximately
$70,000 resulted in a net cash outlay of approximately $16.0 million. An additional $9.0 million
in consideration is payable in cash and/or stock at the Companys
option on or prior to the eighteenth (18) month
anniversary of the Closing Date based on ECC meeting certain
financial performance targets. The additional consideration, if
earned, will be recorded as additional purchase price.
17
At December 1, 2005, the Company recorded $9.8 million in identifiable intangible assets and
$8.6 million in goodwill based on the fair values and the preliminary allocation of purchase price
of the acquired assets and assumed liabilities. The consolidated financial statements include the
operating results of ECC from the date of acquisition in the Companys Satellite Networks product
line in the commercial segment.
The
acquisition of ECC is very complementary to ViaSat because we will
benefit from their technology, namely DVB-S2 and ASIC design
capabilities, customers and highly skilled workforce. The potential
opportunities these benefits provide to ViaSats Satellite
Networks product group in our commercial segment were among the
factors that contributed to a purchase price resulting in the
recognition of goodwill. The intangible assets and goodwill
recognized will be deductible for federal income tax purposes.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. 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 managements
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 the best estimates routinely require adjustment.
Revenue recognition
A substantial portion of our revenues are derived from long-term contracts requiring
development and delivery of products over time and often contain fixed-price purchase options for
additional products. Certain of these contracts are accounted for under the
percentage-of-completion method of accounting under the American Institute of Certified Public
Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1). Sales and earnings under these contracts are
recorded based on the ratio of actual costs incurred to date to total estimated costs expected to
be incurred related to the contract or as products are shipped under the units-of-delivery method.
The percentage-of-completion method of accounting requires management to estimate the profit
margin for each individual contract and to apply that profit margin on a uniform basis as sales are
recorded under the contract. The estimation of profit margins requires management to make
projections of the total sales to be generated and the total costs that will be incurred under a
contract. These projections require management to make numerous assumptions and estimates relating
to items such as the complexity of design and related development costs, performance of
subcontractors, availability and cost of materials, labor productivity and cost, overhead and
capital costs, and manufacturing efficiency. These contracts often include purchase options for
additional quantities and customer change orders for additional or revised product functionality.
Purchase options and change orders are accounted for either as an integral part of the original
contract or separately depending upon the nature and value of the item. Anticipated losses on
contracts are recognized in full in the period in which losses become probable and estimable.
During the three and nine months ended December 30, 2005, we recorded charges of approximately $1.7
million and $5.0 million, respectively, related to loss contracts. During the three and nine months
ended December 31, 2004, we recorded charges of approximately $4.8 million for both periods,
related to loss contracts.
Assuming the initial estimates of sales and costs under a contract are accurate, the
percentage-of-completion method results in the profit margin being recorded evenly as revenue is
recognized under the contract. Changes in these underlying estimates due to revisions in sales and
cost estimates or the exercise of contract options may result in profit margins being recognized
unevenly over a contract as such changes are accounted for on a cumulative basis in the period
estimates are revised. Significant changes in estimates related to accounting for long-term
contracts may have a material effect on our results of operations in the period in which the
revised estimate is made.
We also have contracts and purchase orders where revenue is recorded on delivery of products
in accordance with SAB 104, Staff Accounting Bulletin No. 104: Revenue Recognition. In this
situation, contracts and customer purchase orders are used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are used to verify
delivery. We assess whether the sales price is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund or adjustment, and
assess collectibility based primarily on the creditworthiness of the customer as determined by
credit checks and analysis, as well as the customers payment history.
When a sale involves multiple elements, such as sales of products that include services, the
entire fee from the arrangement is allocated to each respective element based on its relative fair
value in accordance with EITF, 00-21, Accounting for Multiple Element Revenue Arrangements and
recognized when the applicable revenue recognition criteria for each element are met. The
18
amount of product and service revenue recognized is impacted by our judgments as to whether an
arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of
fair value exists for those elements. Changes to the elements in an arrangement and our ability to
establish vendor-specific objective evidence for those elements could affect the timing of the
revenue recognition.
Capitalized software development costs
We charge costs of developing software for sale to research and development expense when
incurred, until technological feasibility has been established. Software development costs incurred
from the time technological feasibility is reached until the product is available for general
release to customers are capitalized and reported at the lower of unamortized cost or net
realizable value. Once the product is available for general release, we amortize the software
development costs 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 not to exceed five years. The determination of net realizable value involves judgment and
estimates of future revenues to be derived from a product, as well as estimates of future costs of
manufacturing that product. We use our experience in the marketplace in making judgments in
estimating net realizable value, but our estimates may differ from the actual outcome. We
periodically assess the assumptions underlying our estimates and, if necessary, we would adjust the
carrying amount of capitalized software development costs downward to our new estimate of net
realizable value.
We did not capitalize any costs related to software developed for resale in the nine month
periods ended December 30, 2005 or December 31, 2004. Amortization expense of software development
was $873,000 and $839,000 for the three months ended December 30, 2005 and December 31, 2004,
respectively, and $2.5 million and $2.6 million for the nine months ended December 30, 2005 and
December 31, 2004, respectively. These software development costs are part of other assets on the
balance sheet and we record the related amortization expense as a charge to cost of revenues on the
statement of operations.
Allowance for doubtful accounts
We make estimates of the collectibility of our accounts receivable based on historical bad
debts, customer credit-worthiness and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts. Historically, our bad debts have been minimal; a contributing
factor to this is that a significant portion of our sales has been to the U.S. government. More
recently, commercial customers comprise a larger part of our revenues. Our accounts receivables
balance was $157.5 million, net of allowance for doubtful accounts of $155,000 as of December 30,
2005 and our accounts receivables balance was $141.3 million, net of allowance for doubtful
accounts of $163,000 as of April 1, 2005.
Warranty reserves
We provide limited warranties on a majority of our products for periods of up to five years.
We record a liability for our warranty obligations when we ship the products based upon an estimate
of expected warranty costs. We classify the amounts we expect to incur within twelve months as a
current liability. For mature products, we estimate the warranty costs based on historical
experience with the particular product. For newer products that do not have a history of warranty
costs, we base our estimates on our experience with the technology involved and the types of
failure 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.
Goodwill and other intangible assets
We account for our goodwill under Statement of Financial Accounting Standards (SFAS) No. 142
Goodwill and Other Intangible Assets. The SFAS No. 142 goodwill impairment model is a two-step
process. First, it requires a comparison of the book value of net assets to the fair value of the
reporting units that have goodwill assigned to them. The only reporting units which have goodwill
assigned to them are the businesses which were acquired and have been included in our commercial
segment. If the fair value is determined to be less than book value, a second step is performed to
compute the amount of the impairment. In this process, a fair value for goodwill is estimated,
based in part on the fair value of the reporting unit used in the first step, and is compared to
its carrying value. The shortfall of the value below carrying value represents the amount of
goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year,
and when an event occurs or circumstances change such that it is reasonably possible that an
impairment may exist.
We estimate the fair values of the related operations using discounted cash flows and other
indicators of fair value. We base the forecast of future cash flows on our best estimate of the
future revenues and operating costs, which we derive primarily from existing firm orders, expected
future orders, contracts with suppliers, labor agreements, and general market conditions. Changes
in these
19
forecasts could cause a particular reporting unit to either pass or fail the first step in the
SFAS No. 142 goodwill impairment model, which could significantly influence whether a goodwill
impairment needs to be recorded. We adjust the cash flow forecasts by an appropriate discount rate
derived from our market capitalization plus a suitable control premium at the date of evaluation.
Impairment of long-lived assets (Property and equipment and other intangible assets)
We adopted SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets on
April 1, 2002. In accordance with SFAS No. 144, we assess potential impairments to our long-lived
assets, including property and equipment and other intangible 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 assets carrying value. Any required impairment loss would
be measured as the amount by which the assets 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. We have not identified any such impairments.
Valuation allowance on deferred tax assets
Management evaluates the realizability of our deferred tax assets and assesses the need for a
valuation allowance on a quarterly basis. In accordance with SFAS No. 109, Accounting for Income
Taxes, 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. A valuation allowance of $758,000 had been provided on deferred tax assets at April 1,
2005, related to the California research credit carryforward
realization. Based on projected future income and usage of California research credits we have reduced the valuation allowance by $758,000 in
the third quarter of fiscal year 2006.
Derivatives
We enter into foreign currency forward and option contracts to hedge certain forecasted
foreign currency transactions. Gains and losses arising from foreign currency forward and option
contracts not designated as hedging instruments are recorded in investment income (expense) as
gains (losses) on derivative instruments. Gains and losses arising from the effective portion of
foreign currency forward and option contracts that are designated as cash-flow hedging instruments
are recorded in accumulated other comprehensive income (loss) as gains (losses) on derivative
instruments until the underlying transaction affects our earnings and are then recorded in the same
income statement line as the underlying transaction. We had $5.9 million of notional value of
foreign currency forward contracts outstanding at December 30, 2005. We had no foreign currency
forward contracts outstanding at December 31, 2004.
20
Results of Operations
The following table presents, as a percentage of total revenues, income statement data for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
December 30, 2005 |
|
December 31, 2004 |
|
December 30, 2005 |
|
December 31, 2004 |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
75.0 |
|
|
|
77.6 |
|
|
|
75.2 |
|
|
|
76.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
25.0 |
|
|
|
22.4 |
|
|
|
24.8 |
|
|
|
23.9 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
13.2 |
|
|
|
12.9 |
|
|
|
13.0 |
|
|
|
13.5 |
|
Independent research and development |
|
|
3.2 |
|
|
|
2.2 |
|
|
|
3.3 |
|
|
|
2.1 |
|
Amortization of intangible assets |
|
|
1.5 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
7.1 |
|
|
|
5.5 |
|
|
|
7.0 |
|
|
|
6.3 |
|
Income before income taxes |
|
|
7.2 |
|
|
|
5.5 |
|
|
|
7.0 |
|
|
|
6.3 |
|
Net income |
|
|
5.9 |
|
|
|
5.9 |
|
|
|
5.6 |
|
|
|
4.9 |
|
The Results of Operations for the nine-month period ended December 30, 2005 include a benefit
to Cost of revenues of $2.7 million relating to the Xetron settlement. See Notes to Condensed
Consolidated Financial Statements Note 8 Commitments and Contingencies.
Three Months Ended December 30, 2005 vs. Three Months Ended December 31, 2004
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Revenues |
|
$ |
111.6 |
|
|
$ |
88.2 |
|
|
$ |
23.4 |
|
|
|
26.6 |
% |
The increase in revenues was due to our higher beginning backlog of $389.9 million, quarterly
customer awards of $78.2 million and the conversion of certain backlog and awards into revenues.
Revenue increases were experienced in both our government and commercial segments and were
predominantly derived from increased revenues in our government communications products
of approximately $5.0 million, and consumer and mobile broadband products of approximately $15.8
million.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Gross profit |
|
$ |
27.9 |
|
|
$ |
19.7 |
|
|
$ |
8.2 |
|
|
|
41.6 |
% |
Percentage of revenues |
|
|
25.0 |
% |
|
|
22.3 |
% |
|
|
|
|
|
|
|
|
Increase in gross profit from $19.7 million to $27.9 million was primarily due to increased
revenues contributing $5.2 million in gross profit and changes in the mix of products sold
increasing gross margin by approximately $3.0 million. Gross profit may fluctuate in future
quarters depending on the mix of products sold and services provided, competitive pricing, new
product introduction costs and other factors.
21
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Selling, general and administrative |
|
$ |
14.7 |
|
|
$ |
11.4 |
|
|
$ |
3.3 |
|
|
|
29.2 |
% |
Percentage of revenues |
|
|
13.2 |
% |
|
|
12.9 |
% |
|
|
|
|
|
|
|
|
The increase in selling, general and administrative (SG&A) expenses in the third quarter of
2006 compared to the third quarter of 2005 was primarily attributable
to higher selling costs due to
our growth and higher facility related expenses due to the
relocation of our Atlanta facilities of approximately $1.0 million. SG&A expenses consist
primarily of personnel costs and expenses for business development, marketing and sales, bid and
proposal, finance, contract administration and general management. Some SG&A expenses are difficult
to predict and vary based on specific government and commercial sales opportunities.
Independent Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Independent research and development |
|
$ |
3.5 |
|
|
$ |
1.9 |
|
|
$ |
1.6 |
|
|
|
81.8 |
% |
Percentage of revenues |
|
|
3.2 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
The increase in independent research and development (IR&D) expenses reflects year over year
increases in the government segment of $703,000 and the commercial segment of $882,000. The higher
IR&D expenses reflect our recognition of certain opportunities in these markets and the need to
invest in the development of new technologies to meet these opportunities.
Amortization
of Intangible Assets The intangible assets from acquisitions
completed in fiscal year 2001,
2002 and fiscal year 2006 are being amortized over useful lives ranging from one
to ten years. The amortization of intangible assets will decrease each year as the intangible
assets with shorter lives become fully amortized.
The current and expected amortization expense for each of the following periods is as follows
(in thousands):
|
|
|
|
|
|
|
Amortization |
|
For the nine months ended December 30, 2005 |
|
$ |
4,718 |
|
|
|
|
|
|
Expected for the remainder of fiscal year 2006 |
|
|
2,088 |
|
Expected for fiscal year 2007 |
|
|
7,254 |
|
Expected for fiscal year 2008 |
|
|
5,584 |
|
Expected for fiscal year 2009 |
|
|
4,836 |
|
Expected for fiscal year 2010 |
|
|
1,612 |
|
Thereafter |
|
|
4,694 |
|
|
|
|
|
|
|
$ |
26,068 |
|
Interest Expense Interest expense was $56,000 for the three months ended December 30, 2005 and
$32,000 for the three months ended December 31, 2004 due to
higher commitment fees as a result of increased line of credit
availability compared to prior year. We had no outstanding borrowings under our
line of credit at December 30, 2005 and December 31, 2004.
Interest Income Interest income increased to $161,000 for the three months ended December 30,
2005 from zero for the three months ended December 31, 2004 due
to higher average invested cash balances
year over year.
Provision (Benefit) for Income Taxes Our effective tax rate for the three months ended
December 30, 2005 was approximately 17.8% compared to an 8.0% tax benefit for the three months
ended December 31, 2004. We currently estimate our annual effective income tax rate to be
approximately 22.7% for fiscal year 2006, as compared to the actual 6.0% effective income tax rate
in fiscal year
22
2005. The
income tax benefit of approximately 8% for the third quarter of
fiscal year 2005 was
lower than the annual effective tax rate primarily due to the recording of federal research and
development tax credits allowed for the third quarter of fiscal year 2005. The 2004 Working Families
Act, enacted on October 4, 2004, extended the federal research and development tax credit from
June 30, 2004 to December 31, 2005. In the first and second quarters of fiscal year 2005, our
estimated annual effective income tax rate did not include the effect of the extension of the
federal research and development tax credit, which resulted in a catch-up adjustment of
approximately $650,000 in the quarter. In addition, our estimate for fiscal year 2005 research and
development tax credit increased, and we also recorded in the third quarter of fiscal year 2005 a
benefit of approximately $300,000 relating to differences in estimates used when preparing our
fiscal 2004 tax provision and actual amounts included in our 2004 tax
return. Our estimated effective tax
rate of 22.7% for fiscal year 2006 reflects the expiration of the federal research and development
tax credit at December 31, 2005. If the federal research and development tax credit is reinstated,
we will have a lower effective tax rate. In the event the federal tax credit for research and
development expenses is reinstated, the amount of the reduction in our tax rate will depend on the
effective date, the terms of the reinstatement as well as the amount of eligible research and
development expenses in our fourth quarter of fiscal year 2006.
A
valuation allowance of $758,000 had been provided
on deferred tax assets at April 1, 2005, related to California
research credit carry forward realization. Based on projected future
income and usage of California research credits we have reduced
the valuation allowance by $758,000 in the third quarter of
fiscal year 2006.
Our Segment Results for the Three Months Ended December 30, 2005 vs. Three Months Ended December
31, 2004
Government Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Revenues |
|
$ |
53.2 |
|
|
$ |
48.6 |
|
|
$ |
4.6 |
|
|
|
9.5 |
% |
The government segment received awards of $33.0 million for the third quarter of fiscal year
2006 compared to $73.4 million for the third quarter of fiscal year 2005.
Revenue increases were predominantly derived from increased revenues in our government
communications products of approximately $5.0 million compared to prior year, offset by slight
sales decreases in various other products.
23
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Operating profit |
|
$ |
12.0 |
|
|
$ |
7.0 |
|
|
$ |
5.1 |
|
|
|
72.3 |
% |
Percentage of government segment revenues |
|
|
22.6 |
% |
|
|
14.4 |
% |
|
|
|
|
|
|
|
|
The increase in government segment operating profit was primarily related to higher revenues
and improved gross margins of approximately eight percentage points
primarily from MIDS production and government
broadband products. The increase in gross margins was partially
offset by higher selling costs of $1.0 million and IR&D expenses of $703,000.
Commercial Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
|
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
49.2 |
|
|
$ |
31.5 |
|
|
$ |
17.7 |
|
|
|
56.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
11.0 |
|
|
$ |
9.5 |
|
|
$ |
1.5 |
|
|
|
15.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
60.2 |
|
|
$ |
41.1 |
|
|
$ |
19.1 |
|
|
|
46.7 |
% |
The increase in commercial segment revenues reflects higher sales in both the satellite
networks and antenna systems product lines. The higher satellite networking systems revenue and
antenna systems revenue is attributable to higher year over year backlog and the conversion of
certain backlog to revenue. The majority of the increase was attributable to sales growth from
consumer and mobile broadband products totaling approximately $15.8 million as compared to prior
year.
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
|
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks operating profit (loss) |
|
$ |
(2.0 |
) |
|
$ |
(0.8 |
) |
|
$ |
(1.2 |
) |
|
|
143.1 |
% |
Percentage of Satellite Network revenues |
|
|
(4.0 |
)% |
|
|
(2.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems operating profit |
|
$ |
0.4 |
|
|
$ |
0.9 |
|
|
$ |
(0.4 |
) |
|
|
(49.2 |
)% |
Percentage of Antenna Systems revenues |
|
|
4.1 |
% |
|
|
9.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss) |
|
$ |
(1.5 |
) |
|
$ |
0.1 |
|
|
$ |
(1.6 |
) |
|
|
(2,033.3 |
)% |
Percentage of commercial segment revenues |
|
|
(2.5 |
)% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
The
decrease in commercial segment operating profit and percentage is
primarily due to a charge of approximately $1.4 million for a
settlement to exit a contract related to a radio frequency
micro-positioning technology, an
increase in IR&D expenses of $882,000 associated with the
development of our DOCSIS-based consumer satellite broadband products
and move costs incurred in the quarter of over $1 million to
relocate our Georgia operations. These decreases were offset by
improved performance in our consumer broadband programs.
24
Nine Months Ended December 30, 2005 vs. Nine Months Ended December 31, 2004
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Revenues |
|
$ |
315.7 |
|
|
$ |
255.0 |
|
|
$ |
60.7 |
|
|
|
23.8 |
% |
The
increase in revenues was due to our beginning backlog of $361.9 million, customer
awards of $310.4 million for the first nine months of our fiscal year 2006 and the conversion of
certain backlog and awards into revenues. Revenues gains were experienced in both our government
and commercial segments. Growth was primarily derived from our tactical data link products and certain
information assurance products increasing approximately $36.3 million, increases from consumer and
mobile broadband products of approximately $31.1 million, offset
by decreases in our UHF mobile
satellite communication and other products of approximately $6.7 million from prior year.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Gross profit |
|
$ |
78.1 |
|
|
$ |
60.9 |
|
|
$ |
17.2 |
|
|
|
28.2 |
% |
Percentage of revenues |
|
|
24.8 |
% |
|
|
23.9 |
% |
|
|
|
|
|
|
|
|
Gross profit dollars grew from the increase in revenue, and gross profit percentage was
slightly higher as well compared to prior year. Results for the first quarter of fiscal year 2006
include a benefit related to a legal settlement with Xetron Corporation, which resulted in a net
benefit to cost of revenues of $2.7 million. Excluding the effects of the Xetron settlement, gross
profit percentages decreased slightly, 0.01%, compared to the same
period last year.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Selling, general and administrative |
|
$ |
40.9 |
|
|
$ |
34.4 |
|
|
$ |
6.5 |
|
|
|
18.7 |
% |
Percentage of revenues |
|
|
13.0 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
SG&A expenses increased due to higher selling expenses in commercial segment, from higher
sales year over year, greater bid and proposal expenses in the government segment, overall higher
selling costs to support our growth and higher facility costs of approximately $1.4 million
related to relocation of our Atlanta facilities, offset by various other net decreases.
25
Independent Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Independent research and development |
|
$ |
10.4 |
|
|
$ |
5.4 |
|
|
$ |
5.0 |
|
|
|
93.8 |
% |
Percentage of revenues |
|
|
3.3 |
% |
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
The increase in IR&D expenses reflects year over year increases in the government segment of
$2.8 million and the commercial segment of $2.2 million. The higher IR&D expenses reflect our
recognition of certain opportunities in these markets and the need to invest in the development of
new technologies to meet these opportunities.
Amortization
of Intangible Assets The intangible assets from acquisitions
completed in fiscal year 2001, 2002 and fiscal year 2006 are being amortized over useful lives ranging from one
to ten years. The amortization of intangible assets will decrease each year as the intangible
assets with shorter lives become fully amortized.
The current and expected amortization expense for each of the following periods is as follows
(in thousands):
|
|
|
|
|
|
|
Amortization |
|
For the nine months ended December 30, 2005 |
|
$ |
4,718 |
|
|
|
|
|
|
Expected for the remainder of fiscal year 2006 |
|
|
2,088 |
|
Expected for fiscal year 2007 |
|
|
7,254 |
|
Expected for fiscal year 2008 |
|
|
5,584 |
|
Expected for fiscal year 2009 |
|
|
4,836 |
|
Expected for fiscal year 2010 |
|
|
1,612 |
|
Thereafter |
|
|
4,694 |
|
|
|
|
|
|
|
$ |
26,068 |
|
Interest Expense Interest expense increased to $238,000 for the nine months ended December 30,
2005 from $91,000 for the nine months ended December 31, 2004. Interest expense relates to
short-term borrowings under our line of credit to cover working capital requirements. The increase
in interest expense was from higher loan costs. We had no outstanding borrowings under our line of
credit at December 30, 2005 and December 31, 2004.
Interest Income Interest income increased to $168,000 for the nine months ended December 30,
2005 from $22,000 for the nine months ended December 31, 2004 due to higher average cash balances
year over year.
Provision for Income Taxes Our effective tax rate for the nine months ended December 30, 2005
was approximately 19.7% compared to 20.7% for the nine months ended December 31, 2004. We currently
estimate our annual effective income tax rate to be approximately 22.7% for fiscal year 2006, as
compared to the actual 6.0% effective income tax rate in fiscal year 2005. Our estimated annual
effective tax rate of 22.7% for fiscal year 2006 reflects the expiration of the federal tax credit
for research and development expenses at December 31, 2005. If the federal research and development
tax credit is reinstated, we will have a lower effective tax rate. In the event the federal
research and development tax credit is reinstated, the amount of the reduction in our tax rate will
depend on the effective date, the terms of the reinstatement as well as the amount of eligible
research and development expenses in our fourth quarter of fiscal year 2006.
A
valuation allowance of $758,000 had been provided
on deferred tax assets at April 1, 2005, related to California
research credit carry forward realization. Based on projected future
income and usage of California research credits we have reduced
the valuation allowance by $758,000 in the third quarter of
fiscal year 2006.
26
Our Segment Results for the Nine Months Ended December 30, 2005 vs. Nine Months Ended December 31,
2004
Government Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Revenues |
|
$ |
156.2 |
|
|
$ |
127.7 |
|
|
$ |
28.5 |
|
|
|
22.3 |
% |
The government segment received awards of $173.1 million for the first nine months of fiscal
year 2006 compared to $178.9 million for the first nine months of fiscal year 2005. The conversion
of certain backlog and orders to revenue contributed to revenue growth. Increased revenues were
primarily attributed to the following products: $25.0 million
increase for tactical data links, principally
our MIDS production units and MIDS JTRS development, $11.3 million increase for certain information assurance systems and products, offset by
decreases of approximately $7.3 million primarily in our UHF satellite communications products.
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Operating profit |
|
$ |
31.7 |
|
|
$ |
20.9 |
|
|
$ |
10.8 |
|
|
|
51.6 |
% |
Percentage of government segment revenues |
|
|
20.3 |
% |
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
The increase in government segment operating profit dollars was primarily related to the
impact from increased revenue period over period contributing approximately $10.8 million in
improved gross profit particularly in our tactical data links products partially offset by higher
SG&A expenses
of $4.9 million and IR&D expenses
of $2.8 million.
Commercial Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
|
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
131.0 |
|
|
$ |
102.0 |
|
|
$ |
29.0 |
|
|
|
28.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
33.7 |
|
|
$ |
29.4 |
|
|
$ |
4.3 |
|
|
|
14.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
164.7 |
|
|
$ |
131.4 |
|
|
$ |
33.3 |
|
|
|
25.3 |
% |
The increase in revenues reflects improved competitive positioning across all our commercial
products, more favorable market conditions in the commercial telecommunications market for our VSAT
network products and further development of our in-flight and consumer satellite broadband internet
systems. Revenue increases were primarily attributable to increases of $31.1 million from our
consumer and mobile broadband products and $4.3 million for antenna systems, offset by decreases
in various other products for the first nine months of fiscal year 2006 over the first nine months
of fiscal year 2005.
27
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Nine months ended |
|
Increase |
|
Increase |
|
|
December 30, 2005 |
|
December 31, 2004 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks operating profit (loss) |
|
$ |
(5.3 |
) |
|
$ |
(0.3 |
) |
|
$ |
(5.0 |
) |
|
|
1,892.5 |
% |
Percentage of Satellite Network revenues |
|
|
(4.0 |
)% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems operating profit |
|
$ |
2.9 |
|
|
$ |
2.6 |
|
|
$ |
0.3 |
|
|
|
13.3 |
% |
Percentage of Antenna Systems revenues |
|
|
8.6 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss) |
|
$ |
(2.4 |
) |
|
$ |
2.3 |
|
|
$ |
(4.7 |
) |
|
|
(204.7 |
)% |
Percentage of commercial segment revenues |
|
|
(1.5 |
)% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
The decrease in commercial
segment operating profit dollars was primarily attributed to
increased Company funded research and development expenses of $2.2 million and decreases in gross margin
primarily due to cost overruns and contract exit costs related to a commercial
radio frequency micro-positioning technology products of
$2.5 million.
Backlog
As reflected in the table below, funded backlog increased while total firm backlog decreased
during the first nine months of fiscal year 2006 with the increase coming from our government
segments.
|
|
|
|
|
|
|
|
|
|
|
December 30, 2005 |
|
|
April 1, 2005 |
|
|
|
(in millions) |
|
Firm backlog |
|
|
|
|
|
|
|
|
Government segment |
|
$ |
211.2 |
|
|
$ |
194.6 |
|
Commercial segment |
|
|
148.5 |
|
|
|
167.3 |
|
|
|
|
|
|
|
|
Total |
|
$ |
359.7 |
|
|
$ |
361.9 |
|
|
|
|
|
|
|
|
Funded backlog |
|
|
|
|
|
|
|
|
Government segment |
|
$ |
136.0 |
|
|
$ |
109.4 |
|
Commercial segment |
|
|
147.0 |
|
|
|
163.9 |
|
|
|
|
|
|
|
|
Total |
|
$ |
283.0 |
|
|
$ |
273.3 |
|
|
|
|
|
|
|
|
Contract options |
|
$ |
36.9 |
|
|
$ |
23.0 |
|
|
|
|
|
|
|
|
The
firm backlog does not include contract options. Of the $359.7 million in firm backlog,
approximately $104.8 million is expected to be delivered during the remaining three months of
fiscal year 2006, and the balance is expected to be delivered in fiscal year 2007 and thereafter.
We include in our backlog only those orders for which we have accepted purchase orders.
Backlog is not necessarily indicative of future sales. A majority of our contracts can be
terminated at the convenience of the customer since 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, contracts may present product specifications that require us to complete
additional product development. A failure to develop products meeting such specifications could
lead to a termination of the related contacts.
The backlog amounts as presented are comprised of funded and unfunded components. Funded
backlog represents the sum of contract amounts for which funds have been specifically obligated by
customers to contracts. Unfunded backlog (primarily associated with our government segment
contracts) 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 funding of our contracts is not
within our control, our experience indicates that actual contract fundings have ultimately
been approximately equal to the aggregate amounts of the contracts.
28
Liquidity and Capital Resources
We have financed our operations to date primarily with cash flows from operations, bank line
of credit financing and equity financing. The general cash needs of our government and commercial
segments can vary significantly and depend on the type and mix of contracts (i.e. product or
service, development or production, timing of payments, etc.) in backlog, the quality of the
customer (i.e. U.S. government or commercial, domestic or international) and the duration of the
contract. In addition, for both of our segments, program performance significantly impacts the
timing and amount of cash flows. If a program is performing and meeting its contractual
requirements, then the cash flow requirements are usually lower.
The cash needs of the government segment tend to be more of a function of the type of contract
rather than customer quality. Also, U.S. government procurement regulations tend to restrict the
timing of cash payments on the contract. In the commercial segment, our cash needs are driven
primarily by the quality of the customer and the type of contract. The quality of the customer will
typically affect the specific contract cash flow and whether financing instruments are required by
the customer. In addition, the commercial environment tends to provide for more flexible payment
terms with customers, including advance payments.
Cash provided by operating activities for the first nine months of fiscal year 2006 was $30.0
million as compared to cash used by operating activities for the first nine months of fiscal year
2005 of $4.4 million. The increase in cash provided by operating activities was primarily
attributable to net income and non-cash add-backs of $32.3 million
less working capital reduction of $2.3 million. Billed accounts receivable
increased due to increased shipments in both our government and commercial segments and the
achievement of program milestones. Unbilled accounts receivable decreased due to the achievement of
milestones primarily on tactical data links, information assurance, consumer broadband and
enterprise VSAT programs. We believe the unbilled accounts receivable balances will continue to
decline as we achieve further program milestones and increase production deliveries.
Cash used in investing activities for the first nine months of fiscal year 2006 was $28.6
million as compared to cash used in investing activities for the first nine months of fiscal year
2005 of $8.9 million. The increase in cash used in investing activities primarily relates to $16.0
million in cash used to acquire Efficient Channel Coding, Inc. (ECC) and asset purchases for our
new facilities in Carlsbad and Atlanta, which are both expected to be substantially completed in
fiscal year 2006.
Cash provided by financing activities for the first nine months of fiscal year 2006 was $6.3
million as compared to cash provided by financing activities for the first nine months of fiscal
year 2005 of $3.5 million. Activity for both years is solely due to cash received from the exercise
of employee stock options and stock purchases through our stock purchase plan.
At December 30, 2005, we had $22.2 million in cash, cash equivalents and short-term
investments, $148.4 million in working capital and no outstanding borrowings under our line of
credit. We had $5.8 million outstanding under standby letters of credit leaving borrowing
availability under our line of credit of $54.2 million. At April 1, 2005, we had $14.7 million in
cash and cash equivalents and short-term investments, $138.9 million in working capital and no
outstanding borrowings under our line of credit.
On January 31, 2005, we entered into a three-year, $60 million revolving credit facility (the
Facility) with Union Bank of California, Comerica Bank and Silicon Valley Bank.
Borrowings under the Facility are permitted up to a maximum amount of $60 million, including
up to $15 million of letters of credit. Borrowings under the Facility bear interest, at our option,
at either the lenders prime rate or at LIBOR (London Interbank Offered Rate) plus, in each case,
an applicable margin based on the ratio of ViaSats total funded debt to EBITDA (income from
operations plus depreciation and amortization). The Facility is collateralized by substantially all
of ViaSats personal property assets.
The Facility contains financial covenants that set a minimum EBITDA limit for the twelve-month
period ending on the last day of any fiscal quarter at $30 million, a minimum tangible net worth as
of the last day of any fiscal quarter at $135 million and a minimum quick ratio (sum of cash and
cash equivalents, accounts receivable and marketable securities, divided by current liabilities) as
of the last day of any fiscal quarter at 1.50 to 1.00. We were in compliance with our loan
covenants at December 30, 2005.
29
In June 2004 we filed a universal shelf registration statement with the Securities and
Exchange Commission for the future sale of up to $154 million of debt securities, common stock,
preferred stock, depositary shares and warrants. Additionally, ViaSat has available $46 million of
these securities, which were previously registered under a shelf registration statement ViaSat
originally filed in September 2001. Up to $200 million of the securities may now be offered from
time to time, separately or together, directly by us or through underwriters at amounts, prices,
interest rates and other terms to be determined at the time of the offering. We currently intend to
use the net proceeds from the sale of the securities under the shelf registration statement for
general corporate purposes, including acquisitions, capital expenditures and working capital.
Our future capital requirements will depend upon many factors, including the expansion of our
research and development and marketing efforts and the nature and timing of orders. Additionally,
we will continue to evaluate possible acquisitions of, or investments in complementary businesses,
products and technologies which may require the use of cash. We believe that our current cash
balances and net cash expected to be provided by operating activities will be sufficient to meet
our operating requirements for at least the next twelve months. However, we may sell additional
equity or debt securities or obtain credit facilities to further enhance our liquidity position.
The sale of additional securities could result in additional dilution of our stockholders. We
invest our cash in excess of current operating requirements in short-term, interest-bearing,
investment-grade securities.
Contractual Obligations
The following table sets forth a summary of our obligations under operating leases,
irrevocable letters of credit, purchase commitments and other long-term liabilities for the periods
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the remainder of |
|
|
For the fiscal years |
|
|
|
Total |
|
|
fiscal year 2006 |
|
|
2007-2008 |
|
|
2009-2010 |
|
|
After 2010 |
|
Operating leases |
|
$ |
81,465 |
|
|
$ |
1,548 |
|
|
$ |
15,891 |
|
|
$ |
15,814 |
|
|
$ |
48,212 |
|
Standby letters of credit |
|
|
5,788 |
|
|
|
986 |
|
|
|
2,269 |
|
|
|
|
|
|
|
2,533 |
|
Land purchase commitment |
|
|
3,115 |
|
|
|
3,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments |
|
|
137,276 |
|
|
|
30,791 |
|
|
|
106,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
227,644 |
|
|
$ |
36,440 |
|
|
$ |
124,645 |
|
|
$ |
15,814 |
|
|
$ |
50,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 as defined by us or that
establish the parameters defining our requirements. In certain instances, these agreements allow us
the option to cancel, reschedule and adjust our requirements based on our business needs prior to
firm orders being placed. Consequently, only a portion of our reported purchase commitments arising
from these agreements are firm, non-cancelable and unconditional commitments.
On September 15, 2005, we entered into an agreement to purchase approximately 10 acres of land
adjacent to a leased facility for approximately $3.1 million. We completed this transaction in
January 2006.
Future Accounting Requirements
In December 2004, the Financial Accounting Standards Board (FASB) revised Statement No. 123
(SFAS 123R), Share-Based Payment, which requires companies to expense the estimated fair value of
employee stock options and similar awards. On April 14, 2005, the Securities and Exchange
Commission adopted a new rule amending the compliance dates for SFAS 123R. In accordance with the
new rule, the accounting provisions of SFAS 123R will be effective
for us in the first quarter of fiscal year 2007. We
will adopt the provisions of SFAS 123R and plan to use the modified prospective transition method.
Under the modified prospective transition method, SFAS 123R, which provides certain changes to
the method for valuing stock-based compensation among other changes, will apply to new awards and
to awards that are outstanding on the effective date and are subsequently modified or cancelled.
Compensation expense for outstanding awards for which the requisite service had not been rendered
as of the effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under SFAS 123. As permitted by SFAS
123, we currently account for stock-based compensation using APB 25s intrinsic value method and,
as such, generally recognize no compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123R will likely have a material impact on our results of operations. However, the
ultimate impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future.
30
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements at December 30, 2005.
Factors That May Affect Future Performance
You should consider each of the following factors as well as the other information in this
Quarterly Report in evaluating our business and prospects. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us
or that we currently consider immaterial may also impair our business operations. If any of the
following risks actually occur, our business and financial results could be harmed. In that case
the trading price of our common stock could decline. You should also refer to the other information
set forth in this Quarterly Report, including our financial statements and the related notes.
A Significant Portion of Our Revenues Is Derived from a Few of Our Contracts
A small number of our contracts account for a significant percentage of our revenues. Our
largest revenue producing contracts are related to our tactical data links (which includes MIDS)
products generating approximately 26% of our revenues in the first nine months of fiscal year 2006,
22% of our revenues in fiscal year 2005 and 15% of our revenues in fiscal year 2004. Our five
largest contracts generated approximately 44% of our revenues in the first nine months of fiscal
year 2006, 27% of our revenues in fiscal year 2005 and 24% of our revenues in fiscal year 2004. The
failure of these customers to place additional orders or to maintain these contracts with us for
any reason, including any downturn in their business or financial condition, or our inability to
renew our contracts with these customers or obtain new contracts when they expire, could materially
harm our business and impair the value of our common stock.
If Our Customers Experience Financial or Other Difficulties, Our Business Could Be Materially Harmed
A number of our commercial customers have in the past, and may in the future experience
financial difficulties. Many of our commercial customers face risks that are similar to those we
encounter, including risks associated with market growth, acceptance by the market of products and
services, and the ability to obtain sufficient capital. We cannot assure you that our customers
will be successful in managing these risks. If our customers do not successfully manage these types
of risks, it could impair our ability to generate revenues, collect amounts due from these
customers and materially harm our business.
Major communications infrastructure programs, such as proposed satellite communications
systems, are important sources of our current and planned future revenues. We also participate in a
number of defense programs. Programs of these types often cannot proceed unless the customer can
raise substantial funds, from either governmental or private sources. As a result, our expected
revenues can be adversely affected by political developments or by conditions in private and public
capital markets. They can also be adversely affected if capital markets are not receptive to a
customers proposed business plans. If our customers are unable to raise adequate funds it could
materially harm our business and impair the value of our common stock.
Our Development Contracts May Be Difficult for Us to Comply With and May Expose Us to Third-Party
Claims for Damages
We are often party to government and commercial contracts involving the development of new
products. We derived approximately 24% of our revenues in the first nine months of fiscal year
2006, 24% of our revenues in fiscal year 2005 and 29% of our revenues in fiscal year 2004 from
these development contracts. These contracts typically contain strict performance obligations and
project milestones. We cannot assure you we will comply with these performance obligations or meet
these project milestones in the future. If we are unable to comply with these performance
obligations or meet these milestones, our customers may terminate these contracts and, under some
circumstances, recover damages or other penalties from us. We are not currently, nor have we always
been, in compliance with all outstanding performance obligations and project milestones. In the
past, when we have not complied with the performance obligations or project milestones in a
contract, generally, the other party has not elected to terminate the contract or seek damages from
us. However, we cannot assure you in the future other parties will not terminate their contracts or
seek damages from us. If other parties elect to terminate their contracts or seek damages from us,
it could materially harm our business and impair the value of our common stock.
We Face Potential Product Liability Claims
We may be exposed to legal claims relating to the products we sell or the services we provide.
Our agreements with our customers generally contain terms designed to limit our exposure to
potential product liability claims. We also maintain a product liability insurance policy for our
business. However, our insurance may not cover all relevant claims or may not provide sufficient
coverage. If our insurance coverage does not cover all costs resulting from future product liability
claims, it could materially harm our business and impair the value of our common stock.
31
Our Operating Results May Be Adversely Affected by Unfavorable Economic and Market Conditions
Adverse and uncertain economic conditions worldwide have had significant effects on markets we
serve, particularly satellite communications equipment manufacturers, service providers and network
operators, and have had a negative effect on our revenues. Adverse and uncertain economic
conditions may affect our business in the future, including our ability to increase or maintain our
revenues and operating results. In addition, because we intend to continue to make investments in
research and development, any decline in the rate of growth of our revenues will have a significant
adverse impact on our operating results.
Further, because current domestic and global economic conditions and economies are uncertain,
it is difficult to estimate the growth in various parts of the economy, including the markets in
which we participate. Because parts of our budgeting and forecasting are reliant on estimates of
growth in the markets we serve, the current economic uncertainty renders estimates of future
revenues and expenditures even more difficult than usual to formulate. The future direction of the
overall domestic and global economies could have a significant impact on our overall financial
performance and impair the value of our common stock.
We May Experience Losses from Our Fixed-Price Contracts
Approximately 89% of our revenues for the first nine months of fiscal year 2006, 88% of our
revenues in fiscal year 2005 and 89% of our revenues in fiscal year 2004 were derived from
government and commercial contracts with fixed prices. We assume greater financial risk on
fixed-price contracts than on other types of contracts because if we do not anticipate technical
problems, estimate costs accurately or control costs during performance of a fixed-price contract,
it may significantly reduce our net profit or cause a loss on the contract. In the past, we have
experienced significant cost overruns and losses on fixed price contracts. We believe a high
percentage of our contracts will be at fixed prices in the future. Although we attempt to
accurately estimate costs for fixed-price contracts, we cannot assure you our estimates will be
adequate or that substantial losses on fixed-price contracts will not occur in the future. If we
are unable to address any of the risks described above, it could materially harm our business and
impair the value of our common stock.
Our Reliance on a Limited Number of Third Parties to Manufacture and Supply Our Products Exposes Us
to Various Risks
Our internal manufacturing capacity is limited and we do not intend to expand our capability
in the foreseeable future. We rely on a limited number of contract manufacturers to produce our
products and expect to rely increasingly on these manufacturers in the future. In addition, some
components, subassemblies and services necessary for the manufacture of our products are obtained
from a sole supplier or a limited group of suppliers.
Our reliance on contract manufacturers and on sole suppliers or a limited group of suppliers
involves several risks. We may not be able to obtain an adequate supply of required components, and
our control over the price, timely delivery, reliability and quality of finished products may be
reduced. The process of manufacturing our products and some of our components and subassemblies is
extremely complex. We have in the past experienced and may in the future experience delays in the
delivery of and quality problems with products and components and subassemblies from vendors. Some
of the suppliers we rely upon have relatively limited financial and other resources. Some of our
vendors have manufacturing facilities in areas that may be prone to natural disasters and other
natural occurrence that may affect their ability to perform and deliver under our contract. If we
are not able to obtain timely deliveries of components and subassemblies of acceptable quality or
if we are otherwise required to seek alternative sources of supply, or to manufacture our finished
products or components and subassemblies internally, it could delay or prevent us from delivering
our systems promptly and at high quality. This failure could damage relationships with current or
prospective customers, which, in turn, could materially harm our business and impair the value of
our common stock.
The Markets We Serve Are Highly Competitive and Our Competitors May Have Greater Resources Than Us
The wireless communications industry is highly competitive and competition is increasing. In
addition, because our industry is evolving and characterized by rapid technological change, it is
difficult for us to predict whether, when and who may introduce new competing technologies,
products or services into our markets. Currently, we face substantial competition from domestic and
international wireless and ground-based communications service providers in the commercial and
government industries. Many of our competitors and potential competitors have significant
competitive advantages, including strong customer relationships, more experience with regulatory
compliance, greater financial and management resources, and control over central communications
networks. In addition, some of our customers continuously evaluate whether to develop and
manufacture their own products and could elect to compete with us at any time. Increased
competition from any of these or other entities could materially harm our business and impair the
value of our common stock.
32
We Depend on a Limited Number of Key Employees Who Would Be Difficult to Replace
We depend on a limited number of key technical, marketing and management personnel to manage
and operate our business. In particular, we believe our success depends to a significant degree on
our ability to attract and retain highly skilled personnel, including our Chairman and Chief
Executive Officer, Mark D. Dankberg, and those highly skilled design, process and test engineers
involved in the manufacture of existing products and the development of new products and processes.
The competition for these types of personnel is intense, and the loss of key employees could
materially harm our business and impair the value of our common stock. We do not have employment
agreements with any of our officers.
Because We Conduct Business Internationally, We Face Additional Risks Related to Global Political
and Economic Conditions and Currency Fluctuations
Approximately 19% of our revenues for the first nine months of fiscal year 2006, 27% of our
revenues in fiscal year 2005 and 24% of our revenues in fiscal year 2004 were derived from
international sales. We anticipate international sales will account for an increasing percentage of
our revenues over the next several years. Many of these international sales may be denominated in
foreign currencies. Because we do not currently engage in nor do we anticipate engaging in material
foreign currency hedging transactions related to international sales, a decrease in the value of
foreign currencies relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies. This decrease in value could also make our products less price-competitive.
There are additional risks in conducting business internationally, including:
|
|
|
unexpected changes in regulatory requirements, |
|
|
|
|
increased cost of localizing systems in foreign countries, |
|
|
|
|
increased sales and marketing and research and development expenses, |
|
|
|
|
availability of suitable export financing, |
|
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|
timing and availability of export licenses, |
|
|
|
|
tariffs and other trade barriers, |
|
|
|
|
political and economic instability, |
|
|
|
|
challenges in staffing and managing foreign operations, |
|
|
|
|
difficulties in managing distributors, |
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|
potentially adverse tax consequences, |
|
|
|
|
potential difficulty in making adequate payment arrangements, and |
|
|
|
|
potential difficulty in collecting accounts receivable. |
In addition, some of our customer purchase agreements are governed by foreign laws, which may
differ significantly from U.S. laws. We may be limited in our ability to enforce our rights under
these agreements and to collect damages, if awarded. If we are unable to address any of the risks
described above, it could materially harm our business and impair the value of our common stock.
33
Our Operating Results Have Varied Significantly from Quarter to Quarter in the Past and, if They
Continue to do so, the Market Price of Our Common Stock Could Be Impaired
Our operating results have varied significantly from quarter to quarter in the past and may
continue to do so in the future. The factors that cause our quarter-to-quarter operating results to
be unpredictable include:
|
|
|
a complex and lengthy procurement process for most of our customers or potential customers, |
|
|
|
|
changes in the levels of research and development spending, including the effects of associated tax credits, |
|
|
|
|
cost overruns on fixed price development contracts, |
|
|
|
|
the difficulty in estimating costs over the life of a contract, which may require adjustment in future periods, |
|
|
|
|
the timing, quantity and mix of products and services sold, |
|
|
|
|
price discounts given to some customers, |
|
|
|
|
market acceptance and the timing of availability of our new products, |
|
|
|
|
the timing of customer payments for significant contracts, |
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|
|
|
one time charges to operating income arising from items such as acquisition expenses and
write-offs of assets related to customer non-payments or obsolescence, |
|
|
|
|
the failure to receive an expected order or a deferral of an order to a later period, and |
|
|
|
|
general economic and political conditions. |
As a result, we believe period-to-period comparisons of our operating results are not
necessarily meaningful and you should not rely upon them as indicators of future performance. If we
are unable to address any of the risks described above, it could materially impair the value of our
common stock. In addition, it is likely that in one or more future quarters our results may fall
below the expectations of analysts and investors. In this event, the trading price of our common
stock would likely decrease.
If Commercial Wireless Communications Markets Fail to Grow as Anticipated, Our Business Could Be
Materially Harmed
A number of the commercial markets for our products in the wireless communications area,
including our broadband products, have only recently developed. Because these markets are
relatively new, it is difficult to predict the rate at which these markets will grow, if at all. If
the markets for commercial wireless communications products fail to grow, or grow more slowly than
anticipated, our business could be materially harmed. Conversely, to the extent that growth in
these markets results in capacity limitations in the wireless communications area, it could
materially harm our business and impair the value of our common stock.
Our Reliance on U.S. Government Contracts Exposes Us to Significant Risks
Our government segment revenues were approximately 50% of our revenues in the first nine
months of fiscal year 2006, 51% of our revenues in fiscal year 2005 and 46% of our revenues in
fiscal year 2004, and were derived from U.S. government applications. Our U.S. government business
will continue to represent a significant portion of our revenues for the foreseeable future. U.S.
government business exposes us to various risks, including:
|
|
|
unexpected contract or project terminations or suspensions, |
|
|
|
|
unpredictable order placements, reductions or cancellations, |
|
|
|
|
reductions in government funds available for our projects due to government policy
changes, budget cuts and contract adjustments, |
34
|
|
|
the ability of competitors to protest contractual awards, |
|
|
|
|
penalties arising from post-award contract audits, |
|
|
|
|
cost audits in which the value of our contracts may be reduced, |
|
|
|
|
higher-than-expected final costs, particularly relating to software and hardware
development, for work performed under contracts where we commit to specified deliveries for
a fixed price, |
|
|
|
|
limited profitability from cost-reimbursement contracts under which the amount of profit
is limited to a specified amount, and |
|
|
|
|
unpredictable cash collections of unbilled receivables that may be subject to acceptance
of contract deliverables by the customer and contract close-out procedures, including
government approval of final indirect rates. |
In addition, substantially all of our U.S. government backlog scheduled for delivery can be
terminated at the convenience of the U.S. government because our contracts with the U.S. government
typically provide that orders may be terminated with limited or no penalties. If we are unable to
address any of the risks described above, it could materially harm our business and impair the
value of our common stock.
We Depend Heavily on the VSAT Market
We derived approximately 20% of our revenues for the first nine months of fiscal year 2006,
26% of our revenues in fiscal year 2005 and 28% of our revenues in fiscal year 2004 from sales of
VSAT communications networks. A significant decline in this market, increased competition from
alternative technologies (DSL, cable and terrestrial wireless) or the replacement of VSAT
technology by an alternative technology could materially harm our business and impair the value of
our common stock.
Our Credit Facility Contains Restrictions that Could Limit Our Ability to Implement Our Business
Plan
The restrictions contained in our line of credit may limit our ability to implement our
business plan, finance future operations, respond to changing business and economic conditions,
secure additional financing, and engage in opportunistic transactions, such as strategic
acquisitions. In addition, if we fail to meet the covenants contained in our line of credit, our
ability to borrow under our line of credit may be restricted. The line of credit, among other
things, restricts our ability to do the following:
|
|
|
incur additional indebtedness, |
|
|
|
|
create liens on our assets, |
|
|
|
|
make certain payments, including payments of dividends in respect of capital stock, |
|
|
|
|
consolidate, merge and sell assets, |
|
|
|
|
engage in certain transactions with affiliates, and |
|
|
|
|
make acquisitions. |
In addition, the line of credit requires us to satisfy the following financial tests:
|
|
|
minimum EBITDA (income from operations plus depreciation and amortization) for the
twelve-month period ending on the last day of any fiscal quarter of $30 million, |
|
|
|
|
minimum tangible net worth as of the last day of any fiscal quarter of $135 million, and |
|
|
|
|
minimum quick ratio (sum of cash and cash equivalents, accounts receivable and marketable
securities, divided by current liabilities) as of the last day of any fiscal quarter of 1.50
to 1.00. |
35
In the past we have violated our credit facility covenants and received waivers for these
violations. We cannot assure that we will be able to comply with our financial or other covenants
or that any covenant violations will be waived in the future. Any violation not waived could result
in an event of default, permitting the lenders to suspend commitments to make any advance, to
declare notes and interest thereon due and payable, and to require any outstanding letters of
credit to be collateralized by an interest bearing cash account, any or all of which could have a
material adverse effect on our business, financial condition and results of operations. In
addition, if we fail to comply with our financial or other covenants, we may need additional
financing in order to service or extinguish our indebtedness. We may not be able to obtain
financing or refinancing on terms acceptable to us, if at all.
Our Success Depends on the Development of New Satellite and Other Wireless Communications Products
and Our Ability to Gain Acceptance of These Products
The wireless communications market in general, and the satellite communications market in
particular, are subject to rapid technological change, frequent new and enhanced product
introductions, product obsolescence and changes in user requirements. Our ability to compete
successfully in these markets depends on our success in applying our expertise and technology to
existing and emerging satellite and other wireless communications markets. Our ability to compete
in these markets also depends in large part on our ability to successfully develop, introduce and
sell new products and enhancements on a timely and cost-effective basis that respond to
ever-changing customer requirements. Our ability to successfully introduce new products depends on
several factors, including:
|
|
|
successful integration of various elements of our complex technologies and system architectures, |
|
|
|
|
timely completion and introduction of new product designs, |
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|
|
|
achievement of acceptable product costs, |
|
|
|
|
timely and efficient implementation of our manufacturing and assembly processes and cost reduction efforts, |
|
|
|
|
establishment of close working relationships with major customers for the design of their
new wireless communications systems incorporating our products, |
|
|
|
|
development of competitive products and technologies by competitors, |
|
|
|
|
marketing and pricing strategies of our competitors with respect to competitive products, and |
|
|
|
|
market acceptance of our new products. |
We cannot assure you our product or technology development efforts for communications products
will be successful or any new products and technologies we develop, including ArcLight, KG-250,
MIDS-JTRS, Surfbeam (our DOCSIS-based consumer broadband product), DVB-S2 and LinkStar, will
achieve sufficient market acceptance. We may experience difficulties that could delay or prevent us
from successfully selecting, developing, manufacturing or marketing new products or enhancements.
In addition, defects may be found in our products after we begin deliveries that could result in
the delay or loss of market acceptance. If we are unable to design, manufacture, integrate and
market profitable new products for existing or emerging communications markets, it could materially
harm our business and impair the value of our common stock.
A Decrease in the Selling Prices of Our Products Could Materially Harm Our Business
The average selling prices of wireless communications products historically decline over
product life cycles. In particular, we expect the average selling prices of our products to decline
as a result of competitive pricing pressures and customers who negotiate discounts based on large
unit volumes. We also expect competition in this industry will continue to increase. To offset
these price decreases, we intend to rely primarily on obtaining yield improvements and
corresponding cost reductions in the manufacturing process of existing products and on the
introduction of new products with advanced features, which can be sold at higher prices. However,
we cannot assure you we will be able to obtain any yield improvements or cost reductions or
introduce any new products in the future. To the extent we do not reduce costs or introduce new
products in a timely manner, or our new products do not achieve market acceptance, it could
materially harm our business and impair the value of our common stock.
36
We Expect to Incur Research and Development Costs, Which Could Significantly Reduce Our
Profitability
Our future growth depends on penetrating new markets, adapting existing communications
products to new applications, and introducing new communications products that achieve market
acceptance. Accordingly, we are actively applying our communications expertise to design and
develop new hardware and software products and enhance existing products. We expended $10.4 million
in the first nine months of fiscal year 2006, $8.1 million in fiscal year 2005 and $10.0 million in
fiscal year 2004 in research and development activities. We expect to continue to spend
discretionary funds on research and development in the near future. The amount of funds spent on
research and development projects is dependent on the amount and mix of customer funded
development, the types of technology being developed and the affordability of the technology being
developed. Because we account for research and development as an operating expense, these
expenditures will adversely affect our earnings in the near future. Our research and development
program may not produce successful results, which could materially harm our business and impair the
value of our common stock.
Our Ability to Protect Our Proprietary Technology is Limited and Infringement Claims Against Us
Could Restrict Our Ability to Conduct Business
Our success depends significantly on our ability to protect our proprietary rights to the
technologies we use in our products and services. If we are unable to protect our proprietary
rights adequately, our competitors could use the intellectual property we have developed to enhance
their own products and services, which could materially harm our business and impair the value of
our common stock. We currently rely on a combination of patents, trade secret laws, copyrights,
trademarks, service marks and contractual rights to protect our intellectual property. We cannot
assure you the steps we have taken to protect our proprietary rights are adequate. Also, we cannot
assure you our issued patents will remain valid or that any pending patent applications will be
issued. Additionally, the laws of some foreign countries in which our products are or may be sold
do not protect our intellectual property rights to the same extent as do the laws of the United
States.
Litigation may often be necessary to protect our intellectual property rights and trade
secrets, to determine the validity and scope of the proprietary rights of others or to defend
against claims of infringement or invalidity. We believe infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from infringement claims
will likely be asserted against us in the future. If any claims or actions are asserted against us,
we may seek to obtain a license under a third partys intellectual property rights. We cannot
assure you, however, that a license will be available under reasonable terms or at all. Litigation
of intellectual property claims could be extremely expensive and time consuming, which could
materially harm our business, regardless of the outcome of the litigation. If our products are
found to infringe upon the rights of third parties, we may be forced to incur substantial costs to
develop alternative products. We cannot assure you we would be able to develop alternative products
or, if these alternative products were developed, they would perform as required or be accepted in
the applicable markets. Also, we have delivered certain technical data and information to the U.S.
government under procurement contracts, and it may have unlimited rights to use that technical data
and information. There can be no assurance that the U.S. government will not authorize others to
use that data and information to compete with us. If we are unable to address any of the risks
described above relating to the protection of our proprietary rights or the U.S. governments
rights with respect to certain technical data and information, it could materially harm our
business and impair the value of our common stock.
Compliance with Changing Regulation of Corporate Governance and Public Disclosure May Result in
Additional Expenses
Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market
rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations
and standards are subject to varying interpretations in many cases due to their lack of
specificity, and as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies, which could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance
practices. We are committed to maintaining high standards of corporate governance and public
disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have
resulted in, and are likely to continue to result in, increased general and administrative expenses
and a diversion of management time and attention from revenue-generating activities to compliance
activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002
and the related regulations regarding our required assessment of our internal control over
financial reporting and our independent registered public accounting firms audit of that
assessment has required, and is likely to continue to require, the commitment of significant
financial and managerial resources, which could materially harm our business and impair the value
of our common stock.
37
We May Identify Material Weaknesses in the Future
In the past we have identified a material weakness in internal control over financial
reporting. Although we have been able to remediate the material weakness and certain internal
control deficiencies in the past, we cannot assure you in the future that a material weakness will
not exist. If this would be the case, and we cannot timely remediate such material weakness,
management may conclude that our internal control over financial reporting is not operating
effectively or our independent registered public accounting firm may be required to issue an
adverse opinion on our internal control over financial reporting, which could in either case
adversely affect investor confidence and impair the value of our common stock.
Changes in Financial Accounting Standards Related to Stock Option Expenses Are Expected to Have a
Significant Effect on Our Reported Results
The FASB issued a revised standard that requires that we record compensation expense in the
statement of operations for employee stock options using the fair value method. The adoption of the
new standard is expected to have a significant effect on our reported earnings and could adversely
impact our ability to provide accurate guidance on our future reported financial results due to the
variability of the factors used to establish the value of stock options. As a result, the adoption
of the new standard in fiscal year 2007 could impair the value of our common stock and result in
greater stock price volatility.
We Depend on the Recruitment and Retention of Personnel with U.S. Government Security Clearances,
and Our Failure to Attract and Retain Such Personnel Could Seriously Harm Our Business
Due to the specialized nature of our businesses, our future performance is dependent upon the
continued services of our key engineering and management personnel with U.S. government security
clearances. Our prospects depend in part upon our ability to attract and retain qualified
engineering and management personnel for our operations. Competition for personnel with U.S.
government security clearances is intense, and we may not be successful in attracting or retaining
such qualified personnel. Our failure to compete for these personnel could seriously harm our
business, results of operations and financial condition.
We May Engage in Strategic Transactions That Could Result in Significant Charges and Management
Disruption and Fail to Enhance Stockholder Value
From time to time, we consider strategic transactions and alternatives with the goal of
maximizing stockholder value. These strategic transactions entail a high degree of risk. We will
continue to evaluate potential strategic transactions and alternatives we believe may enhance
stockholder value. These potential future transactions may include a variety of different business
arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures,
restructurings, divestitures, business combinations and investments. Although our goal is to
maximize stockholder value, such transactions may have unexpected results that adversely affect our
business and the trading price of our common stock. Any such transaction may require us to incur
non-recurring or other charges and may pose significant integration challenges and management and
business disruptions, which could harm our operating results and business prospects.
Any Failure to Successfully Integrate Strategic Acquisitions Could Adversely Affect Our Business
In order to position ourselves to take advantage of growth opportunities, we have made, and
may continue to make, strategic acquisitions that involve significant risks and uncertainties.
These risks and uncertainties include:
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the challenges in achieving strategic objectives, cost savings and other benefits expected from acquisitions, |
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the risk our markets do not evolve as anticipated and the technologies acquired do not
prove to be those needed to be successful in those markets, |
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the potential loss of key employees of the acquired businesses, |
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the risk of diverting the attention of senior management from the operations of our business, |
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the risks of entering markets in which we have less experience, and |
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the risks of potential disputes concerning indemnities and other obligations that could
result in substantial costs and further divert managements attention and resources. |
Any failure to successfully integrate strategic acquisitions could harm our business and
impair the value of our common stock. Furthermore, to complete future acquisitions we may issue
equity securities, incur debt, assume contingent liabilities or have amortization expenses and
write-downs of acquired assets, which could cause our earnings per share to decline.
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Exports of Our Defense Products are Subject to the International Traffic in Arms Regulations and
Require a License from the U.S. Department of State Prior to Shipment
We must comply with the United States Export Administration Regulations and the International
Traffic in Arms Regulations, or ITAR. Our products that have military or strategic applications are
on the munitions list of the ITAR and require an individual validated license in order to be
exported to certain jurisdictions. Any changes in export regulations may further restrict the
export of our products, and we may cease to be able to procure export licenses for our products
under existing regulations. The length of time required by the licensing process can vary,
potentially delaying the shipment of products and the recognition of the corresponding revenue. Any
restriction on the export of a significant product line or a significant amount of our products
could cause a significant reduction in net sales.
Adverse Regulatory Changes Could Impair Our Ability to Sell Products
Our products are incorporated into wireless communications systems that must comply with
various government regulations, including those of the Federal Communications Commission (FCC). In
addition, we operate and provide services to customers through the use of several satellite earth
hub stations, which are licensed by the FCC. Regulatory changes, including changes in the
allocation of available frequency spectrum and in the military standards and specifications that
define the current satellite networking environment, could materially harm our business by (1)
restricting development efforts by us and our customers, (2) making our current products less
attractive or obsolete, or (3) increasing the opportunity for additional competition. Changes in,
or our failure to comply with, applicable regulations could materially harm our business and impair
the value of our common stock. In addition, the increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for these products and
services, generally following extensive investigation of and deliberation over competing
technologies. The delays inherent in this government approval process have caused and may continue
to cause our customers to cancel, postpone or reschedule their installation of communications
systems. This, in turn, may have a material adverse effect on our sales of products to our
customers.
Our Executive Officers and Directors Own a Large Percentage of Our Common Stock and Exert
Significant Influence Over Matters Requiring Stockholder Approval
As of February 2, 2006, our executive officers and directors and their affiliates beneficially
owned an aggregate of approximately 19% of our common stock. Accordingly, these stockholders may be
able to significantly influence the outcome of corporate actions requiring stockholder approval,
such as mergers and acquisitions. These stockholders may exercise this ability in a manner that
advances their best interests and not necessarily those of other stockholders. This ownership
interest could also have the effect of delaying or preventing a change in control.
We Have Implemented Anti-Takeover Provisions That Could Prevent an Acquisition of Our Business at a
Premium Price
Some of the provisions of our certificate of incorporation and bylaws could discourage, delay
or prevent an acquisition of our business at a premium price. These provisions:
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permit the Board of Directors to increase its own size and fill the resulting vacancies, |
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provide for a Board comprised of three classes of directors with each class serving a staggered three-year term, |
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authorize the issuance of preferred stock in one or more series, and |
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prohibit stockholder action by written consent. |
In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on
mergers and other business combinations between us and any holder of 15% or more of our common
stock.
Our Forward-looking Statements are Speculative and May Prove to be Wrong
Some of the information in this Quarterly Report involves forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, statements about our plans, objectives, expectations
and intentions and other statements contained in this Quarterly Report that are not historical
facts. When used in this Quarterly Report, the words expects, anticipates, intends, plans,
believes, seeks, estimates, could, should, may, will and similar expressions are
generally intended to identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors, including the factors discussed in
this Factors that May Affect Future Performance section of the Quarterly Report, which could
cause actual results to differ materially from those expressed or implied by these forward-looking
statements. We undertake no obligation to update or revise any forward-looking statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our financial instruments consist of cash and cash equivalents, short-term investments, trade
accounts receivable, accounts payable, and short-term obligations including the revolving line of
credit. We consider investments in highly liquid instruments purchased with a remaining maturity of
90 days or less at the date of purchase to be cash equivalents. Our exposure to market risk for
changes in interest rates relates primarily to short-term investments and short-term obligations.
As a result, we do not expect fluctuations in interest rates to have a material impact on the fair
value of these securities.
As of December 30, 2005, there was a foreign currency exchange contract outstanding which was
intended to reduce the foreign currency risk for amounts payable to vendors in Euros. The foreign
exchange contract with a notional amount of $5.9 million had a fair value of a net liability of
$340,000 as of December 30, 2005. The fair value of this foreign currency forward contract as of
December 30, 2005, would have changed by $560,300 if the foreign currency exchange rate for the
Euro to the U.S. dollar on this forward contract had changed by 10%. We had no foreign currency
transactions outstanding at December 31, 2004.
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
Securities and Exchange Commissions rules and forms. 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 December 30, 2005, the end of
the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective at
the reasonable assurance level as of December 30, 2005.
During the period covered by this Quarterly Report, there have been 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
A review of our current litigation is disclosed in the Notes to Condensed Consolidated
Financial Statements. See Notes to Condensed Consolidated Financial Statements Note 8
Commitments and Contingencies.
Item 1A.
Risk Factors
Please
refer to the section Factors That May Affect Future
Performance in Managements Discussion and Analysis of
Financial Condition and Results of Operations for a discussion of
risk factors.
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Item 6. Exhibits
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Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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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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February 8, 2006
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/s/ Mark D. Dankberg |
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Mark D. Dankberg |
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Chairman of the Board and Chief |
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Executive Officer (Principal Executive Officer) |
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/s/ Ronald G. Wangerin |
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Ronald G. Wangerin |
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Vice President, Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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