e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 29, 2006.
OR
|
|
|
o |
|
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)
|
|
|
Delaware
|
|
33-0174996 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
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 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
November 3, 2006 was 28,639,042.
PART I Financial Information
Item 1. Financial Statements
VIASAT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 29, |
|
|
March 31, |
|
|
|
2006 |
|
|
2006 |
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
47,268 |
|
|
$ |
36,723 |
|
Short-term investments |
|
|
165 |
|
|
|
164 |
|
Accounts receivable, net |
|
|
163,874 |
|
|
|
144,715 |
|
Inventories |
|
|
45,341 |
|
|
|
49,883 |
|
Deferred income taxes |
|
|
7,008 |
|
|
|
7,008 |
|
Prepaid expenses and other current assets |
|
|
11,445 |
|
|
|
5,960 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
275,101 |
|
|
|
244,453 |
|
Goodwill |
|
|
48,855 |
|
|
|
28,133 |
|
Other intangible assets, net |
|
|
25,872 |
|
|
|
23,983 |
|
Property and equipment, net |
|
|
49,033 |
|
|
|
46,211 |
|
Other assets |
|
|
16,826 |
|
|
|
22,289 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
415,687 |
|
|
$ |
365,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
52,552 |
|
|
$ |
50,577 |
|
Accrued liabilities |
|
|
42,463 |
|
|
|
40,969 |
|
Payable to predecessor shareholders of acquired business |
|
|
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
104,015 |
|
|
|
91,546 |
|
Other liabilities |
|
|
11,314 |
|
|
|
9,389 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
115,329 |
|
|
|
100,935 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary |
|
|
928 |
|
|
|
836 |
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock |
|
|
3 |
|
|
|
3 |
|
Paid in capital |
|
|
201,738 |
|
|
|
177,680 |
|
Retained earnings |
|
|
97,703 |
|
|
|
85,803 |
|
Accumulated other comprehensive (loss) income |
|
|
(14 |
) |
|
|
(188 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
299,430 |
|
|
|
263,298 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
415,687 |
|
|
$ |
365,069 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
September 29, |
|
September 30, |
|
September 29, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Revenues |
|
$ |
131,501 |
|
|
$ |
104,112 |
|
|
$ |
260,202 |
|
|
$ |
204,089 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
97,444 |
|
|
|
78,154 |
|
|
|
195,559 |
|
|
|
153,875 |
|
Selling, general and administrative |
|
|
16,790 |
|
|
|
13,327 |
|
|
|
32,634 |
|
|
|
26,173 |
|
Independent research and development |
|
|
4,832 |
|
|
|
3,557 |
|
|
|
9,624 |
|
|
|
6,861 |
|
Amortization of intangible assets |
|
|
2,621 |
|
|
|
1,512 |
|
|
|
4,681 |
|
|
|
3,024 |
|
|
Income from operations |
|
|
9,814 |
|
|
|
7,562 |
|
|
|
17,704 |
|
|
|
14,156 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
423 |
|
|
|
2 |
|
|
|
749 |
|
|
|
4 |
|
Interest expense |
|
|
(200 |
) |
|
|
(28 |
) |
|
|
(291 |
) |
|
|
(179 |
) |
|
Income before income taxes |
|
|
10,037 |
|
|
|
7,536 |
|
|
|
18,162 |
|
|
|
13,981 |
|
Provision for income taxes |
|
|
3,475 |
|
|
|
1,629 |
|
|
|
6,171 |
|
|
|
2,895 |
|
Minority interest in net earnings (loss) of subsidiary,
net of tax |
|
|
23 |
|
|
|
(46 |
) |
|
|
91 |
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,539 |
|
|
$ |
5,953 |
|
|
$ |
11,900 |
|
|
$ |
11,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
.23 |
|
|
$ |
.22 |
|
|
$ |
.42 |
|
|
$ |
.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
.21 |
|
|
$ |
.21 |
|
|
$ |
.39 |
|
|
$ |
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic net income per share computation |
|
|
28,586 |
|
|
|
26,997 |
|
|
|
28,189 |
|
|
|
26,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted net income per share
computation |
|
|
30,520 |
|
|
|
28,634 |
|
|
|
30,228 |
|
|
|
28,371 |
|
See accompanying notes to condensed consolidated financial statements.
4
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
September 29, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,900 |
|
|
$ |
11,129 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
6,785 |
|
|
|
5,322 |
|
Amortization of intangible assets and capitalized software |
|
|
6,375 |
|
|
|
4,685 |
|
Deferred income taxes |
|
|
2,177 |
|
|
|
(1,405 |
) |
Incremental tax benefits from stock options exercised |
|
|
(550 |
) |
|
|
|
|
Non-cash stock-based compensation |
|
|
2,052 |
|
|
|
|
|
Other non-cash adjustments |
|
|
291 |
|
|
|
(66 |
) |
Increase (decrease) in cash resulting from changes in operating assets and
liabilities, net of the effects of the acquisition: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(16,741 |
) |
|
|
(15,934 |
) |
Inventories |
|
|
5,888 |
|
|
|
577 |
|
Other assets |
|
|
(6,445 |
) |
|
|
4,337 |
|
Accounts payable |
|
|
(26 |
) |
|
|
3,907 |
|
Accrued liabilities |
|
|
131 |
|
|
|
6,222 |
|
Other liabilities |
|
|
1,647 |
|
|
|
332 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
13,484 |
|
|
|
19,106 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of a business, net of cash acquired |
|
|
(281 |
) |
|
|
|
|
Purchase of short-term investments |
|
|
(1 |
) |
|
|
(1 |
) |
Purchases of property and equipment |
|
|
(7,879 |
) |
|
|
(7,773 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(8,161 |
) |
|
|
(7,774 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
|
|
|
|
|
3,000 |
|
Payments on line of credit |
|
|
|
|
|
|
(3,000 |
) |
Proceeds from issuance of common stock, net of issuance costs |
|
|
4,594 |
|
|
|
2,230 |
|
Incremental tax benefits from stock options exercised |
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
5,144 |
|
|
|
2,230 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
78 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
10,545 |
|
|
|
13,540 |
|
Cash and cash equivalents at beginning of period |
|
|
36,723 |
|
|
|
14,579 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
47,268 |
|
|
$ |
28,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Issuance of stock in connection with acquisition (see Note 12) |
|
$ |
16,350 |
|
|
$ |
|
|
Recording of payable to predecessor shareholders of acquired business (see Note 1) |
|
$ |
9,000 |
|
|
$ |
|
|
See accompanying notes to condensed consolidated financial statements.
5
VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Paid in |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
|
Income |
|
Balance at March 31, 2006 |
|
|
27,594,549 |
|
|
$ |
3 |
|
|
$ |
177,680 |
|
|
$ |
85,803 |
|
|
$ |
(188 |
) |
|
$ |
263,298 |
|
|
|
|
|
Exercise of stock options |
|
|
239,746 |
|
|
|
|
|
|
|
3,498 |
|
|
|
|
|
|
|
|
|
|
|
3,498 |
|
|
|
|
|
Tax benefit from exercise of
stock options |
|
|
|
|
|
|
|
|
|
|
1,062 |
|
|
|
|
|
|
|
|
|
|
|
1,062 |
|
|
|
|
|
Issuance of stock under
Employee Stock Purchase Plan |
|
|
50,217 |
|
|
|
|
|
|
|
1,096 |
|
|
|
|
|
|
|
|
|
|
|
1,096 |
|
|
|
|
|
Share-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
2,052 |
|
|
|
|
|
|
|
|
|
|
|
2,052 |
|
|
|
|
|
Value of stock issued in
connection with acquisition of
a business |
|
|
724,231 |
|
|
|
|
|
|
|
16,350 |
|
|
|
|
|
|
|
|
|
|
|
16,350 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,900 |
|
|
|
|
|
|
|
11,900 |
|
|
$ |
11,900 |
|
Hedging transaction, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184 |
|
|
|
184 |
|
|
|
184 |
|
Foreign currency translation,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 29, 2006 |
|
|
28,608,743 |
|
|
$ |
3 |
|
|
$ |
201,738 |
|
|
$ |
97,703 |
|
|
$ |
(14 |
) |
|
$ |
299,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 29, 2006, the condensed
consolidated statements of operations for the three and six months ended September 29, 2006 and
September 30, 2005, the condensed consolidated statements of cash flows for the six months ended
September 29, 2006 and September 30, 2005, and the condensed consolidated statement of
stockholders equity for the six months ended September 29, 2006 have been prepared by the
management of ViaSat, Inc. (the Company), 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 March 31, 2006 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 March 31, 2006
included in our 2006 Annual Report on Form 10-K. Interim operating results are not necessarily
indicative of operating results for the full year. The year-end condensed balance sheet data were
derived from audited financial statements, but do not include all disclosures required by
accounting principles generally accepted in the United States of America.
Our consolidated financial statements include the assets, liabilities and results of
operations of TrellisWare Technologies, Inc., a majority owned subsidiary of 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 2007 refer to the fiscal year ending on
March 30, 2007. Our quarters for fiscal year 2007 end on June 30, 2006, September 29, 2006,
December 29, 2006 and March 30, 2007.
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, share-based compensation, self-insurance reserves,
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 unrealized 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 the life of the lease as a reduction to rent expense.
7
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Payable to Predecessor Shareholders of Acquired Business
On May 23, 2006, in relation to the Companys Efficient Channel Coding, Inc. (ECC) acquisition
and as additional consideration, the Company agreed to pay the maximum earn-out amount to the
former ECC stockholders in the amount of $9.0 million which has been accrued as of September 29,
2006. The $9.0 million will be paid in cash or stock, at the Companys option, in May 2007. The
additional purchase price consideration of $9.0 million was recorded as additional goodwill in the
Satellite Networks segment in the first quarter of fiscal year 2007.
Assets Held-for-Sale
In January 2006, the Company purchased approximately 10 acres of land adjacent to a leased
facility for approximately $3.1 million. During the first quarter of fiscal year 2007, the Company
signed a property listing agreement with the intention to sell the property over the next few
months. As of September 29, 2006, we recorded the property in accordance with SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets, as an asset held-for-sale at the
lower of carrying value or fair value, less estimated costs to sell, which is estimated to be $3.1
million.
Self-Insurance Liabilities
In the first quarter of fiscal 2007, the Company adopted a self-insurance plan to retain a
portion of the exposure for losses related to employee medical benefits. The Company also has a
self-insurance plan for a portion of the exposure for losses related to workers compensation
costs. The self-insured policies provide for both specific and aggregate stop-loss limits. We
utilize internal actuarial methods, as well as an independent third-party actuary for the purpose
of estimating ultimate costs for a particular policy year. Based on these actuarial methods along
with currently available information and insurance industry statistics, the Company recorded
self-insurance liabilities as of September 29, 2006 and March 31, 2006 of $735,000 and $75,000,
respectively. Our estimate which is subject to inherent variability, based on average claims
experience in our industry and our own experience in terms of frequency and severity of claims,
including asserted and unasserted claims incurred but not reported, with no explicit provision for
adverse fluctuation from year to year. This variability may lead to ultimate payments being either
greater or less than the amounts presented above. Self-insurance liabilities have been classified
as current in accordance with the estimated timing of the projected payments.
Share-Based Payments
In December 2004, the Financial Accounting Standards Board (FASB) revised Statement of
Financial Accounting Standards No. 123 (FAS 123R), Share-Based Payment, which establishes
accounting for share-based awards exchanged for employee services and requires companies to expense
the estimated fair value of these awards over the requisite employee service period. On April 14,
2005, the Securities and Exchange Commission adopted a new rule amending the effective dates for
FAS 123R. In accordance with the new rule, the Company adopted the accounting provisions of FAS
123R beginning in the first quarter of fiscal 2007.
Under FAS 123R, share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the employees requisite
service period on a straight-line basis. The Company has no awards with market or performance
conditions. The Company adopted the provisions of FAS 123R on April 1, 2006, the first day of the
Companys fiscal year 2007, using a modified prospective application, which provides for certain
changes to the method for estimating the value of share-based compensation. Under the modified
prospective application method, prior periods are not revised for comparative purposes. The
valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the
effective date which are subsequently modified or cancelled. Estimated compensation expense for
awards outstanding at the effective date will be recognized over the remaining service period using
the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123,
Accounting for Stock-Based Compensation (FAS 123).
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has
elected to adopt the alternative transition method provided in this FASB Staff Position for
calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative
transition method includes a simplified method to establish the beginning balance of the additional
paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation,
which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.
8
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Share-Based Compensation Information under FAS 123R. Upon adoption of FAS 123R, the Company
continued to use the same method of valuation for stock options granted beginning in fiscal 2007,
the Black-Scholes option-pricing model (Black-Scholes model) which was previously used for the
Companys pro forma information required under FAS 123. The Companys employee stock options have
simple vesting schedules typically ranging from three to five years. Therefore, the Company did not
see significant benefits in using a binomial model, a more extensive model, than closed-form models
such as the Black-Scholes model, at the present time.
On
September 29, 2006, the Company had one principal equity compensation plan and employee stock
purchase plan described below. The compensation cost that has been
charged against income for the equity plan under FAS 123R was $309,000 and $477,000 and for the stock purchase plan it was
$215,000 and $414,000 for the three and six months ended September 29, 2006, respectively. The
total income tax benefit recognized in the income statement for share-based compensation
arrangements was $120,000 and $173,000 for the three and six months ended September 29, 2006,
respectively. There was no compensation cost capitalized as part of inventory and fixed assets for
the three and six months ended September 29, 2006, respectively, as the amounts were not
significant.
The
1996 Equity Participation Plan of ViaSat, Inc., as amended on October
4, 2006 (the Plan), which is stockholder-approved,
permits the grant of stock options, stock appreciation rights, restricted stock and other awards to
its employees for up to 10,600,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its
stockholders. Option awards are generally granted with an exercise price equal to the market price
of the Companys stock at the date of grant; those option awards generally vest based on three to
five years of continuous service and have terms from six to ten years. As of September 29, 2006, the Company
had granted options net of cancellations to purchase 7,145,369 shares of common stock under the
Plan.
The ViaSat, Inc. Employee Stock Purchase Plan (the Employee Stock Purchase Plan) assists
employees in acquiring a stock ownership interest in the Company and encourages them to remain in
the employment of the Company. The Employee Stock Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code. The maximum number of shares reserved for issuance under
this plan is 1,500,000 shares. The Employee Stock Purchase Plan permits eligible employees to
purchase common stock at a discount through payroll deductions during specified six-month offering
periods. No employee may purchase more than $25,000 worth of stock in any calendar year. The price
of shares purchased under the Employee Stock Purchase Plan is equal to 85% of the fair market value
of the common stock on the first or last day of the offering period, whichever is lower. As of
September 29, 2006, the Company had issued 1,042,455 shares of common stock under this plan.
As of September 29, 2006, there was $3.0 million and $203,000, respectively, of total
unrecognized compensation cost related to non-vested share-based compensation arrangements granted
under the Plan and the Employee Stock Purchase Plan. These costs are expected to be recognized over a
weighted-average period of 2.0 years. The total fair value of shares vested during the three and
six months ended September 29, 2006 were $309,000 and $477,000, respectively.
Cash received from option exercise under all share-based payment arrangements for the six
months ended September 29, 2006 was $4.6 million. The actual tax benefit realized for the tax
deductions from option exercise of the share-based payment arrangements totaled $1.1 million for
the six months ended September 29, 2006.
The weighted-average estimated fair value of employee stock options granted and employee stock
purchase plan shares issued during the six months ended
September 29, 2006 were $16.16 and $6.85 per
share, respectively, using the Black-Scholes model with the following weighted-average assumptions
(annualized percentages) for the six months ended September 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
Employee Stock |
|
Employee Stock |
|
|
Options |
|
Purchase Plan |
Volatility |
|
|
65.2 |
% |
|
|
38.0 |
% |
Risk-free interest rate |
|
|
5.0 |
% |
|
|
5.3 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted average expected life |
|
6.0 years |
|
|
0.5 years |
|
9
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Companys expected volatility is a measure of the amount by which our stock price is
expected to fluctuate over the expected term of the stock based award. The estimated volatilities for
stock options and employee stock purchase rights are based on the historical volatility calculated
using the daily stock price of our stock over a recent historical period equal to the expected
term. The risk-free interest rate that we use in determining the fair value of our stock-based
awards is based on the implied yield on U.S. Treasury zero-coupon issues with remaining terms
equivalent to the expected term of our stock-based awards.
The expected life of employee stock options represents the calculation using the simplified
method consistent with the guidance in SAB 107. The Company expects to replace the simplified
method with the historical data method for the valuation of shares granted after December 31, 2007,
as more detailed information becomes readily available to the Company, consistent with the guidance
in SAB 107. The weighted average expected life of employee stock options granted during the six
months ended September 29, 2006 derived from the simplified method was 6.0 years. The expected term
or life of employee stock purchase rights issued represents the expected period of time from the
date of grant to the estimated date that the stock purchase right under our Employee Stock Purchase
Plan would be fully exercised.
A summary of employee stock option activity for the six months ended September 29, 2006 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Weighted Average |
|
|
|
|
Number of |
|
Exercise Price |
|
Remaining |
|
Aggregate Intrinsic |
|
|
Shares |
|
per Share |
|
Contractual Term |
|
Value (in 000s) |
Outstanding at April 1, 2006 |
|
|
5,700,146 |
|
|
$ |
16.70 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
134,000 |
|
|
|
25.41 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
(30,243 |
) |
|
|
18.84 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(239,746 |
) |
|
|
14.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2006 |
|
|
5,564,157 |
|
|
$ |
16.99 |
|
|
|
5.57 |
|
|
$ |
45,547 |
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at September 29, 2006 |
|
|
5,334,124 |
|
|
$ |
16.74 |
|
|
|
5.51 |
|
|
$ |
44,907 |
|
The
total intrinsic value of stock options exercised during the six months ended September 29, 2006
was $3.2 million.
As share-based compensation expense recognized in the condensed consolidated statement of
operations for the three and six months ended September 29, 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the Companys pro forma information required under FAS
123 for the periods prior to fiscal 2007, the Company accounted for forfeitures as they occurred.
Total estimated share-based compensation expense, related to the Companys FAS 123R
share-based awards, recognized for the three and six months ended September 29, 2006 was comprised
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended |
|
|
ended |
|
|
|
September 29, 2006 |
|
|
September 29, 2006 |
|
|
|
(In thousands, |
|
|
(In thousands, |
|
|
|
except per share |
|
|
except per share |
|
|
|
data) |
|
|
data) |
|
Cost of revenues |
|
$ |
161 |
|
|
$ |
307 |
|
Selling, general and administrative |
|
|
331 |
|
|
|
537 |
|
Independent research and development |
|
|
32 |
|
|
|
47 |
|
|
|
|
|
|
|
|
Share-based compensation expense before taxes |
|
|
524 |
|
|
|
891 |
|
Related income tax benefits |
|
|
(120 |
) |
|
|
(173 |
) |
|
|
|
|
|
|
|
Share-based compensation expense, net of taxes |
|
$ |
404 |
|
|
$ |
718 |
|
|
|
|
|
|
|
|
Net share-based compensation expense, per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
10
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded $128,000 and $180,000 in share-based compensation expense during the
three and six months ended September 29, 2006, respectively, related to share-based awards granted
during fiscal 2007. In addition, for the six months ended September 29, 2006, the adoption of FAS
123R resulted in a reclassification to reduce net cash provided by operating activities with an
offsetting increase in net cash provided by financing activities of $550,000, related to
incremental tax benefits from stock options exercised in the period.
Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2007. Prior to adopting the
provisions of FAS 123R, the Company recorded estimated compensation expense for employee stock
options based upon their intrinsic value on the date of grant pursuant to Accounting Principles
Board Opinion 25 (APB 25), Accounting for Stock Issued to Employees and provided the required pro
forma disclosures of FAS 123. Because the Company established the exercise price based on the fair
market value of the Companys stock at the date of grant, the stock options had no intrinsic value
upon grant, and therefore no estimated expense was recorded prior to adopting FAS 123R. Each
accounting period, the Company reported the potential dilutive impact of stock options in its
diluted earnings per common share using the treasury-stock method. Out-of-the-money stock options
(i.e., the average stock price during the period was below the strike price of the stock option)
were not included in diluted earnings per common share as their effect was anti-dilutive.
For purposes of pro forma disclosures under FAS 123 for the three and six months ended
September 30, 2005, the estimated fair value of the share-based awards was assumed to be amortized
to expense over the vesting periods. The pro forma effects of recognizing estimated compensation
expense under the fair value method on net income and earnings per common share were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended |
|
|
ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
Net income as reported |
|
$ |
5,953 |
|
|
$ |
11,129 |
|
|
|
|
|
|
|
|
|
|
Stock based compensation included in net income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based employee compensation expense under fair value
based method, net of tax |
|
|
(2,343 |
) |
|
|
(4,691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
3,610 |
|
|
$ |
6,438 |
|
Basic earnings per share |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.22 |
|
|
$ |
0.41 |
|
Pro forma |
|
$ |
0.13 |
|
|
$ |
0.24 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.21 |
|
|
$ |
0.39 |
|
Pro forma |
|
$ |
0.13 |
|
|
$ |
0.23 |
|
The weighted-average estimated fair value of employee stock options granted and employee stock
purchase plan shares issued during the six months ended September 30, 2005 was $12.21 and $5.28 per
share, respectively, using the Black-Scholes model with the following weighted-average assumptions
(annualized percentages) for the six months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Employee Stock |
|
Stock |
|
|
Options |
|
Purchase Plan |
Expected life (in years) |
|
|
6.1 |
|
|
|
0.5 |
|
Risk-free interest rate |
|
|
3.9 |
% |
|
|
2.6 |
% |
Expected volatility |
|
|
55.0 |
% |
|
|
37.0 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
11
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Review of Stock Option Grant Procedures
In
August 2006 we commenced and completed a voluntary internal investigation, assisted by our outside legal counsel, of our
historical stock option granting practices, stock option
documentation and related accounting during the period from our
initial public offering in December 1996 through June 30, 2006. At the conclusion of our
investigation, our outside legal counsel and the Company determined that there was no evidence of a
pattern of intentionally misdating stock option grants to achieve an accounting result, or that any
officer, director, or senior executive at the Company willfully or knowingly engaged in stock
options misdating, or had knowledge of others doing so.
During the investigation we identified certain accounting errors associated with stock options
granted primarily to certain non-executive new hire employees during the ten-year period from
December 1996 to June 30, 2006. Based on the results of the investigation, we identified that
certain stock options to non-executive new hires had incorrectly been accounted for using an
accounting measurement date prior to the date that the new hires commenced employment. We
concluded, with the concurrence of the Audit Committee, that the financial impact of these errors
was not material to our consolidated financial statements for any annual period in which the errors
related. In accordance with Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, paragraph 29, we recorded a cumulative adjustment to compensation expense in the first
quarter of fiscal year 2007 of $703,000, net of tax, because the effect of the correcting
adjustment is not material to our expected fiscal 2007 net income. This non-cash compensation
expense will have no impact on future periods. There is no impact on revenue or net cash provided
by operating activities as a result of recording the compensation expense.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty
in Income Taxes which prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN
48 are effective for fiscal years beginning after December 15, 2006. The Company is in the process
of determining the effect, if any, the adoption of FIN 48 will have on its financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108 (SAB 108), Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB 108 provides interpretive guidance on the SECs views regarding the process of
quantifying materiality of financial statement misstatements. SAB 108 is effective for fiscal years
ending after November 15, 2006, with early application for the first interim period ending after
November 15, 2006. We are currently evaluating the impact of adopting SAB 108 on our financial
statements.
In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used
for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We are currently assessing the impact that SFAS 157 will
have on our results of operations and financial position.
In
September 2006, the FASB issued Statement No. 158 (SFAS 158), Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106, and 132(R). SFAS 158 requires companies to recognize the overfunded or underfunded status
of a defined benefit post-retirement plan as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income, effective for fiscal years ending after December 15, 2006. SFAS 158 also
requires companies to measure the funded status of the plan as of the date of its fiscal year-end,
with limited exceptions, effective for fiscal years ending after December 15, 2008. We do not
believe that SFAS 158 will have any effect on our results of operations or financial position, as
we do not currently have any defined benefit pension or other post-retirement plans.
12
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, 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 months ended September 29, 2006 and September 30, 2005, we recorded charges of approximately
$319,000 and $1.4 million, respectively, related to loss contracts. During the six months ended
September 29, 2006 and September 30, 2005, we recorded charges of approximately $1.4 million and
$3.3 million, respectively, 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 1,933,404 and 1,637,186 shares for the three months ended September
29, 2006 and September 30, 2005, respectively, and 2,038,600 and 1,427,581 shares for the six
months ended September 29, 2006 and September 30, 2005, respectively, were included in the
calculation of diluted earnings per share. Antidilutive shares excluded from the calculation were
372,382 and 292,355 shares for the three months ended September 29, 2006 and September 30, 2005,
respectively, and 178,128 and 1,779,828 shares for the six months ended September 29, 2006 and
September 30, 2005, respectively. Potential common stock is primarily comprised of options granted
under our equity compensation plans.
13
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 Composition of Certain Balance Sheet Captions (In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 29, 2006 |
|
|
March 31, 2006 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Billed |
|
$ |
84,209 |
|
|
$ |
79,107 |
|
Unbilled |
|
|
80,066 |
|
|
|
65,873 |
|
Allowance for doubtful accounts |
|
|
(401 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
$ |
163,874 |
|
|
$ |
144,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
10,717 |
|
|
$ |
28,457 |
|
Work in process |
|
|
20,336 |
|
|
|
9,862 |
|
Finished goods |
|
|
14,288 |
|
|
|
11,564 |
|
|
|
|
|
|
|
|
|
|
$ |
45,341 |
|
|
$ |
49,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ |
6,003 |
|
|
$ |
5,322 |
|
Other |
|
|
5,442 |
|
|
|
638 |
|
|
|
|
|
|
|
|
|
|
$ |
11,445 |
|
|
$ |
5,960 |
|
|
|
|
|
|
|
|
Other intangible assets, net: |
|
|
|
|
|
|
|
|
Technology |
|
$ |
32,270 |
|
|
$ |
29,670 |
|
Contracts and relationships |
|
|
17,836 |
|
|
|
15,436 |
|
Non-compete agreement |
|
|
8,370 |
|
|
|
7,950 |
|
Other intangibles |
|
|
9,225 |
|
|
|
8,075 |
|
|
|
|
|
|
|
|
|
|
|
67,701 |
|
|
|
61,131 |
|
Less accumulated amortization |
|
|
(41,829 |
) |
|
|
(37,148 |
) |
|
|
|
|
|
|
|
|
|
$ |
25,872 |
|
|
$ |
23,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Machinery and equipment |
|
$ |
49,613 |
|
|
$ |
47,704 |
|
Computer equipment and software |
|
|
37,733 |
|
|
|
33,693 |
|
Furniture and fixtures |
|
|
6,122 |
|
|
|
5,905 |
|
Leasehold improvements |
|
|
9,716 |
|
|
|
7,617 |
|
Land held-for-sale |
|
|
3,124 |
|
|
|
3,124 |
|
Construction in progress |
|
|
6,397 |
|
|
|
5,808 |
|
|
|
|
|
|
|
|
|
|
|
112,705 |
|
|
|
103,851 |
|
Less accumulated depreciation |
|
|
(63,672 |
) |
|
|
(57,640 |
) |
|
|
|
|
|
|
|
|
|
$ |
49,033 |
|
|
$ |
46,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Capitalized software costs, net |
|
$ |
5,280 |
|
|
$ |
6,963 |
|
Deferred income taxes |
|
|
8,739 |
|
|
|
13,518 |
|
Other |
|
|
2,807 |
|
|
|
1,808 |
|
|
|
|
|
|
|
|
|
|
$ |
16,826 |
|
|
$ |
22,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Current portion of warranty reserve |
|
$ |
5,027 |
|
|
$ |
4,395 |
|
Accrued vacation |
|
|
6,689 |
|
|
|
6,381 |
|
Accrued bonus and 401(k) matching contribution |
|
|
4,818 |
|
|
|
7,841 |
|
Collections in excess of revenues |
|
|
18,418 |
|
|
|
15,141 |
|
Other |
|
|
7,511 |
|
|
|
7,211 |
|
|
|
|
|
|
|
|
|
|
$ |
42,463 |
|
|
$ |
40,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
Accrued warranty |
|
$ |
5,343 |
|
|
$ |
3,974 |
|
Long term portion of deferred rent |
|
|
3,069 |
|
|
|
2,809 |
|
Deferred income taxes |
|
|
1,764 |
|
|
|
1,764 |
|
Other |
|
|
1,138 |
|
|
|
842 |
|
|
|
|
|
|
|
|
|
|
$ |
11,314 |
|
|
$ |
9,389 |
|
|
|
|
|
|
|
|
14
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 eight months 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 eight months to ten years.
The current and expected amortization expense for each of the following periods is as follows
(in thousands):
|
|
|
|
|
|
|
Amortization |
|
For the six months ended September 29, 2006 |
|
$ |
4,681 |
|
|
Expected for the remainder of fiscal year 2007 |
|
|
4,521 |
|
Expected for fiscal year 2008 |
|
|
6,610 |
|
Expected for fiscal year 2009 |
|
|
5,862 |
|
Expected for fiscal year 2010 |
|
|
2,638 |
|
Expected for fiscal year 2011 |
|
|
2,147 |
|
Thereafter |
|
|
4,094 |
|
|
|
|
|
|
|
$ |
25,872 |
|
|
|
|
|
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 Wachovia 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 September 29, 2006, the Company
had approximately $4.3 million outstanding under standby letters of credit leaving borrowing
availability under our line of credit of $55.7 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 $30.0 million, a minimum tangible net worth
as of the last day of any fiscal quarter at $135.0 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 September 29, 2006.
15
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 cost 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
failures 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 six months ended
September 29, 2006 and September 30, 2005 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
For the six months ended |
|
|
|
September 29, 2006 |
|
|
September 30, 2005 |
|
Balance, beginning of period |
|
$ |
8,369 |
|
|
$ |
7,179 |
|
Change in liability for warranties issued in period |
|
|
3,461 |
|
|
|
2,738 |
|
Settlements made during the period |
|
|
(1,460 |
) |
|
|
(1,806 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
10,370 |
|
|
$ |
8,111 |
|
|
|
|
|
|
|
|
Note 8 Commitments and Contingencies
We are a 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 September 29, 2006, the Company settled certain foreign exchange
contracts recognizing a loss of $1,000 recorded as cost of revenues based on the underlying
transaction. During the six months ended September 29, 2006, the Company settled certain foreign
exchange contracts recognizing a loss of $137,000 recorded as cost of revenues based on the
underlying transaction. The Company did not enter into new foreign currency exchange contracts
during the six months ended September 29, 2006. At September 29, 2006, the Company had no
outstanding foreign currency exchange contracts. We recorded a loss on foreign currency forward
contracts for the three and six months ended September 30, 2005 of $800 and $236,200, respectively,
as a cost of revenues based on the underlying transaction.
Note 10 Income Taxes
The effective income tax rate for the three months ended September 29, 2006 was 34.6%. The
effective tax rate for the six months ended September 29, 2006 was 34.0%. Estimated annual
effective tax rate for the fiscal year ending March 30, 2007 is 35.0%. 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 35.0% for fiscal year 2007 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 the reinstated period.
16
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Reporting segments are determined consistent with the way the chief operating decision maker
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 six months ended September 29, 2006 and September 30, 2005. Certain corporate general
and administrative costs, amortization of intangible assets are not allocated to the segments 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 |
|
|
Six months ended |
|
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
$ |
69,993 |
|
|
$ |
49,461 |
|
|
$ |
134,614 |
|
|
$ |
102,975 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks |
|
|
51,722 |
|
|
|
44,790 |
|
|
|
104,808 |
|
|
|
81,776 |
|
Antenna Systems |
|
|
9,786 |
|
|
|
12,106 |
|
|
|
20,780 |
|
|
|
22,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,508 |
|
|
|
56,896 |
|
|
|
125,588 |
|
|
|
104,435 |
|
Elimination of intersegment revenues |
|
|
|
|
|
|
(2,245 |
) |
|
|
|
|
|
|
(3,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
131,501 |
|
|
|
104,112 |
|
|
|
260,202 |
|
|
|
204,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profits (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
12,415 |
|
|
|
9,383 |
|
|
|
24,244 |
|
|
|
19,680 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks |
|
|
247 |
|
|
|
(240 |
) |
|
|
(1,373 |
) |
|
|
(3,343 |
) |
Antenna Systems |
|
|
(212 |
) |
|
|
1,476 |
|
|
|
(566 |
) |
|
|
2,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
1,236 |
|
|
|
(1,939 |
) |
|
|
(893 |
) |
Elimination of intersegment operating profits |
|
|
|
|
|
|
(1,632 |
) |
|
|
|
|
|
|
(1,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit before corporate and
amortization |
|
|
12,450 |
|
|
|
8,987 |
|
|
|
22,305 |
|
|
|
16,949 |
|
Corporate |
|
|
(15 |
) |
|
|
87 |
|
|
|
80 |
|
|
|
231 |
|
Amortization of intangible assets (1) |
|
|
(2,621 |
) |
|
|
(1,512 |
) |
|
|
(4,681 |
) |
|
|
(3,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
9,814 |
|
|
$ |
7,562 |
|
|
$ |
17,704 |
|
|
$ |
14,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortization of intangibles for Satellite Networks was $1.8 million and $1.3 million for the
three months ended September 29, 2006 and September 30, 2005, respectively. Amortization of
intangibles for Satellite Networks was $3.6 million and $2.7 million for the six months ended
September 29, 2006 and September 30, 2005, respectively. Amortization for Antenna Systems was
$164,000 and $164,000 for the three months ended September 29, 2006 and September 30, 2005,
respectively. Amortization for
Antenna Systems was $328,000 and $328,000 for the six months ended September 29, 2006 and
September 30, 2005, respectively. Amortization of intangibles for the government segment was
$688,000 and $764,000 for the three and six months ended
September 29, 2006, respectively. There was no
amortization of intangibles for the government segment for the three and six months ended
September 30, 2005. |
17
VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 29, 2006 |
|
|
March 31, 2006 |
|
Segment assets (2) |
|
|
|
|
|
|
|
|
Government |
|
$ |
114,760 |
|
|
$ |
77,269 |
|
Commercial |
|
|
|
|
|
|
|
|
Satellite Networks |
|
|
144,893 |
|
|
|
140,346 |
|
Antenna Systems |
|
|
24,784 |
|
|
|
27,330 |
|
|
|
|
|
|
|
|
|
|
|
169,677 |
|
|
|
167,676 |
|
Corporate assets |
|
|
131,250 |
|
|
|
120,124 |
|
|
|
|
|
|
|
|
Total |
|
$ |
415,687 |
|
|
$ |
365,069 |
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Assets identifiable to segments include: accounts receivable, unbilled accounts
receivable, inventory, intangible assets and goodwill. At September 29, 2006, Satellite
Networks had $33.6 million of goodwill and $18.4 million in net intangible assets, Antenna
Systems had $3.6 million of goodwill and $1.7 million in net intangible assets, and the
government segment had $11.7 million of goodwill and $5.8 million in net intangible assets.
At March 31, 2006, Satellite Networks had $24.5 million of goodwill and $22.0 million in
net intangible assets, and Antenna Systems had $3.6 million of goodwill and $2.0 million in
net intangible assets. Government segment had no goodwill or intangible assets on March 31,
2006. |
Revenue information by geographic area for the three and six month periods ended September 29, 2006
and September 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
United States |
|
$ |
114,059 |
|
|
$ |
83,868 |
|
|
$ |
223,669 |
|
|
$ |
166,549 |
|
Asia Pacific |
|
|
6,348 |
|
|
|
6,668 |
|
|
|
11,502 |
|
|
|
14,636 |
|
Europe/Africa |
|
|
8,356 |
|
|
|
7,015 |
|
|
|
18,128 |
|
|
|
10,941 |
|
North America other than United States |
|
|
2,076 |
|
|
|
4,550 |
|
|
|
5,611 |
|
|
|
7,366 |
|
Latin America |
|
|
662 |
|
|
|
2,011 |
|
|
|
1,292 |
|
|
|
4,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
131,501 |
|
|
$ |
104,112 |
|
|
$ |
260,202 |
|
|
$ |
204,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $302,000 at
September 29, 2006 and $341,000 at March 31, 2006.
Note 12 Acquisition
On June 20, 2006, the Company completed the acquisition of all of the outstanding capital
stock of Enerdyne Technologies, Inc. (Enerdyne), a privately-held provider of innovative data link
equipment and digital video systems for defense and intelligence markets, including unmanned aerial
vehicle and other airborne and ground based applications. The initial purchase price of
approximately $17.5 million was comprised primarily of $16.4 million related to the fair value of
724,231 shares of the Companys common stock issued at the closing date, $500,000 in cash
consideration, and $700,000 in direct acquisition costs. The $1.2 million of cash consideration
paid to the shareholders and the transaction expenses paid less cash acquired of $900,000 resulted
in a net cash outlay of approximately $281,000. An additional $8.7 million in consideration is
payable in cash and/or stock at the Companys option based on Enerdyne achieving certain earnings
performance in any fiscal year up to and including the Companys 2010 fiscal year (as well as
projected earnings performance for the one-year period thereafter) and will be recorded as
additional purchase price. No portion of the earn-out is guaranteed. The additional consideration,
if earned, is payable in cash and/or shares of the Companys common stock after the fiscal year in
which Enerdyne achieves the specified earnings performance.
18
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 is as follows:
|
|
|
|
|
(in thousands) |
|
June 20, 2006 |
|
Current assets |
|
$ |
3,543 |
|
Property, plant and equipment |
|
|
343 |
|
Identifiable intangible assets |
|
|
6,570 |
|
Goodwill |
|
|
11,674 |
|
Other assets |
|
|
26 |
|
|
|
|
|
Total assets acquired |
|
|
22,156 |
|
Liabilities assumed |
|
|
(4,666 |
) |
|
|
|
|
Total purchase price |
|
$ |
17,490 |
|
|
|
|
|
Amounts assigned to other intangible assets are being amortized on a straight-line basis over
their estimated useful lives ranging from eight months to seven years and are as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
Customer relationships (7 year weighted average life) |
|
$ |
2,400 |
|
Acquired developed technology (4.5 year weighted average life) |
|
|
2,600 |
|
Non-compete agreements (4 years weighted average life) |
|
|
420 |
|
Backlog (8 months weighted average life) |
|
|
1,150 |
|
|
|
|
|
Total identifiable intangible assets |
|
$ |
6,570 |
|
|
|
|
|
The acquisition of Enerdyne is complementary to ViaSat because we will benefit from their
technology, namely unmanned Analog and digital video data link capabilities, existing relationships
in the unmanned aerial vehicle (UAV) market, customers and highly skilled workforce. The potential
opportunities these benefits provide to ViaSats UAV applications product group in our government
segment were among the factors that contributed to a purchase price resulting in the recognition of
goodwill. The intangible assets and goodwill recognized will not be deductible for federal income
tax purposes. The purchase price allocation is preliminary due to resolution of certain Enerdyne
tax attributes.
The consolidated financial statements include the operating results of Enerdyne from the date
of acquisition in the Companys UAV applications product line in the government 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.
19
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 March 31, 2006, 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 Risk Factors and
elsewhere in this Quarterly Report.
General
We produce innovative satellite and other communication products that enable fast, secure and
efficient communications to any location. The Company provides networking products and managed
network services for enterprise IP applications network-centric military
communications and encryption technologies to the U.S. government; and gateway and customer-premises equipment for consumer and mobile satellite broadband
services. The Companys three wholly owned subsidiaries, US Monolithics, Efficient Channel Coding,
and Enerdyne Technologies design and produce complimentary products such as monolithic
microwave integrated circuits, DVB-S2 satellite communication components, and video data link
systems. 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, 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 47% and 55% of our revenues in the three months ended September 29,
2006 and September 30, 2005, respectively, 48% and 51% of our revenues in the six months ended
September 29, 2006 and September 30, 2005, respectively, and 53% and 51% of our revenues in fiscal
years 2006 and 2005, respectively. 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
20
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.
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 2007. 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.
Our increased capital needs for fiscal year 2007 as compared to fiscal year 2006 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
historically 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 June 20, 2006, the Company completed the acquisition of all of the outstanding capital
stock of Enerdyne Technologies, Inc. (Enerdyne), a privately-held provider of innovative data link
equipment and digital video systems for defense and intelligence markets, including unmanned aerial
vehicle and other airborne and ground based applications. The initial purchase price of
approximately $17.5 million was comprised primarily of $16.4 million related to the fair value of
724,231 shares of the Companys common stock issued at the closing date, $500,000 in cash
consideration, and $700,000 in direct acquisition costs. The $1.2 million of cash consideration
paid to the shareholders and the transaction expenses paid less cash acquired of $900,000 resulted
in a net cash outlay of approximately $281,000. An additional $8.7 million in consideration is
payable in cash and/or stock at the Companys option based on Enerdyne achieving certain earnings
performance in any fiscal year up to and including the Companys 2010 fiscal year (as well as
projected earnings performance for the one-year period thereafter) and will be recorded as
additional purchase price. No portion of the earn-out is guaranteed. The additional consideration,
if earned, is payable in cash and/or shares of the Companys common stock after the fiscal year in
which Enerdyne achieves the specified earnings performance.
21
At June 20, 2006, the Company recorded $6.6 million in identifiable intangible assets and
$11.7 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 Enerdyne from the date of acquisition in the Companys unmanned aerial vehicle
(UAV) product application in the government segment.
The acquisition of Enerdyne is complementary to ViaSat because we will benefit from their
technology, namely unmanned analog and digital video data link capabilities, existing relationships
in the UAV market, customers and highly skilled workforce. The potential opportunities these
benefits provide to ViaSats UAV product application group in our government segment were among the
factors that contributed to a purchase price resulting in the recognition of goodwill. The
intangible assets and goodwill recognized will not be deductible for federal income tax purposes.
The purchase price allocation is preliminary due to resolution of certain Enerdyne tax attributes.
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.
Share-Based Payments
We
grant options to purchase our common stock to our employees and
directors under our equity compensation plans. Eligible employees can also purchase shares of our common stock at 85% of the lower
of the fair market value on the first or the last day of each
six-month offering period under the Employee Stock Purchase Plan. The benefits provided under these plans are share-based payments
subject to the provisions of revised Statement of Financial Accounting Standards No. 123 (FAS
123R), Share-Based Payment. Effective April 1, 2006, we use the fair value method to apply the
provisions of FAS 123R with a modified prospective application which provides for certain changes
to the method for estimating the value of share-based compensation. The valuation provisions of FAS
123R apply to new awards and to awards that are outstanding on the effective date, which are
subsequently modified or cancelled. Under the modified prospective application method, prior
periods are not revised for comparative purposes. Share-based compensation expense recognized under
FAS 123R for the three and six months ended September 29, 2006 was $524,000 and $891,000,
respectively. At September 29, 2006, total unrecognized estimated compensation expense related to
non-vested stock options and the Employee Stock Purchase Plan granted prior to that date were $3.0
million and $203,000, respectively, which is expected to be recognized over a weighted-average
period of 2.0 years.
Upon adoption of FAS 123R, we began estimating the value of stock option awards on the date of
grant using a Black-Scholes option-pricing model (Black-Scholes model). Prior to the adoption of
FAS 123R, the value of all share-based awards was estimated on the date of grant using the
Black-Scholes model as well for the pro forma information required to be disclosed under FAS 123.
The determination of the fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of
complex and subjective variables. These variables include, but are not limited to, our expected
stock price volatility over the term of the awards, actual and projected employee stock option
exercise behaviors, risk-free interest rate and expected dividends.
If factors change and we employ different assumptions in the application of FAS 123R in future
periods, the compensation expense that we record under FAS 123R may differ significantly from what
we have recorded in the current period. Therefore, we believe it is important for investors to be
aware of the high degree of subjectivity involved when using option pricing models to estimate
share-based compensation under FAS 123R. Option-pricing models were developed for use in estimating
the value of traded options that have no vesting or hedging restrictions, are fully transferable
and do not cause dilution. Because our share-based payments have characteristics significantly
different from those of freely traded options, and because changes in the subjective input
assumptions can materially affect our estimates of fair values, in our opinion, existing valuation
models, including the Black-Scholes and lattice binomial models, may not provide reliable measures
of the fair values of our share-based compensation. Consequently, there is a risk that our
estimates of the fair values of our share-based compensation awards on the grant dates may bear
little resemblance to the actual values realized upon the exercise, expiration, early termination
or forfeiture of those share-based payments
22
in the future. Certain share-based payments, such as employee stock options, may expire
worthless or otherwise result in zero intrinsic value as compared to the fair values originally
estimated on the grant date and reported in our financial statements. Alternatively, values may be
realized from these instruments that are significantly in excess of the fair values originally
estimated on the grant date and reported in our financial statements. There is currently no
market-based mechanism or other practical application to verify the reliability and accuracy of the
estimates stemming from these valuation models, nor is there a means to compare and adjust the
estimates to actual values. Although the fair value of employee share-based awards is determined in
accordance with FAS 123R and the Securities and Exchange Commissions Staff Accounting Bulletin No.
107 (SAB 107), using an option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
Estimates of share-based compensation expense can be significant to our financial statements,
but this expense is based on option valuation models and will never result in the payment of cash
by us. The guidance in FAS 123R and SAB 107 is relatively new, and best practices are not well
established. The application of these principles may be subject to further interpretation and
refinement over time. There are significant differences among valuation models, and there is a
possibility that we will adopt different valuation models in the future. This may result in a lack
of consistency in future periods and materially affect the fair value estimate of share-based
payments. It may also result in a lack of comparability with other companies that use different
models, methods and assumptions.
Theoretical valuation models and market-based methods are evolving and may result in lower or
higher fair value estimates for share-based compensation. The timing, readiness, adoption, general
acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical
models may require voluminous historical information, modeling expertise, financial analyses,
correlation analyses, integrated software and databases, consulting fees, customization and testing
for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may
dilute our earnings per share and involve significant transaction fees and ongoing administrative
expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the
benefits to investors.
The Companys expected volatility is a measure of the amount by which our stock price is
expected to fluctuate. The estimated volatility for stock options and employee stock purchase
rights are based on the historical volatility calculated using the daily stock price of our stock
over a recent historical period equal to the expected term. The risk-free interest rate that we use
in determining the fair value of our stock-based awards is based on the implied yield on U.S.
Treasury zero-coupon issues with remaining terms equivalent to the expected term of our stock-based
awards.
The expected life of employee stock options represents the calculation using the simplified
method for plain vanilla options applied consistently to all plain vanilla options, consistent
with the guidance in SAB 107. The Company expects to replace the simplified method with the
historical data method for the valuation of shares granted after December 31, 2007, as more
detailed information becomes readily available to the Company, consistent with the guidance in SAB
107. The weighted average expected life of employee stock options granted during the six months
ended September 29, 2006 derived from the simplified method was 6.0 years. The expected term or
life of employee stock purchase rights issued represents the expected period of time from the date
of grant to the estimated date that the stock purchase right under our Employee Stock Purchase Plan
would be fully exercised.
Review of Stock Option Grant Procedures
In
August 2006 we commenced and completed a voluntary internal investigation, assisted by our outside legal counsel, of our
historical stock option granting practices, stock option
documentation and related accounting during the period from
our initial public offering in December 1996 through June 30, 2006. At the conclusion of our
investigation, our outside legal counsel and the Company determined
that there was no evidence of a
pattern of intentionally misdating stock option grants to achieve an accounting result, or that any
officer, director, or senior executive at the Company willfully or knowingly engaged in stock
options misdating, or had knowledge of others doing so.
During the investigation we identified certain accounting errors associated with stock options
granted primarily to certain non-executive new hire employees during the ten-year period from
December 1996 to June 30, 2006. Based on the results of the investigation, we identified that
certain stock options to non-executive new hires had incorrectly been accounted for using an
accounting measurement date prior to the date that the new hires commenced employment. We
concluded, with the concurrence of the Audit Committee, that the financial impact of these errors
was not material to our consolidated financial statements for any annual period in which the errors
related. In accordance with Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, paragraph 29, we recorded a cumulative adjustment to compensation expense in the first
quarter of fiscal year 2007 of $703,000, net of tax, because the effect of the correcting
adjustment is not material to our expected fiscal 2007 net income. This non-cash compensation
expense will have no impact on future periods. There is no impact on revenue or net cash provided
by operating activities as a result of recording the compensation expense.
23
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. 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 months ended September 29, 2006 and September 30, 2005, we recorded charges of
approximately $319,000 and $1.4 million, respectively, related to loss contracts. During the six
months ended September 29, 2006 and September 30, 2005, we recorded charges of approximately $1.4
million and $3.3 million, respectively, related to loss contracts.
Assuming the initial estimates of sales and costs under a contract are accurate, the
percentage-of-completion method results in the profit margin being recorded evenly as revenue is
recognized under the contract. Changes in these underlying estimates due to revisions in sales and
future cost estimates or the exercise of contract options may result in profit margins being
recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the
period estimates are revised.
The Company believes it has established appropriate systems and processes to enable it to
reasonably estimate future cost on its programs through regular quarterly evaluations of contract
costs, scheduling and technical matters by business unit personnel and management. Historically, in
the aggregate, the Company has not experienced significant deviations in actual costs from
estimated program costs, and when deviations that result in significant adjustments arise, we
disclose the related impact in Managements Discussion and Analysis. However, a significant change
in future cost estimates on one or more programs could have a material effect on the Companys
results of operations. For example, a one percent variance in our future cost estimates on open
fixed-price contracts as of September 29, 2006 would change our pre-tax income by approximately
$357,000.
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 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.
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 $163.9 million, net of allowance
24
for doubtful accounts of $401,000 as of September 29, 2006 and our accounts receivables
balance was $144.7 million, net of allowance for doubtful accounts of $265,000 as of March 31,
2006.
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 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.
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 unrealized gains (losses) on
derivative instruments and accrued liabilities until the underlying transaction affects our
earnings and are then recorded in the same income statement line as the underlying transaction. We
had no foreign currency forward contracts outstanding at September 29, 2006. We had $6.0 million
of notional value of foreign currency forward contracts outstanding
at September 30, 2005.
Self-Insurance Liabilities
We self-insure a portion of the exposure for losses related to workers compensation costs and employee medical benefits. Accounting
for workers compensation expense and employee medical benefits require the use of estimates and assumptions regarding numerous factors, including ultimate severity of
injuries, the timeliness of reporting injuries, and health care cost increases. We insure for workers compensation and employee
medical benefit liabilities under a large deductible program where losses are incurred up to certain specific and aggregate
amounts. Accruals for claims under this self-insurance program are recorded as claims are
incurred. We estimate our liability for claims incurred but not paid,
including claims incurred but not recorded, based on the total incurred claims and paid claims,
adjusted for ultimate losses as determined by our insurance carrier. We evaluate the estimated liability on
a continuing basis and adjust accordingly. To date, workers compensation expense and employee medical benefits expense have been within the range
of managements expectations.
25
Results of Operations
The following table presents, as a percentage of total revenues, income statement data for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
September 29, |
|
September 30, |
|
September 29, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
74.1 |
|
|
|
75.1 |
|
|
|
75.2 |
|
|
|
75.4 |
|
Selling, general and administrative |
|
|
12.8 |
|
|
|
12.8 |
|
|
|
12.5 |
|
|
|
12.8 |
|
Independent research and development |
|
|
3.6 |
|
|
|
3.4 |
|
|
|
3.7 |
|
|
|
3.4 |
|
Amortization of intangible assets |
|
|
2.0 |
|
|
|
1.4 |
|
|
|
1.8 |
|
|
|
1.5 |
|
Income from operations |
|
|
7.5 |
|
|
|
7.3 |
|
|
|
6.8 |
|
|
|
6.9 |
|
Income before income taxes |
|
|
7.6 |
|
|
|
7.2 |
|
|
|
7.0 |
|
|
|
6.9 |
|
Net income |
|
|
5.0 |
|
|
|
5.7 |
|
|
|
4.6 |
|
|
|
5.5 |
|
The results of operations for the six-month period ended September 30, 2005 include a benefit
to Cost of revenues related to a legal settlement with Xetron Corporation of $2.7 million.
Three Months Ended September 29, 2006 vs. Three Months Ended September 30, 2005
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Revenues |
|
$ |
131.5 |
|
|
$ |
104.1 |
|
|
$ |
27.4 |
|
|
|
26.3 |
% |
The increase in revenues was due to our higher beginning backlog of $374.9 million, quarterly
customer awards of $141.4 million and the conversion of certain backlog and awards into revenues.
Revenue increases were experienced in both our government, $20.5 million, and commercial segments,
$4.6 million. The revenue increase in the government segment was predominantly derived from
increased revenues of approximately $15.5 million for next generation MIDS products, $1.5 million
in certain information assurance products and $2.5 million from the recently acquired Enerdyne business. The
revenue increase in the commercial segment was predominately derived from the increased sales of
consumer broadband products of approximately $8.7 million and
$3.2 million in revenues from the Efficient Channel Coding
business, offset by a decrease of approximately $2.5 million from our enterprise
VSAT products and $2.4 million from our Antenna Systems products.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Cost of revenues |
|
$ |
97.4 |
|
|
$ |
78.2 |
|
|
$ |
19.3 |
|
|
|
24.7 |
% |
Percentage of revenues |
|
|
74.1 |
% |
|
|
75.1 |
% |
|
|
|
|
|
|
|
|
The increase in quarterly cost of revenues from $78.2 million to $97.4 million is primarily
due to the Companys increased revenues. Accordingly, the Companys gross profit increase from
$26.0 million to $34.1 million reflected increases due to revenue growth in addition to improved
product margin mix from the Companys consumer broadband products, which yielded margin
improvements of approximately 5.2 percentage points from the same quarter last year. The $8.1
million in gross profit increases included approximately $161,000 in stock based compensation
charges recorded in the second quarter of fiscal 2007. Gross profit may fluctuate in future
quarters depending on the mix of products sold and services provided,
competition, new
product introduction costs and other factors.
26
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Selling, general and administrative |
|
$ |
16.8 |
|
|
$ |
13.3 |
|
|
$ |
3.5 |
|
|
|
26.0 |
% |
Percentage of revenues |
|
|
12.8 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
The increase in selling, general and administrative (SG&A) expenses in the second quarter of
2007 compared to the second quarter of 2006 was primarily attributable to higher selling and
personnel costs to support our growth of approximately $3.0 million and $331,000 in stock based
compensation expense recorded in the second quarter of fiscal 2007. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Independent research and development |
|
$ |
4.8 |
|
|
$ |
3.6 |
|
|
$ |
1.3 |
|
|
|
35.8 |
% |
Percentage of revenues |
|
|
3.6 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
The increase in independent research and development (IR&D) expenses reflects year over year
increases primarily in the government segment of approximately
$800,000, due to planned development efforts in future data link, mobile communication and information assurance products. The
commercial segment contributed $500,000 in IR&D increase, due to
planned efforts related to next generation VSAT
equipment. 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
years 2001, 2002, 2006 and 2007 are being amortized over useful lives ranging from eight months 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 six months ended September 29, 2006 |
|
$ |
4,681 |
|
|
Expected for the remainder of fiscal year 2007 |
|
|
4,521 |
|
Expected for fiscal year 2008 |
|
|
6,610 |
|
Expected for fiscal year 2009 |
|
|
5,862 |
|
Expected for fiscal year 2010 |
|
|
2,638 |
|
Expected for fiscal year 2011 |
|
|
2,147 |
|
Thereafter |
|
|
4,094 |
|
|
|
|
|
|
|
$ |
25,872 |
|
|
|
|
|
Interest Income Interest income increased to $423,000 for the three months ended September 29,
2006 from $2,000 for the three months ended September 30, 2005 due to higher average invested cash
balances year over year and higher interest rates.
Interest Expense Interest expense was $200,000 for the three months ended September 29, 2006
and $28,000 for the three months ended September 30, 2005. We had no outstanding borrowings under
our line of credit at September 29, 2006 or September 30, 2005.
Provision for Income Taxes Our effective tax rate for the three months ended September 29,
2006 was approximately 34.6%, which is approximately equal to the 35.0% estimated annual effective
tax rate for the fiscal year ending March 30, 2007, compared to a 21.6% tax rate for the three
months ended September 30, 2005. Our estimated effective tax rate of approximately 35.0% for fiscal
year 2007 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 and the amount of the tax rate reduction will depend on the
effective date, the terms of the reinstatement as well as the amount of eligible research and
development expenses in the reinstated period.
27
Our Segment Results for the Three Months Ended September 29, 2006 vs. Three Months Ended September
30, 2005
Government Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Revenues |
|
$ |
70.0 |
|
|
$ |
49.5 |
|
|
$ |
20.5 |
|
|
|
41.5 |
% |
The government segment received awards of $68.2 million for the second quarter of fiscal year
2007 compared to $58.7 million for the second quarter of fiscal year 2006. Revenue increase was
predominantly derived from increased revenues of approximately $15.5 million for next generation
MIDS products, $1.5 million in certain information assurance
products and $2.5 million from the recently acquired Enerdyne
business.
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Operating profit |
|
$ |
12.4 |
|
|
$ |
9.4 |
|
|
$ |
3.0 |
|
|
|
32.3 |
% |
Percentage of government segment revenues |
|
|
17.7 |
% |
|
|
19.0 |
% |
|
|
|
|
|
|
|
|
The increase in government segment operating profit was primarily related to higher revenues
and gross margins dollars partially offset by higher selling and administration costs of $1.6
million and IR&D of $800,000.
Commercial Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
51.7 |
|
|
$ |
44.8 |
|
|
$ |
6.9 |
|
|
|
15.5 |
% |
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9.8 |
|
|
$ |
12.1 |
|
|
$ |
(2.3 |
) |
|
|
(19.2 |
)% |
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
61.5 |
|
|
$ |
56.9 |
|
|
$ |
4.6 |
|
|
|
8.1 |
% |
The increase in commercial segment revenues reflects higher sales in the Satellite Networks
product lines. The majority of the increase was attributable to sales growth from consumer
broadband products of approximately $8.7 million, offset by a decrease of approximately $2.5 million
from our enterprise VSAT products and approximately $2.4 million from our Antenna Systems products.
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
Three months ended |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
September 29, 2006 |
|
September 30, 2005 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks operating profit (loss) |
|
$ |
0.2 |
|
|
$ |
(0.2 |
) |
|
$ |
0.5 |
|
|
|
202.9 |
% |
Percentage of Satellite Network revenues |
|
|
0.5 |
% |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems operating (loss) profit |
|
$ |
(0.2 |
) |
|
$ |
1.5 |
|
|
$ |
(1.7 |
) |
|
|
(114.4 |
)% |
Percentage of Antenna Systems revenues |
|
|
(2.2 |
)% |
|
|
12.2 |
% |
|
|
|
|
|
|
|
|
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit |
|
$ |
0.0 |
|
|
$ |
1.2 |
|
|
$ |
(1.2 |
) |
|
|
(97.2 |
)% |
Percentage of commercial segment revenues |
|
|
0.1 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
28
The decrease in commercial segment operating profit is primarily due to decrease revenues and
gross margin percentages from our Antenna Systems products offset by higher revenues of $8.7
million and related gross margins in our consumer broadband products in the Satellite Networks
product group. Additionally the segment had increased IR&D
expenses of approximately $500,000, primarily for planned development efforts related to next generation VSAT equipment.
Six Months Ended September 29, 2006 vs. Six Months Ended September 30, 2005
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Revenues |
|
$ |
260.2 |
|
|
$ |
204.1 |
|
|
$ |
56.1 |
|
|
|
27.5 |
% |
The increase in revenues was due to our beginning backlog of $361.9 million and customer
awards of $275.3 million for the first six months of our fiscal year 2007 and the conversion of
certain backlog and awards into revenues. Revenue growth was experienced in both our government and
commercial segments. Growth primarily derived from our tactical data link products contributing $12.4 million, certain information assurance products increasing approximately $8.0
million, increases from consumer broadband products of approximately $21.2 million, offset by
decreases in certain mobile broadband communication products of
approximately $4.4 million from the prior year. In addition, the
recently acquired Efficient Channel Coding and Enerdyne business contributed
$9.3 million to revenue increase in first six months of fiscal year 2007 when compared to first six
months of fiscal year 2006.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Cost of revenues |
|
$ |
195.6 |
|
|
$ |
153.9 |
|
|
$ |
41.7 |
|
|
|
27.1 |
% |
Percentage of revenues |
|
|
75.2 |
% |
|
|
75.4 |
% |
|
|
|
|
|
|
|
|
The increase in cost of revenues from $153.9 million to $195.6 million is primarily due to the
Companys increased revenues. Accordingly, the Companys gross profit increase from $50.2 million
to $64.6 million reflected increases due to revenue growth in addition to improved product margin
mix from the Companys consumer broadband products, which yielded margin improvements of
approximately 12.3 percentage points compared to the same period
last year. In addition, the recently acquired Efficient Channel
Coding and Enerdyne business added approximately 2.7 percentage points to overall gross margin performance year to date. The $14.4
million in gross profit increases included approximately $1.1 million in stock based compensation
charges recorded in the first six months of fiscal 2007. Gross profit may fluctuate in future
quarters depending on the mix of products sold and services provided, competition, new
product introduction costs and other factors.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Selling, general and administrative |
|
$ |
32.6 |
|
|
$ |
26.2 |
|
|
$ |
6.5 |
|
|
|
24.7 |
% |
Percentage of revenues |
|
|
12.5 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
The increase in SG&A expenses for the first six months of fiscal 2007 compared to the first
six months of 2006 is primarily attributable to higher selling and personnel costs to support our
growth and acquisitions of approximately $5.6 million and approximately $787,000 in stock based
compensation expense recorded in the first six months of fiscal 2007. 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.
29
Independent Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Independent research and development |
|
$ |
9.6 |
|
|
$ |
6.9 |
|
|
$ |
2.8 |
|
|
|
40.3 |
% |
Percentage of revenues |
|
|
3.7 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
The increase in IR&D expenses reflects year over year increases in the government segment of
$934,000 and the commercial segment of $1.8 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
years 2001, 2002, 2006 and 2007 are being amortized over useful lives ranging from eight months 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 six months ended September 29, 2006 |
|
$ |
4,681 |
|
|
Expected for the remainder of fiscal year 2007 |
|
|
4,521 |
|
Expected for fiscal year 2008 |
|
|
6,610 |
|
Expected for fiscal year 2009 |
|
|
5,862 |
|
Expected for fiscal year 2010 |
|
|
2,638 |
|
Expected for fiscal year 2011 |
|
|
2,147 |
|
Thereafter |
|
|
4,094 |
|
|
|
|
|
|
|
$ |
25,872 |
|
|
|
|
|
Interest Income Interest income increased to $749,000 for the six months ended September 29,
2006 from $4,000 for the six months ended September 30, 2005 due to higher average invested cash
balances year over year and higher interest rates.
Interest Expense Interest expense increased to $291,000 for the six months ended September 29,
2006 from $179,000 for the six months ended September 30, 2005. We had no outstanding borrowings
under our line of credit at September 29, 2006 or September 30, 2005.
Provision for Income Taxes Our effective tax rate for the six months ended September 29, 2006
was approximately 34.0% compared to 20.7% for the six months ended September 30, 2005. We currently
estimate our annual effective income tax rate to be approximately 35.0% for fiscal year 2007, which
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, and 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 the
reinstated period.
Our Segment Results for the Six Months Ended September 29, 2006 vs. Six Months Ended September 30,
2005
Government Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
|
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
|
Revenues |
|
$ |
134.6 |
|
|
$ |
103.0 |
|
|
$ |
31.6 |
|
|
|
30.7 |
% |
|
The government segment received awards of $151.1 million for the first six months of fiscal
year 2007 compared to $140.1 million for the first six months of fiscal year 2006. The conversion
of certain backlog and orders to revenue contributed to revenue growth. Increased revenues were
primarily attributed to the following products: $12.4 million for tactical data links,
30
principally our MIDS units, $11.4 million for certain information assurance systems and
networking products and $3.7 million from certain simulation and test equipment product. In
addition, the acquisition of Enerdyne contributed $2.9 million to revenue increase.
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Operating profit |
|
$ |
24.2 |
|
|
$ |
19.7 |
|
|
$ |
4.6 |
|
|
|
23.2 |
% |
Percentage of government segment revenues |
|
|
18.0 |
% |
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
The increase in government segment operating profit dollars was primarily related to the
increased revenues period over period. The segment experienced increases of $1.1 million in gross
profits derived from small increases across various product including tactical data links, $5.6 million in improved gross profit
in certain information assurance systems, and approximately $1.5
million in additional gross profit from
the recently acquired Enerdyne business. These increases were partially offset by higher selling and
administrative costs of $2.4 million and independent research and development expenses of $934,000.
Commercial Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
September 29, |
|
September 30, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
104.8 |
|
|
$ |
81.8 |
|
|
$ |
23.0 |
|
|
|
28.2 |
% |
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
20.8 |
|
|
$ |
22.7 |
|
|
$ |
(1.9 |
) |
|
|
(8.3 |
)% |
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
125.6 |
|
|
$ |
104.4 |
|
|
$ |
21.2 |
|
|
|
20.3 |
% |
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 from consumer broadband
products of approximately $21.2 million, offset by a decrease in our mobile broadband communication
products of approximately $4.4 million for the first six months of fiscal year 2007 over the first
six months of fiscal year 2006. In addition, the recently acquired
Efficient Channel Coding business
contributed $6.4 million to the revenue increase in first six months of fiscal year 2007 when
compared to first six months of fiscal year 2006.
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Dollar |
|
Percentage |
|
|
September 30, |
|
September 29, |
|
Increase |
|
Increase |
(In millions, except percentages) |
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
Satellite Networks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Networks operating profit (loss) |
|
$ |
(1.4 |
) |
|
$ |
(3.3 |
) |
|
$ |
2.0 |
|
|
|
58.9 |
% |
Percentage of Satellite Network revenues |
|
|
(1.3 |
)% |
|
|
(4.1 |
)% |
|
|
|
|
|
|
|
|
Antenna Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antenna Systems operating profit |
|
$ |
(0.6 |
) |
|
$ |
2.5 |
|
|
$ |
(3.0 |
) |
|
|
123.1 |
% |
Percentage of Antenna Systems revenues |
|
|
(2.7 |
)% |
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
Total Commercial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss) |
|
$ |
(1.9 |
) |
|
$ |
(0.9 |
) |
|
$ |
(1.0 |
) |
|
|
(117.1 |
)% |
Percentage of commercial segment revenues |
|
|
(1.5 |
)% |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
31
The decrease in commercial segment operating profit dollars was primarily attributed to
increases in research and development expenses of $1.8 million, decrease in Antenna Systems
operating margin of $3.0 million, primarily due to decreased revenues of our Antenna Systems
products, offset by gross margins increases from our consumer broadband products due to growth in
gross margins percentage of approximately 12.3 points.
Backlog
As reflected in the table below, both funded and total firm backlog increased during the first
six months of fiscal year 2007 with the increase coming from our government segment.
|
|
|
|
|
|
|
|
|
|
|
September 29, 2006 |
|
|
March 31, 2006 |
|
|
|
(in millions) |
|
Firm backlog |
|
|
|
|
|
|
|
|
Government segment |
|
$ |
205.4 |
|
|
$ |
183.7 |
|
Commercial segment |
|
|
189.8 |
|
|
|
191.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
395.2 |
|
|
$ |
374.9 |
|
|
|
|
|
|
|
|
Funded backlog |
|
|
|
|
|
|
|
|
Government segment |
|
$ |
149.4 |
|
|
$ |
132.9 |
|
Commercial segment |
|
|
189.9 |
|
|
|
190.7 |
|
|
|
|
|
|
|
|
Total |
|
$ |
339.3 |
|
|
$ |
323.6 |
|
|
|
|
|
|
|
|
Contract options |
|
$ |
37.0 |
|
|
$ |
13.8 |
|
|
|
|
|
|
|
|
The firm backlog does not include contract options. Of the $395.2 million in firm backlog,
approximately $174.1 million is expected to be delivered during the remaining six months of fiscal
year 2007, and the balance is expected to be delivered in fiscal year 2008 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.
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 six months of fiscal year 2007 was $13.5
million as compared to $19.1 million for the first six months of fiscal year 2006. The decrease in
cash provided by operating activities was primarily attributable to the
32
$15.0 million in additional
cash outlays to fund changes in other operating assets and liabilities offset by slight increase in
net income and the increase in non-cash add-backs of $8.6 million. Billed accounts receivable
increased from year end due to increased shipments in both our government and commercial segments
and the achievement of program milestones. Unbilled accounts receivable increased mostly due to
increases in our tactical data links and information assurance programs partially offset by
continued reduction in consumer broadband programs.
Cash used in investing activities for the first six months of fiscal year 2007 was $8.2
million as compared to cash used in investing activities for the first six months of fiscal year
2006 of $7.8 million. The increase in cash used in investing activities primarily relates to capital increases from facility expansion projects and production test equipment to support our
growth.
Cash provided by financing activities for the first six months of fiscal year 2007 was $5.1
million as compared to cash provided by financing activities for the first six months of fiscal
year 2006 of $2.2 million. The majority of the activity for both years is due to cash received from
the exercise of employee stock options, and stock purchases through our stock purchase plan. The
six months ended September 29, 2006 also includes $550,000 in cash inflows related to the
incremental tax benefit from stock option exercises.
At September 29, 2006, we had $47.4 million in cash, cash equivalents and short-term
investments, $171.1 million in working capital and no outstanding borrowings under our line of
credit. We had $4.3 million outstanding under standby letters of credit leaving borrowing
availability under our line of credit of $55.7 million. At March 31, 2006, we had $36.9 million in
cash and cash equivalents and short-term investments, $152.9 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 Wachovia 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 September 29, 2006.
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.
An additional $8.7 million in consideration is payable in cash and/or stock at the Companys
option based on Enerdyne achieving certain earnings performance in any fiscal year up to and
including the Companys 2010 fiscal year (as well as projected earnings performance for the
one-year period thereafter) which will be recorded as additional purchase price. No portion of the
earn-out is guaranteed. The additional consideration, if earned, is
payable in cash and/or shares of the
Companys common stock after the fiscal year in which Enerdyne achieves the specified earnings
performance.
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.
33
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 2007 |
|
|
2008-2009 |
|
|
2010-2011 |
|
|
After 2011 |
|
Operating leases |
|
$ |
87,090 |
|
|
$ |
4,777 |
|
|
$ |
18,151 |
|
|
$ |
18,431 |
|
|
$ |
45,731 |
|
Standby letters of credit |
|
|
4,269 |
|
|
|
556 |
|
|
|
1,360 |
|
|
|
2,353 |
|
|
|
|
|
Purchase commitments |
|
|
118,150 |
|
|
|
64,419 |
|
|
|
53,371 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
209,509 |
|
|
$ |
69,752 |
|
|
$ |
72,882 |
|
|
$ |
21,144 |
|
|
$ |
45,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Recent Accounting Requirements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty
in Income Taxes which prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN
48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process
of determining the effect, if any, the adoption of FIN 48 will have on its consolidated financial
statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108 (SAB 108), Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB 108 provides interpretive guidance on the SECs views regarding the process of
quantifying materiality of financial statement misstatements. SAB 108 is effective for fiscal years
ending after November 15, 2006, with early application for the first interim period ending after
November 15, 2006. We are currently evaluating the impact of adopting SAB 108 on our financial
statements.
In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used
for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We are currently
assessing the impact that SFAS 157 will have on our results of operations and financial position.
In
September 2006, the FASB issued Statement No. 158 (SFAS 158), Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106, and 132(R). SFAS 158 requires companies to recognize the overfunded or underfunded status
of a defined benefit post-retirement plan as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income, effective for fiscal years ending after December 15, 2006. SFAS 158 also
requires companies to measure the funded status of the plan as of the date of its fiscal year-end,
with limited exceptions, effective for fiscal years ending after December 15, 2008. We do not
believe that SFAS 158 will have any effect on our results of operations or financial position, as
we do not currently have any defined benefit pension or other post-retirement plans.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements at September 29, 2006 as defined in
Regulation S-K Item 303(a)(4) other than as discussed under Contractual Obligations above or fully
disclosed in the notes to our financial statements included in this filing or in our 2006 Annual
Report on Form 10-K.
34
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 September 29, 2006, there were no foreign currency exchange contracts outstanding. The
fair value of our foreign currency forward contracts was a liability of $294,000 at September 30,
2005, and we had $6.0 million of notional value of foreign currency forward contracts outstanding
at September 30, 2005.
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 September 29, 2006, 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 September 29, 2006.
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
There are no material changes to the Risk Factors described under Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Please refer to that section for disclosures regarding the risks and uncertainties related to our business.
35
Item 6. Exhibits
|
|
|
10.1
|
|
Third Amended and Restated 1996 Equity Participation Plan of ViaSat, Inc. (incorporated by reference to Exhibit 99.1 of ViaSats Form 8-K filed on October 10, 2006).
|
|
|
|
10.2
|
|
Form of Restricted Stock Unit Award Agreement under the Third Amended and Restated 1996 Equity Participation Plan of ViaSat, Inc. (for grants to employees) (incorporated by reference to Exhibit 10.1 of ViaSats Form 8-K filed on October 16, 2006). |
|
|
|
10.3
|
|
Form of Restricted Stock Unit Award Agreement under the Third Amended and Restated 1996 Equity Participation Plan of ViaSat, Inc. (for grants to executive officers) (incorporated by reference to Exhibit 10.2 of ViaSats Form 8-K filed on October 16, 2006). |
|
|
|
31.1
|
|
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
VIASAT, INC. |
|
|
|
|
|
|
|
November 7, 2006
|
|
/s/ Mark D. Dankberg
Mark D. Dankberg
|
|
|
|
|
Chairman of the Board and Chief |
|
|
|
|
Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
/s/ Ronald G. Wangerin |
|
|
|
|
|
|
|
|
|
Ronald G. Wangerin |
|
|
|
|
Vice President, Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting Officer) |
|
|
37