Viasat, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2022, Viasat’s second quarter of fiscal 2023. Financial statements are unaudited. Unless noted, dollar amounts below are in millions. Continuing-operations results exclude the Link-16 Tactical Data Links (TDL) business, which was classified as discontinued operations.
Business context and material developments
Viasat operates satellite services, commercial networks and government systems businesses. Its activities include broadband and in-flight connectivity, satellite and networking equipment, and secure communications products and services.
- On October 1, 2022, Viasat agreed to sell certain assets and liabilities of its Link-16 TDL business to L3Harris for approximately $1.96 billion in cash, subject to adjustments and customary closing conditions. The company expects closing in the first half of calendar 2023 and said proceeds are expected to substantially reduce debt and net leverage.
- The pending Inmarsat acquisition is subject to regulatory approvals and other closing conditions. Consideration includes approximately 46.36 million Viasat shares and cash; a $299.3 million Inmarsat dividend reduced the cash consideration. Viasat also expects to assume Inmarsat debt and has obtained financing commitments for up to $1.6 billion in additional debt facilities.
- A $62.2 million Cisco payment resolved a 2019 judgment: Viasat recorded $55.8 million as commercial networks product revenue and $6.4 million as interest income in the quarter.
Financial performance
| Metric | Three months ended September 30, 2022 | Prior-year quarter | Six months ended September 30, 2022 | Prior-year six months |
|---|---|---|---|---|
| Continuing-operations revenue | $656.7 | $609.2 | $1,228.1 | $1,179.9 |
| Product revenue | $254.9 | $221.1 | $424.1 | $426.7 |
| Service revenue | $401.8 | $388.1 | $804.0 | $753.2 |
| Gross profit, calculated as revenue less cost of revenues | $218.1 | $175.3 | $373.5 | $351.3 |
| Gross margin, calculated | 33.2% | 28.8% | 30.4% | 29.8% |
| Operating income (loss) | $1.1 | $(24.4) | $(57.4) | $(38.7) |
| Net income (loss) attributable to Viasat | $(48.2) | $3.3 | $(69.8) | $20.3 |
| Diluted earnings (loss) per share | $(0.64) | $0.04 | $(0.93) | $0.28 |
The quarter’s return to slight operating income was more than offset at the bottom line by a $76.1 million income-tax provision. A $69.0 million valuation allowance on California R&D tax credits was a key driver; management cited expected lower California-apportioned taxable income in connection with the Link-16 sale. Six-month tax provision was $52.5 million.
- Segment trends, quarter: Satellite services revenue was essentially flat at $300.5 million, with an operating loss of $6.1 million versus $14.3 million profit a year earlier. Commercial networks revenue rose 34% to $180.0 million and its operating loss narrowed to $0.8 million, significantly benefiting from the Cisco settlement. Government systems revenue rose 1% to $176.1 million, while operating profit fell to $15.4 million.
- Segment trends, six months: Satellite services revenue increased 7% to $612.6 million but shifted to a $4.7 million operating loss. Commercial networks revenue increased 16% to $292.8 million and its operating loss narrowed to $50.2 million. Government systems revenue declined 8% to $322.7 million and operating profit declined to $12.4 million.
- Quarterly SG&A increased 16% to $177.2 million; six-month SG&A rose 15% to $348.8 million, including acquisition-related expenses primarily associated with Inmarsat. Service costs rose, with management citing lower satellite-services margins, while product costs fell, partly reflecting the Cisco settlement’s favorable effect on commercial networks margins.
Cash flow, debt and liquidity
- Six-month operating cash flow was $228.1 million, broadly unchanged from $227.8 million. Investing activities used $554.8 million, including $508.1 million of purchases of property, equipment and satellites. Financing activities provided $168.4 million.
- Cash and cash equivalents fell to $149.2 million at September 30 from $310.5 million at March 31, 2022. Management reported working capital of $343.5 million, down from $389.1 million.
- Gross debt, including finance leases, was approximately $2.72 billion, versus $2.52 billion at March 31. This included $210.0 million drawn on the revolving credit facility; $429.2 million remained available after letters of credit. The company reported compliance with financial covenants.
- The Term Loan Facility’s effective interest rate was 8.21%; the revolving facility’s weighted average effective rate was 4.85%. Viasat estimated that a 50-basis-point rate increase on those variable-rate borrowings would increase annual interest expense by approximately $4.6 million before capitalized interest.
- Management stated it believed available funding sources were adequate for anticipated operating needs over the next 12 months and to fund the Inmarsat transaction, including cash, borrowing capacity, operating cash flow, expected Link-16 sale proceeds and transaction financing commitments.
Outlook, risks and contingencies
- Viasat reported $2.37 billion in firm backlog, including discontinued operations, and $2.20 billion in funded backlog at September 30. New awards were approximately $1.9 billion for the six months. Backlog is not a guarantee of future revenue: many contracts may be terminated, and funded backlog depends on customer funding.
- Management cited rising in-flight connectivity activity as aircraft returned to service, but said airline traffic had not fully recovered. Approximately 1,970 commercial aircraft had Viasat systems installed and in service, with about 20 inactive; approximately 1,270 additional aircraft under existing agreements were anticipated, though timing and activation are uncertain.
- Satellite-services performance faces bandwidth constraints ahead of ViaSat-3 service, launch and operational risks, supply-chain shortages, and costs to activate ground infrastructure. Management expects increased costs around future satellite launches and cautioned that revenue growth and segment profitability are not assured.
- Government systems faced certification delays and component shortages, although management said awards remained strong through the first half. COVID-19 effects were not material to the reported period’s consolidated financial position, results or cash flows, but management expected some continuing effects, particularly on in-flight connectivity.
- Key transaction risks include regulatory or closing delays, failure to complete the Link-16 sale or Inmarsat acquisition, financing and integration risks, and potential transaction costs. In specified circumstances, termination of the Inmarsat agreement could require a fee of up to $200 million or reimbursement of certain seller expenses up to $40 million.
- Unresolved U.S. Government incurred-cost audits for fiscal 2021 and 2022 could result in adjustments; Viasat had $12.1 million in reserves for potential customer refunds on certain cost-reimbursable contracts. The filing also describes ordinary-course legal matters and government-contract compliance risks; management did not expect current pending matters to materially affect the company, but outcomes are uncertain.
Most important facts for investors to verify
- Whether and when the Link-16 sale closes, final proceeds after adjustments, and the resulting change in debt and leverage.
- Whether the Inmarsat transaction receives required approvals, its final financing and assumed-debt burden, and integration costs and benefits.
- Whether continuing-operations cash generation can support substantial satellite investment and debt service as cash balances decline and variable borrowing costs remain elevated.
- Underlying segment profitability excluding the one-time Cisco settlement, particularly satellite-services margins and government-systems product trends.
- Timing, cost and operational performance of ViaSat-3, and the pace of in-flight connectivity aircraft activations and airline recovery.
- Resolution of government contract audits and realization of deferred tax assets, including the California R&D credit valuation allowance.