ViaSat, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended January 2, 2015; comparative periods ended January 3, 2014. Unaudited. ViaSat provides satellite broadband services and commercial and government communications systems.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $339.6 million | $332.6 million | $1,017.8 million | $1,007.5 million |
| Operating income | $18.2 million | $1.5 million | $63.5 million | $4.4 million |
| Net income (loss) attributable to ViaSat | $14.8 million | $(6.0) million | $32.8 million | $(5.9) million |
| Diluted earnings (loss) per share | $0.31 | $(0.13) | $0.68 | $(0.13) |
- Q3 operating margin was 5.4%, versus 0.5% a year earlier; nine-month operating margin was 6.2%, versus 0.4%.
- Service revenue increased 19.1% in Q3 and 14.3% for nine months; product revenue decreased 10.1% and 8.5%, respectively.
- Satellite services revenue grew 25.5% in Q3 and 29.7% for nine months, supported by subscriber growth and settlement-related revenue. Commercial networks revenue fell 8.5% and 12.1%; government systems revenue fell 7.3% and 9.0%, respectively.
- Operating cash flow was $271.4 million for nine months, versus $134.9 million. Investing cash outflow was $366.6 million, including $272.9 million for property, equipment and satellites and $56.5 million net for acquisitions. Financing cash inflow was $134.7 million. Cash increased $39.3 million to $97.6 million.
Balance sheet and liquidity
- At January 2, 2015, working capital was $307.8 million and total assets were $2.15 billion.
- Total debt was $819.9 million: $575.0 million principal of 6.875% senior notes due 2020 and $235.0 million drawn on the revolving credit facility, plus other debt. The revolver’s weighted-average effective rate was 2.17%.
- The $500 million revolving facility matures in November 2018; $224.5 million remained available after outstanding borrowings and letters of credit. ViaSat reported compliance with its financial covenants.
- ViaSat stated current cash, expected operating cash flow and revolver availability should fund anticipated operating requirements for at least 12 months.
Changes, outlook and notable items
- Q3 and year-to-date results benefited materially from a September 2014 settlement with Space Systems/Loral and Loral requiring total payments of $108.7 million over 2.5 years. ViaSat recognized $46.9 million in the first nine months: $27.0 million as product revenue, $18.7 million as a reduction of SG&A, and $1.2 million as interest income. Further payments are to be recognized when received.
- Satellite services had approximately 675,000 subscribers, up from 620,000 a year earlier. More than 270 aircraft were in service with ViaSat in-flight Wi-Fi at quarter-end.
- NetNearU was acquired in June 2014 for estimated cash consideration of $59.9 million; its network-management technology is intended to support expansion into additional broadband markets.
- ViaSat-2 was under construction. The company estimated total project cost, including satellite, launch, insurance and related gateway infrastructure, at $600–650 million, dependent in part on gateway rollout timing. It expected to fund the project through cash, borrowing capacity and operating cash flow; no assurance of projected benefits was given.
- Firm backlog was $992.9 million, including $903.4 million funded; $200.5 million of firm backlog was expected to be delivered in the remainder of FY2015. Management cautioned backlog is not necessarily indicative of future sales and many contracts can be terminated.
- Management estimated a FY2015 effective income-tax expense rate of approximately 21.2%. The estimate reflected federal R&D tax-credit legislation enacted in December 2014, including $5.9 million of rate-related tax benefits and a $2.4 million discrete benefit in Q3. The rate could fall if the credit were reinstated through fiscal year-end.
Risks and contingencies
- U.S. government incurred-cost audits remained open for FY2011 and later years. Reserves for potential customer refunds were $5.2 million; adverse audit findings could result in refunds, penalties, contract termination or restrictions on government contracting.
- ViaSat identified risks involving ViaSat-2 construction, launch and performance; subscriber growth and execution of its broadband plan; dependence on government contracts and customer funding; competition; supplier concentration; indebtedness and covenant compliance; and litigation and regulatory changes.
- Contract estimates, revenue recognition, warranty costs, tax-asset realizability and goodwill/intangible-asset valuations require significant judgment. A 1% variance in estimated future costs on open fixed-price contracts would change pretax income by approximately $0.5 million.
- The company reported no material off-balance-sheet arrangements and believed pending legal matters would not materially harm its financial condition, results or liquidity. It also noted litigation can nonetheless divert resources and create costs.
Investor verification priorities
- Separate recurring operating performance from settlement-related revenue and SG&A reductions; confirm timing and collection of the remaining settlement payments.
- Track commercial networks and government systems revenue, segment margins, contract awards and backlog conversion, including customer termination and funding risks.
- Review ViaSat-2 spending, schedule, launch and gateway rollout assumptions against the stated $600–650 million project estimate and available financing.
- Monitor revolver borrowings, covenant headroom, debt-service costs and liquidity as capital expenditures continue.
- Follow outstanding government audits, the $5.2 million contract reserve, and the future treatment of tax credits and deferred tax assets.