Business Context and Reporting Period
Company: VIASAT INC
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended December 31, 2004 (Fiscal Year 2005)
Business Overview: ViaSat is a provider of advanced digital satellite communications and wireless networking equipment serving government (defense) and commercial markets. The company operates two primary segments: Government (tactical data links, information security, UHF DAMA) and Commercial (VSAT networks, broadband internet, mobile broadband).
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 31, 2004 |
9 Months Ended Dec 31, 2004 |
9 Months Ended Jan 2, 2004 |
|---|---|---|---|
| Revenues | $88,187 | $255,000 | $195,358 |
| Gross Profit | $19,715 | $60,944 | $52,672 |
| Gross Margin | 22.4% | 23.9% | 27.0% |
| Income from Operations | $4,867 | $16,014 | $11,326 |
| Net Income | $5,241 | $12,549 | $9,354 |
| Diluted EPS | $0.19 | $0.45 | $0.34 |
| Cash and Equivalents | $8,855 | Balance Sheet (Dec 31, 2004) | |
| Working Capital | $132,154 | Calculated (Current Assets - Current Liab) | |
| Debt (Line of Credit) | $0 | Outstanding Borrowings |
Note: Figures are in thousands except per share data. Working capital calculated as Current Assets ($202,130) minus Current Liabilities ($69,976).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 22.8% for the quarter and 30.5% for the nine-month period compared to the prior year, driven by higher backlog and new awards in both segments.
- Profitability Pressure: While Net Income increased, Operating Income for the quarter declined 49.5% ($4.9M vs $9.6M). This was primarily due to a $6.3M one-time benefit from the Scientific-Atlanta (SA) Settlement in the prior year quarter and $4.8M in contract loss charges in the current quarter.
- Cash Flow Reversal: Operating cash flow turned negative, using $4.4M for the nine months ended Dec 31, 2004, compared to providing $30.9M in the prior year. This shift was caused by increased accounts receivable (billed and unbilled), higher inventory levels, and $6.7M in bonus payments, offsetting improved profitability.
- Segment Performance:
- Government: Revenues up 45.9% (quarter) and 44.3% (nine months). Operating profit increased significantly despite $4.8M in cost overrun charges.
- Commercial: Revenues up 4.6% (quarter) and 20.8% (nine months). Operating profit dropped sharply due to the absence of the prior year's SA Settlement benefit and specific costs related to satellite failures and development programs.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Contract Losses: Recorded approximately $4.8M in losses related to cost overruns on two government development programs and $3.3M on consumer broadband programs.
- SA Settlement: The prior year period included a $6.3M benefit from a settlement with Scientific-Atlanta, distorting year-over-year comparisons.
- Outlook & Guidance: Management expects operating profit margins to improve as the fiscal year progresses. Backlog reached a record high of $323.3M (firm) as of Dec 31, 2004. The company anticipates increased capital needs for facility expansion and equipment.
- Material Weakness in Internal Controls: The company identified a material weakness in internal control over financial reporting. This stemmed from improper accounting for "bill and hold" transactions and foreign currency forward contracts. Adjustments were required to interim financial statements.
- Legal Proceedings:
- Xetron Corporation: Pending litigation regarding non-conforming RFAs; ViaSat claims $11M, Xetron counter-claims $8M.
- Scientific-Atlanta: Litigation settled in Dec 2003 for $9M cash.
- Future Accounting Changes: Adoption of SFAS 123R (Share-Based Payment) in Q2 Fiscal 2006 is expected to increase expenses by approximately $2.4M for unamortized options.
Investor Verification Checklist
- Internal Control Remediation: Verify the progress of hiring additional finance personnel and implementing new policies to address the material weakness in revenue recognition and derivative accounting.
- Contract Loss Provisions: Assess the likelihood of further cost overruns on the government and consumer broadband programs that triggered the $8.1M in recent charges.
- Accounts Receivable Aging: Review the composition of the $138.4M receivable balance, specifically the $83.8M in unbilled receivables, to ensure collectibility and milestone achievement.
- Commercial Segment Margins: Monitor the Commercial segment's ability to return to profitability without the one-time settlement benefits, given the recent drop in operating profit.
- Debt Covenants: Confirm continued compliance with the new $60M credit facility covenants (minimum EBITDA of $30M, tangible net worth of $135M, quick ratio of 1.50).