Business Context and Reporting Period
Company: VIASAT INC
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended December 29, 2006 (Fiscal Year 2007)
Business Overview: ViaSat designs and manufactures satellite and communication products for government (defense) and commercial markets. The company operates two primary segments: Government and Commercial (subdivided into Satellite Networks and Antenna Systems).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Dec 29, 2006 | Nine Months Ended Dec 29, 2006 |
|---|---|---|
| Revenues | $124,336 | $384,538 |
| Net Income | $9,690 | $21,590 |
| Diluted EPS | $0.31 | $0.71 |
| Operating Cash Flow (9mo) | N/A | $42,336 |
| Cash & Equivalents (End of Period) | $76,619 | $76,619 |
| Working Capital | $185,505 | $185,505 |
| Debt (Line of Credit Borrowed) | $0 | $0 |
Margins (Nine Months Ended Dec 29, 2006):
- Gross Margin: 25.6% (Cost of Revenues: 74.4%)
- Operating Margin: 6.7%
- Net Profit Margin: 5.6%
Material Changes vs. Prior Period
Revenue Growth: Revenues increased 11.4% in the quarter and 21.8% year-to-date compared to the prior year. Growth was driven by the Government segment (+26.5% quarterly, +29.3% YTD) due to increased sales of MIDS products, information assurance systems, and contributions from the Enerdyne acquisition. The Commercial segment declined 5.4% quarterly but grew 10.9% YTD, with Satellite Networks offsetting declines in Antenna Systems.
Profitability: Net income rose 46.2% in the quarter and 21.6% YTD. Operating income increased 2.6% quarterly and 17.0% YTD. The Government segment operating profit decreased 28.8% quarterly due to higher SG&A and R&D investments, despite revenue growth. The Commercial segment operating profit improved significantly, turning from a loss to a profit in the quarter.
Acquisitions: The company completed the acquisition of Enerdyne Technologies, Inc. in June 2006 for approximately $17.5 million (primarily stock), contributing to Government segment revenues. Additionally, a $9.0 million earn-out payment related to the prior Efficient Channel Coding (ECC) acquisition was accrued and is payable in May 2007.
Guidance, Outlook, and Risks
Management Commentary: Management expects capital needs to increase in fiscal 2007 for facility expansion and equipment. The company anticipates continued growth in government contracts (MIDS, JTRS) and commercial VSAT markets. Backlog increased to $394.9 million (firm) as of December 29, 2006, with approximately $92.5 million expected to be delivered in the remainder of fiscal 2007.
Tax Outlook: The estimated annual effective income tax rate for fiscal 2007 is 25.6%, compared to 17.8% in fiscal 2006. A discrete tax benefit of approximately $1.3 million related to R&D tax credits was recognized in the quarter.
Risks and Contingencies:
- Revenue Recognition: Significant reliance on percentage-of-completion accounting for long-term contracts; a 1% variance in cost estimates could impact pre-tax income by approximately $333,000.
- Stock Option Investigation: An internal investigation identified accounting errors regarding stock option grant dates for non-executive new hires. A cumulative adjustment of $703,000 (net of tax) was recorded, deemed immaterial.
- Self-Insurance: The company adopted a self-insurance plan for medical and workers' compensation, creating liabilities subject to actuarial estimation variability.
- Contract Termination: A majority of government contracts can be terminated at the customer's convenience with limited penalties.
Investor Verification Checklist
- Backlog Realization: Verify the conversion rate of the $394.9 million firm backlog into revenue, noting that a significant portion is unfunded government contracts.
- Commercial Segment Margins: Monitor the Antenna Systems sub-segment, which reported an operating loss in the quarter due to development cost overruns.
- Acquisition Integration: Assess the performance contribution of the Enerdyne acquisition against the $8.7 million potential earn-out obligation.
- Share-Based Compensation: Review the impact of FAS 123R adoption on future expense recognition, with $19.6 million of unrecognized cost remaining.
- Liquidity Position: Confirm the company's ability to meet the $9.0 million ECC earn-out payment in May 2007 without drawing on its $55.7 million available line of credit.