vsat-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018.

OR

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 (000-21767)

 

VIASAT, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

33-0174996

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6155 El Camino Real

Carlsbad, California 92009

(760) 476-2200

(Address of principal executive offices and telephone number)

 

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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares outstanding of the registrant’s common stock, $0.0001 par value, as of July 27, 2018 was 59,549,220.

 

 

 


VIASAT, INC.

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (Unaudited)

 

3

Condensed Consolidated Balance Sheets

 

3

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

4

Condensed Consolidated Statements of Cash Flows

 

5

Condensed Consolidated Statement of Equity

 

6

Notes to the Condensed Consolidated Financial Statements

 

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

32

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

48

Item 4. Controls and Procedures

 

49

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

49

Item 1A. Risk Factors

 

49

Item 6. Exhibits

 

50

Signatures

 

51

 

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

VIASAT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

As of

June 30, 2018

 

 

As of

March 31, 2018

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,789

 

 

$

71,446

 

Accounts receivable, net

 

 

236,085

 

 

 

267,665

 

Inventories

 

 

220,018

 

 

 

196,307

 

Prepaid expenses and other current assets

 

 

102,977

 

 

 

77,135

 

Total current assets

 

 

613,869

 

 

 

612,553

 

 

 

 

 

 

 

 

 

 

Satellites, net

 

 

1,265,021

 

 

 

1,239,987

 

Property and equipment, net

 

 

772,207

 

 

 

722,488

 

Other acquired intangible assets, net

 

 

28,558

 

 

 

31,862

 

Goodwill

 

 

122,455

 

 

 

121,085

 

Other assets

 

 

742,158

 

 

 

686,134

 

Total assets

 

$

3,544,268

 

 

$

3,414,109

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

149,548

 

 

$

157,481

 

Accrued liabilities

 

 

252,312

 

 

 

263,676

 

Current portion of long-term debt

 

 

45,300

 

 

 

45,300

 

Total current liabilities

 

 

447,160

 

 

 

466,457

 

Senior notes

 

 

691,192

 

 

 

690,886

 

Other long-term debt

 

 

381,709

 

 

 

287,519

 

Other liabilities

 

 

132,260

 

 

 

121,240

 

Total liabilities

 

 

1,652,321

 

 

 

1,566,102

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Viasat, Inc. stockholders’ equity

 

 

 

 

 

 

 

 

Common stock

 

 

6

 

 

 

6

 

Paid-in capital

 

 

1,589,167

 

 

 

1,535,635

 

Retained earnings

 

 

277,831

 

 

 

285,960

 

Accumulated other comprehensive income

 

 

15,442

 

 

 

15,565

 

Total Viasat, Inc. stockholders’ equity

 

 

1,882,446

 

 

 

1,837,166

 

Noncontrolling interest in subsidiaries

 

 

9,501

 

 

 

10,841

 

Total equity

 

 

1,891,947

 

 

 

1,848,007

 

Total liabilities and equity

 

$

3,544,268

 

 

$

3,414,109

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


 

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

(In thousands, except per share data)

 

Revenues:

 

 

 

 

 

 

 

 

Product revenues

 

$

218,129

 

 

$

166,118

 

Service revenues

 

 

220,740

 

 

 

213,926

 

Total revenues

 

 

438,869

 

 

 

380,044

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

173,448

 

 

 

122,645

 

Cost of service revenues

 

 

171,432

 

 

 

137,851

 

Selling, general and administrative

 

 

112,642

 

 

 

89,173

 

Independent research and development

 

 

33,373

 

 

 

45,065

 

Amortization of acquired intangible assets

 

 

2,453

 

 

 

3,260

 

Loss from operations

 

 

(54,479

)

 

 

(17,950

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

36

 

 

 

93

 

Interest expense

 

 

(11,324

)

 

 

(56

)

Loss before income taxes

 

 

(65,767

)

 

 

(17,913

)

Benefit from income taxes

 

 

29,205

 

 

 

9,180

 

Equity in income (loss) of unconsolidated affiliate, net

 

 

1,065

 

 

 

(513

)

Net loss

 

 

(35,497

)

 

 

(9,246

)

Less: net loss attributable to noncontrolling interests, net of tax

 

 

(1,487

)

 

 

(207

)

Net loss attributable to Viasat, Inc.

 

$

(34,010

)

 

$

(9,039

)

Basic net loss per share attributable to Viasat, Inc. common

   stockholders

 

$

(0.57

)

 

$

(0.16

)

Diluted net loss per share attributable to Viasat, Inc. common

   stockholders

 

$

(0.57

)

 

$

(0.16

)

Shares used in computing basic net loss per share

 

 

59,208

 

 

 

57,842

 

Shares used in computing diluted net loss per share

 

 

59,208

 

 

 

57,842

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net loss

 

$

(35,497

)

 

$

(9,246

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on hedging, net of tax

 

 

(326

)

 

 

92

 

Foreign currency translation adjustments, net of tax

 

 

203

 

 

 

3,525

 

Other comprehensive (loss) income, net of tax

 

 

(123

)

 

 

3,617

 

Comprehensive loss

 

 

(35,620

)

 

 

(5,629

)

Less: comprehensive loss attributable to noncontrolling

   interests, net of tax

 

 

(1,487

)

 

 

(207

)

Comprehensive loss attributable to Viasat, Inc.

 

$

(34,133

)

 

$

(5,422

)

 

See accompanying notes to the condensed consolidated financial statements.

4


 

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(35,497

)

 

$

(9,246

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

63,793

 

 

 

50,828

 

Amortization of intangible assets

 

 

14,004

 

 

 

13,107

 

Deferred income taxes

 

 

(31,055

)

 

 

(9,377

)

Stock-based compensation expense

 

 

19,126

 

 

 

15,507

 

Loss on disposition of fixed assets

 

 

12,549

 

 

 

9,196

 

Other non-cash adjustments

 

 

1,907

 

 

 

2,793

 

Increase (decrease) in cash resulting from changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

24,125

 

 

 

46,500

 

Inventories

 

 

(22,245

)

 

 

(15,193

)

Other assets

 

 

(10,812

)

 

 

(8,203

)

Accounts payable

 

 

(386

)

 

 

(11,223

)

Accrued liabilities

 

 

12,226

 

 

 

5,348

 

Other liabilities

 

 

6,079

 

 

 

63,617

 

Net cash provided by operating activities

 

 

53,814

 

 

 

153,654

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, equipment and satellites

 

 

(146,633

)

 

 

(109,820

)

Cash paid for patents, licenses and other assets

 

 

(12,155

)

 

 

(18,253

)

Other investing activities

 

 

(2,070

)

 

 

 

Net cash used in investing activities

 

 

(160,858

)

 

 

(128,073

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility borrowings

 

 

130,000

 

 

 

 

Payments of revolving credit facility borrowings

 

 

(15,000

)

 

 

 

Payments of Ex-Im credit facility borrowings

 

 

(22,650

)

 

 

 

Proceeds from issuance of common stock under equity plans

 

 

7,655

 

 

 

7,245

 

Purchase of common stock in treasury (immediately retired) related to tax

   withholdings for share-based awards

 

 

(5,969

)

 

 

(1,931

)

Other financing activities

 

 

(2,376

)

 

 

(372

)

Net cash provided by financing activities

 

 

91,660

 

 

 

4,942

 

Effect of exchange rate changes on cash

 

 

(1,273

)

 

 

(65

)

Net (decrease) increase in cash and cash equivalents

 

 

(16,657

)

 

 

30,458

 

Cash and cash equivalents at beginning of period

 

 

71,446

 

 

 

130,098

 

Cash and cash equivalents at end of period

 

$

54,789

 

 

$

160,556

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of common stock in satisfaction of certain accrued employee

   compensation liabilities

 

$

32,129

 

 

$

16,409

 

Capital expenditures not paid for

 

$

7,637

 

 

$

(5,503

)

 

See accompanying notes to the condensed consolidated financial statements.

 

5


 

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

 

 

 

Viasat, Inc. Stockholders

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

Shares

Issued

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Noncontrolling

Interest in

Subsidiaries

 

 

Total

 

 

 

(In thousands, except share data)

 

Balance at March 31, 2018

 

 

58,905,274

 

 

$

6

 

 

$

1,535,635

 

 

$

285,960

 

 

$

15,565

 

 

$

10,841

 

 

$

1,848,007

 

Exercise of stock options

 

 

7,100

 

 

 

 

 

 

271

 

 

 

 

 

 

 

 

 

 

 

 

271

 

Issuance of stock under Employee Stock Purchase Plan

 

 

132,180

 

 

 

 

 

 

7,384

 

 

 

 

 

 

 

 

 

 

 

 

7,384

 

Stock-based compensation

 

 

 

 

 

 

 

 

21,738

 

 

 

 

 

 

 

 

 

 

 

 

21,738

 

Shares and fully-vested RSUs issued in settlement of

   certain accrued employee compensation liabilities, net

   of shares withheld for taxes which have been retired

 

 

438,433

 

 

 

 

 

 

27,701

 

 

 

 

 

 

 

 

 

 

 

 

27,701

 

RSU awards vesting, net of shares withheld for taxes

   which have been retired

 

 

44,533

 

 

 

 

 

 

(1,541

)

 

 

 

 

 

 

 

 

 

 

 

(1,541

)

Cumulative effect adjustment upon adoption of new

   revenue recognition guidance (ASU 2014-09)

 

 

 

 

 

 

 

 

 

 

 

25,881

 

 

 

 

 

 

 

 

 

25,881

 

Other noncontrolling interest activity

 

 

 

 

 

 

 

 

(2,021

)

 

 

 

 

 

 

 

 

147

 

 

 

(1,874

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(34,010

)

 

 

 

 

 

(1,487

)

 

 

(35,497

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(123

)

 

 

 

 

 

(123

)

Balance at June 30, 2018

 

 

59,527,520

 

 

$

6

 

 

$

1,589,167

 

 

$

277,831

 

 

$

15,442

 

 

$

9,501

 

 

$

1,891,947

 

 

See accompanying notes to the condensed consolidated financial statements.

 

6


 

VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 — Basis of Presentation

The accompanying condensed consolidated balance sheet at June 30, 2018, the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended June 30, 2018 and 2017, the condensed consolidated statements of cash flows for the three months ended June 30, 2018 and 2017 and the condensed consolidated statement of equity for the three months ended June 30, 2018 have been prepared by the management of Viasat, Inc. (also referred to hereafter as the Company or Viasat), and have not been audited. These financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended March 31, 2018 and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s results for the periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended March 31, 2018 included in the Company’s Annual Report on Form 10-K. Interim operating results are not necessarily indicative of operating results for the full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).

The Company’s condensed consolidated financial statements include the assets, liabilities and results of operations of Viasat, its wholly owned subsidiaries and its majority-owned subsidiaries, TrellisWare Technologies, Inc. (TrellisWare) and Euro Broadband Retail Sàrl (Euro Retail Co.). All significant intercompany amounts have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investment in unconsolidated affiliate in other assets (long-term) on the condensed consolidated balance sheets.

The preparation of financial statements in conformity with GAAP 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, stock-based compensation, self-insurance reserves, allowance for doubtful accounts, warranty accruals, valuation of goodwill and other intangible assets, patents, orbital slots and other licenses, software development, property, equipment and satellites, long-lived assets, derivatives, contingencies and income taxes including the valuation allowance on deferred tax assets.

Revenue recognition

Effective April 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (ASC) 606). This update established ASC 606, Revenue from Contracts with Customers and ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers.

 

In order to assess the impact of the new accounting standards, the Company applied the new standards to all open contracts existing as of April 1, 2018. The Company elected the practical expedient to reflect the aggregate effect of all contract modifications occurring before April 1, 2018 when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations. The aggregated effect of applying this practical expedient did not have a significant impact on the Company’s conclusions.

 

 

 

7


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

To reflect the adoption of the new standards, the Company elected to use the “modified retrospective method,” which resulted in the Company recording the retrospective cumulative effect to the opening balance of retained earnings. The following table presents the summary of the impact of adopting the new standards:

 

 

 

As of

March 31,

2018

 

 

Adjustments Due to ASC 606

 

 

As of

April 1,

2018

 

 

 

(In thousands)

 

Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

267,665

 

 

$

(5,664

)

 

$

262,001

 

Inventories

 

 

196,307

 

 

 

1,623

 

 

 

197,930

 

Prepaid expenses and other current assets

 

 

77,135

 

 

 

18,098

 

 

 

95,233

 

Other assets

 

 

686,134

 

 

 

17,738

 

 

 

703,872

 

Accrued liabilities

 

 

263,676

 

 

 

5,916

 

 

 

269,592

 

Retained earnings

 

 

285,960

 

 

 

25,879

 

 

 

311,839

 

 

The key impact of adoption is the deferral of commissions primarily in the Company’s satellite services segment, which were historically expensed as incurred as further described below.

 

The Company applied the five-step model under ASC 606 to its contracts with its customers to determine the impact of the new standard. Under this model the Company (1) identifies the contract with the customer, (2) identifies its performance obligations in the contract, (3) determines the transaction price for the contract, (4) allocates the transaction price to its performance obligations and (5) recognizes revenue when or as it satisfies its performance obligations. These performance obligations generally include the purchase of services (including broadband capacity and the leasing of broadband equipment), the purchase of products, and requirements to develop and deliver complex equipment built to customer specifications under long-term contracts.

 

Performance obligations

 

The timing of satisfaction of performance obligations may require judgment. The Company derives a substantial portion of its revenues from contracts with customers for services, primarily connectivity services including leasing of related broadband equipment. These contracts typically require advance or recurring monthly payments by the customer. The Company’s obligation to provide connectivity services is satisfied over time as the customer simultaneously receives and consumes the benefits provided. The measure of progress over time is based upon either a period of time (e.g., over the estimated contractual term) or usage (e.g., bandwidth used/bytes of data processed). From a recognition perspective, the leasing of broadband equipment is evaluated in accordance with the authoritative guidance for leases (ASC 840). The Company’s accounting for equipment leases involves specific determinations under ASC 840, which may involve complex provisions and significant judgments. In accordance with ASC 840, the Company applies the following criteria to determine the nature of the lease (e.g., as an operating or sales type lease): (1) review for transfers of ownership of the equipment to the lessee by the end of the lease term, (2) review of the lease terms to determine if it contains an option to purchase the leased equipment for a price which is sufficiently lower than the expected fair value of the equipment at the date of the option, (3) review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment, and (4) review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. Additionally, the Company considers the cancelability of the contract and any related uncertainty of collections or risk in recoverability of the lease investment at lease inception. Revenue from sales type leases is recognized at the inception of the lease or when the equipment has been delivered and installed at the customer site, if installation is required. Revenues from equipment rentals under operating leases are recognized as earned over the lease term, which is generally on a straight-line basis.

 

The Company also derives a portion of its revenues from contracts with customers to provide products. Performance obligations to provide products are satisfied at the point in time when control is transferred to the customer. These contracts typically require payment by the customer upon passage of control and determining the point at which control is transferred may require judgment. To identify the point at which control is transferred to the customer, the Company considers indicators that include, but are not limited to whether (1) the Company has the present right to payment for the asset, (2) the customer has legal title to the asset, (3) physical possession of the asset has been transferred to the customer, (4) the customer has the significant risks and rewards of ownership of the asset, and (5) the customer has accepted the asset. For product revenues, control generally passes to the customer upon delivery of goods to the customer.

 

8


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

The vast majority of the Company’s revenues from long-term contracts to develop and deliver complex equipment built to customer specifications are derived from contracts with the U.S. government (including foreign military sales contracted through the U.S. government). The Company’s contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (FAR) and are priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer. Under the typical payment terms of the Company’s U.S. government fixed-price contracts, the customer pays the Company either performance-based payments (PBPs) or progress payments. PBPs are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments based on a percentage of the costs incurred as the work progresses. Because the customer can often retain a portion of the contract price until completion of the contract, the Company’s U.S. government fixed-price contracts generally result in revenue recognized in excess of billings which the Company presents as unbilled accounts receivable on the balance sheet. Amounts billed and due from the Company’s customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For the Company’s U.S. government cost-type contracts, the customer generally pays the Company for its actual costs incurred within a short period of time. For non-U.S. government contracts, the Company typically receives interim payments as work progresses, although for some contracts, the Company may be entitled to receive an advance payment. The Company recognizes a liability for these advance payments in excess of revenue recognized and presents it as collections in excess of revenues and deferred revenues on the balance sheet. An advance payment is not typically considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect the Company from the other party failing to adequately complete some or all of its obligations under the contract.

 

Performance obligations related to developing and delivering complex equipment built to customer specifications under long-term contracts are recognized over time as these performance obligations do not create assets with an alternative use to the Company and the Company has an enforceable right to payment for performance to date. To measure the transfer of control, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the cost-to-cost measure of progress for its contracts because that best depicts the transfer of control to the customer which occurs as the Company incurs costs on its contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

 

Contract costs on U.S. government contracts are subject to audit and review by the Defense Contracting Management Agency (DCMA), the Defense Contract Audit Agency (DCAA), and other U.S. government agencies, as well as negotiations with U.S. government representatives. The Company’s incurred cost audits by the DCAA have not been concluded for fiscal years 2016 through 2018. As of June 30, 2018, the DCAA had completed its incurred cost audit for fiscal year 2004 and approved the Company’s incurred cost claims for fiscal years 2005 through 2015 without further audit. Although the Company has recorded contract revenues subsequent to fiscal year 2015 based upon an estimate of costs that the Company believes will be approved upon final audit or review, the Company does not know the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed the Company’s estimates, its profitability would be adversely affected. As of June 30, 2018 and March 31, 2018, the Company had $1.6 million in contract-related reserves for its estimate of potential refunds to customers for potential cost adjustments on several multi-year U.S. government cost reimbursable contracts (see Note 8).

 

9


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Evaluation of transaction price

 

The evaluation of transaction price, including the amounts allocated to performance obligations, may require significant judgments. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue, and where applicable the cost at completion, is complex, subject to many variables and requires significant judgment. The Company’s contracts may contain award fees, incentive fees, or other provisions, including the potential for significant financing components, that can either increase or decrease the transaction price. These amounts, which are sometimes variable, can be dictated by performance metrics, program milestones or cost targets, the timing of payments, and customer discretion. The Company estimates variable consideration at the amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company. The Company has elected the practical expedient not to adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

 

If a contract is separated into more than one performance obligation, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Estimating standalone selling prices may require judgment.  When available, the Company utilizes the observable price of a good or service when the Company sells that good or service separately in similar circumstances and to similar customers. If a standalone selling price is not directly observable, the Company estimates the standalone selling price by considering all information (including market conditions, specific factors, and information about the customer or class of customer) that is reasonably available.

 

Transaction price allocated to remaining performance obligations

 

The Company’s remaining performance obligations represent the transaction price of firm contracts and orders for which work has not been performed. The Company includes in its remaining performance obligations only those contracts and orders for which it has accepted purchase orders. Remaining performance obligations associated with the Company’s subscribers for fixed consumer and business broadband services in its satellite services segment exclude month-to-month service contracts in accordance with a practical expedient and are estimated using a portfolio approach in which the Company reviews all relevant promotional activities and calculates the remaining performance obligation using the average service component for the portfolio and the average time remaining under the contract. The Company’s future recurring in-flight connectivity (IFC) service contracts in its satellite services segment, do not have minimum service purchase requirements and therefore are not included in the Company’s remaining performance obligations. As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.6 billion, of which the Company expects to recognize approximately 50% over the next twelve months, with the balance recognized thereafter.

 

Disaggregation of revenue

 

The Company operates and manages its business in three reportable segments: satellite services, commercial networks and government systems. Revenue is disaggregated by products and services, customer type, contract type, and geographic area, respectively, as the Company believes this approach best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.

 

The following sets forth disaggregated reported revenue by segment and product and services for the three months ended June 30, 2018:

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

Satellite Services

 

 

Commercial Networks

 

 

Government Systems

 

 

Total Revenues

 

 

 

(In thousands)

 

Product revenues

 

$

 

 

$

85,133

 

 

$

132,996

 

 

$

218,129

 

Service revenues

 

 

153,561

 

 

 

9,933

 

 

 

57,246

 

 

 

220,740

 

Total revenues

 

$

153,561

 

 

$

95,066

 

 

$

190,242

 

 

$

438,869

 

 

10


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Revenues from the U.S. government as an individual customer comprised approximately 28% of total revenues for the three months ended June 30, 2018, mainly reported within the government systems segment. The Company’s commercial customers, mainly reported within the commercial networks and satellite services segments, comprised approximately 72% of total revenues for the three months ended June 30, 2018.

 

The Company’s satellite services segment revenues are primarily derived from the Company’s fixed broadband services, IFC services and worldwide managed network services.

 

Revenues in the Company’s commercial networks and government systems segments are primarily derived from three types of contracts: fixed-price, time-and-materials and cost-reimbursement contracts. Fixed-price contracts (which require the Company to provide products and services under a contract at a specified price) comprised approximately 89% of the Company’s total revenues for these segments for the three months ended June 30, 2018. The remainder of the Company’s revenues in these segments for such periods was derived primarily from cost-reimbursement contracts (under which the Company is reimbursed for all actual costs incurred in performing the contract to the extent such costs are within the contract ceiling and allowable under the terms of the contract, plus a fee or profit) and from time-and-materials contracts (under which the Company is reimbursed for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials utilized in providing such products or services).

 

Historically, a significant portion of the Company’s revenues in its commercial networks and government systems segments has been derived from customer contracts that include the development of products. The development efforts are conducted in direct response to the customer’s specific requirements and, accordingly, expenditures related to such efforts are included in cost of sales when incurred and the related funding (which includes a profit component) is included in revenues. Revenues for the Company’s funded development from its customer contracts were approximately 18% of its total revenues in the three months ended June 30, 2018.

Revenues by geographic area for the three months ended June 30, 2018 were as follows:

 

 

 

Three Months Ended

 

 

 

June 30, 2018

 

 

 

(In thousands)

 

U.S. customers

 

$

378,172

 

Non U.S. customers

 

 

60,697

 

Total revenues

 

$

438,869

 

 

The Company distinguishes revenues from external customers by geographic area based on customer location.

 

Contract balances

 

Contract balances consist of contract asset and contract liability. A contract asset, or with respect to the Company, an unbilled accounts receivable, is recorded when revenue is recognized in advance of the Company’s right to bill and receive consideration, typically resulting from sales under long-term contracts. Unbilled accounts receivable are generally expected to be billed and collected within one year. The unbilled accounts receivable will decrease as provided service or delivered products are billed. The Company receives payments from customers based on a billing schedule established in the Company’s contracts.

 

When consideration is received in advance of the delivery of goods or services, a contract liability, or with respect to the Company, collections in excess of revenues or deferred revenues, is recorded. Reductions in the collections in excess of revenues or deferred revenues will be recorded as the Company satisfies the performance obligations.

 

The following table presents contract assets and liabilities as of June 30, 2018 and April 1, 2018:

 

 

 

As of

June 30,

2018

 

As of

April 1,

2018

 

 

 

(In thousands)

 

Unbilled accounts receivable

 

$

80,852

 

$

79,492

 

Collections in excess of revenues and deferred revenues

 

 

115,579

 

 

127,355

 

Deferred revenues, long-term portion

 

 

81,573

 

 

77,831

 

11


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

 

In the first quarter of fiscal year 2019, the Company recognized revenue of $50.6 million related to the Company’s collections in excess of revenues and deferred revenues at April 1, 2018.

 

Other assets and deferred costs – contracts with customers

 

The adoption of ASU 2014-09 also included the establishment of ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers. The new standard requires the recognition of an asset from the incremental costs of obtaining a contract with a customer, if the Company expects to recover those costs. The incremental costs of obtaining a contract are those costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. ASC 340-40 also requires the recognition of an asset from the costs incurred to fulfill a contract when (1) the costs relate directly to a contract or to an anticipated contract that the Company can specifically identify, (2) the costs generate or enhance resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations in the future, and (3) the costs are expected to be recovered. Adoption of the standard has resulted in the recognition of an asset related to commission costs incurred primarily in the Company’s satellite services segment, and recognition of an asset related to costs incurred to fulfill contracts. Costs to acquire customer contracts are amortized over the estimated customer contract life. Costs to fulfill customer contracts are amortized in proportion to the revenue to which the costs relate. For contracts with an estimated amortization period of less than one year, the Company elected the practical expedient and expenses incremental costs immediately. The Company’s deferred customer contract acquisition costs and costs to fulfill contract balances were $44.2 million and $5.6 million as of June 30, 2018, respectively. Of the Company’s total deferred customer contract acquisition costs and costs to fulfill contracts, $17.6 million was included in prepaid expenses and other current assets and $32.2 million was included in other assets on the Company’s condensed consolidated balance sheet as of June 30, 2018. For the three months ended June 30, 2018, the Company amortized $4.4 million in total deferred customer contract acquisition costs and contract fulfillment costs.

12


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Comparative results

The Company adopted ASC 606 as of April 1, 2018 using the “modified retrospective method” under which the Company is required to provide additional disclosures comparing results to previous accounting standards. Accordingly, the following table presents the Company’s reported results under ASC 606 and the Company’s pro forma results using the historical accounting method under ASC 605 for the three months ended June 30, 2018 and as of June 30, 2018:

 

 

 

Three Months Ended June 30, 2018

 

 

 

As Reported

 

 

Impact of ASC

606

 

 

Historical

Accounting

Method

 

 

 

(In thousands, except per share data)

 

Condensed Consolidated Statements of Operations

   and Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

218,129

 

 

$

579

 

 

$

218,708

 

Service revenues

 

 

220,740

 

 

 

(1,066

)

 

 

219,674

 

Total revenues

 

 

438,869

 

 

 

(487

)

 

 

438,382

 

Cost of product revenues

 

 

173,448

 

 

 

249

 

 

 

173,697

 

Cost of service revenues

 

 

171,432

 

 

 

(121

)

 

 

171,311

 

Selling, general and administrative

 

 

112,642

 

 

 

2,338

 

 

 

114,980

 

Independent research and development

 

 

33,373

 

 

 

2,745

 

 

 

36,118

 

Loss from operations

 

 

(54,479

)

 

 

(5,698

)

 

 

(60,177

)

Interest expense

 

 

(11,324

)

 

 

992

 

 

 

(10,332

)

Loss before income taxes

 

 

(65,767

)

 

 

(4,706

)

 

 

(70,473

)

Benefit from income taxes

 

 

29,205

 

 

 

(185

)

 

 

29,020

 

Net loss

 

 

(35,497

)

 

 

(4,891

)

 

 

(40,388

)

Net loss attributable to Viasat, Inc.

 

 

(34,010

)

 

 

(4,891

)

 

 

(38,901

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share attributable to Viasat, Inc.

   common stockholders

 

$

(0.57

)

 

$

(0.08

)

 

$

(0.66

)

Diluted net loss per share attributable to Viasat, Inc.

   common stockholders

 

$

(0.57

)

 

$

(0.08

)

 

$

(0.66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

As Reported

 

 

Impact of ASC

606

 

 

Historical

Accounting

Method

 

 

 

(In thousands)

 

Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

236,085

 

 

$

5,729

 

 

$

241,814

 

Inventories

 

 

220,018

 

 

 

(2,275

)

 

 

217,743

 

Prepaid expenses and other current assets

 

 

102,977

 

 

 

(19,085

)

 

 

83,892

 

Other assets

 

 

742,158

 

 

 

(21,495

)

 

 

720,663

 

Accrued liabilities

 

 

252,312

 

 

 

(6,356

)

 

 

245,956

 

Retained earnings

 

 

277,831

 

 

 

(30,770

)

 

 

247,061

 

 

Advertising costs

In accordance with the authoritative guidance for advertising costs (ASC 720-35), advertising costs are expensed as incurred and included in selling, general and administrative (SG&A) expenses. Advertising expenses for the three months ended June 30, 2018 and 2017 were $6.6 million and $1.2 million, respectively.

Property, equipment and satellites

Satellites and other property and equipment, including internally developed software, are recorded at cost or, in the case of certain satellites and other property acquired, the fair value at the date of acquisition, net of accumulated depreciation. Capitalized satellite costs consist primarily of the costs of satellite construction and launch, including launch

13


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

insurance and insurance during the period of in-orbit testing, the net present value of performance incentives expected to be payable to satellite manufacturers (dependent on the continued satisfactory performance of the satellites), costs directly associated with the monitoring and support of satellite construction, and interest costs incurred during the period of satellite construction. The Company also constructs earth stations, network operations systems and other assets to support its satellites, and those construction costs, including interest, are capitalized as incurred. At the time satellites are placed in service, the Company estimates the useful life of its satellites for depreciation purposes based upon an analysis of each satellite’s performance against the original manufacturer’s orbital design life, estimated fuel levels and related consumption rates, as well as historical satellite operating trends. Costs related to internally developed software for internal uses are capitalized after the preliminary project stage is complete and are amortized over the estimated useful lives of the assets. Costs incurred for additions to property, equipment and satellites, together with major renewals and betterments, are capitalized and depreciated over the remaining life of the underlying asset. Costs incurred for maintenance, repairs and minor renewals and betterments are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in operations, which for the periods presented, primarily related to losses incurred for unreturned customer premise equipment (CPE). The Company computes depreciation using the straight-line method over the estimated useful lives of the assets ranging from two to 24 years. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of the lease term or the life of the improvement.

Interest expense is capitalized on the carrying value of assets under construction, in accordance with the authoritative guidance for the capitalization of interest (ASC 835-20). With respect to the ViaSat-3 class satellites, gateway and networking equipment and other assets under construction, the Company capitalized $6.2 million of interest expense for the three months ended June 30, 2018. With respect to the ViaSat-2 satellite, ViaSat-3 class satellites, gateway and networking equipment and other assets under construction, the Company capitalized $14.6 million of interest expense for the three months ended June 30, 2017.

The Company owns three satellites in service: ViaSat-2 (its second-generation high-capacity Ka-band spot-beam satellite, which was placed into service in the fourth quarter of fiscal year 2018), ViaSat-1 (its first-generation high-capacity Ka-band spot-beam satellite, which was placed into service in January 2012) and WildBlue-1 (which was placed into service in March 2007). The Company currently has two third-generation ViaSat-3 class satellites under construction. The Company also has an exclusive prepaid lifetime capital lease of Ka-band capacity over the contiguous United States on Telesat Canada’s Anik F2 satellite (which was placed into service in April 2005) and owns related earth stations and networking equipment for all of its satellites. The Company periodically reviews the remaining estimated useful life of its satellites to determine if revisions to estimated lives are necessary. The Company procures indoor and outdoor CPE units leased to subscribers under a retail leasing program as part of the Company’s satellite services segment, which are reflected in investing activities and property and equipment in the accompanying condensed consolidated financial statements. The Company depreciates the satellites, earth stations and networking equipment, CPE units and related installation costs over their estimated useful lives. The total cost and accumulated depreciation of CPE units included in property and equipment, net, as of June 30, 2018 were $310.5 million and $130.1 million, respectively. The total cost and accumulated depreciation of CPE units included in property and equipment, net, as of March 31, 2018 were $298.7 million and $129.0 million, respectively.

Occasionally, the Company may enter into capital lease arrangements for various machinery, equipment, computer-related equipment, software, furniture or fixtures. The Company records amortization of assets leased under capital lease arrangements within depreciation expense.

Patents, orbital slots and other licenses

The Company capitalizes the costs of obtaining or acquiring patents, orbital slots and other licenses. Amortization of intangible assets that have finite lives is provided for by the straight-line method over the shorter of the legal or estimated economic life. Total capitalized costs of $3.2 million related to patents were included in other assets as of June 30, 2018 and March 31, 2018. The Company capitalized costs of $16.4 million and $15.4 million related to acquiring and obtaining orbital slots and other licenses included in other assets as of June 30, 2018 and March 31, 2018, respectively. Accumulated amortization related to these assets was $2.6 million and $2.5 million as of June 30, 2018 and March 31, 2018, respectively. Amortization expense related to these assets was an insignificant amount for the three months ended June 30, 2018 and 2017. If a patent, orbital slot or orbital license is rejected, abandoned or otherwise invalidated, the unamortized cost is expensed in that period. During the three months ended June 30, 2018 and 2017, the Company did not write off any significant costs due to abandonment or impairment.

14


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Debt issuance costs

Debt issuance costs are amortized and recognized as interest expense using the effective interest rate method, or, when the results are not materially different, on a straight-line basis over the expected term of the related debt. During the three months ended June 30, 2018 and 2017, no debt issuance costs were capitalized. Unamortized debt issuance costs related to extinguished debt are expensed at the time the debt is extinguished and recorded in loss on extinguishment of debt in the condensed consolidated statements of operations and comprehensive income (loss). Debt issuance costs related to the Company’s revolving credit facility (the Revolving Credit Facility) are recorded in prepaid expenses and other current assets and in other long-term assets in the condensed consolidated balance sheets in accordance with the authoritative guidance for imputation of interest (ASC 835-30). Debt issuance costs related to the Company’s 5.625% Senior Notes due 2025 (the 2025 Notes) and the Company’s direct loan facility with the Export-Import Bank of the United States for ViaSat-2 (the Ex-Im Credit Facility) are recorded as a direct deduction from the carrying amount of the related debt, consistent with debt discounts, in accordance with the authoritative guidance for imputation of interest (ASC 835-30).

Software development

Costs of developing software for sale are charged to research and development expense when incurred, until technological feasibility has been established. Software development costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of unamortized cost or net realizable value. Once the product is available for general release, the software development costs are amortized based on the ratio of current to future revenue for each product with an annual minimum equal to straight-line amortization over the remaining estimated economic life of the product, generally within five years. Capitalized costs, net, of $246.8 million related to software developed for resale were included in other assets as of June 30, 2018 and March 31, 2018. The Company capitalized $11.4 million and $17.8 million of costs related to software developed for resale for the three months ended June 30, 2018 and 2017, respectively. Amortization expense for capitalized software development costs was $11.4 million and $9.7 million for the three months ended June 30, 2018 and 2017, respectively.

Self-insurance liabilities

The Company has self-insurance plans to retain a portion of the exposure for losses related to employee medical benefits and workers’ compensation. The self-insurance plans include policies which provide for both specific and aggregate stop-loss limits. The Company utilizes internal actuarial methods as well as other historical information for the purpose of estimating ultimate costs for a particular plan year. Based on these actuarial methods, along with currently available information and insurance industry statistics, the Company has recorded self-insurance liability for its plans of $4.6 million and $4.5 million in accrued liabilities in the condensed consolidated balance sheets as of June 30, 2018 and March 31, 2018, respectively. The Company’s estimate, which is subject to inherent variability, is based on average claims experience in the Company’s industry and its 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 a current liability in accrued liabilities in accordance with the estimated timing of the projected payments.

Indemnification provisions

In the ordinary course of business, the Company includes indemnification provisions in certain of its contracts, generally relating to parties with which the Company has commercial relations. Pursuant to these agreements, the Company will indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, including but not limited to losses relating to third-party intellectual property claims. To date, there have not been any material costs incurred in connection with such indemnification clauses. The Company’s insurance policies do not necessarily cover the cost of defending indemnification claims or providing indemnification, so if a claim was filed against the Company by any party that the Company has agreed to indemnify, the Company could incur substantial legal costs and damages. A claim would be accrued when a loss is considered probable and the amount can be reasonably estimated. At June 30, 2018 and March 31, 2018, no such amounts were accrued related to the aforementioned provisions.

15


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Noncontrolling interests

A noncontrolling interest represents the equity interest in a subsidiary that is not attributable, either directly or indirectly, to the Company and is reported as equity of the Company, separately from the Company’s controlling interest. Revenues, expenses, gains, losses, net income (loss) and other comprehensive income (loss) are reported in the condensed consolidated financial statements at the consolidated amounts, which include the amounts attributable to both the controlling and noncontrolling interest.

Investments in unconsolidated affiliate — equity method

Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investment in unconsolidated affiliate in other assets (long-term) on the condensed consolidated balance sheets. The Company records its share of the results of such entities within equity in income (loss) of unconsolidated affiliate, net on the condensed consolidated statements of operations and comprehensive income (loss). The Company monitors such investments for other-than-temporary impairment by considering factors including the current economic and market conditions and the operating performance of the entities and records reductions in carrying values when necessary. The fair value of privately held investments is estimated using the best available information as of the valuation date, including current earnings trends, undiscounted cash flows, quoted stock prices of comparable public companies, and other company specific information, including recent financing rounds.

Common stock held in treasury

As of June 30, 2018 and March 31, 2018, the Company had no shares of common stock held in treasury.

During the three months ended June 30, 2018 and 2017, the Company issued 270,785 and 72,811 shares of common stock, respectively, based on the vesting terms of certain restricted stock unit agreements. In order for employees to satisfy minimum statutory employee tax withholding requirements related to the issuance of common stock underlying these restricted stock unit agreements, during the three months ended June 30, 2018 and 2017, the Company repurchased 94,200 and 27,514 shares of common stock, respectively, at cost and with a total value of $6.0 million and $1.9 million, respectively. Although shares withheld for employee withholding taxes are technically not issued, they are treated as common stock repurchases for accounting purposes (with such shares deemed to be repurchased and then immediately retired), as they reduce the number of shares that otherwise would have been issued upon vesting of the restricted stock units. These retired shares remain as authorized stock and are considered to be unissued. The retirement of treasury stock had no impact on the Company’s total consolidated stockholders’ equity.

Derivatives

The Company enters into foreign currency forward and option contracts from time to time 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 other income (expense) as gains (losses) on derivative instruments. Gains and losses arising from the effective portion of foreign currency forward and option contracts which 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 the Company’s earnings, at which time they are then recorded in the same income statement line as the underlying transaction.

During the three months ended June 30, 2018 and 2017, the Company settled certain foreign exchange contracts and in connection therewith for each period recognized an insignificant gain or loss recorded in cost of revenues based on the nature of the underlying transactions. The fair value of the Company’s foreign currency forward contracts was an insignificant amount recorded as an accrued liability as of June 30, 2018 and an other current asset as of March 31, 2018. The notional value of foreign currency forward contracts outstanding was $6.5 million as of June 30, 2018 and an insignificant amount as of March 31, 2018.

16


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

As of June 30, 2018, the estimated net amount of unrealized gains or losses related to foreign currency forward contracts that was expected to be reclassified to earnings within the next 12 months was insignificant. The Company’s foreign currency forward contracts outstanding as of June 30, 2018 will mature within approximately 21 months from their inception. There were no gains or losses from ineffectiveness of these derivative instruments recorded for the three months ended June 30, 2018 and 2017.

Stock-based compensation

In accordance with the authoritative guidance for share-based payments (ASC 718), the Company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award. Expense for restricted stock units and stock options is recognized on a straight-line basis over the employee’s requisite service period. Expense for total shareholder return (TSR) performance stock options that vest is recognized regardless of the actual TSR outcome achieved and is recognized on a graded-vesting basis. The Company accounts for forfeitures as they occur. The Company recognized $19.1 million and $15.5 million of stock-based compensation expense for the three months ended June 30, 2018 and 2017, respectively.

Income taxes

Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance for accounting for uncertainty in income taxes also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.

The Company calculates its provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period. However, when a reliable estimate cannot be made, the Company computes its provision for income taxes using the actual effective tax rate for the year-to-date period.

A deferred income tax asset or liability is established for the expected future tax consequences resulting from differences in the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credit and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Recent authoritative guidance

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. This guidance replaced most existing revenue recognition guidance and became effective for the Company beginning in fiscal year 2019, including interim periods within that reporting period, based on the FASB decision in July 2015 (ASU 2015-14, Revenue from Contracts with Customers — Deferral of the Effective Date) to delay the effective date of the new revenue recognition standard by one year, but providing entities a choice to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which provides practical expedient for contract modifications and clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to ASC 606, Revenue from Contracts with Customers, which provides for correction or improvement to the guidance previously issued in ASU 2014-09. These standards permit the use of either the retrospective or cumulative effect transition method. The Company adopted this standard effective as of April 1, 2018 utilizing the “modified retrospective method.” For additional information see Note 1 – Revenue recognition.

17


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 825-10). ASU 2016-01 requires that most equity investments (except those accounted for under the equity method for accounting or those that result in consolidation of the investee) be measured at fair value, with subsequent changes in fair value recognized in net income (loss). The new guidance also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The new guidance was required to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. ASU 2016-01 became effective for the Company in fiscal year 2019. The Company adopted this guidance beginning in the first quarter of fiscal year 2019 on a modified retrospective basis and the guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets and eliminates certain real estate-specific provisions. In January 2018, the FASB issued ASU 2018-01, Leases (ASC 842). ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of ASC 842 and that were not previously accounted for as leases under ASC 840. The new guidance will become effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. ASU 2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (ASC 326). ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance will become effective for the Company beginning in fiscal year 2021, with early adoption permitted. The new guidance is required to be applied on a modified-retrospective basis. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 230). ASU 2016-15 makes eight targeted changes to how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The new standard became effective for the Company beginning in fiscal year 2019, with early adoption permitted. The new standard required adoption on a retrospective basis unless impracticable to apply, in which case the Company would have been required to apply the amendments prospectively as of the earliest date practicable. The Company early adopted the guidance on a retrospective basis in the second quarter of fiscal year 2018 and as a result cash payments for debt prepayment and extinguishment were classified as cash outflows for financing activities in fiscal year 2018. Otherwise the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (ASC 740). ASU 2016-16 requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs as opposed to when the asset has been sold to an outside party. The new standard became effective for the Company beginning in the first quarter of fiscal year 2019. The new standard requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period. The Company adopted this guidance beginning in the first quarter of fiscal year 2019 on a modified retrospective basis and the guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (ASC 805). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new standard became effective for the Company beginning in the first quarter of fiscal year 2019. The Company adopted this guidance beginning in the first quarter of fiscal year 2019 on a prospective basis and the guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

18


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASC 350). ASU 2017-04 removes Step 2 from the goodwill impairment test. The standard will become effective for the Company beginning in fiscal year 2021, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (ASC 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term “in-substance nonfinancial asset.” ASU 2017-05 also adds guidance for partial sales of nonfinancial assets. The standard became effective for the Company beginning in the first quarter of fiscal year 2019. The Company adopted this guidance beginning in the first quarter of fiscal year 2019 on a prospective basis and the guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (ASC 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 amends the amortization period for certain callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The standard will become effective for the Company beginning in fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (ASC 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard became effective for the Company beginning in the first quarter of fiscal year 2019. The Company early adopted this standard beginning in the fourth quarter of fiscal year 2018. The guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASC 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The standard will become effective for the Company beginning in fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (ASC 718). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard will become effective for the Company beginning in fiscal year 2020, with early adoption permitted. The Company early adopted the guidance in the first quarter of fiscal year 2019 and the guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

19


VIASAT, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Note 2 — Composition of Certain Balance Sheet Captions

 

 

 

As of

June 30,

2018

 

 

As of

March 31,

2018

 

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

 

Billed

 

$

156,860

 

 

$

184,536

 

Unbilled

 

 

80,852

 

 

 

85,156

 

Allowance for doubtful accounts

 

 

(1,627

)

 

 

(2,027

)

 

 

$

236,085

 

 

$

267,665

 

Inventories:

 

 

 

 

 

 

 

 

Raw materials

 

$

71,901

 

 

$

62,252

 

Work in process

 

 

47,756

 

 

 

47,465

 

Finished goods

 

 

100,361

 

 

 

86,590

 

 

 

$

220,018

 

 

$

196,307

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

87,019

 

 

$

68,516

 

Other

 

 

15,958

 

 

 

8,619

 

 

 

$

102,977

 

 

$

77,135

 

Satellites, net:

 

 

 

 

 

 

 

 

Satellites (estimated useful life of 10-17 years)

 

$

1,160,593

 

 

$

1,152,503

 

Capital lease of satellite capacity — Anik F2 (estimated useful life of 10 years)

 

 

99,090

 

 

 

99,090

 

Satellites under construction

 

 

401,763

 

 

 

362,342

 

 

 

 

1,661,446

 

 

 

1,613,935

 

Less: accumulated depreciation and amortization

 

 

(396,425

)

 

 

(373,948

)

 

 

$

1,265,021

 

 

$

1,239,987

 

Property and equipment, net:

 

 

 

 

 

 

 

 

Equipment and software (estimated useful life of 2-7 years)

 

$

899,685

 

 

$

864,140

 

CPE leased equipment (estimated useful life of 4-5 years)

 

 

310,506

 

 

 

298,746

 

Furniture and fixtures (estimated useful life of 7 years)

 

 

37,580

 

 

 

35,234

 

Leasehold improvements (estimated useful life of 2-17 years)

 

 

113,761

 

 

 

111,841

 

Building (estimated useful life of 24 years)

 

 

8,923

 

 

 

8,923

 

Land

 

 

15,322

 

 

 

15,322

 

Construction in progress

 

 

135,560

 

 

 

108,192

 

 

 

 

1,521,337

 

 

 

1,442,398

 

Less: accumulated depreciation

 

 

(749,130

)

 

 

(719,910

)

 

 

$

772,207

 

 

$

722,488

 

Other acquired intangible assets, net:

 

 

 

 

 

 

 

 

Technology (weighted average useful life of 6 years)

 

$

89,204