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VIASAT INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would," variations of such words and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future economic conditions and performance; the development, customer acceptance and anticipated performance of technologies, products or services; satellite construction activities; the performance and anticipated benefits of the ViaSat-2 satellite; the expected capacity, service, coverage, service speeds and other features of ViaSat-2, and the timing, cost, economics and other benefits associated therewith; anticipated subscriber growth; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ include: our ability to realize the anticipated benefits of the ViaSat-2 satellite; unexpected expenses related to the satellite project; our ability to successfully implement our business plan for our broadband satellite services on our anticipated timeline or at all, including with respect to the ViaSat-2 satellite system; risks associated with the construction, launch and operation of ViaSat-2 and our other satellites, including the effect of any anomaly, operational failure or degradation in satellite performance; our ability to successfully develop, introduce and sell new technologies, products and services; negative audits by the U.S. government; continued turmoil in the global business environment and economic conditions; delays in approving U.S. government budgets and cuts in government defense expenditures; our reliance on U.S. government contracts, and on a small number of contracts which account for a significant percentage of our revenues; reduced demand for products and services as a result of continued constraints on capital spending by customers; changes in relationships with, or the financial condition of, key customers or suppliers; our reliance on a limited number of third parties to manufacture and supply our products; increased competition and other factors affecting the communications and defense industries generally; the effect of adverse regulatory changes on our ability to sell products and services; our level of indebtedness and ability to comply with applicable debt covenants; our involvement in litigation, including intellectual property claims and litigation to protect our proprietary technology; our dependence on a limited number of key employees; and other factors identified under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 4, 2014, under the heading "Risk Factors" in Part II, Item 1A of this report, elsewhere in this report and our other filings with the Securities and Exchange Commission (the SEC). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason. Company Overview We are a leading provider of high-speed fixed and mobile broadband services, advanced satellite and other wireless networks and secure networking systems, products and services. We have leveraged our success developing complex satellite communication systems and equipment for the U.S. government and select commercial customers to develop next-generation satellite broadband technologies and services for both fixed and mobile users. Our product, systems and service offerings are often linked through common underlying technologies, customer applications and market relationships. We believe that our portfolio of products and services, combined with our ability to effectively cross-deploy technologies between government and commercial segments and across different geographic markets, provides us with a strong foundation to sustain and enhance our leadership in advanced communications and networking technologies. ViaSat, Inc. was incorporated in California in 1986, and reincorporated as a Delaware corporation in 1996. During the first quarter of fiscal year 2015, we completed the acquisition of NetNearU Corp. (NetNearU), a privately held Delaware corporation. NetNearU has developed a comprehensive network management system for WiFi and other Internet access networks that we expect to use to extend our Exede® broadband services to a wider subscriber base in multiple markets, including commercial airlines, live events, hospitality, enterprise networking and government broadband projects. NetNearU's primary operations currently support government applications. The purchase price for NetNearU is estimated to be approximately $59.9 million in cash consideration (subject to certain minor working capital post-closing adjustments). We conduct our business through three segments: satellite services, commercial networks and government systems. Satellite Services Our satellite services segment provides retail and wholesale satellite-based broadband services for our consumer, enterprise and mobile broadband customers primarily in the United States. Our Exede broadband services are designed to offer a high-quality broadband service choice to the millions of unserved and under-served consumers in the United States and to significantly expand the quality, capability and availability of high-speed broadband satellite services for U.S. consumers and enterprises. Our satellite services business also provides a platform for the provision of network management services to domestic and international satellite service 24-------------------------------------------------------------------------------- Table of Contents providers. In May 2013, we entered into a satellite construction contract for ViaSat-2, our second high-capacity Ka-band satellite. The primary services offered by our satellite services segment are comprised of: • Retail and wholesale broadband satellite services offered to consumers and small businesses under the Exede and WildBlue brands, which provide two-way satelllite-based broadband internet access and Voice over Internet Protocol (VoIP). As of July 4, 2014, we provided broadband satellite services to approximately 641,000 subscribers. • Mobile broadband serves, which provide global network management and high-speed internet connectivity services for customers using airborne, maritime and ground-mobile satellite systems. • Enterprise broadband services, which include in-flight WiFi (including our flagship Exede In The Air service), live on-line event streaming, oil and natural gas data gathering services and high definition satellite news gathering. Commercial Networks Our commercial networks segment develops and produces a variety of advanced end-to-end satellite and other wireless communication systems and ground networking equipment and products that address five key market segments: consumer, enterprise, in-flight, maritime and ground mobile applications. These communication systems, networking equipment and products are generally developed through a combination of customer and discretionary internal research and development funding, and are either sold to our commercial networks customers or utilized to provide services through our satellite services segment. Our satellite communication systems, ground networking equipment and products cater to a wide range of domestic and international commercial customers and include: • Fixed satellite networks, including next-generation satellite network infrastructure and ground terminals to access Ka-band broadband services on high-capacity satellites. • Mobile broadband satellite communication systems, designed for use in aircraft, high-speed trains and seagoing vessels. • Antenna systems for terrestrial and satellite applications, specializing in geospatial imagery, mobile satellite communication, Ka-band gateways and other multi-band antennas. • Satellite networking development programs, including specialized design and technology services covering all aspects of satellite communication system architecture and technology. Government Systems Our government systems segment develops and produces network-centric Internet Protocol (IP)-based fixed and mobile secure government communications systems, products, services and solutions, which are designed to enable the collection and dissemination of secure real-time digital information between command centers, communications nodes and air defense systems. Customers of our government systems segment include the U.S. Department of Defense (DoD), armed forces, public safety first-responders and remote government employees. The primary products and services of our government systems segment include: • Government satellite communication systems, which comprise an array of portable, mobile and fixed broadband modems, terminals, network access control systems and antenna systems using a range of satellite frequency bands for line-of-sight and beyond-line-of-sight Intelligence, Surveillance and Reconnaissance (ISR) and Command and Control (C2) missions, satellite networking services, network management systems and global mobile broadband capability, and include products designed for manpacks, aircraft, unmanned aerial vehicles (UAVs), seagoing vessels, ground mobile vehicles and fixed applications. 25 -------------------------------------------------------------------------------- Table of Contents • Information security and assurance products and secure networking solutions, which provide advanced, high-speed IP-based "Type 1" and High Assurance Internet Protocol Encryption (HAIPE®)-compliant encryption solutions that enable military and government users to communicate information securely over networks, and that secure data stored on computers and storage devices. • Tactical data links, including Multifunctional Information Distribution System (MIDS) terminals for military fighter jets and their successor, MIDS Joint Tactical Radio System (MIDS-JTRS) terminals, "disposable" weapon data links and portable small tactical terminals. Sources of Revenues Our satellite services segment revenues are primarily derived from our domestic satellite broadband services business and from our worldwide managed network services. Our products in our commercial networks and government systems segments are provided primarily through three types of contracts: fixed-price, time-and-materials and cost-reimbursement contracts. Fixed-price contracts (which require us to provide products and services under a contract at a specified price) comprised approximately 89% and 93% of our total revenues for these segments for the three months ended July 4, 2014 and June 28, 2013, respectively. The remainder of our revenue in these segments for such periods was derived from cost-reimbursement contracts (under which we are 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 (which reimburse us 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). Our ability to grow and maintain our revenues in our commercial networks and government systems segments has to date depended on our ability to identify and target markets where the customer places a high priority on the technology solution, and our ability to obtain additional sizable contract awards. Due to the nature of this process, it is difficult to predict the probability and timing of obtaining awards in these markets. Historically, a significant portion of our revenues has been derived from customer contracts that include the research and development of products. The research and 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 our funded research and development from our customer contracts were approximately 27% of our total revenues in the three months ended July 4, 2014 and June 28, 2013. We also incur independent research and development (IR&D) expenses, which are not directly funded by a third party. IR&D expenses consist primarily of salaries and other personnel-related expenses, supplies, prototype materials, testing and certification related to research and development projects. IR&D expenses were approximately 3% and 4% of total revenues during the three months ended July 4, 2014 and June 28, 2013, respectively. As a government contractor, we are able to recover a portion of our IR&D expenses pursuant to our government contracts. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We describe the specific risks for these critical accounting policies in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates routinely require adjustment. Revenue recognition A substantial portion of our revenues is derived from long-term contracts requiring development and delivery of complex equipment built to customer specifications. Sales related to these contracts are accounted for under the authoritative guidance for the percentage-of-completion method of accounting (Accounting Standards Codification (ASC) 605-35). Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract, or as products are shipped under the units-of-delivery method. The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins 26 -------------------------------------------------------------------------------- Table of Contents requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. For contract claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. During the three months ended July 4, 2014 and June 28, 2013, we recorded losses of approximately $0.1 million and $0.4 million, respectively, related to loss contracts. 27-------------------------------------------------------------------------------- Table of Contents Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and future cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. We believe we have established appropriate systems and processes to enable us to reasonably estimate future costs on our programs through regular evaluations of contract costs, scheduling and technical matters by business unit personnel and management. Historically, in the aggregate, we have not experienced significant deviations in actual costs from estimated program costs, and when deviations that result in significant adjustments arise, we disclose the related impact in Management's Discussion and Analysis of Financial Condition and Results of Operations. However, these estimates require significant management judgment and a significant change in future cost estimates on one or more programs could have a material effect on our results of operations. A one percent variance in our future cost estimates on open fixed-price contracts as of July 4, 2014 would change our loss before income taxes by approximately $0.6 million. We also derive a substantial portion of our revenues from contracts and purchase orders where revenue is recorded on delivery of products or performance of services in accordance with the authoritative guidance for revenue recognition (ASC 605). Under this standard, we recognize revenue when an arrangement exists, prices are determinable, collectability is reasonably assured and the goods or services have been delivered. We also enter into certain leasing arrangements with customers and evaluate the contracts in accordance with the authoritative guidance for leases (ASC 840). Our accounting for equipment leases involves specific determinations under the authoritative guidance for leases, which often involve complex provisions and significant judgments. In accordance with the authoritative guidance for leases, we classify the transactions as sales type or operating leases based on: (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, we consider 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. In accordance with the authoritative guidance for revenue recognition for multiple element arrangements, the Accounting Standards Update (ASU) 2009-13 (ASU 2009-13), Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements, which updates ASC 605-25, Revenue Recognition-Multiple element arrangements, of the Financial Accounting Standards Board (FASB) codification, for substantially all of the arrangements with multiple deliverables, we allocate revenue to each element based on a selling price hierarchy at the arrangement inception. The selling price for each element is based upon the following selling price hierarchy: vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE are available (a description as to how we determine VSOE, TPE and ESP is provided below). If a tangible hardware systems product includes software, we determine whether the tangible hardware systems product and the software work together to deliver the product's essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. Revenue for each separate unit of accounting is recognized when the applicable revenue recognition criteria for each element have been met. To determine the selling price in multiple-element arrangements, we establish VSOE of the selling price using the price charged for a deliverable when sold separately. We also consider specific renewal rates offered to customers for software license updates, product support and hardware systems support, and other services. For nonsoftware multiple-element arrangements, TPE is established by evaluating similar and/or interchangeable competitor products or services in standalone arrangements with similarly situated customers and/or agreements. If we are unable to determine the selling price because VSOE or TPE doesn't exist, we determine ESP for the purposes of allocating the arrangement by reviewing historical transactions, including transactions whereby the deliverable was sold on a standalone basis and considering several other external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, competition, the geographies in which we offer our products and services, the type of customer (i.e. distributor, value added reseller, government agency or direct end user, among others), volume commitments and the stage of the product lifecycle. The determination of ESP considers our pricing model and go-to-market strategy. As our, or our competitors', pricing and go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to our determination of VSOE, TPE and ESP. As a result, our future revenue recognition for multiple-element arrangements could differ materially from those in the current period. 28 -------------------------------------------------------------------------------- Table of Contents Collections in excess of revenues and deferred revenues represent cash collected from customers in advance of revenue recognition and are recorded in accrued liabilities for obligations within the next twelve months. Amounts for obligations extending beyond the twelve months are recorded within other liabilities in the condensed consolidated financial statements. Warranty reserves We provide limited warranties on our products for periods of up to five years. We record a liability for our warranty obligations when we ship the products or they are included in long-term construction contracts based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as accrued liabilities and amounts expected to be incurred beyond twelve months are classified as other liabilities in the consolidated financial statements. For mature products, we estimate the warranty costs based on historical experience with the particular product. For newer products that do not have a history of warranty costs, we base our estimates on our experience with the technology involved and the types of failures that may occur. It is possible that our underlying assumptions will not reflect the actual experience, and in that case, we will make future adjustments to the recorded warranty obligation. Property, equipment and satellites Satellites and other property and equipment 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 insurance and insurance during the period of in-orbit testing, the net present value of performance incentives expected to be payable to the 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. We also construct gateway facilities, network operations systems and other assets to support our satellites, and those construction costs, including interest, are capitalized as incurred. At the time satellites are placed in service, we estimate the useful life of our 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. We own two satellites: ViaSat-1 (our first 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). In May 2013, we entered into a satellite construction contract for ViaSat-2, our second high-capacity Ka-band satellite. In addition, we have 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 own related gateway and networking equipment on all of our satellites. Property and equipment also includes the indoor and outdoor customer premise equipment (CPE) units leased to subscribers under a retail leasing program as part of our satellite services segment. Impairment of long-lived and other long-term assets (property, equipment and satellites, and other assets, including goodwill) In accordance with the authoritative guidance for impairment or disposal of long-lived assets (ASC 360), we assess potential impairments to our long-lived assets, including property, equipment and satellites and other assets, when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. We periodically review the remaining estimated useful life of the satellite to determine if revisions to the estimated life are necessary. We recognize an impairment loss when the undiscounted cash flows expected to be generated by an asset (or group of assets) are less than the asset's carrying value. Any required impairment loss would be measured as the amount by which the asset's carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations. No material impairments were recorded by us for the three months ended July 4, 2014 and June 28, 2013. We account for our goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and the provisions of ASU 2011-08, Testing Goodwill for Impairment, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two step goodwill impairment test. If, after completing our qualitative assessment we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to our carrying value (including goodwill). If the estimated fair value is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value, resulting in goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. In accordance with ASC 350, we assess qualitative factors to determine whether goodwill is impaired. Furthermore, in addition to the qualitative analysis, we believe it is appropriate to conduct a quantitative analysis periodically as a prudent review of our reporting unit goodwill fair values. Our quantitative analysis estimates the fair values of the reporting units using discounted cash flows and other indicators of fair value. The forecast of future cash flow is based on our best estimate of the future revenue and 29-------------------------------------------------------------------------------- Table of Contents operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor resources and general market conditions. Based on a quantitative analysis for fiscal year 2014, we concluded that estimated fair values of our reporting units significantly exceed their respective carrying value. Our qualitative analysis includes assessing the impact of changes in certain factors including: (1) changes in forecasted operating results and comparing actual results to projections, (2) changes in the industry or our competitive environment since the acquisition date, (3) changes in the overall economy, our market share and market interest rates since the acquisition date, (4) trends in the stock price and related market capitalization and enterprise values, (5) trends in peer companies total enterprise value metrics, and (6) additional factors such as management turnover, changes in regulation and changes in litigation matters. Based on our qualitative and quantitative assessment performed during the fourth quarter of fiscal year 2014, we concluded that it was more likely than not that the estimated fair value of our reporting units exceeded its carrying value as of April 4, 2014 and, therefore, determined it was not necessary to perform step two of the goodwill impairment test. Income taxes and valuation allowance on deferred tax assets Management evaluates the realizability of our deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. In accordance with the authoritative guidance for income taxes (ASC 740), net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Our valuation allowance against deferred tax assets increased from $12.8 million at April 4, 2014 to $13.5 million at July 4, 2014. The valuation allowance primarily relates to state net operating loss carryforwards and research and development credit carryforwards available to reduce state income taxes. Our analysis of the need for a valuation allowance on deferred tax assets considered the losses incurred during the three months ended July 4, 2014 and the fiscal years ended April 4, 2014 and March 29, 2013. In fiscal year 2013, we recorded a significant loss, a substantial portion of which resulted from an extinguishment of debt charge that was recorded upon the refinancing of our former 8.875% Senior Notes due 2016 (2016 Notes) with the proceeds from the issuance of additional 6.875% Senior Notes due 2020 (2020 Notes), which provides a benefit to net income due to the lower interest rate of the 2020 Notes. The loss from fiscal year 2014 was less significant and substantial portion of that loss related to legal expense focused on protesting and extending our technology advantages. In addition to these events, our evaluation considered other factors, including our contractual backlog, our history of positive earnings, current earnings trends assuming our satellite subscriber base continues to grow, taxable income adjusted for certain items, and forecasted income by jurisdiction. We also considered the lengthy period over which these net deferred tax assets can be realized and our history of not having federal tax loss carryforwards expire unused. Based on our analysis of the need for a valuation allowance on deferred tax assets, we added $0.7 million to the valuation allowance on state net operating loss carryforwards and research and development credit carryforwards available to reduce state income taxes during the first three months of fiscal year 2015. Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). Under the authoritative guidance, we 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 addresses the derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. We are subject to income taxes in the United States and numerous foreign jurisdictions. In the ordinary course of business, there are calculations and transactions where the ultimate tax determination is uncertain. In addition, changes in tax laws and regulations as well as adverse judicial rulings could adversely affect the income tax provision. We believe we have adequately provided for income tax issues not yet resolved with federal, state and foreign tax authorities. However, if these provided amounts prove to be more than what is necessary, the reversal of the reserves would result in tax benefits being recognized in the period in which we determine that provision for the liabilities is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense would result. 30-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table presents, as a percentage of total revenues, income statement data for the periods indicated: Three Months Ended July 4, June 28, 2014 2013 Revenues: 100.0 % 100.0 % Product revenues 52.6 56.7 Service revenues 47.4 43.3 Operating expenses: Cost of product revenues 40.4 40.3 Cost of service revenues 34.0 33.0 Selling, general and administrative 21.6 20.1 Independent research and development 3.1 4.4 Amortization of acquired intangible assets 1.3 1.1 (Loss) income from operations (0.4 ) 1.1 Interest expense, net (2.7 ) (3.2 ) Loss before income taxes (3.1 ) (2.1 ) Benefit from income taxes (1.1 ) (1.6 ) Net loss (2.0 ) (0.5 ) Net loss attributable to ViaSat, Inc. (1.9 ) (0.6 ) Three Months Ended July 4, 2014 vs. Three Months Ended June 28, 2013 Revenues Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Product revenues $ 168.1 $ 182.2 $ (14.0 ) (7.7 )% Service revenues 151.3 138.9 12.4 8.9 % Total revenues $ 319.5 $ 321.1 $ (1.6 ) (0.5 )% Our total revenues decreased by $1.6 million as a result of the $14.0 million decrease in product revenues, offset by the $12.4 million increase in service revenues. The product revenue decrease was comprised primarily of $10.8 million in our government systems segment and $3.2 million in our commercial networks segment. The service revenue increase was comprised primarily of $23.9 million in our satellite services segment, offset by a decrease of $9.5 million in our government systems segment. Cost of revenues Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Cost of product revenues $ 129.0 $ 129.4 $ (0.4 ) (0.3 )% Cost of service revenues 108.7 105.9 2.8 2.7 % Total cost of revenues $ 237.7 $ 235.3 $ 2.4 1.0 % Cost of revenues grew by $2.4 million primarily due to an increase in cost of service revenues of $2.8 million. The cost of service revenues increase was primarily due to increased service revenues, which would have caused a $9.5 million increase in cost of service revenues on a constant margin basis. This increase mainly related to our expansion of Exede broadband services in our satellite services segment. However, as our Exede subscribers have continued to grow and related revenues scale, we have experienced improved margins from our broadband services in our satellite services segment offsetting the cost of service revenue growth. Our government systems segment also experienced improved margins primarily attributable to government satellite communication systems as some of the fixed costs decreased. Selling, general and administrative expenses Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Selling, general and administrative $ 69.1 $ 64.8 $ 4.3 6.7 % The $4.3 million increase in selling, general and administrative (SG&A) expenses was primarily attributable to higher support costs of $5.2 million, as well as new business proposal costs of approximately $3.2 million (mainly due to our government systems segment), offset by a $4.1 million decrease in selling costs (primarily due to our satellite services segment). Of the higher support costs, $3.1 million related to our satellite services segment (partially due to legal expense 31 -------------------------------------------------------------------------------- Table of Contents focused on protecting and extending our technology advantages). SG&A expenses consisted primarily of personnel costs and expenses for business development, marketing and sales, bid and proposal, facilities, finance, contract administration and general management. 32-------------------------------------------------------------------------------- Table of Contents Independent research and development Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Independent research and development $ 9.8 $ 14.1 $ (4.3 ) (30.6 )% The $4.3 million decrease in IR&D expenses reflected decreased IR&D efforts in our government systems segment of $2.5 million (primarily due to a decrease in advancement of integrated government satellite communications platforms) and in our commercial networks segment of $1.8 million (primarily due to a decrease in next-generation consumer broadband). Amortization of acquired intangible assets We amortize our acquired intangible assets from prior acquisitions over their estimated useful lives, which range from two to ten years. The $0.5 million increase in amortization of acquired intangible assets in the first quarter of fiscal year 2015 compared to the prior year period was primarily the result of our acquisition of NetNearU in June 2014, which contributed an increase of $0.4 million. Current and expected amortization expense for acquired intangible assets for each of the following periods is as follows: Amortization (In thousands) For the three months ended July 4, 2014 $ 4,029 Expected for the remainder of fiscal year 2015 $ 14,063 Expected for fiscal year 2016 15,087 Expected for fiscal year 2017 7,719 Expected for fiscal year 2018 6,386 Expected for fiscal year 2019 3,889 Thereafter 8,962 $ 56,106 Interest income The slight increase in interest income in the three months ended July 4, 2014 compared to the prior year period was primarily due to slightly higher interest rates during the current year period. Interest expense The $1.5 million decrease in interest expense in the three months ended July 4, 2014 compared to the prior year period was due primarily to an increase of $2.2 million in the amount of interest capitalized during the first quarter of fiscal year 2015 compared to the same period last fiscal year. This decrease was partially offset by interest expense on outstanding borrowings under our revolving credit facility (the Credit Facility) during the first quarter of fiscal year 2015. Capitalized interest expense during the three months ended July 4, 2014 and June 28, 2013 related to the construction of ViaSat-2 and other assets. Benefit from income taxes For the three months ended July 4, 2014, we recorded an income tax benefit of $3.5 million. Ordinarily, the effective tax rate at the end of an interim period is calculated using an estimate of the annual effective tax rate expected to be applicable for the full fiscal year. However, when a reliable estimate cannot be made, we compute our provision for income taxes using the actual effective tax rate (discrete method) for the year-to-date period. For the three months ended July 4, 2014, we used the actual effective year-to-date tax rate in calculating the income tax benefit for that period since a reliable estimate of the annual effective tax rate could not be made. The income tax benefit rate for the three months ended June 28, 2013 was greater than the income tax benefit rate for the three months ended July 4, 2014 due to the benefit of the federal research and development tax credit which expired after December 31, 2013. 33-------------------------------------------------------------------------------- Table of Contents Segment Results for the Three Months Ended July 4, 2014 vs. Three Months Ended June 28, 2013 Satellite services segment Revenues Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Segment product revenues $ - $ - $ - - % Segment service revenues 109.7 85.8 23.9 27.8 % Total revenues $ 109.7 $ 85.8 $ 23.9 27.8 % Our satellite services segment revenues grew by $23.9 million, primarily due to the increase in service revenues related to retail and wholesale broadband services. The revenue increase relating to our Exede broadband services was driven by an increase in the number of subscribers, as well as a related higher average revenue per subscriber. Total subscribers grew 17% from approximately 550,000 at June 28, 2013 to approximately 641,000 at July 4, 2014. Segment operating loss Three Months Ended Dollar Percentage July 4, June 28, (Increase) (Increase) (In millions, except percentages) 2014 2013 Decrease Decrease Segment operating loss $ (1.9 ) $ (13.0 ) $ 11.0 85.0 % Percentage of segment revenues (1.8 )% (15.1 )% The $11.0 million reduction in operating loss for our satellite services segment was primarily due to higher earnings contributions as our Exede broadband services subscriber base continued to grow, which resulted in increased revenues and improved margins, as well as lower selling costs. The lower selling costs related to decreased sales and marketing support costs as we have a more established consumer broadband subscriber base, partially offset by increased legal expense focused on protecting and extending our technology advantages. Commercial networks segment Revenues Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Segment product revenues $ 88.6 $ 91.8 $ (3.2 ) (3.5 )% Segment service revenues 3.6 5.6 (1.9 ) (34.8 )% Total revenues $ 92.2 $ 97.4 $ (5.2 ) (5.3 )% Our commercial networks segment revenues decreased by $5.2 million, primarily due to the $3.2 million decrease in product revenues. Of this product revenue decrease, $7.4 million related to fixed satellite networks (driven primarily by consumer broadband products due to reduced revenues from terminal sales as well as our large scale Australian Ka-band infrastructure project as it moves closer to completion, and we begin transitioning engineering resources to our recently awarded next-generation Ka-band system contract in Canada), $2.5 million to satellite networking development programs, and $2.4 million to mobile broadband satellite communication systems. These decreases were partially offset by a $7.9 million increase in product revenues for our antenna systems products and a $2.3 million increase in product revenues for our satellite payload technology development programs. Segment operating (loss) profit Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Segment operating (loss) profit $ (6.0 ) $ 3.3 $ (9.3 ) (279.6 )% Percentage of segment revenues (6.5 )% 3.4 % 34 -------------------------------------------------------------------------------- Table of Contents The change from an operating profit to an operating loss for our commercial networks segment was primarily due to lower earnings contributions from lower margins due to a change in the mix towards funded development activities versus terminal production contracts in our commercial networks segment related to our mobile broadband satellite communication systems products and fixed satellite networks (driven primarily by consumer broadband products). Government systems segment Revenues Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Segment product revenues $ 79.5 $ 90.3 $ (10.8 ) (12.0 )% Segment service revenues 38.0 47.5 (9.5 ) (20.0 )% Total revenues $ 117.5 $ 137.9 $ (20.3 ) (14.7 )% Our government systems segment revenues decreased by $20.3 million, due to a $10.8 million decrease in product revenues and $9.5 million decrease in service revenues. The product revenue decrease was primarily due to a $21.7 million revenue decrease in government satellite communication systems (mainly attributable to command and control situational awareness) and a $3.6 million decrease in tactical satcom radio products (relating to our majority-owned subsidiary TrellisWare Technologies, Inc.), partially offset by a $7.6 million increase in revenues related to tactical data link products and by a $6.9 million increase in information assurance products. Of the service revenue decrease, $11.0 million related to a decrease in government satellite communication systems services (mainly attributable to command and control situational awareness, offset by broadband networking services revenues for military customers), partially offset by a $2.1 million increase relating to NetNearU, our newly acquired subsidiary. Segment operating profit Three Months Ended Dollar Percentage July 4, June 28, Increase Increase (In millions, except percentages) 2014 2013 (Decrease) (Decrease) Segment operating profit $ 10.8 $ 16.6 $ (5.8 ) (34.8 )% Percentage of segment revenues 9.2 % 12.0 % The $5.8 million decrease in our government systems segment operating profit reflected lower earnings contributions of $4.1 million from lower revenues related to government satellite communication systems (mainly attributable to command and control situational awareness) as well as tactical satcom radio products, and higher support and new business proposal costs of $4.1 million. The decrease in operating profit was offset by lower IR&D costs of $2.5 million. Backlog As reflected in the table below, firm backlog decreased and funded backlog increased overall during the first three months of fiscal year 2015. The firm backlog decrease was due to a decrease in the commercial networks segment and the increase in funded backlog was primarily due to an increase in the government systems and satellite services segments. As of As of July 4, 2014 April 4, 2014 (In millions) Firm backlog Satellite Services segment $ 172.4 $ 160.2 Commercial Networks segment 415.3 457.4 Government Systems segment 304.6 281.9 Total $ 892.3 $ 899.5 Funded backlog Satellite Services segment $ 172.4 $ 160.2 Commercial Networks segment 415.3 457.4 Government Systems segment 278.1 235.0 Total $ 865.8 $ 852.6 35 -------------------------------------------------------------------------------- Table of Contents The firm backlog does not include contract options. Of the $892.3 million in firm backlog, $397.2 million is expected to be delivered during the remaining nine months of fiscal year 2015, and the balance is expected to be delivered in fiscal year 2016 and thereafter. We include in our backlog only those orders for which we have accepted purchase orders. Our total new awards were $310.1 million and $254.0 million for the three months ended July 4, 2014 and June 28, 2013, respectively. Backlog is not necessarily indicative of future sales. A majority of our contracts can be terminated at the convenience of the customer. Orders are often made substantially in advance of delivery, and our contracts typically provide that orders may be terminated with limited or no penalties. In addition, purchase orders may present product specifications that would require us to complete additional product development. A failure to develop products meeting such specifications could lead to a termination of the related contract. Firm backlog amounts are comprised of funded and unfunded components. Funded backlog represents the sum of contract amounts for which funds have been specifically obligated by customers to contracts. Unfunded backlog represents future amounts that customers may obligate over the specified contract performance periods. Our customers allocate funds for expenditures on long-term contracts on a periodic basis. Our ability to realize revenues from contracts in backlog is dependent upon adequate funding for such contracts. Although we do not control the funding of our contracts, our experience indicates that actual contract fundings have ultimately been approximately equal to the aggregate amounts of the contracts. Liquidity and Capital Resources Overview We have financed our operations to date primarily with cash flows from operations, bank line of credit financing, debt financing and equity financing. At July 4, 2014, we had $58.1 million in cash and cash equivalents, $288.0 million in working capital, and $205.0 million in outstanding borrowings under our Credit Facility. At April 4, 2014, we had $58.3 million in cash and cash equivalents, $256.8 million in working capital and $105.0 million in outstanding borrowings under our Credit Facility. We invest our cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities. Our future capital requirements will depend upon many factors, including the timing and amount of cash required for our ViaSat-2 satellite project and any future broadband satellite projects we may engage in, expansion of our research and development and marketing efforts, and the nature and timing of orders. Additionally, we will continue to evaluate possible acquisitions of, or investments in complementary businesses, products and technologies which may require the use of cash or additional financing. The general cash needs of our satellite services, commercial networks and government systems segments can vary significantly. The cash needs of our satellite services segment tend to be driven by the timing of capital expenditure payments (e.g., payments under satellite construction and launch contracts) and of network expansion activities, as well as the quality of customer, type of contract and payment terms. In our commercial networks segment, cash needs tend to be driven primarily by the type and mix of contracts in backlog, the nature and quality of customers, the level of investments in IR&D activities and the payment terms of customers (including whether advance payments are made or customer financing is required). In our government systems segment, the primary factors determining cash needs tend to be the type and mix of contracts in backlog (e.g., product or service, development or production) and timing of payments (including restrictions on the timing of cash payments under U.S. government procurement regulations). Other factors affecting the cash needs of our commercial networks and government systems segments include contract duration and program performance. For example, if a program is performing well and meeting its contractual requirements, then its cash flow requirements are usually lower. To further enhance our liquidity position, we may obtain additional financing, which could consist of debt, convertible debt or equity financing from public and/or private capital markets. In March 2013, we filed a universal shelf registration statement with the SEC for the future sale of an unlimited amount of debt securities, common stock, preferred stock, depositary shares, warrants and rights. The securities may be offered from time to time, separately or together, directly by us, by selling security holders, or through underwriters, dealers or agents at amounts, prices, interest rates and other terms to be determined at the time of the offering. We believe that our current cash balances and net cash expected to be provided by operating activities along with availability under our Credit Facility will be sufficient to meet our anticipated operating requirements for at least the next twelve months. Cash flows Cash provided by operating activities for the first quarter of fiscal year 2015 was $46.9 million compared to $53.8 million in the prior year period. This $6.9 million decrease was primarily driven by a $19.0 million year-over-year increase in cash used to fund net operating assets needs, offset by our operating results (net loss adjusted for depreciation, amortization and other non-cash charges) which generated $12.1 million of higher cash inflows. The increase in cash used to fund net operating assets during the first quarter of fiscal year 2015 when compared to the first quarter of fiscal year 2014 was due to higher payments made in our accounts payable due to timing as well as higher combined billed and unbilled accounts receivables, net, attributable to timing of contractual milestones on our larger development programs in our government systems segment. 36 -------------------------------------------------------------------------------- Table of Contents Cash used in investing activities for the first quarter of fiscal year 2015 was $154.3 million compared to $87.2 million in the prior year period. The increase in cash used in investing activities reflects an increase of $54.1 million in cash used for acquisitions and an increase of $35.9 million in cash used for the construction of our ViaSat-2 satellite, offset by a $23.5 million decrease in capital expenditures for new CPE units and other general purpose equipment. Cash provided by financing activities for the first quarter of fiscal year 2015 was $107.0 million compared to $7.4 million for the prior year period. This $99.6 million increase in cash provided by financing activities was primarily related to the $100.0 million in net proceeds from borrowings under our Credit Facility during the first quarter of fiscal year 2015 compared to no borrowings in the prior year period. Cash provided by financing activities for both periods included cash received from stock option exercises and employee stock purchase plan purchases, and cash used for the repurchase of common stock related to net share settlement of certain employee tax liabilities in connection with the vesting of restricted stock unit awards. Satellite service-related activities In May 2013, we entered into an agreement to purchase ViaSat-2, our second high-capacity Ka-band satellite, from The Boeing Company (Boeing) at a price of approximately $358.0 million, plus an additional amount for launch support services to be performed by Boeing. The projected total cost of the ViaSat-2 project, including the satellite, launch, insurance and related gateway infrastructure, through satellite launch is estimated to be between $600.0 million to $650.0 million, and will depend on the timing of the gateway infrastructure roll-out. Our total required cash funding may be reduced through various third party agreements, including potential joint service offerings and other strategic partnering arrangements. We believe we have adequate sources of funding for the project, which include our cash on hand, available borrowing capacity and the cash we expect to generate from operations over the next few years. We have incurred higher operating costs in connection with the late fiscal year 2012 launch and roll-out of our ViaSat-1 satellite and related ground infrastructure and our Exede broadband services, as well as higher interest expense as we capitalized a lower amount of the interest expense on our outstanding debt in fiscal year 2014 as we were in the early stages of construction of ViaSat-2, our second high-capacity Ka-band satellite. These higher operating costs included costs associated with depreciation, gateway connectivity, subscriber acquisition costs, logistics, customer care and various support systems. These additional operating costs attributed to our Exede service commencement have negatively impacted income from operations during recent fiscal years. As the total number of subscribers of our Exede broadband services has increased over time, the resultant increase in service revenues in our satellite services segment has improved income (loss) from operations for that segment, despite the additional litigation expense we have incurred to protect our proprietary technology. At the end of the first quarter of fiscal year 2015, we had approximately 641,000 subscribers which was relatively flat compared to the fiscal year ended April 4, 2014 reflecting cyclical industry trends. There can be no assurance that the number of subscribers of our Exede broadband services and service revenues in our satellite services segment will increase in any future period. We also expect to continue to invest in subscriber acquisition costs during fiscal year 2015 as we further expand our subscriber base as well as make additional investments for ViaSat-2. Credit Facility As of July 4, 2014, the Credit Facility provided a $500.0 million revolving line of credit (including up to $150.0 million of letters of credit) with a maturity date of November 26, 2018. Borrowings under the Credit Facility bear interest, at our option, at either (1) the highest of the Federal Funds rate plus 0.50%, the Eurodollar rate plus 1.00%, or the administrative agent's prime rate as announced from time to time, or (2) the Eurodollar rate, plus, in the case of each of (1) and (2), an applicable margin that is based on our total leverage ratio. At July 4, 2014, the weighted average effective interest rate on our outstanding borrowings under the Credit Facility was 2.16%. The Credit Facility is required to be guaranteed by certain significant domestic subsidiaries of ViaSat (as defined in the Credit Facility) and secured by substantially all of our assets. As of July 4, 2014, none of our subsidiaries guaranteed the Credit Facility. The Credit Facility contains financial covenants regarding a maximum total leverage ratio and a minimum interest coverage ratio. In addition, the Credit Facility contains covenants that restrict, among other things, our ability to sell assets, make investments and acquisitions, make capital expenditures, grant liens, pay dividends and make certain other restricted payments. At July 4, 2014, we had $205.0 million in principal amount of outstanding borrowings under the Credit Facility and $39.5 million outstanding under standby letters of credit, leaving borrowing availability under the Credit Facility as of July 4, 2014 of $255.5 million. Senior Notes due 2020 In February 2012, we issued $275.0 million in principal amount of 2020 Notes in a private placement to institutional buyers, which were exchanged in August 2012 for substantially identical 2020 Notes that had been registered with the SEC. These initial 2020 37 -------------------------------------------------------------------------------- Table of Contents Notes were issued at face value and are recorded as long-term debt in our condensed consolidated financial statements. On October 12, 2012, we issued an additional $300.0 million in principal amount of 2020 Notes in a private placement to institutional buyers at an issue price of 103.50% of the principal amount, which were exchanged in January 2013 for substantially identical 2020 Notes that had been registered with the SEC. The 2020 Notes are all treated as a single class. The 2020 Notes bear interest at the rate of 6.875% per year, payable semi-annually in cash in arrears, which interest payments commenced in June 2012. Debt issuance costs associated with the issuance of the 2020 Notes are amortized to interest expense on a straight-line basis over the term of the 2020 Notes, the results of which are not materially different from the effective interest rate basis. The $10.5 million premium we received in connection with the issuance of the additional 2020 Notes is recorded as long-term debt in our condensed consolidated financial statements and is being amortized as a reduction to interest expense on an effective interest rate basis over the term of those 2020 Notes. The 2020 Notes are required to be guaranteed on an unsecured senior basis by each of our existing and future subsidiaries that guarantees the Credit Facility. During the second quarter of fiscal year 2014, the last remaining subsidiary guarantor, ViaSat Communications, Inc., was merged into ViaSat. Accordingly, as of July 4, 2014, none of our subsidiaries guaranteed the 2020 Notes. The 2020 Notes are our general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured unsubordinated debt. The 2020 Notes are effectively junior in right of payment to our existing and future secured debt, including under the Credit Facility (to the extent of the value of the assets securing such debt), are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the 2020 Notes, and are senior in right of payment to all of our existing and future subordinated indebtedness. The indenture governing the 2020 Notes limits, among other things, our and our restricted subsidiaries' ability to: incur, assume or guarantee additional debt; issue redeemable stock and preferred stock; pay dividends, make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase subordinated debt; make loans and investments; grant or incur liens; restrict dividends, loans or asset transfers from restricted subsidiaries; sell or otherwise dispose of assets; enter into transactions with affiliates; reduce our satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person. Prior to June 15, 2015, we may redeem up to 35% of the 2020 Notes at a redemption price of 106.875% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, from the net cash proceeds of specified equity offerings. We may also redeem the 2020 Notes prior to June 15, 2016, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and any accrued and unpaid interest, if any, thereon to the redemption date. The applicable premium is calculated as the greater of: (i) 1.0% of the principal amount of such 2020 Notes and (ii) the excess, if any, of (a) the present value at such date of redemption of (1) the redemption price of such 2020 Notes on June 15, 2016 plus (2) all required interest payments due on such 2020 Notes through June 15, 2016 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the treasury rate (as defined under the indenture) plus 50 basis points, over (b) the then-outstanding principal amount of such 2020 Notes. The 2020 Notes may be redeemed, in whole or in part, at any time during the twelve months beginning on June 15, 2016 at a redemption price of 103.438%, during the twelve months beginning on June 15, 2017 at a redemption price of 101.719%, and at any time on or after June 15, 2018 at a redemption price of 100%, in each case plus accrued and unpaid interest, if any, thereon to the redemption date. In the event a change of control occurs (as defined in the indenture), each holder will have the right to require us to repurchase all or any part of such holder's 2020 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2020 Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). 38 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table sets forth a summary of our obligations at July 4, 2014: For the Remainder of Fiscal Year For the Fiscal Years Ending (In thousands, including interest where applicable) Total 2015 2016-2017 2018-2019 Thereafter Operating leases and satellite capacity agreements $ 174,207 $ 47,023 $ 49,061 $ 30,653 $ 47,470 2020 Notes 812,188 19,766 79,063 79,063 634,296 Line of credit* 224,717 3,358 8,954 212,405 - Satellite performance incentives 35,453 1,409 4,140 4,723 25,181 Purchase commitments including satellite-related agreements 548,795 286,398 213,685 23,628 25,084 Other 2,756 1,856 600 300 - Total $ 1,798,116 $ 359,810 $ 355,503 $ 350,772 $ 732,031 * To the extent that the interest rate is variable and ultimate amounts borrowed under the Credit Facility may fluctuate, amounts reflected represent estimated interest payments on our current outstanding balances based on the weighted average effective interest rate at July 4, 2014 until the date of the revolving line of credit maturity in the principle repayment in November 2018. We purchase components from a variety of suppliers and use several subcontractors and contract manufacturers to provide design and manufacturing services for our products. During the normal course of business, we enter into agreements with subcontractors, contract manufacturers and suppliers that either allow them to procure inventory based upon criteria defined by us or that establish the parameters defining our requirements. We have also entered into agreements with suppliers for the construction of our ViaSat-2 satellite, and operations of our satellites. In certain instances, these agreements allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to firm orders being placed. Consequently, only a portion of our reported purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments. See "Liquidity and Capital Resources - Satellite service-related activities." Our condensed consolidated balance sheets included $46.2 million and $48.9 million of "other liabilities" as of July 4, 2014 and April 4, 2014, respectively, which primarily consisted of the long-term portion of our satellite performance incentives obligation, our long-term warranty obligations, the long-term portion of deferred rent, long-term portion of deferred revenue and long-term deferred income taxes. With the exception of the long-term portion of our satellite performance incentives obligation, these remaining liabilities have been excluded from the above table as the timing and/or the amount of any cash payment is uncertain. See Note 9 to our condensed consolidated financial statements for additional information regarding our income taxes and related tax positions and Note 7 to our condensed consolidated financial statements for a discussion of our product warranties. Off-Balance Sheet Arrangements We had no material off-balance sheet arrangements at July 4, 2014 as defined in Regulation S-K Item 303(a)(4) other than as discussed under Contractual Obligations above or disclosed in the notes to our consolidated financial statements included in this report or in our Annual Report on Form 10-K for the year ended April 4, 2014. Recent Authoritative Guidance For information regarding recently adopted and issued accounting pronouncements, see Note 1 to the condensed consolidated financial statements. |