VIASAT, INC. 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 the impact of the novel coronavirus (COVID-19) pandemic on our business; 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 and launch activities; the performance and anticipated benefits of ourViaSat -2 andViaSat -3 class satellites and any future satellite we may construct or acquire; the impacts on overall coverage area, planned services and financial results of the identified antenna deployment issue on theViaSat -2 satellite; the expected completion, capacity, service, coverage, service speeds and other features of our satellites, and the timing, cost, economics and other benefits associated therewith; anticipated subscriber growth; plans, objectives and strategies for future operations; the number of in-flight connectivity (IFC) systems anticipated to be activated under existing contracts with commercial airlines; 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 materially include: our ability to realize the anticipated benefits of theViaSat -2 andViaSat -3 class satellites and any future satellite we may construct or acquire; unexpected expenses related to our satellite projects; our ability to successfully implement our business plan for our broadband services on our anticipated timeline or at all; risks associated with the construction, launch and operation of satellites, including the effect of any anomaly, operational failure or degradation in satellite performance; the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees or the overall economy; our ability to realize the anticipated benefits of our acquisitions or strategic partnering arrangements; our ability to successfully develop, introduce and sell new technologies, products and services; audits by theU.S. Government ; changes in the global business environment and economic conditions; delays in approvingU.S. Government budgets and cuts in government defense expenditures; our reliance onU.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; introduction of new technologies and other factors affecting the communications and defense industries generally; the effect of adverse regulatory changes (including changes affecting spectrum availability or permitted uses) on our ability to sell or deploy our products and services; changes in the way others use spectrum; our inability to access additional spectrum, use spectrum for additional purposes, and/or operate satellites at additional orbital locations; competing uses of the same spectrum or orbital locations that we utilize or seek to utilize; the effect of recent changes toU.S. tax laws; 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 endedMarch 31, 2020 , under the heading "Risk Factors" in Part II, Item 1A of this report, elsewhere in this report and our other filings with theSecurities and Exchange Commission (theSEC ). 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 an innovator in communications technologies and services, focused on making connectivity accessible, available and secure for all. Our end-to-end platform of high-capacity Ka-band satellites, ground infrastructure and user terminals enables us to provide cost-effective, high-speed, high-quality broadband solutions to enterprises, consumers and government users around the globe, whether on the ground, in the air or at sea. In addition, our government business includes a market-leading portfolio of military tactical data link systems, satellite communication products and services and cybersecurity and information assurance products and services. Our product, system 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 vertical integration strategy and 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 inCalifornia in 1986, and reincorporated as aDelaware corporation in 1996. 34 --------------------------------------------------------------------------------
We conduct our business through three segments: satellite services, commercial networks and government systems.
Private Placement
OnJuly 23, 2020 , we issued and sold an aggregate of 4,474,559 shares of our common stock at a purchase price of$39.11 per share to certain accredited investors in a private placement transaction exempt from registration under the Securities Act of 1933, as amended, resulting in net proceeds of approximately$174.7 million after deducting offering expenses. We intend to use the proceeds for general corporate purposes, which may include financing costs related to the purchase, launch and operation of satellites, potential acquisitions, joint ventures and strategic alliances, working capital or capital expenditures.
COVID-19
InMarch 2020 , the global outbreak of COVID-19 was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. Government . The COVID-19 pandemic and attempts to contain it, such as mandatory closures, "shelter-in-place" orders and travel restrictions, have caused significant disruptions and adverse effects onU.S. and global economies, including impacts to supply chains, customer demand and financial markets. We have taken measures to protect the health and safety of our employees and to work with our customers, employees, suppliers, subcontractors, distributors, resellers and communities to address the disruptions from the pandemic. Although our financial results for the three and six months endedSeptember 30, 2020 continued to be impacted by the pandemic, the impact was not material to our financial position, results of operations or cash flows in those periods, with negative impacts particularly in our commercial air business offset by strong performance in other parts of our business. We continue to expect our diversified businesses to provide resiliency for the remainder of fiscal year 2021. Our government systems segment, which represented 47% and 48% of our total revenues during the three and six months endedSeptember 30, 2020 , respectively, continued to perform in line with our expectations. Demand for products and services in our government systems segment remained strong despite the evolving COVID-19 pandemic, although our government business continued to experience some administrative delays on certain contractual vehicles as government customers adjust to the challenges inherent in the remote work environment resulting from the COVID-19 pandemic. As a result, we anticipate that contract awards in our government systems segment in fiscal year 2021 may be more heavily weighted towards the second half of our fiscal year. Sincemid-March 2020 , we have experienced an uptick in demand for our fixed broadband services inthe United States , with net subscriber additions for our services and increased demand for our premium highest speed plans. We also continue to participate in certain federal and state programs to ensure our residential and small business customers inthe United States have access to connectivity during the pandemic. However, the COVID-19 pandemic continues to impact our higher-margin in-flight services business and our mobile broadband satellite communications system business in our satellite services and commercial networks segments, respectively, due to the severe decline in global air traffic and resulting downturn in the commercial aviation market. While current airline traffic is still a fraction of the prior year activity, our in-flight services business improved modestly compared to the quarter endedJune 30, 2020 as airline customers began seeing more passengers return to the air and a significant number of previously inactive aircraft returned to service. We expect to continue to see negative impacts on revenues and operating cash flows from our IFC businesses in the second half of fiscal year 2021, but for the effects to continue to lessen over time with increases in passenger air traffic and the return to service of additional currently inactive aircraft. In fiscal year 2020, less than 10% of our total revenues were generated by services and products provided to commercial airlines reported in our satellite services and commercial networks segments. The extent of the impact of the COVID-19 pandemic on our business in fiscal year 2021 and beyond will depend on many factors, including the duration and scope of the public health emergency, the extent, duration and effectiveness of containment actions taken, the extent of its disruption to important global, regional and local supply chains and economic markets, and the impact of the pandemic on overall supply and demand, global air travel, consumer confidence, discretionary spending levels and levels of economic activity. 35 --------------------------------------------------------------------------------
Satellite Services
Our satellite services segment uses our proprietary technology platform to provide satellite-based high-speed broadband services around the globe for use in commercial applications. Our proprietary Ka-band satellites are at the core of our technology platform. We own three satellites in service overNorth America : our second-generationViaSat -2 satellite (launched in 2017), our first-generationViaSat -1 satellite (launched in 2011) and the WildBlue-1 satellite (launched in 2007), have lifetime leases of Ka-band capacity on two satellites, jointly own the KA-SAT satellite overEurope ,Middle East andAfrica (EMEA), and have access to additional Ka-band capacity on partner satellites around the globe through various arrangements with third parties. We also have a global constellation of three third-generationViaSat -3 class satellites under construction. We expect ourViaSat -3 constellation, once in service, to enable us to deliver affordable connectivity across most of the world. The primary services offered by our satellite services segment are comprised of:
• Fixed broadband services, which provide consumers and businesses with
high-speed, high-quality broadband internet access and Voice over Internet
Protocol (VoIP) services, primarily in the United States but also in
various countries in Europe and Latin America . As of September 30, 2020 ,
we provided fixed broadband services to approximately 603,000 U.S. subscribers (excluding subscribers whose service would have ordinarily
been terminated in the absence of the
(
to ensure our customers have access to connectivity during the COVID-19
pandemic). For the three months ended
per fixed broadband subscriber in
• In-flight services, which provide industry-leading IFC, wireless in-flight
entertainment and aviation software services. As of
had our IFC systems installed and in service on approximately 1,390
commercial aircraft, of which, due to impacts of the COVID-19 pandemic
approximately 320 were inactive at quarter end. We anticipate our IFC
services will be activated on approximately 750 additional commercial
aircraft under existing customer agreements with commercial airlines.
However, the timing of installation and entry into service for additional
aircraft under existing customer agreements may be delayed due to COVID-19
impacts. There can be no assurance that anticipated IFC services will be
activated on all such additional commercial aircraft. See the section
entitled "COVID-19" above for a discussion of the impact of the COVID-19
pandemic on our in-flight services business.
• Community Internet services, which offer innovative, affordable,satellite-based connectivity in communities with poor or no other means of
internet access. The services help foster digital inclusion by enabling
millions of people to connect to affordable high-quality internet services
via a centralized community hotspot connected to the internet via
satellite. Since launch, our Community Internet services have reached
approximately 2 million people living and working in thousands of rural,
suburban and urban communities in
advance of full commercial launch in other countries, including
• Other mobile broadband services, which include high-speed, satellite-based
internet services to seagoing vessels (such as energy offshore vessels,
cruise ships, consumer ferries and yachts), as well as L-band managed
services enabling real-time machine-to-machine (M2M) position tracking,
management of remote assets and operations, and visibility into critical
areas of the supply chain.
Commercial Networks
We are a leading end-to-end network technology and equipment supplier in broadband satellite markets. In addition to developing our own proprietary high-capacity Ka-band satellite systems, our commercial networks segment develops and sells a wide array of advanced satellite and wireless products, antenna systems and terminal solutions that support or enable the provision of high-speed fixed and mobile broadband services. We design, develop and produce space system solutions for multiple orbital regimes, including geostationary (GEO), mid earth orbit (MEO) and low earth orbit (LEO). The primary products, systems, solutions and services offered by our commercial networks segment are comprised of:
• Mobile broadband satellite communication systems, designed for use in
aircraft and seagoing vessels.
• Fixed broadband satellite communication systems, including next-generation
satellite network infrastructure and ground terminals.
• Antenna systems, including ground terminals and antennas for terrestrial
and satellite applications, mobile satellite communication, Ka-band earth
stations and other multi-band antennas.
36
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• Satellite networking development, including specialized design and
technology services covering all aspects of satellite communication system
architecture and technology.
• Space systems, including the design and development of high-capacity
Ka-band satellites and associated payload technologies for our own
satellite fleet as well as for third parties.
Government Systems
We are a leading provider of innovative communications and cybersecurity
products and solutions to the U.S. Government and other military and government
users around the world. Our government systems segment offers a broad array of
products and services designed to enable the collection and transmission of
secure real-time digital information and communications between fixed and mobile
command centers, intelligence and defense platforms and individuals in the
field. The primary products and services of our government systems segment
include:
• Government mobile broadband products and services, which provide military
and government users with high-speed, real-time, broadband and multimedia
connectivity in key regions of the world, as well as line-of-sight and
beyond-line-of-sight Intelligence Surveillance and Reconnaissance
missions.
• Government satellite communication systems, which offer an array of
portable, mobile and fixed broadband modems, terminals, network access
control systems and antenna systems, and include products designed for
manpacks, aircraft, unmanned aerial vehicles, seagoing vessels,
ground-mobile vehicles and fixed applications.
• Secure networking, cybersecurity and information assurance products and
services, 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 protect the integrity of data
stored on computers and storage devices.
• Tactical data links, including our Battlefield Awareness and Targeting
System - Dismounted (BATS-D) handheld Link 16 radios, our Small Tactical
Terminal (STT) 2-channel radios for manned and unmanned applications,
"disposable" defense data links, and our Multifunctional Information
Distribution System (MIDS) and MIDS Joint Tactical Radio Systems
(MIDS-JTRS) terminals for military fighter jets.
Sources of Revenues
Our satellite services segment revenues are primarily derived from our fixed broadband services and in-flight services.
Revenues in our commercial networks and government systems segments are primarily derived from three types of contracts: fixed-price, cost-reimbursement and time-and-materials contracts. Fixed-price contracts (which require us to provide products and services under a contract at a specified price) comprised approximately 87% and 89% of our total revenues for these segments for the three months endedSeptember 30, 2020 and 2019, respectively, and approximately 86% and 88% of our total revenues for these segments for the six months endedSeptember 30, 2020 and 2019, respectively. The remainder of our revenues in these segments for such periods was derived primarily 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 in our 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 our funded development from our customer contracts were approximately 23% and 22% of our total revenues for the three months endedSeptember 30, 2020 and 2019, respectively, and approximately 25% and 23% of our total revenues for the six months endedSeptember 30, 2020 and 2019, respectively. 37 -------------------------------------------------------------------------------- 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 (R&D) projects. IR&D expenses were approximately 5% and 6% of total revenues during the three months endedSeptember 30, 2020 and 2019, respectively, and approximately 5% and 6% of total revenues during the six months endedSeptember 30, 2020 and 2019, 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 inthe 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
We apply the five-step revenue recognition model under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (ASC) 606) to our contracts with our customers. Under this model, we (1) identify the contract with the customer, (2) identify our performance obligations in the contract, (3) determine the transaction price for the contract, (4) allocate the transaction price to our performance obligations and (5) recognize revenue when or as we satisfy our 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 the development and delivery of complex equipment built to customer specifications under long-term contracts. The timing of satisfaction of performance obligations may require judgment. We derive a substantial portion of our revenues from contracts with customers for services, primarily consisting of connectivity services. These contracts typically require advance or recurring monthly payments by the customer. Our 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). We evaluate whether broadband equipment provided to our customer as part of the delivery of connectivity services represents a lease in accordance with ASC 842. As discussed in Note 1 - Basis of Presentation - Leases to our condensed consolidated financial statements, for broadband equipment leased to fixed broadband customers in conjunction with the delivery of connectivity services, we account for the lease and non-lease components of connectivity services arrangement as a single performance obligation as the connectivity services represent the predominant component. We also derive a portion of our 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, we consider indicators that include, but are not limited to, whether (1) we have 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. The vast majority of our revenues from long-term contracts to develop and deliver complex equipment built to customer specifications are derived from contracts with theU.S. Government (including foreign military sales contracted through theU.S. Government ). Our contracts with theU.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 underU.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 ourU.S. Government fixed-price contracts, the customer pays us either performance-based payments (PBPs) or progress payments. PBPs are interim payments based on quantifiable 38 -------------------------------------------------------------------------------- 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, ourU.S. Government fixed-price contracts generally result in revenue recognized in excess of billings which we present as unbilled accounts receivable on the balance sheet. Amounts billed and due from our 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 ourU.S. Government cost-type contracts, the customer generally pays us for our actual costs incurred within a short period of time. For non-U.S. Government contracts, we typically receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. We recognize a liability for these advance payments in excess of revenue recognized and present 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 us 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 us and we have 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. We generally use the cost-to-cost measure of progress for our contracts because that best depicts the transfer of control to the customer which occurs as we incur costs on our 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. Estimating the total costs at completion of a performance obligation requires management to make estimates related to items such as subcontractor performance, material costs and availability, labor costs and productivity and the costs of overhead. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recognized in the period the loss is determined. A one percent variance in our future cost estimates on open fixed-price contracts as ofSeptember 30, 2020 would change our income (loss) before income taxes by an insignificant amount. 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 our performance obligations, the estimation of total revenue, and where applicable the cost at completion, is complex, subject to many variables and requires significant judgment. Our 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. We estimate variable consideration at the amount to which we expect to be entitled. We include 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. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. In the event an agreement includes embedded financing components, we recognize interest expense or interest income on the embedded financing components using the effective interest method. This methodology uses an implied interest rate which reflects the incremental borrowing rate which would be expected to be obtained in a separate financing transaction. We have elected the practical expedient not to adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer 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, we utilize the observable price of a good or service when we sell that good or service separately in similar circumstances and to similar customers. If a standalone selling price is not directly observable, we estimate 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. 39 --------------------------------------------------------------------------------
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 12 months are classified as accrued liabilities and amounts expected to be incurred beyond 12 months are classified as other liabilities in the condensed 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 incentive payments 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 earth stations, 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 periodically review the remaining estimated useful life of our satellites to determine if revisions to the estimated useful lives are necessary. We own three satellites in service (ViaSat -2,ViaSat -1 and WildBlue-1) and have lifetime leases of Ka-band capacity on two satellites. We also have a global constellation of three third-generationViaSat -3 class satellites under construction. In addition, we own related earth stations and networking equipment for all of our satellites. Property, equipment and satellites, net also includes the customer premise equipment units leased to subscribers under a retail leasing program as part of our satellite services segment.
Leases
For contracts entered into on or afterApril 1, 2019 , we assess at contract inception whether the contract is, or contains, a lease. Generally, we determine that a lease exists when (1) the contract involves the use of a distinct identified asset, (2) we obtain the right to substantially all economic benefits from use of the asset, and (3) we have the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset, (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (5) the asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria. At the lease commencement date, we recognize a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying leases. Lease payments included in the measurement of lease liabilities consist of (1) fixed lease payments for the noncancelable lease term, (2) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (3) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require variable lease payments that do not depend on an underlying index or rate established at lease commencement. Such payments and changes in payments based on a rate or index are recognized in operating expenses when incurred. 40 -------------------------------------------------------------------------------- Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the depreciation of assets obtained under finance leases on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement. For both operating and finance leases, lease payments are allocated between a reduction of the lease liability and interest expense. For broadband equipment leased to fixed broadband customers in conjunction with the delivery of connectivity services, we have made an accounting policy election not to separate the broadband equipment from the related connectivity services. The connectivity services are the predominant component of these arrangements. The connectivity services are accounted for in accordance ASC 606. We are also a lessor for certain insignificant communications equipment. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
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 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 and six months endedSeptember 30, 2020 and 2019. We account for our goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and the provisions of ASU 2017-04, Simplifying the Test for Goodwill Impairment, which we early adopted in fiscal year 2020. ASU 2017-04 simplifies how we test goodwill for impairment by removing Step 2 from the goodwill impairment test. Current authoritative guidance allows us to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If, after completing the qualitative assessment, we determine that it is more likely than not that the estimated fair value is greater than the carrying value, we conclude that no impairment exists. If it is more likely than not that the carrying value of the reporting unit exceeds its estimated fair value, we compare the fair value of the reporting unit to its carrying value. If the estimated fair value of the reporting unit is less than the carrying value, then a goodwill impairment charge will be recognized in the amount by which the carrying amount exceeds the fair value, limited to the total amount of goodwill allocated to that reporting unit. 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. The 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. Furthermore, in addition to qualitative analysis, we believe it is appropriate to conduct a quantitative analysis periodically as a prudent review of our reporting unit goodwill fair values. We performed this analysis as ofDecember 31, 2019 , our annual impairment test date. 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 each reporting unit's future revenue and operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor resources, general market conditions, and other relevant factors. Based on a quantitative analysis for fiscal year 2020, we concluded that estimated fair values of our reporting units significantly exceed their respective carrying values. Based on our qualitative and quantitative assessment performed during the fourth quarter of fiscal year 2020 and the additional qualitative and quantitative considerations as ofMarch 31, 2020 in light of the significant decline in our market capitalization following the COVID-19 outbreak, we concluded that it was more likely than not that the estimated fair value of our reporting units exceeded their carrying value as ofMarch 31, 2020 . 41 --------------------------------------------------------------------------------
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 to determine if the weight of available evidence suggests that an additional valuation allowance is needed. 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. In the event that our estimate of taxable income is less than that required to utilize the full amount of any deferred tax asset, a valuation allowance is established, which would cause a decrease to income in the period such determination is made. Our valuation allowance against deferred tax assets increased from$42.6 million atMarch 31, 2020 to$47.3 million atSeptember 30, 2020 . The valuation allowance relates to state and foreign net operating loss carryforwards, state R&D tax credit carryforwards and foreign tax credit carryforwards. Our analysis of the need for a valuation allowance on deferred tax assets considered historical as well as forecasted future operating results. In addition, our evaluation considered other factors, including our contractual backlog, our history of positive earnings, current earnings trends assuming our satellite services segment continues to grow, taxable income adjusted for certain items, and forecasted income by jurisdiction. We also considered the period over which these net deferred tax assets can be realized and our history of not having federal tax loss carryforwards expire unused. 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 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 inthe 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.
Results of Operations
The following table presents, as a percentage of total revenues, income statement data for the periods indicated:
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Revenues: 100 % 100 % 100 % 100 %
Product revenues 46 52 47 51
Service revenues 54 48 53 49
Operating expenses:
Cost of product revenues 35 38 35 37
Cost of service revenues 35 32 36 33
Selling, general and administrative 23 22 23 22
Independent research and development 5 6 5 6
Amortization of acquired intangible
assets - - - -
Income from operations 2 3 1 1
Interest expense, net (2 ) (2 ) (2 ) (2 )
Income (loss) before income taxes 1 2 (1 ) (1 )
Benefit from (provision for) income
taxes - - 1 -
Net income (loss) 1 1 - -
Net income (loss) attributable to
Viasat, Inc. - 1 (1 ) (1 )
42
-------------------------------------------------------------------------------- Three Months EndedSeptember 30, 2020 vs. Three Months EndedSeptember 30, 2019 Revenues Three Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Product revenues $ 256.0 $ 306.8$ (50.9 ) (17 )% Service revenues 298.3 285.4 12.9 5 % Total revenues $ 554.3 $ 592.3$ (38.0 ) (6 )% Our total revenues decreased by$38.0 million as a result of a$50.9 million decrease in product revenues, partially offset by a$12.9 million increase in service revenues. The product revenue decrease was driven primarily by decreases of$43.5 million in our government systems segment and$7.4 million in our commercial networks segment. The service revenue increase was primarily due to increases of$10.2 million in our satellite services segment and$4.5 million in our government systems segment, partially offset by a decrease of$1.8 million in our commercial networks segment. Cost of revenues Three Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Cost of product revenues $ 191.9 $ 223.1$ (31.2 ) (14 )% Cost of service revenues 195.4 187.0 8.4 4 % Total cost of revenues $ 387.3 $ 410.1$ (22.8 ) (6 )% Cost of revenues decreased$22.8 million due to a decrease of$31.2 million in cost of product revenues, partially offset by an increase of$8.4 million in cost of service revenues. The cost of product revenue decrease primarily related to decreased revenues, causing a$37.0 million decrease in cost of product revenues on a constant margin basis, mainly in our government systems segment. The increase in cost of service revenues was primarily due to increased revenues from our fixed broadband services business and lower margins in our in-flight services business reflecting the impact of the COVID-19 pandemic in our satellite services segment.
Selling, general and administrative expenses
Three Months Ended Dollar Percentage
September 30, September 30, Increase Increase
(In millions, except percentages) 2020 2019
(Decrease) (Decrease)
Selling, general and administrative $ 125.5 $ 127.4
(2 )%
The $1.9 million decrease in selling, general and administrative (SG&A) expenses
was driven by decreases of $4.6 million in selling costs and $1.9 million in bid
and proposal costs, partially offset by an increase of $4.6 million in support
costs. The decrease in selling costs was reflected primarily in our satellite
services segment, and the decrease in bid and proposal costs was driven by our
government systems segment. The increase in support costs was mainly from our
government systems and commercial networks segments. 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.
Independent research and development
Three Months Ended Dollar Percentage
September 30, September 30, Increase Increase
(In millions, except percentages) 2020 2019 (Decrease) (Decrease)
Independent research and development $ 27.5 $ 34.3 $ (6.8 ) (20 )%
The $6.8 million decrease in IR&D expenses was mainly the result of a decrease
of $4.9 million in IR&D efforts in our commercial networks segment (primarily
related to a decrease in IR&D expenses related to next-generation satellite
payload technologies) and a decrease of $1.8 million in our government systems
segment (primarily related to a decrease in IR&D expenses related to
next-generation dual band mobility solutions).
43
--------------------------------------------------------------------------------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 insignificant
decrease in amortization of acquired intangible assets in the second quarter of
fiscal year 2021 compared to the prior year period was primarily the result of
certain acquired intangibles in our satellite services and commercial networks
segments becoming fully amortized during the prior fiscal year. Current and
expected amortization expense for acquired intangible assets for each of the
following periods is as follows:
Amortization
(In thousands)
For the six months ended
Expected for the remainder of fiscal year 2021 $ 2,412 Expected for fiscal year 2022
3,297
Expected for fiscal year 2023 2,993
Expected for fiscal year 2024 2,472
Expected for fiscal year 2025 856
Thereafter -
$ 12,030
Interest income
The slight decrease in interest income for the three months ended
September 30, 2020 compared to the prior year period was the result of lower
interest rates during the second quarter of fiscal year 2021 compared to the
prior year period.
Interest expense
Interest expense for the three months ended September 30, 2020 was relatively
flat compared to the prior year period. The slight increase was primarily due to
an increase in interest expense attributable to our 6.500% Senior Notes due 2028
(the 2028 Notes), which were issued in the first quarter of fiscal year 2021,
partially offset by an increase in the amount of interest capitalized during the
second quarter of fiscal year 2021 compared to the prior year period.
Income taxes
For the three months endedSeptember 30, 2020 , we recorded an income tax benefit of an insignificant amount, resulting in an effective tax benefit rate of negative 23%. For the three months endedSeptember 30, 2019 , we recorded an income tax expense of$2.4 million , resulting in an effective tax rate of 26%. The effective tax rates for the periods differed from theU.S. statutory rate due primarily to the benefit of federal and state R&D tax credits. 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. Our effective tax rate is highly influenced by the amount of our R&D tax credits. A small change in estimated annual pretax income (loss) can produce a significant variance in the annual effective tax rate given our expected amount of R&D tax credits. This variability provides an unreliable estimate of the annual effective tax rate. As a result, and in accordance with the authoritative guidance for accounting for income taxes in interim periods, we have computed our provision for income taxes for the three months endedSeptember 30, 2020 and 2019 by applying the actual effective tax rates to the income for the three-month periods. Segment Results for the Three Months EndedSeptember 30, 2020 vs. Three Months EndedSeptember 30, 2019 Satellite services segment Revenues Three Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment product revenues $ - $ - $ - - % Segment service revenues 215.9 205.7 10.2 5 % Total segment revenues $ 215.9 $ 205.7$ 10.2 5 % 44
-------------------------------------------------------------------------------- Our satellite services segment revenues increased by$10.2 million due to an increase in service revenues. The increase in service revenues was primarily driven by the expansion of our fixed broadband services and higher ARPU when compared to the prior year period, partially offset by a decrease in our IFC services. Total subscribers atSeptember 30, 2020 were approximately 603,000 (excluding subscribers whose service would have ordinarily been terminated in the absence of the federalFCC Pledge and similar state programs we are currently participating in related to the COVID-19 pandemic) compared to 587,000 subscribers atSeptember 30, 2019 . The increase in ARPU reflected a higher mix of new and existing subscribers choosingViasat's premium highest speed plans. The in-flight service revenue decrease was driven primarily by a 21% decrease in the number of commercial aircraft using in-flight services through our IFC systems as of quarter end as a result of the COVID-19 pandemic. In addition, our second quarter fiscal year 2021 in-flight service revenues continued to be impacted by reduced passenger air traffic, the number of inactive installed aircraft and lower capacity on active installed aircraft as a result of the COVID-19 pandemic. Segment operating profit Three Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment operating profit $ 11.5 $ 5.1$ 6.4 124 % Percentage of segment revenues 5 % 2 % The$6.4 million increase in our satellite services segment operating profit was driven primarily by lower selling costs, and increased revenues with significant flow through resulting in improved margins, reflecting the strength of the low variable costs structure of our fixed broadband services business as the business continues to scale. This was partially offset by lower margins resulting from the negative impact of the COVID-19 pandemic on our in-flight services business and an increase in costs related to our investments in emerging global broadband businesses. Commercial networks segment Revenues Three Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment product revenues $ 66.8 $ 74.1$ (7.4 ) (10 )% Segment service revenues 12.1 13.9 (1.8 ) (13 )% Total segment revenues $ 78.9 $ 88.0$ (9.1 ) (10 )% Our commercial networks segment revenues decreased by$9.1 million , primarily due to a$7.4 million decrease in product revenues and a$1.8 million decrease in service revenues. The decrease in product revenues was primarily due to a decrease of$10.3 million in mobile broadband satellite communication systems products due to decreased IFC terminal deliveries resulting from the severe decline in global air traffic and resulting downturn in the commercial aviation market as a result of the COVID-19 pandemic, partially offset by an increase of$3.0 million in fixed satellite networks products. The decrease in service revenues was primarily driven by a decrease in mobile broadband satellite communications systems services. Segment operating loss Three Months Ended Dollar Percentage September 30, September 30, (Increase) (Increase) (In millions, except percentages) 2020 2019 Decrease Decrease Segment operating loss $ (45.4 ) $ (46.8 )$ 1.4 3 % Percentage of segment revenues (58 )% (53 )% 45
-------------------------------------------------------------------------------- The$1.4 million reduction in our commercial networks segment operating loss was driven primarily by a$4.9 million decrease in IR&D expenses (primarily related to next-generation satellite payload technologies), partially offset by a$1.4 million increase in SG&A costs. The reduction in operating loss was partially offset by lower earnings contributions of$2.0 million , primarily driven by decreased revenues and lower margins in our mobile broadband satellite communication systems products. Government systems segment Revenues Three Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment product revenues $ 189.2 $ 232.7$ (43.5 ) (19 )% Segment service revenues 70.3 65.8 4.5 7 % Total segment revenues $ 259.5 $ 298.5$ (39.0 ) (13 )% Our government systems segment revenues decreased by$39.0 million due to a decrease of$43.5 million in product revenues, partially offset by an increase of$4.5 million in service revenues. The decrease in product revenues was mainly due to a$13.7 million decrease in government mobile broadband products, an$11.2 million decrease in government satellite communication systems products, a$10.8 million decrease in tactical satcom radio products and a$9.7 million decrease in tactical data link products, partially offset by a$2.0 million increase in cybersecurity and information assurance products. Our government systems segment continued to show some impacts from the pandemic, which has somewhat complicated product manufacturing and shipments, but new government systems segment awards remained very strong through the end of the second quarter of fiscal year 2021. The service revenue increase was primarily due to a$3.2 million increase in government mobile broadband services. Segment operating profit Three Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment operating profit $ 47.9 $ 62.1$ (14.3 ) (23 )% Percentage of segment revenues 18 % 21 % The$14.3 million decrease in our government systems segment operating profit was primarily due to lower earnings contributions of$15.7 million , primarily due to a decrease in revenues in our government mobile broadband products, government satellite communication systems products, tactical satcom radio products and tactical data link products, and lower margins from our government mobile broadband products and tactical satcom radio products. This decrease was partially offset by lower IR&D costs of$1.8 million .
Six Months Ended
Revenues
Six Months Ended Dollar Percentage
September 30, September 30, Increase Increase
(In millions, except percentages) 2020 2019 (Decrease) (Decrease)
Product revenues $ 506.6 $ 570.4 $ (63.8 ) (11 )%
Service revenues 578.2 558.8 19.3 3 %
Total revenues $ 1,084.8 $ 1,129.3 $ (44.5 ) (4 )%
46
-------------------------------------------------------------------------------- Our total revenues decreased by$44.5 million as a result of a$63.8 million decrease in product revenues, partially offset by a$19.3 million increase in service revenues. The decrease in product revenues was driven primarily by decreases of$46.7 million in our government systems segment and$17.2 million in our commercial networks segment. The service revenue increase was due to increases of$15.3 million in our satellite services segment and$7.8 million in our government systems segment, partially offset by a decrease of$3.8 million in our commercial networks segment. Cost of revenues Six Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Cost of product revenues $ 379.8 $ 420.0$ (40.2 ) (10 )% Cost of service revenues 393.1 374.5 18.6 5 % Total cost of revenues $ 772.9 $ 794.6$ (21.7 ) (3 )% Cost of revenues decreased by$21.7 million due to a decrease of$40.2 million in cost of product revenues, partially offset by an increase of$18.6 million in cost of service revenues. The cost of product revenue decrease was mainly due to decreased revenues, causing a$47.0 million decrease in cost of product revenues on a constant margin basis mainly from revenue decreases in our government systems and commercial networks segments. The cost of service revenue increase primarily related to increased revenues from our fixed broadband services business and lower margins in our in-flight services business reflecting the impact of the COVID-19 pandemic in our satellite services segment.
Selling, general and administrative expenses
Six Months Ended Dollar Percentage
September 30, September 30, Increase Increase
(In millions, except percentages) 2020 2019
(Decrease) (Decrease)
Selling, general and administrative $ 246.5 $ 252.5
(2 )%
The $6.0 million decrease in SG&A expenses was primarily due to a decrease in
selling costs of $7.5 million and a decrease in bid and proposal costs of $4.5
million , partially offset by an increase in support costs of $6.0 million . The
decrease in selling costs was primarily driven by our satellite services
segment, while the decrease in bid and proposal costs was mainly from our
government systems segment. The increase in support costs was primarily driven
by our government systems and commercial networks segments. 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.
Independent research and development
Six Months Ended Dollar Percentage
September 30, September 30, Increase Increase
(In millions, except percentages) 2020 2019 (Decrease) (Decrease)
Independent research and development $ 55.2 $ 67.8 $ (12.6 ) (19 )%
The $12.6 million decrease in IR&D expenses was mainly the result of a decrease
of $9.3 million in IR&D efforts in our commercial networks segment (primarily
related to a decrease in IR&D expenses related to next-generation satellite
payload technologies) and a decrease of $3.2 million in our government systems
segment (primarily related to a decrease in IR&D expenses related to
next-generation dual band mobility solutions).
47
--------------------------------------------------------------------------------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$1.2 million decrease in amortization of acquired intangible assets in the first six months of fiscal year 2021 compared to the prior year period was primarily the result of certain acquired intangibles in our satellite services and commercial networks segments becoming fully amortized during the prior fiscal year. Current and expected amortization expense for acquired intangible assets for each of the following periods is as follows: Amortization (In thousands)
For the six months ended
Expected for the remainder of fiscal year 2021 $ 2,412 Expected for fiscal year 2022
3,297
Expected for fiscal year 2023 2,993
Expected for fiscal year 2024 2,472
Expected for fiscal year 2025 856
Thereafter -
$ 12,030
Interest income
The slight decrease in interest income for the six months ended
September 30, 2020 compared to the prior year period was the result of lower
interest rates during the first six months of fiscal year 2021 compared to the
prior year period.
Interest expense
The $1.4 million decrease in interest expense in the six months ended
September 30, 2020 compared to the prior year period was primarily due to an
increase in the amount of interest capitalized during the first half of fiscal
year 2021 compared to the prior year period. This decrease in interest expense
was partially offset by the addition of interest expense relating to the 2028
Notes, which were issued in the first quarter of fiscal year 2021, and higher
outstanding borrowings under our Revolving Credit Facility (which outstanding
borrowings were repaid during the first quarter of fiscal year 2021 with
proceeds from the issuance of the 2028 Notes in June 2020 ).
Income taxes
For the six months endedSeptember 30, 2020 , we recorded an income tax benefit of$6.4 million , resulting in an effective tax benefit rate of 56%. For the six months endedSeptember 30, 2019 , we recorded an income tax benefit of$4.8 million , resulting in an effective tax benefit rate of 53%. The effective tax benefit rates for the periods differed from theU.S. statutory rate due primarily to the benefit of federal and state R&D tax credits. 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. Our effective tax rate is highly influenced by the amount of our R&D tax credits. A small change in estimated annual pretax income (loss) can produce a significant variance in the annual effective tax rate given our expected amount of R&D tax credits. This variability provides an unreliable estimate of the annual effective tax rate. As a result, and in accordance with the authoritative guidance for accounting for income taxes in interim periods, we have computed our provision for income taxes for the six months endedSeptember 30, 2020 and 2019 by applying the actual effective tax rates to the loss for the six-month periods. 48 -------------------------------------------------------------------------------- Segment Results for the Six Months EndedSeptember 30, 2020 vs. Six Months EndedSeptember 30, 2019 Satellite services segment Revenues Six Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment product revenues $ - $ - $ - - % Segment service revenues 417.9 402.5 15.3 4 % Total segment revenues $ 417.9 $ 402.5$ 15.3 4 % Our satellite services segment revenues increased by$15.3 million due to an increase in service revenues. The increase in service revenues was primarily driven by the expansion of our fixed broadband services and higher ARPU when compared to the prior year period, partially offset by a decrease in our IFC services. Total subscribers atSeptember 30, 2020 were approximately 603,000 (excluding subscribers whose service would have ordinarily been terminated in the absence of the federalFCC Pledge and similar state programs we are currently participating in related to the COVID-19 pandemic) compared to 587,000 subscribers atSeptember 30, 2019 . The increase in ARPU reflected a higher mix of new and existing subscribers choosingViasat's premium highest speed plans. The in-flight service revenue decrease was driven primarily by a 21% decrease in the number of commercial aircraft using in-flight services through our IFC systems as of quarter end as a result of the COVID-19 pandemic. In addition, our first half of fiscal year 2021 in-flight service revenues continued to be impacted by reduced passenger air traffic, the number of inactive installed aircraft and lower capacity on active installed aircraft as a result of the COVID-19 pandemic. Segment operating profit Six Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment operating profit $ 9.6 $ 3.0$ 6.6 216 % Percentage of segment revenues 2 % 1 % The$6.6 million increase in our satellite services segment operating profit was driven primarily by lower selling and support costs and increased revenues with significant flow through resulting in improved margins, reflecting the strength of the low variable costs structure of our fixed broadband services business as the business continues to scale. This was partially offset by lower margins resulting from the negative impact of the COVID-19 pandemic on our in-flight services business and an increase in costs related to our investments in emerging global broadband businesses. Commercial networks segment Revenues Six Months Ended Dollar Percentage September 30, September 30, Increase Increase (In millions, except percentages) 2020 2019 (Decrease) (Decrease) Segment product revenues $ 121.9 $ 139.0$ (17.2 ) (12 )% Segment service revenues 24.2 28.0 (3.8 ) (14 )% Total segment revenues $ 146.0 $ 167.0$ (21.0 ) (13 )% Our commercial networks segment revenues decreased by$21.0 million , primarily due to a$17.2 million decrease in product revenues and a$3.8 million decrease in service revenues. The decrease in product revenues was primarily due to a decrease of$26.6 million in mobile broadband satellite communication systems products due to decreased IFC terminal deliveries resulting from the severe decline in global air traffic and resulting downturn in the commercial aviation market as a result of the COVID-19 pandemic, partially offset by an increase of$8.8 million in antenna systems products. The decrease in service revenues was primarily due to a$3.0 million decrease in mobile broadband satellite communication systems services. 49 --------------------------------------------------------------------------------
Segment operating loss
Six Months Ended Dollar Percentage
September 30, September 30, (Increase) (Increase)
(In millions, except percentages) 2020 2019 Decrease Decrease
Segment operating loss $ (96.8 ) $ (96.6 ) $ (0.1 ) - %
Percentage of segment revenues (66 )% (58 )%
Our commercial networks segment operating loss was relatively flat
year-over-year. The slight increase in operating loss was driven primarily by a
$9.3 million decrease in IR&D expenses (primarily related to next-generation
satellite payload technologies). The increase in operating loss was also due to
lower earnings contributions of $8.8 million , driven by decreased revenues and
lower margins related to our mobile broadband satellite communication systems
products.
Government systems segment
Revenues
Six Months Ended Dollar Percentage
September 30, September 30, Increase Increase
(In millions, except percentages) 2020 2019 (Decrease) (Decrease)
Segment product revenues $ 384.7 $ 431.4 $ (46.7 ) (11 )%
Segment service revenues 136.1 128.3 7.8 6 %
Total segment revenues $ 520.9 $ 559.7 $ (38.9 ) (7 )%
Our government systems segment revenues decreased by $38.9 million due to a
decrease of $46.7 million in product revenues, partially offset by an increase
of $7.8 million in service revenues. The product revenue decrease was primarily
driven by a $24.1 million decrease in government mobile broadband products and a
$20.2 million decrease in government satellite communication systems products.
Our government systems segment continued to show some impacts from the pandemic,
which has somewhat complicated product manufacturing and shipments, but new
government systems segment awards remained very strong through the first half of
the fiscal year. The service revenue increase was primarily due to a $4.6
million increase in government mobile broadband services and a $2.1 million
increase in tactical data link services.
Segment operating profit
Six Months Ended Dollar Percentage
September 30, September 30, Increase Increase
(In millions, except percentages) 2020 2019 (Decrease) (Decrease)
Segment operating profit $ 97.4 $ 108.0 $ (10.7 ) (10 )%
Percentage of segment revenues 19 % 19 %
The $10.7 million decrease in our government systems segment operating profit
was primarily due to lower earnings contributions of $13.7 million , primarily
due to a decrease in revenues from our government mobile broadband products and
government satellite communication systems products, and lower margins from our
government mobile broadband products and tactical data link products. This
decrease was partially offset by lower IR&D costs of $3.2 million .
50
--------------------------------------------------------------------------------Backlog
As reflected in the table below, our overall firm and funded backlog increased during the first six months of fiscal year 2021.
As of As of
September 30, 2020 March 31, 2020
(In millions)
Firm backlog
Satellite services segment $ 658.8 $ 611.3
Commercial networks segment 531.4 408.1
Government systems segment 1,114.5 851.3
Total $ 2,304.7 $ 1,870.7
Funded backlog
Satellite services segment $ 658.8 $ 611.3
Commercial networks segment 522.7 408.1
Government systems segment 1,017.0 858.7
Total $ 2,198.5 $ 1,878.1
The firm backlog does not include contract options. Of the $2.3 billion in firm
backlog, a little over half is expected to be delivered during the next twelve
months, with the balance delivered thereafter. We include in our backlog only
those orders for which we have accepted purchase orders, and not anticipated
purchase orders and requests. In our satellite services segment, our backlog
includes fixed broadband service revenues under our subscriber agreements, but
does not include future recurring IFC service revenues under our agreements with
commercial airlines. As of September 30, 2020 , we had our IFC systems installed
and in service on approximately 1,390 commercial aircraft, of which, due to
impacts of the COVID-19 pandemic, approximately 320 were inactive at quarter
end. While current airline traffic is still a fraction of the prior year
activity, our in-flight services improved modestly in the quarter as airline
customers began seeing more passengers return to the air. We expect the negative
impact on our IFC business from the pandemic to continue through the remainder
of fiscal year 2021 and potentially beyond due to the severe decline in global
air traffic and associated grounding of installed aircraft, but to lessen over
time with increases in passenger air traffic. We anticipate our IFC services
will be activated on approximately 750 additional commercial aircraft under
existing customer agreements with commercial airlines. However, the timing of
installation and entry into service of IFC systems on additional aircraft under
existing customer agreements may be delayed as a result of the impact of the
COVID-19 pandemic on the global airline industry. Accordingly, there can be no
assurance that all anticipated purchase orders and requests will be placed or
that anticipated IFC services will be activated.
Our total new awards exclude future revenue under recurring consumer commitment
arrangements and were approximately $730.6 million and $1,467.5 million for the
three and six months ended September 30, 2020 , respectively, compared to
approximately $692.3 million and $1,198.1 million for the three and six months
ended September 30, 2019 , 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 funding has 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, export credit agency financing and equity financing. AtSeptember 30, 2020 , we had$350.4 million in cash and 51
-------------------------------------------------------------------------------- cash equivalents,$416.5 million in working capital, and no outstanding borrowings and borrowing availability of$667.5 million under our Revolving Credit Facility. OnJuly 23, 2020 , we issued and sold an aggregate of 4,474,559 shares of our common stock at a purchase price of$39.11 per share to certain accredited investors in a private placement transaction exempt from registration under the Securities Act of 1933, as amended, resulting in net proceeds of approximately$174.7 million after deducting offering expenses. AtMarch 31, 2020 , we had$304.3 million in cash and cash equivalents,$441.1 million in working capital, and$390.0 million in principal amount of outstanding borrowings and borrowing availability of$292.7 million under our Revolving Credit Facility. We invest our cash in excess of current operating requirements in short-term, highly liquid bank money market accounts. Our future capital requirements will depend upon many factors, including the timing and amount of cash required for our satellite projects and any future broadband satellite projects we may engage in, expansion of our R&D 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 and amount of capital expenditures (e.g., payments under satellite construction and launch contracts and investments in ground infrastructure roll-out), investments in joint ventures, strategic partnering arrangements and 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 timing and amount of investments in IR&D activities (including with respect to next-generation satellite payload technologies) 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 underU.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 or to finance the construction and launch of any future satellites, acquisitions, strategic partnering arrangements, joint ventures or other business investment initiatives, we may obtain additional financing, which could consist of debt, convertible debt or equity financing from public and/or private credit and capital markets. InFebruary 2019 , we filed a universal shelf registration statement with theSEC for the future sale of an unlimited amount of common stock, preferred stock, debt securities, 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. To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, we have taken measures to mitigate the impact of COVID-19 on our business and financial position, including deferring certain capital expenditures, reducing discretionary expenditures and undertaking cost-reduction actions. Given our current cash position, outlook for funds generated from operations, borrowing availability under our Revolving Credit Facility of$667.5 million , cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity. Although we can give no assurances concerning our future liquidity, we believe that our current cash balances and net cash expected to be provided by operating activities along with availability under our Revolving Credit Facility will be sufficient to meet our anticipated operating requirements for at least the next 12 months. Cash flows Cash provided by operating activities for the first six months of fiscal year 2021 was$333.5 million compared to$183.3 million in the prior year period. This$150.2 million increase was primarily driven by a$133.6 million year-over-year decrease in cash used to fund net operating assets and our operating results (net loss adjusted for depreciation, amortization and other non-cash charges) which resulted in$16.6 million of higher cash provided by operating activities year-over-year. The decrease in cash used to fund net operating assets during the first six months of fiscal year 2021 when compared to the prior year period was primarily due to an increase in cash inflows year-over-year from combined billed and unbilled accounts receivable, net, attributable to the timing of contractual milestones for certain larger development programs in our government systems segment as well as revenue decreases in our in-flight services business in our satellite services segment and an increase in our collections in excess of revenues and deferred revenues 52 --------------------------------------------------------------------------------
included in accrued liabilities due to the timing of milestone billings for certain larger development projects in our government systems and commercial networks segments.
Cash used in investing activities for the first six months of fiscal year 2021 was$459.9 million compared to$362.7 million in the prior year period. This$97.2 million increase in cash used in investing activities year-over-year reflects an increase of$87.8 million in cash used for satellite construction. Cash provided by financing activities for the first six months of fiscal year 2021 was$171.9 million compared to$5.2 million for the prior year period. This$166.7 million increase in cash provided by financing activities year-over-year was primarily related to$174.7 million in net proceeds from a private placement of common stock inJuly 2020 (after deducting offering expenses).
Satellite-related activities
In connection with the development of any new generation satellite design, and the launch of any new satellite and the commencement of the related service, we expect to incur additional operating costs that negatively impact our financial results. For example, whenViaSat -2 was placed in service in the fourth quarter of fiscal year 2018, this resulted in additional operating costs in our satellite services segment during the ramp-up period prior to service launch and in the fiscal year following service launch. These increased operating costs included depreciation, amortization of capitalized software development, earth station connectivity, marketing and advertising costs, logistics, customer care and various support systems. In addition, interest expense increased during fiscal year 2019 as we no longer capitalized the interest expense relating to the debt incurred for the construction ofViaSat -2 and the related gateway and networking equipment once the satellite was in service. However, as the services we provide using the new satellite continue to scale, we expect to continue to expand the revenue base for our broadband services and gain operating cost efficiencies, which together we expect will yield incremental segment earnings contributions, partially offset by investments associated with our global business and emerging markets growth. However, there can be no assurance that we will be successful in significantly increasing revenues or achieving operating profit in our satellite services segment. We anticipate that we will incur a similar cycle of increased operating costs as we prepare for and launch commercial services on future satellites, including ourViaSat -3 constellation, followed by increases in revenue base and in scale. Our first twoViaSat -3 class satellites, which are expected to cover theAmericas and the EMEA region, respectively, entered the phase of full construction during the second half of fiscal year 2018. InJuly 2019 , we entered into an agreement with The Boeing Company for the construction and purchase of a thirdViaSat -3 class satellite and the integration of our payload technologies into the satellite. This satellite is expected to cover theAsia and Pacific region. We expect ourViaSat -3 constellation, once in service, to provide a substantial amount of capacity and to enable us to deliver affordable connectivity across most of the world. We are making good progress on ourViaSat -3 constellation despite COVID-19 related productivity challenges and are targeting late calendar year 2021 for the launch ofViaSat -3 (Americas ). We believe we have adequate sources of funding for theViaSat -3 class satellites, which include, but are not limited to, our cash on hand, borrowing capacity and the cash we expect to generate from operations over the next few years. Our total cash funding may be reduced through various third-party agreements, including potential joint service offerings and other strategic partnering arrangements. Our IR&D investments are expected to continue through fiscal year 2021 and beyond relating toViaSat -3 ground infrastructure and support of our government and commercial air mobility businesses. We expect to continue to invest in IR&D at a significant level as we continue our focus on leadership and innovation in satellite and space technologies. However, the level of investment in a given fiscal year will depend on a variety of factors, including the stage of development of our satellite projects, new market opportunities and our overall operating performance. In fiscal year 2021, capital expenditures are expected to increase when compared to fiscal year 2020, as we have a thirdViaSat -3 class satellite under construction, as well as increased ground network investments related to international expansion.
Revolving Credit Facility
As ofSeptember 30, 2020 , the Revolving Credit Facility provided a$700.0 million revolving line of credit (including up to$150.0 million of letters of credit), with a maturity date ofJanuary 18, 2024 . As ofSeptember 30, 2020 , we had no outstanding borrowings under the Revolving Credit Facility and$32.5 million outstanding under standby letters of credit, leaving borrowing availability under the Revolving Credit Facility as ofSeptember 30, 2020 of$667.5 million . Borrowings under the Revolving 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. The Revolving Credit Facility is required to be guaranteed by certain significant domestic subsidiaries of 53
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The Revolving Credit Facility contains financial covenants regarding a maximum total leverage ratio and a minimum interest coverage ratio. In addition, the Revolving 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.
Ex-Im Credit Facility
The Ex-Im Credit Facility originally provided a$362.4 million senior secured direct loan facility, which was fully drawn. Of the$362.4 million in principal amount of borrowings made under the Ex-Im Credit Facility,$321.2 million was used to finance up to 85% of the costs of construction, launch and insurance of theViaSat -2 satellite and related goods and services (including costs incurred on or afterSeptember 18, 2012 ), with the remaining$41.2 million used to finance the total exposure fees incurred under the Ex-Im Credit Facility (which included all previously accrued completion exposure fees). AtSeptember 30, 2020 , we had$108.1 million in principal amount of outstanding borrowings under the Ex-Im Credit Facility. Borrowings under the Ex-Im Credit Facility bear interest at a fixed rate of 2.38%, payable semi-annually in arrears. The effective interest rate on our outstanding borrowings under the Ex-Im Credit Facility, which takes into account timing and amount of borrowings and payments, exposure fees, debt issuance costs and other fees, is 4.54%. Borrowings under the Ex-Im Credit Facility are required to be repaid in 16 semi-annual principal installments, which commenced onApril 15, 2018 , with a maturity date ofOctober 15, 2025 . Pursuant to the terms of the Ex-Im Credit Facility, certain insurance proceeds related to theViaSat -2 satellite must be used to pay down outstanding borrowings under the Ex-Im Credit Facility upon receipt. During fiscal years 2019 and 2020, we received an aggregate of$188.0 million of insurance proceeds related to theViaSat -2 satellite, all of which were used to pay down outstanding borrowings under the Ex-Im Credit Facility upon receipt. The Ex-Im Credit Facility is guaranteed byViasat and is secured by first-priority liens on theViaSat -2 satellite and related assets as well as a pledge of the capital stock of the borrower under the facility. The Ex-Im Credit Facility contains financial covenants regardingViasat's maximum total leverage ratio and minimum interest coverage ratio. In addition, the Ex-Im 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. The borrowings under the Ex-Im Credit Facility are recorded as current portion of long-term debt and as other long-term debt, net of unamortized discount and debt issuance costs, in our condensed consolidated financial statements. The discount of$42.3 million (consisting of the initial$6.0 million pre-exposure fee,$35.3 million of completion exposure fees and other customary fees) and deferred financing cost associated with the issuance of the borrowings under the Ex-Im Credit Facility are amortized to interest expense on an effective interest rate basis over the weighted average term of the Ex-Im Credit Facility and in accordance with the related payment obligations.
Senior Notes
Senior Notes due 2028
InJune 2020 , we issued$400.0 million in principal amount of 2028 Notes in a private placement to institutional buyers. The 2028 Notes were issued at face value and are recorded as long-term debt, net of debt issuance costs, in our condensed consolidated financial statements. The 2028 Notes bear interest at the rate of 6.500% per year, payable semi-annually in cash in arrears, which interest payments will commence inJanuary 2021 . Debt issuance costs associated with the issuance of the 2028 Notes are amortized to interest expense on a straight-line basis over the term of the 2028 Notes, the results of which are not materially different from the effective interest rate basis. The 2028 Notes are required to be guaranteed on an unsecured senior basis by each of our existing and future subsidiaries that guarantees the Revolving Credit Facility. As ofSeptember 30, 2020 , none of our subsidiaries guaranteed the 2028 Notes. The 2028 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 2028 Notes are effectively junior in right of payment to our existing and future secured debt, including under the Revolving Credit Facility and the Ex-Im Credit Facility (collectively, our Credit Facilities) and the 2027 Notes (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 2028 Notes, and are senior in right of payment to all of our existing and future subordinated indebtedness. 54
-------------------------------------------------------------------------------- The indenture governing the 2028 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 our assets to, another person. Prior toJuly 15, 2023 , we may redeem up to 40% of the 2028 Notes at a redemption price of 106.500% 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 2028 Notes prior toJuly 15, 2023 , 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 2028 Notes and (ii) the excess, if any, of (a) the present value at such date of redemption of (1) the redemption price of such 2028 Notes onJuly 15, 2023 plus (2) all required interest payments due on such 2028 Notes throughJuly 15, 2023 (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 governing the 2028 Notes) plus 50 basis points, over (b) the then-outstanding principal amount of such 2028 Notes. The 2028 Notes may be redeemed, in whole or in part, at any time during the 12 months beginning onJuly 15, 2023 at a redemption price of 103.250%, during the 12 months beginning onJuly 15, 2024 at a redemption price of 101.625%, and at any time on or afterJuly 15, 2025 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 triggering event occurs (as defined in the indenture governing the 2028 Notes), each holder will have the right to require us to repurchase all or any part of such holder's 2028 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2028 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).
Senior Secured Notes due 2027
InMarch 2019 , we issued$600.0 million in principal amount of 2027 Notes in a private placement to institutional buyers. The 2027 Notes were issued at face value and are recorded as long-term debt, net of debt issuance costs, in our condensed consolidated financial statements. The 2027 Notes bear interest at the rate of 5.625% per year, payable semi-annually in cash in arrears, which interest payments commenced inOctober 2019 . Debt issuance costs associated with the issuance of the 2027 Notes are amortized to interest expense on a straight-line basis over the term of the 2027 Notes, the results of which are not materially different from the effective interest rate basis. The 2027 Notes are required to be guaranteed on a senior secured basis by each of our existing and future subsidiaries that guarantees the Revolving Credit Facility. As ofSeptember 30, 2020 , none of our subsidiaries guaranteed the 2027 Notes. The 2027 Notes are secured, equally and ratably with the Revolving Credit Facility and any future parity lien debt, by liens on substantially all of our assets. The 2027 Notes are our general senior secured obligations and rank equally in right of payment with all of our existing and future unsubordinated debt. The 2027 Notes are effectively senior to all of our existing and future unsecured debt (including our 5.625% Senior Notes due 2025 (the 2025 Notes) and the 2028 Notes) as well as to all of any permitted junior lien debt that may be incurred in the future, in each case to the extent of the value of the assets securing the 2027 Notes. The 2027 Notes are effectively subordinated to any obligations that are secured by liens on assets that do not constitute a part of the collateral securing the 2027 Notes, are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the 2027 Notes (including obligations of the borrower under the Ex-Im Credit Facility), and are senior in right of payment to all of our existing and future subordinated indebtedness. The indenture governing the 2027 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 our assets to, another person. 55 -------------------------------------------------------------------------------- Prior toApril 15, 2022 , we may redeem up to 40% of the 2027 Notes at a redemption price of 105.625% 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 2027 Notes prior toApril 15, 2022 , 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 2027 Notes and (ii) the excess, if any, of (a) the present value at such date of redemption of (1) the redemption price of such 2027 Notes onApril 15, 2022 plus (2) all required interest payments due on such 2027 Notes throughApril 15, 2022 (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 governing the 2027 Notes) plus 50 basis points, over (b) the then-outstanding principal amount of such 2027 Notes. The 2027 Notes may be redeemed, in whole or in part, at any time during the 12 months beginning onApril 15, 2022 at a redemption price of 102.813%, during the 12 months beginning onApril 15, 2023 at a redemption price of 101.406%, and at any time on or afterApril 15, 2024 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 triggering event occurs (as defined in the indenture governing the 2027 Notes), each holder will have the right to require us to repurchase all or any part of such holder's 2027 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2027 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).
Senior Notes due 2025
InSeptember 2017 , we issued$700.0 million in principal amount of 2025 Notes in a private placement to institutional buyers. The 2025 Notes were issued at face value and are recorded as long-term debt, net of debt issuance costs, in our condensed consolidated financial statements. The 2025 Notes bear interest at the rate of 5.625% per year, payable semi-annually in cash in arrears, which interest payments commenced inMarch 2018 . Debt issuance costs associated with the issuance of the 2025 Notes are amortized to interest expense on a straight-line basis over the term of the 2025 Notes, the results of which are not materially different from the effective interest rate basis. The 2025 Notes are required to be guaranteed on an unsecured senior basis by each of our existing and future subsidiaries that guarantees the Revolving Credit Facility. As ofSeptember 30, 2020 , none of our subsidiaries guaranteed the 2025 Notes. The 2025 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 2025 Notes are effectively junior in right of payment to our existing and future secured debt, including under our Credit Facilities and the 2027 Notes (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 2025 Notes, and are senior in right of payment to all of our existing and future subordinated indebtedness. The indenture governing the 2025 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 our assets to, another person. The 2025 Notes may be redeemed, in whole or in part, at any time during the 12 months beginning onSeptember 15, 2020 at a redemption price of 102.813%, during the 12 months beginning onSeptember 15, 2021 at a redemption price of 101.406%, and at any time on or afterSeptember 15, 2022 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 triggering event occurs (as defined in the indenture governing the 2025 Notes), each holder will have the right to require us to repurchase all or any part of such holder's 2025 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2025 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). 56 --------------------------------------------------------------------------------
Contractual Obligations
The following table sets forth a summary of our obligations atSeptember 30, 2020 : For the Remainder of Fiscal Year For the Fiscal Years Ending (In thousands, including interest where applicable) Total 2021 2022-2023 2024-2025 Thereafter Operating leases$ 470,781 $ 33,115 $ 128,602 $ 118,818 $ 190,246 Finance leases 72,784 9,559 24,225 24,000 15,000 2028 Notes 609,517 14,517 52,000 52,000 491,000 2027 Notes 836,250 16,875 67,500 67,500 684,375 2025 Notes 896,876 19,688 78,750 78,750 719,688 Revolving Credit Facility - - - - - Ex-Im Credit Facility 115,809 11,116 43,279 41,411 20,003 Satellite performance incentives 34,910 2,931 9,805 10,756 11,418 Purchase commitments including satellite-related agreements 1,622,599 660,586 858,283 76,083 27,647 Total$ 4,659,526 $ 768,387 $ 1,262,444 $ 469,318 $ 2,159,377 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 also enter into agreements and purchase commitments with suppliers for the construction, launch, and operation 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. Our condensed consolidated balance sheets included$143.4 million and$120.9 million of "other liabilities" as ofSeptember 30, 2020 andMarch 31, 2020 , respectively, which primarily consisted of the long-term portion of deferred revenues, the long-term portion of our satellite performance incentive obligations relating to theViaSat -1 andViaSat -2 satellites and our long-term warranty obligations. With the exception of the long-term portion of our satellite performance incentive obligations relating to theViaSat -1 andViaSat -2 satellites (which is included under "Satellite performance incentives"), 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 12 - Commitments to our consolidated financial statements included in our Annual Report on Form 10-K for the year endedMarch 31, 2020 for additional information regarding satellite performance incentive obligations relating to theViaSat -1 andViaSat -2 satellites. See Note 8 - Product Warranty 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
Recent Authoritative Guidance
For information regarding recently adopted and issued accounting pronouncements, see Note 1 - Basis of Presentation to our condensed consolidated financial statements.
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