Viasat
Annual Report 2015

Plain-text annual report

A LETTER TO SHAREHOLDERS from Mark Dankberg 1 DEAR SHAREHOLDERS, ViaSat’s transformation into a services-led company is well underway, and our results tell the story. In fiscal year 2015 we set new records for revenue and Adjusted EBITDA. Our satellite services segment is driving growing cash profitability and improving margin, accounting for more than a third of revenues and over half of Adjusted EBITDA in the fiscal year. Since fiscal year 2010 our revenues have more than doubled while Adjusted EBITDA has tripled, and since 2004 Adjusted EBITDA has grown by a compounded annual growth rate of better than 20%. Our growing profitability is attributable to the bandwidth economics performance of the ViaSat-1 system we launched in the last quarter of 2011. About 80% of our $500 million in fiscal 2015 satellite services revenue came from services delivered over ViaSat-1. Our network’s unprecedented bandwidth has enabled us to increase the speed of our Exede consumer internet service by a factor of 25. Our in-flight connectivity service, Exede In The Air, routinely delivers speeds over 15 Mbps to each passenger on JetBlue, faster than many terrestrial broadband connections. That 15 Mbps can be up to 50 to 100 times faster on a per-passenger basis than other in-flight Wi-Fi services. And that’s while connecting about four times as many passengers per flight. Our satellite services segment is driving growing cash profitability and improving margin, accounting for more than a third of revenues and over half of Adjusted EBITDA in the fiscal year. Financial and performance achievements like these show that satellite communications is undergoing a renaissance. We think the magnitude of change isn’t well understood by many, including consumers of satellite services, users, and even people in the industry itself. That’s because there are many different kinds of satellite communications companies. These companies proffer different strategies for creating and capturing economic value in relation to either other satellite services or terrestrial alternatives. 2015 Annual Report A satellite with single or double digit Gbps is simply not economically competitive with one with triple digits if the goal is to serve customers who want the most data for a given amount of money. There is a lot to consider—distinct market segments, multiple technologies, diverse distribution channels, and a number of economic, financial, and performance metrics that require thoughtful analysis. Satellites are rocket science, so there is real complexity involved. But most powerful strategies rest on simple truths. This letter offers some insight into how we think and some context for considering our results. First, the most fundamental purpose of communication satellites is totally changing. For over 40 years the satellite industry’s economic engine was broadcast, which meant efficiently transmitting the same information (programs) to as many people as possible at the same time. That linear TV model, while still prevalent, is being eroded by unicast on-demand (e.g., Over The Top) digital entertainment. Satellites have served data markets for decades, with broad geographic coverage to distant locations as the primary value proposition. That is, for remote data users (homes, businesses, ships, airplanes), providing any service at all was enough, let alone a competitive service. But now that there’s a big market for unicast data, satellites with more bandwidth and enough coverage are much more valuable than those with less bandwidth and more coverage. That is a big change and this dynamic creates tremendous new opportunities for innovative satellite communications companies. Second, the bandwidth, or capacity, of a satellite system is predominantly defined by the satellite itself. In the past—when most satellites had comparable bandwidth—many people became lulled into thinking that differences in system performance were primarily due to ground systems. But the past decade has seen orders of magnitude in growth in the capacity of the satellites themselves—which dwarfs the distinctions among ground systems. Broadcast satellites typically have 2 3 around 1 or 2 Gbps of bandwidth, enough to send a hundred or more high-definition TV channels. That might sound like a lot of video, but only in the context of linear TV. If you have hundreds of thousands of users watching different YouTube or Hulu or Netflix videos, that’s not nearly enough bandwidth. WildBlue-1, launched in 2006, has about 7 Gbps. ViaSat-1 has 140 Gbps. ViaSat-2 will have much more. Compared to other networks such as xDSL or wireless, we can create satellite technology to move lots of video-on-demand data cargo at higher effective speed and lower cost. An important factor relative to bandwidth economics that we have demonstrated is that satellites, if carefully designed, are very capital efficient: the investment required to get hundreds of Gbps is not markedly different from getting just a handful. However, once a satellite is designed and built there is nothing that can be done to turn a 1 Gbps satellite into even a 7 Gbps satellite, let alone a 100 Gbps satellite. This means that a satellite with single- or double-digit Gbps is simply not economically competitive with one with triple digits if the goal is to serve customers who want the most data for a given amount of money. And when it comes to high-speed internet, that is definitely what customers want. Third, bandwidth is the most important element of broadband internet service quality in a video-on-demand world. There are several key metrics for broadband quality: speed, bandwidth, latency, and price. Internet data transmission is transportation—moving data bits from place to place. The transportation analogy helps illustrate the relative value of different attributes. Imagine you have a factory in Asia and you want to transport goods to North America. A lot of goods. The tonnage of cargo you move is like bandwidth (measured in Gigabytes vs. tons). On the internet, video accounts for most of the tonnage. Consider two extremes for moving your goods. A huge cargo ship is very cost effective, but takes weeks to make the trip. Air freight has a shorter transit time, but at a much higher 2015 Annual Report unit cost. Then think of the rate at which cargo is unloaded (containers per day) at a terminal (port or airport) as speed of delivery. The first ship might take a while to arrive, but it carries thousands of tons. A regular stream of ships provides a very steady and extremely high rate (speed) of cargo flowing from the factory to the receiving port even when the transit time for each ship is long. It is this type of system that works well for delivering video—video is not sensitive to the transit time (latency) as long as there is a steady stream of bits. Speed (the rate of delivery) is a derived statistic—that is, the number of containers delivered at the destination per unit time. A customer does not perceive that transit time equals speed; rather, it’s the delivery rate (containers per day) that matters. And the delivery rate is determined by the cargo capacity—that is, the bandwidth of the system. So what you see in the transportation world is a race to build the biggest cargo ship—not the fastest. In the broadband world, fiber to the home and modern Hybrid Fiber/Coax (HFC) networks are a unique transportation vehicle because they have high bandwidth, high peak speed, and low latency (it’s like a huge cargo ship that flies). While even our satellites don’t outperform those networks from a pure transmission perspective, we do believe that, compared to other networks such as xDSL or wireless, we can create satellite technology to move lots of video-on-demand data cargo at higher effective speed and lower cost. When video is the most important use of internet bandwidth, that can be a compelling competitive advantage. Hundreds of thousands of subscribers have switched from terrestrial internet services with shorter latency, but slower speeds or less bandwidth, to Exede service. Fourth, focusing investment on providing the most bandwidth is the path to making satellite systems economically rewarding. Our analogy predicts that many users would prefer networks with more bandwidth and longer latency over systems with less bandwidth and shorter latency. That is just what we’ve found with ViaSat-1. Hundreds of thousands of subscribers have switched from terrestrial internet 4 5 services with shorter latency, but slower speeds or less bandwidth, to Exede service. One vivid illustration is seen on in-flight connectivity. The most common form of commercial in-flight Wi-Fi today is air-to-ground (ATG) wireless links. ATG has almost no latency. Yet ATG typically rates as a poor internet connection, while JetBlue Fly-Fi using ViaSat Exede In The Air is consistently ranked as the best in-flight Wi-Fi experience. Of course, a low latency system with enough bandwidth is better than a higher latency system with more than enough bandwidth. But providing enough bandwidth in the on-demand video era is an enormous challenge. Users prefer satellite when it means the difference between video or no video (such as with Exede in-flight Wi-Fi compared to ATG), or when it means the difference between low resolution video and high definition (for a home user on a Skype video call or watching videos on YouTube or Amazon Prime). Gigabits per second, delivered in the best geographic markets, at the lowest total capital cost: we believe this is a playing field where we excel and where we are creating real competitive advantage. There is plenty of evidence that prudent investments in bandwidth productivity can be economically rewarding, even in the presence of lower latency—but also lower bandwidth—competition. And importantly, when we don’t meet some customers’ expectations we usually find that it’s not because of our latency—it’s because our cargo ship still isn’t quite as big as their video appetite (that is, we need more Gigabits, not less latency). One obvious corollary is that deploying satellite systems with shorter latency but much less bandwidth in the best geographic markets would be much less attractive than building satellites with way more bandwidth in the best places, even if the latency is longer. Fifth, the technologies needed to pack hundreds, or thousands, of Gigabits per second through satellites don’t exist—you have to invent them. We believe an analogy to Moore’s law for digital chips is apt. Moore’s law 2015 Annual Report didn’t hold true because of a single technology. It’s been a whole series of innovations in chip architectures, automated design tools, analytical tools, semiconductor materials, lithography, packaging, measurement, and other technologies that have led to the steady gains in transistors per unit area. The same concept holds true for improving information throughput per unit mass and power in space. ViaSat has assembled a unique collection of system, payload, microwave, digital, antenna, networking, distribution, analytics, software, cloud, virtualization, fiber networking, and operational skills to enable the range of multi- disciplinary innovations needed to steadily improve the data throughput of communications satellites—in any type of orbit—from LEO to MEO to GEO or even higher. It’s a very broad, demanding, and challenging technical problem. And it’s pretty straightforward to measure what you’ve accomplished—the number of Gigabits per second, delivered in the best geographic markets, at the lowest total capital cost. We believe this is a playing field where we excel and where we are creating real competitive advantage. This is not the entire ViaSat competitive strategy. We are working on solving a number of important problems in areas like data network security and local wireless distribution, among others. But the previous five points serve as a framework for many of our strategic choices. We aim to invent the technologies needed to not only create highly competitive satellite systems, but to enable satellites to be a better choice than many terrestrial networks. To gain the Moore’s law effect, we have to drive down the learning curve of Gbps per kilogram and kilowatt in space. To drive down the learning curve we need to distribute large amounts of bandwidth to consumer, enterprise, and government customers around the world. None of our end-user customers are telling us they have enough bandwidth, and that fact defines our opportunity. If you are an investor, or a satellite user, we encourage you to test these principles for yourself. And if you are a creative, think-for-yourself type, please talk to us about joining our team! Sincerely, Mark Dankberg Chairman of the Board and Chief Executive Officer 6 7 FINANCIAL SUMMARY $345 $149 $163 $221 2012 2013 2014 2015 ADJUSTED EBITDA* dollars in millions FISCAL YEAR $1,373 $1,426 $1,413 $1,009 2012 2013 2014 2015 NEW CONTRACT AWARDS dollars in millions FISCAL YEAR $1,351 $1,383 $1,120 $864 2012 2013 2014 2015 REVENUES dollars in millions FISCAL YEAR *See page 67 for a reconciliation of Adjusted EBITDA to net income (loss) attributable to ViaSat, Inc. FINANCIAL PERFORMANCE 8 9 PERFORMANCE GRAPH The following graph shows the value of an investment of $100 in cash on April 2, 2010 in (1) ViaSat’s common stock, (2) the NASDAQ Telecommunications Index, (3) the NASDAQ Composite Index and (4) the S&P 600 SmallCap Index. The graph assumes that all dividends, if any, were reinvested. The stock price performance shown on the graph is based on historical data and should not be considered indicative of future performance. The information contained under this heading “Performance Graph” shall not be deemed to be “soliciting material,” or to be “filed” with the SEC, or subject to Regulation 14A or Regulation 14C or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference into any filing of ViaSat, except to the extent that ViaSat specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934. $225 $200 $175 $150 $125 $100 $75 $50 4/2 2010 7/2 2010 10/1 2010 12/31 2010 4/1 2011 7/1 2011 9/30 2011 12/30 2011 3/30 2012 6/29 2012 9/28 2012 12/28 2012 3/29 2013 6/28 2013 10/4 2013 1/3 2014 4/4 2014 7/4 2014 10/3 2014 1/2 2015 4/3 2015 VIASAT, INC. NASDAQ COMPOSITE NASDAQ TELECOM S&P 600 SMALLCAP Financial Performance Table of Contents Selected Financial Data ................................................................... 12 Management’s Discussion and Analysis of Financial Condition and Results of Operations .............................................. 13 Quantitative and Qualitative Disclosures about Market Risk ......... 30 Controls and Procedures ................................................................. 31 Report of Independent Registered Public Accounting Firm ........... 33 Consolidated Balance Sheets .......................................................... 34 Consolidated Statements of Operations and Comprehensive Income (Loss) ....................................................... 35 Consolidated Statements of Cash Flows ......................................... 36 Consolidated Statements of Equity ................................................. 37 Notes to the Consolidated Financial Statements ............................. 38 Valuation and Qualifying Accounts ................................................ 65 Market for Registrant’s Common Equity and Related Stockholder Matters ........................................................................ 66 10 11  SELECTED FINANCIAL DATA The following table provides our selected financial information for each of the fiscal years in the five-year period ended April 3, 2015. The data as of and for each of the fiscal years in the five-year period ended April 3, 2015 have been derived from our audited consolidated financial statements. You should consider the financial statement data provided below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes which are included elsewhere in this Annual Report. April 3, 2015 April 4, 2014 Fiscal Years Ended March 29, 2013 (In thousands, except per share data) March 30, 2012 April 1, 2011 $ 728,074 $ 654,461 664,417 $ 455,273 1,382,535 1,351,462 1,119,690 785,738 $ 565,724 519,483 444,431 270,841 46,670 17,966 83,144 (29,426) — 53,718 13,827 39,891 571,855 419,425 281,533 60,736 14,614 3,299 (37,903) — (34,604) (25,947) (8,657) 484,973 363,188 240,859 35,448 15,584 (20,362) (43,820) (26,501) (90,683) (50,054) (40,629) 542,064 $ 321,563 863,627 523,938 278,268 802,206 402,794 233,187 181,728 24,992 18,732 2,194 (8,247) — (6,053) (13,651) 7,598 389,945 160,623 164,265 28,711 19,409 39,253 (2,831) — 36,422 (2) 36,424 (472) 40,363 $ 789 (9,446) $ 543 (41,172) $ 102 7,496 $ 309 36,115 0.86 $ (0.21) $ (0.94) $ 0.18 $ 0.88 0.84 $ (0.21) $ (0.94) $ 0.17 $ 0.84 Consolidated Statements of Operations Data: Revenues: Product revenues ............................................ Service revenues ............................................ Total revenues .......................................................... Operating expenses: Cost of product revenues ............................... Cost of service revenues ................................ Selling, general and administrative ................ Independent research and development ......... Amortization of acquired intangible assets .... Income (loss) from operations ................................. Interest expense, net ................................................ Loss on extinguishment of debt ............................... Income (loss) before income taxes .......................... Provision for (benefit from) income taxes ............... Net income (loss) ..................................................... Less: Net (loss) income attributable to noncontrolling interest, net of tax ....................... Net income (loss) attributable to ViaSat, Inc. ......... $ Basic net income (loss) per share attributable to ViaSat, Inc. common stockholders ..................... $ Diluted net income (loss) per share attributable to ViaSat, Inc. common stockholders ..................... $ Shares used in computing basic net income (loss) per share .............................................................. Shares used in computing diluted net income (loss) per share .............................................................. 48,285 45,744 43,931 44,226 43,059 Consolidated Balance Sheet Data: Cash and cash equivalents ....................................... Working capital ....................................................... Total assets .............................................................. Senior notes, net ...................................................... Other long-term debt ............................................... Other liabilities ........................................................ Total ViaSat, Inc. stockholders’ equity ................... $ 58,347 $ 256,795 52,263 $ 280,489 105,738 $ 297,725 40,490 167,457 2,158,378 1,960,115 1,794,072 1,727,153 1,405,748 272,296 61,946 23,842 840,125 582,657 223,736 39,995 1,038,582 584,993 1,456 52,640 903,001 547,791 774 50,353 887,975 583,861 105,900 48,893 941,012 172,583 $ 327,110 Our fiscal year 2013 information presented reflects the repurchase and redemption of our former 8.875% Senior Notes due 2016 (2016 Notes) and the associated $26.5 million loss on extinguishment of debt. Refer to Note 5 to the consolidated financial statements for discussion of the repurchase and redemption of all of the 2016 Notes and loss on extinguishment of debt. Our fiscal year 2015 reflects the amounts realized under our settlement agreement with Space Systems/Loral (SS/L) and Loral Space & Communications, Inc. (Loral) (the Settlement Agreement) of $53.7 million, of which $33.0 million was recognized as product revenues, $18.7 million was recognized as a reduction to selling, general and administrative (SG&A) expenses in the Company’s satellite services segment, and $2.0 million was recognized as interest income in the consolidated financial statements. Refer to Note 12 to the consolidated financial statements for discussion of the amounts realized under the Settlement Agreement. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company Overview We are an innovator in broadband technologies and services, including satellite and wireless networking applications and secure networking systems, products and services. We have leveraged our success developing complex satellite communication systems and equipment for the U.S. government and select commercial customers to develop next-generation satellite broadband technologies and services for both fixed and mobile users. Our product, systems and service offerings are often linked through common underlying technologies, customer applications and market relationships. We believe that our portfolio of products and services, combined with our ability to effectively cross-deploy technologies between government and commercial segments and across different geographic markets, provides us with a strong foundation to sustain and enhance our leadership in advanced communications and networking technologies. ViaSat operates in three segments: satellite services, commercial networks and government systems. Satellite Services Our satellite services segment provides retail and wholesale satellite-based broadband services for our consumer, enterprise and mobile broadband customers primarily in the United States. Our Exede broadband services are designed to offer a high-quality broadband service choice to the millions of unserved and under-served consumers in the United States and to significantly expand the quality, capability and availability of high-speed broadband satellite services for U.S. consumers and enterprises. Our satellite services business also provides a platform for the provision of network management services to domestic and international satellite service providers. In May 2013, we entered into a satellite construction contract for ViaSat-2, our second high-capacity Ka-band satellite. The primary services offered by our satellite services segment are comprised of: • Retail and wholesale broadband satellite services offered to consumers and businesses under the Exede and WildBlue brands, which provide two-way satellite-based broadband internet access and Voice over Internet Protocol. As of April 3, 2015, we provided broadband satellite services to approximately 686,000 subscribers. • Mobile broadband services, which provide global network management and high-speed internet connectivity services for • customers using airborne, maritime and ground-mobile satellite systems. Enterprise broadband services, which include in-flight Wi-Fi (including our flagship Exede In The Air service), live on- line event streaming, oil and natural gas data gathering services and high definition satellite news gathering. On September 5, 2014, we entered into the Settlement Agreement with SS/L and Loral, pursuant to which SS/L and Loral are required to pay us a total of $108.7 million, inclusive of interest, over a two and a half year period from the date of settlement. In exchange, we dismissed both lawsuits against SS/L and Loral. The parties further agreed not to sue each other with respect to the patents and intellectual property that were the subject of the lawsuits and, for a period of two years, not to sue each other or each other’s customers for any intellectual property claims. We record payments under the Settlement Agreement as product revenues and as a reduction of SG&A expenses in our satellite services segment, and as interest income. For further information, see Note 12 to the consolidated financial statements. Our commercial networks segment develops and produces a variety of advanced end-to-end satellite and other wireless communication systems and ground networking equipment and products that address five key market segments: consumer, enterprise, in-flight, maritime and ground mobile applications. These communication systems, networking equipment and products are generally developed through a combination of customer and discretionary internal research and development funding, and are either sold to our commercial networks customers or utilized to provide services through our satellite services segment. Our satellite communication systems, ground networking equipment and products cater to a wide range of domestic and international commercial customers and include: • Fixed satellite networks, including next-generation satellite network infrastructure and ground terminals to access Ka- band broadband services on high-capacity satellites. • Mobile broadband satellite communication systems, designed for use in aircraft, high-speed trains and seagoing vessels. • Antenna systems for terrestrial and satellite applications, specializing in geospatial imagery, mobile satellite • communication, Ka-band gateways and other multi-band antennas. Satellite networking development programs, including specialized design and technology services covering all aspects of satellite communication system architecture and technology. 47,139 45,744 43,931 42,325 40,858 Commercial Networks 12 13 Government Systems Critical Accounting Policies and Estimates Our government systems segment develops and produces network-centric Internet Protocol (IP)-based fixed and mobile secure government communications systems, products, services and solutions, which are designed to enable the collection and dissemination of secure real-time digital information between command centers, communications nodes and air defense systems. Customers of our government systems segment include the U.S. Department of Defense, armed forces, public safety first-responders and remote government employees. The primary products and services of our government systems segment include: • Government mobile broadband service and product offerings, which provide military and government users with two-way mobile broadband connectivity via satellite in key regions of the world. • • Government satellite communication systems, which comprise an array of portable, mobile and fixed broadband modems, terminals, network access control systems and antenna systems using a range of satellite frequency bands for line-of-sight and beyond-line-of-sight Intelligence, Surveillance, and Reconnaissance and Command and Control missions, satellite networking services, network management systems for Wi-Fi and other internet access networks and global mobile broadband capability, and include products designed for manpacks, aircraft, unmanned aerial vehicles, seagoing vessels, ground mobile vehicles and fixed applications. Information security and assurance products and secure networking solutions, which provide advanced, high-speed IP- based “Type 1” and High Assurance Internet Protocol Encryption-compliant encryption solutions that enable military and government users to communicate information securely over networks, and that secure data stored on computers and storage devices. Tactical data links, including Multifunctional Information Distribution System (MIDS) terminals for military fighter jets and their successor, MIDS- Joint Tactical Radio System terminals, “disposable” weapon data links and portable small tactical terminals. • Sources of Revenues Our satellite services segment revenues are primarily derived from our domestic satellite broadband services business and from our worldwide managed network services. Our products in our commercial networks and government systems segments are provided primarily through three types of contracts: fixed-price, time-and-materials and cost-reimbursement contracts. Fixed-price contracts (which require us to provide products and services under a contract at a specified price) comprised approximately 90%, 92% and 94% of our total revenues for these segments for fiscal years 2015, 2014 and 2013, respectively. The remainder of our revenue in these segments for such periods was derived from cost-reimbursement contracts (under which we are reimbursed for all actual costs incurred in performing the contract to the extent such costs are within the contract ceiling and allowable under the terms of the contract, plus a fee or profit) and from time-and-materials contracts (which reimburse us for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials utilized in providing such products or services). Our ability to grow and maintain our revenues in our commercial networks and government systems segments has to date depended on our ability to identify and target markets where the customer places a high priority on the technology solution, and our ability to obtain additional sizable contract awards. Due to the nature of this process, it is difficult to predict the probability and timing of obtaining awards in these markets. Historically, a significant portion of our revenues has been derived from customer contracts that include the research and development of products. The research and development efforts are conducted in direct response to the customer’s specific requirements and, accordingly, expenditures related to such efforts are included in cost of sales when incurred and the related funding (which includes a profit component) is included in revenues. Revenues for our funded research and development from our customer contracts were approximately 23%, 31% and 26% of our total revenues during fiscal years 2015, 2014 and 2013, respectively. We also incur independent research and development (IR&D) expenses, which are not directly funded by a third party. IR&D expenses consist primarily of salaries and other personnel-related expenses, supplies, prototype materials, testing and certification related to research and development projects. IR&D expenses were approximately 3%, 5% and 3% of total revenues in fiscal years 2015, 2014 and 2013, respectively. As a government contractor, we are able to recover a portion of our IR&D expenses pursuant to our government contracts. Approximately 17%, 23% and 25% of our total revenues in fiscal years 2015, 2014 and 2013, respectively, were derived from international sales. Doing business internationally creates additional risks related to global political and economic conditions and other factors identified under the heading “Risk Factors” in our most recent Annual Report on Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We describe the specific risks for these critical accounting policies in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates routinely require adjustment. Revenue recognition A substantial portion of our revenues is derived from long-term contracts requiring development and delivery of complex equipment built to customer specifications. Sales related to these contracts are accounted for under the authoritative guidance for the percentage-of-completion method of accounting (Accounting Standards Codification (ASC) 605-35). Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract, or as products are shipped under the units-of-delivery method. The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs, and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. For contract claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. During fiscal years 2015, 2014 and 2013, we recorded losses of approximately $0.6 million, $3.3 million and $3.1 million, respectively, related to loss contracts. Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and future cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. We believe we have established appropriate systems and processes to enable us to reasonably estimate future costs on our programs through regular evaluations of contract costs, scheduling and technical matters by business unit personnel and management. Historically, in the aggregate, we have not experienced significant deviations in actual costs from estimated program costs, and when deviations that result in significant adjustments arise, we disclose the related impact in Management’s Discussion and Analysis of Financial Condition and Results of Operations. However, these estimates require significant management judgment and a significant change in future cost estimates on one or more programs could have a material effect on our results of operations. A one percent variance in our future cost estimates on open fixed-price contracts as of April 3, 2015 would change our income before income taxes by approximately $0.5 million. We also derive a substantial portion of our revenues from contracts and purchase orders where revenue is recorded on delivery of products or performance of services in accordance with the authoritative guidance for revenue recognition (ASC 605). Under this standard, we recognize revenue when an arrangement exists, prices are determinable, collectability is reasonably assured and the goods or services have been delivered. We also enter into certain leasing arrangements with customers and evaluate the contracts in accordance with the authoritative guidance for leases (ASC 840). Our accounting for equipment leases involves specific determinations under the authoritative guidance for leases, which often involve complex provisions and significant judgments. In accordance with the authoritative guidance for leases, we classify the transactions as sales type or operating leases based on: (1) review for transfers of ownership of the equipment to the lessee by the end of the lease term, (2) review of the lease terms to determine if it contains an option to purchase the leased equipment for a price which is sufficiently lower than the expected fair value of the equipment at the date of the option, (3) review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment, and (4) review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. Additionally, we consider the cancelability of the contract and any related uncertainty of collections or risk in recoverability of the lease investment at lease inception. Revenue from sales type leases is recognized at the inception of the lease or when the equipment has been delivered and installed at the customer site, if installation is required. Revenues from equipment rentals under operating leases are recognized as earned over the lease term, which is generally on a straight-line basis. 14 15 In accordance with the authoritative guidance for revenue recognition for multiple element arrangements, the Accounting Standards Update (ASU) 2009-13 (ASU 2009-13), Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements, which updates ASC 605-25, Revenue Recognition-Multiple element arrangements, of the Financial Accounting Standards Board (FASB) codification, for substantially all of the arrangements with multiple deliverables, we allocate revenue to each element based on a selling price hierarchy at the arrangement inception. The selling price for each element is based upon the following selling price hierarchy: vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE are available (a description as to how we determine VSOE, TPE and ESP is provided below). If a tangible hardware systems product includes software, we determine whether the tangible hardware systems product and the software work together to deliver the product’s essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. Revenue for each separate unit of accounting is recognized when the applicable revenue recognition criteria for each element have been met. To determine the selling price in multiple-element arrangements, we establish VSOE of the selling price using the price charged for a deliverable when sold separately. We also consider specific renewal rates offered to customers for software license updates, product support and hardware systems support, and other services. For nonsoftware multiple-element arrangements, TPE is established by evaluating similar and/or interchangeable competitor products or services in standalone arrangements with similarly situated customers and/or agreements. If we are unable to determine the selling price because VSOE or TPE doesn’t exist, we determine ESP for the purposes of allocating the arrangement by reviewing historical transactions, including transactions whereby the deliverable was sold on a standalone basis and considering several other external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, competition, the geographies in which we offer our products and services, the type of customer (i.e. distributor, value added reseller, government agency or direct end user, among others), volume commitments and the stage of the product lifecycle. The determination of ESP considers our pricing model and go-to-market strategy. As our or our competitors’ pricing and go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to our determination of VSOE, TPE and ESP. As a result, our future revenue recognition for multiple-element arrangements could differ materially from those in the current period. Collections in excess of revenues and deferred revenues represent cash collected from customers in advance of revenue recognition and are recorded in accrued liabilities for obligations within the next twelve months. Amounts for obligations extending beyond the twelve months are recorded within other liabilities in the consolidated financial statements. Warranty reserves We provide limited warranties on our products for periods of up to five years. We record a liability for our warranty obligations when we ship the products or they are included in long-term construction contracts based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as accrued liabilities and amounts expected to be incurred beyond twelve months are classified as other liabilities in the consolidated financial statements. For mature products, we estimate the warranty costs based on historical experience with the particular product. For newer products that do not have a history of warranty costs, we base our estimates on our experience with the technology involved and the types of failures that may occur. It is possible that our underlying assumptions will not reflect the actual experience, and in that case, we will make future adjustments to the recorded warranty obligation. Property, equipment and satellites Satellites and other property and equipment are recorded at cost or in the case of certain satellites and other property acquired, the fair value at the date of acquisition, net of accumulated depreciation. Capitalized satellite costs consist primarily of the costs of satellite construction and launch, including launch insurance and insurance during the period of in-orbit testing, the net present value of performance incentives expected to be payable to the satellite manufacturers (dependent on the continued satisfactory performance of the satellites), costs directly associated with the monitoring and support of satellite construction, and interest costs incurred during the period of satellite construction. We also construct gateway facilities, network operations systems and other assets to support our satellites, and those construction costs, including interest, are capitalized as incurred. At the time satellites are placed in service, we estimate the useful life of our satellites for depreciation purposes based upon an analysis of each satellite’s performance against the original manufacturer’s orbital design life, estimated fuel levels and related consumption rates, as well as historical satellite operating trends. We own two satellites: ViaSat-1 (our first high-capacity Ka-band spot-beam satellite, which was placed into service in January 2012) and WildBlue-1 (which was placed into service in March 2007). In May 2013, we entered into a satellite construction contract for ViaSat-2, our second high-capacity Ka-band satellite. In addition, we have an exclusive prepaid lifetime capital lease of Ka-band capacity over the contiguous United States on Telesat Canada’s Anik F2 satellite (which was placed into service in April 2005) and own related gateway and networking equipment on all of our satellites. Property and equipment also includes the customer premise equipment (CPE) units leased to subscribers under a retail leasing program as part of our satellite services segment. Impairment of long-lived and other long-term assets (property, equipment and satellites, and other assets, including goodwill) In accordance with the authoritative guidance for impairment or disposal of long-lived assets (ASC 360), we assess potential impairments to our long-lived assets, including property, equipment and satellites and other assets, when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. We periodically review the remaining estimated useful life of the satellite to determine if revisions to the estimated life are necessary. We recognize an impairment loss when the undiscounted cash flows expected to be generated by an asset (or group of assets) are less than the asset’s carrying value. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations. No material impairments were recorded by us for fiscal years 2015, 2014 and 2013. We account for our goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and the provisions of ASU 2011-08, Testing Goodwill for Impairment, which simplifies how we test goodwill for impairment. Current authoritative guidance allows us to first assess qualitative factors to determine whether it is necessary to perform the two-step 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, a second step is performed in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value, resulting in goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. 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. Based on our qualitative assessment performed during the fourth quarter of fiscal year 2015, we concluded that it was more likely than not that the estimated fair value of our reporting units exceeded their carrying value as of April 3, 2015 and, therefore, determined it was not necessary to perform the two-step goodwill impairment test. Income taxes and valuation allowance on deferred tax assets Management evaluates the realizability of our deferred tax assets and assesses the need for a valuation allowance on a quarterly basis 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 $12.8 million at April 4, 2014 to $15.6 million at April 3, 2015. The valuation allowance primarily relates to state net operating loss carryforwards and research and development credit carryforwards available to reduce state income taxes. Our analysis of the need for a valuation allowance on deferred tax assets considered the losses incurred during the fiscal years ended April 4, 2014 and March 29, 2013 and the income generated during the fiscal year ended April 3, 2015. In fiscal year 2013 we recorded a significant loss, a substantial portion of which resulted from an extinguishment of debt charge that was recorded upon the refinancing of our former 2016 Notes with the proceeds from the issuance of additional 6.875% Senior Notes due 2020 (2020 Notes) in October 2012, which provides a benefit to net income due to the lower interest rate of the 2020 Notes. The loss from fiscal year 2014 was less significant and a substantial portion of that loss related to legal expense focused on protecting and extending our technology advantages in litigation against SS/L and Loral, which was resolved in our favor during the second quarter of fiscal year 2015 (see Note 12 to the consolidated financial statements). In addition to these events, our evaluation considered other factors, including our contractual backlog, our history of positive earnings, current earnings trends assuming our satellite subscriber base continues to grow, taxable income adjusted for certain items, and forecasted income by jurisdiction. We also considered the lengthy period over which these net deferred tax assets can be realized, and our history of not having federal tax loss carryforwards expire unused. Based on our analysis of the need for a valuation allowance on deferred tax assets, we increased the valuation allowance by $2.7 million during fiscal year 2015 which related primarily to state net operating loss carryforwards and research and development credit carryforwards available to reduce state income taxes. Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). 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 16 17 technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance addresses the derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. We are subject to income taxes in the United States and numerous foreign jurisdictions. In the ordinary course of business there are calculations and transactions where the ultimate tax determination is uncertain. In addition, changes in tax laws and regulations as well as adverse judicial rulings could adversely affect the income tax provision. We believe we have adequately provided for income tax issues not yet resolved with federal, state and foreign tax authorities. However, if these provided amounts prove to be more than what is necessary, the reversal of the reserves would result in tax benefits being recognized in the period in which we determine that provision for the liabilities is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense would result. Results of Operations The following table presents, as a percentage of total revenues, income statement data for the periods indicated. Fiscal Years Ended Revenues: ................................................................................ Product revenues ........................................................... Service revenues ............................................................ Operating expenses: Cost of product revenues ............................................... Cost of service revenues ................................................ Selling, general and administrative ............................... Independent research and development ........................ Amortization of acquired intangible assets ................... Income (loss) from operations ................................................ Interest expense, net ...................................................... Loss on extinguishment of debt ..................................... Income (loss) before income taxes .......................................... Provision for (benefit from) income taxes .............................. Net income (loss) .................................................................... Net income (loss) attributable to ViaSat, Inc. ......................... April 3, 2015 100.0% 52.7 47.3 April 4, 2014 100.0% 58.1 41.9 March 29, 2013 100.0% 59.3 40.7 37.6 32.1 19.6 3.4 1.3 6.0 (2.1) — 3.9 1.0 2.9 2.9 42.3 31.0 20.8 4.6 1.1 0.2 (2.8) — (2.6) (2.0) (0.6) (0.7) 43.3 32.4 21.5 3.2 1.4 (1.8) (3.9) (2.4) (8.1) (4.5) (3.6) (3.7) Fiscal Year 2015 Compared to Fiscal Year 2014 Revenues (In millions, except percentages) Product revenues ........................................................ Service revenues ........................................................ Total revenues ............................................................ Fiscal Years Ended April 3, 2015 April 4, 2014 Dollar Increase (Decrease) Percentage Increase (Decrease) $ $ 728.1 $ 654.5 1,382.5 $ 785.7 $ 565.7 1,351.5 $ (57.7) 88.7 31.1 (7.3)% 15.7% 2.3% Our total revenues grew by $31.1 million as a result of an $88.7 million increase in service revenues, offset by a $57.7 million decrease in product revenues. The service revenue increase was comprised primarily of $75.6 million in our satellite services segment and $14.0 million in our government systems segment. The product revenue decrease was driven by a decrease of $47.5 million in our commercial networks segment and $43.7 million in our government systems segment, offset by an increase of $33.5 million in our satellite services segment (related to the Settlement Agreement). Cost of revenues (In millions, except percentages) Cost of product revenues ................................................. Cost of service revenues .................................................. Total cost of revenues ...................................................... Fiscal Years Ended April 4, 2014 571.9 $ 419.4 991.3 $ April 3, 2015 519.5 $ 444.4 963.9 $ $ $ Dollar Increase (Decrease) Percentage Increase (Decrease) (52.4) 25.0 (27.4) (9.2)% 6.0% (2.8)% Cost of revenues decreased by $27.4 million due to a $52.4 million cost of product revenues decrease, offset by a $25.0 million cost of service revenues increase. The cost of product revenues decrease was primarily due to decreased revenues, causing a $66.0 million decrease in cost of product revenues on a constant margin basis, prior to the effects of product revenues related to the implied license under the Settlement Agreement. This cost of product revenues decrease mainly related to our government satellite communications systems (driven by command and control situational awareness) in our government systems segment and fixed satellite networks (driven by consumer broadband products) in our commercial networks segment. The $66.0 million decrease in cost of product revenues on a constant margin basis was offset by lower margins from our commercial networks segment from fixed satellite networks (driven by consumer broadband products), mobile broadband satellite communication systems products and antenna systems products. The cost of service revenues increase was primarily due to increased service revenues, generating a $65.8 million increase in cost of service revenues on a constant margin basis. This increase mainly related to our Exede broadband services in our satellite services segment. However, as our Exede subscribers have continued to grow and related revenues scale, we have also experienced improved margins from our broadband services in our satellite services segment, which partially offset the cost of service growth. Additionally, the cost of service growth was partially offset by improved margins in our government systems segment related to our government satellite communication systems services (mainly due to global mobile broadband services) and the addition of our network management services for Wi-Fi and other internet access networks (relating to our newly acquired subsidiary, NetNearU Corp. (NetNearU)). Selling, general and administrative expenses (In millions, except percentages) Selling, general and administrative ................................. Fiscal Years Ended April 4, 2014 281.5 $ April 3, 2015 270.8 $ $ Dollar Increase (Decrease) Percentage Increase (Decrease) (10.7) (3.8)% The $10.7 million decrease in selling, general and administrative (SG&A) expenses was primarily attributable to the recognition of $18.7 million of payments made under the Settlement Agreement as a reduction to SG&A expenses and a decrease in legal expense as a result of the settlement of the litigation with SS/L and its former parent company Loral during the second quarter of fiscal year 2015. The decrease in SG&A expenses was partially offset by an increase in new business proposal costs of $9.1 million (mainly due to our government systems segment) and an increase in other support costs (spread across 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 (In millions, except percentages) Independent research and development ............................ Fiscal Years Ended April 4, 2014 April 3, 2015 Dollar Increase (Decrease) Percentage Increase (Decrease) $ 46.7 $ 60.7 $ (14.1) (23.2)% The $14.1 million decrease in IR&D expenses reflected decreased IR&D efforts in our government systems segment of $7.8 million (primarily due to a decrease in advancement of integrated government satellite communications platforms and development of next-generation dual band mobility solutions, offset by an increase in tactical data link development projects and information assurance projects) and a decrease in our commercial networks segment of $5.4 million (primarily due to a decrease in next-generation consumer broadband, offset by an increase in mobile broadband satellite communication systems). 18 19 Amortization of acquired intangible assets We amortize our acquired intangible assets from prior acquisitions over their estimated useful lives ranging from two to ten years. The increase in amortization of acquired intangible assets of $3.4 million in fiscal year 2015 compared to last fiscal year was primarily the result of our acquisition of NetNearU in June 2014. Expected amortization expense for acquired intangible assets for each of the following periods is as follows: Expected for fiscal year 2016 ............................................................ Expected for fiscal year 2017 ............................................................ Expected for fiscal year 2018 ............................................................ Expected for fiscal year 2019 ............................................................ Expected for fiscal year 2020 ............................................................ Thereafter .......................................................................................... Amortization (In thousands) 15,135 7,821 6,487 3,974 2,942 5,981 42,340 $ $ Interest income The $2.0 million increase in interest income in fiscal year 2015 compared to fiscal year 2014 was primarily due to the recognition of $2.0 million of payments made under the Settlement Agreement as interest income. Interest expense The decrease in interest expense year-over-year of $6.5 million was primarily due to an increase of $8.1 million in the amount of interest capitalized. This decrease was partially offset by increased interest expense on outstanding borrowings under our revolving credit facility (the Revolving Credit Facility) during fiscal year 2015 due primarily to higher outstanding balances compared to the prior year period. Capitalized interest expense during the fiscal years ended 2015 and 2014 related to the construction of ViaSat-2 and other assets. Provision for (benefit from) income taxes The effective income tax expense in fiscal year 2015 reflected the tax expense from the income before income taxes and the benefit from federal and state research tax credits. Fiscal year 2015 includes twelve months of federal research tax credit including three months from fiscal year 2014 and nine months from fiscal year 2015 as a result of the Tax Increase Prevention Act of 2014 enacted on December 19, 2014 which extended the research and development credit retroactively from January 1, 2014 to December 31, 2014. Fiscal year 2015 also included an expense related to the increase in valuation allowance related primarily to state net operating loss carryforwards and research and development credit carryforwards available to reduce state income taxes. The effective income tax benefit in fiscal year 2014 reflected the tax benefit from the loss before income taxes and the benefit from federal and state research tax credits. Due to the December 31, 2013 expiration of the federal research tax credit, fiscal year 2014 only included nine months of the federal research tax credit. Fiscal year 2014 also included a benefit related to the valuation allowance release related primarily to state net operating loss carryforwards as a result of the combination of the merger of ViaSat Communications, Inc. into ViaSat and changes in the apportioned state tax rates. Segment Results for Fiscal Year 2015 Compared to Fiscal Year 2014 Satellite services segment Revenues (In millions, except percentages) Segment product revenues ............................................... Segment service revenues ................................................ Total revenues .................................................................. Fiscal Years Ended April 4, 2014 April 3, 2015 Dollar Increase (Decrease) Percentage Increase (Decrease) $ $ 33.6 $ — $ 390.7 466.3 390.7 $ 499.9 $ 33.5 75.6 109.2 100.0% 19.4% 27.9% service as of the end of fiscal year 2015. The increase in product revenues was primarily due to the recognition of $33.0 million of payments under the Settlement Agreement as product revenue in our satellite services segment. Segment operating profit (loss) (In millions, except percentages) Segment operating profit (loss) ........................................ Percentage of segment revenues ....................................... $ April 3, 2015 Fiscal Years Ended April 4, 2014 (46.0) $ (11.8)% 62.4 $ 12.5% Dollar Increase (Decrease) Percentage Increase (Decrease) 108.4 235.6% The change from an operating loss to an operating profit for our satellite services segment was primarily due to higher earnings contributions of $77.7 million. Continued growth in the size of our Exede broadband services subscriber base resulted in increased service revenues and improved margins. In addition, our satellite services segment operating profit included $51.8 million from the Settlement Agreement, which resulted in increased product revenues and a decrease in SG&A expenses. Legal expense decreased as a result of the settlement of the litigation with SS/L and its former parent company Loral during the second quarter of fiscal year 2015. Additionally, selling costs decreased due to decreased sales and marketing support costs, reflecting a more established consumer broadband subscriber base. These decreases in SG&A expenses were partially offset by an increase in other support costs. Commercial networks segment Revenues (In millions, except percentages) Segment product revenues ............................................... Segment service revenues ................................................ Total revenues .................................................................. Fiscal Years Ended April 4, 2014 378.6 $ 16.9 395.5 $ April 3, 2015 331.1 $ 16.1 347.1 $ $ $ Dollar Increase (Decrease) Percentage Increase (Decrease) (47.5) (0.9) (48.4) (12.6)% (5.1)% (12.2)% Our commercial networks segment revenues decreased by $48.4 million, primarily due to the $47.5 million decrease in product revenues. Of this product revenue decrease, $68.7 million related to fixed satellite networks (driven primarily by our large scale Australian Ka-band infrastructure project as it moves closer to completion as well as consumer broadband products due to reduced revenues from terminal sales, partially offset by our next-generation Ka-band system contract in Canada). Our satellite networking development programs revenues also decreased $6.4 million. These decreases were partially offset by a $26.1 million increase in product revenues for our antenna systems products. Segment operating loss (In millions, except percentages) Segment operating loss ..................................................... Percentage of segment revenues ....................................... Fiscal Years Ended April 3, 2015 (33.6) $ (9.7)% April 4, 2014 (12.1) $ (3.1)% $ Dollar (Increase) Decrease Percentage (Increase) Decrease (21.5) (177.0)% The $21.5 million increase in operating loss for our commercial networks segment was primarily due to lower earnings contributions of $24.1 million from lower revenues due to fixed satellite networks (driven primarily by consumer broadband products), as well as lower margins resulting from a shift in revenue mix due to lower terminal sales in our fixed satellite networks (driven primarily by consumer broadband products). We also experienced lower margins in our mobile broadband satellite communication systems products and antenna systems and services. The increase in our segment operating loss also reflected higher support, new business proposal and selling costs of $2.9 million, offset by lower IR&D costs of $5.4 million. Government systems segment Revenues Our satellite services segment revenues grew by $109.2 million as a result of a $75.6 million increase in service revenues and a $33.5 million increase in product revenues. The increase in service revenues related primarily to retail and wholesale broadband services, and was primarily driven by an increase in the number of Exede broadband subscribers, as well as related higher average revenue per subscriber. Total broadband subscribers grew 7% from approximately 641,000 at April 4, 2014 to approximately 686,000 at April 3, 2015. The service revenue increase also reflected the expansion of our in-flight Wi-Fi service with over 330 aircraft in (In millions, except percentages) Segment product revenues ............................................... Segment service revenues ................................................ Fiscal Years Ended April 4, 2014 407.1 $ 158.1 April 3, 2015 363.4 $ 172.1 $ Dollar Increase (Decrease) Percentage Increase (Decrease) (43.7) 14.0 (10.7)% 8.8% 20 21 (In millions, except percentages) Total revenues .................................................................. Fiscal Years Ended April 4, 2014 565.2 $ April 3, 2015 535.5 $ $ Dollar Increase (Decrease) Percentage Increase (Decrease) (29.7) (5.3)% Our government systems segment revenues decreased by $29.7 million, due to a decrease of $43.7 million in product revenues, partially offset by a $14.0 million increase in service revenues. The decrease in product revenues was primarily due to revenue decreases of $83.7 million in government satellite communication systems (mainly attributable to command and control situational awareness) and a $5.7 million decrease in tactical satcom radio products (relating to our majority-owned subsidiary TrellisWare Technologies, Inc. (TrellisWare)). This decrease was partially offset by a $29.6 million increase in tactical data link products and $15.1 million increase in information assurance products. The increase in service revenues was primarily due to revenue increases of $23.2 million related to NetNearU, our newly acquired subsidiary, partially offset by a $4.7 million decrease related to government satellite communication systems services (mainly attributable to command and control situational awareness and global mobile broadband, offset by broadband networking services revenues for military customers), by a $2.9 million decrease in information assurance services and by a $1.3 million decrease in tactical data link services. Segment operating profit (In millions, except percentages) Segment operating profit .................................................. Percentage of segment revenues ....................................... Fiscal Years Ended April 4, 2014 April 3, 2015 $ 72.3 $ 13.5% 76.0 $ 13.5% Dollar Increase (Decrease) Percentage Increase (Decrease) (3.7) (4.9)% The $3.7 million decrease in our government systems segment operating profit reflected higher new business proposal, support and selling costs of $16.3 million, offset by lower IR&D costs of $7.8 million and $4.8 million of higher earnings contributions (mainly from improved margins in global mobile broadband and the addition of our network management services for Wi-Fi and other internet access networks (relating to our newly acquired subsidiary NetNearU)). Fiscal Year 2014 Compared to Fiscal Year 2013 Revenues (In millions, except percentages) Product revenues ........................................................ Service revenues ........................................................ Total revenues ............................................................ Fiscal Years Ended April 4, 2014 March 29, 2013 Dollar Increase (Decrease) Percentage Increase (Decrease) $ $ 785.7 $ 565.7 1,351.5 $ 664.4 $ 455.3 1,119.7 $ 121.3 110.5 231.8 18.3% 24.3% 20.7% Our total revenues grew by $231.8 million as a result of a $121.3 million increase in product revenues and a $110.5 million increase in service revenues. The product revenue increase was comprised primarily of $83.1 million in our commercial networks segment and $42.9 million in our government systems segment. The service revenue increase was comprised primarily of $118.4 million in our satellite services segment, offset by a decrease of $5.4 million in our government systems segment. Cost of revenues Fiscal Years Ended (In millions, except percentages) Cost of product revenues .............................................. Cost of service revenues ............................................... Total cost of revenues ................................................... April 4, 2014 571.9 $ 419.4 991.3 $ $ $ March 29, 2013 Dollar Increase (Decrease) Percentage Increase (Decrease) 485.0 $ 363.2 848.2 $ 86.9 56.2 143.1 17.9% 15.5% 16.9% Cost of revenues grew by $143.1 million due to a $86.9 million cost of product revenues increase and a $56.2 million cost of service revenues increase. The cost of product revenues increase was primarily due to increased revenues, causing an $88.6 million increase in cost of product revenues on a constant margin basis. This increase mainly related to growth in fixed satellite networks (driven by consumer broadband products), mobile broadband satellite communication systems, antenna systems products and satellite payload technology development programs in our commercial networks segment, but product sales also grew in our government systems segment from information assurance products, tactical data link products, and tactical satcom radio products (relating to our majority-owned subsidiary TrellisWare). The cost of service revenues increase was primarily due to increased service revenues, generating an $88.1 million increase in cost of service revenues on a constant margin basis. This increase mainly related to our Exede broadband services in our satellite services segment. Additionally, as our Exede subscribers have continued to grow and related revenues scale, we have also experienced improved margins from our broadband services in our satellite services segment. Selling, general and administrative expenses Fiscal Years Ended (In millions, except percentages) Selling, general and administrative .............................. April 4, 2014 281.5 $ $ March 29, 2013 Dollar Increase (Decrease) Percentage Increase (Decrease) 240.9 $ 40.7 16.9% The $40.7 million increase in SG&A expenses was primarily attributable to higher support costs of $33.7 million, higher selling costs of $4.4 million, and higher new business proposal costs of $2.6 million. Of the higher support costs, $23.1 million related to our satellite services segment (due to legal expense, approximately $18.4 million, focused on protecting and extending our technology advantages), $8.4 million to our commercial networks segment, and $2.2 million related to our government systems segment. 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 (In millions, except percentages) Independent research and development ........................ Fiscal Years Ended April 4, 2014 March 29, 2013 Dollar Increase (Decrease) Percentage Increase (Decrease) $ 60.7 $ 35.4 $ 25.3 71.3% The $25.3 million increase in IR&D expenses reflected increased IR&D efforts in our commercial networks segment of $17.7 million (primarily due to next-generation consumer broadband and next-generation satellite communication systems) and in our government systems segment of $7.8 million (primarily due to development of next-generation dual-band mobility solutions and tactical satcom radio products). Amortization of acquired intangible assets We amortize our acquired intangible assets from prior acquisitions over their estimated useful lives ranging from three to ten years. The decrease in amortization of acquired intangible assets of $1.0 million in fiscal year 2014 compared to last fiscal year was a result of acquired trade name intangibles in our satellite services segment becoming fully amortized over the preceding twelve months. Expected amortization expense for acquired intangible assets for each of the following periods is as follows: Expected for fiscal year 2015 ............................................ Expected for fiscal year 2016 ............................................ Expected for fiscal year 2017 ............................................ Expected for fiscal year 2018 ............................................ Expected for fiscal year 2019 ............................................ Thereafter ........................................................................... Amortization (In thousands) 14,668 11,024 4,669 3,616 1,142 278 35,397 $ $ Interest income The slight decrease in interest income in fiscal year 2014 compared to fiscal year 2013 was primarily due to lower average invested cash balances during fiscal year 2014. Interest expense The decrease in interest expense year-over-year of $6.1 million was primarily due to the refinancing, in October 2012, of our former $275.0 million in aggregate principal amount of 2016 Notes with the proceeds from the issuance of an additional $300.0 million in aggregate principal amount of 2020 Notes, which bear interest at a lower rate, coupled with an increase of $5.0 million in the amount of interest capitalized. Capitalized interest expense during fiscal year 2014 related to the commencement of construction of ViaSat-2 and other assets. This decrease was partially offset by interest expense on outstanding borrowings under the Credit Facility during fiscal year 2014. No borrowings were made under the Credit Facility during fiscal year 2013. 22 23 Benefit from income taxes The effective income tax benefit in fiscal year 2014 reflected the tax benefit from the loss before income taxes and the benefit from federal and state research tax credits. Due to the December 31, 2013 expiration of the federal research tax credit, fiscal year 2014 only included nine months of the federal research tax credit. Fiscal year 2014 also included a benefit related to the valuation allowance release related primarily to state net operating loss carryforwards as a result of the combination of the merger of ViaSat Communications, Inc. into ViaSat and changes in the apportioned state tax rates. The effective income tax benefit in fiscal year 2013 reflected the tax benefit from the loss before income taxes and the benefit from federal and state research tax credits. Fiscal year 2013 included fifteen months of federal research tax credit as a result of the January 2013 reinstatement of the credit retroactively from January 1, 2012. Segment Results for Fiscal Year 2014 Compared to Fiscal Year 2013 Satellite services segment Revenues Fiscal Years Ended (In millions, except percentages) Segment product revenues .......................................... Segment service revenues ........................................... Total revenues ............................................................. April 4, 2014 $ — $ 390.7 390.7 $ $ March 29, 2013 Dollar Increase (Decrease) Percentage Increase (Decrease) Government systems segment Revenues 4.7 $ 272.3 277.0 $ (4.7) 118.4 113.7 (99.1)% 43.5% 41.1% Our satellite services segment revenues grew by $113.7 million, primarily due to the increase in service revenues related to retail and wholesale broadband services. The revenue increase relating to our Exede and WildBlue broadband services was driven by a 25% increase in the number of subscribers, which grew from approximately 512,000 at March 29, 2013 to approximately 641,000 at April 4, 2014, as well as a change in the mix of retail and wholesale subscribers and related higher average revenue per subscriber. Segment operating loss (In millions, except percentages) Segment operating loss ................................................ Percentage of segment revenues .................................. Fiscal Years Ended April 4, 2014 (46.0) $ (11.8)% March 29, 2013 (79.2) $ (28.6)% $ Dollar (Increase) Decrease Percentage (Increase) Decrease 33.2 41.9% The $33.2 million reduction in operating loss for our satellite services segment was primarily due to $59.1 million in higher earnings contributions as our Exede broadband services subscriber base continued to grow, which resulted in increased revenues and improved margins, partially offset by $26.2 million in higher support and selling costs. These higher support and selling costs were mainly attributable to legal expense, approximately $18.4 million, focused on protecting and extending our technology advantages, as well as increased sales and marketing support costs as we continued to expand our consumer broadband subscriber base. Commercial networks segment Revenues Fiscal Years Ended (In millions, except percentages) Segment product revenues .......................................... Segment service revenues ........................................... Total revenues ............................................................. April 4, 2014 378.6 $ 16.9 395.5 $ $ $ March 29, 2013 Dollar Increase (Decrease) Percentage Increase (Decrease) 295.5 $ 19.5 314.9 $ 83.1 (2.5) 80.6 28.1% (13.0)% 25.6% Our commercial networks segment revenues increased by $80.6 million, primarily due to the $83.1 million increase in product revenues. Of this product revenue increase, $55.6 million related to fixed satellite networks (driven by consumer broadband products), $18.8 million to mobile broadband satellite communication systems, $8.6 million to antenna systems products, and $6.7 million to satellite payload technology development programs. These increases were partially offset by a decrease in revenues for our satellite networking development programs of $7.6 million. 24 Segment operating loss (In millions, except percentages) Segment operating loss ................................................ Percentage of segment revenues .................................. Fiscal Years Ended April 4, 2014 (12.1) $ (3.1)% March 29, 2013 (11.1) $ (3.5)% $ Dollar (Increase) Decrease Percentage (Increase) Decrease (1.1) (9.5)% The $1.1 million increase in operating loss for our commercial networks segment was primarily due to higher IR&D costs of $17.7 million and higher support and new business proposal costs of $7.3 million, partially offset by $23.9 million in higher earnings contributions from increased revenues in our consumer broadband products, mobile broadband satellite communication systems, and antenna systems products. (In millions, except percentages) Segment product revenues .......................................... Segment service revenues ........................................... Total revenues ............................................................. April 4, 2014 407.1 $ 158.1 565.2 $ $ $ Fiscal Years Ended March 29, 2013 Dollar Increase (Decrease) Percentage Increase (Decrease) 364.2 $ 163.5 527.8 $ 42.9 (5.4) 37.5 11.8% (3.3)% 7.1% Our government systems segment revenues grew by $37.5 million, due to an increase of $42.9 million in product revenues, partially offset by a $5.4 million decrease in service revenues. The increase in product revenues was primarily due to revenue increases of $24.9 million in information assurance products, $8.2 million in tactical data link products, $7.5 million in tactical satcom radio products, and $2.3 million in government satellite communication systems (mainly attributable to command and control situational awareness). Segment operating profit (In millions, except percentages) Segment operating profit ............................................ Percentage of segment revenues ................................. Fiscal Years Ended April 4, 2014 March 29, 2013 $ 76.0 $ 13.5% 85.5 $ 16.2% Dollar Increase (Decrease) Percentage Increase (Decrease) (9.4) (11.0)% The $9.4 million decrease in our government systems segment operating profit reflected higher IR&D costs of $7.8 million and higher selling, support and new business proposal costs of $7.2 million, offset by $5.6 million of higher earnings contributions (mainly from revenue growth in information assurance products and tactical data link products and services). Backlog As reflected in the table below, our overall firm backlog increased during fiscal year 2015. The increase in firm backlog was due to increases in both our government systems and satellite services segments. Our overall funded backlog decreased during fiscal year 2015. The decrease in funded backlog was due to a decrease in our commercial networks segment. Firm backlog Satellite Services segment ........................................... Commercial Networks segment .................................. Government Systems segment .................................... Total ................................................................... Funded backlog Satellite Services segment ........................................... Commercial Networks segment .................................. 25 As of April 3, 2015 As of April 4, 2014 (In millions) $ $ $ 216.2 317.3 382.1 915.6 216.2 317.3 $ $ $ 160.2 457.4 281.9 899.5 160.2 457.4 Government Systems segment .................................... Total ................................................................... $ As of April 3, 2015 As of April 4, 2014 (In millions) 307.9 841.4 $ 235.0 852.6 The firm backlog does not include contract options. Of the $915.6 million in firm backlog, approximately $512.0 million is expected to be delivered in fiscal year 2016, and the balance is expected to be delivered in fiscal year 2017 and thereafter. We include in our backlog only those orders for which we have accepted purchase orders. Our total new awards were approximately $1,413.4 million, $1,425.9 million and $1,373.4 million for fiscal years 2015, 2014 and 2013, respectively. Backlog is not necessarily indicative of future sales. A majority of our contracts can be terminated at the convenience of the customer. Orders are often made substantially in advance of delivery, and our contracts typically provide that orders may be terminated with limited or no penalties. In addition, purchase orders may present product specifications that would require us to complete additional product development. A failure to develop products meeting such specifications could lead to a termination of the related contract. Firm backlog amounts are comprised of funded and unfunded components. Funded backlog represents the sum of contract amounts for which funds have been specifically obligated by customers to contracts. Unfunded backlog represents future amounts that customers may obligate over the specified contract performance periods. Our customers allocate funds for expenditures on long-term contracts on a periodic basis. Our ability to realize revenues from contracts in backlog is dependent upon adequate funding for such contracts. Although we do not control the funding of our contracts, our experience indicates that actual contract fundings have ultimately been approximately equal to the aggregate amounts of the contracts. Liquidity and Capital Resources Overview We have financed our operations to date primarily with cash flows from operations, bank line of credit financing, debt financing, export credit agency financing and equity financing. At April 3, 2015, we had $52.3 million in cash and cash equivalents, $280.5 million in working capital, $210.0 million in outstanding borrowings under our Revolving Credit Facility and $20.5 million in outstanding borrowings under our direct loan facility with the Export-Import Bank of the United States for ViaSat-2 (the Ex-Im Credit Facility and, together with the Revolving Credit Facility, the Credit Facilities). At April 4, 2014, we had $58.3 million in cash and cash equivalents, $256.8 million in working capital and $105.0 million in outstanding borrowings under our Revolving Credit Facility. We invest our cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities. Our future capital requirements will depend upon many factors, including the timing and amount of cash required for our ViaSat-2 satellite project and any future broadband satellite projects we may engage in, expansion of our research and development and marketing efforts, and the nature and timing of orders. Additionally, we will continue to evaluate possible acquisitions of, or investments in complementary businesses, products and technologies which may require the use of cash or additional financing. The general cash needs of our satellite services, commercial networks and government systems segments can vary significantly. The cash needs of our satellite services segment tend to be driven by the timing of capital expenditure payments (e.g., payments under satellite construction and launch contracts) and of network expansion activities, as well as the quality of customer, type of contract and payment terms. In our commercial networks segment, cash needs tend to be driven primarily by the type and mix of contracts in backlog, the nature and quality of customers, the level of investments in IR&D activities and the payment terms of customers (including whether advance payments are made or customer financing is required). In our government systems segment, the primary factors determining cash needs tend to be the type and mix of contracts in backlog (e.g., product or service, development or production) and timing of payments (including restrictions on the timing of cash payments under U.S. government procurement regulations). Other factors affecting the cash needs of our commercial networks and government systems segments include contract duration and program performance. For example, if a program is performing well and meeting its contractual requirements, then its cash flow requirements are usually lower. To further enhance our liquidity position or to finance the construction and launch of any future satellites, acquisitions 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. In March 2013, we filed a universal shelf registration statement with the Securities and Exchange Commission (the SEC) for the future sale of an unlimited amount of debt securities, common stock, preferred stock, depositary shares, warrants and rights. The securities may be offered from time to time, separately or together, directly by us, by selling security holders, or through underwriters, dealers or agents at amounts, prices, interest rates and other terms to be determined at the time of the offering. We believe that our current cash balances and net cash expected to be provided by operating activities along with availability under our Credit Facilities will be sufficient to meet our anticipated operating requirements for at least the next twelve months. Cash flows Cash provided by operating activities for fiscal year 2015 was $349.5 million compared to cash provided by operating activities of $205.1 million for fiscal year 2014. This $144.4 million increase was primarily driven by our operating results (net income adjusted for depreciation, amortization and other non-cash charges) which generated $127.1 million of higher cash inflows, coupled with a $17.3 million year-over-year decrease in cash used to fund net operating assets needs. The decrease in cash used to fund net operating assets during fiscal year 2015 when compared to fiscal year 2014 was partially due to lower combined billed and unbilled accounts receivable, net, attributable to the timing of contractual milestones for our larger development programs in our commercial networks segment, as well as a decrease in cash used for inventory in our commercial networks segment. Cash used in investing activities for fiscal year 2015 was $476.6 million compared to cash used in investing activities in fiscal year 2014 of $354.5 million. The increase in cash used in investing activities reflected an increase of $84.7 million in cash used for the construction of our ViaSat-2 satellite and an increase of $55.0 million in cash used for acquisitions, offset by a $26.4 million decrease in capital expenditures for new CPE units and other general purpose equipment. Cash provided by financing activities for fiscal year 2015 was $121.5 million compared to cash provided by financing activities of $101.8 million for fiscal year 2014. This $19.6 million increase in cash provided by financing activities was primarily related to the $13.9 million of proceeds, net of discount, from borrowings under our Ex-Im Credit Facility. Both periods included $105.0 million in net proceeds from borrowings under our Revolving Credit Facility. Cash provided by financing activities for both periods included cash received from stock option exercises and employee stock purchase plan purchases, offset by cash used for the repurchase of common stock related to net share settlement of certain employee tax liabilities in connection with the vesting of restricted stock unit awards, and payment of debt issuance costs. Comparing fiscal year 2014 cash flow to fiscal year 2013, the $113.3 million increase in cash provided by operating activities was primarily driven by our operating results (net loss adjusted for depreciation, amortization and other non-cash charges) which generated $106.8 million of higher cash inflows, coupled with a $13.6 million year-over-year decrease in cash used to fund net operating assets needs. Cash provided by operating activities for fiscal year 2013 included a $7.1 million net cash inflow related to our refinancing of the 2016 Notes. The increase in cash used in investing activities reflected $119.2 million in cash used during fiscal year 2014 for the construction of our ViaSat-2 satellite, as well as a $23.7 million increase in capital expenditures year-over-year for other general purpose equipment. The $58.9 million increase in cash provided by financing activities was primarily related to the $105.0 million in net proceeds from borrowings under our Revolving Credit Facility, offset by debt issuance costs of $2.5 million during fiscal year 2014, compared to no borrowings in the prior year period. Cash provided by financing activities for fiscal year 2013 reflected the issuance of $300.0 million in aggregate principal amount of additional 2020 Notes, offset by the repurchase and redemption of all of our $275.0 million in aggregate principal amount of 2016 Notes and debt issuance costs of $8.1 million. Satellite service-related activities In May 2013, we entered into an agreement to purchase ViaSat-2, our second high-capacity Ka-band satellite, from The Boeing Company (Boeing) at a price of approximately $358.0 million, plus an additional amount for launch support services to be performed by Boeing. The projected total cost of the ViaSat-2 project, including the satellite, launch, insurance and related gateway infrastructure, through satellite launch is estimated to be between $600.0 million to $650.0 million, and will depend on the timing of the gateway infrastructure roll-out. Our total required cash funding may be reduced through various third party agreements, including potential joint service offerings and other strategic partnering arrangements. We believe we have adequate sources of funding for the project, which include our cash on hand, available borrowing capacity under our Ex-Im Credit Facility and the cash we expect to generate from operations over the next few years. We believe the upcoming launch and roll-out of the ViaSat-2 satellite and related ground infrastructure will impact our financial results in our satellite services segment in future periods, although we expect the relative impact to be less than we experienced in relation to the launch and roll-out of our ViaSat-1 satellite and related ground infrastructure. During the period from late fiscal year 2012 until early fiscal year 2015, we incurred higher operating costs in connection with the launch and roll-out of our ViaSat-1 satellite and related ground infrastructure and our Exede broadband services, as well as higher interest expense as we capitalized a lower amount of the interest expense on our outstanding debt in fiscal year 2014 as we were in the early stages of construction of ViaSat-2, our second high-capacity Ka-band satellite. These higher operating costs included costs associated with depreciation, gateway connectivity, subscriber acquisition costs, logistics, customer care and various support systems. These additional operating costs attributed to our Exede service commencement negatively impacted income from operations during that period. As the total number of subscribers of our Exede broadband services increased, the resultant increase in service revenues in our satellite services segment improved income (loss) from operations for our satellite services segment, despite the additional litigation expense we incurred to successfully protect our proprietary technology, which was resolved in our favor during the second quarter of fiscal year 2015. At the end of fiscal year 2015, we had approximately 686,000 subscribers, however there can be no 26 27 assurance that the number of subscribers of our Exede broadband services and service revenues in our satellite services segment will increase in any future period. issuance of the additional 2020 Notes is recorded as long-term debt in our consolidated financial statements and is being amortized as a reduction to interest expense on an effective interest rate basis over the term of those 2020 Notes. Revolving Credit Facility As of April 3, 2015, the Revolving Credit Facility provided a $500.0 million revolving line of credit (including up to $150.0 million of letters of credit) with a maturity date of November 26, 2018. Borrowings under the 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. At April 3, 2015, the weighted average effective interest rate on our outstanding borrowings under the Revolving Credit Facility was 2.18%. The Revolving Credit Facility is required to be guaranteed by certain significant domestic subsidiaries of ViaSat (as defined in the Revolving Credit Facility) and secured by substantially all of our assets. As of April 3, 2015, none of our subsidiaries guaranteed the Revolving Credit Facility. 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. At April 3, 2015, we had $210.0 million in principal amount of outstanding borrowings under the Revolving Credit Facility and $40.4 million outstanding under standby letters of credit, leaving borrowing availability under the Revolving Credit Facility as of April 3, 2015 of $249.6 million. Ex-Im Credit Facility On March 12, 2015, a foreign subsidiary of ViaSat entered into the Ex-Im Credit Facility with the Export-Import Bank of the United States. As of April 3, 2015, the Ex-Im Credit Facility provided a $524.9 million senior secured direct loan facility, $467.0 million of which can be used to finance up to 85% of the costs of construction, launch and insurance of the ViaSat-2 satellite and related goods and services (including costs incurred on or after September 18, 2012), with the remainder used to finance the total exposure fees incurred under the Ex-Im Credit Facility of up to $57.9 million (depending on the total amount of financing borrowed under the Ex-Im Credit Facility). Borrowings under the Ex-Im Credit Facility bear interest at a fixed rate of 2.38% and are required to be repaid in 17 approximately equal semi-annual installments, commencing approximately six months after the in-orbit acceptance date of the ViaSat-2 satellite (or, if earlier, on October 15, 2017), with a maturity date of October 15, 2025. Exposure fees of $6.0 million were incurred in connection with our initial borrowing under the Ex-Im Credit Facility, with the remaining exposure fees payable by the in-orbit acceptance date for ViaSat-2. Exposure fees under the Ex-Im Credit Facility are amortized using the effective interest rate method. The effective interest rate on our outstanding borrowings under the Ex-Im Credit Facility, which takes into account estimated timing and amount of borrowings, exposure fees, debt issuance costs and other fees, was approximately 4.43% as of April 3, 2015. The Ex-Im Credit Facility is guaranteed by ViaSat and is secured by first-priority liens on the ViaSat-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 regarding ViaSat’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. At April 3, 2015, we had $20.5 million in principal amount of outstanding borrowings under the Ex-Im Credit Facility, leaving $452.5 million available to finance ViaSat-2 related costs as incurred. Borrowings under the Ex-Im Credit Facility were issued with a discount of $7.3 million (comprising the initial $6.0 million exposure fee and other customary fees). The borrowings under the Ex-Im Credit Facility are recorded as long-term debt, net of discount, in our consolidated financial statements. The discount 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 term of the borrowings under the Ex-Im Credit Facility. Senior Notes Senior Notes due 2020 In February 2012, we issued $275.0 million in principal amount of 2020 Notes in a private placement to institutional buyers, which were exchanged in August 2012 for substantially identical 2020 Notes that had been registered with the SEC. These initial 2020 Notes were issued at face value and are recorded as long-term debt in our consolidated financial statements. On October 12, 2012, we issued an additional $300.0 million in principal amount of 2020 Notes in a private placement to institutional buyers at an issue price of 103.50% of the principal amount, which were exchanged in January 2013 for substantially identical 2020 Notes that had been registered with the SEC. The 2020 Notes are all treated as a single class. The 2020 Notes bear interest at the rate of 6.875% per year, payable semi-annually in cash in arrears, which interest payments commenced in June 2012. Debt issuance costs associated with the issuance of the 2020 Notes are amortized to interest expense on a straight-line basis over the term of the 2020 Notes, the results of which are not materially different from the effective interest rate basis. The $10.5 million premium we received in connection with the The 2020 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. During the second quarter of fiscal year 2014, the last remaining subsidiary guarantor, ViaSat Communications, Inc., was merged into ViaSat. Accordingly, as of April 3, 2015, none of our subsidiaries guaranteed the 2020 Notes. The 2020 Notes are our general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured unsubordinated debt. The 2020 Notes are effectively junior in right of payment to our existing and future secured debt, including under the Credit Facilities (to the extent of the value of the assets securing such debt), are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the 2020 Notes, and are senior in right of payment to all of our existing and future subordinated indebtedness. The indenture governing the 2020 Notes limits, among other things, our and our restricted subsidiaries’ ability to: incur, assume or guarantee additional debt; issue redeemable stock and preferred stock; pay dividends, make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase subordinated debt; make loans and investments; grant or incur liens; restrict dividends, loans or asset transfers from restricted subsidiaries; sell or otherwise dispose of assets; enter into transactions with affiliates; reduce our satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person. Prior to June 15, 2015, we may redeem up to 35% of the 2020 Notes at a redemption price of 106.875% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, from the net cash proceeds of specified equity offerings. We may also redeem the 2020 Notes prior to June 15, 2016, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and any accrued and unpaid interest, if any, thereon to the redemption date. The applicable premium is calculated as the greater of: (i) 1.0% of the principal amount of such 2020 Notes and (ii) the excess, if any, of (a) the present value at such date of redemption of (1) the redemption price of such 2020 Notes on June 15, 2016 plus (2) all required interest payments due on such 2020 Notes through June 15, 2016 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the treasury rate (as defined under the indenture) plus 50 basis points, over (b) the then- outstanding principal amount of such 2020 Notes. The 2020 Notes may be redeemed, in whole or in part, at any time during the twelve months beginning on June 15, 2016 at a redemption price of 103.438%, during the twelve months beginning on June 15, 2017 at a redemption price of 101.719%, and at any time on or after June 15, 2018 at a redemption price of 100%, in each case plus accrued and unpaid interest, if any, thereon to the redemption date. In the event a change of control occurs (as defined in the indenture), each holder will have the right to require us to repurchase all or any part of such holder’s 2020 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2020 Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). Discharge of Indenture and Loss on Extinguishment of Debt In connection with our issuance of the additional $300.0 million of 2020 Notes issued in October 2012, we repurchased and redeemed all of our $275.0 million in aggregate principal amount of 2016 Notes then outstanding through a cash tender offer and redemption, and the indenture governing the 2016 Notes was satisfied and discharged in accordance with its terms. As a result of the repurchase and redemption of the 2016 Notes, we recognized a $26.5 million loss on extinguishment of debt during fiscal year 2013, which was comprised of $19.8 million in cash payments (including tender offer consideration, consent payments, redemption premium and related professional fees), and $6.7 million in non-cash charges (including unamortized discount and unamortized debt issuance costs). Contractual Obligations The following table sets forth a summary of our obligations at April 3, 2015: For the Fiscal Years Ending (In thousands, including interest where applicable) Operating leases and satellite capacity agreements ........................ 2020 Notes ...................................................................................... Revolving Credit Facility(1) .......................................................... Ex-Im Credit Facility(2) ................................................................. Satellite performance incentives .................................................... Purchase commitments including satellite-related agreements ...... Other ............................................................................................... Total ............................................................................................... 2017- 2018 2019- 2020 $ 2016 Total 258,818 $ 75,980 $ 69,617 $ 53,503 $ 39,531 79,063 792,422 79,063 4,616 9,283 213,052 226,951 5,649 2,180 280 23,682 5,047 4,424 2,001 34,044 19,232 530,526 301,291 182,322 — 600 Thereafter 59,718 594,765 — 15,573 22,572 27,681 — $ 1,867,343 $ 423,999 $ 347,489 $ 375,546 $ 720,309 300 900 28 29 (1) To the extent that the interest rate is variable and ultimate amounts borrowed under the Revolving Credit Facility may fluctuate, amounts reflected represent estimated interest payments on our current outstanding balances based on the weighted average effective interest rate at April 3, 2015 until the maturity date in November 2018. (2) To the extent that the ultimate amounts borrowed under the Ex-Im Credit Facility may fluctuate, amounts reflected represent estimated interest and principal payments on our current outstanding balance until the maturity date in October 2025. The amounts listed in the table above exclude the completion exposure fee that will be payable under the Ex-Im Credit Agreement by the in-orbit acceptance date for ViaSat-2, the amount of which will be based on the total amount of financing borrowed under the Ex-Im Credit Facility; see “Liquidity and Capital Resources — Ex-Im Credit Facility.” We purchase components from a variety of suppliers and use several subcontractors and contract manufacturers to provide design and manufacturing services for our products. During the normal course of business, we enter into agreements with subcontractors, contract manufacturers and suppliers that either allow them to procure inventory based upon criteria defined by us or that establish the parameters defining our requirements. We have also entered into agreements with suppliers for the construction of our ViaSat-2 satellite, and operations of our satellites. In certain instances, these agreements allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to firm orders being placed. Consequently, only a portion of our reported purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments. See “Liquidity and Capital Resources — Satellite service-related activities.” Our consolidated balance sheets included $40.0 million and $48.9 million of “other liabilities” as of April 3, 2015 and April 4, 2014, respectively, which primarily consisted of the long-term portion of our satellite performance incentives obligation, our long- term warranty obligations, the long-term portion of deferred rent, long-term portion of deferred revenue and long-term deferred income taxes. With the exception of the long-term portion of our satellite performance incentives obligation, these remaining liabilities have been excluded from the above table as the timing and/or the amount of any cash payment is uncertain. See Note 8 to our consolidated financial statements for additional information regarding our income taxes and related tax positions and Note 13 to our consolidated financial statements for a discussion of our product warranties. Off-Balance Sheet Arrangements We had no material off-balance sheet arrangements at April 3, 2015 as defined in Regulation S-K Item 303(a)(4) other than as discussed under Contractual Obligations above or disclosed in the notes to our consolidated financial statements included in this report. Recent Authoritative Guidance For information regarding recently adopted and issued accounting pronouncements, see Note 1 to the consolidated financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, short-term and long-term obligations, including the Credit Facilities and the 2020 Notes, and foreign currency forward contracts. We consider investments in highly liquid instruments purchased with a remaining maturity of three months or less at the date of purchase to be cash equivalents. As of April 3, 2015, we had $210.0 million in principal amount of outstanding borrowings under our Revolving Credit Facility, $20.5 million in principal amount of outstanding borrowings under our Ex-Im Credit Facility, and $575.0 million in aggregate principal amount outstanding of the 2020 Notes, and we held no short-term investments. Our 2020 Notes and borrowings under our Ex-Im Credit Facility bear interest at a fixed rate and therefore our exposure to market risk for changes in interest rates relates primarily to borrowings under our Revolving Credit Facility, cash equivalents, short-term investments and short-term obligations. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. To minimize this risk, we maintain a significant portion of our cash balance in money market funds. In general, money market funds are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate. Our cash and cash equivalents earn interest at variable rates. Our interest income has been and may continue to be negatively impacted by low market interest rates. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. If the underlying weighted average interest rate on our cash and cash equivalents, assuming balances remain constant over a year, changed by 50 basis points, interest income would have increased or decreased by approximately $0.1 million and $0.1 million for the fiscal years ended April 3, 2015 and April 4, 2014, respectively. Because our investment policy restricts us to invest in conservative, interest-bearing investments and because our business strategy does not rely on generating material returns from our investment portfolio, we do not expect our market risk exposure on our investment portfolio to be material. As of April 3, 2015, we had $210.0 million in principal amount of outstanding borrowings under our Revolving Credit Facility. Our primary interest rate under the Revolving Credit Facility is the Eurodollar rate plus an applicable margin that is based on our total 30 leverage ratio. At April 3, 2015, the weighted average effective interest rate on our outstanding borrowings under the Revolving Credit Facility was 2.18%. Assuming the outstanding balance remained constant over a year, a 50 basis point increase in the interest rate would increase interest incurred, prior to effects of capitalized interest, by approximately $1.1 million over a twelve-month period. Foreign Exchange Risk We generally conduct our business in U.S. dollars. However, as our international business is conducted in a variety of foreign currencies, we are exposed to fluctuations in foreign currency exchange rates. Our objective in managing our exposure to foreign currency risk is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, from time to time, we may enter into foreign currency forward contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. As of April 3, 2015, there were no foreign currency forward contracts outstanding. Summarized Quarterly Data (Unaudited) The following financial information reflects all normal recurring adjustments which are, in the opinion of management, necessary for the fair statement of the results for the interim periods. Summarized quarterly data for fiscal years 2015 and 2014 are as follows: 2015 Total revenues ........................................................................... (Loss) income from operations ................................................. Net (loss) income ...................................................................... Net (loss) income attributable to ViaSat, Inc. ........................... Basic net (loss) income per share .............................................. Diluted net (loss) income per share ........................................... 2014 Total revenues ........................................................................... Income (loss) from operations ................................................... Net (loss) income ...................................................................... Net (loss) income attributable to ViaSat, Inc. ........................... Basic net (loss) income per share .............................................. Diluted net (loss) income per share ........................................... 1st Quarter 3rd Quarter 2nd Quarter (In thousands, except per share data) 4th Quarter $ $ $ $ $ 319,471 (1,169) (6,321) (5,944) (0.13) (0.13) $ 321,102 3,424 (1,487) (1,834) (0.04) (0.04) 358,758 46,456 23,992 23,947 0.51 0.50 353,881 (510) 2,281 1,897 0.04 0.04 $ $ 339,553 18,178 14,784 14,811 0.31 0.31 332,555 1,524 (5,960) (5,993) (0.13) (0.13) 364,753 19,679 7,436 7,549 0.16 0.16 343,924 (1,139) (3,491) (3,516) (0.08) (0.08) Summarized quarterly data reflects product revenue recognized with respect to amounts realized under the Settlement Agreement for the second quarter of fiscal year 2015 of $21.0 million, and approximately $6.0 million for each of the third and fourth quarter of fiscal year 2015. Summarized quarterly data reflects a reduction to SG&A expenses with respect to amounts realized under the Settlement Agreement for the second quarter of fiscal year 2015 of $18.7 million. Refer to Note 12 to the consolidated financial statements for discussion of the Settlement Agreement. Basic and diluted net income (loss) per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted net income (loss) per share. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the requirements of the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of April 3, 2015, the end of the period covered by this report. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of April 3, 2015. 31 Management’s Report on Internal Control Over Financial Reporting The company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the company’s management, including our Chief Executive Officer and Chief Financial Officer, the company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the company’s management concluded that its internal control over financial reporting was effective as of April 3, 2015. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The company’s independent registered public accounting firm has audited the effectiveness of the company’s internal control over financial reporting as of April 3, 2015, as stated in their report which appears on page F-1. Changes in Internal Control Over Financial Reporting We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. During the quarter ended April 3, 2015, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of ViaSat, Inc.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and comprehensive income (loss), cash flows and equity present fairly, in all material respects, the financial position of ViaSat, Inc. and its subsidiaries at April 3, 2015 and April 4, 2014, and the results of their operations and their cash flows for each of the three years in the period ended April 3, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule on page II-1 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 3, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. San Diego, California May 22, 2015 32 33 VIASAT, INC. CONSOLIDATED BALANCE SHEETS VIASAT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) ASSETS Current assets: Cash and cash equivalents ....................................................................................... Accounts receivable, net .......................................................................................... Inventories ............................................................................................................... Deferred income taxes ............................................................................................. Prepaid expenses and other current assets ............................................................... Total current assets .................................................................................................. Satellites, net ..................................................................................................................... Property and equipment, net .............................................................................................. Other acquired intangible assets, net ................................................................................. Goodwill ............................................................................................................................ Other assets ....................................................................................................................... Total assets .............................................................................................................. LIABILITIES AND EQUITY Current liabilities: Accounts payable ..................................................................................................... Accrued liabilities .................................................................................................... Total current liabilities ............................................................................................. Senior notes, net ................................................................................................................ Other long-term debt ......................................................................................................... Other liabilities .................................................................................................................. Total liabilities ......................................................................................................... Commitments and contingencies (Notes 11 and 12) Equity: ViaSat, Inc. stockholders’ equity As of April 3, 2015 As of April 4, 2014 (In thousands, except share data) $ $ 52,263 266,339 128,367 57,075 44,702 548,746 58,347 271,891 119,601 37,712 44,070 531,621 762,221 418,022 42,340 117,241 269,808 $ 2,158,378 630,836 421,666 35,397 83,627 256,968 $ 1,960,115 $ $ 76,931 191,326 268,257 98,852 175,974 274,826 582,657 223,736 39,995 1,114,645 583,861 105,900 48,893 1,013,480 Series A, convertible preferred stock, $.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding at April 3, 2015 and April 4, 2014, respectively ........... Common stock, $.0001 par value, 100,000,000 shares authorized; 47,697,413 and 46,229,259 shares outstanding at April 3, 2015 and April 4, 2014, respectively Paid-in capital .......................................................................................................... Retained earnings .................................................................................................... Common stock held in treasury, at cost, no shares and 1,190,572 shares at April 3, 2015 and April 4, 2014, respectively .................................................................................. Accumulated other comprehensive income ............................................................. Total ViaSat, Inc. stockholders’ equity ................................................................... Noncontrolling interest in subsidiary ................................................................................ Total equity .................................................................................................... Total liabilities and equity ....................................................................................... — — 5 786,467 251,963 5 776,452 211,600 — 147 1,038,582 5,151 1,043,733 $ 2,158,378 (49,358) 2,313 941,012 5,623 946,635 $ 1,960,115 See accompanying notes to the consolidated financial statements. Revenues: Product revenues ............................................................................................. $ Service revenues ............................................................................................. Total revenues ........................................................................................................... Operating expenses: Cost of product revenues ................................................................................. Cost of service revenues ................................................................................. Selling, general and administrative ................................................................. Independent research and development .......................................................... Amortization of acquired intangible assets ..................................................... Income (loss) from operations .................................................................................. Other income (expense): Interest income ................................................................................................ Interest expense ............................................................................................... Loss on extinguishment of debt ...................................................................... Income (loss) before income taxes ........................................................................... Provision for (benefit from) income taxes ................................................................ Net income (loss) ...................................................................................................... Less: Net (loss) income attributable to the noncontrolling interest, net of tax ......... Net income (loss) attributable to ViaSat, Inc. .......................................................... $ Net income (loss) per share attributable to ViaSat, Inc. common stockholders: April 3, 2015 Fiscal Years Ended April 4, 2014 (In thousands, except per share data) March 29, 2013 728,074 $ 654,461 1,382,535 785,738 $ 565,724 1,351,462 664,417 455,273 1,119,690 519,483 444,431 270,841 46,670 17,966 83,144 571,855 419,425 281,533 60,736 14,614 3,299 2,022 (31,448) — 53,718 13,827 39,891 (472) 40,363 $ 35 (37,938) — (34,604) (25,947) (8,657) 789 (9,446) $ 484,973 363,188 240,859 35,448 15,584 (20,362) 173 (43,993) (26,501) (90,683) (50,054) (40,629) 543 (41,172) Basic net income (loss) per share attributable to ViaSat, Inc. common stockholders ................................................................................................ $ Diluted net income (loss) per share attributable to ViaSat, Inc. common stockholders ................................................................................................ $ Shares used in computing basic net income (loss) per share .......................... Shares used in computing diluted net income (loss) per share ....................... 0.86 $ (0.21) $ (0.94) 0.84 $ (0.21) $ 47,139 48,285 45,744 45,744 (0.94) 43,931 43,931 Comprehensive income (loss): Net income (loss) ............................................................................................ $ Other comprehensive (loss) income, net of tax: Unrealized (loss) gain on hedging, net of tax ........................................ Foreign currency translation adjustments, net of tax ............................. Other comprehensive (loss) income, net of tax ............................................... Comprehensive income (loss) ......................................................................... Less: comprehensive (loss) income attributable to the noncontrolling interest, net of tax ....................................................................................... Comprehensive income (loss) attributable to ViaSat, Inc. .............................. $ 39,891 $ (8,657) $ (40,629) (25) (2,141) (2,166) 37,725 219 1,488 1,707 (6,950) (472) 38,197 $ 789 (7,739) $ 76 (909) (833) (41,462) 543 (42,005) See accompanying notes to the consolidated financial statements. 34 35 VIASAT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS acquisitions: Cash flows from operating activities: Net income (loss) ................................................................................................................................................. $ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ............................................................................................................................................... Amortization of intangible assets .............................................................................................................. Deferred income taxes ............................................................................................................................... Stock-based compensation expense ........................................................................................................... Loss on disposition of fixed assets ............................................................................................................ Non-cash loss on extinguishment of debt .................................................................................................. Repayment of discount on the 2016 Notes ................................................................................................ Receipt of premium on the Additional 2020 Notes ................................................................................... Other non-cash ........................................................................................................................................... Increase (decrease) in cash resulting from changes in operating assets and liabilities, net of effects of Accounts receivable ................................................................................................................................... Inventories ................................................................................................................................................. Other assets ................................................................................................................................................ Accounts payable ....................................................................................................................................... Accrued liabilities ...................................................................................................................................... Other liabilities .......................................................................................................................................... Net cash provided by operating activities ..................................................................................... Cash flows from investing activities: Purchase of property, equipment and satellites ...................................................................................................... Cash paid for patents, licenses and other assets ..................................................................................................... Payments related to acquisition of businesses, net of cash acquired ...................................................................... Net cash used in investing activities ............................................................................................. Cash flows from financing activities: Proceeds from revolving credit facility borrowings .................................................................................. Payments of revolving credit facility borrowings ..................................................................................... Proceeds from Ex-Im credit facility borrowings, net of discount ............................................................. Proceeds from issuance of 2020 Notes ...................................................................................................... Repayment of 2016 Notes ......................................................................................................................... Payment of debt issuance costs ................................................................................................................. Proceeds from issuance of common stock under equity plans .................................................................. Payments related to tax withholdings on restricted stock unit releases ..................................................... Other .......................................................................................................................................................... Net cash provided by financing activities ..................................................................................... Effect of exchange rate changes on cash ............................................................................................................................. Net decrease in cash and cash equivalents .......................................................................................................................... Cash and cash equivalents at beginning of fiscal year ........................................................................................................ Cash and cash equivalents at end of fiscal year .................................................................................................................. $ Supplemental information: Cash paid for interest (net of amounts capitalized) ................................................................................................ $ Cash paid (received) for income taxes, net ............................................................................................................ $ Non-cash investing and financing activities: Issuance of stock in satisfaction of certain accrued employee compensation liabilities ........................... $ Capital expenditures not paid for ............................................................................................................... $ April 3, 2015 39,891 179,542 41,891 12,420 39,353 31,997 — — — 4,778 3,745 (1,217) (16,328) 862 20,017 (7,435) 349,516 (366,492) (52,686) (57,376) (476,554) 350,000 (245,000) 13,914 — — (2,757) 23,202 (14,788) (3,107) 121,464 (510) (6,084) 58,347 52,263 29,645 494 10,194 6,584 Fiscal Years Ended April 4, 2014 (In thousands) (8,657) $ $ 159,089 25,975 (27,182) 33,639 33,752 — — — 6,153 (9,219) (11,422) (6,561) (7,404) 17,730 (753) 205,140 (307,625) (44,461) (2,400) (354,486) 295,000 (190,000) — — — (2,512) 18,617 (15,588) (3,690) 101,827 128 (47,391) 105,738 58,347 34,446 1,185 8,018 30,237 $ $ $ $ $ $ $ $ $ $ March 29, 2013 (40,629) 134,133 23,038 (50,728) 27,035 12,109 6,726 (3,418) 10,500 4,301 (57,124) 21,233 (15,471) 4,564 9,406 6,123 91,798 (176,295) (25,270) — (201,565) — — — 300,000 (271,582) (8,059) 31,001 (8,412) — 42,948 (26) (66,845) 172,583 105,738 32,004 931 7,060 747 See accompanying notes to the consolidated financial statements. VIASAT, INC. CONSOLIDATED STATEMENTS OF EQUITY ViaSat, Inc. Stockholders Common Stock Common Stock Held in Treasury Number of Shares Issued Amount Paid-in Capital Retained Earnings Number of Shares Amount Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest in Subsidiary Total Balance at March 30, 2012 ................. Exercise of stock options .................... Issuance of stock under 43,776,202 $ 1,178,573 4 $ 649,672 $ 262,218 — 25,915 — (In thousands, except share data) (727,674) $ (25,358) $ — — 157,636 — 197,149 612,233 Employee Stock Purchase Plan ............................................... Stock-based compensation .................. Shares issued in settlement of certain accrued employee compensation liabilities ................ RSU awards vesting ............................ Purchase of treasury shares pursuant to vesting of certain RSU agreements ............... activity .......................................... Net (loss) income ................................ Other comprehensive loss, net Other noncontrolling interest of tax ............................................. Balance at March 29, 2013 ................. Exercise of stock options .................... Issuance of stock under Employee Stock Purchase Plan ............................................... Stock-based compensation .................. Shares issued in settlement of certain accrued employee compensation liabilities ................ RSU awards vesting ............................ Purchase of treasury shares pursuant to vesting of certain RSU agreements ............... Net (loss) income ................................ Other comprehensive income, net of tax ....................................... Balance at April 4, 2014 ..................... Exercise of stock options .................... Issuance of stock under Employee Stock Purchase Plan ............................................... Stock-based compensation .................. Shares issued in settlement of certain accrued employee compensation liabilities ................ held in treasury ............................. Retirement of common stock RSU awards vesting, net of — — — — 45,921,793 $ 592,971 137,921 — 113,126 654,020 — — — 47,419,831 $ 724,800 152,268 — 180,526 (1,190,572) shares withheld for taxes which have been retired ................ Net income (loss) ................................ Other comprehensive loss, net of tax ............................................. Balance at April 3, 2015 ..................... 410,560 — — 47,697,413 $ — — 5,086 27,382 — — 7,060 — — — — — — — — — — — — — — — — — — — — — (41,172) — — — 4 $ 715,115 $ 221,046 — 1 12,910 (219,933) — — — (8,412) — — — (947,607) $ (33,770) $ — — — — 5,706 34,703 — — 8,018 — — — — — — — — — — — — — — — — — — (9,446) — — — 5 $ 776,452 $ 211,600 — 15,732 — (242,965) — — (15,588) — — (1,190,572) $ (49,358) $ — — — — 7,470 40,765 — — — — — — — — 10,194 (49,358) — — — 1,190,572 — 49,358 — — — — (14,788) 40,363 — — — 5 $ 786,467 $ 251,963 — — — — — — — $ — $ 1,439 $ — 4,218 $ — 892,193 25,915 — — — — — — — (833) 606 $ — — — — — — — 1,707 2,313 $ — — — — — — — (2,166) 147 $ — — — — — 73 543 — 4,834 $ — — — — — 5,086 27,382 7,060 — (8,412) 73 (40,629) (833) 907,835 12,911 5,706 34,703 8,018 — — 789 — 5,623 $ — (15,588) (8,657) 1,707 946,635 15,732 — — — — 7,470 40,765 10,194 — (14,788) — 39,891 (472) — (2,166) 5,151 $ 1,043,733 See accompanying notes to the consolidated financial statements. 36 37 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 1 — The Company and a Summary of Its Significant Accounting Policies Concentration of risk The Company ViaSat, Inc. (also referred to hereafter as the “Company” or “ViaSat”) is an innovator in broadband technologies and services, including satellite and wireless networking applications and secure networking systems, products and services. Principles of consolidation The Company’s consolidated financial statements include the assets, liabilities and results of operations of ViaSat, its wholly owned subsidiaries and TrellisWare Technologies, Inc. (TrellisWare), a majority-owned subsidiary. All significant intercompany amounts have been eliminated. For fiscal year 2015 and prior periods, the Company’s fiscal year ended on the Friday closest to March 31, resulting in a 52 or 53 week year approximately every four to five years as a result of the shift in fiscal calendar. For example, references to fiscal year 2015 refer to the fiscal year ended April 3, 2015 and the Company’s quarters for fiscal year 2015 ended on July 4, 2014, October 3, 2014, January 2, 2015 and April 3, 2015. Fiscal year 2014 was a 53 week year, compared with a 52 week year in fiscal years 2015 and 2013. The Company does not believe that the extra week resulted in any material impact on its financial results. On May 4, 2015, the Company’s Board of Directors approved a change in the Company’s fiscal year from a 52 or 53 week fiscal year ending on the Friday closest to March 31 to a fiscal year ending on March 31 of each year, effective with the fiscal year commencing April 4, 2015. Beginning April 4, 2015, the Company’s fiscal quarters will end on June 30, September 30, December 31, and March 31 of each year. Certain prior period amounts have been reclassified to conform to the current period presentation. During the first quarter of fiscal year 2015, the Company completed the acquisition of NetNearU Corp. (NetNearU), a privately held Delaware corporation (see Note 9). During the first quarter of fiscal year 2014, the Company completed the acquisition of LonoCloud, Inc. (LonoCloud), an early-stage privately held company. The LonoCloud purchase price of approximately $2.4 million was primarily allocated to acquired technology intangible assets. These acquisitions were accounted for as purchases and, accordingly, the consolidated financial statements include the operating results of NetNearU and LonoCloud from the dates of acquisition. Management estimates and assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates. Significant estimates made by management include revenue recognition, stock-based compensation, self-insurance reserves, allowance for doubtful accounts, warranty accruals, valuation of goodwill and other intangible assets, patents, orbital slots and other licenses, software development, property, equipment and satellites, long-lived assets, derivatives, contingencies and income taxes including the valuation allowance on deferred tax assets. Cash equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. Accounts receivable, unbilled accounts receivable and allowance for doubtful accounts The Company records receivables at net realizable value including an allowance for estimated uncollectible accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. Amounts determined to be uncollectible are charged or written off against the reserve. Historically, the Company’s allowance for doubtful accounts has been minimal primarily because a significant portion of its sales has been to the U.S. government or with respect to its satellite services commercial business, the Company bills and collects in advance. Unbilled accounts receivables consist of costs and fees earned and billable on contract completion or other specified events. Unbilled accounts receivables are generally expected to be billed and collected within one year. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents and accounts receivable which are generally not collateralized. The Company limits its exposure to credit loss by placing its cash equivalents with high credit quality financial institutions and investing in high quality short-term debt instruments. The Company establishes customer credit policies related to its accounts receivable based on historical collection experiences within the various markets in which the Company operates, historical past due amounts and any specific information that the Company becomes aware of such as bankruptcy or liquidity issues of customers. Revenues from the U.S. government as an individual customer comprised approximately 22.8%, 21.2% and 24.1% of total revenues for fiscal years 2015, 2014 and 2013, respectively. Billed accounts receivable to the U.S. government as of April 3, 2015 and April 4, 2014 were approximately 30.6% and 22.3%, respectively, of total billed receivables. In addition, none of the Company’s commercial customers comprised 10.0% or more of total revenues for fiscal years 2015, 2014 and 2013. The Company’s five largest contracts generated approximately 21.1%, 26.4% and 24.0% of the Company’s total revenues for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013, respectively. The Company relies on a limited number of contract manufacturers to produce its products. Inventory Inventory is valued at the lower of cost or market, cost being determined by the weighted average cost method. Property, equipment and satellites Satellites and other property and equipment are recorded at cost or, in the case of certain satellites and other property acquired, the fair value at the date of acquisition, net of accumulated depreciation. Capitalized satellite costs consist primarily of the costs of satellite construction and launch, including launch insurance and insurance during the period of in-orbit testing, the net present value of performance incentives expected to be payable to satellite manufacturers (dependent on the continued satisfactory performance of the satellites), costs directly associated with the monitoring and support of satellite construction, and interest costs incurred during the period of satellite construction. The Company also constructs gateway facilities, network operations systems and other assets to support its satellites, and those construction costs, including interest, are capitalized as incurred. At the time satellites are placed in service, the Company estimates the useful life of its satellites for depreciation purposes based upon an analysis of each satellite’s performance against the original manufacturer’s orbital design life, estimated fuel levels and related consumption rates, as well as historical satellite operating trends. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets ranging from two to twenty-four years. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of the lease term or the life of the improvement. Costs incurred for additions to property, equipment and satellites, together with major renewals and betterments, are capitalized and depreciated over the remaining life of the underlying asset. Costs incurred for maintenance, repairs and minor renewals and betterments are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in operations, which for the periods presented, primarily related to losses incurred for unreturned customer premise equipment (CPE). Interest expense is capitalized on the carrying value of assets under construction, in accordance with the authoritative guidance for the capitalization of interest (Accounting Standards Codification (ASC) 835-20). With respect to assets under construction, including the ViaSat-2 satellite which commenced construction during the first quarter of fiscal year 2014, the Company capitalized $16.2 million, $8.1 million, and $3.1 million of interest expense during the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013, respectively. The Company owns two satellites: ViaSat-1 (its first high-capacity Ka-band spot-beam satellite, which was placed into service in January 2012) and WildBlue-1 (which was placed into service in March 2007). During the first quarter of fiscal year 2014, the Company entered into a satellite construction contract for ViaSat-2, its second high-capacity Ka-band satellite. In addition, the Company has an exclusive prepaid lifetime capital lease of Ka-band capacity over the contiguous United States on Telesat Canada’s Anik F2 satellite (which was placed into service in April 2005) and owns related gateway and networking equipment for all of its satellites. The Company periodically reviews the remaining estimated useful life of its satellites to determine if revisions to estimated lives are necessary. The Company procures indoor and outdoor CPE units leased to subscribers under a retail leasing program as part of the Company’s satellite services segment, which are reflected in investing activities and property and equipment in the accompanying consolidated financial statements. The Company depreciates the satellites, gateway and networking equipment, CPE units and related installation costs over their estimated useful lives. The total cost and accumulated depreciation of CPE units included in property and equipment, net, as of April 3, 2015 were $250.3 million and $107.8 million, respectively. The total cost and 38 39 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) accumulated depreciation of CPE units included in property and equipment, net, as of April 4, 2014 were $221.0 million and $79.8 million, respectively. Occasionally, the Company may enter into capital lease arrangements for various machinery, equipment, computer-related equipment, software, furniture or fixtures. The Company records amortization of assets leased under capital lease arrangements within depreciation expense. Goodwill and intangible assets The authoritative guidance for business combinations (ASC 805) requires that all business combinations be accounted for using the purchase method. The authoritative guidance for business combinations also specifies criteria for recognizing and reporting intangible assets apart from goodwill; however, acquired workforce must be recognized and reported in goodwill. The authoritative guidance for goodwill and other intangible assets (ASC 350) requires that intangible assets with an indefinite life should not be amortized until their life is determined to be finite. All other intangible assets must be amortized over their useful life. The authoritative guidance for goodwill and other intangible assets prohibits the amortization of goodwill and indefinite-lived intangible assets, but instead requires these assets to be tested for impairment at least annually and more frequently upon the occurrence of specified events. In addition, all goodwill must be assigned to reporting units for purposes of impairment testing. Patents, orbital slots and other licenses The Company capitalizes the costs of obtaining or acquiring patents, orbital slots and other licenses. Amortization of intangible assets that have finite lives is provided for by the straight-line method over the shorter of the legal or estimated economic life. Total capitalized costs of $3.2 million related to patents were included in other assets as of April 3, 2015 and April 4, 2014. The Company had capitalized costs of $15.1 million and $13.5 million related to acquiring and obtaining orbital slots and other licenses included in other assets as of April 3, 2015 and April 4, 2014, respectively. Accumulated amortization related to these assets was $1.4 million and $1.0 million as of April 3, 2015 and April 4, 2014, respectively. Amortization expense related to these assets was an insignificant amount for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013. If a patent, orbital slot or orbital license is rejected, abandoned or otherwise invalidated, the unamortized cost is expensed in that period. During fiscal years 2015, 2014 and 2013, the Company did not write off any significant costs due to abandonment or impairment. Debt issuance costs Debt issuance costs are amortized and recognized as interest expense using the effective interest rate method, or, when the results are not materially different, on a straight-line basis over the expected term of the related debt. During fiscal years 2015, 2014 and 2013, the Company capitalized approximately $3.5 million, $2.5 million and $8.1 million, respectively, of debt issuance costs. Unamortized debt issuance costs related to extinguished debt are expensed at the time the debt is extinguished and recorded in loss on extinguishment of debt in the consolidated statements of operations and comprehensive income (loss). Other unamortized debt issuance costs are recorded in prepaid expenses and other current assets and in other long-term assets in the consolidated balance sheets, depending on the amounts expected to be amortized to interest expense within the next twelve months. Software development Costs of developing software for sale are charged to research and development expense when incurred, until technological feasibility has been established. Software development costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of unamortized cost or net realizable value. Once the product is available for general release, the software development costs are amortized based on the ratio of current to future revenue for each product with an annual minimum equal to straight-line amortization over the remaining estimated economic life of the product, generally within five years. Capitalized costs, net, of $119.9 million and $91.0 million related to software developed for resale were included in other assets as of April 3, 2015 and April 4, 2014, respectively. The Company capitalized $52.4 million and $41.5 million of costs related to software developed for resale for fiscal years ended April 3, 2015 and April 4, 2014, respectively. Amortization expense for software development costs was $23.5 million, $11.1 million and $7.2 million during fiscal years 2015, 2014 and 2013, respectively. 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), the Company assesses potential impairments to 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. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) are less than its 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 the Company for fiscal years 2015, 2014 and 2013. The Company accounts for its goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350) and Accounting Standards Update (ASU) 2011-08 (ASU 2011-08), Intangibles — Goodwill and Other (ASC 350): Testing Goodwill for Impairment, which simplifies how the Company tests goodwill for impairment. Current authoritative guidance allows the Company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If, after completing the qualitative assessment, the Company determines that it is more likely than not that the estimated fair value is greater than the carrying value, the Company concludes that no impairment exists. If it is more likely than not that the carrying value of the reporting unit exceeds its estimated fair value, the Company compares 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, a second step is performed in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value, resulting in goodwill impairment. The Company tests 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. 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 its competitive environment since the acquisition date, (3) changes in the overall economy, its market share and market interest rates since the acquisition date, (4) trends in the stock price and related market capitalization and enterprise values, (5) trends in peer companies total enterprise value metrics, and (6) additional factors such as management turnover, changes in regulation and changes in litigation matters. Based on the Company’s qualitative assessment performed during the fourth quarter of fiscal year 2015, the Company concluded that it was more likely than not that the estimated fair value of the Company’s reporting units exceeded their carrying value as of April 3, 2015, and therefore, determined it was not necessary to perform the two-step goodwill impairment test. No impairments were recorded by the Company related to goodwill and other intangible assets for fiscal years 2015, 2014 and 2013. Warranty reserves The Company provides limited warranties on its products for periods of up to five years. The Company records a liability for its warranty obligations when products are shipped or they are included in long-term construction contracts based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as accrued liabilities and amounts expected to be incurred beyond twelve months are classified as other liabilities in the consolidated financial statements. For mature products, the warranty cost estimates are based on historical experience with the particular product. For newer products that do not have a history of warranty costs, the Company bases its estimates on its experience with the technology involved and the types of failures that may occur. It is possible that the Company’s underlying assumptions will not reflect the actual experience and in that case, future adjustments will be made to the recorded warranty obligation (see Note 13). Fair value of financial instruments The carrying amounts of the Company’s financial instruments, including cash equivalents, receivables, accounts payable and accrued liabilities, approximate their fair values due to their short-term maturities. The estimated fair value of the Company’s long- term borrowings and other long-term interest bearing liabilities is determined by using available market information for those securities or similar financial instruments (see Note 3). Self-insurance liabilities The Company has self-insurance plans to retain a portion of the exposure for losses related to employee medical benefits and workers’ compensation. The self-insurance plans include policies which provide for both specific and aggregate stop-loss limits. The Company utilizes internal actuarial methods, as well as other historical information for the purpose of estimating ultimate costs for a particular plan year. Based on these actuarial methods, along with currently available information and insurance industry statistics, the Company has recorded self-insurance liability for its plans of $3.9 million and $3.5 million as of April 3, 2015 and April 4, 2014, respectively. The Company’s estimate, which is subject to inherent variability, is based on average claims experience in the Company’s industry and its own experience in terms of frequency and severity of claims, including asserted and unasserted claims incurred but not reported, with no explicit provision for adverse fluctuation from year to year. This variability may lead to ultimate payments being either greater or less than the amounts presented above. Self-insurance liabilities have been classified as a current liability in accrued liabilities in accordance with the estimated timing of the projected payments. 40 41 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Indemnification provisions Foreign currency In the ordinary course of business, the Company includes indemnification provisions in certain of its contracts, generally In general, the functional currency of a foreign operation is deemed to be the local country’s currency. Consequently, assets and relating to parties with which the Company has commercial relations. Pursuant to these agreements, the Company will indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, including but not limited to losses relating to third-party intellectual property claims. To date, there have not been any material costs incurred in connection with such indemnification clauses. The Company’s insurance policies do not necessarily cover the cost of defending indemnification claims or providing indemnification, so if a claim was filed against the Company by any party that the Company has agreed to indemnify, the Company could incur substantial legal costs and damages. A claim would be accrued when a loss is considered probable and the amount can be reasonably estimated. At April 3, 2015 and April 4, 2014, no such amounts were accrued related to the aforementioned provisions. Noncontrolling interest A noncontrolling interest represents the equity interest in a subsidiary that is not attributable, either directly or indirectly, to the Company and is reported as equity of the Company, separately from the Company’s controlling interest. Revenues, expenses, gains, losses, net income (loss) and other comprehensive income (loss) are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to both the controlling and noncontrolling interest. Common stock held in treasury During fiscal years 2015, 2014 and 2013, the Company issued 647,006, 654,020 and 612,233 shares of common stock, respectively, based on the vesting terms of certain restricted stock unit agreements. In order for employees to satisfy minimum statutory employee tax withholding requirements related to the issuance of common stock underlying these restricted stock unit agreements, the Company repurchased 236,446, 242,965 and 219,933 shares of common stock with a total value of $14.8 million, $15.6 million and $8.4 million during fiscal years 2015, 2014 and 2013, respectively. During fiscal year 2015, the Company retired 1,427,018 shares of treasury stock with a total value of $64.1 million. These shares remain as authorized stock; however they are now considered to be unissued. This treasury stock retirement resulted in a decrease in common stock held in treasury and in paid-in capital of $64.1 million in the Company’s consolidated balance sheet. The retirement of treasury stock had no impact on the Company’s total consolidated stockholders’ equity. As of April 3, 2015 and April 4, 2014, the Company had no shares and 1,190,572 shares of common stock held in treasury, respectively. During the third quarter of fiscal year 2015, the Board of Directors of the Company approved the retirement of all shares of treasury stock and, with respect to the future issuance of shares of common stock upon vesting of restricted stock units, approved the immediate retirement of shares withheld for employee withholding taxes. Although shares withheld for employee withholding taxes are not issued, they are treated as common stock repurchases for accounting purposes, as they reduce the number of shares that otherwise would have been issued upon vesting of the restricted stock units. Derivatives The Company enters into foreign currency forward and option contracts from time to time to hedge certain forecasted foreign currency transactions. Gains and losses arising from foreign currency forward and option contracts not designated as hedging instruments are recorded in other income (expense) as gains (losses) on derivative instruments. Gains and losses arising from the effective portion of foreign currency forward and option contracts which are designated as cash-flow hedging instruments are recorded in accumulated other comprehensive income (loss) as unrealized gains (losses) on derivative instruments until the underlying transaction affects the Company’s earnings, at which time they are then recorded in the same income statement line as the underlying transaction. During fiscal years 2015, 2014 and 2013, the Company settled certain foreign exchange contracts and in connection therewith for each year recognized an insignificant loss or gain recorded in cost of revenues based on the nature of the underlying transactions. The Company had no foreign currency forward contracts outstanding as of April 3, 2015. The fair value of the Company’s foreign currency forward contracts was an other current asset of less than $0.1 million at April 4, 2014. The notional value of foreign currency forward contracts outstanding as of April 4, 2014 was $3.3 million. There were no gains or losses from ineffectiveness of these derivative instruments recorded for fiscal years 2015, 2014 and 2013. liabilities of operations outside the United States are generally translated into U.S. dollars, and the effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) within ViaSat, Inc. stockholders’ equity. Revenue recognition A substantial portion of the Company’s revenues is derived from long-term contracts requiring development and delivery of complex equipment built to customer specifications. Sales related to long-term contracts are accounted for under the authoritative guidance for the percentage-of-completion method of accounting (ASC 605-35). Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract, or as products are shipped under the units-of-delivery method. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. Changes in estimates of profit or loss on contracts are included in earnings on a cumulative basis in the period the estimate is changed. During fiscal years 2015, 2014 and 2013, the Company recorded losses of approximately $0.6 million, $3.3 million and $3.1 million, respectively, related to loss contracts. The Company also derives a substantial portion of its revenues from contracts and purchase orders where revenue is recorded on delivery of products or performance of services in accordance with the authoritative guidance for revenue recognition (ASC 605). Under this standard, the Company recognizes revenue when an arrangement exists, prices are determinable, collectability is reasonably assured and the goods or services have been delivered. The Company also enters into certain leasing arrangements with customers and evaluates the contracts in accordance with the authoritative guidance for leases (ASC 840). The Company’s accounting for equipment leases involves specific determinations under the authoritative guidance for leases, which often involve complex provisions and significant judgments. In accordance with the authoritative guidance for leases, the Company classifies the transactions as sales type or operating leases based on: (1) review for transfers of ownership of the equipment to the lessee by the end of the lease term, (2) review of the lease terms to determine if it contains an option to purchase the leased equipment for a price which is sufficiently lower than the expected fair value of the equipment at the date of the option, (3) review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment, and (4) review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. Additionally, the Company considers the cancelability of the contract and any related uncertainty of collections or risk in recoverability of the lease investment at lease inception. Revenue from sales type leases is recognized at the inception of the lease or when the equipment has been delivered and installed at the customer site, if installation is required. Revenues from equipment rentals under operating leases are recognized as earned over the lease term, which is generally on a straight-line basis. In accordance with the authoritative guidance for revenue recognition for multiple element arrangements, ASU 2009-13, Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements, which updates ASC 605-25, Revenue Recognition- Multiple element arrangements, of the Financial Accounting Standards Board (FASB) codification, for substantially all of the arrangements with multiple deliverables, the Company allocates revenue to each element based on a selling price hierarchy at the arrangement inception. The selling price for each element is based upon the following selling price hierarchy: vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE are available (a description as to how the Company determines VSOE, TPE and ESP is provided below). If a tangible hardware systems product includes software, the Company determines whether the tangible hardware systems product and the software work together to deliver the product’s essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. Revenue for each separate unit of accounting is recognized when the applicable revenue recognition criteria for each element have been met. To determine the selling price in multiple-element arrangements, the Company establishes VSOE of the selling price using the price charged for a deliverable when sold separately. The Company also considers specific renewal rates offered to customers for software license updates, product support and hardware systems support, and other services. For nonsoftware multiple-element arrangements, TPE is established by evaluating similar and/or interchangeable competitor products or services in standalone arrangements with similarly situated customers and/or agreements. If the Company is unable to determine the selling price because VSOE or TPE doesn’t exist, the Company determines ESP for the purposes of allocating the arrangement by reviewing historical transactions, including transactions whereby the deliverable was sold on a standalone basis and considers several other external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, competition, the geographies in which the Company offers its products and services, the type of customer (i.e., distributor, value added reseller, government agency or direct end user, among others), volume commitments and the stage of the product lifecycle. The determination of ESP considers the 42 43 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Company’s pricing model and go-to-market strategy. As the Company, or its competitors’, pricing and go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to its determination of VSOE, TPE and ESP. As a result, the Company’s future revenue recognition for multiple-element arrangements could differ materially from those in the current period. In accordance with the authoritative guidance for shipping and handling fees and costs (ASC 605-45), the Company records shipping and handling costs billed to customers as a component of revenues, and shipping and handling costs incurred by the Company for inbound and outbound freight as a component of cost of revenues. Collections in excess of revenues and deferred revenues represent cash collected from customers in advance of revenue recognition and are recorded in accrued liabilities for obligations within the next twelve months. Amounts for obligations extending beyond twelve months are recorded within other liabilities in the consolidated financial statements. Contract costs on U.S. government contracts are subject to audit and review by the Defense Contracting Management Agency (DCMA), the Defense Contract Audit Agency (DCAA), and other U.S. government agencies, as well as negotiations with U.S. government representatives. The Company’s incurred cost audits by the DCAA have not been concluded for fiscal year 2011 and subsequent fiscal years. During the second quarter of fiscal year 2015, the DCAA completed its incurred cost audit for fiscal year 2004 and approved the Company’s incurred cost claims for fiscal years 2005 through 2010 without further audit. Although the Company has recorded contract revenues subsequent to fiscal year 2010 based upon an estimate of costs that the Company believes will be approved upon final audit or review, the Company does not know the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed the Company’s estimates, its profitability would be adversely affected. As of April 3, 2015 and April 4, 2014, the Company had $4.3 million and $6.7 million, respectively, in contract-related reserves for its estimate of potential refunds to customers for potential cost adjustments on several multi-year U.S. government cost reimbursable contracts (see Note 12). The year-over-year decrease in contract-related reserves reflected the conclusion of the DCAA’s incurred cost audit for fiscal year 2004 and the DCAA’s approval of the Company’s incurred cost claims for fiscal years 2005 through 2010. Advertising costs In accordance with the authoritative guidance for advertising costs (ASC 720-35), advertising costs are expensed as incurred and included in selling, general and administrative (SG&A) expenses. Advertising expenses for fiscal years 2015, 2014 and 2013 were $17.0 million, $18.9 million and $21.8 million, respectively. Commissions The Company compensates third parties based on specific commission programs directly related to certain product and service sales, and these commissions costs are expensed as incurred. Stock-based compensation In accordance with the authoritative guidance for share-based payments (ASC 718), the Company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award, and recognizes expense on a straight-line basis over the employee’s requisite service period. Stock-based compensation expense is recognized in the consolidated statements of operations and comprehensive income (loss) for fiscal years 2015, 2014 and 2013 only for those awards ultimately expected to vest, with forfeitures estimated at the date of grant. The authoritative guidance for share-based payments requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Independent research and development Independent research and development (IR&D), which is not directly funded by a third party, is expensed as incurred. IR&D expenses consist primarily of salaries and other personnel-related expenses, supplies, prototype materials and other expenses related to research and development programs. Rent expense, deferred rent obligations and deferred lease incentives The Company leases all of its facilities under operating leases. Some of these lease agreements contain tenant improvement allowances funded by landlord incentives, rent holidays and rent escalation clauses. The authoritative guidance for leases (ASC 840) requires rent expense to be recognized on a straight-line basis over the lease term. The difference between the rent due under the stated periods of the lease compared to that of the straight-line basis is recorded as deferred rent within other long-term liabilities in the consolidated balance sheet. For purposes of recognizing landlord incentives and minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date that it obtains the legal right to use and control the leased space to begin recording rent expense, which is generally when the Company enters the space and begins to make improvements in preparation of occupying new space. For tenant improvement allowances funded by landlord incentives and rent holidays, the Company records a deferred lease incentive liability in accrued and other long-term liabilities on the consolidated balance sheets and amortizes the deferred liability as a reduction to rent expense on the consolidated statements of operations and comprehensive income (loss) over the term of the lease. Certain lease agreements contain rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy. Such increasing rent expense is recorded in the consolidated statements of operations and comprehensive income (loss) on a straight-line basis over the lease term. At April 3, 2015 and April 4, 2014, deferred rent included in other long-term liabilities in the Company’s consolidated balance sheets was $8.3 million and $9.8 million, respectively. Income taxes Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance for accounting for uncertainty in income taxes also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. A deferred income tax asset or liability is established for the expected future tax consequences resulting from differences in the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credit and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s analysis of the need for a valuation allowance on deferred tax assets considered the losses incurred during the fiscal years ended April 4, 2014 and March 29, 2013 and the income generated during fiscal year April 3, 2015. In fiscal year 2013, the Company recorded a significant loss, a substantial portion of which resulted from an extinguishment of debt charge that was recorded upon the refinancing of the Company’s former 8.875% Senior Notes due 2016 (2016 Notes) with the proceeds from the issuance of additional 6.875% Senior Notes due 2020 (2020 Notes), which provides a benefit to net income due to the lower interest rate of the 2020 Notes. The loss from fiscal year 2014 was less significant and a substantial portion of that loss related to legal expense focused on protecting and extending the Company’s technology advantages in litigation against Space Systems/Loral, Inc. (SS/L) and its former parent company Loral Space & Communications, Inc. (Loral), which was resolved in the Company’s favor during the second quarter of fiscal year 2015 (see Note 12). In addition to these events, the Company’s evaluation considered other factors, including the Company’s contractual backlog, the Company’s history of positive earnings, current earnings trends assuming the Company’s satellite subscriber base continues to grow, taxable income adjusted for certain items, and forecasted income by jurisdiction. The Company also considered the lengthy period over which these net deferred tax assets can be realized and the Company’s history of not having federal tax loss carryforwards expire unused. Earnings per share Basic earnings per share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is based upon the weighted average number of common shares outstanding and potential common stock, if dilutive during the period. Potential common stock includes options granted and restricted stock units awarded under the Company’s equity compensation plan which are included in the earnings per share calculations using the treasury stock method, common shares expected to be issued under the Company’s employee stock purchase plan, and shares potentially issuable under the ViaSat 401(k) Profit Sharing Plan in connection with the Company’s decision to pay a discretionary match in common stock or cash. The weighted average number of shares used to calculate basic and diluted net income (loss) per share attributable to ViaSat, Inc. common stockholders is the same for the fiscal years ended April 4, 2014 and March 29, 2013, as the Company incurred a net loss for fiscal years 2014 and 2013 and inclusion of potential common stock would be antidilutive. 44 45 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Segment reporting The Company’s reporting segments, namely its satellite services, commercial networks and government systems segments, are primarily distinguished by the type of customer and the related contractual requirements. The Company’s satellite services segment provides retail and wholesale satellite-based broadband services for its consumer, enterprise and mobile broadband customers primarily in the United States. The Company’s commercial networks segment develops and produces a variety of advanced end-to-end satellite and other wireless communication systems and ground networking equipment and products, some of which are ultimately used by the Company’s satellite services segment. The Company’s government systems segment develops and produces network- centric, Internet Protocol (IP)-based fixed and mobile secure government communications systems, network management systems, products, services and solutions and provides global mobile broadband service and product offerings. The more regulated government environment is subject to unique contractual requirements and possesses economic characteristics which differ from the satellite services and commercial networks segments. The Company’s segments are determined consistent with the way management currently organizes and evaluates financial information internally for making operating decisions and assessing performance (see Note 15). Recent authoritative guidance In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (ASC 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU 2013-05 clarifies that the cumulative translation adjustment should be released into net income only when a reporting entity ceases to have a controlling financial interest in a subsidiary or a business within a foreign entity. Further, for an equity method investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. These amendments are to be applied prospectively to derecognition events occurring after the effective date. This guidance became effective for the Company beginning in the first quarter of fiscal year 2015 and the authoritative guidance did not have a material impact on the Company’s consolidated financial statements and disclosures. In July 2013, the FASB issued ASU 2013-11, Income Taxes (ASC 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires the netting of unrecognized tax benefits against available deferred tax assets for losses and other carryforward benefits that would be available to offset the liability for uncertain tax positions rather than presenting the unrecognized tax benefits on a gross basis. This guidance became effective for the Company beginning in the first quarter of fiscal year 2015 and the authoritative guidance did not have a material impact on the Company’s consolidated financial statements and disclosures. In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 limits the requirement to report discontinued operations to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments also require expanded disclosures concerning discontinued operations and disclosures of certain financial results attributable to a disposal of a significant component of an entity that does not qualify for discontinued operations reporting. These amendments will become effective prospectively for the Company beginning in fiscal year 2016, including interim periods within that reporting period, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and disclosures. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. This guidance will replace most existing revenue recognition guidance and will be effective for the Company beginning in fiscal year 2018, including interim periods within that reporting period. Early application is not permitted, but the guidance permits the use of either the retrospective or cumulative effect transition method. The Company has not selected a transition method and the Company is currently evaluating the impact this guidance will have on its consolidated financial statements and disclosures. In November 2014, the FASB issued ASU 2014-17, Business Combinations (ASC 805): Pushdown Accounting. ASU 2014-17 provides companies with the option to apply pushdown accounting in their separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The election to apply pushdown accounting can be made either in the period in which the change of control occurred, or in a subsequent period. This guidance became effective for the Company in November 2014 and the authoritative guidance did not have a material impact on the Company’s consolidated financial statements and disclosures. In February 2015, the FASB issued ASU 2015-02, Consolidation (ASC 810): Amendments to the Consolidation Analysis. ASU 2015-02 amended the process that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance will become effective for the Company in fiscal year 2017, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and disclosures. 46 In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest (ASC 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for the Company in fiscal year 2017, with early adoption permitted. The new guidance shall be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company is currently evaluating the impact of this standard on its consolidated financial statements. Note 2 — Composition of Certain Balance Sheet Captions Accounts receivable, net: Billed .............................................................................................................................................................................. Unbilled .......................................................................................................................................................................... Allowance for doubtful accounts ................................................................................................................................... Inventories: Raw materials ................................................................................................................................................................. Work in process .............................................................................................................................................................. Finished goods ................................................................................................................................................................ Prepaid expenses and other current assets: Prepaid expenses ............................................................................................................................................................ Other ............................................................................................................................................................................... Satellites, net: Satellite — WildBlue-1 (estimated useful life of 10 years) ........................................................................................... Capital lease of satellite capacity — Anik F2 (estimated useful life of 10 years) ......................................................... Satellite — ViaSat-1 (estimated useful life of 17 years) ................................................................................................ Satellite — ViaSat-2 (under construction) ..................................................................................................................... Less accumulated depreciation and amortization ........................................................................................................... Property and equipment, net: Equipment and software (estimated useful life of 2-7 years) ......................................................................................... CPE leased equipment (estimated useful life of 4-5 years) ........................................................................................... Furniture and fixtures (estimated useful life of 7 years) ................................................................................................ Leasehold improvements (estimated useful life of 2-17 years) ..................................................................................... Building (estimated useful life of 24 years) ................................................................................................................... Land ................................................................................................................................................................................ Construction in progress ................................................................................................................................................. Less accumulated depreciation ....................................................................................................................................... Other assets: Capitalized software costs, net ....................................................................................................................................... Patents, orbital slots and other licenses, net ................................................................................................................... Deferred income taxes .................................................................................................................................................... Other ............................................................................................................................................................................... Accrued liabilities: Collections in excess of revenues and deferred revenues .............................................................................................. Accrued employee compensation ................................................................................................................................... Accrued vacation ............................................................................................................................................................ Warranty reserve, current portion .................................................................................................................................. Current portion of other long-term debt ......................................................................................................................... Other ............................................................................................................................................................................... Other liabilities: Deferred revenue, long-term portion .............................................................................................................................. 47 As of April 3, 2015 As of April 4, 2014 (In thousands) 120,345 147,049 (1,055) 266,339 42,716 22,957 62,694 128,367 40,106 4,596 44,702 195,890 99,090 363,204 328,857 987,041 (224,820) 762,221 511,717 250,281 20,395 67,723 8,923 1,621 17,890 878,550 (460,528) 418,022 119,936 16,900 75,789 57,183 269,808 83,528 27,953 25,859 9,235 260 44,491 191,326 4,894 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 129,794 143,651 (1,554) 271,891 42,786 22,279 54,536 119,601 41,341 2,729 44,070 195,890 99,090 363,204 146,610 804,794 (173,958) 630,836 452,197 221,017 18,773 62,159 8,923 1,621 17,062 781,752 (360,086) 421,666 91,022 15,700 110,711 39,535 256,968 69,127 23,954 22,550 9,368 1,856 49,119 175,974 10,097 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Deferred rent, long-term portion .................................................................................................................................... Warranty reserve, long-term portion .............................................................................................................................. Deferred income taxes, long-term portion ..................................................................................................................... Satellite performance incentives obligation, long-term portion ..................................................................................... $ Note 3 — Fair Value Measurements As of April 3, 2015 As of April 4, 2014 (In thousands) 8,307 6,310 363 20,121 39,995 $ $ 9,758 7,655 816 20,567 48,893 In accordance with the authoritative guidance for financial assets and liabilities measured at fair value on a recurring basis (ASC • 820), the Company prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions: Level 1 — Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date. Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 — Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation. • • The following tables present the Company’s hierarchy for its assets measured at fair value on a recurring basis as of April 3, 2015 and April 4, 2014: Assets: Cash equivalents ............................................................................. Total assets measured at fair value on a recurring basis .......................... Assets: Cash equivalents ............................................................................. Foreign currency forward contracts ................................................ Total assets measured at fair value on a recurring basis .......................... Fair Value as of April 3, 2015 Level 1 Level 2 (In thousands) Level 3 2,033 $ 2,033 $ 2,033 $ 2,033 $ — $ — — $ — Fair Value as of April 4, 2014 Level 1 Level 2 (In thousands) Level 3 2,087 $ 2,087 $ 40 — 2,127 $ 2,087 $ — $ — 40 — 40 $ — $ $ $ $ The following section describes the valuation methodologies the Company uses to measure financial instruments at fair value: Cash equivalents — The Company’s cash equivalents consist of money market funds. Money market funds are valued using quoted prices for identical assets in an active market with sufficient volume and frequency of transactions (Level 1). Foreign currency forward contracts — The Company uses derivative financial instruments to manage foreign currency risk relating to foreign exchange rates. The Company does not use these instruments for speculative or trading purposes. The Company’s objective is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates. Derivative instruments are recognized as either assets or liabilities in the accompanying consolidated financial statements and are measured at fair value. Gains and losses resulting from changes in the fair values of those derivative instruments are recorded to earnings or other comprehensive income (loss) depending on the use of the derivative instrument and whether it qualifies for hedge accounting. The Company’s foreign currency forward contracts are valued using standard calculations/models that are primarily based on observable inputs, such as foreign currency exchange rates, or can be corroborated by observable market data (Level 2). Long-term debt — The Company’s long-term debt consists of borrowings under its revolving credit facility (the Revolving Credit Facility) and under its direct loan facility with the Export-Import Bank of the United States for ViaSat-2 (the Ex-Im Credit Facility and, together with the Revolving Credit Facility, the Credit Facilities), reported at the outstanding principal amount of borrowings, and $575.0 million in aggregate principal amount of 2020 Notes reported at amortized cost. However, for disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. As of April 3, 2015 and April 4, 2014, the fair value of the Company’s outstanding long-term debt related to the 2020 Notes was determined using quoted prices in active markets (Level 1) and was $610.9 million and $616.7 million, respectively. The fair value of the Company’s long-term debt related to the Revolving Credit Facility approximates its carrying amount due to its variable interest rate, which approximates a market interest rate. The fair value of the Company’s long-term debt related to the Ex-Im Credit Facility approximates its carrying amount due to the proximity of the closing of the Ex-Im Credit Facility compared to the reporting date. Satellite performance incentives obligation — The Company’s contract with the manufacturer of ViaSat-1 requires the Company to make monthly in-orbit satellite performance incentive payments, including interest at 7.0%, over a fifteen-year period from December 2011 to December 2026, subject to the continued satisfactory performance of the satellite. The Company recorded the net present value of these expected future payments as a liability and as a component of the cost of the satellite. However, for disclosure purposes, the Company is required to measure the fair value of outstanding satellite performance incentives on a recurring basis. The fair value of the Company’s outstanding satellite performance incentives is estimated to approximate their carrying value based on current rates (Level 2). As of each of April 3, 2015 and April 4, 2014, the Company’s estimated satellite performance incentives obligation and accrued interest was $22.4 million and $22.6 million, respectively. Note 4 — Goodwill and Acquired Intangible Assets During fiscal year 2015, the Company’s goodwill increased by $33.6 million, of which $34.6 million was related to the acquisition of NetNearU recorded within the Company’s government systems segment, partially offset by the effect of foreign currency translation recorded within the Company’s government systems and commercial networks segments. During fiscal year 2014, the $0.6 million increase in the Company’s goodwill related to the effects of foreign currency translation recorded mainly within the Company’s commercial networks segment. Other acquired intangible assets are amortized using the straight-line method over their estimated useful lives of two to ten years. Amortization expense related to other acquired intangible assets was $18.0 million, $14.6 million and $15.6 million for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013, respectively. The expected amortization expense of amortizable acquired intangible assets may change due to the effects of foreign currency fluctuations as a result of international businesses acquired. Expected amortization expense for acquired intangible assets for each of the following periods is as follows: Expected for fiscal year 2016 ............................................................................ Expected for fiscal year 2017 ............................................................................ Expected for fiscal year 2018 ............................................................................ Expected for fiscal year 2019 ............................................................................ Expected for fiscal year 2020 ............................................................................ Thereafter .......................................................................................................... Amortization (In thousands) 15,135 7,821 6,487 3,974 2,942 5,981 42,340 $ $ The allocation of the other acquired intangible assets and the related accumulated amortization as of April 3, 2015 and April 4, 2014 is as follows: Technology ...................................................... Contracts and customer relationships ............. Satellite co-location rights .............................. Trade name ...................................................... Other ................................................................ Total other acquired intangible assets ............. Weighted Average Useful Life (In years) 6 $ 8 9 3 7 $ As of April 3, 2015 As of April 4, 2014 Total Accumulated Amortization Net book Value Total Accumulated Amortization Net book Value 67,403 $ 99,556 8,600 5,940 8,722 190,221 $ (55,939) $ (74,019) (4,893) (5,788) (7,242) (147,881) $ (In thousands) 11,464 $ 25,537 3,707 152 1,480 42,340 $ 57,084 $ 88,853 8,600 5,680 6,320 166,537 $ (52,979) $ (62,245) (3,969) (5,680) (6,267) (131,140) $ 4,105 26,608 4,631 — 53 35,397 48 49 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 5 — Senior Notes and Other Long-Term Debt Total long-term debt consisted of the following as of April 3, 2015 and April 4, 2014: Senior Notes 2020 Notes ........................................................................................................................... Unamortized premium on the 2020 Notes ........................................................................... Total senior notes, net of premium ...................................................................................... Less: current portion of the senior notes .............................................................................. Total senior notes long-term, net ......................................................................................... Other Long-Term Debt Revolving Credit Facility ..................................................................................................... Ex-Im Credit Facility ........................................................................................................... Unamortized discount on the Ex-Im Credit Facility ............................................................ Other ..................................................................................................................................... Total other long-term debt ................................................................................................... Less: current portion of other long-term debt ...................................................................... Other long-term debt, net ..................................................................................................... Total debt ............................................................................................................................. Less: current portion ............................................................................................................ Long-term debt, net .............................................................................................................. As of April 3, 2015 (In thousands) As of April 4, 2014 575,000 7,657 582,657 — 582,657 210,000 20,476 (7,302) 822 223,996 260 223,736 806,653 260 806,393 $ $ 575,000 8,861 583,861 — 583,861 105,000 — — 2,756 107,756 1,856 105,900 691,617 1,856 689,761 $ $ The estimated aggregate amounts and timing of payments on the Company’s long-term debt obligations as of April 3, 2015 for the next five years and thereafter were as follows (excluding the effects of premium accretion on the 2020 Notes and discount accretion under the Ex-Im Credit Facility): For the Fiscal Years Ending 2016 ................................................................................... 2017 ................................................................................... 2018 ................................................................................... 2019 ................................................................................... 2020 ................................................................................... Thereafter ........................................................................... Plus: unamortized premium (discount) .............................. Total ................................................................................... (In thousands) 260 263 1,504 212,409 2,409 589,453 806,298 355 806,653 $ $ Revolving Credit Facility As of April 3, 2015, the Revolving Credit Facility provided a $500.0 million revolving line of credit (including up to $150.0 million of letters of credit), with a maturity date of November 26, 2018. Borrowings under the Revolving Credit Facility bear interest, at the Company’s 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 the Company’s total leverage ratio. At April 3, 2015, the weighted average effective interest rate on the Company’s outstanding borrowings under the Revolving Credit Facility was 2.18%. The Company has capitalized certain amounts of interest expense on the Revolving Credit Facility in connection with the construction of various assets during the construction period. The Revolving Credit Facility is required to be guaranteed by certain significant domestic subsidiaries of the Company (as defined in the Revolving Credit Facility) and secured by substantially all of the Company’s and any such subsidiaries’ assets. As of April 3, 2015, none of the Company’s subsidiaries guaranteed the Revolving Credit Facility. 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, the Company’s ability to sell assets, make investments and acquisitions, make capital expenditures, grant liens, pay dividends and make certain other restricted payments. The Company was in compliance with its financial covenants under the Revolving Credit Facility as of April 3, 2015. At April 3, 2015, the Company had $210.0 million in principal amount of outstanding borrowings under the Revolving Credit Facility and $40.4 million outstanding under standby letters of credit, leaving borrowing availability under the Revolving Credit Facility as of April 3, 2015 of $249.6 million. Ex-Im Credit Facility On March 12, 2015, a foreign subsidiary of the Company entered into the Ex-Im Credit Facility with the Export-Import Bank of the United States. As of April 3, 2015, the Ex-Im Credit Facility provided a $524.9 million senior secured direct loan facility, $467.0 million of which can be used to finance up to 85% of the costs of construction, launch and insurance of the ViaSat-2 satellite and related goods and services (including costs incurred on or after September 18, 2012), with the remainder used to finance the total exposure fees incurred under the Ex-Im Credit Facility of up to $57.9 million (depending on the total amount of financing borrowed under the Ex-Im Credit Facility). Borrowings under the Ex-Im Credit Facility bear interest at a fixed rate of 2.38% and are required to be repaid in 17 approximately equal semi-annual installments, commencing approximately six months after the in-orbit acceptance date of the ViaSat-2 satellite (or, if earlier, on October 15, 2017), with a maturity date of October 15, 2025. Exposure fees of $6.0 million were incurred in connection with the initial borrowing under the Ex-Im Credit Facility, with the remaining exposure fees payable by the in-orbit acceptance date for ViaSat-2. Exposure fees under the Ex-Im Credit Facility are amortized using the effective interest rate method. The effective interest rate on the Company’s outstanding borrowings under the Ex-Im Credit Facility, which takes into account estimated timing and amount of borrowings, exposure fees, debt issuance costs and other fees, was approximately 4.43% as of April 3, 2015. The Ex-Im Credit Facility is guaranteed by ViaSat and is secured by first-priority liens on the ViaSat-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 regarding ViaSat’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 Company was in compliance with its financial covenants under the Ex-Im Credit Facility as of April 3, 2015. At April 3, 2015, we had $20.5 million in principal amount of outstanding borrowings under the Ex-Im Credit Facility, leaving $452.5 million available to finance ViaSat-2 related costs as incurred. The borrowings under the Ex-Im Credit Facility were issued with a discount of $7.3 million (comprising the initial $6.0 million exposure fee and other customary fees). The borrowings under the Ex-Im Credit Facility are recorded as long-term debt, net of discount, in the Company’s consolidated financial statements. The discount and deferred financing cost associated with the issuance of the borrowings under the Ex-Im Credit Facility is amortized to interest expense on an effective interest rate basis over the term of the borrowings under the Ex-Im Credit Facility. Senior Notes Senior Notes due 2020 In February 2012, the Company issued $275.0 million in principal amount of 2020 Notes in a private placement to institutional buyers, which were exchanged in August 2012 for substantially identical 2020 Notes that had been registered with the Securities and Exchange Commission (the SEC). These initial 2020 Notes were issued at face value and are recorded as long-term debt in the Company’s consolidated financial statements. On October 12, 2012, the Company issued an additional $300.0 million in principal amount of 2020 Notes in a private placement to institutional buyers at an issue price of 103.50% of the principal amount, which were exchanged in January 2013 for substantially identical 2020 Notes that had been registered with the SEC. The 2020 Notes are all treated as a single class. The 2020 Notes bear interest at the rate of 6.875% per year, payable semi-annually in cash in arrears, which interest payments commenced in June 2012. Debt issuance costs associated with the issuance of the 2020 Notes are amortized to interest expense on a straight-line basis over the term of the 2020 Notes, the results of which are not materially different from the effective interest rate basis. The $10.5 million premium the Company received in connection with the issuance of the additional 2020 Notes is recorded as long-term debt in the Company’s consolidated financial statements and is being amortized as a reduction to interest expense on an effective interest rate basis over the term of those 2020 Notes. The 2020 Notes are required to be guaranteed on an unsecured senior basis by each of the Company’s existing and future subsidiaries that guarantees the Credit Facility. During the second quarter of fiscal year 2014, the last remaining subsidiary guarantor, ViaSat Communications, Inc., was merged into the Company. Accordingly, as of April 3, 2015, none of the Company’s subsidiaries guaranteed the 2020 Notes. The 2020 Notes are the Company’s general senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future unsecured unsubordinated debt. The 2020 Notes are effectively junior in right of payment to the Company’s existing and future secured debt, including under the Credit Facilities (to the extent of the value of the 50 51 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) assets securing such debt), are structurally subordinated to all existing and future liabilities (including trade payables) of the Company’s subsidiaries that do not guarantee the 2020 Notes, and are senior in right of payment to all of their existing and future subordinated indebtedness. The indenture governing the 2020 Notes limits, among other things, the Company’s and its 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 the Company’s satellite insurance; and consolidate or merge with, or sell substantially all of their assets to, another person. Prior to June 15, 2015, the Company may redeem up to 35% of the 2020 Notes at a redemption price of 106.875% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, from the net cash proceeds of specified equity offerings. The Company may also redeem the 2020 Notes prior to June 15, 2016, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and any accrued and unpaid interest, if any, thereon to the redemption date. The applicable premium is calculated as the greater of: (i) 1.0% of the principal amount of such 2020 Notes and (ii) the excess, if any, of (a) the present value at such date of redemption of (1) the redemption price of such 2020 Notes on June 15, 2016 plus (2) all required interest payments due on such 2020 Notes through June 15, 2016 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the treasury rate (as defined under the indenture) plus 50 basis points, over (b) the then-outstanding principal amount of such 2020 Notes. The 2020 Notes may be redeemed, in whole or in part, at any time during the twelve months beginning on June 15, 2016 at a redemption price of 103.438%, during the twelve months beginning on June 15, 2017 at a redemption price of 101.719%, and at any time on or after June 15, 2018 at a redemption price of 100%, in each case plus accrued and unpaid interest, if any, thereon to the redemption date. In the event a change of control occurs (as defined in the indenture), each holder will have the right to require the Company to repurchase all or any part of such holder’s 2020 Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the 2020 Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). Discharge of Indenture and Loss on Extinguishment of Debt In connection with the Company’s issuance of the additional $300.0 million of 2020 Notes issued in October 2012, the Company repurchased and redeemed all of its $275.0 million in aggregate principal amount of 2016 Notes then outstanding through a cash tender offer and redemption, and the indenture governing the 2016 Notes was satisfied and discharged in accordance with its terms. On October 12, 2012, the Company purchased $262.1 million in aggregate principal amount of the 2016 Notes pursuant to the tender offer. The total cash payment to purchase the tendered 2016 Notes in the tender offer, including accrued and unpaid interest up to, but excluding, the repurchase date and a $10 consent payment per $1,000 principal amount of notes tendered, was $282.5 million. On November 14, 2012, the Company redeemed the remaining $12.9 million in aggregate principal amount of 2016 Notes pursuant to the optional redemption provisions of the 2016 Notes at a redemption price of 106.656% of the principal amount, plus accrued and unpaid interest to, but not including, the redemption date. The total cash payment to redeem the remaining 2016 Notes was $14.0 million. As a result of the repurchase and redemption of the 2016 Notes, the Company recognized a $26.5 million loss on extinguishment of debt during fiscal year 2013, which was comprised of $19.8 million in cash payments (including tender offer consideration, consent payments, redemption premium and related professional fees), and $6.7 million in non-cash charges (including unamortized discount and unamortized debt issuance costs). Note 6 — Common Stock and Stock Plans In March 2013, the Company filed a universal shelf registration statement with the SEC for the future sale of an unlimited amount of debt securities, common stock, preferred stock, depositary shares, warrants, and rights. The securities may be offered from time to time, separately or together, directly by the Company, 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. In November 1996, the Company adopted the 1996 Equity Participation Plan (the Equity Participation Plan). The Equity Participation Plan provides for the grant to executive officers, other key employees, consultants and non-employee directors of the Company a broad variety of stock-based compensation alternatives such as nonqualified stock options, incentive stock options, restricted stock units and performance awards. From November 1996 to September 2012 through various amendments of the Equity Participation Plan, the Company increased the maximum number of shares reserved for issuance under this plan to 21,400,000 shares. The Company believes that such awards better align the interests of its employees with those of its stockholders. Shares of the Company’s common stock granted under the Equity Participation Plan in the form of stock options or stock appreciation right are counted against the Equity Participation Plan share reserve on a one for one basis. Shares of the Company’s common stock granted under the Equity Participation Plan as an award other than as an option or as a stock appreciation right with a per share purchase price lower than 100% of fair market value on the date of grant are counted against the Equity Participation Plan share reserve as two shares for each share of common stock prior to September 22, 2010 and subsequent to September 19, 2012, and as 2.65 shares for each share of common stock during the period beginning on September 22, 2010 and ending on September 19, 2012. Restricted stock units are granted to eligible employees and directors and represent rights to receive shares of common stock at a future date. In November 1996, the Company adopted the ViaSat, Inc. Employee Stock Purchase Plan (the Employee Stock Purchase Plan) to assist employees in acquiring a stock ownership interest in the Company and to encourage them to remain in the employment of the Company. The Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code. In September 2013, the Company amended the Employee Stock Purchase Plan to increase the maximum number of shares reserved for issuance under this plan from 2,250,000 shares to 2,550,000 shares. To facilitate participation for employees located outside of the United States in light of non-U.S. law and other considerations, the amended Employee Stock Purchase Plan also provides for the grant of purchase rights that are not intended to be tax-qualified. The Employee Stock Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during specified six-month offering periods. No employee may purchase more than $25,000 worth of stock in any calendar year. The price of shares purchased under the Employee Stock Purchase Plan is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Total stock-based compensation expense recognized in accordance with the authoritative guidance for share-based payments was as follows: Stock-based compensation expense before taxes ............. Related income tax benefits .............................................. Stock-based compensation expense, net of taxes ............. April 3, 2015 $ $ 39,353 (14,889) 24,464 Fiscal Years Ended April 4, 2014 (In thousands) 33,639 (12,685) 20,954 $ $ $ $ March 29, 2013 27,035 (10,213) 16,822 For fiscal years 2015, 2014 and 2013 the Company recorded no incremental tax benefits from stock options exercised and restricted stock unit award vesting as the excess tax benefit from stock options exercised and restricted stock unit award vesting increased the Company’s net operating loss carryforward. The Company has no awards with market or performance conditions. The compensation cost that has been charged against income for the Equity Participation Plan under the authoritative guidance for share-based payments was $37.2 million, $31.7 million and $25.5 million, and for the Employee Stock Purchase Plan was $2.1 million, $1.9 million and $1.5 million, for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013, respectively. The Company capitalized $2.5 million, $1.6 million and $1.0 million of stock-based compensation expense as a part of the cost for software development for resale included in other assets and as a part of the equipment and software for the internal use included in property, equipment and satellites for fiscal years 2015, 2014 and 2013, respectively. As of April 3, 2015, total unrecognized compensation cost related to unvested stock-based compensation arrangements granted under the Equity Participation Plan (including stock options and restricted stock units) and the Employee Stock Purchase Plan was $102.8 million and $0.6 million, respectively. These costs are expected to be recognized over a weighted average period of 2.6 years and 2.7 years, for stock options and restricted stock units, respectively, under the Equity Participation Plan and less than six months for the Employee Stock Purchase Plan. Stock options and employee stock purchase plan. The Company’s employee stock options typically have a simple four-year vesting schedule and a six to ten year contractual term. The weighted average estimated fair value of employee stock options granted and employee stock purchase plan shares issued during fiscal year 2015 was $22.22 and $14.18 per share, respectively, during fiscal year 2014 was $23.03 and $16.32 per share, respectively, and during fiscal year 2013 was $13.96 and $9.02 per share, respectively, using the Black-Scholes model with the following weighted average assumptions (annualized percentages): 52 53 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Employee Stock Options Fiscal Year 2014 Fiscal Year 2013 Fiscal Year 2015 Employee Stock Purchase Plan Fiscal Year 2014 Fiscal Year 2013 Fiscal Year 2015 Volatility ................................................. Risk-free interest rate ............................. Dividend yield ........................................ Expected life ........................................... 5.5 years 34.0% 1.7% 0.0% 40.2% 1.3% 0.0% 41.2% 0.7% 0.0% 30.6% 0.1% 0.0% 34.3% 0.1% 0.0% 30.0% 0.1% 0.0% 5.5 years 5.5 years 0.5 years 0.5 years 0.5 years The Company’s expected volatility is a measure of the amount by which its stock price is expected to fluctuate over the expected term of the stock-based award. The estimated volatilities for stock options are based on the historical volatility calculated using the daily stock price of the Company’s stock over a recent historical period equal to the expected term. The risk-free interest rate that the Company uses in determining the fair value of its stock-based awards is based on the implied yield on U.S. Treasury zero- coupon issues with remaining terms equivalent to the expected term of its stock-based awards. The expected term or life of employee stock options represents the expected period of time from the date of grant to the estimated date that the stock options under the Company’s Equity Participation Plan would be fully exercised. The expected term assumption is estimated based primarily on the options’ vesting terms and remaining contractual life and employees’ expected exercise and post-vesting employment termination behavior. A summary of employee stock option activity for fiscal year 2015 is presented below: Outstanding at April 4, 2014 .......................... Options granted ..................................... Options canceled ................................... Options exercised .................................. Outstanding at April 3, 2015 .......................... Vested and exercisable at April 3, 2015 ......... Number of Shares 2,200,443 $ 351,500 — (724,800) 1,827,143 $ 1,024,982 $ Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term in Years Aggregate Intrinsic Value (In thousands) 35.68 65.15 — 21.71 46.90 39.18 3.23 $ 2.09 $ 26,349 21,602 The total intrinsic value of stock options exercised during fiscal years 2015, 2014 and 2013 was $28.9 million, $25.9 million and $23.5 million, respectively. All options issued under the Company’s stock option plans have an exercise price equal to the fair market value of the Company’s stock on the date of the grant. Restricted stock units. Restricted stock units represent a right to receive shares of common stock at a future date determined in accordance with the participant’s award agreement. There is no exercise price and no monetary payment required for receipt of restricted stock units or the shares issued in settlement of the award. Instead, consideration is furnished in the form of the participant’s services to the Company. Restricted stock units generally vest over four years. Compensation cost for these awards is based on the fair value on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period. For fiscal years 2015, 2014 and 2013, the Company recognized $31.4 million, $26.7 million and $21.7 million, respectively, in stock-based compensation expense related to these restricted stock unit awards. The per unit weighted average grant date fair value of restricted stock units granted during fiscal years 2015, 2014 and 2013 was $65.20, $61.52 and $36.82, respectively. A summary of restricted stock unit activity for fiscal year 2015 is presented below: Outstanding at April 4, 2014 ............................. Awarded ................................................... Forfeited ................................................... Released ................................................... Outstanding at April 3, 2015 ............................. Vested and deferred at April 3, 2015 ................ Number of Restricted Stock Units 1,842,936 815,894 (37,903) (647,006) 1,973,921 133,553 $ $ $ Weighted Average Grant Date Fair Value per Share 47.97 65.20 52.35 46.68 55.42 32.05 The total fair value of shares vested related to restricted stock units during the fiscal years 2015, 2014 and 2013 was $30.6 million, $25.2 million and $21.8 million, respectively. Note 7 — Shares Used In Computing Diluted Net Income (Loss) Per Share Weighted average: Common shares outstanding used in calculating basic net income (loss) per share attributable to ViaSat, Inc. common stockholders ................................................................................................ Options to purchase common stock as determined by application of the treasury stock method ...... Restricted stock units to acquire common stock as determined by application of the treasury stock method ........................................................................................................................................... Potentially issuable shares in connection with certain terms of the ViaSat 401(k) Profit Sharing Plan and Employee Stock Purchase Plan equivalents ................................................................... April 3, 2015 Fiscal Years Ended April 4, 2014 (In thousands) March 29, 2013 47,139 45,744 475 — 43,931 — 515 — 156 — — — Shares used in computing diluted net income (loss) per share attributable to ViaSat, Inc. common stockholders ................................................................................................ 48,285 45,744 43,931 Antidilutive shares relating to stock options excluded from the calculation comprised 451,038 shares for the fiscal year ended April 3, 2015. Antidilutive shares relating to restricted stock units excluded from the calculation comprised 285,481 for the fiscal year ended April 3, 2015. The weighted average number of shares used to calculate basic and diluted net income (loss) per share attributable to ViaSat, Inc. common stockholders is the same for both the fiscal years ended April 4, 2014 and March 29, 2013, as the Company incurred a net loss attributable to ViaSat, Inc. common stockholders for the fiscal years ended April 4, 2014 and March 29, 2013 and inclusion of potentially dilutive shares of common stock would be antidilutive. Potentially dilutive shares of common stock excluded from the calculation for the fiscal year ended April 4, 2014 were 920,113 shares relating to stock options, 618,113 shares relating to restricted stock units and 151,619 shares relating to certain terms of the ViaSat 401(k) Profit Sharing Plan and Employee Stock Purchase Plan. Potentially dilutive shares of common stock excluded from the calculation for the fiscal year ended March 29, 2013 were 1,601,693 shares relating to stock options, 424,464 shares relating to restricted stock units and 162,517 shares relating to certain terms of the ViaSat 401(k) Profit Sharing Plan and Employee Stock Purchase Plan. Note 8 — Income Taxes The provision for income taxes includes the following: Current tax provision (benefit) Federal .................................................................... State ........................................................................ Foreign .................................................................... $ Deferred tax provision (benefit) Federal .................................................................... State ........................................................................ Foreign .................................................................... Total provision (benefit) from income taxes .................... $ April 3, 2015 (216) 1,507 115 1,406 14,546 (1,477) (648) 12,421 13,827 Fiscal Years Ended April 4, 2014 (In thousands) March 29, 2013 $ $ 798 540 12 1,350 (11,188) (16,032) (77) (27,297) (25,947) $ $ (166) 2 (64) (228) (36,042) (12,657) (1,127) (49,826) (50,054) 54 55 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Significant components of the Company’s net deferred tax assets are as follows: Deferred tax assets: Net operating loss carryforwards .......................................... Tax credit carryforwards ....................................................... Warranty reserve ................................................................... Accrued compensation .......................................................... Deferred rent .......................................................................... Inventory reserve ................................................................... Stock-based compensation .................................................... Other ...................................................................................... Valuation allowance .............................................................. Total deferred tax assets ........................................................ Deferred tax liabilities: Property, equipment and satellites and intangible assets ...... Total deferred tax liabilities .................................................. Net deferred tax assets .................................................................... $ As of April 3, 2015 April 4, 2014 (In thousands) $ 223,642 112,183 5,841 8,016 3,585 8,510 12,739 34,116 (15,550) 393,082 269,427 96,586 6,475 6,880 4,128 6,636 9,728 6,872 (12,832) 393,900 (260,582) (260,582) 132,500 $ (246,293) (246,293) 147,607 $ A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows: April 3, 2015 Fiscal Years Ended April 4, 2014 (In thousands) Tax provision (benefit) at federal statutory rate ............................... $ State tax provision, net of federal benefit ......................................... Tax credits, net of valuation allowance ............................................ Non-deductible compensation .......................................................... Non-deductible meals and entertainment ......................................... Foreign effective tax rate differential, net of valuation allowance ... Other ................................................................................................. Total provision (benefit) from income taxes .................................... $ 18,808 $ 4,014 (14,055) 1,966 759 898 1,437 13,827 $ (12,132) $ (3,555) (13,217) 1,337 678 536 406 (25,947) $ March 29, 2013 (31,737) (3,202) (17,136) 1,305 448 (363) 631 (50,054) As of April 3, 2015, the Company had federal and state research credit carryforwards of $84.2 million and $92.7 million, respectively, which begin to expire in fiscal year 2026 and fiscal year 2018, respectively. As of April 3, 2015, the Company had alternative minimum tax (AMT) and foreign tax credit (FTC) carryforwards of $0.4 million and $1.1 million, respectively. The AMT credit does not expire and the FTC begins to expire in fiscal year 2021. As of April 3, 2015, the Company had federal and state net operating loss carryforwards of $703.4 million and $557.8 million, respectively, which begin to expire in fiscal year 2020 and fiscal year 2016, respectively. The Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During fiscal year 2015, the Company did not realize any excess tax benefits. As of April 3, 2015, the Company had $48.4 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits will be accounted for as a credit to additional paid-in capital if and when realized, rather than a reduction of the provision for income taxes. 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. Future realization of existing deferred tax assets ultimately depends on future profitability and the existence of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under tax law. In the event that the Company’s 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. A valuation allowance of $15.6 million at April 3, 2015 and $12.8 million at April 4, 2014 has been established relating to state net operating loss carryforwards and research credit carryforwards that, based on management’s estimate of future taxable income attributable to certain states and generation of additional research credits, are considered more likely than not to expire unused. The Company’s analysis of the need for a valuation allowance on deferred tax assets considered the losses incurred during the fiscal years ended April 4, 2014 and March 29, 2013 and the income generated during the fiscal year ended April 3, 2015. In fiscal year 2013, the Company recorded a significant loss, a substantial portion of such which resulted from an extinguishment of debt charge that was recorded upon the refinancing of the Company’s former 2016 Notes with the proceeds from the issuance of additional 2020 Notes, which provides a benefit to net income due to the lower interest rate of the 2020 Notes. The loss from fiscal year 2014 was less significant and a substantial portion of that loss related to legal expense focused on protecting and extending our technology advantages in the litigation against SS/L and its former parent company Loral, which was resolved in the Company’s favor during the second quarter of fiscal year 2015 (see Note 12). In addition to these events, the Company’s evaluation considered other factors, including the Company’s contractual backlog, the Company’s history of positive earnings, current earnings trends assuming the Company’s satellite subscriber base continues to grow, taxable income adjusted for certain items, and forecasted income by jurisdiction. The Company also considered the lengthy period over which these net deferred tax assets can be realized and the Company’s history of not having federal tax loss carryforwards expire unused. Based on the Company’s analysis of the need for a valuation allowance on deferred tax assets, the Company increased the valuation allowance by $2.7 million during fiscal year 2015 which related primarily to state net operating loss carryforwards and research and development credit carryforwards available to reduce state income taxes. The Company will continue to evaluate the ability to realize its deferred tax assets on a quarterly basis to determine if the weight of available evidence suggests that an additional valuation allowance is needed. If the Company has an “Ownership Change” as defined under Internal Revenue Code Section 382, it may have an annual limitation on the utilization of its net operating loss and tax credit carryforwards. The following table summarizes the activity related to the Company’s unrecognized tax benefits: Balance, beginning of fiscal year ...................................... Increase (decrease) related to prior year tax positions ...... Increases related to current year tax positions .................. Statute expirations ............................................................. Settlements ........................................................................ Balance, end of fiscal year ................................................ April 3, 2015 37,395 524 3,897 (47) — 41,769 $ $ As of April 4, 2014 (In thousands) 34,491 (249) 4,459 (1,306) — 37,395 $ $ March 29, 2013 $ $ 33,556 16 4,608 (3,489) (200) 34,491 Of the total unrecognized tax benefits at April 3, 2015, $34.0 million would reduce the Company’s annual effective tax rate if recognized, subject to valuation allowance consideration. In the next twelve months it is reasonably possible that the amount of unrecognized tax benefits will not change significantly. The Company is subject to periodic audits by domestic and foreign tax authorities. By statute, the Company’s U.S. federal income tax returns are subject to examination by the Internal Revenue Service (“IRS”) for fiscal years 2012 through 2014. Additionally, tax credit carryovers that were generated in prior years and utilized in these years may also be subject to examination by the IRS. With few exceptions, fiscal years 2011 to 2014 remain open to examination by state and foreign taxing jurisdictions. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There were no accrued interest or penalties associated with uncertain tax positions as of April 3, 2015 and April 4, 2014. Note 9 — Acquisition On June 6, 2014, the Company completed the acquisition of all outstanding shares of NetNearU. The purchase price for NetNearU was $60.2 million in cash consideration. The net cash outlay for the acquisition, after taking into account cash acquired of $4.1 million, was $56.1 million. 56 57 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company accounts for business combinations pursuant to the authoritative guidance for business combinations (ASC 805). Accordingly, the Company allocated the purchase price of the acquired company to the net tangible assets and intangible assets acquired based upon their estimated fair values. Under the authoritative guidance for business combinations, acquisition-related transaction costs and acquisition-related restructuring charges are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. Merger-related transaction costs incurred by the Company during the first quarter of fiscal year 2015 were approximately $0.4 million, which were recorded in SG&A expenses. The purchase price allocation of the acquired assets and assumed liabilities based on the estimated fair values as of June 6, 2014 is as follows: Current assets ..................................................................... Property and equipment ..................................................... Identifiable intangible assets .............................................. Goodwill ............................................................................ Total assets acquired ................................................ Current liabilities ............................................................... Other long-term liabilities .................................................. Total liabilities assumed ........................................... Total purchase price ........................................................... (In thousands) 8,482 1,087 24,310 34,576 68,455 (5,305) (2,981) (8,286) 60,169 $ $ Amounts assigned to identifiable intangible assets are being amortized on a straight-line basis over their estimated useful lives and are as follows: Technology ................................................................. Customer relationships ............................................... Non-compete agreements ........................................... Trade name ................................................................. Total identifiable intangible assets ............................. Fair value (In thousands) 10,970 10,950 2,130 260 24,310 $ $ Estimated weighted average life (In years) 7 9 2 2 8 The intangible assets acquired in the NetNearU business combination were determined, in accordance with the authoritative guidance for business combinations, based on the estimated fair values using valuation techniques consistent with the market approach and/or income approach to measure fair value. The remaining useful lives were estimated based on the underlying agreements and/or the future economic benefit expected to be received from the assets. NetNearU has developed a comprehensive network management system for Wi-Fi and other internet access networks that the Company expects to use to extend the Company’s Exede® broadband services to a wider subscriber base in multiple markets, including commercial airlines, live events, hospitality, enterprise networking and government broadband projects. NetNearU’s primary operations currently support government applications with the potential for future expansion into commercial applications. These current benefits and additional opportunities were among the factors that were taken into account in setting the purchase price and contributed to the recognition of preliminary estimated goodwill, which was recorded within the Company’s government systems segment. The intangible assets and goodwill recognized are not deductible for federal income tax purposes. The consolidated financial statements include the operating results of NetNearU from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was insignificant to the financial statements for all periods presented. Note 10 — Employee Benefits The Company is a sponsor of a voluntary deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the plan, the Company may make discretionary contributions to the plan which vest over six years. The Company’s discretionary matching contributions to the plan are based on the amount of employee contributions and can be made in cash or the Company’s common stock at the Company’s election. Subsequent to the 2015 fiscal year-end, the Company elected to settle the discretionary contributions liability in stock, consistent with fiscal year 2014. Based on the year-end common stock closing price, the Company would issue 192,892 shares of common stock at this time. Discretionary contributions accrued by the Company as of April 3, 2015 and April 4, 2014 amounted to $11.6 million and $10.1 million, respectively. Note 11 — Commitments In May 2013, the Company entered into an agreement to purchase ViaSat-2, the Company’s second high-capacity Ka-band satellite, from The Boeing Company (Boeing) at a price of approximately $358.0 million, plus an additional amount for launch support services to be performed by Boeing. In January 2008, the Company entered into several agreements with SS/L, Loral and Telesat Canada related to the Company’s ViaSat-1 satellite, which was placed into service in January 2012. The Company’s contract with SS/L requires monthly in-orbit satellite performance incentive payments, including interest, over a fifteen-year period from December 2011 until December 2026, subject to the continued satisfactory performance of the satellite. The Company recorded the net present value of these expected future payments as a liability and as a component of the cost of the satellite during the third quarter of fiscal year 2012. As of April 3, 2015, the Company’s estimated satellite performance incentives obligation and accrued interest was approximately $22.4 million, of which $2.3 million and $20.1 million have been classified current in accrued liabilities and non-current in other liabilities, respectively. Under the satellite construction contract with SS/L, the Company may incur up to $34.0 million in total costs for satellite performance incentives obligation and related interest earned over the fifteen-year period with potential future minimum payments of $2.0 million, $2.1 million, $2.3 million, $2.4 million and $2.6 million in fiscal years 2016, 2017, 2018, 2019 and 2020, respectively, with $22.6 million commitments thereafter. The Company has various other purchase commitments under satellite capacity agreements which are used to provide satellite networking services to its customers for future minimum payments of approximately $50.0 million, $13.7 million, $11.0 million, $11.0 million, 9.3 million and $3.7 million in fiscal years 2016, 2017, 2018, 2019, 2020 and thereafter respectively. The Company leases office and other facilities under non-cancelable operating leases with initial terms ranging from one to fifteen years which expire between fiscal year 2016 and fiscal year 2026 and provide for pre-negotiated fixed rental rates during the terms of the lease. Certain of the Company’s facilities leases contain option provisions which allow for extension of the lease terms. For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as rent expense on a straight-line basis over the lease term as that term is defined in the authoritative guidance for leases including any option periods considered in the lease term and any periods during which the Company has use of the property but is not charged rent by a landlord (“rent holiday”). Leasehold improvement incentives paid to the Company by a landlord are recorded as a liability and amortized as a reduction of rent expense over the lease term. Total rent expense was $24.5 million, $22.3 million and $19.9 million in fiscal years 2015, 2014 and 2013, respectively. Future minimum lease payments are as follows: Fiscal Years Ending 2016 ................................................................................... 2017 ................................................................................... 2018 ................................................................................... 2019 ................................................................................... 2020 ................................................................................... Thereafter ........................................................................... (In thousands) 25,990 25,611 19,287 18,377 14,866 56,010 160,141 $ $ Note 12 — Contingencies From time to time, the Company is involved in a variety of claims, suits, investigations and proceedings arising in the ordinary course of business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, the Company believes that the resolution of its current pending matters will not have a material adverse effect on its business, financial condition, results of operations or liquidity. The Company has contracts with various U.S. government agencies. Accordingly, the Company is routinely subject to audit and review by the DCMA, the DCAA and other U.S. government agencies of its performance on government contracts, indirect rates and pricing practices, accounting and management internal control business systems, and compliance with applicable contracting and 58 59 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) procurement laws, regulations and standards. An adverse outcome to a review or audit or other failure to comply with applicable contracting and procurement laws, regulations and standards could result in material civil and criminal penalties and administrative sanctions being imposed on the Company, which may include termination of contracts, forfeiture of profits, triggering of price reduction clauses, suspension of payments, significant customer refunds, fines and suspension, or a prohibition on doing business with U.S. government agencies. In addition, if the Company fails to obtain an “adequate” determination of its various accounting and management internal control business systems from applicable U.S. government agencies or if allegations of impropriety are made against it, the Company could suffer serious harm to its business or its reputation, including its ability to bid on new contracts or receive contract renewals and its competitive position in the bidding process. The Company’s incurred cost audits by the DCAA have not been concluded for fiscal year 2011 and subsequent fiscal years. During the second quarter of fiscal year 2015, the DCAA completed its incurred cost audit for fiscal year 2004 and approved the Company’s incurred cost claims for fiscal years 2005 through 2010 without further audit. Although the Company has recorded contract revenues subsequent to fiscal year 2010 based upon an estimate of costs that the Company believes will be approved upon final audit or review, the Company does not know the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed the Company’s estimates, its profitability would be adversely affected. As of April 3, 2015 and April 4, 2014, the Company had $4.3 million and $6.7 million, respectively, in contract-related reserves for its estimate of potential refunds to customers for potential cost adjustments on several multi-year U.S. government cost reimbursable contracts. This reserve is classified as either an element of accrued liabilities or as a reduction of unbilled accounts receivable based on status of the related contracts. The year-over-year decrease in contract-related reserves reflected the conclusion of the DCAA’s incurred cost audit for fiscal year 2004 and the DCAA’s approval of the Company’s incurred cost claims for fiscal years 2005 through 2010. Certain Matters Resolved During Fiscal Year 2015 On September 5, 2014, the Company entered into a settlement agreement with SS/L and Loral (the Settlement Agreement), pursuant to which SS/L and Loral are required to pay the Company a total of $108.7 million, inclusive of interest, over a two and a half year period from the date of settlement. In exchange, the Company dismissed both lawsuits against SS/L and Loral. The parties further agreed not to sue each other with respect to the patents and intellectual property that were the subject of the lawsuits and, for a period of two years, not to sue each other or each other’s customers for any intellectual property claims. The Company accounted for the amounts payable by SS/L and Loral under the Settlement Agreement as a multiple-element arrangement and allocated the total consideration to the identifiable elements based upon their fair value. The consideration assigned to each element was as follows: Implied license ................................................................... Other damages ................................................................... Interest income ................................................................... (In thousands) 85,132 18,714 4,866 108,712 $ $ During fiscal year 2015, the Company recorded $53.7 million with respect to amounts realized under the Settlement Agreement, of which $33.0 million was recognized as product revenues and $18.7 million was recognized as a reduction to SG&A expenses in the Company’s satellite services segment, and $2.0 million was recognized as interest income in the consolidated financial statements. The remaining payments under the Settlement Agreement will be recognized in future periods when realized, and will be recorded as product revenues in the satellite services segment and interest income. Note 13 — Product Warranty The Company provides limited warranties on its products for periods of up to five years. The Company records a liability for its warranty obligations when products are shipped or they are included in long-term construction contracts based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as accrued liabilities and amounts expected to be incurred beyond twelve months are classified as other liabilities in the consolidated financial statements. For mature products, the warranty cost estimates are based on historical experience with the particular product. For newer products that do not have a history of warranty costs, the Company bases its estimates on its experience with the technology involved and the types of failures that may occur. It is possible that the Company’s underlying assumptions will not reflect the actual experience and in that case, future adjustments will be made to the recorded warranty obligation. The following table reflects the change in the Company’s warranty accrual in fiscal years 2015, 2014 and 2013. Balance, beginning of period ............................................................. Change in liability for warranties issued in period .................. Settlements made (in cash or in kind) during the period ......... Balance, end of period ....................................................................... $ $ 17,023 $ 5,725 (7,203) 15,545 $ 14,107 $ 10,110 (7,194) 17,023 $ April 3, 2015 Fiscal Years Ended April 4, 2014 (In thousands) March 29, 2013 11,651 7,441 (4,985) 14,107 Note 14 — Comprehensive Income (Loss) In accordance with the authoritative guidance for reporting of amounts reclassified out of accumulated other comprehensive income (loss) (ASC 220), the Company considers information related to amounts reclassified out of accumulated other comprehensive income (loss) to be insignificant and therefore immaterial for separate disclosures. The changes in the components of accumulated other comprehensive income (loss), net of taxes, were as follows: Net Change in Foreign Currency Translation Adjustments Beginning balance ......................................... Current period other comprehensive income (loss), net of tax ......................................................... Ending balance .............................................. $ $ 2,288 $ (2,141) 147 $ Net Change in Foreign Currency Translation Adjustments Beginning balance ......................................... Current period other comprehensive income (loss), net of tax ......................................................... Ending balance .............................................. $ $ 800 $ 1,488 2,288 $ Net Change in Foreign Currency Translation Adjustments Beginning balance ......................................... Current period other comprehensive income (loss), net of tax ......................................................... Ending balance .............................................. $ $ 1,709 $ (909) 800 $ Fiscal Year Ended April 3, 2015 Net Change in Derivatives (In thousands) 25 $ (25) — $ Fiscal Year Ended April 4, 2014 Net Change in Derivatives (In thousands) (194) $ 219 25 $ Fiscal Year Ended March 29, 2013 Net Change in Derivatives (In thousands) (270) $ 76 (194) $ Accumulated Other Comprehensive Income (Loss) 2,313 (2,166) 147 Accumulated Other Comprehensive Income (Loss) 606 1,707 2,313 Accumulated Other Comprehensive Income (Loss) 1,439 (833 ) 606 60 61 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Tax amounts related to comprehensive income (loss) disclosures are not material for all of the periods presented. Note 15 — Segment Information The Company’s reporting segments, comprised of the satellite services, commercial networks and government systems segments, are primarily distinguished by the type of customer and the related contractual requirements. The Company’s satellite services segment provides retail and wholesale satellite-based broadband services for its consumer, enterprise and mobile broadband customers primarily in the United States. The Company’s commercial networks segment develops and produces a variety of advanced end-to-end satellite and other wireless communication systems and ground networking equipment and products, some of which are ultimately used by the Company’s satellite services segment. The Company’s government systems segment develops and produces network-centric, IP-based fixed and mobile secure government communications systems, network management systems, products, services and solutions and provides global mobile broadband service and product offerings. The more regulated government environment is subject to unique contractual requirements and possesses economic characteristics which differ from the satellite services and commercial networks segments. The Company’s segments are determined consistent with the way management currently organizes and evaluates financial information internally for making operating decisions and assessing performance. Segment revenues and operating profits (losses) for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013 were as follows: Revenues: Satellite Services Commercial Networks Product(1) ........................................................................... Service ................................................................................ Total ....................................................................... Product ................................................................................ Service ................................................................................ Total ....................................................................... Government Systems Product ................................................................................ Service ................................................................................ Total ....................................................................... Elimination of intersegment revenues ............................................. Total revenues .............................................................................................. Operating profits (losses): Satellite Services(2) ........................................................................ Commercial Networks .................................................................... Government Systems ...................................................................... Elimination of intersegment operating profits ................................ Segment operating profit (loss) before corporate and amortization of acquired intangible assets ...................................................................................................... Corporate ......................................................................................... Amortization of acquired intangible assets ..................................... Income (loss) from operations ..................................................................... April 3, 2015 Fiscal Years Ended April 4, 2014 (In thousands) March 29, 2013 $ $ $ $ 33,576 466,284 499,860 331,052 16,078 347,130 363,446 172,099 535,545 — 1,382,535 62,379 (33,616) 72,347 — 101,110 — (17,966) 83,144 $ $ $ 42 $ 390,666 390,708 378,577 16,944 395,521 407,119 158,114 565,233 — 1,351,462 $ (45,991) $ (12,134) 76,038 — 17,913 — (14,614) $ 3,299 $ 4,715 272,272 276,987 295,469 19,471 314,940 364,233 163,530 527,763 — 1,119,690 (79,172) (11,079) 85,473 — (4,778) — (15,584) (20,362) (1) Product revenues in the satellite services segment for the fiscal year ended April 3, 2015, include $33.0 million relating to amounts realized under the Settlement Agreement. (2) Operating profits for the satellite services segment for the fiscal year ended April 3, 2015 include $51.8 million relating to amounts realized under the Settlement Agreement. See Note 12. See Note 12. Assets identifiable to segments include: accounts receivable, unbilled accounts receivable, inventory, acquired intangible assets and goodwill. The Company’s property and equipment, including its satellites, gateways and other networking equipment, are assigned to corporate assets as they are available for use by the various segments throughout their estimated useful lives. Segment assets as of April 3, 2015, April 4, 2014 and March 29, 2013 were as follows: Segment assets: Satellite Services ........................ Commercial Networks ............... Government Systems ................. Total segment assets .................. Corporate assets ......................... Total assets .......................................... As of April 3, 2015 As of April 4, 2014 (In thousands) As of March 29, 2013 $ $ 63,790 $ 217,268 273,313 554,371 1,604,007 2,158,378 $ 73,382 $ 229,455 206,848 509,685 1,450,430 1,960,115 $ 89,945 175,230 238,057 503,232 1,290,840 1,794,072 Other acquired intangible assets, net and goodwill included in segment assets as of April 3, 2015 and April 4, 2014 were as follows: Other Acquired Intangible Assets, Net As of April 3, 2015 As of April 4, 2014 Goodwill As of April 3, 2015 As of April 4, 2014 Satellite Services ....................................................... Commercial Networks .............................................. Government Systems ................................................ Total .......................................................................... $ $ 17,873 1,443 23,024 42,340 $ $ (In thousands) 28,931 2,583 3,883 35,397 $ $ 9,809 43,994 63,438 117,241 $ $ 9,809 44,148 29,670 83,627 Amortization of acquired intangible assets by segment for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013 was as follows: Satellite Services ............................................................... Commercial Networks ...................................................... Government Systems ........................................................ Total amortization of acquired intangible assets ............... April 3, 2015 $ $ 11,058 1,452 5,456 17,966 Fiscal Years Ended April 4, 2014 (In thousands) 11,058 1,337 2,219 14,614 $ $ $ $ March 29, 2013 12,401 666 2,517 15,584 Revenue information by geographic area for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013 was as follows: United States ........................................................ Europe, Middle East and Africa ........................... Asia, Pacific ......................................................... North America other than United States .............. Central and Latin America ................................... Total revenues ...................................................... April 3, 2015 1,149,700 89,982 81,397 51,661 9,795 1,382,535 $ $ Fiscal Years Ended April 4, 2014 (In thousands) 1,044,737 127,696 147,063 25,811 6,155 1,351,462 $ $ March 29, 2013 840,899 171,853 56,195 39,158 11,585 1,119,690 $ $ The Company distinguishes revenues from external customers by geographic area based on customer location. The net book value of long-lived assets located outside the United States was $14.3 million at April 3, 2015, $18.5 million at April 4, 2014 and $18.5 million at March 29, 2013. 62 63 VIASAT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 16 — Certain Relationships and Related-Party Transactions John Stenbit, a director of the Company since August 2004, also serves on the board of directors of Loral. From time to time, the Company enters into various contracts in the ordinary course of business with Telesat Canada, which is owned by Telesat Holdings, Inc., which is a joint venture between Loral and the Public Sector Pension Investment Board. Material amounts related to these contracts are disclosed in the tables below. Revenue and expense for the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013 were as follows: Revenue: Telesat Canada – ordinary course of business ............ $ Expense: Telesat Canada – ordinary course of business ............ * Amount was not meaningful April 3, 2015 Fiscal Years Ended April 4, 2014 (In thousands) March 29, 2013 4,804 $ * $ 7,339 7,785 * 7,685 Cash received and paid during the fiscal years ended April 3, 2015, April 4, 2014 and March 29, 2013 were as follows: Cash received: Telesat Canada – ordinary course of business ............ Cash paid: Telesat Canada – ordinary course of business ............ * Amount was not meaningful April 3, 2015 Fiscal Years Ended April 4, 2014 (In thousands) March 29, 2013 5,484 7,305 * 7,868 1,023 7,358 VALUATION AND QUALIFYING ACCOUNTS For the Three Fiscal Years Ended April 3, 2015 Date Balance, March 30, 2012 ............................................................................................................... Charged (credited) to costs and expenses ............................................................................ Deductions ........................................................................................................................... Balance, March 29, 2013 ............................................................................................................... Charged (credited) to costs and expenses ............................................................................ Deductions ........................................................................................................................... Balance, April 4, 2014 ................................................................................................................... Charged (credited) to costs and expenses ............................................................................ Deductions ........................................................................................................................... Balance, April 3, 2015 ................................................................................................................... Date Balance, March 30, 2012 ................................................................................................................... Charged (credited) to costs and expenses ................................................................................ Deductions ............................................................................................................................... Balance, March 29, 2013 ................................................................................................................... Charged (credited) to costs and expenses ................................................................................ Deductions ............................................................................................................................... Balance, April 4, 2014 ....................................................................................................................... Charged (credited) to costs and expenses ................................................................................ Deductions ............................................................................................................................... Balance, April 3, 2015 ....................................................................................................................... Allowance for Doubtful Accounts (In thousands) 997 1,621 (1,184) 1,434 4,591 (4,471) 1,554 3,822 (4,321) 1,055 $ $ $ $ Deferred Tax Asset Valuation Allowance (In thousands) 14,695 1,270 — 15,965 (3,133) — 12,832 2,718 — 15,550 $ $ $ $ 64 65 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock Our common stock is traded on the Nasdaq Global Select Market under the symbol “VSAT.” The following table sets forth, for the periods indicated, the range of high and low sales prices of our common stock as reported by Nasdaq. Fiscal 2014 First Quarter ...................................................................... $ Second Quarter ................................................................. Third Quarter .................................................................... Fourth Quarter .................................................................. Fiscal 2015 First Quarter ...................................................................... $ Second Quarter ................................................................. Third Quarter .................................................................... Fourth Quarter .................................................................. High Low 73.43 $ 73.35 68.21 74.78 68.50 $ 61.07 68.84 66.58 45.18 62.05 57.37 55.49 53.03 51.50 52.26 55.11 As of May 8, 2015, there were approximately 1,193 holders of record of our common stock. A substantially greater number of holders of ViaSat common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions. Dividend Policy To date, we have neither declared nor paid any dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operation and development of our business and, therefore, do not expect to declare or pay any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, general business condition and such other factors as the Board of Directors may deem relevant. In addition, as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, the existing terms of our Credit Facilities and the indenture governing our 2020 Notes restrict our ability to declare or pay dividends on our common stock. 2015 Annual Report USE OF NON-GAAP FINANCIAL INFORMATION To supplement ViaSat’s consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), ViaSat uses Adjusted EBITDA, a measure ViaSat believes is appropriate to enhance an overall understanding of ViaSat’s past financial performance and prospects for the future. We believe Adjusted EBITDA provides useful information to both management and investors by excluding specific expenses that we believe are not indicative of our core operating results. In addition, since we have historically reported non-GAAP results to the investment community, we believe the inclusion of non-GAAP numbers provides consistency in our financial reporting and facilitates comparisons to the company’s historical operating results. Further, these non-GAAP results are among the primary indicators that management uses as a basis for evaluating the operating performance of our segments, allocating resources to such segments, planning and forecasting in future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of specific adjustments to GAAP results is provided in the table below. Fiscal Years Ended (In thousands)  April 3 2015 April 4 2014 March 29 2013 March 30 2012 An itemized reconciliation between net income (loss) attributable to ViaSat, Inc. and Adjusted EBITDA is as follows: GAAP net income (loss) attributable to ViaSat, Inc. Provision for (benefit from) income taxes Interest expense, net Depreciation and amortization Stock-based compensation expense Acquisition related expenses Loss on extinguishment of debt $ 40,363 $ (9,446) $ (41,172) $ 7,496 13,827 29,426 221,433 39,353 444 — (25,947) (50,054) (13,651) 37,903 185,064 33,639 — — 43,820 157,171 27,035 — 26,501 8,247 125,511 21,382 — — Adjusted EBITDA $ 344,846 $ 221,213 $ 163,301 $ 148,985 FORWARD-LOOKING STATEMENTS This Annual Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future economic conditions and performance; the development, customer acceptance and anticipated performance of technologies, products or services; satellite construction activities; the performance and anticipated benefits of the ViaSat-2 satellite; the expected capacity, service, coverage, service speeds and other features of ViaSat-2, and the timing, cost, economics and other benefits associated therewith; anticipated subscriber growth; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ include: our ability to realize the anticipated benefits of the ViaSat-2 satellite; unexpected expenses related to the satellite project; our ability to successfully implement our business plan for our broadband satellite services on our anticipated timeline or at all, including with respect to the ViaSat-2 satellite system; risks associated with the construction, launch and operation of ViaSat-2 and our other satellites, including the effect of any anomaly, operational failure or degradation in satellite performance; our ability to successfully develop, introduce and sell new technologies, products and services; negative audits by the U.S. government; continued turmoil in the global business environment and economic conditions; delays in approving U.S. government budgets and cuts in government defense expenditures; our reliance on U.S. government contracts, and on a small number of contracts which account for a significant percentage of our revenues; reduced demand for products and services as a result of continued constraints on capital spending by customers; changes in relationships with, or the financial condition of, key customers or suppliers; our reliance on a limited number of third parties to manufacture and supply our products; increased competition and other factors affecting the communications and defense industries generally; the effect of adverse regulatory changes on our ability to sell products and services; our level of indebtedness and ability to comply with applicable debt covenants; our involvement in litigation, including intellectual property claims and litigation to protect our proprietary technology; our dependence on a limited number of key employees; and other factors identified in our most recent reports on Form 10-K, 10-Q and 8-K and our other filings with the SEC. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason. 66 67       CORPORATE INFO Board of Directors MARK DANKBERG Chairman of the Board and Chief Executive Officer FRANK J. BIONDI, JR. Senior Managing Director WaterView Advisors LLC BOB BOWMAN President of Business and Media Major League Baseball Advanced Media DR. ROBERT JOHNSON Venture Capital Investor ALLEN LAY Private Investor DR. JEFFREY NASH Private Investor JOHN STENBIT Private Consultant HARVEY WHITE Chairman (SHW)2 Enterprises Executive Officers MARK DANKBERG Chairman of the Board and Chief Executive Officer RICHARD BALDRIDGE President and Chief Operating Officer BRUCE DIRKS Senior Vice President, Treasury and Corporate Development SHAWN DUFFY Senior Vice President and Chief Financial Officer STEPHEN ESTES Senior Vice President, Commercial Services KEVIN HARKENRIDER Executive Vice President, Commercial Networks STEVEN HART Executive Vice President, Engineering and Chief Technical Officer KEVEN LIPPERT Executive Vice President, General Counsel and Secretary MARK MILLER Executive Vice President and Chief Technical Officer KEN PETERMAN Senior Vice President, Government Systems Annual Meeting The 2015 Annual Meeting will be held at ViaSat’s headquarters, located at 6155 El Camino Real, Founders Hall, Carlsbad, California 92009 on September 16 at 8:30 a.m. Pacific Time. Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 5375 Mira Sorrento Place, Suite 300 San Diego, California 92121 General Legal Counsel Latham & Watkins LLP 12670 High Bluff Drive San Diego, California 92130 Transfer Agent and Registrar Computershare Investor Services P.O. Box 30170 College Station, TX 77842-3170 +1 312-588-4162 web.queries@computershare.com www.computershare.com/investor Investor Relations For investor information, financial information, SEC filings and other useful information, visit our website at www.viasat.com. To obtain a printed copy of our Form 10-K without charge, or to receive additional copies of this Annual Report or other financial information, please contact our Investor Relations department at: ViaSat, Inc. Attn: Investor Relations 6155 El Camino Real Carlsbad, California 92009 +1 760-476-2633 ir@viasat.com The following are trademarks or service marks of ViaSat, Inc.: Exede, WildBlue, ViaSat and the ViaSat logo. All other product and company names mentioned herein are the property of their respective owners. 68 

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