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| VSAT > SEC Filings for VSAT > Form 10-K on 28-May-2009 | All Recent SEC Filings |
28-May-2009
Annual Report
Government Systems
Our government business encompasses specialized products principally serving
defense customers and includes:
• Data links, including MIDS terminals, MIDS Joint Tactical Radio System (MIDS
JTRS) development and UAV technologies,
• Information security and assurance products and services, which enable military and government users to communicate secure information over secure and non-secure networks, and
• Government satellite communication systems and products, including UHF DAMA satellite communications products consisting of modems, terminals and network control systems, and innovative broadband solutions to government customers to increase available bandwidth using existing satellite capacity.
Serving government customers with cost-effective products and solutions
continues to be a critical and core element of our overall business strategy.
Commercial Networks
Our commercial networks segment offers an end-to-end capability to provide
customers with a broad range of satellite communication and other wireless
communications equipment solutions including:
• Consumer broadband products and solutions to customers based on DOCSIS® or
DVB-RCS technology,
• Mobile broadband products and systems for airborne, maritime and ground mobile broadband applications,
• Enterprise Very Small Aperture Terminal (VSAT) networks products,
• Satellite networking systems design and technology development, and
• Antenna systems for commercial and defense applications and customers.
With expertise in commercial satellite network engineering, gateway
construction and remote terminal manufacturing for all types of interactive
communications services, we have the ability to take overall responsibility for
designing, building, initially operating and then handing over a fully
operational, customized satellite network serving a variety of markets and
applications. In addition, based on our advanced satellite technology and
systems integration experience, we have developed products addressing five key
broadband markets: enterprise, consumer, in-flight, maritime and ground mobile
applications.
Satellite Services
Our satellite services segment encompasses three primary areas: managed
broadband services, mobile broadband services and wholesale bandwidth services.
For everyday enterprise networking or backup protection for primary networks,
our managed broadband service provides a combination of terrestrial and
satellite connections through an around-the-clock call center and network
management operation to ensure customer network availability and reliable
digital satellite communications. Our mobile broadband service includes network
management services for our customers who utilize our Arclight-based mobile
communication systems, also through our network management center. In 2008, we
began construction of a high-speed Ka-band satellite in order to provide
wholesale broadband services over North America. We currently plan to launch
this satellite in early 2011 and introduce service later in 2011.
Sources of Revenues
To date, our ability to grow and maintain our revenues has depended on our
ability to identify and target markets where the customer places a high priority
on the technology solution, and obtaining 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.
Our products are provided primarily through three types of contracts:
fixed-price, time-and-materials and cost-reimbursement contracts. Historically,
fixed-price contracts, which require us to provide products and services under a
contract at a specified price, comprised approximately 86% of our revenues for
both fiscal years 2009 and 2008, and 84% of our revenues for fiscal year 2007.
The remainder of our annual revenue 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).
Historically, a significant portion of our revenues are from contracts for
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 were
approximately $126.7 million or 20% of our total revenues during fiscal year
2009, $112.2 million or 20% of our total revenues during fiscal year 2008, and
$122.9 million or 24% of our total revenues during fiscal year 2007.
We also incur independent research and development expenses, which are not
directly funded by a third party. Independent research and development expenses
consist primarily of salaries and other personnel-related expenses, supplies,
prototype materials, testing and certification related to research and
development programs. Independent research and development expenses were
approximately 5%, 6% and 4% of revenues during fiscal years 2009, 2008 and 2007,
respectively. As a government contractor, we are able to recover a portion of
our independent research and development expenses pursuant to our government
contracts.
Executive Summary
We develop, manufacture and provide services related to satellite ground
systems and other related government and commercial digital communication and
networking equipment. Our products are generally highly complex and have a
concept-to-market timeline of several months to several years. The development
of products where customers expect state-of-the-art results requires an
exceptionally talented and dedicated engineering workforce. Since inception, we
have been able to attract, develop and retain engineers who support our business
and customer objectives, while experiencing low turnover (relative to our
industry). The consistency and depth of our engineering workforce has enabled us
to develop leading edge products and solutions for our customers.
During fiscal year 2008, we completed the acquisition of all of the
outstanding capital stock of JAST, S.A. (JAST), a Switzerland based,
privately-held developer of microwave circuits and antennas for terrestrial and
satellite applications, specializing in small, low-profile antennas for mobile
satellite communications. The acquisition was accounted for as a purchase and
accordingly, the consolidated financial statements include the operating results
of JAST from the date of acquisition in our commercial networks segment.
During our fiscal years 2006 and 2007, we completed the acquisitions of
Efficient Channel Coding, Inc. (ECC), Enerdyne Technologies, Inc. (Enerdyne) and
Intelligent Compression Technologies, Inc. (ICT). The acquisitions were
accounted for as purchases and accordingly, the operating results of ECC,
Enerdyne and ICT have been included from the dates of acquisition in our
consolidated financial statements.
Critical Accounting Policies and Estimates
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. 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
percentage-of-completion method of accounting under the American Institute of
Certified Public Accountants' Statement of Position 81-1 (SOP 81-1), "Accounting
for Performance of Construction-Type and Certain Production-Type Contracts."
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 2009, 2008 and 2007, we recorded losses of
approximately $5.4 million, $7.9 million and $4.5 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 cost on our programs through regular quarterly
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 would
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, 2009 would change our income before income
taxes and minority interest by approximately $0.4 million.
We also have contracts and purchase orders where revenue is recorded on
delivery of products in accordance with Staff Accounting Bulletin No. 104 (SAB
104), "Revenue Recognition." In this situation, contracts and customer purchase
orders are used to determine the existence of an arrangement. Shipping documents
and customer acceptance, when applicable, are used to verify delivery. We assess
whether the sales price is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund
or adjustment, and assess collectability based primarily on the creditworthiness
of the customer as determined by credit checks and analysis, as well as the
customer's payment history.
When a sale involves multiple elements, such as sales of products that
include services, the entire fee from the arrangement is allocated to each
respective element based on its relative fair value in accordance with Emerging
Issues Task Force 00-21 (EITF 00-21), "Accounting for Multiple Element Revenue
Arrangements," and recognized when the applicable revenue recognition criteria
for each element have been met. The amount of product and service revenue
recognized is impacted by our judgments as to whether an arrangement includes
multiple elements and, if so, whether sufficient objective and reliable evidence
of fair value exists for those elements. Changes to the elements in an
arrangement and our ability to establish evidence for those elements could
affect the timing of revenue recognition.
Accounting for stock-based compensation
At April 3, 2009, we had stock-based compensation plans described in Note 6
to the Consolidated Financial Statements. We grant options to purchase our
common stock and award restricted stock units to our employees and directors
under our equity compensation plans. Eligible employees can also purchase shares
of our common stock at 85% of the lower of the fair market value on the first or
the last day of each six-month offering period under our employee stock purchase
plan. The benefits provided under these plans are stock-based payments subject
to the provisions of revised SFAS 123R. Stock-based compensation expense
recognized under SFAS 123R for the fiscal year ended April 3, 2009 was
$3.9 million, $4.8 million and $1.1 million for employee stock options
(including stock options assumed in business combination), restricted stock
units and the employee stock purchase plan, respectively. Stock-based
compensation expense recognized under SFAS 123R for the fiscal year ended
March 28, 2008 was $3.9 million, $2.4 million and $0.8 million for employee
stock options (including stock options assumed in a business combination),
restricted stock units and the employee stock purchase plan, respectively.
Stock-based compensation expense recognized under SFAS 123R for the fiscal year
ended March 30, 2007 was $1.9 million, $1.2 million and $0.8 million for
employee stock options, restricted stock units and the employee stock purchase
plan, respectively. At April 3, 2009, there was $6.4 million, $13.2 million and
$0.3 million in unrecognized compensation expense related to unvested stock
options (including stock options assumed in business combination), restricted
stock units and the employee stock purchase plan, respectively, which is
expected to be recognized over a weighted average period of 2.1 years, 2.8 years
and less than six months, respectively.
The determination of the fair value of stock-based payment awards on the date
of grant using an option pricing model (Black-Scholes model) is affected by our
stock price as well as assumptions regarding a number of complex and subjective
variables. These variables include, but are not limited to, our expected stock
price volatility over the term of the awards, actual and projected employee
stock option exercise behaviors, risk-free interest rate and expected dividends.
If factors change and we employ different assumptions in the application of
SFAS 123R in future periods, the compensation expense that we record under SFAS
123R may differ significantly from what we have recorded in the current period.
Therefore, we believe it is important for investors to be aware of the high
degree of subjectivity involved when using option pricing models to estimate
stock-based compensation under SFAS 123R. Option pricing models were developed
for use in estimating the value of traded options that have no vesting or
hedging restrictions, are fully transferable and do not cause dilution. Because
our stock-based payments have characteristics significantly different from those
of freely traded options, and because changes in the subjective input
assumptions can materially affect our estimates of fair values, in our opinion,
existing valuation models, including the Black-Scholes and lattice binomial
models, may not provide reliable measures of the fair values of our stock-based
compensation. Consequently, there is a risk that our estimates of the fair
values of our stock-based compensation awards on the grant dates may bear little
resemblance to the actual values realized upon the exercise, expiration, early
termination or forfeiture of those stock-based payments in the future. Certain
stock-based payments, such as employee stock options, may expire worthless or
otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, values may be realized from these instruments that are
significantly in excess of the fair values originally estimated on the grant
date and reported in our financial statements. There is currently no
market-based mechanism or other practical application to verify the reliability
and accuracy of the estimates stemming from these valuation models, nor is there
a means to compare and adjust the estimates to actual values. Although the fair
value of employee stock-based awards is determined in accordance with SFAS 123R,
SAB 107, "Share-Based Payment," and SAB 110, "Year-End Help For Expensing
Employee Stock Options," using an option pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market
transaction.
Estimates of stock-based compensation expense can be significant to our
financial statements, but this expense is based on option valuation models and
will never result in the payment of cash by us. The guidance in SFAS 123R, SAB
107 and SAB 110 is relatively new and best practices are not well established.
The application of these principles may be subject to further interpretation and
refinement over time. There are significant differences among valuation models,
and there is a possibility that we will adopt different valuation models in the
future. This may result in a lack of consistency in future periods and
materially affect the fair value estimate of stock-based payments. It may also
result in a lack of comparability with other companies that use different
models, methods and assumptions.
Theoretical valuation models and market-based methods are evolving and may
result in lower or higher fair value estimates for stock-based compensation. The
timing, readiness, adoption, general acceptance, reliability and testing of
these methods is uncertain. Sophisticated mathematical models may require
voluminous historical information, modeling expertise, financial analyses,
correlation analyses, integrated software and databases, consulting fees,
customization and testing for adequacy of internal controls. Market-based
methods are emerging that, if employed by us, may dilute our earnings per share
and involve significant transaction fees and ongoing administrative expenses.
The uncertainties and costs of these extensive valuation efforts may outweigh
the benefits to investors.
Our expected volatility is a measure of the amount by which our stock price
is expected to fluctuate. The estimated volatility for stock options and
employee stock purchase rights is based on the historical volatility calculated
using the daily stock price of our stock over a recent historical period equal
to the expected term. The risk-free interest rate that we use in determining the
fair value of our stock-based awards is based on the implied yield on United
States Treasury zero-coupon issues with remaining terms equivalent to the
expected term of our stock-based awards.
The expected life of employee stock options represents the calculation using
the "simplified" method for "plain vanilla" options applied consistently to all
"plain vanilla" options, consistent with the guidance in SAB 107. In
December 2007, the Securities and Exchange Commission (SEC) issued SAB 110 to
amend the SEC's views discussed in SAB 107 regarding the use of the simplified
method in developing an estimate of expected life of options in accordance with
SFAS 123R. Due to significant changes in our option terms in October of 2006 and
lack of sufficient history, we will continue to use the simplified method until
we have the historical data necessary to provide a reasonable estimate of
expected life in accordance with SAB 107, as amended by SAB 110. For the
expected option life, we have what SAB 107 defines as "plain-vanilla" stock
options, and therefore use a simple average of the vesting period and the
contractual term for options as permitted by SAB 107. The weighted average
expected life of employee stock options granted during the fiscal year ended
April 3, 2009, derived from the "simplified" method was 4.1 years. The expected
term or life of employee stock purchase rights issued represents the expected
period of time from the date of grant to the estimated date that the stock
purchase right under our employee stock purchase plan would be fully exercised.
Allowance for doubtful accounts
We make estimates of the collectability of our accounts receivable based on
historical bad debts, customer creditworthiness and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. Historically,
our bad debts have been minimal; a contributing factor to this is that a
significant portion of our sales has been to the United States government. More
recently, commercial customers have comprised a larger part of our revenues. Our
accounts receivable balance was $164.1 million, net of allowance for doubtful
accounts of $0.4 million, as of April 3, 2009, and our accounts receivable
balance was $155.5 million, net of allowance for doubtful accounts of
$0.3 million, as of March 28, 2008.
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 a current liability. 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.
Goodwill and other intangible assets
We account for our goodwill under SFAS 142, "Goodwill and Other Intangible
Assets." The SFAS 142 goodwill impairment model is a two-step process. First, it
requires a comparison of the book value of net assets to the fair value of the
reporting units that have goodwill assigned to them. Reporting units within our
government systems and commercial networks segments have goodwill assigned to
them. If the fair value is determined to be less than book value, a second step
is performed to compute the amount of the impairment. In this process, a fair
value for goodwill is estimated, based in part on the fair value of the
reporting unit used in the first step, and is compared to its carrying value.
The shortfall of the fair value below carrying value, if any, represents the
amount of 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.
We estimate the fair values of the related operations using discounted cash
flows and other indicators of fair value. We base the forecast of future cash
flows on our best estimate of the future revenues and operating costs, which we
derive primarily from existing firm orders, expected future orders, contracts
with suppliers, labor agreements and general market conditions. Changes in these
forecasts could cause a particular reporting unit to either pass or fail the
first step in the SFAS 142 goodwill impairment model, which could significantly
influence whether a goodwill impairment needs to be recorded. We adjust the cash
flow forecasts by an appropriate
discount rate derived from our market capitalization plus a suitable control
premium at the date of evaluation. In applying the first step, which is
identification of any impairment of goodwill, no impairment of goodwill has
resulted.
Property, equipment and satellite
Equipment, computers and software, furniture and fixtures and our satellite
under construction are recorded at cost, net of accumulated depreciation. Costs
are capitalized as incurred and for our satellite include construction, launch
and insurance. Satellite construction costs, including launch services and
. . .
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