KVH Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. KVH designs and sells mobile satellite connectivity products and services, and inertial navigation products and services. Its two segments are mobile connectivity and inertial navigation.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $41.1 million | $39.3 million | $114.6 million | $115.4 million |
| Operating loss | $0.5 million | $4.9 million | $11.6 million | $17.8 million |
| Continuing-operations net loss | $0.5 million | $3.3 million | $10.3 million | $13.1 million |
| Net income (loss), including discontinued operations | $(0.5) million | $(4.3) million | $(10.3) million | $36.7 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(2.9) million | $(11.5) million |
Margins: Product and service costs together were 62% of sales in Q3 2020 versus 66% in Q3 2019, and 65% versus 67% for the nine-month periods. Operating margin was approximately (1.3)% in Q3 and (10.1)% for the nine months, compared with (12.3)% and (15.4)%, respectively, in 2019.
Sales mix and segments: Q3 product sales rose 12% to $16.7 million while service sales were essentially flat at $24.5 million. Mobile connectivity sales slipped 1% to $31.4 million; inertial navigation sales rose 27% to $9.7 million. For the nine months, mobile connectivity sales declined 3% to $89.5 million, while inertial navigation sales increased 7% to $25.1 million.
Liquidity and debt at September 30, 2020: Cash and cash equivalents were $18.1 million and marketable securities were $22.5 million, totaling approximately $40.7 million. Working capital was $62.8 million. The company recorded a $6.9 million PPP loan, with $3.8 million classified as current and $3.1 million long term. No borrowings were outstanding on its revolving facility; covenant restrictions limited available borrowing to $5.0 million of the $15.0 million facility. Capital expenditures were $10.2 million for the nine months.
Material changes versus prior comparable periods
- Q3 sales increased 5%, and operating loss narrowed by $4.4 million. The improvement reflected lower expenses and improved segment results.
- Q3 mobile connectivity service revenue benefited from a 4% increase in mini-VSAT subscribers and a one-time $0.9 million favorable resolution of a customer contractual matter. Lower leisure product sales and content revenue partly offset the growth.
- Q3 inertial navigation product sales increased 40%, while service sales fell 68%. For the nine months, inertial navigation service revenue declined 54%, primarily due to lower contract engineering revenue.
- Nine-month sales were down slightly, but operating loss improved by $6.2 million. The 2019 comparison includes a $49.8 million after-tax gain from the sale of Videotel, reported as discontinued operations; 2020 had no discontinued-operation results.
- Nine-month foreign-currency translation reduced other comprehensive income by $1.5 million. Q3 other expense included increased foreign-exchange losses from UK operations.
Outlook, risks and contingencies
- Management gave no numerical earnings or revenue guidance. It said the duration and economic effects of COVID-19 remain uncertain, and that maritime, travel, leisure and media-related activity are particularly exposed. Salaries for most employees were restored to pre-reduction levels at the start of Q4, while discretionary spending remained limited.
- Management said it expected significant operating losses in the near future and expected operating expenses to rise in upcoming quarters as it invests in R&D and expands the HTS satellite network. The filing identifies continuing COVID-19 disruption, the cost of operating legacy and HTS networks during transition, and the shift toward recurring-revenue subscriptions as pressures on profitability.
- The company had not decided whether to apply for forgiveness of the $6.9 million PPP loan and gave no assurance that any amount would be forgiven. It expected the loan and any forgiveness application to receive careful review.
- KVH planned a full goodwill impairment analysis in Q4 2020. It reported no impairment at September 30, but warned that prolonged pandemic-related disruption could impair KVH Media Group goodwill or intangible assets.
- Backlog was $25.6 million, versus $19.5 million at year-end 2019, but management said backlog is not a meaningful revenue predictor. $11.8 million was subject to customer cancellation for convenience.
- Management believed cash resources and available mitigation measures could support the business through the next 12 months, while noting there was no assurance cash would last for the duration of the pandemic. It reported no legal proceeding likely to materially harm the business.
Important facts for investors to verify
- Whether recurring mini-VSAT and AgilePlans subscriber growth can offset weaker product, leisure and content sales, and whether the one-time $0.9 million customer matter recurs.
- PPP loan eligibility, audit outcome, forgiveness decision and repayment obligations.
- Q4 goodwill impairment test results, particularly for KVH Media Group.
- Compliance with credit-facility covenants and the resulting $5.0 million borrowing availability, including the leverage covenant tightening scheduled for December 31, 2020.
- Cash use, capital spending and operating performance as COVID-19 effects, HTS transition costs and planned R&D investment continue.