KVH Industries, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; fourth-quarter figures below are unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context
KVH designs and sells mobile satellite connectivity products and services for marine and land users, media and maritime training content, and inertial navigation systems for commercial and defense markets. Its reportable segments are mobile connectivity and inertial navigation. International customers generated 61% of FY 2018 sales.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $170.8 million | $160.1 million |
| Product sales | $63.3 million | $57.0 million |
| Service sales | $107.5 million | $103.1 million |
| Gross profit and margin | $70.7 million; 41.4% | $69.9 million; 43.7% |
| Operating loss | $7.2 million | $8.8 million |
| Net loss | $8.2 million; $0.48 per share | $11.0 million; $0.67 per share |
| Cash from operations | $5.2 million | $11.5 million |
| Cash, cash equivalents and marketable securities at year-end | $18.1 million | $42.9 million |
| Working capital at year-end | $21.7 million | $54.4 million |
Sales grew 6.7%, but gross margin fell as service costs rose faster than service revenue, including higher mini-VSAT airtime costs and depreciation associated with HTS hubs and AgilePlans equipment. Product costs were 62% of product sales versus 66% in 2017; service costs were 56% of service sales versus 51%.
Mobile connectivity sales increased 1% to $133.7 million, while segment operating earnings fell 43% to $4.2 million. Inertial navigation sales rose 33% to $37.1 million, and segment operating earnings increased to $4.9 million from $0.6 million, primarily on higher FOG sales and engineering services.
Fourth quarter: Sales were $43.8 million, compared with $39.0 million in Q4 2017. Operating loss was $1.9 million versus $1.1 million; net loss was $1.8 million, or $0.11 per share, versus $1.7 million, or $0.10 per share.
Year-end debt totaled $29.5 million: $21.9 million under the term loan, $5.0 million drawn on the revolver, and approximately $2.6 million on the mortgage. Another $15.0 million was available under the revolver. The company reported $75.2 million of future minimum satellite-capacity and related equipment lease payments; total listed contractual obligations were $118.8 million. Operating cash flow declined, capital expenditures rose to $15.9 million, and cash fell by $16.5 million during the year.
Material changes and accounting
- Compared with 2017, sales increased, but consolidated gross margin declined and operating losses continued. Mobile connectivity profitability weakened while inertial navigation recovered substantially.
- KVH adopted ASC 606 on January 1, 2018. Adoption reduced opening equity by $2.7 million and FY 2018 reported sales by $1.3 million versus prior accounting guidance; the reported net-loss effect for 2018 was approximately $5,000. Comparisons with 2017 are therefore not fully like-for-like.
- In October 2018, KVH refinanced its credit facility with a three-year secured facility, including a $22.5 million term loan and a reducing revolver. A $2.6 million mortgage balloon payment was due in April 2019; management said it intended to repay it.
- KVH sold treasury shares to SKY Perfect JSAT for $4.5 million in February 2018. It paid no dividends and made no open-market share repurchases.
Outlook, commentary and risks
Management expected 2019 sales to increase in both segments, primarily from mini-VSAT airtime and FOG products. It also expected higher costs of sales with growth, increased R&D, sales and marketing, and general and administrative expenses, and further AgilePlans-related depreciation. Management stated that available cash, expected operating cash flow, and borrowing availability should fund operations and obligations for at least the next 12 months under current plans.
Key risks include continued operating losses and cash use; HTS network costs and execution or technical challenges; AgilePlans shifting revenue from equipment sales to subscriptions while increasing capital needs; pressure on service margins and customer churn; debt covenants that tighten over time; significant satellite-capacity commitments; dependence on third-party satellite and technology providers; volatile government and defense orders; currency, trade, Brexit and macroeconomic exposure; and competition. Leisure marine sales are seasonal. The company also reported substantial deferred-tax valuation allowances and uncertain tax positions. Management and the auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether 2019 sales and subscriber growth materialized, and whether mobile connectivity service margins stabilized as HTS and AgilePlans costs developed.
- Actual cash generation, capital expenditures, and liquidity after repayment of the April 2019 mortgage balloon; monitor the secured-facility leverage and fixed-charge covenants.
- How much of the $5.9 million of year-end backlog subject to customer cancellation was fulfilled, and whether large defense/FOG orders remain repeatable.
- Revenue-recognition effects and contract asset/liability balances under ASC 606, particularly for bundled mini-VSAT arrangements.
- Execution and cost of the HTS network transition, satellite lease commitments, customer churn, and equipment recovery under AgilePlans.