KVH Industries, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. This is an annual filing, with fourth-quarter results noted separately below.
Business context
KVH sells mobile satellite connectivity hardware and airtime, media and maritime training services, and fiber-optic-gyro and tactical inertial navigation products. Its reporting segments are mobile connectivity and inertial navigation. Service revenue represented 64% of sales, up from 59% in 2016; 62% of 2017 revenue came from customers outside the United States.
Financial performance and liquidity
- Revenue: $160.1 million, down 9.1% from $176.1 million in 2016. Product sales fell 22% to $57.0 million; service sales were essentially flat at $103.1 million.
- Profitability: Gross profit was $69.9 million, or 43.7% of revenue, versus $76.8 million, or 43.6%, in 2016. Operating loss was $8.8 million (5.5% of revenue), compared with a $1.3 million operating loss. Net loss was $11.0 million, or $0.67 per diluted share, versus a $7.5 million net loss, or $0.47 per share.
- Segments: Mobile connectivity revenue declined 7% to $132.2 million and segment operating earnings fell 27% to $7.3 million. Inertial navigation revenue fell 20% to $27.9 million and segment operating earnings fell 89% to $0.6 million. Corporate/unallocated operating loss was $16.7 million.
- Cash flow and investment: Operating cash flow was $11.5 million, down from $18.7 million. Capital expenditures were $12.8 million, implying approximately $1.3 million of negative operating cash flow after capital expenditures. Investing activities provided $4.5 million, largely reflecting marketable-security maturities and sales; financing activities used $9.7 million, principally for debt repayment.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $42.9 million, and working capital was $54.4 million. Total debt was $47.1 million, including $44.3 million under the term loan; the $15.0 million revolver was undrawn and available. The company reported compliance with its debt covenants at year-end.
- Other metrics: Backlog was $16.3 million, up from $8.9 million; $10.3 million was subject to customer cancellation for convenience. R&D expense was $15.9 million, or 9.9% of revenue. The company recorded $1.1 million of income tax expense despite its pretax loss, including valuation allowances on deferred tax assets.
Fourth quarter: Revenue was $39.0 million; operating loss was $1.1 million and net loss was $1.7 million, compared with fourth-quarter 2016 revenue of $43.9 million and net loss of $6.8 million.
Material changes versus prior year
- Mobile connectivity product sales decreased $8.7 million, reflecting a large prior-year order, weather-related delays in marine retrofits, and the shift toward AgilePlans subscriptions. Mini-VSAT service revenue increased $2.8 million, partly offsetting declines in content/training and Inmarsat services.
- Inertial navigation product sales fell $7.4 million. TACNAV sales declined $10.3 million as significant prior-year orders did not recur, while FOG product sales rose $2.8 million.
- Operating loss widened by $7.4 million. Product mix, lower revenue and higher operating costs contributed; foreign-exchange transaction losses also weighed on results.
- Cash and marketable securities declined by $9.2 million in total, while debt declined by approximately $11.0 million. Capital expenditures more than doubled from 2016.
Outlook, risks and unusual items
- Management expected modest 2018 operating-earnings growth in both segments, citing FOG backlog, engineering services and expansion of mobile connectivity. It cautioned that TACNAV order timing is difficult to predict and said 2018 quarterly operating expenses could rise significantly due to R&D and the new high-throughput satellite (HTS) network.
- AgilePlans launched in 2017 and accounted for less than 1% of revenue. It may support subscriber growth, but can reduce product and separately sold service revenue, increase capital needs and add equipment-recovery risks.
- The HTS network launched in October 2017. Management anticipated near-term costs from operating both the new and legacy networks, with technical, execution and customer-transition risks; longer-term benefits depend on successful deployment and demand.
- ASC 606 adoption began January 1, 2018. KVH estimated an opening accumulated-deficit increase of $3 million to $4 million, primarily from deferring gross margin on certain mini-VSAT hardware contracts; the estimate was preliminary and could change.
- Other material risks include weaker maritime demand associated with low oil prices, government funding and contract cancellations, competition and pricing pressure, satellite-provider dependence, seasonality and weather, foreign-exchange exposure, cybersecurity, and supplier concentration. Management expected sufficient liquidity for at least the next 12 months but identified debt repayment and satellite-capacity commitments as key capital needs.
- The term loan matures July 1, 2019; a $2.6 million mortgage balloon payment is due in April 2019. Contractual obligations totaled $87.4 million, including satellite-capacity and related equipment leases and purchase commitments. A $4.5 million private placement of shares to SKY Perfect JSAT closed February 28, 2018.
- The company reported no legal proceeding it believed likely to materially harm the business. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and HTS deployment improve airtime revenue and margins enough to offset network costs, hardware-sales shifts and customer churn.
- Whether the higher inertial-navigation backlog converts to revenue, and whether TACNAV orders recover after the sharp 2017 decline; note the cancellation terms on part of backlog.
- The final ASC 606 opening adjustment and its effects on revenue timing, contract balances and reported margins.
- Liquidity, covenant headroom and refinancing or repayment plans for the 2019 term-loan maturity and mortgage balloon payment.
- The final tax-reform accounting and recoverability of deferred tax assets, given the substantial valuation allowance and continued losses.