KVH Industries, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 8, 2012. Amounts are U.S. dollars. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing.
Business context
KVH designs and sells mobile satellite communications equipment and airtime services, including mini-VSAT Broadband, and navigation, guidance and stabilization products, including fiber-optic gyros (FOGs) and TACNAV systems. In 2011, mobile communications generated $70.2 million of sales and guidance and stabilization generated $42.3 million. The company completed its initial global Ku-band network coverage plan and announced a planned C-band overlay in early 2012.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $112.5 million | $112.2 million |
| Product sales | $85.1 million | $92.1 million |
| Service sales | $27.4 million | $20.2 million |
| Operating income (loss) | $(0.6) million | $5.5 million |
| Net income | $0.9 million | $8.3 million |
| Diluted EPS | $0.06 | $0.56 |
| Cash from operations | $1.9 million | $9.6 million |
- Product gross margin improved to 45% from 44%; service gross margin improved to 23% from 20%. Service margin gains reflected higher mini-VSAT airtime sales and improved project profitability, but service costs rose faster than service revenue.
- Annual net sales were nearly flat: service revenue rose 36%, mainly from mini-VSAT Broadband airtime, while product revenue fell 8%. Mobile communications product sales were approximately flat; guidance and stabilization sales fell 14%.
- FY2011 net income included a $0.5 million income tax benefit and a net benefit of about $0.8 million related to the LiveTV agreement termination. The filing attributes much of FY2010’s stronger result to a deferred-tax valuation allowance release.
- At year-end, cash and cash equivalents plus marketable securities were $30.6 million, down from $37.3 million; working capital was $59.8 million. Current assets were $79.0 million and current liabilities $19.2 million.
- Debt comprised $9.0 million drawn on a $15.0 million revolving credit facility and $3.7 million of mortgage principal. The company reported compliance with its credit covenants. Management said liquidity and operating cash flows should cover planned requirements for at least 12 months.
- Capital expenditures were $14.1 million, including construction of a new Middletown manufacturing facility. Cash from operations fell substantially, with higher receivables and inventory among the working-capital uses.
Fourth-quarter results and changes versus prior periods
In Q4 2011, sales were $31.9 million ($23.9 million product and $8.0 million service), gross profit was $13.5 million, net income was $1.6 million, and diluted EPS was $0.11. Q4 2010 sales were $27.0 million, gross profit $10.0 million, net income $0.2 million, and diluted EPS $0.02.
- FOG sales declined $17.9 million, or 44%, in 2011, mainly as U.S. Army CROWS procurement slowed pending the next program award.
- TACNAV sales increased $11.4 million, or 190%, in 2011, partly offsetting the FOG decline. Large defense orders helped lift results but make revenue timing uneven.
- Mini-VSAT airtime revenue increased $7.2 million. Mobile communications service sales growth was offset by higher network airtime costs and infrastructure expenses.
- The LiveTV production agreement was terminated in March 2011. KVH wrote off $2.9 million of capitalized antenna development costs in Q3, offset by a termination fee; the resulting net benefit was reported in other income. A new three-year agreement covers maintenance and pricing terms for possible future antenna purchases.
- Sales to General Dynamics Land Systems-Canada were 11.3% of FY2011 revenue. Backlog was $22.1 million, of which approximately $16.0 million was subject to customer cancellation for convenience.
Outlook, risks and contingencies
- Management expected a net loss in Q1 2012, significant declines in TACNAV sales in 2012 versus 2011, and a year-over-year FOG sales decline at least in Q1. The company gave no broader numerical revenue or earnings guidance.
- KVH planned to add C-band coverage to its mini-VSAT network. A five-year satellite-capacity agreement and related hubs were expected to cost approximately $12.2 million; two additional hubs were contractually committed by June 2013. Expansion may add fixed costs before subscriber growth supports profitability.
- FY2011 contractual obligations totaled $77.9 million, including $40.2 million of satellite service capacity and equipment lease obligations and $24.5 million of inventory and fixed-asset purchase commitments. These obligations are not all debt. No off-balance-sheet commitments, guarantees or standby repurchase obligations were reported.
- Key risks include economic and discretionary-spending weakness, unpredictable government procurement and order cancellations, reliance on a small number of defense customers and prime contractors, competition, satellite capacity and third-party technology dependence, supplier concentration, and execution of network expansion. Marine leisure sales are seasonal and weather-sensitive.
- Management reported no material accrued loss contingencies and no litigation it believed likely to materially harm the business. The independent auditor gave an unqualified opinion on the financial statements and internal control; management also concluded controls were effective.
Important facts for investors to verify
- Whether C-band launch costs and satellite-capacity commitments are matched by subscriber growth and improving service margins.
- Actual 2012 TACNAV and FOG orders, including CROWS procurement developments and the effect of large-order timing or cancellation.
- Receivables, inventory and operating cash flow trends, given the 2011 deterioration in cash generation.
- The size and timing of LiveTV-related revenues or costs after termination of the production agreement, and whether the reported termination benefit is nonrecurring.
- Liquidity headroom under the revolving facility, covenant requirements and the company’s ability to fund capital spending and contractual commitments.
- Customer and backlog concentration, including the cancellable portion of backlog and continued reliance on key government contractors.