KVH Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 9, 2012. Financial statements are unaudited. KVH designs and sells mobile satellite communications products and services, and navigation, guidance and stabilization equipment for defense and commercial markets.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $26.7 million | $24.4 million | +9.5% |
| Operating loss | $1.5 million | $2.0 million | Loss narrowed |
| Net loss | $1.4 million | $1.5 million | Loss narrowed |
| Basic and diluted loss per share | $0.09 | $0.10 | Improved |
| Operating cash flow | $5.1 million | $(1.1) million | Improved |
- Product sales were $17.1 million, down 9.5%; service sales were $9.6 million, up 75%. Mobile communications revenue rose to $20.8 million from $15.7 million, while guidance and stabilization revenue declined to $5.9 million from $8.7 million.
- Product gross margin fell to 36% from 44%, chiefly because lower FOG and TACNAV sales reduced the contribution of higher-margin products. Service gross margin rose to 40% from 13%, driven by mini-VSAT Broadband airtime and engineering services. Overall gross margin was approximately 37% in both periods.
- Cash and cash equivalents were $5.6 million and marketable securities $25.8 million at quarter-end, totaling $31.3 million. Working capital was $56.6 million. Total debt was approximately $10.7 million, including $7.0 million drawn on the revolving facility and approximately $3.7 million of mortgage debt.
- Investing cash outflow was $4.4 million, including $2.2 million of capital expenditures; financing cash outflow was $2.1 million, primarily the $2.0 million line-of-credit repayment. Cash declined by $1.5 million to $5.6 million.
Changes, outlook and risks
- Mobile communications product growth reflected demand for TracPhone V7 and V3 and the new HD11 satellite television system. Service revenue growth included a $2.5 million increase in mini-VSAT Broadband airtime.
- FOG sales decreased about 50% and TACNAV sales about 44% year over year. Management expects TACNAV sales to decline significantly in 2012 versus 2011, citing uncertainty in military expenditures, and expects FOG sales to decline year over year at least in Q2.
- Management expects service margins to benefit as the initial Ku-band network build-out is complete, but C-band implementation and capacity expansion costs could offset or exceed those improvements.
- Backlog was $24.3 million, up from $22.1 million at year-end, largely from TACNAV orders. About $17.6 million was subject to customer cancellation; management cautions backlog is not a meaningful revenue predictor.
- KVH reported that cash, cash equivalents and securities should cover planned operating and capital needs for at least 12 months. It had $7.0 million drawn on a $15.0 million credit line at March 31; it borrowed a further $2.0 million in May. The new manufacturing facility was complete, and management expected no material additional building costs. Satellite capacity, hub and teleport commitments were approximately $12.2 million in total, with two additional hubs contractually required by June 2013.
- Risks and contingencies include military-order cancellations, uneven defense-product demand, global economic challenges affecting leisure sales, foreign-currency exposure, and future satellite-network costs. Management said no pending legal matter was likely to materially harm the company. Disclosure controls were deemed effective, with no material internal-control changes identified.
Important facts for investors to verify
- Whether mini-VSAT service growth and improved service margins continue as network capacity and C-band costs increase.
- Whether anticipated TACNAV and FOG declines, and the mix shift away from higher-margin guidance products, affect full-year profitability.
- Conversion and timing of the $24.3 million backlog, particularly orders cancellable for customer convenience.
- Liquidity and covenant headroom after the additional May borrowing, alongside planned hub, satellite-capacity and capital spending.