KVH Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 2, 2019. Financial statements are unaudited. KVH provides mobile satellite connectivity, media and training services, and inertial navigation products and services.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $40.0 million | $40.1 million |
| Product sales | $12.9 million | $14.0 million |
| Service sales | $27.1 million | $26.1 million |
| Operating loss | $5.8 million | $3.2 million |
| Net loss | $6.2 million | $3.9 million |
| Diluted loss per share | $0.36 | $0.23 |
| Operating margin | (14.6)% | (8.0)% |
| Net margin | (15.6)% | (9.7)% |
| Cash used in operating activities | $1.1 million | $1.2 million |
- Revenue was essentially flat, but mix shifted toward services: service sales rose 4% while product sales fell 8%. Cost of sales increased 8% to $24.5 million; service costs rose 21%, reducing service gross margin to about 38% from 47%.
- Mobile connectivity revenue fell 1% to $32.5 million and its segment moved to a $1.0 million operating loss from $1.1 million income. Inertial navigation revenue increased 1% to $7.5 million, with operating income of $0.4 million versus $0.3 million.
- Cash and cash equivalents were $14.3 million, with $0.025 million in marketable securities. Working capital was $11.8 million. Capital expenditures were $3.0 million; operating cash flow less capital expenditures was approximately negative $4.1 million.
- Total debt was $29.5 million before debt issuance costs, including $21.9 million of term notes, $5.0 million drawn on the revolver, and a $2.6 million mortgage balance at quarter-end. The company reported $15.0 million of remaining revolver availability.
- Total assets were $197.5 million and stockholders’ equity was $95.6 million at March 31, 2019. Cash declined $3.8 million during the quarter.
Material changes and notable items
- Operating loss widened by $2.6 million year over year, primarily reflecting higher service delivery costs—especially mini-VSAT airtime, network capacity, legacy network minimums, and AgilePlans equipment depreciation—as well as higher personnel costs.
- Mini-VSAT service revenue increased $1.8 million, supported in part by 14% subscriber growth. Content and training service revenue declined $1.2 million. Mobile connectivity product sales were lower, partly attributed to AgilePlans subscriptions and revenue recognized over time.
- Inertial navigation service sales benefited from a development contract with a major U.S. defense contractor, expected to continue through Q3 2021.
- Backlog was $18.2 million at March 31, up from $14.5 million at year-end; $6.0 million was subject to customer cancellation for convenience. More than 190 TracPhone V7-HTS units were in backlog.
- KVH adopted ASC 842 lease accounting on January 1, 2019, recording a $9.4 million operating lease right-of-use asset and $9.4 million of operating lease liabilities. Comparative periods were not restated.
- The $2.6 million mortgage balloon payment due April 1, 2019 was repaid in full in April, after the reporting date.
Outlook, risks and contingencies
- No quantified full-year revenue or earnings guidance is provided. Management expects mini-VSAT service sales to continue growing through subscriber expansion and AgilePlans, while product sales may decline as customers choose subscriptions.
- Management expects year-over-year increases in research and development, sales and marketing, and general and administrative expenses, reflecting investment, launches, and personnel costs. It also expects AgilePlans growth to shift some sales from product revenue to service revenue and increase equipment depreciation.
- Credit facility covenants require a minimum fixed-charge coverage ratio of 1.25:1 and impose a maximum leverage ratio that tightens over time, from 3.00:1 initially to 2.00:1 by December 2020. Substantially all company assets secure the facility; covenant breaches or other defaults could accelerate repayment.
- Additional risks include dependence on satellite capacity and third-party suppliers, seasonality in marine leisure markets, timing of large customer orders, and cancellable military backlog. International sales represented 62% of revenue.
- Management reported no litigation it believes likely to materially harm the company. Disclosure controls were assessed as effective at March 31, 2019; no material change in internal control was identified during the quarter.
Important facts for investors to verify
- Whether mini-VSAT subscriber and service-revenue growth can offset rising airtime, capacity, and AgilePlans depreciation costs.
- Whether the mobile connectivity segment can return to profitability and whether total expenses can be managed against largely flat revenue.
- Current covenant headroom and liquidity after the April mortgage repayment, including the scheduled tightening of leverage limits.
- Conversion and cancellation risk in the $18.2 million backlog, including the $6.0 million cancellable portion and delivery timing for HTS units.
- Cash generation, inventory growth, and capital spending needs as KVH continues to expand satellite network capacity.