Business context and reporting period
KVH Industries, Inc. designs and sells mobile satellite communications products and services and navigation, guidance and stabilization systems. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $46.0m | $44.9m | $86.3m | $86.2m |
| Operating loss | $(0.7)m | $(0.3)m | $(4.1)m | $(2.2)m |
| Net loss | $(0.8)m | $0.04m income | $(3.6)m | $(1.4)m |
| Net loss per diluted share | $(0.05) | $0.00 | $(0.23) | $(0.09) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $8.9m | $4.9m |
- Q2 product sales were $20.1m, up 12%; service sales were $25.9m, down 4%. For the first half, product sales rose 6% to $35.4m, while service sales fell 4% to $50.9m.
- Reported product gross margin was 35% in Q2 versus 33%; service gross margin was 49% in both periods. First-half product gross margin was 33% versus 32%; service gross margin was 48% versus 49%.
- At June 30, cash and cash equivalents were $24.8m and marketable securities were $22.7m, totaling $47.4m. Working capital was $68.0m.
- Total debt was $61.6m, including $56.5m under the term note; no revolving-credit borrowings were outstanding. The company reported compliance with its financial debt covenants.
- Total assets were $209.2m, down from $226.3m at year-end 2015. Cash increased by $2.1m during the first half. Investing activities used $2.6m and financing activities used $3.3m.
Material changes versus prior comparable periods
- Q2 sales increased 2.5%, but operating loss widened to $0.7m from $0.3m. First-half sales were nearly flat, while the operating loss widened to $4.1m from $2.2m and the net loss increased to $3.6m from $1.4m.
- Higher TACNAV shipments under a previously awarded international military contract drove much of the product-sales growth; guidance and stabilization sales rose, while mobile communication sales declined. Management noted TACNAV shipments can be uneven and depend on orders and timing.
- Service revenue weakened, particularly advanced media services, partly reflecting sterling exchange-rate weakness, and Inmarsat service sales also declined. Lower service costs partly offset the revenue decline.
- Research and development and sales, marketing and support expenses increased. First-half sales and marketing expense also reflected higher warranty expense, mainly for TracPhone V7 and V11 products.
- Foreign-currency translation reduced first-half comprehensive income by $5.1m; goodwill declined $3.1m and intangible assets declined $4.9m, primarily due to translation and amortization. The company reported no impairment indicators during the period.
Outlook, risks and other notable items
- No quantified company-wide revenue or earnings guidance is provided. Management expected 2016 TACNAV product sales to exceed 2015 levels, but warned that shipment timing is uncertain; FOG sales were expected to be relatively flat.
- Management expected mini-VSAT service revenue to grow, while acknowledging that growth could slow amid difficult commercial maritime conditions, especially in oil and gas. Content and service sales were expected to increase; contracted engineering services were not expected to rise meaningfully.
- Management expected modest increases in R&D and general and administrative expenses, and continued growth in sales, marketing and support expenses. It stated cash, securities, working capital and operating cash flows should meet planned requirements for at least the next 12 months, while noting additional financing could be sought and is not assured.
- Key risks include weak offshore oil-and-gas demand and customer churn, unpredictable government and military orders and cancellations, competition, foreign-exchange exposure and Brexit-related uncertainty, dependence on third-party satellite capacity and technology, and substantial debt. Backlog was $17.0m, including $9.9m of orders cancellable for customer convenience; management cautioned backlog is not a meaningful predictor of future revenue.
- The company disclosed no legal proceeding it believed likely to materially harm its business or financial condition. Disclosure controls were judged effective at quarter-end. The filing notes the company was seeking a new CFO following the CFO’s resignation.
Most important facts for investors to verify
- Whether TACNAV contract shipments and future orders occur on schedule, and how much reported growth depends on a small number of military orders.
- Whether mobile satellite demand, customer churn and service margins stabilize, particularly in the offshore oil-and-gas market.
- Debt covenant headroom, required repayments and refinancing needs; the filing states covenant compliance but does not provide clear covenant headroom.
- How foreign-exchange movements, including sterling weakness and Brexit developments, affect sales, earnings and the value of overseas assets.
- Whether the $9.9m of cancellable backlog converts to revenue and whether management’s liquidity expectations remain valid.