KVH Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results. KVH designs and sells mobile satellite connectivity products and services and inertial navigation systems for commercial and defense markets. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $36.9 | $39.7 | $73.5 | $76.1 |
| Operating loss | $3.4 | $6.7 | $11.1 | $12.9 |
| Continuing-operations net loss | $3.6 | $3.3 | $9.8 | $9.8 |
| Continuing-operations loss per diluted share | $0.20 | $0.19 | $0.56 | $0.56 |
- Q2 sales declined 7% year over year. Product sales fell 8% to $13.9 million and service sales fell 6% to $23.0 million. First-half sales decreased 3%.
- Q2 operating margin improved to negative 9.3% from negative 16.8%; first-half operating margin improved to negative 15.1% from negative 17.0%. Cost of sales was 65% of revenue in Q2 versus 71% a year earlier, and 66% versus 68% for the first half.
- Q2 mobile connectivity sales decreased 7% to $29.2 million; segment operating income was $0.6 million versus a $2.4 million loss. Inertial navigation sales decreased 6% to $7.7 million, while the segment returned to a $0.2 million operating profit from a $0.2 million loss. First-half inertial navigation operating results declined to a $0.7 million loss from $0.2 million of income.
- Q2 mini-VSAT service sales rose $1.1 million, with subscribers up 6%, partly offset by weaker product and content sales. First-half mobile connectivity product sales fell 17%; inertial navigation service sales fell 49%, primarily reflecting timing on a defense engineering contract.
- Cash used in operations was $2.9 million for the first half, compared with $6.6 million used in 2019. Capital expenditures were $7.0 million. Cash and cash equivalents were $21.4 million and marketable securities were $22.5 million at June 30; management reported a combined cash position of $43.9 million and working capital of $64.1 million.
- Debt was $6.9 million, representing the PPP loan; $2.7 million was classified as current. No amounts were outstanding under the revolving credit facility, but covenant restrictions prevented the company from drawing on it at June 30.
Material changes and unusual items
- Operating losses narrowed, but continuing-operations net loss remained broadly similar to the prior-year periods. The 2019 reported net income of $47.3 million for Q2 and $41.1 million for the first half included the $50.6 million and $50.9 million after-tax gains, respectively, from the sale of Videotel. Videotel is reported as discontinued operations.
- Lower Q2 sales were more than offset at the operating-income level by lower costs, including reduced 2019 comparison-period costs associated with a $2.1 million TracPhone V-IP inventory reserve. Lower sales and marketing expenses also contributed to improved operating results.
- Foreign currency translation reduced first-half comprehensive income by $2.6 million. The company recorded no impairment of goodwill or intangible assets at June 30, but cautioned that prolonged pandemic effects could affect the carrying value of KVH Media Group assets.
Outlook, commentary and risks
- Management provided no specific numerical revenue or earnings guidance. It expects substantial losses in the near term and says operating expenses in upcoming quarters are expected to increase significantly, including investment in R&D and the HTS network.
- COVID-19 disrupted business in Q2 and continued to weigh on commercial maritime, travel-dependent media, leisure, and inertial navigation demand. KVH reduced salaries and wages and most discretionary spending, including capital expenditures, and said further actions, potentially including furloughs, remained under consideration.
- Management believes available cash and mitigation actions may support the business through the next 12 months, but cautions there is no assurance the cash position will last throughout the pandemic. Mobile connectivity and media operations are particularly exposed to prolonged disruption.
- The $6.9 million PPP loan bears 1% interest and may be forgiven in whole or in part, but KVH had not decided whether to apply and gave no assurance of forgiveness. The company expects the loan and any forgiveness application to receive careful review; repayment, penalties, or reputational harm are possible if eligibility or forgiveness is challenged. A July 30, 2020 credit-facility amendment addressed treatment of the PPP loan in covenant calculations.
- Other material risks include continued losses, covenant limits that restrict access to the revolver, execution and cost risks in transitioning customers to the HTS network, competition and pricing pressure, reliance on third-party satellite capacity and suppliers, and uncertainty in large defense orders. The company reported no legal proceeding it believes likely to materially harm its business or financial condition.
Important facts for investors to verify
- Whether the COVID-19-related reductions in sales, costs, and capital spending persist, and how these affect cash burn and the company’s stated 12-month liquidity assessment.
- Whether KVH applies for and receives PPP loan forgiveness, and whether it can meet credit-facility covenants and regain access to the revolving facility.
- Whether growth in mini-VSAT subscribers and recurring service revenue can offset weaker product, content, and defense-related service sales and support improved profitability.
- Whether the defense engineering contract, HTS network transition, and planned R&D investments deliver expected revenue and margins without material impairment or additional losses.
- That 2019 net income comparisons include the Videotel sale gain; continuing-operations results are the more relevant operating comparison.