KVH Industries, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. KVH designs and sells mobile satellite connectivity products and services and inertial navigation systems. Its reporting segments are Mobile Connectivity and Inertial Navigation. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
- Revenue: $42.3 million, up 15.7% from $36.6 million. Product sales rose 41% to $18.4 million; service sales increased 2% to $23.9 million.
- Profitability: Gross profit was $15.6 million, or 36.4% of sales, compared with $11.7 million, or 32.2%, in Q1 2020. Operating loss narrowed to $3.6 million from $7.6 million. Net loss was $4.0 million, or $0.22 per diluted share, versus $6.2 million, or $0.35 per share.
- Cash flow: Operating cash flow was positive $5.0 million, versus negative $2.9 million. Capital expenditures were $5.2 million; investing cash outflow was $5.1 million. Cash and cash equivalents increased by $1.4 million to $14.0 million.
- Liquidity: Cash, cash equivalents and marketable securities totaled $39.1 million; working capital was $57.8 million. Management expected available funds and operating cash flow to cover requirements for at least 12 months after filing, while noting that this depends on underlying assumptions.
- Debt: Total debt was $6.9 million, consisting of the PPP loan; $6.2 million was classified current. No revolver borrowings were outstanding, and the full $15.0 million revolving facility was available, subject to conditions and covenants.
- Other balance-sheet items: Total assets were $178.3 million and total liabilities were $47.7 million at March 31, 2021. Accounts receivable was $30.0 million and inventory was $22.8 million.
Material changes versus Q1 2020
- Inertial Navigation sales increased 54% to $11.8 million, mainly from a 77% increase in product sales, including higher TACNAV volumes. Segment operating income was $2.1 million versus a $0.8 million loss.
- Mobile Connectivity sales increased 6% to $30.5 million. Mini-VSAT service revenue rose, supported in part by 7% subscriber growth, while content service sales declined. Segment operating loss narrowed to $0.4 million from $2.3 million.
- Product mix and lower sales, marketing and support expense helped lift gross margin and reduce operating loss. General and administrative expense increased 12%, primarily because of higher professional fees related mainly to Board governance matters.
- Other expense was $0.8 million, versus other income of $1.5 million, largely reflecting higher foreign exchange losses from UK operations.
- Backlog fell to $17.0 million at March 31, 2021 from $20.4 million at December 31, 2020; the filing cautions that backlog is not a meaningful predictor of future revenue.
Outlook, risks and contingencies
- Management did not provide numeric revenue or earnings guidance. It expected TACNAV sales in coming quarters to be comparable to the corresponding 2020 quarters, not to sustain Q1 2021’s growth rate.
- COVID-19 continues to create uncertainty, particularly for maritime connectivity, travel-dependent KVH Media Group revenue, and inertial navigation customers’ spending. KVH recorded $1.8 million of intangible-asset impairment and $8.7 million of goodwill impairment in 2020 related to KVH Media Group; it reported no further impairment indicators at March 31, 2021 but warned further impairment could occur if disruption persists or worsens.
- The $6.9 million PPP loan may qualify for partial or full forgiveness, but KVH had not decided whether to apply and gave no assurance of forgiveness. If not forgiven, repayment obligations apply.
- Other risks include reliance on certain single-source suppliers, foreign-exchange exposure, seasonality in marine leisure, large-customer order timing, and the potential cancellation of certain military backlog orders. Of reported backlog, $2.3 million was subject to cancellation for customer convenience.
- KVH plans continued investment in its mini-VSAT network and satellite capacity. The filing describes ordinary-course legal matters but states management did not believe any pending matter was likely to materially harm the company.
- Management reported disclosure controls were effective as of March 31, 2021 and identified no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether mini-VSAT subscriber growth and service revenue continue, and whether content revenue recovers as travel activity changes.
- Whether TACNAV sales normalize as management expects and how much Q1’s segment profit depended on unusually high product volume.
- The status and amount of any PPP loan forgiveness, and resulting debt repayment needs.
- Cash generation relative to planned network investment, capital expenditures, and the company’s stated liquidity outlook.
- Whether COVID-related weakness or updated forecasts trigger further impairment of KVH Media Group goodwill or intangible assets.
- Whether the declining backlog converts to revenue on schedule, including orders subject to cancellation and any supplier-related delivery constraints.