KVH Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The unaudited results cover KVH’s mobile connectivity and inertial navigation businesses; Videotel, sold in 2019, is reported as discontinued operations. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $36.6 | $36.4 |
| Operating loss | $(7.6) | $(6.2) |
| Net loss | $(6.2) | $(6.3) |
| Basic and diluted loss per share | $(0.35) | $(0.36) |
| Net cash used in operations | $(2.9) | $(1.1) |
- Consolidated gross margin was approximately 32.1%, down from 35.0%; operating margin was approximately negative 20.9%, compared with negative 17.1%. Product gross margin fell to approximately 26.4% from 37.3%, while service gross margin improved to approximately 35.3% from 33.6%.
- Cash and cash equivalents were $18.5 million and marketable securities were $22.5 million at quarter-end, or approximately $41.0 million combined. Working capital was $63.6 million.
- Operating cash use was $2.9 million. Investing activities provided $4.1 million, largely from marketable securities maturities and sales; capital expenditures were $3.3 million. Cash and cash equivalents ended at $18.5 million.
- No borrowings were outstanding, but the company said covenant restrictions prevented it from drawing on its $20 million revolver. Total liabilities were $47.4 million, including operating and finance lease obligations.
Changes versus the prior-year quarter
- Sales were nearly unchanged: product sales declined 1% to $13.1 million, while service sales increased 1% to $23.5 million.
- Operating loss widened by $1.4 million. Higher product costs, research and development, and sales, marketing and support expenses outweighed lower general and administrative expense. In inertial navigation, reduced factory-overhead absorption and increased scrap and other manufacturing costs pressured product costs.
- Mobile connectivity sales were flat at $28.9 million: product sales fell 11%, partly offset by 4% growth in services. Mini-VSAT service sales rose, supported in part by a 10% increase in subscribers, primarily from AgilePlans.
- Inertial navigation sales increased 3% to $7.7 million, as 12% product growth more than offset a 29% decline in service sales. The service decline reflected timing on a development contract expected to continue through December 2020. The segment moved from operating income of $0.4 million to a loss of $0.8 million.
- Net loss improved slightly, while loss from continuing operations narrowed to $6.2 million from $6.5 million. Q1 2019 included $0.2 million of income from discontinued operations. Q1 2020 also benefited from $1.5 million of other income, primarily foreign-exchange gains; the prior-year period had $0.1 million of other expense.
Outlook, risks and unusual items
- Management provided no numerical revenue or earnings guidance. It said the pandemic’s duration and economic effects were uncertain, and that COVID-19 had begun affecting Q1 results, particularly businesses exposed to global commerce, travel and leisure.
- Risks cited include weaker mobile product and airtime demand, disruption to the media business from reduced travel, customers conserving cash, limits on field service and installation, and supply-chain delays. Management identified KVH Media Group as particularly affected by travel reductions.
- Management described salary and benefit reductions, shortened work weeks in some areas, cuts to discretionary spending and an indefinite delay of most capital spending, except for AgilePlans and the Photonic Integrated Chip initiative. Further actions could include workforce furloughs or deeper pay reductions.
- Management believed cash and planned mitigation measures positioned the company reasonably well, while noting there was no assurance liquidity would be sufficient if the pandemic persisted. The company stated it believed it had sufficient cash to meet obligations over the next 12 months.
- Goodwill and intangible assets associated with KVH Media Group were $10.3 million and $4.4 million, respectively. No impairment was identified at March 31, but management warned future impairment was possible if pandemic-related disruption continued.
- Backlog was $22.6 million, versus $19.5 million at December 31, 2019; $2.6 million was subject to customer cancellation for convenience. Management cautioned backlog is not a meaningful predictor of future revenue.
- The company repurchased 35,256 shares for approximately $0.4 million during the quarter. A prior-period ASC 606 error affecting Q1 2019 product sales and costs was described as immaterial; the 2019 comparison reflects the adjustment.
- Management reported no legal proceeding likely to materially harm the business and concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter sales, service usage, customer retention, installations and collections, and whether the announced cost controls were implemented or expanded.
- The company’s continued compliance with credit-facility covenants and whether revolver access remains restricted.
- Whether product margins recover, particularly in inertial navigation, and how the development contract’s timing affects service revenue.
- Cash burn, capital spending, working-capital trends and the sustainability of the stated 12-month liquidity assessment.
- Potential impairment of KVH Media Group goodwill and intangible assets if travel-related weakness persists.
- Execution and cancellation risk within backlog, including the $2.6 million of cancellable orders, and any further share repurchases amid pandemic uncertainty.