KVH Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited; dollar amounts below are in millions unless otherwise noted. KVH provides mobile satellite connectivity, entertainment and training services, and inertial navigation products and services.
Financial results and liquidity
- Revenue: $40.1, down 0.3% from $40.2. Product sales fell 5.9% to $14.0; service sales rose 3.0% to $26.1. Service sales were 65.1% of revenue, versus 63.0% a year earlier.
- Profitability: Gross profit was $17.4, or approximately 43.3% of sales, versus $16.4, or 40.8%. Operating loss improved to $3.2 from $4.5; net loss narrowed to $3.9 from $4.9. Diluted loss per share was $0.23 versus $0.30.
- Cash flow: Operations used $1.2, compared with $4.3 generated in Q1 2017. Investing activities provided $1.8, including net marketable-securities maturities and sales; capital expenditures were $3.2. Financing activities provided $1.5, including $4.5 from the treasury-stock sale to SKY Perfect JSAT Corporation and $2.8 of term-note repayments.
- Cash and working capital: Cash, cash equivalents and marketable securities totaled $41.1 at quarter-end; working capital was $51.3. Cash and cash equivalents alone were $37.8.
- Debt: Total reported debt was $44.2, including $41.5 under the term note and $2.7 under the mortgage loan. The $15.0 revolving facility was undrawn and available. KVH reported compliance with its credit-facility covenants. A separate five-year capital lease for satellite hubs had a $3.0 present-value obligation.
Changes versus the prior year
- Mobile connectivity revenue declined 4.5% to $32.7, as product sales fell 19.6% to $7.9; service revenue rose 1.6% to $24.8. Management attributed product-sales pressure partly to AgilePlans subscriptions and ASC 606 revenue timing.
- Inertial navigation revenue increased 24.1% to $7.4, led by higher FOG product and engineering-service sales. Its segment operating result improved to $0.3 profit from a $0.04 loss.
- Mobile connectivity segment operating earnings rose to $1.1 from $0.6. Unallocated operating costs remained substantial at $4.6, though lower than $5.0 a year earlier.
- Operating cash flow deteriorated by $5.5, primarily reflecting less favorable working-capital movements, including accounts receivable and accounts payable/accruals.
Outlook, accounting changes and risks
- Management outlook: No consolidated numerical earnings or revenue guidance was provided. Management expected modest 2018 operating-earnings growth in both segments; it expected mini-VSAT service growth and FOG and contracted engineering-service growth. Product sales may be affected as customers choose AgilePlans. Management also expected higher R&D, sales and marketing, and G&A expenses year over year.
- ASC 606: Adopted January 1, 2018 using the modified retrospective method. The transition reduced opening equity by $2.7 and recorded contract assets and liabilities. For Q1, adoption reduced product revenue by about $0.4 and related product costs by about $0.4 versus prior guidance; it increased net loss by $0.009 and did not affect operating cash flow. Reported 2018 results are therefore not fully comparable with 2017 results prepared under prior guidance.
- Debt and investment requirements: The term note matures July 1, 2019, when the remaining balance is due; the headquarters mortgage has a balloon payment of approximately $2.6 due in April 2019. KVH said available liquidity and expected operating cash flows should cover planned needs for at least 12 months, but noted additional financing might be sought and is not assured. The company expects continued investment in satellite-network capacity.
- Operating risks: Marine leisure sales are seasonal; military backlog orders may be canceled for customer convenience. Backlog was $15.6, including $8.5 subject to such cancellation, and management cautioned backlog is not a meaningful revenue predictor. Certain product components have single-source suppliers. The business also faces foreign-exchange and variable-rate interest exposure; management said a 10% adverse currency move would not cause material losses and estimated a 10% rate move would affect annual interest expense by $0.2.
- Other matters: The company reported no litigation expected by management to materially harm the business. It recorded $0.2 of income-tax expense despite a pretax loss, principally because U.S. deferred tax assets were fully reserved and foreign jurisdictions generated tax expense. Tax Act estimates remained subject to finalization.
Important facts for investors to verify
- Track whether service growth, particularly mini-VSAT and AgilePlans, offsets weaker mobile connectivity product sales and supports improved margins.
- Assess cash conversion and working-capital trends after Q1 operating cash outflow, alongside capital spending for network expansion.
- Review the term-note maturity in July 2019, mortgage balloon payment in April 2019, covenant headroom and refinancing plans.
- Separate underlying performance from ASC 606 timing effects when comparing 2018 results with 2017.
- Monitor backlog conversion and cancellations, FOG demand, supplier availability, seasonal trends, and the final tax-accounting impacts.