KVH Industries, Inc. — Q2 2021 Form 10-Q
Business and period: KVH designs and sells mobile satellite connectivity products and services and inertial navigation products. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $43.4 | $36.9 | $85.7 | $73.5 |
| Operating loss | $(5.8) | $(3.4) | $(9.4) | $(11.1) |
| Net loss | $(5.7) | $(3.6) | $(9.7) | $(9.8) |
| Net loss per diluted share | $(0.31) | $(0.20) | $(0.54) | $(0.56) |
- Q2 sales rose 17% year over year; product sales increased 24% to $17.3 million and service sales increased 14% to $26.1 million. H1 sales rose 17%: products increased 32% and services 8%.
- Gross margin was approximately 35% in Q2 and 36% in H1, based on reported sales and product/service costs. Operating margins were negative 13.4% and 11.0%, respectively.
- Q2 segment sales: mobile connectivity $33.8 million, up 16%; inertial navigation $9.6 million, up 24%. H1 segment sales were $64.3 million and $21.4 million, up 11% and 39%, respectively.
- Q2 segment operating income was $0.6 million for mobile connectivity and $0.6 million for inertial navigation. H1 segment operating income was $0.2 million and $2.7 million, respectively; corporate/unallocated costs remained substantial.
- H1 operating cash flow was $4.8 million, versus cash used of $2.9 million a year earlier. Investing activities used $10.5 million, including $10.5 million of capital expenditures. Cash and cash equivalents declined to $9.2 million from $12.6 million at year-end.
- At June 30, cash, cash equivalents and marketable securities totaled $34.4 million; working capital was $52.2 million. The company reported $6.9 million of PPP debt, all classified as current, and no borrowings under its revolving facility; the full $15.0 million revolver was available.
- Total assets were $176.6 million, total liabilities $49.7 million and stockholders’ equity $126.9 million. No dividend or current share repurchase program was reported.
Changes and notable items
- Growth reflected higher mobile connectivity service revenue, including a 13% increase in mini-VSAT subscribers, and higher inertial navigation product sales, particularly TACNAV and FOG products.
- Despite sales growth, Q2 operating loss widened year over year. General and administrative expense increased $2.9 million, primarily from professional fees related to a stockholder’s competing director slate. H1 professional fees rose $3.3 million for the same reason.
- H1 other expense was $0.8 million, compared with $1.3 million of other income in 2020, primarily reflecting increased foreign-exchange losses from UK operations.
- The 2020 impairment of KVH Media Group goodwill and intangible assets totaled approximately $10.5 million. The company reported no additional impairment indication as of June 30, 2021, but continued pandemic-related disruption could lead to future impairment.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management said it was uncertain whether recent revenue growth rates would continue; the company’s risk disclosures say it expects losses in the near future and cannot predict when profitability will return.
- Management expected existing liquidity and operating cash flow to fund working capital and contractual needs for at least 12 months from filing, while cautioning that weaker-than-expected results could require additional financing. It also said it could take further cost-mitigation actions.
- COVID-19 continued to weigh on KVH Media Group and travel-related demand; recovery was slower than expected. The company cited supply-chain constraints and a global chip shortage as potential sources of delivery delays and higher costs.
- KVH planned to terminate its legacy satellite network by the end of 2021. Approximately 26% of maritime airtime subscribers still relied on that network at June 30; customers who do not transition to the HTS network could be lost, and migration could be costly.
- The $6.9 million PPP loan had a 1% interest rate. KVH planned to apply for forgiveness in August 2021 but gave no assurance it would receive forgiveness; any unforgiven balance would be repayable. The revolving credit facility was scheduled to mature October 30, 2021 and included financial and other covenants.
- Backlog was $26.4 million, including $9.6 million of orders cancellable for customer convenience. The company cautioned that backlog is not a meaningful revenue predictor and that military orders may be delayed or canceled.
- Other key risks include dependence on third-party satellite capacity and single/limited-source suppliers, seasonality, foreign exchange, large and unpredictable defense orders, competition, and potential further impairment. Management reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting during Q2. No legal proceeding was identified as likely to materially harm the company.
Investor facts to verify
- Whether the PPP loan was forgiven, and the repayment or covenant implications if it was not.
- Progress and cost of migrating legacy-network subscribers before the planned year-end 2021 shutdown, including subscriber retention.
- Whether mobile connectivity growth and inertial navigation orders persist, given management’s caution and the timing/cancellation risk of defense orders.
- Cash generation relative to elevated capital spending, and continued availability or renewal of borrowing capacity around the revolver’s October 2021 maturity.
- Whether travel-related recovery supports KVH Media Group forecasts and avoids further goodwill or intangible-asset impairment.