KVH Industries, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it also reports unaudited fourth-quarter results. KVH sells mobile satellite connectivity products and services, media content, and inertial navigation systems. Videotel, its maritime training business, was sold in May 2019 and is presented as discontinued operations.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales from continuing operations | $157.9 million | $153.0 million |
| Product sales | $61.9 million | $63.3 million |
| Service sales | $96.0 million | $89.8 million |
| Gross profit / gross margin | $53.8 million / 34.0% | $58.1 million / 38.0% |
| Operating loss | $(21.1) million | $(10.6) million |
| Net loss from continuing operations | $(16.0) million | $(11.4) million |
| Net income (loss), including discontinued operations | $33.3 million | $(8.2) million |
| Cash from (used in) operating activities | $(14.2) million | $5.2 million |
The 2019 net income primarily reflects the Videotel sale: discontinued operations reported $49.3 million net income, including a $53.7 million pretax gain on sale. The sale generated $88.4 million net cash proceeds after the working-capital adjustment.
Mobile connectivity sales rose 5% to $122.0 million, led by 7% growth in service sales; segment operating results shifted to a $5.6 million loss from $0.7 million income. Inertial navigation sales fell 3% to $35.9 million, and segment operating income declined 40% to $3.0 million.
At year-end, cash and cash equivalents were $18.4 million and marketable securities were $29.9 million, totaling $48.3 million. Working capital was $70.9 million. KVH had no outstanding debt and had $20.0 million available under its revolving credit facility. Future minimum payments for satellite capacity, leases and other commitments were $59.2 million; unconditional supplier purchase orders totaled $24.7 million, expected to be fulfilled in 2020.
Fourth-quarter 2019 continuing-operations sales were $42.5 million and continuing-operations net loss was $2.9 million. Total quarterly net loss, including discontinued operations, was $3.5 million.
Material changes versus 2018
- Revenue increased 3%, as service growth more than offset lower product sales. Service sales rose to 60.8% of revenue from 58.7%.
- Gross margin fell to 34.0% from 38.0%; costs of sales rose to 66% of revenue from 62%.
- Operating loss nearly doubled. Mobile connectivity results were pressured by costs of operating both legacy and high-throughput satellite networks, higher airtime costs, and a $2.3 million reserve on TracPhone V-IP inventory. Inertial navigation product sales also declined.
- Operating cash flow swung from positive $5.2 million to negative $14.2 million, despite reported net income, which included the Videotel gain and other non-recurring effects.
- KVH used Videotel sale proceeds to repay its term loan and revolving borrowings and repaid its mortgage loan; year-end debt was zero.
Outlook, management commentary and risks
Management expects 2020 sales to increase in both segments, citing mini-VSAT airtime, TACNAV and FOG products. It also expects higher research and development, sales and marketing, and general and administrative costs. The filing gives no numerical earnings or revenue guidance; management warns that substantial losses may continue and says it cannot predict when profitability will return.
Key execution risks include the cost and technical demands of transitioning customers to the HTS network while maintaining the legacy network, subscriber churn and service margins, AgilePlans’ near-term effect on product revenue and capital needs, and the success of new product development, including a photonic-chip FOG. Other risks include dependence on third-party satellite capacity and suppliers, lumpy defense orders, international and foreign-exchange exposure, and seasonality. The filing also identifies the coronavirus outbreak as a potential threat to customer demand, installation and service activity, and supply chains.
KVH disclosed an immaterial ASC 606 error involving sales-type leases. The 2019 correction increased product sales by $1.35 million and product costs by $1.59 million, with a $0.25 million net increase in loss. Management and the auditor reported effective internal control over financial reporting at year-end; the auditor gave an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether subscriber growth and HTS migration improve airtime economics enough to offset dual-network costs, churn and fixed capacity commitments.
- Whether the expected 2020 sales growth materializes and whether expense growth and continued operating losses consume available liquidity.
- How much of reported 2019 earnings and cash generation depends on the one-time Videotel sale, versus continuing operations.
- Whether AgilePlans subscriber growth offsets lower hardware sales, higher equipment investment and depreciation, and potential customer defaults.
- The effect of the disclosed revenue-recognition correction and the company’s controls on future reporting, alongside the status of the coronavirus-related risks identified in the filing.