KVH Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. KVH sells mobile satellite communications products and services and navigation, guidance, and stabilization products.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Net sales | $45.8M | $44.5M | $132.2M | $130.6M |
| Operating income (loss) | $3.0M | $0.2M | $(1.1)M | $(2.0)M |
| Net income (loss) | $2.9M | $(0.5)M | $(0.7)M | $(1.8)M |
| Diluted EPS | $0.18 | $(0.03) | $(0.05) | $(0.12) |
| Operating margin | 6.6% | 0.6% | (0.8)% | (1.5)% |
| Operating cash flow | — | — | $19.0M | $10.7M |
Q3 product sales rose 22% to $19.0M, led by TACNAV shipments under an international military contract. Service sales fell 7% to $26.8M. For the nine-month period, product sales increased 11% to $54.5M, while service sales declined 5% to $77.7M. The filing reports Q3 product gross margin of 42% (34% prior year) and service gross margin of 49% (50%); nine-month product gross margin was 36% (33%) and service margin was 49% (unchanged).
At September 30, cash and cash equivalents were $25.1M and marketable securities were $28.7M, totaling $53.8M in liquid funds. Working capital was $70.0M. Total debt was $60.0M, including $55.3M under the term note; no revolving-credit borrowings were outstanding. The company reported compliance with its credit-facility covenants. Nine-month capital expenditures were $4.8M. Cash and equivalents increased $2.4M from year-end to $25.1M.
Changes versus comparable periods
- Q3 net sales increased 3%; nine-month sales increased 1%. Guidance and stabilization sales rose to $9.4M in Q3 from $6.9M, while mobile communication sales declined to $36.5M from $37.6M.
- Q3 returned to profitability, mainly reflecting higher-margin TACNAV product sales and lower general and administrative expense. Nine-month results remained a net loss, although the loss narrowed.
- Nine-month operating cash flow improved by $8.3M, principally due to stronger accounts-receivable collections, lower inventory cash outflows, and higher deferred revenue.
- Debt declined from $64.7M at December 31, 2015 to $60.0M. Cash, cash equivalents, and marketable securities rose from $45.3M to $53.8M.
- Accumulated other comprehensive loss increased to $15.0M from $7.6M, primarily reflecting a $7.4M foreign-currency translation loss for the first nine months.
Outlook, risks, and unusual items
- Management expected 2016 TACNAV sales to be relatively flat versus 2015, with Q4 TACNAV sales below Q4 2015; TACNAV orders and shipment timing can be uneven. FOG sales were expected to be relatively flat.
- Management expected mini-VSAT service sales to be relatively flat in 2016, content and training service sales to decrease due partly to sterling weakness, and contracted engineering services to decline. R&D and sales, marketing, and support expenses were expected to increase modestly; G&A was expected to decrease modestly.
- Management said existing liquid funds, working capital, and operating cash flows should cover planned operating and capital requirements for at least 12 months, while noting additional financing might be sought and is not assured.
- Backlog was $12.5M at September 30, down from $19.8M at year-end; $5.8M was subject to customer cancellation for convenience. Management cautioned backlog is not a meaningful predictor of future revenue.
- The annual goodwill impairment test was still in progress. A charge, if required, would be recorded in Q4 2016. No impairment indicators were identified for goodwill or intangible assets during Q3.
- Key risks include weak demand from offshore oil and gas customers and vessel lay-ups; volatile, potentially cancellable government and military orders; competition and satellite-capacity dependence; foreign-exchange exposure and Brexit-related uncertainty; and substantial debt. The filing reported no legal proceeding believed likely to materially harm the company.
- Disclosure controls were assessed as effective at September 30, 2016, and management reported no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether TACNAV deliveries, backlog conversion, and customer cancellation rights support the stated sales outlook.
- Whether service revenue and margins stabilize amid offshore-market weakness, customer churn, and sterling exposure.
- Results of the annual goodwill impairment test and any resulting Q4 charge.
- Debt repayment, covenant headroom, and liquidity as cash and securities compare with total debt and planned network investment.
- Whether foreign-currency movements, warranty costs, and tax estimates materially affect future reported earnings and cash flows.