KVH Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. KVH designs and sells mobile satellite communications equipment and services, and navigation, guidance and stabilization products. The May 2013 acquisition of Headland Media (KVH Media Group) contributed to service revenue growth.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $37.0 million | $39.9 million |
| Operating income (loss) | $(1.7) million | $2.5 million |
| Net income (loss) | $(1.1) million | $2.0 million |
| Diluted EPS | $(0.07) | $0.13 |
| Operating margin | (4.6)% | 6.2% |
| Net margin | (3.0)% | 4.9% |
- Revenue mix: Product sales were $18.0 million, down 29%; service sales were $19.0 million, up 29%. Mobile communications revenue rose to $29.0 million from $22.9 million, while guidance and stabilization revenue fell to $8.0 million from $17.0 million.
- Margins: Product gross margin declined to 37% from 45%, largely reflecting lower TACNAV sales. Service gross margin increased to 42% from 30%, helped by KVH Media Group and improved mini-VSAT Broadband margins.
- Cash flow: Operating activities used $0.6 million, versus $2.4 million provided a year earlier. Investing activities provided $4.2 million, mainly from net maturities and sales of marketable securities; financing activities used $0.7 million. Cash and cash equivalents increased to $12.3 million from $9.4 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $53.7 million; working capital was $79.0 million. Debt included a $30.0 million revolving credit balance and approximately $8.1 million of mortgage and equipment debt, including current maturities. The company reported compliance with its credit-line covenants.
Changes and drivers
- Total sales fell 7% year over year. The $7.2 million product-sales decline was primarily due to the completion of SANG TACNAV product shipments in 2013 and lower FOG sales, including reduced U.S. Army CROWS III demand.
- Service sales increased $4.3 million, including $3.6 million growth in mini-VSAT Broadband airtime and $3.3 million of KVH Media Group sales; lower SANG engineering services partly offset these increases.
- Operating expenses rose, notably general and administrative expense (up $1.8 million) and research and development expense (up $0.7 million). Management attributed much of the increase to KVH Media Group and development of new products and services.
- The 2013 comparison includes only part of the post-acquisition period for KVH Media Group. The filing reports pro forma Q1 2013 revenue of $43.0 million and net income of $2.1 million as if the acquisition had occurred at the start of that quarter.
Outlook, risks and contingencies
- Management expects mini-VSAT service sales to grow, including from increased customer activations and planned IP-MobileCast revenue beginning in Q2 2014. It anticipates contracted engineering services will decline as SANG project services are expected to conclude in Q3 2014; approximately $0.3 million of SANG services remained at March 31, 2014.
- Management expects year-over-year declines in TACNAV and FOG product sales, while noting that TACNAV sales may be uneven. It remained cautious about marine product demand, particularly in Europe and Asia, and cited an unseasonably cold spring and a temporary component shortage affecting marine television products.
- Backlog was $18.6 million, down from $20.5 million at year-end; $11.9 million was subject to customer cancellation for convenience. Management cautioned that backlog is not a meaningful predictor of future revenue.
- The $30.0 million revolving facility matures December 31, 2015, bears a floating rate, and requires at least $20.0 million in defined unencumbered liquid assets. Mortgage covenant testing applies if cash and marketable securities fall below $25.0 million. Management stated liquidity should cover planned needs for at least twelve months.
- Management reported no legal proceeding likely to materially harm the company and no impairment indicators for goodwill or intangible assets in the quarter. Interest-rate and foreign-exchange risks are discussed; management considered the specified exposures immaterial. Forward-looking results remain subject to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- Whether mini-VSAT customer growth and IP-MobileCast launch timing translate into service revenue and sustainable margins.
- The pace of declines in SANG-related and CROWS III sales, and the timing of completion of remaining SANG services.
- Whether KVH Media Group revenue and cost contributions support profitable growth, given the year-over-year expense increases.
- Credit-line availability, covenant headroom, floating-rate exposure, and the company’s ability to maintain liquidity while funding planned investment.
- Backlog conversion and cancellation risk, especially the $11.9 million of orders cancellable for customer convenience.