KVH Industries, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 17, 2014. The filing also reports fourth-quarter results. KVH designs and sells mobile satellite communications products and services, licensed media content, and navigation, guidance and stabilization systems.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $162.3 million | $137.1 million | +18% |
| Product sales | $90.3 million | $90.7 million | Less than 1% decrease |
| Service sales | $72.0 million | $46.4 million | +55% |
| Operating income | $6.2 million | $6.6 million | −6% |
| Net income | $4.5 million | $3.6 million | +27% |
| Diluted EPS | $0.30 | $0.24 | +$0.06 |
| Operating cash flow | $16.3 million | $15.1 million | +$1.2 million |
- FY2013 gross profit was approximately $66.3 million, or 40.8% of sales. Product gross margin was 43%; service gross margin was 37%, up from 35%.
- Net margin was 2.8%, compared with 2.5% in FY2012. Operating margin decreased to 3.8% from 4.7%.
- Capital expenditures were $4.7 million; operating cash flow less capital expenditures was approximately $11.5 million. Investing cash outflow was $44.7 million, including $22.9 million net cash paid for the Headland Media acquisition and increased investment in marketable securities.
- At year-end, cash, cash equivalents and marketable securities totaled $55.7 million; working capital was $78.9 million. Debt comprised $30.0 million drawn on the credit line and $8.4 million of mortgage and equipment debt. The credit line matures December 31, 2015; the company reported compliance with its covenants.
- Fourth-quarter 2013 sales were $39.0 million and gross profit was $15.4 million; net loss was $0.4 million, or $0.02 per share. In Q4 2012, sales were $39.5 million and net income was $2.8 million, or $0.19 per share.
Material changes versus FY2012
- Service sales rose sharply, driven by $12.2 million higher mini-VSAT airtime sales, the partial-year contribution of KVH Media Group (acquired May 2013), and increased SANG-related engineering services. Service sales grew to 44% of total sales from 34%.
- Product sales were nearly flat: mobile communications product sales declined, particularly land-mobile and sales originating in Europe and Asia, while FOG sales increased. SANG product deliveries were completed in Q2 2013.
- Operating income declined despite higher revenue. Sales, marketing and support expense increased 20%, and general and administrative expense increased 46%, reflecting the media acquisition, acquisition costs, warranty expense and other spending.
- Net income improved in part because income tax expense fell to $2.2 million from $3.3 million, including research and development tax-credit benefits. The company estimates a 2014 effective tax rate of approximately 40%, subject to discrete events.
Outlook, risks and unusual items
- Management expected mini-VSAT service sales to continue growing, with new IP-MobileCast services expected to begin generating revenue in 2014. It anticipated TACNAV service revenue would decline in 2014 as SANG project services concluded; TACNAV product sales could also decline. FOG sales were expected to increase modestly, partly offset by lower CROWS III demand.
- Management expected 2014 product gross margin to be broadly consistent with 2013, but did not expect the same year-over-year improvement in mini-VSAT service margin. Sales, marketing, R&D and administrative expenses were expected to rise.
- Key risks include reliance on large and cancelable government orders and appropriations; the completion of the unusually large SANG contract; competitive pressure and service-capacity needs; lower margins as services grow; customer credit and collection risk; third-party satellite capacity and technology dependence; seasonal and economically sensitive leisure demand; and supplier, export-control and foreign-exchange risks.
- The company acquired Headland Media for approximately $24.2 million, recording $13.1 million of goodwill and $13.9 million of identifiable intangible assets. The acquisition contributed approximately $8.8 million of service revenue from closing through year-end and was largely financed with credit-line borrowings.
- A Danish subsidiary accounting employee had misappropriated funds over at least three years, totaling approximately $118,000–$250,000 in any year. KVH reported recovery through insurance in 2013, remediation of the related material weakness, and effective internal controls at December 31, 2013. The acquired media group was excluded from management’s internal-control assessment.
- Management said available liquidity and operating cash flows should cover planned needs for at least 12 months. Contractual commitments totaled $78.9 million, including satellite service and equipment leases, purchase commitments and debt. No material loss contingencies or materially harmful pending litigation were reported.
Most important facts for investors to verify
- Whether mini-VSAT subscriber growth and IP-MobileCast launch translate into profitable service growth, given network capacity costs and service-margin expectations.
- Actual 2014 revenue and margin effects from the SANG contract wind-down, CROWS III demand and the absence of a similarly sized TACNAV order in backlog.
- KVH Media Group’s ongoing contribution, integration costs, cash generation and assumptions supporting its goodwill and intangible assets.
- Debt repayment and covenant headroom, especially the $30.0 million revolving balance due by December 2015 and the company’s liquidity requirements.
- Whether the Danish control remediation remains effective and whether controls at the acquired media business are brought into the company-wide assessment.