KVH Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts below are in millions of dollars unless stated otherwise. KVH designs and sells mobile satellite connectivity products and services and inertial navigation products and services. Its interim financial statements are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $41.8 | $43.4 | $82.9 | $85.7 |
| Operating loss | $(2.3) | $(5.8) | $(7.0) | $(9.4) |
| Net loss | $(1.4) | $(5.7) | $(6.1) | $(9.7) |
| Net loss per diluted share | $(0.08) | $(0.31) | $(0.33) | $(0.54) |
| Operating cash flow | Not separately provided | Not separately provided | $(3.2) | $4.8 |
- Revenue mix: Q2 product sales fell 21% to $13.6; service sales rose 8% to $28.3. For the first half, product sales declined 22% to $27.9 while service sales increased 10% to $55.0.
- Margins: Gross margin, calculated from reported sales and cost of sales, was approximately 36.6% in Q2 versus 35.4% a year earlier, and 37.0% for the first half versus 36.2%. Product cost as a share of product sales rose to 82% in Q2 from 69%; service cost as a share of service sales improved to 55% from 62%.
- Segments: Q2 mobile connectivity revenue increased 2% to $34.6, with operating income of $4.5 versus $0.6. Inertial navigation revenue fell 24% to $7.3 and shifted to a $1.3 operating loss from $0.6 income. First-half segment revenue was $67.7 for mobile connectivity, up 5%, and $15.2 for inertial navigation, down 29%.
- Cash, liquidity and debt: At June 30, cash and cash equivalents were $10.4 and marketable securities $5.2, totaling $15.6. Working capital was $52.0. No revolver borrowings were outstanding; the $15.0 credit facility was available, and KVH reported covenant compliance. The PPP loan had been fully forgiven in 2021. Total liabilities were $38.3 and stockholders’ equity was $124.0.
- Cash flow and investment: First-half operating cash use was $3.2, including a $6.4 inventory-related cash outflow. Investing provided $2.3, including $2.4 net proceeds from a subsidiary sale and $8.0 from marketable-security maturities and sales, partly offset by $8.0 of capital expenditures. Cash declined $1.0 from year-end.
Changes, outlook and notable matters
- Compared with 2021, lower product revenue—especially TACNAV/inertial navigation—was partly offset by growth in mobile connectivity airtime services. Mobile connectivity operating results improved substantially; inertial navigation weakened as sales fell and product mix worsened.
- Management said it expected available funds and operating cash flow to cover working-capital needs, capital expenditures and contractual obligations for at least 12 months from the filing date, subject to assumptions about revenue and expenses. The filing gives no specific revenue or earnings guidance.
- Supply-chain delays and higher raw-material costs continued. KVH estimated that Q2 raw-material costs exceeded expectations by about $0.6 and orders totaling about $2.7 could not be filled due to component shortages. Management also cited inflation and global supply constraints.
- A $1.6 inventory reserve was recorded for a specialized TACNAV component tied to a customer order that did not materialize. Backlog fell to $3.5 at June 30 from $23.9 at December 31; management cautioned that backlog is not a meaningful predictor of future revenue.
- KVH reduced its workforce by approximately 10% in March. First-half restructuring and related legal/advisory costs totaled about $2.1; approximately $0.2 of additional severance and benefits costs were expected through year-end. CEO Brent Bruun, appointed in June, succeeded retiring CEO Martin Kits van Heyningen. Executive retention agreements provide for bonuses and potential equity vesting acceleration.
- KVH sold KVH Media Group Entertainment Limited in April for $2.4 net cash proceeds and recorded a $0.6 gain. Other income also benefited from foreign-exchange gains.
- Subsequent event: On August 9, 2022, KVH completed the sale of its inertial navigation business to EMCORE for gross proceeds of $55.0, less specified deductions, a $1.0 holdback and a working-capital adjustment. Net proceeds are therefore not stated as a final amount in this filing. KVH also terminated its credit agreement that day with no borrowings outstanding and released related liens. After the sale, KVH will rely on its mobile connectivity business; management warned that the smaller revenue base could pressure margins and that transaction-related liabilities or disputes may arise.
- Other risks include continuing losses, dependence on satellite and other third-party capacity, supplier concentration, seasonality, foreign-exchange exposure, competition, and execution of the restructuring and business transition. Management reported effective disclosure controls as of June 30. It said no legal proceeding was likely to materially harm the business.
Important facts for investors to verify
- Final net proceeds, working-capital adjustment and any retained obligations or transition-service costs from the EMCORE transaction.
- Post-sale revenue, recurring-service growth, margins and overhead costs in the continuing mobile connectivity business.
- Whether supply constraints, unfilled orders and raw-material inflation ease, and whether inventory levels and operating cash flow improve.
- Whether restructuring savings offset remaining severance, retention and management-transition costs.
- Performance of the satellite connectivity subscriber base and capacity costs, including the effect of customers not migrating from the legacy Arclight network.
- Whether KVH sustains adequate liquidity after terminating its revolver and how the board uses the sale proceeds.