KVH Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Unless otherwise noted, amounts below are in U.S. dollars. Financial statement amounts have been converted from thousands to millions.
Business context
KVH designs and sells mobile connectivity products and services, primarily for marine and land-mobile markets. Its continuing business is increasingly service-led: service represented 81% of Q3 sales and 81% of nine-month sales. On August 9, 2022, KVH sold its inertial navigation business to EMCORE and reports its results as discontinued operations. KVH also sold a media subsidiary in April; that sale was not classified as discontinued operations.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Continuing net sales | $35.2m | $34.4m | $102.9m | $98.7m |
| Product sales | $6.6m | $6.9m | $19.8m | $21.8m |
| Service sales | $28.5m | $27.5m | $83.1m | $76.9m |
| Operating income (loss) | $(1.0)m | $(3.5)m | $(6.3)m | $(15.7)m |
| Continuing net income (loss) | $(0.1)m | $3.7m | $(4.6)m | $(8.8)m |
| Net income (loss), including discontinued operations | $29.6m | $4.0m | $23.5m | $(5.7)m |
| Net cash from (used in) operating activities | Not provided quarterly | Not provided quarterly | $(1.5)m | $1.9m |
Continuing-operations gross margin, calculated from reported sales and product/service costs, was approximately 37% in Q3 versus 35% a year earlier, and 39% for the nine-month period versus 35%. Operating loss margins improved to 2.7% from 10.3% in Q3 and to 6.0% from 15.9% for nine months.
At September 30, cash and cash equivalents were $14.4m and marketable securities were $55.2m, or $69.6m combined. Working capital was $91.2m. Total liabilities were $39.7m; no borrowings were outstanding when KVH terminated its credit facility in August. A financing-lease obligation of $0.1m remained. Total assets were $194.3m and stockholders’ equity was $154.6m.
Nine-month investing cash flow was $4.3m, including $55.0m of proceeds from the inertial navigation sale and $2.4m from the media subsidiary sale, partly offset by net purchases of marketable securities. Capital expenditures were $11.0m. Cash and cash equivalents increased by $3.0m to $14.4m over the period.
Material changes versus prior comparable periods
- Q3 continuing sales rose 2%; nine-month sales rose 4%. Service sales increased 4% and 8%, respectively, led by mini-VSAT service growth. Product sales declined 3% and 9%, respectively, largely from lower mini-VSAT product volumes.
- Operating losses narrowed, reflecting lower service costs and reduced sales, marketing, and administrative expenses. Product costs increased; in Q3, product cost of sales exceeded product revenue, which management attributed primarily to supply-chain-related manufacturing period costs.
- Reported net income includes a $30.9m pretax gain on the inertial navigation sale. Discontinued operations contributed $29.7m of net income in Q3 and $28.1m for nine months; continuing operations remained loss-making.
- Inventory rose to $23.9m from $15.8m at December 31, 2021. Nine-month operating cash flow was negative, with inventory increases a significant use of cash.
Outlook, commentary, and risks
- KVH provided no formal revenue or earnings guidance. Management said current liquidity and operating plans should fund working-capital needs, capital expenditures, and contractual obligations for at least 12 months from the filing date, while warning that weaker-than-expected results could require additional financing.
- Management reported component delays and higher raw-material costs. In Q3, it estimated raw-material costs exceeded expectations by about $1.3m and orders of about $2.3m could not be filled due to component shortages. It expected elevated raw-material costs to continue through 2022.
- KVH completed a March restructuring that reduced its workforce by about 10%, and subsequently closed its India and Cyprus offices and Denmark warehouse. It expected additional restructuring costs through year-end. Management also cited seasonality in marine leisure activity and dependence on third-party satellite capacity and suppliers.
- The inertial navigation sale’s working-capital adjustment was still being finalized, with completion expected in Q4 2022. KVH retained short-term transition-service obligations to EMCORE. The board had not decided how to use the sale proceeds.
- Disclosure controls were deemed ineffective as of September 30 because a significant deficiency in internal control over financial reporting led to a late filing. Management attributed the deficiency to inadequate planning for the additional manual work needed to separate the sold business’s financial information; it said there was no identified control deficiency that would prevent or detect a material misstatement. Remediation steps were planned.
- Management reported no legal proceeding it believed likely to materially harm the company. Other notable risks include continued losses, execution of the management transition and restructuring, competition, foreign-exchange exposure, customer and supplier concentration, and potential service disruption or cybersecurity incidents.
Important facts for investors to verify
- Whether continuing-operations service growth and improved operating margins persist, and whether product costs and supply constraints ease.
- How cash generation develops, particularly as inventory levels and capital expenditures affect operating liquidity.
- The final inertial navigation sale working-capital adjustment and any remaining obligations or disputes related to the transaction.
- Progress on remediation of the significant control deficiency and whether disclosure controls become effective.
- Whether management can execute its post-sale strategy, achieve restructuring savings, retain key personnel, and improve continuing-operations profitability.