KVH Industries, Inc. — Q1 2016 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. KVH sells mobile satellite communications products and services and navigation, guidance and stabilization products and services. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $40.38 | $41.31 |
| Product sales | $15.38 | $15.39 |
| Service sales | $25.00 | $25.92 |
| Operating loss | $(3.37) | $(1.91) |
| Net loss | $(2.79) | $(1.42) |
| Loss per diluted share | $(0.18) | $(0.09) |
| Operating cash flow | $8.64 | $3.20 |
- Sales declined 2.2%. Service made up 61.9% of revenue. Mobile communications sales fell to $34.46 million from $36.24 million, while guidance and stabilization sales rose to $5.92 million from $5.06 million.
- Gross margin was approximately 41.4%, versus 42.5% a year earlier. Product gross margin was 31% versus 32%; service gross margin was 48% versus 49%.
- Operating expenses increased to $43.75 million from $43.21 million despite lower sales. Sales, marketing and support expense rose 7% to $8.66 million, including higher warranty, compensation and support costs.
- Operating cash flow increased primarily because of stronger collections, including an $11.5 million cash inflow from accounts receivable. Capital expenditures were $1.28 million; investing cash outflow was $1.30 million and financing cash outflow was $1.73 million.
- At March 31, cash and equivalents were $28.20 million and marketable securities were $22.64 million, totaling $50.84 million. Working capital was $70.7 million. Total debt was $63.14 million, including $7.06 million current; no revolver borrowings were outstanding.
Changes, outlook and risks
- Mobile communications service sales decreased 4%, partly due to lower advanced media, Inmarsat and mini-VSAT airtime revenue and foreign-exchange weakness. Marine communications product demand was affected by weakness in the offshore oil and gas sector. Guidance and stabilization sales increased, including higher commercial FOG shipments.
- Other expense was $0.08 million, compared with $0.41 million of other income in Q1 2015; management attributed the change primarily to foreign-exchange losses related to U.K. operations.
- Management expected TACNAV sales to increase in 2016 versus 2015, while warning that timing is difficult to predict and sales may be uneven. FOG sales were expected to be relatively flat. Mini-VSAT service sales were expected to grow, though growth could slow given challenging commercial maritime conditions, particularly in oil and gas. Management also anticipated higher content and service sales, flat R&D expense, and increased sales, marketing and support expense.
- Management said available cash, securities, working capital and operating cash flows should cover planned needs for at least 12 months. The company was in compliance with its debt covenants at quarter-end; its credit facility has a 1.25:1 maximum leverage ratio and a 1.25:1 minimum fixed-charge coverage ratio. The $57.7 million term loan bears a variable rate; the reported rate was 2.19% at quarter-end.
- Backlog was $20.7 million, of which $17.9 million was scheduled for fulfillment in 2016. About $14.3 million was subject to customer cancellation for convenience; management cautioned backlog is not a meaningful predictor of future revenue.
- The company paid in January a cash settlement of the AMN patent litigation claim previously accrued in 2015. Warranty accruals increased to $2.08 million from $1.88 million, with higher Q1 warranty expense primarily related to V11 TracPhone products. No goodwill or intangible-asset impairment indicators were identified.
Facts investors should verify
- Whether service revenue and margins stabilize, and whether mini-VSAT and content-service growth offsets weakness in maritime and oil-and-gas markets.
- Timing and conversion of TACNAV orders, including the portion of backlog subject to cancellation and the expected 2016 shipments.
- Drivers of higher warranty costs, especially V11-related claims, and the effect on product margins and cash flow.
- Debt covenant headroom and repayment requirements, including the 2019 term-loan maturity and mortgage balloon payment.
- Foreign-exchange effects on U.K. operations, acquired intangible assets and reported results.