KVH Industries(KVHI) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements Presents KVH Industries, Inc.'s unaudited consolidated financial statements for Q2 and H1 2022 Consolidated Balance Sheets Summarizes the company's financial position as of June 30, 2022, detailing changes in assets, liabilities, and equity Consolidated Balance Sheets (in thousands) | | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $85,014 | $87,830 | | Total assets | $162,316 | $168,794 | | Total current liabilities | $33,061 | $33,882 | | Total liabilities | $38,288 | $39,817 | | Total stockholders' equity | $124,028 | $128,977 | | Total liabilities and stockholders' equity | $162,316 | $168,794 | Consolidated Statements of Operations Q2 2022 net loss was $1.4 million on $41.8 million sales, showing improvement from prior year, with similar H1 trends Consolidated Statements of Operations (in thousands, except per share amounts) | | Three Months Ended June 30, | Six Months Ended June 30, | | :--- | :--- | :--- | | | 2022 | 2021 | 2022 | 2021 | | Net sales | $41,837 | $43,363 | $82,931 | $85,655 | | Product Sales | $13,579 | $17,269 | $27,949 | $35,701 | | Service Sales | $28,258 | $26,094 | $54,982 | $49,954 | | Loss from operations | $(2,332) | $(5,802) | $(7,040) | $(9,409) | | Net loss | $(1,444) | $(5,673) | $(6,136) | $(9,701) | | Net loss per share (Basic & Diluted) | $(0.08) | $(0.31) | $(0.33) | $(0.54) | Consolidated Statements of Cash Flows H1 2022 net cash used in operations was $3.2 million, a shift from $4.8 million provided in H1 2021, mainly due to increased inventories Consolidated Statements of Cash Flows (in thousands) | | Six Months Ended June 30, | | :--- | :--- | :--- | | | 2022 | 2021 | | Net cash (used in) provided by operating activities | $(3,234) | $4,815 | | Net cash provided by (used in) investing activities | $2,328 | $(10,457) | | Net cash provided by financing activities | $201 | $2,311 | | Net decrease in cash and cash equivalents | $(981) | $(3,355) | | Cash and cash equivalents at end of period | $10,395 | $9,223 | Notes to Consolidated Financial Statements Details accounting policies and financial components, noting CEO retirement, workforce reduction, subsidiary sale, and the $55 million inertial navigation business sale - The company operates in two segments: mobile connectivity (satellite communication products and services) and inertial navigation (FOG-based systems for commercial and defense)[25][28][30] - In March 2022, the company restructured operations, reducing its workforce by approximately 10% and incurring $2.1 million in related costs in the first half of the year[36] - On April 29, 2022, the company sold its subsidiary KVH Media Group Entertainment Limited for net cash proceeds of $2.4 million, recording a gain of approximately $0.6 million[37] - Subsequent to the quarter end, on August 9, 2022, the company sold its entire inertial navigation business to EMCORE Corporation for gross proceeds of $55 million[124] - The company's PPP loan of $6.9 million was fully forgiven by the SBA in September 2021[73][200] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2022 financial performance, covering the inertial navigation business sale, management changes, restructuring, segment results, and liquidity Overview and Key Events Key events include the $55 million inertial navigation business sale, a $2.4 million subsidiary sale, new CEO appointment, and a 10% workforce reduction - On August 9, 2022, the company sold its inertial navigation business to EMCORE Corporation for $55 million and terminated its credit agreement with Bank of America[129][130] - In March 2022, the company restructured, reducing its workforce by ~10% and incurring ~$2.2 million in related costs for the six months ended June 30, 2022[133] - Brent C. Bruun was appointed President and CEO on June 15, 2022, following the retirement of Martin Kits van Heyningen[132] Results of Operations Q2 2022 net sales decreased 4% YoY to $41.8 million, with product sales down but service sales up, and operating loss narrowed due to lower G&A Net Sales Comparison (in thousands) | Period | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Q2 Net Sales | $41,837 | $43,363 | (4%) | | Q2 Product Sales | $13,579 | $17,269 | (21%) | | Q2 Service Sales | $28,258 | $26,094 | 8% | | H1 Net Sales | $82,931 | $85,655 | (3%) | | H1 Product Sales | $27,949 | $35,701 | (22%) | | H1 Service Sales | $54,982 | $49,954 | 10% | - Q2 2022 operating expenses decreased across the board compared to Q2 2021: R&D down 17%, Sales & Marketing down 12%, and G&A down 21%. The G&A decrease was primarily due to lower professional fees related to a 2021 stockholder proxy contest[160][161][163] Segment Discussion Mobile Connectivity net sales grew 2% to $34.6 million in Q2 2022, while Inertial Navigation net sales fell 24% to $7.3 million, resulting in an operating loss Q2 2022 vs Q2 2021 Segment Performance (in thousands) | Segment | Net Sales 2022 | Net Sales 2021 | Change (%) | Operating Income (Loss) 2022 | Operating Income (Loss) 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Mobile Connectivity | $34,553 | $33,755 | 2% | $4,525 | $580 | | Inertial Navigation | $7,284 | $9,608 | (24%) | $(1,289) | $645 | - Mobile connectivity service sales increased 9% in Q2 2022, driven by a $2.7 million increase in mini-VSAT service sales[169] - Inertial navigation product sales decreased 25% in Q2 2022, primarily due to a $1.3 million decrease in TACNAV product sales and a $1.0 million decrease in FOG and OEM product sales[172] Liquidity and Capital Resources As of June 30, 2022, the company held $15.6 million in cash, with $3.2 million net cash used in H1 2022 operations, and its $15 million credit facility terminated - As of June 30, 2022, the company had $15.6 million in cash, cash equivalents, and marketable securities, and $52.0 million in working capital[201] - The $8.0 million negative swing in cash from operations YoY was primarily due to an $8.7 million increase in cash outflows for inventories[202] - The company's $15 million revolving credit facility was terminated on August 9, 2022, after the sale of the inertial navigation business. No amounts were outstanding at termination[125][206] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2022, with no material changes to internal control over financial reporting in Q2 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[213] - No changes were identified in internal control over financial reporting during Q2 2022 that have materially affected, or are reasonably likely to materially affect, internal controls[215] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not party to any lawsuit or proceeding likely to materially affect its business, financial condition, or operations - The company is not party to any lawsuit or proceeding that is likely to materially harm its business, results of operations, financial condition, or cash flows[219] Item 1A. Risk Factors Details significant risks including historical losses, inertial navigation business sale impact, mobile connectivity reliance, competition, supply chain, cybersecurity, and economic factors Risks related to financial performance and operations The company has a history of losses and may not regain profitability, facing operational risks from CEO transition, workforce reduction, and maintaining service margins - The company has a history of losses and may continue to incur them due to investments in satellite capacity, business model shifts, and restructuring expenses[221] - Risks associated with the recent management transition and a 10% reduction in force include loss of experience, potential for further attrition, and challenges in attracting new talent[226][227] Risks related to the sale of our inertial navigation business The inertial navigation business sale presents risks including potential liabilities, reduced operating margins, and sole reliance on mobile connectivity - The sale of the inertial navigation business will reduce operating and profit margins, as public company overhead costs will be spread over a smaller revenue base[254] - The company is now solely reliant on its mobile connectivity business and faces potential liabilities and disruptions arising from the sale transaction[251][254] Risks related to industry, technology, and supply chain The company faces intense competition, reliance on third-party satellite services and sole suppliers, supply chain disruptions, cybersecurity threats, and IP protection challenges - The mobile connectivity market is highly competitive, with pressure on pricing from competitors like Intellian, Cobham SATCOM, and Inmarsat[258][259] - The company depends on third-party satellite providers (e.g., Intelsat, Sky Perfect-JSAT, Inmarsat, Iridium) and is vulnerable to service disruptions or lack of capacity[237][238] - Dependence on sole or limited-source suppliers and global supply chain constraints (e.g., chip shortages) have delayed product delivery and increased costs. In Q2 2022, an estimated $2.7 million in orders could not be filled due to component shortages[262] Risks related to economic, regulatory, and other factors The business is exposed to economic turmoil, political events, COVID-19 impacts, foreign currency fluctuations, trade policy, international regulations, tax liabilities, and stock price volatility - Economic turmoil, the COVID-19 pandemic, and related supply chain issues have adversely impacted and are expected to continue to impact revenues and financial condition[244] - With 63% of revenue from international sales in H1 2022, the company is exposed to risks from foreign currency exchange rates, tariffs, and complex foreign regulations[248][270] - The company is subject to various regulations, including FCC rules, USF contributions, and data privacy laws like GDPR, which could increase costs and create liability[272][273][274] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including new executive employment agreements and required CEO and CFO certifications - Exhibits filed include executive employment agreements for key officers and certifications by the principal executive and financial officers[281]