KVH Industries(KVHI) - 2022 Q4 - Annual Report

Part I Business The company operates as a single segment focused on mobile connectivity, having divested non-core businesses to concentrate on maritime markets and hybrid solutions - In 2022, KVH sold its inertial navigation business to EMCORE Corporation and its subsidiary KVH Media Group Entertainment Limited, shifting its focus to its core mobile connectivity business[17][51] - The company introduced its TracNet H-series hybrid terminals (VSAT, 5G/LTE, Wi-Fi) in July 2022 and began offering Starlink terminals as a companion solution in March 2023 to enhance its connectivity offerings[25][34] - The company's AgilePlans, a Connectivity as a Service (CaaS) model, provides hardware and services for a monthly fee without a long-term contract, where KVH retains ownership of the equipment[42] - As of December 31, 2022, the company had 397 team members, with a global turnover rate of 18% in 2022, excluding reductions from business sales and restructuring[77][80][82] Consolidated Net Sales Breakdown (2021-2022) | Revenue Source | 2022 Percentage | 2021 Percentage | | :--- | :--- | :--- | | Airtime Service | 74% | 69% | | Product Sales | 19% | 22% | | Content Services | 4% | 6% | Risk Factors The company faces significant risks from its history of losses, intense competition from LEO networks, reliance on key suppliers, and international trade complexities - The company has a history of substantial losses from continuing operations and may incur future losses due to investments in satellite capacity and R&D, alongside supply chain constraints[92] - Competition is intensifying, particularly from new non-geostationary satellite orbit (NGSO) services like Starlink and OneWeb, which could impact the commercial maritime business[126][128] - The business relies on third-party satellite services from providers like Intelsat, Sky Perfect-JSAT, and Inmarsat; any disruption could significantly harm sales and operations[106][107] - The company depends on sole or limited source suppliers for key components and has experienced product delivery delays and increased costs due to global chip shortages and supply chain constraints[133] - The sale of the inertial navigation business reduces the company's revenue base, magnifying the impact of fixed overhead costs and making the company solely reliant on its mobile connectivity business[122] - International operations account for a majority of revenue (62% in 2022) and expose the company to risks including tariffs, trade restrictions, foreign currency fluctuations, and complex regulatory environments[117][140][142] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[149] Properties The company's principal facilities include two owned properties in Rhode Island and a leased European headquarters in Denmark Principal Facilities as of December 31, 2022 | Location | Type | Principal Uses | Square Footage | Ownership | | :--- | :--- | :--- | :--- | :--- | | Middletown, RI | Office | Corp. HQ, R&D, Sales, Admin | 75,000 | Owned | | Middletown, RI | Plant/Warehouse | Manufacturing & Warehousing | 75,300 | Owned | | Kokkedal, Denmark | Office/Warehouse | European HQ, Sales, Support | 11,000 | Leased | Legal Proceedings The company is involved in routine litigation that is not expected to have a material adverse effect on the business - The company is involved in routine litigation but does not expect any current proceedings to materially harm its business, financial condition, or results of operations[151][444] Mine Safety Disclosures This item is not applicable to the company - Not applicable[152] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "KVHI", and it has never paid cash dividends, retaining earnings for operations - The company's common stock trades on the Nasdaq Global Select Market under the symbol "KVHI"[154] - KVH has never declared or paid cash dividends and has no plans to do so, intending to retain future earnings to finance operations[155] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales from continuing operations grew 4%, while the sale of the inertial navigation business drove a reported net income of $24.1 million Results of Operations Net sales rose 4% to $138.9 million in 2022, driven by service sales, while net income reached $24.1 million due to a gain from discontinued operations - The increase in service sales was primarily due to a $10.4 million rise in VSAT service sales, while the decrease in product sales was mainly from a $3.1 million decline in VSAT product sales due to lower unit volume[176][177] - General and administrative expenses decreased by $4.1 million (14%), primarily due to a $3.4 million decrease in professional fees related to a 2021 proxy contest and a $0.9 million contra-expense from the Transition Services Agreement with EMCORE[184] Net Sales Performance (2022 vs. 2021) | Sales Category | 2022 (in thousands) | 2021 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product sales | $26,970 | $30,012 | $(3,042) | (10)% | | Service sales | $111,908 | $103,899 | $8,009 | 8% | | Net sales | $138,878 | $133,911 | $4,967 | 4% | Profitability Summary (2022 vs. 2021) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Loss from operations | $(5,654) | $(19,595) | | Net loss from continuing operations | $(3,924) | $(11,546) | | Income from discontinued operations, net of tax | $28,025 | $1,783 | | Net Income (loss) | $24,101 | $(9,763) | Discontinued Operations The divested inertial navigation business is classified as discontinued operations, contributing $28.0 million to 2022 net income after tax Results for Discontinued Operations (2022 vs. 2021) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Sales from discontinued operations | $16,721 | $37,856 | | Gain on sale of discontinued operations before tax | $30,763 | $— | | Income from discontinued operations, net of tax | $28,025 | $1,783 | Liquidity and Capital Resources The company held $76.7 million in cash and equivalents at year-end 2022, bolstered by divestiture proceeds, and believes it has sufficient liquidity - The company's primary liquidity sources in recent years have been proceeds from business sales, cash from operations, and bank financings[193] - Net cash provided by operating activities was $8.9 million in 2022, an increase from $2.9 million in 2021, primarily due to higher net income and favorable changes in accounts payable[199] - Net cash provided by investing activities was $0.4 million in 2022, a significant shift from $6.7 million used in 2021, driven by $55.0 million in proceeds from the inertial navigation business sale[200] - On August 9, 2022, the company terminated its 2018 Credit Agreement with Bank of America, at which time no borrowings were outstanding[203] Key Liquidity Metrics (as of Dec 31, 2022) | Metric | Amount (in millions) | | :--- | :--- | | Cash, cash equivalents, and marketable securities | $76.7 | | Working capital | $92.3 | Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2022 - Based on an evaluation as of December 31, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[212] - Management assessed the effectiveness of internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2022[213][214] - The independent registered public accounting firm, Grant Thornton LLP, issued a report stating that the company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022[215][220] - No changes in internal control over financial reporting occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, internal controls[216] Part III Information for Part III is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2023 proxy statement - The required information is incorporated by reference to the company's 2023 proxy statement[231] Executive Compensation Required information is incorporated by reference from the company's 2023 proxy statement - The required information is incorporated by reference to the company's 2023 proxy statement[233] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the company's 2023 proxy statement - The required information is incorporated by reference to the company's 2023 proxy statement[234] Certain Relationships and Related Transactions and Director Independence Required information is incorporated by reference from the company's 2023 proxy statement - The required information is incorporated by reference to the company's 2023 proxy statement[235] Principal Accountant Fees and Services Required information is incorporated by reference from the company's 2023 proxy statement - The required information is incorporated by reference to the company's 2023 proxy statement[236] Part IV Exhibits and Financial Statement Schedules This section contains the consolidated financial statements, the independent auditor's report, and a list of exhibits filed with the Form 10-K - This section includes the Report of Independent Registered Public Accounting Firm and the Consolidated Financial Statements[239] - No financial statement schedules were filed[240] - A list of exhibits is provided, including the Asset Purchase Agreement for the inertial navigation business sale, the Stockholder Rights Agreement, and various executive employment agreements[240][241] Form 10-K Summary No Form 10-K summary was provided - None[245]