KVH INDUSTRIES INC \DE\ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The statements included in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, products and services, competitive positions and plans, customer preferences, consumer trends, anticipated product development, and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Risk Factors” in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2024. These and many other factors could affect our future financial and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf. For example, our expectations regarding certain items as a percentage of sales assume that we will achieve our anticipated sales goals. The following discussion and analysis should be read in conjunction with our consolidated interim financial statements and related notes appearing elsewhere in this report. Overview We are a leading global provider of innovative and technology-driven connectivity solutions to primarily maritime commercial, leisure, and military/government customers. We provide global high-speed Internet and Voice over Internet Protocol (VoIP) services via satellite to mobile users at sea and on land. We are also a leading provider of commercially licensed entertainment, including movies, television programming, news, and music, to commercial customers in the maritime market, along with supplemental value-added cybersecurity, email, and crew internet services. We generate a substantial majority of our revenues from sales of satellite Internet airtime services. We provide, for monthly fixed fees and per-usage fees, satellite connectivity encompassing broadband Internet, data and VoIP services, to customers via our global HTS network. In mid-2022, we launched our KVH ONE hybrid network, which integrates global satellite service (including Ku-band VSAT using the Intelsat HTS network along with Starlink, OneWeb, Iridium, and other satellite services), KVH-provided cellular service in more than 150 countries, and shore-based Wi-Fi access. Revenue from our cellular airtime service has supplemented, and we expect will continue to supplement, our satellite-only airtime revenue. In addition, we earn monthly usage fees from sales of third-party satellite connectivity for VoIP, data and Internet services to our 23 Inmarsat, Iridium, and Starlink customers who choose to activate their subscriptions with us. In March 2023, we began selling Starlink terminals and, in September 2023, we became a Starlink authorized hardware and airtime reseller offering Global Priority data plans for maritime use. In October 2024, we expanded our portfolio to include Starlink Local Priority data plans, which will primarily be used for stationary and in-motion commercial use on land. In December 2024, we introduced our TracNet Coastal and TracNet Coastal Pro terminals, expanding our extensive multi-channel portfolio of maritime products and services with a 5G/cellular and Wi-Fi system. We expect to earn usage fees from our offering of OneWeb service, which we launched in January 2025. We also generate service revenue from product repairs and extended warranty sales. Our service sales also include the distribution of entertainment, including movies, television programming, news and music, to commercial customers in the maritime market through KVH Media Group, along with supplemental value-added services. Historically, our Ku-band VSAT communications service has been the primary driver of revenue growth. However, these services represent a declining percentage of our revenues in the face of increased demand for and competition from emerging LEO services. Our satellite-only and hybrid products enable marine customers to receive data, VoIP, and value-added services via satellite, cellular, and shore-based Wi-Fi networks onboard commercial, leisure, and military/government vessels. In addition, our in-motion television terminals permit customers to receive live digital television via regional satellite services in marine vessels, recreational vehicles, buses and automobiles. We sell our products through an extensive international network of dealers and distributors. We also sell and lease products to service providers and end users. In February 2024, we announced a staged wind-down of our product manufacturing operations at our Middletown, Rhode Island location. The wind-down was driven by reduced demand for our hardware products in the face of intensifying competition in the third and fourth quarters of 2023. We concluded that we should discontinue our capital-intensive manufacturing activities and concentrate our efforts on growing sales of our multi-orbit, multi-channel, integrated communications solutions. We expect that we will continue our product manufacturing activities in order to generate a targeted amount of inventory of maritime satellite connectivity and satellite television terminals to meet anticipated demand through 2025 and potentially into 2026 and that we will cease substantially all manufacturing activity by the end of 2025. We expect to continue to facilitate customer transition to third-party hardware products compatible with our mobile satellite communications services. We also plan to continue to conduct maintenance, service, warehousing, shipping and receiving activities at the Middletown, Rhode Island location until our anticipated relocation by early next year. As part of this restructuring, we reduced our headcount by approximately 75 employees, or approximately 20% of our total workforce as of the time we announced the restructuring. As of June 30, 2024, all employee terminations were completed. During 2024, we incurred $3.9 million of severance charges for this and other restructurings. The $3.9 million of severance charges incurred during the year consisted of approximately $3.6 million of cash charges and approximately $0.3 million of non-cash charges arising from pre-existing contractual obligations to accelerate vesting of certain outstanding equity compensation awards. During the second quarter of 2024, we expanded our relationship with Starlink through a bulk data distribution agreement. Under the agreement, we prepaid $17.0 million for access to a large block of Starlink Global Priority data at favorable rates. The new agreement offers us increased flexibility in the development and sale of custom airtime plans using Starlink’s Global Priority service. During the third quarter of 2024, we commenced our plan to sell the warehouse building and surface parking lot located at 75 Enterprise Center in Middletown, Rhode Island (“75 Enterprise Center”). As of September 30, 2024, 75 Enterprise Center had a carrying value of approximately $7.8 million. We determined that all of the criteria to classify 75 Enterprise Center as held for sale had been met as of September 30, 2024. The estimated fair value was determined based upon the anticipated sales price of these assets based on current market conditions and assumptions made by management, less selling costs. We recorded an impairment charge of $1.1 million in 2024, as the carrying value of 75 Enterprise Center at the time the asset for sale criteria were met exceeded the fair value less costs to sell. In December 2024, we entered into an agreement to sell 75 Enterprise Center for $8.5 million. Consummation of the transaction is subject to customary closing conditions. Under the purchase agreement, the buyer has six months to obtain specified zoning approvals, with up to three 30-day extensions, as well as a 60-day inspection period, subject to potential extension. The buyer may terminate the agreement at any time before the expiration of the inspection period and may also terminate the agreement if the specified zoning approvals are denied before the expiration of the zoning approval period. Upon consummation of the sale, we will remain in possession of the property as a tenant under a triple-net lease having an initial term of six months, which we can extend for up to an additional three months. Rent during the initial term is approximately $25,000 per month, which would increase to approximately $44,000 per month during any extension. 24 Additionally, in the third quarter of 2024, we commenced our plan to sell the property, building, improvements, and land located at 50 Enterprise Center in Middletown, Rhode Island (“50 Enterprise Center”). As of September 30, 2024, 50 Enterprise Center had a carrying value of approximately $3.6 million . We determined that all of the criteria to classify 50 Enterprise Center as held for sale had been met as of September 30, 2024. The estimated fair value of 50 Enterprise Center exceeds its carrying value. In December 2024, we entered into an agreement to sell 50 Enterprise Center, subject to the buyer’s right to terminate the agreement during an inspection period. In January 2025, before the end of the inspection period, we received notice of termination from the buyer. In March 2025, we entered into an agreement with another buyer to sell 50 Enterprise Center for $5.3 million. Consummation of the transaction is subject to customary closing conditions. Under the purchase agreement, the buyer has a 60-day inspection period and may terminate the agreement at any time before the end of the inspection period. Our marine leisure business has been highly seasonal, and seasonality can also impact our commercial marine business. Temporary suspensions of our airtime services typically increase in the third and fourth quarters of each year as boats are placed out of service during the winter months. Historically, we have generated the majority of our marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourth quarters of each year, compared to the first two quarters. Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these interim financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our interim financial statements. Our significant accounting policies are summarized in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2024. Critical accounting estimates are those estimates made that involve a significant level of estimation uncertainty and have had or are reasonably likely to have an impact on our statement of operations. We believe that our accounting estimates for intangible assets and other long-lived assets are the only estimates critical to an understanding and evaluation of our financial results for the three months ended March 31, 2025, as discussed below. 25 Results of Operations The following table provides, for the periods indicated, certain financial data relating to our operations expressed as a percentage of net sales: Three Months Ended March 31, 2025 2024 Sales: Service 85.2 % 85.6 % Product 14.8 14.4 Net sales 100.0 100.0 Cost and expenses: Costs of service sales 56.0 48.0 Costs of product sales 14.7 18.1 Research and development 4.7 10.4 Sales, marketing and support 19.5 18.4 General and administrative 13.9 18.1 Total costs and expenses 108.8 113.0 Loss from operations (8.8) (13.0) Interest income 2.2 3.1 Other expense, net — (0.7) Loss before income tax expense (6.6) (10.6) Income tax expense 0.1 0.3 Net loss (6.7) % (10.9) % 26 Three months ended March 31, 2025 and 2024 Net Sales Our net sales for the three months ended March 31, 2025 and 2024 were as follows: Change For the three months ended March 31, 2025 vs. 2024 2025 2024 $ % (dollars in thousands) Service $ 21,642 $ 25,038 $ (3,396) (14) % Product 3,772 4,229 (457) (11) % Net sales $ 25,414 $ 29,267 $ (3,853) (13) % Net sales decreased by $3.9 million, or 13%, for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024. Service sales decreased by $3.4 million, or 14%, to $21.6 million for the three months ended March 31, 2025 from $25.0 million for the three months ended March 31, 2024. The decrease in service sales was primarily due to a $3.5 million decrease in our airtime service sales, of which $2.5 million was related to the U.S. Coast Guard contract downgrade. In addition, there was a decrease in VSAT-only subscribers, partially offset by an increase in LEO service sales. Alternative solutions offered by recent LEO entrants have heightened competition in the global leisure segment and in commercial and government markets. Product sales decreased by $0.5 million, or 11%, to $3.8 million for the three months ended March 31, 2025 from $4.2 million for the three months ended March 31, 2024. The decrease in product sales was primarily due to a $0.5 million decrease in TracVision product sales and a $0.2 million decrease in accessory and land mobile connectivity product sales, partially offset by a $0.2 million increase in Starlink product sales and a $0.2 million increase in CommBox Edge product sales. The decline in product sales was primarily driven by product sales mix. Competition from low-cost alternatives to VSAT, which include streaming capabilities, has had a significant impact on sales of both TracVision and VSAT Broadband products. Costs of Sales Costs of sales consists of costs of service sales and costs of product sales. Costs of sales decreased by $1.4 million, or 7%, in the three months ended March 31, 2025 to $18.0 million from $19.4 million in the three months ended March 31, 2024. The decrease in costs of sales was driven by a $1.6 million decrease in costs of product sales, partially offset by a $0.2 million increase in costs of service sales. As a percentage of net sales, costs of sales were 71% and 66% for the three months ended March 31, 2025 and 2024, respectively. Our costs of service sales consist primarily of satellite service capacity, depreciation, service network overhead expense associated with our VSAT Broadband network infrastructure, direct network service labor, product installation costs, media materials and distribution costs, and service repair materials. For the three months ended March 31, 2025, costs of service sales increased by $0.2 million, or 1%, to $14.2 million from $14.0 million for the three months ended March 31, 2024, primarily due to a $0.2 million increase in content services cost of service sales. As a percentage of service sales, costs of service sales were 66% and 56% for the three months ended March 31, 2025 and 2024, respectively, driven primarily by fixed costs. Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. For the three months ended March 31, 2025, costs of product sales decreased by $1.6 million, or 30%, to $3.7 million from $5.3 million in the three months ended March 31, 2024, primarily due to a $1.2 million decrease in various manufacturing and other unabsorbed expenses, a $0.4 million decrease in TracVision cost of product sales and a $0.2 million decrease in accessory cost of product sales, partially offset by a $0.2 million increase in Starlink cost of product sales. As a percentage of product sales, costs of product sales were 99% and 126% for the three months ended March 31, 2025 and 2024, respectively. Cost of product sales decreased as a percentage of product sales primarily due to the decrease in various manufacturing and other unabsorbed expense. 27 Operating Expenses Research and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internally funded product development and product sustaining engineering activities. Research and development expense for the three months ended March 31, 2025 decreased by $1.9 million, or 61%, to $1.2 million from $3.0 million for the three months ended March 31, 2024. The decrease in research and development expense resulted primarily from a $1.7 million decrease in salaries, benefits and taxes, after giving effect to $0.8 million in costs incurred during the three months ended March 31, 2024 related to the reduction in our workforce. As a percentage of net sales, research and development expense was 5% and 10% for the three months ended March 31, 2025 and 2024, respectively. Sales, marketing, and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in-house and third-party representatives, costs related to the co-development of certain content, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and support costs, warranty-related costs and bad debt expense. Sales, marketing and support expense for the three months ended March 31, 2025 decreased by $0.4 million, or 8%, to $5.0 million from $5.4 million for the three months ended March 31, 2024. The decrease in sales, marketing and support expense resulted primarily from a $0.4 million decrease in salaries, benefits and taxes, after giving effect to $0.3 million in costs incurred during the three months ended March 31, 2024 related to the reduction in our workforce. As a percentage of net sales, sales, marketing and support expense was 20% and 18% for the three months ended March 31, 2025 and 2024, respectively. General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources, certain outside professional services, and other administrative costs. General and administrative expense for the three months ended March 31, 2025 decreased by $1.8 million, or 33%, to $3.5 million from $5.3 million for the three months ended March 31, 2024. The decrease in general and administrative expense resulted primarily from a $1.6 million decrease in salaries, benefits and taxes, after giving effect to $0.6 million in costs incurred during the three months ended March 31, 2024 related to the reduction in our workforce, and a $0.3 million decrease in depreciation expense. As a percentage of net sales, general and administrative expense was 14% and 18% for the three months ended March 31, 2025 and 2024, respectively. Interest and Other Expense, Net Interest income decreased by $0.3 million to $0.6 million for the three months ended March 31, 2025 from $0.9 million for the three months ended March 31, 2024. Of the current period interest income of $0.6 million, $0.5 million is attributable to interest earned on cash and cash equivalents, and $0.1 million was attributable to interest from lease receivables. Other expense, net decreased by $0.2 million to other expense, net of less than $0.1 million for the three months ended March 31, 2025 from other expense, net of $0.2 million for the three months ended March 31, 2024. This decrease was driven by a $0.2 million decrease in the loss on disposal of fixed assets. Income Tax Expense Income tax expense for the three months ended March 31, 2025 was less than $0.1 million and related to states taxes and taxes on income earned in foreign jurisdictions. Income tax expense for the three months ended March 31, 2024 was $0.1 million and related to taxes on income earned in foreign jurisdictions. Liquidity and Capital Resources Our primary liquidity needs have been to fund general business requirements, including working capital requirements and capital expenditures. In recent years, we have funded our operations primarily from the sale of two businesses in 2022, the sale of a business in 2019, a PPP loan, cash flows from operations, bank financings and proceeds received from exercises of stock options and the issuance of stock. On August 9, 2022, we sold our inertial navigation business to EMCORE Corporation for net proceeds of $54.9 million, less specified deductions. As of March 31, 2025, we had $48.6 million in cash and cash equivalents, of which $3.5 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries. We held no marketable securities as of March 31, 2025. As of March 31, 2025, we had $108.5 million in working capital. 28 Based upon our current working capital position, current operating plans and expected business conditions, we expect to have sufficient funds, through at least twelve months from the date that this report is filed with the SEC, to fund our short-term and long-term working capital requirements, including capital expenditures and contractual obligations. Our funding plans for our working capital needs and other commitments may be adversely impacted if our underlying assumptions regarding our anticipated revenues and expenses are not realized. If our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements. In that event, adequate funds may not be available when needed or may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise funds by issuing equity securities, our stockholders may experience dilution. Net cash used in operations was $1.3 million for the three months ended March 31, 2025 compared to net cash used in operations of $0.8 million for the three months ended March 31, 2024. The $0.5 million increase in net cash used in operations was primarily the result of a $3.1 million increase in cash outflows related to accounts payable, a $1.3 million decrease in cash inflows relating to accounts receivable, a change of $0.7 million related to non-cash items and a $0.5 million increase in cash outflows related to prepaid expenses and current assets, partially offset by a $2.5 million decrease in cash outflows relating to accrued compensation, product warranty and other expenses, a $1.5 million decrease in net loss and a $1.0 million decrease in cash outflows relating to inventories. Net cash used in investing activities was $0.6 million for the three months ended March 31, 2025 compared to net cash provided by investing activities of $0.9 million for the three months ended March 31, 2024. The $1.4 million change in net cash provided by investing activities was primarily the result of a $3.3 million decrease in proceeds from net sales of marketable securities, which was driven by the liquidation of our marketable securities held by Wells Fargo in 2024, partially offset by a $1.3 million decrease in capital expenditures and a $0.6 million increase in proceeds from the sale of fixed assets. Net cash used in financing activities was $0.2 million for the three months ended March 31, 2025 compared to net cash provided by financing activities of $0.1 million for the three months ended March 31, 2024. The $0.3 million change in net cash used in financing activities is primarily attributable to a $0.2 million increase in cash outflows related to the repurchase of treasury stock and $0.1 million decrease in cash inflows relating to proceeds from the exercise of stock options and purchases under our employee stock purchase plan. Other Matters On December 9, 2024, our Board of Directors authorized a share repurchase program pursuant in which we may purchase outstanding shares of our common stock for an aggregate purchase price of up to $10 million. Under the program, we, at management’s discretion, may repurchase shares from time to time through various means, including on the open market, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. We may elect to make purchases under Rule 10b-18 under the Securities Exchange Act of 1934, as amended, which imposes certain volume limitations, and/or under Rule 10b5-1 under that act, which would permit repurchases to occur during periods when we might otherwise be precluded from making purchases under insider trading laws or our company policy. The volume and timing of any such repurchases will depend on a variety of factors, including the availability of shares, price, market conditions, alternative uses of capital, liquidity, general business conditions, satisfaction of debt covenants, and applicable regulatory requirements. The program does not obligate us to repurchase any minimum number or dollar amount of shares, and the program may be modified, suspended or terminated at any time without prior notice. During the three months ended March 31, 2025, we repurchased 30,818 shares of common stock in open market transactions at a cost of $0.2 million. Except as noted above, there were no other repurchase programs outstanding. 29