Notes to Consolidated Financial Statements
(Unaudited, all amounts in thousands except per share amounts)
(1) Description of Business
KVH Industries, Inc. (together with its subsidiaries, the Company or KVH) designs, develops, manufactures and markets mobile communications products and services for the marine and land mobile markets, and navigation, guidance, and stabilization products for both the defense and commercial markets.
KVH’s mobile communications products enable customers to receive voice and Internet services, and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles. KVH’s CommBox offers a range of tools designed to increase communication efficiency, reduce costs, and manage network operations. KVH sells and leases its mobile communications products through an extensive international network of dealers and distributors. KVH also sells and leases products directly to end users.
KVH’s mobile communications service sales represent primarily sales earned from satellite voice and Internet airtime services and from product repairs. KVH provides, for monthly fixed and usage fees, satellite connectivity services, including broadband Internet, data and Voice over Internet Protocol (VoIP) services, to its TracPhone V-series customers. Mobile communications services sales also include the distribution of commercially licensed entertainment, including news, sports, music, and movies to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media Group (acquired as Headland Media Limited), the media and entertainment service company that KVH acquired on May 11, 2013, and the distribution of training films and e-Learning computer-based training courses to commercial customers in the maritime market through Super Dragon Limited and Videotel Marine Asia Limited (together referred to as Videotel), a maritime training services company that KVH acquired on July 2, 2014. KVH also earns monthly usage fees from third-party satellite connectivity services, including voice, data and Internet services, provided to its Inmarsat and Iridium customers who choose to activate their subscriptions with KVH. Mobile communications service sales also include sales from product repairs and extended warranty sales.
KVH also offers precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing and guidance. KVH’s guidance and stabilization products also include tactical navigation systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. KVH’s guidance and stabilization products are sold directly to U.S. and foreign governments and government contractors, as well as through an international network of authorized independent sales representatives. In addition, KVH's guidance and stabilization products are used in numerous commercial products, such as navigation and positioning systems for various applications including precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems, industrial robotics, and optical stabilization.
KVH’s guidance and stabilization service sales include product repairs, engineering services provided under development contracts and extended warranty sales.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of KVH Industries, Inc. and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company has evaluated all subsequent events through the date of this filing. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have not been audited by the Company's independent registered public accounting firm and include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods presented. These consolidated financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended
December 31, 2015
filed on March 14, 2016 with the Securities and Exchange Commission. The results for the
three
months ended
March 31, 2016
are not necessarily indicative of operating results for the remainder of the year.
Significant Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. As described in the Company's annual report on Form 10-K, the most significant estimates and assumptions by management affect the Company’s revenue recognition, valuation of accounts receivable, valuation of inventory, assumptions used to determine fair value of goodwill and intangible assets, deferred tax assets and related valuation allowance, stock-based compensation, warranty and accounting for contingencies. The Company has reviewed these estimates and determined that these remain the most significant estimates for the
three months ended
March 31, 2016
. There have been no material changes to the significant accounting policies previously disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2015.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.
The Company has accounted for its
$19,000
contract received in October 2014 from an international military customer to purchase TACNAV products and services under ASC 605-25,
Multiple-Element Arrangements
. This contract includes program management and engineering services expected to be delivered through 2017, and hardware shipments fulfilled in 2015 and expected to be fulfilled in 2016, as well as out-year support services. The revenue for these services is recognized using the proportional performance accounting method. The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specific return or refund privileges. Total revenue recognized on this contract for the
three months ended
March 31, 2016
and
2015
was approximately
$30
and
$300
, respectively.
(3) Recently Announced Accounting Pronouncements
Revenue from Contracts
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"). ASU 2014-09 represents the culmination of efforts by the FASB and the International Accounting Standards Board to issue a common revenue standard. In April 2015, the FASB voted to defer the effective date of the new revenue recognition standard by one year, which resulted in ASU 2014-09 becoming effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption on its financial position, results of operations and cash flows.
Lease Accounting
In February 2016, the FASB issued its new leases standard, ASU No. 2016-02,
Leases (Topic 842)
("ASU 2016-02"). ASU 2016-02 is aimed at putting most leases on lessees’ balance sheets, but it would also change aspects of lessor accounting. ASU 2016-02 is effective for public business entities for annual periods beginning after December 15, 2018 and interim periods within that year. As a result, the Company will adopt this standard effective January 1, 2019. The Company is currently evaluating the impact of the adoption on its financial position, results of operations and cash flows.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of the adoption on its financial position, results of operations and cash flows.
There are no other recent accounting pronouncements that have been issued by the FASB that would have a material impact on the financial statements of the Company.
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(4)
|
Marketable Securities
|
Included in marketable securities as of
March 31, 2016
and
December 31, 2015
are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Money market mutual funds
|
$
|
15,551
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,551
|
|
Corporate notes
|
1,001
|
|
|
—
|
|
|
—
|
|
|
1,001
|
|
Certificates of deposit
|
6,086
|
|
|
—
|
|
|
—
|
|
|
6,086
|
|
Total marketable securities designated as available-for-sale
|
$
|
22,638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Money market mutual funds
|
$
|
13,244
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,244
|
|
United States treasuries
|
1,002
|
|
|
—
|
|
|
—
|
|
|
1,002
|
|
Corporate notes
|
2,283
|
|
|
1
|
|
|
—
|
|
|
2,284
|
|
Certificates of deposit
|
6,089
|
|
|
—
|
|
|
—
|
|
|
6,089
|
|
Total marketable securities designated as available-for-sale
|
$
|
22,618
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
22,619
|
|
The amortized costs and fair value of debt securities as of
March 31, 2016
and
December 31, 2015
are shown below by effective maturity. Effective maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
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|
|
|
|
|
|
|
March 31, 2016
|
Amortized
Cost
|
|
Fair
Value
|
Due in less than one year
|
$
|
4,585
|
|
|
$
|
4,585
|
|
Due after one year and within two years
|
2,502
|
|
|
2,502
|
|
|
$
|
7,087
|
|
|
$
|
7,087
|
|
December 31, 2015
|
Amortized
Cost
|
|
Fair
Value
|
Due in less than one year
|
$
|
5,515
|
|
|
$
|
5,516
|
|
Due after one year and within two years
|
3,859
|
|
|
3,859
|
|
|
$
|
9,374
|
|
|
$
|
9,375
|
|
Interest income from marketable securities was
$20
and
$30
during the three months ended
March 31, 2016
and
2015
, respectively.
(5) Stock-Based Compensation
(a) Stock Equity and Incentive Plan
The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718,
Compensation--Stock Compensation
. Stock-based compensation expense was $
1,040
and $
958
for the three months ended
March 31, 2016
and
2015
, respectively. As of
March 31, 2016
, there was
$1,465
of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of
2.33
years. As of
March 31, 2016
, there was
$6,450
of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of
3.07
years.
The Company granted
379
and
163
restricted stock awards to employees under the terms of the Amended and Restated 2006 Stock Incentive Plan during the
three
months ended
March 31, 2016
and
2015
, respectively. The restricted stock awards vest ratably over
four years
from the date of grant subject to the recipient remaining employed through the applicable vesting dates. Compensation expense for restricted stock awards is measured at fair value on the date of grant based on the number of shares granted and the quoted market closing price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.
The Company granted
60
and
95
stock options to employees under the terms of the Amended and Restated 2006 Stock Incentive Plan during the
three months ended
March 31, 2016
and
2015
, respectively.
The fair value of stock options granted during the
three months ended
March 31, 2016
and
2015
was estimated as of the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value per share for all options granted during the
three months ended
March 31, 2016
and
2015
was
$8.53
and
$12.76
, respectively. The weighted-average assumptions used to value options as of their grant date were as follows:
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|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.43
|
%
|
|
1.54
|
%
|
Expected volatility
|
38.22
|
%
|
|
44.30
|
%
|
Expected life (in years)
|
4.17
|
|
|
4.18
|
|
Dividend yield
|
0
|
%
|
|
0
|
%
|
Subject to stockholder approval at the Company's 2016 Annual Meeting of Stockholders, the Board of Directors has approved a 2016 Equity and Incentive Plan, which would reserve
3,000
shares of common stock for issuance under such plan, plus certain additional shares in respect of outstanding awards that may be forfeited, canceled, reacquired by the Company, or terminated.
(b) Employee Stock Purchase Plan
Under the terms of the Company’s Amended and Restated Employee Stock Purchase Plan (ESPP), eligible employees can elect to have up to six percent of their pre-tax compensation withheld to purchase shares of the Company's common stock through six-month offering periods. The ESPP allows eligible employees to purchase the Company’s common stock at
85%
of the market price at the end of each offering period. As of
March 31, 2016
, the Company is authorized to issue up to
650
shares of common stock under the ESPP and substantially all of those shares had been issued. Subject to stockholder approval at the Company's 2016 Annual Meeting of Stockholders, the Board of Directors has approved an amendment to the ESPP that authorizes the issuance of an additional
1,000
shares under the plan, changes the offering price to
85%
of the fair market value of the Company's common stock on the first or last day of the offering period, whichever is less, and makes certain other changes to the terms of the plan. The Company recorded compensation charges of $13 and $14 for the
three months ended
March 31, 2016
and
2015
, related to the ESPP.
(6) Net Loss per Common Share
Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net loss per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined with the treasury stock accounting method. For the
three months ended March 31, 2016
and
2015
, since there was a net loss, the Company excluded all outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these securities would have reduced the net loss per share.
A reconciliation of the basic and diluted weighted average common shares outstanding is as follows:
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Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Weighted average common shares outstanding—basic
|
15,723
|
|
|
15,538
|
|
Dilutive common shares issuable in connection with stock plans
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
15,723
|
|
|
15,538
|
|
(7) Inventories
Inventories are stated at the lower of cost or market using the first-in first-out costing method. Inventories as of
March 31, 2016
and
December 31, 2015
include the costs of material, labor, and factory overhead. Components of inventories consist of the following:
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|
March 31,
2016
|
|
December 31,
2015
|
Raw materials
|
$
|
13,605
|
|
|
$
|
12,833
|
|
Work in process
|
2,383
|
|
|
2,778
|
|
Finished goods
|
7,166
|
|
|
5,978
|
|
|
$
|
23,154
|
|
|
$
|
21,589
|
|
(8) Product Warranty
The Company’s products carry standard limited warranties that range from
one
to
two years
and vary by product. The warranty period begins on the date of retail purchase or lease by the original purchaser. The Company accrues estimated product warranty costs at the time of sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. Factors that affect the Company’s warranty liability include the number of units sold or leased, historical and anticipated rates of warranty repairs and the cost per repair. Warranty and related costs are reflected within sales, marketing and support in the accompanying consolidated statements of operations. As of
March 31, 2016
and
December 31, 2015
, the Company had accrued product warranty costs of
$2,075
and
$1,880
, respectively.
The following table summarizes product warranty activity during
2016
and
2015
:
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|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
1,880
|
|
|
$
|
1,853
|
|
Charges to expense
|
528
|
|
|
57
|
|
Costs incurred
|
(333
|
)
|
|
(196
|
)
|
Ending balance
|
$
|
2,075
|
|
|
$
|
1,714
|
|
(9) Debt
Long-term debt consists of the following:
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|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Term note
|
$
|
57,687
|
|
|
$
|
58,906
|
|
Mortgage loan
|
3,075
|
|
|
3,114
|
|
Equipment loan
|
2,376
|
|
|
2,672
|
|
Total
|
63,138
|
|
|
64,692
|
|
Less amounts classified as current
|
7,055
|
|
|
6,638
|
|
Long-term debt, excluding current portion
|
$
|
56,083
|
|
|
$
|
58,054
|
|
Term Note and Line of Credit
On July 1, 2014, the Company entered into (i) a
five
-year senior credit facility agreement (the Credit Agreement) with Bank of America, N.A., as Administrative Agent, and the lenders named from time to time as parties thereto (the Lenders), for an aggregate amount of up to
$80,000
, including a revolving credit facility (the Revolver) of up to
$15,000
and a term loan (Term Loan) of
$65,000
to be used for general corporate purposes, including both (A) the refinancing of the Company’s
$30,000
then-outstanding indebtedness under its previous credit facility and (B) permitted acquisitions, (ii) revolving credit notes (together, the Revolving Credit Note) to evidence the Revolver, (iii) term notes (together, the Term Note, and together with the Revolving Credit Note, the Notes) to evidence the Term Loan, (iv) a Security Agreement (the Security Agreement) required by the Lenders with respect to the grant by the Company of a security interest in substantially all of the assets of the
Company in order to secure the obligations of the Company under the Credit Agreement and the Notes, and (v) Pledge Agreements (the Pledge Agreements) required by the Lenders with respect to the grant by the Company of a security interest in
65%
of the capital stock of each of KVH Industries A/S and KVH Industries U.K. Limited held by the Company in order to secure the obligations of the Company under the Credit Agreement and the Notes.
The Credit Agreement was amended in June 2015 to modify the circumstances under which certain changes in the Company's Board of Directors would constitute a change of control. The Credit Agreement was further amended in September 2015 to modify the Maximum Consolidate Leverage Ratio as of September 30, 2015.
The
$65,000
Term Note was executed on July 1, 2014 in connection with the acquisition of Videotel. See note 14 below for more information regarding the acquisition. Proceeds in the amount of
$35,000
were applied toward the payment of a portion of the purchase price for the acquired shares of Videotel, and proceeds in the amount of approximately
$30,000
were applied toward the refinancing of the then-outstanding balance of the Company’s previous credit facility. The Company must make principal repayments on the Term Loan in the amount of approximately
$1,200
at the end of each of the first 8
three
-month periods following the closing; thereafter, the Company must make principal repayments in the amount of approximately
$1,600
for each succeeding three-month period until the maturity of the loan on July 1, 2019. The Company made the first payment on this debt in September 2014. On the maturity date, the entire remaining principal balance of the loan, including any future loans under the Revolver, is due and payable, together with all accrued and unpaid interest, penalties and other amounts due and payable under the Credit Agreement. The Credit Agreement contains provisions requiring the mandatory prepayment of amounts outstanding under the Term Loan and the Revolver under specified circumstances, including (i)
100%
of the net cash proceeds from certain dispositions to the extent not reinvested in the Company’s business within a stated period, (ii)
50%
of the net cash proceeds from stated equity issuances and (iii)
100%
of the net cash proceeds from certain receipts of more than
$250
outside the ordinary course of business. The prepayments are first applied to the Term Loan, in inverse order of maturity, and then to the Revolver. In the discretion of the Administrative Agent, certain mandatory prepayments made on the Revolver can permanently reduce the amount of credit available under the Revolver.
Loans under the Credit Agreement bear interest at varying rates determined in accordance with the Credit Agreement. Each LIBOR Rate Loan, as defined in the Credit Agreement, bears interest on the outstanding principal amount thereof for each interest period from the applicable borrowing date at a rate per annum equal to the LIBOR Daily Floating Rate or LIBOR Monthly Floating Rate, each as defined in the Credit Agreement, as applicable, plus the Applicable Rate, as defined in the Credit Agreement, and each Base Rate Loan, as defined in the Credit Agreement, bears interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate, as defined in the Credit Agreement, plus the Applicable Rate. The Applicable Rate ranges from
1.50%
to
2.25%
, depending on the Company’s Consolidated Leverage Ratio, as defined in the Credit Agreement. The highest Applicable Rate applies when the Consolidated Leverage Ratio exceeds
2.00:1.00
. Upon certain defaults, including failure to make payments when due, interest becomes payable at a higher default rate.
Borrowings under the Revolver are subject to the satisfaction of numerous conditions precedent at the time of each borrowing, including the continued accuracy of the Company’s representations and warranties and the absence of any default under the Credit Agreement. As of
March 31, 2016
, there were no borrowings outstanding under the Revolver.
The Credit Agreement contains
two
financial covenants, a Maximum Consolidated Leverage Ratio and a Minimum Consolidated Fixed Charge Coverage Ratio, each as defined in the Credit Agreement. In September 2015, the Maximum Consolidated Leverage Ratio was increased from 1.00:1.00 to 1.75:1.00 for September 30, 2015, 1.50:1.00 for December 31, 2015, and 1.25:1.00 for March 31, 2016 and each fiscal quarter thereafter. The Minimum Consolidated Fixed Charge Coverage Ratio may not be less than
1.25
:1.00. The Company was in compliance with these financial ratio debt covenants as of March 31, 2016.
The Credit Agreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the payment of taxes and other obligations, compliance with laws, entry into material contracts, creation of liens, incurrence of indebtedness, investments, dispositions, fundamental changes, restricted payments, changes in the nature of the Company’s business, transactions with affiliates, corporate and accounting changes, and sale and leaseback arrangements.
The Company’s obligation to repay loans under the Credit Agreement could be accelerated upon a default or event of default under the terms of the Credit Agreement, including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to comply with the Company’s affirmative and negative covenants under the Credit Agreement, a change of control of the Company, certain defaults in payment relating to other indebtedness, the acceleration of payment of certain other indebtedness, certain events relating to the liquidation, dissolution, bankruptcy, insolvency or receivership of the Company, the entry of certain judgments against the Company, certain events relating to the impairment of collateral or the Lenders' security interest therein, and any other material adverse change with respect to the Company.
Mortgage Loan
On April 6, 2009, the Company entered into a mortgage loan in the amount of $
4,000
related to its headquarters facility in Middletown, Rhode Island. On June 9, 2011, the Company entered into an amendment to the mortgage loan. The loan term is
ten years
, with a principal amortization of
20 years
, and the interest rate will be a rate per year adjusted periodically based on a defined interest period equal to the BBA LIBOR Rate plus
2.00
percentage points. Land, building and improvements with an approximate carrying value of $
5,000
as of
March 31, 2016
secure the mortgage loan. The monthly mortgage payment is approximately $
13
plus interest and increases in increments of approximately $
1
each year throughout the life of the mortgage. Due to the difference in the term of the loan and amortization of the principal, a balloon payment of $
2,551
is due on April 1, 2019. The loan contains
one
financial covenant, a Fixed Charge Coverage Ratio, which applies in the event that the Company's consolidated cash, cash equivalents and marketable securities balance falls below $
25,000
at any time. As the Company's consolidated cash, cash equivalents, and marketable securities balance was above the minimum threshold throughout the
three months ended March 31, 2016
, the Fixed Charge Coverage Ratio did not apply. Under the mortgage loan the Company may prepay its outstanding loan balance subject to certain early termination charges as defined in the mortgage loan agreement. If the Company were to default on its mortgage loan, the land, building and improvements would be used as collateral. As discussed in Note 17 to the consolidated financial statements, effective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, the Company entered into
two
interest rate swap agreements that are intended to hedge its mortgage interest obligations by fixing the interest rates specified in the mortgage loan to
5.91%
for half of the principal amount outstanding and
6.07%
for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires on
April 16, 2019
.
Equipment Loan
On January 30, 2013, the Company borrowed $
4,700
from a bank and pledged as collateral
six
satellite hubs and related equipment, including
three
hubs purchased in 2012. The term of the equipment loan is
five
years, and the loan bears interest at a fixed rate of
2.76%
per annum. The monthly payment is approximately $
83
, including interest expense. On December 30, 2013, the Company borrowed $
1,200
from a bank and pledged as collateral
one
satellite hub and related equipment. The term of the equipment loan is
five
years, and the loan bears interest at a fixed rate of
3.08%
per annum. The monthly payment is approximately
$21
, including interest expense.
(10) Segment Reporting
Under common operational management, the Company designs, develops, manufactures and markets its navigation, guidance and stabilization and mobile communications products for use in a wide variety of applications. Products are generally sold directly to third-party consumer electronic dealers and retailers, original equipment manufacturers, government contractors or to U.S. and other foreign government agencies. Primarily, sales originating in the Americas consist of sales within the United States and Canada and, to a lesser extent, Mexico and some Latin and South American countries. The Americas’ sales also include all guidance and stabilization product sales throughout the world. Sales originating from the Company’s European and Asian subsidiaries principally consist of sales into all European countries, both inside and outside the European Union, as well as Africa, Asia/Pacific, the Middle East and India.
The Company operates in
two
geographic segments, exclusively in the mobile communications, navigation and guidance and stabilization equipment industry, which it considers to be a single business activity. The Company has
two
primary product categories: mobile communication and guidance and stabilization. Mobile communication sales and services include marine, land mobile, and automotive communication equipment and satellite-based voice, television and Broadband Internet connectivity services; the distribution of commercially licensed news, sports, movies, and music content for commercial and leisure customers in the maritime, hotel, and retail markets; and the distribution of training films and e-Learning computer-based training courses to commercial customers in the maritime market.
Guidance and stabilization sales and services include sales of defense-related and commercial navigation and guidance and stabilization equipment based upon digital compass and FOG sensor technology. Mobile communication and guidance and stabilization sales also include development contract revenue, product repairs and extended warranty sales.
The following table summarizes information regarding the Company’s operations by geographic segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Originating From
|
Three months ended March 31, 2016
|
|
Americas
|
|
Europe and
Asia
|
|
Total
|
Mobile communication sales to the United States
|
|
$
|
20,717
|
|
|
$
|
527
|
|
|
$
|
21,244
|
|
Mobile communication sales to Canada
|
|
347
|
|
|
190
|
|
|
537
|
|
Mobile communication sales to Europe
|
|
198
|
|
|
8,084
|
|
|
8,282
|
|
Mobile communication sales to other geographic areas
|
|
875
|
|
|
3,518
|
|
|
4,393
|
|
Guidance and stabilization sales to the United States
|
|
2,246
|
|
|
—
|
|
|
2,246
|
|
Guidance and stabilization sales to Canada
|
|
1,776
|
|
|
—
|
|
|
1,776
|
|
Guidance and stabilization sales to Europe
|
|
869
|
|
|
—
|
|
|
869
|
|
Guidance and stabilization sales to other geographic areas
|
|
1,033
|
|
|
—
|
|
|
1,033
|
|
Intercompany sales
|
|
1,770
|
|
|
653
|
|
|
2,423
|
|
Subtotal
|
|
29,831
|
|
|
12,972
|
|
|
42,803
|
|
Eliminations
|
|
(1,770
|
)
|
|
(653
|
)
|
|
(2,423
|
)
|
Net sales
|
|
$
|
28,061
|
|
|
$
|
12,319
|
|
|
$
|
40,380
|
|
Segment net loss
|
|
$
|
(2,507
|
)
|
|
$
|
(284
|
)
|
|
$
|
(2,791
|
)
|
Depreciation and amortization
|
|
$
|
1,226
|
|
|
$
|
1,963
|
|
|
$
|
3,189
|
|
Total assets
|
|
$
|
135,346
|
|
|
$
|
82,675
|
|
|
$
|
218,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Originating From
|
Three months ended March 31, 2015
|
|
Americas
|
|
Europe and
Asia
|
|
Total
|
Mobile communication sales to the United States
|
|
$
|
22,046
|
|
|
$
|
435
|
|
|
$
|
22,481
|
|
Mobile communication sales to Canada
|
|
255
|
|
|
16
|
|
|
271
|
|
Mobile communication sales to Europe
|
|
98
|
|
|
5,039
|
|
|
5,137
|
|
Mobile communication sales to other geographic areas
|
|
1,334
|
|
|
7,020
|
|
|
8,354
|
|
Guidance and stabilization sales to the United States
|
|
1,085
|
|
|
—
|
|
|
1,085
|
|
Guidance and stabilization sales to Canada
|
|
2,210
|
|
|
—
|
|
|
2,210
|
|
Guidance and stabilization sales to Europe
|
|
847
|
|
|
—
|
|
|
847
|
|
Guidance and stabilization sales to other geographic areas
|
|
920
|
|
|
—
|
|
|
920
|
|
Intercompany sales
|
|
1,168
|
|
|
798
|
|
|
1,966
|
|
Subtotal
|
|
29,963
|
|
|
13,308
|
|
|
43,271
|
|
Eliminations
|
|
(1,168
|
)
|
|
(798
|
)
|
|
(1,966
|
)
|
Net sales
|
|
$
|
28,795
|
|
|
$
|
12,510
|
|
|
$
|
41,305
|
|
Segment net loss
|
|
$
|
(1,154
|
)
|
|
$
|
(268
|
)
|
|
$
|
(1,422
|
)
|
Depreciation and amortization
|
|
$
|
1,176
|
|
|
$
|
1,953
|
|
|
$
|
3,129
|
|
Total assets
|
|
$
|
142,814
|
|
|
$
|
82,307
|
|
|
$
|
225,121
|
|
(11) Legal Matters
From time to time, the Company is involved in litigation incidental to the conduct of its business. In the ordinary course of business, the Company is a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers.
In March 2015, Advanced Media Networks, L.L.C., or AMN, filed suit in the United States District Court for the District of Rhode Island against us for allegedly infringing two of its patents, seeking unspecified monetary damages and other relief. The Company settled the claim for a cash payment. The Company accrued the settlement of this claim as of December 31, 2015 and made this cash payment to AMN in January 2016.
(12) Share Buyback Program
On November 26, 2008, the Company’s Board of Directors authorized a program to repurchase up to
1,000
shares of the Company’s common stock. As of
March 31, 2016
,
341
shares of the Company’s common stock remain available for repurchase under the authorized program. The repurchase program is funded using the Company’s existing cash, cash equivalents, marketable securities and future cash flows. Under the repurchase program, the Company, at management’s discretion, may repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated at any time without prior notice. The repurchase program has no expiration date. There were
no
other repurchase programs outstanding during the
three months ended
March 31, 2016
and
no
repurchase programs expired during the period.
During the
three months ended
March 31, 2016
and 2015, the Company did not repurchase any shares of its common stock.
(13) Fair Value Measurements
ASC Topic 820,
Fair Value Measurements and Disclosures
(ASC 820), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
|
|
Level 1:
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company’s Level 1 assets are investments in money market mutual funds, government agency bonds, United States treasuries, corporate notes, and certificates of deposit.
|
|
|
Level 2:
|
Quoted prices for similar assets or liabilities in active markets; or observable prices that are based on observable market data, based on directly or indirectly market-corroborated inputs. The Company’s Level 2 assets are investments in municipal bonds and its Level 2 liabilities are interest rate swaps.
|
|
|
Level 3:
|
Unobservable inputs that are supported by little or no market activity, and are developed based on the best information available given the circumstances. The Company has no Level 3 assets.
|
Assets and liabilities measured at fair value are based on the valuation techniques identified in the table below. The valuation techniques are:
|
|
(a)
|
Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets.
|
|
|
(b)
|
The valuations of the interest rate swaps intended to mitigate the Company’s interest rate risk are determined with the assistance of a third-party financial institution using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves and interest rate volatility, and reflects the contractual terms of these instruments, including the period to maturity.
|
The following tables present financial assets and liabilities at
March 31, 2016
and
December 31, 2015
for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
15,551
|
|
|
$
|
15,551
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(a)
|
Corporate notes
|
1,001
|
|
|
—
|
|
|
1,001
|
|
|
—
|
|
|
(a)
|
Certificates of deposit
|
6,086
|
|
|
6,086
|
|
|
—
|
|
|
—
|
|
|
(a)
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
258
|
|
|
—
|
|
|
258
|
|
|
—
|
|
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
13,244
|
|
|
$
|
13,244
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(a)
|
United States treasuries
|
1,002
|
|
|
1,002
|
|
|
—
|
|
|
—
|
|
|
(a)
|
Corporate notes
|
2,284
|
|
|
—
|
|
|
2,284
|
|
|
—
|
|
|
(a)
|
Certificates of deposit
|
6,089
|
|
|
6,089
|
|
|
—
|
|
|
—
|
|
|
(a)
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
238
|
|
|
—
|
|
|
238
|
|
|
—
|
|
|
(b)
|
Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company's non-financial assets and liabilities, such as goodwill, intangible assets and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if there are indicators of impairment identified during a quarter or if an impairment is identified during the annual goodwill test. There were no indicators of impairment identified during the
three months ended
March 31, 2016
.
As of
March 31, 2016
, the Company did not have any other non-financial assets or liabilities that were carried at fair value on a recurring basis in the consolidated financial statements or for which a fair value measurement was required.
(14) Acquisition
On July 2, 2014, KVH Media Group Limited (KMG UK), an indirectly wholly owned subsidiary of KVH, entered into a Share Purchase Agreement with Nigel Cleave to acquire all of the issued share capital of Super Dragon Limited and Videotel Marine Asia Limited, for an aggregate purchase price of approximately
$47,446
, which excluded
$1,719
of cash consideration that was considered deferred compensation in purchase accounting. Videotel is a maritime training services company headquartered in London that produces and distributes training films and e-Learning computer-based training courses to commercial customers in the maritime market. Videotel also has sales offices in Hong Kong and Singapore. The acquisition was consummated on the same day. The purchase price was determined through arm’s-length negotiation and was subject to a potential post-closing adjustment based on the value of the net assets delivered at the closing. In the second quarter of 2015, the Company finalized its valuations of the fair value of the assets acquired and liabilities assumed, which resulted in no adjustments to the purchase price.
The Share Purchase Agreement contains certain representations, warranties, covenants and indemnification provisions. The Share Purchase Agreement provides that
10%
of the purchase price would be held in escrow for a period of approximately
21 months
after the closing in order to satisfy valid indemnification claims that KMG UK could have asserted for specified breaches of representations, warranties and covenants. The escrow and holdback amounts of approximately
$6,000
were fully funded to the escrow account during the first quarter of 2015. In April 2016, approximately
$600
of the
$4,400
total escrow funds were released to the Company to cover post-completion accounts receivable write-offs and the balance was released to the seller. The holdback of approximately
$1,600
is expected to be released in the third quarter of 2016.
(15) Goodwill and Intangible Assets
Goodwill
The following table sets forth the changes in the carrying amount of goodwill for the
three months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
Amounts
|
Balance at December 31, 2015
|
|
$
|
36,747
|
|
Foreign currency translation adjustment
|
|
(967
|
)
|
Balance at March 31, 2016
|
|
$
|
35,780
|
|
The Company performed its annual goodwill impairment test as of August 31, 2015, as defined by ASC Topic 350,
Intangibles—Goodwill and Other
(ASC 350). ASC 350 requires that the impairment test be performed through the application of a two-step process. The first step compares the carrying value of the Company’s reporting units to their estimated fair values as of the test date. If fair value is less than carrying value, a second step is performed to quantify the amount of the impairment, if any. As of August 31, 2015, the Company performed its annual impairment test for goodwill at the reporting unit level and, after conducting the first step, determined that it was not necessary to conduct the second step as it concluded that the fair value of its reporting units exceeded their carrying value. Accordingly, the Company determined no adjustment to goodwill was necessary.
Intangible Assets
The changes in the carrying amount of intangible assets during the
three months ended
March 31, 2016
are as follows:
|
|
|
|
|
|
|
|
Amounts
|
Balance at December 31, 2015
|
|
$
|
26,755
|
|
Amortization expense
|
|
(1,283
|
)
|
Foreign currency translation adjustment
|
|
(774
|
)
|
Balance at March 31, 2016
|
|
$
|
24,698
|
|
Intangible assets arose from an acquisition made prior to 2013, the acquisition of KVH Media Group (acquired as Headland Media Limited) in May 2013 and the acquisition of Videotel in July 2014. Intangibles arising from the acquisition made prior to 2013 are being amortized on a straight-line basis over an estimated useful life of
7 years
. Intangibles arising from the acquisition of KVH Media Group are being amortized on a straight-line basis over the estimated useful life of: (i)
10 years
for acquired subscriber relationships, (ii)
15 years
for distribution rights, (iii)
3 years
for internally developed software and (iv)
2 years
for proprietary content. Intangibles arising from the acquisition of Videotel are being amortized on a straight-line basis over the estimated useful life of: (i)
8 years
for acquired subscriber relationships, (ii)
5 years
for favorable leases, (iii)
4 years
for internally developed software and (iv)
5 years
for proprietary content. The intangibles arising from the KVH Media Group and Videotel acquisitions were recorded in pounds sterling and fluctuations in exchange rates could cause these amounts to increase or decrease from time to time.
Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at
March 31, 2016
and
December 31, 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
March 31, 2016
|
|
|
|
|
|
|
Subscriber relationships
|
|
$
|
18,727
|
|
|
$
|
4,956
|
|
|
$
|
13,771
|
|
Distribution rights
|
|
4,623
|
|
|
970
|
|
|
3,653
|
|
Internally developed software
|
|
2,422
|
|
|
1,399
|
|
|
1,023
|
|
Proprietary content
|
|
8,634
|
|
|
3,287
|
|
|
5,347
|
|
Intellectual property
|
|
2,283
|
|
|
1,811
|
|
|
472
|
|
Favorable lease
|
|
682
|
|
|
250
|
|
|
432
|
|
|
|
$
|
37,371
|
|
|
$
|
12,673
|
|
|
$
|
24,698
|
|
December 31, 2015
|
|
|
|
|
|
|
Subscriber relationships
|
|
$
|
19,161
|
|
|
$
|
4,426
|
|
|
$
|
14,735
|
|
Distribution rights
|
|
4,736
|
|
|
895
|
|
|
3,841
|
|
Internally developed software
|
|
2,457
|
|
|
1,244
|
|
|
1,213
|
|
Proprietary content
|
|
8,812
|
|
|
2,879
|
|
|
5,933
|
|
Intellectual property
|
|
2,283
|
|
|
1,729
|
|
|
554
|
|
Favorable lease
|
|
696
|
|
|
217
|
|
|
479
|
|
|
|
$
|
38,145
|
|
|
$
|
11,390
|
|
|
$
|
26,755
|
|
Estimated future amortization expense remaining at
March 31, 2016
for intangible assets acquired is as follows:
|
|
|
|
|
|
Year Ending
|
|
December 31,
|
2016
|
$
|
4,910
|
|
2017
|
4,888
|
|
2018
|
4,319
|
|
2019
|
2,865
|
|
2020
|
2,427
|
|
Thereafter
|
5,289
|
|
Total future amortization expense
|
$
|
24,698
|
|
For intangible assets, the Company assesses the carrying value of these assets whenever events or circumstances indicate that the carrying value may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset, or asset group, to the future undiscounted cash flows expected to be generated by the asset, or asset group. There were no events or changes in circumstances during the
first quarter
of
2016
which indicated that an assessment of the impairment of goodwill and intangible assets was required.
(16) Business and Credit Concentrations
Significant portions of the Company’s net sales are as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Net sales to foreign customers outside the U.S. and Canada
|
37.0
|
%
|
|
36.9
|
%
|
No
single customer accounted for 10% or more of consolidated net sales for the first quarter of 2016 or 2015 or accounts receivable at March 31, 2016. The Company had
one
customer that accounted for
17%
of the accounts receivable as of December 31, 2015.
(17) Derivative Instruments and Hedging Activities
Effective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, the Company entered into
two
interest rate swap agreements. These interest rate swap agreements are intended to hedge the Company’s mortgage loan related to its headquarters facility in Middletown, Rhode Island by fixing the interest rates specified in the mortgage loan to
5.91%
for half of the principal amount outstanding and
6.07%
for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires on
April 16, 2019
.
As required by ASC Topic 815,
Derivatives and Hedging
, the Company records all derivatives on the balance sheet at fair value. As of
March 31, 2016
, the fair value of the derivatives is included in other accrued liabilities and the unrealized loss is included in accumulated other comprehensive loss.
As of
March 31, 2016
, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives
|
Notional
(in thousands)
|
|
Asset
(Liability)
|
|
Effective Date
|
|
Maturity Date
|
|
Index
|
|
Strike Rate
|
Interest rate swap
|
$
|
1,537
|
|
|
(125
|
)
|
|
April 1, 2010
|
|
April 1, 2019
|
|
1-month LIBOR
|
|
5.91
|
%
|
Interest rate swap
|
$
|
1,537
|
|
|
(133
|
)
|
|
April 1, 2010
|
|
April 1, 2019
|
|
1-month LIBOR
|
|
6.07
|
%
|