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 connectivity products and services for the marine and land mobile markets, and inertial navigation products for both the commercial and defense markets. In the fourth quarter of 2016, consistent with certain internal organizational changes implemented, the Company changed its reporting structure from two operating segments based on geographies selling navigation, guidance, and stabilization and mobile communication products, to two operating segments based on product lines: mobile connectivity and inertial navigation. The change was driven by several factors including:
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•
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changes in the Company's overall organizational structure, including the appointment of a Chief Operating Officer and a new Chief Financial Officer;
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•
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the completion of the Company's planning process for 2017, as a result of which the Company changed how it will measure and assess its financial performance; and
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•
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the Company's process for measuring incentive compensation for key executives in 2016 and later years.
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KVH’s mobile connectivity 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 connectivity products through an extensive international network of dealers and distributors. KVH also sells and leases products directly to end users.
KVH’s mobile connectivity service sales represent primarily sales earned from satellite voice and Internet airtime services. 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 connectivity service 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 eLearning 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 connectivity service sales also include engineering services provided under development contracts, sales from product repairs, and extended warranty sales.
KVH's inertial navigation products offer precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing and guidance. KVH’s inertial navigation 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 inertial navigation 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 inertial navigation 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 inertial navigation 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, 2016
filed on March 9, 2017 with the Securities and Exchange Commission. The results for the
three
months ended
March 31, 2017
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, valuations and purchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of long-lived assets, including goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, key valuation assumptions for its share-based awards, estimated fulfillment costs for warranty obligations, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance. The Company has reviewed these estimates and determined that these remain the most significant estimates for the
three months ended
March 31, 2017
. 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, 2016, except for ASC Update No. 2016-09,
Compensation- Stock Compensation (Topic 718): Improvements t
o Employee Share-Based Payment Accounting, which the Company adopted as required on January 1, 2017 resulted primarily in a change in the Company’s accounting prospectively for share-based payment forfeitures and accounting for excess tax benefits or deficiencies related to share-based payments as a component of earnings (see Note 5 for further discussion) and ASC Update No. 2015-11,
Simplifying the Measurement of Inventory
adopted as of January 1, 2017, which simplified the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value test (see Note 7 for further discussion).
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.
(3) Recently Announced Accounting Pronouncements
ASC Updates No. 2014-09, No. 2016-08, No. 2016-10, No. 2016-11, No. 2016-12 and No. 2016-20
In May 2014, the FASB issued ASC Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
Update No. 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies using International Financial Reporting Standards and U.S. GAAP. The core principle requires entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to approve a one year deferral, making the standard effective for public entities for annual and interim periods beginning after December 15, 2017.
In March 2016, the FASB issued ASC Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. The purpose of Update No. 2016-08 is to clarify the guidance on principal versus agent considerations. It includes indicators that help to determine whether an entity controls the specified good or service before it is transferred to the customer and to assist in determining when the entity satisfied the performance obligation and as such, whether to recognize a gross or a net amount of consideration in their consolidated statement of operations.
In April 2016, the FASB issued ASC Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
Update No. 2016-10 clarifies that entities are not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. Update No. 2016-10 also addresses how to determine whether promised goods or services are separately identifiable and permits entities to make a policy election to treat shipping and handling costs as fulfillment activities. In addition, it clarifies key provisions in Topic 606 related to licensing.
In May 2016, the FASB issued ASC Update No. 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815).
Update No. 2016-11 rescinds previous SEC comments that were codified in Topic 605, Topic 932 and Topic 815. Upon adoption of Topic 606, certain SEC comments including guidance on accounting for shipping and handling fees and costs and consideration given by a vendor to a customer should not be relied upon.
In May 2016, the FASB also issued ASC Update No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients
. Update No. 2016-12 provides clarity around collectability, presentation of sales taxes, non-cash consideration, contract modifications at transition and completed contracts at transition. Update No. 2016-12 also includes a technical correction within Topic 606 related to required disclosures if the guidance is applied retrospectively upon adoption.
In December 2016, the FASB issued ASC Update No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. Update No. 2016-20 allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the optional exemptions to expand their qualitative disclosures. Update No. 2016-20 also clarifies other areas of the new revenue standard, including disclosure requirements for prior period performance obligations, impairment guidance for contract costs and the interaction of impairment guidance in ASC 340-40 with other guidance elsewhere in the Codification.
The Company will adopt Topic 606 effective January 1, 2018. The Company anticipates it will adopt Topic 606 under the modified retrospective method and will only apply this method to contracts that are not completed as of the date of adoption. The modified retrospective method will result in a cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application for any open contracts as of the adoption date. The Company has established a cross-functional implementation team consisting of representatives from all of its business divisions and regions. The Company has commenced analyzing the impact of the standard on its contract portfolio by reviewing a sample of its contracts to identify potential differences that would result from applying the requirements of the new standard. The implementation team is apprising both management and the audit committee of project status on a recurring basis.
The Company has not yet finalized its assessment of the impact of Topic 606. The Company continues to analyze combining of contracts, performance obligations, variable consideration and disclosures. Additionally, the Company is monitoring updates issued by the FASB. The Company continues to perform its impact assessment and, following completion, the Company will initiate efforts to redesign impacted processes, policies and controls as necessary.
ASC Update No. 2016-01
In January 2016, the FASB issued ASC Update No. 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
It is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application of certain provisions is permitted. Update No. 2016-01 requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. It also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. Update No. 2016-01 also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and liability. The adoption of Update No. 2016-01 is not expected to have a material impact on the Company's financial position or results of operations.
ASC Update No. 2016-02
In February 2016, the FASB issued ASC Update No. 2016-02,
Leases (Topic 842).
It is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. Update No. 2016-02 is intended to increase the transparency and comparability among organizations by recognizing lease asset and lease liabilities on the balance sheet, including those previously classified as operating leases under current U.S. GAAP, and disclosing key information about leasing arrangements. The Company is in the process of determining the effect that the adoption of this standard will have on its financial position and results of operations.
ASC Update No. 2016-13
In June 2016, the FASB issued ASC Update No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. The update is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. The purpose of Update No. 2016-13 is to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. The Company is in the process of determining the effect that the adoption will have on its financial position and results of operation.
ASC Update No. 2016-15
In August 2016, the FASB issued ASC Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
The update is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The purpose of Update No. 2016-15 is to reduce the diversity in practice in presentation and classification of the following items within the statement of cash flows: debt prepayments, settlement of zero coupon debt instruments, contingent consideration payments, insurance proceeds, securitization transactions and distributions from equity method investees. The update also addresses classification of transactions that have characteristics of more than one class of cash flows. The Company is in the process of determining the effect that the adoption will have on its financial position and results of operations.
ASC Update No. 2016-16
In October 2016, the FASB issued ASC Update No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. The update is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The purpose of Update No. 2016-16 is to allow an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, as opposed to waiting until the asset is sold to an outside party. The Company is in the process of determining the effect that the adoption will have on its financial position and results of operations.
ASC Update No. 2017-04
In January 2017, the FASB issued ASC Update No. 2017-04,
Intangibles--Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment.
This ASC simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step of the goodwill impairment test under ASC 350. Under previous guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. To determine the implied fair value of goodwill, entities estimate the fair value of any unrecognized intangible assets (including in-process research and development) and any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1. Under this new guidance if a reporting unit's carrying value exceeds its fair value, an entity will record an impairment charge based on that difference with such impairment charge limited to the amount of goodwill in the reporting unit. This ASC does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This ASC will be applied prospectively and is effective for annual and interim impairment test performed in periods beginning after December 15, 2019 for public business enterprises. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company elected to early adopt this ASC as of January 1, 2017. The adoption of this ASC had no impact on the Company's consolidated statements of operations, financial condition or cash flows. The Company expects that adoption of this ASC will simplify the evaluation and recording of goodwill impairment charges, if any.
There are no other recent accounting pronouncements issued by the FASB that would have a material impact on the Company's financial statements.
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(4)
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Marketable Securities
|
Marketable securities as of
March 31, 2017
and
December 31, 2016
consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Money market mutual funds
|
$
|
14,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,233
|
|
Certificates of deposit
|
2,510
|
|
|
—
|
|
|
—
|
|
|
2,510
|
|
Total marketable securities designated as available-for-sale
|
$
|
16,743
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Money market mutual funds
|
$
|
21,848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,848
|
|
Certificates of deposit
|
3,864
|
|
|
—
|
|
|
—
|
|
|
3,864
|
|
Total marketable securities designated as available-for-sale
|
$
|
25,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,712
|
|
The amortized costs and fair value of marketable securities as of
March 31, 2017
and
December 31, 2016
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.
|
|
|
|
|
|
|
|
|
March 31, 2017
|
Amortized
Cost
|
|
Fair
Value
|
Due in less than one year
|
$
|
2,510
|
|
|
$
|
2,510
|
|
December 31, 2016
|
Amortized
Cost
|
|
Fair
Value
|
Due in less than one year
|
$
|
3,864
|
|
|
$
|
3,864
|
|
Interest income from marketable securities was
$31
and
$20
during the three months ended
March 31, 2017
and
2016
, respectively.
(5) Stockholder's Equity
(a) Stock Equity and Incentive Plan
The Company adopted ASC Update No. 2016-09,
Compensation- Stock Compensation (ASC Topic 718): Improvements to Employee Share-Based Payment Accounting
on January 1, 2017. Although, this ASC update did not impact the Company’s results of operations, financial position or cash flows for any periods prior to the adoption, the adoption of this ASC update had the following impact on the date of adoption:
|
|
•
|
The adoption of ASC Update No. 2016-09 requires all income tax adjustments to be recorded in the consolidated statements of operations. The cumulative adjustment upon adoption to accumulated earnings was zero since the increase in net deferred tax assets was fully offset by a corresponding increase in the deferred tax asset valuation allowance. The amount of deferred tax assets that had not been previously recognized due to the recognition of excess tax benefits was
$1,571
.
|
|
|
•
|
The tax benefit or expense is required to be classified as a cash flow provided by (used in) operating activities. It was previously required to be presented as a cash flow provided by (used in) financing activities in the Consolidated Statements of Cash Flows, with a corresponding adjustment to operating cash flows.
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•
|
In the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefit. This provision, which is only applicable on a prospective basis, did not have an impact on the Company's diluted net earnings per share calculation for the
three months ended March 31, 2017
.
|
|
|
•
|
The Company has elected to account for forfeitures on share-based payments as these forfeitures occur, which represents a change from the accounting previously required under ASC Topic 718. As a result, the Company notes that future forfeitures could result in a significant reversal of stock-based compensation expense recognized in the period in which such forfeitures occur. During the
three months ended March 31, 2017
, as a result of share-based award forfeitures, the Company recorded a reversal of previously recognized stock-based compensation expense of
$5
. In addition, had the Company continued to account for stock-based compensation expense related to forfeitures of share-based payments based on estimating the number of awards expected to be forfeited and recognizing only stock-based compensation expense on awards expected to vest, the Company would have recognized
$927
of stock-based compensation expense, or
$16
less than what was actually recorded during the
three months ended March 31, 2017
.
|
The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718,
Compensation--Stock Compensation
. Stock-based compensation expense, excluding compensation charges related to our employee stock purchase plan, ESPP, was $
943
and $
1,040
for the three months ended
March 31, 2017
and
2016
, respectively. As of
March 31, 2017
, there was
$2,022
of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of
3.24
years. As of
March 31, 2017
, there was
$5,626
of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of
2.89
years.
Stock Options
During the
three months ended
March 31, 2017
,
114
stock options were exercised for common stock, none of which was delivered to the Company as payment for the exercise price or related minimum tax withholding obligations. Additionally, during the
three months ended
March 31, 2017
,
531
stock options were granted with a weighted average grant date fair value of
$2.47
, per share and
4
stock options were forfeited. The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions utilized to determine the fair value of options granted during the
three months ended
March 31, 2017
were as follows:
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Risk-free interest rate
|
1.96
|
%
|
|
1.43
|
%
|
Expected volatility
|
35.53
|
%
|
|
38.22
|
%
|
Expected life (in years)
|
4.22
|
|
|
4.17
|
|
Dividend yield
|
0
|
%
|
|
0
|
%
|
As of
March 31, 2017
, there were
1,048
options outstanding with a weighted average exercise price of
$9.76
per share and
281
options exercisable with a weighted average exercise price of
$12.14
per share.
Restricted Stock
During the
three months ended
March 31, 2017
,
209
shares of restricted stock were granted with a weighted average grant date fair value of
$8.31
per share and
no
shares of restricted stock were forfeited. Additionally, during the
three months ended
March 31, 2017
,
233
shares of restricted stock vested, of which
43
shares of common stock were surrendered to the Company as payment by employees in lieu of cash to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock. As of
March 31, 2017
, there were
620
shares of restricted stock outstanding still subject to service-based vesting conditions.
As of
March 31, 2017
, the Company had no unvested outstanding options and no shares of restricted stock that were subject to performance-based or market-based vesting conditions.
(b) Employee Stock Purchase Plan
On June 15, 2016, at the Company's 2016 Annual Meeting of Stockholders, the stockholders of the Company also approved amendments to the Company's Amended and Restated 1996 Employee Stock Purchase Plan (ESPP) that, among other things, increased the number of shares of common stock reserved for issuance to a total of
1,650
. As amended, the ESPP affords eligible employees the right to purchase common stock, via payroll deductions, through various offering periods at a purchase price equal to
85%
of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. During the
three months ended
March 31, 2017
and
2016
, no shares were issued under the ESPP plan. The Company recorded compensation charges of
$17
and
$13
for the
three months ended
March 31, 2017
and
2016
, related to the ESPP.
(c) Stock- Based Compensation Expense
The following presents stock-based compensation expense including ESPP in the Company's consolidated statements of operations for the
three months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Cost of product sales
|
$
|
82
|
|
|
$
|
90
|
|
Cost of service sales
|
—
|
|
|
1
|
|
Research and development
|
189
|
|
|
186
|
|
Sales, marketing and support
|
268
|
|
|
273
|
|
General and administrative
|
421
|
|
|
503
|
|
|
$
|
960
|
|
|
$
|
1,053
|
|
(d) Accumulated Other Comprehensive Loss
Comprehensive income (loss) includes net earnings (loss), unrealized gains and losses from foreign currency translation, unrealized gains and losses from available for sale marketable securities and changes in fair value related to interest rate swap derivative instruments, net of tax attributes. The components of the Company’s comprehensive income (loss) and the effect on earnings for the periods presented are detailed in the accompanying consolidated statements of comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Available for Sale Marketable Securities
|
|
Interest Rate Swaps
|
|
Total Accumulated Other Comprehensive Loss
|
Balance, December 31, 2016
|
(16,651
|
)
|
|
—
|
|
|
(158
|
)
|
|
(16,809
|
)
|
Other comprehensive (loss) income before reclassifications
|
601
|
|
|
—
|
|
|
5
|
|
|
606
|
|
Amounts reclassified from AOCI to Other income (expense), net (1)
|
—
|
|
|
—
|
|
|
22
|
|
|
22
|
|
Net other comprehensive (loss) income, March 31, 2017
|
601
|
|
|
—
|
|
|
27
|
|
|
628
|
|
Balance, March 31, 2017
|
(16,050
|
)
|
|
—
|
|
|
(131
|
)
|
|
(16,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Available for Sale Marketable Securities
|
|
Interest Rate Swaps
|
|
Total Accumulated Other Comprehensive Loss
|
Balance, December 31, 2015
|
$
|
(7,363
|
)
|
|
$
|
1
|
|
|
$
|
(238
|
)
|
|
$
|
(7,600
|
)
|
Other comprehensive (loss) income before reclassifications
|
(676
|
)
|
|
—
|
|
|
(45
|
)
|
|
(721
|
)
|
Amounts reclassified from AOCI to Other income (expense), net (1)
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
Net other comprehensive (loss) income, March 31, 2016
|
(676
|
)
|
|
—
|
|
|
(20
|
)
|
|
(696
|
)
|
Balance, March 31, 2016
|
(8,039
|
)
|
|
1
|
|
|
(258
|
)
|
|
(8,296
|
)
|
(1) For additional information, see Note 4, "Marketable Securities," and see Note 17, "Derivative Instruments and Hedging Activities."
(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, 2017
and
2016
, 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:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
Weighted average common shares outstanding—basic
|
16,261
|
|
|
15,723
|
|
Dilutive common shares issuable in connection with stock plans
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
16,261
|
|
|
15,723
|
|
(7) Inventories
The Company adopted ASC 2015-11,
Simplifying the Measurement of Inventory
as of January 1, 2017. ASC 2015-11 simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value test. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations. Inventories are stated at the lower of cost or net realizable value using the first-in first-out costing method. Inventories as of
March 31, 2017
and
December 31, 2016
include the costs of material, labor, and factory overhead. Components of inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Raw materials
|
$
|
11,629
|
|
|
$
|
10,606
|
|
Work in process
|
2,170
|
|
|
2,185
|
|
Finished goods
|
7,956
|
|
|
7,954
|
|
|
$
|
21,755
|
|
|
$
|
20,745
|
|
(8) Property and Equipment
Property and equipment, net, as of
March 31, 2017
and
December 31, 2016
consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Land
|
$
|
3,828
|
|
|
$
|
3,828
|
|
Building and improvements
|
22,994
|
|
|
21,717
|
|
Leasehold improvements
|
155
|
|
|
155
|
|
Machinery and equipment
|
42,258
|
|
|
41,777
|
|
Office and computer equipment
|
14,990
|
|
|
14,824
|
|
Motor vehicles
|
51
|
|
|
51
|
|
|
84,276
|
|
|
82,352
|
|
Less accumulated depreciation
|
(47,117
|
)
|
|
(45,766
|
)
|
|
$
|
37,159
|
|
|
$
|
36,586
|
|
Depreciation expense was
$1,693
and
$1,907
for the
three months ended March 31, 2017
and
2016
, respectively.
Included within machinery and equipment are certain hardware revenue generating assets that had a net book value of
$7,161
and
$7,734
as of
March 31, 2017
and
December 31, 2016
, respectively, that are utilized in the delivery of the Company's airtime services, media, and other content.
(9) 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, 2017
and
December 31, 2016
, the Company had accrued product warranty costs of
$2,395
and
$2,280
, respectively.
The following table summarizes product warranty activity during
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
2,280
|
|
|
$
|
1,880
|
|
Charges to expense
|
237
|
|
|
528
|
|
Costs incurred
|
(122
|
)
|
|
(333
|
)
|
Ending balance
|
$
|
2,395
|
|
|
$
|
2,075
|
|
(10) Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Term note
|
$
|
46,000
|
|
|
$
|
53,625
|
|
Mortgage loan
|
2,910
|
|
|
2,951
|
|
Equipment loans
|
—
|
|
|
1,477
|
|
Total
|
48,910
|
|
|
58,053
|
|
Less amounts classified as current
|
2,475
|
|
|
7,900
|
|
Long-term debt, excluding current portion
|
$
|
46,435
|
|
|
$
|
50,153
|
|
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 Consolidated Leverage Ratio as of September 30, 2015. The Credit Agreement was amended again in March 2017 to further modify the Maximum Consolidated Leverage Ratio, to amend the Applicable Rate and amortization schedule of the Term Loan and to modify the definition of the Consolidated Fixed Charges Coverage Ratio, as well as make certain other changes. The amendment was accounted for as a debt modification as it did not result in a significant modification to the Credit Agreement.
The
$65,000
Term Note was executed on July 1, 2014 in connection with the acquisition of Videotel. 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 was required to 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 was required to 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 and has made all required principal repayments on a timely basis. In connection with the March 2017 amendment, the Company made an additional principal repayment of
$6,000
on the Term Note and amended the repayment terms. Under the amended terms, the Company must make principal repayments of
$575
every three months starting on April 1, 2017 until the Term Note maturity on July 1, 2019. 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
1.75%
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
1.50:1.00
. 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, 2017
, there were no borrowings outstanding under the Revolver and the full balance of
$15,000
was available for borrowing.
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. In March 2017, the Maximum Consolidated Leverage Ratio was increased to
1.50
:1.00. The Minimum Consolidated Fixed Charge Coverage Ratio may not be less than
1.25:1.00
. In March 2017, the definition of the Consolidated Fixed Charge Coverage Ratio was amended to include only maintenance capital expenditures, as defined in the amendment, and to reflect certain other changes. The Company was in compliance with these financial ratio debt covenants as of
March 31, 2017
.
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, 2017
secure the mortgage loan. The monthly mortgage payment is approximately $
14
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, 2017
, 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 Loans
In January 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 was
five
years, and the loan bore interest at a fixed rate of
2.76%
per annum. In
March 31, 2017
, the Company repaid in full the current balance of the loan in advance of the January 30, 2018 original maturity date. In December 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 was
five
years, and the loan bore interest at a fixed rate of
3.08%
per annum. In March 2017, the Company repaid in full the current balance of the loan in advance of the December 30, 2018 original maturity date.
(11) Segment Reporting
The financial results of each segment are based on revenues from external customers, cost of revenue and operating expenses that are directly attributable to the segment and an allocation of costs from shared functions. These shared functions include, but are not limited to, facilities, human resources, information technology, and engineering. Allocations are made based on management’s judgment of the most relevant factors, such as head count, number of customer sites, or other operational data that contribute to the shared costs. Certain corporate-level costs have not been allocated as they are not attributable to either segment. These costs primarily consist of broad corporate functions, including executive, legal, finance, and costs associated with corporate actions. Segment-level asset information has not been provided as such information is not reviewed by the chief operating decision-maker for purposes of assessing segment performance and allocating resources. There are no inter-segment sales or transactions.
The Company's performance is impacted by the levels of activity in the marine and land mobile markets and defense sectors, among others. Performance in any particular period could be impacted by the timing of sales to certain large customers.
The mobile connectivity segment primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and services that provide access to television, the Internet and voice services while on the move. Product sales within the mobile connectivity segment accounted for approximately
25%
and
27%
of our consolidated net sales for the three months ended
March 31, 2017
and
2016
, respectively. Sales of mini-VSAT Broadband airtime service accounted for approximately
40%
and
38%
of our consolidated net sales for the three months ended
March 31, 2017
and
2016
, respectively. Sales of content and training services within the mobile connectivity segment accounted for approximately
19%
and
22%
of our consolidated net sales for the three months ended
March 31, 2017
and
2016
, respectively.
The inertial navigation segment manufactures and distributes a portfolio of digital compass and fiber optic gyro (FOG)-based systems that address the rigorous requirements of military and commercial customers and provide reliable, easy-to-use and continuously available navigation and pointing data. The principal product categories in this segment include the FOG-based inertial measurement units (IMUs) for precision guidance, FOGs for tactical navigation as well as pointing and stabilization systems, and digital compasses that provide accurate heading information for demanding applications, security, automation and access control equipment and systems. Sales of FOG-based guidance and navigation systems within the inertial navigation segment accounted for approximately
11%
and
10%
of the company's consolidated net sales for for the three months ended
March 31, 2017
and
2016
, respectively.
No other single product class accounts for 10% or more of consolidated net sales.
The Company operates in a number of major geographic areas across the globe. The Company generates international net sales, based upon customer location, primarily from customers located in Canada, Europe, Africa, Asia/Pacific, the Middle East, and India. International revenues represented
59%
and
63%
of consolidated net sales for the three months ended
March 31, 2017
and
2016
, respectively. No individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended
March 31, 2017
and
2016
, respectively.
As of
March 31, 2017
and
December 31, 2016
, the long-lived tangible assets related to the Company’s international subsidiaries were less than
10%
of the Company’s long-lived tangible assets and were deemed not material.
Net sales and operating earnings (loss) for the Company's reporting segments and the Company's loss before income tax expense (benefit) for the three months ended
March 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2017
|
|
2016
|
Net sales:
|
|
|
|
Mobile connectivity
|
$
|
34,287
|
|
|
$
|
35,265
|
|
Inertial navigation
|
5,924
|
|
|
5,115
|
|
Consolidated net sales
|
$
|
40,211
|
|
|
$
|
40,380
|
|
|
|
|
|
Operating earnings (loss):
|
|
|
|
Mobile connectivity
|
$
|
622
|
|
|
$
|
1,990
|
|
Inertial navigation
|
(44
|
)
|
|
(927
|
)
|
Subtotal
|
578
|
|
|
1,063
|
|
Unallocated, net
|
(5,048
|
)
|
|
(4,437
|
)
|
Loss from operations
|
(4,470
|
)
|
|
(3,374
|
)
|
Net interest and other expense
|
(255
|
)
|
|
(347
|
)
|
Loss before income tax expense (benefit)
|
$
|
(4,725
|
)
|
|
$
|
(3,721
|
)
|
Depreciation expense and amortization expense for the Company's segments are presented in the following table for the periods presented:
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2017
|
|
2016
|
Depreciation expense:
|
|
|
|
Mobile connectivity
|
1,478
|
|
|
1,659
|
|
Inertial navigation
|
195
|
|
|
224
|
|
Unallocated
|
20
|
|
|
24
|
|
Total consolidated depreciation expense
|
1,693
|
|
|
1,907
|
|
|
|
|
|
Amortization expense:
|
|
|
|
Mobile connectivity
|
1,068
|
|
|
1,283
|
|
Inertial navigation
|
—
|
|
|
—
|
|
Unallocated
|
—
|
|
|
—
|
|
Total consolidated amortization expense
|
1,068
|
|
|
1,283
|
|
(12) 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. The Company is not a party to any lawsuit or proceeding that, in management's opinion, is likely to materially harm the Company's business, results of operations, financial condition, or cash flows.
(13) 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, 2017
,
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, 2017
and
no
repurchase programs expired during the period.
During the
three months ended
March 31, 2017
and 2016, the Company did not repurchase any shares of its common stock.
(14) 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 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 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, 2017
and
December 31, 2016
for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
14,233
|
|
|
$
|
14,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(a)
|
Certificates of deposit
|
2,510
|
|
|
2,510
|
|
|
—
|
|
|
—
|
|
|
(a)
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
131
|
|
|
—
|
|
|
131
|
|
|
—
|
|
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
21,848
|
|
|
$
|
21,848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(a)
|
Certificates of deposit
|
3,864
|
|
|
3,864
|
|
|
—
|
|
|
—
|
|
|
(a)
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
158
|
|
|
—
|
|
|
158
|
|
|
—
|
|
|
(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. The carrying amount of the Company's debt approximates fair value based on currently
available quoted rates of similarly structured debt.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company's non-financial assets, 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 an impairment exists. There were no impairments of the Company’s non-financial assets noted as of
March 31, 2017
. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis.
(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, 2017
:
|
|
|
|
|
|
|
|
Amounts
|
Balance at December 31, 2016
|
|
$
|
31,343
|
|
Foreign currency translation adjustment
|
|
260
|
|
Balance at March 31, 2017
|
|
$
|
31,603
|
|
ASC Topic 350,
Intangibles—Goodwill and Other
(ASC 350) requires the completion of a goodwill impairment test at least annually. Historically, this goodwill impairment test was comprised 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, 2016 (the Company's annual goodwill impairment test date), 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. If different assumptions were used, particularly with respect to estimating future cash flows, weighted average costs of capital, and terminal growth rates, different estimates of fair value may have resulted. However, based on the excess of fair value over carrying value and additional sensitivity analysis considered with respect to the Company’s valuation assumptions, the Company concluded that it was more likely than not that no goodwill impairment exists. As of August 31, 2016, the Company noted that the fair value of all of the Company’s reporting units exceeded their carrying values by more than 10%. The Company notes that its one reporting unit whose fair value exceeded its carrying value by less than 100% had goodwill of approximately
$4,401
at March 31, 2017. A negative trend of
operating results or material changes to forecasted operating results could result in the requirement for additional interim goodwill impairment tests and the potential of a future goodwill
impairment charge, which could be material.
In January 2017, the FASB issued ASC Update No. 2017-04,
Intangibles--Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment.
This ASC simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step of the goodwill impairment test under ASC 350. Under previous guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. To determine the implied fair value of goodwill, entities estimate the fair value of any unrecognized intangible assets (including in-process research and development) and any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1. Under this new guidance if a reporting unit's carrying value exceeds its fair value, an entity will record an impairment charge based on that difference with such impairment charge limited to the amount of goodwill in the reporting unit. This ASC does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This ASC will be applied prospectively and is effective for annual and interim impairment test performed in periods beginning after December 15, 2019 for public business enterprises. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company has elected to early adopt this ASC as of January 1, 2017. The adoption of this ASC had no impact on the Company's consolidated statements of operations, financial condition or cash flows. There were no potential indicators of goodwill impairment identified during the three months ended March 31, 2017 that would require an interim goodwill impairment test.
Intangible Assets
The changes in the carrying amount of intangible assets during the
three months ended
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
Amounts
|
Balance at December 31, 2016
|
|
$
|
17,838
|
|
Amortization expense
|
|
(1,068
|
)
|
Intangible assets acquired in asset acquisition
|
|
100
|
|
Foreign currency translation adjustment
|
|
164
|
|
Balance at March 31, 2017
|
|
$
|
17,034
|
|
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.
In January 2017, the Company completed the acquisition of certain subscriber relationships from a third party. This acquisition did not meet the definition of a business under ASC 2017-01,
Business Combinations (Topic 805)-Clarifying the Definition of a Business
, which the Company adopted on October 1, 2016. The Company ascribed
$100
of the initial purchase price to the acquired subscriber relationships definite-lived intangible assets with an initial estimated useful life of
10
years. Under the asset purchase agreement, the purchase price includes a component of contingent consideration under which the Company is required to pay a percentage of recurring revenues received from the acquired subscriber relationships through 2026 up to a maximum annual payment of
$114
. As the acquisition did not represent a business combination, the contingent consideration arrangement is recognized only when the contingency is resolved and the consideration is paid or becomes payable. The amounts payable under the contingent consideration arrangement, if any, will be included in the measurement of the cost of the acquired subscriber relationships. During the three months ended
March 31, 2017
, no additional consideration was earned under the contingent consideration arrangement.
Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at
March 31, 2017
and
December 31, 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
March 31, 2017
|
|
|
|
|
|
|
Subscriber relationships
|
|
$
|
17,086
|
|
|
$
|
6,891
|
|
|
$
|
10,195
|
|
Distribution rights
|
|
4,150
|
|
|
1,245
|
|
|
2,905
|
|
Internally developed software
|
|
2,304
|
|
|
1,983
|
|
|
321
|
|
Proprietary content
|
|
7,993
|
|
|
4,785
|
|
|
3,208
|
|
Intellectual property
|
|
2,284
|
|
|
2,137
|
|
|
147
|
|
Favorable lease
|
|
629
|
|
|
371
|
|
|
258
|
|
|
|
$
|
34,446
|
|
|
$
|
17,412
|
|
|
$
|
17,034
|
|
December 31, 2016
|
|
|
|
|
|
|
Subscriber relationships
|
|
$
|
16,888
|
|
|
$
|
6,431
|
|
|
$
|
10,457
|
|
Distribution rights
|
|
4,122
|
|
|
1,180
|
|
|
2,942
|
|
Internally developed software
|
|
2,301
|
|
|
1,904
|
|
|
397
|
|
Proprietary content
|
|
7,960
|
|
|
4,431
|
|
|
3,529
|
|
Intellectual property
|
|
2,284
|
|
|
2,056
|
|
|
228
|
|
Favorable lease
|
|
627
|
|
|
342
|
|
|
285
|
|
|
|
$
|
34,182
|
|
|
$
|
16,344
|
|
|
$
|
17,838
|
|
Amortization expense related to intangible assets for the three months ended
March 31, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Expense Category
|
2017
|
|
2016
|
Cost of service sales
|
$
|
355
|
|
|
$
|
452
|
|
General administrative expense
|
713
|
|
|
831
|
|
Total amortization expense
|
$
|
1,068
|
|
|
$
|
1,283
|
|
As of
March 31, 2017
, the total weighted average remaining useful lives of the definite-lived intangible assets was
4.9
years and the weighted average remaining useful lives by the definite-lived intangible asset category are as follows:
|
|
|
Intangible Asset
|
Weighted Average Remaining Useful Life in Years
|
Subscriber relationships
|
5.6
|
Distribution rights
|
11.1
|
Internally developed software
|
1.1
|
Proprietary content
|
2.3
|
Intellectual property
|
0.5
|
Favorable lease
|
2.3
|
Estimated future amortization expense remaining at
March 31, 2017
for intangible assets acquired is as follows:
|
|
|
|
|
Remainder of 2017
|
$
|
3,099
|
|
2018
|
3,766
|
|
2019
|
2,880
|
|
2020
|
2,114
|
|
2021
|
2,114
|
|
Thereafter
|
3,061
|
|
Total future amortization expense
|
$
|
17,034
|
|
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
2017
which indicated that an assessment of the impairment of goodwill and intangible assets was required.
(16) Business and Credit Concentrations
Concentrations of risk with respect to trade accounts receivable are generally limited due to the large number of customers and their dispersion across several geographic areas. Although the Company does not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishes allowances for potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and its expectations for future collectability concerns. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral.
No
single customer accounted for 10% or more of consolidated net sales for the first quarter of 2017 or 2016 or accounts receivable at March 31, 2017 or December 31, 2016.
Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating results.
(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
5.9%
for half of the principal amount outstanding and
6.1%
for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires on
April 16, 2019
. The Company does not use derivatives for speculative purposes. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in accumulated other comprehensive income ("AOCI") to the extent the derivative is effective at offsetting the changes in the cash flows being hedged until the hedged item affects earnings. As the Company makes the required principal and interest payments under the mortgage loan and the related interest rate swaps are settled, the Company reclassifies the amounts recorded in AOCI related to the changes in the fair value of the settled interest rate swaps to earnings. To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings in other income (expense) in the consolidated statements of income. The interest rate swap is recorded within accrued other liabilities on the balance sheet. The critical terms of the interest rate swaps were designed to mirror the terms of the Company’s mortgage loans. The Company designated these derivatives as cash flow hedges of the variability of the LIBOR-based interest payments on principal over a nine-year period, which ends on April 1, 2019. As of
March 31, 2017
, the Company determined that the existence of hedge ineffectiveness, if any, was immaterial and all changes in the fair value of the interest rate caps were recorded in the consolidated statements of comprehensive (loss) income as a component of AOCI.
As of
March 31, 2017
, 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
|
$
|
1,455
|
|
|
(63
|
)
|
|
April 1, 2010
|
|
April 1, 2019
|
|
1-month LIBOR
|
|
5.91
|
%
|
Interest rate swap
|
$
|
1,455
|
|
|
(68
|
)
|
|
April 1, 2010
|
|
April 1, 2019
|
|
1-month LIBOR
|
|
6.07
|
%
|
As of
December 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
|
$
|
1,476
|
|
|
(76
|
)
|
|
April 1, 2010
|
|
April 1, 2019
|
|
1-month LIBOR
|
|
5.91
|
%
|
Interest rate swap
|
$
|
1,476
|
|
|
(82
|
)
|
|
April 1, 2010
|
|
April 1, 2019
|
|
1-month LIBOR
|
|
6.07
|
%
|
(18) Income Taxes
The Company’s effective tax rate for the three months ended
March 31, 2017
was
(3.41)%
compared with
25.00%
for the corresponding period in the prior year. The effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods, including retroactive changes in tax legislation, settlements of tax audits or assessments, the resolution or identification of tax position uncertainties and acquisitions of other companies.
For the three months ended
March 31, 2017
, the effective tax rate was lower than the statutory tax rate primarily due to the Company maintaining a valuation allowance reserve on its US deferred tax assets, and the composition of income from foreign jurisdictions that were taxed at lower rates compared to the statutory tax rates in the U.S. For the three months ended March 31, 2016, the effective tax rate was lower than the statutory tax rate primarily due to the composition of income from foreign jurisdictions taxed at lower rates.
As of January 1, 2017 the Company adopted ASC 2016-09,
Improvements to Employee Share-Based Payment Accounting
(ASC 2016-09). In accordance with ASC 2016-09, previously unrecognized excess tax benefits are recognized on a modified retrospective basis. On January 1, 2017, the Company recorded a
$1,117
deferred tax asset related to unrecognized excess tax benefits with an offsetting adjustment to retained earnings. As the Company had previously recorded a full valuation allowance on its U.S. deferred tax assets, a corresponding increase to the valuation allowance was recorded with an offsetting adjustment to retained earnings. During the
three months ended March 31, 2017
, exercises of non-qualified stock options and releases of restricted stock awards resulted in shortfalls and related tax expense of
$342
. The Company also recorded an offsetting tax benefit of
$342
resulting from a corresponding decrease to the valuation allowance.
As of
March 31, 2017
and
December 31, 2016
, the Company had reserves for uncertain tax positions of
$1,293
and
$1,283
, respectively. The Company recognizes interest and penalties related to income taxes as a component of income tax expense. As of
March 31, 2017
,
$467
in interest and penalties have been accrued. There were no material changes during the three months ended
March 31, 2017
to the Company’s reserve for uncertain tax positions. The Company does not expect that its unrecognized tax benefits will materially change within the next twelve months.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company's tax years from 2013 through 2016 are subject to examination by these various tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local and foreign examinations by tax authorities for years before 2013.