CVD Equipment Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Comparisons are with the same 2020 periods unless stated otherwise.
Business context
CVD designs and manufactures custom chemical vapor deposition equipment and operates the CVD Equipment, Stainless Design Concepts (SDC), and CVD Materials segments. In January 2021, the company appointed a new CEO and shifted its strategic focus toward the core equipment business. It is eliminating further investment in the Tantaline product line after forecasting continuing losses and negative cash flow for that business.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4.33 million | $3.99 million | $11.73 million | $13.75 million |
| Gross profit | $0.73 million | $0.44 million | $1.90 million | $2.97 million |
| Gross margin | 17.0% | 10.9% | 16.2% | 21.6% |
| Operating loss | $0.92 million | $1.39 million | $3.62 million | $2.42 million |
| Net income (loss) | $5.97 million | $(1.29) million | $5.94 million | $(0.77) million |
| Basic and diluted EPS | $0.89 | $(0.19) | $0.89 | $(0.12) |
- Q3 revenue increased 8.4%, reflecting higher SDC revenue, partly offset by lower CVD Equipment sales. Nine-month revenue fell 14.7%, principally because of lower CVD Equipment spare-parts and equipment sales following the COVID-related downturn in orders.
- Q3 gross margin improved with manufacturing efficiencies and product mix. The nine-month margin declined as lower sales weighed on fixed costs and payroll.
- Reported net income includes a $6.89 million gain on sale of the 555 Building in Q3 and a $2.44 million PPP loan-forgiveness gain in the nine-month period. The company remained loss-making at the operating level in both periods.
- Nine-month operating cash flow was negative $3.58 million, versus negative $1.19 million in 2020. Investing cash flow was positive $22.86 million, mainly from building-sale proceeds; financing cash flow was negative $9.54 million, largely reflecting debt repayments. Cash rose to $17.45 million from $7.70 million at December 31, 2020.
- Working capital was $17.7 million, compared with $8.1 million at year-end 2020. Total liabilities were $5.68 million, down from $16.81 million. Remaining debt was approximately $1.84 million, classified as current; the headquarters mortgage has a balloon payment due in March 2022.
Material changes, outlook and risks
- The company sold the 555 Building on July 26, 2021, for a stated sale price of $24.36 million. It used part of the proceeds to settle the building mortgage and reported approximately $14 million in net proceeds. The sale also generated the $6.89 million accounting gain.
- The company received full forgiveness of its $2.42 million PPP loan in June 2021. It reported compliance with the financial covenant on its remaining mortgage.
- New orders were approximately $6.1 million in Q3 2021, versus $3.4 million in Q3 2020; orders were approximately $6.0 million in Q2 2021. Management said it expects cash and projected operating cash flow to meet working-capital and capital-expenditure needs for the next 12 months from the filing date. No revenue or earnings guidance was provided.
- Management cited COVID-related demand weakness, especially in aerospace, and Q3 supply-chain delays and component cost increases that could delay revenue recognition, lengthen manufacturing lead times, and pressure margins. It is placing orders earlier, evaluating alternative suppliers and components, and using flexible in-house manufacturing to mitigate these effects; results and duration remain uncertain.
- Management said discontinuing further Tantaline investment is expected to avoid approximately $1.5–$2.0 million in additional costs. It estimated possible employee-related and lease-termination costs of approximately $400,000. The filing also reports $5.7 million of unrecognized contract revenue expected to be recognized within 12 months, subject to project execution and cost estimates.
- Customer concentration is notable: two customers each represented more than 10% of Q3 revenue. Management maintains a full valuation allowance against net deferred tax assets. Disclosure controls were reported effective, and the filing lists no legal proceedings or off-balance-sheet arrangements.
Key facts for investors to verify
- How much of reported earnings reflects recurring operating performance versus the building-sale and PPP-forgiveness gains.
- Whether new orders convert into recognized revenue and improve operating cash flow, given the $3.58 million nine-month operating cash outflow and contract-estimate uncertainty.
- The timing and terms for repayment or refinancing of the remaining mortgage balloon due March 2022.
- The scale and persistence of supply-chain cost and delivery pressures, and whether Tantaline cost reductions and consolidation proceed as planned.
- Whether customer concentration, COVID-related aerospace demand, and the fully reserved deferred tax assets change materially.