CVD EQUIPMENT CORP quarterly report, Q3 FY2020

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CVD Equipment Corporation — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. CVD designs and manufactures custom chemical vapor deposition equipment and operates CVD Equipment, Stainless Design Concepts (SDC), and CVD Materials segments.

Financial performance

  • Q3 revenue: $3.99 million, down 30.0% from $5.70 million. CVD Equipment revenue fell $2.1 million; Materials revenue rose $0.5 million and SDC revenue decreased $0.1 million.
  • Q3 gross profit and margin: $436,000 and 10.9%, versus $1.40 million and 24.5%. The company attributed the decline to lower sales, costs maintained to support higher activity, and product mix.
  • Q3 operating and net loss: Operating loss was $1.39 million versus $249,000; net loss was $1.29 million, or $0.19 per diluted share, versus $138,000, or $0.02 per share.
  • Nine-month revenue: $13.75 million, down 2.5% from $14.10 million. CVD Equipment revenue declined $0.9 million, partly offset by increases in SDC ($0.2 million) and Materials ($0.4 million).
  • Nine-month gross profit and margin: $2.97 million and 21.6%, compared with $1.50 million and 10.7%. Management cited improved efficiencies on repeat orders, lower costs including furlough-related savings, and product mix.
  • Nine-month operating and net loss: Operating loss narrowed to $2.42 million from $4.36 million. Net loss was $768,000, or $0.12 per diluted share, versus $3.71 million, or $0.57 per share. The 2020 result included a $1.53 million income tax benefit related to the CARES Act NOL carryback.
  • Cash flow: Nine-month operating cash use was $1.19 million, compared with $2.09 million in 2019; investing cash use was $1.20 million, mainly capital expenditures. Financing provided $1.91 million, including a $2.42 million PPP loan and $501,000 of debt principal payments. Cash declined $477,000 to $8.19 million.
  • Liquidity and debt: Working capital was $9.9 million at September 30, versus $8.8 million at December 31, 2019. Total debt was approximately $14.0 million, including current maturities. The company reported $13.29 million of long-term debt and $681,000 of current maturities; mortgage maturities include balloon payments in March 2022 and December 2022.
  • Other measures: Total assets were $46.17 million and stockholders’ equity was $29.39 million. Nine-month capital expenditures were $1.20 million; rental income was approximately $395,000.

Material developments, outlook, and risks

  • Management said new orders fell substantially during the first nine months and into early Q4, with adverse revenue effects beginning in Q2. COVID-19, particularly reduced aerospace activity amid lower air travel, also caused operational disruption, furloughs, and production slowdowns. The company said the impact could remain material into 2021 but could not be reliably estimated. No specific revenue or earnings guidance was provided.
  • Active employee headcount was approximately 125 at September 30, down 28% from 172 at December 31, 2019. The company said it continued to assess staffing and expenses against orders and operating needs.
  • The company received a $2.42 million PPP loan at 1% interest, maturing in April 2022; some or all may be forgiven subject to program requirements. PPP forgiveness status is not stated.
  • The CARES Act allowed a five-year NOL carryback, producing a $1.5 million tax benefit. The filing reports $713,000 of tax receivable on the balance sheet and says approximately $0.8 million had been collected, with the remaining approximately $0.7 million expected in Q4.
  • Management stated cash, cash equivalents, and operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months. It cautioned that a prolonged or worsening environment could require further actions. The company reported compliance with its mortgage financial covenant at September 30; a second mortgage modification signed October 22, 2020 changed certain minimum-liquid-assets covenant balances.
  • Revenue and contract margins depend on estimates of costs to complete custom projects; changes in cost forecasts, schedules, or contract scope may materially affect results. Customer concentration also remains relevant: two customers represented 26% of Q3 revenue, and three represented 46% of nine-month revenue.
  • The company maintained a full valuation allowance against net deferred tax assets. It reported no legal proceedings or off-balance-sheet arrangements and stated disclosure controls were effective.

Important facts for investors to verify

  • Whether order activity, especially in aerospace and CVD Equipment, stabilized or improved after Q3, and how that translated into revenue and backlog.
  • Whether gross margins recovered and whether project cost-to-complete estimates or customer credit conditions changed.
  • PPP loan forgiveness progress and receipt of the remaining CARES Act tax refund.
  • Current liquidity-covenant requirements and compliance, as well as cash needs and refinancing plans for the 2022 mortgage balloon maturities.
  • Whether Materials’ operating scale and contribution improved, given its ongoing investment and management’s stated plans for larger-scale operations.