CVD Equipment Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. The company designs, manufactures and sells custom chemical vapor deposition equipment and operates CVD, Stainless Design Concepts (SDC) and Materials segments. It adopted ASC 606 on January 1, 2018; management said adoption did not significantly affect the financial statements or period comparisons.
Financial results and liquidity
- Revenue: $9.15 million, down 5.1% from $9.65 million. Aerospace revenue was $3.87 million versus $6.76 million; industrial revenue rose to $3.25 million from $0.97 million. SDC revenue increased, while the recently acquired Materials segment contributed $0.37 million.
- Profitability: Gross profit was $3.76 million versus $4.17 million; gross margin contracted to 41.1% from 43.2%. Operating income fell 46.9% to $0.91 million. Net income was $0.56 million, or $0.09 per basic and diluted share, versus $1.02 million, or $0.16 per share.
- Cash flow: Operating cash flow was positive $0.04 million, compared with negative $2.93 million. Investing used $0.95 million, including $0.81 million in capital expenditures; financing used $0.17 million for debt payments. Cash declined $1.08 million to $13.13 million.
- Liquidity and debt: Working capital was approximately $22.3 million, versus $22.4 million at year-end. Long-term debt, including current maturities, totaled approximately $13.19 million. The company had an unused $7 million revolving credit facility available through September 1, 2018, expected to be renewed; it reported compliance with its covenants.
- Balance sheet movements: Accounts receivable rose to $8.98 million from $2.06 million, principally due to invoice, shipment and payment timing; management said the receivables were subsequently substantially collected. Contract assets declined to $3.72 million from $8.40 million, while contract liabilities rose to $1.52 million from $0.47 million.
Changes, outlook and risks
- Revenue from the largest customer, an aerospace customer, fell by approximately $2.5 million and represented 47.6% of quarterly revenue, versus 70.4% a year earlier. Increased revenue from other customers partly offset the decline. One customer also accounted for approximately 82% of accounts receivable at quarter-end.
- Management attributed lower gross margin to product mix and added fixed costs at Materials. Materials recorded an approximately $0.61 million pretax loss; management described this as continued investment in the Tantaline and Mesoscribe businesses.
- Management intends to continue investing and incur additional costs during 2018 to build out the Materials facility and develop the acquired businesses, which it expects to generate significant revenue and profits in coming years. No quantified guidance was provided. Management believes cash and operating cash flow will cover working capital and capital expenditures for the next 12 months.
- Interest expense increased to $0.12 million from $0.02 million, primarily due to the mortgage on the Materials facility. The first-quarter tax provision reflects the U.S. tax rate reduction under the Tax Cuts and Jobs Act, as well as other tax effects.
- Disclosure controls: Management concluded disclosure controls and procedures were ineffective at quarter-end, citing material weaknesses in timely communication with the Audit Committee and auditors and insufficient written reporting procedures. Remediation actions include formal communication and reporting procedures, additional qualified personnel, and more review levels. Management reported no material changes in internal control over financial reporting during the quarter.
- The filing identifies customer and receivable concentration, competition, financing availability, future profitability and acquired-business performance as risks. It reports no legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the largest customer’s order timing and concentration continue to affect revenue and collections.
- Whether the stated subsequent collection of receivables is reflected in later-period cash flows and whether customer concentration remains high.
- Materials’ investment needs, losses and progress toward management’s longer-term revenue and profit expectations.
- Renewal terms for the revolving credit facility and debt service obligations, including the mortgage balloon payment due in March 2022.
- Implementation and effectiveness of the planned disclosure-control remediation.