CVD Equipment Corporation — FY2017 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2017, compared with 2016. CVD designs and manufactures chemical vapor deposition and related process equipment, gas and chemical delivery systems, and materials and coating solutions for research and industrial customers. Its principal reporting segments are CVD and SDC. The company acquired MesoScribe Technologies’ operating assets in October 2017 and purchased a Central Islip facility in November 2017.
Financial results and position
| Metric | FY2017 / December 31, 2017 | FY2016 / December 31, 2016 |
|---|---|---|
| Revenue | $41.13 million | $20.96 million |
| Gross profit / margin | $17.60 million / 42.8% | $7.10 million / 33.9% |
| Operating income (loss) | $7.22 million | $(0.72) million |
| Net income (loss) | $5.26 million; $0.82 diluted EPS | $(0.15) million; $(0.02) diluted EPS |
| Income tax expense (benefit) | $1.93 million | $(0.50) million |
| Cash and cash equivalents | $14.21 million | $21.68 million |
| Working capital | $22.4 million | $20.5 million |
| Long-term debt, including current maturities | $13.65 million | $3.27 million |
| Backlog at year-end | Approximately $15.5 million | Approximately $27.8 million |
Cash flow and liquidity. The audited cash flow statement reports net cash used in operating activities of $2.38 million in 2017, versus $8.85 million provided in 2016. Investing activities used $15.32 million, principally for the building purchase and MesoScribe acquisition; financing activities provided $10.23 million, including the new mortgage. Cash declined by $7.47 million. The company had an unused $7 million revolving credit facility available through September 1, 2018 and said cash and operating cash flow should cover working capital and capital expenditure needs for the following 12 months.
Debt includes a $10.39 million fixed-rate mortgage for the new facility at 3.9148%, maturing in December 2022, and approximately $2.97 million remaining on the mortgage for its existing Central Islip facility. The company guarantees the new subsidiary’s mortgage obligations. The filing reports compliance with the revolving credit facility’s financial covenants at year-end.
Material changes versus 2016
- Revenue nearly doubled, up 96.3%, primarily because of work on increased orders, especially from the largest customer. Gross margin rose 8.9 percentage points, attributed to higher volume and order mix.
- The largest customer accounted for approximately 66.1% of 2017 revenue, or $27.2 million, compared with 45.3% in 2016. The filing identifies this as a material concentration risk.
- Orders received declined 30.8% to approximately $29.5 million, and year-end backlog fell 44.2%. However, the largest customer’s share of backlog declined from 84% to 42.3%, indicating improved backlog diversification.
- General and administrative expense rose to $8.54 million from $6.93 million, partly due to personnel and occupancy costs associated with CVD Materials and its subsidiaries. Selling and shipping expense also increased. The company reported approximately $1.2 million of startup costs for Tantaline and MesoScribe, with no appreciable revenue from those businesses during 2017.
- Cash fell while debt and property, plant and equipment increased, reflecting the facility purchase. The $13.85 million purchase was partly financed with the $10.39 million mortgage.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management described continued opportunities with new and existing customers and plans to use the additional facility to expand materials, coatings, surface treatments, carbon composites and electronic-material capabilities. Backlog is not assurance of revenue or profit and may be delayed or cancelled.
- Customer and demand risks: The company has no long-term volume production contracts, operates in cyclical markets, and relies heavily on one customer. Large custom orders, long sales cycles and customer acceptance or cancellation can cause significant earnings and cash-flow variability.
- Execution and acquisition risks: The Tantaline and MesoScribe businesses had limited or immaterial reported revenue through year-end; management must integrate and commercialize their technologies. The filing also cites manufacturing capacity, staffing, supplier lead times and acquisition-related impairment risks.
- Tax item: The Tax Cuts and Jobs Act prompted a $689,000 deferred tax expense from remeasurement of deferred tax balances, contributing to total 2017 income tax expense of $1.93 million.
- Other unusual item: 2016 included a $629,000 gain from negotiated legal-fee reductions relating to the Taiwan Glass litigation settlement; there was no corresponding gain in 2017. The filing reports no pending legal proceedings.
- Financial reporting: The company adopted the new revenue standard in the first quarter of 2018 using the modified retrospective method and expected no opening retained-earnings adjustment. Management reported effective disclosure controls and internal control over financial reporting; the auditor’s report did not include an internal-control attestation.
- Audit: The independent auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Whether customer concentration remains elevated and whether the largest customer continues to place orders at a comparable pace.
- How much of the $15.5 million backlog converts to revenue, on what schedule, and at what margins; the filing notes completion can take up to two years.
- Whether operating cash flow recovers after the reported 2017 cash use and the substantial facility-related investment.
- The repayment profile and covenant terms for both mortgages, including the existing facility’s variable-rate exposure and the new loan’s December 2022 maturity.
- Whether MesoScribe and Tantaline generate material revenue and meet the conditions for up to $300,000 of contingent MesoScribe consideration.
- A discrepancy in the filing’s cash-flow discussion: MD&A describes approximately $1.9 million of cash provided by operating activities, while the audited cash flow statement reports $2.38 million used. Investors should use the audited statement and seek clarification.
- Reported SDC revenue figures are not fully consistent across the narrative and segment table; confirm the segment revenue and elimination details when assessing divisional growth.