CVD Equipment Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 30, 2017. This is an annual report, not a standalone fourth-quarter report, so the filing text does not provide clear Q4-only results.
Business context
CVD designs and manufactures chemical vapor deposition equipment, furnaces, gas and chemical delivery systems, and related process solutions for research and industrial applications, including aerospace, medical, semiconductor, solar, LED and nanomaterials markets. Its operating divisions are CVD/First Nano and Stainless Design Concepts (SDC). In December 2016, the company acquired certain Tantaline A/S assets for $500,000 and established a Danish subsidiary to commercialize tantalum-based corrosion-resistant surface treatments; activity in 2016 was minimal.
Financial performance and position
| Metric | FY 2016 / Dec. 31, 2016 | FY 2015 / Dec. 31, 2015 |
|---|---|---|
| Revenue | $20.96 million | $38.97 million |
| Gross profit; gross margin | $7.10 million; 33.9% | $15.15 million; 38.9% |
| Operating income (loss) | ($0.72 million) | $4.59 million |
| Net income (loss) | ($0.15 million); diluted EPS ($0.02) | $3.20 million; diluted EPS $0.51 |
| Cash provided by operating activities | $8.85 million | $1.73 million |
| Cash and cash equivalents | $21.68 million | $13.07 million |
| Working capital | $20.5 million | $19.9 million |
| Total long-term debt, including current maturities | $3.27 million | $3.85 million |
- Revenue fell 46.2%. CVD/First Nano revenue was reported as $18.56 million, down 47.7%; SDC revenue was reported in MD&A as $2.40 million, down 31.6%.
- Gross margin declined 5.0 percentage points. Management attributed the reduction to lower revenue and maintaining production staff in anticipation of a large follow-on order.
- Operating cash flow was boosted by working-capital movements, especially a $5.26 million increase in billings in excess of costs and estimated earnings on contracts. Receivables declined by $2.5 million to $0.61 million, largely due to shipment and payment timing.
- Investing activities used $0.41 million, including the $0.50 million Tantaline asset purchase, partly offset by other investing cash flows. Cash increased $8.60 million during the year.
- The company had an undrawn $7 million HSBC revolving facility available through September 1, 2018; it reported compliance with its financial covenants. The separate $2.1 million term loan was paid off in August 2016. The mortgage on the Central Islip facility had a $3.27 million balance and matures in March 2022.
Material changes and management commentary
- Management said a delay in protracted negotiations with a major aviation-component supplier postponed a large anticipated follow-on order and was the primary cause of the revenue decline. SDC was also affected by an industry slowdown, although management reported some expected orders beginning to arrive.
- Orders received rose to approximately $42.6 million from $24.0 million. Year-end backlog increased to approximately $27.8 million from $6.1 million. About 84% of the 2016 backlog was attributable to one customer; completion timing can extend to two years. Orders and backlog can be delayed or canceled and do not assure revenue or profit.
- One customer represented 45.3% of 2016 revenue; two customers together represented approximately 53.5%. The company cautioned that loss, delay or cancellation of major customer orders could materially affect results.
- Research and development expense was approximately $2.45 million in 2016, compared with $1.73 million in 2015. Of this, $434,000 in 2016 and $605,000 in 2015 was independent of external customer orders. Independent R&D was curtailed during the first half of 2016 and expanded in the second half.
- Management stated that cash and expected operating cash flow should be sufficient for working capital and capital spending for the next 12 months. The filing provides no quantified earnings or revenue guidance. It also describes anticipated revenue and operational growth, while warning that growth may strain manufacturing capacity, staffing, systems and liquidity.
Unusual items, risks and contingencies
- 2016 operating results included a $629,000 gain from a negotiated reduction in legal fees related to Taiwan Glass litigation. Other income included a $119,000 insurance recovery in excess of property-repair costs. In 2015, the company recorded a $995,000 litigation settlement expense.
- The principal risks highlighted include customer and backlog concentration, cyclical and volatile capital-equipment demand, order cancellations and revenue-recognition estimates for percentage-of-completion contracts, competition and pricing pressure, production capacity and supplier lead times, and the ability to retain technical personnel.
- Other disclosed risks include uncertain health and environmental effects of nanomaterials, acquisition integration and commercialization, intellectual-property disputes, international and export-related risks, product liability, environmental regulation, cybersecurity and conflict-mineral compliance.
- The company reported no legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting as of December 31, 2016. The independent auditor issued an unmodified opinion on the financial statements but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Confirm whether the anticipated follow-on order from the major aviation-component customer was received, and assess its timing, acceptance and cancellation terms.
- Track backlog conversion, particularly the concentration of 84% with one customer, and distinguish accepted orders from revenue recognized under percentage-of-completion accounting.
- Reconcile segment revenue figures: MD&A reports SDC revenue net of eliminations of $2.395 million, while the segment table reports SDC revenue of $2.935 million before $0.548 million of eliminations. The filing text does not explain this presentation difference.
- Reconcile total assets: the balance sheet reports $45.605 million, while the segment table reports consolidated assets of $45.660 million. The filing text does not provide a clear explanation for the difference.
- Evaluate the sustainability of operating cash flow, given the substantial contribution from customer billings in excess of contract costs, and monitor liquidity, mortgage obligations and the undrawn credit facility.
- Assess the Tantaline acquisition’s integration, operating costs and ability to generate sales; the filing reports minimal 2016 activity and provides no quantified forward targets.