CVD Equipment Corporation — Q2 2016 Form 10-Q
Business context and period. The unaudited filing covers the three and six months ended June 30, 2016, with comparisons to the same 2015 periods. CVD operates two divisions: CVD, serving semiconductor and related process markets, and SDC, an ultra-high-purity manufacturing business.
Financial performance and liquidity
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 |
|---|---|---|---|
| Revenue | $3.74 million | $8.75 million | $10.43 million and $20.13 million, respectively |
| Gross profit and margin | $0.49 million; 13.2% | $2.03 million; 23.2% | $4.16 million; 39.8% and $7.92 million; 39.3% |
| Operating income (loss) | $(0.98) million | $(1.51) million | $1.52 million and $2.72 million |
| Net income (loss) | $(0.50) million; $(0.08) per share | $(0.83) million; $(0.13) per share | $1.33 million; $0.22 basic per share, and $2.00 million; $0.32 per share |
Revenue declined 64.1% in Q2 and 56.5% for the six-month period. Management attributed the decline to completion of a large aviation-component pilot-production contract and delays in follow-on orders. Lower revenue and the cost of retaining production staff reduced margins. A $0.629 million gain from a negotiated reduction in previously accrued Taiwan Glass litigation fees partially offset operating costs. The six-month tax benefit was $0.704 million, including $0.633 million of deferred tax benefit.
For the six months, operating activities provided $0.694 million of cash, versus using $1.276 million in 2015. Investing activities provided $0.168 million, including release of $0.200 million of restricted cash; financing activities provided $0.102 million, including $0.462 million in stock-option proceeds and $0.360 million of debt payments. Cash increased $0.963 million to $14.037 million.
At June 30, cash was $14.037 million, working capital was approximately $19.9 million, and total assets were $45.0 million. Total debt was approximately $3.49 million, including current maturities. The company also reported an unused $7 million revolving facility, available through September 1, 2018; it was in compliance with its financial covenants. The mortgage is secured by the Central Islip facility. Management believed cash and operating cash flow would cover working-capital and capital-expenditure needs for the next 12 months.
Changes, outlook and risks
- Q2 orders were $31.9 million; six-month orders were $34.2 million. Backlog reached $31.0 million, up from $19.3 million a year earlier. A single $29.6 million order was the largest in company history.
- Approximately $29.5 million, or 90.8%, of June backlog came from one customer. That customer accounted for 87.0% of accounts receivable, versus 44.2% at year-end 2015. Net receivables rose to $7.77 million from $3.09 million.
- Management cautioned that backlog is not assurance of future revenue or profit; orders may be delayed or cancelled, and fulfillment can take up to two years. It provided no quantified revenue or earnings guidance.
- Other stated uncertainties include competition, future profitability, access to acceptable financing, and possible business or product-line expansion. Management said inflation had not materially affected operations. It had temporarily curtailed independently funded research to reduce spending.
- The company reported no legal proceedings in Part II, no off-balance-sheet arrangements, and effective disclosure controls; it reported no material quarterly changes in internal controls. It was evaluating the effects of new revenue-recognition, lease, and share-based-payment accounting standards.
Important facts for investors to verify
- Whether the large customer’s orders convert to shipments, recognized revenue, and cash collection on schedule, given the concentration in backlog and receivables.
- Whether revenue and gross margins recover after the aviation pilot-production contract ended and follow-on orders were delayed.
- Backlog composition, cancellation or delay exposure, and expected timing of fulfillment for the $29.6 million order and related customer orders.
- Receivables collectability and cash-flow trends, including the impact of working-capital movements and contract billings.
- The sustainability of profitability and liquidity, and the effect of the Taiwan Glass settlement gain and deferred tax benefits on reported results.