CVD Equipment Corporation — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. CVD designs and manufactures custom chemical vapor deposition equipment and reports three segments: CVD Equipment, Stainless Design Concepts (SDC), and CVD Materials. Results are unaudited.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $6.04 million | $3.47 million |
| Gross profit (loss) | $1.94 million | $(0.39) million |
| Gross margin | 32.1% | (11.2%) |
| Operating income (loss) | $0.11 million | $(2.57) million |
| Pretax income (loss) | $0.13 million | $(2.63) million |
| Income tax benefit | $1.53 million | $0.46 million |
| Net income (loss) | $1.66 million | $(2.18) million |
| Basic and diluted EPS | $0.25 | $(0.33) |
| Operating cash flow | $(0.68) million | $0.42 million |
| Capital expenditures | $0.42 million | $0.44 million |
- Revenue increased 74%, primarily from higher CVD Equipment segment sales, including spare parts; SDC revenue also increased, while CVD Materials revenue declined.
- Management attributed the gross-margin improvement to higher sales, operating efficiencies on repeat orders, product mix, and lower costs, including furlough-related cost reductions late in March.
- Q1 net income was substantially affected by the $1.53 million tax benefit following the CARES Act’s five-year NOL carryback provision. Pretax income was $0.13 million.
- Cash and cash equivalents were $7.40 million at March 31, down from $8.66 million at December 31, 2019. Working capital was $10.2 million, versus $8.8 million at year-end.
- Total debt was approximately $11.9 million, including $0.68 million current maturities. The two mortgage loans mature in 2022; the company reported compliance with its minimum-liquid-assets covenant.
Material changes and operating details
- Revenue growth and lower operating expenses turned the prior-year operating loss into modest operating income. General and administrative expense declined to $1.55 million from $1.74 million, and selling and shipping expense declined to $0.17 million from $0.28 million.
- Operating cash flow was negative despite reported net income, reflecting higher contract assets and tax receivable, lower contract liabilities and accrued expenses, and other working-capital movements. The $1.53 million tax receivable arose from the CARES Act NOL carryback.
- Three customers represented 27.1%, 21.5%, and 19.3% of Q1 revenue. Two customers together represented 69% of accounts receivable at quarter-end.
- Segment revenue was approximately $4.1 million for CVD Equipment, $1.8 million for SDC, and $0.3 million for CVD Materials, before eliminations. CVD Materials reported an operating loss of approximately $0.36 million.
Outlook, risks, and unusual items
- COVID-19: Management reported substantial reductions in new orders during Q1 and into early Q2, and anticipated substantial revenue reductions and operating losses beginning in Q2 2020. The company cited aerospace-sector weakness, supply-chain and logistics constraints, and facility closures or slowed production. The later effects were uncertain and not reasonably estimable.
- The company furloughed a substantial portion of its workforce from March 16, 2020, maintaining staffing for essential operations and reviewing staffing levels weekly.
- On April 21, 2020, after quarter-end, the company obtained a $2.416 million Paycheck Protection Program loan at 1% interest, maturing April 21, 2022. Some or all may be forgiven subject to program requirements. Management stated it believed cash, operating cash flow, the PPP loan, and expected tax-receivable proceeds would be sufficient for working capital and capital needs for the 12 months following the filing.
- The company expected to receive the approximately $1.5 million tax-receivable funds in the second half of 2020. It maintained a full valuation allowance against net deferred tax assets.
- Management noted that revenue recognition for custom contracts depends on estimates of total costs to complete; changes in those estimates may materially affect results. No off-balance-sheet arrangements or legal proceedings were reported.
Important facts for investors to verify
- Subsequent order intake, backlog, and revenue trends, particularly in aerospace, and the timing and scale of the anticipated Q2 operating losses.
- Whether the tax carryback receivable is collected as expected and whether future deferred tax assets remain subject to a full valuation allowance.
- PPP loan forgiveness eligibility and the effect of the loan and any forgiveness on liquidity and future results.
- Customer concentration, collection of receivables, and movements in contract assets and liabilities.
- Contract cost-to-complete estimates, CVD Materials’ ramp-up and cash requirements, and compliance with mortgage covenants.