CVD Equipment Corporation — Q3 2016 Form 10-Q
Business and period: Unaudited consolidated results for the quarter and nine months ended September 30, 2016, compared with the same 2015 periods. The company operates CVD and SDC equipment-manufacturing divisions.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $4.88 million | $10.65 million | $13.63 million | $30.77 million |
| Gross profit / margin | $1.69 million / 34.6% | $4.13 million / 38.8% | $3.72 million / 27.3% | $12.04 million / 39.1% |
| Operating income (loss) | ($395,000) | $871,000 | ($1.91 million) | $3.59 million |
| Net income (loss) | ($85,000) | $811,000 | ($919,000) | $2.81 million |
| EPS, basic | ($0.01) | $0.13 | ($0.15) | $0.46 |
- Cash flow: Nine-month operating cash flow was $3.17 million, versus $1.82 million in 2015. Cash increased $3.56 million to $16.64 million. Operating cash flow included a $9.13 million increase in billings in excess of costs and estimated earnings on contracts.
- Liquidity and debt: Working capital was approximately $19.9 million. Long-term debt totaled approximately $3.34 million, including $300,000 current maturities. The company completed repayment of a separate term loan in August 2016. Its unused $7 million revolving credit facility runs through September 2018; the company reported compliance with its covenants.
- Balance sheet: Total assets were $47.50 million and stockholders’ equity was $33.31 million at September 30, 2016. Accounts receivable was $7.16 million; one customer represented 84% of the balance.
Material changes and management commentary
- Revenue fell 54.1% in Q3 and 55.7% for the nine-month period, primarily because protracted negotiations with a major aviation-component-supplier customer delayed an anticipated follow-on order. The customer represented 42.9% of Q3 revenue and 61.0% of nine-month revenue.
- Gross margin declined as lower revenue left production staffing costs spread over less activity. Management also cited costs of maintaining production staff in anticipation of the delayed order.
- Orders rose 75.3% in Q3 to $5.02 million and 84.9% for the nine months to $39.18 million. September 30 backlog was $31.81 million, compared with $11.49 million a year earlier. One customer accounted for $27.1 million, or 85.2%, of backlog. Management said a significant portion was expected to be completed within 12 months, but noted that completion can take as long as two years and cancellations or delays are possible.
- Management believes cash and operating cash flow will be sufficient for working capital and capital expenditure needs over the next 12 months. No specific revenue or earnings guidance was provided. Additional capital could be sought for acquisitions or if conditions are favorable; equity financing could dilute shareholders.
- Unusual items included a $629,000 gain from a negotiated reduction in previously accrued Taiwan Glass litigation fees and a $119,000 insurance recovery in excess of property-repair costs. The 2015 comparison included a $995,000 litigation settlement expense. The nine-month 2016 tax benefit was $907,000, primarily reflecting deferred tax benefits from the period’s loss.
- Risks highlighted include uneven order timing, dependence on a major customer, competition, uncertain future profitability, and possible difficulty obtaining financing on acceptable terms. Cash and investments exceeded FDIC insurance limits by $15.0 million at quarter-end. Management reported effective disclosure controls; no material change in internal controls was reported.
Important facts for investors to verify
- Whether the delayed follow-on order is received, and how much of the concentrated backlog converts to revenue and cash.
- Customer concentration in revenue, backlog, and receivables, including the collectability and timing of the large receivable balance.
- How much operating cash generation depends on customer advances and contract billings, and whether margins recover as revenue changes.
- The sustainability and accounting implications of the litigation-fee gain, insurance recovery, and deferred tax benefit.
- Debt repayment terms, mortgage loan maturity and rate exposure, and continued compliance with revolving-credit covenants.