CVD Equipment Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company designs and manufactures custom chemical vapor deposition equipment, gas-control systems and materials coatings. Results are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $4.03 million | $3.72 million | $7.40 million | $9.76 million |
| Gross profit | $846,000 | $602,000 | $1.16 million | $2.54 million |
| Gross margin | 20.9% | 16.2% | 15.7% | 26.0% |
| Operating loss | ($1.08 million) | ($1.13 million) | ($2.70 million) | ($1.02 million) |
| Net income (loss) | $1.47 million | ($1.13 million) | ($35,000) | $524,000 |
- Q2 net income included a $2.44 million gain from forgiveness of the company’s Paycheck Protection Program loan. Excluding that gain, the quarter remained loss-making at the operating level.
- Six-month revenue fell 24.1% year over year, mainly because of lower CVD Equipment sales, particularly spare parts, and lower SDC revenue. Materials revenue increased by $1.0 million.
- Q2 revenue rose 8.5% year over year, as higher Materials and SDC revenue more than offset lower CVD Equipment revenue. Management attributed the improved quarterly gross margin to manufacturing efficiencies and higher sales.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $5.39 million, down from $7.70 million at December 31, 2020. Six-month operating cash flow was negative $1.85 million; capital expenditures were $118,000.
- Working capital was $11.5 million, compared with $8.1 million at year-end. The June balance sheet classified the 555 Building’s $16.2 million carrying value and $9.1 million mortgage as held for sale.
- At June 30, debt included approximately $9.1 million related to the 555 Building and $1.9 million secured by the remaining 355 Building. The 555 Building loan was paid off when the sale closed July 26, 2021. The 355 Building mortgage matures in March 2022; the company reported covenant compliance at June 30.
- The 555 Building sold for $24.36 million, subject to adjustments. After repayment of mortgage debt and closing costs, net proceeds were approximately $14 million. Management’s pro forma balance sheet reflects cash of $19.36 million following the transaction.
- Management said cash and operating cash flows should be sufficient for working-capital and capital-expenditure needs for the next 12 months, while noting it may take further actions if conditions persist or worsen.
Business changes, outlook and risks
- In January 2021, the board appointed Emmanuel Lakios CEO and initiated a strategic review. The company is refocusing on its core equipment business and revising its Materials strategy. It plans no further investment in the Tantaline product line, citing forecast losses and negative cash flow, and estimates this will avoid $1.5 million to $2.0 million of additional costs. Potential employee and lease-termination costs were estimated at approximately $400,000.
- The company consolidated Tantaline operations and began moving MesoScribe into the 355 Building. It stated that U.S. expenses related to Tantaline had ceased.
- New orders were approximately $6.0 million in Q2 2021, compared with $3.8 million in Q1 2021 and $1.9 million in Q2 2020. The filing provides no formal revenue or earnings guidance.
- COVID-19 continued to weigh on demand, especially aerospace and spare-parts sales. Management cited uncertainty from the pandemic, including the Delta variant, and said future effects could be material. The company also faces long sales and production cycles, volatile demand, and customer concentration: three customers accounted for 41.4% of Q2 revenue.
- The company has a full valuation allowance against net deferred tax assets. Six-month 2020 net income included a $1.5 million CARES Act tax benefit; approximately $700,000 remained receivable at June 30, 2021.
- Management reported effective disclosure controls and no material changes in internal controls during the quarter. The filing reported no legal proceedings or risk-factor updates.
Important facts for investors to verify
- Whether Q2 order growth converts into revenue and improved operating results, given the company’s extended order-to-delivery cycle.
- The durability of cost reductions and the final costs, if any, from the Tantaline exit and facility consolidation.
- Actual net cash proceeds and recognized gain from the 555 Building sale, including final adjustments, costs and tax effects.
- Liquidity and refinancing plans for the remaining 355 Building mortgage maturing in March 2022, and ongoing covenant compliance.
- Customer concentration, aerospace recovery and the impact of COVID-19 on orders, margins and cash flows.