CVD Equipment Corporation — Q2 2020 Form 10-Q
Business context and reporting period. The company designs and manufactures custom chemical vapor deposition equipment and operates CVD Equipment, Stainless Design Concepts (SDC), and CVD Materials segments. This unaudited report covers the three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3.72 million | $4.92 million | $9.76 million | $8.40 million |
| Gross profit / margin | $0.60 million / 16.2% | $0.49 million / 10.0% | $2.54 million / 26.0% | $0.11 million / 1.3% |
| Operating loss | $(1.13) million | $(1.54) million | $(1.02) million | $(4.11) million |
| Net income (loss) | $(1.13) million | $(1.39) million | $0.52 million | $(3.57) million |
| Basic and diluted EPS | $(0.17) | $(0.21) | $0.08 | $(0.55) |
- Cash flow: First-half operating cash use was $0.51 million, investing cash use was $0.86 million, and financing provided $2.08 million, including the $2.42 million PPP loan. Cash increased $0.71 million to $9.38 million.
- Liquidity: Current assets were $15.56 million and current liabilities $4.25 million at June 30, 2020; working capital was approximately $11.32 million. The company reported working capital of $8.8 million at December 31, 2019.
- Debt: Current and long-term debt totaled approximately $14.13 million, including the PPP loan. The two property mortgages had balances of about $2.2 million and $9.5 million; the company reported compliance with its mortgage financial covenant.
- Other balance-sheet items: Total assets were $48.33 million and stockholders’ equity $30.62 million. A $1.53 million tax receivable was recorded following the CARES Act NOL carryback provision.
Material changes versus comparable periods
- Q2 revenue declined 24.4%, principally from lower CVD Equipment sales and lower SDC revenue. First-half revenue rose 16.2%, with higher CVD Equipment and SDC sales partly offset by lower CVD Materials revenue.
- Gross margins improved in both comparisons. Management cited product mix, efficiencies on repeat orders, and lower costs, including the effect of furloughs.
- Operating losses narrowed, but the first-half net profit was driven by a $1.53 million income tax benefit associated with the CARES Act; the company still recorded a first-half operating loss.
- First-half CVD Equipment revenue was $6.38 million, SDC $2.84 million, and CVD Materials $0.80 million, before eliminations and unallocated items. Q2 segment performance was mixed; SDC reported operating income of $65,000, while CVD Equipment and CVD Materials reported operating losses.
Outlook, commentary, and risks
- COVID-19 materially affected operations and demand. Management said new orders fell substantially during the first half and into early Q3, with adverse revenue effects expected to continue toward year-end 2020. The company cited particular weakness in aerospace amid reduced air travel, as well as possible production interruptions, supply-chain disruption, and logistics constraints. The full impact into 2021 could not be predicted and could be material.
- The company furloughed a substantial portion of its workforce beginning March 16, 2020 and continued to reassess staffing. It said cash and operating cash flow should be sufficient for working capital and capital expenditure needs for the next 12 months, while noting that a longer or worse downturn could require further action.
- The $2.42 million PPP loan bears 1% interest and matures April 21, 2022; some or all may be forgiven if applicable requirements are met. The filing’s note describes eligible costs during the first eight weeks, while MD&A refers to the first 24 weeks; verify the applicable terms and treatment.
- The $1.53 million CARES Act tax benefit relates to carrying NOLs back five years; management expected to receive the funds in the second half of 2020. Deferred tax assets remained fully reserved.
- Customer concentration is significant: two customers represented 42.2% and 10.0% of Q2 revenue; one customer represented 37% of first-half revenue. Four customers accounted for 66% of accounts receivable at quarter-end.
- Contract revenue recognition depends on estimates of costs to complete; changes in estimates may materially affect reported results. Approximately $1.6 million of contract revenue remained unrecognized and was expected to be recognized within 12 months.
- No formal earnings or revenue guidance was provided. The company reported no legal proceedings and no off-balance-sheet arrangements.
Investor verification priorities
- Track order intake, backlog conversion, and revenue trends after Q2, particularly in aerospace and CVD Equipment.
- Confirm receipt and collection of the CARES Act tax receivable and assess the tax-driven nature of first-half net income.
- Verify PPP forgiveness eligibility, covered-cost period, and any repayment or accounting consequences, given the filing’s differing eight-week and 24-week descriptions.
- Monitor cash burn, capital spending, mortgage maturities and balloon payments, and continued covenant compliance.
- Assess customer concentration, receivable collectability, and the adequacy of the allowance for doubtful accounts, which increased to approximately $104,000 from $24,000 at year-end.