CVD Equipment Corporation — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. CVD designs and manufactures custom chemical vapor deposition equipment and reports three segments: CVD Equipment, Stainless Design Concepts (SDC), and CVD Materials. Materials began small-scale operations at its new facility during Q3. The filing was signed November 12, 2019.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.70 million | $4.03 million | $14.10 million | $19.62 million |
| Gross profit (margin) | $1.40 million (24.5%) | $(0.06) million (-1.4%) | $1.50 million (10.6%) | $4.82 million (24.6%) |
| Operating loss | $(0.25) million | $(2.85) million | $(4.36) million | $(3.32) million |
| Net loss | $(0.14) million | $(2.50) million | $(3.71) million | $(3.27) million |
| Loss per diluted share | $(0.02) | $(0.39) | $(0.57) | $(0.51) |
- For the nine months, operating cash flow was negative $2.09 million, versus positive $2.72 million in 2018. Investing cash flow was negative $2.12 million, primarily for property, plant, equipment and facility improvements; financing cash flow was negative $0.49 million from debt payments.
- Cash and cash equivalents fell to $6.74 million from $11.44 million at December 31, 2018. Working capital was $9.7 million, down from $15.4 million.
- At September 30, total debt was approximately $12.2 million: about $2.4 million secured by the headquarters and $9.8 million related to the Materials facility. The loans have balloon maturities in 2022.
- Total assets were $49.53 million and stockholders’ equity was $33.16 million. The balance sheet reports current liabilities of $4.82 million.
Material changes versus prior comparable periods
- Q3 revenue increased 41.6% year over year, primarily from higher CVD Equipment spare-parts and equipment sales. Management attributed improved quarterly gross margin to higher sales, operating efficiencies, lower costs and product mix.
- Nine-month revenue declined 28.1%, primarily because orders from a large prior-year customer had been completed. CVD Equipment segment revenue decreased $5.3 million; SDC revenue also fell modestly, while Materials revenue was roughly flat.
- Nine-month gross margin fell to 10.6% from 24.6%, as reduced sales were accompanied by costs, principally payroll, retained to support anticipated Materials expansion and growth. The nine-month operating loss and net loss worsened despite lower operating expenses.
- Operating expenses declined year over year, reflecting workforce and related cost reductions, lower stock compensation and consulting costs, and a $200,000 recovery of a MesoScribe contingent earnout. Headcount was 168 at September 30, down 15% from December 31, 2018.
- The company recorded $207,000 of rental income in 2019 from subleasing part of the Materials facility. After quarter-end, the tenant exercised an option to terminate the east-side sublease effective December 31, 2019; the west-side sublease remains in effect.
Outlook, risks and unusual items
- Management reported Q3 orders of $7.9 million, compared with $6.5 million in Q1 and $3.3 million in Q2. It gave no formal revenue or earnings guidance, but said cash and expected operating cash flow should be sufficient for working capital and capital expenditures for the 12 months following the filing date.
- Revenue recognition on custom system contracts depends on cost-to-complete estimates. Changes in estimates can materially affect reported results; the filing recorded a net $331,000 increase in Q3 revenue from estimate changes and a net $223,000 decrease for the nine-month period.
- Customer concentration is significant: two customers accounted for 42.8% of Q3 revenue and 28.1% of nine-month revenue. Two customers represented 47.9% of accounts receivable at quarter-end.
- The company had been out of compliance with a mortgage fixed-charge coverage covenant at year-end 2018. HSBC waived the issue through April 1, 2020, and an August 2019 amendment replaced that covenant with a minimum-liquid-assets covenant. The company reported compliance at September 30, 2019.
- Management continues to assess whether deferred tax assets will be realizable. The nine-month tax benefit was $692,000, principally deferred. The filing also identifies competition, access to financing, future profitability, acquired operations and expansion as risks to forward-looking results.
- Management said disclosure controls were effective and described remediation steps for earlier control deficiencies, including revised procedures, added review levels and more frequent subsidiary reporting. No legal proceedings were reported; the filing states there are no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the Q3 order level converts into deliveries and revenue, and whether order intake remains stronger than in the first half.
- Cash burn, working-capital needs and liquidity-covenant compliance, particularly given negative nine-month operating cash flow and scheduled debt payments.
- Large-customer dependence, receivable concentration and collection timing.
- Progress and costs at the Materials facility, including the financial impact of the east-side sublease termination.
- Contract cost estimates and gross-margin recovery, as well as the sustainability of expense reductions and tax benefits.