CVD Equipment Corporation (NASDAQ: CVV) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; the filing separately cites Q4 revenue and order activity.
Business context
CVD designs and manufactures chemical vapor deposition, gas-control and related equipment, and provides materials coating and process-development services. Its three segments are CVD Equipment, SDC and CVD Materials, which includes Tantaline and MesoScribe. Customers span aerospace, industrial, research, semiconductor and other advanced-technology markets.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $19.65 million | $24.33 million |
| Gross profit / margin | $2.80 million / 14.2% | $5.18 million / 21.3% |
| Operating loss | $4.98 million | $5.25 million |
| Loss before income taxes | $4.91 million | $5.56 million |
| Income tax expense (benefit) | $1.41 million | ($0.36 million) |
| Net loss / diluted loss per share | $6.33 million / $0.96 | $5.20 million / $0.80 |
| Cash provided by operating activities | $0.57 million | $0.51 million |
| Capital expenditures | $2.69 million | $2.54 million |
| Cash and cash equivalents at year-end | $8.66 million | $11.44 million |
| Working capital at year-end | $8.8 million | $15.4 million |
| Total debt at year-end | $12.05 million | $12.91 million |
Revenue fell 19.3%, primarily because prior-year orders from the largest aerospace customer were completed. CVD Equipment revenue declined 21.3% to $14.1 million; SDC revenue declined 16.7% to $3.9 million; and CVD Materials revenue declined 5.9% to $1.6 million. The largest customer contributed $4.7 million, or 23.8% of 2019 revenue, versus $9.3 million, or 38.2%, in 2018. Two customers together represented 39.3% of 2019 revenue.
Gross margin contracted as sales declined and costs remained geared toward CVD Materials expansion. Operating expenses decreased to $7.78 million from $10.43 million, helping narrow the operating loss. The net loss nevertheless widened, mainly reflecting a $1.41 million tax expense, including a full valuation allowance against net deferred tax assets of $2.50 million. The filing reports a $0.41 million other-income item, principally rental income from subleasing part of the materials facility.
Operating cash flow was positive, but capital spending and debt payments exceeded it; cash declined by $2.78 million. Management reported cash and operating cash flow sufficient for working capital and capital requirements for the next 12 months from the financial-statement issuance date. Working capital was $8.8 million. Debt included approximately $9.69 million on the materials-facility mortgage and $2.37 million on the headquarters mortgage. The former has a December 2022 maturity; the latter matures in March 2022 and includes a balloon payment. The filing lists $10.69 million of debt maturities in 2022. The company was in compliance with its modified mortgage covenant at year-end.
Changes, outlook and key risks
- Fourth-quarter 2019 revenue was $5.5 million, and new orders were $7.8 million; third-quarter revenue and new orders were $5.7 million and $7.9 million, respectively. Management said first-quarter 2020 new orders were significantly below those levels.
- Year-end backlog rose to approximately $8.9 million from $3.0 million. Backlog may be delayed or cancelled and is not assurance of revenue or profit.
- MesoScribe’s relocation to New York was completed and operations were fully running by the middle of Q3 2019. It secured approximately $2 million in orders from September 2019; four support employees were hired in early 2020. Tantaline U.S. systems were still being installed and tested.
- The company invested approximately $2.7 million in 2019, primarily for CVD Materials. It reduced headcount from 197 to 172 during the year. Management said a return to profitability depends on new orders, scaling the materials business and cost controls; no quantified earnings or revenue guidance was provided.
- COVID-19-related shutdowns, including impacts to the company and its customers and suppliers, created substantial uncertainty. Management said the scope and severity of disruptions could not then be predicted.
- Principal risks include customer and order concentration, long and variable sales cycles, continued losses and recovery of CVD Materials investments, competition, project cost-estimation risk, supply and delivery disruptions, financing needs, and potential asset impairment. International sales were 21.3% of revenue, up from 9.9% in 2018.
- An O2Cure patent-infringement action was voluntarily dismissed without prejudice in January 2020 and closed. A separate former-employee injury claim remained pending; management said it believed insurance coverage and defenses were adequate, while noting possible exposure if coverage were insufficient.
- The auditor gave an unqualified opinion on the financial statements. Management reported effective internal control over financial reporting; the filing did not include an auditor attestation of those controls. Previously identified control deficiencies were reported as remediated.
Investor verification priorities
- Track order intake, cancellations, backlog conversion and customer concentration, especially given first-quarter 2020 order weakness.
- Assess whether MesoScribe and Tantaline orders translate into repeatable revenue, acceptable margins and profitable CVD Materials operations.
- Reconcile cash use and planned investment with the company’s liquidity outlook, mortgage payments and the substantial 2022 debt maturities.
- Review the effects of COVID-19 on operations, customers, suppliers and the company’s ability to meet delivery schedules.
- Check subsequent filings for tax-asset realizability, covenant compliance, litigation developments and any impairment indicators.